1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934.
For the fiscal year ended October 31, 1993
COMMISSION FILE NO. 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)
(216) 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. [X]
As of January 3, 1994, 10,030,310 common shares were outstanding, and
the aggregate market value of the common shares (based upon the last price on
that date) was approximately $194,337,000.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the documents of the Registrant listed below have
been incorporated by reference into the indicated parts of this Annual Report
on Form 10-K.
Notice of Annual Meeting of Shareholders March 23, 1994 and Proxy
Statement filed December 27, 1993 and as
amended January 26, 1994. . . . . . . . . . . . . Part III, Items 10-13
Part IV, Item 14
The exhibit index is located on page 55.
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Part I
ITEM I. BUSINESS
(a) General development of business:
Commercial Intertech Corp. (formerly Commercial Shearing, Inc.) was
incorporated in Ohio in 1920. The Company is engaged in the design,
manufacture and sale of products in three groups: hydraulic components,
fabricated metal products, and fluid purification products. In January 1986,
the Company acquired Cuno, Incorporated ("Cuno"), a manufacturer of fluid
purification products. Before that acquisition, hydraulic components and
fabricated metal products accounted for all of the Company's business.
(b) Financial information about industry segments:
See Note I of the Notes to Consolidated Financial Statements on pages
43-45.
(c) Narrative description of business:
HYDRAULIC COMPONENTS
Hydraulic components consist primarily of gear pumps and motors,
control valves and telescopic cylinders for use generally on heavy-duty mobile
equipment such as dump trucks, cranes, bulldozers, front-end loaders, backhoes
and mining machines. Other products manufactured by the Company include
hydraulic test equipment for military and industrial applications, hydraulic
steer transmissions for military vehicles, mobile electrical power generators,
hydraulic tilt and trim mechanisms for recreational boating and axial piston
pumps and motors for industrial and marine applications. The Company's gear
pumps and motors, control valves and telescopic cylinders are sold primarily to
original equipment manufacturers by the Company's hydraulic sales organization
consisting of approximately 65 persons in the United States and Canada and
approximately 45 persons outside North America. A portion of the Company's
sales is made to independent distributors for resale primarily to the
replacement market.
The Company acquired the assets of Kenart EMC, Inc., formerly doing
business as Teknar EMC, Inc. in February, 1991. Teknar manufactures a line of
electronic motion control products. The Company relocated Teknar operations to
an existing production facility in Minneapolis, Minnesota.
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ITEM I. BUSINESS (continued)
The Company acquired Cylinder City, Inc., a manufacturer and marketer
of hydraulic cylinders located in Minneapolis, Minnesota in June, 1990. At the
time of acquisition, the cylinders, primarily for refuse and dump body trucks,
were sold principally to the repair and replacement aftermarket. Presently,
cylinders are primarily sold to original equipment manufacturers.
The Company acquired Kontak Hydraulics Ltd., a manufacturer of a line
of oil hydraulic control valves located in Grantham, England, in September,
1989. The control valves, primarily for mobile equipment, augment a range of
similar valves manufactured in the United States by Commercial.
The Company believes that it is the largest supplier of gear pumps and
is among the leading single-source suppliers of hydraulic components for mobile
equipment in the United States. The market for hydraulic components is highly
competitive and is presently affected by the existence of excess industry
capacity.
METAL PRODUCTS
The metal products operations consist of two units: metal stampings
and Astron (pre-engineered metal buildings). The Company produces custom and
standard metal stampings, including tank ends and a wide variety of other
stamped steel products, such as wheels for tracked vehicles, components for
railcar brake activators, couplings and covers for mechanical power
transmission applications, large circuit breaker covers, and enclosures serving
many purposes. The sales and marketing activities for metal stampings are
conducted in North America with exports to Pacific Rim and South America by a
sales organization of approximately 20 persons. The metal stamping unit faces
intense competition from domestic companies that may have lower costs.
Additionally, standard products are offered for sale from five (5) fast service
distribution centers in Dallas, Texas; Atlanta, Georgia; Chicago, Illinois,
Hagerstown, Maryland and Youngstown, Ohio.
Astron, the European market leader in Metal Building Systems produces
single and multi story buildings that serve as aircraft hangars, indoor
athletic facilities, automobile showrooms, supermarkets, factories and
warehouses. Astron buildings are sold throughout the twelve countries of the
European Economic Community, in Scandinavia and in Eastern Europe, as well as
South Korea. This division developed its own computerized building proposal
system, known as Cyprion, that tailors buildings to customers' precise
dimension and design requirements. Through Cyprion, Astron's more than 400
qualified builder/dealers can provide pricing and building plans in a fraction
of traditional architectural time. The builder/dealers are supported by
Astron's sales force of nearly 75 persons.
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ITEM I. BUSINESS (continued)
Astron has entered a joint venture with Arbed, Europe's fifth largest
steel producer, to offer multistory steel buildings. In addition, in 1992 the
Astron Division licensed Geoyang Development Co., Ltd. of South Korea, to
manufacture, sell and erect Astron buildings in Korea. Geoyang will also
cooperate with the Company's Singapore sales company for marketing and
manufacturing throughout the Pacific Rim.
FLUID PURIFICATION PRODUCTS
The fluid purification group operates worldwide with two major
divisions: process and consumer. The process division manufactures a broad
range of filtration products for general and fine filtration applications. The
general filtration product line includes gradient density cartridges made from
resin impregnated fibers and cartridges made from thermally bonded synthetic
bicomponent fibers, as well as cleanable metal filter products. The general
filtration products are used extensively in chemical, petrochemical, paint and
coatings industrial applications, as well as in prefiltration and service
applications for the food, beverage, utility and pharmaceutical industries.
The fine filtration product line provides critical filtration and separation
performance primarily to the food, beverage, electronics, diagnostic,
biotechnology, medical and pharmaceutical markets. The fine filtration
products range from ZetaPlus(R) charge modified felted depth filters to
membrane filters which are made of nylon, polypropylene and
polytetrafluorethylene materials. The general and fine filtration product
lines are complemented by a broad line of metal and plastic housings, which are
the pressure vessels that hold filters. The process housing line includes
products made of plastic, carbon steel and stainless steel, and is capable of
meeting sophisticated customer demands for sanitary, crevice free and even
mirror-like 10RA finishes. In December 1991 the Company acquired Bioken
Separations, Inc., a start-up supplier of crossflow systems and ultrafiltration
membranes. This acquisition adds significant new technology which services the
group's principal markets of paint, chemical, industrial, pharmaceutical, food
and beverage.
The consumer division is principally involved in manufacturing
products that purify water for drinking. The consumer filtration product line
consists of a variety of filter cartridges with capabilities which include
similar products to the process resin impregnated and bicomponent fiber
products, as well as carbon cartridges. The reverse osmosis product line,
though principally focused on drinking water, has made inroads into certain
commercial or industrial niche applications, such as lithography, car washes
and food service. The drinking water product range includes drinking water
systems for fast food restaurant chains, ice maker filters for appliances,
point of use countertop or under-the-counter filters or reverse osmosis systems
and whole house filter systems. The acquisition of Water Factory Systems, a
manufacturer of residential, commercial and industrial reverse osmosis systems,
brought expanded production and technical capabilities to the consumer
division.
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ITEM I. BUSINESS (continued)
FLUID PURIFICATION PRODUCTS (continued)
The Company believes that it is one of the leading suppliers of
general process filtration products. This industry is characterized by a
limited number of major suppliers including Pall Corporation, subsidiaries of
divisions of Parker Hannifin Corporation and MEMTEC. The fine filtration
market is served by certain major competitors, with Pall Corporation and
Millipore Corporation being the most significant. Cuno's fine filtration depth
filter cartridges hold a leadership position in the market, and although its
membrane product line holds a relatively small market share its sales are
increasing. The consumer division's principal competitor is Ametek
Corporation. Consumer has long been a leading supplier to the plumbing
wholesale channel, and has been gaining penetration in the food service, OEM
and direct marketing segments of the business. Consumer has a modest position
in the retail trade with a split between specialty water quality dealers or
kitchen and bath shops. In the food service market, a unit of Culligan is the
leading supplier.
Process filtration products are marketed in the United States by a
group of independent distributors, most of which have been distributing these
products for at least 16 years. In the international market, sales are made
either directly or through approximately 100 distributors in 75 countries. The
consumer market is reached by a combination of Company sales personnel and a
significant number of distributors and wholesalers, as well as through OEM
relationships.
MANUFACTURING
The Company manufactures hydraulic products in 14 plants and metal
products in three plants worldwide. The Company's hydraulic manufacturing
operation is highly integrated and the Company purchases few components from
independent suppliers. The Company has developed tooling for a substantial
number of its fabricated metal products, which enables a reduction in the costs
and time of manufacturing. Cuno maintains five manufacturing facilities in the
United States and five manufacturing facilities abroad. The manufacture of
the Cuno fluid purification products employs numerous proprietary processes.
RESEARCH AND PRODUCT DEVELOPMENT
The Company conducts research and development primarily in its
hydraulics and fluid purification product groups. In fiscal 1993 the Company
expended $4,914,000 for research and development of various hydraulic products
as compared to $5,986,000 and $4,532,000 in 1992 and 1991, respectively. The
Company expended $1,794,000 for research and development for fluid purification
products during 1993, $2,059,000 in 1992 and $1,675,000 in 1991. The Company
intends to continue substantial expenditures on research and development in
this area in order to bring developmental products to market.
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ITEM I. BUSINESS (continued)
PATENTS AND TRADEMARKS
The Company currently holds registered trademarks and patents
associated with certain existing products and has filed applications for
additional patents covering certain of its newer products. Although the
Company considers patents and trademarks significant factors in all of its
businesses, it does not consider the ownership of patents essential to the
operation of its hydraulic components and metal products groups. The Company
relies on product quality and features, the strength of its marketing and
distribution network and on new product introductions rather than on its
existing patents to protect and improve its market position in the hydraulic
components and metal products groups. Cuno currently holds numerous patents,
has others pending and has registered its trademarks. Cuno considers many of
these patents and trademarks important to its business.
SEASONALITY
Because sales of certain hydraulic components and pre-engineered metal
buildings are related to the construction industry, this portion of the
Company's business is affected by the seasonality of that industry.
EMPLOYEES
The Company employs approximately 3,720 full-time employees worldwide.
The Company believes that its labor relations are generally satisfactory.
BACKLOG
The backlog of orders believed to be firm at the end of fiscal 1993
was approximately $107,000,000. Backlogs at the end of fiscal years 1992 and
1991 were $111,000,000 and $131,000,000, respectively. Registrant expects a
substantial portion of its order backlog at the end of 1993 will be shipped
during fiscal 1994.
(d) Financial information about foreign and domestic operations and
export sales.
See Note I - Segment Reporting - of the Notes to Consolidated
Financial Statement on pages 43-45.
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ITEM 2. PROPERTIES
The principal plants of the Registrant and its subsidiaries by
industry segments are located in:
Owned:
-----
Hydraulic Components Metal Products
-------------------- --------------
Youngstown, Ohio Youngstown, Ohio
Hicksville, Ohio Diekirch, Luxembourg
Kings Mountain, N. Carolina Orange, California
Benton, Arkansas
Mairinque, Brazil Fluid
Lamadelaine, Luxembourg Purification Products
Grantham, England ---------------------
Liverpool, England Meriden, Connecticut
Minneapolis, Minnesota Stafford Springs, Connecticut
Port Melbourne, Australia Enfield, Connecticut
Warwick, England Mairinque, Brazil
Blacktown, Australia
Mazeres, Toulouse, France
Chemin du Contre Halage
Les Attaques, Marek, France
Kita-Ibaragi, Japan
Leased:
------
Hydraulic Components Metal Products
-------------------- --------------
Gloucester, England Hagerstown, Maryland
Minneapolis, Minnesota Chicago, Illinois
Dallas, Texas
Atlanta, Georgia
Fluid
Purification Products
---------------------
Irvine, California
Norwood, Massachusetts
Jurong, Singapore
Properties of Registrant and its subsidiaries are suitably constructed
and maintained for their respective uses. Details of liens on property are
given in Note B - Long-Term Debt of the Notes to Consolidated Financial
Statements on pages 31 and 32 .
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ITEM 3. LEGAL PROCEEDINGS
As of the date hereof there is no pending litigation of a material
nature, other than ordinary routine litigation incidental to the business, to
which the Registrant or any of its subsidiaries is a party or which may affect
the income from, title to, or possession of, any of their respective
properties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding executive officers of the Registrant is
presented in Part III below and incorporated here by reference.
