ITEM 1. BUSINESS.
Daniel Industries, Inc. is engaged in providing products and systems used to measure rates of flow and accumulated volumes of fluids, primarily oil and natural gas. The Company manufactures a variety of measurement devices including orifice, turbine, positive displacement, ultrasonic and oval gear meters and a wide range of electronic instruments used in conjunction with flow measurement products. The Company also designs, fabricates and assembles large, automated flow measurement systems to meet specific needs and applications, as well as other systems utilized for enhanced oil recovery. The Company's flow measurement products and systems are used mainly by producers, refiners and transporters of oil and natural gas. The Company is also engaged in the manufacture and sale of pipeline valves, fasteners and fabricated production equipment.
Daniel Industries, Inc. was incorporated under the laws of Delaware in 1988 as the successor to a business started in 1930. Unless the context indicates otherwise, references herein to the "Company" refer to Daniel Industries, Inc., its subsidiaries and their predecessors.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company has two industry segments: Flow Measurement and Energy Products. Financial information for the Company's industry segments is presented in NOTE 13 of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. Such information is hereby incorporated by reference herein.
FLOW MEASUREMENT
Since its inception in 1930, the Company has manufactured products that employ a method known as differential orifice measurement to measure fluids, primarily natural gas. These orifice measurement products cause a decline in pressure as fluid flows through the device. This decline in pressure is measured and used to determine rates of flow and accumulated volumes of fluid. In addition to its orifice measurement products, the Company manufactures flow measurement products using turbines whose frequency of rotation indicates rates of flow and accumulated volumes of fluid. The Company also manufactures positive displacement and oval gear meters for the measurement of various liquid flows. Sales of all metering equipment worldwide contributed 43%, 53% and 49% of this industry segment's revenues in fiscal 1994, 1993 and 1992, respectively.
The Company also manufactures a wide range of electronic instruments used in conjunction with flow measurement products. Sales of electronic products worldwide contributed approximately 20%, 24% and 25% of this industry segment's revenues in fiscal 1994, 1993 and 1992, respectively. The Company's electronic flow computers instantaneously compute and display the rate of flow and accumulated volumes of fluid. The Company has developed several software programs and has an in-house programming capability to meet specific customer applications. Other electronic products manufactured by the Company include chromatographs for analysis of natural gas to determine its BTU content and
ultrasonic flowmeters for nonintrusive gas flow measurement. In addition, the Company designs and manufactures electronic products for the automation of liquid petroleum loading facilities.
The Company designs, fabricates and assembles large flow measurement systems, including specialized electronic and control systems for the automation of liquid petroleum product loading systems. Sales of all systems worldwide contributed approximately 37%, 23% and 26% of this industry segment's revenues in fiscal 1994, 1993 and 1992, respectively. A typical system is mounted on one or more skids for ease of installation and contains various mechanical equipment, electronic instruments, piping, supports and walkways. A system can be operated manually or it can be completely automated through the use of computers and other instrumentation supplied and programmed by the Company. In the process of supplying a flow measurement system, the Company first defines the total measurement requirements, and subsequently designs the system. The Company then fabricates or supplies the various mechanical and electronic components of the system. The system is assembled and tested at the Company's Houston, Texas or Falkirk, Scotland plant. The Company also has the capability to supervise on-site installation and start-up operations of the system and to provide servicing for the system after installation.
The Company has sales offices in eight United States cities, Calgary, Canada; Cramerview, South Africa; Dammam, Saudi Arabia; Datchet, England; Edmonton, Canada; Falkirk, Scotland; Leiden, Holland; Moscow, Russia; Potsdam- Babelsberg, Germany and Singapore through which it sells its flow measurement products and systems. In addition, sales are made domestically and in certain foreign countries through a system of sales representatives and distributors working on a commission basis. Although the Company's flow measurement products and systems have been used in water handling and the chemical and power generation industries, sales are principally to integrated oil companies, gas pipeline companies and other concerns engaged in the production, transmission and marketing of oil and natural gas. The geographic market for the Company's flow measurement products and systems is worldwide.
In competing for the sale of large systems, the Company may enter into contracts which provide for the completion of the systems at specified prices and in accordance with time schedules. These contracts may involve greater risks as a result of unforeseen increases in the prices of raw materials and other costs. In its financial statements, the Company accounts for large systems using the percentage-of-completion method, which requires recognition of revenues and costs over the life of the contract, rather than solely at the time the contract is completed.
The Company has not compiled detailed market information regarding its competitive position in the flow measurement industry. However, the Company believes that, in terms of revenues, it is the largest United States producer of orifice measurement products used to measure natural gas flows in custody transfer. In addition, management considers the Company to be a major international supplier of large flow measurement systems, which are used to measure crude oil flows. Among the other devices used for flow measurement are turbine measurement products, but the Company is less influential in the market for those products. In general, the Flow Measurement segment of the Company has
numerous competitors, none of which is considered to be dominant. The principal competitive factors in this industry include, singularly or in various combinations, price, design, efficiency and the ability of the products or systems to measure and display rates of flow and accumulated volumes of fluid accurately.
