FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1996.
COMMISSION FILE NUMBER 1-4003
DRESSER INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-0813641
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
POST OFFICE BOX 718 75221 (P.O. Box)
2001 ROSS AVENUE, DALLAS, TEXAS 75201
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (214) 740-6000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
Common Stock, Par Value New York Stock Exchange, Inc.
25 CENTS Per Share Pacific Stock Exchange Incorporated
Baroid Corporation 8% Guaranteed New York Stock Exchange, Inc.
Senior Notes due 2003
Preferred Stock Purchase Rights New York Stock Exchange, Inc.
Pacific Stock Exchange Incorporated
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. / /
The aggregate market value of the voting stock (based on the closing price on
the New York Stock Exchange as of January 3, 1997) held by non-affiliates of
the registrant was approximately $5,576 million.
As of January 3, 1997, there were 175,819,288 shares of Dresser Industries,
Inc. Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Sections of Registrant's Notice of 1997 Annual Meeting of Shareholders and
Proxy Statement (Part III).
PART I
ITEM 1. BUSINESS OF DRESSER.
Dresser Industries, Inc., together with its subsidiaries (hereinafter
"Dresser" or "Registrant" or the "Company") is a supplier of highly engineered
products, technical services and project management for hydrocarbon energy-
related activities that are primarily utilized in oil and gas drilling,
production and transmission; gas distribution; power generation; gas
processing; petroleum refining and marketing; and petrochemical production.
Demand for Dresser's products and services is generally determined by global
demand for energy and oil and gas by-products. Dresser was incorporated under
the laws of Delaware in 1956 as a successor to a Pennsylvania corporation
organized in 1938 by the consolidation of S. R. Dresser Manufacturing Company
and Clark Bros. Company. Both were carrying on businesses founded in 1880.
Dresser's executive offices are located at 2001 Ross Avenue, Dallas, Texas
75201 (telephone number 214/740-6000).
For the fiscal year ended October 31, 1996, consolidated revenues of
Registrant amounted to $6,561.5 million. A majority of such revenues was
derived from the sale of products and services to energy-oriented industries,
including oil and gas exploration, drilling and production, gas transmission
and distribution; petroleum and chemical processing; production of electricity;
and marketing of petroleum products.
Registrant's operations are divided into three industry segments:
Petroleum Products and Services; Engineering Services and Energy Equipment.
The Information by Industry Segment is included in Note N to Consolidated
Financial Statements on page 56 and in Management's Discussion and Analysis on
pages 23-26. This information includes sales and service revenues, operating
profit or loss and identifiable assets attributable to each of Registrant's
business segments for each of the past three fiscal years. This information
should be read in conjunction with the consolidated financial statements, notes
and accountant's report appearing in Item 8 of this report.
Effective February 29, 1996, Dresser entered into an agreement to form a
joint venture with Shaw Industries Ltd. ("Shaw"). Dresser contributed its
Bredero Price assets and Shaw contributed its Shaw Pipe Protection assets both
on a world wide basis. Dresser has an option to purchase Shaw's interest in
the joint venture at the end of the second and fourth years of the joint
venture. Shaw also has the right to require Dresser to purchase Shaw's
interest in the joint venture under the same provisions.
In August 1996, Dresser issued $300,000,000 in 7.60% unsecured debentures
due in 2096. A portion of the proceeds of the debt issuance were used to
repurchase shares of Dresser's common stock and to reduce short term
borrowings.
PETROLEUM PRODUCTS AND SERVICES SEGMENT
Dresser's Petroleum Products and Services segment supplies products,
services and project management for oil and gas exploration, drilling,
production and transmission activities both onshore and offshore. Its products
and services include project management and integrated well services, drilling
fluids systems, drill bits, measurement-while-drilling services, directional
drilling services, completion and production tools, production valves and
pumps, meters and measuring equipment, engineering, procurement, installation
and construction contractor services for subsea and onshore projects, remotely
operated vehicles, seabed equipment, flexible flowlines, riser systems and pipe
coating, laying and burying services. Demand for these products and services
is directly affected by energy prices and drilling activity.
2
DRILLING AND PRODUCTION OPERATIONS
DRILLING FLUIDS
Baroid Drilling Fluids provides oil and gas producers specially formulated
fluids used in the drilling process to lubricate and cool the drill bit, seal
porous well formations, remove rock cuttings and control downhole pressure. It
also provides completion fluids and wellsite services. Total revenues for
Drilling Fluids were $680.6 in 1996, $532.0 in 1995 and $554.0 million in 1994.
Revenues include $147.0 million in 1994 for M-I Drilling Fluids Company which
was sold effective February 28, 1994.
DRILLING SERVICES AND PRODUCTS
Sperry-Sun Drilling Services supplies oil and gas producers with
directional and measurement-while-drilling (MWD) services and directional
drilling equipment including mud motors, downhole steering and surveying
instruments, and geological and drilling data monitoring.
DRILL BITS
Security DBS produces and markets to oil and gas producers a complete line
of roller cone, polycrystalline diamond cutter (PDC) and natural diamond drill
bits for use in drilling oil and gas wells and provides coring and hole
enlargement services. Security DBS also makes a variety of downhole oilfield
drilling tools and certain types of blasthole and pilot bits for the mining
market.
COMPLETION AND PRODUCTION TOOLS
Dresser Oil Tools consists of Axelson surface safety equipment, downhole
rod pumps and sucker rods as well as a broad range of Guiberson/AVA's
completion and production products, including sub-surface safety valves, gravel
pack, downhole hydraulic pumps, tubing converged perforating equipment,
production packers and swab cups. These products are used in the production of
oil and gas.
Dresser Wheatley Division manufactures and sells a line of oil and gas
production products, including Wheatley valves, Wheatley Gaso plunger and
piston pumps, Omega well-servicing pumps, and Clif Mock meters, measurement and
sampling equipment.
PROJECT MANAGEMENT
Dresser Drilling and Production Services was formed to provide oil and gas
producers with project management capabilities and the integrated services and
products required to drill and complete wells more efficiently. Its
activities include well planning, project management and the procurement of
wellsite drilling, completion and production services and equipment.
KELLOGG OIL & GAS SERVICES
Kellogg Oil & Gas Services was formed in 1995 to provide subsea field design
and development, underwater engineering, repair and construction services,
including remotely operated vehicles, diving services and pipe laying and pipe
coating services as well as to act as an engineering, procurement, installation
and construction contractor for all aspects of subsea and onshore oil and gas
projects. It offers products and services through the following operations.
3
PIPE COATING PRODUCTS AND SERVICES
The Bredero-Shaw joint venture provides a broad range of speciality pipe
coating, insulation and related services to protect pipelines above ground,
below ground and offshore in major oil and gas producing areas of the world.
UNDERWATER EQUIPMENT AND SERVICES
Sub Sea International provides production companies and offshore rig
operators with diving and underwater engineering services. Sub Sea equipment
is used to inspect, construct, maintain and repair offshore drilling rigs and
platforms, underwater pipelines and other offshore oil and gas facilities. Sub
Sea designs, manufactures and deploys remotely operated vehicles (ROVs) which
are often used to perform these services. Wellstream designs, manufactures
and markets non-bonded flexible pipe for the oil and gas industry. Products
including flowlines, jumpers, service lines, and static and dynamic risers for
both subsea and topside applications.
ENGINEERING SERVICES SEGMENT
The M.W. Kellogg Company, provides engineering, construction and related
services primarily to the hydrocarbon process industries. Kellogg provides
its own proprietary technologies and the advanced technologies of others to
facilitate the environmentally acceptable conversion of raw hydrocarbon and
other chemicals into value-added end products. Kellogg's services include the
development of processes, engineering design, construction and procurement for
energy-related complexes in the U.S. and international regions. Kellogg
participates in projects involving liquefied natural gas (LNG) plants and
receiving terminals, refining and petrochemical activities, ammonia/fertilizer
facilities and the retrofitting of all kinds of energy-related complexes for
environmental purposes. Revenues for The M.W. Kellogg Company were $1,621.9
million, $1,457.6 million and $1,265.2 million for 1996, 1995 and 1994,
respectively.
ENERGY EQUIPMENT SEGMENT
Dresser's Energy Equipment segment designs, manufactures and markets
highly engineered products and systems for oil and gas producers, transporters,
processors, distributors and users throughout the world. Products and systems
of this segment include compressors, turbines, generators, electric motors,
pumps, engines and power systems, valves and controls, instruments, meters and
pipe couplings, blowers and gasoline dispensing systems. Demand for these
products is directly affected by global economic activity, which influences
demand for transportation fuels, petrochemicals, plastics, fertilizers,
chemicals and by-products of oil and gas.
COMPRESSION AND PUMPING
Dresser-Rand Company, a New York partnership in which Dresser has 51%
interest, manufactures turbines, compressors, electric motors, generators and
turbine-generator sets utilized in gas processing, refining and petrochemical
activities. Dresser-Rand also is a producer of gas injection compression
systems that enhance oil production and a manufacturer of powerful pipeline
boosters for the transmission of natural gas.
The Consolidated Statements of Earnings for 1996, 1995 and 1994 include
$1,177.8 million, $1,138.3 million and $1,234.5 million, respectively, of
Dresser-Rand's revenues.
Ingersoll-Dresser Pump Company, a partnership in which Dresser has 49%
interest, develops, manufactures and markets a broad range of pump products and
services on a global basis through local facilities
4
in more than 40 countries. The company's pumps are used for critical and
non-critical service in a wide variety of applications associated with power
generation, chemical and petrochemical processing, oil and gas production,
water distribution and water and waste water treatment. The product line
includes heavy-duty process, submersible, vertical turbine, standard
end-suction, horizontal split-case, centrifugal, and multi-stage pumps.
Dresser's wholly owned Mono Pump operations produce progressing cavity
pumps for handling viscous fluids. These pumps have hydrocarbon energy-related
applications and are also utilized by the waste water, mining, paper, food and
chemical industries.
MEASUREMENT
Dresser's Wayne Division manufactures and markets fully integrated vehicle
fueling systems for the global retail petroleum industry. Wayne's technology
systems include gasoline pumps and dispensers, management control devices and
point-of-sale credit and debit card machines.
Dresser's Instrument Division designs and manufactures mechanical and
electronic instruments for pressure and temperature measurement and control.
These products are utilized by the oil, gas and power industries and a variety
of customers in industrial, commercial, automotive and medical markets.
DMD products include gas meters, pipe fittings, couplings and repair
devices utilized by the gas and water utilities and other industrial markets.
FLOW CONTROL
Energy Valve Division designs, manufactures and markets valves (ball,
gate, check, butterfly, plug and specialty valves such as rising stem, top
entry, retractable seat ball valves or full port metal seated plug valves),
actuators, chemical injection pumps, regulators and surge relievers of its
Grove, TK, Tom Wheatley, Texsteam, Ledeen and Wheatley Gaso operations. This
comprehensive product range is primarily used in oil and gas exploration and
transmission, onshore and offshore, in power generation, in water desalination
and transmission and in segments of the oil and gas process industry.
The Valve and Controls Division includes Dresser's Masoneilan and
Industrial Valve operations. Masoneilan produces automated process control
valves, instruments, level instruments and regulators. Industrial Valve
manufactures Consolidated, Dewrance and Hancock safety, safety relief and line
valves. Both the Masoneilan and Industrial Valve operations primarily serve
process and power markets.
POWER SYSTEMS
Dresser's Waukesha Engine Division produces spark-ignited and gas fueled
engines and power systems. The division's products are used throughout the
world in the gathering and storage of natural gas and as drivers for crude oil
pumping and prime movers for electrical power generation and cogeneration.
Dresser's Roots Division offers a full line of low to medium pressure air
and gas handling blowers along with vacuum pumps. These include rotary lobe and
screw-type positive displacement products and several turbo machinery
(centrifugal) lines. Roots products are used in natural gas processing plants,
refineries, chemical plants, flue gas desulphurization facilities, vacuum swing
absorption applications, waste water treatment plants and many other industrial
applications.
5
BACKLOG
The backlog of unfilled orders at October 31, 1996, 1995 and 1994 is
included in Management's Discussion and Analysis on pages 25-26.
SALES AND DISTRIBUTION
Registrant's products and services are marketed through various channels.
In the United States, sales are generally made through a group or division
sales organization or through independent distributors. Sales in Canada are
usually effected through a division of Canadian subsidiaries. Sales in other
countries are made directly by a United States division or subsidiary, through
foreign subsidiaries or affiliates, and through distributor arrangements or
with the assistance of independent sales agents.
COMPETITION AND ECONOMIC CONDITIONS
Dresser's products are sold in highly competitive markets, and its sales
and earnings can be affected by changes in competitive prices, fluctuations in
the level of activity in major markets, or general economic conditions.
FOREIGN OPERATIONS
Registrant maintains manufacturing, marketing or service facilities
serving more than 60 foreign countries. Global distribution of products and
services is accomplished through more than 455 subsidiary and affiliated
companies engaged in various production, manufacturing, service, and marketing
functions, and through foreign representatives serving the principal market
areas of the world.
The Information by Geographic Area is included in Management's Discussion
and Analysis on page 24.
Registrant's foreign operations are subject to the usual risks which may
affect such operations. Such risks include unsettled political conditions in
certain areas, exposure to possible expropriation or other governmental
actions, operating in highly inflationary environments, and exchange control
and currency problems.
RESEARCH, DEVELOPMENT AND PATENTS
Registrant's divisions, subsidiaries and affiliates conduct research and
development activities in laboratories and test facilities within their
particular fields for the purposes of improving existing products and
developing new ones to meet the needs of their customers. In addition,
research and development programs are directed toward development of new
products and services for diversification or expansion. For the fiscal years
ended October 31, 1996, 1995 and 1994, Registrant spent $110.6 million, $96.5
million and $102.5 million, respectively, for research and development
activities.
At December 1, 1996, Registrant and its subsidiaries and affiliates owned
1,790 patents and had pending 1,129 patent applications, covering various
products and processes. They also were licensed under patents owned by others.
Registrant does not consider that any patent or group of patents relating to a
particular product or process is of material importance when judged from the
standpoint of Registrant's total business.
6
EMPLOYEES
As of October 31, 1996, Registrant had approximately 19,200 employees in
the United States (an increase of approximately 2% from October 31, 1995), of
whom approximately 5,800 were members of 12 unions represented by 22 bargaining
units. As of the same date, Registrant had approximately 12,900 employees at
foreign locations of whom approximately 2,500 were members of unions. During
fiscal 1996, Registrant experienced no contract negotiation strikes in the
United States. Relations between Registrant and its employees are generally
considered to be satisfactory.
EXECUTIVE OFFICERS OF REGISTRANT
The names and ages of all executive officers of Registrant, all positions
and offices with Registrant presently held by each person named and their
business experience during the last five years are stated below:
PRINCIPAL OCCUPATION DURING
NAME, AGE AND POSITION PAST FIVE YEARS
---------------------- ---------------------------
William E. Bradford (62) Chairman of the Board of Registrant
Chairman of the Board, Chief since December 1996, President March
Executive Officer and Director 1992 - December 1996, Chief Executive
Officer since November 1995, Chief
Operating Officer March 1992 -
November 1995; President and Chief
Executive Officer of Dresser-Rand
Company February 1988 - March 1992;
Senior Vice President - Operations of
Registrant March 1984 - March 1992.
Donald C. Vaughn (60) President and Chief Operating Officer
President, Chief Operating Officer of Registrant since December 1996,
and Director Executive Vice President November 1995
- December 1996, Senior Vice President
- Operations January 1992 - November
1995; Chairman, President and Chief
Executive Officer of M. W. Kellogg,
Inc. June 1995 - June 1996; Chairman
and Chief Executive Officer of The M.
W. Kellogg Company September 1986 -
June 1996, President November 1983 -
June 1995.
James L. Bryan (60) Senior Vice President - Operations of
Senior Vice President - Operations Registrant since January 1994, Vice
President - Operations May 1990 -
January 1994.
Clint E. Ables (57) Vice President and General Counsel of
Vice President and General Counsel Registrant since October 1993, Vice
President - Corporate Development
November 1992 - October 1993, Senior
Counsel - Corporate Ventures July 1986
- November 1992.
Paul M. Bryant (50) Vice President - Human Resources of
Vice President - Human Resources Registrant since May 1993; Vice
President - Human Resources of
Dresser-Rand Company January 1987 -
May 1993.
7
PRINCIPAL OCCUPATION DURING
NAME, AGE AND POSITION PAST FIVE YEARS
---------------------- ---------------------------
George A. Helland (59) Vice President of Registrant since
Vice President March 1993; Deputy Assistant Secretary
for Export Assistance, United States
Department of Energy, September 1990 -
January 1993; Principal, Innova
Partners, Inc., January 1988 -
September 1990.
Ardon B. Judd, Jr. (60) Vice President - Washington Counsel of
Vice President - Washington Registrant since September 1986.
Counsel
George H. Juetten (49) Vice President and Chief Financial
Vice President and Chief Officer of Registrant since December
Financial Officer 1996, Vice President - Controller May
1993 - December 1996; Audit Partner,
Price Waterhouse LLP, independent
public accountants, July 1980 - April
1993.
