Exhibit 13.1
Shareholder Information
Annual Meeting
Shareholders are invited to attend Interlake's Annual Meeting at 10:00 a.m.
local time on Thursday, April 28, 1994. The location will be the Radisson
Hotel Lisle-Naperville, 3000 Warrenville Road, Lisle, IL.
Common Stock Listing and Price Information
Interlake's common stock is listed on the New York and Chicago stock exchanges.
Its ticker symbol is "IK" and it is listed as "Intlake in the New York Stock
Exchange Composite Transactions, which appear in the business pages of larger
daily newspapers.
Shareholder Services
Please address questions about your Interlake stock to: The First Chicago Trust
Company of New York, P.O. Box 2500, Jersey City, NJ 07303-2500; (800) 446-2617.
Form 10-K Available
A copy of The Interlake Corporation Annual Report on Form 10-K, filed with the
Securities and Exchange Commission, is available to shareholders upon request
to the Corporate Secretary, The Interlake Corporation, 550 Warrenville Road,
Lisle, IL 60532-4387.
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INTERLAKE AT A GLANCE
Interlake is a multinational manufacturer with four operating groups.
MAJOR PLANT SITES PRODUCTS/USES CUSTOMERS MARKET POSITION
SPECIAL MATERIALS Ferrous metal powders Metal powder parts Leader in North
Automotive engine and suppliers America
Hoeganaes powertrain parts Automotive parts
Corporation Farm and construction manufacturers
equipment parts Heavy machinery
Gallatin, TN Appliance parts producers
Milton, PA Welding, chemical and
Riverton, NJ photocopy applications
AEROSPACE COMPONENTS Fabricated components Leading jet engine A leader in
Precision ducts, manufacturers this market
rings, casings and segment
other complex
Chem-tronics, fabrications for
Inc. military and Prime aerospace Unique in its
commercial jet contractors array of
engines and space fabrication
launch vehicles technologies
El Cajon, CA
Tulsa, OK Repair services Most major airlines Significant
Jet engine fan blades Overhaul centers share in
and other components Engine this market
manufacturers
HANDLING Storage rack Businesses in all Largest in
Distribution size ranges in U.S. and
facilities; manufact- North America, Australia
Interlake Material uring facilities; Australia, Pacific
Handling receiving, shipping, Rim and the Far
in-process storage East
Blacktown, Australia Conveyors and conveyor Growing
Lodi, CA systems supplier in
Pontiac, IL Retail display a fragmented
Shepherdsville,KY equipment, field
Sumter, SC office interiors A leader in
Australia
Dexion Group plc Storage rack Businesses in all Largest in the
Distribution size ranges in U.K. and
facilities; the U.K., Belgium; a
Gainsborough, U.K. manufacturing continental leader in
Halle, Germany facilities; receiving Europe, Africa, Germany
Hemel Hempstead,U.K. shipping, in-process Middle East
storage
Kilnhurst, U.K. Conveyors and conveyor A U.K. leader
Laubach, Germany systems for unit load
Nivelles, Belgium Shelving, office conveyors and
interiors shelving
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PACKAGING Non-metallic strapping Steel, lumber, Largest in the
machines and non- brick, corru- U.K., a leader
metallic strapping gated, newspaper, in North
Interlake Steel strapping graphics, can, America
Packaging machines and steel bottle, textile Largest
strapping and distribution supplier in
Fountain Inn, SC Carton strapping; industries Canada; a
Hodgkins, IL securing unit loads; leader in the
Kilnhurst, U.K. i.e. pallets, textile Businesses that U.K.
Maidenhead, U.K. products, lumber, ship products in
newspapers cartons
Racine, WI Stitchers and Businesses that A leader in
stitching wire ship products in the U.S.
Scarborough, Canada Boxboard sealing cartons
Book, magazine binding Graphics arts
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To Our Shareholders and Employees:
A stronger domestic economy improved the outlook for most of our North American
operations as we concluded 1993. However, with a significant deterioration in
the continental European economic climate during the year and increases in raw
material costs at Special Materials, Interlake employees' success in improving
our operations could not prevent declines in sales and earnings for 1993. The
combination of the weak European economy and stronger dollar compared with 1992
(which reduced the reported dollar earnings of our foreign operations) more
than offset the improvements we have begun to see in most of our domestic
operations. Despite lower sales and earnings, we continue to manage the cash
flows of our operations effectively and strengthen our competitiveness in the
face of mixed economic conditions.
During the fourth quarter we took a pretax restructuring charge of $5.6 million
to cover costs associated with closure of several small facilities and further
job eliminations, primarily in our European Handling operations, and also the
write-down of non-performing assets. We believe these actions will enhance the
Company's future results by improving our operating efficiencies. In addition,
during the fourth quarter we increased by $3.9 million our reserves associated
with environmental obligations at a Superfund site sold by a predecessor
company over 20 years ago. Further details of these charges are included in
Management's Discussion and Analysis of Results on page 13.
Review of 1993 Results
Net sales in 1993 were $681.3 million, down 4% compared with 1992. The decline
resulted mainly from lower sales volumes in our European Handling operations
and unfavorable foreign currency exchange rates, which were only partially
offset by increased volumes in our powder metal and domestic Handling
operations. Selling and administrative expenses were 8% lower than 1992 due to
continuing aggressive cost reduction efforts and the exchange rate effect.
Operating income, excluding the 1993 restructuring charge, declined to $43.8
million from $50.4 million in 1992. The decline from 1992 was largely due to
lower earnings at our European operations and our Aerospace Components
business. In addition, higher scrap steel costs reduced margins at our powder
metal operation in 1993, and the stronger dollar reduced reported earnings of
our foreign operations by approximately $2.4 million compared with 1992.
However, we saw stronger earnings at our domestic Handling operation in 1993.
Excluding the effects of restructuring, environmental and extraordinary charges
in 1993 and 1992, the 1993 net loss was $16.0 million, compared with $14.0
million in 1992. In 1993, restructuring and environmental charges added $9.4
million to the reported net loss, while in 1992 extraordinary charges related
to completion of our financing plan and the retroactive adoption of new
accounting standards for postretirement benefits and income taxes increased the
reported net loss by $13.7 million.
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Outlook
Improvement in Interlake's results depends in part upon the economic
environments in which our businesses operate. The improving domestic economy
is leading to increased demand in most of our North American operations, so
that we expect improved results in 1994 for our Special Materials, North
American Handling, and Packaging operations. Overseas, we're seeing stronger
demand in the U.K. and Australia, but we have yet to see improvement in our
continental European operations, where we have taken additional actions to
reduce costs.
However, Interlake is not relying solely on economic recovery for its growth.
We continue to grow our core businesses through geographic expansion, increased
market penetration and new product development.
At Special Materials, we are developing new patent-protected metal powders and
processes that will expand the applications for powder metal parts.
Furthermore, by expanding annealing capacity at our two atomizing plants we
will improve our ability to respond consistently to growing market demand and
customer delivery requirements.
At Aerospace Components, our fabrication unit continues to successfully capture
business in the commercial and space markets, but this has not offset fully the
declines in military work. Our aviation repair unit has experienced lower
sales due to the weak commercial airline industry. In response, we are
reducing costs, lowering the turnaround time for jet engine fan blade repairs,
and expanding future growth opportunities through new repairs in both
traditional and non-aerospace businesses.
At Handling, we are strengthening our global market coverage with new sales
offices in the Asia Pacific region and expanded coverage in the Middle East and
eastern Europe. We continue to broaden our product range with plans in 1994 to
introduce new conveyor and office interiors products. In addition, we are
setting up targeted marketing programs to reach new customers in retail
merchandising, automotive aftermarket, food distribution and other key growth
areas.
At Packaging, we are concentrating our development efforts on new plastic
strapping applications, where we expect demand to increase as the fiber
industry continues its conversion from steel to polyester strapping. In
addition, we are establishing a stronger sales and marketing presence in
continental Europe, where we will build upon our successful export sales into
this region. We are also expanding our marketing efforts in Australia and
South America.
Over the past several years, we have worked hard to ensure that our businesses
have a solid base upon which to grow. We have strictly controlled working
capital and overhead costs; expanded employee involvement in project-based
continuous improvement programs; invested in our facilities to increase
capacity, improve productivity and ensure environmental compliance; initiated
programs to improve customer service and support; and funded new product
development. Because of these and many other actions by our employees
worldwide, Interlake's businesses continue to hold leading shares in the
markets where we compete, with a consistent reputation for high quality
products and superior customer service.
