<<

. 94
( 208 .)



>>




tion is a designer of process controls and factory automation systems and operates as
part of the Square D Automation Products business. Also in 1989, the company acquired
Electrical Specialty Products (ESP) of Montevallo, Alabama. ESP is a manufacturer of elec-
trical connectors and operates as part of the Square D Connectors business. These acqui-
sitions were accounted for as purchases; their sales and net earnings for the periods prior
to the dates of acquisition were not material.

G. Inventories
Inventories valued by the last-in, ¬rst-out (LIFO) method aggregated $83,941 and
$65,017 at December 31, 1990 and 1989, respectively. If the ¬rst-in, ¬rst-out (FIFO)
method had been used, inventories would have been $138,120 and $140,076 higher
than reported in the accompanying consolidated balance sheets at December 31, 1990
and 1989, respectively.
Inventories are maintained by element of cost; therefore, it is not practical to determine
major classes such as ¬nished goods, work in process and raw materials.

H. Lease Commitments
The company rents various warehouse and of¬ce facilities and certain equipment, princi-
pally computers and vehicles, under lease arrangements classi¬ed as operating leases.
Future minimum rental payments under noncancelable operating leases with initial
terms of one year or more as of December 31, 1990 are:

......................................................

1991 $10,160
1992 7,266
1993 5,520
1994 4,473
1995 975
Remainder 1,224
Total $29,618
......................................................
442 Prospective Analysis: Valuation Theory and Concepts




11-38
Prospective Analysis: Valuation Theory and Concepts




J. Debt
Long-term debt consists of:

1990 1989
.........................................................................................................................

ESOP Notes, 7.7%, due on various dates to 2004 $120,400 $ ”
Senior Notes, 10.0%, due 1995 75,000 75,000




Schneider and Square D
Industrial Revenue Bonds, 5.6% to 8.8%, due on various
dates to 2004 25,715 26,610
First Mortgage Notes, 9.0% to 9.2%, due on various
dates to 2009 10,825 11,119
Subordinated Convertible Notes, 9.0%, due 1992 (net
of unamortized discount at 13.0%: 1990”$220,
1989”$376) 2,787 4,096
Payable to banks; average rate 1990”13.8%, 1989”
10.3%; due on various dates to 1996 1,114 2,423
Other debt: average rate 1990”14.4%, 1989”12.7%;
due on various dates to 2000 24,046 14,346
Subtotal 259,887 133,594
Less current maturities 15,067 10,174
Total $244,820 $123,420
.........................................................................................................................


The aggregate annual maturities of long-term debt for the years 1991 through 1995 are
$15,067, $14,642, $14,968, $13,877 and $82,187, respectively.
The Employee Stock Ownership Plan (ESOP) Notes include $25,000 of direct borrow-
ings by the company, the proceeds from which have been advanced in the form of a loan
to the company™s ESOP. Direct borrowings of the ESOP, aggregating $95,400 as of
December 31, 1990, have been guaranteed by the company and accordingly, are
reported as long-term debt of the company. See Note Q for further discussion.
Industrial Revenue Bonds of $9,115 and the First Mortgage Notes are secured by the
property and equipment acquired with the proceeds of the ¬nancings.
The Subordinated Convertible Notes are convertible at a rate of 28.57 shares for each
one thousand dollars of principal. The company has reserved 85,934 shares of common
stock for the conversion.
The company has entered into revolving credit agreements in which twelve of its princi-
pal banks participate. The agreements provide for up to $180,000 of revolving credit
through 1994. The credit is available in both the domestic and euro markets.
Short-term debt includes bank borrowings of $33,611 and $19,438 and commercial
paper of $70,260 and $214,292 at December 31, 1990 and 1989, respectively. Addi-
tionally, short-term debt includes a master note agreement of $20,000 and $30,000 at
December 31, 1990 and 1989, respectively.
The company has additional unused short-term lines of credit which aggregated
$69,501 at December 31, 1990.
443
Prospective Analysis: Valuation Theory and Concepts




11-39 Part 2 Business Analysis and Valuation Tools




K. Income Taxes
Pre-tax income from continuing operations is as follows:

1990 1989 1988
.........................................................................................................................

United States $163,674 $142,855 $155,453
International 20,745 18,107 18,939
Schneider and Square D




Total $184,419 $160,962 $174.392
.........................................................................................................................


Income tax provisions for continuing operations are as follows:

1990 1989 1988
.........................................................................................................................

