<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934.
For the fiscal year ended October 31, 1994
COMMISSION FILE NO. 0-588
COMMERCIAL INTERTECH CORP.
(Exact name of registrant as specified in its charter)
Ohio 34-0159880
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1775 Logan Avenue, Youngstown, Ohio 44501
(Address of principal executive offices) (Zip Code)
(216) 746-8011
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $1 PER SHARE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to the
filing requirements for at least the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of January 3, 1995, 15,261,590 common shares were outstanding, and
the aggregate market value of the common shares (based upon the last price on
that date) was approximately $288,063,000.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the documents of the Registrant listed below have
been incorporated by reference into the indicated parts of this Annual Report
on Form 10-K.
Notice of Annual Meeting of Shareholders March 22, 1995 and Proxy
Statement filed January 17, 1995. . . Part III, Items 10-13
Part IV, Item 14
The exhibit index is located on page 60.
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Part I
ITEM I. BUSINESS
(a) General development of business:
Commercial Intertech Corp. (formerly Commercial Shearing, Inc.) was
incorporated in Ohio in 1920. The Company is engaged in the design,
manufacture and sale of products in three groups: hydraulic components, metal
products, and fluid purification systems. In January 1986, the Company
acquired Cuno, Incorporated ("Cuno"), a manufacturer of fluid purification
products. Before that acquisition, hydraulic components and metal products
accounted for all of the Company's business.
(b) Financial information about industry segments:
See Note I of the Notes to Consolidated Financial Statements
on pages 45-47.
(c) Narrative description of business:
HYDRAULIC COMPONENTS
Hydraulic components consist primarily of gear pumps and motors,
control valves and telescopic cylinders for use generally on heavy- duty mobile
equipment such as dump trucks, cranes, refuse vehicles, front-end loaders,
backhoes and mining machines. Other products manufactured by the Company
include hydraulic test equipment for military and industrial applications,
hydraulic steer transmissions for military vehicles, mobile electrical power
generators, hydraulic tilt and trim mechanisms for recreational boating and
axial piston pumps and motors for industrial and marine applications. The
Company's gear pumps and motors, control valves and telescopic cylinders are
sold primarily to original equipment manufacturers by the Company's hydraulic
sales organization consisting of approximately 73 persons in the United States
and Canada and approximately 78 persons outside North America. A portion of
the Company's sales is made to independent distributors for resale primarily to
the replacement market.
The Company acquired the stock of ORSTA Hydraulik in May 1994. ORSTA
Hydraulik, a former East German state-owned enterprise, is a manufacturer of
hydraulic cylinders, piston and gear pumps, power packs, hydraulic testing
equipment and industrial valves.
The Company acquired the assets of Kenart EMC, Inc., formerly doing
business as Teknar EMC, Inc. in February, 1991. Teknar manufactures a line of
electronic motion control products. The Company relocated Teknar operations to
an existing production facility in Minneapolis, Minnesota.
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ITEM I. BUSINESS (Continued)
The Company acquired Cylinder City, Inc., a manufacturer and marketer
of hydraulic cylinders located in Minneapolis, Minnesota in June, 1990.
The Company believes that it is the largest supplier of gear pumps and
is among the leading single-source suppliers of hydraulic components for mobile
equipment in the United States. The market for hydraulic components is highly
competitive.
METAL PRODUCTS
The metal products operations consist of two units: metal stampings
and Astron (pre-engineered metal buildings). The Company produces custom and
standard metal stampings, including tank ends and a wide variety of other
stamped steel products, such as wheels for tracked vehicles, components for
railcar brake activators, couplings and covers for mechanical power
transmission applications, large circuit breaker covers, and enclosures serving
many purposes. The sales and marketing activities for metal stampings are
conducted in North America with exports to Pacific Rim and South America by a
sales organization of approximately 20 persons. The metal stamping unit faces
strong competition from regional domestic companies that often may have lower
producing costs. Additionally, standard products are offered for sale from six
(6) fast service distribution centers in Dallas, Texas; Atlanta, Georgia;
Chicago, Illinois; Hagerstown, Maryland; Seattle, Washington and Middleboro,
Massachusetts.
Astron, the European market leader in Metal Building Systems produces
single and multi story buildings that serve as aircraft hangars, indoor
athletic facilities, automobile showrooms, supermarkets, factories and
warehouses. Astron buildings are sold throughout the twelve countries of the
European Economic Community, in Scandinavia and in Eastern Europe, as well as
in China and South Korea. This division developed its own computerized
building pricing and proposal system, known as Cyprion, that tailors buildings
to customers' precise dimension and design requirements. Through Cyprion,
Astron's just under 400 qualified builder/dealers can provide pricing and
building plans in a fraction of traditional architectural time. The
builder/dealers are supported by Astron's sales force of nearly 84 persons.
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ITEM I. BUSINESS (Continued)
Three years ago Astron entered into a joint venture with Arbed,
Europe's fifth largest steel producer, and is now producing multistory steel
buildings for European markets. In addition, in 1992 the Astron Division
licensed Geoyang Development Co., Ltd. of South Korea, to manufacture, sell and
erect Astron buildings in Korea. Geoyang now known as POSEC, is also
cooperating with the Company's Luxembourg and Singapore sales companies for
marketing and manufacturing throughout the Pacific Rim.
FLUID PURIFICATION PRODUCTS
The fluid purification group operates worldwide with two major
divisions: process and consumer. The process division manufactures a broad
range of filtration products for general and fine filtration applications. The
general filtration product line includes gradient density cartridges made from
resin impregnated fibers and cartridges made from thermally bonded synthetic
bicomponent fibers, as well as cleanable metal filter products. The general
filtration products are used extensively in chemical, petrochemical, paint and
coatings industrial applications, as well as in prefiltration and service
applications for the food, beverage, utility and pharmaceutical industries.
The fine filtration product line provides critical filtration and separation
performance primarily to the food, beverage, electronics, diagnostic,
biotechnology, medical and pharmaceutical markets. The fine filtration
products range from ZetaPlus(R) charge modified felted depth filters to
membrane filters which are made of nylon, polypropylene and
polytetrafluorethylene materials. The general and fine filtration product
lines are complemented by a broad line of metal and plastic housings, which are
the pressure vessels that hold filters. The process housing line includes
products made of plastic, carbon steel and stainless steel, and is capable of
meeting sophisticated customer demands for sanitary, crevice free and even
mirror-like 10RA finishes.
The consumer division is principally involved in manufacturing
products that purify water for drinking. The consumer filtration product line
consists of a variety of filter cartridges with capabilities which include
similar products to the process resin impregnated and bicomponent fiber
products, as well as carbon cartridges. The reverse osmosis product line,
though principally focused on drinking water, has made inroads into certain
commercial or industrial niche applications, such as lithography, car washes
and food service. The drinking water product range includes drinking water
systems for fast food restaurant chains, ice maker filters for appliances,
point of use countertop or under-the-counter filters or reverse osmosis systems
and whole house filter systems. The acquisition of Water Factory Systems, a
manufacturer of residential, commercial and industrial reverse osmosis systems,
brought expanded production and technical capabilities to the consumer
division.
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<PAGE> 5
ITEM I. BUSINESS (Continued)
FLUID PURIFICATION PRODUCTS (Continued)
The Company believes that it is one of the leading suppliers of
general process filtration products. This industry is characterized by a
limited number of major suppliers including Pall Corporation, subsidiaries of
divisions of Parker Hannifin Corporation and MEMTEC. The fine filtration
market is served by certain major competitors, with Pall Corporation and
Millipore Corporation being the most significant. Cuno's fine filtration depth
filter cartridges hold a leadership position in the market, and although its
membrane product line holds a relatively small market share its sales are
increasing. The consumer division's principal competitor is Ametek
Corporation. Consumer has long been a leading supplier to the plumbing
wholesale channel, and has been gaining penetration in the food service, OEM
and direct marketing segments of the business. Consumer has a modest position
in the retail trade with a split between specialty water quality dealers or
kitchen and bath shops. In the food service market, a unit of Culligan is the
leading supplier.
Process filtration products are marketed in the United States by a
group of independent distributors, most of which have been distributing these
products for at least 17 years. In the international market, sales are made
either directly or through approximately 100 distributors in 75 countries. The
consumer market is reached by a combination of Company sales personnel and a
significant number of distributors and wholesalers, as well as through OEM
relationships.
MANUFACTURING
The Company manufactures hydraulic products in 16 plants and metal
products in three plants worldwide. The Company's hydraulic manufacturing
operation is highly integrated and the Company purchases few components from
independent suppliers. The Company has developed tooling for a substantial
number of its fabricated metal products, which enables a reduction in the costs
and time of manufacturing. Cuno maintains five manufacturing facilities in the
United States and three manufacturing facilities abroad. The manufacture of
the Cuno fluid purification products employs numerous proprietary processes.
RESEARCH AND PRODUCT DEVELOPMENT
The Company conducts research and development primarily in its
hydraulics and fluid purification product groups. In fiscal 1994 the Company
expended $5,409,000 for research and development of various hydraulic products
as compared to $4,914,000 and $5,986,000 in 1993 and 1992, respectively. The
Company expended $1,884,000 for research and development for fluid purification
products during 1994, $1,794,000 in 1993 and $2,059,000 in 1992. The Company
intends to continue substantial expenditures on research and development in
this area in order to bring developmental products to market.
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ITEM I. BUSINESS (Continued)
PATENTS AND TRADEMARKS
The Company currently holds registered trademarks and patents
associated with certain existing products and has filed applications for
additional patents covering certain of its newer products. Although the
Company considers patents and trademarks significant factors in all of its
businesses, it does not consider the ownership of patents essential to the
operation of its hydraulic components and metal products groups. The Company
relies on product quality and features, the strength of its marketing and
distribution network and on new product introductions rather than on its
existing patents to protect and improve its market position in the hydraulic
components and metal products groups. Cuno currently holds numerous patents,
has others pending and has registered its trademarks. Cuno considers many of
these patents and trademarks important to its business.
SEASONALITY
Because sales of certain hydraulic components and pre-engineered metal
buildings are related to the construction industry, this portion of the
Company's business is affected by the seasonality of that industry.
EMPLOYEES
The Company employs approximately 4,484 full-time employees worldwide.
The Company believes that its labor relations are generally satisfactory.
BACKLOG
The backlog of orders believed to be firm at the end of fiscal 1994
was approximately $154,000,000. Backlogs at the end of fiscal years 1993 and
1992 were $107,000,000 and $111,000,000, respectively. Registrant expects a
substantial portion of its order backlog at the end of 1994 will be shipped
during fiscal 1995.
(d) Financial information about foreign and domestic operations and
export sales.
See Note I - Segment Reporting - of the Notes to Consolidated
Financial Statement on pages 45-47.
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<TABLE>
ITEM 2. PROPERTIES
The principal plants of the Registrant and its subsidiaries by
industry segments are located in:
<CAPTION>
Owned:
-----
Hydraulic Components Metal Products
-------------------- --------------
<S> <C>
Youngstown, Ohio Youngstown, Ohio
Hicksville, Ohio Diekirch, Luxembourg
Kings Mountain, N. Carolina Orange, California
Benton, Arkansas
Mairinque, Brazil Fluid
Lamadelaine, Luxembourg Purification Products
---------------------
Grantham, England
Minneapolis, Minnesota Meriden, Connecticut
Port Melbourne, Australia Stafford Springs, Connecticut
Warwick, England Enfield, Connecticut
Chemnitz, Germany Mairinque, Brazil
Geringeralde, Germany Blacktown, Australia
Mazeres, Toulouse, France
Chemin du Contre Halage
Les Attaques, Marek, France
Kita-Ibaragi, Japan
</TABLE>
<TABLE>
<CAPTION>
Leased:
------
Hydraulic Components Metal Products
-------------------- --------------
<S> <C>
Gloucester, England Hagerstown, Maryland
Chicago, Illinois
Dallas, Texas
Atlanta, Georgia
Seattle, Washington
Middleboro, Massachusetts
Fluid
Purification Products
---------------------
Irvine, California
Jurong, Singapore
</TABLE>
Properties of Registrant and its subsidiaries are suitably constructed
and maintained for their respective uses. Details of liens on property are
given in Note B - Debt of the Notes to Consolidated Financial Statements on
pages 33 and 34.
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ITEM 3. LEGAL PROCEEDINGS
As of the date hereof there is no pending litigation of a material
nature, other than ordinary routine litigation incidental to the business, to
which the Registrant or any of its subsidiaries is a party or which may affect
the income from, title to, or possession of, any of their respective
properties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding executive officers of the Registrant is
presented in Part III below and incorporated here by reference.
PART II
ITEM 5. COMPANY COMMON STOCK
The Company's common stock is traded on the New York Stock Exchange
under the ticker symbol TEC. The following is the range of high and low sales
prices and cash dividends paid per share for fiscal 1994 and 1993 by quarters.
All amounts have been restated for the effects of a three-for-two stock split
effective September 1, 1994.
<TABLE>
<CAPTION>
RANGE OF SALES
PRICES
------------- DIVIDENDS
HIGH LOW PER SHARE
---- --- ---------
<S> <C> <C> <C> <C>
1994:
----
First quarter. . . . . $14 $12 $.113
Second quarter . . . . 16 12 2/3 .114
Third quarter. . . . . 19 5/6 14 5/6 .125
Fourth quarter . . . . 20 5/12 17 3/8 .125
-----
$.477
=====
1993:
----
First quarter. . . . . $14 1/2 $12 1/2 $.113
Second quarter . . . . 13 1/2 12 1/2 .114
Third quarter. . . . . 14 7/12 12 1/2 .113
Fourth quarter . . . . 15 1/2 13 1/3 .113
-----
$.453
=====
</TABLE>
As of October 31, 1994 there were 3,776 shareholders of record of
Common Stock.
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<PAGE> 9
<TABLE>
ITEM 6. SELECTED FINANCIAL DATA
The following table summaries information with respect to the
operation of the Company.
<CAPTION>
(in thousands, except per-share data and ratios)
INCOME DATA - Note A 1994 1993 1992 1991 1990 1989
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . . $516,931 $448,577 $450,608 $436,961 $453,075 $434,775
Gross profit . . . . . . . . . . . . . . . 157,470 129,740 134,301 135,741 139,890 142,147
Interest expense . . . . . . . . . . . . . 4,952 5,744 6,277 5,881 6,170 6,595
Income from continuing operations
before income taxes . . . . . . . . . . 27,803 20,602 23,349 36,215 50,791 44,433
Income taxes . . . . . . . . . . . . . . . 8,184 6,587 9,304 16,097 23,184 20,314
Income from continuing operations. . . . . 19,619 14,015 14,045 20,118 27,607 24,119
Net income . . . . . . . . . . . . . . . . 25,081 14,015 17,436 11,103 27,607 6,730
Earnings per share - Note B
Primary:
Income from continuing operations. . 1.14 .79 .65 .93 1.36 1.35
Net income . . . . . . . . . . . . . 1.50 .79 .88 .32 1.36 .38
Fully diluted:
Income from continuing operations. . 1.09 .76 .63 .88 1.31 1.30
Net income . . . . . . . . . . . . . 1.41 .76 .84 .32 1.31 .38
Dividends per share of common stock:
Cash. . . . . . . . . . . . . . . . . . .48 .45 .45 .45 .44 .40
Stock . . . . . . . . . . . . . . . . . 50% -- -- -- -- --
OTHER FINANCIAL DATA - Note A
Total assets . . . . . . . . . . . . . . . $422,978 $347,335 $349,999 $335,062 $361,559 $325,201
Current assets . . . . . . . . . . . . . . 235,366 170,965 169,013 158,272 182,466 165,601
Less current liabilities . . . . . . . . . 134,966 110,199 109,170 92,460 100,824 91,107
Net working capital . . . . . . . . . . 100,400 60,766 59,843 65,812 81,642 74,494
Net plant investment . . . . . . . . . . . 125,437 114,981 122,149 120,825 120,888 107,475
Gross capital expenditures . . . . . . . . 23,052 9,435 14,116 20,097 22,831 17,783
Long-term debt . . . . . . . . . . . . . . 77,020 78,059 84,392 54,718 69,852 41,481
Redeemable preferred stock . . . . . . . . 0 0 0 38,491 37,594 0
Shareholders' equity . . . . . . . . . . . 153,760 122,937 121,849 116,344 130,265 173,045
Shareholders' equity per share of common
stock - Note C. . . . . . . . . . . . . 9.82 7.93 8.04 7.85 8.81 9.09
Actual number of shares outstanding
at year-end . . . . . . . . . . . . . . 15,199 15,056 14,864 14,686 14,781 19,030
Average number of shares outstanding
during the year . . . . . . . . . . . . 15,327 15,096 14,863 14,888 16,994 17,852
RATIOS - Note A
Gross profit to net sales. . . . . . . . . 30.5% 28.9% 29.8% 31.1% 30.9% 32.7%
Income from continuing operations
to net sales. . . . . . . . . . . . . . 3.8% 3.1% 3.1% 4.6% 6.1% 5.5%
Effective income tax rate. . . . . . . . . 29.4% 32.0% 39.8% 44.4% 45.6% 45.7%
Income from continuing operations
to average shareholders'
equity. . . . . . . . . . . . . . . . . 14.2% 11.5% 11.8% 16.3% 18.2% 14.9%
Ratio of current assets to
current liabilities . . . . . . . . . . 1.74:1 1.55:1 1.52:1 1.68:1 1.78:1 1.80:1
Ratio of long-term debt to
shareholders' equity plus
long-term debt. . . . . . . . . . . . . 33.4% 38.8% 40.9% 32.0% 34.9% 19.3%
</TABLE>
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<TABLE>
ITEM 6. SELECTED FINANCIAL DATA (Continued)
<CAPTION>
(in thousands, except per-share data and ratios)
INCOME DATA - Note A 1988 1987 1986 1985 1984
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . . $398,666 $321,348 $274,510 $192,186 $204,849
Gross profit . . . . . . . . . . . . . . . 123,164 99,641 83,958 54,949 56,278
Interest expense . . . . . . . . . . . . . 7,309 7,905 7,709 1,959 1,861
Income from continuing operations
before income taxes . . . . . . . . . . 30,586 19,265 18,369 16,742 19,313
Income taxes . . . . . . . . . . . . . . . 13,822 8,041 7,753 8,826 6,620
Income from continuing operations. . . . . 16,764 11,224 10,616 7,916 12,693
Net income . . . . . . . . . . . . . . . . 16,564 11,224 10,616 7,916 12,693
Earnings per share - Note B
Primary:
Income from continuing operations. . 1.01 .68 .64 .48 .77
Net income . . . . . . . . . . . . . .99 .68 .64 .48 .77
Fully diluted:
Income from continuing operations. . .96 .67 .64 .48 .77
Net income . . . . . . . . . . . . . .96 .67 .64 .48 .77
Dividends per share of common stock:
Cash. . . . . . . . . . . . . . . . . . .38 .37 .37 .35 .35
Stock . . . . . . . . . . . . . . . . . -- -- -- -- 5%
OTHER FINANCIAL DATA - Note A
Total assets . . . . . . . . . . . . . . . $308,388 $280,259 $271,449 $170,396 $157,912
Current assets . . . . . . . . . . . . . . 151,690 125,840 118,673 112,042 101,453
Less current liabilities . . . . . . . . . 80,182 58,972 55,028 44,509 36,604
Net working capital . . . . . . . . . . 71,508 66,868 63,645 67,533 64,849
Net plant investment . . . . . . . . . . . 102,682 105,609 105,400 48,446 47,374
Gross capital expenditures . . . . . . . . 9,995 9,889 13,553 5,739 4,693
Long-term debt . . . . . . . . . . . . . . 60,225 72,371 83,356 3,922 4,335
Redeemable preferred stock . . . . . . . . 0 0 0 0 0
Shareholders' equity . . . . . . . . . . . 150,530 134,678 122,262 114,621 110,269
Shareholders' equity per share of common
stock - Note C. . . . . . . . . . . . . 9.08 8.17 7.43 6.98 6.73
Actual number of shares outstanding
at year-end . . . . . . . . . . . . . . 16,585 16,487 16,456 16,414 16,387
Average number of shares outstanding
during the year . . . . . . . . . . . . 16,664 16,565 16,493 16,403 16,383
RATIOS - Note A
Gross profit to net sales. . . . . . . . . 30.9% 31.0% 30.6% 28.6% 27.5%
Income from continuing operations
to net sales. . . . . . . . . . . . . . 4.2% 3.5% 3.9% 4.1% 6.2%
Effective income tax rate. . . . . . . . . 45.2% 41.7% 42.2% 52.7% 34.3%
Income from continuing operations
to average shareholders'
equity. . . . . . . . . . . . . . . . . 11.8% 8.7% 9.0% 7.0% 11.7%
Ratio of current assets to
current liabilities . . . . . . . . . . 1.87:1 2.10:1 2.13:1 2.50:1 2.75:1
Ratio of long-term debt to
shareholders' equity plus
long-term debt. . . . . . . . . . . . . 28.6% 35.0% 40.5% 3.3% 3.8%
<FN>
Note A - Data for fiscal years 1986-1994 have been computed in accordance with
Employers' Accounting for Pensions, SFAS No. 87. Fiscal years
1991-1994 have been computed in accordance with Employers' Accounting
for Postretirement Benefits Other Than Pensions, SFAS No. 106. Fiscal
years 1992-1994 have been computed in accordance with Accounting for
Income Taxes, SFAS No. 109. Prior years have not been restated.