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Having secured an amendment to our bank credit agreement during the fourth
quarter of 1993, we have provided adequate liquidity for our operating cash
requirements during 1994. We have bank debt principal payment obligations that
become due beginning in 1995. We are presently evaluating various actions to
refinance some or all of these obligations in order to improve Interlake's
financial flexibility beyond 1994. We expect these actions will address the
Company's near-term financial needs while preserving the value opportunities
for our shareholders to be realized through improved economic and market
conditions.
I firmly believe that by combining the strengths of our businesses with the
continued support of our employees and investors, we can profit from economic
recovery and grow in the years to come.
Sincerely,
/s/
W. Robert Reum
Chairman, President and Chief Executive Officer
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Business Profile - Special Materials
Interlake conducts its Special Materials business through Hoeganaes
Corporation. Hoeganaes is the North American market leader in ferrous metal
powders, which are sold to customers who primarily manufacture precision parts
for automobiles, light trucks, farm and garden equipment, appliances and other
applications requiring high volumes. About 60% of Hoeganaes' sales are for
automotive applications, including components for transmissions, engines and
suspension systems. Hoeganaes also provides powders for non-structural
applications including photocopying, welding and chemicals.
Hoeganaes uses two basic production processes: atomization, which converts
high-grade steel scrap into powder through the use of an electric furnace steel
making and atomizing system, and direct reduction, which converts high purity
iron ore into a highly porous metal powder. The resulting base powders can
then be blended with various additives and lubricants and treated with coatings
using patented technologies to produce a wide variety of powders tailored to
customer specifications.
Our largest customers for ferrous metal powders in North America are the
original equipment manufacturers of automobile components. Usage of powder
metal parts in vehicles is growing on a cyclical basis as the domestic auto
industry recovers from the recent downturn, and on a secular basis as powder
metallurgy (P/M) continues to displace forging and other more costly metal
forming techniques for component production.
Hoeganaes is driving this additional growth by advancing P/M technology to
increase part strength and density. As the industry's acknowledged technical
leader, Hoeganaes has strategic relationships with key parts producers to
cooperate with them in developing new high-tonnage applications.
These relationships are an integral part of our business strategy for
Hoeganaes, which centers on the research and development of advanced
proprietary engineered materials and processes that will expand P/M parts
applications in automotive and other markets. Broad industry acceptance of our
new ANCORBOND (registered trademark) premixes during 1993 underlines the
success of this strategy. The patented ANCORBOND blend technology, which bonds
alloy additives directly to individual iron particles, results in more
consistent metallurgical properties and improved productivity through better
flow characteristics and more efficient manufacturing performance. ANCORBOND
also results in greatly reduced dusting, which improves factory environmental
conditions. In 1994, Hoeganaes will launch the next generation of ANCORBOND
technology that will open more new applications by further increasing part
strength and density.
Beyond our commitment to research and development, we continue to fund
significant capital projects at Hoeganaes to add capacity, improve quality and
ensure compliance with environmental legislation. Expanding annealing capacity
in 1993 and 1994 at our two atomizing plants will improve our ability to
respond consistently to the growing P/M market and to satisfy customer delivery
requirements across our entire product range. Planned improvements in the
steel making and annealing areas will further improve product quality and
reinforce our position as the low-cost producer. A $5 million fugitive dust
collection system completed in 1993 at our Riverton, New Jersey, plant uses the
latest technology to control particulate emissions both inside and outside the
facility.
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A projected 8-10% growth in vehicle production in North America leads to a
positive outlook for the P/M market in 1994. Hoeganaes expects to share in
this increased tonnage, with volume opportunities not only in the automotive
market, but in the hand tool, lawn and garden and appliance markets as well.
Competitive pressure is expected to remain strong and selling price increases
will not fully compensate for the increases in raw material costs experienced
during 1993.
Despite the competitive pressures, we expect Hoeganaes will maintain its market
leadership and improve profitability through continued development of
patent-protected powders and processes, combined with further productivity
improvements and cost reduction.
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Business Profile - Aerospace Components
Interlake conducts its Aerospace Components business through Chem-tronics, Inc.
Chem-tronics marked its 40th year in the aerospace business in 1993 as a
leading producer of components for commercial and military aerospace
applications. Our primary fabricated products include jet engine ducts, rings
and containment cases; complete fan case assembly modules; and complex
fabrications for military and commercial jet engines and space launch vehicles.
We produce these components using hot and cold forming, chemical milling,
conventional machining and welding. Principal customers are the original
equipment manufacturers (OEMs) of jet aircraft engines.
Chem-tronics also is a leading supplier of jet engine fan blade repair
services. Our customers include all major jet engine manufacturers, most major
airlines and various engine overhaul centers. Our aviation repair business is
certified to repair nearly all commercial jet engine fan blades, using CNC
machining, hot creep forming, electron beam welding and other processes.
The aerospace industry continues to suffer through depressed market conditions
that have persisted for several years. Prime aerospace contractors have seen
sales fall due to declining military business, and the fact that many of the
major air carriers have postponed or canceled new aircraft purchases in the
light of their poor financial condition. The result is an extremely
competitive environment where several marginal producers have exited the
business.
Chem-tronics intends to grow during this period of industry contraction by
executing a strategy of expanding its product line using core competencies of
advanced engineering, machining and fabrication capabilities, and diversifying
its customer base. Our components manufacturing unit continues to successfully
capture business from the commercial and space markets to partially offset
declining military work.
In 1993 we successfully delivered first articles for several major new
programs, including the first major subassembly Chem-tronics has manufactured
for an OEM - the fan case module for the Rolls-Royce Trent 800 engine, which is
under development for use on the new twin engine Boeing 777 widebody aircraft.
Other new programs include a compressor case for the small Allison gas turbine
engine destined for use on small commuter and business aircraft, a columbium
nozzle that goes on the Delta II launch vehicle and components for the Titan IV
launch vehicle.
Critical to the success of all these new programs is a commitment to superior
quality and customer responsiveness, and strict control of start-up and
production costs. Chem-tronics is achieving these goals through widespread
employee involvement on problem solving and process improvement teams,
additional focused work cells, and enhanced shop floor engineering support.
The market for aviation repair services contracted during 1993, as demand from
the airlines declined and price competition intensified. Demand is expected to
remain flat in the near term, as overall airline fleet size is not expected to
grow substantially until later in the decade, except for modest near-term
growth in the Pacific Rim.
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Our strategy for repair services calls for market sensitive pricing strategies,
a continued commitment to reducing turnaround times for blade repairs, lowering
our cost structure and expanding volume by establishing new repairs in both
traditional and non-aerospace businesses.
A competitive advantage for Chem-tronics, as the industry market leader, is
that we have a reputation for high quality and customer responsiveness, and the
ability to offer a wider scope of repairs than anyone in the industry. Our
acknowledged technical competency has prompted engine manufacturers to choose
Chem-tronics as the launch source for fan blade repairs on new engine programs.
Challenging business conditions are nothing new for the aerospace industry, and
Chem-tronics is making the necessary changes to maintain its leading position
in today's competitive environment and to grow in the years to come.
Business Profile - Handling
Interlake's Handling operations are conducted through Interlake Material
Handling and Dexion Group, with production facilities located in the U.S.,
Europe and Australia. Handling designs, manufactures and sells storage rack,
shelving, conveyors and related equipment for use in warehouses, distribution
centers, factories and other storage applications. We also supply equipment
for retail display and office interiors.
With our ability to provide global market coverage, Handling is the world's
leading supplier of rack systems and offers the broadest product line of
material handling and storage products. Furthermore, Handling is the most
experienced provider of sophisticated rack configurations and integrated
storage and handling solutions. Our in-house design capabilities and large
manufacturing capacity enable us to respond rapidly to our largest customers'
complex needs and exacting delivery schedules, while our extensive distributor
network allows us to reach smaller clients on a timely basis.
