<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended OCTOBER 31, 1995
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to ___________________
Commission file number: 1-5190
VARITY CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 22-3091314
-------- ----------
(State or other jurisdiction (IRS Employer
of Incorporation) Identification No.)
672 DELAWARE AVENUE, BUFFALO, NEW YORK 14209
- -------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Telephone number including area code: (716) 888-8000
-----------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
THE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF NOVEMBER 17, 1995 WAS
40,160,696 SHARES.
Exhibit index appears on page 16.
<PAGE>
VARITY CORPORATION
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION: PAGE
Item 1. Financial Statements
Consolidated Condensed Statements of Operations........ 3
Consolidated Condensed Balance Sheets.................. 4
Consolidated Condensed Statements of Cash Flows........ 5
Notes to Consolidated Condensed Financial Statements... 6
Item 2. Management's Discussion and Analysis................... 9
PART II. OTHER INFORMATION:
Item 1. - Legal Proceedings.................................. 14
Item 2. - Changes in Registered Securities................... 14
Item 3. - Defaults upon Senior Securities.................... 14
Item 4. - Submission of Matters to a Vote of Security Holders 14
Item 5. - Other Information.................................. 14
Item 6.(a) - Exhibits........................................ 14
Item 6.(b) - Reports on Form 8-K............................. 14
SIGNATURES.................................................... 15
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 1995 REPRESENTS THE PERIOD FEBRUARY 1, 1995 TO JANUARY
31, 1996).
Page 2
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
VARITY CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED OCTOBER 31,
(Unaudited)
(Dollars in millions except per share amounts)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended October 31, Ended October 31,
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $ 594.7 $ 590.8 $1,762.4 $1,589.2
------- ------- -------- --------
Expenses:
Cost of goods sold 478.9 483.6 1,428.3 1,305.1
Marketing, general and administration 43.9 43.5 130.5 120.2
Engineering and product development 25.5 21.1 72.0 62.4
Interest, net 4.3 4.4 13.9 15.9
Other (income) expense, net 0.8 1.7 (0.7) (0.7)
Restructuring charges, net (Note 3) 14.6 - 14.6 -
------- ------- -------- --------
568.0 554.3 1,658.6 1,502.9
------- ------- -------- --------
Income before income taxes, earnings of associated
companies and discontinued operations 26.7 36.5 103.8 86.3
Income tax provision (9.5) (6.9) (27.2) (15.3)
------- ------- -------- --------
Income before earnings of associated companies and
discontinued operations 17.2 29.6 76.6 71.0
Equity in earnings of associated companies 3.6 3.4 10.6 10.2
------- ------- -------- --------
Income before discontinued operations 20.8 33.0 87.2 81.2
------- ------- -------- --------
Discontinued operations (Note 2):
Earnings (loss) from discontinued operations - (0.3) 0.5 3.7
Gain on sale of discontinued operations - - - 23.2
------- ------- -------- --------
- (0.3) 0.5 26.9
------- ------- -------- --------
Net income $ 20.8 $ 32.7 $ 87.7 $ 108.1
======= ======= ======== ========
Income attributable to common stockholders $ 20.2 $ 32.1 $ 85.9 $ 106.3
Earnings per common share:
Before discontinued operations $ 0.49 $ 0.73 $ 2.07 $ 1.79
Discontinued operations - - 0.01 0.61
------- ------- -------- --------
Net income $ 0.49 $ 0.73 $ 2.08 $ 2.40
======= ======= ======== ========
Weighted average shares of common stock
and equivalents (in thousands) 41,385 44,165 41,386 44,334
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements.
Page 3
<PAGE>
VARITY CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(Dollars in millions)
<TABLE>
<CAPTION>
October 31, January 31,
1995 1995
----------- -----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 147.0 $ 147.0
Marketable securities 42.4 42.7
Receivables 406.2 367.7
Inventories (Note 4) 164.4 146.0
Prepaid expenses and other 24.1 19.9
Net assets of discontinued operation (Note 2) - 11.2
-------- --------
Total current assets 784.1 734.5
Investments in associated and other companies 117.3 103.1
Fixed assets, net 649.5 613.2
Other assets and intangibles 356.8 361.7
-------- --------
$1,907.7 $1,812.5
======== ========
Liabilities
Current liabilities:
Current portion of long-term debt and notes payable $ 5.9 $ 5.3
Accounts payable 299.5 286.2
Accrued liabilities 276.6 255.1
-------- --------
Total current liabilities 582.0 546.6
-------- --------
Non-current liabilities:
Long-term debt 166.6 163.4
Other long-term liabilities 326.3 318.8
-------- --------
Total non-current liabilities 492.9 482.2
-------- --------
Stockholders' equity (Note 5):
Preferred stock 6.8 6.8
Common stock 643.4 638.4
Contributed surplus 656.3 656.3
Deficit (333.1) (419.0)
Other (10.1) (14.1)
Less treasury stock at cost (130.5) (84.7)
-------- --------
Total stockholders' equity 832.8 783.7
-------- --------
$1,907.7 $1,812.5
======== ========
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements.
