ITEM 1 - BUSINESS
General Development of Business
Zurn Industries, Inc., a corporation founded in 1900 and incorporated in 1932 together with its subsidiaries (the "Company") designs, constructs, manufactures, markets, and operates in four industry segments: Power Systems; Water Control; Lynx Golf; Other businesses.
In March 1994, a decision was made to close the steam generating manufacturing facilities of the Power Systems segment because of uncompetitive costs.
Financial Information about Industry Segments
"Industry Segment Data" on page 19 of the Annual Report to Stockholders for the year ended March 31, 1994 is incorporated herein by reference.
Narrative Description of Business
The first sentence of the first paragraph and the second paragraph, excluding the fourth sentence, of "Notes to Consolidated Financial Statements - Industry Segment Data" on page 20 of the Annual Report to Stockholders for the year ended March 31, 1994 is incorporated herein by reference.
Product Class Sales Year Ended March 31 Segment and Products 1994 1993 1992 (Thousands) Power Systems Power plants and steam generating systems $450,674 $336,593 $255,562 Other products 11,375 14,460 15,365
Water Control Plumbing products 99,496 88,051 84,782 Water resource and treatment systems 85,921 60,416 78,531 Other products 61,048 83,926 90,442
Power Systems - Design, engineering, construction, and operation of alternate energy and combined-cycle power plants; factory-assembled and field- constructed steam generating systems, waste heat energy recovery systems, economizers, superheaters, spreader stokers, burners, pulverizers, and other auxiliary components; solid, liquid, and gaseous waste incineration systems; acid gas removal systems, mechanical dust collectors, wet scrubbers, fabric filters, heavy-duty dampers, and fans.
Water Control - Construction of water resource and treatment systems and general construction services for civil, structural, and mechanical piping fields; engineered concrete products including precast prestressed concrete bridge components, box beam girders, pilings, panels, support systems, underground wastewater pipe, and modular jail cells; plumbing products,
including roof, floor, and trench drains, primers, traps, backwater valves, hair, grease, oil, and solids interceptors, cleanouts, off-the-floor fixture supports, water hammer arrestors, hydrants, floor sinks, ferrous castings, flush valves, shower heads, faucets, and hand dryers for commercial, industrial, and institutional applications; residential, commercial, and industrial pressure reducing and regulating valves, temperature/pressure relief valves, swing-away ball valves, reduced pressure backflow preventers, pressure vacuum breakers, check valves, double check valves, water gravity flow systems; automatic interior fire protection sprinkler systems.
Lynx Golf - Golf clubs and accessories.
Other Businesses - Clutches, heavy-duty overrunning clutches, clutch couplings, torque and overload release clutches, backstops, and Ringspann freewheel clutches; flexible gear and diaphragm couplings, flexible spindle couplings, universal joints, and precision steel forgings.
Segment Status
No new segment or product is being planned or developed which will require the investment of a material amount of the Company's assets, or which otherwise is material.
Sources and Availability of Raw Materials
The Company's businesses use ferrous and non-ferrous metals, concrete products, and stainless steel castings purchased from various domestic and foreign suppliers. The sources of supply are adequate and the Company is not substantially dependent upon any one supplier.
Patents and Licenses
The Company owns numerous patents relating to the design and manufacture of its products and systems. From time to time, the Company grants licenses to others under certain of its patents and obtains licenses under the patents of others. While the Company considers that, in the aggregate, its patents and licenses are important in the operation of its businesses, it believes that the successful manufacture and sale of its products generally depends more upon its technological know-how and manufacturing and construction skills.
Seasonal Business
The demand for Lynx Golf products is highest in the Company's first and fourth quarters. None of the other industry segments is considered to have significant seasonal business.
Working Capital Requirements
Certain products of the Water Control segment are considered standard items and significant amounts of inventory are required to meet rapid delivery requirements of customers. The Lynx Golf segment requires significant amounts of inventory to meet customer demands. There are no special or unusual working capital requirements for the Company's other businesses.
Customer Dependence
None of the industry segments has a customer the loss of which would have a material adverse effect on the segment.
Customer Identity
There are no customers the loss of which would have a material adverse effect on the Company.
Backlog
The backlog of unshipped orders was as follows: March 31 1994 1993 (Thousands)
Power Systems $159,000 $422,000 Water Control 69,000 137,000 Lynx Golf 5,000 10,000 Other Businesses 11,000 12,000 $244,000 $581,000
Approximately 9% of the Power Systems backlog and 4% of the Water Control backlog is expected to be completed in fiscal years ending after March 31, 1995.
Government Contracts
No material portion of the business of any industry segment is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the Government.
Competitive Conditions
The Company's major markets are electric power generation, industrial, commercial, municipal, and consumer. The Company competes with a number and variety of diverse manufacturers, both large and small. Because of the multiplicity and diversity of such markets, it is impracticable to ascertain a proper competitive rating index for any of the Company's segments.
In general, all the Company's products and systems are sold for the most part in world-wide markets characterized by substantial price, service, and product quality competition.
Research and Development
Research and development expenditures were not material in any of the last three years.
Impact of Environmental Laws and Regulations
Federal, state, and local regulations enacted to regulate the discharge of materials into the environment will have no material effect on the Company's capital expenditures, earnings, or competitive position.
Number of Employees
The Company has approximately 2,900 employees.
Foreign and Domestic Operations and Export Sales
The Company's foreign operations represented less than 10% of consolidated sales, operating income, and assets in each of the last three years. Export sales were: 1994-$20,073,000; 1993-$29,309,000; 1992-$28,903,000.
ITEM 2
ITEM 2 - PROPERTIES
The Company principally operates in various locations throughout the United States in facilities considered to be in good condition, well maintained, and adequate for its purposes. The approximate square feet of floor space utilized in the United States is as follows: Owned Leased
Power Systems 94,000 73,000 Water Control 564,000 140,900 Lynx Golf 61,000 124,000 Other Businesses 353,000 5,000 Corporate Headquarters 213,600 1,285,600 342,900
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS
On September 24, 1993, the Superior Court of Imperial County California entered a judgment in the amount of $25.7 million against the Company and its subsidiary, National Energy Production Corporation (NEPCO), in connection with a cross complaint filed in February 1991 by Imperial Resource Recovery Associates, L.P., a California Limited Partnership, which alleged that NEPCO had failed to construct an electric generating facility in accordance with contract terms. The Court also assessed prejudgment interest of $6.1 million and attorney fees of $8.4 million. An appeal from the entire judgment was taken on September 24, 1993 by the Company and NEPCO and is pending in the California Court of Appeal, Fourth Appellate District.
Four civil actions against the Company, two of its subsidiaries, and eighteen other defendants were filed in the Superior Court of Los Angeles County California in May 1991 by Continental Insurance Company, Insurance Company of
North America, Continental Casualty Company, Allianz Underwriters, Inc., and others seeking recovery of an aggregate $76.5 million in insurance claims arising out of a 1988 fire in a building undergoing alterations. It is alleged that the Company's standpipe valves and fire sprinkler system installation procedures contributed to the duration of the fire.
The Company received an Administrative Order, effective April 30, 1992, issued by the United States Environmental Protection Agency (EPA) pursuant to Section 106(a) of the Comprehensive Environmental Response, Compensation and Liability Act of 1980 directing the Company and thirty-five others to implement response activities at the Millcreek Dumpsite in Erie County, Pennsylvania in accordance with a remedial plan. The Company is informed that EPA has secured estimates of the cost of the remedial work which approximate $12 million. Also, the respondents may be obligated to reimburse EPA for amounts expended for preliminary cleanup, the development of a Record of Decision, and the remedial design. The Company and seventeen of the other respondents have notified EPA of their intention to undertake the remedial action.
On October 19, 1993, the Commonwealth of Pennsylvania Department of Environmental Resources (Department) filed a complaint in the United States District Court for the Western District of Pennsylvania against the Company and twenty-six others seeking to recover past and future specified and unspecified costs exceeding $2.2 million arising out of the Department's involvement at the Millcreek Dumpsite in Erie County, Pennsylvania.
