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, 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--17,061,188
shares as of July 31, 1995.
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Consolidated Statements of Income--Three and six
months ended June 30, 1995 and 1994 2
Consolidated Balance Sheets--June 30, 1995 and
December 31, 1994 3
Consolidated Statements of Cash Flows--Six
months ended June 30, 1995 and 1994 4
Notes to Consolidated Financial Statements--
June 30, 1995 5 - 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 12 - 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 19
Item 4. Submission of Matters to a Vote of Security
Holders. 20
Item 6. Exhibits and Reports on Form 8-K. 21
SIGNATURES 22
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 Six Months Ended
June 30, June 30,
1995 1994* 1995 1994*
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net Sales $ 127,231 $ 123,230 $ 251,603 $ 233,972
Cost of products sold 91,473 89,431 179,633 168,973
Gross Profit 35,758 33,799 71,970 64,999
Selling, general and
administrative expenses 23,055 23,101 45,910 43,552
Research and development expenses 1,849 1,478 3,845 3,138
Income From Operations 10,854 9,220 22,215 18,309
Interest expense 7,702 8,727 15,448 17,283
Interest income (479) (511) (1,292) (647)
Other (income) expense, net (481) 117 (690) (114)
Equity in (income) loss of
unconsolidated companies (227) 75 (252) 50
Income From Continuing
Operations Before Income
Taxes, Minority Interest and
Extraordinary Item 4,339 812 9,001 1,737
Income tax expense 886 586 1,935 905
Minority interest 43 238 106 333
Income (Loss) From Continuing
Operations Before Extraordinary
Item 3,410 (12) 6,960 499
Discontinued Operations:
Income from Operations (net of
income taxes of $.2 million
and $.3 million,
respectively, in 1994) --- 1,764 --- 2,158
Gain on Disposal (net of
income taxes of $5.2 million) --- --- 39,613 ---
Total Income from
Discontinued Operations --- 1,764 39,613 2,158
Extraordinary Item - Loss on
Extinguishment of Debt --- --- (4,140) ---
Net Income $ 3,410 $ 1,752 $ 42,433 $ 2,657
Earnings per share:
Continuing operations
before extraordinary item $ 0.20 $ --- $ 0.41 $ 0.03
Discontinued operations $ --- $ 0.10 $ 2.32 $ 0.13
Extraordinary item $ --- $ --- $ (0.24) $ ---
Net income $ 0.20 $ 0.10 $ 2.49 $ 0.16
Weighted average number of
shares outstanding 17,030,866 16,911,270 17,022,499 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>
June 30, December 31,
1995 1994
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 48,763 $ 26,942
Trade accounts and notes
receivable, less allowance of $2,468
in 1995 and $2,659 in 1994 96,499 84,924
Inventories-net 92,350 86,823
Deferred income taxes 6,753 4,328
Net assets of discontinued
operations-current 2,726 68,697
Prepaid expenses and other
current assets 15,005 6,593
Total Current Assets 262,096 278,307
Property, Plant and Equipment-on
the basis of cost 196,689 183,701
Less allowance for depreciation
and amortization (100,433) (91,297)
Net Property, Plant and Equipment 96,256 92,404
Intangible Assets, Principally Goodwill 79,402 82,435
Investments in and Advances to
Unconsolidated Companies 4,545 3,653
Net Assets of Discontinued
Operations - Noncurrent 14,025 76,273
Other Assets 53,470 41,587
Total Assets $ 509,794 $ 574,659
LIABILITIES AND SHAREHOLDERS'EQUITY
Current Liabilities
Notes payable $ 12,224 $ 12,771
Trade accounts payable 55,989 47,696
Accrued expenses and other liabilities 46,769 53,676
Accrued costs related to
discontinued operations 6,232 6,444
Income taxes payable 8,833 5,479
Current portion of long-term debt 2,307 17,039
Total Current Liabilities 132,354 143,105
Long-Term Debt 271,425 376,998
Deferred Income Taxes 7,688 7,364
Accrued Postretirement Benefits - Long-Term 28,533 30,918
Accrued Pension Expense and Other Liabilities 49,958 41,997
Total Liabilities 489,958 600,382
Minority Interest 1,994 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
18,720,674 and 18,680,428 in 1995 and 1994,
respectively 18,721 18,680
Additional paid-in capital 80,042 79,789
Retained earnings (deficit) (63,869) (106,302)
Cumulative foreign currency
