1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------ FORM 10-K (MARK ONE) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 29, 1996 ----------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from __________ to __________ Commission file number 1-5075 ----------------------------- EG&G, INC. (Exact name of registrant as specified in its charter) <TABLE> <S> <C> MASSACHUSETTS 04-2052042 - ------------------------------------------------------------- ----------------------------------- (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 45 WILLIAM STREET, WELLESLEY, MASSACHUSETTS 02181 - ------------------------------------------------------------- ----------------------------------- (Address of Principal Executive Offices) (Zip Code) </TABLE> Registrant's telephone number, including area code (617) 237-5100 ---------------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: <TABLE> <S> <C> TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- COMMON STOCK, $1 PAR VALUE NEW YORK STOCK EXCHANGE, INC. - ------------------------------------------------------------- ----------------------------------------- PREFERRED SHARE PURCHASE RIGHTS NEW YORK STOCK EXCHANGE, INC. - ------------------------------------------------------------- ----------------------------------------- </TABLE> Securities registered pursuant to Section 12 (g) of the Act: NONE - -------------------------------------------------------------------------------- Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] The aggregate market value of the common stock, $1 par value, held by nonaffiliates of the registrant on February 21, 1997, was $1,020,483,522. As of February 21, 1997, there were outstanding, exclusive of treasury shares, 46,383,953 shares of common stock, $1 par value. DOCUMENTS INCORPORATED BY REFERENCE PORTIONS OF EG&G, INC.'S PROXY STATEMENT FOR THE 1997 ANNUAL MEETING OF STOCKHOLDERS...........PART III (Items 10, 11 and 12)
2 PART I ITEM 1. BUSINESS GENERAL BUSINESS DESCRIPTION EG&G, Inc. was incorporated under the laws of the Commonwealth of Massachusetts in 1947. EG&G, Inc. (hereinafter referred to as "EG&G", the "Company", or the "Registrant", which includes the Company's subsidiaries) is a diversified technology company which provides optoelectronic, mechanical and electromechanical components and instruments to manufacturers and end-user customers. These customers exist in varied markets that include aerospace, automotive, transportation, chemical, petrochemical, environmental, industrial, medical, photography, security and other global arenas. The Company's services also extend to technical and managerial support for governmental and industrial customers. In 1996, the Company had sales of $1.4 billion from continuing operations. The Company's continuing operations are classified into four industry segments: Instruments, Mechanical Components, Optoelectronics and Technical Services. RECENT DEVELOPMENTS During 1996, the Company purchased 1.6 million shares of its common stock under a previously announced program at an aggregate cost of $30.8 million. As of December 29, 1996, the Company had authorization to purchase 4.1 million additional shares. In July 1996, the Company announced that it had purchased a majority interest in Xian Yong Hua Petrochemical Machinery, a China-based manufacturer of mechanical seals with petrochemical, aerospace, utility, and general industrial applications. The resulting joint venture will work with EG&G's Sealol Industrial Division, which manufactures mechanical seals used by industry worldwide. In July 1996, the U.S. Marshals Service awarded EG&G Astrophysics a $6 million contract to supply state-of-the-art explosives-detection systems for federal courthouses. In September 1996, EG&G was selected by the Greater Kelly Development Corporation to assist in the preparation and implementation of a redevelopment plan for the privatization and reuse of Kelly Air Force Base, in San Antonio, Texas. In November 1996, EG&G Astrophysics and InVision Technologies announced that they had entered into a strategic alliance to develop and market a new, advanced explosives detection system. The agreement is aimed at providing customers with a fully integrated explosives detection system that is expected to be produced and available for use in airports worldwide by the end of 1997. In December 1996, EG&G Astrophysics, Lunar Corporation and the University of Alabama's Birmingham Research Center Foundation reached a settlement relating to litigation concerning dual-energy baggage security scanners. In January 1997, Dr. Fred B. Parks announced that he had resigned as President and Chief Operating Officer of EG&G. In January 1997, EG&G Washington Analytical Services Center was awarded a $106.5 million, five-year support contract from the U.S. Navy to provide engineering and technical services for the Navy's new attack submarine program. In February 1997, EG&G Dynatrend was awarded a five-year contract to provide nationwide asset management to the Internal Revenue Service. The contract has an estimated value of $30.9 million. INDUSTRY SEGMENTS Set forth below is a brief summary of each of the Company's four industry segments together with a description of certain of the more significant or recently introduced products, services or operations. -1-
3 INSTRUMENTS The Company develops and manufactures instruments and systems for applications in medical and clinical diagnostics; biochemical, medical and life science research; industrial and pharmaceutical process measurement; environmental monitoring; airport and industrial security; and food inspection. The Company's instruments provide a wide range of measurement capabilities and options through the use of high-speed signal processing, image enhancement and a broad utilization of detector technologies, including products which feature the accurate generation, detection and measurement of various segments of the electromagnetic spectrum. The Company offers products in this segment under trade names which include Astrophysics, Flow Technology, Berthold, Ortec and Wallac. In 1996, this segment represented 23% of the Company's total sales from continuing operations and 32% of the Company's operating income from continuing operations before general corporate expenses. High-performance bioanalytic and diagnostic instruments manufactured by the Company are used in hospitals, clinics and pharmaceutical and medical research facilities. These instruments employ time-resolved fluorescence and chemiluminescence technologies, as well as radioisotopes, to analyze samples. The advantage of fluorescence and luminescense is that they do not involve the use of radioactive material, so that concerns about sample transport and waste disposal are minimized. Among other things, these instruments are used to screen blood for thyroid dysfunction, fertility-related disorders, fetal defects and diseases in newborns, and to detect relapse in patients who have been treated for cancer. The Company manufactures AutoDelfia(R), an automated immunoassay fluorescence diagnostic system. The Company also sells reagents for use in connection with certain of these instruments. Through its Instruments segment, the Company also produces security screening systems that employ X-ray technology in conjunction with image-enhancing techniques for non-intrusive inspection of baggage and packages at airport portals, baggage processing areas, mail rooms, courthouses, schools and buildings. The Company has introduced two new security screening products: the Z-Scan(TM) and a portable, large-cargo X-ray screening system. The Z-Scan, which can process up to 1,800 bags per hour, uses color images, X-rays and proprietary software to detect explosives, narcotics or contraband in packages and luggage. The United Kingdom's Department of Transportation has certified the Z-Scan for detection of drugs and contraband in checked cargo. The large-cargo X-ray screening system allows non-intrusive inspection of boxes, crates and containers. It supports the search for contraband, weapons and explosives at border crossings, ports of entry, warehouses and airports. Instruments produced by the Company also include process inspection systems that combine X-ray technology from the Company's Instruments segment and optical components from the Company's Optoelectronics segment. These systems are used in food processing and packaging plants to monitor, detect and remove foreign objects from raw and processed food at various stages of production. Such systems are also used to check intravenous-medicine bags and automobile oil filters for leaks, to measure the fat content of meat and to detect and separate non-biodegradable PVCs from recyclable plastics. Based on its expertise in nuclear measurements, the Company produces instruments to detect, characterize and measure radiation, including a complete line of radiation-protection measuring systems for laboratories, nuclear facilities and environmental monitoring stations. The Company also offers industrial on-line level and density measuring instruments for process control and measurement of liquids, slurries or solids in containers, tanks and pipes. MECHANICAL COMPONENTS Through its Mechanical Components segment, the Company produces advanced seals and bellows products, valves, nozzles, metal ducting, precision aerospace components, motors and heat management devices for the petrochemical and chemical processing, transportation, defense and aerospace markets. The Company offers these products under trade names which include Pressure Science, Rotron and Sealol. In 1996, this segment represented 19% of the Company's total sales from continuing operations and 26% of the Company's operating income from continuing operations before general corporate expenses. Products sold in this segment include blower systems, power-conversion devices and other components for locomotives, transit cars and buses and defense product applications. Many of these products were first developed by the Company for defense-related purposes and are now marketed and sold for commercial applications. -2-
4 The Company also produces mechanical sealing components and systems, which use welded metal bellows devices pioneered by the Company for the process industries. Such industries include pharmaceuticals, food processing, oil refining and chemical and petrochemical processing. The Company expects that the market for the Company's advanced zero-leakage gas seals will grow as a result of environmental legislation, which requires manufacturers to significantly reduce emissions. For aerospace applications, the Company produces valves, advanced sealing components, aircraft exhaust components and ducting. OPTOELECTRONICS Through its Optoelectronics segment, the Company offers a broad variety of components that emit and detect light in the spectrum from ultraviolet through visible to the far infrared. These components range from simple photocells to sophisticated imaging systems, light sources that include various types of flashtubes and laser diodes, and complex devices for weapons' trigger systems. Applications include light sensors used in automotive and commercial electronics, sensors used in smoke detectors and medical imaging systems, and sophisticated arrays for communications and remote sensing of the earth. The Company expects to make significant research and development and capital expenditures in this segment over the next several years. This segment offers products under trade names which include Electro-Optics, Heimann Optoelectronics, IC Sensors, Reticon, Judson and Vactec. In 1996, this segment represented 19% of the Company's total sales from continuing operations and 11% of the Company's operating income from continuing operations before general corporate expenses. Products manufactured by this segment also include detectors of visible and non-visible light, including high-performance silicon photodiodes that detect and measure light and other optical radiation for industrial, space, military, analytical and scientific instrumentation. Light detectors are also manufactured by the Company for a variety of commercial applications. The Company also makes a wide variety of flashlamps for use in photocopy and reprographic equipment, photo-typesetting systems, beacons, indicators and laser systems and accessories. In addition, the Company manufactures power supplies for military high-frequency electronic applications that are used primarily for precision controlled switching of electric current in electronic equipment. The Company is developing amorphous silicon imaging systems for medical and industrial applications. These X-ray systems incorporate amorphous silicon, which replaces film in X-ray systems and translates the rays directly into digital pulses that then immediately produce the image on a cathode ray tube. Through this segment, the Company also produces micromachined sensors, which are small silicon-wafer-based devices that combine a sensing function with intelligent signal processing. The Company mass produces these micromachined infrared sensors for consumer, medical and automotive applications and manufactures high-performance micromachined silicon sensors for missile-guidance systems. In a joint venture, the Company is developing more advanced micromachined electronic accelerometers for automotive and industrial applications. TECHNICAL SERVICES Through its Technical Services segment, the Company supplies engineering, scientific, environmental, management and technical support services to a broad range of governmental and industrial customers. These services include: analysis and testing services for the automotive industry; base operations for the National Aeronautics and Space Administration ("NASA") at the Kennedy Space Center ("KSC"); chemical weapons disposal and technical and support services for the U.S. Department of Defense ("DoD"); seized-property administration for the U.S. Customs Service; technical support in a joint venture for the National Science Foundation in Antarctica; consulting services in transportation; physical security services for government agencies; and services and products for the environmental market. The Company offers services in this segment under trade names which include Automotive Research, Dynatrend, Structural Kinematics and Washington Analytical Services Center. In 1996, this segment represented 39% of the Company's total sales from continuing operations and 31% of the Company's operating income from continuing operations before general corporate expenses. For the automobile, chemical additive and petroleum industries, the Company provides automobile durability, performance and emissions testing, and tests fuels, lubricants and chemical additives. The Company performs automobile durability and performance testing for all major U.S. and a number of foreign automobile manufacturers. -3-
