<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For period ended January 31, 1999
Commission file number 1-10697
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 44501-0239
- ------------------------------------------ -------------------
(Address of principal executive offices) (Zip Code)
(330) 746-8011
--------------------------------------------------
Registrant's telephone number, including area code
Not Applicable
--------------
(Former name, former address and former fiscal year, if changed since last
report)
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 periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date.
Common Stock, $1 Par Value-- 14,443,879 shares as of March 8, 1999
<PAGE> 2
INDEX
COMMERCIAL INTERTECH CORP.
<TABLE>
<CAPTION>
Page No.
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Statements of Income (unaudited)
- Three Months Ended January 31, 1999 and 1998 ............................... 3
Consolidated Condensed Balance Sheets (unaudited)
- January 31, 1999 and October 31, 1998........................................ 4
Statements of Consolidated Condensed Cash Flows (unaudited)
- Three Months Ended January 31, 1999 and 1998................................. 5
Notes to Consolidated Condensed Financial Statements (unaudited)
January 31, 1999............................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................... 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................... 16
SIGNATURE..................................................................................... 17
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
COMMERCIAL INTERTECH CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (unaudited)
<TABLE>
<CAPTION>
Three Months Ended
(Thousands of dollars, except per share data) January 31,
---------------------
1999 1998
-------- ------
<S> <C> <C>
Net sales ..................................... $ 120,290 $ 128,530
Less costs and expenses:
Cost of products sold ...................... 91,648 97,804
Selling, administrative and general expenses 21,726 21,753
Nonrecurring costs ......................... 5,392 0
--------- ---------
118,766 119,557
--------- ---------
Operating income .............................. 1,524 8,973
Nonoperating income (expense):
Interest income ............................ 356 154
Interest expense ........................... (2,407) (2,533)
Foreign currency (losses) .................. (779) (175)
Other ...................................... 259 (47)
--------- ---------
(2,571) (2,601)
--------- ---------
Income (loss) before income taxes ............. (1,047) 6,372
Income taxes (benefit) ........................ (335) 2,464
--------- ---------
Net income (loss) ............................. $ (712) $ 3,908
========= =========
Preferred stock dividends ..................... (458) (465)
--------- ---------
Net income (loss) applicable to common stock .. $ (1,170) $ 3,443
========= =========
Earnings per share of common stock:
Net income (loss):
Basic ................................. $ (0.08) $ 0.25
Diluted ............................... $ (0.08) $ 0.22
Dividends per common share .................... $ 0.150 $ 0.135
</TABLE>
See notes to consolidated condensed financial statements.
3
<PAGE> 4
<TABLE>
<CAPTION>
COMMERCIAL INTERTECH CORP. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS (unaudited)
(Thousands of dollars) January 31, October 31,
1999 1998
----------- ------------
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents ............................................. $ 18,329 $ 35,851
Accounts receivable, less allowance (1999-$2,438; 1998- $2,703) ...... 75,610 87,197
Inventories ........................................................... 67,865 65,992
Deferred income tax benefits .......................................... 15,115 15,172
Prepaid expenses and other current assets ............................. 4,422 3,891
--------- ---------
TOTAL CURRENT ASSETS 181,341 208,103
PROPERTY, PLANT AND EQUIPMENT ............................................ 238,928 232,804
Less allowance for depreciation ....................................... 125,998 124,940
--------- ---------
112,930 107,864
NONCURRENT ASSETS:
Intangible assets ..................................................... 41,597 42,242
Pension assets ........................................................ 47,615 47,052
Other assets .......................................................... 4,209 3,964
--------- ---------
TOTAL NONCURRENT ASSETS 93,421 93,258
--------- ---------
TOTAL ASSETS $ 387,692 $ 409,225
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Bank loans ............................................................ $ 3,395 $ 499
Accounts payable ...................................................... 43,866 50,896
Accrued expenses ...................................................... 49,526 55,783
Accrued income taxes .................................................. 8,476 9,885
Dividends payable ..................................................... 2,808 2,759
Current portion of long-term debt ..................................... 3,212 3,137
--------- ---------
TOTAL CURRENT LIABILITIES 111,283 122,959
NONCURRENT LIABILITIES:
Long-term debt ........................................................ 102,782 108,533
Deferred income taxes ................................................. 21,944 22,111
Postretirement benefits ............................................... 26,750 25,210
--------- ---------
TOTAL NONCURRENT LIABILITIES 151,476 155,854
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: 1999 - 926,070 shares; 1998 - 926,070 shares ........... 21,531 21,531
Common stock, $1 par value:
Authorized: 30,000,000 shares
Issued: 1999 - 14,416,883 shares (excluding 1,940,164 in treasury);
1998 - 14,270,134 shares (excluding 1,937,689 in treasury) ...... 14,417 14,270
Capital surplus ....................................................... 5,365 5,749
Retained earnings ..................................................... 106,136 109,289
Deferred compensation ................................................. (13,822) (15,079)
Accumulated other comprehensive income:
Translation adjustment ........................................... (8,694) (5,348)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY . 124,933 130,412
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ...................... $ 387,692 $ 409,225
========= =========
</TABLE>
See notes to consolidated condensed financial statements.
