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 cash dividends paid per share for fiscal 1994 and 1993 by quarters. All amounts have been restated for the effects of a three-for-two stock split effective September 1, 1994.
As of October 31, 1994 there were 3,776 shareholders of record of Common Stock.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - ---------------------
Consolidated Results
A strengthening U.S. economy and marked improvements in business conditions for overseas operations other than Europe and the United Kingdom were the contributing factors leading to significantly increased sales and income for the Corporation in 1994. Income from continuing operations amounted to $19.6 million for the year, up 40 percent from the $14.0 million reported in both 1993 and 1992. Included in the results for 1994 are $3.8 million in after-tax charges to consolidate and close certain operations in Europe and the U.S. Similar activities reduced income from continuing operations in 1993 and 1992 by $0.6 million and $0.9 million, respectively. Excluding these charges, income from continuing operations in 1994 was higher than the preceding year by $8.8 million or 60 percent.
Net income for the year of $25.1 million includes a $5.5 million noncash gain from the reversal of tax accruals no longer required in connection with a discontinued operation. In 1992, the cumulative effect of adopting FASB Statement No. 109, "Accounting For Income Taxes," increased net income by $3.4 million.
Record sales of $516.9 million were higher than those in 1993 and 1992 by 15 percent and 17 percent, respectively, after adjusting for the effects of exchange rate differences on foreign sales reported in U.S. dollars. Revenues for the Corporation's U.S. operations advanced for the third consecutive year to an all-time high of $290.4 million, surpassing those in 1993 and 1992 by 20 percent and 38 percent, respectively. Domestic sales were substantially higher in 1994 for the Hydraulic and Metal Product Groups while revenues in the Fluid Purification Group grew at a more moderate rate. Export sales were up 15 percent over last year reflecting increased shipments to nonaffiliated customers in Canada, Europe, Pacific Rim countries, and the Middle East. Domestic operations accounted for 56 percent of the Company's total sales in 1994 versus 54 percent in 1993 and 47 percent in 1992. Revenues for the Company's overseas operations increased by 10 percent over those in 1993 but most of the year-over-year gain was derived from the mid-year acquisition of two hydraulics businesses in Germany known as ORSTA Hydraulik. Sales for other European operations were generally flat in 1994 due to the continuing effects of the economic recession. Business conditions were much stronger for operating units in Australia and Southeast Asia where sales have grown at substantial rates over the three-year period.
ITEM 7. (Continued)
RESULTS OF OPERATIONS (Continued) - ---------------------------------
Operating income of $34.8 million was higher than income in 1993 and 1992 by 37 percent and 16 percent, respectively, reflecting the surge in U.S. business during 1994. Operating income for the domestic segment reached an all-time high at $26.3 million while consolidation charges and lackluster performance in Europe negated strong profit gains by other overseas operations in Australia, Brazil, Southeast Asia and Japan. Operating income for the Hydraulic Components Group increased for the third consecutive year while earnings declined marginally in the Metal Products Group as the Astron Division continued to struggle with the economic recession in Europe. Year-over-year improvements in all of the domestic and foreign operating units enabled the Fluid Purification Group to generate an operating profit in 1994, following the losses sustained in the two previous years.
Included in operating income for 1994 are the financial results of the ORSTA Hydraulik operations acquired by the Company at the beginning of the third quarter. ORSTA, a manufacturer of hydraulic cylinders, piston pumps, gear pumps, and industrial valves, consists of Sachsenhydraulik Chemnitz GmbH ("SHC") and its wholly owned subsidiary Hydraulik Rochlitz GmbH. Shares of the business were acquired on May 3, 1994 from the Treuhandanstalt ("THA"), the regulatory agency of the Federal Republic of Germany responsible for the privatization of former East German state-owned enterprises. Under terms of the Purchase Agreement, Commercial Intertech tendered no financial consideration to acquire the shares of SHC but received, in addition to the net assets of the two companies, cash contributions from the THA to fund pre-existing capital investment programs and cover estimated operating losses over a period of two years. That portion of the cash contribution available to the Corporation for the indemnification of operating losses amounted to approximately $23.6 million (39.0 million Deutsche marks) as of the acquisition date. The loss indemnification was recorded as a deferred credit (negative goodwill) and is being amortized to income through cost of sales in accordance with a predetermined schedule which coincides with projected losses in each fiscal quarter over the two-year period. Operating income for the ORSTA operations, after amortization of the deferred credit, amounted to $140,000 in 1994 on sales of $15.3 million (see Note K for further details). Aside from providing a new range of hydraulic products and access to markets heretofore unavailable to the Corporation, this acquisition offers a number of strategic operating advantages including a large inventory of technologically advanced machine tools, cylinder manufacturing capability in Europe, facilities suitable to accommodate the centralization of all the Company's hydraulic manufacturing operations in Europe, and the production capacity necessary to manufacture two new series of piston and gear pumps now being introduced to the marketplace.