5 As base operations contractor for the KSC, the Company provides institutional, technical and maintenance support services. In particular, the Company manages KSC's 600 buildings, structures and facilities; tests new astronaut rescue procedures and escape systems; fields a force of 200 uniformed security personnel and a SWAT team; provides fire protection and medical services; handles all propellant substances; and manages the shuttle landing facility. The Company has been the base operations contractor at KSC since 1983 and is currently in the fourth year of a four-year contract that has three two-year renewal options at the discretion of the government. In 1996, NASA designated United Space Associates as the single Space Flight Operations contractor. While it is possible that the Company's contract could be absorbed by the single Space Flight Operations contract, the Company believes that its contract will be renewed by NASA and changed to a performance-based contract. Company contracts with the DoD fall into two general categories: (i) traditional defense activities, and (ii) decommissioning. The Company's traditional defense activities focus on such strategic areas as research and engineering analyses in support of DoD advanced development programs. An example of a decommissioning project is the operation of the U.S. Army's facility for the disposal of lethal chemical agents and munitions in Tooele, Utah. The Company was recently awarded a contract from the Greater Kelly Development Corporation to assist in the preparation and implementation of a redevelopment plan for Kelly Air Force Base in San Antonio, Texas. The contract consists of a one-year planning phase and three three-year renewal options at the discretion of the customer for implementation activities. The Company also provides engineering and management services in a variety of fields, including transportation, physical security and property management for several government agencies. Government clients include the U.S. Departments of Transportation, State and Treasury, the U.S. Customs Service and the Environmental Protection Agency. In the environmental area, the Company is developing a range of proprietary technologies with a view toward expanding its presence in the public and private sector waste minimization and remediation markets. DISCONTINUED OPERATIONS Since its founding, the Company has provided services to the U.S. Department of Energy ("DOE") and its predecessor organizations. These services related primarily to nuclear energy research and nuclear weapons production and testing. As a result of changing procurement and administrative priorities at the DOE, to continue to provide these services the Company would have been required to invest significant levels of capital and accept broader liabilities and lower fees. In 1994, the Company determined that it would not seek renewal of its four contracts with the DOE and would not seek management and operations contracts at other DOE sites. Accordingly, the Company is reporting its former DOE Support segment as discontinued operations. Future sales and income from discontinued operations will decrease as the remaining DOE contract expires in 1997 and are dependent upon the negotiated work scope and fee pools. Three of these DOE contracts expired in 1995. The Rocky Flats contract for the management and operation of the Rocky Flats Environmental Technology Center near Golden, Colorado terminated in June 1995. The Reynolds Electrical and Engineering Co. contract for support and maintenance services for the underground nuclear weapons test program and its design laboratories at the Nevada Test Site expired on December 31, 1995. The Energy Measurements contract to provide scientific and engineering services also relating to the Nevada Test Site expired on December 31, 1995. The remaining DOE contract, for Mound Applied Technologies at DOE's Miamisburg, Ohio facility, was scheduled to expire on September 30, 1996. Under this contract, the Company provides all support services at the facility and is responsible for the assembly and testing of radioisotopic thermionic generators for space and special terrestrial power missions. The contract has been extended by the DOE to June 30, 1997 under existing terms and conditions and could be extended under three one-month options through September 30, 1997. The Company also is responsible for the transfer to other DOE facilities of technology relating to the Mound facility's former mission involving the manufacturing of components for nuclear weapons. MARKETING The Company markets its services and products through its own specialized sales forces as well as independent foreign and domestic manufacturer representatives and distributors. In certain foreign countries, the Company has entered into joint venture and license agreements with local firms to manufacture and market its products. -4-
6 RAW MATERIALS AND SUPPLIES Raw materials and supplies used by the Company are generally readily available in adequate quantities from domestic and foreign sources. PATENTS AND TRADEMARKS While the Company's patents, trademarks and licenses in the aggregate are important to its business, the Company does not believe that the loss of any one patent, trademark or license or group of related patents, trademarks or licenses would have a materially adverse effect on the overall business of the Company or on any of its industry segments. BACKLOG The approximate dollar value of unfilled orders of continuing operations by industry segment as of December 29, 1996 and December 31, 1995 is set forth in the table below. (In Thousands) December 29, 1996 December 31, 1995 ----------------- ----------------- Instruments $ 45,883 $ 50,776 Mechanical Components 105,762 95,466 Optoelectronics 112,759 125,630 Technical Services 285,170 224,087 -------- -------- Continuing Operations $549,574 $495,959 ======== ======== At December 29, 1996, 50% of the backlog represents orders received from U.S. government agencies, primarily the DoD and NASA. The Company estimates that over 95% of its backlog as of December 29, 1996 will be billed during 1997. The order backlog for each segment relates differently to future sales based on different business characteristics, primarily order and delivery lead times and customer demand requirements. As customer order cycles continue to shorten, reducing required lead times, many of the Company's businesses operate with reducing backlogs. While the Company has not generally experienced material cancellations of orders, orders may be cancelled by customers without financial penalty, and backlog does not necessarily represent actual future shipments. Backlog of the former DOE Support segment, which is reported as discontinued operations and is not reflected above, represents appropriated annual contract funding and was $53 million at December 29, 1996 and $126 million at December 31, 1995. GOVERNMENT CONTRACTS In accordance with government regulations, all of the Company's government contracts are subject to termination for the convenience of the government. Costs incurred under cost-reimbursable contracts are subject to audit by the government. The results of prior audits, which have been completed through 1991, have not had a material effect on the Company. CONTINUING OPERATIONS: Sales to U.S. government agencies, which were predominantly to the DoD and NASA, were $527 million, $537 million and $542 million in 1996, 1995 and 1994, respectively. In October 1993, the Company was selected by NASA to continue as the base operations contractor at the KSC. The award/incentive fee contract contributed sales of $172 million in 1996 and 1995 and $176 million in 1994. The contract expires on October 31, 1997 and has three two-year renewal options at the discretion of the government. DISCONTINUED OPERATIONS: The EG&G Rocky Flats, Inc. contract terminated in June 1995. The Reynolds Electrical and Engineering Co., Inc. and the EG&G Energy Measurements, Inc. contracts expired on December 31, 1995. The EG&G Mound Applied Technologies, Inc. contract, the Company's remaining DOE management and operations contract, has -5-
7 been extended by the DOE to June 30, 1997 under existing terms and conditions and could be extended for up to an additional three months. Sales and income from the Mound contract are dependent upon the negotiated work scope and fee pools. The Mound cost-plus-award-fee contract contributed $141 million of sales to discontinued operations in 1996. The Company does not anticipate incurring any material loss on the ultimate completion of the contract. COMPETITION Because of the wide range of its products and services, the Company faces many different types of competition and competitors. Competitors range from large foreign and domestic organizations that produce a comprehensive array of goods and services, to small concerns producing a few goods or services for specialized market segments. In the Instruments segment, the Company competes with instrument companies, some large, most small, that serve narrow segments of markets in X-ray and magnetic security systems, nuclear, industrial, and diagnostic instrumentation, and instrumentation for exploration and development of oil and gas resources. The Company competes in these markets on the basis of product performance, product reliability, service and price. Consolidation of competitors through acquisitions and mergers and the Company's increasing activity in selected diagnostics and industrial markets are expected to increase the proportion of large competitors in this segment. In the Mechanical Components segment, the Company is a leading supplier of selected precision aircraft exhaust components, specialized fans and heat transfer devices, and mechanical seals for industrial applications. Competition in these areas typically is from small specialized manufacturing companies. In the Optoelectronics segment, the Company is among the leading suppliers of specialty flashtubes, silicon photodetectors, avalanche photodiodes, cadmium sulfide and cadmium selenide detectors, photodiode arrays and switched power supplies. Typically, competition is from small specialized manufacturing companies. The Technical Services segment provides technical services to several agencies of the federal government, including the DoD and NASA. This business is typically won through competition with a number of large and small contractors, many of which are as large or larger than the Company and which, therefore, have resources and capabilities that are comparable to or greater than those of the Company. The primary bases for competition in these markets are technical and management capabilities, current and past performance, and price. Competition is typically subject to mandated procurement and competitive bidding requirements. Competition for automotive testing services is primarily from a few specialized testing companies and from customer-owned testing facilities, and is primarily based on quality, service, and price. Within the Mechanical Components, Optoelectronics and Instruments segments, competition for governmental purchases is subject to mandated procurement procedures and competitive bidding practices. In these segments, the Company competes on the basis of product performance, quality, service and price. In much of the Optoelectronics and Instruments segments and in the specialized fan and aircraft and marine mechanical seal markets included in the Mechanical Components segment, advancing technology and research and development are also important competitive factors. RESEARCH AND DEVELOPMENT During 1996, 1995 and 1994, Company-sponsored research and development expenditures were approximately $42.8 million, $42.4 million and $38.6 million, respectively. ENVIRONMENTAL COMPLIANCE The Company is conducting a number of environmental investigations and remedial actions at current and former Company locations and, along with other companies, has been named a potentially responsible party for certain waste disposal sites. The Company accrues for environmental issues in the accounting period that the Company's responsibility is established and when the cost can be reasonably estimated. As of December 29, 1996, the Company had an accrual of $3.2 million to reflect its estimated liability for environmental remediation. As assessments and remediation activities progress at each individual site, these liabilities are reviewed and adjusted to reflect additional information as it becomes available. There have been no environmental problems to date that have had or are expected to have a material effect on the Company's financial position or results of operations. While it is reasonably possible -6-
8 that a material loss exceeding the amounts recorded may have been incurred, the preliminary stages of the investigations make it impossible for the Company to reasonably estimate the range of potential exposure. EMPLOYEES As of March 1, 1997, the Company employed approximately 15,000 persons, including 1,000 persons in the former DOE Support segment. Certain of the Company's subsidiaries are parties to contracts with labor unions. The Company considers its relations with employees to be satisfactory. FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS Sales and Operating Income (Loss) From Continuing Operations by Industry Segment For the Five Years Ended December 29, 1996 <TABLE> <CAPTION> (In thousands) 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> <C> INSTRUMENTS Sales $ 321,704 $ 293,575 $ 273,088 $ 237,223 $ 226,900 Operating Income (Loss) 36,400 17,142 (49,580) 10,143 16,016 MECHANICAL COMPONENTS Sales $ 276,389 $ 249,255 $ 232,500 $ 244,878 $ 274,199 Operating Income 29,203 27,241 18,766 24,408 21,835 OPTOELECTRONICS Sales $ 269,530 $ 259,357 $ 213,380 $ 201,274 $ 210,118 Operating Income 12,249 19,328 8,674 11,474 3,905 TECHNICAL SERVICES Sales $ 559,629 $ 617,391 $ 613,588 $ 636,041 $ 608,864 Operating Income 34,169 48,155 46,075 68,762 56,924 GENERAL CORPORATE EXPENSES $ (24,391) $ (29,193) $ (34,882) $ (27,573) $ (29,895) CONTINUING OPERATIONS Sales $1,427,252 $1,419,578 $1,332,556 $1,319,416 $1,320,081 Operating Income (Loss) 87,630 82,673 (10,947) 87,484 68,785 </TABLE> The operating income (loss) from continuing operations for 1994 included a goodwill write-down of $40.3 million and restructuring charges of $30.4 million. The impact of these nonrecurring charges on each segment was as follows: Instruments - $55.7 million, Mechanical Components - $2.7 million, Optoelectronics - $9.7 million, Technical Services - $1.6 million and General Corporate Expenses - $1 million. -7-
9 Additional information relating to the Company's operations in the various industry segments is as follows: <TABLE> <CAPTION> Depreciation and Capital (In thousands) Amortization Expense Expenditures ------------------------------------ -------------------------------------- 1996 1995 1994 1996 1995 1994 ------- ------- ------- -------- ------- ------- <S> <C> <C> <C> <C> <C> <C> Instruments $10,976 $11,887 $11,621 $ 4,550 $ 4,639 $ 5,398 Mechanical Components 5,729 5,585 6,091 10,367 6,978 6,197 Optoelectronics 14,880 13,220 10,690 47,327 35,925 17,748 Technical Services 8,193 7,698 7,447 16,714 12,047 7,314 Corporate 1,158 1,036 941 1,532 2,250 620 ------- ------- ------- -------- ------- ------- $40,936 $39,426 $36,790 $ 80,490 $61,839 $37,277 ======= ======= ======= ======== ======= ======= </TABLE> <TABLE> <CAPTION> (In thousands) Identifiable Assets -------------------------------------- 1996 1995 1994 -------------------------------------- <S> <C> <C> <C> Instruments $221,831 $225,358 $220,232 Mechanical Components 110,276 100,363 93,721 Optoelectronics 235,969 200,719 193,302 Technical Services 117,340 113,901 129,995 Corporate and Other 137,484 163,574 155,879 -------- -------- -------- $822,900 $803,915 $793,129 ======== ======== ======== </TABLE> Corporate assets consist primarily of cash and cash equivalents, prepaid pension and taxes, and investments. FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS Information relating to geographic areas is as follows: <TABLE> <CAPTION> Operating Income (Loss) (In thousands) Sales From Continuing Operations ---------------------------------------- ---------------------------------------- 1996 1995 1994 1996 1995 1994 ---------- ---------- ---------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> U.S. $1,066,561 $1,065,424 $1,026,970 $ 68,108 $ 82,256 $ 57,679 Germany 80,465 87,690 61,310 5,154 4,508 (43,492) Other Non-U.S. 280,226 266,464 244,276 38,759 25,102 9,748 Corporate - - - (24,391) (29,193) (34,882) ---------- ---------- ---------- -------- -------- -------- $1,427,252 $1,419,578 $1,332,556 $ 87,630 $ 82,673 $(10,947) ========== ========== ========== ======== ======== ======== </TABLE> <TABLE> <CAPTION> (In thousands) Identifiable Assets -------------------------------------- 1996 1995 1994 -------- -------- -------- <S> <C> <C> <C> U.S. $380,080 $353,130 $341,725 Germany 86,881 89,834 100,650 Other Non-U.S. 218,455 197,377 194,875 Corporate and Other 137,484 163,574 155,879 -------- -------- -------- $822,900 $803,915 $793,129 ======== ======== ======== </TABLE> Transfers between geographic areas were not material. -8-
