Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-9294
Imo Industries Inc.
(Exact name of registrant as specified in its charter)
Delaware 21-0733751
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1009 Lenox Drive, Building Four West
Lawrenceville, New Jersey 08648
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code 609-896-7600
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest
practicable date: Common Stock, $1.00 Par Value-- 17,124,109
shares as of October 31, 1996.
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Consolidated Statements of Income--Three and nine
months ended September 30, 1996 and 1995 2
Consolidated Balance Sheets--September 30, 1996 and
December 31, 1995 3
Consolidated Statements of Cash Flows--Nine
months ended September 30, 1996 and 1995 4
Notes to Consolidated Financial Statements--
September 30, 1996 5 - 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 12 - 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 23
Item 6. Exhibits and Reports on Form 8-K. 23
SIGNATURES 24
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
Imo Industries Inc. and Subsidiaries
Consolidated Statements of Income
(Dollars in thousands except per share amounts)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net Sales $ 113,095 $ 109,428 $ 354,498 $ 361,031
Cost of products sold 82,202 78,419 253,465 258,052
Gross Profit 30,893 31,009 101,033 102,979
Selling, general and
adminstrative expenses 22,919 19,085 69,713 64,995
Research and development
expenses 1,392 1,721 4,177 5,566
Income From Operations 6,582 10,203 27,143 32,418
Interest expense 8,179 7,842 24,493 23,290
Interest income (295) (402) (999) (1,694)
Other expense (income), net 82 (165) 344 (855)
Equity in (income) loss of
unconsolidated companies 107 (25) 57 (277)
Income (Loss) From Continuing
Operations Before Income Taxes,
Minority Interest and
Extraordinary Item (1,491) 2,953 3,248 11,954
Income tax expense 10,900 695 12,894 2,630
Minority Interest 26 (69) (25) 37
Income (Loss) From Continuing
Operations Before
Extraordinary Item (12,417) 2,327 (9,621) 9,287
Discontinued Operations:
Estimated Gain (Loss) on
Disposal (net of income
taxes of $5.2 million in 1995) (7,349) (6,750) (7,349) 32,863
Total Income (Loss)
from Discontinued Operations (7,349) (6,750) (7,349) 32,863
Extraordinary Item - Loss on
Extinguishment of Debt --- (304) (8,455) (4,444)
Net Income (Loss) $ (19,766) $ (4,727) $ (25,425) $ 37,706
Earnings per share:
Continuing operations
before extraordinary item $ (0.73) $ 0.14 $ (0.57) $ 0.55
Discontinued operations $ (0.43) $ (0.40) $ (0.43) $ 1.92
Extraordinary item $ --- $ (0.02) $ (0.49) $ (0.26)
Net income (loss) $ (1.16) $ (0.28) $ (1.49) $ 2.21
Weighted average number of
shares outstanding 17,105,047 17,067,916 17,093,234 17,038,127
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
Imo Industries Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
<CAPTION>
September 30, December 31,
1996 1995 *
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 5,022 $ 5,539
Trade accounts and notes
receivable, less
allowance of $2,000 in 1996
and $2,197 in 1995 81,592 76,962
Inventories-net 94,167 97,151
Deferred income taxes 9,307 11,371
Net assets of discontinued
operations-current 8,255 6,810
Prepaid expenses and other
current assets 7,556 7,182
Total Current Assets 205,899 205,015
Property, Plant and Equipment-
on the basis of cost 213,575 206,736
Less allowance for depreciation
and amortization (115,072) (104,938)
Net Property, Plant and Equipment 98,503 101,798
Intangible assets, principally
goodwill 86,255 81,309
Investments in and advances to
unconsolidated companies 9,911 5,481
Deferred income taxes -
noncurrent --- 4,609
Net assets of discontinued
operations - noncurrent 11,539 6,066
Other assets 30,427 30,644
Total Assets $ 442,534 $ 434,922
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current Liabilities
Notes payable $ 22,941 $ 18,868
Trade accounts payable 42,478 49,408
Accrued expenses and other
liabilities 42,497 43,222
Accrued costs related to
discontinued operations 9,099 3,055
Income taxes payable 5,236 7,109
Current portion of long-term debt 110,434 2,376
Total Current Liabilities 232,685 124,038
Long-Term Debt 168,207 249,761
Deferred Income Taxes 3,320 ---
Accrued Postretirement Benefits -
Long-Term 19,014 24,372
Accrued Pension Expense and Other
Liabilities 38,516 30,203
Total Liabilities 461,742 428,374
Minority Interest 1,235 1,206
SHAREHOLDERS' EQUITY (DEFICIT)
Preferred stock: $1.00 par value;
authorized and unissued 5,000,000
shares --- ---
Common stock: $1.00 par value;
authorized 25,000,000 shares;
issued 18,795,647 and 18,756,397
in 1996 and 1995, respectively 18,796 18,756
Additional paid-in capital 80,460 80,275
Retained earnings (deficit) (102,017) (76,592)
Cumulative foreign currency
translation adjustments 2,139 2,724
Minimum pension liability
adjustment (1,801) (1,801)
Treasury stock at cost -
1,672,788 shares in 1996
and 1995 (18,020) (18,020)
Total Shareholders' Equity
(Deficit) (20,443) 5,342
Total Liabilities and
Shareholders' Equity (Deficit) $ 442,534 $ 434,922
</TABLE>
See accompanying notes to consolidated financial statements.
* Reclassified to conform to 1996 presentation.
