Item 1 - BUSINESS
General Betz Laboratories, Inc. and its subsidiaries ("Registrant") is engaged in the engineered chemical treatment of water, wastewater and process systems operating in a wide variety of industrial and commercial applications, with particular emphasis on the chemical, petroleum refining, paper, automotive, electric utility and steel industries. Registrant produces and markets a wide range of specialty chemical products, including the technical and laboratory services necessary to utilize these products effectively. Chemical treatment programs are developed and marketed for use in boilers, cooling systems, heat exchangers, paper and petroleum process streams and both influent and effluent systems. Registrant monitors changing water, process and plant operating conditions so as to prescribe the appropriate treatment programs to solve problems such as corrosion, scale, deposit formation and a variety of process problems. Registrant has thirteen (13) production plants in the United States and nine (9) in foreign countries. Operations are conducted primarily in the United States and Canada, and also in Europe, Southeast Asia and the Caribbean area. Registrant employs approximately 3,980 people worldwide.
Marketing During 1994, the Registrant continued implementation of its globalization initiative. Pursuant to this globalization initiative, Registrant's foreign paper and refinery process sales and marketing organizations report to Registrant's domestic operations along technology lines. Under this initiative, Betz PaperChem, Inc. and Betz Process Chemicals, Inc. were assigned worldwide responsibility for marketing Registrant's paper and petroleum process chemical technologies, respectively. In 1995, the Registrant expects to integrate worldwide sales and marketing of water and wastewater technology into Betz Water Management Group. Domestically, the Registrant markets its products and technology along industry specific groups utilizing eight marketing units. Each unit operates as a separate profit center with its own sales staff and specific technology for the market it serves. Betz Water Management Group is comprised of five divisions: the Refining and Chemical Division; the Pulp and Paper Division; the Power Industry Division; the Manufacturing Industries Division and, effective December 31, 1994, the Betz Entec Division. In 1994, it marketed all of Registrant's water and wastewater technology within the United States. Betz Water Management Group, which accounts for 49.6% of Registrant's 1994 sales, will continue to provide specialty water treatment programs for boiler, cooling, influent and effluent applications to its principal markets, such as refining, chemical, paper, electric utility, food, light industrial, commercial and institutional establishments.
Betz Process Chemicals, Inc., a subsidiary, develops specific products used in process streams in the refining, petrochemical and steel industries. These products are "process-side" treatments as compared to "water-side" treatments and are formulated to reduce production inefficiencies in large industrial plants. This technology is applied in many ways including controlling corrosion with effective inhibitors and controlling fouling in heat exchangers through trace metal deactivation, polymer retardants, foam control, and oxidation control. Betz PaperChem, Inc. serves the pulp and paper industry. This subsidiary formulates custom engineered programs for the process related problems associated with paper production. As a consumer of large amounts of water in the production process, the pulp and paper industry's efforts to reuse water and conserve energy have increased the need for water treatment chemicals. Recirculating water systems build up organic and inorganic deposits which must be controlled. Deposition, corrosion, microbiological fouling, pulp processing, foam control, de-inking and felt conditioning are other problems associated with pulp and paper production that are treated by Betz PaperChem, Inc.'s technology. In June, 1994, the Registrant sold Betz Energy Chemicals, Inc., a subsidiary that served the oil field production market by providing products and services used in the extraction of crude oil deposits in the earth. Betz Energy Chemicals, Inc. had annualized sales of approximately $10 million. The sale was part of the Registrant's efforts to concentrate on developing its core technologies. The Betz MetChem Division serves steel, aluminum and plastic producers, and the related transportation, machinery, appliances, fabricated parts and coil industries. Its products and treatment programs are designed for cleaning, passivation, conversion coating, paint detackification and storage of metals and metal parts. Technical sales representatives working in each of the Registrant's eight marketing units assist in the development of engineered programs to meet a customer's needs. Such programs are custom designed to conserve energy, minimize corrosion and deposits, control microbiological fouling, reduce waste generation, improve process efficiency or any combination of the above, depending on the customer's requirements. Technical sales representatives also train customer operating personnel in the controlling, testing and chemical feeding required in applying Registrant's treatment programs. Since plant operating conditions and intake water characteristics do not remain static, the technical sales representatives make regular, scheduled plant follow-up visits to monitor the treatment program results and help customer operating personnel. To ensure treatment effectiveness, Registrant may also provide additional technical services from its mobile water treatment TravelLabs (registered trademark) which conduct tests on customer water systems. In the United States and other countries, Registrant has approximately 1,465 District Regional Managers, District Managers and technical sales representatives selling and servicing its chemical technologies.
Registrant's worldwide sales of specialty chemicals and the above related products during 1994 amounted to $708,286,000, as compared to $684,872,000 in 1993 and $706,972,000 in 1992, and in each case constituted 100% of Registrant's consolidated net sales. Consolidated net earnings for 1994 were $73,171,000, as compared to $65,520,000 in 1993 and $82,047,000 in 1992.
International Operations Registrant's international activities are conducted through subsidiaries operating in fifteen foreign locations. Betz International, Inc., a wholly-owned domestic subsidiary of Registrant, manages Registrant's U.S. based international sales effort and holds substantially all of the stock in Registrant's Singapore, Australian, Korean, Venezuelan and Indian subsidiaries. Betz International markets to customers located primarily in the Caribbean, Central America, South America, Saudi Arabia, India, Korea, Singapore, Malaysia, Indonesia, Thailand, Australia and New Zealand. Betz Europe, Inc., a wholly-owned domestic subsidiary of Registrant, holds directly or indirectly all of the stock in Registrant's Belgian, Austrian, German, Finnish, Swedish, French, Italian and United Kingdom subsidiaries. Registrant's Canadian subsidiary, Betz Canada Inc., operates independently of Betz International and Betz Europe. Although Registrant does not believe that its foreign operations are presently subject to a materially greater risk than its domestic operations, Registrant's foreign operations may at any time be adversely affected by conditions outside its control including economic and political conditions. See Notes 1, 2 and 4 to Consolidated Financial Statements for certain additional information pertaining to foreign operations. The range of products sold by Registrant to customers located outside of the United States is substantially similar to, although not as broad in scope as, those sold in the United States. Products and services sold to foreign markets during 1994 accounted for approximately $170,400,000 or 24.1% of Registrant's consolidated net sales as compared to $153,592,000 (22.4%) in 1993 and $160,484,000 (22.7%) in 1992. Of these amounts, direct exports by Betz International from the United States to foreign markets accounted for approximately $13,629,000 or 1.9% of Registrant's consolidated net sales in 1994, as compared to $11,981,000 (1.7%) in 1993 and $10,913,000 (1.5%) in 1992. Excluding products and services exported directly by Betz International, sales for 1994 by foreign subsidiaries were approximately $156,771,000 or 22.1% of the Registrant's consolidated net sales. Foreign subsidiary sales in 1993 and 1992 and their percentage of Registrant's consolidated net sales were $141,611,000 (20.7%) and $149,571,000 (21.2%), respectively. Of these amounts, sales by Registrant's Canadian subsidiary amounted to $38,404,000 (5.4%) in 1994; $36,171,000 (5.3%) in 1993; and $34,361,000 (4.9%) in 1992. The operating earnings of Registrant's foreign subsidiaries in 1994 were $22,701,000 or 3.2% of Registrant's consolidated net sales, as compared to $18,988,000 (2.8%) in 1993 and $27,069,000 (3.8%) in 1992. Approximately $395,046,000 or 71.1% of Registrant's identifiable assets are attributable to its domestic operations and $160,452,000 or 28.9% are attributable to its foreign operations.
