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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
MARK ONE
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________________ TO ______________________
COMMISSION FILE NUMBER: 000-29358
DENISON INTERNATIONAL PLC
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(Exact name of Registrant as specified in its charter)
ENGLAND AND WALES NOT APPLICABLE
(State or other Jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
14249 INDUSTRIAL PARKWAY
MARYSVILLE, OHIO 43040
(Address of principal executive offices) (Zip Code)
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) (937) 644-4500
SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
American Depositary Shares (as evidenced by American Depositary Receipts), each
representing one Ordinary Share, $0.01 par value of the registrant
(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 [ ]
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 the Registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 27, 2001 was $ 105,736,300
The number of outstanding shares of each of the registrant's classes of
capital or common stock as of March 27, 2001 was as follows:
10,563,950 ORDINARY SHARES, $0.01 PAR VALUE
7,015 'A' ORDINARY SHARES, (POUND)8.00 PAR value
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's Definitive Proxy Statement on schedule 14A relating to the
Annual Meeting of Shareholders to be held on May 22, 2001 is incorporated by
reference in Part I and Part III of the Form 10-K to the extent stated herein.
TABLE OF CONTENTS
Page
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PART I
Item 1. Business........................................................................................1
Item 2. Properties.....................................................................................11
Item 3. Legal Proceedings..............................................................................11
Item 4. Submission of Matters to a Vote of Security Holders............................................11
Item 4A. Executive Officers of the Company..............................................................12
PART II
Item 5. Market for the Company's Common Equity And Related Stockholder Matters.........................12
Item 6. Exchange Controls and Other Limitations Affecting Security Holders.............................13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..........14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.....................................21
Item 8. Financial Statements and Supplementary Data....................................................21
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...........45
PART III
Item 10. Directors and Officers of the Registrant.......................................................45
Item 11. Executive Compensation.........................................................................46
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................46
Item 13. Certain Relationships and Related Transactions.................................................46
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................46
SIGNATURES.......................................................................................................48
SCHEDULE II.....................................................................................................F-1
EXHIBIT INDEX...................................................................................................E-1
(i)
References to Shares herein refer to (i) the Ordinary Shares of Denison,
$0.01 par value per Ordinary Share (the "Ordinary Shares") and (ii) Denison's
American Depositary Shares ("ADSs"), each of which represents one Ordinary
Share. The ADSs are evidenced by American Depositary Receipts ("ADRs").
Denison publishes its financial statements in U.S. dollars. In this Form
10-K, references to "dollars" or "$" are to U.S. dollars and references to
"pounds sterling," "(pound)" or "p" are to U.K. currency. Except as otherwise
stated herein, all monetary amounts in this Form 10-K have been presented in
dollars.
The Company publishes annual reports containing annual audited consolidated
financial statements and opinions thereon by independent public auditors. Such
financial statements are prepared on the basis of accounting principles
generally accepted in the United States ("US GAAP") expressed in U.S. dollars.
The Company has published quarterly updates and semi-annual reports containing
unaudited financial information prepared on the same basis as its audited US
GAAP consolidated financial statements.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K includes and incorporates forward-looking statements within
the meaning of section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. All statements, other than statements of
historical facts, included or incorporated in this Form 10-K regarding the
Company's strategy, future operations, financial position, future revenues,
projected costs, prospects, plans and objectives of management are
forward-looking statements. The words "anticipates", "believes", "estimates",
"expects", "intends", "may", "plans", "projects", "will", "would" and similar
expressions are intended to identify forward-looking statements, although not
all forward-looking statements contain these identifying words. The Company
cannot guarantee that it actually will achieve the plans, intentions or
expectations disclosed in its forward-looking statements and undue reliance
should not be placed on the Company's forward-looking statements. Actual results
or events could differ materially from the plans, intentions and expectations
disclosed in the forward-looking statements. The Company has included important
factors in the cautionary statements included or incorporated in this Form 10-K
that the Company believes could cause actual results or events to differ
materially from the forward-looking statements made. The Company's
forward-looking statements do not reflect the potential impact of any future
acquisitions, mergers, dispositions, joint ventures or investments the Company
may make. The Company does not assume any obligation to update any
forward-looking statements.
PART I
ITEM 1. BUSINESS.
OVERVIEW
Denison International plc and its subsidiaries ("Denison" or the
"Company") design, manufacture, sell and service highly-engineered components
for use in hydraulic fluid power systems, as well as complete hydraulic fluid
power systems. Hydraulic systems, which are part of larger pieces of machinery
and equipment, provide the force to move and position very heavy materials and
equipment as well as the precision to move and position very light loads with a
high degree of accuracy. The components manufactured by the Company for these
systems include hydraulic pumps, motors, manifolds, and valves. Many of
Denison's products are designed to be used under demanding conditions, such as
elevated pressure, high temperature, variable speed and low decibel levels. The
Company sells its products globally to a diverse group of end-users for use in a
broad array of industrial applications, such as machine tools and material
handling equipment, various mobile applications, such as construction,
agricultural and utility equipment, and in marine applications, such as military
equipment.
The Company focuses on the specialty segment of the hydraulic power
market and works closely with its customers to meet their specified performance
objectives. Denison's product offerings include a wide variety of piston pumps
and motors; vane pumps and motors; manifold systems; pressure, directional and
proportional valve products; radial piston motors; and electronic control
products. Denison's products enjoy excellent brand recognition and significant
market share in certain sectors of the market targeted by the Company. The
Company markets and sells its products primarily through a global network of
regional sales and service subsidiaries, independent fluid power equipment
distributors and, to a lesser extent, directly to end-users. In the United
States, the Company relies primarily on independent fluid power distributors
which also distribute other products that do not generally compete with
Denison's. In Europe and Asia, Denison primarily sells its products directly to
OEMs through its regional sales and service subsidiaries. For certain
information concerning the Company's revenue, operating profit and identifiable
assets attributable to each of the Company's geographical market segments, see
Note 16 of "Notes to Consolidated Financial Statements".
Denison, whose operations date back to the early 1930s, is a pioneer in
the hydraulic products market. The Company's long history of innovation can be
traced back to its first product, the hydraulic-powered car pusher, a
revolutionary development which led to widespread application of hydraulic power
as a solution for numerous industrial and mobile requirements. Denison's
research and development efforts have resulted in its being granted
approximately 600 patents since its inception. The business of the Company was
acquired by its present owners in 1993 from Hagglund & Soner AB. The Company has
conducted business under the "Denison" name since 1932.
The Company was incorporated in England and Wales as a private company
limited by shares in March 1993 and was re-registered as a public limited
company on July 28, 1997. On August 8, 1997, the Company completed an initial
public offering in which it issued and sold 450,000 Ordinary Shares at $16.00
per share. The net proceeds from the offering were $4,480,000. In December 1998
the Company acquired 100% of the shares of Lokomec Oy, a manufacturer and
distributor of highly engineered manifold systems located in Tampere, Finland.
In April 2000 the Company acquired 100% of the shares of Riva Calzoni
Oleodinamica, a manufacturer and distributor of radial piston motors located in
Bologna, Italy.
The Company's principal U.S. executive offices are located at 14249
Industrial Parkway, Marysville, Ohio 43040 and its telephone number is
937-644-4500. The Company's U.K. executive offices are located at Masters House,
107 Hammersmith Road, London W14 0QH, England and its telephone number is
44-20-7603-1515.
INDUSTRY OVERVIEW
Hydraulics, or fluid power, is a motion control technology that is used
to transfer and control force and power through fluids under pressure. Hydraulic
systems are typically comprised of a pump, valves, manifolds and actuators.
Pumps are used to move fluid from one location to another. Pressure is generated
when the fluid encounters resistance. Valves and manifolds control the flow of
fluids, and actuators, such as cylinders and rotary motors, convert pressure
into mechanical energy.
Hydraulic systems offer greater flexibility of layout, compact design
and higher performance-to-weight ratio than other forms of motion control, such
as mechanical and electrical systems. Hydraulic systems provide the force to
move and position materials and equipment weighing several tons as well as the
precision to move and position very light loads with a high degree of accuracy.
For example, hydraulics is a tool powerful enough for heavy-duty steel
production in blast furnaces and precise enough for handling of steel ingots in
a stamping mill. As a result, hydraulic systems are integral to a wide variety
of industrial, mobile and marine applications. Although generally not noticed by
most end-product users, virtually every production process uses hydraulic power
as does almost every machine, vehicle and aircraft.
The hydraulic pump and valve market is a highly-fragmented,
multi-billion dollar worldwide industry. The hydraulics market is divided
broadly into two product segments: specialty and commodity. The specialty
segment is comprised of highly-engineered, high-performance, specialized
hydraulic products, which are generally more complex and used in demanding
applications. Specialty products tend to be less price sensitive, generally have
higher margins and are more likely to utilize servicing and maintenance. The
commodity segment is comprised of lower performance products, which are sold for
use in price-sensitive applications.
Demand and growth in different application sectors of the hydraulics
industry have typically been driven by various external economic factors. The
industrial sector of the hydraulics industry has typically been affected by the
cyclicality of the overall economy. Sales of mobile hydraulic systems and
components have been driven by infrastructure development factors such as
construction and new housing starts. Sales of marine systems have been largely
influenced by military expenditures and, thus, are less affected by cyclical
economic factors. Demand and growth in each of the industrial, mobile and marine
sectors of the hydraulics market are also affected by the replacement cycle of
the hydraulic products.
PRODUCTS
The Company designs, manufactures, sells and services a broad range of
components for use in hydraulic fluid power systems, as well as complete
hydraulic fluid power systems, for applications with high reliability,
performance, precision and durability requirements. The Company's primary
products are piston pumps and motors, vane pumps and motors, manifolds, radial
piston motors, and valves. In 2000, vane pumps and motors accounted for 30.0% of
the Company's net sales, piston pumps and motors accounted for 27.8% of the
Company's net sales, valves accounted for 20.8% of the Company's net sales,
radial piston motors accounted for 6.5% of the Company's net sales, and
manifolds accounted for 5.4% of the Company's net sales. In addition, the
Company manufactures electronic control products and certain other components
and accessories used in hydraulic systems. Other products sales accounted for
9.5% of the Company's net sales.
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The markets served by the Company are substantial and diversified, with
no single customer accounting for 4% or more of its net sales in 2000. The
Company's products are used in many different industrial, mobile and marine
applications, including mining machinery, drilling equipment, excavators,
cranes, machine tools, die casting and plastics processing machinery.
PUMPS AND MOTORS
Hydraulic pumps include piston pumps and motors, which provide
adjustable flow and variable displacement, and vane pumps and motors, which
provide continuous flow and fixed displacement. Each type of pump or motor is
suitable for particular uses, depending upon variables such as speed, pressure,
operating temperature, noise level, life expectancy and cost. Piston pumps and
motors are used in tractors, tanks, machine tools, sophisticated winches, such
as anchors on a ship or deck cranes on an aircraft carrier, as well as in other
products with complex performance requirements, such as varying or multiple
speeds or pressures. Vane pumps and motors are used in less complex applications
generally requiring low noise levels but little or no variation in flow, such as
refuse trucks, cranes and large presses.
All hydraulic pumps operate on the displacement principle in which a
fluid (typically petroleum-based oil) is transferred from an inlet (suction
port) into a mechanically-sealed, low-pressure chamber and subsequently, to a
high-pressure chamber having the outlet (pressure port). The transfer of the
fluid inside the pump can be accomplished by the movement of screws, gears,
vanes or pistons which compact the fluid and create pressure.
Hydraulic motors operate on a principle, which is the reverse of the
hydraulic pump process, absorbing hydraulic flow and pressure and converting
them into mechanical energy and rotary motion. This rotary motion can then be
used for various industrial applications, including the rotation of the wheels
of a mobile loader, driving winches on mobile crane systems or turning the
rollers on a conveyor belt.
Pumps and motors operate in either an open- or closed-loop system. In
an open-loop system, the hydraulic fluid is drawn into one or more pumps to
produce flow and then travels to a number of different actuators performing
independent functions. For example, an industrial conveyor belt system,
involving many unrelated functions, may use an open-loop system. In a
closed-loop system, the pump is dedicated to a single motor or set of motors
performing a single function. Unlike in an open-loop system, in which the
hydraulic fluid goes to a storage "reservoir" after passing through the motor,
in a closed-loop system, the oil returns to the pump before being transferred
back to the motor. The closed-loop system enables the flow direction of the
hydraulic fluid to be reversed while the system is operating. This, in turn,
allows for rapid changes in direction and speed of the motor, which is useful in
applications such as rotating the wheels of a front-loader. In general, piston
pumps are specifically manufactured for use in either an open-loop or
closed-loop system, while vane pumps are typically used only in open-loop
systems. A motor can generally be used in either an open- or closed-loop system.
Piston Pumps and Motors. Piston pumps are distinguished from vane pumps
by their ability to produce variable displacement; the amount of hydraulic fluid
passing through the pump, and thus the pressure generated by the hydraulic
system, can be varied to meet the changing requirements of the application.
Variable displacement generally reduces the cost of operating the hydraulic
system because the pump can operate at lowered displacement when the system
requirements are lowered, thus saving energy. Piston pumps are also typically
used with high horsepower applications because their design enables them to
operate at greater pressures than vane pumps.
Denison manufactures a full range of piston pumps which operate at
pressures as high as 7,250 pounds per square inch ("psi") and which vary in size
from 0.9 cubic inches to 38.9 cubic inches, and in displacement from 11 to 303
gallons per minute ("gpm"). Denison is particularly well-known in the
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hydraulics industry for its large-size piston pumps, such as the larger piston
pumps in the Company's Gold Cup Series and in the Premier Series. Denison is one
of very few manufacturers that offer very large piston pumps as a standard,
rather than a custom-made, product. Denison's large-size piston pumps are
distinguished from those of its competitors by its proprietary "barrel-bearing"
design, which enables the pump to run in a stable condition at high speed and
pressure. Management believes the "barrel-bearing" design gives the larger
Denison piston pumps a sturdier construction than other piston pump designs,
resulting in a longer life cycle in severe duty applications such as heavy
mining equipment and aircraft carrier steering systems.
