FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Quarterly Report under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended March 31, 1995 Commission File Number 2-36877
IREX CORPORATION
Pennsylvania 23-1712949
120 North Lime Street, Lancaster 17603
Registrant's Telephone Number, Including Area Code, (717) 397-3633
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 preceeding 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
Common Shares Outstanding (Single Class) 398,982
<PAGE>
IREX CORPORATION AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
The condensed financial statements included herein have been prepared by
Irex Corporation (the "Company"), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations.
The financial information presented herein reflects all adjustments
( consisting only of normal recurring adjustments) which are, in the opinion of
management , necessary for a fair presentation of the results for the interim
periods presented . Certain prior period amounts have been reclassified to
conform with the current presentation. The results for interim periods are not
necessarily indicative of the results to be expected for the full year.
IREX CORPPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended March 31
1995 1994
(Dollars in Thousands Except
Per Common Share Amounts)
Contracting Revenues $ 31,063 $ 33,134
Distribution and Other Revenues 25,360 20,121
Total Revenues 56,423 53,255
Cost of Revenues 43,989 42,552
Gross Profit 12,434 10,703
Selling, General and Administrative Expenses 12,630 11,681
Operating Loss (196) (978)
Interest Expense, Net 439 498
Loss Before Income Taxes (635) (1,476)
Income Tax Benefit (286) (618)
Loss Before Cumulative Effect
of Accounting Change (349) (858)
Cumulative Effect of Accounting Change,
Net of Income Taxes 1,377 -
Net Income (Loss) $ 1,028 $ (858)
Less Dividend Requirements
for Preferred Stock (245) (245)
NET INCOME (LOSS) APPLICABLE
TO COMMON STOCK $ 783 $ (1,103)
Average Common Shares Outstanding 398,607 402,733
Per Common Share Amounts
Loss Before Cumulative Effect
of Accounting Change $ (1.49) $ (2.74)
Cumulative Effect of Accounting Change 3.45 -
Net Income (Loss) $ 1.96 $ (2.74)
IREX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31 December 31
1995 1994
(In Thousands)
ASSETS
Cash and Cash Equivalents $ 605 $ 1,564
Receivables, Net 45,924 51,758
Inventories 12,402 10,887
Deferred Income Taxes 7,997 8,896
Prepaid Expe 493 1,027
Excess of Cost and Estimated Contract
Revenue over Actual Billings 7,363 4,563
Total Current Assets 74,784 78,695
Property and Equipment, Net 3,368 3,481
Other Assets 280 384
TOTAL ASSETS $ 78,432 $ 82,560
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Notes Payable $ 3,159 $ 6,007
Current Portion of Long-Term Debt 1,536 1,580
Accounts Payable 8,099 8,268
Excess of Actual Billings over Cost
and Estimated Contract Revenue 3,481 2,381
Accrued Liabilities 25,811 28,807
Total Current Liabilities 42,086 47,043
Long-Term Debt (Less Current Portion) 15,800 15,800
Redeemable Preferred Stock 10,496 10,496
Capital Stock 1,028 1,028
Paid-in Surplus 465 472
Retained Earnings 27,202 26,419
Cumulative Translation Adjustments (187) (190)
Treasury Stock at Cost (18,332) (18,347)
ESOP Shares Financed with Debt (126) (161)
Total Shareholders' Investment 10,050 9,221
TOTAL LIABILITIES AND
SHAREHOLDERS' INVESTMENT $ 78,432 $ 82,560
IREX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Three Months Ended March 31
1995 1994
(In Thousands)
Cash Flows from Operating Activities
Net Income (Loss) $ 1,028 $ (858)
Non-cash items included in net income (loss)
Cumulative Effect of Accounting Change (1,377) -
Depreciation and Amortization 346 420
Deferred Income Taxes - 5
Stock Contributions to Employee Benefit Plans 8 -
Provision for Bad Debts 104 108
(Increase) decrease in current assets
Receivables 5,730 851
Inventories (1,515) (955)
Prepaid expenses 534 (789)
Excess of Cost and Estimated Contract
Revenue over Actual Billings (Net) (1,700) (1,087)
Increase (decrease) in current liabilities
Accounts Payable (169) (1,410)
Other accrued liabilities (720) 101
Net cash provided by (used in)
operating activities 2,269 (3,614)
Cash Flows from Investing Activities
Net additions to property and equipment (233) (298)
Decrease in other assets 104 145
Exchange rate changes 3 (51)
Net cash used in investing activities (126) (204)
Cash Flows from Financing Activities
(Decrease) increase in notes payable (2,848) 3,754
Payment on debt (9) (759)
Dividend payments (245) (245)
Net cash (used in) provided by
financing activities (3,102) 2,750
Net decrease in Cash and Cash Equivalents (959) (1,068)
Cash and Cash Equivalents at Beginning of Period 1,564 1,068
Cash and Cash Equivalents at End of Period $ 605 $ 0
- 4 -<PAGE>
IREX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) The consolidated financial statements include the accounts of Irex
Corporation (the "Company") and its subsidiaries, all of which are wholly
owned . All significant intercompany accounts and transactions have been
eliminated in consolidation.