Because Handling's customers are primarily engaged in retailing and wholesaling
of food and consumer durables and non-durables, our sales are in part dependent
upon prevailing economic conditions in the markets where we compete. With
recessionary conditions continuing in continental Europe and weak recoveries in
the U.K. and Australia, those markets for storage products remain highly
competitive. The domestic market has shown good signs of recovery in the
second half of 1993 and is expected to continue to improve as the domestic
economy strengthens.
Handling's business strategy centers on continuously reducing production costs,
adding value to our product offerings through superior service and support, and
expanding to selected Pacific Rim, European and North American markets. We
have directed capital spending in the last several years toward productivity
and quality improvements, including a new $2 million paint line at our Lodi,
California, plant that has improved finish quality, lowered paint cost,
increased factory throughput and ensured compliance with environmental air
quality standards. More and more Handling employees are involved in continuous
improvement programs that are contributing to additional cost reductions and
productivity improvements.
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We are improving our design, quotation and sales order processing systems to
enhance the effectiveness of our sales force, and we're implementing targeted
marketing programs to reach new customers in retail merchandising, automotive
aftermarket, food distribution and other key growth areas. We are also
developing new distribution channels, such as catalog sales.
During 1993 we expanded our presence in the rapidly growing Asia Pacific
region, opening a sales office in Singapore. Also in 1993, we expanded our
regional sales office in Dubai, United Arab Emirates, serving the growing
Middle East market, and we are strengthening our sales coverage of the emerging
eastern European markets. We intend to establish a sales and distribution
outlet during early 1994 in Hong Kong to serve that market and the rapidly
expanding market in mainland China.
Along with geographic expansion, we plan to continue to broaden our product
offerings, with planned introductions this year of a new high-speed lineshaft
conveyor and improved office interiors and office systems products for the
European and Australian markets.
While we continue to pursue new product and geographic market opportunities
aggressively, we are also responding quickly to contracting market conditions,
particularly in Europe, where we have significantly reduced our cost structure
over the past several years. All of our Handling operations have improved cost
structures and are positioned to capitalize on the market recovery. Our
outlook for 1994 calls for improved market conditions in the U.S., U.K., and
Asia Pacific markets. However, we expect that markets in continental Europe
will not improve until the second half of 1994 at the earliest. In
anticipation of this continued weakness in our European markets, we took
additional actions during 1993 to further reduce our cost structure.
While worldwide economic conditions remain challenging, we are confident
Handling's low-cost producer status, unrivalled product range and superior
customer service will enable us to leverage the benefit of economic recovery
and support our growth initiatives.
Business Profile - Packaging
Interlake's Packaging operations design and sell machinery for applying steel
and plastic strapping and stitching wire, and produce strapping and wire for
use in such machines. We are the leading supplier of steel strapping in Canada
and second in the U.K.; a market leader in plastic strapping and machines in
the U.K.; and a leading supplier of plastic strapping and stitching products in
the U.S.
Our principal plastic strapping customers are the corrugated, newspaper,
graphics, can, bottle, textile and distribution industries. Primary users of
steel strapping are heavy goods manufacturers such as the steel, lumber, brick
and concrete industries. Stitching products are sold to a broad customer base
including the corrugated box, graphic arts, automotive, agricultural and food
industries.
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Aside from modest increases in North American strapping sales, Packaging's 1993
results were unfavorably affected by weak fundamentals in the other markets
where we compete. Our 1994 economic outlook foresees modest growth in North
America and the U.K., but pricing will remain competitive. Packaging's
business strategy, therefore, hinges on continued cost reductions and improved
production efficiencies in our manufacturing operations, increased penetration
of new applications for plastic strapping, expanding plastic strapping sales to
new European markets and improved product offerings in the stitching business.
As the market for capital equipment gradually improves in the U.S., we
anticipate stronger activity in the newspaper, corrugated, and graphics
industries, where we offer the technically-advanced PowerStrap and Interlake
lines of plastic strapping machines. Our reputation for quality, breadth of
product range and excellent field support buttresses our position in this
market. We expect demand for plastic strapping to increase as the fiber
industry continues its conversion from steel to polyester strapping. In 1993,
Packaging completed installation of a new polyester strap manufacturing line at
our Fountain Inn, South Carolina, plant to support this growing market. The
new line features the latest computerized monitoring and control, and it also
improves our ability to use post-industrial and post-consumer recycled
polyester in the manufacturing process.
Packaging's Canadian and U.K. steel strapping businesses are facing strong
price competition and material cost increases in their primary markets. Our
strategy for these units centers on reducing manufacturing costs and improving
productivity, expanding export sales and increasing domestic market
penetration. In Canada, we are also increasing sales of our product
identification line, used by the lumber and other industries in inventory
control applications.
Expanding sales to new geographic regions is also a key strategic thrust of our
U.K. plastic strapping business. In late 1993 we established a sales office in
France to build upon our successful export sales into this region.
In our U.S. stitching business, 1993 saw the introduction of the Commander, a
side-feed stitching head for the graphics industry. A major improvement was
made to our widely-used Champion stitching head. Renamed the Magnatek, the
improved head incorporates an Interlake-exclusive magnetic rotator that
virtually eliminates dropped stitches and jams, improving its reliability in
high-speed bindery applications.
Our outlook for 1994 foresees better market conditions in North America and the
U.K. With plans for further market expansion, new product introductions and
cost reduction initiatives, we believe we are positioned to take advantage of
improving economic conditions in our existing markets and to pursue growth in
new areas.
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Management's Discussion and Analysis of Results of Operations and Financial
Condition
(Dollars in millions)
Results of Operations
Net sales were $681.3, $708.2, and $714.7, respectively, in 1993, 1992, and
1991. In the Engineered Materials segment, strong North American auto and
light truck production in 1993 led to a $9.0 increase in sales of metal powders
which was offset by a $6.5 decline in Aerospace Component sales.
Handling/Packaging Systems sales declined as increased U.S. sales of material
handling equipment were more than offset by recessionary conditions in
continental Europe and the effects of a stronger U.S. dollar. In 1992, in the
Engineered Materials segment, increased sales of metal powders were more than
offset by a $14.2 decline in defense-related business. Lower strapping
equipment sales accounted for the 1992 sales decrease in the Handling/Packaging
Systems segment as lower selling prices for Handling products were offset by
higher Handling volume.
Operating income was $38.2, $50.4, and $61.5, respectively, in 1993, 1992, and
1991. In 1993 operating income was $12.2 lower than in 1992 reflecting the
recessionary impact on volume and pricing in the Handling/Packaging Systems
segment in continental Europe, a restructuring charge of $5.6, lower shipments
and weak conditions in the commercial aerospace industry, and higher scrap
steel costs in Engineered Materials. These declines were partially offset by
higher domestic Handling profits. The $11.1 decline in 1992 as compared with
1991 was due to lower selling prices and reduced benefits from liquidation of
LIFO inventories in the Handling/Packaging Systems segment, and to lower
defense-related sales volume and higher expenses in developing new non-defense
business in the Engineered Materials segment.
During the three year period, Engineered Materials' sales of metal powders
increased due to higher North American auto and light truck production.
Defense-related sales declined approximately $14.9 since 1991 at Aerospace
Components. In the three year period, Handling/Packaging Systems' sales have
reflected a lack of demand for capital goods in most major economies throughout
the world. This lack of demand has generally led to reduced selling prices
and lower volumes, resulting in lower segment earnings. The unfavorable trend
in the Handling/Packaging Systems segment's operating profit also reflects
declining benefits from liquidations of LIFO inventories, with LIFO benefits
being $1.2, $1.5, and $4.1, respectively, in 1993, 1992, and 1991.
Cost of sales (excluding unusual items of expense) as a percentage of sales was
76%, 75%, and 73%, respectively, in 1993, 1992, and 1991. The Company was able
to offset most of the effect of unabsorbed fixed costs due to lower sales by
reducing total manufacturing costs, but was unable to offset the entire effect
of lower selling prices in either 1993 or 1992. Selling and administrative
expenses for the core businesses were reduced each year and as a percentage of
sales were 17% in 1993 and 18% in both 1992 and 1991.
The following business segment commentary excludes unusual items and
restructuring charges. The analysis of individual business unit results is
presented here before allocation of general corporate expenses. See Note 8 of
Notes to Consolidated Financial Statements for further information on business
segments.
