ITEM 2. PROPERTIES
The principal plants of the Registrant and its subsidiaries by industry segments are located in:
Properties of Registrant and its subsidiaries are suitably constructed and maintained for their respective uses. Details of liens on property are given in Note B - Long-Term Debt of the Notes to Consolidated Financial Statements on pages 31 and 32 .
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
As of the date hereof there is no pending litigation of a material nature, other than ordinary routine litigation incidental to the business, to which the Registrant or any of its subsidiaries is a party or which may affect the income from, title to, or possession of, any of their respective properties.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding executive officers of the Registrant is presented in Part III below and incorporated here by reference.
PART II
ITEM 5.
ITEM 5. COMPANY COMMON STOCK
The Company's common stock is traded on the New York Stock Exchange under the ticker symbol TEC. The following is the range of high and low sales prices and dividends paid per share for fiscal 1993 and 1992 by quarters.
As of October 31, 1993 there were 3,866 shareholders of record of Common Stock.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table summaries information with respect to the operation of the Company.
(in thousands, except per-share data and ratios)
ITEM 6. SELECTED FINANCIAL DATA (continued)
(in thousands, except per-share data and ratios)
Note A - Data for fiscal years 1986-1993 have been computed in accordance with Employers' Accounting for Pensions, SFAS No. 87. Fiscal years 1991-1993 have been computed in accordance with Employers' Accounting for Postretirement Benefits Other Than Pensions, SFAS No. 106. Fiscal years 1993 and 1992 have been computed in accordance with Accounting for Income Taxes, SFAS No. 109. Prior years have not been restated.
Note B - Based on weighted average number of shares outstanding adjusted for all subsequent share dividends.
Note C - Based on actual number of shares outstanding at end of period adjusted for all subsequent share dividends.
Note D - Prior years amounts have been reclassified to conform to current classification.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Consolidated Results
In 1993, income before cumulative effect of changes in accounting of $14.0 million was nearly identical to 1992, but fell short of the $20.1 million achieved in 1991 by 30 percent due to several nonrecurring gains recorded in that year. Earnings held steady versus 1992 as declining income from the Company's operations in Europe was offset by a resurgence in the domestic business segment. The cumulative effect of adopting FASB Statement No. 109, "Accounting for Income Taxes," increased net income in 1992 by $3.4 million while adoption of FASB Statement No. 106," Employers' Accounting for Postretirement Benefits," decreased income in 1991 by $9.0 million. There were no material cumulative effects in income from changes in accounting principles for 1993.
Consolidated revenues of $448.6 million were higher than those in 1992 and 1991 by 3 percent and 4 percent, respectively, after adjusting for the effects of exchange rate differences on foreign sales reported in U.S. dollars. Record sales in the United States of $242.3 million were higher than 1992 and 1991 by 15 percent and 17 percent, respectively, as a result of increased business in the Hydraulic and Metal Products groups. Domestic revenues for the Fluid Purification Group were relatively flat over the three-year period. Exports improved again in 1993 due to increased demand from customers in Canada, Mexico, South America, Pacific Rim countries, and the Middle East. Foreign sales as measured in local currencies were down nearly 8 percent from last year reflecting the deepening recession in Europe and a sluggish economy in Japan. Operating units in Australia and Southeast Asia, on the other hand, enjoyed strong revenue gains for the second consecutive year. Overseas operations accounted for 46 percent of the Company's total revenues in 1993 versus more than 52 percent in the two previous years.
Operating income of $25.4 million was lower than income in 1992 and 1991 by 16 percent and 34 percent, respectively. Significant nonrecurring gains and losses associated with plant consolidations and relocations within an ongoing business unit have been identified separately in the income statement and the industry segment footnote. Most of the nonrecurring charges shown for the three-year period pertain to plant restructuring activities in the Fluid Purification business segment. Operating income in 1993 fell short of the previous year as a result of a severe decline in earnings for the Astron Division in Europe where the deepening economic recession caused a slowdown of new construction in 1993. Operating profits were down from 1991 due to the combined effects of the downturn in the Astron Division and an operating loss sustained by the Fluid Purification group for the second consecutive year. Income and gross margin were also favorably impacted in 1991 by a $3.1 million credit resulting from the liquidation of some LIFO inventory layers valued at costs recorded in earlier years.
ITEM 7. (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
A discussion follows regarding changes in operating results for each business segment.
Industry Segments
- Hydraulic Components
Sales and operating income in the Hydraulic Components segment improved for the second consecutive year, driven by a resurgence in the domestic sector. Revenues increased by $12.1 million or 7 percent over last year while operating income improved by 44 percent. Sales and income were higher for all of the domestic operating units in 1993, reflecting substantially increased demand from distributors and nearly all of the original equipment markets served by this product group, including the transportation, refuse, construction and agricultural equipment industries. Revenues and operating income improved again this year for the Oildyne Division due to increased deliveries of compact pumps first introduced in 1992 for high pressure water sprayer applications. Financial performance deteriorated in the foreign segment during 1993 as results were mixed among the various overseas operating units. The Keelavite Division in the United Kingdom performed well again and contributed significantly to the Hydraulic Product group's total operating income in 1993, but a major segment of the contract to produce power generators for military uses was completed late in the year, leading to the likelihood of diminished sales and income in 1994 for this unit. Worsening economic conditions caused deficits to widen for other Hydraulic operations in Europe and the United Kingdom. Elsewhere, strong demand from the local sugar cane industry and a surge in export activity to the Pacific Rim helped sales and income to improve dramatically for the subsidiary in Australia while a continuation of depressed business conditions and political instability resulted in another year of operating losses in Brazil.
Capital expenditures amounted to $4.4 million for this segment in 1993 versus expenditures of $4.5 million in 1992 and $8.7 million in 1991. Nearly 80 percent of the capital spending in the last two years resulted from the purchase of technologically advanced equipment to enhance production capacity and improve the operating efficiency of the domestic manufacturing facilities. Construction of a new facility in the United Kingdom accounted for approximately 50 percent of total expenditures in 1991.
ITEM 7. (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Incoming orders for the Hydraulic Components segment improved during the fourth quarter of 1993, reflecting a surge in activity among the domestic operating units. Bookings were also higher for most of the foreign units but order rates were not as strong as those seen in the U.S. Excluding the impact of the production contract at Keelavite, the backlog of unfilled orders to start the new fiscal year was 24 percent higher than last year after adjusting for foreign currency differences.
- Metal Products
Revenues in the Metal Products segment declined $16.7 million or 12 percent from the previous year while operating income fell 50 percent. All of the year-over-year decline derives from the Astron Division in Europe where the deepening economic recession caused sales and income to diminish for the second consecutive year. Astron's revenues, as measured in local currencies, were lower than those in 1992 by 15 percent, reflecting the combined effects of decreased volume and implementation of a price discounting strategy to preserve market share and stimulate demand under distressed business conditions. Profit margins were therefore lower in 1993 which, when added to the impact of reduced business volume, caused Astron's operating income to fall 60 percent from the previous year. Sales were higher than a year ago for the metal stampings operations in the U.S., reflecting increased activity in the transportation and storage vessel markets and continued success with the Division's expanding Distribution Center program in the eastern part of the country. Despite the upturn in revenues, however, operating income for the U.S. operations was flat in 1993 due to intense price competition in certain product ranges and a general rise in manufacturing costs.
