1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A
Amendment No. 1 to Annual Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended October 31, 1995
COMMISSION FILE NUMBER 0-588
COMMERCIAL INTERTECH CORP.
(Exact name of registrant as specified in its charter)
Ohio 34-0159880
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1775 Logan Avenue, Youngstown, Ohio 44501
(Address of principal executive offices) (Zip Code)
(330) 746-8011
Registrant's telephone number, including area code
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, PAR VALUE $1 PER SHARE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for at least 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. [ ]
As of July 15, 1996, 14,665,404 common shares were outstanding, and the
aggregate market value of the voting stock held by non-affiliates of the
Registrant (based upon the last price on that date and, for purposes of this
calculation only, the assumption that all of the Registrant's officers,
directors and their affiliates are affiliates of the Registrant), was
approximately $391,516,016. Because no market exists for the ESOP Convertible
Preferred Stock Series B shares, these shares were not included in determining
the aggregate market value of the Registrant's voting stock.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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PART I
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
STATEMENTS OF CONSOLIDATED INCOME
Commercial Intertech Corp. and Subsidiaries
Year Ended October 31,
1995 1994 1993
--------------------------
(in thousands, except per-share data)
Net sales. . . . . . . . . . . . . . . . $621,836 $516,931 $448,577
Less costs and expenses:
Cost of products sold . . . . . . . . 436,857 363,701 319,697
Selling, administrative and general
expenses . . . . . . . . . . . . . 139,729 118,401 103,510
--------- --------- ---------
576,586 482,102 423,207
--------- --------- ---------
Operating income . . . . . . . . . . . . 45,250 34,829 25,370
Nonoperating income (expense):
Interest income . . . . . . . . . . . 1,966 1,393 1,047
Interest expense. . . . . . . . . . . (6,912) (4,952) (5,744)
Other . . . . . . . . . . . . . . . . (362) (3,467) (71)
--------- --------- ---------
(5,308) (7,026) (4,768)
--------- --------- ---------
Income from continuing operations before
income taxes. . . . . . . . . . . . . 39,942 27,803 20,602
Provision for income taxes:
Current . . . . . . . . . . . . . . . 10,404 9,949 8,794
Deferred. . . . . . . . . . . . . . . (845) (1,765) (2,207)
--------- --------- ---------
9,559 8,184 6,587
--------- --------- ---------
Income from continuing operations. . . . 30,383 19,619 14,015
Income from discontinued operation . . . 0 5,462 0
--------- --------- ---------
Net income . . . . . . . . . . . . . . . $ 30,383 $ 25,081 $ 14,015
========= ========= =========
Preferred stock dividends and adjustments. (2,084) (2,097) (2,109)
--------- --------- ---------
Net income applicable to common stock. . $ 28,299 $ 22,984 $ 11,906
========= ========= =========
Earnings per share of common stock:
Primary:
Income from continuing operations $1.82 $1.14 $0.79
Net income . . . . . . . . . . . . 1.82 1.50 0.79
Fully diluted:
Income from continuing operations. $1.72 $1.09 $0.76
Net income . . . . . . . . . . . . 1.72 1.41 0.76
See notes to consolidated financial statements.
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ITEM 8. (Continued)
CONSOLIDATED BALANCE SHEETS
Commercial Intertech Corp. and Subsidiaries
October 31, October 31,
1995 1994
------------------------
Assets (in thousands)
CURRENT ASSETS
Cash (including equivalents of $ 25,237,000
in 1995 and $37,073,000 in 1994 . . . . $ 39,689 $ 52,666
Accounts and notes receivable, less
allowances for doubtful accounts of
$ 3,442,000 in 1995 and $2,890,000 in
1994 . . . . . . . . . . . . . . . . . . 114,921 94,212
Inventories . . . . . . . . . . . . . . . . 73,482 62,320
Deferred income tax benefits. . . . . . . . 17,405 15,307
Prepaid expenses and other current assets . 7,523 10,861
--------- --------
Total current assets . . . . . . . . . . 253,020 235,366
NONCURRENT ASSETS
Intangible assets . . . . . . . . . . . . . 23,761 26,563
Pension assets. . . . . . . . . . . . . . . 35,742 31,191
Other noncurrent assets . . . . . . . . . . 4,607 4,421
--------- --------
Total noncurrent assets. . . . . . . . . 64,110 62,175
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements. . . . . . . . . 14,073 13,571
Buildings . . . . . . . . . . . . . . . . . 73,233 66,194
Machinery and equipment . . . . . . . . . . 178,482 164,069
Construction in progress. . . . . . . . . . 14,648 10,056
--------- --------
280,436 253,890
Less allowances for depreciation and
amortization. . . . . . . . . . . . . . . . 137,710 128,453
--------- --------
142,726 125,437
--------- --------
Total assets . . . . . . . . . . . . . . . . . $459,856 $422,978
======== ========
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ITEM 8. (Continued)
CONSOLIDATED BALANCE SHEETS (Continued)
October 31, October 31,
1995 1994
------------------------
(in thousands)
Liabilities and Shareholders' Equity
CURRENT LIABILITIES
Bank loans. . . . . . . . . . . . . . . . . . $ 19,725 $ 20,273
Accounts payable. . . . . . . . . . . . . . . 58,477 44,489
Accrued payrolls and related taxes. . . . . . 29,010 22,168
Accrued expenses. . . . . . . . . . . . . . . 38,742 40,669
Dividends payable . . . . . . . . . . . . . . 2,788 2,509
Accrued income taxes. . . . . . . . . . . . . 6,163 2,037
Current portion of long-term debt . . . . . . 2,269 2,821
--------- --------
Total current liabilities. . . . . . . . . 157,174 134,966
NONCURRENT LIABILITIES
Long-term debt. . . . . . . . . . . . . . . . 73,929 77,020
Deferred income taxes . . . . . . . . . . . . 18,179 16,926
Postretirement benefits . . . . . . . . . . . 23,711 21,188
Deferred credit . . . . . . . . . . . . . . . 3,731 19,118
--------- --------
Total noncurrent liabilities . . . . . . . 119,550 134,252
SHAREHOLDERS' EQUITY
Preferred stock, no par value:
Authorized: 10,000,000 shares
Series A participating preferred
shares. . . . . . . . . . . . . . . . . 0 0
Series B ESOP convertible preferred shares
Issued: 1995 - 1,053,508 shares
1994 - 1,059,407 shares . . . . 24,494 24,631
Common stock, $1 par value:
Authorized: 30,000,000 shares
Issued:
1995 - 15,439,514 shares;
(excluding 149,043 in treasury)
1994 - 15,199,258 shares;
(excluding 144,261 in treasury) . . . . 15,440 15,199
Capital surplus . . . . . . . . . . . . . . . 38,396 35,844
Retained earnings . . . . . . . . . . . . . . 112,907 91,649
Deferred compensation . . . . . . . . . . . . (18,851) (20,108)
Translation adjustment. . . . . . . . . . . . 10,746 6,545
--------- ---------
183,132 153,760
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $459,856 $422,978
========= =========
See notes to consolidated financial statements.
