UNITED STATES
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, 1997
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-- 17,126,609
shares as of April 30, 1997.
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements (Unaudited). NUMBER
Consolidated Statements of Income--Three
months ended March 31, 1997 and 1996 2
Consolidated Balance Sheets--March 31, 1997 and
December 31, 1996 3
Consolidated Statements of Cash Flows--Three
months ended March 31, 1997 and 1996 4
Notes to Consolidated Financial Statements--
March 31, 1997 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
<PAGE>
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,
1997 1996*
(Unaudited)
<S> <C> <C>
Net Sales $ 119,546 $ 121,415
Cost of products sold 84,087 85,857
Gross Profit 35,459 35,558
Selling, general and
administrative expenses 23,931 22,332
Research and development expenses 2,267 2,275
Unusual item 12,900 ---
Income (Loss) From Operations (3,639) 10,951
Interest expense 8,402 8,290
Interest income (285) (397)
Other expense, net 278 177
Equity in (income) loss of
unconsolidated companies 178 (25)
Income (Loss) From Continuing
Operations Before Income
Taxes and Minority Interest (12,212) 2,906
Income tax expense 655 948
Minority Interest (25) 18
Income (Loss) From Continuing
Operations (12,842) 1,940
Discontinued Operations:
Income from Operations --- ---
Total Income from
Discontinued Operations --- ---
Net Income (Loss) $(12,842) $ 1,940
Earnings (Loss) per share:
Continuing operations $ (0.75) $ 0.11
Discontinued operations $ --- $ ---
Net income (loss) $ (0.75) $ 0.11
Weighted average number of
shares outstanding 17,125,047 17,084,734
</TABLE>
See accompanying notes to consolidated financial statements.
* Reclassified to conform to 1997 presentation.
2
<PAGE>
<TABLE>
Imo Industries Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
<CAPTION>
March 31, December 31,
1997 1996
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 3,087 $ 4,863
Trade accounts and notes
receivable, less
allowance of $1,905 in 1997
and $1,877 in 1996 87,776 78,955
Inventories-net 93,826 94,433
Deferred income taxes 9,174 9,165
Net assets of discontinued
operations-current 6,072 7,214
Prepaid expenses and other
current assets 12,474 7,877
Total Current Assets 212,409 202,507
Property, Plant and Equipment-
on the basis of cost 204,380 212,356
Less allowance for depreciation
and amortization (108,777) (112,581)
Net Property, Plant and Equipment 95,603 99,775
Intangible Assets, Principally
Goodwill 67,330 69,402
Investments in and Advances to
Unconsolidated Companies 8,813 9,872
Net Assets of Discontinued
Operations - Noncurrent 6,395 7,615
Other Assets 17,407 22,443
Total Assets $407,957 $411,614
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current Liabilities
Notes payable $ 50,546 $ 43,338
Trade accounts payable 43,397 42,821
Accrued expenses and other
liabilities 56,215 42,632
Accrued costs related to
discontinued operations 7,265 8,586
Income taxes payable 5,495 6,011
Current portion of long-term debt 15,652 14,994
Total Current Liabilities 178,570 158,382
Long-Term Debt 246,324 251,860
Deferred Income Taxes 4,175 4,069
Accrued Postretirement Benefits -
Long-Term 17,271 17,418
Accrued Pension Expense and Other
Liabilities 32,109 33,815
Total Liabilities 478,449 465,544
Minority Interest 836 954
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 18,798,147 and 18,796,897
in 1997 and 1996, respectively 18,798 18,797
Additional paid-in capital 80,469 80,466
Retained earnings (deficit) (147,804) (134,962)
Cumulative foreign currency
translation adjustments (1,568) 2,057
Minimum pension liability
adjustment (2,503) (2,503)
Unearned compensation (700) (719)
Treasury stock at cost -
1,672,788 shares in 1997 and 1996 (18,020) (18,020)
Total Shareholders' Equity (Deficit) (71,328) (54,884)
Total Liabilities and
Shareholders' Equity (Deficit) $407,957 $411,614
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
<TABLE>
Imo Industries Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
<CAPTION>
Three Months Ended
March 31,
1997 1996*
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (12,842) $ 1,940
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
continuing operations:
Discontinued operations --- ---
Depreciation 4,191 3,913
Amortization 894 1,076
Unusual item 12,900 ---
Other 306 42
