<PAGE>
Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
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 1-9294
Imo Industries Inc.
(Exact name of registrant as specified in its charter)
Delaware 21-0733751
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3450 Princeton Pike
Lawrenceville, New Jersey 08648
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code 609-896-7600
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 and 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: Common Stock, $1.00 Par
Value--16,911,270 shares as of July 31, 1994.
<PAGE> 1
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Consolidated Statements of Income--Three and six
months ended June 30, 1994 and 1993 2
Consolidated Balance Sheets--June 30, 1994 and
December 31, 1993 3
Consolidated Statements of Cash Flows--Six
months ended June 30, 1994 and 1993 4
Notes to Consolidated Financial Statements--
June 30, 1994 5-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 10-17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 17
Item 4. Submission of Matters to a Vote of Security Holders. 18
Item 6. Exhibits and Reports on Form 8-K. 18
SIGNATURES 19
<PAGE> 2
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
Imo Industries Inc. and Subsidiaries
Consolidated Statements of Income
(Dollars in thousands except per share amounts)
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
1994 1993* 1994 1993*
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
NET SALES $ 164,875 $ 167,483 $ 318,570 $ 334,647
Cost of products sold 121,573 117,247 235,622 236,439
GROSS PROFIT 43,302 50,236 82,948 98,208
Selling, general and
administrative expenses 28,776 32,726 55,235 65,565
Research and development expenses 1,958 2,826 4,079 5,969
INCOME FROM OPERATIONS 12,568 14,684 23,634 26,674
Interest expense 10,531 11,843 20,893 23,708
Interest income (511) (89) (647) (275)
Other (income) expense, net (56) (302) (318) 84
Equity in (income) loss of
unconsolidated companies (165) 150 (487) (643)
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES, MINORITY
INTEREST AND EXTRAORDINARY ITEM 2,769 3,082 4,193 3,800
INCOME TAXES (BENEFIT)
Current 779 --- 1,203 ---
Deferred --- (411) --- (138)
TOTAL INCOME TAXES (BENEFIT) 779 (411) 1,203 (138)
Minority interest 238 26 333 60
INCOME FROM CONTINUING OPERATIONS
BEFORE EXTRAORDINARY ITEM 1,752 3,467 2,657 3,878
Loss from discontinued operation
(net of income tax benefits in
1993 of $1 million and $2.7
million, respectively) --- (1,717) --- (4,554)
Extraordinary item - loss on
extinguishment of debt (net of
income tax benefit of $6,876) --- (11,219) --- (11,219)
NET INCOME (LOSS) $ 1,752 $ (9,469) $ 2,657 $ (11,895)
Earnings (loss) per share:
Continuing operations before
extraordinary item $0.10 $0.20 $0.16 $0.23
Discontinued operation --- ($0.10) --- ($0.27)
Extraordinary item --- ($0.66) --- ($0.66)
Net income (loss) $0.10 ($0.56) $0.16 ($0.70)
Weighted average number of shares
outstanding 16,911,270 16,881,270 16,911,270 16,881,270
</TABLE>
See accompanying notes to consolidated financial statements.
*Reclassified to conform to 1994 presentation.
2
<PAGE> 3
<TABLE>
Imo Industries Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
<CAPTION>
June 30, December 31,
1994 1993
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 11,747 $ 19,935
Trade accounts and notes receivable, less
allowance of $2,898 in 1994 and $3,144 in 1993 129,866 102,871
Inventories--net 115,021 116,254
Recoverable income taxes --- 3,826
Deferred income taxes 1,600 2,680
Net assets of discontinued operation - current 52,233 47,993
Prepaid expenses and other current assets 14,326 13,908
TOTAL CURRENT ASSETS 324,793 307,467
PROPERTY, PLANT AND EQUIPMENT--on the basis of cost 341,235 348,755
Less allowances for depreciation and amortization (183,779) (178,960)
NET PROPERTY, PLANT AND EQUIPMENT 157,456 169,795
INTANGIBLE ASSETS, PRINCIPALLY GOODWILL 89,506 93,123
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED COMPANIES 7,299 6,466
NET ASSETS OF DISCONTINUED OPERATION - NONCURRENT 32,767 37,007
OTHER ASSETS 23,406 24,053
TOTAL ASSETS $ 635,227 $ 637,911
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Notes payable $ 43,047 $ 42,759
Trade accounts payable 61,792 47,479
Accrued expenses and other liabilities 80,475 88,911
Accrued costs related to discontinued operation 5,989 12,688
Income taxes payable 1,203 ---
Current portion of long-term debt 3,765 8,527
TOTAL CURRENT LIABILITIES 196,271 200,364
LONG-TERM DEBT 353,934 353,752
DEFERRED INCOME TAXES 14,264 13,944
ACCRUED POSTRETIREMENT BENEFITS - LONG-TERM 37,723 40,971
ACCRUED PENSION EXPENSE AND OTHER LIABILITIES 58,543 61,101
TOTAL LIABILITIES 660,735 670,132
MINORITY INTEREST 2,227 1,746
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred Stock: $1.00 par value; authorized and
unissued 5,000,000 shares --- ---
