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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED] For the fiscal year ended JANUARY 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] 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
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(State or other jurisdiction of Incorporation) (IRS Employer Identification No.)
672 DELAWARE AVENUE, BUFFALO, NEW YORK 14209
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (716) 888-8000
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------- -----------------------------------------
Common stock U.S.A. New York Stock Exchange, Inc.
Unlisted trading privileges:
Boston Stock Exchange
Chicago Stock Exchange
Pacific Stock Exchange
Canada The Toronto Stock Exchange
Holland Amsterdam Stock Exchange
In the form of Dutch Bearer
Certificates
Securities registered pursuant to Section 12(g) of the Act:
None
---------------------------
(Title of class)
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.[ ]
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 AGGREGATE MARKET VALUE OF VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT AS OF MARCH 15, 1995 WAS APPROXIMATELY $1,432.4 MILLION.
THE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF MARCH 15, 1995 WAS
40,925,180 SHARES.
Portions of the Proxy Statement relating to the Annual Meeting of Stockholders
on May 25, 1995 are incorporated by reference in Part III of this report.
This report consists of 61 pages.
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VARITY CORPORATION
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PART I Page
Item 1. Business..................................................................................... 2
Item 2. Properties................................................................................... 8
Item 3. Legal Proceedings............................................................................ 9
Item 4. Submission of Matters to a Vote of Security Holders.......................................... 10
Executive Officers of the Registrant................................................................... 10
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................ 13
Item 6. Selected Financial Data...................................................................... 14
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 15
Item 8. Consolidated Financial Statements and Supplementary Data..................................... 21
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......... 52
PART III
Item 10. Directors and Executive Officers of the Registrant........................................... 52
Item 11. Executive Compensation....................................................................... 52
Item 12. Security Ownership of Certain Beneficial Owners and Management............................... 52
Item 13. Certain Relationships and Related Transactions............................................... 52
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................. 53
SIGNATURES.................................................................................................. 61
</TABLE>
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).
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PART I
ITEM 1. BUSINESS
THE COMPANY
Varity Corporation and its subsidiaries (the Company), founded in 1847, is a
major international industrial company with core manufacturing and distribution
businesses in automotive components and diesel engines. The Company conducts
and manages its businesses under two separate operating groups: the Automotive
Products Group and the Perkins Group. The Company's products are marketed in
more than 140 countries. Through a series of transactions completed between
January 1992 and June 1994, the Company sold its worldwide Massey Ferguson farm
machinery business to AGCO Corporation (AGCO).
THE AUTOMOTIVE PRODUCTS GROUP
The Company's Automotive Products Group supplies brake systems and components to
domestic and foreign manufacturers of passenger cars and light trucks, through
Kelsey-Hayes Company (Kelsey-Hayes), as well as medium and heavy duty trucks and
trailers, through Dayton Walther. The Company acquired Dayton Walther, a major
manufacturer of engineered products for the medium and heavy duty truck and
trailer industries in December 1986. On November 30, 1989, the Company acquired
K-H Corporation and its subsidiary, Kelsey-Hayes. Following the acquisition,
the Company took actions to reduce employment levels, reorganize the business
unit and management structure of Kelsey-Hayes and strengthen its international
business operations. Kelsey-Hayes and Dayton Walther comprise the Automotive
Products Group. The most significant automotive products manufactured and
marketed by the Automotive Products Group are anti-lock braking systems (ABS),
disc and drum brakes, disc brake rotors, hubs, drums, electromechanical sensors
and power door lock actuators for passenger cars and light trucks.
Kelsey-Hayes is a leading producer of brake components for passenger cars and
light trucks. The Company believes that Kelsey-Hayes is one of the leaders in
the production of ABS, supplying both two-wheel and four-wheel systems. Kelsey-
Hayes is the leading manufacturer of ABS in North America for light trucks.
Kelsey-Hayes has been successful in developing new ABS products for both light
trucks and passenger cars and recently introduced a new generation of four-wheel
ABS that is compatible with virtually any size passenger car or light truck and
any brake configuration. In order to meet increased North American ABS demand,
the Company completed construction of and commenced production in a new plant in
Fowlerville, Michigan during fiscal 1994. The Company also completed
construction of a new ABS plant in Heerlen, The Netherlands, which will commence
production in the first quarter of fiscal 1995, supplying European markets. In
addition, the Company believes that Kelsey-Hayes is also one of the leaders in
the production of foundation (conventional) brakes, and benefits from its
strategic position as a major supplier of both ABS and foundation brakes for
light trucks, vans and sport utility vehicles as North American production of
these vehicles grew 16% in fiscal 1994.
Dayton Walther supplies spoke wheels, hubs, brake drums and disc brake
calipers shipped as loose units or in assemblies to the medium and heavy duty
truck and trailer markets. Dayton Walther derives a major share of its business
from large OEMs. Dayton Walther's market share in all of its core products is
substantial, ranging from 23% to 47%.
The Company owns 46.3% of the outstanding common stock of Hayes Wheels
International, Inc. (Hayes Wheels), which the Company believes is the largest
supplier of cast aluminum wheels in Europe, the second largest supplier of cast
aluminum wheels in North America and the largest independent supplier of
fabricated steel wheels in North America. Prior to December 1992, Hayes Wheels
conducted its automotive wheels systems business jointly with the automotive
brakes systems business of Kelsey-Hayes. In December 1992, Hayes Wheels sold,
in separate public offerings, debt securities and common stock, decreasing the
Company's ownership interest in Hayes Wheels from 100% to 46.3%. As a result,
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Hayes Wheels is no longer consolidated with the Company for accounting purposes
and the Company accounts for its investment in Hayes Wheels using the equity
method of accounting. The Company believes that its ownership in Hayes Wheels
comprises an important and continuing portion of the Automotive Products Group.
AFTERMARKET PARTS
The aftermarket parts business consists of the Kelsey Parts business, which
supplies maintenance and repair parts for many brands of passenger cars and
light truck products. In connection with the Company's divestiture of certain
non-core businesses, on December 31, 1992 the Company sold Dayton Parts, Inc., a
supplier of maintenance and repair parts for heavy trucks.
INTERNATIONAL
Operations outside the United States, including those of Hayes Wheels, are
conducted through various foreign companies in which the Group's interest ranges
from minor to complete control. International manufacturing operations are
located in Canada, Italy, Mexico, Spain, Venezuela, The Netherlands and the
Czech Republic. The Automotive Products Group licenses its patents, designs,
manufacturing technology and know-how in a number of other foreign countries.
During the first quarter of fiscal 1993, the Company sold its majority
interest in Brembo Kelsey-Hayes, S.p.A., an Italian specialty producer of high
performance disc brakes and rotors, in connection with the Company's program to
divest non-core businesses. Expanding its international position during fiscal
1993, Kelsey-Hayes established a European ABS marketing and technical center in
Wiesbaden, Germany. During fiscal 1994, Kelsey-Hayes opened a sales office in
Korea.
COMPETITION
Suppliers to original equipment manufacturers (OEMs) operate under highly
competitive conditions. Certain OEMs are capable of producing products supplied
by the Automotive Products Group. The Automotive Products Group competes
directly with the OEMs as well as many other suppliers with respect to price,
quality, delivery and technical ability in developing products. The Company
believes that, as a result of its manufacturing and engineering expertise,
combined with an ongoing emphasis on cost control and quality, it has the
ability to compete effectively with the OEMs and with other suppliers. With
respect to brake components, the Automotive Products Group has over 15
substantial competitors, most of which are large and diversified concerns.
Kelsey-Hayes estimates that its share of the North American four-wheel ABS
market grew from 20% in 1993 to 24% in 1994 and is projected to increase in the
future in this growth market, based on awarded contracts. Kelsey-Hayes
estimates that its share of the North American foundation brake market
(excluding OEM captive manufacturers) on a unit basis was approximately 35% in
1994.
MARKETING AND DISTRIBUTION
Most of the Automotive Products Group's sales are made directly to OEMs, with
the remainder sold largely to replacement part distributors. Sales by the
Automotive Products Group to its three major customers, Ford Motor Company
(Ford), General Motors Corporation (GM) and Chrysler Corporation (Chrysler),
accounted for 76% of the Automotive Products Group's consolidated net sales in
fiscal 1994, with Ford being the largest customer during this period (36% of the
Automotive Products Group's consolidated net sales). Sales to all OEMs
accounted for approximately 99% of the Automotive Products Group's fiscal 1994
revenues. Although the loss of all or a substantial portion of sales to its
major customers, Ford, GM or Chrysler, would have a serious adverse effect on
its business, management believes that such a loss is unlikely as: the
Automotive Products Group has been doing business with each of these companies
for many years; sales to these companies are comprised of a number of different
products and models or types of the same products, the sales of which are not
dependent on each other; and sales of many products are made to individual
divisions and subsidiaries of each of these companies and are not dependent upon
sales to other divisions or subsidiaries of the same company.
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MARKET OVERVIEW
Sales by the Automotive Products Group are primarily dependent on the overall
level of North American passenger car and light truck production, which, in
turn, is sensitive to the overall level of United States economic activity.
Moreover, sales of passenger cars and light trucks have, in the past, been
adversely affected by recessionary business conditions and to some extent
increases in the general level of interest rates. The level of economic
activity in the United States was generally strong during 1994, despite interest
rate increases, as North American production of cars and light trucks continued
its recovery from the depressed 1991 levels. A prolonged downturn in the
overall level of United States economic activity or increased competition from
imported products or a prolonged strike at one or more of its major customers
would adversely affect the Automotive Products Group. The Automotive Products
Group continues its efforts to increase its global presence and to lessen
dependence on North American car and light truck production.
THE PERKINS GROUP
Through the Perkins Group, the Company designs, produces and markets a
comprehensive array of multi-cylinder water-cooled diesel engines in the 7 to
2,500 horsepower range. The 1,500 to 2,500 horsepower range was added in fiscal
1994 by the acquisition of Dorman Diesels Limited in the United Kingdom. The
intended uses and markets for the Perkins Group's engines vary widely among the
configurations of the particular engines. The Company adapts these basic
engines to meet the specific requirements of its diverse customer base. The
Perkins Group's engines are used as original equipment in virtually every
application for which diesel engines are suitable, including agricultural
tractors, industrial and construction machinery, material handling equipment,
generators, passenger cars, trucks, vans, buses and other commercial vehicles,
pleasure and commercial boats, armored personnel carriers and battle tanks. The
Perkins Group, together with its associate companies and licensees, is one of
the leading producers of diesel engines other than those used as original
equipment in passenger cars.
All of the Perkins Group's fully assembled engines are manufactured in the
United Kingdom, except for the sub-50 horsepower engines which are presently
sourced from ISM in Japan but which from 1996 onward will also be manufactured
by Perkins in the United Kingdom. In addition, the Company has associate
companies and licensees in 14 countries that manufacture or assemble Perkins
engines, often from kits sold to them by the Company. Tianjin Engine Works
recently became its first licensee in China.
The Perkins Group's customer base includes over 300 OEMs. The Company
believes that its associate companies and licensees sell to a similar number of
additional OEMs. The Perkins Group's 10 largest customers accounted for
approximately 47% of its net third party sales in fiscal 1994. No one customer
accounted for more than 10%.
In 1994, the Perkins Group continued to build on a ten year supply agreement,
commenced in 1992, with Caterpillar Inc. (Caterpillar), the world's largest
construction and earth-moving machinery producer, as sales continue to increase
from this agreement which covers a range of engines for back-hoe and wheeled
loaders, road pavers and excavators. Aggregate sales over the ten year term of
the agreement could be up to $1.0 billion. In addition, long-term supply
agreements were signed in fiscal 1994 with Massey Ferguson after its divestiture
by the Company to AGCO and with F.G. Wilson, the United Kingdom based generator
set manufacturer now owned by Emerson Electric Co.
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PARTS
The Company provides replacement parts for all of the engines that it sells.
The Company carries over 34,000 different replacement parts for diesel engines,
many of which it manufactures or assembles and the balance of which it obtains
from independent suppliers. In 1993, the Perkins Group consolidated its parts
warehouses and opened a new parts distribution center in Manchester, England,
managed by Caterpillar Logistics Systems. The center, believed to be the most
efficient of its kind in Europe, operates its computerized order processing,
retrieval and shipment services 24 hours a day for customers around the world.
Sales of parts accounted for 16% of the Perkins Group's net sales in fiscal
1994.
COMPETITION
Most diesel engines are used by the engine manufacturer in other products
produced by it or its affiliates, including cars and trucks, agricultural
equipment and industrial machinery. Consequently, competition in the diesel
engine market is primarily for those customers that do not manufacture engines
for their own use. The Company competes for third-party sales directly with
other producers of diesel engines, which are either large companies conducting
business on an international scale, with full product ranges, or small or
medium-sized companies conducting business locally, often with a limited range
of products. The Company also competes indirectly with manufacturers of gasoline
engines. The Perkins Group's major competitors for third-party sales of diesel
engines worldwide are Klockner-Humboldt-Deutz AG (Deutz), Cummins Engines Co.
Inc., Caterpillar (generally for products not covered by the supply agreement
described above), Detroit Diesel Corporation and several Japanese producers.
The Perkins Group estimates that its share of the Western Europe diesel engine
market, its primary market, has averaged approximately 12% of units sold over
the three year period from fiscal 1992 to fiscal 1994. The Company believes
that the most important competitive factor in the diesel engine market is the
ability to design and manufacture engines specially adapted to the needs of an
individual customer for a particular application. Quality, fuel efficiency,
after-sale servicing and pricing are also important, as is the ability to meet
increasingly stringent environmental requirements. The Company believes that
the Perkins Group competes effectively on all of these bases and compares
favorably with many of its competitors in its ability to design and manufacture
specialized engines and in its ability to meet environmental requirements.
MARKETING AND DISTRIBUTION
Third-party sales of fully assembled diesel engines (mostly to OEMs) and third-
party sales of diesel engines replacement parts are made both directly by the
Company (primarily through sales offices in eight countries) and through a
worldwide network of approximately 4,000 independent distributors and dealers in
140 countries. To facilitate direct sales by the Perkins Group, and to a lesser
extent by its distributors and dealers, four of the Perkins Group's sales
offices also provide engine finishing services and other support. The Company
has additional distributorship agreements covering North America with Detroit
Diesel Corporation and Japan with Iseki. Diesel engines manufactured or
assembled by associate companies or licensees are distributed by them, generally
in their home countries. Distribution arrangements in certain countries, which
may involve those countries' governments, prohibit the Company from effecting
sales other than through designated national distributors.
OTHER OPERATIONS
HYDRAULIC COMPONENTS
The Company also manufactures, through its Pacoma components operations,
hydraulic cylinders and hydraulic valves and, to a lesser degree, allied
equipment for producers of construction machines, agricultural and industrial
equipment and, more recently, for the automotive passenger car industry.
Pacoma's products, all of which are manufactured in Germany, are marketed by
Pacoma to over 80 OEMs.
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In recent years, Pacoma has substantially decreased its dependence on the
agricultural equipment business by diversifying applications of its products and
expanding its third-party customer base. All sales of components are made
directly by the Company to OEMs.
The principal competitive factors in the sale of hydraulic cylinders to third
parties vary by geographic area and application. In North America, where
hydraulic cylinders have generally been standardized, competition, particularly
in the agricultural equipment market, is based primarily on price. In Western
Europe, where most components purchased by third parties are manufactured
according to specific product requirements, competition is based primarily on
product performance, pricing and reputation in the industry. The Company
believes that, although there are many manufacturers of hydraulic cylinders for
the OEM agricultural equipment markets, it is one of a small number of
manufacturers with the ability to meet the more stringent quality and durability
standards of the OEM construction machinery market and the passenger car
industry.
POLYGON REINSURANCE
The Company's captive insurance subsidiary, Polygon Reinsurance Company Limited,
a Bermuda corporation, provides reinsurance for product liability, property,
business interruption and other risks arising from the Company's operations.
Because it offers reinsurance, the Company believes that primary insurance
coverage is more readily available to it and that, in certain instances, its
insurance premiums may be favorably affected.
BACKLOG
There is no significant backlog of unfilled equipment orders. Substantially all
of the unfilled equipment orders at any time are expected to be filled within
the following year.
INFORMATION BY SEGMENT AND GEOGRAPHIC AREA
Information about the Company's operations and assets by industry segment and
geographic area for the years ended January 31, 1995, 1994 and 1993 appears in
Note 18 of the Notes to Consolidated Financial Statements and is included in
Part II on pages 42 through 44 of this Form 10-K. Sales by product are included
in Part II on page 51 of this Form 10-K.
EMPLOYEES AND LABOR RELATIONS
At January 31, 1995, the Company had approximately 10,500 full-time employees.
The Company's worldwide labor force is represented by approximately 20 labor
organizations. Employee-management relations vary from country to country.
Certain of the Company's production facilities are located in areas where
organized labor has traditionally been very active.
SOURCES AND AVAILABILITY OF COMPONENTS AND RAW MATERIAL
The Company purchases numerous components in its manufacturing operations. Most
of these components are available from a variety of sources, however, certain
critical components are produced by a small number of suppliers and may, in
certain cases, be purchased from a single source of supply. The unplanned loss
of any of these single sources of supply could have a significant adverse effect
on those operations.
There are many sources of the raw materials and other component parts
essential to the conduct of the Company's operations readily available in
reasonable proximity to those plants utilizing such materials. The Company has
not experienced any significant supply problems for its operations for many
years and the Company does not anticipate any significant supply problems in the
foreseeable future.
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RESEARCH AND DEVELOPMENT; PATENTS; TRADEMARKS
During fiscal 1994, 1993 and 1992 the Company expended $44.5 million, $39.6
million and $32.0 million, respectively, on research and development. Such
research and development expenditures have enabled the Company to upgrade its
existing product lines and introduce new products. The Company has a history of
developing new technology jointly with its suppliers or customers, particularly
for diesel engines. The cost of such programs with suppliers is reflected
mainly in unit costs and not necessarily in research and development
expenditures.
The Company owns numerous patents and trademarks and has patent licenses from
third parties relating to products and manufacturing methods. The Company also
grants patent and trademark licenses to others throughout the world. The
Company is the sole owner of certain advanced diesel engine fuel injection
technology and rights, in part by patent license. The Perkins Group is
obtaining additional patent protection with respect to this technology. The
Company believes that continued development of this technology will aid the
Perkins Group in its engineering design, production and sale of advanced diesel
engines. Various patents relating to the anti-lock brakes business have been
issued to Kelsey-Hayes and others, including its competitors. The Company
examines its own and its competitors' products to guard against infringement,
both on its own initiative and, where appropriate, in response to inquiries or
comments of others. The Company views its own patents and patent applications
as significant. Based on examination of its own and others' patents, available
existing technology and the ability to avoid infringement issues by engineering
design, the Company does not believe its business is materially impacted by
patents of others.
The Company regards its many trademarks as having significant value and as
being an important factor in the marketing of its products. The Company
believes that its most significant trademarks are "Kelsey-Hayes," "Perkins,"
"Dayton" and "Pacoma," as well as Kelsey-Hayes' design trademarks. The foregoing
trademarks are generally registered in the United States, Canada, the United
Kingdom and a number of other countries where the Company operates. In
addition, the Company owns numerous minor trademarks that are registered or for
which a registration application is pending. The Company's policy is to pursue
trademark registration wherever possible and to oppose infringement of its
trademarks.