10 ITEM 2. PROPERTIES As of March 1, 1997, the Company occupied approximately 4,093,500 square feet of building area, of which approximately 1,611,800 square feet is owned. The balance is leased. The Company's headquarters occupies 53,350 square feet of leased space in Wellesley, Massachusetts. The Company's other operations are conducted in manufacturing and assembly plants, research laboratories, administrative offices and other facilities located in 26 states, Washington, D.C., Puerto Rico, the U.S. Virgin Islands and 25 foreign countries. Non-U.S. facilities account for approximately 1,154,300 square feet of owned and leased property, or approximately 28% of the Company's total occupied space. The Company's leases on property are both short-term and long-term. In management's opinion, the Company's properties are well-maintained and are adequate for its present requirements. Except for operations based on government facilities, substantially all of the machinery and equipment used by the Company in its other activities is owned by the Company and the balance is leased or furnished by contractors or customers. The following table indicates the approximate square footage of real property owned and leased attributable to each of the Company's industry segments. <TABLE> <CAPTION> Owned Leased Total (Sq. Feet) (Sq. Feet) (Sq. Feet) ---------- --------- --------- <S> <C> <C> <C> Instruments 551,100 409,500 960,600 Mechanical Components 556,700 502,600 1,059,300 Optoelectronics 336,000 489,200 825,200 Technical Services 163,400 1,020,200 1,183,600 Corporate Offices 4,600 60,200 64,800 --------- --------- --------- Continuing Operations 1,611,800 2,481,700 4,093,500 ========= ========= ========= </TABLE> ITEM 3. LEGAL PROCEEDINGS The Company is subject to various investigations, claims and legal proceedings covering a wide range of matters that arise in the ordinary course of its business activities. Each of these matters is subject to various uncertainties, and it is possible that some of these matters may be resolved unfavorably to the Company. The Company has established accruals for matters that are probable and reasonably estimable. Management believes that any liability that may ultimately result from the resolution of these matters in excess of amounts provided will not have a material adverse effect on the financial position or results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. -9-
11 EXECUTIVE OFFICERS Listed below are the executive officers of the Company as of March 24, 1997. No family relationship exists between any of the officers. <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------- Name Position Age - ------------------------------------------------------------------------------------------------------------------- <S> <C> <C> John M. Kucharski Chairman of the Board, President 61 and Chief Executive Officer John F. Alexander, II Senior Vice President 40 and Chief Financial Officer Murray Gross Senior Vice President, 60 General Counsel and Clerk Angelo D. Castellana Vice President 55 Dale L. Fraser Vice President 61 Anthony L. Klemmer Vice President 41 E. Lavonne Lewis Vice President 60 Deborah S. Lorenz Vice President 47 Donald H. Peters Vice President 56 Luciano S. Rossi Vice President 51 Theodore P. Theodores Vice President 61 C. Michael Williams Vice President 60 Daniel T. Heaney Treasurer 43 William J. Ribaudo Corporate Controller 37 </TABLE> -10-
12 Mr. Kucharski joined the Company in 1972. He was elected a Vice President in 1979, a Senior Vice President in 1982 and Executive Vice President in 1985. In 1986 he was elected President and Chief Operating Officer, in 1987 Chief Executive Officer and was elected Chairman of the Board of Directors in 1988. He was again elected President in 1997. Mr. Gross joined the Company in 1971. He was elected Assistant General Counsel and Assistant Clerk in 1978, Vice President, General Counsel and Clerk in 1990, and Senior Vice President in 1996. Mr. Alexander joined the Company in 1982. He was elected Corporate Controller in 1991, a title he retained when named a Vice President in 1995. He was elected Chief Financial Officer and Senior Vice President in 1996. Mr. Castellana joined the Company in 1965. He was elected a Vice President in 1991 and serves as a principal executive in the office of the Chief Operating Officer. Mr. Fraser joined the Company in 1961. After holding a number of increasingly responsible positions, he was appointed General Manager of EG&G Reynolds Electrical & Engineering Co., Inc. in 1986. He was elected a Vice President of the Company in 1990. Mr. Klemmer joined the Company in 1996 as Vice President of Corporate Marketing. From 1989 to 1996 Mr. Klemmer was General Partner of Quaestus & Company, a strategic planning and marketing consulting firm. Ms. Lewis joined the Company in 1970. She managed the Human Resources Department of EG&G Reynolds Electrical & Engineering Co., Inc. from 1984 until 1995 when she was elected Vice President of EG&G. Ms. Lewis is responsible for Human Resources. Ms. Lorenz joined the Company in 1990. She was elected a Vice President in 1992 and is responsible for Investor Relations and Corporate Communications. Dr. Peters joined the Company in 1968. He was elected a Vice President in 1987 and is responsible for Planning. Mr. Rossi joined the Company in 1967. He was elected a Vice President in 1988 and serves as a principal executive in the office of the Chief Operating Officer. Mr. Theodores joined the Company in 1986. He was Director of Corporate New Business Development from 1992 until being elected a Vice President of Mergers and Acquisitions in 1996. Mr. Williams joined the Company in 1972. He was elected a Vice President in 1984 and serves as a principal executive in the office of the Chief Operating Officer. Mr. Heaney joined the Company in 1980, serving as Manager of Financial Analysis, Controller of the Technical Services segment from 1989 to 1994 and Director of Economic Value Added Implementation in 1994-5. He was elected Treasurer in 1995. Mr. Ribaudo joined the Company in 1996 as Corporate Controller. He had been associated with Arthur Andersen LLP since 1982, and was elected a partner of that firm in 1994. -11-
13 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET PRICE OF COMMON STOCK 1995 Quarters ------------- First Second Third Fourth ------ ------ ------ ------ High $15.50 $18.38 $20.00 $24.50 Low 13.00 15.00 16.38 18.00 1996 Quarters ------------- First Second Third Fourth ------ ------ ------ ------ High $25.13 $23.50 $21.38 $21.13 Low 20.38 19.88 16.88 16.25 DIVIDENDS 1995 Quarters ------------- First Second Third Fourth ----- ------ ----- ------ Cash Dividends Per Common Share $ .14 $ .14 $ .14 $ .14 1996 Quarters ------------- First Second Third Fourth ----- ------ ----- ------ Cash Dividends Per Common Share $ .14 $ .14 $ .14 $ .14 The Company's common stock is listed and traded on the New York Stock Exchange. The number of holders of record of the Company's common stock as of February 21, 1997, was approximately 11,330. In October 1996, the Board of Directors of the Company declared a regular quarterly cash dividend of fourteen cents per share of common stock. The quarterly cash dividend was paid on February 10, 1997, to stockholders of record at the close of business on January 17, 1997. -12-
14 ITEM 6. SELECTED FINANCIAL DATA SELECTED FINANCIAL INFORMATION <TABLE> <CAPTION> For the Five Years Ended December 29, 1996 (In thousands where applicable) 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> <C> OPERATIONS: Sales $1,427,252 $1,419,578 $1,332,556 $1,319,416 $1,320,081 Operating income (loss) from continuing operations 87,630 82,673 (10,947)a 87,484 68,785 Income (loss) from continuing operations 54,480 54,304 (32,107) 54,622 48,765 Income from discontinued operations, net of income taxes 5,676 13,736 26,452 24,949 39,014 Income (loss) before cumulative effect of accounting changes 60,156 68,040 (5,655) 79,571 87,779 Net income (loss) 60,156 68,040 (5,655) 59,071c 87,779 Earnings (loss) per share: Continuing operations 1.15 1.05 (.58) .97 .87 Discontinued operations .12 .27 .48 .44 .69 Income (loss) before cumulative effect of accounting changes 1.27 1.32 (.10) 1.41 1.56 Net income (loss) 1.27 1.32 (.10) 1.05c 1.56 Return on equity 16.4% 16.8% (1.2)%b 12.4%d 19.6% Weighted average common shares outstanding 47,298 51,483 55,271 56,504 56,385 FINANCIAL POSITION: Working capital $ 194,915 $ 218,235 $ 199,656 $ 227,935 $ 247,518 Current ratio 1.75:1 1.87:1 1.71:1 1.98:1 2.07:1 Total assets 822,900 803,915 793,129 764,887 746,577 Short-term debt 21,499 5,275 59,988 43,589 40,267 Long-term debt 115,104 115,222 812 1,450 1,956 Long-term liabilities 82,894 71,296 65,129 52,727 38,871 Stockholders' equity 365,106 366,946 445,366 477,534 473,636 - Per share 7.88 7.71 8.08 8.51 8.34 Total debt/total capital 27% 25% 12% 9% 8% Common shares outstanding 46,309 47,610 55,124 56,131 56,812 OTHER DATA: Cash flows from continuing operations $ 73,238 $ 123,831 $ 70,341 $ 76,217 $ 94,554 Cash flows from discontinued operations 6,920 26,334 25,542 35,920 33,253 Cash flows from operating activities 80,158 150,165 95,883 112,137 127,807 Capital expenditures 80,490 61,839 37,277 27,860 22,446 Depreciation and amortization 40,936 39,426 36,790 37,842 36,292 Cash dividends per common share .56 .56 .56 .52 .49 </TABLE> a) Included a goodwill write-down of $40.3 million and restructuring charges of $30.4 million. b) Return on equity before effect of nonrecurring items described in a) was 11.8%. c) Included one-time after-tax charges of $20.5 million, or $.36 per share, due to adoption of SFAS Nos. 106 and 109. d) Return on equity before cumulative effect of accounting changes was 16.4%. -13-
15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION OVERVIEW In 1994, the Company initiated a series of significant actions to reposition its businesses for future success. These initiatives included withdrawal from the Department of Energy (DOE) Support business, restructuring the cost model of continuing operations, improved utilization of working capital, liquidation of nonstrategic investments and assets, replacing a portion of equity capital with long-term debt, adoption of Economic Value Added (EVA) as the basis of measurement and incentive compensation systems and increased investment in internal development programs. Substantial progress was made in each of these areas in 1995 and 1996 and is detailed later in this report. The repositioning continued in 1996 with a realignment of the operating organization to continue to position the Company for sustained long-term growth. The overall goal of the effort is to provide greater focus on the end-use customer by consolidating divisions around common technology, manufacturing processes and markets. As part of this program, a new corporate office was established to which all division managers report directly, resulting in the elimination of a management layer. These programs have resulted in improved financial results since 1994, which are expected to continue in the future. 1996 COMPARED TO 1995 Sales from continuing operations increased 1% in 1996 compared to 1995, reflecting a growth in product sales of 8% and a decrease in Technical Services' sales. Operating income from continuing operations increased 6% in 1996 compared to 1995. The improvement reflected the impact of higher sales in the Instruments and Mechanical Components segments and lower costs resulting from the Company's 1994 restructuring plan. Partially offsetting these increases in operating income were decreases in Optoelectronics caused by significant operational problems resulting in a loss in the micromachined sensors business and decreases in Technical Services caused by lower automotive testing services and the completion of two contracts in 1995. Cost savings under the 1994 restructuring plan totaled $26 million in 1996, which represents an $11 million increase over the savings achieved in 1995. Capital expenditures increased 30% in 1996 to $80 million, and outlays for research and development were $43 million. The Company's program to reduce working capital and to dispose of nonstrategic assets continued in 1996 with cumulative reductions of over $85 million since its inception in 1994. Key measures of effectiveness of working capital management, Days Sales Outstanding and Inventory Turns, improved by 2% and 9%, respectively, in 1996. 1995 COMPARED TO 1994 Sales from continuing operations increased by $87 million in 1995 to $1.4 billion, and operating income before nonrecurring charges increased by 38% over 1994. Key measures of effectiveness of working capital management, Days Sales Outstanding and Inventory Turns, improved by 10% and 15%, respectively, in 1995. Research and development and capital expenditures increased by 10% and 66%, respectively. FACTORS AFFECTING FUTURE OPERATING RESULTS Except for the historical information contained herein, the matters discussed in this Annual Report are forward-looking statements that involve risks and uncertainties. Future trends in revenues and operating income will be dependent both on external factors and on the success of the various programs described in this report. In Technical Services, future performance will continue to be impacted by a highly competitive procurement environment, continuing changes in federal budget priorities and rapidly changing customer requirements. The NASA contract expires on October 31, 1997 and has three 2-year renewal options at the discretion of the government. While it is possible that the Company's contract could be absorbed by the single Space Flight Operations contract, the -14-
16 Company believes that its contract will be renewed by NASA. Future performance in our three product segments will be highly dependent on the technological success and market acceptance of new program initiatives, including the amorphous silicon project and the micromachined sensors business. The Optoelectronics results are also dependent on management's ability to bring the micromachined sensors business to break-even operations in 1997. Continued success in improving operational efficiency will be required to offset increasing price pressure in most of the Company's product offerings. As customer order cycles continue to shorten, reducing required lead times, many of our businesses operate with reducing backlogs. As the Company's operations continue to expand globally, movements in foreign exchange rates could affect operating results. Effective tax rates in the future could be affected by changes in the geographical distribution of income, utilization of net operating loss carryforwards and repatriation costs. RESULTS OF OPERATIONS The discussion that follows is a summary analysis of the major changes by industry segment. INSTRUMENTS 1996 COMPARED TO 1995 The $28.1 million sales increase resulted mainly from higher demand for explosives detection systems, primarily from U.S. government facilities, and for diagnostic and medical research products. These increases were partially offset by decreases totaling $12 million, which resulted from the effect of changes in foreign exchange rates and the divestiture of two product lines in 1995. Operating income was 11.3% of sales in 1996 compared to 5.8% in 1995. Operating income increased $19.3 million, primarily from improved margins on higher sales. Also contributing, to a lesser extent, were manufacturing and engineering process improvements, lower costs resulting from the restructuring plan, lower inventory provisions due to improved inventory management, the favorable impact of changes in foreign exchange rates, income from the expiration of a grant liability and a 1995 provision for additional cost reductions. A $4.2 million provision for a 1996 patent infringement settlement and increased management incentive accruals partially offset these increases. As part of the settlement, the Company entered into a royalty agreement covering future sales. 1995 COMPARED TO 1994 The $20.4 million sales increase resulted primarily from higher demand for diagnostic and security products and the effect of changes in foreign exchange rates, partially offset by an $11 million decrease due to the divestiture of three product lines under the restructuring plan. The increase in operating income of $11.1 million, excluding the 1994 nonrecurring charges of $55.7 million, resulted from cost reductions of $6.9 million from the 1994 restructuring plan, margin on higher sales and the 1994 expense related to the close-down of a research and development project. The increases were partially offset by the unfavorable impact on export shipment margins caused by the strengthening of the Finnish markka against other major currencies, the expenses associated with the expansion of the food-monitoring business and a provision for additional cost reductions. MECHANICAL COMPONENTS 1996 COMPARED TO 1995 Higher demand for aerospace, electromechanical and industrial process sealing products resulted in 11% sales growth. The 7% increase in operating income resulted from the margin on higher sales and lower costs from the restructuring plan, partially offset by provisions for projected excess contract costs and warranty repairs. -15-