Capital expenditures for the Metal Products segment amounted to $1.8 million in 1993 versus spending of $2.9 million in each of the previous two years. Two-thirds of the total expenditures in 1993 and 1992 pertain to storage facilities, office automation, training facilities, tooling and upgraded production equipment for the Astron Division while the remainder relates to automation, refurbishment and replacement of production equipment in the U.S. Expansion of Astron's production capacity accounts for nearly 75 percent of the capital expenditures in 1991.
ITEM 7. (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Incoming orders were brisk during the fourth quarter of 1993 for the metal stampings segment in the U.S. and the backlog of unfilled orders to start the new year was up 27 percent from last year. In the Astron Division, however, fourth quarter bookings were weak and the backlog was down 10 percent from a year ago after adjusting for foreign currency differences.
- Fluid Purification Systems
The Fluid Purification segment incurred an operating loss for the second consecutive year on only a modest increase in revenues of 2 percent. The operating deficit narrowed slightly to $2.5 million from a loss of $3.1 million a year ago due to moderate year-over-year improvements for some of the overseas units. The loss is indicative of the prolonged worldwide slump in this segment's core process filtration product line. Demand was weak again in 1993 from customers in the chemical, coatings, automotive and food & beverage industries while the ultrafiltration line, acquired in 1992, incurred a loss for the year of $1.7 million as sales volumes failed to materialize as expected. Profitability was adversely affected by difficulties and disruptions in the consumer division resulting from the relocation of Aqua-Pure and Water Factory operations to a new facility in Connecticut. Operating results for 1993 also include severance and termination charges to downsize certain manufacturing operations in Brazil and Europe. Elsewhere, sales and income improved again for subsidiaries in Australia and Southeast Asia while the Japanese unit rebounded from a poor performance in 1992 due to the favorable effect of a stronger yen on imported materials and the implementation of a stringent program to control other manufacturing costs. Despite the poor showing overall in the last two years, the Fluid Purification group has nonetheless managed to generate a modest cash flow in both periods.
Operating results for each of the three years include nonrecurring charges for various plant restructuring activities in the U.S. These charges pertain to the recently completed effort to consolidate the water filtration operations and to a pending program which will relocate and merge the ultrafiltration product line, presently located in Norwood, Massachusetts, with other process filtration operations in Connecticut.
ITEM 7. (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Capital expenditures amounted to $3.2 million in 1993 versus spending of $6.7 million in 1992 and $8.6 million in 1991. More than 80 percent of the current year spending pertains to investment in the U.S. for emission controls, improvements and fixtures for the new water filtration facility in Connecticut, and miscellaneous production equipment. Included in capital expenditures for 1992 is $4.4 million for the acquisition of land and building in connection with the program to consolidate the water filtration operations. Facilities expansion in Japan and restoration of the manufacturing facilities in Europe destroyed by fire in 1990 accounted for three-fourths of the capital spending in 1991.
Incoming orders in the fourth quarter, while 14 percent higher than those for the same period last year, tended to be somewhat sluggish in Europe and the U.S. versus activity in the third quarter of 1993. The backlog of unfilled orders to start the new year was up 27 percent from last year on a parity-adjusted basis.
Nonoperating Income And Expense
Interest received from investments decreased from $1.4 million in 1992 to $1.0 million in 1993 reflecting a general decline in investment yields and the use of cash during the year to retire some of the outstanding debt. Approximately 80 percent of the total interest expense incurred in 1993 resulted from long-term obligations. Most of the long-term interest expense derives from the issuance last year of $45.0 million in 8.2 percent senior notes as part of a capital restructuring program. Remaining interest expense pertains to long- term debt to fund major construction projects completed in recent years and short-term borrowings to support current operations. Effective interest rates paid by the Company declined between 1991 and 1992 and generally stabilized in the current year.
Foreign currency exchange and translation losses (principally in Brazil) and withholding taxes on repatriated foreign earnings are included in other nonoperating income and expense for the three-year period reported herein. These amounts totaled $1.2 million in 1993, $1.9 million in 1992 and $2.4 million in 1991. Other nonoperating income for 1993 also includes $1.0 million in initial technology license fees derived from a License Agreement entered into with Geoyang Development Co. Ltd. whereby Geoyang was given the rights and technology necessary to design, engineer, manufacture, market and assemble Astron's integrated metal building systems in Korea. Other nonoperating income in 1991 includes a $3.2 million deferred translation gain resulting from the liquidation of an inactive subsidiary in Switzerland and a $2.4 million insurance settlement related to certain assets in Europe destroyed by fire in an earlier year.
ITEM 7. (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Taxes
The consolidated effective tax rate decreased to 32 percent in 1993 primarily as a result of favorable conclusions to a number of open tax issues, including prior years' tax audits in the U.S. and abroad and the settlement of a dispute with one foreign tax authority over deductibility of certain expenses. The effective rate was also reduced by the favorable tax impact of reserve contract benefits and a change in tax law for one overseas subsidiary which lowered the statutory rate on that entity's taxable income. Tax rate reductions are scheduled for adoption in some other foreign countries for the new fiscal year, but the Company's effective rate is expected to remain in excess of the U.S. federal income tax rate due, principally, to higher statutory rates for some overseas subsidiaries, the tax consequences of repatriating foreign earnings, state and local taxes levied on domestic income, and nondeductible expense for goodwill acquired in purchase transactions prior to July 25, 1991.
In August 1993, the U.S. Congress passed the Omnibus Budget Reconciliation Act of 1993 which generally raised the level of U.S. Federal taxes which the Company must pay. The Act increased the top corporate rate from 34 percent to 35 percent effective January 1, 1993 and imposed new deduction limitations on compensation and certain business expenses. The Act also extends the research & development credit through June 1995 and now permits a tax deduction for the amortization of goodwill or going-concern value acquired in a purchase transaction after July 25, 1991. The impact of the new law on deferred tax obligations was negligible. The Act is expected to have no material effect on the Company's operating policies.
Accounting Standards
In 1993, the Company adopted FASB Statement No. 112, "Employers' Accounting for Postemployment Benefits." This new accounting standard requires accrual accounting for workers compensation, disability, health insurance continuation, severance pay and other postemployment benefits provided to former or inactive employees when such benefits are attributable to service rendered by the employee, the obligation vests or accumulates, and payment of the obligation is probable. The effect of adopting SFAS No. 112 was immaterial to the financial statements as the Company was already accounting for such costs on an accrual basis.
