<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended OCTOBER 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to ___________________
Commission file number: 1-5190
VARITY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 22-3091314
---------------------------- --------------------------
(State or other jurisdiction (IRS Employer
of Incorporation) Identification No.)
672 DELAWARE AVENUE, BUFFALO, NEW YORK 14209
-------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Telephone number including area code: (716) 888-8000
- --------------------------------------------------------------------------------
(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 period 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 .
--- ---
THE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF NOVEMBER 30, 1994 WAS
43,055,953 SHARES.
================================================================================
Exhibit index appears on page 17.
<PAGE>
VARITY CORPORATION
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION: Page
Item 1. Financial Statements
Consolidated Statements of Operations................... 3
Consolidated Balance Sheets............................. 5
Consolidated Statements of Cash Flows................... 6
Notes to Consolidated Financial Statements.............. 7
Item 2. Management's Discussion and Analysis.................... 10
PART II. OTHER INFORMATION:
Item 1. - Legal Proceedings.................................... 15
Item 2. - Changes in Registered Securities..................... 15
Item 3. - Defaults upon Senior Securities...................... 15
Item 4. - Submission of Matters to a Vote of Security Holders.. 15
Item 5. - Other Information.................................... 15
Item 6.(a) -Exhibits............................................. 15
Item 6.(b) -Reports on Form 8-K.................................. 15
SIGNATURES....................................................... 16
Unless otherwise indicated references to "Company" mean Varity Corporation and
its subsidiaries and references to "fiscal" mean the Company's year ended
January 31 (e.g. fiscal 1994 represents the period February 1, 1994 to January
31, 1995).
Page 2
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
VARITY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 31,
(Unaudited)
(Dollars in millions except per share amounts)
<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Total sales and revenues $ 605.0 $ 463.2
----------- -----------
Expenses:
Cost of goods sold 496.4 384.2
Marketing, general and administration 45.0 34.1
Engineering and product development 21.3 17.8
Interest, net 4.4 6.9
Exchange losses 1.5 0.6
Other expense, net 0.2 0.1
----------- -----------
568.8 443.7
----------- -----------
Income before income taxes, earnings of associated
companies and discontinued operation 36.2 19.5
Income tax provision (6.9) (3.0)
----------- -----------
Income before earnings of associated companies and
discontinued operation 29.3 16.5
Equity in earnings of associated companies 3.4 2.4
----------- -----------
Income before discontinued operation 32.7 18.9
Earnings from discontinued operation (Note 2) - 3.3
----------- -----------
Net income $ 32.7 $ 22.2
=========== ===========
Income attributable to common stockholders $ 32.1 $ 21.6
Earnings per common share:
Before discontinued operation:
Primary $ 0.73 $ 0.49
Fully diluted $ 0.73 $ 0.41
Discontinued operation:
Primary $ - $ 0.09
Fully diluted $ - $ 0.08
Net income:
Primary $ 0.73 $ 0.58
Fully diluted $ 0.73 $ 0.49
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Page 3
<PAGE>
VARITY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED OCTOBER 31,
(Unaudited)
(Dollars in millions except per share amounts)
<TABLE>
<CAPTION>
1994 1993
------------ ------------
<S> <C> <C>
Total sales and revenues $ 1,628.2 $ 1,341.2
------------ ------------
Expenses:
Cost of goods sold 1,339.1 1,111.8
Marketing, general and administration 125.2 109.7
Engineering and product development 63.0 49.3
Interest, net 16.1 23.6
Exchange gains (1.0) (0.4)
Other (income) expense, net 0.2 (0.2)
------------ ------------
1,542.6 1,293.8
------------ ------------
Income before income taxes, earnings of associated
companies, discontinued operation, extraordinary loss and
cumulative effect of changes in accounting principles 85.6 47.4
Income tax provision (15.3) (8.1)
------------ ------------
Income before earnings of associated companies,
discontinued operation, extraordinary loss and cumulative
effect of changes in accounting principles 70.3 39.3
Equity in earnings of associated companies 10.2 7.8
------------ ------------
Income before discontinued operation, extraordinary loss and
cumulative effect of changes in accounting principles 80.5 47.1
------------ ------------
Discontinued operation (Note 2):
Earnings from discontinued operation 4.4 2.2
Gain on sale of discontinued operation 23.2 -
------------ ------------
27.6 2.2
------------ ------------
Income before extraordinary loss and cumulative effect of
changes in accounting principles 108.1 49.3
Extraordinary loss - (1.7)
Cumulative effect of changes in accounting principles - (146.1)
------------ ------------
Net income (loss) $ 108.1 $ (98.5)
============ ============
Income (loss) attributable to common stockholders $ 106.3 $ (108.3)
Earnings (loss) per common share:
Before discontinued operation, extraordinary loss and
cumulative effect of changes in accounting principles:
Primary $ 1.78 $ 1.09
Fully diluted $ 1.78 $ 1.08
Discontinued operation:
Primary $ 0.62 $ 0.07
Fully diluted $ 0.62 $ 0.05
Extraordinary loss:
Primary $ - $ (0.05)
Fully diluted $ - $ (0.05)*
Cumulative effect of changes in accounting principles:
Primary $ - $ (4.28)
Fully diluted $ - $ (4.28)*
Net income (loss):
Primary $ 2.40 $ (3.17)
Fully diluted $ 2.40 $ (3.17)*
</TABLE>
*Anti-dilutive
See accompanying Notes to Consolidated Financial Statements.
