SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 29, 1998
Commission file number 1-9149
THE INTERLAKE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-3428543
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
550 Warrenville Road, Lisle, Illinois 60532-4387
(Address of Principal Executive Offices) (Zip Code)
(630) 852-8800
(Registrant's telephone number, including area code)
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 ____
As of April 15, 1998, 23,175,142 shares of the registrant's common stock were
outstanding.
THE INTERLAKE CORPORATION
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following consolidated financial statements as of March 29, 1998 and for
the periods ended March 29, 1998 and March 30, 1997 are unaudited, but
include all adjustments which the Registrant considers necessary for a fair
presentation of results of operations and financial position for the
applicable periods. Except as noted, all adjustments are of a normal,
recurring nature. Operating results for the three month period ended March
29, 1998 are not indicative of the results that may be expected for the
entire 1998 fiscal year. The balance sheet as of December 28, 1997 has been
derived from the audited financial statements of the Company. The statements
included herein should be read in conjunction with the audited financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 28, 1997.
THE INTERLAKE CORPORATION
Consolidated Statement of Operations
For the Periods Ended
March 29, 1998 and March 30, 1997
(In thousands except per share amounts)
1998 1997
Net Sales $133,982 $170,174
Cost of Products Sold 106,847 131,832
Selling & Administrative Expense 13,393 24,435
Operating Profit 13,742 13,907
Non-operating (Income) Expense (1,645) (455)
Earnings Before Interest & Taxes 15,387 14,362
Interest Expense 9,715 11,540
Interest Income (980) (768)
Income from Continuing Operations Before Taxes,
Minority Interest and Extraordinary Loss 6,652 3,590
Provision for Income Taxes 2,683 2,245
Income from Continuing Operations Before Minority
Interest and Extraordinary Loss 3,969 1,345
Minority Interest in Net Income of Subsidiaries 1,130 1,264
Income from Continuing Operations Before
Extraordinary Loss 2,839 81
Income from Discontinued Operations, Net of
Income Taxes -- 1,484
Extraordinary Loss, Net of Income Taxes (220) (1,482)
Net Income $ 2,619 $ 83
Comprehensive Income (Loss) $ 2,612 $ (2,165)
Income (Loss) Per Share of Common Stock-Basic:
Income from Continuing Operations Before
Extraordinary Loss $.12 $.00
Discontinued Operations -- .06
Extraordinary Loss (.01) (.06)
Net Income $.11 $.00
Income (Loss) Per Share of Common Stock-Diluted:
Income from Continuing Operations Before
Extraordinary Loss $.08 $.00
Discontinued Operations -- .05
Extraordinary Loss .00 (.05)
Net Income $.08 $.00
Average Shares Outstanding - Basic 23,206 23,141
Average Shares Outstanding - Diluted 33,606 32,311
THE INTERLAKE CORPORATION
Consolidated Balance Sheet
March 29, 1998 and December 28, 1997
(Dollars in thousands)
Assets 1998 1997
Current Assets:
Cash and cash equivalents $ 32,591 $ 84,508
Receivables, less allowances for doubtful accounts
of $570 at March 29, 1998 and $542 at
December 28, 1997 87,392 78,124
Inventories - Raw materials and supplies 24,383 20,029
- Semi-finished and finished products 20,103 16,700
Other current assets 5,833 5,962
Total Current Assets 170,302 205,323
Other Assets 40,532 41,379
Property, Plant and Equipment, at cost 325,514 315,506
Less - Depreciation and amortization (193,117) (189,142)
132,397 126,364
Total Assets $343,231 $373,066
Liabilities and Shareholders' Equity (Deficit)
Current Liabilities:
Accounts payable $ 43,042 $ 39,097
Accrued liabilities 21,431 20,551
Interest payable 6,342 10,439
Accrued salaries and wages 9,066 11,946
Income taxes payable 36,272 36,887