At September 30, 1994 and 1993, the Company's backlog of orders believed to be firm for the Flow Measurement segment's products and systems was approximately $27,400,000 and $64,800,000, respectively. The Company expects that substantially all of the backlog at September 30, 1994, will be filled during the fiscal year ending September 30, 1995. (See "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." - "Results of Operations".)
ENERGY PRODUCTS
The Energy Products segment offers to the energy markets an array of services and products which include: pipeline valves, fasteners including stud bolts, nuts, ring joint gaskets and industrial flanges, and energy recovery products such as steam generators and fabricated production equipment.
The Company is engaged in the manufacture of fabricated gate valves that range from 2" to 84" in diameter. The bodies of these valves are fabricated from plate steel which is cut and welded, rather than from castings. The Company's gate valve operation includes a line of cast gate valves ranging from 2" to 6" in diameter and a round body design, which incorporates a combination of fabricated and cast valve components, for large diameter and high pressure applications. The Company manufactures a line of forged-body trunnion ball valves in 2" through 48" bore sizes. Their primary application is pipeline block valves and on/off service in liquid and gas systems. The Company also manufactures two-way and four-way cast steel plug-type valves ranging from 2" to 30" and 3" to 24" in diameter, respectively. These valves are used in metering systems and other applications which require more precise cutoff or control of pipeline flows.
The Company's pipeline valves are marketed by two domestic sales offices and offices in Calgary, Canada; Cramerview, South Africa; Dammam, Saudi Arabia; Datchet, England; Leiden, Holland; Moscow, Russia and Singapore. In addition, sales are made worldwide through representatives working on a commission basis. The Company's valves are sold primarily to contractors, refineries and transmission companies for use in controlling liquid or gas pipeline flows.
The Company competes worldwide with numerous manufacturers of fabricated, forged and cast valves. Ability to meet strict delivery requirements, as well as price and quality of the valves sold, are considered to be the principal competitive factors in the sale of pipeline valves.
The Company manufactures a complete line of alloy stud bolts. Stud bolts are unheaded bolts which are either entirely threaded or threaded only on the ends. Generally, the stud bolts manufactured by the Company are sold with attached nuts which are purchased from outside sources. The Company's bolt manufacturing process uses on-site heat-treating furnaces which enable the
Company to purchase untreated coils of alloy steel, rather than the more expensive heat-treated and sized bars of steel traditionally used by stud bolt manufacturers. The manufacturing process is conducted under strict quality control, and various tests are run to ensure the strength and quality of the bolts produced. The Company also manufactures ring joint gaskets for production well-head equipment, valves and piping systems. These gaskets frequently are used in conjunction with stud bolts and nuts. The Company also manufactures industrial flanges.
The fasteners are sold through the Company's own sales force, located in Aberdeen, Scotland; Edmonton, Canada; Gardena, California; and Houston, Texas, to valve manufacturers, engineering contractors, supply houses and bolt and nut distributors. The Company's fasteners are used mainly by manufacturing industries which supply equipment to companies engaged in the production, processing and transporting of oil and natural gas.
The Company is one of many foreign and domestic manufacturers of fasteners. The Company believes that neither the Company nor any of its competitors clearly dominates the market. However, competition from foreign manufacturers is intense. Strength and uniformity of the product, price and the ability to meet delivery requirements are the principal competitive factors in the fastener industry.
The Company is a leading manufacturer of large steam generators and water treatment equipment for enhanced oil recovery operations and also produces equipment for pipeline and production facilities. While these markets are not completely new, the international requirements for these products have increased. To remove certain toxic materials from major gas pipelines, the Company has designed and manufactured pipeline gas blow-down packages which safely remove the unwanted materials. These trailer-mounted units separate gas, liquids and solids; reduce pressure; measure flow rate and reduce noise of blow-down gas to a permissible level. In addition, the Company makes LACT units, separators, strainers, heater-treater units and meter provers.
At September 30, 1994 and 1993, the Company's backlog of orders believed to be firm for the Energy Products segment was approximately $6,000,000 and $7,400,000, respectively. The Company expects that substantially all of the backlog at September 30, 1994, will be filled during the fiscal year ending September 30, 1995.
FOREIGN OPERATIONS
Approximately 26% of the Company's consolidated revenues for its fiscal year ended September 30, 1994, was attributable to sales of flow measurement products and systems manufactured or assembled at the Company's plants in Falkirk, Scotland and Potsdam-Babelsberg, Germany. Sales of Company products and systems for foreign installation or use outside the United States, inclusive of the Scotland and German operations, contributed approximately 60%, 52% and 54% of the Company's consolidated revenues in fiscal 1994, 1993 and 1992, respectively. The Company's operations outside the United States are subject to the usual risks of such operations, including changes in governmental policies, currency transfer restrictions and devaluation. The Company endeavors to
minimize these risks through the use of letters of credit, United States dollar-denominated contracts and hedging of specific foreign currency commitments.
Financial information about the Company's foreign and domestic operations and export sales by geographic area is presented in NOTE 13 of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. Such information is hereby incorporated by reference herein.