Michael J. Kammerer (56) Vice President - Operations of
Vice President - Operations Registrant since July 1996,
President Valve and Controls Division
since 1988.
Robert J. Menerey (52) Vice President - Operations of
Vice President - Operations Registrant since July 1996; President
of Baroid Drilling Fluids, Inc. since
May 1991, Vice President August 1990 -
April 1991.
Rebecca R. Morris (51) Vice President - Corporate Counsel of
Vice President - Corporate Counsel Registrant since January 1994,
and Secretary Secretary since November 1990,
Corporate Counsel June 1987 - January
1994.
Patrick M. Murray (54) Vice President - Operations of
Vice President - Operations Registrant since July 1996; President
of Sperry-Sun Drilling Services, Inc.
since 1988.
David R. Smith (50) Vice President - Tax of Registrant
Vice President - Tax since January 1994, Director of Tax
October 1987 - January 1994.
A. Jack Stanley (54) Vice President - Operations of
Vice President - Operations Registrant since July 1996; Chairman,
President and Chief Executive Officer
of M.W. Kellogg, Inc. since July 1996;
Chairman and Chief Executive Officer
of The M.W. Kellogg Company since June
1996, President since June 1995, Chief
Operating Officer June 1995 - June
1996, Executive Vice President March
1991 - June 1995, Various positions of
increasing responsibility since 1975.
8
G. Phillip Tevis (54) Vice President - Operations of
Vice President - Operations Registrant since July 1996, President
Waukesha Engine Division June 1994 -
July 1995; Senior Vice President,
Technology and Venture Operations of
The M.W. Kellogg Company 1992 - June
1994, Vice President - Sales March
1989 - 1992.
Kenneth J. Kotara (43) Controller of Registrant since
Controller December 1996, Assistant Controller
January 1994 - December 1996;
Controller of Baroid Corporation March
1989 - January 1994.
Mark Rothleitner (38) Treasurer of Registrant since December
Treasurer 1996; Director International Treasury
then Assistant Treasurer -
International of the Black & Decker
Corporation January 1991 - December
1996; Various positions of increasing
responsibility culminating in Manager
of International Treasury with Allied
Signal Inc. June 1986 - December 1990.
OFFICER EMPLOYED BY JOINT VENTURE COMPANY
PRINCIPAL OCCUPATION DURING
NAME, AGE AND POSITION PAST FIVE YEARS
---------------------- ---------------------------
Ben R. Stuart (61) Chairman of Dresser-Rand Company since
Senior Vice President - January 1997, President and Chief
Operations Executive Officer March 1992 -
December 1996; Senior Vice President -
Operations of Registrant since March
1992, Vice President - Operations
August 1988 - March 1992.
All officers are elected annually by the Board of Directors at a meeting
following the Annual Meeting of Shareholders. The officers serve at the
pleasure of the Board of Directors and can be removed at any time by the Board.
ITEM 2. PROPERTIES
Registrant, together with its subsidiaries and affiliates, has more than 90
manufacturing plants, ranging in size from approximately 3,000 square feet to
in excess of 3,200,000 square feet and totaling more than 18 million square
feet, located in the United States, Canada, and various other foreign
countries. The majority of the manufacturing sites are owned in fee. In
addition, sales offices, warehouses, service centers and stock points are
maintained, almost all in leased space, in the United States, Canada and
certain other foreign countries. The properties are believed to be generally
well maintained, adequate for the purposes for which they are used, and capable
of supporting a higher level of market demand.
During fiscal 1996 Baroid Drilling Fluids, Inc. had 21 grinding and/or other
facilities for beneficiating mineral ores, containing approximately 3,400 acres
in plant site property.
9
The following are the locations of the principal facilities of Registrant
and its majority owned joint ventures for each industry segment as of October
31, 1996:
APPROXIMATE
FLOOR AREA
INDUSTRY SEGMENT AND LOCATION PRODUCT AREA (SQUARE FEET)
----------------------------- ------------ -------------
Petroleum Products and Services
Aberdeen, Scotland (Underwater Services) 118,000
Belle Chasse, Louisiana (Underwater Services) 86,000
Panama City, Florida (Underwater Services) 110,000 (1)
Dallas, Texas (Drill Bits) 294,000
Dallas, Texas (Completion & Production Tools) 278,500
Longview, Texas (Completion & Production Tools) 235,000
Colorado Springs, Colorado (Completion & Production Tools) 97,000
Tulsa, Oklahoma (Completion & Production Tools) 64,000
Kuantan, Malaysia (Pipe Coatings) 852,831 (1)
Satfship Chon Buri, Thailand (Pipe Coatings) 3,249,005 (1)
Zhanjiang, China (Pipe Coatings) 116,251 (1)
Layyah, Sharjah, U.A.E. (Pipe Coatings) 1,233,070 (1)
Warri, Nigeria (Pipe Coatings) 1,568,173 (1)
Harvoy, Louisiana (Pipe Coatings) 96,750 (1)
Pearland, Texas (Pipe Coatings) 157,262 (1)
Fontane, California (Pipe Coatings) 65,000
Fort Collins, Colorado (Pipe Coatings) 67,173
Morrisville, Pennsylvania (Pipe Coatings) 83,748
Engineering Services
Houston, Texas (Engineering & Construction) 416,240 (1)
Sudbury, England (Engineering & Construction) 163,860
Energy Equipment
Manchester, England (Compression & Pumping) 242,000
Victoria, Australia (Compression & Pumping) 145,000
Connersville, Indiana (Power Systems) 376,790
Huddersfield, England (Power Systems) 120,729
Waukesha, Wisconsin (Power Systems) 774,739 (1)
Appingedam, Netherlands (Power Systems) 136,935
Painted Post, New York (Compressors) 978,000
Broken Arrow, Oklahoma (Compressors) 129,000
Wythenshawe, England (Compressors) 321,000
Olean, New York (Compressors) 909,000
LeHavre, France (Compressors) 538,000
Kongsberg, Norway (Compressors) 140,000 (1)
Wellsville, New York (Steam Turbines) 404,000
Minneapolis, Minnesota (Motors and Generators) 350,000
Skelmersdale, England (Control Products) 154,000 (1)
10
APPROXIMATE
FLOOR AREA
INDUSTRY SEGMENT AND LOCATION PRODUCT AREA (SQUARE FEET)
----------------------------- ------------ -------------
Energy Equipment (con't.)
Avon, Massachusetts (Control Products) 93,000
Montebello, California (Control Products) 60,248
Conde, France (Control Products) 147,363
Naples, Italy (Control Products) 63,852
Alexandria, Louisiana (Control Products) 247,000
Dumfermline, Scotland
(Pitreavie) (Control Products) 170,801
Houston, Texas (Control Products) 156,000
Stafford, Texas (Control Products) 110,000
Voghera, Italy (Control Products) 417,610
Stratford, Connecticut (Measurement) 335,000
Berea, Kentucky (Measurement) 105,000
Jacarei, Brazil (Measurement) 80,699
Bradford, Pennsylvania (Measurement) 428,000
Houston, Texas (Measurement) 110,000 (1)
Salisbury, Maryland (Measurement) 343,572 (1)
Austin, Texas (Measurement) 103,491
Malmo, Sweden (Measurement) 305,987
Einbeck, Germany (Measurement) 86,511
Rio de Janeiro, Brazil (Measurement) 129,166
Bonnyrigg, Scotland (Measurement) 63,000
______________
(1) all or a portion of these facilities are leased.
Baroid Drilling Fluids, Inc. has mineral rights to proven and prospective
reserves of barite and bentonite. Such rights included leaseholds and mining
claims and property owned in fee either directly by Baroid Drilling Fluids,
Inc. or by its wholly owned subsidiary Bentonite Corporation. The principal
deposit of barite is located in Nevada, with deposits also located in Missouri
and Georgia. Reserves of bentonite are located in Wyoming, Montana and South
Dakota. Based on the number of tons of each of the above minerals consumed in
fiscal 1996, Baroid Drilling Fluids, Inc. estimates its reserves, which it
considers to be proven, to be sufficient for operation for a period of 9 years
or more.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in various legal proceedings. Information called
for by this Item is included in Note J to Consolidated Financial Statements on
pages 47-50.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's security holders
during the quarter ended October 31, 1996.
11
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Registrant is listed on the New York and Pacific Stock Exchanges. The
stock symbol is DI. The quarterly market prices for Registrant's Common
Stock, traded principally on the New York Stock Exchange, were as follows for
the two most recent fiscal years:
FIRST SECOND THIRD FOURTH YEAR
-------------------------------------------------
1996 High....... $ 26.00 32.875 32.00 33.875 33.875
1996 Low........ $ 20.75 25.25 26.125 26.875 20.75
1995 High....... $ 21.875 22.125 24.00 25.125 25.125
1995 Low........ $ 18.50 19.375 21.625 19.125 18.50
Dividends on Registrant's Common Stock are declared by the Board of
Directors and normally paid to shareholders as of the record date during the
third week of March, June, September and December.
The cash dividends paid per share of common stock for the 1995 and 1994
fiscal years were:
FIRST SECOND THIRD FOURTH YEAR
---------------------------------------------
1996............ $ .17 .17 .17 .17 .68
1995............ $ .17 .17 .17 .17 .68
As of January 3, 1997, there were approximately 19,950 shareholders of
record of the Registrant's Common Stock.
12
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and notes thereto
included in this report.
1996 1995 1994 1993 1992
-------- -------- -------- ------- --------
(IN MILLIONS, EXCEPT PER SHARE DATA)
Revenues $6,561.5 $5,628.7 $5,330.7 $5,202.3 $4,723.3
Earnings from
continuing
operations before
extraordinary items
and accounting
changes:
Earnings 257.5 213.1 361.8* 133.6 97.7
Per share 1.44 1.17 1.98* .74 .55
Earnings per share
before special items 1.44 1.17 1.09 1.17 .83
Total assets 5,150.2 4,707.4 4,323.6 4,445.6 3,901.9
Long-term debt 756.3 459.3 460.6 492.2 148.5
Cash dividends
declared 122.1 124.3 116.5 100.2 96.3
Per share** .68 .68 .66 .60 .60
*Includes $146.5 million or $.80 per share from sale of interest in Western
Atlas International, Inc.
**Dresser historical dividends.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
MERGERS
On January 21, 1994, Dresser merged with Baroid Corporation (Baroid). On
August 5, 1994, Dresser merged with Wheatley TXT Corp. (Wheatley). The
"Company," as used in this discussion, refers to Dresser and its subsidiaries
including Baroid and Wheatley. The mergers have been accounted for as poolings
of interests. Financial data, statistical data, financial statements and
discussion of financial information included in this report reflect the
financial position and results of operations as if the mergers had occurred as
of the beginning of the first year presented.
RESULTS OF OPERATIONS
Results of operations for the three years ended October 31, 1996 are summarized
as follows (in millions, except per share amounts):
1996 1995 1994
-------- -------- --------
Earnings before special items $ 257.5 $ 213.1 $ 197.8
Special items - - 17.5
-------- -------- --------
Earnings from operations 257.5 213.1 215.3
Gain on sale of interest in Western Atlas - - 146.5
-------- -------- --------
Earnings before accounting change 257.5 213.1 361.8
Accounting change for postemployment benefits - (16.0) -
-------- -------- --------
Net earnings $ 257.5 $ 197.1 $ 361.8
-------- -------- --------
-------- -------- --------
Earnings per share
Earnings before special items $ 1.44 $ 1.17 $ 1.09
Special items - - .09
-------- -------- --------
Earnings from operations 1.44 1.17 1.18
Gain on sale of interest in Western Atlas - - .80
-------- -------- --------
Earnings before accounting change 1.44 1.17 1.98
Accounting change for postemployment benefits - (.09) -
-------- -------- --------
Net earnings $ 1.44 $ 1.08 $ 1.98
-------- -------- --------
-------- -------- --------
14
RESULTS OF OPERATIONS (CONTINUED)
The Company recorded a charge of $16.0 million (net of tax of $9.0 million) or
$.09 per share in the first quarter of 1995 for the cumulative effect of
changing its accounting for postemployment benefits as required by Statement of
Financial Accounting Standards No. 112, EMPLOYERS' ACCOUNTING FOR
POSTEMPLOYMENT BENEFITS. (See Note A to Consolidated Financial Statements.)
The Company sold its 29.5% interest in Western Atlas International, Inc. in
January 1994 and recognized a pre-tax gain of $275.7 million. (See Note B to
Consolidated Financial Statements.)
During 1994, the Company entered into a number of unusual or nonrecurring
transactions, including mergers, divestitures and restructuring of existing
operations. The impact of these transactions is described below. The
discussions of results of operations will focus on earnings excluding these
transactions.
AFTER-TAX PER
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) AMOUNT SHARE
--------- ------
Parker & Parsley litigation - insurance recovery/settlement $ 11.6 $ .06
Wheatley merger expenses (7.9) (.04)
Restructuring and other special charges (10.0) (.05)
Earnings of M-I Drilling Fluids 6.3 .03
Tax benefits from sale of affiliate 17.5 .09
------ -----
Total $ 17.5 $ .09
------ -----
------ -----
In April 1994, the Company recognized an $18.4 million pre-tax gain from the
settlement of a coverage dispute with certain insurance carriers regarding the
Parker & Parsley litigation which was settled in 1993. (See Note L to
Consolidated Financial Statements.)
The Company recorded pre-tax expenses of $10.7 million in August 1994 related
to the Wheatley merger. (See Notes A and L to Consolidated Financial
Statements.)
The Company recorded pre-tax expenses of $15.7 million in 1994 for
restructuring costs and other special items. (See Note L to Consolidated
Financial Statements.)
The Company sold its investment in M-I Drilling Fluids Company effective
February 28, 1994. (See Note B to Consolidated Financial Statements.)
The Company sold its interest in IRI International Corporation, an
unconsolidated affiliate, in September 1994 and was able to recognize $17.5
million of tax benefits applicable to previously unrecognized losses. (See
Note B to Consolidated Financial Statements.)
15
RESULTS OF OPERATIONS (CONTINUED)
GENERAL OPERATING ENVIRONMENT
Dresser is a fully integrated manufacturer and supplier of products and
services to customers in the oil and gas industry. The Company produces a
broad range of highly engineered products for hydrocarbon exploration,
drilling, production, transmission and processing activities. Dresser also
provides engineering, procurement and project management services for all
aspects of the energy business. Operations are organized into three segments:
Petroleum Products and Services, Engineering Services and Energy Equipment.
Descriptions of the segments are contained in Note N to Consolidated Financial
Statements.
The business environment for Petroleum Products and Services is directly
affected by prices for oil and natural gas, drilling activity and exploration
and production spending by oil and natural gas producers. In 1996, the average
posted price of West Texas Intermediate crude oil rose approximately 19% to
$20.77 per barrel while the average spot price of natural gas increased 53% to
$2.30 per million BTUs.
Overall, the rig count rose 4.5% in fiscal 1996. The rig count in North
America was up 4.5%, primarily reflecting an increase in wells drilled for
natural gas, while the rig count in international markets increased 4.6%,
reflecting higher activity levels in major producing regions like Latin
America, the Middle East, Africa, the North Sea and the Gulf of Mexico. The
global offshore rig count was up 11.1%.
The business environment for Engineering Services and Energy Equipment is
effected by numerous factors, including global and regional economic growth
rates, the prices of oil and natural gas, the supply and demand for products
created from hydrocarbons including gasoline, jet fuel, ethylene,
petrochemicals, chemicals, fertilizers and power. These factors determine the
capital spending budgets, both upstream and downstream, of integrated oil and
gas companies around the world.
According to published sources, economic growth is expected to continue at an
average of 6% for developing countries and 2.5% for developed countries.
Developing country growth expectations are due largely to steadily increasing
population and greater industrialization that will also generate rising per
capita energy demand. Increasing consumption of oil and natural gas is
expected to be driven by rising demand for refined products, petrochemicals,
fertilizers and power.
Capital and maintenance spending for downstream hydrocarbon processing projects
is expected to increase to $71.5 billion in 1997, up 6.7% from a projected
$67.0 billion in 1996. Recent project award activity has increased for
petrochemical/chemical projects. Global project activity in 1996 hit its
highest level (over 3,000 projects) since 1982, led by international project
activity, particularly in the Far East and Europe.
16
RESULTS OF OPERATIONS (CONTINUED)
CONSOLIDATED RESULTS
1996 COMPARED TO 1995
Earnings per share and net earnings of $1.44 and $257.5 million for 1996 were
up 23% and 21%, respectively, from $1.17 and $213.1 million in 1995 before an
accounting change. The earnings improvement reflects the substantial growth
seen in the global market for oil and gas and their by-products.
Revenues for 1996 were $6.6 billion, an increase of 17% over the $5.6 billion
in 1995. Segment operating profit was $589.5 million in 1996 compared to
$473.1 million in 1995 for a 25% increase.
All three industry segments had higher revenues and operating profit. Within
the segments, all operations had higher revenues with virtually all operations
showing improvement. See the Industry Segment Analysis for discussion of
results by operation.
General corporate expenses of $83.6 million were $8.4 million higher than in
1995. The higher level of expenses in 1996 was primarily due to (i) foreign
exchange losses on devaluations of the Venezuelan currency in December 1995 and
April 1996 and (ii) costs of hedging the Company's investment in an Italian
subsidiary. Higher benefit-related expenses in 1996 also contributed to the
increase.
