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, 1995
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.)
1009 Lenox Drive, Building Four West
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 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--17,025,193
shares as of April 30, 1995.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Consolidated Statements of Income--Three
months ended March 31, 1995 and 1994
Consolidated Balance Sheets--March 31, 1995 and
December 31, 1994
Consolidated Statements of Cash Flows--Three
months ended March 31, 1995 and 1994
Notes to Consolidated Financial Statements--
March 31, 1995
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Item 5. Other Information.
Item 6. Exhibits and Reports on Form 8-K.
SIGNATURES
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,
1995 1994*
(Unaudited)
<S> <C> <C>
Net Sales $ 124,372 $ 110,742
Cost of products sold 88,160 79,542
Gross Profit 36,212 31,200
Selling, general and administrative expenses 22,855 20,451
Research and development expenses 1,996 1,660
Income from Operations 11,361 9,089
Interest expense 7,746 8,556
Interest income (813) (136)
Other income, net (209) (231)
Equity in income of unconsolidated companies (25) (25)
Income From Continuing Operations
Before Income Taxes, Minority Interest
and Extraordinary Item 4,662 925
Income tax expense 1,049 319
Minority interest 63 95
Income From Continuing Operations
Before Extraordinary Item 3,550 511
Discontinued Operations:
Income from Operations (net of
income taxes of $.1 million in 1994) --- 394
Gain on Disposal (net of income taxes of $5.2 million) 39,613 ---
Total Income from Discontinued Operations 39,613 394
Extraordinary Item - Loss on Extinguishment of Debt (4,140) ---
Net Income $ 39,023 $ 905
Earnings per share:
Continuing operations before extraordinary item $ 0.21 $ 0.03
Discontinued operations $ 2.32 $ 0.02
Extraordinary item $ (0.24) ---
Net income $ 2.29 $ 0.05
Weighted average number of shares outstanding 17,014,805 16,911,270
</TABLE>
See accompanying notes to consolidated financial statements.
*Reclassified to conform to 1995 presentation.
<TABLE>
Imo Industries Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
<CAPTION>
March 31, December 31,
1995 1994
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 14,151 $ 26,942
Trade accounts and notes receivable, less
allowance of $2,608 in 1995 and $2,659 in 1994 94,073 84,924
Inventories-net 88,855 86,823
Deferred income taxes 6,472 4,328
Net assets of discontinued operations-current 39,829 68,697
Prepaid expenses and other current assets 12,770 6,593
Total Current Assets 256,150 278,307
Property, Plant and Equipment-on the basis of cost 192,974 183,701
Less allowance for depreciation and amortization (96,667) (91,297)
Net Property, Plant and Equipment 96,307 92,404
Intangible Assets, Principally Goodwill 77,479 82,435
Investments in and Advances to Unconsolidated
Companies 4,343 3,653
Net Assets of Discontinued Operations - Noncurrent 34,100 76,273
Other Assets 52,935 41,587
Total Assets $ 521,314 $ 574,659
LIABILITIES AND SHAREHOLDERS'EQUITY
Current Liabilities
Notes payable $ 10,695 $ 12,771
Trade accounts payable 53,836 47,696
Accrued expenses and other liabilities 51,458 53,676
Accrued costs related to discontinued operations 13,176 6,444
Income taxes payable 9,856 5,479
Current portion of long-term debt 2,973 17,039
Total Current Liabilities 141,994 143,105
Long-Term Debt 271,451 376,998
Deferred Income Taxes 7,403 7,364
Accrued Postretirement Benefits - Long-Term 29,780 30,918
Accrued Pension Expense and Other Liabilities 54,795 41,997
Total Liabilities 505,423 600,382
Minority Interest 2,270 2,281
SHAREHOLDERS' EQUITY
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 18,697,981 and
18,680,428 in 1995 and 1994, respectively 18,698 18,680
Additional paid-in capital 79,898 79,789
Retained earnings (deficit) (67,279) (106,302)
Cumulative foreign currency translation
adjustments 1,177 (1,298)
Minimum pension liability adjustment (853) (853)
Treasury stock at cost -1,672,788 shares in 1995
and 1994 (18,020) (18,020)
Total Shareholders' Equity 13,621 (28,004)
Total Liabilities and Shareholders' Equity $ 521,314 $ 574,659
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
Imo Industries Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
<CAPTION>
Three Months Ended March 31,
1995 1994*