RAW MATERIALS
Raw materials and other supplies used by the Company in the manufacture and fabrication of its products are purchased from suppliers and other manufacturers. No purchases are made under long-term contracts, and the Company does not consider that it is materially dependent upon any single source of supply. From time to time, however, the Company encounters difficulty in obtaining steel and steel castings.
CUSTOMERS
Occasionally, the Company's Flow Measurement segment is engaged to supply one or more large flow measurement systems for a single installation. A few contracts to design and assemble such systems would be of material importance to that industry segment's results of operations for a particular fiscal period. However, the Company is not dependent on a few customers on a continuing basis.
PATENTS AND RESEARCH
The Company has sought patent protection for products which appear to have commercial importance. The Company does not consider that the patents currently held by it are material to its operations as a whole.
The Company engages in research activities with a view to the development of new products as well as the improvement of existing products. The amounts spent during the fiscal years ended September 30, 1994, 1993 and 1992, on research and product development activities were approximately $4,100,000, $5,300,000 and $5,500,000, respectively.
EMPLOYEES
At September 30, 1994, the Company employed approximately 1,450 persons, of whom approximately 1,100 were located in the United States, approximately 250 were located in the United Kingdom and 100 were located in other nations.
ENVIRONMENTAL COMPLIANCE
Compliance with existing governmental regulations which have been enacted or adopted regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, does not have, nor is expected to have, a material effect on the Company.
OTHER BUSINESS CONDITIONS AND REGULATIONS
The Company's business is largely dependent upon the level and nature of the activities in the worldwide oil and natural gas industries. The level of such activities may be influenced by numerous factors, including general economic conditions, the demand for oil and/or natural gas, development of alternative energy sources, taxation, price controls and other political and economic conditions.
The business of the Company is moderately seasonal to the extent that many of the Company's products and systems are installed and its services provided out-of-doors. Consequently, sales attributable to these products and services tend to increase somewhat during the summer months when the weather is more favorable, and there are more daylight hours.
For a discussion of the Company's practices relating to working capital, see "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." - "Liquidity and Capital Resources."
ITEM 2.
ITEM 2. PROPERTIES.
The principal offices and manufacturing facilities of the Company are as follows:
(a) Includes Corporate headquarters.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
The Company is subject to legal proceedings and claims which arise in the ordinary course of business. In the opinion of management, the amounts of ultimate liability, if any, with respect to these actions will not materially affect the financial position of the Company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There was no matter during the fourth quarter of the fiscal year covered by this Annual Report on Form 10-K submitted to a vote of security holders, through the solicitation of proxies or otherwise.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
The shares of common stock, $1.25 par value, of the Company are traded on the New York Stock Exchange under the symbol DAN. At November 30, 1994, the approximate number of holders of record of shares of common stock of the Company was 1,372. The following table sets forth for each quarterly period during the fiscal years ended September 30, 1994 and 1993 (i) the high and low sales prices of shares of common stock of the Company and (ii) the amount of cash dividends per share paid on the common stock of the Company. Such dividends were declared and paid on a quarterly basis.
The Company is authorized by its Certificate of Incorporation to issue up to 1,000,000 shares of serial preferred stock, $1 par value, but no shares of serial preferred stock of the Company have been issued. Subject to the rights of holders of serial preferred stock, the holders of shares of common stock of the Company are entitled to receive dividends when and as declared by the Board of Directors of the Company out of funds legally available therefor.
The Company has paid cash dividends on its common stock during each year since 1948. The Company's future dividend policy with respect to its common stock, including the frequency, type and amount of dividends, if any, will be determined by its Board of Directors in light of its results of operations, its cash flow, its anticipated capital requirements, possible future issuances of serial preferred stock and the restrictions as to payment of dividends contained in instruments pursuant to which the Company has issued long-term debt. (See NOTE 9 of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.)
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
OVERVIEW
Revenues for the fiscal year ended September 30, 1994 were $203,766,000 compared to $180,249,000 in fiscal 1993. Net income was $1,324,000, or $.11 per share, compared to $5,025,000, or $.42 per share, last year. The Company's Flow Measurement segment, which consists of meters, electronic instruments and engineered systems, reported higher revenues and earnings for fiscal 1994 compared to a year ago. The Flow Measurement segment serves primarily worldwide natural gas markets. The Energy Products segment, which consists of valves, industrial fasteners and energy recovery equipment, reported lower revenues and earnings for fiscal 1994 compared to last year. The Energy Products segment serves primarily the domestic crude oil markets.
FISCAL 1994 VS. FISCAL 1993
Consolidated revenues increased 13% to $203,766,000 for fiscal 1994, from $180,249,000 for fiscal 1993. The Flow Measurement segment posted a 32% increase in revenues to $145,657,000 for the current year, from $110,009,000 for last year. Sales of flow measurement systems, which comprised 37% and 23% of this segment's revenues in the respective periods, increased significantly in the more recent period due primarily to construction of two gas metering stations destined for the North Sea. Sales of flow measurement products increased eight percent, reflecting increased demand for the Company's metering and electronic products, primarily in foreign markets. The Energy Products segment experienced a 17% decline in revenues to $57,739,000 for the current year, compared to $69,424,000 for last year. Sales of pipeline valves, which comprised approximately one-half of this segment's revenues in the respective periods, decreased due to a more competitive worldwide market.