All Denison piston pumps are manufactured at the Company's Marysville,
Ohio facility. During 2000, the Marysville plant produced and shipped in excess
of 14,000 units.
Vane Pumps and Motors. Vane pumps and motors are ideal for applications
which require a fixed displacement in which the pressure produced does not need
to be adjusted during operation. Vane pumps and motors typically produce a low
noise level and are ideal for applications which require low noise output, such
as garbage trucks, injection-molding machines and other devices found in
workplaces where OSHA regulations mandate reduced noise levels. In addition, due
to their simpler design, vane pumps and motors are less susceptible than piston
products to contamination from impurities in the hydraulic system, a feature
that makes vane pumps and motors ideal for use in steel production and mining,
which produce many contaminants.
Denison is the second-largest manufacturer of vane pumps in the world
in terms of net sales. The Company produces a full range of vane pumps and
motors which operate at pressures in excess of 4,500 psi and which vary in size
from 0.35 cubic inches to 16 cubic inches, and in displacement from 1 to 250
gpm. Denison's newest vane pump product is the M5BF series fan-drive motor. The
M5BF is designed for use in industrial applications, and offers less noise and
leakage and higher operating pressure than earlier vane pump models.
Denison's vane pumps are recognized as among the strongest products in
the hydraulics industry and are distinguished from competitors' vane pumps by
Denison's double-lip design, in which the vane is in contact with the cam ring
at two points rather than at one as with the single-lip design. This double-lip
design makes Denison's vane pumps less susceptible to contamination than
single-lip pumps. The Company believes that no other manufacturer currently
offers the double-lip design, a feature of all vane pumps manufactured by
Denison since the 1940's.
All Denison vane pumps are manufactured at the Company's Vierzon,
France facility. During 2000, the Vierzon plant produced and dispatched in
excess of 70,000 units.
RADIAL PISTON MOTORS
Radial piston motors are a unique design of low speed, high torque
hydraulic motors that are utilized in a variety of applications including
industrial machinery, agriculture and natural resource exploration. The unique
design relates to the principle of transmitting power to the rotary shaft by
means of a pressurized column of oil contained in a telescopic cylinder, as
opposed to the more common approach of utilizing connecting rods, pistons, pads
and pins. The Denison radial piston motor offers advantages of high torque at
very low speeds, reduced wear on moving parts, and a significant reduction in
weight and overall size compared to other motors with the same capacity.
Denison manufactures three types of radial piston motors: fixed
displacement, dual displacement, and variable displacement. This product
offering allows Denison to offer our customers components that are less
standard, but more suitable to respond to the customer's specific requirements.
Denison's radial
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piston motor products respond to the hydraulic market's evolution towards
products offering optimum performance and maximum efficiency.
All Denison radial piston motors are manufactured in the Company's
Bologna, Italy facility. Since its acquisition by the Company in April 2000, the
Bologna facility produced approximately 9,000 radial piston motors.
MANIFOLDS
Manifolds are machined steel or aluminum blocks, which act as housing
for surface mounted, or cartridge valves, which control the operation of a wide
variety of hydraulic equipment such as presses, bailers, lifting devices, and
mobile machinery and equipment. Manifolds are utilized in conjunction with
pumps, motors, cylinders, and valves to form a complete hydraulic system.
Systems are a growing trend in the hydraulics industry as customers are
essentially outsourcing the hydraulics engineering expertise and component
integration to a single supplier offering a complete "package". The manufacture
and sale of manifolds offers the Company an avenue to utilize its engineering
expertise to sell additional valves, which are often not competitive if sold as
individual items. Substantially all of Denison's manifolds are manufactured at
the Company's Tampere, Finland facility. During 2000, the Tampere factory
produced and sold in excess of 10,000 manifolds.
VALVES
Valves function by changing the size or direction of the orifice
through which the pressurized fluid passes as it travels from the pump to the
piston or motor. This function provides control over the direction, pressure and
flow of the pressurized fluid depending upon the requirements of the system in
which the valve is operating. Often, electronic controllers are used to control
the size and direction of the valve orifice.
Denison manufactures four basic types of valves: directional control
valves which alter the path of pressurized fluid through the hydraulic systems;
pressure control valves which regulate the pressure of the hydraulic fluid; flow
control valves which match the hydraulic fluid's flow with the requirements of
the system; and check valves which allow fluid to pass in one direction and not
the other. Denison's valves are used in a variety of commercial settings,
including injection molding, metal and material forming, mobile equipment such
as cranes, and marine systems such as ship-mounted winches.
Denison is one of the few manufacturers of flange mounted pressure
control valves, a design which enables the valve to be attached directly to
another hydraulic component, such as a pump or a motor. Most competitors' valves
must be connected to the associated component with hydraulic lines, which tend
to be more expensive and are less effective at controlling leaks than flange
mounting. Denison's high performance directional valves, when combined with the
Company's pressure controls, offers the best range of valves available in the
market.
All Denison valves are manufactured at the Company's Hilden, Germany
plant, with the exception of a line of pressure control valves, manufactured for
Denison by a Swiss company, and a line of cartridge valves, manufactured for
Denison by an English company. In each case, the manufacturing company produces
the valves using Denison's specification. During 2000, the Hilden factory
supplied approximately 240,000 units, of which approximately 210,000 were
manufactured at the Hilden factory.
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ELECTRONICS
Denison manufactures electronic controllers to be used with its piston
pumps and motors. Electronic controllers act as an interface between a hydraulic
component and the master controls of the hydraulic system operator and as a
protective device against unusual and potentially damaging signals from the
hydraulic system.
The Venus Controller is Denison's newest and most sophisticated
microprocessor-based controller. It is programmed and adjusted with a personal
computer or other small-computerized device, providing faster response and
greater accuracy than older analog devices. The Venus Controller is
distinguished from many competitors' controllers by its ability to
simultaneously control several different hydraulic functions or components. For
example, it can control both open-loop and closed-loop functions, whereas many
competitors' products require different controllers for each of these functions.
This simplifies the control and adjustment of hydraulic systems.
The Venus Controller is manufactured at the Marysville, Ohio facility.
The other Denison controllers are manufactured at the Marysville, Ohio facility
and the Hilden, Germany facility.
SERVICE
The Company provides a full array of aftermarket services, consisting
primarily of upgrades and replacement of its own and other manufacturers'
hydraulic related products and systems, and to a lesser extent field service,
repairs and maintenance. The Company provides these aftermarket services through
its own regional sales and service subsidiaries and through its network of
independent fluid power equipment distributors.
Denison's large installed customer base provides it with significant
aftermarket sales of spare parts and services. The highest level of aftermarket
service is piston pumps, which tend to be more complex and require more
maintenance than vane pumps. Approximately 135,000 piston pumps and 440,000 vane
pumps have been manufactured by Denison and are currently in use and therefore
may be subject to service. In 2000, 12.5% of the Company's net sales were
derived from aftermarket services, primarily the sales of spare and replacement
parts.
PRODUCT DEVELOPMENT
Denison has a long history of emphasizing research and development,
dating back to the formation of the Company in 1932. Denison was an early
technological leader within the hydraulics industry and has been granted
approximately 600 patents since the Company's inception. Denison has remained
strongly committed to being on the forefront of technological innovation, as
evidenced by the Company's continuing focus on development of new products and
enhancements to existing products.
As of December 31, 2000, Denison's research and development staff
consisted of a total of 53 employees. Thirty of these employees conduct research
and development on piston pumps and motors at Denison's Ohio facility; eleven
focus on research and development related to vane pumps and motors at Denison's
France facility; and twelve perform research and development on industrial
valves at Denison's Germany plant. The main activities of the research and
development staff involve developing new concepts and new product designs, and
modifying and improving existing products and designing variations of existing
products to suit specific customer needs. Denison currently has no plans to
significantly change the number of its R&D employees. Denison incurred research
and development costs of $5.0 million, $4.4 million and $3.1 million in the
years ended December 31, 2000, 1999 and 1998, respectively.
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MANUFACTURING AND SUPPLIERS
The Company's production facilities are located in Marysville, Ohio;
Vierzon, France; Bologna, Italy; Tampere, Finland and Hilden, Germany. The
Marysville plant manufactures piston pumps and motors, the Vierzon plant
manufactures vane pumps and motors, the Bologna plant manufacturers radial
piston motors, the Tampere plant manufactures manifolds, and the Hilden plant
manufactures valves. The manufacturing plants have undergone significant
upgrading and rationalization in recent years and are in superior manufacturing
condition. Currently, the facilities are operated in two to three shifts with
the possibility of increasing capacity with existing machinery by increasing
working hours. Approximately 35% of the manufacturing workforce is dedicated to
the production of vane pumps and motors, 23% to the production of piston pumps
and motors, 21% to the production of valves, 15% to the production of radial
piston motors, and 6% to the production of manifolds. Each facility is equipped
with testing equipment to maintain the Company's high quality control standards.
All of the Company's manufacturing facilities are ISO9001 certified.
The Company manufactures in-house virtually all of the high value-added
or quality critical components such as the rotating groups, body components and
controls used to build its products. The Company has computerized numerically
controlled type flexible machinery and equipment that is organized in a series
of work cells, utilizing just-in-time production scheduling techniques. The
Company has spent in excess of $25.0 million on new production equipment in the
last four years. As a result of these investments, significant gains in
productivity efficiency have been realized since 1993. Management believes that
the improvement programs in progress will further add to efficiency and promote
cost reductions, particularly in piston pump, radial piston motor and valve
production.
The Company's ability to produce components to high-level standards of
complex design makes it difficult for competitors to offer products of equal
performance for certain demanding applications. Modern and innovative machining
practices are employed to produce a wide array of products, while assuring
process control. The Company also utilizes specialized and precision grinding
methods that allow superior speed, precision and efficiency, and innovative
fabrication and manufacturing processes. All manufacturing processes employed
are well proven and support the Company's efforts to produce products that are
both highly durable and reliable.
The primary products purchased from suppliers are castings (all
products), solenoids (valves), turned parts (valves), steel bars (vane and
piston), steel and aluminum stock (manifolds), bearings (vane and piston), brass
(piston) and shafts. The Company has implemented an aggressive program of
consolidating suppliers of component parts and raw materials. This program has
resulted in an increased supply of component parts, improved quality, and
reduced costs of production materials. Currently, there are few common suppliers
between the different manufacturing facilities. Management anticipates that the
continuation of this program will yield additional savings in the future.
The Company's operations involve the handling and use of substances
that are subject to foreign, Federal, state and local environmental laws and
regulations that impose limitations on the discharge of pollutants into the
soil, air, and water and establish standards for their storage and disposal. The
Company is not involved in any pending or threatened proceedings that would
require curtailment of its operations because of such regulations. The Company
believes that it is in material compliance with all of such laws in the United
States, and it continually expends funds to assure that it remains in material
compliance. Investigations of the Company's European facilities have identified
areas of contamination and practices, which may be in violation of applicable
regulations. Compliance with foreign and domestic environmental laws has not
had, and is not expected to have, any material effect on the Company's earnings
or competitive position.
-7-
SALES AND MARKETING
Denison has an extensive and well-trained international sales network
comprised of 16 regional sales and service subsidiaries and 193 independent
fluid power equipment distributors in 52 countries. Distributors buy products
from the Company and resell them to end-users. To a small extent, other
manufacturers' products are distributed through the Company's channels; however,
the Company's distributors do not typically carry products, which compete with
the Company's products. Denison's sales and service subsidiaries are full
service offices engaged in the customized modification, design, manufacture,
packaging, sale and servicing of the Company's hydraulic components and systems.
Typically, the sales and service subsidiaries as well as the distributors are
staffed with professional engineers who are capable of designing hydraulic
systems to meet the requirements of customers' applications. The network is
divided into three main geographical regions: Europe, North America and the
Asia-Pacific region.
The Company's sales and marketing network in North America is comprised
of 46 sales and marketing employees, as well as 40 independent distributors.
Denison's regional sales and service subsidiaries are located in 16 countries
around the world, including Germany, the United Kingdom, France, Italy,
Scandinavia, Spain, Singapore, China, Japan and Australia. Denison's plants
supply pumps, motors, manifolds and valves to its regional subsidiaries, which
maintain small inventories of the components and parts with the highest customer
demand. Each of the regional subsidiaries has the capacity to modify or convert
pumps, motors and valves on-site to meet specific needs of customers, thus
allowing the subsidiaries to offer a flexible product line without maintaining
an extensive inventory. The regional subsidiaries also have sophisticated test
rigs to permit on-site diagnosis and repair of Denison products. Together with
the additional 193 distributors throughout the world, the regional subsidiaries
constitute an international sales network providing extensive support in
application engineering, service and repair parts for Denison products
worldwide.
OEMs and distributors are normally updated with technical developments
through meetings, training sessions and product brochures, while promotion
efforts to other customers are handled by the distributors themselves. The OEMs
prefer to purchase all their required equipment from a single source supplier.
In order to capitalize on this trend, the Company intends to become a full range
supplier within chosen niches in various market sectors. These chosen niches
include metal forming, material forming, capital plant and machine tools in the
industrial sector; earthmoving and construction, special purpose machinery
(including mining) and agriculture in the mobile sector; and a number of
applications in the commercial and military marine sector. These have been
selected not only on the basis of fit with existing products, but also on the
basis of product overlap and management's expectation of above-average growth in
demand for these products in the foreseeable future. Management estimates that
it is possible for Denison to increase its presence as a full range supplier
within these niches through relatively few additions to its existing product
range.