<TABLE>
Imo Industries Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
<CAPTION>
Nine Months
Ended September 30,
1996 1995
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (25,425) $ 37,706
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) continuing operations:
Discontinued operations 7,349 (32,863)
Depreciation 11,544 11,670
Amortization 3,150 2,738
Provision for deferred income
taxes 10,000 ---
Extraordinary item 8,455 4,444
Other 271 (395)
Other changes in operating
assets and liabilities:
(Increase) decrease in
accounts and notes receivable (3,925) 4,925
Decrease (increase) in
inventories 4,034 (7,972)
Decrease in accounts payable
and accrued expenses (9,244) (7,815)
Other operating assets and
liabilities (4,985) (14,003)
Net cash provided by (used by)
continuing operations 1,224 (1,565)
Net cash used by discontinued
operations (5,645) (13,709)
Net Cash Used in Operating Activities (4,421) (15,274)
INVESTING ACTIVITIES
Purchases of property, plant and
equipment (11,121) (15,126)
Proceeds from sale of businesses and
sales of property, plant and equipment 7,414 173,416
Acquisitions, net of cash acquired (7,972) ---
Net cash used by discontinued
operations (53) (3,955)
Other --- (122)
Net Cash (Used in) Provided by
Investing Activities (11,732) 154,213
FINANCING ACTIVITIES
Increase (decrease) in notes payable 4,073 (2,485)
Proceeds from long-term borrowings 342,547 11,757
Principal payments on long-term debt (316,387) (173,554)
Payment of debt financing costs (14,578) ---
Other 28 547
Net Cash Provided by (Used in)
Financing Activities 15,683 (163,735)
Effect of exchange rate changes on
cash (47) 167
Decrease in Cash and Cash Equivalents (517) (24,629)
Cash and cash equivalents at beginning
of period 5,539 26,942
Cash and Cash Equivalents at End of
Period $ 5,022 $ 2,313
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest expense $ 22,017 $ 28,713
Income taxes $ 1,720 $ 5,448
</TABLE>
See accompanying notes to consolidated financial statements.
Imo Industries Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited with
respect to September 30, 1996 and 1995 and the periods then
ended.)
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The accompanying unaudited
consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for
interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes
required by generally accepted accounting principles for
complete financial statements. In the opinion of management,
all adjustments (See Notes B and F) considered necessary for
a fair presentation have been included. Operating results
for the nine months ended September 30, 1996 are not
necessarily indicative of the results that may be expected
for the year ending December 31, 1996. For further
information, refer to the consolidated financial statements
and footnotes thereto included in the Company's annual report
on Form 10-K/A for the year ended December 31, 1995.
Restatements: The Consolidated Financial Statements, and the
notes thereto, have been restated to reflect the Company's
Roltra-Morse business segment as a continuing operation.
Certain prior year amounts have been reclassified to conform
to the current year presentation.
NOTE B--DISCONTINUED OPERATIONS
On November 11, 1996, the Company announced the withdrawal of
its Roltra-Morse business from its divestiture program because
threats to revoke certain license agreements made by an
unsuccessful bidder have made it impossible for the Company to
receive fair value for the business. Due to the withdrawal
of Roltra-Morse from potential sale, the Company has restated
its nine month and first and second quarter earnings of 1996
to reflect Roltra-Morse as a continuing operation. In addition,
certain prior year amounts have been reclassified. Accounting
for the business as a continuing operation has required the
Company to reserve a favorable $10 million tax benefit, which
was based on an anticipated gain on the sale of Roltra-Morse,
and to recognize $4.8 million of 1996 operational losses of
Roltra-Morse, which were previously deferred based on the
anticipated gain. The Company had been accounting for its
Roltra-Morse business as a discontinued operation since its
plan to sell the operation was announced on February 7, 1996.
A condensed summary of operations and net assets (in thousands
of dollars) for the Roltra-Morse business for each of the
periods presented is as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
(Unaudited) (Unaudited)
Net Sales $ 17,264 $ 20,701 $ 61,596 $ 77,844
Income (Loss) from
Operations before Income
Taxes and Minority Interest (1,194) 781 (1,391) 3,926
September 30, December 31,
1996 1995
(Unaudited)
Total Assets $ 74,539 $ 72,625
Total Liabilities 56,459 52,633
Net Assets $ 18,080 $ 19,992
The Company has accounted for its former Electro-Optical
Systems business and Turbomachinery business segments as
discontinued operations in accordance with Accounting
Principles Board Opinion No. 30. By the end of the second
quarter of 1995, the Company had completed the sales of its
Turbomachinery business and a substantial part of its Electro-
Optical Systems business. The income recorded in the first
nine months of 1995 includes the estimated net gain of $39.6
million on the sale of the Turbomachinery business, which was
sold in January of 1995, net of a $6.7 million charge related
to the final purchase price adjustment for the sale of the
Electro-Optical business, which was sold in June 1995. In the
fourth quarter of 1995, the Company recorded additional
provisions of $11.2 million related to the resolution of
contingencies associated with the Turbomachinery sale and the
Electro-Optical Systems sale, which reduced the net gain on
sale of discontinued operations recognized in 1995 to $21.6
million. Not included in the 1995 asset sales were certain
idle facilities which are being held for sale, as well as the
Electro-Optical System's Varo Electronic Systems division.
