1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended Commission file number December 31, 1996 0-325 THE DURIRON COMPANY, INC. (Exact name of registrant as specified in its charter) New York 31-0267900 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 3100 Research Boulevard 45420 Dayton, Ohio (Zip Code) (Address of Principal Executive Offices) Registrant's telephone number, including area code: (513) 476-6100 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered None None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $1.25 par value (Title of Class) 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 [ ] (Continued)
2 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 or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] <TABLE> <CAPTION> <S> <C> At close of business on February 15, 1997: Number of Shares of Common Stock, $1.25 par value, outstanding ................. 23,489,819 Aggregate market value of shares of Common Stock, $1.25 par value, held by nonaffiliates of the Company ................. $539,889,865 </TABLE> -------------------- DOCUMENTS INCORPORATED BY REFERENCE ----------------------------------- 1. The Duriron Company, Inc. Proxy Statement for its 1997 Annual Meeting of Shareholders to be held on April 24, 1997 (the "Proxy Statement"). Definitive copies of the Proxy Statement will be filed with the Commission within 120 days of the end of the Company's most recently completed fiscal year. Only such portions of the Proxy Statement as are specifically incorporated by reference under Part III of this Report shall be deemed filed as part of this Report. -------------------- 2
3 PART I ------ ITEM 1. BUSINESS - ------- -------- The Duriron Company, Inc. was incorporated under the laws of the State of New York on May 1, 1912. All references herein to the "Company" or "Duriron" refer collectively to The Duriron Company, Inc. and its subsidiaries, unless otherwise indicated by the context. Duriron is principally engaged in the design, manufacture and marketing of fluid handling equipment, primarily pumps and valves and mechanical seals, for industries that utilize difficult to handle and often corrosive fluids in manufacturing processes. The Company specializes in the development of precision-engineered equipment that is capable of withstanding the severely deteriorating effects associated with the flow of acids, chemical solutions, slurries and gases. Based upon its analysis of trade association data and other market information, the Company considers itself a leading supplier of corrosion resistant fluid movement and control equipment to the basic chemical industry. The Company's materials expertise, design, engineering capabilities and applications know-how have enabled it to develop product lines that are responsive to the chemical process industries' desire to achieve manufacturing efficiencies, avoid premature equipment failure and reduce maintenance cost. The Company operates primarily in one business segment, fluid movement and control equipment (primarily pumps, valves, mechanical seals and related equipment). Included in Note 19 of the Financial Statements provided as part of Item 8 of this Report and incorporated herein by this reference, is information concerning the Company's revenues, operating profit and identifiable assets by geographic area for each year in the three-year period ended December 31, 1996. With respect to a majority of its products, the Company's domestic operations supply each other and the Company's foreign manufacturing subsidiaries with components and subassemblies. PRODUCTS -------- The Company's principal fluid movement and control equipment products are pumps, valves, mechanical seals and related equipment, marketed primarily under the trademarks "Durco," "Atomac," "Valtek," "Automax," "Accord," "Kammer," "Sereg," "Durametallic," "Dura Seal," "Pac-Seal" and "Metal Fab." In many manufacturing processes, fluids must be moved by pumps, and flow must be controlled by valves. The Company's pumps, valves and mechanical seals are designed to withstand the corrosive nature of the fluids and the varying temperatures and pressures under which manufacturing processes occur. The Company manufactures, under the Durco trade name, several lines of centrifugal pumps, including metallic and non-metallic pumps, varying in size, capacity, material components and sealant specifications. Durco pumps are used primarily to move liquids during processing activities as well as in auxiliary services such as waste removal, water treatment and pollution control. Critical elements in pump selection include the nature and volume of the fluids to be handled, the height and distance the fluids are to be moved, the temperature and pressure at which they are to flow, the presence of stray elements or particles, and the toxicity of the fluids. 3
4 The Company also manufactures several lines of metering pumps under the Durco trade name which are generally used to inject measured quantities of additives or catalysts into a process stream. The Company's valves are used to control the flow of liquids and gases in industrial processing systems. The Company manufactures product lines of plug and butterfly valves under the Durco trademark which are made of various metals, alloys and plastics. The Company also produces a lined ball valve under the Atomac trade name. Actuators and other control accessories manufactured by the Company under the Automax and Accord trade names are either sold independently or mounted on these valves to move them from open to closed positions and to various specified positions in between. The Company manufactures, under the Valtek, Kammer and Sereg trade names, automatic control valves, valve actuators and related components. Automatic control valves are important components in the automation of manufacturing and processing systems since they are capable of modulating (that is, automatically adjusting) the rate and amount of fluids moving in a manufacturing production system. The Valtek product line includes high-pressure valves, rotary valves, and anti-noise and anti-cavitation valves. Substantially all of the Valtek valves are sold with an actuator. The Company also developed and manufactures a Valtek automatic control valve (under the "StarPac" trade name) with "on-board" sensor and microprocessor capabilities. The Kammer automated control valves are primarily sold with actuators to chemical process applications requiring alloy steel control valves of a smaller size than most of the Valtek products. The Company sells control valves under the Valtek Sereg trade name primarily in France and other European countries. The Company's mechanical seals and sealing systems are used to prevent the leakage of process fluids along the rotating shaft of industrial pumps, mixing equipment and miscellaneous other rotating equipment used in moving and otherwise handling process fluids during manufacturing operations. Certain types of these mechanical seals and sealing systems, which are marketed under the "Durametallic" and "Dura Seal" trade names, are used within the centrifugal pumps manufactured by the Company. Durametallic mechanical seals include a spring loaded design and a welded metal bellows design which both offer fluid sealing protection while rotating with the shaft of pumps, mixers and similar equipment in industrial operations. Mechanical seals sold under the "Pac-Seal" trademark are primarily used in water pumps and other non-corrosive applications. Finally, the Company also manufactures filtration products under the Durco trade name and specialty welded metal bellows products under the "Metal Fab" trade name. MARKETING AND DISTRIBUTION -------------------------- The Company's Durco pump and Durco quarter-turn valve products are primarily marketed to end-users and engineering contractors through the Company's own sales forces, regional service centers, a national parts distribution center and independent distributors and representatives. The Company sales personnel are divided, for the Durco pump and Durco valve products, into separate organizations which specialize in the respective product lines. The specialization of these two sales forces helps enable them to maintain a high level of technical 4
5 knowledge about their applicable products, customer applications, in-plant installation and maintenance services. Both the pump and quarter-turn valve sales organizations have field sales offices located in principal industrial markets and resident sales personnel at additional locations. The Company also maintains regional service centers in the greater Houston, Salt Lake City and metropolitan Philadelphia areas. These centers stock a full array of critical pump parts and have machining and product modification capabilities. A national pump parts distribution and service center, located in Birmingham, Alabama, provides 24-hour assistance to customers and ships critical replacement parts on an immediate need basis. The Company also has licensed certain independent valve distributors located throughout the United States to service and remanufacture its quarter-turn valve products. Automax and Atomac products are distributed with Durco manual valves by Company sales personnel and through a network of independent stocking distributors. The Company's valve sales force provides training and technical assistance to the Company's independent distributors, who also participate in periodic training programs relating to Company products and customer applications. Durametallic and Pac-Seal products are sold through a combination of direct sales personnel who specialize only in these products and by independent sales representatives or distributors. The Company maintains branch and service center facilities in the U.S. at the following locations which specialize in Durametallic and Pac-Seal products: Baton Rouge, Louisiana, Carson, California; Posen, Illinois; Bridgeport, New Jersey; Matthews, North Carolina; Cincinnati, Ohio; Houston, Texas; and Vancouver, Washington. Durametallic products are also marketed internationally through sales offices in almost sixty (60) countries. The Company also markets Durametallic products through foreign subsidiaries including operations established in Argentina, Canada, Belgium, Mexico, Brazil, Australia, New Zealand and Singapore. The Company maintains joint ventures in India, Korea, Saudi Arabia and Malaysia to manufacture and sell mechanical seals utilizing Durametallic product technology within those countries. Valtek products are marketed through specialized sales offices with sales engineers and service centers in Springville (Utah), Houston, Philadelphia, Beaumont (Texas), Corpus Christi and Baton Rouge. In other territories, Valtek products are sold on a commission basis through independent manufacturers' representatives located in principal marketing centers in the United States. The Company provides extensive training in the sophisticated Valtek products and customer applications for its sales representatives. Kammer products are primarily marketed through a direct sales force in Germany and through independent distribution in other countries. Kammer products are marketed with Valtek products in certain U.S. locations, with a Kammer product sales office located in Pittsburgh, Pennsylvania, supporting U.S. marketing. Valtek Sereg products are generally sold through employees in France and combined with other Valtek products for sale in the U.S. and elsewhere. The Company maintains a subsidiary, Davco Equipment Inc., to market its Durco pumps, Durco quarter-turn valves, Automax actuators and Valtek control valves directly and on a consolidated basis through employees of this subsidiary to customers in the Freeport, Texas, area. 5
6 Formerly, the Company had marketed these varying product lines through a variety of specialized independent distributors and employees. The Company's international sales include domestic export sales and sales by the Company's foreign subsidiaries. Duriron Canada Inc., headquartered in Woodbridge, Ontario, manufactures and sells Durco pumps and valves throughout eastern Canada. S.A. Durco Europe N.V. is headquartered in Brussels, Belgium. This subsidiary manufactures pumps, mechanical seals and valves in its Petit Rechain, Belgium, facility and maintains selling organizations in Europe and sales representatives in the Middle East. Atomac, of Ahaus, Germany, and a division of Durco GmbH, engages in the manufacture and sale of lined ball valves and associated equipment. The Company further maintains subsidiaries in the United Kingdom, Italy, Spain, The Netherlands and France to provide sales and service of Durco products in these countries. A Singapore subsidiary, Durco Valtek (Asia Pacific) Pte. Ltd., services and prepares pumps, quarter-turn valves and control valves for sale in the Asian market in a recently expanded facility. An Italian subsidiary of the Company manufactures actuators sold in the U.S. under the Automax trade name. The Company has manufacturing and marketing operations for Valtek products in Australia and Canada. Valtek products are also manufactured and marketed by licensees in the United Kingdom and Brazil under long-term license arrangements. The Company has additionally entered into a joint venture with Yokogawa Electric Corporation and Kitz Corporation, both of which are Japanese companies, to manufacture and sell certain Valtek products within Japan. The Company has entered into licenses with local manufacturers in Mexico, South Korea and India to permit them to manufacture and market pumps and valves under the Durco trade name and pursuant to Company specifications in those respective countries. Finally, the Company has formed majority owned joint ventures in India to manufacture Durco pumps, Durco valves and Valtek control valves for export to the American, Asian and European markets. BACKLOG ------- The Company's backlog of orders was approximately $111.9 million, $101.4 million and $78.2 million at December 31, 1996, 1995 and 1994, respectively. Nearly all current backlog is expected to be shipped within the next 12 months. Sales of the Company's products are not normally subject to material seasonal fluctuations. Almost all of the Company's customers are in the private sector, and the Company's backlog is thus not exposed to renegotiation in any significant way at the election of a government customer. COMPETITION AND CUSTOMERS ------------------------- Based upon its analysis of trade association data and other marketing data, the Company considers itself a leading supplier of corrosion-resistant pumps, mechanical seals, 6