Page 4
<PAGE>
VARITY CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED OCTOBER 31,
(Unaudited)
(Dollars in millions)
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 87.7 $ 108.1
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 64.2 53.6
Other (36.3) (148.9)
--------- ---------
Cash provided by operating activities 115.6 12.8
--------- ---------
Cash flows from investing activities:
Purchases of marketable securities (32.3) (23.6)
Proceeds from sales of marketable securities 34.7 42.8
Additions to fixed assets (101.7) (120.2)
Proceeds from sales of businesses 9.3 333.2
Acquisition of business, net of cash acquired - (42.7)
Other (2.4) 11.6
--------- ---------
Cash provided (used) by investing activities (92.4) 201.1
--------- ---------
Cash flows from financing activities:
Proceeds from bank borrowings 16.3 37.6
Repayments of bank borrowings (14.0) (102.1)
Proceeds from long-term debt 3.6 97.9
Repayments of long-term debt (3.2) (126.7)
Repurchases of common stock (30.1) (21.9)
Other 3.2 (0.8)
--------- ---------
Cash used by financing activities (24.2) (116.0)
--------- ---------
Effect of foreign currency translation on
cash and cash equivalents 1.0 8.4
--------- ---------
Increase in cash and cash equivalents
during the period - 106.3
Cash and cash equivalents at beginning of period 147.0 51.2
--------- ---------
Cash and cash equivalents at end of period $ 147.0 $ 157.5
========= =========
Cash paid for:
Interest $ 10.6 $ 12.9
Income taxes $ 5.2 $ 3.0
</TABLE>
See accompanying Notes to Consolidated Condensed Financial Statements.
Page 5
<PAGE>
VARITY CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Three and Nine Months Ended October 31, 1995 and 1994
(Unaudited)
(Dollars in millions unless otherwise stated)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have been
prepared by management and in the opinion of management contain all adjustments,
consisting of normal recurring adjustments, necessary to present fairly the
financial position of the Company as of October 31, 1995 and January 31, 1995,
the results of its operations for the three and nine months ended October 31,
1995 and 1994 and its cash flows for each of the nine month periods ended
October 31, 1995 and 1994. The consolidated condensed financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Form 10-K for the fiscal year ended
January 31, 1995. Results for interim periods are not necessarily indicative of
those to be expected for the year.
2. DISCONTINUED OPERATIONS
In October 1995, the Company sold substantially all the net operating assets of
its Pacoma components operations (Pacoma) at book value, resulting in no gain or
loss. Pacoma manufactured hydraulic cylinders and hydraulic valves and to a
lesser degree allied equipment, primarily for producers of construction
machines. Such operations had historically been referred to as the Company's
'other' segment. The transaction excluded cash, receivables, indebtedness and
certain liabilities, primarily pertaining to pensions for all former Pacoma
employees. Prior years' financial statements have been restated to conform to
the current year presentation.
The operating results of the discontinued Pacoma operation are as follows:/(1)/
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
October 31, October 31,
------------------- -----------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $ 9.9 $14.2 $44.1 $39.0
===== ===== ===== =====
Income (loss) before income taxes $ - $(0.3) $ .5 $(0.7)
Income tax provision - - - -
----- ----- ----- -----
Net income (loss) $ - $(0.3) $ .5 $(0.7)
===== ===== ===== =====
</TABLE>
/(1)/ Includes the period up to and including September 29, 1995, the effective
date of the sale.
Page 6
<PAGE>
A summary of the assets and liabilities of the discontinued Pacoma operation is
as follows:
<TABLE>
<CAPTION>
January 31,
1995
-----------
<S> <C>
Current assets $10.4
Noncurrent assets 11.8
-----
22.2
-----
Current liabilities 9.2
Noncurrent liabilities 1.8
-----
11.0
-----
Net assets of discontinued operation $11.2
=====
</TABLE>
Additionally, pursuant to a plan to dispose of its farm equipment segment,
during the second quarter of fiscal 1994, the Company completed the sale of its
worldwide Massey Ferguson farm machinery business resulting in a gain of $23.2
million. The transaction excluded cash, indebtedness and certain liabilities,
primarily pertaining to pension and retiree medical benefits for all former
North American Massey Ferguson employees, for which the Company 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.