PART II
ITEM 5. COMPANY COMMON STOCK
The Company's common stock is traded on the New York Stock Exchange
under the ticker symbol TEC. The following is the range of high and low sales
prices and dividends paid per share for fiscal 1993 and 1992 by quarters.
RANGE OF SALES
PRICES
------------- DIVIDENTS
HIGH LOW PER SHARE
---- --- ---------
1993:
---
First quarter. . . . . $21 3/4 $18 3/4 $.17
Second quarter . . . . 20 1/4 18 3/4 .17
Third quarter. . . . . 21 7/8 18 3/4 .17
Fourth quarter . . . . 23 1/4 20 .17
----
$.68
====
1992:
---
First quarter. . . . . $19 $15 1/8 $.17
Second quarter . . . . 19 5/8 17 1/2 .17
Third quarter. . . . . 18 7/8 16 3/4 .17
Fourth quarter . . . . 19 5/8 16 3/4 .17
----
$.68
====
As of October 31, 1993 there were 3,866 shareholders of record of
Common Stock.
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ITEM 6. SELECTED FINANCIAL DATA
The following table summaries information with respect to the
operation of the Company.
(in thousands, except per-share data and ratios)
INCOME DATA - Note A 1993 1992 1991 1990 1989 1988
---- ---- ---- ---- ---- ----
Net sales. . . . . . . . . . . . . . . . . $448,577 $450,608 $436,961 $453,075 $434,775 $398,666
Gross profit . . . . . . . . . . . . . . . 129,740 134,301 135,741 139,890 142,147 123,164
Interest expense . . . . . . . . . . . . . 5,744 6,277 5,881 6,170 6,595 7,309
Income from continuing operations
before income taxes . . . . . . . . . . 20,602 23,349 36,215 50,791 44,433 30,586
Income taxes . . . . . . . . . . . . . . . 6,587 9,304 16,097 23,184 20,314 13,822
Income from continuing operations. . . . . 14,015 14,045 20,118 27,607 24,119 16,764
Net income . . . . . . . . . . . . . . . . 14,015 17,436 11,103 27,607 6,730 16,564
Earnings per share - Note B
Primary:
Income from continuing operations. . 1.18 .97 1.39 2.04 2.03 1.51
Net income . . . . . . . . . . . . . 1.18 1.31 .48 2.04 .57 1.49
Fully diluted:
Income from continuing operations. . 1.14 .95 1.31 1.96 1.95 1.45
Net income . . . . . . . . . . . . . 1.14 1.26 .48 1.96 .57 1.43
Dividends per share of common stock:
Cash. . . . . . . . . . . . . . . . . . .68 .68 .68 .66 .60 .57
Stock . . . . . . . . . . . . . . . . . -- -- -- -- -- --
OTHER FINANCIAL DATA - Note A
Total assets . . . . . . . . . . . . . . . $347,335 $349,999 $335,062 $361,559 $325,201 $308,388
Current assets . . . . . . . . . . . . . . 170,965 169,013 158,272 182,466 165,601 151,690
Less current liabilities - Note D. . . . . 110,199 109,170 92,460 100,824 91,107 80,182
Net working capital - Note D. . . . . . 60,766 59,843 65,812 81,642 74,494 71,508
Net plant investment . . . . . . . . . . . 114,981 122,149 120,825 120,888 107,475 102,682
Gross capital expenditures . . . . . . . . 9,435 14,116 20,097 22,831 17,783 9,995
Long-term debt . . . . . . . . . . . . . . 78,059 84,392 54,718 69,852 41,481 60,225
Redeemable preferred stock . . . . . . . . 0 0 38,491 37,594 0 0
Shareholders' equity . . . . . . . . . . . 122,937 121,849 116,344 130,265 173,045 150,530
Shareholders' equity per share of common
stock - Note C. . . . . . . . . . . . . 11.90 12.05 11.77 13.22 13.64 13.61
Actual number of shares outstanding
at year-end . . . . . . . . . . . . . . 10,038 9,910 9,791 9,854 12,687 11,057
Average number of shares outstanding
during the year . . . . . . . . . . . . 10,064 9,909 9,925 11,329 11,901 11,109
RATIOS - Note A
Gross profit to net sales. . . . . . . . . 28.9% 29.8% 31.1% 30.9% 32.7% 30.9%
Income from continuing operations
to net sales. . . . . . . . . . . . . . 3.1% 3.1% 4.6% 6.1% 5.5% 4.2%
Effective income tax rate. . . . . . . . . 32.0% 39.8% 44.4% 45.6% 45.7% 45.2%
Income from continuing operations
to average shareholders'
equity. . . . . . . . . . . . . . . . . 11.5% 11.8% 16.3% 18.2% 14.9% 11.8%
Ratio of current assets to
current liabilities . . . . . . . . . . 1.55:1 1.52:1 1.68:1 1.78:1 1.80:1 1.87:1
Ratio of long-term debt to
shareholders' equity plus
long-term debt. . . . . . . . . . . . . 38.8% 40.9% 32.0% 34.9% 19.3% 28.6%
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ITEM 6. SELECTED FINANCIAL DATA (continued)
(in thousands, except per-share data and ratios)
INCOME DATA - Note A 1987 1986 1985 1984 1983
---- ---- ---- ---- ----
Net sales. . . . . . . . . . . . . . . . . $321,348 $274,510 $192,186 $204,849 $168,710
Gross profit . . . . . . . . . . . . . . . 99,641 83,958 54,949 56,278 40,447
Interest expense . . . . . . . . . . . . . 7,905 7,709 1,959 1,861 2,245
Income from continuing operations
before income taxes . . . . . . . . . . 19,265 18,369 16,742 19,313 5,956
Income taxes . . . . . . . . . . . . . . . 8,041 7,753 8,826 6,620 2,619
Income from continuing operations. . . . . 11,224 10,616 7,916 12,693 3,337
Net income . . . . . . . . . . . . . . . . 11,224 10,616 7,916 12,693 3,337
Earnings per share - Note B
Primary:
Income from continuing operations. . 1.02 .97 .72 1.16 .31
Net income . . . . . . . . . . . . . 1.02 .97 .72 1.16 .31
Fully diluted:
Income from continuing operations. . 1.00 .96 .72 1.16 .31
Net income . . . . . . . . . . . . . 1.00 .96 .72 1.16 .31
Dividends per share of common stock:
Cash. . . . . . . . . . . . . . . . . . .56 .56 .52 .53 .47
Stock . . . . . . . . . . . . . . . . . -- -- -- 5% 3%
OTHER FINANCIAL DATA - Note A
Total assets . . . . . . . . . . . . . . . $280,259 $271,449 $170,396 $157,912 $156,372
Current assets . . . . . . . . . . . . . . 125,840 118,673 112,042 101,453 100,610
Less current liabilities - Note D. . . . . 58,972 55,028 44,509 36,604 35,274
Net working capital - Note D. . . . . . 66,868 63,645 67,533 64,849 65,336
Net plant investment . . . . . . . . . . . 105,609 105,400 48,446 47,374 49,358
Gross capital expenditures . . . . . . . . 9,889 13,553 5,739 4,693 8,521
Long-term debt . . . . . . . . . . . . . . 72,371 83,356 3,922 4,335 4,910
Redeemable preferred stock . . . . . . . . 0 0 0 0 0
Shareholders' equity . . . . . . . . . . . 134,678 122,262 114,621 110,269 107,139
Shareholders' equity per share of common
stock - Note C. . . . . . . . . . . . . 12.25 11.14 10.47 10.09 9.81
Actual number of shares outstanding
at year-end . . . . . . . . . . . . . . 10,991 10,971 10,943 10,925 10,921
Average number of shares outstanding
during the year . . . . . . . . . . . . 11,044 10,995 10,936 10,922 10,913
RATIOS - Note A
Gross profit to net sales. . . . . . . . . 31.0% 30.6% 28.6% 27.5% 24.0%
Income from continuing operations
to net sales. . . . . . . . . . . . . . 3.5% 3.9% 4.1% 6.2% 2.0%
Effective income tax rate. . . . . . . . . 41.7% 42.2% 52.7% 34.3% 44.0%
Income from continuing operations
to average shareholders'
equity. . . . . . . . . . . . . . . . . 8.7% 9.0% 7.0% 11.7% 3.1%
Ratio of current assets to
current liabilities . . . . . . . . . . 2.10:1 2.13:1 2.50:1 2.75:1 2.85:1
Ratio of long-term debt to
shareholders' equity plus
long-term debt. . . . . . . . . . . . . 35.0% 40.5% 3.3% 3.8% 4.4%
Note A - Data for fiscal years 1986-1993 have been computed in accordance with
Employers' Accounting for Pensions, SFAS No. 87. Fiscal years
1991-1993 have been computed in accordance with Employers' Accounting
for Postretirement Benefits Other Than Pensions, SFAS No. 106. Fiscal
years 1993 and 1992 have been computed in accordance with Accounting
for Income Taxes, SFAS No. 109. Prior years have not been restated.
Note B - Based on weighted average number of shares outstanding adjusted for
all subsequent share dividends.
Note C - Based on actual number of shares outstanding at end of period adjusted
for all subsequent share dividends.
Note D - Prior years amounts have been reclassified to conform to current
classification.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Consolidated Results
In 1993, income before cumulative effect of changes in accounting
of $14.0 million was nearly identical to 1992, but fell short of the
$20.1 million achieved in 1991 by 30 percent due to several nonrecurring
gains recorded in that year. Earnings held steady versus 1992 as
declining income from the Company's operations in Europe was offset by a
resurgence in the domestic business segment. The cumulative effect of
adopting FASB Statement No. 109, "Accounting for Income Taxes,"
increased net income in 1992 by $3.4 million while adoption of FASB
Statement No. 106," Employers' Accounting for Postretirement Benefits,"
decreased income in 1991 by $9.0 million. There were no material
cumulative effects in income from changes in accounting principles for
1993.
Consolidated revenues of $448.6 million were higher than those in 1992
and 1991 by 3 percent and 4 percent, respectively, after adjusting for the
effects of exchange rate differences on foreign sales reported in U.S. dollars.
Record sales in the United States of $242.3 million were higher than 1992 and
1991 by 15 percent and 17 percent, respectively, as a result of increased
business in the Hydraulic and Metal Products groups. Domestic revenues for the
Fluid Purification Group were relatively flat over the three-year period.
Exports improved again in 1993 due to increased demand from customers in
Canada, Mexico, South America, Pacific Rim countries, and the Middle East.
Foreign sales as measured in local currencies were down nearly 8 percent from
last year reflecting the deepening recession in Europe and a sluggish economy
in Japan. Operating units in Australia and Southeast Asia, on the other hand,
enjoyed strong revenue gains for the second consecutive year. Overseas
operations accounted for 46 percent of the Company's total revenues in 1993
versus more than 52 percent in the two previous years.
Operating income of $25.4 million was lower than income in 1992 and
1991 by 16 percent and 34 percent, respectively. Significant nonrecurring
gains and losses associated with plant consolidations and relocations within an
ongoing business unit have been identified separately in the income statement
and the industry segment footnote. Most of the nonrecurring charges shown for
the three-year period pertain to plant restructuring activities in the Fluid
Purification business segment. Operating income in 1993 fell short of the
previous year as a result of a severe decline in earnings for the Astron
Division in Europe where the deepening economic recession caused a slowdown of
new construction in 1993. Operating profits were down from 1991 due to the
combined effects of the downturn in the Astron Division and an operating loss
sustained by the Fluid Purification group for the second consecutive year.
Income and gross margin were also favorably impacted in 1991 by a $3.1 million
credit resulting from the liquidation of some LIFO inventory layers valued at
costs recorded in earlier years.
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ITEM 7. (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
A discussion follows regarding changes in operating results for
each business segment.
Industry Segments
- Hydraulic Components
Sales and operating income in the Hydraulic Components segment
improved for the second consecutive year, driven by a resurgence in the
domestic sector. Revenues increased by $12.1 million or 7 percent over last
year while operating income improved by 44 percent. Sales and income were
higher for all of the domestic operating units in 1993, reflecting
substantially increased demand from distributors and nearly all of the original
equipment markets served by this product group, including the transportation,
refuse, construction and agricultural equipment industries. Revenues and
operating income improved again this year for the Oildyne Division due to
increased deliveries of compact pumps first introduced in 1992 for high
pressure water sprayer applications. Financial performance deteriorated in the
foreign segment during 1993 as results were mixed among the various overseas
operating units. The Keelavite Division in the United Kingdom performed well
again and contributed significantly to the Hydraulic Product group's total
operating income in 1993, but a major segment of the contract to produce power
generators for military uses was completed late in the year, leading to the
likelihood of diminished sales and income in 1994 for this unit. Worsening
economic conditions caused deficits to widen for other Hydraulic operations in
Europe and the United Kingdom. Elsewhere, strong demand from the local sugar
cane industry and a surge in export activity to the Pacific Rim helped sales
and income to improve dramatically for the subsidiary in Australia while a
continuation of depressed business conditions and political instability
resulted in another year of operating losses in Brazil.