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Net Sales and Operating Profit by Business Segment
(in millions)
________Net_Sales______ _____Operating_Profit_____
1993______1992_____1991_____1993______1992______1991__
Engineered Materials
Special Materials $131.5 $122.5 $114.5
Aerospace Components __61.0 __67.5 __77.9
Core Businesses 192.5 190.0 192.4 $ 26.3 $ 29.6 $ 32.4
Restructuring Charges _____- _____- _____- __(1.8) _____- _____-
_192.5 _190.0 _192.4 __24.5 __29.6 __32.4
Handling/Packaging Systems
Handling 366.7 395.3 392.0
Packaging _122.1 _122.9 _130.3
Core Businesses 488.8 518.2 522.3 19.1 24.0 33.7
Restructuring Charges - - - (3.8) - -
Unusual Items _____- _____- _____- _____- __(2.5) __(3.3)
_488.8 _518.2 _522.3 __15.3 __21.5 __30.4
Corporate Items/
Eliminations _____- _____- _____- _(56.0)* _(52.6) _(62.4)*
Consolidated Totals $681.3 $708.2 $714.7 $(16.2) $ (1.5) $ 0.4
* Includes provisions of $4.8 in 1993 and $6.0 in 1991 for environmental matters.
See Note 17 of Notes to Consolidated Financial Statements.
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Engineered Materials
Engineered Materials includes Special Materials (metal powders for
manufacturing precision parts) and Aerospace Components (precision machined
structures, complex fabrications, and jet engine component repairs).
Sales increased 1% in 1993 over 1992 in the Engineered Materials segment.
Metal powder shipments were up 8% in 1993 following a 9% increase in 1992
reflecting increased North American automobile and light truck production.
Aerospace Components' sales declined 10% in 1993. Fabrication shipments
declined due to the continued slowdown in military procurement and weak
conditions in the commercial aerospace industry. Weak demand from the airline
industry has had a negative impact on repair volumes and has led to increased
price competition.
Aerospace Components' defense-related business represented approximately 39%,
36%, and 50% of this business' sales in 1993, 1992, and 1991, respectively.
(Defense-related sales as a percent of the Company's consolidated sales were
approximately 3%, 3%,and 5% in the last three years.) Aerospace Components has
emphasized a strategy of developing fabrication business in the commercial and
space sectors to replace declining defense-related business and has experienced
an 11% increase in this area from 1990 to 1993 despite weak conditions in the
industry.
Operating profit for the segment fell 11% in 1993. Special Materials'
operating profit fell 3% despite the higher metal powder volume as higher scrap
steel costs and other manufacturing costs more than offset the benefits of
higher volume. The average cost of scrap steel in 1993 was 20% higher than in
1992. The Company expects to partially recover increases in scrap costs during
1994 through higher selling prices. Aerospace Components' operating profit was
37% lower in 1993. In addition to the volume shortfall noted above, depressed
conditions in the commercial aerospace and airline industries have resulted in
excess capacity leading to increased price competition. Results in 1993 were
also unfavorably affected by high initial costs related to the early production
stages of new non-defense business.
Engineered Materials' sales declined 1% in 1992 as compared with 1991. Special
Materials' shipments increased 9% and Aerospace Components' sales declined 13%.
Efforts to grow non-defense business at Aerospace Components were successful
and led to a 10% sales increase in this area, but were not sufficient to offset
the effects of defense-related sales declines of 37% in 1992.
Segment operating profit declined 9% in 1992 as compared with 1991. Special
Materials' operating profit advanced in line with sales, although revenue per
ton declined 1%. Aerospace Components' operating profit was reduced by roughly
50% due to a decline in defense-related business and expenses associated with
developing new non-defense business, such as start-up expenses at a new blade
repair facility in Tulsa.
The Engineered Materials segment ended 1993 with an order backlog of $73.6,
down from $82.9 at the end of 1992. Special Materials' backlog, which is
generally short-term in nature, was up 11%. Aerospace Components' backlog was
down 19% due mainly to reductions in multi-year military order backlog.
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Handling/Packaging Systems
Handling/Packaging Systems' sales in 1993 were down 6% from 1992. Domestic
Handling sales were up 17% as demand for material handling equipment in the
United States showed substantial improvement during the year. However, this
increase was more than offset by a decline in continental Europe and the
unfavorable effects of the stronger dollar. Recessionary conditions in
continental Europe, especially Germany, resulted in lower volume and pricing
levels, leading to a sales decline of 21% for the European Handling unit
overall. Packaging sales fell by 1% during the year. Higher volume in North
American strapping and machines was more than offset by the impact of a
stronger dollar on European sales, and lower sales of stitching products.
Segment operating profit in 1993 was 20% below 1992. Handling profit fell 20%,
as improved domestic volume and cost reduction efforts throughout the group
were not enough to offset the recessionary impact of lower volume and pricing
on the European operations and the effect of a stronger dollar. Packaging
operating profit was 10% lower than the prior year as improved strapping and
machine volume in North America was more than offset by lower stitching product
volume and the effect of a stronger dollar.
Sales for the segment fell by less than 1% in 1992 as compared with 1991.
Recessionary conditions in capital goods markets led to intensified price
competition which caused the segment's sales reduction. Handling's sales in
1992 were largely unchanged from 1991 due to the offsetting effects of lower
selling prices, primarily in North America, and higher unit sales in Germany,
which were up 9%. Packaging's sales fell by 6% with most of the decline in
machine sales. Operating profit for the segment declined 29% in 1992, due to
lower North American selling prices and reduced benefits from liquidations of
LIFO inventories.
Handling/Packaging Systems ended 1993 with an order backlog of $71.6, down from
$81.0 at the end of 1992 (at the same exchange rates) because of lower orders
in the European Handling business.
Restructuring Charge
The $5.6 restructuring charge in 1993 consisted of costs associated with the
closure of several small facilities, personnel reductions and write-offs of
non-performing equipment and inventory. The personnel reductions relate
primarily to the European Handling operations. These reductions, together with
others that have occurred in 1993 and 1992, will result in a total reduction of
8% in the Company's work force.
Unusual Items
Unusual items in 1992 and 1991 were $2.5 and $3.3, respectively, and reflected
unfavorable adjustments with respect to non-core businesses which were divested
in 1992 and 1993.
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Interest Expense
The Company has a highly leveraged capital structure with substantial net
interest expense. Net interest expense was $49.1, $51.4, and $56.1 in 1993,
1992, and 1991, respectively. The declines in 1993 and 1992 were largely the
result of lower average outstanding borrowings. In 1992, the Company
substantially fixed its future interest rates. Completion of a debt
refinancing in 1992 included the placement of $220.0 of fixed rate (12 1/8%)
Senior Subordinated Debentures and retirement of Subordinated Increasing Rate
Notes. In addition, the Company has long-term interest rate agreements as
required under its bank credit agreement, which effectively provide fixed rates
of interest on 67% of its bank obligations at the end of 1993.
Nonoperating Items
The Company incurs certain expenses which are not related to its ongoing
operations. These include costs for environmental matters arising from sites
related to former operations of a predecessor of the Company, and
postretirement expenses attributable to disposed of or discontinued operations.
The Company has been identified as one of four potentially responsible parties
at a Superfund site in Duluth, Minnesota. In 1991, based on a review of its
environmental matters involving nonoperating locations, the Company took a
special charge of $6.0, of which $4.5 was attributable to its estimate of its
share of the potential costs related to the Duluth site. Based on its
experience at the Duluth site since 1991, and further studies conducted by the
Company in response to a request issued by the Minnesota Pollution Control
Agency in 1993, the Company took an additional special charge of $3.9 for
environmental matters in the fourth quarter of 1993. The charge was based on
the Company's estimate of its share of the likely costs to complete remediation
of the soils at the site to standards consistent with industrial use and to
further investigate the underwater sediments. It does not attempt to account
for potential costs of remediation consistent with an alternative use, or to
account for remediation of the underwater sediments, which the Company believes
are not reasonably determinable absent further investigation and indication by
governmental agencies as to what level of remediation, if any, will be required.
The Company believes that further remediation at the Duluth site should and will
be consistent with its long-time industrial use. Were the governmental agencies
to insist upon clean-up to residential use standards, or require remediation of
the underwater sediments, it is likely that the costs of remediation would be
significantly higher. (See Note 17 of Notes to Consolidated Financial
Statements.)