Interest expense increased to $60.5 million in 1996 from $47.4 million in 1995
due to an increase in total borrowings and to the higher interest rate on new
long-term debt versus the previously issued commercial paper. Interest income
decreased to $12.7 million in 1996 from $21.6 million in 1995 due to a lower
level of short-term investment of excess funds.
The effective income tax rate for 1996 was 34% compared to 32% for 1995. The
increased rate reflects a lower level of utilization of foreign net operating
losses.
1995 COMPARED TO 1994
Net earnings in 1995 before the accounting change were $213.1 million ($1.17
per share) compared to $197.8 million ($1.09 per share) in 1994 excluding the
effect of the special items discussed above. This represents a 7% earnings per
share increase.
Revenues of $5.6 billion were up $298.0 million or 6% over 1994. Segment
operating profit of $473.1 million increased $12.9 million or 3% from 1994.
The Petroleum Products and Services Segment and the Energy Equipment Segment
were up while the Engineering Services Segment was down versus 1994.
17
RESULTS OF OPERATIONS (CONTINUED)
CONSOLIDATED RESULTS (CONTINUED)
1995 COMPARED TO 1994 (continued)
See the Industry Segment Analysis for discussion of changes in revenues and
operating profit.
General corporate expenses of $75.2 million were $4.3 million higher than in
1994. The increase was primarily due to 1994 gains on sales of interests in
M-I Drilling Fluids Company and IRI International Corporation. Net interest
expense increased $7.6 million to $25.8 million primarily because of lower
interest income due to a lower level of short-term investments.
The effective income tax rate for 1995 was 32% compared to an overall rate of
36% in 1994. In 1994, a lower tax basis on the investment in Western Atlas
International, Inc., compared to the book basis, resulted in a tax charge of
$129.3 million or 47% on the book gain on sale. The additional taxes on the
gain on sale of Western Atlas were somewhat offset by the $17.5 million of
special tax benefits recognized upon sale of investment in IRI International
Corporation. Excluding these two transactions, the effective rate for 1994
was 33%.
Minority interest provision was $19.8 million, down $13.1 million from 1994.
The decrease was primarily attributable to the 49% share in lower earnings of
Dresser-Rand.
INDUSTRY SEGMENT ANALYSIS
See details of financial information by Industry Segment and Geographic Area on
pages 23 through 26.
PETROLEUM PRODUCTS AND SERVICES
DRILLING AND PRODUCTION OPERATIONS
Revenues of $1.53 billion in 1996 were 20% higher than 1995, and operating
profit of $197.4 million was up 37% over the prior year. Sales to customers
outside of the U.S. accounted for 62% of total sales, slightly higher than
1995, with strong growth in Latin America, Europe and Africa.
Particularly strong gains were experienced by Baroid Drilling Fluids, Sperry-
Sun Drilling Services and Security DBS. Baroid's revenues increased 28% over
1995 as it capitalized on the growth of higher quality wells being drilled,
particularly offshore deepwater wells. Market share gains in the Gulf of
Mexico, Latin America and West Africa also contributed to the exceptional
growth over 1995. Sperry-Sun revenues were 20% higher than 1995 with key
growth areas including the Gulf of Mexico, the North Sea and Latin America.
Increases in capital spending for measurement-while-drilling tools and a
continuation of high utilization rates were seen during the year. Security DBS
revenues and operating profit increased in 1996 over 1995 as the result of
increased sales of higher margin fixed cutter bits, combined with cost
improvements obtained from manufacturing efficiencies in its U.S. plants. For
total drilling and production operations, the ratio of operating profit to
sales was 12.9% compared to 11.3% last year.
18
RESULTS OF OPERATIONS (CONTINUED)
INDUSTRY SEGMENT ANALYSIS (CONTINUED)
PETROLEUM PRODUCTS AND SERVICES
DRILLING AND PRODUCTION OPERATIONS (CONTINUED)
Revenues of $1.28 billion in 1995 were $99.6 million or 8% higher than 1994
levels. Excluding the revenues of M-I Drilling Fluids, which was sold in
February 1994, revenues increased $246.6 million or 24%. Operating profit of
$143.9 million was $46.8 million higher than 1994. Excluding the impact of M-I
Drilling Fluids, operating profit increased $56.7 million or 65% over 1994.
The operating margin improved to 11.3% of sales from 8.2% in 1994 or 8.4%
excluding M-I. All geographic sectors improved in 1995, in particular Latin
America and the North Sea where drilling activity was greater than in the prior
fiscal year.
Although each operating division improved, the majority of the gains in sales
and operating profit were attributable to Baroid Drilling Fluids and Sperry-Sun
Drilling Services. Baroid revenues increased 31% due to higher activity in
major producing regions including the North Sea, Latin America and the Gulf of
Mexico. In addition, new market penetration of products developed within the
last five years, including PETROFREE and DRIL-N drilling systems, contributed
to the performance. Sperry-Sun's revenues improved 29%, reflecting increasing
demand, coupled with higher system capacity and utilization rates, for
measurement-while-drilling and directional drilling services in most major
markets. In addition, new products including Slim Phase 4, Lateral Tie Back
System (LTBS) and Underbalanced Drilling contributed to the improvement.
Revenues for Security DBS rose 4%, reflecting an increase in international
sales of roller-cone drill bits. Operating profit improved significantly,
reflecting successful restructuring and manufacturing cycle-time reductions.
Dresser Oil Tools benefited from strong sales in Canada and international
markets as well as cost savings from the consolidation of manufacturing and
sales and distribution operations. New product introductions also contributed
to the improvement. Despite a weak Canadian market, the Dresser Wheatley
Division benefited from the marketing of additional Dresser products.
KELLOGG OIL AND GAS SERVICES
Revenues of $626.7 million and operating profit of $33.9 million were 76% and
87% higher, respectively, in 1996 compared to 1995. The Bredero-Shaw
pipecoating operations saw substantial increases during the year, primarily
from a large contract in the Norwegian sector of the North Sea that was awarded
in the latter part of 1995. Activity also increased in U.S. markets as the
result of an acquisition made in 1995. Although Sub Sea revenues grew 18% in
1996 compared to 1995, earnings declined as the result of poor lay barge
utilization and day rates in the Gulf of Mexico and soft market conditions in
the Middle East.
19
RESULTS OF OPERATIONS (CONTINUED)
INDUSTRY SEGMENT ANALYSIS (CONTINUED)
PETROLEUM PRODUCTS AND SERVICES (CONTINUED)
KELLOGG OIL AND GAS SERVICES (CONTINUED)
Wellstream, acquired in mid-1995, was profitable in its first full year of
operation and is seeing improved demand for its flexible pipe and riser
systems. To meet this demand, a new plant is being constructed in the U.K.
which will enable Wellstream to expand its product lines and double its
existing capacity.
Revenues and operating profit declined $14.5 million and $36.2 million,
respectively, in 1995 compared to 1994. A cyclical downturn in the Bredero
Price pipecoating business in the North Sea and the Far East resulted in
significantly lower revenues and operating profit in 1995. The Sub Sea
underwater engineering operations had higher revenues and operating profit in
1995 as the result of improvements in both the North Sea and Gulf of Mexico,
combined with the impact of acquisitions made during 1995.
ENGINEERING SERVICES
M. W. Kellogg revenues of $1.62 billion were 11% higher than 1995, and
operating profit of $98.1 million was 24% higher. These gains resulted from
higher activity on projects in the U.K., Uzbekistan, Africa and the U.S. The
successful completion of significant milestones on several large contracts also
contributed to the higher profit levels. A number of significant projects
commenced during the year for LNG, fertilizer and petrochemical production.
M. W. Kellogg revenues of $1.46 billion in 1995 rose 15% from $1.27 billion in
1994. Major improvement in activity occurred in North America, Latin America
and Europe. These gains were partially offset by lower activity in the Far
East, reflecting the wind-down of projects in Malaysia, Africa and the Middle
East. Petrochemicals and gas processing activity accounted for much of the
pick up in activity in the United States and Europe.
M. W. Kellogg operating profit in 1995 declined 7% due principally to lower
equity income of $9.7 million from M.W. Kellogg's investment in Bufete
Industriale, S.A. de C.V., a major Mexican engineering and construction firm.
Operating profit for 1995 also included a gain of $7.5 million from the sale of
one-third of its investment in Bufete, and the 1994 results included a gain of
$11.0 million associated with an initial public offering of Bufete. Excluding
the impact of Bufete, operating profit in 1995 increased 10%.
Backlog of $2.9 billion at October 31, 1996 was more than double the year-ago
level of $1.4 billion, reflecting increases in LNG, fertilizer, ethylene and
enhanced oil recovery project bookings.
20
RESULTS OF OPERATIONS (CONTINUED)
INDUSTRY SEGMENT ANALYSIS (CONTINUED)
ENERGY EQUIPMENT
COMPRESSION AND PUMPING
Compression and Pumping revenues of $1.27 billion were 4% higher than 1995.
Operating profit of $101.7 million was 23% higher than the prior year.
Dresser-Rand's earnings of $71.5 million were up 14% from last year on
approximately 3% higher sales. The increase in earnings reflects higher
complete machine, aftermarket and contract compression sales, and reduced sales
of lower margin purchased equipment. Lower manufacturing overhead and selling,
general and administrative expenses also aided the earnings improvement.
Revenues and operating profit both fell approximately 6% in 1995 compared to
1994. Dresser-Rand revenues declined $96.2 million or 8% to $1.14 billion as a
cyclical downturn in the compression industry resulted in lower volumes of
complete units and repair parts during the first half of the year and from the
impact of a major multi-year gas compression project in Venezuela that was
completed early in fiscal 1995. In 1995, 60% of Dresser-Rand's revenues were
from markets outside of North America. An increase in revenues in the United
States and the Far East was more than offset by declines attributable to the
factors noted above. Dresser-Rand operating profit of $62.8 million was down
$8.6 million from 1994. All markets were affected by margin pressure on
complete-unit sales, especially the Far East. Cost reduction programs and the
benefits associated with higher levels of production during the year partially
offset the decline in margin.
Earnings from the 49%-owned Ingersoll-Dresser Pump (IDP) joint venture were
$22.1 million in 1996, $13.2 million in 1995 and $8.8 million in 1994. The
improvement in 1996 over 1995 and 1994 was driven by margin improvements and
continuing improvements to its cost structure since the formation of the joint
venture.
MEASUREMENT
Revenues of $637.0 million in 1996 were $18.3 million or 3% higher than in
1995; however, 1996 operating profit of $55.7 million was $15.7 million or
22% lower than in 1995. The operating profit decrease occurred in the Wayne
(fuel dispensing) Division due to pricing pressures in the U.S. and increased
software development costs. The improvement in the Instrument Division
primarily reflected the contribution of an acquisition in early 1996.
Measurement operation revenues of $618.7 million in 1995 were $52.2 million or
9% higher than 1994 levels. However, operating profit was essentially
unchanged at $71.4 million compared to $72.0 million in 1994. Although the
Wayne Division enjoyed improved sales in Europe and South America, margins were
negatively impacted by cost and pricing pressures in the U.S. market, resulting
in lower overall operating profit in 1995. The Instrument Division reported a
13% revenue increase and a slight improvement in operating profit. Earnings
from higher activity in South America and new product introductions were offset
by a decline in Europe and the effect of increased spending in the marketing
and research and development areas.
21
RESULTS OF OPERATIONS (CONTINUED)
INDUSTRY SEGMENT ANALYSIS (CONTINUED)
FLOW CONTROL
In 1996, revenues of $611.1 million and operating profit of $64.6 million
were up from 1995 by $152.7 million or 33% and $22.8 million or 55%,
respectively. The increases were primarily attributable to the inclusion in
the Energy Valve Division of a full year's results for Grove S.p.A., which
was acquired in June 1995, as well as the beneficial impact of higher
activity in its U.S. operations. The Valve and Controls Division showed
improvement with volume growth associated with increased activity in the
refining, chemical and power sectors as well as the ongoing benefits
associated with the restructuring of its European operations.
Flow Control 1995 revenues of $458.4 million were $53.4 million or 13% higher
than 1994. Operating profit of $41.8 million was $12.5 million or 43% higher
than 1994. The acquisition of Grove S.p.A. in June 1995 was the major reason
for the year-to-year increase in revenues and operating profit. The Valve and
Controls Division performed ahead of 1994 as a result of increased project-
related orders in 1995 and the cost savings realized from the 1994
restructuring in Europe.
POWER SYSTEMS
Revenues of $306.0 million in 1996 showed a $29.1 million or 11% increase
over 1995 while 1996 operating profit of $38.1 million increased $2.2 million
or 6% over 1995. Both the Waukesha and Roots divisions had volume increases.
Roots contributed most of the operating profit improvement. Price
discounting and early-year softness in gas compression markets pressured
Waukesha's operating profit in the first half of the year. A pick up in U.S.
and international activity contributed to a modest recovery in the second
half of fiscal 1996.
Power Systems operations operating profit improved 5% in 1995 on a 12% revenue
increase. Waukesha Division revenues of $205.3 million increased $24.4 million
or 14%, with a slight improvement in operating profit. The sales improvement
was primarily in the lower margin power generation market, and higher new
product development costs also impacted operating profit in 1995. The Roots
Division saw operating profit improve $1.8 million on essentially flat sales of
$82.6 million. The earnings improvement was primarily the result of a major
reengineering effort to improve its manufacturing cost structure during the
year.
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION
The Company's liquidity and overall financial condition remained strong at
October 31, 1996. During the year, the Company used approximately $263.2
million more cash than the operations generated. Major expenditures included
$335.4 million for capital expenditures, $122.1 million for dividends, $228.1
million to repurchase shares and $32.2 million for business acquisitions. In
addition, $108.2 million of cash was used to finance working capital primarily
for increases in accounts receivable and inventories partially offset by an
increase in contract advances. The Company increased its net borrowings by
$251.4 million during the year by the issuance in August of $300.0 million
(face value) 100 year notes along with a $45.6 million reduction in short-term
debt. Shareholders' equity decreased $74.6 million as dividends and stock
repurchases more than offset earnings.
22
LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL CONDITION (CONTINUED)
Total debt was $842.3 million as of October 31, 1996, compared to $590.9
million at October 31, 1995. Total debt was 35% of total book capitalization
as of October 31, 1996, compared to 26% as of October 31, 1995. Net debt to
net book capitalization was 28% at October 31, 1996 compared to 17% at October
31, 1995. Net debt was 10% of market capitalization at October 31, 1996,
versus 8% at October 31, 1995.
Management believes that the cash on hand of $232.4 million and $612.3 million
of existing unused lines of credit, combined with cash that will be provided by
future operations, will be adequate to finance known requirements. The
Company's long-term debt is rated A by Standard and Poors, A1 by Moody's and A+
by Duff and Phelps. The three agencies give their highest ratings to the
Company's commercial paper. Management believes that the Company's strong
financial condition and favorable credit ratings will allow the Company to
borrow additional funds should the need arise.
LEGAL AND ENVIRONMENTAL MATTERS
The Company is currently involved in a number of lawsuits. See Note J to
Consolidated Financial Statements for information on these lawsuits and
evaluation of the Company's exposure. The Company has been identified as a
potentially responsible party in a number of Superfund sites. Note J to
Consolidated Financial Statements includes a review and evaluation of the
claims.
GEOGRAPHIC AREA AND INDUSTRY SEGMENT FINANCIAL INFORMATION -
COVERED BY REPORT OF INDEPENDENT ACCOUNTANTS
The following financial information by Geographic Area and Industry Segment
for the years ended October 31, 1996, 1995 and 1994 is an integral part of
Note N to Consolidated Financial Statements.
Total revenues include sales and services to unaffiliated customers.
Intersegment and intergeographic area sales and services are accounted for at
prices which approximate arm's length market prices. The intersegment and
intergeographic area revenues are eliminated. Revenues also include royalties
and share of earnings or losses of unconsolidated affiliates.
Operating profit consists of total revenues less total operating expenses and
includes the Company's share of earnings or losses from unconsolidated
affiliates. General corporate expenses, amortization of acquisition
intangibles, interest income and expense, and other income and expenses not
identifiable with a segment have been excluded in determining operating profit.
Identifiable assets are those assets that are identified with particular
segments. Corporate assets are principally cash and cash equivalents and
deferred income tax benefits.