In January 1994, the State of California filed a complaint in the Municipal Court of the Los Angeles Judicial District against the Company's subsidiary, Zurn Constructors, Inc., two of its employees, and another company and individual alleging felony and misdemeanor violations of the State's Health and Safety, Water, and Penal codes in connection with the discharge of a pollutant from the other company's property into a Coyote Creek tributary. The maximum fines for the alleged charges sought in the complaint against Zurn Constructors total $.6 million.
ITEM 4
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.
EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Positions Period Served
George H. Schofield 64 Director Since 1984 Chairman Since 1986 Chief Executive Officer Since 1985 President 1985 - 1991 Charles L. Hedrick 59 Director and Vice Chairman Since 1992 Senior Executive Vice President 1983 - 1992 William A. Freeman 51 Director and President Since 1991 Senior Vice President-Finance and Administration 1986 - 1991 Donald F. Fessler 63 Executive Vice President Since 1985 James A. Zurn 52 Director Since 1970 Senior Vice President Since 1981 John E. Rutzler III 53 Vice President-Controller Since 1989 Dennis Haines 41 General Counsel and Secretary Since 1993 Associate General Counsel 1989 - 1993
PART II
ITEM 5
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
The principal markets on which the Company's Common Stock is traded are the New York Stock Exchange and the Pacific Stock Exchange.
"Unaudited Quarterly Financial Data - Common Stock Market Price" on page 13 of the Annual Report to Stockholders for the year ended March 31, 1994 is incorporated herein by reference.
Holders
At March 31, 1994, there were 6,242 holders of record of the Company's Common Stock.
Dividends
"Unaudited Quarterly Financial Data - Common Stock Cash Dividends Declared" on page 13 of the Annual Report to Stockholders for the year ended March 31, 1994 is incorporated herein by reference.
ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA
"Five Year Consolidated Financial Summary - Operating Data," "Five Year Consolidated Financial Summary - Financial Position at Year End - Total Assets and Debt and Capital Leases," and the footnote thereto on page 13 of the Annual Report to Stockholders for the year ended March 31, 1994 are incorporated herein by reference.
ITEM 7
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
"Financial Review" on pages 14 and 15 of the Annual Report to Stockholders for the year ended March 31, 1994 is incorporated herein by reference.
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and notes to consolidated financial statements on pages 16 through 23 of the Annual Report to Stockholders for the year ended March 31, 1994 are incorporated herein by reference.
"Unaudited Quarterly Financial Data" on page 13 of the Annual Report to Stockholders for the year ended March 31, 1994 is incorporated herein by reference. INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders Zurn Industries, Inc. Erie, Pennsylvania
We have audited the consolidated financial statements and the financial statement schedules of Zurn Industries, Inc. and subsidiaries listed in Item 14. These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements listed in Item 14 present fairly, in all material respects, the consolidated financial position of Zurn Industries, Inc. and subsidiaries at March 31, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended March 31, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. As discussed in the significant accounting policies note to the consolidated financial statements, the Company changed its methods of accounting for postretirement benefits other than pensions and for income taxes in the year ended March 31, 1992.
/s/ Ernst & Young
Erie, Pennsylvania May 19, 1994 ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There has been no change in independent auditors within twenty-four months prior to the date of the most recent financial statements.
PART III
ITEM 10
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
"Nominees for Election as Directors" and "Directors Whose Terms of Office Continue Until 1995" on page 2 and "Directors Whose Terms of Office Continue Until 1996" on page 3 of the Proxy Statement dated June 27, 1994 are incorporated herein by reference.
Information with respect to executive officers is presented in Part I.
Based solely upon a review of Forms 3, 4, and 5, and amendments thereto, furnished to the Company with respect to its most recent fiscal year, and written representations that no Form 5 was required, no person who, at any time during the fiscal year, was a director, officer, or beneficial owner of more than 10% of any class of equity securities of the Company failed to file on a timely basis reports required by Section 16(a) of the Securities Exchange Act of 1934 during the most recent fiscal year or prior fiscal years, except as set forth under "Compliance With Exchange Act Section 16(a)" on page 6 of the Proxy Statement dated June 27, 1994 incorporated herein by reference.
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION
"Summary Compensation Table" on page 6, "Stock Option Grants" and "Stock Option Exercises and Fiscal Year End Option Values" on page 7, "Pension Plans" on page 8, and "Directors' Compensation" on pages 8 and 9 of the Proxy Statement dated June 27, 1994 are incorporated herein by reference.
ITEM 12
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
"Security Ownership of Common Stock" on page 5 of the Proxy Statement dated June 27, 1994 is incorporated herein by reference.
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There were no relationships or related transactions required to be reported during the fiscal year covered by this report.
PART IV
ITEM 14
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Financial Statements
The following consolidated financial statements included in the Annual Report to Stockholders for the year ended March 31, 1994 are incorporated herein by reference:
Consolidated Financial Position - March 31, 1994 and 1993
Consolidated Operations - Years Ended March 31, 1994, 1993, and 1992
Consolidated Stockholders' Equity - Years ended March 31, 1994, 1993, and 1992
Consolidated Cash Flows - Years ended March 31, 1994, 1993, and 1992
Industry Segment Data - Years ended March 31, 1994, 1993, and 1992
Notes to Consolidated Financial Statements
Financial Statement Schedules
The following consolidated financial statement schedules are included in this Item:
Schedule I - Marketable Securities - Other Investments
Schedule II - Accounts Receivable from Related Parties and Underwriters, Promoters, and Employees other than Related Parties
Schedule VIII - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.
Exhibits
The exhibits listed in the Exhibit Index to this report are incorporated herein by reference.
Reports on Form 8-K
March 22, 1994 incorporating a news release commenting on earnings estimates for the fourth quarter ending March 31, 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.