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ITEM 8. (Continued)
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
Commercial Intertech Corp. and Subsidiaries
Year Ended October 31,
1995 1994 1993
--------------------------
(in thousands, except per-share data)
PREFERRED STOCK (Series B)
Balance at beginning of year. . . . . $ 24,631 $ 24,758 $ 24,886
Shares converted. . . . . . . . . . . (137) (127) (128)
--------- --------- ---------
Balance at end of year. . . . . . . . 24,494 24,631 24,758
COMMON STOCK
Balance at beginning of year. . . . . 15,199 10,038 9,910
Shares issued:
Employee Stock Ownership Plan. . . 34 25 23
Stock option and award plans . . . 207 63 105
Shares issued as of September 1, 1994
in stock split effected in the form
of a 50% share dividend. . . . . . 0 5,073 0
--------- --------- ---------
Balance at end of year. . . . . . . . 15,440 15,199 10,038
CAPITAL SURPLUS
Balance at beginning of year. . . . . 35,844 39,034 37,628
Employee Stock Ownership Plan . . . . 631 112 419
Stock option and award plans. . . . . 1,921 1,771 987
Par value transferred to common stock
in connection with stock split
effected in form of share dividend 0 (5,073) 0
--------- --------- ---------
Balance at end of year. . . . . . . . 38,396 35,844 39,034
RETAINED EARNINGS
Balance at beginning of year. . . . . 91,649 75,087 69,199
Net income for the year . . . . . . . 30,383 25,081 14,015
--------- --------- ---------
122,032 100,168 83,214
Dividends:
Common (per share: 1995 - $0.51;
1994 - $0.48; 1993 - $0.45) . . 7,862 7,239 6,821
Preferred Series B . . . . . . . . 2,082 2,095 2,107
--------- --------- ---------
9,944 9,334 8,928
Other preferred stock adjustments . . (819) (815) (801)
--------- --------- ---------
Balance at end of year. . . . . . . . 112,907 91,649 75,087
DEFERRED COMPENSATION. . . . . . . . . . (18,851) (20,108) (21,248)
TRANSLATION ADJUSTMENT . . . . . . . . . 10,746 6,545 (4,732)
--------- --------- ---------
Total shareholders' equity . . . . $183,132 $153,760 $122,937
========= ========= =========
Shareholders' equity per share of common
stock . . . . . . . . . . . . . . . . $11.50 $9.82 $7.93
See notes to consolidated financial statements.
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ITEM 8. (Continued)
STATEMENTS OF CONSOLIDATED CASH FLOWS
Commercial Intertech Corp. and Subsidiaries
Year Ended October 31,
1995 1994 1993
------------------------
OPERATING ACTIVITIES: (in thousands)
Net income . . . . . . . . . . . . . . . . . $ 30,383 $ 25,081 $ 14,015
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for depreciation and
amortization. . . . . . . . . . . . 19,205 17,962 16,764
Discontinued operation . . . . . . . . 0 (5,462) 0
Amortization of deferred credit. . . . (16,095) (6,466) 0
Postretirement benefits. . . . . . . . 634 383 781
Pension plan credits . . . . . . . . . (1,853) (2,531) (2,386)
Change in deferred income taxes. . . . (944) (2,026) (1,615)
Change in current assets and liabilities:
(Increase) decrease in accounts
receivable . . . . . . . . . . . (19,838) (4,615) 138
(Increase) decrease in inventories. (9,709) (4,475) 2,349
(Increase) in prepaid expenses
and other current assets . . . . (3,135) (1,020) (1,332)
Increase in accounts payable and
accrued expenses . . . . . . . . 16,022 21,597 7,688
Increase (decrease) in accrued
income taxes . . . . . . . . . . 5,605 (6,072) (143)
--------- --------- ---------
Net cash provided by operating
activities. . . . . . . . . . 20,275 32,356 36,259
INVESTING ACTIVITIES:
Proceeds from sale of fixed assets . . . . . 487 284 340
Business acquisition . . . . . . . . . . . . (886) 0 0
Cash and cash equivalents acquired in
business acquisition. . . . . . . . . . . 0 11,140 0
Installments received - acquisition. . . . . 17,146 18,833 0
Investment in intangibles. . . . . . . . . . (389) (450) (496)
Capital expenditures . . . . . . . . . . . . (37,028) (22,373) (9,583)
--------- --------- ---------
Net cash (used) provided by investing
activities. . . . . . . . . . . . . (20,670) 7,434 (9,739)
FINANCING ACTIVITIES:
Proceeds from long-term debt . . . . . . . . 4,012 0 1,548
Principal payments on long-term debt . . . . (7,700) (2,897) (8,114)
Net borrowings under bank loan agreements. . 629 (2,237) (1,034)
Proceeds from reserve contracts. . . . . . . 2,089 830 631
Purchase of reserve contracts. . . . . . . . (3,475) (3,430) (2,503)
Conversion of other assets . . . . . . . . . (660) 653 (817)
Dividends paid . . . . . . . . . . . . . . . (9,666) (9,094) (8,872)
--------- --------- ---------
Net cash (used) by financing activities (14,771) (16,175) (19,161)
Effect of exchange rate changes on cash . . . . 2,189 3,985 (1,689)
--------- --------- ---------
Net (decrease)increase in cash and cash
equivalents. . . . . . . . . . . . . . . . (12,977) 27,600 5,670
Cash and cash equivalents at beginning of year. 52,666 25,066 19,396
--------- --------- ---------
Cash and cash equivalents at end of year. . . . $ 39,689 $ 52,666 $ 25,066
========= ========= =========
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . $7,055 $6,162 $6,032
Income taxes . . . . . . . . . . . . . . . . 4,899 16,282 8,344
See notes to consolidated financial statements.
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ITEM 8. (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Commercial Intertech Corp. and Subsidiaries
NOTE A - ACCOUNTING POLICIES
Consolidation:
The accounts of the Company and all of its subsidiaries
are included in the consolidated financial statements. All intercompany
accounts and transactions are eliminated upon consolidation. Certain amounts
in the consolidated financial statements for prior years have been reclassified
to conform to the current presentation.
Inventories:
Inventories are stated at the lower of cost or market. Inventories in the
United States are primarily valued on the last-in, first-out (LIFO) cost
method. The method used for all other inventories is first-in, first-out
(FIFO). Approximately 51 percent (56 percent in 1994) of worldwide inventories
are accounted for using the LIFO method. Inventories as of October 31
consisted of the following:
1995 1994
---- ----
(in thousands)
Raw materials . . . . . . . . $17,982 $15,393
Work in process . . . . . . . 34,461 31,188
Finished goods. . . . . . . . 21,039 15,739
------- -------
$73,482 $62,320
======= =======
If all inventories were priced using the FIFO method, which approximates
replacement cost, inventories would have been $16,591,000 higher in 1995 and
$15,510,000 higher in 1994.
Intangibles:
Intangible assets at October 31 are summarized as follows:
1995 1994
---- ----
(in thousands)
Goodwill, less accumulated
amortization (1995 - $5,856,000;
1994 - $5,088,000) . . . . . $17,829 $18,331
Other intangibles, less accumulated
amortization (1995 - $22,652,000;
1994 - $20,249,000) . . . . . . 5,932 8,232
------- -------
$23,761 $26,563
======= =======
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ITEM 8. (Continued)
NOTE A - ACCOUNTING POLICIES (Continued)
Excess cost over the fair value of net assets acquired (or goodwill)
generally is amortized on a straight-line basis over 40 years. The carrying
value of goodwill is reviewed if facts and circumstances suggest that it may be
impaired. If this review indicates that goodwill will not be recoverable, as
determined on the estimated undiscounted cash flows of the entity acquired over
the remaining amortization period, the Company's carrying value of the goodwill
is reduced by the estimated shortfall of cash flows. In addition, the Company
assesses long-lived assets for impairment under Financial Accounting Standards
Board Statement No. 121. Under those rules, goodwill associated with assets
acquired in a purchase business combination is included in impairment
evaluations when events or circumstances exist that indicate the carrying
amount of those assets may not be recoverable.
Other intangibles, including patents, know-how and trademarks, are carried
at their appraised value on the acquisition date less accumulated amortization,
which is provided using the straight-line method over 10 to 25 years.
Deferred credit represents negative goodwill from an acquisition (see Note
K).
Properties and Depreciation:
Property, plant and equipment are recorded at cost. Buildings and
equipment are depreciated over their useful lives, principally by use of the
straight-line method.
Income Taxes:
The Company uses the liability method as required by Statement of
Financial Accounting Standards No. 109 in measuring the provision for income
taxes and recognizing deferred tax assets and liabilities on the balance sheet.
Deferred income tax assets and liabilities principally arise from differences
between the tax basis of the asset or liability and its reported amount in the
consolidated financial statements. These include inventory valuation
differences under uniform capitalization rules, depreciation expense, accrued
expenses, postretirement benefit expenses, net operating loss carryforwards and
a gain on the sale of property in the United Kingdom. Deferred tax balances
are determined by using provisions of the enacted tax laws; the effects of
future changes in tax laws or rates are not anticipated.
