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 October 2, 1998
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 (I.R.S. Employer
of 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--17,127,859 shares as of November 16, 1998.
<PAGE>
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Condensed Statements of Income (Unaudited) Three months ended
October 2, 1998 and September 30, 1997 and nine months ended October 2,
1998 and September 30, 1997
Consolidated Condensed Balance Sheets - October 2, 1998 (Unaudited)
and December 31, 1997
Consolidated Condensed Statements of Cash Flows (Unaudited) Nine months
ended October 2, 1998 and September 30, 1997
Notes to Consolidated Condensed Financial Statements (Unaudited) -
October 2, 1998
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Item 6. Exhibits and Reports on Form 8-K.
SIGNATURES
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Imo Industries Inc. and Subsidiaries
Consolidated Condensed Statements of Income
(Dollars in thousands except per share amounts)
Three Months Ended Nine Months Ended
October 2, September 30, October 2, September 30,
1998 1997* 1998 1997*
- ------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Net Sales $ 75,464 $ 76,735 $ 239,579 $ 236,967
Cost of products sold 51,417 54,969 162,340 164,776
- -------------------------------------------------------------------------------
Gross Profit 24,047 21,766 77,239 72,191
Selling, general and administrative
expenses 12,774 16,189 42,907 51,975
Research and development expenses 1,318 1,417 4,144 4,136
Unusual items - 20,844 - 31,344
- -------------------------------------------------------------------------------
Income (Loss) From Operations 9,955 (16,684) 30,188 (15,264)
Other expense (income), net (294) (104) (461) (208)
- -------------------------------------------------------------------------------
Income (Loss) From Continuing
Operations Before Interest, Income
Taxes, and Extraordinary Item 10,249 (16,580) 30,649 (15,056)
Interest Expense 5,132 6,737 16,864 20,348
- -------------------------------------------------------------------------------
Income (Loss) From Continuing
Operations Before Income Taxes and
Extraordinary Item 5,117 (23,317) 13,785 (35,404)
Income Tax Expense 1,345 528 2,847 1,564
- -------------------------------------------------------------------------------
Income (Loss) From Continuing
Operations Before
Extraordinary Item 3,772 (23,845) 10,938 (36,968)
Income from Discontinued Operations - (9,198) - (6,488)
Extraordinary Item - Loss on
Extinguishment of Debt (1,114) (287) (6,717) (287)
- -------------------------------------------------------------------------------
Net Income (Loss) $ 2,658 $ (33,330) $ 4,221 $ (43,743)
===============================================================================
Earnings (Loss) per share, basic and diluted
Continuing operations before
extraordinary item $ .22 $ (1.39) $ .64 $ (2.16)
Discontinued operations - (.54) - (.37)
Extraordinary item (.06) (.02) (.39) (.02)
- -------------------------------------------------------------------------------
Net income (loss) $ .16 $ (1.95) $ .25 $ (2.55)
- -------------------------------------------------------------------------------
Weighted average number of shares
outstanding 17,127,859 17,127,547 17,127,859 17,126,359
===============================================================================
The accompanying notes are an integral part of these consolidated condensed
financial statements.
*Restated to conform to 1998 presentation. See Note B.
Imo Industries Inc. and Subsidiaries
Consolidated Condensed Balance Sheets
(Dollars in thousands except par value amounts)
October 2, December 31,
1998 1997
- -------------------------------------------------------------------------
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 4,393 $ 3,528
Trade accounts and notes receivable, less
allowance of $1,182 in 1998 and $1,435 45,973 53,732
in 1997
Inventories-net 56,689 64,888
Prepaid expenses and other current assets 12,477 17,656
- -----------------------------------------------------------------------
Total Current Assets 119,532 139,804
Property, plant and equipment, net of
accumulated 59,230 61,409
depreciation of $6,631 and $3,202,
respectively
Net Intangible assets, principally 235,392 233,054
goodwill
Net assets of discontinued operations 83 14,927
Other assets 14,914 14,106
- -----------------------------------------------------------------------
Total Assets $429,151 $463,300
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable and current portion of $ 42,556 $ 34,320
long-term debt
Trade accounts payable 15,766 22,750
Accrued expenses and other liabilities 67,607 64,065
- -----------------------------------------------------------------------
Total Current Liabilities 125,929 121,135
Long-term debt 136,419 192,319
Other liabilities 63,061 59,599
- -----------------------------------------------------------------------
Total Liabilities 325,409 373,053
- -----------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Preferred stock: $1.00 par value;
5,000,000 shares
authorized and unissued - -
Common stock: $1.00 par value; 25,000,000
shares
authorized; issued 17,127,859 17,128 17,128
Additional paid-in capital 103,624 106,805
Retained earnings (deficit) (16,999) (33,016)
Accumulated other comprehensive income (11) (670)
- ------------------------------------------------------------------------
Total Shareholders' Equity 103,742 90,247
========================================================================
Total Liabilities and Shareholders' $429,151 $463,300
Equity
========================================================================
The accompanying notes are an integral part of these consolidated condensed
financial statements.