translation adjustments 1,821 (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 17,842 (28,004)
Total Liabilities and
Shareholders' Equity $ 509,794 $ 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>
Six Months Ended June 30,
1995 1994*
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 42,433 $ 2,657
Adjustments to reconcile net income to
net cash provided by
continuing operations:
Discontinued operations --- (2,158)
Gain on sale of discontinued
operations (39,613) ---
Extraordinary item 4,140 ---
Depreciation 7,857 8,680
Amortization 1,879 2,905
Other 312 957
Other changes in operating
assets and liabilities:
Increase in accounts and
notes receivable (11,575) (20,962)
Increase in inventories (5,527) (5,779)
Decrease in recoverable
income taxes --- 3,826
Increase in accounts
payable and accrued expenses 3,500 17,339
Other operating assets and
liabilities (12,466) 256
Net cash (used) provided by
continuing operations (9,060) 7,721
Net cash used by discontinued operations (8,715) (8,102)
Net Cash Used in Operating Activities (17,775) (381)
INVESTING ACTIVITIES
Purchases of property, plant and equipment (10,319) (2,075)
Proceeds from sale of businesses and
sales of property, plant and equipment 174,784 7,326
Net cash used by discontinued operations (3,800) (1,603)
Other (75) (841)
Net Cash Provided by Investing Activities 160,590 2,807
FINANCING ACTIVITIES
(Decrease) increase in notes payable (547) 282
Proceeds from long-term borrowings 12,834 302
Principal payments on long-term debt (133,702) (6,798)
Payment of debt financing costs --- (2,696)
Other 290 69
Net Cash Used in Financing Activities (121,125) (8,841)
Effect of exchange rate changes on cash 131 216
Increase (decrease) in Cash and Cash
Equivalents 21,821 (6,199)
Cash and cash equivalents at beginning
of period 26,942 22,356
Cash and Cash Equivalents at End of Period $ 48,763 $ 16,157
Supplemental disclosures of cash flow
information:
Cash paid (received) during the
period for:
Interest expense $ 22,396 $ 25,804
Income taxes $ 4,580 $ (5,332)
</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 June 30, 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 six months ended
June 30, 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. A loss was
previously recognized in connection with the net realizable
value adjustment on the entire Electro-Optical Systems
business recorded in 1993.
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.
On June 2, 1995, the Company completed the sale of the
Optical Systems and Ni-Tec divisions of Varo Inc. and the
Optical Systems division of Baird, which represent the major
part of its Electro-Optical Systems business, to Litton
Industries for approximately book value. The proceeds were
used by the Company to pay off $8 million outstanding under
the revolving credit facility on June 2, 1995 and to redeem
an additional $40 million of its 12.25% senior subordinated
debentures on July 6, 1995.
Not included in the sale were certain idle facilities which
are being held for sale, as well as Varo's Electronic Systems
division, which continue to be 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.
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.
Remaining net assets and liabilities of the Discontinued
Operations consist of the following:
June 30, December 31,
(Dollars in thousands) 1995 1994
(Unaudited)
Current Assets:
Receivables $ 2,963 $ 57,778
Inventories 8,180 60,280
Other current assets 465 2,031
11,608 120,089
Current Liabilities:
Trade accounts payable 4,232 21,049
Other current liabilities 4,650 30,343
8,882 51,392
Net Current Assets $ 2,726 $ 68,697
Long-term Assets:
Property $ 15,916 $ 67,522
Intangible assets --- 3,988
Other long-term assets --- 9,308
15,916 80,818
Long-term Liabilities 1,891 4,545
Net Long-term Assets $ 14,025 $ 76,273
Net Assets $ 16,751 $ 144,970
Net assets related to the Electro-Optical Systems business
are $13.7 million and $85 million as of June 30, 1995 and
December 31, 1994, respectively, and net assets related to
the Turbomachinery business are $3.1 million and $60 million
as of June 30, 1995 and December 31, 1994, respectively.