Note B - Based on weighted average number of shares outstanding adjusted for
all subsequent share dividends.
Note C - Based on actual number of shares outstanding at end of period adjusted
for all subsequent share dividends.
</TABLE>
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<PAGE> 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Consolidated Results
A strengthening U.S. economy and marked improvements in
business conditions for overseas operations other than Europe
and the United Kingdom were the contributing factors leading
to significantly increased sales and income for the Corporation
in 1994. Income from continuing operations amounted to
$19.6 million for the year, up 40 percent from the $14.0 million
reported in both 1993 and 1992. Included in the results for 1994
are $3.8 million in after-tax charges to consolidate and close
certain operations in Europe and the U.S. Similar activities
reduced income from continuing operations in 1993 and 1992 by
$0.6 million and $0.9 million, respectively. Excluding these
charges, income from continuing operations in 1994 was higher
than the preceding year by $8.8 million or 60 percent.
Net income for the year of $25.1 million includes a $5.5 million noncash
gain from the reversal of tax accruals no longer required in connection with a
discontinued operation. In 1992, the cumulative effect of adopting FASB
Statement No. 109, "Accounting For Income Taxes," increased net income by $3.4
million.
Record sales of $516.9 million were higher than those in 1993 and 1992 by
15 percent and 17 percent, respectively, after adjusting for the effects of
exchange rate differences on foreign sales reported in U.S. dollars. Revenues
for the Corporation's U.S. operations advanced for the third consecutive year
to an all-time high of $290.4 million, surpassing those in 1993 and 1992 by 20
percent and 38 percent, respectively. Domestic sales were substantially higher
in 1994 for the Hydraulic and Metal Product Groups while revenues in the Fluid
Purification Group grew at a more moderate rate. Export sales were up 15
percent over last year reflecting increased shipments to nonaffiliated
customers in Canada, Europe, Pacific Rim countries, and the Middle East.
Domestic operations accounted for 56 percent of the Company's total sales in
1994 versus 54 percent in 1993 and 47 percent in 1992. Revenues for the
Company's overseas operations increased by 10 percent over those in 1993 but
most of the year-over-year gain was derived from the mid-year acquisition of
two hydraulics businesses in Germany known as ORSTA Hydraulik. Sales for other
European operations were generally flat in 1994 due to the continuing effects
of the economic recession. Business conditions were much stronger for
operating units in Australia and Southeast Asia where sales have grown at
substantial rates over the three-year period.
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<PAGE> 12
ITEM 7. (Continued)
RESULTS OF OPERATIONS (Continued)
- ---------------------------------
Operating income of $34.8 million was higher than income in 1993 and 1992
by 37 percent and 16 percent, respectively, reflecting the surge in U.S.
business during 1994. Operating income for the domestic segment reached an
all-time high at $26.3 million while consolidation charges and lackluster
performance in Europe negated strong profit gains by other overseas operations
in Australia, Brazil, Southeast Asia and Japan. Operating income for the
Hydraulic Components Group increased for the third consecutive year while
earnings declined marginally in the Metal Products Group as the Astron Division
continued to struggle with the economic recession in Europe. Year-over-year
improvements in all of the domestic and foreign operating units enabled the
Fluid Purification Group to generate an operating profit in 1994, following the
losses sustained in the two previous years.
Included in operating income for 1994 are the financial results of the
ORSTA Hydraulik operations acquired by the Company at the beginning of the
third quarter. ORSTA, a manufacturer of hydraulic cylinders, piston pumps,
gear pumps, and industrial valves, consists of Sachsenhydraulik Chemnitz GmbH
("SHC") and its wholly owned subsidiary Hydraulik Rochlitz GmbH. Shares of the
business were acquired on May 3, 1994 from the Treuhandanstalt ("THA"), the
regulatory agency of the Federal Republic of Germany responsible for the
privatization of former East German state-owned enterprises. Under terms of
the Purchase Agreement, Commercial Intertech tendered no financial
consideration to acquire the shares of SHC but received, in addition to the net
assets of the two companies, cash contributions from the THA to fund
pre-existing capital investment programs and cover estimated operating losses
over a period of two years. That portion of the cash contribution available to
the Corporation for the indemnification of operating losses amounted to
approximately $23.6 million (39.0 million Deutsche marks) as of the acquisition
date. The loss indemnification was recorded as a deferred credit (negative
goodwill) and is being amortized to income through cost of sales in accordance
with a predetermined schedule which coincides with projected losses in each
fiscal quarter over the two-year period. Operating income for the ORSTA
operations, after amortization of the deferred credit, amounted to $140,000 in
1994 on sales of $15.3 million (see Note K for further details). Aside from
providing a new range of hydraulic products and access to markets heretofore
unavailable to the Corporation, this acquisition offers a number of strategic
operating advantages including a large inventory of technologically advanced
machine tools, cylinder manufacturing capability in Europe, facilities suitable
to accommodate the centralization of all the Company's hydraulic manufacturing
operations in Europe, and the production capacity necessary to manufacture two
new series of piston and gear pumps now being introduced to the marketplace.
-12-
<PAGE> 13
ITEM 7. (Continued)
RESULTS OF OPERATIONS (Continued)
- ---------------------------------
Following the acquisition of ORSTA Hydraulik during the latter half of
1994, the Corporation announced strategic plans to close certain Hydraulic
facilities in Europe and the United Kingdom, phase out some nonperforming
products manufactured at those facilities, and consolidate the remaining core
businesses with the newly acquired operations in Germany and other existing
operations located in the United Kingdom. Operating results for 1994 include
nonrecurring charges of $4.2 million and concurrent inventory writeoffs in cost
of sales of $0.7 million recorded in connection with these plans. The amount
identified as a nonrecurring charge includes separation costs for 117 employees
($1.6 million), estimated costs to close and vacate the facilities ($1.0
million), the writedown of fixed assets made idle or excess by the decision to
combine operations ($0.6 million), and other direct and incremental costs
necessary to complete the consolidation effort ($1.0 million). Remaining
liabilities at the end of 1994 amount to $1.2 million for employee separations,
$0.8 million for plant closures, and $0.8 million for all other consolidation
costs. Accomplishment of this program is expected to improve the Corporation's
operating results over time through reduced employment costs, more effective
utilization of plant and equipment, and lower depreciation expense. The
consolidation effort is being executed in phases with two out of three
scheduled for completion during the first quarter of fiscal 1995 and the final
phase ending in June, 1995. Most of the nonrecurring charges shown for 1993
and 1992 pertain to plant consolidation activities in the Fluid Purification
business segment.
Industry Segments
- Hydraulic Components
The Hydraulic Components segment accounted for 46 percent of the
Company's total sales and 59 percent of total operating income in 1994.
Revenues in this segment increased by $50.7 million or nearly 27 percent over
last year, while operating income before nonrecurring items rose 45 percent
over 1993 and was more than double the income reported in 1992. All of the
gain from the previous year occurred in the domestic sector where the surging
U.S. economy, aggressive initiatives to increase share and expand market
coverage, and concerted efforts to maximize operating leverage combined to
produce record sales and income for all of the domestic hydraulic operating
units. Demand in the U.S. has increased substantially over the three-year
period from customers in the transportation, construction, refuse, mining, and
agricultural equipment industries. Orders have also risen steadily over the
period from our distributor network while the Oildyne Division has enjoyed
dramatic growth since 1991 from new applications of specialized miniature fluid
power components in the marine, automotive and recreational vehicle industries.
Financial performance held steady in the foreign segment during 1994 but
results were mixed among the
-13-
<PAGE> 14
ITEM 7. (Continued)
RESULTS OF OPERATIONS (Continued)
- ---------------------------------
individual units. Earnings deteriorated in the United Kingdom
where sales and income were greatly reduced for the Keelavite
Division following completion in late 1993 of a major portion of
a military contract to produce power generators. All of the
Corporation's industrial and specialty hydraulic product
manufacturing operations in the United Kingdom are now being
consolidated at the Keelavite facility to reduce overheads,
improve utilization of assets, and employ human resources more
effectively. The valve manufacturing unit located in Grantham
ended a series of operating losses incurred in recent years by
earning a modest profit in 1994. Elsewhere, an expanding local
economy and continued growth in export shipments to the Pacific
Rim enabled our subsidiary in Australia to post substantial gains
in sales and income for the second consecutive year. Finally,
the Brazilian operating unit returned to profitability in 1994 as
the economy in that country seems to have responded favorably to
the mid-year introduction of the Real Plan, a new economic reform
program designed to reduce inflation and normalize business
conditions.
Capital expenditures amounted to $16.5 million for this segment in 1994
versus expenditures of $4.4 million in 1993 and $4.5 million in 1992. Included
in the total for the current year are expenditures of $5.1 million for facility
upgrades, machining centers for the manufacture of new products, and building
construction at the newly acquired operations in Chemnitz and Rochlitz,
Germany. Funding for most of these projects was provided by the THA in
accordance with the terms of the Purchase Agreement. The majority of the
remaining expenditures in 1994 pertain to equipment purchases in the U.S. to
upgrade manufacturing performance, increase production capacity, and outfit
specialized machining cells for the manufacture of new products being
introduced by the Oildyne Division.
Incoming orders for the Hydraulic Components segment
stabilized during the fourth quarter of 1994 but exceeded those
for the same period last year by 29 percent. Bookings were
higher in both the domestic and foreign sectors. Excluding the
impact of the production contract at Keelavite, the backlog of
unfilled orders to start the new fiscal year was 59 percent
higher than last year after adjusting for foreign currency
differences.
-14-
<PAGE> 15
ITEM 7. (Continued)
RESULTS OF OPERATIONS (Continued)
- ---------------------------------
- Metal Products
The Metal Products segment accounted for 26 percent of
the Company's total sales and 30 percent of total operating
income in 1994. Revenues for this group were up 4 percent over
1993 but operating income declined marginally as year-over-year
improvements in the domestic sector were negated by reduced
income overseas. Sales for the Astron Division were flat in
1994 as widespread economic recession continued to depress
construction activity in Europe. Profit margins diminished for
the second consecutive year due to the combined effects of rising
costs and price discounting in certain markets to preserve share
and stimulate demand under distressed business conditions.
Shrinking margins and reduced business volume caused Astron's
operating income to decrease 17 percent from the previous year
and to fall short of the near-record earnings achieved in 1992 by
67 percent. Business conditions were much stronger for the metal
stampings operations in the U.S. where sales were higher than
1993 and 1992 by 15 percent and 30 percent, respectively. These
year-over-year improvements were primarily driven by a surge in
demand from the home building industry and the Division's
expanding Distribution Center program. Two new Distribution
Centers were opened in 1994, bringing the total number now in
operation to six. Operating income for the combined Metal
Products operations in the U.S. were up 21 percent from the
previous year.
Capital expenditures for the Metal Products segment amounted
to $2.7 million in 1994 versus spending of $1.8 million in 1993
and $2.9 million in 1992. More than half of the current year
expenditures pertain to upgraded production equipment, increased
production capacity, and office automation for the Astron
Division while the remainder relates to automation, refurbishment
and replacement of production equipment in the U.S. General
upgrading of Astron's facilities and production capabilities
accounts for two-thirds of the capital expenditures in 1993 and
1992.
Incoming orders improved during the fourth quarter of 1994
for both the domestic and foreign operations in this business
segment and exceeded combined bookings for the same period last
year by 30 percent on a parity-adjusted basis. Bookings were
particularly brisk in the Astron Division where business
conditions have been considerably stronger during the latter half
of 1994. The backlog of unfilled orders to start the new year
was up 17 percent from a year ago in the U.S. while the Astron
backlog is higher by 45 percent after adjusting for foreign
currency differences.
-15-
<PAGE> 16
ITEM 7. (Continued)
RESULTS OF OPERATIONS (Continued)
- ---------------------------------
- Fluid Purification Systems
The Fluid Purification segment accounted for 28 percent
of the Company's total sales and 11 percent of the total
operating income in 1994. Sales for the group were up 9 percent
following unchanged revenues in 1993. Sales for domestic
operations increased by less than 5 percent in 1994 as moderate
growth in the Process Division was counteracted by sluggish
activity in the Consumer product line. Orders were brisk this
year from customers in the pharmaceutical, coatings, electronics
and food & beverage industries while demand remained weak from
the chemical and industrial processing segments. Sales for the
combined overseas operations were up 11 percent from the previous
year on a parity-adjusted basis but were particularly strong in
Australia, Asia and Brazil where the year-over-year gain averaged
23 percent. Revenue growth was moderate in Europe while sales in
Japan failed to advance for the second consecutive year as a
result of a stagnant economy. Increased sales volume, healthier
profit margins, and the initial benefits of recent restructuring
and reorganization efforts enabled the Fluid Purification Group
to generate an operating profit for the first time in three
years. Results improved over 1993 for all of the operating units
in this group, but a substantial portion of the year-over-year
gain occurred in the foreign sector reflecting strong revenue
growth in the Pacific Rim, improved performance in Brazil
paralleling results for the Hydraulics Division in that country,
a major turnaround in Europe from increased sales activity and
improving manufacturing efficiencies, and a significant
improvement in earnings for the Japanese unit due to the
favorable effects of a stronger yen on imported material and the
maintaining of effective controls over other operating costs.
Capital expenditures amounted to $3.8 million in 1994 versus spending of
$3.2 million in 1993 and $6.7 million in 1992. Two- thirds of the current year
spending pertains to investment in the U.S. for upgraded computer capabilities,
advanced testing equipment and miscellaneous production equipment. Capital
expenditures in the overseas units primarily consisted of upgraded computer
equipment, environmental controls, and office equipment. Most of the spending
in 1993 occurred in the U.S. for emission controls, facility improvements and
production equipment. Included in capital expenditures for 1992 is $4.4
million for the acquisition of land and building in connection with a program
to consolidate the domestic water filtration operations.
-16-
<PAGE> 17
ITEM 7. (Continued)
RESULTS OF OPERATIONS (Continued)
- ---------------------------------
Incoming orders in the fourth quarter for the overseas units
were 18 percent higher than the same period last year on a
parity-adjusted basis, while bookings for the domestic operations
were only marginally better. The backlog of unfilled orders to
start the new year was about the same as last year for this
group.
Nonoperating Income And Expense
Interest received from investments increased from
$1.0 million in 1993 to $1.4 million in 1994 due, primarily, to
additional interest earned on cash contributions from the THA in
connection with the mid-year acquisition of ORSTA Hydraulik.
Investment yields recovered during the latter half of the year
from a general decline experienced in 1993.
Approximately 80 percent of total interest expense incurred
in 1994 resulted from long-term obligations. Most of the
long-term interest expense derives from the issuance in 1992 of
$45.0 million in 8.2 percent senior notes as part of a capital
restructuring program. Remaining interest expense primarily
pertains to long-term debt to fund major construction projects
completed in recent years, some equipment leases, and short-term
borrowings to support current operations. Recorded as a credit
to interest expense in 1994 is a $1.3 million reversal of an
unrealized interest obligation accrued in prior years. Effective
interest rates paid by the Company were relatively unchanged in
1992 and 1993 but rose steadily throughout fiscal 1994.
Foreign currency exchange and translation losses
(principally in Brazil) and withholding taxes on repatriated
foreign earnings are included in other nonoperating expense for
the three-year period reported herein. These amounts totaled
$3.1 million in 1994, $1.2 million in 1993 and $1.9 million in
1992.
Other nonoperating expense for 1994 includes a $1.1 million
loss incurred on the fourth quarter sale of the Fluid
Purification Group's ultrafiltration product line located in the
U.S. The disposal of this unprofitable business will improve the
operating results of the Fluid Purification Group in future years.
Included in nonoperating income for 1994 and 1993 are
$0.5 million and $1.0 million, respectively, in initial
technology license fees derived from a license agreement
entered into with Geoyang Development Co. Ltd. in 1993. Under
terms of the agreement, Geoyang obtained the rights and
technology necessary to design, engineer, manufacture, market and
assemble Astron's integrated metal building systems in Korea.