<PAGE>
Imo Industries Inc. and Subsidiaries
Consolidated Condensed Statements of Cash Flows
(Dollars in thousands)
Nine Months Ended
October 2, September 30,
1998 1997*
- ----------------------------------------------------------------------------
(Unaudited)
OPERATING ACTIVITIES
Net income (loss) $ 4,221 $ (43,743)
Adjustments to reconcile net income (loss)
to net cash provided by
(used by) continuing operations:
Discontinued operations - 6,488
Depreciation and amortization 8,895 9,971
Extraordinary item 6,717 287
Unusual items - 31,344
Other (67) 453
Other changes in operating assets and liabilities:
Accounts and notes receivable 7,817 (404)
Inventories 8,199 (593)
Accounts payable and accrued (7,863) (31,435)
expenses
Other operating assets and 1,445 (1,895)
liabilities
- --------------------------------------------------------------------------
Net cash provided by (used by) 29,364 (29,527)
continuing operations
Net cash (used by) provided by (1,035) 4,600
discontinued operations
- --------------------------------------------------------------------------
Net Cash Provided by (Used by) Operating 28,329 (24,927)
Activities
- --------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (4,339) (5,182)
Proceeds from sale of businesses and 30,038 110,691
property, plant and equipment
Net cash used by discontinued operations (1,164) (5,482)
Other 80 478
- --------------------------------------------------------------------------
Net Cash Provided by Investing Activities 24,615 100,505
- --------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase (decrease) in notes payable 5,693 (17,568)
Proceeds from long-term borrowings 1,601 119
Principal payments on long-term debt (54,771) (39,695)
Payment of premium on notes repurchased and (4,699) (3,473)
debt financing costs
Other (37) (194)
- --------------------------------------------------------------------------
Net Cash Used by Financing Activities (52,213) (60,811)
- --------------------------------------------------------------------------
Effect of exchange rate changes on cash 134 (700)
- --------------------------------------------------------------------------
Increase in Cash and Cash Equivalents 865 14,067
Cash and cash equivalents at beginning of 3,528 1,419
period
- --------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 4,393 $ 15,486
==========================================================================
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 14,965 $ 20,143
Income taxes $ 1,922 $ 2,848
The accompanying notes are an integral part of these consolidated condensed
financial statements.
* Reclassified to conform to 1998 presentation. See Note B.
Imo Industries Inc. and Subsidiaries
Notes to Consolidated Condensed Financial Statements (Unaudited with respect to
October 2, 1998 and September 30, 1997 and the periods then ended.)
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The accompanying unaudited consolidated condensed
financial statements have been prepared in accordance with generally accepted
accounting principles. 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, 1997. In the opinion of
management, all adjustments considered necessary for a fair presentation have
been included. Operating results for the nine months ended October 2, 1998 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1998.
Fiscal Year End: Effective January 1, 1998, the Company adopted a "4-4-5"
accounting calendar.
Change in Accounting Policies: The Company adopted Financial Accounting
Standards Board ("FASB") Statement No. 130, "Reporting Comprehensive Income," on
January 1, 1998. For the third quarter of 1998, total comprehensive income was
$3.6 million, compared to reported net income of $2.7 million. For the third
quarter of 1997, total comprehensive loss was $28.9 million, compared to a
reported net loss of $33.3 million. For the nine months ended October 2, 1998,
total comprehensive income was $4.9 million, compared to reported net income of
$4.2 million. For the nine months ended September 30, 1997, total comprehensive
loss was $41.5 million, compared to a reported net loss of $43.7 million.
NOTE B - DISCONTINUED OPERATIONS
On February 27, 1998, the Company completed the sale of its Roltra-Morse
business segment to Magna International Inc. for cash of $30 million, plus the
assumption of Roltra Morse's debt. The operating results of the Roltra-Morse
segment have been segregated and reported as a discontinued operation in the
accompanying Consolidated Condensed Statements of Income. Prior year financial
statements have been reclassified to conform to the current year presentation.