Other changes in operating
assets and liabilities:
Increase in accounts and
notes receivable (8,987) (2,593)
Decrease in inventories 607 2,695
Increase (decrease) in
accounts payable and
accrued expenses 1,109 (2,107)
Other operating assets and
liabilities (1,085) (1,445)
Net cash (used by) provided by
continuing operations (2,907) 3,521
Net cash used by discontinued
operations (263) (640)
Net Cash (Used in) Provided by
Operating Activities (3,170) 2,881
INVESTING ACTIVITIES
Purchases of property, plant and
equipment (4,195) (1,597)
Proceeds from sale of businesses and
sales of property, plant and equipment 264 ---
Acquisition, net of cash acquired --- (2,700)
Net cash used by discontinued operations --- (10)
Other 528 ---
Net Cash Used in Investing Activities (3,403) (4,307)
FINANCING ACTIVITIES
Increase (decrease) in notes payable 9,185 (3,624)
Proceeds from long-term borrowings 119 5,148
Principal payments on long-term debt (3,184) (632)
Payment of debt financing costs (384) ---
Other (480) 11
Net Cash Provided by Financing Activities 5,256 903
Effect of exchange rate changes on cash (459) (66)
Decrease in Cash and Cash Equivalents (1,776) (589)
Cash and cash equivalents at beginning
of period 4,863 5,539
Cash and Cash Equivalents at End of
Period $ 3,087 $ 4,950
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest expense $ 3,196 $ 6,767
Income taxes $ 1,171 $ 182
</TABLE>
See accompanying notes to consolidated financial statements.
* Reclassified to conform to 1997 presentation.
4
<PAGE>
Imo Industries Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited with
respect to March 31, 1997 and 1996 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, 1997 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1997.
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,
1996.
Impact of Recently Issued Accounting Standards: In February
1997, the FASB issued Statement No. 128, "Earnings Per
Share," which specifies the computation, presentation, and
disclosure requirements for earnings per share. The
Statement is effective for annual periods ending after
December 15, 1997, and early adoption is not permitted. The
Company does not believe the effect of adoption will be
material.
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 due
to its withdrawal from potential sale in November 1996.
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. On April 28, 1997, the Company
completed the sale of the Varo Electronic Systems division to
a small defense contractor for $12.0 million, which was used
to reduce its domestic senior debt. The sale of this business
completed the sale of the Electro-Optical Systems business.
5
<PAGE>
Net sales of the discontinued operations were $7.5 million
and $4.8 million for the three months ended March 31, 1997
and 1996, respectively. Operating results of discontinued
operations for the first three months of 1997 resulted in net
income of $.5 million compared to a net loss of $.1 million
for the three months ended March 31, 1996. These results
from operations include allocated interest expense of $.4
million and $.5 million for the three months ended March 31,
1997 and 1996, respectively. The 1997 net income and 1996
net loss from discontinued operations have been 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:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
(Unaudited)
<S> <C> <C>
Finished products $ 43,522 $ 46,905
Work in process 32,496 30,802
Materials and supplies 29,780 30,641
105,798 108,348
Less customers' progress payments 1,708 2,710
Less valuation allowance 10,264 11,205
$ 93,826 $ 94,433
</TABLE>
6
<PAGE>
NOTE D--ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities (in thousands of
dollars) consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
(Unaudited)
<S> <C> <C>
Accrued product warranty costs $ 2,647 $ 2,596
Accrued litigation and claim costs 15,137 2,132
Payroll and related items 15,651 17,610
Accrued interest payable 9,008 3,731
Accrued restructuring costs 2,491 3,422
Accrued divestiture costs 1,985 2,460
Other 9,296 10,681
$ 56,215 $ 42,632
</TABLE>
NOTE E--EARNINGS PER SHARE
Earnings per share for 1997 and 1996 are based upon the
weighted average number of shares of common stock
outstanding. Common stock equivalents related to stock
options and warrants are excluded because their effect is not
material.