ZURN INDUSTRIES, INC. (Registrant)
June 6, 1994 /s/ G.H. Schofield George H. Schofield Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
/s/ G.H. Schofield Director, Chairman, and June 6, 1994 George H. Schofield Chief Executive Officer
/s/ Charles L. Hedrick Director and Vice Chairman June 6, 1994 Charles L. Hedrick
/s/ W.A. Freeman Director and President June 6, 1994 William A. Freeman
/s/ John E. Rutzler III Vice President-Controller June 6, 1994 John E. Rutzler III
/s/ K.S. Axelson Director June 6, 1994 Kenneth S. Axelson
/s/ Zoe Baird Director June 6, 1994 Zoe Baird
/s/ William E. Butler Director June 6, 1994 William E. Butler
/s/ E.J. Campbell Director June 6, 1994 Edward J. Campbell
/s/ Alton S. Cartwright Director June 6, 1994 Alton S. Cartwright
/s/ David W. Wallace Director June 6, 1994 David W. Wallace
/s/ James A. Zurn Director June 6, 1994 James A. Zurn
EXHIBIT INDEX
3 Articles of Incorporation and By-laws
Restated Articles of Incorporation with Amendments through Incorporated August 7, 1987 filed as Exhibit 19A to Form 10-Q for the by reference quarter ended September 30, 1987
By-laws as of April 1990 filed as Exhibit 3 to Form 10-K Incorporated for the year ended March 31, 1990 by reference
4 Instruments Defining the Rights of Security Holders, Including Indentures
Description of Common Stock contained in the prospectus Incorporated dated July 26, 1972 beginning on page 18 ("Description of by reference Capital Stock") forming a part of Amendment No. 3 to the Form S-1 Registration Statement No. 2-44631
Description of Common Stock as set forth in the Restated Incorporated Articles of Incorporation with Amendments through by reference August 7, 1987 filed as Exhibit 19A to Form 10-Q for the quarter ended September 30, 1987
Description of Preferred Share Purchase Rights contained Incorporated in the Form 8-A Registration Statement dated May 22, 1986 by reference
Description of 5-3/4% Convertible Subordinated Debentures Incorporated due 1994 contained in the prospectus dated November 12, by reference 1969 beginning on page 15 ("Description of Debentures") forming a part of the Form S-1 Registration Statement filed November 12, 1969
10 Material Contracts
1986 Stock Option Plan filed as Exhibit 28A to Form S-8 Incorporated Post-Effective Amendment No. 1 Registration Statement No. by reference 33-19103
1989 Directors Stock Option Plan filed as Exhibit 28 to Incorporated Form S-8 Registration Statement No. 33-30383 by reference
1991 Stock Option Plan filed as Exhibit 28 to Form S-8 Incorporated Registration Statement No. 33-49224 by reference
Supplemental Executive Retirement Plan of Zurn Incorporated Industries, Inc. filed as Exhibit 19A to Form 10-Q for by reference the quarter ended December 31, 1992
1982 Retirement Plan for Outside Directors of Zurn Incorporated Industries, Inc. filed as Exhibit 19A to Form 10-Q for by reference the quarter ended June 30, 1989
1986 Retirement Plan for Outside Directors of Zurn Incorporated Industries, Inc. filed as Exhibit 19B to Form 10-Q for by reference the quarter ended June 30, 1989
Agreements Relating to Employment dated June 5, 1989 with Incorporated D.F. Fessler, W.A. Freeman, C.L. Hedrick, G.H. Schofield by reference and J.A. Zurn filed as Exhibit 10H to Form 10-Q for the quarter ended June 30, 1989
Zurn Industries, Inc. Deferred Compensation Plan for Non- Incorporated Employee Directors filed as Exhibit 19E to Form 10-Q for by reference the quarter ended June 30, 1989
Zurn Industries, Inc. Deferred Compensation Plan for Incorporated Salaried Employees filed as Exhibit 19F to Form 10-Q for by reference the quarter ended June 30, 1989
Zurn Industries, Inc. Optional Deferment Plan for Incorporated Incentive Compensation Plan Participants filed as Exhibit by reference 19G to Form 10-Q for the quarter ended June 30, 1989
Zurn Industries, Inc. Supplemental Pension Plan for Incorporated Participants in the Deferred Compensation Plan for by reference Salaried Employees filed as Exhibit 19B to Form 10-Q for the quarter ended December 31, 1992
Indemnity Agreements dated August 14, 1986 with K.S. Incorporated Axelson, E.J. Campbell, A.S. Cartwright, G.H. Schofield, by reference D.W. Wallace, and J.A. Zurn filed as Exhibit 19J to Form 10-Q for the quarter ended September 30, 1986
Indemnity Agreements dated October 20, 1986 with D.F. Incorporated Fessler, W.A. Freeman, and C.L. Hedrick filed as Exhibit by reference 19A to Form 10-Q for the quarter ended December 31, 1986 and with J.E. Rutzler III filed as Exhibit 10B to Form 10-Q for the quarter ended December 31, 1988
Indemnity Agreements dated January 25, 1993 with W.E. Incorporated Butler, April 1, 1993 with D. Haines, and August 6, 1993 by reference with Z. Baird filed as Exhibit 10A to Form 10-Q for the quarter ended June 30, 1993
Irrevocable Trust Agreements for the Grantor's: 1982 Incorporated Retirement Plan for Outside Directors of Zurn Industries, by reference Inc.; 1986 Retirement Plan for Outside Directors of Zurn Industries, Inc.; Deferred Compensation Plan for Non- Employee Directors; Supplemental Executive Retirement Plan for Zurn Industries, Inc.; Zurn Industries, Inc. Supplemental Pension Plan for Participants in the Deferred Compensation Plan for Salaried Employees; Deferred Compensation Plan for Salaried Employees; Optional Deferment Plan for Incentive Compensation Plan Participants filed as Exhibit 19I to Form 10-Q for the quarter ended September 30, 1986
Second Irrevocable Trust Agreement for the Grantor's Incorporated Indemnity Agreements filed as Exhibit 10A to Form 10-Q by reference for the quarter ended December 31, 1988
10A Incentive Compensation Plan
11 Statement Re Computation of Per Share Earnings
Computation of Earnings Per Share
13 Annual Report to Security Holders
Electronic Format of Pages of Annual Report to Stockholders for the Year Ended March 31, 1994 Incorporated by Reference
21 Subsidiaries of the Registrant
Subsidiaries
23 Consents of Experts and Counsel
Consent of Independent Auditors
EXHIBIT 10A - INCENTIVE COMPENSATION PLAN
The Company's Incentive Compensation Plan, as it applies to executive officers, provides that an amount equal to 4% of earnings before income taxes in excess of a 10% return on the Company's net worth plus 4% of earnings before income taxes in excess of a 20% return on the Company's net worth is available to the Management Development and Compensation Committee to make incentive compensation payments. The distributable amount may be modified by the Committee in circumstances it views as appropriate (e.g., when the Company incurs an unusual gain or loss). Using both financial and non-financial criteria to measure performance, the Committee determines the amount to be awarded to the Chief Executive Officer and, based on his recommendations and their evaluation, to each other executive officer.
EXHIBIT 11 - COMPUTATION OF EARNINGS PER SHARE (Thousands Except Per Share Amounts)
Year Ended March 31 1994 1993 1992 Primary Earnings Per Share
Net (loss) income $(13,876) $27,488 $(5,222) Preferred stock dividends 3 3 3 $(13,879) $27,485 $(5,225)
Shares outstanding Weighted average common shares 12,438 12,457 12,514 Net common shares issuable on Anti- exercise of stock options dilutive 64 92 Average common shares outstanding as adjusted 12,438 12,521 12,606
Primary (loss) earnings per share $ (1.12) $ 2.20 $ (.42)
Fully Diluted Earnings Per Share
Net income A $27,488 A Interest on convertible debentures, n n net of applicable income taxes t 37 t i $27,525 i d d Shares outstanding i i Average common shares as adjusted l l for primary computation u 12,521 u Common shares issuable if the t t preferred stock and convertible i i debentures were converted at v v the beginning of the year e 77 e Additional common shares issuable on exercise of stock options 13 Average common shares outstanding as adjusted 12,611
Fully diluted earnings per share $ 2.18
EXHIBIT 13 ELECTRONIC FORMAT OF PAGES OF ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED MARCH 31, 1994 INCORPORATED BY REFERENCE
ANNUAL REPORT PAGE 13
FIVE YEAR CONSOLIDATED FINANCIAL SUMMARY
Year Ended March 31 1994 1993 1992 1991 1990 (Thousands of Dollars Except Per Share Amounts)
OPERATING DATA Net sales $785,688 $669,841 $596,532 $696,728 $605,294 (Loss) income before accounting changes (13,876) 27,488 11,512 30,737 28,324 Accounting changes (16,734) Net (loss) income (13,876) 27,488 (5,222) 30,737 28,324 Earnings per share: Before accounting changes (1.12) 2.20 .91 2.46 2.28 Accounting changes (1.33) Net (loss) income (1.12) 2.20 (.42) 2.46 2.28 Common stock cash dividends declared per share .88 .88 .88 .82 .72
FINANCIAL POSITION AT YEAR END Liquid assets $ 65,433 $ 90,643 $ 69,723 $ 41,568 $ 39,003 Working capital 160,516 183,778 171,497 159,727 145,242 Property, plant, and equipment 57,003 70,423 67,138 73,131 75,994 Total assets 447,893 490,178 441,132 437,317 394,551 Debt and capital leases 13,806 20,934 18,164 13,121 15,050 Stockholders' equity 221,583 249,098 237,601 250,856 227,691 Per share of common stock 17.86 20.03 18.90 20.22 18.47
GENERAL STATISTICS Capital expenditures $ 9,180 $ 14,318 $ 10,697 $ 8,925 $ 15,005 Depreciation and amortization 10,687 10,649 11,539 12,292 11,612 Stockholders of record 6,277 6,278 6,445 6,499 6,428 Average common shares outstanding (thousands) 12,438 12,521 12,606 12,513 12,431 Common stock price range: High 39 1/2 40 3/4 39 1/4 51 1/8 44 1/4 Low 22 3/4 27 3/4 30 1/4 29 1/2 27 1/2
1994 includes costs relating to litigation ($38,902 - $2.00 per share) and a plant closing and the write off of assets ($23,000 - $1.15 per share). 1992 includes restructuring costs ($14,700 - $.72 per share) and changes in accounting for postretirement benefits other than pensions and for income taxes.