CUSTOMERS
Denison's broad base of well-known customers in the hydraulics industry
in the United States, Europe and the Asia-Pacific region attests to the high
reliability and quality of the Company's products. In 2000, Denison's top ten
OEM and direct end-user customers accounted for approximately 12% of net sales,
and the top ten customers overall accounted for approximately 11% of net sales.
The markets served by the Company are substantial and diversified, with no
single customer accounting for more than 4% of the Company's net sales in 2000.
The Company's products are primarily utilized in industrial, mobile and
marine applications. Industrial applications involve equipment that generally is
stationary in factories or processing plants, such as presses, injection molding
equipment, power units, drilling equipment, test stands, mining machinery,
-8-
metal-forming and metal-cutting machinery and machine tools. The requirements of
the industrial marketplace are more demanding than most mobile applications
since industrial equipment typically operates at significantly higher cycles.
The Company's products are designed to meet these operating imperatives.
Denison's industrial customers include Cincinnati Milacron (machine tools and
injection molding equipment); Ingersoll-Rand and Driltech (rotary drills);
General Electric and Solar Turbines (power generation); Harris Waste Management
and Kershaw Manufacturing (presses and boilers); and Husky (injection molding
equipment).
Mobile applications involve equipment that generally is not fixed in
place, such as construction, demolition, agricultural, mining, lumber and pulp
harvest, and utility equipment. These industries tend to place a premium on
considerations of space, weight and cost. Mobile customers include Komatsu
(construction equipment); Case, Caterpillar and Volvo (wheel loaders); Plasser &
Theurer (railroad repair machinery); and PPM Crane (mobile cranes and
excavators).
Marine applications involve equipment used on sea vessels by both
commercial and military end-users, such as anchors, ship-mounted winches and
deck cranes on aircraft carriers. Marine customers include the U.S. Navy and
Hepburn Engineering.
End users who purchase the Company's products through distributors
include Bethlehem Steel and Kaiser Aluminum (primary metals); Boeing and Textron
(aerospace); Boise Cascade and Roseberg Forest Products (pulp and paper
industry); and Westinghouse and Stewart & Stevenson (power generation). Other
major customers include large OEMs such as Grove Manufacturing and Tamrock in
the United States; Grange (France), Hagglund & Soner AB (Sweden), Krupp
(Germany) and MIR (Italy), in Europe; and IHI, Kawasaki and Mitsubishi in Japan.
BACKLOG
The Company's backlog of unfilled firm orders was $32.5 million at
December 31, 2000, compared with $23.7 million at December 31, 1999. The Company
estimates that approximately 98% of the December 31, 2000 backlog will be filled
by December 31, 2001.
COMPETITION
The hydraulics industry is highly fragmented and intensely competitive.
The Company competes primarily on the basis of the performance, quality and
durability of its products, as well as the availability of aftermarket support
through its regional sales and service subsidiaries and through its network of
independent fluid power equipment distributors.
The Company competes with divisions of large corporations, such as
Rexroth (proposed to be acquired by Bosch) and divisions of Eaton, Parker
Hannifin and Bosch, as well as companies with more limited product lines. Some
of the Company's competitors are larger and have greater financial and other
resources than the Company and thus can better withstand adverse economic or
market conditions as compared to the Company. In addition, companies not
currently in direct competition with the Company may introduce competing
products in the future.
The Company has a large number of competitors, some of which are
full-line producers and others that are niche suppliers like the Company. The
most significant competitors market globally. In addition, the Company faces
competition from a number of local companies in regional markets. Full-line
producers have the ability to provide integrated hydraulic systems to customers,
including components functionally similar to those manufactured by the Company.
There has been some consolidation activity in recent years, with large,
full-line producers filling out their product lines with the acquisition of
smaller, privately held
-9-
producers. The Company's main competitors by product include Rexroth, Oilgear,
Hydrakraft and Parker Hannifin (piston products); Eaton, Atos and Parker
Hannifin (vane products); and Rexroth, Bosch, Eaton, Atos and Parker Hannifin
(valve products). In addition, various small regional companies compete with the
Company's manifold and radial piston motor product lines.
EMPLOYEES
As of December 31, 2000, the Company had 1,072 full-time employees,
including 564 employees in manufacturing and operations, 53 employees in product
development, 318 employees in sales and marketing and 137 employees in
management and administration. In addition, the Company utilizes the services of
approximately 70 temporary employees. Of the Company's full-time employees, 239
are working in the United States, 177 in Germany, 264 in France, 121 in Italy,
49 in Finland and the remainder in the Company's sales and service facilities.
The Company considers its relations with its employees to be satisfactory.
A collective bargaining agreement with the International Association of
Machinists and Aerospace Workers AFL-CIO/CLC, Denison Lodge 427, District Lodge
28, which covers all hourly-paid production and maintenance employees in the
Company's Marysville, Ohio facility (125 employees overall) expires in June
2002. Management at the US facility knows of no grievances which are likely to
threaten work stoppage. The French facility has a collective bargaining
agreement, the "Convention Collective de la Metallurgie," which covers all
employees and is mandatory in French companies which engage in activities such
as Denison's. The non-management personnel are represented by several unions.
While the German facility is not directly subject to collective bargaining
agreements, it does adopt certain provisions of collective bargaining agreements
applicable to the metalworking industry in its employment contracts. Such
provisions relate to matters such as working conditions, wages and year-end
bonuses. The Italian facility is covered under the National Collective Labor
Agreement ("NLCA"), which covers all employees and is mandatory in Italian
companies which engage in activities such as those of the Company. The NLCA
includes collective bargaining agreement provisions relating to issues such as
wage and salary arrangements, working conditions and other matters. Management
at each of the facilities believes labor relations to be good.
ENVIRONMENTAL MATTERS
The Company's operations involve the handling and use of substances
that are subject to foreign, federal, state and local environmental laws and
regulations that impose limitations on the discharge of pollutants into the
soil, air and water and establish standards for their storage and disposal. A
risk of environmental liability is inherent in manufacturing activities.
Investigations of the Company's European facilities have identified
areas of contamination and some practices which may be in violation of
applicable regulations. The Company is in the process of determining whether any
remediation and/or any changes in current practices are necessary. There can be
no assurance that remediation of these facilities will not be required or that
fines or sanctions will not be imposed on the Company for violations of
environmental law, if any are determined to exist. While management does not
believe that compliance with environmental requirements is likely to have a
material adverse effect on the Company, there can be no assurance that future
additional environmental compliance or remediation obligations will not arise at
one or more of the Company's facilities or that such obligations could not have
a material adverse effect on the Company's financial condition or results of
operations. The Company has an accrual of $1.3 million at December 31, 2000 for
anticipated future costs related to environmental liabilities. See Note 15 of
Notes to Consolidated Financial Statements.
-10-
PATENTS AND TRADEMARKS
The Company believes that the growth of its business is dependent upon
the quality of its products, its ability to produce products that meet the
requirements of its customers and its relationships in the marketplace, rather
than the extent of its patents and trademarks. The Company currently has over
100 patents and has been granted approximately 600 patents since its inception.
The loss of any single patent is not likely to have a material adverse effect on
the Company's business, financial condition and results of operations.
ITEM 2. PROPERTIES
Denison has administrative, sales and manufacturing facilities located
in Marysville, Ohio; Vierzon, France; Bologna, Italy; Tampere, Finland; and
Hilden, Germany. The facilities in the United States, France, Finland and
Germany are owned by the Company and occupy 170,000, 174,100, 120,000 and
146,600 square feet, respectively. The Company's facility in Bologna, Italy is a
leased facility occupying 120,000 square feet. The Marysville plant manufactures
piston pumps and motors, the Vierzon plant manufactures vane pumps, and motors,
the Bologna plant manufacturers radial piston product, the Tampere plant
manufactures manifolds, and the Hilden plant manufactures valves. The
manufacturing plants have undergone significant upgrading and rationalization in
recent years and are in superior manufacturing condition. Currently, the
facilities are operated in two to three shifts with the possibility of
increasing capacity with existing machinery by increasing working hours.
Approximately 35% of the manufacturing workforce is dedicated to the production
of vane pumps and motors, 23% to the production of piston pumps and motors, 21%
to the production of valves, 15% to the production of radial piston motors and
6% to the production of manifolds. Each facility is equipped with testing
equipment to maintain the Company's high quality control standards. All
facilities are ISO9001 certified.
The Company also owns a sales and service facility in Wakefield,
England. In addition, the Company leases or subleases facilities for its
regional sales and service subsidiaries in the following countries: Australia,
Belgium, Canada, Denmark, Finland, France, Germany, China, Italy, Japan,
Luxembourg, the Netherlands, Singapore, Spain, Sweden, the United Kingdom and
the United States. The Company believes that its existing facilities are
sufficient for its current needs, and that suitable additional or alternative
space will be available in the future on commercially reasonable terms as
needed.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in certain legal proceedings incidental to the
normal conduct of its business. The Company does not believe that any
liabilities relating to any of the legal proceedings to which it is a party are
likely to be, individually or in the aggregate, material to its consolidated
financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
-11-
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY.
The following table sets forth the name and position of the
executive officers of the Registrant.
PRESENT OFFICE
NAME AGE POSITION HELD SINCE
- ---- --- -------- ----------
J. Colin Keith 56 Chairman of the Board of 1993
Directors
David L. Weir 47 Chief Executive Officer, 1997
President and Director
Anders C.H. Brag 48 Managing Director and Director 1993
Bruce A. Smith 45 Chief Financial Officer and 1998
Director
Paul G. Dumond 46 Company Secretary 1993
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The principal trading market for the Company's securities is ADSs
listed on the Nasdaq National Market. The Company's ADSs have traded in the U.S.
since August 8, 1997 under the symbol "DENHY". Each ADS represents one Ordinary
Share, par value $0.01 per Ordinary Share. Each ADS is evidenced by an ADR.
Bankers Trust Company is the Depositary for the ADRs. As of December 31, 2000,
10,563,950 ADSs were held by 20 registered ADR holders. The largest holder, The
Depository Trust Company, holds 5,308,142 ADSs representing 61 participants. At
the annual meeting of shareholders held on May 8, 2000, the shareholders granted
authority to the Company to repurchase up to 1,111,395 shares of the Company's
stock at market prices. Throughout 2000 the Company re-purchased a total of
550,000 shares at an average price of $13.413 per share (See Note 9 of Notes to
Consolidated Financial Statements).
The following table shows the high and low sales prices of the ADSs on
the Nasdaq National Market for each quarterly period for the two years ended
December 31, 2000.
PRICE PER ADS (US$)
QUARTERLY PERIOD ENDED HIGH LOW
---------------------- ---- ---
March 31, 1999 14.75 11.00
June 30, 1999 19.25 12.63
September 30, 1999 16.00 11.50
December 31, 1999 11.63 8.50
March 31, 2000 15.00 8.50
June 30, 2000 13.25 9.875
September 30, 2000 14.25 12.00
December 31, 2000 15.063 12.875
-12-
At March 27, 2001, the last reported price for an ADS on the Nasdaq
National Market was $ 14.875.
The Company has never declared or paid dividends on its Ordinary
Shares. The Company currently intends to retain its earnings to finance the
growth and development of its business and, consequently, does not anticipate
paying any dividends on the Ordinary Shares in the foreseeable future. Under the
Companies Act 1985, as amended, of Great Britain (the "Companies Act"),
dividends are payable on the Ordinary Shares only out of profits available for
distribution determined in accordance with accounting principles generally
accepted in the United Kingdom, which differ in certain respects from US GAAP.
In addition, certain of the Company's financing agreements restrict the
Company's ability to pay dividends to its shareholders and it is anticipated
that future financing agreements will have similar restrictions. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data for each of the five years in
the period ended December 31, 2000 are derived from the Consolidated Financial
Statements of the Company. The selected consolidated financial data of the
Company set forth below are qualified by reference to, and should be read in
conjunction with the Consolidated Financial Statements, Related Notes and other
financial information included in this Form 10-K.
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Net sales $ 153,095 $ 135,543 $ 145,253 $ 148,388 $ 148,149
Cost of sales 99,993 90,430 90,917 94,008 95,312
------------ ------------- ------------- ------------ ------------
Gross profit 53,102 45,113 54,336 54,380 52,837
Selling, general
and administrative
expenses 34,735 31,966 33,028 33,618 35,336
------------ ------------- ------------- ------------ ------------
Operating income 18,367 13,147 21,308 20,762 17,501
Other income/(expense) 279 (693) 0 2,175 1,829
Interest income, net 1,030 354 938 218 48
------------ ------------- -------------- ------------- --------------
Income before taxes 19,676 12,808 22,246 23,155 19,378
Provision for income
taxes 5,917 4,522 5,956 3,367 2,437
------------ ------------- ------------- ------------ ------------
Net income $ 13,759 $ 8,286 $ 16,290 $ 19,788 $ 16,941
============ ============= ============= ============ ============
Basic earnings per share $ 1.25 $ .75 $ 1.47 $ 1.84 $ 1.61
============ ============= ============= ============ ============
Diluted earnings per share $ 1.25 $ .74 $ 1.46 $ 1.82 $ 1.59
============ ============= ============= ============ ============
-13-
CONSOLIDATED BALANCE SHEET DATA:
AT DECEMBER 31,
--------------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
Cash and cash
equivalents $ 32,097 $ 31,174 $ 35,799 $ 30,337 $ 19,144
Working capital 67,812 66,533 66,432 63,834 51,074
Total assets 144,394 128,820 143,457 107,493 93,726
Total debt(1) 6,560 5,697 12,881 2,478 4,177
Redeemable preferred stock -- -- -- -- 1,141
Total shareholders' equity 84,958 81,060 78,527 59,552 39,120
(1) Total debt comprises bank lines of credit with a maturity of less than
one year, long-term debt (including current portion) and capital lease
obligations (including current portion).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following should be read in conjunction with "Item 6. Selected
Financial Data" and the Company's Consolidated Financial Statements and the
Notes related thereto appearing elsewhere in this Form 10-K.
