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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, 1996
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
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Common stock U.S.A. New York Stock Exchange, Inc.
Unlisted trading privileges:
Boston Stock Exchange
Chicago Stock Exchange
Pacific Stock Exchange
Holland Amsterdam Stock Exchange
In the form of Dutch Bearer
Certificates
Securities registered pursuant to Section 12(g) of the Act:
None
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(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, 1996 WAS APPROXIMATELY $1,612.1 MILLION.
THE NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AS OF MARCH 15, 1996 WAS
39,319,296 SHARES.
Portions of the Proxy Statement relating to the Annual Meeting of
Stockholders on May 23, 1996 are incorporated by reference in Part III of this
report.
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Exhibit index appears on page 64.
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VARITY CORPORATION
FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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........................ 22
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure ............................... 54
PART III
Item 10. Directors and Executive Officers of the
Registrant................................ 54
Item 11. Executive Compensation..................... 54
Item 12. Security Ownership of Certain Beneficial
Owners and Management..................... 54
Item 13. Certain Relationships and Related
Transactions.............................. 54
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K................... 55
SIGNATURES............................................... 63
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).
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PART I
ITEM 1. BUSINESS
THE COMPANY
Varity Corporation and its subsidiaries (the Company), founded in 1847, is a
global 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 Engines Group. The Company's products are marketed in more than 160
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). In October 1995, the Company sold its
Pacoma components operations.
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 (pick-ups,
vans and sport utility vehicles), through Kelsey-Hayes Company and Kelsey-Hayes
Canada, Ltd., collectively referred to as VarityKelsey-Hayes, as well as medium
and heavy duty trucks and trailers, through Dayton Walther Corporation
(VarityDaytonWalther). The Company acquired VarityDaytonWalther, 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 subsidiaries, which included the entities previously
referred to as VarityKelsey-Hayes. VarityKelsey-Hayes and VarityDaytonWalther
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
and sensors for passenger cars and light trucks. VarityKelsey-Hayes sold its
non-ABS sensor and door lock actuator businesses during fiscal 1995.
VarityKelsey-Hayes is a leading producer of brake components for passenger
cars and light trucks. The Company believes that VarityKelsey-Hayes is the
world's leader in the production of ABS, supplying both two-wheel and four-wheel
systems. VarityKelsey-Hayes is the leading manufacturer of ABS in North America
for light trucks. VarityKelsey-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 commenced production in the first quarter of fiscal 1995,
supplying European markets. In addition, the Company believes that
VarityKelsey-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. In excess of 80%
of VarityKelsey-Hayes sales of braking systems including ABS and foundation
brakes are generated from light trucks.
VarityDaytonWalther 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. VarityDaytonWalther derives a major share of its
business from large OEMs. VarityDaytonWalther's market share in all of its core
products is substantial, ranging from 19% to 42%.
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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 VarityKelsey-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, 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.
AFTERMARKET PARTS
The aftermarket parts business consists of the service parts organization of
VarityKelsey-Hayes, which supplies maintenance and repair parts for many brands
of passenger cars and light 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.
VarityKelsey-Hayes opened sales offices in Korea during fiscal 1994 and Hong
Kong during fiscal 1995. In addition, during fiscal 1995, VarityKelsey-Hayes
completed a joint venture agreement with First Automobile Group (FAW) of
Changchun, China to produce front and rear axle assemblies, chassis components
and brake systems. FAW is China's oldest auto manufacturer and one of its three
largest automotive companies. Production is expected to begin in Changchun in
the third quarter of fiscal 1996 with initial product programs expected to
generate annual sales of more than $100 million by 1998.
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 in its chosen product
categories with respect to price, quality, delivery and technical ability in
developing products. With respect to brake components, the Automotive Products
Group has over 15 substantial competitors, most of which are large and
diversified concerns. 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. VarityKelsey-Hayes estimates that its share of
the North American four-wheel ABS market on a unit basis grew from 21% in 1994
to 25% in 1995 and is projected to increase further in this growth market, based
on awarded contracts. VarityKelsey-Hayes estimates that its share of the North
American foundation brake market (excluding OEM captive manufacturers) on a unit
basis was approximately 26% in 1995.
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MARKETING AND DISTRIBUTION
The Automotive Products Group's sales are made almost exclusively to OEMs, with
the remainder sold largely to replacement part distributors. Sales by the
Automotive Products Group to its three major customers, General Motors
Corporation (GM), Ford Motor Company (Ford) and Chrysler Corporation (Chrysler),
accounted for 88% of the Automotive Products Group's consolidated net sales in
fiscal 1995, with GM being the largest customer during this period (40% of the
Automotive Products Group's consolidated net sales). Sales to all OEMs
accounted for approximately 90% of the Automotive Products Group's fiscal 1995
revenues. Although the loss of all or a substantial portion of sales to its
major customers, GM, Ford 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.
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 economic activity. Sales of
passenger cars and light trucks have traditionally been adversely affected by
recessionary business conditions and to some extent increases in the general
level of interest rates, leading to a cyclical sales trend for these products.
The level of economic activity in North America began to soften during 1995,
resulting in declining North American light vehicle production. A prolonged
downturn in the overall level of United States economic activity, 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 ENGINES GROUP
Through VarityPerkins, 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 VarityPerkins' 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 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. VarityPerkins, 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 VarityPerkins' fully assembled engines are manufactured in the United
Kingdom, including the sub-50 horsepower engines manufactured by a new joint
venture with ISM of Japan. 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, a licensee in
China, shipped its first Perkins engine in fiscal 1995.
The VarityPerkins customer base includes over 600 OEMs. The Company believes
that its associate companies and licensees sell to a similar number of
additional OEMs. VarityPerkins' 10 largest customers accounted for
approximately 46% of its net sales in fiscal 1995, including one customer which
accounted for approximately 11%.
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In fiscal 1995, VarityPerkins continued to build on a ten year supply
agreement, commenced in fiscal 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.
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 fiscal 1993, VarityPerkins 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 15% of VarityPerkins' net sales in
fiscal 1995.
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 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.
VarityPerkins' major competitors for sales of diesel engines worldwide are
Klockner-Humboldt-Deutz AG, Cummins Engines Co. Inc., Caterpillar (generally for
products not covered by the supply agreement described above), Detroit Diesel
Corporation and several Japanese producers. VarityPerkins estimates that its
share of the Western Europe diesel engine market, its primary market, has
averaged approximately 13% of units sold over the three year period from fiscal
1993 to fiscal 1995. 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 VarityPerkins 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 cost effectively.
MARKETING AND DISTRIBUTION
Sales of fully assembled diesel engines (mostly to OEMs) and sales of diesel
engines replacement parts are made both directly by the Company (primarily
through sales offices in seven countries) and through a worldwide network of
approximately 4,000 independent distributors and dealers in 160 countries. To
facilitate direct sales by VarityPerkins, and to a lesser extent by its
distributors and dealers, four of VarityPerkins' sales offices also provide
engine finishing services and other support. The Company has additional
distributorship agreements covering North America with Detroit Diesel
Corporation and with Iseki for Japan. 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.
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OTHER OPERATIONS
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.
VARITYZECAL
During fiscal 1994, the Company purchased a majority interest in Zecal
Incorporated (formerly Ceramic Packaging Inc.), a technology-based company using
innovation and miniaturization in bonding copper to ceramics in electronic
circuitry.
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, 1996, 1995 and 1994 appears in
Note 17 of the Notes to Consolidated Financial Statements and is included in
Part II on pages 43 through 45 of this Form 10-K. Sales by product are included
in Part II on page 53 of this Form 10-K.
EMPLOYEES AND LABOR RELATIONS
At January 31, 1996, the Company had approximately 9,800 full-time employees.
The Company's worldwide labor force is represented by approximately 15 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.
RESEARCH AND DEVELOPMENT; PATENTS; TRADEMARKS
During fiscal 1995, 1994 and 1993 the Company expended $70.7 million, $51.8
million and $40.5 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.
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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. VarityPerkins is obtaining
additional patent protection with respect to this technology. The Company
believes that continued development of this technology will aid VarityPerkins in
its engineering design, production and sale of advanced diesel engines. Various
patents relating to the anti-lock brakes business have been issued to
VarityKelsey-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 the
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" and
"Dayton," as well as design trademarks for Kelsey-Hayes products. 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 and Canada. 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.
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 U.S. dollars and various
European currencies for pounds sterling, for periods generally consistent with
the underlying transaction exposures.
In addition, the Company has entered into interest rate swaps to manage its
exposure to increases in interest rates on a floating-rate revolving credit
facility in the United Kingdom.
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CAUTIONARY STATEMENT
Statements included herein which are not historical facts are forward looking
statements. Such forward looking statements are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. The
forward looking statements involve a number of risks and uncertainties,
including but not limited to, changes in economic conditions, demand for the
Company's products, pricing pressures, intense competition in the industries in
which the Company operates, the need for the Company to keep pace with
technological developments and timely respond to changes in customer needs, the
Company's dependence on third party suppliers, the labor relations of the
Company and its customers and other factors identified in the Company's
Securities and Exchange Commission filings.
ITEM 2. PROPERTIES
The Company and its subsidiaries own and operate 17 manufacturing facilities in
the United States and Canada with aggregate space of approximately 3.2 million
square feet. There are also five facilities located in Europe with a total
manufacturing area of approximately 2.2 million square feet which are owned and
operated by the Company. In addition, the Company leases a 201,000 square foot
facility in the United Kingdom and a 30,000 square foot facility in Singapore.
The automotive products segment manufactures its range of products at 17
locations in North America and one in Europe, which is pledged to the Company's
lenders. Such facilities aggregate approximately 3.3 million square feet in
total and range 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:
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 Woodstock, Ontario-2
Fayette, Ohio Kingsway, Ohio
Fenton, Michigan Milford, Michigan
The engines segment manufactures diesel engines and parts at five locations
in England (Lincoln, Shrewsbury, Stafford and two in Peterborough) with a total
space of approximately 2.3 million square feet, the largest of which is
approximately 1.4 million square feet. The Company also operates a 30,000
square foot facility in Singapore.
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. 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 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. On March 19, 1996, the Supreme Court affirmed the circuit court's
decision. The ruling, when implemented by the district court, will require
payment of the $800,000 in damages and reinstatement of the plaintiffs to the MF
Inc. medical plan on a going-forward basis. Plaintiffs are also seeking
reimbursement for attorneys' fees and costs in connection with the litigation.
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 currently stayed.
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, due to its financial difficulties, it may not be able to continue to
comply with these indemnity obligations. If FTC does not do so, 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. 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, 1996.
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, 1996, the date on
which they were appointed to such positions and their business experience during
the past five years. In addition, the table also includes the same information
for certain significant employees who report to Varity's chief operating officer
and make significant contributions to the Company through the businesses that
they operate.
<TABLE>
<CAPTION>
Date Appointed Business Experience During
Name Title Age To Present Position Past Five Years (1)
- -------------------------------- ------------------------- --- ------------------- --------------------------------
<S> <C> <C> <C> <C>
V.A. Rice....................... Chairman of the.......... 54 May 1980 Same
Board and Chief
Executive Officer
N.D. Arnold..................... Senior Vice.............. 47 August 1990 Same
President and Chief
Financial Officer
P.N. Barton..................... Vice President,.......... 56 March 1988 Same
Strategic and
Business Planning
M.J. Baunton.................... Group Chief.............. 44 March 1995 President, Walker Manufacturing
Executive, -- October 1993 - February
VarityPerkins 1995. Managing Director,
Monroe Europe -- April 1987 -
September 1993.
K.M. Bihary..................... Vice President,.......... 42 May 1995 Director, Corporate
Public Affairs Communications - ICOM
Public Affairs, Johnson &
Johnson -- March 1993 -
December 1994. Director,
Corporate Communications,
The RW Johnson
Pharmaceutical Research
Institute -- May 1991 -
February 1993. Director of
Marketing Services,
Medimetrix Group --
September 1989 - April 1991.
J.H. Chandler................... Senior Vice.............. 56 September 1994 Senior Vice President, Human
President and 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.
</TABLE>
10
<PAGE>
<TABLE>
Date Appointed Business Experience During
Name Title Age To Present Position Past Five Years (1)
- -------------------------------- ------------------------- --- ------------------- --------------------------------
<S> <C> <C> <C> <C>
D.J-M. Chauvin.................. Group Chief.............. 55 November 1995 President, AGCO International
Executive, -- June 1994 - October 1995.