Production and Distribution Many of Registrant's products are produced at more than one of the twenty-two (22) production plants referred to under Item 2
Item 2 - PROPERTIES
The Registrant's principal facilities are at the following locations:
Domestic Facilities - --------------------------------------------------------------------------- Square Owned Footage or of Location Leased Facility General Character - --------------------------------------------------------------------------- Bakersfield, California Owned 55,000 Office, Plant and Warehouse Cerritos, California Leased 28,480 Office and Warehouse Compton, California Owned 36,600 Plant and Warehouse Long Beach, California Owned 13,000 Office Ventura, California Leased 10,000 Office and Laboratory Jacksonville, Florida Owned 117,000 Office and Laboratory Macon, Georgia Owned 71,000 Plant and Warehouse Addison, Illinois Owned 56,800 Plant and Warehouse Leased 16,000 Warehouse Reserve, Louisiana Owned 24,000 Plant and Warehouse New Philadelphia, Ohio Owned 108,000 Plant and Warehouse Trevose, Pennsylvania Owned 198,000 Headquarters Owned 46,500 W. H. and L. D. Betz Research Center Owned 50,000 Training Center, Warehouse and Maintenance Bldg. Owned 81,000 J. D. Betz Engineering Laboratory and Betz Water Management Group Laboratory Langhorne, Pennsylvania Owned 134,000 Plant and Warehouse Horsham, Pennsylvania Owned 32,500 Office and Laboratory Horsham, Pennsylvania Owned 126,000 Office and Limited Production Horsham, Pennsylvania Owned 100,000 Office
Square Owned Footage or of Location Leased Facility General Character - --------------------------------------------------------------------------- Puerto Rico Leased 12,000 Office and Warehouse Beaumont, Texas Owned 82,000 Plant, Warehouse and Office The Woodlands, Texas Owned 120,000 Laboratory and Office Garland, Texas Owned 45,000 Plant and Warehouse Orange, Texas Owned 53,000 Plant and Warehouse South Houston, Texas Owned 25,000 Plant and Warehouse Washougal, Washington Owned 46,000 Plant and Warehouse Cheyenne, Wyoming Owned 35,800 Plant and Warehouse
Foreign Facilities
Ingleburn, New South Wales, Australia Owned 31,895 Office, Plant, Warehouse and Laboratory Haasrode, Belgium Owned 38,500 Office and Laboratory Herentals, Belgium Owned 43,800 Office, Plant and Laboratory Herentals, Belgium Owned 11,500 Office Edmonton, Alberta, Canada Owned 59,800 Plant, Warehouse and Laboratory Pointe Claire Quebec, Canada Owned 90,000 Office and Plant Kanata, Ontario, Canada Owned 24,400 Office and Laboratory Winsford, England Owned 49,000 Office, Plant and Laboratory Crissey, France Owned 48,000 Office and Plant Marne la Vallee, France Owned 21,000 Office and Laboratory Willich, Germany Owned 15,000 Office and Laboratory Ferentino, Italy Owned 35,721 Office, Plant and Laboratory
Square Owned Footage or of Location Leased Facility General Character - --------------------------------------------------------------------------- Rome, Italy Owned 18,200 Office Iri, Korea Owned 22,700 Office, Plant and Laboratory Singapore* Owned/ 26,320 Office, Plant, Lease Warehouse and Laboratory - ---------- * In accordance with local law and custom, Registrant owns the Singapore facility but presently holds the land upon which the facility is situated under a 30 year lease, which expires in August, 2009. At such time as the lease lapses without being renewed, the office, plant and warehouse would become the property of the Singapore government. Registrant would receive no compensation therefor.
The Registrant believes that the present production capacity of its plants is adequate to meet its present and reasonably anticipated domestic and foreign needs. In addition to owned facilities, the Registrant leases numerous office facilities throughout the world from which its local sales efforts are conducted. See Note 7 to the Consolidated Financial Statements comprising Item 8 hereof for information concerning lease obligations.
Item 3
Item 3 - PENDING LEGAL PROCEEDINGS
There are no material pending legal proceedings other than ordinary routine litigation incidental to the business of the Registrant to which the Registrant or any of its subsidiaries is a party or of which any of their property is the subject. The Registrant is a "Potentially Responsible Party" ("PRP") under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") as amended by the Superfund Amendments and Reauthorization Act ("SARA") with respect to thirteen (13) sites at which alleged releases or threatened releases of hazardous substances into the environment may have occurred. In response, the Registrant has been voluntarily participating with other PRPs at each of these sites to familiarize itself with site conditions, determine the nature and extent of contamination, analyze alternatives for remediation and develop a plan for clean-up. In each instance, the Registrant has participated in discussions with representatives of the EPA and other PRPs to determine its potential liability for financing necessary response actions. Although it is impossible to determine the exact cost of response activities, present information and the likelihood of contributions from other PRPs at each site indicates that the Registrant's ultimate share of remediation costs at ten (10) of the thirteen (13) sites will be less than $100,000 of the total anticipated response cost. At the Operating Industries, Inc. site, Monterey Park, California (the "Site"), the Registrant is a signatory to two Partial Consent Decrees among the United States of America, the State of California, the California Hazardous Substance Account and approximately four hundred (400) other parties entered in the United States District Court for the Central District of California in 1989 and 1992, respectively. Pursuant to such Partial Consent Decrees, the parties are performing remedial activities at the Site in response to alleged releases and threatened releases of hazardous substances into the environment. The Registrant, without admitting liability, agreed to an allocation of costs of approximately $279,000 to be paid over a period of seven (7) years pursuant to the 1989 Partial Consent Decree. Pursuant to the 1992 Partial Consent Decree, the Registrant agreed to pay a portion of state and federal past costs and perform necessary remedial work, and pay for oversight of such work. Although Registrant's share of such costs has not been finally determined among the parties, it is estimated that Registrant's future allocation will be approximately $180,000 payable over the next seven to nine years. Such amount, if ultimately assessed and paid, would not be material to the business of the Registrant. The Registrant is a third party defendant in two federal court actions in the State of New Jersey involving the Helen Kramer Landfill site in Mantua Township, New Jersey. It is alleged that the Registrant's wastes were shipped to the site from 1968 to 1971 and that two loads of municipal solid waste were sent to the site in 1981. In September, 1988 EPA estimated the chosen remedy to have a present worth cost of approximately $44 million. Actual costs have been higher; press releases issued in January, 1993 indicated costs were in the range of $90-100 million. However, in overall settlement discussions, EPA and New Jersey Department of Environmental Protection have demanded over $185 million to end the litigation. The defendants and third-party defendants await documentation of this later sum. If remedial costs exceed $100 million, the Registrant's allocation may exceed $100,000;
however, such allocation is speculative and would most likely not materially affect the Registrant's financial condition or results of operations. Presently, no allocation of costs has been determined among the PRPs, and the Registrant's ultimate allocation is still speculative. The Registrant is a counterclaim defendant in a lawsuit initiated by EPA seeking recovery of response costs incurred at the Artel Chemical Corporation Site in Kanawha and Putnam Counties, West Virginia. There is a total of 57 companies in the litigation. It is alleged that the Registrant used this site for the blending of certain anti-freeze chemicals used in the coal mining business. EPA estimates clean-up costs to be in the range of $100 million. The Registrant is participating in a court-approved settlement process and a final allocation is expected in 1995. The allocation of response costs attributable to the Registrant is speculative. However, such allocation would most likely not materially affect the Registrant's financial condition or results of operations. The Registrant is a secondary defendant in the case of Katherine Adams, et al. v. Pacific Gas and Electric, ("PG&E") et al. commenced October, 1994 in the Superior Court of California, County of Los Angeles. Plaintiffs seek money damages for alleged exposures to chromate based products sold by Registrant to PG&E for use in a cooling tower between 1952 to 1966. PG&E apparently released the water from the cooling tower to an unlined pond which in turn caused contamination of the groundwater. Registrant has been advised that PG&E has entered into a settlement agreement with the plaintiffs. Registrant denies any legal liability to plaintiffs for the acts of PG&E. Registrant also believes that adequate insurance coverage exists which would make recovery of damages, if any, by the plaintiffs unlikely to materially affect the Registrant's financial condition or results of operations.
