-54-
EXHIBIT (13)
PORTIONS OF THE 1993
ANNUAL REPORT TO SHAREHOLDERS
11-Year Summary of Selected Financial Data
Years Ended December 31 (1993-1988)
(Dollars in millions, except per share data)
1993 1992 1991 1990 1989 1988
Continuing Operations
Net sales $1,643.8 $1,695.5 $1,681.2 $1,955.4 $1,942.3 $1,781.3
Cost of products sold 1,247.4 1,307.4 1,309.1 1,477.7 1,441.4 1,294.8
Interest expense 25.5 26.3 26.5 31.7 28.6 31.8
Income taxes (credit) 6.6 9.6 (11.2) 29.6 29.6 51.5
Income (loss) from continuing
operations before cumulative
effect adjustment 10.5a 14.4 (184.1)c 45.5d 33.4e 87.5g
Discontinued operations - - - - (1.1)f .3
Cumulative effect adjustment (70.2) - - - - -
Net Income (Loss) (59.7) 14.4 (184.1) 45.5 32.3 87.8
Income (Loss) Attributable
to Common Stock (59.7) 14.4 (184.1) 45.5 32.3 91.6
Per Common Share Data
Primary
- - Continuing operations before
cumulative effect adjustment .37 .51 (6.52)c 1.51d .98e 2.53g
- - Discontinued operations - - - - (.03)f .01
- - Cumulative effect adjustment (2.47) - - - - -
- - Net income (loss) (2.10) .51 (6.52) 1.51 .95 2.54
- - Average shares outstanding
(in millions) 28.4b 28.3b 28.2b 30.2b 34.1b 36.1
Financial Position
Cash 20.5 26.3 26.6 25.5 23.0 37.1
Plants and properties-net 386.8 405.5 434.5 467.2 455.8 464.1
Total assets 972.2 1,017.4 1,070.4 1,314.2 1,361.5 1,426.7
Working capital 162.4 178.6 123.2 242.5 322.5 407.9
Long-term debt 246.2 239.1 177.3 195.6 203.9 279.0
Shareholders' equity 253.2 352.9 374.6 598.7 651.3 679.2
Other Data
Cash dividends per share
- - Common .68 .68 .68 .68 .66 .60
- - Preferred
Shares outstanding at Dec. 31 (in millions)
- - Common 28.4 28.2 28.2 28.2 33.0 34.2
- - Preferred
Return on average
shareholders' equity -a 4.0% -c 7.4% 4.8%e 13.7%
Debt-to-capitalization ratio 55.1% 50.3% 47.0% 35.5% 30.4% 34.9%
Number of employees at Dec. 31
- - Non-U.S. 5,094 5,948 6,516 7,935 8,835 9,251
- - U.S. 9,918 9,975 11,180 11,486 12,762 12,979
- - Total 15,012 15,923 17,696 19,421 21,597 22,230
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11-Year Summary of Selected Financial Data
Years Ended December 31 (1987-1983)
(Dollars in millions, except per share data)
1987h 1986 1985 1984 1983
Continuing Operations
Net sales $1,533.2 $1,279.2 $1,114.7 $ 988.3 $ 454.2
Cost of products sold 1,105.6 909.7 788.2 668.1 332.6
Interest expense 30.3 23.2 24.1 25.1 9.8
Income taxes (credit) 51.7 24.7 35.3 35.1 16.9
Income (loss) from continuing
operations before cumulative
effect adjustment 68.3 31.4i 47.6 50.2 21.6
Discontinued operations 4.2 91.1j 27.1 20.5 18.8
Cumulative effect adjustment (12.5) - - - -
Net Income (Loss) 59.9 122.6 74.6 70.6 40.4
Income (Loss) Attributable
to Common Stock 58.9 118.1 69.9 65.8 35.6
Per Common Share Data
Primary
- - Continuing operations before
cumulative effect adjustment 2.00 .80i 1.17 1.34 .50
- - Discontinued operations .12 2.68j .73 .60 .56
- - Cumulative effect adjustment (.37) - - - -
- - Net income (loss) 1.75 3.48 1.90 1.94 1.06
- - Average shares outstanding
(in millions) 33.7 33.9 36.7 33.9 33.6
Financial Position
Cash 24.0 17.6 25.8 20.7 123.6
Plants and properties-net 437.0 354.8 291.5 209.5 100.2
Total assets 1,319.7 1,155.1 1,204.9 969.8 743.0
Working capital 283.0 240.7 410.3 359.8 332.3
Long-term debt 244.1 148.7 216.6 205.1 139.6
Shareholders' equity 614.4 549.7 716.3 529.4 493.0
Other Data
Cash dividends per share
- - Common .53 .476 .447 .41 .40
- - Preferred 1.1875 4.75 4.75 4.75 4.75
Shares outstanding at Dec. 31
(in millions)
- - Common 34.1 30.2 41.5 33.9 33.5
- - Preferred .9 1.0 1.0 1.0
Return on average
shareholders' equity 10.4% 19.9%ij 12.2% 13.7% 8.4%
Debt-to-capitalization ratio 35.7% 33.0% 27.8% 33.5% 24.1%
Number of employees at Dec. 31
- - Non-U.S. 7,683 7,258 7,005 6,030 2,531
- - U.S. 11,964 10,828 10,592 8,973 4,964
- - Total 19,647 18,086 17,597 15,003 7,495
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<FN>
(a) Includes a special charge for severance and other personnel-related costs
amounting to $26 million pretax, $18.2 million net ($.64 per share) and a
provision for unsuccessfully contested prior years' value-added taxes in
Brazil amounting to $7 million pretax, $4.7 million net ($.17 per share).
(b) The Company's 6 percent convertible debentures, which are common stock
equivalents, have not been included in average shares outstanding because
the effect of their inclusion would be anti-dilutive. (See Note 1, Net
Income (Loss) per Share, of Notes to Financial Statements.)
(c) Includes a special charge for the write-off of intangibles and other
charges amounting to $166.4 million pretax, $156.4 million net ($5.54 per
share) and a gain from settlement of outstanding litigation associated
with the purchase and installation of automated factory equipment
amounting to $2.3 million pretax, $1.4 million net ($.05 per share).
(d) Includes settlement gains associated with terminated pension plans
amounting to $5.2 million pretax, $2.8 million net ($.09 per share).
(e) Includes a provision for restructuring amounting to $53 million pretax,
$38.5 million net ($1.13 per share); a provision of $8 million pretax, $5
million net ($.15 per share) for costs associated with the write-down in
value of a flexible manufacturing system; and a gain of $4 million
pretax, $2.5 million net ($.07 per share) from the sale of certain
investments.
(f) Includes a loss on the sale of the Laminated Products Group business
amounting to $1.7 million pretax, $1.1 million net ($.03 per share).
(g) Includes settlement gains associated with terminated pension plans
amounting to $6.1 million pretax, $3.3 million net ($.09 per share).
(h) 1987 financial statements were restated to reflect the adoption of FASB
Statement No. 96 retroactive to January 1, 1987. This change in
accounting method decreased net income for the year ended December 31,
1987, by $2.7 million ($.08 per share). Net income for the year ended
December 31, 1987, was also decreased $12.5 million ($.37 per share) for
the cumulative effect of the change in accounting related to years prior
to 1987 which were not restated.
(i) Includes a provision for restructuring amounting to $49.1 million pretax,
$28.4 million net ($.84 per share).
(j) Includes a gain from disposal of the Glass business and other associated
gains amounting to $99.4 million pretax, $85 million net ($2.50 per
share).
All applicable common share amounts and per share data have been adjusted to
reflect the two-for-one common stock split in 1987 and the three-for-two
common stock split in 1986.
-57-
FINANCIAL REVIEW AND ANALYSIS OF OPERATIONS
Analysis of Operations
1993 Compared with 1992
The following data provide highlights for the year 1993 compared with the year
1992.
Percent
(dollars in thousands, Year Ended December 31 Increase
except per share data) 1993 1992 (Decrease)
CONSOLIDATED
Net sales $1,643,841 $1,695,512 (3.0)%
Manufacturing income 396,427 388,155 2.1
Manufacturing margin 24.1% 22.9%
Special charge 26,000 - -
Operating income 68,892* 58,980 16.8
Operating margin 4.2%* 3.5%
Income before cumulative effect
of accounting change 10,511* 14,442 (27.2)
Cumulative effect to January 1, 1993,
of accounting change, net of income
tax benefit (70,229) - -
Net income (loss) (59,718)* 14,442 -
Income (Loss) per Share
Income before cumulative effect
of accounting change .37* .51 (27.5)
Cumulative effect of accounting
change, net of income tax benefit (2.47) - -
Net income (loss) per share (2.10)* .51 -
Number of employees 15,012 15,923 (5.7)
INDUSTRIAL
Net sales 864,590 902,794 (4.2)
Special charge 19,200 - -
Operating income 17,118* 16,733 2.3
Operating margin 2.0%* 1.9%
Order intake 898,140 927,845 (3.2)
Order backlog at December 31 148,399 152,225 (2.5)
AUTOMOTIVE
Net sales 452,637 415,387 9.0
Special charge 2,600 - -
Operating income 45,724* 32,291 41.6
Operating margin 10.1%* 7.8%
AEROSPACE & DEFENSE
Net sales 326,614 377,331 (13.4)
Special charge 3,600 - -
Operating income 26,016* 29,756 (12.6)
Operating margin 8.0%* 7.9%
Order intake 297,869 327,496 (9.0)
Order backlog at December 31 278,351 321,610 (13.5)
<FN>
*After deducting the special charge.