ITEM 7. (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
In 1992, the Company adopted FASB Statement No. 109, "Accounting for Income Taxes," which changes the criteria for measuring the provision for income taxes and recognizing deferred tax assets and liabilities. This accounting standard requires application of the liability method wherein deferred taxes are recorded on the basis of enacted tax rates as opposed to use of historical tax rates under the previous tax accounting rules. In adopting SFAS No. 109, the Company elected to immediately recognize the effect in income as a change in accounting principle rather than restate prior years. The cumulative effect of the accounting change to November 1, 1991, which was recorded during the first quarter of 1992, increased net income for the year by $.34 per share ($.31 per share on a fully-diluted basis).
In 1991, the Company adopted FASB Statement No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." The effect of adopting this accounting standard reduced income before cumulative effect of accounting changes by $325,000 ($.03 per share) in 1993, $373,000 ($.04 per share) in 1992, and $396,000 ($.04 per share) in 1991. In adopting this accounting standard, the Company elected to immediately recognize in net income the initial unfunded liability, or transition obligation, as the effect of a change in accounting principle. The after-tax cumulative effect of the accounting change to November 1, 1990 amounted to a charge to net income of $9,015,000 or $.91 per share ($.83 per share on a fully-diluted basis).
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is generally defined as the ability to generate cash, by whatever means available, to satisfy short-and long-term needs of the Company. Cash generated from operating activities totaled $36.9 million in 1993, representing a decrease of $2.8 million or 7 percent from the previous year mainly as a result of reduced earnings for the Astron Division in the Metal Products group. Cash from operations was also lower than 1991 due to the performance of both the Astron Division and the Fluid Purification business segment. The accounting changes associated with SFAS No. 109 in 1992 and SFAS No. 106 in 1991 were noncash in nature and therefore had no effect on cash flow in their respective fiscal periods. Net working capital increased 2 percent to $60.8 million at the end of 1993.
ITEM 7. (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
Cash used in investing activities amounted to $9.7 million in 1993. Capital expenditures totaled $9.4 million for the year versus spending of $14.1 million in 1992 and $20.1 million in 1991 (see Note I). Most of the current year spending pertained to capacity expansion, emission controls, and equipment upgrades for operations in the U.S. Of the total expenditures in 1992, $4.4 million represented the purchase of land and building in connection with the program to consolidate the domestic water filtration operations. The remainder of the capital spending in that year related to purchases of new equipment, product tooling, and office automation. Construction of new facilities in Japan and the United Kingdom accounted for $7.4 million of the total spending in 1991 while another $3.4 million was expended to restore the filtration production facility in Europe which was destroyed by fire in an earlier period. Authorized but unspent capital expenditure programs totaled $8.5 million at fiscal year-end, and the Company intends to consider other capital projects during the coming year. Significant purchases in 1994 will include production equipment necessary to launch new product offerings and expand production capacity in the Hydraulic Products group, new automated equipment to improve production efficiencies in the Metal Stamping and Astron Divisions, equipment upgrades and product line extensions in the Fluid Purification group, acquisition of a manufacturing facility in the U.S. which is presently leased, and investments to reengineer and downsize the Company's information technology capabilities. Other investing activities in 1992 included the acquisition of the assets of Bioken Separations, Inc., a manufacturer of proprietary membrane filtration devices, for $2.2 million. Other sources of cash in 1991 for this category included receipt of $3.3 million in installment proceeds from the earlier sale of property in the United Kingdom and business property insurance proceeds in the amount of $3.1 million.
Cash used in financing activities totaled $19.8 million in 1993. Principal activities included the retirement of debt, payment of reserve contract premiums, and the distribution of dividends to shareholders. Long-term debt was reduced from $84.4 million last year to $78.1 million at the end of the current fiscal period. Dividends totaled $8.9 million in 1993, of which $6.8 million was paid to shareholders of common stock. Financing activities in 1992 included a refinancing program whereby proceeds from issuance of $45.0 million in 8.2 percent senior notes were used to redeem all of the Series C senior increasing rate cumulative convertible preferred shares originally issued in 1990. Principal payments against the senior notes are scheduled to commence in 1997 with the final payment to be made in 2002. The impact of the refinancing has improved cash flow and increased net income available to shareholders of common stock.
ITEM 7. (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
As part of a restructuring program completed in 1990, the Company established two leveraged employee stock ownership plans (the ESOPs) and sold Series B cumulative convertible preferred shares to the plans for approximately $25.0 million. The ESOPs borrowed funds to purchase the Series B shares. During 1993, the ESOPs completed a refinancing program whereby a floating rate loan was replaced with a $23.2 million, 7.08 percent, 17-year term loan privately placed with a group of insurance companies. This program provided permanent financing for the remaining life of the benefit plan. The Company has guaranteed the repayment of any remaining principal as of December 31, 2009. The outstanding loan balance at October 31, 1993 was approximately $23.2 million.
Internal cash flows are expected to be sufficient to provide the capital resources necessary to support operating needs and finance capital expenditure programs in the coming year. During 1992 the Company amended a five-year $75.0 million reducing credit facility negotiated with a group of lending institutions in a prior period to reflect a three-year $35.0 million nonreducing facility. The funds available to the Company under the new agreement may be used for any general corporate purpose. Total unused credit lines of $120.5 million, denominated in both domestic and foreign currencies, were available to the Company at fiscal year-end. Borrowing rates to start the new year are generally lower than the same period a year ago, reflecting prevailing market conditions.
IMPACT OF INFLATION AND CHANGING PRICES
Rates of inflation moderated for the second consecutive year and ranged from 1 to 3 percent for most locales. The continuing worldwide economic recession helped stabilize costs for raw materials and purchased components for most of the Company's operations in 1993 but, for the first time in several years, U.S. steel suppliers raised prices in an attempt to restore profits sacrificed in previous periods. Wages, benefits and operating expenses were higher for the year but generally advanced in line with inflation, with the exception of domestic health care where cost increases exceeded inflation. Where possible, rising manufacturing costs were offset by increased selling prices but, as has been the case in recent years, competitive pressures and depressed market conditions limited the extent to which cost increases were passed along to customers. In general, profit margins diminished in the Metal Products group as the metal stampings operations in the U.S. were unable to recover cost increases in all instances, while the Astron Division found it necessary to discount selling prices in the wake of deteriorating market conditions. The ability to recover cost increases and maintain margins continues to be a major challenge for most operating units, and the Company relies upon cost containment, aggressive purchasing, quality initiatives and cost-saving investments to combat profit erosion and remain competitive.
ITEM 7. (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
BUSINESS OUTLOOK
The consolidated backlog of unfilled orders at the end of the year amounted to $107.1 million which, after adjusting for the production contract at Keelavite and the effects of exchange rate differences on the foreign segments, represents a 17 percent increase from the previous fiscal year-end. Ending backlogs were particularly strong for domestic operations but incoming orders have generally lagged in the Astron Division. Substantially all of the consolidated backlog is deliverable in 1994.