4
<PAGE> 5
COMMERCIAL INTERTECH CORP. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CONDENSED CASH FLOWS (unaudited)
<TABLE>
<CAPTION>
Three Months Ended
(Thousands of dollars) January 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) .............................................. $ (712) $ 3,908
Adjustments to reconcile net income to net cash (used)
by operating activities:
Provision for depreciation and amortization .............. 4,197 3,953
Amortization of deferred credit .......................... 0 (361)
Nonrecurring costs, net of income taxes .................. 3,297 0
Postretirement benefit ................................... (701) 121
Pension plan credits ..................................... (720) (810)
Change in deferred income taxes .......................... 1,853 565
Change in current assets and liabilities:
Decrease (increase) in accounts receivable ............ 10,148 (1,167)
(Increase) in inventories ............................. (3,538) (2,481)
(Increase) in prepaid expenses and other current assets (768) (121)
(Decrease) in accounts payable and accrued expenses ... (12,993) (15,422)
(Decrease) in accrued income taxes .................... (924) (457)
-------- --------
Net cash (used) by operating activities ........ (861) (12,272)
INVESTING ACTIVITIES:
Proceeds from sale of fixed assets ............................. 2 18
Capital expenditures ........................................... (10,207) (3,971)
-------- --------
Net cash (used) by investing activities ........ (10,205) (3,953)
FINANCING ACTIVITIES:
Proceeds from long-term debt ................................... 10,300 3,824
Principal payments on long-term debt ........................... (15,821) (3,639)
Net borrowings under bank loan agreements ...................... 3,189 3,930
Proceeds from reserve contracts ................................ 90 325
Conversion of other assets ..................................... (1,413) (225)
Dividends paid ................................................. (2,572) (2,442)
-------- --------
Net cash (used) provided by financing activities (6,227) 1,773
Effect of exchange rate changes on cash ........................... (229) (1,007)
-------- --------
Net (decrease) in cash and cash equivalents ....................... (17,522) (15,459)
Cash and cash equivalents at beginning of period .................. 35,851 27,630
-------- --------
Cash and cash equivalents at end of period ........................ $ 18,329 $ 12,171
======== ========
Supplemental disclosures:
Cash paid during the period for:
Interest .................................................... $ 3,834 $ 3,356
Income taxes ................................................ 632 2,355
</TABLE>
See notes to consolidated condensed financial statements.
5
<PAGE> 6
COMMERCIAL INTERTECH CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (unaudited)
January 31, 1999
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial
statements of Commercial Intertech Corp. and subsidiaries (the "Company" or
"Commercial Intertech") have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. For further information,
refer to the consolidated financial statements and footnotes thereto included in
Commercial Intertech Corp. and Subsidiaries' annual report on Form 10-K for the
year ended October 31, 1998. Operating results for the three-month period ended
January 31, 1999 are not necessarily indicative of the results that may be
expected for the year ended October 31, 1999.