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 39,023 $ 905
Adjustments to reconcile net income to net cash provided by
continuing operations:
Discontinued operations --- (394)
Depreciation 4,049 4,511
Amortization 881 1,469
Gain on sale of discontinued operations (39,613) ---
Extraordinary item 4,140 ---
Other 85 283
Other changes in operating assets and liabilities:
Increase in accounts and notes receivable (8,258) (9,438)
Increase in inventories (2,032) (2,556)
Decrease in recoverable income taxes --- 3,826
Increase in accounts payable and accrued expenses 6,421 6,971
Other operating assets and liabilities (13,013) (4,440)
Net cash (used) provided by continuing operations (8,317) 1,137
Net cash provided (used) by discontinued operations 3,296 (648)
Net Cash (Used in) Provided by Operating Activities (5,021) 489
INVESTING ACTIVITIES
Purchases of property, plant and equipment (6,765) (827)
Proceeds from sale of businesses and sales
of property, plant and equipment 121,870 3,506
Net cash used by discontinued operations (1,527) (518)
Other (72) (13)
Net Cash Provided by Investing Activities 113,506 2,148
FINANCING ACTIVITIES
(Decrease) increase in notes payable (1,705) 1,751
Proceeds from long-term borrowings 2,815 78
Principal payments on long-term debt (122,682) (4,915)
Payment of debt financing costs --- (1,248)
Other 149 49
Net Cash Used in Financing Activities (121,423) (4,285)
Effect of exchange rate changes on cash 147 89
Decrease in Cash and Cash Equivalents (12,791) (1,559)
Cash and cash equivalents at beginning of period 26,942 22,356
Cash and Cash Equivalents at End of Period $ 14,151 $ 20,797
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest expense $ 12,994 $ 13,481
Income taxes $ 2,720 $ (3,416)
</TABLE>
See accompanying notes to consolidated financial statements.
* Reclassified to conform to 1995 presentation.
Imo Industries Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited with
respect to March 31, 1995 and 1994 and the periods then
ended.)
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
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, 1995 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1995.
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,
1994.
Restatements: The Consolidated Financial Statements, and the
notes thereto, have been restated to reflect the Company's
Turbomachinery business segment as a discontinued operation,
in accordance with Accounting Principles Board Opinion No.
30. Certain prior year amounts have been restated to conform
to the current year presentation.
NOTE B--DISCONTINUED OPERATIONS
Electro-Optical Systems
Pursuant to a plan approved by the Board of Directors, the
Company announced in January 1994 its intention to dispose of
its Electro-Optical Systems operations. On January 3, 1995,
the Company completed the sale of its Baird Analytical
Instruments division to Thermo Instruments Systems Inc. for
$12.3 million in cash, which was used to reduce its domestic
senior debt. A loss was previously recognized in connection
with the net realizable value adjustment on the entire
Electro-Optical Systems business recorded in 1993.
On February 8, 1995, the Company announced that it had a
letter of intent from Litton Industries for the acquisition
of the Optical Systems and Ni-Tec divisions of Varo Inc. and
the Optical Systems division of Baird Corporation. On March
24, 1995, the Company and Litton Industries each received
Second Requests for Documents from the Federal Trade
Commission in connection with this proposed transaction. The
Company complied with this request in early May
1995. On May 11, 1995, the Company entered into a definitive
agreement with Litton Industries and Litton Systems, Inc.
for this sale. Closing of the sale is subject to normal
closing conditions, certain governmental approvals,
including Federal Trade Commission clearance, and
finalization of various contractual schedules and exhibits.
These sales will complete a substantial part of the Company's
planned divestiture of its Electro-Optical Systems business.
Not included in the proposed agreement is Varo's Electronic
Systems division, which is being marketed to interested
parties.
Turbomachinery
On July 28, 1994, the Company announced that it had reached
an agreement in principle to sell its Delaval Turbine and
TurboCare divisions, which comprise 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.