ENVIRONMENTAL PROTECTION AND SAFETY LAWS
Environmental protection and safety laws in the countries in which the Company
manufactures and sells its products have a significant effect on product design,
but apply equally to competitors and have not had, nor are they expected to
have, a material adverse effect on the Company's competitive position. The
Company does not anticipate that the costs it expects to incur in order to meet
environmental and safety standards for its products or to satisfy environmental
standards relating to operation of its manufacturing and other facilities
imposed by various legislative bodies around the world will be materially
adverse to the Company.
IMPACT OF GOVERNMENT POLICIES
The operations of the Company and its competitors are affected by government
policies, such as those relating to interest rates, trade, the price and
availability of oil, and exchange and price controls.
The Company's production facilities are located principally in the United
States, United Kingdom, The Netherlands, Canada and Germany. Although there is
some interdependence among certain of the Company's facilities for components
and services, adverse local conditions in any one region should not have a
significant adverse effect on the Company's operations.
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The Company's production costs are affected by conditions prevailing in the
countries in which its production facilities are located. The Company is
exposed to currency exchange risks in the transfer of goods and services between
countries. Exchange rate fluctuations also affect the Company's consolidated
financial reporting as a result of the translation of its financial statements
into U.S. dollars. The Company's production costs, profit margins and
competitive position are materially affected by the strength of the currencies
in the countries where it manufactures goods relative to the strength of the
currencies in the countries where its goods are sold. To protect against
fluctuations in foreign currencies, the Company from time to time enters into
foreign exchange contracts, primarily to exchange dollars and various European
currencies for pound sterling, for periods generally consistent with the
underlying transaction exposures.
ITEM 2. PROPERTIES
The Company and its subsidiaries operate 18 manufacturing facilities in the
United States and Canada with aggregate space of approximately 3.2 million
square feet. There are also six facilities located in Europe with a total
manufacturing area of approximately 3.0 million square feet. All of these
facilities are owned by the Company. The Company also leases a 30,000 square
foot facility in Singapore. All of the Company's European manufacturing
facilities are pledged to its lenders.
The automotive products segment manufactures its range of products at 18
locations in North America and one in Europe aggregating approximately 3.3
million square feet and ranging in size from approximately 500,000 square feet
in Detroit, Michigan to 56,000 square feet in Carrollton, Kentucky. The
locations of this segment's plants are as follows:
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Brighton, Michigan Fowlerville, Michigan Moraine, Ohio
Camden, Tennessee Fremont, Ohio Mt. Vernon, Ohio
Carrollton, Kentucky-2 Heerlen, The Netherlands Portsmouth, Ohio
Detroit, Michigan Jackson, Michigan St. Catharines, Ontario
Fayette, Ohio Kingsway, Ohio Woodstock, Ontario-2
Fenton, Michigan Milford, Michigan
</TABLE>
The engines segment manufactures diesel engines and parts at four locations
in England (Lincoln, Peterborough, Shrewsbury and Stafford) with a total space
of approximately 2.6 million square feet, the largest of which is approximately
1.8 million square feet. The Company also operates a 30,000 square foot
facility in Singapore.
The other products segment, which presently includes the hydraulic cylinder
and valve manufacturing business, operates from a 313,000 square foot facility
in Eschwege, Germany.
The Company also operates five major parts warehouses in five countries,
three of which are leased. In addition, the Company owns or leases a number of
other properties in the United States, Canada, the United Kingdom and certain
other countries.
In general, the Company believes that its facilities are in good operating
condition and are suitable for their intended use. In order to meet increased
ABS demand in the United States and Europe within the automotive products
segment, the Company completed construction of two new plants in fiscal 1994,
located in Heerlen, The Netherlands and Fowlerville, Michigan. In the engines
segment the Company added three plants in 1994 through the acquisition of Dorman
Diesels Limited. Current facilities are adequate for existing production needs
and provide a reasonable margin for further growth and expansion in the
underlying businesses. The Company believes that its plants and equipment are
adequately insured. Over the last five years, the Company has disposed of a
number of its manufacturing facilities as part of the rationalization of its
businesses. It continues to own several facilities no longer used in its
operations which are being held for sale.
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Item 3. Legal Proceedings
1. 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 circuit 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. On March
6, 1995, the Company filed in the Supreme Court of the United States a petition
for a writ of certiorari to review the circuit court's decision.
2. Fruehauf Trailer Corporation
In July, 1989, a predecessor of Fruehauf Trailer Corporation (FTC) acquired the
trailer operations of Fruehauf Corporation and in that connection assumed
certain liabilities. FTC is obligated to indemnify the Company's subsidiary, K-H
Corporation, in respect of such assumptions. FTC has advised the Company that it
does not intend, at least in the foreseeable future, to make further payments in
respect to certain of such assumed liabilities. If FTC is unable to pay, then
the Company's subsidiary, K-H Corporation, may be liable with respect to certain
of such liabilities which arose out of operations prior to the 1989 sale,
including those in respect of products manufactured or sold, environmental
liabilities, worker's compensation and retiree welfare benefits. FTC appears to
have taken its position at the request of its lenders for purposes of focusing
the use of available cash on current operations of FTC. The actual amount of
such liabilities and/or the extent to which the Company's subsidiary, K-H
Corporation, actually may be liable cannot be determined at this time. The
Company intends to vigorously defend its position with respect to FTC and all
other third parties.
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Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders for the quarter ended
January 31, 1995.
Executive Officers of the Registrant
The following table sets out the names and ages of each of the executive
officers of the Company, their positions as of January 31, 1995, the date on
which they were appointed to such positions and their business experience during
the past five years:
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<CAPTION>
Date Appointed Business Experience During
Name Title Age To Present Position Past Five Years (1)
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V.A. Rice............. Chairman of the.......54.......May 1980............ Same
Board & Chief
Executive Officer
N.D. Arnold........... Senior Vice...........46.......August 1990......... Senior Vice President & Chief
President & Chief Administrative Officer --
Financial Officer March 1988 - July 1990.
P.N. Barton........... Vice President,.......55.......March 1988.......... Same
Strategic Planning
& Development
J.H. Chandler......... Senior Vice...........55.......September 1994...... Senior Vice President, Human
President & Chief Resources -- April 1994 -
Administrative Officer August 1994. Group Corporate
Affairs Director, Grand
Metropolitan PLC -- October
1991 - March 1994. Group
External Affairs Director,
Grand Metropolitan PLC --
October 1990 - September
1991. Executive Vice President &
Chief Administrative Officer,
The Pillsbury Company --
January 1989 - September
1990.
F.J. Chapman.......... Vice President,.......55.......March 1990.......... Treasurer -- February 1989 -
Treasurer February 1990.
R.C. Clarke........... Vice President &......56.......November 1994....... Vice President, Corporate
Executive Assistant to Communications -- January
the Chairman & CEO 1994 - October 1994. Director,
& Acting Vice Aubade Investments Ltd.
President, Corporate -- February 1991 - December
Communications 1993. Director, Varity
Comercial Ltd. -- September
1988 - January 1991.
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Date Appointed Business Experience During
Name Title Age To Present Position Past Five Years (1)
- ---- ----- --- ------------------- --------------------------
<S> <C> <C> <C> <C>
J.A. Gilroy........... Chief Operating ......58.......November 1994....... Group Chief
Officer & Acting Executive, Perkins Group --
Group Chief February 1989 - October 1994.
Executive, Perkins
Group
E.J. Gulda............ Group Chief...........49.......September 1994...... Group President, Kelsey Hayes --
Executive, February 1994 - August 1994.
Kelsey-Hayes Group President, Kelsey-Hayes
Group Worldwide ABS & Controls --
February 1991- January 1994.
President, Kelsey-Hayes Brake
Group -- February 1990 -
January 1991.
D.W. Gutow............ Vice President,.......56.......September 1990...... Vice President Tax, Norton
Tax Planning Co. -- June 1980 - August
1990.
K. Iida............... President, Varity.....53.......June 1992........... General Manager, Perkins
(Japan) KK Engines (Japan) KK -- April
1982 - May 1992.
M.S. Protzik.......... Vice President,.......52.......July 1994........... Director, Pensions & Benefits --
Compensation & October 1991 - June 1994.
Benefits Director, Compensation &
Benefits, TRW, Inc. -- April
1981 - September 1991.
A.A. Rogers........... Vice President,.......44.......January 1995........ Personnel Manager - Middle East,
Management Far East, Australia & New
Resourcing Zealand, SEDCO Forex
Schlumberger -- January 1992 -
October 1994. Manager,
Compensation Benefits &
Manpower Planning, SEDCO
Forex Schlumberger -- January
1990 - December 1991.
K.C. Shanahan......... Vice President,.......46.......August 1994......... Vice President, Controller -
Investor Relations Principal Accounting Officer--
& Acting Vice January 1992 - August 1994.
President, Controller - Assistant Controller, Textron
Principal Accounting Inc. -- June 1987 - January
Officer 1992.
J.E. Utley............ Senior Vice...........53.......September 1994...... Senior Vice President,
President, Strategic & Chairman, Kelsey-Hayes --
Marketing March 1994 - August 1994.
Chairman & Group Chief
Executive, Kelsey-Hayes --
August 1992 - February 1994.
Vice Chairman, K-H
Corporation & Vice President,
Strategic Planning, Kelsey-
Hayes Company -- December
1989 - July 1992.
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Date Appointed Business Experience During
Name Title Age To Present Position Past Five Years (1)
- ---- ----- --- ------------------- --------------------------
<S> <C> <C> <C> <C>
K.L. Walker........... Vice President,.......46.......September 1991...... Senior Counsel, TRW, Inc.,
Legal & Secretary Engine Components Group
-- July 1984 - August 1991.
W.N. White............ President,............52.......July 1994........... Vice President, Operations,
Dayton Walther Strategic
Planning/Acquisitions, Monroe
Auto Equipment -- December
1993-April 1994.
Vice President, Operations and
Engineering, Monroe Auto
Equipment -- January 1990 -
November 1993.
A.T. Williams......... Vice President,.......48.......July 1994........... Vice President, Business
Financial & Performance -- February 1991 -
Business Analysis June 1994. Director, Financial
Analysis -- November 1986 -
January 1991.
</TABLE>
(1) All positions shown are with the Company unless otherwise indicated.
(2) All executive officers are appointed by the Board of Directors of the
Company and serve at its pleasure.
(3) There are no family relationships between any of the executive officers,
directors or persons nominated for such positions and there is no
arrangement or understanding between any of the executive officers and any
other person pursuant to which he or she was selected as an officer.
12
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
WORLD HEADQUARTERS
672 Delaware Avenue
Buffalo, New York 14209-2202
Telephone: 716 888-8000
ANNUAL MEETING
The annual meeting of the Company's shareholders will be held on Thursday, May
25, 1995 at the Hyatt Hotel, Two Fountain Plaza, Buffalo, New York.
STOCK TRADING SYMBOL
Common: VAT
STOCK EXCHANGE LISTINGS
Common: New York, Toronto
Common stock has unlisted trading privileges on Boston, Chicago and Pacific
stock exchanges.
TRANSFER AGENT AND REGISTRAR
Mellon Securities Trust Company
120 Broadway
New York, New York 10271
Telephone 1 800 526-0801
1 412 236-8000
Telecommunications Devices for the Deaf
1 800 231-5469
DIVIDENDS
As long as any shares of Class II Series A Preferred Stock are outstanding,
unless all cumulative and "additional" dividends then payable on these shares
have been declared and paid or amounts set aside for payment, the Company may
not, without the prior approval of the holders of these shares:
1) declare or pay any dividends (other than stock dividends in shares of the
Company ranking junior to these shares) on any common or junior shares;
2) redeem, purchase or make any capital distribution in respect of any equal or
junior shares; or
3) issue any additional shares ranking as to capital or dividends prior to or
on a parity with these shares.
At this time all dividends now payable have been paid or set aside for payment.
STATISTICAL DATA
January 31, 1995 1994
------ ------
Number of registered
shareholders:
Common................ 19,538 21,544
Preferred............. 4 8
Shares outstanding
(thousands):
Common................ 41,661 43,957
Class II Preferred 2,001 2,001
MARKET PRICE OF COMMON STOCK
<TABLE>
<CAPTION>
Year ended January 31, 1995
----------------
Quarters HIGH LOW
- -------- ---- ---
<S> <C> <C>
First $50 1/8 $33 1/2
Second $42 $35 1/2
Third $39 5/8 $33
Fourth $39 $34
</TABLE>
<TABLE>
<CAPTION>
Year ended January 31, 1994
----------------
Quarters High Low
- -------- ---- ---
<S> <C> <C>
First $34 3/4 $25 3/4
Second $34 3/8 $26 7/8
Third $39 1/8 $33 1/8
Fourth $47 7/8 $36 1/4
</TABLE>
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA /(1)(2)(3)/
The following selected financial data has been derived from the Consolidated
Financial Statements of the Company for the fiscal years 1994, 1993, 1992, 1991
and 1990.
The selected financial data should be read in connection with the Consolidated
Financial Statements and Notes thereto and Management's Discussion and Analysis
of Financial Condition and Results of Operations included elsewhere herein.
<TABLE>
<CAPTION>
(Dollars in millions except per share amounts)
Years ended January 31, 1995 1994 1993/(4)/ 1992 1991
------ ------ --------- ------ ------
<S> <C> <C> <C> <C> <C>
Total sales and revenues.... $2,268 $1,827 $2,234 $2,037 $2,232
Income (loss) before
discontinued operation,
extraordinary loss and
cumulative effect of
changes in accounting
principles................. $ 117 $ 69 $ 50 $ (96) $ 41
Per share income (loss)
before discontinued
operation, extraordinary
loss and cumulative
effect of changes in
accounting principles:
Primary................... $ 2.61 $ 1.60 $ 1.18 $(4.57) $ .93
Fully diluted............. $ 2.61 $ 1.56 $ 1.17 $(4.57)* $ .93*
* Anti-dilutive
Total assets................ $1,824 $1,760 $1,805 $2,521 $2,756
Long-term debt.............. $ 163 $ 186 $ 305 $ 717 $ 609
</TABLE>
(1) See Note 15 to the Consolidated Financial Statements included herein for
discussion of contingent liabilities and commitments.
(2) No cash dividends on common stock have been paid in any of the years in the
five-year period ended January 31, 1995.
(3) As a result of the fiscal 1994 sale of the farm equipment segment, prior
years' financial data has been restated to conform to the current year
presentation of the farm equipment segment as a discontinued operation.
(4) Amounts reported for January 31, 1993 reflect the sale of a majority
ownership in Hayes Wheels.
14
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
For the year ended January 31, 1995 (fiscal 1994), Varity Corporation earned
$117.1 million ($2.61 per share) compared to $69.1 million ($1.60 per share)
for fiscal 1993 and $49.5 million ($1.18 per share) for fiscal 1992 before
discontinued operations, extraordinary losses and the cumulative effect of
changes in accounting principles. In June 1994, the Company completed the sale
of its worldwide Massey Ferguson farm machinery business to AGCO Corporation
(AGCO) 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, the farm
equipment segment, including the gain realized on sale, has been presented as a
discontinued operation in the accompanying financial statements. During the
first quarter of fiscal 1993, the Company recognized a one-time, non-cash $146.1
million charge ($3.98 per share) in connection with the adoption of two new
accounting standards as described in Note 3 of the Notes to Consolidated
Financial Statements. In addition, during fiscal 1993 and fiscal 1992 the
Company incurred extraordinary losses of $1.7 million ($.05 per share) and $6.4
million ($.24 per share), respectively, with respect to the early redemption of
debt. Fiscal 1992 results also included a $17.3 million non-recurring gain
from the sale of a majority ownership in a Kelsey-Hayes subsidiary. As a
result, net income (loss) amounted to $144.7 million, $(71.5) million and $27.0
million in fiscal 1994, 1993 and 1992, respectively.
Foreign exchange rate fluctuations between various European currencies and to
a lesser extent the United States dollar can significantly affect the Company's
reported results, as a substantial volume of engines and related parts are sold
into other countries from manufacturing locations in the United Kingdom, where a
significant portion of the costs associated with the engines segment are
incurred. This cross-trading gives rise to exchange gains and losses on
individual transactions in different currencies.
The average value of the U.S. dollar (utilized to translate foreign currency
revenues and expenses) for fiscal 1994 was 3% lower against the British pound
and approximately 4% lower against the other major European currencies, compared
to such average values in fiscal 1993. As a result, the Company's sales and
related costs transacted in the foreign countries where the Company primarily
operates were at marginally higher relative values than in the prior year, based
on the higher translation value of such foreign currencies. At January 31, 1995,
the value of the U.S. dollar was 5% lower against the British pound and
approximately 10% lower against the other major European currencies as compared
to values at the previous year-end. Accordingly, the Company's consolidated
assets and liabilities denominated in foreign currencies (which are translated
using the respective year-end rates of exchange) are affected by the higher
translation value of such foreign currencies in comparison to the prior year,
the impact of which is reflected in the foreign currency translation adjustment
account in stockholders' equity in the Company's consolidated balance sheet.
The accompanying fiscal 1992 consolidated statement of operations is not
readily comparable to fiscal 1994 or fiscal 1993 as a result of the Company's
disposition in the fourth quarter of fiscal 1992 of a majority ownership of
Kelsey-Hayes' wheels business which is no longer included in the Company's
consolidated results, as is described more fully in Note 17 of the Notes to
Consolidated Financial Statements. Subsequent to the disposition, the Company's
remaining ownership in the wheels business is accounted for on the equity method
of accounting. Significant declines in sales and revenues, cost of goods sold,
marketing, general and administration and interest, net are a direct result of
this disposition.
15
<PAGE>
SEGMENT OPERATING REVIEW
<TABLE>
<CAPTION>
(Dollars in millions)
Fiscal 1994 Fiscal 1993 Fiscal 1992
----------- ----------- -----------------------------
Actual Actual Pro Forma /(1)/ Historical
----------- ----------- --------------- ----------
<S> <C> <C> <C> <C>
Sales and revenues:
Automotive products:
Brake Systems $1,228 $1,018 $ 856 $1,366
Heavy Duty Brakes 161 160 134 171
Eliminations (16) (29) (21) (21)
------ ------ ------ ------
1,373 1,149 969 1,516
Engines 861 702 744 744
Other 55 50 60 60
Eliminations (21) (74) (86) (86)
------ ------ ------ ------
Total $2,268 $1,827 $1,687 $2,234
====== ====== ====== ======
Operating income (loss):
Automotive products:
Brake Systems $ 121 $ 87 $ 68 $ 128
Heavy Duty Brakes (5) 3 (2) 5
------ ------ ------ ------
116 90 66 133
Engines 69 46 42 42
Other (1) (2) (5) (5)
------ ------ ------ ------
Total $ 184 $ 134 $ 103 $ 170
====== ====== ====== ======
</TABLE>
(1) Automotive products segment information for fiscal 1992 is presented on a
pro forma basis to exclude $547 million of sales and revenues and $56
million of operating earnings of Hayes Wheels International, Inc. (Hayes
Wheels), Brembo Kelsey Hayes, S.p.A. (Brembo) and Dayton Parts, Inc.
