FORM 10-K/A
AMENDMENT NO. 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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 or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
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.
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common Stock, $1.00 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statement incorporated by reference in Part III of this Form
10-K or any amendment to the Form 10-K. ( )
Aggregate market value of the voting stock held by non-affiliates of
the Registrant computed by reference to the closing price of such stock on
the New York Stock Exchange, Inc. on
March 15, 1996...........................................$119,595,763
Shares of Registrant's common stock, $1.00 par value, outstanding as of
March 15, 1996 ............................................17,085,109
DOCUMENTS INCORPORATED BY REFERENCE
Identification of Documents Part into which Incorporated
Portions of the Company's Proxy Items 10, 11, 12 of Part III
Statement for its Annual Meeting of
Stockholders to be held May 21, 1996
SECTIONS AMENDED BY THIS FORM 10-K/A
Part II, Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II, Item 8 Financial Statements and Supplementary Data - Notes
1, 2, 10, 14, and 15 to the Consolidated Financial
Statements, and Report of Independent Auditors
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The following discussion and analysis of the Company's
consolidated results of operations and financial condition
should be read in conjunction with the audited Consolidated
Financial Statements included elsewhere in this Form 10-K
Report.
Overview
In October 1992, the Company determined that it needed to
delever its balance sheet through the sale of certain
businesses and the application of the proceeds from the
divestitures to reduce debt. Pursuant to this decision, the
Company divested its Heim Bearings, Aerospace, Barksdale
Controls and CEC Instruments businesses. See "Liquidity and
Capital Resources" below. In 1993, management, under Donald
K. Farrar, who became Chief Executive Officer in September
1993, initiated a strategy to reposition the Company to focus
on its less capital intensive businesses that exhibited
strong brand name recognition, a broad customer base and
market leadership with less dependence on U.S. Government
sales. In connection with this strategy, the Company
divested its Turbomachinery and most of its Electro-Optical
Systems businesses. This repositioning will be completed upon
the sale of the Roltra-Morse business, the remaining portion
of the Electro-Optical Systems business and certain non-
operating real estate. See "Remaining Asset Sales" below.
The Company's continuing businesses are now grouped into four
core business segments for management and segment reporting
purposes: Power Transmission, Pumps, Instrumentation and
Morse Controls. Previously, the Power Transmission, Pumps and
the Instrumentation business segments were all included in a
single business segment and the Morse Controls business
segment included the Roltra-Morse business.
1995 Asset Sales
Electro-Optical Systems
In January 1994, the Company announced a plan to sell its
Electro-Optical Systems business. On January 3, 1995, the
Company completed the sale of the Analytical Instruments
division of its wholly owned subsidiary, Baird Corporation,
for $12.3 million in cash, the proceeds of which were used to
reduce outstanding amounts under its Credit Agreement dated
August 5, 1994 (the "Existing Credit Agreement").
On June 2, 1995, the Company completed the sale of the
Optical Systems and Ni-Tec divisions of its wholly owned
subsidiary, Varo, Inc. ("Varo"), and the Optical Systems
division of Baird for $50 million in cash, the proceeds of
which were used to redeem $40 million in aggregate principal
amount of the 12.25% senior subordinated debentures (the
"Debentures") and to reduce outstanding amounts under the
Existing Credit Agreement. In the second half of 1995, the
Company recorded provisions totaling $13.3 million related to
the Electro-Optical Systems business, $6.8 million of which
was recorded in the third quarter related to the resolution
of contingencies associated with such divisions sales, and
$6.5 million of which was recorded in the fourth quarter
related primarily to write-downs of remaining non-operating
real estate to estimated fair market value.
TurboMachinery
On January 17, 1995, the Company completed the sale of its
Delaval Turbine and TurboCare divisions, which comprised
substantially all of the Company's former Turbomachinery
business segment, and its 50% interest in Delaval-Stork, a
Dutch joint venture. The final adjusted purchase price was
$119 million, of which the Company received $109 million in
cash at closing, with the balance earning interest until it
is received at specified future contract dates, subject to
adjustment as provided in the agreement. It is management's
expectation that there will be no further adjustment to the
purchase price. The proceeds from this sale were used to
repay in full term and bridge loans outstanding under the
Existing Credit Agreement and to redeem $40 million in
aggregate principal amount of the 12.25% Debentures. In the
fourth quarter of 1995, the Company recorded a provision of
$4.6 million related primarily to the resolution of
contingencies associated with this sale. The fourth quarter
provision partially offset the after-tax gain of $39.6
million recorded in the first quarter of 1995, bringing the
net gain on these sales to $35.0 million.
Remaining Asset Sales
The remaining operation of the Company's Electro-Optical
Systems business, which is Varo's Electronic Systems
division, continues to be marketed to interested parties.
The Company expects to complete the sale of this business in
1996 and plans to use the proceeds to reduce debt.
In February 1996, the Company announced its intention to sell
its Roltra-Morse business. The Company expects to complete
the sale of this business in 1996 for proceeds in excess of
net book value and plans to use the proceeds to reduce debt.
Other non-operating real estate, representing less than 10%
of the original value of assets announced to be sold in
October 1992, remains for sale. Results for the fourth
quarter of 1995 include an unusual charge of $5.0 million
related to the write-down of this non-operating real estate
to its net realizable value.
Cost Reduction Programs
In the fourth quarter of 1995, the Company recorded a charge
to continuing operations of $4.0 million, including severance
and other expenses related to a Company-wide program to
reduce general and administrative costs. This program
includes a reduction of 65 employees, or 2% of the total
number of Company employees, including a reduction of the
corporate headquarters staff by 20%. This program is
expected to reduce general and administrative expenses by
approximately $2.9 million in 1996, $4.0 million in 1997 and
$5.0 million annually thereafter. The required cash outlay
related to this program was $.4 million in 1995, and the
expected cash requirements during 1996 are $3.2 million. The
remainder of the charges represent non-cash charges.
In 1993, the Company recorded a charge to continuing
operations of $5.2 million for a cost reduction program which
benefited 1994 and 1995 operating results. Following Mr.
Farrar joining as Chief Executive Officer, the Company
implemented cost-cutting measures at its core operations to
reduce its expense structure and to eliminate duplicative
functions. In addition, in connection with this 1993 cost
reduction program, the Company consolidated certain
operations in its European Instrumentation and Morse Controls
businesses and revised operating processes and reduced
employment levels at its Pumps segment and other operations.
The number of Company employees in core operations declined
by 205, or 7%, between mid-1993 and mid-1994. These
organizational restructuring measures have been providing net
cash benefits, compared to 1993 levels, which approximated
$4.5 million and $1.5 million for continuing operations, in
1995 and 1994, respectively, and are expected to approximate
$5.5 million annually thereafter, based largely on reduced
employment costs.
Results of Operations
The Electro-Optical, Turbomachinery and Roltra-Morse
businesses are accounted for as discontinued operations.
Accordingly, their operating results have been segregated and
reported as Discontinued Operations in the audited
Consolidated Financial Statements included elsewhere in this
Form 10-K. Financial results prior to 1995 have been
reclassified to conform to current year presentation.
1995 Compared to 1994
Sales. Net sales from continuing operations in 1995 were
$373.2 million, compared with $360.8 million in 1994. Sales
from core operations (excluding operations sold in 1994 that
were not accounted for as discontinued operations) increased
4.8% in 1995 compared with the 1994 level of $356.0 million.
All sales in 1995 were from core operations. Each of the
Company's four core business segments contributed to this
increase. See "Segment Operating Results" below.
Gross Profit. The gross profit in 1995 remained relatively
constant at 30.8% of sales compared with 31.0% in 1994. See
"Segment Operating Results" below.
Selling, General and Administrative Expenses. Selling,
general and administrative expenses increased $3.0 million,
or 3.8%, in 1995 over the 1994 level. As a percent of sales,
selling, general and administrative expenses remained
relatively constant at 21.7% in 1995 compared with 21.6% in
1994. While 1995 benefited from a full year of savings from
the 1993 cost reduction program implemented during 1994, a
portion of these savings were offset by the Instrumentation
segment's efforts to expand marketing of transducer products
in the United States and Gems products in Europe, as well as
to increase sales in the Far East markets. Research and
development expenditures were 1.3% of sales in both 1995 and
1994.
Interest Expense. Average borrowings in 1995 were
approximately $120 million lower than in 1994. As a result,
total interest expense (before allocation to discontinued
operations) of $36.4 million in 1995 was $15.3 million, or
30%, less than in 1994. Interest expense for continuing
operations excludes interest expense incurred by the
discontinued operations of $3.0 million and $3.1 million in
1995 and 1994, respectively, as well as an interest
allocation to the discontinued operations. Interest
allocated to discontinued operations was $7.5 million in 1995
and $19.4 million in 1994.
Interest Expense: 1995 1994
(in millions)
Total (Before Allocations
to Discontinued Operations) $36.4 $51.7
Continuing Operations 25.9 29.2
Income from Continuing Operations. The Company had income
from continuing operations of $12.0 million, or $.71 per
share, in 1995, which included unusual charges of $9.0
million and a deferred tax benefit of $17.0 million. In
1994, income from continuing operations was $.2 million, or
$.01 per share. See "Other Operating Results" for discussion
regarding Unusual Items and Provision for Income Taxes.
Income (Loss) from Discontinued Operations. The Company had
income from discontinued operations of $22.1 million (net of
income tax expense of $6.1 million), or $1.29 per share, in
1995 as compared to income of $9.0 million (net of income tax
expense of $1.4 million), or $.53 per share, in 1994. The
income recorded in 1995 includes an aggregate net gain of
$21.6 million on the sale of the Company's former
Turbomachinery business and substantially all of its former
Electro-Optical Systems business. The Company retained
certain liabilities upon the sales of the Electro-Optical
Systems and Turbomachinery businesses of approximately $16.0
million and $25.0 million, respectively. 1995 required cash
outlays were $5.7 million and $14.1 million, and expected
1996 cash requirements are approximately $7.0 million and
$5.5 million, related to the Electro-Optical Systems and
Turbomachinery sales, respectively. Results from operations
for the discontinued operations include allocations for
interest of $7.5 million and $19.4 million for 1995 and 1994,
respectively.
Net Income . Net income in 1995 was $29.7 million compared
with $3.9 million in 1994. Net income per share in 1995 was
$1.74 compared with a net income per share of $.23 in 1994.
Net income (loss) per share by component for each year is
summarized below:
Earnings (loss) per share: 1995 1994
Continuing Operations
Before Extraordinary Item $ .71 $ .01
Discontinued Operations 1.29 .53
Extraordinary Item (.26) (.31)
Net income $1.74 $ .23
1994 Compared to 1993
Sales. Net sales from continuing operations in 1994 were
$360.8 million, compared with $416.5 million in 1993. Sales
from core operations (excluding operations sold in 1994 and
1993 that were not accounted for as discontinued operations)
were $356.0 million in 1994 compared with $340.8 million in
1993, an increase of 4.5%. Sales in the Power Transmission
and Morse Controls business segments increased 8.6% and
10.1%, respectively, in 1994 compared with 1993. Sales in
the Pumps and the Instrumentation business segments in 1994
remained near 1993 levels. See "Segment Operating Results"
below.
Gross Profit. The gross profit margin in 1994 decreased
slightly to 31.0% of sales compared with 31.8% in 1993. See
"Segment Operating Results" below.
Selling, General and Administrative Expenses. Selling,
general and administrative expenses declined $24.9 million,
or 24.2%, in 1994 from the 1993 level, with most of the
decline attributable to businesses sold subsequent to June
30, 1993, the phase-out of certain postretirement benefit
subsidies in 1994, and lower levels of general and
administrative staff in 1994 as a result of the 1993 cost
reduction plan. As a percent of sales, selling, general and
administrative expenses decreased to 21.6% in 1994 compared
with 24.7% in 1993. Research and development expenditures
were 1.3% of sales in 1994 compared with 1.8% in 1993.
Interest Expense. Average borrowings in 1994 were
approximately $50 million lower than in 1993. As a result,
total interest expense (before allocation to discontinued
operations) of $51.7 million in 1994 was $5.5 million, or
10%, less than in 1993. Interest expense for continuing
operations excludes interest expense incurred by discontinued
operations of $3.1 million and $4.3 million in 1994 and 1993,
respectively, as well as an interest allocation to
discontinued operations of $19.4 million in 1994 and $19.6
million in 1993.
Interest Expense: 1994 1993
(in millions)
Total (Before Allocations
to Discontinued Operations) $51.7 $57.2
Continuing Operations 29.2 33.3
Income (Loss) from Continuing Operations. The Company had
income from continuing operations of $.2 million, or $.01 per
share, in 1994. In 1993, loss from continuing operations was
$37.9 million, or $2.25 per share, primarily as a result of
the net unusual charges of $14.3 million and a $13.5 million
tax reserve provided against previously recorded future tax
benefits. See "Other Operating Results" for discussion
regarding Unusual Items and Provision for Income Taxes.
Income (Loss) from Discontinued Operations. The Company had
income from discontinued operations of $9.0 million (net of
income tax expense of $1.4 million),or $.53 per share, in
1994 as compared to a net loss of $214.5 million (including
income tax expense of $1.5 million), or $12.70 per share, in
1993. The loss recorded in 1993 includes an estimated loss
on the disposal of the Company's Electro-Optical Systems
business of $168.0 million, most of which represented a non-
cash adjustment to reduce the carrying value of assets to
estimated realizable value. Of the total estimated loss on
disposal recorded in 1993, required cash outlays were
approximately $8.4 million and $4.6 million in 1995 and
1994, respectively, the remainder of which, represented non-
cash charges. Results from operations for the discontinued
operations include allocations for interest of $19.4 million
and $19.6 million for 1994 and 1993, respectively.
Net Income (Loss). Net income in 1994 was $3.9 million
compared with a net loss of $270.6 million in 1993. Net
income per share in 1994 was $.23 compared with a net loss
per share of $16.02 in 1993. Net income (loss) per share by
component for each of the periods is summarized below:
Earnings (loss) per share: 1994 1993
Continuing Operations
Before Extraordinary Item $ .01 $ (2.25)
Discontinued Operations .53 (12.70)
Extraordinary Item (.31) (1.07)
Net income (loss) $ .23 $(16.02)
Other Operating Results
Unusual Items. During the fourth quarter of 1995, the
Company recognized unusual charges of $9.0 million in income
from continuing operations. These charges include $4.0 million
in severance benefits and other expenses related to a Company
- -wide program to reduce general and administrative costs
($.9 million included in the Instrumentation segment, $1.5
million included in the Morse Controls segment and $1.6
million included in Corporate Expense), and $5.0 million
related to the write-down of non-operating real estate to net
realizable value (included in Corporate Expense). Of the $9.0
million of unusual charges, the required cash outlay in 1995
was $.4 million and the expected cash requirements during 1996
are $3.2 million. The remainder represents non-cash charges.
