UNITED STATES
Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 of (I.R.S. Employer
incorporation or organization) Identification No.)
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 May 15, 2000.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Condensed Statements of Income (Unaudited) - Three months
ended March 31, 2000 and April 2, 1999
Consolidated Condensed Balance Sheets - March 31, 2000 (Unaudited)
and December 31, 1999
Consolidated Condensed Statements of Cash Flows (Unaudited) -
Three months ended March 31, 2000 and April 2, 1999
Notes to Consolidated Condensed Financial Statements (Unaudited) -
March 31, 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 except per share amounts)
Three Months Ended
March 31, April 2,
2000 1999
- ----------------------------------------------------------------
- ----------------------------------------------------------------
(Unaudited)
Net Sales $81,796 $74,499
Cost of products sold 55,085 50,731
- ----------------------------------------------------------------
Gross Profit 26,711 23,768
Selling, general and administrative
expenses 14,622 12,897
Research and development expenses 1,190 1,202
- ----------------------------------------------------------------
Income From Operations 10,899 9,669
Other (income) expense, net (1,060) 103
Gain on sale of assets 276 ---
Interest expense 4,766 4,258
- ----------------------------------------------------------------
Income From Continuing Operations Before
Income Taxes and Extraordinary Item 7,469 5,308
Income tax expense 2,936 1,987
- ----------------------------------------------------------------
Income From Continuing Operations Before
Extraordinary Item 4,533 3,321
Extraordinary item - loss on
extinguishment of debt --- (216)
- ----------------------------------------------------------------
Net Income $4,533 $3,105
================================================================
Other comprehensive loss, net of taxes -
Foreign currency translation adjustments (1,128) (1,427)
- ----------------------------------------------------------------
Comprehensive Income $3,405 $1,678
================================================================
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)
March 31, December 31,
2000 1999
- ------------------------------------------------------------------------
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 2,457 $ 2,898
Trade accounts and notes receivable, less
allowance of $1,268 in 2000 and $1,348 in 1999 36,011 30,075
Inventories 62,511 57,844
Deferred income tax assets 12,155 11,972
Prepaid expenses and other current assets 3,045 3,051
- ------------------------------------------------------------------------
Total Current Assets 116,179 105,840
Property, plant and equipment, net of
accumulated depreciation of $14,429 and
$12,911, respectively 60,720 61,584
Net intangible assets, principally goodwill 179,762 180,746
Other assets 28,347 28,551
- ------------------------------------------------------------------------
Total Assets $ 385,008 $ 376,721
========================================================================
- ------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable and current portion of
long-term debt $ 12,230 $ 10,742
Trade accounts payable 23,129 21,854
Accrued expenses and other liabilities 39,126 34,487
- ------------------------------------------------------------------------
Total Current Liabilities 74,485 67,083
Long-term debt 161,089 159,624
Other liabilities 28,439 32,424
- ------------------------------------------------------------------------
Total Liabilities 264,013 259,131
- ------------------------------------------------------------------------
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) 4,081 (452)
Cumulative foreign currency translation
adjustments (3,838) (2,710)
- ------------------------------------------------------------------------
Total Shareholders' Equity 120,995 117,590
- ------------------------------------------------------------------------
Total Liabilities and Shareholders'
Equity $ 385,008 $ 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)
Three Months Ended
March 31, April 2,
2000 1999
- ------------------------------------------------------------------------------
(Unaudited)
OPERATING ACTIVITIES
Net income $ 4,533 $ 3,105
Adjustments to reconcile net income to net cash
(used by) provided by continuing operations:
Depreciation and amortization 3,204 2,706
Extraordinary item --- 216
Other (261) (11)
Other changes in operating assets and liabilities:
Accounts and notes receivable (6,270) (9,271)
Inventories (5,061) 1,711
Accounts payable and accrued expenses 1,345 3,751
Other operating assets and liabilities 1,473 1,580
- ------------------------------------------------------------------------------
Net cash (used by) provided by continuing
operations (1,037) 3,787
Net cash used by discontinued operations (888) (556)
- ------------------------------------------------------------------------------
Net Cash (Used by) Provided by Operating Activities (1,925) 3,231
- ------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of property, plant and equipment (1,405) (1,574)
Proceeds from sale of businesses and property,
plant and equipment 279 139
- ------------------------------------------------------------------------------
Net Cash Used by Investing Activities (1,126) (1,435)
- ------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase in notes payable 615 3,217
Increase (decrease) in long-term debt 2,383 (9,692)
Payment of premium on notes repurchased and
debt financing costs --- (210)
- ------------------------------------------------------------------------------
Net Cash Provided by (Used by) Financing Activities 2,998 (6,685)
- ------------------------------------------------------------------------------
Effect of exchange rate changes on cash (388) (1,055)
- ------------------------------------------------------------------------------
Decrease in Cash and Cash Equivalents (441) (5,944)
Cash and cash equivalents at beginning of period 2,898 6,230
- ------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $2,457 $ 286
==============================================================================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 2,234 $ 2,035
Income taxes $ 589 $ 664
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
March 31, 2000 and April 2, 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 Imo Industries Inc.'s
(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 three months
ended March 31, 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:
March 31, December 31,
(in thousands) 2000 1999
------------- -------------
(Unaudited)
Finished products $ 28,034 $ 24,740
Work in process 12,132 14,277
Materials and supplies 23,509 19,904
--------- ---------
63,675 58,921
Less customers' progress payments (1,164) (1,077)
--------- ---------
$ 62,511 $ 57,844
========= =========
NOTE C - NOTES PAYABLE AND LONG-TERM DEBT
As of March 31, 2000, the Company had $8.7 million of outstanding standby
letters of credit under the Company's existing credit agreement. The Company had
$7.0 million in foreign short-term credit facilities with amounts outstanding at
March 31, 2000 of $1.9 million.