On April 12, 2000 the Company completed its acquisition of 100% of the
outstanding shares of Riva Calzoni Oleodinamica S.p.A. ("Calzoni"), a wholly
owned subsidiary of Intek S.p.A., effective as of April 1, 2000. The cash
purchase price was $4,015,000 ($5,354,000 net of cash acquired and debt
assumed). Calzoni designs, manufacturers and distributes radial piston
oil-pressure motors for industrial hydraulics applications, and is located in
Bologna, Italy. The acquisition has been accounted for utilizing the purchase
method of accounting, and the operating results of Calzoni have been included in
the operating results of the Company from April 1, 2000. Goodwill of $838,000 is
being amortized by the straight-line method over 30 years.
Although the Company reports its financial results in U.S. dollars,
approximately 73% of the Company's revenues and expenses are incurred in foreign
currencies. The fluctuation of the functional currencies earned by the Company
against the U.S. dollar has had the effect of increasing or decreasing (as
applicable) U.S. dollar reported denominated income statement amounts in such
foreign currencies when translated into U.S. dollars as compared to prior
periods.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH YEAR ENDED DECEMBER 31, 1999
The Company's net sales increased 12.9% to $153.1 million in
fiscal 2000 from $135.5 million in fiscal 1999. During the same period, net
sales in North America increased 19.6% to $48.9 million from $40.9 million; net
sales in Europe increased 7.8% to $83.1 million from $77.1 million; and net
sales in Asia-Pacific region increased 20.2% to $21.0 million from $17.5
million. The primary reason for the increased volume recorded for fiscal 2000
compared with the same period in 1999 is the increased
-14-
product demand for all of the Company's products on a worldwide basis, combined
with the impact of the Calzoni acquisition which added $10.0 million to net
sales in 2000. Also impacting revenues was the continuing recovery of the
economies in the Asia-Pacific region, combined with the Company's increased
efforts to further penetrate those markets. Partially offsetting these increases
was the continued strengthening of the US dollar against most of the functional
currencies utilized in the Company's European operations.
Restated (at average exchange rates for fiscal 1999), net sales for
fiscal 2000 were $163.4 million, a 20.5% increase versus 1999. The increased
sales revenue for the period attributable to the changes in exchange rate was
$10.3 million. Restated (at average exchange rates for fiscal 1999), net sales
for fiscal 2000 for the Company's European operations increased 21.2% to $93.5
million from $77.1 million; while net sales for the Asia-Pacific region
increased 19.7% to $21.0 million from $17.5 million.
The Company's gross profit increased to $53.1 million in fiscal 2000
from $45.1 million in fiscal 1999. Gross profit as a percentage of net sales
increased to 34.7% in fiscal 2000 from 33.3% in fiscal 1999. The increased gross
profit was primarily attributable to the increased volume demand realized for
the Company's products worldwide, combined with the impact of the Calzoni
acquisition and the impact of operating efficiencies at the Company's
manufacturing facilities. The increased gross profit as a percentage of sales
for fiscal 2000 versus fiscal 1999 resulted from the impact of high production
volume and cost control at the Company's manufacturing facilities.
Gross profit in North America increased 39.6% to $12.6 million in
fiscal 2000 from $9.0 million in fiscal 1999. Gross profit in Europe increased
8.0% to $33.3 million in fiscal 2000 from $30.8 million in fiscal 1999, and
Asia-Pacific gross profit increased 36.6% to $7.2 million in fiscal 2000 from
$5.3 million in fiscal 1999. Restated (at average exchange rates for fiscal
1999), gross profit in Europe was $32.7 million, or a 22.3% increase over fiscal
1999, and gross profit in the Asia-Pacific region was $7.3 million, or a 37.7%
increase over fiscal 1999. The total gross profit increase for the period
attributable to the exchange rate differences was $4.4 million. Restated (at
average exchange rates for fiscal 1999), consolidated gross profit as a
percentage of net sales increased to 35.2% for fiscal 2000 compared to 33.3% for
fiscal 1999.
Selling, general and administrative ("SG&A") expenses increased 8.7% to
$34.7 million for fiscal 2000 from $32.0 million for fiscal 1999. These expenses
as a percentage of net sales were 22.7% for fiscal 2000 as compared to 23.6% for
fiscal 1999. The increase in these expenses was primarily the result of the
Calzoni acquisition, while the decrease in these expenses as a percentage of net
sales reflects cost control measures implemented in fiscal 1999 and fiscal 2000.
Restated (at average exchange rates for fiscal 1999), SG&A increased 16.4% to
$37.2 million (22.8% of net sales) in fiscal 2000 from $32.0 million (23.6% of
net sales) in fiscal 1999.
Operating income increased 39.7% to $18.4 million in fiscal 2000 from
$13.1 million in fiscal 1999. Operating income as a percentage of net sales
increased to 12.0% in fiscal 2000 from 9.7% in fiscal 1999. Restated (at average
exchange rates for fiscal 1999), operating income increased 54.5% to $20.3
million (12.4% of net sales) in fiscal 2000 from $13.1 million (9.7% of net
sales) in fiscal 1999. The increased operating earnings realized, on both a
dollar and percentage of net sales basis, was the result of the volume and cost
control factors discussed, combined with the impact of the Calzoni acquisition.
The total restated operating earnings increase for the period attributable to
exchange rate differences was $1.9 million.
-15-
Other income was recorded for fiscal 2000 of $279,000 (0.2% of net
sales) as compared to other expense of $693,000 for the comparable period of
fiscal 1999. The increase in other income was the result of recognition of
non-cash currency gains on inter-company loans for fiscal 2000 versus losses
recorded on these transactions in the comparable period of 1999.
Net interest income was $1.0 million in fiscal 2000 compared to
$354,000 of net interest income in fiscal 1999. The increase in interest income
was primarily due to increased interest bearing cash balances held at the
subsidiary level, combined with changes in investment strategies implemented in
2000.
The effective tax rate for fiscal 2000 was 30.0% compared with 35.3%
for fiscal 1999 resulting from the mix of profits generated in the Company's
overseas operations, particularly the Company's German operations, with varying
effective tax rates, as opposed to the mix recorded in 1999. The Company's
German operations, which has net operating losses available to offset taxable
income, recorded earnings in fiscal 2000 versus a loss in fiscal 1999. The
provision for taxes increased 30.8% to $5.9 million in fiscal 2000 compared to
$4.5 million in fiscal 1999. This provision as a percentage of net sales
increased to 3.9% in fiscal 2000 from 3.3% in fiscal 1999, reflecting the higher
operating margins discussed earlier.
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998
The Company's net sales decreased 6.7% to $135.5 million in
fiscal 1999 from $145.3 million in fiscal 1998. During the same period, net
sales in North America decreased 23.1% to $40.9 million from $53.2 million; net
sales in Europe increased 1.7% to $77.1 million from $75.8 million; and net
sales in Asia-Pacific region increased 8.0% to $17.5 million from $16.2 million.
The strengthening US dollar against most of the functional currencies earned by
the Company, combined with a slow-down in the Company's North American markets
supporting the mining and gas and oil exploration markets and a work stoppage at
the Company's Marysville, Ohio manufacturing facility were the primary reasons
for the reduced revenues realized. Partially offsetting these factors were
strong first year sales of the Company's manifold operations in Tampere,
Finland, a company acquired late in 1998 and a recovering demand for the
Company's products in the Asia-Pacific markets.
Restated (at average exchange rates for fiscal 1998), net sales for
fiscal 1999 were $137.6 million, a 5.3% decrease versus 1998. The increased
sales revenue for the period attributable to the changes in exchange rate was
$2.1 million. Restated (at average exchange rates for fiscal 1998), net sales
for fiscal 1999 for the Company's European operations increased 6.1% to $80.4
million from $75.8 million; while net sales for the Asia-Pacific region remained
constant with 1998 net sales of $16.2 million.
The Company's gross profit decreased to $45.1 million in fiscal 1999
from $54.3 million in fiscal 1998. Gross profit as a percentage of net sales
decreased to 33.3% in fiscal 1999 from 37.4% in fiscal 1998. The decreased gross
profit was primarily attributable to the decreased volume demand realized,
combined with planned production curtailments throughout 1999 to reduce
inventory levels and the impact of a 10 week work stoppage at the Company's
Marysville, Ohio manufacturing facility. Worldwide inventories were reduced in
1999 from 1998 levels by $5.2 million (before the impact on inventory balances
from currency fluctuations). Partially offsetting these factors were strong
first year earnings from the Company's manifold operations in Tampere, Finland,
a company acquired late in 1998, combined with the impact of cost reductions
made throughout 1999 and prior fiscal years.
-16-
Gross profit in North America decreased 43.7% to $9.0 million in fiscal
1999 from $15.8 million in fiscal 1998. Gross profit in Europe decreased 7.0% to
$30.6 million in fiscal 1999 from $32.9 million in fiscal 1998, and Asia-Pacific
gross profit increased 6.0% to $5.3 million in fiscal 1999 from $5.0 million in
fiscal 1998. Restated (at average exchange rates for fiscal 1998), gross profit
in Europe was $31.7 million, or a 3.7% decrease over fiscal 1998, and gross
profit in the Asia-Pacific region was $4.9 million, or a 2.0% decrease over
fiscal 1998. The total gross profit decrease for the period attributable to the
exchange rate differences was $0.7 million. Restated (at average exchange rates
for fiscal 1998), consolidated gross profit as a percentage of net sales
decreased to 33.4% for fiscal 1999 compared to 37.4% for fiscal 1998.
SG&A expenses decreased 3.2% to $32.0 million for fiscal 1999 from
$33.0 million for fiscal 1998. These expenses as a percentage of net sales were
23.6% for fiscal 1999 as compared to 22.7% for fiscal 1998. Restated (at average
exchange rates for fiscal 1998), SG&A decreased 2.1% to $32.3 million (23.5% of
net sales) in fiscal 1999 from $33.0 million (22.7% of net sales) in fiscal
1998. The restated decrease in these expenses for fiscal 1999 as compared to
fiscal 1998 is due primarily to the impact of cost reductions implemented by the
Company in fiscal 1999 and prior fiscal years. The increase in these expenses as
a percentage of net sales is reflected by a currency adjusted decrease in net
sales revenue leveraged from a 2.1% marginal decrease in SG&A expenses.
Operating income decreased 38.5% to $13.1 million in fiscal 1999 from
$21.3 million in fiscal 1998. Operating income as a percentage of net sales
decreased to 9.7% in fiscal 1999 from 14.7% in fiscal 1998. Restated (at average
exchange rates for fiscal 1998), operating income decreased 36.2% to $13.6
million (9.9% of net sales) in fiscal 1999 from $21.3 million (14.7% of net
sales) in fiscal 1998. The changes in exchange rates had the effect of
decreasing operating income for the period by $0.5 million.
Other expense increased to $0.7 million (.5% of net sales) in fiscal
1999 from $0.0 million in fiscal 1998. The increase in other expense was the
result of recognition of non cash currency losses on inter-company loans
throughout fiscal 1999, with no such transactions completed in fiscal 1998.
Net interest income was $354,000 in fiscal 1999 compared to $938,000 of
net interest income in fiscal 1998. The decrease in interest income was
primarily due to decreased interest bearing cash balances held at the subsidiary
level, with funds utilized to reduce the borrowings utilized in the acquisition
of Lokomec Oy late in 1998, combined with lower worldwide investment rates on
the Company's cash balances.
The effective tax rate for fiscal 1999 was 35.3% compared with 26.9%
for fiscal 1998. This change is the result of year to date variations in the
country sources of the Company's profits, in each case at tax rates that vary
among jurisdictions. The provision for taxes decreased 24.1% to $4.5 million in
fiscal 1999 compared to $6.0 million in fiscal 1998. This provision as a
percentage of net sales decreased to 3.3% in fiscal 1999 from 4.1% in fiscal
1998, reflecting the lower operating margins discussed earlier.
-17-
LIQUIDITY AND CAPITAL RESOURCES
Year Ended and At December 31,
---------------------------------------------------------
2000 1999 1998
------------------ ------------------- ------------------
(DOLLARS IN THOUSANDS)
Cash & cash equivalents 32,097 31,173 35,799
Net cash provided by operating activities 16,576 13,246 14,859
Net cash used in investing activities (7,475) (7,051) (20,692)
Net cash provided by (used in) financing activities (6,849) (7,416) 10,333
Effect of exchange rate changes on cash (1,329) (3,404) 962
Historically the Company has funded its cash requirements through cash
flow from operations, although short-term fluctuations in working capital
requirements for some of the Company's subsidiaries have been met through
borrowings under revolving lines of credit obtained locally. The Company's
primary uses of cash have been to fund capital expenditures, acquisitions, stock
repurchases and to service and repay debt.
Net cash provided by operating activities for fiscal 2000 increased to
$16.6 million from $13.2 million in fiscal 1999. The $3.4 million increase in
net cash provided by operating activities for fiscal 2000 compared to fiscal
1999 was attributable to a $5.5 million increase in net income, partially offset
by a $1.3 million increase in utilization of cash from operating assets and
liabilities. The increase in utilization of cash from operating assets and
liabilities was the result of the net assets acquired in the Calzoni
acquisition. The Company anticipates that operating cash and capital expenditure
requirements will continue to be funded by cash flow from operations, cash on
hand and bank borrowings.
Net cash used in investing activities was $7.5 million for fiscal 2000,
compared to $7.1 million for fiscal 1999. Investing activities in 2000 consisted
of the acquisition of Calzoni for $4.0 million and investment in manufacturing
equipment for the Company's five production facilities for $3.5 million. During
1998, investing activities also reflect the acquisition of 100% of the
outstanding shares of Lokomec Oy for $10.9 million, net of cash acquired. The
Company anticipates that it will incur approximately $10.0 million for capital
expenditures for fiscal 2001, excluding any acquisitions of new businesses, as
the Company expands production capabilities at its manufacturing facilities.