The Company has also accounted for its former Electro-Optical Systems and
Instrumentation business segments as discontinued operations. The sale of the
Varo Electronic Systems division of the Electro-Optical Systems business and the
sale of the Instrumentation business segment were completed in April 1997 and
August 1997, respectively.
Net sales of the discontinued operations were $14.4 million and $126.3 million
for the nine months ended October 2, 1998 and September 30, 1997, respectively,
and $31.2 million for the third quarter of 1997. Operating results of the
discontinued operations resulted in net loss of $1.0 million and net income of
$2.4 million for the nine months ended October 2, 1998 and September 30, 1997,
respectively, and a net loss of $.3 million for the third quarter of 1997. These
operating results from discontinued operations include allocated interest
expense of $.2 million for the nine months ended October 2, 1998, $1.9 million
for the nine months ended September 30, 1997, and $.5 million for the third
quarter of 1997.
Based on its quarterly review of the assumptions used in determining the
estimated loss from discontinued operations, the Company recorded a charge of
$8.4 million in the third quarter of 1997. This charge related to changes in
estimates on legal and other reserve requirements of its former Electro-Optical
and Turbomachinery businesses.
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 are summarized as follows:
October 2, December 31,
(in thousands) 1998 1997
------------- -------------
(Unaudited)
Finished products $20,710 $18,823
Work in process 18,529 23,218
Materials and supplies 18,717 23,481
---------- ---------
57,956 65,522
Less customers' progress payments 1,267 634
========== =========
$56,689 $64,888
========== =========
NOTE D - NOTES PAYABLE AND LONG-TERM DEBT
As of October 2, 1998, the Company had revolver borrowings of $33 million and
$15.5 million of outstanding standby letters of credit under the Company's
existing credit agreement. The Company had $5.5 million in foreign short-term
credit facilities with amounts outstanding at October 2, 1998 of $1.6 million.
Due to the short-term nature of these debt instruments, it is the Company's
opinion that the carrying amounts approximate fair value. The weighted average
interest rate on short-term notes payable was 7.86% at October 2, 1998 and 8.03%
at December 31, 1997.
In addition, the Company had outstanding $92.5 million of its 11.75% senior
subordinated notes due in 2006, and $48.5 million of term loan borrowings. The
sale of Roltra-Morse and the resultant reduction in domestic senior debt
increased the Company's availability under its revolving credit facility,
allowing it to purchase a portion of its 11.75% senior subordinated notes (the
"Notes") in the open market. During the first and third quarters of 1998, the
Company purchased, in the open market at a premium, Notes in the face amounts of
$33.1 million and $9.5 million, respectively. As a result of the early
extinguishment of these Notes and the prepayment of a portion of the term loan
facility, extraordinary charges of $5.6 million and $1.1 million were recognized
in the first and third quarters of 1998, respectively.
NOTE E - CONTINGENCIES
Legal Proceedings
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 6,000
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 a few of the industrial and marine products
formerly sold by the Company and the subsidiary named in such complaints
contained components which contained asbestos. Claims against the Company and
its subsidiary have been tendered to its insurers, who are defending pursuant to
Defense and Indemnity Agreements and under their stated reservation of rights.
In addition, the Company and the subsidiary are named in cases, involving
approximately 26,000 claimants, which have been "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. The Company
believes that it has adequate insurance coverage or has established appropriate
reserves to cover potential liabilities related to these cases.
The Company is a defendant in a lawsuit brought in the Superior Court of New
Jersey on April 3, 1998, which seeks damages in excess of $17 million for
alleged problems associated with turbines sold to it in 1986 for use at a
powerplant in Long Beach, California. The Company has few details of this matter
other than as set forth in the complaint, however, the Company believes that
there are legal and factual defenses to the claims and will defend the action
vigorously.
On June 3, 1997 the Company was served with a complaint in a case brought in the
Superior Court of New Jersey which alleges damages in excess of $10 million
incurred as a result of losses under a Government Contract Bid transferred in
connection with the sale of the Company's former Electro-Optical Systems
business. The Electro-Optical Systems business was sold in a transaction that
closed on June 2, 1995. The sales contract provided certain representations and
warranties as to the status of the business at the time of sale. The complaint
alleges that the Company failed to provide notice of a "reasonably anticipated
loss" under a bid that was pending at the time of the transfer of the business.