ANNUAL REPORT PAGE 14
FINANCIAL REVIEW
Sales And Earnings The fifth new record high sales level in the last seven years was attained in fiscal 1994. The single most significant factor affecting consolidated sales has been the change in Power Systems segment revenues (increases of $111.0 million in 1994 and $80.1 in 1993) primarily related to the number, size, and completion status of power plants under construction. In 1994, water resource construction revenues increased $25.5 million and sales of plumbing products by the Water Control segment increased $11.4 million in 1994 and $3.3 million in 1993, but the segment suffered an 8% decline in fiscal 1993 due to lower revenues from water resource projects and dispositions of nonstrategic businesses. Lynx Golf sales were off slightly having more than doubled in the United States market in fiscal 1993, reversing the downward trend of the prior two years from the recession's effects on consumer spending. Generally gross profit margins have been affected from year to year by the types and numbers of projects the Power Systems segment has under construction. This year the margins were lower primarily because of the high costs and weak market for steam generating systems manufactured by the Power Systems segment and increased costs incurred by Lynx Golf. While margins from the construction of power plants and sales by Lynx Golf improved in fiscal 1993, there was an overall decline attributable to the fire protection sprinkler systems business. Inflation's effect on the Company's costs over the last three years has not been as great as the consumer price index change and most cost increases have been recovered currently. Marketing and administration expenses for the most part do not bear a direct relationship to sales volumes and, as a percent of sales, they declined in each of the last three years. These expenses increased in the last two years primarily as a result of Lynx Golf promotional efforts, and its sales growth in 1993, and the higher operating levels of the Power Systems segment. The fiscal 1994 increases, together with Water Control segment new product introduction costs, almost equaled the $5.4 million incurred in fiscal 1993 by businesses which have been sold. The unusual items are described in the notes to consolidated financial statements and discussed elsewhere in this review. The items in the footnote table reduced income $2.74 per share in fiscal 1994 and $1.10 in 1992, and they increased income $.02 per share in fiscal 1993. In addition, the revaluation of net deferred tax assets resulting from a tax law change added $.15 per share in fiscal 1994 and the income tax adjustment associated with the 1993 state tax settlement increased that year's income $.14 per share. Interest income derived from financial instruments has not been significantly affected by the changes in liquid assets over the last three years as declining rates offset the higher liquid asset level that existed through fiscal 1994's third quarter. The higher income levels for 1994 and 1992 came from Power Systems' long-term receivables and financing of equipment for customers' projects. Interest expense on long-term obligations was lower in fiscal 1994, but the total increased as a result of providing for interest on the recorded litigation liability.
ANNUAL REPORT PAGE 14
Tax exempt investment income was the major contributor to the lower effective tax rates in fiscal 1994 and 1992. Settlement of prior year state tax assessments significantly reduced the overall effective tax rate in fiscal 1993. The net (loss) income per share for the last three years was: 1994 - $(1.12); 1993 - $2.20; 1992 - $(.42). Absent the unusual items, and the accounting principles change in fiscal 1992, net income per share would have been: 1994 - $1.47; 1993 - $2.04; 1992 - $2.01.
Backlog 1994 1993 1992 (Millions)
Power Systems $159 $422 $324 Water Control 69 137 121 Lynx Golf 5 10 11 Others 11 12 16 $244 $581 $472 Completion after fiscal 1995 is expected for 9% of the Power Systems and 4% of the Water Control amounts at March 31, 1994.
Power Systems The segment's design, engineering, and construction of power plants has made it the Company's most significant source of revenues. Most of its fiscal 1994 power plant project revenues were derived from the record high beginning of the year backlog while the segment's equipment manufacturing businesses suffered a 21% decline in sales. In fiscal 1993, the segment's revenues were boosted by the combination of new power plant orders and those received in the latter part of fiscal 1992. The lower revenues in 1992 resulted from postponement of projects due to delays experienced by customers in obtaining permits and financing. Six power plants were completed in 1994, three in 1993, and four were completed in 1992. The gross profit margin from construction of power plants in fiscal 1994 exceeded 1992's level by 25% while fiscal 1993's margin exceeded 1992 by 30% as the plants under construction that year included less purchased equipment. The Company's overall gross profit margin was adversely affected in fiscal 1994 by high steam generating systems manufacturing costs and the decline in sales of those systems. The Power Systems segment had an operating loss for fiscal 1994 rather than a $19.1 million profit because of the $50.8 million of unusual items for litigation, plant closing costs, and the recovery of one of the accounts receivable from a financially stressed power plant project owner written off in fiscal 1992. In fiscal 1993, its operating profit was reduced by unusual litigation costs and the lower operating levels of the equipment manufacturing businesses. Substantially lower Power Systems revenues and operating profit are expected in the near term because of the excess domestic electric power generation capacity and the effects of the slowed United States economy in the last few years which the fiscal 1994 year-end backlog reflects. For the balance of the decade, the North American market could be about half the size of the last several years. Profitability also will be affected to some extent
ANNUAL REPORT PAGE 14
by the segment's move into the developing international market for small and medium-size private power plants, with long order lead times, and the reorientation of the steam generating systems business resulting from the decision to close its manufacturing facilities before the second half of fiscal 1995 begins.
Water Control Fiscal 1994 sales were up 14% from last year excluding the effect of businesses sold in the fourth quarter of fiscal 1993. This resulted from the greater water resource construction project revenues and increased sales of plumbing products which have been driven in the last two years by market share gains from new products introduced over the last several years. Revenues from the installation of fire protection sprinkler systems were lower in fiscal 1994, reflecting the depressed, highly-competitive West Coast commercial construction market, after increasing in each of the prior three years. The comparison of fiscal 1993 sales with 1992 also is distorted by the operations of the businesses sold in each of those years. The unusual items note to the consolidated financial statements includes other information about changes in the Water Control segment's operations resulting from acquisitions and dispositions. The segment's operating profit did not benefit from the fiscal 1994 sales increase because of lower margins on those sales and the development costs for new plumbing products. However, as the result of downsizing, the fire protection sprinkler systems business made a positive contribution to the year's operating profit after incurring a small loss in fiscal 1993. The lower water resource construction revenues in 1993 had little effect on the segment's operating profit that year. The lower Water Control backlog at the end of fiscal 1994 is attributable to the water resource construction business. However, because the Southern California market it serves has a continuing need to expand and upgrade its water and wastewater infrastructure, there should be new projects that can be bid successfully and managed profitably.
ANNUAL REPORT PAGE 15
Lynx Golf And Others Domestic sales of golf clubs and accessories, 36% of which were derived from new metal woods, experienced a small decline in fiscal 1994 which was offset for the most part by a 28% sales increase in the United Kingdom and Europe. The fiscal 1993 sales increase was derived from domestic market share gains as foreign sales, which fell 38% in fiscal 1992, were essentially unchanged due to the very depressed offshore markets. Surplus capacity in the last three years has been a significant factor contributing to the operating losses. The fiscal 1994 loss includes $2.4 million for the disposition of discontinued products and $.9 million for the write off of manufacturing assets not being used. Excess costs initially encountered in producing the new metal woods and substantially higher new product introduction costs contributed to the loss in both 1994 and 1993. The manufacturing difficulties have been solved and new,
ANNUAL REPORT PAGE 15
innovative products scheduled for introduction in the latter part of fiscal 1995 are directed at positioning Lynx Golf to be a strong contender in a market which is expected to consolidate rapidly over the next few years. The Mechanical Drives Products group was the only significant other business in fiscal 1994. Its $37.2 million in sales was up 7% despite the continuing weak market for industrial equipment in the United States which caused a 14% decline in sales the prior year. The group's operating profit also would have increased in 1994 absent a $1.8 million charge for the write off of a minority investment in a product line which no longer fit the group's future direction. In fiscal 1993, the group's operating profit fell 37%. The other changes in sales and operating profit for 1993 compared with fiscal 1992 are attributable to businesses which have been sold and restructuring costs described in the notes to financial statements. In the prior two years, Corporate income resulted from the reversal in fiscal 1993 of interest ($4.6 million) which had been accrued in connection with a state income tax dispute which was settled and from gains on the sales of businesses (1993 - $4.6 million; 1992 - $2.4 million).