A condensed summary of operations for the Discontinued
Operations is as follows:
Three months ended Six months ended
June 30, June 30,
(Dollars in thousands) 1995 1994 1995 1994
(Unaudited) (Unaudited)
Net Sales $ 16,741 $ 87,975 $ 48,317 $176,370
Income from operations
before income taxes --- 1,956 --- 2,455
Income taxes --- 192 --- 297
Income from Operations $ --- $ 1,764 $ --- $ 2,158
The income from operations of the Discontinued Operations for
1995 and 1994 includes allocated interest expense. Interest
expense of $1.6 million and $4.2 million for the three months
ended June 30, 1995 and 1994, respectively, and $4.1 million
and $8.3 million for the six months ended June 30, 1995 and
1994, 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 F for discussion of contingencies related to the
Electro-Optical Systems and Turbomachinery businesses.
NOTE C--INVENTORIES
Inventories (in thousands of dollars) are summarized as
follows:
June 30, December 31,
1995 1994
(Unaudited)
Finished products $ 36,493 $ 35,649
Work in process 36,762 31,990
Materials and supplies 34,601 32,952
107,856 100,591
Less customers' progress payments 1,322 1,635
Less valuation allowance 14,184 12,133
$ 92,350 $ 86,823
NOTE D--ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities (in thousands of
dollars) consist of the following:
June 30, December 31,
1995 1994
(Unaudited)
Accrued product warranty costs $ 2,121 $ 5,037
Accrued litigation and claim costs 2,430 4,493
Payroll and related items 15,472 12,773
Accrued interest payable 8,373 10,573
Accrued divestiture costs 4,908 8,582
Other 13,465 12,218
$ 46,769 $ 53,676
NOTE E--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 F--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. On July 22, 1992, the trial
court entered a judgment against the Company 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 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 where
it is now pending.
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 response, 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 a 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. 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. Oral arguments relating to
this motion were held on February 24, 1995 and the Company
received in March 1995 the District Court's tentative
decision, which if made final, would award the insurer
reimbursement of the $11.2 million. In the tentative 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 was erroneous and
invited briefing on an additional issue, not previously
considered by the Court, regarding the insurer's obligation
to pay the $10 million in defense costs. The Company
submitted its Memorandum on April 19, 1995. In June 1995 the
Company received a copy of a judgment entered by the District
Court awarding $11.2 million with interest accruing from
March 1995. The judgment was not supported by an order
ruling upon the remaining open issues. In response to a
request from the Company on July 13, 1995 the Court vacated
the judgment as being premature as the outstanding issue of
recoverability of the $10 million defense costs had not been
finally determined, returned an appeal bond posted by the
Company, and indicated that it would be issuing an order on
open issues shortly.
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 former 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 ("OEC"). OEC
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
Company sold the operations relating to Ni-Tec to Litton
Industries in June 1995 but retained liabilities associated
with this investigation.
The Securities and Exchange Commission (the "Commission")
conducted 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 were being investigated by a criminal
investigative task force of the United States Department of
Justice and the Internal Revenue Service. The investigation
related to marketing activities regarding contracts with the
Arab Republic of Egypt and with related certifications in
connection with the transactions which were funded with
United States foreign military aid. In connection with this
investigation, the Company received and responded to a
subpoena issued by the Federal Grand Jury for the District of
Columbia. In May 1995, in order to resolve this matter
expeditiously, Varo Inc., as the surviving entity to OEC,
entered into a civil consent decree enjoining OEC against any
future violation of the Foreign Corrupt Practices Act. The
consent decree contains no finding of non-compliance by the
Company and imposes no penalty on the Company.