Based on its quarterly review of the assumptions used in
determining the estimated loss from discontinued operations,
the Company recorded a $7.4 million charge in the third
quarter of 1996 related to changes in estimates on legal and
other reserve requirements of its former Electro-Optical and
Turbomachinery businesses. Management believes that the
recorded amount of estimated liabilities related to the loss
on disposal of discontinued operations at September 30, 1996
is adequate. The adequacy of these liabilities is evaluated
each quarter based on current estimates, which may differ
from actual results.
The Company entered into a definitive agreement in September
1996 to sell the Varo Electronic Systems division, the
remaining portion of its former Electro-Optical Systems
business, to a small defense contractor. The sale, which is
contingent on the buyer obtaining necessary financing, is
anticipated to close before the end of the fourth quarter of
1996.
Net sales of the discontinued operations were $7.2 million
and $4.9 million for the three months ended September 30,
1996 and 1995, respectively, and $16.9 million and $53.2
million for the nine months ended September 30, 1996 and
1995, respectively. Operating results of discontinued
operations resulted in break-even results and a loss of $.1
million for the three months ended September 30, 1996 and
1995, respectively, and income of $.6 million and a loss of
$2.2 million for the nine months ended September 30, 1996 and
1995, respectively. These results from operations include
allocated interest expense of $.4 million and $.5 million for
the three months ended September 30, 1996 and 1995,
respectively, and $1.3 million and $4.5 million for the nine
months ended September 30, 1996 and 1995, respectively. The
1996 net income was netted against an increase in estimated
reserve requirements, while the 1995 net loss, including
allocated interest, was charged against the reserve for
anticipated losses previously established by the Company.
Allocated interest expense includes interest on debt of the
discontinued operations to be assumed by the buyer, and an
allocation of other consolidated 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 other consolidated debt.
NOTE C--INVENTORIES
Inventories (in thousands of dollars) are summarized as
follows:
September 30, December 31,
1996 1995
(Unaudited)
Finished products $ 37,579 $ 39,332
Work in process 33,530 33,604
Materials and supplies 37,892 36,605
109,001 109,541
Less customers' progress payments 3,029 689
Less valuation allowance 11,805 11,701
$ 94,167 $ 97,151
NOTE D--ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities (in thousands of
dollars) consist of the following:
September 30, December 31,
1996 1995
(Unaudited)
Accrued product warranty costs $ 1,929 $ 2,737
Accrued litigation and claim costs 1,992 1,674
Payroll and related items 16,797 18,628
Accrued interest payable 9,554 6,511
Accrued restructuring costs 1,182 1,688
Accrued divestiture costs 570 2,861
Other 10,473 9,123
$ 42,497 $ 43,222
NOTE E--EARNINGS PER SHARE
Earnings per share for 1996 and 1995 are based upon the
weighted average number of shares of common stock
outstanding. Common stock equivalents related to stock
options and warrants are excluded because their effect is
anti-dilutive or not material.
NOTE F--NOTES PAYABLE AND LONG-TERM DEBT
The Company's domestic senior credit agreement dated as of
April 29, 1996 (the "New Credit Agreement") and $155 million
senior subordinated notes (the "Notes") contain provisions
which require the Company, among other things, to meet
certain objectives with respect to financial ratios and place
certain other limitations on the Company. The Company is
currently prohibited from declaring or paying cash dividends.
As a result of the charges related to Roltra-Morse and other
discontinued operations taken as of September 30, 1996 (see
Note B), the Company was in technical default of a net worth
financial covenant under the New Credit Agreement. In
addition, the Company was in breach of an obligation
thereunder to provide the lenders with a mortgage on one
piece of real estate belonging to one of its discontinued
operations. The Company has obtained a waiver through
December 20, 1996 (the "Waiver Period") regarding the net
worth covenant default and a waiver of its obligation to
provide the mortgage within ninety days of the date of the
New Credit Agreement. Since the Waiver Period does not extend
beyond one year, $97.7 million of long-term debt has been
classified as current. The Company expects to renegotiate
the terms of the New Credit Agreement before the end of the
Waiver Period. For further details, see the Liquidity and
Capital Resources section of Management's Discussion and
Analysis of Financial Condition and Results of Operations in
Part I, Item 2 of this report.
NOTE G--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. In September 1993, the Second Circuit Court
of Appeals affirmed a previous trial court decision entering
a judgment against the Company in the amount of $18.3
million, 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").
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, among
other things, because International 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 reimbursing the Company for $1.7 million
in defense costs, Granite State refused to reimburse the
Company for an additional $8.5 million in 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 million
of the judgment rendered against the Company, thereby
exhausting its $20 million policy. The Company claimed that
the insurer's refusal to pay the $8.5 million in additional
defense costs was in bad faith and the Company is entitled to
its cost of money and other damages. In a counterclaim,
Granite State sought reimbursement of all or part of the $1.7
million in defense costs previously paid by it, and 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 paid on behalf of the Company). In May
1996, the Company and Granite State reached an agreement
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 prejudice approximately
18,000 maritime asbestos injury cases, including
approximately 13,000 cases involving claims against the
Company and a number of other defendants. 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 defendant 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 involving the manufacture of tubes
for night vision equipment 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
consented to the settlement. The U.S. government had recently
notified the Company that it intended to intervene in the
civil action, which had been under seal. The settlement
involves the payment by Varo of approximately $2.0 million
and the 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 all claims of common
law fraud and breach of contract. This settlement amount was
previously reserved in full by the Company. One-half of the
settlement amount was paid in July 1996, with the remainder
to be paid in July 1997. As a result of the settlement, Varo
collected 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.