Common Stock: $1.00 par value; authorized 25,000,000
shares; issued 18,584,058 shares in 1994 and 1993 18,584 18,584
Additional paid-in capital 79,080 79,080
Retained earnings (deficit) (107,576) (110,233)
Cumulative foreign currency translation adjustments 1,965 (1,610)
Minimum pension liability adjustment (1,768) (1,768)
Treasury stock at cost--1,672,788 shares in 1994
and 1993 (18,020) (18,020)
TOTAL SHAREHOLDERS' EQUITY (DEFICIT) (27,735) (33,967)
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 635,227 $ 637,911
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 4
<TABLE>
Imo Industries Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
<CAPTION>
Six Months
Ended June 30,
1994 1993*
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 2,657 $ (11,895)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) continuing operations:
Discontinued operation --- 4,554
Depreciation 11,171 12,408
Amortization 3,515 2,594
Provision for losses on accounts receivable 574 470
Deferred tax benefit --- (138)
Equity in earnings of unconsolidated companies
(in excess of) less than dividends received (92) 176
Minority interest in net income 333 60
Extraordinary item (net of applicable taxes) --- 11,219
Gain on sale of property, plant and equipment --- (25)
Other changes in operating assets and liabilities:
Increase in accounts and notes receivable (27,569) (35)
Increase in inventories (1,911) (2,495)
Decrease in recoverable income taxes 3,826 7,270
Increase in accounts payable and accrued expenses 12,495 1,301
Other operating assets and liabilities (1,665) (8,202)
Net cash provided by continuing operations 3,334 17,262
Net cash used by discontinued operation (5,967) (9,025)
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (2,633) 8,237
INVESTING ACTIVITIES
Purchases of property, plant and equipment (3,328) (5,138)
Proceeds from sale of property, plant and equipment 3,489 40
Proceeds from sale of businesses, net 3,837 4,006
Net cash used by discontinued operation (350) (640)
Other (578) 59
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 3,070 (1,673)
FINANCING ACTIVITIES
Increase (decrease) in notes payable 282 (1,470)
Proceeds from long-term borrowings 302 2,593
Principal payments on long-term debt (6,798) (3,171)
Payment of debt financing costs (2,696) (856)
Dividends paid to minority interests --- (82)
Other 69 (89)
NET CASH USED IN FINANCING ACTIVITIES (8,841) (3,075)
Effect of exchange rate changes on cash 216 (187)
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (8,188) 3,302
Cash and cash equivalents at beginning of period 19,935 15,343
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,747 $ 18,645
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest expense $ 25,804 $ 29,099
Income taxes $ (5,332) $ (6,408)
</TABLE>
See accompanying notes to consolidated financial statements.
* Reclassified to conform to 1994 presentation.
4
<PAGE> 5
Imo Industries Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited with respect to June 30,
1994 and 1993 and the periods then ended.)
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the six months ended June 30, 1994 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1994. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 1993.
NOTE B--DISCONTINUED OPERATION
In January 1994, the Company announced its intention to dispose of its
Electro-Optical Systems operations, which consist of the Company's
subsidiaries Varo Inc. and Baird Corporation. Under a plan approved by the
Board of Directors, the Company intends to sell these operations in 1994 and
has engaged an outside investment banking firm to assist in the divestiture.
In accordance with APB Opinion No. 30, the disposal of this business segment
has been accounted for as a discontinued operation and, accordingly, its
operating results are segregated and reported as a Discontinued Operation in
the accompanying Consolidated Statements of Income. Prior year financial
statements have been reclassified to conform to the current year presentation.
Net sales of the Discontinued Operation were $46.3 million and $41.6 million
for the three months ended June 30, 1994 and 1993 and $91.8 million and $77.4
million for the six months ended June 30, 1994 and 1993, respectively. The
net loss, excluding interest allocation of $2.4 million and $2.6 million ($1.6
million net of tax), was $1.9 million and $0.1 million for the three months
ended June 30, 1994 and 1993, respectively. The net loss, excluding interest
allocation of $4.7 million and $5.1 million ($3.2 million net of tax), was
$2.0 million and $1.4 million for the six months ended June 30, 1994 and 1993,
respectively. The 1994 net loss including allocated interest was charged
against the reserve for anticipated losses established by the Company in 1993.
See Note G for discussion of contingencies related to the Electro-Optical
Systems business.