Prospects for the Company's domestic businesses appear bright in 1994 as the momentum which produced strong year-over-year gains in 1993 for this sector has continued into the early stages of the new fiscal year. The Commerce Department's outlook for 1994 predicts significant growth for some of the more important market segments served by our U.S. operations, such as the automotive, truck, transportation, electronics and housing industries. This forecast for improved conditions stems from low interest rates, increased investment in capital equipment, and growing consumer purchases of durable goods. Economic growth, an expanding customer base and new product introductions are therefore expected to yield profit improvements for all three of the Company's U.S. business segments in the new year. Emerging world trade agreements are likely to produce additional benefits which will augment the Company's already successful export program. Mitigating this optimism are uncertainties as to the Fluid Purification group's ability to perform at acceptable levels given the poor business conditions in some of the specific industries served by this unit and the probability that the ultrafiltration product line will incur an operating loss again in 1994 while preparations are made to consolidate this division with other process filtration operations.
In the overseas sector, strong performances are anticipated again in Australia and Southeast Asia where preparations are being made to expand the distribution base in Singapore. Prospects are less certain for operations in Japan where the economy has stagnated, and severe business conditions are anticipated again in Brazil amid that country's continuing political and economic turmoil. In the United Kingdom, Keelavite's contribution to corporate earnings will diminish due to completion of a major portion of the power generator contract in 1993. Conditions remain difficult for the Astron, Hydraulic and Filtration segments in Europe and significant improvements in business levels in these areas are not expected until the latter part of the year.
ITEM 7. (continued)
MANAGEMENT'S DISCUSSION AND ANALYSIS (continued)
The Company continues to restructure manufacturing operations, commit to capital improvements and reduce overheads in an effort to lower operating costs and improve profitability. The competitive advantages which these programs provide and the apparent beginnings of economic recovery in some of our major markets cause us to anticipate moderate improvements in consolidated results for 1994.
See notes to consolidated financial statements.
ITEM 8.
ITEM 8. (continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Commercial Intertech Corp. and Subsidiaries
NOTE A - ACCOUNTING POLICIES
Consolidation: The accounts of the Company and all of its subsidiaries are included in the consolidated financial statements. All intercompany accounts and transactions are eliminated upon consolidation. Certain amounts in the consolidated financial statements prior to October 31, 1993 have been reclassified to conform to the current presentation.
Restructuring charges have been reported in operating income under the caption nonrecurring items.
Inventories: Inventories are stated at the lower of cost or market. Inventories in the United States are primarily valued on the last-in, first-out (LIFO) cost method. The method used for all other inventories is first-in, first-out (FIFO). Approximately 57 percent (54 percent in 1992) of worldwide inventories are accounted for using the LIFO method. Inventories as of October 31 consisted of the following:
If all inventories were priced using the FIFO method, which approximates replacement cost, inventories would have been $14,713,000 higher in 1993 and $14,556,000 higher in 1992.
Intangibles:
Intangible assets at October 31 are summarized as follows:
ITEM 8. (continued)
NOTE A - Accounting Policies (continued)
Goodwill, representing the excess of acquisition cost over the value of assets acquired, is being amortized on the straight-line method generally over 40 years.
Other intangibles, including patents, know-how and trademarks, are carried at their appraised value on the acquisition date less accumulated amortization, which is provided using the straight-line method over 10 to 25 years.
Properties and Depreciation: Property, plant and equipment are recorded at cost. Buildings and equipment are depreciated over their useful lives, principally by use of the straight-line method.
Income Taxes: Effective November 1, 1991, the Company adopted Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for Income Taxes," which changed the criteria for measuring the provision for income taxes and recognizing deferred tax assets and liabilities on the balance sheet. Deferred income tax assets and liabilities principally arise from differences between the tax basis of the asset or liability and its reported amount in the consolidated financial statements. These include inventory valuation differences under uniform capitalization rules, depreciation expense, accrued expenses, postretirement benefit expenses and gain on the sale of property in the United Kingdom. Deferred tax balances are determined by using provisions of the enacted tax laws; the effects of future changes in tax laws or rates are not anticipated. The Company elected not to restate prior years. Prior to the implementation of SFAS No. 109, the Company accounted for income taxes using Accounting Principles Board Opinion No. 11. The cumulative effect, through November 1, 1991, of this change in accounting amounted to $3,391,000, or $.34 per share, and was included in net income as of that date.
Provisions are made for appropriate income taxes on undistributed earnings of foreign subsidiaries which are expected to be remitted to the parent company in the near future. The cumulative amount of unremitted earnings of subsidiaries, which aggregated approximately $54,879,000 at October 31, 1993, is deemed to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state income taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries. Determination of the amount of unrecognized deferred U.S. tax liability is not practicable because of the complexities associated with its hypothetical calculation; however, unrecognized foreign tax credit carryforwards would be available to reduce some portion of the U.S. liability.
ITEM 8. (continued)
NOTE A - Accounting Policies (continued)
Translation of Foreign Currencies: The financial statements of foreign entities are translated in accordance with Financial Accounting Standards Board (FASB) Statement No. 52, except for those entities located in highly inflationary countries. Under this method, revenue and expense accounts are translated at the average exchange rate for the year while all asset and liability accounts are translated into U.S. dollars at the current exchange rate. Resulting translation adjustments are recorded as a separate component of shareholders' equity and do not affect income determination.
Earnings Per-Share Amounts: Income per share of common stock is computed using the weighted-average number of shares outstanding for each year. The preferred stock issuances were determined not to be common stock equivalents for primary earnings per common share. In computing primary earnings per common share, the Series B and C preferred dividends and adjustments reduce income available to common shareholders.
In computing fully diluted earnings per share, dilution is determined by dividing net earnings by the weighted-average number of common shares outstanding during each year after giving effect to dilutive preferred stock assumed converted to common stock. In 1993, the dilutive calculation assumes conversion of Series B preferred stock to common shares and the subsequent adjustment for dividend rates to arrive at income available to common shareholders. In 1992 and 1991, the most dilutive calculation assumes conversion of Series B preferred stock to common shares and the subsequent adjustments to net income for Series C preferred dividends and dividend rate adjustments for Series B preferred to arrive at income available to common shareholders. Alternative conversion of Series C preferred or both Series B and C preferred results in an anti-dilutive effect on earnings per share.
Cash Equivalents: The Company considers all highly liquid investments with a maturity of three months or less, when purchased, to be cash equivalents. The carrying amounts reported in the balance sheet for cash and cash equivalents approximate fair value.
Investment In Reserve Contracts: During the third quarter of fiscal 1992, the Company purchased corporate-owned life insurance contracts on all domestic employees. The contracts are recorded at cash surrender value, net of policy loans, in Other Assets. The net contract expense, including interest expense, is included in Selling, Administrative and General Expenses in the Statements of Consolidated Income. The related interest expense was $3,660,000 in 1993 and $1,124,000 in fiscal 1992 which is reduced for contract benefits and net amortization of contract premiums and cash surrender value.