NOTE F--CONTINGENCIES
Legal Proceedings
LILCO Insurance Litigation. 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 Insurance Company ("International") alleging
that International was entitled to recover $10 million in
defense costs, and $1.2 million of a judgment, each of which
was paid on behalf of the Company in connection with
litigation between the Company and Long Island Lighting
Company ("LILCO") which was concluded in October 1993.
International's principal contention is that the
International policies did not cover the matters in question
in the LILCO case. 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 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. On May 8, 1997, the Company
was informed that the Court had reinstated the International
Judgment. The Company is reviewing various options available
to it, including an appeal to
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the Ninth Circuit Court of Appeals. If the Company elects to
appeal, which is likely, the Company must either pay the
amount of the International Judgment under a reservation of
rights, post an appeal bond backed by a letter of credit in
an amount to be determined by the Court, or provide other
satisfactory financial arrangements to provide security in
the event of an unsuccessful appeal. Settlement discussions
could also be undertaken with International, and in the event
settlement is reached the appeal would be discontinued. In
order to provide maximum liquidity, it is probable that the
Company will preserve its appeal rights by paying the
International Judgment or arranging with International by May
27, 1997, for other satisfactory financial arrangements to
provide security in the event of an unsuccessful appeal. The
Company has therefore recorded a charge to income in the
first quarter of 1997 of $12.9 million as an unusual item,
which represents the amount of the judgment plus interest to
date.
Additional Litigation and Claims. 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 6,100 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. In addition, the Company
and the subsidiary are named in cases involving approximately
20,000 claimants which in 1996 were "administratively
dismissed" by the U.S. District Court for the Eastern
District of Pennsylvania. 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.
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, and the Cook County suit
is scheduled for trial in late 1997.
The major portion of the Company's former Electro-Optical
Systems business was sold to Litton Industries in a
transaction, which closed on June 2, 1995. The sales
contract between the Company and Litton Industries provided
certain representations and warranties as to the status of
the business at the time of the sale. By letters dated
November 19, 1996 and November 26, 1996, Litton has notified
the Company of claims under the representations and warranty
provisions for: (1) environmental losses of unspecified
amounts, and (2)
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<PAGE>
anticipated losses in excess of $9 million under a U.S.
Government contract as a result of the Company's alleged
failure to notify Litton of a reasonably anticipated loss
under a bid that was pending at the time of transfer of the
business. The contract was subsequently awarded to the
Company's Varo subsidiary and thereafter transferred to
Litton. The Company has preliminarily analyzed the
supporting documentation provided by Litton and has notified
Litton that it disputes the nature, validity, and amount of
the claims of losses and objects to the timeliness of
submission of notice to the Company with respect to the
claims. The Company believes the claims are without merit
and intends to vigorously defend against the claims.
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.
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, as to 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.
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.
NOTE G-SUBSEQUENT EVENT
On May 8, 1997, the Company was informed that the U.S.
District Court for the Northern District of California had
reinstated the International Judgment, awarding International
$11.2 million, plus interest from March 1995 (See Note F).
The Company is reviewing various options available to it,
including an appeal to the Ninth Circuit Court of Appeals. If
the Company elects to appeal, which is likely, the Company
must either pay the amount of the judgment of approximately
$12.9 million under a reservation of rights, post an appeal
bond backed by a letter of credit in an amount to be
determined by the Court, or provide
9
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other satisfactory financial arrangements to provide security
in the event of an unsuccessful appeal. Settlement discussions
could also be undertaken with International, and in the event
settlement is reached the appeal would be discontinued. In
order to provide maximum liquidity, it is probable that the
Company will preserve its appeal rights by paying the
International Judgment or arranging with International by May
27, 1997, for other satisfactory financial arrangements to
provide security in the event of an unsuccessful appeal. The
Company has therefore recorded a charge to income in the
first quarter of 1997 of $12.9 million as an unusual item,
which represents the amount of the judgment plus interest to
date.