5
<PAGE> 6
NOTE C--INVENTORIES
Inventories (in thousands of dollars) are summarized as follows:
June 30, December 31,
1994 1993
(Unaudited)
Finished products $35,045 $ 39,074
Work in process 62,363 65,802
Materials and supplies 45,305 45,786
_________ __________
142,713 150,662
Less customers' progress payments 12,696 20,848
Less valuation allowance 14,996 13,560
_________ __________
$115,021 $116,254
NOTE D--ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities (in thousands of dollars) consist of
the following:
June 30, December 31,
1994 1993
(Unaudited)
Accrued contract completion costs $ 610 $ 967
Accrued product warranty costs 8,362 8,907
Accrued litigation and claim costs 12,099 14,312
Payroll and related items 13,966 15,139
Accrued interest payable 10,178 11,590
Customer advance payments 3,818 5,168
Accrued restructuring costs 5,269 8,414
Other 26,173 24,414
__________ __________
$ 80,475 $ 88,911
NOTE E--EARNINGS (LOSS) PER SHARE
Earnings (loss) per share for 1994 and 1993 are based upon the weighted
average number of shares of common stock outstanding. Common stock equivalents
related to stock options and warrants are excluded because their effect is not
material.
6
<PAGE> 7
NOTE F--POSTRETIREMENT BENEFITS
In March 1994, the Company amended its policy regarding retiree medical and
life insurance. This amendment, which affects some current retirees and all
future retirees, phases out the Company subsidy for retiree medical and life
insurance over a three year period ending December 31, 1996. The Company
expects to amortize associated reserves to income over the phase out period at
approximately $7 million per year on a pretax basis. The pretax amounts
amortized to income were $1.7 million and $3.5 million for the three and six
month periods ended June 30, 1994, respectively. The Company does not
anticipate a significant increase or decrease in cash requirements related to
this change in policy during the phase out period.
NOTE G--CONTINGENCIES
In August 1985, the Company was named as defendant in a lawsuit filed by Long
Island Lighting Company ("LILCO"). The action stemmed from the sale of three
diesel generators to LILCO for use at its Shoreham Nuclear Power Station.
During testing of the diesel generators, the crankshaft of one of the diesel
generators severed. The Company's insurers have defended the action under a
reservation of rights.
On April 10, 1991, a jury, in a trial limited to liability, in the U.S.
District Court in the Southern District of New York, found that the warranty
was in effect from the time of shipment of the diesel generators until July
1986. On July 22, 1992, the trial court entered a judgment in the amount of
$18.3 million which included interest to the judgment date.
On September 22, 1993, the Second Circuit Court of Appeals affirmed all lower
court decisions in this matter. On October 25, 1993, the judgment against the
Company was satisfied by payment to LILCO of approximately $19.3 million by
two of the Company's insurers.
In late June 1992, the Company filed an action in the Northern District of
California against one of its insurers in an attempt to collect amounts for
defense costs paid to counsel retained by the Company in defense of the LILCO
litigation. The insurer has refused to reimburse the Company for
approximately $8 million in defense costs paid by the Company alleging that
defense costs above reasonable levels were expended in defending this
litigation. Upon motion by the defendant this action has now been transferred
to the Southern District of New York and assigned to one of the judges who
heard the underlying LILCO trial.
In January 1993, the Company was served a complaint in a case brought in
California by another insurer alleging that the insurer was entitled to
recover $10 million in defense costs previously paid in connection with the
LILCO matter and $1.2 million of the judgment which was paid on behalf of the
Company. The complaint alleges inter alia that the insurer's policies did not
cover the matters in question in the LILCO case. An Answer and various
motions have been filed in connection with this matter.
7
<PAGE> 8
The Company and one of its subsidiaries are two of a large number of
defendants in a number of lawsuits brought by approximately 20,000 claimants
who allege injury caused by exposure to asbestos. Although the Company and
its subsidiary have never been producers or direct suppliers of asbestos, it
is alleged that the industrial and marine products sold by the Company and the
subsidiary had components which contained asbestos. The allegations state a
claim for asbestos exposure when Company-manufactured equipment was maintained
or installed. Suits against the Company have been tendered to its insurers who
are defending under their stated reservation of rights. The insurers for the
subsidiary are being identified and will be provided notice. Settlement
agreements relating to approximately 10,000 claimants have been reached.
Should additional settlements be reached at comparable levels, the settlements
would not be expected to have a material effect on the Company.
The activities of certain employees of the Ni-Tec Division of the Company's
Varo Inc. subsidiary ("Ni-Tec"), headquartered in Garland, Texas, are the
focus of an ongoing investigation by the Office of the Inspector General of
the United States Department of Defense and the Department of Justice
(Criminal Division). On July 16, 1992, Ni-Tec received a subpoena for certain
records as a part of the investigation, which subpoena has been responded to.
Additional subpoenas for additional documents were received in September 1992,
February 1993, and March 1994. The Company responded to the September
subpoena, the government subsequently withdrew the February subpoena and the
Company is in the process of responding to the March subpoena. The
investigation appears directed at quality control, testing and documentation
activities which began at Ni-Tec while it was a division of Optic-Electronic
Corp. Optic-Electronic Corp. was acquired by the Company in November 1990 and
subsequently merged with Varo Inc. in 1991. The Company continues to
cooperate fully with the investigation.
