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 September 30, 2000
------------------
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 Identification No.)
organization)
997 Lenox Drive, Suite 111
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 November 1, 2000.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial
Statements.
Consolidated Condensed Statements of Income and Comprehensive Income
(Unaudited) - Three months and nine months ended September 30, 2000 and
October 1, 1999
Consolidated Condensed Balance Sheets - September 30, 2000 (Unaudited)
and December 31, 1999
Consolidated Condensed Statements of Cash Flows (Unaudited) -
Nine months ended September 30, 2000 and October 1, 1999
Notes to Consolidated Condensed Financial Statements (Unaudited) -
September 30, 2000
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)
Three Months Ended Nine Months Ended
Sept. 30, Oct. 1, Sept. 30, Oct. 1,
2000 1999 2000 1999
--------------------------------------------------------------------------------
(Unaudited) (Unaudited)
Net Sales $ 77,301 $67,159 $ 246,488 $ 217,501
Cost of products sold 52,862 46,260 166,466 147,184
--------------------------------------------------------------------------------
Gross Profit 24,439 20,899 80,022 70,317
Selling, general and administrative
expenses 12,833 11,813 41,836 36,879
Research and development expenses 875 982 3,116 3,445
--------------------------------------------------------------------------------
Income From Operations 10,731 8,104 35,070 29,993
Other (income) expense, net (452) 4 (2,470) 17
Gain on sale of assets --- --- (276) ---
Interest expense 4,964 4,219 14,213 12,443
--------------------------------------------------------------------------------
Income From Operations Before Income
Taxes and Extraordinary Item 6,219 3,881 23,603 17,533
Income tax expense 2,662 1,603 9,403 6,582
--------------------------------------------------------------------------------
Income From Operations Before
Extraordinary Item 3,557 2,278 14,200 10,951
Extraordinary item - loss on
extinguishment of debt --- --- --- (216)
--------------------------------------------------------------------------------
Net Income $3,557 $ 2,278 $14,200 $10,735
================================================================================
Other comprehensive loss, net of taxes -
Foreign currency translation
adjustments (827) 746 (3,976) (1,185)
--------------------------------------------------------------------------------
Comprehensive Income $2,730 $ 3,024 $10,224 $ 9,550
================================================================================
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 share data)
September 30, December 31,
2000 1999
--------------------------------------------------------------------------
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 3,235 $ 2,898
Trade accounts and notes receivable, less
allowance of $1,315 in 2000 and $1,348
in 1999 34,649 30,075
Inventories 57,879 57,844
Deferred income tax assets 12,136 11,972
Prepaid expenses and other current assets 2,336 3,051
------------------------------------------------------------------------
Total Current Assets 110,235 105,840
Property, plant and equipment, net of
accumulated depreciation of $17,565 and
$12,911 respectively 57,758 61,584
Net intangible assets, principally goodwill 177,055 180,746
Other assets 29,353 28,551
------------------------------------------------------------------------
Total Assets $ 374,401 $ 376,721
========================================================================
------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable and current portion of
long-term debt $12,166 $ 10,742
Trade accounts payable 18,829 21,854
Accrued expenses and other liabilities 38,013 34,487
------------------------------------------------------------------------
Total Current Liabilities 69,008 67,083
Long-term debt 151,716 159,624
Other liabilities 25,863 32,424
------------------------------------------------------------------------
Total Liabilities 246,587 259,131
------------------------------------------------------------------------
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) 13,748 (452)
Cumulative foreign currency translation
adjustments (6,686) (2,710)
------------------------------------------------------------------------
Total Shareholders' Equity 127,814 117,590
------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 374,401 $ 376,721
========================================================================
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)
Nine Months Ended
Sept. 30, Oct. 1,
2000 1999
------------------------------------------------------------------------------
(Unaudited)
OPERATING ACTIVITIES
Net income $14,200 $10,735
Adjustments to reconcile net income to net cash
provided by continuing operations:
Depreciation and amortization 9,673 8,294
Extraordinary item --- 216
Other (189) 130
Other changes in operating assets and liabilities:
Accounts and notes receivable (6,281) (3,801)
Inventories (1,341) 5,019
Accounts payable and accrued expenses (8,370) (3,718)
Other operating assets and liabilities 3,776 774
------------------------------------------------------------------------------
Net cash provided by continuing operations 11,468 17,649
Net cash used by discontinued operations (791) (1,469)
------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 10,677 16,180
------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (3,759) (4,363)
Proceeds from sale of property, plant and equipment 366 74
------------------------------------------------------------------------------
Net Cash Used by Investing Activities (3,393) (4,289)
-------------------------------------------------------------------------------
FINANCING ACTIVITIES
(Decrease) increase in notes payable (1,194) 231
Decrease in long-term debt (5,106) (14,277)
Payment of premium on notes repurchased and
debt financing costs --- (210)
-------------------------------------------------------------------------------
Net Cash Used by Financing Activities (6,300) (14,256)
-------------------------------------------------------------------------------
Effect of exchange rate changes on cash (647) (755)
-------------------------------------------------------------------------------
Increase (decrease) in Cash and Cash Equivalents 337 (3,120)
Cash and cash equivalents at beginning of period 2,898 6,230
------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $3,235 $ 3,110
==============================================================================
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 11,525 $9,536
Income taxes $ 2,300 $1,925
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
September 30, 2000 and October 1, 1999 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, 1999. In the opinion of
management, all adjustments considered necessary for a fair presentation have
been included. Operating results for the nine months ended September 30, 2000
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2000.