ITEM 8. (continued)
NOTE A - Accounting Policies (continued)
Revenue Recognition: Revenue is recognized when the earning process is complete and the risks and rewards of ownership have transferred to the customer, which is generally considered to have occurred upon shipment of the finished product.
Postemployment Benefits The Company adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits," as of November 1, 1992. The effect of adoption was immaterial to the financial statements.
During the second quarter of fiscal 1992, the Company successfully completed a refinancing program by issuing $45 million of 8.20 percent senior notes due in 2002, privately placed with a group of insurance companies. The notes have level annual sinking fund payments beginning at the end of 1997. The senior notes include covenants which require the maintenance of certain financial ratios. The Company was in compliance with these covenants at October 31, 1993. The proceeds from the notes were used to redeem the Series C Senior Increasing Rate Cumulative Convertible Preferred shares.
The Company maintains a $35 million nonreducing revolving credit facility with a group of three banks. The funds available under the agreement may be used for any general corporate purposes, including share purchases. The Company pays a facility fee of 0.25 percent per annum on the total commitment. The revolving credit portion of the agreement has interest options determinable by the Company based upon LIBOR, certificate of deposit or prime interest rates. The maximum rate is prime rate, 7/8 percentage point over LIBOR or one percentage point over certificate of deposit rates. The credit agreement also has a competitive bid option feature, which under certain conditions provides lower interest rates. The credit agreement includes covenants which require the maintenance of certain financial ratios. The Company was in compliance with these covenants at October 31, 1993. Additionally, under the most restrictive provisions of the agreement, approximately $11.3 million of unrestricted retained earnings is available for future dividend payments or share purchases. The agreement may be extended for up to two additional years beyond the current expiration date of April 1995 upon the mutual consent of the banks and the Company.
Industrial revenue loans cover two separate domestic expansion programs and have maturities to January 1, 2001. Interest costs currently range from 4.74 to 7.75 percent, and the loans are secured by property and equipment at the Benton, Arkansas and Hicksville, Ohio facilities (net book value at October 31, 1993 - $5,985,000).
ITEM 8. (continued)
NOTE B - Long-Term Debt (continued)
Mortgages relate to construction programs at two facilities. Three loans are collateralized with a Japanese facility and bear interest at 5.7 to 6.2 percent, maturing through the year 2005. These loans are secured with property and equipment at Kita-Ibaragi, Japan (net book value at October 31, 1993 - $6,943,000). The loan for the second program is collateralized by a facility located in Enfield, Connecticut and bears interest at 5.0 percent maturing in the year 2000. The Enfield facility's net book value at October 31, 1993 was $4,013,000.
The Company established the Employee Stock Ownership Plan in February, 1990 financed by a $25 million variable interest rate loan. Loan proceeds were used to purchase the Company's Series B ESOP convertible preferred shares. During the third quarter of fiscal 1993, the Company's ESOP completed a refinancing program by issuing $23.2 million of 7.08 percent senior notes due December 31, 2009 privately placed with a group of insurance companies. The proceeds were used to repay the variable rate loan. Since the debt is guaranteed by the Company, it is included in Long-Term Debt with an offset recorded as Deferred Compensation in Shareholders' Equity. As Company contributions and dividends on the shares held by the ESOP are used to meet interest and principal payments, shares are released for allocation to eligible employees.
Principal payments due in the five years after October 31, 1993 (excluding the ESOP loan guarantee) are:
The Company had available unused lines of credit totaling approximately $85.5 million short-term and $35.0 million long-term at October 31, 1993.
The carrying amounts of the Company's borrowings under its short-term credit agreements approximate their fair value. The fair values of the long-term debt are estimated using discounted cash flow analysis, based on the Company's incremental borrowing rates for similar types of borrowing arrangements.
Fair Values as of October 31, 1993:
ITEM 8. (continued)
NOTE C - FOREIGN CURRENCY TRANSLATION
The cumulative effects of foreign currency translation gains and losses are reflected in the Translation Adjustment section of Shareholders' Equity. Translation adjustments decreased equity by $7,453,000 and $6,405,000 in 1993 and 1991, respectively, and increased equity by $104,000 in 1992. The translation adjustment account was further reduced by $3,213,000 in 1991 due to the liquidation of an inactive subsidiary located in Switzerland. The liquidation, which was completed during the first quarter of 1991, increased income from continuing operations by $3,213,000 ($.31 per share after related taxes) as a result of recognizing deferred translation gains in income. The gain is recorded as Nonoperating Income in the Statements of Consolidated Income.
Foreign currency transaction gains and losses, which include U.S. dollar translation losses in Brazil, are reflected in income. For the three-year period reported herein, foreign currency losses have decreased Income before Income Taxes and Cumulative Effect of Changes in Accounting as follows:
In certain instances, the Company utilizes foreign currency exchange contracts to minimize the impact of currency fluctuations on transactions. At October 31, 1993, the Company and its subsidiaries held contracts for $5,545,000 with a fair value of $5,482,000. The fair value of these foreign currency contracts is estimated based on quoted exchange rates at October 31, 1993.
ITEM 8. (continued)
NOTE D - STOCK OPTIONS AND AWARDS
Under the Company's stock option and award plans, approximately 757,000 shares of common stock are reserved for issuance to key employees as of October 31, 1993. The options are exercisable at various dates and expire ten years from the date of grant. Stock options granted during 1993 totaled 89,400 shares. No options were forfeited during the year. Stock appreciation rights may be granted as part of a stock option or as a separate right to the holders of any options previously granted. The present plan also provides for awards of restricted and performance shares of common stock to key employees. There were no restricted shares awarded in 1993 while a total of 30,600 were awarded in 1992. Awards of performance shares totaled 81,650 in 1993. No performance shares were awarded in 1992. When rights, options or awards are granted, associated compensation expense is accrued from date of grant to the date such options or awards are exercised.
A summary of the activity follows:
Shares available for future grants amounted to approximately 324,000 and 137,000 as of October 31, 1993 and 1992, respectively.
ITEM 8. (continued)
NOTE E - BENEFIT PLANS
The Company and its subsidiaries have a number of noncontributory defined benefit pension plans covering most U.S. employees. Pension benefits for the hourly employees covered by these plans are expressed as a percentage of average earnings over a ten-year period times years of continuous service or as a flat benefit rate times years of continuous service. Benefits for salaried employees are based upon a percentage of the employee's average compensation during the preceding ten years, reduced by 50 percent of the Social Security Retirement Benefit. The Company's funding policy is to contribute amounts to the plans sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, plus such additional amounts as may be deemed appropriate from time to time.
The Company also sponsors defined contribution pension plans for the hourly employees of its operations in Benton, Arkansas; Kings Mountain, North Carolina and Minneapolis, Minnesota. Contributions and expense for these plans are computed at 3 percent of annual employee compensation or at a discretionary rate as determined each year by the Company. Hourly employees at the Orange, California facility are covered by a multiemployer plan which provides benefits in a manner similar to a defined contribution arrangement.