(Dayton Parts). Subsequent to the Company's sale of its majority
ownership in Hayes Wheels in the fourth quarter of fiscal 1992, such
operations are not consolidated and accordingly are not included in the
above segment information. The Company's 46% share of the earnings of
Hayes Wheels for the last month of fiscal 1992 and subsequent thereto,
excluding charges associated with first quarter fiscal 1993 accounting
changes, is included in equity in earnings of associated companies in the
consolidated statements of operations. Brembo and Dayton Parts were sold
and as a result did not contribute to the Company's fiscal 1993 or 1994
results. Automotive products results have also been adjusted to reflect
the impact of the incremental costs associated with Statement of Financial
Accounting Standard (SFAS) No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," which was adopted in the
first quarter of fiscal 1993, as if it had been adopted at the beginning
of fiscal 1992.
16
<PAGE>
AUTOMOTIVE PRODUCTS
United States automobile and light truck demand during fiscal 1994 continued to
improve, as measured by a 10% increase in vehicle sales over the comparable
fiscal 1993 period, reflecting a continuation of increased consumer confidence
and a generally stronger overall business environment. Correspondingly, North
American industry production of these vehicles, which incorporate Kelsey-Hayes'
products and influences the Company's automotive products segment, increased 11%
during the same period. Within Varity's automotive products segment, Kelsey-
Hayes brake systems benefitted 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, as North American industry
production of these vehicles increased 16% during fiscal 1994. In excess of 70%
of Kelsey-Hayes sales of braking systems including ABS and foundation brakes are
generated from light trucks, vans and sport utility vehicles. As a result,
Kelsey-Hayes brake systems recorded sales of $1.2 billion in the current year,
an increase of 21% over fiscal 1993.
In addition to increased North American light vehicle production, higher sales
also resulted from expanded ABS installation rates in new vehicles (54%
penetration in fiscal 1994 versus 37% in fiscal 1993), continued industry
conversion from two-wheel ABS to higher value four-wheel systems on numerous
vehicle platforms and strong demand for foundation brake products.
Kelsey-Hayes brake systems segment operating income in fiscal 1994 increased
by 39% to $121 million from $87 million last year. Earnings improved over the
prior year as a direct result of increased sales, particularly higher margin
four-wheel ABS products, and the continued focus on implementing cost reductions
and productivity improvements. The current year's results were tempered,
however, by expenses associated with expanding capacity, pursuing potential ABS
business and product development and start up expenditures in Europe.
In addition, North American Kelsey-Hayes brake systems engineering and product
development costs increased 28% during fiscal 1994, in support of two new,
state-of-the-art four-wheel ABS offerings -- the 25 series for light truck
applications and the 30 series for passenger car applications. These new
product offerings are designed for higher performance, lower cost, smaller size,
a 30% reduction in the number of parts and more packaging options for
installation.
The automotive products segment also includes sales of products for the heavy
and medium duty truck and trailer market by Dayton Walther, a wholly-owned
subsidiary of the Company. Sales of this unit of $161 million were constant
with the prior year level.
Dayton Walther heavy duty brakes sustained a segment operating loss of $5
million in fiscal 1994 compared to operating income of $3 million in fiscal
1993, reflecting the negative impact of capacity constraints and outsourcing
penalties caused by continued strong medium and heavy duty truck demand as well
as the cost of other management actions to return the business to profitability.
During fiscal 1993, United States automobile and light truck retail sales
increased 9% over the prior period, as consumer and business confidence
improved. Correspondingly, industry vehicle production increased 12% during the
same period, with light truck production increasing 15%.
As a result of the automotive products segment's significant presence in light
truck products, sales increased 19% to $1.1 billion in fiscal 1993 from the
prior year, as adjusted for business divestitures. Sales increased due to
higher ABS sales resulting from increased vehicle production, improved market
installation rates, replacement of two-wheel ABS with higher value four-wheel
systems on several vehicle platforms and strong demand for foundation brake
products.
The automotive products segment recorded operating income of $90 million
during fiscal 1993 as compared to fiscal 1992 operating income of $66 million,
as adjusted for business divestitures. The earnings improvement was primarily
due to higher volumes and cost reduction efforts, despite increased costs
incurred in pursuit of new business and penalties associated with foundation
brakes capacity constraints as a result of certain high-volume vehicle
platforms.
17
<PAGE>
ENGINES
Demand for diesel engines in the major market sectors in which the Company's
Perkins engines segment participates (agricultural, construction, industrial and
power generation) improved during fiscal 1994 as manufacturers that incorporate
such equipment in their products experienced an increase in demand, particularly
in the United States and Europe. For Perkins, this was particularly apparent in
the European agricultural sector and the United States and United Kingdom
construction markets, all of which experienced higher sales, reflecting both
increased sales to certain existing accounts in connection with new engine
applications and an expanding customer base arising from strategic alliances
developed in recent years. Such alliances include supply contracts with
Caterpillar Inc., the world's largest construction and earth-moving machinery
producer, Massey Ferguson subsequent to its divestiture by the Company to AGCO
and F.G. Wilson, the United Kingdom based generator set manufacturer now owned
by Emerson Electric Co. In addition, during the second quarter of fiscal 1994,
Perkins acquired Dorman Diesels Limited, a manufacturer of diesel and natural
gas powered engines in the 1,000 to 2,500 horsepower range, designed primarily
for the power generation sector, which added approximately $47 million of
incremental sales. As a result, total engines segment sales increased 23% to
$861 million in fiscal 1994 as compared with the prior year.
Operating income in fiscal 1994 for the engines segment increased 50% to $69
million reflecting the benefit of higher sales and on-going success with margin
improvement and cost control programs, despite an increase of $9.8 million in
engineering and product development in fiscal 1994 compared to fiscal 1993.
Dorman Diesels Limited contributed $4 million of operating profit in fiscal
1994.
Engines segment sales in fiscal 1993, adjusted to neutralize the effects of
differing foreign exchange rates between periods, increased by 8% to $702
million compared with fiscal 1992. (Reported engines segment sales declined $42
million due to the lower translation value of the British pound during fiscal
1993 versus fiscal 1992.) Higher sales in the United Kingdom, specifically in
the agricultural and power generation sectors, the United States, Middle East
and Asia/Pacific offset lower volumes attributable to the difficult economic
conditions in continental Europe during fiscal 1993.
Operating income in fiscal 1993 increased 10% to $46 million versus fiscal
1992 as a result of the higher exchange adjusted sales, productivity
improvements and cost control measures, offset in part by certain non-recurring,
higher margin military sales in fiscal 1992.
NON-SEGMENT OPERATING REVIEW
In June 1994, the Company completed the sale of its worldwide Massey Ferguson
farm machinery business to AGCO 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. Subsequent to the sale, the Company settled its
pension benefit obligation related to former Massey Ferguson employees in North
America through the purchase of annuity contracts.
As a result of the aforementioned sale, the Company's effective tax rate
increased to 18.5% in fiscal 1994, as certain foreign income could no longer be
sheltered against farm equipment tax losses within the same taxing jurisdiction.
The Company anticipates that its effective tax rate will be higher in fiscal
1995.
During the fiscal 1994 third quarter, the Company sold its 500,000 shares of
AGCO common stock, resulting in net proceeds of approximately $22 million and a
gain of $3.8 million, which is included in other (income) expense, net, in the
consolidated statement of operations. Offsetting this gain is a $4.0 million
write-down of an unrelated foreign investment in an associated company.
As a result of the adoption of several new accounting standards in fiscal
1993, the Company incurred a non-cash, one-time charge of $146.1 million,
primarily pertaining to postretirement benefits other than pensions.
In connection with the use of proceeds generated from a common equity offering
during fiscal 1993, the Company incurred an extraordinary loss of $1.7 million
on the early redemption of indebtedness consisting of redemption premiums and
the write-off of related unamortized debt issuance costs. Similarly, the
Company incurred a $6.4 million loss on the early redemption of debt in fiscal
1992.
18
<PAGE>
As a result of such debt redemptions and other repayments from proceeds
received from business divestitures during fiscal 1994, fiscal 1993 and the
latter portion of fiscal 1992, the Company has continued to significantly reduce
its net interest expense, which amounted to $22.5 million in fiscal 1994
compared with $32.0 million and $99.1 million in fiscal 1993 and 1992,
respectively.
During the fourth quarter of fiscal 1992, the Company recognized a gain from
the sale of a majority ownership in a Kelsey-Hayes subsidiary (the wheels
business) amounting to $17.3 million. In accordance with SFAS No. 96, no
provision for taxes was made at the time of the transaction with respect to the
gain due to the Company's existing tax loss carryforwards. Subsequent to the
transaction, the Company accounts for its investment in Hayes Wheels on the
equity method of accounting. As a result of higher underlying sales and net
income at Hayes Wheels, equity in earnings of associated companies rose to $13.3
million in fiscal 1994, compared to $11.5 million in fiscal 1993.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
During fiscal 1994, the Company continued its strategic actions to strengthen
its balance sheet and enhance its competitive position in markets around the
world, including the sale of its worldwide farm machinery business. The
proceeds from this sale, and those generated from ongoing operations, enabled
the Company to further reduce debt levels in order to improve the Company's
financial flexibility to fund increased investment in its Kelsey-Hayes and
Perkins businesses. The Company also utilized approximately $63 million to make
contributions to its underfunded North American pension plans in the third
quarter and approximately $10 million in the fourth quarter to purchase
insurance contracts to annuitize vested benefits under retained Massey Ferguson
pension plans, which had the effect of eliminating the Company's ongoing
liability for such benefits. In addition, the Company began its previously
announced stock repurchase program during the year, pursuant to which it
repurchased 2,329,500 shares of previously outstanding common stock at a cost of
$84.7 million. The Company will continue the periodic repurchase of up to 4.5
million shares of its common stock as market conditions warrant.
As a result of the aforementioned debt repayments, long-term debt outstanding
at January 31, 1995 (including current maturities) decreased to $165.7 million
from $191.1 million at January 31, 1994. Similarly, short-term notes payable
decreased by $65.0 million to $3.0 million at January 31, 1995 from $68.0
million at January 31, 1994, further increasing the Company's liquidity.
Unused long-term and short-term lines of credit at January 31, 1995 were
$139.0 million and $100.7 million, respectively. Management believes that
Varity, as a result of its continued strategic initiatives, will have improved
access to credit markets 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 January 31, 1995 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 year
ending January 31, 1996.
Receivables increased $38.4 million to $367.7 million at January 31, 1995 from
$329.3 million at January 31, 1994, primarily due to strong sales in the fourth
quarter of fiscal 1994 and to a lesser extent foreign exchange fluctuations and
the Dorman Diesels Limited acquisition by Perkins.
Inventories of raw materials, work-in-process and finished products increased
to $154.9 million at January 31, 1995 from $127.8 million at January 31, 1994
primarily due to the impact of increased manufacturing schedules in response
to customer demand and to a lesser extent foreign exchange fluctuations and the
Dorman Diesels Limited acquisition.
Accounts payable and accrued liabilities increased $60.4 million to $550.5
million at January 31, 1995 from $490.1 million at January 31, 1994 due to the
Dorman Diesels Limited acquisition, the effect of higher throughput and to a
lesser extent foreign currency movements.
19
<PAGE>
Net fixed assets increased $102.7 million to $624.9 million at January 31,
1995 from $522.2 million at January 31, 1994 due to higher capital expenditures
in connection with the completion of construction of new ABS plants in
Fowlerville, Michigan and Heerlen, The Netherlands and to a lesser extent
increases due to foreign exchange and the Dorman Diesels Limited acquisition.
Capital expenditures during fiscal 1994 and 1993 were $154.9 million and $135.8
million, respectively, and depreciation and amortization were $78.0 million and
$65.4 million, respectively, for the same periods. Capital expenditures for
fiscal 1995 should approximate $200 million, of which $56.0 million has been
committed. These expenditures will be for normal equipment replacements and
operating improvements related to reducing costs and increasing output.
Other assets and intangibles increased by $25.2 million to $361.8 million at
January 31, 1995 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 $59.1 million to $320.6 million at
January 31, 1995 from $379.7 million at January 31, 1994, primarily due to
pension funding contributions, partially offset by additional liabilities
recorded in connection with the Massey Ferguson sale.
Stockholders' equity increased by $153.0 million to $783.7 million at January
31, 1995, due to net income and positive currency translation and pension
liability adjustments, partially offset by dividends paid and treasury stock
repurchases.
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. The Company has ongoing short-
term cash requirements for working capital, capital expenditures, dividends,
interest and debt payments. The Company believes that its cash requirements
will be met through internally and externally generated sources, existing cash
balances and utilization of available borrowing facilities.
As a result of the Company's actions over the past three 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 posture the Company to
finance investment in and expansion of the growth areas of its businesses. In
order to maintain financial flexibility the Company has filed with the
Securities and Exchange Commission a registration statement covering $100
million of debt securities of the Company and Kelsey-Hayes but which has not yet
become effective; however, the Company has no immediate plans to make an
offering under such registration statement. The Company continues to explore
opportunities to divest operations that do not meet its strategic objectives.
The Company anticipates any such transactions would further improve its
liquidity and financial flexibility.
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 positioned to
increase sales and margins in fiscal 1995, even if North American light vehicle
production is flat, as a result of secular ABS penetration and as actions taken
to relieve capacity constraints and enhance productivity continue to provide
positive returns. Continued improvements in manufacturing processes, in
addition to an expanding customer base arising from strategic alliances
developed in prior years, have positioned its Perkins engines segment to benefit
further as the European economy improves, despite anticipated increases in new
product research and development expenditures in fiscal 1995.
20
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Dollars in millions except per share amounts) Varity Corporation and subsidiaries
- ---------------------------------------------------------------------- ----------------------------------------------
Years ended January 31, 1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Total sales and revenues.............................................. $ 2,267.8 $ 1,827.4 $ 2,233.9
---------- ---------- ----------
Expenses:
Cost of goods sold................................................ 1,857.7 1,514.9 1,836.6
Marketing, general and administration............................. 176.1 150.3 192.5
Engineering and product development............................... 87.7 65.5 64.0
Interest, net (Note 10).......................................... 22.5 32.0 99.1
Exchange (gains) losses .......................................... (3.8) (1.6) 5.6
Other (income) expense, net....................................... 0.3 (2.9) (5.4)
Non-recurring gain (Note 17)...................................... - - (17.3)
---------- ---------- ----------
2,140.5 1,758.2 2,175.1
---------- ---------- ----------
Income before income taxes, earnings of associated companies,
discontinued operation, extraordinary loss and cumulative
effect of changes in accounting principles....................... 127.3 69.2 58.8
Income tax provision (Note 4)........................................ (23.5) (11.6) (9.9)
---------- ---------- ----------
Income before earnings of associated companies, discontinued
operation, extraordinary loss and cumulative effect of
changes in accounting principles................................. 103.8 57.6 48.9
Equity in earnings of associated companies (Note 19).................. 13.3 11.5 0.6
---------- ---------- ----------
Income before discontinued operation, extraordinary loss
and cumulative effect of changes in accounting principles........ 117.1 69.1 49.5
---------- ---------- ----------
Discontinued operation (Note 1):
Earnings (loss) from discontinued operation...................... 4.4 7.2 (16.1)
Gain on sale of discontinued operation........................... 23.2 - -
---------- ---------- ----------
27.6 7.2 (16.1)
---------- ---------- ----------
Income before extraordinary loss and cumulative
effect of changes in accounting principles....................... 144.7 76.3 33.4
Extraordinary loss (Note 10).......................................... - (1.7) (6.4)
Cumulative effect of changes in accounting principles (Note 3)........ - (146.1) -
---------- ---------- ----------
Net income (loss)..................................................... $ 144.7 $ (71.5) $ 27.0
========== ========== ==========
Income (loss) attributable to
common stockholders............................................... $ 142.3 $ (81.9) $ 8.5
Per share data (Note 5):
Before discontinued operation, extraordinary loss and
cumulative effect of changes in accounting principles:
Primary ..................................................... $ 2.61 $ 1.60 $ 1.18
Fully diluted ............................................... $ 2.61 $ 1.56 $ 1.17
Discontinued operation:
Primary...................................................... $ 0.63 $ 0.20 $ (0.62)
Fully diluted................................................ $ 0.63 $ 0.17 $ (0.62)*
Extraordinary loss:
Primary ..................................................... $ - $ (0.05) $ (0.24)
Fully diluted ............................................... $ - $ (0.05)* $ (0.24)*
Cumulative effect of changes in accounting principles:
Primary ..................................................... $ - $ (3.98) $ -
Fully diluted ............................................... $ - $ (3.98)* $ -
Net income (loss):
Primary ..................................................... $ 3.24 $ (2.23) $ 0.32
Fully diluted ............................................... $ 3.24 $ (2.23)* $ 0.32
</TABLE>
* Anti-dilutive
See accompanying notes to consolidated financial statements.
21
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Dollars in millions) Varity Corporation and subsidiaries
- ---------------------------------------------------------------- -------------------------------------
As of January 31, 1995 1994
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................... $ 147.0 $ 51.2
Marketable securities (Note 6)............................... 42.7 58.0
Receivables (Note 7)......................................... 367.7 329.3
Inventories (Note 2)......................................... 154.9 127.8
Prepaid expenses and other................................... 21.4 21.2
Net assets of discontinued operation (Note 1)................ - 219.8
---------- ----------
Total current assets............................................ 733.7 807.3
---------- ----------
Investments in associated and
other companies (Note 19).................................... 103.1 93.5
Fixed assets:
Land and buildings........................................... 207.0 184.7
Machinery, equipment and tooling............................. 787.6 655.4
---------- ----------
994.6 840.1
Accumulated depreciation and amortization....................... (369.7) (317.9)
---------- ----------
Net fixed assets................................................ 624.9 522.2
Other assets and intangibles (Note 8)........................... 361.8 336.6
---------- ----------
$ 1,823.5 $ 1,759.6
========== ==========
LIABILITIES
Current liabilities:
Notes payable................................................ $ 3.0 $ 68.0
Current portion of long-term debt (Note 10).................. 2.3 5.6
Accounts payable and accrued liabilities (Note 9)............ 550.5 490.1
---------- ----------
Total current liabilities....................................... 555.8 563.7
---------- ----------
Long-term debt (Note 10)........................................ 163.4 185.5
Other long-term liabilities (Note 11)........................... 320.6 379.7
Contingent liabilities and commitments (Note 15)................
---------- ----------
STOCKHOLDERS' EQUITY (Note 14)
Preferred stock - at stated value
(Liquidation value: 1995 - $35.6; 1994 - $37.6)................ 6.8 6.8
Common stock - at stated value
(Shares issued: 1995 - 41,660,653; 1994 - 43,957,126).......... 638.4 637.4
Contributed surplus............................................. 656.3 656.3
Deficit......................................................... (419.0) (561.3)
Foreign currency translation adjustment......................... (10.7) (79.8)
Pension liability adjustment (Note 12).......................... (1.6) (30.5)
Unrealized gains (losses) on marketable securities (Note 6)..... (1.8) 1.8
Less treasury stock at cost..................................... (84.7) -
---------- ----------
Total stockholders' equity...................................... 783.7 630.7
---------- ----------
$ 1,823.5 $ 1,759.6
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Thousands of
shares outstanding Equity (Dollars in millions)
- ---------------------------------------- -------------------------- ----------------------------
Preferred Stock Preferred Stock
----------------- Common ------------------ Common
Class I Class II stock Class I Class II stock
------- -------- ------ ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 31, 1992................ 11,806 2,001 24,988 $ 215.3 $6.8 $150.4
Sale of common stock..................... 5,750 119.6
Shares issued under Performance Equity
Plan................................... 194 6.2
Exercise of stock options................ 67 0.8
Foreign currency translation adjustment..
Dividends on Class I Preferred Stock.....