Capital expenditures amounted to $4.4 million for this segment in 1993
versus expenditures of $4.5 million in 1992 and $8.7 million in 1991. Nearly
80 percent of the capital spending in the last two years resulted from the
purchase of technologically advanced equipment to enhance production capacity
and improve the operating efficiency of the domestic manufacturing facilities.
Construction of a new facility in the United Kingdom accounted for
approximately 50 percent of total expenditures in 1991.
-12-
13
ITEM 7. (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Incoming orders for the Hydraulic Components segment improved during
the fourth quarter of 1993, reflecting a surge in activity among the domestic
operating units. Bookings were also higher for most of the foreign units but
order rates were not as strong as those seen in the U.S. Excluding the impact
of the production contract at Keelavite, the backlog of unfilled orders to
start the new fiscal year was 24 percent higher than last year after adjusting
for foreign currency differences.
- Metal Products
Revenues in the Metal Products segment declined $16.7 million or
12 percent from the previous year while operating income fell 50 percent. All
of the year-over-year decline derives from the Astron Division in Europe where
the deepening economic recession caused sales and income to diminish for the
second consecutive year. Astron's revenues, as measured in local currencies,
were lower than those in 1992 by 15 percent, reflecting the combined effects of
decreased volume and implementation of a price discounting strategy to preserve
market share and stimulate demand under distressed business conditions. Profit
margins were therefore lower in 1993 which, when added to the impact of reduced
business volume, caused Astron's operating income to fall 60 percent from the
previous year. Sales were higher than a year ago for the metal stampings
operations in the U.S., reflecting increased activity in the transportation and
storage vessel markets and continued success with the Division's expanding
Distribution Center program in the eastern part of the country.
Despite the upturn in revenues, however, operating income for the U.S.
operations was flat in 1993 due to intense price competition in certain
product ranges and a general rise in manufacturing costs.
Capital expenditures for the Metal Products segment amounted to $1.8
million in 1993 versus spending of $2.9 million in each of the previous two
years. Two-thirds of the total expenditures in 1993 and 1992 pertain to
storage facilities, office automation, training facilities, tooling and
upgraded production equipment for the Astron Division while the remainder
relates to automation, refurbishment and replacement of production equipment in
the U.S. Expansion of Astron's production capacity accounts for nearly 75
percent of the capital expenditures in 1991.
-13-
14
ITEM 7. (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Incoming orders were brisk during the fourth quarter of 1993
for the metal stampings segment in the U.S. and the backlog of unfilled orders
to start the new year was up 27 percent from last year. In the Astron
Division, however, fourth quarter bookings were weak and the backlog was down
10 percent from a year ago after adjusting for foreign currency differences.
- Fluid Purification Systems
The Fluid Purification segment incurred an operating loss for the
second consecutive year on only a modest increase in revenues of 2 percent.
The operating deficit narrowed slightly to $2.5 million from a loss of $3.1
million a year ago due to moderate year-over-year improvements for some of the
overseas units. The loss is indicative of the prolonged worldwide slump in
this segment's core process filtration product line. Demand was weak again in
1993 from customers in the chemical, coatings, automotive and food & beverage
industries while the ultrafiltration line, acquired in 1992, incurred a loss
for the year of $1.7 million as sales volumes failed to materialize as
expected. Profitability was adversely affected by difficulties and disruptions
in the consumer division resulting from the relocation of Aqua-Pure and Water
Factory operations to a new facility in Connecticut. Operating results for
1993 also include severance and termination charges to downsize certain
manufacturing operations in Brazil and Europe. Elsewhere, sales and income
improved again for subsidiaries in Australia and Southeast Asia while the
Japanese unit rebounded from a poor performance in 1992 due to the favorable
effect of a stronger yen on imported materials and the implementation of a
stringent program to control other manufacturing costs. Despite the poor
showing overall in the last two years, the Fluid Purification group has
nonetheless managed to generate a modest cash flow in both periods.
Operating results for each of the three years include nonrecurring
charges for various plant restructuring activities in the U.S. These charges
pertain to the recently completed effort to consolidate the water filtration
operations and to a pending program which will relocate and merge the
ultrafiltration product line, presently located in Norwood, Massachusetts, with
other process filtration operations in Connecticut.
-14-
15
ITEM 7. (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Capital expenditures amounted to $3.2 million in 1993 versus spending
of $6.7 million in 1992 and $8.6 million in 1991. More than 80 percent of the
current year spending pertains to investment in the U.S. for emission controls,
improvements and fixtures for the new water filtration facility in Connecticut,
and miscellaneous production equipment. Included in capital expenditures for
1992 is $4.4 million for the acquisition of land and building in connection
with the program to consolidate the water filtration operations. Facilities
expansion in Japan and restoration of the manufacturing facilities in Europe
destroyed by fire in 1990 accounted for three-fourths of the capital spending
in 1991.
Incoming orders in the fourth quarter, while 14 percent higher than
those for the same period last year, tended to be somewhat sluggish in Europe
and the U.S. versus activity in the third quarter of 1993. The backlog of
unfilled orders to start the new year was up 27 percent from last year on a
parity-adjusted basis.
Nonoperating Income And Expense
Interest received from investments decreased from $1.4 million in
1992 to $1.0 million in 1993 reflecting a general decline in investment
yields and the use of cash during the year to retire some of the
outstanding debt. Approximately 80 percent of the total interest
expense incurred in 1993 resulted from long-term obligations. Most of
the long-term interest expense derives from the issuance last year of
$45.0 million in 8.2 percent senior notes as part of a capital
restructuring program. Remaining interest expense pertains to long-
term debt to fund major construction projects completed in recent years
and short-term borrowings to support current operations. Effective
interest rates paid by the Company declined between 1991 and 1992 and
generally stabilized in the current year.
Foreign currency exchange and translation losses (principally in
Brazil) and withholding taxes on repatriated foreign earnings are
included in other nonoperating income and expense for the three-year
period reported herein. These amounts totaled $1.2 million in 1993,
$1.9 million in 1992 and $2.4 million in 1991. Other nonoperating
income for 1993 also includes $1.0 million in initial technology
license fees derived from a License Agreement entered into with Geoyang
Development Co. Ltd. whereby Geoyang was given the rights and technology
necessary to design, engineer, manufacture, market and assemble Astron's
integrated metal building systems in Korea. Other nonoperating income
in 1991 includes a $3.2 million deferred translation gain resulting from
the liquidation of an inactive subsidiary in Switzerland and a
$2.4 million insurance settlement related to certain assets in Europe
destroyed by fire in an earlier year.
-15-
16
ITEM 7. (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Taxes
The consolidated effective tax rate decreased to 32 percent in
1993 primarily as a result of favorable conclusions to a number of open
tax issues, including prior years' tax audits in the U.S. and abroad and
the settlement of a dispute with one foreign tax authority over
deductibility of certain expenses. The effective rate was also reduced
by the favorable tax impact of reserve contract benefits and a change in
tax law for one overseas subsidiary which lowered the statutory rate on
that entity's taxable income. Tax rate reductions are scheduled for
adoption in some other foreign countries for the new fiscal year, but
the Company's effective rate is expected to remain in excess of the U.S.
federal income tax rate due, principally, to higher statutory rates for
some overseas subsidiaries, the tax consequences of repatriating foreign
earnings, state and local taxes levied on domestic income, and
nondeductible expense for goodwill acquired in purchase transactions
prior to July 25, 1991.
In August 1993, the U.S. Congress passed the Omnibus Budget
Reconciliation Act of 1993 which generally raised the level of U.S.
Federal taxes which the Company must pay. The Act increased the top
corporate rate from 34 percent to 35 percent effective January 1, 1993
and imposed new deduction limitations on compensation and certain
business expenses. The Act also extends the research & development
credit through June 1995 and now permits a tax deduction for the
amortization of goodwill or going-concern value acquired in a purchase
transaction after July 25, 1991. The impact of the new law on deferred
tax obligations was negligible. The Act is expected to have no material
effect on the Company's operating policies.
Accounting Standards
In 1993, the Company adopted FASB Statement No. 112, "Employers'
Accounting for Postemployment Benefits." This new accounting standard
requires accrual accounting for workers compensation, disability,
health insurance continuation, severance pay and other postemployment
benefits provided to former or inactive employees when such benefits are
attributable to service rendered by the employee, the obligation vests
or accumulates, and payment of the obligation is probable. The effect
of adopting SFAS No. 112 was immaterial to the financial statements as
the Company was already accounting for such costs on an accrual basis.
-16-
17
ITEM 7. (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
In 1992, the Company adopted FASB Statement No. 109, "Accounting
for Income Taxes," which changes the criteria for measuring the
provision for income taxes and recognizing deferred tax assets and
liabilities. This accounting standard requires application of the
liability method wherein deferred taxes are recorded on the basis of
enacted tax rates as opposed to use of historical tax rates under the
previous tax accounting rules. In adopting SFAS No. 109, the Company
elected to immediately recognize the effect in income as a change in
accounting principle rather than restate prior years. The cumulative
effect of the accounting change to November 1, 1991, which was recorded
during the first quarter of 1992, increased net income for the year by
$.34 per share ($.31 per share on a fully-diluted basis).
In 1991, the Company adopted FASB Statement No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." The effect
of adopting this accounting standard reduced income before cumulative
effect of accounting changes by $325,000 ($.03 per share) in 1993,
$373,000 ($.04 per share) in 1992, and $396,000 ($.04 per share) in
1991. In adopting this accounting standard, the Company elected to
immediately recognize in net income the initial unfunded liability, or
transition obligation, as the effect of a change in accounting
principle. The after-tax cumulative effect of the accounting change to
November 1, 1990 amounted to a charge to net income of $9,015,000 or
$.91 per share ($.83 per share on a fully-diluted basis).
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is generally defined as the ability to generate cash, by
whatever means available, to satisfy short-and long-term needs of the
Company. Cash generated from operating activities totaled $36.9 million
in 1993, representing a decrease of $2.8 million or 7 percent from the
previous year mainly as a result of reduced earnings for the Astron
Division in the Metal Products group. Cash from operations was also
lower than 1991 due to the performance of both the Astron Division and
the Fluid Purification business segment. The accounting changes
associated with SFAS No. 109 in 1992 and SFAS No. 106 in 1991 were
noncash in nature and therefore had no effect on cash flow in their
respective fiscal periods. Net working capital increased 2 percent to
$60.8 million at the end of 1993.
-17-
18
ITEM 7. (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Cash used in investing activities amounted to $9.7 million in
1993. Capital expenditures totaled $9.4 million for the year versus
spending of $14.1 million in 1992 and $20.1 million in 1991 (see
Note I). Most of the current year spending pertained to capacity
expansion, emission controls, and equipment upgrades for operations in
the U.S. Of the total expenditures in 1992, $4.4 million represented
the purchase of land and building in connection with the program to
consolidate the domestic water filtration operations. The remainder of
the capital spending in that year related to purchases of new equipment,
product tooling, and office automation. Construction of new facilities
in Japan and the United Kingdom accounted for $7.4 million of the total
spending in 1991 while another $3.4 million was expended to restore the
filtration production facility in Europe which was destroyed by fire in
an earlier period. Authorized but unspent capital expenditure programs
totaled $8.5 million at fiscal year-end, and the Company intends to
consider other capital projects during the coming year. Significant
purchases in 1994 will include production equipment necessary to launch
new product offerings and expand production capacity in the Hydraulic
Products group, new automated equipment to improve production
efficiencies in the Metal Stamping and Astron Divisions, equipment
upgrades and product line extensions in the Fluid Purification group,
acquisition of a manufacturing facility in the U.S. which is presently
leased, and investments to reengineer and downsize the Company's
information technology capabilities. Other investing activities in 1992
included the acquisition of the assets of Bioken Separations, Inc., a
manufacturer of proprietary membrane filtration devices, for
$2.2 million. Other sources of cash in 1991 for this category included
receipt of $3.3 million in installment proceeds from the earlier sale of
property in the United Kingdom and business property insurance proceeds
in the amount of $3.1 million.