There were no unusual items in 1994.
During the twelve months ended December 31, 1993, the Company
recognized unusual charges of $14.3 million in loss from
continuing operations. During the fourth quarter of 1993,
the Company recognized charges of $20.3 million that include
provisions of $5.2 million related to the restructuring and
consolidation of certain of the Company's operating units
($.2 million, $.5 million, $.9 million, $2.4 million and
$1.2 million, included in the Power Transmission, Pumps,
Instrumentation and Morse Controls segments and Corporate
Expense, respectively), $10.1 million expected net loss
overall related to the Company's asset divestiture program
(included in a non-core segment entitled "Other") and $5.0
million in debt related financing fees (included in Corporate
Expense). These charges are net of unusual income of $6.0
million recorded in the third quarter of 1993 as a result of a
change in estimate related to legal costs associated with
pending litigation (included in the Other segment). Of the
$20.3 million of unusual charges, required cash outlays were
approximately $1.3 million, $7.1 million, and $.2 million
in 1995, 1994 and 1993, respectively, with the remainder
representing non-cash charges.
Extraordinary Items. The twelve months ended December 31,
1995 include an extraordinary charge of $4.4 million after-
tax representing charges related to the early extinguishment
of portions of its debt under the Existing Credit Agreement
and the 12.25% Debentures.
The twelve months ended December 31, 1994 include an
extraordinary charge of $5.3 million after-tax, $.31 per
share, representing fees and charges related to
extinguishment of debt in connection with the restructuring
of the Company's credit facilities in August 1994.
The results of operations for the twelve months ended
December 31, 1993 included an extraordinary item of $18.1
million, $1.07 per share, representing fees and expenses
related to extinguishment of senior debt of which
approximately $4.0 million required immediate cash outlays,
approximately $2.0 million related to the write-off of
previously deferred debt expense and approximately $12.0
million was provided as an estimate for the prepayment of its
senior notes. Additionally, approximately $4.0 million of
fees related to the 1993 restructuring of the Company's
credit facilities were paid in 1993. This amount was being
amortized until August 1994, at which time, the balance was
recognized as an extraordinary charge in connection with the
extinguishment of the restructured credit facilities.
Provision for Income Taxes. Income tax expense (benefit)
from continuing operations was a benefit of $(14.8) million
for 1995, and expense of $1.8 million and $13.5 million for
1994 and 1993, respectively. The 1995 amount is comprised of
current tax expense of $2.2 million representing foreign and
state income taxes, as the Company is utilizing existing U.S.
net operating loss carryforwards on its domestic earnings.
This amount is offset by a deferred tax benefit in 1995 of
$(17.0) million, representing a reduction in the deferred tax
valuation allowance against U.S. net operating loss
carryforwards.
The 1994 income tax expense represents foreign and state
income taxes. The 1993 amount is principally comprised of the
provision of a reserve against previously recorded tax
benefits. The Company did not record a benefit for the 1993
loss as a valuation allowance was established in accordance
with the provisions of FASB Statement No. 109, "Accounting
for Income Taxes." The Company is recognizing these benefits
only as reassessment demonstrates that it is more likely than
not that they will be realized.
In 1995, the Company reduced the valuation allowance applied
against the net operating loss carryforward by $17 million
to a level where management beleives it is more likely than
not that the tax benefit will be realized. The total amount
of future taxable income in the U.S. necessary to realize
the asset is approximately $48 million. The Company would
generate this income principally from the sale of its Roltra-
Morse operations in 1996 and based upon future income
projections from its continuing operations. Although the
Company has a history of prior losses, these losses were
primarily attributable to divested businesses and unusual
items. The remaining valuation allowance is necessary due
to the uncertainty of future income estimates.
The Company has a net operating loss carryforward of
approximately $85 million expiring in years 2002 through
2010, foreign tax credit carryforwards of approximately $8.3
million expiring through 2000, and minimum tax credits of
approximately $2.1 million which may be carried forward
indefinitely. These carryforwards are available to offset
future taxable income. These existing tax loss carryforwards
will allow the Company's future earnings to be essentially
free from the payment of U.S. taxes for the foreseeable
future.
Taxes have not been provided on the unremitted earnings of
foreign subsidiaries, since it is the Company's intention to
indefinitely reinvest these earnings overseas. The amount of
foreign withholding taxes that would be payable on remittance
of these earnings is approximately $.9 million.
Retiree Medical and Life Insurance. In March 1994, the
Company amended its policy regarding retiree medical and life
insurance plans. This amendment, which affects some current
retirees and all future retirees, phases out the Company
subsidy for retiree medical and life insurance over a three-
year period ending December 31, 1996. The Company expects to
amortize associated reserves to income from continuing
operations over the phase-out period. The pre-tax amount
amortized to income from continuing operations was $4.6
million and $4.4 million in 1995 and 1994, respectively. The
Company does not anticipate a significant increase or
decrease in cash requirements related to this change in
policy during the phase-out period.
Segment Operating Results
Operating results by business segment for the years 1995,
1994 and 1993 are summarized below:
Power Transmission: 1995 1994 1993
(in millions)
Net Sales $ 95.1 $ 93.3 $ 85.9
Segment Operating Income(1) $ 11.3 $ 8.9 $ 2.3
(1) The Power Transmission segment's operating income
includes an unusual charge of $.2 million in 1993.
Power Transmission segment net sales remained strong across
substantially all markets in 1995, increasing 1.9% over 1994,
despite a nearly $2.0 million decline in sales to the
printing market. Operating income rose more than 25% for the
year, largely as a result of cost containment efforts and a
shift in product mix which resulted in a higher level of
manufacturing activity.
Power Transmission segment net sales increased 8.6% while
operating profit more than tripled in 1994 as compared with
1993 levels, as results benefited from an upturn in the
general mechanical and printing markets in the United States,
as well as the favorable effect of the phasing out the
subsidy for certain benefit plans. See "Retiree Medical and
Life Insurance" above.
Pumps: 1995 1994 1993
(in millions)
Net Sales $94.4 $90.4 $91.6
Segment Operating Income(1) $ 9.9 $10.4 $10.4
(1) The Pumps segment's operating income includes an
unusual charge of $.5 million in 1993.
Pumps segment net sales in 1995 were up 4.4% from 1994, 2.1%
of which was due to the effects of foreign exchange rates.
However, segment operating income decreased 5.4% due to a
shift in product mix. Startup costs related to a new line of
corrosive-resistant composite pumps also adversely affected
income, as did expenses caused by now resolved technical
difficulties related to a custom, high performance product
order.
The Company is in the process of acquiring substantially all
of the assets of a long-time three-screw pump licensee in
France, which will allow the Company to gain additional
market penetration in Europe and North Africa.
Pumps segment net sales and operating profit in 1995 and 1994
were adversely affected by a decline in U.S. Navy sales of
over $6.0 million in 1994 and over $10.0 million in 1995, as
compared with 1993 levels. These declines were offset by
increases in commercial sales of over $5.0 million in 1994
and over $13.5 million in 1995, as compared with 1993 levels.
Instrumentation: 1995 1994 1993
(in millions)
Net Sales $76.1 $72.2 $72.4
Segment Operating Income(1) $ 6.7 $9.8 $ 8.0
(1) The Instrumentation segment's operating income includes
unusual charges of $.9 million in both 1993 and 1995.
Instrumentation segment experienced a double-digit growth
rate in its industrial business in 1995, offset by a 40% drop
in sales to the U.S. Navy. The result was an overall
increase in net sales of 5.4% for the year. 1995 earnings
were negatively impacted by the costs associated with a
restructuring of this segment's European operations coupled
with a significant investment in new marketing and sales
initiatives.
During 1995, the Instrumentation segment closed its plant in
Frankfurt, Germany and shifted production of certain products
into a lower-cost manufacturing facility in the United
Kingdom. Total fourth quarter costs relating to this
relocation exceeded $1.2 million, including $.9 million of
unusual items. In response to the growing global markets for
fluid sensor products, the Company spent an additional $2.0
million in 1995 to upgrade its sales and marketing
organization and launched several new marketing initiatives.
The marketing efforts included an aggressive new trade
advertising program designed to produce a continuing source
of new sales leads. These investments should result in lower
manufacturing costs and greater sales beginning in 1996.
Instrumentation segment net sales in 1994 were approximately
$.2 million less than 1993 net sales. Segment operating
income in 1994, however, increased 23.1% from 1993. Excluding
the unusual charge of $.9 million incurred in 1993, segment
income in 1994 increased 10.6% from 1993 levels resulting
from improved performance in the European operations.
Morse Controls: 1995 1994 1993
(in millions)
Net Sales $107.7 $100.1 $ 90.9
Segment Operating Income(1) $ 5.3 $ 5.7 $ .5
(1) The Morse Controls segment's operating income includes
unusual charges of $2.4 million and $1.5 million in
1993 and 1995, respectively.
Morse Controls segment net sales of $107.7 million were up
7.6% for 1995, as compared with $100.1 million in net sales
in 1994, due to increases in the mobile equipment, aviation
and other general industrial markets. 1995 segment
operating income of $5.3 million decreased only $.4 million,
as compared with the 1994 level of $5.7 million. In the
fourth quarter of 1995, the segment recorded unusual charges
of $1.5 million related to a major downsizing of its European
operations, and non-cash adjustments of $1.5 million,
principally related to inventory. Excluding unusual items
and non-cash charges, segment operating income increased to
$8.3 million in 1995, as compared with $5.7 million in 1994.
In the third quarter of 1995, Morse entered into a joint-
venture in China with an affiliate of Dong Feng Motor
Corporation, China's largest truck manufacturer. The joint-
venture will manufacture push-pull cables, pull-only cables
and other products used in trucks and other vehicles. In the
last quarter in 1995, Morse also completed the strategic
acquisition of RMH Controls, a small, specialized
manufacturer of electronic controls with operations in Sweden
and the United Kingdom. RMH's technology will permit Morse
to expand its product offering in microprocessor-based
electronic controls for marine and industrial applications.
The Morse Controls segment had net sales of $100.1 million in
1994, compared with net sales of $90.9 million for 1993, an
increase of 10.1%, based on increased pleasure marine sales.
The increased sales level resulted in operating income for
the segment of $5.7 million in 1994, compared with $.5
million in 1993. Operating income in 1993 included unusual
charges of $2.4 million related to restructuring and
facilities consolidations.
Company-wide Fourth Quarter Results
Net sales from continuing operations in the fourth quarter of
1995 were $90.0 million, compared with $90.3 million in the
fourth quarter of 1994. The Company had income from
continuing operations of $4.0 million, or $.23 per share, in
the fourth quarter of 1995 compared with a loss from
continuing operations of $.3 million, or $.02 per share, in
the comparable 1994 period. Income from continuing
operations benefited from a reduction in deferred tax asset
valuation allowances of $17.0 million, partially offset by
the unusual charges of $9.0 million in the fourth quarter of
1995.
Power Transmission segment net sales experienced a decline of
3.6% to $22.4 million in the fourth quarter of 1995 compared
to the same period in 1994 as the general mechanical market
slowed. Despite this sales decrease, segment operating
income increased 11.7% to $2.2 million in the 1995 fourth
quarter as compared with the 1994 period, largely as a result
of cost containment efforts and a shift in product mix.
Pumps segment net sales of $24.8 million were up 4.9% in the
fourth quarter of 1995 compared to the same period in 1994.
Segment operating income was down 20.8% to $1.6 million,
when compared to the same period in 1994, due in part to a
shift in product mix and to startup costs related to a new
line of corrosive-resistant composite pumps and expenses
caused by now-resolved technical difficulties related to
a custom, high performance product order.
Instrumentation segment fourth quarter 1995 net sales
were $18.6 million, a decrease of 2.9%, compared with the
same period in 1994. Fourth quarter 1995 earnings of $.2
million, which compared with $ 2.8 million in the fourth
quarter of 1994, were negatively impacted primarily by the
costs associated with a restructuring of its European
operations. Total costs relating to this relocation exceeded
$1.2 million including $.9 million of unusual items. In
addition, the increased investment in new marketing and sales
initiatives during 1995 contributed to the decrease compared
to the 1994 fourth-quarter period.
Morse Controls segment net sales in the fourth quarter of
both 1995 and 1994 were $24.2 million. The segment incurred
an operating loss of $1.9 million in the fourth quarter of
1995, as compared with operating income of $1.3 million in
the comparable 1994 period. Unusual items totaling $1.5
million were recorded related to a major downsizing of its
European Operations. Additionally, fourth quarter 1995
results were negatively impacted by approximately $1.5
million of non-cash adjustments principally related to
inventory.
Liquidity and Capital Resources
Short-term and Long-term Debt
The Company's domestic liquidity requirements are currently
served by the $60 million revolving credit facility
(including a letter of credit subfacility) under the Existing
Credit Agreement, while its needs outside the United States
are covered by short and intermediate term credit facilities
from foreign banks. As of December 31, 1995, there were
$18.2 million of revolving credit borrowings and $7.8 million
of standby letters of credit outstanding under the Existing
Credit Agreement .
The Company also has, in the aggregate, foreign short-term
credit facilities of approximately $35.5 million. As of
December 31, 1995, $18.8 million is outstanding under these
foreign facilities, of which $9.8 million relates to
indebtedness of discontinued operations.
In addition, at December 31, 1995, the Company had
outstanding $70.0 million in aggregate principal amount of
the 12.25% Debentures, maturing in 1997, and $150 million in
aggregate principal amount of the 12% Debentures, maturing in
amounts of $37.5 million in 1999, $37.5 million in 2000 and
$75.0 million in 2001. The Debentures contain covenants
that, among other things, restrict indebtedness to specified
levels. Under certain circumstances, such covenants could
result in the Company's inability to fully utilize the
revolving credit facility under the Existing Credit Agreement
and the foreign short-term credit facilities.
