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, 1997
Commission File Number 0-588
COMMERCIAL INTERTECH CORP.
(Exact name of registrant as specified in its charter)
Ohio 34-0159880
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1775 Logan Avenue, Youngstown, Ohio 44501-0239
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(Address of principal executive offices) (Zip Code)
(330) 746-8011
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Registrant's telephone number, including area code
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
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Common Stock, par value $1 per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
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]
The aggregate market value of common shares held by non-affiliates of
the Registrant at December 31, 1997 was approximately $259 million (based upon
the closing price on that date). For purposes of this calculation only,
affiliates of the Registrant are deemed to be the Registrant's directors,
executive officers and their affiliates.
As of December 31, 1997, 14,083,224 common shares were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the Notice of Annual Meeting of Shareholders March 25,
1998 and Proxy Statement filed January 21, 1998 have been incorporated by
reference into Part III, Items 10 through 13 of this Annual Report on Form 10-K.
2
INDEX
COMMERCIAL INTERTECH CORP.
Page No.
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PART I
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ITEM 1. Business.................................................................... 3
ITEM 2. Properties.................................................................. 7
ITEM 3. Legal Proceedings........................................................... 7
ITEM 4 Submission of Matters to a Vote of Security Holders......................... 8
ITEM 4A. Executive Officers of the Registrant........................................ 8
PART II.
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ITEM 5. Markets for Registrant's Common Equity and Related Stockholder
Matters.................................................................. 8
ITEM 6. Selected Financial Data..................................................... 9
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................... 11
ITEM 8. Financial Statements and Supplementary Data................................. 20
ITEM 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure...................................... 50
PART III
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ITEM 10. Directors and Executive Officers of the Registrant.......................... 50
ITEM 11. Executive Compensation...................................................... 50
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management............................................................... 51
ITEM 13. Certain Relationships and Related Transactions.............................. 51
PART IV
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ITEM 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.............................................................. 51
SIGNATURES................................................................................ 55
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PART I
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ITEM 1. BUSINESS
(a) General development of business:
Commercial Intertech Corp. (the "Company" or "Commercial Intertech") was
formerly named Commercial Shearing, Inc. and was incorporated in Ohio in 1920.
The Company is engaged in the design, manufacture and sale of products in two
business groups: the Hydraulic Systems segment and the Building Systems and
Metal Products segment. In 1986, the Company acquired CUNO Incorporated
("CUNO"), a manufacturer of fluid purification products. The Company made a 100
percent spin-off of the common stock of the CUNO business in 1996 and reflected
the net assets and operating results for CUNO for 1996 and prior years as a
discontinued operation. Therefore, the Hydraulic Systems segment and the
Building Systems and Metal Products segment account for all of the Company's
continuing businesses. Unless otherwise noted, all references in this report of
the Registrant relate to the continuing businesses.
(b) Financial information about industry segments:
See Note I - Segment Reporting - to the Notes to Consolidated Financial
Statements on pages 42 through 44.
(c) Narrative description of business:
HYDRAULIC SYSTEMS
Hydraulic Systems 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, refuse vehicles, 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 81 persons in the United States and Canada and
approximately 75 persons outside North America. A portion of the Company's sales
is made to independent distributors for resale primarily to the replacement
market.
In November 1996, the Company acquired all of the outstanding common stock
of Ultra Hydraulics Limited ("Ultra") through its wholly-owned subsidiary,
Commercial Intertech Limited, located in the United Kingdom. Ultra serves the
mobile equipment market primarily in the United Kingdom, Europe, the United
States and the Far East. Major customers include manufacturers of material
handling, turf care, construction, transportation and compaction equipment.
Ultra's products complement and extend the range of pumps, motors and valves
offered by Commercial Intertech.
In June 1996, the Company acquired the assets of Component Engineering
Company, a manufacturer of cartridge-valves and integrated circuits. The Company
continues to operate the business from its location in Chanhassen, Minnesota.
The Company acquired the stock of ORSTA Hydraulik in May 1994. ORSTA
Hydraulik, a former East German state-owned enterprise, is a manufacturer of
hydraulic cylinders, piston and gear pumps, power packs and hydraulic testing
equipment.
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ITEM 1. BUSINESS (Continued)
The Company believes that it is the largest supplier of gear pumps and is
among the leading single- source suppliers of hydraulic systems for mobile
equipment in the United States. The market for hydraulic components is highly
competitive. The Company's Hydraulic Systems business competes on the basis of
product quality and innovation, customer service and price.
BUILDING SYSTEMS AND METAL PRODUCTS
The Building Systems and Metal Products operations consist of two units:
Metal Stampings and Building Systems (custom-engineered metal buildings by
Astron).
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, offices, 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 in
China and South Korea. This division developed its own computerized building
pricing and proposal system, known as Cyprion(TM), that tailors buildings to
customers' precise dimension and design requirements. Through Cyprion, Astron's
nearly 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 approximately 94 persons. Additionally, Astron has
developed state of the art work stations utilizing computer design technology
which automatically configures optimum parameters for more efficient use of
material maximizing manufacturing technology.
In 1991 Astron entered into a joint venture with Arbed, Europe's fifth
largest steel producer, and began producing multi-story steel buildings for
European markets. Commercial Intertech acquired the remaining interest from
Arbed effective November 1, 1995. In addition, in 1992 Astron licensed a South
Korean manufacturer to manufacture, sell and erect Astron buildings in Korea. In
1997 Astron Building Systems marketing and manufacturing rights were transferred
to a new Korean licensee.
The Company's Metal Stampings unit 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 differential and
transmission applications, large circuit breaker covers, and circular closures
and accessories for a broad variety of vessels and containers produced in sizes
from four inches to 24 feet. Also known as tank ends or tank heads, this product
line is the most comprehensive and extensive in the United States, serving
thousands of customers from three manufacturing locations and seven
strategically located Distribution Centers.
The Metal Stampings' Distribution Center concept is unique to the industry,
and has successfully served both large and small vessel fabricators for over 35
years providing 48-hour delivery service. The Distribution Center concept
remains a major contributor to the success of the Metal Stampings operations.
The sales and marketing activities for metal stampings are conducted in North
America, with exports to the Pacific Rim and South America, by a sales
organization of approximately 24 persons. The Metal Stampings unit competes
successfully for specialty custom designed and formed products in a variety of
shapes and sizes with regional domestic companies that often have lower freight
producing costs. Additionally, standard products are offered for sale from Metal
Stampings' Distribution Centers in Saginaw, Texas; Atlanta, Georgia; Chicago,
Illinois; Hagerstown, Maryland; Seattle, Washington; Middleboro, Massachusetts
and Orange, California.
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ITEM 1. BUSINESS (Continued)
The Company purchased the former Hall F&D Head Company (renamed the
Southern Metals Division) in Saginaw, Texas, in 1995. This division along with
the Orange County facility produces specialty medium and large-diameter products
in a broad variety of circular shapes for the storage tank and pressure vessel
industries.
The Company's Building System and Metal Products businesses compete on the
basis of product performance and price.
MANUFACTURING
The Company manufactures Hydraulic Systems in 17 plants and Building
Systems and Metal Products in five plants worldwide. The Company's hydraulic
manufacturing operation is highly integrated and the Company generally 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 the time of manufacturing. In general, raw materials required
by the Company's manufacturing operations are available from numerous sources in
the quantities desired.
RESEARCH AND PRODUCT DEVELOPMENT
The Company conducts research and development primarily for its Hydraulics
Systems products. In fiscal 1997 the Company expended $6,984,000 for research
and development activities compared with $5,897,000 and $5,966,000 in 1996 and
1995, respectively. The Company intends to continue to make substantial research
and development expenditures in order to bring developmental products to market.
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
Systems segment or its Building Systems and Metal Products segment. 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
Systems and Building Systems and Metal Products segments.
SEASONALITY
Because sales of certain hydraulic systems and custom-engineered metal
buildings are related to the construction industry, this portion of the
Company's business is affected by the seasonality of that industry.
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ITEM 1. BUSINESS (Continued)
EMPLOYEES
The Company employs 3,805 full-time employees worldwide. The Company
believes that its labor relations are generally satisfactory.
BACKLOG
The consolidated backlog of unfilled orders at the end of fiscal 1997 was
approximately $200 million. Backlogs at the end of fiscal years 1996 and 1995
were $142 million and $155 million, respectively. The Company expects a
substantial portion of its order backlog at the end of 1997 will be shipped
during fiscal 1998.
(d) Financial information about foreign and domestic operations and export
sales.
See Note I - Segment Reporting - to the Notes to Consolidated Financial
Statements on pages 42 through 44.
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ITEM 2. PROPERTIES
The principal plants of the Registrant and its subsidiaries by industry
segments are located in:
OWNED:
Building Systems and
Hydraulic Systems Metal Products
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Youngstown, Ohio Youngstown, Ohio
Hicksville, Ohio Diekirch, Luxembourg
Kings Mountain, North Carolina Orange, California
Benton, Arkansas Saginaw, Texas
Mairinque, Brazil Sternbeck, Czech Republic
Grantham, England
Minneapolis, Minnesota
Chanhassen, Minnesota
Blacktown, Australia
Port Melbourne, Australia
Warwick, England
Gloucester, England
Verona, Italy
Chemnitz, Germany
Geringswalde, Germany
LEASED:
Building Systems and
Hydraulic Systems Metal Products
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Brisbane, Australia Hagerstown, Maryland
Chicago, Illinois
Atlanta, Georgia
Seattle, Washington
Middleboro, Massachusetts
Properties of Registrant and its subsidiaries are suitably constructed and
maintained for their respective uses.
ITEM 3. LEGAL PROCEEDINGS
As of the date hereof there is no pending litigation, other than ordinary
routine litigation incidental to the business that is not of a material nature,
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.
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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 of this report and incorporated herein by reference.
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
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 cash dividends paid per share by quarters for fiscal 1997 and 1996.
RANGE OF SALES
PRICES
-------------------------- DIVIDENDS
HIGH LOW PER SHARE
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1997:
First quarter . . ............. $ 13 7/8 $ 9 3/4 $ .135
Second quarter. . ............. 13 3/8 11 1/8 .135
Third quarter . . ............. 16 11 5/8 .135
Fourth quarter . .............. 19 1/4 14 3/4 .135
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$ .540
======
1996:
First quarter.................. $ 19 3/8 $ 16 1/2 $ .135
Second quarter ................ 20 18 .135
Third quarter ................. 30 18 .135
Fourth quarter *............... 26 3/4 10 11/16 .135
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$ .540
======
<FN>
* Shares prices include periods before and after the 100
percent spin-off of Cuno Incorporated on September 10, 1996
which had a market value of $15 per share.
</FN>
As of October 31, 1997, there were 3,660 holders of record of the Company's
common stock.
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ITEM 6. SELECTED FINANCIAL DATA
SUMMARY OF FINANCIAL DATA, 1987 - 1997
Commercial Intertech Corp. and Subsidiaries
(in thousands, except per-share data and ratios) 1997 1996 1995 1994 1993 1992
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INCOME DATA - Note A
Net sales ...................................... $ 526,624 $ 465,209 $ 459,137 $ 373,820 $ 317,806 $ 322,413
Gross profit ................................... 139,284 124,216 122,015 106,832 88,243 94,550
Interest expense ............................... 10,493 7,083 6,238 4,262 5,472 4,650
Income from continuing operations before
income taxes ................................ 40,318 23,738 30,379 25,760 23,151 28,163
Income taxes ................................... 13,527 8,382 6,097 7,948 8,435 9,402
Income from continuing operations .............. 26,791 15,356 24,282 17,812 14,716 18,761
Discontinued operations, accounting changes and
extraordinary items ......................... 0 2,039 6,101 7,269 (701) (1,325)
Net income .................................... 26,791 17,395 30,383 25,081 14,015 17,436
Earnings per share - Note B
Income from continuing operations:
Primary ..................................... 1.72 .87 1.42 1.03 .84 .97
Fully diluted ............................... 1.51 .83 1.35 .98 .80 .92
Net income:
Primary ..................................... 1.72 1.01 1.82 1.50 .79 .88
Fully diluted ............................... 1.51 .95 1.72 1.41 .76 .84
Dividends per share of common stock:
Cash ........................................ .54 .54 .51 .48 .45 .45
Stock ....................................... -- -- -- 50% -- --
OTHER FINANCIAL DATA - Note A
Total assets ................................... $ 384,798 $ 337,116 $ 402,679 $ 370,595 $ 302,295 $ 301,734
Current assets ................................. 189,996 190,403 182,859 172,760 114,082 113,209
Less current liabilities ....................... 127,345 116,223 117,420 99,482 78,934 76,040
Net working capital ......................... 62,651 74,180 65,439 73,278 35,148 37,169
Net plant investment ........................... 103,426 96,620 94,795 77,105 65,426 70,586
Gross capital expenditures ..................... 11,699 17,712 31,709 19,236 6,194 7,387
Long-term debt ................................. 111,342 93,415 69,869 71,846 72,479 79,974
Redeemable preferred stock ..................... 0 0 0 0 0 0
Shareholders' equity ........................... 102,830 87,161 176,593 147,982 120,106 117,405
Shareholders' equity per share - Note C ........ 6.89 5.94 11.07 9.44 7.74 7.74
Actual number of shares outstanding at year-end 14,125 13,560 15,440 15,199 15,056 14,864
Average number of shares outstanding
during the year ............................. 14,488 15,256 15,582 15,327 15,096 14,863
RATIOS - Note A
Gross profit to net sales ...................... 26.4% 26.7% 26.6% 28.6% 27.8% 29.3%
Income from continuing operations to net sales . 5.1% 3.3% 5.3% 4.8% 4.6% 5.8%
Effective income tax rate ...................... 33.6% 35.3% 20.1% 30.9% 36.4% 33.4%
Income from continuing operations to average
shareholders' equity ........................ 28.2% 11.6% 15.0% 13.3% 12.4% 16.3%
Ratio of current assets to current liabilities . 1.49:1 1.64:1 1.56:1 1.74:1 1.45:1 1.49:1
Ratio of long-term debt to shareholders' equity
plus long-term debt ......................... 52.0% 51.7% 28.3% 32.7% 37.6% 40.5%
<FN>
Note A - Years 1996 and prior have been restated to reflect the 100 percent spin-off of CUNO Incorporated as of
September 10, 1996. Fiscal years 1991-1997 have been computed in accordance with Employers' Accounting for
Postretirement Benefits Other Than Pensions, SFAS No. 106. Fiscal years 1992-1997 have been computed in accordance
with Accounting for Income Taxes, SFAS No. 109. Prior years have not been restated for SFAS No. 106 and SFAS No.