Cash used in financing activities totaled $19.8 million in 1993.
Principal activities included the retirement of debt, payment of reserve
contract premiums, and the distribution of dividends to shareholders.
Long-term debt was reduced from $84.4 million last year to $78.1 million at the
end of the current fiscal period. Dividends totaled $8.9 million in 1993, of
which $6.8 million was paid to shareholders of common stock. Financing
activities in 1992 included a refinancing program whereby proceeds from
issuance of $45.0 million in 8.2 percent senior notes were used to redeem all
of the Series C senior increasing rate cumulative convertible preferred shares
originally issued in 1990. Principal payments against the senior notes are
scheduled to commence in 1997 with the final payment to be made in 2002. The
impact of the refinancing has improved cash flow and increased net income
available to shareholders of common stock.
-18-
19
ITEM 7. (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
As part of a restructuring program completed in 1990, the Company
established two leveraged employee stock ownership plans (the ESOPs)
and sold Series B cumulative convertible preferred shares to the plans
for approximately $25.0 million. The ESOPs borrowed funds to purchase
the Series B shares. During 1993, the ESOPs completed a refinancing
program whereby a floating rate loan was replaced with a $23.2 million,
7.08 percent, 17-year term loan privately placed with a group of
insurance companies. This program provided permanent financing for the
remaining life of the benefit plan. The Company has guaranteed the
repayment of any remaining principal as of December 31, 2009. The
outstanding loan balance at October 31, 1993 was approximately
$23.2 million.
Internal cash flows are expected to be sufficient to provide the
capital resources necessary to support operating needs and finance
capital expenditure programs in the coming year. During 1992 the
Company amended a five-year $75.0 million reducing credit facility
negotiated with a group of lending institutions in a prior period to
reflect a three-year $35.0 million nonreducing facility. The funds
available to the Company under the new agreement may be used for any
general corporate purpose. Total unused credit lines of $120.5 million,
denominated in both domestic and foreign currencies, were available to
the Company at fiscal year-end. Borrowing rates to start the new year
are generally lower than the same period a year ago, reflecting
prevailing market conditions.
IMPACT OF INFLATION AND CHANGING PRICES
Rates of inflation moderated for the second consecutive year and
ranged from 1 to 3 percent for most locales. The continuing worldwide economic
recession helped stabilize costs for raw materials and purchased components for
most of the Company's operations in 1993 but, for the first time in several
years, U.S. steel suppliers raised prices in an attempt to restore profits
sacrificed in previous periods. Wages, benefits and operating expenses were
higher for the year but generally advanced in line with inflation, with the
exception of domestic health care where cost increases exceeded inflation.
Where possible, rising manufacturing costs were offset by increased selling
prices but, as has been the case in recent years, competitive pressures and
depressed market conditions limited the extent to which cost increases were
passed along to customers. In general, profit margins diminished in the Metal
Products group as the metal stampings operations in the U.S. were unable to
recover cost increases in all instances, while the Astron Division found it
necessary to discount selling prices in the wake of deteriorating market
conditions. The ability to recover cost increases and maintain margins
continues to be a major challenge for most operating units, and the Company
relies upon cost containment, aggressive purchasing, quality initiatives and
cost-saving investments to combat profit erosion and remain competitive.
-19-
20
ITEM 7. (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
BUSINESS OUTLOOK
The consolidated backlog of unfilled orders at the end of the year
amounted to $107.1 million which, after adjusting for the production
contract at Keelavite and the effects of exchange rate differences on
the foreign segments, represents a 17 percent increase from the previous
fiscal year-end. Ending backlogs were particularly strong for domestic
operations but incoming orders have generally lagged in the Astron
Division. Substantially all of the consolidated backlog is deliverable
in 1994.
Prospects for the Company's domestic businesses appear bright in
1994 as the momentum which produced strong year-over-year gains in 1993
for this sector has continued into the early stages of the new fiscal
year. The Commerce Department's outlook for 1994 predicts significant
growth for some of the more important market segments served by our U.S.
operations, such as the automotive, truck, transportation, electronics
and housing industries. This forecast for improved conditions stems
from low interest rates, increased investment in capital equipment, and
growing consumer purchases of durable goods. Economic growth, an
expanding customer base and new product introductions are therefore
expected to yield profit improvements for all three of the Company's
U.S. business segments in the new year. Emerging world trade agreements
are likely to produce additional benefits which will augment the
Company's already successful export program. Mitigating this optimism
are uncertainties as to the Fluid Purification group's ability to
perform at acceptable levels given the poor business conditions in some
of the specific industries served by this unit and the probability that
the ultrafiltration product line will incur an operating loss again in
1994 while preparations are made to consolidate this division with other
process filtration operations.
In the overseas sector, strong performances are anticipated again
in Australia and Southeast Asia where preparations are being made to
expand the distribution base in Singapore. Prospects are less certain
for operations in Japan where the economy has stagnated, and severe
business conditions are anticipated again in Brazil amid that country's
continuing political and economic turmoil. In the United Kingdom,
Keelavite's contribution to corporate earnings will diminish due to
completion of a major portion of the power generator contract in 1993.
Conditions remain difficult for the Astron, Hydraulic and Filtration
segments in Europe and significant improvements in business levels in
these areas are not expected until the latter part of the year.
-20-
21
ITEM 7. (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
The Company continues to restructure manufacturing operations,
commit to capital improvements and reduce overheads in an effort to
lower operating costs and improve profitability. The competitive
advantages which these programs provide and the apparent beginnings of
economic recovery in some of our major markets cause us to anticipate
moderate improvements in consolidated results for 1994.
-21-
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
STATEMENTS OF CONSOLIDATED INCOME
Commercial Intertech Corp. and Subsidiaries
Year Ended October 31,
1993 1992 1991
--------------------------
(in thousands, except per-share data)
Net sales. . . . . . . . . . . . . . . . $448,577 $450,608 $436,961
Less costs and expenses:
Cost of products sold . . . . . . . . 318,837 316,307 301,220
Selling, administrative and general
expenses . . . . . . . . . . . . . 103,510 102,827 96,880
Nonrecurring items. . . . . . . . . . 860 1,335 569
--------- --------- ---------
423,207 420,469 398,669
--------- --------- ---------
Operating income . . . . . . . . . . . . 25,370 30,139 38,292
Nonoperating income (expense):
Interest income . . . . . . . . . . . 1,047 1,426 1,123
Interest expense. . . . . . . . . . . (5,744) (6,277) (5,881)
Other . . . . . . . . . . . . . . . . (71) (1,939) 2,681
--------- --------- ---------
(4,768) (6,790) (2,077)
--------- --------- ---------
Income before income taxes and cumulative
effect of changes in accounting . . . 20,602 23,349 36,215
Provision for income taxes:
Current . . . . . . . . . . . . . . . 8,794 10,372 15,007
Deferred. . . . . . . . . . . . . . . (2,207) (1,068) 1,090
--------- --------- ---------
6,587 9,304 16,097
--------- --------- ---------
Income before cumulative effect of
changes in accounting . . . . . . . . 14,015 14,045 20,118
Cumulative effect of changes in accounting:
Accounting for income taxes . . . . . 0 3,391 0
Accounting for postretirement benefits 0 0 (9,015)
--------- --------- ---------
Net income . . . . . . . . . . . . . . . $ 14,015 $ 17,436 $ 11,103
========= ========= =========
Preferred stock dividends and
adjustments . . . . . . . . . . . . . (2,109) (4,413) (6,298)
--------- --------- ---------
Net income applicable to common stock. . $ 11,906 $ 13,023 $ 4,805
========= ========= =========
Earnings per share of common stock:
Primary:
Income before cumulative effect
of changes in accounting . . . . $1.18 $0.97 $1.39
Net income. . . . . . . . . . . . . 1.18 1.31 0.48
Fully diluted:
Income before cumulative effect
of changes in accounting . . . . 1.14 0.95 1.31
Net income. . . . . . . . . . . . . 1.14 1.26 0.48
See notes to consolidated financial statements.
-22-
23
ITEM 8. (continued)
CONSOLIDATED BALANCE SHEETS
Commercial Intertech Corp. and Subsidiaries
October 31, October 31,
1993 1992
------------------------
Assets (in thousands)
CURRENT ASSETS
Cash (including equivalents of $18,409,000
in 1993 and $14,836,000 in 1992) . . . . $ 25,066 $ 19,396
Accounts and notes receivable, less
allowances for doubtful accounts of
$1,765,000 in 1993 and $1,612,000 in
1992 . . . . . . . . . . . . . . . . . . 78,484 80,983
Inventories . . . . . . . . . . . . . . . . 49,883 54,028
Deferred income tax benefits. . . . . . . . 12,889 11,083
Prepaid expenses and other current assets . 4,643 3,523
-------- --------
Total current assets . . . . . . . . . . 170,965 169,013
NONCURRENT ASSETS
Intangible assets . . . . . . . . . . . . . 29,822 32,579
Pension assets. . . . . . . . . . . . . . . 26,645 22,382
Other noncurrent assets . . . . . . . . . . 4,922 3,876
-------- --------
Total noncurrent assets. . . . . . . . . 61,389 58,837
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements. . . . . . . . . 12,467 12,631
Buildings . . . . . . . . . . . . . . . . . 61,084 62,538
Machinery and equipment . . . . . . . . . . 156,669 161,185
Construction in progress. . . . . . . . . . 5,495 3,219
-------- --------
235,715 239,573
Less allowances for depreciation and
amortization. . . . . . . . . . . . . . . . 120,734 117,424
-------- --------
114,981 122,149
-------- --------
Total assets . . . . . . . . . . . . . . . . . $347,335 $349,999
======== ========
-23-
24
ITEM 8. (continued)
CONSOLIDATED BALANCE SHEETS
Commercial Intertech Corp. and Subsidiaries
October 31, October 31,
1993 1992
-------------------------
(in thousands)
Liabilities and Shareholders' Equity
CURRENT LIABILITIES
Bank loans. . . . . . . . . . . . . . . . . . $ 17,599 $ 18,268
Accounts payable. . . . . . . . . . . . . . . 33,387 35,433
Accrued payrolls and related taxes. . . . . . 15,290 15,229
Accrued expenses. . . . . . . . . . . . . . . 25,305 21,068
Dividends payable . . . . . . . . . . . . . . 2,270 2,213
Accrued income taxes. . . . . . . . . . . . . 14,786 15,731
Current portion of long-term debt . . . . . . 1,562 1,228
-------- --------
Total current liabilities. . . . . . . . . 110,199 109,170
NONCURRENT LIABILITIES
Long-term debt. . . . . . . . . . . . . . . . 78,059 84,392
Deferred income taxes . . . . . . . . . . . . 16,273 16,674
Postretirement benefits . . . . . . . . . . . 19,867 17,914
-------- --------
Total noncurrent liabilities . . . . . . . 114,199 118,980
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: 1993 - 1,064,846 shares
1992 - 1,070,353 shares . . . . 24,758 24,886
Common stock, $1 par value:
Authorized: 30,000,000 shares
Issued:
1993 - 10,037,575 shares;
(excluding 42,063 in treasury)
1992 - 9,909,608 shares;
(excluding 42,980 in treasury). . . . . 10,038 9,910
Capital surplus . . . . . . . . . . . . . . . 39,034 37,628
Retained earnings . . . . . . . . . . . . . . 75,087 69,199
Deferred compensation . . . . . . . . . . . . (21,248) (22,495)
Translation adjustment. . . . . . . . . . . . (4,732) 2,721
--------- --------
122,937 121,849
--------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $347,335 $349,999
========= ========
See notes to consolidated financial statements.