Dividends on Class II Preferred Stock....
Pension liability adjustment ............
Net income...............................
------- ----- ------ ------ ---- ------
Balance, January 31, 1993................ 11,806 2,001 30,999 215.3 6.8 277.0
Officer notes receivable.................
Sale of common stock..................... 4,600 143.7
Exercise of stock options................ 273 4.5
Class I Preferred Stock converted
to common stock...................... (11,806) 8,085 (215.3) 212.2
Foreign currency translation adjustment..
Dividends on Class I Preferred Stock.....
Dividends on Class II Preferred Stock....
Pension liability adjustment ............
Unrealized gains on marketable
securities............................
Net loss.................................
------- ----- ------ ------ ---- ------
Balance, January 31, 1994................ - 2,001 43,957 - 6.8 637.4
Exercise of stock options................ 34 1.0
Repurchases of common stock.............. (2,330)
Foreign currency translation adjustment..
Dividends on Class II Preferred Stock....
Pension liability adjustment.............
Unrealized losses on marketable
securities............................
Net income...............................
------- ----- ------ ------ ---- ------
BALANCE, JANUARY 31, 1995................ - 2,001 41,661 $ - $6.8 $638.4
======= ===== ====== ====== ==== ======
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Notes
Unrealized receivable
Trans- Pension gains from Total
lation liability (losses) on officer Less stock-
Contributed adjust- adjust- marketable stock- treasury holders'
surplus Deficit ment ment securities holders stock equity
----------- ------- ------- --------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 656.3 $(487.9) $ (28.8) $ (10.8) $ - $ (6.2) $ - $ 495.1
119.6
6.2
0.8
(46.5) (46.5)
(15.9) (15.9)
(2.6) (2.6)
(35.2) (35.2)
27.0 27.0
------- ------- ------- ------- ------ ----- ------- -------
656.3 (479.4) (75.3) (46.0) - (6.2) - 548.5
6.2 6.2
143.7
4.5
(3.1)
(4.5) (4.5)
(7.9) (7.9)
(2.5) (2.5)
15.5 15.5
1.8 1.8
(71.5) (71.5)
------- ------- ------- ------- ------ ----- ------- -------
656.3 (561.3) (79.8) (30.5) 1.8 - - 630.7
1.0
(84.7) (84.7)
69.1 69.1
(2.4) (2.4)
28.9 28.9
(3.6) (3.6)
144.7 144.7
------- ------- ------- ------- ------ ----- ------- -------
$ 656.3 $(419.0) $ (10.7) $ (1.6) $ (1.8) $ - $ (84.7) $ 783.7
======= ======= ======= ======= ====== ===== ======= =======
</TABLE>
24
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Dollars in millions) Varity Corporation and subsidiaries
- -------------------------------------------------------------------- -------------------------------------
Years ended January 31, 1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................ $ 144.7 $ (71.5) $ 27.0
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Depreciation and amortization............................. 78.0 65.4 99.4
Gain on sales of fixed assets............................. (0.5) - (0.3)
Non-recurring gain........................................ - - (17.3)
Deferred income taxes..................................... 2.0 7.5 2.2
Equity in earnings of associated companies
in excess of dividends received....................... (12.8) (11.0) (0.6)
Gain on sale of discontinued operation.................... (23.2) - -
Extraordinary loss ....................................... - 1.7 6.4
Cumulative effect of changes in accounting principles..... - 146.1 -
Changes in:
Receivables........................................... (12.8) (46.4) (33.2)
Inventories........................................... 0.8 (13.4) 1.3
Prepaid expenses and other............................ (2.9) 7.4 1.2
Accounts payable and accrued liabilities.............. (3.4) 2.0 (25.9)
Other long-term liabilities........................... (96.9) 18.0 (22.6)
Net assets of discontinued operation.................. 26.9 15.5 21.5
-------- -------- --------
Cash provided by operating activities......................... 99.9 121.3 59.1
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities.............................. (36.1) (52.9) (28.3)
Proceeds from sales of marketable securities.................... 70.1 40.4 22.8
Additions to fixed assets....................................... (154.9) (135.8) (88.9)
Proceeds from sales of fixed assets............................. 11.7 12.4 2.8
Proceeds from sales of businesses............................... 333.2 33.6 146.4
Acquisition of business, net of cash acquired................... (42.7) - -
Additions to investments........................................ - (4.3) (2.9)
Additions to other assets and intangibles....................... (4.9) (15.6) (14.9)
Other........................................................... 0.4 - (8.9)
-------- -------- --------
Cash provided (used) by investing activities.................. 176.8 (122.2) 28.1
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowings .................................. 38.3 108.7 248.6
Repayments of bank borrowings................................... (107.5) (164.6) (291.8)
Proceeds from long-term debt.................................... 98.9 89.3 47.6
Repayments of long-term debt.................................... (127.9) (225.8) (229.3)
Repurchases of common stock..................................... (84.7) - -
Proceeds from sale of common stock.............................. - 143.7 119.6
Dividends paid.................................................. (2.4) (10.4) (18.5)
Other........................................................... 1.0 0.1 (3.8)
-------- -------- --------
Cash used by financing activities............................. (184.3) (59.0) (127.6)
-------- -------- --------
Effect of foreign currency translation on
cash and cash equivalents....................................... 3.4 (0.3) (10.7)
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
DURING THE YEAR................................................. 95.8 (60.2) (51.1)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR...................... 51.2 111.4 162.5
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR............................ $ 147.0 $ 51.2 $ 111.4
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
Notes to Consolidated Financial Statements
Years ended January 31, 1995, 1994 and 1993
(Fiscal 1994, 1993 and 1992, respectively)
(Dollars in millions unless otherwise stated)
1. 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 (AGCO) 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 Company did not
record an income tax provision with respect to the gain primarily due to
existing tax loss carryforwards.)
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 continued to be
responsible. Subsequent to the sale, the Company settled its pension benefit
obligation related to former Massey Ferguson employees in North America 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 years' financial statements have been
restated to conform to the current year presentation.
The operating results of the discontinued operation are as follows:
<TABLE>
<CAPTION>
Years ended January 31, 1995 /(1)/ 1994 1993
---------- ------ --------
<S> <C> <C> <C>
Sales and revenues.............. $253.1 $898.4 $1,140.6
====== ====== ========
Income (loss) before income taxes
and cumulative effect of changes
in accounting principles......... $ 5.0 $ 8.2 $ (14.4)
Income tax provision.............. (.6) (1.0) (1.7)
------ ------ --------
Income (loss) before cumulative
effect of changes in accounting
principles....................... $ 4.4 $ 7.2 $ (16.1)
====== ====== ========
</TABLE>
/(1)/ Includes the period up to and including April 30, 1994, the effective
date of the sale.
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>
26
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation and Consolidation
The consolidated financial statements include the accounts of all wholly and
majority-owned subsidiaries. Investments in associated companies in which the
Company's ownership interest ranges from 20 to 50% and over which the Company
exercises influence on operating and financial policies are accounted for using
the equity method (see Note 19). Other investments are accounted for using the
cost method. Significant intercompany balances and transactions have been
eliminated in consolidation.
(b) Cash Equivalents
Cash equivalents consist of liquid instruments with an original maturity of
three months or less.
(c) Marketable Securities
Effective January 31, 1994, the Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," as described in Note 3. The Company
has determined that its marketable securities portfolio is available-for-sale,
as defined within the pronouncement, and has presented the unrealized net gain
or loss on such portfolio as a separate component of stockholders' equity.
Prior to the adoption of SFAS No. 115, marketable securities were carried at
cost, which approximated market value.
(d) Inventories
Inventories are valued at the lower of cost or net realizable value with cost
determined primarily on the first-in, first-out (FIFO) basis. Cost includes the
cost of material, direct labor and an applicable share of manufacturing
overhead. The last-in, first-out (LIFO) method is used to determine the cost of
a portion of inventory in the automotive products segment. Inventories priced
at LIFO as of January 31, 1995 and 1994 were 35% and 34% of total inventories,
respectively. If the FIFO method (which approximates current cost) had been
used exclusively, inventories would have been higher than reported by $1.3
million and $1.1 million at January 31, 1995 and 1994, respectively.
The major classes of inventory are as follows:
<TABLE>
<CAPTION>
January 31, 1995 1994
------ ------
<S> <C> <C>
Raw materials.................................. $ 54.1 $ 42.9
Work in process................................ 41.2 31.0
Finished goods................................. 59.6 53.9
------ ------
$154.9 $127.8
====== ======
</TABLE>
27
<PAGE>
(e) Fixed Assets
Additions to fixed assets are recorded at cost. Depreciation of fixed assets is
generally provided on a straight-line basis at rates which are intended to
depreciate the assets over their estimated useful lives as follows:
<TABLE>
<CAPTION>
<S> <C>
Buildings.................................................. 10 to 50 years
Machinery, equipment and tooling........................... 3 to 12 years
</TABLE>
(f) Goodwill
The excess of the acquisition cost over the aggregate fair value of the
underlying net assets of businesses acquired is amortized on a straight-line
basis over no more than 40 years.
(g) Revenue Recognition
Sales are recorded by the Company when products are shipped.
(h) Research and Development Costs
Research and development costs, the majority of which are included in
engineering and product development expenses, are charged to expense as incurred
($44.5, $39.6 and $32.0 million for fiscal 1994, 1993 and 1992, respectively).
(i) Foreign Currency Translation
For most foreign subsidiaries, the local currency is considered the functional
currency. Assets and liabilities of these subsidiaries are translated at year-
end rates of exchange. Revenue and expense items are translated at average
rates of exchange for the year. Translation adjustments, including the
translation effect of intercompany transactions deemed permanent in nature, that
arise due to fluctuations in exchange rates are recorded directly in
stockholders' equity. Gains and losses resulting from foreign currency
transactions are included in the statement of operations.
(j) Income Taxes
Effective February 1, 1993, the Company adopted the provisions of SFAS No. 109,
"Accounting for Income Taxes," as described in Note 3.
Deferred income taxes are provided on all significant temporary differences
and represent the tax effect of transactions recorded for financial reporting
purposes in periods different than for tax purposes.
(k) Financial Instruments
The carrying values of the Company's financial instruments at January 31, 1995
approximate their estimated fair values. The carrying amounts of cash and cash
equivalents and notes payable approximate fair value due to the short-term
maturity of such instruments. The carrying amount of marketable securities is
based on quoted market prices. The carrying amount of long-term debt
approximates fair value based on the quoted market prices for the same or
similar issues, or the current rates offered to the Company for debt with
similar maturities and characteristics.
Derivative financial instruments are recorded at market value, with resultant
gains or losses recognized in the statement of operations immediately, unless
the instrument is an effective hedge of a firm, committed transaction, in which
case the associated gain or loss is deferred and recognized in connection with
the underlying transaction exposure.
28
<PAGE>
3. CHANGES IN ACCOUNTING PRINCIPLES
During fiscal 1993 the Company changed its method of accounting for income
taxes, postretirement benefits other than pensions, postemployment benefits and
marketable securities in accordance with several new Statements of Financial
Accounting Standards. Prior years' financial statements were not restated for
these changes.
Effective February 1, 1993, the Company adopted the provisions of SFAS No.
109, "Accounting for Income Taxes." SFAS No. 109 replaced SFAS No. 96 which the
Company previously followed in accounting for income taxes. The principal
difference between SFAS No. 109 and SFAS No. 96 is the ability, under SFAS No.
109, to record a deferred tax asset for net operating loss and credit
carryforwards, when its ultimate realization is more likely than not. The
adoption of SFAS No. 109 had no effect on the Company's results of operations or
financial condition.
The Company adopted SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," effective February 1, 1993. This standard
requires that the cost of postretirement benefits, primarily health care
benefits, be recognized over employees' active working lives. In prior years,
these costs were expensed as paid. The Company recorded the transition
obligation, which represents costs related to service already rendered by both
active and retired employees prior to fiscal 1993, as a cumulative effect of a
change in accounting principle. This one-time, non-cash charge was $126.7
million. (The Company did not record an associated income tax benefit from the
charge as tax operating losses in prior years diminish the Company's immediate
ability to demonstrate that it is more likely than not that such benefits will
be realized.) The Company will continue to follow its policy of funding
postretirement benefits when due. In addition to the Company's adoption of SFAS
No. 106, the cumulative effect of changes in accounting principles in the
consolidated statement of operations includes a similar one-time charge ($11.4
million, net of tax benefit) for Hayes Wheels International, Inc. (Hayes
Wheels), a 46.3% owned affiliate.
Effective February 1, 1993, the Company changed its method of accounting for
postemployment benefits, in accordance with SFAS No. 112, "Employers' Accounting
for Postemployment Benefits," to recognize a charge for such benefits when it is
probable that a liability has been incurred and the amount can be reasonably
estimated. The adoption of SFAS No. 112 resulted in a one-time, non-cash $8.0
million charge which has been included within the cumulative effect of changes
in accounting principles in the Company's consolidated statement of operations.
Effective January 31, 1994, the Company adopted the provisions of SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities." SFAS
No. 115 supersedes SFAS No. 12 which the Company previously followed in
accounting for marketable securities. SFAS No. 115 requires that debt and
equity securities not classified as either held-to-maturity securities or
trading securities be classified as available-for-sale securities and reported
at fair value, with unrealized gains and losses excluded from earnings and
reported as a separate component of stockholders' equity. The Company has
determined that its marketable securities portfolio is available-for-sale, as
defined within the pronouncement, and has presented the unrealized net gain or
loss on such portfolio as a separate component of stockholders' equity.
29
<PAGE>
4. INCOME TAXES
Effective February 1, 1993, the Company adopted the provisions of SFAS No. 109,
"Accounting for Income Taxes," as described in Note 3.
Income tax provisions have been recorded in respect of the Company's results
of operations as follows:
<TABLE>
<CAPTION>
Years ended January 31, 1995 1994 1993
------ ----- -----
<S> <C> <C> <C>
Income before income taxes, earnings
of associated companies, discontinued
operation, extraordinary loss and
cumulative effect of changes in
accounting principles:
United States.......................... $ 85.6 $54.8 $21.1
Foreign................................ 41.7 14.4 37.7
------ ----- -----
$127.3 $69.2 $58.8
====== ===== =====
Income taxes currently payable:
United States........................... $ 2.4 $ 1.2 $ .2
Foreign................................. 19.1 2.9 7.5
------ ----- -----
21.5 4.1 7.7
Deferred income taxes:
Foreign................................. 2.0 7.5 2.2
------ ----- -----
Income tax provision...................... $ 23.5 $11.6 $ 9.9
====== ===== =====
</TABLE>
United States taxes include federal and state income taxes. State
income taxes were not significant in fiscal 1993 or 1992.
The following table reconciles the 35%, 35% and 34% statutory United
States federal income tax rates for the years ended January 31, 1995, 1994 and
1993, respectively, to the Company's effective tax rates:
<TABLE>
<CAPTION>
Years ended January 31, 1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Income tax provision at the
statutory rate.............................. $ 44.6 $ 24.2 $ 20.0
Increase (decrease) in income tax provision
attributable to:
Net effect of foreign tax rates.......... (.8) (3.4) .7
Permanent differences resulting from
purchase accounting.................... 2.2 2.2 4.4
Translation exchange adjustments.......... - (.7) (1.9)
Operating losses for which no benefit has
been provided........................... 11.4 9.4 7.3
Utilization of prior years' net operating
loss carryforwards...................... (36.5) (22.4) (18.2)
State income taxes and other.............. 2.6 2.3 (2.4)
------ ------ ------
Income tax provision......................... $ 23.5 $ 11.6 $ 9.9
====== ====== ======
Effective tax rate........................... 18.5% 16.8% 16.8%
====== ====== ======
</TABLE>
30
<PAGE>
The tax effects of temporary differences that give rise to deferred tax assets
and deferred tax liabilities recorded on the balance sheet as of January 31,
1995 and 1994 are as follows:
<TABLE>
<CAPTION>
January 31, 1995 1994
------ ------
<S> <C> <C>
Deferred tax assets:
Tax loss carryforwards......................... $129.2 $187.0
Benefit plans.................................. 95.7 103.6
Liabilities and reserves....................... 26.3 6.4
Other.......................................... 5.8 9.6
------ ------
Gross deferred tax assets..................... 257.0 306.6
Less: valuation allowance..................... 149.6 191.3
------ ------
Total......................................... 107.4 115.3
------ ------
Deferred tax liabilities:
Fixed assets................................... 88.1 81.3
Intangible assets.............................. 17.0 18.7
Investments and other.......................... 23.8 35.1
------ ------
Total......................................... 128.9 135.1
------ ------
Net deferred tax liability.................... $ 21.5 $ 19.8
====== ======
</TABLE>
The valuation allowance results principally from tax operating losses in prior
years which diminish the Company's immediate ability to demonstrate that it is
more likely than not that future benefits will be realized.
No provision has been made for United States federal or foreign taxes on that
portion of foreign subsidiaries' undistributed earnings ($146.5 million at
January 31, 1995) considered to be permanently reinvested. There would have
been no United States federal income tax liability had such earnings actually
been repatriated due to the Company's existing tax loss carryforwards, however,
upon repatriation, certain foreign countries would impose income and withholding
taxes, which in the aggregate would be immaterial.
31
<PAGE>
Deferred income taxes for fiscal 1992 resulted primarily from differences in
the depreciation methods used for financial reporting and tax purposes, and
certain business acquisition adjustments.
At January 31, 1995, the Company had net operating loss carryforwards for tax
purposes aggregating approximately $359 million. These loss carryforwards,
principally in the United States, expire as follows: January 31, 1997 - $54
million; 1998 - $19 million; 1999 - $32 million and 2000 and beyond -
approximately $254 million. Applicable tax laws of the United States and other
countries may limit utilization of these losses, including United States federal
operating loss carryforwards in the amount of $107 million generated by certain
subsidiaries prior to their acquisition.
Cash payments for income taxes were $5.5, $5.1 and $4.8 million for fiscal
years 1994, 1993 and 1992, respectively.
5. PER SHARE DATA
Primary earnings per share of common stock have been calculated after deducting
dividend entitlements on preferred stock and using the weighted average number
of shares of common stock and dilutive common stock equivalents (stock options
and awards) outstanding. Fully diluted earnings per share of common stock have
been calculated using the fully diluted weighted average number of shares of
common stock outstanding, and include the dilutive effect, if any, of
convertible preferred stock outstanding.
In October 1993, the Company called for redemption all of the outstanding
Class I Preferred Stock at a redemption price of $20.00 a share. As each share
of Class I Preferred Stock was convertible into .6849 shares of the Company's
common stock and as the market price of such common stock was greater than
$29.20 per share, substantially all of the holders of such Class I Preferred
Stock converted their shares into the Company's common stock in lieu of
redemption. As a result of the foregoing, the Company issued 8,085,000
additional shares of common stock. The fully diluted weighted average number of
shares of common stock outstanding assumes the conversion had taken place on the
first day of fiscal 1993.