Item 4
Item 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Registrant's security holders through the solicitation of proxies or otherwise during the fourth quarter of the fiscal year to which this report relates.
PART II
Item 5
Item 5 - MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
Pursuant to General Instruction G(2) to Form 10-K, in response to Item 5, Registrant hereby incorporates by reference the information contained in Note 10 to the Consolidated Financial Statements, "Quarterly Financial Information (Unaudited)", under the captions "Cash Dividends Declared per Common Share" and "Common Share Market Prices" on page 26 of Registrant's 1994 Annual Report to its Shareholders.
Item 6
Item 6 - SELECTED FINANCIAL DATA
Pursuant to General Instruction G(2) to Form 10-K, in response to Item 6, Registrant hereby incorporates by reference the following information contained under the heading "Consolidated Summary of Operations" on pages 30 and 31, of Registrant's 1994 Annual Report to its Shareholders: For Fiscal Years 1990 through 1994, both inclusive, the information under the headings "Net Sales", "Net Earnings", "Earnings per Common Share", "Cash Dividends Declared per Common Share", "Total assets", and "ESOP debt".
Item 7
Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Pursuant to General Instruction G(2) to Form 10-K, in response to Item 7, Registrant hereby incorporates by reference the information contained under the heading "Management's Discussion And Analysis Of Financial Condition And Results Of Operations" on pages 27 through 29 of Registrant's 1994 Annual Report to its Shareholders.
Item 8
Item 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Pursuant to General Instruction G(2) to Form 10-K, in response to Item 8, Registrant hereby incorporates by reference the consolidated financial statements included on pages 17 through 26, both inclusive, of Registrant's 1994 Annual Report to its Shareholders.
Item 9
Item 9 - DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10
Item 10 - DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Pursuant to General Instruction G(3) to Form 10-K, in response to Item 10, Registrant hereby incorporates by reference the information contained under the heading "Directors and Executive Officers" on pages 2 through 6, both inclusive, of Registrant's definitive proxy statement to be used in connection with Registrant's 1995 Annual Meeting of Shareholders, as filed with the Securities and Exchange Commission on or about March 8, 1995.
Item 11
Item 11 - EXECUTIVE COMPENSATION AND TRANSACTIONS
Pursuant to General Instruction G(3) to Form 10-K, in response to Item 11, Registrant hereby incorporates by reference the information contained under the headings "Executive Compensation" on pages 15 through 22, both inclusive, of Registrant's definitive proxy statement to be used in connection with Registrant's 1995 Annual Meeting of Shareholders, as filed with the Securities and Exchange Commission on or about March 8, 1995.
Item 12
Item 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Pursuant to General Instruction G(3) to Form 10-K, in response to Item 12, Registrant hereby incorporates by reference the information contained under the heading "Ownership of Company Shares" on pages 13 and 14 of Registrant's definitive proxy statement to be used in connection with Registrant's 1995 Annual Meeting of Shareholders, as filed with the Securities and Exchange Commission on or about March 8, 1995.
Item 13
Item 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
Item 14
Item 14 - EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
a. 1. and 2. The following consolidated financial statements of Betz Laboratories, Inc. and subsidiaries, included in the Annual Report of Registrant to its Shareholders for the year ended December 31, 1994, are incorporated by reference in Item 8:
Annual Report Page(s)
Consolidated Statements of Operations--Years ended December 31, 1994, 1993 and 1992...................... 17 Consolidated Balance Sheets--December 31, 1994 and 1993 18-19 Consolidated Statements of Cash Flows--Years ended December 31, 1994, 1993 and 1992................ 20 Consolidated Statements of Common Shareholders' Equity-- Years ended December 31, 1994, 1993 and 1992.......... 21 Notes to Consolidated Financial Statements.............. 22-26
The following consolidated financial statement schedule of Betz Laboratories, Inc. and subsidiaries is included in Item 14(d):
Form 10-K Page(s) Schedule II -- Valuation and Qualifying Accounts...... 17 (F-1)
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
3. Listing of Exhibits.
Form 10-K Exhibit Number Description Page 3 Articles of Incorporation and Bylaws . . . . * * The items designated Exhibit 3 to Registrant's Annual Report on Form 10-K for fiscal year 1988, (Restated Articles of Incorporation and Bylaws of Betz Laboratories, Inc.) as heretofore filed with the Securities and Exchange Commis- sion are hereby incorporated by reference as Exhibit 3 hereto.
4 Instruments defining the rights of Security Holders . . . . . . . . . . . . . . . . . . . * See Exhibit 3 hereto.
10 Material Contracts . . . . . . . . . . . . * *The items designated Exhibit 10 to Registrant's Annual Report on Form 10-K for fiscal year 1992 ("Guidelines For Betz Laboratories, Inc. Corporate Discretionary Senior Executive Officer Bonus Plan; Corporate Discretionary Executive Officer Bonus Plan; Corporate Discretionary Officer Bonus Plan; and Corporate Discretionary Key Employee Bonus Plan"); the item designated as Exhibit A to Registrant's definitive Proxy Statement dated March 8, 1995 ("Stock Incentive Plan"); the item designated Exhibit A to Registrant's definitive Proxy Statement dated March 5, 1982 ("Stock Option Plan"); and the item designated Exhibit B to Registrant's definitive Proxy Statement dated March 8, 1995 ("Stock Option Plan of 1987"); all as heretofore filed with the Securities and Exchange Commission are hereby incorporated by reference as Exhibit 10 hereto. 11 Statement regarding computation of per share earnings 18 13 Registrant's 1994 Annual Report to Shareholders 19 [only those portions specifically incorporated in this Annual Report on Form 10-K are to be deemed as filed with the Commission].
21 Subsidiaries of Registrant............................. 54 23 Consent of Independent Auditors........................ 55 27 Financial Data Schedule................................ 56
b. Reports on Form 8K None
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.
BETZ LABORATORIES, INC.
By: s/ William R. Cook Date: March 28, 1995 ---------------------------------- William R. Cook, President and Chief Executive Officer
By: s/ R. Dale Voncanon Date: March 28, 1995 ---------------------------------- R. Dale Voncanon, Vice President - Finance and Treasurer (Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
By: s/John F. McCaughan Date: March 28, 1995 ---------------------------------- John F. McCaughan, Director
By: s/John W. Boyer, Jr. Date: March 28, 1995 ---------------------------------- John W. Boyer, Jr., Director
By: s/Patrick F. Brennan Date: March 28, 1995 ---------------------------------- Patrick F. Brennan, Director
By: s/Carolyn S. Burger Date: March 28, 1995 ---------------------------------- Carolyn S. Burger, Director
By: s/George A. Butler Date: March 28, 1995 ---------------------------------- George A. Butler, Director
By: s/William R. Cook Date: March 28, 1995 ---------------------------------- William R. Cook, Director
By: s/John A. Miller Date: March 28, 1995 ---------------------------------- John A. Miller, Director
By: s/John Quarles Date: March 28, 1995 ---------------------------------- John Quarles, Director
By: s/John A. H. Shober Date: March 28, 1995 ---------------------------------- John A. H. Shober, Director
By: s/Geoffrey Stengel, Jr. Date: March 28, 1995 ---------------------------------- Geoffrey Stengel, Jr., Director
By: s/Robert L. Yohe Date: March 28, 1995 ---------------------------------- Robert L. Yohe, Director
FINANCIAL REPORT Betz Laboratories, Inc.
TO OUR SHAREHOLDERS:
The management of Betz Laboratories, Inc. is responsible for the preparation and presentation of the financial statements and other financial information contained in the Annual Report. The financial statements include amounts that are based on management's best estimates and judgments. These statements have been prepared in conformity with generally accepted accounting principles and have been audited by Ernst & Young LLP, independent auditors. The Company and its subsidiaries maintain adequate accounting systems and financial controls. The quality and scope of our accounting systems and financial controls are augmented by ongoing internal audit programs. In addition, the Audit Committee of the Board of Directors periodically meets with management, our internal audit group and representatives of Ernst & Young LLP to discuss financial reporting matters as well as to review auditing and internal control procedures.