ITEM 7. (Continued)
RESULTS OF OPERATIONS (Continued) - ---------------------------------
Following the acquisition of ORSTA Hydraulik during the latter half of 1994, the Corporation announced strategic plans to close certain Hydraulic facilities in Europe and the United Kingdom, phase out some nonperforming products manufactured at those facilities, and consolidate the remaining core businesses with the newly acquired operations in Germany and other existing operations located in the United Kingdom. Operating results for 1994 include nonrecurring charges of $4.2 million and concurrent inventory writeoffs in cost of sales of $0.7 million recorded in connection with these plans. The amount identified as a nonrecurring charge includes separation costs for 117 employees ($1.6 million), estimated costs to close and vacate the facilities ($1.0 million), the writedown of fixed assets made idle or excess by the decision to combine operations ($0.6 million), and other direct and incremental costs necessary to complete the consolidation effort ($1.0 million). Remaining liabilities at the end of 1994 amount to $1.2 million for employee separations, $0.8 million for plant closures, and $0.8 million for all other consolidation costs. Accomplishment of this program is expected to improve the Corporation's operating results over time through reduced employment costs, more effective utilization of plant and equipment, and lower depreciation expense. The consolidation effort is being executed in phases with two out of three scheduled for completion during the first quarter of fiscal 1995 and the final phase ending in June, 1995. Most of the nonrecurring charges shown for 1993 and 1992 pertain to plant consolidation activities in the Fluid Purification business segment.
Industry Segments
- Hydraulic Components
The Hydraulic Components segment accounted for 46 percent of the Company's total sales and 59 percent of total operating income in 1994. Revenues in this segment increased by $50.7 million or nearly 27 percent over last year, while operating income before nonrecurring items rose 45 percent over 1993 and was more than double the income reported in 1992. All of the gain from the previous year occurred in the domestic sector where the surging U.S. economy, aggressive initiatives to increase share and expand market coverage, and concerted efforts to maximize operating leverage combined to produce record sales and income for all of the domestic hydraulic operating units. Demand in the U.S. has increased substantially over the three-year period from customers in the transportation, construction, refuse, mining, and agricultural equipment industries. Orders have also risen steadily over the period from our distributor network while the Oildyne Division has enjoyed dramatic growth since 1991 from new applications of specialized miniature fluid power components in the marine, automotive and recreational vehicle industries. Financial performance held steady in the foreign segment during 1994 but results were mixed among the
ITEM 7. (Continued)
RESULTS OF OPERATIONS (Continued) - ---------------------------------
individual units. Earnings deteriorated in the United Kingdom where sales and income were greatly reduced for the Keelavite Division following completion in late 1993 of a major portion of a military contract to produce power generators. All of the Corporation's industrial and specialty hydraulic product manufacturing operations in the United Kingdom are now being consolidated at the Keelavite facility to reduce overheads, improve utilization of assets, and employ human resources more effectively. The valve manufacturing unit located in Grantham ended a series of operating losses incurred in recent years by earning a modest profit in 1994. Elsewhere, an expanding local economy and continued growth in export shipments to the Pacific Rim enabled our subsidiary in Australia to post substantial gains in sales and income for the second consecutive year. Finally, the Brazilian operating unit returned to profitability in 1994 as the economy in that country seems to have responded favorably to the mid-year introduction of the Real Plan, a new economic reform program designed to reduce inflation and normalize business conditions.
Capital expenditures amounted to $16.5 million for this segment in 1994 versus expenditures of $4.4 million in 1993 and $4.5 million in 1992. Included in the total for the current year are expenditures of $5.1 million for facility upgrades, machining centers for the manufacture of new products, and building construction at the newly acquired operations in Chemnitz and Rochlitz, Germany. Funding for most of these projects was provided by the THA in accordance with the terms of the Purchase Agreement. The majority of the remaining expenditures in 1994 pertain to equipment purchases in the U.S. to upgrade manufacturing performance, increase production capacity, and outfit specialized machining cells for the manufacture of new products being introduced by the Oildyne Division.
Incoming orders for the Hydraulic Components segment stabilized during the fourth quarter of 1994 but exceeded those for the same period last year by 29 percent. Bookings were higher in both the domestic and foreign sectors. Excluding the impact of the production contract at Keelavite, the backlog of unfilled orders to start the new fiscal year was 59 percent higher than last year after adjusting for foreign currency differences.
ITEM 7. (Continued)
RESULTS OF OPERATIONS (Continued) - ---------------------------------
- Metal Products
The Metal Products segment accounted for 26 percent of the Company's total sales and 30 percent of total operating income in 1994. Revenues for this group were up 4 percent over 1993 but operating income declined marginally as year-over-year improvements in the domestic sector were negated by reduced income overseas. Sales for the Astron Division were flat in 1994 as widespread economic recession continued to depress construction activity in Europe. Profit margins diminished for the second consecutive year due to the combined effects of rising costs and price discounting in certain markets to preserve share and stimulate demand under distressed business conditions. Shrinking margins and reduced business volume caused Astron's operating income to decrease 17 percent from the previous year and to fall short of the near-record earnings achieved in 1992 by 67 percent. Business conditions were much stronger for the metal stampings operations in the U.S. where sales were higher than 1993 and 1992 by 15 percent and 30 percent, respectively. These year-over-year improvements were primarily driven by a surge in demand from the home building industry and the Division's expanding Distribution Center program. Two new Distribution Centers were opened in 1994, bringing the total number now in operation to six. Operating income for the combined Metal Products operations in the U.S. were up 21 percent from the previous year.
Capital expenditures for the Metal Products segment amounted to $2.7 million in 1994 versus spending of $1.8 million in 1993 and $2.9 million in 1992. More than half of the current year expenditures pertain to upgraded production equipment, increased production capacity, and office automation for the Astron Division while the remainder relates to automation, refurbishment and replacement of production equipment in the U.S. General upgrading of Astron's facilities and production capabilities accounts for two-thirds of the capital expenditures in 1993 and 1992.