VarityKelsey-Hayes Group Chief Executive,
Massey Ferguson -- November
1993 - May 1994. General
Manager, Massey Ferguson
Tracteurs Compagnie -- March
1990 - October 1993.
F.J. Chapman.................... Vice President........... 56 March 1990 Same
and Treasurer
R.C. Clarke..................... Vice President and....... 57 November 1994 Vice President, Corporate
Executive Assistant Communications -- January
to the Chairman 1994 - October 1994.
and CEO Director, Aubade Investments
Ltd. -- February 1991 -
December 1993.
J.A. Gilroy..................... Chief Operating.......... 59 November 1994 Group Chief Executive,
Officer VarityPerkins -- February
1989 - October 1994.
D.W. Gutow...................... Vice President,.......... 57 September 1990 Same
Tax Planning
K. Iida......................... President, Varity........ 54 June 1992 General Manager, Perkins
Japan KK Engines Japan KK -- April
1982 - May 1992.
M.J. MacGuidwin................. Vice President,.......... 44 April 1995 Vice President Finance,
Controller Libbey-Owens-Ford (LOF) --
September 1990 - March 1995.
M.S. Protzik.................... Vice President,.......... 53 July 1994 Director, Pensions & Benefits --
Compensation October 1991 - June 1994.
and Benefits Director, Compensation &
Benefits, TRW, Inc. -- April
1981 - September 1991.
A.A. Rogers..................... Vice President,.......... 45 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,.......... 47 August 1994........ Vice President, Controller --
Investor Relations January 1992 - August 1994.
Assistant Controller, Textron
Inc. -- June 1987 - January
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>
J.H.T. Shen................ President, Varity ...... 51 March 1995......... Director and General Manager,
Asia Pacific First Paper (Yantai)
Corporation -- March 1992 -
January 1994. Director and
General Manager, Valmet
(East Asia) Limited -- January
1985 - February 1992.
J.E. Utley................. Senior Vice ............ 54 September 1994..... Senior Vice President,
President, Strategic & Chairman,
Marketing VarityKelsey-Hayes -- March
1994 - August 1994.
Chairman & Group Chief
Executive, VarityKelsey-Hayes
-- August 1992 - February
1994. Vice Chairman, K-H
Corporation & Vice President,
Strategic Planning,
VarityKelsey-Hayes --
December 1989 - July 1992.
K.L. Walker................ Vice President, ........ 47 September 1991.... Senior Counsel, TRW, Inc.,
Legal and Engine Components Group
Corporate Secretary -- July 1984 - August 1991.
J.R. Walnes................ President,.............. 48 January 1996..... President, CEO and Director,
VarityZecal Engineered Coatings, Inc.
(ECI) -- January 1992 -
September 1994. Vice
President and Group Executive
- Interconnections Group,
Kollmorgen Corporation -- July
1987 - September 1991.
W.N. White................. President,............. 53 July 1994...... Vice President, Operations,
VarityDaytonWalther Strategic Planning -
Acquisitions, Monroe Auto
Equipment -- December 1993 -
April 1994. Vice President,
Operations and Engineering,
Monroe Auto Equipment --
January 1990 - November
1993.
</TABLE>
- ---------------------------------
(1) All positions shown are with the Company unless otherwise indicated.
(2) All of the above individuals are executive officers appointed by the Board
of Directors of the Company and serve at its pleasure; except for K. Iida,
J.H.T. Shen, J.R. Walnes and W.N. White who are considered significant
employees, as defined.
(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
23, 1996 at the Hyatt Hotel, Two Fountain Plaza, Buffalo, New York.
STOCK TRADING SYMBOL
Common: VAT
STOCK EXCHANGE LISTINGS
Common: New York
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
STATISTICAL DATA
- ------------------------------------------------------------
January 31, 1996 1995
- ------------------------------------------------------------
Number of registered
shareholders:
Common............................ 18,050 19,538
Preferred......................... 4 4
- ------------------------------------------------------------
Shares outstanding
(thousands):
Common............................ 39,478 41,661
Class II Preferred................ 2,001 2,001
- ------------------------------------------------------------
MARKET PRICE OF COMMON STOCK
- ------------------------------------------------------------
Year ended January 31, 1996
- ------------------------------------------------------------
Quarters HIGH LOW
First............................ $43 1/2 $33 5/8
Second........................... $50 3/4 $41 3/8
Third............................ $48 1/4 $34
Fourth........................... $40 1/2 $32 3/4
- ------------------------------------------------------------
Year ended January 31, 1995
- ------------------------------------------------------------
Quarters High Low
- ------------------------------------------------------------
First............................. $50 1/8 $33 1/2
Second............................ $42 $35 1/2
Third............................. $39 5/8 $33
Fourth............................ $39 $34
- ------------------------------------------------------------
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 1995, 1994, 1993, 1992
and 1991.
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, 1996 1995 1994 1993/(4)/ 1992
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales............................... $2,375 $2,213 $1,780 $2,184 $2,002
Income (loss) before discontinued
operations, extraordinary loss
and cumulative effect of changes
in accounting principles.......... $ 125 $ 118 $ 71 $ 56 $ (78)
- -----------------------------------------------------------------------------------
Per share income (loss)
before discontinued
operations, extraordinary loss
and cumulative effect of changes
in accounting principles:
Primary........................ $ 2.99 $ 2.63 $ 1.66 $ 1.41 $(3.85)
Fully diluted.................. $ 2.99 $ 2.63 $ 1.61 $ 1.40 $(3.85)*
* Anti-dilutive
- -----------------------------------------------------------------------------------
Total assets....................... $1,835 $1,813 $1,750 $1,792 $2,508
Long-term debt..................... $ 151 $ 163 $ 186 $ 305 $ 717
- -----------------------------------------------------------------------------------
</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, 1996.
(3) As a result of the fiscal 1995 sale of the Company's Pacoma operations,
prior years' financial data has been restated to conform to the current
year presentation of Pacoma 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, 1996 (fiscal 1995), Varity Corporation earned
$125.0 million ($2.99 per share) compared to $118.2 million ($2.63 per share)
for fiscal 1994 and $71.4 million ($1.66 per share) for fiscal 1993 before
discontinued operations, extraordinary losses and the cumulative effect of
changes in accounting principles. During fiscal 1995, the Company recognized
net restructuring charges in the amount of $14.6 million related to its
VarityKelsey-Hayes foundation (conventional) brakes business. (VarityKelsey-
Hayes refers to Kelsey-Hayes Company and Kelsey-Hayes Canada, Ltd.
collectively.) Such charges included costs associated with non-performing asset
write-downs and a plant closure in Canada, partially offset by a gain on the
sale of its non-core door lock actuator business. Excluding the effect of the
restructuring charges, income from continuing operations in fiscal 1995 amounted
to $139.6 million ($3.34 per share).
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. As a result of the sale, the "other" segment has been
presented as a discontinued operation. Additionally, 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 18 of the Notes to
Consolidated Financial Statements. In addition, during fiscal 1993 the Company
incurred an extraordinary loss of $1.7 million ($.05 per share) with respect to
the early redemption of debt. As a result, net income (loss) amounted to $125.5
million, $144.7 million and $(71.5) million in fiscal 1995, 1994 and 1993,
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) was generally lower against the major European
currencies in fiscal 1995, compared to such average values in fiscal 1994.
Specifically, against the British pound, the Company's most significant foreign
currency, the average value of the U.S. dollar was 2% lower. 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, 1996, the value of the U.S. dollar was 4% higher against the
British pound compared to the value 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 generally lower 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.
15
<PAGE>
<TABLE>
<CAPTION>
SEGMENT OPERATING REVIEW
(Dollars in millions)
Fiscal 1995 Fiscal 1994 Fiscal 1993
----------- ----------- -----------
Sales:
<S> <C> <C> <C>
Automotive products:
Brake Systems $1,245 $1,228 $1,018
Heavy Duty Brakes 124 161 160
Eliminations (3) (16) (29)
------ ------ ------
1,366 1,373 1,149
Engines 1,009 861 702
Eliminations - (21) (71)
------ ------ ------
Total $2,375 $2,213 $1,780
====== ====== ======
Operating income (loss):
Automotive products:
Brake Systems:
Before restructuring charges $ 127 $ 121 $ 87
Restructuring charges, net (15) - -
------ ------ ------
112 121 87
Heavy Duty Brakes (1) (5) 3
------ ------ ------
111 116 90
Engines 92 69 46
------ ------ ------
Total $ 203 $ 185 $ 136
====== ====== ======
</TABLE>
AUTOMOTIVE PRODUCTS
United States automobile and light truck demand during fiscal 1995 declined
marginally, as measured by a 2% decrease in vehicle sales over the comparable
fiscal 1994 period, with sales of passenger cars declining 4%, partially offset
by sales of light trucks which increased 1%. North American industry production
of these light vehicles, which incorporate Kelsey-Hayes products and influences
the Company's automotive products segment, decreased 3% during the same period
with light truck production declining 1%. Within Varity's automotive products
segment, VarityKelsey-Hayes brake systems benefitted from its strategic position
as a major supplier of anti-lock braking systems (ABS) and foundation brakes for
light trucks (pick-ups, vans and sport utility vehicles). In excess of 80% of
VarityKelsey-Hayes' sales of braking systems including ABS and foundation brakes
are generated from light trucks. In addition, expanded ABS installation rates
in new vehicles (64% penetration in fiscal 1995 versus 54% in fiscal 1994),
continued industry conversion from two-wheel ABS to higher value four-wheel
systems on numerous vehicle applications and higher ABS sales in Europe served
to offset the aforementioned production declines. As a result, VarityKelsey-
Hayes brake systems recorded sales of $1.2 billion in the current year, an
increase of $17 million over fiscal 1994. After adjusting fiscal 1995 for the
absence of $39 million in sales from VarityKelsey-Hayes' divested non-ABS sensor
and door lock actuator businesses, sales increased $56 million or 5% from the
prior year.
16
<PAGE>
Segment operating income for VarityKelsey-Hayes brake systems in
fiscal 1995 increased by 5% to $127 million (before restructuring charges) from
$121 million last year. Earnings improved over the prior year as a direct
result of slightly increased sales, particularly higher margin four-wheel ABS
products, and the continued emphasis on implementing cost reductions and
productivity improvements. During the third quarter of fiscal 1995, the Company
recognized net restructuring charges in the amount of $14.6 million related to
its VarityKelsey-Hayes foundation brakes business. Such charges included costs
associated with a 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. As a result, including such charges, VarityKelsey-Hayes
brake systems segment operating income in fiscal 1995 decreased by 7% to $112
million from the prior year.
The automotive products segment also includes sales of products for
the medium and heavy duty truck and trailer markets by Dayton Walther
Corporation (VarityDaytonWalther), a wholly-owned subsidiary of the Company.
Sales of this unit declined $37 million to $124 million in fiscal 1995 primarily
as a result of the cessation of an unprofitable light-duty truck contract which
was completed in the fourth quarter of fiscal 1994.
VarityDaytonWalther heavy duty brakes' $1 million loss for fiscal 1995
was a $4 million improvement over the prior year. This improvement is
attributable to the cessation of the light-duty truck contract mentioned above
as well as continuing cost reduction actions.
During fiscal 1994, United States automobile and light truck retail
sales increased 10% over the prior period, as consumer and business confidence
improved. Correspondingly, industry light vehicle production increased 11%
during the same period, with light truck production increasing 16%.
Sales of the automotive products segment increased 19% to $1.4 billion
in fiscal 1994 from the prior year. 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 $116
million during fiscal 1994 as compared to fiscal 1993 operating income of $90
million. The earnings improvement was primarily due to higher volumes and cost
reduction efforts.
ENGINES
Demand for diesel engines in the major market sectors in which the Company's
VarityPerkins engines segment participates (agricultural, construction,
industrial and power generation) continued to improve during fiscal 1995 as
manufacturers that incorporate such equipment in their products experienced an
increase in demand, particularly in the United States and Europe; although in
the latter portion of fiscal 1995 signs of market softening were detected in
many of the European economies in which VarityPerkins operates.
For the year as a whole, the strength in engine demand was
particularly apparent for VarityPerkins in the European materials handling and
forklift truck markets and the international market for power generation, 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. In
addition, the integration of Dorman Diesels Limited (Dorman Diesels), purchased
in the second quarter of fiscal 1994, continues to enhance VarityPerkins'
position in the power generation sector. Dorman Diesels contributed
approximately $45 million of incremental sales in fiscal 1995. As a result,
total engines segment sales increased to $1.0 billion in fiscal 1995 or 17%
higher than the prior year. Operating income in fiscal 1995 for the engines
segment increased 33% to $92 million reflecting the benefit of higher sales and
ongoing success with margin improvement and cost control programs, despite an
increase of $12.3 million in engineering and product development in fiscal 1995
in support of new engines and applications.
