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 April 2, 1999
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, $.01 Par
Value--100 shares as of May 14, 1999.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial
Statements.
Consolidated Condensed Statements of Income (Unaudited) Three months ended
April 2, 1999 and April 3, 1998
Consolidated Condensed Balance Sheets - April 2, 1999 (Unaudited)
and December 31, 1998
Consolidated Condensed Statements of Cash Flows (Unaudited) -
Three months ended April 2, 1999 and April 3, 1998
Notes to Consolidated Condensed Financial Statements (Unaudited) -
April 2, 1999
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
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Imo Industries Inc. and Subsidiaries
Consolidated Condensed Statements of Income and Comprehensive Income
(Dollars in thousands except per share amounts)
Three Months Ended
April 2, April 3,
1999 1998
- ----------------------------------------------------------------
(Unaudited)
Net Sales $74,499 $83,031
Cost of products sold 50,731 56,286
- ----------------------------------------------------------------
Gross Profit 23,768 26,745
Selling, general and administrative
expenses 12,897 15,199
Research and development expenses 1,202 1,456
- ----------------------------------------------------------------
Income From Operations 9,669 10,090
Other expense, net 103 81
- ----------------------------------------------------------------
Income From Continuing Operations Before
Interest, Income Taxes, and Extraordinary
Item 9,566 10,009
Interest Expense 4,258 5,856
- ----------------------------------------------------------------
Income From Continuing Operations Before
Income Taxes and Extraordinary Item 5,308 4,153
Income Tax Expense 1,987 829
- ----------------------------------------------------------------
Income From Continuing Operations Before
Extraordinary Item 3,321 3,324
Extraordinary Item - Loss on
Extinguishment of Debt (216) (5,603)
- ----------------------------------------------------------------
Net Income (Loss) $3,105 $ (2,279)
================================================================
Other comprehensive loss, net of taxes -
Foreign currency translation
adjustments (1,427) (343)
- ----------------------------------------------------------------
Comprehensive Income (Loss) $1,678 $(2,622)
================================================================
The accompanying notes are an integral part of these consolidated condensed
financial statements.
Imo Industries Inc. and Subsidiaries
Consolidated Condensed Balance Sheets
(Dollars in thousands except par value amounts)
April 2, December 31,
1999 1998
- ------------------------------------------------------------------------
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 286 $6,230
Trade accounts and notes receivable, less
allowance of $1,028 in 1999 and $1,058
in 1998 48,969 40,125
Inventories-net 51,014 53,114
Deferred income tax assets 16,097 16,096
Prepaid expenses and other current assets 2,514 2,525
- ------------------------------------------------------------------------
Total Current Assets 118,880 118,090
Property, plant and equipment, net of
accumulated depreciation of $9,001 and 58,829 59,430
$7,660, respectively
Net Intangible assets, principally goodwill 176,416 177,826
Other assets 33,451 33,626
- ------------------------------------------------------------------------
Total Assets $387,576 $ 388,972
========================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable and current portion of
long-term debt $ 10,011 $9,303
Trade accounts payable 18,592 15,350
Accrued expenses and other liabilities 54,069 52,919
- ------------------------------------------------------------------------
Total Current Liabilities 82,672 77,572
Long-term debt 158,629 165,843
Other liabilities 40,331 41,291
- ------------------------------------------------------------------------
Total Liabilities 281,632 284,706
- ------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Preferred stock: $1.00 par value;
5,000,000 shares authorized and unissued --- ---
Common stock: $.01 par value, 100 shares
authorized and issued 1 1
Additional paid-in capital 120,751 120,751
Retained earnings (deficit) (12,445) (15,550)
Cumulative foreign currency translation
adjustments (2,363) (936)
- ------------------------------------------------------------------------
Total Shareholders' Equity 105,944 104,266
- ------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 387,576 $ 388,972
========================================================================
The accompanying notes are an integral part of these consolidated condensed
financial statements.