17 1995 COMPARED TO 1994 The $16.8 million sales increase was due to improving market conditions, primarily for industrial process sealing and aerospace products. The $5.8 million increase in operating income, excluding the 1994 restructuring charges of $2.7 million, resulted primarily from margin on higher sales and $1.5 million of cost reductions. The 1994 results included a provision for environmental remediation costs of $1.3 million and increased start-up costs for the transportation element of the electromechanical business. OPTOELECTRONICS 1996 COMPARED TO 1995 Sales of new imaging products and higher demand for detectors and accelerometers for the automotive market, partially offset by decreases caused by lower power supplies sales and the divestiture of a product line in 1995, resulted in an increase of $10.2 million. Operating income decreased $7.1 million as significant operational problems resulted in a loss in the micromachined sensors business, which had sales of $37 million. To a lesser extent, lower sales and projected excess contract costs in the power supplies business contributed to the decrease. Management is implementing corrective actions in the micromachined sensors business, which are expected to result in break-even operations in 1997. Partially offsetting these decreases were the margin on the sales of new imaging products and lower costs resulting from the restructuring plan. The 1996 impact of the development effort for the amorphous silicon project continued at the $5 million level. 1995 COMPARED TO 1994 Sales increased $46 million, or 22%, primarily due to $28 million of higher sales of IC Sensors, acquired at the end of the third quarter of 1994, and higher shipments of flash products. The $1 million operating income increase, excluding the 1994 nonrecurring charges of $9.7 million, resulted from margin on higher sales and $2.6 million of cost reductions. The increases were partially offset by lower margins due to competitive pricing pressures and higher production costs in one product line and completion of certain government contracts in 1994. The Company significantly increased research and development expenses and capital expenditures in 1995 to support the amorphous silicon and micromachined sensor programs. TECHNICAL SERVICES 1996 COMPARED TO 1995 The $57.8 million sales reduction was mainly the result of the absence in 1996 of the billings under two large contracts discussed below. Also contributing to the reduction was a decrease in sales of the automotive operations, primarily due to continuing lower demand for stationary testing services caused by customers' budget constraints and mature testing specifications, and completion of a lubricant testing contract at the end of the first quarter of 1996. The $14 million operating income reduction was the result of the sales reductions partially offset by the recognition of a productivity incentive fee on the Kennedy Space Center (KSC) contract and the 1995 estimated provision for a legal judgment. 1995 COMPARED TO 1994 The $3.8 million sales increase was the net result of billings under two contracts for communication systems development and water flow control offset by decreases resulting from continuing reductions in government funding and the phasedown of the Superconducting Super Collider Laboratory contract. In addition, demand for stationary automotive testing services was lower in 1995. Operating income was flat, excluding the 1994 restructuring charges of $1.6 million. The income earned on the two previously described contracts, and an unfavorable contract adjustment and early retirement costs recorded in 1994 were offset by several decreases. These decreases included costs incurred in excess -16-
18 of contract coverage, an estimated provision for a legal judgment, start-up costs for the environmental services and systems business and the effect of lower sales levels in certain government services and the automotive testing markets. GENERAL CORPORATE EXPENSES 1996 COMPARED TO 1995 The $4.8 million decrease was primarily due to lower costs resulting from the restructuring plan and lower management incentive accruals. 1995 COMPARED TO 1994 The $4.6 million decrease, excluding the 1994 restructuring charges of $1 million, resulted from $3.8 million of cost reductions in 1995, and $1 million of separation costs and $1 million of costs associated with the restructuring plan recorded in 1994. These decreases in expenses were partially offset by management incentive accruals. OTHER 1996 COMPARED TO 1995 The $10.7 million net increase in other expense was due to higher interest expense reflecting the issuance of $115 million of ten-year notes in October 1995 and lower gains on the disposition of nonstrategic assets. The effective tax rate of 32.2% for 1996 was lower than the 36.9% rate in 1995 primarily due to changes in the geographical distribution of income. 1995 COMPARED TO 1994 The $9.6 million increase in other income was due to gains on sales of investments and nonstrategic assets, higher income generated by joint ventures and lower investment write-downs. Partially offsetting these factors were higher interest expense and foreign exchange losses. The effective tax rate for continuing operations was 36.9% in 1995. The effective tax rate of 87.5% in 1994 was higher than normal as a result of the impact of the goodwill write-down and the restructuring charges. DISCONTINUED OPERATIONS 1996 COMPARED TO 1995 The decrease in income from discontinued operations, net of income taxes, reflected the expiration of the Rocky Flats and Nevada Test Site contracts in 1995. The Mound contract, the Company's remaining management and operations contract with the DOE, has been extended to June 30, 1997 under existing terms and conditions and could be extended by the DOE for up to an additional three months. Sales and income from the Mound contract are dependent upon the negotiated work scope and fee pools. 1995 COMPARED TO 1994 Income from discontinued operations, net of income taxes, was $12.7 million lower in 1995. The decrease reflected the expiration of the Idaho National Engineering Laboratory contract in September 1994 and the Rocky Flats contract in June 1995. DEPRECIATION CHANGE In 1995, the Company changed its method of depreciation for certain classes of plant and equipment purchased after January 1, 1995 from an accelerated method to the straight-line method for financial -17-
19 reporting purposes. The Company believes that the straight-line method more appropriately reflects the timing of the economic benefits to be received from these assets, consisting mainly of manufacturing equipment. The Company also changed its convention for calculating depreciation expense during the year that an asset is acquired. Previously, the Company used the half-year convention; starting in 1995, the Company commences depreciation in the month the asset is placed in service. In 1995, the effect of applying these new methods was to reduce depreciation expense by $4.3 million, and to increase income from continuing operations and net income by $2.7 million and net income per share by $.05. ENVIRONMENTAL The Company is conducting a number of environmental investigations and remedial actions at current and former Company locations and, along with other companies, has been named a potentially responsible party for certain waste disposal sites. The Company accrues for environmental issues in the accounting period that the Company's responsibility is established and when the cost can be reasonably estimated. As of December 29, 1996, the Company had an accrual of $3.2 million to reflect its estimated liability for environmental remediation. As assessments and remediation activities progress at each individual site, these liabilities are reviewed and adjusted to reflect additional information as it becomes available. There have been no environmental problems to date that have had or are expected to have a material effect on the Company's financial position or results of operations. While it is reasonably possible that a material loss exceeding the amounts recorded may have been incurred, the preliminary stages of the investigations make it impossible for the Company to reasonably estimate the range of potential exposure. FINANCIAL CONDITION The Company's cash and cash equivalents decreased $28.4 million in 1996 while commercial paper borrowings increased $18 million, mainly due to the higher level of capital expenditures. Net cash provided by operating activities was $80.2 million in 1996, $150.2 million in 1995 and $95.9 million in 1994. The net cash provided by continuing operations was lower in 1996 compared to 1995 primarily as a result of increases in accounts receivable and inventories in 1996 compared to decreases in 1995. The accounts receivable increase was mainly caused by higher sales in the product segments; inventory levels increased primarily for anticipated sales. The Company's program to reduce working capital and to dispose of nonstrategic assets continued in 1996 with cumulative reductions of over $85 million since 1993. The net cash provided by continuing operations was higher in 1995 compared to 1994 as a result of increased earnings and a $29.6 million reduction in accounts receivable and inventories, despite higher sales. The net cash provided by operating activities was used principally for capital expenditures, stock repurchases, cash dividends and, in 1994, for acquisitions. Cash outlays in 1996 under the 1994 restructuring plan were $3.5 million, bringing the total spent under the plan to $25 million. Discontinued operations generated cash of $6.9 million in 1996 compared to $26.3 million in 1995, reflecting the expiration of the Rocky Flats and Nevada Test Site contracts during 1995. Future cash flows from discontinued operations will continue to decrease due to the expected expiration of the Mound contract at the end of the second quarter of 1997. Capital expenditures were $80 million in 1996, an increase of $19 million over the 1995 level, and are expected to return to approximately the 1995 level in 1997. These expenditures support new product development initiatives primarily in the Optoelectronics segment, including the amorphous silicon and micromachined sensor programs and Technical Services segment, including the new facility for testing light trucks and sports-utility vehicles. In 1995, the Company issued $115 million of unsecured ten-year notes, of a total $150 million authorized, at an interest rate of 6.8%. The unissued notes of $35 million are covered by a shelf -18-
20 registration statement. The proceeds were used to pay off commercial paper borrowings that were used mainly to finance repurchases of the Company's common stock. The Company has two revolving credit agreements totaling $200 million. These agreements consist of a $100 million, 364-day facility, which expires in March 1997, and a $100 million, five-year facility, which expires in March 2001. The Company did not draw down either of these credit facilities during 1996 and is in the process of negotiating an extension of these agreements. During 1996, the Company purchased 1.6 million shares of its common stock through periodic purchases on the open market at a cost of $30.8 million. As of December 29, 1996, the Company had authorization to purchase 4.1 million additional shares and, subject to market conditions, plans to maintain approximately the 1996 level of purchases in 1997. The Company has limited involvement with derivative financial instruments and uses forward contracts and options to hedge certain foreign commitments and transactions denominated in foreign currencies. The notional amount of outstanding forward exchange contracts was $62 million as of December 29, 1996. The average contract term is one month, and there are no cash requirements on forward contracts until maturity. Credit risk is minimal because the contracts are with very large banks; any market risk is offset by the exposure on the underlying hedged items. Gains and losses on forward contracts are offset against foreign exchange gains and losses on the underlying hedged items. DIVIDENDS In January 1997, the Board of Directors declared a regular quarterly cash dividend of 14 cents per share, resulting in an annual rate of 56 cents per share for 1997. EG&G has paid cash dividends, without interruption, for 32 years and continues to retain what management believes to be sufficient earnings to support the funding requirements of its planned growth. -19-
21 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED BALANCE SHEET AS OF DECEMBER 29, 1996 AND DECEMBER 31, 1995 (Dollars in thousands except per share data) 1996 1995 - ------------------------------------------------------------------------------ Current Assets: Cash and cash equivalents $ 47,846 $ 76,204 Accounts receivable (Note 2) 222,856 211,903 Inventories (Note 3) 119,558 114,199 Other current assets (Note 12) 64,451 66,380 --------- ---------- TOTAL CURRENT ASSETS 454,711 468,686 --------- ---------- Property, Plant and Equipment: At cost (Note 5) 480,858 417,566 Accumulated depreciation and amortization (288,808) (270,026) --------- ---------- Net Property, Plant and Equipment 192,050 147,540 --------- ---------- Investments (Note 6) 16,839 16,072 Intangible Assets (Note 7) 110,368 123,421 Other Assets (Note 11) 48,932 48,196 --------- ---------- TOTAL ASSETS $ 822,900 $ 803,915 ========= ========== Current Liabilities: Short-term debt (Note 8) $ 21,499 $ 5,275 Accounts payable 75,749 72,759 Accrued expenses (Note 10) 157,558 168,671 Net liabilities of discontinued operations (Note 4) 4,990 3,746 --------- ---------- TOTAL CURRENT LIABILITIES 259,796 250,451 --------- ---------- Long-Term Debt (Note 8) 115,104 115,222 Long-Term Liabilities (Notes 11 and 12) 82,894 71,296 Contingencies (Note 13) Stockholders' Equity (Note 15): Preferred stock - $1 par value, authorized 1,000,000 shares; none outstanding - - Common stock - $1 par value, authorized 100,000,000 shares; issued 60,102,000 shares 60,102 60,102 Retained earnings 532,043 498,181 Cumulative translation adjustments 18,228 28,679 Net unrealized gain on marketable investments (Note 6) 1,204 244 Cost of shares held in treasury; 13,792,000 shares in 1996 and 12,492,000 shares in 1995 (246,471) (220,260) --------- --------- Total Stockholders' Equity 365,106 366,946 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 822,900 $ 803,915 ========= ========= The accompanying notes are an integral part of these consolidated financial statements. -20-
22 <TABLE> <CAPTION> CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE YEARS ENDED DECEMBER 29, 1996 (Dollars in thousands except per share data) 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Sales: Products $ 867,623 $ 802,187 $ 750,649 Services 559,629 617,391 581,907 ---------- ---------- ---------- TOTAL SALES 1,427,252 1,419,578 1,332,556 ---------- ---------- ---------- Costs and Expenses: Cost of sales: Products 547,504 512,970 486,564 Services 501,239 539,076 508,045 ---------- ---------- ---------- Total cost of sales 1,048,743 1,052,046 994,609 Research and development expenses 42,841 42,379 38,585 Selling, general and administrative expenses 248,038 242,480 239,609 Goodwill write-down (Note 7) - - 40,300 Restructuring charges (Note 9) - - 30,400 ---------- ---------- ---------- Total Costs and Expenses 1,339,622 1,336,905 1,343,503 ---------- ---------- ---------- OPERATING INCOME (LOSS) FROM CONTINUING OPERATIONS 87,630 82,673 (10,947) Other Income (Expense), Net (Note 18) (7,276) 3,386 (6,176) ---------- ---------- ---------- Income (Loss) From Continuing Operations Before Income Taxes 80,354 86,059 (17,123) Provision for Income Taxes (Note 12) 25,874 31,755 14,984 ---------- ---------- ---------- INCOME (LOSS) FROM CONTINUING OPERATIONS 54,480 54,304 (32,107) Income From Discontinued Operations, Net of Income Taxes (Note 4) 5,676 13,736 26,452 ---------- ---------- ---------- NET INCOME (LOSS) $ 60,156 $ 68,040 $ (5,655) ========== ========== ========== Earnings (Loss) Per Share (Note 19): CONTINUING OPERATIONS $ 1.15 $ 1.05 $ (.58) Discontinued Operations .12 .27 .48 ---------- ---------- ---------- NET INCOME (LOSS) $ 1.27 $ 1.32 $ (.10) ========== ========== ========== </TABLE> The accompanying notes are an integral part of these consolidated financial statements. -21-