17
<PAGE>
Engines segment sales in fiscal 1994 increased by 23% to $861 million
compared with fiscal 1993. This increase was due primarily to increased demand
for diesel engines in the major market sectors in which VarityPerkins
participates, particularly the European agricultural sector and the United
States and United Kingdom construction markets. Increased sales reflected both
higher sales to certain existing accounts and an expanding customer base and to
a lesser extent the Dorman Diesels acquisition.
Operating income in fiscal 1994 increased 50% to $69 million versus
fiscal 1993 as a result of higher sales, productivity improvements and cost
control measures, despite an increase of $9.8 million in engineering and product
development costs.
NON-SEGMENT OPERATING REVIEW
In October 1995, the Company sold substantially all the net operating assets of
its Pacoma components operations 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.
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 of the farm machinery business,
the Company's effective tax rate increased to 25.2% in fiscal 1995, 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 the same or slightly higher in fiscal 1996.
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.
As a result of such debt redemptions and other repayments from
proceeds received from business divestitures during fiscal 1994 and fiscal 1993,
the Company has continued to reduce its net interest expense, which amounted to
$18.2 million in fiscal 1995 compared with $22.2 million and $31.3 million in
fiscal 1994 and 1993, respectively.
18
<PAGE>
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Liquidity during fiscal 1995 was provided from ongoing operations and existing
cash reserves. Cash provided from operations during the current year amounted
to $153.8 million as compared to $98.8 million in fiscal 1994. This improvement
primarily reflects the absence in fiscal 1995 of one-time contributions to fund
North American pension plans, of which approximately $63 million were made in
fiscal 1994.
During fiscal 1995 the Company completed its 4.5 million share common
stock repurchase program, commenced in fiscal 1994, with the repurchase of
2,170,400 shares of previously outstanding common stock at a cost of $78.4
million. In the fourth quarter of fiscal 1995, the Company commenced a program
to repurchase an additional 3.0 million shares of previously outstanding common
stock. As of January 31, 1996, 258,000 shares had been repurchased at a cost of
$8.9 million. The Company plans to continue the periodic repurchase of shares
of its common stock, with the intention, subject to market conditions, of
completing the program around mid-year.
Unused long-term and short-term lines of credit at January 31, 1996
were $157.9 million and $112.0 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 contain 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, 1996 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, 1997.
Receivables increased $9.7 million to $377.4 million at January 31,
1996 from $367.7 million at January 31, 1995, primarily due to moderately higher
sales in the latter portion of the fourth quarter of fiscal 1995, partially
offset by foreign exchange fluctuations.
Inventories of raw materials, work-in-process and finished products
increased to $151.2 million at January 31, 1996 from $146.0 million at January
31, 1995 primarily due to routine adjustments in manufacturing schedules,
partially offset by foreign exchange fluctuations.
Accounts payable and accrued liabilities decreased $29.5 million to
$511.8 million at January 31, 1996 from $541.3 million at January 31, 1995
primarily due to a current year reduction in captive reinsurance reserves
subsequent to the divestiture of Massey Ferguson, lower foreign income taxes
payable of a subsidiary pursuant to a tax prepayment in connection with a
dividend repatriated to the parent, and to a lesser extent, foreign exchange
fluctuations.
Net fixed assets increased $61.3 million to $674.5 million at January
31, 1996 from $613.2 million at January 31, 1995 due to capital additions
exceeding depreciation and disposals. Capital expenditures during fiscal 1995
and 1994 were $154.2 million and $153.9 million, respectively, and depreciation
and amortization were $90.8 million and $75.0 million, respectively, for the
same periods. Capital expenditures for fiscal 1996 should approximate $190
million, of which $81.0 million has been committed. These expenditures will be
for normal equipment replacements and operating improvements related to reducing
costs and increasing output.
19
<PAGE>
Other assets and intangibles increased by $11.6 million to $373.3
million at January 31, 1996 from $361.7 million at January 31, 1995, primarily
due to increases in prepaid pensions.
Other long-term liabilities increased by $32.3 million to $351.1
million at January 31, 1996 from $318.8 million at January 31, 1995 primarily
due to increases in deferred taxes and the recognition of additional minimum
pension liabilities in accordance with Statement of Financial Accounting
Standards (SFAS) No. 87, "Employers' Accounting for Pensions."
Stockholders' equity increased by $30.8 million to $814.5 million at
January 31, 1996. The increase resulted primarily from net income of $125.5
million, partially offset by repurchases of 2,428,400 shares of common stock
amounting to $87.3 million.
In March 1995, the Financial Accounting Standards Board issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of." This standard, which will be adopted in the first
quarter of the fiscal year ended January 31, 1997 (fiscal 1996), requires that
long-lived assets to be held and used be assessed for impairment if events
indicate that the carrying amount may not be recoverable. If impairment exists,
the asset is to be written down to its fair value. Long-lived assets to be
disposed of as a part of a plan approved by management are to be written down to
the lower of its carrying value or fair value less cost to sell.
The Company continues to analyze the impact of this standard, however,
it is not expected to have a significant effect on the Company's consolidated
financial statements.
In October 1995, SFAS No. 123 "Accounting for Stock-Based
Compensation," was issued and must be adopted in fiscal 1996. This statement
encourages entities to adopt a fair value based method of accounting for
compensation costs of employee stock compensation plans. Under the fair value
based method, compensation cost is measured at the grant date based on the value
of the award and is recognized over the service period, which is usually the
vesting period. SFAS No. 123 allows an entity to continue the application of
the intrinsic value based method of accounting prescribed by Accounting
Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees," however, proforma footnote disclosures of net income and earnings
per share, as if the fair value based method of accounting had been applied, are
required. Under the intrinsic value based method, compensation cost is the
excess, if any, of the quoted market price of the stock at the grant date over
the amount an employee must pay to acquire the stock. Upon adoption, the
Company intends to continue its current accounting under APB No. 25 and provide
the proforma footnote disclosures required under the new accounting standard.
Shortly after year-end, the Company announced it had withdrawn its
proposal to acquire, for $25 per share, the remaining 9.4 million outstanding
shares of Hayes Wheels International, Inc. it did not already own.
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 has also entered into interest rate swaps to manage
its exposure to increases in interest rates on a floating-rate revolving credit
facility in the United Kingdom. The Company does not hold or issue financial
instruments for trading purposes.
20
<PAGE>
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 concerted actions over the past several
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 Company
but 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
The Company believes that fiscal 1996 will be characterized by difficult
economic conditions in light of anticipated North American light vehicle
production declines and soft economies in Europe. Subject to the severity of
the foregoing, as well as the effects of any labor disruptions at the Big Three,
the Company anticipates that it will increase sales and net income for the full
year through higher sales of four-wheel ABS at VarityKelsey-Hayes and the launch
of new engines and expanded market share at VarityPerkins.
21
<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, 1996 1995 1994
--------- ----------- -----------
<S> <C> <C> <C>
Sales...................................................................... $ 2,375.0 $ 2,213.1 $ 1,780.4
---------- ----------- -----------
Expenses:
Cost of goods sold...................................................... 1,918.7 1,809.2 1,473.8
Marketing, general and administration................................... 174.3 169.8 143.1
Engineering and product development..................................... 99.5 86.9 64.9
Interest, net (Note 10)................................................ 18.2 22.2 31.3
Exchange (gains) losses ................................................ 0.4 (3.7) (1.9)
Other (income) expense, net............................................. (0.9) 0.3 (2.3)
Restructuring charges, net (Note 3)..................................... 14.6 - -
--------- ----------- -----------
2,224.8 2,084.7 1,708.9
--------- ----------- -----------
Income before income taxes, earnings of associated companies,
discontinued operations, extraordinary loss and cumulative
effect of changes in accounting principles............................. 150.2 128.4 71.5
Income tax provision (Note 4).............................................. (37.9) (23.5) (11.6)
--------- ----------- -----------
Income before earnings of associated companies, discontinued
operations, extraordinary loss and cumulative effect of
changes in accounting principles....................................... 112.3 104.9 59.9
Equity in earnings of associated companies (Note 19)........................ 12.7 13.3 11.5
--------- ----------- -----------
Income before discontinued operations, extraordinary loss
and cumulative effect of changes in accounting principles.............. 125.0 118.2 71.4
--------- ----------- -----------
Discontinued operations (Note 2):
Earnings from discontinued operations.................................. 0.5 3.3 4.9
Gain on sale of discontinued operations................................ - 23.2 -
--------- ----------- -----------
0.5 26.5 4.9
--------- ----------- -----------
Income before extraordinary loss and cumulative
effect of changes in accounting principles............................. 125.5 144.7 76.3
Extraordinary loss (Note 10)................................................ - - (1.7)
Cumulative effect of changes in accounting principles (Note 18)............. - - (146.1)
--------- ----------- -----------
Net income (loss).......................................................... $ 125.5 $ 144.7 $ (71.5)
========= =========== ===========
Income (loss) attributable to common stockholders.......................... $ 123.1 $ 142.3 $ (81.9)
Per share data (Note 5):
Before discontinued operations, extraordinary loss and
cumulative effect of changes in accounting principles:
Primary .......................................................... $ 2.99 $ 2.63 $ 1.66
Fully diluted .................................................... $ 2.99 $ 2.63 $ 1.61
Discontinued operations:
Primary........................................................... $ 0.01 $ 0.61 $ 0.14
Fully diluted..................................................... $ 0.01 $ 0.61 $ 0.12
Extraordinary loss:
Primary .......................................................... $ - $ - $ (0.05)
Fully diluted .................................................... $ - $ - $ (0.05)*
Cumulative effect of changes in accounting principles:
Primary .......................................................... $ - $ - $ (3.98)
Fully diluted .................................................... $ - $ - $ (3.98)*
Net income (loss):
Primary .......................................................... $ 3.00 $ 3.24 $ (2.23)
Fully diluted .................................................... $ 3.00 $ 3.24 $ (2.23)*
</TABLE>
* Anti-dilutive
See accompanying notes to consolidated financial statements.
22
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Dollars in millions) Varity Corporation and subsidiaries
- ---------------------------------------- -------------------------
As of January 31, 1996 1995
-------------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............ $ 78.4 $ 147.0
Marketable securities (Note 6)....... 33.7 42.7
Receivables (Note 7)................. 377.4 367.7
Inventories (Note 1)................. 151.2 146.0
Prepaid expenses and other........... 29.4 19.9
Net assets of discontinued operation
(Note 2)............................ - 11.2
-------------- ---------
Total current assets.................... 670.1 734.5
-------------- ---------
Investments in associated and
other companies (Note 19)............ 117.2 103.1
Fixed assets:
Land and buildings................... 194.1 193.3
Machinery, equipment and tooling..... 863.3 758.2
-------------- ---------
1,057.4 951.5
Accumulated depreciation and
amortization........................... (382.9) (338.3)
-------------- ---------
Net fixed assets........................ 674.5 613.2
Other assets and intangibles (Note 8)... 373.3 361.7
-------------- ---------
$ 1,835.1 $1,812.5
============== =========
LIABILITIES
Current liabilities:
Notes payable (Note 10).............. $ 3.1 $ 3.0
Current portion of long-term debt
(Note 10)........................... 3.6 2.3
Accounts payable and accrued
liabilities (Note 9)................ 511.8 541.3
-------------- ---------
Total current liabilities............... 518.5 546.6
-------------- ---------
Long-term debt (Note 10)................ 151.0 163.4
Other long-term liabilities (Note 11)... 351.1 318.8
Contingent liabilities and commitments
(Note 15)..............................
-------------- ---------
STOCKHOLDERS' EQUITY (Note 14)
Preferred stock - at stated value
(Liquidation value: 1996 - $36.4; 1995
- $35.6).............................. 6.8 6.8
Common stock - at stated value
(Shares issued: 1996 - 44,236,296;
1995 - 43,990,153).................... 643.3 638.4
Contributed surplus..................... 656.3 656.3
Deficit................................. (295.9) (419.0)
Foreign currency translation adjustment. (20.6) (10.7)
Pension liability adjustment (Note 12).. (4.1) (1.6)
Unrealized gains (losses) on marketable
securities (Note 6).................... 0.7 (1.8)
Treasury stock - at cost (Shares held:
1996 - 4,758,000; 1995 - 2,329,600).... (172.0) (84.7)
-------------- ---------
Total stockholders' equity.............. 814.5 783.7
-------------- ---------
$ 1,835.1 $1,812.5
============== =========
</TABLE>
See accompanying notes to consolidated financial statements.