The Company sold its CEC Instruments division, corporate
headquarters building and other previously identified assets
for aggregate proceeds of $13.2 million in 1994, and its Heim
Bearings, Aerospace and Barksdale Controls operations for
aggregate proceeds of approximately $91 million in 1993.
The Company used the net proceeds from these sales to reduce
amounts outstanding under its then existing senior notes and
revolving credit facility. In the first quarter of 1995, the
Company repaid outstanding term and bridge loans under the
Existing Credit Agreement in the aggregate principal amounts
of $36.7 million and $45.0 million, respectively. In 1995,
the Company redeemed $80 million in aggregate principal
amount of the 12.25% Debentures at 100% of their principal
amount, $40 million of which were redeemed in March 1995 with
proceeds from the sale of the Company's former Turbomachinery
business, and an additional $40 million of which were
redeemed in July 1995 with proceeds from the sale of a
majority of the Company's Electro-Optical Systems business.
As a result of these actions, total interest expense has been
significantly reduced as compared with prior period levels.
As a result of the early extinguishment of debt referred to
above, a $4.1 million, or $.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 debt repaid under the
Existing Credit Agreement and the redemption of a portion of
the 12.25% Debentures. The redemption of $40 million in
aggregate principal amount of the 12.25% Debentures on July
6, 1995 resulted in an extraordinary charge of approximately
$.3 million, or $0.02 per share, in the third quarter of
1995.
Management continues to actively pursue opportunities to
further reduce its high interest debt. The Company plans to
use the proceeds from the sales of its Roltra-Morse and
Varo's Electronic Systems businesses to reduce debt.
Moreover, the Company is currently negotiating to refinance
the Existing Credit Agreement and the Debentures. Management
expects to complete the refinancing in the first half of
1996.
Cash Flow
The Company's operating activities used cash of $31.7 million
in 1995, compared with providing cash of $16.8 million in
1994, due principally to cash requirements of $22.0 million
related to discontinued operations, cash requirements related
to previously sold operations (not classified as discontinued
operations) and a net increase in working capital items
within the Company's continuing operations. Net cash
provided by investing activities was $145.5 million in 1995,
compared with cash used of $.3 million in 1994. The 1995
increase in net cash provided by investing activities is
principally a result of $174.9 million of net proceeds
generated from the sale of businesses and assets in 1995
versus $13.6 million in 1994. Cash and cash equivalents
decreased to $3.8 million at December 31, 1995 from $26.9
million at December 31, 1994, due to cash used by operating
activities and increased capital expenditures during 1995.
Working capital at December 31, 1995 was $81.0 million, a
decrease of $51.2 million from the end of 1994, due
principally to the sales of the Company's former
Turbomachinery business and substantially all of its Electro-
Optical Systems business. The reduction in assets was
partially offset by a reduction in current debt and accrual
levels (related primarily to previously sold businesses) in
1995. The ratio of current assets to current liabilities was
2.0 at December 31, 1995, compared with 2.2 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 1995, the
Company's total debt as a percent of its total capitalization
decreased to 97.2%, compared to 107.0% and 109.4% at December
31, 1994 and 1993, respectively.
Capital expenditures of continuing operations of $14.6
million increased significantly over the 1994 level of $6.0
million. The 1995 level was a planned increase over the 1994
level in order to make investments to maintain and to improve
competitive advantages at the Company's operations. The
Company anticipates that capital expenditures in 1996 will
increase slightly over the 1995 level primarily to improve
productivity. There were no material outstanding commitments
for the acquisition of property, plant and equipment at
December 31, 1995.
Management of the Company believes that cash flow from
operations, cash available from unused credit facilities and
cash generated by additional asset sales will be sufficient
to meet its foreseeable liquidity needs.
Seasonality; Customer Concentration; Inflation
General economic conditions worldwide continue to create
business opportunities for the coming year in many of the
markets in which the Company operates. Management believes
that because of the nature of its industrial products and the
fact that the Company sells diverse products to many markets,
the Company is not significantly affected by the cyclical
behavior, or seasonality, of any particular market that it
serves.
Total sales to the United States Department of Defense in the
form of prime and subcontracts were approximately 7% of net
sales from continuing operations in 1995, 9% of sales in 1994
and 14% of sales in 1993.
Approximately 31% of the property, plant and equipment of the
Company's continuing operations has been acquired over the
past five years and has a remaining useful life ranging from
five years to fifteen years for equipment to thirty years for
buildings. In addition, property, plant and equipment of the
businesses acquired by the Company have been adjusted to
their fair value at the time of acquisition. Assets acquired
in prior years are expected to be replaced at higher costs
but this will take place over many years. The newer assets
will result in higher depreciation charges but, in many
cases, due to technological improvements, there will be
operating cost savings as well. The Company considers these
matters in establishing its pricing policies.
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements and supplementary data
required by Part II, Item 8 of Form 10-K are included in Part
IV of this Form 10-K Report as indexed at Item 14(a)(1).
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.
(a) (1) Financial Statements
The Financial Statements and Supplementary Data required by
Part II, Item 8 of Form 10-K are included in this Part IV of
this Form 10-K Report as follows:
Consolidated Financial Statements Page
Consolidated Statements of Income for the Years
Ended December 31, 1995, 1994 and 1993................F-1
Consolidated Balance Sheets at December 31, 1995
and 1994..............................................F-2
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1995, 1994 and 1993......... F-3
Consolidated Statements of Shareholders' Equity
for the Years Ended December 31, 1995, 1994 and 1993..F-4
Notes to Consolidated Financial Statements............. F-5
Report of Independent Auditors..........................F-29
Quarterly Financial Information.........................F-30
(2) Financial Statement Schedules
The following consolidated financial statement schedule for
the year ended December 31, 1995, 1994 and 1993 is filed as
part of this Report and should be read in conjunction with the
Company's Consolidated Financial Statements.
Schedule Page
II Valuation and Qualifying Accounts.......... S-1
All other schedules for which provision is made in the
applicable regulation of the Securities and Exchange Commission
are omitted because they are not required under the related
instructions or because the required information is given in
the financial statements or notes thereto.
(3) Exhibits
The Exhibits listed in the accompanying Index to Exhibits are
filed as part of this Report.
(b) Reports on Form 8-K
Not Applicable.
EXHIBIT INDEX
Exhibit No. Note No. Description
3(i) (10) The Company's Restated Certificate of Incorporation,
as amended March 10, 1989 and November 10, 1992
3(ii) (14) The Company's Bylaws
4.1 (A) (6) Indenture agreement dated August 15, 1987 between the
Company and IBJ Schroder Bank & Trust Company, Trustee
(B) (12) First Supplemental Indenture dated as of February 14,
1994 between the Company and IBJ Schroder Bank & Trust
Company, Trustee
4.2 (6) Indenture agreement dated November 1, 1989 between the
Company and IBJ Schroder Bank & Trust Company, Trustee
4.3 (A) (3) Rights Agreement dated as of April 22, 1987 between the
Company and Philadelphia National Bank, as Rights Agent
(B) (10) Amendment dated December 16, 1991 between the Company
and First Chicago Trust Company of New York
Management Contracts, Compensatory Plans and Arrangements:
10.1 (16) Amended and restated Equity Incentive Plan for Key
Employees
10.2 (18) Amended and restated 1988 Equity Incentive Plan for
Outside Directors
10.3 (17) 1995 Equity Incentive Plan for Outside Directors
10.4 (19) The Company's Supplemental Retirement Income Plan
10.5 (10) Change in Control Agreement dated January 9, 1987 between
the Company and John J. Carr
10.6 (10) Change in Control Agreement dated December 23, 1988
between the Company and Brian Lewis
10.7 (10) Change in Control Agreement dated August 5, 1992 between
the Company and William M. Brown
10.8 (10) Change in Control Agreement dated August 13, 1992 between
the Company and Thomas J. Bird
10.9 (A) (12) Employment Agreement dated September 13, 1993 between the
Company and Donald K. Farrar
(B) (14) Amendment dated November 17, 1994 to the Employment
Agreement between the Company and Donald K. Farrar
10.10 (12) Change in Control Agreement dated September 13, 1993
between the Company and Donald K. Farrar
10.11 (19) Change in Control Agreement dated October 2, 1995 between
the Company and David C. Christensen
Other Material Contracts:
10.12(A) (4), (6) The Company's Salaried Employees Stock Savings Plan as
amended on July 1,1987 and as amended on June 14, 1988
(B) (9) Amendment dated March 16, 1989 to the Imo Industries Inc.
Employees Stock Savings Plan
(C) (7) Amendments dated September 6, 1990 and February 14, 1991
to the Imo Industries Inc. Employees Stock Savings Plan
(D) (8) Amendment dated May 9, 1991 to the Imo Industries Inc.
Employees Stock Savings Plan
(E) (10) Amendments dated December 30, 1991 and August 3, 1992 to
the Imo Industries Inc. Employees Stock Savings Plan
(F) (14) Trust Agreement for the Imo Industries Inc. Employees
Stock Savings Plan as of March 1, 1995 between the
Company and Eagle Trust Company
10.13 (1) Distribution Agreement dated December 18, 1986 between
Transamerica Corporation and the Company
10.14 (1) Tax Agreement between the Company and Transamerica
Corporation
10.15(J) (11) Warrant dated July 15, 1993 issued by the Company to The
Prudential Insurance Company of America
10.16 (2) Stock Purchase Agreement dated November 30, 1987 between
the Company and TRIFIN B.V.
10.17 (5) Agreement and Plan of Merger, dated as of August 21,
1988 by and among the Company, VI Acquisition Corp. and
Varo Inc.
10.18 (5) Stock option agreement, dated as of August 21, 1988,
between VI Acquisition Corp. and Varo Inc.
10.19 (6) Agreement for the purchase of the stock of Warren Pumps
Inc. by the Company dated April 3, 1989 among the
Company, Warren Pumps Inc. and the holders of all of the
issued and outstanding stock of Warren Pumps Inc.
10.20 (7) Stock Purchase Agreement dated as of May 31, 1990 among
United Scientific Holdings PLC, United Scientific Inc.
and the Company
10.21 (12) Stock Purchase Agreement dated as of October 28, 1993
among the Company, Imo Industries GmbH, Mark Controls
Corporation and Mark Controls GmbH i. Gr., as amended
10.22 (12) German Asset Purchase Agreement among Imo Industries
GmbH, Mark Controls GmbH i. Gr., the Company and Mark
Controls Corporation, as amended
10.23(A) (13) Credit Agreement dated as of August 5, 1994 among the
Company, as Borrower, Baird Corporation, as Guarantor,
Warren Pumps Inc., as Guarantor, the Institutions from
time to time party thereto as Lenders and as Issuing
Banks, and Citibank, N.A., as Agent
(B) (14) First Amendment dated as of November 18, 1994, Second
Amendment dated as of January 11, 1995, and Third
Amendment dated as of February 17, 1995 to the Credit
Agreement dated as of August 5, 1994 among the Company as
Borrower, Baird Corporation, as Guarantor, Warren Pumps
Inc., as Guarantor, the Institutions from time to time
party thereto as Lenders and as Issuing Banks, and
Citibank, N.A., as Agent
(C) (19) Fourth Amendment dated as of May 3, 1995, Fifth
Amendment dated as of August 14, 1995, Sixth Amendment
dated as of December 11, 1995, and Seventh Amendment
dated as of March 4, 1996 to the Credit Agreement dated
as of August 4, 1994 among the Company as Borrower,
Baird Corporation, as Guarantor, Warren Pumps Inc., as
Guarantor, the Institutions from time to time party
thereto as Lenders and as Issuing Banks, and Citibank,
N.A., as Agent
10.24(A) (13) Asset Purchase Agreement dated as of November 4, 1994 by
and among the Company, Imo Industries International Inc.
and Mannesmann Capital Corporation
(B) (14) Agreement, Amendment and Waiver dated January 17, 1995
by and among the Company and Mannesmann Capital
Corporation
10.25 (14) Asset and Stock Purchase Agreement dated as of January 1,
1995 by and among the Company and Thermo Jarrell Ash
Corporation
10.26 (15) 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
20 Proxy Statement for the Company's 1996 Annual Meeting of
Stockholders (incorporated by reference to the Company's
Proxy Statement to be filed separately with the Commission
pursuant to Regulation 14A of the Securities Exchange Act
of 1934, as amended)
21 (19) Subsidiaries of the Company
23 Consent of Ernst & Young LLP dated August 15, 1996
27 (19) Financial Data Schedule as of December 31, 1995
_______________________________________________
NOTES
(1) Incorporated by reference to the Company's Form 8 Amendment No. 2
filed with the Commission on December 9, 1986 amending the Company's
Form 10 as filed with the Commission on October 15, 1986.
(2) Incorporated by reference to the Company's Form 8-K filed with the
Commission on February 17, 1987.
(3) Incorporated by reference to the Company's Form 8-K filed with the
Commission on May 4, 1987.
(4) Incorporated by reference to the Imo Industries Inc. Employees Stock
Savings Plan Form 11-K filed with the Commission on April 13, 1988.
(5) Incorporated by reference to the Company's Form 8-K filed with the
Commission on October 14, 1988.
(6) Incorporated by reference to the Company's Form 10-K filed with the
Commission on March 29, 1990.
(7) Incorporated by reference to the Company's Form 10-K filed with the
Commission on March 28, 1991.
(8) Incorporated by reference to the Company's Form S-8 filed with the
Commission on June 17, 1991.
(9) Incorporated by reference to the Company's Form 10-K filed with the
Commission on March 26, 1992.
(10) Incorporated by reference to the Company's Form 10-K filed with the
Commission on April 19, 1993.
(11) Incorporated by reference to the Company's Form 10-K/A filed with the
Commission on August 6, 1993 amending the Company's Form 10-K as filed
with the Commission on April 19, 1993.
(12) Incorporated by reference to the Company's Form 10-K filed with the
Commission on March 31, 1994.
(13) Incorporated by reference to the Company's Form 10-Q filed with the
Commission on November 14, 1994.
(14) Incorporated by reference to the Company's Form 10-K filed with the
Commission on March 29, 1995.
(15) Incorporated by reference to the Company's Form 8-K filed with the
Commission on June 19, 1995.
(16) Incorporated by reference to the Company's Form S-8 as filed with the
Commission on June 23, 1995, Registration No. 33-60533
(17) Incorporated by reference to the Company's Form S-8 as filed with the
Commission on June 23, 1995, Registration No. 33-60535
(18) Incorporated by reference to the Company's Form 10-Q filed with the
Commission on November 13, 1995.