NOTE B - INVENTORIES
Inventories are summarized as follows:
Sept. 30, December 31,
(in thousands) 2000 1999
------------- -------------
(Unaudited)
Finished products $ 25,477 $ 24,740
Work in process 10,950 14,277
Materials and supplies 22,113 19,904
--------- ---------
58,540 58,921
Less customers' progress payments (661) (1,077)
--------- ---------
$ 57,879 $ 57,844
========= =========
NOTE C - NOTES PAYABLE AND LONG-TERM DEBT
As of September 30, 2000, the Company had $6.0 million of outstanding standby
letters of credit under the Company's existing credit agreement. The Company had
$6.5 million in foreign short-term credit facilities with no amount outstanding
at September 30, 2000.
In addition, the Company had outstanding $74.2 million (net of unamortized
discount of $0.8 million) of its 11.75% senior subordinated notes ("Notes") due
in 2006, $30.3 million of term loan borrowings and $58.5 million in revolver
borrowings. During the first nine months of 1999, the Company purchased, in the
open market at a premium, Notes in the face amounts of $3.5 million. As a result
of the early extinguishment of these Notes, extraordinary charges of $0.2
million was recognized in the first nine months of 1999.
NOTE D - SEGMENT INFORMATION
The Company classifies its continuing operations into two business segments:
Fluid Handling and Industrial Positioning. Detailed information regarding
products by segment is contained in the section entitled "Business" included in
Part I, Item I of the Company's 1999 Form 10-K Report. Information about the
business of the Company by business segment is presented below:
Three Months Ended Nine Months Ended
(Dollars in thousands) September October September October
30, 2000 1, 1999 30, 2000 1, 1999
--------------------------------------------------------------------------------
Net Sales
Fluid Handling $ 24,420 $ 23,778 $72,973 $77,208
Industrial Positioning 52,881 43,381 173,515 140,293
--------------------------------------------------------------------------------
Total net sales $ 77,301 $ 67,159 $246,488 $217,501
================================================================================
Segment operating income
Fluid Handling $ 6,586 $ 5,088 $ 18,253 $17,061
Industrial Positioning 6,280 4,884 23,785 18,517
--------------------------------------------------------------------------------
Total segment operating income 12,866 9,972 42,038 35,578
================================================================================
Equity in income of unconsolidated
companies 171 --- 689 ---
Unallocated corporate expenses (1,824) (1,903) (6,385) (5,696)
Gain on sale of assets --- --- 276 ---
Other non-operating 2 --- 978 ---
Net interest expense (4,996) (4,188) (13,993) (12,349)
--------------------------------------------------------------------------------
Income from continuing operations
before Income taxes and extraordinary
item $ 6,219 $ 3,881 $23,603 $17,533
================================================================================
A reconciliation of segment operating income to income from operations follows:
Three Months Ended Nine Months Ended
(Dollars in thousands) September October September October
30, 2000 1, 1999 30, 2000 1, 1999
--------------------------------------------------------------------------------
Segment operating income $ 12,866 $ 9,972 $ 42,038 $ 35,578
Unallocated corporate expenses (1,824) (1,903) (6,385) (5,696)
Other (income) expense (311) 35 (583) 111
--------------------------------------------------------------------------------
Income from operations $ 10,731 $ 8,104 $ 35,070 $29,993
================================================================================
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 4,500
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 its insurers, who are defending under their stated reservation of
rights. In addition, the Company and the subsidiary are named in cases,
involving approximately 40,000 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 in the Supreme Court of British Columbia
alleging breach of contract arising from the sale of a steam turbine delivered
by the Company's former Delaval Turbine Division and claiming damages in excess
of $10 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 Circuit Court of Cook County,
Illinois alleging performance shortfalls in products delivered by the Company's
former Delaval Turbine Division. The Company has reached an agreement on
December 7, 1999, with the plaintiff settling all claims between the parties.