23
<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, 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
Exercise of stock options............... 245 4.9
Repurchases of common stock............. (2,428)
Foreign currency translation adjustment.
Dividends on Class II Preferred Stock...
Pension liability adjustment ...........
Unrealized gains on marketable
securities..........................
Net income..............................
------- ------ ------ --------- ------- ----------
Balance, January 31, 1996............... - 2,001 39,478 $ - $ 6.8 $ 643.3
======= ====== ====== ========= ======= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Notes
Unrealized receivable
Trans- Pension gains from Total
lation liability (losses) on officer 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 $ (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
4.9
(87.3) (87.3)
(9.9) (9.9)
(2.4) (2.4)
(2.5) (2.5)
2.5 2.5
125.5 125.5
- ------------- --------- --------- --------- ----------- --------- ---------- ----------
$ 656.3 $ (295.9) $ (20.6) $ (4.1) $ 0.7 $ - $ (172.0) $ 814.5
============= ========= ========= ========= =========== ========= ========== ==========
</TABLE>
25
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Dollars in millions) Varity Corporation and subsidiaries
- ---------------------------------------------------- -------------------------------------
Years ended January 31, 1996 1995 1994
---------- ----------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................ $ 125.5 $ 144.7 $ (71.5)
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Depreciation and amortization.............. 90.8 75.0 62.4
Gain on sales of fixed assets.............. - (0.5) -
Restructuring charges, net................. 14.6 - -
Deferred income taxes...................... 8.7 2.0 7.5
Equity in earnings of associated companies
in excess of dividends received........ (12.2) (12.8) (11.0)
Gain on sale of discontinued operations.... - (23.2) -
Extraordinary loss ........................ - - 1.7
Cumulative effect of changes in accounting
principals................................ - - 146.1
Changes in:
Receivables............................ (11.8) (12.8) (46.4)
Inventories............................ (8.3) - (13.6)
Prepaid expenses and other............. (7.2) (3.1) 6.8
Accounts payable and accrued
liabilities........................... (39.9) (3.4) 4.6
Other long-term liabilities............ (6.9) (96.9) 18.0
Net assets of discontinued operations.. 0.5 29.8 13.7
---------- --------- --------
Cash provided by operating activities.......... 153.8 98.8 118.3
---------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities............... (45.9) (36.1) (52.9)
Proceeds from sales of marketable securities..... 57.4 70.1 40.4
Additions to fixed assets........................ (154.2) (153.9) (132.8)
Proceeds from sales of fixed assets.............. 5.5 11.7 12.4
Proceeds from sales of businesses................ 28.1 333.2 33.6
Acquisition of business, net of cash acquired.... - (42.7) -
Additions to investments......................... (1.7) - (4.3)
Additions to other assets and intangibles........ (14.2) (4.9) (15.6)
Other............................................ - 0.5 -
---------- --------- --------
Cash provided (used) by investing activities... (125.0) 177.9 (119.2)
---------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowings ................... 16.9 38.3 108.7
Repayments of bank borrowings.................... (16.8) (107.5) (164.6)
Proceeds from long-term debt..................... 4.0 98.9 89.3
Repayments of long-term debt..................... (15.8) (127.9) (225.8)
Repurchases of common stock...................... (87.3) (84.7) -
Exercise of stock options........................ 4.9 1.0 4.5
Proceeds from sale of common stock............... - - 143.7
Dividends paid................................... (2.4) (2.4) (10.4)
Other............................................ - - (4.4)
---------- --------- --------
Cash used by financing activities.............. (96.5) (184.3) (59.0)
---------- --------- --------
Effect of foreign currency translation on
cash and cash equivalents........................ (0.9) 3.4 (0.3)
---------- --------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
DURING THE YEAR.................................. (68.6) 95.8 (60.2)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR....... 147.0 51.2 111.4
---------- --------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR............ $ 78.4 $ 147.0 $ 51.2
========== ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
Notes to Consolidated Financial Statements
Years ended January 31, 1996, 1995 and 1994
(Fiscal 1995, 1994 and 1993, respectively)
(Dollars in millions unless otherwise stated)
1. 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.
Certain reclassifications have been made to the fiscal 1994 and fiscal 1993
consolidated financial statements and notes to conform with the fiscal 1995
presentation.
(b) Cash Equivalents
Cash equivalents consist of liquid instruments with an original maturity of
three months or less.
(c) Marketable Securities
Marketable securities are carried at fair value. Unrealized net gains or losses
resulting from changes in fair value are presented as a separate component of
stockholders' equity.
(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, 1996 and 1995 were 31% and 37% of total inventories,
respectively. If the FIFO method (which approximates current cost) had been
used exclusively, inventories would have been higher than reported by $1.8
million and $1.3 million at January 31, 1996 and 1995, respectively.
The major classes of inventory are as follows:
- ------------------------------------------------------------------------------
January 31, 1996 1995
------ ------
Raw materials...................................... $ 61.1 $ 52.3
Work in process.................................... 31.9 36.5
Finished goods..................................... 58.2 57.2
------ -----
$151.2 $146.0
====== ======
(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:
- --------------------------------------------------------------------------------
Buildings.......................................... 10 to 50 years
Machinery, equipment and tooling................... 3 to 12 years
(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.
27
<PAGE>
(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
($70.7, $51.8 and $40.5 million for fiscal 1995, 1994 and 1993, 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 Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes," as
described in Note 18. 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, 1996
generally 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. As a result of declining interest rates in
the U.S., the fair value of long-term debt was $162.3 million and $176.6 million
at January 31, 1996 and 1995, respectively, and the related carrying amounts
were $154.6 million and $165.7 million, respectively. The fair value of long-
term debt is estimated 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 (see Note 16).
(l) Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." This standard, which will be adopted in the first quarter of
the fiscal year ended January 31, 1997 (fiscal 1996), requires that long-lived
assets to be held and used be assessed for impairment if events indicate that
the carrying amount may not be recoverable. If impairment exists, the asset is
to be written down to its fair value. Long-lived assets to be disposed of as a
part of a plan approved by management are to be written down to the lower of its
carrying value or fair value less cost to sell.
The Company continues to analyze the impact of this standard, however, it is
not expected to have a significant effect on the Company's consolidated
financial statements.
(m) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent liabilities to prepare these consolidated financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from these estimates.
28
<PAGE>
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. As a result, Pacoma has been presented as a discontinued
operation in the accompanying financial statements. 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:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Years ended January 31, 1996/ (1)/ 1995 1994
----------- ------ ------
<S> <C> <C> <C>
Sales............................................................................................... $ 44.1 $54.7 $47.0
=========== ===== =====
Income (loss) before income taxes
and cumulative effect of changes
in accounting principles.......................................................................... $ .5 $(1.1) $(2.3)
Income tax provision................................................................................ - - -
----------- ----- -----
Income (loss) before cumulative
effect of changes in accounting
principles........................................................................................ $ .5 $(1.1) $(2.3)
=========== ===== =====
/(1)/ Includes the period up to and including September 29, 1995, the effective date of the sale.
A summary of the assets and liabilities of the discontinued Pacoma operation is as follows:
- ----------------------------------------------------------------------------------------------------------------------------------
January 31, 1995
-----
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>
29
<PAGE>
Additionally, 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 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.
The operating results of the discontinued Massey Ferguson operation
are as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Years ended January 31, 1995/ (1)/ 1994
------------ -------
<S> <C> <C>
Sales........................................................................................... $ 253.1 $898.4
=========== ======
Income before income taxes
and cumulative effect of changes
in accounting principles...................................................................... $ 5.0 $ 8.2
Income tax provision............................................................................ (.6) (1.0)
----------- ------
Income before cumulative
effect of changes in accounting
principles.................................................................................... $ 4.4 $ 7.2
=========== ======
/(1) / Includes the period up to and including April 30, 1994, the effective date of the sale.
</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
VarityKelsey-Hayes foundation (conventional) brakes business. (VarityKelsey-
Hayes refers to Kelsey-Hayes Company and Kelsey-Hayes Canada, Ltd.
collectively.) Such charges included costs associated with write-downs of non-
performing assets and a plant closure in Canada, partially offset by a gain on
the sale of its non-core door lock actuator business. The charges related to
the plant closure consist primarily of severance and other benefits associated
with the elimination of 115 positions, including both factory and administrative
personnel. As of January 31, 1996, the closure had been completed and
substantially all related liabilities had been settled.
30
<PAGE>
4. INCOME TAXES
Income tax provisions have been recorded in respect of the Company's results of
operations as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Years ended January 31, 1996 1995 1994
------ ------ -----
<S> <C> <C> <C>
Income before income taxes, earnings
of associated companies, discontinued
operations, extraordinary loss and
cumulative effect of changes in
accounting principles:
United States.......................... $ 80.5 $ 85.6 $54.8
Foreign................................ 69.7 42.8 16.7
------ ------ -----
$150.2 $128.4 $71.5
====== ====== =====
Income taxes currently payable:
United States.......................... $ 3.4 $ 2.4 $ 1.2
Foreign................................ 25.8 19.1 2.9
------ ------ -----
29.2 21.5 4.1
Deferred income taxes:
Foreign................................ 8.7 2.0 7.5
------ ------ -----
Income tax provision......................... $ 37.9 $ 23.5 $11.6
====== ====== =====
</TABLE>
United States taxes include federal and state income taxes.
The following table reconciles the 35% statutory United States federal
income tax rate to the Company's effective tax rates:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years ended January 31, 1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Income tax provision at the
statutory rate.............................. $ 52.6 $ 44.9 $25.0
Increase (decrease) in income tax provision
attributable to:
Net effect of foreign tax rates............ (3.2) (.8) (3.4)
Permanent differences resulting from
purchase accounting....................... 2.2 2.2 2.2
Translation exchange adjustments........... (.6) - (.7)
Operating losses for which no benefit has
been provided............................. 9.3 11.1 8.6
Utilization of prior years' net operating
loss carryforwards........................ (27.9) (36.5) (22.4)
State income taxes and other............... 5.5 2.6 2.3
------ ------ ------
Income tax provision......................... $ 37.9 $ 23.5 $11.6
====== ====== ======
Effective tax rate........................... 25.2% 18.3% 16.2%
====== ====== ======
</TABLE>
31
<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, 1996 and 1995 are as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
January 31, 1996 1995
------ ------
<S> <C> <C>
Deferred tax assets:
Tax loss carryforwards....... $122.2 $129.2
Benefit plans................ 92.8 95.7
Liabilities and reserves..... 14.9 26.3
Other........................ 9.4 5.8
------ ------
Gross deferred tax assets 239.3 257.0
Less: valuation allowance 121.6 149.6
------ ------
Total 117.7 107.4
------ ------
Deferred tax liabilities:
Fixed assets................. 91.9 88.1
Intangible assets............ 15.9 17.0
Investments and other........ 37.6 23.8
------ ------
Total 145.4 128.9
------ ------
Net deferred tax liability $ 27.7 $ 21.5
====== ======
</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 ($146.9 million
at January 31, 1996) considered to be permanently reinvested. It is not
practicable to determine the amount of income or withholding tax that would be
payable upon repatriation to the Company.
At January 31, 1996, the Company had net operating loss carryforwards
for tax purposes aggregating approximately $313 million. These loss
carryforwards, principally in the United States, expire as follows: January 31,
1997 - $11 million; 1998 - $19 million; 1999 - $32 million; 2000 - $17 million
and 2001 and beyond - approximately $234 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 $21.4, $5.5 and $5.1 million for fiscal
years 1995, 1994 and 1993, 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.
32
<PAGE>
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. The weighted average shares outstanding are
summarized as follows:
(Thousands of shares)
- --------------------------------------------------------------------------------
Years ended January 31, 1996 1995 1994
-------- -------- ------
Primary................................... 41,079 43,997 36,700
======= ======= =======
Fully diluted............................. 41,101 44,000 42,753
======= ======= =======
6. MARKETABLE SECURITIES
The cost, gross unrealized gains and losses and fair value of the Company's
marketable securities follows:
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
January 31, 1996
--------------------------------
Gross Gross
unrealized unrealized Fair
Cost gains losses value
------- ---------- ---------- -------
<S> <C> <C> <C> <C>
United States government bonds........... $ 16.2 $ .7 $ - $ 16.9
Corporate bonds.......................... 11.8 .1 (.2) 11.7
Foreign government bonds................. 5.0 .1 - 5.1
------- ------ ------- -------
$ 33.0 $ .9 $ (.2) $ 33.7
======== ======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
January 31, 1995
-----------------------------------
Gross Gross
unrealized unrealized Fair
Cost gains losses value
------- ---------- ---------- -------
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
======= ======== ======== =======
At January 31, 1996 the Company's marketable securities generally have
contractual maturities that are long-term in nature, the majority of which are
due after January 31, 1998.