Provision for Income Taxes
The high level of net interest expense and continued sluggish levels of
economic activity caused domestic losses in 1993, 1992, and 1991. These losses
can be carried forward and tax benefits realized in future years, but did not
result in federal tax benefits in the calculation of the provision for income
taxes for the 1991-1993 period. Consequently, the taxes due to foreign and
state authorities were not offset by any U.S. federal income tax benefits in
this period. As a result, the Company recorded a tax expense compared to
pretax losses in 1993 and 1992 and a tax expense in excess of pretax income in
1991. The decline in taxes in 1993, from 1992, was due to lower foreign
income.
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At the end of 1993, the Company's U.S. federal income tax returns for the years
1988 through 1990 were in the process of examination. Resolution of the years
1982-87 is pending with the Appeals Division of the Internal Revenue Service.
The Company believes that adequate provision has been made for the possible
assessments of additional taxes. However, there can be no assurance that
federal income tax issues for the years 1982-1990 will be resolved in
accordance with the Company's expectations.
In 1992, the Company adopted a new method of accounting for income taxes (see
Cumulative Effect of Accounting Changes and Note 3 of Notes to Consolidated
Financial Statements). The effect of this change on taxes provided against
results of operations in 1993 and 1992 was immaterial.
Extraordinary Loss
In 1992, as part of its debt refinancing, the Company redeemed its Increasing
Rate Notes and negotiated an amended bank credit agreement. These actions
necessitated the write-off of related deferred debt issuance costs amounting to
$7.6 without any net tax benefit in 1992.
Cumulative Effect of Accounting Changes
In 1992, the Company adopted the Financial Accounting Standards Board's
Statements of Financial Accounting Standards (FAS) No. 106 "Employers'
Accounting for Postretirement Benefits Other Than Pensions" and No. 109
"Accounting for Income Taxes". The cumulative effects of these adoptions were
recognized in 1992, as of the beginning of the year. The adoption of FAS No.
106 resulted in a charge of $9.2 (net of taxes), while the adoption of FAS No.
109 resulted in a credit of $3.1. (See Note 3 of Notes to Consolidated
Financial Statements.)
Intangible Assets
The Company regularly reviews the carrying values of long-lived assets for
potential impairment based on earnings history and market conditions.
Impairment is determined by comparing the sum of the undiscounted future cash
flows attributable to the businesses to which the intangible assets relate to
the carrying value of all the assets attributable to such businesses. Under
this analysis, the Company has determined that its intangible assets at present
are not impaired. However, in the light of changing conditions in the markets
of the businesses to which the intangible assets relate, including changes
taking place in the aerospace and newspaper industries, the Company will
continue to periodically assess the carrying values of its intangible assets
using the analysis described above and other analyses as deemed appropriate,
and may conclude at some point in the future that their value has been impaired.
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Liquidity and Capital Resources
Capital Resources
At December 26, 1993, cash totaled $31.9 compared with $38.6 at the end of
1992. During the fourth quarter of 1993 the Company reached an accord with its
bank group to amend its credit agreement, enabling it to maintain compliance
with the terms of its existing credit agreement. Under the amended credit
agreement, during 1994 the Company will be able to borrow for general corporate
purposes up to an additional $36.7. However, outstanding bank borrowings at
the end of each fiscal quarter will be limited to between $9.7 and $16.7 above
its year end 1993 bank borrowings of $200.1. In addition, $5.8 will be
available for use in connection with the Duluth Superfund site. The Company
believes that the revised credit agreement provides for adequate liquidity in
1994.
Based on the level of operating profit achieved in 1993, the Company believes
that it will be unlikely that operating cash flow combined with the additional
borrowing capacity available under the amended credit agreement will be
sufficient to meet the Company's projected cash requirements in 1995 and 1996,
which include long-term debt amortization of $24.7 in 1995 and $88.2 in 1996.
The Company is evaluating alternative actions to refinance some or all of its
long-term bank obligations in order to improve its financial flexibility beyond
1994.
Cash Flow (see Consolidated Statement of Cash Flows)
Cash inflows provided by operating activities were $8.0 and $23.4 in 1993 and
1991, respectively, while operating activities used cash of $7.2 in 1992.
Excluding debt issuance costs related to the 1992 financing plan, cash inflows
provided by operating activities were $4.8 in 1992. Cash inflows in 1992,
excluding debt issuance costs, were down mainly due to lower operating earnings
and increased working capital requirements.
Cash outflows used by investing activities were $13.1, $26.3 and $9.4,
respectively, in 1993, 1992 and 1991. Included in 1993 and 1992 capital
expenditures were expansion projects of $6.1 and $8.8, respectively. Expansion
spending in 1993 included an additional annealing furnace to expand capacity at
the Special Materials operation and a new production line for polyester
strapping at Packaging. Expansion spending in 1992 included the implementation
of advanced manufacturing techniques to further enhance the quality of Special
Materials' atomized metal powders and the establishment of Aerospace
Components' new Tulsa facility for repair of jet engine fan blades. Expansion
spending in 1991 totaled $4.5 and included the purchase of a German production
facility near Leipzig which, along with the establishment of new distribution
centers, enhanced the Company's business in eastern Germany. Management
believes that capital expenditures have been adequate to properly maintain the
Company's businesses and provide for anticipated growth opportunities. At the
end of 1993, the unexpended balance on approved capital expenditure projects
was $6.0. The Company anticipates that 1994 capital spending will be
approximately $20.0 which is expected to be funded by operations.
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Cash outflows used for financing activities were $1.3 and $21.8 in 1993 and
1991, respectively, while in 1992, a net cash inflow of $67.5 resulted from
implementation of the 1992 debt refinancing. Outflows in 1991 represented
scheduled amortization of long-term debt, but included the use of $7.5 of
deferred term loan facilities.
Foreign Operations
The Company does business in a number of foreign countries, mainly through its
Handling/Packaging Systems segment. The results of these operations are
initially measured in local currencies, principally in British pounds, German
marks, Canadian dollars, or Australian dollars and then translated into U.S.
dollars at applicable exchange rates. The reported results of these operations
are sensitive to changes in applicable foreign exchange rates and could have a
material effect on the Company's results of operations. In 1993, the dollar
was generally stronger against most European currencies than in 1992, resulting
in a negative impact on sales of $35.7 and on operating income of $2.4.
Fluctuations in foreign currency exchange rates in 1992 had very little effect
on sales and operating income. (For additional information about the Company's
operations by geographic area, see Note 8 of Notes to Consolidated Financial
Statements.)
Effects of Inflation
The impact of inflation on the Company in recent years has not been material,
and it is not expected to have a significant effect in the foreseeable future.
20
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The Interlake Corporation - Report of Management
The consolidated financial statements of The Interlake Corporation, presented
on pages 23 through 26 of this annual report, have been prepared by management,
which is responsible for their accuracy and integrity. They have been prepared
in conformity with generally accepted accounting principles, consistently
applied, and include informed judgments and estimates, as required. Other
financial information in this annual report is consistent with the financial
statements.
Interlake's system of internal controls is designed to provide reasonable
assurance, at a justifiable cost, as to the reliability of financial records
and reporting and the protection of assets. This system includes
organizational arrangements with clearly defined lines of responsibility.
Internal controls are monitored through recurring internal audit programs.
Price Waterhouse, independent accountants, have examined Interlake's financial
statements and their opinion appears below.
The Audit Review Committee of the Board of Directors, composed solely of
outside directors, determines that management is fulfilling its financial
responsibilities by meeting periodically with Price Waterhouse, the internal
auditors and management to review accounting, auditing and financial reporting
matters. The internal auditors and independent accountants have free and
complete access to the Audit Review Committee.
Interlake has adopted formal corporate policies demanding high standards of
ethical and financial integrity and has disseminated these policies to
appropriate employees. Internal audit procedures have been developed to
provide reasonable assurance that violations of these policies, if any, are
detected.
/s/ John J. Greisch
Vice President - Finance, Treasurer and Chief Financial Officer
/s/ W. Robert Reum
Chairman, President and Chief Executive Officer
Report of Independent Accountants
To the Board of Directors and Shareholders of The Interlake Corporation:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of cash flows and of shareholders' equity
present fairly, in all material respects, the financial position of The
Interlake Corporation and its subsidiaries at December 26, 1993 and December
27, 1992, and the results of their operations and their cash flows for each of
the three years in the period ended December 26, 1993, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of The Interlake Corporation's management; our responsibility is
to express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
21
PAGE
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 3 to the consolidated financial statements, the Company
changed its method of accounting for postretirement benefits other than
pensions and its method of accounting for income taxes in 1992.