On January 17, 1995, the Company completed the sale for $124
million. Of this amount, $109 million was received at
closing, with the remainder earning interest to the Company
and to be received at specified future contract dates subject
to adjustment as provided in the agreement. The Company used
the proceeds to pay off its domestic senior debt in January
1995 and to redeem $40 million of its 12.25% senior
subordinated debentures in March 1995. As reflected in the
Company's first quarter operating results of 1995, the sale
resulted in a gain on disposal of $39.6 million (net of
applicable income tax expense of $5.2 million) after
considering estimated costs to be incurred in connection with
the sale.
Remaining net assets and liabilities of the Discontinued
Operations consist of the following:
March 31, December 31,
(Dollars in thousands) 1995 1994
(Unaudited)
Current Assets:
Receivables $ 17,367 $ 57,778
Inventories 38,371 60,280
Other current assets 1,283 2,031
57,021 120,089
Current Liabilities:
Trade accounts payable 5,851 21,049
Other current liabilities 11,341 30,343
17,192 51,392
Net Current Assets $ 39,829 $ 68,697
Long-term Assets:
Property $ 35,911 $ 67,522
Intangible assets --- 3,988
Other long-term assets 491 9,308
36,402 80,818
Long-term Liabilities 2,302 4,545
Net Long-term Assets 34,100 76,273
Net Assets $ 73,929 $ 144,970
Net assets related to the Electro-Optical Systems business
are $70.4 million and $85 million as of March 31, 1995 and
December 31, 1994, respectively, and net assets related to
the Turbomachinery business are $3.5 million and $60 million
as of March 31, 1995 and December 31, 1994, respectively.
A condensed summary of operations for the Discontinued
Operations is as follows:
Three months ended March 31,
(Dollars in thousands)
1995 1994
(Unaudited)
Net Sales $ 31,576 $ 88,395
Income from operations before
income taxes and minority interest --- 499
Income taxes --- 105
Minority interest --- ---
Income from Operations $ --- $ 394
The income from operations of the Discontinued Operations for
1995 and 1994 includes allocated interest expense. Interest
expense of $2.5 million and $4.2 million, respectively, was
allocated based on the ratio of the estimated net assets to
be sold in relation to the sum of the Company's shareholders'
equity and the aggregate of outstanding debt at each period
end.
See Note G for discussion of contingencies related to the
Electro-Optical Systems and Turbomachinery businesses.
NOTE C--DEBT REPAYMENTS AND EXTRAORDINARY ITEM
The proceeds from the sales of the Baird Analytical
Instruments division and the Turbomachinery business in the
first quarter of 1995 (See Note B), were used to pay off the
Company's domestic senior debt in January 1995 and to redeem
$40 million of its 12.25% senior subordinated debentures in
March 1995.
The domestic senior debt repaid in January 1995 was part of
the Company's credit facilities, entered into on August 5,
1994, for borrowings of up to $150 million from a group of
lenders (the "New Credit Agreement"). The New Credit
Agreement provided for a $65 million revolving credit
facility through July 31, 1997, a $40 million term loan
amortizing to July 1997, and a $45 million bridge loan
maturing January 1996. Under the New Credit Agreement, the
Company had $36.7 million and $45 million in term and bridge
loans, respectively, and no borrowings against the $65
million revolving credit facility outstanding at December 31,
1994; however, $35 million of standby letters of credit were
outstanding. With the sale proceeds, the Company repaid the
term loan of $36.7 million and the bridge loan of $40 million
under the New Credit Agreement. At the same time, and in
keeping with the terms of the New Credit Agreement, the $65
million revolving credit facility was reduced to $50 million.
As of March 31, 1995, there were no borrowings under the $50
million revolving credit facility; however $18.9 million of
standby letters of credit were outstanding.
In March 1995, the Company redeemed $40 million of its 12.25%
senior subordinated debentures, at 100% of their principal
amount, with the remainder of the proceeds.
As a result of this early extinguishment of debt, a $4.1
million ($.24 per share) charge was recorded as an
extraordinary item in the first quarter of 1995. The charge
consisted of the write-off of deferred debt expense
associated with the portions of the domestic senior debt
repaid and the 12.25% senior subordinated debentures
redeemed.