23 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE THREE YEARS ENDED DECEMBER 29, 1996 <TABLE> <CAPTION> Net Unrealized Total Cumulative Gain on Cost of Stock- Common Retained Translation Marketable Shares Held holders' (Dollars in thousands except per share data) Stock Earnings Adjustments Investments in Treasury Equity ---------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> BALANCE, JANUARY 2, 1994 $60,102 $ 496,063 $ (8,287) $ - $ (70,344) $ 477,534 Net loss - (5,655) - - - (5,655) Cash dividends ($.56 per share) - (31,012) - - - (31,012) Exercise of employee stock options and related income tax benefits - 342 - - 887 1,229 Translation adjustments - - 19,072 - - 19,072 Purchase of common stock for treasury - - - - (19,139) (19,139) Unrealized gain on marketable investments - - - 3,337 - 3,337 ------- --------- -------- ------- --------- --------- BALANCE, JANUARY 1, 1995 60,102 459,738 10,785 3,337 (88,596) 445,366 Net income - 68,040 - - - 68,040 Cash dividends ($.56 per share) - (29,293) - - - (29,293) Exercise of employee stock options and related income tax benefits - 246 - - 3,415 3,661 Translation adjustments - - 17,894 - - 17,894 Purchase of common stock for treasury - - - - (135,079) (135,079) Change in net unrealized gain on marketable investments - - - (3,093) - (3,093) Redemption of shareholder rights - (550) - - - (550) ------- --------- -------- ------- --------- --------- BALANCE, DECEMBER 31, 1995 60,102 498,181 28,679 244 (220,260) 366,946 Net income - 60,156 - - - 60,156 Cash dividends ($.56 per share) - (26,589) - - - (26,589) Exercise of employee stock options and related income tax benefits - 295 - - 4,549 4,844 Translation adjustments - - (10,451) - - (10,451) Purchase of common stock for treasury - - - - (30,760) (30,760) Change in net unrealized gain on marketable investments - - - 960 - 960 ------- --------- -------- ------- --------- --------- BALANCE, DECEMBER 29, 1996 $60,102 $ 532,043 $ 18,228 $ 1,204 $(246,471) $ 365,106 ======= ========= ======== ======= ========= ========= </TABLE> The accompanying notes are an integral part of these consolidated financial statements. -22-
24 <TABLE> <CAPTION> CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE THREE YEARS ENDED DECEMBER 29, 1996 (Dollars in thousands) 1996 1995 1994 ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Cash Flows Provided by Operating Activities: Net income (loss) $ 60,156 $ 68,040 $ (5,655) Deduct net income from discontinued operations (5,676) (13,736) (26,452) -------- --------- -------- Income (loss) from continuing operations 54,480 54,304 (32,107) Adjustments to reconcile income (loss) from continuing operations to net cash provided by continuing operations: Goodwill write-down - - 40,300 Noncash portion of restructuring charges - - 4,902 Depreciation and amortization 40,936 39,426 36,790 Losses (gains) on asset dispositions and investments, net (1,714) (5,442) 5,322 Changes in assets and liabilities, net of effects from companies purchased and divested: Decrease (increase) in accounts receivable (11,781) 17,535 6,284 Decrease (increase) in inventories (6,659) 12,106 1,643 Increase in accounts payable 3,469 6,087 2,124 Increase (decrease) in accrued restructuring costs (3,455) (17,522) 21,532 Increase (decrease) in accrued expenses (718) 27,609 2,904 Change in prepaid and deferred taxes 8,793 (3,712) (5,163) Change in prepaid expenses and other (10,113) (6,560) (14,190) -------- --------- -------- Net Cash Provided by Continuing Operations 73,238 123,831 70,341 Net Cash Provided by Discontinued Operations 6,920 26,334 25,542 -------- --------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 80,158 150,165 95,883 -------- --------- -------- Cash Flows Used in Investing Activities: Capital expenditures (80,490) (61,839) (37,277) Proceeds from dispositions of businesses and sales of property, plant and equipment 1,744 15,238 2,872 Cost of acquisitions, net of cash and cash equivalents acquired - - (32,841) Proceeds from sales of investment securities 9,447 10,584 5,092 Other (2,000) (2,754) (2,730) -------- --------- -------- NET CASH USED IN INVESTING ACTIVITIES (71,299) (38,771) (64,884) -------- --------- -------- Cash Flows Used in Financing Activities: Increase (decrease) in commercial paper 17,965 (49,814) 14,873 Other debt payments (1,959) (5,607) (3,939) Proceeds from issuance of long-term debt - 115,000 - Proceeds from issuance of common stock 4,844 3,661 1,229 Purchases of common stock (30,760) (135,079) (19,139) Cash dividends (26,589) (29,293) (31,012) Other - (1,763) - ------- --------- -------- NET CASH USED IN FINANCING ACTIVITIES (36,499) (102,895) (37,988) -------- --------- -------- Effect of Exchange Rate Changes on Cash and Cash Equivalents (718) 1,281 1,228 -------- --------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (28,358) 9,780 (5,761) Cash and Cash Equivalents at Beginning of Year 76,204 66,424 72,185 -------- --------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 47,846 $ 76,204 $ 66,424 ======== ========= ======== Supplemental Disclosures of Cash Flow Information: Cash paid during the year for: Interest $ 13,526 $ 7,271 $ 5,063 Income taxes 35,678 23,380 41,353 </TABLE> The accompanying notes are an integral part of these consolidated financial statements. -23-
25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the accounts of EG&G, Inc. and its subsidiaries (the Company). All material intercompany balances and transactions have been eliminated in consolidation. Certain reclassifications have been made to conform prior years' data to the current format. SALES: Sales under cost-reimbursement contracts are recorded as costs are incurred and include applicable income in the proportion that costs incurred bear to total estimated costs. Other product and service sales are recorded at the time of shipment for products and at the end of a contract phase for service contracts. If a loss is anticipated on any contract, provision for the entire loss is made immediately. INVENTORIES: Inventories, which include material, labor and manufacturing overhead, are valued at the lower of cost or market. The majority of inventories is accounted for using the first-in, first-out method; remaining inventories are accounted for using the last-in, first-out (LIFO) method. PROPERTY, PLANT AND EQUIPMENT: For financial statement purposes, the Company depreciates plant and equipment over their estimated useful lives, which generally fall within the following ranges: buildings and special-purpose structures -- 10 to 25 years; leasehold improvements -- estimated useful life or remaining term of lease, whichever is shorter; machinery and equipment -- 3 to 7 years; special-purpose equipment -- expensed or depreciated over the life of the initial related contract. Nonrecurring tooling costs are capitalized, while recurring costs are expensed. The Company depreciates plant and equipment over their estimated useful lives using accelerated methods for income tax purposes. The Company changed its method of depreciation for certain classes of plant and equipment purchased after January 1, 1995 from an accelerated method to the straight-line method for financial statement purposes. The Company believes that the straight-line method more appropriately reflects the timing of the economic benefits to be received from these assets, consisting mainly of manufacturing equipment, during their estimated useful lives. The Company also changed its convention for calculating depreciation expense during the year that an asset is acquired. Previously, the Company used the half-year convention; starting in 1995, the Company commences depreciation in the month the asset is placed in service. In 1995, the effect of applying these new methods was to reduce depreciation expense by $4.3 million, and to increase income from continuing operations and net income by $2.7 million and net income per share by $.05. The reductions in depreciation expense represent the differences in current year depreciation expense between the old and new methods. Most of this difference occurred in the Optoelectronics segment. Depreciation and amortization was higher in 1995 than in 1994 because the effect of the changes in methods was exceeded by the effect of higher capital expenditures and inclusion of IC Sensors' depreciation for a full year. PENSION PLANS: The Company's funding policy provides that payments to the U.S. pension trusts shall at least be equal to the minimum funding requirements of the Employee Retirement Income Security Act of 1974. Non-U.S. plans are accrued for but generally not funded, and benefits are paid from operating funds. TRANSLATION OF FOREIGN CURRENCIES: The balance sheet accounts of non-U.S. operations, exclusive of stockholders' equity, are translated at year-end exchange rates, and income statement accounts are translated at weighted average rates in effect during the year; any translation adjustments are made directly to a component of stockholders' equity. The net transaction gains (losses) were not material for the years presented. -24-
26 INTANGIBLE ASSETS: Intangible assets result from acquisitions accounted for using the purchase method of accounting and include the excess of cost over the fair market value of the net assets of the acquired businesses. Substantially all of these intangible assets are being amortized over periods of up to 20 years. Subsequent to the acquisition, the Company continually evaluates whether later events and circumstances have occurred that indicate the remaining estimated useful life of goodwill may warrant revision or that the remaining balance of goodwill may not be recoverable. See Note 7 for discussion of the goodwill write-down that occurred in 1994. Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The adoption of this statement did not impact the Company's financial statements. STOCK-BASED COMPENSATION: Effective January 1, 1996, the Company adopted the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." The Company has elected to continue to account for stock options at intrinsic value with disclosure of the effects of fair value accounting on net income and earnings per share on a pro forma basis. CASH FLOWS: For purposes of the Consolidated Statement of Cash Flows, the Company considers all highly liquid instruments with a purchased maturity of three months or less to be cash equivalents. The carrying amount of cash and cash equivalents approximates fair value due to the short maturities. ENVIRONMENTAL MATTERS: The Company accrues for costs associated with the remediation of environmental pollution when it is probable that a liability has been incurred and the Company's proportionate share of the amount can be reasonably estimated. Any recorded liabilities have not been discounted. 2. ACCOUNTS RECEIVABLE Accounts receivable as of December 29, 1996 and December 31, 1995 included unbilled receivables of $44 million, which were due primarily from U.S. government agencies. Accounts receivable were net of reserves for doubtful accounts of $4.2 million and $4.4 million as of December 29, 1996 and December 31, 1995, respectively. 3. INVENTORIES Inventories as of December 29, 1996 and December 31, 1995 consisted of the following: (In thousands) 1996 1995 -------- -------- Finished goods $ 31,436 $ 28,540 Work in process 28,536 28,613 Raw materials 59,586 57,046 -------- -------- $119,558 $114,199 ======== ======== The portion of inventories accounted for using the LIFO method of determining inventory costs in 1996 and 1995 approximated 23% of total inventories. The excess of current cost of inventories over the LIFO value was approximately $8 million as of December 29, 1996 and $9 million as of December 31, 1995. -25-
27 4. DISCONTINUED OPERATIONS The former DOE Support segment, which has provided services under management and operations contracts, is presented as discontinued operations in accordance with Accounting Principles Board Opinion No. 30. The EG&G Rocky Flats, Inc. contract terminated in June 1995. The Reynolds Electrical and Engineering Co., Inc. and the EG&G Energy Measurements, Inc. contracts expired on December 31, 1995. The EG&G Mound Applied Technologies, Inc. contract, the Company's remaining DOE management and operations contract, has been extended by the DOE to June 30, 1997 under existing terms and conditions and could be extended for up to an additional three months. Sales and income from the Mound contract are dependent upon the negotiated work scope and fee pools. Summary operating results of the discontinued operations were as follows: <TABLE> <CAPTION> (In thousands) 1996 1995 1994 -------- -------- ---------- <S> <C> <C> <C> Sales $141,181 $659,852 $1,300,064 Costs and expenses 132,449 638,719 1,259,369 -------- -------- ---------- Income from discontinued operations before income taxes 8,732 21,133 40,695 Provision for income taxes 3,056 7,397 14,243 -------- -------- ---------- Income from discontinued operations, net of income taxes $ 5,676 $ 13,736 $ 26,452 ======== ======== ========== </TABLE> Given the nature of the government contracts, the Company does not anticipate incurring any material loss on the ultimate completion of the contracts. Net assets (liabilities) of discontinued operations as of December 29, 1996 and December 31, 1995 consisted of the following: <TABLE> <CAPTION> (In thousands) 1996 1995 ------- -------- <S> <C> <C> Accounts receivable, primarily unbilled $ 2,050 $ 7,693 Operating current liabilities (7,040) (11,439) ------- -------- $(4,990) $ (3,746) ======= ======== </TABLE> 5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment, at cost, as of December 29, 1996 and December 31, 1995 consisted of the following: <TABLE> <CAPTION> (In thousands) 1996 1995 -------- -------- <S> <C> <C> Land $ 12,324 $ 12,003 Buildings and leasehold improvements 123,575 108,254 Machinery and equipment 344,959 297,309 -------- -------- $480,858 $417,566 ======== ======== </TABLE> -26-
28 6. INVESTMENTS Investments as of December 29, 1996 and December 31, 1995 consisted of the following: <TABLE> <CAPTION> (In thousands) 1996 1995 -------- -------- <S> <C> <C> Marketable investments (Note 11) $12,294 $ 9,547 Other investments 558 1,396 Joint venture investments 4,363 7,349 ------- ------- 17,215 18,292 Investments classified as other current assets (376) (2,220) ------- ------- $16,839 $16,072 ======= ======= </TABLE> Marketable investments consisted of common stocks and trust assets which were primarily invested in common stocks and fixed-income securities to meet the supplemental executive retirement plan obligation. The net unrealized holding gain on marketable investments, net of deferred income taxes, reported as a separate component of stockholders' equity, was $1.2 million at December 29, 1996, a $1 million increase from the $0.2 million gain at December 31, 1995. In 1996, proceeds and gross realized losses from sales of available-for-sale securities were $1.2 million and $0.4 million, respectively. Average cost was the basis for computing the realized losses. Marketable investments classified as available for sale as of December 29, 1996 and December 31, 1995 consisted of the following: (In thousands) 1996 ----------------------------------------------- GROSS UNREALIZED HOLDING MARKET ------------------------ VALUE COST GAINS (LOSSES) ------- ------- ------ -------- Common stocks $ 9,347 $ 7,498 $2,050 $(201) Fixed-income securities 2,712 2,710 2 - Money market funds 128 128 - - Other 107 105 2 - ------- ------- ------ ----- $12,294 $10,441 $2,054 $(201) ======= ======= ====== ===== (In thousands) 1995 ------------------------------------------------ Gross Unrealized Holding Market ------------------------ Value Cost Gains (Losses) ------- ------- ------ -------- Common stocks $6,355 $6,144 $ 919 $(708) Fixed-income securities 2,789 2,694 95 - Money market funds 261 261 - - Other 142 72 70 - ------ ------ ------ ----- $9,547 $9,171 $1,084 $(708) ====== ====== ====== ===== The market values were based on quoted market prices. As of December 29, 1996, the fixed-income securities, on average, have maturities of approximately nine years. Other investments consisted of nonmarketable investments in venture capital partnerships and private companies, which are carried at the lower of cost or net realizable value. The estimated aggregate fair value of other investments approximated the carrying amount at December 29, 1996 and December 31, 1995. The fair values of other investments were estimated based on the most recent rounds of financing and securities transactions and on other pertinent information, including financial condition and operating results. The Company -27-