Net cash used by financing activities was $6.8 million for fiscal 2000
compared to net cash used of $7.4 million for fiscal 1999. Cash utilized in
fiscal 2000 by financing activities was comprised mainly of $7.4 million
utilized to repurchase 550,000 shares of the Company's stock, partially offset
by a slight increase in borrowings.
The effect of exchange rate changes on cash and cash equivalents was $
1.3 million and $3.4 million for fiscal 2000 and fiscal 1999, respectively. As
greater than two thirds of the Company's business is transacted in currencies
other than the U.S. dollar, foreign currency fluctuations had a significant
impact on dollar reported balances for fiscal 2000 compared to fiscal 1999. The
$1.3 million impact of exchange rate changes on cash and cash equivalents was
attributable to a continuing fiscal 2000 strengthening U.S. dollar against most
of the functional currencies earned by the Company in its European operations.
The average dollar-weighted foreign currency decrease for fiscal 2000 for the
Company's European operations was 15.7%.
-18-
In April 2000, the Company's Japanese subsidiary entered into a bank
loan with a bank that provided $2.5 million for working capital and
acquisitions. Borrowings under the agreement are secured by a guarantee by the
Company. At December 31, 2000, $1.2 million was outstanding under the bank loan.
Interest on the loan accrues at a rate of 2.38%. Interest on the loan is payable
quarterly. The bank loan is due April 20, 2001.
In May 1999, the Company's U.S. subsidiary entered into an revolving
credit note with a bank that provides up to $15.0 million for working capital
and acquisitions. Borrowings under the agreement are secured by a guarantee by
the Company. At December 31, 2000 $4.5 million was outstanding under the note.
Interest on the credit line, which is based on LIBOR plus 0.875% (7.60% at
December 31, 2000), is payable monthly. The revolving credit note is due April
30, 2002.
Short-term borrowings outside the United States under available
informal credit facilities are typically a result of overdrafts. At December 31,
2000, the Company had an additional $ 0.8 million of other foreign debt
outstanding. The Company also has an additional $1.7 million of unused foreign
credit facilities. The banks may withdraw these facilities at any time. The
weighted average interest rates on short-term borrowings as of December 31, 2000
and 1999 were 5.3% and 5.1% respectively.
IMPACT OF INFLATION
The impact of inflation on the operating results of the Company has
been moderate in recent years reflecting generally lower rates of inflation in
the economy and relative stability in the Company's cost structure. Although
inflation has not had, and the Company does not expect that it will have, a
material impact on operating results, there is no assurance that the Company's
business will not be effected by inflation in the future.
EXPOSURE TO CURRENCY FLUCTUATIONS
A significant portion of the Company's business is conducted in
currencies other than the dollar, including pounds sterling, equivalent European
euro currencies and Japanese yen. The Company's financial statements are
prepared in dollars, and therefore fluctuations in exchange rates in the pound
sterling and other currencies in which the Company does business relative to the
dollar may cause fluctuations in reported financial information, which are not
necessarily related to the Company's operations. In 2000, for example, the
Company experienced a 21.2% increase in net sales in the European region
(denominated in local currencies); however, the dollar-translated net sales
figures showed a net increase due to the fluctuation of the dollar against the
local currencies of only 7.8%. Due to the volatility of currency exchange rates,
the Company cannot predict the effect of exchange rate fluctuations upon future
operating results. Although the Company currently engages in transactions to
hedge a portion of the risks associated with fluctuations in currency exchange
rates, it may not do so in the future. There can be no assurance that the
Company's business, financial condition and results of operations will not be
materially adversely affected by exchange rate fluctuations or that any hedging
techniques implemented by the Company will be effective.
The following table illustrates the effect of the currency exchange rates on
certain of the Company's income items in fiscal 2000 and fiscal 1999 which have
been recalculated to show what such amounts would have been applying 1998
average exchange rates to fiscal 1999 amounts and 1999 average exchange rates to
fiscal 2000 amounts.
-19-
YEAR ENDED DECEMBER 31,
-----------------------
1999 2000 2000 AT 1999
ACTUAL ACTUAL EXCHANGE RATES
------ ------ --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales $ 135,543 $ 153,095 $ 163,360
Gross profit 45,113 53,102 57,518
Operating income 13,147 18,367 20,314
Net income 8,286 13,759 15,220
Basic earnings per share .75 1.25 1.38
Diluted earnings per share .74 1.25 1.38
YEAR ENDED DECEMBER 31,
-----------------------
1998 1999 1999 AT 1998
ACTUAL ACTUAL EXCHANGE RATES
------ ------ --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net sales $ 145,253 $ 135,543 $ 137,629
Gross profit 54,336 45,113 45,630
Operating income 21,308 13,147 13,587
Net income 16,290 8,286 8,530
Basic earnings per share 1.47 .75 .77
Diluted earnings per share 1.46 .74 .77
IMPACT OF YEAR 2000
In prior years, the Company discussed the nature and progress of its plans to
become Year 2000 ready. In late 1999, the Company completed its remediation and
testing of systems. As a result of those planning and implementation efforts,
the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and those systems
successfully responded to the year 2000 date change. In addition, the Company
experienced no material problems resulting from Year 2000 issues, either with
its products, its internal systems, or the products or services of third
parties.
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
This Form 10-K includes and incorporates forward-looking statements
within the meaning of section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. All statements, other than statements of
historical facts, included or incorporated in this Form 10-K regarding the
Company's strategy, future operations, financial position, future revenues,
projected costs, prospects, plans and objectives of management are
forward-looking statements. The words "anticipates", "believes", "estimates",
"expects", "intends", "may", "plans", "projects", "will", "would" and similar
expressions are intended to identify forward-looking statements, although not
all forward-looking statements contain these identifying words. The Company
cannot guarantee that it actually will achieve the plans, intentions or
expectations disclosed in its forward-looking statements and undue reliance
should not be placed on the Company's forward-looking statements. Actual results
or events could differ materially from the plans, intentions and expectations
disclosed in the forward-looking statements. The Company has included important
factors in the cautionary statements included or incorporated in this Form 10-K
that the Company believes could cause actual results or events to differ
materially from the forward-looking statements made. The Company's
forward-looking statements do not reflect the potential impact of any future
acquisitions, mergers, dispositions, joint ventures or investments the Company
may make. The Company does not assume any obligation to update any
forward-looking statements.
-20-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risks relating to the Company's operations result primarily from
changes in exchange rates or interest rates or weak economic conditions in the
markets in which the Company sells its products. The Company does not use
financial instruments for trading purposes and is not a party to any leveraged
derivatives.
Foreign Currency Risk
The Company enters into foreign exchange contracts to hedge some of its
foreign currency exposure. The Company uses such contracts to hedge exposure to
foreign currency exchange rates associated with anticipated costs to be incurred
in a foreign currency. The Company seeks to minimize the risk that the expenses
incurred by a subsidiary in a currency other than its functional currency will
be affected by changes in the exchange rates. The Company believes that the
possible financial statement impact of its foreign currency forward contracts is
immaterial.
Interest Rate Risk
The Company's interest bearing liabilities are most sensitive to
changes in the London InterBank Offered Rate (LIBOR) as substantially all of its
short term investments bear minimal interest rate risk.
As of December 31, 2000, the Company had approximately $6.6 million
outstanding on its revolving line of credit and short term credit agreements.
The potential loss to the Company over one year that would result from a
hypothetical, instantaneous, and unfavorable change of 100 basis points in the
interest rates of all applicable assets and liabilities would be approximately
be $0.1 million.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DENISON INTERNATIONAL plc
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Report of Independent Auditors 24
Consolidated Balance Sheets as of December 31, 2000 and 1999 25
Consolidated Statements of Income for each of the years ended
December 31, 2000, 1999 and 1998 27
Consolidated Statements of Changes in Shareholders' Equity for each
of the years ended December 31, 2000, 1999 and 1998 28
Consolidated Statements of Cash Flows for each of the years ended
December 31, 2000, 1999 and 1998 29
Notes to Consolidated Financial Statements 31
-21-
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Denison International plc
We have audited the consolidated balance sheets of Denison
International plc and subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for each of the three years in the period ended December 31, 2000.
Our audit also included the financial statement schedule listed in the index at
Item 14. These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Denison International plc and subsidiaries at December 31, 2000 and 1999, and
the consolidated results of their operations, and their cash flows for each of
the three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States. 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.
/S/ ERNST & YOUNG LLP
Columbus, Ohio
February 16, 2001
-22-
DENISON INTERNATIONAL plc
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
DECEMBER 31,
2000 1999
---- ----
Current assets:
Cash and cash equivalents $32,097 $31,174
Accounts receivable, less allowances of
$2,412 and $2,175 in 2000
and 1999, respectively 33,387 28,267
Inventories 37,968 31,453
Other current assets 4,495 3,566
------- -------
Total current assets 107,947 94,460
Property, plant and equipment, net 24,341 24,519
Other assets 4,137 2,727
Goodwill, net of accumulated amortization of $610 and
$345 in 2000 and 1999, respectively 7,969 7,114
----- -------
Total assets $144,394 $128,820
-23-
LIABILITIES AND SHAREHOLDERS' EQUITY
DECEMBER 31,
2000 1999
---- ----
Current liabilities:
Notes payable to bank $ 6,560 $ 5,586
Accounts payable 14,986 9,027
Accrued payroll and related expenses 7,204 3,996
Other accrued liabilities 7,396 7,527
Income tax payable 3,989 1,680
Current portion of capital lease obligations -- 111
-------- -------
Total current liabilities 40,135 27,927
Noncurrent liabilities:
Pension accrual 11,364 10,506
Other noncurrent liabilities 4,761 4,516
Negative goodwill, net of accumulated
amortization of $7,489 and $6,195
in 2000 and 1999, respectively 3,176 4,811
----- -----
19,301 19,833
Shareholders' equity:
'A' ordinary shares (pound)8.00 par value;
7,125 shares authorized; 7,015
issued and outstanding in 2000
and 1999 86 86
Ordinary shares $0.01 par value;
15,000,000 shares authorized; and
10,563,950 and 11,113,950 shares issued and
outstanding in 2000 and 1999, respectively 107 111
Additional paid-in capital 5,150 5,479
Capital redemption reserve 1,090 1,090
Retained earnings 89,385 82,691
Accumulated other comprehensive loss (10,860) (8,397)
--------- ---------
Total shareholders' equity 84,958 81,060
------- -------
Total liabilities and shareholders' equity $144,394 $128,820
======== ========
The accompanying notes are an integral part of these statements.
-24-
DENISON INTERNATIONAL plc
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(U.S. DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
2000 1999 1998
---- ---- ----
Net sales $ 153,095 $ 135,543 $ 145,253
Cost of sales 99,993 90,430 90,917
--------- --------- ---------
Gross profit 53,102 45,113 54,336
Selling, general and
administrative expenses 34,735 31,966 33,028
--------- --------- ---------
Operating income 18,367 13,147 21,308
Other income (expense) 279 (693) --
Interest income, net 1,030 354 938
--------- ---------- --------
Income before taxes 19,676 12,808 22,246
Provision for income taxes 5,917 4,522 5,956
--------- ---------- --------
Net income $ 13,759 $ 8,286 $ 16,290
========= ========== =========
Basic earnings per share $ 1.25 $ .75 $ 1.47
========== =========== ==========
Diluted earnings per share $ 1.25 $ .74 $ 1.46
========== =========== ==========
The accompanying notes are an integral part of these statements.
-25-
DENISON INTERNATIONAL plc
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
SHARE CAPITAL(I)
-------------------------------------------
ACCUM-
ORDIN- ADDI- ULATED
A A ARY TIONAL OTHER
ORDINARY ORDINARY ORDINARY SHARES PAID CAPITAL RE- COMPRE- COMPRE-
SHARES OF SHARES OF SHARES OF OF IN REDEM- TAINED HENSIVE HENSIVE
(pound)8.00 $0.01 (pound)8.00 $0.01 CAPITAL TION EARNINGS INCOME INCOME
EACH EACH EACH EACH (II) RESERVE (III) (LOSS) (LOSS) TOTAL
---- ---- ---- ---- ---- ------- ----- ------ ------ -----
(NUMBER OF SHARES)
Balance at January 1, 1998 7,015 11,057,700 $86 $111 $5,411 $1,090 $58,115 $(5,261) $59,552
Exercise of stock
options -- 39,750 -- -- 42 -- -- -- -- 42
Net income -- -- -- -- -- -- 16,290 -- 16,290 16,290
Translation
adjustment -- -- -- -- -- -- -- 2,643 2,643 2,643
-----
Comprehensive
Income -- -- -- -- -- -- -- -- $18,933 --
=======
---- --------- --- ---- ------ ------ ------- ------ -------
Balance at December 31, 1998 7,015 11,097,450 $86 $111 $5,453 $1,090 $74,405 $(2,618) $78,527
Exercise of stock
options -- 16,500 -- -- 26 -- -- -- -- 26
Net income -- -- -- -- -- -- 8,286 -- 8,286 8,286
Translation
adjustment -- -- -- -- -- -- -- (5,779) (5,779) (5,779)
-------
Comprehensive
Income -- -- -- -- -- -- -- -- $2,507 --
======
---- --------- --- ---- ------ ------ ------- ------ -------
Balance at December 31, 1999 7,015 11,113,950 $86 $111 $5,479 $1,090 $82,691 $(8,397) $81,060
Purchase and retirement
of treasury shares -- (550,000) -- (4) (329) -- (7,065) -- -- (7,398)
Net income -- -- -- -- -- -- 13,759 -- 13,759 13,759
Translation
adjustment -- -- -- -- -- -- -- (2,463) (2,463) (2,463)
-------
Comprehensive
Income -- -- -- -- -- -- -- -- $11,296 --
=======
---- --------- --- ---- ------ ------ ------- ------ -------
Balance at December 31, 2000 7,015 10,563,950 $86 $107 $5,150 $1,090 $89,385 $(10,860) $84,958
===== ========== === ==== ====== ====== ======= ========= =======
(i) The share capital has been retroactively restated to reflect the
restructuring of the Company's share capital in July 1997, as described
in Note 1(c) of Notes to the Consolidated Financial Statements.