Debt due within one year 3,245 27,267
Total Current Liabilities 119,398 146,187
Long-Term Debt 292,419 296,365
Other Long-Term Liabilities and Deferred Credits 88,096 89,079
Preferred Stock - 2,000,000 shares authorized
Convertible Exchangeable Preferred Stock - Redeemable,
par value $1 per share, issued 40,000 shares
(liquidation value $66,538 at March 29, 1998 and
$65,114 at December 28, 1997) 39,155 39,155
Shareholders' Equity (Deficit):
Common stock, par value $1 per share, authorized
100,000,000 shares, issued 23,530,455 shares at
March 29, 1998 and 23,393,695 shares at
December 28, 1997 23,530 23,394
Additional paid-in capital 3,039 2,604
Cost of common stock held in treasury (355,313 shares
at March 29, 1998 and 106,153 shares at
December 28, 1997) (3,777) (2,477)
Accumulated deficit (218,615) (221,234)
Accumulated foreign currency translation adjustments (14) (7)
(195,837) (197,720)
Total Liabilities and Shareholders' Equity (Deficit) $343,231 $373,066
THE INTERLAKE CORPORATION
Consolidated Statement of Cash Flows
For the Periods Ended March 29, 1998 and March 30, 1997
(In thousands)
1998 1997
Cash flows from (for) operating activities:
Net income $ 2,619 $ 83
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,028 4,838
(Gain) on discontinued operations -- (1,484)
Extraordinary loss 220 1,482
Other operating adjustments (1,934) 87
(Increase) decrease in working capital:
Accounts receivable (9,283) 11,171
Inventories (7,764) (932)
Other current assets 127 (273)
Accounts payable 3,960 (7,840)
Other accrued liabilities (6,327) (11,774)
Income taxes payable (446) 1,250
Total working capital change (19,733) (8,398)
Net cash provided (used) by operating activities (14,800) (3,392)
Cash flows from (for) investing activities:
Capital expenditures (9,579) (3,736)
Proceeds from disposal of PP&E -- 21
Acquisitions -- (5,000)
Divestitures -- 1,703
Other investment flows 36 79
Net cash provided (used) by investing activities (9,543) (6,933)
Cash flows from (for) financing activities:
Retirements of long-term debt (27,968) (15,377)
Debt retirement costs -- (1,504)
Other financing flows 396 268
Net cash provided (used) by financing activities (27,572) (16,613)
Effect of exchange rate changes (2) (616)
Increase (Decrease) in cash and cash equivalents (51,917) (27,554)
Cash and cash equivalents, beginning of period 84,508 70,228
Cash and cash equivalents, end of period $ 32,591 $ 42,674
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Financial Statements
The interim information furnished in these financial statements is
unaudited.
The Registrant and its subsidiaries are referred to herein on a
consolidated basis as the Company.
Note 2 - Extraordinary Loss
In the first quarter of 1998, the Company repurchased $24.0 million in
principal amount of its Senior Subordinated Debentures. Deferred debt
issuance costs of $.3 million related to the repurchased Debentures were
written off. An extraordinary loss of $.2 million related to this
repurchase, net of applicable income taxes, was reported in the quarter.
In the first quarter of 1997, the Company repurchased $14.5 million in
principal amount of its Senior Notes at a premium of $1.5 million. In
addition, deferred debt issuance costs of $.3 million related to the
repurchased Notes were written off. An extraordinary loss of $1.5 million
related to this repurchase, net of applicable income taxes, was reported
in the quarter.
Note 3 - Discontinued Operations
In the first quarter of 1997, the Company received additional proceeds from
the sale of its Packaging businesses resulting in income from discontinued
operations of $1.5 million, net of applicable income taxes.
Note 4 - Computation of Common Share Data
The weighted average number of common shares outstanding used to compute
basic per share amounts was 23,206,000 for 1998 and 23,141,000 for 1997.
