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 March 31, 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 April 30, 1994.
<PAGE> 1
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Consolidated Statements of Income--Three
months ended March 31, 1994 and 1993 2
Consolidated Balance Sheets--March 31, 1994 and
December 31, 1993 3
Consolidated Statements of Cash Flows--Three
months ended March 31, 1994 and 1993 4
Notes to Consolidated Financial Statements--
March 31, 1994 5-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 9-15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 15
Item 4. Submission of Matters to a Vote of Security Holders. 15
Item 6. Exhibits and Reports on Form 8-K. 16
SIGNATURES 17
<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 Ended March 31,
1994 1993 *
(Unaudited)
<S> <C> <C>
NET SALES $ 153,695 $ 167,164
Cost of products sold 114,049 119,192
GROSS PROFIT 39,646 47,972
Selling, general and administrative expenses 26,459 32,839
Research and development expenses 2,121 3,143
INCOME FROM OPERATIONS 11,066 11,990
Interest expense 10,362 11,865
Interest income (136) (186)
Other (income) expense, net (287) 386
Equity in income of unconsolidated companies (297) (793)
INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES AND MINORITY INTEREST 1,424 718
INCOME TAXES
Current 424 ---
Deferred --- 273
TOTAL INCOME TAXES 424 273
Minority interest 95 34
INCOME FROM CONTINUING OPERATIONS 905 411
Loss from Discontinued Operation --- (2,837)
NET INCOME (LOSS) $ 905 $ (2,426)
Earnings (Loss) per share:
Continuing operations $0.05 $0.03
Discontinued operation --- ($0.17)
Net income (loss) $0.05 ($0.14)
Weighted average number of shares outstanding 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>
March 31, December 31,
1994 1993
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 17,389 $ 19,935
Trade accounts and notes receivable, less
allowance of $2,614 in 1994 and $3,144 in 1993 115,236 102,871
Inventories--net 116,103 116,254
Recoverable income taxes --- 3,826
Deferred income taxes 2,327 2,680
Net assets of discontinued operation - current 50,338 47,993
Prepaid expenses and other current assets 15,742 13,908
TOTAL CURRENT ASSETS 317,135 307,467
PROPERTY, PLANT AND EQUIPMENT--on the basis of cost 345,457 348,755
Less allowances for depreciation and amortization (185,289) (178,960)
NET PROPERTY, PLANT AND EQUIPMENT 160,168 169,795
INTANGIBLE ASSETS, PRINCIPALLY GOODWILL 89,667 93,123
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED COMPANIES 6,496 6,466
NET ASSETS OF DISCONTINUED OPERATION - NONCURRENT 34,662 37,007
OTHER ASSETS 23,601 24,053
TOTAL ASSETS $631,729 $637,911
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Notes payable $ 44,258 $ 42,759
Trade accounts payable 54,196 47,479
Accrued expenses and other liabilities 86,585 88,911
Accrued costs related to discontinued operation 10,201 12,688
Current portion of long-term debt 4,471 8,527
TOTAL CURRENT LIABILITIES 199,711 200,364
LONG-TERM DEBT 354,154 353,752
DEFERRED INCOME TAXES 13,923 13,944
ACCRUED POSTRETIREMENT BENEFITS - LONG-TERM 38,898 40,971
ACCRUED PENSION EXPENSE AND OTHER LIABILITIES 55,621 61,101
TOTAL LIABILITIES 662,307 670,132
MINORITY INTEREST 1,892 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
Retained earnings (109,326) (110,233)
Additional paid-in capital 79,080 79,080
Cumulative foreign currency translation adjustments (1,020) (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) (32,470) (33,967)
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 631,729 $ 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>
Three Months
Ended March 31,
1994 1993 *
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 905 $ (2,426)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) continuing operations:
Discontinued operation --- 2,837
Depreciation 5,779 6,351
Amortization 1,774 1,326
Provision for losses on accounts receivable 244 242
Provision for deferred income taxes --- 273
Dividends received in excess of equity in
earnings of unconsolidated companies 73 25
Minority interest in net income 95 34
Other changes in operating assets and liabilities:
(Increase) decrease in accounts and notes
receivable (12,609) 9,617
Decrease (increase) in inventories 151 (3,905)
Decrease in recoverable income taxes 3,826 8,639
Decrease (increase) in accounts payable and
accrued expenses 5,639 (5,066)
Other operating assets and liabilities (3,822) (3,421)
Net cash provided by continuing operations 2,055 14,526
Net cash used by discontinued operation (2,557) (1,425)
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (502) 13,101
INVESTING ACTIVITIES
Purchases of property, plant and equipment (1,230) (3,414)
Proceeds from sale of property, plant and equipment 3,506 ---
Net cash used by discontinued operation (111) (1,219)
Other (13) 278
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 2,152 (4,355)
FINANCING ACTIVITIES
Increase (decrease) in notes payable 1,751 (4,571)
Proceeds from long-term borrowings 78 2,593
Principal payments on long-term debt (4,915) (1,679)
Payment of debt financing costs (1,248) ---
Other 49 (208)
NET CASH USED IN FINANCING ACTIVITIES (4,285) (3,865)
Effect of exchange rate changes on cash 89 (222)
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (2,546) 4,659
Cash and cash equivalents at beginning of period 19,935 15,343
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 17,389 $ 20,002
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest expense $ 13,481 $ 14,921
Income taxes $ (3,416) $ (7,302)