7 valves, valve actuators and control valves to the basic U.S. chemical industry, with generally a lesser market share in other countries. No significant competitor of the Company manufactures pumps, valves and mechanical seals or has as its single primary market the basic chemical industry. However, the Company competes with companies which manufacture either pumps, valves or mechanical seals, portions of whose product lines are sold to the chemical process industries. The Company competes in general on the basis of product design and quality, materials expertise, delivery capability, price, application know-how, parts support and similar factors. The Company believes that it is, in the aggregate, strong in these areas. During 1996, no single customer or group of related customers accounted for more than 10% of sales. MANUFACTURING AND RAW MATERIALS ------------------------------- The Company is a vertically-integrated manufacturer of certain product lines. Certain of the corrosion-resistant castings for the Company's pumps and quarter turn valves are manufactured at its Dayton, Ohio, foundries, which include a highly automated precision foundry, plus resin shell, no bake and centrifugal foundries. Ductile iron, gray iron, steel and large alloy metal castings are purchased from outside sources. Other Company manufacturing locations machine castings to precise specifications and assemble Company products. The Company's commitment to Total Quality control procedures and cellular manufacturing technologies is key to the efficient and successful manufacture of its products. The Company also produces most of its highly engineered corrosion resistant plastic parts for its pump and valve product lines. This includes rotomolding as well as injection and compression molding of a variety of fluorocarbon and other plastic materials. Basic manufacturing raw materials are purchased from various foreign and domestic vendors. These materials include Teflon, nickel, chrome, molybdenum, high silicon pig iron, ferro silicon, fused silica, epoxy resins and fluorocarbon resins, tungsten carbide, silicon carbides and high grade tubing. In addition, bar stock, tubing, motors and other necessary equipment for inclusion in the Company's finished products are purchased from various suppliers. The supply of raw materials and components has been, in general, sufficient and available without significant delivery delays. RESEARCH AND DEVELOPMENT ------------------------ The Company's research and development laboratories in Dayton, Ohio, Cookeville, Tennessee, Ahaus, Germany, Springville, Utah, and Kalamazoo, Michigan support the Company's manufacturing efforts by providing hydraulic test facilities for the Company's fluid movement and control products as well as facilities for the development of corrosion-resistant alloys and plastics. The Company spent approximately $7.9 million, $7.0 million and $8.6 million on Company sponsored research and development activities in 1996, 1995 and 1994, respectively. The expenditures were primarily for new product development. 7
8 PATENTS, TRADEMARKS AND LICENSES -------------------------------- The Company owns a number of trademarks, patents and patent applications relating to the name and design of its products. While the Company considers that, in the aggregate, its trademarks and patents are useful to its operations, the Company believes that the successful manufacture and sale of its products generally depend more upon its specialized materials, designs and manufacturing methods developed over a period of time. The Company, in general, is the owner of the rights to the products which it manufactures and sells, and the Company is not dependent in any material way upon any licenses or franchises in order to so operate. PERSONNEL --------- At December 31, 1996, the Company employed approximately 3,900 persons, of whom about 2,680 were employed in the United States. Approximately 375 of the Company's employees, who are primarily located in the Company's pump, foundry and filtration operations, are represented by either the United Steel Workers of America or the International Union of Electronic, Electrical, Technical Salaried & Machine Workers. The Company believes, in general, that it has good relations with these unions and its nonunion employees. The Company entered into a new three year collective bargaining agreement with the United Steel Workers representing production workers at its pump and foundry operations in Dayton, Ohio in October, 1996. Information with regard to the directors and executive officers of the Company is incorporated herein by reference to Item 10 of this Report and the Proxy Statement. ENVIRONMENTAL MATTERS --------------------- The Company completed projects in prior years relating to compliance with federal, state and local environmental protection regulations. At present, the Company has no plans for material capital expenditures for environmental control facilities. However, the Company has experienced and continues to experience substantial operating costs relating to environmental matters, although certain costs have been offset in part by the Company's successful waste minimization programs. FOREIGN OPERATIONS ------------------ The Company's foreign operations are affected by various factors and subject to risks which may be different from or in addition to those present in domestic operations. These may include currency exchange rate fluctuations, restrictions on the Company's ability to repatriate funds to the United States, and potential political and economic instability. As the Company expands its international business, the factors and risks associated with international operations will likely have a more significant impact on the Company's results. However, the Company believes that, in general, the geographical diversification of its business operations is of benefit in expanding the size of its markets and in helping to partially offset the full impact of normal business cycles in the U.S. market. 8
9 ITEM 2. PROPERTIES - ------- ---------- The Company's headquarters and executive offices are located in Dayton, Ohio, at a leased site in the Miami Valley Research Park. This site encompasses approximately 40,000 square feet. The location, size and products manufactured of the Company's principal manufacturing facilities are as follows: <TABLE> <CAPTION> Square Products Location Footage Manufactured - -------- ------- ------------ Domestic: - --------- <S> <C> <C> Dayton, Ohio 600,000 Castings and Durco pumps Cookeville, Tennessee 190,000 Durco valves Springville, Utah 140,000 Valtek valves and actuators Angola, New York 96,000 Durco filters, filtration systems and metering pumps Springboro, Ohio 50,000 Plastic components for pumps and valves Cincinnati, Ohio 35,000 Automax actuators Provo, Utah 30,000 Valtek product components Kalamazoo, Michigan 137,000 Durametallic mechanical seals Burr Ridge, Illinois 25,000 Pac-Seal mechanical seals Ormond Beach, Florida 40,000 Metal Fab specialty welded metal bellows International: - ------------- Woodbridge, Ontario, Canada 32,000 Durco pumps and valves Petit Rechain, Belgium 65,000 Durco pumps and valves St. Thomas, Ontario, Canada 13,000 Durametallic mechanical seals Edmonton, Alberta, Canada 35,000 Valtek valves and actuators Melbourne, Australia 32,000 Valtek valves and actuators Ahaus, Germany 68,000 Atomac valves Essen, Germany 50,000 Kammer valves and actuators Cormano, Italy 35,000 Automax actuators Nova, Italy 44,000 Automax actuators Thiers, France 33,000 Valtek Sereg valves and actuators Tlaxcala, Mexico 18,000 Durametallic mechanical seals Sao Paulo, Brazil 12,000 Durametallic mechanical seals Auckland, New Zealand 19,000 Durametallic mechanical seals Singapore 12,000 Durametallic mechanical seals </TABLE> All manufacturing facilities are owned with the exception of the Cookeville, Tennessee, facility, the Cincinnati, Ohio, facility, the Springboro facility, the Burr Ridge, Illinois facility, the Melbourne, Australia, facility, the Italian facilities and portions of the Brazilian site 9
10 and the Angola, New York, facility. The Company also leases space for district sales offices and service centers throughout the United States, Canada, Europe, and Asia. On the average, the Company utilizes roughly 85% of its manufacturing capacity, although there is a variation in usage rate among the facilities. The Company could, in general, increase its capacity through the purchase of new or additional manufacturing equipment without obtaining additional facilities. ITEM 3. LEGAL PROCEEDINGS - ------- ----------------- Although the Company is involved in litigation arising from its business operations, there are no legal proceedings involving the Company which management believes are likely to have a material adverse impact on the Company. For further information about such litigation, please see Footnote #12, entitled "Contingencies," in the Company's "Financial Statements and Supplementary Data" set forth in Item 8. Such footnote is incorporated herein by reference. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------- --------------------------------------------------- None. PART II ------- ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND - ------- --------------------------------------------- RELATED STOCKHOLDER MATTERS --------------------------- MARKET INFORMATION The common stock of the Company (DURI) is traded in the Over-the-Counter market and quotations are supplied by the National Association of Securities Dealers through NASDAQ's National Market System. In January 1997, Transfer Agent records showed 2,259 shareholders of record. Based on these records plus requests from brokers and nominees listed as shareholders of record, the Company estimates there are approximately 7,200 beneficial owners of its common stock. During 1996, the Company paid a dividend of thirteen cents per share each calendar quarter, and in 1995, a dividend of eleven and one-half cents per share was paid each calendar quarter. On February 18, 1997, a 7.7% dividend increase was declared which raised the quarterly dividend to 14 cents per share. 10
11 PRICE RANGE OF DURIRON COMMON STOCK (HIGH/LOW CLOSING PRICES) 1996 1995 ---- ---- 1st Quarter $29.00/$20.75 $20.50/$17.25 2nd Quarter $29.00/$23.00 $23.50/$20.63 3rd Quarter $27.38/$19.25 $29.88/$22.38 4th Quarter $28.06/$25.88 $29.25/$22.88 11
12 <TABLE> <CAPTION> Item 6. FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA (DOLLARS IN THOUSANDS EXCEPT FOR PER SHARE DATA) RESULTS OF OPERATIONS 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Net sales $ 605,454 $ 532,726 $ 460,507 $ 421,838 $ 403,984 Cost of sales $ 361,354 $ 317,306 $ 275,077 $ 249,779 $ 240,414 Gross profit margin $ 244,100 $ 215,420 $ 185,430 $ 172,059 $ 163,570 Selling and administrative expense $ 147,223 $ 137,346 $ 125,081 $ 114,679 $ 107,611 Research, engineering and development expense $ 15,482 $ 14,972 $ 14,913 $ 13,872 $ 13,396 Interest expense $ 4,921 $ 5,179 $ 4,901 $ 4,552 $ 3,981 Other expense, net $ 6,545 $ 2,759 $ 1,964 $ 2,887 $ 623 Restructuring expense $ 5,778 -- -- -- $ 5,965 Merger transaction expenses -- $ 5,042 -- -- -- Earnings before income taxes $ 64,151 $ 50,122 $ 38,571 $ 36,069 $ 31,994 Provision for income taxes $ 20,900 $ 19,450 $ 14,175 $ 14,378 $ 12,201 Earnings from continuing operation $ 43,251 $ 30,672 $ 24,396 $ 21,691 $ 19,793 Loss on discontinued operation -- -- -- $ (2,938) $ (259) Cumulative effect of change in accounting principle -- -- -- $ (945) (26,899) Net earnings (loss) $ 43,251 $ 30,672 $ 24,396 $ 17,808 $ (7,365) Average shares outstanding 24,448 24,737 24,711 24,709 24,698 (thousands) Net earnings (loss) per share $ 1.77 $ 1.24 $ 0.99 $ 0.72 $ (0.30) Dividends paid $ 0.52 $ 0.44 $ 0.41 $ 0.38 $ 0.37 (on shares outstanding) Incoming business $ 616,599 $ 555,241 $ 466,398 $ 420,548 $ 415,164 Ending backlog $ 111,873 $ 101,407 $ 78,169 $ 69,723 $ 73,612 - ------------------------------------------------------------------------------------------------------- PERFORMANCE RATIOS (AS A PERCENT OF NET SALES) - ------------------------------------------------------------------------------------------------------- Cost of sales 59.7% 59.6% 59.7% 59.2% 59.5% Gross profit margin 40.3% 40.4% 40.3% 40.8% 40.5% Selling and administrative 24.3% 25.8% 27.2% 27.2% 26.6% Research, engineering and development 2.6% 2.8% 3.2% 3.3% 3.3% Earnings before income taxes 10.6% 9.4% 8.4% 8.6% 7.9% Net earnings (loss) 7.1% 5.8% 5.3% 4.2% -1.8% - ------------------------------------------------------------------------------------------------------- FINANCIAL CONDITION - ------------------------------------------------------------------------------------------------------- Cash and cash equivalents $ 29,474 $ 19,434 $ 19,625 $ 26,253 $ 20,521 Working capital $ 154,020 $ 135,000 $ 114,417 $ 108,801 $ 97,528 Net property, plant and equipment $ 99,912 $ 103,723 $ 102,935 $ 93,732 $ 97,667 Intangibles and other assets $ 73,160 $ 66,928 $ 54,382 $ 46,112 $ 50,877 Total assets $ 425,490 $ 395,373 $ 344,266 $ 314,508 $ 319,251 Capital expenditures $ 16,852 $ 13,317 $ 14,363 $ 12,096 $ 18,140 Depreciation and amortization $ 20,089 $ 19,093 $ 18,313 $ 16,926 $ 15,123 Long-term debt $ 63,239 $ 51,756 $ 42,998 $ 35,285 $ 42,482 Postretirement benefits and other deferred items $ 64,074 $ 58,123 $ 54,383 $ 51,508 $ 50,183 Shareholders' equity $ 199,779 $ 195,772 $ 174,353 $ 161,852 $ 153,407 - ------------------------------------------------------------------------------------------------------- FINANCIAL RATIOS - ------------------------------------------------------------------------------------------------------- Return on average shareholders' equity 21.7% 16.6% 14.5% 11.3% -4.5% Return on average net assets 14.3% 11.5% 10.4% 8.1% -2.1% Debt ratio 19.3% 16.9% 15.8% 14.2% 17.3% Current ratio 2.6 2.5 2.6 2.7 2.3 Interest coverage ratio 14.0 10.7 8.9 8.9 9.0 Cash dividends as a percent of beginning shareholders' equity 6.4% 6.2% 6.1% 6.1% 5.4% Book value (on shares outstanding) $ 8.51 $ 8.02 $ 7.16 $ 6.55 $ 6.26 </TABLE>
13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Net sales were at a record level for the tenth consecutive year. Net sales for 1996 of $605.5 million were up 13.7% over $532.7 million in 1995 and 31.5% over $460.5 million in 1994. The increase in net sales reflects strong global shipments from all business units and across all geographic regions as high levels of capital spending by the Company's major customers continued. In addition, moderate price increases and the acquisition of Pac-Seal in August of 1995 (through the Company's merger with Durametallic) favorably impacted reported sales growth in 1996. The sales growth in 1995 compared with 1994 reflected strong global capital spending, strengthening of the European currencies against the U.S. dollar, moderate price increases and the acquisitions of Pac-Seal and Sereg Vannes. Incoming business for 1996 of $616.6 million was at a record level, up 11.1% over the previous year's record of $555.2 million in 1995 and up 32.2% over $466.4 million in 1994. The increase in incoming business over the past two years reflected aggressive capital spending by the worldwide process industries and moderate price increases. Incoming business in the international markets was particularly strong during 1996 and 1995. Strong incoming business in 1996 resulted in an ending backlog of $111.9 million at December 31, 1996, an increase of $10.5 million over the 1995 ending backlog of $101.4 million. The Company remains committed to its program of reducing throughput time and meeting customer request dates for deliveries. International subsidiary contributions to consolidated net sales were a record of 33.7% in 1996, compared to 33.4% and 30.5% in 1995 and 1994, respectively. The majority of international sales are distributed through the Company's international subsidiaries. Export sales from the United States increased significantly in 1996 to $49.8 million, compared with $27.1 million in both 1995 and 1994. Export sales to customers in the Asia-Pacific and Latin American regions were particularly high in 1996. Total net sales to international customers, as a percentage of net sales, were an historic high of 42.0% in 1996, compared to 38.5% in 1995 and 36.4% in 1994. The improvement in international sales over the three years reflects the increase in export sales, strength in the Asia-Pacific and European markets, and the acquisitions of Sereg Vannes and Mecair. The Company expects the percent of international sales contributions to consolidated net sales to increase in future years as management continues its strategic emphasis on international sales and market. Gross profit margins were 40.3% in 1996, compared with 40.4% and 40.3% in 1995 and 1994, respectively. The gross profit margin in 1996 was negatively impacted by a less favorable product mix in the fourth quarter of 1996. The gross profit margin was favorably impacted in 1996 by moderate price increases, improvements in burden absorption related to higher levels of plant utilization and the continuing positive effects of cost reduction and productivity improvement programs throughout the Company. Pricing throughout the three year periods has been competitive and is expected to remain competitive. The Company believes its emphasis on becoming the low total cost producer and continued emphasis on improving customer service will have a favorable impact on the gross profit margin in the future.
