Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 or 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-- 17,086,609
shares as of April 30, 1996.
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited).
Consolidated Statements of Income--Three
months ended March 31, 1996 and 1995 2
Consolidated Balance Sheets--March 31, 1996 and
December 31, 1995 3
Consolidated Statements of Cash Flows--Three
months ended March 31, 1996 and 1995 4
Notes to Consolidated Financial Statements--
March 31, 1996 5 - 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 10 - 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. 16
Item 6. Exhibits and Reports on Form 8-K. 17
SIGNATURES 18
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
Imo Industries Inc. and Subsidiaries
Consolidated Statements of Income
(Dollars in thousands except per share amounts)
<CAPTION>
Three Months Ended
March 31,
1996 1995*
(Unaudited)
<S> <C> <C>
Net Sales $ 99,412 $ 95,884
Cost of products sold 67,530 64,990
Gross Profit 31,882 30,894
Selling, general and administrative
expenses 20,486 20,510
Research and development expenses 1,340 1,338
Income from Operations 10,056 9,046
Interest expense 6,970 6,571
Interest income (397) (805)
Other (income) expense, net 177 (162)
Equity in income of unconsolidated
companies (25) (25)
Income From Continuing Operations
Before Income Taxes and
Extraordinary Item 3,331 3,467
Income tax expense 627 881
Income From Continuing Operations
Before Extraordinary Item 2,704 2,586
Discontinued Operations:
Income from Operations (net of
income taxes of $.2 million in 1995) --- 964
Estimated Gain on Disposal (net of
income taxes of $5.2 million in
1995) --- 39,613
Total Income from
Discontinued Operations --- 40,577
Extraordinary Item - Loss on
Extinguishment of Debt --- (4,140)
Net Income $ 2,704 $ 39,023
Earnings per share:
Continuing operations before
extraordinary item $ 0.16 $ 0.15
Discontinued operations $ --- $ 2.38
Extraordinary item $ --- $ (0.24)
Net income $ 0.16 $ 2.29
Weighted average number of shares
outstanding 17,084,734 17,014,805
</TABLE>
See accompanying notes to consolidated financial statements.
* Reclassified to conform to 1996 presentation.
<TABLE>
Imo Industries Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
<CAPTION>
March 31, December 31,
1996 1995
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 674 $ 3,809
Trade accounts and notes
receivable, less allowance
of $1,990 in 1996 and
$2,030 in 1995 63,263 53,965
Inventories-net 84,169 85,030
Deferred income taxes 11,375 11,371
Net assets of discontinued
operations-current 5,765 5,220
Prepaid expenses and other
current assets 4,606 4,617
Total Current Assets 169,852 164,012
Property, Plant and Equipment-on
the basis of cost 164,756 164,349
Less allowance for depreciation
and amortization (85,252) (82,996)
Net Property, Plant and Equipment 79,504 81,353
Intangible Assets, Principally
Goodwill 69,006 68,664
Investments in and Advances to
Unconsolidated Companies 5,497 5,415
Deferred income taxes - Noncurrent 4,609 4,609
Net Assets of Discontinued
Operations - Noncurrent 28,457 29,190
Other Assets 30,880 30,644
Total Assets $ 387,805 $ 383,887
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current Liabilities
Notes payable $ 7,171 $ 9,019
Trade accounts payable 25,259 23,733
Accrued expenses and other
liabilities 37,857 38,069
Accrued costs related to
discontinued operations 2,018 3,055
Income taxes payable 8,172 8,354
Current portion of long-term debt 1,401 805
Total Current Liabilities 81,878 83,035
Long-Term Debt 249,203 245,802
Accrued Postretirement Benefits -
Long-Term 23,129 24,372
Accrued Pension Expense and Other
Liabilities 24,413 23,794
Total Liabilities 378,623 377,003
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 18,757,897 and
18,756,397 in 1996 and 1995,
respectively 18,758 18,756
Additional paid-in capital 80,284 80,275
Retained earnings (deficit) (73,888) (76,592)
Cumulative foreign currency
translation adjustments 3,849 4,266
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 9,182 6,884
Total Liabilities and
Shareholders' Equity $ 387,805 $ 383,887
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
Imo Industries Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
<CAPTION>
Three Months Ended
March 31,
1996 1995*
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,704 $ 39,023
Adjustments to reconcile net income to
net cash provided by
(used in) continuing operations:
Discontinued operations --- (40,577)
Depreciation 3,003 3,217
Amortization 830 819
Extraordinary item --- 4,140
Other 24 22
Other changes in operating
assets and liabilities:
Increase in accounts and
notes receivable (8,247) (4,864)
Decrease (increase) in
inventories 1,911 (2,454)
Increase in accounts