The contract was subsequently awarded to the Company's Varo subsidiary and
thereafter transferred to the buyer of the Electro-Optical Systems business. The
complaint alleges among other matters, breach of contract, fraud, and negligent
misrepresentation. The case is in the preliminary stages of pleading but the
Company believes that there are legal and factual defenses to the claims and
intends to defend the action vigorously.
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. Similarly, the
Company has received notice that it is one of a number of defendants named in an
action filed in the United States District Court, for the Southern District of
Ohio Western Division by a group of plaintiffs who are attempting to allocate a
share of cleanup costs, for which they are responsible, to a large number of
additional parties, including the Company. 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 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. With respect to these proceedings and the litigation
and claims described in the preceding paragraphs, management of the Company
believes that it either will 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, and 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 or results of operations 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 and nine months ended
October 2, 1998. This section should be read in conjunction with the Company's
1997 Form 10-K Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Recent Events
Merger: On August 28, 1997, Colfax Corporation (previously known as II
Acquisition Corp.) acquired approximately 93% of the outstanding shares of
common stock of Imo Industries Inc. ("Imo") pursuant to its tender offer for all
outstanding shares of the common stock. The consideration paid was $7.05 per
share of common stock or $112.1 million in total. The acquisition has been
accounted for under the purchase method. On July 2, 1998, Colfax Corporation's
wholly-owned subsidiary, Imo Merger Corp., merged with and into Imo, pursuant to
a short-form merger under Delaware law ("back-end merger"). Imo was the
surviving corporation in the back-end merger and as a result became a
wholly-owned subsidiary of Colfax Corporation.
New York Stock Exchange: Imo delisted its Common Stock from the New York Stock
Exchange on July 2, 1998. The Common Stock was deregistered under the Securities
Exchange Act of 1934.
Consent Solicitation: On April 14, 1998, the Company commenced a consent
solicitation, seeking consents from the holders of the Company's 11 3/4% Senior
Subordinated Notes due 2006 ("the Notes") to certain amendments to the Indenture
governing the Notes. The proposed amendments would permit the Company to
complete the back-end merger with and into a wholly owned subsidiary of Colfax
Corporation. On May 6, 1998, the Company received sufficient consents to effect
the proposed amendments, and entered into a Supplemental Indenture with respect
to such amendments. The Company paid an aggregate of $483,650 to holders of
Notes in connection with the solicitation.
Roltra-Morse Sale: On February 27, 1998, the Company completed the sale of its
Roltra-Morse business to Magna International Inc. for cash of $30 million plus
the assumption of Roltra-Morse's debt. The sale price approximated the recorded
net book value of the business. Net proceeds were used to reduce domestic senior
debt. This transaction is reflected in the Company's consolidated condensed
financial statements for the quarter ended April 3, 1998.
Results of Operations
The Roltra-Morse, Instrumentation, and Electro-Optical Systems business segments
were sold in February 1998, August 1997, and April 1997, respectively, and were
accounted for as discontinued operations in the accompanying consolidated
condensed financial statements. Accordingly, the discussion that follows
concerns only the results of continuing operations. The Company's continuing
businesses are grouped into three business segments for management and segment
reporting purposes: Power Transmission, Pumps, and Morse Controls.
Three Months Ended October 2, 1998 Compared to Three Months Ended
September 2, 1997
Sales. Net sales from continuing operations for the third quarter of 1998 were
$75.5 million compared with $76.7 million in the comparable 1997 period. Third
quarter 1998 net sales increased 10.7% for the Pumps segments and decreased 4.5%
and 12.0% for the Morse Controls and Power Transmission segments, respectively,
compared to the prior year period. The increase in the Pumps segment is due to
the increase in the volume of shipments and new products. The decrease in the
Morse Controls segment is primarily due to unfavorable foreign currency
fluctuations and the sale of the conveyor business in Germany on July 31, 1998.
The decrease in the Power Transmission segment is primarily due to the sale of
the Delroyd product line, which was sold on December 31, 1997.
Gross Profit. Gross profit increased as a percentage of sales to 31.9% for the
third quarter of 1998 compared with 28.4% in the third quarter of 1997. The
higher gross profit was the result of productivity improvements in each segment.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased as a percentage of sales to 16.9% for the
third quarter of 1998 compared with 21.1% in the third quarter of 1997. The
decreased expenses as a percentage of sales in 1998 were due to the effects of
Company-wide cost reduction programs instituted in August of 1997, offset by
increased goodwill amortization resulting from the purchase of the Company by
Colfax Corporation
Unusual Items. The Company recorded unusual charges of $21.6 million in the
third quarter of 1997. Of these charges, $16.6 million was related to the sale
of the Company and $5 million was related to additional legal provisions
concerning certain litigation matters.