14 Selling and administrative expenses as a percent of net sales were 24.3% in 1996, compared to 25.8% and 27.2% in 1995 and 1994, respectively. As planned, the Company continues to leverage selling and administrative expense as a percent of net sales. Selling and administrative expense in dollars during the three year period increased due to continued development and growth of international markets, higher commission payments on large project shipments and general wage increases. The Company continues to invest resources in the development and growth of international operations. While this has increased selling and service costs at the expense of short-term profits, these programs are consistent with the Company's longer-range goals. The Company expects to further leverage selling and administrative expenses as a percent of net sales in 1997 through continued emphasis on cost containment. Research, engineering and development expenses were $15.5 million in 1996, compared to $15.0 million and $14.9 million in 1995 and 1994, respectively. The spending level during 1996 reflects the Company's continued investment in new products and production processes. The Company believes that continued investment in research, engineering and development will provide important new products and processes that will benefit its customers and shareholders in future years. Other expense was $6.5 million in 1996 compared to $2.8 million and $2.0 million in 1995 and 1994, respectively. The increase in expense includes a lower level of royalty income in 1996 compared with an unusually high amount of income in 1995. In addition, expense in 1996 reflects higher levels of long and short term incentive compensation as the Company achieved record financial results and exceeded goals. The Company recognized a restructuring charge of $5.8 million before income taxes, or $.12 per share, during the second quarter of 1996 to restructure its recently acquired Durametallic operations in Europe and Australia. Durametallic operations in Belgium, Germany, Italy, France and Australia were combined with larger and more efficient Duriron facilities during the second half of 1996. The restructuring was a part of the plan to obtain positive synergies between the two companies. The savings associated with the plan will be immediate since the facilities had been unprofitable for many years and fixed operating costs will be permanently reduced. Annual savings associated with the restructuring should amount to approximately $1.5 million. The restructuring plan is expected to result in the termination of 55 employees at a cost of $3.2 million. In addition, exit costs associated with the plant closings are estimated at $2.6 million. The restructuring activities are expected to be funded with operating cash flows. Additional costs to fully implement the reorganization plan in continuing processes were recorded as period costs and categorized into cost of sales and administrative expense in the latter half of 1996. These additional costs related to moving equipment and cross-training employees to support ongoing operations at the Duriron facilities. Through December 31, 1996, termination fees for 42 employees of $2.1 million and exit costs of $1.7 million were paid. The remainder of the termination fees and exit costs accrued in 1996 are expected to be incurred during the first half of 1997 with minimal changes in estimate from the original accrual. Merger transaction expenses of $5.0 million pretax were recognized in 1995 as a result of the merger with Durametallic. Approximately $3.3 million of the expense was non-tax deductible and related to financial advisory, legal, accounting, printing and other related services associated with the merger. The remaining expense of $1.7 million was tax deductible and included severance fees for certain Durametallic management who elected to retire under Executive Severance Agreements assumed by the Company which became effective after the change in control.
15 The effective tax rate was 32.6% in 1996, compared to 38.8% and 36.8% in 1995 and 1994, respectively. The lower 1996 effective tax rate includes benefits associated with restructuring the Company's European entities and significantly higher utilization of tax loss carryforwards in the Company's Asia-Pacific and European operations than in the prior two years. The utilization rate was higher due to improved profitability throughout the year but particularly in the fourth quarter in international operations with tax loss carryforwards and the merger of fiscal entities. The effective tax rate in future years is not expected to include significant benefits associated with utilization of tax loss carryforwards. The 1995 tax rate reflected the unfavorable impact of the non-tax deductible merger transaction expenses which had the effect of increasing the tax rate by 2.3% points. The 1995 rate was favorably impacted by utilization of tax loss carryforwards generated within the certain of the Company's foreign operations. The 1994 rate included the favorable impacts of the fourth quarter liquidation of a wholly owned foreign entity, utilization of foreign tax loss carryforwards and resolution of a multi-year state tax issue. Record net earnings in 1996 reflect the fourth consecutive year of earnings improvement. Excluding restructuring fees of $3.0 million after tax, net earnings in 1996 improved 50.9% to $46.3 million, or $1.89 per share. This compares with $30.7 million, or $1.24 per share, and $24.4 million, or $.99 per share in 1995 and 1994, respectively. Including restructuring expenses, record net earnings improved 41.0% to $43.3 million, or $1.77 per share. The increase in earnings resulted from strong business conditions which led to improvements in global profits, leveraging of selling and administrative expenses and the lower effective tax rate. CAPITAL RESOURCES AND LIQUIDITY The Company's capital structure, consisting of long-term debt, deferred items and shareholders' equity, continues to enable the Company to finance short-and long-range business objectives. At December 31, 1996, long-term debt was 19.3% of the capital structure, compared to 16.9% and 15.8% at December 31, 1995 and 1994, respectively. The increase in long-term debt in 1996 reflected additional borrowings needed to fund the share repurchase program (see next paragraph for further information about the repurchase program). The borrowings were funded from a $100.0 million revolving credit agreement the Company entered into in 1996 to fund the share repurchase program, provide for future major capital needs and to allow for the consolidation of existing credit arrangements. Concurrent with signing the credit agreement, the Company entered into swap agreements to fix $50.0 million of this debt at an interest rate of 7.04% for a period of ten years. The increase in long-term debt in 1995 from 1994 resulted from the acquisition of Pac-Seal which was partially funded through external borrowings. In 1996 and 1995, increases in debt were partially offset by scheduled debt repayments. In July, 1996, the Company announced that its Board of Directors had authorized the purchase in the open market and through negotiated transactions of up to 2.4 million of its shares of Common Stock at an aggregate purchase price not to exceed $50 million. It is the Company's intent to repurchase shares up to the maximum number of shares covered by the authorization which represents almost 10% of the number of outstanding shares. Under the share repurchase program, the Company repurchased 1.1 million shares at a price of $27.8 million during 1996. The share repurchase program was funded with the aforementioned new long-term debt.
16 The return on average net assets was 14.3% including restructuring expenses, (or a record 15.2% excluding restructuring expenses). This compares to 11.5% in 1995 and 10.4% in 1994. In 1996, return on average shareholders' equity was a record 21.7% (or 23.0% excluding restructuring expenses), compared to 16.6% in 1995 and 14.5% in 1994. The change in the returns resulted from the improvements in profitability over the three year period resulting from strong business conditions and focus on asset management. Management continues to focus on improving its performance in these areas as many of the Company's incentive compensation plans are linked to return on net assets and economic value added measurements. Capital expenditures in 1996 were $16.9 million, compared to $13.3 million and $14.4 million in 1995 and 1994, respectively. The 1996 expenditures were invested in new and replacement products, international market development and general manufacturing equipment upgrades. Capital spending in 1997 is expected to be over $20.0 million, largely for low cost manufacturing facilities in India, new product development and machine replacement and upgrades. Cash and cash equivalents for 1996 were $29.5 million, compared to $19.4 million and $19.6 million at December 31, 1995 and 1994, respectively. Cash flow from operations increased 51.6% in 1996 over 1995 as a result of continued improvement in profitability and emphasis on asset management. Over the past three years, cash flow from operations enabled the Company to fully fund all capital expenditures, debt repayments and dividend payments and to partially fund acquisitions in 1995 and 1994. Cash in excess of current requirements was invested in high-grade, short-term securities. Cash and amounts available under borrowing arrangements will be adequate to fund operating needs and capital expenditures through the coming year. The Company's liquidity position is reflected in a current ratio of 2.6 to 1 at December 31, 1996. This compares to 2.5 to 1 and 2.6 to 1 at December 31, 1995 and 1994, respectively. Working capital increased to $154.0 million in 1996, compared to $135.0 million and $114.4 million in 1995 and 1994, respectively. <TABLE> <CAPTION> Graph 1 Net Sales $ Millions 1992 1993 1994 1995 1996 <S> <C> <C> <C> <C> $404.0 $421.8 $460.5 $532.7 $605.5 1996 reflects the tenth consecutive year of record sales. </TABLE> <TABLE> <CAPTION> Graph 2 Incoming Business $ Millions 1992 1993 1994 1995 1996 <S> <C> <C> <C> <C> $415.2 $420.5 $466.4 $555.2 $616.6 Record levels of incoming business continued in 1996. </TABLE> <TABLE> <CAPTION> Graph 3 Earnings Per Share from Continuing Operations 1992 1993 1994 1995 1996 <S> <C> <C> <C> <C> $0.80 $0.88 $0.99 $1.24 $1.77 Record 1996 earnings reflect the fourth consecutive year of improvements. </TABLE> <TABLE> <CAPTION> Graph 4 Capital Structure $ Millions 1992 1993 1994 1995 1996 <S> <C> <C> <C> <C> <C> Capital structure $246.1 $248.6 $271.7 $305.7 $327.1 Long-term debt 17.3% 14.2% 15.8% 16.9% 19.3% Shareholders' equity 62.3% 65.1% 64.2% 64.1% 61.1% Deferrals 20.4% 20.7% 20.0% 19.0% 19.6% <FN> Capital structure provides financial flexibility to finance short and long-range business objectives. </TABLE> <TABLE> <CAPTION> Graph 5 Return on Average Net Assets (based on earnings from continuing operations) 1992 1993 1994 1995 1996 <C> <C> <C> <C> <C> 9.4% 9.6% 10.4% 11.5% 14.3% Return on net assets reflects focus on asset management and a record level of profitability. </TABLE> <TABLE> <CAPTION> Graph 6 Working Capital/Current Ratio $ Millions 1992 1993 1994 1995 1996 <S> <C> <C> <C> <C> <C> Working capital $97.5 $108.8 $114.4 $135.0 $154.0 Current ratio 2.3 2.7 2.6 2.5 2.6 Current ratio remains strong as working capital increases. </TABLE> <TABLE> <CAPTION> Graph 7 Return on Average Shareholders' Equity (based on earnings from continuing opertions) <S> <C> <C> <C> <C> <C> 1992 1993 1994 1995 1996 12.2% 13.8% 14.5% 16.6% 21.7% 1996 return on average shareholders' equity reflects record earnings. </TABLE>
17 <TABLE> <CAPTION> ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED STATEMENT OF INCOME (dollars in thousands except per share data) Years ended December 31, 1996 1995 1994 - -------------------------------------------------------------------------------------- Net sales $ 605,454 $ 532,726 $ 460,507 - -------------------------------------------------------------------------------------- Costs and expenses: <S> <C> <C> <C> Cost of sales 361,354 317,306 275,077 Selling and administrative 147,223 137,346 125,081 Research, engineering and development 15,482 14,972 14,913 Interest 4,921 5,179 4,901 Other, net 6,545 2,759 1,964 Restructuring 5,778 -- -- Merger transaction expenses -- 5,042 -- - -------------------------------------------------------------------------------------- 541,303 482,604 421,936 - -------------------------------------------------------------------------------------- Earnings before income taxes 64,151 50,122 38,571 Provision for income taxes 20,900 19,450 14,175 - -------------------------------------------------------------------------------------- Net earnings $ 43,251 $ 30,672 $ 24,396 ====================================================================================== Earnings per share $ 1.77 $ 1.24 $ 0.99 ====================================================================================== Average common and common equivalent shares outstanding (in thousands of shares) 24,448 24,737 24,711 ====================================================================================== (See accompanying notes.) </TABLE>
18 <TABLE> <CAPTION> CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (dollars in thousands except share data) Foreign currency Total Capital in and other share- Common excess of Retained Treasury equity holders' stock par value earnings stock adjustments equity - --------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Balance at December 31, 1993 $23,146 $14,253 $127,481 ($161) ($2,867) $161,852 Net earnings -- -- 24,396 -- -- 24,396 Cash dividends ($.41 per share) -- -- (9,895) -- -- (9,895) Stock retired (441,000) (708) (1,066) (3,145) -- -- (4,919) Shares issued for three-for-two stock split 7,897 (7,897) -- -- -- -- Stock issued (67,000) under stock plans 92 287 -- -- 149 528 Foreign currency translation adjustment -- -- -- -- 2,026 2,026 Nonqualified pension plan adjustment -- -- -- -- 263 263 Net treasury stock activity (3,600) -- -- -- 102 -- 102 - --------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1994 30,427 5,577 138,837 (59) (429) 174,353 Net earnings -- -- 30,672 -- -- 30,672 Cash dividends ($.44 per share) -- -- (10,730) -- -- (10,730) Retirement of common stock (6) (14) (21) -- -- (41) Stock issued (62,000) under stock plans 85 459 (4) -- 117 657 Foreign currency translation adjustment -- -- -- -- 951 951 Nonqualified pension plan adjustment -- -- -- -- 61 61 Net treasury stock activity (4,700) -- -- -- (151) -- (151) - --------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1995 30,506 6,022 158,754 (210) 700 195,772 Net earnings -- -- 43,251 -- -- 43,251 Cash dividends ($.52 per share) -- -- (12,615) -- -- (12,615) Stock issued (163,000) under stock plans 204 2,355 -- -- (590) 1,969 Foreign currency translation adjustment -- -- -- -- (1,124) (1,124) Nonqualified pension plan adjustment -- -- -- -- (229) (229) Net treasury stock activity (1,073,000) -- -- -- (27,245) -- (27,245) - --------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1996 $30,710 $8,377 $189,390 ($27,455) ($1,243) $199,779 - --------------------------------------------------------------------------------------------------------------------------- (See accompanying notes.) </TABLE>
