Consolidated Income Statements
Years Ended
(Dollars in thousands except per share amounts)March 31, 1996March 31, 1995March 31, 1994
Sales$1,193,846$786,904$775,329
Cost of sales971,618679,982651,060
Gross margin222,228106,922124,269
Operating expenses:
Research and development16,59014,59815,617
Selling41,41438,65936,079
General and administrative49,88931,81331,477
Restructuring charges (recovery)(3,196)38,000­
Change of control charges­24,639­
Litigation settlement charges­15,000­
Total operating expenses104,697162,70983,173
Income (loss) from operations117,531(55,787)41,096
Other income (expense):
Interest expense(45,148)(11,407)(8,209)
Interest income1,8538432,109
Other, net2,133(843)(1,122)
Total other expense(41,162)(11,407)(7,222)
Income (loss) from continuing operations before income taxes76,369(67,194)33,874
Income tax provision16,801­­
Income (loss) from continuing operations59,568(67,194)33,874
Discontinued operations
Loss from discontinued operations, net of income taxes(5,527)(5,414)(1,400)
Loss on disposal of discontinued operations, net of income taxes(6,240)­­
Income (loss) before cumulative effect of accounting change47,801(72,608)32,474
Cumulative effect of accounting change net of income taxes­(1,500)­
Net income (loss)$47,801$(74,108)$32,474
Primary and fully diluted earnings (loss) per
common and common equivalent share:
Continuing operations$4.43$(6.68)$3.35
Discontinued operations(.87)(.54)(.14)
Cumulative effect of accounting change­(.15)­
Net income (loss)$3.56$(7.37)$3.21
See Notes to Financial Statements.

 

Consolidated Balance Sheets
(Dollars in thousands)March 31, 1996March 31, 1995
Assets
Current assets:
Cash and cash equivalents$45,085$26,138
Marketable securities348348
Receivables246,567284,911
Net inventory100,246103,886
Deferred income tax asset28,46244,032
Other current assets4,7234,996
Total current assets425,431464,311
Net property, plant, and equipment413,541517,373
Goodwill132,62318,215
Deferred charges14,75118,364
Other assets31,06333,556
Total assets$1,017,409$1,051,819
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt$45,000$30,000
Notes payable2,7563,441
Accounts payable82,28554,398
Advance payments from customers56,83770,449
Accrued compensation31,90828,523
Accrued income taxes9,3109,417
Restructuring liability ­ current24,78231,403
Other accrued liabilities114,365108,326
Total current liabilities367,243335,957
Long-term debt350,000395,000
Post-retirement and post-employment benefits liability88,93093,844
Pension and other long-term liabilities43,21944,229
Restructuring liability ­ long-term2,04026,740
Litigation settlement liability ­ long-term8,50011,500
Deferred income tax liability­4,179
Total liabilities859,932911,449
Contingencies (see Note 15)
Stockholders' equity:
Common stock ­ $.01 par value
Authorized ­ 20,000,000 shares
Issued and outstanding 12,965,542 shares at March 31, 1996, and 13,849,452 at March 31, 1995130139
Additional paid-in-capital249,814250,188
Retained earnings (deficit)(54,798)(102,599)
Unearned compensation(2,552)(4,792)
Pension liability adjustment(1,189)(2,566)
Common stock in treasury, at cost (898,071 shares held at March 31, 1996)(33,928)­
Total stockholders' equity157,477140,370
Total liabilities and stockholders' equity$1,017,409$1,051,819
See Notes to Financial Statements.

 

Consolidated Statements of Cash Flows
Years Ended
(Dollars in thousands)March 31, 1996March 31, 1995March 31, 1994
Operating Activities
Net income (loss)$47,801$(74,108)$32,474
Adjustments to net income (loss) to arrive at cash provided by (used for) operations:
Restructuring charges ­ non-cash portion­18,433­
Change of control charges ­ non-cash portion­7,991­
Litigation settlement charges ­ non-cash portion­15,000­
Cumulative effect of accounting change ­ net of income taxes­1,500­
Depreciation53,34122,52420,514
Amortization of intangible assets and unearned compensation9,0752,4593,009
Loss on sale of marketable securities­1,562­
Loss (gain) on disposition of property(148)1,005(1,213)
Changes in assets and liabilities:
Receivables(6,614)(29,918)19,954
Inventories24,0571,26624,648
Accounts payable23,314(11,322)(8,204)
Contract advances and allowances(18,376)1,10118,161
Accrued compensation3,367(6,465)(1,947)
Accrued income taxes(115)1,1277,212
Accrued restructure liability(37,471)(4,800)(50,515)
Other assets and liabilities(9,540)(4,815)(4,589)
Cash provided by (used for) operations88,691(57,460)59,504
Investing Activities
Capital expenditures(28,014)(19,335)(20,699)
Acquisition of businesses­(305,891)(31,573)
Purchase price finalization29,115­­
Accrued transaction fees paid(6,000)­­
Proceeds from the disposition of property1,0441492,411
Purchase of marketable securities­­(11,883)
Proceeds from sale of marketable securities­3,7596,451
Other investing activities, net414(988)­
Cash used for investing activities(3,441)(322,306)(55,293)
Financing Activities
Proceeds from issuance of long-term debt­425,000­
Payments made on long-term debt and notes payable(30,685)(53,465)(40,945)
Payments made for debt issue costs(534)(12,997)­
Purchase of treasury shares(36,860)­­
Proceeds from exercised stock options1,7761,7931,032
Other financing activities, net­(11)­
Cash provided by (used for) financing activities(66,303)360,320(39,913)
Increase (decrease) in cash and cash equivalents18,947(19,446)(35,702)
Cash and cash equivalents at beginning of period26,13845,58481,286
Cash and cash equivalents at end of period$45,085$26,138$45,584
See Notes to Financial Statements.

 

Notes to the Consolidated Financial Statements


(Dollars in thousands except per share amounts)

1. Basis of Presentation and Significant Accounting Policies

Basis of Presentation - The consolidated financial statements of the Company include all wholly owned subsidiaries. Intercompany balances and transactions between entities included in these financial statements have been eliminated.

Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect amounts reported therein. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may differ from those estimates.