The Company is primarily engaged in the business of thermal insulation
contracting throughout the United States and Canada. Allied activities include
the direct sale of insulation and acoustical materials, the fabrication of
insulation materials, and interior contracting.
(2) The Company has authorization for 2,000,000 shares of its common stock
with a par value of $1.00 per share. At March 31, 1995, 1,028,633 shares were
issued, 398,982 shares were outstanding and 629,651 shares were held, at cost,
in Treasury stock.
(3) All highly liquid investments with a maturity of three months or less at
the time of purchase are considered to be cash equivalents. Certain funding of
the Company's defined contribution savings incentive and employee stock
ownership plans are treated as non-cash financing activities in the consolidated
statements of cash flows. The Company's income tax and interest payments for
the first three months of 1995 and 1994 were:
1995 1994
Income Taxes: $ 856,000 $ 197,000
Interest: $ 496,000 $ 55,000
(4) The Company is self-insured against a portion of its workers' compensation
and other insurance risks. The process of determining reserve requirements for
losses within its self-insured retention limits utilizes historical trends,
involves an evaluation of claim frequency, severity and other factors and also
includes the effect of future inflation.
Effective January 1, 1995, the Company changed its method of measuring
the estimated liability for workers' compensation claims. The new method
employs actuarial assumptions to discount to present value the estimated future
payments for these claims, using a risk-free interest rate. The Company
believes this method is preferable because it more accurately reflects the
current impact on its financial condition of the future cash outflows. The
cumulative effect of this accounting change was $1,377,000 ($2,276,000 less the
related tax effect of $899,000) and was included in net income for the three
months ended March 31 , 1995 . The impact of this change, exclusive of the
cumulative effect , on operating results in the first quarter of 1995 was not
significant nor is it expected to have a significant impact on future results of
operations .
At January 1, 1995 the estimated undiscounted liability for workers'
compensation claims was $13,310,000. The present value of such claims was
$11,034,000, using a weighted average discount rate of 7.4%.
- 5 -<PAGE>
Notes to Consolidated Financial Statements (Unaudited) (continued)
The expected future payments as of January 1, 1995, on an undiscounted
basis, were as follows:
1995 $3,597,000
1996 2,242,000
1997 1,676,000
1998 1,323,000
1999 994,000
2000 and Thereafter 3,478,000
$13,310,000
- 6 -<PAGE>
IREX CORPORATION AND SUBSIDIARIES
March 31, 1995 and 1994
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results from Operations
The Company's loss from operations was ($196,000) for the first quarter of 1995,
which compares favorably with the ($978,000) loss reported for the first quarter
of 1994. Historically, due to the seasonality of the contracting business, the
first quarter will report weak earnings for the Company.
Loss before the cumulative effect of accounting change was ($349,000) in the
first quarter of 1995, compared to a loss of ($858,000) in the same quarter of
last year. The Company recognized the cumulative effect of an accounting
change , net of income taxes, of $1,377,000 due to the change in the method of
estimating workers' compensation claims liability in the first quarter of 1995.