R. Dale Voncannon Vice President -- Finance and Treasurer January 27, 1995
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Shareholders and Board of Directors Betz Laboratories, Inc.
We have audited the accompanying consolidated balance sheets of Betz Laboratories, Inc. as of December 31, 1994 and 1993, and the related consolidated statements of operations, common shareholders' equity and cash flows for each of the three years in the period ended December 31, 1994. 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 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 Betz Laboratories, Inc. at December 31, 1994 and 1993, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. As discussed in the Notes to Consolidated Financial Statements, in 1993 the Company changed its methods of accounting for income taxes (Note 2) and postretirement benefits other than pensions (Note 9) and changed its method of calculating asset values used in the determination of pension expense (Note 3).
Ernst & Young LLP Philadelphia, Pennsylvania January 27, 1995
CONSOLIDATED BALANCE SHEETS Betz Laboratories, Inc.
December 31 ----------------------- (Dollars in thousands, except per share amounts) 1994 1993 - ------------------------------------------------------------------------------ ASSETS
CURRENT ASSETS Cash and cash equivalents $ 43,926 $ 43,921 Trade accounts receivable, less allowances: 1994 -- $2,693; 1993 -- $2,698 121,660 102,882 Inventories: Finished products and goods purchased for resale 19,491 17,155 Raw materials 20,133 20,191 -------- -------- 39,624 37,346
Prepaid expenses and other 24,666 24,486 -------- -------- TOTAL CURRENT ASSETS 229,876 208,635
PROPERTY, PLANT AND EQUIPMENT -- at cost Buildings 172,833 155,781 Machinery and equipment 396,074 360,426 Allowance for depreciation (291,588) (253,881) -------- -------- 277,319 262,326
Land 22,056 21,146 Construction in progress (estimated cost to complete -- $17,230) 9,573 17,270 -------- -------- 308,948 300,742
OTHER ASSETS Investments and other 10,256 7,223 Intangibles -- at cost, less amortization: 1994 -- $2,855; 1993 -- $2,513 6,418 4,529 -------- ------- 16,674 11,752 -------- ------- $555,498 $521,129 ======== ========
December 31 ----------------------- 1994 1993 - ------------------------------------------------------------------------------ LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES Trade accounts payable $ 30,740 $ 32,554 Payroll and related taxes 24,010 17,727 Accrued expenses 20,305 24,577 Income taxes 12,587 6,838 Dividends payable 10,031 9,845 Current portion of ESOP debt 1,000 500 -------- -------- TOTAL CURRENT LIABILITIES 98,673 92,041
ESOP DEBT -- less portion classified as current 96,500 97,500
LONG-TERM LIABILITIES Income taxes 20,765 21,998 Other 15,602 10,271 -------- -------- 36,367 32,269
SHAREHOLDERS' EQUITY Preferred Shares -- Authorized -- 1,000,000 shares, $.10 par value, voting Series A ESOP Convertible, 8% Cumulative, stated at aggregate liquidation preference; Issued: 1994 -- 492,167 shares; 1993 -- 496,005 shares 98,433 99,201 Guarantee of related ESOP debt (92,834) (94,101) -------- -------- 5,599 5,100
Common Shareholders' Equity: Common Shares -- Authorized -- 90,000,000 shares, $.10 par value; Issued (including treasury shares): 1994 -- 33,649,527 shares; 1993 -- 33,654,715 shares 3,365 3,365 Capital in excess of par value of shares 81,802 78,667 Retained earnings 423,519 394,726 Cost of Common Shares in treasury: 1994 -- 5,784,899 shares; 1993 -- 5,527,310 shares (187,523) (170,442) Unearned compensation (5,521) (7,773) Foreign currency translation adjustments 2,717 (4,324) -------- -------- COMMON SHAREHOLDERS' EQUITY 318,359 294,219 -------- -------- TOTAL SHAREHOLDERS' EQUITY 323,958 299,319 -------- -------- $555,498 $521,129 ======== ========
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Betz Laboratories, Inc.
1 Summary of Significant Accounting Policies Principles of Consolidation -- The consolidated financial statements include the accounts of the Company and all subsidiaries. All significant intercompany items and transactions are eliminated from the consolidated statements. Foreign Operations -- The Company follows the practice of using a November 30 fiscal year for all foreign subsidiaries in order to expedite the year-end closing. Cash Equivalents -- The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The carrying value of these investments approximates their fair value at December 31, 1994. Inventories -- Inventories are stated at the lower of cost or market. Cost of approximately 70 percent of the inventory is determined by the last-in, first-out (LIFO) method, the balance by the first-in, first-out (FIFO) method. If the FIFO method of inventory accounting had been used for all inventory, amounts would have been approximately $10,681,000 and $10,419,000 higher than reported at December 31, 1994 and December 31, 1993, respectively. Depreciation -- Depreciation is computed principally by the straight- line method over the estimated useful lives of the related assets. Depreciation expense for the three years ended December 31, 1994, 1993 and 1992 is $44,769,000, $41,758,000 and $38,528,000, respectively. Investments -- Marketable equity securities and cash surrender value of officers' life insurance policies are recorded at fair value. All other investments are generally carried at cost. Intangible Assets -- Intangible assets consist primarily of cost in excess of net assets of acquired businesses. Amortization is computed by the straight-line method generally over 40 years. Foreign Currency Exposure Management -- The Company, through its foreign subsidiaries, is exposed to the effect of foreign exchange rate fluctuations on the U.S. dollar value of the income of its foreign subsidiaries. During 1994, the Company purchased foreign currency forward contracts to minimize the effect of fluctuating foreign currencies on its cash flow and unremitted income from certain of its foreign subsidiaries. The forward contracts are marked to market and resulting adjustments are recorded directly in income. At December 31, 1994, the Company had forward exchange contracts, all having original maturities of less than twelve months, to exchange various foreign currencies for U.S. dollars in the amount of $3,352,000. The unrealized gains reflected in the financial statements at December 31, 1994 are $54,000. Research and Development -- Research and development costs ($29,818,000 in 1994, $28,732,000 in 1993 and $28,343,000 in 1992) are charged to expense as incurred. Per Share Amounts -- Primary earnings per Common Share is computed by dividing net income available to common shareholders by the weighted average number of shares outstanding during the periods presented. In computing primary earnings per Common Share, preferred stock dividends, net of related income tax benefit, reduce income available to common shareholders. In computing fully diluted earnings per Common Share, conversion of the Series A ESOP Convertible Preferred Shares is assumed.