Revenue Recognition - In the fourth quarter of fiscal 1995, the Company applied a new method of accounting to measure the extent of progress toward completion on contracts for a majority of Marine Systems products and a limited number of Defense Systems products. The change in method of revenue recognition results in revenues being recognized based on the ratio of costs incurred to total estimated costs (cost to cost) as opposed to units delivered (units of delivery). This predominant industry practice provides better matching of revenues and expenses for contracts which exhibit long lead times between contract award and incurrence of costs, and the initial delivery of product. This change did not have a cumulative effect on beginning retained earnings but did result in the recognition during fiscal 1995 of approximately $42,000 of sales and $400 in income from operations that otherwise would have been recognized in future periods.

Long-Term Contracts - Sales under long-term contracts are accounted for under the percentage of completion method and include cost reimbursement and fixed-price contracts. Sales under cost reimbursement contracts are recognized as costs are incurred. Sales under fixed-price contracts are either recognized as the actual cost of work performed relates to the estimate at completion (cost-to-cost) or based on results achieved, which usually coincides with customer acceptance (units-of-delivery).

Profits expected to be realized on contracts are based on the Company's estimates of total contract sales value and costs at completion. Estimated amounts for contract changes and claims are included in contract sales only when realization is probable. Assumptions used for recording sales and earnings are adjusted in the period of change to reflect revisions in contract value and estimated costs. In the period in which it is determined that a loss will be incurred on a contract, the entire amount of the estimated loss is charged to income.

Research and development, selling and general and administrative costs are expensed in the year incurred.

Environmental Remediation and Compliance - Expenditures associated with environmental compliance and preventing future contamination are expensed or capitalized as appropriate. Expenditures relating to the remediation of an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are expensed. Liabilities are recognized for remedial activities when they are probable and the remediation cost can be reasonably estimated.

The cost of each environmental liability is estimated by engineering, financial, and legal specialists within the Company based on current law and existing technologies. Such estimates are based primarily upon the estimated cost of investigation and remediation required and the likelihood that other potentially responsible parties (PRPs) will be able to fulfill their commitments at the sites where the Company may be jointly and severally liable. The Company's estimates for environmental obligations are dependent on, and affected by, changes in environmental laws and regulations, the nature and extent of historical information and physical data relating to a contaminated site, the complexity of the site, methods of remediation available, the technology that will be required, the outcome of discussions with regulatory agencies and other PRPs at multi-party
sites, the number and financial viability of other PRPs, future technological developments, and the timing of expenditures; accordingly, such estimates could change materially as the Company periodically evaluates and revises such estimates based on expenditures against established reserves and the availability of additional information.

Cash Equivalents - Cash equivalents are all highly liquid temporary cash investments purchased with original maturities of three months or less. The fair market value of such investments at March 31, 1996 approximates cost.

Marketable Securities - Marketable securities sold during fiscal 1995 represent available-for-sale investments in a diversified mutual fund whose portfolio consists of U.S. Treasury bills, bonds, and other government-backed obligations and are recorded at estimated market value. Gross realized gains recorded in fiscal 1996, 1995, and 1994 were $0, $0, and $300, respectively. Gross realized losses for the same periods were $0, $1,562, and $460, respectively, calculated using the specific identified cost basis. Unrealized gains and losses were negligible at March 31, 1996 and 1995, respectively.

Inventories - Inventoried costs relating to long-term contracts and programs are stated at actual production costs, including factory overhead, initial tooling, and other related nonrecurring costs incurred to date, reduced by amounts identified with sales recognized on units delivered or progress completed. Inventoried costs relating to long-term contracts and programs are reduced by charging any amounts in excess of estimated realizable value to cost of sales. Progress payments received from customers relating to the uncompleted portions of contracts are first offset against unbilled receivable balances. Any remaining progress payment balance is deducted from applicable inventories.

Property and Depreciation - Property, plant, and equipment is stated at cost and depreciated over estimated useful lives. Machinery and test equipment is depreciated using the double declining balance method, converting to straight-line depreciation for the last third of the asset's life. All other depreciable property is depreciated using the straight-line method.

Goodwill - Goodwill represents the excess of the cost of purchased businesses over the fair value of their net assets at date of acquisition and is being amortized on a straight-line basis over periods up to 40 years. The recoverability of the carrying value of goodwill is periodically evaluated by comparison with the estimated future undiscounted cash flows from related operations.
Income Taxes - Deferred income taxes result from temporary differences between the basis of assets and liabilities recognized for differences between the financial statement and tax basis thereon, and for the expected future tax benefits to be derived from tax losses and tax credit carryforwards. A valuation allowance is recorded to reflect the likelihood of realization of deferred tax assets.
Financial Instruments and Hedging - Derivative financial instruments are used to hedge the risk of fluctuating interest rates. The Company has entered into interest rate swap and interest rate cap agreements to manage the risk associated with changing interest rates. As interest rates change, the differential paid or received is recognized in interest expense of the period.

Effective April 1, 1995, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments." This statement requires disclosures about derivative financial instruments - futures, forward, swap, and option contracts, and other financial instruments with similar characteristics.
Earnings Per Share Data - For the fiscal years ended March 31, 1996, 1995, and 1994, primary and fully diluted earnings (loss) per share is computed based on weighted average common and common equivalent shares outstanding of 13,431,000, 10,052,000, and 10,131,000, respectively. Common stock equivalents are excluded from the earnings (loss) per share calculation for fiscal 1995 because the effect would be antidilutive.

Common stock equivalents used in computing earnings per share relate to stock options which, if exercised, would have a dilutive effect on earnings per share for fiscal 1996 and 1994.
Reclassifications - Certain reclassifications have been made to the 1994 and 1995 financial statements to conform to the 1996 classification.

 

2. Receivables

Receivables, including amounts due under long-term contracts (contract receivables), are summarized as follows:
Years Ended
Mar. 31, 1996Mar. 31, 1995
Contract receivables
Billed receivables$86,309$118,761
Unbilled receivables156,878163,596
Other receivables3,3802,554
$246,567$284,911

Receivable balances are shown net of reductions of $379,732 and $384,545 as of March 31, 1996 and 1995, respectively, for progress payments received from customers relating to completed portions of contracts.