109.
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.
</FN>
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ITEM 6. SELECTED FINANCIAL DATA (Continued)
SUMMARY OF FINANCIAL DATA, 1987 - 1997
Commercial Intertech Corp. and Subsidiaries
(in thousands, except per-share data and ratios) 1991 1990 1989 1988 1987
---- ---- ---- ---- ----
INCOME DATA - Note A
Net sales ...................................... $ 305,942 $ 322,167 $ 300,640 $ 279,369 $ 227,185
Gross profit ................................... 90,801 101,061 96,180 83,072 66,352
Interest expense ............................... 4,549 4,592 6,168 7,576 7,713
Income from continuing operations before
income taxes ................................ 32,150 41,636 42,085 27,944 15,623
Income taxes ................................... 13,242 17,809 16,251 11,552 6,193
Income from continuing operations .............. 18,908 23,827 25,834 16,392 9,430
Discontinued operations, accounting changes and
extraordinary items ......................... (7,805) 3,780 (19,104) 172 1,794
Net income .................................... 11,103 27,607 6,730 16,564 11,224
Earnings per share - Note B
Income from continuing operations:
Primary ..................................... .85 1.14 1.45 .98 .57
Fully diluted ............................... .80 1.10 1.39 .94 .57
Net income:
Primary ..................................... .32 1.36 .38 .99 .68
Fully diluted ............................... .32 1.31 .38 .95 .67
Dividends per share of common stock:
Cash ........................................ .45 .44 .40 .38 .37
Stock ....................................... -- -- -- -- --
OTHER FINANCIAL DATA - Note A
Total assets ................................... $ 289,712 $ 315,617 $ 298,252 $ 279,073 $ 255,773
Current assets ................................. 102,330 124,936 109,474 100,129 85,773
Less current liabilities ....................... 62,383 70,775 74,423 61,981 43,253
Net working capital ......................... 39,947 54,161 35,051 38,148 42,520
Net plant investment ........................... 71,753 71,376 58,166 51,628 52,509
Gross capital expenditures ..................... 11,543 16,432 12,056 7,145 5,408
Long-term debt ................................. 48,268 64,871 39,175 57,429 69,910
Redeemable preferred stock ..................... 38,491 37,594 0 0 0
Shareholders' equity ........................... 112,608 124,891 170,463 146,828 131,664
Shareholders' equity per share - Note C ........ 7.59 8.45 8.96 8.85 7.99
Actual number of shares outstanding at year-end 14,686 14,781 19,030 16,585 16,487
Average number of shares outstanding
during the year ............................. 14,888 16,994 17,852 16,664 16,565
RATIOS - Note A
Gross profit to net sales ...................... 29.7% 31.4% 32.0% 29.7% 29.2%
Income from continuing operations .............. 6.2% 7.4% 8.6% 5.9% 4.2%
Effective income tax rate ...................... 41.2% 42.8% 38.6% 41.3% 39.6%
Income from continuing operations to average
shareholders' equity ........................ 15.9% 16.1% 16.3% 11.8% 7.4%
Ratio of current assets to current liabilities . 1.60:1 1.77:1 1.47:1 1.62:1 1.98:1
Ratio of long-term debt to shareholders' equity
plus long-term debt ......................... 30.0% 34.2% 18.7% 28.1% 34.7%
<FN>
Note A - Years 1996 and prior have been restated to reflect the 100 percent spin-off of CUNO Incorporated as of
September 10, 1996. Fiscal years 1991-1997 have been computed in accordance with Employers' Accounting for
Postretirement Benefits Other Than Pensions, SFAS No. 106. Fiscal years 1992-1997 have been computed in accordance
with Accounting for Income Taxes, SFAS No. 109. Prior years have not been restated for SFAS No. 106 and SFAS No.
109.
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.
</FN>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 1995 - 1997
RESULTS OF OPERATIONS
Consolidated Results
The Company announced on July 29, 1996 that the Board of Directors
had voted to declare a dividend to Commercial Intertech Corp.'s common
shareholders of 100 percent of the common stock of CUNO Incorporated ("CUNO"),
the fluid purification segment of the business. Each holder of record of
Commercial Intertech common shares at the close of business on September 10,
1996, the payable date for the Distribution, received one share of CUNO Common
Stock for every one share of Commercial Intertech common share. The financial
results and net assets of CUNO have been restated and presented as a
discontinued operation in the accompanying consolidated financial statements for
all periods prior to the Distribution Date.
CUNO and Commercial Intertech entered into a Distribution and
Interim Services Agreement (the "Services Agreement") providing for, among other
things, the principal corporate transactions required to effect the separation
of CUNO from Commercial Intertech, the Distribution, and certain other
arrangements governing the relationship between CUNO and Commercial Intertech
with respect to or in consequence of the Distribution. Subject to certain
exceptions, the Services Agreement provided for cross-indemnities to place
financial responsibility for the liabilities of the CUNO business with CUNO, and
financial responsibility for the liabilities of the Commercial Intertech
remaining businesses with Commercial Intertech. Obligations under the Services
Agreement have essentially been completed as of October 31, 1997.
CUNO and Commercial Intertech also entered into a Tax Allocation
Agreement ("Tax Agreement") which provided, among other things, for the
allocation between the parties thereto of federal, state, and foreign tax
liabilities for all periods through the distribution date. The Tax Agreement
also allocates between CUNO and Commercial Intertech any liability for taxes
which may arise in the event the Distribution does not qualify as tax-free.
Under the Tax Allocation Agreement, if the Distribution is determined to be
taxable because a change of control of Commercial Intertech occurs, then the
resulting tax liability shall be borne solely by Commercial Intertech. If the
Distribution is determined to be taxable because of a change of control of CUNO,
then the resulting tax liability shall be borne solely by CUNO. If a tax
liability arises in connection with the Distribution for any reason not set
forth above, then such liability shall be borne equally by Commercial Intertech
and CUNO. For purposes of the Tax Allocation Agreement "a change of control"
means a greater than 50 percent change in stock ownership, measured by vote and
value of either company.
Following the successful spin-off of CUNO, which is reflected as a
discontinued operation for fiscal 1996 and prior, the Company's continuing
operations include the Hydraulic Systems and Building Systems and Metal Products
segments. The remaining discussion relates to Commercial Intertech's continuing
operations and excludes CUNO's historical results.
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ITEM 7. (Continued)
During the third quarter of 1996, the Company received an
unsolicited tender offer, which the Board of Directors voted unanimously as
inadequate and confirmed the Company's strategic plan to spin-off to
shareholders 100 percent of its wholly-owned CUNO operation. In addition, the
Board of Directors approved a program to repurchase up to 2.5 million common
shares. The cost of $8.2 million associated with the successful defense against
the hostile takeover attempt and the cost to further reorganize the remaining
core businesses of the Company were recorded as nonrecurring defense and
reorganization costs.
Strength in the U.S. economy and improved business conditions in
Europe, the United Kingdom and Brazil enabled the Corporation to achieve record
sales and earnings in 1997. Income from continuing operations before
extraordinary items of $26.8 million was nearly 75 percent higher than last
year's income of $15.4 million and more than 10 percent higher than the $24.3
million reported in 1995. Excluding nonrecurring defense and reorganization
charges of $7.1 million after taxes recorded in 1996, income from continuing
operations for 1997 exceeds last year's earnings by more than 19 percent.
Record sales of $526.6 million were higher than those in 1996 and
1995 by 17 percent and 20 percent, respectively, after adjusting for the effects
of exchange rate differences on foreign sales reported in U.S. dollars. Most of
the improvement resulted from increased volume as price increases have been
relatively modest over the three-year period. Acquisitions of the Ultra
Hydraulics and Component Engineering operations also contributed to the
improvement in 1997. Domestic sales have increased substantially over this
period for the Hydraulic and Metal Products groups. Export sales were up 12
percent over last year, reflecting increased shipments to nonaffiliated
customers in Canada and South America. Domestic operations accounted for 55
percent of the Company's total sales in 1997 versus 54 percent in 1996 and 55
percent in 1995. Sales for the Company's overseas operations increased by 20
percent over those in 1996 on a parity-adjusted basis. A significant portion of
the year-over-year gain in overseas revenue relates to the acquisition of Ultra
Hydraulics Limited in mid-November 1996. Sales were generally higher in the
United Kingdom, Europe and Brazil but were marginally lower in Australia on a
parity-adjusted basis.
Operating income of $48.8 million was higher than 1996 and 1995 by
38 percent and 42 percent, respectively, after adjusting for the $8.2 million
nonrecurring defense and reorganization costs incurred in 1996. Operating income
rebounded for the Hydraulic Systems group by increasing 37 percent after last
year's 19 percent decrease. The Building Systems and Metal Products group
reported a 39 percent increase in operating income over 1996 and was more than
double operating earnings in 1995, reflecting continuous improvement for both
the Metal Stampings Division in the U.S. and the Astron Division in Europe.
ORSTA, a manufacturer of hydraulic cylinders, piston pumps and gear
pumps, was acquired in 1994 from the Truehandanstalt ("THA"), the regulatory
agency of the Federal Republic of Germany responsible for privatizing
state-owned enterprises in this region. Under terms of the Purchase Agreement,
Commercial Intertech tendered no financial consideration to acquire the shares
of the businesses but received, in addition to net assets, cash contributions
from the THA to fund pre-existing capital investment programs and cover
estimated operating losses over a period of two years. The loss indemnification
was recorded as a deferred credit (negative goodwill) and subsequently amortized
to income through cost of products sold in accordance with a predetermined
schedule through the end of the second quarter in fiscal 1996. Additional
operating subsidies were received from the German government at the outset of
fiscal 1997 and are being amortized to income in a similar fashion through the
end of fiscal 1998. The combined German operations represented by this
acquisition incurred
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ITEM 7. (Continued)
operating losses, net of subsidy amortization, of $5.4 million in 1997, $7.8
million in 1996 and $2.2 million in 1995. Revenues amounted to $34.7 million,
$38.2 million and $35.8 million, respectively, (see Note K for further details).
Industry Segments
- -Hydraulic Systems
The Hydraulic Systems segment accounted for 67 percent of the
Company's total sales and 55 percent of total operating income in 1997. Revenues
in this segment increased by $58.7 million or 20 percent over last year, while
operating income increased by $7.2 million or 37 percent over last year. The
domestic sector of the business reported a 17 percent increase in revenue over
1996. Revenues had been flat in 1996 and 1995. Combined domestic operating
income was up 45 percent, reflecting strong recovery from weak business market
conditions in late 1996. The truck and transportation, construction and
agriculture equipment markets were particularly strong in 1997. The U.S.
Cylinder Division reported significant increases in revenue and operating income
compared with the corresponding period last year. The acquisition of Component
Engineering Company late in the third quarter of 1996 also contributed to the
increased revenue and operating income in 1997. Component Engineering is a
manufacturer of cartridge-type valves which are manifold mounted for mobile and
industrial applications. Revenue and operating income records were set by the
Hydraulic Systems group during 1997 despite problems associated with production
capacity and receipt of externally supplied components at key operating units.
Delivery dates of manufacturing equipment to increase capacity were extended by
various machine tool vendors while outside suppliers of components were unable
to respond quickly to increased requirements from the Company. Financial
performance was favorable in the foreign segment of the business during 1997 as
all business units reported improved results over last year. The combined United
Kingdom units reported improved operating results for the third consecutive
year. The operations in Germany reported lower revenue in 1997 compared to 1996,
but the operating deficit was reduced by nearly 30 percent, reflecting continued
improvements in manufacturing efficiencies and productivity. The Brazilian
operating unit posted record earnings in 1997 as the government has been able to
control inflation and normalize business conditions.
Ultra Hydraulics Limited, acquired in November, also performed well
during the first year with Commercial Intertech as time and effort was expended
to relocate and streamline the operations to better serve its customers in the
future. This unit serves the mobile equipment market in the United Kingdom,
Europe, the United States and the Far East. Major customers include
manufacturers of material handling, turf care, construction, transportation and
compaction equipment. Ultra's products complement and extend the range of pumps,
motors and valves offered by the Company.
Capital expenditures amounted to $9.9 million for this segment in
1997 versus expenditures of $13.9 million in 1996 and $28.1 million in 1995.
Included in the total for the current year are expenditures of $1.1 million for
completion of the plant expansion for the valve facility in Hicksville, Ohio,
and $1.8 million for the continuing upgrades at our facilities located in
Germany. The majority of the remaining expenditures in 1997 pertains to ongoing
equipment purchases in the U.S. to upgrade manufacturing performance and to
outfit specialized machining cells for the manufacture of new products.
Incoming orders for the Hydraulic Systems group were higher than
those in 1996 by 37 percent on a parity-adjusted basis. Excluding acquisitions,
bookings were up 22 percent from last year. The backlog of unfilled orders to
start the new fiscal year was 57 percent higher than last year, after adjusting
for currency differences (38 percent excluding Ultra Hydraulics).
-13-
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ITEM 7. (Continued)
- - Building Systems and Metal Products
Revenues were up slightly for this segment in 1997 compared to 1996
and were even with those in 1995. Operating income improved by 39 percent over
1996 and was more than double the operating income reported in 1995. Sales for
1997 were 11 percent higher than last year for the Astron Building Systems on a
parity-adjusted basis, and earnings improved significantly for the second
consecutive year. Increased demand, favorable pricing, and increased utilization
of the satellite manufacturing operation in the Czech Republic contributed to
the increase in operating income. Sales were 10 percent higher than 1996 and 6
percent higher than 1995 for the Metal Stamping Division in the U.S. Operating
income results were 23 percent higher than 1996 and 40 percent higher than 1995.