During fiscal 1995 the Company realized $1.2 million of gross gains
and $.2 million of gross losses on $57.4 million of proceeds from sales of
available-for-sale securities. During fiscal 1994 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. Cost was computed using
the specific identification method.
33
<PAGE>
7. RECEIVABLES
Receivables are presented net of allowances for doubtful accounts of $5.2
million and $5.1 million at January 31, 1996 and 1995, respectively.
Credit risk is generally concentrated within the Company's primary
business segments. The Company performs ongoing credit evaluations of its
customers' financial condition.
8. OTHER ASSETS AND INTANGIBLES
Other assets and intangibles consist of the following:
- -------------------------------------------------------------------------------
January 31, 1996 1995
------ ------
Goodwill........................... $247.1 $253.1
Other, including prepaid pensions.. 126.2 108.6
------ ------
$373.3 $361.7
====== ======
Other assets and intangibles are presented net of accumulated
amortization of $68.3 million and $71.6 million at January 31, 1996 and 1995,
respectively.
9. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consist of the following:
January 31, 1996 1995
------ -------
Accounts payable.............. $283.2 $286.2
Employee costs................ 68.3 96.4
Captive reinsurance reserves.. 30.3 36.5
Other accrued liabilities..... 130.0 122.2
------ ------
$511.8 $541.3
====== ======
34
<PAGE>
10. LONG-TERM DEBT
Debt is repayable in United States dollars unless otherwise indicated.
- -------------------------------------------------------------------------------
January 31, 1996 1995
------ ------
11.375% Senior Notes due November 15, 1998 (a).. $148.7 $148.4
Bank revolving loan maturing 1997-2000
interest at Amsterdam Interbank Offered Rate
plus 1.25% (4.77% at January 31, 1996),
secured by fixed assets (Netherland Guilders).. 3.0 11.7
Other........................................... 2.9 5.6
------ ------
Total debt...................................... 154.6 165.7
Less: current portion of long-term debt........ 3.6 2.3
------ ------
Long-term debt.................................. $151.0 $163.4
====== ======
(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) Upon receipt of the proceeds of an equity offering by the Company in June
1993, 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 contain 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, 1996 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,
1997.
(d) As of January 31, 1996, debt maturities for long-term debt during the next
five fiscal years are as follows: 1996 - $3.6 million; 1997 - $.8 million; 1998
- - $149.4 million; 1999 - $.2 million and 2000 and thereafter - $.6 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 6.5% to 11.8% at January 31, 1996. The weighted average
interest rate of the facilities outstanding at January 31, 1996 and 1995 is 7.8%
and 8.4%, respectively.
35
<PAGE>
Unused long-term and short-term lines of credit at January 31, 1996
were $157.9 million and $112.0 million, respectively (January 31, 1995 - $139.0
million and $100.7 million, respectively). Approximately $72 million of
consolidated assets secure such lines at January 31, 1996.
(f) Interest, net includes interest income of $8.6, $4.7 and $6.3 million for
fiscal 1995, 1994 and 1993, respectively. Cash payments of interest were $18.9,
$23.1 and $37.2 million for fiscal 1995, 1994 and 1993, respectively.
(g) Subsidiaries' debt agreements have financial covenants which may, in certain
circumstances, restrict approximately $680 million of subsidiaries' net assets
from being loaned, advanced or dividended to the Company.
11. OTHER LONG-TERM LIABILITIES
Other long-term liabilities consist of the following:
- -------------------------------------------------------------------------------
January 31, 1996 1995
---- ----
Accrued employee benefits other than pension.. $188.7 $194.0
Accrued pension cost.......................... 52.6 45.5
Deferred tax liabilities...................... 38.4 30.8
Other......................................... 71.4 48.5
------ ------
$351.1 $318.8
====== ======
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:
- -------------------------------------------------------------------------------
Years ended January 31, 1996 1995 1994
------- ------- -------
Service cost for the year............ $ 8.5 $ 8.5 $ 7.7
Interest cost on projected benefit
obligation....................... 42.0 41.4 45.1
Actual return on plan assets......... (64.5) (5.2) (85.2)
Net amortization and deferral........ 25.6 (30.7) 46.7
------ ------ ------
Net pension expense.................. $ 11.6 $ 14.0 $ 14.3
====== ====== ======
36
<PAGE>
In connection with the closure of a Canadian brake plant in fiscal
1995, as is further described in Note 3, the Company recognized $2.2 million of
curtailment and settlement losses which are included in the net amortization and
deferral component.
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 operations within the consolidated statement of operations and not
in the preceding table.
The funded status of pension plans is as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
January 31, 1996 1995
------------------------- -------------------------
UNDERFUNDED OVERFUNDED Underfunded Overfunded
PLANS PLANS plans plans
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Accumulated benefit obligation:
Vested benefit obligation.................................. $ 82.2 $ 396.9 $ 66.5 $ 368.3
Nonvested benefit obligation............................... 5.3 13.7 3.6 15.6
------ ------- ------ -------
$ 87.5 $ 410.6 $ 70.1 $ 383.9
====== ======= ====== =======
Projected benefit obligation................................. $ 95.6 $ 437.8 $ 78.1 $ 410.3
Plan assets at market value.................................. (36.8) (448.9) (21.8) (419.4)
------ ------- ------ -------
Projected benefit obligation
in excess of (less than) plan assets....................... 58.8 (11.1) 56.3 (9.1)
Unrecognized net gains (losses).............................. (.2) (34.4) 3.8 (32.6)
Unrecognized transition assets (liabilities)................. (14.1) (.6) (12.0) 2.3
Additional minimum liability recognized...................... 13.0 - 6.9 -
------ ------- ------ -------
Pension costs accrued (prepaid)
in the consolidated balance sheets......................... $ 57.5 $ (46.1) $ 55.0 $ (39.4)
====== ======= ====== =======
</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.
The fiscal 1995 additional minimum pension liability is a non-cash
item which is offset by an intangible asset of $10.1 million and a direct
reduction in stockholders' equity of $2.9 million (corresponding offsets in
fiscal 1994 were $6.4 million and $.5 million, respectively). The Company's
consolidated direct reduction in stockholders' equity also includes a component
for the additional minimum liability of equity investee Hayes Wheels
International, Inc. (Hayes Wheels).
37
<PAGE>
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, 1996, the annual discount rates range from 7.25% to 9.0%
(7.5% in fiscal 1995 for plans domiciled in the United States), the remuneration
increases range from 4.5% to 6.0% and the expected annual long-term rates of
return on assets range from 8.25% to 10.25%.
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
18. This standard requires that the cost of postretirement benefits, primarily
health care benefits, be recognized over employees' active working lives. These
costs had previously been 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, 1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Service cost - benefits earned during the period.. $ 2.0 $ 3.0 $ 2.0
Interest cost on accumulated postretirement
benefit obligation............................. 19.7 17.5 17.6
Amortization of actuarial losses.................. 1.2 .5 -
----- ----- -----
Postretirement benefit expense.................... $22.9 $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 and its subsidiaries, Kelsey-Hayes Company and
Kelsey-Hayes Canada, Ltd., are as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
January 31, 1996 1995
------- -------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees.............................................. $193.5 $190.7
Fully eligible active participants.................... 23.5 18.3
Other active participants............................. 32.9 27.9
------ ------
249.9 236.9
Unrecognized net loss.................................. (38.7) (21.7)
------ ------
Accrued postretirement benefit liability............... $211.2 $215.2
====== ======
</TABLE>
38
<PAGE>
The assumed fiscal 1996 health care cost trend rate used in measuring
the accumulated postretirement benefit obligation was 8% and was further assumed
to decrease by 1 percentage point 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, 1996 by approximately $21.3 million and the aggregate of the service
and interest cost components of postretirement benefit expense for the year then
ended by approximately $2.2 million. The weighted average discount rate used
in determining the accumulated postretirement benefit obligation was 7.68% and
8.34% as of January 31, 1996 and 1995, respectively.
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, 1996.
(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, 1996, 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, 1996, 8,160,000 shares of this stock were outstanding and held by a
wholly-owned subsidiary of the Company. These shares 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 fiscal 1995 the Company completed a 4.5 million share common
stock repurchase program, commenced in fiscal 1994, with the repurchase of
2,170,400 shares of previously outstanding common stock. In the fourth quarter
of fiscal 1995 the Company commenced a second program to repurchase an
additional 3.0 million shares of previously outstanding common stock. As of
January 31, 1996, 258,000 shares had been repurchased. The Company will
continue the periodic repurchase of up to 3.0 million shares of its common
stock, subject to market conditions, with the intention of completing the
program around mid-year of fiscal 1996. As a result of these programs,
39,478,296 common shares were outstanding at January 31, 1996.
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%-
45%) 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, 1996:
(Thousands of shares)
- ------------------------------------------------------------------
Years ended January 31, 1996 1995 1994
------ ------ ------
Options outstanding, beginning of period.. 2,208 1,502 851
Granted................................... 573 773 980
Exercised (1)............................. (245) (34) (273)
Expired or canceled....................... (111) (33) (56)
----- ----- -----
Options outstanding, end of period (2).... 2,425 2,208 1,502
===== ===== =====
(1) Options have been exercised at average prices of $19.33, $24.53 and $15.50
for fiscal 1995, 1994 and 1993, respectively.
(2) Options to purchase 1,812,000, 1,314,000 and 586,000 common shares were
exercisable at January 31, 1996, 1995 and 1994, respectively. Options
outstanding at January 31, 1996 were exercisable at prices ranging from $11.59
to $58.75 ($11.59 to $58.75 at January 31, 1995 and $11.59 to $81.40 at January
31, 1994).
In October 1995, SFAS No. 123 "Accounting for Stock-Based
Compensation," was issued and must be adopted in fiscal 1996. This statement
encourages entities to adopt a fair value based method of accounting for
compensation costs of employee stock compensation plans. Under the fair value
based method, compensation cost is measured at the grant date based on the value
of the award and is recognized over the service period, which is usually the
vesting period. SFAS No. 123 allows an entity to continue the application of
the intrinsic value based method of accounting prescribed by Accounting
Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to
Employees," however, proforma footnote disclosures of net income and earnings
per share, as if the fair value based method of accounting had been applied, are
required. Under the intrinsic value based method, compensation cost is the
excess, if any, of the quoted market price of the stock at the grant date over
the amount an employee must pay to acquire the stock. Upon adoption, the
Company intends to continue its current accounting under APB No. 25 and provide
the proforma footnote disclosures required under the new accounting standard.
40
<PAGE>
(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, 1996, 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, 1996, the Company could pay up to approximately
$409 million of cash dividends on its common stock under the most restrictive
dividend covenant in such indenture.
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) Sale of Net Assets of Pacoma
In connection with the sale of net assets of Pacoma, the Company remains
responsible for certain contingent liabilities related to its former Pacoma
operations, principally costs associated with certain creditors and the active
employees of Pacoma should the purchaser be unable to meet its obligations to
them. The Company is contingently liable for these costs for the period of one
year following the date of sale.
The Company believes it made adequate provisions at the time of the
sale for contingent liabilities relating to the Pacoma operations and intends to
fulfill its obligations under the purchase agreement.
(c) Capital Expenditure Programs
Approved capital expenditure programs outstanding at January 31, 1996
approximated $237.0 million, including capital commitments of approximately
$81.0 million.
(d) Discounted Obligations
The Company has contingent liabilities relating to accounts receivable
discounted, bills guaranteed and similar obligations amounting to $4.2 million
and $4.5 million at January 31, 1996 and 1995, 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: 1996 - $14.1 million; 1997 - $11.3 million; 1998 -
$6.4 million; 1999 - $3.8 million; 2000 - $2.6 million and $36.2 million
thereafter.
41
<PAGE>
(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 totaling 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
$76 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 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, 1996, the Company had $92.1
million of forward exchange contracts outstanding, primarily to exchange U.S.
dollars and various European currencies for pounds sterling (approximately $84.8
million at January 31, 1995). 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, 1996, approximately $.7 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.