The operating results of the discontinued Massey Ferguson operation are as
follows:
<TABLE>
<CAPTION>
Nine Months Ended
October 31, 1994
-----------------
<S> <C>
Sales $253.1
======
Income before income taxes $ 5.0
Income tax provision (.6)
------
Net income $ 4.4
======
</TABLE>
3. RESTRUCTURING CHARGES
During the third quarter of fiscal 1995, the Company recognized net
restructuring charges in the amount of $14.6 million related to its Kelsey-Hayes
foundation brakes business. Such charges included costs associated with a
conventional brake plant closure in Canada and write-downs of non-performing
assets, partially offset by a gain on the sale of its non-core door lock
actuator business.
The Company continues to explore potential additional actions, including the
possibility of closing another plant, related to the further rationalization of
its foundation brakes business intended to reduce floor space and labor content
concurrent with the introduction of new manufacturing processes, the net effect
of which will be to maintain or increase productive capacity under a lower cost
structure. Such actions may result in the recognition of additional
restructuring charges in the fourth quarter of fiscal 1995 or the first quarter
of fiscal 1996. An estimate of future restructuring charges, if any, is not
available at this time.
Page 7
<PAGE>
4. INVENTORIES
The major classes of inventory are as follows:
<TABLE>
<CAPTION>
October 31, January 31,
1995 1995
----------- -----------
<S> <C> <C>
Raw material $ 61.0 $ 52.3
Work in process 38.9 36.5
Finished goods 64.5 57.2
------ ------
$164.4 $146.0
====== ======
</TABLE>
5. STOCKHOLDERS' EQUITY
The following table summarizes changes in stockholders' equity that occurred
during the nine months ended October 31, 1995:
<TABLE>
<CAPTION>
Thousands of
shares
outstanding Equity (Dollars in millions)
----------- --------------------------------------------------------------------
Total
Class II Class II Contri- stock-
preferred Common preferred Common buted Treasury holders'
stock stock stock stock surplus Deficit Other stock equity
--------- ------ --------- ------ ------- ------- ----- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 31, 1995 2,001 41,661 $6.8 $638.4 $656.3 $(419.0) $(14.1) $ (84.7) $783.7
Exercise of stock options 246 5.0 5.0
Repurchases of common stock (1,325) (45.8) (45.8)
Foreign currency translation
adjustment 1.9 1.9
Dividends on Class II
preferred stock (1.8) (1.8)
Unrealized gains on marketable
securities 2.1 2.1
Net income 87.7 87.7
- -------------------------------- ----- ------ ---- ------ ------ -------- ------- -------- ------
Balance, October 31, 1995 2,001 40,582 $6.8 $643.4 $656.3 $(333.1) $(10.1) $(130.5) $832.8
================================ ===== ====== ==== ====== ====== ======== ======= ======== ======
</TABLE>
As of October 31, 1995 options to purchase 2.5 million shares of common stock
were outstanding.
Page 8
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
OVERVIEW
During the third quarter of fiscal 1995, the Company recognized net
restructuring charges in the amount of $14.6 million related to its Kelsey-Hayes
foundation brakes business. Such charges included costs associated with a
conventional brake plant closure in Canada and write-downs of non-performing
assets, partially offset by a gain on the sale of its non-core door lock
actuator business.
The Company continues to explore potential additional actions, including
the possibility of closing another plant, related to the further rationalization
of its foundation brakes business intended to reduce floor space and labor
content concurrent with the introduction of new manufacturing processes, the net
effect of which will be to maintain or increase productive capacity under a
lower cost structure. Such actions may result in the recognition of additional
restructuring charges in the fourth quarter of fiscal 1995 or the first quarter
of fiscal 1996. An estimate of future restructuring charges, if any, is not
available at this time.
In October 1995, the Company sold substantially all the net operating
assets of Pacoma at book value, resulting in no gain or loss. Such operations
have historically been referred to as the Company's 'other' segment. As a result
of the sale, the 'other' segment has been presented as a discontinued operation
in the accompanying financial statements. Prior year financial statements have
been restated to conform to the current year presentation.
In addition, in June 1994, the Company, pursuant to a plan to dispose of
its farm equipment segment, completed the sale of its worldwide Massey Fergus on
farm machinery business resulting in a gain of $23.2 million. As a result of the
plan and subsequent sale, the farm equipment segment has been presented as a
discontinued operation in the accompanying financial statements.