For diluted per share amounts, the weighted average number of common shares
outstanding used was 33,606,000 for 1998 and 32,311,000 for 1997. The
effect of the dilutive Convertible Exchangeable Preferred Stock was to
increase the weighted average number of shares outstanding used in the
computation of diluted earnings per share by 10,016,000 and 9,170,000
shares in the first quarters of 1998 and 1997, respectively. Stock options
added 384,000 common shares in the first quarter of 1998, but were excluded
from the computation in the first quarter of 1997 because the exercise
price exceeded the average market price and would have been antidilutive.
Note 5 - Income Taxes
The effective tax rate on income from continuing operations was 40.3% and
62.5% for the first quarter of 1998 and 1997, respectively. In 1998, the
Company provided for U.S. federal and state income taxes as well as for
additional amounts related to open U.S. federal tax return years of 1982
through 1990.
In 1997, because most of the Company's interest expense was borne in the
United States at the parent company level, the Company had substantial
taxable income in foreign and state jurisdictions. Taxes due to foreign
authorities were not offset by U.S. federal income tax benefits.
Note 6 - Comprehensive Income
In June of 1997, the Financial Accounting Standards Board issued Financial
Accounting Standard (FAS) No. 130 "Reporting Comprehensive Income". The
Statement, which the Company adopted in the first quarter of 1998,
establishes standards for reporting and displaying comprehensive income and
its components in a full set of general-purpose financial statements.
Where applicable, earlier periods have been restated to conform to the
standards set forth in FAS No. 130. The Company's Comprehensive Income
consists of net income and foreign currency translation adjustments which
are presented before tax. Comprehensive Income in the first quarter of
1997 includes $2.2 million of foreign currency exchange losses relating to
the foreign Handling businesses sold in the fourth quarter of 1997. The
Company does not provide for U.S. income taxes on foreign currency
translation adjustments because it does not provide for such taxes on
undistributed earnings of foreign subsidiaries, some of which were subject
to statutory restrictions on distribution.
Note 7 - Acquisitions
In the first quarter of 1997, the Company acquired the assets of ARC Metals
Inc. for $5.0 million in cash and a promissory note in the amount of $2.8
million.
Note 8 - Environmental Matters
In connection with the reorganization of the old Interlake, Inc. (now Acme
Steel Company ("Acme")) in 1986, the Company, then newly-formed,
indemnified Acme against certain environmental liabilities relating to
properties which had been shut down or disposed of by Acme's iron and steel
division prior to the 1986 reorganization. After taking a nonoperating
charge of $10.5 million in the fourth quarter of 1997 as discussed below,
the Company's reserves for environmental liabilities totaled $10.5 million
as of March 29, 1998, most of which relates to the Acme indemnification.
Of this amount, $4.3 million is classified as a current liability at March
29, 1998.
The nonoperating charge of $10.5 million in the fourth quarter of 1997
related to anticipated liabilities for environmental matters. Of that
amount, $8.2 million related to anticipated costs of remediation of certain
underwater sediments at the Superfund site on the St. Louis River in
Duluth, Minnesota (the "Duluth Site"). The Company's liability with
respect to the Duluth Site arises out of the Acme indemnification discussed
above. In 1997, the Company substantially completed an investigation of
certain contaminated underwater sediments at the Duluth Site. Based on
that investigation, the Company submitted a review of alternative remedial
options to the Minnesota Pollution Control Agency ("MPCA") in December,
1997. Those alternatives range in estimated cost from zero to $50.0
million. The nonoperating charge reflects the estimated cost of any of
several alternatives which the Company views as equally likely to be
implemented, based largely upon its own analysis and the advice of its
consultants, as well as upon discussions with the MPCA, community groups
and other interested parties to date. However, there is no assurance that
the remedy ultimately chosen will not cost more or less. The remainder of
the $10.5 million special nonoperating charge is largely attributable to
costs incurred in substantially completing the remediation of certain soils
at the Duluth Site; and anticipated to be incurred in the resolution of the
Company's potential liability with respect to the Conservation Chemical
site located in Gary, Indiana, with respect to which an administrative
order on consent is being negotiated with the United States Environmental
Protection Agency.