The Securities and Exchange Commission (the "Commission") is conducting an
inquiry into, among other things, certain accounting practices at Ni-Tec and
the 1991 and 1992 fiscal year financial reporting by the Company with respect
thereto. The Commission has sought certain information from the Company
relating to such inquiry and the Company is cooperating with this request.
The Company was notified in August, 1994 that its Electro-Optical operations
are being investigated by the United States Attorney for the District of
Columbia. The investigation concerns the appropriateness of certifications
submitted by Company personnel regarding its contracts with the Arab Republic
of Egypt that were funded by the United States Government. In connection with
this investigation, the Company has received and is complying with a subpoena
issued by the Grand Jury for the District of Columbia.
Regarding environmental matters, the operations of the Company, like those of
other companies engaged in similar businesses, involve the use, disposal and
cleanup of substances regulated under environmental protection laws.
In a number of instances the Company has received Notice of Potential
Liability from the United States Environmental Protection Agency alleging that
various of its divisions had arranged for the disposal of hazardous wastes at
8
<PAGE> 9
a number of facilities that have been targeted for cleanup pursuant to the
Comprehensive Environmental Response Compensation and Liability Act
("CERCLA"). Although CERCLA liability is joint and several, the Company
believes that its liability will not have a material adverse effect on the
financial condition of the Company since it believes that it qualifies as a de
minimis or minor contributor to each site with a large number of Potential
Responsible Parties ("PRP's") having a greater share. Accordingly, the Company
believes that the portion of remediation costs that it will be responsible for
will therefore not be material.
The Company is a defendant in an action filed in the United States District
Court for Middle District of Louisiana brought by Gulf States Utilities
Company ("GSU"). The complaint alleges that the Company breached its contract
for the sale of two emergency diesel generators delivered to GSU's River Bend
Nuclear Generating Station in 1981 and 1982. GSU alleges that it has incurred
a loss of $8 million and claims additional amounts for the use of money and an
equitable adjustment of the purchase price. In July 1992, the District Court
for the Middle District of Louisiana granted the Company's motion for Summary
Judgment dismissing GSU's claims. In November 1993, the Fifth Circuit Court
of Appeals reversed and remanded the case for trial. The ruling eliminated
the Company's statute of limitations defense, but preserved all other
defenses. The Company has recently learned that the District Court will set
this matter for trial in early 1995.
The Company also has two lawsuits pending against it relating to equipment
sold by its former diesel engine division. The Company currently has pending
against it a lawsuit relating to performance shortfalls in products delivered
by its Delaval Turbine Division in a prior year.
With respect to the litigation and claims described in the preceding
paragraphs, it is management's opinion that the Company either expects to
prevail, has adequate insurance coverage or has established appropriate
reserves to cover potential liabilities; however, the ultimate outcome of any
of these matters is indeterminable at this time.
In addition, the Company is involved in various other pending legal
proceedings arising out of the Company's business. The adverse outcome of any
of these legal proceedings is not expected to have a material adverse effect
on the financial condition of the Company. However, if all or substantially
all of these legal proceedings were to be determined adversely to the Company,
which is viewed by the Company as only a remote possibility, there could be a
material adverse effect on the financial condition of the Company.
NOTE H--SUBSEQUENT EVENT
On July 28, 1994, the Company announced that it reached an agreement in
principle to sell its Delaval Turbine and Turbocare divisions, which are
substantially all of the Company's Turbomachinery business segment, and its
50% interest in Delaval-Stork, a Dutch joint venture, to Mannesmann Demag of
Dusseldorf, Germany, for $124 million in cash. The sale is subject to
negotiation and execution of a definitive agreement, formal approval of the
9
<PAGE> 10
board of directors of each company, and receipt of all necessary government
approvals. The parties have a joint objective to close on the transaction
before the end of 1994.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
The following paragraphs provide Management's discussion and analysis of the
significant factors which have affected the Company's financial condition and
results of operations during the three and six month periods ended June 30,
1994.
Restructuring Plan
The Company has completed a significant portion of the asset divestiture
program adopted in October 1992. The Company sold its Heim Bearings,
Aerospace and Barksdale Controls operations for aggregate proceeds of
approximately $91 million in 1993 and its CEC Instruments Division and other
previously identified assets for $7.3 million in the first six months of 1994.
Also, the Company sold its corporate headquarters building in July 1994 for
$4.8 million. Net proceeds from these sales have been used to reduce senior
debt. Results of these operations to their date of sale as well as operations
remaining to be sold, other than the Electro-Optical Systems business, are
included in continuing operations reported in the consolidated financial
statements.
Pursuant to a plan announced in January 1994, the Company intends to sell its
Electro-Optical Systems business (Varo Inc. and Baird Corporation). The post-
cold war slowdown in defense spending has impacted the Electro-Optical Systems
operations and its recent performance. Selling the business will help the
Company reduce debt, halt further cash drains, and concentrate the Company's
focus on its core businesses. The sale of this business segment is expected
to be consummated in the second half of the year. The disposal of this
business segment has been accounted for as a discontinued operation and
accordingly, its operating results are segregated and reported as a
Discontinued Operation in the accompanying Consolidated Statements of Income.