The continued strong demand comes from the significant growth in the truck
equipment and storage vessel industries. The Southern Metals Stamping Division,
located in Saginaw, Texas, reported its best year since it was acquired in
January 1995.
Capital expenditures for this segment amounted to $1.8 million in
1997 versus $3.9 million in 1996 and $3.6 million in 1995. Nearly two-thirds of
the current year expenditures pertain to automation, refurbishment and
replacement of production equipment in the U.S. while the remainder relates to
upgraded production equipment, increased production capacity and office
automation of the Astron Division. Nearly two-thirds of the 1996 expenditures
pertained to upgrade production equipment and equipment for the satellite
facility in the Czech Republic. The balance of the spending in 1996 and the
majority of the capital expenditure in 1995 were for general upgrades of
Astron's facilities and production capabilities.
Incoming orders for domestic operations in the fourth quarter were
somewhat lower than the same period last year while bookings in the Astron
Building Systems were up 9 percent over those in the final quarter of 1996 on a
parity-adjusted basis. The backlog of unfilled orders to start the new year is
equal to last year in the U.S., while the Astron backlog is 29 percent higher
after adjusting for foreign currency differences.
Nonoperating Income and Expense
Interest received from investments decreased from $1.0 million in
1996 to $0.9 million in 1997 due, primarily, to lower average invested balances
reflecting efforts to reduce long-term debt resulting from the acquisition of
Ultra Hydraulics Limited, the repurchase of common stock, and the defense
against a hostile takeover attempt. Investment yields were marginally lower than
those in previous years.
Approximately 93 percent of total interest expense incurred on
borrowed funds in 1997 resulted from long-term obligations. Most of the
long-term interest expense derives from the senior unsecured revolving credit
and term loan facilities and the senior unsecured notes. The term loan facility
was replaced in July 1997 with 7.61 percent senior unsecured notes placed with a
group of institutional investors. Remaining interest expense primarily pertains
to long-term debt to fund major construction projects, equipment leases and
short-term borrowings to support current operations. The effective interest rate
paid by the Company has decreased since last year due to the refinancing of the
term loan in July. Short-term rates have fluctuated on an interim basis.
-14-
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ITEM 7. (Continued)
Foreign currency exchange and translation gains and losses are
included in other nonoperating expense. These amounts totaled losses of $0.5
million in 1997 and $0.3 in 1995 and a gain of $0.3 in 1996. The Company
utilized foreign currency forward contracts to hedge the principal and interest
due on loans which are periodically made with foreign subsidiaries. Deferred
gains and losses from such hedging activities were negligible at the end of the
current fiscal year (see Note J).
Other nonoperating income for 1997 includes $1.0 million from the
transfer of Astron Building Systems marketing and manufacturing rights to a new
Korean licensee. Included in 1996 is a $1.6 million gain of the sale of unused
assets principally located in the United Kingdom and Germany.
Taxes
The Company's effective tax rate decreased slightly to 34 percent
in 1997 compared to 35 percent in 1996. The Company continues to utilize the tax
loss carryforwards acquired with the ORSTA business in 1994 to shelter earnings
of the Company's other German operations, including those of an Astron
subsidiary. Remaining ORSTA net operating losses of approximately $106.5 million
may be carried forward indefinitely and are expected to provide tax relief on
income earned by all operations in Germany for a number of years. Effective
rates are also reduced by the favorable tax impact of reserve contracts.
Partially offsetting these benefits were the tax consequences of repatriating
foreign earnings and state and local taxes levied on domestic income.
Impact of Year 2000
The Year 2000 Issue is the result of computer programs being
written using two digits rather than four to define the applicable year. Any of
the Company's computer programs that have time-sensitive software may recognize
a date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations, causing disruptions of operations
including, among other things, a temporary inability to process transactions,
send invoices or engage in similar normal business activities.
Based on a recent assessment, the Company determined that it will
be required to modify or replace portions of its software so that its computer
systems will function properly with respect to dates in the year 2000 and
thereafter. The company presently believes that with modifications to existing
software and conversions to new software, the Year 2000 Issue will not pose
significant operational problems for its computer systems. However, if timely
modifications and conversions are not made or are not completed, the Year 2000
Issue could have a material impact on the operations of the Company.
The Company will utilize both internal and external resources to
reprogram, or replace, and test the software for Year 2000 modifications. The
Company anticipates completing the Year 2000 project prior to any anticipated
impact on its operating systems. The incremental cost of the Year 2000 project
is expected to be immaterial.
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ITEM 7. (Continued)
Management's estimates of cost and time necessary to complete the
Year 2000 project were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved, and actual results could differ materially
from those anticipated. Specific factors that might cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
computer codes, and similar uncertainties.
Accounting Standards
In October 1996, the Accounting Standards Executive Committee of
the American Institute of Certified Public Accountants issued Statement of
Position ("SOP") 96-1, "Environmental Remediation Liabilities." The SOP does not
make changes to existing accounting rules, but it clarifies how existing
authoritative guidance on loss contingencies should be applied in determining
environmental liabilities. The Company does not believe the SOP will have any
material impact on future operations. The Company will be required to report
under the SOP in financial statements for 1998.
In October 1995, the Financial Accounting Standards Board ("FASB")
issued Statement No. 123, "Accounting for Stock-Based Compensation" governing
financial accounting and reporting standards for compensation plans which award
employees in the form of stock options, restricted stock, performance shares and
similar stock awards. As permitted by this Statement, the Company elected to
continue to account for such compensation using the intrinsic value method in
accordance with Accounting Principles Board Opinion No. 25. Accordingly,
compensation cost of stock options is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of grant over the amount
that must be paid to acquire the stock. Such cost is expensed over the period
from the date of grant to the date the stock options become exercisable.
Compensation cost for stock appreciation rights and awards of common stock are
determined based on the quoted market price of the Company's stock. Pro forma
disclosures as required by the pronouncement indicate net income would have
decreased by approximately $0.1 million in both 1997 and 1996.
In February 1997, the FASB issued Statement No. 128, "Earning Per
Share." The new statement replaces the current primary and fully diluted
earnings per share presentation with basic and diluted earnings per share. Basic
earnings per share measures operating performance assuming no dilution from
securities or contracts to issue common stock. Diluted earnings per share
measures operation performance giving effect to the dilution that would occur
assuming that securities or contracts to issue common stock are exercised or
converted. The statement is effective for the first quarter of our fiscal 1998
reporting and all prior periods are required to be restated.
The FASB also issued Statement No. 130, "Reporting Comprehensive
Income" and Statement No. 131, "Disclosures about Segments of an Enterprise and
Related Information" in June 1997. Both of these statements require the Company
to evaluate its present reporting and disclosure requirements. The statements
are effective for fiscal year ending October 31, 1998 and will not effect
amounts recorded in the basic financial statements.
-16-
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ITEM 7. (Continued)
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is generally defined as the ability to generate cash, by
whatever means available, to satisfy the short- and long-term needs of the
Company. With respect to cash flow in 1997, the balance of cash and cash
equivalents of $27.6 million remained essentially unchanged from the end of
1996. The ORSTA acquisition made in 1994 continues to be a consumer of Company
funds. Under terms of the Purchase Agreement, Commercial Intertech received cash
contributions from the THA and other German regulatory agencies to cover
operating losses for a period of two years and fund pre-existing capital
expenditure programs of the acquired businesses. Additional government subsidies
were received during the first quarter of 1997 to assist with the operating
losses over an extended two-year period. Cash subsidies amounted to $3.0 million
in 1997 and $17.1 million in 1995. The German operations consumed net cash of
$2.1 million in 1997, $5.2 million in 1996 and $9.3 million in 1995.
Cash generated from Commercial Intertech's continuing operations
amounted to $53.9 million in 1997, representing an increase of $8.4 million from
the previous year. A decrease in receivable from discontinued operations and
increased accounts payable and accrued expenses offset by increased trade
receivables and inventory were the principal factors in the year-over-year
increase. Income from discontinued operations, amortization of intangibles and
deferred credit, postretirement benefits and deferred income taxes are noncash
in nature and therefore had no effect on cash flow in these periods.
Cash used in investing activities amounted to $47.8 million in
1997, reflecting the $39.4 million purchase of all the outstanding common stock
of Ultra Hydraulics Limited. Capital expenditures totaled $11.4 million for the
year versus $18.0 million in 1996 and $31.8 million in 1995 (see Note I). Nearly
60 percent of the current year spending pertained to investments in the U.S. for
expansion of production capacity, equipment upgrades to improve manufacturing
performance, machine tools for the manufacture of new product introductions,
construction of a plant expansion and purchase of advanced computer systems to
support manufacturing processes and administrative functions. Investments in
technologically advanced production and other operating improvements for the
ORSTA units and Ultra Hydraulics Limited accounted for most of the overseas
capital spending. Completion of a new manufacturing facility, production
equipment and other operating improvements for the ORSTA units and the purchase
of production equipment for the Astron satellite facility in the Czech Republic
accounted for most of the capital spending overseas during 1996. Construction of
a new manufacturing plant, capacity expansion, equipment upgrades and office
automation accounted for the majority of the capital expenditures in the U.S. in
the two preceding years. Authorized, but unspent capital expenditure programs
totaled $10.2 million at fiscal year-end, including projects for
state-of-the-art production equipment cells for the Hydraulic Systems group and
upgraded production equipment to improve efficiency and increase capacity for
the Metal Products group. Proceeds were received during 1996 from the sale of
idle property and equipment located in the United Kingdom and Germany.
Cash used in financing activities totaled $3.1 million. Principal
activities included the replacement of the Company's $60.0 million term loan
agreement with unsecured private placement senior notes and the reduction of
debt following the acquisition of Ultra Hydraulics Limited. Other activities
include the payment of reserve contract premiums, the dividend from CUNO
Incorporated in connection with the 1996 spin-off and the distribution of
dividends to shareholders. Dividends totaled $9.3 million in 1997, of which $7.4
million were paid to shareholders of common stock.
-17-
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ITEM 7. (Continued)
During the hostile takeover attempt in 1996, the Company completed
a refinancing program to fund the repurchase of 2.0 million common shares,
retire the $45.0 million senior notes that were outstanding and purchase the
employee stock ownership plan's senior notes. The senior notes provide permanent
financing for the remaining life of the benefit plan.
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. The Company and its foreign
subsidiaries have and will continue to make loans among affiliates of the
consolidated group to fund worldwide cash requirements when interest rate
spreads make it cost effective to do so. Foreign currency forward contracts are
used to hedge the lending affiliate's receipt of principal and interest due from
these loans (see Note J). The forward contracts are an effective hedge against
fluctuations in the value of the foreign currency. The Company has $79.1 million
of a $125.0 million credit facility available which expires in 2001. The funds
available to the Company under this agreement may be used for any general
corporate purpose. Including this facility, total credit lines of $128.9
million, denominated in both domestic and foreign currencies, were available to
the Company at fiscal year-end. Borrowing rates to start the new year were
generally lower than the same period a year ago, reflecting prevailing market
conditions.
IMPACT OF INFLATION AND CHANGING PRICES
Rates of inflation were moderately lower than the previous year,
ranging from a low of 2 percent or less to a high of 3 percent in most
instances. Manufacturing and operating costs generally advanced in line with
inflation, but the continuing trend of competitive pressures and price
resistance in the marketplace limited the extent to which cost increases could
be passed along to customers in 1997. Consequently, the Corporation relied upon
volumetric efficiencies, productivity improvements and cost saving measures to
offset a shortfall in pricing and successfully maintain or improve profit
margins in most business units. Margins continued to improve for the Astron
Division where weak industry prices and price discounting in certain market
segments adversely affected profitability in fiscal 1995.
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 capital investments to combat profit erosion and remain competitive.
BUSINESS OUTLOOK
The consolidated backlog of unfilled orders amounted to $200
million at the end of the year which, after adjusting for the effects of
exchange rate differences on foreign segments, represents an increase of 47
percent over the previous fiscal year-end. Substantially all of the consolidated
backlog is deliverable in 1998.
Business conditions to start the new fiscal year for the Company's
domestic operations are stronger than a year ago as orders were particularly
brisk in most industry segments during the last quarter of 1997. Early signs in
fiscal 1998 indicate increased demand by most of our core product lines. Recent
reports suggest that economic growth in the U.S. will continue and the Company
intends to realize benefits from 1997 capital investments that were delayed
during the latter part of 1997 to improve productivity. New products introduced
in the last 18 months, all of which enhance our competitive position and open
new markets, as well as the continued growth in miniature and specialized
hydraulics, are experiencing increased customer demand.
-18-
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ITEM 7. (Continued)
Prospects are mixed for the Company's overseas operations to start
fiscal 1998. Operations in Germany will continue to incur losses during 1998,
but we expect significant improvement due to strengthening of market conditions
and additional volume from new product introductions. Conditions remain strong
for the Astron Division as demand is expected to increase in major European
markets, with particular strength in Eastern Europe. Elsewhere, management
expects improved results for operations in the United Kingdom, Australia and
Brazil pending continuation of favorable economic conditions.
We continue to monitor the financial crisis in the Asia Pacific
region and its potential impact on the Company. While our direct exposure in
this area is relatively minor, the greater risk to the Company lies in the
broader effect which the crisis might eventually have on economic conditions in
other parts of the world. The impact of any such effect on the Company, its
customers or suppliers cannot be determined at this time.
The Company began to accelerate the implementation of a program to
enhance its manufacturing capacity and efficiency; accordingly, capital
expenditures should be higher in fiscal 1998 as we complete our existing
program. The Company continues to identify and implement strategic initiatives,
and reduce overhead where possible to lower operating costs and improve
profitability. The competitive advantages which these programs provide, our
ability to meet the challenges of globalization and increased international
competition, and continuation of moderate growth in world economies cause us to
anticipate increased consolidated results in 1998.