23
GEOGRAPHIC AREA FINANCIAL INFORMATION-
COVERED BY REPORT OF INDEPENDENT ACCOUNTANTS
(IN MILLIONS OF DOLLARS)
Mid East/
United Latin Far East
States Canada America Europe & Africa Eliminations Total
------- ------ ------- ------- --------- ------------ -------
1996
Revenues by point of
origin 3,736.3 221.9 482.4 1,854.5 655.4 (389.0) 6,561.5
Revenues by point of
destination 2,407.8 268.0 829.9 1,658.0 1,397.8 - 6,561.5
U.S. exports - 82.1 350.0 193.6 546.9 - 1,172.6
Operating profit 216.0 44.9 71.5 141.4 115.7 - 589.5
Identifiable assets 2,151.4 114.8 223.4 1,065.2 329.8 (125.8) 3,758.8
1995
Revenues by point of
origin 3,288.0 192.9 560.4 1,558.8 558.5 (529.9) 5,628.7
Revenues by point of
destination 2,058.8 215.3 811.9 1,342.1 1,200.6 - 5,628.7
U.S. exports - 63.2 333.5 98.8 472.6 - 968.1
Operating profit 173.7 37.8 74.1 70.0 117.5 - 473.1
Identifiable assets 1,906.4 90.0 246.6 996.7 303.5 (231.0) 3,312.2
1994
Revenues by point of
origin 3,061.8 242.5 409.8 1,399.7 753.4 (536.5) 5,330.7
Revenues by point of
destination 1,801.4 261.9 722.3 1,069.2 1,475.9 - 5,330.7
U.S. exports - 52.5 291.1 82.5 512.6 - 938.7
Operating profit 170.8 31.2 53.4 58.0 146.8 - 460.2
Identifiable assets 1,656.3 85.6 182.0 832.0 260.9 (128.7) 2,888.1
24
INDUSTRY SEGMENT FINANCIAL INFORMATION-
COVERED BY REPORT OF INDEPENDENT ACCOUNTANTS
(IN MILLIONS OF DOLLARS)
Petroleum Products & Services Engineering Services
--------------------------------------- --------------------
Drilling & Kellogg
Production Oil & Gas M. W. Kellogg
Operations Services Total Operations
---------- --------- ------- -------------
1996
Revenues 1,533.8 626.7 2,160.5 1,621.9
------- ----- ------- -------
Operating profit 197.4 33.9 231.3 98.1
Amortization of acquisition
intangibles (6.4) (5.5) (11.9) (10.2)
General corporate expenses - - - -
Interest expense, net - - - -
------- ----- ------- -------
Earnings before taxes 191.0 28.4 219.4 87.9
------- ----- ------- -------
Identifiable assets 1,087.5 577.1 1,664.6 229.6
Acquisition intangibles 142.8 196.1 338.9 216.5
Corporate assets - - - -
------- ----- ------- -------
Total assets 1,230.3 773.2 2,003.5 446.1
------- ----- ------- -------
Capital expenditures 125.8 49.8 175.6 35.1
Depreciation & amortization 74.6 32.4 107.0 20.5
Backlog (unaudited) 22.9 549.3 572.2 2,897.2
1995
Revenues 1,279.0 356.6 1,635.6 1,457.6
------- ----- ------- -------
Operating profit 143.9 18.1 162.0 79.3
Amortization of acquisition
intangibles (8.1) (4.4) (12.5) (10.2)
General corporate expenses - - - -
Interest expense, net - - - -
------- ----- ------- -------
Earnings before taxes 135.8 13.7 149.5 69.1
------- ----- ------- -------
Identifiable assets 923.2 441.0 1,364.2 212.8
Acquisition intangibles 147.7 198.2 345.9 210.5
Corporate assets - - - -
------- ----- ------- -------
Total assets 1,070.9 639.2 1,710.1 423.3
------- ----- ------- -------
Capital expenditures 101.7 55.6 157.3 7.1
Depreciation & amortization 64.3 26.1 90.4 17.6
Backlog (unaudited) 19.7 508.1 527.8 1,400.0
1994
Revenues 1,179.4 371.1 1,550.5 1,265.2
------- ----- ------- -------
Operating profit 97.1 54.3 151.4 85.5
Amortization of acquisition
intangibles (7.1) (3.2) (10.3) (10.3)
General corporate expenses - - - -
Gain on sale of interest in
Western Atlas - - - -
Interest expense, net - - - -
------- ----- ------- -------
Earnings before taxes 90.0 51.1 141.1 75.2
------- ----- ------- -------
Identifiable assets 843.0 283.3 1,126.3 204.8
Acquisition intangibles 155.7 120.2 275.9 217.3
Corporate assets - - - -
------- ----- ------- -------
Total assets 998.7 403.5 1,402.2 422.1
------- ----- ------- -------
Capital expenditures 73.9 32.3 106.2 2.1
Depreciation & amortization 62.8 18.1 80.9 18.8
Backlog (unaudited) 15.2 142.9 158.1 1,626.1
25
ENERGY EQUIPMENT
- -----------------------------------------------------
COMPRESSION CORPORATE
AND FLOW POWER AND
PUMPING MEASUREMENT CONTROL SYSTEMS TOTAL ELIMINATIONS TOTAL
- ----------- ----------- ------- ------- ------- ------------ -------
1,273.5 637.0 611.1 306.0 2,827.6 (48.5) 6,561.5
------- ----- ----- ----- ------- ------ -------
101.7 55.7 64.6 38.1 260.1 - 589.5
(1.6) (1.5) (5.9) (.2) (9.2) - (31.3)
- - - - - (83.6) (83.6)
- - - - - (47.8) (47.8)
------- ----- ----- ----- ------- ------ -------
100.1 54.2 58.7 37.9 250.9 (131.4) 426.8
------- ----- ----- ----- ------- ------ -------
1,024.9 257.4 424.4 162.4 1,869.1 (4.5) 3,758.8
63.2 25.0 225.9 6.6 320.7 - 876.1
- - - - - 515.3 515.3
------- ----- ----- ----- ------- ------ -------
1,088.1 282.4 650.3 169.0 2,189.8 510.8 5,150.2
------- ----- ----- ----- ------- ------ -------
75.2 14.4 16.1 17.8 123.5 1.2 335.4
44.6 14.8 25.8 10.7 95.9 6.4 229.8
1,130.3 112.5 199.0 75.1 1,516.9 (6.6) 4,979.7
1,220.4 618.7 458.4 276.9 2,574.4 (38.9) 5,628.7
------- ----- ----- ----- ------- ------ -------
82.7 71.4 41.8 35.9 231.8 - 473.1
(1.9) (1.3) (3.8) (.2) (7.2) - (29.9)
- - - - - (75.2) (75.2)
- - - - - (25.8) (25.8)
------- ----- ----- ----- ------- ------ -------
80.8 70.1 38.0 35.7 224.6 (101.0) 342.2
------- ----- ----- ----- ------- ------ -------
954.7 248.0 409.6 160.6 1,772.9 (37.7) 3,312.2
65.4 19.1 204.4 6.8 295.7 - 852.1
- - - - - 543.1 543.1
------- ----- ----- ----- ------- ------ -------
1,020.1 267.1 614.0 167.4 2,068.6 505.4 4,707.4
------- ----- ----- ----- ------- ------ -------
85.4 15.3 11.3 10.0 122.0 1.8 288.2
44.7 13.9 20.2 10.3 89.1 9.5 206.6
1,076.4 115.9 234.0 91.2 1,517.5 (9.1) 3,436.2
1,304.5 566.5 405.0 248.2 2,524.2 (9.2) 5,330.7
------- ----- ----- ----- ------- ------ -------
87.9 72.0 29.3 34.1 223.3 - 460.2
(3.1) (1.3) (2.2) (.2) (6.8) - (27.4)
- - - - - (70.9) (70.9)
- - - - - 275.7 275.7
- - - - - (18.2) (18.2)
------- ----- ----- ----- ------- ------ -------
84.8 70.7 27.1 33.9 216.5 186.6 619.4
------- ----- ----- ----- ------- ------ -------
924.5 227.0 296.1 153.6 1,601.2 (44.2) 2,888.1
58.5 20.9 88.8 7.0 175.2 - 668.4
- - - - - 767.1 767.1
------- ----- ----- ----- ------- ------ -------
983.0 247.9 384.9 160.6 1,776.4 722.9 4,323.6
------- ----- ----- ----- ------- ------ -------
43.4 12.8 9.4 10.9 76.5 2.3 187.1
69.9 12.9 14.8 9.7 107.3 9.3 216.3
856.1 103.1 114.4 81.3 1,154.9 (2.1) 2,937.0
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Management
Report of Independent Accountants - Price Waterhouse LLP
Consolidated Statements of Earnings - Years Ended October 31, 1996, 1995 and
1994
Consolidated Balance Sheets - October 31, 1996 and 1995
Consolidated Statements of Shareholders' Equity - Years Ended October 31, 1996,
1995 and 1994
Consolidated Statements of Cash Flows - Years Ended October 31, 1996, 1995 and
1994
Note A - Accounting Change, Basis of Presentation and Summary of Significant
Accounting Policies
Note B - Acquisitions and Divestitures
Note C - Unconsolidated Affiliated Companies
Note D - Cash Flow Data
Note E - Income Taxes
Note F - Short-Term Debt
Note G - Long-Term Debt
Note H - Employee Incentive Plans
Note I - Capital Shares
Note J - Commitments and Contingencies
Note K - Postretirement Benefits
Note L - Supplementary Information and Special Charges
Note M - Financial Instruments
Note N - Information by Industry Segment and Geographic Area (Information
is included in Item 7. of this report.)
Note O - Baroid Financial Information
Note P - Quarterly Financial Data (Unaudited)
27
REPORT OF MANAGEMENT
The consolidated financial statements of Dresser Industries, Inc. and
subsidiaries have been prepared by management and have been audited by
independent accountants. The management of the Company is responsible for
the financial information and representations contained in the financial
statements and other sections of this report. Management believes that the
financial statements have been prepared in conformity with generally accepted
accounting principles appropriate under the circumstances to reflect, in all
material respects, the substance of events and transactions that should be
included. In preparing the consolidated financial statements, it is
necessary that management make informed estimates and judgments based on
currently available information of the effects of certain events and
transactions.
In meeting its responsibility for the reliability of the consolidated
financial statements, management depends on the Company's internal control
structure. This internal control structure is designed to provide reasonable
assurance that assets are safeguarded and transactions are executed in
accordance with management's authorization and are properly recorded. In
designing control procedures, management recognizes that errors or
irregularities may occur. Also, estimates and judgments are required to
assess and balance the relative cost and expected benefits of the controls.
Management believes that the Company's internal control structure provides
reasonable assurance that errors or irregularities that could be material to
the consolidated financial statements are prevented or would be detected
within a timely period by employees in the normal course of performing their
assigned functions.
The Board of Directors fulfills its oversight role for the accompanying
consolidated financial statements through its Audit and Finance Committee,
which is composed solely of directors who are not officers or employees of
the Company. The Committee meets with management, the independent
accountants and the internal auditors to review the work of each and to
monitor the discharge by each of its responsibilities. The Committee also
meets with the independent accountants and internal auditors, without
management present, to discuss internal control structure, auditing and
financial reporting matters.
G. H. Juetten, Vice President and K. J. Kotara, Controller
Chief Financial Officer
28
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareowners of Dresser Industries, Inc.
In our opinion, the consolidated financial statements and financial statement
schedule listed in the index appearing under Item 14(a)(1) and (2) and
14 (d) on page F-2 present fairly, in all material respects, the financial
position of Dresser Industries, Inc. and its subsidiaries at October 31, 1996
and 1995, and the results of their operations and their cash flows for each
of the three years in the period ended October 31, 1996, in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note A to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 112, EMPLOYERS'
ACCOUNTING FOR POSTEMPLOYMENT BENEFITS, effective as of November 1, 1994.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
Dallas, Texas
November 27, 1996
29
DRESSER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED OCTOBER 31,
------------------------------
IN MILLIONS, EXCEPT PER SHARE DATA 1996 1995 1994
-------- -------- --------
Sales $4,184.5 $3,538.9 $3,562.3
Service revenues 2,348.7 2,073.7 1,745.0
Share of earnings of unconsolidated
affiliates 28.3 16.1 23.4
-------- -------- --------
Total revenues 6,561.5 5,628.7 5,330.7
-------- -------- --------
Cost of sales 3,028.5 2,526.0 2,538.2
Cost of services 2,059.6 1,831.9 1,533.5
-------- -------- --------
Total costs of sales and services 5,088.1 4,357.9 4,071.7
-------- -------- --------
Gross earnings 1,473.4 1,270.8 1,259.0
Selling, engineering, administrative
and general expenses (988.1) (909.1) (896.7)
Special charges - - (8.0)
Other income (deductions)
Interest expense (60.5) (47.4) (49.3)
Interest earned 12.7 21.6 31.1
Gain on sale of interest in Western Atlas - - 275.7
Gain on affiliate's public offering - - 11.0
Other, net (10.7) 6.3 (3.4)
-------- -------- --------
Earnings before income taxes and
other items below 426.8 342.2 619.4
Income taxes (145.1) (109.3) (224.7)
Minority interest (24.2) (19.8) (32.9)
-------- -------- --------
Earnings before accounting change 257.5 213.1 361.8
Cumulative effect of accounting change - (16.0) -
-------- -------- --------
Net earnings $ 257.5 $ 197.1 $ 361.8
-------- -------- --------
-------- -------- --------
Earnings per common share
Earnings before accounting change $ 1.44 $ 1.17 $ 1.98
Cumulative effect of accounting change - (.09) -
-------- -------- --------
Net earnings $ 1.44 $ 1.08 $ 1.98
-------- -------- --------
-------- -------- --------
Average common shares outstanding 179.3 182.8 182.8
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
30
DRESSER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31,
---------------------
1996 1995
-------- --------
IN MILLIONS
ASSETS
Current Assets
Cash and cash equivalents $ 232.4 $ 248.7
Notes and accounts receivable 1,173.8 988.3
Less allowance for doubtful receivables 21.7 24.6
-------- --------
1,152.1 963.7
Inventories
Finished products and work in process 699.4 617.7
Raw materials and supplies 214.2 191.7
-------- --------
913.6 809.4
Deferred income taxes 83.8 84.8
Prepaid expenses 87.6 94.6
-------- --------
Total Current Assets 2,469.5 2,201.2
-------- --------
Investments in and receivables from unconsolidated
affiliates 182.5 201.9
Goodwill less accumulated amortization of $141.7 in 1996
and $115.5 in 1995 870.6 845.2
Deferred income taxes 184.0 188.9
Other assets 181.2 143.1
Property, Plant and Equipment, at cost
Land and land improvements 98.4 98.9
Buildings 473.5 429.7
Machinery and equipment 2,264.8 2,044.3
-------- --------
2,836.7 2,572.9
Less accumulated depreciation 1,574.3 1,445.8
-------- --------
Total Properties, net 1,262.4 1,127.1
-------- --------
Total Assets $5,150.2 $4,707.4
-------- --------
-------- --------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
31
DRESSER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
OCTOBER 31,
-----------------------
IN MILLIONS 1996 1995
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Short-term debt and current portion of long-term debt $ 86.0 $ 131.6
Accounts payable 570.6 520.4
Contract advances 459.8 324.4
Accrued compensation and benefits 250.4 237.7
Accrued warranty costs 51.4 53.0
Income taxes 111.3 113.2
Other accrued liabilities 332.3 332.1
-------- --------
Total Current Liabilities 1,861.8 1,712.4
-------- --------
Long-Term Debt 756.3 459.3
Employee Retirement Benefit Obligations 676.3 689.2
Deferred Compensation, Insurance Reserves and
Other Liabilities 118.0 110.7
Minority Interest 155.6 79.0
Commitments and Contingencies
Shareholders' Equity -
Preferred shares, 10 million authorized - -
Common shares, $0.25 par value
Authorized: 400 million
Issued: 184.9 million 46.2 46.1
Capital in excess of par value 454.8 451.6
Retained earnings 1,420.8 1,285.4
Cumulative translation adjustment (81.5) (76.7)
Pension liability adjustment (6.9) (7.0)
-------- --------
1,833.4 1,699.4
Less treasury shares, at cost 251.2 42.6
-------- --------
Total Shareholders' Equity, net 1,582.2 1,656.8
-------- --------
Total Liabilities and Shareholders' Equity $5,150.2 $4,707.4
-------- --------
-------- --------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
32
DRESSER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED OCTOBER 31,
--------------------------------------
IN MILLIONS, EXCEPT PER SHARE DATA 1996 1995 1994
-------- -------- --------
COMMON SHARES, PAR VALUE
Beginning of year $ 46.1 $ 46.0 $ 45.2
Sale of common shares - - .5
Shares issued pursuant to stock
warrant agreement .1 - -
Shares issued under benefit and
dividend reinvestment plans - .1 .3
-------- -------- --------
End of year $ 46.2 $ 46.1 $ 46.0
-------- -------- --------
-------- -------- --------
CAPITAL IN EXCESS OF PAR VALUE
Beginning of year $ 451.6 $ 448.6 $ 407.3
Sale of common shares - - 29.5
Shares issued pursuant to stock
warrant agreement 7.8 - -
Shares issued under benefit and
dividend reinvestment plans (4.6) 3.0 11.8
-------- -------- --------
End of year $ 454.8 $ 451.6 $ 448.6
-------- -------- --------
-------- -------- --------
RETAINED EARNINGS
Beginning of year $1,285.4 $1,212.6 $ 967.3
Net earnings 257.5 197.1 361.8
Dividends on common shares* (122.1) (124.3) (116.5)
-------- -------- --------
End of year $1,420.8 $1,285.4 $1,212.6
-------- -------- --------
-------- -------- --------
CUMULATIVE TRANSLATION ADJUSTMENTS
Beginning of year $ (76.7) $ (63.1) $ (130.2)
Translation rate changes (4.8) (13.6) 67.1
-------- -------- --------
End of year $ (81.5) $ (76.7) $ (63.1)
-------- -------- --------
-------- -------- --------
PENSION LIABILITY ADJUSTMENT
Beginning of year $ (7.0) $ (7.6) $ (13.8)
Current year adjustment .1 .6 6.2
-------- -------- --------
End of year $ (6.9) $ (7.0) $ (7.6)
-------- -------- --------
-------- -------- --------
TREASURY SHARES, AT COST
Beginning of year $ (42.6) $ (4.2) $ (3.6)
Shares purchased (228.1) (46.8) -
Shares issued under benefit and
dividend reinvestment plans 19.5 8.4 (.6)
-------- -------- --------
End of year $ (251.2) $ (42.6) $ (4.2)
-------- -------- --------
-------- -------- --------
TOTAL SHAREHOLDERS' EQUITY, END OF YEAR $1,582.2 $1,656.8 $1,632.3
-------- -------- --------
-------- -------- --------
*Dividends paid per common share were $.68 in 1996 and 1995 and $.66 in 1994.