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ITEM 8. (Continued)
NOTE A - ACCOUNTING POLICIES (Continued)
Provisions are made for appropriate income taxes on undistributed earnings
of foreign subsidiaries which are expected to be remitted to the parent company
in the near term. The cumulative amount of unremitted earnings of
subsidiaries, which aggregated approximately $70,794,000 at October 31, 1995,
is deemed to be indefinitely reinvested and, accordingly, no provision for U.S.
federal and state income taxes has been provided thereon. Upon distribution of
those earnings in the form of dividends or otherwise, the Company would be
subject to both U.S. income taxes (subject to an adjustment for foreign tax
credits) and withholding taxes payable to the various foreign countries.
Determination of the amount of unrecognized deferred U.S. tax liability is not
practicable because of the complexities associated with its hypothetical
calculation; however, unrecognized foreign tax credit carryforwards would be
available to reduce some portion of the U.S. liability.
Translation of Foreign Currencies:
The financial statements of foreign entities are translated in accordance
with Financial Accounting Standards Board (FASB) Statement No. 52, except for
those entities located in highly inflationary countries. Under this method,
revenue and expense accounts are translated at the average exchange rate for
the year while all assets and liability accounts are translated into U.S.
dollars at the current exchange rate. Resulting translation adjustments are
recorded as a separate component of shareholders' equity and do not affect
income determination.
Earnings Per-Share Amounts:
The Company's Board of Directors approved a three-for-two split in July
1994 of the Company's common stock in the form of a 50 percent share dividend.
The par value of each share was not changed from $1. Accordingly, all per
share and stock option data have been restated to reflect the split. In
connection with the split, common stock was credited and capital surplus was
charged for the aggregate par value of the shares that were issued.
Income per share of common stock is computed using the weighted-average
number of shares outstanding for each year after giving retroactive effect to
the 1994 share dividend. The preferred stock issuances were determined not to
be common stock equivalents for primary earnings per common share. In
computing primary earnings per common share, the Series B preferred dividends
reduce income available to common shareholders.
- 9 -
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ITEM 8. (Continued)
NOTE A - ACCOUNTING POLICIES (Continued)
In computing fully diluted earnings per share, dilution is determined by
dividing net earnings by the weighted average number of common shares
outstanding during each year adjusted for the 1994 share dividend after giving
effect to dilutive preferred stock assumed converted to common stock. The
dilutive calculation assumes conversion of Series B preferred stock to common
shares and the subsequent adjustment for dividend rates to arrive at income
available to common shareholders.
Cash Equivalents:
The Company considers all highly liquid investments with a maturity of
three months or less, when purchased, to be cash equivalents.
Investment in Reserve Contracts:
The Company holds corporate owned life insurance contracts on all domestic
employees. The contracts are recorded at cash surrender value, net of policy
loans, in Other Assets. The net contract expense, including interest expense,
is included in Selling, Administrative and General Expenses in the Statements
of Consolidated Income. The related interest expense was $7,973,000 in 1995,
$6,320,000 in 1994, and $3,660,000 in 1993 which in each year is reduced for
contract benefits and net amortization of contract premiums and cash surrender
value.
Revenue Recognition:
Revenue is recognized when the earning process is complete and the risks
and rewards of ownership have transferred to the customer, which is generally
considered to have occurred upon shipment of the finished product.
Advertising:
The Company expenses all advertising cost as incurred. Advertising
expense incurred during the period was immaterial.
Newly Issued Accounting Standards:
In March 1995, 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 No. 121), was issued. The Company adopted SFAS No.
121 during fiscal 1995. There was no impact on the Company's financial results
or position. SFAS No. 121 requires companies to review long-lived assets and
certain identifiable intangibles to be held and used for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable.
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ITEM 8. (Continued)
NOTE A - ACCOUNTING POLICIES (Continued)
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," was issued. As permitted by this
statement, the Company intends to continue to account for such compensation,
using the intrinsic value method in accordance with APB No. 25. Adoption of
the new standard in this form will have no impact on reported income in future
years. Pro forma disclosures as required by this pronouncement will apply to
stock-based awards granted on or after November 1, 1995 and will first be
disclosed in financial statements for 1997.
- 11 -
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ITEM 8. (Continued)
NOTE B - DEBT
Long-term debt obligations are summarized below:
1995 1994
---- ----
(in thousands)
Senior notes . . . . . . . . . . . . . $45,000 $45,000
Industrial revenue loans . . . . . . . 3,533 4,225
Mortgages. . . . . . . . . . . . . . . 4,973 5,868
Other. . . . . . . . . . . . . . . . . 1,010 2,265
------- -------
54,516 57,358
Less current portion . . . . . . . . . 2,269 2,821
------- -------
52,247 54,537
Guarantee of employee stock ownership
plan loan . . . . . . . . . . . . . 21,682 22,483
------- -------
$73,929 $77,020
======= =======
The Company has outstanding $45 million of 8.20 percent senior notes due
in 2002, privately placed with a group of insurance companies. The notes have
level annual sinking fund payments beginning in April 1997. The senior notes
include covenants which require the maintenance of certain financial ratios.
The Company was in compliance with these covenants at October 31, 1995.
The Company maintains a $35 million nonreducing revolving credit facility
with a group of three banks. There were no borrowings outstanding from this
facility at October 31, 1995 or 1994. The funds available under the agreement
may be used for any general corporate purposes, including share purchases. The
Company pays a facility fee of 0.25 percent per annum on the total commitment.
The revolving credit portion of the agreement has interest options determinable
by the Company based upon LIBOR, certificate of deposit or prime interest
rates. The maximum rate is prime rate, 7/8 percentage point over LIBOR or one
percentage point over certificate of deposit rates. The credit agreement also
has a competitive bid option feature, which under certain conditions provides
lower interest rates. The credit agreement includes covenants which require
the maintenance of certain financial ratios. The Company was in compliance
with these covenants at October 31, 1995. Additionally, under the most
restrictive provisions of the agreement, approximately $23.5 million of
unrestricted retained earnings is available for future dividend payments or
share purchases. During 1994 the agreement was extended two years and will
expire April 1997.
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13
ITEM 8. (Continued)
NOTE B - DEBT (Continued)
Industrial revenue loans cover two separate domestic expansion programs
and have maturities to January 1, 2001. Interest costs currently range from
6.825 to 7.75 percent, and the loans are secured by property and equipment at
the Benton, Arkansas and Hicksville, Ohio facilities (net book value at October
31, 1995 - $5,340,000).
Mortgages relate to construction programs at two facilities. The three
loans collateralized with a Japanese facility were replaced during fiscal 1995
with two loans that bear interest at 1.75 and 1.88 percent, maturing through
the year 2000. One of the two loans is secured with property and equipment at
Kita-Ibaragi, Japan (net book value at October 31, 1995 - $6,395,000). The
second loan is unsecured. The loan for the second program is collateralized by
a facility located in Enfield, Connecticut and bears interest at 5.0 percent,
also maturing in the year 2000. The Enfield facility's net book value at
October 31, 1995 was $4,062,000.
The Company established the Employee Stock Ownership Plan (ESOP) in
February 1990. The ESOP is presently financed by 7.08 percent senior notes due
December 31, 2009, privately placed with a group of insurance companies. Since
the debt is guaranteed by the Company, it is included in Long-Term Debt with an
offset recorded as Deferred Compensation in Shareholders' Equity. As Company
contributions and dividends on the shares held by the ESOP are used to meet
interest and principal payments, shares are released for allocation to eligible
employees.
Principal payments due in the five years after October 31, 1995 (excluding
the ESOP loan guarantee) are:
(in thousands)
1996 - $ 2,269
1997 - 9,644
1998 - 9,246
1999 - 9,282
2000 - 9,074
The Company had available unused lines of credit in various countries
totaling approximately $96.4 million short-term and $35.0 million long-term at
October 31, 1995. Outstanding bank loans at October 31, 1995 and 1994 had
weighted average interest rates of 4.3 percent and 6.1 percent, respectively.
- 13 -
14
ITEM 8. (Continued)
NOTE C - FOREIGN CURRENCY TRANSLATION
The cumulative effects of foreign currency translation gains and losses
are reflected in the Translation Adjustment section of Shareholders' Equity.
