-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AWR4bVBMVfAc/uCyYvM5ousSjbvKE+tibzBnzmgl7wYHspsU7Q2YnuYs6Z3Gh4sI I42OR6g5Ji0Li1BIP23c0Q== 0000804151-98-000033.txt : 19981118 0000804151-98-000033.hdr.sgml : 19981118 ACCESSION NUMBER: 0000804151-98-000033 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981002 FILED AS OF DATE: 19981116 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IMO INDUSTRIES INC CENTRAL INDEX KEY: 0000804151 STANDARD INDUSTRIAL CLASSIFICATION: GENERAL INDUSTRIAL MACHINERY & EQUIPMENT [3560] IRS NUMBER: 210733751 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09294 FILM NUMBER: 98752382 BUSINESS ADDRESS: STREET 1: 1009 LENOX DR STREET 2: PO BOX 6550 CITY: LAWRENCEVILLE STATE: NJ ZIP: 08648-0550 BUSINESS PHONE: 6098967600 MAIL ADDRESS: STREET 1: 1009 LENOX DR STREET 2: PO BOX 6550 CITY: LAWRENCEVILLE STATE: NJ ZIP: 08648-0550 FORMER COMPANY: FORMER CONFORMED NAME: IMO DELAVAL INC DATE OF NAME CHANGE: 19890313 FORMER COMPANY: FORMER CONFORMED NAME: TRANSAMERICA DELAVAL INC /DE DATE OF NAME CHANGE: 19861207 10-Q 1 THIRD QUARTER 1998 FORM 10-Q 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. 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 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. 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. 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 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 EX-27 2 10/02/98 FDS
5 1,000 9-MOS DEC-31-1998 OCT-2-1998 4,393 0 47,155 (1,182) 56,689 119,532 65,861 (6,631) 429,151 125,929 136,419 0 0 17,128 86,614 429,151 239,579 239,579 162,340 162,340 0 0 16,864 13,785 2,847 10,938 0 (6,717) 0 4,221 0.25 0.25
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