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
33
DRESSER INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED OCTOBER 31,
--------------------------------------
IN MILLIONS 1996 1995 1994
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 257.5 $ 197.1 $ 361.8
------- ------- -------
Adjustments to reconcile net earnings to cash flow:
Depreciation and amortization 229.8 206.6 216.3
Cumulative effect of accounting change - 16.0 -
Earnings from unconsolidated affiliates (28.3) (16.1) (23.4)
Dividends and advances from
unconsolidated affiliates 37.0 23.0 28.6
Minority interest provision 24.2 19.8 32.9
Special charges - - 8.0
Gain on sale of interest in Western Atlas, net of tax - - (146.5)
Changes in working capital (108.2) (27.3) (130.0)
Other, net 0.2 8.1 6.4
------- ------- -------
Total adjustments 154.7 230.1 (7.7)
------- ------- -------
Net cash provided by operating activities 412.2 427.2 354.1
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (335.4) (288.2) (187.1)
Business acquisitions (32.2) (325.7) (85.5)
Proceeds from disposal of assets 14.6 35.6 6.0
Cash of acquired businesses 3.3 8.6 -
Proceeds of sales of interests in:
Western Atlas - net of taxes paid - - 451.8
M-I Drilling Fluids - - 160.0
------- ------- -------
Net cash (used) provided by investing activities (349.7) (569.7) 345.2
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt 295.5 - -
Purchase of common shares for Treasury (228.1) (46.8) -
Dividends paid (122.1) (124.3) (116.5)
Increase (decrease) in short-term debt (45.6) 58.2 (256.9)
Increase (decrease) in long-term debt (3.0) (16.8) (46.4)
Sale/issuance of common shares 20.7 7.3 30.0
------- ------- -------
Net cash (used) by financing activities (82.6) (122.4) (389.8)
------- ------- -------
EFFECT OF TRANSLATION ADJUSTMENTS ON CASH 3.8 (1.4) 5.4
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (16.3) (266.3) 314.9
CASH AND CASH EQUIVALENTS:
Beginning of year 248.7 515.0 200.1
------- ------- -------
End of year $ 232.4 $ 248.7 $ 515.0
------- ------- -------
------- ------- -------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
34
DRESSER INDURSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ACCOUNTING CHANGE, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
ACCOUNTING CHANGE
Effective November 1, 1994, the Company changed its accounting for
postemployment benefits as required by Statement of Financial Accounting
Standards No. 112, EMPLOYERS' ACCOUNTING FOR POSTEMPLOYMENT BENEFITS (SFAS
112). Postemployment benefits include salary continuation, disability, and
health care for former or inactive employees who are not retired. Medical
benefits for employees on long-term disability are the most significant of
the benefits. SFAS 112 requires accrual of the cost of these benefits
currently. The Company had previously accrued the liability for salary
continuation but had expensed the other benefits as paid. The Consolidated
Statement of Earnings for 1995 includes a charge of $16.0 million (net of tax
of $9.0 million) or $0.09 per share for the cumulative effect of the
accounting change.
BAROID AND WHEATLEY MERGERS
Dresser Industries, Inc. (Dresser) merged with Baroid Corporation (Baroid) on
January 21, 1994 and with Wheatley TXT Corp. (Wheatley) on August 5, 1994.
"The Company," as used in these consolidated financial statements, refers to
Dresser and its subsidiaries including Baroid and Wheatley. The mergers have
been accounted for as poolings of interests. These consolidated financial
statements reflect the results of operations and cash flows of the combined
companies as if the mergers had occurred on November 1, 1993.
CONSOLIDATION
All majority-owned subsidiaries are consolidated and all material intercompany
accounts and transactions are eliminated. Investments in 20% to 50% owned
partnerships and affiliates are accounted for on the equity method and
investments in less than 20% owned affiliates are accounted for on the cost
method.
REVENUE RECOGNITION
Revenues and earnings from long-term engineering and construction contracts are
recognized on the percentage-of-completion method, measured generally on the
cost incurred basis. Estimated contract costs include allowances for
completion risks, process and schedule guarantees and warranties that generally
are not finally determinable until the latter stages of a contract. Estimated
contract earnings are reviewed and revised periodically as the work progresses.
Estimated losses are charged against earnings in the period in which such
losses are identified. Revenues from sale of products and services other than
from long-term construction contracts are recorded when the products are
shipped or the services performed.
35
DRESSER INDURSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ACCOUNTING CHANGE, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
LONG-TERM CONTRACTS
Consistent with industry practice, service revenues and cost of services
include the value of materials, equipment and labor contracts furnished by
customers and for which the Company is responsible for the ultimate
acceptability of performance of the project based on such material, equipment
and labor. The value of such items was $239.6 million, $138.3 million and
$138.7 million for the years ended October 31, 1996, 1995 and 1994,
respectively.
Amounts billed in excess of revenues recognized or costs incurred are included
in current liabilities under contract advances.
INVENTORIES
Inventories are valued at the lower of cost or market. The cost of most
inventories is determined using either the first-in, first-out (FIFO) method or
the average cost method. The cost of certain U.S. inventories is determined
using the last-in, first-out (LIFO) method.
Inventories on the LIFO method were $118.4 million and $112.0 million at
October 31, 1996 and 1995, respectively. Under the average cost method,
inventories would have increased by $99.0 million and $100.0 million at October
31, 1996 and 1995, respectively.
Inventories are stated net of progress payments received on contracts of $118.5
million and $94.5 million at October 31, 1996 and 1995, respectively.
PROPERTY, PLANT AND EQUIPMENT
Fixed assets are stated at cost. Depreciation is computed principally by the
straight-line method over the estimated useful lives of 10 to 40 years for
buildings and 3 to 20 years for machinery and equipment. Certain assets with
service lives of more than 10 years are depreciated on accelerated methods.
Accelerated depreciation methods are also used for tax purposes, wherever
permitted. Maintenance and repairs are expensed as incurred. Major improvements
are capitalized.
GOODWILL
The difference between purchase price and the fair values of net assets at date
of acquisition of businesses acquired is amortized on a straight-line basis
over the estimated periods benefited, not exceeding 40 years.
In the event facts and circumstances indicate the carrying amount of goodwill
associated with an acquisition is impaired, the carrying amount will be reduced
to an amount representing the estimated undiscounted future cash flows before
interest to be generated by the operation.
36
DRESSER INDURSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ACCOUNTING CHANGE, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
TRANSLATION OF FOREIGN CURRENCIES
Financial statements of foreign subsidiaries are translated into U.S. dollars
based on the functional currency of each business unit. For units whose local
currency is the functional currency, asset and liability accounts are
translated at rates in effect at the balance sheet date, and revenue and
expense accounts are translated at rates approximating the actual rates on the
dates of the transactions. Translation adjustments are included as a separate
component of shareholders' equity. For units which have the U.S. dollar as the
functional currency, inventories, cost of sales, property, plant and equipment
and related depreciation are translated at historical rates. Other asset and
liability accounts are translated at rates in effect at the balance sheet date,
and revenues and expenses (excluding cost of sales and depreciation) are
translated at rates approximating the actual rates on the dates of the
transactions. Translation adjustments are reflected in the statement of
earnings.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from those estimates, but management does not believe
such differences will materially affect the Company's financial position,
results of operations or cash flows.
RECLASSIFICATION OF PRIOR YEARS
Prior year financial statements have been reclassified to conform to 1996
presentations.
FUTURE REPORTING REQUIREMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF (SFAS 121) and Statement of
Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION
(SFAS 123). The Company must adopt the provisions of SFAS 121 and SFAS 123
beginning in fiscal year 1997. SFAS 121 requires that long-lived assets and
certain identifiable intangibles held and used by a company be reviewed for
possible impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. SFAS 123 encourages,
but does not require, companies to recognize compensation expense for grants of
stock, stock options, and other equity instruments based on a fair-value method
of accounting. The Company does not expect the effect of the adoption of SFAS
121 to be material in relation to its financial position or results of
operations. Concerning SFAS 123, the Company expects to continue to follow the
accounting provisions of Accounting Principles Board Opinion No. 25 for stock-
based compensation and to furnish the pro-forma disclosures required under SFAS
123, if material.
37
DRESSER INDURSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - JOINT VENTURES, ACQUISITIONS AND DIVESTITURES
JOINT VENTURES
Effective February 29, 1996, the Company entered into an agreement to form a
joint venture with Shaw Industries Ltd. (Shaw) by contributing its Bredero
Price assets and Shaw contributing its Shaw Pipe Protection assets on a
worldwide basis. The Company has an option to purchase Shaw's interest in the
joint venture at the end of the second and fourth years of the joint venture.
Shaw also has the right to require the Company to purchase Shaw's interest in
the joint venture under the same provisions.
ACQUISITIONS
The Company acquired several small businesses during 1996 for $32.2 million.
These businesses did not have a significant effect on revenues or earnings.
During fiscal 1995, the Company acquired Subtec Asia Ltd., a Sharjah, United
Arab Emirates company, which provides underwater technology services primarily
to the offshore oil and gas industry, for $37.6 million in cash including
repayment of debt. On May 2, 1995, the Company acquired North Sea Assets
P.L.C., the remotely operated vehicle business of NSA/HMB Group, for
approximately $30.4 million in cash. On May 1, 1995, the Company acquired the
assets of Wellstream Company L.P., which was engaged in the production of high
pressure flexible pipe and riser systems, for $62.4 million in cash including
repayment of debt. Also, the Company acquired the assets of Energy Coatings
Company on May 5, 1995 and Pipeline Coating, Inc. on July 1, 1995 for a total
of approximately $13.6 million in cash. These last two companies perform pipe
coating services.
Effective May 31, 1995, the Company acquired all the outstanding shares of
Grove S.p.A. (Grove), an Italian corporation, for $162.7 million in cash
including repayment of debt. Grove is a multinational company engaged in the
production of oilfield valves and regulators.
The above acquisitions were accounted for as purchases, and their results of
operations are included in the Consolidated Statements of Earnings from the
acquisition dates. The purchase prices exceeded the value of the net assets
acquired by $244.1 million. The excess is included in goodwill in the
Consolidated Balance Sheets and is being amortized on a straight-line basis
over 40 years. The pro forma effect of these acquisitions is not material.
In December 1993, Wheatley acquired Axelson, Inc. and Tom Wheatley Valve
Company for $85.5 million cash, a $1.7 million promissory note and liabilities
assumed of $2.0 million. Axelson is a manufacturer of downhole rod pumps and
safety equipment used in the production of oil, and Tom Wheatley Valve Company
produces valves for the oil and gas industry. These acquisitions were
accounted for as purchases, and their results of operations are included in the
Consolidated Statements of Earnings from the acquisition dates.
DIVESTITURES
On January 28, 1994, the Company sold its 29.5% interest in Western Atlas
International, Inc. to a wholly-owned subsidiary of Litton Industries for
$558.0 million. The Company recognized a gain of $275.7 million ($146.5
million net of tax) on the sale.
38
DRESSER INDURSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - JOINT VENTURES, ACQUISITIONS AND DIVESTITURES (CONTINUED)
DIVESTITURES (CONTINUED)
Following the Baroid merger (See Note A) and in accordance with an agreement
reached with the Antitrust Division of the United States Department of Justice,
the Company sold its 64% interest in M-I Drilling Fluids Company to Smith
International, Inc. for $160.0 million in cash, effective February 28, 1994.
The Company recognized a $2.6 million pre-tax gain on the sale.
In September 1994, the Company sold its 50% interest in IRI International
Corporation and recognized a pre-tax gain of $4.6 million. Due to the sale,
the Company was able to recognize $17.5 million of tax benefits applicable to
previously unrecognized losses associated with IRI.
NOTE C - UNCONSOLIDATED AFFILIATED COMPANIES
The Company has several investments in less than majority owned affiliates and
the nature and extent of these investments change over time. A summary of the
impact of these investments on the consolidated financial statements follows
(in millions):
1996 1995 1994
------ ------ ------
Share of earnings of unconsolidated affiliates
Ingersoll-Dresser Pump Company $ 22.1 $ 13.2 $ 8.8
Bufete Industriale, S.A. de C.V. - (5.2) 4.5
Other affiliates 6.2 8.1 10.1
------ ------ ------
$ 28.3 $ 16.1 $ 23.4
------ ------ ------
------ ------ ------
Dividends received $ 8.2 $ 7.4 $ 13.1
------ ------ ------
------ ------ ------
Advances received $ 28.8 $ 15.6 $ 15.5
------ ------ ------
------ ------ ------
OCTOBER 31,
---------------
1996 1995
------ ------
Investments in and receivables from
unconsolidated affiliates
Ingersoll-Dresser Pump Company $132.5 $143.0
Other affiliates 50.0 58.9
------ ------
$182.5 $201.9
------ ------
------ ------
The Company's share of earnings for Ingersoll-Dresser Pump Company is before
income taxes and includes adjustments made by the Company for differences in
the timing of adoption of an accounting change and for expenses retained by the
Company.
In connection with the Ingersoll-Dresser Pump Company joint venture agreement
and a subsequent amendment, the Company granted to Ingersoll-Rand Company an
option to purchase 51% of the stock of Mono Group Limited for a price equal to
51% of its book value, including unamortized goodwill, at the exercise date.
The option price will be the amount at January 31, 1995 or at the end of the
month during which Ingersoll-Rand gives notice of its intention to exercise the
option, whichever amount is
39
DRESSER INDURSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE C - UNCONSOLIDATED AFFILIATED COMPANIES (CONTINUED)
lower. The option will expire on April 30, 1997. If the option to purchase is
exercised by Ingersoll-Rand Company, both Ingersoll-Rand and the Company have
agreed to contribute their respective Mono Group Limited shares to the
Ingersoll-Dresser Pump Company as a contribution of capital to the partnership.
In the fourth quarter of 1995, The M. W. Kellogg Company (a wholly-owned
subsidiary) sold a portion of its interest in its Mexican affiliate, Bufete
Industriale, S.A. de C.V., and recognized a gain of $7.5 million. As a result
of the sale, Kellogg's ownership interest fell below 20%. Thereafter, Kellogg
accounted for its investment on the cost method rather than the equity method
used before the sale. Separately, Kellogg entered into a derivative
transaction with the purchasers of the Bufete shares. The derivative agreement
is based on the $20.4 million price of the shares sold. On the settlement date
of October 30, 1998, the Company will receive or make a cash payment equal to
the increase or decrease, respectively, in the value of the shares sold. The
estimated effect of the agreement will be accrued during the term of the
agreement. As of October 31, 1996, the carrying value of the derivative was
not significant and the fair value approximated the carrying value. The
counterparties to the derivative are high quality institutions, and the Company
believes that they are not significant credit risks. Kellogg has the right of
first refusal should the purchasers want to sell the shares.
NOTE D - CASH FLOW DATA
Cash and cash equivalents include cash on hand and investments with maturities
of three months or less at time of original purchase. Supplemental
information about cash payments is as follows (in millions):
1996 1995 1994
------ ------ ------
Cash payments for income taxes $155.6 $ 82.6 $210.3
------ ------ ------
------ ------ ------
Cash payments for interest on debt $ 51.2 $ 46.1 $ 46.3
------ ------ ------
------ ------ ------
Working capital changes on the Consolidated Statements of Cash Flows were as
follows (in millions):
1996 1995 1994
------- ------- -------
(Increase) in receivables $(145.3) $ (71.2) $(111.9)
(Increase) decrease in inventories (101.5) (89.2) 15.3
(Increase) decrease in deferred taxes and
prepaid expenses 5.4 (33.3) 84.6
Increase (decrease) in accrued
liabilities and accounts payable 19.2 95.0 (81.9)
Increase (decrease) in contract advances 131.3 56.3 (24.4)
Increase (decrease) in income taxes payable (17.3) 15.1 (11.7)
------- ------- -------
$(108.2) $ (27.3) $(130.0)
------- ------- -------
------- ------- -------
40
DRESSER INDURSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E - INCOME TAXES
The domestic and foreign components of earnings before income taxes consist of
the following (in millions):
1996 1995 1994
------ ------ ------
Domestic $267.0 $177.8 $494.2
Foreign 159.8 164.4 125.2
------ ------ ------
Total earnings before income taxes $426.8 $342.2 $619.4
------ ------ ------
------ ------ ------
The components of the provision for income taxes are as follows (in millions):
1996 1995 1994
------ ------ ------
Current
U.S. Federal $ 84.3 $ 52.1 $129.5
State 7.1 3.7 5.1
Foreign 43.3 48.3 60.1
------ ------ ------
134.7 104.1 194.7
------ ------ ------
Deferred
U.S. Federal (3.0) (5.7) 33.7
Foreign 13.4 10.9 (3.7)
------ ------ ------
10.4 5.2 30.0
------ ------ ------
Total income tax provision $145.1 $109.3 $224.7
------ ------ ------
------ ------ ------
The Company has not provided U.S. federal income and foreign withholding taxes
on $590 million of non-U.S. subsidiaries' undistributed earnings as of October
31, 1996, because such earnings are intended to be reinvested indefinitely to
finance foreign operations and expansion. If these earnings were distributed,
foreign tax credits should become available under current law to reduce or
eliminate the resulting U.S. income tax liability. When the Company identifies
exceptions to the general reinvestment policy, additional taxes are provided.