FORWARD LOOKING INFORMATION
Because Commercial Intertech wants to provide shareholders with
more meaningful and useful information, this Annual Report contains certain
statements which reflect the Company's current expectations regarding the future
results of operations, performance and achievements. Commercial Intertech Corp.
has tried, wherever possible, to identify these "forward looking" statements by
using words such as "anticipate," "believe," "estimate," "expect" and similar
expressions. These statements reflect the Company's current beliefs and are
based on information currently available to it. Accordingly, these statements
are subject to risks and uncertainties which could cause the Company's actual
results, performance or achievements to differ materially from those expressed
in or implied by these statements. These risks and uncertainties include the
following: the effectiveness of the Company's program to reduce general
corporate and operating unit overhead; volumes of shipments of the Company's
products, changes in the Company's product mix and product pricing; costs of raw
materials; the rate of economic and industry growth in the United States and the
other countries in which the Company conducts its business; economic and
political conditions in the foreign countries in which the Company conducts a
substantial part of its operations and other risks associated with international
operations including taxation policies, exchange rate fluctuations and the risk
of expropriation; the Company's ability to protect its technology, proprietary
products and manufacturing techniques; changes in technology, changes in
industrial requirements and risks generally associated with new product
introductions and applications; and domestic and international competition in
the Company's global markets. The Company is not obligated to update or revise
these "forward looking" statements to reflect new events or circumstances.
-19-
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
STATEMENTS OF CONSOLIDATED INCOME
Commercial Intertech Corp. and Subsidiaries
Year Ended October 31,
1997 1996 1995
--------- --------- ---------
(in thousands, except per-share data)
Net sales ........................................ $ 526,624 $ 465,209 $ 459,137
Less costs and expenses:
Cost of products sold ......................... 387,340 340,993 337,122
Selling, administrative and general expenses .. 90,516 88,799 87,670
Nonrecurring defense and reorganization costs . 0 8,202 0
--------- --------- ---------
477,856 437,994 424,792
--------- --------- ---------
Operating income ................................. 48,768 27,215 34,345
Nonoperating income (expense):
Interest income ............................... 880 1,031 1,837
Interest expense .............................. (10,493) (7,083) (6,238)
Gain on sale of assets ........................ 506 1,603 204
Other ......................................... 657 972 231
--------- --------- ---------
(8,450) (3,477) (3,966)
Income from continuing operations before
income taxes and extraordinary items .......... 40,318 23,738 30,379
Provision for income taxes:
Current ....................................... 12,259 10,875 5,706
Deferred ...................................... 1,268 (2,493) 391
--------- --------- ---------
13,527 8,382 6,097
--------- --------- ---------
Income from continuing operations before
extraordinary items ........................... 26,791 15,356 24,282
Income from discontinued operations (net of income
taxes of $4,857 in 1996 and $3,462 in 1995) ... 0 6,083 6,101
Extraordinary items (losses on early retirement of
debt, net of income tax benefits of $2,694) ... 0 (4,044) 0
--------- --------- ---------
Net income ....................................... $ 26,791 $ 17,395 $ 30,383
========= ========= =========
Preferred stock dividends and adjustments ........ (1,895) (2,058) (2,084)
--------- --------- ---------
Net income applicable to common stock ............ $ 24,896 $ 15,337 $ 28,299
========= ========= =========
Earnings per share of common stock:
Primary:
Income from continuing operations before
extraordinary items ....................... $ 1.72 $ 0.87 $ 1.42
Income from discontinued operations ......... 0.00 0.40 0.40
Extraordinary items ......................... 0.00 (0.26) 0.00
Net income .................................. 1.72 1.01 1.82
Fully diluted:
Income from continuing operations before
extraordinary items ....................... $ 1.51 $ 0.83 $ 1.35
Income from discontinued operations ......... 0.00 0.36 0.37
Extraordinary items ......................... 0.00 (0.24) 0.00
Net income .................................. 1.51 0.95 1.72
See notes to consolidated financial statements.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
CONSOLIDATED BALANCE SHEETS
Commercial Intertech Corp. and Subsidiaries
October 31,
1997 1996
-------- --------
(in thousands)
ASSETS
- ------
CURRENT ASSETS
Cash (including equivalents of $21,615 in 1997 and
$19,291 in 1996) ............................................ $ 27,630 $ 27,552
Accounts and notes receivable, less allowances for doubtful
accounts of $2,456 in 1997 and $1,724 in 1996 ............... 81,886 70,399
Inventories .................................................... 60,944 58,129
Deferred income tax benefits ................................... 15,281 15,515
Prepaid expenses and other current assets ...................... 4,255 4,012
Dividend receivable from discontinued operations ............... 0 4,612
Receivable from discontinued operations ........................ 0 10,184
-------- --------
TOTAL CURRENT ASSETS ...... 189,996 190,403
NONCURRENT ASSETS
Intangible assets .............................................. 44,460 9,051
Pension assets ................................................. 42,961 37,371
Other noncurrent assets ........................................ 3,955 3,671
-------- --------
TOTAL NONCURRENT ASSETS ........... 91,376 50,093
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements ..................................... 6,194 6,379
Buildings ...................................................... 51,457 51,353
Machinery and equipment ........................................ 152,117 130,314
Construction in progress ....................................... 6,262 8,863
-------- --------
216,030 196,909
Less allowance for depreciation ................................ 112,604 100,289
-------- --------
103,426 96,620
-------- --------
TOTAL ASSETS $384,798 $337,116
======== ========
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
CONSOLIDATED BALANCE SHEETS (Continued)
Commercial Intertech Corp. and Subsidiaries
October 31,
1997 1996
--------- ---------
(in thousands)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Bank loans ................................................................ $ 140 $ 2,745
Accounts payable .......................................................... 52,382 51,648
Accrued payrolls and related taxes ........................................ 18,989 17,116
Accrued expenses .......................................................... 37,536 37,175
Dividends payable ......................................................... 2,592 2,449
Accrued income taxes ...................................................... 11,085 4,385
Current portion of long-term debt ......................................... 4,621 705
--------- ---------
TOTAL CURRENT LIABILITIES ................... 127,345 116,223
NONCURRENT LIABILITIES
Long-term debt ............................................................ 111,342 93,415
Deferred income taxes ..................................................... 18,274 15,495
Postretirement benefits ................................................... 25,007 24,822
--------- ---------
TOTAL NONCURRENT LIABILITIES ...................... 154,623 133,732
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: 1997 - 942,552 shares
1996 - 1,039,657 shares .................................... 21,914 24,172
Common stock, $1 par value:
Authorized: 30,000,000 shares
Issued: 1997 - 14,125,175 shares (excluding 1,945,995 in treasury)
1996 - 13,559,579 shares (excluding 2,211,868 in treasury) 14,125 13,560
Capital surplus ........................................................... 5,264 0
Retained earnings ......................................................... 85,884 67,808
Deferred compensation ..................................................... (16,337) (17,594)
Translation adjustment .................................................... (8,020) (785)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY ........................ 102,830 87,161
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................................. $ 384,798 $ 337,116
========= =========
See notes to consolidated financial statements.
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23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
Commercial Intertech Corp. and Subsidiaries
Year Ended October 31,
1997 1996 1995
-----------------------------------
(in thousands, except per-share data)
PREFERRED STOCK (Series B)
Balance at beginning of year ............... $ 24,172 $ 24,494 $ 24,631
Shares converted ........................... (2,258) (322) (137)
--------- --------- ---------
Balance at end of year ..................... 21,914 24,172 24,494
COMMON STOCK
Balance at beginning of year ............... 13,560 15,440 15,199
Shares issued:
Employee Stock Ownership Plan ........... 319 99 34
Stock option and award plans ............ 246 65 207
Repurchase program ......................... 0 (2,044) 0
--------- --------- ---------
Balance at end of year ..................... 14,125 13,560 15,440
CAPITAL SURPLUS
Balance at beginning of year ............... 0 38,396 35,844
Employee Stock Ownership Plan .............. 2,291 1,458 631
Stock option and award plans ............... 2,973 1,110 1,921
Repurchase program ......................... 0 (56,937) 0
Transfer from retained earnings ............ 0 15,973 0
--------- --------- ---------
Balance at end of year ..................... 5,264 0 38,396
RETAINED EARNINGS
Balance at beginning of year ............... 67,808 112,907 91,649
Net income for the year .................... 26,791 17,395 30,383
--------- --------- ---------
94,599 130,302 122,032
Less:
Dividends:
Common (per share: 1997 - $0.54;
1996 - $0.54; 1995 - $0.51) .......... 7,603 7,847 7,862
Preferred Series B ...................... 1,863 2,055 2,082
--------- --------- ---------
9,466 9,902 9,944
Other preferred stock adjustments ........ (751) (811) (819)
Stock distribution - CUNO Incorporated ... 0 37,430 0
Transfer to capital surplus .............. 0 15,973 0
--------- --------- ---------
Balance at end of year ..................... 85,884 67,808 112,907
DEFERRED COMPENSATION ......................... (16,337) (17,594) (18,851)
TRANSLATION ADJUSTMENT ........................ (8,020) (785) 4,207
--------- --------- ---------
Total shareholders' equity .............. $ 102,830 $ 87,161 $ 176,593
========= ========= =========
Shareholders' equity per share of common stock $ 6.89 $ 5.94 $ 11.07
See notes to consolidated financial statements
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (Continued)
STATEMENTS OF CONSOLIDATED CASH FLOWS
Commercial Intertech Corp. and Subsidiaries
Year Ended October 31,
1997 1996 1995
-----------------------------------
(in thousands, except per-share data)
OPERATING ACTIVITIES:
Net income ................................................. $ 26,791 $ 17,395 $ 30,383
Adjustments to reconcile net income to net
cash provided by operating activities:
Discontinued operations .............................. 0 (6,083) (6,101)
Provision for depreciation ........................... 14,071 11,999 10,710
Amortization of intangibles .......................... 1,827 567 566
Amortization of deferred credit ...................... (1,518) (3,634) (16,095)
Extraordinary losses on early retirement of debt ..... 0 6,738 0
Postretirement benefits .............................. 333 2,205 634
Pension plan credits ................................. (5,467) (2,524) (2,872)
Change in deferred income taxes ...................... 2,539 (969) 278
Change in current assets and liabilities:
(Increase) decrease in accounts receivable ........ (7,956) 10,446 (15,999)
(Increase) in inventories ......................... (1,800) (6,998) (9,073)
(Increase) decrease in prepaid expenses
and other current assets ....................... (2,796) 903 (2,843)
Decrease in receivable from discontinued operations 10,253 0 0
Increase in accounts payable and accrued expenses . 10,113 12,780 14,545
Increase in accrued income taxes .................. 7,536 2,727 5,270
--------- --------- ---------
Net cash provided by continuing operations ................. 53,926 45,552 9,403
Net cash provided by discontinued operations ............... 0 8,356 3,128
--------- --------- ---------
Net cash provided by operating activities ........ 53,926 53,908 12,531
INVESTING ACTIVITIES:
Proceeds from sale of fixed assets ......................... 849 2,934 374
Business acquisitions ...................................... (39,359) (10,731) (886)
Investments in intangibles ................................. (896) (25) (46)
Capital expenditures ....................................... (11,405) (17,950) (31,794)
Operating subsidies ........................................ 3,016 0 17,146
--------- --------- ---------
Net cash (used) by investing activities .......... (47,795) (25,772) (15,206)
FINANCING ACTIVITIES:
Proceeds from long-term debt ............................... 137,974 268,500 0
Principal payments on long-term debt ....................... (123,925) (245,435) (2,800)
Net borrowings under bank loan agreements .................. (5,371) (6,328) (251)
Repurchase of common shares ................................ 0 (58,980) 0
Debt early retirement ...................................... 0 (6,738) 0
Proceeds from reserve contracts ............................ 619 2,136 2,089
Purchase of reserve contracts .............................. (4,083) (3,566) (3,475)
Conversion of other assets ................................. (3,576) (1,706) (661)
Dividend from CUNO Incorporated ............................ 4,612 30,000 0
Dividends paid ............................................. (9,322) (10,177) (9,666)
--------- --------- ---------
Net cash (used) by financing activities .......... (3,072) (32,294) (14,764)
Effect of exchange rate changes on cash and cash equivalents .. (2,981) (1,239) 2,130
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents .......... 78 (5,397) (15,309)
Cash and cash equivalents at beginning of year ................ 27,552 32,949 48,258
--------- --------- ---------
Cash and cash equivalents at end of year ...................... $ 27,630 $ 27,552 $ 32,949
========= ========= =========
Supplemental disclosures:
Cash paid during the year for:
Interest ................................................. $ 9,523 $ 6,829 $ 7,055
Income taxes ............................................. 5,303 12,852 4,899
See notes to consolidated financial statements.
-24-
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ITEM 8. (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Commercial Intertech Corp. and Subsidiaries
NOTE A - ACCOUNTING POLICIES
Organization:
Commercial Intertech Corp. ("Commercial Intertech" or the "Company") is a
multinational manufacturer of Hydraulic Systems and Building Systems and Metal
Products. The Company operates 28 facilities in eight countries.
Discontinued Operations:
On July 29, 1996 the Board of Directors of Commercial Intertech Corp.
approved a plan to spin-off the Company's fluid purification business by
declaring a dividend distribution of 100 percent of the common stock of CUNO
Incorporated ("CUNO") on a pro-rata basis to the holders of Commercial Intertech
common shares (the "Distribution"). Each holder of record of Commercial
Intertech common shares at the close of business on September 10, 1996, the
payable date for the Distribution, received one share of CUNO Common Stock for
every one share of Commercial Intertech common share. No fractional shares of
CUNO were issued. The net assets and operating results of CUNO are presented in
the accompanying consolidated financial statements as a discontinued operation
through the distribution date. The CUNO revenues through the distribution date
were $147,934,000 in 1996 and $162,699,000 in 1995.
In connection with the spin-off, the Board of Directors of Commercial
Intertech declared a dividend of approximately $35,675,000 payable from the CUNO
locations to Commercial Intertech, and immediately prior to the Distribution,
CUNO assumed $30,000,000 of Commercial Intertech's debt in the form of a
dividend.