Consolidated backlog at September 30, 1994, was approximately $33,400,000, compared to $72,200,000 a year ago. The decline in backlog is due to inclusion in the prior year of an unusually large order for a flow measurement system in the amount of approximately $23,000,000.
The consolidated gross profit margin declined to 32% of revenues for fiscal 1994, compared to 38% of revenues for fiscal 1993. The gross profit margin in the Flow Measurement segment declined seven percentage points to 35% of revenues primarily due to a shift in product mix towards sales of flow measurement systems, which earn lower margins than sales of flow measurement products. The gross profit margin in the Energy Products segment declined seven percentage points to 23% of revenues primarily as a result of current year pricing pressures for pipeline valve and fastener products and declines in operational efficiencies at both the valve and fastener operations.
Consolidated selling, general and administrative expenses increased to $57,026,000 for fiscal 1994, from $52,592,000 for fiscal 1993. However, these expenses, as a percentage of revenues, declined slightly between the two periods. Within the Flow Measurement segment, selling expenses declined as a percentage of revenues due to the change in product mix towards sales of flow measurement systems, which have lower sales commissions than sales of flow measurement products. General and administrative expenses also declined as a percentage of revenues, resulting from the significant increase in sales. The Energy Products segment's expenses increased as a percentage of revenues since certain of these expenses are fixed and do not decrease proportionately with sales. Corporate expenses increased 66% to $8,273,000 primarily due to reductions of accruals in fiscal 1993 relating to settled litigation.
Research and development expenses decreased 23% to $4,094,000 for fiscal 1994, compared to $5,343,000 for fiscal 1993, primarily due to completion of certain electronics projects.
Consolidated depreciation and amortization expense increased 14% to $7,483,000 for fiscal 1994 due to capital expenditures in fiscal 1993 in both the Flow Measurement and Energy Products segments.
Consolidated interest expense decreased eight percent to $1,927,000 for fiscal 1994 due to lower long-term debt levels, partially offset by increased short-term borrowing levels.
The effective tax rate for fiscal 1994 of 38% is consistent with the effective tax rate in fiscal 1993. Effective October 1, 1993, the Company adopted the Financial Accounting Standards Board's Statement No. 109, "Accounting for Income Taxes" ("FAS 109"), changing the method of determining reported income tax expense. Financial statements for prior years have not been restated and the cumulative effect of the accounting change was not material. (See NOTE 8 of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.)
FISCAL 1993 VS. FISCAL 1992
Consolidated revenues decreased 14% to $180,249,000 for fiscal 1993, from $210,362,000 for fiscal 1992. The Flow Measurement segment experienced a 10% decline in revenues to $110,009,000 for fiscal 1993. Sales of flow measurement products, which comprised approximately three-fourths of this segment's sales in both fiscal 1993 and 1992, decreased $5,206,000 due to the severe slowdown in the domestic oil and gas markets. Sales of flow measurement systems, which accounted for approximately 25% of this segment's sales in both fiscal 1993 and 1992, decreased $6,492,000. This decrease can be attributed to a temporary decline in volume at the Company's U.K. subsidiary and the strengthening of the U.S. dollar against the British pound. The Energy Products segment experienced a 21% decline in revenues to $69,424,000 for fiscal 1993. Sales of pipeline valve products, which comprised approximately half of this segment's sales in fiscal 1993 and 1992, decreased $9,832,000 as a result of comparison to fiscal 1992 which included an unusually large international order. Sales of fasteners and related products, which accounted for approximately one-third of this segment's sales in both fiscal 1993 and 1992, decreased $3,450,000 due primarily to the severe slowdown in the domestic oil and gas markets.
The consolidated gross profit margin remained flat at 38% of revenues for fiscal 1993 and 1992. The gross profit margin in both the Flow Measurement and Energy Products segments remained unchanged at 42% and 30% of revenues, respectively.
Consolidated selling, general and administrative expenses decreased 10% to $52,592,000 for fiscal 1993, compared to $58,408,000 for fiscal 1992. The Flow Measurement segment's expenses decreased 8% to $31,488,000 and the Energy Products segment's expenses decreased 4% to $16,119,000. Corporate expenses decreased 33% to $4,985,000 due primarily to the realization of $1,500,000 pretax income from an insurance settlement. This settlement was a reimbursement of litigation expenses and defense costs incurred in prior years. Consolidated selling, general and administrative expenses, however, increased as a percentage of sales since certain of these expenses are fixed and do not decrease proportionately with revenues.
Consolidated interest expense declined 13% to $2,088,000 for fiscal 1993 as a result of the retirement of debt.
The effective tax rate of approximately 38% for fiscal 1993 is greater than the U.S. statutory rate primarily due to losses at the Company's German operation for which no tax benefits are currently recognized.