Unbilled receivables represent the balance of recoverable costs and accrued profit comprised principally of revenue recognized on contracts for which billings have not been presented to the customer because the amounts were earned but not billable as of the balance sheet date under the contractual terms. These amounts include expected additional billable general overhead costs and fees on flexibly priced contracts awaiting final rate negotiations, and are generally billable and collectible within one year.

3. Inventories

Inventory balances are shown net of reductions of $87,362 and $97,244 as of March 31, 1996 and 1995, respectively, for progress payments received from customers relating to uncompleted portions of contracts.

4. Property, Plant, and Equipment

The major categories of property consist of the following:
Years Ended
Mar. 31, 1996Mar. 31, 1995
Land$29,138$29,138
Buildings and improvements189,118177,383
Machinery and equipment345,808416,053
Property not yet in service7,1074,505
571,171627,079
Less accumulated depreciation(157,630)(109,706)
$413,541$517,373

The significant change in property, plant, and equipment reflects the finalization of purchase accounting for the Aerospace acquisition on March 15, 1995.

5. Goodwill, Deferred Charges, and Other Long-Term Assets

Goodwill, deferred charges, and other long-term assets consist of the following:
Years Ended
Mar. 31, 1996Mar. 31, 1995
Goodwill, net of accumulated amortization:1996 - $7,779, 1995 - $4,211$132,623$18,215
Debt issuance costs, net of accumulated amortization: 1996 - $2,433, 1995 - $0, $11,098$12,997
Other $3,653 $5,367
$14,751$18,364
Pre-paid and intangible pension asset$29,584$32,839
Other $1,479$717
$31,063$33,556

The significant change in goodwill reflects the finalization of purchase accounting for the Aerospace acquisition, primarily due to completion of the detailed property, plant and equipment appraisal.

6. Other Accrued Liabilities

The Major categories of other accrued liabilities are as follows:
Years Ended
Mar. 31, 1996Mar. 31, 1995
Employee benefits and insurance$39,447$44,101
Legal accruals27,65727,427
Other accruals47,26136,798
$114,365$108,326

7. Long-Term Debt

The components of the Company's long-term debt are as follows:
Years Ended
Mar. 31, 1996Mar. 31, 1995
Bank Term Loan with quarterly principal and interest payments through March 2001$245,000$275,000
11.75% Senior Subordinated Notes with semi-annual interest payments, maturing 2003150,000150,000
Total long-term debt395,000425,000
Less current portion(45,000)(30,000)
Long-term portion$350,000$395,000

In connection with the Aerospace acquisition, the Company entered into a six-year, $500,000 bank credit facility which is comprised of a $275,000 term loan and a $225,000 revolving working capital and letter of credit facility. The interest rate charged for borrowings under the bank credit facility is, at the option of the Company, either a floating rate based on a defined prime rate or a fixed rate related to the London Interbank Offered Rate (LIBOR) plus a margin based on the Company's debt rating. As of March 31, 1996, the unhedged interest rate on outstanding borrowings under this facility was approximately 6.94 percent. Letters of credit totaling $75,550 reduced the available line of credit to $149,450 at March 31, 1996. An adjustable fee, based on the Company's long-term debt rating, is charged for outstanding letters of credit, in addition to an issuance fee, which varies and is negotiated with each bank. The Company is required to pay a commitment fee on the $225,000 revolving working capital and letter of credit facility. Such fee, one half of one percent for fiscal 1996, is subject to adjustment based on the Company's long term debt rating. Borrowings are secured by substantially all of the assets of the Company. Amounts outstanding under this agreement at March 31, 1996, based on current rates for similar instruments with the same maturities, approximate fair market value. There were no outstanding borrowings against the revolving line of credit at March 31, 1996.

In addition to the bank credit facility, the Company issued $150,000 of 11.75 percent senior subordinated notes on March 15, 1995. The senior subordinated notes are redeemable at the option of the Company, in whole or in part, at any time on or after March 1, 1999, at certain defined redemption prices. The estimated fair value of the Company's senior subordinated notes, based on bank quotes, is approximately $166,500.

The Company's bank credit facility and senior subordinated notes limit the payment of dividends and contain certain covenants with respect to the Company's consolidated net worth, leverage, and debt and interest coverage. Additionally, the Company's debt agreements impose certain restrictions on the incurrence of additional indebtedness, sale of assets, mergers and consolidations, transactions with affiliates, creation of liens, and certain other matters.

At March 31, 1996, the aggregate maturities due under the bank term loan and the senior subordinated notes are $45,000, $50,000, $55,000, and $55,000 for the fiscal years ending March 31, 1997, 1998, 1999, and 2000, respectively; amounts due thereafter total $190,000.

The Company's weighted average interest rate on short-term borrowings during fiscal 1996 and 1995 was 7.27 percent and 7.30 percent, respectively.

The Company has entered into hedging transactions to protect against increases in market interest rates on its long-term debt. At March 31, 1996, the notional amount of amortizing interest rate swap agreements was approximately $156 million. Under the swap agreements, the Company currently pays an average fixed rate of 6.9 percent, and receives interest at a rate equal to three-month LIBOR (5.44 percent at March 31, 1996). These agreements have terms of one to three years. Fair value of the interest rate swap agreements at March 31, 1996 is $(3.6) million. The interest rate cap agreements limit the Company's LIBOR exposure to 7.0 percent, and expire on October 1, 1997. The notional amount of amortizing interest rate cap agreements at March 31, 1996 was $52.5 million. The recorded value of the interest rate cap agreements approximates fair value at March 31, 1996. The interest rate swaps and caps contain an element of risk that the counterparties may be unable to meet the terms of the agreements. However, the Company minimizes such risk exposure by limiting the counterparties to major financial institutions. The Company does not expect to record any losses as a result of counterparty default. The estimated fair market value amounts have been determined using available market information or other appropriate valuation methodologies. However, considerable judgment is required in interpreting market data to develop estimates of fair value; therefore, the estimates are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange. The effect of using different market assumptions and/or estimation methodologies may be material to the estimated fair value amounts.

8. Employee Benefit Plans

The Company's noncontributory defined benefit pension plans cover substantially all employees. Plans provide either pension benefits of stated amounts for each year of credited service, or pension benefits based on employee yearly pay levels and years of credited service. The Company funds the plans in accordance with Federal requirements, calculated using appropriate actuarial methods.