Additionally, in June 1993 and December 1992, the Company sold, through
separate public offerings, 4,600,000 and 5,750,000 shares, respectively, of
previously unissued common stock. A substantial portion of the proceeds served
to reduce short-term and long-term debt. The primary and fully diluted weighted
average number of shares outstanding include shares from such offerings from the
actual transaction dates. The weighted average shares outstanding are summarized
as follows:
(Thousands of shares)
<TABLE>
<CAPTION>
Years ended January 31, 1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
Primary........................... 43,997 36,700 26,264
====== ====== ======
Fully diluted..................... 44,000 42,753 26,436
====== ====== ======
</TABLE>
32
<PAGE>
6. MARKETABLE SECURITIES
The cost, gross unrealized gains and losses and fair value of the Company's
marketable securities follows:
<TABLE>
<CAPTION>
January 31, 1995
-------------------------------------
Gross Gross
unrealized unrealized Fair
Cost gains losses value
----- ----------- ---------- -----
<S> <C> <C> <C> <C>
United States government bonds.. $20.9 $ .1 $ (.5) $20.5
Corporate bonds................. 21.0 - (1.3) 19.7
Foreign government bonds........ 2.6 - ( .1) 2.5
----- ------ ----- -----
$44.5 $ .1 $(1.9) $42.7
===== ====== ===== =====
</TABLE>
<TABLE>
<CAPTION>
January 31, 1994
-------------------------------------
Gross Gross
unrealized unrealized Fair
Cost gains losses value
----- ----- ---------- -----
<S> <C> <C> <C> <C>
United States government bonds.. $15.0 $ .5 $ - $15.5
Corporate bonds................. 31.4 1.2 (.2) 32.4
Foreign government bonds........ 9.8 .3 - 10.1
----- ---- ---- -----
$56.2 $2.0 $(.2) $58.0
===== ==== ==== =====
</TABLE>
At January 31, 1995 the Company's marketable securities generally have
contractual maturities that are long-term in nature, the majority of which are
due after January 31, 1997.
During the year ended January 31, 1995 the Company realized $4.2 million of
gross gains and $1.8 million of gross losses on $70.1 million of proceeds from
sales of available-for-sale securities, with cost computed using the specific
identification method.
7. RECEIVABLES
Receivables are presented net of allowances for doubtful accounts of $5.1
million and $3.9 million at January 31, 1995 and 1994, respectively.
Credit risk is generally concentrated within the Company's primary business
segments. Geographically, such concentrations are principally within the United
States and Western Europe. The Company performs ongoing credit evaluations of
its customers' financial condition.
33
<PAGE>
8. OTHER ASSETS AND INTANGIBLES
Other assets and intangibles consist of the following:
<TABLE>
<CAPTION>
January 31, 1995 1994
------ ------
<S> <C> <C>
Goodwill..................................... $253.1 $225.9
Other........................................ 108.7 110.7
------ ------
$361.8 $336.6
====== ======
</TABLE>
Other assets and intangibles are presented net of accumulated amortization of
$74.0 million and $64.7 million at January 31, 1995 and 1994, respectively.
The increase in goodwill during the current year is due primarily to the
approximately $50 million acquisition of Dorman Diesels Limited, a United
Kingdom based manufacturer of high horsepower diesel engines.
9. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
<TABLE>
<CAPTION>
January 31, 1995 1994
------ ------
<S> <C> <C>
Accounts payable............................. $290.2 $279.4
Employee costs............................... 99.9 93.9
Captive reinsurance reserves................. 36.5 44.6
Other accrued liabilities.................... 123.9 72.2
------ ------
$550.5 $490.1
====== ======
</TABLE>
34
<PAGE>
10. LONG-TERM DEBT
Debt is repayable in United States dollars unless otherwise indicated.
<TABLE>
<CAPTION>
January 31, 1995 1994
------ ------
<S> <C> <C>
11.375% Senior Notes due November 15, 1998 (a)............ $148.4 $148.0
Bank revolving loan maturing 1997-2000
interest at Amsterdam Interbank Offered Rate
plus 1.25% (6.35% at January 31, 1995),
secured by fixed assets (Netherland Guilders)............ 11.7 -
Term loan maturing September 1998
interest at LIBOR plus 1%, secured by
all assets of the borrowing subsidiary.................... - 23.8
French State loan maturing 1991-98
interest at 8.0% plus an additional fluctuating
interest charge or credit based on cash flow............. - 7.1
Other (b)................................................. 5.6 12.2
------ ------
Total debt................................................ 165.7 191.1
Less: current portion of long-term debt.................. 2.3 5.6
------ ------
Long-term debt............................................ $163.4 $185.5
====== ======
</TABLE>
(a) Varity's 11.375% Senior Notes due November 15, 1998 are redeemable at the
option of the Company, in whole or in part, at any time on or after November 15,
1996, at 100% of the principal amount thereof plus accrued interest to the date
of redemption. The related indenture, among other things, restricts the Company
and its subsidiaries' ability to make certain cash distributions, requires
minimum levels of net worth, as defined, places restrictions on the use of
proceeds from asset sales and limits the incurrence of additional indebtedness.
See Note 14(b) (ii).
(b) In connection with the Company's equity offering in June 1993, as described
in Note 5, various indebtedness was retired, including certain debentures
subject to early redemption premiums, which combined with the write-off of
related unamortized debt issuance costs, resulted in an extraordinary loss of
$1.7 million.
(c) Certain of the Company's loan agreements provide for financial covenants
affecting the Company and its principal subsidiaries. These covenants relate to
such matters as the maintenance of specified financial ratios and minimum net
worth. Certain loan agreements also contain cross-default provisions. At
January 31, 1995 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 year ending January 31,
1996.
(d) As of January 31, 1995, debt maturities for long-term debt during the next
five fiscal years are as follows: 1995 - $2.3 million; 1996 - $2.5 million; 1997
- - $3.8 million; 1998 - $152.0 million and 1999 and thereafter - $5.1 million.
(e) The Company maintains various short-term credit facilities with lenders in
certain countries for which related amounts outstanding are classified as notes
payable in the consolidated financial statements. These credit facilities are
generally restricted only in terms of a predefined maximum utilization and are
subject to renewal annually or ongoing lender review. Certain facilities are
secured by assets of the respective subsidiaries. The facilities bear interest
at rates ranging from 7.0% to 10.5% at January 31, 1995. The weighted-average
interest rate of the facilities outstanding at January 31, 1995 and 1994 is 8.4%
and 6.9%, respectively.
35
<PAGE>
Unused long-term and short-term lines of credit at January 31, 1995 were
$139.0 million and $100.7 million, respectively (January 31, 1994 - $97.6
million and $51.5 million, respectively). Approximately $525 million of
consolidated assets secure such lines at January 31, 1995.
(f) Interest, net includes interest income of $4.7, $6.3 and $7.0 million for
fiscal 1994, 1993 and 1992, respectively. Cash payments of interest were $23.3,
$37.8 and $98.4 million for fiscal 1994, 1993 and 1992, respectively.
(g) Subsidiaries' debt agreements have financial covenants which may, in certain
circumstances, restrict approximately $570 million of subsidiaries' net assets
from being loaned, advanced or dividended to the Company.
(h) During fiscal 1992 the Company's wholly-owned subsidiary, Dayton Walther,
called its 14% Senior Subordinated Notes. The redemption premium and write-off
of related unamortized debt issuance costs resulted in an extraordinary loss of
$6.4 million.
11. OTHER LONG-TERM LIABILITIES
Other long-term liabilities consist of the following:
<TABLE>
<CAPTION>
January 31, 1995 1994
------ ------
<S> <C> <C>
Accrued employee benefits other than pension...... $194.0 $180.4
Accrued pension cost.............................. 47.3 110.2
Deferred tax liabilities.......................... 30.8 28.3
Other............................................. 48.5 60.8
------ ------
$320.6 $379.7
====== ======
</TABLE>
12. PENSION BENEFITS
The Company and its subsidiaries have established pension plans in the principal
countries where they operate. The majority of its employees are covered by
either government or Company sponsored pension plans. Most of the Company's
defined benefit plans provide pension benefits that are based on the employee's
highest average eligible compensation. Plan assets consist primarily of
exchange-listed stocks and bonds. The Company's funding policy is to contribute
at least the amount required by law in the various jurisdictions in which the
pension plans are domiciled. During the year ended January 31, 1995, the
Company made approximately $63 million of additional contributions to its
underfunded pension plans in excess of the minimum amount required by law.
Pension expense consists of the following:
<TABLE>
<CAPTION>
Years ended January 31, 1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Service cost for the year................... $ 8.5 $ 7.7 $ 10.9
Interest cost on projected benefit
obligation................................. 41.4 45.1 53.4
Actual return on plan assets................ (5.2) (85.2) (26.3)
Net amortization and deferral............... (30.7) 46.7 (17.1)
------ ------ ------
Net pension expense......................... $ 14.0 $ 14.3 $ 20.9
====== ====== ======
</TABLE>
36
<PAGE>
As a result of the sale of its farm equipment business in fiscal 1994, the
Company incurred $32.5 million of curtailment and settlement losses in
connection with pension benefit obligations related to former North American
Massey Ferguson employees. Such losses are included in the gain on sale of
discontinued operation within the consolidated statement of operations and not
in the table above.
In connection with the fiscal 1992 divestitures of certain non-core
businesses, the Company recognized $4.6 million of curtailment and settlement
losses which are included in the net amortization and deferral component of net
pension expense for that year.
The funded status of pension plans is as follows:
<TABLE>
<CAPTION>
January 31, 1995 1994
------------------------- ------------------------
UNDERFUNDED OVERFUNDED Underfunded Overfunded
PLANS PLANS plans plans
------------ ----------- ------------ ----------
<S> <C> <C> <C> <C>
Accumulated benefit obligation:
Vested benefit obligation...................... $ 66.5 $ 368.3 $ 284.8 $ 246.8
Nonvested benefit obligation................... 3.6 15.6 16.1 4.4
------ ------- ------- -------
$70.1 $383.9 $ 300.9 $ 251.2
====== ======= ======= =======
Projected benefit obligation..................... $ 78.1 $ 410.3 $ 309.2 $ 279.5
Plan assets at market value...................... (21.8) (419.4) (188.6) (297.4)
------ ------- ------- -------
Projected benefit obligation
in excess of (less than) plan assets........... 56.3 (9.1) 120.6 (17.9)
Unrecognized net gains (losses).................. 3.8 (32.6) (30.1) (7.2)
Unrecognized transition assets (liabilities)..... (12.0) 2.3 (12.3) 6.5
Additional minimum liability recognized.......... 6.9 - 33.9 -
------ ------- ------- -------
Pension costs accrued (prepaid)
in the consolidated balance sheets............. $ 55.0 $ (39.4) $ 112.1 $ (18.6)
====== ======= ======= =======
</TABLE>
As a result of the Company's settlement of its pension benefit obligations
related to former North American Massey Ferguson employees, such obligations are
not included in the table above as of January 31, 1995.
The fiscal 1994 additional minimum pension liability is a non-cash item which
is offset by an intangible asset of $6.4 million and a direct reduction in
stockholders' equity of $.5 million (corresponding offsets in fiscal 1993 were
$7.2 million and $26.7 million, respectively). The Company's consolidated
direct reduction in stockholders' equity also includes a component for equity
investee Hayes Wheels' additional minimum liability.
The actuarial assumptions used to develop pension expense reflect prevailing
economic conditions and interest rate environments of the different countries
wherein the respective pension plans are domiciled. For the three years ended
January 31, 1995, the annual discount rates range from 7.5% to 9.5% (8.25% in
fiscal 1994 for plans domiciled in the United States), the remuneration
increases range from 4.0% to 8.0% and the expected annual long-term rates of
return on assets range from 8.25% to 11.0%.
37
<PAGE>
13. OTHER POSTRETIREMENT BENEFITS
Effective February 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" as described in Note
3. This standard requires that the cost of postretirement benefits, primarily
health care benefits, be recognized over employees' active working lives. In
prior years, these costs were expensed as paid. The Company will continue to
follow its policy of funding postretirement benefits when due.
The Company provides medical and group life benefits to substantially all
North American retirees, including retirees of the divested farm equipment
business who elect to participate in the Company's medical and group life plans.
Medical plan contributions of the participating employees are adjusted
periodically; the life insurance plan is non-contributory.
The components of postretirement benefits expense are as follows:
<TABLE>
<CAPTION>
Years ended January 31, 1995 1994
----- -----
<S> <C> <C>
Service cost - benefits earned during the period................ $ 3.0 $ 2.0
Interest cost on accumulated postretirement benefit obligation.. 17.5 17.6
Amortization of actuarial losses................................ .5 -
----- -----
Postretirement benefit expense.................................. $21.0 $19.6
===== =====
</TABLE>
The recorded actuarial liabilities for postretirement benefits, including
those previously recorded in connection with the fiscal 1989 acquisition of K-H
Corporation (the parent of Kelsey-Hayes Company), are as follows:
<TABLE>
<CAPTION>
January 31, 1995 1994
-------- -------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees...................................... $190.7 $184.1
Fully eligible active participants............ 18.3 30.1
Other active participants..................... 27.9 15.1
------ ------
236.9 229.3
Unrecognized net loss........................... (21.7) (31.1)
------ ------
Accrued postretirement benefit liability........ $215.2 $198.2
====== ======
</TABLE>
The assumed fiscal 1995 health care cost trend rate used in measuring the
accumulated postretirement benefit obligation was 9% and was further assumed to
decrease by 1% per annum to an ultimate rate of 6%. An increase in the assumed
health care cost trend rate of 1 percentage point per year would increase the
accumulated postretirement benefit obligation as of January 31, 1995 by
approximately $19.6 million and the aggregate of the service and interest cost
components of postretirement benefit expense for the year then ended by
approximately $2.0 million. The weighted average discount rate used in
determining the accumulated postretirement benefit obligation was 8.34% and
7.67% as of January 31, 1995 and 1994, respectively.
38
<PAGE>
During the year ended January 31, 1993, $13.5 million was charged to expense
with respect to health care claims and life insurance premiums for retired
employees based on the Company's previous cash-based method of accounting for
these costs.
14. STOCKHOLDERS' EQUITY
(a) Authorized, Issued and Outstanding Stock
The Company is authorized to issue the following shares of stock:
(i) Class I Stock:
50,000,000 shares authorized, par value $.01 per share, issuable in series. Two
series had been designated: 11,816,309 shares were designated as U.S. $1.30
Senior Cumulative Redeemable Convertible Exchangeable Preferred Class I Stock,
Series A, par value $.01 per share; and 11,816,309 shares were designated as
U.S. $1.30 Senior Cumulative Redeemable Convertible Exchangeable Preferred Class
I Stock, Canadian Series A, stated value $5.00 per share (collectively, the
Class I Preferred Stock). In October 1993 the Company called for redemption all
of the previously outstanding shares of Class I Preferred Stock (see Note 5).
No shares of Class I Stock are designated or outstanding at January 31, 1995.
(ii) Class II Stock:
50,000,000 shares authorized, par value $.01 per share, issuable in series.
Currently, one series of 2,001,000 shares has been designated the Cdn. $1.625
Cumulative Redeemable Convertible Exchangeable Preferred Class II Stock, Series
A (Class II Preferred Stock). As of January 31, 1995, 2,001,000 shares of Class
II Preferred Stock were outstanding.
The holders of the Class II Preferred Stock are entitled to receive, as and
when declared by the Board of Directors, fixed, cumulative, preferential
dividends at an annual rate of Canadian $1.625 per share, payable quarterly.
The Class II Preferred Stock is junior to the Class I Stock in dividend and
liquidation rights. Each share is convertible at any time into common stock at
a conversion price of Canadian $75 per share of common stock (equivalent to
.3333 shares of common stock per share of Class II Preferred Stock), subject to
adjustment under certain conditions. Shares are redeemable at the Company's
option. Each share is redeemable at, and has a liquidation value of, Canadian
$25 plus accrued and unpaid cumulative dividends. Holders of Class II
Preferred Stock have voting rights limited to a fractional vote per share. The
fraction is determined by dividing 5% of the total number of shares of common
stock entitled to vote by the total number of shares of Class II Preferred Stock
entitled to vote.
(iii) Class III Stock:
50,000,000 shares authorized, par value $.01 per share, issuable in series. No
series has been designated or issued.
(iv) Special Purpose Preferred Stock:
9,000,000 shares of U.S. $1.30 Redeemable Reset Special Purpose Preferred Stock
authorized, par value $.01 per share, were issued for Canadian tax purposes in
connection with the reincorporation of the Company from Canada to the United
States in 1991. The shares do not have any financial impact on the Company. At
January 31, 1995, 8,160,000 shares of this stock were outstanding and held by a
wholly-owned subsidiary of the Company. These shares pay dividends at an annual
rate of $1.30 per share, have no voting rights, and have a redemption and
liquidation value of $20 per share. The shares are junior to the Class I Stock,
Class II Stock and Class III Stock and are entitled to preference over the
common stock as to dividends and the distribution of assets in the event of a
liquidation of the Company.
39
<PAGE>
(v) Common Stock and Options:
150,000,000 shares authorized, par value $.01 per share.
During the second half of fiscal 1994 the Company commenced a common stock
repurchase program which resulted in the repurchase of 2,329,500 shares of
previously outstanding common stock. The Company will continue the periodic
repurchase of up to 4.5 million shares of its common stock as conditions
warrant. As a result of this program, 41,660,653 common shares were outstanding
at January 31, 1995.
During fiscal 1992, $6.2 million of common stock was issued pursuant to the
termination of the Performance Equity Plan in a non-cash transaction.
Under the Shareholder Value Incentive Plan, the Company may from time to time
grant options to purchase common stock at a specified price per share but not
less than market value at the date of grant. Commencing in fiscal 1993, the
substantial majority of such grants have been at a significant premium (29%-35%)
to market value as of the grant date. The following table summarizes common
stock option activity during each of the years in the three year period ended
January 31, 1995:
<TABLE>
<CAPTION>
(Thousands of shares)
Years ended January 31, 1995 1994 1993
------ ------ -----
<S> <C> <C> <C>
Options outstanding, beginning of period.. 1,502 851 696
Granted................................... 773 980 837
Exercised (1)............................. (34) (273) (67)
Expired or cancelled...................... (33) (56) (615)
----- ----- ----
Options outstanding, end of period (2).... 2,208 1,502 851
===== ===== ====
</TABLE>
(1) Options have been exercised at average prices of $24.53, $15.50 and $11.59
for fiscal 1994, 1993 and 1992, respectively.
(2) Options to purchase 1,314,000, 586,000 and 837,000 common shares were
exercisable at January 31, 1995, 1994 and 1993, respectively. Options
outstanding at January 31, 1995 were exercisable at prices ranging from $11.59
to $58.75 ($11.59 to $81.40 at January 31, 1994 and 1993).
(b) Restrictions on Dividends, Issue and Reduction of Capital
(i) As long as any Class II Preferred Stock is outstanding, and unless all
dividends then payable on such shares have been declared and paid or amounts set
aside for payment, the Company may not, without the prior approval of the
holders of these shares:
(1) declare or pay any dividends (other than stock dividends in shares
of the Company ranking junior to such shares) on any common stock or junior
ranking shares;
(2) redeem, purchase or make any capital distribution in respect of any
equal or junior ranking shares; or
(3) issue any additional shares ranking as to capital or dividends prior
to or in parity with these shares.
As of January 31, 1995, all dividends payable on the Class II Preferred Stock
have been paid or set aside for payment.
(ii) The indenture governing the Company's 11.375% Senior Notes due in 1998
limits the Company's ability to make certain cash distributions to its
stockholders. As of January 31, 1995, the Company could pay up to approximately
$352 million of cash dividends on its common stock under the most restrictive
dividend covenant in such indenture.