There are lawsuits pending against the Company 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 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 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 estimated.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The following paragraphs provide Management's discussion and
analysis of the significant factors which have affected the
Company's consolidated results of operations and financial
condition during the three and nine months ended September
30, 1996.
Restructuring Plan
Background and Recent Developments
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 during 1993 and 1994.
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 during 1995. On
February 7, 1996, the Company had announced a plan to sell
its Roltra-Morse business and had been accounting for this
business as a discontinued operation since then.
On November 11, 1996, the Company announced the withdrawal of
its Roltra-Morse business from its divestiture program
because threats to revoke certain license agreements made by
an unsuccessful bidder have made it impossible for the Company
to receive fair value for the business. Due to the withdrawal
of Roltra-Morse from potential sale, the Company has restated
its nine-month and first and second quarter earnings of 1996
to reflect Roltra-Morse as a continuing operation. In addition,
certain prior year amounts have been reclassified. Accounting
for the business as a continuing operation has required the
Company to reserve a favorable $10 million tax benefit which
was based on an anticipated gain on the sale of Roltra-Morse,
and to recognize $4.8 million of previously deferred 1996
losses related to Roltra-Morse. Additionally, the Company
recognized $7.4 million related to changes in estimates on
legal and other unanticipated reserve requirements of other
previously discontinued operations.
Due to the charges described above, the Company had a net
loss in the third quarter of 1996 of $19.8 million, or $1.16
per share, compared with a loss of $4.7 million, or $.28 per
share, in the 1995 third quarter.
During the fourth quarter, the Company will be completing an
evaluation of the Roltra operations to determine what
structural or other changes may be necessary to position this
business for profitable future growth. The fourth quarter
results will be adversely affected by Roltra-Morse and the
actions necessary to restructure this business. Consequently,
the Company expects an overall loss in the fourth quarter.
Since withdrawing Roltra-Morse from sale, the Company is
evaluating other alternatives to meet its deleveraging
objectives, including the possible sale of other assets.
Remaining Asset Sales
The Company is proceeding with its plan to sell the remaining
portion of the Company's Electro-Optical Systems business. On
September 13, 1996, the Company entered into a definitive
agreement with a small defense contractor for the sale of its
Varo Electronic Systems division. The closing is contingent
upon the buyer obtaining the necessary financing. The
Company expects to complete the sale of this business in 1996
and plans to use the proceeds to reduce debt. Reference is
made to Note B in Item I of this report for additional
information regarding the sale of the Electro-Optical Systems
business.
During the first half of 1996, the Company completed the
sales of four of its non-operating real estate holdings for
net proceeds of $3.5 million. Less than 10% of the original
value of assets announced to be sold in October 1992 remains
for sale.
Results of Operations
The remaining Electro-Optical Systems business is accounted
for as a discontinued operation in the accompanying
consolidated financial statements. Certain prior year amounts
have been reclassified to conform to current year
presentation. Accordingly, the discussion that follows
concerns only the results of continuing operations. The
Company's continuing businesses are now grouped into five
core business segments for management and segment reporting
purposes: Power Transmission, Pumps, Instrumentation, Morse
Controls, and Roltra-Morse.
Three Months Ended September 30, 1996 Compared with 1995
Sales. Net sales from continuing operations for the three
months ended September 30, 1996 were $113.1 million, a 3.4%
increase, compared with $109.4 million in the 1995 period.
The Pumps, Instrumentation and Morse Controls segments
experienced increased sales levels in the 1996 third quarter
as compared with the prior year. These increases were
partially offset by a decrease in net sales of the Roltra-
Morse segment compared to the prior year third quarter. Net
sales for the Power Transmission segment remained flat
compared to the prior year period. See "Segment Operating
Results" below.
Gross Profit. The gross profit in the third quarter of 1996
was 27.3% compared with 28.3% in 1995. See "Segment
Operating Results" below.
Selling, General and Administrative Expenses. Selling,
general and administrative expenses increased as a percentage
of sales to 20.3% for the three months ended September 30,
1996 compared with 17.4% in the 1995 period. Although the
1996 period benefited from cost savings attributable to the
Company-wide cost reduction program adopted in the fourth
quarter of 1995, and net reductions of $.5 million to
previously recorded provisions, these benefits were offset by
increased selling expenses in the Pumps and Instrumentation
segments and higher general and administrative expenses as a
percentage of sales in the Roltra-Morse segment as sales
volumes decreased in that segment compared to the prior year.
Research and development expenditures were 1.2% and 1.6% of
net sales for the three months ended September 30, 1996 and
1995, respectively.
Interest Expense. Average borrowings in the third quarter of
1996 were approximately $299 million compared with $251
million in the comparable 1995 period. As a result, total
interest expense (before allocation to discontinued
operations) of $8.6 million for the three months ended
September 30, 1996 was $.3 million, or 4%, higher than the
same period in 1995. Interest expense for continuing
operations excludes a general interest allocation to the
discontinued operations of $.4 million and $.5 million for
the three months ended September 30, 1996 and 1995,
respectively.
Provision for Income Taxes. Income tax expense for
continuing operations was $10.9 million and $.7 million for
the three months ended September 30, 1996 and 1995,
respectively. Of these amounts, $.9 million and $.7 million,
respectively, represent current tax expense for foreign and
state income taxes, as the Company is utilizing existing U.S.
net operating loss carryforwards with its domestic earnings.