Plan assets for the Company are held in a trust and are invested in a diversified portfolio principally of equity securities and fixed income investments.

The workforce reduction associated with the fiscal 1995 restructuring program resulted in curtailments as defined by SFAS No. 88, "Employees' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits." The impact of the curtailments was a charge to fiscal 1995 income of $12,243, and an increase in the accumulated benefit obligation as of March 31, 1995 of $7,665.
 

The components of the Company's net periodic pension cost are as follows:
Years Ended
Mar. 31, 1996Mar. 31, 1995Mar. 31, 1994
Service cost of benefits earned during the period$13,662$9,766$7,716
Interest cost of projected benefit obligation 45,87122,38821,188
Return on assets(110,907)15,590 (25,640)
Net amortization and deferral 64,612(32,307)11,372
Net pension cost$13,238$15,437$14,636

The plans' funded status and amounts recognized in the Company's balance sheets for its pension plans are summarized below:
Plans Whose Accumulated
Benefits Exceed Assets
Mar. 31, 1996Mar. 31, 1995
Actuarial present value of benefit obligations: Vested benefit obligation$(296,277)$(269,498)
Accumulated benefit obligation(300,779)(271,901)
Projected benefit obligation(324,480)(298,175)
Plan assets at fair value272,649222,729
Projected benefit obligation (in excess of) plan assets(51,831)(75,446)
Remaining unrecognized net transition obligation (asset)(3,472)(4,018)
Unrecognized prior service cost15,06715,751
Unrecognized net loss2,33622,660
Accrued contribution to plans 3,4966,583
Adjustment to recognize minimum liability(7,780)(9,412)
Unfunded pension liability recognized in balance sheet$(42,184)$(43,882)

 

Plans Whose Assets Exceed Accumulated Benefits
Years Ended
Mar. 31, 1996Mar. 31, 1995
Actuarial present value of benefit obligations: Vested benefit obligation$(240,523)$(242,000)
Accumulated benefit obligation(249,830)(250,000)
Projected benefit obligation(289,946)(280,000)
Plan assets at fair value351,784 306,000
Funded status61,83826,000
Remaining unrecognized net transition obligation (asset)--
Unrecognized prior service cost--
Unrecognized net gain(38,739)-
Accrued contribution to plans--
Adjustment to recognize minimum liability--
Prepaid premium expense recognized in balance sheet$23,099$26,000

 

Assumptions used in the accounting for defined benefit plans were:
Years Ended
Mar. 31, 1996Mar. 31, 1995Mar. 31, 1994
Discount rate used in determining present values7.50%8.25% 7.25%
Annual increase in future compensation levels4.25%4.75%4.25%
Expected long-term rate of return on assets8.75%8.25%8.25%

The Company also sponsors a number of defined contribution plans. Participation in one of these plans is available to substantially all employees. The two principal defined contribution plans are Company-sponsored 401(K) plans to which employees may contribute up to 18 percent of their pay. The Company contributes in Company stock or cash amounts equal to 50 percent of employee contributions up to 4 or 6 percent of the employee's pay. The amount expensed for the Company match provision of the plans was $5,780, $3,606, and $2,799 in fiscal 1996, 1995, and 1994, respectively. The significant increase in fiscal 1996 reflects the addition of the Aerospace employees on March 15, 1995. The Company employs approximately 2,350 employees (30 percent of its total employees) covered by collective bargaining agreements, 550 of whom are covered under agreements expected to be renegotiated during fiscal 1997 due to current agreement expirations.

9. Post-Retirement Benefits

Generally, employees retiring from the Company after attaining age 55 who have had at least five years of service are entitled to post-retirement health care benefits and life insurance coverage until the retiree reaches age 65. The portion of the premium cost borne by the Company for such benefits is dependent on the employee's years of service. Further contributions from retirees are also required based on plan deductibles and co-payment provisions.

Post-retirement benefit costs, other than those related to pensions, in the fiscal years ended March 31, 1996, 1995, and 1994, included the following components:

Years Ended
Mar. 31, 1996Mar. 31, 1995Mar. 31, 1994
Service cost of benefits earned during the year$842$366$625
Interest cost on accumulated post-retirement benefit obligation7,6032,1122,538
Net amortization and deferral(25)­­
Curtailment gain(1,120)(25)(3,245)
Net post-retirement benefit cost (income)$7,300$2,453$(82)

Curtailment gains were recognized in fiscal 1996 and 1994 as a result of the reduction in employment in connection with restructuring programs.

The Company's post-retirement benefit obligations other than pensions are not prefunded. The following table sets forth the status of the retiree benefit obligations at March 31, 1996 and 1995:

Years Ended
Mar. 31, 1996Mar. 31, 1995
Actuarial present value of benefits attributed to:
Retirees$74,067$73,848
Fully eligible active employees6,5936,910
Other active employees12,68710,859
Accumulated post-retirement benefit obligation$93,347$91,617
Unrecognized net actuarial (loss) gain(6,644)399
Unrecognized prior service cost245328
Post-retirement benefit liability recognized in the balance sheet$86,948$92,344

An assumed discount rate of 7.5 percent was used to determine post-retirement benefit costs other than pensions for fiscal 1996. The 1996 weighted average annual assumed rate of increase in the per capita cost of covered benefits (health care cost trend rates) is 7 percent, decreasing gradually to 5 percent over a period of two to five years. Increasing this rate by one percentage point in each year would have increased the accumulated post-retirement benefit obligation as of March 31, 1996 by $15,479 and increased the aggregate of the service and interest cost components of post-retirement benefit costs for fiscal 1996 by $1,116.

10. Post-Employment Benefits

The Company provides certain disability and workers' compensation benefits to former or inactive employees. Effective April 1, 1994, the Company adopted SFAS No. 112, "Employers' Accounting for Post-Employment Benefits." This statement requires recognition of these benefits on an accrual basis. Prior to April 1, 1994, certain disability benefits were expensed as claims were reported. The effect of adopting SFAS No. 112 was recognized immediately in fiscal 1995 as the effect of a change in accounting principle and resulted in a charge of $1,500 or $0.15 per share against fiscal 1995 income.