Translation adjustments increased equity by $4,201,000 in 1995 and $11,277,000
in 1994 and decreased equity by $7,453,000 in 1993.
Foreign currency transaction gains and losses, which include U.S. dollar
translation losses in Brazil, are reflected in income. For the three-year
period reported herein, foreign currency losses have decreased Income from
Continuing Operations before Income Taxes as follows:
(in thousands)
1995 - $ 779
1994 - 2,751
1993 - 678
- 14 -
15
ITEM 8. (Continued)
NOTE D - STOCK OPTIONS AND AWARDS
Under the Company's stock option and award plans, approximately 1,413,600
shares of common stock are reserved for issuance to key employees as of October
31, 1995. The options are exercisable at various dates and expire ten years
from the date of grant. Stock options granted during 1995 totaled 123,750
shares. A total of 43,500 options were forfeited during the year. Stock
appreciation rights may be granted as part of a stock option or as a separate
right to the holders of any options previously granted. The present plan also
provides for awards of restricted and performance shares of common stock to key
employees. There were 43,800 restricted shares awarded in 1995 and 93,150
restricted shares awarded in 1994. Awards of performance shares totaled
130,650 in 1995 and 1,500 in 1994. When rights, options or awards are granted,
associated compensation expense is accrued from date of grant to the date such
options or awards are exercised.
A summary of the activity follows:
Number Option Price Range
of Shares Per Share
--------- ------------------
Options outstanding at October 31:
1995. . . . . . . . . . . . 617,051 $9.83 - $21.88
1994. . . . . . . . . . . . 623,337 6.50 - 15.58
Options exercised during the year:
1995. . . . . . . . . . . . 86,536 $6.50 - $14.83
1994. . . . . . . . . . . . 141,138 9.83 - 14.83
Options exercisable at October 31:
1995. . . . . . . . . . . . 340,376 $9.83 - $15.58
1994. . . . . . . . . . . . 294,987 6.50 - 14.83
Shares available for future grants amounted to approximately 796,550 and
300,450 as of October 31, 1995 and 1994, respectively.
All data presented herein has been restated for the effects of a
three-for-two stock split of the Company's common stock which was approved on
July 27, 1994.
- 15 -
16
ITEM 8. (Continued)
NOTE E - BENEFIT PLANS
The Company and its subsidiaries have a number of noncontributory defined
benefit pension plans covering most U.S. employees. Pension benefits for the
hourly employees covered by these plans are expressed as a percentage of
average earnings over a ten-year period times years of continuous service or as
a flat benefit rate times years of continuous service. Benefits for salaried
employees are based upon a percentage of the employee's average compensation
during the preceding ten years, reduced by 50 percent of the Social Security
Retirement Benefit. The Company's funding policy is to contribute amounts to
the plans sufficient to meet the minimum funding requirements set forth in the
Employee Retirement Income Security Act of 1974, plus such additional amounts
as may be deemed appropriate from time to time.
The Company also sponsors defined contribution pension plans for the
hourly employees of its operations in Benton, Arkansas; Kings Mountain, North
Carolina; and Minneapolis, Minnesota. Contributions and expense for these
plans are computed at 3 percent of annual employee compensation or at a
discretionary rate as determined each year by the Company. Hourly employees at
the Orange, California facility are covered by a multiemployer plan which
provides benefits in a manner similar to a defined contribution arrangement.
The Company accounts for pension costs under the provisions of FASB
Statement No. 87 for contributory defined benefit pension plans covering its
employees in Japan and the United Kingdom. Benefits under these plans are
generally based on years of service and compensation during the years
immediately preceding retirement. Funding is predicated on minimum
contributions as required by local laws and regulations plus additional
amounts, if any, as may be deemed appropriate. Some employees of other foreign
operations also participate in postemployment benefit arrangements not subject
to the provisions of FASB Statement No. 87.
- 16 -
17
ITEM 8. (Continued)
NOTE E - BENEFIT PLANS (Continued)
A summary of the various components of net periodic pension cost for
defined benefit plans and cost information for other plans for the three-year
period is shown below:
1995 1994 1993
---- ---- ----
(in thousands)
Defined benefit plans:
Service cost. . . . . . . . . . $ 3,166 $ 3,054 $ 2,360
Interest cost . . . . . . . . . 8,548 7,484 7,087
Actual return on plan assets. . (26,195) (4,124) (19,945)
Net amortization and deferral . 14,671 (6,499) 10,001
--------- -------- --------
Net pension expense (income). . 190 (85) (497)
Other plans:
Defined contribution plans. . . 388 356 284
Multiemployer plan. . . . . . . 70 81 75
Foreign plans . . . . . . . . . 585 599 471
--------- -------- --------
Total pension expense . . . . . $ 1,233 $ 951 $ 333
========= ======== ========
Assumptions used in the accounting for the defined benefit plans as of October
31 were:
1995 1994 1993
---- ---- ----
Weighted-average discount rate . . . . . . . . . 7.25% 8.5% 7.25%
Rates of increase in compensation levels . . . . 4.5 % 4.5% 4.5 %
Expected long-term rate of return on assets. . . 10.0 % 10.0% 10.0 %
- 17 -
18
ITEM 8. (Continued)
NOTE E - BENEFIT PLANS (Continued)
The following table sets forth the funded status and amounts recognized in
the Consolidated Balance Sheets at October 31, 1995 and 1994 for the Company's
U.S. and foreign defined benefit pension plans. Other foreign pension plans do
not determine net assets or the actuarial present value of accumulated benefits
as calculated and disclosed herein:
1 9 9 5 1 9 9 4
---------------------------- ----------------------------
Plans Whose Plans Whose Plans Whose Plans Whose
Assets Exceed Accumulated Assets Exceed Accumulated
Accumulated Benefits Accumulated Benefits
Benefits Exceed Assets Benefits Exceed Assets
------------- ------------- ------------- -------------
(in thousands)
Actuarial present value of
benefit obligations:
Vested benefit obligation. . . . $(51,207) $(54,267) $(44,039) $(43,967)
========= ========= ========= =========
Accumulated benefit obligation . $(53,236) $(57,696) $(45,576) $(46,448)
========= ========= ========= =========
Projected benefit obligation . . . $(57,085) $(69,788) $(48,626) $(55,256)
Market value of plan assets. . . . 89,627 52,726 78,223 44,018
--------- --------- --------- ---------
Projected benefit obligation less
than or (in excess of) plan
assets. . . . . . . . . . . . . 32,542 (17,062) 29,597 (11,238)
Unrecognized net (gain) loss . . . (1,040) 7,883 (71) 5,028
Unrecognized prior service cost. . 2,479 2,880 2,741 2,964
Unrecognized net (asset) obligation (4,528) 3,790 (5,712) 1,190
Additional liability . . . . . . . 0 (2,585) 0 (1,035)
--------- ---------- --------- ---------
Net pension asset (liability)
recognized in the Consolidated
Balance Sheet . . . . . . . . . $ 29,453 $ (5,094) $ 26,555 $ (3,091)
========= ========= ========= =========
Plan assets at October 31, 1995 are invested in publicly traded and
restricted mutual funds, various corporate and government bonds, guaranteed
income contracts and listed stocks, including common stock of the Company
having a market value of $3,701,700 at that date.
- 18 -
19
ITEM 8. (Continued)
NOTE E - BENEFIT PLANS (Continued)
In addition to pension benefits, the Company sponsors other defined
benefit postretirement plans in the U.S. which provide medical and life
insurance benefits for certain hourly and salaried employees. Benefits are
provided on a noncontributory basis for those salaried retirees who have
attained the age of 55 with 15 years of service and those hourly retirees who
have attained the age of 60 with 15 years of service or 30 years of service
with no age restriction, up to 65 years of age. Coverage is also provided for
surviving spouses of hourly retirees. Medical plans for both employee groups
incorporate deductibles and coinsurance features. The plans are unfunded, and
postretirement benefit claims and premiums are paid as incurred.
Company-sponsored postretirement benefits are not available to employees of
foreign subsidiaries.
Components of net periodic postretirement benefit cost are shown below.
Net periodic cost associated with retiree life insurance benefits amounted to
$269,000 in 1995, $314,000 in 1994, and $296,000 in 1993.