19 <TABLE> <CAPTION> CONSOLIDATED BALANCE SHEET (dollars in thousands) <S> <C> <C> December 31, 1996 1995 - ------------------------------------------------------------------------------------------------ ASSETS - ------------------------------------------------------------------------------------------------ Current assets: Cash and cash equivalents $ 29,474 $ 19,434 Accounts receivable 112,710 103,963 Inventories 101,070 93,155 Prepaid expenses 9,164 8,170 - ------------------------------------------------------------------------------------------------ Total current assets 252,418 224,722 - ------------------------------------------------------------------------------------------------ Property, plant and equipment, at cost 257,680 247,975 Less accumulated depreciation and amortization 157,768 144,252 - ------------------------------------------------------------------------------------------------ Net property, plant and equipment 99,912 103,723 - ------------------------------------------------------------------------------------------------ Intangibles and other assets 73,160 66,928 - ------------------------------------------------------------------------------------------------ $ 425,490 $ 395,373 - ------------------------------------------------------------------------------------------------ LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------------------------------------------------------------------ Current liabilities: Accounts payable $ 31,256 $ 31,499 Notes payable 5,784 3,723 Income taxes 3,298 3,448 Accrued liabilities 50,535 44,455 Long-term debt due within one year 7,525 6,597 - ------------------------------------------------------------------------------------------------ Total current liabilities 98,398 89,722 - ------------------------------------------------------------------------------------------------ Long-term debt due after one year 63,239 51,756 - ------------------------------------------------------------------------------------------------ Postretirement benefits and other deferred items 64,074 58,123 - ------------------------------------------------------------------------------------------------ Shareholders' equity: Serial preferred stock, $1.00 par value, no shares issued -- Common stock, $1.25 par value, 24,568,000 shares issued (24,405,000 in 1995) 30,710 30,506 Capital in excess of par value 8,377 6,022 Retained earnings 189,390 158,754 - ------------------------------------------------------------------------------------------------ 228,477 195,282 Treasury stock, 1,081,000 shares at cost (8,200 in 1995) (27,455) (210) Foreign currency and other equity adjustments (1,243) 700 - ------------------------------------------------------------------------------------------------ Total shareholders' equity 199,779 195,772 - ------------------------------------------------------------------------------------------------ $ 425,490 $ 395,373 ================================================================================================ (See accompanying notes.) </TABLE>
20 <TABLE> <CAPTION> CONSOLIDATED STATEMENT OF CASH FLOWS (dollars in thousands) Years ended December 31, 1996 1995 1994 - -------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents - -------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Operating activities: Net earnings $ 43,251 $ 30,672 $ 24,396 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 20,089 19,093 18,313 Loss (gain) on the sale of fixed assets 551 193 (345) Change in assets and liabilities net of effects of acquisitions: Accounts receivable (10,794) (14,123) (4,841) Inventories (8,799) (15,989) 2,908 Prepaid expenses (1,014) (2,184) 1,163 Accounts payable and accrued liabilities 7,112 13,968 (706) Income taxes 147 2,031 (1,756) Postretirement benefits and other deferred items 5,855 (200) (391) Net deferred taxes (1,659) 657 (26) Other (6,480) (2,280) (16) - -------------------------------------------------------------------------------------------------------- Net cash flows from operating activities 48,259 31,838 38,699 - -------------------------------------------------------------------------------------------------------- Investing activities: Capital expenditures (16,852) (13,317) (14,363) Payment for acquisitions, net of cash acquired 0 (12,217) (14,900) - -------------------------------------------------------------------------------------------------------- Net cash flows from investing activities (16,852) (25,534) (29,263) - -------------------------------------------------------------------------------------------------------- Financing activities: Net withdrawals (repayments) under lines-of-credit 2,280 (2,723) (4,873) Payments on long-term debt (21,738) (6,188) (6,774) Proceeds from long-term debt 36,296 12,061 10,056 Repurchase of common stock (27,838) (41) (4,919) Proceeds from issuance of common stock 2,333 567 893 Dividends paid (12,615) (10,730) (9,895) - -------------------------------------------------------------------------------------------------------- Net cash flows from financing activities (21,282) (7,054) (15,512) - -------------------------------------------------------------------------------------------------------- Effect of exchange rate changes (85) 559 (552) - -------------------------------------------------------------------------------------------------------- Net change in cash and cash equivalents 10,040 (191) (6,628) Cash and cash equivalents at beginning of year 19,434 19,625 26,253 - -------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 29,474 $ 19,434 $ 19,625 ======================================================================================================== (See accompanying notes.) </TABLE>
21 <TABLE> <CAPTION> UNAUDITED QUARTERLY FINANCIAL DATA (dollars in thousands except per share data) Net Cost Net Earnings sales of sales earnings per share - ----------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Quarter ended: March 31, 1996 $ 149,193 $ 89,279 $ 10,114 $ 0.41 June 30, 1996 151,071 88,463 8,915 (a) 0.36 (a) September 30, 1996 150,170 88,964 11,554 0.47 December 31, 1996 155,020 94,648 12,668 0.53 - ----------------------------------------------------------------------------------------- $ 605,454 $ 361,354 $ 43,251 (a) 1.77 (a) ========================================================================================= Quarter ended: March 31, 1995 $ 122,664 $ 72,456 $ 7,658 $ 0.31 June 30, 1995 131,096 78,522 8,022 0.32 September 30, 1995 132,913 80,657 9,046 0.37 December 31, 1995 146,053 85,671 5,946 (b) 0.24 (b) - ----------------------------------------------------------------------------------------- $ 532,726 $ 317,306 $ 30,672 (b) 1.24 (b) ========================================================================================= <FN> (a) Net earnings in the second quarter of 1996 include restructuring expenses of $3.0 million, or $.12 per share, related to consolidating operations in Europe and Australia. Excluding restructuring expenses, second quarter net earnings were $11.9 million, or $.48 per share, and net earnings for the year ended December 31, 1996 were $46.3 million, or $1.89 per share. See Note 4 to Consolidated Financial Statements. (b) Net earnings in the fourth quarter of 1995 include transaction expenses of $4.4 million after tax, or $.18 per share, related to the merger with Durametallic. Excluding transaction expenses, fourth quarter net earnings were $10.3 million, or $.42 per share, and net earnings for the year ended December 31, 1995 were $35.1 million, or $1.42 per share. See Note 3 to Consolidated Financial Statements. </TABLE>
22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars presented in tables in thousands except per share data) - ---------------------------------------------------------------- 1. ORGANIZATION The Duriron Company, Inc. ( the "Company") was incorporated under the laws of the State of New York on May 1, 1912. The Company, headquartered in Dayton, Ohio, is principally engaged in the design, manufacture and marketing of fluid handling equipment, primarily pumps, valves and mechanical seals, for industries that utilize difficult to handle and often corrosive fluids in manufacturing processes. Based upon its analysis of trade association data and other market information, the Company considers itself a leading supplier of corrosion resistant fluid movement and control equipment to the basic chemical industry. The Company markets its products on a global basis. With respect to a majority of its products, the Company's domestic operations supply each other and the company's foreign manufacturing subsidiaries with components and subassemblies.
23 2. SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of the Company and its wholly and majority-owned subsidiaries. All significant intercompany transactions have been eliminated. Investments in unconsolidated affiliated companies, which represent all non-majority ownership interests, are carried on the equity basis, which approximates the Company's equity in their underlying net book value. BUSINESS COMBINATIONS - Business combinations which have been accounted for under the pooling of interests method of accounting combine the assets, liabilities, and stockholders' equity of the acquired entity with the Company's respective accounts at recorded values. Prior period financial statements have been restated to give effect to the merger. Business combinations which have been accounted for under the purchase method of accounting include the results of operations of the acquired business from the date of acquisition. Net assets of the companies acquired are recorded at their fair value to the Company at the date of acquisition. CASH EQUIVALENTS - Cash equivalents represent short-term investments with an original maturity of three months or less when purchased which are highly liquid with principal values that are not subject to significant risk of change due to interest rate fluctuations. ACCOUNTS RECEIVABLE - Accounts receivable are stated net of the allowance for doubtful accounts of $1,547,000 and $1,408,000 at December 31, 1996 and 1995, respectively. INVENTORIES - Inventories are stated at the lower-of-cost or market. Cost is determined for all domestic inventories by the last-in, first-out (LIFO) method and for foreign inventories by the first-in, first-out (FIFO) method. FINANCIAL INSTRUMENTS - Gains and losses on hedges of existing assets or liabilities are included in the carrying amounts of those assets or liabilities and are ultimately recognized in income as part of those carrying amounts. Gains and losses related to hedges of anticipated transactions are recognized in income as the transactions occur. The carrying amounts of the Company's financial instruments approximate fair value as defined under Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures About Fair Value of Financial Instruments." Fair value is estimated by reference to quoted prices by financial institutions, as well as through other valuation techniques. RETIREMENT BENEFIT COSTS - Defined benefit pension expense and postretirement benefit expense are based on independent actuarial valuations assuming current and prior service costs are recognized over employees' expected service periods. PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION - Property, plant and equipment is stated on the basis of cost. Depreciation is computed by the straight-line method based on the estimated useful lives of the depreciable assets for cost and by accelerated methods for income tax purposes. INTANGIBLES AND OTHER ASSETS - Excess cost over the fair value of net assets acquired (or goodwill) generally is amortized on a straight-line basis over 15-40 years. The carrying value of goodwill will be reviewed if the facts and circumstances suggest that it may be impaired. If this review indicates that goodwill will not be recoverable, as determined based on the undiscounted cash flows of the entity acquired over the remaining amortization period, the
24 Company's carrying value of the goodwill will be reduced by the estimated shortfall of cash flows. FOREIGN CURRENCY TRANSLATION - Assets and liabilities of the Company's foreign affiliates, other than those located in highly inflationary countries, are translated at current exchange rates, while income and expenses are translated at average rates for the period. For entities in highly inflationary countries, a combination of current and historical rates is used to determine currency gains and losses resulting from financial statement translation and those resulting from transactions. Translation gains and losses are reported as a component of stockholders' equity, except for those associated with highly inflationary countries which are reported directly in the consolidated statements of income. STOCK-BASED COMPENSATION - The Company elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its employee stock options because the alternative fair value accounting provided for under SFAS No. 123, "Accounting for Stock-Based Compensation," required use of option valuation models that were not developed for use in valuing employee stock options. Under APB No. 25, no compensation expense is recorded because the exercise price of the Company's stock options equals the market price of the underlying stock on the date of grant. USE OF ESTIMATES - The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. BASIS OF COMPARISON - Certain amounts in 1995 and 1994 financial statements and footnotes have been reclassified to permit comparison with the 1996 presentation.