Page 4
<PAGE>
VARITY CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in millions)
<TABLE>
<CAPTION>
October 31, January 31,
1994 1994
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 157.5 $ 51.2
Marketable securities 56.6 58.0
Receivables 408.7 329.3
Inventories (Note 3(a)) 171.1 127.8
Prepaid expenses and other 20.5 21.2
Net assets of discontinued operation (Note 2) - 219.8
--------- ----------
Total current assets 814.4 807.3
Investments in associated and other companies 100.0 93.5
Fixed assets, net (Note 3(b)) 612.4 522.2
Other assets and intangibles 360.4 336.6
--------- ----------
$ 1,887.2 $ 1,759.6
========= ==========
Liabilities
Current liabilities:
Notes payable $ 7.6 $ 68.0
Current portion of long-term debt 2.3 5.6
Accounts payable and accrued liabilities
(Note 3(c)) 561.0 490.1
--------- ----------
Total current liabilities 570.9 563.7
--------- ----------
Non-current liabilities:
Long-term debt 163.7 185.5
Other long-term liabilities 341.4 379.7
--------- ----------
Total non-current liabilities 505.1 565.2
--------- ----------
Stockholders' equity (Note 4):
Preferred stock 6.8 6.8
Common stock 638.4 637.4
Contributed surplus 656.3 656.3
Deficit (455.0) (561.3)
Foreign currency translation adjustment 0.7 (79.8)
Pension liability adjustment (5.1) (30.5)
Unrealized gains (losses) on marketable
securities (2.9) 1.8
Less treasury stock at cost (28.0) -
--------- ----------
Total stockholders' equity 811.2 630.7
--------- ----------
$ 1,887.2 $ 1,759.6
========= ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Page 5
<PAGE>
VARITY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED OCTOBER 31,
(Unaudited)
(Dollars in millions)
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 108.1 $ (98.5)
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Depreciation and amortization 56.3 49.0
Gain on sales of fixed assets (0.7) (0.1)
Deferred income taxes 2.9 4.6
Equity in earnings of associated companies in
excess of dividends received (9.9) (7.8)
Gain on sale of discontinued operation (23.2) -
Extraordinary loss - 1.7
Cumulative effect of changes in accounting principles - 146.1
Changes in:
Receivables (51.0) (31.2)
Inventories (15.9) (16.2)
Prepaid expenses and other (1.2) 7.8
Accounts payable and accrued liabilities 10.2 0.5
Other long-term liabilities (88.5) (45.5)
Net assets of discontinued operation 26.9 42.5
---------- ----------
Cash provided by operating activities 14.0 52.9
---------- ----------
Cash flows from investing activities:
Purchases of marketable securities (23.6) (34.1)
Proceeds from sales of marketable securities 42.8 30.1
Additions to fixed assets (121.3) (86.9)
Proceeds from sales of fixed assets 11.3 10.9
Proceeds from sales of businesses 333.2 33.6
Acquisition of business, net of cash acquired (42.7) -
Additions to other assets and intangibles - (3.9)
Other 0.2 (0.8)
---------- ----------
Cash provided (used) by investing activities 199.9 (51.1)
---------- ----------
Cash flows from financing activities:
Proceeds from bank borrowings 37.6 68.7
Repayments of bank borrowings (102.1) (158.2)
Proceeds from long-term debt 97.9 78.9
Repayments of long-term debt (126.7) (171.1)
Proceeds from sale of common stock - 143.7
Repurchases of common stock (21.9) -
Exercise of stock options 1.0 2.9
Dividends paid (1.8) (9.8)
Other - (4.4)
---------- ----------
Cash used by financing activities (116.0) (49.3)
---------- ----------
Effect of foreign currency translation on
cash and cash equivalents 8.4 (0.4)
---------- ----------
Increase (decrease) in cash and cash equivalents
during the period 106.3 (47.9)
Cash and cash equivalents at beginning of period 51.2 111.4
---------- ----------
Cash and cash equivalents at end of period $ 157.5 $ 63.5
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
Page 6
<PAGE>
VARITY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended October 31, 1994 and 1993
(Unaudited)
(Dollars in millions unless otherwise stated)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
by management and in the opinion of management contain all adjustments,
consisting of normal recurring adjustments, necessary to present fairly the
financial position of the Company as of October 31, 1994 and January 31, 1994,
and the results of its operations for the three and nine months ended October
31, 1994 and 1993 and cash flows for each of the nine month periods ended
October 31, 1994 and 1993. Certain prior period amounts have been reclassified
to conform with the current period's presentation. The consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Form 10-K for the fiscal
year ended January 31, 1994. Results for interim periods are not necessarily
indicative of those to be expected for the year.