Incoming orders improved during the fourth quarter of 1994 for both the domestic and foreign operations in this business segment and exceeded combined bookings for the same period last year by 30 percent on a parity-adjusted basis. Bookings were particularly brisk in the Astron Division where business conditions have been considerably stronger during the latter half of 1994. The backlog of unfilled orders to start the new year was up 17 percent from a year ago in the U.S. while the Astron backlog is higher by 45 percent after adjusting for foreign currency differences.
ITEM 7. (Continued)
RESULTS OF OPERATIONS (Continued) - ---------------------------------
- Fluid Purification Systems
The Fluid Purification segment accounted for 28 percent of the Company's total sales and 11 percent of the total operating income in 1994. Sales for the group were up 9 percent following unchanged revenues in 1993. Sales for domestic operations increased by less than 5 percent in 1994 as moderate growth in the Process Division was counteracted by sluggish activity in the Consumer product line. Orders were brisk this year from customers in the pharmaceutical, coatings, electronics and food & beverage industries while demand remained weak from the chemical and industrial processing segments. Sales for the combined overseas operations were up 11 percent from the previous year on a parity-adjusted basis but were particularly strong in Australia, Asia and Brazil where the year-over-year gain averaged 23 percent. Revenue growth was moderate in Europe while sales in Japan failed to advance for the second consecutive year as a result of a stagnant economy. Increased sales volume, healthier profit margins, and the initial benefits of recent restructuring and reorganization efforts enabled the Fluid Purification Group to generate an operating profit for the first time in three years. Results improved over 1993 for all of the operating units in this group, but a substantial portion of the year-over-year gain occurred in the foreign sector reflecting strong revenue growth in the Pacific Rim, improved performance in Brazil paralleling results for the Hydraulics Division in that country, a major turnaround in Europe from increased sales activity and improving manufacturing efficiencies, and a significant improvement in earnings for the Japanese unit due to the favorable effects of a stronger yen on imported material and the maintaining of effective controls over other operating costs.
Capital expenditures amounted to $3.8 million in 1994 versus spending of $3.2 million in 1993 and $6.7 million in 1992. Two- thirds of the current year spending pertains to investment in the U.S. for upgraded computer capabilities, advanced testing equipment and miscellaneous production equipment. Capital expenditures in the overseas units primarily consisted of upgraded computer equipment, environmental controls, and office equipment. Most of the spending in 1993 occurred in the U.S. for emission controls, facility improvements and production equipment. Included in capital expenditures for 1992 is $4.4 million for the acquisition of land and building in connection with a program to consolidate the domestic water filtration operations.
ITEM 7. (Continued)
RESULTS OF OPERATIONS (Continued) - ---------------------------------
Incoming orders in the fourth quarter for the overseas units were 18 percent higher than the same period last year on a parity-adjusted basis, while bookings for the domestic operations were only marginally better. The backlog of unfilled orders to start the new year was about the same as last year for this group.
Nonoperating Income And Expense
Interest received from investments increased from $1.0 million in 1993 to $1.4 million in 1994 due, primarily, to additional interest earned on cash contributions from the THA in connection with the mid-year acquisition of ORSTA Hydraulik. Investment yields recovered during the latter half of the year from a general decline experienced in 1993.
Approximately 80 percent of total interest expense incurred in 1994 resulted from long-term obligations. Most of the long-term interest expense derives from the issuance in 1992 of $45.0 million in 8.2 percent senior notes as part of a capital restructuring program. Remaining interest expense primarily pertains to long-term debt to fund major construction projects completed in recent years, some equipment leases, and short-term borrowings to support current operations. Recorded as a credit to interest expense in 1994 is a $1.3 million reversal of an unrealized interest obligation accrued in prior years. Effective interest rates paid by the Company were relatively unchanged in 1992 and 1993 but rose steadily throughout fiscal 1994.
Foreign currency exchange and translation losses (principally in Brazil) and withholding taxes on repatriated foreign earnings are included in other nonoperating expense for the three-year period reported herein. These amounts totaled $3.1 million in 1994, $1.2 million in 1993 and $1.9 million in 1992.
Other nonoperating expense for 1994 includes a $1.1 million loss incurred on the fourth quarter sale of the Fluid Purification Group's ultrafiltration product line located in the U.S. The disposal of this unprofitable business will improve the operating results of the Fluid Purification Group in future years.
Included in nonoperating income for 1994 and 1993 are $0.5 million and $1.0 million, respectively, in initial technology license fees derived from a license agreement entered into with Geoyang Development Co. Ltd. in 1993. Under terms of the agreement, Geoyang obtained the rights and technology necessary to design, engineer, manufacture, market and assemble Astron's integrated metal building systems in Korea. Commercial Intertech will also receive royalties and fees on buildings manufactured and sold by Geoyang in future periods.
ITEM 7. (Continued)
RESULTS OF OPERATIONS (Continued) - ---------------------------------
Taxes
The consolidated effective tax rate decreased to 29 percent in the current year due, principally, to the utilization of tax loss carryforwards acquired with the ORSTA business to shelter 1994 earnings of the company's other German operations, including those of an Astron subsidiary. Remaining ORSTA net operating losses of approximately $123.0 million, which may be carried forward indefinitely, are expected to provide tax relief on income earned by all operations in Germany for a number of years. The effective rate for 1994 was also reduced by the favorable tax impact of reserve contracts and tax law changes which lowered the statutory rate for two overseas subsidiaries. Partially offsetting these benefits were higher tax rates for some of the overseas operations, 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.
The consolidated tax rate in 1993 was 32 percent as a result of favorable conclusions to a number of open tax issues and the settlement of a dispute with one foreign tax authority over deductibility of certain expenses.