-58-
Consolidated sales for 1993 were 3 percent lower than in 1992. Sales for the
industrial and aerospace & defense segments declined during the year, but
automotive segment sales increased. Consolidated U.S. sales increased $31.9
million, or 3.2 percent, but non-U.S. sales declined $83.6 million, or 12.2
percent. Changes in currency exchange rates accounted for nearly $51 million
of the decline.
Industrial sales declined $38.2 million, or 4.2 percent, from 1992. U.S.
sales increased $28.3 million, or 5.6 percent, over the prior year as key
markets in the U.S. industrial sector continued to improve. Sales within
industrial markets in Asia and Brazil also improved over 1992. Industrial
sales in Europe, however, declined from 1992 levels, principally the result of
the ongoing recession in most European countries. Including the effects of
changes in currency exchange rates, industrial sales in Europe declined nearly
26 percent from the prior year.
Order intake for the industrial segment declined $29.7 million, or 3.2
percent, from 1992 levels. U.S. industrial order intake improved over 1992,
as did order intake in Asia and Brazil. European order intake was, however,
27 percent lower than in 1992 and continued to reflect the severity of the
ongoing recession in that region.
Automotive sales increased $37.3 million, or 9.0 percent, over 1992. U.S.
automotive sales increased $37 million, or nearly 20 percent, over the prior
year and include the effect of consolidation in 1993 of a joint venture that
had previously been accounted for by the equity method. The Company's
European automotive sales volume remained strong during 1993, but because of
the negative effects of changes in currency exchange rates, the reported
European sales were flat compared with 1992. Although demand for the
Company's air conditioning and power steering components and systems remained
strong in 1993, the continued depressed levels of European auto production and
severe price competition are expected to inhibit the Company's European
automotive sales growth in 1994.
Aerospace & defense sales declined $50.7 million, or 13.4 percent, from 1992.
This reduction reflects the continued weak conditions in worldwide aerospace
and defense markets, as both U.S. and non-U.S. sales were lower than in 1992.
U.S. government defense spending has continued to decline, and commercial
aircraft manufacturers have continued to cut back production schedules.
Partially offsetting this trend, sales to the commercial aftermarket and
repair markets continued to grow in 1993.
Order intake for the aerospace & defense segment declined $29.6 million, or 9
percent, from 1992. Due to strong orders in the fourth quarter, European
orders for the year were flat compared with 1992, while order intake in the
U.S. declined.
Consolidated manufacturing margin improved to 24.1 percent from 22.9 percent
for 1992. Manufacturing margin for the industrial and automotive segments
improved in 1993. Manufacturing margin for the aerospace & defense segment
remained flat compared with 1992, although volume was 13.4 percent lower.
Aggressive cost-reduction efforts and continued consolidation of operations
and manufacturing processes contributed to improved margins. Liquidation of
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LIFO inventory quantities reduced cost of products sold, principally
benefitting the industrial segment, by $7.6 million in 1993, compared with
$6.6 million in 1992. Underabsorption of manufacturing burden due to
continued inventory reduction partially offset this benefit in both years.
Initiatives which were undertaken in 1992 to reduce selling and general
administrative and engineering, research and development expenses (operating
expenses) were aggressively pursued during 1993. Operating expenses in 1993
were $27.6 million, or 8.4 percent, lower than in 1992 and were 18.3 percent
of sales in 1993, compared with 19.4 percent in 1992. The reduction in
engineering, research and development expenses does not represent a reduced
focus in this area, but a streamlining of efforts to achieve greater
efficiency.
In the 1993 second quarter, the Company recorded a $26 million ($18.2 million
after tax, or $.64 per share) provision for severance and other personnel-
related costs associated with worldwide work force reductions, primarily
focusing on the Company's industrial operations in Europe. The number of
employees worldwide was reduced by approximately 900 persons, or 6 percent,
during the year 1993. This work force reduction is, in part, the result of
the 1993 and 1991 restructuring initiatives. These initiatives contributed to
the improvement in manufacturing and operating margins during 1993.
Restructuring payments in 1993 (net of proceeds from sale of properties)
amounted to $17.4 million. This compares with restructuring payments in 1992
totaling $31.7 million. Operating income for the year ended December 31,
1993, amounted to $68.9 million after deducting the special charge of $26
million and compares with operating income for the year 1992 of $59.0 million.
Other - net deductions were $17.6 million greater in 1993 than in 1992. In
the 1993 fourth quarter, the Company recognized a charge of $7 million ($4.7
million after tax, or $.17 per share) to provide for unsuccessfully contested
prior years' value-added taxes in Brazil. Also, other - net deductions for
the year 1993 include exchange losses of $10.6 million, principally relating
to Brazil, compared with $4.9 million for the year 1992.
Income before cumulative effect of accounting change amounted to $10.5
million, or $.37 per share, compared with net income of $14.4 million, or $.51
per share, in 1992. The effective tax rate for the year 1993 was 38.6
percent. Adjustment of net deferred tax assets due to the change in the
statutory U.S. federal income tax rate reduced the provision for income taxes
for the year ended December 31, 1993, by approximately $1 million. The
effective income tax rate for the year 1992 was 39.9 percent.
The Company evaluated the realizability of deferred tax assets at December 31,
1993. Valuation allowances were provided or maintained in those taxing
jurisdictions where the Company has net deductible temporary differences and
net operating loss carryforwards, and sufficient positive evidence, including
the ability to implement available tax planning alternatives, did not exist to
conclude that the associated deferred tax assets would be realized.
In the 1993 first quarter, the Company adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement
Benefits Other than Pensions." The Company elected to recognize the
transition obligation in the 1993 first quarter as the cumulative effect of a
change in accounting principle, resulting in a $113.2 million charge to income
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($70.2 million after tax, or $2.47 per share for the year). In addition to
the cumulative effect of change in accounting, the Company's 1993
postretirement benefit cost increased $6.8 million from what it would have
been had the change in accounting not been made. The Company also adopted
Statement of Financial Accounting Standards No. 112, "Employers' Accounting
for Postemployment Benefits," effective January 1, 1993. The effect of
adopting this standard was not significant to the Company's results of
operations or consolidated financial position.
[Dual bar charts - See Appendix A filed hereunder]
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Analysis of Operations
1992 Compared with 1991
The following data provide highlights for the year 1992 compared with the year
1991.
Percent
(dollars in thousands, Year Ended December 31 Increase
except per share data) 1992 1991 (Decrease)
CONSOLIDATED
Net sales $1,695,512 $1,681,212 0.9%
Manufacturing income 388,155 372,118 4.3
Manufacturing margin 22.9% 22.1%
Special charge - 166,400 -
Operating income (loss) 58,980 (155,876 -)*
Operating margin 3.5% -
Net income (loss) 14,442 (184,079)* -
Net income (loss) per share .51 (6.52)* -
Number of employees 15,923 17,696 (10.0)
INDUSTRIAL
Net sales 902,794 883,962 2.1
Special charge - 88,100 -
Operating income (loss) 16,733 (96,313)* -
Operating margin 1.9% -
Order intake 927,845 902,848 2.8
Order backlog at December 31 152,225 169,477 (10.2)
AUTOMOTIVE
Net sales 415,387 358,637 15.8
Special charge - 47,800 -
Operating income (loss) 32,291 (43,822)* -
Operating margin 7.8% -
AEROSPACE & DEFENSE
Net sales 377,331 438,613 (14.0)
Special charge - 30,500 -
Operating income 29,756 4,524* -
Operating margin 7.9% 1.0%*
Order intake 327,496 415,327 (21.1)
Order backlog at December 31 321,610 383,201 (16.1)
<FN>
*After deducting the special charge.
-62-
Consolidated sales for 1992 were marginally higher than in 1991. Sales for
the Company's automotive operations increased significantly over 1991, largely
due to European market penetration. This increase was offset by reductions in
the aerospace & defense segment, where cutbacks by the major airlines and
reduction in defense spending reduced sales from the 1991 level. Industrial
sales showed a modest gain over 1991 as the U.S. economy improved but Europe
weakened. Consolidated U.S. sales declined $33 million from 1991, principally
due to aerospace & defense, while non-U.S. sales increased $47 million,
largely because of automotive.
Industrial sales increased $18.8 million, or 2.1 percent, over 1991. U.S.
industrial sales showed improvement for the year, although certain key
markets, such as construction and farm equipment, remained weak. Industrial
sales in Europe declined from 1991 as recessionary conditions accelerated.