</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 March
31, 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 three months ended March 31, 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 consists 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 for the first quarter of 1994 were
$45.4 million compared with $35.8 million for the first quarter of last
year. The net loss excluding pretax allocated interest of $2.4 million and
$2.6 million, was $.1 million and $.2 million, respectively for the same
periods. 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:
March 31, December 31,
1994 1993
(Unaudited)
Finished products $39,367 $ 39,074
Work in process 64,465 65,802
Materials and supplies 44,274 45,786
148,106 150,662
Less customers' progress payments 16,349 20,848
Less valuation allowance 15,654 13,560
$116,103 $116,254
NOTE D--ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities (in thousands of dollars) consist of
the following:
March 31, December 31,
1994 1993
(Unaudited)
Accrued contract completion costs $ 951 $ 967
Accrued product warranty costs 7,677 8,907
Accrued litigation and claim costs 13,446 14,312
Payroll and related items 15,478 15,139
Accrued interest payable 10,121 11,590
Customer advance payments 6,507 5,168
Accrued restructuring costs 7,948 8,414
Other 24,457 24,414
$ 86,585 $ 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 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 January 1, 1997. 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 amount
amortized to income for the three months ended March 31, 1994 was $1.8
million (pretax). 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. Tentative 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.
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 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") owning a greater share.
Accordingly, the Company believes that the portion of remediation costs
that it will be responsible for will therefore not be material.
8
<PAGE> 9
The Company is a defendant in an action filed in the United States District
Court for the 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 of 1992 the District Court for the Middle District of Louisiana
granted the Company's motion for Summary Judgment dismissing GSU's claims.
In November of 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 on August 22, 1994. 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.
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 months ended March 31,
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. 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
9
<PAGE> 10
consolidated financial statements. Gains of $18.1 million
on the assets divested during 1993 have been deferred and applied to the
reserve for divestitures.
Pursuant to a plan announced in January 1994, the Company intends to sell
its Electro-Optical Systems business. 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.
In accordance with the restructuring program announced in January 1994, the
Company is implementing cost-cutting measures at its remaining operations
to reduce its expense structure and to eliminate duplicative functions by
consolidating some of its smaller operating units. The Company is
consolidating its four domestic turbo-machinery aftermarket maintenance
divisions into one TurboCare division; is consolidating 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 Company expects these
programs to generally be complete by mid-year and the number of employees
company-wide is forecast to decline by approximately 450, or 9% from
continuing operations, between mid-1993 and mid-1994. The benefits from the
restructuring program should become more apparent in the latter part of the
year. The restructurings 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
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, except for the Electro-
Optical Systems operations, have been grouped as a separate segment
entitled Other for segment reporting purposes.
10
<PAGE> 11
Results of Operations
Net sales from continuing operations in the first quarter of 1994 were
$153.7 million compared with $167.2 million in the first quarter of 1993.
Sales from core operations (excluding operations divested in 1993 or
pending divestiture) were $149.8 million for the first quarter of 1994,
compared with $141.5 million for the first quarter of 1993, a 5.9%
increase.
Income from continuing operations in the first quarter of 1994 was $905,000
or $0.05 per share, compared with $411,000 or $0.03 per share in the first
quarter of 1993. Net income for the current quarter was also $905,000 or
$0.05 per share, while there was a net loss of $2.4 million, or $0.14 per
share in the first quarter of 1993. The result of the discontinued
operation in 1993's first quarter was a loss of $2.8 million, or $0.17 per
share.
Bookings from continuing operations were $162.2 million, compared with
$163.2 last year, and quarter-end backlog was $218.6 million, compared with
$273.8 million at the end of March 1993. Approximately $37 million of the
year-over-year decline in backlog is associated with operations divested in
1993. Backlog during the first quarter of 1994 gained $9 million from the
1993 year-end level.
Core operations' bookings in the current quarter were $158.4 million,
compared with $137.6 million last year, while comparable period-end
backlogs were $213.9 million and $232.4 million, respectively. The backlog
for core operations increased during the first quarter of 1994 from $205.4
million at year-end 1993.