The assets and liabilities have been condensed into net assets of discontinued
operation on the accompanying Consolidated Balance Sheets. The 1993 amounts
have been reclassified to conform to this presentation.
On July 28, 1994, the Company announced that it reached an agreement in
principle to sell its Delaval Turbine and Turbocare divisions and its 50%
interest in Delaval-Stork, a Dutch joint venture, to Mannesmann Demag of
Dusseldorf, Germany, for $124 million in cash. The sale is subject to
negotiation and execution of a definitive agreement, formal approval of the
board of directors of each company, and receipt of all necessary governmental
approvals. The parties have a joint objective to close the transaction before
the end of this year. The proceeds from this sale will be used primarily to
reduce debt.
10
<PAGE> 11
If a definitive sales agreement is executed, these Turbomachinery operations
will be accounted for as a discontinued operation. Sales and operating income
for these operations for the periods reported in this Form 10-Q Report are as
follows:
Operating
Sales Income
($ millions)
Three months ended June 30, 1994 $39.8 $3.3
Three months ended June 30, 1993 33.2 3.8
Six months ended June 30, 1994 81.1 5.4
Six months ended June 30, 1993 64.9 7.9
Also included in the agreement is the Company's investment in Delaval-Stork, a
joint venture. Equity income of $0.2 million and $0.1 million was recorded
for the three months ended June 30, 1994 and 1993, respectively, and $0.5
million and $0.9 million was recorded for the six months ended June 30, 1994
and 1993, respectively.
Based on the prescribed accounting for discontinued operations, substantially
all of the Company's net income for the six months ended June 30, 1994 would
be attributable to these operations. However, assuming that the net proceeds
from the sale of these operations were used to pay down a portion of the
Company's 12.25% Senior Subordinated Debentures due 1997, the Company would
reduce annual interest expense by approximately $14 million. In the event that
the transaction is not consummated, the Company expects to continue these
operations.
The Company is continuing to implement cost-cutting measures at its core
operations to reduce its expense structure and to eliminate duplicative
functions by consolidating some of its smaller operating units. The Company
has consolidated its four domestic turbo-machinery aftermarket maintenance
divisions into one Turbocare division; has consolidated certain operations in
the European mechanical controls and automotive components divisions; and is
revising operating processes and reducing employment levels at the
turbomachinery, pumps and other operations. The number of employees company-
wide has been reduced by approximately 490, or 10% from continuing operations,
between mid-1993 and mid-1994. These organizational restructuring measures
are expected to provide net cash benefits of approximately $3 million in 1994
and $13 million annually thereafter.
Also as a result of restructuring, the Company has realigned its core
businesses into three new groupings for management and segment reporting
purposes. The Power Products and Services Group is basically unchanged but
will now be known as the Turbomachinery segment. The Mechanical Controls
Group, which previously contained three of the Aerospace divisions (sold
September 1993), is now called the Morse Controls segment. The Power
11
<PAGE> 12
Transmission Group lost two Aerospace divisions through divestiture but gained
Gems Sensors, Fincor Electronics and TransInstruments through realignment.
This Group is now known as Pumps, Power Transmission & Controls segment. The
Instruments Group no longer exists because the Electro-Optical Systems
business is now accounted for as a discontinued operation. Finally, the
operating units sold and the remaining assets to be sold as part of the asset
divestiture program but not including the Delaval Turbine and Turbocare
divisions and also excluding the Electro-Optical Systems operations, have been
grouped as a separate segment entitled Other for segment reporting purposes.
Results of Operations
Three months ended June 30, 1994 vs. 1993
Net sales from continuing operations in the second quarter of 1994 were $164.9
million, compared with $167.5 million for the same period a year ago. Sales
from core operations (excluding operations divested since the beginning of
1993 or pending divestiture but including the Delaval Turbine and Turbocare
divisions) were $161.4 million for the second quarter of 1994, compared with
$143.6 million for the second quarter of 1993, a 12.4% increase.
Income from continuing operations for the second quarter of 1994 was $1.8
million, or $0.10 per share. This compares with income from continuing
operations of $3.5 million, or $0.20 per share, in the second quarter of 1993.
Last year's income included the earnings of operations subsequently divested,
and a $1.6 million ($0.09 per share) tax benefit related to the Company's
prior acquisition of the outstanding portion of the Company's Teleflex GmbH
joint venture.
Net income for the second quarter was $1.8 million, or $0.10 per share. The
net loss of $9.5 million ($0.56 per share) in last year's second quarter
included an extraordinary item of $11.2 million ($0.66) for fees and charges
related to a restructuring of the Company's senior credit facilities, and a
loss from discontinued operation of $1.7 million ($0.10).