NOTE D--INVENTORIES
Inventories (in thousands of dollars) are summarized as
follows:
March 31, December 31,
1995 1994
(Unaudited)
Finished products $ 34,737 $ 35,649
Work in process 34,433 31,990
Materials and supplies 34,667 32,952
103,837 100,591
Less customers' progress payments 2,195 1,635
Less valuation allowance 12,787 12,133
$ 88,855 $ 86,823
NOTE E--ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities (in thousands of
dollars) consist of the following:
March 31, December 31,
1995 1994
(Unaudited)
Accrued contract completion costs $ 149 $ 556
Accrued product warranty costs 4,766 5,037
Accrued litigation and claim costs 2,174 4,493
Payroll and related items 14,113 12,773
Accrued interest payable 9,362 10,573
Accrued divestiture costs 8,149 8,582
Other 12,745 11,662
$ 51,458 $ 53,676
NOTE F--EARNINGS PER SHARE
Earnings per share for 1995 and 1994 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.
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 United
States District Court for 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 $8.5 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 with a complaint in a
case brought in the United States District Court for the
Northern District of 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. In connection with this matter, the
Company filed a counterclaim against the insurer seeking
payment of $8.5 million in defense costs that the Company
previously paid in connection with the LILCO litigation. On
January 25, 1995, the Court entered a judgment, based on its
December 15, 1994 memorandum and order, dismissing the
Company's counterclaim, denying the Company's Motion for
Summary Judgment, and finding sua sponte that there was no
coverage under the insurer's policy for the LILCO matter. On
February 8, 1995, the Company filed an Application for Leave
to File Motion for Reconsideration of the Judgment which was
subsequently denied. The Company also filed a Notice of
Appeal with the Ninth Circuit Court of Appeals. Subsequent to
entry of the District Court Judgment, the insurer moved to
have the judgment modified to award the insurer the $10
million defense costs and $1.2 million indemnity payment. The
Company filed a motion in opposition to this motion. Oral
arguments relating to this motion were held on February 24,
1995 and the Company recently received the District Court's
tentative decision, which if made final, would award the
insurer reimbursement of the $11.2 million. In tentatively
ruling, the District Court expressly provided the Company
with the opportunity to submit a Memorandum of Points and
Authorities as to why the Court's tentative conclusion is
erroneous. The Company submitted its Memorandum on April 19,
1995 and intends to continue to pursue vigorously its claim
and belief that it is not obligated to make any such
reimbursement.
The Company and one of its subsidiaries are two of a large
number of defendants in a number of lawsuits brought by
approximately 13,500 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 have been and will be
provided notice. Should settlements for these claims be
reached at levels comparable to those reached by the Company
in the past, they 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 and March subpoenas and the government subsequently
withdrew the February 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 and is negotiating a possible basis
for settlement with the government.
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 has
cooperated with this request. This inquiry has been dormant
since August 1994.
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 has responded to 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 clean-up of
substances regulated under environmental protection laws.
In a number of instances the Company has been identified as a
Potentially Responsible Party by the United States
Environmental Protection Agency, and in one instance the
State of Washington, alleging that because various of its
divisions had arranged for the disposal of hazardous wastes
at a number of facilities that have been targeted for clean-
up pursuant to the Comprehensive Environmental Response
Compensation and Liability Act ("CERCLA") or similar State
law. Although CERCLA and corresponding State law 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 either
qualifies as a de minimis or minor contributor at each site.
Accordingly, the Company believes that the portion of
remediation costs that it will be responsible for will
therefore not be material.
The Company also has a lawsuit pending against it relating to
equipment sold by its former diesel engine division and a
lawsuit relating to performance shortfalls in products
delivered by its former Delaval Turbine Division.
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, 1995.
Restructuring Plan
As of May 11, 1995, the Company has either completed the sale
of, or has entered into a definitive agreement for the sale
of, substantially all of the businesses included in the asset
divestiture program initially begun in October, 1992.
Proceeds from asset sales completed during the first quarter
of 1995 have been used to repay all of the Company's
outstanding senior domestic bank debt as well as to redeem
$40 million of the Company's 12.25% senior subordinated
debentures.