The Company and CUNO entered into a Tax Allocation Agreement in connection
with the distribution. In addition, the Company and CUNO entered into a
Distribution and Interim Services Agreement which provided that certain services
which had historically been provided to CUNO by the Company would continue to be
provided following the Distribution Date, at rates specified in such agreement,
for a period of up to 12 months.
Consolidation:
The accounts of the Company and its subsidiaries are included in the
consolidated financial statements. Intercompany accounts and transactions are
eliminated upon consolidation. All statements and amounts presented have been
restated to reflect the 100 percent spin-off of CUNO as a discontinued
operation.
Distribution and reorganization costs incurred to successfully defend
against a hostile takeover attempt and to further reorganize the remaining core
businesses were reported in operating income under the caption nonrecurring
defense and reorganization costs.
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ITEM 8. (Continued)
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 54 percent (53 percent in 1996) of worldwide inventories are
accounted for using the LIFO method. Inventories as of October 31 consisted of
the following:
1997 1996
---- ----
(in thousands)
Raw materials...................................................... $ 20,899 $ 21,090
Work in process.................................................... 30,161 27,353
Finished goods .................................................... 9,884 9,686
----------- ---------
$ 60,944 $ 58,129
=========== ==========
If all inventories were priced using the FIFO method, which approximates
replacement cost, inventories would have been $14,960,000 higher in 1997 and
$14,603,000 higher in 1996.
Intangible Assets:
Intangible assets at October 31 are summarized as follows:
1997 1996
---- ----
(in thousands)
Goodwill, less accumulated amortization (1997 - $ 2,768,000;
1996 - $1,280,000)..................................................... $ 43,165 $ 8,495
Other intangibles, less accumulated amortization (1997 -
$844,000; 1996 - $443,000)............................................. 1,295 556
----------- ----------
$ 44,460 $ 9,051
=========== ==========
The excess cost over the fair value of net assets acquired (or goodwill)
generally is amortized on a straight-line basis over 25 to 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. The Company uses the
straight-line method in computing depreciation for financial reporting purposes
and generally uses accelerated methods for income tax purposes. The annual
provisions for depreciation are provided using the following estimated useful
lives:
Buildings and improvements................................ 20 - 35 years
Machinery and equipment................................... 5 - 10 years
Furniture and fixtures.................................... 3 - 15 years
Impairment of Long-Lived Assets:
In the event that facts and circumstances indicate that the carrying value
of intangibles and long-lived assets or other assets may be impaired, an
evaluation of recoverability would be performed. If an evaluation is required,
the estimated future undiscounted cash flow associated with the asset would be
compared to the asset's carrying amount to determine if a write-down is
required.
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ITEM 8. (Continued)
Income Taxes:
The Company uses the liability method in measuring the provision for income
taxes and recognizing deferred tax assets and liabilities. 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. 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.
Provisions are made for appropriate income taxes on undistributed earnings
of foreign subsidiaries which are expected to be remitted to the parent company
in the near term. The cumulative amount of unremitted earnings of subsidiaries,
which aggregated approximately $67,433,000 at October 31, 1997, is deemed to be
indefinitely reinvested and, accordingly, no provision for U.S. federal and
state income taxes has been provided thereon. Upon distribution of those
earnings in the form of dividends or otherwise, the Company would be subject to
both U.S. income taxes (subject to an adjustment for foreign tax credits) and
withholding taxes payable to the various foreign countries. Determination of the
amount of unrecognized deferred U.S. tax liability is not practicable because of
the complexities associated with its hypothetical calculation; however,
unrecognized foreign tax credit carryforwards would be available to reduce some
portion of the U.S. liability.
Translation of Foreign Currencies:
The financial statements of foreign entities are translated in accordance
with Financial Accounting Standards Board (FASB) Statement No. 52, except for
those entities located in highly inflationary countries. Under this method,
revenue and expense accounts are translated at the average exchange rate for the
year, while 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. Effective for the first quarter of fiscal 1998, the Company will
change its foreign currency translation procedures for its operations located in
Brazil which reflects a change in its economy to a non-highly inflationary
status. The change will not materially impact the Company's financial
statements.
Derivative Financial Instruments:
The Company's utilization of derivative financial instruments is primarily
limited to the use of forward exchange contracts which are designated as hedges
of specific foreign currency transactions, including specific loans among
consolidated affiliates. The unrealized gains and losses related to such
contracts are deferred and included in the measurement of related foreign
currency transaction. In instances where hedge designations are, or become
inappropriate, gains and losses related to such contracts will be included in
income as nonoperating income (expense).
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 preferred
dividends 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. 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.
-27-
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ITEM 8. (Continued)
Cash Equivalents:
The Company considers all highly liquid investments with a maturity of three
months or less, when purchased, to be cash equivalents.
Investment in Reserve Contracts:
The Company holds corporate-owned life insurance contracts on most domestic
employees. The contracts are recorded at cash surrender value, net of policy
loans, in other noncurrent assets. The net contract expense, including interest
expense, is included in selling, administrative and general expenses in the
Statements of Consolidated Income. The related interest expense was $7,264,000
in 1997, $7,715,000 in 1996 and $7,973,000 in 1995, which in each year is
reduced for contract benefits and net amortization of contract premiums and cash
surrender value.
Concentration of Credit Risks:
The Company sells products and extends credit based on an evaluation of the
customer's financial condition, generally without requiring collateral. Exposure
to losses on receivables is principally dependent on each customer's financial
condition. The Company monitors its exposure for credit losses and maintains
allowances for anticipated losses.
Use of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Revenue Recognition:
Revenue is recognized when the earning process is complete and the risks
and rewards of ownership have transferred to the customer, which is generally
considered to have occurred upon shipment of the finished product.
Advertising:
The Company expenses all advertising cost as incurred. Advertising expense
incurred during the period was immaterial.
Stock-Based Compensation:
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," permits the Company to continue to use the
intrinsic value method prescribed by Accounting Principles Board Opinion No. 25
to account for stock-based compensation. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market price of
the Company's stock at the date of grant over the amount that must be paid to
acquire the stock. Such cost is expensed over the period from the date of grant
to the date the stock options become exercisable. Compensation cost for stock
appreciation rights and awards of common stock are determined based on the
quoted market price of the Company's stock.
-28-
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ITEM 8. (Continued)
Newly Issued Accounting Standards:
In October 1996, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
("SOP") 96-1, "Environmental Remediation Liabilities." The SOP is effective for
fiscal years beginning after December 15, 1996. The SOP does not make changes to
existing accounting rules, but it clarifies how existing authoritative guidance
on loss contingencies should be applied in determining environmental
liabilities. The Company does not believe the SOP will have any material impact
on future operations. The Company will be required to report under the SOP in
its financial statements for 1998.
In February 1997, SFAS No. 128, "Earnings Per Share" was issued. Under the
new statement, the presentations of primary and fully diluted earnings per share
which are currently required are replaced by basic and diluted earnings per
share. Basic earnings per share measures operating performance assuming no
dilution from securities or contracts to issue common stock. Diluted earnings
per share measures operating performance giving effect to the dilution that
would occur assuming that securities or contracts to issue common stock are
exercised or converted. The new statement is required for our fiscal 1998
reporting. Early adoption is not permitted. Under the new statement, basic
earnings per share from continuing operations before extraordinary items would
be $1.83, $0.91, and $1.48 for the years ended October 31, 1997, 1996 and 1995,
respectively. Diluted earnings per share from continuing operations before
extraordinary items under the new statement would be $1.56, $0.86, and $1.37 for
the years ended October 31, 1997, 1996, and 1995, respectively.
In June 1997, SFAS No. 130, "Reporting Comprehensive Income" was issued.
SFAS No. 130 defines comprehensive income and outlines certain reporting and
disclosure requirements related to comprehensive income and is effective for
fiscal year ending October 31, 1998. The Company has not completed its
evaluation of the impact of the new disclosure requirements.
In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information" was issued. SFAS No. 131 requires changes in the
presentation of operating segment information in both interim and annual
financial statements and is effective for fiscal year ending October 31, 1998.
The Company has not completed its evaluation of the impact of the new disclosure
requirements.
NOTE B - DEBT
Long-term debt obligations at October 31 are summarized below:
1997 1996
-------- --------
(in thousands)
Senior unsecured notes .................................. $ 60,000 $ 0
Senior unsecured revolving credit and term loan agreement 45,855 91,000
Other ................................................... 10,108 3,120
-------- --------
115,963 94,120
Less current portion .................................... 4,621 705
-------- --------
$111,342 $ 93,415
======== ========
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ITEM 8. (Continued)
Senior Unsecured Notes
- ----------------------
In July 1997, the Company completed a private placement of $60,000,000 in
senior unsecured notes with a group of institutional investors. The 7.61 percent
notes have an average life of seven years and a maturity date of 10 years. The
notes, subject to certain provisions, are callable at any time at the option of
the Company. The notes include covenants which require the maintenance of
certain financial ratios. The Company was in compliance with these covenants at
October 31, 1997.
Senior Unsecured Revolving Credit and Term Loan Agreement
- ---------------------------------------------------------
During the third and fourth quarters of fiscal 1996, the Company entered
into a $190,000,000 bridge loan agreement to fund the repurchase of 2,000,000
common shares, to purchase the outstanding loans of the Company's Employee Stock
Ownership Plan ("ESOP") and to retire the $45,000,000 senior notes outstanding.
Following the spin-off of CUNO in September 1996, $55,000,000 of the loan was
allocated to CUNO. On October 31, 1996, the Company replaced the bridge facility
with a $125,000,000 aggregate senior unsecured revolving credit and $60,000,000
senior unsecured term loan facilities. Extraordinary items associated with the
losses on the early retirement of debt were recorded in fiscal 1996.
The $125,000,000 revolving credit agreement provides the Company an option
to borrow the pounds sterling equivalent of $50,000,000 to finance the
acquisition, including working capital, of Ultra Hydraulics Limited which was
consummated in November 1996 (see Note K). The revolving credit agreement
matures on October 31, 2001.
The $60,000,000 term credit agreement which was scheduled to mature on
January 31, 2000 was repaid in July 1997 using proceeds from the senior
unsecured notes.
Under the revolving credit agreement, the Company pays a variable per-annum
fee on the unused amount of the commitment, payable quarterly in arrears. The
rate at October 31, 1997 was .15 percent and will reduce to .125 percent
effective January 1998 based on the Company's leverage ratio at October 31,
1997. The agreement has interest rate options determinable by the Company based
upon prime interest or LIBOR rates plus an applicable margin. The margin was .5
percent at October 31, 1997 and will reduce to .375 percent effective January
1998 based on the Company's leverage ratio at October 31, 1997. The credit
agreement also has a competitive bid option feature, which under certain
conditions provides lower interest rates. At October 31, 1997, approximately 90
percent of the funds drawn on the revolving credit agreement were denominated in
pounds sterling. The combined U.S. dollar and pounds sterling weighted average
interest rate was 7.69 percent. The credit agreement includes covenants which
require the maintenance of certain financial ratios. The Company was in
compliance with these covenants at October 31, 1997. Additionally, under the
most restrictive provisions of the agreement, approximately $26,600,000 of
unrestricted retained earnings is available for future dividend payments or
share purchases.
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ITEM 8. (Continued)
Other
- -----
Debt principal payments due in the five fiscal years after October 31, 1997
are:
(in thousands)
1998............. $ 4,621
1999............. 2,320
2000............. 1,673
2001............. 54,975
2002............. 8,698
Included in debt principal payments for the fiscal year 2001 is $45,855,000
which is currently outstanding under the senior unsecured revolving credit
agreement.
The Company had available unused lines of credit in various countries
totaling approximately $49,800,000 short-term and $79,100,000 long-term at
October 31, 1997. Outstanding bank loans at October 31, 1997 and 1996 had
weighted average interest rates of 5.95 percent and 5.40 percent, respectively.
NOTE C - FOREIGN CURRENCY TRANSLATION
The cumulative effects of foreign currency translation gains and losses are
reflected in the translation adjustments section of Shareholders' Equity.
Foreign currency transaction gains and losses, which include U.S. dollar
translation losses in Brazil, are reflected in income. Foreign currency gains
and losses have (decreased) increased income from continuing operations before
income taxes and extraordinary items as follows:
(in thousands)
1997.............$ (492)
1996............. 266
1995 ............ (330)
-31-
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ITEM 8. (Continued)
NOTE D - STOCK OPTION AND AWARD PLANS
Under the Company's stock option and award plans, approximately 1,528,800
shares of common stock are reserved for issuance to key employees and
non-employee directors at October 31, 1997. Stock options are exercisable at
various dates and generally expire ten years from the date of grant. 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 stock and performance shares of common stock
to key employees. The restricted shares generally vest over a five-year period
and are charged to earnings over the vesting period. There were 46,890; 42,380
and 43,800 restricted shares awarded in 1997, 1996 and 1995, respectively. The
performance shares generally vest over a three-year period based on the
attainment of specified average annual earnings growth and return-on-net-asset
targets. Awards of performance shares totaled 154,950 in 1997, 900 in 1996 and
130,650 in 1995. The weighted-average grant-date fair value of the restricted
and performance share awards was $12.29 for 1997, $19.84 for 1996 and $18.97 for
1995. Charges to income before income taxes for current and future distributions
amounted to $3,117,000 in 1997, $2,183,000 in 1996 and $1,749,000 in 1995.
In January 1997, the Company established a plan which allows non-employee
directors to elect to receive shares of the Company's common stock at a future
date instead of cash otherwise payable for certain director fees. If shares are
elected, the number of shares at market value equal to 120 percent of the fees
otherwise payable are identified for distribution at a future date established
by the Management Evaluation and Compensation Committee of the Board of
Directors. In addition, non-employee directors automatically receive an option
to purchase 2,250 shares upon election to a new three-year term.