Interest Expense. Average borrowings in the third quarter of 1998 were
approximately $98 million lower than the third quarter of 1997. Total interest
expense (before allocation to discontinued operations) was $5.1 million for the
third quarter of 1998 compared with $6.7 million for the same period in 1997.
Interest expense for continuing operations excludes a general interest
allocation to the discontinued operations of $.5 million for the third quarter
of 1997.
Provision for Income Taxes. Income tax expense for continuing operations was
$1.3 million and $0.5 million for the third quarters of 1998 and 1997,
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.
Income from Continuing Operations. The Company had net income from continuing
operations of $3.7 million, or $0.22 per share, for the third quarter of 1998,
compared with a net loss of $23.8 million, or $1.39 per share, for the
comparable 1997 period.
Income (Loss) from Discontinued Operations. There was no income from
discontinued operations for the third quarter of 1998 compared with a loss of
$9.2 million for the third quarter of 1997.
Extraordinary Item. During the third quarter of 1998, the Company purchased, in
the open market at a premium, Notes in the face amount of $9.5 million. As a
result of the early extinguishment of these Notes, an extraordinary charge of
$1.1 million was recognized in the third quarter of 1998. On August 29, 1997,
$67.9 million was prepaid of the New Credit Agreement resulting in an
extraordinary charge of $0.3 million, representing the write-off of previously
deferred loan costs.
Net Income (Loss). The net income in the third quarter of 1998 was $2.7 million,
or $0.16 per share, compared with a net loss of $33.3 million, or $1.95 per
share, in the comparable 1997 period.
Nine Months Ended October 2, 1998 Compared to Nine Months Ended
September 30, 1997
Sales. Net sales from continuing operations for the nine months ended October 2,
1998 were $239.6 million, an increase of 1.1%, compared with $237.0 million in
the comparable 1997 period. Net sales for the nine months ended October 2, 1998
increased 7.1% and 2.6% for the Pumps and Morse Controls segments, respectively.
Net sales decreased 7.8% for the Power Transmission segment, compared to the
prior year period. The increases in the Pumps and Morse Controls segments are
due to increases in volume of shipments and new products. The decrease at the
Power Transmission segment is primarily due to the sale of the Delroyd product
line, which was sold on December 31, 1997.
Gross Profit. Gross profit increased as a percentage of sales to 32.2% for the
nine months ended October 2, 1998 compared with 30.5% for the comparable period
in 1997. The higher gross profit was the result of productivity improvements in
each segment.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased as a percentage of sales to 17.9% for the nine
months ended October 2, 1998 compared with 21.9% in the comparable period in
1997. The decreased expenses as a percentage of sales in 1998 were due to
increased sales volume and the effects of Company-wide cost reduction programs
instituted in August of 1997, offset by increased goodwill amortization
resulting from the purchase of the Company by Colfax Corporation.
Unusual Items. The Company recorded unusual charges of $32.1 million in the nine
months ended September 30, 1997. Of these charges, $10.5 million related to the
International judgment, $16.6 million was related to the sale of the Company and
$5 million was related to additional legal provisions concerning certain
litigation matters.
Interest Expense. Average borrowings for the nine months ended October 2, 1998
were approximately $97 million lower than the comparable period in 1997. Total
interest expense (before allocation to discontinued operations) was $16.9
million for the nine months ended October 2, 1998 compared with $20.3 million
for the same period in 1997. Interest expense for continuing operations excludes
a general interest allocation to the discontinued operations of $.2 million and
$1.9 million for the first nine months of 1998 and 1997, respectively.
Provision for Income Taxes. Income tax expense for continuing operations was
$2.8 million and $1.6 million for the nine months ended October 2, 1998 and
September 30, 1997, 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.
Income from Continuing Operations. The Company had net income from continuing
operations of $10.9 million, or $0.64 per share, for the nine months ended
October 2, 1998, compared with a net loss of $37.0 million, or $2.16 per share,
for the comparable 1997 period.
Income (Loss) from Discontinued Operations. Roltra-Morse's net loss of $1
million, which includes $.2 million of allocated interest, was included with the
net book value of the assets on the date of sale February 27, 1998. Therefore,
there was no income from discontinued operations for the first nine months of
1998 compared with a loss of $6.5 million for the first nine months of 1997.