The new method employs actuarial assumptions to discount to present value the
estimated future payments for these claims. The impact of this change,
exclusive of the cumulative effect, on operating results in the first quarter of
1995 , was not significant .
The following table presents for the periods indicated certain items in the
Company's consolidated statements of income as a percentage of total revenue:
Three Months Ended
March 31
1995 1994
Contracting Revenues 55.1% 62.2%
Distribution and Other Revenues 44.9% 37.8%
Total Revenue 100.0% 100.0%
Gross Profit Margin 22.0% 20.1%
Loss from Operations (0.3%) (1.8%)
Net Loss (Before Accounting Change) (0.6%) (1.6%)
Revenues
Total revenues in 1995 increased by 5.9% as compared to the first quarter of
1994. Contracting revenue declined 6.3% from prior year results, mainly as a
result of increasing competitive conditions within the construction segment.
The Company's distribution business continued to record strong revenue growth,
increasing by a substantial 26.0% over last year's first quarter. Distribution
revenues, which were at a record level for a quarter, accounted for 44.9% of
total revenues in the first quarter of 1995, versus 37.8% in the prior year.
- 7 -<PAGE>
Gross Profit
For the three months ended March 31, 1995, gross profit recorded was
$12,434,000 which is an increase of $1,731,000 from the $10,703,000 reported
in the first quarter of 1994. Gross profit margins were 22.0% for 1995 and
20.1% for 1994. The increase is mainly due to better contract execution in
1995 . The adverse weather conditions in the first quarter of 1994 had a
significant negative impact on contracting margins achieved in the prior year.
Distribution margins were off slightly, however, the strong growth in distribu-
tion revenues resulted in a 20.2% increase in gross profits from the activity.
Selling, General and Administrative Expenses
Operating expenses amounted to $12,630,000, an increase of $949,000, or 8.1%
from the $11,681,000 reported for the first quarter of last year. Increases of
personnel expenses of $334,000 is mainly normal compensation adjustments and
growth in employment within the distribution business. During the quarter,
distribution added six additional branches which resulted in an increase of 16
full-time salaried positions. Both property related and other administrative
costsindicate increases mainly as a result of the above mentioned expansion
activities . As a percent of sales, first quarter operating expenses were 22.4%
in 1995 compared to 21.9% for 1994.
Financial Condition and Liquidity
The Company at March 31, 1995, had working capital of $32.7 million and
stockholders' equity (excluding preferred stock) of $10.1 million. Working
capital at December 31, 1994, was $31.7 million and stockholders' equity was
$9.2 million.
Total short-term lines of credit of $22.8 million at March 31, 1995, remain
adequate to provide sufficient liquidity for operations. Outstanding balances
under these unsecured lines of credit at March 31, 1995, were $3.2 million, a
decrease of $2.8 million from December 31, 1994. The decrease in interest
expense is reflective of decreased borrowing under these lines. Long-term debt,
excluding the current portion, is $15.8 million at March 31, 1995.
- 8 -<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company's principal subsidiary, ACandS, Inc., is one of a number of
defendants in pending lawsuits filed by approximately 69,000 individual
claiments seeking damages for injuries allegedly caused by exposure to asbestos
fibers in insulation products used at one time by ACandS in its business.
ACandS has defenses to these actions, including defenses based on the fact it is
primarily a contracting company in the business of installing products manufact-
ured by others . During the first quarter of 1995, ACandS was served with cases
involving approximately 7,620 individual plaintiffs. There were 18,122 new
plaintiffs in 1994; 20,542 new plaintiffs in 1993; 13,875 new plaintiffs in
1992; 10,090 new plaintiffs in 1991; and 13,214 new plaintiffs in 1990. Of the
1993 , filings over 4,000 were dismissed against ACandS shortly after filing.
It is the pattern in this litigation for suits to be filed as the result of mass
screenings of individuals employed at a particular facility, through a
particular union local, or by a particular employer. It is ACandS's experience
that such suits are often filed with little investigation as to whether the
claiment ever had any causative exposure to asbestos-containing products
associated with the various named defendants. As a result, historically, about
half of the cases filed against ACandS have been closed without payment.