Financial Condition Liquidity is important to the Company's ability to take on construction contract commitments. Year-end liquid assets amounted to $65.4 million, down from the $90.6 million accumulated at the end of fiscal 1993 primarily from the then growing level of power plant and water resource construction activities. The cash provided by operations was nominal in fiscal 1994 partly because of the steam generating systems business and Lynx Golf operating losses. The other factors affecting cash from operations were the advance billings on fiscal 1994's contracts in fiscal 1993 and the payment of operating expenses which exceeded the benefit from utilizing inventories which had been purchased in the prior year. The proceeds from sales of operations and liquid assets were used for investments in facilities ($33.4 million over the last three years) and to purchase treasury stock in 1994 and 1993. Other significant uses of funds were dividend payments to stockholders, payment of income taxes and interest in connection with the fiscal 1993 settlement of prior year tax assessments, and long-term investments including the purchases of plumbing products businesses in fiscal 1994 and 1992. Most of the working capital components were reduced in fiscal 1994 as construction activities slowed and total working capital was diminished as a result of the litigation provision and the losses in the steam generating systems and Lynx Golf businesses. Working capital amounted to $160.5 million at year end and the 1.9 to 1 current ratio was only one-tenth point lower than its historical level. A $20.0 million short-term line of credit, with interest at money market rates, is available to augment working capital.
ANNUAL REPORT PAGE 15
Property, plant, and equipment was reduced in fiscal 1994 by part of the plant closing and asset write-off provision. That provision and the one for litigation caused the increase in net deferred tax assets included in current and other long-term assets. A change in the funding status of a pension plan and the accrual of employee termination benefits increased both the prepaid cost in other long-term assets and the retirement obligations liability. Power plant performance efficiency payments earned by the Power Systems segment, but payable in future years, more than offset the $5.0 million reduction in long-term investments that resulted from relinquishing the limited partnership investment related to the collection of the $8.4 million construction contract receivable which was fully reserved in fiscal 1992. Associated with the receivable collection was the cancellation of a $5.0 million nonrecourse note payable which caused a substantial part of the decline in long-term obligations. In fiscal 1992, $8.2 million was borrowed pursuant to the terms of a 1991 sales-type lease transaction. Otherwise, long-term debt has been reduced over the last three years by scheduled payments and conversions of debentures into common stock. Should financing be necessary in the future, the Company has a revolving credit agreement which is described in the debt and line of credit note to the financial statements. The Company recognized its previously unrecorded $26.7 million commitment for postretirement benefits other than pensions in April 1991. While the accounting change reduced stockholders' equity by 6%, future cash flows will be unaffected. No other item, including the litigation disclosed in the unusual items, commitments and contingencies note to the financial statements, is expected to have a future material effect on the Company's financial position. However, if all issues which led to the unusual litigation provision are lost on appeal, the resulting cash expenditure could be more than $30 million net of the ensuing income tax payment reductions. Some of the cash expenditures included in the plant closing provision for the added costs of winding up manufacturing operations, and for union and nonunion employees' pensions and severance, have already been made. The balance will not adversely affect liquidity. Common stock dividends in the last eight profitable years have averaged 40% of the per share earnings. In fiscal 1994, they were 60% of the $1.47 per share before unusual items. Prospectively, dividend payments will be based on future earnings trends and expectations and could be impacted by losing the litigation appeal. Total capital employed at March 31, 1994 amounted to $235.4 million which includes $221.6 million ($17.86 per share of common stock) of stockholders' equity. The March 1994 equity to debt ratio was 16 to 1.
ANNUAL REPORT PAGE 16
CONSOLIDATED FINANCIAL POSITION
March 31 1994 1993 (Thousands)
ASSETS
Current Assets Cash and equivalents $ 4,137 $ 25,491 Marketable securities 61,296 65,152 Accounts receivable 132,328 151,433 Inventories and contracts in progress 86,379 92,338 Deferred income taxes 41,880 26,740 Other assets 5,642 4,959 Total Current Assets 331,662 366,113
Property, Plant, And Equipment 57,003 70,423 Investments 35,958 35,896 Other Assets 23,270 17,746 $447,893 $490,178
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities Trade accounts payable $ 47,948 $ 66,347 Advance billings on contracts in progress 31,369 52,200 Litigation 25,937 Insurance 14,065 14,432 Salaries, wages, and payroll items 13,622 15,132 Income taxes 1,012 2,274 Other liabilities 37,193 31,950 Total Current Liabilities 171,146 182,335
Long-Term Obligations 10,972 18,694 Retirement Obligations 44,192 40,051
Stockholders' Equity Common stock, $.50 par value per share 100,000 authorized - 12,570 issued 6,285 6,285 Capital in excess of par value 36,226 36,372 Retained earnings 183,670 210,483 Treasury stock - 166 and 139 shares (4,598) (4,042) 221,583 249,098 Commitments And Contingencies $447,893 $490,178
See notes to consolidated financial statements.
ANNUAL REPORT PAGE 17
CONSOLIDATED OPERATIONS
Year Ended March 31 1994 1993 1992 (Thousands Except Per Share Amounts)
Net Sales $785,688 $669,841 $596,532
Cost of sales 669,460 542,993 477,365 Marketing and administration 90,278 89,636 83,533 Unusual items 53,539 (384) 22,464 Interest income (5,067) (3,907) (5,119) Interest expense 3,334 2,406 2,857 Other income (2,380) (1,731) (2,590) (Loss) Income Before Income Taxes (23,476) 40,828 18,022 Income tax (benefit) expense (9,600) 13,340 6,510 (Loss) Income Before Accounting Changes (13,876) 27,488 11,512 Accounting changes (16,734) Net (Loss) Income $(13,876) $ 27,488 $ (5,222)
Earnings Per Share (Loss) income before accounting changes $(1.12) $2.20 $ .91 Accounting changes (1.33) Net (loss) income $(1.12) $2.20 $ (.42)
ANNUAL REPORT PAGE 17
CONSOLIDATED STOCKHOLDERS' EQUITY Capital in Common Excess of Retained Treasury Stock Par Value Earnings Stock Total (Thousands)
Balance April 1, 1991 $6,216 $33,693 $211,703 $ (756) $250,856 Net loss (5,222) (5,222) Cash dividends declared - $.88 per common share (11,032) (11,032) Conversion of debentures - 91 shares 33 623 637 1,293 Stock options - 72 shares 33 2,007 (101) 119 2,058 Pension minimum liability (168) (168) Currency translation (184) (184) Balance March 31, 1992 6,282 36,323 194,996 - 237,601
Net income 27,488 27,488 Cash dividends declared - $.88 per common share (10,961) (10,961) Treasury stock purchased - 191 shares (5,563) (5,563) Conversion of debentures - 10 shares 1 (78) 214 137 Stock options - 48 shares 2 127 (41) 1,307 1,395 Pension minimum liability (310) (310) Currency translation (689) (689) Balance March 31, 1993 6,285 36,372 210,483 (4,042) 249,098
Net loss (13,876) (13,876) Cash dividends declared - $.88 per common share (10,945) (10,945) Treasury stock purchased - 99 shares (2,632) (2,632) Conversion of debentures - 8 shares (114) 227 113 Stock options - 64 shares (32) (248) 1,849 1,569 Investment unrealized loss (1,241) (1,241) Pension minimum liability (123) (123) Currency translation (380) (380)
Balance March 31, 1994 $6,285 $36,226 $183,670 $(4,598) $221,583
See notes to consolidated financial statements.