For the three months ended October 31, 1995, the Company earned $20.8
million ($.49 per share) on sales of $594.7 million, compared with income
before discontinued operations of $33.0 million ($.73 per share) on sales of
$590.8 million for the comparable period in the prior year. Excluding the
effect of the Company's restructuring charge in the current quarter, income from
continuing operations amounted to $35.4 million ($.84 per share), an increase of
7% from the prior year's third quarter. Net income in the prior year third
quarter of $32.7 million ($.73 per share) included losses from discontinued
operations of $0.3 million. For the nine months ended October 31, 1995, the
Company earned $87.2 million ($2.07 per share) before the aforementioned
discontinued operations on sales of $1,762.4 million, compared with income of
$81.2 million ($1.79 per share) on sales of $1,589.2 million for the comparable
period in fiscal 1994. Fiscal 1994 sales did not include $21 million of
intercompany sales from the engines segment to the discontinued farm equipment
operation. Sales to this same customer are reflected as third party sales in
fiscal 1995. Excluding the effect of the Company's restructuring charge, income
from continuing operations amounted to $101.8 million ($2.42 per share), an
increase of 25% from the prior year's first nine months. Income from
discontinued operations was $.5 million ($.01 per share) for the nine months
ended October 31, 1995 as compared to $26.9 million ($.61 per share) in the
prior year, which included $4.4 million of earnings from the discontinued farm
equipment segment and the related gain on sale of $23.2 million, for which no
similar amounts exist in fiscal 1995.
Page 9
<PAGE>
<TABLE>
<CAPTION>
SEGMENT OPERATING REVIEW
(Dollars in millions) Three Months Ended Nine Months Ended
October 31, October 31,
----------- -----------
% %
1995 1994 Change 1995 1994 Change
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Sales:
Automotive products:
Brake Systems $ 334 $334 - $ 938 $ 900 4
Heavy Duty Brakes 30 41 (27) 95 128 (26)
Eliminations - (3) - (2) (14) -
----- ---- ------ ------
364 372 (2) 1,031 1,014 2
Engines 231 219 5 731 596 23
Intercompany sales to discontinued
farm equipment operation - - - - (21) -
----- ---- ------ ------
Total $ 595 $591 1 $1,762 $1,589 11
===== ==== ====== ======
Operating income (loss):
Automotive products:
Brake Systems /(1)/ $ 20 $ 37 (46) $ 80 $ 87 (8)
Heavy Duty Brakes - (2) - - (3) -
----- ---- ------ ------
20 35 (43) 80 84 (5)
Engines 21 17 24 64 46 39
----- ---- ------ ------
Total $ 41 $ 52 (21) $ 144 $ 130 11
===== ==== ====== ======
</TABLE>
/(1)/ Inclusive of restructuring charges, net for the three and nine months
ended October 31, 1995 of $14.6 million. Excluding such charges, segment
operating income for Brake Systems and in total would have been $35 million
and $56 million, respectively, for the three months and $95 million and
$159 million for the nine months ended October 31, 1995.
AUTOMOTIVE PRODUCTS
United States light vehicle demand during the third quarter of fiscal 1995
declined as measured by a 2% decrease in vehicle sales over the comparable
fiscal 1994 period, with sales of light trucks falling 1%. In addition, North
American industry production of light vehicles, which incorporates Kelsey-Hayes'
products and influences the Company's automotive products segment, decreased 4%
during the same period with light truck production decreasing by 2%. Despite
these decreases, within Varity's automotive products segment, Kelsey-Hayes brake
systems benefitted from secular anti-lock braking systems (ABS) growth,
partially mitigated by a decline in conventional brake sales associated with the
lower North American passenger car production of certain platforms on which
Kelsey-Hayes has significant content. As a result, Kelsey-Hayes brake systems
recorded sales of $334 million in the quarter ended October 31, 1995, level with
the third quarter of fiscal 1994. Year to date, Kelsey-Hayes brake systems
sales increased 4% to $938 million despite a 2% decrease in North American
production of light vehicles from the prior year's first nine months. The
increase in sales is attributable to secular ABS growth and replacement of two-
wheel ABS with higher value four-wheel systems.
During the third quarter of fiscal 1995, the Company recognized net
restructuring charges in the amount of $14.6 million related to its Kelsey-Hayes
foundation brakes business. Such charges included costs associated with a
conventional brake plant closure in Canada and write-downs of non-performing
assets, partially offset by a gain on the sale of its non-core door lock
actuator business, which had historically contributed approximately $40 million
of sales annually.