11. Income Taxes

The components of the Company's income tax provision consist of:

Years Ended
Mar. 31, 1996Mar. 31, 1995Mar. 31, 1994
Current:
Federal$3,454
State­­493
Deferred16,801­(3,947)
Income tax provision$16,801$0$ 0

The items responsible for the differences between the federal statutory rate and the Company's effective rate are shown as follows:

Years Ended
Mar. 31, 1996Mar. 31, 1995Mar. 31, 1994
Income taxes computed atstatutory federal rate $26,729$(25,938)$11,366
State income taxes ­ net of federal impact2,838(3,705)1,299
Permanent non-deductible costs4,4502,0191,341
Unrecorded (recorded) tax benefits(17,216)27,624(13,354)
Other­­(652)
Income tax provision$16,801$0$0

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and operating loss and tax credit carryforwards. Significant items comprising the net deferred tax asset shown on the statement of financial position are:

Years Ended
Mar. 31, 1996Mar. 31, 1995
Deferred sales$(18,363)$(7,889)
Accelerated depreciation(29,994)(41,609)
Deferred income tax liabilities(48,357)(49,498)
Reserves for employee benefits53,28537,810
Restructuring and environmental reserves15,12432,729
Net operating loss carryforwards33,68335,108
Other reserves45,95736,306
Deferred income tax assets148,049141,953
Valuation allowance(68,795)(52,602)
Net deferred income tax asset$30,897$39,853
Current deferred income tax asset28,46244,032
Noncurrent deferred income tax asset (liability)2,435(4,179)
Net deferred income tax asset$30,897$39,853

During fiscal 1996, the deferred tax asset valuation allowance increased by $16,193. This increase is due principally to the Company's analysis of the likelihood of realizing the future tax benefit of tax loss carryforwards and additional temporary differences arising from the Aerospace acquisition. Realization of the net deferred tax asset (net of recorded valuation allowance) is dependent upon profitable operations and future reversals of existing taxable temporary differences. Although realization is not assured, the Company believes it is more likely than not that such net benefits will be realized through the reduction of future taxable income. The amount of the net deferred tax assets considered realizable, however, could be reduced in the near term if actual future taxable income is lower than estimated, or if there are differences in the timing or amount of future reversals of existing taxable temporary differences.

Federal and state carryforwards for tax purposes are $84,206 at March 31, 1996. These carryforwards expire in 2010.

12. Leases

The Company leases land, buildings, and equipment under various operating leases which generally have renewal options of one to five years. Rental expense for the years ended March 31, 1996, 1995, and 1994, was $12,100, $13,166, and $10,646, respectively.

Minimum rental commitments payable under noncancellable lease commitments outstanding at March 31, 1996, are $12,421, $9,641, $5,609, $3,632, and $1,604, respectively, for the fiscal years ending March 31, 1997, 1998, 1999, 2000, and 2001. Approximately $3,500 of these lease commitments remain accrued at March 31, 1996, as part of the restructuring charges referred to in Note 13.

13. Restructuring Charges

The Company initiated a restructuring program in the quarter ending March 31, 1995, which resulted in a fourth-quarter pre-tax charge of $38.0 million. The program was designed to achieve greater efficiency and competitiveness, and to improve margins in the Defense and Marine Systems businesses. Cash expenditures under this restructuring program totaled approximately $12 million and $3.7 million in fiscal 1996 and fiscal 1995, respectively, primarily for employee-related costs. Approximately $12.2 million of the non-cash portion of the charge consists of accruals for certain pension-related liabilities in accordance with SFAS No. 88 "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits."

The Company experienced lower than expected severance costs in fiscal 1996, due to higher than expected employee attrition. As a result, the Company recorded a $3.2 million credit in the fourth quarter of fiscal 1996 to reduce the restructure accrual. In mid-fiscal 1996, various executive management changes were made within the Defense Systems Group. As a result of these changes, new management re-evaluated business strategies for the Group, including its restructure plans and, while the significant components of the restructure plan did not change, the anticipated timing of certain severance and facility closure costs was pushed to fiscal 1997.

The balance of the reserve at March 31, 1996 represents specifically identified incremental employee severance and facility closure costs expected to be incurred in fiscal 1997. Amounts charged for restructuring reserves include estimates of costs related to facility closure and employee severance costs which are subject to change in the near term (although not currently anticipated) due to changes in assumptions and the period over which such costs are expected to be incurred.

14. Stockholders' Equity

Changes in stockholders' equity are summarized below:

(Dollars in thousands except share data)Common Stock $.01 ParAdditional Paid-In CapitalRetained Earnings (Deficit)Pension Liability AdjustmentUnearned CompensationCost Treasury SharesTotal
SharesAmount
Balance, March 31, 19939,729,698$97$127,080$(60,965)$(535)$(82)$65,595
Net income32,47432,474
Pension Liability Adjustment(7,085)(7,085)
Exercise of stock options90,27815295021,032
Restricted stock grants16,000413(448)35
Treasury shares received(17,560)(8)22(455)(441)
Amortization of restricted stock405405
Balance, March 31, 19949,818,41698128,014(28,491)(7,085)(556)­91,980
Net loss(74,108)(74,108)
Treasury shares received(61,784)(519)52(1,351)(1,818)
Pension liability adjustment4,5194,519
Issuance to Hercules, Inc.3,862,06939111,961112,000
Stock value guarantees3,6063,606
Stock options issued 3,241(3,241)
Performance incentive compensation27,09173051781
Exercise of stock options136,06019461,2752,222
Restricted stock grants67,60012,209(2,235)250
Amortization of restricted stock1,1881,188
Balance, March 31, 199513,849,452139250,188(102,599)(2,566)(4,792)­140,370
Net income47,80147,801
Treasury shares received(983,333)(10)43(37,080)(37,047)
Pension liability adjustment1,3771,377
Exercise of stock options80,2231(759)2,7011,943
Restricted stock grants19,200385(836)451
Amortization of restricted stock3,0333,033
Balance, March 31, 199612,965,542$130$249,814$(54,798)$(1,189)$(2,552)$(33,928)$157,477

The Company has authorized 5,000,000 shares of preferred stock, par value $1.00, none of which has been issued.