-24-
25
ITEM 8. (continued)
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
Commercial Intertech Corp. and Subsidiaries
Year Ended October 31,
1993 1992 1991
--------------------------
(in thousands, except per-share data)
PREFERRED STOCK (Series B)
Balance at beginning of year. . . . . $ 24,886 $ 24,950 $ 24,973
Shares converted. . . . . . . . . . . (128) (64) (23)
--------- --------- ---------
Balance at end of year. . . . . . . . 24,758 24,886 24,950
COMMON STOCK
Balance at beginning of year. . . . . 9,910 9,791 9,854
Shares issued:
Water Factory Systems -
Acquisition . . . . . . . . . . 0 55 65
Stock option and award plans . . . 105 53 40
Repurchase programs . . . . . . . . . 0 0 (172)
Other . . . . . . . . . . . . . . . . 23 11 4
--------- --------- ---------
Balance at end of year. . . . . . . . 10,038 9,910 9,791
CAPITAL SURPLUS
Balance at beginning of year. . . . . 37,628 36,665 38,553
Water Factory Systems -
Acquisition. . . . . . . . . . . . 0 (55) (65)
Stock option and award plans. . . . . 987 890 545
Repurchase programs . . . . . . . . . 0 0 (2,424)
Other . . . . . . . . . . . . . . . . 419 128 56
--------- --------- ---------
Balance at end of year. . . . . . . . 39,034 37,628 36,665
RETAINED EARNINGS
Balance at beginning of year. . . . . 69,199 66,177 69,623
Net income for the year . . . . . . . 14,015 17,436 11,103
--------- --------- ---------
83,214 83,613 80,726
Dividends:
Common (per share: 1993 - $0.68;
1992 - $0.68; 1991 - $0.68) . . 6,821 6,729 6,682
Preferred Series B . . . . . . . . 2,107 2,117 2,652
Preferred Series C . . . . . . . . 0 1,659 5,093
--------- --------- ---------
8,928 10,505 14,427
Other preferred stock adjustments . . (801) 3,909 122
--------- --------- ---------
Balance at end of year. . . . . . . . 75,087 69,199 66,177
DEFERRED COMPENSATION. . . . . . . . . . (21,248) (22,495) (23,856)
TRANSLATION ADJUSTMENT . . . . . . . . . (4,732) 2,721 2,617
--------- --------- ---------
Total shareholders' equity . . . . $122,937 $121,849 $116,344
========= ========= =========
Shareholders' equity per share of common
stock . . . . . . . . . . . . . . . . $11.90 $12.05 $11.77
See notes to consolidated financial statements.
-25-
26
ITEM 8. (continued)
STATEMENTS OF CONSOLIDATED CASH FLOWS
Commercial Intertech Corp. and Subsidiaries
Year Ended October 31,
1993 1992 1991
--------------------------
OPERATING ACTIVITIES: (in thousands)
Net income . . . . . . . . . . . . . . . . . . . . . $ 14,015 $ 17,436 $ 11,103
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for depreciation and amortization. . 16,764 16,756 16,524
Adoption of SFAS No. 109 . . . . . . . . . . . 0 (3,391) 0
Liquidation of foreign investment. . . . . . . 0 0 (3,213)
Gain on sale of property . . . . . . . . . . . 0 0 (375)
Gain on insurance settlement . . . . . . . . . 0 0 (2,411)
Postretirement benefits. . . . . . . . . . . . 781 607 15,185
Pension plan credits . . . . . . . . . . . . . (2,386) (2,879) (2,968)
Change in deferred income taxes. . . . . . . . (1,615) (836) (3,409)
Change in current assets and liabilities:
Decrease in accounts receivable . . . . . . 138 1,468 2,943
Decrease (increase) in inventories. . . . . 2,349 (2,378) 5,225
(Increase) decrease in prepaid expenses
and other current assets . . . . . . . . (1,332) 1,606 (884)
Increase (decrease) in accounts payable and
accrued expenses . . . . . . . . . . . . 8,319 10,732 (1,045)
(Decrease) increase in accrued income taxes (143) 545 5,327
--------- --------- ---------
Net cash provided by operating
activities. . . . . . . . . . . . . . 36,890 39,666 42,002
INVESTING ACTIVITIES:
Proceeds from sale of fixed assets . . . . . . . . . 340 219 4,640
Proceeds from insurance settlement . . . . . . . . . 0 0 3,140
Business acquisition . . . . . . . . . . . . . . . . 0 (2,279) (225)
Payments on notes receivable . . . . . . . . . . . . 0 0 1,000
Investment in intangibles. . . . . . . . . . . . . . (496) (209) (223)
Capital expenditures . . . . . . . . . . . . . . . . (9,583) (14,054) (20,774)
--------- --------- ---------
Net cash (used) by investing activities (9,739) (16,323) (12,442)
FINANCING ACTIVITIES:
Proceeds from long-term debts. . . . . . . . . . . . 1,548 22,000 30,057
Principal payments on long-term debts. . . . . . . . (8,114) (37,337) (40,837)
Net borrowings under bank loan agreements. . . . . . (1,034) 9,493 (547)
Proceeds from issuance of senior notes . . . . . . . 0 45,000 0
Payments for refinancing . . . . . . . . . . . . . . 0 (550) 0
Redemption of redeemable preferred stock . . . . . . 0 (43,200) 0
Purchase of reserve contracts. . . . . . . . . . . . (2,503) (1,826) 0
Repurchase of common shares. . . . . . . . . . . . . 0 0 (2,596)
Conversion of other assets . . . . . . . . . . . . . (817) 840 697
Dividends paid . . . . . . . . . . . . . . . . . . . (8,872) (11,562) (12,849)
--------- --------- ---------
Net cash (used) by financing activities. (19,792) (17,142) (26,075)
Effect of exchange rate changes on cash . . . . . . . . (1,689) (264) (2,075)
--------- --------- ---------
Net increase in cash and cash equivalents . . . . . . . 5,670 5,937 1,410
Cash and cash equivalents at beginning of year. . . . . 19,396 13,459 12,049
--------- --------- ---------
Cash and cash equivalents at end of year. . . . . . . . $ 25,066 $ 19,396 $ 13,459
========= ========= =========
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . . . . . $6,032 $5,062 $6,371
Income taxes . . . . . . . . . . . . . . . . . . . . 8,344 9,595 8,653
See notes to consolidated financial statements.
-26-
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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 prior to October 31, 1993 have been
reclassified to conform to the current presentation.
Restructuring charges have been reported in operating income under the
caption nonrecurring items.
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 57 percent (54 percent in 1992) of worldwide inventories
are accounted for using the LIFO method. Inventories as of October 31
consisted of the following:
1993 1992
---- ----
(in thousands)
Raw materials . . . . . . . . $11,412 $13,573
Work in process . . . . . . . 24,067 23,842
Finished goods. . . . . . . . 14,404 16,613
------- -------
$49,883 $54,028
======= =======
If all inventories were priced using the FIFO method, which approximates
replacement cost, inventories would have been $14,713,000 higher in 1993 and
$14,556,000 higher in 1992.
Intangibles:
Intangible assets at October 31 are summarized as follows:
1993 1992
---- ----
(in thousands)
Goodwill, less accumulated
amortization (1993 - $4,497,000;
1992 - $3,816,000). . . . . . . . $19,522 $20,057
Other intangibles, less accumulated
amortization (1993 - $17,795,000;
1992 - $15,374,000) . . . . . . . 10,300 12,522
------- -------
$29,822 $32,579
======= =======
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ITEM 8. (continued)
NOTE A - Accounting Policies (continued)
Goodwill, representing the excess of acquisition cost over the value of
assets acquired, is being amortized on the straight-line method generally over
40 years.
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.
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:
Effective November 1, 1991, the Company adopted Statement of Financial
Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for Income Taxes,"
which changed the criteria for 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 and 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. The Company elected not to restate prior years. Prior to the
implementation of SFAS No. 109, the Company accounted for income taxes using
Accounting Principles Board Opinion No. 11. The cumulative effect, through
November 1, 1991, of this change in accounting amounted to $3,391,000, or $.34
per share, and was included in net income as of that date.
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 future. The cumulative amount of unremitted earnings of
subsidiaries, which aggregated approximately $54,879,000 at October 31, 1993,
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.
-28-
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ITEM 8. (continued)
NOTE A - Accounting Policies (continued)
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 asset 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:
Income per share of common stock is computed using the weighted-average
number of shares outstanding for each year. 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 and C
preferred dividends and adjustments reduce income available to common
shareholders.
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 after giving effect to dilutive preferred stock
assumed converted to common stock. In 1993, 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. In 1992 and 1991, the most dilutive calculation assumes
conversion of Series B preferred stock to common shares and the subsequent
adjustments to net income for Series C preferred dividends and dividend rate
adjustments for Series B preferred to arrive at income available to common
shareholders. Alternative conversion of Series C preferred or both Series B
and C preferred results in an anti-dilutive effect on earnings per share.
Cash Equivalents:
The Company considers all highly liquid investments with a maturity of
three months or less, when purchased, to be cash equivalents. The carrying
amounts reported in the balance sheet for cash and cash equivalents approximate
fair value.
Investment In Reserve Contracts:
During the third quarter of fiscal 1992, the Company purchased
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 $3,660,000 in 1993 and $1,124,000 in
fiscal 1992 which is reduced for contract benefits and net amortization of
contract premiums and cash surrender value.
-29-
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ITEM 8. (continued)
NOTE A - Accounting Policies (continued)
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.
Postemployment Benefits
The Company adopted Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits," as of November 1, 1992.
The effect of adoption was immaterial to the financial statements.
-30-
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ITEM 8. (continued)
NOTE B - LONG-TERM DEBT
Long-term debt obligations are summarized below:
1993 1992
---- ----
(in thousands)
Senior notes . . . . . . . . . . . . . $45,000 $45,000
Revolving credit agreements. . . . . . 0 6,000
Industrial revenue loans . . . . . . . 4,898 5,446
Mortgages. . . . . . . . . . . . . . . 6,162 4,684
Other. . . . . . . . . . . . . . . . . 330 432
------- -------
56,390 61,562
Less current portion . . . . . . . . . 1,562 1,228
------- -------
54,828 60,334
Guarantee of employee stock ownership
plan loan . . . . . . . . . . . . . 23,231 24,058
------- -------
$78,059 $84,392
======= =======
During the second quarter of fiscal 1992, the Company successfully
completed a refinancing program by issuing $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 at the end of 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, 1993. The proceeds from the notes were used to redeem the Series C
Senior Increasing Rate Cumulative Convertible Preferred shares.
The Company maintains a $35 million nonreducing revolving credit facility
with a group of three banks. 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, 1993. Additionally, under the most
restrictive provisions of the agreement, approximately $11.3 million of
unrestricted retained earnings is available for future dividend payments or
share purchases. The agreement may be extended for up to two additional years
beyond the current expiration date of April 1995 upon the mutual consent of the
banks and the Company.
Industrial revenue loans cover two separate domestic expansion
programs and have maturities to January 1, 2001. Interest costs
currently range from 4.74 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, 1993 - $5,985,000).
-31-
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ITEM 8. (continued)
NOTE B - Long-Term Debt (continued)
Mortgages relate to construction programs at two facilities. Three loans
are collateralized with a Japanese facility and bear interest at 5.7 to 6.2
percent, maturing through the year 2005. These loans are secured with property
and equipment at Kita-Ibaragi, Japan (net book value at October 31, 1993 -
$6,943,000). The loan for the second program is collateralized by a facility
located in Enfield, Connecticut and bears interest at 5.0 percent maturing in
the year 2000. The Enfield facility's net book value at October 31, 1993 was
$4,013,000.
The Company established the Employee Stock Ownership Plan in February,
1990 financed by a $25 million variable interest rate loan. Loan proceeds were
used to purchase the Company's Series B ESOP convertible preferred shares.
During the third quarter of fiscal 1993, the Company's ESOP completed a
refinancing program by issuing $23.2 million of 7.08 percent senior notes due
December 31, 2009 privately placed with a group of insurance companies. The
proceeds were used to repay the variable rate loan. 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, 1993 (excluding
the ESOP loan guarantee) are:
(in thousands)
1994 - $1,562
1995 - 1,509
1996 - 1,516
1997 - 9,045
1998 - 9,025
The Company had available unused lines of credit totaling approximately
$85.5 million short-term and $35.0 million long-term at October 31, 1993.
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.
Fair Values as of October 31, 1993:
Long-term debt: (in thousands)
--------------
Senior notes $50,131
Industrial revenue loans 5,147
Mortgages 6,586
Other 341
-------
62,205
ESOP guarantee 24,688
-------
$86,893
=======
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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 decreased equity by $7,453,000 and $6,405,000 in 1993
and 1991, respectively, and increased equity by $104,000 in 1992. The
translation adjustment account was further reduced by $3,213,000 in 1991 due to
the liquidation of an inactive subsidiary located in Switzerland. The
liquidation, which was completed during the first quarter of 1991, increased
income from continuing operations by $3,213,000 ($.31 per share after related
taxes) as a result of recognizing deferred translation gains in income. The
gain is recorded as Nonoperating Income in the Statements of Consolidated
Income.
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 before
Income Taxes and Cumulative Effect of Changes in Accounting as follows:
(in thousands)
1993 - $ 678
1992 - 1,266
1991 - 1,790
In certain instances, the Company utilizes foreign currency exchange
contracts to minimize the impact of currency fluctuations on transactions. At
October 31, 1993, the Company and its subsidiaries held contracts for
$5,545,000 with a fair value of $5,482,000. The fair value of these foreign
currency contracts is estimated based on quoted exchange rates at
October 31, 1993.