41
DRESSER INDURSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E - INCOME TAXES (CONTINUED)
The following is a reconciliation of income taxes at the U.S. Federal income
tax rate of 35% to the effective provision for income taxes reflected in the
Consolidated Statements of Earnings (in millions):
1996 1995 1994
------ ------ ------
Provision for income taxes at statutory rates $149.4 $119.8 $216.8
Minority interest's share of domestic
partnership earnings - - (3.8)
Net tax benefits of foreign dividends
and foreign tax credit carry forwards (10.1) (5.3) (4.2)
Foreign losses not benefited 9.6 5.6 10.4
Foreign taxes less than U.S. rate on
foreign earnings (7.4) (6.9) (.5)
Nondeductible goodwill amortization 8.3 7.1 6.9
Book/tax basis differential of acquired property (5.4) - 4.7
Alternative minimum tax credit - - (7.3)
Book/tax basis differences on Western Atlas
divestiture - - 27.5
Change in valuation allowance attributable to:
IRI divestiture - - (17.5)
Baroid domestic operations - - (17.3)
Foreign net operating losses (3.5) (6.3) -
Utilization of capital losses - (2.8) -
State and local income taxes, net of
U.S. Federal income tax benefit 4.1 2.4 3.3
Other .1 (4.3) 5.7
------ ------ ------
Provision for income taxes $145.1 $109.3 $224.7
------ ------ ------
------ ------ ------
Income tax expense is based on pretax financial accounting income. Deferred
tax assets and liabilities are recognized for the expected tax consequences of
temporary differences between the tax bases of assets and liabilities and their
reported amounts.
42
DRESSER INDURSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E - INCOME TAXES (CONTINUED)
The deferred income tax provisions (credits) relate to the following (in
millions):
1996 1995 1994
------ ------ ------
Postretirement benefits $ 4.1 $ 4.6 $ 9.8
Reserve for litigation settlements (1.1) (2.3) 22.4
Restructuring costs .4 (.7) 12.3
Bad debt (1.4) .2 20.2
Increase (decrease) in valuation allowance
on temporary differences 4.6 (9.1) (34.8)
Other items including warranty, insurance
and similar accruals 3.8 12.5 .1
------ ------ ------
Total deferred taxes $ 10.4 $ 5.2 $ 30.0
------ ------ ------
------ ------ ------
The components of the net deferred tax asset as of October 31, were as follows
(in millions):
1996 1995
------ ------
Deferred tax asset:
Postretirement and postemployment benefits $201.3 $205.4
Long-term contracts 18.2 26.0
Warranty reserves 9.7 9.6
Inventory 21.6 24.0
Insurance reserves 33.7 34.7
Deferred compensation 19.4 19.0
Net operating loss carryforwards 24.6 14.7
Other items 27.0 23.1
Valuation allowance (17.4) (12.8)
------ ------
Total deferred tax asset 338.1 343.7
------ ------
Deferred tax liability:
Depreciation and amortization (64.6) (63.1)
Other items (5.7) (6.9)
------ ------
Total deferred tax liability (70.3) (70.0)
------ ------
Net deferred tax asset $267.8 $273.7
------ ------
------ ------
At October 31, 1996, the Company had foreign operating loss carryforwards of
approximately $50 million that had not been benefited. The tax benefit of
these losses is recorded as a deferred tax asset and offset with a
corresponding valuation allowance. These losses are available to reduce the
future tax liabilities of their respective foreign entities. Approximately
$25 million of these losses will carry forward indefinitely while the remaining
losses expire at various dates from 1997 to 2006.
The net change of $4.6 million in 1996 in the valuation allowance for deferred
tax assets relates to increases in the valuation allowance for foreign losses.
43
DRESSER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE F - SHORT-TERM DEBT
Short-term debt at October 31, 1996 consists of $84.4 million of foreign bank
loans including amounts drawn against overdraft facilities. The foreign bank
loans are mostly in foreign currencies and are at negotiated interest rates.
As of October 31, 1996 the Company had $280.0 million unused and available
short-term committed U.S. bank lines of credit. Such lines provide for
borrowings at negotiated interest rates for a high quality industrial
company. The lines of credit may be terminated at the option of the banks or
the Company.
As of October 31, 1996 loan arrangements had been established with banks
outside the United States under which the Company's foreign subsidiaries may
borrow on an overdraft and short-term note basis. At October 31, 1996 the
amount unused and available under these arrangements aggregated $332.3
million.
NOTE G - LONG-TERM DEBT
Long-term debt is summarized as follows (in millions):
OCTOBER 31,
------------------
1996 1995
------ ------
Notes, 6.25%, due 2000 $300.0 $300.0
Debentures, 7.60%, due 2096 300.0 -
Senior notes, 8%, due 2003 149.3 149.2
Other loan agreements 8.6 12.4
------ ------
757.9 461.6
Less portion due within one year 1.6 2.3
------ ------
$756.3 $459.3
------ ------
------ ------
NOTE H - EMPLOYEE INCENTIVE PLANS
STOCK COMPENSATION PLAN
Dresser's 1992 Stock Compensation Plan includes a Stock Option Program, a
Restricted Incentive Stock Program and a Performance Stock Unit Program.
The Stock Option Program provides for the granting of options to officers and
key employees for purchase of the Company's common shares. The Plan is
administered by the Executive Compensation Committee of the Board of
Directors, whose members are not eligible for grants under the Plan. No
option can be for a term of more than ten years from date of grant. The
option price is recommended by the committee, but cannot be less than 100% of
the average of the high and low prices of the shares on the New York Stock
Exchange on the day the options are granted. The option price for 950,622
shares granted from 1993 through 1995 and still outstanding include prices
that increase on the annual anniversary dates of grants.
44
DRESSER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H - EMPLOYEE INCENTIVE PLANS (CONTINUED)
STOCK COMPENSATION PLAN (CONTINUED)
Changes in outstanding options under the Stock Option Program during the
three years ended October 31, 1996 and options exercisable at October 31,
1996 are as follows:
Outstanding at October 31, 1993 3,285,765
Granted at $17.375 to $21.00 662,263
Exercised at $5.583 to $21.98 (419,445)
Canceled or expired (475,631)
---------
Outstanding at October 31, 1994 3,052,952
Granted at $19.313 to $23.00 474,737
Exercised at $9.313 to $23.04 (414,082)
Canceled or expired (29,470)
---------
Outstanding at October 31, 1995 3,084,137
Granted at $21.75 to $28.375 768,423
Exercised at $11.4688 to $23.88 (676,237)
---------
Outstanding at October 31, 1996 3,176,323
---------
---------
Exercisable at October 31, 1996 at $9.125 to $27.875 2,000,610
---------
---------
At October 31, 1996 a total of 7.1 million Dresser common shares were
reserved for granting of future options under the 1992 plan.
NOTE I - CAPITAL SHARES
Changes in issued common shares during the three years ended October 31, 1996
are as follows (in thousands):
Shares at October 31, 1993 180,962
Sold in a public offering by Wheatley 2,100
Issued under benefit and dividend reinvestment plans 986
-------
Shares at October 31, 1994 184,048
Issued under benefit and dividend reinvestment plans 418
-------
Shares at October 31, 1995 184,466
Issued pursuant to stock warrant agreement 400
-------
Shares at October 31, 1996 184,866
-------
-------
45
DRESSER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I - CAPITAL SHARES (CONTINUED)
Changes in common shares held in treasury during the three years ended
October 31, 1996 are as follows (in thousands):
Treasury shares at October 31, 1993 190
Exchanged under benefit and dividend reinvestment plans 6
-----
Treasury shares at October 31, 1994 196
Shares purchased 2,327
Issued under benefit and dividend reinvestment plans (413)
-----
Treasury shares at October 31, 1995 2,110
Shares purchased 8,163
Issued under benefit and dividend reinvestment plans (1,026)
-----
Treasury shares at October 31, 1996 9,247
-----
-----
PREFERRED STOCK PURCHASE RIGHTS PLAN
The Company has a plan under which it issues one Preferred Stock Purchase
Right for each outstanding share of the Company's Common Stock. The Rights
expire in 2000 unless they are redeemed earlier.
The Rights will generally not be exercisable until after 10 days (or such
later time as the Board of Directors may determine) from the earlier of a
public announcement that a person or group has, without Board approval,
acquired beneficial ownership of 15% or more of the Company's Common Stock or
the commencement of, or public announcement of an intent to commence, a
tender or exchange offer which, if successful, would result in the offeror
acquiring 30% or more of the Company's Common Stock. Once exercisable, each
Right would entitle its holder to purchase 1/100 of a share of the Company's
Series A Junior Preferred Stock at an exercise price of $90, subject to
adjustment in certain circumstances.
If the Company is acquired in a merger or other business combination not
previously approved by the Company's Continuing Directors, each Right then
exercisable would entitle its holder to purchase, at the exercise price, that
number of shares of the surviving company's common stock which has a market
value equal to twice the Right's exercise price. In addition, if any person
or group (with certain exceptions) were to acquire beneficial ownership of
15% or more of the Company's Common Stock (unless pursuant to a transaction
approved by the Company's Continuing Directors), each Right would entitle all
rightholders, other than the 15% stockholder or group, to purchase that
number of Series A Junior Preferred Stock having a market value equal to
twice the Right's price.
The Rights may be redeemed by the Company for $.01 per Right until the tenth
day after a person or group has obtained beneficial ownership of 15% or more
of the Company's Common Stock (or such later date as the Continuing Directors
may determine).
The Rights are not considered to be common stock equivalents because there is
no indication that any event will occur which would cause them to become
exercisable.
46
DRESSER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J - COMMITMENTS AND CONTINGENCIES
GENERAL LITIGATION
The Company continues to be involved in a lawsuit brought by parties who
purchased a construction equipment dealership from a third party in 1988. In
April 1994 the plaintiffs were awarded judgment of $6.5 million for
compensatory damages and $4.0 million for punitive damages. The Company
appealed the case. Appeal brief was filed in March 1995 and oral arguments
were heard in October 1995. A decision is not expected for several months.
The purchasers of the Company's former hand tool division sued the Company
for fraud in connection with the October 1983 transaction. In May 1994 the
jury returned a verdict awarding the plaintiffs $4.0 million in compensatory
damages and $50.0 million in punitive damages. On October 13, 1994 the Court
ordered a reduction of damages from $54.0 million to $12.0 million. On
October 15, 1996 the Court of Appeals issued its decision reversing the trial
court's decision and remanding the case for a new trial on damages.
Based on a review of the current facts and circumstances, management has
provided for what is believed to be a reasonable estimate of the exposure to
loss associated with these matters. While acknowledging the uncertainties of
litigation, management believes that these matters will be resolved without a
material effect on the Company's financial position or results of operations.
ASBESTOSIS LITIGATION
The Company has approximately 69,000 pending claims, reflecting approximately
27,000 new claims opened in fiscal 1996 and 28,000 claims closed in fiscal
1996, in which it is alleged that third parties sustained injuries and
damages resulting from the inhalation of asbestos fibers in products
manufactured by the Company.
Of the pending claims, approximately 15,000 allege injury as a result of
exposure to asbestos contained in refractory products. The Company has
entered into an agreement with its insurance carriers on these claims that
currently covers 79% of its fees, expenses and indemnity payments. A lawsuit
has been filed against certain of the Company's excess carriers, which, if
successful, would raise the amount to 83%. During the fiscal year, there
were approximately 500 new claims filed, and approximately 2,000 claims were
tried, settled or summarily disposed for a gross cost of $2.4 million,
including legal fees, expenses and indemnity payments. Since 1976 the
Company has tried, settled or summarily disposed of approximately 18,000
claims for a gross cost of $39.1 million, including legal fees, expenses and
indemnity payments. Management has no reason to believe the carriers will not
be able to meet their share of the obligations under the agreement. The
Company has provided for the estimated exposure, based upon past experience,
of the open claims. Refractory product claims subsequent to July 31, 1992,
are the responsibility of Harbison-Walker Refractories Company (formerly
INDRESCO Inc.) pursuant to an agreement entered into at the time of the
spin-off of INDRESCO by the Company.
47
DRESSER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J - COMMITMENTS AND CONTINGENCIES (CONTINUED)
ASBESTOSIS LITIGATION (CONTINUED)
Of the approximately 54,000 non-refractory product claims, approximately half
are covered, in whole or in part, by a separate agreement with insurance
carriers. Because the agreement for these claims is governed by exposure
dates, the covered amount varies by individual claim, but currently averages
64% of fees, expenses and indemnity payments. During the fiscal year, there
were approximately 7,000 new claims filed, and approximately 7,000 claims
were tried, settled or summarily disposed for a gross cost of $1.5 million,
including legal fees, expenses and indemnity payments. Since 1976 the
Company has tried, settled or summarily disposed of approximately 16,000
claims for a gross cost of $7.6 million, including legal fees, expenses and
indemnity payments. Management has no reason to believe that carriers will
not be able to meet their obligations under the agreement.
Regarding the claims that are not currently covered by any agreement with
carriers, during the fiscal year, there were approximately 20,000 new claims
filed, and approximately 18,000 claims were tried, settled or summarily
disposed for a gross cost of $4.7 million, including legal fees, expenses and
indemnity payments. The Company has tried, settled or summarily disposed of
approximately 34,000 claims since 1976 for a total cost of $9.5 million,
including legal fees, expenses and indemnity payments. A lawsuit has been
filed against a separate group of insurers seeking to recover the defense and
indemnity costs for these claims, and the Company is in negotiation with
those carriers. There is no guarantee that the amount covered by insurance
under any future agreements will be similar to prior agreements. The Company
has provided for the estimated exposure of the open non-refractory claims
based upon recent per claim settlement costs.
In 1993 the Company sustained an adverse judgment in cases filed by employees
of Ingalls Shipyard in Pascagoula, Mississippi. The Company's share of
damages awarded in six cases amounted to $3.8 million plus 10% add on for
punitive damages. In August 1995 an agreement was reached with plaintiff's
counsel to settle these claims, along with 16,500 additional claims for which
the Company is responsible. Individual plaintiffs have the right to opt out
of the settlement. As of October 31, 1996, the Company had received
approximately 9,000 releases for a gross cost of approximately $10.2 million,
including legal fees, expenses and indemnity payments. These claims are
included in pending claims until all releases are obtained. No one had opted
out of the settlements and the judgment against the Company has been vacated.
The Company expects that the settlement will be implemented in its entirety
and has fully provided for its liability.
In December 1994 a jury in Baltimore, Maryland returned a verdict on the
liability portion of a consolidated asbestos case and awarded compensatory
damages for five trial plaintiffs, including two against the Company's former
Refractory Division. On February 9, 1995 the jury returned its verdict in
the punitive damages portion of the case, applying a 200% punitive damage
multiplier. During 1995 the Baltimore Court overturned the jury's verdict
both as to any Company responsibility for the asbestos illnesses of the two
individual trial plaintiffs and the punitive damage multiplier for the two
plaintiffs and future claimants. Plaintiffs have appealed the Court's
ruling. The Court did sustain the jury's findings that the Company was
negligent in using asbestos in its products and in addition is responsible
for any injury caused by exposure to those products on a strict liability
basis. These findings, which the Company has appealed, would apply to
additional claimants, each of whom would have to establish in a future
mini-trial both the existence of an asbestos-related disease and that the
Company's products were a substantial cause of that disease.
48
DRESSER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J - COMMITMENTS AND CONTINGENCIES (CONTINUED)
ASBESTOSIS LITIGATION (CONTINUED)
Included in the 69,000 pending claims at October 31, 1996 are approximately
31,000 settlements that are still carried as pending until all releases are
signed. Such settlements include the 16,500 Mississippi claims and
approximately 14,000 non-refractory claims in Texas, New York and New Jersey.
Resolution of these claims will reduce the number of pending claims at October
31, 1996 by approximately 35% for refractory product claims and 45% for non-
refractory product claims.
Management recognizes the uncertainties of litigation and the possibility that
a series of adverse rulings could materially impact operating results.
However, based upon the Company's historical experience with similar claims,
the time elapsed since the Company discontinued sale of products containing
asbestos, and management's understanding of the facts and circumstances which
gave rise to such claims, management believes that the pending asbestos claims
will be resolved without material effect on the Company's financial position or
results of operations.