1995 1994 1993
---- ---- ----
(in thousands)
Service cost. . . . . . . . . . . . . . . $ 386 $ 419 $ 377
Interest cost . . . . . . . . . . . . . . 1,463 1,357 1,411
Actual return on plan assets. . . . . . . 0 0 0
Amortization of transition obligation . . 0 0 0
Net amortization and deferral . . . . . . (11) 49 26
-------- ------ ------
Net periodic postretirement benefit cost. $ 1,838 $1,825 $1,814
======= ====== ======
The following table shows the aggregated funded status of the benefit
plans reconciled with amounts recognized in the Company's Consolidated Balance
Sheets. The accrued postretirement cost associated with retiree life insurance
benefits amounted to $3,410,000 and $3,257,000 as of October 31, 1995 and 1994,
respectively.
October 31,
---------------
1995 1994
---- ----
(in thousands)
Accumulated postretirement benefit obligations:
Retirees. . . . . . . . . . . . . . . . . $ (7,897) $ (8,048)
Fully eligible active plan participants . (3,462) (2,834)
Other active plan participants. . . . . . (7,269) (7,003)
--------- ---------
(18,628) (17,885)
Plan assets at fair value. . . . . . . . . . 0 0
--------- ---------
Accumulated postretirement benefit
obligation (in excess of) plan assets . . (18,628) (17,885)
Unrecognized net loss. . . . . . . . . . . . 771 716
Unrecognized prior service cost. . . . . . . 0 0
Unrecognized transition obligation . . . . . 0 0
--------- ---------
(Accrued) postretirement benefit cost. . . . $(17,857) $(17,169)
========= =========
- 19 -
20
ITEM 8. (Continued)
NOTE E - BENEFIT PLANS (Continued)
The weighted-average annual assumed rate of increase in the per capita
cost of covered benefits in the medical plans, or health care cost trend rate,
was 10.0 percent for 1995 and 12.0 percent for 1994. The trend rate is assumed
to decrease gradually to 5.5 percent in the year 2005 and remain at that level
thereafter. Increasing the assumed health care cost trend rate by one
percentage point in each year would increase the accumulated postretirement
benefit obligation as of October 31, 1995 by $1,728,300 and the aggregate of
service and interest cost components of net periodic postretirement benefit
cost for 1995 by $48,200. The weighted-average discount rate used in
determining the accumulated postretirement benefit obligation was 7.25 percent
and 8.5 percent at October 31, 1995 and 1994, respectively. The annual
assumed rate of salary increase for retiree life insurance is 4.5 percent at
October 31, 1995 and October 31, 1994.
- 20 -
21
ITEM 8. (Continued)
NOTE F - INCOME TAXES
The components of income from continuing operations before income taxes
and the provision for income taxes are summarized as follows:
1995 1994 1993
---- ---- ----
(in thousands)
Income from continuing operations
before income taxes
Domestic . . . . . . . . . . . . $23,268 $19,184 $ 8,313
Foreign . . . . . . . . . . . . 16,674 8,619 12,289
-------- -------- --------
39,942 27,803 20,602
Provision for income taxes
Current
Domestic-Federal . . . . . . . . 7,402 5,672 3,348
-State and local . . . . 621 1,838 382
Foreign. . . . . . . . . . . . . 7,082 4,531 5,064
-------- -------- --------
15,105 12,041 8,794
Deferred
Domestic-Federal . . . . . . . . (1,323) (650) (1,376)
-State and local . . . . (273) (257) (130)
Foreign. . . . . . . . . . . . . 751 (858) (701)
-------- -------- --------
(845) (1,765) (2,207)
Benefit of operating loss
carryforwards. . . . . . . . . . (4,701) (2,092) 0
-------- -------- --------
9,559 8,184 6,587
Income from continuing operations
Domestic . . . . . . . . . . . . 16,841 12,581 6,089
Foreign. . . . . . . . . . . . . 13,542 7,038 7,926
-------- -------- --------
$30,383 $19,619 $14,015
======== ======== ========
A reconciliation of the effective tax rate to the U.S. statutory rate for
1995, 1994 and 1993 follows:
1995 1994 1993
---- ---- ----
Statutory U.S. federal income tax rate. . 35.0% 35.0% 34.8%
State and local taxes on income net of
domestic income tax benefit. . . . . . 0.6 3.7 0.8
Increase in effective rate due to
impact of foreign subsidiaries . . . . 5.0 2.4 0.4
Benefit of operating loss carryforwards . (11.8) (7.5) 0
Repatriation of foreign earnings. . . . . 1.2 1.5 0.6
Reserve contracts . . . . . . . . . . . . (5.5) (5.0) (3.7)
Goodwill with no U.S. tax benefit . . . . 1.6 2.0 2.5
All other . . . . . . . . . . . . . . . . (2.2) (2.7) (3.4)
----- ----- -----
Effective income tax rate. . . . . . . 23.9% 29.4% 32.0%
===== ===== =====
- 21 -
22
ITEM 8. (Continued)
NOTE F - INCOME TAXES (Continued)
Significant components of the Company's deferred income tax liabilities and
assets as of October 31, are as follows:
(in thousands)
Deferred income tax liabilities: 1995 1994 1993
---- ---- ----
Tax over book depreciation. . . . . . . . . $13,140 $13,142 $13,234
Prepaid pension asset . . . . . . . . . . . 10,975 9,991 8,760
United Kingdom property sale. . . . . . . . 1,360 1,407 1,274
Other . . . . . . . . . . . . . . . . . . . 375 278 273
------- ------- -------
Total deferred income tax liabilities. . 25,850 24,818 23,541
Deferred income tax assets:
Postretirement benefits . . . . . . . . . . 7,032 6,769 6,783
Employee benefits . . . . . . . . . . . . . 7,909 7,157 6,407
Net operating loss carryforwards. . . . . . 66,869 58,587 4,895
Inventory valuation . . . . . . . . . . . . 2,166 2,111 2,048
Product liability . . . . . . . . . . . . . 3,620 2,710 1,928
Other . . . . . . . . . . . . . . . . . . . 4,349 4,452 2,306
-------- ------- -------
Total deferred income tax assets . . . . 91,945 81,786 24,367
Valuation allowance for deferred income tax
assets . . . . . . . . . . . . . . . . . 66,869 58,587 4,210
-------- ------- -------
Net deferred income tax assets . . . . . 25,076 23,199 20,157
-------- ------- -------
Net deferred income tax liabilities. . . $ 774 $ 1,619 $ 3,384
======= ======= =======
The valuation allowance has increased by $8,282,000 in 1995, $54,377,000
in 1994, and $1,640,000 in 1993. At October 31, 1995, the Company also had
unused foreign tax credit carryovers of approximately $2,813,000 of which
$489,000 will expire in 1997, $721,000 in 1998, and the balance will expire in
the year 1999.
Of the $66,869,000 in tax benefits from operating loss carryforwards,
$65,037,000 relates to the ORSTA Hydraulik operations acquired in 1994 which
are available indefinitely. The balance of the loss carryforward relates to
operations in Brazil and is also available indefinitely.
- 22 -
23
ITEM 8. (Continued)
NOTE G - QUARTERLY DATA (unaudited)
1995 First Second Third Fourth Total
- -----------------------------------------------------------------------------
(in thousands, except per-share amounts)
Net sales. . . . . . . . . . . $135,307 $153,965 $162,728 $169,836 $621,836
Gross profit . . . . . . . . . 41,461 45,296 48,389 49,833 184,979
Net income . . . . . . . . . . 6,120 7,307 8,393 8,563 30,383
Earnings per share:
Net income:
Primary . . . . . . . . . . $.36 $.43 $.50 $.52 $1.82
Fully diluted . . . . . . . .34 .41 .47 .49 1.72
Dividends per common share . . .125 .125 .125 .135 .510
1994 First Second Third Fourth Total
- -----------------------------------------------------------------------------
(in thousands, except per-share amounts)
Net sales. . . . . . . . . . . $104,360 $121,443 $139,554 $151,574 $516,931
Gross profit . . . . . . . . . 31,701 38,528 38,845 44,156 153,230
Income from continuing
operations. . . . . . . . . 2,068 6,609 4,933 6,009 19,619
Income from discontinued
operations. . . . . . . . . 0 0 5,462 0 5,462
Net income . . . . . . . . . . 2,068 6,609 10,395 6,009 25,081
Earnings per share:
Primary:
Income from continuing
operations. . . . . $ .10 $ .40 $ .29 $ .36 $ 1.14
Net Income. . . . . . .10 .40 .64 .36 1.50
Fully diluted:
Income from continuing
operations. . . . . .10 .38 .27 .34 1.09
Net Income . . . . . . .10 .38 .60 .34 1.41
Dividends per common share . . .113 .114 .125 .125 .477
The Company received fees from a licensing agreement between the Company's
Astron Division in Europe and Geoyang Development Co., Ltd., in Korea. The
fees increased net income by $365,000 or $.02 per share in the first quarter of
1994.