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 and six month periods ended June 30, 1995.
Restructuring Plan
As of June 30, 1995, the Company has substantially completed
the sale of businesses included in the restructuring program
initially begun in October 1992, with only one business unit
and certain idle facilities remaining to be sold. Through
August 9, 1995, proceeds from asset sales completed during
the first half of 1995 have been used to repay all of the
Company's outstanding senior domestic bank debt as well as to
redeem $80 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 half 1995 results, shareholders'
equity was $17.8 million at June 30, 1995 as compared with a
deficit of $28.0 million at December 31, 1994.
On June 2, 1995, the Company completed the sale of its
Optical Systems and Ni-Tec divisions of Varo Inc. and the
Optical Systems division of Baird Corporation to Litton
Industries and Litton Systems Inc. for $50 million in cash,
which approximates book value. On June 2, 1995, the Company
used a portion of the proceeds to repay all borrowings on its
domestic line of credit, and on July 6, 1995 the remainder of
the proceeds were used to redeem an additional $40 million of
its 12.25% senior subordinated debentures, at 100% of their
principal amount. This sale did not include Varo's
Electronic Systems division and certain idle facilities which
continue to be marketed to interested parties. Refer to the
1994 Annual Report on Form 10-K for further details related
to previous asset sales.
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.
Three Months Ended June 30, 1995 Compared with 1994
Net Sales
Net sales from continuing operations for the three months
ended June 30, 1995 were $127.2 million, compared with $123.2
million in the 1994 period, an increase of 3.0%. This
included an increase of 5.0% in net sales from core
operations (excluding operations divested since the beginning
of 1994). The increase was attributable to a 11% increase in
the Company's Pumps, Power Transmission & Instrumentation
segment while sales remained flat in the Morse Controls
segment compared with the 1994 period.
Costs and Expenses
The Company's overall gross profit margin for continuing
operations increased to 28.1% of net sales for the second
quarter of 1995 as compared with 27.4% 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 decreased slightly during the second quarter of 1995 to
18.1%, compared with 18.7% 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 cost savings
as a result of the restructuring efforts started in early
1994. The Pumps, Power Transmission & Instrumentation
segment's selling, general and administrative expenses
remained flat compared to the 1994 period, as cost savings
benefits realized in 1995, as a result of the 1994
restructuring, were offset by the Instrumentation group's
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
increased slightly to 1.5% of net sales, from 1.2% in the
comparable 1994 period, principally due to increased spending
by the Company's Roltra-Morse group to meet future product
requirements.
Total interest expense (before allocation to discontinued
operations) in the second quarter of 1995 was 10% lower than
in the 1995 first quarter, reflecting the favorable effects
of debt paydowns from asset sale proceeds. Total interest
expense of $9.3 million for the three months ended June 30,
1995 was $3.8 million, or 28.9%, less than the three months
ended June 30, 1994. This decrease was a result of average
borrowings in the second quarter of 1995 being approximately
$115.9 million lower than the comparable 1994 period. 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 $1.5
million and $4.3 million for the three months ended June 30,
1995 and 1994, respectively.
The effective income tax rate for continuing operations for
the second quarter of 1995 was 20.4% compared with 72.2% 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 $3.4 million ($.20 per share) in the second quarter of
1995, compared with break-even results ($0.00 per share) in
the same period of 1994. Net income was $3.4 million and
$1.8 million for the three months ended June 30, 1995 and
1994, respectively.
Segment Operating Results (Three Months Ended June 30, 1995
Compared with 1994)
The Morse Controls segment consists of the Roltra-Morse group
and the Morse Controls group. Although the Morse Controls
segment's net sales remained essentially flat in the second
quarter of 1995 at $57.3 million, as compared with $58.1
million in the second quarter a year ago, the operating
income increased by 52% to $4.9 million as improvements in
the segment's Morse Controls group more than offset a decline
in the Roltra-Morse group.