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 extended the research and development credit through June 1995 and made provision for tax deductions on amortized goodwill or going-concern value acquired in a purchase transaction after July 25, 1991. The Act has had 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)
RESULTS OF OPERATIONS (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 $.23 per share ($.21 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 the short-and-long- term needs of the Company. With respect to cash flow in 1994, the balance of cash and cash equivalents increased from $25.1 million at the end of 1993 to a total of $52.7 million at the end of the current period. A significant portion of this change is attributable to the ORSTA acquisition wherein Commercial Intertech received cash from the THA and other German government agencies to cover operating losses and fund pre- existing capital expenditure programs of the Chemnitz and Rochlitz subsidiaries. Contributions available to the Company in the form of cash deposits, scheduled installment payments, and investment grants and subsidies amounted to $43.0 million as of the May 3rd acquisition date (see Note K). Of this total, payment was received in the amount of $30.0 million during 1994, including $11.1 million in cash deposits acquired as of the purchase date. Most of the remaining contributions due of $13.0 million will be received in 1995. Under terms of the Purchase Agreement, the Company agreed to maintain certain employment levels for a period of three years, invest approximately $23.6 million in capital programs over a period of four years (most of which are funded by the cash contributions received), and continue to operate the business for a minimum of five years. Contributions received in connection with the purchase are expected to be sufficient to satisfy these requirements and cover operating needs during the indemnification period. During the period since the acquisition, ORSTA has consumed approximately $12.0 million in cash for operating requirements and expended $5.1 million for capital programs.
ITEM 7. (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued) - -------------------------------------------
Cash generated from Commercial Intertech's total operating activities amounted to $32.4 million in 1994, representing a decrease of $4.5 million or 12 percent from the previous year. Higher tax payments and cash requirements for the ORSTA operations at Chemnitz and Rochlitz were the principal factors in the year-over-year decline. Income from discontinued operations of $5.5 million in 1994 and the $3.4 million cumulative effect from adopting SFAS No. 109 in 1992 were both noncash in nature and therefore had no effect on cash flow in their respective fiscal periods.
Investing activities generated a positive cash flow of $7.4 million in 1994 reflecting the $30.0 million contribution received in connection with the ORSTA acquisition. Capital expenditures totaled $23.1 million for the year versus spending of $9.4 million in 1993 and $14.1 million in 1992 (see Note I). More than 60 percent of the current year spending pertained to expansion of production capacity, equipment upgrades to improve manufacturing performance, machine tools for the manufacture of new product introductions, acquisition of a manufacturing facility which had previously been leased, and investment in advanced computer systems for operations in the U.S. Construction of a new manufacturing facility, machining centers for the manufacture of an expanded product line, and general operating improvements for the ORSTA units accounted for most of the capital spending in the overseas segment during 1994. Other major projects included additional production equipment for the Astron Division and upgraded computer capabilities for several of the foreign subsidiaries. Capacity expansion, emission controls and office automation in the U.S. accounted for the majority of capital expenditures in the two preceding years. Expenditures for 1992 also include $4.4 million to purchase land and building in connection with the program to consolidate the domestic water filtration operations. Authorized but unspent capital expenditure programs totaled $35.7 million at fiscal year-end, of which $16.6 million pertains to new facility construction and other funded capital investment programs at ORSTA. Other significant projects authorized for 1995 include construction of a new cylinder manufacturing facility in the U.S.; production equipment necessary to launch new product offerings and expand production capacity in the Hydraulics Product Group; new equipment and manufacturing systems to improve production efficiencies and increase capacity for the Metal Stampings and Astron Divisions; upgraded production capabilities and installation of emission control devices in the Fluid Purification Group.
ITEM 7. (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued) - -------------------------------------------
Cash used in financing activities totaled $16.2 million in 1994. Principal activities included the retirement of debt, payment of reserve contract premiums, and the distribution of dividends to shareholders. Dividends totaled $9.1 million in 1994, of which $7.2 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.
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, 1994 was approximately $22.5 million.
Internal cash flows, supplemented by payments received from the THA, 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 has a $35.0 million nonreducing credit facility available from a group of lending institutions which expires in 1997. The funds available to the Company under this agreement may be used for any general corporate purpose. Including this facility, total unused credit lines of $128.2 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 higher than the same period a year ago, reflecting prevailing market conditions.
ITEM 7. (Continued)
IMPACT OF INFLATION AND CHANGING PRICES - ---------------------------------------
Rates of inflation held steady versus the previous year, despite surging economies in some sectors (notably the U.S.), and ranged from 1 to 3 percent for most locales. 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 1994. Modest price increases were insufficient to cover rising costs for wages, benefits, raw materials, purchased components and other manufacturing costs during the year. Consequently, the Corporation relied upon volumetric efficiencies, productivity improvements and cost-saving measures to offset the shortfall in pricing and successfully maintain or improve profit margins in most business units. Margins were lower, however, for the Astron Division where weak business conditions have made price discounting necessary in certain markets over the past two years.
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 $154.3 million at the end of the year which, after adjusting for the effects of exchange rate differences on the foreign segments, represents a 36 percent increase over the previous fiscal year- end. Ending backlogs were particularly strong for domestic operations, up 41 percent from last year. Incoming orders have been less robust for most of the overseas units, but steady growth in bookings over the latter half of 1994 enabled the Astron Division to finish the period with an ending backlog which was 45 percent higher than a year ago. Substantially all of the consolidated backlog is deliverable in 1995.