25 3. MERGERS AND ACQUISITIONS POOLING TRANSACTION - On November 30, 1995, Durametallic Corporation was merged with and into a subsidiary of the Company. Durametallic, a privately held corporation headquartered in Kalamazo, Michigan prior to the merger, is a leading manufacturer of mechanical seals and sealing systems. The Company exchanged 5,344,868 shares of common stock for all outstanding shares of Durametallic. Additionally, 125,283 shares of the Company's common stock were reserved for outstanding stock options issued by Durametallic and assumed by the Company. The merger was accounted for under the pooling of interests method of accounting, and accordingly, the accompanying consolidated financial statements have been restated for all periods prior to the acquisition to include the financial position, results of operations and cash flows of Durametallic. Net sales and net earnings for the individual entities are as follows: <TABLE> <CAPTION> Years ended December 31, ------------------------------ 1995 1994 ------------------------------ <S> <C> <C> Total sales Duriron $ 398,994 $ 345,388 Durametallic 135,999 116,557 Less intercompany sales (2,267) (1,438) ============ ------------ $ 532,726 $ 460,507 ============ ============ Net earnings Duriron $ 26,410 $ 17,158 Durametallic 8,661 7,238 Merger expenses (4,399) -- ------------ ------------ $ 30,672 $ 24,396 ============ ============ </TABLE> In connection with the merger of the Company and Durametallic, merger transaction expenses of $4,399,000 after tax, or $.18 per share, were recognized in 1995. PURCHASE TRANSACTIONS - On August 31, 1995, Durametallic purchased Pac-Seal and two affiliated companies. Pac-Seal, located in Burr Ridge, Illinois, is a manufacturer of mechanical seals used primarily in water pump applications. The acquisition was funded through the combination of internal cash and long-term borrowings. On April 28, 1994, the Company purchased Sereg Vannes S.A., an automatic control valve company headquartered in Thiers, France. The acquisition was funded with the combination of internal cash and long-term borrowings.
26 On January 5, 1994, the Company purchased the valve actuator business of Mecair SpA in Milan, Italy, and its associated companies in Limburg, Germany; Alton Hampshire, England; and Gennevilliers, France. The acquisition was funded through the utilization of internal cash. The aforementioned 1995 and 1994 purchase transactions were not material, either individually or in the aggregate by year, therefore, no pro forma information is presented for these acquisitions.
27 4. RESTRUCTURING The Company recognized a restructuring charge of $5,778,000 before income taxes, or $.12 per share after tax, during the second quarter of 1996 to restructure its recently acquired Durametallic operations in Europe and Australia. Durametallic operations in Belgium, Germany, Italy, France and Australia were combined with larger and more efficient Duriron facilities during the second half of 1996. The restructuring was a part of the plan to obtain positive synergies between the two companies. The savings associated with the plan will be immediate since the facilities had been unprofitable for many years and fixed operating costs will be permanently reduced. Annual savings associated with the restructuring will amount to approximately $1.5 million. The restructuring plan is expected to result in the termination of 55 employees at a cost of $3.2 million. In addition, exit costs associated with the plant closings are estimated at $2.6 million. The restructuring activities are expected to be funded with operating cash flows. Additional costs to fully implement the reorganization plan in continuing processes were recorded as period costs and categorized into cost of sales and administrative expense in the latter half of 1996. These additional costs related to moving equipment and cross-training employees to support ongoing operations at the Duriron facilities. Through December 31, 1996, termination fees for 42 employees of $2.1 million and exit costs of $1.7 million were paid. The remainder of the termination fees and exit costs accrued in 1996 are expected to be incurred during the first half of 1997 with minimal changes in estimate from the original accrual.
28 5 INVENTORIES Inventories at December 31, 1996 and 1995 and the method of determining cost were as follows: <TABLE> <CAPTION> Domestic Foreign inventories inventories Total (LIFO) (FIFO) inventories - -------------------------------------------------------------------------------- <S> <C> <C> <C> December 31, 1996: Raw materials $ 2,285 $ 3,339 $ 5,624 Work in process and finished goods 52,613 42,833 95,446 - -------------------------------------------------------------------------------- $ 54,898 $ 46,172 $ 101,070 ================================================================================ December 31, 1995: Raw materials $ 2,642 $ 2,476 $ 5,118 Work in process and finished goods 48,857 39,180 88,037 - -------------------------------------------------------------------------------- $ 51,499 $ 41,656 $ 93,155 ================================================================================ </TABLE> LIFO inventories at current cost were $38,039,000 and $36,127,000 higher than reported at December 31, 1996 and 1995, respectively.
29 <TABLE> <CAPTION> 6. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at December 31, 1996 and 1995 were as follows: <S> <C> <C> <C> 1996 1995 - ------------------------------------------------------------------------------- Land $ 4,457 $ 4,559 Buildings 57,127 56,945 Machinery and equipment 152,782 148,795 Furniture and fixtures 43,314 37,676 - ------------------------------------------------------------------------------- $ 257,680 $ 247,975 =============================================================================== </TABLE>
30 <TABLE> <CAPTION> 7. INTANGIBLES AND OTHER ASSETS Intangibles and other assets at December 31, 1996 and 1995 were as follows: 1996 1995 - ----------------------------------------------------------------------------- <S> <C> <C> <C> Cost in excess of fair value of tangible net assets acquired $ 37,440 $ 38,810 Amortization of intangibles (5,079) (4,253) Pension assets 7,832 7,885 Deferred tax assets 9,408 5,969 Deferred compensation funding 6,999 4,634 Investments in unconsolidated affiliates 5,100 4,582 Patents 4,623 4,704 Other 6,837 4,597 - ----------------------------------------------------------------------------- $ 73,160 $ 66,928 ============================================================================== </TABLE>
31 <TABLE> <CAPTION> 8. ACCRUED LIABILITIES Accrued liabilities at December 31, 1996 and 1995 were as follows: 1996 1995 <S> <C> <C> <C> - ------------------------------------------------------------------------------- Wages and other compensation $ 28,393 $ 26,397 Other 22,142 18,058 - -------------------------------------------------------------------------------- $ 50,535 $ 44,455 =============================================================================== </TABLE>
32 9. Debt and dividend restrictions Long-term debt, including capital lease obligations, at December 31, 1996 and 1995 were as follows: <TABLE> <CAPTION> 1996 1995 ---- ---- <S> <C> <C> 7.04% loan due 2006 $36,000 $ - 8.94% loan due annually through 2001 19,836 24,529 Floating rate revolving notes 5,900 20,820 7.45% loan due quarterly through 1999 5,722 6,743 Capital lease obligations 1,236 1,941 Other, various maturities and rates 2,070 4,320 ------ ------ 70,764 58,353 Less amounts due within one year 7,525 6,597 ------ ------ $63,239 $51,756 ======= ======= </TABLE> Interest paid amounted to $4,840,000, $4,957,000 and $4,418,000 in 1996, 1995 and 1994, respectively. Maturities of long-term debt, including capital lease obligations for each of the four years subsequent to 1997, are as follows: <TABLE> <CAPTION> <S> <C> <C> 1998 $6,781 1999 $7,968 2000 $4,739 2001 $3,022 </TABLE> In 1996, the Company entered into a $100,000,000 revolving credit agreement. This facility will be used to fund the stock repurchase program, to provide for future capital needs and to allow for the consolidation of existing bilateral credit arrangements. Concurrent with the signing of the credit agreement, the Company entered into swap agreements totaling $50,000,000 to fix an interest rate of 7.04% for a period of 10 years. The 8.94% loan is a U.S. dollar private placement which was effectively converted to a deutsche mark obligation through a currency swap agreement. The currency swap is a hedge of the net investment in a German subsidiary. Unrealized gains and losses on the hedge are not recognized in income, but are shown in the cumulative translation adjustment account included in shareholders' equity with the related amounts due to and from the counterparty included in long-term debt. The maturity and repayment terms of the swap match precisely the maturity and repayment term of the underlying debt. Long-term debt agreements require the company to maintain specified levels of tangible net worth and restrict the payment of cash dividends. Approximately, $30,281,000 and $28,543,000 of consolidated retained earnings were unrestricted for the payment of dividends at December 31, 1996, and 1995, respectively. Under current covenants, dividends are limited to $27,000,000 plus common stock issued and 50% of defined net earnings subsequent to September 30, 1996.
33 At December 31, 1996 and 1995, the Company had short term credit facilities available from banks under which it could borrow, at local market rates up to $30,941,000 and $32,830,000, respectively. Under these facilities, the Company had $5,784,000 and $3,723,000 in borrowings outstanding at December 31, 1996 and 1995, respectively. The weighted average interest rate on these borrowings at December 31, 1996 and 1995, was 4.3% and 5.3%, respectively. In both years, these borrowings were used primarily to support the operations of foreign subsidiaries. Additionally, at December 31, 1996, the Company had $64,000,000 available under the revolving credit agreement.
34 <TABLE> <CAPTION> 10. POSTRETIREMENT BENEFITS AND OTHER DEFERRED ITEMS Deferred postretirement benefits and other deferred items at December 31, 1996 and 1995 were as follows: 1996 1995 - ------------------------------------------------------------------------- <S> <C> <C> <C> Postretirement benefits $ 47,577 $ 47,185 Deferred compensation 6,999 4,634 Other 9,498 6,304 - ------------------------------------------------------------------------- $ 64,074 $ 58,123 ========================================================================= </TABLE>
35 11. LEASES AND RENTALS Assets subject to capitalized leases and included in property, plant and equipment at cost amounted to $7,056,000 in 1996 and $7,320,000 in 1995. Accumulated amortization for the capitalized leases amounted to $5,915,000 in 1996 and $6,019,000 in 1995. The minimum rental commitments as of December 31, 1996 for all noncancelable leases were as follows: <TABLE> <CAPTION> Operating Capital leases leases - --------------------------------------------------------------------------- <S> <C> <C> <C> 1997 $ 6,894 $ 794 1998 4,441 531 1999 2,950 53 2000 1,303 1 2001 898 -- 2002 and subsequent 1,691 -- - --------------------------------------------------------------------------- Total minimum lease payments $ 18,177 1,379 =========================================================================== Less amount representing interest on capital leases 143 - --------------------------------------------------------------------------- Present value of minimum capital lease payments $ 1,236 ============================================================================ </TABLE> Total rental expense amounted to $9,499,000 , $8,490,000 and $8,065,000 in 1996, 1995 and 1994, respectively.