Effective with the third quarter of 1994, financial results include the
operations of ORSTA Hydraulik acquired by the Company on May 3, 1994 (see Note
K). Third and fourth quarter results also include charges related to the
closure and consolidation of certain previously existing company facilities in
Europe and the U.S. These charges decreased net income by $2,515,000 or $.17
per share in the third quarter and $1,275,000 or $.08 per share in the fourth
quarter. Income from discontinued operations in the third quarter of 1994 of
$5,462,000 represents the elimination of income tax accruals no longer required
that relate to a business written off in 1989 which was treated as a
discontinued operation.
Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share do not
necessarily equal the total for the year.
- 23 -
24
ITEM 8. (Continued)
NOTE H - PRODUCT DEVELOPMENT COSTS
The Company maintains ongoing development programs at various facilities
to formulate, design and test new products and product alternatives, and to
further develop and significantly improve existing products. The Company
intends to continue substantial expenditures on research and development in
this area. Costs associated with these activities, which the Company expenses
as incurred, are shown for the three-year period below:
1995 1994 1993
---- ---- ----
(in thousands)
Research and Development. . . $ 8,449 $ 7,293 $ 6,708
Engineering . . . . . . . . . 17,710 14,436 12,416
------- ------- -------
$26,159 $21,729 $19,124
======= ======= =======
Percent of net sales. . . . . 4.2% 4.2% 4.3%
==== ==== ====
- 24 -
25
ITEM 8. (Continued)
NOTE I - SEGMENT REPORTING
The Company is engaged in the design, manufacture and sale of products in
three segments: Hydraulic Systems, Building Systems and Metal Products and
Fluid Purification.
Operating income represents total revenue less total operating expenses.
Identifiable assets are those assets used in the operations of each business
segment or geographic area or which are allocated when used jointly. Corporate
assets are principally cash and cash equivalents.
- -----------------------------------------------------------------------------
INDUSTRY SEGMENTS (in thousands)
Building
Systems
And
Hydraulic Metal Fluid
1995 Systems Products Purification Total
- -----------------------------------------------------------------------------
Net sales. . . . . . . . . . . $285,679 $173,458 $162,699 $621,836
Operating income . . . . . . . 25,130 10,205 9,915 45,250
Interest expense . . . . . . . 6,912
Other income - net . . . . . . 1,604
Income from continuing operations
before income taxes . . . . 39,942
Identifiable assets. . . . . . 192,737 87,317 141,716 421,770
Corporate assets . . . . . . . 38,086
Total assets . . . . . . . . . 459,856
Depreciation and amortization. 7,757 3,088 8,348 19,193
Capital expenditures . . . . . 28,110 3,599 5,728 37,437
1994
- -----------------------------------------------------------------------------
Net sales. . . . . . . . . . . $240,830 $132,990 $143,111 $516,931
Operating income . . . . . . . 20,694 10,358 3,777 34,829
Interest expense . . . . . . . 4,952
Other expense - net. . . . . . 2,074
Income from continuing operations
before income taxes . . . . 27,803
Identifiable assets. . . . . . 168,684 64,898 137,879 371,461
Corporate assets . . . . . . . 51,517
Total assets . . . . . . . . . 422,978
Depreciation and amortization. 6,549 2,604 8,586 17,739
Capital expenditures . . . . . 16,540 2,696 3,816 23,052
- 25 -
26
ITEM 8. (Continued)
NOTE I - SEGMENT REPORTING (continued)
1993
- -----------------------------------------------------------------------------
Net sales. . . . . . . . . . . $190,170 $127,636 $130,771 $448,577
Operating income . . . . . . . 17,170 10,699 (2,499) 25,370
Interest expense . . . . . . . 5,744
Other income - net . . . . . . 976
Income from continuing operations
before income taxes . . . . 20,602
Identifiable assets. . . . . . 124,608 59,124 137,895 321,627
Corporate assets . . . . . . . 25,708
Total assets . . . . . . . . . 347,335
Depreciation and amortization. 6,125 2,455 7,956 16,536
Capital expenditures . . . . . 4,434 1,760 3,241 9,435
- 26 -
27
ITEM 8. (Continued)
NOTE I - SEGMENT REPORTING (Continued)
In the following table, data in the column labeled "Europe" pertains to
subsidiaries operating within the European Economic Community. Data for all
remaining overseas subsidiaries is shown in the column marked "Other."
GEOGRAPHIC AREA (in thousands)
United
1995 States Europe Other Elimination Consolidated
- -----------------------------------------------------------------------------
Sales to customers. . . $329,426 $208,035 $ 84,375 $621,836
Inter-area sales. . . . 26,320 6,888 1,884 $ 35,092
------------------------------------------------------
Total sales . . . . . . 355,746 214,923 86,259 35,092 621,836
Operating income. . . . 30,800 4,895 9,555 45,250
Identifiable assets . . 224,984 143,871 52,915 421,770
1994
- -----------------------------------------------------------------------------
Sales to customers. . . $290,361 $160,658 $ 65,912 $516,931
Inter-area sales. . . . 21,585 4,014 1,517 $ 27,116
-----------------------------------------------------
Total sales . . . . . . 311,946 164,672 67,429 27,116 516,931
Operating income. . . . 26,291 (201) 8,739 34,829
Identifiable assets . . 207,578 115,683 48,200 371,461
1993
- -----------------------------------------------------------------------------
Sales to customers. . . $242,333 $151,207 $ 55,037 $448,577
Inter-area sales. . . . 17,493 3,165 880 $ 21,538
-----------------------------------------------------
Total sales . . . . . . 259,826 154,372 55,917 21,538 448,577
Operating income. . . . 15,352 5,208 4,810 25,370
Identifiable assets . . 193,036 87,557 41,034 321,627
Net assets of foreign subsidiaries at October 31, 1995 and 1994 were
$120,163,000 and $108,852,000, respectively, of which net current assets were
$69,717,000 and $80,253,000, also respectively.
- 27 -
28
ITEM 8 (Continued)
NOTE J - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures of financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for cash and cash equivalents approximate fair value.
Long and short-term debt: The carrying amounts of the Company's
borrowings under its short-term credit agreements approximate their fair value.
The fair values of the long-term debt are estimated using discounted cash flow
analysis, based on the Company's incremental borrowing rates for similar types
of borrowing arrangements.
Foreign currency exchange contracts: The Company utilizes foreign
currency exchange contracts to minimize the impact of currency fluctuations on
transactions. At October 31, 1995, the Company and its subsidiaries held
contracts for $9,478,000 with a fair value of $9,408,000. The fair values of
these foreign currency exchange contracts are estimated based on quoted
exchange rates at October 31, 1995.
The carrying amounts and fair values of the Company's financial
instruments at October 31, 1995 are as follows:
(in thousands)
Carrying Amount Fair Value
--------------- ----------
Cash and cash equivalents $ 39,689 $ 39,689
Short-term debt 19,725 19,725
Long-term debt:
Senior notes $ 45,000 $ 47,667
Industrial revenue loans 3,533 3,596
Mortgages 4,973 4,943
Other 1,010 1,037
-------- --------
54,516 57,243
ESOP guarantee 21,682 22,440
-------- --------
$ 76,198 $ 79,683
======== ========
From time to time, the Company makes loans to its foreign subsidiaries
denominated in the subsidiaries' functional currencies. Generally, these loans
are made when the Company can borrow at lower interest rate spreads than are
available to the subsidiary in its local market. Foreign currency forward
contracts are used to hedge the Company's receipt of principal and interest due
from the loans. The forward contracts are an effective hedge against
fluctuations in the value of the foreign currency. Therefore, the contracts
have no income statement impact.