QUANTUM CHEMICAL LITIGATION
In October 1992 Quantum Chemical Corporation ("Quantum") brought suit against
the Company's wholly owned subsidiary, The M. W. Kellogg Company ("Kellogg"),
alleging that Kellogg negligently failed to provide an adequate design for an
ethylene facility which Kellogg designed and constructed for Quantum and
fraudulently misrepresented the state of development of its Millisecond
Furnace technology to be used in the facility. Quantum sought $200 million
in actual damages and twice that amount in punitive damages. Kellogg
answered denying the claim and filed a counterclaim against Quantum alleging
libel, slander, breach of contract and fraud. The case was tried during
1995. On November 30, 1995 the jury returned a verdict finding that there
was no fraud on the part of Kellogg, that Quantum's claim was barred by the
statute of limitations, that Quantum is liable for $4.3 million in breach of
contract damages, that Quantum is liable for $4.1 million in damages for
theft of trade secrets, and that Quantum is liable for $3.0 million of
Kellogg's legal fees. Quantum has filed a motion for a new trial and the
case is now on appeal. The Company has not recognized any income related to
the jury verdict.
ENVIRONMENTAL MATTERS
The Company has been preliminarily identified as a potentially responsible
party in 97 Superfund sites. Primary responsibility for eight of these sites
was assumed by Global Industrial Technologies Inc. and there is joint
responsibility at three sites. The Company has entered into settlements at 35
sites at a total cost of $2 million. Upon evaluation of the information
concerning various sites, the Company determined that it is not a responsible
party and had no liability at 26 sites. Based on the Company's historical
experience with similar claims and management's understanding of the facts and
circumstances, management believes that the resolution of liability at the 28
remaining sites will be reached without material effect on the Company's
financial position or results of operations.
49
DRESSER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J - COMMITMENTS AND CONTINGENCIES (CONTINUED)
OTHER LITIGATION
The Company is involved in certain other legal actions and claims arising in
the ordinary course of business. Management recognizes the uncertainties of
litigation and the possibility that one or more adverse rulings could
materially impact operating results. However, based upon the nature of and
management's understanding of the facts and circumstances which gave rise to
such actions and claims, management believes that such litigation and claims
will be resolved without material effect on the Company's financial position or
results of operations.
OTHER COMMITMENTS
Total rental and lease expense charged to earnings was $107.0 million in 1996,
$103.4 million in 1995 and $99.0 million in 1994. At October 31, 1996 the
aggregate minimum annual obligations under noncancelable leases were: $58.9
million for 1997; $35.8 million for 1998; $23.9 million for 1999; $15.5 million
for 2000; $13.6 million for 2001 and $50.3 million for all subsequent years.
The lease obligations related primarily to general and sales office space and
warehouses.
NOTE K - POSTRETIREMENT BENEFITS
HEALTH CARE AND LIFE INSURANCE BENEFITS
The Company has health care and life insurance plans for eligible retired U.S.
union and non-union employees. Although certain plans are contributory, the
Company generally absorbs the majority of the costs. The Company funds the
benefit plans as claims and premiums are paid.
The net periodic postretirement benefit expense and the actual benefits paid
were as follows (in millions):
1996 1995 1994
------ ------ ------
Service cost for benefits earned $ 4.2 $ 4.2 $ 4.5
Interest cost on accumulated postretirement
benefit obligation 29.3 29.7 27.1
Net amortization of unrecognized gain (19.2) (18.5) (15.7)
------ ------ ------
Net periodic postretirement benefit expense $ 14.3 $ 15.4 $ 15.9
------ ------ ------
------ ------ ------
Actual benefits paid $ 24.6 $ 25.3 $ 24.8
------ ------ ------
------ ------ ------
50
DRESSER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K - POSTRETIREMENT BENEFITS (CONTINUED)
HEALTH CARE AND LIFE INSURANCE BENEFITS (CONTINUED)
The liability of the plans at October 31 was as follows (in millions):
1996 1995
------ ------
Actuarial present value of accumulated postretirement
benefit obligation:
Retirees $253.3 $268.9
Fully eligible active plan participants 53.8 47.4
Other active plan participants 65.8 69.1
------ ------
Total accumulated postretirement benefit obligation 372.9 385.4
Unamortized gains from plan amendments 158.8 173.6
Unrecognized net gain 92.0 75.0
------ ------
Accrued postretirement benefit liability $623.7 $634.0
------ ------
------ ------
Accrued compensation and benefits on the Consolidated Balance Sheets include the
current portion of the accrued liability.
Assumptions used to calculate the Accumulated Postretirement Benefit Obligation
as of October 31 were as follows:
Discount rate - 8.0% for 1996 and 8.25% for 1995 and 1994
Health care trend rate (weighted based on participant count) -
1996 - 10.0% for 1996 declining to 5.5% in 2002 and level thereafter.
1995 - 10.0% for 1995 declining to 5.5% in 2002 and level thereafter.
1994 - 12.0% for 1994 declining to 5.5% in 2003 and level thereafter.
A one percentage-point increase in the assumed health care cost trend rate for
each year would increase the net postretirement benefit expense for 1996 by
approximately $3.3 million and would increase the accumulated postretirement
benefit obligation as of October 31, 1996 by approximately $28.1 million.
PENSION PLANS AND RETIREMENT SAVINGS PLANS
The Company has numerous defined benefit pension plans covering certain
employees in the United States. The benefits under the U.S. plans are based
primarily on years of service and employees' qualifying compensation during the
final years of employment for salaried employees and are based primarily on
years of service for hourly employees. The U.S. plans are funded in accordance
with the requirements of applicable laws and regulations. The U.S. plan assets
are invested in cash, short-term investments, equities, fixed-income
instruments and real estate at October 31, 1996.
51
DRESSER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K - POSTRETIREMENT BENEFITS (CONTINUED)
PENSION PLANS AND RETIREMENT SAVINGS PLANS (CONTINUED)
The Company has additional defined benefit pension plans for employees outside
the United States. The benefits under these plans are based primarily on years
of service and compensation levels. The Company funds these plans in amounts
sufficient to meet the minimum funding requirements under governmental
regulations, plus such additional amounts as the Company may deem appropriate.
The Company has defined contribution 401(K) plans for most of its U.S. salaried
employees and certain U.S. union hourly employees. Under these plans, eligible
employees may contribute amounts through payroll deductions. The employee
contributions and employer contributions are invested in funds available under
the plans.
Expense for all defined contribution plans was $41.8 million, $24.4 million and
$18.6 million in 1996, 1995 and 1994, respectively. The 1996 expense increase
versus 1995 resulted from a full year's cost of the new retirement savings plan
compared with five months in 1995. The 1995 expense increase versus 1994
resulted from the costs of the new retirement savings plan. The expense
increases were substantially offset by lower defined benefit plan expenses.
Expense for all defined benefit plans and cash contributions to the plans were
as follows (in millions):
1996 1995 1994
------ ------ ------
Service cost for benefits earned $ 15.5 $ 17.4 $ 22.8
Interest cost on projected benefit obligation 43.6 41.0 38.2
Return on plan assets (48.8) (44.6) (42.0)
Net amortization and deferral (3.7) (1.2) 2.5
------ ------ ------
Net pension expense $ 6.6 $ 12.6 $ 21.5
------ ------ ------
------ ------ ------
Cash contributions $ 18.8 $ 23.5 $ 28.8
------ ------ ------
------ ------ ------
52
DRESSER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K - POSTRETIREMENT BENEFITS (CONTINUED)
PENSION PLANS AND RETIREMENT SAVINGS PLANS (CONTINUED)
The funded status of the defined benefit plans on the measurement dates of
October 31 was as follows (in millions):
Plans with Assets Exceeding Projected Benefits
1996 1995
-------- --------
Actuarial present value of benefit obligations:
Vested benefit obligation $ 251.6 $ 238.6
-------- --------
-------- --------
Accumulated benefit obligation $ 256.0 $ 243.3
-------- --------
-------- --------
Projected benefit obligation $ 277.8 $ 262.9
Plan assets at fair value 384.3 348.6
-------- --------
Plan assets over projected benefit obligation 106.5 85.7
Unrecognized net loss 1.3 13.3
Prior service cost not yet recognized in net periodic
pension expense (24.1) (29.5)
Unrecognized transition net asset (16.2) (19.6)
-------- --------
Prepaid pension costs $ 67.5 $ 49.9
-------- --------
-------- --------
Plans with Projected Benefits Exceeding Assets
1996 1995
-------- --------
Actuarial present value of benefit obligations:
Vested benefit obligation $ 246.1 $ 206.9
-------- --------
-------- --------
Accumulated benefit obligation $ 260.9 $ 222.5
-------- --------
-------- --------
Projected benefit obligation $ 297.2 $ 253.5
Plan assets at fair value 217.6 181.8
-------- --------
Projected benefit obligation over plan assets (79.6) (71.7)
Unrecognized net loss 1.4 .8
Prior service cost not yet recognized in net
periodic pension expense 24.3 20.8
Unrecognized transition obligation 7.8 8.9
Adjustment required to recognize minimum liability (32.5) (28.3)
-------- --------
Pension liability $ (78.6) $ (69.5)
-------- --------
-------- --------
On the Consolidated Balance Sheets, "Other assets" include prepaid pension costs
and "Accrued compensation and benefits" include the current portion of the
pension liabilities.
The Company recognized an additional minimum pension liability for underfunded
defined benefit plans. The additional minimum liability is equal to the excess
of the accumulated benefit obligation over plan assets and accrued liabilities.
A corresponding amount is recognized as either an intangible asset or a
reduction of shareholders' equity. As of October 31, 1996 and 1995, the
Company had recorded additional liabilities of $32.5 million and $28.3 million,
intangible assets of $20.9 million and $16.3 million, and adjustments to
shareholders' equity, (net of income taxes and minority interest) of $6.9
million and $7.0 million, respectively.
53
DRESSER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K - POSTRETIREMENT BENEFITS (CONTINUED)
PENSION PLANS AND RETIREMENT SAVINGS PLANS (CONTINUED)
The actuarial assumptions used in determining funded status of the plans were
as follows:
1996 1995
----------- -----------
U.S. Plans
Discount rate 8.0% 8.25%
Expected long-term rate of return on assets 8.5% to 9.0% 8.5% to 9.0%
Rate of increase in compensation levels 4.0% to 5.5% 4.0% to 5.5%
Foreign Plans
Discount rate 7.0% to 12.5% 7.0% to 12.5%
Expected long-term rate of return on assets 7.0% to 13.5% 7.0% to 13.5%
Rate of increase in compensation levels 4.0% to 11.0% 4.0% to 11.0%
NOTE L - SUPPLEMENTARY INFORMATION AND SPECIAL CHARGES
Depreciation of property, plant and equipment charged to earnings amounted to
$193.4 million in 1996, $174.4 million in 1995 and $187.0 million in 1994.
Amortization of intangibles was $36.4 million in 1996, $32.2 million in 1995
and $29.3 million in 1994 and is included in selling, engineering,
administrative and general expenses.
Research and development costs charged to earnings were $110.6 million in 1996,
$96.5 million in 1995 and $102.5 million in 1994.
The components of other income (deductions), net on the Consolidated Statements
of Earnings are as follows (in millions):
1996 1995 1994
------ ------- -------
Gain on business disposals $ - $ - $ 7.1
Gains on sales of assets 4.5 7.5 3.1
Foreign exchange gain (loss) (15.2) (1.2) (13.6)
------ ------- -------
$(10.7) $ 6.3 $ (3.4)
------ ------- -------
------ ------- -------
Special charges consist of the following
(in millions):
1994
------
Parker & Parsley - insurance recovery $ 18.4
Merger expenses (10.7)
Drill bit pricing litigation settlement (9.5)
Restructuring charges (6.2)
------
$ (8.0)
------
------
In April 1994 the Company entered into settlement agreements with certain
insurance carriers relating to the Parker & Parsley litigation which was
settled in 1993. Pursuant to the settlement agreements, the Company received
approximately $33.8 million, which, after legal fees and a provision for other
potential litigation settlements, resulted in a gain of $18.4 million.
54
DRESSER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L - SUPPLEMENTARY INFORMATION AND SPECIAL CHARGES (CONTINUED)
In 1994 the Company recorded expenses associated with the Wheatley merger (See
Note A) totaling $10.7 million, including professional fees and costs related
to eliminating duplicate facilities.
The Company paid $9.5 million in February 1994 for the settlement of drill bit
pricing litigation.
In 1994 the Company accrued expenses of $6.2 million primarily for personnel
reduction costs associated with restructuring its Valve and Controls
operations. Of the costs, $2.5 million was paid in 1994 and $3.7 million was
paid in 1995.
NOTE M - FINANCIAL INSTRUMENTS
The Company does not hold or issue financial instruments for purposes of
trading. The carrying amounts of cash and short-term investments, accounts
receivable, accounts payable and short-term debt approximate fair value because
of the short maturity of these instruments. The carrying amounts of long-term
debt, including the current portion, were lower than fair value by $1.6 million
at October 31, 1996 and $4.8 million at October 31, 1995. Fair values of the
debt were determined by reference to market interest rates.
The Company has cash and cash equivalents, receivables and payables denominated
in currencies other than functional currencies. These financial assets and
liabilities create exposure to potential foreign exchange gains and losses
arising on future changes in currency exchange rates. The Company hedges such
risks by entering into forward exchange contracts. A forward exchange contract
is an agreement to exchange different currencies at a specified future date and
forward rate. The Company does not enter into forward contracts to engage in
speculation, nor does the Company hedge investments in foreign entities. The
Company had $282.9 million and $394.0 million, notional amounts, of forward
exchange contracts outstanding at October 31, 1996 and 1995, respectively. The
notional amounts are used to express the volume of these transactions and do
not represent exposure to loss. At October 31, 1996, substantially all of
these contracts were in European currencies. The carrying value of the
contracts was not significant. The fair value of the contracts, based on year-
end quoted rates for purchasing contracts with similar terms and maturity
dates, approximated carrying value and was also not significant.
See Note C for information about a derivative financial instrument that the
Company entered into with the purchasers of part of the Company's investment in
an unconsolidated affiliate.
The Company's financial instruments do not represent significant credit risks
at October 31, 1996 because they are either with high quality financial
institutions or widely dispersed across many customers and financial
institutions.
55
DRESSER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N - INFORMATION BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA
Descriptions of the Company's industry segments are as follows:
PETROLEUM PRODUCTS AND SERVICES
This segment provides services and project management for oil and gas
exploration, drilling, completion, production and transmission activities.
Principal products and services of the Drilling and Production Operations
include integrated well services and project management, drilling fluids
systems, drill bits, measurement-while-drilling services, directional
drilling services, completion and production tools, production valves and
pumps, meters and measuring equipment. Kellogg Oil and Gas Services is an
EPIC contractor (engineering, procurement, installation and construction)
for subsea and onshore projects, and it supplies ROVs (remotely operated
vehicles), seabed equipment, flexible flowlines, riser systems and pipe
coating, pipe laying and pipe burying services.
ENGINEERING SERVICES
This segment consists of the M. W. Kellogg Company, which provides
engineering, construction and related services primarily for the
hydrocarbon processing industries. M. W. Kellogg has its own proprietary
technologies and utilizes the advanced technologies of others to facilitate
the environmentally acceptable conversion of raw hydrocarbons and their
chemicals into value-added end products. The Company participates in
projects involving liquefied natural gas (LNG) plants and receiving
terminals, refining and petrochemical activities and ammonia/fertilizer
facilities. This includes grassroots activity as well as the modernizing
and retrofitting of energy-related complexes for efficiency and
environmental control purposes.
ENERGY EQUIPMENT
This segment designs, manufactures and markets engineered products for oil
and gas producers, transporters and processors, petroleum marketers and the
power industry. Compression and Pumping Operations include the Dresser-
Rand joint venture, which produces compressors, turbines, generators and
electric motors, as well as the Ingersoll-Dresser Pump unconsolidated joint
venture and the Mono Pumps unit. Measurement Operations supply gasoline
dispensing systems, instruments, meters and piping specialties. Flow
Control Operations manufacture a broad range of valves (including control,
safety, safety relief, ball, check, gate/plug, butterfly and industrial
valves) as well as fluid-powered, linear and electric actuators. Power
Systems Operations produce engines, generators and blowers.
The Financial Information by Industry Segment and Geographic Area for the years
ended October 31, 1996, 1995 and 1994 is included on pages 23 through 26 of
Management's Discussion and Analysis included elsewhere in this report and is an
integral part of this Note to Consolidated Financial Statements.