IMPACT OF INFLATION
An effect of inflation is to increase the prices of labor and raw materials used to manufacture the Company's products, which may require periodic increases in the prices for those products to maintain gross profit margins. Although this principle impacts most manufacturers, management does not consider the Company to have any unique difficulty in managing the effects of inflation on the Company's business. With respect to the effect of inflation on reported income,
the Company applies the LIFO method to a majority of its inventories to account for production costs.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1994, the Company's working capital balance was $65,990,000, compared to $67,209,000 at September 30, 1993. Although the Company's working capital position decreased slightly between the two periods, its cash balance declined significantly to $2,520,000 at September 30, 1994, from $23,220,000 at September 30, 1993. The decrease in cash was due to capital expenditures, the funding of operational activities, payments on long-term debt and payments of dividends. Receivables, inventories and costs in excess of billings on contracts in progress increased an aggregate of $19,743,000, consistent with the increase in revenues in the Flow Measurement segment. The Company recorded a current deferred tax asset, in the amount of $5,126,000 at September 30, 1994, in connection with the implementation of FAS 109. (See NOTE 8 of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.)
Working capital at September 30, 1994, included $45,314,000 of inventory, which is not as liquid as other current assets.
Since April 1994, the Company has relied upon short-term borrowings under its bank lines of credit to supplement its working capital and other cash requirements. At September 30, 1994, the Company had uncommitted short- term lines of credit aggregating approximately $40,000,000. As of September 30, 1994 and December 19, 1994, borrowings under these lines were $5,900,000 and $13,550,000, respectively, at weighted average interest rates of 5.54% and 6.3%, respectively. While the Company expects its borrowing requirements to generally increase in fiscal 1995 over present levels, the timing of one or a few major expenditures or receipts may affect the level of borrowings at a particular point in time. The Company considers its financial position to be strong, with a working capital ratio of 2.4 to 1.0 and debt to total capitalization of 14%. The Company believes that its current financial position and available lines of credit will provide ample sources of funds to meet foreseeable requirements.
The Company anticipates capital expenditures in fiscal 1995 of approximately $6,000,000, compared to $13,631,000 in fiscal 1994 and $11,793,000 in fiscal 1993. Most of the anticipated capital expenditures for fiscal 1995 are not the subject of firm commitments, and the Company may modify its plans depending upon future results of operations and other factors.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements required to be filed under this item are presented on pages 19 through 36 of this report, and the supplementary financial information required to be filed under this item is presented in NOTE 14 of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. Such financial statements are hereby incorporated by reference under this Item 8.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
During the twenty-four months prior to September 30, 1994, the Company did not file a Form 8-K which reports a change of accountants or disagreement with its accountants on any matter of accounting principles, practices or financial statement disclosure.
PART III
ITEMS 10 TO 13 INCLUSIVE.
The information contained under the headings "Election of Directors", "Company Executive and Subsidiary Officers", "Executive Compensation", "Certain Relationships and Related Transactions" and "Principal Stockholders" in the Company's Proxy Statement for its Annual Meeting of Stockholders proposed to be held February 2, 1995, which Proxy Statement shall be filed within 120 days of the end of the Company's fiscal year, is hereby incorporated by reference herein.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) DOCUMENTS FILED AS A PART OF THIS REPORT
1. Financial Statements
2. Financial Statement Schedules
All other schedules and financial statements are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto listed above in Item 14(a) 1.
3. Exhibits
(b) REPORTS ON FORM 8-K
The Company did not file any reports on Form 8-K during the fourth quarter of its fiscal year ended September 30, 1994.
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.
DANIEL INDUSTRIES, INC. (Registrant)
DATE: DECEMBER 16, 1994 BY W. A. GRIFFIN W. A. Griffin CHAIRMAN OF THE BOARD
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 DATES INDICATED.
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF DANIEL INDUSTRIES, INC.
In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a) 1 and 2 on page 14 present fairly, in all material respects, the financial position of Daniel Industries, Inc. and its subsidiaries at September 30, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1994, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Houston, Texas November 15, 1994
DANIEL INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
The accompanying notes are an integral part of the financial statements.
DANIEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
The accompanying notes are an integral part of the financial statements.
DANIEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS EXCEPT FOR SHARES)
The accompanying notes are an integral part of the financial statements.
DANIEL INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
The accompanying notes are an integral part of the financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
TRANSLATION OF FOREIGN CURRENCIES Gains and losses resulting from balance sheet translation of foreign operations where a foreign currency is the functional currency are included as a separate component of stockholders' equity. Gains and losses resulting from balance sheet translation of foreign operations where the U. S. dollar is the functional currency are included in the consolidated results of operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS Management has determined that the fair value of the Company's financial instruments is equivalent to the carrying amount of such instruments as presented or disclosed in the financial statements.
CASH AND CASH EQUIVALENTS The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
ACCOUNTS RECEIVABLE A substantial portion of the Company's trade receivables are with customers primarily in the petroleum industry.
REVENUE RECOGNITION Sales and cost of goods sold of large systems contracts are recorded using the percentage-of-completion method, based on the ratio of costs incurred to date to total estimated costs on each contract. Losses, if any, to be incurred on contracts in progress are charged to income in full as soon as they become apparent, and estimated warranty costs are accrued as revenues are earned. Sales and cost of goods sold of products are recorded when the customer takes title to the products.