NOTE B - INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
January 31, October 31,
---------- ----------
1999 1998
<S> <C> <C>
Raw materials ................ $ 20,760 $ 23,341
Work-in-process .............. 33,396 31,460
Finished goods ............... 13,709 11,191
---------- ----------
$ 67,865 $ 65,992
========== ==========
</TABLE>
6
<PAGE> 7
NOTE C - SEGMENT REPORTING
The Company is engaged in the design, manufacture and sale of
products in two segments. The Hydraulic Systems group consists of gear pumps and
motors, control valves and telescopic cylinders which are sold primarily to
original equipment manufacturers and to independent distributors. The Building
Systems and Metal Products group consists of two operating units: Metal
Stampings which produces custom and standard metal stampings serving a variety
of customers in the United States and Building Systems which produces single and
multi-story buildings that serve many industries throughout Europe.
<TABLE>
<CAPTION>
Three Months Ended
January 31,
---------------------------
1999 1998
---- ----
(in thousands)
<S> <C> <C>
Hydraulic Systems
Net sales ................................... $ 79,927 $ 89,723
Operating income ............................ 3,249 5,542
Percent to sales ....................... 4.1% 6.2%
Building Systems and Metal Products
Net sales ................................... $ 40,363 $ 38,807
Operating income ............................ 3,667 3,431
Percent to sales ....................... 9.1% 8.8%
Nonrecurring costs (see Note G) .................. $ (5,392) $ 0
TOTAL
Net sales ................................... $ 120,290 $ 128,530
Operating income ............................ 1,524 8,973
Percent to sales ....................... 1.3% 7.0%
</TABLE>
7
<PAGE> 8
NOTE D - PER-SHARE DATA
The computation of basic and diluted earnings per share is shown
below:
<TABLE>
<CAPTION>
Three Months Ended
January 31,
----------------------------
1999 1998
(in thousands, except per share data)
<S> <C> <C>
Numerator:
Net income (loss) .................................................... $ (712) $ 3,908
Series B preferred stock dividends ................................... (458) (465)
------------ ------------
Numerator for basic earnings per share - net income (loss)
applicable to common stock ..................................... (1,170) 3,443
Effect of dilutive securities - Series B preferred stock dividends and
adjustments resulting from assumed conversion .................. 0 384
------------ ------------
Numerator for diluted earnings per share - net income (loss)
applicable to common stock after assumed conversion ............ $ (1,170) $ 3,827
============ ============
Denominator:
Denominator for basic earnings per share - weighted average shares
outstanding .................................................... 13,953 13,743
Effect of dilutive securities:
Series B convertible preferred stock ........................... 0 2,849
Assumed issuance of stock under stock option and award plans
based on treasury stock method ............................ 0 511
------------ ------------
Denominator for diluted earnings per share - weighted average
shares outstanding and impact of dilutive securities ........... 13,953 17,103
============ ============
Basic earnings (loss) per share ...................................... $ (0.08) $ 0.25
============ ============
Diluted earnings (loss) per share .................................... $ (0.08) $ 0.22
============ ============
</TABLE>
The impact of the assumed conversion of Series B convertible
preferred stock and the assumed issuance of stock under stock option and award
plans was not included in the computation of diluted earnings per share for the
three months ended January 31, 1999 because the impact of such potential common
shares was not dilutive.
NOTE E - SHAREHOLDERS' EQUITY
On February 10, 1999, the Company reported that the Board of
Directors has authorized the repurchase of up to 1,000,000 shares of Commercial
Intertech common stock to be used for employee benefit plans and other corporate
purposes. Purchases will be made from time to time in the open market and in
private transactions at prevailing prices. No time limit was placed on the
duration of the repurchase program. As of March 1, 1999, the Company has not
repurchased any of its common shares.