2. DISCONTINUED OPERATION
Pursuant to a plan to dispose of its farm equipment segment, in June 1994 the
Company completed the sale of its worldwide Massey Ferguson farm machinery
business to AGCO Corporation for $310 million in cash and 500,000 shares of AGCO
common stock, resulting in a gain of $23.2 million. The gain is net of the
recognition of $70.0 million of deferred foreign exchange losses and pension
liability adjustments, previously reported in the accompanying consolidated
balance sheets as a reduction in stockholders' equity.
The transaction excluded cash, indebtedness and certain liabilities, primarily
pertaining to pension and retiree medical benefits for all former North American
Massey Ferguson employees, for which the Company continues to be responsible.
During the current quarter the Company settled its pension benefit obligation
related to former Massey Ferguson employees in Canada through the purchase of
annuity contracts. As a result of the aforementioned plan, the farm equipment
segment has been presented as a discontinued operation in the accompanying
financial statements. Prior year financial statements have been reclassified to
conform to the current year presentation.
The operating results of the discontinued operation are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31, October 31,
------------------- ------------------
1994 1993 1994 1993
------- --------- ------- --------
<S> <C> <C> <C> <C>
Sales and revenues $ - $229.0 $253.1 $656.9
======= ====== ====== ======
Income before income taxes and
cumulative effect of changes in
accounting principles $ - $ 3.4 $ 5.0 $ 2.7
Income tax provision - (.1) (.6) (.5)
------- ------ ------ ------
Income before cumulative
effect of changes in accounting
principles $ - $ 3.3 $ 4.4 $ 2.2
======= ====== ====== ======
</TABLE>
Page 7
<PAGE>
A summary of the assets and liabilities of the discontinued operation is as
follows:
<TABLE>
<CAPTION>
January 31,
1994
-----------
<S> <C>
Current assets $356.5
Noncurrent assets 132.1
------
488.6
------
Current liabilities 262.1
Noncurrent liabilities 6.7
------
268.8
------
Net assets of discontinued operation $219.8
======
</TABLE>
3. OTHER INFORMATION
<TABLE>
<CAPTION>
(a) Inventories
The major classes of inventory are as follows:
October 31, January 31,
1994 1994
----------- -----------
<S> <C> <C>
Raw materials and work in process $ 98.0 $ 66.0
Finished goods 73.1 61.8
------ -----------
$171.1 $127.8
====== ===========
</TABLE>
(b) Fixed assets, net
Fixed assets are stated net of accumulated depreciation and amortization
(October 31, 1994 - $ 373.9 million and January 31, 1994 - $312.9 million).
(c) Accounts payable and accrued liabilities
A summary of accounts payable and accrued liabilities follows:
<TABLE>
<CAPTION>
October 31, January 31,
1994 1994
----------- -----------
<S> <C> <C>
Accounts payable $306.9 $279.4
Accrued liabilities 254.1 210.7
------ ------
$561.0 $490.1
====== ======
</TABLE>
(d) Supplementary Cash Flows Information
Cash payments by the Company for interest during the nine months ended October
31, 1994 and 1993 were $13.2 million and $26.1 million, respectively.
Cash payments for income taxes during the nine months ended October 31, 1994 and
1993 were $3.0 million and $3.8 million, respectively.
In connection with the current quarter repurchases of common stock, $6.1 million
of such stock did not settle as of the balance sheet date. As a result, this
amount is included as a current liability in the consolidated balance sheet.
Page 8
<PAGE>
4. STOCKHOLDERS' EQUITY
The following table summarizes changes in stockholders' equity that occurred
during the nine months ended October 31, 1994:
<TABLE>
<CAPTION>
Thousands of
shares
outstanding Equity (Dollars in millions)
------------------ ------------------------------------------------------------------------
Unrealized
Trans- Pension gains
Class II Class II Contri- lation liability (losses) on
preferred Common preferred Common buted adjust- adjust- marketable
stock stock stock stock surplus Deficit ment ment securities
--------- ------- --------- ------ ------- -------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 31, 1994 2,001 43,957 $6.8 $637.4 $656.3 $(561.3) $(79.8) $(30.5) $ 1.8
Exercise of stock options 33 1.0
Repurchases of common stock (750)
Foreign currency
translation
adjustment 80.5
Dividends on Class II
preferred stock (1.8)
Pension liability
adjustment 25.4
Unrealized losses on
marketable
securities (4.7)
Net income 108.1
- --------------------------- ----- ------ --------- ------ ------- ------- ------- ---------- ----------
Balance, October 31, 1994 2,001 43,240 $6.8 $638.4 $656.3 $(455.0) $ .7 $ (5.1) $(2.9)
=========================== ===== ====== ========= ====== ======= ======= ======= ========== ==========
<CAPTION>
Equity (Dollars in millions)
----------------------------
Total
stock-
Treasury holders'
stock equity
--------- -------
<S> <C> <C>
Balance, January 31, 1994 $ - $630.7
Exercise of stock options 1.0
Repurchases of common stock (28.0) (28.0)
Foreign currency
translation
adjustment 80.5
Dividends on Class II
preferred stock (1.8)
Pension liability
adjustment 25.4
Unrealized losses on
marketable
securities (4.7)
Net income 108.1
- --------------------------- ------- ------
Balance, October 31, 1994 $(28.0) $811.2
=========================== ======= ======
</TABLE>
As of October 31, 1994 options to purchase 2.2 million shares of common stock
were outstanding.