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, 1997.
Recent Events
On May 8, 1997, the Company was informed that the U.S.
District Court for the Northern District of California had
reinstated the International Judgment, awarding International
$11.2 million, plus interest from March 1995. The Company is
reviewing various options available to it, including an appeal
to the Ninth Circuit Court of Appeals. In order to provide
maximum liquidity, it is probable that the Company will
preserve its appeal rights by paying the judgment or arranging
with International by May 27, 1997, for other satisfactory
financial arrangements to provide security in the event of an
unsuccessful appeal. Reference is made to Notes F and G in
Part I of this Form 10-Q Report for additional information.
On April 28, 1997, the Company completed the sale of its Varo
Electronic Systems business to a small defense contractor for
$12 million in cash. The sale of this business completed the
divestiture of the Company's Electro-Optical Systems
business. The proceeds from this sale were used to repay
senior debt.
On March 21, 1997, the Company announced that it had retained
Credit Suisse First Boston to help it explore strategic
alternatives, including the possibility of a merger or sale
of the Company. The impact of this action, if any, on the
remaining asset sales is uncertain at this time. See
"Restructuring Plans" below for discussion on assets being
held for sale.
Restructuring Plans
In October 1992, the Company determined that it needed to de-
lever 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
10
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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. The remaining
Electro-Optical Systems business was sold in April 1997.
On February 7, 1996, the Company announced a plan to sell its
Roltra-Morse business. The Company had been accounting for
this business as a discontinued operation from that time
until November 11, 1996, when the Company announced the
withdrawal of Roltra-Morse from its divestiture program. The
Company made the decision to withdraw Roltra-Morse from sale
because threats to revoke certain license agreements, made by
an unsuccessful bidder for the business, made it impossible
for the Company to receive fair value for this business.
Roltra-Morse has been reclassified as a continuing operation
and the prior year results have been restated to reflect this
change.
Management believes that the recorded amount of estimated
liabilities related to the loss on disposal of discontinued
operations at March 31, 1997 is adequate. The adequacy of
these liabilities is evaluated each quarter based on current
estimates, which may differ from actual results.
The Company continues to explore alternatives, including the
possibility of a merger or sale of the Company as announced
on March 21, 1997. See "Recent Events" above. In addition,
the Company continues to actively market certain non-
operating real estate originally identified for sale in
October 1992 and targets completion of these sales over the
next 12 months and plans to apply the net proceeds to reduce
debt.
Reference is made to the Company's 1996 Annual Report on Form
10-K for the year ended December 31, 1996 for further details
related to previous asset sales and cost reduction programs.
Results of Operations
The recently sold Electro-Optical Systems business was
accounted for as a discontinued operation in the accompanying
consolidated financial statements. Accordingly, the
discussion that follows concerns only the results of
continuing operations. The Company's continuing businesses
are grouped into five business segments for management and
segment reporting purposes: Power Transmission, Pumps,
Instrumentation, Morse Controls, and Roltra-Morse.
11
<PAGE>
Three Months Ended March 31, 1997 Compared with 1996
Sales. Net sales from continuing operations for the three
months ended March 31, 1997 were $119.5 million, a slight
decrease, compared with $121.4 million in the comparable 1996
period. The Pumps and Roltra-Morse segments experienced
increased sales levels in the first quarter of 1997 as
compared with the prior year, which were offset by decreases
in net sales of the Power Transmission, Instrumentation and
Morse Controls segments. See "Segment Operating Results"
below.
Gross Profit. The gross profit in the first quarter of 1997
increased slightly to 29.7% compared with 29.3% in 1996. See
"Segment Operating Results" below.