Morse Controls segment sales in the first quarter of 1994 were up 3.8% over
the first quarter of 1993 as the result of higher activity in the
operation's farm equipment, over-the-road vehicle and construction
equipment markets in the U.S. Segment operating income, which was up 31.4%,
benefited from this increased proportion of industrial business in the
product mix, as well as from restructuring actions in European operations.
The U.S. operation's industrial bookings were a record in March.
The segment's automotive components operation experienced a gain in market
share and benefited from the successful launch late last year of a new Fiat
model. However, the dollar value of the gain in sales over the year-ago
quarter was offset by a roughly equal adverse change in foreign exchange
rates. Backlog at this operation grew 18% in the quarter.
Pumps, Power Transmission & Controls segment sales in the first quarter of
this year were down 3.1% from the first quarter of last year. Segment
operating income was up 24.6%, largely as the result of reduced overhead
expenses, the phase out of certain postretirement benefit subsidies, and
improved volume in the power transmission sector.
11
<PAGE> 12
Pump operations sales and operating profit were adversely affected by the
continued fall-off in defense business. Although overall bookings were
down from the prior year's first quarter because of weak Navy business,
commercial bookings in the chemical processing, hydrocarbon processing and
pulp and paper markets improved. Imo Pump division bookings in March were
the highest in 15 months.
Power Transmission sales and operating profit improved for the quarter,
compared with last year's first quarter. March results, including
bookings, were particularly good. Gear shipments to general industrial
markets increased during the period, as did brand-labeled electrical
products for distributors.
Controls sales declined in the quarter, mainly due to weakness in European
markets early in the period. Bookings for the Navy and process markets
were strong in the first quarter, as was the level of customer inquiries
for environmental markets products.
Turbomachinery segment sales were up 25.2% in the first quarter 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 the mix of lower-margin product. The expected benefits of
restructuring activities being put in place have yet to be realized.
Segment bookings in the first quarter were $45 million, compared with
bookings of $33 million in the prior year's quarter. The current period's
bookings contain $14 million of non-Imo sourced gas turbines to be provided
by Imo in connection with Imo compressors.
The Company's overall gross profit margin for continuing operations in the
first quarter of 1994 decreased to 25.8%, compared with 28.7% in the first
quarter 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. The gross profit margin for the fourth quarter of
1993 was 26.4%.
Selling, general and administrative expenses for continuing operations
declined $6.4 million compared with the first quarter of 1993, with most of
the decline attributable to businesses sold subsequent to the first quarter
of 1993 and the phase out of certain postretirement benefit subsidies.
Total selling, general and administrative expenses decreased as a percent
of sales to 17.2% in the first quarter of 1994 compared with 19.4% in the
first quarter a year ago. Research and development expenditures for
continuing operations decreased $1.0 million and were 1.4% of net sales
compared with 1.9% of net sales in the first quarter 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 ($1.8 million (pretax) in the first quarter of 1994). The
Company does not anticipate a significant
12
<PAGE> 13
increase or decrease in cash requirements related
to this change in policy during the phase out period.
Equity in income of unconsolidated companies was $0.3 million, down from
the $0.8 million recorded in the first quarter of the prior year, primarily
because of a reduced level of business in the Company's European based
turbomachinery affiliate, Delaval Stork.
Average borrowings in the first quarter of 1994 were $71 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 $12.7 million in 1994 was $1.9 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 $2.4 million in 1994 and $2.6 million in 1993.
Income taxes were provided at a 30% rate of pretax income from continuing
operations in the first quarter of 1994 versus 38% for the same period of
1993. 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.
The Company has a net operating loss carryforward of approximately $49
million expiring in 2008 and has 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.
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 senior credit facilities. The
agreement provides the Company with a new credit facility ("New Facility")
through March 31, 1995, and 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 (reduced in
February 1994 from $65 million by agreement of the Company and the lenders
thereunder) 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 March 31, 1994, $31.2
million in working capital loans and $39.7 million in standby letters of
credit were outstanding under these facilities of which $20 million in
working capital loans and $24.2 million in
13
<PAGE> 14
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 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. The Company also has approximately $35.0 million
in foreign short-term credit facilities with approximately $13.1 million
outstanding.
As a result of the loss for the fourth quarter of 1993, the Company was not
in compliance with several of the financial covenants under its senior
credit facilities. It has subsequently received waivers of such defaults
and amendments to these agreements from its senior lenders.
Moreover, in February, 1994 the Company obtained the consent of its 12.25%
Senior Subordinated Debenture holders to amend the indenture governing
these debentures and permit the Company to incur up to $35 million
indebtedness (including letters of credit and foreign borrowings) above the
level outstanding at year-end 1993. The foregoing waivers, amendments, and
consent should give the Company sufficient financial flexibility to meet
its financial commitments until such time as its recently announced plans
to sell the Electro-Optical Systems business are completed.