Additionally, as a result of the $39.6 million after-tax gain
recognized on the January 17, 1995 sale of the Turbomachinery
business and positive first quarter 1995 results,
shareholders' equity was $13.6 million as of March 31, 1995,
as compared with a deficit of $28.0 million as of December
31, 1994.
The Company sold the Baird Analytical Instruments division of
its Electro-Optical Systems business to a subsidiary of
Thermo Instruments Systems Inc. on January 3, 1995 for $12.3
million in cash, which was used to reduce its domestic senior
debt.
On January 17, 1995, the Company completed the sale of its
Delaval Turbine and TurboCare divisions, which comprised
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. At closing, the Company received $109 million in
cash, with the balance earning interest until it is received
at specified future contract dates subject to adjustment as
provided in the agreement. These proceeds were used to
complete the repayment of the Company's domestic senior debt
and to redeem $40 million of the Company's 12.25% senior
subordinated debentures.
On February 8, 1995, the Company announced that it had a
letter of intent for the acquisition of most of its Electro-
Optical Systems business by Litton Industries, for
approximately book value. Under the terms of the letter of
intent, Litton would acquire all of the assets of the Varo
night vision and laser business, other than real estate, and
would lease the operations' facilities in Dallas, Texas, for
two years with options to extend the leases. The sale is
subject to the receipt of certain government approvals. On
March 24, 1995, the Company and Litton Industries each
received Second Requests for Documents from the Federal Trade
Commission in connection with the antitrust review of this
proposed transaction. The Company complied with this
request in early May 1995. On May 11, 1995, the Company
entered into a definitive agreement with Litton Industries
and Litton Systems Inc. for this sale. Closing of the sale
is subject to normal closing conditions, certain governmental
approvals, including Federal Trade Commission clearance, and
finalization of various contractual schedules and exhibits.
Not included in the proposed agreement is Varo's Electronic
Systems division, which is being marketed to interested
parties. Management intends to use the proceeds of these
sales to pay down debt.
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,
Corporate headquarters building and other previously
identified assets for aggregate proceeds of $13.2 million in
1994. Results of those operations sold in 1994 to their date
of sale as well as an operation remaining to be sold, other
than the Electro-Optical and Turbomachinery businesses, are
included in continuing operations reported in the
consolidated financial statements.
Results of Operations
The Electro-Optical and Turbomachinery businesses are
accounted for as discontinued operations in the accompanying
consolidated financial statements. Accordingly, the
discussion that follows concerns only the results of
continuing operations. The 1994 amounts have been
reclassified to conform to this presentation. As a result of
discontinuing the Electro-Optical Systems and Turbomachinery
business segments, the Company has focused its operations on
the remaining two core business segments, the Morse Controls
segment and the Pumps, Power Transmission & Instrumentation
segment.
Net Sales
Net sales from continuing operations for the three months
ended March 31, 1995 were $124.4 million, compared with
$110.7 million in the 1994 period, an increase of 12.3%.
This included an increase of 14.8% in net sales from core
operations (excluding operations divested since the beginning
of 1994 or pending divestiture). While both of the Company's
core business segments experienced increased sales in 1995,
the largest part of the increase was attributable to the
Morse Controls segment's Italian automobile business and
sales of its mechanical and electronic control products.
Costs and Expenses
Gross profit for the first quarter of 1995 increased by $5.0
million or 16.1% from last year reflecting the effects of the
improved sales volumes. The Company's overall gross profit
margin for continuing operations increased to 29.1% of net
sales for the first quarter of 1995 as compared with 28.2% in
the 1994 period. Both the Morse Controls segment and the
Pumps, Power Transmission & Instrumentation segment gross
profit margins compared favorably to the prior year.