payable and accrued expenses 144 3,236
Other operating assets and
liabilities (708) (7,077)
Net cash used by continuing
operations (339) (4,515)
Net cash provided by (used by)
discontinued operations 674 (506)
Net Cash Provided by (Used in)
Operating Activities 335 (5,021)
INVESTING ACTIVITIES
Purchases of property, plant and
equipment (1,108) (6,515)
Proceeds from sale of businesses and
sales of property, plant and equipment --- 121,870
Acquisition, net of cash acquired (2,700) ---
Net cash used by discontinued operations (499) (1,776)
Other --- (73)
Net Cash (Used in) Provided by
Investing Activities (4,307) 113,506
FINANCING ACTIVITIES
Decrease in notes payable (4,724) (1,705)
Proceeds from long-term borrowings 29,848 2,815
Principal payments on long-term debt (24,232) (122,682)
Other 11 149
Net Cash Provided by (Used in)
Financing Activities 903 (121,423)
Effect of exchange rate changes on cash (66) 147
Decrease in Cash and Cash
Equivalents (3,135) (12,791)
Cash and cash equivalents at beginning
of period 3,809 26,942
Cash and Cash Equivalents at End of
Period $ 674 $ 14,151
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest expense $ 6,767 $ 12,994
Income taxes $ 182 $ 2,720
</TABLE>
See accompanying notes to consolidated financial statements.
* Reclassified to conform to 1996 presentation.
Imo Industries Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited with
respect to March 31, 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 (consisting only of normal recurring
accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended
March 31, 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 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 discontinued operation, in
accordance with Accounting Principles Board Opinion No. 30.
Certain prior year amounts have been restated to conform to
the current year presentation.
NOTE B--DISCONTINUED OPERATIONS
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. As reflected in the Company's first
quarter operating results of 1995, the sale of the
Turbomachinery business segment resulted in an estimated
gain of $39.6 million (net of applicable income tax expense
of $5.2 million). Not included in these sales were certain
idle facilities which are being held for sale, as well as the
Electro-Optical System's Varo Electronic Systems division,
which continues to be marketed to interested parties.
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.
Net sales of the discontinued operations were $26.8 million
and $60.1 million for the three months ended March 31, 1996
and 1995, respectively. Operating results of discontinued
operations for the first three months of 1996 resulted in a
net loss of $.8 million compared to net income of $1 million
for the three months ended March 31, 1995. The 1996 net loss
has been deferred as the Company anticipates realizing a gain
on the sale of Roltra-Morse. These results from operations
include allocated interest expense of $1.0 million and $3.1
million for the three months ended March 31, 1996 and 1995,
respectively.
NOTE C--INVENTORIES
Inventories (in thousands of dollars) are summarized as
follows:
March 31, December 31,
1996 1995
(Unaudited)
Finished products $ 36,012 $ 39,684
Work in process 31,239 31,235
Materials and supplies 30,121 26,372
97,372 97,291
Less customers' progress payments 1,698 689
Less valuation allowance 11,505 11,572
$ 84,169 $ 85,030
NOTE D--ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities (in thousands of
dollars) consist of the following:
March 31, December 31,
1996 1995
(Unaudited)
Accrued contract completion costs $ 36 $ 94
Accrued product warranty costs 2,113 2,737
Accrued litigation and claim costs 1,703 1,674
Payroll and related items 11,223 14,328
Accrued interest payable 9,083 6,511
Accrued restructuring costs 1,841 1,688
Accrued divestiture costs 2,581 2,861
Other 9,277 8,176
$ 37,857 $ 38,069
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 not
material.
NOTE F--SUBSEQUENT EVENT
On April 29, 1996, the Company completed the refinancing of
its senior domestic debt, 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 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 with a group of lenders. Initial
borrowings under the senior secured credit facilities were
approximately $112 million. The cost of issuance of the new
senior subordinated notes and the new credit facility will be
amortized over their respective terms.
Proceeds of the senior subordinated notes and a portion of
the credit facility 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 previous credit facility.
As a result of the refinancing, an extraordinary charge of
approximately $8.5 million will be 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.