The segment's Morse Controls group net sales increased 8.7%
for the three months ended June 30, 1995, compared with the
1994 period (including a 5% increase due to the favorable
effects of exchange rate changes). The increases from
operations in both sales and income was primarily a result of
a better economic environment for the group's products in
Germany, and the resolution of a number of difficulties
encountered in consolidating divisional operations in Germany
that negatively affected last year's second period.
The Roltra-Morse group's second quarter 1995 net sales
decreased 9.8% compared with the 1994 period, due to a
reduction in customer requirements for certain automotive
components, and a 4% unfavorable effect related to exchange
rate changes for the Italian lira. This lower sales level and
an increase in research and development spending to meet
future product requirements reduced the group's operating
income in the quarter below that of a year ago.
Segment bookings and backlog are both down from prior-year
levels, primarily as the result of anticipated reduced
requirements for certain automotive components.
The Pumps, Power Transmission & Instrumentation segment
consists of the Pumps group, the Power Transmission group and
the Instrumentation group. Segment sales and operating income
in the second quarter of 1995 were each 11% ahead of the
comparable period last year, with all three groups in the
segment contributing to the respective improvements.
Net sales of the Pumps group increased 10.1 % in the second
quarter of 1995, as compared with the 1994 period. Sales in
the quarter benefited as foreign exchange rates made Imo Pump
divisions' exports from both the U.S. and Sweden more
competitive, particularly in the crude oil marketplace.
Gains in commercial sales more than offset continued soft
Navy requirements. Bookings in the recent second quarter
were 21% ahead of bookings in the same quarter last year.
Power Transmission group net sales increased 7.2% in the
second quarter of 1995, over the second quarter of 1994,
continuing to show year-over-year gains into the industrial
distribution marketing channel, with improvement occurring in
most major product lines.
Instrumentation group sales in the second quarter of 1995
advanced 16% over sales in the second quarter of 1994.
Strong increases in demand for the group's transducer
products in Europe are the driving factor behind this gain.
Six Months Ended June 30, 1995 Compared with 1994
Net Sales
Net sales from continuing operations for the six months ended
June 30, 1995 were $251.6 million, compared with $234.0
million in the 1994 period, an increase of 7.5%. This
included an increase of 9.7% in net sales from core
operations (excluding operations divested since the beginning
of 1994). The Company's core business segments both
contributed with increases over the prior year of 10.8% and
8.8%, in the Morse Controls and the Pumps, Power Transmission
& Instrumentation business segment net sales, respectively.
Costs and Expenses
The Company's overall gross profit margin for continuing
operations for the first half of 1995 continued to compare
favorably to the prior year, as both its Morse Controls and
its Pumps, Power Transmission & Instrumentation business
segments experienced increases.
Selling, general and administrative expenses as a percent of
sales decreased slightly for the first half of 1995 to 18.2%,
compared with 18.6% 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. The 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 group's
efforts to expand sales coverage of transducer products in
the U.S., Gems products in Europe and increase exposure to the
far east markets.
Average borrowings during the first six months of 1995 were
$88.8 million lower than the comparable 1994 period due to
the repayments of debt from asset sale proceeds. As a result,
total interest expense of $19.5 million (before allocation of
$4.1 million to discontinued operations) for the six months
ended June 30, 1995 was $6.3 million, or 24.4%, less than the
1994 period total interest of $25.8 million (before
allocation of $8.5 million to discontinued operations). 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.
The effective income tax rate for continuing operations for
the first half of 1995 was 21.5% compared with 52.1% 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 $7.0 million ($.41 per share) for the six months ended
June 30, 1995, compared with $0.5 million ($0.03 per share)
in the same period of 1994. Net income for the first half of
1995 was $42.4 million ($2.49 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 half of 1994 was $2.7 million ($.16 per
share).