Order intake for the industrial segment increased $25 million, or 2.8 percent,
over 1991. This increase includes the effects of new product introductions,
greater market penetration and improving market conditions. Orders in the
U.S. showed gains during the year, while orders in Europe and Brazil declined.
Automotive sales increased $56.8 million, or 15.8 percent, over 1991. Demand
for air conditioning and power steering products in Europe led to a strong
increase in non-U.S. sales. Non-U.S. sales accounted for 53 percent of total
automotive sales in 1992, compared with 46 percent in 1991. U.S. sales, after
improving in the first half of the year, fell below last year's level in the
second half and remained flat year-over-year.
Aerospace & defense sales declined $61.3 million, or 14 percent, from 1991.
Most of this decline occurred in the United States. Sales for each of the
1992 quarterly periods were lower than the comparable 1991 periods, reflecting
reductions in both defense spending and the commercial aerospace business.
Declines in economic activity resulted in extension of orders in the
commercial aerospace business, which pushed back the delivery of component
parts to airline manufacturers during 1992. Commercial aftermarket business
also declined year-over-year, but showed signs of stability near year end.
[Dual bar charts and bar chart - See Appendix A filed hereunder]
Order intake for the aerospace & defense segment declined $87.8 million, or
21.1 percent, from 1991. Order patterns continued to reflect the softness in
the commercial aerospace business. U.S. defense orders have also declined in
response to the lower military spending.
During 1992, the Company continued its efforts to streamline operations and
improve manufacturing and distribution processes. Additional facilities were
closed during the year, resulting in further consolidation of manufacturing,
assembly and warehousing operations at selected facilities to improve
throughput and customer service. Such actions contributed to improved margins
in 1992.
Manufacturing margin for the year 1992 improved to 22.9 percent from 22.1
percent for 1991. Manufacturing margin for the automotive and aerospace &
defense segments improved over 1991, while industrial margins remained at
about the same level. The benefits in 1992 from continued improvements in
manufacturing and distribution processes, reductions in personnel and cost
savings associated with the special charge recorded in the 1991 fourth
quarter, including reduced amortization of intangibles, contributed to the
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increased earnings. Liquidation of LIFO inventory quantities reduced cost of
products sold by $6.6 million in 1992, compared with $5.7 million in 1991.
Conversely, underabsorption of manufacturing burden due to inventory reduction
programs partially offset this benefit in both years.
Initiatives to reduce selling and general administrative and engineering,
research and development expenses (operating expenses) continued to show
positive results. Operating expenses in 1992 were $32.4 million, or 9
percent, lower than in 1991. Operating expenses as a percent of sales were
19.4 percent in 1992, compared with 21.5 percent in 1991. This reduction was
due in large part to significant reductions in personnel.
Operating income for the year 1992 amounted to $59.0 million, compared with an
operating loss of $155.9 million in 1991 after deducting a special charge of
$166.4 million.
Other-net deductions in 1992 were $4.3 million less than in 1991, largely due
to lower exchange losses. Other-net deductions for 1991 included a gain from
settlement of litigation associated with the purchase and installation of
automated factory equipment at one of the Company's production facilities.
The effective tax rate for 1992 was 39.9 percent, compared with a benefit of
5.7 percent in 1991. In 1992, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109). The
Company had previously been accounting for income taxes in accordance with
Statement of Financial Accounting Standards No. 96. Financial statements for
prior years were not restated, and there was no significant effect on the 1992
financial statements.
FAS 109 specifies that deferred tax assets and liabilities must be recognized
for estimated future tax effects attributable to temporary differences and
loss carryforwards. The Company recorded additional deferred tax assets as of
January 1, 1992, amounting to approximately $29 million, attributable to
temporary differences and loss carryforwards at certain non-U.S. locations.
Because of the uncertainty associated with the future realization of the
deferred tax assets, corresponding valuation allowances were also recorded as
of January 1, 1992, in accordance with the requirements of the standard.
Effects of Inflation
The Company attempts to minimize the effects of inflation on operating costs
through cost-control and productivity improvement programs. As raw material
and other operating costs increase, the Company attempts to recover the
increased costs through its product pricing to the extent permitted by
competitive factors. The Company uses the LIFO method of accounting for
substantially all of its U.S. inventories. Under this method, other than the
effect of quantity liquidations when inventories are decreasing, cost of
products sold as reported in the financial statements approximates current
costs, thereby reducing the distortion in reported income due to increasing
costs. The charges to operations for depreciation, however, represent
allocations of historical costs incurred in prior years and are less than
charges to income would be if productive capacity were replaced at current
costs.
-64-
Liquidity, Working Capital and Capital Investment
Cash provided by operating activities during 1993 totaled $128.9 million and
compares with $46.1 million in 1992. Higher earnings, after adjustment for
the non-cash effects of the cumulative effect of change in accounting and the
special charge, contributed to the increase in cash provided by operations.
Continued inventory reductions and other working capital changes also
contributed to increased cash from operating activities. Restructuring
payments, amounting to $17.4 million in 1993, are net of proceeds totaling $-
19.4 million from the sale of properties. Several facilities remain to be
sold at December 31, 1993.
Capital expenditures totaled $55.1 million in 1993, compared with $52.3
million in 1992. Capital spending in 1994 is expected to be moderately higher
than in 1993. Dividend payments remained unchanged at $.68 per share. Debt
payments, net of borrowings, totaled $57.8 million in 1993. In 1992,
borrowings exceeded debt payments by $29.6 million. The debt-to-
capitalization ratio was 55.1 percent, up from 50.3 percent at December 31,
1992. The increase in the debt-to-capitalization ratio was primarily the
result of the first-quarter non-cash charge to income for the cumulative
effect of change in accounting. This accounting change did not affect the
Company's ability to comply with restrictive covenants of revolving credit
agreements.
Under terms of its revolving credit agreements with several U.S. and non-U.S.
banks, the Company may borrow up to $155 million. These agreements are
renewable annually, are intended to support the Company's commercial paper
borrowings and, to the extent not so utilized, provide domestic borrowings.
There were no borrowings under these agreements or commercial paper
outstanding at December 31, 1993. In addition, the Company has uncommitted
arrangements with various banks to provide short-term financing as necessary.
The Company expects that cash flow from operating activities and available
short-term financing arrangements will be sufficient to meet normal operating
requirements over the near term.
The Company or certain of its subsidiaries have been named potentially
responsible parties (PRP) for site investigation and cleanup costs under the
Comprehensive Environmental Response, Compensation, and Liability Act
(Superfund) or similar state laws with respect to certain sites. In addition,
the Company has undertaken corrective and preventive environmental projects of
its own to achieve compliance with applicable environmental laws at certain of
its facilities. The Company believes that the costs arising out of such PRP
designations and the Company's compliance projects will not have a material
adverse effect on the Company's consolidated financial position.
-65-
QUARTERLY RESULTS OF OPERATIONS
The following is a summary of the quarterly results of operations for the
years ended December 31, 1993, and 1992.
1993
--------------------------------------------------------
Three Months Ended
-------------------------------------------- Year Ended
Mar 31 Jun 30 Sep 30 Dec 31 Dec 31
------- ------- ------- ------- -----------
(In thousands, except per share data)
Net sales $ 429,169 $ 419,748 $ 393,263 $ 401,661 $1,643,841
Manufacturing income 98,231 101,919 96,260 100,017 396,427
Income (loss) before cumulative
effect of accounting change 5,634 (9,121) 9,461 4,537 10,511(a)
Cumulative effect of accounting
change (70,229) - - - (70,229)
Net income (loss) (64,595) (9,121) 9,461 4,537 (59,718)(a)
Income (loss) per share
Income (loss) before cumulative
effect of accounting change .20 (.32) .33 .16 .37(a)
Cumulative effect of accounting
change (2.48) - - - (2.47)(c)
Net income (loss) per share (2.28) (.32) .33 .16 (2.10)(a,c)
Average shares outstanding 28,296 28,345 28,434 28,512 28,405(b)
1992
--------------------------------------------------------
Three Months Ended
-------------------------------------------- Year Ended
Mar 31 Jun 30 Sep 30 Dec 31 Dec 31
------- ------- ------- ------- ----------
(In thousands, except per share data)
Net sales $ 422,644 $ 439,009 $ 402,223 $ 431,636 $1,695,512
Manufacturing income 93,409 104,173 90,978 99,595 388,155
Net income 450 6,204 1,735 6,053 14,442
Net income per share .02 .22 .06 .21 .51
Average shares outstanding 28,253 28,266 28,268 28,264 28,259(b)
-66-
<FN>
(a) The 1993 fourth quarter and year include a provision for unsuccessfully
contested prior years' value-added taxes in Brazil amounting to $7
million pretax, $4.7 million net ($.17 per share). The income tax
provision for the 1993 third quarter and year was reduced by
approximately $1 million due to adjustment of net deferred tax assets to
recognize the change in the U.S. statutory tax rate. The income tax
provision for the 1993 third quarter also includes the benefit from
utilization of a current year operating loss of a non-U.S. subsidiary.
The 1993 second quarter and year include a special charge for severance
and other personnel-related costs amounting to $26 million pretax, $18.2
million net ($.64 per share).