Page 10
<PAGE>
Excluding the aforementioned restructuring charge, Kelsey-Hayes brake systems
segment operating income in the third quarter decreased marginally to $35
million from $37 million in the third quarter of the prior year. Continued
improvement in margins associated with the ABS business was offset by
inefficiencies associated with unexpected changes in OEM manufacturing schedules
during the quarter and costs associated with accelerated investment activities
related to recently announced new business activities in Asia. Year to date,
such earnings before restructuring charges improved 9% to $95 million as
compared to the first nine months of fiscal 1994. Earnings improvement over the
prior year's first nine months is a direct result of increased sales and the
continued focus on implementing cost reductions and productivity improvements,
partially mitigated by the aforementioned changes in OEM manufacturing schedules
and increased activity in Asia.
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 declined $11 million to $30
million in the third quarter of 1995. Year to date, sales decreased $33 million
to $95 million. These decreases were primarily a result of the cessation of an
unprofitable light-duty truck contract which was completed in the fourth quarter
of fiscal 1994. Operating profits were breakeven for the three and nine months
ended October 31, 1995, as compared to losses of $2 million and $3 million in
the third quarter and first nine months, respectively, of fiscal 1994, despite a
rapidly declining medium and heavy duty truck and trailer market in 1995.
Improved operating results were due to the cessation of the unprofitable
contract, productivity enhancements and related cost reductions.
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) continued to improve during the third quarter of fiscal 1995,
although at a lesser rate than the previous two quarters, as manufacturers that
incorporate such equipment in their products generally experienced increased
demand. Total engines segment sales increased 5% to $231 million in the quarter
ended October 31, 1995 and 23% to $731 million in the first nine months of
fiscal 1995, as compared with the same periods in the prior year. These
increases reflect both increased sales to certain existing accounts in
connection with new engine applications and an expanding customer base, offset
by some softness in certain European markets which tempered quarterly sales
growth. In addition, during the second quarter of fiscal 1994, Perkins acquired
Dorman Diesels Limited (Dorman), 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 $40 million of
incremental sales in the first nine months of fiscal 1995.
Operating income for the engines segment increased 24% to $21 million in the
third quarter and 39% to $64 million in the first nine months of fiscal 1995,
reflecting the benefit of higher sales and on-going success with margin
improvement and cost control programs, despite increases of $3 million and $11
million in engineering and product development expenditures for new engine
programs in the current quarter and first nine months of fiscal 1995,
respectively. Dorman contributed $4 million of incremental operating profits in
the first nine months of fiscal 1995.
NON-SEGMENT OPERATING REVIEW
Interest expense declined $.1 million to $4.3 million for the three months
ended October 31, 1995, and $2.0 million to $13.9 million for the nine months
ended October 31, 1995, principally due to lower average debt outstanding in the
current year as compared to the same periods of fiscal 1994.
Income taxes increased to $9.5 million and $27.2 million for the three and
nine months ended October 31, 1995, respectively. The Company's effective tax
rate increased to 23%, since, as a result of the sale of Massey Fergus on,
certain foreign income is no longer sheltered against farm equipment losses
within the same taxing jurisdiction.
Page 11
<PAGE>
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Liquidity during the current quarter was provided from ongoing operations and
existing cash reserves. Cash provided from operations during the first nine
months of fiscal 1995 amounted to $115.6 million as compared to $12.8 million in
the same period last year. This improvement in cash provided reflects improved
working capital management and approximately $60 million in one-time
contributions to fund North American pension plans in the first nine months of
fiscal 1994.
Unused long-term and short-term lines of credit at October 31, 1995 were
$160.3 million and $115.8 million, respectively. Management believes that
Varity's improved financial condition and operating results will continue to
improve its 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 October 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 period
ending October 31, 1996.
Receivables increased $38.5 million to $406.2 million at October 31, 1995 from
$367.7 million at January 31, 1995, primarily due to $35 million outstanding at
October 31, 1995 relating to the sale of Pacoma and the door lock actuator
business; $24 million of such amount was collected on November 1, 1995,
subsequent to quarter end.
Inventories of raw materials, work-in-process and finished products increased
$18.4 million to $164.4 million at October 31, 1995 from $146.0 million at
January 31, 1995, primarily due to routine adjustments in manufacturing
schedules.
Accounts payable and accrued liabilities increased $34.8 million during the
first nine months of fiscal 1995 to $576.1 million at October 31, 1995,
primarily due to increased throughput and fluctuations associated with foreign
exchange.
Net fixed assets increased $36.3 million to $649.5 million at October 31, 1995
due to capital additions exceeding depreciation and disposals. Capital
expenditures for the first nine months of fiscal 1995 were $101.7 million
compared to $120.2 million last year, and depreciation and amortization were
$64.2 million and $53.6 million, respectively, for the same periods. Capital
expenditures for fiscal 1995 should approximate $175 million. These
expenditures will be mainly for normal equipment replacements and operating
improvements related to reducing costs and increasing output.