Commercial Intertech will also receive royalties and fees on
buildings manufactured and sold by Geoyang in future periods.
-17-
<PAGE> 18
ITEM 7. (Continued)
RESULTS OF OPERATIONS (Continued)
- ---------------------------------
Taxes
The consolidated effective tax rate decreased to 29 percent
in the current year due, principally, to the utilization of tax
loss carryforwards acquired with the ORSTA business to shelter
1994 earnings of the company's other German operations, including
those of an Astron subsidiary. Remaining ORSTA net operating
losses of approximately $123.0 million, which may be carried
forward indefinitely, are expected to provide tax relief on
income earned by all operations in Germany for a number of years.
The effective rate for 1994 was also reduced by the favorable tax
impact of reserve contracts and tax law changes which lowered the
statutory rate for two overseas subsidiaries. Partially
offsetting these benefits were higher tax rates for some of the
overseas operations, the tax consequences of repatriating foreign
earnings, state and local taxes levied on domestic income, and
nondeductible expense for goodwill acquired in purchase
transactions prior to July 25, 1991.
The consolidated tax rate in 1993 was 32 percent as a result
of favorable conclusions to a number of open tax issues and the
settlement of a dispute with one foreign tax authority over
deductibility of certain expenses.
In August 1993, the U.S. Congress passed the Omnibus Budget
Reconciliation Act of 1993 which generally raised the level of
U.S. federal taxes which the company must pay. The Act increased
the top corporate rate from 34 percent to 35 percent effective
January 1, 1993 and imposed new deduction limitations on
compensation and certain business expenses. The Act also
extended the research and development credit through June 1995
and made provision for tax deductions on amortized goodwill or
going-concern value acquired in a purchase transaction after
July 25, 1991. The Act has had no material effect on the
Company's operating policies.
Accounting Standards
In 1993, the Company adopted FASB Statement No. 112,
"Employers' Accounting for Postemployment Benefits." This new
accounting standard requires accrual accounting for workers'
compensation, disability, health insurance continuation,
severance pay and other postemployment benefits provided to
former or inactive employees when such benefits are attributable
to service rendered by the employee, the obligation vests or
accumulates, and payment of the obligation is probable. The
effect of adopting SFAS No. 112 was immaterial to the financial
statements as the Company was already accounting for such costs
on an accrual basis.
-18-
<PAGE> 19
ITEM 7. (Continued)
RESULTS OF OPERATIONS (Continued)
- ---------------------------------
In 1992, the Company adopted FASB Statement No. 109,
"Accounting for Income Taxes," which changes the criteria for
measuring the provision for income taxes and recognizing deferred
tax assets and liabilities. This accounting standard requires
application of the liability method wherein deferred taxes are
recorded on the basis of enacted tax rates as opposed to use of
historical tax rates under the previous tax accounting rules.
In adopting SFAS No. 109, the Company elected to immediately
recognize the effect in income as a change in accounting
principle rather than restate prior years. The cumulative effect
of the accounting change to November 1, 1991, which was recorded
during the first quarter of 1992, increased net income for the
year by $.23 per share ($.21 per share on a fully diluted basis).
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Liquidity is generally defined as the ability to generate
cash, by whatever means available, to satisfy the short-and-long-
term needs of the Company. With respect to cash flow in 1994,
the balance of cash and cash equivalents increased from
$25.1 million at the end of 1993 to a total of $52.7 million at
the end of the current period. A significant portion of this
change is attributable to the ORSTA acquisition wherein
Commercial Intertech received cash from the THA and other German
government agencies to cover operating losses and fund pre-
existing capital expenditure programs of the Chemnitz and
Rochlitz subsidiaries. Contributions available to the Company in
the form of cash deposits, scheduled installment payments, and
investment grants and subsidies amounted to $43.0 million as of
the May 3rd acquisition date (see Note K). Of this total,
payment was received in the amount of $30.0 million during 1994,
including $11.1 million in cash deposits acquired as of the
purchase date. Most of the remaining contributions due of
$13.0 million will be received in 1995. Under terms of the
Purchase Agreement, the Company agreed to maintain certain
employment levels for a period of three years, invest
approximately $23.6 million in capital programs over a period
of four years (most of which are funded by the cash
contributions received), and continue to operate the business
for a minimum of five years. Contributions received in
connection with the purchase are expected to be sufficient to
satisfy these requirements and cover operating needs during the
indemnification period. During the period since the acquisition,
ORSTA has consumed approximately $12.0 million in cash for
operating requirements and expended $5.1 million for capital
programs.
-19-
<PAGE> 20
ITEM 7. (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
- -------------------------------------------
Cash generated from Commercial Intertech's total operating
activities amounted to $32.4 million in 1994, representing a
decrease of $4.5 million or 12 percent from the previous year.
Higher tax payments and cash requirements for the ORSTA
operations at Chemnitz and Rochlitz were the principal factors in
the year-over-year decline. Income from discontinued operations
of $5.5 million in 1994 and the $3.4 million cumulative effect
from adopting SFAS No. 109 in 1992 were both noncash in nature
and therefore had no effect on cash flow in their respective
fiscal periods.
Investing activities generated a positive cash flow of $7.4 million in
1994 reflecting the $30.0 million contribution received in connection with the
ORSTA acquisition. Capital expenditures totaled $23.1 million for the year
versus spending of $9.4 million in 1993 and $14.1 million in 1992 (see Note I).
More than 60 percent of the current year spending pertained to expansion of
production capacity, equipment upgrades to improve manufacturing performance,
machine tools for the manufacture of new product introductions, acquisition of
a manufacturing facility which had previously been leased, and investment in
advanced computer systems for operations in the U.S. Construction of a new
manufacturing facility, machining centers for the manufacture of an expanded
product line, and general operating improvements for the ORSTA units accounted
for most of the capital spending in the overseas segment during 1994. Other
major projects included additional production equipment for the Astron Division
and upgraded computer capabilities for several of the foreign subsidiaries.
Capacity expansion, emission controls and office automation in the U.S.
accounted for the majority of capital expenditures in the two preceding years.
Expenditures for 1992 also include $4.4 million to purchase land and building
in connection with the program to consolidate the domestic water filtration
operations. Authorized but unspent capital expenditure programs totaled $35.7
million at fiscal year-end, of which $16.6 million pertains to new facility
construction and other funded capital investment programs at ORSTA. Other
significant projects authorized for 1995 include construction of a new cylinder
manufacturing facility in the U.S.; production equipment necessary to launch
new product offerings and expand production capacity in the Hydraulics Product
Group; new equipment and manufacturing systems to improve production
efficiencies and increase capacity for the Metal Stampings and Astron
Divisions; upgraded production capabilities and installation of emission
control devices in the Fluid Purification Group.
-20-
<PAGE> 21
ITEM 7. (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
- -------------------------------------------
Cash used in financing activities totaled $16.2 million in
1994. Principal activities included the retirement of debt,
payment of reserve contract premiums, and the distribution of
dividends to shareholders. Dividends totaled $9.1 million in
1994, of which $7.2 million was paid to shareholders of common
stock. Financing activities in 1992 included a refinancing
program whereby proceeds from issuance of $45.0 million in
8.2 percent senior notes were used to redeem all of the Series C
senior increasing rate cumulative convertible preferred shares
originally issued in 1990. Principal payments against the senior
notes are scheduled to commence in 1997 with the final payment to
be made in 2002. The impact of the refinancing has improved cash
flow and increased net income available to shareholders of common
stock.
As part of a restructuring program completed in 1990, the
Company established two leveraged employee stock ownership plans
(the ESOPs) and sold Series B cumulative convertible preferred
shares to the plans for approximately $25.0 million. The ESOPs
borrowed funds to purchase the Series B shares. During 1993, the
ESOPs completed a refinancing program whereby a floating rate
loan was replaced with a $23.2 million, 7.08 percent, 17-year
term loan privately placed with a group of insurance companies.
This program provided permanent financing for the remaining life
of the benefit plan. The Company has guaranteed the repayment of
any remaining principal as of December 31, 2009. The outstanding
loan balance at October 31, 1994 was approximately $22.5 million.
Internal cash flows, supplemented by payments received from
the THA, are expected to be sufficient to provide the capital
resources necessary to support operating needs and finance
capital expenditure programs in the coming year. The Company has
a $35.0 million nonreducing credit facility available from a
group of lending institutions which expires in 1997. The funds
available to the Company under this agreement may be used for any
general corporate purpose. Including this facility, total unused
credit lines of $128.2 million, denominated in both domestic and
foreign currencies, were available to the Company at fiscal year-
end. Borrowing rates to start the new year are generally higher
than the same period a year ago, reflecting prevailing market
conditions.
-21-
<PAGE> 22
ITEM 7. (Continued)
IMPACT OF INFLATION AND CHANGING PRICES
- ---------------------------------------
Rates of inflation held steady versus the previous year, despite surging
economies in some sectors (notably the U.S.), and ranged from 1 to 3 percent
for most locales. Manufacturing and operating costs generally advanced in line
with inflation, but the continuing trend of competitive pressures and price
resistance in the marketplace limited the extent to which cost increases could
be passed along to customers in 1994. Modest price increases were insufficient
to cover rising costs for wages, benefits, raw materials, purchased components
and other manufacturing costs during the year. Consequently, the Corporation
relied upon volumetric efficiencies, productivity improvements and cost-saving
measures to offset the shortfall in pricing and successfully maintain or
improve profit margins in most business units. Margins were lower, however,
for the Astron Division where weak business conditions have made price
discounting necessary in certain markets over the past two years.
The ability to recover cost increases and maintain margins
continues to be a major challenge for most operating units, and
the Company relies upon cost containment, aggressive purchasing,
quality initiatives and cost-saving capital investments to combat
profit erosion and remain competitive.
BUSINESS OUTLOOK
- ----------------
The consolidated backlog of unfilled orders amounted to $154.3 million at
the end of the year which, after adjusting for the effects of exchange rate
differences on the foreign segments, represents a 36 percent increase over the
previous fiscal year- end. Ending backlogs were particularly strong for
domestic operations, up 41 percent from last year. Incoming orders have been
less robust for most of the overseas units, but steady growth in bookings over
the latter half of 1994 enabled the Astron Division to finish the period with
an ending backlog which was 45 percent higher than a year ago. Substantially
all of the consolidated backlog is deliverable in 1995.
Strong business conditions to start the new fiscal year and
continued evidence of upward momentum in the U.S. economy are
portents of bright prospects for the Company's domestic
operations in 1995. Recent economic reports suggest that
business is still growing in some of the major markets served by
our U.S. operations, such as the electronics, motor vehicle,
transportation, construction and farm equipment industries, as
manufacturers invest in capital equipment to improve productivity
and expand capacity in response to increasing demand. These
favorable indications notwithstanding, economists generally
predict that interest rate increases implemented by the U.S.
-22-
<PAGE> 23
ITEM 7. (Continued)
BUSINESS OUTLOOK (Continued)
- ----------------------------
Federal Reserve will eventually cause the economy to grow at a
slower pace during the coming year, particularly in the interest-
sensitive consumer segments such as the housing and durable goods
industries. Profit improvements are nevertheless expected for
all three of our U.S. product groups in 1995 as the Company
intends to implement marketing strategies which will expand the
customer base and increase share, invest in capital equipment to
increase production capacity and improve manufacturing
performance, introduce new product offerings, and continue to
pursue business acquisitions which will complement existing
product lines and allow access to new market segments. The
disposal of an unprofitable product line late in 1994 will
further enhance the earnings potential of the Fluid Purification
Group in the coming year.
Conditions are less certain in the overseas sector where
economic revival has been somewhat uneven in the important
European markets and hesitant, at best, in Japan. Recent trends
indicate that difficult business conditions prevail in some areas
of Europe, notably France, but that economies are showing signs
of sustained growth in Germany and the United Kingdom. Results
are expected to improve in this sector during 1995 as the Company
takes advantage of more favorable economic conditions, continues
to penetrate markets in the former Eastern Bloc, and begins to
realize benefits from recent consolidation activities designed to
lower operating costs. The ORSTA operations are expected to have
little impact on the Company's operating income during an ongoing
period of reorganization and transition in 1995. Elsewhere, the
outlook is excellent for continued economic growth in Australia
and Southeast Asia where strong performances are anticipated
again for our Hydraulic and Fluid Purification operations located
in that region. Year-over-year improvements are also likely for
operations in Brazil, pending continued success of the Real Plan
in keeping inflation in check and stimulating business growth.
The Company continues to invest in capital improvements,
identify and implement strategic initiatives, and reduce
overheads where possible to lower operating costs and improve
profitability. The competitive advantages which these programs
provide, our ability to meet the challenges of globalization and
increased international competition, and the rapidly recovering
world economies cause us to anticipate strong consolidated
results again for 1995.
-23-
<PAGE> 24
<TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
STATEMENTS OF CONSOLIDATED INCOME
Commercial Intertech Corp. and Subsidiaries
<CAPTION>
Year Ended October 31,
1994 1993 1992
--------------------------
(in thousands, except per-share data)
<S> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . $516,931 $448,577 $450,608
Less costs and expenses:
Cost of products sold . . . . . . . . 359,461 318,837 316,307
Selling, administrative and general
expenses . . . . . . . . . . . . . 118,401 103,510 102,827
Nonrecurring items. . . . . . . . . . 4,240 860 1,335
--------- --------- ---------
482,102 423,207 420,469
--------- --------- ---------
Operating income . . . . . . . . . . . . 34,829 25,370 30,139
Nonoperating income (expense):
Interest income . . . . . . . . . . . 1,393 1,047 1,426
Interest expense. . . . . . . . . . . (4,952) (5,744) (6,277)
Other . . . . . . . . . . . . . . . . (3,467) (71) (1,939)
--------- --------- ---------
(7,026) (4,768) (6,790)
--------- --------- ---------
Income from continuing operations before
income taxes and cumulative effect of
change in accounting. . . . . . . . . 27,803 20,602 23,349
Provision for income taxes:
Current . . . . . . . . . . . . . . . 9,949 8,794 10,372
Deferred. . . . . . . . . . . . . . . (1,765) (2,207) (1,068)
--------- --------- ---------
8,184 6,587 9,304
--------- --------- ---------
Income from continuing operations before
cumulative effect of change in
accounting. . . . . . . . . . . . . . 19,619 14,015 14,045
Income from discontinued operation . . . 5,462 0 0
--------- --------- ---------
Income before cumulative effect of
accounting change.. . . . . . . . . . 25,081 14,015 14,045
Cumulative effect of change in
accounting for income taxes . . . . . 0 0 3,391
--------- --------- ---------
Net income . . . . . . . . . . . . . . . $ 25,081 $ 14,015 $ 17,436
========= ========= =========
Preferred stock dividends and
adjustments . . . . . . . . . . . . . (2,097) (2,109) (4,413)
--------- --------- ---------
Net income applicable to common stock. . $ 22,984 $ 11,906 $ 13,023
========= ========= =========
Earnings per share of common stock:
Primary:
Income from continuing operations
before cumulative effect of
change in accounting. . . . . . $1.14 $0.79 $0.65
Income before cumulative effect of
accounting change . . . . . . . 1.50 0.79 0.65
Net income . . . . . . . . . . . . 1.50 0.79 0.88
Fully diluted:
Income from continuing operations
before cumulative effect of
change in accounting. . . . . . $1.09 $0.76 $0.63
Income before cumulative effect of
accounting change . . . . . . . 1.41 0.76 0.63
Net income . . . . . . . . . . . . 1.41 0.76 0.84
<FN>
See notes to consolidated financial statements.
</TABLE>
-24-
<PAGE> 25
<TABLE>
ITEM 8. (Continued)
CONSOLIDATED BALANCE SHEETS
Commercial Intertech Corp. and Subsidiaries
<CAPTION>
October 31, October 31,
1994 1993
------------------------
Assets (in thousands)
<S> <C> <C>
CURRENT ASSETS
Cash (including equivalents of $37,073,000
in 1994 and $18,409,000 in 1993) . . . . $ 52,666 $ 25,066
Accounts and notes receivable, less
allowances for doubtful accounts of
$2,890,000 in 1994 and $1,765,000 in
1993 . . . . . . . . . . . . . . . . . . 94,212 78,484
Inventories . . . . . . . . . . . . . . . . 62,320 49,883
Deferred income tax benefits. . . . . . . . 15,307 12,889
Prepaid expenses and other current assets . 10,861 4,643
-------- --------
Total current assets . . . . . . . . . . 235,366 170,965
NONCURRENT ASSETS
Intangible assets . . . . . . . . . . . . . 26,563 29,822
Pension assets. . . . . . . . . . . . . . . 31,191 26,645
Other noncurrent assets . . . . . . . . . . 4,421 4,922
-------- --------
Total noncurrent assets. . . . . . . . . 62,175 61,389
PROPERTY, PLANT AND EQUIPMENT
Land and land improvements. . . . . . . . . 13,571 12,467
Buildings . . . . . . . . . . . . . . . . . 66,194 61,084
Machinery and equipment . . . . . . . . . . 164,069 156,669
Construction in progress. . . . . . . . . . 10,056 5,495
-------- --------
253,890 235,715
Less allowances for depreciation and
amortization. . . . . . . . . . . . . . . . 128,453 120,734
-------- --------
125,437 114,981
-------- --------
Total assets . . . . . . . . . . . . . . . . . $422,978 $347,335
======== ========
</TABLE>
-25-
<PAGE> 26
<TABLE>
ITEM 8. (Continued)
CONSOLIDATED BALANCE SHEETS (Continued)
<CAPTION>
October 31, October 31,
1994 1993
------------------------
(in thousands)
Liabilities and Shareholders' Equity
<S> <C> <C>
CURRENT LIABILITIES
Bank loans. . . . . . . . . . . . . . . . . . $ 20,273 $ 17,599
Accounts payable. . . . . . . . . . . . . . . 44,489 33,387
Accrued payrolls and related taxes. . . . . . 22,168 15,290
Accrued expenses. . . . . . . . . . . . . . . 40,669 25,305
Dividends payable . . . . . . . . . . . . . . 2,509 2,270
Accrued income taxes. . . . . . . . . . . . . 2,037 14,786
Current portion of long-term debt . . . . . . 2,821 1,562
-------- --------
Total current liabilities. . . . . . . . . 134,966 110,199
NONCURRENT LIABILITIES
Long-term debt. . . . . . . . . . . . . . . . 77,020 78,059
Deferred income taxes . . . . . . . . . . . . 16,926 16,273
Postretirement benefits . . . . . . . . . . . 21,188 19,867
Deferred credit . . . . . . . . . . . . . . . 19,118 -0-
-------- --------
Total noncurrent liabilities . . . . . . . 134,252 114,199
SHAREHOLDERS' EQUITY
Preferred stock, no par value:
Authorized: 10,000,000 shares
Series A participating preferred
shares. . . . . . . . . . . . . . . . . 0 0
Series B ESOP convertible preferred shares
Issued: 1994 - 1,059,407 shares
1993 - 1,064,846 shares . . . . 24,631 24,758
Common stock, $1 par value:
Authorized: 30,000,000 shares
Issued:
1994 - 15,199,258 shares;
(excluding 144,261 in treasury)
1993 - 10,037,575 shares;
(excluding 42,063 in treasury). . . . . 15,199 10,038
Capital surplus . . . . . . . . . . . . . . . 35,844 39,034
Retained earnings . . . . . . . . . . . . . . 91,649 75,087
Deferred compensation . . . . . . . . . . . . (20,108) (21,248)
Translation adjustment. . . . . . . . . . . . 6,545 (4,732)
--------- --------
153,760 122,937
--------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $422,978 $347,335
========= ========
<FN>
See notes to consolidated financial statements.