/s/ PRICE WATERHOUSE
Chicago, Illinois
January 27, 1994
22
PAGE
The Interlake Corporation
Consolidated Statement of Operations
For the Years Ended December 26, 1993, December 27, 1992 and December 29, 1991
(in thousands except per share data)
__1993___ __1992___ __1991___
Net Sales $ 681,330 $ 708,199 $ 714,742
Cost of Products Sold 520,508 527,857 521,803
Selling and Administrative Expense 117,025 127,436 128,056
Unusual Items - 2,523 3,344
Restructuring Charge ____5,611 ________- ________-
Operating Income 38,186 50,383 61,539
Interest Expense 50,906 54,284 58,654
Interest Income (1,855) (2,859) (2,508)
Dividend Income - - (220)
Nonoperating Expense (see Note 17) ____5,359 ______484 ____5,186
Income (Loss) Before Taxes on Income,
Minority Interest, Extraordinary Loss
and Accounting Changes (16,224) (1,526) 427
Provision for Income Taxes ____6,542 ____9,040 ___10,530
Income (Loss) Before Minority Interest,
Extraordinary Loss and Accounting
Changes (22,766) (10,566) (10,103)
Minority Interest in Net Income
of Subsidiaries ____3,196 ____3,424 ____3,641
Income (Loss) Before Extraordinary Loss
and Accounting Changes (25,962) (13,990) (13,744)
Extraordinary Loss on Early
Extinguishment of Debt, Net of
Applicable Income Taxes - (7,567) -
Cumulative Effect of Change
in Accounting Principles ________- ___(6,141) ________-
Net Income (Loss) $ (25,962) $ (27,698) $ (13,744)
Income (Loss) Per Share of Common Stock:
Income (Loss) Before Extraordinary
Loss and Accounting Changes $ (1.18) $ (0.84) $ (1.31)
Extraordinary Loss - (0.46) -
Accounting Changes ________- ____(0.37) ________-
Net Income (Loss) $ (1.18) $ (1.67) $ (1.31)
Average Shares Outstanding 22,027 16,754 10,484
(See notes to consolidated financial statements)
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The Interlake Corporation
Consolidated Balance Sheet - December 26, 1993 and December 27, 1992
(Dollars in thousands)
__1993___ ___1992__
Assets
Current Assets:
Cash and cash equivalents $ 31,934 $ 38,640
Receivables, less allowances of $2,775
in 1993 and $3,989 in 1992 107,861 129,370
Inventories 77,025 74,121
Other current assets ____9,720 ____9,454
Total Current Assets __226,540 __251,585
Goodwill and Other Assets:
Goodwill, less accumulated amortization
of $20,141 in 1993 and $18,646 in 1992 38,916 42,905
Other assets ___61,888 ___60,583
Total Goodwill and Other Assets __100,804 __103,488
Property, Plant and Equipment:
Land 6,729 6,863
Buildings 74,175 73,629
Equipment 284,060 265,025
Construction in progress 4,222 15,319
Less - depreciation and amortization _(219,495) _(204,617)
Property, Plant and Equipment, net __149,691 __156,219
Total Assets $ 477,035 $ 511,292
Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable $ 60,382 $ 60,702
Accrued liabilities 43,272 42,474
Interest payable 13,913 13,341
Accrued salaries and wages 14,713 13,759
Income taxes payable 17,866 21,793
Debt due within one year ____2,525 ____6,727
Total Current Liabilities __152,671 __158,796
Long-Term Debt __440,610 __444,074
Other Long-Term Liabilities ___65,765 ___63,794
Deferred Tax Liabilities ___19,771 ___20,233
Commitments and Contingencies ________- ________-
Minority Interest ___18,830 ___17,958
Preferred Stock - 2,000,000 shares authorized
Convertible Exchangeable Preferred Stock - Redeemable,
par value $1 per share, issued 40,000 shares 39,155 39,155
Shareholders' Equity:
Common stock, par value $1 per share, authorized
100,000,000 shares, issued 23,228,695 in 1993 and 1992 23,229 23,229
Additional paid-in capital 30,248 30,271
Cost of common stock held in treasury (1,202,000 shares
in 1993 and 1,201,956 shares in 1992) (28,047) (28,060)
Retained earnings (Accumulated deficit) (253,215) (227,252)
Unearned compensation (11,279) (12,934)
Accumulated foreign currency
translation adjustments __(20,703) __(17,972)
Total Shareholders' Equity _(259,767) _(232,718)
Total Liabilities and Shareholders' Equity $ 477,035 $ 511,292
(See notes to consolidated financial statements)
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The Interlake Corporation
Consolidated Statement of Cash Flows
For the Years Ended December 26, 1993, December 27, 1992 and December 29, 1991
(in thousands)
___1993___ ___1992___ ___1991___
Cash Flows from (for) Operating Activities:
Net income (loss) $ (25,962) $ (27,698) $ (13,744)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Restructuring charge 5,611 - -
Depreciation and amortization 25,040 27,535 25,324
Extraordinary item - 7,488 -
Debt issuance costs - (11,952) -
Accounting changes - 6,141 -
Nonoperating environmental matters 4,750 - 6,000
Other operating adjustments (7,231) (4,412) 1,963
(Increase) Decrease working capital:
Accounts receivable 16,233 (6,469) (754)
Inventories (4,190) (3,616) 8,548
Other current assets (1,642) 190 5,518
Accounts payable 519 2,724 2,033
Other accrued liabilities (2,708) 10,779 (11,773)
Income taxes payable ___(2,432) ___(7,866) ______260
Total Working Capital Change ____5,780 ___(4,258) ____3,832
Net Cash Provided (Used) by Operating Activities ____7,988 ___(7,156) ___23,375
Cash Flows from (for) Investing Activities:
Capital expenditures (14,540) (24,588) (13,472)
Proceeds from disposal of PP&E 284 636 2,344
Acquisitions - (2,319) (5,472)
Redemption of preferred stock received from
1984 business disposition - - 6,000
Divestitures - - 2,160
Other investment flows ____1,122 ________- ___(1,007)
Net Cash Provided (Used) by Investing Activities __(13,134) __(26,271) ___(9,447)
Cash Flows from (for) Financing Activities:
Proceeds from issuance of long-term debt 104 267,832 111,344
Retirements of long-term debt (7,582) (282,430) (133,179)
Proceeds from issuance of common stock - 41,759 -
Proceeds from issuance of preferred stock - 39,155 -
Other financing flows ____6,158 ____1,217 _______36
Net Cash Provided (Used) by Financing Activities ___(1,320) ___67,533 __(21,799)
Effect of Exchange Rate Changes _____(240) ___(6,007) ______(61)
Increase (Decrease) in Cash and Cash Equivalents (6,706) 28,099 (7,932)
Cash and Cash Equivalents, Beginning of Year ___38,640 ___10,541 ___18,473
Cash and Cash Equivalents, End of Year $ 31,934 $ 38,640 $ 10,541
(See notes to consolidated financial statements)
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The Interlake Corporation
Consolidated Statement of Shareholders' Equity
For the Years Ended December 26, 1993,December 27, 1992 and December 29, 1991
(in thousands)
Common Stock Common Stock Retained Unearned Foreign
and_Paid-In_Capital Held_in_Treasury Earnings Compen- Currency
Shares Amount Shares Amount (Deficit) sation Translation Total
____________________________________________________________________________________________
Balance December 30, 1990 11,741 $ 11,741 (1,351) $ (30,685) $(182,654) $ (16,064) $ (9,146) $(226,808)
Net income (loss) (13,744) (13,744)
Stock incentive plans 94 1,976 (2,010) 745 711
ESOP transactions 1,207 1,207
Translation loss ______ ________ ______ _________ _________ _________ ____(831) _____(831)
Balance December 29, 1991 11,741 11,741 (1,257) (28,709) (198,408) (14,112) (9,977) (239,465)
Net income (loss) (27,698) (27,698)
Sale of stock 11,488 41,759 41,759
Stock incentive plans 55 649 (1,146) 273 (224)
ESOP transactions 905 905
Translation loss ______ ________ ______ _________ _________ _________ __(7,995) ___(7,995)
Balance December 27, 1992 23,229 53,500 (1,202) (28,060) (227,252) (12,934) (17,972) (232,718)
Net income (loss) (25,962) (25,962)
Stock incentive plans (23) 13 (1) 46 35
ESOP transactions 1,609 1,609
Translation loss ______ ________ _______ _________ _________ _________ ___(2,731) ___(2,731)
Balance December 26, 1993 23,229 $ 53,477 (1,202) $ (28,047) $(253,215) $ (11,279) $ (20,703) $(259,767)
(See notes to consolidated financial statements)
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The Interlake Corporation
Notes to Consolidated Financial Statements
For the Years Ended December 26, 1993, December 27, 1992 and December 29, 1991
(All dollar amounts in thousands except where indicated)
NOTE_1_-_Summary_of_Significant_Accounting_Policies
Principles of Consolidation - The consolidated financial statements include the
accounts of all majority-owned domestic and foreign subsidiaries.