Selling, general and administrative expenses as a percent of
sales remained relatively constant for the first three months
of 1995 at 18.4%, compared with 18.5% during the comparable
1994 period. The Morse Controls segment's selling, general
and administrative expenses as a percent of sales compared
favorably to 1994 as benefits were realized from the
increased sales volume as well as cost savings as a result of
the restructuring efforts started in early 1994. This
decrease as a percent of sales in the Morse Controls segment
was partially offset by increased selling expenses in the
Pumps, Power Transmission & Instrumentation segment due to
the Instrumentation groups efforts to expand sales coverage
of transducer products in the U.S., Gems products in Europe
and increase exposure to the far east markets. Research and
development expenditures were 1.6% and 1.5% of net sales for
the three months ended March 31, 1995 and 1994, respectively.
Total interest expense (before allocation to discontinued
operations) of $10.2 million for the three months ended March
31, 1995 was $2.6 million, or 20% less than the three months
ended March 31, 1994. This decrease was a result of average
borrowings in the first quarter of 1995 being approximately
$69 million lower than the comparable 1994 period, as debt
was paid down with proceeds of the asset sales. The interest
expense for continuing operations as shown on the
Consolidated Statements of Income excludes interest expense
incurred by the discontinued operations as well as an
interest allocation to the discontinued operations of $2.5
million and $4.2 million for the three months ended March 31,
1995 and 1994, respectively.
The effective income tax rate for continuing operations for
the first quarter of 1995 was 22.5% compared with 34.5% in
the comparable 1994 period. The amounts in both periods
represent foreign and state income taxes. The Company is
utilizing existing U.S. net operating loss carryforwards on
its domestic earnings. The decrease in the effective tax rate
in 1995 is a result of the larger domestic earnings component
of pretax income compared with the corresponding 1994 period.
Income from continuing operations before extraordinary item
was $3.6 million ($.21 per share) in the first quarter of
1995, compared with $.5 million ($.03 per share) in the same
period of 1994. Net income for the first three months of
1995 was $39.0 million ($2.29 per share). This included an
after-tax gain on the disposal of the Company's
Turbomachinery business segment of $39.6 million ($2.32 per
share) and an extraordinary charge of $4.1 million ($.24 per
share) related to the early extinguishment of debt. Net
income for the first quarter of 1994 was $.9 million ($.05
per share).
Segment Operating Results
The Morse Controls segment consists of the Roltra-Morse group
and the Morse Controls group. The Morse Controls segment
sales increased 26% (including a 4% benefit from changes in
foreign exchange rates) to $56.0 million for the first
quarter of 1995, compared with $44.4 million for 1994 period.
Roltra-Morse, the segment's automotive components supplier,
enjoyed a sales increase of 24%. Worldwide sales of other
controls products gained 28%. Earnings of both groups within
the Morse Controls segment benefited from the increased sales
volume, and segment operating income increased to $4.8
million from $2.6 million for the first three months of 1995
compared with the same period in 1994.
The very favorable sales comparisons at Roltra-Morse were due
to year-over-year increases in production of automobiles in
Italy using the group's products. In addition, the group's
operation in Poland was not in production during the 1994
first quarter. Sales of other Morse mechanical and
electronic controls products had favorable comparisons, as
the marine market continues its recovery begun in 1993 and
most industrial market products, such as construction
equipment, expanded.
The Pumps, Power Transmission & Instrumentation segment
consists of the Pumps group, the Power Transmission group and
the Instrumentation group. Pumps, Power Transmission &
Instrumentation segment sales in the first quarter of 1995
were $66.7 million, a 7% increase compared to $62.5 million
in the first quarter of 1994. Segment operating profit for
the first three months of 1995 remained flat at $7.8 million
as compared with $7.7 million in the comparable 1994 period,
as a substantial improvement in the Power Transmission group
was offset by declines in the other two operating groups
caused primarily by shifts in product mix and increased
spending directed toward development of the sales and
marketing organizations.
Pump group sales in the quarter were flat, as increases to
general industrial markets were offset by a delay in
deliveries to the Navy. This shift in mix was largely
responsible for lower earnings comparisons.
Power Transmission sales were up 12% compared with the first
quarter of 1994. The industrial distribution marketing
channel was very strong and sales increases were realized in
most major product lines, resulting in an expanded operating
profit margin.
Instrumentation group sales were up 10% in the first quarter
of this year, compared with the first quarter of last year,
but segment operating margins and profit contracted primarily
due to a change in sales mix and a higher level of selling
expenses associated with the groups efforts to expand sales
coverage of transducer products in the U.S., Gems products in
Europe and increase exposure to the far east markets .