NOTE G--CONTINGENCIES
Legal Proceedings
LILCO Litigation. In August 1985, the Company was named as
defendant in a lawsuit filed 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 by 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 one of its insurers, International
Insurance Company ("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
Insurance Co. ("Granite State"), one of its insurers, in an
attempt to collect amounts for defense costs paid to counsel
retained by the Company in defense of the LILCO litigation.
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 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 is 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 previously 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 represents amounts previously
paid by LILCO to the Company for generator repairs and which
Granite State had paid on behalf of the Company).
Additional Litigation. The Company and one of its
subsidiaries are two of a large number of defendants in a
number of lawsuits brought 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, are the focus of an ongoing 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 appears directed at quality
control, testing and documentation activities which began at
Ni-Tec while it was a division of Optic-Electronic Corp.
Optic-Electronic Corp. was acquired by the Company in
November 1990 and subsequently merged with Varo Inc. in 1991.
The Company continues to cooperate fully with the
investigation and is pursuing settlement discussions with the
U.S. government. Should settlement be reached consistent
with current discussions, it would not be expected to have a
material effect on the Company.
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.
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. The adverse outcome of any of these
legal proceedings is not expected to have a material adverse
effect on the financial condition of the Company. However,
if all or substantially all of these legal proceedings were
to be determined adversely to the Company, there could be a
material adverse effect on the financial condition of the
Company.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
The following paragraphs provide Management's discussion and
analysis of the significant factors which have affected the
Company's consolidated results of operations and financial
condition during the three months ended March 31, 1996.
Restructuring Plan
Background
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. 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. During the first quarter of
1996, the Company commenced negotiations to refinance its
then existing credit agreement and senior subordinated
debentures, as another step to further reduce its high
interest debt.
Recent Developments
On April 29, 1996, the Company completed the refinancing of
its senior domestic debt and all remaining subordinated
debentures. Under the terms of the refinancing, the Company
has issued $155 million of 11.75% senior subordinated notes
and has also entered into a new agreement for $175 million in
senior secured credit facilities with a group of lenders.
Proceeds of the senior subordinated notes and a portion of
the credit facility 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 previous credit
facility. The refinancing has extended the maturities of the
Company's existing indebtedness,allows some of the debt to be
prepaid without undue penalties, and lowers its overall
interest rate. See "Liquidity and Capital Resources" below.
Remaining Asset Sales
The Company is proceeding with its plan to sell its Roltra-
Morse business, as announced in February 1996, and expects
proceeds from the sale to exceed net book value. The
remaining portion of the Company's Electro-Optical Systems
business also continues to be marketed. The Company expects
to complete these sales of businesses in 1996 and plans to
use the proceeds to reduce debt.
In addition, 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.
Refer to the Company's 1995 annual report on Form 10-K for
the year ended December 31, 1995 for further details related
to previous asset sales and cost reduction programs.
Results of Operations
The Roltra-Morse and the remaining Electro-Optical Systems
businesses are accounted for as discontinued operations 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 four
core business segments for management and segment reporting
purposes: Power Transmission, Pumps, Instrumentation and
Morse Controls.
Sales. Net sales from continuing operations for the three
months ended March 31, 1996 were $99.4 million, a 3.7%
increase compared with $95.9 million in the 1995 period. The
Pumps segment experienced a significant increase in net sales
compared to the prior year, due principally to delays in
deliveries to the U.S. Navy in the 1995 period. The
Instrumentation and Morse Controls segments also experienced
increased sales levels as compared with the prior year.
These increases were partially offset by a decrease in Power
Transmission net sales in the first quarter of 1996 compared
with an exceptionally strong 1995 first quarter. See "Segment
Operating Results" below.
Gross Profit. The gross profit in the first quarter of 1996
remained relatively constant at 32.1% of sales compared with
32.2% in 1995. See "Segment Operating Results" below.
Selling, General and Administrative Expenses. Selling,
general and administrative expenses decreased as a percent of
sales, to 20.6% in the first quarter of 1996 compared with
21.4% in the prior year, as the 1996 period benefited from
cost savings attributable to the Company-wide cost reduction
program adopted in the fourth quarter of 1995. Research and
development expenditures were 1.3% and 1.4% of net sales for
the three months ended March 31, 1996 and 1995, respectively.