8
<PAGE> 9
NOTE F - COMPREHENSIVE INCOME
As of November 1, 1998, the Company adopted Financial Accounting
Standards Board Statement No. 130, "Reporting Comprehensive Income." The
adoption of this statement had no impact on the Company's financial condition or
results of operations. Statement No. 130 established standards for reporting
total nonowner changes in shareholders' equity. For the Company, total nonowner
changes in shareholders' equity include net income and the change in the
cumulative foreign exchange translation adjustment component of shareholders'
equity. Nonowner changes in shareholders' equity for the three months ended
January 31, 1999 and 1998 amount to reductions of $4,058,000 and $172,000,
respectively.
NOTE G - NONRECURRING COSTS
During the quarter ended January 31, 1999, the Company recorded a
nonrecurring charge of $5,392,000 ($3,297,000 after taxes) to recognize costs
incurred in connection with initiatives to reorganize certain areas of the
business and reduce operating costs. The nonrecurring costs consist of: (i)
charges totaling $5,074,000 in association with a voluntary early retirement
program and the separation of fixed support personnel at certain locations;
these actions will reduce the Company's worldwide employment by a total of 70
employees, and (ii) charges totaling $318,000 in connection with the
consolidation of certain operating facilities in the United States and Europe.
None of the recorded costs relate to the write-down or write-off of inventory or
fixed assets of the affected businesses. Most of the indicated actions were
completed in the first quarter of fiscal 1999 with the remainder scheduled for
completion before the current fiscal year-end. Of the total pre-tax charge of
$5,392,000, approximately $4,400,000 will be settled in the form of deferred
payments over an extended period of time. The remainder, of which $300,000 was
expended during the first quarter of 1999, will be fully expended before October
31, 1999.
9
<PAGE> 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
First Quarter 1999 Compared With First Quarter 1998
- ---------------------------------------------------
Consolidated Results
Fiscal 1999 first quarter sales of $120,290,000 were lower than sales
for the same period last year by $8,240,000 or six percent. Net loss for the
current quarter totaled $712,000 compared with net income of $3,908,000 in the
prior year quarter which primarily reflects the recognition of after-tax
nonrecurring costs totaling $3,297,000 in the current quarter. Excluding the
nonrecurring charge, net income for the current quarter would have been
$2,585,000. Results for the current quarter were also unfavorably impacted by an
after-tax foreign currency loss in Brazil of approximately $500,000.
Net sales recorded by domestic operations totaled $67,354,000 during
the current quarter which were $7,520,000 or 10 percent less than net sales of
the first quarter of the prior fiscal year. The domestic Hydraulics Systems
group recorded net sales which were 11 percent lower than the first quarter of
last year primarily due to reduced demand in mobile hydraulic markets. The
domestic Metal Products group recorded first quarter sales which were six
percent lower than the same quarter last year.
Net sales of foreign operations totaled $52,936,000 which were
$720,000 or one percent lower than the first quarter of last year. The foreign
Hydraulic Systems group reported shipments which were 11 percent lower than the
first quarter of last year. Sales of the Company's Astron Division located in
Europe improved by 11 percent.
Consolidated gross profit of $28,642,000 was $2,084,000 or seven
percent lower than the first quarter of fiscal 1998 which primarily reflects the
impact of the decline in sales during the current quarter. Gross profit margins
for the current quarter were flat compared with the first quarter of fiscal
1998.
During the quarter ended January 31, 1999, the Company recorded a
nonrecurring charge of $5,392,000 ($3,297,000 after taxes) to recognize costs
incurred in connection with initiatives to reorganize certain areas of the
business and reduce operating costs. The nonrecurring costs consist of: (i)
charges totaling $5,074,000 in association with a voluntary early retirement
program and the separation of fixed support personnel at certain locations;
these actions will reduce the Company's worldwide employment by a total of 70
employees, and (ii) charges totaling $318,000 in connection with the
consolidation of certain operating facilities in the United States and Europe.
None of the recorded costs relate to the write-down or write-off of inventory or
fixed assets of the affected businesses. Most of the indicated actions were
completed in the first quarter of fiscal 1999 with the remainder scheduled for
completion before the current fiscal year-end. Of the total pre-tax charge of
$5,392,000, approximately $4,400,000 will be settled in the form of deferred
payments over an extended period of time. The remainder, of which $300,000 was
expended during the first quarter of 1999, will be fully expended before October
31, 1999. Annual savings from these profit improvement initiatives should exceed
$5,000,000 on a pre-tax basis. For fiscal 1999, most of the savings from these
programs will be realized in the remaining three quarters of the fiscal year.
