ITEM 1. BUSINESS
UNOVA, Inc. (the "Company" or "UNOVA") operates in two business segments: Industrial Automation Systems ("IAS") and Automated Data Systems ("ADS"). For the year ended December 31,1998, IAS generated revenues and operating profits of $833.3 million and $76.9 million, respectively, and ADS produced revenues and operating profits of $829.4 million and $55.4 million, respectively. The Company became an independent public company upon the distribution of its common stock to the shareholders of Western Atlas Inc. ("WAI") on October 31, 1997.
See Note K to the consolidated and combined financial statements for financial information by industry segment and by geographical area.
Information related to business acquisitions, investments, and dispositions is set forth in Note B to the consolidated and combined financial statements.
GENERAL
The Company is an industrial technologies company providing global customers with solutions for improving their efficiency and productivity. The Industrial Automation Systems business segment includes integrated manufacturing systems, metal-cutting and composite production systems, body welding and assembly systems, precision grinding and abrasive operations and stand-alone machine tools, primarily serving the worldwide automotive, off-road vehicle, diesel engine and aerospace manufacturing industries. The Automated Data Systems business segment comprises automated data collection, network and mobile computing products and services, principally serving the industrial market. Customers include global distribution and transportation companies, food and beverage operations, manufacturing industries, health care providers and government agencies.
PRODUCTS AND SERVICES
INDUSTRIAL AUTOMATION SYSTEMS. The Company is a major designer, producer and integrator of manufacturing technologies, primarily for the global automotive, off-road vehicle and diesel engine industries, but it also operates in the aerospace, electronics, durable goods and the general job shop markets. Products include integrated manufacturing systems for the production of powertrain components such as engines, transmissions and connecting rods, and chassis components such as steering knuckles, rear axle housings and brake calipers; body welding and assembly systems; test and automation equipment for integration into production lines; precision grinding and abrasives; multi-axis manufacturing systems; profiling systems for composite materials; stand-alone vertical and horizontal metal-cutting machining centers; the redesign, remanufacturing and retooling of installed equipment; and design/ engineering services.
During the fourth quarter of 1998, UNOVA acquired the machine tool business of Cincinnati Milacron for approximately $180.0 million in cash, subject to post-closing adjustments. The division, which was renamed Cincinnati Machine, A UNOVA Company ("Cincinnati Machine"), is engaged in the design, manufacture, sale and servicing of standard and advanced computer numerically controlled metal cutting machine tools for the industrial component, aerospace, job shop, fluid power and automotive industries.
During the third quarter of 1998, UNOVA acquired R & B Machine Tool Company, a specialty machine and retooling company.
The Company's IAS segment includes the following divisions: Lamb Technicon Machining Systems, Cincinnati Machine, Lamb Technicon Body & Assembly Systems, Lamb Assembly & Test Systems,
ITEM 1. BUSINESS (CONTINUED) Modern Prototype, Lamb UK, Honsberg Lamb, Landis Gardner, Landis Lund, R & B Machine Tool Company, Citco and Cranfield Precision.
The IAS segment's major offices and production facilities are located in Illinois, Kentucky, Michigan, Ohio and Pennsylvania and internationally in Canada, the United Kingdom and Germany.
INTEGRATED MANUFACTURING SYSTEMS. Manufacturing solutions are being designed and integrated by the Company for auto and diesel customers, primarily for powertrain components. Product lines include computer numeric control (CNC) machines for low-volume applications, modular, flexible systems for medium-volume production and transfer lines for high-volume production. Integrated manufacturing systems, which include the operations of Cincinnati Machine subsequent to the acquisition, accounted for 29%, 27% and 39% of the Company's consolidated and combined revenues in fiscal 1998, 1997 and 1996, respectively.
Virtual design, prototyping and simultaneous engineering techniques are used to optimize solutions for complex automotive manufacturing projects. By working closely with customers, especially during their product design and engineering phase, the Company is able to develop machining processes that reduce capital requirements, lower lifecycle costs, eliminate costly shop floor programming and improve productivity by reducing downtime during operations.
Through its Assembly and Test Systems operations, the Company also designs and builds specialized assembly and/or testing equipment and systems for a variety of automotive manufacturing and other industries.
BODY AND ASSEMBLY SYSTEMS. The Company designs and integrates automated systems to form, assemble and weld high-quality auto and truck bodies as well as other industrial products. Robotic systems are integrated with high-precision holding and alignment fixtures and high-volume welding equipment to produce components and subassemblies. Proprietary processes have been developed specifically to assemble doors, hoods and trunk lids, which historically represent the most critical "fit and finish" manufacturing parts of car bodies.
Using 3-D computer simulations, UNOVA has established one of the broadest process and tool design capabilities in the industry. Tool design and prototyping are now linked into the product engineering process, reducing costs and risks for automotive customers long before their programs move into the capital investment stage. Body and Assembly Systems accounted for 8%, 14% and 12% of the Company's consolidated and combined revenues in fiscal 1998, 1997 and 1996, respectively.
PRECISION GRINDING AND ABRASIVES. The Company is an innovator of cylindrical grinding products and processes that improve accuracy and reliability in critical engine parts. These processes ultimately result in lower emissions, better fuel economies and reduced maintenance for car owners. Combined with the centerless grinding activities from Cincinnati Machine, the Company has moved into a leading position as a provider of advanced grinding applications in non-automotive markets. Precision Grinding and Abrasives accounted for 13%, 15% and 17% of the Company's consolidated and combined revenues in fiscal 1998, 1997 and 1996, respectively.
Superabrasive grinding wheels, electronic controls, high-precision, maintenance-free hydrostatic bearings and state-of-the-art, value-engineered double disc grinding technologies enable today's car manufacturers to machine parts with precision measured in the sub-micron range. Research into the processing of new materials also has resulted in the development of ultra-high-precision grinding and finishing techniques. These advances are being applied to requirements of the microelectronics, computer, aerospace and optics industries for the manufacture of materials such as composites, silicon, glass and ceramics.
ITEM 1. BUSINESS (CONTINUED) CINCINNATI MACHINE. The addition of the Cincinnati Machine operations (acquired from Cincinnati Milacron) directly complements UNOVA's existing product range and brings an established global distribution network in non-automotive markets. The new division provides advanced systems such as multi-axis and composite manufacturing systems for the aerospace industry; production systems, including horizontal machining centers and flexible manufacturing cells, for the general metalworking industry; and standard CNC machines such as vertical machining and horizontal turning centers for job shops.
TECHNOLOGIES/TRENDS. UNOVA continues to develop manufacturing technologies to broaden its product offerings and respond to automotive customers' needs to lower costs, improve fuel consumption and decrease car emissions. New modular, multi-spindle machining centers are reducing cycle time, and flexible fixturing systems are under development to cut costs of high-volume machining. Advances in grinding technologies are beginning to allow UNOVA to move into other markets, where the Company's machines can be applied to finish non-metallic materials with extreme accuracy.
AUTOMATED DATA SYSTEMS. The Company's automated data collection ("ADC") and mobile computing systems business comprise the Intermec, Norand and UBI activities. Intermec was acquired in 1991; Norand and UBI were acquired early in 1997. In 1997, these three companies were consolidated into one organization called Intermec Technologies Corporation, serving the global bar code, data collection and mobile computing market, which has grown approximately 12% to 15% annually over the past five years. This organization is divided into three global product divisions: Local Area Systems, Norand Mobile Systems and Identification Systems. ADS, which included only Intermec's results until the 1997 acquisitions of Norand and UBI, accounted for 50%, 44% and 32% of the Company's consolidated and combined revenues in 1998, 1997 and 1996, respectively.
In 1998, the Company acquired the radio frequency identification ("RFID") business unit of Amtech Corporation known as the Amtech Systems Group ("Amtech Systems"), which became a division of Intermec Technologies Corporation. Amtech Systems is a supplier of wireless data technologies for electronic toll collection, rail and motor fleet tracking, and access control to parking and other structures. The Company had previously purchased $10.0 million of Amtech Corporation's common stock which was applied towards the purchase price of Amtech Systems. According to industry statistics, the U.S. RFID market grew over 20% in 1998 to $655 million.
This combination of companies and capabilities establishes the Company as a leading participant in the growing ADC marketplace. Together, they offer a broad range of products which are used to gather, organize, process, transmit and exchange information between various field-based or in-premise locations and central computers or information retrieval systems. By facilitating sales order processes, and tracking parts, work-in-process, finished products and people through manufacturing, distribution and other commercial operations, industrial users are able to control inventory and to improve the productivity, quality and responsiveness of their operations, from supply chain management and enterprise resource planning ("ERP") to field sales and service.
Major offices and manufacturing facilities are located in the states of Iowa, Ohio and Washington; and internationally in the United Kingdom, the Netherlands, Sweden, France and Australia.
LOCAL AREA SYSTEMS. The Company has demonstrated market leadership in the wireless Local Area Network (LAN) industry by being first to provide a network architecture that allows customers to use multiple radio technologies within one LAN system. This Radio Independent-TM- wireless LAN solution supports all major radio technologies (including synthesized UHF, 900 MHz and 2.4 GHz direct sequence and frequency-hopping, spread-spectrum radio technologies), giving customers the ability to choose the most efficient radio technology for their facilities to solve data rate, transmission speed and
ITEM 1. BUSINESS (CONTINUED) range issues in order to create a reliable communications environment. To ensure compatibility with customer host systems, all major industry standard networks are supported.