Selling, General and Administrative Expenses. Selling,
general and administrative expenses increased as a percentage
of sales to 20.0% for the three months ended March 31, 1997
compared with 18.4% in the 1996 period. The increased
expenses as a percent of sales in 1997 was due to the fact
that the 1996 period benefited from a favorable adjustment of
$1.1 million related to the Company phase-out of accumulated
postretirement benefit obligations, and the decreased sales
volume in 1997. First quarter 1997 selling, general and
administrative expenses were partially offset by net
reductions of $.6 million to previously recorded provisions.
Research and development expenditures were 1.9% of net sales
for both the three months ended March 31, 1997 and 1996.
Unusual Item. In the first quarter of 1997, the Company
recorded an unusual charge of $12.9 million, as a result of
the reinstatement of a judgment, plus interest to date,
against the Company in favor of International Insurance
Company. Reference is made to Notes F and G in Part I of
this Form 10-Q Report for additional information.
Interest Expense. Average borrowings in the first quarter of
1997 were approximately $312 million compared with $271
million in the comparable 1996 period. Although the 1997
level of average borrowings was $41 million higher than the
first quarter of 1996, the Company has incurred lower
interest rates since refinancing its domestic debt in April
of 1996. As a result, total interest expense (before
allocation to discontinued operations) remained relatively
constant at $8.8 million for the three months ended March 31,
1997 compared with $8.7 million for the same period in 1996.
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 March 31,
1997 and 1996, respectively.
Provision for Income Taxes. Income tax expense for
continuing operations was $.7 million and $.9 million for the
three months ended March 31, 1997 and 1996, respectively.
These amounts 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.
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
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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
net loss from continuing operations of $12.8 million, or $.75
per share, for the three months ended March 31, 1997, compared
with income of $1.9 million, or $.11 per share, for the
comparable 1996 period. See "Unusual Item" above and "Segment
Operating Results" below.
Net (Loss) Income. The net loss in the first quarter of 1997
was $12.8 million, or $.75 per share, compared with net income
of $1.9 million, or $.11 per share, in the comparable 1996
period. See "Unusual Item" above and "Segment Operating
Results" below.
Segment Operating Results
Operating results by business segment for the three months
ended March 31, 1997 and 1996 are summarized below.
Power Transmission. Net sales of $23.0 million in the first
quarter of 1997 were 2.8% below last year's comparable
period. The first quarter of 1996 was a particularly strong
period for the power transmission business. Industry sales
began to turn down in the second quarter of last year and
have not yet returned to historic levels. Segment operating
income of $2.0 million was $.8 million below the first
quarter of 1996, which included a $.5 million credit related
to the employee benefit phase-out. Additionally, lower sales
volume, a change in product mix and price pressures affected
results in 1997. The segment introduced an important new line
of low-cost micro inverters in the first quarter, used to
control the speed and torque of fractional horsepower AC
motors in hundreds of different applications. The segment
also introduced a new line of hollow shaft worm gear speed
reducers for the material handling industry, the power
transmission business' largest market.
Pumps. Segment operating income for the first quarter of
1997 of $3.6 million was 4.6% ahead of last year's first
quarter on a 4.0% increase in net sales to $27.4 million. The
primary factor contributing to this sales increase was the
results of Imo Pompes, SA, a French licensee acquired in
March 1996. The segment's North American operations posted a
particularly strong quarter, with operating income 12% over
the first quarter of 1996 and its best-ever first quarter
bookings, running nearly 8% ahead of 1996. The segment's
Warren Pumps unit, which is part of its North American
operations, returned to profitability in the first quarter of
1997. Although its sales were lower than last year's
comparable quarter, bookings improved dramatically over the
fourth quarter of 1996. The Pumps segment booked important
new orders during the quarter for projects involving power
generation, crude oil transfer, pulp and papermaking and
commercial shipbuilding. Highly competitive market conditions
combined with negative currency translation weakened European
operating results.