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.
Effective August 5, 1994, the Company obtained credit
facilities for borrowings up to $150 million from a group of
lenders (the " New Credit Agreement"), 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 New
Credit Agreement provided for a $65 million revolving credit
facility through July 31, 1997, a $40 million term loan
amortizing to July 1997, and a $45 million bridge loan
maturing January 1996. Under the New Credit Agreement, the
Company had $36.7 million and $45 million in term and bridge
loans, respectively, and no borrowings against the $65
million revolving credit facility outstanding at December 31,
1994; however, $35 million of standby letters of credit were
outstanding. With the net proceeds generated from the
divestitures in the first quarter of 1995, the Company repaid
the amount outstanding under the term loan of $36.7 million
and the bridge loan of $40 million under the New Credit
Agreement. At the same time, and in keeping with the terms
of the New Credit Agreement, the $65 million revolving credit
facility was reduced to $50 million.
In March 1995, the Company redeemed $40 million of its 12.25%
senior subordinated debentures, at 100% of their principal
amount, with the remainder of the proceeds of the
divestitures. The Company expects to use proceeds from the
remainder of its divestiture program to reduce its 12.25%
senior subordinated debentures and thereby further reduce its
interest expense.
As a result of this early extinguishment of debt, a $4.1
million ($.24 per share) charge was recorded as an
extraordinary item in the first quarter of 1995. The charge
consisted of the write-off of deferred debt expense
associated with the portions of the domestic senior debt
repaid and the 12.25% senior subordinated debentures
redeemed.
The Company's operating activities used cash of $5.0 million
in the first quarter of 1995, compared with providing cash of
$.5 million in the comparable 1994 period. Net cash provided
by investing activities was $113.5 million in 1995, compared
with cash provided of $2.1 million in the 1994 period. The
increase in net cash provided by investing activities is
principally a result of $121.9 million of net proceeds
generated from the sale of businesses and assets in the first
quarter of 1995 versus $3.5 million in 1994. Cash and cash
equivalents decreased to $14.2 million at March 31, 1995 from
$26.9 million at December 31, 1994, due to cash used by
operating activities and increased capital expenditures
during the first quarter of 1995.
Working capital at March 31, 1995 was $114.2 million, a
decrease of $21.0 million from the end of 1994, due
principally to the sales of the Company's Turbomachinery
business segment and Baird Analytical Instruments division in
the first quarter of 1995. The ratio of current assets to
current liabilities was 1.8 at March 31, 1995, compared with
1.9 at December 31, 1994. Principally as a result of the
aforementioned sales of businesses, the resulting gain on the
disposal of the Turbomachinery business and the related debt
repayments during the first quarter of 1995, the Company's
total debt as a percent of its total capitalization was
reduced to 95.4% at March 31, 1995 from 107.5% at December
31, 1994.
At March 31, 1995, the Company had outstanding $110 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. As of March 31, 1995, there were
no borrowings under the $50 million revolving credit
facility; however $18.9 million of standby letters of credit
were outstanding. Letter of credit exposure was reduced from
the December 31, 1994 level of $35 million after the
Turbomachinery business sale in January 1995. The Company
also has approximately $30.7 million in foreign short-term
credit facilities with approximately $10.7 million
outstanding as of March 31, 1995.
The Company believes that cash flow from operations, together
with the credit facilities, available cash and cash generated
by the remainder of asset divestiture program will be
sufficient to meet its liquidity needs for the foreseeable
future.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In January 1993, the Company was served with a complaint in a
case brought in the United States District Court for the
Northern District of California by an 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. On January 25, 1995, the Court entered a judgment,
based on its December 15, 1994 memorandum and order,
dismissing the Company's counterclaim, denying the Company's
Motion for Summary Judgment, and finding sua sponte that
there was no coverage under the insurer's policy for the
LILCO matter. On February 8, 1995, the Company filed an
Application for Leave to File Motion for Reconsideration of
the Judgment which was subsequently denied. The Company also
filed a Notice of Appeal with the Ninth Circuit Court of
Appeals. Subsequent to entry of the District Court Judgment,
the insurer moved to have the judgment modified to award the
insurer the $10 million defense costs and $1.2 million
indemnity payment. The Company has filed a motion in
opposition to this motion. Oral arguments relating to this
motion were held on February 24, 1995 and the Company
recently received the District Court's tentative decision,
which if made final, would award the insurer reimbursement of
the $11.2 million. In tentatively ruling, the District Court
expressly provided the Company with the opportunity to submit
a Memorandum of Points and Authorities as to why the Court's
tentative conclusion is erroneous. The Company submitted its
Memorandum on April 19, 1995 and intends to continue to
pursue vigorously its claim and belief that it is not
obligated to make any such reimbursement.