However, a co-defendant, Federal Insurance Company, continues to pursue its
counterclaim against the Company for attorney's fees it alleges it incurred in
its role as surety for the project from which the litigation arose. The Company
believes that there are legal and factual defenses to the claim 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
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
of the Electro-Optical Systems business. 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, 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 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 nine months ended September 30,
2000. This section should be read in conjunction with the Company's 1999 Form
10-K Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Recent Events
Sierra International Inc. Acquisition: On December 1, 1999, the Company
purchased the stock of Sierra International Inc. ("Sierra") from Echlin Inc., a
subsidiary of Dana Corporation. Sierra sells and distributes replacement parts
for marine and power equipment applications and marine hose products. Sierra has
become part of the Company's Industrial Positioning segment.
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 September 30, 2000 Compared to Three Months Ended
October 1, 1999
Sales. Net sales from continuing operations for the third quarter of 2000 were
$77.3 million compared with $67.2 million in the comparable 1999 period. Third
quarter 2000 net sales increased 2.7% for the Fluid Handling segment and
increased 21.9% for the Industrial Positioning segment, respectively, compared
to the prior year period. The increase in the Fluid Handling segment is due to
the strengthening of the crude oil market in the third quarter of 2000 and
increased parts sales to the U.S. Navy, offset by unfavorable foreign currency
fluctuations of the Swedish Krona. The increase in the Industrial Positioning
segment is due to the purchase of Sierra on December 1, 1999.
Gross Profit. Gross profit increased as a percentage of sales to 31.6% for the
third quarter of 2000 compared with 31.1% in the third quarter of 1999, as a
result of productivity improvements in each segment.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased as a percentage of sales to 16.6% for the
third quarter of 2000 compared with 17.6% in the third quarter of 1999, due to
cost reduction programs at each segment.
Interest Expense. Average borrowings in the third quarter of 2000 were
approximately $3.5 million higher than the third quarter of 1999, due to the
increase in borrowings for the purchase of Sierra. Total interest expense was
$5.0 million for the third quarter of 2000 compared with $4.2 million for the
same period in 1999.
Provision for Income Taxes. Provision for income taxes for continuing operations
was $2.7 million and $1.6 million for the third quarters of 2000 and 1999,
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.
Net Income. The net income in the third quarter of 2000 was $3.6 million
compared with net income of $2.3 million in the comparable 1999 period.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended
October 1, 1999
Sales. Net sales from continuing operations for the first nine months of 2000
were $246.5 million compared with $217.5 million in the comparable 1999 period.
Net sales decreased 5.5% for the Fluid Handling segment and increased 23.7% for
the Industrial Positioning segment, respectively, compared to the prior year
period. The decrease in the Fluid Handling segment is due to downturns in the
crude oil and elevator pump markets during the first six months of 2000 and
unfavorable foreign currency fluctuations of the Swedish Krona. The increase in
the Industrial Positioning segment is due to the purchase of Sierra on December
1, 1999.
Gross Profit. Gross profit increased as a percentage of sales to 32.5% for the
first nine months of 2000 compared with 32.3% for first nine months of 1999 as a
result of productivity improvements in each segment.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses remained constant as a percentage of sales at 17.0% for
the first nine months of 2000 and the first nine months of 1999.
Interest Expense. Average borrowings in the first nine months of 2000 were
approximately $2.2 million higher than the first nine months of 1999, due to the
increase in borrowings for the purchase of Sierra. Total interest expense was
$14.2 million for the first nine months of 2000 compared with $12.4 million for
the same period in 1999.
Provision for Income Taxes. Provision for income taxes for continuing operations
was $9.4 million and $6.6 million for the first nine months of 2000 and 1999,
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 nine months of 1999, the Company purchased,
in the open market at a premium, Notes in the face amount of $3.5 million. As a
result of the early extinguishment of these Notes, an extraordinary charge of
$0.2 million was recognized in the first nine months of 1999.
Net Income. The net income in the first nine months of 2000 was $14.2 million
compared with net income of $10.7 million in the comparable 1999 period.
Liquidity and Capital Resources
Short-term and Long-term Debt
As of September 30, 2000 the Company had $6.0 million of outstanding standby
letters of credit under the Company's existing credit agreement. The Company had
$6.5 million in foreign short-term credit facilities with no amount outstanding
at September 30, 2000.
In addition, the Company had outstanding $74.2 million (net of unamortized
discount of $0.8 million) of its 11.75% senior subordinated notes due in 2006,
$30.3 million of term loan borrowings and $58.5 million in revolver borrowings.
Cash Flow
The Company's operating activities provided net cash of $11.0 million in the
first nine months of 2000 compared with cash provided of $16.2 million in the
comparable 1999 period. The cash provided by operating activities in 2000 was
attributable to net operating profits offset by the increase in working capital
in the period. Cash and cash equivalents were $3.2 million at September 30, 2000
compared with $2.9 million at December 31, 1999.
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.
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, 1999, 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 September 30, 2000
(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: November 1, 2000
----------------
/s/ JOHN A. YOUNG
--------------------------------
John A. Young
Chief Financial Officer
Date: November 1, 2000
----------------
/s/ SCOTT FAISON
----------------------------
Scott Faison
Corporate Controller