2 Income Taxes Effective January 1, 1993, the Company changed its method of accounting for income taxes from the deferred method to the liability method required by Financial Accounting Standard No. 109, "Accounting for Income Taxes." As permitted under the new rules, 1992 financial statements have not been restated. The cumulative effect of adopting Statement 109 as of January 1, 1993 was to increase net income by $3,600,000. The effect on 1993 earnings before cumulative effect of accounting changes was not material. The components of earnings before income taxes and cumulative effect of accounting changes consists of the following (in thousands):
1994 1993 1992 - -------------------------------------------------------------------------- Domestic $ 90,613 $ 75,232 $ 99,316 Foreign 30,331 28,838 34,855 -------- -------- -------- $120,944 $104,070 $134,171 ======== ======== ========
The provision for income taxes consists of the following (in thousands): Deferred Liability Method Method ----------------------- --------- 1994 1993 1992 - -------------------------------------------------------------------------- Current: Federal $34,837 $28,879 $32,985 State 4,291 5,505 5,360 Foreign 10,222 9,894 12,730 ------- ------- ------- Total Current 49,350 44,278 51,075
Deferred: Federal (1,924) (2,507) 1,013 State (145) (532) 75 Foreign 492 (548) (39) ------- ------- ------- Total Deferred (1,577) (3,587) 1,049 ------- ------- ------- Total Taxes $47,773 $40,691 $52,124 ======= ======= =======
A reconciliation of the effective income tax rate with the applicable statutory federal income tax rate is as follows:
1994 1993 1992 - -------------------------------------------------------------------------- Federal tax rate 35.0% 35.0% 34.0% State and local taxes, net of federal income taxes 2.3 3.2 2.8 Other items 2.2 0.9 2.0 ----- ----- ----- Effective income tax rate 39.5% 39.1% 38.8% ===== ===== =====
Deferred income taxes reflect the estimated future tax effects of temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of December 31 are as follows (in thousands):
1994 1993 - -------------------------------------------------------------------------- Deferred Tax Assets: Stock and benefit plans $ 8,400 $ 5,763 Nondeductible expenses 5,221 7,395 Tax carryforwards 366 2,788 Other 2,981 3,165 -------- -------- Total Deferred Tax Assets 16,968 19,111 Valuation allowance for deferred tax assets (366) (3,095) -------- -------- Net Deferred Tax Assets 16,602 16,016 Deferred Tax Liabilities: Tax over book depreciation (28,635) (29,913) Other (704) (290) -------- -------- Total Deferred Tax Liabilities (29,339) (30,203) -------- -------- Net Deferred Tax Liabilities $(12,737) $(14,187) ======== ========
In 1994 and 1993, prepaid expenses and other includes deferred tax assets of $7,683,000 and $7,712,000 and investments and other includes deferred tax assets of $345,000 and $99,000, respectively. The balance of $20,765,000 and $21,998,000 is included in long-term liabilities - income taxes on the balance sheet. At December 31, 1994, the Company has capital loss carryforwards of $1,046,000 for income tax purposes that expire in the years 1995 through 1998. The Company made income tax payments of $39,299,000, $43,087,000 and $42,122,000 for the years 1994, 1993 and 1992, respectively. The Company has not provided United States income taxes on $79,865,000 of unremitted earnings of foreign subsidiaries because management views such earnings as being indefinitely invested.
3 Employee Retirement Plans The Company has defined benefit plans to provide pension benefits to substantially all of its employees. The benefits are primarily based on years of service and the employee's final average compensation. The Company's funding policy is to contribute an amount annually based upon actuarial and economic assumptions designed to achieve adequate funding of projected benefit obligations. Plan assets are principally invested in listed common stocks, bonds and common trust funds. Effective January 1, 1993, the Company changed its method of calculating the value of assets of its pension plan for purposes of determining annual pension costs under Financial Accounting Standard No. 87. This calculated value is the basis for computing the annual expected return on plan assets and the net amortization and deferral component of pension costs. This calculated value recognizes changes in fair value of assets over three years (previously five years). The new method, which also changes the manner in which such changes in fair value are recognized over the three-year period, is preferable because, in the Company's situation, it produces a calculated value which more closely approximates fair value, and is therefore more sensitive to the current economic environment, while still mitigating the effect of extreme market value fluctuations. The cumulative effect on years prior to 1993 was $1,241,000 (net of taxes of $780,000), or $.04 per share, which is a one-time, noncash increase in net income for 1993. The effect of this change on 1993 results of operations and the pro forma effects on results of operations for 1992 are not material. Net periodic pension expense (excluding the cumulative effect of the accounting change) for the Company's defined benefit plans consists of the following (in thousands):
1994 1993 1992 - -------------------------------------------------------------------------- Service cost $ 9,070 $ 6,262 $ 5,707 Interest cost 12,558 10,907 9,763 Return on plan assets (12,327) (11,469) (11,055) Net amortization and deferral 623 1,477 3,457 ------- ------- ------- Net periodic pension expense $ 9,924 $ 7,177 $ 7,872 ======= ======= =======
The following table sets forth the actuarial present value of benefit obligations and funded status at December 31 for the Company's plans (in thousands):
1994 1993 - ------------------------------------------------------------------------- Actuarial present value of benefit obligations: Vested benefits $(113,075) $(113,256) Nonvested benefits (6,419) (6,900) --------- --------- Accumulated benefit obligation (119,494) (120,156) Effect of projected future salary increases (42,262) (47,628) --------- ---------
Projected benefit obligation (161,756) (167,784) Plan assets at fair value 140,580 142,069 --------- ---------
Projected benefit obligation in excess of plan assets (21,176) (25,715) Unrecognized net loss 8,389 18,953 Unrecognized prior service cost 6,244 6,970 Other 614 (2,418) --------- ---------
Net pension liability included in the balance sheet $ (5,929) $ (2,210) ========= =========
Assumptions used to develop the Company's net periodic pension expense and the actuarial present value of benefit obligations were as follows: December 31 1994 1993 1992 - -------------------------------------------------------------------------- Discount rate 8.5% 7.25% 8.75% Rate of increase in compensation levels 5.0% 5.0% 5.0% Long-term rate of return on plan assets 9.25% 9.5% 9.5%
4 Segment and Geographic Information The Company operates principally in one industry segment which includes the development, manufacture and sale of specialty chemical products used to treat industrial water and industrial processes using water. The Company's areas of operation outside of the United States and Europe principally include Canada, the Caribbean and the Pacific. No one single foreign country in which the Company produces or markets its products is significant to consolidated operations. No single customer accounts for more than 10 percent of the Company's revenues. Information about the Company's operations in different geographic locations is shown below.
United Other Consoli- 1994 States Europe Foreign dated - -------------------------------------------------------------------------- Net sales $551,515 $92,994 $63,777 $708,286 Operating earnings 94,804 13,303 9,398 117,505 Identifiable assets 395,046 102,885 57,567 555,498
- -------------------------------------------------------------------------- Net sales $543,261 $84,613 $56,998 $684,872 Operating earnings 82,298 9,905 9,083 101,286 Identifiable assets 399,927 75,928 45,274 521,129
- -------------------------------------------------------------------------- Net sales $557,401 $96,168 $53,403 $706,972 Operating earnings 104,195 16,140 10,929 131,264 Identifiable assets 397,306 75,149 38,162 510,617
United States identifiable assets include $27,000,000, $32,100,000 and $49,500,000 of cash and cash equivalents, marketable securities and other investments at December 31, 1994, 1993 and 1992, respectively. These assets are available for general corporate purposes. Direct export sales of $13,629,000, $11,981,000 and $10,913,000 for the years 1994, 1993 and 1992, respectively, are included in United States net sales.