The Company has developed an extensive line of hand-held computers and stationary and vehicle-mounted terminals that combine PC-type capability with scanning and data transmission abilities. Intermec's family of products ranges from low-cost, hand-held batch data collection devices to sophisticated and powerful terminals, computers and network products. The Company's "open systems" product design philosophy is to deliver maximum flexibility for customers with diverse application requirements.
NORAND MOBILE SYSTEMS. As a leader in ruggedized mobile computing systems, especially with its PEN*KEY-Registered Trademark- terminals, the Company provides comprehensive data communications, wide-area networks, application software, hand-held and truck-mounted PC-based products with peripherals and printer solutions. These allow instant information exchange between companies' field and central organizations, automating sales, distribution, electronic billing, dispatching, routing and updating of customer information in real time.
Mobile computing refers to rugged PC-based devices for route accounting, meter reading, field services and sales management, rather than general personal or desktop computing applications. In combination with wireless communications, mobile computing enables remote workers to have access to centralized computer applications and databases and to send and receive information through wireless networks for improved productivity, efficiency and accuracy of data.
IDENTIFICATION SYSTEMS. Intermec's Identification Systems products, which include wands, imagers, charge-couple devices (CCD), badge and laser scanners, as well as printers and media products, are able to read or collect data, and then print the data on customized labels and tags.
The Company's line of flexible "on demand" bar code printers ranges from low-cost, light- to heavy-duty industrial models that accommodate a wide array of printing widths, materials and label configurations. A variety of specialty printers provides custom capabilities including color printing, a global language enabler and high-resolution (400 DPI) printing which ensures sharp fonts and precise graphics, even on extremely small labels such as those used by the electronics industry. The Company also supports its customers with a broad range of label and tag solutions as well as other supplies for its printer product range.
AMTECH SYSTEMS. Intermec's newest division, acquired in June 1998, is a leading supplier of RFID solutions for intelligent transportation systems. Amtech designs, manufactures, markets, integrates and supports innovative RFID products and services for electronic toll and traffic management; rail, intermodal and fleets; and access control for parking, security, airports and ground transportation. Amtech formed a strategic business unit to develop the next generation of low-cost RFID products for the transportation, security, manufacturing and logistics markets. The division plans to offer its new technology for integration with and to complement existing automatic identification and data capture solutions such as bar code, mobile computing and other enterprise-wide information systems.
TECHNOLOGIES/TRENDS. The Company is consistently broadening the application of ADC and mobile computing by developing or integrating new technologies into its product range. Recent examples include the Company's smart, vehicle-based docking solution for pen-based computers as well as 2-D bar codes, smart cards and RFID. Tags or labels based on RFID technology can be updated during their use, making them an integral part of an electronic information network.
ITEM 1. BUSINESS (CONTINUED) BUSINESS STRATEGY
The Company's strategy is to develop products, processes and services that help improve productivity and efficiency in a variety of manufacturing and distribution applications. Both of the Company's business segments offer single products as well as integrated solutions to their customers.
Future growth in these businesses is expected to result from expansion of the Company's existing operations and its customer base, and through acquisitions. In seeking acquisitions, the Company will concentrate on technologies, products and services that enhance customer productivity and efficiency, and those that can be characterized as growth drivers.
In its IAS business segment, the Company plans to continue to develop its existing customer base by seeking a greater role in customer projects, by continuing its emphasis on product development and by expanding its international activities. The ongoing development of the Company's ADC/mobile computing activities will depend primarily on the application of new technologies and products to maintain its position in this technology-driven market. The Company believes it has the necessary technical expertise to achieve this goal. Future geographic opportunities have been identified outside North America, particularly in Europe, South America and Asia, where the use of data collection technology is less developed. To capitalize on these emerging markets, the Company is expanding its international marketing, distribution and support network, and is engaged in an ongoing program to locate Company-owned resources in key markets worldwide.
The Company continues to explore ways to increase its presence in market segments where it presently holds a smaller market share, such as the application of lower-volume flexible manufacturing systems and CNC machines. In some areas the Company also has developed high-precision manufacturing technologies that should allow it to establish a presence in growth markets such as microelectronics with its new generation of ultra-high-precision wafer grinders.
In recent years, cost-cutting needs and quality requirements in the automotive industry have affected the Company's relationships with its customers. The carmakers' trend toward fewer suppliers has benefited the Company and allowed it to expand its market participation. These market-driven changes also have forced many smaller competitors either to withdraw from the market or to reduce their role to that of second or third tier suppliers. The Company's strategy has been to establish an extensive outsourcing network of qualified suppliers in North America and overseas, thereby avoiding unnecessary vertical integration and gaining flexibility in its market approach.
MARKETS AND CUSTOMERS
INDUSTRIAL AUTOMATION SYSTEMS. The Company participates in the automotive manufacturing and general manufacturing markets. Investments by automotive customers are driven by model changes, competitive pressures, government regulations such as emission standards and gasoline consumption rates, and by the customers' own internal spending cycles. Investments in diesel engine manufacturing are influenced by the infrastructure needs of emerging industrial nations and by the efficiency benefits diesel engines offer for heavy and light trucks and utility vehicles.
Customers for the Company's integrated manufacturing systems products are the major auto and diesel manufacturers and their Tier One suppliers. Although the passenger car and light truck industries continue to represent this division's largest market, business from diesel engine manufacturers has grown in recent years.
The Company believes that its future growth in this business segment will be dependent on its ability to broaden the scope of products and services that it markets to its current customer base, which allows
ITEM 1. BUSINESS (CONTINUED) the Company to expand into other industrial manufacturing markets. This strategy was further supported by the acquisition of Cincinnati Machine, which is already participating in markets such as the aerospace and general metalworking industries as well as the broad job shop market. Cincinnati Machine also brings flexible CNC machine technology to the other IAS divisions, allowing them to market these products and systems to the automotive supplies industry, while products developed by the auto-related divisions can be sold through Cincinnati Machine's global distribution network to other, non-automotive markets.
A substantial part of the IAS segment's total revenues is currently generated by worldwide automotive and diesel engine industry purchases of automated manufacturing systems, including integrated machining, body welding and assembly and precision grinding systems. Among customers for such equipment, U.S. and Canadian auto and auto-related manufacturers currently account for the majority of Industrial Automation Systems sales. The remainder of sales represents products manufactured and sold in Europe and those exported from the Company's production facilities, mostly for installation in Latin America and Asia.
Recent major customers include U.S.-based Cummins, DaimlerChrysler, Ford, General Motors, Navistar and Detroit Diesel; and Western Europe-based BMW/Rover, Fiat, Mercedes Benz, Jaguar, Peugeot, Renault, Volkswagen, and the European subsidiaries of the large U.S. manufacturers, as well as Tata (Telco) in India. The Company has also won major systems contracts for the "transplant" manufacturing facilities of foreign auto makers, including both European and Japanese, and also serves the automotive components manufacturing market.
AUTOMATED DATA SYSTEMS. Because automated data systems represents technologies that can be utilized by a company of any size, and small systems can be installed at very low cost, the market is extensive. Worldwide sales of automated data systems equipment reached over $5 billion in 1998, according to estimates from independent research sources. These sources also predict that the overall market will continue to grow at an annual rate of approximately 12% to 15% over the next several years.
Market growth is driven by the global need for technologies and solutions that improve quality, productivity and cost-efficiency in business and government, particularly through logistics automation, supply chain management and ERP solutions. Worldwide coverage with a dedicated sales organization is therefore a major advantage.
Through its application of technologies in the manufacturing, warehouse-distribution, transportation, health care, government and other non-retail markets, the Company maintains a strong position in the global non-retail ADC/mobile computing market.
The Company sells and services its products through multiple sales and distribution channels: a direct field sales force which concentrates on large, complex systems sales; value added resellers that offer applications-specific solutions; and alliances with major systems integrators. The Company's direct sales organization serves customers from offices throughout North America and Europe and in some selected countries outside these regions. An indirect sales channel includes long-time exclusive relationships with value-added distributors and master resellers.
Although the Company obtains approximately 60% of its sales through indirect sales channels, no individual value-added distributor or reseller is material to overall Company results. The Company also maintains contact with customers and prospective users by having established user forums for automated data systems applications and technologies.
The mobile computing systems market consists of several applications, such as route accounting for the distribution and package/parcel delivery industries, sales merchandising, remote delivery and field
ITEM 1. BUSINESS (CONTINUED) service. These applications are generally used in the consumer products, food, beverage, wholesale, parcel delivery, freight, field service and home service industries.
Manufacturing applications include the collection and communication of information related to receipt of materials, work-in-progress, finished goods inventory and other functions throughout the manufacturing process. Warehousing and distribution center applications involve the collection and communication of information related to receiving materials to be stored, storage locations, materials retrieval and shipping. Retail applications include the automation of shelf label maintenance and product shipping and receiving functions.
International sales opportunities exist in countries where mobile computing systems market practices and other applications are similar to those in the U.S. The extent of RF systems opportunities in any particular country is based on the level of industrialization, the status of bar coding implementation and the RF regulatory environment. The major markets for printers are manufacturing, distribution, warehousing, transportation, health care, government and other services.
COMPETITION
Strong competition exists both in the domestic and international markets for the Company's products and services. Products are sold and projects are won in the marketplace based on price, technology and service.