</TABLE>
-26-
<PAGE> 27
<TABLE>
ITEM 8. (Continued)
STATEMENTS OF CONSOLIDATED SHAREHOLDERS' EQUITY
Commercial Intertech Corp. and Subsidiaries
<CAPTION>
Year Ended October 31,
1994 1993 1992
--------------------------
(in thousands, except per-share data)
<S> <C> <C> <C>
PREFERRED STOCK (Series B)
Balance at beginning of year. . . . . $ 24,758 $ 24,886 $ 24,950
Shares converted. . . . . . . . . . . (127) (128) (64)
--------- --------- ---------
Balance at end of year. . . . . . . . 24,631 24,758 24,886
COMMON STOCK
Balance at beginning of year. . . . . 10,038 9,910 9,791
Shares issued:
Water Factory Systems -
Acquisition . . . . . . . . . . 0 0 55
Stock option and award plans . . . 63 105 53
Shares issued as of September 1, 1994
in stock split effected in the form
of a 50% share dividend. . . . . . 5,073 0 0
Other . . . . . . . . . . . . . . . . 25 23 11
--------- --------- ---------
Balance at end of year. . . . . . . . 15,199 10,038 9,910
CAPITAL SURPLUS
Balance at beginning of year. . . . . 39,034 37,628 36,665
Water Factory Systems -
Acquisition. . . . . . . . . . . . 0 0 (55)
Stock option and award plans. . . . . 1,771 987 890
Par value transferred to common stock
in connection with stock split
effected in form of share dividend (5,073) 0 0
Other . . . . . . . . . . . . . . . . 112 419 128
--------- --------- ---------
Balance at end of year. . . . . . . . 35,844 39,034 37,628
RETAINED EARNINGS
Balance at beginning of year. . . . . 75,087 69,199 66,177
Net income for the year . . . . . . . 25,081 14,015 17,436
--------- --------- ---------
100,168 83,214 83,613
Dividends:
Common (per share: 1994 - $0.48;
1993 - $0.45; 1992 - $0.45) . . 7,239 6,821 6,729
Preferred Series B . . . . . . . . 2,095 2,107 2,117
Preferred Series C . . . . . . . . 0 0 1,659
--------- --------- ---------
9,334 8,928 10,505
Other preferred stock adjustments . . (815) (801) 3,909
--------- --------- ---------
Balance at end of year. . . . . . . . 91,649 75,087 69,199
DEFERRED COMPENSATION. . . . . . . . . . (20,108) (21,248) (22,495)
TRANSLATION ADJUSTMENT . . . . . . . . . 6,545 (4,732) 2,721
--------- --------- ---------
Total shareholders' equity . . . . $153,760 $122,937 $121,849
========= ========= =========
Shareholders' equity per share of common
stock . . . . . . . . . . . . . . . . $9.82 $7.93 $8.04
<FN>
See notes to consolidated financial statements.
</TABLE>
-27-
<PAGE> 28
<TABLE>
ITEM 8. (Continued)
STATEMENTS OF CONSOLIDATED CASH FLOWS
Commercial Intertech Corp. and Subsidiaries
<CAPTION>
Year Ended October 31,
1994 1993 1992
------------------------
OPERATING ACTIVITIES: (in thousands)
<S> <C> <C> <C>
Net income . . . . . . . . . . . . . . . . . $ 25,081 $ 14,015 $ 17,436
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for depreciation and
amortization. . . . . . . . . . . . 17,962 16,764 16,756
Adoption of SFAS No. 109 . . . . . . . 0 0 (3,391)
Discontinued operation . . . . . . . . (5,462) 0 0
Amortization of deferred credit. . . . (6,466) 0 0
Postretirement benefits. . . . . . . . 383 781 607
Pension plan credits . . . . . . . . . (2,531) (2,386) (2,879)
Change in deferred income taxes. . . . (2,026) (1,615) (836)
Change in current assets and liabilities:
(Increase) decrease in accounts
receivable . . . . . . . . . . . (4,615) 138 1,468
(Increase) decrease in inventories. (4,475) 2,349 (2,378)
(Increase) decrease in prepaid
expenses and other current
assets . . . . . . . . . . . . . (1,020) (1,332) 1,606
Increase in accounts payable and
accrued expenses . . . . . . . . 21,597 8,319 10,732
(Decrease) increase in accrued
income taxes . . . . . . . . . . (6,072) (143) 545
--------- --------- ---------
Net cash provided by operating
activities. . . . . . . . . . 32,356 36,890 39,666
INVESTING ACTIVITIES:
Proceeds from sale of fixed assets . . . . . 284 340 219
Business acquisition . . . . . . . . . . . . 0 0 (2,279)
Cash and cash equivalents acquired in
business acquisition. . . . . . . . . . . 11,140 0 0
Installments received - Acquisition. . . . . 18,833 0 0
Investment in intangibles. . . . . . . . . . (450) (496) (209)
Capital expenditures . . . . . . . . . . . . (22,373) (9,583) (14,054)
--------- --------- ---------
Net cash provided (used) by investing
activities. . . . . . . . . . . . . 7,434 (9,739) (16,323)
FINANCING ACTIVITIES:
Proceeds from long-term debt . . . . . . . . 0 1,548 22,000
Principal payments on long-term debt . . . . (2,897) (8,114) (37,337)
Net borrowings under bank loan agreements. . (2,237) (1,034) 9,493
Proceeds from issuance of senior notes . . . 0 0 45,000
Payments for refinancing . . . . . . . . . . 0 0 (550)
Redemption of redeemable preferred stock . . 0 0 (43,200)
Purchase of reserve contracts. . . . . . . . (3,430) (2,503) (1,826)
Conversion of other assets . . . . . . . . . 1,483 (817) 840
Dividends paid . . . . . . . . . . . . . . . (9,094) (8,872) (11,562)
--------- --------- ---------
Net cash (used) by financing activities (16,175) (19,792) (17,142)
Effect of exchange rate changes on cash . . . . 3,985 (1,689) (264)
--------- --------- ---------
Net increase in cash and cash equivalents . . . 27,600 5,670 5,937
Cash and cash equivalents at beginning of year. 25,066 19,396 13,459
--------- --------- ---------
Cash and cash equivalents at end of year. . . . $ 52,666 $ 25,066 $ 19,396
========= ========= =========
Cash paid during the year for:
Interest . . . . . . . . . . . . . . . . . . $6,162 $6,032 $5,062
Income taxes . . . . . . . . . . . . . . . . 16,282 8,344 9,595
<FN>
See notes to consolidated financial statements.
</TABLE>
-28-
<PAGE> 29
ITEM 8. (Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Commercial Intertech Corp. and Subsidiaries
NOTE A - ACCOUNTING POLICIES
Consolidation:
The accounts of the Company and all of its subsidiaries are included in
the consolidated financial statements. All intercompany accounts and
transactions are eliminated upon consolidation. Certain amounts in the
consolidated financial statements for prior years have been reclassified to
conform to the current presentation.
Restructuring charges have been reported in operating income under the
caption nonrecurring items.
Inventories:
Inventories are stated at the lower of cost or market. Inventories in the
United States are primarily valued on the last-in, first-out (LIFO) cost
method. The method used for all other inventories is first-in, first-out
(FIFO). Approximately 56 percent (57 percent in 1993) of worldwide inventories
are accounted for using the LIFO method. Inventories as of October 31
consisted of the following:
<TABLE>
<CAPTION>
1994 1993
---- ----
(in thousands)
<S> <C> <C>
Raw materials . . . . . . . . $15,393 $11,412
Work in process . . . . . . . 31,188 24,067
Finished goods. . . . . . . . 15,739 14,404
------- -------
$62,320 $49,883
======= =======
</TABLE>
If all inventories were priced using the FIFO method, which approximates
replacement cost, inventories would have been $15,510,000 higher in 1994 and
$14,713,000 higher in 1993.
Intangibles:
Intangible assets at October 31 are summarized as follows:
<TABLE>
<CAPTION>
1994 1993
---- ----
(in thousands)
<S> <C> <C>
Goodwill, less accumulated
amortization (1994 - $5,088,000;
1993 - $4,497,000). . . . . . . . $18,331 $19,522
Other intangibles, less accumulated
amortization (1994 - $20,249,000;
1993 - $17,795,000) . . . . . . . 8,232 10,300
------- -------
$26,563 $29,822
======= =======
</TABLE>
-29-
<PAGE> 30
ITEM 8. (Continued)
NOTE A - ACCOUNTING POLICIES (Continued)
Excess cost over the fair value of net assets acquired (or goodwill)
generally is amortized on a straight-line basis over 40 years. The carrying
value of goodwill is reviewed in those instances where the facts and
circumstances suggest that it may be impaired. If this review indicates that
goodwill will not be recovered based upon the undiscounted cash flows of the
entity acquired over the remaining amortization period, the Company's carrying
value of the goodwill is reduced by the estimated shortfall of cash flows.
Other intangibles, including patents, know-how and trademarks, are carried
at their appraised value on the acquisition date less accumulated amortization,
which is provided using the straight-line method over 10 to 25 years.
Deferred credit represents negative goodwill from an acquisition (see
Note K).
Properties and Depreciation:
Property, plant and equipment are recorded at cost. Buildings and
equipment are depreciated over their useful lives, principally by use of the
straight-line method.
Income Taxes:
Effective November 1, 1991, the Company adopted Statement of Financial
Accounting Standards No. 109 ("SFAS No. 109"), "Accounting for Income Taxes,"
which changed the criteria for measuring the provision for income taxes and
recognizing deferred tax assets and liabilities on the balance sheet. Deferred
income tax assets and liabilities principally arise from differences between
the tax basis of the asset or liability and its reported amount in the
consolidated financial statements. These include inventory valuation
differences under uniform capitalization rules, depreciation expense, accrued
expenses, postretirement benefit expenses, net operating loss carryforwards and
a gain on the sale of property in the United Kingdom. Deferred tax balances
are determined by using provisions of the enacted tax laws; the effects of
future changes in tax laws or rates are not anticipated. The Company elected
not to restate prior years. Prior to the implementation of SFAS No. 109, the
Company accounted for income taxes using Accounting Principles Board Opinion
No. 11. The cumulative effect, through November 1, 1991, of this change in
accounting amounted to $3,391,000, or $.23 per share, and was included in net
income as of that date.
-30-
<PAGE> 31
ITEM 8. (Continued)
NOTE A - ACCOUNTING POLICIES (Continued)
Provisions are made for appropriate income taxes on undistributed earnings
of foreign subsidiaries which are expected to be remitted to the parent company
in the near future. The cumulative amount of unremitted earnings of
subsidiaries, which aggregated approximately $57,930,000 at October 31, 1994,
is deemed to be indefinitely reinvested and, accordingly, no provision for U.S.
federal and state income taxes has been provided thereon. Upon distribution of
those earnings in the form of dividends or otherwise, the Company would be
subject to both U.S. income taxes (subject to an adjustment for foreign tax
credits) and withholding taxes payable to the various foreign countries.
Determination of the amount of unrecognized deferred U.S. tax liability is not
practicable because of the complexities associated with its hypothetical
calculation; however, unrecognized foreign tax credit carryforwards would be
available to reduce some portion of the U.S. liability.
Translation of Foreign Currencies:
The financial statements of foreign entities are translated in accordance
with Financial Accounting Standards Board (FASB) Statement No. 52, except for
those entities located in highly inflationary countries. Under this method,
revenue and expense accounts are translated at the average exchange rate for
the year while all assets and liability accounts are translated into U.S.
dollars at the current exchange rate. Resulting translation adjustments are
recorded as a separate component of shareholders' equity and do not affect
income determination.
Earnings Per-Share Amounts:
On July 27, 1994, the Company's Board of Directors approved a three-for
two split of the Company's common stock in the form of a 50% share dividend for
shareholders of record as of September 1, 1994 (1994 share dividend). The par
value of each share was not changed from $1. Accordingly, all per share and
stock option data have been restated to reflect the split. In connection with
the split, common stock was credited and capital surplus was charged for the
aggregate par value of the shares that were issued.
Income per share of common stock is computed using the weighted-average
number of shares outstanding for each year after giving retroactive effect to
the 1994 share dividend. The preferred stock issuances were determined not to
be common stock equivalents for primary earnings per common share. In
computing primary earnings per common share, the Series B and C preferred
dividends and adjustments reduce income available to common shareholders.
-31-
<PAGE> 32
ITEM 8. (Continued)
NOTE A - ACCOUNTING POLICIES (Continued)
In computing fully diluted earnings per share, dilution is determined by
dividing net earnings by the weighted average number of common shares
outstanding during each year adjusted for the 1994 share dividend after giving
effect to dilutive preferred stock assumed converted to common stock. In 1994
and 1993, the dilutive calculation assumes conversion of Series B preferred
stock to common shares and the subsequent adjustment for dividend rates to
arrive at income available to common shareholders. In 1992, the most dilutive
calculation assumes conversion of Series B preferred stock to common shares and
the subsequent adjustments to net income for Series C preferred dividends and
dividend rate adjustments for Series B preferred to arrive at income available
to common shareholders. Alternative conversion of Series C preferred or both
Series B and C preferred in 1992 results in an anti-dilutive effect on earnings
per share.
Cash Equivalents:
The Company considers all highly liquid investments with a maturity of
three months or less, when purchased, to be cash equivalents.
Investment In Reserve Contracts:
During the third quarter of fiscal 1992, the Company purchased corporate
owned life insurance contracts on all domestic employees. The contracts are
recorded at cash surrender value, net of policy loans, in Other Assets. The
net contract expense, including interest expense, is included in Selling,
Administrative and General Expenses in the Statements of Consolidated Income.
The related interest expense was $6,320,000 in 1994, $3,660,000 in 1993 and
$1,124,000 in 1992 which in each year is reduced for contract benefits and net
amortization of contract premiums and cash surrender value.
Revenue Recognition:
Revenue is recognized when the earning process is complete and the risks
and rewards of ownership have transferred to the customer, which is generally
considered to have occurred upon shipment of the finished product.
-32-
<PAGE> 33
ITEM 8. (Continued)
<TABLE>
NOTE B - DEBT
Long-term debt obligations are summarized below:
<CAPTION>
1994 1993
---- ----
(in thousands)
<S> <C> <C>
Senior notes . . . . . . . . . . . . . $45,000 $45,000
Industrial revenue loans . . . . . . . 4,225 4,898
Mortgages. . . . . . . . . . . . . . . 5,868 6,162
Other. . . . . . . . . . . . . . . . . 2,265 330
------- -------
57,358 56,390
Less current portion . . . . . . . . . 2,821 1,562
------- -------
54,537 54,828
Guarantee of employee stock ownership
plan loan . . . . . . . . . . . . . 22,483 23,231
------- -------
$77,020 $78,059
======= =======
</TABLE>
The Company has outstanding $45 million of 8.20 percent senior notes due
in 2002, privately placed with a group of insurance companies. The notes have
level annual sinking fund payments beginning at the end of 1997. The senior
notes include covenants which require the maintenance of certain financial
ratios. The Company was in compliance with these covenants at October 31,
1994.
The Company maintains a $35 million nonreducing revolving credit facility
with a group of three banks. There were no borrowings outstanding from this
facility at October 31, 1994 or 1993. The funds available under the agreement
may be used for any general corporate purposes, including share purchases. The
Company pays a facility fee of 0.25 percent per annum on the total commitment.
The revolving credit portion of the agreement has interest options determinable
by the Company based upon LIBOR, certificate of deposit or prime interest
rates. The maximum rate is prime rate, 7/8 percentage point over LIBOR or one
percentage point over certificate of deposit rates. The credit agreement also
has a competitive bid option feature, which under certain conditions provides
lower interest rates. The credit agreement includes covenants which require
the maintenance of certain financial ratios. The Company was in compliance
with these covenants at October 31, 1994. Additionally, under the most
restrictive provisions of the agreement, approximately $17.6 million of
unrestricted retained earnings is available for future dividend payments or
share purchases. During 1994 the agreement was extended two years and will
expire April 1997.
-33-
<PAGE> 34
ITEM 8. (Continued)
NOTE B - DEBT (Continued)
Industrial revenue loans cover two separate domestic expansion programs
and have maturities to January 1, 2001. Interest costs currently range from
6.05 to 7.75 percent, and the loans are secured by property and equipment at
the Benton, Arkansas and Hicksville, Ohio facilities (net book value at October
31, 1994 - $5,811,000).
Mortgages relate to construction programs at two facilities. Three loans
are collateralized with a Japanese facility and bear interest at 5.7 to 6.2
percent, maturing through the year 2005. These loans are secured with property
and equipment at Kita-Ibaragi, Japan (net book value at October 31, 1994 -
$7,101,000). The loan for the second program is collateralized by a facility
located in Enfield, Connecticut and bears interest at 5.0 percent maturing in
the year 2000. The Enfield facility's net book value at October 31, 1994 was
$3,991,000.
The Company established the Employee Stock Ownership Plan (ESOP) in
February, 1990. The ESOP is presently financed by 7.08 percent senior notes
due December 31, 2009 privately placed with a group of insurance companies.
Since the debt is guaranteed by the Company, it is included in Long-Term Debt
with an offset recorded as Deferred Compensation in Shareholders' Equity. As
Company contributions and dividends on the shares held by the ESOP are used to
meet interest and principal payments, shares are released for allocation to
eligible employees.