40
<PAGE>
15. CONTINGENT LIABILITIES AND COMMITMENTS
(a) Sale of Massey Ferguson
Pursuant to the Massey Ferguson purchase and sale agreement, the Company remains
responsible for certain contingent liabilities of its former farm machinery
business, principally product liability, taxes and environmental claims.
The total contingent liability, if any, may not exceed, in the aggregate, an
amount as pre-defined in the agreement. The Company believes it made adequate
provisions at the time of the sale for contingent liabilities relating to the
farm machinery business and intends to fulfill its obligations under the
purchase and sale agreement.
(b) Investment in Hayes Wheels
The Company currently owns 46.3% of Hayes Wheels. If such ownership becomes
less than 40%, the Company is required to offer to replace existing creditors
under the current Hayes Wheels revolving credit agreement.
(c) Capital Expenditure Programs
Approved capital expenditure programs outstanding at January 31, 1995
approximated $102.0 million, including capital commitments of approximately
$56.0 million.
(d) Discounted Obligations
The Company has contingent liabilities relating to accounts receivable
discounted, bills guaranteed and similar obligations amounting to $4.5 million
and $3.8 million at January 31, 1995 and 1994, respectively.
(e) Leases
The Company leases certain property and equipment under noncancellable operating
leases. Payments due under these leases during the next five fiscal years and
thereafter are as follows: 1995 - $14.5 million; 1996 - $13.0 million; 1997 -
$9.6 million; 1998 - $4.1 million; 1999 - $2.4 million and $37.6 million
thereafter.
(f) Environmental
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 in
terms of its financial condition or liquidity. The Company has made no
provision for unasserted claims as it is not possible to estimate the potential
size of such future claims, if any.
(g) Litigation
The Company is party to various litigation, certain of which involve significant
claims. Management believes that the outcome of these lawsuits will not have a
material adverse effect on the consolidated financial statements.
16. FINANCIAL INSTRUMENTS
Derivative financial instruments are utilized by the Company to reduce the risks
associated with changes in interest rates and foreign exchange rates. The
Company does not hold or issue financial instruments for trading purposes.
The Company has entered into interest rate swaps totalling 50 million pounds
sterling (notional amount) which expire in September 1998, to manage its
exposure to increases in interest rates on its LIBOR based, floating-rate long-
term revolving credit facility. The notional amount of the swaps (approximately
$79 million) represents an approximation of the average expected outstanding
balance under the associated credit facility. The agreement enables the Company
to make a constant, fixed interest payment regardless of any fluctuation in the
underlying credit facility's contractual floating interest rate. Quarterly
stabilization payments are either made to (or by) the Company from (or to) Chase
Manhattan Bank N.A. to effect a
41
<PAGE>
constant annualized net expense of 6.37% of the notional amount plus the spread
over LIBOR required under the associated credit facility.
The Company also enters into forward exchange contracts to hedge certain firm
sales commitments, net of offsetting purchases, denominated in foreign
currencies. In addition, forward exchange contracts are entered into for a
portion of anticipated sales commitments, net of anticipated purchases, expected
to be denominated in foreign currencies. The purpose of such foreign currency
hedging activities is to protect the Company from the risk that the eventual
cash flows resulting from the sale of products to foreign customers (net of
purchases from foreign suppliers) will be adversely affected by fluctuations in
exchange rates. At January 31, 1995, the Company had $84.8 million of forward
exchange contracts outstanding, primarily to exchange dollars and various
European currencies for pound sterling (approximately $90.8 million at January
31, 1994). Substantially all contracts mature within a period of six months.
Gains and losses on forward exchange contracts in connection with firm
commitments that are designated and effective as hedges of such transactions are
deferred and recognized in income in the same period as the hedged transactions.
At January 31, 1995, less than $.5 million of unrecognized net losses were
deferred on such contracts. Gains and losses on forward exchange contracts in
connection with anticipated transactions are marked to market monthly with the
resulting gain or loss recognized immediately in the consolidated statement of
operations.
The Company is exposed to credit loss in the event of nonperformance by the
counterparties to the interest rate swaps and the forward exchange contracts.
The Company does not anticipate nonperformance by any counterparty. The amount
of such exposure is the amount owed to the Company, if any, related to the swaps
and the deferred gains, if any, related to the forward exchange contracts.
17. NON-RECURRING GAIN
During the fourth quarter of fiscal 1992, the wheels business of Kelsey-Hayes
was reorganized as Hayes Wheels and the non-wheel businesses and assets of
Kelsey-Hayes, principally its automotive brake systems business, were
transferred to, and the liabilities related thereto were assumed by, a newly-
formed, wholly-owned subsidiary of the Company.
The Company reduced its ownership percentage in Hayes Wheels to 46.3% through
a public offering of approximately 9.4 million common shares by Hayes Wheels in
December, 1992. Subsequent to the closing date of the offering, the Company has
accounted for its investment in Hayes Wheels on the equity method of accounting
(see Note 19 for summarized financial information).
The proceeds to Hayes Wheels from the offering at $19 per share, after
deducting commissions and related expenses, were approximately $162.0 million.
The Company recognized a non-cash gain from this transaction amounting to $17.3
million which reflects the net increase in value of the Company's investment in
Hayes Wheels at that date. In accordance with SFAS No. 96, no provision for
taxes was made at the time of the transaction with respect to the gain due to
the Company's existing tax loss carryforwards. An appropriate liability for
such deferred taxes was recognized at the time of adoption of SFAS No. 109.
18. BUSINESS SEGMENT INFORMATION
The principal industry segments and geographic regions in which the Company
operates are set forth below. The automotive products segment manufactures and
sells brake systems and other components primarily to the original equipment
manufacturers (OEMs) of the motor vehicle industry. Prior to the sale of a
majority ownership in Hayes Wheels, this segment also included the manufacture
and sale of aluminum and steel wheels to OEMs and the aftermarket. In fiscal
1994, this segment had sales to two domestic OEM customers that individually
comprised more than 10% of consolidated total sales and revenues. The fiscal
1994 sales to these customers were $491 million and $467 million, respectively
(the amounts related to these customers in fiscal 1993 were $396 million and
$358 million, respectively and in fiscal 1992 were $421 million and $393
million, respectively). The engines segment manufactures and sells multi-
cylinder, multi-purpose diesel engines. "Other" consists of the hydraulic
components business.
42
<PAGE>
INDUSTRY SEGMENT
<TABLE>
<CAPTION>
Auto- Adjustments
Fiscal motive and
years products Engines Other eliminations Consolidated
------ -------- ------- ----- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Sales to and revenues from
unaffiliated customers..... 1994 $1,373 $841 $ 54 $ - $2,268
1993 1,149 631 47 - 1,827
1992 1,516 668 50 - 2,234
Intersegment sales to
discontinued operation..... 1994 - 20 1 (21) -
1993 - 71 3 (74) -
1992 - 76 10 (86) -
Total sales and revenues..... 1994 1,373 861 55 (21) 2,268
1993 1,149 702 50 (74) 1,827
1992 1,516 744 60 (86) 2,234
Operating income (loss) (1).. 1994 116 69 (1) - 184
1993 90 46 (2) - 134
1992 133 42 (5) - 170
Identifiable assets (2)...... 1994 1,010 454 28 - 1,492
1993 929 346 28 - 1,303
1992 937 343 32 - 1,312
Depreciation and
amortization............... 1994 51 20 3 - 74
1993 41 16 3 - 60
1992 69 21 3 - 93
Capital expenditures......... 1994 124 30 1 - 155
1993 113 17 3 - 133
1992 66 18 2 - 86
</TABLE>
43
<PAGE>
GEOGRAPHIC SEGMENT
<TABLE>
<CAPTION>
Adjustments
Fiscal United and
years States Europe Other eliminations Consolidated
------ ------ ------ -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Sales to and revenues from
unaffiliated customers.... 1994 $1,266 $874 $128 $ - $ 2,268
1993 1,056 666 105 - 1,827
1992 1,245 915 74 - 2,234
Intersegment sales to
discontinued operation.... 1994 - 21 - (21) -
1993 - 74 - (74) -
1992 - 86 - (86) -
Total sales and revenues.... 1994 1,266 895 128 (21) 2,268
1993 1,056 740 105 (74) 1,827
1992 1,245 1,001 74 (86) 2,234
Operating income (1)........ 1994 124 48 12 - 184
1993 93 33 8 - 134
1992 103 59 8 - 170
Identifiable assets (2)..... 1994 907 504 81 - 1,492
1993 835 387 81 - 1,303
1992 817 453 42 - 1,312
</TABLE>
Reconciliation to consolidated financial statements:
<TABLE>
<CAPTION>
Fiscal years 1994 1993 1992
------- -------- -------
<S> <C> <C> <C>
(1) Operating income................ $ 184 $ 134 $ 170
Interest expense, net..................... (23) (32) (99)
General and corporate expense, net (a).... (34) (33) (12)
------- -------- -------
Income before income taxes, earnings of
associated companies, discontinued operation,
extraordinary loss and cumulative effect of
changes in accounting principles $ 127 $ 69 $ 59
======= ======== =======
(2) Identifiable assets............. $ 1,492 $1,303 $1,312
Investments..................................... 103 94 103
Corporate assets................................ 229 143 166
Net assets of discontinued operation............ - 220 224
------- -------- -------
$ 1,824 $1,760 $1,805
======= ======== =======
</TABLE>
(a) Includes exchange adjustments, non-recurring gain and general corporate
expense net of miscellaneous income.
44
<PAGE>
19. INVESTMENTS IN ASSOCIATED AND OTHER COMPANIES
Varity's investments in associated and other companies as of January 31, 1995
and 1994 consists primarily of its 46.3% interest in Hayes Wheels. During
fiscal 1994 and 1993 the Company received dividends of $.5 million each year
from Hayes Wheels. No dividends were received during fiscal 1992. As of
January 31, 1995, the Company's investment in Hayes Wheels, a publicly traded
company, had a market value of approximately $130 million.
Varity's consolidated statement of operations for fiscal 1992 includes
100% of the revenues and expenses of Hayes Wheels prior to the completion of the
public offering as described in Note 17.
Summarized financial information of these investee companies,
including Hayes Wheels prior to the deconsolidation, is presented below:
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended January 31, 1995 1994 1993
------ ------ -------
<S> <C> <C> <C>
Net sales and revenues........................................ $537.6 $428.2 $408.7
Cost of goods sold............................................ 441.4 344.4 336.4
------ ------ ------
Gross profit.................................................. 96.2 83.8 72.3
Other costs and expenses...................................... 46.3 41.6 64.5
------ ------ ------
Income before taxes and cumulative effect of
changes in accounting principles........................... 49.9 42.2 7.8
Income tax provision.......................................... (20.0) (17.6) (4.2)
------ ------ ------
Income before cumulative effect of changes
in accounting principles................................... 29.9 24.6 3.6
Cumulative effect of changes in accounting principles (1)..... - (24.6) -
------ ------ ------
Net income.................................................... $ 29.9 $ - $ 3.6
====== ====== ======
</TABLE>
(1) Primarily relates to an investee company's adoption of SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions."
45
<PAGE>
BALANCE SHEETS
<TABLE>
<CAPTION>
January 31, 1995 1994
------ ------
<S> <C> <C>
Current assets...................... $157.6 $113.7
Fixed assets........................ 285.7 268.9
Other............................... 146.3 145.0
------ ------
$589.6 $527.6
====== ======
Current liabilities................. $130.5 $108.0
Non-current liabilities............. 242.6 234.8
Shareholders' equity................ 216.5 184.8
------ ------
$589.6 $527.6
====== ======
</TABLE>
Certain investees' indebtedness restrict approximately $190 million of
investee net assets from being loaned, advanced or dividended to the Company by
such investees.
Varity's consolidated deficit at January 31, 1995 and 1994 includes $13.0
million and $.2 million, respectively, of undistributed earnings of the above
investees.
20. KELSEY-HAYES
Effective November 30, 1989, the Company acquired K-H Corporation ("K-H",
formerly Fruehauf Corporation). K-H, through its wholly-owned subsidiary
Kelsey-Hayes Company (Kelsey-Hayes), is a leading manufacturer of brake systems
and other components for passenger cars and light trucks.
The following table presents summarized consolidated financial information for
Kelsey-Hayes, which comprises a substantial portion of the automotive products
segment.
(i) Balance Sheets
<TABLE>
<CAPTION>
January 31, 1995 1994
-------- ------
<S> <C> <C>
Current assets................................... $ 198.8 $184.0
Non-current assets............................... 636.0 579.5
-------- ------
$ 834.8 $763.5
======== ======
Current liabilities.............................. $ 190.9 $182.0
Non-current liabilities.......................... 73.2 126.8
Stockholder's equity............................. 570.7 454.7
------ ------
$ 834.8 $763.5
======== ======
</TABLE>
(ii) Statements of Operations
<TABLE>
<CAPTION>
Years ended January 31, 1995 1994 1993
-------- ------ ------
<S> <C> <C> <C>
Net sales........................................ $1,126.9 $920.2 $895.0
Gross profit..................................... $ 201.1 $159.9 $146.0
Income before extraordinary loss and cumulative
effect of changes in accounting principles.... $ 75.8 $ 53.2 $ 7.4
Net income....................................... $ 75.8 $ 36.3 $ 7.4
</TABLE>
46
<PAGE>
Independent Auditors' Report
THE BOARD OF DIRECTORS AND STOCKHOLDERS
VARITY CORPORATION:
We have audited the consolidated financial statements of Varity Corporation and
subsidiaries listed in Item 14(a)(1) of the Annual Report on Form 10-K for the
fiscal year 1994. In connection with our audits of the consolidated financial
statements, we also have audited the financial statement schedules listed in
Item 14(a)(2) of the Annual Report on Form 10-K for the fiscal year 1994. These
consolidated financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion of these consolidated financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Varity
Corporation and subsidiaries as of January 31, 1995 and 1994 and the results of
their operations and their cash flows for each of the years in the three-year
period ended January 31, 1995 in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedules,
when considered in relation to the basic consolidated financial statements taken
as a whole, present fairly, in all material respects, the information set forth
therein.
As discussed in Note 3 of the Notes to Consolidated Financial Statements,
in the year ended January 31, 1994, the Company changed its methods of
accounting for income taxes to adopt the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes," postretirement
benefits to adopt the provisions of Statement of Financial Accounting Standards
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," postemployment benefits to adopt the provisions of Statement of
Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits," and marketable securities to adopt the provisions of
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities."
/s/ KPMG Peat Marwick LLP
Buffalo, New York
February 28, 1995
47
<PAGE>
Management's Report on Financial Statements
The accompanying consolidated financial statements of the Company have been
prepared by management in accordance with generally accepted accounting
principles. Management is responsible for all information in the Annual Report.
All financial and operating data in the Annual Report are consistent with that
contained in the consolidated financial statements.
Management is also responsible for the integrity and objectivity of the
consolidated financial statements. In the preparation of these statements,
estimates are sometimes necessary when transactions affecting the current
accounting period are dependent on the outcome of future events. Such estimates
are based on careful judgements and have been appropriately reflected in the
accompanying consolidated financial statements. Management has established
systems of internal control which are designed to provide reasonable assurance
that assets are safeguarded from loss or unauthorized use and to produce
reliable accounting records.
The Board of Directors is responsible for ensuring that management fulfills
its responsibilities for financial reporting and internal control. The Board
exercises these responsibilities principally through the Audit Committee. The
Audit Committee meets periodically with management and the internal and the
external auditors to satisfy itself that their responsibilities are properly
discharged and to review the consolidated financial statements.
The Company's independent external auditors have audited the consolidated
financial statements. Their audit was conducted in accordance with generally
accepted auditing standards, which includes consideration of the Company's
internal controls to the extent necessary to form an independent opinion on the
financial statements prepared by management. The internal and external auditors
have had, and continue to have, full and free access to the Audit Committee of
the Board.
Management recognizes its responsibility for conducting the Company's affairs
in compliance with established financial standards and applicable laws, and for
the maintenance of proper standards of business conduct in its activities.
February 28, 1995
/s/ Victor Rice
Victor Rice
Chief Executive Officer
/s/ J.A. Gilroy
J.A. Gilroy
Chief Operating Officer
/s/ N.D. Arnold
N. D. Arnold
Senior Vice President
Chief Financial Officer
48
<PAGE>
SUPPLEMENTARY INFORMATION
(Unaudited)
<TABLE>
<CAPTION>
QUARTERLY CONDENSED UNAUDITED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JANUARY 31, 1995 AND 1994 ARE PRESENTED BELOW. (1)
- -------------------------------------------------------------------------------------------------------------------------------
(Dollars in millions except per share amounts) 1994 QUARTERS 1993 QUARTERS
------------------------------------- ------------------------------------
1 2 3 4 1 2 3 4
------ ------ ------ ------ ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total sales and revenues......................... $505.8 $517.4 $605.0 $639.6 $ 455.6 $422.4 $463.2 $486.2
------ ------ ------ ------ ------- ------ ------ ------
Gross profit..................................... $ 88.8 $91.7 $108.6 $121.0 $ 78.2 $ 72.2 $ 79.0 $ 83.1
Expenses......................................... 63.4 67.7 72.2 79.2 63.6 59.2 59.4 64.0
Other (income) expense, net...................... (0.8) 0.8 0.2 0.1 - (0.3) 0.1 (2.7)
Income tax provision............................. 4.6 3.8 6.9 8.2 2.3 2.8 3.0 3.5
Equity in earnings of associated
companies..................................... (3.4) (3.4) (3.4) (3.1) (2.8) (2.6) (2.4) (3.7)
------ ------ ------ ------ ------- ------ ------ ------
Income before discontinued operation,
extraordinary loss and
cumulative effect of changes
in accounting principles...................... 25.0 22.8 32.7 36.6 15.1 13.1 18.9 22.0
Earnings (loss) from discontinued
operation..................................... 4.4 - - - (4.1) 3.0 3.3 5.0
Gain on sale of discontinued
operation..................................... - 23.2 - - - - - -
------ ------ ------ ------ ------- ------ ------ ------
Income before extraordinary
loss and cumulative effect of
changes in accounting principles.............. 29.4 46.0 32.7 36.6 11.0 16.1 22.2 27.0
Extraordinary loss (2)........................... - - - - - (1.7) - -
Cumulative effect of changes in
accounting principles (3)..................... - - - - (146.1) - - -
------ ------ ------ ------ ------- ------ ------ ------
Net income (loss)................................ $ 29.4 $ 46.0 $ 32.7 $ 36.6 $(135.1) $ 14.4 $ 22.2 $ 27.0
====== ====== ====== ====== ======= ====== ====== ======
Per share data (4):
Before discontinued operation,
extraordinary loss and
cumulative effect of changes
in accounting principles:
Primary..................................... $ 0.55 $ 0.50 $ 0.73 $ 0.84 $ 0.33 $ 0.25 $ 0.49 $ 0.48
Fully diluted............................... $ 0.55 $ 0.50 $ 0.73 $ 0.84 $ 0.33 $ 0.25 $ 0.41 $ 0.48
Before extraordinary loss and
cumulative effect of changes in
accounting principles:
Primary..................................... $ 0.65 $ 1.02 $ 0.73 $ 0.84 $ 0.20 $ 0.34 $ 0.58 $ 0.59
Fully diluted............................... $ 0.65 $ 1.02 $ 0.73 $ 0.84 $ 0.20 $ 0.34 $ 0.49 $ 0.59
Net income (loss):
Primary..................................... $ 0.65 $ 1.02 $ 0.73 $ 0.84 $ (4.50) $ 0.29 $ 0.58 $ 0.59
Fully diluted............................... $ 0.65 $ 1.02 $ 0.73 $ 0.84 $ (4.50)* $ 0.29 $ 0.49 $ 0.59
</TABLE>
* Anti-dilutive
(1) As a result of the fiscal 1994 sale of the farm equipment segment, as
described in Note 1 to the Consolidated Financial Statements, prior year
financial data has been restated to conform to the current year
presentation of the farm equipment segment as a discontinued operation.