The Company accounts for pension costs under the provisions of FASB Statement No. 87 for contributory defined benefit pension plans covering its employees in Japan and the United Kingdom. Benefits under these plans are generally based on years of service and compensation during the years immediately preceding retirement. Funding is predicated on minimum contributions as required by local laws and regulations plus additional amounts, if any, as may be deemed appropriate. Some employees of other foreign operations also participate in postemployment benefit arrangements not subject to the provisions of FASB Statement No. 87.
A summary of the various components of net periodic pension cost for defined benefit plans and cost information for other plans for the three-year period is shown below:
ITEM 8. (continued)
NOTE E - Benefit Plans (continued)
Assumptions used in the accounting for the defined benefit plans as of October 31 were:
The following table sets forth the funded status and amounts recognized in the Consolidated Balance Sheets at October 31, 1993 and 1992 for the Company's U.S. and foreign defined benefit pension plans. Other foreign pension plans do not determine net assets or the actuarial present value of accumulated benefits as calculated and disclosed herein:
Plan assets at October 31, 1993 are invested in publicly traded and restricted mutual funds, various corporate and government bonds, guaranteed income contracts and listed stocks, including common stock of the Company having a market value of $3,034,480 at that date.
ITEM 8. (continued)
NOTE E - Benefit Plans (continued)
In addition to pension benefits, the Company sponsors other defined benefit postretirement plans in the U.S. which provide medical and life insurance benefits for certain hourly and salaried employees. Benefits are provided on a noncontributory basis for those salaried retirees who have attained the age of 55 with 15 years of service and those hourly retirees who have attained the age of 60 with 15 years of service or 30 years of service with no age restriction, up to 65 years of age. Coverage is also provided for surviving spouses of hourly retirees. Medical plans for both employee groups incorporate deductibles and coinsurance features. The plans are unfunded, and postretirement benefit claims and premiums are paid as incurred. Company-sponsored postretirement benefits are not available to employees of foreign subsidiaries.
In 1991, the Company adopted FASB Statement No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." The effect of adopting the new rules increased net periodic postretirement benefit costs by $524,000 in 1993, $607,000 in 1992 and $644,000 in 1991. Income before cumulative effect of accounting changes was reduced $325,000 ($.03 per share) in 1993, $373,000 ($.04 per share) in 1992 and $396,000 ($.04 per share) in 1991.
In adopting the new accounting standard, the Company elected to immediately recognize in net income the initial unfunded liability, or transition obligation, as the effect of a change in accounting principle. The after-tax cumulative effect of the accounting change to November 1, 1990 amounted to a charge to net income of $9,015,000 or $.91 per share ($.83 per share on a fully diluted basis).
Components of net periodic postretirement benefit cost are shown below. Net periodic cost associated with retiree life insurance benefits amounted to $296,000 in 1993, $288,000 in 1992 and $276,000 in 1991.
ITEM 8. (continued)
NOTE E - Benefit Plans (continued)
The following table shows the aggregated funded status of the benefit plans reconciled with amounts recognized in the Company's Consolidated Balance Sheets. The accrued postretirement cost associated with retiree life insurance benefits amounted to $3,094,000 and $2,947,000 as of October 31, 1993 and 1992, respectively.
The weighted-average annual assumed rate of increase in the per capita cost of covered benefits in the medical plans, or health care cost trend rate, is 12.5 percent for 1993 and 13.5 percent for 1992. The trend rate is assumed to decrease gradually to 5.5 percent in the year 2008 and remain at that level thereafter. Increasing the assumed health care cost trend rate by one percentage point in each year would increase the accumulated postretirement benefit obligation as of October 31, 1993 by $1,425,000 and the aggregate of service and interest cost components of net periodic postretirement benefit cost for 1993 by $143,000. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7.25 percent and 8 percent at October 31, 1993 and 1992, respectively. The annual assumed rate of salary increase for retiree life insurance is 4.5 percent at October 31, 1993 and 5 percent at October 31, 1992.
A reconciliation of the effective tax rate to the U.S. statutory rate for 1993, 1992 and 1991 follows:
The use of accelerated depreciation for income tax purposes resulted in a deferred tax benefit of $358,000 in 1991. SFAS No. 87 pension credits resulted in deferred tax expense of $1,047,000 in 1991.
ITEM 8. (continued)
NOTE F - Income Taxes (continued)
Significant components of the Company's deferred income tax liabilities and assets as of October 31, are as follows:
The net effect of tax rate changes decreased deferred income taxes approximately $240,000 during fiscal 1993. The valuation allowance has increased by $1,640,000 in 1993 and $847,000 in 1992 since adoption of SFAS No. 109 on November 1, 1991. Of the $4,895,000 in operating loss carryforwards, $1,306,000 will expire in 1995, $1,348,000 in 1997 and the balance will be available indefinitely. At October 31, 1993, the Company also had unused foreign tax credit carryovers of approximately $2,462,000 of which $1,263,000 will expire in 1995 and the balance will expire through the year 1998.
ITEM 8. (continued)
NOTE G - QUARTERLY DATA (unaudited)
During the first and second quarters of 1993, the Company received fees from a licensing agreement between the Company's Astron Division in Europe and Geoyang Development Co., Ltd., in Korea. The fees increased net income by $365,000 or $.04 per share in the first quarter and $323,000 or $.03 per share in the second quarter. Favorable conclusions to a number of open tax issues, including prior years' tax audits and settlement of a dispute with one foreign tax authority, increased net income in the third and fourth quarters of 1993 by $1,100,000 or $.11 per share and $952,000 or $.09 per share, respectively.
During the second quarter of 1992, the Company used the proceeds from the Senior Notes to redeem the Series C Senior Increasing Rate Cumulative Convertible Preferred shares. The result of this refinancing activity increased income applicable to common stock by $1,456,000 or $.14 per share ($.07 in both the third and fourth quarters).
Earnings per share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly earnings per share do not necessarily equal the total for the year.
ITEM 8. (continued)
NOTE H - PRODUCT DEVELOPMENT COSTS
The Company maintains ongoing development programs at various facilities to formulate, design and test new products and product alternatives, and to further develop and significantly improve existing products. The Company intends to continue substantial expenditures on research and development in this area. Costs associated with these activities, which the Company expenses as incurred, are shown for the three-year period below:
ITEM 8. (continued)
NOTE I - SEGMENT REPORTING
The Company is engaged in the design, manufacture and sale of products in three segments: Hydraulic Components, Metal Products and Fluid Purification Systems.
Operating income represents total revenue less total operating expenses. Identifiable assets are those assets used in the operations of each business segment or geographic area or which are allocated when used jointly. Corporate assets are principally cash and cash equivalents.