-33-
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ITEM 8. (continued)
NOTE D - STOCK OPTIONS AND AWARDS
Under the Company's stock option and award plans, approximately 757,000
shares of common stock are reserved for issuance to key employees as of October
31, 1993. The options are exercisable at various dates and expire ten years
from the date of grant. Stock options granted during 1993 totaled 89,400
shares. No 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 no restricted shares awarded in 1993 while a total of 30,600 were awarded
in 1992. Awards of performance shares totaled 81,650 in 1993. No performance
shares were awarded in 1992. 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:
1993. . . . . . . . . . . . 432,900 $ 9.75 - $22.25
1992. . . . . . . . . . . . 389,800 $ 9.75 - $22.25
Options exercised during the year:
1993. . . . . . . . . . . . 46,300 $ 9.75 - $17.25
1992. . . . . . . . . . . . 27,100 $ 9.75 - $17.25
Options exercisable at October 31:
1993. . . . . . . . . . . . 195,500 $ 9.75 - $22.25
1992. . . . . . . . . . . . 162,600 $ 9.75 - $22.25
Shares available for future grants amounted to approximately 324,000 and
137,000 as of October 31, 1993 and 1992, respectively.
-34-
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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.
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:
1993 1992 1991
---- ---- ----
(in thousands)
Defined benefit plans:
Service cost. . . . . . . . . . $ 2,360 $ 2,141 $ 1,785
Interest cost . . . . . . . . . 7,087 6,619 6,248
Actual return on plan assets. . (19,945) (7,887) (22,124)
Net amortization and deferral . 10,001 (2,089) 12,444
-------- -------- ---------
Net pension (income). . . . . . (497) (1,216) (1,647)
Other plans:
Defined contribution plans. . . 284 283 259
Multiemployer plan. . . . . . . 75 63 63
Foreign plans . . . . . . . . . 471 562 613
-------- -------- ---------
Total pension expense (income). $ 333 $ (308) $ (712)
======== ======== =========
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ITEM 8. (continued)
NOTE E - Benefit Plans (continued)
Assumptions used in the accounting for the defined benefit plans as of
October 31 were:
1993 1992 1991
---- ---- ----
Weighted-average discount rate . . . . . . . . . 7.25% 8.0% 8.5%
Rates of increase in compensation levels . . . . 4.5 % 5.0% 5.0%
Expected long-term rate of return on assets. . . 10.0 % 10.0% 10.0%
The following table sets forth the funded status and amounts recognized in
the Consolidated Balance Sheets at October 31, 1993 and 1992 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 3 1 9 9 2
---------------------------- ----------------------------
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. . . . . $(43,761) $(41,222) $(65,553) $ (8,774)
========= ========= ========= =========
Accumulated benefit obligation . . $(45,339) $(43,671) $(68,040) $ (9,658)
========= ========= ========= =========
Projected benefit obligation. . . . . $(48,448) $(52,029) $(75,803) $(11,078)
Market value of plan assets . . . . . 80,147 40,130 97,439 7,455
--------- --------- --------- ---------
Projected benefit obligation less
than or (in excess of) plan
assets . . . . . . . . . . . . . . 31,699 (11,899) 21,636 (3,623)
Unrecognized net (gain) loss. . . . . (4,752) 5,601 2,361 1,045
Unrecognized prior service cost . . . 3,086 3,157 3,826 1,207
Unrecognized net (asset) obligation . (6,541) 1,262 (7,442) 315
Additional liability. . . . . . . . . 0 (1,732) 0 (1,371)
--------- --------- --------- ---------
Net pension asset (liability)
recognized in the Consolidated
Balance Sheets . . . . . . . . . . $ 23,492 $ (3,611) $ 20,381 $ (2,427)
========= ========= ========= =========
Plan assets at October 31, 1993 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 $3,034,480 at that date.
-36-
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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.
In 1991, the Company adopted FASB Statement No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." The effect of
adopting the new rules increased net periodic postretirement benefit costs by
$524,000 in 1993, $607,000 in 1992 and $644,000 in 1991. Income before
cumulative effect of accounting changes was reduced $325,000 ($.03 per share)
in 1993, $373,000 ($.04 per share) in 1992 and $396,000 ($.04 per share) in
1991.
In adopting the new accounting standard, the Company elected to
immediately recognize in net income the initial unfunded liability, or
transition obligation, as the effect of a change in accounting principle. The
after-tax cumulative effect of the accounting change to November 1, 1990
amounted to a charge to net income of $9,015,000 or $.91 per share ($.83 per
share on a fully diluted basis).
Components of net periodic postretirement benefit cost are shown below.
Net periodic cost associated with retiree life insurance benefits amounted to
$296,000 in 1993, $288,000 in 1992 and $276,000 in 1991.
1993 1992 1991
---- ---- ----
(in thousands)
Service cost. . . . . . . . . . . . . . . $ 377 $ 312 $ 258
Interest cost . . . . . . . . . . . . . . 1,411 1,408 1,361
Actual return on plan assets. . . . . . . 0 0 0
Amortization of transition obligation . . 0 0 0
Net amortization and deferral . . . . . . 26 0 0
------ ------ ------
Net periodic postretirement benefit cost. $1,814 $1,720 $1,619
====== ====== ======
-37-
38
ITEM 8. (continued)
NOTE E - Benefit Plans (continued)
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 $3,094,000 and $2,947,000 as of
October 31, 1993 and 1992, respectively.
October 31,
---------------
1993 1992
---- ----
(in thousands)
Accumulated postretirement benefit obligations:
Retirees. . . . . . . . . . . . . . . . . $ (8,959) $ (9,106)
Fully eligible active plan participants . (2,577) (2,277)
Other active plan participants. . . . . . (7,402) (6,891)
--------- ---------
(18,938) (18,274)
Plan assets at fair value. . . . . . . . . . 0 0
--------- ---------
Accumulated postretirement benefit
obligation (in excess of) plan assets . . (18,938) (18,274)
Unrecognized net loss. . . . . . . . . . . . 2,621 2,482
Unrecognized prior service cost. . . . . . . 0 0
Unrecognized transition obligation . . . . . 0 0
--------- ---------
(Accrued) postretirement benefit cost. . . . $(16,317) $(15,792)
========= =========
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,
is 12.5 percent for 1993 and 13.5 percent for 1992. The trend rate is assumed
to decrease gradually to 5.5 percent in the year 2008 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, 1993 by $1,425,000 and the aggregate of
service and interest cost components of net periodic postretirement benefit
cost for 1993 by $143,000. The weighted-average discount rate used in
determining the accumulated postretirement benefit obligation was 7.25 percent
and 8 percent at October 31, 1993 and 1992, respectively. The annual assumed
rate of salary increase for retiree life insurance is 4.5 percent at October
31, 1993 and 5 percent at October 31, 1992.
-38-
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ITEM 8. (continued)
NOTE F - INCOME TAXES
The components of income before income taxes and cumulative effect of
changes in accounting and the provision for income taxes are summarized as
follows:
1993 1992 1991
---- ---- ----
(in thousands)
Income before income taxes and cumulative
effect of changes in accounting
Domestic . . . . . . . . . . . . $ 8,313 $ 4,896 $14,785
Foreign . . . . . . . . . . . . 12,289 18,453 21,430
-------- -------- --------
20,602 23,349 36,215
Provision for income taxes
Current
Domestic-Federal . . . . . . . . 3,348 1,483 4,393
-State and local . . . . 382 560 1,690
Foreign. . . . . . . . . . . . . 5,064 8,329 8,924
-------- -------- --------
8,794 10,372 15,007
Deferred
Domestic-Federal . . . . . . . . (1,376) (1,393) 558
-State and local . . . . (130) (161) 0
Foreign. . . . . . . . . . . . . (701) 486 532
-------- -------- --------
(2,207) (1,068) 1,090
-------- -------- --------
6,587 9,304 16,097
Income before cumulative effect of
changes in accounting
Domestic . . . . . . . . . . . . 6,089 4,407 8,144
Foreign. . . . . . . . . . . . . 7,926 9,638 11,974
-------- -------- --------
$14,015 $14,045 $20,118
======== ======== ========
A reconciliation of the effective tax rate to the U.S. statutory rate for
1993, 1992 and 1991 follows:
1993 1992 1991
---- ---- ----
Statutory U.S. federal income tax rate. . 34.8% 34.0% 34.0%
State and local taxes on income net of
domestic income tax benefit. . . . . . 0.8 1.1 3.1
Increase in effective rate due to
impact of foreign subsidiaries . . . . 0.4 4.8 6.0
Foreign subsidiary liquidation. . . . . . 0 0 (3.0)
Repatriation of foreign earnings. . . . . 0.6 0.8 3.0
Reserve contracts . . . . . . . . . . . . (3.7) (0.5) 0
Goodwill with no U.S. tax benefit . . . . 2.5 2.5 1.5
All other . . . . . . . . . . . . . . . . (3.4) (2.9) (0.2)
----- ----- -----
Effective income tax rate. . . . . . . 32.0% 39.8% 44.4%
===== ===== =====
The use of accelerated depreciation for income tax purposes resulted in a
deferred tax benefit of $358,000 in 1991. SFAS No. 87 pension credits
resulted in deferred tax expense of $1,047,000 in 1991.
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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: 1993 1992
---- ----
Tax over book depreciation. . . . . . . . . . . . $13,234 $13,358
Prepaid pension asset . . . . . . . . . . . . . . 8,760 7,412
United Kingdom property sale. . . . . . . . . . . 1,274 1,339
Other . . . . . . . . . . . . . . . . . . . . . . 273 846
------- -------
Total deferred income tax liabilities. . . . . 23,541 22,955
Deferred income tax assets:
Postretirement benefits . . . . . . . . . . . . . 6,783 5,995
Employee benefits . . . . . . . . . . . . . . . . 6,407 5,810
Net operating loss carryforwards. . . . . . . . . 4,895 3,603
Inventory valuation . . . . . . . . . . . . . . . 2,048 2,361
Product liability . . . . . . . . . . . . . . . . 1,928 1,452
Other . . . . . . . . . . . . . . . . . . . . . . 2,306 713
------- -------
Total deferred income tax assets . . . . . . . 24,367 19,934
Valuation allowance for deferred income tax
assets . . . . . . . . . . . . . . . . . . . . 4,210 2,570
------- -------
Net deferred income tax assets . . . . . . . . 20,157 17,364
------- -------
Net deferred income tax liabilities. . . . . . $ 3,384 $ 5,591
======= =======
The net effect of tax rate changes decreased deferred income taxes
approximately $240,000 during fiscal 1993. The valuation allowance has
increased by $1,640,000 in 1993 and $847,000 in 1992 since adoption of
SFAS No. 109 on November 1, 1991. Of the $4,895,000 in operating loss
carryforwards, $1,306,000 will expire in 1995, $1,348,000 in 1997 and the
balance will be available indefinitely. At October 31, 1993, the Company
also had unused foreign tax credit carryovers of approximately $2,462,000
of which $1,263,000 will expire in 1995 and the balance will expire through
the year 1998.
-40-
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ITEM 8. (continued)
NOTE G - QUARTERLY DATA (unaudited)
1993 First Second Third Fourth Total
- ----------------------------------------------------------------------------------
(in thousands, except per-share amounts)
Net sales. . . . . . . . . . . $99,327 $114,213 $117,252 $117,785 $448,577
Gross profit . . . . . . . . . 27,159 33,174 34,272 35,135 129,740
Net income . . . . . . . . . . 627 3,158 4,156 6,074 14,015
Earnings per share:
Net income:
Primary. . . . . . . . . $ .01 $ .26 $ .36 $ .55 $ 1.18
Fully diluted. . . . . . .01 .25 .35 .52 1.14
Dividends per common share . . .17 .17 .17 .17 .68
1992 First Second Third Fourth Total
- ----------------------------------------------------------------------------------
(in thousands, except per-share amounts)
Net sales. . . . . . . . . . . $95,463 $104,512 $119,552 $131,081 $450,608
Gross profit . . . . . . . . . 27,919 30,125 35,939 40,318 134,301
Income before cumulative effect
of change in accounting . . 743 1,492 4,801 7,009 14,045
Change in accounting for
income taxes. . . . . . . . 3,391 0 0 0 3,391
Net income . . . . . . . . . . 4,134 1,492 4,801 7,009 17,436
Earnings per share:
Primary:
Income (loss) before cumulative
effect of change in
accounting. . . . . . $(.08) $(.01) $.43 $.65 $ .97
Net income (loss). . . . .26 (.01) .43 .65 1.31
Fully diluted:
Income (loss) before cumulative
effect of change in
accounting. . . . . . (.08) (.01) .41 .61 .95
Net income (loss). . . . .25 (.01) .41 .61 1.26
Dividends per common share . . .17 .17 .17 .17 .68
During the first and second quarters of 1993, 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 $.04 per share in the first quarter and $323,000 or $.03 per share
in the second quarter. Favorable conclusions to a number of open tax issues,
including prior years' tax audits and settlement of a dispute with one foreign
tax authority, increased net income in the third and fourth quarters of 1993 by
$1,100,000 or $.11 per share and $952,000 or $.09 per share, respectively.