(19) Incorporated by reference to the Company's Form 10-K filed with the
Commission on March 28, 1996.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Imo Industries Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
IMO INDUSTRIES INC.
Date: August 13, 1996 By: /s/ WILLIAM M. BROWN
William M. Brown
Executive Vice President,
Chief Financial Officer
and Corporate Controller
<TABLE>
Imo Industries Inc. and Subsidiaries
Consolidated Statements of Income
(Dollars in thousands except per share amounts)
<CAPTION>
Year Ended December 31, 1995 1994* 1993*
<S> <C> <C> <C>
Net Sales $373,227 $360,785 $416,526
Cost of products sold 258,335 248,835 284,227
Gross Profit 114,892 111,950 132,299
Selling, general and administrative
expenses 80,964 77,973 102,916
Research and development expenses 4,831 4,646 7,537
Unusual items 9,020 --- 14,338
Income from Operations 20,077 29,331 7,508
Interest expense 25,860 29,168 33,341
Interest income (1,980) (1,592) (511)
Other income (739) (219) (1,074)
Equity in (income) loss of
unconsolidated companies (302) --- 231
Income (Loss) From Continuing
Operations Before Taxes and
Extraordinary Item (2,762) 1,974 (24,479)
Income taxes (benefit):
Current 2,209 1,790 ---
Deferred (17,000) --- 13,450
Total Income Taxes (Benefit) (14,791) 1,790 13,450
Income (Loss) From Continuing Operations
Before Extraordinary Item 12,029 184 (37,929)
Discontinued Operations:
Income (Loss) from Operations (net of
income tax expense of $.9 million
in 1995, $1.4 million in 1994 and
$1.5 million in 1993) 500 9,046 (46,528)
Estimated Gain (Loss) on Disposal (net
of income taxes of $5.2 million in
1995) 21,625 --- (168,014)
Total Income (Loss) from
Discontinued Operations 22,125 9,046 (214,542)
Extraordinary Item - Loss on
Extinguishment of Debt (4,444) (5,299) (18,095)
Net Income (Loss) $ 29,710 $ 3,931 $(270,566)
Earnings (loss) per share:
Continuing operations before
extraordinary item $ .71 $ .01 $ (2.25)
Discontinued operations $ 1.29 $ .53 $(12.70)
Extraordinary item $ (.26) $ (.31) $ (1.07)
Net income (loss) $ 1.74 $ .23 $(16.02)
Weighted average number of shares
outstanding 17,048,622 16,926,071 16,890,501
See accompanying notes to consolidated financial statements.
*Reclassified to conform to 1995 presentation.
F-1
</TABLE>
<TABLE>
Imo Industries Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
<CAPTION>
December 31, 1995 1994*
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 3,809 $ 26,942
Trade accounts and notes receivable, less
allowance of $2,030 in 1995 and $2,192 in 1994 53,965 53,909
Inventories-net 85,030 76,902
Deferred income taxes 11,371 4,328
Net assets of discontinued operations - current 5,220 75,165
Prepaid expenses and other current assets 4,617 5,089
Total Current Assets 164,012 242,335
Property, Plant and Equipment - on the basis of cost
Land 10,407 5,930
Buildings and improvements 44,786 40,449
Machinery and equipment 109,156 102,730
164,349 149,109
Less allowances for depreciation and amortization (82,996) (71,867)
Net Property, Plant and Equipment 81,353 77,242
Intangible Assets, Principally Goodwill 68,664 73,834
Investments in and Advances to Unconsolidated Companies 5,415 3,653
Deferred income taxes - Long-Term 4,609 ---
Net Assets of Discontinued Operations - Noncurrent 29,190 89,313
Other Assets 30,644 26,242
Total Assets $ 383,887 $ 512,619
Liabilities and Shareholders' Equity
Current Liabilities
Notes payable $ 9,019 $ 9,699
Trade accounts payable 23,733 22,012
Accrued expenses and other liabilities 38,069 51,620
Accrued costs related to discontinued operations 3,055 6,444
Income taxes payable 8,354 6,671
Current portion of long-term debt 805 13,675
Total Current Liabilities 83,035 110,121
Long-Term Debt 245,802 372,365
Deferred Income Taxes --- 7,364
Accrued Postretirement Benefits - Long-Term 24,372 30,918
Accrued Pension Expense and Other Liabilities 23,794 17,696
Total Liabilities 377,003 538,464
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 18,756,397 and 18,680,428 in 1995
and 1994, respectively 18,756 18,680
Additional paid-in capital 80,275 79,789
Retained earnings (deficit) (76,592) (106,302)
Cumulative foreign currency translation adjustments 4,266 861
Minimum pension liability adjustment (1,801) (853)
Treasury stock at cost - 1,672,788 shares
in 1995 and 1994 (18,020) (18,020)
Total Shareholders' Equity 6,884 (25,845)
Total Liabilities and Shareholders' Equity $ 383,887 $ 512,619
See accompanying notes to consolidated financial statements.
* Restated to conform to 1995 presentation.
F-2
</TABLE>
<TABLE>
Imo Industries Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
<CAPTION>
Year Ended December 31, 1995 1994* 1993*
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $29,710 $ 3,931 $(270,566)
Adjustments to reconcile net income
(loss) to net cash (used by) provided
by continuing operations:
Discontinued operations (22,125) (9,046) 214,542
Depreciation 12,100 12,771 15,325
Amortization 3,122 5,832 4,471
Provision (credit) for deferred
income taxes (17,000) --- 13,450
Extraordinary item 4,444 5,299 18,095
Unusual items 9,020 --- 14,338
Other 172 666 1,243
Other changes in operating assets
and liabilities:
Decrease (increase) in accounts and
notes receivable 236 (1,557) 9,491
(Increase) decrease in inventories (7,157) (368) 7,198
Decrease in recoverable income taxes --- 3,826 7,270
(Decrease) increase in accounts
payable and accrued expenses (13,273) (9,160) 7
Other operating assets and
liabilities (9,014) (5,387) (8,846)
Net cash (used by) provided by continuing
operations (9,765) 6,807 26,018
Net cash (used by) provided by
discontinued operations (21,978) 9,971 986
Net Cash (Used in) Provided by Operating
Activities (31,743) 16,778 27,004
INVESTING ACTIVITIES
Net proceeds from sale of businesses and
sales of property, plant and equipment 174,922 13,568 86,619
Purchases of property, plant and equipment (14,600) (6,025) (6,343)
Acquisitions, net of cash acquired (5,247) --- ---
Net investing activities of discontinued
operations (9,426) (6,994) (9,724)
Other (122) (857) 252
Net Cash Provided by (Used in) Investing
Activities 145,527 (308) 70,804
FINANCING ACTIVITIES
(Decrease) increase in notes payable 5,407 (31,346) (29,915)
Proceeds from long-term borrowings 45,461 86,951 4,377
Principal payments on long-term debt (188,200) (56,759) (55,575)
Payment of debt financing costs (401) (11,277) (8,326)
Proceeds from stock options exercised 535 415 ---
Other 59 15 (318)
Net Cash Used in Financing Activities (137,139) (12,001) (89,757)
Effect of exchange rate changes on cash 222 117 (462)
(Decrease) increase in Cash and Cash
Equivalents (23,133) 4,586 7,589
Cash and cash equivalents at
beginning of year 26,942 22,356 14,767
Cash and Cash Equivalents at
End of Year $ 3,809 $26,942 $22,356
See accompanying notes to consolidated financial statements.
*Reclassified to conform to 1995 presentation.
F-3
</TABLE>
<TABLE>
Imo Industries Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
(Dollars in thousands)
<CAPTION>
Cumulative
Addit- Foreign Minimum
ional Retained Currency Pension
Common Paid-In Earnings Translation Liability Treasury
Stock Capital (Deficit) Adjustments Adjustment Stock Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
January 1,
1993 * $18,554 $78,557 $160,333 $ 491 $ --- $(18,020) $239,915
Net loss --- --- (270,566) --- --- --- (270,566)
Foreign currency
translation
adjustments --- --- --- (1,638) --- --- (1,638)
Minimum pension
liability
adjustment --- --- --- --- (1,768) --- (1,768)
Issuance of
common stock
warrants --- 336 --- --- --- --- 336
Restricted shares
issued under
the equity
incentive plan 30 187 --- --- --- --- 217
Balance at
December 31,
1993 * 18,584 79,080 (110,233) (1,147) (1,768) (18,020) (33,504)
Net income --- --- 3,931 --- --- --- 3,931
Foreign currency
translation
adjustments --- --- --- 2,008 --- --- 2,008
Minimum pension
liability
adjustment --- --- --- --- 915 --- 915
Shares issued
under stock
option plan 56 359 --- --- --- --- 415
Restricted shares
issued under
the equity
incentive plan 40 350 --- --- --- --- 390
Balance at
December 31,
1994 * 18,680 79,789 (106,302) 861 (853) (18,020) (25,845)
Net income --- --- 29,710 --- --- --- 29,710
Foreign currency
translation
adjustments --- --- --- 3,405 --- --- 3,405
Minimum pension
liability
adjustment --- --- --- --- (948) --- (948)
Shares issued
under stock
option plan 73 462 --- --- --- --- 535
Restricted shares
issued under
the equity
incentive plan 3 24 --- --- --- --- 27
Balance at
December 31,
1995 $18,756 $80,275 $(76,592) $4,266 $(1,801) $(18,020) $6,884
See accompanying notes to consolidated financial statements.
* Reclassified to conform to current year presentation.
F-4
</TABLE>
Imo Industries Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 Significant Accounting Policies
Consolidation: The consolidated financial statements
include the accounts of the Company and its majority-
owned subsidiaries. Significant intercompany
transactions have been eliminated in consolidation. The
Company uses the equity method to account for
investments in corporations in which it does not own a
majority voting interest but has the ability to exercise
significant influence over operating and financial
policies.
Translation of Foreign Currencies: Assets and
liabilities of international operations are translated
into U.S. dollars at current exchange rates. Income and
expense accounts are translated into U.S. dollars at
average rates of exchange prevailing during the year.
Translation adjustments are reflected as a separate
component of shareholders' equity.
Cash Equivalents: Cash equivalents include investments
in government securities funds and certificates of
deposit. Investment periods are generally less than one
month.
Financial Instruments: The Company uses forward
exchange contracts to hedge certain firm foreign
commitments denominated in foreign currencies. Gains or
losses on forward contracts are deferred and offset
against the foreign exchange gains and losses on the
underlying hedged item. The forward exchange contracts
are for periods of less than one year, and the amounts
outstanding as well as gains or losses on such contracts
are not material.
Inventories: Inventories are carried at the lower of
cost or market, cost being determined principally on the
basis of standards which approximate actual costs on the
first-in, first-out method, and market being determined
by net realizable value. Appropriate consideration is
being given to deterioration, obsolescence and other
factors in evaluating net realizable value.
Revenue Recognition: Revenues are recorded generally
when the Company's products are shipped.
Depreciation and Amortization: Depreciation and
amortization of plant and equipment are computed
principally by the straight-line method based on the
estimated useful lives of the assets as follows:
buildings, 10 to 35 years and machinery and equipment,
3 to 15 years.
Interest Expense: Interest expense incurred during the
construction of facilities and equipment is capitalized
as part of the cost of those assets. Total interest
paid by the Company amounted to $39.5 million in 1995,
$49.5 million in 1994 and $56.7 million in 1993. There
was no interest capitalized in 1995. Interest
capitalized in 1994 and 1993 was $.2 million and $.1
million, respectively.
Earnings Per Share: Earnings per share are based upon
the weighted average number of shares of common stock
outstanding. Common stock equivalents related to stock
options are excluded because their effect is not
material.
Impact of Recently Issued Accounting Standards: In March
1995, the FASB issued Statement No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", which requires impairment
losses to be recorded on long-lived assets used in
operations when indicators of impairment are present
and the undiscounted cash flows estimated to be
generated by those assets are less than the assets'
carrying amount. Statement 121 also addresses the
accounting for long-lived assets that are expected to
be disposed of. The Company will adopt Statement 121
in the first quarter of 1996 and, based on current
circumstances, does not believe the effect of adoption
will be material.
Stock Compensation: The Company grants stock options
and shares of restricted stock to certain employees
under its Equity Incentive Plan. The stock options are
for a fixed number of shares and have an exercise price
equal to the fair value of the shares at the date of
grant. Restricted shares are valued at fair value of
the shares at the date of grant and compensation expense
is recognized over the vesting period.
In October 1995, the FASB issued Statement No. 123,
"Accounting for Stock-Based Compensation", which
encourages companies to recognize expense for stock-
based awards based on their estimated fair value on the
date of grant. The Company accounts for its stock
compensation arrangements under the provisions of APB 25,
"Accounting for Stock Issued to Employees", and intends
to continue to do so. For the fiscal year ended December
31, 1996, the Company will be required to provide pro-
forma disclosures of what net income and earnings per
share would have been for 1996 and 1995 had the new fair
value method been used and to provide additional general
disclosures regarding employee stock options, as
required by Statement No. 123.
Intangible Assets: Goodwill of companies acquired is
being amortized on the straight-line basis over 40
years. The carrying value of goodwill is reviewed when
indicators of impairment are present, by evaluating
future cash flows of the associated operations to
determine if impairment exists. Goodwill related to
continuing operations at December 31, 1995 and 1994 was
$63.1 million and $61.2 million, respectively, net of
respective accumulated amortization of $14.6 million and
$12.9 million. Patents are amortized over the shorter of
their legal or estimated useful lives.
Management Estimates: The preparation of financial
statements in conformity with generally accepted
accounting principles requires management to make
estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of
revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Restatements: The Consolidated Financial Statements,
and the notes thereto, have been restated to reflect the
Company's Roltra-Morse business segment as a
discontinued operation in accordance with Accounting
Principles Board Opinion No. 30. Certain prior year
amounts have been reclassified to conform to the current
year presentation.
Note 2 Discontinued Operations
Electro-Optical Systems
In January 1994, pursuant to a plan approved by the
Board of Directors, the Company announced 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 approximately $12.3
million, which was used to repay a portion of the
Company's 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 Corporation, which represented the
major part of its Electro-Optical Systems business, to
Litton Industries for approximately book value. The
proceeds were used to pay off $8 million outstanding
under the revolving credit facility on June 2, 1995 and
to redeem $40 million of its 12.25% senior subordinated
debentures on July 6, 1995. Remaining assets to be sold
include the Electro-Optical System's Varo Electronic
Systems division and non-operating real estate, which
continue to be marketed to interested parties.