ANNUAL REPORT PAGE 18
CONSOLIDATED CASH FLOWS
Year Ended March 31 1994 1993 1992 (Thousands)
OPERATIONS Net (loss) income $(13,876) $27,488 $ (5,222) Items not affecting cash from operations: Litigation 34,317 Plant closings and asset write-offs 22,277 14,700 Depreciation and amortization 10,687 10,649 11,539 Deferred income taxes (18,000) 40 (8,490) Accounting changes 16,734 Miscellaneous (429) (4,400) (3,624) Changes in operating assets and liabilities: Receivables (24,194) (13,362) 27,949 Inventories and prepaid expenses 9,145 (3,018) (1,250) Trade accounts payable and accrued expenses (18,533) 33,391 (16,929) Income taxes and interest 403 (7,915) (1,545) Total From Operations 1,797 42,873 33,862
INVESTING Capital expenditures (9,180) (14,318) (9,925) Purchases of businesses (3,387) (2,297) Long-term investments (1,143) (34) (1,966) Sales of operations 2,716 7,453 9,103 Marketable securities 1,771 (22,888) (14,963) Property, plant, and equipment disposals 300 474 619 Notes receivable 100 1,909 2,122 Total Used For Investing (8,823) (27,404) (17,307)
FINANCING Dividends paid (10,956) (10,992) (10,997) Treasury stock purchased (2,632) (5,563) Debt payments (2,309) (2,475) (2,648) Stock options exercised 1,569 1,395 1,785 Borrowing 198 8,497 Total Used For Financing (14,328) (17,437) (3,363)
CASH AND EQUIVALENTS (Decrease) increase (21,354) (1,968) 13,192 Beginning of year 25,491 27,459 14,267 End Of Year $ 4,137 $25,491 $ 27,459
See notes to consolidated financial statements.
ANNUAL REPORT PAGE 19
INDUSTRY SEGMENT DATA
Power Water Lynx Systems Control Golf Others Corporate Total (Thousands)
Year Ended March 31, 1994 Net sales $462,049 $246,465 $39,284 $37,890 $785,688 Operating (loss) profit (31,699) 22,095 (14,424) 1,920 (22,108) Corporate expense (1,368) Loss before income taxes (23,476) Identifiable assets 122,021 124,042 48,482 27,264 $126,084 447,893 Capital expenditures 1,599 3,923 2,244 1,201 213 9,180 Depreciation and amortization 3,063 3,623 1,631 1,662 708 10,687
Year Ended March 31, 1993 Net sales $351,053 $232,393 $39,626 $46,769 $669,841 Operating profit (loss) 10,495 21,549 (3,124) 4,023 32,943 Corporate income 7,885 Income before income taxes 40,828 Identifiable assets 139,592 109,659 54,642 31,113 $155,172 490,178 Capital expenditures 4,373 4,491 2,601 2,386 467 14,318 Depreciation and amortization 3,343 3,498 1,367 1,782 659 10,649
Year Ended March 31, 1992 Net sales $270,927 $253,755 $24,789 $47,061 $596,532 Operating profit (loss) 4,628 21,265 (7,271) (2,702) 15,920 Corporate income 2,102 Income before income taxes 18,022 Identifiable assets 124,161 118,027 41,477 35,054 $122,413 441,132 Capital expenditures 2,715 4,282 744 2,761 195 10,697 Depreciation and amortization 3,412 4,399 1,310 1,737 681 11,539
See notes to consolidated financial statements.
ANNUAL REPORT PAGE 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The financial statements include the accounts of the Company and its subsidiaries after elimination of significant intercompany transactions and accounts with reclassification of certain amounts to conform with the current year presentation.
Investments Marketable and irrevocable trust securities are available-for- sale and are carried at their estimated fair value (carried at cost before March 1994) with unrealized gains and losses included in stockholders' equity as a component of retained earnings. Debt securities maturing within three months of purchase are cash equivalents. Certificates of deposit and notes receivable are carried at cost with interest recognized as it accrues. The sales-type lease represents the present value of future minimum rental payments. Business ventures are accounted for by the equity method, or carried at cost if less than 20% of the stock is owned.
Engineering and Construction Contracts Revenue and costs on long-term contracts are recognized by the cost-to-cost percentage-of-completion method, commencing when progress is sufficient to determine earnings with reasonable accuracy, based on estimates of total sales value and cost at completion. Earnings adjustments arising from changes in estimates are recognized currently. Estimated losses are recorded when identified.
Inventories Inventories are valued at the lower of cost, which includes material, labor, and manufacturing overhead, or market.
Properties Property, plant, and equipment are stated at cost. Depreciation and amortization of properties are provided over their estimated useful lives by the straight-line method.
Foreign Currency Translation Translation adjustments of foreign subsidiaries, whose local currencies are their functional currencies, are included in stockholders' equity as a component of retained earnings.
Earnings Per Share Earnings per share are based on net income or loss and the average shares of common stock and dilutive stock options outstanding during the year (1994 - 12,438,000; 1993 - 12,521,000; 1992 - 12,606,000).
Financial Instrument Fair Values No class of instrument has a significant difference between its carrying value and estimated fair value based on market quotations, projected cash flows, and other estimating methods.
ANNUAL REPORT PAGE 20
Changes In Accounting Principles Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which reduced fiscal 1994 stockholders' equity by $1,241,000. In fiscal 1992, SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," which reduced earnings by $26,709,000, less income taxes of $10,550,000, ($1.29 per share) and SFAS No. 109, "Accounting for Income Taxes," which reduced earnings by $575,000 ($.04 per share).
INDUSTRY SEGMENT DATA The Power Systems segment designs, constructs, and operates alternate energy and combined-cycle power plants, designs steam generators and waste heat energy recovery and incineration systems, and produces equipment and fans to control emissions of solid particulate and gaseous pollutants. The segment's major construction contracts generally are with project financed entities with credit extended based on the financing without collateral. Sales to individual customers amounting to more than 10% of consolidated sales were: 1994 - $192,456,000; 1993 - $77,957,000 and $68,853,000; 1992 - $78,945,000. The Water Control segment manufactures and constructs a wide variety of systems and products used in nonresidential construction and by government agencies, among others, to control and treat water and wastewater. Lynx Golf manufactures and distributes golf clubs and accessories to country club professionals, golf specialty shops, and distributors. These products and systems are marketed by the Company's sales organizations and through factory sales offices and independent representatives and agents. Credit is extended based on evaluations of customers' financial condition. Industry segment operating profit is net sales less operating costs and certain corporate administrative expenses, allocated to the segments in relation to their sales, payrolls, and assets, and excludes interest expense. Corporate amounts include gains from sales of businesses, investment income, unallocated administrative expenses, and interest expense. Corporate assets consist principally of cash and equivalents, short-term marketable securities, long-term investments, and corporate headquarters and rental properties.