Stockholders' equity increased by $49.1 million to $832.8 million at October
31, 1995. The increase resulted primarily from net income of $87.7 million and
a favorable change in the cumulative foreign currency translation adjustment of
$1.9 million, partially offset by repurchases of 1,325,000 shares of common
stock for $45.8 million and preferred dividends paid of $1.8 million.
The Company 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.
The Company does not hold or issue forward exchange contracts or other financial
instruments for trading purposes.
Page 12
<PAGE>
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.
During the current quarter the Company announced a proposal for a business
combination to acquire the entire equity interest in Hayes Wheels International,
Inc. (Hayes Wheels) for $25 per share. The Company currently owns 8,144,000
shares or approximately 46% of the outstanding 17,574,000 shares of Hayes Wheels
common stock. A special committee of Hayes Wheels' Board of Directors is
reviewing the proposal. The proposal is not subject to any financing condition
and the Company is currently reviewing several alternatives to fund the
transaction.
As a result of the Company's concerted 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 which has not
yet become effective; the Company has no immediate plans to make an offering
under such registration statement.
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
Despite anticipated weaker North American light vehicle production, the
Company continues to believe that its automotive products segment is positioned
to increase sales and margins during the balance of fiscal 1995 and beyond, as
a result of secular ABS penetration and as actions taken to relieve capacity
constraints and enhance productivity continue to provide positive returns.
Kelsey-Hayes is aggressively pursuing additional margin enhancements and world-
class manufacturing status in its foundation brakes business. Cost reduction
actions are being implemented to reduce floor space and labor content concurrent
with the introduction of new manufacturing processes and rationalization of work
flow on the plant floor, the net effect of which will be to maintain or increase
productive capacity under a lower cost structure. To date, these actions
include the closure of a conventional brake plant in Canada and the sale of the
non-core door lock actuator business. The Company continues to explore
alternative cost reduction actions, including the possibility of closing another
plant, related to the further rationalization of its foundation brakes business.
Such actions may result in the recognition of additional restructuring charges
in the fourth quarter of fiscal 1995 or the first quarter of fiscal 1996. An
estimate of future restructuring charges, if any, is not available at this
time.
Continued improvements in manufacturing processes, in addition to an expanding
customer base arising from strategic alliances developed in prior years, have
positioned the Perkins engines segment for continued growth in sales and
operating margins despite uncertainty as to the economic health of many markets
throughout the world and anticipated increases in its new product research and
development expenditures in the balance of fiscal 1995 and thereafter to support
new engine programs.
Page 13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
MASSEY COMBINES CORPORATION
In Howe et al. v. Varity Corporation and Massey-Ferguson Inc. (United States
District Court, Southern District of Iowa), plaintiffs representing a class of
former salaried employees and retirees of Massey-Ferguson Inc. (MF Inc.),
commenced an action in 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 sought to
compel reinstatement of benefits, compensatory damages, punitive damages and the
costs of action. In 1991 a jury 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 district court struck completely the punitive
damage award and reduced the compensatory damage award to $8.3 million.
Upon appeal, on September 29, 1994, the United States Court of Appeals for
the Eighth Circuit upheld the district court's denial of punitive damages. In
place of the $8.3 million award, the circuit 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 based on a
breach of fiduciary duty. The circuit court did not reach alternative theories
relied on by the district court. On March 24, 1995, the Supreme Court of the
United States granted the Company's petition for a writ of certiorari to review
the decision of the circuit court with respect to recovery by the retiree
plaintiffs. The Supreme Court heard oral arguments on November 1, 1995. It is
not certain when the Supreme Court will render its decision.
Proceedings in Wells et al. v. MF Inc. and Varity Corporation, commenced in
state court, removed to the federal district court and based on the same
operative facts as Howe, are stayed pending the Supreme Court's decision in
Howe.