As a result of withdrawing Roltra-Morse from potential sale,
the results for the three months ended September 30, 1996
also include a provision of $10.0 million against deferred
tax benefits previously recognized based on an anticipated
gain on the sale. The Company establishes valuation
allowances against unrecognized prior year tax benefits 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.
Income (Loss) from Continuing Operations. The Company had a
loss from continuing operations of $12.4 million, or $.73 per
share, for the three months ended September 30, 1996,
compared with income of $2.3 million, or $.14 per share, for
the comparable 1995 period.
Income (Loss) from Discontinued Operations. For the three
months ended September 30, 1996, the income (loss) from
operations of the discontinued operations resulted in break-
even results and a loss of $.1 million for the three months
ended September 30, 1996 and 1995, respectively. Results
from operations for the discontinued operations include
allocations for interest of $.4 million and $.5 million for
the three months ended September 30, 1996 and 1995,
respectively. The 1995 net loss, including allocated
interest, was charged against the reserve for anticipated
losses previously established by the Company.
Based on its quarterly review of the assumptions used in
determining the estimated loss from discontinued operations,
the Company recorded a $7.4 million charge in the third
quarter of 1996 related to changes in estimates on legal and
other reserve requirements of its former Electro-Optical and
Turbomachinery businesses. Management believes that the
recorded amount of estimated liabilities related to the loss
on disposal of discontinued operations at September 30, 1996
is adequate. The adequacy of these liabilities is evaluated
each quarter based on current estimates, which may differ
from actual results.
Extraordinary Item. The three months ended September 30,
1995 include an extraordinary charge of $.3 million ($0.02
per share) representing a non-cash write-off of previously
deferred loan costs related to the early extinguishment of
$40 million of the Company's then outstanding 12.25% senior
subordinated debentures.
Net Income (Loss). The net loss in the third quarter of 1996
was $19.8 million, or $1.16 per share, compared with a net
loss of $4.7 million, or $.28 per share, in the 1995 third
quarter. Net income (loss) per share by component for each
period is summarized below:
Three Months Ended
September 30,
Earnings (loss) per share: 1996 1995
Continuing Operations
Before Extraordinary Item $ (.73) $ .14
Discontinued Operations (.43) (.40)
Extraordinary Item --- (.02)
Net income (loss) $(1.16) $ (.28)
Segment Operating Results
Operating results by business segment for the three months
ended September 30, 1996 and 1995 are summarized below.
Power Transmission. Boston Gear sales and earnings improved
in the third quarter compared with the second quarter of
1996, but slippage at Fincor Electronics reduced the combined
results for the segment. Third quarter sales of $22.1
million were about even with last year, but operating income
was down 17%. Fincor sales have been impacted by an industry
trend away from DC adjustable speed drives, where it is a
market leader, toward AC drives, where it currently has an
incomplete offering. This is expected to improve as new
products come on line. In August, for example, Fincor
introduced a new AC drive in the popular one-to-five
horsepower range that generated more than $500,000 in new
orders in 30 days, making September its best booking month
this year.
Pumps. Sales of pump products were up 16% for the third
quarter, including the effect of acquiring a French pump
company at the end of the first quarter. Operating income
was down 27% due to lower margins, higher selling expenses,
and increased warranty costs. Export markets are showing
vigorous growth for pumps used in power generation and crude
oil transfer and processing. The U.S. market for hydraulic
pumps used in low rise elevators is currently enjoying a
double-digit rate of growth. The Company dominates this
market segment, with more than 200,000 pumps currently in
service. The sale of lube oil pumps used in industrial
machinery is also up sharply.
Instrumentation. A 18% increase in sales at the U.S.
operation more than offset an essentially flat performance in
Europe, giving the Instrumentation segment a combined 12%
sales increase and a 14% income increase for the third
quarter, compared with the same period of 1995. Several new
marketing initiatives were launched in the third quarter that
are expected to further extend the Company's leadership
position in industrial level and flow sensors in 1997.
Morse Controls. Sales in Europe were up 11% in the third
quarter of 1996 compared with the third quarter of 1995,
reflecting the additional sales volume of RMH Controls, which
was acquired at the end of 1995. Operating income increased
in line with the sales increase. Worldwide, third quarter
sales were up 6% and income up 21%. Although unusually cold
spring weather in the U.S. dampened consumer interest in
boating, an aggressive promotional effort by Morse's marine
products group turned a lackluster pleasure boating season
into a modest improvement in sales and earnings for this
product segment.
Roltra-Morse. Sales of $17.3 million in the third quarter
were 16% below last year's third quarter. Volumes have been
affected by weak auto sales in Italy, where continuing
political and economic uncertainty and the government's
current austerity budget have depressed consumer spending.
The strengthening of the lira has had a detrimental impact on
exports. Roltra incurred a small loss of $149,000 in segment
operating income for the third quarter, compared to income of
$1.6 million for the same quarter of last year. A modest
improvement in sales volume is expected in Italy in 1997,
with Roltra well positioned to secure additional business
when new auto models move into production. Roltra is also
benefiting from its geographical diversification. Orders
from the new Brazilian joint venture are now at $1 million
per month, and sales are gaining considerable strength at the
Roltra-Morse subsidiary in Poland.
Nine Months Ended September 30, 1996 Compared with 1995
Sales. Net sales from continuing operations for the nine
months ended September 30, 1996 were $354.5 million, a 1.8%
decrease compared with $361.0 million in the 1995 period.