36 12. CONTINGENCIES The Company is involved as a "potentially responsible party"at five former public waste disposal sites which may be subject to remediation under pending government procedures. The sites are in various stages of evaluation by federal and state environmental authorities. The projected cost of remediating these sites, as well as the Company's alleged "fair share" allocation, is uncertain and speculative until all studies have been completed and the parties have either negotiated an amicable resolution or the matter has been judicially resolved. At each site, there are many other parties who have similarly been identified, and the identification and location of additional parties is continuing under applicable federal or state law. Many of the other parties identified are financially strong and solvent companies which appear able to pay their share of the remediation costs. Based on the Company's preliminary information about the waste disposal practices at these sites and the environmental regulatory process in general, the Company believes that it is likely that ultimate remediation liability costs for each site will be apportioned among all liable parties, including site owners and waste transporters, according to the volumes and/or toxicity of the wastes shown to have been disposed of at the sites. The Company is a defendant in numerous pending lawsuits (which include, in many cases, multiple claimants) which seek to recover damages for alleged personal injury allegedly resulting from exposure to asbestos containing products formerly manufactured and distributed by the Company. All such products were used within self-contained process equipment, and management does not believe that there was any emission of ambient asbestos fiber during the use of this equipment. The Company has resolved numerous claims at an average of about $106 per claim, the cost of which was fully paid by insurance. The Company continues to have a substantial amount of available insurance from financially solvent carriers to cover the cost of both defending and resolving the claims. The Company is also a defendant in several other products liability lawsuits which are insured, subject to the applicable deductibles, and certain other non-insured lawsuits received in the ordinary course of business. The Company has fully accrued the estimated loss reserve for each such lawsuit. No insurance recovery has been projected for any of the insured claims because management currently believes that all will be resolved within applicable deductibles. Although none of the aforementioned gives rise to any additional liability that can now be reasonably estimated, it is possible that the Company could incur additional costs in the range of $250,000 to $1,000,000 over the upcoming five years to fully resolve these matters. Although the Company has accrued the minimum end of this range as a precaution, management has no current reason to believe that any such additional costs are probable or quantifiable. The Company will continue to evaluate these contingent loss exposures and, if they develop, recognize expense as soon as such losses can be reasonably estimated.
37 13. SHAREHOLDERS' EQUITY At December 31, 1996 and 1995, the Company had 60,000,000 shares of common stock, $1.25 par value, and 1,000,000 shares of $1.00 preferred stock authorized. In July of 1996 the Company updated and extended the expiration of the shareholder rights plan. Each share of the Company's common stock contains a preferred stock purchase right. These rights are not currently exercisable and trade in tandem with the common stock. The rights, in general, become exercisable and trade separately in the event of certain significant changes in common stock ownership or on the commencement of certain tender offers which in either case, may lead to a change of control of the Company. Upon becoming exercisable, the rights provide shareholders the opportunity to acquire a new series of Company preferred stock to be then automatically issued at a pre-established price. In the event of certain forms of acquisition of the Company, the rights also provide Company shareholders the opportunity to purchase shares of the acquiring company's common stock from the acquirer at a 50% discount from the current market value. The rights are redeemable for $.022 per right by the Company at any time prior to becoming exercisable and will expire in August, 2006. At December 31, 1996, approximately 1,196,000 shares of common stock were reserved for exercise of stock options and for grants of restricted stock.
38 14. STOCK PLANS The Company maintains a shareholder approved stock option plan which provided for the grant of 1,125,000 options to purchase shares of the Company's common stock. At December 31, 1996, approximately 88,000 options remain available for grant. Options have been granted to officers and employees to purchase shares of common at a price not less that the fair market value of the date of grant. Generally, these options become exercisable over staggered periods, but may not be exercised after 10 years from the date of the grant. The plan provides that any option may include a stock appreciation right, however, none have been granted since 1989. The aggregate number of shares exercisable were 547,683, 570,601 and 455,139 at December 31, 1996, 1995 and 1994, respectively. <TABLE> <CAPTION> Average Stock option price options per share - ----------------------------------------------------------------- <S> <C> <C> <C> Outstanding at December 31, 1993 805,592 $ 11.50 Options granted 172.599 14.81 Options exercised (83,833) 7.18 Options canceled (36,071) 12.03 - ---------------------------------------------- Outstanding at December 31, 1994 858,287 12.57 Options granted 121,364 27.05 Options exercised (75,976) 8.69 Options canceled (9,676) 11.77 - ---------------------------------------------- Outstanding at December 31, 1995 893,999 14.87 Options granted 193,000 26.40 Options exercised (149,471) 9.37 - ---------------------------------------------- Outstanding at December 31, 1996 937,528 $ 18.12 ============================================== </TABLE> The exercise price of options outstanding at December 31, 1996 ranged from $5.95 to $26.75. The weighted average contractual life of options outstanding is 6.7 years. Pro forma information regarding net income and earnings per share is required by SFAS No. 123, which also requires that the information be determined as if the Company has accounted for its stock options granted subsequent to December 31, 1994 under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Binomial option pricing model (a modified Black-Scholes model) with the following weighted-average assumptions for 1995 and 1996. The risk free interest rate was 6.2%, the dividend yield was 2.1%, the expected volatility of the Company's common stock was 36.6% and the weighted average expected life of the option was 6.75 years. During 1995 and 1996, options were granted which had a weighted average fair value on date of grant of $10.68 and $10.42, respectively.
39 Option valuation models were developed for use in estimating the fair value of traded options which have no vesting restrictions and are freely transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, existing models do not provide a reliable single measure of the fair value of its options. For purposes of pro forma disclosure, the estimated fair value of the options is amortized to expense over the options vesting periods. The Company's pro forma information follows (in thousands except for per share information): <TABLE> <CAPTION> 1996 1995 ---- ---- <S> <C> <C> Pro forma net income $42,680 $30,622 Pro forma earnings per share $1.75 $1.24 </TABLE> The effects of providing pro forma disclosure are not indicative of future amounts until the new rules are applied to all outstanding nonvested awards. The restricted stock plan was shareholder approved and authorized the grant of up to 337,500 share of the Company's common stock. In general, the shares cannot be transferred for a period of not less than one nor more than ten years and are subject to forfeiture during the restriction period. The fair value of the shares is amortized to compensation expense over the periods in which the restrictions lapse. Restricted stock grants of 29,900, 4,100 and 2,400 shares were made in 1996, 1995 and 1994, respectively. The weighted average fair value of the restricted stock grants at date of grant were $25.84, $22.28 and $16.38 per share, respectively. Total compensation expense recognized in the income statement for all stock based awards was $584,000 , $193,000 and $177,000 for 1996, 1995 and 1994 respectively.
40 <TABLE> <CAPTION> 15. INCOME TAXES Earnings before income taxes consist of the following components: 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------- Earnings before income taxes: <S> <C> <C> <C> United States $41,060 $33,394 $31,533 Foreign 23,091 16,728 7,038 - ---------------------------------------------------------------------------------------------------------------------------- $64,151 $50,122 $38,571 ============================================================================================================================ </TABLE> Significant components of the provision for income taxes attributable to continuing operations are as follows: <TABLE> <CAPTION> 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Current: United States $13,940 $13,887 $9,900 Foreign 5,396 5,649 2,529 State and local 2,649 1,697 1,041 - ---------------------------------------------------------------------------------------------------------------------------- Total current 21,985 21,233 13,470 - ---------------------------------------------------------------------------------------------------------------------------- Deferred: United States (1,112) (1,629) 614 Foreign 73 (41) 52 State and local (46) (113) 39 - ---------------------------------------------------------------------------------------------------------------------------- Total deferred (1,085) (1,783) 705 - ---------------------------------------------------------------------------------------------------------------------------- $20,900 $19,450 $14,175 ============================================================================================================================ </TABLE> Income taxes paid amounted to $21,413,000, $19,508,000 and $13,476,000 during 1996, 1995 and 1994, respectively. The reasons for the differences between the effective tax rate and the U.S. federal income tax rate were as follows: <TABLE> <CAPTION> 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> U.S. federal income tax rate 35.0% 35.0% 35.0% Foreign tax rate differential and utilization of operating loss carryforwards (4.0) (.5) .7 Merger transaction expenses - 2.3 - State and local income taxes, net of federal income tax benefit 2.7 2.2 1.8 Other net (none more than 1.75%) (1.1) (.2) (.7) - ------------------------------------------------------------------------------------------------------------------------------ Effective tax rate 32.6% 38.8% 36.8% =============================================================================================================================== </TABLE>
41 Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of December 31, 1996 and 1995 were as follows: <TABLE> <CAPTION> 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------- Deferred tax assets related to: <S> <C> <C> Postretirement benefits $17,603 $17,445 Net operating loss carryforwards 4,398 5,530 Compensation accruals 4,151 3,381 Foreign tax credit carryforwards 949 1,344 Capital loss carryforwards 1,263 1,263 Other 6,070 4,648 - ----------------------------------------------------------------------------------------------------------------------------- Total deferred tax assets 34,434 33,611 Less valuation allowances 6,250 7,990 - ----------------------------------------------------------------------------------------------------------------------------- Net deferred tax assets 28,184 25,621 - ----------------------------------------------------------------------------------------------------------------------------- Deferred tax liabilities related to: Depreciation 7,973 8,307 Pension benefits 2,426 2,466 Other 3,904 3,967 - ----------------------------------------------------------------------------------------------------------------------------- Total deferred tax liabilities 14,303 14,740 - ----------------------------------------------------------------------------------------------------------------------------- Deferred tax asset, net of liabilities $13,881 $10,881 ============================================================================================================================== </TABLE> The Company has recorded valuation allowances to reflect the estimated amount of deferred tax assets which may not be realized due to the expiration of net operating loss, foreign tax credit and capital loss carryforwards. The change in the valuation allowances for the year ended December 31, 1996 were as follows: <TABLE> <CAPTION> Net operating Foreign Capital losses tax credits losses - ------------------------------------------------------------------------------------------------------------------------------- <S> <C> Balance at December 31, 1995 $ 5,383 $ 1,344 $ 1,263 Utilization of carryforwards (3,014) - - Increase in expected nonutilization 1,969 123 - Expiration of carryforwards (300) (518) - - ------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1996 $ 4,038 $ 949 $ 1,263 ================================================================================================================================ </TABLE> Undistributed earnings of the Company's foreign subsidiaries amounted to approximately $44,000,000 at December 31, 1996. These earnings are considered to be indefinitely reinvested and, accordingly, no additional United States income taxes or foreign withholding taxes have been provided.
42 16. RESEARCH AND DEVELOPMENT Research and development expense amounted to $7,912,000, $7,032,000 and $8,642,000 in 1996, 1995 and 1994, respectively.
43 17. RETIREMENT BENEFITS The Company sponsors several noncontributory defined benefit pension plans, covering approximately 40% of domestic employees, which provide benefits based on years of service and compensation. Retirement benefits for all other employees are provided through defined contribution pension plans and government sponsored retirement programs. All defined benefit pension plans are funded based on independent actuarial valuations to provide for current service and an amount sufficient to amortize unfunded prior service over periods not to exceed thirty years. Net defined benefit pension expense (income) for 1996,1995 and 1994 included the following components: <TABLE> <CAPTION> 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Service cost - benefits earned during the period $ 1,727 $ 1,773 $ 1,660 Interest cost on projected benefit obligations 4,245 4,306 4,157 Actual loss (gain) on plan assets (9,935) (15,164) 405 Net amortization and deferral 4,167 8,635 (6,297) - ----------------------------------------------------------------------------------------------------------------------------- Net defined benefit pension expense (income) $ 204 $ (450) $ (75) ============================================================================================================================= </TABLE> The following table presents defined benefit pension plan funded status and amounts recognized in the Company's consolidated balance sheet at December 31, 1996 and 1995: <TABLE> <CAPTION> 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Actuarial present value of: Vested benefits $45,013 $46,631 Nonvested benefits 6,877 6,509 - ----------------------------------------------------------------------------------------------------------------------------- Accumulated benefit obligations 51,890 53,140 Projected future compensation increases 8,474 7,642 - ----------------------------------------------------------------------------------------------------------------------------- Projected benefit obligations 60,364 60,782 Less plan assets, at fair value 82,620 76,727 - ----------------------------------------------------------------------------------------------------------------------------- Plan assets in excess of projected benefit obligations 22,256 15,945 Unrecognized net transition asset (2,399) (2,984) Unrecognized net gain (15,674) (8,553) Unrecognized prior service cost 2,105 2,198 - ----------------------------------------------------------------------------------------------------------------------------- Net pension asset $ 6,288 $ 6,606 ============================================================================================================================= </TABLE> The average discount rate and the assumed rate of increase in future compensation levels used in determining the actuarial present value of benefit obligations were 7.5% and 5.0%, respectively. The expected long-term rate of return on plan assets was 8.0%. Plan assets include marketable equity securities, corporate and government debt securities, insurance company contracts and real estate.