(ii) Additional paid in capital is not distributable.
(iii) Retained earnings available for distribution as dividends by the parent
company at December 31, 2000 were $54,939,000.
The accompanying notes are an integral part of these statements.
-26-
DENISON INTERNATIONAL plc
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(U.S. DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998
---- ---- ----
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 13,759 $ 8,286 $16,290
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Amortization of goodwill (1,043) (1,172) (1,417)
Depreciation 5,050 4,676 3,703
Deferred income taxes 831 306 210
Gain on sale of assets -- 32 (65)
Changes in operating assets
and liabilities:
Accounts receivable (3,039) (146) 2,245
Inventories (4,653) 4,510 (7,526)
Other current assets (52) 1,438 (768)
Other assets (1,482) 58 27
Accounts payable 4,545 (873) (86)
Accrued payroll and
related expenses 2,912 3 (1,017)
Income tax payable 914 476 (670)
Other accrued liabilities (1,268) (4,370) 1,359
Pension accrual 164 220 527
Other noncurrent
liabilities (62) (198) 2,047
---------- ---------- ------
Net cash provided by
operating activities 16,576 13,246 14,859
-------- ------- ------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of subsidiary, net of cash
acquired (4,015) (788) (10,923)
Purchase of property, plant
and equipment (3,698) (6,345) (9,923)
Proceeds from disposal of
property, plant and
equipment 238 82 154
------- ------ --------
Net cash used in investing
activities (7,475) (7,051) (20,692)
------- ------- --------
-27-
YEAR ENDED DECEMBER 31,
-----------------------
2000 1999 1998
---- ---- ----
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from borrowings
under revolving line of credit -- 993 12,000
Net borrowing (repayment)
on lines of credit 660 (8,204) (1,041)
Purchase and retirement of
treasury shares (7,398) -- --
Repayment of capital lease
obligations (111) (231) (668)
Proceeds from exercise
of stock options -- 26 42
-------- -------- ---
Net cash (used in) provided
by financing activities (6,849) (7,416) 10,333
------- ------- ------
EFFECT OF EXCHANGE RATE
CHANGES ON CASH (1,329) (3,404) 962
-------- ----------- --------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS 923 (4,625) 5,462
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 31,174 35,799 30,337
------ ------ ------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $32,097 $31,174 $35,799
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION
Interest paid $ 436 $ 807 $ 221
Income taxes paid $ 2,729 $ 4,109 $ 6,418
The accompanying notes are an integral part of these statements.
-28-
DENISON INTERNATIONAL plc
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
(a) Business of the Company
Denison International plc (the "Company"), a Company incorporated in
England and Wales, and its subsidiaries manufacture and distribute hydraulic
pumps and valves. The manufacturing plants are located in the United States,
Germany, France, Italy and Finland and there are sales and distribution
operations in the United Kingdom, Canada, Sweden, Denmark, The Netherlands,
Spain, Italy, Japan, Australia, China and Singapore.
(b) Incorporation
The Company was incorporated on March 10, 1993 as Alnery No. 1278
Limited and on May 14, 1993 changed its name to Denison International Limited
("DIL") and re-registered as a public limited company on July 28, 1997.
(c) Share Restructuring and Initial Public Offering
Throughout the period from January 1, 1994 to December 31, 1996, the
Company's authorized share capital was (pound)682,500, divided into 500,000 A
Ordinary Shares, (pound)0.01 par value per share, ("A Ordinary Share") and
1,000,000 B Ordinary Shares, (pound)0.01 par value per share ("B Ordinary
Share") and 667,500 cumulative redeemable preference shares, (pound)1.00 par
value per share. Each A Ordinary Share entitled the holder to one vote and each
B Ordinary Share entitled the holder to 1.85 votes.
On January 23, 1997 the Company redeemed the 667,500 preference shares.
On July 24, 1997 (i) 667,500 unallocated preference shares, (pound)1.00
par value per share, were canceled; (ii) the Company's then outstanding A
Ordinary Shares and B Ordinary Shares were redesignated as Ordinary Shares,
(pound)0.01 par value per share, ranking pari passu; (iii) the Company made a
bonus issue (stock dividend) of seven Ordinary Shares for every one Ordinary
Share then held; (iv) the then outstanding Ordinary Shares, (pound)0.01 par
value per share, were consolidated into 700,930 Ordinary Shares, (pound)0.08 par
value per share; (v) all of the authorized and outstanding Ordinary Shares,
(pound)0.08 par value per share, were redesignated as A Ordinary Shares; (vi)
the Company made a bonus issue (stock dividend) of fifteen Ordinary Shares,
$0.01 par value per share, for each A Ordinary Share; (vii) 570 A Ordinary
Shares, (pound)0.08 par value per share, were subscribed; and (viii) the then
outstanding A Ordinary Shares were consolidated into 7,015 A Ordinary Shares,
(pound)8 par value per share.
As a result, the Company's authorized share capital was 15,000,000
Ordinary Shares, $0.01 par value per share, and 7,125 A Ordinary Shares,
(pound)8 par value per share. After the reorganization, there were 10,513,950
Ordinary Shares and 7,015 A Ordinary Shares issued and outstanding.
On August 8, 1997 the Company completed an initial public offering in
which it issued and sold 450,000 Ordinary shares at $16.00 per share (the
"Offering"). Net proceeds from the Offering were $4,480,000.
-29-
2. BASIS OF FINANCIAL STATEMENTS
Companies Act 1985
These consolidated financial statements do not comprise the Company's
statutory accounts within the meaning of section 240 of the Companies Act 1985,
as amended, of Great Britain (the "Companies Act"). The Company's statutory
accounts, which are its primary consolidated financial statements, are prepared
in accordance with accounting principles generally accepted in the United
Kingdom ("U.K. GAAP") in compliance with the Companies Act and are presented in
pounds sterling. Statutory accounts for the years ended December 31, 1998 and
1999 have been, and for the year ended December 31, 2000 will be filed with the
Registrar of Companies for England and Wales. The auditors' reports on those
accounts previously filed were unqualified.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiaries, all of which are wholly-owned. Significant
intercompany accounts and transactions have been eliminated on consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity
with accounting principles generally accepted in the United States ("U.S. GAAP")
requires management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying notes. Actual
results could differ from these estimates.
3. SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared in accordance with
accounting principles generally accepted in the United States. The significant
accounting policies applied in their preparation are as follows:
Cash and Cash Equivalents
The Company considers all highly liquid investments having an original
maturity of three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined using the first-in, first-out (FIFO) method. Work-in-progress and
finished goods include the cost of direct materials and labor plus a reasonable
proportion of manufacturing overheads based on normal levels of activity.
-30-
Property, Plant and Equipment
Property, plant and equipment are depreciated using the straight-line
method over their estimated useful lives as follows:
Buildings owned by the Company 33 to 38 years
Leaseholds Life of lease
Plant and equipment 4 to 10 years
Goodwill
Goodwill (including negative goodwill) is amortized using the
straight-line method over periods of ten to thirty years. Goodwill represents
the excess of the purchase price over the estimated fair value of net assets
acquired. Negative goodwill represents the excess of the estimated fair value of
net assets acquired (after the elimination of the carrying value of all
noncurrent assets) over the purchase price.
The Company's policy is to periodically review its goodwill and other
long-lived assets based upon the evaluation of such factors as the occurrence of
a significant adverse event or change in the environment in which the business
operates or if the expected future net cash flows (undiscounted and without
interest) would become less than the carrying amount of the asset. An impairment
loss would be recorded in the period such determination is made based on the
fair value of the related businesses.
Environmental Remediation
Environmental liabilities are recorded based on the most probable cost
if known or on the estimated minimum cost, determined on a site by site basis.
The Company's environmental liabilities are not discounted and do not take into
consideration any possible future insurance proceeds or any significant amounts
of claims against other third parties.
Revenue Recognition
The Company recognizes revenues from the sale of its products at the
time of shipment to the customer. Provision is made currently for estimated
product returns, which may occur.
Warranty
The Company generally warrants its products for one year. An estimate
of the amount required to cover warranty expense on products sold is charged
against income at the time of sale. Other liabilities include accrued warranty
costs of $2.2 million and $1.6 million at December 31, 2000 and 1999,
respectively, of which $2.0 million and $1.5 million are classified as
short-term.
Advertising Expense
The Company expenses the costs of advertising as incurred. Advertising
expenses include the promotion of specific products and kinds of advertising
include Company and product catalogues, business and industrial publications.
Advertising expense was $0.8 million, $0.9 million and $0.9 million for the
years ended December 31, 2000, 1999 and 1998, respectively.
-31-
Research and Development
Expenditures for research and development are expensed as incurred.
Research and development expense was $5.0 million, $4.4 million and $3.1 million
for the years ended December 31, 2000, 1999 and 1998, respectively.
Income Taxes
Full provision is made for income taxes using the liability method on
all temporary differences between financial reporting and tax bases of assets
and liabilities, using enacted tax rates and laws.
Foreign Currency
The functional currencies of the Company and its subsidiaries are their
local currencies.
For U.S. reporting purposes, these consolidated financial statements
are translated from local currency into U.S. dollars using year-end rates for
the balance sheets and average rates for statements of operations and cash flows
in accordance with Financial Accounting Standards Board Statement No. 52,
"Foreign Currency Translation." Translation gains and losses are accumulated in
the accumulated other comprehensive income or loss component of shareholders'
equity.
Foreign currency transactions are converted into functional currencies
at the rates of exchange at the transaction date or average rate for the period
of the transaction. Exchange gains and losses arising from transactions in
foreign currencies are recorded in the consolidated statements of operation and
are insignificant for all years presented.
Stock Based Compensation
As permitted by Financial Accounting Standards Board Statement No. 123,
"Accounting and Disclosure of Stock-Based Compensation" ("FAS 123"), the Company
accounts for employee share option grants using the intrinsic value method in
accordance with Accounting Principle Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"). Under APB 25, because the exercise price equals
the estimated market price on the date of grant, no compensation expense has
been recognized for stock option awards. The effect of applying the fair value
method of FAS 123 to the Company's option grants is presented in Note 10.
Earnings per Common Share
Basic net income per common share is computed using the weighted
average number of common shares outstanding during the period. Diluted net
income per common share is computed using the weighted average number of common
and diluted equivalent shares outstanding during the period. Dilutive common
equivalent shares consist of stock options (see Note 10).
-32-
Concentrations of Business and Credit Risk
Financial instruments which potentially subject the Company to credit
risk consist principally of trade receivables. The Company performs on-going
credit evaluations of its customers and generally does not require collateral.
The Company maintains adequate reserves for potential losses and such losses,
which have historically been minimal, have been within management's estimates.
The Company sells the majority of its products to distributors and
original equipment manufactures throughout North America, Europe and
Asia-Pacific.
Comprehensive Income (Loss)
Accumulated other comprehensive loss on the balance sheet consists of:
DECEMBER 31,
-------------------------------
2000 1999
------------- -------------
(U.S. DOLLARS IN THOUSANDS)
Pension liability adjustment (43) (43)
Cumulative translation adjustment (10,817) (8,354)
------------- -------------
Accumulated other comprehensive loss $ (10,860) $ (8,397)
============= =============
New Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial
Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities," as amended in June 2000 by Statement of
Financial Accounting Standards No. 138 ("SFAS 138"), "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," which requires companies
to recognize all derivatives as either assets or liabilities in the balance
sheet and measure such instruments at fair value. As amended by Statement of
Financial Accounting Standards No. 137 ("SFAS 137"), "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133," the provisions of SFAS 133 will require adoption no later
than the beginning of the Company's fiscal year ending December 2001. The
Company has determined that adoption of SFAS 133, as amended by SFAS 138, is not
expected to have a material impact on the Company's consolidated financial
statements.
The Company implemented Emerging Issues Task Force ("ETIF") Issue No.
00-10, "Accounting for Shipping and Handling Fees and Costs" in the fourth
quarter of 2000. This issue addresses the statement of income and expense
classification for shipping and handling fees billed to customers and shipping
and handling costs. This issue did not have an impact on the Company's
consolidated financial statements for any of the years presented.
-33-
4. INVENTORIES
Inventories consisted of the following:
DECEMBER 31,
-------------------------------
2000 1999
------------- -------------
(U.S. DOLLARS IN THOUSANDS)
Finished goods $ 22,577 $ 18,482
Work-in-progress 3,767 2,565
Raw materials and supplies 11,624 10,406
$ 37,968 $ 31,453
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net, consisted of the following:
DECEMBER 31,
-------------------------------
2000 1999
------------- -------------
(U.S. DOLLARS IN THOUSANDS)
Land and buildings $ 4,654 $ 3,952
Machinery and equipment 36,996 33,859
Motor vehicles 881 911
------- --------
42,531 38,722
Less accumulated depreciation (18,190) (14,203)
-------- ---------
Property, plant and equipment, net $ 24,341 $24,519
======== =======
6. NOTES PAYABLE TO BANK
In May 1999, the Company's U.S. subsidiary entered into a revolving
credit agreement with a bank that provides up to $15.0 million for working
capital and acquisitions. Borrowings under the agreement are guaranteed by the
Company. At December 31, 2000, $4.5 million was outstanding under the time note.
Interest on the note accrues at a rate of LIBOR + 0.875% (7.60% at December 31,
2000). Interest on the note is payable monthly. The revolving credit note is due
on April 30, 2002. This note is classified as a current liability based on the
Company's intention to repay the note in 2001.
In April 2000, the Company's Japan subsidiary entered into a bank loan
with a bank that provided $2.5 million for working capital and acquisitions.