Turbomachinery
In August 1994 the Board of Directors approved a plan to
sell the Company's Turbomachinery operations. On January
17, 1995, the Company completed the sale of its Delaval
Turbine and TurboCare divisions and its 50% interest in
Delaval-Stork, to Mannesmann Demag. The final adjusted
purchase price was $119 million of which, $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. It is management's expectation that
there will be no further adjustment to the purchase
price. A portion of the proceeds were used by the
Company to pay off its domestic senior debt in January
1995 and in March 1995 the Company redeemed $40 million
of its 12.25% senior subordinated debentures with the
remainder of the proceeds.
Roltra-Morse
In February 1996 the Company announced a plan to sell
its Roltra-Morse operations. The Company has engaged an
investment banking firm to assist in the sale which is
expected to be completed in 1996 with proceeds in excess
of net book value of the operations.
In accordance with APB Opinion No. 30, the disposals of
these business segments have been accounted for as
discontinued operations and, accordingly, their
operating results have been segregated and reported as
Discontinued Operations in the accompanying Consolidated
Statements of Income. Prior year financial statements
have been reclassified to conform to the current year
presentation.
Discontinued operations include management's best
estimates of amounts expected to be realized at the time
of disposal. The amounts the Company will ultimately
realize could differ materially in the near term from
the amounts used to determine the gain or loss on
disposal of the discontinued operations.
Net assets and liabilities of the Discontinued
Operations consist of the following:
December 31 (Dollars in thousands) 1995 1994
Current Assets:
Receivables $ 25,956 $ 88,793
Inventories 21,484 70,194
Other current assets 6,351 4,986
53,791 163,973
Current Liabilities:
Notes Payable 9,849 3,072
Trade accounts payable 27,687 46,733
Other current liabilities 11,035 39,003
48,571 88,808
Net Current Assets $ 5,220 $ 75,165
Long-term Assets:
Property $ 22,112 $ 82,684
Intangible assets 12,645 12,589
Other long-term assets 11,666 9,308
46,423 104,581
Long-term Liabilities 17,233 15,268
Net Long-term Assets $ 29,190 $ 89,313
Net Assets $ 34,410 $164,478
Net assets related to the Electro-Optical Systems
business are $11.9 million and $85 million as of
December 31, 1995 and 1994, respectively; net assets
related to the Turbomachinery business are $1.0 million
and $60 million as of December 31, 1995 and 1994,
respectively; and net assets related to the Roltra-Morse
business are $21.5 million and $19.5 million as of
December 31, 1995 and 1994, respectively.
The Discontinued Operations have $19.4 million in
foreign short-term credit facilities with amounts
outstanding at December 31, 1995 of $9.8 million. Total
long-term debt of discontinued operations amounted to
$7.1 million and $9.6 million as of December 31, 1995
and 1994, respectively. Of these amounts, $1.6 million
and $3.4 million represent the current portion.
A condensed summary of operations for the Discontinued
Operations is as follows:
Year Ended December 31
(Dollars in thousands) 1995 1994 1993
Net Sales $159,339 $444,656 $396,731
Income (loss) from
operations before
income taxes and
minority interest 653 10,882 (44,431)
Income taxes 878 1,443 1,550
Minority interest (725) 393 547
Income (loss) from
operations $ 500 $ 9,046 $(46,528)
The income (loss) from operations of the Discontinued
Operations for 1995, 1994 and 1993 includes allocated
interest expense of $7.5 million, $19.4 million,
and $19.6 million, respectively. Allocated interest
expense includes interest on debt of the discontinued
operations to be assumed by the buyer, and an allocation
of interest expense to the Discontinued Operations based
on the ratio of net assets to be sold to the sum of the
Company's consolidated net assets, if positive, plus
consolidated debt.
Electro-Optical Business
The Electro-Optical loss from operations was $45.3
million for 1993. Losses from the Electro-Optical
Systems operations for 1995 and 1994 resulted in a net
charge of $1.0 million and $6.2 million, respectively,
to reserves established as of December 31, 1993.
The Company recorded charges of $155.3 million at
December 31, 1993, which included a $104.6 million
goodwill write-off to reduce the carrying amount of the
Electro-Optical discontinued operation to estimated
realizable value. During 1995 the Company recognized an
additional $13.3 million loss on disposal. Included in
the additional loss was $6.8 million related to the
resolution of contingencies associated with the sale of
the business and fourth quarter charges of $6.5 million
primarily to write-down remaining non-operating real
estate to net realizable value. As of December 31, 1995,
the Company has an accrual for anticipated operating
losses of $.6 million (including $.9 million of
allocated interest) through the date of sale, which is
expected to occur during the second half of 1996.
Turbomachinery Business
The Turbomachinery business income from operations was
$5.6 million and $1.0 million for 1994 and 1993,
respectively.
As a result of the sale of the Turbomachinery business
in 1995, the Company recognized an estimated gain on
disposal of $35.0 million, net of income taxes of $5.2
million. The gain is net of fourth quarter charges of
$4.6 million, related to the resolution of
contingencies associated with the sale to Mannesmann
Demag and to a write-down of remaining assets to net
realizable value.
Roltra-Morse
The Roltra-Morse business had income from operations of
$.5 million and $3.5 million for 1995 and 1994,
respectively, and a loss from operations of $2.1 million
in 1993.
Note 3 Restructuring Plan
Asset Sales
In October 1992, the Company announced a plan to
strengthen its balance sheet through the sale of certain
businesses and the application of the proceeds to reduce
debt. Pursuant to this plan, the Company divested its
Heim Bearings, Aerospace, Barksdale Controls and CEC
Instruments businesses. In 1993, the Company sold its
Heim Bearings, Aerospace and Barksdale Controls
operations for proceeds of approximately $91 million,
and in 1994, sold its CEC Instruments and Turboflex Ltd.
operations, its Corporate headquarters building and
other previously identified assets for aggregate
proceeds of $13.2 million. These proceeds, net of
related expenses, were used to repay senior debt in the
amount of $81.9 million in 1993 and $13.2 million in
1994, in accordance with the terms of the 1993
restructured credit facilities.
Other non-operating real estate, representing less than
10% of the original value of assets announced to be sold
in October 1992, remain for sale. Results for the
fourth quarter of 1995 include an unusual charge of $5.0
million related to the write-down of this non-operating
real estate to its net realizable value (See Note 6).
The Company targets completion of the divestitures over
the next 9 to 12 months.
In the fourth quarter of 1993, management initiated a
strategy to reposition the Company on its less capital
intensive businesses that exhibited strong brand name
recognition, a broad customer base and market leadership
with less dependence on U.S. Government sales. In
connection with this strategy, the Company divested its
Turbomachinery and most of its Electro-Optical Systems
businesses in 1995. This repositioning will be completed
upon the sales of the Roltra-Morse business, and the
remaining portion of the Electro-Optical Systems
business, which are expected to be completed in 1996
(See Note 2).
Cost Reduction Programs
In the fourth quarter of 1995, the Company recorded a
charge to continuing operations of $4.0 million,
including severance and other expenses related to a
Company-wide program to reduce general and
administrative costs (See Note 6). This program
includes a reduction of 65 employees, or 2% of the total
number of Company employees, including a reduction of
the corporate headquarters staff by 20%. This program
is expected to reduce general and administrative
expenses by approximately $2.9 million in 1996, $4.0
million in 1997 and $5.0 million annually thereafter.
The required cash outlay related to this program was $.4
million in 1995, and the expected cash requirements
during 1996 are $3.2 million. The remainder represents
non-cash charges.
In 1993, the Company recorded a charge to continuing
operations of $5.2 million for a cost reduction program
which benefited 1994 and 1995 operating results (See
Note 6). The Company implemented cost-cutting measures
at its core operations to reduce its expense structure
and to eliminate duplicative functions. In addition, in
connection with this 1993 cost reduction program, the
Company consolidated certain operations in its European
Instruments and Morse Controls businesses and revised
operating processes and reduced employment levels at its
Pumps segment and other operations. The number of
Company employees in core operations declined by 205, or
7%, between mid-1993 and mid-1994. These organizational
restructuring measures have been providing net cash
benefits, compared to 1993 levels, which approximated
$4.5 million and $1.5 million for continuing operations,
in 1995 and 1994, respectively, and are expected to
approximate $5.5 million annually thereafter, based
largely on reduced employment costs.
Note 4 Inventories
Inventories are summarized as follows:
December 31 (Dollars in thousands) 1995 1994
Finished products $ 39,684 $ 33,350
Work in process 31,235 30,049
Materials and supplies 26,372 27,022
97,291 90,421
Less customers' progress payments 689 1,635
Less valuation allowance 11,572 11,884
$ 85,030 $ 76,902
Note 5 Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consist of the
following:
December 31 (Dollars in thousands) 1995 1994
Accrued contract completion costs $ 94 $ 556
Accrued product warranty costs 2,737 4,310
Accrued litigation and claims costs 1,674 4,493
Payroll and related items 14,328 12,547
Accrued interest payable 6,511 10,167
Accrued restructuring costs 1,688 960
Accrued divestiture costs 2,861 8,582
Other 8,176 10,005
$ 38,069 $ 51,620
Note 6 Unusual Items
During the fourth quarter of 1995, the Company
recognized unusual charges of $9.0 million ($.53 per
share) in income from continuing operations. These
charges include $4.0 million in severance benefits and
other expenses related to a Company-wide program to
reduce general and administrative costs (See Note 3) and
$5.0 million related to the write-down of certain non-
operating real estate to net realizable value (See Note
3).
During the twelve months ended December 31, 1993, the
Company recognized unusual charges of $14.3 million
($.85 per share) in loss from continuing operations.
During the fourth quarter of 1993, the Company
recognized charges of $20.3 million that include
provisions of $5.2 million related to the restructuring
and consolidation of certain of the Company's operating
units (See Note 3), $10.1 million expected net loss
overall related to the Company's asset divestiture
program (See Note 3) and $5.0 million in debt related
financing fees associated with obtaining consents from
holders of its 12.25% senior subordinated debentures to
amend the indenture governing these debentures and
obtain waivers from its senior lenders for non-
compliance with certain financial covenants as of
December 31, 1993, as a result of the fourth quarter net
loss. These charges are net of unusual income of $6.0
million recorded in the third quarter of 1993 as a
result of a change in estimate related to legal costs
associated with pending litigation.
Note 7 Income Taxes
The components of income tax expense (benefit) from
continuing operations are:
Year Ended December 31
(Dollars in thousands) 1995 1994 1993
Current:
Federal $ --- $ --- $ ---
Foreign 1,906 1,330 ---
State 303 460 ---
2,209 1,790 ---
Deferred:
Federal (17,000) --- 13,000
Foreign and State --- --- 450
(17,000) --- 13,450
$(14,791) $ 1,790 $ 13,450
Income tax expense from discontinued operations, in
thousands, is as follows: 1995 - $878; 1994 - $1,443;
and 1993 - $1,550.
Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes.
Significant components of the Company's deferred tax
assets and liabilities as of December 31, 1995 and 1994
are as follows:
December 31
(Dollars in thousands) 1995 1994
Current Long-term Current Long-term
Deferred tax assets:
Postretirement benefit
obligation $ 765 $ 8,940 $ 765 $ 11,593
Expenses not currently
deductible 19,101 9,895 19,174 25,879
Net operating loss carryover --- 30,041 --- 24,673
Tax credit carryover --- 5,033 --- 8,653
Total deferred tax assets 19,866 53,909 19,939 70,798
Valuation allowance for
deferred tax assets (8,495) (23,180) (15,140) (53,770)
Net deferred tax assets 11,371 30,729 4,799 17,028
Deferred tax liabilities:
Tax over book depreciation --- 18,593 --- 18,838
Difference between book
and tax basis of income
recognition --- --- 471 1,230
Other --- 7,527 --- 4,324
Total deferred tax liabilities --- 26,120 471 24,392
Net deferred tax assets
(liabilities) $11,371 $ 4,609 $ 4,328 $ (7,364)
At December 31, 1995, unremitted earnings of foreign
subsidiaries were approximately $23.4 million. Since it
is the Company's intention to indefinitely reinvest
these earnings, no U.S. taxes have been provided.
Determination of the amount of unrecognized deferred tax
liability on these unremitted earnings is not
practicable. The amount of foreign withholding taxes
that would be payable upon remittance of those earnings
is approximately $.9 million.
The components of income (loss) from continuing
operations before income taxes and extraordinary item:
Year Ended December 31
(Dollars in thousands) 1995 1994 1993
United States $(5,584) $ (322) $(21,086)
Foreign 2,822 2,296 (3,393)
$(2,762) $ 1,974 $(24,479)
U.S. income tax expense (benefit) at the statutory tax
rate is reconciled below to the overall U.S. and foreign
income tax expense (benefit).
Year Ended December 31
(Dollars in thousands) 1995 1994 1993
Tax at U.S. federal income tax rate $ (967) $ 691 $ (8,567)
State taxes, net of federal income
tax effect 197 299 396
Impact of foreign tax rates and
credits 918 526 ---
Net U.S. tax on distributions of
current foreign earnings 586 935 ---
Goodwill amortization 643 656 694
Other/valuation reserve (16,168) (1,317) 20,927
Income tax expense (benefit) $ (14,791) $ (1,790) $ 13,450
Net income taxes paid during 1995 and 1994 were $6.3
million and $.2 million, respectively, and net income
tax refunds received during 1993 were $7 million.
The Company has net operating loss carryforwards of
approximately $85 million expiring in years 2002 through
2010, foreign tax credit carryforwards of approximately
$8.3 million expiring through 2000, which, for financial
reporting purposes, are reflected as deductible foreign
taxes, and minimum tax credits of approximately $2.1
million which may be carried forward indefinitely.
These carryforwards are available to offset future
federal taxable income.
In 1995, the Company reduced the valuation allowance
applied against the net operating loss carryforward by
$17 million to a level where management believes it is
more likely than not that the tax benefit will be
realized. The total amount of future taxable income in
the U.S. necessary to realize the asset is approximately
$48 million. The Company would generate this income
from the execution of reasonable and prudent tax
planning strategies and based upon future income
projections, including the Company's announced plan to
sell Roltra-Morse SpA in 1996. The amount of the
deferred tax asset considered realizable, however, could
be reduced in the near term if estimates of future
taxable income during the carryforward period are
reduced.