ITEM 2. CHANGES IN REGISTERED SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 11 - Earnings per share computations
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K:
None
Page 14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VARITY CORPORATION
/s/ N.D. Arnold /s/ M.J. MacGuidwin
- ----------------------------- ------------------------------
N.D. Arnold Mark J. MacGuidwin
Senior Vice President and Vice President, Controller
Chief Financial Officer (Principal Accounting Officer)
(Principal Financial Officer)
December 8, 1995
Page 15
<PAGE>
VARITY CORPORATION
INDEX TO EXHIBITS
Exhibit
Number
- ------
11.0 PRIMARY EARNINGS PER SHARE COMPUTATIONS
11.1 PRIMARY EARNINGS PER SHARE COMPUTATIONS FOR THREE MONTHS ENDED
OCTOBER 31, 1995 AND 1994
11.2 PRIMARY EARNINGS PER SHARE COMPUTATIONS FOR NINE MONTHS ENDED
OCTOBER 31, 1995 AND 1994
27.0 FINANCIAL DATA SCHEDULE
27.1 NINE MONTHS ENDED OCTOBER 31, 1995
27.2 SIX MONTHS ENDED JULY 31, 1995 (RESTATED)
27.3 THREE MONTHS ENDED APRIL 30, 1995 (RESTATED)
27.4 YEAR ENDED JANUARY 31, 1995 (RESTATED)
27.5 NINE MONTHS ENDED OCTOBER 31, 1994 (RESTATED)
27.6 SIX MONTHS ENDED JULY 31, 1994 (RESTATED)
Page 16
<PAGE>
EXHIBIT 11.1
VARITY CORPORATION
PRIMARY EARNINGS PER SHARE COMPUTATIONS
(Dollars in millions except per share amounts)
<TABLE>
<CAPTION>
Three months ended October 31,
--------------------------------
1995 1994
--------------- ---------------
<S> <C> <C>
Income before discontinued operations................ $ 20.8 $ 33.0
Preferred stock dividend entitlements................ (.6) (.6)
------- -------
Income attributable to common stockholders before
discontinued operations (A)........................ 20.2 32.4
Earnings (loss) from discontinued operations (B)..... - (.3)
------- -------
Net income attributable to common stockholders (C)... $ 20.2 $ 32.1
======= =======
Weighted average shares of common stock outstanding
during the period (in thousands)................... 40,973 43,757
Common stock equivalents:
Common stock options............................... 412 408
------- -------
Primary weighted average shares of common stock
outstanding during the period (D).................. 41,385 44,165
======= =======
Primary income per share of common stock:
Before discontinued operations (A/D)............... $ .49 $ .73
Discontinued operations (B/D)...................... - -
------- -------
Net income (C/D)................................... $ .49 $ .73
======= =======
</TABLE>
Note: Fully diluted earnings per share computations are not presented as no
significant dilution exists.
<PAGE>
EXHIBIT 11.2
VARITY CORPORATION
PRIMARY EARNINGS PER SHARE COMPUTATIONS
(Dollars in millions except per share amounts)
<TABLE>
<CAPTION>
Nine months ended October 31,
-------------------------------
1995 1994
--------------- --------------
<S> <C> <C>
Income before discontinued operations................ $ 87.2 $ 81.2
Preferred stock dividend entitlements................ (1.8) (1.8)
------- -------
Income attributable to common stockholders before
discontinued operations (A)........................ 85.4 79.4
Earnings from discontinued operations (B)............ .5 26.9
------- -------
Net income attributable to common stockholders (C)... $ 85.9 $ 106.3
======= =======
Weighted average shares of common stock outstanding
during the period (in thousands)................... 40,954 43,897
Common stock equivalents:
Common stock options............................... 432 431
Long-term incentive plans.......................... - 6
------- -------
Primary weighted average shares of common stock
outstanding during the period (D).................. 41,386 44,334
======= =======
Primary income per share of common stock:
Before discontinued operations (A/D)............... $ 2.07 $ 1.79
Discontinued operations (B/D)...................... .01 .61
------- -------
Net income (C/D)................................... $ 2.08 $ 2.40
======= =======
</TABLE>
Note: Fully diluted earnings per share computations are not presented as no