(2) The fiscal 1993 second quarter extraordinary loss arose on the early
extinguishment of debt as described in Note 10 to the Consolidated
Financial Statements.
(3) Primarily relates to the Company's adoption of SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," effective
February 1, 1993, as described in Note 3 to the Consolidated Financial
Statements.
(4) Per share calculations for each of the quarters is based on the weighted
average number of shares outstanding for each period; the sum of the
quarters may not necessarily be equal to the full year per share amount.
49
<PAGE>
FINANCIAL STATISTICS (1)
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in millions except per share amounts)
- ------------------------------------------------------------------------------------------------------------------------------------
Fiscal years 1994 1993 1992(2) 1991 1990
- -------------------------------------------------------------------------------- ---------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Total sales and revenues......................................................... $ 2,268 1,827 2,234 2,037 2,232
Gross profit..................................................................... $ 410 313 397 323 421
Net expenses (excluding interest)................................................ $ 259 212 239 243 260
Interest expense (net)........................................................... $ 23 32 99 101 94
Losses on sales and other restructuring charges.................................. $ - - - 64 8
Income tax provision............................................................. $ 24 12 10 11 18
Equity in earnings of associated companies....................................... $ 13 12 1 - -
Income (loss) before discontinued operation, extraordinary loss
and cumulative effect of changes in accounting principles.................... $ 117 69 50 (96) 41
Earnings (loss) from discontinued operation...................................... $ 5 7 (16) (82) 53
Gain on sale of discontinued operation........................................... $ 23 - - - -
Extraordinary loss (3)........................................................... $ - (2) (7) - -
Cumulative effect of changes in accounting principles............................ $ - (146) - - -
Net income (loss)................................................................ $ 145 (72) 27 (178) 94
Preferred stock dividends........................................................ $ 2 10 19 19 18
---------- ------ ------ ------ ------
FINANCIAL CONDITION
Working capital.................................................................. $ 178 244 (46) (118) (95)
Additions to fixed assets ....................................................... $ 155 136 89 98 98
Depreciation and amortization.................................................... $ 78 65 99 92 85
Total assets..................................................................... $ 1,824 1,760 1,805 2,521 2,756
---------- ------ ------ ------ ------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current.......................................................................... $ 556 564 663 934 999
Other............................................................................ $ 484 565 593 1,092 1,037
Stockholders' equity............................................................. $ 784 631 549 495 720
Return on closing total stockholders' equity....................................... 18.5 % (11.3) 4.9 (36.0) 13.1
---------- ------ ------ ------ ------
AS A PERCENT OF SALES AND REVENUES
Cost of goods sold................................................................. 81.9 % 82.9 82.2 84.1 81.1
Gross profit....................................................................... 18.1 % 17.1 17.8 15.9 18.9
Marketing, general and administration.............................................. 7.8 % 8.2 8.6 8.4 8.2
Engineering and product development................................................ 3.9 % 3.6 2.9 3.0 2.9
Net income (loss).................................................................. 6.4 % (3.9) 1.2 (8.7) 4.2
---------- ------ ------ ------ ------
PER COMMON SHARE
Total sales and revenues......................................................... $ 51.54 49.79 85.06 81.63 89.55
Income (loss) before discontinued operation, extraordinary loss
and cumulative effect of changes in accounting principles.................... $ 2.61 1.60 1.18 (4.57) 0.93
Net income (loss)................................................................ $ 3.24 (2.23) 0.32 (7.87) 3.06
New York Stock Exchange quotes:(4)
High......................................................................... $ 50.13 47.88 30.25 28.75 33.75
Low.......................................................................... $ 33.00 25.75 12.13 10.50 16.25
---------- ------ ------ ------ ------
STOCKHOLDERS/EMPLOYEES (AT YEAR END)
Stockholders - Common...................................................... 19,538 21,544 33,054 34,237 41,464
- Preferred................................................... 4 8 573 419 361
Employees........................................................................ 10,511 13,110 14,026 17,523 18,731
Common stock outstanding (thousands) (4)......................................... 41,661 43,957 30,999 24,988 24,930
Preferred stock outstanding (thousands).......................................... 2,001 2,001 13,807 13,807 13,817
========== ====== ====== ====== ======
</TABLE>
(1) As a result of the fiscal 1994 sale of the farm equipment segment, as
described in Note 1 to the Consolidated Financial Statements, prior years'
financial data has been restated to conform to the current year
presentation of the farm equipment segment as a discontinued operation.
(2) Amounts reported for fiscal 1992 reflect the sale of a majority ownership
of Hayes Wheels.
(3) Extraordinary loss for fiscal 1993 and 1992 consist of $1.7 million and
$6.4 million, respectively, associated with the early extinguishment of
debt.
(4) Amounts have been restated to reflect the one for 10 reverse stock split as
of the earliest period presented.
50
<PAGE>
SALES AND REVENUES STATISTICS (1)
(Unaudited)
(Dollars in millions)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Fiscal years 1994 1993 1992 1991 1990
---- ---- ---- ---- ----
% OF TOTAL AMOUNT $ $ $ $ $
----------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
NET SALES AND REVENUES BY MARKETS
North America
United States............................... 60.6 1,373.1 1,133.3 1,113.8 1,008.1 1,144.9
Canada...................................... 3.2 73.0 64.8 189.2 141.6 131.0
----- ------- ------- ------- ------- -------
Total........................................... 63.8 1,446.1 1,198.1 1,303.0 1,149.7 1,275.9
----- ------- ------- ------- ------- -------
Europe
United Kingdom.............................. 18.0 408.6 328.2 342.2 337.1 371.5
France...................................... 2.9 65.0 34.3 57.6 51.1 66.3
Italy....................................... 2.7 61.7 46.5 134.7 138.4 144.0
Germany..................................... 2.6 57.8 44.7 142.0 118.1 117.3
Scandinavia................................. 1.4 31.5 14.4 10.7 10.6 14.0
Other....................................... 1.4 32.3 55.9 48.1 52.7 38.6
----- ------- ------- ------- ------- -------
Total........................................... 29.0 656.9 524.0 735.3 708.0 751.7
----- ------- ------- ------- ------- -------
East Asia....................................... 2.3 53.1 29.5 47.5 42.5 44.8
Latin America................................... 2.0 46.4 36.8 68.4 56.9 46.3
Near East....................................... 1.3 30.0 18.2 37.9 31.2 47.6
Africa.......................................... 0.7 14.8 8.3 10.3 9.3 11.9
Australasia..................................... 0.6 12.8 7.7 11.8 7.3 8.4
West Asia....................................... 0.3 7.7 4.8 19.7 32.2 45.6
----- ------- ------- ------- ------- -------
Total........................................... 100.0 2,267.8 1,827.4 2,233.9 2,037.1 2,232.2
===== ======= ======= ======= ======= =======
NET SALES AND REVENUES BY PRODUCTS
Automotive products............................. 60.5 1,372.7 1,148.8 1,516.3 1,354.4 1,449.5
----- ------- ------- ------- ------- -------
Engines
Engines..................................... 32.1 727.4 585.4 616.2 572.9 698.0
Parts and other............................. 5.9 134.0 117.0 127.7 144.1 142.6
Intersegment sales to discontinued operation (0.9) (20.4) (71.2) (76.3) (70.0) (104.3)
----- ------- ------- ------- ------- -------
Total........................................... 37.1 841.0 631.2 667.6 647.0 736.3
----- ------- ------- ------- ------- -------
Other products
Components.................................. 2.4 55.0 50.6 59.9 44.7 65.6
Intersegment sales to discontinued operation - (0.9) (3.2) (9.9) (9.0) (19.2)
----- ------- ------- ------- ------- -------
Total........................................... 2.4 54.1 47.4 50.0 35.7 46.4
----- ------- ------- ------- ------- -------
Total........................................... 100.0 2,267.8 1,827.4 2,233.9 2,037.1 2,232.2
===== ======= ======= ======= ======= =======
</TABLE>
(1) As a result of the fiscal 1994 sale of the farm equipment segment, as
described in Note 1 to the Consolidated Financial Statements, prior years'
financial data has been restated to conform to the current year presentation
of the farm equipment segment as a discontinued operation. Sales related to
the farm equipment segment have been reclassified into earnings (loss) from
discontinued operation on the consolidated statements of operations.
51
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
For the fiscal year ended January 31, 1995, there have been no disagreements
with accountants on accounting or financial disclosure.
PART III
The following information contained in Varity Corporation's Proxy Statement
relating to the Annual Meeting of Stockholders, is incorporated herein by
reference:
<TABLE>
<CAPTION>
Caption or
Location
in Proxy
Statement
---------------
<S> <C>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......... Election of
(Information covering the Executive Officers is included in Part I, Directors
on pages 10 through 12 of this Form 10-K)
ITEM 11. EXECUTIVE COMPENSATION..................................... Executive
Compensation
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT......................................................... Election of
Directors-
Directors'
and Officers'
Share
Ownership
and Other
Stockholder
Ownership
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. William A. Corbett, a Director, is a partner of Fraser & Beatty
(Barristers & Solicitors), who have provided and continue to provide legal
advice to the Company.
52
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements Page
----
Included in Part II, Item 8. of this report:
Consolidated Statements of Operations for the years ended
January 31, 1995, 1994 and 1993................................. 21
Consolidated Balance Sheets as at January 31, 1995 and 1994..... 22
Consolidated Statements of Changes in Stockholders' Equity for
the years ended January 31, 1995, 1994 and 1993................. 23
Consolidated Statements of Cash Flows for the years ended
January 31, 1995, 1994 and 1993................................. 25
Notes to Consolidated Financial Statements...................... 26
Independent Auditors' Report.................................... 47
Management's Report on Financial Statements..................... 48
Supplementary Information (Unaudited)
Quarterly Condensed Unaudited Statements of Operations for the
years ended January 31, 1995 and 1994......................... 49
Financial Statistics for the years ended January 31, 1995,
1994, 1993, 1992 and 1991..................................... 50
Sales and Revenues Statistics for the years ended January 31,
1995, 1994, 1993, 1992 and 1991............................... 51
2. Financial Statement Schedules for the years ended January 31,
1995, 1994 and 1993
Included in Part IV of this report: Schedule
Number Page
-------- ----
Condensed Financial Statements of Varity
Corporation (Unconsolidated):
Condensed Statements of Operations
and Deficit (Unconsolidated) for the
years ended January 31, 1995, 1994 and 1993 .. III 56
Condensed Balance Sheets (Unconsolidated)
as at January 31, 1995 and 1994............... III 57
Condensed Statements of Cash Flows (Unconsolidated)
for the years ended January 31, 1995, 1994 and
1993.......................................... III 58
Notes to Condensed Financial Statements
(Unconsolidated).............................. III 59
Valuation and Qualifying Accounts................. VIII 60
Other schedules are omitted because they are not applicable, not required or
because the information required is included in the Consolidated Financial
Statements and Notes thereto (see Part II).
53
<PAGE>
(b) Reports on Form 8-K
There were no reports on Form 8-K filed with the Securities and Exchange
Commission (SEC) subsequent to those listed in the Quarterly Report on Form
10-Q for the three months ended October 31, 1994, filed on December 8, 1994.
(c) Exhibits
(G) 3.1 - Restated Certificate of Incorporation of Varity Corporation.
(H) 3.2 - By-laws.
(F) 4.1 - Indenture, dated as of October 8, 1991 between Varity Corporation and
Manufacturers & Traders Trust Company, as trustee, relating to 11
3/8% Senior Notes due 1998.
10.0 - MATERIAL CONTRACTS
10.1 - LOAN AGREEMENTS
(L) (a) - Amended and restated Credit Agreement dated as of June 9, 1993
between Dayton Walther Corporation, The Bank of Nova Scotia and
NBD Bank, N.A.
(i) Varity Corporation Guarantee dated June 9, 1993 to The Bank
of Nova Scotia and NBD Bank, N.A.
(L) (b) - Amended and restated Credit Agreement dated as of August 31, 1993
between Kelsey-Hayes Company, The Chase Manhattan Bank N.A., as
agent, and The Bank of Nova Scotia, as co-agent.
(L) (c) - Facility Agreement dated as of September 30, 1993 among Perkins
Limited and others, various banks and Lloyds Bank Plc, as agent.
(i) Guarantee Agreement dated September 30, 1993.
(ii) Trust Agreement dated September 30, 1993.
(iii) Composite Security Assignment and Deposit Charge dated
September 30, 1993.
(L) (d) - Facility Agreement dated as of September 30, 1993 among Perkins
Group Limited and others, and Lloyds Bank Plc.
(i) Composite Debenture dated September 30, 1993.
(ii) Guarantee dated September 30, 1993.
(iii) Omnibus Guarantee dated September 30, 1993.
(O) (e) - Loan Agreement dated as of January 21, 1994 between Heerlen ABS
Manufacturing C.V. and Cooperatieve Centrale Raiffeisen -
Boerenleenbank B.A. and De Nationale Investeringsbank N.V.
(O) (f) - Overdraft Facility Agreement dated as of January 21, 1994 between
Heerlen ABS Manufacturing C.V. and Cooperatieve Centrale
Raiffeisen - Boerenleenbank B.A.
(O) (g) - Continuing Guarantee dated as of January 21, 1994 between Varity
Corporation and Cooperatieve Centrale Raiffeisen - Boerenleenbank
B.A. and De Nationale Investeringsbank N.V., reference (e) and
(f).
(O) (h) - Pledge Agreement dated as of April 12, 1994 between Heerlen ABS
Manufacturing C.V., Heerlen ABS Manufacturing B.V., and
Cooperatieve Centrale Raiffeisen - Boerenleenbank B.A. and De
Nationale Investeringsbank N.V., reference (e) and (f).
(O) (i) - Continuing Guaranty dated as of April 12, 1994 between Heerlen
ABS Manufacturing B.V. and Cooperatieve Centrale Raiffeisen -
Boerenleenbank B.A. and De Nationale Investeringsbank N.V.,
reference (e) and (f).
10.2 - OTHER MATERIAL CONTRACTS
(C) (a) - Class II Share Exchange Agreement dated April 30, 1986 among MF
Limited, CDIC, ODC, Canadian Imperial Bank of Commerce ("CIBC")
and The Secretary of State for Trade and Industry acting by the
Export Credits Guarantee Department ("ECGD").
(J) * (b) - Form of Executive Termination Arrangements.
(I) * (c) - Executive Stock Option Plan.
(J) * (d) - Varity Corporation Retirement Equity and Deferred Compensation
Plan.
(K) * (e) - Form of Employment Agreement and Supplement to Retirement Equity
and Deferred Compensation Plan of Varity Corporation.
(B) * (f) - Canadian Retirement Income Plan for Designated Employees.
(B) * (g) - United Kingdom Executive Pension Scheme.
54
<PAGE>
(E) (h) - Agreement dated December 17, 1990 between Varity Corporation and
the Government of Canada, Canada Development Investment
Corporation, the Government of Ontario and Ontario Development
Corporation replacing the Governments Foundation Agreement dated
as of January 27, 1986.
(D) (i) - Agreement between Varity Corporation and National Automobile,
Aerospace and Agricultural Implement Workers Union of Canada and
its Locals 439 and 458 dated as of October 18, 1990.
(M) * (j) - Shareholder Value Incentive Plan.
(N) (k) - Purchase and Sale Agreement between and among AGCO Corporation
and Varity Holdings Limited, Varity GmbH, Massey Ferguson GmbH,
Massey Ferguson Industries Limited, Massey Ferguson (Delaware)
Inc. and Varity Corporation dated as of April 26, 1994.
(A) 11. - Earnings Per Share Computations.
(A) 21. - Subsidiaries of the Registrant.
(A) 23. - Consent of KPMG Peat Marwick LLP, Independent Auditors.
(A) 27. - Financial Data Schedule.
LEGEND FOR EXHIBITS (PAGES 54 THROUGH 55)
(A) Filed herewith.
(B) Incorporated by reference from the Registrant's Registration Statement No.
33-7716 on Form S-1, filed with the SEC on July 15, 1986, as amended.
(C) Incorporated by reference from the Registrant's Annual Report on Form 10-K,
for the year ended January 31, 1986 filed with the SEC on May 15, 1986.
(D) Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q, for the quarter ended October 31, 1990 filed with the SEC on December
13, 1990.
(E) Incorporated by reference from the Registrant's Annual Report on Form 10-K,
for the year ended January 31, 1991 filed with the SEC on April 30, 1991.
(F) Incorporated by reference from the Registrant's Registration Statement No.
33-42401 on Form S-3, filed with the SEC on August 23, 1991.
(G) Incorporated by reference from the Registrant's Registration Statement on
Form 8-B, filed with the SEC on September 24, 1991.
(H) Incorporated by reference from the Registrant's Registration Statement No.
41125 on Form S-4, filed with the SEC on June 13, 1991.
(I) Incorporated by reference from the Registrant's Registration Statement No.
33-44266 on Form S-8, filed with the SEC on November 29, 1991.
(J) Incorporated by reference from the Registrant's Annual Report on Form 10-K,
for the year ended January 31, 1992 filed with the SEC on April 30, 1992.
(K) Incorporated by reference from the Registrant's Annual Report on Form 10-K,
for the year ended January 31, 1993 filed with the SEC on April 29, 1993.
(L) Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q, for the quarter ended October 31, 1993 filed with the SEC on December
10, 1993.
(M) Incorporated by reference from the Registrant's Annual Report on Form 10-K,
for the year ended January 31, 1994 filed with the SEC on April 18, 1994.
(N) Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q, for the quarter ended April 30, 1994 filed with the SEC on June 10,
1994.
(O) Incorporated by reference from the Registrant's Quarterly Report on Form
10-Q, for the quarter ended July 31, 1994 filed with the SEC on September 9,
1994.
* Represents compensatory plans or arrangements for directors or executive
officers of the Registrant.
(d) Financial Statements of Significant Subsidiary
Financial statements and notes thereto and the financial statement schedules
required by Articles 3 and 5 of Regulation S-X, of a 50 percent or less owned
company, as defined, Hayes Wheels International, Inc. (Hayes Wheels), are
incorporated herein by reference from Hayes Wheels' Annual Report on Form 10-K
for the year ended January 31, 1995.