<TABLE>
Principal payments due in the five years after October 31, 1994 (excluding
the ESOP loan guarantee) are:
<CAPTION>
(in thousands)
<S> <C> <C>
1995 - $2,821
1996 - 2,077
1997 - 9,463
1998 - 9,092
1999 - 9,103
</TABLE>
The Company had available unused lines of credit in various countries
totaling approximately $93.2 million short-term and $35.0 million long-term at
October 31, 1994. Outstanding bank loans at October 31, 1994 and 1993 had
weighted average interest rates of 6.1 percent and 5.7 percent, respectively.
-34-
<PAGE> 35
ITEM 8. (Continued)
NOTE C - FOREIGN CURRENCY TRANSLATION
The cumulative effects of foreign currency translation gains and losses
are reflected in the Translation Adjustment section of Shareholders' Equity.
Translation adjustments increased equity by $11,277,000 and $104,000 in 1994
and 1992, respectively, and decreased equity by $7,453,000 in 1993.
<TABLE>
Foreign currency transaction gains and losses, which include U.S. dollar
translation losses in Brazil, are reflected in income. For the three-year
period reported herein, foreign currency losses have decreased Income from
Continuing Operations before Income Taxes as follows:
<CAPTION>
(in thousands)
<S> <C> <C>
1994 - $2,751
1993 - 678
1992 - 1,266
</TABLE>
-35-
<PAGE> 36
ITEM 8. (Continued)
NOTE D - STOCK OPTIONS AND AWARDS
Under the Company's stock option and award plans, approximately 924,000
shares of common stock are reserved for issuance to key employees as of October
31, 1994. The options are exercisable at various dates and expire ten years
from the date of grant. Stock options granted during 1994 totaled 138,375
shares. A total of 23,250 options were forfeited during the year. Stock
appreciation rights may be granted as part of a stock option or as a separate
right to the holders of any options previously granted. The present plan also
provides for awards of restricted and performance shares of common stock to key
employees. There were 93,150 restricted shares awarded in 1994 and no
restricted shares awarded in 1993. Awards of performance shares totaled 1,500
in 1994 and 122,475 in 1993. When rights, options or awards are granted,
associated compensation expense is accrued from date of grant to the date such
options or awards are exercised.
<TABLE>
A summary of the activity follows:
<CAPTION>
Number Option Price Range
of Shares Per Share
--------- ------------------
<S> <C> <C>
Options outstanding at October 31:
1994. . . . . . . . . . . . 623,337 $6.50 - $15.58
1993. . . . . . . . . . . . 649,350 $6.50 - $14.83
Options exercised during the year:
1994. . . . . . . . . . . . 141,138 $9.83 - $14.83
1993. . . . . . . . . . . . 69,450 $6.50 - $11.50
Options exercisable at October 31:
1994. . . . . . . . . . . . 294,987 $6.50 - $14.83
1993. . . . . . . . . . . . 293,250 $6.50 - $14.83
</TABLE>
Shares available for future grants amounted to approximately 300,000 and
486,000 as of October 31, 1994 and 1993, respectively.
All data presented herein has been restated for the effects of a
three-for-two stock split of the Company's common stock which was approved on
July 27, 1994.
-36-
<PAGE> 37
ITEM 8. (Continued)
NOTE E - BENEFIT PLANS
The Company and its subsidiaries have a number of noncontributory defined
benefit pension plans covering most U.S. employees. Pension benefits for the
hourly employees covered by these plans are expressed as a percentage of
average earnings over a ten-year period times years of continuous service or as
a flat benefit rate times years of continuous service. Benefits for salaried
employees are based upon a percentage of the employee's average compensation
during the preceding ten years, reduced by 50 percent of the Social Security
Retirement Benefit. The Company's funding policy is to contribute amounts to
the plans sufficient to meet the minimum funding requirements set forth in the
Employee Retirement Income Security Act of 1974, plus such additional amounts
as may be deemed appropriate from time to time.
The Company also sponsors defined contribution pension plans for the
hourly employees of its operations in Benton, Arkansas; Kings Mountain, North
Carolina and Minneapolis, Minnesota. Contributions and expense for these plans
are computed at 3 percent of annual employee compensation or at a discretionary
rate as determined each year by the Company. Hourly employees at the Orange,
California facility are covered by a multiemployer plan which provides benefits
in a manner similar to a defined contribution arrangement.
The Company accounts for pension costs under the provisions of FASB
Statement No. 87 for contributory defined benefit pension plans covering its
employees in Japan and the United Kingdom. Benefits under these plans are
generally based on years of service and compensation during the years
immediately preceding retirement. Funding is predicated on minimum
contributions as required by local laws and regulations plus additional
amounts, if any, as may be deemed appropriate. Some employees of other foreign
operations also participate in postemployment benefit arrangements not subject
to the provisions of FASB Statement No. 87.
<TABLE>
A summary of the various components of net periodic pension cost for
defined benefit plans and cost information for other plans for the three-year
period is shown below:
<CAPTION>
1994 1993 1992
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Defined benefit plans:
Service cost. . . . . . . . . . $ 3,054 $ 2,360 $ 2,141
Interest cost . . . . . . . . . 7,484 7,087 6,619
Actual return on plan assets. . (4,124) (19,945) (7,887)
Net amortization and deferral . (6,499) 10,001 (2,089)
-------- -------- --------
Net pension (income). . . . . . (85) (497) (1,216)
Other plans:
Defined contribution plans. . . 356 284 283
Multiemployer plan. . . . . . . 81 75 63
Foreign plans . . . . . . . . . 599 471 562
-------- -------- --------
Total pension expense (income). $ 951 $ 333 $ (308)
======== ======== ========
</TABLE>
-37-
<PAGE> 38
ITEM 8. (Continued)
NOTE E - BENEFIT PLANS (Continued)
<TABLE>
Assumptions used in the accounting for the defined benefit plans as of October
31 were:
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Weighted-average discount rate . . . . . . . . . 8.5% 7.25% 8.0%
Rates of increase in compensation levels . . . . 4.5% 4.5 % 5.0%
Expected long-term rate of return on assets. . . 10.0% 10.0 % 10.0%
</TABLE>
<TABLE>
The following table sets forth the funded status and amounts recognized in
the Consolidated Balance Sheets at October 31, 1994 and 1993 for the Company's
U.S. and foreign defined benefit pension plans. Other foreign pension plans do
not determine net assets or the actuarial present value of accumulated benefits
as calculated and disclosed herein:
<CAPTION>
1 9 9 4 1 9 9 3
---------------------------- ----------------------------
Plans Whose Plans Whose Plans Whose Plans Whose
Assets Exceed Accumulated Assets Exceed Accumulated
Accumulated Benefits Accumulated Benefits
Benefits Exceed Assets Benefits Exceed Assets
------------- ------------- ------------- -------------
(in thousands)
<S> <C> <C> <C> <C>
Actuarial present value of
benefit obligations:
Vested benefit obligation. . . . $(44,039) $(43,967) $(43,761) $(41,222)
========= ========= ========= =========
Accumulated benefit obligation . $(45,576) $(46,448) $(45,339) $(43,671)
========= ========= ========= =========
Projected benefit obligation . . . $(48,626) $(55,256) $(48,448) $(52,029)
Market value of plan assets. . . . 78,223 44,018 80,147 40,130
--------- --------- --------- ---------
Projected benefit obligation less
than or (in excess of) plan
assets. . . . . . . . . . . . . 29,597 (11,238) 31,699 (11,899)
Unrecognized net (gain) loss . . . (71) 5,028 (4,752) 5,601
Unrecognized prior service cost. . 2,741 2,964 3,086 3,157
Unrecognized net (asset)
obligation . . . . . . . . . . (5,712) 1,190 (6,541) 1,262
Additional liability . . . . . . . 0 (1,035) 0 (1,732)
--------- --------- --------- ---------
Net pension asset (liability)
recognized in the Consolidated
Balance Sheet . . . . . . . . . $ 26,555 $ (3,091) $ 23,492 $ (3,611)
========= ========= ========= =========
</TABLE>
Plan assets at October 31, 1994 are invested in publicly traded and
restricted mutual funds, various corporate and government bonds, guaranteed
income contracts and listed stocks, including common stock of the Company
having a market value of $4,236,500 at that date.
-38-
<PAGE> 39
ITEM 8. (Continued)
NOTE E - BENEFIT PLANS (Continued)
In addition to pension benefits, the Company sponsors other defined
benefit postretirement plans in the U.S. which provide medical and life
insurance benefits for certain hourly and salaried employees. Benefits are
provided on a noncontributory basis for those salaried retirees who have
attained the age of 55 with 15 years of service and those hourly retirees who
have attained the age of 60 with 15 years of service or 30 years of service
with no age restriction, up to 65 years of age. Coverage is also provided for
surviving spouses of hourly retirees. Medical plans for both employee groups
incorporate deductibles and coinsurance features. The plans are unfunded, and
postretirement benefit claims and premiums are paid as incurred.
Company-sponsored postretirement benefits are not available to employees of
foreign subsidiaries.
<TABLE>
Components of net periodic postretirement benefit cost are shown below.
Net periodic cost associated with retiree life insurance benefits amounted to
$314,000 in 1994, $296,000 in 1993, and $288,000 in 1992.
<CAPTION>
1994 1993 1992
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Service cost. . . . . . . . . . . . . . . $ 419 $ 377 $ 312
Interest cost . . . . . . . . . . . . . . 1,357 1,411 1,408
Actual return on plan assets. . . . . . . 0 0 0
Amortization of transition obligation . . 0 0 0
Net amortization and deferral . . . . . . 49 26 0
------ ------ ------
Net periodic postretirement benefit cost. $1,825 $1,814 $1,720
====== ====== ======
</TABLE>
<TABLE>
The following table shows the aggregated funded status of the benefit
plans reconciled with amounts recognized in the Company's Consolidated Balance
Sheets. The accrued postretirement cost associated with retiree life insurance
benefits amounted to $3,257,000 and $3,094,000 as of October 31, 1994 and 1993,
respectively.
<CAPTION>
October 31,
---------------
1994 1993
---- ----
(in thousands)
<S> <C> <C>
Accumulated postretirement benefit obligations:
Retirees. . . . . .. . . . . . . . . . . . . $ (8,048) $ (8,959)
Fully eligible active plan participants . . (2,834) (2,577)
Other active plan participants . . . . . . . (7,003) (7,402)
--------- ---------
(17,885) (18,938)
Plan assets at fair value . . . . . . . . . . . 0 0
--------- ---------
Accumulated postretirement benefit
obligation (in excess of) plan assets . . . (17,885) (18,938)
Unrecognized net loss . . . . . . . . . . . . . 716 2,621
Unrecognized prior service cost . . . . . . . . 0 0
Unrecognized transition obligation . . . . . . 0 0
--------- ---------
(Accrued) postretirement benefit cost . . . . . $(17,169) $(16,317)
========= =========
</TABLE>
-39-
<PAGE> 40
ITEM 8. (Continued)
NOTE E - BENEFIT PLANS (Continued)
The weighted-average annual assumed rate of increase in the per capita
cost of covered benefits in the medical plans, or health care cost trend rate,
is 12.0 percent for 1994 and 12.5 percent for 1993. The trend rate is assumed
to decrease gradually to 6.25 percent in the year 2007 and remain at that level
thereafter. Increasing the assumed health care cost trend rate by one
percentage point in each year would increase the accumulated postretirement
benefit obligation as of October 31, 1994 by $1,659,400 and the aggregate of
service and interest cost components of net periodic postretirement benefit
cost for 1994 by $262,000. The weighted-average discount rate used in
determining the accumulated postretirement benefit obligation was 8.5 percent
and 7.25 percent at October 31, 1994 and 1993, respectively. The annual
assumed rate of salary increase for retiree life insurance is 4.5 percent at
October 31, 1994 and October 31, 1993.
-40-
<PAGE> 41
ITEM 8. (Continued)
<TABLE>
NOTE F - INCOME TAXES
The components of income from continuing operations before income taxes
and cumulative effect of change in accounting and the provision for income
taxes are summarized as follows:
<CAPTION>
1994 1993 1992
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Income from continuing operations
before income taxes and cumulative
effect of change in accounting:
Domestic . . . . . . . . . . . . $19,184 $ 8,313 $ 4,896
Foreign . . . . . . . . . . . . 8,619 12,289 18,453
-------- -------- --------
27,803 20,602 23,349
Provision for income taxes
Current
Domestic-Federal . . . . . . . . 5,672 3,348 1,483
-State and local . . . . 1,838 382 560
Foreign. . . . . . . . . . . . . 4,531 5,064 8,329
-------- -------- --------
12,041 8,794 10,372
Deferred
Domestic-Federal . . . . . . . . (650) (1,376) (1,393)
-State and local . . . . (257) (130) (161)
Foreign. . . . . . . . . . . . . (858) (701) 486
-------- -------- --------
(1,765) (2,207) (1,068)
Benefit of operating loss
carryforwards. . . . . . . . . . (2,092) -0- -0-
-------- -------- --------
8,184 6,587 9,304
Income from continuing operations
before cumulative effect of change
in accounting:
Domestic . . . . . . . . . . . . 12,581 6,089 4,407
Foreign. . . . . . . . . . . . . 7,038 7,926 9,638
-------- -------- --------
$19,619 $14,015 $14,045
======== ======== ========
</TABLE>
<TABLE>
A reconciliation of the effective tax rate to the U.S. statutory rate for
1994, 1993 and 1992 follows:
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Statutory U.S. federal income tax rate. . 35.0% 34.8% 34.0%
State and local taxes on income net of
domestic income tax benefit. . . . . . 3.7 0.8 1.1
Increase in effective rate due to
impact of foreign subsidiaries . . . . 2.4 0.4 4.8
Benefit of operating loss carryforwards . (7.5) 0 0
Repatriation of foreign earnings. . . . . 1.5 0.6 0.8
Reserve contracts . . . . . . . . . . . . (5.0) (3.7) (0.5)
Goodwill with no U.S. tax benefit . . . . 2.0 2.5 2.5
All other . . . . . . . . . . . . . . . . (2.7) (3.4) (2.9)
----- ----- -----
Effective income tax rate. . . . . . . 29.4% 32.0% 39.8%
===== ===== =====
</TABLE>
-41-
<PAGE> 42
ITEM 8. (Continued)
NOTE F - INCOME TAXES (Continued)
<TABLE>
Significant components of the Company's deferred income tax liabilities and
assets as of October 31, are as follows:
<CAPTION>
(in thousands)
Deferred income tax liabilities: 1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Tax over book depreciation. . . . . . . . . $13,142 $13,234 $13,358
Prepaid pension asset . . . . . . . . . . . 9,991 8,760 7,412
United Kingdom property sale. . . . . . . . 1,407 1,274 1,339
Other . . . . . . . . . . . . . . . . . . . 278 273 846
------- ------- -------
Total deferred income tax liabilities. . 24,818 23,541 22,955
Deferred income tax assets:
Postretirement benefits . . . . . . . . . . 6,769 6,783 5,995
Employee benefits . . . . . . . . . . . . . 7,157 6,407 5,810
Net operating loss carryforwards. . . . . . 58,587 4,895 3,603
Inventory valuation . . . . . . . . . . . . 2,111 2,048 2,361
Product liability . . . . . . . . . . . . . 2,710 1,928 1,452
Other . . . . . . . . . . . . . . . . . . . 4,452 2,306 713
------- ------- -------
Total deferred income tax assets . . . . 81,786 24,367 19,934
Valuation allowance for deferred income tax
assets . . . . . . . . . . . . . . . . . 58,587 4,210 2,570
------- ------- -------
Net deferred income tax assets . . . . . 23,199 20,157 17,364
------- ------- -------
Net deferred income tax liabilities. . . $ 1,619 $ 3,384 $ 5,591
======= ======= =======
</TABLE>
The net effect of tax rate changes decreased deferred income taxes
approximately $240,000 during fiscal 1993. The valuation allowance has
increased by $54,377,000 in 1994, $1,640,000 in 1993 and $847,000 in 1992 since
adoption of SFAS No. 109 on November 1, 1991. At October 31, 1994, the Company
also had unused foreign tax credit carryovers of approximately $3,697,000 of
which $1,263,000 will expire in 1995, $249,000 in 1997, $721,000 in 1998 and
the balance will expire in the year 1999.
Of the $58,587,000 in tax benefits from operating loss carryforwards,
$55,308,000 relates to the ORSTA Hydraulik operations acquired in 1994 which
are available indefinitely. The balance of the loss carryforward expires as
follows; $1,579,000 in 1997, $634,000 in 1998 and the balance available
indefinitely.
-42-
<PAGE> 43
<TABLE>
ITEM 8. (Continued)
NOTE G - QUARTERLY DATA (unaudited)
<CAPTION>
1994 First Second Third Fourth Total
- -----------------------------------------------------------------------------
(in thousands, except per-share amounts)
<S> <C> <C> <C> <C> <C>
Net sales. . . . . . . . . . . $104,360 $121,443 $139,554 $151,574 $516,931
Gross profit . . . . . . . . . 31,701 38,528 42,135 45,106 157,470
Income from continuing
operations. . . . . . . . . 2,068 6,609 4,933 6,009 19,619
Income from discontinued
operation . . . . . . . . . 0 0 5,462 0 5,462
Net income . . . . . . . . . . 2,068 6,609 10,395 6,009 25,081
Earnings per share:
Primary:
Income from continuing
operations. . . . . . $.10 $.40 $.29 $.36 $1.14
Net income . . . . . . . .10 .40 .64 .36 1.50
Fully diluted:
Income from continuing
operations. . . . . . .10 .38 .27 .34 1.09
Net income . . . . . . . .10 .38 .60 .34 1.41
Dividends per common share . . .113 .114 .125 .125 .477
</TABLE>
<TABLE>
<CAPTION>
1993 First Second Third Fourth Total
- -----------------------------------------------------------------------------
(in thousands, except per-share amounts)
<S> <C> <C> <C> <C> <C>
Net sales. . . . . . . . . . . $99,327 $114,213 $117,252 $117,785 $448,577
Gross profit . . . . . . . . . 27,159 33,174 34,272 35,135 129,740
Net income . . . . . . . . . . 627 3,158 4,156 6,074 14,015
Earnings per share:
Net income:
Primary. . . . . . . . . $ .01 $ .17 $ .24 $ .37 $ .79
Fully diluted. . . . . . .01 .17 .23 .35 .76
Dividends per common share . . .113 .114 .113 .113 .453
</TABLE>
The Company received fees from a licensing agreement between the Company's
Astron Division in Europe and Geoyang Development Co., Ltd., in Korea. The
fees increased net income by $365,000 or $.02 per share in the first quarters
of 1994 and 1993, and by $323,000 or $.02 per share in the second quarter of
1993.