Interest Expense. Average borrowings in the 1996 first
quarter were approximately $70 million lower than in the
comparable 1995 period. As a result, total interest expense
(before allocation to discontinued operations) of $8.7
million for the three months ended March 31, 1996 was $1.5
million, or 15%, less than same period in 1995. Interest
expense for continuing operations excludes interest expense
incurred by the discontinued operations of $0.8 million and
$0.6 million for the three months ended March 31, 1996 and
1995, respectively, as well as an interest allocation to the
discontinued operations. Interest allocated to discontinued
operations was $1.0 million in the first quarter of 1996 and
$3.1 million in the 1995 period.
Three Months Ended
March 31,
Interest Expense: 1996 1995
Total (Before
Allocations to
Discontinued
Operations) $ 8.7 $10.2
Continuing Operations 7.0 6.6
Provision for Income Taxes. Income tax expense for
continuing operations was $.6 million and $.9 million for the
three months ended March 31, 1996 and 1995, respectively. The
amounts in both periods are comprised of current tax expense
representing foreign and state income taxes, as the Company
is utilizing existing U.S. net operating loss carryforwards
on its domestic earnings. The Company has previously
established 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 from Continuing Operations. The Company had income
from continuing operations of $2.7 million, or $.16 per
share, for the three months ended March 31, 1996, compared
with $2.6 million, or $.15 per share, for the comparable 1995
period.
Income from Discontinued Operations. For the three months
ended March 31, 1996, discontinued operations had a net loss
of $.8 million. This loss has been deferred as the Company
anticipates realizing a gain on the sale of Roltra-Morse. For
the three months ended March 31, 1995 the Company had income
from discontinued operations of $40.6 million (net of income
tax expense of $5.4 million), or $2.38 per share. The income
recorded in the first quarter of 1995 includes the estimated
net gain of $39.6 million on the sale of the Company's former
Turbomachinery business which was sold in January of 1995. In
the second half of 1995, the Company recorded provisions of
$17.9 million related to the resolution of contingencies
associated with the Turbomachinery sale and the June 1995
Electro-Optical Systems sale which reduced the net gain on
sale of discontinued operations to $21.6 million by year-end
1995. Results from operations for the discontinued
operations include allocations for interest of $1.0 million
and $3.1 million for the three months ended March 31, 1996
and 1995, respectively.
Extraordinary Item. The three months ended March 31, 1995
include an extraordinary charge of $4.1 million after-tax, or
$.24 per share, representing charges related to the early
extinguishment of portions of its debt under the Company's
then existing Credit Agreement and 12.25% senior subordinated
debentures.
Net Income. Net income in the first quarter of 1996 was $2.7
million, or $.16 per share, compared with $39.0 million, or
$2.29 per share, in the 1995 first quarter. Net income
(loss) per share by component for each year is summarized
below:
Three Months Ended
March 31,
Earnings (loss) per 1996 1995
share:
Continuing Operations
Before Extraordinary
Item $ .16 $ .15
Discontinued
Operations --- 2.38
Extraordinary Item --- (.24)
Net income $ .16 $2.29
Segment Operating Results
Operating results by business segment for the three months
ended March 31, 1996 and 1995 are summarized below.
Power Transmission segment net sales and operating income
were $23.7 million and $2.8 million, respectively, in the
first three months of 1996, compared with $26.1 million and
$3.6 million in the comparable 1995 period. The decrease in
the current period is due to the exceptionally strong demand
experienced in the industrial distribution marketing channel
in the first quarter of 1995. Both segment net sales and
operating income increased compared to the fourth quarter of
1995.
Pumps segment net sales increased 19.4% to $26.3 million in
the first quarter of 1996, as compared with $22.1 million for
the 1995 first quarter. The segment is experiencing continued
growth in its U.S. industrial markets and strong export
demand, driven by products in crude oil transfer, chemical
processing, and power generation. The global marine market
has also gained strength. Segment operating income for the
first three months of 1996 was $3.5 million, a 43% increase
compared with $2.4 million for the comparable 1995 period.
On March 31, 1996, the Company acquired 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. The acquisition will increase pump sales
in Europe by approximately $6 million annually.
The Instrumentation segment's net sales increased 4.7% to
$19.4 million in the first three months of 1996, as compared
with the same period in 1995. First quarter 1996 operating
income of $2.1 million increased 24.9% compared with 1995,
largely as a result of operational improvements made at a
factory located in England. The turnaround continues to
progress at this factory, which has now absorbed all the
product lines previously manufactured at a German plant that
was closed in 1995.