Strong business conditions to start the new fiscal year and continued evidence of upward momentum in the U.S. economy are portents of bright prospects for the Company's domestic operations in 1995. Recent economic reports suggest that business is still growing in some of the major markets served by our U.S. operations, such as the electronics, motor vehicle, transportation, construction and farm equipment industries, as manufacturers invest in capital equipment to improve productivity and expand capacity in response to increasing demand. These favorable indications notwithstanding, economists generally predict that interest rate increases implemented by the U.S.
ITEM 7. (Continued)
BUSINESS OUTLOOK (Continued) - ----------------------------
Federal Reserve will eventually cause the economy to grow at a slower pace during the coming year, particularly in the interest- sensitive consumer segments such as the housing and durable goods industries. Profit improvements are nevertheless expected for all three of our U.S. product groups in 1995 as the Company intends to implement marketing strategies which will expand the customer base and increase share, invest in capital equipment to increase production capacity and improve manufacturing performance, introduce new product offerings, and continue to pursue business acquisitions which will complement existing product lines and allow access to new market segments. The disposal of an unprofitable product line late in 1994 will further enhance the earnings potential of the Fluid Purification Group in the coming year.
Conditions are less certain in the overseas sector where economic revival has been somewhat uneven in the important European markets and hesitant, at best, in Japan. Recent trends indicate that difficult business conditions prevail in some areas of Europe, notably France, but that economies are showing signs of sustained growth in Germany and the United Kingdom. Results are expected to improve in this sector during 1995 as the Company takes advantage of more favorable economic conditions, continues to penetrate markets in the former Eastern Bloc, and begins to realize benefits from recent consolidation activities designed to lower operating costs. The ORSTA operations are expected to have little impact on the Company's operating income during an ongoing period of reorganization and transition in 1995. Elsewhere, the outlook is excellent for continued economic growth in Australia and Southeast Asia where strong performances are anticipated again for our Hydraulic and Fluid Purification operations located in that region. Year-over-year improvements are also likely for operations in Brazil, pending continued success of the Real Plan in keeping inflation in check and stimulating business growth.
The Company continues to invest in capital improvements, identify and implement strategic initiatives, and reduce overheads 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 the rapidly recovering world economies cause us to anticipate strong consolidated results again for 1995.
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 for prior years 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 56 percent (57 percent in 1993) 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 $15,510,000 higher in 1994 and $14,713,000 higher in 1993.
Intangibles:
Intangible assets at October 31 are summarized as follows:
ITEM 8. (Continued)
NOTE A - ACCOUNTING POLICIES (Continued)
Excess cost over the fair value of net assets acquired (or goodwill) generally is amortized on a straight-line basis over 40 years. The carrying value of goodwill is reviewed in those instances where the facts and circumstances suggest that it may be impaired. If this review indicates that goodwill will not be recovered based upon the undiscounted cash flows of the entity acquired over the remaining amortization period, the Company's carrying value of the goodwill is reduced by the estimated shortfall of cash flows.
Other intangibles, including patents, know-how and trademarks, are carried at their appraised value on the acquisition date less accumulated amortization, which is provided using the straight-line method over 10 to 25 years.
Deferred credit represents negative goodwill from an acquisition (see Note K).
Properties and Depreciation: Property, plant and equipment are recorded at cost. Buildings and equipment are depreciated over their useful lives, principally by use of the straight-line method.
Income Taxes: 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, net operating loss carryforwards and a gain on the sale of property in the United Kingdom. Deferred tax balances are determined by using provisions of the enacted tax laws; the effects of future changes in tax laws or rates are not anticipated. 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 $.23 per share, and was included in net income as of that date.
ITEM 8. (Continued)
NOTE A - ACCOUNTING POLICIES (Continued)
Provisions are made for appropriate income taxes on undistributed earnings of foreign subsidiaries which are expected to be remitted to the parent company in the near future. The cumulative amount of unremitted earnings of subsidiaries, which aggregated approximately $57,930,000 at October 31, 1994, is deemed to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state income taxes has been provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries. Determination of the amount of unrecognized deferred U.S. tax liability is not practicable because of the complexities associated with its hypothetical calculation; however, unrecognized foreign tax credit carryforwards would be available to reduce some portion of the U.S. liability.
Translation of Foreign Currencies: The financial statements of foreign entities are translated in accordance with Financial Accounting Standards Board (FASB) Statement No. 52, except for those entities located in highly inflationary countries. Under this method, revenue and expense accounts are translated at the average exchange rate for the year while all assets and liability accounts are translated into U.S. dollars at the current exchange rate. Resulting translation adjustments are recorded as a separate component of shareholders' equity and do not affect income determination.
Earnings Per-Share Amounts: On July 27, 1994, the Company's Board of Directors approved a three-for two split of the Company's common stock in the form of a 50% share dividend for shareholders of record as of September 1, 1994 (1994 share dividend). The par value of each share was not changed from $1. Accordingly, all per share and stock option data have been restated to reflect the split. In connection with the split, common stock was credited and capital surplus was charged for the aggregate par value of the shares that were issued.
Income per share of common stock is computed using the weighted-average number of shares outstanding for each year after giving retroactive effect to the 1994 share dividend. The preferred stock issuances were determined not to be common stock equivalents for primary earnings per common share. In computing primary earnings per common share, the Series B and C preferred dividends and adjustments reduce income available to common shareholders.