Operating income of $1,524,000 in the current quarter was $7,449,000
lower than the same quarter last year which primarily reflects the recognition
of nonrecurring costs of $5,392,000 in the current quarter. Operating income of
the Hydraulic Systems group of $3,249,000 was 41 percent lower than the same
quarter last year. The Building Systems and Metal Products group recorded
operating income of $3,667,000 which was seven percent higher than operating
income of the first quarter of last year.
10
<PAGE> 11
Industry Segments
- - Hydraulic Systems
<TABLE>
<CAPTION>
Three Months Ended
January 31,
------------------
1999 1998
-------- -------
(in thousands)
<S> <C> <C>
Net sales .................... $ 79,927 $ 89,723
Operating income ............. 3,249 5,542
Percent to sales ........ 4.1% 6.2%
</TABLE>
The Hydraulic Systems segment accounted for 66 percent of the
Company's total sales and 47 percent of the total operating income excluding
nonrecurring costs. Revenues in this segment were $79,927,000 in the current
quarter which is $9,796,000 less than segment revenues recorded in the first
quarter of the prior year. Operating income in the current quarter was
$3,249,000 which is $2,293,000 less than the prior year primarily due to a
year-over-year decline in the U.S. where customers reacted to reduced demand and
excess inventory in the mobile hydraulic markets. Operating results for the
overseas operations were somewhat better than those for the same quarter last
year despite the residual effects of the Asian crisis on operations in Australia
and the adverse effects of local fiscal policies on financial results in Brazil.
Performance for Ultra Hydraulics in the United Kingdom was up dramatically over
the first quarter of last year while results from the German operations improved
more than 35 percent versus the comparable period of 1998.
- - Building Systems and Metal Products
<TABLE>
<CAPTION>
Three Months Ended
January 31,
------------------
1999 1998
-------- -------
(in thousands)
<S> <C> <C>
Net sales .................... $ 40,363 $ 38,807
Operating income ............. 3,667 3,431
Percent to sales ......... 9.1% 8.8%
</TABLE>
The Building Systems and Metal Products segment accounted for 34
percent of the Company's total sales and 53 percent of total operating income
excluding nonrecurring costs. Revenues in this segment were $40,363,000 which is
$1,556,000 greater than segment revenues of the prior year quarter. Operating
income improved by $236,000, or seven percent, to $3,667,000 in the current
quarter. First quarter earnings for Astron Building Systems were the highest for
any first quarter in the last ten years and were 49 percent above the level of
1998. Operating income for the domestic Metal Stampings units was 12 percent
below last year's first quarter. Net sales for this business segment were up
four percent over the first quarter of 1998, reflecting year-over-year
improvement in revenues from Astron. Continued weakness in the container
industry caused revenues for Metal Stampings to fall short of the level achieved
in the first quarter of last year by six percent. Combined operating margin of
9.1 percent of sales, up from the 8.8 percent of last year, was attributable to
Astron's strong first quarter 1999 performance.
Nonoperating Income and Expense
During the first quarter of fiscal 1999, nonoperating expenses of
$2,571,000 were $30,000 lower than the same quarter last year. Interest expense
of $2,407,000 in the current quarter was $126,000 lower than the prior year
primarily due to lower levels of debt in the current quarter compared with the
11
<PAGE> 12
first quarter of fiscal 1998. Foreign currency exchange and translation losses
totaled $779,000 in the first quarter of fiscal 1999 compared with a loss of
$175,000 in the first quarter of the prior year. Most of the increase is
attributable to foreign currency losses recorded in the current quarter for
operations in Brazil where the local currency was severely devalued during the
period.
The Company utilizes foreign currency forward contracts to hedge the
principal and interest due on loans which are periodically made with foreign
subsidiaries. Deferred gains and losses from such hedging activities were
negligible at the end of the current quarter.