42
<PAGE>
17. BUSINESS SEGMENT INFORMATION AND CONCENTRATIONS OF RISKS
The Company is a global industrial company with core manufacturing and
distribution businesses in automotive products (primarily brake systems and
components) and multi-cylinder, multi-purpose diesel engines. The automotive
products segment is larger in size based on sales.
The principal market for the Company's automotive products, which are
manufactured primarily in the United States, is original equipment manufacturers
(OEMs) of which the Big Three automobile manufacturers account for approximately
88% of the Company's automotive products sales. Fiscal 1995 sales of the
automotive products segment to three OEMs that individually comprised more than
10% of consolidated sales, along with comparable fiscal 1994 and 1993 amounts,
are as follows:
- -------------------------------------------------
Years ended January 31, 1996 1995 1994
----- ----- -----
General Motors Corporation.. $ 553 $ 467 $ 358
Ford Motor Company.......... $ 396 $ 491 $ 396
Chrysler Corporation........ $ 251 $ 314 $ 237
The Company's sales of automotive products 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.
Diesel engines and replacement parts, which are manufactured
predominately in the United Kingdom, are sold primarily to OEMs in Western
Europe, the United Kingdom, the United States, and to a lesser extent, Asia. As
a substantial volume of engines and related parts are sold into other countries
from manufacturing locations in the United Kingdom, foreign exchange rate
fluctuations between various European currencies, and to a lesser extent the
United States dollar, can affect the Company's reported results.
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 temporary
adverse effect on the Company.
The financial information for the principal industry segments and geographic
regions in which the Company operates are set forth below. Fiscal 1995
operating income for the automotive products segment includes restructuring
charges of $14.6 million as is further described in Note 3 of the Notes to
Consolidated Financial Statements.
43
<PAGE>
<TABLE>
<CAPTION>
INDUSTRY SEGMENT
- -----------------------------------------------------------------------------------------
Auto- Adjustments
Fiscal motive and
years products Engines eliminations Consolidated
------ -------- ------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated customers.. 1995 $1,366 $1,009 $ - $2,375
1994 1,373 840 - 2,213
1993 1,149 631 - 1,780
Intersegment sales to
discontinued operations....... 1995 - - - -
1994 - 21 (21) -
1993 - 71 (71) -
Total sales...................... 1995 1,366 1,009 - 2,375
1994 1,373 861 (21) 2,213
1993 1,149 702 (71) 1,780
Operating income (1) (2)......... 1995 111 92 - 203
1994 116 69 - 185
1993 90 46 - 136
Identifiable assets (3).......... 1995 1,047 512 - 1,559
1994 1,010 454 - 1,464
1993 929 346 - 1,275
Depreciation and
amortization.................. 1995 68 22 - 90
1994 51 20 - 71
1993 41 16 - 57
Capital expenditures............. 1995 100 51 - 151
1994 124 30 - 154
1993 113 17 - 130
</TABLE>
(1) Inclusive of $14.6 million of restructuring charges pertaining to the
automotive products segment as is further described in Note 3 of the Notes to
Consolidated Financial Statements.
44
<PAGE>
GEOGRAPHIC SEGMENT
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Adjustments
Fiscal United and
years States Europe Other eliminations Consolidated
----- ------ ------ ----- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Sales to unaffiliated
customers........................... 1995 $1,242 $1,009 $ 124 $ - $2,375
1994 1,266 819 128 - 2,213
1993 1,056 619 105 - 1,780
Intersegment sales to
discontinued operations............. 1995 - - - - -
1994 - 21 - (21) -
1993 - 71 - (71) -
Total sales.......................... 1995 1,242 1,009 124 - 2,375
1994 1,266 840 128 (21) 2,213
1993 1,056 690 105 (71) 1,780
Operating income (1)(2).............. 1995 130 77 (4) - 203
1994 124 49 12 - 185
1993 93 35 8 - 136
Identifiable assets (3).............. 1995 940 555 64 - 1,559
1994 907 476 81 - 1,464
1993 835 359 81 - 1,275
</TABLE>
Reconciliation to consolidated financial statements:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Fiscal years 1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
(2) Operating income................................. $ 203 $ 185 $ 136
Interest expense, net............................ (18) (22) (31)
General and corporate expense, net (a)........... (35) (35) (33)
------ ------ ------
Income before income taxes, earnings of
associated companies, discontinued operations,
extraordinary loss and cumulative effect of
changes in accounting principles................ $ 150 $ 128 $ 72
======== ====== ======
(3) Identifiable assets.............................. $ 1,559 $1,464 $1,275
Investments...................................... 117 103 94
Corporate assets................................. 159 235 148
Net assets of discontinued operations............ - 11 233
----- ------- ----
$ 1,835 $1,813 $1,750
====== ====== ======
</TABLE>
(a) Includes exchange adjustments and general corporate expense, net of
miscellaneous income.
45
<PAGE>
18. 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. These costs had
previously been 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, 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.
46
<PAGE>
19. INVESTMENTS IN ASSOCIATED AND OTHER COMPANIES
Varity's investments in associated and other companies as of January 31, 1996
and 1995 consists primarily of its 46.3% interest in Hayes Wheels. During
fiscal 1995, 1994 and 1993 the Company received dividends of $.5 million each
year from Hayes Wheels. As of January 31, 1996, the Company's investment in
Hayes Wheels, a publicly traded company, had a market value of approximately
$197 million.
Summarized financial information of these investee companies is presented
below:
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------------
Years ended January 31, 1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Net sales.................................................. $611.1 $537.6 $428.2
Cost of goods sold......................................... 513.4 441.4 344.4
------ ------ ------
Gross profit............................................... 97.7 96.2 83.8
Other costs and expenses................................... 51.5 46.3 41.6
------ ------ ------
Income before taxes and cumulative effect of
changes in accounting principles........................ 46.2 49.9 42.2
Income tax provision....................................... (17.8) (20.0) (17.6)
------ ------ ------
Income before cumulative effect of changes
in accounting principles................................ 28.4 29.9 24.6
Cumulative effect of changes in accounting principles (1).. - - (24.6)
------ ------ ------
Net income................................................. $ 28.4 $ 29.9 $ -
====== ====== ======
</TABLE>
(1) Primarily relates to an investee company's adoption of SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions."
<TABLE>
<CAPTION>
BALANCE SHEETS
- --------------------------------------------------------------------------------------
January 31, 1996 1995
------ ------
<S> <C> <C>
Current assets........... $180.2 $157.6
Fixed assets............. 304.4 285.7
Other.................... 149.3 146.3
------ ------
$633.9 $589.6
====== ======
Current liabilities...... $136.8 $130.5
Non-current liabilities.. 251.8 242.7
Shareholders' equity..... 245.3 216.4
------ ------
$633.9 $589.6
====== ======
</TABLE>
Certain investees' indebtedness restrict approximately $204 million of
investee net assets from being loaned, advanced or dividended to the Company by
such investees.
Varity's consolidated deficit at January 31, 1996 and 1995 includes
$25.2 million and $13.0 million, respectively, of undistributed earnings of the
above investees.
47
<PAGE>
20. KELSEY-HAYES COMPANY
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, 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 Company, which comprises a substantial portion of
the automotive products segment.
<TABLE>
<CAPTION>
(i) Balance Sheets
- -----------------------------------------------------------------------------------------------
January 31, 1996 1995
-------- --------
<S> <C> <C>
Current assets................................... $ 210.5 $ 198.7
Non-current assets............................... 668.7 637.1
-------- --------
$ 879.2 $ 835.8
======== ========
Current liabilities.............................. $ 203.2 $ 193.4
Non-current liabilities.......................... 71.9 73.6
Stockholder's equity............................. 604.1 568.8
-------- --------
$ 879.2 $ 835.8
======== ========
(ii) Statements of Operations
- -----------------------------------------------------------------------------------------------
Years ended January 31, 1996 1995 1994
-------- -------- ------
Net sales........................................ $1,149.3 $1,126.9 $920.2
Gross profit..................................... $ 207.6 $ 201.1 $159.9
Income tax provision............................. $ 26.2 $ 5.5 $ .5
Income before extraordinary loss and cumulative
effect of changes in accounting principles $ 61.1 $ 73.3 $ 53.2
Net income....................................... $ 61.1 $ 73.3 $ 36.3
</TABLE>
48
<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 1995. 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 1995. 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, 1996 and 1995 and the results of
their operations and their cash flows for each of the years in the three-year
period ended January 31, 1996 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 18 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 27, 1996
49
<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 27, 1996
/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
50
<PAGE>
SUPPLEMENTARY INFORMATION
(Unaudited)
<TABLE>
<CAPTION>
QUARTERLY CONDENSED UNAUDITED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED JANUARY 31, 1996 AND 1995 ARE PRESENTED BELOW. (1)
(Dollars in millions except per share amounts) 1995 Quarters 1994 Quarters
- --------------------------------------------------------------------------------------------------------------------------------
1 2 3 4 1 2 3 4
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Sales...................................... $ 595.3 $ 572.4 $ 594.7 $ 612.6 $ 494.1 $ 504.3 $ 590.8 $ 623.9
- --------------------------------------------------------------------------------------------------------------------------------
Gross profit............................... $ 109.3 $ 109.0 $ 115.8 $ 122.2 $ 87.3 $ 89.6 $ 107.2 $ 119.8
Expenses (2)............................... 70.7 70.6 88.8 76.9 61.4 65.7 70.5 77.6
Other (income) expense, net................ (0.2) 0.1 0.3 (1.1) (0.8) 0.8 0.2 0.1
Income tax provision....................... 8.9 8.8 9.5 10.7 4.6 3.8 6.9 8.2
Equity in earnings of associated
companies............................... (3.8) (3.2) (3.6) (2.1) (3.4) (3.4) (3.4) (3.1)
- --------------------------------------------------------------------------------------------------------------------------------
Income before discontinued
operations.............................. 33.7 32.7 20.8 37.8 25.5 22.7 33.0 37.0
Earnings (loss) from discontinued
operations.............................. 0.5 - - - 3.9 0.1 (0.3) (0.4)
Gain on sale of discontinued
operations.............................. - - - - - 23.2 - -
- --------------------------------------------------------------------------------------------------------------------------------
Net income................................. $ 34.2 $ 32.7 $ 20.8 $ 37.8 $ 29.4 $ 46.0 $ 32.7 $ 36.6
================================================================================================================================
Per share data (3) (4):
Before discontinued operations............. $ 0.80 $ 0.78 $ 0.49 $ 0.93 $ 0.56 $ 0.50 $ 0.73 $ 0.84
Net income................................. $ 0.81 $ 0.78 $ 0.49 $ 0.93 $ 0.65 $ 1.02 $ 0.73 $ 0.84
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) As a result of the fiscal 1995 sale of the Company's Pacoma operations, as
described in Note 2 to the Consolidated Financial Statements, prior year
financial data has been restated to conform to the current year
presentation of the Pacoma operations as a discontinued operation.
(2) Includes fiscal 1995 third quarter restructuring charges of $14.6 million.
(3) 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.
(4) Fully diluted earnings per share computations are not presented as no
significant dilution exists.