Segment Operating Results (Six Months Ended June 30, 1995
Compared with 1994)
Morse Controls segment sales increased 10.8% (including a 3%
benefit from changes in foreign exchange rates) to $115.0
million in the first half of 1995, as compared with $103.8
million for the 1994 period. The segment's Morse Controls
group sales increased by 17.9% in the first half of 1995
(including a 6% benefit from changes in foreign exchange
rates), as a result of a better economic environment for the
group's products in Germany, the continued recovery in the
marine market and increased demand for most industrial market
equipment. The Roltra-Morse group, the segment's automotive
components supplier, had a sales increase of 4.5% for the
first six months of 1995, as compared with the 1994 period,
due to increases in production of automobiles in Italy using
the group's products, partially offset by the second quarter
reduction for certain automotive products and unfavorable
change in foreign exchange rates.
Segment operating income increased 68%, to $9.8 million for
the first six months of 1995, compared with $5.8 million for
the first half of 1994. The Morse Controls group segment
operating income more than doubled as compared with the 1994
period, benefiting from the increased sales volume along with
the resolution of a number of difficulties in consolidating
divisional operations in Germany that negatively affected
1994 results. Roltra-Morse group earnings increased 6% for
the first six months of 1995 as the product requirements due
to increased production of automobiles in Italy more than
offset the second quarter 1995 reductions in customer
requirements for certain products and unfavorable effects of
exchange rate changes.
Pumps, Power Transmission & Instrumentation segment sales
were $136.6 million during the first half of 1995, an
increase of 8.8% compared to the prior year level of $125.5
million. The segment's earnings of $16.0 were 5.5% ahead of
the 1994 period. All three groups in the segment contributed
to the increase in sales. The segment's Power Transmission
group earnings increased 45% during the first half of 1995,
compared with 1994, benefiting from the increased volume.
This increase was offset by decreased earnings for the
segment's Pumps and Instrumentation groups caused primarily
by shifts in product mix and increased spending directed
toward development of the sales and marketing organizations.
Liquidity and Capital Resources
The Company's domestic liquidity requirements are served by a
$50 million revolving credit facility, while its needs
outside the U.S. are covered by short and intermediate term
credit facilities from foreign banks.
As of June 30, 1995, there were no borrowings under the $50
million revolving credit facility; however $27.2 million of
standby letters of credit were outstanding. The Company also
has approximately $32.4 million in foreign short-term credit
facilities with approximately $12.2 million outstanding as of
June 30, 1995.
Through August 9, 1995, the Company redeemed $80 million of
its 12.25% senior subordinated debentures, at 100% of their
principal amount, thereby further reducing its interest
expense. In March 1995, $40 million were redeemed with
proceeds from the sale of its Turbomachinery business, and on
July 6, 1995 an additional $40 million were redeemed with
proceeds from the sale of the Company's Electro-Optical
Systems businesses. The Company anticipates refinancing the
remaining $70 million of its 12.25% senior subordinated
debentures before the end of the year.
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 $40 million redemption of 12.25% senior
subordinated debentures on July 6, 1995 will result in an
extraordinary charge of approximately $.3 million in the
third quarter of 1995.
At June 30, 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.
The Company's operating activities used cash of $17.7 million
in the first half of 1995, compared with cash used of $.4
million in the comparable 1994 period. Net cash provided by
investing activities was $160.6 million in 1995, compared
with cash provided of $2.8 million in the 1994 period. The
increase in net cash provided by investing activities is
principally a result of $174.8 million of net proceeds
generated from the sale of businesses and assets in the first
six months of 1995 versus $7.3 million in 1994. Cash and
cash equivalents increased to $48.7 million at June 30, 1995
from $26.9 million at December 31, 1994, due to proceeds of
asset sales on hand, partially offset by cash used by
operating activities and increased capital expenditures
during the first half of 1995.
Working capital at June 30, 1995 was $129.7 million, a
decrease of $5.5 million from the end of 1994, due
principally to the sales of the Company's Turbomachinery
business segment and most of its Electro-Optical Systems
business in the first half of 1995. The ratio of current
assets to current liabilities was 2.0 at June 30, 1995,
compared with 1.9 at December 31, 1994. Principally as a
result of the aforementioned sales of businesses, the gain on
the disposal of the Turbomachinery business and the related
debt repayments during the first half of 1995, the Company's
total debt as a percent of its total capitalization was
reduced to 94.1% at June 30, 1995 from 107.5% at December 31,
1994.