Effective with the third quarter of 1994, financial results include the
operations of ORSTA Hydraulik acquired by the Company on May 3, 1994 (see Note
K). Third and fourth quarter results also include charges related to the
closure and consolidation of certain previously existing company facilities in
Europe and the U.S. These charges decreased net income by $2,515,000 or $.17
per share in the third quarter and $1,275,000 or $.08 per share in the fourth
quarter. Income from discontinued operations in the third quarter of 1994 of
$5,462,000 represents the elimination of income tax accruals no longer required
that relate to a business written off in 1989 which was treated as a
discontinued operation.
Fiscal 1993 was impacted by favorable conclusions to a number of open tax
issues, including prior years' tax audits and settlement of a dispute with one
foreign tax authority, which increased net income in the third and fourth
quarters of 1993 by $1,100,000 or $.07 per share and $952,000 or $.06 per
share, respectively.
Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share do not
necessarily equal the total for the year.
-43-
<PAGE> 44
ITEM 8. (Continued)
NOTE H - PRODUCT DEVELOPMENT COSTS
<TABLE>
The Company maintains ongoing development programs at various facilities
to formulate, design and test new products and product alternatives, and to
further develop and significantly improve existing products. The Company
intends to continue substantial expenditures on research and development in
this area. Costs associated with these activities, which the Company expenses
as incurred, are shown for the three-year period below:
<CAPTION>
1994 1993 1992
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Research and Development. . . $ 7,293 $ 6,708 $ 8,045
Engineering . . . . . . . . . 14,436 12,416 11,352
------- ------- -------
$21,729 $19,124 $19,397
======= ======= =======
Percent of net sales. . . . . 4.2% 4.3% 4.3%
==== ==== ====
</TABLE>
-44-
<PAGE> 45
ITEM 8. (Continued)
NOTE I - SEGMENT REPORTING
The Company is engaged in the design, manufacture and sale of products in
three segments: Hydraulic Components, Metal Products and Fluid Purification
Systems.
Operating income represents total revenue less total operating expenses.
Identifiable assets are those assets used in the operations of each business
segment or geographic area or which are allocated when used jointly. Corporate
assets are principally cash and cash equivalents.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
INDUSTRY SEGMENTS (in thousands)
Fluid
Hydraulic Metal Purification
1994 Components Products Systems Total
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales. . . . . . . . . . . $240,830 $132,990 $143,111 $516,931
Operating income:
Before nonrecurring items . 24,934 10,358 3,777 39,069
Nonrecurring items. . . . . (4,240) 0 0 (4,240)
--------------------------------------------
Total operating income . 20,694 10,358 3,777 34,829
Interest expense . . . . . . . 4,952
Other expense-net. . . . . . . 2,074
Income from continuing operations
before income taxes . . . . 27,803
Identifiable assets. . . . . . 168,684 64,898 137,879 371,461
Corporate assets . . . . . . . 51,517
Total assets . . . . . . . . . 422,978
Depreciation and amortization. 6,549 2,604 8,586 17,739
Capital expenditures . . . . . 16,540 2,696 3,816 23,052
1993
- -----------------------------------------------------------------------------
Net sales. . . . . . . . . . . $190,170 $127,636 $130,771 $448,577
Operating income:
Before nonrecurring items . 17,170 10,699 (1,639) 26,230
Nonrecurring items. . . . . 0 0 (860) (860)
--------------------------------------------
Total operating income . 17,170 10,699 (2,499) 25,370
Interest expense . . . . . . . 5,744
Other income-net . . . . . . . 976
Income from continuing operations
before income taxes . . . . 20,602
Identifiable assets. . . . . . 124,608 59,124 137,895 321,627
Corporate assets . . . . . . . 25,708
Total assets . . . . . . . . . 347,335
Depreciation and amortization. 6,125 2,455 7,956 16,536
Capital expenditures . . . . . 4,434 1,760 3,241 9,435
</TABLE>
-45-
<PAGE> 46
ITEM 8. (Continued)
NOTE I - SEGMENT REPORTING (Continued)
<TABLE>
<CAPTION>
1992
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales. . . . . . . . . . . $178,072 $144,348 $128,188 $450,608
Operating income:
Before nonrecurring items . 12,175 21,280 (1,981) 31,474
Nonrecurring items. . . . . (240) 0 (1,095) (1,335)
--------------------------------------------
Total operating income . 11,935 21,280 (3,076) 30,139
Interest expense . . . . . . . 6,277
Other expense-net. . . . . . . 513
Income from continuing operations
before income taxes . . . . 23,349
Identifiable assets. . . . . . 126,736 64,654 138,781 330,171
Corporate assets . . . . . . . 19,828
Total assets . . . . . . . . . 349,999
Depreciation and amortization. 5,918 2,260 8,451 16,629
Capital expenditures . . . . . 4,529 2,858 6,729 14,116
</TABLE>
-46-
<PAGE> 47
ITEM 8. (Continued)
NOTE I - SEGMENT REPORTING (Continued)
<TABLE>
In the following table, data in the column labeled "Europe" pertains to
subsidiaries operating within the European Economic Community. Data for all
remaining overseas subsidiaries is shown in the column marked "Other."
<CAPTION>
GEOGRAPHIC AREA (in thousands)
United
1994 States Europe Other Elimination Consolidated
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales to customers. . . $290,361 $160,658 $65,912 $516,931
Inter-area sales. . . . 21,585 4,014 1,517 $27,116
-----------------------------------------------------
Total sales . . . . . . 311,946 164,672 67,429 27,116 516,931
Operating income. . . . 26,291 (201) 8,739 34,829
Identifiable assets . . 207,578 115,683 48,200 371,461
</TABLE>
<TABLE>
<CAPTION>
1993
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales to customers. . . $242,333 $151,207 $55,037 $448,577
Inter-area sales. . . . 17,493 3,165 880 $21,538
-----------------------------------------------------
Total sales . . . . . . 259,826 154,372 55,917 21,538 448,577
Operating income. . . . 15,352 5,208 4,810 25,370
Identifiable assets . . 193,036 87,557 41,034 321,627
</TABLE>
<TABLE>
<CAPTION>
1992
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales to customers. . . $210,663 $186,797 $53,148 $450,608
Inter-area sales. . . . 21,770 3,094 943 $25,807
-----------------------------------------------------
Total sales . . . . . . 232,433 189,891 54,091 25,807 450,608
Operating income. . . . 9,275 17,814 3,050 30,139
Identifiable assets . . 185,620 104,610 39,941 330,171
</TABLE>
Net assets of foreign subsidiaries at October 31, 1994 and 1993 were
$108,852,000 and $89,997,000, respectively, of which net current assets were
$80,253,000, and $50,034,000, also respectively.
-47-
<PAGE> 48
ITEM 8. (Continued)
NOTE J - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in
estimating its fair value disclosures of financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance
sheet for cash and cash equivalents approximate fair value.
Long and short-term debt: The carrying amounts of the Company's
borrowings under its short-term credit agreements approximate their fair value.
The fair values of the long-term debt are estimated using discounted cash flow
analysis, based on the Company's incremental borrowing rates for similar types
of borrowing arrangements.
Foreign currency exchange contracts: The Company utilizes foreign
currency exchange contracts to minimize the impact of currency fluctuations on
transactions. At October 31, 1994, the Company and its subsidiaries held
contracts for $5,481,000 with a fair value of $5,894,000. The fair values of
these foreign currency exchange contracts are estimated based on quoted
exchange rates at October 31, 1994.
<TABLE>
The carrying amounts and fair values of the Company's financial
instruments at October 31, 1994 are as follows:
<CAPTION>
(in thousands)
Carrying Amount Fair Value
--------------- ----------
<S> <C> <C>
Cash and cash equivalents $52,666 $52,666
Short-term debt 20,273 20,273
Long-term debt:
Senior notes $45,000 $45,024
Industrial revenue loans 4,225 4,364
Mortgages 5,868 6,071
Other 2,265 2,336
------- -------
57,358 57,795
ESOP guarantee 22,483 20,881
------- -------
$79,841 $78,676
======= =======
</TABLE>
From time-to-time the Company makes loans to its foreign subsidiaries
denominated in the subsidiaries' functional currencies. Generally, these loans
are made when the Company can borrow at lower interest rate spreads than are
available to the subsidiary in its local market. Foreign currency forward
contracts are used to hedge the Company's receipt of principal and interest due
from the loans. The forward contracts are an effective hedge against
fluctuations in the value of the foreign currency. Therefore, the contracts
have no income statement impact.
-48-
<PAGE> 49
ITEM 8. (Continued)
NOTE K - ACQUISITIONS
Effective May 3, 1994, (the "acquisition date") the Company acquired the
stock of Sachsenhydraulik Chemnitz GmbH ("SHC") and its wholly owned subsidiary
(Hydraulik Rochlitz GmbH), which are known as ORSTA Hydraulik. ORSTA is a
manufacturer of hydraulic cylinders, piston and gear pumps and industrial
valves. The stock was acquired from the Treuhandanstalt, the regulatory agency
of the Federal Republic of Germany responsible for the privatization of the
former East German state-owned enterprises. The acquisition has been accounted
for as a purchase transaction, therefore, the accounts are included in the
accompanying financial statements since the acquisition date. Pro forma
financial results are not provided herein since the companies acquired operated
in a different environment under the Treuhandanstalt control.
Under terms of the Agreement, the Company tendered no financial
consideration to acquire the stock of SHC and its wholly owned subsidiary but
received, in addition to the net business assets of the two companies, cash
contributions of 59.0 million Deutsche marks (approximately U.S. $36.0 million)
to fund pre-existing capital investment programs and to cover estimated
operating losses over a period of two years. This additional consideration was
negotiated with the Treuhandanstalt based on the financial position of the
acquired companies as of January 1, 1994 (the "measurement date"). Cash
contributions available to the Company on the acquisition date were adjusted
for funds consumed by the operations during the interim period between the
measurement and acquisition dates. Details of investment on the acquisition
date are as follows:
<TABLE>
<CAPTION>
(in thousands)
--------------
<S> <C>
Fair value of assets acquired,
other than cash and cash equivalents $ 31,836
Liabilities assumed (19,333)
Deferred credit-operating loss
indemnification (23,643)
--------
Cash and cash equivalents acquired $ 11,140
========
</TABLE>
In addition to the cash acquired at the acquisition date, a balance of
44.1 million Deutsche marks (approximately U.S. $26.8 million) was receivable
from the Treuhandanstalt in regard to the original cash contribution. Cash
received since the acquisition date amounted to 30.1 million Deutsche marks
(approximately U.S. $18.8 million). The remaining contributions will be
received by SHC during fiscal 1995. Of the funds provided by the
Treuhandanstalt since the acquisition date, 10.3 million Deutsche marks
(approximately U.S. $6.5 million) were consumed by operating losses from May 3,
1994 to October 31, 1994 and 7.6 million Deutsche marks (approximately U.S.
$5.1 million) were used to fund the pre-existing capital investment program.
-49-
<PAGE> 50
ITEM 8. (Continued)
NOTE K - ACQUISITION (Continued)
The Company agreed to the following obligations and guarantees with
respect to the operation of the acquired businesses:
a) to maintain a minimum employment level for a period
of three years; the level stipulated by the Agreement
is considered by the Company to be reasonable and
necessary for the intended use of the business,
b) to invest 39.0 million Deutsche marks (approximately
U.S. $23.6 million) in capital programs over a period
of four years,
c) to continue to operate the businesses for a minimum
of five years, and
d) to refrain from selling or transferring acquired land
and buildings for a period of six years.
Of the total 59.0 million Deutsche mark cash contribution to be received
(as calculated on the measurement date of January 1, 1994), 51.5 million
Deutsche marks was designed as an indemnification of estimated operating losses
over a period of two years from acquisition. The amount of operating loss
indemnification available to the Company was adjusted for cash consumed by the
ORSTA operations between the measurement date and the acquisition date. The
operating loss indemnification is being amortized based on estimated operating
results of the ORSTA Hydraulik operations as determined on May 3, 1994. The
quarterly amortization value will remain unchanged as actual results are
reported and will be translated from Deutsche marks into U.S. dollars at the
average exchange rate for the period. The deferred credit on the balance sheet
is translated at end of period rate.
<TABLE>
Negative Goodwill Amortization:
<CAPTION>
Fiscal Quarters Deutsche Marks U.S. Dollars
- --------------- -------------- ------------
(in thousands)
<S> <C> <C>
Amounts amortized
- -----------------
Third quarter, 1994 DM 3,297 $ 2,044
Fourth quarter, 1994 7,015 4,422
------ -------
Total DM 10,312 $ 6,466
====== =======
Remainder (Balance Sheet)
- -------------------------
First quarter, 1995 DM 6,855 $ 4,557
Second quarter, 1995 6,500 4,321
Third quarter, 1995 5,410 3,596
Fourth quarter, 1995 4,745 3,154
First quarter, 1996 3,745 2,490
Second quarter, 1996 1,504 1,000
------ -------
Total DM 28,759 $19,118
====== =======
</TABLE>
-50-
<PAGE> 51
ITEM 8. (Continued)
NOTE K - ACQUISITION (Continued)
<TABLE>
ORSTA Hydraulik income statement for the six months ended October 31, 1994
follows:
<CAPTION>
(in thousands)
<S> <C>
Sales $15,292
Cost of products sold 16,708
Less: negative goodwill (6,466)
-------
Total cost of products sold 10,242
-------
Gross profit 5,050
Selling, administrative and
general expense 4,910
-------
Operating profit $ 140
=======
</TABLE>
-51-
<PAGE> 52
ITEM 8. (Continued)
NOTE L - PREFERRED STOCK
During fiscal 1990, the Company designated two separate series of
preferred shares as follows:
Series A Participating Preferred Shares
- ---------------------------------------
On November 29, 1989, the Company created a new class of stock, Series A
Participating Preferred Shares (the Series A) and adopted a Shareholder Rights
Plan (the Plan). The Plan is designed to protect shareholders from the
disruptions created by market accumulators and certain abusive takeover
practices. The Plan provides for the distribution of one preferred share
purchase right as a dividend for each outstanding share of common stock. Each
right, when exercisable, entitles shareholders to buy one one-hundredth of a
share of the Series A preferred stock for $75. Each one one-hundredth of a
share of preferred stock is intended to be the practical economic equivalent of
a share of common stock and will have one one-hundredth of a vote on all
matters submitted to a vote of shareholders of the Company. Until the rights
become exercisable, they have no dilutive effect on earnings per share.
The rights may be exercised, in general, only if a person or group
acquires 20 percent or more of the common stock without the prior approval of
the Board of Directors of the Company or announces a tender or exchange offer
that would result in ownership of 20 percent or more of the common stock. In
the event of the acquisition of 20 percent or more of the common stock without
the prior approval of the Board, all rights holders except the acquirer may
purchase the common stock of the Company having a value of twice the exercise
price of the rights. If the Company is acquired in a merger, after the
acquisition of 20 percent of the voting power of the Company, rights holders
except the acquirer may purchase shares in the acquiring company at a similar
discount. The Plan was not adopted in response to any pending takeover
proposal, and the rights will expire on November 29, 1999.
Series B ESOP Convertible Preferred Stock
- -----------------------------------------
On February 14, 1990, the Company established two newly-formed leveraged
employee stock ownership plans (the ESOPs) and sold to the ESOPs 1,074,107
shares of a newly created cumulative ESOP Convertible Preferred Stock Series B
(the Series B) for a total of $24,973,000. The ESOPs currently cover most
domestic salaried employees and certain domestic hourly employees. The
remaining Series B shares are convertible into 1,308,368 shares of common stock
at any time (1.235 shares of common stock for each Series B share), subject to
anti-dilution adjustments. The Series B shares are entitled to one and
one-half votes per share and will vote together with the common stock as a
single class.
-52-
<PAGE> 53
ITEM 8. (Continued)
NOTE L - PREFERRED STOCK (Continued)
Series B ESOP Convertible Preferred Stock (Continued)
- -----------------------------------------------------
The Series B shares are held by a trustee which votes the allocated shares as
directed by Plan participants. Unallocated shares held by the trustee are
voted in the same proportion as are the allocated shares. Annual dividends are
$1.97625 per share. The ESOPs have borrowed to purchase the Series B shares,
and the Company guaranteed the repayment of the remaining outstanding balance
of that loan.
The Company paid to the ESOPs $2,098,000 in 1994, ($2,109,000 in 1993 and
$2,118,000 in 1992) in preferred stock dividends and accrued or paid an
additional $1,310,000 in 1994, ($1,036,000 in 1993 and $862,000 in 1992), in
Company match of employee's contributions to the plan and to cover amounts
sufficient to meet the debt service. These expenses were determined on the
shares allocated method. In turn, the ESOPs made debt service payments of
$2,366,000 in 1994, $1,841,000 in 1993 and $1,975,000 in 1992, primarily for
interest charges.
-53-
<PAGE> 54
ITEM 8. (Continued)
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Shareholders and Board of Directors
Commercial Intertech Corp.
Youngstown, Ohio
We have audited the accompanying consolidated balance sheets of Commercial
Intertech Corp. and subsidiaries as of October 31, 1994 and 1993, and the
related statements of consolidated income, shareholders' equity and cash flows
for each of the three years in the period ended October 31, 1994. [Our audits
also included the financial statement schedule listed in the index at Item
14(a). These financial statements and schedule are the responsibility of the
Company's management.] Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Commercial
Intertech Corp. and subsidiaries at October 31, 1994 and 1993, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended October 31, 1994 in conformity with generally
accepted accounting principles. [Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.]
As discussed in Note F to the consolidated financial statements, in 1992, the
Company changed its method of accounting for income taxes by adopting Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes."
/s/ Ernst & Young LLP
Cleveland, Ohio
December 9, 1994
-54-
<PAGE> 55
ITEM 8. (Continued)
REPORT OF MANAGEMENT CONCERNING THE RESPONSIBILITIES
FOR FINANCIAL REPORTING AND INTERNAL CONTROL
The financial statements and other related financial information contained
in this report are the responsibility of, and prepared by, the management of
the Company in conformity with generally accepted accounting principles. The
statements present fairly and consistently the Company's financial position and
results of operations but necessarily include amounts that are based on
management's best estimates and judgement giving due consideration to
materiality.
The Company`s financial statements are audited by Ernst & Young LLP,
independent auditors who are appointed by the shareholders. Their role is to
perform reviews of the Company's controls and audit the financial statements to
the extent required by generally accepted auditing standards and to render an
independent professional opinion of the results.
The Company relies upon a system of internal accounting controls to ensure
that its responsibility for the integrity of the financial operations and
financial reporting is maintained. An internal audit staff coordinates its
activities with the independent auditors to monitor the effectiveness of the
operating policies, procedures and control systems.