Cash Equivalents - The Company considers all highly liquid financial
instruments with original maturities of three months or less to be cash
equivalents and reports the earnings from these instruments as interest income.
Revenue Recognition - Revenue from sales is generally recognized when product
is shipped, except on long-term contracts in the Handling/Packaging Systems
segment, where revenue is accounted for principally by the
percentage-of-completion method.
Deferred Charges - The Company periodically enters into long-term agreements
with customers where tooling and other development costs are capitalized as
Other Assets. These assets are then amortized during the production stage by
the units of production method.
Inventories - Inventories are stated at the lower of cost or market value.
Gross inventories valued on the LIFO method represent approximately 44% and 43%
of gross inventories and 55% and 50% of domestic gross inventories at December
26, 1993 and December 27, 1992, respectively. The current cost of these
inventories exceeds their valuation determined on a LIFO basis by $16,628 at
December 26, 1993 and by $17,689 at December 27, 1992.
During 1993, 1992, and 1991, inventory quantities valued on the LIFO
method were reduced, resulting in the liquidation of LIFO inventory quantities
carried at lower costs that prevailed in prior years as compared with the costs
of production for 1993, 1992, and 1991. As a result, pretax income from core
operations in 1993, 1992, and 1991 was increased by $1,201, $1,948, and $4,643,
respectively. Pretax income from non-core operations in 1991 was increased by
$277.
Inventories by category at December 26, 1993 and December 27, 1992 were:
__1993__ __1992__
Raw materials $ 13,443 $ 12,291
Semi-finished and finished products 54,795 53,082
Supplies ___8,787 ___8,748
$ 77,025 $ 74,121
Property, Plant and Equipment and Depreciation - For financial reporting
purposes, plant and equipment are depreciated principally on a straight-line
method over the estimated useful lives of the assets. Depreciation claimed for
income tax purposes is computed by use of accelerated methods.
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Upon sale or disposal of property, plant and equipment, the asset cost
and related accumulated depreciation are removed from the accounts, and any
gain or loss on the disposal is generally credited or charged to nonoperating
income. (In 1992 and 1991, gains and losses on disposals related to the 1989
restructuring program [see Note 6] were included in operating
income as unusual items.)
Expenditures for renewals and betterments which extend the originally
estimated useful life of an asset or materially increase its productivity are
capitalized. Expenditures for maintenance and repairs are charged to expense
as incurred.
Property, plant and equipment by category at December 26, 1993 and
December 27, 1992 were:
__1993__ __1992__
At cost:
Land $ 6,729 $ 6,863
Buildings 74,175 73,629
Equipment 284,060 265,025
Construction in progress ____4,222 ___15,319
369,186 360,836
Less-Depreciation and amortization _(219,495) _(204,617)
$ 149,691 $ 156,219
Goodwill - Goodwill represents the excess of the purchase price over the fair
value of the net assets of acquired companies and is amortized on a
straight-line method over periods not exceeding thirty years. The Company
carries its intangible assets at their purchase prices, less amortized amounts,
but subject to regular review for impairment.
Foreign Currency Translation - The financial position and results of operations
of the Company's foreign subsidiaries are measured using local currency as the
functional currency. Assets and liabilities of these subsidiaries are
translated at the exchange rate in effect at each year end. Income statement
accounts are translated at the average rate of exchange prevailing during the
year. Translation adjustments arising from differences in exchange rates from
period to period are included in the accumulated foreign currency translation
adjustments account in shareholders' equity.
Foreign Exchange Contracts - The Company periodically enters into foreign
exchange contracts to hedge inventory purchases and other transactions
denominated in foreign currencies. Premiums received and fees paid on foreign
exchange contracts are deferred and amortized over the period of the contracts.
At December 26, 1993, the Company had outstanding currency contracts to
exchange $2,995 for foreign currency (may include Canadian dollars, Australian
dollars, deutsche marks, pounds sterling, Japanese yen and Belgian francs).
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial guarantee is represented by the currency
fluctuations related to the amounts to be exchanged; however, the Company does
not anticipate nonperformance by the counterparties.
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Interest Rate Hedges - The Company utilizes various financial instruments to
hedge its interest rate exposures (see Note 16). Interest expense increases or
decreases are accrued as they occur and are settled on a quarterly basis. At
current interest rates the Company has no exposure to credit loss.
Research and Development Expenses - Research and development expenditures for
Company sponsored projects are generally expensed as incurred. Research and
development expenses included in selling and administrative expenses were
$2,153, $2,209, and $2,510 for the Engineered Materials segment in 1993, 1992,
and 1991, respectively, and $1,092, $607, and $1,272 for the Handling/Packaging
Systems segment in 1993, 1992, and 1991, respectively.
NOTE_2_-_Restructuring_Charge
During 1993, the Company identified restructuring charges totaling $5,611
associated with the closure of several small facilities, personnel reductions
which relate primarily to the European Handling operations, and the write-off
of non-performing equipment and inventory.
NOTE_3_-_Cumulative_Effect_of_Changes_in_Accounting_Principles
In the fourth quarter of 1992, the Company changed its method of accounting for
postretirement benefits and income taxes by adopting pronouncements of the
Financial Accounting Standards Board which are mandatory for fiscal years
beginning after December 15, 1992. The one-time cumulative effect of these new
accounting standards on income was a net charge of $6,141 which was reported
retroactively to the beginning of fiscal 1992. Such accounting changes did not
affect cash flows in 1992 and will not affect future cash flows.
The Company provides certain medical and life insurance benefits to
qualifying domestic retirees. In 1992, the Company changed its method of
accounting for these postretirement benefits by adopting the Financial
Accounting Standards Board's Statement of Financial Accounting Standards (FAS)
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions". This change recognized the difference between the estimated
accumulated postretirement benefit obligation under FAS No. 106 ($34,477) and
the obligation accrued under the Company's previous accrual method ($20,439) by
making a charge against income of $14,038 ($9,265 after taxes, equivalent to
$.56 per share) retroactively to the beginning of the fiscal year.
In 1992, the Company changed its method of accounting for income taxes
by adopting the Financial Accounting Standards Board's FAS No. 109, "Accounting
for Income Taxes". In making this change, the Company recognized the
cumulative effect of the difference in accounting methods as a $3,124 credit to
earnings (equivalent to $.19 per share) retroactive to the beginning of the
fiscal year.
NOTE_4_-_Financing_Plan
During 1992, the Company consummated a comprehensive Financing Plan. The plan
was designed to increase the Company's ability to meet working capital
requirements, to make capital expenditures, and to take advantage of improved
economic conditions and future business opportunities.
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PAGE
To implement the Financing Plan, the Company:
a) sold $40,000 of convertible exchangeable preferred stock
receiving net proceeds of $39,155 (see Note 12);
b) sold 11,488,000 shares of common stock (including the
underwriters' over-allotment option) receiving net proceeds of
$41,759 (see Note 13);
c) sold $220,000 of 12 1/8% Senior Subordinated Debentures due in
2002 receiving net proceeds of $212,463 (see Note 15);
d) entered into an agreement with its bank group which amended and
restated the Company's bank credit agreement to modify payment
and other terms; and
e) redeemed $200,000 of Subordinated Increasing Rate Notes for
$200,708 (including accrued interest) and repaid $51,074 of
long-term bank debt (see Note 15).