Extraordinary Item. During the nine months ended October 2, 1998, the Company
purchased, in the open market at a premium, Notes in the face amounts of $42.6
million. As a result of the early extinguishment of these Notes and the
prepayment of a portion of the term loan facility, extraordinary charges of $6.7
million were recognized in the nine months ended October 2, 1998. On August 29,
1997, $67.9 million was prepaid of the New Credit Agreement resulting in an
extraordinary charge of $0.3 million, representing the write-off of previously
deferred loan costs.
Net Income (Loss). The net income for the nine months ended October 2, 1998 was
$4.2 million, or $0.25 per share, compared with a net loss of $43.7 million, or
$2.55 per share, in the comparable 1997 period.
Liquidity and Capital Resources
Short-term and Long-term Debt
As of October 2, 1998, Imo had revolver borrowings of $33 million and $15.5
million of outstanding standby letters of credit. Imo had $5.5 million in
foreign short-term credit facilities with amounts outstanding at October 2, 1998
of $1.6 million. Due to the short-term nature of these debt instruments it is
the Company's opinion that the carrying amounts approximate the fair value. The
weighted-average interest rate on short-term notes payable was 7.86% at October
2, 1998.
In addition, the Company had outstanding $92.5 million of its 11.75% senior
subordinated notes due in 2006, and $48.5 million of term loan borrowings.
Cash Flow
The Company's operating activities provided net cash of $28.3 million in the
nine months of 1998, compared with cash used of $24.9 million in the comparable
1997 period. The cash provided by operating activities in 1998 was attributable
to net operating profits and the decrease in working capital in the period, due
to a decrease in accounts receivable, inventories, and other current assets,
offset by a decrease in accounts payable. For the nine months ended October 2,
1998, total debt reduction was $47.5 million, $30 million of which was provided
by the sale of Roltra-Morse. Cash and cash equivalents were $4.4 million at
October 2, 1998 compared with $3.5 million at December 31, 1997.
The sale of the Roltra-Morse business segment has improved the Company's
liquidity position. Management believes that cash flow from operations and cash
available from unused credit facilities will be sufficient to meet the Company's
foreseeable liquidity needs.
Year 2000 Compliance
The Company has conducted a review of the software, databases, microcode,
hardware, systems and devices with date-related functionality (collectively,
"Systems") used in the businesses of Imo (whether used on a stand-alone basis or
in combination with other software, hardware, systems or devices), and has
taken, or is in the process of taking, all steps that the Company believes are
necessary or appropriate to ensure that such Systems accurately process all
dates, including those before, on or after January 1, 2000, without loss of
functionality, interoperability or performance. The Company has assessed the
impact of the Year 2000 issue on its embedded Systems and is not currently aware
of any material risks. Although all such embedded Systems are not presently Year
2000 compliant, the Company believes it has identified all non-compliant
embedded Systems and is seeking solutions to make such systems Year 2000
compliant. The Company has assessed the impact of the Year 2000 issue upon those
third parties with which the Company has a material relationship, and the
Company is not currently aware of any material third-party risks resulting from
the Year 2000 issue.
The Company estimates that the aggregate cost of investigating and remediating
(where required) any Year 2000 issues relating to its businesses will be less
than $500,000. In most cases, the Company believes that the only remediation
measures required to address the Year 2000 issue are widely available software
upgrades for its purchase and accounting systems. Due to the nature of its
businesses, the Company does not believe that its customers or suppliers will be
materially adversely affected by the Year 2000 issue. Although the Company's
Boston Gear business unit relies to a significant extent on online ordering, the
Company does not believe that the Year 2000 issue will materially adversely
affect the Company's business or results of operations.
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) Legal Proceedings - the future impact of legal proceedings on the
financial condition of the Company; and, (ii) "Results of Operations" - the
future performance of various programs and foreign market conditions in each
segment and the impact of such programs and foreign market conditions on future
sales and on operating income. 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.
The Company is filing this report pursuant to the filing requirements related to
the 11-3/4% Senior Subordinated Debentures due in 2006.
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
For information regarding certain pending lawsuits, reference is made to the
Company's Form 10-K for the year ended December 31, 1997, which is incorporated
herein by reference, and to Note E in Part I of this Form 10-Q 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 October 2, 1998
(b) Reports on Form 8-K:
None
<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: November 16, 1998
/s/ JOHN A. YOUNG
John A. Young
Chief Financial Officer
Date: November 16, 1998
/s/ G. SCOTT FAISON
G. Scott Faison
Corporate Controller
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> OCT-2-1998
<CASH> 4,393
<SECURITIES> 0
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0
0
<COMMON> 17,128
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<SALES> 239,579
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