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ITEM 8. (Continued)
Information regarding stock options for 1997, 1996 and 1995 is as follows:
1997 1996 1995
-------------------------- -------------------------- ----------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price Shares
---------- -------- ---------- -------- ----------
Options outstanding, beginning of year ....... 1,067,473 $ 6.90 617,051 $ 13.64 623,337
Adjustment ................................... (25,214) -- 591,219 --
Options exercised ............................ (179,056) 5.84 (235,547) 12.18 (86,536)
Options granted .............................. 147,500 4.14 142,000 2.07 123,750
Options expired .............................. 0 0 (750) 5.87 0
Options forfeited ............................ (44,828) 8.36 (46,500) 8.17 (43,500)
---------- -------- ---------- -------- ----------
Options outstanding, end of year ............. 965,875 $ 7.95 1,067,473 $ 6.90 617,051
========== ======== ========== ======== ==========
Option price range at end of year ............ $4.68 to $12.88 $4.68 to $9.76 $9.83 to $21.88
Option price range for exercised shares ...... $5.13 to $8.64 $9.83 to $21.88 $6.50 to $14.83
Options available for grant at end of year ... 562,930 767,760 796,550
Weighted-average fair value of options granted
during the year ........................... $ 4.14 $ 2.07
Options exercisable at end of year ........... 501,234 $ 6.16 485,709 $ 5.59 340,376
During 1996, terms of the outstanding stock option grants were amended to
offset the dilution created by the September 10, 1996 distribution of the common
stock of CUNO to the shareholders of Commercial Intertech common stock. The
amendments, which applied to stock options outstanding as of the distribution
date, included a pro-rata reduction in the exercise price per option and an
increase in the number of shares under option, thereby restoring option holders
to the same economic position which existed prior to the distribution. The
number of options outstanding as of October 31, 1996 increased by 591,219 shares
as a result of this adjustment and no compensation expense was charged to
earnings.
The following table summarizes information about stock options outstanding
as of October 31, 1997:
Options Outstanding Options Exercisable
------------------------------------------ --------------------------
Weighted- Weighted- Weighted
Average Average Average
Range of Number Remaining Exercise Number Exercise
Exercise Prices Outstanding Contractual Life Price Exercisable Price
--------------- ------------------------------------------ --------------------------
$ 4.68 to $ 5.32 155,805 3.87 $ 5.09 155,805 $ 5.09
$ 5.87 246,249 5.83 5.87 246,249 5.87
$ 6.62 to $ 8.42 219,642 8.10 8.37 6,724 6.70
$ 8.48 to $ 8.64 184,912 7.42 8.62 85,732 8.63
$ 9.76 to $ 12.88 159,267 9.05 12.60 6,724 9.76
--------- ---- ------ -------- -------
$ 4.68 to $ 12.88 965,875 6.87 $ 7.95 501,234 $ 6.16
========= ==== ====== ======== =======
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ITEM 8. (Continued)
As permitted under Statement of Financial Accounting Standards No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation," the Company has elected
to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB No. 25"), and related Interpretations, in accounting
for stock-based awards to employees. Under APB No. 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized in
the Company's financial statements for all periods presented. Compensation
expense is recognized for performance shares based upon the current stock fair
value and the number of shares expected to be earned under APB No. 25.
If the Company had elected to follow SFAS 123, the effect on net income
and earnings per share would have been minimal in fiscal 1997 and 1996. Because
the Statement provides for pro forma amounts for option grants after December
15, 1995, the pro forma expense will likely increase in future years as the new
option grants become subject to the pricing model.
1997 1996
---- ----
(in thousands, except per share data)
Net income - as reported.................$ 26,791 $ 17,395
Net income - pro forma................... 26,674 17,285
Net income per share:
Primary:
As reported......................... $ 1.72 $ 1.01
Pro forma........................... 1.73 1.01
Fully diluted:
As reported........................ $ 1.51 $ 0.95
Pro forma.......................... 1.53 0.96
The fair value of each option grant is estimated on the date of grant,
using the Black-Scholes option- pricing model with the following
weighted-average assumptions used for grants in 1997 and 1996:
1997 1996
---- ----
Expected life (years).................... 6.75 6.75
Risk-free interest rate (%).............. 6.00 6.00
Volatility (%)........................... 40.50 40.50
Dividend yield (%)....................... 5.63 5.63
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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;
Minneapolis, Minnesota; and Chanhassen, 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 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:
1997 1996 1995
---- ---- ----
(in thousands)
Defined benefit plans:
Service cost ................. $ 2,560 $ 2,338 $ 1,829
Interest cost ................ 9,026 7,942 7,483
Actual return on plan assets . (34,695) (29,778) (24,410)
Net amortization and deferral 21,071 18,299 13,526
-------- -------- --------
Net pension (income) ......... (2,038) (1,199) (1,572)
Other plans:
Defined contribution plans ... 482 463 388
Multiemployer plan ........... 68 73 70
Foreign plans ................ 444 396 367
Termination benefit .......... 0 1,639 0
-------- -------- --------
Total pension (income) expense $ (1,044) $ 1,372 $ (747)
======== ======== ========
-35-
36
ITEM 8. (Continued)
Assumptions used in the accounting for the defined benefit plans as of
October 31 were:
1997 1996 1995
---- ---- ----
Weighted-average discount rate ............ 7.25% 7.75% 7.25%
Rates of increase in compensation levels .. 4.5% 5.0% 4.5%
Expected long-term rate of return on assets 10.0% 10.0% 10.0%
-36-
37
ITEM 8. (Continued)
The following table sets forth the funded status and amounts recognized in
the Consolidated Balance Sheets at October 31, 1997 and 1996 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 7 1 9 9 6
--------------------------- --------------------------
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 ....... $(101,501) $ (7,344) $ (84,866) $ (6,190)
========= ========= ========= =========
Accumulated benefit obligation .. $(106,467) $ (7,344) $ (88,304) $ (6,194)
========= ========= ========= =========
Projected benefit obligation .... $(116,448) $ (8,306) $ (99,738) $ (6,719)
Market value of plan assets ....... 186,547 3,409 146,732 2,956
--------- --------- --------- ---------
Projected benefit obligation less
than or (in excess of) plan
assets ......................... 70,099 (4,897) 46,994 (3,763)
Unrecognized net (gain) loss ...... (34,669) 1,001 (22,504) 643
Unrecognized prior service cost ... 5,009 1,034 5,309 696
Unrecognized net (asset) obligation (2,331) 567 1,872 657
Additional liability .............. 0 (1,639) 0 (1,471)
--------- --------- --------- ---------
Net pension asset (liability)
recognized in the Consolidated
Balance Sheet .................. $ 38,108 $ (3,934) $ 31,671 $ (3,238)
========= ========= ========= =========
Plan assets at October 31, 1997 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 $3,564,600 at that date.
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.
-37-
38
ITEM 8. (Continued)
Components of net periodic postretirement benefit cost are shown below. Net
periodic cost associated with retiree life insurance benefits amounted to
$190,000 in 1997, $190,000 in 1996 and $269,000 in 1995.
1997 1996 1995
---- ---- ----
(in thousands)
Service cost ........................... $ 434 $ 396 $ 386
Interest cost .......................... 1,456 1,294 1,463
Actual return on plan assets ........... 0 0 0
Amortization of transition obligation .. 0 0 0
Net amortization and deferral .......... (47) (47) (11)
------- ------- -------
Net periodic postretirement benefit cost $ 1,843 $ 1,643 $ 1,838
======= ======= =======
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 $3,481,000 and $3,429,000 as of October 31, 1997 and 1996,
respectively.
October 31,
---------------------
1997 1996
---- ----
(in thousands)
Accumulated postretirement benefit obligations:
Retirees ................................. $ (7,993) $ (7,833)
Fully eligible active plan participants .. (4,119) (3,553)
Other active plan participants ........... (7,433) (5,849)
-------- --------
(19,545) (17,235)
Plan assets at fair value ..................... 0 0
-------- --------
Accumulated postretirement benefit
obligation (in excess of) plan assets ...... (19,545) (17,235)
Unrecognized net (gain) loss .................. 745 (772)
Unrecognized prior service (asset) ............ (423) (471)
Unrecognized transition obligation ............ 0 0
-------- --------
(Accrued) postretirement benefit cost ......... $(19,223) $(18,478)
======== ========
The weighted-average annual assumed rate of increase in the per-capita cost
of covered benefits in the medical plans, or health care cost trend rate, was
9.0 percent for 1997 and 9.5 percent for 1996. The trend rate is assumed to
decrease gradually from 8.0 percent in 1998 to 5.0 percent in the year 2004 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, 1997 by $1,836,000 and the
aggregate of service and interest cost components of net periodic postretirement
benefit cost for 1997 by $210,000. The weighted-average discount rate used in
determining the accumulated postretirement benefit obligation was 7.25 percent
and 7.75 percent at October 31, 1997 and 1996, respectively. The annual assumed
rate of salary increase for retiree life insurance is 4.5 percent and 5.0
percent at October 31, 1997 and October 31, 1996, respectively.
-38-
39
ITEM 8. (Continued)
NOTE F - INCOME TAXES
The components of income from continuing operations before income taxes and
extraordinary items and the provision for income taxes are summarized as
follows:
1997 1996 1995
-------- -------- --------
(in thousands)
Income from continuing operations before
income taxes and extraordinary items
Domestic ............................................ $ 23,295 $ 8,466 $ 20,717
Foreign ............................................. 17,023 15,272 9,662
-------- -------- --------
40,318 23,738 30,379
Provision for income taxes
Current
Domestic
Federal .......................................... 7,021 6,261 6,258
State and local .................................. 604 1,294 374
Foreign ............................................. 6,278 4,242 2,053
-------- -------- --------
13,903 11,797 8,685
Deferred
Domestic
Federal .......................................... 872 (2,687) (699)
State and local .................................. 175 (510) (177)
Foreign ............................................. 221 704 1,267
-------- -------- --------
1,268 (2,493) 391
Benefit of operating loss
carryforwards ....................................... (1,644) (922) (2,979)
-------- -------- --------
13,527 8,382 6,097
Income from continuing operations
before extraordinary items
Domestic ............................................ 14,623 4,108 14,961
Foreign ............................................. 12,168 11,248 9,321
-------- -------- --------
$ 26,791 $ 15,356 $ 24,282
======== ======== ========
A reconciliation of the effective tax rate to the U.S. statutory rate
follows:
1997 1996 1995
---- ---- ----
Statutory U.S. federal income tax rate .. 35.0% 35.0% 35.0%
State and local taxes on income net of
domestic income tax benefit ........ 1.3 2.4 .4
Increase (decrease) in effective rate due
to impact of foreign subsidiaries .. 1.4 (1.7) (.2)
Benefit of operating loss carryforwards . (4.1) (3.9) (9.8)
Repatriation of foreign earnings ........ 2.9 5.1 1.2
Nonrecurring defense costs .............. .0 8.0 .0
Reserve contracts ....................... (1.8) (7.8) (7.2)
All other ............................... (1.1) (1.8) .7
---- ---- ----
Effective income tax rate ............... 33.6% 35.3% 20.1%
==== ==== ====
-39-
40
ITEM 8. (Continued)
Significant components of the Company's deferred income tax liabilities and
assets as of October 31 are as follows:
1997 1996 1995
---- ---- ----
(in thousands)
Deferred income tax liabilities:
Tax over book depreciation ................ $ 9,976 $ 8,512 $ 8,215
Prepaid pension asset ..................... 14,500 12,615 11,555
United Kingdom property sale .............. 1,547 1,400 1,360
Other ..................................... 81 387 383
-------- -------- --------
Total deferred income tax liabilities . 26,104 22,914 21,513
Deferred income tax assets:
Postretirement benefits ................... 7,544 7,248 7,032
Employee benefits ......................... 6,891 6,241 5,404
Net operating loss carryforwards .......... 47,886 54,047 65,037
Inventory valuation ....................... 1,204 1,222 1,504
Product liability ......................... 4,479 4,237 3,484
Other ..................................... 2,993 3,986 1,616
-------- -------- --------
Total deferred income tax assets ...... 70,997 76,981 84,077
Valuation allowance for deferred income tax
assets ................................ 47,886 54,047 65,037
-------- -------- --------
Net deferred income tax assets ........ 23,111 22,934 19,040
-------- -------- --------
Net deferred income tax liabilities (assets) ... $ 2,993 $ (20) $ 2,473
======== ======== ========
The valuation allowance decreased by $6,161,000 in 1997 and $10,990,000 in
1996 and increased by $9,729,000 in 1995. The decrease in fiscal 1997 is a
result of translation into the stronger dollar at October 1997 versus 1996; the
decrease in fiscal 1996 is the result of tax audits on years prior to the
acquisition of ORSTA Hydraulik. At October 31, 1997, the Company also had unused
foreign tax credit carryovers of approximately $3,257,000 of which $314,000 will
expire in 1998, $1,603,000 in 1999, and the balance will expire in the year
2001.
Tax benefits from operating loss carryforwards relate to the ORSTA
Hydraulik operations acquired in 1994 which are available indefinitely.