Cases pending against ACandS are now being handled by the Aetna Casualty and
Surety Co. with the participation of other insurers that wrote coverage for
ACandS . Virtually all of ACandS's liability and defense costs for these cases
are being paid by Aetna and other insurance carriers.
Since the beginning of 1981, approximately 79,000 individual claims against
ACandS have been settled, dismissed or otherwise resolved. Although payments in
individual cases have varied considerably, ACandS's percentage of the aggregate
liability payments for those cases has been small. As a result, ACandS's
average resolution cost for closed cases is very low. The resolution cost per
closed case in recent years has been consistent with long-term averages.
Historically , payments on behalf of ACandS to resolve consolidated proceedings
in jurisdictions with have been difficult for all defendants have exceeded
average costs . ACandS anticipates that it will continue to face such
proceedings in the future .
Beginning in the early 1980's, a number of companies who had been significant
defendants in asbestos cases have filed for bankruptcy. These companies are
principally all among the manufacturing defendants that traditionally have been
the principal targets in the litigation. The large number of bankruptcy
proceedings involving former manufacturers of asbestos-containing products has
significantly reduced the number of viable defendants in many cases. The
bankruptcy of manufacturers whose products ACandS handled does pose increased
risks tp ACandS in certain cases. However, the bankruptcies to date have not
significantly increased the cost of resolving cases, and ACandS does not expect
that they will do so.
- 9 -<PAGE>
PART 11. OTHER INFORMATION
Item 1. Legal Proceedings (continued)
On July 29, 1991, the Judicial Panel on Multidistrict Litigation ordered that
all asbestos-related bodily injury cases pending in the Federal trial courts and
not the in trial should be transferred to Judge Charles R. Weiner in the
United States District Court for the Eastern District of Pennsylvania for
coordinated or consolidated pretrial proceedings. These proceedings involved
less than one-fourth of the cases then pending against ACandS. Judge Weiner
has expressed a desire to achieve a global, or comprehensive, resolution of the
asbestos related bodily injury cases in these proceedings. To date, however,
the proceedings have achieved only the settlement of some individual actions and
a portion of cases brought by selected plaintiffs' counsel. It is unclear how
the Judicial Panels order and the proceedings before Judge Weiner will ultimate-
ly affect the litigation of asbestos-related claims.
On January 15, 1993, certain plaintiffs' counsel and the members of the Center
for Claims Resolution (an organization of 20 asbestos litigation defendants)
filed a class action complaint, answer and settlement agreement involving all
previously unasserted claims by individuals who have been occupationally exposed
to asbestos fibers. The action was filed in the United States District Court
for the Eastern District of Pennsylvania and was assigned to Judge Weiner as
related to the Multidistrict Litigation proceedings. Judge Weiner, in turn,
assigned certain aspects of the proceedings to Judge Lowell A. Reed. In an
order dated August 16, 1994, Judge Reed approved the settlement. Judge Reed's
approval remains subject to appeal. Due to the complexity of the action and the
issues involved , it currently is uncertain what, if any, effect it will have on
asbestos related bodily injury litigation.
Although the large number of pending cases, the continued efforts of certain
courts to clear dockets through consolidated or class proceedings, the
bankruptcy filings by defendants, efforts toward national solutions, the
transfer of federal cases to the United States District Court for the Eastern
District of Pennsylvania , and the Center for Claims Resolution class action
render prediction uncertain , ACandS expects that its percentage of liability
payments will continue to be relatively small .
ACandS has secured the commitment through final settlement agreements of a
large percentage of the very substantial insurance coverage applicable to its
asbestos-related bodily injury claims. ACandS believes it will secure signifi-
cant additional coverage, if needed, from those insurers which have not to date
settled with ACandS.
Given the number of currently pending cases and the rate of new filings, it is
anticipated that the aggregate amount to be paid by all defendants for
asbestos-related bodily injury claims will be very large. Nevertheless, as
noted ,ACandS's percentage of aggregate liability payments is expected to remain
small. Management, therefore, believes that ACandS's insurance coverage is
adequate to ensure that these actions will not have a material adverse effect on
the long-term business or financial position of the Company.