ANNUAL REPORT PAGE 21
UNUSUAL ITEMS, COMMITMENTS AND CONTINGENCIES
UNUSUAL ITEMS
Year Ended March 31 1994 1993 1992 (Thousands)
Litigation $38,902 $ 8,793 Plant closings and asset write-offs 23,000 $14,700 Doubtful account (recovery) provisions (8,363) 10,169 Prior year state income tax settlement (4,614) Sales of businesses (4,563) (2,405) $53,539 $ (384) $22,464
The litigation charge was recognized as the result of a jury verdict against the Company in connection with a contract to construct an agricultural waste- burning power plant and includes $9,747,000 for the write-off of accounts receivable and legal costs (1994-$2,655,000; 1993-$8,793,000). If all issues are lost on the appeal which is being aggressively pursued, additional charges could reach $18,000,000. In fiscal 1994, a decision was made to close the Energy Division manufacturing facilities because of uncompetitive costs and certain other assets were written off. The $8,400,000 of probable cash expenditures and $14,600,000 in asset write-downs charged to the industry segments were: Power Systems - $20,300,000; Lynx Golf - $860,000; Other - $1,840,000. In fiscal 1992, the $14,700,000 principally represented the revaluation of assets and excess operating costs of nonstrategic businesses associated with Water Control operations ($9,472,000) and Other segment operations ($3,676,000). One Water Control business was sold in fiscal 1993 and the Other segment business (fiscal 1993 sales - $11,123,000) was sold effective with the beginning of fiscal 1994. The Water Control segment sold Permutit and Vinylplex (fiscal 1993 sales - $16,519,000) in the fourth quarter of fiscal 1993 for cash ($7,992,000) and a ninety-day note ($1,900,000) and, in fiscal 1992, it sold Lamar for cash ($5,251,000) and a note ($1,900,000) which was paid in fiscal 1993. Operating profits of the businesses were nominal. It also sold a product line effective April 1991 and purchased slightly larger plumbing products businesses in May 1991 and December 1993. In fiscal 1994, the Power Systems segment recovered one of the accounts receivable it wrote off in fiscal 1992. Also in fiscal 1994, the revaluation of net deferred tax assets because of a tax law change reduced the net loss by $.15 per share. The unusual income tax settlement item is the reversal of previously accrued interest and an associated income tax adjustment amounted to $.14 per share in fiscal 1993.
ANNUAL REPORT PAGE 21
In the normal course of business, financial and performance guarantees are made in connection with major engineering and construction contracts and a liability is recognized when a probable loss occurs. Also, there are various claims, legal, and environmental proceedings which management believes will have no material effect on the Company's financial position or results of operations when they are resolved. Outstanding letters of credit amount to $19,387,000.
FINANCIAL INSTRUMENTS Unrealized March 31, 1994 Cost Gain Loss Fair Value (Thousands)
Statement Classification Cash and equivalents $ 123 $ 123 Marketable securities 63,381 $ 11 $2,096 61,296 Other current assets 1,847 17 4 1,860 Investments 15,507 140 36 15,611 $80,858 $168 $2,136 $78,890
Investment Type Certificates of deposit $ 301 $ 301 Debt securities: United States Treasury 8,788 $ 6 8,782 States and subdivisions 33,135 $155 565 32,725 Tax exempt bond funds 28,675 13 7 28,681 Mortgage-backed 9,959 1,558 8,401 $80,858 $168 $2,136 $78,890
The certificates of deposit and United States Treasury securities are pledged in lieu of providing construction performance surety bonds. Debt securities mature within three years except for mortgage-backed instruments maturing in various subsequent years. The values for marketable securities at March 31, 1993 were: cost - $64,599; market - $65,379; carrying - $65,152.
ACCOUNTS RECEIVABLE
(Thousands)
At March 31, 1994 accounts receivable include retainage on long-term contracts expected to be collected in fiscal 1995 - $4,438 and 1996 - $84. Allowances deducted are: 1994 - $6,203; 1993 - $13,915.
ANNUAL REPORT PAGE 21
INVENTORIES AND CONTRACTS IN PROGRESS
March 31 1994 1993 (Thousands)
Finished products $44,208 $45,897 Work in process 16,390 22,612 Raw materials and supplies 13,386 16,763 Contracts in progress 12,395 7,066 $86,379 $92,338
Last-in, first-out (LIFO) method 71% 62% First-in, first-out (FIFO) method 29 38
Inventory increase if only the FIFO method, which approximates replacement costs, had been used $13,295 $13,285
PROPERTY, PLANT, AND EQUIPMENT
March 31 1994 1993 (Thousands)
Land and land improvements $ 7,297 $ 7,552 Buildings and leasehold improvements 35,723 46,834 Machinery and equipment 95,761 108,005 138,781 162,391 Depreciation and amortization 81,778 91,968 $ 57,003 $ 70,423
INVESTMENTS
March 31 1994 1993 (Thousands)
Irrevocable trust securities for nonqualified pension, deferred compensation, and other employee plans $15,611 $14,821 Notes receivable 8,180 2,162 Sales-type lease 7,843 7,997 Business ventures 3,786 10,100 Other 538 816 $35,958 $35,896
ANNUAL REPORT PAGE 22
DEBT AND LINE OF CREDIT Payment of the unsecured note is guaranteed by the lessee under a sales-type lease. The unsecured 5 3/4% Convertible Subordinated Debentures due November 1994 are convertible into common stock at $14.25 per share, are redeemable at the Company's option, and are subordinated to other long-term debt. The nonrecourse note was canceled on collection of a construction contract receivable. The Company has a $75,000,000 three-year commitment, annually extendable for one year by mutual agreement until March 2000, from a group of banks for revolving credit loans with interest, at the Company's election, at the agent bank's prime rate, or based on quoted bid rates for certificates of deposit or the London interbank market rate. One-half of the commitment may be used for letters of credit. Certain agreements contain restrictive covenants pertaining to the maintenance of working capital and net worth and limit certain indebtedness.
LONG-TERM OBLIGATIONS
March 31 1994 1993 (Thousands)
Unsecured note - 8.46% interest $ 7,493 $ 7,811 Notes secured by various properties - 2% to 5% interest 4,563 5,811 Nonrecourse note - prime rate interest 5,000 Capital lease obligations 915 1,364 5 3/4% Convertible Subordinated Debentures 835 948 13,806 20,934 Less current portion 2,834 2,240 $10,972 $18,694
Year Ended March 31 1994 1993 1992 (Thousands)
Interest incurred $3,334 $2,406 $2,857 Interest paid 1,603 5,366 1,660
Long-term obligation principal payments due in future fiscal years: 1995 - $2,834; 1996 - $1,623; 1997 - $1,544; 1998 - $1,424; 1999 - $949; thereafter - $5,453.
ANNUAL REPORT PAGE 22
RETIREMENT OBLIGATIONS Substantially all employees are covered by noncontributory Company sponsored or multiemployer defined benefit plans. Generally those in collective bargaining groups are provided benefits of stated amounts for each year of service, while benefits for others are based on years of service and the five highest years' compensation in the ten years prior to retirement, or compensation at retirement. Funding of Company sponsored plans, invested primarily in listed stocks and bonds and cash equivalents, is the minimum required by law and additional amounts as deemed appropriate from time to time. Contributions to multiemployer plans are related to hours worked or compensation levels. The Company provides postretirement medical and death benefits for certain retirees and their spouses from unfunded plans. Employees participating in the primary pension plan on December 31, 1986, or in other plans through various dates ending in 1989, are eligible for these benefits. The Company also sponsors defined contribution plans.