A summary of the weighted average number of shares of common stock outstanding
used to calculate earnings (loss) per common share follows (in thousands of
shares):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31, October 31,
------------------ -----------------
<S> <C> <C> <C> <C>
1994 1993 1994 1993
------ ------ ------ ------
Primary 44,165 37,247 44,334 34,110
Fully Diluted 44,178 44,172 44,338 41,857
</TABLE>
The terms of the Company's Class II preferred stock and certain debt agreements
restrict the payment of dividends on certain of the Company's common stock, as
described in Note 12 to the consolidated financial statements for the fiscal
year ended January 31, 1994.
Page 9
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
In June 1994, the Company, pursuant to a plan to dispose of its farm equipment
segment, completed the sale of its worldwide Massey Ferguson farm machinery
business to AGCO Corporation for $310 million in cash and 500,000 shares of AGCO
common stock, resulting in a non-recurring gain of $23.2 million. As a result
of the plan and subsequent sale, the farm equipment segment, including the gain
realized on sale, has been presented as a discontinued operation in the
accompanying financial statements.
For the three months ended October 31, 1994, the Company earned $32.7 million
($.73 per share) on sales and revenues of $605.0 million, compared with income
of $18.9 million ($.49 per share) before the aforementioned discontinued
operation on sales and revenues of $463.2 million for the comparable period in
fiscal 1993. For the nine months ended October 31, 1994 the Company earned
$80.5 million ($1.78 per share) before the discontinued operation and related
gain on disposition on sales and revenues from continuing operations of $1,628.2
million, compared with income of $47.1 million ($1.09 per share), on sales and
revenues of $1,341.2 million, for the comparable period in fiscal 1993 before
the prior year's cumulative effect of changes in accounting principles and an
extraordinary loss of $1.7 million on the early repayment of indebtedness.
During the prior year's first quarter, the Company recognized a one-time, non-
cash $146.1 million charge ($4.28 per share) in connection with the adoption of
new accounting standards for postretirement and postemployment benefits as is
further described in Note 1 of the Notes to Consolidated Financial Statements
included in the Company's Form 10-K for the year ended January 31, 1994.
Earnings of the discontinued farm equipment segment were $4.4 million for the
nine months ended October 31, 1994 as compared to $2.2 million in the comparable
period for fiscal 1993.
<TABLE>
<CAPTION>
SEGMENT OPERATING REVIEW
(Dollars in millions) Three Months Ended Nine Months Ended
October 31, October 31,
-------------------------- ---------------------------
% %
1994 1993 Change 1994 1993 Change
------ ------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
Sales and revenues (1):
Automotive products $ 372 $ 294 27 $1,014 $ 852 19
Engines 219 176 24 596 506 18
Other 14 13 8 39 39 -
Intercompany sales to discontinued
operation - (20) - (21) (56) (63)
----- ----- -- ------ ------ ----
Total $ 605 $ 463 31 $1,628 $1,341 21
===== ===== == ====== ====== ====
Operating income (loss) (1):
Automotive products $ 35 $ 24 46 $ 84 $ 68 24
Engines 17 11 55 46 30 53
Other (1) - - (1) (2) (100)
----- ----- -- ------ ------ ----
Total $ 51 $ 35 46 $ 129 $ 96 34
===== ===== == ====== ====== ====
</TABLE>
(1) All periods prior to the sale of Massey Ferguson, effective April 30, 1994,
reflect the Company's former farm equipment segment as a discontinued
operation.
Page 10
<PAGE>
AUTOMOTIVE PRODUCTS
United States automobile and light truck demand during the third quarter of
fiscal 1994 continued to improve, as measured by a 19% increase in vehicle sales
over the comparable fiscal 1993 period, reflecting continued increased consumer
confidence in the overall economic environment. North American production of
these vehicles, which incorporates Kelsey-Hayes' products and influences the
Company's automotive products segment, increased 16% during the same period.
Varity's automotive products segment continued to benefit from its strategic
position as a major supplier of anti-lock braking systems (ABS) and foundation
(conventional) brakes for light trucks, vans and sport utility vehicles. The
Company's sales of ABS (and related products) and foundation brakes for these
specific vehicles comprise approximately 90% and 60%, respectively, of the
Company's total ABS and foundation brakes sales for all vehicles. North
American industry production of these vehicles increased 21% during the third
quarter of fiscal 1994. In addition, expanded ABS installation rates in new
vehicles and replacement of two-wheel ABS with higher value four-wheel systems
resulted in the Company's automotive products segment recording sales of $372
million in the current quarter, reflecting an increase of 27% over the prior
year's third quarter.