- 28 -
29
ITEM 8.(Continued)
NOTE K - ACQUISITIONS
HALL F&D HEAD COMPANY
Effective January 31, 1995, the Company acquired the assets of Hall F&D
Head Company, a producer of medium and large diameter bump and spun metal
products, located in Saginaw, Texas. The acquisition was accounted for as a
purchase transaction, and therefore, included in the accompanying financial
statements since the acquisition date. Pro forma financial results are not
provided herein because the impact of sales and net earnings on consolidated
amounts is immaterial.
ORSTA HYDRAULIK
Effective May 3, 1994 (the "acquisition date"), the Company acquired the
stock of Sachsenhydraulik Chemnitz GmbH ("SHC") and its wholly owned subsidiary
(Hydraulik Rochlitz GmbH), which are known as ORSTA Hydraulik. ORSTA is a
manufacturer of hydraulic cylinders, piston and gear pumps and industrial
valves. The stock was acquired from the Treuhandanstalt, the regulatory agency
of the Federal Republic of Germany responsible for the privatization of the
former East German state-owned enterprises. The acquisition has been accounted
for as a purchase transaction; therefore, the accounts are included in the
accompanying financial statements since the acquisition date. Pro forma
financial results are not provided herein since the companies acquired operated
in a different environment under the Treuhandanstalt control.
Under terms of the Agreement, the Company tendered no financial
consideration to acquire the stock of SHC and its wholly owned subsidiary but
received, in addition to the net business assets of the two companies, cash
contributions of 59.0 million Deutsche marks (approximately U.S. $36.0 million)
to fund pre-existing capital investment programs and to cover estimated
operating losses over a period of two years. This additional consideration was
negotiated with the Treuhandanstalt based on the financial position of the
acquired companies as of January 1, 1994 (the "measurement date"). Cash
contributions available to the Company on the acquisition date were adjusted
for funds consumed by the operations during the interim period between the
measurement and acquisition dates. Details of investment on the acquisition
date are as follows:
(in thousands)
--------------
Fair value of assets acquired,
other than cash and cash equivalents $ 31,836
Liabilities assumed (19,333)
Deferred credit - operating loss
indemnification (23,643)
--------
Cash and cash equivalents acquired $ 11,140
========
- 29 -
30
ITEM 8. (Continued)
NOTE K - ACQUISITIONS (Continued)
In addition to the cash acquired at the acquisition date, a balance of
44.1 million Deutsche marks (approximately U.S. $28.5 million) was receivable
from the Treuhandanstalt in regard to the original cash contribution during
fiscal 1995 and 1994. Of the funds provided by the Treuhandanstalt since the
acquisition date, 33.8 million Deutsche marks (approximately U.S. $22.6
million) were consumed by operating losses from May 3, 1994 to October 31, 1995
and 20.8 million Deutsche marks (approximately U.S. $14.5 million) were used to
fund the pre-existing capital investment program.
The Company agreed to the following obligations and guarantees with
respect to the operation of the acquired businesses:
a) to maintain a minimum employment level for a period
of three years; the level stipulated by the Agreement
is considered by the Company to be reasonable and
necessary for the intended use of the business,
b) to invest 39.0 million Deutsche marks (approximately
U.S. $23.6 million) in capital programs over a period
of four years,
c) to continue to operate the businesses for a minimum
of five years, and
d) to refrain from selling or transferring acquired land
and buildings for a period of six years.
Of the total 59.0 million Deutsche mark cash contribution to be received
(as calculated on the measurement date of January 1, 1994), 51.5 million
Deutsche marks was designed as an indemnification of estimated operating losses
over a period of two years from acquisition. The amount of operating loss
indemnification available to the Company was adjusted for cash consumed by the
ORSTA operations between the measurement date and the acquisition date. The
operating loss indemnification is being amortized based on estimated operating
results of the ORSTA Hydraulik operations as determined on May 3, 1994. The
quarterly amortization value will remain unchanged as actual results are
reported and will be translated from Deutsche marks into U.S. dollars at the
average exchange rate for the period. The deferred credit on the balance sheet
is translated at end-of-period rate.
- 30 -
31
ITEM 8. (Continued)
NOTE K - ACQUISITIONS (Continued)
Negative Goodwill Amortization:
Fiscal Quarters Deutsche Marks U.S. Dollars
- --------------- -------------- ------------
(in thousands)
Amounts Amortized
- -----------------
FISCAL 1994
Third quarter, 1994 DM 3,297 $ 2,044
Fourth quarter, 1994 7,015 4,422
------- --------
TOTAL FISCAL 1994 DM 10,312 $ 6,466
FISCAL 1995
First quarter, 1995 DM 6,855 $ 4,419
Second quarter, 1995 6,500 4,470
Third quarter, 1995 5,410 3,879
Fourth quarter, 1995 4,745 3,327
------- --------
TOTAL FISCAL 1995 DM 23,510 $ 16,095
---------- --------
TOTAL AMORTIZED DM 33,822 $ 22,561
========== ========
Remainder (Balance Sheet)
- -------------------------
FISCAL 1996
First quarter, 1996 DM 3,745 $ 2,662
Second quarter, 1996 1,504 1,069
---------- --------
TOTAL DM 5,249 $ 3,731
========== ========
ORSTA Hydraulik income statement for the twelve months ended October 31,
1995 and the six months ended October 31, 1994 follows:
Twelve Six
Months Months
Ended Ended
1995 1994
------ ------
(in thousands)
Sales $ 35,846 $ 15,292
Cost of products sold 41,918 16,708
Less: negative goodwill (16,095) (6,466)
--------- ---------
Total cost of products sold 25,823 10,242
--------- ---------
Gross profit 10,023 5,050
Selling, administrative and
general expense 12,234 4,910
--------- ---------
Operating (loss) profit $ (2,211) $ 140
========= =========
- 31 -
32
ITEM 8. (Continued)
NOTE L - PREFERRED STOCK
During fiscal 1990, the Company designated two separate series of
preferred shares as follows:
Series A Participating Preferred Shares
- ---------------------------------------
On November 29, 1989, the Company created a new class of stock, Series A
Participating Preferred Shares (the Series A) and adopted a Shareholder Rights
Plan (the Plan). The Plan is designed to protect shareholders from the
disruptions created by market accumulators and certain abusive takeover
practices. The Plan provides for the distribution of one preferred share
purchase right as a dividend for each outstanding share of common stock. Each
right, when exercisable, entitles shareholders to buy one one-hundredth of a
share of the Series A preferred stock for $75. Each one one-hundredth of a
share of preferred stock is intended to be the practical economic equivalent of
a share of common stock and will have one one-hundredth of a vote on all
matters submitted to a vote of shareholders of the Company. Until the rights
become exercisable, they have no dilutive effect on earnings per share.
The rights may be exercised, in general, only if a person
or group acquires 20 percent or more of the common stock without the prior
approval of the Board of Directors of the Company or announces a tender or
exchange offer that would result in ownership of 20 percent or more of the
common stock. In the event of the acquisition of 20 percent or more of the
common stock without the prior approval of the Board, all rights holders except
the acquirer may purchase the common stock of the Company having a value of
twice the exercise price of the rights. If the Company is acquired in a
merger, after the acquisition of 20 percent of the voting power of the Company,
rights holders except the acquirer may purchase shares in the acquiring company
at a similar discount. The Plan was not adopted in response to any pending
takeover proposal, and the rights will expire on November 29, 1999.