(b) The assumed conversion of the Company's 6 percent convertible debentures,
which are common stock equivalents, was not included in average shares
outstanding because the effect of the inclusion would have been anti-
dilutive.
(c) The total of the quarterly income per share amounts does not equal the
annual per share amounts.
[Pie charts - See Appendix A filed hereunder]
-67-
MANAGEMENT'S STATEMENT ON RESPONSIBILITY
FOR FINANCIAL STATEMENTS
Shareholders and Board of Directors
TRINOVA Corporation
The management of TRINOVA Corporation has prepared the financial statements as
well as other data included in this annual report and has primary
responsibility for the integrity and objectivity of the financial information
and its presentation. The financial statements were prepared in accordance
with generally accepted accounting principles and contain estimates and
judgments by management as appropriate.
The Company maintains a system of internal accounting controls designed to
provide reasonable assurance that assets are safeguarded, that transactions
are executed in accordance with management's authorization and are properly
recorded, and that accounting records may be relied upon for preparation of
financial statements. Management is responsible for maintenance of these
systems, which is accomplished through communication of an established written
code of conduct, policies and procedures; careful selection and training of
qualified personnel; and appropriate delegation of authority and segregation
of responsibilities. Adherence to these controls, policies and procedures is
monitored and evaluated on a periodic basis by the Company's internal
auditors.
The Company's independent auditors provide an objective audit of TRINOVA
Corporation's financial statements. In planning and performing their audit of
the Company's financial statements, the independent auditors consider the
Company's internal control structure in determining their auditing procedures
to enable them to set forth their opinion. The independent auditors also
prepare recommendations for improving policies and procedures. Such
recommendations are communicated in accordance with Company policy to the
individuals responsible for implementation.
The Audit Committee of the Board of Directors, composed solely of outside
directors, meets periodically with the independent auditors, internal auditors
and financial management to review their respective activities and to satisfy
itself that each is properly discharging its responsibilities. Both the
independent auditors and internal auditors have direct access to the Audit
Committee, with or without the presence of management, to discuss the scope
and results of their audits, their comments on the adequacy of internal
accounting controls and the quality of financial reporting.
/S/ DARRYL F. ALLEN /S/ DAVID M. RISLEY
Darryl F. Allen David M. Risley
Chairman, President and Vice President - Finance
Chief Executive Officer and Chief Financial Officer
-68-
REPORT OF ERNST & YOUNG,
Independent Auditors
Shareholders and Board of Directors
TRINOVA Corporation
We have audited the accompanying statement of financial position of TRINOVA
Corporation and subsidiaries as of December 31, 1993 and 1992, and the related
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1993. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of TRINOVA
Corporation and subsidiaries at December 31, 1993 and 1992, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1993, in conformity with
generally accepted accounting principles.
As discussed in Notes 5 and 8 of Notes to Financial Statements, in 1993 the
Company changed its method of accounting for postretirement benefits other
than pensions and in 1992 its method of accounting for income taxes.
/S/ ERNST & YOUNG
Toledo, Ohio
January 26, 1994
-69-
STATEMENT OF OPERATIONS
Years ended December 31, 1993, 1992 and 1991
(In thousands, except per share data)
1993 1992 1991
-------- -------- --------
Net sales $1,643,841 $1,695,512 $1,681,212
Cost of products sold 1,247,414 1,307,357 1,309,094
---------- ---------- ----------
MANUFACTURING INCOME 396,427 388,155 372,118
Selling and general administrative
expenses 246,221 263,863 286,727
Engineering, research and development
expenses 55,314 65,312 74,867
Special charges 26,000 - 166,400
---------- ---------- ----------
OPERATING INCOME (LOSS) 68,892 58,980 (155,876)
Interest expense (25,516) (26,313) (26,453)
Other - net (26,265) (8,625) (12,950)
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES
AND CUMULATIVE EFFECT OF ACCOUNTING
CHANGE 17,111 24,042 (195,279)
Income taxes (credit) 6,600 9,600 (11,200)
---------- ---------- ----------
INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 10,511 14,442 (184,079)
Cumulative effect to January 1, 1993,
of accounting change, net of income
tax benefit (70,229) - -
---------- ---------- ----------
NET INCOME (LOSS) $ (59,718) $ 14,442 $ (184,079)
========== ========== ==========
INCOME (LOSS) PER SHARE
Income (loss) before cumulative
effect of accounting change $ .37 $ .51 $ (6.52)
Cumulative effect of accounting
change, net of income tax benefit (2.47) - -
---------- ---------- ----------
NET INCOME (LOSS) PER SHARE $ (2.10) $ .51 $ (6.52)
========== ========== ==========
Average number of common
shares outstanding 28,405 28,259 28,242
========== ========== ==========
<FN>
The Notes to Financial Statements are an integral part of this statement.
-70-
STATEMENT OF FINANCIAL POSITION
December 31, 1993 and 1992
(Dollars in thousands, except per share data)
1993 1992
------------ ------------
ASSETS
CURRENT ASSETS
Cash $ 20,534 $ 26,269
Receivables 200,340 202,850
Inventories 212,346 268,028
Other current assets 54,011 49,588
----------- -----------
TOTAL CURRENT ASSETS 487,231 546,735
Plants and properties 826,100 826,756
Less accumulated depreciation 439,281 421,213
----------- -----------
386,819 405,543
Other assets 98,151 65,111
----------- -----------
TOTAL ASSETS $ 972,201 $ 1,017,389
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 60,539 $ 109,549
Accounts payable 81,133 82,624
Income taxes 27,364 25,484
Other accrued liabilities 151,469 141,907
Current maturities of long-term debt 4,257 8,582
----------- -----------
TOTAL CURRENT LIABILITIES 324,762 368,146
Long-term debt 246,214 239,061
Postretirement benefits other than pensions 120,058 -
Deferred credits and other liabilities 22,558 20,846
Deferred income taxes 5,377 36,476
SHAREHOLDERS' EQUITY
Common stock - par value $5 a share
Authorized - 100,000,000 shares
Outstanding - 28,405,880 and
28,237,626 shares, respectively
(after deducting 5,804,016 and
5,972,270 shares, respectively, in treasury) 142,029 141,188
Additional paid-in capital 2,157 470
Retained earnings 138,628 217,604
Currency translation adjustments (29,582) (6,402)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 253,232 352,860
------------ -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 972,201 $ 1,017,389
=========== ===========
The Notes to Financial Statements are an integral part of this statement.
-71-
STATEMENT OF CASH FLOWS
Years ended December 31, 1993, 1992 and 1991
(In thousands)
1993 1992 1991
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (59,718) $ 14,442 $ (184,079)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Cumulative effect of accounting change,
net of income tax benefit 70,229 - -
Special charges 26,000 - 166,400
Depreciation 61,802 62,242 61,979
Deferred income taxes (5,465) 11,178 (15,732)
Changes in certain assets and liabilities,
excluding effects from special charges
- -Receivables (15,041) (26,405) (4,303)
- -Inventories 42,656 24,679 36,712
- -Accounts payable 5,016 1,153 (2,363)
- -Income taxes (8,298) (3,010) (10,623)
- -Other assets, payables and accruals 18,810 (6,538) (4,969)
Restructuring proceeds (payments) - net (17,439) (31,749) 43,885
Other 10,367 135 7,996
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 128,919 46,127 94,903
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (55,128) (52,278) (86,366)
Other 1,904 993 4,372
---------- ---------- ----------
NET CASH USED BY INVESTING ACTIVITIES (53,224) (51,285) (81,994)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends (19,258) (19,198) (19,190)
Increase (decrease) in notes payable (51,092) (30,193) 28,319
Repayments of long-term borrowings (15,261) (15,920) (18,058)
Long-term borrowings 8,523 75,744 837
Other 2,528 192 107
---------- ---------- ----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (74,560) 10,625 (7,985)
Effect of exchange rate changes on cash (6,870) (5,795) (3,791)
---------- ---------- ----------
INCREASE (DECREASE) IN CASH (5,735) (328) 1,133
Cash at beginning of year 26,269 26,597 25,464
---------- ---------- ----------
CASH AT END OF YEAR $ 20,534 $ 26,269 $ 26,597
========== ========== ==========
<FN>
The Notes to Financial Statements are an integral part of this statement.
-72-
STATEMENT OF SHAREHOLDERS' EQUITY
Years ended December 31, 1993, 1992 and 1991
(Dollars in thousands, except per share data)
Additional Currency
Common Paid-In Retained Translation
Stock Capital Earnings Adjustments
BALANCE AT JANUARY 1, 1991 $ 141,093 $ 266 $ 425,629 $ 31,722
Net loss for the year (184,079)
Cash dividends paid ($.68 a share) (19,190)
Issuance of 7,470 shares, net of
shares exchanged, under stock plans 37 70
Translation and hedge adjustments (20,901)
--------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1991 141,130 336 222,360 10,821
Net income for the year 14,442
Cash dividends paid ($.68 a share) (19,198)
Issuance of 11,656 shares, net of
shares exchanged, under stock plans 58 134
Translation and hedge adjustments (17,223)
--------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1992 141,188 470 217,604 (6,402)
Net loss for the year (59,718)
Cash dividends paid ($.68 a share) (19,258)
Issuance of 168,254 shares, net of
shares exchanged, under stock plans 841 1,687
Translation and hedge adjustments (23,180)
--------- --------- --------- ---------
BALANCE AT DECEMBER 31, 1993 $ 142,029 $ 2,157 $ 138,628 $ (29,582)
========= ========= ========= =========
<FN>
The Notes to Financial Statements are an integral part of this statement.