An audit committee appointed by the Board of Directors and composed solely
of nonmanagement directors meets periodically with management, the independent
auditors and the internal auditors to ensure that each is properly discharging
its responsibilities. The independent auditors and the internal auditors have
free access at all times to this committee without management present to
discuss the results of their audits and their opinion of the quality of
financial controls.
Management also recognizes its responsibility for maintaining a strong
ethical climate so that its affairs are conducted according to the highest
standards of personal and corporate conduct. Employees and management are
required to operate in accordance with a code of conduct which is publicized
throughout the Company and its subsidiaries. This code of conduct addresses,
among other things, potential conflicts of interest, compliance with all
domestic and foreign laws, compliance in respect of financial disclosure and
confidentiality of the Company's proprietary information. A systematic program
is maintained to assure that these principles are adhered to.
Paul J. Powers
Chairman of the Board and
Chief Executive Officer
Philip N. Winkelstern
Senior Vice President and
Chief Financial Officer
-55-
<PAGE> 56
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
N/A
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Regarding the directors of the Registrant, reference is made to the
information set forth under the caption "Election of Directors" in the
Company's definitive Proxy Statement filed January, 1995, which information is
incorporated by reference herein.
<TABLE>
The principal executive officers of the Company and their recent business
experience are as follows:
<CAPTION>
Name Office Held Age
---- ----------- ---
<S> <C> <C>
Paul J. Powers . . . . . Chairman of the Board of Directors 59
and Chief Executive Officer
Kipton C. Kumler . . . . President and Chief Operating Officer 54
Philip N. Winkelstern. . Senior Vice President, Chief Financial 64
Officer and Director
Mark G. Kachur . . . . . Senior Vice President-Fluid Purification
Products 51
Robert A. Calcagni . . . Group Vice President-Metal Products 54
John Gilchrist . . . . . Group Vice President-Hydraulic Products 49
William G. Welker. . . . Group Vice President 64
William W. Cushwa. . . . Vice President - Planning, Assistant 57
Treasurer and Director
Bruce C. Wheatley. . . . Vice President - Administration 53
Gilbert M. Manchester. . Vice President and General Counsel 50
Steven J. Hewitt . . . . Controller 45
</TABLE>
None of the officers are related and they are elected from year to year or
until their successors are duly elected and qualified.
All of the Executive Officers have been continuously employed by the
Company for more than five years except Mr. Kipton Kumler, Mr. Mark Kachur and
Mr. Bruce Wheatley.
Mr. Kumler became an employee of Commercial Intertech Corp in January of
1994. Prior to joining Commercial, Mr. Kumler was President and Chief
Executive Officer of the Lexington Consulting Group, Inc., a management
consulting firm. Mr. Kumler has been a member of the Board of Directors of
Commercial Intertech Corp. since 1985.
-56-
<PAGE> 57
PART III - (Continued)
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(Continued)
Mr. Kachur became an employee of Commercial Intertech Corp. in April of
1994. Before joining Commercial, Mr. Kachur's experience includes: President
of Biotage, Inc., a biotechnology company engaged in high and low-pressure
chromatography and Group Vice President of Pall Corporation.
Mr. Wheatley became an employee of Commercial Intertech Corp. in July of
1992. Before joining Commercial, Mr. Wheatley's experience includes: Senior
Vice President of Marketing and Public Affairs of The PIE Mutual Insurance
Company and President of Dix & Eaton/Public Relations.
-57-
<PAGE> 58
PART III - (Continued)
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the information set forth under the caption
"Executive Compensation" appearing in the Company's definitive Proxy Statement
filed January 17, 1995, which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Reference is made to the information contained under the captions
"Security Ownership of Board of Directors and Named Executives" and "Security
Ownership of Certain Beneficial Owners" in the Company's definitive Proxy
Statement filed January 17, 1995, which information is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the information contained under the caption
"Compensation of Directors" in the Company's definitive Proxy Statement filed
January 17, 1995, which information is incorporated herein by reference.
-58-
<PAGE> 59
<TABLE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF THIS REPORT:
(1) Financial Statements:
<CAPTION>
Page Number
In This Report
--------------
<S> <C>
Statements of Consolidated Income - Years
ended October 31, 1994, 1993 and 1992. . . . 24
Consolidated Balance Sheets as of
October 31, 1994 and 1993. . . . . . . . . . 25-26
Statements of Consolidated Shareholders'
Equity - Years ended October 31, 1994, 1993
and 1992 . . . . . . . . . . . . . . . . . . 27
Statements of Consolidated Cash Flows - Years
ended October 31, 1994, 1993 and 1992. . . . 28
Notes to Consolidated Financial Statements. . . 29-53
Report of Independent Auditors. . . . . . . . . 54
Report of Management Concerning the
Responsibilities for Financial Reporting
and Internal Control . . . . . . . . . . . . 55
(2) Financial Statement Schedules -- Years
Ended October 31, 1994, 1993 and 1992:
Schedule VIII-Valuation and Qualifying
Accounts . . . . . . . . . . . . . . . . . . S-1
</TABLE>
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.
-59-
<PAGE> 60
PART IV (Continued)
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(Continued)
(3) Exhibits
3 -- Articles of Incorporation filed as of April 17,
1992 (incorporated by reference to Exhibit I to
the Company's Annual Report on Form 10-K for the
year ended October 31, 1992)
10 -- Material Contracts
Exhibits
(4) Employment Agreement - Philip N. Winkelstern
dated February 15, 1988
(5) Severance Compensation and Consulting
Agreement - Paul J. Powers dated
February 15, 1988
(7) Severance Compensation and Consulting
Agreement - Philip N. Winkelstern dated
February 15, 1988
(10) Severance Compensation Agreement -
William G. Welker dated April 26, 1989
(12) Severance Compensation Agreement -
William W. Cushwa dated September 28, 1989
(13) Severance Compensation Agreement -
Steven J. Hewitt dated September 28, 1989
(14) Severance Compensation Agreement -
Robert A. Calcagni dated
September 28, 1989
(15) Severance Compensation Agreement -
John Gilchrist dated June 25, 1992
(16) Severance Compensation Agreement -
Gilbert M. Manchester dated
September 28, 1989
(17) Severance Compensation Agreement -
Bruce C. Wheatley dated July 20, 1992
<TABLE>
Exhibits 4, 5, 7, 10 and 11-17 for "Material Contracts"
are incorporated by reference to exhibits filed with
Form 10-K for the following years:
<CAPTION>
Exhibits Year Filed
-------- ----------
<S> <C>
4, 5 and 7 October 31, 1988
10 October 31, 1989
12 and 13 October 31, 1990
14 and 15 October 31, 1992
16 and 17 October 31, 1993
</TABLE>
-60-
<PAGE> 61
PART IV - (Continued)
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K
(Continued)
Additional information relating to management contracts
and remunerative plans is contained in Note D - Stock
Options and Awards of the Notes to Consolidated
Financial Statements on page 36.
11 -- Computation of Per Share Earnings
18 -- Employment Agreement - Paul J. Powers dated July 27, 1994.
22 -- Subsidiaries of The Registrant
23 -- Consent of Independent Auditors
27 -- Financial Data Schedule
(B) There were no reports on Form 8-K for the quarter ended
October 31, 1994.
-61-
<PAGE> 62
<TABLE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
COMMERCIAL INTERTECH CORP.
Dated: January 25, 1995
<S> <C>
Paul J. Powers P. N. Winkelstern
Chairman of the Board of Senior Vice President,
Directors, and Principal Principal Financial Officer,
Executive Officer and Director
Steven J. Hewitt
Controller
</TABLE>
<TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated above.
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
Charles B. Cushwa III Director January 25, 1995
William W. Cushwa Director January 25, 1995
John M. Galvin Director January 25, 1995
Richard J. Hill Director January 25, 1995
Neil D. Humphrey Director January 25, 1995
Kipton C. Kumler Director January 25, 1995
Gerald C. McDonough Director January 25, 1995
John Nelson Director January 25, 1995
John F. Peyton Director January 25, 1995
Don E. Tucker Director January 25, 1995
</TABLE>
-62-
<PAGE> 63
<TABLE>
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS
COMMERCIAL INTERTECH CORP. AND SUBSIDIARIES
FOR THE YEARS ENDED OCTOBER 31, 1994, 1993 AND 1992
<CAPTION>
- ----------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------------------------------------------------------------------------------------------
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1994: (A)
Allowance for doubtful accounts. . . $1,764,726 $ 990,026 $ (134,824) $ 2,889,576
========== ========== ============ ===========
1993:
Allowance for doubtful accounts. . . $1,611,566 $ 581,798 $ 428,638 $ 1,764,726
========== ========== ============ ===========
1992:
Allowance for doubtful accounts. . . $1,535,257 $1,175,235 $ 1,098,926 $ 1,611,566
========== ========== ============ ===========
<FN>
(A) Uncollectible accounts written off.
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1994:
Allowance for deferred income (B)
tax assets . . . . . . . . . . . $4,210,000 $7,037,000 $(47,340,000) $58,587,000
========== ========== ============ ===========
1993:
Allowance for deferred income
tax assets . . . . . . . . . . . $2,570,000 $1,640,000 $ 0 $ 4,210,000
========== ========== ============ ===========
1992:
Allowance for deferred income (C)
tax assets . . . . . . . . . . . $ 0 $2,570,000 $ 0 $ 2,570,000
========== ========== ============ ===========
<FN>
(B) Mainly, represents operating loss carryforward acquired with the ORSTA
Hydraulik acquisition.
(C) Of the $2,570,000, $1,723,000 represents the valuation allowance from the
adoption of SFAS No. 109 on November 1, 1991.
</TABLE>
S-1
<PAGE> 1
<TABLE>
Exhibit 11
<CAPTION>
Computation of per share earnings
Year Ended October 31,
1994 1993 1992
---- ---- ----
(in thousands, except per-share data)
<S> <C> <C> <C>
Primary
- -------
Average shares outstanding 15,146 15,012 14,815
Net effect of dilutive stock options -
based on the treasury stock
method using average market price 181 84 48
------- ------ ------
Total 15,327 15,096 14,863
======= ====== ======
Income from continuing operations
before cumulative effect of
change in accounting $19,619 $14,015 $14,045
Preferred stock dividends and adjustments (2,097) (2,109) (4,413)
------- ------- -------
Income applicable to common stock $17,522 $11,906 $ 9,632
======= ====== ======
Per share amount $1.14 $0.79 $0.65
===== ===== =====
Net income $25,081 $14,015 $17,436
Preferred stock dividends and adjustments (2,097) (2,109) (4,413)
------- ------- -------
Income applicable to common stock $22,984 $11,906 $13,023
======= ====== ======
Per share amount $1.50 $0.79 $0.88
===== ===== =====
Fully Diluted
- -------------
Average shares outstanding 15,146 15,012 14,815
Net effect of dilutive stock options -
based on the treasury stock method
using the year end price, if higher
than average market price 266 104 85
Common share equivalents:
Series B Preferred 1,308 1,316 1,322
------- ------ ------
Total 16,720 16,432 16,222
======= ====== ======
Income from continuing operations
before cumulative effect of
changes in accounting $19,619 $14,015 $14,045
Preferred stock (Series C) dividends
and adjustments 0 0 (2,296)
Preferred stock (Series B) dividends
rate adjustment (1,474) (1,512) (1,518)
------- ------- -------
Income applicable to common stock $18,145 $12,503 $10,231
======= ====== ======
Per share amount $1.09 $0.76 $0.63
===== ===== =====
Net income $25,081 $14,015 $17,436
Preferred stock (Series C) dividends
and adjustments 0 0 (2,296)
Preferred stock (Series B) dividends
rate adjustment (1,474) (1,512) (1,518)
------- ------- -------
Income applicable to common stock $23,607 $12,503 $13,622
======= ====== ======
Per share amount $1.41 $0.76 $0.84
===== ===== =====
</TABLE>
-1-
<PAGE> 1
EXHIBIT 18
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made as of July 27, 1994, by and between
COMMERCIAL INTERTECH CORP., an Ohio corporation (the "Company"), and PAUL J.
POWERS ("Executive").
RECITALS
WHEREAS, Executive is and has been serving as Chairman of the Company's
Board of Directors (the "Board") and Chief Executive Officer of the Company and
is an integral part of its management;
WHEREAS, Executive and the Company are parties to an employment agreement
dated February 15, 1988 (the "1988 Employment Agreement") which provides for an
original five year term with annual one-year renewals thereafter unless either
party gives to the other one year's advance notice of his or its intention not
to extend the term of the 1988 Employment Agreement;
WHEREAS, Executive will attain age 65 in February of 2000 and presently
intends to continue in the Company's employ until that time, to retire from his
full-time employment with the Company on February 28, 2000, and the Company
wishes to assure itself of Executive's continued full-time employment through
the Executive's anticipated retirement date;
WHEREAS, the Company wishes to ensure that Executive will not compete with
the Company for a period of two years after the last date on which he is either
an employee of the Company or a member of the Board; and
WHEREAS, Executive is prepared to enter into this employment agreement
with the Company and to give the Company assurances it desires;
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements herein set forth, the parties hereto have agreed and do hereby
mutually agree as follows:
1. Employment, Contract Period. During the period specified in this
Section 1, the Company shall employ Executive, and Executive shall serve the
Company, on the terms and subject to the conditions set forth herein. The term
of Executive's employment hereunder shall commence as of July 27, 1994 (the
"Effective Date"), and, subject to prior termination as provided in Section 6
hereof, shall continue through February 28, 2000. The term of Executive's
employment hereunder is sometimes hereinafter referred to as the "Contract
Period."
-1-
<PAGE> 2
2. Responsibility. At all times during the Contract Period, Executive
shall serve the Company as the Company's Chairman and Chief Executive Officer
and shall (a) devote his full business time and effort exclusively to the
performance of duties as assigned to him by the Board that are normally
incident to the office of Chief Executive Officer, and (b) use his best efforts
to promote the interests of the Company and its affiliates.
3. Remuneration. At all times during the Contract Period, the Company
shall pay to Executive compensation as provided in this Section 3.
(a) Base Salary. The Corporation shall pay Executive
a base salary at an annual rate of not less than $465,000
paid on a monthly basis. The annual rate of base salary may
be increased at the discretion of the Compensation Committee
of the Board (the "Committee"). If increased, the annual
rate of base salary may not thereafter be decreased during
the term of this Agreement.
(b) Annual Incentive Compensation. The Corporation may
pay Executive an annual cash bonus under the provisions of
the Company's Management Incentive Plan or any successor
plans, but only if and when authorized by the Committee.
(c) Performance Shares. If, while Executive remains
employed pursuant to this Agreement, the Company, in its
fiscal year ending October 31, 1995, makes grants of
Performance Shares under the Company's Performance Share
Plan (with respect to the three-year performance period
ending on October 31, 1997), the Company shall then grant
not fewer than 28,500 of such Performance Shares to
Executive. If, while Executive remains employed pursuant to
this Agreement, the Company, in its fiscal year ending
October 31, 1997, makes grants of Performance Shares under
the Company's Performance Share Plan (with respect to the
three-year performance period ending on October 31, 1999),
the Company shall then grant not fewer than 28,500 of such
Performance Shares to Executive.
(d) Restricted Shares. The Company shall grant to
Executive, effective as of the Effective Date, 25,000
restricted shares of the Company's Common Stock pursuant to
the Company's Stock Option and Award Plan of 1993 subject to
the condition that Executive shall forfeit the shares unless
Executive actually remains in the active employ of the
Company through February 28, 2000.
-2-
<PAGE> 3
(e) Other Compensation. Executive shall be eligible
to participate in other incentive, stock option, profit-
sharing, and similar plans maintained by the Company for the
benefit of its executives.
(f) Deferral. The Committee may, in its discretion,
give Executive the opportunity to defer a portion of his
cash compensation.
4. Employee Benefits. Executive shall be included, to the extent
eligible thereunder with respect to the requirements applicable to all
employees eligible thereunder, (at the expense of the Company, if appropriate)
under any and all existing plans (and any plans that later may be adopted)
providing benefits for the Company's employees. These plans, include, but are
not limited to:
(a) The Company's group life insurance plan, under
which Executive shall be eligible for life insurance equal
to four times his then-current base salary as defined in
Section 3(a) or the Group Replacement Insurance Plan, at
Executive's option.
(b) The Company's hospitalization and medical plans, as
provided to all Company employees.
(c) The Company's long-term disability plan, as
provided to all Company employees.
(d) Any pension, thrift plans, profit-sharing plans,
stock purchase plans, and any and all other similar or
comparable benefits.
(e) The SERP and any other supplemental executive
retirement plan or excess benefit plan.
Executive shall also be provided with a suitable automobile leased by the
Company under the terms of the Company's executive automobile program, paid
vacation of at least four weeks per year, officers' and directors' liability
insurance coverage in an amount reasonably available, and estate planning
counsel.
5. Amendment of SERP. The Company and Executive shall take such steps as
are necessary to amend the supplemental executive retirement plan applicable to
Executive (the "SERP") so that:
(a) the Executive's rights under the SERP will be
scheduled to fully vest and to be fully funded by the
Company in a rabbi trust if and when Executive attains age
65 while employed by the Company;
-3-
<PAGE> 4
(b) if Executive dies after attaining age 62 but before
attaining age 65, the Executive's rights under the SERP will
be vested and funded by the Company in the same manner as if
he had attained age 65 while employed by the Company;
(c) if Executive dies before attaining age 62, the
surviving spouse benefit under the SERP shall be calculated
as though the SERP had been scheduled to fully vest when
Executive attained age 62 rather than when he attained age
65 and any reduction attributable to Executive's death
before the date of full vesting shall be made on that basis;
and
(d) the aggregate of payments to Executive under the
SERP and under the Company's qualified retirement plan will
equal 50 percent of the average of the high three of
Executive's last 10 years of annual compensation (base
salary plus annual incentive payments).
6. Termination.
(a) On February 28, 2000. If not earlier terminated,
Executive's employment hereunder shall terminate at the
close of business on February 28, 2000.
(b) Death or Disability. Executive's employment
hereunder will terminate immediately upon Executive's death.
The Company may terminate Executive's employment hereunder
immediately upon giving notice of termination if Executive
is disabled, by reason of physical or mental impairment, to
such an extent that he has been unable to substantially
perform his duties under this Agreement for an aggregate of
180 days (whether business or non-business days and whether
or not consecutive) during any period of twelve consecutive
calendar months.