29 wrote down certain investments by $2.5 million in 1995 and $4.5 million in 1994 to their estimated realizable value due to deterioration in the company/partnership's financial condition and the decision to liquidate the Company's position in investments no longer consistent with its strategic direction. Joint venture investments are accounted for using the equity method. 7. INTANGIBLE ASSETS Intangible assets were shown net of accumulated amortization of $51.8 million and $42.2 million as of December 29, 1996 and December 31, 1995, respectively. The $13.1 million net decrease in intangible assets resulted primarily from current year amortization and the effect of translating goodwill denominated in non-U.S. currencies at current exchange rates. In 1994, the continued decline in the financial results of the operating elements of the Company's Berthold business acquired in 1989, the resultant strategic and operational review and the application of the Company's objective measurement tests resulted in an evaluation of goodwill for possible impairment. The underlying factors contributing to the decline in financial results included changes in the marketplace, delays in customer acceptance of new technologies and worldwide economic conditions. The Company calculated the present value of expected cash flows to determine the fair value of the business using a discount rate of 12%, which represented the Company's weighted average cost of capital. The evaluation resulted in a $39.2 million write-down of Berthold's $76 million goodwill balance. The evaluation also led the Company to determine that the remaining amortization period for the goodwill should be reduced from 36 years to 16 years based on the factors identified above. The Company also wrote off $1.1 million of a small Optoelectronics unit's goodwill in 1994. 8. DEBT Short-term debt at December 29, 1996 consisted primarily of $18 million of commercial paper borrowings that had maturities of less than 30 days. There were no commercial paper borrowings outstanding at December 31, 1995. The weighted average interest rate on commercial paper borrowings was 6.2% at December 29, 1996. Commercial paper borrowings averaged $28 million during 1996 at an average interest rate of 5.4%, compared to average borrowings of $52.5 million during 1995 at an average interest rate of 6.1%. During 1996, the Company renewed its credit facilities with the signing of two revolving credit agreement extensions totaling $200 million. These agreements consist of a $100 million, 364-day facility, which expires in March 1997, and a $100 million, five-year facility, which expires in March 2001. These agreements serve as backup facilities for the commercial paper borrowings. During 1996, the Company did not draw down either of these credit facilities, and there are no significant commitment fees. The Company is in the process of negotiating an extension of these agreements. At December 29, 1996 and December 31, 1995, long-term debt included $115 million of unsecured ten-year notes issued in October 1995 at an interest rate of 6.8%. The total notes authorized were $150 million, and the unissued notes of $35 million are covered by a shelf registration statement. The carrying amount of the Company's long-term debt approximated the estimated fair value at December 29, 1996 and December 31, 1995 based on a quoted market price. -28-
30 9. RESTRUCTURING CHARGES During the third quarter of 1994, management completed its review of various operating elements and developed a plan to reposition these businesses to attain the Company's business goals. The plan resulted in pre-tax restructuring charges of $30.4 million. The major components of the restructuring charges were $21 million of employee separation costs, $4.9 million of noncash charges to dispose of certain product lines and assets through sale or abandonment and $4.5 million of charges to terminate lease and other contractual obligations no longer required as a result of the restructuring plan. The principal actions in the restructuring plan included reduction of excess manufacturing capacity, changes in distribution channels, consolidation and re-engineering of support infrastructure, disposal of underutilized assets, withdrawal from certain unprofitable product lines, disposal of excess property and general cost reductions. The net workforce reduction under the plan was approximately 700 positions. The implementation of this plan commenced during the second half of 1994 and was substantially complete at the end of 1995. Under the 1994 restructuring plan, cash outlays in 1996 were $3.5 million, bringing the total spent to $25 million. 10. ACCRUED EXPENSES Accrued expenses as of December 29, 1996 and December 31, 1995 consisted of the following: (In thousands) 1996 1995 -------- -------- Payroll and incentives $ 29,732 $ 28,660 Employee benefits 44,845 40,178 Federal, non-U.S. and state income taxes 24,186 33,153 Other accrued operating expenses 58,795 66,680 -------- -------- $157,558 $168,671 ======== ======== 11. EMPLOYEE BENEFIT PLANS SAVINGS PLAN: The Company has a savings plan for the benefit of qualified U.S. employees. Under this plan, the Company contributes an amount equal to the lesser of 55% of the amount of the employee's voluntary contribution or 3.3% of the employee's annual compensation. Savings plan expense was $5.8 million in 1996, $5.7 million in 1995 and $6.2 million in 1994. PENSION PLANS: The Company has defined benefit pension plans covering substantially all U.S. employees and non-U.S. pension plans for non-U.S. employees. The plans provide benefits that are based on an employee's years of service and compensation near retirement. Assets of the U.S. plan are composed primarily of corporate equity and debt securities. Net periodic pension cost included the following components: <TABLE> <CAPTION> (In thousands) 1996 1995 1994 -------- -------- -------- <S> <C> <C> <C> Service cost - benefits earned during the period $ 9,248 $ 9,073 $ 9,822 Interest cost on projected benefit obligations 17,335 16,733 15,070 Actual return on plan assets (32,287) (42,992) (461) Net amortization and deferral 13,116 24,310 (15,442) -------- -------- -------- $ 7,412 $ 7,124 $ 8,989 ======== ======== ======== </TABLE> The decrease in pension expense for 1995 was caused by changes in the discount rate and other actuarial assumptions in the U.S. plan. -29-
31 The following table sets forth the funded status of the principal U.S. pension plan and the principal non-U.S. pension plans and the amounts recognized in the Company's Consolidated Balance Sheet as of December 29, 1996 and December 31, 1995: <TABLE> <CAPTION> (In thousands) 1996 1995 ---------------------- ---------------------- Non-U.S. U.S. Non-U.S. U.S. -------- -------- -------- -------- <S> <C> <C> <C> <C> Actuarial present value of benefit obligations: Vested benefit obligations $25,119 $177,714 $23,702 $165,913 ======= ======== ======= ======== Accumulated benefit obligations $26,163 $184,765 $24,806 $174,569 ======= ======== ======= ======== Projected benefit obligations for service provided to date $31,663 $213,146 $31,490 $205,100 Plan assets at fair value - 249,431 - 219,960 ------- -------- ------- -------- Plan assets less (greater) than projected benefit obligations 31,663 (36,285) 31,490 (14,860) Unrecognized net transition asset - 3,756 - 4,508 Unrecognized prior service costs (1,380) 690 (983) 807 Unrecognized net gain (loss) 2,527 518 2,504 (18,922) ------- -------- ------- --------- Accrued pension liability (asset) $32,810 $(31,321) $33,011 $(28,467) ======= ======== ======= ======== Actuarial assumptions as of the year-end measurement date were: Discount rate 6.50% 7.50% 7.00% 7.25% Rate of compensation increase 4.00% 5.00% 4.50% 5.00% Long-term rate of return on assets - 9.50% - 9.50% </TABLE> The non-U.S. accrued pension liability included $32.3 million and $32.5 million classified as long-term liabilities as of December 29, 1996 and December 31, 1995, respectively. The U.S. pension asset was classified as other noncurrent assets. The Company also sponsors a supplemental executive retirement plan to provide senior management with benefits in excess of normal pension benefits. At December 29, 1996 and December 31, 1995, the projected benefit obligations were $11.2 million and $11 million, respectively. Assets with a fair value of $9.1 million and $8.3 million, segregated in a trust, were available to meet this obligation as of December 29, 1996 and December 31, 1995, respectively. Pension expense for this plan was approximately $1.5 million in 1996, 1995 and 1994. POSTRETIREMENT MEDICAL PLANS: The Company provides health care benefits for eligible retired U.S. employees under a comprehensive major medical plan or under health maintenance organizations where available. The majority of the Company's U.S. employees become eligible for retiree health benefits if they retire directly from the Company and have at least ten years of service. Generally, the major medical plan pays stated percentages of covered expenses after a deductible is met and takes into consideration payments by other group coverages and by Medicare. The plan requires retiree contributions under most circumstances and has provisions for cost-sharing changes. For employees retiring after 1991, the Company has capped its medical premium contribution based on employees' years of service. The Company funds the amount allowable under a 401(h) provision in the Company's defined benefit pension plan. Assets of the plan are composed primarily of corporate equity and debt securities. -30-
32 Net periodic postretirement medical benefit cost included the following components: <TABLE> <CAPTION> (In thousands) 1996 1995 1994 ------- ------ ------ <S> <C> <C> <C> Service cost - benefits earned during the period $ 349 $ 391 $ 426 Interest cost on accumulated benefit obligations 1,459 1,697 1,620 Actual return on plan assets (1,128) (1,001) (70) Net amortization and deferral 296 544 (237) ------- ------- ------ $ 976 $ 1,631 $1,739 ======= ======= ====== </TABLE> The following table sets forth the plan's funded status and the amounts recognized in the Company's Consolidated Balance Sheet at December 29, 1996 and December 31, 1995: (In thousands) 1996 1995 ------- ------- Actuarial present value of accumulated benefit obligations: Current retirees $15,699 $15,762 Active employees eligible to retire 563 908 Other active employees 4,848 7,171 ------- ------- 21,110 23,841 Plan assets at fair value 8,470 7,342 ------- ------- Plan assets less than accumulated benefit obligations 12,640 16,499 Unrecognized net gain 4,669 381 ------- ------- Accrued postretirement medical liability $17,309 $16,880 ======= ======= Actuarial assumptions as of the year-end measurement date were: Discount rate 7.50% 7.25% Health care cost trend rate: First year 12.00% 13.00% Ultimate 6.50% 6.50% Years to reach ultimate 7 years 8 years Long-term rate of return on assets 9.50% 9.50% The accrued postretirement medical liability included $16.3 million and $15.9 million classified as long-term liabilities as of December 29, 1996 and December 31, 1995, respectively. If the health care cost trend rate was increased 1%, the accumulated postretirement benefit obligations would have increased by approximately $1.3 million at December 29, 1996. The effect of this increase on the annual cost for 1996 would have been approximately $0.1 million. OTHER: During 1995, the Company adopted an EVA Incentive Compensation Plan, the purpose of which is to provide incentive compensation to certain key employees, including all officers, in a form that relates the financial rewards to an increase in the value of the Company to its shareholders. Awards under this plan are approved annually by the Board of Directors. The above information does not include amounts related to benefit plans applicable to employees associated with contracts with the DOE and NASA because the Company is not responsible for the current or future funded status of the plans. -31-
33 12. INCOME TAXES The components of income (loss) from continuing operations before income taxes for financial reporting purposes were as follows: <TABLE> <CAPTION> (In thousands) 1996 1995 1994 ------- ------- -------- <S> <C> <C> <C> U.S. $36,235 $53,264 $ 15,986 Non-U.S. 44,119 32,795 (33,109) ------- ------- -------- $80,354 $86,059 $(17,123) ======= ======= ======== </TABLE> The components of the provision for income taxes for continuing operations were as follows: (In thousands) 1996 ------------------------------------------------------- DEFERRED CURRENT (PREPAID) TOTAL ------- -------- ------- Federal $ 4,209 $10,473 $14,682 State 3,653 135 3,788 Non-U.S. 8,545 (1,141) 7,404 ------- -------- -------- $16,407 $ 9,467 $25,874 ======= ======= ======= (In thousands) 1995 ------------------------------------------------------- Deferred Current (Prepaid) Total ------- -------- ------- Federal $26,268 $(3,411) $22,857 State 3,572 (264) 3,308 Non-U.S. 5,325 265 5,590 ------- ------- ------- $35,165 $(3,410) $31,755 ======= ======= ======= (In thousands) 1994 ------------------------------------------------------- Deferred Current (Prepaid) Total ------- -------- ------- Federal $10,735 $(2,569) $ 8,166 State 3,670 157 3,827 Non-U.S. 2,834 157 2,991 ------- ------- ------- $17,239 $(2,255) $14,984 ======= ======= ======= The total provision for income taxes included in the consolidated financial statements was as follows: (In thousands) 1996 1995 1994 -------- ------- ------- Continuing operations $25,874 $31,755 $14,984 Discontinued operations 3,056 7,397 14,243 ------- ------- ------- $28,930 $39,152 $29,227 ======= ======= ======= -32-
34 The major differences between the Company's effective tax rate for continuing operations and the federal statutory rate were as follows: 1996 1995 1994 ----- ---- ----- Federal statutory rate 35.0% 35.0% (35.0)% Non-U.S. rate differential, net (10.1) (2.5) (29.7) State income taxes, net 3.1 2.5 14.5 Goodwill amortization 2.4 2.0 10.0 Increase (decrease) in valuation allowance (1.1) (2.3) 128.5 Other, net 2.9 2.2 (0.8) ----- ---- ----- Effective tax rate 32.2% 36.9% 87.5% ===== ==== ===== The 1994 tax provision and effective rate for continuing operations were significantly impacted by the goodwill write-down and the restructuring charges. The Company did not record any tax benefit from the goodwill write-down and approximately $11 million of the restructuring charges because these charges, while tax deductible, were incurred in tax jurisdictions where the Company had existing operating loss carryforwards; therefore, the related tax assets were offset by a valuation allowance. The tax effects of temporary differences and carryforwards which gave rise to prepaid (deferred) income taxes as of December 29, 1996 and December 31, 1995 were as follows: (In thousands) 1996 1995 -------- -------- Deferred tax assets: Inventory reserves $ 5,738 $ 4,902 Other reserves 9,628 10,983 Depreciation 3,869 6,020 Vacation pay 6,200 6,319 Net operating loss carryforwards 42,932 45,380 Postretirement health benefits 5,077 5,940 Restructuring reserve 616 1,870 All other, net 25,229 26,850 -------- -------- Total deferred tax assets 99,289 108,264 -------- -------- Deferred tax liabilities: Award and holdback fees (3,814) (3,629) Pension contribution (9,212) (8,301) Amortization (8,113) (8,896) All other, net (14,489) (11,663) -------- -------- Total deferred tax liabilities (35,628) (32,489) -------- -------- Valuation allowance (35,250) (38,227) -------- -------- Net prepaid taxes $ 28,411 $ 37,548 ======== ======== At December 29, 1996, the Company had non-U.S. (primarily from Germany) net operating loss carryforwards of $92.7 million, of which $2.5 million expire in the years 1998 through 2002 and $90.2 million of which carry forward indefinitely. The $35.3 million valuation allowance results primarily from these carryforwards, for which the Company currently believes it is more likely than not that they will not be realized. Current prepaid income taxes of $38.6 million and $40.2 million at December 29, 1996 and December 31, 1995, respectively, were included in other current assets. Long-term prepaid income taxes of $3.6 million were included in other noncurrent assets at December 31, 1995. Long-term deferred income taxes of $10.2 million and $6.3 million were included in long-term liabilities at December 29, 1996 and December 31, 1995, respectively. -33-