Note 8 Notes Payable and Long-Term Debt
In August 1994, the Company obtained credit facilities
for borrowings up to $150 million from a group of
lenders (the "Existing 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 Existing 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.
The revolving credit facility is extendible to July 1999
under certain conditions. Proceeds from the Existing
Credit Agreement were used to repay the Company's
working capital loans under the former domestic senior
credit facilities, as well as other outstanding senior
debt obligations.
In January 1995, proceeds from the sales of the Baird
Analytical Instruments division and the Turbomachinery
business were used to repay amounts outstanding on the
term and bridge loans of $36.7 million and $45 million,
respectively (See Note 2). At the same time, and in
keeping with the terms of the Existing Credit Agreement,
the $65 million revolving credit facility was reduced to
$50.0 million. In December 1995, the Existing Credit
Agreement was amended to increase the revolving credit
facility to $60 million. At December 31, 1995 the
Company had borrowings of $18.2 million outstanding
under the revolving credit facility in addition to $7.8
million of outstanding standby letters of credit. The
Company's continuing operations currently have $16.1
million in foreign short-term credit facilities with
amounts outstanding at December 31, 1995 of $9.0
million. Due to the short-term nature of these debt
instruments it is the Company's opinion that the
carrying amounts approximate the fair value. The
weighted average interest rate on short-term notes
payable was 8.0% and 8.5% at December 31, 1995 and 1994,
respectively.
Long-term debt of continuing operations consists of the
following:
December 31 (Dollars in thousands) 1995 1994
Borrowings on revolving credit facility
expiring July 31, 1997 (1) $18,200 $ ---
Bridge loan due January 31, 1996 --- 45,000
Term loan, $3.3 million due quarterly
October 31, 1994 to July 31, 1997 --- 36,667
Senior subordinated debentures with
interest at 12.25%, due August 15, 1997 70,000 150,000
Senior subordinated debentures with
interest at 12%, due November 1,
1999 to 2001 150,000 150,000
Other 8,407 4,373
246,607 386,040
Less current portion 805 13,675
$245,802 $372,365
(1) These loans bear interest at a rate equal to LIBOR plus 2.25%.
___________________________________________________________________
The aggregate annual maturities of long-term debt from
continuing operations, in thousands, for the four years
subsequent to 1996 are: 1997 - $90,460; 1998 - $935;
1999 - $37,672; and 2000 - $37,662.
The 12.25% senior subordinated debentures are redeemable
in whole or in part, at the option of the Company at any
time, at 100% of their principal amount, plus accrued
interest. Interest is payable semi-annually on February
15 and August 15. The fair value of these instruments at
December 31, 1995, based on market bid prices, was $70.4
million. In March 1995, $40 million of the 12.25% senior
subordinated debentures were redeemed from the proceeds
received from the sale of the Turbomachinery business in
January 1995 and on July 6, 1995 an additional $40
million were redeemed with proceeds from the sale of the
Company's Electro-Optical Systems businesses (See Note
2).
The 12% senior subordinated debentures are currently
redeemable in whole or in part, at the option of the
Company, at 102.5% of their principal amount, plus
accrued interest. The redemption price declines to 100%
on or after November 1, 1996. Interest is payable semi-
annually on May 1 and November 1. The fair value of
these instruments at December 31, 1995, based on market
bid prices, was $153.0 million.
The Existing Credit Agreement requires the Company to
meet certain objectives with respect to financial ratios
and it and the 12.25% and 12% senior subordinated
debentures contain provisions which place certain
limitations on dividend payments and outside borrowings.
Under the most restrictive of such provisions, the
Company must maintain certain minimum consolidated net
worth levels, interest coverage and fixed charge
coverage levels and the Company is prohibited from
declaring or paying cash dividends through at least July
31, 1997. The senior subordinated debentures contain
covenants that, among other things, restrict
indebtedness to specified levels. Under certain
circumstances, such covenants could result in the
Company's inability to fully utilize the revolving
credit facility under the Existing Credit Agreement and
the foreign short-term credit facilities. At December
31, 1995, the Company was in technical violation of one
of the covenants under the Existing Credit Agreement
which was subsequently amended. The Company received a
waiver of this technical violation.
In connection with the early repayment and redemption of
domestic senior debt and $80 million of the 12.25%
senior subordinated debentures, as discussed in the
preceding paragraphs, a $4.4 million ($.26 per share)
charge was recorded as an extraordinary item in 1995.
The charge consisted of the write-off of deferred debt
expense associated with portions of the domestic senior
debt repaid and the 12.25% senior subordinated
debentures redeemed.
Bank, advisory and legal fees associated with the 1994
refinancing of the Existing Credit Agreement amounted to
approximately $5.6 million in 1994. In addition, a $5.3
million ($.31 per share) charge related to the
extinguishment of senior debt under the former domestic
senior credit facilities was recorded as an
extraordinary charge in 1994. The $5.3 million charge is
comprised of a $3.7 million premium paid in 1994 on the
prepayment of its $30 million 12.75% senior promissory
note and the write-off of approximately $1.6 million of
previously deferred loan costs.
Bank, advisory and legal fees associated with the 1993
restructuring of the Company's domestic senior credit
facilities amounted to approximately $8.0 million
payable in 1993. In addition, 200,000 warrants for the
Company's common stock, valued at approximately $.4
million, were issued to one senior lender and, as part
of the $125 million repayment plan, the Company has
recognized a charge in 1993 of approximately $12 million
on the prepayment of its senior notes which was
partially financed with Make-Whole Notes issued to one
of its senior lenders and the write-off of approximately
$2 million of previously deferred loan costs.
Approximately $18.1 million ($1.07 per share) of the
above amounts relate to the extinguishment of senior
debt and were recorded as an extraordinary item in 1993.
Note 9 Shareholders' Equity
Equity Incentive Plan
Under the Company's Equity Incentive plan, up to
3,050,000 shares of the Company's $1.00 par value common
stock can be issued pursuant to the granting of stock
options, stock appreciation rights, restricted stock
awards and restricted unit awards to key employees.
Options can be granted at no less than 100 percent of
the fair market value of the stock on the date of grant
or on the prospective date fixed by the Board of
Directors. None of these options can be exercised for
at least a one-year period from the date of grant.
After this waiting period, 25 percent of each option, on
a cumulative basis, can be exercised in each of the
following four years. Additionally, each option shall
terminate no later than 10 years from the date of grant.
On August 17, 1993, the Board of Directors approved the
repricing of certain outstanding non-qualified stock
options granted on previous dates under the Plan. This
resulted in the replacement of 468,000 non-qualified
stock options at various exercise prices ranging from
$10.375 to $20.375, by 272,865 non-qualified stock
options at an exercise price of $7.375, the fair market
value at the date of the replacement grant, subject to
the market price of the Company's stock exceeding $10
per share for a period of 30 days. During 1994, the
aforementioned criteria was met. Vested dates are based
on the original grant dates of the replaced options.
On June 20, 1994, certain additional outstanding non-
qualified stock options, granted on previous dates under
the Plan, were repriced pursuant to the August 17, 1993
Board of Directors approval. This resulted in the
replacement of 15,000 non-qualified stock options at
various exercise prices ranging from $11.625 to $20.375,
by 9,970 non-qualified stock options at an exercise
price of $10.25, the fair market value at the date of
the replacement grant. Vested dates are based on the
original grant dates of the replaced options.
On June 23, 1995, the Company's Equity Incentive Plan
was amended to increase the total issuable shares by
850,000 to 3,050,000 and to prohibit repricing without
prior shareholder approval.
The Plan permits awards of restricted stock to key
employees subject to a restricted period and a purchase
price, if any, to be paid by the employee as determined
by the Committee of the Equity Incentive Plan. Grants
of 40,000 shares and 30,000 shares of restricted stock
were made in 1994 and 1993, respectively, all of which
were outstanding as of December 31, 1995. Vesting of
such awards is subject to a defined vesting period and
to the Company's stock achieving certain performance
levels during such period.
Stock option activity under the plan was as follows:
Year Ended December 31
(Shares in thousands) 1995 1994 1993
Options:
Granted 250 410 498
Exercised (73) (56) ---
Canceled (210) (159) (150)
Repricing
Canceled --- (15) (468)
Issued --- 10 273
Outstanding at end of year 1,464 1,497 1,307
Exercisable at end of year 691 654 652
Available for grant at end of year 865 55 341
Option price range per share:
Granted $ 6.00 $ 9.75- $ 7.375
$ 10.25
Exercised $ 7.00- $ 7.00- ---
$ 7.375 $ 7.375
During 1988, the Company adopted the Equity Incentive
Plan for Outside Directors. The plan provides for the
granting of non-qualified stock options of up to 360,000
shares of the Company's common stock to directors of the
Company who are not employees of the Company or any of
its affiliates. Pursuant to this plan, options can be
granted at no less than 100 percent of the fair market
value of the stock on a date five business days after
the option is granted and no option granted may be
exercised during the first year after its grant. After
this waiting period, 25 percent of each option, on a
cumulative basis, can be exercised in each of the
following four years. In February 1988, 320,000 stock
options were granted at $16.19 per share, all of which
were exercisable as of December 31, 1995. In December
1990, 40,000 stock options were granted at $10.375 per
share, all of which were exercisable as of December 31,
1995. In June 1995, the Plan was amended to reduce the
number of shares issuable to an aggregate of 360,000.
In June 1995, the Company adopted the 1995 Equity
Incentive Plan for Outside Directors. The Plan provides
for the granting of restricted stock awards and non-
qualified stock options of up to 240,000 shares of the
Company's common stock to outside directors of the
Company who are not employees of the Company or any of
its affiliates. Pursuant to this Plan, each outside
director will be granted, on an annual basis, options to
purchase 4,000 shares of the Company's common stock. The
exercise price of the options will be 100 percent of
the fair market value of the common stock at the date of
grant and no option granted may be exercised during the
first year after its grant subject to certain plan
provisions. After this waiting period, the options
become exercisable in four equal annual installments of
1,000 shares. Additionally, each option terminates no
later than 10 years from the date of grant. The plan
also provides for the granting of an annual restricted
stock award of 1,000 shares of the Company's common
stock. Each award is made in four quarterly installments
of 250 shares beginning July 1, 1995. The shares
comprising the restricted stock awards may not be sold
or otherwise transferred by the outside director until
termination from service. During 1995, 24,000 stock
options were granted at $8.00 per share, none of which
were excercisable as of December 31, 1995, and 3,000
shares of restricted stock awards were issued.
Preferred Stock Purchase Rights
On April 22, 1987, the Board of Directors declared a
distribution of one Preferred Stock Purchase Right for
each share of common stock outstanding. Each right will
entitle the holder to buy from the Company a unit
consisting of 1/100 of a share of Junior Participating
Preferred Stock, Series A, at an exercise price of $70
per unit. The rights become exercisable ten days after
public announcement that a person or group has acquired
20 percent or more of the Company's common stock or has
commenced a tender offer for 30 percent or more of
common stock. The rights may be redeemed prior to
becoming exercisable by action of the Board of Directors
at a redemption price of $0.025 per right. If more than
35 percent of the Company's common stock becomes held by
a beneficial owner, other than pursuant to an offer
deemed in the best interest of the shareholders by the
Company's independent directors, each right may be
exercised for common stock, or other property, of the
Company having a value of twice the exercise price of
each right. If the Company is acquired by any person
after the rights become exercisable, each right will
entitle its holder to receive common stock of the
acquiring company having a market value of twice the
exercise price of each right. The rights expire on May
4, 1997.
Employee Stock Savings Plan
Up to 600,000 shares of the Company's common stock are
reserved for issuance under the Company's Employee Stock
Savings Plan. (See Note 11)
Common Stock Warrants
In July 1993, the Company issued warrants to purchase
200,000 shares of its common stock at $9.02 per share
(subject to adjustment in certain events), to one of its
senior lenders in connection with the restructuring of
its senior credit facilities. The warrants are
exercisable on or before December 31, 1998.
Note 10 Operations by Industry Segment and Geographic
Area
The Company classifies its continuing operations into
four core business segments: Power Transmission, Pumps,
Instrumentation and Morse Controls. Detailed information
regarding products by segment is contained in the
section entitled "Business" included in Part I, Item 1
of this Form 10-K Report. A fifth business segment
entitled Other is included in continuing operations for
financial reporting purposes, and includes operations
previously sold as part of the Company's asset
divestiture program, such as units of the Company's
aerospace business and certain other non-strategic
businesses, which no longer fit into its core business
segments as redefined in 1993 and 1995. The 1994 and
1993 amounts have been restated to reflect Roltra-Morse
as a discontinued operation and the redefinition
of the Company's business segments. Information about
the business of the Company by business segment,
foreign operations and geographic area is presented
below:
Year Ended December 31
(Dollars in thousands) 1995 1994 1993
Net Sales
Power Transmission $ 95,075 $ 93,308 $ 85,906
Pumps 94,375 90,428 91,556
Instrumentation 76,113 72,226 72,434
Morse Controls 107,664 100,075 90,876
Other --- 4,748 75,754
Total net sales $373,227 $360,785 $416,526
Segment operating income
Power Transmission $ 11,348 $ 8,905 $ 2,338
Pumps 9,884 10,447 10,357
Instrumentation 6,746 9,791 7,951
Morse Controls 5,292 5,743 457
Other --- (216) 886
Total segment operating income 33,270 34,670 21,989
Equity in income (loss) of
unconsolidated companies 302 --- (231)
Unallocated corporate expenses (12,454) (5,120) (13,407)
Net interest expense (23,880) (27,576) (32,830)
Income (loss) from continuing
operations before income taxes
and extraordinary item $ (2,762) $ 1,974 $ (24,479)
A reconciliation of segment operating income to income from
operations follows:
Year Ended December 31
(Dollars in thousands) 1995 1994 1993
Segment operating income $ 33,270 $ 34,670 $ 21,989
Unallocated corporate expenses (12,454) (5,120) (13,407)
Other income (739) (219) (1,074)
Income from operations $ 20,077 $ 29,331 $ 7,508
Segment operating income for the year ended December 31,
1995, includes $2.4 million of unusual charges, of which
$.9 million and $1.5 million relate to the
Instrumentation and Morse Controls segments,
respectively. Unallocated corporate expenses include
unusual charges of $6.6 million for the year ended
December 31, 1995.