55
<PAGE>
SCHEDULE III
VARITY CORPORATION
CONDENSED STATEMENTS OF OPERATIONS AND DEFICIT
(Unconsolidated)
(Dollars in millions)
<TABLE>
<CAPTION>
Years ended January 31,
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Income:
Interest income:
Subsidiary companies............................................... $ 5.9 $ 6.7 $ 16.5
Other.............................................................. .8 .6 .6
Other income (expense), net......................................... 3.8 - (1.8)
Equity in earnings of subsidiaries.................................. 134.2 79.8 46.8
------- ------- -------
144.7 87.1 62.1
------- ------- -------
Expenses:
Interest expense:
Subsidiary companies............................................... .6 .1 .2
Other.............................................................. 20.5 18.4 20.3
Marketing, general and administration............................... 8.1 3.0 2.7
Exchange gains...................................................... (1.6) (1.8) (4.2)
------- ------- -------
27.6 19.7 19.0
------- ------- -------
Income before income taxes, discontinued operation and
cumulative effect of changes in accounting principles............... 117.1 67.4 43.1
Income tax provision................................................. - - -
------- ------- -------
Income before discontinued operation
and cumulative effect of changes in
accounting principles............................................... 117.1 67.4 43.1
------- ------- -------
Discontinued operation:
Equity in earnings (losses) from discontinued operation............. 4.4 7.2 (16.1)
Gain on sale of discontinued operation.............................. 23.2 - -
------- ------- -------
27.6 7.2 (16.1)
------- ------- -------
Income before cumulative effect of changes in accounting principles.. 144.7 74.6 27.0
Cumulative effect of changes in accounting principles................ - (146.1) -
------- ------- -------
Net income (loss).................................................... 144.7 (71.5) 27.0
Dividends on preferred stock......................................... (2.4) (10.4) (18.5)
Deficit at beginning of year......................................... (561.3) (479.4) (487.9)
------- ------- -------
Deficit at end of year............................................... $(419.0) $(561.3) $(479.4)
======= ======= =======
See accompanying Notes to Condensed Financial Statements.
</TABLE>
56
<PAGE>
SCHEDULE III
VARITY CORPORATION
CONDENSED BALANCE SHEETS
(Unconsolidated)
(Dollars in millions)
<TABLE>
<CAPTION>
At January 31,
1995 1994
------- -------
<S> <C> <C>
ASSETS
Cash.................................................................. $ 29.4 $ 26.4
Receivables from subsidiaries......................................... 59.8 37.1
Other current assets.................................................. .1 .7
Net assets of discontinued operation.................................. - 219.8
Fixed assets, net..................................................... 11.0 15.7
Investments:
Subsidiary companies:
Shares, at equity in net assets..................................... 949.2 530.2
Long-term advances.................................................. 33.2 36.6
Other assets.......................................................... 9.1 12.3
-------- -------
$1,091.8 $ 878.8
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt..................................... $ - $ .1
Accounts payable and accrued charges.................................. 36.0 24.7
Due to subsidiaries................................................... 72.2 14.8
Long-term debt........................................................ 148.4 148.0
Other long-term liabilities........................................... 51.5 60.5
Contingent liabilities and commitments (Notes 6 and 7)
Stockholders' equity:
Preferred stock - at stated value (Liquidation value: 1995 - $35.6;
1994 - $37.6)....................................................... 6.8 6.8
Common stock - at stated value (Shares issued: 1995 - 41,660,653;
1994 - 43,957,121).................................................. 638.4 637.4
Contributed surplus.................................................. 656.3 656.3
Deficit.............................................................. (419.0) (561.3)
Foreign currency translation adjustment.............................. (10.7) (79.8)
Pension liability adjustment......................................... (1.6) (30.5)
Unrealized gains (losses) on marketable securities................... (1.8) 1.8
Less treasury stock at cost.......................................... (84.7) -
-------- -------
783.7 630.7
-------- -------
$1,091.8 $ 878.8
======== =======
</TABLE>
See accompanying Notes to Condensed Financial Statements.
57
<PAGE>
SCHEDULE III
VARITY CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unconsolidated)
(Dollars in millions)
<TABLE>
<CAPTION>
Years ended January 31,
1995 1994 1993
------ ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $144.7 $ (71.5) $ 27.0
Adjustments to reconcile net income (loss) to cash
used by operating activities:
Depreciation and amortization.......................... 3.9 4.9 4.5
Gain on sale of assets................................. (3.8) - -
Equity in earnings of subsidiaries in excess
of dividends received................................ (66.3) (59.0) (46.8)
Equity in (earnings) losses of discontinued operation
in excess of dividends received...................... (4.4) (7.2) 61.3
Gain on sale of discontinued operation................. (23.2) - -
Cumulative effect of changes in accounting principles.. - 146.1 -
Changes in:
Receivables.......................................... (58.3) 15.0 (81.5)
Other current assets................................. .6 .1 (.8)
Accounts payable and accrued charges................. .1 (28.3) 2.1
Payables to subsidiary companies..................... 57.4 (44.8) (1.4)
Other long-term liabilities.......................... (29.1) 13.1 (17.3)
Net assets of discontinued operation................. 26.9 (3.7) (2.8)
------ ------- -------
Cash provided (used) by operating activities.............. 48.5 (35.3) (55.7)
------ ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of marketable securities.............. 22.4 - -
Proceeds from sales of fixed assets....................... 4.2 - -
(Additions) reductions to investments..................... 18.4 (108.2) 3.7
(Additions) reductions in other assets.................... (4.7) (4.4) 5.2
------ ------- -------
Cash provided (used) by investing activities.............. 40.3 (112.6) 8.9
------ ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchases of common stock............................... (84.7) - -
Proceeds from bank borrowings............................. - - 121.0
Repayments of bank borrowings............................. - - (138.5)
Dividends paid on preferred shares........................ (2.4) (10.4) (18.5)
Proceeds from sale of stock............................... - 143.7 119.6
Other..................................................... 1.3 1.6 .6
------ ------- -------
Cash provided (used) by financing activities.............. (85.8) 134.9 84.2
------ ------- -------
INCREASE (DECREASE) IN CASH DURING THE YEAR................. 3.0 (13.0) 37.4
CASH AT BEGINNING OF YEAR................................... 26.4 39.4 2.0
------ ------- -------
CASH AT END OF YEAR......................................... $ 29.4 $ 26.4 $ 39.4
====== ======= =======
</TABLE>
See accompanying Notes to Condensed Financial Statements.
58
<PAGE>
SCHEDULE III
VARITY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unconsolidated)
(Dollars in millions)
1. These notes should be read in conjunction with the accounting policies and
other significant accounting matters contained in the Notes to Consolidated
Financial Statements (see Part II).
2. 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 (AGCO) for $310 million in cash and
500,000 shares of AGCO common stock, resulting in a gain of $23.2 million.
As a result of this plan, the farm equipment segment has been presented
as a discontinued operation in the accompanying condensed financial
statements. See Note 1 to the Consolidated Financial Statements (see Part
II).
3. During fiscal 1993 Varity changed its method of accounting for income
taxes, postretirement benefits other than pensions, postemployment benefits
and marketable securities in accordance with several new Statements of
Financial Accounting Standards. A one-time, non-cash charge of $146.1
million was recorded as a cumulative effect of changes in accounting
principles and includes the cumulative effect relating to Varity's
subsidiaries and associated companies. The details of these changes in
accounting principles are discussed in Note 3 to the Consolidated Financial
Statements (see Part II).
4. In fiscal 1994, 1993 and 1992, Varity increased its investment in
subsidiaries through non-cash transactions by approximately $44 million,
$60 million and $149 million, respectively, by capitalizing intercompany
loans and receivables.
During fiscal 1992, $6.2 million of common stock was issued pursuant to
the termination of the Performance Equity Plan in a non-cash transaction.
5. Varity received cash dividends from its consolidated subsidiaries amounting
to $72.1 million, $20.8 million and nil for the years ended January 31,
1995, 1994 and 1993, respectively.
In fiscal 1994, Varity received dividends in the form of marketable
securities from its consolidated subsidiaries amounting to $18.6 million.
Varity charges its subsidiaries for costs which it incurs on their
behalf. The amounts of such charges for the years ended January 31, 1995,
1994 and 1993, were $16.1 million, $18.9 million and $17.1 million,
respectively.
6. Varity has guaranteed approximately $12 million of its subsidiaries'
indebtedness outstanding at January 31, 1995.
7. Varity and its subsidiaries have agreed to certain covenants and
undertakings with their lenders. There are also certain contingent
obligations of the Company and it subsidiaries. The details of these
covenants and undertakings, and compliance therewith, and contingent
obligations are discussed in Notes 10 and 15 to the Consolidated Financial
Statements (see Part II).
59
<PAGE>
SCHEDULE VIII
VARITY CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
Years ended January 31, 1995, 1994 and 1993
(Dollars in millions)
<TABLE>
<CAPTION>
Additions
-------------------------
Balance at Charged Deductions Balance at
Description January 31, Charged to to other from January 31,
- ----------- 1994 income accounts/(1)/ reserves 1995
----------- ---------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Deducted from receivables:
Allowance for doubtful notes and accounts... $ 3.9 $ 3.1 $ - $ (1.9) $ 5.1
Discounts, volume and performance bonuses,
returns and other allowances............... .2 - - (.2) -
------ ------ ------ ------ ------
$ 4.1 $ 3.1 $ - $ (2.1) $ 5.1
====== ====== ====== ====== ======
<CAPTION>
Additions
-------------------------
Balance at Charged Deductions Balance at
January 31, Charged to to other from January 31,
1993 income accounts/(1)/ reserves 1994
----------- ---------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Deducted from receivables:
Allowance for doubtful notes and accounts... $ 5.4 $ (.2) $ - $ (1.3) $ 3.9
Discounts, volume and performance bonuses,
returns and other allowances............... 1.8 - - (1.6) .2
------ ------ ------ ------ ------
$ 7.2 $ (.2) $ - $ (2.9) $ 4.1
====== ====== ====== ====== ======
<CAPTION>
Additions
-------------------------
Balance at Charged Deductions Balance at
January 31, Charged to to other from January 31,
1992 income accounts/(1)/ reserves 1993
----------- ---------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Deducted from receivables:
Allowance for doubtful notes and accounts... $ 4.8 $ 2.3 $ (.6) $ (1.1) $ 5.4
Discounts, volume and performance bonuses,
returns and other allowances............... 5.7 - (.4) (3.5) 1.8
------ ------ ------ ------ ------
$ 10.5 $ 2.3 $ (1.0) $ (4.6) $ 7.2
====== ====== ====== ====== ======
</TABLE>
- ----------
(1) Charges to other accounts arise on translation of reserves of companies
outside the United States and are reflected in the currency translation
adjustment account.
60
<PAGE>
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.
VARITY CORPORATION
/s/ J.A. Gilroy
J.A. Gilroy
Chief Operating Officer
April 14, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ Victor Rice Chairman of the Board,
- ------------------------------------------- Chief Executive Officer and Director April 14, 1995
Victor Rice (Principal Executive Officer)
/s/ J.A. Gilroy Chief Operating Officer April 14, 1995
- -------------------------------------------
J.A. Gilroy
/s/ N. D. Arnold Senior Vice President
- ------------------------------------------- and Chief Financial Officer April 14, 1995
N.D. Arnold (Principal Financial Officer)
/s/ Kevin C. Shanahan
- ------------------------------------------- Vice President, Controller April 14, 1995
Kevin C. Shanahan (Principal Accounting Officer)
/s/ Vince D. Laurenzo
- ------------------------------------------- Vice Chairman of the Board April 14, 1995
Vince D. Laurenzo and Director
/s/ Paul M.F. Cheng Director April 14, 1995
- -------------------------------------------
Paul M.F. Cheng
/s/ W. A. Corbett Director April 14, 1995
- -------------------------------------------
W. A. Corbett
/s/ T. N. Davidson Director April 14, 1995
- -------------------------------------------
T. N. Davidson
/s/ Robert M. Gates Director April 14, 1995
- -------------------------------------------
Robert M. Gates
/s/ L. F. Kahl Director April 14, 1995
- -------------------------------------------
L. F. Kahl
/s/ W. Darcy McKeough Director April 14, 1995
- -------------------------------------------
W. Darcy McKeough
/s/ Sir Bryan Nicholson Director April 14, 1995
- -------------------------------------------
Sir Bryan Nicholson
/s/ Warren S. Rustand Director April 14, 1995
- -------------------------------------------
Warren S. Rustand
/s/ W. R. Teschke Director April 14, 1995
- -------------------------------------------
W. R. Teschke
/s/ Robin Warrender Director April 14, 1995
- -------------------------------------------
The Hon. Robin Warrender
</TABLE>
61
<PAGE>
VARITY CORPORATION
INDEX TO EXHIBITS
FILED HEREWITH (1)
Exhibit
Number
- --------
11.1 Primary Earnings Per Share Computations for the years ended January
31, 1995, 1994 and 1993
11.2 Fully Diluted Earnings Per Share Computations for the years ended
January 31, 1995, 1994 and 1993
21 Subsidiaries of the Registrant
23 Consent of KPMG Peat Marwick LLP, Independent Auditors
27 Financial Data Schedule
- ------
(1) Complete listing of all exhibits can be found on pages 54-55.
<PAGE>
EXHIBIT 11.1
VARITY CORPORATION
PRIMARY EARNINGS PER SHARE COMPUTATIONS
(Dollars in millions except per share amounts)
<TABLE>
<CAPTION>
Years ended January 31,
----------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Income before discontinued operation, extraordinary
loss and cumulative effect of changes in accounting principles.. $ 117.1 $ 69.1 $ 49.5
Preferred stock dividend entitlements............................. (2.4) (10.4) (18.5)
------- ------- -------
Income attributable to common stockholders before
discontinued operation, extraordinary loss and
cumulative effect of changes in accounting principles (A)....... 114.7 58.7 31.0
Earnings (loss) from discontinued operation (B)................... 27.6 7.2 (16.1)
Extraordinary loss (C)............................................ - (1.7) (6.4)
Cumulative effect of changes in accounting principles (D)......... - (146.1) -
------- ------- -------
Net income (loss) attributable to common stockholders (E)......... $ 142.3 $ (81.9) $ 8.5
======= ======= =======
Weighted average shares of common stock outstanding
during the period (in thousands)................................ 43,555 36,311 25,978
Common stock equivalents:
Common stock options............................................ 437 369 272
Long-term incentive plans....................................... 5 20 14
------- ------- -------
Primary weighted average shares of common stock
outstanding during the period (F)............................... 43,997 36,700 26,264
======= ======= =======
Primary income (loss) per share of common stock:
Before discontinued operation, extraordinary loss and
cumulative effect of changes in accounting principles (A/F)... $ 2.61 $ 1.60 $ 1.18
Discontinued operation (B/F).................................... $ .63 $ .20 $ (.62)
Extraordinary loss (C/F)........................................ $ - $ (.05) $ (.24)
Cumulative effect of changes in accounting principles (D/F)..... $ - $ (3.98) $ -
Net income (loss) (E/F)......................................... $ 3.24 $ (2.23) $ .32
</TABLE>
Note: If the actual conversion of Class I Stock into common stock in the third
quarter of fiscal 1993 was assumed to have occurred as of the first day of
fiscal 1993, primary income per share of common stock before discontinued
operation, extraordinary loss and cumulative effect of changes in accounting
principles would have amounted to $1.57.
<PAGE>
EXHIBIT 11.2
VARITY CORPORATION
FULLY DILUTED EARNINGS PER SHARE COMPUTATIONS
(Dollars in millions except per share amounts)
<TABLE>
<CAPTION>
Years ended January 31,
------------------------------
1995 1994 1993
-------- --------- ---------
<S> <C> <C> <C>
Income before discontinued operation, extraordinary
loss and cumulative effect of changes in accounting principles.. $ 117.1 $ 69.1 $ 49.5
Preferred stock dividend entitlements............................. (2.4) (2.5) (18.5)
------- ------- -------
Income attributable to common stockholders before
discontinued operation, extraordinary loss and
cumulative effect of changes in accounting principles (A)....... 114.7 66.6 31.0
Earnings (loss) from discontinued operation (B)................... 27.6 7.2 (16.1)
Extraordinary loss (C)............................................ - (1.7) (6.4)
Cumulative effect of changes in accounting principles (D)......... - (146.1) -
------- ------- -------
Net income (loss) attributable to common stockholders (E)......... $ 142.3 $ (74.0) $ 8.5
======= ======= =======
Weighted average shares of common stock outstanding
during the period (in thousands) (1)............................ 43,555 42,107 25,983
Common stock equivalents:
Common stock options............................................ 440 625 428
Long-term incentive plans....................................... 5 21 25
------- ------- -------
Fully diluted weighted average shares of common stock
outstanding during the period (F)............................... 44,000 42,753 26,436
======= ======= =======
Fully diluted income (loss) per share of common stock:
Before discontinued operation, extraordinary loss and
cumulative effect of changes in accounting principles (A/F).. $ 2.61 $ 1.56 $ 1.17
Discontinued operation (B/F).................................... $ .63 $ .17 $ (.62)*
Extraordinary loss (C/F)........................................ $ - $ (.05)* $ (.24)*
Cumulative effect of changes in accounting principles (D/F)..... $ - $ (3.98)* $ -
Net income (loss) (E/F)......................................... $ 3.24 $ (2.23)* $ .32
</TABLE>
*Anti-dilutive
(1) The calculation for the year ended January 31, 1994 assumes the actual
conversion of Class I Preferred Stock into common stock occurred as of the first
day of the period. See Note 5 to Consolidated Financial Statements.
<PAGE>
EXHIBIT 21
The following is a list at March 15, 1995 of all material subsidiaries of the
Company (including subsidiaries which if considered in the aggregate as a single
subsidiary would constitute a significant subsidiary), with information in
regard to each as to the jurisdiction under the laws of which it is organized
and the percentage of voting securities owned by its immediate parent. The
voting securities of all listed subsidiaries are 100% owned directly or
indirectly, through subsidiaries, by the Registrant, unless otherwise indicated.
The Registrant is not a subsidiary of any other company.
VARITY CORPORATION SUBSIDIARY COMPANIES
<TABLE>
<CAPTION>
Jurisdiction Percent
Name of Subsidiary of Incorporation Parent Ownership
- ----------------------------------- ----------------- ------------------------- ---------
<S> <C> <C> <C>
Varity Automotive Inc. Delaware (U.S.A.) Registrant 100.0
Dayton Walther Corporation Ohio (U.S.A.) Varity Automotive Inc. 100.0
K-H Corporation Delaware (U.S.A.) Varity Automotive Inc. 100.0
Kelsey-Hayes Company Delaware (U.S.A.) K-H Corporation 100.0
Hayes Wheels International, Inc. Delaware (U.S.A.) K-H Corporation 46.3
Varity International Inc. Delaware (U.S.A.) Registrant 100.0
Varity Assets Corporation Delaware (U.S.A.) Varity International Inc. 100.0
Polygon Reinsurance Company Limited Bermuda Varity Assets Corporation 100.0
Varity Nederland NV The Netherlands Varity Assets Corporation 100.0
Varity Europe Limited Delaware (U.S.A.) Varity Assets Corporation 100.0
Perkins Group Limited U.K. Varity Europe Limited 100.0
Perkins Engines Group Limited U.K. Perkins Group Limited 100.0
Perkins Engines Limited U.K. Perkins Group Limited 100.0
Perkins Limited U.K. Perkins Group Limited 100.0
Dorman Diesels Limited U.K. Perkins Group Limited 100.0
Varity GmbH Germany Perkins Group Limited 100.0
Pacoma Hydraulik GmbH Germany Varity GmbH 100.0
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS'
The Board of Directors
Varity Corporation:
We consent to incorporation by reference in the registration statements (No. 33-
48135) on Form S-8 and (No. 33-57397) on Form S-3 of Varity Corporation of our
report dated February 28, 1995, relating to the consolidated balance sheets of
Varity Corporation and subsidiaries as of January 31, 1995 and 1994, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows and related schedules for each of the years in the three-year
period ended January 31, 1995, which report is included in the January 31, 1995
annual report on Form 10-K of Varity Corporation.
/s/ KPMG Peat Marwick LLP
Buffalo, New York
April 14, 1995
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