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ITEM 8. (continued)
NOTE I - Segment Reporting (continued)
In the following table, data in the column labeled "Europe" pertains to subsidiaries operating within the European Economic Community. Data for all remaining overseas subsidiaries is shown in the column marked "Other."
ITEM 8. (continued)
NOTE I - Segment Reporting (continued)
Net assets of foreign subsidiaries at October 31, 1993 and 1992 were $89,997,000 and $99,396,000, respectively, of which net current assets were $50,034,000 and $53,219,000, also respectively.
ITEM 8. (continued)
NOTE J - INSURANCE SETTLEMENT
Included in 1991 nonoperating income is an insurance settlement gain of $2,411,000 for a filtration production facility in Calais, France, partially destroyed by fire during the latter half of 1990. The settlement increased net income in the first quarter of 1991 by $1,743,000 or $.17 per share. The Company also received business interruption insurance proceeds during 1991 which were sufficient to offset lost business and the added costs incurred to supply European product requirements from an alternative source within the Corporation. No previous income recognition was determinable until the insurance carrier and the Company had reached agreement as to the settlement amount.
ITEM 8. (continued)
NOTE K - ACQUISITIONS
BIOKEN SEPARATIONS, INC. Effective December 6, 1991, the Company acquired the assets of Bioken Separations, Inc., a manufacturer of proprietary cross- flow membrane devices and systems. The unit operates under the Fluid Purification Systems group and is located in Norwood, Massachusetts. The cost of the acquisition amounted to $2,224,000 and was financed by internally generated funds.
KENART EMC, INC. Effective February 28, 1991, the Company acquired the assets of Kenart EMC, Inc., formerly doing business as Teknar EMC, Inc. Teknar manufactures a line of electronic motion control products. The Company relocated operations to an existing production facility in Minneapolis, Minnesota.
The two acquisitions have been accounted for as purchase transactions, and therefore, the accounts of each have been included in the accompanying financial statements since their respective acquisition date. Pro forma financial results are not provided herein for any of the acquisitions because the impact of sales and net earnings on consolidated amounts are immaterial in each case.
ITEM 8. (continued)
NOTE L - PREFERRED STOCK
During fiscal 1990, the Company designated three separate series of preferred shares as follows:
SERIES A PARTICIPATING PREFERRED SHARES
On November 29, 1989, the Company created a new class of stock, Series A Participating Preferred Shares (the Series A) and adopted a Shareholder Rights Plan (the Plan). The Plan is designed to protect shareholders from the disruptions created by market accumulators and certain abusive takeover practices. The Plan provides for the distribution of one preferred share purchase right as a dividend for each outstanding share of common stock. Each right, when exercisable, entitles shareholders to buy one one-hundredth of a share of the Series A preferred stock for $75. Each one one- hundredth of a share of preferred stock is intended to be the practical economic equivalent of a share of common stock and will have one one-hundredth of a vote on all matters submitted to a vote of shareholders of the Company. Until the rights become exercisable, they have no dilutive effect on earnings per share.
The rights may be exercised, in general, only if a person or group acquires 20 percent or more of the common stock without the prior approval of the Board of Directors of the Company or announces a tender or exchange offer that would result in ownership of 20 percent or more of the common stock. In the event of the acquisition of 20 percent or more of the common stock without the prior approval of the Board, all rights holders except the acquirer may purchase the common stock of the Company having a value of twice the exercise price of the rights. If the Company is acquired in a merger, after the acquisition of 20 percent of the voting power of the Company, rights holders except the acquirer may purchase shares in the acquiring company at a similar discount. The Plan was not adopted in response to any pending takeover proposal, and the rights will expire on November 29, 1999.
SERIES B ESOP CONVERTIBLE PREFERRED STOCK
On February 14, 1990, the Company established two newly-formed leveraged employee stock ownership plans (the ESOPs) and sold to the ESOPs 1,074,107 shares of a newly created cumulative ESOP Convertible Preferred Stock Series B (the Series B) for a total of $24,973,000. The ESOPs currently cover most domestic salaried employees and certain domestic hourly employees. The remaining Series B shares are convertible into 876,368 shares of common stock at any time (0.823 of a share of common stock for each Series B share), subject to anti-dilution adjustments. The Series B shares are entitled to one vote per share and will vote together with the common stock as a single class. The Series B shares are held by a trustee which votes the allocated shares as directed by Plan participants. Unallocated shares held by the trustee are voted in the same proportion as are the allocated shares. Annual dividends are $1.97625 per share. The ESOPs originally borrowed $24,973,000 to purchase the Series B shares, and the Company has guaranteed the repayment of the remaining outstanding balance of that loan.
ITEM 8. (continued)
NOTE L - Preferred Stock (continued)
SERIES B ESOP CONVERTIBLE PREFERRED STOCK (continued)
The Company paid to the ESOP's $2,109,000 in 1993 ($2,118,000 in 1992 and $2,122,000 in 1991) in preferred stock dividends and accrued or paid an additional $1,036,000 in 1993 ($862,000 in 1992 and $1,233,000 in 1991), in Company match of employees' contributions to the Plan and to cover amounts sufficient to meet the debt service. These expenses were determined on the shares allocated method. In turn, the ESOPs made debt service payments of $1,841,000 in 1993, $1,975,000 in 1992 and $2,389,000 in 1991, primarily for interest charges.
SERIES C SENIOR INCREASING RATE CUMULATIVE CONVERTIBLE PREFERRED STOCK
Also on February 14, 1990, the company sold 1,379,310 shares of a new Cumulative Convertible Preferred Stock Series C to General Electric Capital Corporation (GECC) for $40 million. The cumulative convertible preferred shares were subsequently replaced with a Series C Senior Increasing Rate Cumulative Convertible Preferred Stock (Series C) with the shareholders' approval on February 26, 1991. The Series C preferred stock was redeemed during the second quarter of fiscal 1992 with the proceeds received from the issuance of Senior Notes (see Note B). In addition to the face amount of $40 million, the Company was required to pay an early redemption premium of 8 percent ($3.2 million charged directly to retained earnings).
ITEM 8. (continued)
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS
Shareholders and Board of Directors Commercial Intertech Corp. Youngstown, Ohio
We have audited the accompanying consolidated balance sheets of Commercial Intertech Corp. and subsidiaries as of October 31, 1993 and 1992, and the related statements of consolidated income, shareholders' equity and cash flows for each of the three years in the period ended October 31, 1993. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Commercial Intertech Corp. and subsidiaries at October 31, 1993 and 1992, and the consolidated results of their operations and their cash flows for each of the three years in the period ended October 31, 1993, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
As discussed in Note F to the consolidated financial statements, in 1992, the Company changed its method of accounting for income taxes by adopting Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes."