51
<PAGE>
FINANCIAL STATISTICS (1)
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in millions except per share amounts)
- ------------------------------------------------------------------------------------------------------------------------
Fiscal years 1995 1994 1993 1992(2) 1991
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Sales................................................ $ 2,375 2,213 1,780 2,184 2,002
Gross profit......................................... $ 456 404 307 393 330
Net expenses (excluding interest).................... $ 273 253 205 230 234
Interest expense, net................................ $ 18 22 31 98 99
Losses on sales and other restructuring charges...... $ 15 - - - 64
Income tax provision................................. $ 38 24 12 10 11
Equity in earnings of associated companies........... $ 13 13 12 1 -
Income (loss) before discontinued operations,
extraordinary loss and cumulative effect of changes
in accounting principles............................ $ 125 118 71 56 (78)
Earnings (loss) from discontinued operations......... $ 1 4 5 (22) (100)
Gain on sale of discontinued operations.............. $ - 23 - - -
Extraordinary loss (3)............................... $ - - (2) (7) -
Cumulative effect of changes in accounting principles $ - - (146) - -
Net income (loss).................................... $ 126 145 (72) 27 (178)
Preferred stock dividends............................ $ 2 2 10 19 19
- ------------------------------------------------------------------------------------------------------------------------
FINANCIAL CONDITION
Working capital...................................... $ 152 188 235 (48) (126)
Additions to fixed assets ........................... $ 154 154 133 87 96
Depreciation and amortization........................ $ 91 75 62 96 89
Total assets......................................... $ 1,835 1,813 1,750 1,792 2,508
- ------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current.............................................. $ 519 547 556 652 922
Other................................................ $ 501 482 563 591 1,091
Stockholders' equity................................. $ 815 784 631 549 495
Return on closing total stockholders' equity......... 15.4 % 18.5 (11.3) 4.9 (36.0)
- ------------------------------------------------------------------------------------------------------------------------
AS A PERCENT OF SALES
Cost of goods sold................................... 80.8 % 81.7 82.8 82.0 83.5
Gross profit......................................... 19.2 % 18.3 17.2 18.0 16.5
Marketing, general and administration................ 7.3 % 7.7 8.0 8.5 8.1
Engineering and product development.................. 4.2 % 3.9 3.6 2.9 3.0
Net income (loss).................................... 5.3 % 6.5 (4.0) 1.2 (8.9)
- ------------------------------------------------------------------------------------------------------------------------
PER COMMON SHARE
Sales................................................ $ 57.82 50.30 48.51 83.14 80.20
Income (loss) before discontinued operations,
extraordinary loss and cumulative effect of
changes in accounting principles................. $ 2.99 2.63 1.66 1.41 (3.85)
Net income (loss).................................... $ 3.00 3.24 (2.23) 0.32 (7.87)
New York Stock Exchange quotes:
High............................................. $ 50.75 50.13 47.88 30.25 28.75
Low.............................................. $ 32.75 33.00 25.75 12.13 10.50
- ------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS/EMPLOYEES (AT YEAR END)
Stockholders- Common................................. 18,050 19,538 21,544 33,054 34,237
- Preferred.............................. 4 4 8 573 419
Employees............................................ 9,755 10,511 13,110 14,026 17,523
Common stock outstanding (thousands)................. 39,478 41,661 43,957 30,999 24,988
Preferred stock outstanding (thousands).............. 2,001 2,001 2,001 13,807 13,807
===============================================================================================================
</TABLE>
(1) As a result of the fiscal 1995 sale of the Company's Pacoma operations, as
described in Note 2 to the Consolidated Financial Statements, prior years'
financial data has been restated to conform to the current year
presentation of Pacoma 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.
52
<PAGE>
SALES STATISTICS (1)
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in millions)
- ---------------------------------------------------------------------------------------------------------------------------
Fiscal years 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------------
% of Total Amount $ $ $ $ $
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SALES BY MARKETS
North America
United States................ 46.9 1,113.3 1,183.3 997.4 1,111.6 1,006.5
Canada....................... 11.2 267.4 229.6 174.3 189.0 141.5
- ---------------------------------------------------------------------------------------------------------------------------
Total.......................... 58.1 1,380.7 1,412.9 1,171.7 1,300.6 1,148.0
- ---------------------------------------------------------------------------------------------------------------------------
Europe
United Kingdom............... 18.7 444.3 380.8 303.8 321.3 322.3
France....................... 3.8 90.6 63.7 33.2 56.6 50.4
Italy........................ 3.4 80.5 59.1 44.8 132.4 136.8
Germany...................... 3.4 79.1 40.6 25.8 119.9 102.4
Scandinavia.................. 1.6 38.6 31.5 14.4 10.7 10.6
Other........................ 1.4 33.4 29.1 51.1 46.5 51.6
- ---------------------------------------------------------------------------------------------------------------------------
Total.......................... 32.3 766.5 604.8 473.1 687.4 674.1
- ---------------------------------------------------------------------------------------------------------------------------
East Asia...................... 3.1 73.3 52.7 37.3 47.5 42.5
Near East...................... 2.4 58.1 30.0 18.2 37.9 31.2
Latin America.................. 2.1 48.9 72.2 54.8 68.4 56.9
West Asia...................... 0.8 18.0 7.7 4.8 19.7 32.2
Australasia.................... 0.6 15.2 18.0 12.2 11.8 7.3
Africa......................... 0.6 14.3 14.8 8.3 10.3 9.3
- ---------------------------------------------------------------------------------------------------------------------------
Total.......................... 100.0 2,375.0 2,213.1 1,780.4 2,183.6 2,001.5
===========================================================================================================================
SALES BY PRODUCTS
Automotive products............ 57.5 1,365.6 1,372.7 1,149.0 1,516.0 1,354.4
- ---------------------------------------------------------------------------------------------------------------------------
Engines
Engines ..................... 36.1 858.0 727.4 585.4 616.2 572.9
Parts and other.............. 6.4 151.4 134.0 117.0 127.7 144.1
Intersegment sales to
discontinued operations..... - - (21.0) (71.0) (76.3) (69.9)
- ---------------------------------------------------------------------------------------------------------------------------
Total.......................... 42.5 1,009.4 840.4 631.4 667.6 647.1
- ---------------------------------------------------------------------------------------------------------------------------
Total.......................... 100.0 2,375.0 2,213.1 1,780.4 2,183.6 2,001.5
===========================================================================================================================
</TABLE>
(1) As a result of the fiscal 1995 sale of the Company's Pacoma operations, as
described in Note 2 to the Consolidated Financial Statements, prior years'
financial data has been restated to conform to the current year
presentation of Pacoma as a discontinued operation. Sales related to the
Pacoma operations have been reclassified into earnings from discontinued
operations on the consolidated statements of operations.
53
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
For the fiscal year ended January 31, 1996, 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>
<S> <C>
Caption or
Location
in Proxy
Statement
----------------
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, retired during 1995 from the law firm of
Fraser & Beatty (Barristers & Solicitors), who have provided and continue to
provide legal advice to the Company.
54
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Included in Part II, Item 8. of this report. Page
----
Consolidated Statements of Operations for the
years ended January 31, 1996, 1995 and 1994............. 22
Consolidated Balance Sheets as at January 31, 1996
and 1995................................................ 23
Consolidated Statements of Changes in Stockholders'
Equity for the years ended January 31, 1996, 1995
and 1994................................................ 24
Consolidated Statements of Cash Flows for the years
ended January 31, 1996, 1995 and 1994................... 26
Notes to Consolidated Financial Statements.............. 27
Independent Auditors' Report............................ 49
Management's Report of Financial Statements............. 50
Supplementary Information (Unaudited)
Quarterly Condensed Unaudited Statements of Operations
for the years ended January 31, 1996 and 1995........ 51
Financial Statistics for the years ended January 31,
1996, 1995, 1994, 1993 and 1992...................... 52
Sales Statistics for the years ended January 31, 1996,
1995, 1994, 1993 and 1992............................ 53
2. Financial Statement Schedules for the years ended January 31, 1996,
1995 and 1994
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, 1996, 1995 and 1994....... I 58
Condensed Balance Sheets (Unconsolidated)
as at January 31, 1996 and 1995................... I 59
Condensed Statements of Cash Flows (Unconsolidated)
for the years ended January 31, 1996, 1995
and 1994.......................................... I 60
Notes to Condensed Financial Statements
(Unconsolidated)................................... I 61
Valuation and Qualifying Accounts ................... II 62
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).
55
<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, 1995, filed on December 13, 1995.
(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
(P) (a) -- Amended and restated Credit Agreement dated as of July 14,
1995 between Dayton Walther Corporation, The Bank of Nova
Scotia and NBD Bank, N.A.
(i) Varity Corporation Guarantee dated July 14, 1995 to The
Bank of Nova Scotia and NBD Bank, N.A.
(P) (b) -- Amended and restated Credit Agreement dated as of May 1, 1995
between Kelsey-Hayes Company, The Chase Manhattan Bank N.A.,
as agent, and The Bank of Nova Scotia, as co-agent.
(O) (c) -- Facility Agreement dated as of April 13, 1995 among Perkins
Limited and others, various banks and Lloyds Bank Plc, as
agent.
(i) Guarantee Agreement dated April 13, 1995.
(O) (d) -- Facility Agreement dated as of April 13, 1995 among Perkins
Group Limited and others, and Lloyds Bank Plc.
(i) Guarantee dated April 13, 1995.
(N) (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.
(N) (f) -- Overdraft Facility Agreement dated as of January 21, 1994
between Heerlen ABS Manufacturing C.V. and Cooperatieve
Centrale Raiffeisen -Boerenleenbank B.A .
(N) (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).
(N) (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).
(N) (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.
56
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(B) * (f)-- Canadian Retirement Income Plan for Designated Employees.
(B) * (g)-- United Kingdom Executive Pension Scheme.
(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.
(L) * (j)-- Shareholder Value Incentive Plan.
(M) (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.
</TABLE>
- -----------------
LEGEND FOR EXHIBITS (PAGES 56 THROUGH 57)
(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 Annual Report on Form 10-K,
for the year ended January 31, 1994 filed with the SEC on April 18, 1994.
(M) 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.
(N) 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.
(O) Incorporated by reference from the Registrant's Quarterly Report on Form 10-
Q, for the quarter ended April 30, 1995 filed with the SEC on June 8, 1995.
(P) Incorporated by reference from the Registrant's Quarterly Report on Form 10-
Q, for the quarter ended July 31, 1995 filed with the SEC on September 8,
1995.
* 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, 1996.
57
<PAGE>
SCHEDULE I
VARITY CORPORATION
CONDENSED STATEMENTS OF OPERATIONS AND DEFICIT
(Unconsolidated)
(Dollars in millions)
<TABLE>
<CAPTION>
Years ended January 31,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Income:
Interest income:
Subsidiary companies.............................................. $ 3.9 $ 5.9 $ 6.7
Other............................................................. .7 .8 .6
Other income, net................................................... - 3.8 -
Equity in earnings of subsidiaries.................................. 150.4 135.3 82.1
------- ------- -------
155.0 145.8 89.4
------- ------- -------
Expenses:
Interest expense:
Subsidiary companies............................................... 5.2 .6 .1
Other.............................................................. 21.0 20.5 18.4
Marketing, general and administration............................... 3.4 8.1 3.0
Exchange (gains) losses............................................. .4 (1.6) (1.8)
------- ------- -------
30.0 27.6 19.7
------- ------- -------
Income before discontinued operations
and cumulative effect of changes in
accounting principles............................................... 125.0 118.2 69.7
------- ------- -------
Discontinued operations:
Equity in earnings from discontinued operations..................... .5 3.3 4.9
Gain on sale of discontinued operations............................. - 23.2 -
------- ------- -------
.5 26.5 4.9
------- ------- -------
Income before cumulative effect of changes in accounting principles.. 125.5 144.7 74.6
Cumulative effect of changes in accounting principles................ - - (146.1)
------- ------- -------
Net income (loss).................................................... 125.5 144.7 (71.5)
Dividends on preferred stock......................................... (2.4) (2.4) (10.4)
Deficit at beginning of year......................................... (419.0) (561.3) (479.4)
------- ------- -------
Deficit at end of year............................................... $(295.9) $(419.0) $(561.3)
======= ======= =======
</TABLE>
See accompanying Notes to Condensed Financial Statements.
58
<PAGE>
SCHEDULE I
VARITY CORPORATION
CONDENSED BALANCE SHEETS
(Unconsolidated)
(Dollars in millions)
<TABLE>
<CAPTION>
At January 31,
1996 1995
--------- --------
<S> <C> <C>
ASSETS
Cash......................................................................... $ 35.4 $ 29.4
Receivables from subsidiaries................................................ 37.5 59.8
Other current assets......................................................... .3 .1
Net assets of discontinued operation......................................... - 11.2
Fixed assets, net............................................................ 11.9 11.0
Investments:
Subsidiary companies:
Shares, at equity in net assets........................................... 1,009.6 938.0
Long-term advances........................................................ 30.0 33.2
Other assets................................................................. 8.7 9.1
-------- -------
$1,133.4 $1,091.8
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued charges......................................... $ 30.0 $ 36.0
Due to subsidiaries.......................................................... 90.2 72.2
Long-term debt............................................................... 148.7 148.4
Other long-term liabilities.................................................. 50.0 51.5
Contingent liabilities and commitments (Notes 6 and 7)
Stockholders' equity:
Preferred stock - at stated value (Liquidation value: 1996 - $36.4;
1995 - $35.6)............................................................. 6.8 6.8
Common stock - at stated value (Shares issued: 1996 - 44,236,296;
1995 - 43,990,153)........................................................ 643.3 638.4
Contributed surplus......................................................... 656.3 656.3
Deficit..................................................................... (295.9) (419.0)
Foreign currency translation adjustment..................................... (20.6) (10.7)
Pension liability adjustment................................................ (4.1) (1.6)
Unrealized gains (losses) on marketable securities.......................... .7 (1.8)
Treasury stock - at cost (Shares held: 1996 - 4,758,000; 1995 - 2,329,600).. (172.0) (84.7)
-------- -------
814.5 783.7
-------- -------
$1,133.4 $1,091.8
======== ========
</TABLE>
See accompanying Notes to Condensed Financial Statements.