Taxes
The Company's effective income tax rate amounted to a tax benefit of
32 percent during the first quarter of fiscal 1999 and a tax expense of 39
percent during the first quarter of the prior fiscal year. The current year
effective rate is somewhat lower as a result of increased utilization of the tax
loss carryforward in Germany.
Impact of Year 2000
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. Any of the
Company's computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations thereby causing disruptions of operations
including, among other things, a temporary inability to process transactions,
send invoices or engage in similar normal business activities. The Year 2000
Issue could also impact embedded systems which are devices which are used to
control, monitor or assist in the operation of the Company's plant, machinery
and equipment. Embedded systems are an integral part of the system in which they
operate and the impact of the Year 2000 Issue may not be obvious in these
instances. Embedded systems can affect manufacturing and process control
systems, communications systems, systems related to the operation of buildings
and premises and the operation of office equipment.
During fiscal year 1998, the Company completed an assessment which
indicated that it will be required to modify or replace portions of its software
to ensure that its computer systems will function properly with respect to dates
in the year 2000 and thereafter. A significant portion of the tasks identified
by the assessment have either been completed or are in the process of being
completed. The Company presently believes that, upon completion of all the
required modifications, the Year 2000 Issue will not pose significant
operational problems for its computer systems. However, if all system
modifications are not completed in a timely manner, the Year 2000 Issue could
have a material impact on the operations of the Company. The Company's
assessment also included an analysis of the impact of the Year 2000 Issue with
regard to its embedded systems to provide reasonable assurance that all plant,
machinery and equipment on which the Company depends will continue to function
in a satisfactory manner in the year 2000 and beyond. The Company has utilized,
and will continue to utilize, both internal and external resources to reprogram,
replace, and test the software for Year 2000 modifications. The Company
anticipates completing the Year 2000 project prior to any anticipated impact on
its operating systems. Current assessments indicate that projects to achieve
Year 2000 compliance will be completed by the end of our fiscal year 1999.
Presently, it is estimated that approximately 65 percent of such projects are
complete. The Company does not currently expect to develop a formal contingency
plan against failure to complete the project.
Concurrent with the Year 2000 Issue, the Company is in the process of
replacing outdated computer hardware and software at major facilities in the
U.S. and Germany. The computer hardware and software being installed in those
countries will increase the functionality and efficiency of information
technology systems required to support manufacturing processes and
administrative functions. Costs
12
<PAGE> 13
incurred in this regard are being capitalized in accordance with the Company's
accounting policies. The amount capitalized through January 31, 1999 in
connection with these replacement programs is approximately $3.3 million. Costs
for converting the remainder of the Company's computer systems to ensure Year
2000 compliance are estimated to be $0.5 million before tax. Of this amount,
approximately $0.2 million was expended prior to January 31, 1999. Such
conversion costs are expensed as incurred.
Management's estimates of cost and time necessary to complete tasks
associated with the Year 2000 project were derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources, third party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved, and actual results could
differ materially from those anticipated. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in this area, the ability to locate and correct all
relevant computer codes, and similar uncertainties.
The Company also made inquiries with regard to certain of its vendors
and suppliers with which it has a significant relationship in order to identify
any potential material adverse effects that may impact such third parties as a
result of the Year 2000 Issue. Although the Company believes its efforts will
adequately address the Year 2000 Issue internally, it is possible that the
Company will be adversely affected by problems encountered by its vendors or
suppliers. Despite any vendor's or supplier's certification regarding Year 2000
compliance, there can be no assurance that the vendor's or supplier's ability to
provide goods and services will not be adversely affected by the Year 2000
Issue. The most likely worst-case scenario would be that a failure by the
Company or one or more of its vendors or suppliers to adequately and timely
address the Year 2000 Issue would interrupt manufacturing of the Company's
products for an indeterminable period of time. The Company intends to identify
alternative vendors should a vendor's ability to meet the Company's raw material
and supply requirements be impacted by the Year 2000 Issue. While the Company
believes it can minimize the impact of such non-compliance through the use of
these alternative vendors, a disruption in production could have a material
adverse impact on the Company.