5 Stock Option, Stock Incentive and Shareholder Rights Plans
Option Plans -- Options granted under the Company's Stock Option Plans are at the fair value at the date of grant. The period during which these options become exercisable ranges from date of grant to two years after date of grant. Unexercised options expire ten years after date of grant. No individual may receive an option if that individual owns (or would own if options were exercised) stock possessing 5 percent of the voting power or value of all classes of stock of the Company. Option activity is summarized as follows:
Number of Option Price Shares per Share - ---------------------------------------------------------------------------- Outstanding at January 1, 1992 1,340,006 $15.125 - $58.50 Granted 358,681 53.875 - 60.50 Exercised (240,972) 15.125 - 56.75 -------- Outstanding at December 31, 1992 1,457,715 15.50 - 60.50 Granted 612,641 43.625 - 59.00 Cancelled (20,619) 33.50 - 60.50 Exercised (76,797) 15.50 - 58.25 -------- Outstanding at December 31, 1993 1,972,940 17.375 - 60.50 Granted 727,746 43.25 - 49.625 Cancelled (25,490) 33.50 - 60.00 Exercised (110,927) 17.375 - 46.75 -------- Outstanding at December 31, 1994 2,564,269 $17.375 - $60.50 ========== Exercisable at December 31, 1994 1,947,412 ==========
At December 31, 1994, the Company had remaining an aggregate of 2,471,634 Common Shares reserved for issuance under its Stock Option Plans. The Board of Directors has adopted amendments to the Employee Stock Option Plan of 1987 which provide for an additional 2,000,000 shares of the Company's common stock to be used for granting stock options to employees and members of the Board of Directors until April 13, 2005. These actions are subject to approval by the shareholders at the 1995 Annual Meeting. Incentive Plan -- The Employee Stock Incentive Plan provides that up to 2,500,000 shares of common stock may be granted to April 11, 2001, at the discretion of the Board of Directors, to key employees at no cost to the employees. The Company granted 20,098, 48,504 and 47,573 shares during 1994, 1993 and 1992, respectively. Key employees receiving grants are entitled to receive dividends, but assumption of full beneficial ownership is contingent at the time of grant. In the event the employee does not remain in continuous employment for the periods stipulated, the shares are cancelled and revert to the Company for reissuance under the Plan. The aggregate fair market value of the shares granted under this Plan is considered unearned compensation at the time of grant and compensation is earned ratably over the stipulated period. The Board of Directors has adopted an amendment to the Employee Stock Incentive Plan which provides for the grant of incentive stock to non- employee Directors and to extend the date for the grant of shares to April 13, 2005. This action is subject to approval by the shareholders at the 1995 Annual Meeting. At December 31, 1994, the Company had remaining an aggregate of 642,197 Common Shares available for issuance under its Employee Stock Incentive Plan. Common Stock Shareholder Rights Plan -- On September 8, 1988, the Board of Directors declared a distribution of one Stock Purchase Right for each Common Share outstanding. Each right will entitle the holder to buy from the Company a unit consisting of one Common Share at an exercise price of $75 per unit. The rights become exercisable ten days after a public announcement that a person or group has acquired 20 percent or more of the Company's Common Shares or has commenced a tender offer for 20 percent or more of the Common Shares. The rights may be redeemed prior to becoming exercisable by action of the Board of Directors at a redemption price of $.01 per right. If more than 20 percent of the Company's Common Shares become held by a beneficial owner, other than pursuant to an offer deemed in the best interests of the shareholders by the Company's independent directors, each right may be exercised for Common Shares, or other property, of the Company having a value of twice the exercise price of each right. If the Company is acquired by any person after the rights become exercisable, each right will entitle its holder to receive common shares of the acquiring company having a market value of twice the exercise price of each right. The rights expire on September 19, 1998.
6 Employee Stock Ownership (ESOP) and 401(k) Plan In 1989, the Company established an ESOP and a related trust as a long-term benefit for substantially all of its domestic employees. This plan supplements the Company's employee retirement plan. Under this plan, the Company sold 500,000 shares of a new Series A ESOP Convertible Preferred Stock to the trust for $100,000,000. The Company arranged for and guaranteed a loan of $100,000,000 to the trust for the purchase of the preferred stock. Proceeds of the loan were primarily used for the purchase of common treasury stock to be used for future conversion and redemption of the preferred stock, which is presently convertible into 2,757,000 shares of common stock. The loan and guarantee are recorded in the Company's consolidated balance sheets as long-term debt and a reduction in shareholders' equity. Effective January 1, 1990, the Company's 401(k) program was integrated into the Employee Stock Ownership Plan. Employees may invest 2 to 15 percent of eligible compensation. Company matches, equal to 25 percent of the first 4 percent of employees' investments, fully vest to employees upon the completion of 5 years of service. The Company's matching contributions, which are included in ESOP expense, are made in the form of the ESOP Convertible Preferred Stock. The fair value of such matching contributions amounted to $1,365,000 in 1994, $1,411,000 in 1993 and $1,224,000 in 1992. After satisfying the 401(k) matching contributions, the remaining shares of ESOP stock are allocated to each participant based on the ratio of the participant's compensation to total compensation of all participants. During 1994, 3,838 shares of the Preferred Stock were converted to Common Shares by plan participants and permanently retired. The number of shares allocated and unallocated at December 31 are as follows:
1994 1993 - -------------------------------------------------------------------------- Allocated 102,884 85,096 Unallocated 389,283 410,909 ------- ------- Total shares held by ESOP 492,167 496,005 ======= =======
The Company is required to make quarterly contributions to the Plan which enable the trust to service its indebtedness. Net ESOP cost for the Company is comprised of the following elements (in thousands):
1994 1993 1992 - -------------------------------------------------------------------------- ESOP expense $ 9,163 $ 9,210 $ 9,321 Preferred dividends (charged to retained earnings) (7,905) (7,947) (7,964) ------- ------- ------- ESOP expense charged to earnings $ 1,258 $ 1,263 $ 1,357 ======= ======= ======= ESOP debt interest expense at 8.08% for 1994 and 1993; 8.15% for 1992 $ 7,897 $ 7,937 $ 8,047 ======= ======= ======= ESOP contributions $ 8,398 $ 8,441 $ 8,548 ======= ======= =======
The ESOP expense is calculated using the 80-percent-of-shares- allocated method. To the extent that this expense exceeds the ESOP's annual debt service requirements, an adjustment is made to the shareholders' equity reduction to reflect the cumulative effect of the excess charges ($7,166,000, $5,899,000 and $4,626,000 in 1994, 1993 and 1992, respectively). The ESOP debt matures on June 19, 2009 and requires principal payments as follows: in each of the years 1995-1999 -- $1,000,000. The Company is obligated to maintain, among other things, certain levels of tangible net worth and interest coverage, and not to exceed a maximum funded debt level. The fair value of the ESOP debt approximates $92,000,000, which was estimated using discounted cash flow analyses, based on quoted market rates for similar obligations. Amounts paid by the Company to the ESOP which are characterized as interest expense in the accompanying financial statements and interest on other indebtedness amounted to $1,263,000, $1,331,000 and $1,376,000 for the years 1994, 1993 and 1992, respectively. Capitalized interest amounted to $1,085,000, $1,188,000 and $1,055,000 in 1994, 1993 and 1992, respectively.
7 Long-Term Leases Total rental expense for all leases amounted to $13,971,000 in 1994, $13,270,000 in 1993 and $12,064,000 in 1992. The future rental commitments, primarily for automobiles, as of December 31, 1994 for all noncancelable leases are: 1995 -- $9,117,000, 1996 -- $4,174,000, 1997 -- $1,032,000, 1998 -- $167,000, 1999 -- $113,000 and $1,040,000 thereafter.
8 Provision for Restructuring The $16,196,000 provision for restructuring recorded in 1993 was for the estimated costs associated with the Company's decision to lower operating costs on a prospective basis and reorganize the Company's marketing efforts on a global basis. The provision included $5,171,000 for asset writedowns and $11,025,000 for personnel reductions, globalization of marketing efforts and other anticipated restructuring costs. At December 31, 1994, $3,622,000 and $1,627,000 of accrued restructuring costs are included in accrued expenses and other deferred credits, respectively.