44 The Company sponsors several defined contribution pension plans covering substantially all domestic and Canadian employees and certain other foreign employees. Employees may contribute to these plans and these contributions are matched in varying amounts by the Company. The Company may also make additional contributions to eligible employees. Defined contribution pension expense for the Company was $5,803,000, $5,966,000 and $4,236,000 for 1996, 1995 and 1994, respectively. The Company also sponsors several defined benefit postretirement health care plans covering approximately 65% of future retirees and most current retirees in the United States. These medical and dental benefits are provided through insurance companies and health maintenance organizations, include participant contributions, deductibles, co-insurance provisions and other limitations, and are integrated with Medicare and other group plans. The plans are funded as insured benefits and health maintenance organization premiums are incurred. Net postretirement benefit expense for 1996, 1995 and 1994 included the following components: <TABLE> <CAPTION> 1996 1995 1994 - ----------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Service cost - benefits earned during the period $ 602 $ 651 $ 666 Interest cost on accumulated postretirement benefit obligations 2,667 2,715 2,625 Net amortization and deferral (741) (678) (679) - ----------------------------------------------------------------------------------------------------------------------------- Net postretirement benefit expense $ 2,528 $ 2,688 $ 2,612 ============================================================================================================================= </TABLE> The following table presents postretirement benefit amounts recognized in the Company's consolidated balance sheet at December 31, 1996 and 1995: <TABLE> <CAPTION> 1996 1995 <S> <C> <C> Actuarial present value of accumulated postretirement benefit obligations: Retirees $19,955 $19,048 Active employees eligible to retire 5,364 4,169 Active employees not eligible to retire 12,446 15,264 - ----------------------------------------------------------------------------------------------------------------------------- Total 37,765 38,481 Unrecognized prior service cost 5,102 5,773 Unrecognized net gain 4,710 2,931 - ----------------------------------------------------------------------------------------------------------------------------- Deferred postretirement benefits $47,577 $47,185 ============================================================================================================================= </TABLE> The average discount rate used in determining accumulated postretirement benefit obligations was 7.5%. The assumed annual rates of increase in per capita costs were, for periods prior to Medicare, 9% for 1996 and 8.5% for 1997 with a gradual decrease to 6% for 2002 and future years and, for periods after Medicare, 7% for 1996 and 6.5% for 1997 with a gradual decrease to 5% for 2000 and future years. Increasing the assumed rate of increase in postretirement benefit costs by 1% in each year would increase net postretirement benefit expense by approximately $387,000 and accumulated postretirement benefit obligations by $3,810,000.
45 18. FOREIGN CURRENCY TRANSLATION The foreign currency translation equity adjustments consist of the following: <TABLE> <CAPTION> 1996 1995 1994 - -------------------------------------------------------------------------------- <S><C> <C> <C> <C> Current year translation adjustment $ (1,124) $ 951 $ 2,026 Foreign currency translation equity adjustment: Beginning of year 1,283 332 (1,694) - -------------------------------------------------------------------------------- End of year $ 159 $ 1,283 $ 332 ================================================================================ </TABLE>
46 19. OPERATIONS IDENTIFIED BY GEOGRAPHIC AREA The Company operates in predominately one business segment, fluid movement and control equipment (pumps, valves, seals and related equipment). Transfers between geographic areas are accounted for primarily at cost plus a profit margin. Operating profit consists of revenues less certain costs and expenses. In determining operating profit none of the following items have been added or deducted: unallocated general corporate expense, interest expense and income taxes. Identifiable assets are those assets of the Company that are identifiable with the operations in each geographic area. Unallocated general corporate assets principally reflect future tax benefits. No individual country within the below listed geographic segments represents 10% or more of the consolidated Company's revenues from sales to unafilliated customers or its identifiable assets. The Other geographic segment includes Canada, Latin and South America and the Asia Pacific. Export sales from the United States to foreign unaffiliated customers were $49,842,000, $27,068,000 and $27,143,000 in 1996, 1995 and 1994, respectively. <TABLE> <CAPTION> Financial information by geographic area follows: Years ended December 31, 1996 1995 1994 - ------------------------------------------------------------------------------------------ Revenues: <S> <C> <C> <C> United States $ 401,309 $ 354,547 $ 320,086 Europe 119,018 106,997 83,654 Other 85,127 71,182 56,767 - ------------------------------------------------------------------------------------------ Consolidated totals $ 605,454 $ 532,726 $ 460,507 - ------------------------------------------------------------------------------------------ Inter-geographic transfers: United States $ 39,638 $ 36,276 $ 24,369 Europe 16,016 19,516 11,662 Other 1,431 1,458 996 Eliminations & adjustments (57,085) (57,250) (37,027) - ------------------------------------------------------------------------------------------ Consolidated totals $ 0 $ 0 $ 0 - ------------------------------------------------------------------------------------------ Total revenues & transfers: United States $ 440,947 $ 390,823 $ 344,455 Europe 135,034 126,513 95,316 Other 86,558 72,640 57,763 Eliminations & adjustments (57,085) (57,250) (37,027) - ------------------------------------------------------------------------------------------ Consolidated totals $ 605,454 $ 532,726 $ 460,507 ========================================================================================== Operating profit: United States $ 54,721 $ 47,859 $ 37,977 Europe 8,535 10,485 4,857 Other 10,824 7,081 2,654 Eliminations & adjustments (123) (774) 271 - ------------------------------------------------------------------------------------------ Consolidated totals 73,957 64,651 45,759 Corporate expense 4,885 9,350 2,287 Interest expense 4,921 5,179 4,901 - ------------------------------------------------------------------------------------------ Earnings before income taxes $ 64,151 $ 50,122 $ 38,571 ========================================================================================== Identifiable assets: United States $ 259,267 $ 247,125 $ 212,509 Europe 112,613 101,817 88,405 Other 52,118 50,331 44,060 Eliminations & adjustments (17,080) (18,039) (13,250) - ------------------------------------------------------------------------------------------ Consolidated totals 406,918 381,234 331,724 General corporate assets 18,572 14,139 12,542 - ------------------------------------------------------------------------------------------ Total assets $ 425,490 $ 395,373 $ 344,266 ========================================================================================== </TABLE> In 1996, 1995 and 1994 foreign currency transaction gains/(losses) of approximately $624,000, $217,000 and ($1,150,000), respectively, were included in earnings before income taxes.
47 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders The Duriron Company, Inc. We have audited the accompanying consolidated balance sheet of The Duriron Company, Inc. as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. Our audits also include the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Duriron Company, Inc. at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. Ernst & Young LLP Dayton, Ohio February 5, 1997
48 REPORT OF MANAGEMENT The Company's management has prepared and is responsible for the consolidated financial statements and information included in this Annual Report. The financial statements were prepared in accordance with generally accepted accounting principles and present fairly the Company's financial position and results of operations. Such statements necessarily include amounts based on judgments and estimates by management. Internal accounting control systems have been designed and implemented over the years and transactions are executed in accordance with management's authorizations. These internal control systems provide reasonable assurance that the financial statements and information included in this report properly reflect transactions of the Company. The Company also maintains an internal auditing function which evaluates and formally reports on the adequacy and effectiveness of internal accounting controls, policies and procedures. The Board of Directors has an Audit/Finance Committee composed of five members who are non-employee Directors of the Company. The Audit/Finance Committee met a total of four times during 1996. The Committee regularly meets (jointly and separately) with representatives of the independent auditors, the internal auditors and management. The Company's consolidated financial statements have been audited by Ernst & Young LLP, who have expressed their opinion with respect to the fairness of these statements. Their audit included a review of internal controls and testing of transactions and records that they consider necessary in the circumstances. William M. Jordan Bruce E. Hines Chairman of the Board, Senior Vice President and President and Chief Administrative Officer Chief Executive Officer
49 ITEM 9. NOT APPLICABLE
50 PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ----------------------------------------------------------- Officers are, in general, appointed annually to their respective positions at the April meeting of the Board of Directors. The executive officers and other officers of the Company at March 1, 1997 were as follows: William M. Jordan, Chairman, President and Chief Executive Officer, Director Bruce E. Hines, Senior Vice President and Chief Administrative Officer Thomas E. Haan, Group Vice President - Fluid Sealing Group George A. Shedlarski, Group Vice President - Rotating Equipment Group Mark E. Vernon, Group Vice President - Industrial Products Group Reid B. Wayman, Group Vice President - Flow Control Group Ronald F. Shuff, Vice President - Secretary and General Counsel Cheryl D. McNeal, Vice President - Human Resources Gregory L. Smith, Treasurer Kathleen A. Giddings, Controller WILLIAM M. JORDAN, 53, was elected President and Chief Executive Officer in 1993 and a Director in 1991. He was additionally elected Chairman of the Board on April 25, 1996. Mr. Jordan became Executive Vice President in 1990 and President in 1991. He was Chief Operating Officer from 1990 to 1993. From 1984 until 1991, Mr. Jordan was the Group Vice President of International Operations, and he was the Assistant Group Vice President International Operations in 1983. From 1979 to 1983, he was Vice President and General Manager of Duriron Canada Inc. Mr. Jordan joined the Company in 1972 as a sales engineer and held various sales positions prior to 1979. BRUCE E. HINES, 53, who rejoined the Company in 1989, was then elected Senior Vice President and added the position of Chief Administrative Officer in 1990. He previously had served as President of Vernay Labs, a manufacturer of precision rubber components. Prior to joining Vernay Labs, Mr. Hines had served in a variety of financial positions with the Company for nineteen years. He also functions as Chief Financial Officer. THOMAS E. HAAN, 47, was elected a Group Vice President effective January 1, 1996. He is responsible for the global operations of the Company's mechanical seal and sealing system products which are marketed under the "Durametallic" trade name. In 1970, he joined Durametallic. He was elected to the following Durametallic offices: a Vice President in 1985, Senior Vice President in 1990 and Executive Vice President - Chief Operating Officer in 1993. GEORGE A. SHEDLARSKI, 53, was elected a Group Vice President in 1987 and is responsible for the Company's worldwide pump operations, its foundry and for certain foreign operations. From 1984 until becoming a Group Vice President, Mr. Shedlarski was President of the Filtration Systems Division. From 1983 to 1984, he served as President and General Manager of Duriron Canada Inc. Mr. Shedlarski joined the Company in 1972 as a filtration product specialist and held various sales and managerial positions prior to 1983. 48
51 MARK E. VERNON, 44, was elected a Group Vice President in 1993. He is responsible for the worldwide operations of the Company's quarter turn valve and valve actuator businesses and certain foreign operations. He was President of the Company's Valtek Inc. subsidiary from 1991 to 1993 and Senior Vice President of Valtek from 1988 to 1990. Mr. Vernon joined Valtek Incorporated in 1978. REID B. WAYMAN, 44, was elected a Group Vice President effective March 1, 1997. He is responsible for the Company's global control valve operations. He served most recently as Vice President of Sales and European Operations of the Company's Rotating Equipment Group and as Vice President-European Operations of its Flow Control Group. He joined the Company in 1975. RONALD F. SHUFF, 44, was elected Vice President - Secretary and General Counsel of the Company in 1990. He joined the Company in 1988 as General Counsel and Assistant Secretary. Mr. Shuff became General Counsel and Secretary in 1989. He also is responsible for corporate development matters. CHERYL D. MCNEAL, 46, joined the Company in April, 1996 as Vice President Human Resources. She had previously served in a series of progressively more responsible human resources management positions at NCR Corporation for eighteen years. GREGORY L. SMITH, 43, was elected Treasurer in 1987. He joined the Company in 1975. From 1985 until assuming his present position, he was Assistant Treasurer and, prior to becoming Assistant Treasurer, he was Manager of Corporate Tax. KATHLEEN A. GIDDINGS, 34, was elected Controller in 1993. She joined the Company in 1985. She has served the Company in a number of financial management positions, including Director of Financial Reporting and Corporate Controller in 1993, Manager Financial Accounting from 1990 to 1992, Supervisor Financial Accounting in 1989 and Financial Accountant from 1985 to 1989. Additional information required by this Item 10 is incorporated herein by this reference from the Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION - -------- ---------------------- The information required by this Item 11 is set forth in the Proxy Statement and is incorporated herein by this reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND - -------- --------------------------------------------------- MANAGEMENT ---------- The information required by this Item 12 is set forth in the Proxy Statement and is incorporated herein by this reference. 49