ITEM 8. (Continued)
NOTE A - ACCOUNTING POLICIES (Continued)
In computing fully diluted earnings per share, dilution is determined by dividing net earnings by the weighted average number of common shares outstanding during each year adjusted for the 1994 share dividend after giving effect to dilutive preferred stock assumed converted to common stock. In 1994 and 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, 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 in 1992 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.
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 $6,320,000 in 1994, $3,660,000 in 1993 and $1,124,000 in 1992 which in each year is reduced for contract benefits and net amortization of contract premiums and cash surrender value.
Revenue Recognition: Revenue is recognized when the earning process is complete and the risks and rewards of ownership have transferred to the customer, which is generally considered to have occurred upon shipment of the finished product.
ITEM 8. (Continued)
The Company has outstanding $45 million of 8.20 percent senior notes due in 2002, privately placed with a group of insurance companies. The notes have level annual sinking fund payments beginning 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, 1994.
The Company maintains a $35 million nonreducing revolving credit facility with a group of three banks. There were no borrowings outstanding from this facility at October 31, 1994 or 1993. 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, 1994. Additionally, under the most restrictive provisions of the agreement, approximately $17.6 million of unrestricted retained earnings is available for future dividend payments or share purchases. During 1994 the agreement was extended two years and will expire April 1997.
ITEM 8. (Continued)
NOTE B - DEBT (Continued)
Industrial revenue loans cover two separate domestic expansion programs and have maturities to January 1, 2001. Interest costs currently range from 6.05 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, 1994 - $5,811,000).
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, 1994 - $7,101,000). 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, 1994 was $3,991,000.
The Company established the Employee Stock Ownership Plan (ESOP) in February, 1990. The ESOP is presently financed by 7.08 percent senior notes due December 31, 2009 privately placed with a group of insurance companies. Since the debt is guaranteed by the Company, it is included in Long-Term Debt with an offset recorded as Deferred Compensation in Shareholders' Equity. As Company contributions and dividends on the shares held by the ESOP are used to meet interest and principal payments, shares are released for allocation to eligible employees.
The Company had available unused lines of credit in various countries totaling approximately $93.2 million short-term and $35.0 million long-term at October 31, 1994. Outstanding bank loans at October 31, 1994 and 1993 had weighted average interest rates of 6.1 percent and 5.7 percent, respectively.
ITEM 8. (Continued)
NOTE C - FOREIGN CURRENCY TRANSLATION
The cumulative effects of foreign currency translation gains and losses are reflected in the Translation Adjustment section of Shareholders' Equity. Translation adjustments increased equity by $11,277,000 and $104,000 in 1994 and 1992, respectively, and decreased equity by $7,453,000 in 1993.
ITEM 8. (Continued)
NOTE D - STOCK OPTIONS AND AWARDS
Under the Company's stock option and award plans, approximately 924,000 shares of common stock are reserved for issuance to key employees as of October 31, 1994. The options are exercisable at various dates and expire ten years from the date of grant. Stock options granted during 1994 totaled 138,375 shares. A total of 23,250 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 93,150 restricted shares awarded in 1994 and no restricted shares awarded in 1993. Awards of performance shares totaled 1,500 in 1994 and 122,475 in 1993. 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.
Shares available for future grants amounted to approximately 300,000 and 486,000 as of October 31, 1994 and 1993, respectively.
All data presented herein has been restated for the effects of a three-for-two stock split of the Company's common stock which was approved on July 27, 1994.
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.
ITEM 8. (Continued)
NOTE E - BENEFIT PLANS (Continued)
Plan assets at October 31, 1994 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 $4,236,500 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.
ITEM 8. (Continued)
NOTE E - BENEFIT PLANS (Continued)
The weighted-average annual assumed rate of increase in the per capita cost of covered benefits in the medical plans, or health care cost trend rate, is 12.0 percent for 1994 and 12.5 percent for 1993. The trend rate is assumed to decrease gradually to 6.25 percent in the year 2007 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, 1994 by $1,659,400 and the aggregate of service and interest cost components of net periodic postretirement benefit cost for 1994 by $262,000. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 8.5 percent and 7.25 percent at October 31, 1994 and 1993, respectively. The annual assumed rate of salary increase for retiree life insurance is 4.5 percent at October 31, 1994 and October 31, 1993.
ITEM 8. (Continued)
ITEM 8. (Continued)
NOTE F - INCOME TAXES (Continued)
The net effect of tax rate changes decreased deferred income taxes approximately $240,000 during fiscal 1993. The valuation allowance has increased by $54,377,000 in 1994, $1,640,000 in 1993 and $847,000 in 1992 since adoption of SFAS No. 109 on November 1, 1991. At October 31, 1994, the Company also had unused foreign tax credit carryovers of approximately $3,697,000 of which $1,263,000 will expire in 1995, $249,000 in 1997, $721,000 in 1998 and the balance will expire in the year 1999.
Of the $58,587,000 in tax benefits from operating loss carryforwards, $55,308,000 relates to the ORSTA Hydraulik operations acquired in 1994 which are available indefinitely. The balance of the loss carryforward expires as follows; $1,579,000 in 1997, $634,000 in 1998 and the balance available indefinitely.
The Company received fees from a licensing agreement between the Company's Astron Division in Europe and Geoyang Development Co., Ltd., in Korea. The fees increased net income by $365,000 or $.02 per share in the first quarters of 1994 and 1993, and by $323,000 or $.02 per share in the second quarter of 1993.