Current:
U.S. Federal $ 33,452 $ 46,784 $ 35,261
International 7,999 4,752 3,989
State 9,037 9,902 6,625
50,488 61,438 45,875
Deferred:
U.S. Federal 17,189 (1,375) 17,475
International (869) 1,479 228
State 965 (1,686) (268)
17,285 (1,582) 17,435
Total $ 67,773 $ 59,856 $ 63,310
.........................................................................................................................


The components of the deferred income tax provision are as follows:

1990 1989 1988
.........................................................................................................................

Leasing subsidiary income $ 17,077 $ 22,502 $ 25,256
401(k) contributions 4,383 ” ”
State tax 965 (1,686) (268)
Tax over book depreciation 2,535 1,301 751
Deferred taxable income on installment
sales ” (13,006) (5,615)
Alternative minimum tax ” 8,484 1,634
Funding of group health insurance trust ” (6,863) (11,634)
Restructuring charge ” (4,510) ”
Other (7,675) (7,804) 7,311
Deferred Income Tax Expense (Bene¬t) $ 17,285 $ (1,582) $ 17,435
.........................................................................................................................
444 Prospective Analysis: Valuation Theory and Concepts




11-40
Prospective Analysis: Valuation Theory and Concepts




A reconciliation between the statutory and effective tax rates for continuing operations is
as follows:

1990 1989 1988
..........................................................................................................................

U.S. Federal statutory rate 34.0% 34.0% 34.0%
State income taxes, net of Federal bene¬t 3.6 3.4 2.4
Rate reduction ” ” (2.5)




Schneider and Square D
U.S. tax on international dividend 0.4 0.3 4.2
International rate differential 0.1 (0.9) (2.6)
Leasing subsidiary (0.1) (0.2) (0.8)
Restructuring charge ” 0.6 ”
Other (1.3) ” 1.6
Effective tax rate 36.7% 37.2% 36.3%
..........................................................................................................................


No provisions have been made for possible international withholding and U.S. income
taxes payable on the distribution of approximately $120,009 of undistributed earnings
which have been or will be reinvested abroad or are expected to be returned to the
United States in tax-free distributions. Provisions for taxes have been made for all earn-
ings which the company presently plans to repatriate.

L. Supplementary Earnings Statement Information

1990 1989 1988
..........................................................................................................................

Non-Operating Income:
Interest income $25,501 $14,497 $9,666
Settlement of lawsuit 5,695 ” ”
Income from leveraged leases 5,273 6,694 8,219
Gain (loss) on sale of property, plant and
equipment 1,005 (1,933) (673)
Other non-operating (expense) income (2,734) (2,152) 43
Total $34,740 $17,106 $17,255

Research and Development $55,384 $44,720 $46,533
Maintenance and Repairs 47,328 49,572 47,131
Advertising 26,584 25,933 19,586
Rents 22,857 23,238 19,958
Foreign Currency Transaction (Loss) Gain (1,423) 292 2,343
..........................................................................................................................


O. Pension Plans
The company™s domestic operations maintain several pension plans, primarily de¬ned
bene¬t pension plans covering substantially all employees for normal retirement bene¬ts
at age 65. De¬ned bene¬ts for salaried employees are based on a ¬nal average com-
445
Prospective Analysis: Valuation Theory and Concepts




11-41 Part 2 Business Analysis and Valuation Tools




pensation formula and hourly plans are based on an amount per year of service formula.
The company makes annual contributions to the plans in accordance with ERISA and IRS
regulations, including amortization of past service cost over the average remaining ser-
vice life of active employees.
In 1989 the company adopted SFAS No. 87 for its signi¬cant international pension
plans. For the company™s international pension plans that have not adopted SFAS No.
87, the excess of vested bene¬ts over fund assets is insigni¬cant. The company makes
annual contributions to the plans in accordance with the laws and regulations of the
Schneider and Square D




respective international taxing jurisdictions in which the company operates.
Components of net periodic pension cost for the company™s domestic and international
pension plans consist of the following:

1990 1989 1988
.........................................................................................................................

Service cost”bene¬ts earned during period $12,409 $11,039 $9,515
Net deferral and amortization (42,253) 24,976 (11,621)
Interest on projected bene¬t obligation 28,547 25,796 25,414
Actual return on plan assets 10,809 (55,795) (14,388)
Net periodic pension cost $ 9,512 $ 6,016 $ 8,920
.........................................................................................................................

The net periodic pension cost attributable to the company™s signi¬cant international pen-
sion plans was $843 and $1,000 in 1990 and 1989, respectively.
The following tables set forth the company™s domestic and international pension plans™
funded status and amounts recognized in the company™s balance sheet at December 31:

<<

. 94
( 208 .)



>>