The automotive products segment also includes sales of products for the heavy
duty truck and trailer market, which are produced by the Dayton Walther heavy
duty brake group.
Year to date, the Company's automotive products segment sales have increased
19% to $1,014 million principally due to an increase in North American
production of light trucks, vans and sport utility vehicles of approximately 18%
from the prior year's first nine months, and higher four-wheel ABS installation
rates.
Segment operating income in the current quarter for the automotive products
segment was $35 million, up 46% from 1993 results of $24 million. Year to date,
such earnings improved 24% to $84 million from the same period in the prior
year. Earnings improved over the prior year for the current quarter and the
first nine months as a direct result of the aforementioned increased sales and
the continued focus on implementing cost reductions and productivity
improvements, including the opening of the new Fowlerville, Michigan ABS
manufacturing facility in the third quarter. The current periods' results were
tempered, however, by expenses associated with expanding capacity and pursuing
new brake systems business. These expenditures included costs for establishment
of the European brake systems marketing and technical center in Wiesbaden,
Germany and the initial start-up activities at the Heerlen, Netherlands and
Fowlerville, Michigan ABS manufacturing facilities. The majority of these
expenditures were associated with product engineering and vehicle testing
activities to support customer programs. In addition, during the current
quarter capacity constraints and costs of outsourcing and overtime negatively
affected operating margins in the heavy duty brakes business pending
implementation of manufacturing process improvements, resulting in a $2 million
loss in this business.
ENGINES
Total engines segment sales increased by 24% to $219 million in the third
quarter and by 18% to $596 million in the first nine months of fiscal 1994 as
compared with the same periods in the prior year, primarily due to increased
demand in the agricultural sector in Europe, especially the United Kingdom, in
addition to improvements in the United Kingdom and United States industrial and
construction sectors, as well as incremental sales contributed by Dorman Diesels
Limited, which was acquired by Perkins in the second quarter. In the power
generation sector, the high level of industry growth that was experienced during
1993 has started to slow somewhat in 1994. Perkins, however, has benefitted
from a shift in demand towards the larger, higher value and higher margin
engines. The comparative strength of the agricultural and construction sectors
against fiscal 1993 has more than offset the continuing difficult economic
conditions being experienced in significant continental European markets,
although the prolonged economic downturn appears to be slowly turning around.
Page 11
<PAGE>
Operating income for the engines segment increased 55% to $17 million in the
third quarter and 53% to $46 million in the first nine months of fiscal 1994
from the comparable periods in the prior year as a result of higher sales,
including the contributions of Dorman Diesels Limited, productivity improvements
and continuing cost reduction achievements.
NON-SEGMENT OPERATING REVIEW
In June 1994, the Company completed the sale of its worldwide Massey Ferguson
farm machinery business to AGCO Corporation for $310 million in cash and 500,000
shares of AGCO common stock, resulting in a non-recurring gain of $23.2 million.
The transaction excluded cash, indebtedness and certain liabilities, primarily
pertaining to pension and retiree medical benefits for all former North American
Massey Ferguson employees, for which the Company continues to be responsible.
During the current quarter the Company settled its pension benefit obligation
related to former Massey Ferguson employees in Canada through the purchase of
annuity contracts. The farm equipment segment has been presented as a
discontinued operation. Prior year financial statements have been reclassified
to conform to the current year presentation.
During the third quarter, the Company sold its 500,000 shares of AGCO
Corporation common stock, resulting in net proceeds of approximately $22 million
and a gain of $3.8 million, which is included in other expense, net, in the
consolidated statements of operations. Offsetting this gain is a $4.0 million
write-down of an unrelated foreign investment in an associated company.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Liquidity during the current quarter was provided from ongoing operations and
proceeds from the aforementioned sale of AGCO Corporation common stock. The
Company utilized approximately $63 million of such proceeds and those received
from the sale of Massey Ferguson in the second quarter to make contributions to
its unfunded North American pension plans in the third quarter. The Company
intends to further utilize approximately $9 million in the fourth quarter to
complete its plan to purchase insurance contracts to annuitize vested benefits
under retained Massey Ferguson pension plans which would eliminate the Company's
ongoing liability for such benefits. The settlement is not anticipated to
result in a significant gain or loss upon completion. In addition, the Company
began its previously announced stock re-purchase program during the quarter,
resulting in the repurchase of 750,000 shares of previously outstanding common
stock at a cost of $28 million. The Company will continue the periodic
repurchase of up to 4.5 million shares of its common stock as conditions
warrant.
Notwithstanding the foregoing initiatives, the Company's financial liquidity
and flexibility will permit planned investment in what it believes are high-
return, high-growth products and opportunities, largely out of internal sources.
Cash provided from operations during the first nine months of fiscal 1994
amounted to $14.0 million as compared to $52.9 million during the same period
last year. This decrease in cash provided was mainly attributable to the
aforementioned contributions to unfunded North American pension liabilities,
partially offset by increased earnings from continuing operations.
Short-term notes payable decreased $60.4 million to $7.6 million at October
31, 1994 as a result of the indebtedness reductions in connection with proceeds
received from the sale of Massey Ferguson and normal operational funding
activity.
