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, 1996 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 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
Common Shares Outstanding (Single Class) 394,357
<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 CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended March 31
---------------------------
1996 1995
---- ----
(Dollars in Thousands Except
Per Common Share Amounts)
Contracting Revenues $ 32,467 $ 31,063
Distribution and Other Revenues 30,312 25,360
-------- --------
Total Revenues 62,779 56,423
Cost of Revenues 49,660 43,989
-------- --------
Gross Profit 13,119 12,434
Selling, General and Administrative Expenses 13,132 12,630
-------- --------
Operating Loss (13) (196)
Interest Expense, Net 452 439
-------- --------
Loss Before Income Taxes (465) (635)
Income Tax Benefit (167) (286)
-------- --------
Loss Before Cumulative Effect
of Accounting Change (298) (349)
Cumulative Effect of Accounting Change,
Net of Income Taxes - 1,377
-------- --------
Net (Loss) Income $ (298) $ 1,028
======== ========
Less Dividend Requirements
for Preferred Stock (245) (245)
-------- --------
NET (LOSS) INCOME APPLICABLE
TO COMMON STOCK $ (543) $ 783
======== ========
Per Common Share Amounts
Average Common Shares Outstanding 394,107 398,607
Loss Before Cumulative Effect
of Accounting Change $ (1.38) $ (1.49)
Cumulative Effect of Accounting Change - 3.45
-------- --------
Net (Loss) Income $ (1.38) $ 1.96
======== ========
IREX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31 December 31
1996 1995
(In Thousands)
ASSETS
Cash and Cash Equivalents $ 535 $ 411
Receivables, Net 49,811 51,639
Inventories 12,690 12,367
Deferred Income Taxes 8,298 8,298
Prepaid Income Taxes 749 303
Other Prepaid Expenses 458 624
Actual Cost and Estimated Earnings on
Contracts in Process in Excess of Billings 5,100 4,675
-------- --------
Total Current Assets 77,641 78,317
Property and Equipment, Net 3,202 3,199
Other Assets 90 119
-------- --------
TOTAL ASSETS $ 80,933 $ 81,635
======== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
Notes Payable $ 6,350 $ 8,756
Current Portion of Long-Term Debt 3,257 3,257
Accounts Payable 8,609 8,164
Billings in Excess of Actual Cost and Estimated
Earnings on Contracts in Process 2,605 2,546
Accrued Workers Compensation Insurance 10,623 10,260
Accrued Liabilities 16,903 15,535
-------- --------
Total Current Liabilities 48,347 48,518
-------- --------
Long-Term Debt (Less Current Portion) 12,543 12,543
-------- --------
Redeemable Preferred Stock 10,496 10,496
-------- --------
Capital Stock 1,028 1,028
Paid-in Surplus 458 465
Retained Earnings 26,674 27,217
Cumulative Translation Adjustments (154) (158)
Treasury Stock at Cost (18,459) (18,474)
-------- --------
Total Shareholders' Investment 9,547 10,078
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' INVESTMENT $ 80,933 $ 81,635
======== ========
IREX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Three Months Ended March 31
---------------------------
1996 1995
(In Thousands)
Cash Flows from Operating Activities
Net (Loss) Income $ (298) $ 1,028
Non-cash items included in net (loss) income
Cumulative effect of accounting change (1,377)
Depreciation and Amortization 233 346
Provision for bad debts 96 104
Decrease (increase) in current assets
Receivables 1,732 5,730
Inventories (323) (1,515)
Prepaid income taxes and other prepaid expenses (280) 534
Excess of actual cost and estimated earnings
over actual billings (net) (366) (1,700)
Increase (decrease) in current liabilities
Accounts payable 445 (169)
Other accrued liabilities 1,731 (720)
-------- --------
Net cash provided by
operating activities 2,970 2,261
-------- --------
Cash Flows from Investing Activities
Net additions to property and equipment (236) (233)
Decrease in other assets 29 104
Exchange rate changes 4 3
-------- --------
Net cash used in investing activities (203) (126)
-------- --------
Cash Flows from Financing Activities
Decrease in notes payable (2,406) (2,848)
Payment on debt (9)
Dividend payments (245) (245)
Reissuance of common stock 8 8
-------- --------
Net cash used in financing activities (2,643) (3,094)
-------- --------
Net increase (decrease) in Cash
and Cash Equivalents 124 (959)
Cash and Cash Equivalents at
Beginning of Period 411 1,564
-------- --------
Cash and Cash Equivalents at
End of Period $ 535 $ 605
======== ========
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 fabrica-
tion 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, 1996, 1,028,633 shares were
issued, 394,357 shares were outstanding and 634,276 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. The Company's
income tax and interest payments for the first three months of 1996 and 1995
were:
1996 1995
------ ------
Income Taxes: $ 749,000 $ 856,000
Interest: $ 115,000 $ 496,000
(4) The Company is self-insured against a portion of its workers' compensa-
tion and other insurance risks. The process of determining reserve require-
ments 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 1996
and 1995 was not significant nor is it expected to have a significant impact
on future results of operations.