With the nonoperating charge discussed above, the Company believes that
based on its current estimate of its potential environmental liabilities,
including all contingent liabilities, individually and in the aggregate,
asserted and unasserted, that subject to the remaining uncertainty with
respect to the Duluth Site discussed above, the costs of environmental
matters have been fully provided for or are unlikely to have a material
adverse effect on the Company's business, future results of operations,
liquidity or financial condition. In arriving at its current estimate of
its potential environmental liabilities, the Company has relied upon the
estimates and analyses of its environmental consultants and legal advisors,
as well as its own evaluation, and has considered: the probable scope and
cost of investigations and remediations for which the Company expects to
have liability; the likelihood of the Company being found liable for the
claims asserted or threatened against it; and the risk of other responsible
parties not being able to meet their obligations with respect to clean-ups.
The Company's estimate has not been discounted to reflect the time-value
of money, although a significant delay in implementation of certain of the
remedies thought to be probable could result in cost estimates increasing
due to inflation.
The Company's current estimates of its potential environmental liabilities
do not reflect any anticipated recoveries from third parties. The Company
believes that the successors to certain coal tar processors at the Duluth
Site (the "tar companies"), who have been named as additional responsible
parties for a portion of the underwater sediments by the MPCA, are the
cause of a significant portion of the underwater contamination at the site.
The tar companies have maintained that their contributions were minimal.
In addition, the Company has pending an action seeking a declaratory
judgment and recoveries from insurers under policies covering various
periods during the 1960's, 1970's and 1980's. In the first quarter of
1998, the Company's net income benefitted by $1.6 million in insurance
recoveries relating to historical environmental issues.
The Company's current expectation is that cash outlays related to its
outstanding reserves for environmental matters will be made during the
period from 1998 through 2000 with the most significant expenditures
expected in 1999 and 2000.
Note 9 - Commitments and Contingencies
The Company is engaged in certain routine litigation arising in the
ordinary course of business. Based upon its evaluation of available
information, management does not believe that any such matters are likely,
individually or in the aggregate, to have a material adverse effect upon
the Company's business future, results of operations, liquidity or
consolidated financial condition.
On March 10, 1995, SC Holdings, Inc., a subsidiary of Waste Management
International plc ("SC Holdings"), filed a complaint in federal district
court in Trenton, New Jersey, against Hoeganaes Corporation, an Interlake
subsidiary, and numerous other defendants, seeking to recover amounts
expended or to be expended in the remediation of the Cinnaminson
Groundwater Contamination Site in Burlington County, New Jersey. SC
Holdings claims to have spent approximately $10.0 million in investigation
and remediation, and purportedly estimates the total costs of investigation
and remediation to be approximately $60.0 million. The site is a
broadly-defined Superfund site which encompasses a landfill formerly operated
by SC Holdings and may also include the groundwater under Hoeganaes' Riverton,
New Jersey facility. Hoeganaes may have shipped certain materials to the
landfill. SC Holdings alleges that Hoeganaes has liability as both an
owner/operator and a generator. The Company believes that Hoeganaes has
meritorious defenses against both alleged bases of liability.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Results of Operations
First Quarter 1998 Compared with First Quarter 1997
Interlake's foreign Handling businesses were sold in the fourth quarter of
1997. The results of their operations and cash flow are included in the
Company's consolidated statement of operations and consolidated statement
of cash flows for the 1997 first quarter, but are excluded for the 1998
first quarter.