significant dilution exists.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-START> FEB-01-1995
<PERIOD-END> OCT-31-1995
<CASH> 147
<SECURITIES> 42
<RECEIVABLES> 406
<ALLOWANCES> 0
<INVENTORY> 164
<CURRENT-ASSETS> 784
<PP&E> 650
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,908
<CURRENT-LIABILITIES> 582
<BONDS> 167
<COMMON> 643
0
7
<OTHER-SE> 183
<TOTAL-LIABILITY-AND-EQUITY> 1,908
<SALES> 1,762
<TOTAL-REVENUES> 1,762
<CGS> 1,428
<TOTAL-COSTS> 1,428
<OTHER-EXPENSES> 87
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14
<INCOME-PRETAX> 104
<INCOME-TAX> 27
<INCOME-CONTINUING> 87
<DISCONTINUED> 1
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 88
<EPS-PRIMARY> 2.08
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-START> FEB-01-1995
<PERIOD-END> JUL-31-1995
<CASH> 108
<SECURITIES> 43
<RECEIVABLES> 357
<ALLOWANCES> 0
<INVENTORY> 158
<CURRENT-ASSETS> 698
<PP&E> 644
<DEPRECIATION> 0
<TOTAL-ASSETS> 1814
<CURRENT-LIABILITIES> 498
<BONDS> 164
<COMMON> 642
0
7
<OTHER-SE> 181
<TOTAL-LIABILITY-AND-EQUITY> 1814
<SALES> 1168
<TOTAL-REVENUES> 1168
<CGS> 949
<TOTAL-COSTS> 949
<OTHER-EXPENSES> 47
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10
<INCOME-PRETAX> 77
<INCOME-TAX> 18
<INCOME-CONTINUING> 66
<DISCONTINUED> 1
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 67
<EPS-PRIMARY> 1.59
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-31-1996
<PERIOD-START> FEB-01-1995
<PERIOD-END> APR-30-1995
<CASH> 137
<SECURITIES> 42
<RECEIVABLES> 380
<ALLOWANCES> 0
<INVENTORY> 158
<CURRENT-ASSETS> 749
<PP&E> 966
<DEPRECIATION> 338
<TOTAL-ASSETS> 1846
<CURRENT-LIABILITIES> 563
<BONDS> 164
<COMMON> 639
0
7
<OTHER-SE> 150
<TOTAL-LIABILITY-AND-EQUITY> 1846
<SALES> 595
<TOTAL-REVENUES> 595
<CGS> 486
<TOTAL-COSTS> 486
<OTHER-EXPENSES> 23
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5
<INCOME-PRETAX> 39
<INCOME-TAX> 9
<INCOME-CONTINUING> 34
<DISCONTINUED> 1
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 34
<EPS-PRIMARY> .81
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-31-1995
<PERIOD-START> FEB-01-1994
<PERIOD-END> JAN-31-1995
<CASH> 147
<SECURITIES> 43
<RECEIVABLES> 373
<ALLOWANCES> 5
<INVENTORY> 146
<CURRENT-ASSETS> 735
<PP&E> 939
<DEPRECIATION> 326
<TOTAL-ASSETS> 1813
<CURRENT-LIABILITIES> 547
<BONDS> 163
<COMMON> 638
0
7
<OTHER-SE> 139
<TOTAL-LIABILITY-AND-EQUITY> 1813
<SALES> 2213
<TOTAL-REVENUES> 2213
<CGS> 1809
<TOTAL-COSTS> 1809
<OTHER-EXPENSES> 87
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22
<INCOME-PRETAX> 128
<INCOME-TAX> 24
<INCOME-CONTINUING> 118
<DISCONTINUED> 27
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 145
<EPS-PRIMARY> 3.24
<EPS-DILUTED> 3.24
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-31-1995
<PERIOD-START> FEB-01-1994
<PERIOD-END> OCT-31-1994
<CASH> 158
<SECURITIES> 57
<RECEIVABLES> 409
<ALLOWANCES> 0
<INVENTORY> 161
<CURRENT-ASSETS> 816
<PP&E> 930
<DEPRECIATION> 330
<TOTAL-ASSETS> 1876
<CURRENT-LIABILITIES> 561
<BONDS> 164
<COMMON> 638
0
7
<OTHER-SE> 166
<TOTAL-LIABILITY-AND-EQUITY> 1876
<SALES> 1589
<TOTAL-REVENUES> 1589
<CGS> 1305
<TOTAL-COSTS> 1305
<OTHER-EXPENSES> 62
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16
<INCOME-PRETAX> 86
<INCOME-TAX> 15
<INCOME-CONTINUING> 81
<DISCONTINUED> 27
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 108
<EPS-PRIMARY> 2.40
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-31-1995
<PERIOD-START> FEB-01-1994
<PERIOD-END> JUL-31-1994
<CASH> 155
<SECURITIES> 78
<RECEIVABLES> 384
<ALLOWANCES> 0
<INVENTORY> 160
<CURRENT-ASSETS> 805
<PP&E> 893
<DEPRECIATION> 303
<TOTAL-ASSETS> 1857
<CURRENT-LIABILITIES> 557
<BONDS> 163
<COMMON> 638
0
7
<OTHER-SE> 142
<TOTAL-LIABILITY-AND-EQUITY> 1857
<SALES> 998
<TOTAL-REVENUES> 998
<CGS> 822
<TOTAL-COSTS> 822
<OTHER-EXPENSES> 41
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12
<INCOME-PRETAX> 50
<INCOME-TAX> 8
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<DISCONTINUED> 27
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 75
<EPS-PRIMARY> 1.67
<EPS-DILUTED> 0
</TABLE>