The Pumps segment experienced a 15.1% increase in net sales
compared to the prior year, due principally to increased
demand in most markets it serves. The Instrumentation and
Morse Controls segments experienced modest sales level
increases of 2.7% and 3.9%, respectively, as compared with
the prior year. These increases were offset by decreases in
Power Transmission and Roltra-Morse segment net sales of 7.7%
and 20.9%, respectively, in the first nine months of 1996
compared with the 1995 period. See "Segment Operating
Results" below.
Gross Profit. The gross profit in the first nine months of
1996 remained constant at 28.5% compared with 1995. See
"Segment Operating Results" below.
Selling, General and Administrative Expenses. Selling,
general and administrative expenses increased as a percent of
sales, to 19.7% for the nine months ended September 30, 1996
compared with 18.0% in the prior year. Although the 1996
period benefited from cost savings attributable to the
Company-wide cost reduction program adopted in the fourth
quarter of 1995, and net reductions of $1.3 million to
previously recorded provisions, these benefits were offset by
increased selling expenses in the Pumps and Instrumentation
segments and higher general and administrative expenses as a
percentage of sales in the Roltra-Morse segment as sales
volumes decreased in that segment compared to the prior year.
Research and development expenditures were 1.2% and 1.5% of
net sales for the nine months ended September 30, 1996 and
1995, respectively.
Interest Expense. Average borrowings during the first nine
months of 1996 were approximately $10.2 million lower than in
the comparable 1995 period. As a result, total interest
expense (before allocation to discontinued operations) of
$25.8 million for the nine months ended September 30, 1996
was $2.0 million, or 7.0%, less than same period in 1995.
Interest expense for continuing operations excludes a general
interest allocation to the discontinued operations of $1.3
million in the first nine months of 1996 and $4.5 million in
the 1995 period.
Provision for Income Taxes. Income tax expense for
continuing operations was $12.9 million and $2.6 million for
the nine months ended September 30, 1996 and 1995,
respectively. Of these amounts, $2.9 million and $2.6
million, respectively, represent current tax expense for
foreign and state income taxes, as the Company is utilizing
existing U.S. net operating loss carryforwards with its
domestic earnings. As a result of withdrawing Roltra-Morse
from potential sale, the results for the nine months ended
September 30, 1996 also include a provision of $10.0 million
against deferred tax benefits previously recognized based on
an anticipated gain on the sale. The Company establishes
valuation allowances against unrecognized prior year tax
benefits 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.
Income (Loss) from Continuing Operations. The Company had a
loss from continuing operations of $9.6 million, or $.57 per
share, for the nine months ended September 30, 1996, compared
with income of $9.3 million, or $.55 per share, for the
comparable 1995 period.
Income (Loss) from Discontinued Operations. Operating
results from discontinued operations was income of $.6
million and a loss of $2.2 million for the nine months ended
September 30, 1996 and 1995, respectively. Results from
operations for the discontinued operations include
allocations for interest of $1.3 million and $4.5 million
for the nine months ended September 30, 1996 and 1995,
respectively. The 1996 net income was netted against an
increase in estimated reserve requirements, while the 1995
net loss, including allocated interest, was charged against
the reserve for anticipated losses previously established by
the Company.
Based on its quarterly review of the assumptions used in
determining the estimated loss from discontinued operations,
the Company recorded a $7.4 million charge in the third
quarter of 1996 related to changes in estimates on legal and
other reserve requirements of its former Electro-Optical and
Turbomachinery businesses. Management believes that the
recorded amount of estimated liabilities related to the loss
on disposal of discontinued operations at September 30, 1996
is adequate. The adequacy of these liabilities is evaluated
each quarter based on current estimates, which may differ from
actual results. For the nine months ended September 30, 1995,
the discontinued operations had a gain of $32.9 million (net
of income tax expense of $5.2 million), or $1.92 per share.
The income recorded in the first nine months of 1995 includes
the estimated net gain of $39.6 million on the sale of the
Turbomachinery business, which was sold in January of 1995,
net of a $6.7 million charge related to the final purchase
price adjustment for the sale of the Electro-Optical
business, which was sold in June 1995. In the fourth quarter
of 1995, the Company recorded additional provisions of $11.2
million related to the resolution of contingencies associated
with the Turbomachinery sale and the Electro-Optical Systems
sale, which reduced the net gain on sale of discontinued
operations recognized in 1995 to $21.6 million.
Extraordinary Item. The nine months ended September 30, 1996
include an extraordinary charge of $8.5 million, or $.49 per
share, representing charges related to the early
extinguishment of the Company's former revolving credit
agreement (the "Old Credit Agreement") and its 12.25% and 12%
senior subordinated debentures, as well as the write-off of
previously deferred loan costs as a result of its debt
refinancing on April 29, 1996.
The nine months ended September 30, 1995 include an
extraordinary charge of $4.4 million after-tax, or $.26 per
share, representing charges related to the early
extinguishment of portions of its debt under the Company's
Old Credit Agreement and 12.25% senior subordinated
debentures.
Net Income (Loss). The net loss in the first nine months of
1996 was $25.4 million, or $1.49 per share, compared with net
income of $37.7 million, or $2.21 per share, in the
comparable 1995 period. Net income (loss) per share by
component for each year is summarized below:
Nine Months Ended
September 30,
Earnings (loss) per share: 1996 1995
Continuing Operations
Before Extraordinary Item $ (.57) $ .55
Discontinued Operations (.43) 1.92
Extraordinary Item (.49) (.26)
Net income $ (1.49) $ 2.21
Segment Operating Results
Operating results by business segment for the nine months
ended September 30, 1996 and 1995 are summarized below.