35 In general, it is the practice and intention of the Company to reinvest the earnings of its non-U.S. subsidiaries in those operations. Repatriation of retained earnings is done only when it is advantageous. Applicable federal taxes are provided only on amounts planned to be remitted. Accumulated net earnings of non-U.S. subsidiaries for which no federal taxes have been provided as of December 29, 1996 were $82.4 million, which does not include amounts that, if remitted, would result in little or no additional tax because of the availability of non-U.S. tax credits. Federal taxes that would be payable upon remittance of these earnings are estimated to be $24.5 million at December 29, 1996. 13. CONTINGENCIES The Company is subject to various investigations, claims and legal proceedings covering a wide range of matters that arise in the ordinary course of its business activities. Each of these matters is subject to various uncertainties, and it is possible that some of these matters may be resolved unfavorably to the Company. The Company has established accruals for matters that are probable and reasonably estimable. Management believes that any liability that may ultimately result from the resolution of these matters in excess of amounts provided will not have a material adverse effect on the financial position or results of operations of the Company. In addition, the Company is conducting a number of environmental investigations and remedial actions at current and former Company locations and, along with other companies, has been named a potentially responsible party for certain waste disposal sites. The Company accrues for environmental issues in the accounting period that the Company's responsibility is established and when the cost can be reasonably estimated. The Company has accrued $3.2 million as of December 29, 1996 to reflect its estimated liability for environmental remediation. As assessments and remediation activities progress at each individual site, these liabilities are reviewed and adjusted to reflect additional information as it becomes available. There have been no environmental problems to date that have had or are expected to have a material effect on the Company's financial position or results of operations. While it is reasonably possible that a material loss exceeding the amounts recorded may have been incurred, the preliminary stages of the investigations make it impossible for the Company to reasonably estimate the range of potential exposure. During 1994, 1995 and 1996, the Company received notices from the Internal Revenue Service (IRS) asserting deficiencies in federal corporate income taxes for the Company's 1985 to 1992 tax years. The total additional tax proposed by the IRS amounts to $53 million plus interest. The Company has filed petitions in the United States Tax Court to challenge most of the deficiencies asserted by the IRS. The Company believes that it has meritorious legal defenses to those deficiencies and believes that the ultimate outcome of the case will not result in a material impact on the Company's consolidated results of operations or financial position. 14. NATURE OF OPERATIONS, RISKS AND UNCERTAINTIES EG&G, Inc. is a broad-based technology company that provides an array of products and technical services to manufacturers and end-users in medical, aerospace, photography, automotive and other ground transportation, environmental, industrial and government markets worldwide. The Company's industry segments are Instruments, Mechanical Components, Optoelectronics and Technical Services. Based on sales, Technical Services is the largest segment, representing approximately 40% of the Company's sales; each of the other segments accounts for approximately 20% of sales. The Instruments segment develops and manufactures hardware and associated software for applications in medical diagnostics, biochemical and medical research, materials analyses, environmental monitoring, industrial process measurement, food monitoring, and airport and industrial security worldwide. Mechanical Components provides products to four worldwide markets. Mechanical seals and -34-
36 bellows products are designed and manufactured for the chemical and petrochemical industries. Fans, blowers, ducting, components, seals and metallic parts/valves are supplied to the aerospace market. Motors and power supplies are sold to the transportation market. Regenerative blower and biofiltration systems are used in the environmental remediation market. The Optoelectronics segment designs and manufactures optical sensors, flashlamps and laser diodes. Electronic components are provided for industrial, consumer, medical and photography applications, and defense and energy programs. Micromachined sensors are used for a variety of applications, such as pressure sensors and accelerometers for the medical and automotive industries. Optoelectronics is designing medical imaging devices based on amorphous silicon technology. High-reliability power supplies are manufactured. This segment's products are distributed worldwide, and its future results are dependent on management's ability to bring the micromachined sensors business to break-even operations in 1997. The Technical Services segment supplies engineering, scientific, environmental, management and skilled support services primarily to U.S. government agencies. Analysis and testing services are provided primarily to the U.S. automotive and petroleum industries. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In 1996, 37% of the Company's sales from continuing operations were to U.S. government agencies, predominantly to the Department of Defense and NASA. In accordance with government regulations, all of the Company's government contracts are subject to termination for the convenience of the government. Costs incurred under cost-reimbursable contracts are subject to audit by the government. The results of prior audits, complete through 1991, have not had a material effect on the Company. The Company's award/incentive-fee contract with NASA at the KSC, which contributed sales of $172 million in 1996, expires on October 31, 1997 and has three 2-year renewal options at the discretion of the government. While it is possible that the Company's contract could be absorbed by the single Space Flight Operations contract, the Company believes that its contract will be renewed by NASA and changed to a performance-based contract. The Company has been the base operations contractor at the KSC for 14 years and recently received its highest grades. Given the nature of the DOE contracts, which are presented as discontinued operations, the Company does not anticipate incurring any material loss on the ultimate completion of the contracts. For information concerning various investigations, claims, legal proceedings, environmental investigations and remedial actions, and notices from the IRS, see Note 13. 15. STOCKHOLDERS' EQUITY At December 29, 1996, six million shares of the Company's common stock were reserved for employee benefit plans. The Company has nonqualified and incentive stock option plans for officers and key employees. Under these plans, options may be granted at prices not less than 100% of the -35-
37 fair market value on the date of grant. All options expire ten years from the date of grant. Options granted since 1994 become exercisable, in ratable installments, over a period of five years from the date of grant. In other years, options became exercisable at the date of grant. The Stock Option Committee of the Board of Directors, at its sole discretion, may also include stock appreciation rights in any option granted. There are no stock appreciation rights outstanding under these plans. A summary of certain stock option information is as follows: <TABLE> <CAPTION> (Shares in thousands) 1996 1995 1994 ------------------------------- ------------------------------- ------------------------------ Number Weighted Number Weighted Number Weighted of Shares Average Price of Shares Average Price of Shares Average Price --------- ------------- --------- ------------- --------- ------------- <S> <C> <C> <C> <C> <C> <C> Outstanding at beginning of year 3,276 $18.81 3,611 $18.77 3,260 $19.80 Granted 1,392 20.67 13 16.66 736 14.31 Exercised (266) 17.00 (197) 17.52 (54) 14.87 Lapsed (241) 18.57 (151) 19.28 (331) 19.66 ----- ------ ----- ------ ----- ------ Outstanding at end of year 4,161 $19.56 3,276 $18.81 3,611 $18.77 ===== ====== ===== ====== ===== ====== Exercisable at end of year 2,477 2,740 2,895 ===== ===== ===== Available for grant at end of year 1,831 2,226 1,354 ===== ===== ===== </TABLE> During 1996, the Board of Directors granted 650,000 options in January and 728,000 options in December at exercise prices of $21.75 and $19.75 per share, respectively. Effective January 1, 1996, the Company adopted the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." The Company has elected to continue to account for stock options at intrinsic value with disclosure of the effects of fair value accounting on net income and earnings per share on a pro forma basis. Had compensation costs for the stock option plans been determined using the fair value method, the Company's 1996 pro forma net income and earnings per share from continuing operations would have been $54 million and $1.14, respectively. Consistent with SFAS No. 123, pro forma net income and earnings per share have not been calculated for options granted prior to January 1, 1995. There are no pro forma disclosures for 1995 because the options granted were insignificant. Pro forma compensation cost may not be representative of that to be expected in future years. The fair value of each option was $6.68 for the options granted in January 1996 and $6.20 for the options granted in December 1996. The values were estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in January and December 1996, respectively: risk-free interest rates of 5.5% and 6.3%, expected dividend yields of 2% for both periods, expected lives of seven years for both periods and expected volatilities of 25% and 24%. On January 25, 1995, the Board of Directors adopted a new Shareholder Rights Plan. Under the plan, preferred stock purchase rights were distributed on February 8, 1995 as a dividend at the rate of one right for each share of common stock outstanding. Each right, when exercisable, entitles a stockholder to purchase one one-thousandth of a share of a new series of junior participating preferred stock at a price of $60. The rights become exercisable only if a person or group acquires 20% or more or announces a tender or exchange offer for 30% or more of the Company's common stock. This preferred stock is nonredeemable and will have 1,000 votes per share. The rights are nonvoting, expire in 2005 and may be redeemed prior to becoming exercisable. The Company has reserved 70,000 shares of preferred stock, designated as Series C Junior Participating Preferred Stock, for issuance upon exercise of such rights. If a person (an "Acquiring Person") acquires or obtains the -36-
38 right to acquire 20% or more of the Company's outstanding common stock (other than pursuant to certain approved offers), each right (other than rights held by the Acquiring Person) will entitle the holder to purchase shares of common stock of the Company at one-half of the current market price at the date of occurrence of the event. In addition, in the event that the Company is involved in a merger or other business combination in which it is not the surviving corporation or in connection with which the Company's common stock is changed or converted, or it sells or transfers 50% or more of its assets or earning power to another person, each right that has not previously been exercised will entitle its holder to purchase shares of common stock of such other person at one-half of the current market price of such common stock at the date of the occurrence of the event. In connection with the adoption of the plan, the Company redeemed the rights issued pursuant to the Company's January 28, 1987 Rights Agreement at a redemption price of $.01 per right to shareholders of record as of February 8, 1995. 16. FINANCIAL INSTRUMENTS Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and accounts receivable. The Company had no significant concentrations of credit risk as of December 29, 1996. The Company has limited involvement with derivative financial instruments and uses forward contracts and options to hedge certain foreign commitments and transactions denominated in foreign currencies. The notional amount of outstanding forward contracts was $62.4 million as of December 29, 1996 and $57.4 million as of December 31, 1995. The carrying value as of December 29, 1996 and December 31, 1995, which approximated fair value, was not significant. The average contract term is one month, and there are no cash requirements on forward contracts until maturity. Credit risk is minimal because the contracts are with very large banks; any market risk is offset by the exposure on the underlying hedged items. When forward contracts are closed, the Company enters into spot transactions to fulfill the contract obligations. Gains and losses on forward contracts are offset against foreign exchange gains and losses on the underlying hedged items. Transactions covered by hedge contracts primarily include collection of receivables from third-party customers, collection of intercompany receivables, payments to third-party suppliers and payment of intercompany payables. See Notes 1, 6 and 8 for disclosures about fair values, including methods and assumptions, of other financial instruments. 17. LEASES The Company leases certain property and equipment under operating leases. Rental expense charged to earnings for 1996, 1995 and 1994 amounted to $17.2 million, $18.7 million and $19.3 million, respectively. Minimum rental commitments under noncancelable operating leases are as follows: $14.5 million in 1997, $10.8 million in 1998, $7.3 million in 1999, $3.9 million in 2000, $3.2 million in 2001 and $6.5 million after 2001. The above information does not include amounts related to leases covered by contracts with the DOE and NASA because the costs are reimbursable under the contracts. -37-
39 18. OTHER INCOME (EXPENSE) <TABLE> <CAPTION> Other income (expense), net, consisted of the following: (In thousands) 1996 1995 1994 -------- ------- ------- <S> <C> <C> <C> Interest income $ 3,879 $ 4,930 $ 3,167 Gains (losses) on investments, net (Note 6) 1,714 2,047 (4,682) Interest expense (13,427) (8,514) (5,419) Other 558 4,923 758 -------- ------- ------- $ (7,276) $ 3,386 $(6,176) ======== ======= ======= </TABLE> Other consists mainly of gains on the sale of operating assets, income from joint ventures and foreign exchange losses. 19. EARNINGS (LOSS) PER SHARE Earnings (loss) per common share was computed by dividing net income (loss) by the weighted average number of common shares outstanding. The number of shares issuable upon the exercise of stock options had no material effect on earnings (loss) per share. The weighted average number of shares used in the earnings (loss) per share computations were 47,298,000 for 1996, 51,483,000 for 1995 and 55,271,000 for 1994. 20. INDUSTRY SEGMENT AND GEOGRAPHIC AREA INFORMATION The Company's continuing operations are classified into four industry segments: Technical Services, Instruments, Mechanical Components and Optoelectronics. The products and services of these segments are described in Note 14 and elsewhere in the Annual Report. Sales and operating income (loss) from continuing operations by industry segment are shown in the Sales and Operating Income by Industry Segment section of this report; such information with respect to 1996, 1995 and 1994 is considered an integral part of this note. Sales to U.S. government agencies, which were predominantly to the Department of Defense and NASA, were $527 million, $537 million and $542 million in 1996, 1995 and 1994, respectively. In October 1993, the Company was selected by NASA to continue as the base operations contractor at the KSC. The award/incentive fee contract contributed sales of $172 million in 1996 and 1995 and $176 million in 1994. The contract expires on October 31, 1997 and has three 2-year renewal options at the discretion of the government. -38-
40 Additional information relating to the Company's operations in the various industry segments is as follows: <TABLE> <CAPTION> Depreciation and Capital (In thousands) Amortization Expense Expenditures ------------------------------ ----------------------------- 1996 1995 1994 1996 1995 1994 ------- ------- ------- ------- ------- ------- <S> <C> <C> <C> <C> <C> <C> Instruments $10,976 $11,887 $11,621 $ 4,550 $ 4,639 $ 5,398 Mechanical Components 5,729 5,585 6,091 10,367 6,978 6,197 Optoelectronics 14,880 13,220 10,690 47,327 35,925 17,748 Technical Services 8,193 7,698 7,447 16,714 12,047 7,314 Corporate 1,158 1,036 941 1,532 2,250 620 ------- ------- ------- ------- ------- ------- $40,936 $39,426 $36,790 $80,490 $61,839 $37,277 ======= ======= ======= ======= ======= ======= </TABLE> Identifiable (In thousands) Assets ------------------------------- 1996 1995 1994 -------- -------- -------- Instruments $221,831 $225,358 $220,232 Mechanical Components 110,276 100,363 93,721 Optoelectronics 235,969 200,719 193,302 Technical Services 117,340 113,901 129,995 Corporate and Other 137,484 163,574 155,879 --------- -------- -------- $822,900 $803,915 $793,129 ======== ======== ======== Corporate assets consist primarily of cash and cash equivalents, prepaid pension and taxes, and investments. Information relating to geographic areas is as follows: <TABLE> <CAPTION> (In thousands) Operating Income (Loss) Sales From Continuing Operations --------------------------------------- ---------------------------------- 1996 1995 1994 1996 1995 1994 ---------- ---------- ---------- -------- -------- -------- <S> <C> <C> <C> <C> <C> <C> U.S. $1,066,561 $1,065,424 $1,026,970 $ 68,108 $ 82,256 $ 57,679 Germany 80,465 87,690 61,310 5,154 4,508 (43,492) Other Non-U.S. 280,226 266,464 244,276 38,759 25,102 9,748 Corporate - - - (24,391) (29,193) (34,882) ---------- ---------- ---------- -------- -------- -------- $1,427,252 $1,419,578 $1,332,556 $ 87,630 $ 82,673 $(10,947) ========== ========== ========== ======== ======== ======== </TABLE> (In thousands) Identifiable Assets -------------------------------------- 1996 1995 1994 -------- -------- -------- U.S. $380,080 $353,130 $341,725 Germany 86,881 89,834 100,650 Other Non-U.S. 218,455 197,377 194,875 Corporate and Other 137,484 163,574 155,879 -------- -------- -------- $822,900 $803,915 $793,129 ======== ======== ======== Transfers between geographic areas were not material. -39-