- 10 -<PAGE>
PART 11. OTHER INFORMATION
Item 1. Legal Proceedings (continued)
ACandS is also one of a number of defendants in nine actions by the owners of
schools and other buildings seeking to recover costs associated with the
replacement or treatment of installed asbestos-containing products. These cases
involve school buildings, public buildings, hospitals, and office buildings.
One of the cases is an alleged class action.
ACandS has substantial defenses to the actions, including defenses based upon
the character of its operations and the fact that ACandS did not manufacture the
asbestos-containing products involved. Moreover, ACandS potentially has
indemnification and/or contribution claims against the product manufacturers.
To date, ACandS has been dismissed from 101 cases, largely on the basis it had
no connection with the products at issue in the claimants' buildings, and has
agreed to settle 13 claims. The aggregate amount paid has been very small in
the context of this litigation. ACandS was not served with any new building
related case in the first quarter of 1995. Since 1990, only three new building
related cases have been served on ACandS.
ACandS's primary insurance carriers, the Aetna Casualty and Surety Co. and the
Travelers Insurance Companies, are currently providing ACandS with a defense in
these building cases, as well as paying settlements when necessary. Travelers
is providing coverage pursuant to a settlement agreement, but Aetna has
asserted reservations of rights to later contest both the availability and the
amount of coverage. Aetna, nevertheless, continues to make its required
payments .
Decisions in litigation involving insurance coverage available for other
defendants in asbestos building cases have thus far varied widely. The
appellant rulings which have fully considered coverage issues for asbestos
building claims to date provide significant coverage for policyholders. The
decisions are consistent with ACandS's view that the trend in the courts is to
provide broad coverage for asbestos building cases .
Although the availability of coverage for existing and future suits is not
resolved , and the aggregate potential loss from these suits may be significant,
management believes that ACandS's defenses, potential indemnification and/or
contribution rights and insurance coverage are adequate to ensure that these
actions will not have a material adverse effect on the long-term business or
financial position of the Company.
From time to time, the Company and its subsidiaries are also parties as both
plaintiff and defendant to various claims and litigation arising in the normal
course of business, including claims concerning work performed under various
contracts In the opinion of management, the outcome of such claims and litiga-
tion will not materially affect the Company's long-term business, financial
position or results of operations.
- 11 -<PAGE>
EXHIBIT I
ARTHUR ANDERSEN LLP
LETTER REGARDING CHANGE IN ACCOUNTING PRINCIPLE
Irex Corporation
Re: Form 10-Q Report for the Quarter Ended March 31, 1995
Gentlemen:
This letter is written to meet the requirements of Regulation S-K calling for a
letter from a registrant's independent accountants whenever there has been a
change in accounting principle or practice.
We have been informed that, as of January 1, 1995, the Company changed its
method of measuring the estimated liability for workers' compensation claims.
The new method employs actuarial assumptions to discount to present value the
estimated future payments for these claims. According to the management of the
Company, this change was made to more accurately reflect the current impact on
its financial condition of the future cash outflows.
A complete coordinated set of financial and reporting standards for determining
the preferability of accounting principles among acceptable alternative
principles has not been established by the accounting profession. Thus, we
cannot make an objective determination of whether the change in accounting
described in the preceding paragraph is to a preferable method. However, we
have reviewed the pertinent factors, including those related to financial
reporting , in this particular case on a subjective basis, and our opinion
stated below is based on our determination made in this manner.
We are of the opinion that the Company's change in method of accounting is to an
acceptable alternative method of accounting, which, based upon the reasons
stated for the change and our discussions with you, is also preferable under the
circumstances in this particular case. In arriving at this opinion, we have
relied on the business judgment and business planning of your management.
We have not audited the application of this change to the financial statements
of any period subsequent to December 31, 1994. Further, we have not examined
and do not express any opinion with respect to your financial statements for the
three months ended March 31, 1995.
Very truly yours,
(Arthur Andersen L.L.P.)
Lancaster, Pennsylvania
April 30, 1995
- 12 - <PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IREX CORPORATION
Date May 12, 1995 J. P. Farrell
J. P. Farrell
Controller
Duly Authorized Signer
- 13 -