The Company was a defendant in an action filed in the United
States Court for the Middle District of Louisiana brought by
Gulf States Utilities Company ("GSU"). The complaint alleged
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 alleged
that it had incurred a loss of $8 million and claimed
additional amounts for the use of money and an equitable
adjustment of the purchase price. In February 1995, a
settlement of this matter was tentatively reached requiring a
$1.8 million payment by the Company to GSU. In March 1995,
the tentative settlement was ratified by the parties and the
Company has subsequently paid GSU $1.8 million as full
satisfaction in this matter.
For additional information regarding certain pending
lawsuits, reference is made to the Company's Form 10-K for
the year ended December 31, 1994, which is incorporated
herein by reference, and to Note G in Part I of this report.
Item 5. Other Information.
On April 26, 1995, the Company announced the Donald C.
Trauscht has been named to its Board of Directors,
increasing to six the number of outside directors on
the seven-person board.
Mr. Trauscht, 61, is the chairman, chief executive
officer and former president of Borg-Warner Security
Corporation. He has held various positions with Borg-
Warner Corporation since joining that company in 1967,
including chairman and chief executive officer, and
other executive positions in finance-strategy, business
development, and acquisitions. Prior to joining Borg-
Warner Corporation, he served as president of Langevin
Company, a California electronics manufacturer.
Mr. Trauscht is also a director of Baker Hughes
Incorporated in Houston, TX; Esco Electronics in St.
Louis, MO; Borg-Warner Automotive, Inc. in Chicago,
IL; Thiokol Corporation in Ogden, UT; and Blue Bird
Corporation in Macon, GA. He is trustee of the Museum
of Science and Industry in Chicago; the Orange County
(CA) Marine Institute; Boy Scouts Council of Chicago;
Chicago Sunday Evening Club; Lantern Bay (CA)
Association; the Illinois Literacy Foundation; and
the De LaSalle Founders Club. He is also chairman of
the Chicago Metropolitan Area U.S. Savings bond
Campaign.
Mr. Trauscht fills a vacancy on the Company's board
created by the retirement of Stephen F. Agocs.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
The following exhibits are being filed as part
of this Report:
Exhibit No. Description
27 Financial Data Schedule as of March 31, 1995
(b) Reports on Form 8-K:
On February 1, 1995, the Company filed a report on Form
8-K, reporting under Items 2 and 7, disclosing the
completion of the sale of the Delaval Turbine and
Turbocare divisions, its 50% interest in Delaval-Stork,
a Dutch joint venture to Mannesmann Capital
Corporation a subsidiary of Mannesmann Demag of
Dusseldorf Germany and the sale of the Baird
Analytical Instruments Division to Thermo Instrument
Systems Inc. a subsidiary of Thermo Electron
Corporation.
A Pro Forma Condensed Consolidated Statement of Income
(Unaudited) for the Twelve Months Ended December 31,
1993 was filed under item 7 (b) Pro Forma Financial
Information.
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 11, 1995 /s/ DONALD K. FARRAR
Donald K. Farrar
Chairman, Chief Executive Officer,
President and Director
(principal executive officer)
Date May 11, 1995 /s/ WILLIAM M. BROWN
William M. Brown
Executive Vice President and
Chief Financial Officer
(principal financial officer)
Date May 11, 1995 /s/ ROBERT A. DERR II
Robert A. Derr II
Vice President and
Corporate Controller
(principal accounting officer)
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