Power Transmission segment net sales and operating income
were $67.1 million and $6.8 million, respectively, in the
first nine months of 1996, compared with $72.6 million and
$9.2 million in the comparable 1995 period. The 7.7% decrease
in net sales was due to a sharp downturn in the U.S. gear
market in 1996, resulting in major customers' adjusting their
inventory levels, after a relatively strong 1995. The 26.2%
decrease in segment operating income resulted from the sales
decrease and the higher unabsorbed costs experienced at the
decreased volume.
Pumps segment net sales increased 15.1% to $80.0 million for
the first nine months of 1996, as compared with $69.5 million
for the 1995 period. Segment operating income for the 1996
nine- month period was $9.2 million, a 12.1% increase,
compared with $8.2 million for the comparable 1995 period.
The segment is experiencing continued growth in its U.S.
industrial markets and strong export demand, driven by
products in crude oil transfer, power generation and general
industrial markets, as well as increased demand in the U.S.
marine market. 1996 sales and operations were favorably
affected for the past three months by the recent acquisition
of the segment's former French distributor. The segment's
operating income is beginning to experience the benefits from
the North American consolidation of its Imo Pump and Warren
Pumps operations into a single business unit.
The Instrumentation segment's net sales increased 2.7% to
$59.0 million for the first nine months of 1996, as compared
with $57.5 million for the same period in 1995. Segment
operating income of $7.0 million for the nine months ended
September 30, 1996 increased 7.4% compared with $6.5 million
for the 1995 period. The segment's operating income
continues to benefit from the operational improvements made
at a factory located in England, and the increased demand in
the U.S., partially offset by the slowdown experienced in the
European market in general.
Morse Controls segment net sales were $86.8 million in the
first nine months of 1996, a 3.9% increase compared with
$83.5 million in the first nine months of 1995. Segment
operating income increased 3.0% to $7.4 million, compared
with $7.2 million for the same period of 1995. The segment
has been favorably affected in 1996 by the acquisition of a
Swedish manufacturer of specialized electronic controls, which
was completed in late December 1995, which was partially offset
by slowed marine sales in the U.S. due to the late arrival of
the spring pleasure boating season, and delays related to the
restructuring of the German operation.
Roltra-Morse. Sales of $61.6 million in the first nine
months of 1996 were 20.9% below the comparable prior year
amount of $77.8 million. Volumes have been affected by weak
auto sales in Italy, where continuing political and economic
uncertainty and the government's current austerity budget
have depressed consumer spending. The strengthening of the
lira has had a detrimental impact on exports. Year-to-date
operating income of $1.3 million is well behind last year's
total of $6 million. A modest improvement in sales volume is
expected in Italy in 1997, with Roltra well positioned to
secure additional business when new auto models move into
production. Roltra is also benefiting from its geographical
diversification. Orders from the new Brazilian joint venture
are now at $1 million per month, and sales are gaining
considerable strength at the Roltra-Morse subsidiary in
Poland.
During the fourth quarter, the Company will be completing an
evaluation of the Roltra operations to determine what
structural or other changes may be necessary to position this
business for profitable future growth. It is expected that
the fourth quarter will be adversely affected by the actions
necessary to restructure this business.
Liquidity and Capital Resources
Short-term and Long-term Debt
On April 29, 1996, the Company completed the refinancing of
its Old Credit Agreement, its 12% senior subordinated
debentures and its then remaining 12.25% senior subordinated
debentures. Under terms of the refinancing, the Company
issued $155 million of 11.75% Notes due in 2006, priced at a
discount to yield 12%. The Company also entered into the New
Credit Agreement, which provides for a $70 million revolving
credit facility (including a letter of credit subfacility)
through April 30, 2001, a $25 million term loan amortizing to
April 2001, a $35 million term loan amortizing to April 2001,
and a $45 million term loan amortizing to April 2003.
Proceeds of the Notes and 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, and to refinance all obligations under the Old Credit
Agreement. The cost of issuance of the 11.75% Notes and the
implementation of the New Credit Agreement will be amortized
over their respective terms.
As a result of the refinancing, an extraordinary charge of
approximately $8.5 million was recorded in the second quarter
ended June 30, 1996. This charge represents the costs
incurred in connection with the above described early
extinguishment of debt as well as the write-off of previously
deferred loan costs.
The Company's domestic liquidity requirements are served by
the $70 million revolving credit facility (including a letter
of credit subfacility) under the New Credit Agreement, while
its needs outside the U.S. continue to be covered by short
and intermediate term credit facilities from foreign banks.
As of September 30, 1996, there were $3.6 million of
revolving credit borrowings and $6.6 million of standby
letters of credit outstanding under the New Credit Agreement.
The Company also has, in the aggregate, foreign short-term
credit facilities of approximately $35 million. As of
September 30, 1996, $22.9 million was outstanding under those
foreign facilities.
At September 30, 1996, the Company also had outstanding under
the New Credit Agreement $23.8 million in a term loan
amortizing to April 2001, $33.1 million in a second term loan
amortizing to April 2001, and $44.9 million in a third term
loan amortizing to April 2003. In addition, the Company had
outstanding $155 million of the Notes.
The third quarter 1996 loss placed the Company in technical
default of a net worth financial covenant under the New
Credit Agreement. In addition, the Company was in breach of
an obligation thereunder to provide the lenders with a
mortgage on one piece of real estate belonging to one of its
discontinued operations. The Company has obtained a waiver
through December 20, 1996 regarding the net worth covenant
default and a waiver of its obligation to provide the
mortgage within ninety days of the date of the New Credit
Agreement.