-40-
41
ITEM 8. (Continued)
NOTE G - QUARTERLY FINANCIAL DATA (unaudited)
Selected quarterly financial data for each quarter in fiscal year 1997 and
1996 is as follows:
1997 First Second Third Fourth Total
- ------------------------------------------------------------------------------------------------------------------
(in thousands, except per-share amounts)
Net sales....................................... $ 116,716 $ 129,892 $ 137,051 $ 142,965 $ 526,624
Gross profit.................................... 28,313 33,524 36,542 40,905 139,284
Net income ..................................... 2,952 5,740 7,701 10,398 26,791
Earnings per share:
Primary...................................... $ 0.17 $ 0.37 $ 0.50 $ 0.68 $ 1.72
Fully diluted................................ 0.17 0.33 0.44 0.59 1.51
Dividends per common share...................... 0.135 0.135 0.135 0.135 0.540
1996 First Second Third Fourth Total
- ------------------------------------------------------------------------------------------------------------------
(in thousands, except per-share amounts)
Net sales....................................... $ 106,962 $ 112,227 $ 121,009 $ 125,011 $ 465,209
Gross profit.................................... 26,853 28,960 32,299 36,104 124,216
Income from continuing operations
before extraordinary items................... 3,402 4,392 3,199 4,363 15,356
Income from discontinued operations............. 1,851 3,251 630 351 6,083
Extraordinary items............................. 0 0 0 (4,044) (4,044)
Net income ..................................... 5,253 7,643 3,829 670 17,395
Earnings per share:
Primary:
Income from continuing operations
before extraordinary items.............. $ 0.18 $ 0.25 $ 0.17 $ 0.28 $ 0.87
Income from discontinued operations........ 0.12 0.21 0.05 0.02 0.40
Extraordinary items ....................... 0.00 0.00 0.00 (0.29) (0.26)
Net income................................. 0.30 0.46 0.22 0.01 1.01
Fully diluted:
Income from continuing operations
before extraordinary items.............. 0.18 0.24 0.17 0.26 0.83
Income from discontinued operations........ 0.11 0.19 0.04 0.02 0.36
Extraordinary items ....................... 0.00 0.00 0.00 (0.25) (0.24)
Net income................................. 0.29 0.43 0.21 0.01 0.95
Dividends per common share ..................... 0.135 0.135 0.135 0.135 0.540
The Company received fees from the transfer of Astron Building Systems
marketing and manufacturing rights to a new Korean licensee. The fees increased
net income by $735,000 or $0.04 per share in the second quarter of 1997.
-41-
42
ITEM 8. (Continued)
The Company incurred charges of $3,637,000 or $.21 per share during the
third quarter of 1996 and $3,452,000 or $.21 per share (net of tax) during the
fourth quarter to successfully defend itself against a hostile takeover attempt
and to further reorganize the remaining core business of the Company following
the September 10, 1996 spin-off of CUNO. The Company also recorded extraordinary
charges of $4,044,000 or $.24 per share in the fourth quarter of 1996 for losses
associated with early retirement of debt.
Gains on the sale of assets were recorded during the 1996 fiscal year,
principally related to assets located in Germany and the United Kingdom. After
tax gains were as follows:
First quarter.............$241,000 or $0.01 per share;
Second quarter............$320,000 or $0.02 per share and
Third quarter.............$906,000 or $0.05 per share of fiscal 1996
Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share does not
necessarily equal the total for the year.
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 below:
1997 1996 1995
---- ---- ----
(in thousands)
Research and development $ 6,984 $ 5,897 $ 5,966
Engineering ............ 12,566 12,885 11,885
------- ------- -------
$19,550 $18,782 $17,851
======= ======= =======
Percent of net sales ... 3.7% 4.0% 3.9%
======= ======= =======
NOTE I - SEGMENT REPORTING
The Company is engaged in the design, manufacture and sale of products in
two segments: the Hydraulic Systems consist of gear pumps and motors, control
valves and telescopic cylinders which are sold primarily to original equipment
manufacturers and to independent distributors. The Building Systems and Metal
Products consist of two units: Metal Stampings which produce custom and standard
metal stampings serving a variety of customers; Building Systems produces single
and multi-story buildings that serve many industries.
-42-
43
ITEM 8. (Continued)
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, and receivables from
discontinued operations.
INDUSTRY SEGMENTS
(in thousands) Building
Systems Nonrecurring
And Defense &
Hydraulic Metal Reorganization
1997 Systems Products Costs Total
- -----------------------------------------------------------------------------------------------------
Net sales .............................. $353,043 $173,581 $ 0 $526,624
Operating income ....................... 26,863 21,905 0 48,768
Interest expense ....................... 10,493
Other income - net ..................... 2,043
Income from continuing operations before
income taxes ........................ 40,318
Identifiable assets .................... 280,610 74,655 0 355,265
Corporate assets ....................... 29,533
Total assets ........................... 384,798
Depreciation and amortization .......... 12,604 3,013 0 15,617
Capital expenditures ................... 9,907 1,792 0 11,699
1996
- -----------------------------------------------------------------------------------------------------
Net sales .............................. $294,337 $170,872 $ 0 $465,209
Operating income ....................... 19,624 15,793 (8,202) 27,215
Interest expense ....................... 7,083
Other income - net ..................... 3,606
Income from continuing operations before
income taxes and extraordinary items 23,738
Identifiable assets .................... 213,790 79,596 0 293,386
Corporate assets ....................... 43,730
Total assets ........................... 337,116
Depreciation and amortization .......... 9,241 2,935 0 12,176
Capital expenditures ................... 13,851 3,861 0 17,712
1995
- -----------------------------------------------------------------------------------------------------
Net sales .............................. $285,679 $173,458 $ 0 $459,137
Operating income ....................... 24,308 10,037 0 34,345
Interest expense ....................... 6,238
Other income - net ..................... 2,272
Income from continuing operations before
income taxes ........................ 30,379
Identifiable assets .................... 194,746 88,569 0 283,315
Corporate assets ....................... 119,364
Total assets ........................... 402,679
Depreciation and amortization .......... 7,932 3,088 0 11,020
Capital expenditures ................... 28,110 3,599 0 31,709
-43-
44
ITEM 8. (Continued)
In the following table, data in the column labeled "Europe" pertains to
subsidiaries operating within the European Economic Community. Data for all
remaining overseas subsidiaries is shown in the column marked "Other."
GEOGRAPHIC AREA
(in thousands)
Eliminations
and
United Corporate
1997 States Europe Other Items Consolidated
- ------------------------------------------------------------------------------------------------------------
Sales to customers.................. $ 291,453 $ 210,212 $ 24,959 $ 526,624
Inter-area sales.................... 7,837 16,088 1,058 $ 24,983
----------------------------------------------------------------------
Total sales......................... 299,290 226,300 26,017 24,983 526,624
Operating income.................... 32,984 10,707 5,077 0 48,768
Identifiable assets................. 160,452 185,252 9,561 0 355,265
1996
- ------------------------------------------------------------------------------------------------------------
Sales to customers.................. $ 252,414 $ 190,919 $ 21,876 $ 465,209
Inter-area sales.................... 6,855 6,826 918 $ 14,599
----------------------------------------------------------------------
Total sales......................... 259,269 197,745 22,794 14,599 465,209
Operating income.................... 28,501 5,503 1,413 8,202 27,215
Identifiable assets................. 150,795 133,661 8,930 0 293,386
1995
- ------------------------------------------------------------------------------------------------------------
Sales to customers.................. $ 254,533 $ 180,335 $ 24,269 $ 459,137
Inter-area sales.................... 9,803 5,465 1,326 $ 16,594
----------------------------------------------------------------------
Total sales......................... 264,336 185,800 25,595 16,594 459,137
Operating income.................... 29,193 3,222 1,930 0 34,345
Identifiable assets................. 126,864 146,318 10,133 0 283,315
Net assets of foreign subsidiaries at October 31, 1997 and 1996 were
$80,205,000 and $85,708,000, respectively, of which net current assets were
$43,973,000 and $50,517,000, also respectively.
NOTE J - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures of financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for cash and cash equivalents approximate fair value.
-44-
45
ITEM 8. (Continued)
Long and short-term debt: The carrying amounts of the Company's borrowings
under its short-term and long-term revolving credit agreements approximate their
fair value. The fair values of the long-term debt are estimated using discounted
cash flow analysis, based on the Company's incremental borrowing rates for
similar types of borrowing arrangements.
Foreign currency exchange contracts: The Company utilizes foreign currency
exchange contracts to minimize the impact of currency fluctuations on
transactions. At October 31, 1997 and 1996, the Company held contracts for
$23,482,000 and $2,100,000, respectively, with fair values of $23,468,000 and
$2,051,000, also respectively. The fair values of these foreign currency
exchange contracts are estimated based on quoted exchange rates at October 31,
1997 and 1996.
The carrying amounts and fair values of the Company's financial instruments
at October 31 are as follows:
1997 1996
--------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(in thousands)
Cash and cash equivalents ...... $ 27,630 $ 27,630 $ 27,552 $ 27,552
Short-term debt ................ 140 140 2,745 2,745
Long-term debt:
Senior unsecured notes ....... $ 60,000 $ 62,201 $ 0 $ 0
Revolving credit and term loan 45,855 45,855 91,000 91,000
Industrial revenue loans ..... 1,020 1,039 1,315 1,340
Other ........................ 9,088 8,912 1,805 1,662
-------- -------- -------- --------
$115,963 $118,007 $ 94,120 $ 94,002
======== ======== ======== ========
From time to time, the Company and its foreign subsidiaries make loans
among affiliates of the consolidated group. Generally, these loans are made when
the Company can borrow at lower interest rate spreads than is available to the
borrowing affiliate in its local market. Foreign currency forward contracts are
used to hedge the lending affiliate's receipt of principal and interest due from
the loans. The forward contracts are an effective hedge against fluctuations in
the value of the foreign currency.
NOTE K - ACQUISITIONS
The acquisitions described below 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.
Ultra Hydraulics Limited
- ------------------------
On November 18, 1996, the Company reported it acquired all of the
outstanding common stock of Ultra Hydraulics Limited ("Ultra") for approximately
$39,400,000 through its wholly-owned subsidiary, Commercial Intertech Limited,
located in the United Kingdom. Ultra Hydraulics is headquartered near
Gloucester, England and employs more than 300 men and women in the United
Kingdom and the United States.
-45-
46
ITEM 8. (Continued)
Ultra serves the mobile equipment market primarily in the United Kingdom,
Europe, the United States and the Far East. Major customers include
manufacturers of material handling, turf care, construction, transportation and
compaction equipment. Ultra's products complement and extend the range of pumps,
motors and valves now offered by Commercial Intertech.
Component Engineering Company
- -----------------------------
Effective June 28, 1996, the Company acquired the assets of Component
Engineering Company, a manufacturer of cartridge-type hydraulic valves based in
Chanhassen, Minnesota.
Hall F&D Head Company
- ---------------------
Effective January 31, 1995, the Company acquired the assets of Hall F&D
Head Company, a producer of medium and large-diameter bump and spun metal
products, located in Saginaw, Texas.
Pro forma financial results for the above acquisitions are not provided
herein because the impact of sales and net earnings on consolidated amounts are
immaterial in each case.
ORSTA Hydraulik
- ---------------
During fiscal 1994, the Company acquired the stock of Sachsenhydraulik
Chemnitz GmbH and its wholly owned subsidiary (Hydraulik Rochlitz GmbH), which
are known as ORSTA Hydraulik. The stock was acquired from the Treuhandanstalt,
the regulatory agency of the Federal Republic of Germany responsible for the
privatization of the former East German state-owned enterprises. Under terms of
the acquisition, the Company tendered no financial consideration but received,
in addition to the net business assets of the two companies, cash contributions
to fund pre-existing capital investment programs and to cover estimated
operating losses over a period of two years (May 1994 through April 1996).
The Company agreed to the following obligations and guarantees with
respect to the operations:
a) to maintain a minimum employment level for a period of three years;
the level stipulated by the Agreement is considered by the Company
to be reasonable and necessary for the intended use of the business,
b) to invest 39.0 million Deutsche marks (approximately U.S. $23.6
million) in capital programs over a period of four years,
c) to continue to operate the businesses for a minimum of five years,
and
d) to refrain from selling or transferring acquired land and buildings
for a period of six years.
The Company received a two-year extension of the operating subsidies
during the first quarter of 1997 from the German government. The Company expects
operating subsidies of approximately $1.9 million in 1998.
-46-
47
ITEM 8. (Continued)
ORSTA Hydraulik income statement for the years ended October 31, 1997,
1996 and 1995 follows:
1997 1996 1995
------------------------------------------
(in thousands)
Sales .............................. $ 34,650 $ 38,181 $ 35,846
Cost of products sold................. 34,956 40,165 41,918
Less: Subsidies...................... (2,702) (3,634) (16,095)
------------------------------------------
Total cost of products sold........... 32,254 36,531 25,823
------------------------------------------
Gross profit.......................... 2,396 1,650 10,023
Selling, administrative and
general expense................... 7,754 9,443 12,234
------------------------------------------
Operating loss........................ $ 5,358 $ 7,793 $ 2,211
==========================================
NOTE L - PREFERRED STOCK
The Company has two separate series of preferred shares:
Series A Participating Preferred Shares
- ---------------------------------------
The Series A Participating Preferred Shares (the Series A) and related
Shareholder Rights Plan (the Plan) are 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.
-47-
48
ITEM 8. (Continued)
Series B ESOP Convertible Preferred Stock
- -----------------------------------------
During 1990, the Company established two 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. During fiscal year 1997, the Company combined the two
ESOPs into one plan. The ESOP currently covers most domestic employees. The
remaining Series B shares are convertible into 2,849,092 shares of common stock
at any time (3.023 shares of common stock for each Series B share), subject to
anti-dilution adjustments. The Series B shares are entitled to one vote per
share and will vote together with the common stock as a single class. The Series
B shares are held by a trustee which votes the allocated shares as directed by
Plan participants. The ESOP trust agreement provides that unallocated shares
held by the trustee are to be voted in the same proportion as are the allocated
shares. Annual dividends are $1.97625 per share. The ESOP has borrowed to
purchase the Series B shares, and the Company guaranteed the repayment of the
remaining outstanding balance of that loan. In 1996, the notes were purchased by
the Company.
The Company paid to the ESOPs $1,911,000 in 1997 ($2,061,000 in 1996
and $2,084,000 in 1995) in preferred stock dividends, and accrued or paid an
additional $1,192,000 ($1,907,000 in 1996 and $1,787,000 in 1995) in Company
match of employees' contributions to the Plan and to cover amounts sufficient to
meet the debt service. These expenses were determined on the shares allocated
method. In turn, the ESOPs made debt service payments of $2,360,000 in 1997
($2,362,000 in 1996 and $2,364,000 in 1995) primarily for interest charges.
The number of ESOP shares outstanding at October 31 are as follows:
1997 1996
---- ----
(in thousands)
Allocated shares .............. 240 283
Committed-to-be-released shares 54 54
Suspense shares ............... 649 703
----- -----
Total ESOP Shares .......... 943 1,040
===== =====
-48-
49
ITEM 8. (Continued)
Report of Ernst & Young LLP, Independent Auditors
Shareholders and Board of Directors
Commercial Intertech Corp.