59
<PAGE>
SCHEDULE I
VARITY CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(Unconsolidated)
(Dollars in millions)
<TABLE>
<CAPTION>
Years ended January 31,
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................................ $125.5 $144.7 $(71.5)
Adjustments to reconcile net income (loss) to cash provided
(used) by operating activities:
Depreciation and amortization............................... 1.4 3.9 4.9
Gain on sale of assets...................................... - (3.8) -
Equity in earnings of subsidiaries in excess
of dividends received...................................... (61.9) (67.4) (61.3)
Equity in earnings of discontinued operations
in excess of dividends received............................ (.5) (3.3) (4.9)
Gain on sale of discontinued operations..................... - (23.2) -
Cumulative effect of changes in accounting principles....... - - 146.1
Changes in:
Receivables.............................................. 25.5 (58.3) 15.0
Other current assets..................................... (.2) .6 .1
Accounts payable and accrued charges..................... (6.0) .1 (28.3)
Payables to subsidiary companies......................... 18.0 57.4 (44.8)
Other long-term liabilities.............................. (1.5) (29.1) 13.1
Net assets of discontinued operation..................... .5 29.8 (5.5)
------ ------ -------
Cash provided (used) by operating activities................. 100.8 51.4 (37.1)
------ ------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of marketable securities.................. - 22.4 -
Additions to fixed assets..................................... (1.4) - -
Proceeds from sales of fixed assets........................... - 4.2 -
(Additions) reductions to investments......................... (8.4) 15.5 (106.4)
Additions in other assets..................................... (.5) (4.7) (4.4)
------ ------ -------
Cash provided (used) by investing activities.................. (10.3) 37.4 (110.8)
------ ------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchases of common stock................................... (87.3) (84.7) -
Dividends paid on preferred shares............................ (2.4) (2.4) (10.4)
Proceeds from sale of stock................................... - - 143.7
Exercise of stock options..................................... 4.9 1.0 4.5
Other......................................................... .3 .3 (2.9)
------ ------ -------
Cash provided (used) by financing activities.................. (84.5) (85.8) 134.9
------ ------ -------
INCREASE (DECREASE) IN CASH DURING THE YEAR.................... 6.0 3.0 (13.0)
CASH AT BEGINNING OF YEAR...................................... 29.4 26.4 39.4
------ ------ -------
CASH AT END OF YEAR............................................ $ 35.4 $ 29.4 $ 26.4
====== ====== =======
</TABLE>
See accompanying Notes to Condensed Financial Statements.
60
<PAGE>
SCHEDULE I
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. 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.
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 the aforementioned divestitures, the farm equipment segment
and the Pacoma operations have been presented as discontinued operations in
the accompanying condensed financial statements. See Note 2 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 18 to the Consolidated Financial Statements (see Part II).
4. In fiscal 1994 and 1993, Varity increased its investment in subsidiaries
through non-cash transactions by approximately $44 million and $60 million,
respectively, by capitalizing intercompany loans and receivables.
5. Varity received cash dividends from its consolidated subsidiaries amounting
to $88.5 million, $72.1 million and $20.8 million for the years ended January
31, 1996, 1995 and 1994, 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, 1996, 1995 and
1994, were $23.2 million, $16.1 million and $18.9 million, respectively.
6. Varity has guaranteed approximately $5 million of its subsidiaries'
indebtedness outstanding at January 31, 1996.
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).
61
<PAGE>
SCHEDULE II
VARITY CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
Years ended January 31, 1996, 1995 and 1994
(Dollars in millions)
<TABLE>
<CAPTION>
Additions
--------------------------
Balance at Charged Deductions Balance at
January 31, Charged to to other from January 31,
Description 1995 income accounts/(1)/ reserves 1996
- ----------- ------------- ---------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Deducted from receivables:
Allowance for doubtful notes and accounts..... $ 5.1 $ 2.4 $ (.1) $ (2.2) $ 5.2
Discounts, volume and performance bonuses,
returns and other allowances................. - - - - -
------- ------- -------- --------- -----
$ 5.1 $ 2.4 $ (.1) $ (2.2) $ 5.2
======= ======= ======== ========= ======
</TABLE>
<TABLE>
<CAPTION>
Additions
--------------------------
Balance at Charged Deductions Balance at
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
======= ======= ======== ========= ======
</TABLE>
<TABLE>
<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
======= ======= ======== ========= ======
</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.
62
<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 12, 1996
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.
Chairman of the Board,
/s/ Victor Rice Chief Executive Officer and Director April 12, 1996
- -------------------------- (Principal Executive Officer)
Victor Rice
/s/ J.A. Gilroy Chief Operating Officer April 12, 1996
- --------------------------
J.A. Gilroy
Senior Vice President
/s/ N. D. Arnold and Chief Financial Officer April 12, 1996
- --------------------------
N. D. Arnold (Principal Financial Officer)
/s/ Mark J. MacGuidwin Vice President, Controller April 12, 1996
- --------------------------
Mark J. MacGuidwin (Principal Accounting Officer)
/s/ Vince D. Laurenzo Vice Chairman of the Board April 12, 1996
- --------------------------
Vince D. Laurenzo and Director
/s/ Paul M.F. Cheng Director April 12, 1996
- --------------------------
Paul M.F. Cheng
/s/ W. A. Corbett Director April 12, 1996
- --------------------------
W. A. Corbett
/s/ T. N. Davidson Director April 12, 1996
- --------------------------
T. N. Davidson
/s/ Robert M. Gates Director April 12, 1996
- --------------------------
Robert M. Gates
/s/ L. F. Kahl Director April 12, 1996
- --------------------------
L. F. Kahl
/s/ W. Darcy McKeough Director April 12, 1996
- --------------------------
W. Darcy McKeough
/s/ Sir Bryan Nicholson Director April 12, 1996
- --------------------------
Sir Bryan Nicholson
/s/ Warren S. Rustand Director April 12, 1996
- --------------------------
Warren S. Rustand
/s/ W. R. Teschke Director April 12, 1996
- --------------------------
W. R. Teschke
/s/ Robin Warrender Director April 12, 1996
- --------------------------
The Hon. Robin Warrender
63
<PAGE>
VARITY CORPORATION
INDEX TO EXHIBITS
FILED HEREWITH (1)
Exhibit
Number
- --------
11.1 Primary Earnings Per Share Computations for the years ended January
31, 1996, 1995 and 1994
11.2 Fully Diluted Earnings Per Share Computations for the years ended
January 31, 1996, 1995 and 1994
21 Subsidiaries of the Registrant
23 Consent of KPMG Peat Marwick LLP, Independent Auditors
27.1 Financial Data Schedule - Year Ended January 31, 1996
27.2 Financial Data Schedule - Year Ended January 31, 1995 (Restated)
- ------
(1) Complete listing of all exhibits can be found on pages 56-57.
64
<PAGE>
EXHIBIT 11.1
VARITY CORPORATION
PRIMARY EARNINGS PER SHARE COMPUTATIONS
(Dollars in millions except per share amounts)
<TABLE>
<CAPTION>
Years ended January 31,
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Income before discontinued operation, extraordinary
loss and cumulative effect of changes in accounting principles.. $ 125.0 $ 118.2 $ 71.4
Preferred stock dividend entitlements............................. (2.4) (2.4) (10.4)
------- ------- -------
Income attributable to common stockholders before
discontinued operation, extraordinary loss and
cumulative effect of changes in accounting principles (A)....... 122.6 115.8 61.0
Earnings (loss) from discontinued operation (B)................... .5 26.5 4.9
Extraordinary loss (C)............................................ - - (1.7)
Cumulative effect of changes in accounting principles (D)......... - - (146.1)
------- ------- -------
Net income (loss) attributable to common stockholders (E)......... $ 123.1 $ 142.3 $ (81.9)
======= ======= =======
Weighted average shares of common stock outstanding
during the period (in thousands)................................ 40,685 43,555 36,311
Common stock equivalents:
Common stock options............................................ 394 437 369
Long-term incentive plans....................................... - 5 20
------- ------- -------
Primary weighted average shares of common stock
outstanding during the period (F)............................... 41,079 43,997 36,700
======= ======= =======
Primary income (loss) per share of common stock:
Before discontinued operation, extraordinary loss and
cumulative effect of changes in accounting principles (A/F)... $ 2.99 $ 2.63 $ 1.66
Discontinued operation (B/F).................................... $ .01 $ .61 $ .14
Extraordinary loss (C/F)........................................ $ - $ - $ (.05)
Cumulative effect of changes in accounting principles (D/F)..... $ - $ - $ (3.98)
Net income (loss) (E/F)......................................... $ 3.00 $ 3.24 $ (2.23)
</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,
-----------------------------
1996 1995 1994
-------- -------- ---------
<S> <C> <C> <C>
Income before discontinued operation, extraordinary
loss and cumulative effect of changes in accounting principles.. $ 125.0 $ 118.2 $ 71.4
Preferred stock dividend entitlements............................. (2.4) (2.4) (2.5)
------- ------- -------
Income attributable to common stockholders before
discontinued operation, extraordinary loss and
cumulative effect of changes in accounting principles (A)....... 122.6 115.8 68.9
Earnings (loss) from discontinued operation (B)................... .5 26.5 4.9
Extraordinary loss (C)............................................ - - (1.7)
Cumulative effect of changes in accounting principles (D)......... - - (146.1)
------- ------- -------
Net income (loss) attributable to common stockholders (E)......... $ 123.1 $ 142.3 $ (74.0)
======= ======= =======
Weighted average shares of common stock outstanding
during the period (in thousands) (1)............................ 40,685 43,555 42,107
Common stock equivalents:
Common stock options............................................ 416 440 625
Long-term incentive plans....................................... - 5 21
------- ------- -------
Fully diluted weighted average shares of common stock
outstanding during the period (F)............................... 41,101 44,000 42,753
======= ======= =======
Fully diluted income (loss) per share of common stock:
Before discontinued operation, extraordinary loss and
cumulative effect of changes in accounting principles (A/F).. $ 2.99 $ 2.63 $ 1.61
Discontinued operation (B/F).................................... $ .01 $ .61 $ .12
Extraordinary loss (C/F)........................................ $ - $ - $ (.05)*
Cumulative effect of changes in accounting principles (D/F)..... $ - $ - $ (3.98)*
Net income (loss) (E/F)......................................... $ 3.00 $ 3.24 $ (2.23)*
</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, 1996 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 100.00
Zecal Incorporated New York (U.S.A.) Registrant 82.1
Dayton Walther Corporation Ohio (U.S.A.) Varity Automotive Inc. 100.00
K-H Corporation Delaware (U.S.A.) Varity Automotive Inc. 100.00
Kelsey-Hayes Company Delaware (U.S.A.) K-H Corporation 100.00
Hayes Wheels International, Inc. Delaware (U.S.A.) K-H Corporation 46.3
Varity International Inc. Delaware (U.S.A.) Registrant 100.00
Varity Assets Corporation Delaware (U.S.A.) Varity International Inc. 100.00
Polygon Reinsurance Company Limited Bermuda Varity Assets Corporation 100.00
Varity Nederland NV The Netherlands Varity Assets Corporation 100.00
Varity Europe Limited Delaware (U.S.A.) Varity Assets Corporation 100.00
Perkins Group Limited U.K. Varity Europe Limited 100.00
Perkins Engines Group Limited U.K. Perkins Group Limited 100.00
Perkins Engines Limited U.K. Perkins Group Limited 100.00
Perkins Limited U.K. Perkins Group Limited 100.00
Dorman Diesels Limited U.K. Perkins Group Limited 100.00
Varity GmbH Germany Perkins Group Limited 100.00
Pacoma Hydraulik GmbH Germany Varity GmbH 100.00
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS'
The Board of Directors and Stockholders
VARITY CORPORATION:
We consent to incorporation by reference in the registration statements (No. 33-
48135, No. 33-50811 and No. 33-59481) on Form S-8 and (No. 33-57397) on Form S-3
of Varity Corporation of our report dated February 27, 1996, relating to the
consolidated balance sheets of Varity Corporation and subsidiaries as of January
31, 1996 and 1995, 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, 1996, which report is
included in the January 31, 1996 annual report on Form 10-K of Varity
Corporation.
/s/ KPMG Peat Marwick LLP
Buffalo, New York
April 12, 1996
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