IREX CORPORATION AND SUBSIDIARIES
March 31, 1996 and 1995
Management's Discussion and Analysis of
Financial Condition and Results of Operations
-----------------------------------------------
Results from Operations
- ------------------------
In the first quarter of 1996 the Company s loss from operations was ($13,000),
which compares favorably with the ($196,000) operating loss reported for the
first quarter of 1995. This first quarter, although reported as a loss,
represents the Company s best start since 1991. The Company s first quarter
results are typically the weakest of the year.
After the preferred stock dividend requirement, net losses applicable to
common stockholders was ($543,000) or ($1.38) per share for the first quarter
of 1996. The comparable period of 1995 indicated net income of $783,000, or
$1.96 per share. However, this was significantly increased by the recognition
of an accounting change, net of income taxes, of $1,377,000, or $3.45 per
share, due to the change in the method of estimating workers compensation
claims liability.
The following table presents for the periods indicated certain items in the
Company s consolidated statements of operations as a percentage of total
revenue:
Three Months Ended
------------------
March 31
1996 1995
------ ------
Contracting Revenues 51.7% 55.1%
Distribution and Other Revenues 48.3% 44.9%
-------- --------
Total Revenue 100.0% 100.0%
======== ========
Gross Profit Margin 20.9% 22.0%
Loss from Operations (0.0%) (0.3%)
Loss Before Cumulative
Effect of Accounting Change (0.5%) (0.6%)
Revenues
- ---------
Total revenues in 1996 increased 11.3% as compared to the first quarter of
1995. For three months ended March 31, 1996, total revenues amounted to
$62,779,000 versus $56,423,000 for the similar period ended 1995. Contracting
revenues totaled $32,467,000 and $31,063,000 for the three-month period ending
March 31, 1996 and 1995, respectively. The increase in contracting revenue of
4.5% is mainly attributed to activity within the interiors contracting
business.
Distribution activity continues to record strong revenue growth, increasing
19.5% over last year s first quarter. Revenue achieved for three months ended
March 31, 1996, was $30,312,000 as compared to $25,360,000 for three months
ended March 31, 1995. In the first quarter ended March 31, 1996, the distri-
bution business achieved a new sales record, and accounts for 48.3% of total
revenues in the first quarter of 1996, versus 44.9% in the prior year.
Gross Profit
- -------------
Gross profit for the first three months ended March 31, 1996, was $13,119,000
which is an increase of $685,000 from the $12,434,000 reported in the first
three months ended March 31, 1995. Gross profit margins were 20.9% for 1996
and 22.0% for 1995. Most of the decline in contracting margins was due in
part to a relatively greater amount of cost-plus work performed this year than
last. However, the substantial growth in distribution revenues resulted in a
19.0% increase in gross profits from the activity.
Selling, General and Administrative Expenses
- ---------------------------------------------
As a percent of revenues, operating expenses were 20.9% in 1996 compared to
22.4% in 1995. Operating expenses amounted to $13,132,000, an increase of
$502,000, or 4.0% from the $12,630,000 reported for the first quarter of last
year. Increases of personnel expenses of $157,000 is mainly normal salary
increases and personnel additions as a result of expansion in the distribution
business. Other related general and administrative cost increases are due to
travel and meeting expenses incurred in the development of field personnel and
also, property and telecommunications costs in connection with the above
mentioned expansion.
Financial Condition and Liquidity
- ----------------------------------
The Company at March 31, 1996, had working capital of $29.3 million and
stockholders equity (excluding preferred stock) of $9.5 million. Working
capital at December 31, 1995, was $29.8 million and stockholders equity was
$10.1 million.
Total debt outstanding at March 31, 1996, was $22.1 million compared to $24.6
million at December 31, 1995. Available short-term lines of credit as of
March 31, 1996, were $22.9 million and remain adequate to provide sufficient
liquidity for operations. Outstanding balances under these unsecured lines of
credit at March 31, 1996, were $4.6 million, a decrease of $4.2 million from
December 31, 1995. Long-term debt, excluding the current portion, is $12.5
million at March 31, 1996.
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 107,000 individual
claimants seeking damages for injuries allegedly caused by exposure to
asbestos fibers in insulation products used at one time by ACandS in its busi-
ness. ACandS has defenses to these actions, including defenses based on the
fact it is primarily a contracting company in the business of installing
products manufactured by others. During the first quarter of 1996, ACandS was
served with cases involving approximately 9,104 individual plaintiffs. There
were 44,904 new plaintiffs in 1995, 18,122 new plaintiffs in 1994; 20,542 new
plaintiffs in 1993; 13,875 new plaintiffs in 1992; and 10,090 new plaintiffs
in 1991. Of the 1993 filings, over 4,000 were dismissed against ACandS
shortly after filing.