INVENTORIES Inventories are valued at the lower of cost or market. Cost, which includes material, labor and overhead, is determined principally by the last-in, first-out (LIFO) method and by the average cost method.
INVESTMENTS Marketable securities are carried at the lower of aggregate cost or market. Realized gains and losses on the sale of investments are recognized in income.
The Company has not elected early adoption of the Financial Accounting Standards Board Statement No. 115, "Accounting for Certain Investments in Debt and Equity Securities" effective for fiscal years beginning after December 15, 1993, which is the Company's year ended September 30, 1995. The Company believes
adoption of this Statement will not materially affect the Company's financial statements.
PROPERTY, PLANT AND EQUIPMENT Depreciation of plant and equipment is provided over the estimated useful lives of the various classes of assets using the straight-line method. Maintenance and repairs are charged to expense. Renewals and betterments are capitalized. On retirement or sale of assets, the cost of such assets and accumulated depreciation are removed from the accounts and the gain or loss, if any, is credited or charged to income.
INTANGIBLE ASSETS Goodwill, representing the excess cost of purchased subsidiaries over the fair value of net assets acquired, is amortized using the straight-line method over a 40-year period. Other intangible assets are amortized using the straight-line method over their estimated useful lives, none of which exceeds 12 years. At September 30, 1994 and 1993, accumulated amortization on intangibles was approximately $2,600,000 and $2,400,000, respectively.
INCOME TAXES Prior to October 1, 1993, the Company provided deferred income taxes for timing differences arising when revenues or expenses were recognized in different periods for financial reporting and tax purposes. Effective October 1, 1993, the Company adopted the Financial Accounting Standards Board Statement No. 109, "Accounting for Income Taxes" ("FAS 109"). The statement requires the use of an asset and liability approach for financial accounting and reporting for income taxes. Information on the adoption of FAS 109 is set forth in NOTE 8 of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
The Company does not provide for U.S. income taxes on foreign subsidiaries' undistributed earnings intended to be permanently reinvested in foreign operations.
EARNINGS (LOSS) AND DIVIDENDS PER SHARE Earnings (loss) per share are computed based on the average number of shares outstanding during each year. Dividends per share are stated at the current equivalent of the number of shares outstanding at the time the dividends were declared. Stock options outstanding have not been included in the computation of earnings per share since the effect is not significant.
NOTE 2 - ACQUISITION
As previously reported in the Company's Annual Report on Form 10-K for the year ended September 30, 1993, the Company acquired, effective January 1, 1992, from an agency of the German government, a facility in Potsdam-Babelsberg in the former German Democratic Republic ("GDR"). The facility manufactures oval gear meters and will produce other Company products. Acquisition and related costs, aggregating approximately $4,900,000, are recorded primarily in property, plant and equipment. Registration of legal title in the Company's name was completed in June 1994.
In connection with the Company's scheduled expenditures and committed employment level at the German facility, the Company received formal notification that a government subsidy of approximately $1,650,000 was granted. Approximately $411,000 and $535,000 of this subsidy has been recognized in the Company's fiscal 1994 and 1993 results of operations, respectively.
NOTE 3 - CONTRACTS IN PROGRESS
Information with respect to contracts in progress accounted for under the percentage-of-completion method is as follows:
NOTE 4 - INVENTORIES
Inventory reduction in fiscal 1993 resulted in liquidation of LIFO inventory layers carried at lower costs prevailing in prior periods as compared with current costs, the effect of which increased earnings by approximately $.02 per share.
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment and related accumulated depreciation are summarized as follows:
NOTE 6 - NOTES PAYABLE
At September 30, 1994, the Company had uncommitted short-term lines of credit aggregating approximately $40,000,000. Loans under these lines may be made in such amounts and at such maturities and interest rates as are offered by the banks and accepted by the Company at the time of each borrowing. At September 30, 1994, borrowings under these lines were $5,900,000. These borrowings were at a weighted average interest rate of 5.54% and were due at varying dates through October 1994.
NOTE 7 - ACCRUED EXPENSES
Accrued expenses are summarized as follows:
NOTE 8 - INCOME TAXES
The Company adopted the Financial Accounting Standards Board's Statement No. 109, "Accounting for Income Taxes" ("FAS 109") effective October 1, 1993. Financial statements for prior years have not been restated. The cumulative effect of the accounting change was not material. Adoption of FAS 109 resulted in the reclassification of certain current deferred tax assets which had previously been offset against non-current deferred tax liabilities.
Deferred tax liabilities (assets) are as follows:
Through September 30, 1994, the Company's German subsidiary has generated a tax loss carryforward of $6,993,000 which may be carried forward indefinitely. The valuation allowance relates to the amount of the German loss carryforward which may not be realized.
Income tax expense (benefit) is as follows:
The 1992 deferred tax expense of $5,205,000 results principally from realization of the deferred tax benefit of certain expenses associated with a litigation settlement recognized in 1991 for financial reporting purposes.
The components of income before income tax expense (benefit) are:
The cumulative undistributed earnings of foreign subsidiaries, on which U.S. taxes have not been provided, were approximately $12,700,000, $10,100,000 and $8,800,000 at September 30, 1994, 1993 and 1992, respectively. The U.S. income tax effect associated with the repatriation of these earnings may be offset by foreign tax credits.