52 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------- ---------------------------------------------- The information required by this Item 13 is set forth to the extent applicable in the Proxy Statement and is incorporated herein by this reference. 50
53 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS - -------- ---------------------------------------------------- ON FORM 8-K ----------- (a) (1) FINANCIAL STATEMENTS The following consolidated financial statements of the Company are incorporated herein by this reference as part of this Report at Item 8 hereof. Report of Independent Auditors Consolidated Statement of Income for the years ended December 31, 1996, 1995 and 1994 Consolidated Statement of Shareholders' Equity for the years ended December 31, 1996, 1995 and 1994 Consolidated Balance Sheet at December 31, 1996 and 1995 Consolidated Statement of Cash Flows for the years ended December 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements (a) (2) FINANCIAL STATEMENT SCHEDULE Schedule II - Valuation and Qualifying Accounts All other schedules are omitted because they are not applicable or not required, or because the required information is included in the consolidated financial statements or notes thereto. (a) (3) EXHIBITS See INDEX to EXHIBITS (b) REPORTS ON FORM 8-K None 51
54 <TABLE> <CAPTION> THE DURIRON COMPANY, INC. Schedule II - Valuation and Qualifying Accounts (dollars in thousands ) Column A Column B Column C Column D Column E -------- -------- -------- -------- -------- Balance at Additions Deductions Balance at beginning charged to from end of Description of year earnings reserve year ----------- ------- -------- ------- ---- <S> <C> <C> <C> <C> Year ended December 31, 1996: Allowance for doubtful accounts (a): $1,408 $446 $307 $1,547 ====== ==== ==== ====== Year ended December 31, 1995: Allowance for doubtful accounts (a): $1,470 $577 $639 $1,408 ====== ==== ==== ====== Year ended December 31, 1994: Allowance for doubtful accounts (a): $1,282 $665 $477 $1,470 ====== ==== ==== ====== Restructuring inventory provision (b) $478 $0 $478 $0 ====== ==== ==== ====== Restructuring fixed asset reserve (c) $100 $0 $100 $0 ====== ==== ==== ====== (a) Deductions from reserve represent accounts written off, net of recoveries. (b) Deductions from reserve represent inventory written off. (c) Deductions from reserve represent fixed assets written off, and amounts reclassified to the general restructuring reserve. </TABLE>
55 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, The Duriron Company, Inc. has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 17th day of February, 1997. THE DURIRON COMPANY, INC. BY /s/ WILLIAM M. JORDAN ----------------------------------- WILLIAM M. JORDAN CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER 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 Duriron Company, Inc. and in the capacities and on the dates indicated: <TABLE> <CAPTION> - ------------------------------------------------------------------------------ NAME TITLE DATE - ------------------------------------------------------------------------------ <S> <C> <C> <C> /s/ William M. Jordan Chairman of the Board February 17, 1996 - --------------------- President and Chief WILLIAM M. JORDAN Executive Officer, Director /s/ Bruce E. Hines Senior Vice President - February 17, 1996 - -------------------- Chief Administrative Officer BRUCE E. HINES (Principal Accounting and Financial Officer) /s/ R. Elton White Director, Chairman February 17, 1996 - -------------------- of Audit/Finance Committee R. ELTON WHITE /s/ Hugh K. Coble Director February 17, 1996 - -------------------- HUGH K. COBLE /s/ John S. Haddick Director February 17, 1996 - -------------------- JOHN S. HADDICK /s/ Diane C. Harris Director February 17, 1996 - -------------------- DIANE C. HARRIS /s/ James S. Ware Director February 17, 1996 - -------------------- JAMES S. WARE </TABLE> 52
56 <TABLE> <CAPTION> INDEX TO EXHIBITS FOOTNOTE REFERENCE ---------- <S> <C> <C> (3) ARTICLES OF INCORPORATION AND BY-LAWS: 3.1 1988 Restated Certificate of Incorporation of The Duriron Company, Inc. was filed as Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1988...................... * 3.2 1989 Amendment to Certificate of Incorporation was filed as Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1989.................................... * 3.3 By-Laws of The Duriron Company, Inc. (as restated) were filed with the Commission as Exhibit 3.2 to The Company's Annual Report on Form 10-K for the year ended December 31, 1987................................................. * 3.4 1996 Certificate of Amendment of Certificate of Incorporation was filed as Exhibit 3.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995.................................... * 3.5 Amendment No. 1 to Restated Bylaws was filed as Exhibit 3.5 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995................................................. * (4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES: 4.1 Lease agreement, indenture of mortgage and deed of trust, and guarantee agreement, all executed on June 1, 1978 in connection with 9-1/8% Industrial Development Revenue Bonds, Series A, City of Cookeville, Tennessee.............. + </TABLE> 53
57 <TABLE> <CAPTION> FOOTNOTE REFERENCE --------- <S> <C> <C> <C> 4.2 Lease agreement, indenture of trust, and guaranty agreement, all executed on June 1, 1978 in connection with 7-3/8% Industrial Development Revenue Bonds, Series B, City of Cookeville, Tennessee........................................ + 4.3 Form of Rights Agreement dated as of August 1, 1986 was filed as an Exhibit to the Company's Form 8-A dated August 13, 1986..................... * 4.4 Amendment to Rights Agreement dated August 1, 1996 was filed as Exhibit 4.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996.............. * 4.5 Interest Rate and Currency Exchange Agreement between the Company and Barclays Bank dated November 17, 1992 PLC in the amount of $25,000,000 was filed as Exhibit 4.9 to Company's Report of Form 10-K for year ended December 31, 1992.......... * 4.6 Loan Agreement in the amount of $25,000,000 between the Company and Metropolitan Life Insurance Company dated November 12, 1992 was filed as Exhibit 4.10 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992 ..... + 4.7 Revolving Credit Agreement between the Company and First of America Bank - Michigan, N.A. in the amount of $20,000,000 and dated August 22, 1995.......................................................... + 4.8 Credit Facility between the Company in the amount of $100,000,000 and National City Bank, as Agent, FILED dated December 3, 1996........................................ HEREWITH 4.9 Rate Swap Agreement in the amount of $25,000,000 between the Company and National City Bank dated FILED November 14, 1996............................................. HEREWITH </TABLE> 54
58 <TABLE> <CAPTION> FOOTNOTE REFERENCE --------- <S> <C> <C> <C> 4.10 Rate Swap Agreement in the amount of $25,000,000 between the Company and Key Bank National FILED Association dated October 28, 1996........................ HEREWITH (10) MATERIAL CONTRACTS: (See Footnote "a") 10.1 The Duriron Company, Inc. Incentive Compensation Plan (the "Incentive Plan") for Senior Executives, as amended and restated effective January 1, 1994, was filed as Exhibit 10.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993............. * 10.2 Amendment No. 1 to the Incentive Plan was filed as Exhibit 10.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995....... * 10.3 The Duriron Company, Inc. Supplemental Pension Plan for Salaried Employees was filed with the Commission as Exhibit 10.4 to the Company's Annual Report on Form 10-K for the year ended December 31, 1987............................................. * 10.4 The Duriron Company, Inc. amended and restated Director Deferral Plan was filed as Attachment A to the Company's definitive 1996 Proxy Statement filed with the Commission on March 10, 1996.................................. * 10.5 Change in Control Agreement ("CIC") between The Duriron Company, Inc. and William M. Jordan, FILED Chairman, President and CEO............................. HEREWITH 10.6 Form of CIC Agreement between all other executive FILED officers of the Company............................................. HEREWITH 10.7 The Duriron Company, Inc. First Master Benefit Trust Agreement dated October 1, 1987 was filed as Exhibit 10.24 to the Company's Annual Report on Form 10-K for the year ended December 31, 1987... * </TABLE> 55
59 <TABLE> <CAPTION> FOOTNOTE REFERENCE --------- <S> <C> <C> <C> 10.8 Amendment #1 to the first Master Benefit Trust Agreement dated October 1, 1987 was filed as Exhibit 10.24 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993........ * 10.9 Amendment #2 to First Master Benefit Trust Agreement was filed as Exhibit 10.25 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993........................................... * 10.10 The Duriron Company, Inc. Second Master Benefit Trust Agreement dated October 1, 1987 was filed as Exhibit 10.12 to the Company's Annual Report on Form 10-K for the year ended December 31, 1987............... * 10.11 First Amendment to Second Master Benefit Trust Agreement was filed as Exhibit 10.26 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993.............................. * 10.12 The Duriron Company, Inc. Long-Term Incentive Plan (the "Long-Term Plan"), as amended and restated effective November 1, 1993 was filed as Exhibit 10.8 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993........ * 10.13 Amendment No. 1 to the Long-Term Plan was filed as Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995...................... * 10.14 The Duriron Company, Inc. 1989 Stock Option Plan FILED as amended and restated effective January 1, 1997...................... HEREWITH 10.15 The Duriron Company, Inc. 1989 Restricted Stock Plan (the "Restricted Stock Plan") as amended and FILED restated effective January 1, 1997..................................... HEREWITH </TABLE> 56
60 <TABLE> <CAPTION> FOOTNOTE REFERENCE --------- <S> <C> <C> <C> 10.16 The Duriron Company, Inc. Retirement Compensation Plan for Directors ("Director Retirement Plan") was filed as Exhibit 10.15 on the Company's Annual Report to Form 10-K for the year ended December 31, 1988....................... * 10.17 Amendment No. 1 to Director Retirement Plan was filed as Exhibit 10.21 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995............................................... * 10.18 The Company's Benefit Equalization Pension Plan ("Equalization Plan") was filed as Exhibit 10.16 to the Company's Annual Report on Form 10-K for the year ended December 31, 1989....... * 10.19 Amendment #1 dated December 15, 1992 to the Equalization Plan was filed as Exhibit 10.18 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992.................. * 10.20 The Company's Equity Incentive Plan as amended and restated effective July 21, 1995 was filed as Exhibit 10.25 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995............................................... * 10.21 Supplemental Pension Agreement between the Company and William M. Jordan dated January 18, 1993 was filed as Exhibit 10.15 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992........................... * 10.22 1979 Stock Option Plan, as amended and restated April 23, 1991, and Amendment #1 thereto dated December 15, 1992, was filed as Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992 ...................... * </TABLE> 57
61 <TABLE> <CAPTION> FOOTNOTE REFERENCE --------- <S> <C> <C> <C> 10.23 Deferred Compensation Plan for Executives was filed as Exhibit 10.19 to the Company's Annual Report on Form 10-K for the year ended December 31, 1992 ...................................... * 10.24 Executive Life Insurance Plan of The Duriron Company, Inc. was filed as Exhibit 10.29 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995............................ * 10.25 Executive Long-Term Disability Plan of The Duriron Company, Inc. was filed as Exhibit 10.30 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995........................ * 10.26 Consulting Agreement between James S. Ware and Durametallic Corporation dated April 21, 1991 was filed as Exhibit 10.31 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995................................................ * 10.27 Senior Executive Death Benefit Agreement between James S. Ware and Durametallic dated April 12, 1991 was filed as Exhibit 10.32 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995........................ * 10.28 Executive Severance Agreement between James S. Ware and Durametallic Corporation dated January 6, 1994 was filed as Exhibit 10.33 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995.............................. * 10.29 Agreement between James S. Ware and the Company dated September 11, 1995 was filed as Exhibit 10.34 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995....................................... * </TABLE> 58
62 <TABLE> <CAPTION> FOOTNOTE REFERENCE --------- <S> <C> <C> <C> 10.30 Agreement and Plan of Merger Among The Duriron Company, Inc., Wolverine Acquisition Corporation and Durametallic Corporation, dated as of September 11, 1995 was filed as Annex A on the Form S-4 Registration Statement filed by the Company on September 11, 1995....................................................... * 10.31 Split-Dollar Life Insurance Agreement between the Company and James S. and Sheila D. Ware Irrevocable Trust II signed March 6, 1996 was filed as Exhibit 10.36 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 1996................................................................. * 10.32 Employee Protection Plan, as revised effective March 1, 1997 (which provides certain severance benefits to employees upon a change of control of the Company)........................................... FILED HEREWITH </TABLE> 59
63 (22) (a) All subsidiaries are wholly owned or controlled except as otherwise indicated by one of the following footnotes (b) 40% ownership (c) 51% ownership - ---------- (23) CONSENTS OF EXPERTS AND COUNSEL FILED 23.1 Consent of Ernst & Young LLP .................... HEREWITH (27) FINANCIAL DATA SCHEDULE 27.1 Financial Data Schedule (submitted for the SEC's FILED information) .................................... HEREWITH - ---------- "*" Indicates that the exhibit is incorporated by reference into this Annual Report on Form 10-K from a previous filing with the Commission. The Company's file number with the Commission is "0-325". "+" Indicates that the document relates to a class of indebtedness that does not exceed 10% of the total assets of the Company and subsidiaries and that the Company will furnish a copy of the document to the Commission upon request. "a" The documents identified under Item 10 include all management contracts and compensatory plans and arrangements required to be filed as exhibits. 61