The Company has authorized an additional 1,000,000 shares of common stock for a total of up to 2,620,679 shares to be granted under the 1990 Equity Incentive Plan of which 380,673 were available at March 31, 1996 for future grants. Stock options covering an aggregate of 387,000 shares were issued on March 15, 1995, at $30.00 per share, pursuant to agreements entered into on October 27, 1994. This plan also provides for the issuance of 250,000 stock appreciation rights which may be issued in tandem with stock options. Restricted stock issued to non-employee directors and certain key employees totaled 19,200, 67,600, and 16,000 for the fiscal years ended March 31, 1996, 1995, and 1994, respectively. All restricted stock granted before August 10, 1994 became fully vested as of that date due to the change of control (see Note 16). Shares issued subsequent to that date total 74,700 and vest over periods of one to four years from the date of award.

A summary of the Company stock options issued and outstanding is as follows:

SharesExercise Price
Outstanding at March 31, 1993671,616$8.82-$27.75
Granted153,500$23.63-$27.63
Exercised(90,278)$10.63-$14.59
Canceled(5,478)$14.59-$27.63
Outstanding at March 31, 1994729,360$8.82-$27.75
Granted701,271$23.50-$38.00
Exercised(136,060)$8.82-$23.63
Canceled(442,138)$8.82-$27.63
Outstanding at March 31, 1995852,433$8.82-$38.00
Granted232,340$37.38-$47.63
Exercised(80,223)$8.82-$34.75
Canceled(13,340)$37.38
Outstanding at March 31, 1996991,210$8.82-$47.63

In fiscal 1995, limited stock appreciation rights (LSARs) were attached to 623,253 stock options, which became exercisable at the time of change of control (see Note 16). The Company offered to certain executive officers a note receivable and one stock option in exchange for deferring the LSAR payment through November 8, 1997. This offer was accepted for 152,371 LSARs and 282,767 LSARs were exercised. Non-executive officers were offered a Stock Value Guarantee (SVG) in exchange for their LSARs, in which the Company agreed to pay any holder the excess, if any, of the guaranteed minimum price of $34.75 over the amount that the holder receives upon the exercise of the stock option, and the simultaneous market transaction sale of the stock received upon such exercise, prior to the expiration date of June 30, 1997. SVGs were accepted on 188,115 shares of stock and 50,899 LSARs were exercised by non-executive officers.

Options totaling 482,210 shares were exercisable at March 31, 1996, at prices ranging from $8.82-$34.75 per share.

The Company initiated a $50 million share repurchase plan in fiscal 1996. In connection with that plan, the Company has repurchased 975,880 shares of the Company's stock in the open market as of March 31, 1996, at an average price of $37.79 per share, for an aggregate amount of $36.9 million.

In accordance with SFAS No. 87, "Employer's Accounting for Pensions," the Company has recognized the minimum liability for underfunded pension plans equal to the excess of the accumulated benefit obligation over plan assets. A corresponding amount is recognized as an intangible asset to the extent of any unrecognized prior service cost, with the remaining balance recorded as reduction to equity.

As of March 31, 1996, the minimum pension liability in excess of the unrecognized prior service cost was $1,189.

15. Contingencies

As a U.S. Government contractor, the Company is subject to defective pricing and cost accounting standards noncompliance claims by the Government. Additionally, the Company has substantial Government contracts and subcontracts, the prices of which are subject to adjustment. The Company believes that resolution of such claims and price adjustments made or to be made by the Government for open fiscal years (1987 through 1996) will not materially exceed the amount provided in the accompanying balance sheets.

The Company is subject to various local and national laws relating to protection of the environment and is in various stages of investigation or remediation of potential, alleged, or acknowledged contamination. At March 31, 1996, the accrued liability for environmental remediation of $11,000 represents management's best estimate of the probable and reasonably estimable costs related to all environmental remediation. The extent of liability is evaluated quarterly based on currently available information, including the progress of remedial investigation at each site and the current status of negotiations with regulatory authorities. Due to the uncertainties surrounding the recovery of environmental insurance claims, the Company recognizes insurance recovery only when claims are settled. The Company received $3,200 in environmental settlements from insurance carriers in fiscal 1994. There were no material insurance recoveries related to environmental remediations during fiscal 1996 or 1995. The Company has recorded assets of $4.4 million and $2.5 million at March 31, 1996 and 1995, respectively, which represents the amount of incurred costs that the Company expects to be reimbursed under contracts for environmental clean-up. The expected reimbursable amount is anticipated to be received in fiscal 1997. Capital expenditures necessary to ensure that ongoing operations are in compliance with environmental laws and regulations were not material in fiscal 1996, 1995, or 1994. Operating and maintenance costs associated with environmental compliance and preventing future contamination are expensed as incurred unless determined
to benefit future operations, at which time they are capitalized.

As part of the Aerospace acquisition, the Company has generally assumed responsibility for environmental compliance at the Aerospace facilities. There may also be significant environmental remediation costs associated with the Aerospace facilities that will, at some facilities, be funded in the first instance by the Company. It is expected that much of the compliance and remediation costs associated with the Aerospace facilities will be reimbursable under U.S. Government contracts and that those environmental remediation costs not covered through such contracts will be covered by Hercules under various agreements. The estimated nondiscounted range of these reasonably possible costs of study and remediation in the Aerospace operations is between $0 and $27 million. Where the Company is required to first conduct the remediation and then seek reimbursement from the Federal Government or Hercules, the Company's working capital may be materially affected until the Company receives such reimbursement.

The estimated nondiscounted range of the reasonably possible costs of study and remediation for non-Aerospace sites is between $6.0 million and $27.4 million.

The Company does not anticipate that resolution of the environmental contingencies in excess of amounts accrued or the ongoing environmental costs to be expensed or capitalized as incurred, will materially affect future operating results.

The Company is a defendant in numerous lawsuits that arise out of, and are incidental to, the conduct of its business. Such matters arise out of the normal course of business and relate to product liability, government regulations, including environmental issues, and other issues. Certain of the lawsuits and claims seek damages in very large amounts. In these legal proceedings, no director, officer, or affiliate is a party or a named defendant.