Impact of Euro Conversion
On January 1, 1999, eleven of the fifteen member countries of the
European Union (the "participating countries") established fixed conversion
rates between their existing sovereign currencies (the "legacy currencies") and
a new common currency called the "euro." The participating countries agreed to
adopt the euro as their common legal currency on that date. The euro currently
trades on currency exchanges and is available for non-cash transactions. The
legacy currencies are scheduled to remain legal tender in the participating
countries as denominations of the euro between January 1, 1999 and January 1,
2002 (the "transition period"). During the transition period, payment for goods
and services can be made using either the euro or the participating country's
legacy currency. Beginning January 1, 2002, the participating countries will
withdraw all bills and coins denominated in the legacy currencies making
conversion to euro complete.
The Company believes it has identified all euro conversion issues and
formulated and implemented appropriate action plans. However, there can be no
certainty that such plans will successfully address euro conversion issues or
that external factors may arise as a result of euro conversion, either of which
may have an adverse effect on the Company's operations.
13
<PAGE> 14
LIQUIDITY AND CAPITAL RESOURCES
The Company expects that sufficient financial resources, generated
from both internal and external sources, will be available during the upcoming
year to meet operating needs, to meet scheduled debt repayments, to fund capital
expenditure programs and to fund the repurchase of up to 1,000,000 of its common
stock if such repurchase occurs. Cash and cash equivalents declined by
$17,522,000 during the first quarter of fiscal 1999 and totaled $18,329,000 at
period end. Cash used by operating activities during the current quarter was
$861,000 compared with cash used of $12,272,000 in the first quarter of last
year. The improvement is primarily due to a decline in accounts receivable
during the current quarter.
Cash used in investing activities was $10,205,000 in the first
quarter of fiscal 1999 compared with $3,953,000 used in the first quarter of
last year. Capital expenditures of $10,207,000 in the current quarter were
$6,236,000 greater than capital expenditures for the same quarter last year.
Cash used by financing activities was $6,227,000 during the current
quarter compared with cash provided of $1,773,000 during the prior year quarter.
During the current quarter net long-term debt totaling $5,521,000 was repaid.
On February 10, 1999, the Company reported that the Board of
Directors has authorized the repurchase of up to 1,000,000 shares of Commercial
Intertech common stock to be used for employee benefit plans and other corporate
purposes. Purchases will be made from time to time in the open market or in
private transactions at prevailing prices. No time limit was placed on the
duration of the repurchase program. The timing and extent of any purchases will
depend upon market conditions and other Company considerations and will be
funded by internally generated cash or through utilization of available credit.
As of March 1, 1999, the Company has not repurchased any of its common shares.
MARKET RISK
Information regarding market risk of the Company as of October 31,
1998 is presented under the caption "Market Risk" which is included in Item 7 of
the Company's annual report on Form 10-K for the year ended October 31, 1998.
There have been no material changes in the Company's exposure to market risk
during the three months ended January 31, 1999 as described therein except for
the unfavorable financial impact of the severe devaluation of the currency in
Brazil as a result of local fiscal policies. During the quarter ended January
31, 1999, the Company incurred an after-tax foreign currency loss of
approximately $500,000 as a result of the devaluation. Further devaluation of
the currency in Brazil could continue to negatively impact the Company's results
of operations.
BUSINESS OUTLOOK
Incoming customer orders totaled $123,549,000 during the first
quarter of fiscal 1999. Current period orders are 23 percent lower than orders
received last year on a parity-adjusted basis. First quarter bookings of the
Hydraulic Systems group of $81,646,000 were 28 percent lower than last year's
record orders of $113,045,000 on a parity-adjusted basis. Bookings of
$41,903,000 for the Building Systems and Metal Products group were 11 percent
less than the amount recorded in the first quarter of the prior year.
The worldwide backlog of unshipped orders amount to $184,606,000 at
January 31, 1999. The amount of unshipped orders is two percent lower than the
balance at the end of fiscal 1998 and 20 percent lower than the ending order
backlog twelve months ago, both adjusted for foreign currency exchange rate
differences.