Bookings from continuing operations were $162.1 million in the second quarter
of 1994, compared with $156.0 million a year ago, a gain of 3.9%. Excluding
divestiture businesses, bookings were 20% ahead of last year and backlog was
down 4%.
Morse Controls segment sales increased 26.7% in the second quarter of 1994,
compared with the second quarter a year ago, as a result of a 51% gain in
sales by Roltra-Morse. The increase at Roltra-Morse was net of a 10% decrease
due to unfavorable foreign currency effects. Segment operating income was 9%
below last year's level, as a sharp improvement at Roltra-Morse was offset by
results at Morse's other operations in Europe.
The substantial gains at the segment's automotive components operation reflect
an increase in market share on certain car models, participation on a new
model car introduced late last year, the successful launch of operations in
Poland, and a slight increase in market share by Fiat, the operation's primary
customer.
12
<PAGE> 13
U.S. operations continued to benefit year-over-year, as they did in the first
quarter, from improved industrial activity in the farm machinery, construction
equipment, and truck markets. The recent demand for small Jet Boats added to
the division's marine market sales.
The segment's European industrial market performance was negatively affected
by the economic environment in Germany and because the consolidation of
divisional operations there has been slower than anticipated. A pick-up in
bookings indicates some recovery is taking place, and improved profit
performance is expected.
Pumps, Power Transmission & Controls segment sales in the current second
quarter were flat with those of last year, but segment operating income was up
12.1% as the result of gains in the power transmission sector.
Pump operations sales and operating profit were down in the second quarter of
1994, compared with the same period a year ago, continuing the pattern seen in
the first quarter. Improved bookings and sales of equipment for the power
generation, pulp and paper, and chemical and hydrocarbon processing markets
were offset by ongoing erosion of Navy business.
The segment's power transmission operations continue to benefit from the
upturn in general industrial activity in the U.S., with improved sales to
suppliers of such industries as automotive, steel, mining, printing and
refrigeration. Operating profit margin has responded to the increase in sales
because of the high level of automation and cost-containment programs in
place.
Both sales and operating profit for the controls sector were about flat with
those of last year's second quarter, as improvements in the U.S. and Canada
offset lower results in Europe.
Turbomachinery segment sales were up 16.2% in the second quarter of 1994
compared with the same period during the prior year, as the result of
increased major unit completions. Segment operating income declined, however,
largely as the result of cost overruns and generally lower margins on the
units, reflecting the competitive pricing experienced in the marketplace over
the past two years.
The Company's overall gross profit margin for continuing operations in the
second quarter of 1994 decreased to 26.3%, compared with a 30.0% in the second
quarter of 1993. The Turbomachinery segment is the primary reason for the
decrease as a result of cost overruns and generally lower margins on major
units. The gross profit margin for the first quarter of 1994 was 25.8%.
Selling, general and administrative expenses for continuing operations
declined $4.0 million in the second quarter of 1994 compared with the same
period a year ago, with most of the decline attributable to businesses sold
subsequent to June 1993 and the phase out of certain postretirement benefit
subsidies. Total selling, general and administrative expenses decreased as a
percent of sales to 17.5% in the second quarter of 1994 compared with 19.5% in
the second quarter of 1993.
13
<PAGE> 14
Results of Operations
Six months ended June 30, 1994 vs. 1993
Net sales from continuing operations in the first six months of 1994 were
$318.6 million compared with $334.6 million for the same period last year.
Sales from core operations (excluding operations divested since the beginning
of 1993 or pending divestiture but including the Delaval Turbine and Turbocare
divisions) were $311.2 million in the first six months of 1994 compared with
$285.2 million last year, an increase of 9.1%.
For the first six months of 1994, income from continuing operations was $2.7
million ($0.16 per share) compared with $3.9 million ($0.23 per share) in the
same period of 1993. Net income for the current six months was also $2.7
million ($0.16), while there was a net loss of $11.9 million ($0.70) in the
same period last year. The 1993 period included an extraordinary after-tax
charge representing fees and charges related to the restructuring of the
Company's senior credit facilities of $11.2 million ($0.66), and a loss from
discontinued operations of $4.6 million ($0.27).
Morse Controls segment sales in the first half of 1994 were up 15.5% over the
first half of 1993, primarily as the result of a 27% gain in sales by Roltra-
Morse. The increase at Roltra-Morse was net of a 10% decrease due to
unfavorable foreign currency effects. Most of the increase occurred in the
second quarter. Segment operating income increased 5.6% over last year, as a
sharp improvement at Roltra-Morse was largely offset by Morse's other
operations in Europe.
Pumps, Power Transmission and Controls segment sales in the first six months
of 1994 were down 1.5% from the first half of 1993. Segment operating income
was up 18.1%, largely as the result of improved volume in the power
transmission sector, the phase out of certain postretirement benefit
subsidies, and reduced overhead expenses.