INDUSTRIAL AUTOMATION SYSTEMS. While product quality is a key determinate in the competition to win market share, pricing is also a major criterion in the global market. Integrated Manufacturing Systems' strength is the ability to design reliable and efficient manufacturing processes for its customers and combine them with cost-effective machining solutions in order to win orders against strong competition.
The North American and European market for high-volume production systems for engines and transmissions is divided among approximately ten major competitors and numerous smaller participants. Major competitors are Thyssen, Ingersoll Milling and Grob-Werke (Germany).
In the body welding and assembly systems market, the Company is faced with competitors that are involved in a broad range of assembly equipment and other competitors that provide "niche" machines. Primary competitors include DCT, Progressive Industries (PICO) and Valiant in North America; Thyssen, FFT and Kuka in Germany and Comau in Italy.
In the worldwide market for high-precision grinding of engine parts, the Company has achieved a strong market position through innovative products that improve customer efficiency while reducing their capital costs. Major competitors are the foreign companies Koyo and Toyoda in Japan; the Schleifring Group, Junker in Germany; and Giustina in Italy.
Cincinnati Machine faces separate competitors in its different product markets such as Ingersoll Milling, DST (Germany) and Forrest Line (France) in aerospace systems; Mazak, Okuma and Mori Seiki (all Japan) in production systems; and Fadal (Thyssen) and Haas (both North America) in the market for stand-alone machines.
AUTOMATED DATA SYSTEMS. The market for ADC/mobile computing systems is highly fragmented. Based on independent market surveys, management believes that Intermec Technologies Corporation is one of the largest participants measured by revenues. The other two major participants are Symbol and Telxon. The Company also faces strong competition for single product lines from specialized suppliers.
ITEM 1. BUSINESS (CONTINUED) The Company competes on the basis of its open modular systems approach, network and communications expertise, applications software, level of sales and support services, and product functionality, performance, ruggedness and overall quality.
The market for mobile computing and RF products is highly competitive and rapidly changing. Some firms manufacture and market hand-held systems for route accounting applications, including Telxon and Fujitsu. In addition, a number of firms manufacture and market radio-linked data communication products, including LXE, Teklogix, Symbol, and Telxon. On the printer side, the Company faces competition from Zebra/Eltron, Datamax and many others, depending on the geographic area.
RESEARCH AND DEVELOPMENT
Companywide expenditures on research and development activities amounted to $71.5 million, $53.1 million and $29.7 million, substantially all of which was sponsored by the Company, in the years ended December 31, 1998, 1997 and 1996, respectively. The Company expensed a total of $211.5 million of acquired in-process research and development in 1997. See further discussion in Note B to the consolidated and combined financial statements.
PATENTS AND TRADEMARKS
The Company owns a large number of patents, trademarks and copyrights relating to its manufactured products, which have been secured over a period of years. These patents, trademarks and copyrights have been of value in the growth of the Company's business and may continue to be of value in the future. However, the Company's business generally is not dependent upon the protection of any patent, patent application or patent license agreement, or group thereof, and would not be materially affected by expiration thereof.
The Company has approximately 40 patent licenses under which it paid out or received income in the year ended December 31, 1998. During 1998, the aggregate amount of license fees paid by the Company was approximately $6.2 million, and the aggregate amount of license fees received was approximately $7.8 million.
SEASONALITY; BACKLOG
Sales backlog was $831 million, $395 million and $595 million at December 31, 1998, 1997 and 1996, respectively. The operations of the Company are not seasonal to any appreciable degree. The majority of the Company's backlog is concentrated in the IAS segment. The ADS market typically operates without a significant backlog of firm orders and does not consider backlog to be a relevant measure of future sales.
EMPLOYEES
At December 31, 1998, the Company had approximately 10,361 full-time employees, of which approximately 6,477 are engaged in the IAS segment, approximately 3,761 in the ADS business and approximately 123 in corporate and shared services.
ENVIRONMENTAL AND REGULATORY MATTERS
During 1998, the amounts incurred to comply with federal, state and local legislation pertaining to environmental standards did not have a material effect upon the capital expenditures or earnings of the Company.
ITEM 1. BUSINESS (CONTINUED) Radio emissions are the subject of governmental regulation in all countries in which the Company currently conducts business. In North America, both the Canadian and the U.S. governments publish relevant regulations, and changes to these regulations are made only after public discussion. In some countries regulatory changes can be introduced with little or no grace period for implementing the specified changes. Furthermore, there is little consistency among the regulations of various countries outside North America, and future regulatory changes in North America are possible. These conditions introduce uncertainty into the product planning process and could have an adverse effect on the ADC/ Mobile Computing business.
The European Community ("EC") has passed a directive requiring its members to adopt laws relating to electro-magnetic compatibility and emissions standards. These standards will apply to ADC/Mobile Computing products sold in EC member countries as those countries adopt the EC standards into law. Currently, the Company believes that its products are in material compliance with the regulations in force in each of the EC member countries.
RAW MATERIALS
The Company uses a wide variety of raw materials in the manufacture of its products and obtains such raw materials from a variety of suppliers. No single supplier provides 10% or more of the Company's raw materials, nor do raw materials from any one supplier generate 10% or more of the Company's consolidated revenues. The Company does not have any long-term supply agreements relating to raw materials.
ITEM 2.
ITEM 2. PROPERTIES
UNOVA's corporate headquarters building at 360 North Crescent Drive, Beverly Hills, California was sold in December 1998. The Company is currently leasing office space in the Beverly Hills building but plans to move the corporate headquarters to a leased facility at 21900 Burbank Boulevard, Woodland Hills, California in 1999.
Its principal plants and offices have an aggregate floor area of approximately 8,238,239 square feet, of which 7,209,484 square feet (88%) are located in the United States, and 1,028,755 square feet (12%) are located outside of the United States, primarily in the United Kingdom, Germany and Canada.
These properties are used by the business segments as follows:
Approximately 6,635,492 square feet (81%) of the principal plant, office and commercial floor area is owned by the Company, and the balance is held under lease.
The Company's plants and offices in the United States are situated in 21 locations in the following states:
The above-mentioned facilities are in satisfactory condition and suitable for the particular purposes for which they were acquired or constructed and are adequate for present operations.
The foregoing information excludes Company-held properties leased to others and also excludes plants or offices which, when added to all other of the Company's plants and offices in the same city, have a total floor area of less than 50,000 square feet.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is currently, and is from time to time, subject to claims and suits arising in the ordinary course of its business. Although the results of litigation proceedings cannot be predicted with certainty, the Company believes that the ultimate resolution of these proceedings will not have a material adverse effect on the Company's financial statements.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters have been submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of the fiscal year ended December 31, 1998.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
UNOVA, INC.
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(1) General and Administrative Costs include allocated charges from Western Atlas of $13.5 million, $22.2 million, $19.9 million and $27.6 million for the years ended December 31, 1997, 1996, 1995 and 1994, respectively. The year ended December 31, 1997 includes charges of $211.5 million, or $3.91 per share, for the value of acquired in-process research and development activities resulting from acquisitions made during the year.
(2) Interest expense includes allocated charges from Western Atlas of $12.0 million, $8.3 million, $8.4 million and $12.1 million for the years ended December 31, 1997, 1996, 1995 and 1994, respectively.
(3) In thousands. The number of common shares used to calculate basic and diluted earnings per share prior to 1997 is based on the number of shares of Western Atlas Common Stock that was outstanding as of June 30, 1997.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Sales and service revenues and segment operating profit for the years ended December 31, 1998, 1997 (excluding the $211.5 million charges for acquired in-process research and development) and 1996, were as follows:
YEAR ENDED DECEMBER 31, 1998 COMPARED TO 1997
Total sales and service revenues increased $236.5 million, or 17% for the year ended December 31, 1998 compared with the corresponding prior period. Total segment operating profit increased $28.6 million, or 28% for the year ended December 31, 1998 compared to the corresponding prior period.
IAS revenues increased $43.5 million, or 6% while related operating profit decreased $17.7 million, or 19% for the year ended December 31, 1998 compared with the corresponding prior period. The increase in IAS revenues is primarily attributable to the acquisitions of Cincinnati Machine and R&B Machine Tool, which are discussed below. Startup issues on a new product line at Lamb Honsberg in Germany impacted operating profit in 1998. In addition, the IAS segment began several new projects in 1998 that are not expected to materially affect sales and profits until next year. Delays caused by unexpected customer changes were encountered in the engineering phase of these new projects. Conversely, during the first half of 1997, the integrated manufacturing systems operations experienced a higher level of sales and profits from contracts in the final delivery and installation phase. IAS backlog increased from $332.0 million at December 31, 1997 to $705.5 million at December 31, 1998.
ADS segment sales increased $193.0 million or 30% and operating profit increased $46.3 or 509% for the year ended December 31, 1998 compared with the corresponding prior period. The sales and operating profit increases are due primarily to new licensing revenues, internal growth and the contribution of a full year of operations and the realization of improved profitability from the integration of the Norand and UBI acquisitions, offset by information system problems that negatively impacted the results of the third and fourth quarter. These problems, which were caused by the larger volume of business that resulted from the integration, did not allow the ADS segment to fully realize the benefits of its integration activities in 1998. A new information system, designed to resolve these problems, will become operational during 1999.