56
DRESSER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE O - BAROID FINANCIAL INFORMATION
Baroid has ceased filing periodic reports with the Securities and Exchange
Commission. Baroid's 8% Senior Notes remain outstanding (See Note G), and
the Notes are fully guaranteed by Dresser. As long as the Notes remain
outstanding, summarized financial information of Baroid is required to be
presented as follows (in millions):
OCTOBER 31,
-----------------------
BAROID CORPORATION 1996 1995
-------- --------
Current assets $ 796.2 $ 680.0
Noncurrent assets 578.9 532.8
-------- --------
Total $1,375.1 $1,212.8
-------- --------
-------- --------
Current liabilities 377.7 $ 345.1
Noncurrent liabilities 429.2 408.2
Shareholders' equity 568.2 459.5
-------- --------
Total $1,375.1 $1,212.8
-------- --------
-------- --------
YEARS ENDED OCTOBER 31,
--------------------------------------
1996 1995 1994
-------- -------- --------
Revenues $1,606.8 $1,323.3 $ 923.2
-------- -------- --------
-------- -------- --------
Gross earnings $ 443.7 $ 358.8 $ 245.8
-------- -------- --------
-------- -------- --------
Earnings from operations $ 185.2 $ 133.1 $ 78.2
Other income (deductions) (21.0) (18.5) (17.8)
-------- -------- --------
Earnings before taxes
and minority interests 164.2 114.6 60.4
Income taxes (55.8) (37.8) (19.8)
Minority interest (.4) .4 1.9
-------- -------- --------
Net earnings $ 108.0 $ 77.2 $ 42.5
-------- -------- --------
-------- -------- --------
57
DRESSER INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE P - QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTERS ENDED
----------------------------------------------
IN MILLIONS, EXCEPT PER SHARE DATA JANUARY 31 APRIL 30 JULY 31 OCTOBER 31
---------- -------- -------- ----------
1996
Net revenues $1,462.9 $1,629.6 $1,638.0 $1,831.0
-------- -------- -------- --------
-------- -------- -------- --------
Gross earnings 320.4 349.8 369.6 433.6
-------- -------- -------- --------
-------- -------- -------- --------
Net earnings 46.6 57.2 68.3 85.4
-------- -------- -------- --------
-------- -------- -------- --------
Earnings per common share $ .26 $ .31 $ .38 $ .49
-------- -------- -------- --------
-------- -------- -------- --------
1995
Net revenues $1,300.3 $1,261.2 $1,437.4 $1,629.8
-------- -------- -------- --------
-------- -------- -------- --------
Gross earnings 281.5 295.7 322.1 371.5
-------- -------- -------- --------
-------- -------- -------- --------
Earnings before accounting change $ 38.6 $ 45.1 $ 45.0 $ 84.4
Cumulative effect of accounting change (16.0) - - -
-------- -------- -------- --------
Net earnings $ 22.6 $ 45.1 $ 45.0 $ 84.4
-------- -------- -------- --------
-------- -------- -------- --------
Earnings per common share
Earnings before accounting change $ .21 $ .25 $ .25 $ .46
Cumulative effect of accounting change (.09) - - -
-------- -------- -------- --------
Net earnings $ .12 $ .25 $ .25 $ .46
-------- -------- -------- --------
-------- -------- -------- --------
58
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.
Certain information required by this Item is incorporated by reference to
Dresser's definitive proxy statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A within 120 days after the end of
the fiscal year covered by this report (the "Dresser Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference to the
Dresser Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is incorporated by reference to the
Dresser Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is incorporated by reference to the
Dresser Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) List of Financial Statements, Financial Statement Schedules and Exhibits.
(1) and (2) - Response to this portion of Item 14 is submitted as a
separate section of this report.
(3) Response to this portion of Item 14 is submitted as a separate section
of this report.
(b) Reports on Form 8-K.
None.
(c) Exhibits - Response to this portion of Item 14 is submitted as a
separate section to this report. Management contracts or compensatory
plans or arrangements in which Directors or executive officers
participate are included in Exhibits 10.1 - 10.26.
(d) Financial Statement Schedules - The response to this portion of Item
14 is submitted as a separate section of this report.
59
UNDERTAKINGS
For the purpose of complying with the rules governing registration statements
on Form S-8 under the Securities Act of 1933 (as amended effective July 31,
1990), the undersigned Registrant hereby undertakes as follows, which
undertaking shall be incorporated by reference into Registrant's registration
statements on Form S-8 Nos. 2-76847 (filed April 5, 1982), 2-81536 (filed
January 28, 1983), 33-26099 (filed December 21, 1988), 33-30821 (filed
August 28, 1989), 33-48165 (filed May 27, 1992), 33-52067 (filed January 28,
1994) and 33-52989 (filed April 6, 1994), and to the Post-Effective Amendments
on Form S-8 to Registration Statement on Form S-4 Nos. 33-50563 (filed January
28, 1994) and 33-54099 (filed August 31, 1994):
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
Registrant pursuant to the provisions of the Company's Restated Certificate of
Incorporation, as amended, or otherwise, Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by Registrant of expenses
incurred or paid by a director, officer or controlling person of Registrant in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on January 27, 1997.
DRESSER INDUSTRIES, INC.
By: /s/ KENNETH J. KOTARA
----------------------------------
Kenneth J. Kotara
Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on January 27, 1997.
SIGNATURE TITLE
--------- -----
*WILLIAM E. BRADFORD
- ------------------------------------- Chairman of the Board, Chief Executive
(William E. Bradford, Director) Officer and Director (Principal Executive
Officer)
*GEORGE H. JUETTEN
- ------------------------------------- Vice President and Chief Financial
(George H. Juetten) Officer (Principal Financial Officer)
/S/ KENNETH J. KOTARA Controller
- ------------------------------------- (Principal Accounting Officer)
(Kenneth J. Kotara)
*SAMUEL B. CASEY, JR. *J. LANDIS MARTIN
- ------------------------------------- -------------------------------------
(Samuel B. Casey, Jr., Director) (J. Landis Martin, Director)
*LAWRENCE S. EAGLEBURGER *LIONEL H. OLMER
- ------------------------------------- -------------------------------------
(Lawrence S. Eagleburger, Director) (Lionel H. Olmer, Director)
*SYLVIA A. EARLE, PH.D. *JAY A. PRECOURT
- ------------------------------------- -------------------------------------
(Sylvia A. Earle, Ph.D., Director) (Jay A. Precourt, Director)
*RAWLES FULGHAM *DONALD C. VAUGHN
- ------------------------------------- -------------------------------------
(Rawles Fulgham, Director) (Donald C. Vaughn, Director)
*JOHN A. GAVIN *RICHARD W. VIESER
- ------------------------------------- -------------------------------------
(John A. Gavin, Director) (Richard W. Vieser, Director)
*RAY L. HUNT
- -------------------------------------
(Ray L. Hunt, Director)
*By:/s/ REBECCA R. MORRIS
- -------------------------------------
Rebecca R. Morris
(Attorney-In-Fact)
FORM 10-K
ITEM 14(a)(1) AND (2) AND ITEM 14(d)
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
YEAR ENDED OCTOBER 31, 1996
DRESSER INDUSTRIES, INC.
DALLAS, TEXAS
F-1
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements and report of independent
accountants are included in Item 8:
Page
Number
------
Report of Independent Accountants 29
Consolidated Statements of Earnings--
Years ended October 31, 1996, 1995, and 1994 30
Consolidated Balance Sheets--
October 31, 1996 and 1995 31
Consolidated Statements of Shareholders' Equity--
Years ended October 31, 1996, 1995 and 1994 33
Consolidated Statements of Cash Flows--
Years ended October 31, 1996, 1995, and 1994 34
Notes to Consolidated Financial Statements 35
The following consolidated financial statement schedule of Dresser Industries,
Inc. is included herein:
Schedule II--Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
Separate financial statements are not presented for any of the unconsolidated
affiliates because none constitutes a significant subsidiary.
F-2
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
DRESSER INDUSTRIES, INC. AND SUBSIDIARIES
(MILLIONS OF DOLLARS)
Col. C
-----------------------
Col. A Col. B Additions Col. D Col. E
------ ------------------------------------ -----------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Descriptions of Period Expenses Accounts Deductions Period
------------ ---------- ----------- ---------- ---------- ----------
ALLOWANCE DEDUCTED FROM ASSETS TO WHICH THEY APPLY
Year ended October 31, 1996
For doubtful receivables classified as current assets $24.6 $3.2 $ - $ 6.1(B) $21.7
----- ---- ---- ----- -----
----- ---- ---- ----- -----
For deferred tax asset valuation
allowance classified as noncurrent assets $15.0 $ - $2.4 $ - $17.4
----- ---- ---- ----- -----
----- ---- ---- ----- -----
Year ended October 31, 1995
For doubtful receivables classified as current assets $30.4 $3.7 $ .7 $10.2(B) $24.6
----- ---- ---- ----- -----
----- ---- ---- ----- -----
For deferred tax asset valuation
allowance classified as noncurrent assets $21.9 $ - $ - $ 6.9 $15.0
----- ---- ---- ----- -----
----- ---- ---- ----- -----
Year ended October 31, 1994
For doubtful receivables classified as current assets $33.3 $6.4 $1.1(A) $10.4(B) $30.4
----- ---- ---- ----- -----
----- ---- ---- ----- -----
For deferred tax asset valuation
allowance classified as noncurrent assets $54.3 $ - $ - $32.4 $21.9
----- ---- ---- ----- -----
----- ---- ---- ----- -----
Notes:
(A) Primarily reclassification from other accrued liabilities, and addition of
accounts due to acquisition.
(B) Receivable write-offs and reclassifications, net of recoveries.
F-3
INDEX TO EXHIBITS
EXHIBIT DESCRIPTION
- ------- -----------
3.1 Restated Certificate of Incorporation of Registrant and amendments
thereto. (Incorporated by reference to Exhibit 3(I) to Registrant's
Form 10-Q/A for the quarter ended April 30, 1996).
*3.2 By-Laws, as amended, of Registrant.
4.1 Rights Agreement dated August 16, 1990, between Registrant and
Harris Trust Company of New York as Rights Agent. (Incorporated by
reference to Exhibit 1 to Registration Statement on Form 8-A filed
on August 30, 1990, as amended by Amendment No.1 on Form 8 filed on
October 3, 1990).
4.2 Form of Indenture, between Dresser Industries, Inc. and NationsBank
of Texas, N.A., as Trustee, for unsecured debentures, notes and
other evidences of indebtedness. (Incorporated by reference to
Exhibit 4.1 to Registrant's Registration Statement on Form S-3,
Registration No. 33-59562).
4.3 Form of Indenture, between Baroid Corporation and Texas Commerce
Bank National Association, as Trustee, for 8% Senior Notes due 2003.
(Incorporated by reference to Exhibit 4.01 to the Registration
Statement on Form S-3, Registration No. 33-60174).
4.4 Form of Supplemental Indenture, between Dresser Industries, Inc.,
Baroid Corporation and Texas Commerce Bank N.A. as Trustee, for 8%
Guaranteed Senior Notes due 2003. (Incorporated by reference to
Exhibit 4.3 to Registration Statement on Form S-4 filed by Baroid
Corporation, Registration No. 33-53077).
4.5 Form of Indenture, between Dresser Industries, Inc. and Texas
Commerce Bank National Association, Trustee, for 7.60% Debentures
due 2096. (Incorporated by reference to Exhibit 4 to the
Registration Statement on Form S-3 as amended, Registration No.
333-01303).
4.6 Form of Supplemental Indenture, between Dresser Industries, Inc.
and Texas Commerce Bank National Association, Trustee, for 7.60%
Debentures due 2096. (Incorporated by reference to Exhibit 4.1 to
the Registration Statement on Form 8-K filed on August 9, 1996).
10.1 Dresser Industries, Inc. Deferred Compensation Plan. (Incorporated
by reference to Exhibit A to Registrant's Proxy Statement dated
February 11, 1966, filed pursuant to Regulation 14A, File No.
1-4003).
10.2 Dresser Industries, Inc. Short-Term Deferred Compensation Plan.
(Incorporated by reference to Exhibit 10(b) to Registrant's Form
10-K for the year ended October 31, 1992).
- -----------
* Filed Herewith
INDEX TO EXHIBITS (CONT.)
EXHIBIT DESCRIPTION
- ------- -----------
10.3 Dresser Industries, Inc. Retirement Income Plan under ERISA, as
amended effective May 1, 1984, and Amendments No. 1, 2 and 3
thereto. (Incorporated by reference to Exhibit 10(d) to
Registrant's Form 10-K for the year ended October 31, 1986).
10.4 Dresser Industries, Inc. Consolidated Salaried Retirement Plan, as
amended by restatement effective May 1, 1994. (Incorporated by
reference to Exhibit 10.4 to Registrant's Form 10-K for the year
ended October 31, 1994).
10.5 Amendments No. 1 and 2 to the Dresser Industries, Inc. Consolidated
Salaried Retirement Plan, as amended and restated effective May 1,
1994. (Incorporated by reference to Exhibit 10.5 to Registrant's
Form 10-K for the year ended October 31, 1995).
10.6 Dresser Industries, Inc. 1982 Stock Option Plan. (Incorporated by
reference to Exhibit A to Registrant's Proxy Statement dated
February 12, 1982, filed pursuant to Regulation 14A, File No.
1-4003).
10.7 ERISA Excess Benefit Plan for Dresser Industries, Inc. as amended
and restated effective June 1, 1995. (Incorporated by reference
to Exhibit 10.7 to Registrant's Form 10-K for the year ended
October 31, 1995).
10.8 ERISA Compensation Limit Benefit Plan for Dresser Industries, Inc.,
as amended and restated effective June 1, 1995. (Incorporated by
reference to Exhibit 10.8 to Registrant's Form 10-K for the year
ended October 31, 1995).
10.9 Supplemental Executive Retirement Plan of Dresser Industries, Inc.,
as amended and restated effective June 1, 1995. (Incorporated by
reference to Exhibit 10.9 to Registrant's Form 10-K for the year
ended October 31, 1995).
10.10 Dresser Industries, Inc. Deferred Compensation Plan for Non-employee
Directors, as amended. (Incorporated by reference for Exhibit 10(n)
to Registrant's Form 10-K/A for the year ended October 31, 1992).
10.11 Dresser Industries, Inc. 1989 Restricted Incentive Stock Plan.
(Incorporated by reference to Exhibit A to Registrant's Proxy
Statement dated February 10, 1989, filed pursuant to Regulation 14A,
File No. 1-4003).
10.12 Dresser Industries, Inc. 1989 Director Retirement Plan, as amended
by restatement effective July 15, 1993. (Incorporated by reference
to Exhibit 10.16 to Registrant's Form 10-K for the year ended
October 31, 1993).
10.13 Form of Election for Deferral of Awards pursuant to the Dresser
Industries, Inc. 1989 Director Retirement Plan. (Incorporated by
reference to Exhibit 10.17 to Registrant's Form 10-K for the year
ended October 31, 1993).
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* Filed Herewith
INDEX TO EXHIBITS (CONT.)
EXHIBIT DESCRIPTION
- ------- -----------
10.14 The M. W. Kellogg Company Retirement Plan, as amended and restated
effective January 1, 1989. (Incorporated by reference to
Exhibit 10.15 to Registrant's Form 10-K for the year ended
October 31, 1995).
10.15 Long Term Performance Plan for Selected Employees of The
M. W. Kellogg Company. (Incorporated by reference to Exhibit 10(r)
to Registrant's Form 10-K for the year ended October 31, 1991).
10.16 Annual Incentive Plan for Selected Employees of The M. W. Kellogg
Company. (Incorporated by reference to Exhibit 10(s) to
Registrant's Form 10-K for the year ended October 31, 1991).
10.17 Dresser Industries, Inc. 1992 Stock Compensation Plan. (Incorporated
by reference to Exhibit A to Registrant's Proxy Statement dated
February 7, 1992, filed pursuant to Regulation 14A, File No. 1-4003).
10.18 Amendments No.1 and 2 to Dresser Industries, Inc. 1992 Stock
Compensation Plan. (Incorporated by reference to Exhibit A to
Registrant's Proxy Statement dated February 6, 1995, filed
pursuant to Regulation 14A, File No. 1-4003).
10.19 Dresser-Rand Company Pension Plan. (Incorporated by reference to
Exhibit 10(y) to Registrant's Form 10-K for the year ended
October 31, 1992).
10.20 Dresser Industries, Inc. Deferred Savings Plan. (Incorporated by
reference to Exhibit 10(z) to Registrant's Form 10-K for the year
ended October 31, 1992).
10.21 The M. W. Kellogg Company Executive Benefits Program. (Incorporated
by reference to Exhibit 10.26 to Registrant's Form 10-K for the
year ended October 31, 1994).
10.22 Dresser Industries, Inc. 1995 Executive Incentive Compensation Plan.
(Incorporated by reference to Exhibit B to Registrant's Proxy
Statement dated February 6, 1995, filed pursuant to Regulation 14A,
File No. 1-4003).
10.23 Dresser Industries, Inc. Retirement Savings Plan - A as adopted
effective June 1, 1995. (Incorporated by reference to Exhibit 10.24
to Registrant's Form 10-K for the year ended October 31, 1995).
10.24 Agreement with John Gavin (Incorporated by reference to Exhibit 10
to Registrant's Form 10-Q/A for the quarter ended April 30, 1996).
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* Filed Herewith
INDEX TO EXHIBITS (CONT.)
EXHIBIT DESCRIPTION
- ------- -----------
*10.25 Agreement with John Gavin for the period November 1, 1996-
January 31, 1997.
*10.26 Special 1997 Restricted Incentive Stock Grant.
*21 Subsidiaries of Registrant at October 31, 1996.
*23 Consent of Price Waterhouse LLP.
*24 Powers of Attorney.
*27 Financial Data Schedule.
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* Filed Herewith