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, $34.6 million of term loan borrowings, $56.8 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 quarter 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 quarter 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
(Dollars in thousands) March 31, April 2,
2000 1999
- --------------------------------------------------------------
Net Sales
Fluid Handling $ 23,489 $ 26,454
Industrial Positioning 58,307 48,045
- ------------------------------------------------------------
Total net sales $ 81,796 $ 74,499
============================================================
Segment operating income
Fluid Handling $ 5,430 $ 5,496
Industrial Positioning 7,727 5,941
- ------------------------------------------------------------
Total segment operating income $ 13,157 $ 11,437
- ------------------------------------------------------------
Unallocated corporate expenses (2,226) (1,893)
Gain on sale of assets 276 ---
Other non-operating 979 (4)
Net interest expense (4,717) (4,232)
- ------------------------------------------------------------
Income from continuing operations before
Income taxes and extraordinary item $7,469 $5,308
============================================================
A reconciliation of segment operating income to income from operations follows:
Three Months Ended
(Dollars in thousands) March 31, April 2,
2000 1999
- --------------------------------------------------------------
Segment operating income $ 13,157 $ 11,437
Unallocated corporate expenses (2,226) (1,893)
Other (income) expense (32) 125
- ------------------------------------------------------------
Income from operations $ 10,899 $9,669
============================================================
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 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 Deltex division. The complaint
seeks damages in excess of $12 million. On June 2, 1999, the Court granted a
summary judgment motion filed by the Company which effectively dismissed all
claims. 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 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 $1 million dollars. 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 three months ended March 31, 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 March 31, 2000 Compared to Three Months Ended April 2, 1999
- ------------------------------------------------------------------------------
Sales. Net sales from continuing operations for the first quarter of 2000 were
$81.8 million compared with $74.5 million in the comparable 1999 period. First
quarter 2000 net sales decreased 11.2% for the Fluid Handling segment and
increased 21.4% 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 and
unfavorable currency fluctuations of the Swedish Krona. The increase in the
Industrial Positioning segment is due to the purchase of Sierra on November 30,
1999, and market share gains at Boston Gear.
Gross Profit. Gross profit increased as a percentage of sales to 32.7% for the
first quarter of 2000 compared with 31.9% in the first quarter of 1999, as a
result of productivity improvements in each segment.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased as a percentage of sales to 17.9% for the
first quarter of 2000 compared with 17.3% in the first quarter of 1999, due to
management additions at the Company's Industrial Positioning segment and at the
corporate office.
Interest Expense. Average borrowings in the first quarter of 2000 were
approximately $0.7 million higher than the first quarter of 1999, due to
borrowings for the purchase of Sierra. Total interest expense was $4.8 million
for the first quarter of 2000 compared with $4.3 million for the same period in
1999.
Provision for Income Taxes. Income tax expense for continuing operations was
$2.9 million and $2.0 million for the first 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.
Extraordinary Item. There were no extraordinary items during the first quarter
of 2000. During the first quarter 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 quarters of 1999.
Net Income (Loss). The net income in the first quarter of 2000 was $4.5 million
compared with net income of $3.1 million in the comparable 1999 period.
Liquidity and Capital Resources
Short-term and Long-term Debt
As of March 31, 2000, the Company had $8.7 million of outstanding standby
letters of credit under the Company's existing credit agreement. The Company had
$7.0 million in foreign short-term credit facilities with amounts outstanding at
March 31, 2000 of $1.9 million.
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, $34.6 million of term loan borrowings, $56.8 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 used net cash of $1.6 million in the first
quarter of 2000 compared with cash provided of $3.2 million in the comparable
1999 period. The cash used by operating activities in 2000 was attributable to
the increase in working capital in the period. Cash and cash equivalents were
$2.5 million at March 31, 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:
(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 15, 2000
/s/ JOHN A. YOUNG
John A. Young
Chief Financial Officer
Date: May 15, 2000
/s/ G. SCOTT FAISON
G. Scott Faison
Corporate Controller
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