In October 1998, UNOVA acquired the machine tool business of Cincinnati Milacron for approximately $180.0 million in cash, subject to post-closing adjustments. The division, which was renamed Cincinnati Machine, a UNOVA Company ("Cincinnati Machine"), is engaged in the design, manufacture, sale and servicing of standard and advanced computer numerically controlled metal cutting machine tools for the
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) industrial component, aerospace, job shop, fluid power and automotive industries. Cincinnati Machine has become part of the Company's Industrial Automation Systems ("IAS") segment. The acquisition cost has been allocated on a preliminary basis to the net assets acquired based on their relative fair values. The acquisition was funded using the Company's committed credit facility and was accounted for under the purchase method of accounting.
During the third quarter of 1998, UNOVA acquired R&B Machine Tool Company ("R&B Machine"), a specialty machine and retooling company. This acquisition was funded using short-term uncommitted credit lines. In June 1998, the Company acquired the radio frequency identification ("RFID") business unit of Amtech Corporation known as the Amtech Systems Division ("Amtech Systems"). Amtech Systems is a supplier of wireless data technologies for electronic toll collection, rail and motor fleet tracking, and access control to parking and other structures. The Company had previously purchased $10.0 million of Amtech Corporation common stock which was applied towards the purchase price of Amtech Systems.
Depreciation and amortization increased from $40.7 million to $57.0 million from the year ended December 31, 1997 to the year ended December 31, 1998. This increase is primarily due to higher amortization of goodwill and other intangibles resulting from the Norand and UBI acquisitions, as well as additional depreciation from capital expenditures and business acquisitions.
Selling, general and administrative ("SG&A") expense increased $59.3 million from the year ended December 31, 1997 to the year ended December 31, 1998. However, as a percentage of sales, SG&A remained constant at 23% in both years. The increase in the amount is due primarily to 1998 acquisitions as well as the increase in the Company's sales and service revenues over the prior year.
Net interest expense was $25.7 million and $16.7 million for the years ended December 31, 1998 and 1997, respectively. The increase is attributable to an increase in outstanding debt due primarily to the acquisitions of Norand and UBI in 1997 and Cincinnati Machine, R&B Machine and Amtech Systems in 1998.
Other income, net consists of a gain of $35.5 million recognized on the sale of UNOVA's corporate headquarters building, offset by other non-operating expenses.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO 1996
Total sales and service revenues increased $261.5 million, or 22% for the year ended December 31, 1997 compared with the corresponding prior period. Total segment operating profit, excluding the $211.5 million charges for acquired in-process research and development, increased $4.1 million, or 4% for the year ended December 31, 1997 compared to the corresponding prior period.
IAS revenues decreased $7.6 million, or 1% and related operating profit increased $25.1 million, or 36% for the year ended December 31, 1997 compared with the corresponding prior period. The decrease in IAS revenues is primarily attributable to the sale of the Material Handling Systems ("MHS") division in November 1996, which offsets an increase in integrated manufacturing systems revenues. IAS experiences lower profit margins in the early stages of long-term contracts until the development risks have been mitigated. During 1997 the integrated manufacturing systems operations experienced a higher level of revenues and profits from contracts in the final delivery and installation phase. These projects contributed to an increase in operating margins for IAS from 8.7% in 1996 to 12.0% in 1997. Accordingly, IAS backlog declined from $545.0 million at December 31, 1996 to $332.0 million at December 31, 1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Also contributing to the increased operating profit are nonrecurring costs recorded in 1996 associated with the MHS sale and the reorganization of the Company's IAS European operations and domestic grinding businesses.
ADS revenues increased by $269.1 million, or 73% due to the acquisitions of Norand Corporation ("Norand") and United Barcode Industries ("UBI"). However, ADS operating profit declined by $21.0 million, or 70% due primarily to the process of integrating the newly acquired companies with Intermec and the costs of a long-term contract related to wireless RFID technology purchased from IBM Corporation.
The Company acquired Norand on March 3, 1997, and UBI on April 4, 1997. Norand designs, manufactures and markets mobile computing systems and wireless data communications networks using radio frequency technology. UBI is a European-based automated data collection company headquartered in Sweden. These companies were integrated into Intermec Technologies Corporation. Both transactions were funded by WAI borrowings and cash on hand, and have been accounted for under the purchase method of accounting. Accordingly, the acquisition costs (approximately $280.0 million and $107.0 million for Norand and UBI, respectively) were allocated to the net assets acquired based upon their relative fair values. Such allocation resulted in $203.3 million assigned to in-process research and development activities; $154.1 million assigned to goodwill (amortized over 25 years); and $29.0 million assigned to other intangibles (amortized over periods ranging from 4 to 18 years). During the second quarter of 1997, the Company expensed the amounts assigned to acquired in-process research and development in accordance with Financial Accounting Standards Board Interpretation No. 4.
The Company acquired the remaining 51% of Honsberg, a German machine tool maker, in the second quarter of 1997. The original 49% of Honsberg was acquired during 1995. The Company acquired the stamping, engineering, and prototyping division of Modern Prototype Company in September 1997. In December 1997, UNOVA acquired Goldcrown Machinery, Inc., a manufacturer of precision centerless grinding systems. Also, in November 1997, the Company acquired 13% of the common stock of Amtech Corporation, which was applied toward the purchase price of Amtech's RFID business in 1998.
SG&A expense as a percentage of sales and service revenues increased to 22.7% for the year ended December 31, 1997, compared to 18.8% in 1996. This increase is primarily due to a higher percentage of the Company's 1997 sales coming from the ADS segment, where SG&A rates are historically higher than those experienced in the IAS segment. ADS sales as a percentage of total Company sales increased to 44.6% in 1997 from 31.5% in 1996.
Net interest expense was $16.7 million and $7.1 million for the years ended December 31, 1997 and 1996, respectively. The increase is primarily due to an increase in the level of Western Atlas allocated debt from $109.6 million at December 31, 1996 to $230.0 million at October 31, 1997 (when the Company paid this amount to WAI as an intercompany dividend). The increase in allocated debt is primarily attributable to the 1997 acquisitions of Norand and UBI.
FOREIGN CURRENCY TRANSACTIONS
The Company is subject to the effects of international currency fluctuations due to the global nature of its operations. Currency fluctuations did not have a significant impact on operations during fiscal years 1998, 1997 and 1996. It is not possible to predict the Company's exposure to foreign currency fluctuations beyond the near term because revenues generated from particular foreign jurisdictions vary widely over time. The Company hedges transactions from time to time, but the amount and volume of such transactions are not material.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) For fiscal year 1998, the Company derived approximately 36% of its revenues and approximately 26% of its operating profits (exclusive of corporate overhead) from non-U.S. operations. At December 31, 1998, identifiable assets attributable to foreign operations comprised 22% of total assets. As the largest components of these foreign assets are attributable to European operations, the exposure of identifiable assets to foreign currency fluctuations or expropriations is not significant.
LIQUIDITY AND CAPITAL RESOURCES
Cash and marketable securities increased from $13.7 million at December 31, 1997 to $17.7 million at December 31, 1998. Total debt increased from $303.6 million at December 31, 1997 to $603.8 million at December 31, 1998 due to the acquisitions of Cincinnati Machine, R&B Machine and Amtech Systems and the normal capital expenditure and working capital needs of the operations.
In March 1998, the Company sold $200.0 million principal amount of senior unsecured debt. The sale comprised $100.0 million of 6.875% seven-year notes, at a price of 99.867 and $100.0 million of 7.00% ten-year notes, at a price of 99.856. Including underwriting fees, discounts and effects of forward rate agreements entered into by the Company to hedge the interest rates on the debt, the effective interest rates on the seven-year and ten-year notes are 7.125% and 7.175%, respectively. The net proceeds of approximately $198.0 million were used by the Company to repay outstanding debt.
The Company has two unsecured committed credit facilities with a group of banks from which it may borrow up to $500.0 million. Under these credit facilities, the Company may borrow at the prime rate or at rates based on the London Inter Bank Offered Rate, certificates of deposit or other rates that are mutually acceptable to the banks and the Company. At February 12, 1999, $300.0 million of these credit facilities was available for the Company's general use. In addition, the Company maintains other uncommitted credit facilities and lines of credit of which $89.3 million was available to the Company at February 12, 1999.
The Company expects that cash flow from operations, along with available borrowing capacity, will be adequate to meet working capital requirements.
YEAR 2000
The Year 2000 issue is the result of computer programs designed to define a year using two digits rather than four. As such, a date sensitive field using "00" could be recognized as the year 1900 rather than the year 2000, potentially causing the worst case scenario of a system failure or other business disruption.
The operating segments of the Company formed internal review teams to address the Year 2000 issue. The teams are monitored on an ongoing basis by executive management. As a result of this review, the Company has identified its significant information technology and non-information technology systems that will require modification to ensure Year 2000 compliance. Internal and external resources are being used to make the required modifications and test Year 2000 compliance. Although there can be no assurance that the Company will identify and correct every Year 2000 problem, the Company believes that it has in place a comprehensive program to identify and correct any such problems. The Company plans to complete the internal modification and testing process prior to December 31, 1999.
UNOVA is also actively working with its significant suppliers and customers to assess their Year 2000 compliance efforts and the Company's exposure to them. While the Company currently does not anticipate problems related to third party Year 2000 issues, the Company will continue to assess potential risk from third parties. However, there can be no assurance that Year 2000 problems originating with a supplier or other third party will not occur.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The Company has also assessed the capability of its products to determine whether they are Year 2000 compliant. The Company believes that all of its current products are Year 2000 compliant. UNOVA has not tested products that are no longer sold by the Company and the Company does not believe it is legally responsible for costs incurred by customers related to ensuring their Year 2000 capability. However, the Company is providing customer support and customer satisfaction services related to Year 2000 issues. UNOVA defines "Year 2000 compliant" as a product that, when used properly and in conformity with the product information provided by the Company, will accurately transition data between the twentieth and twenty-first centuries, including leap year calculations, provided that all other technology used in combination with the product properly exchanges data with the UNOVA product.