13
<PAGE>
Instrumentation. Segment operating income of $2.4 million
for the three months ended March 31, 1997 was 10.3% ahead of
the comparable prior year period. Total sales declined 5.9%
to $18.2 million, largely as a result of the European
operation's decision to withdraw from the marginally
profitable production of flight data recording systems, which
it had been producing under a private branding agreement. The
recent strengthening of the British pound also adversely
impacted both sales and income. The segment's North American
operation recorded a 30.8% increase in segment operating
income on a 12.3% sales increase for the first quarter of
1997.
Morse Controls. Segment net sales declined $1.5 million, or
5.1%, to $28.5 million in the first quarter of 1997 compared
with the prior year. Segment operating income was down $.6
million, or 21.7%, to $2.1 million when comparing the same
periods. The downturn in both sales and income was
attributable to unfavorable foreign exchange rate changes and
continuing poor economic conditions in Europe, one of Morse's
key markets. U.S. sales rose 3.9% in the quarter, largely due
to new orders for throttle control systems for personal
watercraft. Industrial sales for agricultural and
construction vehicles rose for the quarter, offsetting the
dip in leisure marine sales.
Roltra-Morse. Net sales for the Roltra-Morse segment rose
strongly in the first quarter of 1997, boosted by the impact
of Italian government incentives to auto buyers intended to
prod the stagnant Italian economy into recovery. This
stimulus has increased auto sales in Italy by more than 20%.
Roltra-Morse sales of $22.4 million were 1.8% ahead of the
comparable period of 1996 and more than 20% ahead of 1996
fourth quarter sales, despite a 4% unfavorable shift in
exchange rates. This improved volume was a primary factor in
enabling Roltra-Morse to post segment operating income of $.4
million for the quarter.
Liquidity and Capital Resources
Short-term and Long-term Debt
The Company's domestic liquidity requirements are served by
the $70 million revolving credit facility (including a letter
of credit subfacility) under its senior secured credit
agreement entered into in April 1996 (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 March 31, 1997, there were $28.2 million
of revolving credit borrowings and $10.8 million of standby
letters of credit outstanding under the New Credit Agreement.
In connection with the judgment entered against the Company
related to the International Insurance matter, the Company is
evaluating its available options. One option would be to
enter an appeal, in which case the Company would be required
to pay the amount of the judgment under a reservation of
rights, post an appeal bond backed by a letter of credit, or
provide other satisfactory financial arrangements to provide
security in the event of an unsuccessful appeal. Another
option would be attempting to negotiate a settlement. If the
Company pays the amount of the judgment under a reservation
of rights the availability under its revolving credit
facility will be approximately $5.5 million. If the Company
elects
14
<PAGE>
to post an appeal bond backed by a letter of credit, which
amount would be set by the Court, the availability under
its revolving credit facility could be lower. Reference
is made to Notes F and G in Part I of this Form 10-Q Report
and "Recent Events" above, for additional information.
The Company also has, in the aggregate, foreign short-term
credit facilities of approximately $34.8 million. As of
March 31, 1997, $22.3 million was outstanding under those
foreign facilities.
At March 31, 1997, the Company also had outstanding under the
New Credit Agreement $21.3 million of a term loan amortizing
to April 2001, $27.9 million of a second term loan amortizing
to April 2001, and $44.6 million of a third term loan
amortizing to April 2003. In addition, the Company had
outstanding $155 million of its 11.75% senior subordinated
notes due in 2006 (the "Notes").
The Company used the proceeds of $12 million from the sale of
its Varo Electronic Systems business on April 28, 1997 to
reduce the outstanding principal amount of the second term
loan under the New Credit Agreement to $15.9 million. See
"Recent Events" above.
Management continues to review ways to improve the capital
structure of the Company. See "Recent Events" above, for
discussion regarding the March 21, 1997 announcement made by
the Company.
Cash Flow
The Company's operating activities used cash of $3.2 million
in the first quarter of 1997, compared with cash generated of
$2.9 million in the comparable 1996 period. The use of cash
in operating activities in 1997 was primarily due to the
increase in working capital in the period. Net cash used in
investing activities was $3.4 million in the first quarter of
1997, compared with $4.3 million for the prior year. Cash and
cash equivalents were $3.1 million at March 31, 1997 compared
with $5.0 million at December 31, 1996.