Imo Industries Inc. and Subsidiaries
Consolidated Condensed Statements of Cash Flows
(Dollars in thousands)
Three Months Ended
April 2, 1999 April 3, 1998
- ------------------------------------------------------------------------------
(Unaudited)
OPERATING ACTIVITIES
Net income (loss) $ 3,105 $ (2,279)
Adjustments to reconcile net income (loss) to
net cash provided by (used by) continuing operations:
Depreciation and amortization 2,706 3,020
Extraordinary item 216 5,603
Other (11) 16
Other changes in operating assets and
liabilities:
Accounts and notes receivable (9,271) (504)
Inventories 1,711 (414)
Accounts payable and accrued expenses 3,751 (2,862)
Other operating assets and liabilities 1,580 6,232
- ------------------------------------------------------------------------------
Net cash provided by continuing operations 3,787 8,812
Net cash used by discontinued operations (556) (920)
- ------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 3,231 7,892
- ------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (1,574) (2,058)
Proceeds from sale of businesses and property,
plant and equipment 139 30,735
Net cash used by discontinued operations --- (1,164)
Other --- 80
- ------------------------------------------------------------------------------
Net Cash (Used by) Provided by Investing Activities (1,435) 27,593
- ------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in notes payable 3,217 7,533
Decrease in long-term debt (9,692) (40,089)
Payment of premium on notes repurchased and
debt financing costs (210) (4,199)
Other --- (37)
- -------------------------------------------------------------------------------
Net Cash Used by Financing Activities (6,685) (36,792)
- -------------------------------------------------------------------------------
Effect of exchange rate changes on cash (1,055) (63)
- -------------------------------------------------------------------------------
Decrease in Cash and Cash Equivalents (5,944) (1,370)
Cash and cash equivalents at beginning of period 6,230 3,528
- ------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 286 $2,158
==============================================================================
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 2,035 $3,532
Income taxes $ 664 $ 442
The accompanying notes are an integral part of these consolidated condensed
financial statements.
Imo Industries Inc. and Subsidiaries
Notes to Consolidated Condensed Financial Statements (Unaudited with respect to
April 2, 1999 and April 3, 1998 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, 1998. In the opinion of
management, all adjustments considered necessary for a fair presentation have
been included. Operating results for the three months ended April 2, 1999 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1999.
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.
Net sales of the discontinued operations were $14.4 million for the three months
ended April 3, 1998. Operating results of the discontinued operations resulted
in net loss of $1.0 million for the three months ended April 3, 1998. These
operating results from discontinued operations include allocated interest
expense of $.2 million for the three months ended April 3, 1998. The operating
loss for Roltra Morse was accrued as a portion of the estimated loss on disposal
as of December 31, 1997.
NOTE C - INVENTORIES
Inventories are summarized as follows:
April 2, December 31,
(in thousands) 1999 1998
------------- -------------
(Unaudited)
Finished products $ 16,954 $ 18,926
Work in process 18,675 17,880
Materials and supplies 16,817 17,545
--------- ---------
52,446 54,351
Less customers' progress payments (1,432) (1,237)
========= =========
$ 51,014 $ 53,114
========= =========
NOTE D - NOTES PAYABLE AND LONG-TERM DEBT
As of April 2, 1999, the Company had $12.0 million of outstanding standby
letters of credit under the Company's existing credit agreement. The Company had
$7.9 million in foreign short-term credit facilities with amounts outstanding at
April 2, 1999 of $3.9 million.
In addition, the Company had outstanding $74.2 million of its 11.75% senior
subordinated notes ("Notes") due in 2006, $44.6 million of term loan borrowings,
$40.0 million in revolver borrowings and $5.0 million due to Ameridrives
International, L.P., whose majority shareholders are also the majority
shareholders of the Company. During the first quarters of 1999 and 1998, the
Company purchased, in the open market at a premium, Notes in the face amounts of
$3.5 million and $33.1 million, respectively. As a result of the early
extinguishment of these Notes, extraordinary charges of $0.2 million and $5.6
million were recognized in the first quarters of 1999 and 1998.
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 7,000
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. In addition, the Company and the subsidiary are named in cases involving
approximately 32,000 claimants which 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. 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 United States District
Court for the District of New Jersey alleging failure in performance of
equipment sold in 1986 by the Company's former Delavel Turbine division. The
complaint seeks damages in excess of $12 million. The Company believes that
there are legal and factual defenses to the claim and intends to defend the
action vigorously.
The Company was a defendant in a lawsuit in the U.S. District Court for the
Western District of Pennsylvania, which alleged component failures in equipment
sold by its former diesel engine division. The complaint sought damages of
approximately $3 million. On September 30, 1997 the Court granted a summary
judgment motion filed by the Company which effectively dismissed all claims
against it. Plaintiffs have appealed this judgment to the United States Court of
Appeals for the Third Circuit.