Long-term debt outstanding at October 31, 1994 (including current maturities)
decreased to $166.0 million from $191.1 million at January 31, 1994, due to
indebtedness reductions in connection with proceeds received from the sale of
Massey Ferguson.
Page 12
<PAGE>
Unused long-term and short-term lines of credit at October 31, 1994 were
$149.6 million and $90.3 million, respectively. Management believes that Varity
will have improved access to credit markets as a result of the sale of Massey
Ferguson and that its credit facilities and cash flow from operations will
continue to be sufficient to meet its operating needs.
Certain of the Company's loan agreements provide for financial covenants
relating to such matters as the maintenance of specified financial ratios and
minimum net worth. Certain loan agreements also contain cross-default
provisions. At October 31, 1994, the Company and each of its subsidiaries were
in compliance with their financial covenants. Management expects that the
Company and each of its subsidiaries will remain in compliance during the period
ending October 31, 1995.
Receivables increased $79.4 million to $408.7 million at October 31, 1994 from
$329.3 million at January 31, 1994, primarily due to increased sales in the
current quarter and to a lesser extent the Dorman Diesels Limited acquisition by
Perkins in the second quarter.
Inventories of raw materials, work-in-process and finished products increased
to $171.1 million at October 31, 1994 from $127.8 million at January 31, 1994,
primarily due to the Dorman Diesels Limited acquisition and routine adjustments
in manufacturing schedules in response to higher customer demand.
Accounts payable and accrued liabilities increased $70.9 million during the
first nine months of fiscal 1994 due to the Dorman Diesels Limited acquisition
and the effect of higher throughput and normal disbursement activity.
Net fixed assets increased $90.2 million to $612.4 million at October 31, 1994
due to capital additions exceeding depreciation and disposals and to a lesser
extent the Dorman Diesels Limited acquisition. Capital expenditures for the
first nine months of fiscal 1994 were $121.3 million compared to $86.9 million
last year, and depreciation and amortization were $56.3 million and $49.0
million, respectively, for the same periods. Capital expenditures for fiscal
1994 should approximate $175.0 million. These expenditures will be mainly for
normal equipment replacements and operating improvements related to reducing
costs and increasing output.
Other assets and intangibles increased by $23.8 million to $360.4 million at
October 31, 1994 from $336.6 million at January 31, 1994, primarily due to
goodwill additions resulting from Perkins' acquisition of Dorman Diesels
Limited.
Other long-term liabilities decreased by $38.3 million to $341.4 million at
October 31, 1994 from $379.7 million at January 31, 1994, primarily due to
pension funding contributions made in the current quarter, partially offset by
additional liabilities recorded in connection with the Massey Ferguson sale.
Stockholders' equity increased by $180.5 million to $811.2 million at October
31, 1994. The increase resulted primarily from year to date net income of
$108.1 million and a favorable change in the cumulative foreign currency
translation adjustment of $80.5 million, of which $55.0 million was due to the
recognition of previously deferred foreign exchange losses on the Company's sale
of its foreign investment in Massey Ferguson, partially offset by repurchases of
common stock of $28.0 million and preferred dividends paid of $1.8 million.
Varity is primarily dependent on its subsidiaries to meet its cash
requirements. Varity's ability to obtain cash from its subsidiaries or to
transfer cash between subsidiaries is governed by the financial condition and
operating requirements of these subsidiaries, and in certain instances the terms
of loan agreements or similar agreements to which its subsidiaries are parties.
The Company has ongoing short-term cash requirements for working capital,
capital expenditures, dividends, interest and debt payments. The Company
believes that its short-term cash requirements will be met through internally
and externally generated sources, existing cash balances and utilization of
available borrowing facilities.
Page 13
<PAGE>
As a result of the Company's actions over the past few years to reduce debt
and increase operating efficiencies, the Company's financial position and
liquidity have improved markedly. The Company believes these actions have
improved its access to capital markets and will better position the Company to
finance investment in and expansion of the growth areas of its businesses.
During the next five years the Company believes that its cash requirements for
working capital, capital expenditures, dividends, interest and debt repayments
will continue to be met through internally and externally generated sources and
utilization of available borrowing sources.
The Company, primarily through its automotive products segment, is involved in
a limited number of remedial actions under various federal and state laws and
regulations relating to the environment which impose liability on parties to
clean up, or contribute to the cost of cleaning up, sites on which their
hazardous wastes or materials were disposed or released. The Company believes
that it has made adequate provision for costs associated with known remediation
efforts in accordance with generally accepted accounting principles and does not
anticipate the future cash requirements of such efforts to be significant. The
Company has made no provision for any unasserted claims as it is not possible to
estimate the potential size of such future claims, if any.
OUTLOOK
The Company believes that its automotive products segment is well positioned
to benefit from the ongoing upturn in the North American automotive industry
during the balance of fiscal 1994 and beyond. The Company will continue to
address the incremental cost burdens it is experiencing as a result of increased
production schedules. Continued management actions and cost reduction efforts
have positioned the engines segment to benefit as the European economy improves,
although the Company does not expect a major upturn in Europe in the near
future.