41 21. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) Selected quarterly financial information follows: <TABLE> <CAPTION> (In thousands except per share data) Quarters ------------------------------------------------------------ First Second Third Fourth Year -------- -------- -------- -------- ---------- <S> <C> <C> <C> <C> <C> 1996 - ---- Sales $346,791 $355,907 $354,747 $369,807 $1,427,252 Operating income from continuing operations 19,925 21,414 23,201 23,090 87,630 Income from continuing operations before income taxes 18,030 20,355 20,946 21,023 80,354 Income from continuing operations 11,882 14,143 14,201 14,254 54,480 Net income 12,782 15,639 15,637 16,098 60,156 Earnings per share: Continuing operations .25 .30 .30 .30 1.15 Net income .27 .33 .33 .34 1.27 Cash dividends per common share .14 .14 .14 .14 .56 Market price of common stock: High 25.13 23.50 21.38 21.13 Low 20.38 19.88 16.88 16.25 Close 22.38 21.38 17.88 20.88 1995 - ---- Sales $338,230 $342,251 $361,602 $377,495 $1,419,578 Operating income from continuing operations 15,673 20,435 19,086 27,479 82,673 Income from continuing operations before income taxes 15,473 20,268 20,304 30,014 86,059 Income from continuing operations 9,352 12,343 13,669 18,940 54,304 Net income 13,689 16,376 15,978 21,997 68,040 Earnings per share: Continuing operations a) .17 .23 .27 .40 1.05 Net income a) .25 .31 .32 .46 1.32 Cash dividends per common share .14 .14 .14 .14 .56 Market price of common stock: High 15.50 18.38 20.00 24.50 Low 13.00 15.00 16.38 18.00 Close 15.00 16.75 19.50 24.25 </TABLE> a) The sum of the quarterly earnings per share does not equal the year's earnings per share. This is due to changes in weighted average shares of common stock outstanding resulting from share repurchases in 1995. -40-
42 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE STOCKHOLDERS OF EG&G, INC.: We have audited the accompanying consolidated balance sheets of EG&G, Inc. (a Massachusetts corporation) and subsidiaries as of December 29, 1996 and December 31, 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for the years ended December 29, 1996, December 31, 1995 and January 1, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of EG&G, Inc. and subsidiaries as of December 29, 1996 and December 31, 1995, and the results of their operations and their cash flows for the years ended December 29, 1996, December 31, 1995 and January 1, 1995, in conformity with generally accepted accounting principles. As explained in Note 1 to the consolidated financial statements, effective January 2, 1995, the Company changed its method of accounting for depreciation of certain plant and equipment. /s/ Arthur Andersen LLP - ----------------------- Arthur Andersen LLP Boston, Massachusetts January 21, 1997 -41-
43 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT a) DIRECTORS The information required by this Item with respect to Directors is contained on Pages 2 through 7 of the Company's 1997 Proxy Statement under the captions "Election of Directors" and "Information Relative to the Board of Directors and Certain of its Committees" and is herein incorporated by reference. b) EXECUTIVE OFFICERS The information required by this item with respect to Executive Officers is contained in Part I of this Report. ITEM 11. EXECUTIVE COMPENSATION The information required to be disclosed by this Item is contained in Pages 14 - 20 of the Company's 1997 Proxy Statement from under the caption "Summary Compensation Table" up to and including "Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Value Option Table" and Notes thereto, and is herein incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is contained on Pages 8 - 9 of the Company's 1997 Proxy Statement under the captions "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management" and is herein incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not applicable. -42-
44 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) DOCUMENTS FILED AS PART OF THIS REPORT: 1. FINANCIAL STATEMENTS Included in Part II, Item 8: Consolidated Balance Sheet as of December 29, 1996 and December 31, 1995 Consolidated Statement of Operations for the Three Years Ended December 29, 1996 Consolidated Statement of Stockholders' Equity for the Three Years Ended December 29, 1996 Consolidated Statement of Cash Flows for the Three Years Ended December 29, 1996 Notes to Consolidated Financial Statements Report of Independent Public Accountants 2. FINANCIAL STATEMENT SCHEDULES Report of Independent Public Accountants on Financial Statement Schedules Schedule II - Valuation and Qualifying Accounts Financial statement schedules, other than those above, are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto. Separate financial statements of the Registrant are omitted since it is primarily an operating company, and since all subsidiaries included in the consolidated financial statements being filed, in the aggregate, do not have minority equity interests and/or indebtedness to any person other than the Registrant or its consolidated subsidiaries in amounts which together exceed five percent of total consolidated assets. 3. EXHIBITS 3.1 The Company's Restated Articles of Organization, as filed with the Massachusetts Secretary of the Commonwealth on July 31, 1995, were filed with the Commission on September 21, 1995 as Exhibit 4(i) to the Company's Registration Statement on Form S-8 and are herein incorporated by reference. -43-
45 3.2 The Company's By-Laws as amended by the Board of Directors on May 3, 1995, were filed with the Commission on September 21, 1995, as Exhibit 4(ii) to the Company's Registration Statement on Form S-8, and are herein incorporated by reference. 4.1 The form of certificate used to evidence ownership of EG&G Common Stock, $1 par value, was filed as Exhibit 4(a) to EG&G's Registration Statement on Form S-3, File No. 2-69642 and is herein incorporated by reference. 4.2 Form of Indenture dated June 28, 1995 between the Company and the First National Bank of Boston, as Trustee was filed with the Commission as Exhibit 4.1 to EG&G's Registration Statement on Form S-3, File No. 33-59675 and is herein incorporated by reference. *10.1 EG&G, Inc. Supplemental Executive Retirement Plan revised as of April 19, 1995 was filed as Exhibit 10.1 to EG&G's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, and is herein incorporated by reference. *10.2 EG&G, Inc. Economic Value Added Plan as amended and restated by the EG&G, Inc. Board of Directors on April 23, 1996. 10.3 3-Year Competitive Advance and Revolving Credit Facility Agreement ("3-Year Agreement") dated as of March 21, 1994 among EG&G, Inc., the Lenders Named Herein and Chemical Bank as Administrative Agent; Amendment No. 1 to 3-Year Agreement dated as of March 15, 1995; and Amendment No. 2 to 3-Year Agreement dated as of March 14, 1996 was filed as Exhibit 10.3 to EG&G's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, and are herein incorporated by reference. Amendment No. 3 to 3-Year Agreement dated as of March 7, 1997 is attached hereto as Exhibit 10.3. 10.4 364-Day Competitive Advance and Revolving Credit Facility Agreement ("364- Day Agreement") dated as of March 21, 1994 among EG&G, Inc., the Lenders Named Herein and Chemical Bank as Administrative Agent; Amendment No. 1 to 364-Day Agreement dated as of March 15, 1995; and Amendment No. 2 to 364-Day Agreement dated as of March 14, 1996 was filed as Exhibit 10.4 to EG&G's Annual Report on Form 10-K for the fiscal year ended December 31, 1995, and are herein incorporated by reference. Amendment No. 3 to 364-day Agreement dated as of March 7, 1997 is attached hereto as Exhibit 10.4. *10.5 Employment Contracts: (1) Employment contract between John M. Kucharski and EG&G dated November 1, 1993. (2) Employment contract between Murray Gross and EG&G dated November 1, 1993. (3) Employment contract between John F. Alexander, II and EG&G dated November 1, 1993. (4) Employment contract between Angelo Castellana and EG&G dated November 1, 1993. -44-
46 (5) Employment contract between Dale L. Fraser and EG&G dated November 1, 1993. (6) Employment contract between Daniel T. Heaney and EG&G dated June 1, 1995. (7) Employment contract between Anthony L. Klemmer and EG&G dated January 1,1997. (8) Employment contract between E. Lavonne Lewis and EG&G dated June 1, 1995. (9) Employment contract between Deborah S. Lorenz and EG&G dated November 1, 1993. (10) Employment contract between Donald H. Peters and EG&G dated November 1, 1993. (11) Employment contract between William J. Ribaudo and EG&G dated March 29, 1996. (12) Employment contract between Luciano Rossi and EG&G dated November 1, 1993. (13) Employment contract between Theodore P. Theodores and EG&G dated April 23, 1996. (14) Employment contract between C. Michael Williams and EG&G dated November 1, 1993. Except for the name of the officer in the employment contracts identified by numbers 3 through and including 14, the form of said employment contracts is identical in all respects. The employment contracts identified by numbers 1 and 2 are identical to each other and are virtually identical to the contracts identified by numbers 3 through 14 except that they provide for a longer contract term, three years as opposed to one year. The employment contract between John F. Alexander, II and EG&G is representative of the employment contracts of the executive officers and is attached hereto as Exhibit 10.5. *10.6 The EG&G, INC. 1978 NON-QUALIFIED STOCK OPTION PLAN as amended by the Board of Directors on January 26, 1988, was filed with the Commission as Exhibit 14(a)3.(v) to EG&G's Annual Report on Form 10-K for the fiscal year ending January 3, 1988, and is herein incorporated by reference. *10.7 The EG&G, INC. 1982 INCENTIVE STOCK OPTION PLAN as amended by the Board of Directors on January 24, 1990, was filed with the Commission as Exhibit B on pages 37-42 of the Company's 1990 Proxy Statement and is herein incorporated by reference. *10.8 The EG&G, Inc. 1992 STOCK OPTION PLAN was filed as Exhibit 4(v) to EG&G's Registration Statement on Form S-8, File No. 33-49898 and is herein incorporated by reference. -45-
47 21 Subsidiaries of the Registrant. 23 Consent of Independent Public Accountants. 24 Power of Attorney (appears on signature page). 27 Financial Data Schedule. *This exhibit is a management contract or compensatory plan or arrangement required to be filed as an Exhibit pursuant to Item 14(c) of Form 10-K. (b) REPORTS ON FORM 8-K A report on Form 8-K was filed with the Commission on December 18, 1996 regarding a $4.2 million patent infringement judgment against EG&G Astrophysics and its parent, EG&G, Inc. (c) PROXY STATEMENT EG&G's 1997 Proxy Statement, in definitive form, was filed electronically on March 6, 1997, with the Securities and Exchange Commission in Washington, D.C. pursuant to the Commission's Rule 14a-6. -46-
48 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES To EG&G, Inc.: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of EG&G, Inc. included in this Form 10-K and have issued our report thereon dated January 21, 1997. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP - ----------------------- Arthur Andersen LLP Boston, Massachusetts January 21, 1997 -47-
49 <TABLE> SCHEDULE II EG&G, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE YEARS ENDED DECEMBER 29, 1996 <CAPTION> (In thousands) Additions (Subtractions) Balance Charged Accounts Balance at Beginning (Credited) Charged at End Description of Year to Income Off Other of Year - ----------- ------------ ------------- -------- ----- ------- <S> <C> <C> <C> <C> <C> Reserve for Doubtful Accounts - ----------------- Year Ended January 1, 1995 $6,126 $1,255 $(1,868) $307 $5,820 Year Ended December 31, 1995 $5,820 $ (468) $(1,214) $218 $4,356 Year Ended December 29, 1996 $4,356 $2,055 $(2,217) $ 47 $4,241 </TABLE> -48-
50 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our reports dated January 21, 1997, included in this Form 10-K, into Registration Statements previously filed by EG&G, Inc. on, respectively, Form S-8, File No. 2-61241; Form S-8, File No. 2-98168; Form S-8, File No. 33-36082; Form S-8, File No. 33-35379; Form S-8, File No. 33-49898; Form S-8, File No. 33-57606; Form S-8, File No. 33-54785; Form S-8, File No. 33-62805; Form S-8, File No. 33-8811 and Form S-3, File No. 33-59675. /s/Arthur Andersen LLP - ---------------------- Arthur Andersen LLP Boston, Massachusetts March 27, 1997 POWER OF ATTORNEY We, the undersigned officers and directors of EG&G, Inc., hereby severally constitute John M. Kucharski, and Murray Gross, and each of them singly, our true and lawful attorneys with full power to them, and each of them singly, to sign for us and in our names, in the capacities indicated below, this Annual Report on Form 10-K and any and all amendments to said Annual Report on Form 10-K, and generally to do all such things in our name and behalf in our capacities as officers and directors to enable EG&G, Inc. to comply with the provisions of the Securities Exchange Act of 1934, and all requirements of the Securities and Exchange Commission, hereby rectifying and confirming signed by our said attorneys, and any and all amendments thereto. Witness our hands on the date set forth below. 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. EG&G, Inc. March 18, 1997 By:/s/John M. Kucharski ----------------------- John M. Kucharski Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) March 18, 1997 By:/s/John F. Alexander, II --------------------------- John F. Alexander, II Senior Vice President and Chief Financial Officer (Principal Financial Officer) March 18, 1997 By:/s/William J. Ribaudo ------------------------ William J. Ribaudo Corporate Controller (Principal Accounting Officer) -49-
51 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 date indicated: By: /s/John M. Kucharski -------------------- John M. Kucharski, Director Date: March 18, 1997 By: /s/Tamara J. Erickson --------------------- Tamara J. Erickson, Director Date: March 20, 1997 By: /s/Robert F. Goldhammer ----------------------- Robert F. Goldhammer, Director Date: March 24, 1997 By: /s/John B. Gray --------------- John B. Gray, Director Date: March 18, 1997 By: /s/Kent F. Hansen ----------------- Kent F. Hansen, Director Date: March 18, 1997 By: /s/Nicholas A. Lopardo ---------------------- Nicholas A. Lopardo, Director Date: March 19, 1997 By: /s/Greta E. Marshall -------------------- Greta E. Marshall, Director Date: March 26, 1997 By: ---------------- Fred B. Parks, Director Date: March __, 1997 By: /s/William F. Pounds -------------------- William F. Pounds, Director Date: March 26, 1997 By: /s/John Larkin Thompson ----------------------- John Larkin Thompson, Director Date: March 18, 1997 By: /s/G. Robert Tod ---------------- G. Robert Tod, Director Date: March 26, 1997 -50-
52 EXHIBIT INDEX Exhibit Exhibit Name Number ------------ - ------ 10.2 EG&G, Inc. Economic Value Added Plan as amended and restated by the EG&G, Inc. Board of Directors on April 23, 1996. 10.3 Amendment No. 3 dated as of March 7, 1997 to 3-Year Competitive Advance and Revolving Credit Facility Agreement dated as of March 21, 1994 among EG&G, Inc., the Lenders Named Herein and The Chase Manhattan Bank (as successor to Chemical Bank) as Administrative Agent. 10.4 Amendment No. 3 dated as of March 7, 1997 to 364-Day Competitive Advance and Revolving Credit Facility Agreement dated as of March 21, 1994 among EG&G, Inc., the Lenders Named Herein and The Chase Manhattan Bank (as successor to Chemical Bank) as Administrative Agent. 10.5 Employment Contract between John F. Alexander, II and EG&G, Inc. 21 Subsidiaries of the Registrant. 27 Financial Data Schedule. -51-