The Company's operating activities used cash of $0.5 million in the first
quarter of 1994, compared with providing cash of $13.1 million in the first
quarter of 1993. Net cash provided by investing activities was $2.1
million in the first quarter of 1994 compared with cash used of $4.4
million in the 1993 quarter. The improvements in net cash provided by
investing activities are principally a result of $3.5 million of cash
generated from the sale of assets and $2.2 million less being spent on
capital additions in the 1994 period compared with the 1993 period. Cash
and cash equivalents were $17.4 million at March 31, 1994 compared with
$19.9 million at December 31, 1993.
Working capital as of March 31, 1994 was $117.4 million, an increase of
$10.3 million from the end of 1993. The ratio of current assets to current
liabilities was 1.6 at March 31, 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 108.8% at March 31, 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 had at
March 31, 1994, a $30 million 12.75% Senior Note due March 31, 1995, which
the Company may, at its option, extend to at least December 31, 1996, and,
with the concurrence of the holder, through December 1, 2002, in which
event, $6 million will become due on December 1 in each of the years 1995
and 1996, and $3 million will be due annually from December 1, 1997 to
2002. The Company also has $0.3 million outstanding of an original $50
million 10.35% Senior Note due in 1994 and $12.4 million of Make-Whole
Notes due December 31, 1996, which require quarterly interest payments at
2% above prime.
14
<PAGE> 15
The Company is on schedule with its previously announced divestiture and
debt reduction programs. As of March 31, 1994, six divisions have been
sold and $81.9 million of the debt from the domestic senior lender group
has been repaid from the net proceeds. The Company is planning to sell its
Electro-Optical Systems business, certain other non-strategic businesses
and under-utilized real estate holdings. The Company is continually
evaluating its options and business strategies in the interest of
strengthening the Company.
Of the $125 million of debt required to be repaid to the domestic senior
lender group by the July 15, 1993 definitive senior debt restructuring
agreement, $90.0 million was repaid by March 31, 1994 with the final
installment of $35 million due by September 30, 1994. The Company
currently anticipates that cash flow from operations together with cash
generated by asset sales will be sufficient to permit the required
repayments. Without the sale of a sufficient portion of its operating
assets currently held for sale or the refinancing of the senior
obligations, the Company would not have sufficient cash flow from
operations to make the repayment required in September, 1994. The process
of disposing of assets is continuing and in addition, management is
presently seeking replacement financing. While there can be no guarantee as
to the Company's ability to sell sufficient assets or obtain refinancing
within the necessary time frame, significant progress has been made to
date, and management believes its plans are achievable.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is a defendant in an action filed in the United States District
Court for the 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 of 1992 the District Court for the Middle District of Louisiana
granted the Company's motion for Summary Judgment dismissing GSU's claims.
In November of 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 on August 22, 1994.
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.
Item 4. Submission of Matters to a Vote of Security Holders.
15
<PAGE> 16
In a Form 8-K filed February 1, 1994, the Company reported that it had
commenced solicitation of consents of holders of its 12-1/4% Senior
Subordinated Debentures Due 1997 (the "Debentures") to an amendment of the
indenture pursuant to which such Debentures were issued (the "Indenture")
for the purpose of allowing the Company and its subsidiaries to incur an
additional $35 million of indebtedness above December 31, 1993 senior debt
outstandings.
In a Form 8-K filed February 16, 1994, the Company reported that it had
received the necessary consents for approval of the proposed amendment to
the Indenture, as announced in Company's press release dated February 15,
1994, which was filed as an Exhibit to that Form 8-K. The Company received
consents to the proposed Indenture amendment from holders of Debentures
representing $143,534,000 (approximately 95.69%) in aggregate principal
amount of the Debentures. Holders of Debentures representing $6,466,000
(approximately 4.31%) in aggregate principal amount of the Debentures
withheld their consent to the proposed amendment. There were no abstentions
or broker non-votes.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits: None
(b) Reports on Form 8-k:
On February 1, 1994, the Company filed a Report on Form 8-K
reporting under Item 5.
On February 16, 1994, the Company filed a Report on Form 8-K
reporting under Item 5.
16
<PAGE> 17
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 May 14, 1994 /s/ DONALD K. FARRAR
Donald K. Farrar
Chief Executive Officer,
President and Director
(principal executive officer)
Date May 14, 1994 /s/ WILLIAM M. BROWN
William M. Brown
Executive Vice President and
Chief Financial Officer
(principal financial officer)
Date May 14, 1994 /s/ ROBERT A. DERR II
Robert A. Derr II
Vice President and Corporate
Controller
(principal accounting officer)
17