Ernst & Young
Cleveland, Ohio December 10, 1993
ITEM 8. (continued)
REPORT OF MANAGEMENT CONCERNING THE RESPONSIBILITIES FOR FINANCIAL REPORTING AND INTERNAL CONTROL
The financial statements and other related financial information contained in this report are the responsibility of, and prepared by, the management of the Company in conformity with generally accepted accounting principles. The statements present fairly and consistently the Company's financial position and results of operations but necessarily include amounts that are based on management's best estimates and judgement giving due consideration to materiality.
The Company`s financial statements are audited by Ernst & Young, independent auditors who are appointed by the shareholders. Their role is to perform reviews of the Company's controls and audit the financial statements to the extent required by generally accepted auditing standards and to render an independent professional opinion of the results.
The Company relies upon a system of internal accounting controls to ensure that its responsibility for the integrity of the financial operations and financial reporting is maintained. An internal audit staff coordinates its activities with the independent auditors to monitor the effectiveness of the operating policies, procedures and control systems.
An audit committee appointed by the Board of Directors and composed solely of nonmanagement directors meets periodically with management, the independent auditors and the internal auditors to ensure that each is properly discharging its responsibilities. The independent auditors and the internal auditors have free access at all times to this committee without management presence to discuss the results of their audits and their evaluation of the quality of financial controls.
Management also recognizes its responsibility for maintaining a strong ethical climate so that its affairs are conducted according to the highest standards of personal and corporate conduct. Employees and management are required to operate in accordance with a code of conduct which is publicized throughout the Company and its subsidiaries. This code of conduct addresses, among other things, potential conflicts of interest, compliance with all domestic and foreign laws, compliance in respect of financial disclosure and confidentiality of the Company's proprietary information. A systematic program is maintained to assure that these principles are adhered to.
Paul J. Powers Chairman of the Board, President and Chief Executive Officer
Philip N. Winkelstern Senior Vice President and Chief Financial Officer
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
N/A
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Regarding the directors of the Registrant, reference is made to the information set forth under the caption "Election of Directors" in the Company's definitive Proxy Statement filed December 27, 1993 and as amended January 26, 1994, which information is incorporated by reference herein.
The principal executive officers of the Company and their recent business experience are as follows:
None of the officers are related and they are elected from year to year or until their successors are duly elected and qualified.
All of the Executive Officers have been continuously employed by the Company for more than five years except Mr. Thomas Bird and Mr. Bruce Wheatley.
Mr. Bird became an employee of Commercial Intertech Corp. in September of 1989. Before joining Commercial, Mr. Bird's experience includes: President of Channon's office supply stores and President and General Manager of the consumer division of Sherwin Williams.
Mr. Wheatley became an employee of Commercial Intertech Corp. in July of 1992. Before joining Commercial, Mr. Wheatley's experience includes: Senior Vice President of Marketing and Public Affairs of The PIE Mutual Insurance Company and President of Dix & Eaton/Public Relations.
PART III - (continued)
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the information set forth under the caption "Executive Compensation" appearing in the Company's definitive Proxy Statement filed December 27, 1993 and as amended January 26, 1994, which information is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to the information contained under the captions "Security Ownership of Board of Directors and Named Executives" and "Security Ownership of Certain Beneficial Owners" in the Company's definitive Proxy Statement filed December 27, 1993 and as amended January 26, 1994, which information is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the information contained under the caption "Compensation of Directors" in the Company's definitive Proxy Statement filed December 27, 1993 and as amended January 26, 1994, which information is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF THIS REPORT:
(1) Financial Statements:
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K (continued)
(3) Exhibits
3 -- Articles of Incorporation filed as of April 17, 1992 (incorporated by reference to Exhibit I to the Company's Annual Report on Form 10-K for the year ended October 31, 1992)
10 -- Material Contracts
Exhibits (2) Employment Agreement - Paul J. Powers dated February 15, 1988 (4) Employment Agreement - Philip N. Winkelstern dated February 15, 1988 (5) Severance Compensation and Consulting Agreement - Paul J. Powers dated February 15, 1988 (7) Severance Compensation and Consulting Agreement - Philip N. Winkelstern dated February 15, 1988 (10) Severance Compensation Agreement - William G. Welker dated April 26, 1989 (11) Severance Compensation Agreement - Thomas N. Bird dated September 28, 1989 (12) Severance Compensation Agreement - William W. Cushwa dated September 28, 1989 (13) Severance Compensation Agreement - Steven J. Hewitt dated September 28, 1989 (14) Severance Compensation Agreement - Robert A. Calcagni dated September 28, 1989 (15) Severance Compensation Agreement - John Gilchrist dated June 25, 1992
Exhibits 2, 4, 5, 7 and 10-15 for "Material Contracts" are incorporated by reference to exhibits filed with Form 10-K for the following years:
(16) Severance Compensation Agreement - Gilbert M. Manchester dated September 28, 1989 (17) Severance Compensation Agreement - Bruce C. Wheatley dated July 20, 1992
Additional information relating to management contracts and remunerative plans is contained in Note D - Stock Options and Awards of the Notes to Consolidated Financial Statements on page 34.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K (continued)
11 -- Computation of Per Share Earnings
22 -- Subsidiaries of The Registrant
23 -- Consent of Independent Auditors
(B) There were no reports on Form 8-K for the quarter ended October 31, 1993.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
COMMERCIAL INTERTECH CORP.
Dated: January 26, 1994
Steven J. Hewitt Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated above.
SCHEDULE V -- PROPERTY, PLANT AND EQUIPMENT COMMERCIAL INTERTECH CORP. AND SUBSIDIARIES
FOR THE YEARS ENDED OCTOBER 31, 1993, 1992 AND 1991
[FN] (1) Includes Bioken Separations, Inc. purchase of $976,688 in 1992; remainder is translation adjustment resulting from FASB #52.
The annual provisions to depreciation have been computed principally in accordance with the following ranges of rates:
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SCHEDULE VI -- ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT COMMERCIAL INTERTECH CORP. AND SUBSIDIARIES
FOR THE YEARS ENDED OCTOBER 31, 1993, 1992 AND 1991
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SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS COMMERCIAL INTERTECH CORP. AND SUBSIDIARIES
FOR THE YEARS ENDED OCTOBER 31, 1993, 1992 AND 1991
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SCHEDULE IX -- SHORT-TERM BORROWINGS COMMERCIAL INTERTECH CORP. AND SUBSIDIARIES
FOR THE YEARS ENDED OCTOBER 31, 1993, 1992 AND 1991
(1) Consists of bank loans with various dates of maturity. (2) The average amount outstanding during the period was computed by dividing the total of month-end outstanding principal balances by 12. (3) The weighted average interest rate during the period was computed by dividing the actual interest expense by average short-term debt outstanding.
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SCHEDULE X -- SUPPLEMENTARY INCOME STATEMENT INFORMATION COMMERCIAL INTERTECH CORP. AND SUBSIDIARIES
FOR THE YEARS ENDED OCTOBER 31, 1993, 1992 AND 1991
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Amounts for taxes, other than payroll and income taxes, and royalties are not presented as such amounts are less than 1% of net sales.
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