(c) For "Cause." The Company may terminate Executive's
employment under this Agreement for "Cause" only on the
basis of:
(i) Executive's willful and continued failure
substantially to perform his duties with the Company,
after a written demand for substantial performance is
delivered to Executive by the Board, which written
demand specifically identifies the manner in which the
Board believes Executive has not substantially performed
his duties, or
-4-
<PAGE> 5
(ii) Executive's willful engagement in conduct
materially and demonstrably injurious to the Company.
For purposes of this Agreement, no act or failure to act on Executive's part
shall be considered "willful" unless done, or omitted to be done, by Executive
not in good faith and without reasonable belief that his action or omission was
in the best interest of the Company. Executive shall not be deemed to have
been terminated for Cause unless and until there shall have been delivered to
Executive a copy of a resolution duly adopted by the affirmative vote of not
less than two-thirds of the entire membership of the Board at a meeting of the
Board called and held for that purpose, finding that in the good faith opinion
of the Board, Executive was guilty of conduct set forth in clause (i) or clause
(ii) of this subsection 6(c) and specifying the particulars thereof in detail.
No termination of Executive's employment by the Company for "Cause" shall be
effective unless and until it is communicated by the Company to Executive by a
written notice that refers to either or both of clause (i) and clause (ii) of
this subsection 6(c) as the specific termination provision or provisions relied
upon by the Company and that sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of Executive's
employment under the provision or provisions so indicated.
(d) Without "Cause". The Company may terminate
Executive's employment under this Agreement without "Cause"
at any time, effective at such time as the Board may specify
in a motion duly adopted by the affirmative vote of two-
thirds of the members of the Board then in office.
7. Compensation and Benefits Following Termination Without "Cause". If
the Company terminates Executive's employment under this Agreement without
"Cause:"
(a) the Company shall pay to Executive, in immediately
available funds, within 10 days of the date of termination
of Executive's employment, a lump sum amount that:
(i) if the termination occurs on or before
September 30, 1997, is equal to the sum of (A) 30
months' of base salary at the highest rate paid to
Executive before the termination, plus (B) two and
one-half times the average of the annual cash bonuses,
if any, received by Executive under the provisions
of the Company's Management Incentive Plan or any
successor plan with respect to each of the two most
recent fiscal years of the Company ended before the
termination, or
-5-
<PAGE> 6
(ii) if the termination occurs after
September 30, 1997, is equal to the sum otherwise
determined under clause (a)(i), above, multiplied
by a fraction, the numerator of which is the number
of calendar months all or any part of which falls
within the period beginning on the date of the
termination and ending on February 28, 2000 and the
denominator of which is 30;
(b) the restrictions on any restricted shares held
by Executive immediately before the termination of his
employment shall terminate simultaneously with the
termination of his employment;
(c) any options to purchase shares in the Company
held by Executive immediately before the termination of
his employment that were not otherwise exercisable by
Executive shall be exercisable by Executive at any time
during the 90 day period beginning immediately after the
date of termination of his employment; and
(d) except for the post-termination health benefits
referred to in Section 10 of this Agreement, the Company
shall not be obligated to pay any compensation, benefits,
or perquisites to Executive by reason of this Agreement
after the termination of his employment.
If Executive receives any payments under this Agreement as a result of
termination of his employment following a termination without Cause, those
payments shall be in lieu of any and all other claims or rights that Executive
may have for severance, separation, and/or salary continuation pay upon that
termination of his employment. Nothing in this Section 7 shall diminish
Executive's right to receive any payment or to enjoy any benefit required to be
paid or provided by the Company to Executive under any plan, practice, or
commitment of the Company that would have continued after the termination of
Executive's employment under this Agreement if Executive's employment with the
Company had continued through February 28, 2000 and then terminated.
8. Compensation and Benefits Following Termination on Account of
Disability. If the Company terminates Executive's employment under this
subsection 6(c) of this Agreement by reason of Executive's disability:
(a) the Company shall pay and provide to Executive,
not later than 75 days after the end of the fiscal year
in which the termination occurs, that portion of the total
bonus, if any, to which he would have been entitled had he
continued to be employed under this Agreement through the
end of the fiscal year in which the termination occurs,
equal to that total bonus multiplied by a fraction, the
numerator of which is the number of days in the fiscal year
ending on or before the date of Executive's termination and
the denominator of which is 365;
-6-
<PAGE> 7
(b) the restrictions on any restricted share held
by Executive immediately before the termination of his
employment shall terminate simultaneously with the
termination of his employment; and
(c) except for the post-termination health benefits
referred to in Section 10 of this Agreement, the Company
shall not be obligated to pay any compensation, benefits,
or perquisites to Executive by reason of this Agreement
after the termination of his employment.
Nothing in this Section 8 shall diminish Executive's right to receive any
payment or to enjoy any benefit required to be paid or provided by the Company
to Executive under any plan, practice, or commitment of the Company that would
have continued after the termination of Executive's employment under this
Agreement if Executive's employment with the Company had continued through
February 28, 2000 and then terminated.
9. Miscellaneous Services following Termination of Employment. Following
termination of his full-time employment under this Agreement and for so long as
Executive remains a member of the Board, Executive shall make himself available
at all reasonable times for consultation by and with the Company's officers and
directors. If Executive is called upon to render services of this nature, he
shall, in consideration therefor and as a condition thereto, receive reasonable
compensation for the services rendered and reimbursement for any travel or
other out-of-pocket expenses incurred in connection therewith.
10. Post-Retirement Health Benefits. If Executive remains in the employ
of the Company through February 28, 2000 or is terminated by the Company before
that date either on account of Executive's disability or without cause, the
Company shall provide to Executive, for so long as he lives and thereafter, if
she survives him, to his wife, Barbara, for her life, health benefits,
including hospitalization and medical insurance, equal to the health benefits
from time to time provided to active executive employees of the Company.
11. Benefit. This Agreement shall inure to the benefit
of and be enforceable by Executive's personal and legal representatives,
executors, administrators, successors, heirs, distributees, devisees, and
legatees. If Executive should die while any amounts are still payable to
Executive hereunder, all such amounts, unless otherwise provided herein, shall
be paid in accordance with the terms of this Agreement to Executive's devisee,
legatee, or other designee or, if there be no such designee, to Executive's
estate.
-7-
<PAGE> 8
12. Successor to the Company. The Company shall require any successor or
assign (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all the business and/or assets of the
Company, by agreement in form and substance satisfactory to Executive,
expressly, absolutely and unconditionally to assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession or assignment had taken place.
13. Confidential Information and Noncompetition. Executive agrees and
acknowledges Executive's talents, skills, and experience are unique, and that a
Company has invested considerable efforts and money in developing and compiling
customer lists, supplier lists, and trade and market information, in developing
business techniques and practices, and in maintaining valuable market
relationships; that such items and all other information that relates to the
business of the Company, the business of any customer or supplier of the
Company, or the business of any person, firm, or corporation that consults with
or is affiliated with the Company, constitute for purposes hereof the
"Confidential Information" of the Company; and that the Confidential
Information is valuable property of the Company and is vital to the operation
and continuation of the Company's business. Confidential Information shall not
include information so generally known as to be part of the public domain.
Executive acknowledges that the Company has and will disclose Confidential
Information to Executive and afford him access to Confidential Information in
connection with his employment with the Company. Executive agrees that he
shall use such Confidential Information solely for the benefit of the Company.
Executive further acknowledges that the grant of 25,000 restricted shares
referred to in Section 3(d) is being made by the Company in order to induce
Executive to agree to the restrictions contained in this Section 13 and that
Executive has received valuable consideration commensurate with those
restrictions. Accordingly, Executive agrees and acknowledges that:
(a) Except as required in the performance of his duties
as an employee of the Company, Executive shall not at any
time, either directly or indirectly, use, divulge, disclose,
or communicate to any person, firm, or corporation in any
manner whatsoever any Confidential Information.
-8-
<PAGE> 9
(b) Executive has been given access to the Company's
Confidential Information solely for purposes relating to his
employment by the Company. Executive shall have no rights
in such Confidential Information or any letters patent,
copyrights, or other proprietary rights relating thereto,
and Executive hereby assigns to the Company any supplemental
or additional information relating to the Confidential
Information acquired by Executive, whether solely or in
collaboration with others, that relates in any manner to
either the subject of Executive's work for the Company or
any business of the Company during the Contract Period
("Improvements"). Executive will disclose promptly in
writing to the Company all such Improvements or information
supplemental or related thereto, and such Improvements shall
be treared for all purposes as Confidential Information
hereunder.
(c) During the Contract Period and thereafter, at the
request of the Company and without expense to Executive,
Executive shall cooperate in the procurement of any patent,
copyright, trademark, or trade name protection in the
Company's name that may be necessary or desirable to vest,
or to perfect the record of, title to the Confidential
Information in the Company. Executive agrees to execute all
documents and do all things necessary or desirable in any
controversy or otherwise to aid Company in obtaining and
enforcing proper protection of its Confidential Information.
(d) During the period commencing on the Effective Date
and ending on the second anniversary of the first date on
which Executive is neither employed by the Company nor a
member of the Board (the "Restriction Period"), Executive
shall not, directly or indirectly, own, operate, have any
other than a minor financial interest in, be employed by,
or in any other manner take part in or consult with any
business that is the same as, similar to, or competitive
with the business of the Company as such business is
conducted during the Contract Period. During the
Restriction Period, Executive shall not solicit (other than
for the benefit of the Company during the Contract Period)
any sale or purchase to or from any person who is or was a
customer or supplier of the Company during the term of
Executive's employment by the Company, either as an
employee, agent, consultant, licensee, independent
contractor, owner, or otherwise.
(e) At any time upon request of the Company and upon
termination of his employment by the Company, Executive
shall deliver to the Company, and shall not retain for his
own or another's use, any and all lists, information, notes,
memoranda, documents, devices, and any other material, and
all copies thereof, relating to Executive's work or the
products or business of the Company of which Executive had
knowledge.
-9-
<PAGE> 10
(f) If any provision of this Section 13 is determined
by any court of competent jurisdiction to be unenforceable
by reason of its extending for too great a period of time or
over too great a geographical area, it shall be interpreted
to extend only over the maximum period of time for which it
may be enforceable, or over the maximum geographical area
to which it may be enforceable, or both; and such partial
unenforceability shall not affect any other provision of
this Agreement. Executive acknowledges that, in light of
the proprietary interest of the Company in the Confidential
Information, the restrictions set forth herein are
reasonable and that the remedies at law for the breach of
any provision of this Section 13 are inadequate.
Accordingly, in the event of any breach, or reasonable
belief as to the existence or imminence of a breach, of the
provisions hereof, the Company shall be entitled to
injunctive relief to enjoin the breach (in addition to any
other legal and equitable remedies that the Company may
have, including an equitable accounting of gain to Executive
resulting from the breach), together with all costs and
expenses, including reasonable attorney's fees, related to
the enforcement by the Company of its rights hereunder.
14. Anti-dilution. If, at any time after the Effective Date and before
the date on which any grant of Performance Shares is to be made to Executive
pursuant to Section 3(c), above, there occurs any stock dividend, stock split,
or share combination of the shares of Common Stock of the Company or any
reclassification, merger, consolidation, other form of business combination,
liquidation, or dissolution involving the Company or any spin-off or other
distribution to shareholders of the Company (other than normal cash dividends),
the number of shares of the Company's Common Stock to be granted as Performance
Shares shall be appropriately adjusted to the extent necessary and in such
manner that the benefit to Executive of the grant of those Performance Shares
is maintained substantially as before the occurrence of the event.
15. Validity. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
16. Counterparts. This Agreement may be executed in one
or more counterparts, each of which shall be deemed to be an original but all
of which together will constitute one and the same instrument.
17. Legal Fees and Expenses. The Company shall pay all legal fees and
expenses that Executive may incur as a result of the Company's contesting the
validity, enforceability, or Executive's Interpretation of, or determinations
under, this Agreement.
-10-
<PAGE> 11
18. Notices. All notices under this Agreement shall be in writing and
shall be deemed effective when delivered in person, or three days after deposit
thereof in the official U.S. mails, postage prepaid, for delivery as registered
or certified mail, addressed as follows:
If to the Company:
Commercial Intertech Corp.
Attention: General Counsel
1775 Logan Avenue
Youngstown, Ohio 44501
If to Executive:
Paul J. Powers
5469 Bay Hill Drive
Canfield, Ohio 44406
In lieu of personal notice or notice by deposit in the official U.S. mails, a
party may give notice by confirmed telegram or fax. Either party may change
the address to which notice to that party may be mailed by notifying the other
party of the change in the manner contemplated in this section.
19. Effect on Existing Severance Compensation and Consulting Agreement.
Executive and the Company are parties to a Severance Compensation and
Consulting Agreement dated as of February 15, 1988, pursuant to which Executive
may become entitled to severance and consulting compensation if Executive's
employment is terminated under certain circumstances following a Change in
Control, as defined in that agreement (the "Change in Control Agreement").
Executive and the Company intend that if a Change in Control, as defined in the
Change in Control Agreement, occurs and thereafter Executive receives any
payments pursuant to Section 7 of this Agreement (any "Section 7 Payments"),
the entire amount of such Section 7 Payments will be treated as "actual damages
paid to the Executive by the Company as a result of the Company's breach of an
employment contract with the Executive" within the meaning of that phrase in
Section 4(b)(i) of the Change in Control Agreement, with the result that the
payments otherwise due under that Section 4(b)(i) will be reduced by the full
amount of the Section 7 Payments. In addition, if the amount of the Section 7
Payments exceeds the amount otherwise due under Section 4(b)(i) of the Change
in Control Agreement, any amount otherwise payable to Executive under Section
5(b) of the change in Control Agreement shall be reduced by the amount of that
excess. The provisions of this Section 18 shall prevail over any inconsistent
language in the Change in Control Agreement and, to the extent necessary to be
effective, shall be deemed to be an amendment to the Change in Control
Agreement.
-11-
<PAGE> 12
20. Entire Agreement. This Agreement amends and restates the Employment
Agreement between Executive and the Company dated as of February 15, 1988.
This Agreement expresses the entire agreement of the parties with respect to
the subject matter hereof, and all promises, representations, understandings,
arrangements, and prior agreements are merged herein and superseded hereby. No
person, other than pursuant to a resolution of the Board, shall have any
authority on behalf of the Company to agree to modify or change this Agreement
or anything in reference thereto, and any such modification or change must be
in writing and signed by both parties.
21. Governing Law. This Agreement has been entered into in, and is
intended to be performed primarily within, the State of Ohio, and shall be
construed, interpreted, and governed in accordance with the laws of the State
of Ohio.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
EXECUTIVE COMMERCIAL INTERTECH CORP.
/s/Paul J. Powers By: /s/Bruce C. Wheatley
---------------------- -----------------------------
Paul J. Powers Bruce C. Wheatley
December 14, 1994
----------------------------
<PAGE> 1
<TABLE>
Exhibit 22
SUBSIDIARIES OF THE REGISTRANT
Listed below, as of January 3, 1995, are the significant subsidiaries
of the Company and their jurisdictions of organization. All of such
subsidiaries are either directly or indirectly wholly-owned by the Company.
Other subsidiaries of the Company have been omitted because, considered in the
aggregates they would not constitute a significant subsidiary.
<CAPTION>
Jurisdiction of
Name of Subsidiary Organization
------------------ ---------------
<S> <C>
100% Owned
- ----------
Cuno Incorporated Connecticut
Orange County Metal Works California
Cylinder City, Inc. Minnesota
Commercial Hydraulics Pty., Ltd. Australia
Cuno Pacific, Pty., Ltd. Australia
Commercial Intertech do Brasil, Ltda. Brazil
Commercial Intertech Limited England
Astron S.A.R.L. France
Cuno Europe S.A. France
Sachsenhydraulik Chemnitz GmbH Germany
Cuno KK Japan
Commercial Intertech S.A. Luxembourg
Cuno Filtration Asia Pte. Ltd. Singapore
Other: (see Note A)
- -----
Hydraulik Rochlitz GmbH Germany
Commercial Intertech GmbH Germany
<FN>
Note A Commercial Intertech GmbH is 100% owned by Hydraulik Rochlitz GmbH,
- ------ which is 100% owned by Sachsenhydraulik Chemnitz GmbH.
</TABLE>
-1-
<PAGE> 1
<TABLE>
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference of our report dated December
9, 1994, with respect to the consolidated financial statements and schedule of
Commercial Intertech Corp. and subsidiaries included in this Annual Report
(Form 10-K) for the year ended October 31, 1994, in the Prospectuses contained
in the following Registration Statements:
<CAPTION>
Registration Filing
Number Description Date
- ------------ ----------- ------
<S> <C> <C>
2-66710 Savings and Stock Purchase Plan for
Employees of Commercial Shearing, Inc.
- Form S-8 Registration Statement June 23, 1986
2-62512 Commercial Shearing, Inc. Stock Option
and Award Plan of 1985 - Forms S-8 and
S-3 Registration Statement April 24, 1986
33-25795 Non-Qualified Stock Purchase Plan of
Commercial Intertech Corp. - Form S-8
Registration Statement Nov. 29, 1988
33-29980 Commercial Intertech Corp. Stock Option
and Award Plan of 1989 including Pre-
Effective Amendment No. 1 to Form S-8
Registration Statement filed
July 24, 1989 July 10, 1989
33-43907 Commercial Intertech Corp. Retirement
Stock Ownership and Savings Plan -
Form S-8 Registration Statement Nov. 13, 1991
33-52443 Commercial Intertech Corp. Stock Option
and Award Plan of 1993 - Form S-8
Registration Statement Feb. 28, 1994
<FN>
/s/ Ernst & Young LLP
Cleveland, Ohio
January 23, 1995
</TABLE>
-1-
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1994
<PERIOD-START> NOV-01-1993
<PERIOD-END> OCT-31-1994
<CASH> 52,666
<SECURITIES> 0
<RECEIVABLES> 97,102
<ALLOWANCES> 2,890
<INVENTORY> 62,320
<CURRENT-ASSETS> 235,366
<PP&E> 253,890
<DEPRECIATION> 128,453
<TOTAL-ASSETS> 422,978
<CURRENT-LIABILITIES> 134,966
<BONDS> 77,020
<COMMON> 15,199
0
24,631
<OTHER-SE> 113,930
<TOTAL-LIABILITY-AND-EQUITY> 422,978
<SALES> 516,931
<TOTAL-REVENUES> 516,931
<CGS> 359,461
<TOTAL-COSTS> 359,461
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 990
<INTEREST-EXPENSE> 4,952
<INCOME-PRETAX> 27,803
<INCOME-TAX> 8,184
<INCOME-CONTINUING> 19,619
<DISCONTINUED> 5,462
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,081
<EPS-PRIMARY> 1.50
<EPS-DILUTED> 1.41
</TABLE>