The Company is involved in two "qui tam" lawsuits brought by former employees of the Aerospace operations acquired from Hercules. One involves allegations relating to submission of false claims and records, delivery of defective products, and a deficient quality control program. The other involves allegations of mischarging of work performed under Government contracts, misuse of Government equipment, other acts of financial mismanagement and wrongful termination claims. The Government did not join in either of these lawsuits. Under the terms of the agreements relating to the Aerospace acquisition, all litigation and legal disputes arising in the ordinary course of operations will be assumed by the Company except for a few specific lawsuits and disputes including the two qui tam lawsuits referred to above. The Company has agreed to indemnify and reimburse Hercules for a portion of litigation costs incurred, and a portion of damages, if any, awarded in these lawsuits. Under terms of the purchase agreement with Hercules, the Company's maximum settlement liability is approximately $4 million, for which the Company has fully reserved at March 31, 1996.

While the results of litigation and other proceedings cannot be predicted with certainty, in the opinion of management, the actions seeking to recover damages against the Company either are without merit, are covered by insurance and reserves, do not support any grounds for cancellation of any contract, or are not likely to materially affect the financial condition or results of operations of the Company, although the resolution of any of such matters during a specific period could have a material effect on the quarterly or annual operating results for that period.

It is reasonably possible that management's current estimates of liabilities for the above contingencies could change in the near term, as more definitive information becomes available.

16. Change of Control

In August 1994, six new directors nominated by Capstay Partners, L.P. were elected to the Company's Board of Directors, resulting in a "change of control" as defined in the Company's compensation and benefit plans and in agreements with certain employees. These change of control agreements resulted in the Company incurring an "unusual charge" totaling $24,639 in fiscal 1995. Except as described in the following paragraph, no additional expenses are currently expected as a result of the "change of control."

Under the change of control provisions of certain employment agreements, additional benefit payments are required to be made to certain employees in the event of termination within three years of the August 1994 change of control. In the unlikely event that all employees covered by the change of control agreements are terminated (other than for cause) before August 1996, the Company estimates that severance-related payments would be approximately $5,200, excluding income tax gross-ups, out-placement costs, and payments under employee benefit plans. The agreements also provide for extended benefits to certain employees who leave withina specified time period. If all such employees were to be terminated (other than for cause) after August 1996 but before August 1997, the maximum additional expense would be approximately $2,400.

17. Litigation Settlement

The Company had been a defendant in a "qui tam" lawsuit by claimants, including present and former employees of Accudyne Corporation, alleging violations of the False Claims Act. The alleged violations occurred prior to the acquisition of Accudyne by the Company in October 1993.

To avoid the expense and disruption of protracted litigation, on June 23, 1995, the Company and claimants reached a preliminary agreement to settle the lawsuit. Terms of the agreement include payment by the Company of $12,000, consisting of a payment of $500 in June 1995, and payments to be made of $3,000 in April 1996, $4,000 in April 1997, and $4,500 in June 1998, plus interest at the three-year Treasury Bill rate. Accordingly, the Company recorded an unusual charge of $15,000 as of the fourth quarter of fiscal 1995, which includes legal costs of approximately $3,000 which were agreed to be paid for by the Company.

18. Discontinued Operations

During fiscal 1994, the Company entered into two joint ventures in Belarus and Ukraine, for the purpose of establishing demilitarization operations in those countries. In March 1996, Company management, after evaluating its strategic plans for the future, elected to discontinue the pursuit of its foreign demilitarization businesses ("Demilitarization operations"). Accordingly, in the fourth quarter of fiscal 1996, the Company estimated and recorded a $6,240 loss on disposal of discontinued operations (net of taxes of $4,160). Amounts charged for the estimated loss on disposal of these operations include significant assumptions made with regard to the timing of such a sale, the sales proceeds expected to be received, and selling costs currently expected to be incurred. These costs are subject to changes in the near term (although are not currently expected to) due to changes in assumptions. Those changes could have a material impact on the operating results in that period. The net assets of the Demilitarization operations at March 31, 1996 were approximately $13.1 million, which consisted primarily of net working capital. The Company has provided a letter of credit to support approximately $2.5 million of bank borrowings of the joint ventures. The disposition of the Demilitarization operations is expected to be completed by sale of the operations. Negotiations with prospective buyers are currently underway and are expected to be completed during fiscal 1997. The results of operations of the discontinued business during the disposal period is expected to be at an approximate break-even level. The consolidated income statements of the Company reflect the operating results and loss on disposal of discontinued operations separately from continuing operations. The components of the loss from discontinued operations are summarized as follows:

Years Ended
Mar. 31, 1996Mar. 31, 1995Mar. 31, 1994
Sales$13,436$2,158
Loss from discontinued operations(9,217)(5,414)(1,400)
Loss on disposal of assets(10,400)­­
Income tax benefit7,850­­
Loss from discontinued operations$(11,767)$(5,414)$(1,400)

19. Supplemental Cash Flow Information

In fiscal 1995, the Company acquired the aerospace operations of Hercules Aerospace Company (Aerospace operations) from Hercules Incorporated for $305,891 in cash and $112,000 in stock. During fiscal 1996, the Company received a net amount of $29.1 million from Hercules as an adjustment to the purchase price. The adjustment was primarily the result of large receivables collections just prior to the closing of the acquisition, which reduced assets and lowered the final purchase price. In fiscal 1994, the Company acquired three Defense Systems operations for $31,573 in cash and $3,300 in short-term notes payable to sellers.

Net income taxes paid (refunded) in the fiscal years ended March 31, 1996, 1995, and 1994, totaled $100, $(1,100), and $(5,562), respectively.

Amounts paid for interest were $40,736, $8,715, and $7,345 for fiscal 1996, 1995, and 1994, respectively. Amounts received for interest in those same periods were $1,789, $564, and $2,057, respectively. The significant change in interest paid during fiscal 1996 reflects payments of interest on debt issued in connection with the March 15, 1995 acquisition of the Aerospace operations.

20. Acquisition

On March 15, 1995, the Company acquired the Aerospace operations (Aerospace acquisition) of Hercules Incorporated for $276,776 in cash (net of a $29,115 purchase price reimbursment received by the Company in fiscal 1996 from Hercules, reflecting finalization of the purchase price), and 3.86 million shares of Common Stock valued at $112,000, for an aggregate purchase price of approximately $388,776.