The unusually large number of filings in 1995 and the first quarter of 1996
included 22,549 in Texas, 6,707 from the Maritime Legal Clinic and 6,715 in
West Virginia. The Texas filings were predominantly on behalf of out-of-state
claimants. Many of the 1995 filings were apparently motivated by counsels'
efforts to get claims on record before the effective date of a tort reform
statute. Continued high Texas filings may reflect concern that rules for out-
of-state filing may be tightened. The West Virginia filings are attributable
to efforts to participate in a scheduled consolidated trial. Approximately
13,800 claims filed by the Maritime Legal Clinic in the U.S. District Court
for the Northern District of Ohio, including most of the Clinic s 1995 and
1996 filings, will be administratively dismissed through a Court Order dated
May 2, 1996, although this Order does not preclude the Clinic from attempting
to refile the claims in State Court. Filings nationwide were apparently also
increased by plaintiffs seeking to insure that cases were filed before the
passage of possible federal tort reform legislation. Accordingly, ACandS
believes that the recent filings generally represent an advancement of case
filings which will not significantly effect the ultimate number of cases that
may be filed.
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 experi-
ence that such suits are often filed with little investigation as to whether
the claimant ever had any causative exposure to asbestos-containing products
associated with the various named defendants. Because of the pattern,
historically, about half of the cases filed against ACandS have been closed
without payment.
The defense of the cases pending against ACandS is now being handled by the
Travelers/Aetna Property Casualty Corp. 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 ACandS s insurance
carriers.
Since the beginning of 1981, approximately 92,000 individual claims against
ACandS have been settled, dismissed or otherwise resolved. This figure does
not include the approximately 13,800 Northern District of Ohio Maritime Legal
Clinic Claims which are being administratively dismissed as noted above.
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. Bankruptcy filings by a number of companies which had
been significant defendants in asbestos cases have not significantly increased
the cost of resolving cases. Historically, payments on behalf of ACandS to
resolve consolidated proceedings in jurisdictions which have been difficult
for all defendants have exceeded average costs. ACandS anticipates that it
will continue to face such proceedings in the future.
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 then 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.
Subsequently, 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, which was assigned to Judge Weiner
as related to the Multidistrict Litigation proceedings. In an order dated
August 16, 1994, the District Court approved the settlement. This approval
remains subject to appeal. The District Court for the Eastern District of
Texas has also approved a class settlement of future asbestos cases against
Fiberboard Corporation which is also currently on appeal. Due to the complex-
ity of these actions and the claims involved, it is uncertain what impact they
will have on the 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 and Fiberboard
class actions 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
significant 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.
ACandS is also one of a number of defendants in seven 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, 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 102 cases, largely on the basis it had
no connection with the products at issue in the claimants' buildings, and has
agreed to settle 14 claims. The aggregate amount paid has been very small in
the context of this litigation. ACandS was not served with any new building-
related cases in 1995 and the first quarter of 1996. Since 1990, only three
new building related cases have been served on ACandS.
The Travelers/Aetna Property Casualty Corp is currently providing ACandS with
a defense in these building cases, as well as paying settlements when neces-
sary. Coverage based on polities of the Travelers Insurance Companies is
furnished pursuant to a settlement agreement, but coverage based on Aetna
Casualty and Surety Co. policies is subject to asserted reservations of rights
to later contest both the availability and the amount of coverage. Required
payments, nevertheless, continue to be made on the Aetna policies.
Decisions in litigation involving insurance coverage available for other
defendants in asbestos building cases have thus far varied widely. The
appellate 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 signifi-
cant, 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.
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 13 1996 J. P. Farrell
--------------- -----------------
J. P. Farrell
Controller
Duly Authorized Signer
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 535,000
<SECURITIES> 0
<RECEIVABLES> 49,715,000
<ALLOWANCES> 96,000
<INVENTORY> 12,690,000
<CURRENT-ASSETS> 77,641,000
<PP&E> 3,525,000
<DEPRECIATION> 233,000
<TOTAL-ASSETS> 80,933,000
<CURRENT-LIABILITIES> 48,347,000
<BONDS> 12,543,000
10,496,000
0
<COMMON> 1,028,000
<OTHER-SE> 8,519,000
<TOTAL-LIABILITY-AND-EQUITY> 80,933,000
<SALES> 62,779,000
<TOTAL-REVENUES> 62,779,000
<CGS> 49,660,000
<TOTAL-COSTS> 49,660,000
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<INTEREST-EXPENSE> 452,000
<INCOME-PRETAX> (465,000)
<INCOME-TAX> (167,000)
<INCOME-CONTINUING> (543,000)
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