Effective with the third quarter of 1994, financial results include the operations of ORSTA Hydraulik acquired by the Company on May 3, 1994 (see Note K). Third and fourth quarter results also include charges related to the closure and consolidation of certain previously existing company facilities in Europe and the U.S. These charges decreased net income by $2,515,000 or $.17 per share in the third quarter and $1,275,000 or $.08 per share in the fourth quarter. Income from discontinued operations in the third quarter of 1994 of $5,462,000 represents the elimination of income tax accruals no longer required that relate to a business written off in 1989 which was treated as a discontinued operation.
Fiscal 1993 was impacted by favorable conclusions to a number of open tax issues, including prior years' tax audits and settlement of a dispute with one foreign tax authority, which increased net income in the third and fourth quarters of 1993 by $1,100,000 or $.07 per share and $952,000 or $.06 per share, respectively.
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
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.
ITEM 8. (Continued)
NOTE I - SEGMENT REPORTING (Continued)
ITEM 8. (Continued)
NOTE I - SEGMENT REPORTING (Continued)
Net assets of foreign subsidiaries at October 31, 1994 and 1993 were $108,852,000 and $89,997,000, respectively, of which net current assets were $80,253,000, and $50,034,000, also respectively.
ITEM 8. (Continued)
NOTE J - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its fair value disclosures of financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance sheet for cash and cash equivalents approximate fair value.
Long and short-term debt: The carrying amounts of the Company's borrowings under its short-term credit agreements approximate their fair value. The fair values of the long-term debt are estimated using discounted cash flow analysis, based on the Company's incremental borrowing rates for similar types of borrowing arrangements.
Foreign currency exchange contracts: The Company utilizes foreign currency exchange contracts to minimize the impact of currency fluctuations on transactions. At October 31, 1994, the Company and its subsidiaries held contracts for $5,481,000 with a fair value of $5,894,000. The fair values of these foreign currency exchange contracts are estimated based on quoted exchange rates at October 31, 1994.
From time-to-time the Company makes loans to its foreign subsidiaries denominated in the subsidiaries' functional currencies. Generally, these loans are made when the Company can borrow at lower interest rate spreads than are available to the subsidiary in its local market. Foreign currency forward contracts are used to hedge the Company's receipt of principal and interest due from the loans. The forward contracts are an effective hedge against fluctuations in the value of the foreign currency. Therefore, the contracts have no income statement impact.
ITEM 8. (Continued)
NOTE K - ACQUISITIONS
Effective May 3, 1994, (the "acquisition date") the Company acquired the stock of Sachsenhydraulik Chemnitz GmbH ("SHC") and its wholly owned subsidiary (Hydraulik Rochlitz GmbH), which are known as ORSTA Hydraulik. ORSTA is a manufacturer of hydraulic cylinders, piston and gear pumps and industrial valves. The stock was acquired from the Treuhandanstalt, the regulatory agency of the Federal Republic of Germany responsible for the privatization of the former East German state-owned enterprises. The acquisition has been accounted for as a purchase transaction, therefore, the accounts are included in the accompanying financial statements since the acquisition date. Pro forma financial results are not provided herein since the companies acquired operated in a different environment under the Treuhandanstalt control.
Under terms of the Agreement, the Company tendered no financial consideration to acquire the stock of SHC and its wholly owned subsidiary but received, in addition to the net business assets of the two companies, cash contributions of 59.0 million Deutsche marks (approximately U.S. $36.0 million) to fund pre-existing capital investment programs and to cover estimated operating losses over a period of two years. This additional consideration was negotiated with the Treuhandanstalt based on the financial position of the acquired companies as of January 1, 1994 (the "measurement date"). Cash contributions available to the Company on the acquisition date were adjusted for funds consumed by the operations during the interim period between the measurement and acquisition dates. Details of investment on the acquisition date are as follows:
In addition to the cash acquired at the acquisition date, a balance of 44.1 million Deutsche marks (approximately U.S. $26.8 million) was receivable from the Treuhandanstalt in regard to the original cash contribution. Cash received since the acquisition date amounted to 30.1 million Deutsche marks (approximately U.S. $18.8 million). The remaining contributions will be received by SHC during fiscal 1995. Of the funds provided by the Treuhandanstalt since the acquisition date, 10.3 million Deutsche marks (approximately U.S. $6.5 million) were consumed by operating losses from May 3, 1994 to October 31, 1994 and 7.6 million Deutsche marks (approximately U.S. $5.1 million) were used to fund the pre-existing capital investment program.
ITEM 8. (Continued)
NOTE K - ACQUISITION (Continued)
The Company agreed to the following obligations and guarantees with respect to the operation of the acquired businesses:
a) to maintain a minimum employment level for a period of three years; the level stipulated by the Agreement is considered by the Company to be reasonable and necessary for the intended use of the business,
b) to invest 39.0 million Deutsche marks (approximately U.S. $23.6 million) in capital programs over a period of four years,
c) to continue to operate the businesses for a minimum of five years, and
d) to refrain from selling or transferring acquired land and buildings for a period of six years.
Of the total 59.0 million Deutsche mark cash contribution to be received (as calculated on the measurement date of January 1, 1994), 51.5 million Deutsche marks was designed as an indemnification of estimated operating losses over a period of two years from acquisition. The amount of operating loss indemnification available to the Company was adjusted for cash consumed by the ORSTA operations between the measurement date and the acquisition date. The operating loss indemnification is being amortized based on estimated operating results of the ORSTA Hydraulik operations as determined on May 3, 1994. The quarterly amortization value will remain unchanged as actual results are reported and will be translated from Deutsche marks into U.S. dollars at the average exchange rate for the period. The deferred credit on the balance sheet is translated at end of period rate.