The Company is a defendant in 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
million. To date the Court has granted a series of Summary Judgment motions
filed by the Company which have significantly reduced the scope of damages which
the Plaintiff may claim but has permitted additional discovery to determine
whether any other damages exist which plaintiff may be entitled to seek at a
trial, but the Company believes that there are legal and factual defenses to the
claims and intends to 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 plus
interest 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 and therefore a representation was breached. The contract was
subsequently awarded to the Company's Varo subsidiary and thereafter transferred
to the buyer. 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 a
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 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 April 2, 1999.
This section should be read in conjunction with the Company's 1998 Form 10-K
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Results of Operations
The Company's continuing businesses are grouped into two business segments for
management and segment reporting purposes: Fluid Handling and Industrial
Positioning.
Three Months Ended April 2, 1999 Compared to Three Months Ended April 3, 1998
Sales. Net sales from continuing operations for the first quarter of 1999 were
$74.5 million compared with $83.0 million in the comparable 1998 period. First
quarter 1999 net sales decreased 9.0% for the Fluid Handling segment and
decreased 11.0% for the Industrial Positioning segment, respectively, compared
to the prior year period. The decrease in the Fluid Handling segment is due to
the downturn of the crude oil business in Canada and South America. The decrease
in the Industrial Positioning segment is due to a downturn in demand in the
agricultural sector, the sale of the conveyor business in Germany on July 31,
1998, the general softening of the power transmission market and inventory
reduction programs initiated by key customers.
Gross Profit. Gross profit slightly decreased as a percentage of sales to 31.9%
for the first quarter of 1999 compared with 32.2% in the first quarter of 1998,
due to unfavorable manufacturing variances resulting from the reduced sales
volume.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased as a percentage of sales to 17.3% for the
first quarter of 1999 compared with 18.3% in the first quarter of 1998. The
decreased expenses as a percentage of sales in 1999 was the result of
Company-wide cost reduction programs instituted after the Acquisition.
Interest Expense. Average borrowings in the first quarter of 1999 were
approximately $36.1 million lower than the first quarter of 1998. Total interest
expense was $4.3 million for the first quarter of 1999 compared with $5.9
million for the same period in 1998.
Provision for Income Taxes. Income tax expense for continuing operations was
$2.0 million and $0.8 million for the first quarters of 1999 and 1998,
respectively. These amounts represent both current tax expense for foreign
income taxes and deferred federal income taxes, as the Company is utilizing
existing U.S. net operating loss carryforwards with its U.S. earnings.
Extraordinary Item. During the first quarters of 1999 and 1998, the Company
purchased, in the open market at a premium, Notes in the face amount of $3.5
million and $33.1 million, respectively. As a result of the early extinguishment
of these Notes, an extraordinary charge of $0.2 million and $5.6 million was
recognized in the first quarters of 1999 and 1998.
Net Income (Loss). The net income in the first quarter of 1999 was $3.1 million
compared with a net loss of $2.3 million in the comparable 1998 period.
Liquidity and Capital Resources
Short-term and Long-term Debt
As of April 2, 1999, the Company had $12.0 million of outstanding standby
letters of credit under the Company's existing credit agreement. The Company had
$7.9 million in foreign short-term credit facilities with amounts outstanding at
April 2, 1999 of $3.9 million.
In addition, the Company had outstanding $74.2 million of its 11.75% senior
subordinated notes due in 2006, $44.6 million of term loan borrowings, $40.0
million in revolver borrowings and $5.0 million due to Ameridrives
International, L.P., whose majority shareholders are also the majority
shareholders of the Company.
Cash Flow
The Company's operating activities provided net cash of $3.2 million in the
first quarter of 1999 compared with cash provided of $7.9 million in the
comparable 1998 period. The cash provided by operating activities in 1999 was
attributable to net operating profits and the decrease in working capital in the
period. For the three months ended April 2, 1999, total debt reduction was $6.5
million. Cash and cash equivalents were $0.3 million at April 2, 1999 compared
with $6.2 million at December 31, 1998.
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 $750,000. 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 11.75% Senior Subordinated Notes due in 2006.
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, 1998, 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 April 2, 1999
(b) Reports on Form 8-K:
None
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 17, 1999
/s/ JOHN A. YOUNG
John A. Young
Chief Financial Officer
Date: May 17, 1999
/s/ G. SCOTT FAISON
G. Scott Faison
Corporate Controller
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