Segment operating income for the year ended December 31,
1993, includes $8.1 million of unusual charges, of which
$.2 million, $.5 million, $.9 million, $2.4 million and
$4.1 million relates to the Power Transmission, Pumps,
Instrumentation, Morse Controls, and Other segments,
respectively. Unallocated corporate expenses include
unusual charges of $6.2 million for the year ended
December 31, 1993.
The Pumps and Instrumentation segments had sales to the
United States Department of Defense, in the form of
prime and subcontracts, which accounted for 14% of
consolidated sales in 1993. No one customer accounted
for 10% or more of consolidated sales in 1995 and 1994.
Year Ended December
(Dollars in thousands) 1995 1994 1993
Identifiable assets
Power Transmission $ 86,343 $ 88,284 $ 89,301
Pumps 69,347 63,172 60,430
Instrumentation 42,538 44,862 47,017
Morse Controls 111,482 107,471 101,986
Other 13,321 18,054 40,413
Corporate 26,446 26,298 55,915
Discontinued Operations:
Electro-Optical 11,893 85,000 85,000
Turbomachinery 983 59,970 56,711
Roltra-Morse 21,534 19,508 14,765
Total identifiable assets $383,887 $512,619 $551,538
Depreciation and amortization
Power Transmission $ 4,618 $ 4,778 $ 4,053
Pumps 3,972 3,578 3,878
Instrumentation 1,840 1,464 1,518
Morse Controls 3,392 4,155 3,518
Other --- 655 3,313
Corporate 1,400 3,973 3,516
Total depreciation and amortization $ 15,222 $ 18,603 $ 19,796
Capital expenditures
Power Transmission $ 3,384 $ 1,245 $ 1,317
Pumps 7,367 2,164 1,694
Instrumentation 1,445 1,177 1,054
Morse Controls 2,131 1,080 886
Other --- 39 1,042
Corporate 273 320 350
Total capital expenditures $ 14,600 $ 6,025 $ 6,343
The continuing operations of the Company on a geographic
basis are as follows:
Year Ended December 31
(Dollars in thousands) 1995 1994 1993
Net sales
United States $244,341 $246,601 $307,918
Foreign (principally Europe) 128,886 114,184 108,608
Total net sales $373,227 $360,785 $416,526
Segment operating income
United States $ 29,642 $ 31,679 $ 26,046
Foreign 3,628 2,991 (4,057)
Total segment operating income $ 33,270 $ 34,670 $ 21,989
Identifiable assets
Continuing Operations:
United States $234,382 $238,916 $283,614
Foreign 115,095 109,225 111,448
Discontinued Operations:
United States 12,876 141,053 135,585
Foreign 21,534 23,425 20,891
Total identifiable assets $383,887 $512,619 $551,538
Export sales
Asia $ 4,060 2,763 4,362
Latin America 2,747 2,368 1,699
Canada 4,643 3,748 3,132
Mexico 472 861 701
Europe 2,704 2,857 2,750
Other 2,568 3,293 2,596
Total export sales $ 17,194 $ 15,890 $ 15,240
Note 11 Pension Plans
The Company and its subsidiaries have various pension
plans covering substantially all of their employees.
Benefits are based on either years of service or years
of service and average compensation during the years
immediately preceding retirement. It is the general
policy of the Company to fund its pension plans in
conformity with requirements of applicable laws and
regulations.
Pension expense was $4.2 million in 1995, $7.9 million
in 1994 and $8.4 million in 1993, and includes
amortization of prior service cost and transition
amounts for periods of 5 to 15 years. The 1995 expense
includes costs related to retained pension liabilities
of discontinued operations. In 1994 and 1993 these
amounts were charged to discontinued operations. In
1993 the Company's divestiture program resulted in a
decrease in U.S. pension plan participants. The total
curtailment and settlement gain, in 1993, of $1.2
million was applied to the reserve for divestitures (See
Note 3). The Company included $2.0 million of
curtailment and settlement losses in its gain on
disposal related to the discontinued operations in 1995.
Net pension expense (including $5.7 million and $4.5
million charged to discontinued operations in 1994 and
1993, respectively) is comprised of the following:
Year Ended December 31
(Dollars in thousands) 1995 1994 1993
Service cost $ 4,297 $ 7,237 $ 7,678
Interest cost on projected
benefit obligation 13,429 14,158 13,802
Actual return on plan assets (17,797) (449) (22,646)
Net amortization and deferral 4,274 (12,963) 9,567
Net pension expense $ 4,203 $ 7,983 $ 8,401
Assumptions used in the accounting for the Company-
sponsored defined benefit plans:
Year Ended December 31 1995 1994 1993
Weighted average discount rate 7.5% 8.5% 7.5%
Rate of increase in compensation levels 5.3% 5.3% 5.3%
Expected long-term rate of return on assets 9.0% 9.0% 9.0%
The following table sets forth the funded status and
amounts recognized in the consolidated balance sheet for
the defined benefit pension plans:
Year Ended December 31
(Dollars in thousands) 1995
Assets Accumulated
Exceed Benefits
Accumulated Exceed
Benefits Assets
Actuarial present value of
benefit obligations:
Vested benefit obligation $117,455 $ 46,445
Accumulated benefit obligation $124,808 $ 46,564
Projected benefit obligation $138,866 $ 47,454
Plan assets at fair value 148,275 35,226
Plan assets in excess of (less than)
projected benefit obligation 9,409 (12,228)
Unrecognized net (gain) or loss (9,566) 107
Prior service cost not yet recognized
in net periodic pension cost 2,812 956
Unrecognized net (asset) obligation
at transition 2,037 171
Adjustment required to recognize
minimum liability --- (3,132)
Pension asset (liability) recognized
in the balance sheet $ 4,692 $(14,126)
Year Ended December 31
(Dollars in thousands) 1994
Assets Accumulated
Exceed Benefits
Accumulated Exceed
Benefits Assets
Actuarial present value of
benefit obligations:
Vested benefit obligation $101,869 $ 60,492
Accumulated benefit obligation $105,020 $ 61,253
Projected benefit obligation $119,886 $ 62,661
Plan assets at fair value 127,850 47,542
Plan assets in excess of (less than)
projected benefit obligation 7,964 (15,119)
Unrecognized net (gain) or loss (5,897) (175)
Prior service cost not yet recognized
in net periodic pension cost 4,066 3,348
Unrecognized net (asset) obligation
at transition 3,407 821
Adjustment required to recognize
minimum liability --- (4,165)
Pension asset (liability) recognized
in the balance sheet $ 9,540 $ (15,290)
Plan assets at December 31, 1995, are invested in fixed
dollar guaranteed investment contracts, United States
Government obligations, fixed income investments,
guaranteed annuity contracts and equity securities whose
values are subject to fluctuations of the securities
market.
The Company maintains two defined contribution (Employee
Stock Savings) plans covering substantially all
domestic, non-union employees. Eligible employees may
generally contribute from 1% to 12% of their
compensation on a pre-tax basis. Company contributions
to the plans are based on a percentage of employee
contributions. In July 1995 the Company restored its
matching contribution, previously suspended in July
1992, at 25% of the first 6% of each participant's pre-
tax contribution. The Company's expense for 1995 was
$.3 million.
Note 12 Postretirement Benefits
In addition to providing pension benefits, the Company
provides certain health care and life insurance benefits
for retired employees. Substantially all of the
Company's non-union employees retiring from active
service and immediately receiving retirement benefits
from one of the Company's pension plans would be
eligible to receive such benefits. The Company's
unionized retiree benefits are determined by their
individually negotiated contracts. The Company's
contribution toward the full cost of the benefits is
based on the retiree's age and continuous unbroken
length of service with the Company. The Company's
policy is to pay the cost of medical benefits as claims
are incurred. Life insurance costs are paid as insured
premiums are due.
In March 1994, the Company amended its policy regarding
retiree medical and life insurance. This amendment,
which affects some current retirees and all future
retirees, phases out the Company subsidy for retiree
medical and life insurance over a three year period
ending January 1, 1997. The pre-tax amount amortized to
income from continuing operations was $4.6 million and
$4.4 million in 1995 and 1994, respectively. The Company
will amortize remaining associated reserves of
approximately $5 million to income in 1996. The
amendment has not resulted in a significant increase or
decrease in cash requirements during the phase-out
period.
The following tables set forth the plans' combined
status reconciled with the amounts included in the
consolidated balance sheet:
December 31 (Dollars in thousands) 1995
Life
Medical Insurance
Plans Plans Total
Accumulated postretirement
benefit obligation:
Retirees $11,780 $4,974 $16,754
Fully eligible active plan
participants 1,277 312 1,589
Other active plan participants 1,011 81 1,092
14,068 5,367 19,435
Plan assets --- --- ---
Unrecognized prior service cost 3,109 3,924 7,033
Unrecognized net gain (loss) 2,379 (2,290) 89
Postretirement benefit liability
recognized in the balance sheet $19,556 $7,001 $26,557
December 31 (Dollars in thousands) 1994
Life
Medical Insurance
Plans Plans Total
Accumulated postretirement
benefit obligation:
Retirees $16,709 $ 4,826 $21,535
Fully eligible active plan
participants 1,365 262 1,873
Other active plan participants 1,326 68 1,148
19,400 5,156 24,556
Plan assets --- --- ---
Unrecognized prior service cost 7,840 7,376 15,216
Unrecognized net loss (2,423) (2,043) (4,466)
Postretirement benefit liability
recognized in the balance sheet $24,817 $10,489 $35,306
The 1995 accrued postretirement benefits amount is
classified as follows: $2.2 million current liabilities
and $24.4 million long-term liabilities. For 1994,
these amounts are $2.2 million current liabilities,
$30.9 million long-term liabilities and $2.2 million in
net assets of discontinued operations - noncurrent.
As a result of the divestitures in 1994 and 1993, the
Company recognized a $0.3 million gain and a $2.2
million gain, respectively, related to the curtailment
of its postretirement benefit plans. These curtailment
gains were applied to the reserve for divestitures (See
Note 3).
As a result of the Company's decision to sell its
Electro-Optical Systems operations a curtailment gain of
$1.3 million was recognized in 1993. This curtailment
gain is a component of the loss on disposal of
discontinued operations (See Note 2).
Net periodic postretirement benefit cost (including $2.3
million credited in 1994 and $1.0 million charged in
1993 to discontinued operations) included the following
components:
Year Ended December 31
(Dollars in thousands) 1995
Life
Medical Insurance
Plans Plans Total
Service cost $ 59 $ 5 $ 64
Interest cost 1,057 415 1,472
Amortization of prior service cost (3,110) (2,319) (5,429)
Amortization of gain (loss) (166) 102 (64)
Net periodic postretirement
benefit cost $(2,160) $(1,797) $(3,957)
Year Ended December 31
(Dollars in thousands) 1994
Life
Medical Insurance
Plans Plans Total
Service cost $ 100 $ 7 $ 107
Interest cost 1,547 289 1,836
Amortization of prior service cost (5,955) (1,967) (7,922)
Amortization of loss 543 103 646
Net periodic postretirement
benefit cost $(3,765) $(1,568) $(5,333)
Year Ended December 31
(Dollars in thousands) 1993
Life
Medical Insurance
Plans Plans Total
Service cost $ 372 $ 63 $ 435
Interest cost 2,999 750 3,749
Amortization of prior service cost --- --- ---
Amortization of loss --- --- ---
Net periodic postretirement
benefit cost $ 3,371 $ 813 $ 4,184
Actual negotiated health care premiums were used in
calculating 1995, 1994 and 1993 health care costs. It
is expected that the annual increase in medical costs
will be 8.0% from 1995 to 1996, grading down in future
years by 1.0% per year until it reaches a future general
medical inflation level of 5%. Inflation has been
capped at 200% for active non-union employees. The
health care cost trend rate assumption has a significant
effect on the amounts reported. For example, a 1%
increase in the health care trend rate would increase
the accumulated postretirement benefit obligation at
December 31, 1995 by $1.1 million and the net periodic
cost by $.1 million for the year. Effective January 1,
1995, the Company changed its medical inflation rate to
reflect actual experience. Such change resulted in a
reduction of the 1995 net periodic cost of $.8 million.
The weighted average discount rate used in determining
the accumulated postretirement benefit obligation was
7.5% and 8.5% in 1995 and 1994, respectively.
Note 13 Leases
The Company leases certain manufacturing and office
facilities, equipment, and automobiles under long-term
leases. Future minimum rental payments required under
operating leases of continuing operations that have
initial or remaining noncancelable lease terms in excess
of one year, as of December 31, 1995, are:
(Dollars in thousands)
1996 $5,355
1997 4,362
1998 3,799
1999 2,649
2000 1,268
Thereafter 4,854
Total minimum lease payments $22,287
Total rental expense under operating leases charged
against continuing operations was $7.3 million in 1995,
$8.2 million in 1994 and $8.0 million in 1993.
Note 14 Contingencies
Legal Proceedings
LILCO Litigation. In August 1985, the Company was named
as defendant in a lawsuit filed in the U.S. District
Court, Southern District of New York, by Long Island
Lighting Company ("LILCO") following the severing of a
crankshaft in a diesel generator sold to LILCO by the
Company. LILCO's complaint contained 11 counts, including
counts for breach of warranty, negligence and fraud, and
sought $250 million in damages. In various decisions from
1986 through 1990, 10 of the original 11 counts and
various additional amended counts were dismissed with only
the original breach of warranty count remaining. Thereafter,
the trial court entered a judgment against the Company
in the amount of $18.3 million. In September 1993, the
Second Circuit Court of Appeals affirmed the judgment,
and in October 1993, the judgment was satisfied by
payment to LILCO of approximately $19.3 million (which
amount included approximately $1.0 million of post-
judgment interest) by International Insurance Company
("International") and Granite State Insurance Co.
("Granite State"), two of the Company's insurers.
In January 1993, the Company was served with a complaint
in a case brought in the U.S. District Court for the
Northern District of California by International,
alleging that, because, among other things, its policies
did not cover the matters in question in the LILCO case,
it was entitled to recover $10 million in defense costs
previously paid in connection with such case and $1.2
million of the judgment which was paid on behalf of the
Company. In June 1995, the Court entered a judgment in
favor of International awarding it $11.2 million, plus
interest from March 1995 (the "International Judgment").
The International Judgment, however, was not supported
by an order, and in July of 1995, the court vacated the
International Judgment as being premature because
certain outstanding issues of recoverability of the $10
million in defense costs had not been finally
determined. The Company is awaiting a final decision.