In addition, the Company has begun internal discussions concerning contingency planning to address potential problem areas with internal systems and third parties. If deemed necessary, these contingency plans will be developed prior to December 31, 1999.
The Company estimates that the total incremental cost of these Year 2000 compliance activities will be approximately $7.0 million. Of these costs, it is estimated that approximately $1.5 million are expense items and the remaining $5.5 million are capitalizable. As of December 31, 1998, the Company has incurred approximately $3.3 million of Year 2000 costs of which about $500 thousand was expensed and approximately $2.8 million was capitalized. These costs and the date on which the Company plans to complete the Year 2000 modification are based on management's best estimates, which were derived utilizing numerous assumptions of future events. However, there can be no guarantee that these estimates will be achieved and actual results could differ from those plans. Based on currently available information, management does not believe that Year 2000 issues will have a material adverse impact on the Company's financial condition or results of operations. However, the Year 2000 problem has many aspects and potential consequences, some of which are not reasonably foreseeable, and there can be no assurance that unforeseen consequences will not arise.
INFLATION
In the opinion of management, inflation has not been a significant factor in the markets in which the Company operates and has not had a significant impact upon the results of its operations.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which is effective for fiscal years beginning after June 15, 1999. The Company is currently evaluating the impact of adopting this statement.
FORWARD-LOOKING STATEMENTS
The Company cautions readers that, in addition to the historical information covered in this discussion and analysis, included are certain forward-looking statements and information that are based on management's beliefs as well as on assumptions made by and information currently available to management. They include, but are not limited to, statements about the demand for the Company's products and services, the Company's ability to profitably exploit new technologies acquired or developed, and the Company's ability to realize its intentions with respect to the future performance of operations being acquired. Such forward-looking statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions which could cause the Company's future results to differ materially from those expressed or implied in any forward-looking statements made by, or on behalf of, the
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Company. Such factors include, but are not limited to, the following which are beyond the Company's control: fluctuations in the strength of the automotive and aerospace markets; technological changes and developments, particularly in the ADC/Mobile Computing System industry; the presence of competitors with greater financial and other resources; the availability and cost of materials and supplies; relations with the Company's employees; the Company's ability to manage its operating costs and to integrate acquired businesses in an effective manner; worldwide political stability and economic conditions; regulatory uncertainties; operating risks associated with international operations; and the risk that the Company's due diligence procedures may have failed to reveal undisclosed material information concerning acquired operations. Any forward-looking statements should be considered in light of these factors, many of which are beyond the Company's ability to control or predict. Readers are cautioned not to put undue reliance on forward-looking statements. The Company disclaims any intent or obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to interest rate risk primarily from its short-term and long-term borrowings and to exchange rate risk with respect to its foreign operations and from foreign currency transactions. The information presented below summarizes the Company's cash flows for its borrowings and related interest rates by dates of maturity. Variable interest rates disclosed represent the weighted average rates of the borrowings at December 31, 1998. Fair values have been determined based on quoted market prices. The information presented below should be read in conjunction with Note C to the Consolidated and Combined Financial Statements.
The Company from time to time enters into foreign currency exchange contracts to hedge certain foreign currency transactions and commitments and to reduce its exposure from investments in certain foreign operations. These contracts were not significant at December 31, 1998. The Company does not enter into any foreign currency contracts for trading purposes. A hypothetical 10% change in the relevant currency rates at December 31, 1998 would not have a material impact on the Company's results of operations or cash flows.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See the information relating to directors of the Company under "Item One. Election of Directors" in the Company's definitive Proxy Statement relating to the Annual Meeting of Shareholders to be held on May 7, 1999 (the "1999 Proxy Statement"), which is incorporated herein by reference.
The executive officers of the Company are elected each year by the Board of Directors at its first meeting following the Annual Meeting of Shareholders to serve during the ensuing year and until their respective successors are elected and qualify. There are no family relationships between any of the executive officers of the Company. The following information indicates the positions and ages of the Company's executive officers at February 13, 1999 and their business experience during the prior five years:
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
See the information relating to executive compensation under the captions "Summary Compensation Table," "Stock Option Information," "Employment and Change in Control Arrangements" and "Retirement Benefits" of the Company's 1999 Proxy Statement, which is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See the information with respect to beneficial ownership of the Company's voting securities by each director, certain executive officers and all executive officers and directors as a group, and by any person known to beneficially own more than 5% of any class of voting security of the Company, under the caption "Security Ownership by Certain Beneficial Owners and Management" of the Company's 1999 Proxy Statement, which is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See the information with respect to certain relationships and related transactions under the caption "Certain Relationships and Related Transactions" of the Company's 1999 Proxy Statement, which is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
* All schedules and notes specified under Regulation S-X are omitted because they are either not applicable, not required or the information called for therein appears in the consolidated and combined financial statements or notes thereto.
UNOVA, INC. EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
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.
March 11, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
UNOVA, INC. MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The consolidated and combined financial statements of UNOVA, Inc. and subsidiaries and related financial information included in this Annual Report, have been prepared by the Company, whose management is responsible for their integrity. These statements, which necessarily reflect estimates and judgments, have been prepared in conformity with generally accepted accounting principles.
The Company maintains a system of internal controls to provide reasonable assurance that assets are safeguarded and transactions are properly executed and recorded. As part of this system, the Company has an internal audit staff to monitor compliance with and the effectiveness of established procedures.
The consolidated and combined financial statements have been audited by Deloitte & Touche LLP, independent auditors, whose report appears on page.
The Audit and Compliance Committee of the Board of Directors, which consists solely of directors who are not employees of the Company, meets periodically with management, the independent auditors and the Company's internal auditors to review the scope of their activities and reports relating to internal controls and financial reporting matters. The independent and internal auditors have full and free access to the Audit and Compliance Committee and meet with the Committee both with and without the presence of Company management.
/s/ Michael E. Keane
Senior Vice President and Chief Financial Officer
February 12, 1999
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
UNOVA, Inc.
Beverly Hills, California
We have audited the accompanying consolidated and combined balance sheets of UNOVA, Inc. and subsidiaries (as described in Note A) as of December 31, 1998 and 1997, and the related consolidated and combined statements of operations, changes in shareholders' investment, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated and combined financial statements present fairly, in all material respects, the financial position of UNOVA, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP Los Angeles, California
February 12, 1999
UNOVA, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
See accompanying notes to consolidated and combined financial statements.
UNOVA, INC.
CONSOLIDATED BALANCE SHEETS
(THOUSANDS OF DOLLARS)
See accompanying notes to consolidated and combined financial statements.
UNOVA, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(THOUSANDS OF DOLLARS)
See accompanying notes to consolidated and combined financial statements.
UNOVA, INC.
CONSOLIDATED AND COMBINED STATEMENTS OF CHANGES IN SHAREHOLDERS' INVESTMENT
(THOUSANDS OF DOLLARS)
See accompanying notes to consolidated and combined financial statements.
UNOVA, INC. NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
NOTE A: SIGNIFICANT ACCOUNTING POLICIES
GENERAL INFORMATION. UNOVA, Inc. ("UNOVA" or the "Company") became an independent public company on October 31, 1997 (the "Distribution Date"), when all of the UNOVA common stock was distributed to holders of common stock of Western Atlas Inc. ("WAI"), in the form of a dividend (the "Distribution"). Every WAI shareholder of record on October 24, 1997 was entitled to receive one share of UNOVA common stock for each WAI share of common stock held.
NATURE OF OPERATIONS. UNOVA is an industrial technologies company providing global customers with solutions for improving their efficiency and productivity. The Automated Data Systems business segment comprises automated data collection ("ADC") and mobile computing products and services, principally serving the industrial market. Customers are global distribution and transportation companies, food and beverage operations, manufacturing industries, health care providers and government agencies. The Industrial Automation Systems business segment includes integrated manufacturing systems, body welding and assembly systems, precision grinding and abrasives operations, and machining systems and stand-alone machine tools primarily serving the worldwide automotive, off-road vehicle, diesel engine and aerospace manufacturing industries.
PRINCIPLES OF CONSOLIDATION AND COMBINATION. The consolidated and combined financial statements include those of the Company, its subsidiaries and companies in which UNOVA has a controlling interest. Investments in companies over which UNOVA has influence but not a controlling interest are accounted for using the equity method. Investments in other companies are carried at cost. All material intercompany transactions have been eliminated.
The combined financial statements for all periods presented prior to the Distribution Date include the historical accounts and operations of the former WAI businesses that now comprise the Company. They include, at their historical amounts, the assets, liabilities, revenues and expenses directly related and those allocated to the businesses that now comprise the Company's operations. A pro rata share of certain general and administrative corporate costs incurred by WAI prior to the Distribution Date have been allocated to the Company based on the relative ratio of such projected costs to be incurred by WAI and the Company individually. Such costs include general management, legal, tax, treasury, insurance, financial audit, financial reporting, human resources and real estate services.
The Company's debt prior to the Distribution Date includes an allocation of a portion of WAI's corporate debt, based on the Company's estimated past capital requirements. Interest expense related thereto has been included in the Company's statements of operations at WAI's estimated blended historical rate of interest on long-term borrowings of 7.5%.