Components of the difference between the income tax expense (benefit) computed at the U.S. statutory income tax rate and the income tax expense (benefit) are as follows:
NOTE 9 - LONG-TERM DEBT
Long-term debt includes the following:
In December 1988, four insurance companies purchased an aggregate of $20,000,000 of the Company's unsecured 11.5% Senior Notes due 1998. Prepayment of amounts in excess of scheduled maturities are subject to certain restrictions and would be at a premium. The note purchase agreement related to the sale of these notes requires the maintenance of a specified current ratio and a specified amount of net worth and also includes restrictive covenants relating to additional indebtedness and leases, creation of liens, payment of dividends, mergers and disposition of assets. Retained earnings was unrestricted as to the payment of dividends at September 30, 1994.
Long-term debt at September 30, 1994, matures as follows:
NOTE 10 - STOCKHOLDERS' EQUITY, STOCK OPTIONS AND PROFIT SHARING AND SAVINGS PLAN
On May 31, 1990, the Board of Directors declared a dividend of one Preferred Share Purchase Right (the "Right") for each outstanding share of common stock. Under certain conditions, each Right may be exercised to purchase one one-hundredth share of a new series of junior participating preferred stock at an exercise price of $60, subject to adjustment. The Rights may only be exercised 10 days following a public announcement that a third party has acquired 20% or more of the outstanding common shares or 10 days following the commencement of, or announcement of an intention to make a tender offer or exchange offer, the consummation of which would result in the beneficial ownership by a third party of 20% or more of such outstanding common shares. The Rights, which do not have voting rights, expire May 31, 2000, and at the Company's option, may be redeemed by the Company prior to expiration for $.01 per Right. In the event that the Company is acquired in a merger or other business combination or 50% or more of its consolidated assets or earning power are sold, provision shall be made so that each holder of a Right shall have the right to receive, upon exercise thereof at the then current exercise price, that number of shares of common stock of the surviving company which at the time of such transaction would have a market value of two times the exercise price of the Right.
During fiscal 1994, the Company had options outstanding under two stock option plans and under separate stock option agreements. A description of the plans and agreements follows:
STOCK OPTION PLANS
In 1977, the Board of Directors of the Company adopted a non-qualified stock option plan and reserved 100,000 shares of common stock for issuance upon the exercise of options granted to executives and other key personnel. In December 1986, each option holder was granted a new stock option subject to relinquishment of previously granted options. In 1993 and 1989, the Board of Directors amended the non-qualified stock option plan and reserved 400,000 and 250,000 shares of common stock, respectively, for issuance upon the exercise of options granted to executives and other key personnel. Approval of the stockholders was obtained.
In 1981, the Board of Directors of the Company adopted an incentive stock option plan and reserved 300,000 shares of common stock for issuance upon the exercise of options granted to executives and other key personnel. In 1984, the Board of Directors amended the incentive stock option plan and reserved an additional 100,000 shares of common stock for issuance upon the exercise of options granted to executives and other key personnel. Effective December 31, 1986, as a result of changes in the federal income tax treatment of incentive stock options, the Board of Directors amended and restated the 1981 Plan to provide for the granting of options not intended to qualify as incentive stock options. In addition, in December 1986, each option holder was granted a new stock option subject to the relinquishment of previously granted options.
For each of these plans, a committee of the Board of Directors determines which eligible employees will receive options, the times at which such options are to be granted, the number of shares subject to such options and the exercise price and duration of such options. In the case of the 1981 Plan, optionees may, with the committee's permission, exercise options using previously-owned shares of common stock, in lieu of cash, to satisfy all or part of the exercise price.
Options that have been granted under the 1977 Plan are for a ten-year term and are exercisable either from the date of grant or at the end of the first year of the term. The fair market value of the shares on the dates the options outstanding at September 30, 1994, were granted was approximately $5,000,000. At September 30, 1994 and 1993, there were 461,376 and 38,876 shares (adjusted for stock dividends and a stock split) reserved for future options that may be granted under the 1977 Plan.
Under the provisions of the 1981 Plan, the exercise price may not be less than the fair market value of the shares on the date of grant. Options that have been granted are for a ten-year term and are exercisable either from the date of grant or at the end of the first year of the term. The fair market value of the shares on the dates the options outstanding at September 30, 1994, were granted was approximately $2,000,000. At September 30, 1994 and 1993, there were no shares reserved for future options that may be granted under the 1981 Plan.
NON-EMPLOYEE DIRECTORS' STOCK OPTION AGREEMENTS
In February 1986, the Board of Directors of the Company granted to non-employee members of the Board of Directors options to purchase 60,000 shares of common stock and reserved an additional 30,000 shares for future grants to non-employee Board members. The 1986 options were granted subject to both the relinquishment by the non-employee members of the Board of Directors of the December 1981 options granted to them and approval by shareholders of the Company, which was obtained in February 1987. In addition, the Board of Directors released from reservation 15,000 shares of common stock that were reserved in 1982 for grants of options to future non-employee directors of the Company. The Board of Directors determines which future non-employee directors will receive options and the terms of such options. Options are exercisable for six years from the date of grant. The fair market value of the shares on the date the options outstanding at September 30, 1994, were granted was approximately $100,000. At September 30, 1994 and 1993, there were 10,000 and
20,000 shares reserved for future options that may be granted to non-employee directors of the Company.