14
<PAGE> 15
Difficult conditions persist in many of the industry segments and
geographic regions in which the Company conducts business. Incoming orders have
been disappointing over the most recent two quarters and the possibility remains
that the underlying market fundamentals may further delay recovery in demand
over the near term. These conditions, coupled with the on-going economic turmoil
in Brazil, could potentially lead to lower earnings in 1999 despite the benefits
to be derived from aggressive profit improvement initiatives. Nevertheless,
management remains cautiously optimistic about prospects for avoiding such a
shortfall and believes that earnings which equal or marginally exceed those of
last year are still possible for 1999 given continuing expectations for another
strong year in the Building Systems Division, initial success in the launch of a
new series of hydraulic and metal products, and some signs of a rebound in
activity for certain industry segments following a significant first quarter
decline. However, success in achieving this goal will ultimately hinge on a
recovery in order rates for Hydraulic Systems and Metal Products in the near
term.
FORWARD-LOOKING INFORMATION
Forward-looking statements contained in this Form 10-Q government
filing are made pursuant to the safe harbor provision of the Private Securities
Litigation Reform Act of 1995. Commercial Intertech Corp. has tried, wherever
possible, to identify these "forward looking" statements by using such words as
"anticipate," "believe," "estimate," "expect" and similar expressions. The
Company cautions that a number of important factors could cause the Company's
actual results for 1999 and beyond to differ materially from those expressed in
any forward-looking statements made by or on behalf of the Company. These
important factors include, without limitation, demand for the Company's
products; the Company's ability to manufacture commercial quantities of its
products on an efficient and cost effective basis; competition by rival
developers of hydraulic systems and building systems and metal products; changes
in technology; customer preferences; growth in the hydraulic systems and
building systems and metal products industries; and general economic and
business conditions. These important factors and other factors which could
affect the Company's results are detailed in the Company's filings with the
Securities and Exchange Commission and are included herein by reference. The
Company assumes no obligation to update the information in this filing.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Information regarding market risk of the Registrant is presented
under the caption "Market Risk" which is included in Item 2 of this report and
is incorporated herein by reference.
15
<PAGE> 16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit 11- Statement re: Computation of Per Share Earnings
(omitted - inapplicable)
The information with respect to the computation of both basic
and diluted earnings per share is presented in Note D to the
financial statements included in PART I, Item 1.
Exhibit 27 - Financial Data Schedule (filed herewith)
(b) Reports on Form 8-K
No reports were filed on Form 8-K during the quarter for which
this report is filed.
16
<PAGE> 17
SIGNATURE
Pursuant to the requirements 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.
Date March 10, 1999 By /s/ Steven J. Hewitt
--------------- -----------------------------
Steven J. Hewitt
Senior Vice President and
Principal Financial Officer
17
<PAGE> 18
Commercial Intertech Corp.
Index To Exhibits Filed Herewith
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule
18
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 18,329
<SECURITIES> 0
<RECEIVABLES> 78,048
<ALLOWANCES> 2,438
<INVENTORY> 67,865
<CURRENT-ASSETS> 181,341
<PP&E> 238,928
<DEPRECIATION> 125,998
<TOTAL-ASSETS> 387,692
<CURRENT-LIABILITIES> 111,283
<BONDS> 102,782
0
21,531
<COMMON> 14,417
<OTHER-SE> 88,985
<TOTAL-LIABILITY-AND-EQUITY> 387,692
<SALES> 120,290
<TOTAL-REVENUES> 120,290
<CGS> 91,648
<TOTAL-COSTS> 91,648
<OTHER-EXPENSES> 5,392
<LOSS-PROVISION> 200
<INTEREST-EXPENSE> 2,407
<INCOME-PRETAX> (1,047)
<INCOME-TAX> (335)
<INCOME-CONTINUING> (712)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (712)
<EPS-PRIMARY> (0.08)
<EPS-DILUTED> (0.08)
</TABLE>