-73-
NOTES TO FINANCIAL STATEMENTS
December 31, 1993
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements include
the accounts of the Company and its subsidiaries. Affiliated companies in
which the Company's ownership is 20 to 50 percent are accounted for by the
equity method. All other minority investments are carried at cost. All
significant intercompany transactions and balances are eliminated upon
consolidation.
Inventories: Inventories are stated at the lower of cost or market.
Inventory costs for U.S. operations are determined principally by the last-in,
first-out (LIFO) method. The remaining inventory costs are determined
primarily by the first-in, first-out (FIFO) method.
Plants and Properties: Plants and properties are carried at cost.
Depreciation is generally computed by the straight-line method over the
estimated useful lives of the respective assets. In general, depreciation is
provided at annual rates of 2.5 to 3 percent on buildings and 8 to 10 percent
on equipment.
Accounting Changes: The Company adopted Statement of Financial Accounting
Standards No. 106, "Employers' Accounting for Postretirement Benefits Other
than Pensions," effective January 1, 1993. The effect of adopting this
standard is discussed in Note 8. The Company also adopted Statement of
Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits," effective January 1, 1993. This standard specifies
the use of accrual methods for recognition of postemployment benefit costs.
The effect of adopting this standard was not significant to the Company's
results of operations or consolidated financial position.
Income (Loss) per Share: Income (loss) per share is computed using the
average number of common shares outstanding, including common stock
equivalents. The assumed conversion of the Company's 6 percent convertible
debentures was not included in average shares outstanding in any of the years
presented because the effect of the inclusion would have been anti-dilutive.
NOTE 2 - ACCOUNTS RECEIVABLE
The Company has an agreement expiring on December 22, 1995, with a financial
institution to sell, on an ongoing basis, undivided percentage ownership
interests in a designated pool of U.S. trade accounts receivable, up to a
maximum of $75,000,000. Accounts receivable amounting to $75,000,000 and
$73,250,000 had been sold under this agreement at December 31, 1993 and 1992,
respectively. The Company has retained substantially the same risk of loss as
if these accounts receivable had not been sold.
-74-
NOTES TO FINANCIAL STATEMENTS
NOTE 3 - INVENTORIES
Inventory costs determined by the LIFO method accounted for approximately
51 percent and 48 percent of the total inventories at December 31, 1993 and
1992, respectively. If all inventories valued by the LIFO method had been
valued at current costs, these inventories would have been approximately
$32,829,000 and $41,985,000 higher than reported at December 31, 1993 and
1992, respectively.
During 1993, 1992 and 1991 certain inventories were reduced, resulting in the
liquidation of LIFO inventory quantities carried at lower costs prevailing in
prior years compared with current cost. The effect of these inventory
liquidations was to reduce cost of products sold in 1993, 1992 and 1991 by
$7,615,000, $6,590,000 and $5,740,000, respectively. This increased income
before cumulative effect of accounting change in 1993 and net income in 1992
by $4,653,000 ($.16 per share) and $4,086,000 ($.14 per share), respectively,
and decreased the net loss in 1991 by $3,800,000 ($.13 per share).
NOTE 4 - DEBT
Long-term debt consists of the following:
December 31
-----------------------
1993 1992
------ ------
(In thousands)
6% convertible subordinated debentures $100,000 $100,000
7.95% notes 75,000 75,000
9.55% senior sinking fund debentures 50,000 50,000
Industrial revenue bonds - interest rates from
4% to 11% - due at various dates to 2013 11,176 16,340
Other 14,295 6,303
-------- --------
250,471 247,643
Less current maturities 4,257 8,582
-------- --------
$246,214 $239,061
======== ========
The 6 percent convertible subordinated debentures are convertible into the
Company's $5 par value common stock at a conversion price of $52.50 per share.
The debentures mature on October 15, 2002, and are subject to earlier
redemption, at the option of the Company, in whole or in part, at specified
declining redemption prices plus accrued interest. The 7.95 percent notes
mature on May 1, 1997, are not redeemable prior to maturity and are not
subject to a sinking fund.
-75-
NOTES TO FINANCIAL STATEMENTS
NOTE 4 - DEBT (Continued)
The 9.55 percent senior sinking fund debentures mature on February 1, 2018,
and are subject to earlier redemption, at the option of the Company, in whole
or in part, at specified declining redemption prices plus accrued interest.
An annual mandatory sinking fund payment of $2,500,000 is required commencing
February 1, 1999. The Company may increase its sinking fund payment in any
year by an additional amount of up to $5,000,000.
Under terms of revolving credit agreements with several U.S. and non-U.S.
banks, the Company may borrow up to $155,000,000 until September 28, 1994.
The agreements may be extended for an additional 364-day period upon the
request of the Company and acceptance by the participating banks. Borrowings
under the credit line will, at the Company's option, bear interest at rates
derived from the lendors' certificate of deposit or Eurodollar rates plus a
margin based on independent ratings of the Company's outstanding, unsecured,
long-term public debt or other interest rates that may be agreed to by the
Company and lendors. The agreements specify fees on the entire commitment
ranging from .125 percent to .25 percent, depending on independent ratings of
the Company's outstanding, unsecured long-term public debt. These agreements
are maintained to support the Company's commercial paper borrowings and, to
the extent not so utilized, to provide domestic borrowings. At December 31,
1993, there were no borrowings under these agreements and no commercial paper
was outstanding. Covenants of the revolving credit agreements and certain
other debt instruments require the Company to maintain certain financial
ratios, including a limitation that the Company's debt-to-capitalization ratio
(exclusive of the effects of the change in accounting for postretirement
benefit obligations) not exceed a specified amount. At December 31, 1993,
under the most restrictive of these covenants, retained earnings of
$149,000,000 were available for the payment of cash dividends.
At December 31, 1993, the Company's long-term debt amounting to $250,471,000,
including current maturities, had an estimated fair value of $265,600,000.
Fair value for long-term debt at December 31, 1992, and fair value for notes
payable at December 31, 1993 and 1992, approximate the carrying amounts at
those dates.
Maturities of long-term debt in 1994 and in the four succeeding years are
$4,257,000, $11,484,000, $441,000, $75,486,000 and $536,000. Interest paid on
debt during 1993, 1992 and 1991 amounted to $24,994,000, $26,825,000 and
$27,500,000, respectively.
-76-
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - INCOME TAXES
The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (FAS 109), effective January 1, 1992. The
Company had previously been accounting for income taxes in accordance with
Statement of Financial Accounting Standards No. 96. Financial statements for
prior years were not restated, and there was no cumulative effect adjustment
upon adoption of FAS 109. FAS 109 specifies that deferred tax assets and
liabilities must be recognized for estimated future tax effects attributable
to temporary differences and loss carryforwards. This standard also specifies
that deferred tax assets are to be reduced by valuation allowances if it is
likely that some portion or all of the deferred tax assets will not be
realized. The Company recorded additional deferred tax assets with
corresponding valuation allowances upon adoption of FAS 109 as of January 1,
1992, amounting to $29,012,000, attributable to temporary differences and loss
carryforwards at certain non-U.S. locations.
-77-
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - INCOME TAXES (Continued)
The components of income (loss) before income taxes and cumulative effect of
accounting change consist of the following:
Year Ended December 31
--------------------------------
1993 1992 1991
------ ------ ------
(In thousands)
U.S. $ 8,147 $ 649 $(118,874)
Non-U.S. 8,964 23,393 (76,405)
-------- --------- ---------
$ 17,111 $ 24,042 $(195,279)
======== ========= =========
Income tax expense (benefit) consists of the following:
Year Ended December 31
--------------------------------
1993 1992 1991
------ ------ ------
(In thousands)
Current:
U.S. federal $ 4,841 $ (6,098) $ (3,461)
State and local 299 1,875 1,606
Non-U.S. 6,925 2,645 6,387
-------- --------- ---------
12,065 (1,578) 4,532
Deferred:
U.S. federal (2,050) 9,055 (4,264)
Non-U.S. (3,415) 2,123 (11,468)
-------- --------- ---------
(5,465) 11,178 (15,732)
-------- --------- ---------
$ 6,600 $ 9,600 $ (11,200)
======== ========= =========
-78-
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - INCOME TAXES (Continued)
The effect of temporary differences and loss carryforwards giving rise to
deferred tax assets and liabilities at December 31, 1993 and 1992, is as
follows:
1993 1992
------ ------
(In thousands)
Gross Deferred Tax Assets
Postretirement benefits other than pensions $ 45,540 $ -
Tax loss and tax credit carryforwards 44,712 27,903
Employee benefit accruals 9,315 9,503
Special charges 4,095 4,070
Assigned acquisition basis 3,144 3,406
Discontinued operations 3,612 3,621
Other 7,990 9,143
--------- ---------
Gross deferred tax assets 118,408 57,646
Gross Deferred Tax Liabilities
Depreciation (36,875) (39,172)
Pensions (5,746) (1,961)
Other (2,243) (2,127)
--------- ---------
Gross deferred tax liabilities (44,864) (43,260)
Valuation allowances (29,962) (30,441)
--------- ---------
Net deferred tax assets (liabilities) $ 43,582 $ (16,055)
========= =========
The components of deferred tax assets (liabilities) net of valuation
allowances were classified in the Statement of Financial Position at
December 31, 1993 and 1992, as follows:
1993 1992
---- ----
(In thousands)
Current assets $ 19,287 $ 20,421
Non-current assets 29,672 -
Non-current liabilities (5,377) (36,476)
-------- --------
Net deferred tax assets (liabilities) $ 43,582 $(16,055)
======== ========
Valuation allowances decreased $479,000 for the year ended December 31, 1993,
and increased $1,429,000 for the year ended December 31, 1992.