Borrowings under the agreement are guaranteed by the Company. At December 31,
2000, $1.2 million was outstanding under the bank loan. Interest on the loan
accrues at a rate of 2.38%. Interest on the loan is payable quarterly. The bank
loan is due on April 20, 2001.
Other short-term borrowings outside the United States under available
informal credit facilities are typically a result of overdrafts. At December 31,
2000, the Company had an additional $.8 million of other foreign debt
outstanding. The Company also has an additional $1.7 million of unused foreign
credit facilities. These facilities may be withdrawn at any time by the banks.
-34-
The weighted average interest rates on short-term borrowings as of
December 31, 2000 and 1999 were 5.2% and 5.1%, respectively.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company estimates the fair values of financial instruments at the
balance sheet dates using available market information and appropriate valuation
methodologies. These estimates are highly subjective in nature and involve
uncertainties and significant judgment in interpretation of current market data.
The estimated fair values of the Company's financial instruments approximate
their carrying values at December 31, 2000 and 1999.
The Company conducts its business in various foreign currencies. As a
result, it is subject to the transaction exposures that arise from foreign
exchange rate movements between the dates that foreign currency transactions are
recorded and the date they are consummated. The Company hedges some anticipated
transactions, primarily intercompany purchases, through the use of forward
contracts. Gains and losses on contracts that are designated and effective as
hedges of anticipatory intercompany purchase transactions are marked-to-market
and recognized currently in cost of sales. Forward contracts and the related
value at risk were not material at December 31, 2000 and 1999.
8. ACQUISITIONS
On April 12, 2000 the Company completed its acquisition of 100% of the
outstanding shares of Riva Calzoni Oleodinamica S.p.A. ("Calzoni"), a wholly
owned subsidiary of Intek S.p.A., effective as of April 1, 2000. The cash
purchase price was $4,015,000 ($5,354,000 net of cash acquired and debt
assumed). Calzoni designs, manufacturers and distributes radial piston
oil-pressure motors for industrial hydraulics applications, and is located in
Bologna, Italy. The acquisition has been accounted for utilizing the purchase
method of accounting, and the operating results of Calzoni have been included in
the operating results of the Company from April 1, 2000. Goodwill of $838,000 is
being amortized by the straight-line method over 30 years.
The following unaudited pro forma summary presents the Company's
combined 2000 and 1999 results as if the acquisition occurred at January 1,
1999, after giving effect to certain adjustments including goodwill
amortization. These pro forma results are not necessarily indicative of those
that would have occurred had the acquisition occurred at January 1, 1999:
Year ended
----------------------------------------------------------------
December 31, 2000 December 31, 1999
(U.S. dollars in thousands) (U.S. dollars in thousands)
(except per share data) (except per share data)
Net sales $ 156,388 $ 145,800
========= =========
Net income $ 13,909 $ 8,000
========= =========
Basic earnings per share $ 1.26 $ .72
========= ==========
Diluted earnings per share $ 1.26 $ .71
========= ==========
-35-
On December 23, 1998 the Company closed its acquisition of Lokomec Oy
effective as of October 1, 1998, for a cash purchase price of $16,038,000
($10,923,000 net of cash acquired). Lokomec is a manufacturer of hydraulic
manifolds located in Tampere, Finland. The acquisition was accounted for using
the purchase method of accounting, and the operating results of Lokomec have
been included in the consolidated results of the Company from October 1, 1998.
Goodwill of $8,599,000 is being amortized by the straight-line method over 30
years. The purchase price may be increased dependent upon the achievement of
certain operating objectives, principally based upon earnings before interest
and taxes over a 3 year period. In 2000 and 1999, the Company paid $572,000 and
$788,000, respectively, related to this earnout provision.
9. SHAREHOLDERS EQUITY
At the Company's 2000 Annual General Meeting of Shareholders held on
May 8, 2000, shareholders unanimously approved a plan under which the Company
may repurchase up to 1,111,395 of its Ordinary Shares under certain terms and
conditions. The approval will expire on November 8, 2001. During Fiscal 2000,
550,000 shares were purchased and retired under this plan for an aggregate price
of $7.4.million. As of December 31, 2000, the Company had remaining
authorization for future purchases under the plan of 561,395 shares.
10. STOCK OPTIONS
The Company's Executive Stock Option Plan authorizes awards to
employees in the form of options to purchase the Company's Ordinary Shares. The
aggregate number of Ordinary Shares for which options may be granted under the
plan is 850,000. Options granted under the plan are for periods not to exceed 10
years, and must be issued at the higher of par value or the fair market value of
the shares on the date of grant. Options vest one year from the date of grant
subject to any additional restrictions which may be imposed by the board of
directors. Pro forma information regarding net income and earnings per share is
required under FAS 123, and has been determined as if the Company has accounted
for its employee stock options under the fair value method of that Statement.
The Company uses the Black-Scholes method to estimate the fair value of options
at the date of grant with the following assumptions for 2000, 1999 and 1998:
risk-free interest rates of 6%, volatility of 53%, 37% and 42% respectively, no
dividend yield and an expected life of 5 years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
2000 1999 1998
-------- ------ -----------
(U.S. dollars in thousands, except per share data)
Pro forma net income $ 12,523 $7,183 $ 15,587
Pro forma earnings per share:
Basic $ 1.13 $ .65 $ 1.41
Diluted $ 1.13 $ .65 $ 1.40
-36-
The following table summarizes share option activity for Ordinary
Shares:
2000 1999 1998
----------------------------- ---------------------------------- ----------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
----------------------------- ---------------------------------- ----------------------------
Outstanding beginning of year 650,500 $ 16.81 626,000 $ 16.66 $13.98
370,250
Granted 20,000 11.56 46,000 12.75 17.75
327,500
Exercised -- -- (16,500) 1.53 (39,750) .98
Forfeited (47,500) 16.00 (5,000) 12.88 (32,000) 16.22
----------------------------- ---------------------------------- ----------------------------
Outstanding end of year 623,000 $ 16.67 650,500 $ 16.81 626,000 $ 16.66
============================= ================================== ============================
Exercisable at end of year 353,000 222,875 83,520
Weighted-average fair value
of options granted during
the year $ 6.09 $ 5.40 $ 8.05
Share options outstanding at December 31, 2000 are summarized as follows:
OUTSTANDING EXERCISABLE
-------------------------------------------- ------------------------------------
WEIGHTED-
WEIGHTED AVERAGE WEIGHTED
AVERAGE REMAINING AVERAGE
EXERCISE CONTRACTUAL EXERCISE
NUMBER PRICE LIFE NUMBER PRICE
-------------------------------------------- ------------------------------------
Exercise prices between
$11.56 and $13.88 66,000 $12.54 8.5 46,000 $12.98
$16.00 and $19.53 557,000 $17.16 6.7 307,000 $16.96
-37-
11. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share:
2000 1999 1998
------------- ------------- -------------
(U.S. dollars in thousands, except share and
per share data)
Numerator:
Net income $ 13,759 $ 8,286 $ 16,290
============== ============== ==============
Denominator:
Denominator for basic earnings per
share -- weighted-average shares 11,046,976 11,120,965 11,089,607
Effect of dilutive stock options 852 8,127 43,649
------------- ------------- -------------
Denominator for diluted earnings
per share -- adjusted weighted-
average shares 11,047,828 11,129,092 11,133,256
============= ============= =============
Basic earnings per share $ 1.25 $ .75 $ 1.47
============== ============== ==============
Diluted earnings per share $ 1.25 $ .74 $ 1.46
============== ============== ==============
12. COMMITMENTS
The Company has purchase commitments with various vendors for
approximately $2.2 million as of December 31, 2000. These purchase commitments
are payable during 2001.
Future minimum lease payments under non-cancelable operating leases
with initial terms of one year or more consisted of the following at December
31, 2000:
OPERATING
LEASES
------
(U.S. DOLLARS IN THOUSANDS)
2001 $ 1,782
2002 1,141
2003 582
2004 73
2005 54
Thereafter 40
------
Total minimum lease payments $3,672
======
-38-
Property, plant and equipment include the following amounts for leases
that have been capitalized at December 31, 2000 and 1999:
DECEMBER 31,
2000 1999
---- ----
(U.S. DOLLARS IN THOUSANDS)
Machinery and equipment $1,559 $ 1,598
Less accumulated depreciation (1,177) (900)
-------- -------
$ 382 $ 698
======== =======
Amortization of leased assets is included in depreciation expense. The
interest element of the rental obligations is charged to income over the period
of the lease at the estimated effective interest rate implicit in the lease.
Rent expense charged to operations for the years ended December 31,
2000, 1999 and 1998 was $1.5 million, $1.5 million and $1.6 million,
respectively.
13. INCOME TAXES
The Company's income before income taxes relates to operations in the
United Kingdom and operations other than the United Kingdom (foreign). The
relationship between income before income taxes and the provision for income
taxes varies from period to period because each jurisdiction in which the
Company operates has its own system of taxation (not only with respect to the
statutory rate, but also with respect to the availability of deductions,
credits, and other benefits) and because the amounts earned in and subject to
tax by, each jurisdiction changes from period to period.
For financial reporting purposes, income before income taxes includes
the following components:
YEAR ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
--------- ------- -------
(U.S. DOLLARS IN THOUSANDS)
Pretax income:
United Kingdom $ 2,471 $ 2,821 $ 2,866
Foreign 17,205 9,987 19,380
-------- ------ -------
$19,676 $12,808 $22,246
======= ======= =======
-39-
Significant components of the provision for income tax expense were as follows:
YEAR ENDED DECEMBER 31,
2000 1999 1998
---- ---- ----
(U.S. DOLLARS IN THOUSANDS)
Current:
United Kingdom $ (27) $ 491 $ 335
Foreign 5,113 3,725 5,411
----- ------- ------
Total Current $5,086 $4,216 $5,746
====== ====== ======
Deferred:
United Kingdom -- -- --
Foreign 831 306 210
--- ------ ------
Total provision for income taxes $5,917 $4,522 $5,956
====== ====== ======
The effective tax rate on earnings before income taxes varies from the
current U.K. statutory income tax rate as follows:
DECEMBER 31,
2000 1999 1998
---- ---- ----
Provision at statutory rate 30% 31% 31%
Foreign operations taxed at rates different from United
Kingdom Statutory rate 6 2 7
Reduction in valuation allowance relating to utilization
of NOL carry forwards and other deferred tax assets (3) (1) (6)
Amortization of negative goodwill (1) (2) (2)
Other--net (2) 5 (3)
------ ---- ------
Effective tax rate 30% 35% 27%
===== ==== ======
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 for income tax purposes recorded at the
applicable statutory rates where the Company's operations are located.
-40-
Significant components of the Company's deferred tax assets and liabilities
are as follows:
DECEMBER 31,
-----------------------
2000 1999
------ ------
Deferred tax assets:
Employee benefits $ 745 $ 1,038
Net operating loss carryforwards 4,326 7,487
Other 1,867 3,014
Valuation allowance (5,275) (9,134)
------ ------
Deferred tax assets 1,663 2,405
------ ------
Deferred tax liabilities 1,234 1,145
Net deferred tax assets $ 429 $1,260
====== ======
A valuation allowance has been provided against the net deferred tax
assets for financial reporting purposes in respect of temporary differences and
net operating loss carryforwards. These deferred tax assets primarily relate to
existing net operating losses and basis differences that arose as part of the
June 15, 1993 acquisition. Certain of these net operating losses and future tax
deductions are subject to limitations under foreign tax law which are described
further below. When the deferred tax assets from the acquisition are realized,
the Company records a reduction in the current year income tax expense equal to
the valuation reserve which has been realized. The valuation allowance has been
reduced by $3.9 million at December 31, 2000 and was reduced by $1.6 million at
December 31, 1999 and 1998.
At December 31, 2000, the Company has net operating loss carryforwards
("NOLs") of approximately $17.4 million for foreign income tax purposes, of
which $13.0 million will be allowable against national taxes and $4.4 million
will be allowable against local trade taxes. The NOL deductions in the U.S. are
limited under Section 382 of the Internal Revenue Code to $0.6 million per year
expiring in 2007. The Company and its subsidiaries file for group relief or
consolidated tax returns in the jurisdictions where available.
The Company has not provided for taxes on undistributed foreign
earnings since the Company intends to reinvest these earnings in the future
growth of the business.
14. PENSION AND OTHER POSTRETIREMENT BENEFITS
The Company operates four defined benefit plans in the United States,
Germany and Japan. The plans are generally funded in advance by contributions
from members at levels set in the rules, and from the Company at rates assessed
by each plan's professionally qualified actuaries. Plan assets consist
principally of corporate and government bonds and common stocks.
In addition to the Company's defined benefit pension plans, the
Company's U.S. subsidiary provides health care and life insurance benefits for
certain retired employees, and life insurance benefits for certain active
employees. The health care and life insurance plans are non-contributory and the
health care plan contains other cost-sharing features such as deductibles and
coinsurance.