Youngstown, Ohio
We have audited the accompanying consolidated balance sheets of Commercial
Intertech Corp. and subsidiaries as of October 31, 1997 and 1996, and the
related statements of consolidated income, shareholders' equity and cash flows
for each of the three years in the period ended October 31, 1997. Our audits
also included the financial statement schedule listed in the index at Item
14(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Commercial
Intertech Corp. and subsidiaries at October 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended October 31, 1997, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/Ernst & Young LLP
Cleveland, Ohio
December 8, 1997
-49-
50
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
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 January 21, 1998, which information is
incorporated herein by reference.
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, 62
President and Chief Executive Officer
Steven J. Hewitt Senior Vice President and Chief Financial Officer 48
Bruce C. Wheatley Senior Vice President-Administration 56
Robert A. Calcagni Group Vice President-Building Systems and 57
Metal Products
John Gilchrist Group Vice President-Hydraulic Systems 52
Gilbert M. Manchester Vice President and General Counsel 53
Kenneth E. Stumbaugh Controller 51
None of the executive officers are related and they are each 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.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the information set forth under the caption "Executive
Compensation" and "Section 16(a) Beneficial Ownership Reporting Compliance"
appearing in the Company's definitive Proxy Statement filed January 21, 1998,
which information is incorporated herein by reference.
-50-
51
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Reference is made to the information contained under the captions "Security
Ownership of Management" and "Security Ownership of Certain Beneficial Owners"
in the Company's definitive Proxy Statement filed January 21, 1998, 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
January 21, 1998, which information is incorporated herein by reference.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) Documents filed as part of this report:
(1) The following consolidated financial statements of Commercial
Intertech Corp. and Subsidiaries are included in Item 8:
Page Number
In This Report
--------------
Statements of Consolidated Income - Years ended
October 31, 1997, 1996 and 1995......................................... 20
Consolidated Balance Sheets as of October 31, 1997
and 1996................................................................ 21 and 22
Statements of Consolidated Shareholders' Equity -
Years ended October 31, 1997, 1996 and 1995............................. 23
Statements of Consolidated Cash Flows - Years ended
October 31, 1997, 1996 and 1995......................................... 24
Notes to Consolidated Financial Statements.................................... 25 - 48
Report of Independent Auditors................................................ 49
(2) The following consolidated financial statement schedule of Commercial Intertech Corp. and
Subsidiaries is included in Item 14(d):
Schedule II - Valuation and Qualifying Accounts .............................. S-1
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are
not required under the related instructions or are inapplicable, and
therefore have been omitted.
-51-
52
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K (Continued)
(3) Exhibits
3.1 Articles of Incorporation Filed as of April 17, 1992, incorporated by reference to
Exhibit 3 filed with Registrant's Annual Report on Form 10-K for the year ended
October 31, 1992
3.2 Code of Regulations of Commercial Intertech Corp. as amended through March 26, 1997
(filed herewith)
* 10.18 Employment Agreement - Paul J. Powers dated July 27, 1994, incorporated by
reference to Exhibit 10.18 filed with Registrant's Annual Report on Form 10-K for the
year ended October 31, 1994
* 10.19 Termination and Change of Control Agreement - Paul J. Powers dated October 1,
1996, incorporated by reference to Exhibit 10.19 filed with Registrant's Annual Report
on Form 10-K for the year ended October 31, 1996
* 10.20 Termination and Change of Control Agreement - Bruce C. Wheatley dated October 1,
1996, incorporated by reference to Exhibit 10.20 filed with Registrant's Annual Report
on Form 10-K for the year ended October 31, 1996
* 10.21 Termination and Change of Control Agreement - Steven J. Hewitt dated December 1,
1996, incorporated by reference to Exhibit 10.21 filed with Registrant's Annual Report
on Form 10-K for the year ended October 31, 1996
* 10.22 Termination and Change of Control Agreement - John Gilchrist dated October 1,
1996, incorporated by reference to Exhibit 10.22 filed with Registrant's Annual Report
on Form 10-K for the year ended October 31, 1996
* 10.23 Termination and Change of Control Agreement - Robert A. Calcagni dated October
1, 1996, incorporated by reference to Exhibit 10.23 filed with Registrant's Annual
Report on Form 10-K for the year ended October 31, 1996
* 10.24 Termination and Change of Control Agreement - Gilbert M. Manchester dated
October 1, 1996, incorporated by reference to Exhibit 10.24 filed with Registrant's
Annual Report on Form 10-K for the year ended October 31, 1996
* 10.25 Termination and Change of Control Agreement - Kenneth E. Stumbaugh dated October
1, 1996, incorporated by reference to Exhibit 10.25 filed with Registrant's Annual
Report on Form 10-K for the year ended October 31, 1996
-52-
53
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K (Continued)
10.26 Form of Distribution and Interim Service Agreement by and between CUNO Incorporated
and Commercial Intertech Corp., incorporated by reference to Exhibit 10.4 filed with
the Form 10 of CUNO Incorporated (as filed with Amendment No. 2 thereto dated August
20, 1996) (File No. 0-21109)
10.27 Form of Tax Sharing Agreement by and between CUNO Incorporated and Commercial
Intertech Corp., incorporated by reference to Exhibit 10.5 filed with the Form 10 of
CUNO Incorporated (as filed with Amendment No. 2 thereto dated August 20, 1996) (File
No. 0-21109)
10.28 Form of Employee Benefits and Compensation Allocation Agreement by and between CUNO
Incorporated and Commercial Intertech Corp., incorporated by reference to Exhibit 10.6
filed with the Form 10 of CUNO Incorporated (as filed with Amendment No. 2 thereto
dated August 20, 1996) (File No. 0-21109)
10.29 Credit Agreement by and among Commercial Intertech Corp. and Commercial Intertech
Holdings Limited, as borrowers, and the banks party thereto and Mellon Bank, N.A., as
agent, dated October 31, 1996 (filed herewith)
10.30 Commercial Intertech Corp. Note Purchase Agreement dated as of June 30, 1997 (filed
herewith)
* 10.31 Commercial Shearing, Inc. Stock Option and Award Plan of 1985 incorporated by
reference to Exhibit 4.1 filed with Registration Statement No. 2-62512 on Form S-8
* 10.32 Non-Qualified Stock Purchase Plan of Commercial Intertech Corp. incorporated by
reference to Exhibit 4.1 filed with Registration Statement No. 33-25795 on Form S-8
* 10.33 Commercial Intertech Corp. Stock Option and Award Plan of 1989 incorporated by
reference to Exhibit 4.1 filed with Registration Statement No. 33-29980 on Form S-8
10.34 Commercial Intertech Corp. Retirement Stock Ownership and Savings Plan incorporated by
reference to Exhibit 4.1 filed with Registration Statement No. 33-43907 on Form S-8
* 10.35 Commercial Intertech Corp. Stock Option and Award Plan of 1993 incorporated by
reference to Exhibit 4.1 filed with Registration Statement No. 33-52443 on Form S-8
* 10.36 Commercial Intertech Corp. Stock Option and Award Plan of 1995 incorporated by
reference to Exhibit 4.1 filed with Registration Statement No. 33-61453 on Form S-8
-53-
54
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K (Continued)
* 10.37 Commercial Intertech Corp. Non-Employee Directors' Stock Plan incorporated by
reference to Exhibit 4.1 filed with Registration Statement No. 333-28903 on Form S-8
* 10.38 Commercial Intertech Corp. Non-Employee Directors' Performance Share Plan
incorporated by reference to Exhibit 4.1 filed with Registration Statement No.
333-41551 on Form S-8
* 10.39 Commercial Intertech Corp. Nonqualified Deferred Compensation Plan for Paul J.
Powers, as amended and restated effective January 1, 1996 (filed herewith)
* 10.40 Commercial Intertech Corp. Nonqualified Deferred Compensation Plan for Bruce C.
Wheatley, as amended and restated effective January 1, 1996 (filed herewith)
* 10.41 First Amendment to the Commercial Intertech Corp. Nonqualified Deferred
Compensation Plan for Bruce C. Wheatley, as amended and restated effective as of
January 1, 1996 (filed herewith)
* 10.42 Commercial Intertech Corp. Supplemental Executive Retirement Plan, as amended
and restated effective as of January 1, 1996 (filed herewith)
* 10.43 First Amendment to the Commercial Intertech Supplemental Executive Retirement
Plan, as amended and restated effective as of January 1, 1996 (filed herewith)
11 Statement re: Computation of Per Share Earnings (filed herewith)
21 Subsidiaries of the Registrant (filed herewith)
23 Consent of Independent Auditors (filed herewith)
27 Financial Data Schedule (filed herewith)
* Denotes management contracts and compensatory plans and arrangements
required to be identified by Item 14(a)(3).
(b) No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
(c) The Company hereby files as exhibits to this Form 10-K the exhibits set
forth in Item 14(a)(3) hereof which are not incorporated by reference.
(d) The Company hereby files as financial statement schedules to this Form
10-K the financial statement schedules set forth in Item 14(a)(2) hereof.
-54-
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 28th day of
January, 1998.
COMMERCIAL INTERTECH CORP.
(Registrant)
/s/ Paul J. Powers /s/ Steven J. Hewitt
- ----------------------------------------- ----------------------------------
Paul J. Powers Steven J. Hewitt
Chairman of the Board of Directors, Senior Vice President and
President and Principal Executive Officer Principal Financial Officer
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.
Name Title Date
---- ----- ----
/s/ William J. Bresnahan
- -----------------------------------------
William J. Bresnahan Director January 28, 1998
/s/ Charles B. Cushwa III
- -----------------------------------------
Charles B. Cushwa III Director January 28, 1998
/s/ William W. Cushwa
- -----------------------------------------
William W. Cushwa Director January 28, 1998
/s/ John M. Galvin
- -----------------------------------------
John M. Galvin Director January 28, 1998
/s/ Richard J. Hill
- -----------------------------------------
Richard J. Hill Director January 28, 1998
/s/ Neil D. Humphrey
- -----------------------------------------
Neil D. Humphrey Director January 28, 1998
/s/ William E. Kassling
- -----------------------------------------
William E. Kassling Director January 28, 1998
/s/ Gerald C. McDonough
- -----------------------------------------
Gerald C. McDonough Director January 28, 1998
/s/ C. Edward Midgley
- -----------------------------------------
C. Edward Midgley Director January 28, 1998
/s/ George M. Smart
- -----------------------------------------
George M. Smart Director January 28, 1998
/s/ Don E. Tucker
- -----------------------------------------
Don E. Tucker Director January 28, 1998
-55-
56
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
COMMERCIAL INTERTECH CORP. AND SUBSIDIARIES
YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
(in thousands)
==================================================================================================================================
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------------------------------------------------------------------------------------------------------------------------------
Balance at Balance at
Description Beginning ADDITIONS Deductions End of
of Period Period
---------------------------
Charged to Charged to
Costs and Other
Expenses Accounts-
Describe
==================================================================================================================================
Year ended October 31, 1997
Deducted from asset accounts:
Allowance for doubtful accounts
receivable.................................... $ 1,724 $1,607 $ 105 (B) $ 980 (A) $ 2,456
======== ====== ======== ======== ========
Valuation allowance for deferred $ 1,644 (C)
income tax assets............................. $ 54,047 $ 0 $ 0 $ 4,517 (F) $ 47,886
======== ====== ======== ======== ========
Year ended October 31, 1996
Deducted from asset accounts:
Allowance for doubtful accounts
receivable.................................... $ 2,306 $ 850 $ 0 $ 1,432 (A) $ 1,724
======== ====== ======== ======== ========
Valuation allowance for deferred 10,068 (D)
income tax assets............................. $ 65,037 $ 0 $ 0 $ 922 (C) $ 54,047
======== ====== ======== ======== ========
Year ended October 31, 1995
Deducted from asset accounts:
Allowance for doubtful accounts
receivable.................................... $ 2,016 $ 745 $ 0 $ 455 (A) $ 2,306
======== ====== ======== ======== ========
Valuation allowance for deferred
income tax assets............................. $ 55,308 $ 0 $ 12,708 (E) $ 2,979 (C) $ 65,037
======== ====== ======== ======== ========
<FN>
(A) Uncollectible accounts written off.
(B) Represents beginning balance acquired with Ultra Hydraulics Limited acquisition.
(C) Net operating loss carryforwards utilized or expired.
(D) Decrease due to German Tax Audits
(E) Increase in net operating loss carryforwards for the year.
(F) Primarily represents impact of foreign currency translation.
</FN>
S-1
57
Commercial Intertech Corp.
Index To Exhibits Filed Herewith
Exhibit No. Description
----------- -----------
3.2 Code of Regulations of Commercial Intertech Corp. (As
amended through March 26, 1997)
10.29 Credit Agreement by and among Commercial Intertech Corp.
and Commercial Intertech Holdings Limited, as borrowers,
and the banks party hereto and Mellon Bank, N.A., as
agent, dated October 31, 1996
10.30 Commercial Intertech Corp. Note Purchase Agreement dated
as of June 30, 1997
10.39 Commercial Intertech Corp. Nonqualified Deferred
Compensation Plan for Paul J. Powers, as amended and
restated effective January 1, 1996
10.40 Commercial Intertech Corp. Nonqualified Deferred
Compensation Plan for Bruce C. Wheatley, as amended and
restated effective January 1, 1996
10.41 First Amendment to the Commercial Intertech Corp.
Nonqualified Deferred Compensation Plan for Bruce C.
Wheatley, as amended and restated effective as of January
1, 1996
10.42 Commercial Intertech Corp. Supplemental Executive
Retirement Plan, as amended and restated effective as of
January 1, 1996
10.43 First Amendment to the Commercial Intertech Supplemental
Executive Retirement Plan, as amended and restated
effective as of January 1, 1996
11 Statement re: Computation of Per Share Earnings
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
27 Financial Data Schedule