-79-
NOTES TO FINANCIAL STATEMENTS
NOTE 5 - INCOME TAXES (Continued)
Reconciliation of the statutory U.S. federal income tax rate to the effective
income tax rate before cumulative effect of accounting change follows:
Year Ended December 31
--------------------------------
1993 1992 1991
------ ------ ------
Statutory U.S. federal income tax rate 35.0% 34.0% (34.0)%
Increase (decrease) resulting from:
State and local taxes, net of federal
benefit 1.1 5.1 (.5)
Special charges - basis differences and
charges without tax benefits 15.6 - 23.0
Taxes in excess of (less than) the
U.S. tax rate on non-U.S. earnings (6.0) - 2.0
Rate differential on temporary
differences (6.5) - -
Other (.6) .8 3.8
---- ---- -----
Effective income tax rate 38.6% 39.9% (5.7)%
==== ==== =====
Adjustment of net deferred tax assets due to the change in the statutory U.S.
federal income tax rate reduced the provision for income taxes for the year
ended December 31, 1993, by approximately $1,000,000.
At December 31, 1993, the Company had net operating loss carryforwards of
$104,512,000 for income tax purposes. Loss carryforwards of approximately
$36,942,000 have no expiration dates and the remainder expire in years through
2008.
The Company does not provide deferred income taxes on undistributed earnings
of its non-U.S. subsidiaries which have been reinvested indefinitely.
Recorded undistributed earnings of non-U.S. subsidiaries for which U.S. income
taxes have not been provided approximated $76,000,000 at December 31, 1993.
If these earnings are remitted, certain countries will impose withholding
taxes that will be available for use as credits against any U.S. federal
income tax liability, subject to certain limitations. It is not practical to
estimate the amount of tax that would be payable should the Company remit
these earnings. However, withholding taxes of approximately $5,600,000 would
be payable if all recorded undistributed earnings were remitted.
Income taxes paid during 1993, 1992 and 1991 amounted to $20,363,000,
$1,432,000 and $15,155,000, respectively.
-80-
NOTES TO FINANCIAL STATEMENTS
NOTE 6 - ENVIRONMENTAL
The Company or certain of its subsidiaries have been named potentially
responsible parties (PRP) for site investigation and cleanup costs under the
Comprehensive Environmental Response, Compensation, and Liability Act
(Superfund) or similar state laws with respect to certain sites. While the
ultimate outcome of the PRP designations and other environmental matters
cannot now be predicted, the Company believes that costs, in excess of amounts
provided, arising out of these matters will not have a material adverse effect
on the Company's consolidated financial position.
NOTE 7 - RETIREMENT PLANS
The Company has adopted trusteed defined-contribution plans as the primary
retirement vehicle. Such plans now cover most full-time U.S. employees and
certain non-U.S. employees. Annual expense for the major defined-contribution
plans is based primarily upon employee participation and earnings of the
Company. The Company follows the policy of funding retirement plan
contributions as accrued.
The Company has trusteed defined-benefit plans covering a limited number of
full-time U.S. employees. The defined-benefit plans typically provide for
full vesting after five years of service, and benefits are principally based
on employee earnings and/or length of service. The Company's funding policy
for these plans is to make annual contributions at least sufficient to meet
minimum legal funding requirements. Various plans are also in effect for
subsidiaries operating outside the U.S., including trusteed or insured,
government-sponsored and unfunded plans.
Components of net periodic pension cost for the defined-benefit plans and the
total contributions charged to pension expense for the defined-contribution
plans are summarized below. Net periodic pension cost for the year ended
December 31, 1993, was reduced by settlement gains for certain non-U.S. plans
aggregating $1,400,000.
-81-
NOTES TO FINANCIAL STATEMENTS
NOTE 7 - RETIREMENT PLANS (Continued)
Year Ended December 31
--------------------------------
1993 1992 1991
------ ------ ------
(In thousands)
Defined-benefit plans:
Service cost - benefits earned during
the period $ 2,900 $ 3,200 $ 4,300
Interest cost on projected benefit
obligation 10,900 11,200 11,600
Actual return on plans' assets (23,500) (12,300) (17,600)
Net amortization and deferral 12,300 1,800 8,600
-------- -------- --------
Net pension cost - defined-benefit plans 2,600 3,900 6,900
Defined-contribution plans 19,400 14,600 9,400
Other non-U.S. retirement plans 700 300 700
-------- -------- --------
Total pension expense $ 22,700 $ 18,800 $ 17,000
======== ======== ========
The defined-benefit plans' assets consist of equity securities, corporate and
government bonds, and real estate. Following are assumptions used in
determining the projected benefit obligation and plans' assets at fair value.
The measurement dates for these plans were principally September 30.
1993 1992
------ ------
Weighted-average discount rate:
U.S. 7.25% 8.25%
Non-U.S. 7.6 8.3
Rates of increase in future compensation:
U.S. 4.0 4.0
Non-U.S. 3.0-5.5 4.5-6.5
Long-term rate of return 10.0 10.0
-82-
NOTES TO FINANCIAL STATEMENTS
NOTE 7 - RETIREMENT PLANS (Continued)
The following table sets forth the funded status and amounts recognized in the
Company's Statement of Financial Position at December 31, 1993 and 1992, for
defined-benefit plans.
December 31, 1993 December 31, 1992
----------------------- -----------------------
Assets Accumulated Assets Accumulated
Exceed Benefits Exceed Benefits
Accumulated Exceed Accumulated Exceed
Benefits Assets Benefits Assets
----------- ----------- ----------- -----------
(In thousands)
Actuarial present value
of benefit obligation:
Vested benefit obligation $107,800 $ 17,800 $ 99,800 $ 17,800
======== ======== ======== ========
Accumulated benefit obligation $110,800 $ 18,500 $103,200 $ 18,200
======== ======== ======== ========
Projected benefit obligation $128,200 $ 19,400 $124,500 $ 19,100
Plans' assets at fair value 136,300 900 129,500 800
-------- -------- -------- --------
Projected benefit obligation
(in excess of) less than
plans' assets 8,100 (18,500) 5,000 (18,300)
Unrecognized net gain (9,300) (1,200) (6,900) (2,100)
Unrecognized net
obligation less amortization 4,400 1,200 5,800 1,300
Unrecognized prior service cost 9,000 700 8,000 800
Adjustment required to
recognize minimum liability - (500) - (600)
-------- -------- -------- --------
Net pension asset (liability)
recognized in the Statement
of Financial Position $ 12,200 $(18,300) $ 11,900 $(18,900)
======== ======== ======== ========
-83-
NOTES TO FINANCIAL STATEMENTS
NOTE 8 - POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company and its subsidiaries provide access to benefits under death and
health care plans for most retired U.S. and certain retired non-U.S. employees
and eligible spouses (participants). Most retirees outside the U.S. are
covered by government-sponsored or retiree-funded programs. Benefits for U.S.
retirees are generally subject to participant contributions, deductibles, co-
payment provisions and certain other limitations. The Company has reserved
the right to change these benefit plans as necessary or appropriate, where
permitted by law. Effective January 1, 1992, changes were made to plans
covering certain retired participants, resulting in a realignment of benefits
and consolidation of certain plans. Effective January 1, 1993, further
changes were made to certain of these plans, which will affect participants
who retire after January 1, 1995.
The revised plans recognize that the Company, as the secondary provider to
Medicare, will contribute toward the cost of health care benefits for
participants who are age 65 or older and have at least 10 years of service at
retirement. The amount of the Company's contribution has been capped but
exceeds the cost of providing access to benefits at current costs. However,
as medical costs escalate, participants will share the cost of these benefits.
During a transition period, the Company will contribute toward the cost of
health care benefits for participants who retire prior to age 65, providing
they meet certain age and service requirements as of January 1, 1995. The
amount of the Company's contribution has been capped at the current cost of
providing these benefits. Those participants not meeting the age and service
requirements will have the option to purchase postretirement benefits at full
cost until becoming eligible for a Company contribution at age 65.