- 32 -
33
ITEM 8. (Continued)
NOTE L - Preferred Stock (Continued)
Series B ESOP Convertible Preferred Stock
- -----------------------------------------
On February 14, 1990, the Company established two newly-formed leveraged
employee stock ownership plans (the ESOPs) and sold to the ESOPs 1,074,107
shares of a newly created cumulative ESOP Convertible Preferred Stock Series B
(the Series B) for a total of $24,973,000. The ESOPs currently cover most
domestic salaried employees and certain domestic hourly employees. The
remaining Series B shares are convertible into 1,301,082 shares of common stock
at any time (1.235 shares of common stock for each Series B share), subject to
anti-dilution adjustments. The Series B shares are entitled to one vote per
share and will vote together with the common stock as a single class. The
Series B shares are held by a trustee which votes the allocated shares as
directed by Plan participants. Unallocated shares held by the trustee are
voted in the same proportion as are the allocated shares. Annual dividends are
$1.97625 per share. The ESOPs have borrowed to purchase the Series B shares,
and the Company guaranteed the repayment of the remaining outstanding balance
of that loan.
The Company paid to the ESOPs $2,084,000 in 1995 ($2,097,000 in 1994 and
$2,109,000 in 1993) in preferred stock dividends and accrued or paid an
additional $1,787,000 in 1995 ($1,310,000 in 1994 and $1,036,000 in 1993) in
Company match of employees' contributions to the plan and to cover amounts
sufficient to meet the debt service. These expenses were determined on the
shares allocated method. In turn, the ESOPs made debt service payments of
$2,364,000 in 1995, $2,366,000 in 1994, and $1,841,000 in 1993, primarily for
interest charges.
- 33 -
34
Item 8. (continued)
Note M - Subsequent Events (Unaudited)
On July 11, 1996, the Board of Directors of the Company determined to proceed
with a plan to spin-off 100% of the stock of the Company's Cuno Incorporated
fluid filtration and purification subsidiary to the Company's shareholders (the
"Spin-Off"), subject to customary conditions, including the receipt of an
opinion of counsel with respect to the tax-free nature of the Spin-Off. The
Board also unanimously approved a program to repurchase up to 2,500,000 common
shares in open market and privately negotiated transactions (the "Repurchase
Program"). The Company executed on July 12, 1996, a bridge credit agreement
providing for an unsecured revolving bridge facility of up to $60,000,000, of
which $55,000,000 can be used to repurchase common shares.
- 34 -
35
ITEM 8. (Continued)
Report of Ernst & Young LLP, Independent Auditors
Shareholders and Board of Directors
Commercial Intertech Corp.
Youngstown, Ohio
We have audited the accompanying consolidated balance sheets of Commercial
Intertech Corp. and subsidiaries as of October 31, 1995 and 1994, and the
related statements of consolidated income, shareholders' equity and cash flows
for each of the three years in the period ended October 31, 1995. Our audits
also included the financial statement schedule listed in the Index at Item
14(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Commercial
Intertech Corp. and subsidiaries at October 31, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended October 31, 1995, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/Ernst & Young LLP
Cleveland, Ohio
December 8, 1995
- 35 -
36
Part IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(A) DOCUMENTS FILED AS PART OF THIS REPORT:
(1) The following consolidated financial statements of Commercial
Intertech Corp. and Subsidiaries are included in Item 8:
Page Number
In This Report
--------------
Statement of Consolidated Income - Years
ended October 31, 1995, 1994 and 1993. . 2
Consolidated Balance sheets as of
October 31, 1995 and 1994. . . . . . . . 3-4
Statements of Consolidated Shareholders'
Equity - Years ended October 31, 1995,
1994, and 1993 . . . . . . . . . . . . . 5
Statements of Consolidated Cash Flows -
Years ended October 31, 1995, 1994,
and 1993 . . . . . . . . . . . . . . . . 6
Notes to Consolidated Financial Statements 7-34
Report of Independent Auditors. . . . . . . . 35
(2) The following consolidated financial statement
schedules of Commercial Intertech Corp. and
Subsidiaries are included in Item 14(d):
Schedule II Valuation and Qualifying
Accounts . . . . . . . . . . . . .. . . . . S-1
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.
- 36 -
37
PART IV (Continued)
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(Continued)
(3) Exhibits
3 -- Articles of Incorporation Filed as of April 17, 1992
(Incorporated by reference to Exhibit I to the
Company's Annual Report on Form 10-K for the year
ended October 31, 1992)
10 -- Material Contracts
Exhibits
(5) Severance Compensation and Consulting Agreement
- Paul J. Powers dated February 15, 1988
(10) Severance Compensation Agreement
- William G. Welker dated April 26, 1989
(12) Severance Compensation Agreement
- William W. Cushwa dated September 28, 1989
(13) Severance Compensation Agreement
- Steven J. Hewitt dated September 28, 1989
(14) Severance Compensation Agreement
- Robert A. Calcagni dated September 28, 1989
(15) Severance Compensation Agreement
- John Gilchrist dated June 25, 1992
(16) Severance Compensation Agreement
- Gilbert M. Manchester dated September 28, 1989
(17) Severance Compensation Agreement
- Bruce C. Wheatley dated July 20, 1992
(18) Employment Agreement - Paul J. Powers
dated July 27, 1994
Exhibits 5, 10 and 12-18 for "Material Contracts" are
incorporated by reference to exhibits filed with Form 10-K for
the following years:
Exhibits Year Filed
-------- ----------
5 October 31, 1988
10 October 31, 1989
12 and 13 October 31, 1990
14 and 15 October 31, 1992
16 and 17 October 31, 1993
18 October 31, 1994
- 37 -
38
PART IV - (Continued)
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(Continued)
Additional information relating to management contracts and
renumerative plans is contained in Note D - Stock Options
and Awards of the Notes to Consolidated Financial
Statements on page 15.
11 -- Statement re: Computation of Per Share Earnings
(Previously filed as part of this Annual Report on Form 10-K)
22 -- Subsidiaries of The Registrant
(Previously filed as part of this Annual Report on Form 10-K)
23 -- Consent of Independent Auditors
27 -- Financial Data Schedule
(Previously filed as part of this Annual Report on Form 10-K)
(B) There were no reports on Form 8-K for the quarter ended October 31,
1995.
- 38 -
39
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.
Commercial Intertech Corp.
Dated: July 22, 1996
/s/ Paul J. Powers
- ----------------------------------
Paul J. Powers
Chairman of the Board of
Directors, President and
Principal Executive Officer
- 39 -
40
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
COMMERCIAL INTERTECH CORP. AND SUBSIDIARIES
YEARS ENDED OCTOBER 31, 1995, 1994 AND 1993
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------------------------------------------------------------------------------------------------------------------
ADDITIONS
- ----------------------------------------------------------------------------------------------------------------------
CHARGED TO
Balance at Charged to Other Balance at
Beginning Costs and Accounts- Deductions End of
of Period Expenses Describe Period
- ----------------------------------------------------------------------------------------------------------------------
Description
Year ended October 31, 1995
Deducted from asset accounts:
Allowance for doubtful accounts
receivable $ 2,889,576 $1,388,761 0 $ 835,942 (A) $ 3,442,935
============ =========== ============= =========== ============
Valuation allowance for deferred
income tax assets $58,587,000 $ 0 $12,983,000 (D) $4,701,000 (C) $66,869,000
============ =========== ============= =========== ============
Year ended October 31, 1994
Deducted from asset accounts:
Allowance for doubtful accounts
receivable $ 1,764,726 $ 990,026 $ 2,384,000 (B) $2,249,176 (A) $ 2,889,576
============ =========== ============ =========== ============
Valuation allowance for deferred $ 9,129,000 (D)
income tax assets $ 4,210,000 $ 0 $47,340,000 (B) $2,092,000 (C) $58,587,000
============ =========== ============ =========== ============
Year ended October 31, 1993
Deducted from asset accounts:
Allowance for doubtful accounts
receivable $ 1,611,566 $ 581,798 $ 0 $ 428,638 (A) $ 1,764,726
============ =========== ============ =========== ============
Valuation allowance for deferred
income tax assets $ 2,570,000 $ 0 $ 1,640,000 (D) $ 0 $ 4,210,000
============ =========== ============ =========== ============
(A) Uncollectible accounts written off.
(B) Represents beginning balance acquired with the ORSTA Hydraulik
acquisition.
(C) Net operating loss carryforwards utilized or expired.
(D) Increase in net operating loss carryforwards for the year.
S-1