Management believes the above stated allocations were made on a reasonable basis; however, they do not necessarily reflect the results of operations which would have occurred had the Company been an independent entity nor are they necessarily indicative of future expenses or income (see Note J).
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for each reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS. The Company considers time deposits and commercial paper purchased within three months of their date of maturity to be cash equivalents.
NOTE A: SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INVENTORIES. Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out or last-in, first-out method.
REVENUE RECOGNITION. Revenues are generally recognized when products are shipped or as services are performed. Revenues and profits on long-term contracts are recorded under the percentage-of-completion, cost to cost method of accounting. Any anticipated losses on contracts are charged to operations as soon as they are determinable. General and administrative costs are expensed as incurred.
RESEARCH AND DEVELOPMENT. Research and development costs are charged to expense as incurred. Total expenditures on research and development activities amounted to $71.5 million, $53.1 million and $29.7 million, in the years ended December 31, 1998, 1997, and 1996, respectively. The Company expensed a total of $211.5 million of acquired in-process research and development in 1997. See further discussion in Note B.
OTHER INCOME, NET. In the year ended December 31, 1998, other income, net consists of a gain of $35.5 million recognized on the sale of UNOVA's corporate headquarters building, offset by other non-operating expenses.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment is stated at cost. Depreciation, computed generally by the straight-line method for financial reporting purposes, is provided over the estimated useful lives of the related assets.
INCOME TAXES. The Company accounts for income taxes using the asset and liability approach, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. See further discussion in Note G.
The Company's domestic operations and their foreign branches were included in WAI's consolidated tax returns (for periods prior to the Distribution Date). Any tax benefits related to these operations have been recorded in these financial statements if such were realizable by WAI on a consolidated basis. Foreign entities included in these financial statements pay taxes in accordance with local laws and regulations.
CONCENTRATIONS OF CREDIT RISK. Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and trade receivables. The Company places its cash and cash equivalents with high credit quality institutions and limits the amount of credit exposure with any one institution. Concentrations of credit risk with respect to trade receivables are limited because a large number of geographically diverse customers make up the Company's customer base, thus spreading the trade credit risk. The Company evaluates the creditworthiness of its customers and maintains an allowance for anticipated losses.
No customer was significant to the Company's revenues in 1998. In 1997, one automotive customer represented 13% of revenues, while in 1996 another automotive customer represented 15% of revenues.
FOREIGN CURRENCIES. The currency effects of translating the financial statements of the Company's foreign entities that operate in local currency environments are included in the "cumulative currency translation adjustment" component of shareholders' investment. Currency transaction gains and losses are included in the consolidated and combined statements of operations and were not material for any periods presented herein.
FINANCIAL INSTRUMENTS. The Company from time to time enters into foreign currency exchange contracts to hedge certain foreign currency transactions and commitments and to reduce its exposure from
NOTE A: SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) investments in certain foreign operations. The amount and volume of such transactions are not material. The Company does not enter into any foreign currency contracts for trading purposes.
GOODWILL AND OTHER INTANGIBLES. Goodwill is amortized on a straight-line basis over periods ranging from 15 to 40 years. Other intangibles are amortized on a straight-line basis over periods ranging from four to 18 years.
IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL. The Company assesses the recoverability of long-lived assets and goodwill at the end of each fiscal year or as circumstances indicate that the carrying amount of an asset may not be fully recoverable. Factors considered in evaluating recoverability include management's plans for the operations to which the asset relates and the historical earnings and projected undiscounted cash flows of such operations. An impairment is recorded to writedown long-lived assets and goodwill to their estimated fair value if the undiscounted cash flows estimated to be generated by the asset are less than its carrying amount.
ENVIRONMENTAL COSTS. Provisions for environmental costs are recorded when the Company determines its responsibility for remedial efforts and such amounts are reasonably estimable.
NEW ACCOUNTING PRONOUNCEMENTS. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, which is effective for fiscal years beginning after June 15, 1999. The Company is currently evaluating the impact of adopting this statement.
RECLASSIFICATIONS. Certain prior year amounts have been reclassified to conform to the current year presentation.
NOTE B: BUSINESS ACQUISITIONS, INVESTMENTS, AND DISPOSITIONS
ACQUISITIONS AND INVESTMENTS
In October 1998, UNOVA acquired the machine tool business of Cincinnati Milacron for approximately $180.0 million in cash, subject to post-closing adjustments. The division, which was renamed Cincinnati Machine, a UNOVA Company ("Cincinnati Machine"), is engaged in the design, manufacture, sale and servicing of standard and advanced computer numerically controlled metal cutting machine tools for the industrial component, aerospace, job shop, fluid power and automotive industries. Cincinnati Machine has become part of the Company's Industrial Automation Systems ("IAS") segment. The acquisition cost has been allocated to the net assets acquired based on the relative fair values. The acquisition was funded using the Company's committed credit facility and was accounted for under the purchase method of accounting.
During the third quarter of 1998, UNOVA acquired R & B Machine Tool Company ("R&B Machine"), a specialty machine and retooling company. This acquisition was funded using short-term uncommitted credit lines. In June 1998, the Company acquired the radio frequency identification ("RFID") business unit of Amtech Corporation known as the Amtech Systems Division ("Amtech Systems"). Amtech Systems is a supplier of wireless data technologies for electronic toll collection, rail and motor fleet tracking, and access control to parking and other structures. The Company had previously purchased $10.0 million of Amtech Corporation common stock which was applied towards the purchase price of Amtech Systems. Although these acquisitions are integral to the Company's business strategy, they are not material in the aggregate to UNOVA's consolidated and combined financial statements.
The allocation of the acquisition costs of Cincinnati Machine, R&B Machine and Amtech Systems is preliminary and subject to revision upon receipt of pending information, such as final assessment of certain legal and environmental exposures and the completion of certain appraisals. Any such revisions are not expected to have a material impact on the Company's consolidated and combined financial statements.
The Company acquired Norand Corporation ("Norand") on March 3, 1997, and United Barcode Industries ("UBI") on April 4, 1997. Norand designs, manufactures and markets mobile computing systems and wireless data communications networks using radio frequency technology. UBI, a European-based ADC company, manufactures bar code on-demand printers with labels and ribbons as well as hand-held scanners. These two companies were consolidated in Intermec Technologies Corporation, the Company's Automated Data Systems subsidiary. Both acquisitions were funded by Western Atlas borrowings and cash on hand, and have been accounted for under the purchase method of accounting. Accordingly, the acquisition costs (approximately $280.0 million and $107.0 million for Norand and UBI, respectively) were allocated to the net assets acquired based upon their relative fair values. Such allocation resulted in $203.3 million assigned to acquired in-process research and development activities; $154.1 million assigned to goodwill (amortized over 25 years using the straight-line method); and $29.0 million assigned to other intangibles (amortized over periods ranging from four to 18 years using the straight-line method). During the second quarter of 1997, the Company expensed the amounts assigned to acquired in-process research and development projects that had not yet achieved technological feasibility in accordance with Financial Accounting Standards Board Interpretation No. 4 ("FIN 4").
The Company acquired the remaining 51% of Honsberg, a German machine tool maker, in the second quarter of 1997. The original 49% of Honsberg was acquired during 1995. The Company purchased the stamping, engineering and prototyping division of Modern Prototype Company in September 1997. In December 1997, UNOVA acquired Goldcrown Machinery, Inc., a manufacturer of precision centerless grinding systems. Although these acquisitions are integral to the Company's business strategy, they are not material in the aggregate to UNOVA's consolidated and combined financial statements.
In December 1997, the Company acquired radio frequency identification ("RFID") technology from IBM Corporation. In connection with this acquisition, the Company recorded a $13.0 million after-tax charge
NOTE B: BUSINESS ACQUISITIONS, INVESTMENTS, AND DISPOSITIONS (CONTINUED) in 1997 to expense acquired in-process research and development in accordance with FIN 4 and the anticipated loss on a related long-term contract. The Company is using this acquired technology to further develop its own RFID technology.
CASH FLOW DISCLOSURE
The fair values of acquired assets and liabilities, at their respective acquisition dates, are presented below for supplemental cash flow disclosure purposes. The 1998 balances include the assets and liabilities of Cincinnati Machine, R&B Machine and Amtech Systems while the 1997 balances include Norand, UBI, Honsberg, Modern Prototype and Goldcrown Machinery.
PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The pro forma information for the year ended December 31, 1998 in the following paragraph gives effect to the acquisition of Cincinnati Machine as if it had occurred on January 1, 1998. The pro forma information for the year ended December 31, 1997 gives effect to the acquisitions of Cincinnati Machine and Norand as if they had occurred on January 1, 1997. The financial information has been prepared from the historical financial statements of the Company, Cincinnati Machine and Norand after giving effect to certain pro forma adjustments, including depreciation on the fair market value of the acquired property, plant, and equipment and interest expense associated with the increase in debt.
Unaudited pro forma sales and service revenues, net earnings and earnings per diluted share for the year ended December 31, 1998 are $2,009.1 million, $68.2 million and $1.25, respectively, reflecting the Cincinnati Machine acquisition as if it had occurred on January 1, 1998. Unaudited pro forma sales and service revenues, net earnings and earnings per diluted share for the year ended December 31, 1997 are $1,921.0 million, $27.4 million and $0.51, respectively, reflecting the Cincinnati Machine and Norand acquisitions as if they had occurred on January 1, 1997.