9 Postretirement Benefits The Company pays limited medical and dental insurance premiums on behalf of certain early retirees as well as providing a small life insurance benefit for certain retirees. Prior to 1993, the cost of these benefits, which was not significant, was charged to expense when incurred. Effective January 1, 1993, the Company adopted Financial Accounting Standard No. 106. Under this Standard, the Company recognizes the cost of postretirement benefits over the active service period of its employees. The Company elected to recognize the transition obligation, which represents the previously unrecognized prior service cost, as a one-time noncash charge of $2,700,000 to net earnings in the first quarter of 1993. This charge was net of a $1,700,000 deferred tax benefit. The following table sets forth the plans' status at December 31: Accumulated postretirement benefit obligation (in thousands):
1994 1993 - -------------------------------------------------------------------------- Retirees $(1,186) $(1,000) Active plan participants (7,499) (5,000) ------- ------- Accumulated postretirement benefit obligation (8,685) (6,000) Unrecognized net loss 2,647 1,100 Unrecognized prior service cost 249 -- ------- ------- Postretirement benefit liability included in balance sheet $(5,789) $(4,900) ======= =======
Such benefit obligation is unfunded. The components of net periodic postretirement benefit cost follow (in thousands):
1994 1993 - -------------------------------------------------------------------------- Service cost $ 543 $ 180 Interest cost on accumulated benefit obligation 547 320 Net amortization and other 191 -- ------- ------ Net periodic postretirement benefit costs $ 1,281 $ 500 ======= ======
The estimated cash expenses for these benefits is approximately $222,000 for 1994 and $120,000 in 1993 and 1992. To more accurately reflect expected claims payments in the future, some assumptions changed which increased the Company's 1994 net periodic postretirement benefit cost approximately $490,000. Changes were made to the retirement age scale, the percentage of participants and participants' spouses electing benefits and the method of credibility weighting between actual claims and expected claims. The medical trend assumption was changed from 13% in 1993 grading down to 6% by .5% per year to 11.0% in 1994 grading down to 5% by .5% per year. An increase of 1% in the health care cost trend assumption would increase the accumulated postretirement obligation by approximately $966,000. Also, the discount rate was increased from 7.25% at December 31, 1993 to 8.5% at December 31, 1994.
10 Quarterly Financial Information (unaudited) The following is a summary of quarterly financial information for the years ended December 31, 1994 and 1993 (in thousands, except for per share data).
The common stock of the Company is traded on the New York Stock Exchange under the symbol BTL. The high/low price represents the high and low sales prices for the Company's stock. The approximate number of record holders of Common Shares as of February 10, 1995, was 3,755.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Betz Laboratories, Inc.
Overview Nineteen ninety-four was a challenging year. Although the economy expanded at a healthy pace, some customers continued to take a conservative approach to spending for the Company's treatment programs to meet short- term cost control objectives. For the year 1994, net sales increased $23.4 million from $684.9 million in 1993 to the current-year record level of $708.3 million. The 3 percent sales increase was comprised of a 4 percent volume-mix gain, partially offset by a decrease of approximately 1 percent resulting from the sale of the Company's oil field chemicals business on June 30, 1994. The Company experienced no significant impact on 1994 net sales from selling prices nor from the effects of foreign currency fluctuations. Operating earnings increased 16 percent from the prior year's $101.3 million to $117.5 million. Current-year earnings before the cumulative effect of accounting changes increased 15 percent compared to 1993 totals from $63.4 million to $73.2 million, while net earnings after accounting changes gained 12 percent from $65.5 million to $73.2 million. Fully diluted earnings per Common Share before the cumulative effect of accounting changes rose 18 percent from $1.95 to $2.30 and fully diluted earnings per Common Share after accounting changes were up 14 percent from $2.02 to $2.30. 1993 results of operations included a pretax and after-tax provision for restructuring of $16.2 million and $9.9 million, respectively, equivalent to $.31 per Common Share on a fully diluted, after-tax basis. In 1993, net sales decreased 3 percent from 1992 (primarily comprised of volume-mix losses of approximately 2 percent, a 2 percent decrease due to foreign currency fluctuations and selling price increases of approximately 1 percent). Net earnings decreased 20 percent for the same time period.
Results of Operations -- 1994 vs. 1993 The Company's results of operations for 1994 reflect the early success of globalization initiatives to capture a larger share of foreign markets. While domestic sales increased 2 percent from $543.3 million in 1993 to $551.5 million, foreign sales increased 11 percent from $141.6 million to $156.8 million in 1994. The 1994 domestic/foreign sales relationship was 78 percent/22 percent, respectively. Foreign sales in Europe were 10 percent higher than 1993 in local currencies with strong results posted by our French, German and Scandinavian subsidiaries. Betz Canada Inc. reported a local currency 1994 sales increase of 12 percent, due primarily to higher sales of its industrial water treatment and paper process treatment programs. The Company also reported double-digit sales increases in the Caribbean, Australia and South Korea. On June 30, 1994, the Company announced the sale of its oil field chemicals business to Western Company of North America. The oil field production chemicals business, served by Betz Energy Chemicals, Inc., had annual sales of approximately $10 million. The sale will allow the Company to concentrate more of its efforts on developing its core technologies. It will also allow the Company to focus on expanding its leadership position in the U.S. and its globalization initiative to address the significant opportunities for continued growth in Europe, Latin America and the Pacific. The current year's domestic net sales, excluding Betz Energy Chemicals, Inc., increased 3 percent over the prior year from $532.9 million to $547.4 million. Sales of water and wastewater treatment programs rose 2 percent with four of the five domestic Water Management Divisions recording positive sales gains. Betz Entec, Inc. experienced a high single- digit sales gain of its water treatment programs to the commercial, institutional and light industrial marketplace. Entec had a record year in terms of shipments to customers using Entec's CDS (registered trademark) delivery service. This service eliminates the cost and potential hazard associated with handling and disposing of empty metal drums. Sales of specialty process chemical treatment programs within the U.S. rose 3 percent from the 1993 level of $177.5 million to $182.8 million in 1994. Betz PaperChem, Inc., which markets the Company's line of specialty process chemicals to the pulp and paper industry, reported a similar increase. Sales of refinery process treatment programs marketed by Betz Process Chemicals, Inc. were essentially unchanged from the prior year. ProChem's results reflect continuing cost pressures within the refining industry. Nevertheless, this subsidiary continued to experience strong growth of its ALKAT-XL (registered trademark) treatment program which improves the efficiency of alkylation units in refineries. ProChem has been very successful in marketing new products such as ALKAT-XL (registered trademark) which result in significant savings in operating costs to customers. Another example of this is STYREX (registered trademark), a newly patented product which helps styrene manufacturers to increase yield. Betz MetChem Division, which markets the Company's line of specialty process chemicals to the metals industry, reported double-digit sales increases during 1994. MetChem's results reflect the continuing success of its NORINSE II (registered trademark) technology to the coil industry and ADHERE (registered trademark) programs to the plastics industry. The Company's gross profit margin decreased 1 percent from 65.3 percent of net sales in the prior year to 64.3 percent of 1994's net sales. This deterioration in the gross profit margin percentage is primarily due to a less favorable product mix. The Company also experienced increases in production, distribution and materials costs during 1994, with no corresponding increase in selling prices. Selling, research and administrative expenses increased from $329.9 million in 1993 to $338.3 million in 1994, but decreased as a percent of net sales with 1994's level at 47.8 percent compared to 1993's 48.2 percent. Reductions in research and administrative expenses, resulting mainly from restructuring actions, were partially offset by increases in selling and marketing expenses and net pension expense. Selling expenses increased to support the higher sales level in 1994 and our globalized marketing effort. Net periodic pension expense increased due to the reduction in the discount rate assumption, from 8.75% in 1993 to 7.25% in 1994, used to develop net pension expense.
The $16.2 million provision for restructuring recorded in 1993 was for the estimated costs associated with the Company's decision to lower operating costs on a prospective basis and reorganize the Company's marketing efforts on a global basis. The provision included a noncash charge of $5.2 million for asset writedowns and $11.0 million for personnel reductions, globalization of marketing efforts and other anticipated restructuring costs. No significant components of this charge would have been recognized in 1993 in the absence of these efforts. During 1994, the Company charged the restructuring reserve $5.4 million and completed most of the restructuring of administrative support services, including information services, maintenance, security, and human resources. Also, all assets designated for disposal under this program were sold during 1994. The final areas, customer services and finance, will be completed in 1995. Reductions in operating expenses were approximately $6 million in 1994 and are anticipated to approximate $10 million in 1995 and future years. The $5.2 million restructuring liability remaining at December 31, 1994 is sufficient to meet remaining obligations. The Company expects to fund this liability with available cash and cash equivalents and cash provided by future operating activities. Investment and other income increased from $2.9 million in 1993 to $3.6 million in 1994 mainly due to a gain recorded on the sale of Betz Energy Chemicals, Inc. The effective income tax rate increased from 39.1 percent in 1993 to 39.5 percent in 1994, reflecting the provisions of the Omnibus Budget Reconciliation Act of 1993 which became effective in 1994.