Morse Controls segment net sales were $30.0 million in the
first quarter of 1996, a 2.7% increase compared with $29.2
million in the first three months of 1995. Segment operating
income increased 7.2% to $2.7 million for the same periods.
The increases resulted from the acquisition of RMH Controls,
a Swedish manufacturer of specialized electronic controls,
which was completed in late December 1995, and were partially
offset by slowed marine sales in the U.S. due to the late
arrival of the spring pleasure boating season.
Liquidity and Capital Resources
Short-term and Long-term Debt
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. The New Credit Agreement 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. Initial borrowings under the New
Credit Agreement were $105 million in aggregate term loans
and $6.6 million of revolving credit borrowings. Outstanding
standby letters of credit were $6.4 million as of April 29,
1996.
Proceeds of the senior subordinated notes and a portion of
the new credit facility 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. The cost of issuance of the New
Notes and the New Credit Agreement will be amortized over the
terms of their respective agreements.
As a result of the refinancing, an extraordinary charge of
approximately $8.5 million will be 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.
Prior to the refinancing, the Company's domestic liquidity
requirements were served by a $60 million revolving credit
facility (including a letter of credit subfacility) under the
Old Credit Agreement, while its needs outside the United
States continue to be covered by short and intermediate term
credit facilities from foreign banks. As of March 31, 1996,
there were $19.3 million of revolving credit borrowings and
$6.4 million of standby letters of credit outstanding under
the Old Credit Agreement.
The Company also has, in the aggregate, foreign short-term
credit facilities of approximately $35 million. As of
March 31, 1996, $14.1 million was outstanding under those
foreign facilities, of which $7.0 million related to
indebtedness of discontinued operations.
In addition, at March 31, 1996, the Company had outstanding
$70.0 million in aggregate principal amount of the 12.25%
senior subordinated debentures, maturing in 1997, and $150
million in aggregate principal amount of the 12% senior
subordinated debentures, maturing in amounts of $37.5 million
in 1999, $37.5 million in 2000 and $75.0 million in 2001.
Management continues to actively pursue opportunities to
further reduce its high interest debt. The recently completed
debt refinancing has enabled the Company to extend the
maturities of its existing indebtedness, allows some of the
debt to be prepaid without undue penalties, and lowers its
overall interest rate. The Company plans to use the proceeds
from the sales of its Roltra-Morse and Varo Electronic
Systems businesses to reduce debt.
Cash Flow
The Company's operating activities provided cash of $.3
million in the first quarter of 1996, compared with cash used
of $5.0 million in the comparable 1995 period, due
principally to 1995 cash requirements related to previously
divested companies and discontinued operations. Net cash
used in investing activities was $4.3 million in the first
three months of 1996, compared with cash provided of $113.5
million in the three months ended March 31, 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 quarter of 1995 of
$121.9 million. Cash and cash equivalents decreased to $.7
million at March 31, 1996 from $3.8 million at December 31,
1995, principally due to cash used in investing activities,
which included the completion of the acquisition of a former
three-screw pump licensee in France.
Working capital at March 31, 1996 was $88.0 million, an
increase of $7.0 million from the end of 1995, due
principally to the increase in receivable levels since year
end. The ratio of current assets to current liabilities was
2.1 at March 31, 1996, compared with 2.0 at December 31,
1995. The Company's total debt as a percent of its total
capitalization was 96.6% at March 31, 1996, compared with
97.4% 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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company and one of its subsidiaries are two of a large
number of defendants in a number of lawsuits brought 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.
For additional information regarding certain pending
lawsuits, reference is made to the Company's Form 10-K for
the year ended December 31, 1995, which is incorporated
herein by reference, and to Note G in Part I of this report.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
The following exhibit is being filed as part
of this Report:
Exhibit No. Description
27 Financial Data Schedule as of March 31, 1996
(b) Reports on Form 8-K:
On February 22, 1996, the Company filed a report on
Form 8-K, reporting under Item 5, disclosing the
announcement of the approval by the Board of Directors
of a plan to sell its Italian-based Roltra-Morse
business unit and that the Company has engaged an
investment banking firm to assist in the sale. The
sale is expected to be completed in 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Imo Industries Inc.
(Registrant)
Date May 14, 1996 /s/ DONALD K. FARRAR
Donald K. Farrar
Chairman, Chief Executive Officer,
President and Director
(principal executive officer)
Date May 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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