The Company is currently renegotiating the terms of its New
Credit Agreement and expects to complete this before the end
of the Waiver Period. In the event that the Company were to
be unsuccessful and the $105.3 million of loans outstanding
under the New Credit Agreement were accelerated, the Company
would not have sufficient immediate funds to repay such debt.
Additionally, such acceleration would enable the trustee for
the Company's 11.75% Notes or 25% of their holders to
accelerate the repayment of all of the outstanding Notes. In
such event, the Company would not have sufficient immediate
funds to repay the $155 million outstanding under the 11.75%
Notes.
Management continues to actively pursue opportunities to
further reduce its debt. The Company plans to use the
proceeds from the sale of its Varo Electronic Systems
business to reduce debt, and is currently evaluating other
alternatives to meet its deleveraging objectives, including
the possible sale of other assets.
Cash Flow
The Company's operating activities used cash of $4.4 million
in the first nine months of 1996, compared with cash used of
$15.3 million in the comparable 1995 period. The use of cash
in operating activities in 1996 was due entirely to the use
of $5.6 million by discontinued operations. The 1995 use of
cash was due principally to cash requirements of $13.7
million related to discontinued operations. Net cash used in
investing activities was $11.7 million in the first nine
months of 1996, compared with cash provided of $154.2 million
for the nine months ended September 30, 1995. The decrease
in the current year investing activities is due principally
to the 1995 net proceeds generated from the sale of
businesses and assets in the first nine months of 1995 of
$173.4 million, compared to $7.4 million in the first nine
months of 1996. Cash and cash equivalents of continuing
operations decreased to $5.0 million at September 30, 1996
from $5.5 million at December 31, 1995.
Working capital at September 30, 1996 was a net liability of
$26.8 million, a decrease of $107.8 million from the end of
1995. This was due primarily to the reclassification of
$97.7 million of obligations under the Company's New Credit
Agreement from long-term to current as a result of the
Company being in technical default under a net worth
financial covenant as of September 30, 1996. The ratio of
current assets to current liabilities was 0.9 at September
30, 1996 compared to 1.7 at December 31, 1995. The Company's
total debt as a percent of its total capitalization increased
to 107.3% at September 30, 1996 due to the unfavorable
adjustments recorded in the third quarter of 1996 related to
accounting for Roltra-Morse as a continuing operation and
other changes in estimates related to sold discontinued
operations, compared with 98.0% at December 31, 1995.
Management of the Company expects to successfully renegotiate
the terms of its New Credit Agreement before the end of the
Waiver Period and 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.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. Except for historical matters, the matters discussed
in this Form 10-Q are forward-looking statements based on
current expectations and involve risks and uncertainties.
Forward-looking statements include, but are not limited to,
statements under the following headings: (i) "Discontinued
Operations" - the likelihood of closing the sale of the Varo
Electronic Systems Division; (ii) "Contingencies" - the
future impact of legal proceedings on the financial condition
of the Company; (iii) "Segment Operating Results" - the
future performance of various programs in each segment and
the impact of such programs on future sales; and, (iv)
"Liquidity and Capital Resources" - statements concerning the
Company's ability to obtain necessary waivers and amendments
to its New Credit Agreement. The Company wishes to caution
the reader that, in addition to the matters decribed above,
various factors such as delays in contracts from key
customers, demand and market acceptance risk for new
products, continued or increased competitive pricing and the
effects of underutilization of plants and facilities,
particularly in Europe, and the impact of worldwide economic
conditions on demand for the Company's products, could cause
results to differ materially from those in any forward-
looking statement.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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).
For additional information with respect to the Ni-Tec
investigation, reference is made to the Company's 1995 Form
10-K/A and to Note G in Part I of this report. 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 consented to the settlement. The U.S.
government had 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 of, 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 all claims of common law fraud
and breach of contract. One-half of the settlement amount
was paid in July 1996, with the remainder to be paid in July
1997. As a result of the settlement, Varo collected
approximately $400,000 in contract payments which were being
held by a prime contractor pending resolution of Varo's
dispute with the government.
For additional information regarding certain pending
lawsuits, reference is made to the Company's Form 10-K/A for
the year ended December 31, 1995, which is incorporated
herein by reference, and to Note G in Part I, Item 1 of this
report.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
The following exhibits are being filed as
part of this Report:
Exhibit No. Description
27 Financial Data Schedule as of September 30, 1996
(b) Reports on Form 8-K:
On July 18, 1996, the Company filed a report on Form 8-
K, reporting under Item 5, disclosing the announcement
of the Registrant's reported results of operations for
the second quarter ended June 30, 1996, and material
developments of previously disclosed legal proceedings.
On November 12, 1996, the Company filed a report on
Form 8-K, reporting under Item 5, disclosing the
announcement that it is withdrawing its Roltra-Morse
business from sale, and disclosing its restated third
quarter 1996 results.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Imo Industries Inc.
(Registrant)
Date: November 14, 1996 /s/ DONALD K. FARRAR
Donald K. Farrar
Chairman, Chief Executive Officer,
President and Director
(principal executive officer)
Date: November 14, 1996 /s/ WILLIAM M. BROWN
William M. Brown
Executive Vice President,
Chief Financial Officer and
Corporate Controller
(principal financial and
accounting officer)
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0
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