Page 14
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
MASSEY COMBINES CORPORATION
In the case Howe et al. v. Varity Corporation and Massey-Ferguson Inc. (United
States District Court, Southern District of Iowa), plaintiffs, purporting to
represent a class of former salaried employees and retirees of Massey-Ferguson
Inc. (MF Inc.), commenced an action in October 1988 alleging that the
defendant corporations sought to avoid their contractual obligations to
provide health and insurance benefits and employment termination allowances by
transferring the plaintiffs to Massey Combines Corporation (MCC), a Canadian
corporation, in 1986, which subsequently entered receivership in 1988.
The action asserts violations of the Employee Retirement Income Security Act
of 1974, breach of fiduciary duty, breach of contract, promissory estoppel,
wrongful interference with protected rights, and fraudulent misrepresentation.
Plaintiffs' motion for a preliminary injunction requiring extension of
benefits to retirees and disabled persons pending trial was granted by the
lower court but reversed by the appellate court as to retirees. The
plaintiffs seek to compel reinstatement of benefits, compensatory damages,
punitive damages and the costs of action. The jury on September 23, 1991
awarded two subclasses of former employees of MCC and ten individuals formerly
employed by MF Inc., $9.8 million in compensatory damages and $36 million in
punitive damages against Varity and MF Inc. On March 26, 1993, the court
struck completely the punitive damage award and reduced the compensatory
damage award to $8.3 million.
Upon appeal, on September 29, 1994, the court upheld the district court's
denial of punitive damages. However, the court ordered the Company to
reinstate the plaintiffs medical benefits and awarded them approximately
$800,000 in damages for the period during which they were not covered. The
Company is reviewing its alternatives with respect to the court's decision.
ITEM 2. CHANGES IN REGISTERED SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 11 - Earnings per share computations
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K:
None
Page 15
<PAGE>
SIGNATURES
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.
VARITY CORPORATION
/s/ N.D. Arnold /s/ Kevin C. Shanahan
________________________________ ______________________________________
N.D. Arnold Kevin C. Shanahan
Senior Vice President and Vice President, Controller
Chief Financial Officer (Principal Accounting Officer)
(Principal Financial Officer)
December 7, 1994
Page 16
<PAGE>
VARITY CORPORATION
INDEX TO EXHIBITS
Exhibit
Number
- -------
11.0 EARNINGS PER SHARE COMPUTATIONS
11.1 Primary Earnings Per Share Computations for Three Months Ended October
31, 1994 and 1993.
11.2 Primary Earnings Per Share Computations for Nine Months Ended October
31, 1994 and 1993.
11.3 Fully Diluted Earnings Per Share Computations for Three Months Ended
October 31, 1994 and 1993.
11.4 Fully Diluted Earnings Per Share Computations for Nine Months Ended
October 31, 1994 and 1993.
27.0 FINANCIAL DATA SCHEDULE
Page 17
<PAGE>
EXHIBIT 11.1
VARITY CORPORATION
PRIMARY EARNINGS PER SHARE COMPUTATIONS
(Dollars in millions except per share amounts)
<TABLE>
<CAPTION>
Three months ended October 31,
--------------------------------
1994 1993
--------------- ---------------
<S> <C> <C>
Income before discontinued operation................. $ 32.7 $ 18.9
Preferred stock dividend entitlements................ (.6) (.6)
------- -------
Income attributable to common stockholders before
discontinued operation (A)......................... 32.1 18.3
Earnings from discontinued operation (B)............. - 3.3
------- -------
Net income attributable to common stockholders (C)... $ 32.1 $ 21.6
======= =======
Weighted average shares of common stock outstanding
during the period (in thousands)................... 43,757 36,929
Common stock equivalents:
Common stock options............................... 408 307
Long-term incentive plans.......................... - 11
------- -------
Primary weighted average shares of common stock
outstanding during the period (D).................. 44,165 37,247
======= =======
Primary income per share of common stock:
Before discontinued operation (A/D)................ $ .73 $ .49
Discontinued operation (B/D)....................... $ - $ .09
Net income (C/D)................................... $ .73 $ .58
</TABLE>
<PAGE>
EXHIBIT 11.2
VARITY CORPORATION
PRIMARY EARNINGS PER SHARE COMPUTATIONS
(Dollars in millions except per share amounts)
<TABLE>
<CAPTION>
Nine months ended October 31,
-------------------------------
1994 1993
-------------- ---------------
<S> <C> <C>
Income before discontinued operation, extraordinary
loss and cumulative effect of changes in accounting principles.. $ 80.5 $ 47.1
Preferred stock dividend entitlements............................. (1.8) (9.8)
------- -------
Income attributable to common stockholders before
discontinued operation, extraordinary loss and
cumulative effect of changes in accounting principles (A)....... 78.7 37.3
Earnings from discontinued operation (B).......................... 27.6 2.2
Extraordinary loss (C)............................................ - (1.7)