During the second quarter of 1992, the Company used the proceeds from the
Senior Notes to redeem the Series C Senior Increasing Rate Cumulative
Convertible Preferred shares. The result of this refinancing activity
increased income applicable to common stock by $1,456,000 or $.14 per share
($.07 in both the third and fourth quarters).
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.
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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:
1993 1992 1991
---- ---- ----
(in thousands)
Research and Development. . . $ 6,708 $ 8,045 $ 6,207
Engineering . . . . . . . . . 12,416 11,352 11,023
------- ------- -------
$19,124 $19,397 $17,230
======= ======= =======
Percent of net sales. . . . . 4.3% 4.3% 3.9%
==== ==== ====
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ITEM 8. (continued)
NOTE I - SEGMENT REPORTING
The Company is engaged in the design, manufacture and sale of products in
three segments: Hydraulic Components, Metal Products and Fluid Purification
Systems.
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)
Fluid
Hydraulic Metal Purification
1993 Components Products Systems Total
- -------------------------------------------------------------------------------
Net sales. . . . . . . . . . . $190,170 $127,636 $130,771 $448,577
Operating income:
Before nonrecurring items . 17,170 10,699 (1,639) 26,230
Nonrecurring items. . . . . 0 0 (860) (860)
----------------------------------------------
Total operating income . 17,170 10,699 (2,499) 25,370
Interest expense . . . . . . . 5,744
Other income-net . . . . . . . 976
Income 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
1992
- ------------------------------------------------------------------------------
Net sales. . . . . . . . . . . $178,072 $144,348 $128,188 $450,608
Operating income:
Before nonrecurring items . 12,175 21,280 (1,981) 31,474
Nonrecurring items. . . . . (240) 0 (1,095) (1,335)
----------------------------------------------
Total operating income . 11,935 21,280 (3,076) 30,139
Interest expense . . . . . . . 6,277
Other expense-net. . . . . . . 513
Income before income taxes . . 23,349
Identifiable assets. . . . . . 126,736 64,654 138,781 330,171
Corporate assets . . . . . . . 19,828
Total assets . . . . . . . . . 349,999
Depreciation and amortization. 5,918 2,260 8,451 16,629
Capital expenditures . . . . . 4,529 2,858 6,729 14,116
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ITEM 8. (continued)
NOTE I - Segment Reporting (continued)
1991
- -------------------------------------------------------------------------------
Net sales. . . . . . . . . . . $166,373 $139,569 $131,019 $436,961
Operating income:
Before nonrecurring items . 9,143 22,965 6,753 38,861
Nonrecurring items. . . . . 466 0 (1,035) (569)
----------------------------------------------
Total operating income . 9,609 22,965 5,718 38,292
Interest expense . . . . . . . 5,881
Other income-net . . . . . . . 3,804
Income before income taxes . . 36,215
Identifiable assets. . . . . . 123,692 60,817 137,135 321,644
Corporate assets . . . . . . . 13,418
Total assets . . . . . . . . . 335,062
Depreciation and amortization. 5,728 1,989 8,727 16,444
Capital expenditures . . . . . 8,658 2,885 8,554 20,097
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."
-44-
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ITEM 8. (continued)
NOTE I - Segment Reporting (continued)
GEOGRAPHIC AREA (in thousands)
United
1993 States Europe Other Elimination Consolidated
- --------------------------------------------------------------------------------
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 . . 172,218 103,383 46,026 321,627
1992
- --------------------------------------------------------------------------------
Sales to customers. . . $210,663 $186,797 $53,148 $450,608
Inter-area sales. . . . 21,770 3,094 943 $25,807
-------------------------------------------------------
Total sales . . . . . . 232,433 189,891 54,091 25,807 450,608
Operating income. . . . 9,275 17,814 3,050 30,139
Identifiable assets . . 185,620 104,610 39,941 330,171
1991
- --------------------------------------------------------------------------------
Sales to customers. . . $207,860 $174,967 $54,134 $436,961
Inter-area sales. . . . 20,602 2,888 533 $24,023
-------------------------------------------------------
Total sales . . . . . . 228,462 177,855 54,667 24,023 436,961
Operating income. . . . 15,796 18,868 3,628 38,292
Identifiable assets . . 178,857 99,982 42,805 321,644
Net assets of foreign subsidiaries at October 31, 1993 and 1992 were
$89,997,000 and $99,396,000, respectively, of which net current assets were
$50,034,000 and $53,219,000, also respectively.
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ITEM 8. (continued)
NOTE J - INSURANCE SETTLEMENT
Included in 1991 nonoperating income is an insurance settlement gain of
$2,411,000 for a filtration production facility in Calais, France, partially
destroyed by fire during the latter half of 1990. The settlement increased net
income in the first quarter of 1991 by $1,743,000 or $.17 per share. The
Company also received business interruption insurance proceeds during 1991
which were sufficient to offset lost business and the added costs incurred to
supply European product requirements from an alternative source within the
Corporation. No previous income recognition was determinable until the
insurance carrier and the Company had reached agreement as to the settlement
amount.
-46-
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ITEM 8. (continued)
NOTE K - ACQUISITIONS
BIOKEN SEPARATIONS, INC.
Effective December 6, 1991, the Company acquired the assets of Bioken
Separations, Inc., a manufacturer of proprietary cross- flow membrane devices
and systems. The unit operates under the Fluid Purification Systems group and
is located in Norwood, Massachusetts. The cost of the acquisition amounted to
$2,224,000 and was financed by internally generated funds.
KENART EMC, INC.
Effective February 28, 1991, the Company acquired the assets of Kenart
EMC, Inc., formerly doing business as Teknar EMC, Inc. Teknar manufactures a
line of electronic motion control products. The Company relocated operations
to an existing production facility in Minneapolis, Minnesota.
The two acquisitions have been accounted for as purchase transactions, and
therefore, the accounts of each have been included in the accompanying
financial statements since their respective acquisition date. Pro forma
financial results are not provided herein for any of the acquisitions because
the impact of sales and net earnings on consolidated amounts are immaterial in
each case.
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ITEM 8. (continued)
NOTE L - PREFERRED STOCK
During fiscal 1990, the Company designated three 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.
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 876,368 shares of common stock
at any time (0.823 of a share 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 originally borrowed $24,973,000 to purchase the
Series B shares, and the Company has guaranteed the repayment of the remaining
outstanding balance of that loan.
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ITEM 8. (continued)
NOTE L - Preferred Stock (continued)
SERIES B ESOP CONVERTIBLE PREFERRED STOCK (continued)
The Company paid to the ESOP's $2,109,000 in 1993 ($2,118,000 in 1992 and
$2,122,000 in 1991) in preferred stock dividends and accrued or paid an
additional $1,036,000 in 1993 ($862,000 in 1992 and $1,233,000 in 1991), 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
$1,841,000 in 1993, $1,975,000 in 1992 and $2,389,000 in 1991, primarily for
interest charges.
SERIES C SENIOR INCREASING RATE CUMULATIVE CONVERTIBLE PREFERRED STOCK
Also on February 14, 1990, the company sold 1,379,310 shares of a new
Cumulative Convertible Preferred Stock Series C to General Electric Capital
Corporation (GECC) for $40 million. The cumulative convertible preferred
shares were subsequently replaced with a Series C Senior Increasing Rate
Cumulative Convertible Preferred Stock (Series C) with the shareholders'
approval on February 26, 1991. The Series C preferred stock was redeemed
during the second quarter of fiscal 1992 with the proceeds received from the
issuance of Senior Notes (see Note B). In addition to the face amount of $40
million, the Company was required to pay an early redemption premium of 8
percent ($3.2 million charged directly to retained earnings).
-49-
50
ITEM 8. (continued)
REPORT OF ERNST & YOUNG, 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, 1993 and 1992, and the
related statements of consolidated income, shareholders' equity and cash flows
for each of the three years in the period ended October 31, 1993. Our audits
also included the financial statement schedules listed in the Index at Item
14(a). These financial statements and schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedules 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Commercial Intertech Corp. and subsidiaries at October 31, 1993 and 1992, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended October 31, 1993, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
As discussed in Note F to the consolidated financial statements, in 1992, the
Company changed its method of accounting for income taxes by adopting Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes."
Ernst & Young
Cleveland, Ohio
December 10, 1993
-50-
51
ITEM 8. (continued)
REPORT OF MANAGEMENT CONCERNING THE RESPONSIBILITIES
FOR FINANCIAL REPORTING AND INTERNAL CONTROL
The financial statements and other related financial information contained
in this report are the responsibility of, and prepared by, the management of
the Company in conformity with generally accepted accounting principles. The
statements present fairly and consistently the Company's financial position and
results of operations but necessarily include amounts that are based on
management's best estimates and judgement giving due consideration to
materiality.
The Company`s financial statements are audited by Ernst & Young,
independent auditors who are appointed by the shareholders. Their role is to
perform reviews of the Company's controls and audit the financial statements to
the extent required by generally accepted auditing standards and to render an
independent professional opinion of the results.
The Company relies upon a system of internal accounting controls to ensure
that its responsibility for the integrity of the financial operations and
financial reporting is maintained. An internal audit staff coordinates its
activities with the independent auditors to monitor the effectiveness of the
operating policies, procedures and control systems.
An audit committee appointed by the Board of Directors and composed solely
of nonmanagement directors meets periodically with management, the independent
auditors and the internal auditors to ensure that each is properly discharging
its responsibilities. The independent auditors and the internal auditors have
free access at all times to this committee without management presence to
discuss the results of their audits and their evaluation of the quality of
financial controls.
Management also recognizes its responsibility for maintaining a strong
ethical climate so that its affairs are conducted according to the highest
standards of personal and corporate conduct. Employees and management are
required to operate in accordance with a code of conduct which is publicized
throughout the Company and its subsidiaries. This code of conduct addresses,
among other things, potential conflicts of interest, compliance with all
domestic and foreign laws, compliance in respect of financial disclosure and
confidentiality of the Company's proprietary information. A systematic program
is maintained to assure that these principles are adhered to.
Paul J. Powers
Chairman of the Board,
President and Chief Executive Officer
Philip N. Winkelstern
Senior Vice President and Chief Financial Officer
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
N/A
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Regarding the directors of the Registrant, reference is made to the
information set forth under the caption "Election of Directors" in the
Company's definitive Proxy Statement filed December 27, 1993 and as amended
January 26, 1994, which information is incorporated by reference herein.
The principal executive officers of the Company and their recent business
experience are as follows:
Name Office Held Age
---- ----------- ---
Paul J. Powers . . . . . Chairman of the Board of Directors, 58
President and Chief Executive Officer
Philip N. Winkelstern. . Senior Vice President, Chief Financial 63
Officer and Director
Thomas N. Bird . . . . . Group Vice President - Fluid Purification 49
Products
Robert A. Calcagni . . . Group Vice President - Metal Products 53
John Gilchrist . . . . . Group Vice President - Hydraulic Products 48
William G. Welker. . . . Group Vice President 63
William W. Cushwa. . . . Vice President - Planning, Assistant 56
Treasurer and Director
Bruce C. Wheatley. . . . Vice President - Administration 52
Gilbert M. Manchester. . General Counsel and Secretary 49
Steven J. Hewitt . . . . Controller 44
None of the officers are related and they are elected from year to year or
until their successors are duly elected and qualified.
All of the Executive Officers have been continuously employed by the
Company for more than five years except Mr. Thomas Bird and Mr. Bruce Wheatley.
Mr. Bird became an employee of Commercial Intertech Corp. in September of
1989. Before joining Commercial, Mr. Bird's experience includes: President of
Channon's office supply stores and President and General Manager of the
consumer division of Sherwin Williams.