The unaudited pro forma financial information is not necessarily indicative of what the results of operations would have been if the combination had occurred on the above-mentioned dates. Additionally, such information may not be predictive of future results of operations.
DISPOSITIONS
The Company sold its Material Handling Systems operations in November of 1996. The activities of the division were not considered a core business of the Company.
NOTE C: CASH AND CASH EQUIVALENTS, DEBT AND INTEREST
Cash and cash equivalents amounted to $17.7 million and $13.7 million at December 31, 1998 and December 31, 1997, respectively, and consisted mainly of time deposits and commercial paper.
Notes payable and long-term obligations consist of the following:
At December 31, 1998 the Company classified $150.0 million of borrowings under the revolving credit facility as long-term, as the Company intends to refinance such obligations on a long-term basis. At December 31, 1997 the Company classified $200.0 million of short-term debt as long-term to reflect the debt offering that occurred in March 1998, which is described below.
Notes payable and long-term obligations at December 31, 1998 mature as follows:
The Company has an unsecured committed credit facility with a group of banks from which it may borrow up to $400.0 million. Under this credit facility, which expires in September 2002, the Company may borrow at the prime rate or at rates based on the London Inter Bank Offered Rate, certificates of deposit or other rates that are mutually acceptable to the banks and the Company. At February 12, 1999, $200.0 million of the credit facility was available for the Company's general use.
NOTE C: CASH AND CASH EQUIVALENTS, DEBT AND INTEREST (CONTINUED) In January 1999, the Company entered into a new unsecured committed credit facility with a group of banks from which it may borrow up to $100.0 million. Under this credit facility, which expires in January 2000, the Company may borrow at the prime rate or at rates based on the London Inter Bank Offered Rate, certificates of deposit or other rates that are mutually acceptable to the banks and the Company. At February 12, 1999, $100.0 million of the credit facility was available for the Company's general use.
In addition, the Company maintains other uncommitted credit facilities and lines of credit of which $89.3 million was available to the Company at February 12, 1999.
The Company is in compliance with its various debt covenants the most restrictive of which relate to the Company's incurrence of debt, mergers, consolidations and sale of assets and which require the Company to satisfy certain leverage ratios.
In March 1998, the Company sold $200.0 million principal amount of senior unsecured debt. The sale comprised $100.0 million of 6.875% seven-year notes, at a price of 99.867 and $100.0 million of 7.00% ten-year notes, at a price of 99.856. Including underwriting fees, discounts and effects of forward rate agreements entered into by the Company to hedge the interest rates on the debt, the effective interest rates on the seven-year and ten-year notes are 7.125% and 7.175%, respectively. The net proceeds of approximately $198.0 million were used by the Company to repay outstanding short-term debt.
Financial instruments on the Company's consolidated balance sheets include accounts receivable, notes payable, and accounts payable which approximate their market values due to their short maturity. The $366.5 million of long term obligations had an estimated fair market value of $363.4 million as of December 31, 1998, based primarily on quoted market prices. UNOVA also has off-balance-sheet guarantees and letter-of-credit reimbursement agreements with respect to liabilities totaling a maximum amount of $228.8 million at December 31, 1998. These agreements primarily relate to the guarantee of performance on contracts.
Net interest expense is composed of the following:
The Company made interest payments to non-related parties of $25.3 million, $6.6 million, and $2.6 million in the years ended December 31, 1998, 1997 and 1996, respectively. Capitalized interest costs in each of the periods presented were not material. Interest expense of $12.0 million and $8.3 million on the allocated portion of WAI's corporate debt for the years ended December 31, 1997 and 1996, respectively, has been included in the Company's consolidated and combined statements of operations at WAI's estimated blended historical rate of interest on long-term borrowings of 7.5%.
NOTE D: ACCOUNTS RECEIVABLE AND INVENTORIES
Accounts receivable consists of the following:
The unbilled costs and retentions at December 31, 1998 are expected to be entirely billed and collected during 1999.
Inventories consist of the following:
NOTE E: PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
Depreciation expense was $40.9 million, $27.4 million and $20.7 million for the years ended December 31, 1998, 1997 and 1996, respectively.
The range of estimated useful lives of the major classes of assets are:
As of December 31, 1998, minimum rental commitments under noncancellable operating leases were:
Rental expense for operating leases, including amounts for short-term leases with nominal, if any, future rental commitments, was $20.5 million, $17.9 million and $10.4 million, for the years ended December 31, 1998, 1997 and 1996, respectively.
In 1998, proceeds totaling approximately $71.1 million were received on the sale of the Company's corporate headquarters building and three operations facilities.
NOTE F: SHAREHOLDERS' INVESTMENT
CAPITAL STOCK
At December 31, 1998, there were authorized 250 million shares of common stock, par value $0.01, and 50 million shares of preferred stock, par value $0.01.
SHAREHOLDER RIGHTS PLAN
On September 24, 1997, the Company's Board of Directors adopted a Share Purchase Rights Plan (the "Plan") and, in accordance with such Plan, declared a dividend of one preferred share purchase right (the "Right") for each outstanding share of Company common stock, payable to shareholders of record on October 31, 1997. The Plan will cause substantial dilution to a party that attempts to acquire the Company in a manner or on terms not approved by the Board of Directors. Each Right entitles the holder to purchase from the Company one one-hundredth of a share of Series A Preferred Stock at a price of seventy dollars. The Rights become exercisable if a person other than a person which presently holds more than 15 percent of the Company's common stock acquires 15 percent or more, or announces a tender offer for 15 percent or more, of the Company's outstanding common stock. If a person acquires 15 percent or more of the Company's outstanding common stock, each right will entitle the holder to purchase the Company's common stock having a market value of twice the exercise price of the Right. The Rights, which expire in September 2007, may be redeemed by UNOVA at a price of one cent per Right at any time prior to a person acquiring 15 percent or more of the outstanding common stock.
EARNINGS PER SHARE
For the year ended December 31, 1998, basic earnings per share is calculated using the weighted average number of common shares outstanding for the period while diluted earnings per share is computed on the basis of the weighted average number of common shares outstanding plus the effect of outstanding stock options using the "treasury stock" method. For the year ended December 31, 1997, basic earnings per share is calculated using the weighted average balance of the number of shares outstanding for post-Distribution Date periods and the outstanding shares of WAI common stock at June 30, 1997 for periods prior to the Distribution Date, while diluted earnings per share is computed by adding the effect of outstanding stock options using the "treasury stock" method to the basic weighted average balance.
Shares used for basic and diluted earnings per share were computed as follows:
The Company used 53,891,534 shares, the outstanding shares of WAI common stock at June 30, 1997, to calculate both basic and diluted earnings per share in the year ended December 31, 1996.
At December 31, 1998, Company employees and directors held options to purchase 3,937,750 shares of Company common stock that were antidilutive to the diluted earnings per share computation. These options could become dilutive in future periods if the average market price of the Company's common stock exceeds the exercise price of the outstanding options.
NOTE F: SHAREHOLDERS' INVESTMENT (CONTINUED) STOCK OPTIONS
The UNOVA, Inc. 1997 Stock Incentive Plan (the "1997 Plan") provides for the grant of incentive awards to officers and other key employees. Incentive awards may be granted in the form of stock options, with or without related stock appreciation rights, or in the form of restricted stock. Under the 1997 Plan, stock options may not be granted at a price less than the market value of the Company's common stock on the date of grant. The 1997 Plan options usually vest in equal increments over five years. The Company also has a Director Stock Option and Fee Plan (the "Director Plan") which provides for the grant of stock options to the Company's non-employee directors. Under the Director Plan, stock options are granted annually at the market value of the Company's common stock on the date of grant. The number of options granted annually is fixed by the plan. Such options become fully exercisable on the first anniversary of their grant. Under the 1997 Plan and Director Plan, there were 582,700 options exercisable and 2,045,250 options available for grant as of December 31, 1998. No options were exercisable as of December 31, 1997.
The following table summarizes the activity of the Company's stock option plans:
Outstanding stock option data as of December 31, 1998:
The weighted-average fair value of stock options granted during 1998 and 1997 were $7.10 per option and $7.76 per option, respectively. The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1998 and 1997, respectively; risk-free interest rates of 4.63% and 5.80%, expected life of five years for both years; and expected volatility of 39.6%, determined from historical UNOVA stock price fluctuations, and 36.0%, determined from historical industry stock price fluctuations. There is no assurance that the assumptions used in determining the fair values of stock options will prove true in the future. The actual value of the options depends on several factors, including the actual market price of the common stock on the date of exercise. Changes in any of these factors as well as fluctuations in the market price of the Company's common stock will cause the actual value of these options to vary from the theoretical value indicated above.
NOTE F: SHAREHOLDERS' INVESTMENT (CONTINUED) EMPLOYEE STOCK PURCHASE PLAN
Effective January 1, 1998, UNOVA adopted an Employee Stock Purchase Plan under which the Company is authorized to sell up to five million shares of common stock to its eligible full-time employees. Under the terms of the plan, which is intended to qualify under Section 423 of the Internal Revenue Code, employees can choose to have up to 8% of their annual earnings (up to a maximum amount of $21,250 per calendar year) withheld to purchase the Company's common stock. The purchase price of the stock is 85% of the lower of the market price on the first day or last day of the applicable offering period, which is normally six months in duration. The Company sold 433,506 shares under the Plan in 1998, with approximately 30% of eligible employees participating. The weighted-average fair value of purchase rights granted in 1998 was $5.14 per share. The fair value of the stock purchase rights were determined using the same method and parameters for stock option grants described above, except for the use of an expected life equal to the applicable offering period. As previously noted, the actual value of purchase rights may vary from the theoretical value determined using the Black-Scholes option pricing model.