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 a 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.
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. 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 a tentative 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 was erroneous and invited briefing on an
additional issue, not previously considered by the Court,
regarding the insurer's obligation to pay the $10 million in
defense costs. The Company submitted its Memorandum on April
19, 1995. In June 1995 the Company received a copy of a
judgment entered by the District Court awarding $11.2 million
with interest accruing from March 1995. The judgment was not
supported by an order ruling upon the remaining open issues.
In response to a request from the Company on July 13, 1995
the Court vacated the judgment as being premature as the
outstanding issue of recoverability of the $10 million
defense costs had not been finally determined, returned an
appeal bond posted by the Company, and indicated that it
would be issuing an order on open issues shortly.
The Company was notified in August 1994 that its Electro-
Optical operations were being investigated by a criminal
investigative task force of the United States Department of
Justice and the Internal Revenue Service. The investigation
related to marketing activities regarding contracts with the
Arab Republic of Egypt and with related certifications in
connection with the transactions which were funded with United
States foreign military aid. In connection with this
investigation, the Company received and responded to a subpoena
issued by the Federal Grand Jury for the District of Columbia.
In May 1995, in order to resolve this matter expeditiously, Varo
Inc., as surviving entity to Optic-Electronic Corp., entered
into a civil consent decree enjoining Optic-Electronic Corp
against any future violation of the Foreign Corrupt Practices
Act. The consent decree contains no finding of non-compliance
by the Company and imposes no penalty on the Company.
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 F in Part I of this report.
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of the Company's Stockholders was held on May
18, 1995.
The following Directors were elected:
Name Votes For Votes Withheld
Donald K. Farrar 14,507,940 624,080
Donald C. Trauscht 14,486,861 645,159
There were no broker non-votes regarding the election of
Directors.
Ernst & Young LLP was elected as independent auditors of the
Company with 15,003,178 votes in favor of such election, 66,316
votes against and 62,526 abstentions. There were no broker non-
votes regarding the election of such auditors.
An amendment to the Company's Equity Incentive Plan for Key
Employees was approved with 9,468,414 votes in favor of such
amendment, 4,272,917 votes against, 129,030 abstentions, and
1,261,659 broker non-votes regarding the approval of the
amendment.
The Company's 1995 Equity Incentive Plan for Outside Directors
was approved with 11,321,764 votes in favor of the Plan,
2,410,780 votes against, 137,817 abstentions, and 1,261,659
broker non-votes regarding the approval of the Plan.
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
10.41 Purchase and Sale Agreement among Litton
Industries, Inc., and Litton Systems,
Inc., and Imo Industries Inc., Baird
Corporation, Optic-Electronic
International, Inc. and Varo Inc. dated
May 11, 1995 and amended and restated as
of June 2, 1995 ( incorporated by
reference to Exhibit 10.41 to the
Company's Form 8-K report filed with the
Commission on June 19, 1995 ).
27 Financial Data Schedule as of June 30, 1995
(b) Reports on Form 8-K:
On June 19, 1995, the Company filed a report on Form 8-K,
reporting under Items 2 and 7, disclosing the
completion of the sale of its Optical Systems and Ni-
Tec divisions of Varo Inc. and the Optical Systems
division of Baird Corporation to Litton Industries,
Inc. and Litton Systems, Inc.
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 9, 1995 /s/ DONALD K. FARRAR
Donald K. Farrar
Chairman, Chief Executive Officer,
President and Director
(principal executive officer)
Date August 9, 1995 /s/ WILLIAM M. BROWN
William M. Brown
Executive Vice President and
Chief Financial Officer
(principal financial officer)
Date August 9, 1995 /s/ ROBERT A. DERR II
Robert A. Derr II
Vice President and
Corporate Controller
(principal accounting officer)
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