FUNDING STATUS March 31 1994 1993 Pension Plans Medical Pension Plans Medical Over Under And Life Over Under And Life Funded Funded Plans Funded Funded Plans (Thousands)
Actuarial present value of benefits: Vested $ 69,483 $ 25,363 $ 22,664 $ 78,325 $ 9,405 $ 22,288 Nonvested 424 402 6,663 2,636 48 9,024 Accumulated 69,907 25,765 29,327 80,961 9,453 31,312 Salary increases 8,264 1,617 10,853 91 Projected 78,171 27,382 29,327 91,814 9,544 31,312 Plans' assets 121,657 16,932 128,798 1,277 Asset excess (deficiency) 43,486 (10,450) (29,327) 36,984 (8,267) (31,312) Unrecognized: Net (gain) loss (23,136) 2,105 (966) (18,161) 1,359 2,267 Initial asset (4,092) (187) (5,440) (9) Prior service cost (329) (805) 456 73 Minimum liability (1,958) (1,528) Prepaid (accrued) cost $ 15,929 $(11,295) $(30,293) $ 13,839 $(8,372) $(29,045)
ANNUAL REPORT PAGE 22
COSTS Company Defined Benefit Plans Pension Medical And Life Year Ended March 31 1994 1993 1992 1994 1993 1992 (Thousands)
Service cost $ 3,339 $ 3,194 $ 2,920 $ 541 $ 565 $ 488 Interest 7,360 7,176 7,149 2,240 2,213 2,095 Termination benefits 2,652 142 Curtailment (gain) loss (1,112) 63 Return on assets (13,888) (13,516) (19,944) Other 3,031 3,099 9,639 78 Net expense (income) $ 1,382 $ (47) $ (236) $2,986 $2,856 $2,583
Other Plans
Year Ended March 31 1994 1993 1992 (Thousands)
Multiemployer $2,535 $3,397 $2,861 Defined contribution 341 272 242
ACTUARIAL ASSUMPTIONS
Year Ended March 31 1994 1993 1992 Obligation discount 7.25% 7.25% 7.5% Compensation increase 4.35 to 7.5 4.35 to 7.5 4.6 to 7.75 Asset long-term return 9.0 9.0 9.0 Health care cost trend rate 13.0 13.5 14.0
The accumulated medical and life plan obligation is attributable to: retirees - 56%; fully-eligible employees - 21%; other active employees - 23%. The assumed medical care cost trend rate declines 1/2% each year to 5.25% in 2010. A 1% greater rate would increase the accumulated obligation by $3,555 and the annual expense by $441. Most of the termination benefits and curtailment gain relate to union and nonunion employees and are part of the fiscal 1994 plant closing costs. They changed the funded status of one pension plan from overfunded to marginally underfunded.
ANNUAL REPORT PAGE 23
STOCKHOLDERS' EQUITY There are 1,997,000 shares of unreserved authorized preferred stock. At March 31, 1994, common stock has been reserved for the conversion of debentures (59,000 shares) and for the exercise of stock options (1,447,000 shares). Three million shares of Second Series Junior Participating Preferred Stock ($1.00 par value, $2.00 liquidation preference to common stock, redeemable at the greater of $260 or four times the current common stock market price) are reserved for issuance on exercise of rights attached to outstanding common stock. The rights may be redeemed at $.025 per right and expire in May 1996. If 20% or more of the Company's common stock becomes beneficially owned by a person or group, or if an exchange or tender offer which would result in 30% or more ownership is commenced, the rightholders, except such beneficial owners, may purchase one-quarter share of the preferred stock at $65 per share. If other triggering events constituting a change in control occur, the same rightholders may, for $65, purchase shares of either the Company's or the acquirer's common stock at one-half its market value. The Company's stock option plan provides for granting either nonqualified or incentive stock options to key employees to purchase no earlier than six months after the grant date shares of common stock at its market value on the grant date. Another plan provides for the annual distribution of a nonqualified option for 1,000 shares of common stock, at its market value on the distribution date, to each director who is not employed by the Company. Outstanding options expire on dates from April 1994 to August 2003. In lieu of cash, common stock was received and distributed on exercise of certain stock options.
ANNUAL REPORT PAGE 23
STOCK OPTIONS
Shares Option Price Per Share (Thousands of Shares)
Year Ended March 31, 1994 Granted 131 $32.75 - $37.25 Exercised 94 21.125 - 28.75 Canceled 5 37.25 At year end: Outstanding 703 21.125 - 45.375 Average 35.43 Exercisable 366 21.125 - 45.375 Available for grant 744
Year Ended March 31, 1993 Granted 159 $30.125 - $35.00 Exercised 59 21.125 - 34.50 Canceled 10 28.75 - 41.00 At year end: Outstanding 671 21.125 - 45.375 Average 33.27 Exercisable 309 21.125 - 45.375 Available for grant 870
Year Ended March 31, 1992 Granted 149 $33.00 - $37.00 Exercised 90 17.50 - 28.75 Canceled 4 21.125 - 28.75
STOCK EXCHANGED
Year Ended March 31 1994 1993 1992 (Thousands)
Options exercised 42 18 29 Shares received and distributed: Number 30 11 18 Market value $884 $404 $657 Additional shares issued 12 7 11 Charge to retained earnings $248 $ 41 $101
ANNUAL REPORT PAGE 23
RETAINED EARNINGS COMPONENTS
March 31 1994 1993 1992 (Thousands)
Investment unrealized loss $ (1,241) Pension minimum liability (1,007) $ (884) $ (574) Currency translation (1,288) (908) (219) Retained earnings 187,206 212,275 195,789
INCOME TAXES
NET DEFERRED TAX ASSET COMPONENTS
March 31 1994 1993 (Thousands)
Retirement obligations $14,200 $12,220 Litigation 9,550 Plant closings 6,850 1,750 Insurance 5,480 5,470 Engineering and construction contracts 4,830 3,400 Allowance for doubtful accounts 4,410 5,470 Warranties 4,000 4,440 Deferred compensation 1,750 1,540 State income taxes 290 390 Miscellaneous 2,840 1,100 54,200 35,780 Valuation allowance (680) (150) Depreciation and amortization (5,770) (6,800) $47,750 $28,830
TAXES PAID
Year Ended March 31 1994 1993 1992 (Thousands) $9,357 $13,405 $17,355
ANNUAL REPORT PAGE 23
PROVISIONS
Year Ended March 31 1994 1993 1992 (Thousands)
Current federal $ 6,770 $12,810 $11,870 Current state 1,630 3,160 3,130 Prior year state tax settlement (2,670) 8,400 13,300 15,000 Deferred federal (14,890) 270 (7,050) Deferred state (1,260) (230) (1,440) Deferred tax rate change (1,850) (18,000) 40 (8,490) $ (9,600) $13,340 $ 6,510
TAX RATE RECONCILEMENT
Year Ended March 31 1994 1993 1992 Federal statutory rate (35.0)% 34.0% 34.0% Tax exempt investment income (4.6) (2.5) (6.1) State income taxes, net of federal tax benefit (4.0) 4.8 5.5 Deferred tax valuation allowance 2.3 Prior year state tax settlement (4.3) Miscellaneous .4 .7 2.7 Effective rate (40.9)% 32.7% 36.1%
EXHIBIT 21 - SUBSIDIARIES
State or Other Jurisdiction Subsidiary of Incorporation
Cosco Fire Protection, Inc. -A California Environmental Energy Company California Firetrol Protection Systems, Inc. Utah Gary Concrete Products, Inc. -A Georgia
HL Capital Corp. California Lynx Golf, Inc. California Lynx Golf (Canada) Ltd. -B Ontario, Canada Lynx Golf (Scotland) Limited -B United Kingdom
National Energy Production Corporation Washington National Energy Production Corporation of Canada, Ltd. Ontario, Canada La Corporation D'Energie Production Nationale Du Canada, Ltee. -C Nuevo Camino Constructors Co. California Operational Energy Corp. -C California
Sharyn Steam, Inc. California Zurn Constructors, Inc. California Zurn Export, Inc. U.S. Virgin Islands Zurn Industries Limited Ontario, Canada Zurco, Inc. Delaware
A-Subsidiary of Zurn Constructors, Inc. B-Subsidiary of Lynx Golf, Inc. C-Subsidiary of National Energy Production Corporation
EXHIBIT 23 - CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement on Form S-8 No. 33-19103 pertaining to the 1986 Stock Option Plan, the Registration Statement on Form S-8 No. 33-30383 pertaining to the 1989 Directors Stock Option Plan, and the Registration Statement on Form S-8 No. 33-49224 pertaining to the 1991 Stock Option Plan of Zurn Industries, Inc. of our report dated May 19, 1994 included in Item 8 with respect to the consolidated financial statements and financial statement schedules incorporated by reference or included in the Annual Report on Form 10-K of Zurn Industries, Inc.
/s/ Ernst & Young
Erie, Pennsylvania June 27, 1994