Unaudited pro forma results of operations of the Company for the years ended March 31, 1995 and March 31, 1994 as if the acquisition had been completed at the beginning of the respective periods are:

Years Ended
Mar. 31, 1995Mar. 31, 1994
Sales$1,403,536$1,435,303
Income (loss) before cumulative effect of accounting change$(7,306)$81,277
Income (loss) per share from continuing operations$(.19)$6.55

The unaudited pro forma results of operations are not necessarily indicative of the results of operations that would have occurred had the businesses actually been combined during the periods presented nor is this information indicative of expected future results of operations.

The Company used the purchase method of accounting to account for the Aerospace Systems acquisition. Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on fair value. The excess of purchase price over the estimated fair value of the assets acquired, approximately $118 million, has been recorded as goodwill, and is being amortized over 40 years.

The Company acquired three operations in fiscal 1994 which were accounted for as purchase business combinations. The excess of purchase price over the estimated fair values of the net assets acquired, in the amount of $10,973, has been recorded as goodwill. The acquisitions would have had no significant pro forma effect on the Company's operating revenues, net income, or earnings per share.

21. Business Segment Information

The Company operates one business segment which is involved in the production of various types of defense systems. The Aerospace Systems Group designs, develops, and manufactures launch vehicle systems, solid propulsion systems, munitions propellants, defense electronics systems, and composite structures. The Defense Systems Group designs, develops, and manufactures ammunition, fuzes, shoulder-fired weapons, smart weapons/munitions, antitank mines, warheads, air-delivered munition, artillery fire control, battlefield monitoring systems, and decoy flares. The Marine Systems Group designs, develops, manufactures, and provides after-market support for underseas weapon systems (primarily torpedoes), naval ship acoustic sensors and signal processing systems, underseas surveillance and range systems, and underseas mine countermeasure systems. The Emerging Business Group consists of three primary business units: Global Environmental Solutions, Power Sources Center, and Advanced Technology Applications.

The Company's sales are predominantly derived from contracts with agencies of, and prime contractors to, the U.S. Government.

The various U.S. Government customers exercise independent purchasing decisions, and sales to the U.S. Government generally are not regarded as constituting sales to one customer, but instead, each contracting entity is considered to be a separate customer. During fiscal 1996, approximately 87.0 percent of the Company's sales were derived from contracts with the U.S. Government or U.S. Government prime contractors. Export sales to customers were $121,161, $87,500, and $69,300 in fiscal years 1996, 1995, and 1994, respectively.

The following summarizes the Company's sales to the U.S. Government and total sales by business group. Fiscal 1994 sales for Marine Systems have been adjusted to reclassify results of businesses which are now included in the Emerging Business Group.

Years Ended
Mar. 31, 1996Mar. 31, 1995Mar. 31, 1994
U.S. Government contract sales$1,038,239$680,570$700,099
Sales by business group:
Aerospace Systems$553,147 $20,269¹
Defense Systems437,080472,932533,194
Marine Systems164,112273,100221,735
Emerging Business Group39,50720,60320,400
Total$1,193,846$786,904$775,329
¹ Represents operations from March 15, 1995 through March 31, 1995, from the Aerospace acquisition.

22. Quarterly Financial Data (Unaudited)

Quarterly financial data is summarized for the years ended March 31, 1996, 1995, and 1994, as follows:

Fiscal Year 1996 Quarter Ended
July 2Oct. 1Dec. 31Mar. 31
Sales$292,948$267,650$298,205$335,043
Gross margin49,34451,89653,62867,360
Income from continuing operations10,62411,42714,85222,665
Per share.78.861.111.69
Net income10,06511,18612,49414,056
Per share.74.84.931.05
Fiscal Year 1995 Quarter Ended
July 3Oct. 2Jan. 1Mar. 31
Sales$168,944$136,059$172,630$309,271
Gross margin27,42019,62531,77428,103
Income (loss) from continuing operations8,101(12,502)4,476(67,269)
Per share0.80(1.27)0.44(6.28)
Net income (loss)5,719(14,491)3,745(69,081)
Per share0.56(1.47)0.37(6.45)
Fiscal Year 1994 Quarter Ended
July 4Oct. 3Jan. 2Mar. 31
Sales$168,487$137,923$169,665$299,254
Gross margin26,43725,08229,62043,130
Income from continuing operations8,7258,6728,9217,556
Per share.86.85.87.74
Net income8,3758,3228,5717,206
Per share.83.82.84.71

Losses from discontinued operations, net of income taxes were $(559), $(241), $(2,358), and $(2,369) for the first, second, third, and fourth quarters of fiscal 1996, respectively (see Note 18). The fourth quarter results for fiscal 1996 were additionally affected by an after-tax charge of $6,240 for the estimated loss on disposal of discontinued operations and a $3,196 reversal of restructure reserves, due to lower than expected severance costs.

The adoption of SFAS No. 112 resulted in a $1,500 cumulative effect charge to income in the first quarter of fiscal 1995 (see Note 10). A restructuring charge of $38,000 was recorded in the fourth quarter of fiscal 1995 (see Note 13). Change of control charges, the majority of which occurred in the third quarter, of $24,639 were recorded in fiscal 1995 (see Note 16). A litigation settlement charge of $15,000 was recorded as of the fourth quarter of fiscal 1995 (see Note 17). In addition, $42,000 in sales and $400 in income from operations were recorded in the fourth quarter of fiscal 1995 due to the change to the cost-to-cost method of revenue recognition (see Note 1). This change had no cumulative effect on beginning retained earnings and did not materially affect sales or income for the previous three quarters, accordingly, such quarters' financial statements were not restated.

Following is a summary of the Company's stock price for the past three years.

Common Stock Price
Quarter EndedHighLow
March 31, 1996$50.50$46.25
December 31, 199553.0044.63
October 1, 199547.5041.50
July 2, 199541.7535.63
March 31, 199540.3834.88
January 1, 199540.6327.25
October 2, 199433.6328.50
July 3, 199429.7521.75
March 31, 199429.7523.75
January 2, 199429.8825.00
October 3, 199330.0025.13
July 4, 199325.0022.00
March 31, 199331.0022.25

The Company does not currently pay dividends on its common stock.