Net sales from continuing operations were $134.0 million in the quarter
ended March 29, 1998 compared with sales of $170.2 million in the prior
year period. Net sales without the results of the sold foreign Handling
businesses were $114.6 million in the 1997 quarter. Sales in the
Engineered Materials segment increased 15% to $83.8 million in the 1998
quarter due to higher volume at Special Materials and increased fabricated
component sales at Aerospace Components. Handling segment sales declined
48% to $50.2 million in the 1998 quarter reflecting the sale of the foreign
Handling businesses. Sales at the remaining Handling business in North
America increased 19% reflecting increased shipments in the 1998 quarter.
Operating profit was $13.7 million in the 1998 quarter compared to $13.9
million in the prior year period. Excluding the results of the sold
foreign Handling businesses, operating profit in the first quarter of 1997
was $12.7 million. 1998 non-operating income in the first quarter includes
a $1.6 million benefit from insurance recoveries relating to historical
environmental issues. Interest expense was $9.7 million compared to $11.5
million in the 1997 quarter reflecting lower levels of indebtedness after
the required application of proceeds from the sale of the foreign Handling
businesses. Net income of $2.6 million for the 1998 quarter included an
extraordinary loss of $.2 million, net of tax, related to the early
retirement of a portion of the Company's debt. Net income of $.1 million
in the first quarter of 1997 included income from discontinued operations
of $1.5 million and an extraordinary loss of $1.5 million related to early
debt retirement.
Segment Results
The Company's businesses are organized into two segments: Engineered
Materials and Handling. Businesses in Engineered Materials are Special
Materials (ferrous metal powders) and Aerospace Components (precision
aerospace component fabrication and aviation repair). The Handling segment
includes the North American operations in the 1998 quarter, while the sold
foreign Handling businesses in Europe and Asia Pacific are also included
in 1997.
First Quarter Segment Results
Net Sales Operating Profit
1998 1997 1998 1997
(in millions)
Engineered Materials
Special Materials $ 52.8 $ 50.5
Aerospace Components 31.0 22.3
83.8 72.8 $12.4 $12.2
Handling 50.2 97.4 1.4 2.1
Corporate Items (.1) (.4)
Consolidated Totals $134.0 $170.2 $13.7 $13.9
Engineered Materials
First quarter 1998 sales in the Engineered Materials segment increased 15%
to $83.8 million, due to increased metal powder sales at Special Materials
and higher fabrication shipments at Aerospace Components. Operating profit
increased 2% in the 1998 quarter compared to the 1997 period because volume
increases were partially offset by higher material and manufacturing costs
at both Special Materials and Aerospace Components.
Special Materials' metal powder sales increased 4% compared with the same
period last year due to additional volume and improved sales pricing.
Earnings for the quarter were comparable to the 1997 period as the benefit
of increased volume, favorable sales pricing and improved sales of higher
margin products were offset by higher material and manufacturing costs.
Aerospace Components' sales increased 39% compared to the 1997 first
quarter from increased fabrication shipments on key engine programs and
improved blade repair activity. Earnings for the quarter increased 19% as
the benefit of the additional volume was partially offset by higher
manufacturing costs resulting from the assimilation of new employees to
accommodate the additional activity as well as increased material costs.
Order backlogs in this segment rose 11% to $192.0 million at the end of
1998 quarter compared to $173.2 million in the 1997 period reflecting
continued strong order intake. Aerospace Components' backlog reached a
record level, reflecting increased orders on commercial fabrication
programs.
Handling
Sales in the Handling segment for the first quarter decreased 48% to $50.2
million, compared with $97.4 million in the 1997 quarter due to the sale
of the foreign Handling businesses. North American Handling sales
increased 19% from additional volume which was partially offset by sales
price weakness.
Handling segment operating profit declined 36% to $1.4 million reflecting
the disposition of the foreign Handling businesses. Handling North
America's earnings decreased 7% in the 1998 quarter as the effect of the
increased volume and a favorable settlement with a supplier were more than
offset by sales pricing weakness, less favorable operating variances and
favorable accrual adjustments in 1997.