Effective January 1, 1993, the Company discontinued death benefits for most
future retirees. However, during a transition period, certain participants
who met specified age and service requirements as of January 1, 1993, will be
eligible for limited postretirement death benefits.
The Company adopted Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other than Pensions" (FAS
106), effective January 1, 1993. This standard specifies that the expected
cost of providing postretirement benefits other than pensions be accrued
during the eligible employees' active service periods. The Company elected to
recognize the transition obligation in the 1993 first quarter as a cumulative
effect to January 1, 1993, of a change in accounting principle resulting in a
non-cash charge to income of $113,229,000 ($70,229,000 after tax, or $2.47 per
share for the year). In addition to the cumulative effect of change in
accounting, the Company's 1993 postretirement benefit cost increased
$6,800,000 from what it would have been had the change in accounting not been
made, decreasing income before cumulative effect of accounting change for the
year ended December 31, 1993, by $4,200,000, or $.15 per share. The cost of
retiree health care and death benefits recognized as expense when claims were
incurred was $5,000,000 in each of the years 1992 and 1991.
-84-
NOTES TO FINANCIAL STATEMENTS
NOTE 8 - POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (Continued)
Postretirement benefit cost for the year ended December 31, 1993, is as
follows (in thousands):
Service cost - benefits earned during the period $ 3,121
Interest cost on accumulated postretirement
benefit obligation 9,093
---------
$ 12,214
=========
The Company's postretirement benefit plans are not funded. The status of the
plans at December 31, 1993, (based on measurement of the accumulated
postretirement benefit obligation at September 30) is as follows (in
thousands):
Accumulated postretirement benefit obligation:
Retirees $ 67,673
Plans' participants fully eligible to receive benefits 14,368
Other active plan participants 28,566
---------
110,607
Unrecognized prior service cost 3,859
Unrecognized net gain 5,592
--------
Accrued postretirement benefits other than pensions $120,058
========
The assumed discount rates used in determining the accumulated postretirement
benefit obligation at January 1, 1993, and December 31, 1993, were 8.25
percent and 7.25 percent, respectively. The assumed health care cost trend
rates used to measure the expected cost of benefits covered by these plans are
10.6 percent and 7.7 percent in 1994 for pre-age 65 and post-age 65
participants, respectively. These rates were assumed to decline gradually to
5.25 percent through the year 2008 and remain at that level thereafter. A
one-percentage- point increase in the assumed health care cost trend rates
would increase the annual postretirement benefit cost by $1,175,000 and the
accumulated postretirement obligation as of September 30, 1993, by $8,900,000.
-85-
NOTES TO FINANCIAL STATEMENTS
NOTE 9 - LEASES
The Company and its subsidiaries lease a variety of real property and
equipment used in operations. Rent expense under operating leases amounted to
approximately $22,470,000, $23,960,000 and $25,110,000 for 1993, 1992 and
1991, respectively.
Future minimum rental payments required under operating leases that have
initial or remaining non-cancelable lease terms in excess of one year as of
December 31, 1993, are as follows (in thousands):
1994 $ 15,600
1995 13,600
1996 10,500
1997 8,800
1998 7,500
Thereafter 32,600
--------
$ 88,600
========
NOTE 10 - FORWARD EXCHANGE CONTRACTS
The Company enters into forward exchange contracts to hedge the exposed net
asset positions of certain non-U.S. subsidiaries. Gains and losses on these
contracts are deferred in the currency translation adjustments component of
shareholders' equity. The Company also enters into forward exchange contracts
to hedge against rate fluctuations on future purchases denominated in
currencies other than the functional currencies of the originating
subsidiaries. Gains and losses on these contracts are included in income in
the periods the exchange rates change. The forward exchange contracts are
written with major international financial institutions. The Company's risk
in these transactions is limited to the cost of replacing the contracts at
current market rates in the event of non-performance by the counterparties.
The Company believes its risk of loss is remote, and any losses incurred would
not be material. At December 31, 1993, the Company had approximately
$49,000,000 of forward exchange contracts outstanding, of which $42,000,000
relates to hedges of exposed net assets.
NOTE 11 - SPECIAL CHARGES AND OTHER TRANSACTIONS
In 1993, the Company recorded a special charge of $26,000,000 for severance
and other personnel-related costs associated with worldwide work force
reductions, primarily focusing on the Company's industrial operations in
Europe. This special charge increased the net loss for the year ended
December 31, 1993, by $18,200,000, or $.64 per share. Also in 1993, the
Company recorded a charge in Other - net of $7,000,000 ($4,700,000 after tax,
or $.17 per share) to provide for unsuccessfully contested prior years' value-
added taxes in Brazil.
-86-
NOTES TO FINANCIAL STATEMENTS
NOTE 11 - SPECIAL CHARGES AND OTHER TRANSACTIONS - Continued
In 1991, the Company recorded a special charge of $166,400,000 for the write-
off of certain intangibles and other charges. The write-off of intangibles,
primarily goodwill, amounted to $105,300,000. Other charges totaling
$61,100,000 consisted of write-downs to anticipated sales prices for certain
properties included in the 1989 provision for restructuring, as well as
provisions for new initiatives for additional facility closures and personnel
reductions. The special charge increased the net loss for 1991 by
$156,400,000, or $5.54 per share.
Also in 1991, the Company recognized a gain in Other - net of $2,300,000
($1,400,000 after tax, or $.05 per share) from settlement of outstanding
litigation associated with the purchase and installation of automated factory
equipment at one of the Company's production facilities.
NOTE 12 - CAPITAL STOCK AND EMPLOYEE STOCK OPTIONS
The Company has 4,000,000 shares of serial preferred stock authorized, of
which no shares were outstanding at December 31, 1993 or 1992. At December
31, 1993, the Company had 3,596,554 shares of common stock reserved for
issuance in connection with its stock option plans and conversion of its 6
percent convertible subordinated debentures.
The Company has rights outstanding as set forth in a Rights Agreement, whereby
holders of common stock have one right for each share of common stock
outstanding. When exercisable, each right entitles its holder to buy one one-
hundredth of a new preferred share for $125. If a person or group acquires 20
percent or more of the Company's outstanding common stock without complying
with the Ohio Control Share Acquisition Act, or engages in certain self-
dealing transactions, holders of rights will be entitled to purchase (a)
common stock of the Company at one-half the market price, or (b) shares of an
acquiring company at one-half the market price, depending upon the
circumstances of the transaction. The Company may redeem the rights at a
price of $.01 per right at any time prior to the rights becoming exercisable.
The rights will expire in 1999.
Key employees of the Company and its subsidiaries are eligible to participate
in the TRINOVA Corporation 1987 Stock Option Plan (the "Stock Option Plan").
Under the Stock Option Plan, options for the Company's common stock are
granted to participants as approved by the Company's Board of Directors (the
"Board"). Options are granted at prices not less than the fair market value
at date of grant, become exercisable after one year, expire 10 years after
date of grant and may be exercised without limitation as to number in any one
year. Options granted may be incentive stock options or non-qualified
options. In addition, the Board may grant options which do not require the
payment of any option price, but which call for the transfer of shares to the
optionee subject to forfeiture if conditions prescribed by the Board are not
-87-
NOTES TO FINANCIAL STATEMENTS
NOTE 12 - CAPITAL STOCK AND EMPLOYEE STOCK OPTIONS (Continued)
satisfied. Options are subject to adjustment upon the occurrence of certain
events, including stock splits and stock dividends. Stock appreciation rights
("SARs") may be granted in connection with options. No SARs were outstanding
at December 31, 1993.
At December 31, 1993, options were outstanding with expiration dates ranging
to May 27, 2003, to purchase 1,271,892 shares of common stock at a weighted-
average exercise price of $27.34 per share.
The following table summarizes stock options for the years 1993 and 1992.
1993 1992
-------------------------- --------------------------
Option Range of Option Range of
Shares Option Prices Shares Option Prices
----------- ------------- ----------- -------------
Outstanding at
January 1 1,546,739 $14.17 to $32.81 1,428,039 $10.21 to $32.81
Granted 278,000 29.38 289,000 22.63 to 26.25
Exercised (468,897) 14.17 to 29.25 (17,650) 10.21 to 22.50
Expired or canceled (83,950) 22.50 to 29.38 (152,650) 10.21 to 32.81
Outstanding at
December 31 1,271,892 14.17 to 32.81 1,546,739 14.17 to 32.81
Exercisable at
December 31 1,007,892 14.17 to 32.81 1,262,739 14.17 to 32.81
Available for future
grant at December 31 419,900 613,950
NOTE 13 - BUSINESS SEGMENTS
TRINOVA is a world leader in the manufacture and distribution of engineered
components and systems for industry, sold through its companies, Aeroquip and
Vickers, to the industrial, automotive, and aerospace and defense markets.