If the International Judgment is reinstated, the Company
intends to appeal. If the ultimate outcome of this
matter is unfavorable, the Company will record a charge
for the judgment amount plus accrued interest.
In June 1992, the Company filed an action, subsequently
transferred to the U.S. District Court, Southern
District of New York, that is currently pending against
Granite State in an attempt to collect amounts for
defense costs paid to counsel retained by the Company in
defense of the LILCO litigation. After having reimbursed
the Company for $1.7 million in defense costs, Granite
State refused to reimburse the Company for $8.5 million
in additional defense costs paid by the Company,
alleging, among other things, that defense costs above
reasonable levels were expended in defending the LILCO
litigation. The insurer subsequently paid $18.1 million
of the judgment rendered against the Company, thereby
exhausting its $20 million policy. The Company claims
that the insurer's refusal to pay defense costs was in
bad faith and the Company s entitled to its cost of
money and other damages. In a counterclaim, Granite
State is seeking reimbursement of all or part of the
$1.7 million in defense costs peviously paid by it,
and has indicated that it may seek additional damages
beyond the reimbursement of defense costs, including
recoupment of approximately $4.0 million of the amount
awarded by the jury in the LILCO litigation (which $4.0
million represents amounts previously paid by LILCO to
the Company for generator repairs and which Granite
State had repaid on behalf of the Company). In May 1996,
the Company and Granite State reached an agreement in
principle which will result in the dismissal of all
claims and counterclaims and the elimination of all
issues concerning the $20 million payment previously
made on behalf of the Company under the terms of the
Granite State policy. This agreement preserves the
Company's ability to seek reimbursement of the $8.5
million of defense costs from persons other than Granite
State.
Additional Litigation. The Company and one of its
subsidiaries are two of a large number of defendants in
a number of lawsuits brought in various jurisdictions
by approximately 19,000 claimants who allege injury
caused by exposure to asbestos. Although neither the
Company nor any of its subsidiaries has ever been a
producer or direct supplier of asbestos, it is alleged
that the industrial and marine products sold by the
Company and the subsidiary named in such complaints
contained components which contained asbestos. Suits
against the Company and its subsidiary have been
tendered to their insurers who are defending under their
stated reservation of rights. On May 10, 1996, the
Company learned that the U.S. District Court for the
Eastern District of Pennsylvania entered an order which
"administratively dismissed" without predjudice
approximately 18,000 maritime asbestos injury cases,
including approximately 13,000 cases involving claims
against the Company and a number of other defendents.
Cases that have been "administratively dismissed" may be
reinstated only upon a showing to the Court that (i)
there is satisfactory evidence of an asbestos-related
injury; and (ii) there is probative evidence that the
plaintiff was exposed to products or equipment supplied
by each individual defendent in the case. 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, were the focus of
an investigation by the Office of the Inspector
General of the U.S. Department of Defense and the
Department of Justice (Criminal Division). Ni-Tec
received subpoenas for certain records as a part of the
investigation in 1992, 1993 and 1994, each of which was
responded to. The investigation was apparently directed
at alleged failures in 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. On July 15, 1996, the Company reached an
agreement with the U.S. government to settle all claims
related to this investigation and a related qui tam civil
action brought in the U.S. District Court for the
Northern District of Texas by a former Varo employee who
has consented to the settlement. The U.S. government
recently notified the Company that it intended to
intervene in this civil action, which had been under seal.
The settlement involves the payment by Varo of
approximately $2.0 million in consideration for, among
other things, dismissal of all civil and administrative
claims under the False Claims Act, 31 USC 3929 et seq.,
the Contract Disputes Act, 41 USC 601 et seq., and claims
of common law fraud and breach of contract. This
settlement amount was previously reserved in full by the
Company. As a result of the settlement, Varo will
receive approximately $400,000 in contract payments which
were being held by a prime contractor pending resolution
of Varo's dispute with the government.
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 U.S. Environmental Protection
Agency, and in one instance by the State of Washington,
with respect to the disposal of hazardous wastes at a
number of facilities that have been targeted for clean-
up pursuant to 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 not be material. For additional information
see section entitled Environmental Matters in Part I,
Item I of this Form 10-K Report.
The Company also has a lawsuit pending against it in the
U.S. District Court for the Western District of
Pennsylvania alleging component failures in equipment
sold by its former diesel engine division and claiming
damages of approximately $3.0 million and a lawsuit in
the Circuit Court of Cook County, Illinois, alleging
performance shortfalls in products delivered by the
Company's former Delaval Turbine Division and claiming
damages of approximately $8.0 million. Each lawsuit is
in the document discovery stage.
With respect to the litigation and claims described in
the preceding paragraphs, management of the Company
believes that it either expects to prevail, has adequate
insurance coverage or has established appropriate
reserves to cover potential liabilities. There can be
no assurance, however, on the ultimate outcome of any of
these matters.
The Company is also involved in various other pending
legal proceedings arising out of the ordinary course of
the Company's business. None of these legal proceedings
is expected to have a material adverse effect
on the financial condition of the Company. A range
of possible outcomes for all of these legal proceedings
currently cannot be reasonably determined.
Reported profits from the sale of certain products to
the U.S. Government and its agencies are subject to
adjustments. In the opinion of management, refunds, if
any, will not have a material effect upon the
consolidated financial statements.
The Company is self-insured for a portion of its product
liability and certain other liability exposures.
Depending on the nature of the liability claim, and with
certain exceptions, the Company's maximum self-insured
exposure ranges from $250,000 to $500,000 per claim with
certain maximum aggregate policy limits per claim year.
With respect to the exceptions, which relate principally
to diesel and turbine units sold before 1991, the
Company's maximum self-insured exposure is $5 million
per claim.
Note 15 Subsequent Events
Refinancing. On April 29, 1996, the Company completed
the refinancing of its senior domestic debt (the "Old
Credit Agreement"), its 12% senior subordinated
debentures and its remaining 12.25% senior subordinated
debentures.
Under terms of the refinancing, the Company has issued
$155 million of 11.75% senior subordinated notes ( the
"New Notes") due in 2006, priced at a discount to yield
12%. The Company also has entered into a new agreement
for $175 million in senior secured credit facilities
(the "New Credit Agreement") with a group of lenders.
Initial borrowings under the New Credit Agreement
were approximately $112 million. The cost of issuance
of the New Notes and the implementation of the New
Credit Agreement will be amortized over their respective
terms.
Proceeds of the New Notes and a portion of the New
Credit Agreement were used to redeem the remaining
$70 million of the Company's 12.25% senior subordinated
debentures due 1997 and all $150 million of its 12%
senior subordinated debentures due 2001, together with
accrued interest and a prepayment premium for the
latter issue. Proceeds were also used to refinance
all obligations under the Old Credit Agreement.
As a result of the refinancing, an extraordinary charge
of approximately $8.5 million was recorded in the
second quarter of 1996. This charge represents the
costs incurred in connection with the early
extinguishment of the debt as well as the write-off of
previously deferred loan costs.
Discontinued Operations. The Company is currently
negotiating the final wording of the contract for the
sale of Varo Electronic Systems division, a division of
its former Electro-Optical Systems business, with a
small defense contractor. The Company beleives that
there do not appear to be any major outstanding issues
unresolved at this point. Both parties are in agreement
as to the contract price based on a range of net asset
value on the date of closing (which includes the buyer's
assumption of certain recorded liabilities). The steps
left to complete prior to the execution of a definitve
contract are: 1) finalization of the contract, and 2)
completion of all financial schedules and exhibits to
the contract.
The Company estimates that an agreement and signing of a
definitive contract could be reached within two to four
weeks. Closing of the sale would be contingent on the
buyer's ability to obtain financing and to finalize due
diligence efforts. The Company estimates that if an
agreement is reached within this time frame that the
sale could close before the end of the fourth quarter
of 1996.
REPORT OF INDEPENDENT AUDITORS
Board of Directors,
Imo Industries Inc.
We have audited the accompanying consolidated balance sheets
of Imo Industries Inc. and subsidiaries as of December 31,
1995 and 1994, and the related consolidated statements of
income, cash flows and shareholders' equity for each of the
three years in the period ended December 31,1995. Our audits
also included the financial statement schedule listed in the
Index at Item 14(a). These financial statements and schedule
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally
accepted auditing standards. Those standards require that
we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatements. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing
the accounting principles used and significant estimates
made by management, as well as evaluating the overall
financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Imo Industries Inc. and subsidiaries
at December 31, 1995 and 1994, and the consolidated results
of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial
statements as a whole, presents fairly in all material
respects the information set forth therein.
ERNST & YOUNG LLP
Princeton, New Jersey
February 15, 1996,
except for Note 15,
as to which the date is
August 1, 1996
Imo Industries Inc. and Subsidiaries
Quarterly Financial Information (Unaudited)
Quarterly financial information for 1995 and 1994 is as
follows:
1995 (Dollars in thousands except 1st* 2nd* 3rd* 4th
per share amounts (a) Quarter Quarter Quarter Quarter
Net Sales $95,884 $98,576 $88,727 $90,040
Gross profit 30,894 30,943 27,389 25,666
Income (loss) before
extraordinary item:
Continuing Operations 2,586 2,962 2,515 3,966
Discontinued Operations 40,577 448 (6,938) (11,962)
Extraordinary Item (4,140) --- (304) ---
Net income (loss) 39,023 3,410 (4,727) (7,996)
Earnings (loss) per share:
Before extraordinary item:
Continuing Operations .15 .18 .15 .23
Discontinued Operations 2.38 .02 (.41) (.70)
Extraordinary Item (.24) --- (.02) ---
Net income (loss) 2.29 .20 (.28) (.47)
1994 (Dollars in thousands except 1st* 2nd* 3rd* 4th*
per share amounts (a) Quarter Quarter Quarter Quarter
Net Sales $87,800 $91,478 $91,235 $90,272
Gross profit 27,759 28,296 27,278 28,617
Income (loss) before
extraordinary item:
Continuing Operations 341 (1,045) 1,208 (320)
Discontinued Operations 564 2,797 1,580 4,105
Extraordinary Item --- --- (5,299) ---
Net income (loss) 905 1,752 (2,511) 3,785
Earnings (loss) per share:
Before extraordinary item:
Continuing Operations .02 (.06) .07 (.02)
Discontinued Operations .03 .17 .09 .24
Extraordinary Item --- --- (.31) ---
Net income (loss) .05 .11 (.15) .22
(a) The notes to the consolidated financial statements located in
Part IV of this Form 10-K Report as indexed at Item 14(a)(1)
should be read in conjunction with this summary.
* Reclassified to conform to 1995 full year presentation.
<TABLE>
SCHEDULE II
IMO INDUSTRIES INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
THREE-YEAR PERIOD ENDED DECEMBER 31, 1995
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND OTHER - DEDUCTIONS - AT END
OF YEAR EXPENSES DESCRIBE DESCRIBE OF YEAR
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995:
Allowance for doubtful
accounts $ 2,192 $ 394 $ 74(2) $ 642(4) $ 2,030
12(9)
Inventory Valuation
Allowance $11,884 $ 2,454 $ 312(2) $ 2,918(7) $11,572
30(9) 190(3)
Valuation allowance for
deferred tax assets $68,910 $ --- $ --- $15,550(3) $31,675
17,000(10)
4,685(11)
Accrued product warranty
liability $ 4,310 $ 1,563 $ 9(9) $ 1,341(5) $ 2,737
45(2) 2,253(3)
404(3)
Accrued contract completion
costs $ 556 $ 91 $ --- $ 183(6) $ 94
370(3)
YEAR ENDED DECEMBER 31, 1994: *
Allowance for
doubtful accounts $ 2,371 $ 742 $ 123(2) $ 839(4) $ 2,192
205(3)
Inventory Valuation
Allowance $11,577 $ 5,452 $ --- $ 4,381(7) $11,884
764(3)
Valuation allowance for
deferred tax assets $60,215 $ --- $ 8,695(3) $ --- $68,910
Accrued product warranty
liability $ 3,777 $ 1,188 $ 17(2) $ 672(5) $ 4,310
Accrued contract completion
costs $ 886 $ 324 $ --- $ 179(3) $ 556
475(6)
YEAR ENDED DECEMBER 31, 1993: *
Allowance for
doubtful accounts $ 2,338 $ 1,374 $ --- $ 327(8) $ 2,371
914(4)
37(2)
63(3)
Inventory Valuation
Allowance $14,033 $ 3,435 $ --- $ 2,591(7) $11,577
1,870(3)
1,430(8)
Valuation allowance for
deferred tax assets $ 1,500 $15,000 $43,715(1) $ --- $60,215
Accrued product warranty
liability $ 5,272 $ 1,191 $ 30(2) $ 2,719(5) $ 3,777
63(3) 60(3)
Accrued contract completion
costs $ 701 $ 627 $ 60(3) $ 502(6) $ 886
* Reclassified to conform to the 1995 presentation (continuing operations).
(1) Net change in allowance primarily to offset tax benefit of current year tax loss.
(2) Foreign exchange adjustments.
(3) Reclassification and adjustments.
(4) Uncollectible accounts written off, net of recoveries.
(5) Product warranty claims honored during the year.
(6) Current year charges for contract completion.
(7) Charges against inventory valuation account during the year.
(8) Ending balances of businesses sold.
(9) Opening balance of companies acquired during the year.
(10) Reduction due to revaluation of realizable tax benefit.
(11) Utilization of net operating loss carryforwards by discontinued operations.
S-1
</TABLE>
EXHIBIT 23 -- CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statements (Forms S-8 No. 33-13362, No. 33-41260, and No. 33-
60533) pertaining to the Imo Industries Inc. Employees' Stock
Savings Plan, Registration Statement (Form S-8 No. 33-26118)
pertaining to the Imo Industries Inc. Equity Incentive Plan for
Key Employees and the Equity Incentive Plan for Outside Directors,
as amended on June 23, 1995, Registration Statement (Form S-8 No.
33-60535) pertaining to the Imo Industries Inc. 1995 Equity
Incentive Plan for Outside Directors of Imo Industries Inc. of our
report dated February 15, 1996, (except Note 15, as to which the
date is August 1, 1996), with respect to the consolidated
financial statements and schedule of Imo Industries Inc. included
in this amended Annual Report on Form 10-K/A for the year ended
December 31, 1995.
ERNST & YOUNG LLP
Princeton, New Jersey
August 15, 1996