Pump operations sales and operating profit were adversely affected by the
continued fall-off in defense business. Power Transmission sales and
operating profit both improved for the six month period compared with last
year, benefiting from the upturn in general industrial activity in the U.S.
Controls sales declined in the six month period, mainly due to weakness in
European markets. Operating income was down slightly.
Turbomachinery sales were up 20.6% in the first six months of 1994 compared
with the prior year, primarily as the result of increased major unit
completions. Segment operating income declined largely due to cost overruns
and generally lower margins on the units. The expected benefits of
restructuring activities being put in place have yet to be realized.
The Company's overall gross profit margin from continuing operations in the
first half of 1994 was 26.0% compared with 29.3% in the first half of 1993.
The Turbomachinery segment is the primary reason for the decrease as a result
of that segment's cost overruns and an unfavorable mix of lower-margin
product.
14
<PAGE> 15
Selling, general and administrative expenses for continuing operations
declined $10.3 million compared with the first half of 1993, with most of the
decline attributable to businesses sold subsequent to June 30, 1993 and the
phase out of certain postretirement benefit subsidies. Total selling, general
and administrative expenses decreased as a percent of sales to 17.3% in the
first half of 1994 compared with 19.6% in the first half a year ago. Research
and development expenditures for continuing operations decreased $1.9 million
and were 1.3% of net sales compared with 1.8% of net sales in the first half
of 1993.
In March 1994, the Company amended its policy regarding retiree medical and
life insurance plans. This amendment, which affects some current retirees and
all future retirees, phases out the Company subsidy for retiree medical and
life insurance over a three year period ending December 31, 1996. The Company
expects to amortize associated reserves to income over the phase out period at
approximately $7 million per year on a pretax basis ($3.5 million (pretax) in
the six months ended June 30, 1994). The Company does not anticipate a
significant increase or decrease in cash requirements related to this change
in policy during the phase out period.
Equity in income of unconsolidated companies was $0.5 million, down slightly
from the $0.6 million recorded the first half of the prior year.
Average borrowings in the first six months of 1994 were $72 million lower than
for the same period in 1993 as a result of debt pay-downs from proceeds of
asset sales. As a result, total interest expense (before allocation to
discontinued operations) of $25.8 million in 1994 was $3.5 million less than
in 1993. The interest expense for continuing operations as shown in the
Consolidated Statements of Income excludes interest expense incurred by the
discontinued operation as well as an interest allocation to the discontinued
operation of $4.7 million in 1994 and $5.1 million in 1993.
Income taxes were provided at a 29% rate of pretax income from continuing
operations in the first half of 1994 versus 38% for the same period of 1993.
The 1993 tax provision was more than offset by a tax benefit of $1.6 million
related to a dividend paid by a former foreign affiliate, now a consolidated
subsidiary. The 1994 provision is comprised of foreign and state income
taxes. The decrease in the effective tax rate is due to the existence of U.S.
net operating loss carryforwards in 1994.
As of December 31, 1993, the Company had a net operating loss carryforward of
approximately $49 million expiring in 2008 and foreign tax credit
carryforwards of approximately $5 million expiring through 1998. These
carryforwards, which are available to offset future taxable income, have been
reserved in accordance with FASB Statement No. 109.
Taxes have not been provided on the unremitted earnings of foreign
subsidiaries, since it is the Company's intention to indefinitely reinvest
these earnings. This policy has no impact on the Company's liquidity since
the Company does not anticipate paying any U.S. tax on these unremitted
earnings. The amount of foreign withholding taxes that would be payable on
remittance of these earnings is approximately $1 million.
15
<PAGE> 16
Liquidity and Capital Resources
The Company's domestic liquidity requirements are served by a revolving credit
facility, while its needs outside the U.S. are covered by short and
intermediate term credit facilities from foreign banks.
On July 15, 1993, the Company completed a definitive agreement with its
domestic senior lenders for the restructuring of its existing senior credit
facilities and a new credit facility ("New Facility") through March 31, 1995,
which includes provisions for letters of credit outstanding at that time to
continue through March 31, 1996. The New Facility provides approximately $60
million of revolving credit of which $10 million is for working capital, $40
million is for letters of credit to support commercial contracts and $10
million is for either working capital or letters of credit. As of June 30,
1994, $30.3 million in working capital loans and $36.9 million in standby
letters of credit were outstanding under these facilities of which $20 million
in working capital loans and $21.9 million in letters of credit were
outstanding under the New Facility and the remainder was outstanding under the
restructured credit facility. Both the New Facility and the restructured
credit facilities, as well as the Company's Senior Note and Make-Whole Note
referred to below, are secured by the assets of the Company's domestic
operations and all or a portion of the stock of certain of the Company's
subsidiaries. Approximately $91.2 million of the Company's senior
indebtedness has been repaid through June 30, 1994, principally from the
proceeds of asset sales. The Company also has approximately $35.0 million in
foreign short-term credit facilities with approximately $12.8 million
outstanding.