The industrial business serves original equipment and aftermarket customers in
various worldwide markets including construction, mining, logging and farm
equipment; machine tool; process industries; electrical machinery; air
conditioning/refrigeration; appliances and communications equipment;
electronics; lift truck; material handling; plant maintenance; and housing and
commercial construction.
The automotive business serves worldwide automobile, light truck and van
manufacturers.
-88-
NOTES TO FINANCIAL STATEMENTS
NOTE 13 - BUSINESS SEGMENTS (Continued)
The aerospace & defense business serves original equipment and aftermarket
customers in worldwide commercial aerospace and military markets including
commercial aircraft, air defense, cargo handling, combat and support vehicles,
commuter aircraft, engines, marine, military aircraft, military weaponry,
missiles and naval machinery.
Products include fluid connectors, pumps, hydraulic and electric motors,
electric drives, cylinders, hydraulic and electronic controls, filters and
fluid-evaluation services, and a wide variety of custom-engineered molded
automotive and industrial plastic products.
Operating income (loss) is net sales less operating expenses. Operating
expenses include cost of products sold, selling and general administrative
expenses, and engineering, research and development expenses. For 1993,
operating expenses include a special charge amounting to $26,000,000,
allocated $19,200,000 to industrial, $2,600,000 to automotive, $3,600,000 to
aerospace & defense and $600,000 to corporate. For 1991, operating expenses
include a special charge amounting to $166,400,000, allocated $88,100,000 to
industrial, $47,800,000 to automotive and $30,500,000 to aerospace & defense.
Identifiable assets by business segment include all assets directly identified
with those operations. Corporate assets consist of cash, receivables,
properties, deferred income taxes and deferred charges.
-89-
NOTES TO FINANCIAL STATEMENTS
NOTE 13 - BUSINESS SEGMENTS (Continued)
The following data relate to business segments:
Depreciation
Operating Identi- and
Income fiable Amortization Capital
Net Sales (Loss) Assets Expense Expenditures
----------- ----------- ----------- ----------- -----------
(In thousands)
1993
Industrial $ 864,590 $ 17,118 $ 477,182 $ 31,860 $ 29,115
Automotive 452,637 45,724 203,725 17,547 14,705
Aerospace & Defense 326,614 26,016 189,050 11,785 10,724
---------- ---------- ---------- ---------- ----------
$1,643,841 88,858 869,957 61,192 54,544
==========
Corporate (19,966) 64,655 1,826 584
Investments in
affiliates - 37,589 - -
---------- ---------- ---------- ----------
$ 68,892 $ 972,201 $ 63,018 $ 55,128
========== ========== ========== ==========
1992
Industrial $ 902,794 $ 16,733 $ 551,367 $ 33,145 $ 30,374
Automotive 415,387 32,291 193,549 15,555 12,178
Aerospace & Defense 377,331 29,756 199,063 12,910 8,915
---------- ---------- ---------- ---------- ----------
$1,695,512 78,780 943,979 61,610 51,467
==========
Corporate (19,800) 35,891 1,591 811
Investments in
affiliates - 37,519 - -
---------- ---------- ---------- ----------
$ 58,980 $1,017,389 $ 63,201 $ 52,278
========== ========== ========== ==========
1991
Industrial $ 883,962 $ (96,313) $ 579,706 $ 33,248 $ 61,956
Automotive 358,637 (43,822) 196,787 16,471 12,133
Aerospace & Defense 438,613 4,524 229,525 16,314 11,872
---------- ---------- ---------- ---------- ----------
$1,681,212 (135,611) 1,006,018 66,033 85,961
==========
Corporate (20,265) 28,017 1,736 405
Investments in
affiliates - 36,316 - -
---------- ---------- ---------- ----------
$ (155,876) $1,070,351 $ 67,769 $ 86,366
========== ========== ========== ==========
-90-
NOTES TO FINANCIAL STATEMENTS
NOTE 14 - NON-U.S. OPERATIONS
U.S. sales include export sales to unaffiliated non-U.S. customers of
$81,650,000, $71,707,000 and $65,917,000 in 1993, 1992 and 1991, respectively.
Currency exchange losses charged to non-operating income amounted to
$16,398,000, $8,442,000 and $10,172,000 in 1993, 1992 and 1991, respectively.
The exchange losses principally result from translation of financial
statements for the Company's operations in Brazil and are due, in part, to
funds which have been invested. The currency exchange losses were partially
offset by investment income.
The following summary of financial data pertains to the Company and its non-
U.S. operations. The geographic groupings of non-U.S. operations have been
based on similarities of business environments and geographic proximity.
United Elimina- Consoli-
States Europe Other tions dated
--------- --------- --------- --------- ---------
(In thousands)
1993
Net sales $1,041,016 $ 486,829 $ 115,996 $ - $1,643,841
Operating income (loss)(a) 55,051 (876) 14,717 - 68,892
Identifiable assets 683,478 325,757 69,339 143,962 934,612
Total assets 721,480 325,757 69,339 144,375 972,201
Total liabilities 683,449 103,406 (1,139) 66,747 718,969
(a) Includes special
charge amounting to: (10,775) (15,125) (100) - (26,000)
1992
Net sales $1,009,052 $ 578,464 $ 107,996 $ - $1,695,512
Operating income 33,822 15,399 9,759 - 58,980
Identifiable assets 658,879 368,117 73,933 121,061 979,868
Total assets 697,257 368,117 73,933 121,918 1,017,389
Total liabilities 506,900 219,247 2,069 63,687 664,529
1991
Net sales $1,041,718 $ 526,213 $ 113,281 $ - $1,681,212
Operating income
(loss) (b) (67,164) (92,228) 3,516 - (155,876)
Identifiable assets 665,293 401,614 78,812 111,684 1,034,035
Total assets 703,340 401,614 78,812 113,415 1,070,351
Total liabilities 487,685 259,477 12,889 64,347 695,704
(b) Includes special
charge amounting to: (79,654) (82,482) (4,264) - (166,400)
-91-
NOTES TO FINANCIAL STATEMENTS
NOTE 15 - OTHER INFORMATION
December 31
-----------------------
1993 1992
---------- ----------
(In thousands)
Receivables
Receivables $ 213,877 $ 216,555
Less allowance for doubtful accounts 13,537 13,705
--------- ---------
$ 200,340 $ 202,850
========= =========
Inventories
In-process and finished products $ 172,964 $ 217,865
Raw materials and manufacturing supplies 39,382 50,163
--------- ---------
$ 212,346 $ 268,028
========= =========
Other Current Assets
Deferred income taxes $ 19,287 $ 20,421
Prepaid expenses and other current assets 34,724 29,167
--------- ---------
$ 54,011 $ 49,588
========= =========
Plants and Properties - at Cost
Land and improvements $ 20,729 $ 22,644
Buildings 182,054 190,458
Machinery and equipment 591,219 582,977
Construction in progress 32,098 30,677
--------- ---------
$ 826,100 $ 826,756
========= =========
-92-
NOTES TO FINANCIAL STATEMENTS
NOTE 15 - OTHER INFORMATION - Continued
December 31
-----------------------
1993 1992
---------- ----------
(In thousands)
Other Assets
Investments in and advances to affiliates $ 37,589 $ 37,519
Deferred income taxes 29,672 -
Receivables, deposits and other assets 21,291 17,381
Other 9,599 10,211
--------- ---------
$ 98,151 $ 65,111
========= =========
Notes Payable
Short-term notes payable to banks $ 60,539 $ 73,853
Commercial paper - 35,696
--------- ---------
$ 60,539 $ 109,549
========= =========
Other Accrued Liabilities
Employees' compensation and amounts
withheld therefrom $ 51,130 $ 49,770
Restructuring 9,192 8,246
Taxes, other than income taxes 11,671 8,429
Other accrued liabilities 79,476 75,462
--------- ---------
$ 151,469 $ 141,907
========= =========
-93-
INVESTOR INFORMATION
Stock Exchanges
TRINOVA's common stock is traded on the New York, Midwest and Pacific Stock
Exchanges, and on the London and Frankfurt Stock Exchanges. TRINOVA's NYSE
ticker symbol is TNV.
TRINOVA's 6 percent convertible subordinated debentures are listed on the
Luxembourg Stock Exchange.
Stock Ownership
On December 31, 1993, there were 12,164 record holders of TRINOVA's common
stock. Although exact information is unavailable, TRINOVA estimates there are
approximately 9,500 additional beneficial owners, based upon the 1993 proxy
solicitation.
Dividend Information
Cash dividends have been paid without interruption on common stock since 1933.
The payment of dividends is subject to restrictions described in Note 4 of
Notes to Financial Statements.
Quarterly Common Stock Information
1993 1992
Quarter Ended High Low Close High Low Close
March 31 28.25 21. 26.50 25.25 19.25 23.25
June 30 31.88 24.50 31.38 26.75 21.13 22.75
September 30 31.50 26.88 26.88 25.25 21.63 22.63
December 31 33.75 25.50 31.38 22.88 20.25 21.38
Dividend Payments per Share of Common Stock
1993 1992
March $ .17 $ .17
June .17 .17
September .17 .17
December .17 .17
$ .68 $ .68