Order backlogs in this segment were $32.3 million at the end of the first
quarter compared to $89.9 million in 1997 which included the backlog of the
sold foreign Handling businesses. The order backlog at the remaining
Handling business in North America increased 88% from order levels of $17.2
million in the prior year, because of increased order intake.
Discontinued Operations
In the first quarter of 1997, the Company received additional proceeds in
respect of the October 1996 sale of its Packaging businesses. Income from
discontinued operations of $1.5 million, net of applicable income taxes,
was recorded to reflect the adjustment to the gain.
Extraordinary Loss
During the first quarter of 1998, the Company recorded an extraordinary
loss of $.2 million, net of income taxes, for the write-off of deferred
debt issuance costs related to the repurchase and early retirement of $24.0
million of the Company's Senior Subordinated Debentures.
During the first quarter of 1997, the Company recorded an extraordinary
loss of $1.5 million, net of income taxes, for the premium incurred and the
write-off of deferred debt issuance costs related to the repurchase and
early retirement of $14.5 million of the Company's Senior Notes.
Financial Condition
The Company's total debt was $295.7 million at the end of the first quarter
of 1998, down $28.0 million from the 1997 year-end. Cash and equivalents
totaled $32.6 million at the end of the quarter, compared with $84.5
million at the end of 1997 reflecting the repurchase of $24.0 million of
Senior Subordinated Debentures, the $4.0 million payoff of the ESOP note,
increased working capital requirements and capital expenditures. Capital
expenditures of $9.6 million during the first quarter of 1998 compared to
$3.7 million in 1997 reflecting increased spending for expansion,
particularly in the Engineered Materials segment. The Company anticipates
that 1998 capital spending will be approximately $55.0 million.
In December 1997, the Company entered into an amended and restated bank
credit agreement which provides credit facilities totaling $106.0 million,
available for acquisitions and letters of credit. The agreement expires
on June 30, 1998.
The Company is in the process of replacing its existing bank credit
facilities. Were it unable to obtain such facilities, or other financing,
based on current levels of performance, the Company might not have adequate
liquidity to fund its operations and carry out its 1998 capital spending
plan. However, the Company expects, based on its current levels of
performance, current market conditions and indications from credit
providers to date, it will be able to arrange new credit facilities with
terms and in amounts sufficient to fund the Company's liquidity needs
through 2000. The Company has substantial debt repayment requirements in
the years 2001 and 2002.
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The nature of the Company's business is such that it is regularly involved
in legal proceedings incidental to its business. None of these proceedings
is material within the meaning of regulations of the Securities and
Exchange Commission.
The Company is a party in certain litigation and a proceeding before a
governmental agency which relate to the contamination of the environment.
These matters are described in Note 8 and Note 9 of Notes to Consolidated
Financial Statements included herein. Reference is also made to the
Company's Annual Report on Form 10-K for the fiscal year ended December 28,
1997, Part I, Item 3--Legal Proceedings.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 Financial Data Schedule for the quarter ended
March 29, 1998
(b) Reports on Form 8-K
A current report on Form 8-K was filed January 5, 1998 reporting,
under Item 2 of the Form, that the Registrant had sold its European
and Asia-Pacific material handling businesses on December 19, 1997.
The report filed on January 5, 1998 included unaudited pro forma
condensed consolidated statements of operations for the fiscal year
ended December 29, 1996 and the nine months ended September 28,
1997, and an unaudited pro forma condensed consolidated balance
sheet as of September 28,1997, based on the historical financial
statements of the Company and giving pro forma effect to the
disposition as if it had occurred at the beginning of the period
or as of the date presented, as applicable.
A current report on Form 8-K was also filed on January 22, 1998
reporting, under Item 5 of the Form, the Registrants's Fourth
Quarter and Full Year results for the fiscal year ended
December 28, 1997.
SIGNATURE
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.
THE INTERLAKE CORPORATION
April 22, 1998 /s/STEPHEN GREGORY
Stephen Gregory
Vice President - Finance
and Chief Financial Officer
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