When stock options are exercised, the par value of the shares issued is credited to the common stock account and the excess of the exercise price over such par value is credited to capital in excess of par value. Any tax benefits resulting from the exercise of options in excess of those included in income are credited to capital in excess of par value.
Additional information regarding shares of the Company's common stock related to the Company's stock options is as follows:
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(a) Options were granted in 1989 at $10.00 per share, in 1991 at $16.75 per share, in 1992 at $11.875 per share and in 1993 at $14.125 per share. (b) Options were exercised at $7.00 per share. (c) Options were granted in 1986 at $7.00 and $7.70 per share and in 1991 at $16.75 and $18.425 per share. (d) Options were granted in 1989 at $12.75 per share and in 1994 at $11.00 per share.
PROFIT SHARING AND SAVINGS PLAN
The Company and certain of its domestic subsidiaries have adopted a profit sharing and savings plan in which substantially all employees are eligible to participate. Annual contributions to the profit sharing portion of the plan are discretionary, and are determined by the Company's Board of Directors. Contributions to the savings portion of the plan are made on a monthly basis in an amount as required by the plan. Contributions accrued and expenses related to this plan were approximately $1,800,000, $1,300,000 and $1,200,000 for the years 1994, 1993 and 1992, respectively.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
The Company is subject to legal proceedings and claims which arise in the ordinary course of business. In the opinion of management, the amount of ultimate liability with respect to these actions will not materially affect the financial position of the Company. Additionally, in the ordinary course of
business, the Company has issued standby letters of credit and bank guarantees as security for advances, progress payments and performance on long-term contracts and, as a result, is contingently liable in the amount of approximately $26,300,000 at September 30, 1994.
NOTE 12 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of unaudited quarterly financial data for fiscal 1994 and 1993:
During the fourth quarter of fiscal 1993, the Company realized $1,500,000 of pretax income from an insurance settlement. This settlement was a reimbursement of litigation expenses and defense costs incurred in prior years.
There were no other unusual or infrequently occurring items or adjustments, other than normal recurring adjustments, in any of the quarters presented.
NOTE 13 - INDUSTRY SEGMENTS
The Company has two principal industry segments: Flow Measurement and Energy Products. The Flow Measurement segment manufactures and services products and systems used to measure rates of flow and accumulated volumes of fluids, primarily oil and natural gas. The Energy Products segment offers an array of products and services to the energy markets. Operations of this segment include the manufacture of pipeline valves used on both gas and liquid pipelines, the production of fasteners for use in oil, gas and process industries and energy recovery products.
Intersegment transfers (primarily Energy Products to Flow Measurement) and transfers to other geographic areas (primarily U.S. to U.K.) are not significant to the operations of either segment or geographic area and are accounted for as transfers at cost on the following schedules. Segment operating income represents revenues less operating expenses and is not reduced for interest
expense, general corporate expenses and income taxes. Identifiable assets are those tangible and intangible assets that are identified with the operations of a particular industry segment or geographic area.
INFORMATION ON INDUSTRY SEGMENTS (IN THOUSANDS)
(a) Includes pretax income of $1,500 from an insurance settlement.
INFORMATION ON GEOGRAPHIC OPERATIONS (IN THOUSANDS)
Included in United States revenues were export sales of $52,800,000, $55,500,000 and $69,900,000 in fiscal 1994, 1993 and 1992, respectively. These sales were primarily to Africa, the Far East, the Middle East, and South America. At September 30, 1994, 1993 and 1992, the Company's investment in consolidated foreign subsidiaries, primarily its U.K. subsidiary, approximated $40,200,000, $30,100,000 and $28,100,000, respectively.
Foreign currency transaction gains and losses included in income were immaterial in fiscal 1994, 1993 and 1992.
NOTE 14 - SUPPLEMENTARY STATEMENT OF INCOME INFORMATION
The following amounts were charged to costs and expenses:
(a) Minimum operating lease commitments relate principally to office space and manufacturing facilities and are not material to the Company.
Schedule V DANIEL INDUSTRIES, INC.
PROPERTY, PLANT AND EQUIPMENT (in thousands)
(a) Includes acquisition of a facility in Germany.
Schedule VI DANIEL INDUSTRIES, INC.
ACCUMULATED DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT (in thousands)
Schedule IX
DANIEL INDUSTRIES, INC.
SHORT-TERM BORROWINGS (in thousands except percentages)
(a) Borrowings during fiscal 1994 were made under bank lines of credit. Maturities ranged from one to 61 days.
(b) Average amount outstanding during the period was computed by dividing the total of daily outstanding principal balances by the number of days in the fiscal year.
(c) Weighted average interest rate during the period was computed by dividing the actual short-term interest expense by the average amount outstanding during the period as described in (b) above.
INDEX TO EXHIBITS
INDEX TO EXHIBITS
INDEX TO EXHIBITS