The following table sets forth the reconciliation of the beginning and
ending balances of the benefit obligation and plan assets, the funded status and
the amounts recognized in the consolidated balance sheets for the defined
benefit and other postretirement plans as of December 31:
-41-
PENSION BENEFITS OTHER BENEFITS
---------------- ---------------
2000 1999 2000 1999
---- ---- ---- ----
(U.S. DOLLARS IN THOUSANDS)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation beginning of year $14,947 $16,057 $ 870 $ 929
Service cost 308 342 4 4
Interest cost 794 871 53 56
Actuarial (gain)/loss (461) (732) -- 58
Benefits paid (616) (669) (173) (177)
Exchange rate changes (723) (922) -- --
------- ------- ----- -----
Benefit obligation at end of year $14,249 $14,947 $ 754 $ 870
------- ------- ----- -----
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ 5,567 $ 5,312 $ -- $ --
Actual return on plan assets 237 337 -- --
Employer contributions 266 231 173 177
Benefits paid (349) (370) (173) (177)
Exchange rate changes (66) 57 -- --
------- ------- ----- -----
Fair value of plan assets at end of year $ 5,655 $ 5,567 $ 0 $ 0
------- ------- ----- -----
RECONCILIATION OF FUNDED STATUS
Funded status $ (8,594) $ (9,381) $ (754) $ (870)
Unrecognized actuarial (gain)/loss (991) (813) 19 19
Unrecognized net asset 17 180 -- --
Accumulated other comprehensive income -- (43) -- --
------- ------- ----- -----
Accrued benefit cost $ (9,568) $(10,057) $ (735) $ (851)
------- ------- ----- -----
AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE
SHEETS CONSISTS OF:
Prepaid benefit cost $ 474 $ 449 $ -- $ --
Accrued benefit liability (10,042) (10,506) (735) (851)
------- ------- ----- -----
Net amount recognized $ (9,568) $(10,057) $ (735) $ (851)
========= ========= ======= =======
ADDITIONAL YEAR-END INFORMATION FOR PLANS WITH BENEFIT
OBLIGATIONS IN EXCESS OF PLAN ASSETS
Projected benefit obligation 13,530 14,180
Accumulated benefit obligation 12,744 13,258
Fair value of plan assets 4,867 4,631
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost 308 342 4 4
Interest cost 794 871 53 56
Expected return on plan assets (337) (352) -- --
Amortization of transitional (asset) or obligation 42 38 -- --
Recognized actuarial (gain) or loss (26) 17 -- --
------- ------- ----- -----
Net periodic benefit cost 781 916 57 60
------- ------- ----- -----
WEIGHTED AVERAGE ASSUMPTIONS AS OF DECEMBER 31
Discount rate 6.09% 6.05% 7.50% 7.50%
Rate of increase in compensation levels 2.40% 2.40% -- --
Expected long-term rate of return on assets 6.72% 6.75% -- --
-42-
The annual assumed health care cost trend rate is 6% for the year
subsequent to December 31, 2000 and is assumed to remain at 6% thereafter.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A one-percentage point change in
assumed health care trend rate would have the following effects:
(U.S. dollars in thousands) 1% Increase 1% Decrease
- --------------------------- ----------- -----------
Effect on total service and interest cost $ 19 $ 16
Effect on postretirement benefit obligation $132 $108
15. CONTINGENCIES
The Company remains involved in environmental cleanup efforts at
Company owned sites. The Company's estimate of the total anticipated cost of the
cleanup efforts is $3.0 million of which $1.7 million has been spent as of
December 31, 2000. Remaining accrued cleanup costs total $1.3 million of which
$1.3 million is classified in the consolidated financial statements as long-term
accrued liabilities. The liability was reduced by $.5 million in 1999. There
were no charges to the accrual in 2000.
Because of the uncertainties relating to remediation activities, the
future expenditures to remediate the currently identified sites could be higher
than the accrued liability. Although it is difficult to assess the final outcome
related to environmental exposures, management believes that these liabilities
are fully accrued for in the accompanying consolidated financial statements.
16. SEGMENT INFORMATION
The Company operates exclusively in the hydraulics industry.
Substantially all revenues result from the sale of hydraulics products. The
Company's reportable segments are based on geographic area. The accounting
policies of the operating segments are the same as described in Note 3. Sales
are determined based on the country of origin. The Company evaluates the
performance of its operating segments based on operating profit after
elimination of profits on transfers between geographic area.
A summary of the Company's operations by geographic area follows:
(U.S. dollars in thousands)
2000 1999 1998
---- ---- ----
SALES TO UNAFFILIATED COMPANIES:
United Kingdom $ 8,776 $ 8,903 10,172
France 14,447 16,562 17,215
Germany 11,405 10,697 12,450
Italy 18,941 10,600 9,435
Rest of Europe 29,561 30,354 26,529
-------- ------ ------
Total Europe 83,130 77,116 75,801
United States 41,078 34,540 45,170
Canada 7,855 6,384 8,055
--------- --------- ---------
Total N. America 48,933 40,924 53,225
Asia-Pacific 21,032 17,503 16,227
---------- ------ ------
Total consolidated $153,095 $135,543 $145,253
========= ======== ========
-43-
TRANSFERS BETWEEN GEOGRAPHIC AREA:
United Kingdom $ 274 $ 107 $ 143
France 23,822 21,698 27,357
Germany 14,518 14,151 17,118
Rest of Europe 886 210 214
--------- --------- ---------
Total Europe 39,500 36,166 44,832
United States 13,188 8,840 11,557
Canada 0 0 0
--------- --------- ---------
Total N. America . 13,188 8,840 11,557
Asia-Pacific 94 36 69
--------- --------- ---------
Total transfers .. 52,782 45,042 56,458
Eliminations (52,782) (45,042) (56,458)
--------- --------- ---------
Total consolidated $ 0 $ 0 $ 0
========= ========= =========
DEPRECIATION EXPENSE:
United Kingdom $ 163 $ 166 $ 122
France 1,282 1,626 1,480
Germany 680 524 394
Italy 589 64 78
Rest of Europe 498 584 264
--------- --------- ---------
Total Europe 3,212 2,964 2,338
United States 1,470 1,287 1,046
Canada 19 15 18
--------- --------- ---------
Total N. America . 1,489 1,302 1,064
Asia-Pacific 349 410 301
--------- --------- ---------
Total consolidated $ 5,050 $ 4,676 $ 3,703
========= ========= =========
OPERATING INCOME:
United Kingdom $ 1,036 $ 1,619 $ 2,030
France 6,537 6,213 7,493
Germany 1,388 (489) 2,761
Italy 1,605 813 706
Rest of Europe 3,656 4,402 2,472
--------- --------- ---------
Total Europe 14,222 12,558 15,462
United States 2,107 16 5,315
Canada 819 592 985
--------- --------- ---------
Total N. America 2,926 608 6,300
Asia-Pacific 1,219 (19) (454)
--------- --------- ---------
Total consolidated $ 18,367 $ 13,147 $ 21,308
========= ========= =========
-44-
IDENTIFIABLE ASSETS:
United Kingdom $ 10,043 $ 15,461 $ 9,211
France 23,600 21,274 33,035
Germany 16,236 14,214 17,615
Italy 18,584 6,237 9,189
Rest of Europe 29,225 25,903 27,119
Total Europe 97,688 83,089 96,169
United States 25,938 26,182 29,007
Canada 4,920 4,183 3,950
Total N. America 30,858 30,365 32,957
Asia-Pacific 15,848 15,366 14,331
Total consolidated $ 144,394 $ 128,820 $ 143,457
17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(U.S. DOLLARS IN THOUSANDS)
QUARTER ENDED
-------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
2000
Net Sales $37,033 $39,959 $36,744 $39,359
Gross Profit 13,344 14,029 12,314 13,415
Operating Income 4,470 5,208 4,256 4,433
Net Income 3,162 3,857 3,291 3,449
Basic Earnings per Share 0.28 0.35 0.30 0.32
Diluted Earnings per Share 0.28 0.35 0.30 0.32
1999
Net Sales $36,469 $34,593 $30,192 $34,289
Gross Profit 12,561 12,411 9,171 10,970
Operating Income 3,936 4,190 1,725 3,296
Net Income 2,886 2,873 885 1,642
Basic Earnings per Share 0.26 0.26 0.08 0.15
Diluted Earnings per Share 0.26 0.26 0.08 0.14
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT
The information regarding Directors appearing under the caption "
Election of Directors" in the Company's Definitive Proxy Statement to be used in
connection with the Annual General Meeting of Stockholders to be held on May 22,
2001 (the "2001 Proxy Statement") is incorporated herein by reference, since
such Proxy Statement will be filed with the Securities and Exchange Commission
not later than 120 days after the end of the Company's fiscal year pursuant to
Regulation 14A. Information required by this item as to executive officers of
the Company is included in Part I (See "Executive Officers of the Company") of
this Annual Report on Form 10-K. Information required by Item 405 of
-45-
Regulation S-K is set forth in the 2001 Proxy Statement under the heading "
Section 16(a) Beneficial Ownership Reporting Compliance" which information is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item is incorporated herein by
reference to "Executive Compensation" in the 2001 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item is incorporated herein by
reference to "Stock Ownership of Beneficial Owners and management" in the 2001
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) Documents filed as part of this Form 10-K:
1. Financial Statements
The 2000 Consolidated Financial Statements of Denison
International plc are included in Part II, Item 8.
2. Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts is enclosed at page F-1 of this
Form 10-K.
All other financial statement schedules for the Company and
its subsidiaries have been included in the consolidated
financial statements or the related footnotes, or they are
either inapplicable or not required.
3. Exhibits
See the Index to Exhibits at page E-1 of this Form 10-K.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended December 31,
2000.
-46-
INDEX OF EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1 Agreement, dated December 23, 1998, by and among Denison International
plc, Merifire Oy and other persons named therein, for the acquisition
of 100% of the outstanding shares of Lokomec Oy. ***
2.2 Stock Purchase Agreement, dated March 14, 2000, by and among Denison
Hydraulics Italy s.r.l. and Intek S.p.A., for the acquisition of 100%
of the shares outstanding of Riva Calzoni Oleodinamica S.p.A. *
3.1 Memorandum and Articles of Association of the Company **
4.1 Form of Deposit Agreement, among the Company, Bankers Trust Company, as
Depository, and holders from time to time of American Depository Shares
issued thereunder (including as an exhibit the form of American
Depository Receipt and the form of said Agreement) **
4.2 Form of Ordinary Share Certificate **
10.1 The Denison International Stock Option Plan **
10.2 Employment Agreement, dated as of June 1, 1998, by and among David L.
Weir, Denison Hydraulics, Inc. and Denison International plc ***
10.3 Revolving Credit Agreement, dated as of May 18, 1999 by and between
Denison Hydraulics, Inc. and Bank One, NA. +
10.4 Stock Purchase Agreement, dated May 8, 2000, by and between Denison
International plc and ING Barings LLP for the purchase of up to
1,113,950 of the outstanding shares of the Company.*
10.5 Agreement dated May 31, 2000' by and between David L. Weir and Denison
Hydraulics Inc. and Denison International plc to extend the employment
agreement entered into June 1, 1998.
21.1 Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP
* Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the period ended March 31, 2000 and incorporated herein by reference.
** Filed as an exhibit to the Company's Registration Statement on Form F-1
(Registration No. 333-7248) and incorporated herein by reference.
*** Filed as an exhibit to the Company's Annual Report on Form 20-F for the
year ended December 31, 1998 and incorporated herein by reference.
+ Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1999 and incorporated herein by reference.
-47-
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Form 10-K to be signed
on its behalf by the undersigned, thereunto duly authorized.
Denison International plc (registrant)
March 29, 2001 By: /s/ Bruce A. Smith
-------------------
Bruce A. Smith
Chief Financial 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
registrant and in the capacities and on the dates indicated.
/S/ J. COLIN KEITH March 29, 2001
------------------
J. Colin Keith, Chairman of the Board
/S/ ANDERS C. H. BRAG March 29, 2001
---------------------
Anders C. H. Brag, Managing Director and Director
/S/ DAVID L. WEIR March 29, 2001
-----------------
David L. Weir, President, CEO and Director
/S/ BRUCE A. SMITH March 29, 2001
------------------
Bruce A. Smith, CFO and Director
-48-
SCHEDULE II
DENISON INTERNATIONAL PLC
VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
-------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER DEDUCTIONS END OF
PERIOD EXPENSES ACCOUNTS (WRITE-OFFS) PERIOD
------ -------- -------- ------------ ------
DESCRIPTION
Allowance for doubtful accounts
receivable
Year ended December 31, 1998 3,087 261 62 (a) (1,015) 2,395
Year ended December 31, 1999 2,395 1,060 (225)(a) (1,055) 2,175
Year ended December 31, 2000 2,175 1,660 (41)(a) (1,382) 2,412
(a) Exchange adjustment
F-1
INDEX OF EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
2.1 Agreement, dated December 23, 1998, by and among Denison International
plc, Merifire Oy and other persons named therein, for the acquisition
of 100% of the outstanding shares of Lokomec Oy. ***
2.2 Stock Purchase Agreement, dated March 14, 2000, by and among Denison
Hydraulics Italy s.r.l. and Intek S.p.A., for the acquisition of 100%
of the shares outstanding of Riva Calzoni Oleodinamica S.p.A. *
3.1 Memorandum and Articles of Association of the Company **
4.1 Form of Deposit Agreement, among the Company, Bankers Trust Company, as
Depository, and holders from time to time of American Depository Shares
issued thereunder (including as an exhibit the form of American
Depository Receipt and the form of said Agreement) **
4.2 Form of Ordinary Share Certificate **
10.1 The Denison International Stock Option Plan **
10.2 Employment Agreement, dated as of June 1, 1998, by and among David L.
Weir, Denison Hydraulics, Inc. and Denison International plc ***
10.3 Revolving Credit Agreement, dated as of May 18, 1999, by and between
Denison Hydraulics, Inc. and Bank One, NA. +
10.4 Stock Purchase Agreement, dated May 8, 2000, by and between Denison
International plc and ING Barings LLP for the purchase of up to
1,113,950 of the outstanding shares of the Company. *
10.5 Agreement, dated May 31, 2000, by and between David L. Weir, Denison
Hydraulics Inc. and Denison International plc to extend the employment
agreement entered into June 1, 1998.
21.1 Subsidiaries of Registrant
23.1 Consent of Ernst & Young LLP
* Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for
the period ended March 31, 2000 and incorporated herein by reference.
** Filed as an exhibit to the Company's Registration Statement on Form F-1
(Registration No. 333-7248) and incorporated herein by reference.
*** Filed as an exhibit to the Company's Annual Report on Form 20-F for the
year ended December 31, 1998 and incorporated herein by reference.
+ Filed as an exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1999 and incorporated herein by reference.
E-1