In the near future, the Company expects to complete a definitive agreement
with a group of lenders, led by Citibank N.A. as agent, for up to $150 million
in credit facilities. The agreement will provide for a $65 million revolving
credit facility through July 1997, a $40 million term loan amortizing to July
1997, and a $45 million bridge loan maturing January 1996. Both the revolving
credit facility and the term loan are extendible to July 1999 under certain
conditions. The Citibank-led facilities will give the Company increased
financial flexibility and are intended to ensure that the Company will have
adequate funding to meet anticipated working capital needs over the next
several years. Proceeds from the Citibank-led facilities will be used to
repay the Company's working capital loans under the present domestic senior
credit facilities, the $30 million 12.75% Senior Note and the $12.4 million
Make-Whole Note, referred to below.
As a result of the expected early extinguishment of the present facilities,
the Company anticipates that it will incur a $5.3 million (pre tax)
extraordinary charge in the third quarter, of which $3.7 million will be cash
related to the prepayment premium for the $30 million 12.75% Senior Note.
The Company's operating activities used cash of $2.6 million in the first half
of 1994, compared with providing cash of $8.2 million in the first half of
1993. Net cash provided by investing activities was $3.1 million in the first
half of 1994 compared with cash used of $1.7 million in the 1993 half. The
improvements in net cash provided by investing activities is principally a
16
<PAGE> 17
result of $7.3 million of cash generated from the sale of assets and $1.8
million less being spent on capital additions in the 1994 period compared with
the 1993 period. Cash and cash equivalents were $11.7 million at June 30,
1994 compared with $19.9 million at December 31, 1993.
Working capital as of June 30, 1994 was $128.5 million, an increase of $21.4
million from the end of 1993. The ratio of current assets to current
liabilities was 1.7 at June 30, 1994, compared with 1.5 at December 31, 1993.
Principally as a result of the 1993 loss, the Company's total debt as a
percent of its total capitalization was 107.4% at June 30, 1994, compared with
109.2% at December 31, 1993.
The Company presently has outstanding $150 million of 12.25% Senior
Subordinated Debentures maturing in 1997 and $150 million of 12% Senior
Subordinated Debentures maturing in amounts of $37.5 million in 1999, $37.5
million in 2000 and $75.0 million in 2001. In addition, the Company has a $30
million 12.75% Senior Note due March 31, 1995, and a $12.4 million Make-Whole
Note due December 31, 1996, both of which are expected to be repaid by
proceeds from the Citibank-led facilities.
The Company is on schedule with its previously announced divestiture and debt
reduction programs. The Company is planning to sell its Electro-Optical
Systems business, certain other non-strategic businesses and under-utilized
real estate holdings. In addition, the Company has reached an agreement in
principle to sell its Delaval Turbine and Turbocare divisions and its 50%
interest in Delaval Stork. The Company is continually evaluating its options
and business strategies in the interest of strengthening the Company.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Securities and Exchange Commission is conducting an inquiry into, among
other things, certain accounting practices at the Ni-Tec Division of the
Company's Varo, Inc. subsidiary and the 1991 and 1992 fiscal year financial
reporting by the Company with respect thereto. The Commission has sought
certain information from the Company relating to such inquiry and the Company
is cooperating with this request.
The Company was notified in August, 1994 that its Electro-Optical operations
are being investigated by the United States Attorney for the District of
Columbia. The investigation concerns the appropriateness of certifications
submitted by Company personnel regarding its contracts with the Arab Republic
of Egypt that were funded by the United States Government. In connection with
this investigation, the Company has received and is complying with a subpoena
issued by the Grand Jury for the District of Columbia.
For additional information regarding certain pending lawsuits, reference is
made to the Company's Form 10-K Report for the year ended December 31, 1993,
which is incorporated herein by reference, and to Note G in Part I of this
report.
17
<PAGE> 18
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of the Company's Stockholders was held on May 24, 1994.
The following Directors were elected:
Name Votes For Votes Withheld
James B. Edwards 14,257,742 333,510
Carter P. Thacher 14,326,553 264,694
There were no abstentions or broker non-votes regarding the election
of Directors.
Ernst & Young were elected as independent auditors of the Company with
14,427,121 votes in favor of such election, 102,987 votes against and
61,144 abstentions. There were no broker non-votes regarding the
election of such auditors.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: None
(b) Reports on Form 8-K: None
18
<PAGE> 19
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.
Imo Industries Inc.
(Registrant)
Date August 11, 1994 /s/ DONALD K. FARRAR
Donald K. Farrar
Chairman, Chief Executive Officer,
President and Director
(principal executive officer)
Date August 11, 1994 /s/ WILLIAM M. BROWN
William M. Brown
Executive Vice President and
Chief Financial Officer
(principal financial officer)
Date August 11, 1994 /s/ ROBERT A. DERR II
Robert A. Derr II
Vice President and
Corporate Controller
(principal accounting officer)
19