Cumulative effect of changes in accounting principles (D)......... - (146.1)
------- -------
Net income (loss) attributable to common stockholders (E)......... $ 106.3 $(108.3)
======= =======
Weighted average shares of common stock outstanding
during the period (in thousands)................................ 43,897 33,776
Common stock equivalents:
Common stock options............................................ 431 310
Long-term incentive plans....................................... 6 24
------- -------
Primary weighted average shares of common stock
outstanding during the period (F)............................... 44,334 34,110
======= =======
Primary income (loss) per share of common stock:
Before discontinued operation, extraordinary loss and
cumulative effect of changes in accounting principles (A/F)... $ 1.78 $ 1.09
Discontinued operation (B/F).................................... $ .62 $ .07
Extraordinary loss (C/F)........................................ $ - $ (.05)
Cumulative effect of changes in accounting principles (D/F)..... $ - $ (4.28)
Net income (loss) (E/F)......................................... $ 2.40 $ (3.17)
</TABLE>
<PAGE>
EXHIBIT 11.3
VARITY CORPORATION
FULLY DILUTED EARNINGS PER SHARE COMPUTATIONS
(Dollars in millions except per share amounts)
<TABLE>
<CAPTION>
Three months ended October 31,
-------------------------------
1994 1993
-------------- ---------------
<S> <C> <C>
Income before discontinued operation................... $ 32.7 $ 18.9
Preferred stock dividend entitlements.................. (.6) (.6)
------- -------
Income attributable to common stockholders before
discontinued operation (A)........................... 32.1 18.3
Earnings from discontinued operation (B)............... - 3.3
------- -------
Net income attributable to common stockholders (C)..... $ 32.1 $ 21.6
======= =======
Weighted average shares of common stock outstanding
during the period (in thousands)..................... 43,757 43,844
Common stock equivalents:
Common stock options................................. 421 317
Long-term incentive plans............................ - 11
------- -------
Fully diluted weighted average shares of common stock
outstanding during the period (D).................... 44,178 44,172
======= =======
Fully diluted income per share of common stock:
Before discontinued operation (A/D).................. $ .73 $ .41
Discontinued operation (B/D)......................... $ - $ .08
Net income (C/D)..................................... $ .73 $ .49
</TABLE>
<PAGE>
EXHIBIT 11.4
VARITY CORPORATION
FULLY DILUTED EARNINGS PER SHARE COMPUTATIONS
(Dollars in millions except per share amounts)
<TABLE>
<CAPTION>
Nine months ended October 31,
--------------------------------
1994 1993
--------------- ---------------
<S> <C> <C>
Income before discontinued operation, extraordinary
loss and cumulative effect of changes in accounting principles.. $ 80.5 $ 47.1
Preferred stock dividend entitlements............................. (1.8) (1.9)
------- -------
Income attributable to common stockholders before
discontinued operation, extraordinary loss and
cumulative effect of changes in accounting principles (A)....... 78.7 45.2
Earnings from discontinued operation (B).......................... 27.6 2.2
Extraordinary loss (C)............................................ - (1.7)
Cumulative effect of changes in accounting principles (D)......... - (146.1)
------- -------
Net income (loss) attributable to common stockholders (E)......... $ 106.3 $(100.4)
======= =======
Weighted average shares of common stock outstanding
during the period (in thousands)................................ 43,897 41,497
Common stock equivalents:
Common stock options............................................ 435 336
Long-term incentive plans....................................... 6 24
------- -------
Primary weighted average shares of common stock
outstanding during the period (F)............................... 44,338 41,857
======= =======
Primary income (loss) per share of common stock:
Before discontinued operation, extraordinary loss and
cumulative effect of changes in accounting principles (A/F)..... $ 1.78 $ 1.08
Discontinued operation (B/F).................................... $ .62 $ .05
Extraordinary loss (C/F)........................................ $ - $ (.05)*
Cumulative effect of changes in accounting principles (D/F)..... $ - $ (4.28)*
Net income (loss) (E/F)......................................... $ 2.40 $ (3.17)*
</TABLE>
*Anti-dilutive
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1995
<PERIOD-START> FEB-01-1994
<PERIOD-END> OCT-31-1994
<CASH> 158
<SECURITIES> 57
<RECEIVABLES> 409
<ALLOWANCES> 0
<INVENTORY> 171
<CURRENT-ASSETS> 814
<PP&E> 986
<DEPRECIATION> 374
<TOTAL-ASSETS> 1,887
<CURRENT-LIABILITIES> 571
<BONDS> 164
<COMMON> 638
0
7
<OTHER-SE> 166
<TOTAL-LIABILITY-AND-EQUITY> 1,887
<SALES> 1,628
<TOTAL-REVENUES> 1,628
<CGS> 1,339
<TOTAL-COSTS> 1,339
<OTHER-EXPENSES> 187
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16
<INCOME-PRETAX> 86
<INCOME-TAX> 15
<INCOME-CONTINUING> 81
<DISCONTINUED> 28
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 108
<EPS-PRIMARY> 2.40
<EPS-DILUTED> 2.40
</TABLE>