Mr. Wheatley became an employee of Commercial Intertech Corp. in July of
1992. Before joining Commercial, Mr. Wheatley's experience includes: Senior
Vice President of Marketing and Public Affairs of The PIE Mutual Insurance
Company and President of Dix & Eaton/Public Relations.
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PART III - (continued)
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the information set forth under the caption
"Executive Compensation" appearing in the Company's definitive Proxy Statement
filed December 27, 1993 and as amended January 26, 1994, which information is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to the information contained under the captions
"Security Ownership of Board of Directors and Named Executives" and "Security
Ownership of Certain Beneficial Owners" in the Company's definitive Proxy
Statement filed December 27, 1993 and as amended January 26, 1994,
which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the information contained under the caption
"Compensation of Directors" in the Company's definitive Proxy Statement filed
December 27, 1993 and as amended January 26, 1994, which information is
incorporated herein by reference.
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54
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF THIS REPORT:
(1) Financial Statements:
Page Number
In This Report
--------------
Statements of Consolidated Income - Years
ended October 31, 1993, 1992 and 1991. . . . . . 22
Consolidated Balance Sheets as of
October 31, 1993 and 1992. . . . . . . . . . . . 23-24
Statements of Consolidated Shareholders'
Equity - Years ended October 31, 1993, 1992
and 1991 . . . . . . . . . . . . . . . . . . . . 25
Statements of Consolidated Cash Flows - Years
ended October 31, 1993, 1992 and 1991. . . . . . 26
Notes to Consolidated Financial Statements. . . . . 27-49
Report of Independent Auditors. . . . . . . . . . . 50
Report of Management Concerning the
Responsibilities for Financial Reporting
and Internal Control . . . . . . . . . . . . . . 51
(2) Financial Statements Schedules -- Years
Ended October 31, 1993, 1992 and 1991:
Schedule V - Property, Plant and Equipment . . . S-1
Schedule VI - Accumulated Depreciation,
Depletion and Amortization of
Property, Plant and Equipment. . S-2
Schedule VIII - Valuation and Qualifying Accounts . S-3
Schedule IX - Short-Term Borrowings . . . . . . . S-4
Schedule X - Supplementary Income Statement
Information. . . . . . . . . . . S-5
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.
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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
(2) Employment Agreement - Paul J. Powers
dated February 15, 1988
(4) Employment Agreement - Philip N. Winkelstern
dated February 15, 1988
(5) Severance Compensation and Consulting Agreement -
Paul J. Powers dated February 15, 1988
(7) Severance Compensation and Consulting Agreement -
Philip N. Winkelstern dated February 15, 1988
(10) Severance Compensation Agreement - William G. Welker
dated April 26, 1989
(11) Severance Compensation Agreement - Thomas N. Bird
dated September 28, 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
Exhibits 2, 4, 5, 7 and 10-15 for "Material Contracts" are
incorporated by reference to exhibits filed with Form 10-K for
the following years:
Exhibits Year Filed
-------- ----------
2, 4, 5 and 7 October 31, 1988
10 and 11 October 31, 1989
12 and 13 October 31, 1990
14 and 15 October 31, 1992
(16) Severance Compensation Agreement -
Gilbert M. Manchester dated September 28, 1989
(17) Severance Compensation Agreement - Bruce C. Wheatley
dated July 20, 1992
Additional information relating to management contracts and
remunerative plans is contained in Note D - Stock Options and
Awards of the Notes to Consolidated Financial Statements on
page 34.
-55-
56
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(continued)
11 -- Computation of Per Share Earnings
22 -- Subsidiaries of The Registrant
23 -- Consent of Independent Auditors
(B) There were no reports on Form 8-K for the quarter ended
October 31, 1993.
-56-
57
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: January 26, 1994
Paul J. Powers P. N. Winkelstern
Chairman of the Board of Senior Vice President,
Directors, President and Principal Financial Officer,
Principal Executive Officer and Director
Steven J. Hewitt
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 and on the date indicated above.
Name Title Date
---- ----- ----
Charles B. Cushwa III Director January 26, 1994
William W. Cushwa Director January 26, 1994
John M. Galvin Director January 26, 1994
Richard J. Hill Director January 26, 1994
Neil D. Humphrey Director January 26, 1994
Kipton C. Kumler Director January 26, 1994
Gerald C. McDonough Director January 26, 1994
John Nelson Director January 26, 1994
John F. Peyton Director January 26, 1994
Don E. Tucker Director January 26, 1994
-57-
58
SCHEDULE V -- PROPERTY, PLANT AND EQUIPMENT
COMMERCIAL INTERTECH CORP. AND SUBSIDIARIES
FOR THE YEARS ENDED OCTOBER 31, 1993, 1992 AND 1991
- ----------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- ----------------------------------------------------------------------------------------------------
OTHER
BALANCE AT CHARGES BALANCE AT
BEGINNING ADDITIONS ADD END OF
CLASSIFICATION OF PERIOD AT COST RETIREMENTS (DEDUCT) (1) PERIOD
- ----------------------------------------------------------------------------------------------------
1993:
Land & land improvements. . $ 12,631,180 $ 0 $ 22,430 $ (141,709) $ 12,467,041
Buildings . . . . . . . . . 62,537,851 554,426 590,775 (1,417,752) 61,083,750
Machinery & equipment . . . 161,185,199 6,565,092 6,783,315 (4,297,430) 156,669,546
Construction in progress. . 3,219,188 2,315,444 (37,118) (77,136) 5,494,614
------------ ----------- ----------- ----------- ------------
Totals. . . . . . . . $239,573,418 $ 9,434,962 $ 7,359,402 $(5,934,027) $235,714,951
============ =========== =========== =========== ============
1992:
Land & land improvements. . $ 12,331,108 $ 472,707 $ 0 $ (172,635) $ 12,631,180
Buildings . . . . . . . . . 55,305,416 6,322,969 33,432 942,898 62,537,851
Machinery & equipment . . . 149,335,609 11,115,197 1,448,345 2,182,738 161,185,199
Construction in progress. . 6,808,444 (3,794,660) 127,806 333,210 3,219,188
------------ ----------- ----------- ----------- ------------
Totals. . . . . . . . $223,780,577 $14,116,213 $ 1,609,583 $ 3,286,211 $239,573,418
============ =========== =========== =========== ============
1991:
Land & land improvements. . $ 12,727,920 $ 96,817 $ 70,249 $ (423,380) $ 12,331,108
Buildings . . . . . . . . . 43,821,668 14,926,897 2,240,482 (1,202,667) 55,305,416
Machinery & equipment . . . 145,948,773 11,925,601 5,208,096 (3,330,669) 149,335,609
Construction in progress. . 14,229,612 (6,852,647) 83,541 (484,980) 6,808,444
------------ ----------- ----------- ----------- ------------
Totals. . . . . . . . $216,727,973 $20,096,668 $ 7,602,368 $(5,441,696) $223,780,577
============ =========== =========== =========== ============
[FN]
(1) Includes Bioken Separations, Inc. purchase of $976,688 in 1992; remainder
is translation adjustment resulting from FASB #52.
The annual provisions to depreciation have been computed principally in
accordance with the following ranges of rates:
Land improvements 4 -- 20%
Buildings 2 -- 20%
Machinery & equipment 5 -- 34%
Patent rights and other intangible assets 2.5 -- 34%
S-1
59
SCHEDULE VI -- ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF
PROPERTY, PLANT AND EQUIPMENT COMMERCIAL INTERTECH CORP. AND SUBSIDIARIES
FOR THE YEARS ENDED OCTOBER 31, 1993, 1992 AND 1991
- -----------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- -----------------------------------------------------------------------------------------------------
OTHER
BALANCE AT CHARGES BALANCE AT
BEGINNING ADDITIONS ADD END OF
CLASSIFICATION OF PERIOD AT COST RETIREMENTS (DEDUCT) (A) PERIOD
- -----------------------------------------------------------------------------------------------------
1993:
Land improvements . . . . . $ 1,558,516 $ 329,352 $ (125,000) $ (80,962) $ 1,931,906
Buildings . . . . . . . . . 19,492,915 1,919,865 379,359 (617,667) 20,415,754
Machinery & equipment . . . 96,372,974 11,204,118 6,361,681 (2,829,033) 98,386,378
------------ ----------- ----------- ------------ ------------
Totals. . . . . . . . $117,424,405 $13,453,335 $ 6,616,040 $(3,527,662) $120,734,038
============ =========== =========== ============ ============
1992:
Land improvements . . . . . $ 1,358,361 $ 160,430 $ 0 $ 39,725 $ 1,558,516
Buildings . . . . . . . . . 16,124,969 2,093,296 6,934 1,281,584 19,492,915
Machinery & equipment . . . 85,472,594 11,173,302 1,100,936 828,014 96,372,974
------------ ----------- ----------- ------------ ------------
Totals. . . . . . . . $102,955,924 $13,427,028 $ 1,107,870 $ 2,149,323 $117,424,405
============ =========== =========== ============ ============
1991:
Land improvements . . . . . $ 1,265,631 $ 147,957 $ 10,257 $ (44,970) $ 1,358,361
Buildings . . . . . . . . . 15,128,524 1,825,580 429,934 (399,201) 16,124,969
Machinery & equipment . . . 79,445,800 11,388,057 3,227,040 (2,134,223) 85,472,594
------------ ----------- ----------- ------------ ------------
Totals. . . . . . . . $ 95,839,955 $13,361,594 $ 3,667,231 $(2,578,394) $102,955,924
============ =========== =========== ============ ============
<FN>
(A) Includes translation adjustment resulting from FASB #52.
S-2
60
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS
COMMERCIAL INTERTECH CORP. AND SUBSIDIARIES
FOR THE YEARS ENDED OCTOBER 31, 1993, 1992 AND 1991
- ----------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------------------------------------------------------------------------------------------
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND DEDUCTIONS END OF
DESCRIPTION OF PERIOD EXPENSES (A) PERIOD
- ----------------------------------------------------------------------------------------------
1993:
Allowance for doubtful accounts. . . $1,611,566 $ 581,798 $ 428,638 $1,764,726
========== ========== ========== ==========
1992:
Allowance for doubtful accounts. . . $1,535,257 $1,175,235 $1,098,926 $1,611,566
========== ========== ========== ==========
1991:
Allowance for doubtful accounts. . . $1,751,378 $ 942,261 $1,158,382 $1,535,257
========== ========== ========== ==========
<FN>
(A) Uncollectible accounts written off.
S-3
61
SCHEDULE IX -- SHORT-TERM BORROWINGS
COMMERCIAL INTERTECH CORP. AND SUBSIDIARIES
FOR THE YEARS ENDED OCTOBER 31, 1993, 1992 AND 1991
- ------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- ------------------------------------------------------------------------------------------------------------
BALANCE WEIGHTED MAXIMUM AMOUNT AVERAGE AMOUNT WEIGHTED AVERAGE
CATEGORY OF AGGREGATE AT AVERAGE OUTSTANDING OUTSTANDING INTEREST RATE
SHORT-TERM BORROWINGS END OF INTEREST DURING THE DURING THE DURING THE
(1) PERIOD RATE PERIOD PERIOD (2) PERIOD (3)
- ------------------------------------------------------------------------------------------------------------
1993:
Loans payable to bank. . . $17,599,143 5.7% $24,955,732 $20,538,329 4.9%
1992:
Loans payable to bank. . . $18,268,042 4.6% $20,471,989 $15,985,988 6.7%
1991:
Loans payable to bank. . . $ 8,269,096 10.8% $32,861,489 $22,323,804 11.2%
<FN>
(1) Consists of bank loans with various dates of maturity.
(2) The average amount outstanding during the period was computed by
dividing the total of month-end outstanding principal balances by 12.
(3) The weighted average interest rate during the period was computed by
dividing the actual interest expense by average short-term debt
outstanding.
S-4
62
SCHEDULE X -- SUPPLEMENTARY INCOME STATEMENT INFORMATION
COMMERCIAL INTERTECH CORP. AND SUBSIDIARIES
FOR THE YEARS ENDED OCTOBER 31, 1993, 1992 AND 1991
- -----------------------------------------------------------------------
COLUMN A COLUMN B
- -----------------------------------------------------------------------
Item Charges To Costs And Expenses
- -----------------------------------------------------------------------
1993 1992 1991
---- ---- ----
Maintenance and repairs. . . . . . . $8,203,000 $8,375,000 $7,690,000
Amortization of intangible assets. . 3,141,000 3,232,000 3,083,000
Advertising costs. . . . . . . . . . 5,930,000 5,307,000 5,328,000
Amounts for taxes, other than payroll and income taxes, and royalties are
not presented as such amounts are less than 1% of net sales.
S-5