PRO FORMA COMPENSATION COST DISCLOSURE
The Company accounts for its stock-based compensation plans in accordance with Accounting Principles Board Opinion No. 25, under which no compensation cost has been recognized at the grant of stock options. Had compensation cost for these plans been determined consistent with Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, the Company's pro forma net income and diluted earnings per share for 1998 would have been $64.6 million and $1.18, respectively. In 1997 the Company's pro forma net loss and diluted loss per share would have been $173.6 million and $3.21, respectively.
NOTE G: TAXES ON INCOME
Earnings (loss) before taxes on income by geographic area are as follows:
Taxes on income consist of the following provisions (benefits):
Deferred taxes result from the effect of transactions which are recognized in different periods for financial and tax reporting purposes. The primary components of the Company's deferred tax assets and liabilities are as follows:
The Company has available at December 31, 1998, a net operating tax loss carryforward in the United States of approximately $69.4 million. Approximately $7.7 million, $13.9 million, $4.2 million and
NOTE G: TAXES ON INCOME (CONTINUED) $43.6 million of the net operating tax loss carryforwards will expire in 2010, 2011, 2017 and 2018, respectively. The Company also has general business credit and other tax credits of approximately $6.4 million to offset future tax liability in the United States through 2018. The Company has foreign net operating tax loss carryforwards of $17.9 million and $31.4 million in Germany and the U.K. respectively.
Valuation allowances of $8.9 million and $4.4 million as of December 31, 1998 and 1997, respectively, were established for deferred income tax benefits related to the German loss carryforwards that may not be realized. Included in the valuation allowance is $4.4 million that relates to the acquired German net operating loss carryforwards; any tax benefits subsequently recognized for the acquired German net operating loss carryforwards will be allocated to goodwill. With the exception of the German tax loss carryforward, the Company believes it will utilize all other U.S. and foreign carryforward benefits.
The following is a reconciliation of income taxes at the U.S. statutory rate to the provision for income taxes:
The Company made net tax payments of $4.5 million, $44.4 million and $26.1 million in the years ended December 31, 1998, 1997 and 1996, respectively.
The Company has provided for federal income taxes and foreign withholding taxes on the undistributed earnings of foreign subsidiaries.
NOTE H: PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
The Company has retirement and pension plans which cover most of its employees. Most of the Company's U.S. employees are covered by a contributory defined benefit plan, under which annual contributions are made to the extent such contributions are actuarially determined to adequately fund the plan.
There are also defined contribution voluntary savings programs generally available for U.S. employees, which are intended to qualify under Sections 401(a) and 401(k) of the Internal Revenue Code. These plans are designed to enhance the retirement programs of participating employees. Under these plans, the Company matches up to 50% of a certain portion of participants' contributions.
Certain of the Company's non-U.S. subsidiaries also have a retirement plan for employees. The pension liabilities and their related costs are computed in accordance with the laws of the individual nations and appropriate actuarial practices.
U.S. PENSION PLANS
The following table sets forth the change in benefit obligations and plan assets of the Company's U.S. pension plans and the amounts recognized in the Company's balance sheets at December 31, 1998 and 1997.
NOTE H: PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (CONTINUED) The preceding table includes prepaid pension cost presented net of pension liabilities for plans in which accumulated benefits exceed plan assets. As of December 31, 1998 and 1997, these liabilities amounted to $17.1 million and $16.2 million, respectively.
Actuarial assumptions for the Company's U.S. defined benefit plans included an expected long-term rate of return on plan assets of 9 1/4% for fiscal years 1998 and 1997. The weighted-average discount rate used in determining the actuarial present value of the projected benefit obligation was 7% and 7 1/2% at December 31, 1998 and 1997, respectively. The rate of increase in future compensation levels was 4 1/2% and 5% at December 31, 1998 and 1997, respectively.
Plan assets consist primarily of equity securities and U.S. Government securities. The excess of plan assets over the projected benefit obligation at August 1, 1986 (when the Company adopted SFAS No. 87) and subsequent unrecognized gains and losses are fully amortized over the average remaining service period of active employees expected to receive benefits under the plans, generally 15 years.
A summary of the components of net periodic pension income for the U.S. defined benefit plans and defined contribution plans for the years ended December 31, 1998, 1997 and 1996, is as follows:
NON-U.S. PENSION PLANS
For the principal non-U.S. pension plans located in the United Kingdom, the weighted-average discount rate used was approximately 6% at December 31, 1998. The rate of increase in future compensation used was approximately 3 1/2%, and the rate of return on assets was 6 1/2% at December 31, 1998.
Pension costs for non-U.S. pension plans were not material for any of the periods presented herein. The actuarial present value of projected benefits at December 31, 1998 was $107.2 million compared with net assets available for benefits of $111.6 million.
NOTE H: PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS (CONTINUED) OTHER POSTRETIREMENT BENEFITS
In addition to pension benefits, certain of the Company's U.S. employees are covered by postretirement health care and life insurance benefit plans provided by UNOVA. These benefit plans are unfunded. The following table sets forth the change in benefit obligation of the Company's other postretirement benefits and amounts recognized in the Company's balance sheets at December 31, 1998 and 1997.
The following table sets forth the status of the Company's net periodic postretirement benefit cost for the years ended December 31, 1998, 1997 and 1996.
Actuarial assumptions used to measure the accumulated benefit obligation include a discount rate of 7% and 7 1/2% at December 31, 1998 and 1997. The assumed health care cost trend rate for fiscal year 1998 was 12% and is projected to decrease over 18 years to 6%, where it is expected to remain thereafter. The effect of a one-percentage-point increase or decrease in the assumed health care cost trend rate on the service cost and interest cost components of the net periodic postretirement benefit cost is not material. A one-percentage-point increase in the assumed health care cost trend rate on the accrued postretirement benefit obligation results in an increase of approximately $1.9 million, while a one-percentage point decrease results in a decrease of $1.7 million.
NOTE I: LITIGATION, COMMITMENTS AND CONTINGENCIES
The Company is currently, and is from time to time, subject to claims and suits arising in the ordinary course of its business. In the opinion of the Company's General Counsel, the ultimate resolution of currently pending proceedings will not have a material adverse effect on the Company's consolidated and combined financial statements.
NOTE J: RELATED PARTY TRANSACTIONS
Included in other assets are amounts due from certain Company officers and other related parties of $1.9 million and $2.1 million at December 31, 1998 and 1997, respectively.
In 1999, the Company intends to move its executive offices to a leased facility that is owned by the UNOVA Master Trust, a vehicle which holds the assets of the Company's major U.S. pension plans ("UNOVA Master Trust"). The Company is currently awaiting Department of Labor approval of the transaction under provisions of the Employment Retirement Income Security Act of 1974 governing transactions between pension plans and related parties before it executes a long-term lease with the UNOVA Master Trust, which is expected to be consummated on terms equivalent to an arm's-length transaction.
Immediately prior to the Distribution in 1997, the Company paid a dividend of $230.0 million to WAI with funds borrowed under the Company's revolving credit facility.
Included in general and administrative expenses are allocated charges from WAI of $13.5 million and $22.2 million, for the years ended December 31, 1997 and 1996, respectively.
Included in interest expense are allocated charges from WAI of $12.0 million and $8.3 million, for the years ended December 31, 1997 and 1996, respectively.
NOTE K: BUSINESS SEGMENT REPORTING
The Company manages and reports its operations in two business segments: the Automated Data Systems segment and the Industrial Automation Systems segment. Material Handling Systems was sold during the fourth quarter of 1996. Figures for this division were reported as part of the Industrial Automation Systems segment. The Company uses operating profit, which is computed by adding net interest expense to earnings before taxes on income, to evaluate performance.
Corporate and other amounts include corporate operating costs and currency transaction gains and losses (see Notes A and J). Assets classified as corporate and other amounts consist of cash and cash equivalents and other corporate assets. Activities are primarily product sales oriented. Export sales are not material. All material intercompany transactions have been excluded.
OPERATIONS BY BUSINESS SEGMENT (MILLIONS OF DOLLARS)
(A) Includes the $211.5 million charges for acquired in-process research and development.
(B) Includes gain of $35.5 million on sale of UNOVA's corporate headquarters building.
OPERATIONS BY GEOGRAPHIC AREA (MILLIONS OF DOLLARS)
UNOVA, INC. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
As of January 31, 1999 there were approximately 20,246 holders of record of the Company's common stock.
(1) The common stock began trading on the New York Stock Exchange under the symbol "UNA" on October 22, 1997 on a "when issued" basis, and "regular way" on November 3, 1997. Prior to October 31, 1997, the Company was a wholly owned subsidiary of Western Atlas Inc.
(2) In December 1998, the Company recognized a gain of $35.5 million on the sale of its corporate headquarters building.
(3) In June 1997, the Company expensed $203.3 million of in-process research and development activities in connection with the acquisitions of Norand and UBI.
(4) In December 1997, the Company expensed $4.9 million (net of tax) of in-process research and development activities in connection with the acquisition of RFID technology.
UNOVA, INC. INDEX TO EXHIBITS
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* Copies of these documents have been included in this Annual Report on Form 10-K filed with the Securities and Exchange Commission.
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