Working capital at March 31, 1997 was $33.8 million, a
decrease of $10.3 million from the end of 1996, due primarily
to the provision recorded in the first quarter of 1997
related to the International Judgment. The ratio of current
assets to current liabilities was 1.2 at March 31, 1997
compared with 1.3 at December 31, 1996. The Company's total
debt as a percent of its total capitalization increased to
123.0% at March 31, 1997 compared with 121.5% at December 31,
1996.
In light of the recent International Judgment against the
Company as described above, it is management's intention to
maximize its liquidity by reducing working capital and
restricting capital expenditures. With these additional
efforts, management believes that cash flow from operations,
cash available from unused credit facilities and cash
generated by additional asset sales will be sufficient to
meet the Company's foreseeable liquidity needs.
15
<PAGE>
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 Report 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) "Restructuring
Plans" - the likelihood of completing the sales of the
remaining assets identified for sale and the impact of
various cost reduction programs; (ii) Legal Proceedings - 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 on operating
income; and, (iv) "Recent Events" and "Liquidity and Capital
Resources" - statements concerning the option ultimately
elected by the Company in dealing with the International
Judgment, the Company's ability to sell the remaining assets
identified for sale and repay outstanding debt under the New
Credit Agreement and statements regarding the possibility of
a merger or sale of the Company and the impact of such an
action, if any, on the remaining asset sales. The Company
wishes to caution the reader that, in addition to the matters
described 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 under-utilization 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
LILCO Insurance Litigation. On May 8, 1997, the Company was
informed that the U.S. District Court for the Northern
District of California had reinstated the judgment in favor
of International Insurance Company. This case was commenced
in January 1993, in the U.S. District Court for the Northern
District of California by International alleging that
International was entitled to recover $10 million in defense
costs, and $1.2 million of a judgment, each of which was paid
on behalf of the Company in connection with litigation
between the Company and LILCO which was concluded in October
1993. International contends, among other things, that the
International policies did not cover the matters in question
in the LILCO case. The Company is reviewing various options
available to it, including an appeal to the Ninth Circuit
Court of Appeals. If the Company elects to appeal, which
is likely, the Company must either pay the amount of the
International Judgment under a reservation of rights, post
an appeal bond backed by a letter of credit in an amount to
be determined by the Court, or provide other satisfactory
financial arrangements to provide security in the event of
an unsuccessful appeal. Settlement discussions could also
be undertaken with International, and in the event settlement
is reached the appeal would be discontinued. In order to
provide maximum liquidity, it is probable that the Company will
16
<PAGE>
preserve its appeal rights by paying the International Judgment
or arranging with International by May 27, 1997, for other
satisfactory financial arrangements to provide security in
the event of an unsuccessful appeal. The Company has
therefore recorded a charge to income in the first quarter of
1997 of $12.9 million as an unusual item, which represents
the amount of the judgment plus interest to date.
For information regarding certain pending lawsuits, reference
is made to the Company's Form 10-K for the year ended
December 31, 1996, which is incorporated herein by reference,
and to Note F 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, 1997
(b) Reports on Form 8-K:
On May 2, 1997, the Company filed a report on Form
8-K, reporting under Item 5, disclosing that the
Board of Directors of the Registrant had declared a
dividend distribution of one Right for each outstanding
share of Company Common Stock to shareholders of record
on the close of business on May 4, 1997, and that the
Registrant's Varo Inc. subsidiary had successfully
completed the sale of its Electronic Systems Division
for $12 million.
17
<PAGE>
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, 1997 /s/ DONALD K. FARRAR
Donald K. Farrar
Chairman, Chief Executive Officer,
President and Director
(principal executive officer)
Date May 14, 1997 /s/ WILLIAM M. BROWN
William M. Brown
Executive Vice President,
Chief Financial Officer and
Corporate Controller
(principal financial and accounting
officer)
18
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