Results of Operations -- 1993 vs. 1992 The Company's results of operations for 1993 were negatively impacted by sluggish growth in the industrial sector of the economy, particularly the chemical, refining and paper industries, the Company's major customers. Some customers in these industries reduced consumption of existing treatment programs to meet short-term cost control objectives. The Company's domestic/foreign sales relationship was 79 percent/21 percent, respectively. Domestic sales decreased 3 percent from $557.4 million in 1992 to $543.3 million in 1993. Foreign sales decreased 5 percent from $149.6 million to $141.6 million for the same time period, but were up approximately 5 percent when translated at 1992 foreign currency exchange rates. On a combined basis, sales of the Betz Industrial Division, the Company's largest operating unit, and the Betz MetChem Division were down 5 percent from the prior year. Although Betz Industrial added new business at a record pace in 1993, the shrinkage in business at existing accounts more than offset new business gains. Sales at Betz PaperChem, Inc., our second largest domestic operating unit which markets the Company's line of specialty process chemicals to the pulp and paper industry, declined 4 percent from the 1992 level, primarily as a result of customer shutdowns and reduced treatment levels at existing accounts. Betz Process Chemicals, Inc. posted modest sales gains for 1993. The marketing of unique technology, such as SPEC-AID (registered trademark) Finished Product Additives and ALKAT-XL (registered trademark) treatment programs which increase the efficiency of alkylation units in refineries, contributed to the sales increase at this subsidiary. Betz Energy Chemicals, Inc. reported strong increases in sales of its oil field chemical treatment programs despite the fact that crude oil production within the U.S. fell to a 35-year low during 1993. Betz Entec, Inc. experienced a 6 percent sales increase over the prior year to the commercial, institutional and light industrial marketplace. New business generated by Betz Entec was a strong contributing factor to this unit's growth. Regarding our foreign operations, Betz Canada Inc. recorded a 13 percent sales gain in Canadian dollars over the prior period. This operating unit experienced strong increases in sales of its process treatment programs to the pulp and paper industry. Betz International, Inc. reported a 10 percent increase in sales over 1992 and experienced strong gains in Southeast Asia, South Korea and the Caribbean. Betz Europe, Inc. sales were up fractionally in local currencies, but were down 12 percent when translated to U.S. dollars. Sales increases in France, Italy and Scandinavia were offset by slightly lower sales in the rest of the Company's European operations. The Company's gross profit margin decreased slightly from 65.9 percent of net sales in the prior year to 65.3 percent of 1993's net sales. Selling, research and administrative expenses decreased from $334.3 million in 1992 to $329.9 million in 1993, but increased as a percent of net sales with 1993's level at 48.2 percent compared to 1992's 47.3 percent. The increase in selling, research and administrative expenses, as a percentage of net sales, was primarily related to higher levels of research and selling expenses due to continued emphasis on the development of new products and expansion of the Company's sales force. This increase was partially offset by declines in administrative expenses resulting from the implementation of cost controls during the first half of 1993. Investment and other income decreased slightly as a result of lower investment yields on the Company's cash, partially offset by gains on the sales of long-term investments. The effective income tax rate increased from 38.8 percent in 1992 to 39.1 percent in 1993, reflecting the provisions of the Omnibus Budget Reconciliation Act of 1993. In the first quarter of 1993, the Company adopted two new accounting standards issued by the Financial Accounting Standards Board. Financial Accounting Standard No. 106 requires companies to recognize expense relating to postretirement benefits as employees render services instead of when the benefits are actually paid. The cumulative effect of this change in accounting method was a one-time, noncash charge to the Company's 1993 net earnings of $2.7 million (net of a $1.7 million deferred
tax benefit). Financial Accounting Standard No. 109 requires companies to adopt the liability method of accounting for income taxes. Deferred income taxes were reduced by $3.6 million resulting in a one-time, noncash credit to the Company's net earnings in 1993. In the fourth quarter of 1993, effective January 1, 1993, the Company changed its method of calculating the value of assets of its pension plan for purposes of determining annual pension costs under Financial Accounting Standard No. 87. The cumulative effect on years prior to December 31, 1992 was $1.2 million (net of taxes of $0.8 million), which was a one-time, noncash increase in net income for the year 1993. The effect of this change on 1993 results of operations and the pro forma effects on results of operations for 1992 are not material.
Liquidity and Sources of Capital The financial condition of the Company demonstrates consistent strength. The Company's ratio of current assets to current liabilities was 2.3 at the end of 1994 and 1993 and 2.4 at the end of 1992. During the years 1992 through 1994, net cash provided by operating activities and available cash balances have funded common dividend requirements, capital expenditures, treasury share purchases, restructuring obligations and dividend and debt requirements associated with the ESOP. Net cash provided from operating activities amounted to $114.3 million, $120.2 million and $114.7 million for the years 1994, 1993 and 1992, respectively. The current-year decrease in cash provided from operations is mainly the result of increases in the Company's accounts receivable balances from 1993 to 1994, necessary to support the increase in sales. Net cash used in investing activities decreased by $0.7 million in 1994 as compared to 1993. Capital expenditures for the year 1994 were $55.0 million, an $8.2 million decline from the 1993 expenditures. Major projects in 1994 included expansion and process improvements at the Company's manufacturing facilities in Washougal, Washington, Orange, Texas and Macon, Georgia. The Company anticipates that capital expenditures for 1995 will be approximately $75 million. $3.5 million of cash was used to fund the increase in long-term investments, principally for the $2.4 million funding of a Rabbi Trust. Investing activities also included $9.1 million of cash proceeds from the sales of long-term assets, primarily resulting from the sales of Betz Energy Chemicals, Inc. and property, plant and equipment under the restructuring program. During 1994, the Company continued its program of treasury share purchases by acquiring 400,000 shares at an approximate cost of $20.0 million. The purchases are pursuant to an authorization by the Board of Directors in November 1990. Shares repurchased will be used in connection with stock plans and for other corporate purposes. Future purchases will be made through brokers or directly from shareholders at such times as deemed appropriate by the Company's management. The globalization of the Company's operations has increased the need to hedge its exposure to foreign currency fluctuations. During 1994, the Company began hedging its exposure to foreign currency fluctuations through the use of foreign currency forward contracts. The Company executed a series of forward contracts during the year that were primarily accounted for on a mark to market basis. Gains or losses are included with investment and other income on the Consolidated Statement of Operations. There are $54,000 of unrealized gains on these forward contracts included in the December 31, 1994 Consolidated Balance Sheet. The Company expects to continue hedging in the future, to the extent necessary to manage its foreign exchange risks, through the use of forward contracts and options, as well as foreign cash management techniques designed to hedge exchange risks. The Company is a "Potentially Responsible Party" to thirteen waste disposal sites under the Comprehensive Environmental Response, Compensation and Liability Act as amended by the Superfund Amendments and Reauthorization Act of 1986. Adequate provision has been made in the financial statements for the Company's portion of the anticipated remediation costs of these sites. While it is not possible to precisely predict future costs in these matters, the Company does not believe that any such assessments would have a materially adverse impact upon its financial position. The Company anticipates that present cash and cash equivalents and net cash provided from 1995 operating activities combined with other available financial resources will be sufficient to fund the Company's operating and capital expenditure requirements and to service the dividend and debt requirements of approximately $8.8 million associated with its Employee Stock Ownership Plan.
Impact of Inflation and Changing Prices The Company attempts to counter the impact of rising costs through timely adjustments of product pricing whenever possible. The Company believes that its substantial use of the LIFO cost method and higher depreciation charges associated with its newer, more costly and improved facilities mitigates the impact of inflation on its reported earnings.