ITEM 8. (Continued)
NOTE K - ACQUISITION (Continued)
ITEM 8. (Continued)
NOTE L - PREFERRED STOCK
During fiscal 1990, the Company designated two separate series of preferred shares as follows:
Series A Participating Preferred Shares - ---------------------------------------
On November 29, 1989, the Company created a new class of stock, Series A Participating Preferred Shares (the Series A) and adopted a Shareholder Rights Plan (the Plan). The Plan is designed to protect shareholders from the disruptions created by market accumulators and certain abusive takeover practices. The Plan provides for the distribution of one preferred share purchase right as a dividend for each outstanding share of common stock. Each right, when exercisable, entitles shareholders to buy one one-hundredth of a share of the Series A preferred stock for $75. Each one one-hundredth of a share of preferred stock is intended to be the practical economic equivalent of a share of common stock and will have one one-hundredth of a vote on all matters submitted to a vote of shareholders of the Company. Until the rights become exercisable, they have no dilutive effect on earnings per share.
The rights may be exercised, in general, only if a person or group acquires 20 percent or more of the common stock without the prior approval of the Board of Directors of the Company or announces a tender or exchange offer that would result in ownership of 20 percent or more of the common stock. In the event of the acquisition of 20 percent or more of the common stock without the prior approval of the Board, all rights holders except the acquirer may purchase the common stock of the Company having a value of twice the exercise price of the rights. If the Company is acquired in a merger, after the acquisition of 20 percent of the voting power of the Company, rights holders except the acquirer may purchase shares in the acquiring company at a similar discount. The Plan was not adopted in response to any pending takeover proposal, and the rights will expire on November 29, 1999.
Series B ESOP Convertible Preferred Stock - -----------------------------------------
On February 14, 1990, the Company established two newly-formed leveraged employee stock ownership plans (the ESOPs) and sold to the ESOPs 1,074,107 shares of a newly created cumulative ESOP Convertible Preferred Stock Series B (the Series B) for a total of $24,973,000. The ESOPs currently cover most domestic salaried employees and certain domestic hourly employees. The remaining Series B shares are convertible into 1,308,368 shares of common stock at any time (1.235 shares of common stock for each Series B share), subject to anti-dilution adjustments. The Series B shares are entitled to one and one-half votes per share and will vote together with the common stock as a single class.
ITEM 8. (Continued)
NOTE L - PREFERRED STOCK (Continued)
Series B ESOP Convertible Preferred Stock (Continued) - -----------------------------------------------------
The Series B shares are held by a trustee which votes the allocated shares as directed by Plan participants. Unallocated shares held by the trustee are voted in the same proportion as are the allocated shares. Annual dividends are $1.97625 per share. The ESOPs have borrowed to purchase the Series B shares, and the Company guaranteed the repayment of the remaining outstanding balance of that loan.
The Company paid to the ESOPs $2,098,000 in 1994, ($2,109,000 in 1993 and $2,118,000 in 1992) in preferred stock dividends and accrued or paid an additional $1,310,000 in 1994, ($1,036,000 in 1993 and $862,000 in 1992), in Company match of employee's 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 $2,366,000 in 1994, $1,841,000 in 1993 and $1,975,000 in 1992, primarily for interest charges.
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, 1994 and 1993, and the related statements of consolidated income, shareholders' equity and cash flows for each of the three years in the period ended October 31, 1994. [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, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended October 31, 1994 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.]
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."
/s/ Ernst & Young LLP
Cleveland, Ohio December 9, 1994
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 LLP, 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 present to discuss the results of their audits and their opinion 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 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 January, 1995, which information is incorporated by reference herein.
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. Kipton Kumler, Mr. Mark Kachur and Mr. Bruce Wheatley.
Mr. Kumler became an employee of Commercial Intertech Corp in January of 1994. Prior to joining Commercial, Mr. Kumler was President and Chief Executive Officer of the Lexington Consulting Group, Inc., a management consulting firm. Mr. Kumler has been a member of the Board of Directors of Commercial Intertech Corp. since 1985.
PART III - (Continued)
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (Continued)
Mr. Kachur became an employee of Commercial Intertech Corp. in April of 1994. Before joining Commercial, Mr. Kachur's experience includes: President of Biotage, Inc., a biotechnology company engaged in high and low-pressure chromatography and Group Vice President of Pall Corporation.
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 January 17, 1995, 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 January 17, 1995, 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 January 17, 1995, which information is incorporated herein by reference.
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.
PART IV (Continued)
ITEM 14.
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 (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 (12) Severance Compensation Agreement - William W. Cushwa dated September 28, 1989 (13) Severance Compensation Agreement - Steven J. Hewitt dated September 28, 1989 (14) Severance Compensation Agreement - Robert A. Calcagni dated September 28, 1989 (15) Severance Compensation Agreement - John Gilchrist dated June 25, 1992 (16) Severance Compensation Agreement - Gilbert M. Manchester dated September 28, 1989 (17) Severance Compensation Agreement - Bruce C. Wheatley dated July 20, 1992
PART IV - (Continued)
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K (Continued)
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 36.
11 -- Computation of Per Share Earnings
18 -- Employment Agreement - Paul J. Powers dated July 27, 1994.
22 -- Subsidiaries of The Registrant
23 -- Consent of Independent Auditors
27 -- Financial Data Schedule
(B) There were no reports on Form 8-K for the quarter ended October 31, 1994.
S-1