The 1992 Financing Plan was designed to increase the Company's equity
base, fix the rate of interest and extend the maturity of its subordinated
debt. The bank credit agreement was also amended to defer scheduled repayments
and adjust the terms of covenants.
NOTE_5_-_Extraordinary_Loss
The 1992 Financing Plan included an early extinguishment of debt, reflecting
the redemption of the Company's Increasing Rate Notes and the comprehensive
amendment and restatement of its original 1989 Credit Agreement. This
necessitated the write-off of issuance costs related to this previously
outstanding indebtedness which were originally deferred so that they could be
expensed over the original lives of such indebtedness. This resulted in an
extraordinary loss of $7,567 without any currently usable tax benefit in 1992
(equivalent to $.46 per share).
The cash flow impact of the early extinguishment of debt was
immaterial. However, new debt issuance costs related to the amendment and
restatement of the bank credit agreement and the issuance of the 12 1/8% Senior
Subordinated Debentures had a negative cash flow consequence of $11,952 which
was deducted in determining net cash provided (used) by operating activities in
the Consolidated Statement of Cash Flows.
NOTE_6_-_Unusual_Items
During 1989, the Company adopted a restructuring program which modified its
strategic operating plan. The modified strategic operating plan identified
certain businesses and Corporate assets to be disposed of (the Designated Asset
Sale Program) and implemented major Corporate cost reductions. Most of the
designated businesses were sold or shut down in 1990. Additional costs of
$2,523 and $3,344 were provided for in 1992 and 1991, respectively, reflecting
unfavorable adjustments with respect to non-core businesses designated to be
divested including losses on disposition of assets. These divestitures were
completed in 1993.
30
PAGE
NOTE_7_-_Acquisitions
In 1989, the Company and certain of its subsidiaries acquired 80% interests in
Power Industries, Ltd. of Maidenhead, England and Power Strap, Inc. of
Cleveland, Ohio, along with its wholly owned subsidiary Power Polystrap of
Jacksonville, Florida, which was sold in 1990. The Company accounted for this
acquisition using the purchase method. Earn-out payments (based on
performance) were made in 1992, 1991, and 1990 for $275, $28, and $3,961,
respectively, and are being amortized on a straight-line basis over seven,
eight, and nine year periods, respectively. In 1990, Power Strap, Inc. changed
its name to InterPower Packaging Corporation ("InterPower"). The remaining 20%
interests in InterPower and Power Industries, Ltd. were acquired in July, 1992
and November, 1991, respectively, for $2,045 and $5,472, respectively, with
related increases in goodwill of $1,752 and $4,387, respectively. InterPower
has since been merged into the Interlake Packaging Corporation.
NOTE_8_-_Business_Segment_Information
The Company operates in two segments, each of which is composed of products
which have a similar strategic emphasis. The two business segments are:
Engineered Materials - includes Special Materials, which produces ferrous metal
powder used to manufacture precision parts, and Aerospace Components, which
manufactures precision jet engine components and repairs jet engine fan blades.
Handling/Packaging Systems - comprised of the Company's Handling operations,
which design, manufacture and sell storage rack, shelving and related equipment
primarily for use in warehouses, distribution centers and for other storage
applications; and the Company's Packaging operations, which design and sell
machinery for applying strapping and stitching wire, and also supply strapping
and stitching wire for use in such machines.
The accompanying tables present financial information by business segment
for the years 1993, 1992, and 1991. Operating profit consists of net sales of
the segment less all costs and expenses related to the segment. "Corporate
Items" includes net interest expense and other items which are not related to
either of the two business segments. "Corporate Items" includes special
nonoperating charges of $4,750 and $6,000 for environmental matters in 1993 and
1991, respectively (see Note 17). Total assets by business segment consist of
those assets used directly in the operations of each segment. Corporate net
assets consist principally of cash, nonoperating investments, prepaid pension
cost and liabilities related to closed plants and discontinued operations.
31
PAGE
Information_About_the_Company's_Business_Segments
The operating profits of specific segments were increased (decreased) by the
following significant items:
Handling/
Engineered Packaging
_Materials_ _Systems_
(in millions)
1993
Restructuring charge $ (1.8) $ (3.8)
Liquidation of LIFO inventory quantities - 1.2
1992
Businesses to be divested* $ - $ (2.5)**
Liquidation of LIFO inventory quantities .4 1.5
1991
Businesses to be divested* $ - $ (3.3)**
Liquidation of LIFO inventory quantities .5 4.1
* Businesses to be divested under the Designated Asset Sale Program
(see Note 6).
** Included in unusual items.
Assets Depreciation
Operating at Year and Capital
Year Net_Sales(a) _Profit __End Amortization Expenditures
(in millions)
Engineered Materials 1993 $192.5 $ 24.5 $178.3 $ 12.2 $ 9.0
1992 190.0 29.6 173.5 11.8 15.5
1991 192.4 32.4 162.6 11.8 6.5
Handling/Packaging Systems 1993 488.8 15.3 265.6 12.6 5.5
1992 518.2 21.5 279.4 15.5 9.1
1991 522.3 30.4 296.6 13.3 7.0
Corporate Items/Eliminations 1993 - (56.0) 33.1 .2 -
1992 - (52.6) 58.4 .2 -
1991 - (62.4) 18.9 .2 -
Consolidated 1993 681.3 (16.2) 477.0 25.0 14.5
1992 708.2 (1.5) 511.3 27.5 24.6
1991 714.7 .4 478.1 25.3 13.5
(a) includes sales in _1993_ _1992_ _1991_
- Engineered Materials: Special Materials $131.5 $122.5 $114.5
Aerospace Components 61.0 67.5 77.9
- Handling/Packaging Systems: Handling 366.7 395.3 392.0
Packaging 122.1 122.9 130.3
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PAGE
The following table presents information about the Company's operations by
geographic area. Transfers between geographic areas, which are all in the
Handling/Packaging Systems segment, are made at prices which approximate the
prices of similar items sold to distributors. Operating profit by geographic
area is the difference between net sales attributable to the area and all costs
and expenses related to the geographic area. Total assets consist of those
assets used directly in the operations in the geographic areas shown. Export
sales to unaffiliated customers included in the United States' sales are not
material. Sales to domestic and foreign government agencies are not material.
Information_About_the_Company's_Operations_by_Geographic_Region
The operating profits by geographic area were increased (decreased) by the
following significant items:
Canada &
United_States Europe Australia
(in millions)
Restructuring charge
1993 $(3.8) $(1.1) $ (.7)
Businesses to be divested*
1992** - (1.6) (.9)
1991** .9 - (4.2)
Liquidation of LIFO inventory
quantities
1993 - 1.1 .1
1992 1.1 .7 .1
1991 3.1 1.3 .2
* Businesses to be divested under the Designated Asset Sale Program
(see Note 6).
** Included in unusual items.
______Net_Sales______
Inter- Operating Assets at
Year Customers geographic __Profit_ Year-End_
(in millions)
United States 1993 $390.0 $ 2.6 $ 28.3 $275.1
1992 363.5 3.6 32.7 274.4
1991 364.0 5.8 44.2 255.7
Europe 1993 206.5 1.4 8.5 94.7
1992 256.5 1.2 15.7 106.3
1991 254.9 2.4 19.0 125.0
Canada and Australia 1993 84.8 1.2 3.0 74.1
1992 88.2 2.2 2.7 72.2
1991 95.8 1.1 (.4) 78.5
Corporate Items/
Eliminations 1993 - (5.2) (56.0) 33.1
1992 - (7.0) (52.6) 58.4
1991 - (9.3) (62.4) 18.9
Consolidated 1993 681.3 - (16.2) 477.0
1992 708.2 - (1.5) 511.3
1991 714.7 - .4 478.1
33
PAGE
NOTE_9_-_Income_Taxes
Provisions for income taxes were calculated according to the precepts of FAS
No. 109 in 1993 and 1992 and according to Accounting Principles Board Opinion
No. 11 "Accounting for Income Taxes" in 1991. The balance sheet effects
related to the retroactive adoption of FAS No. 109 as of the beginning of 1992
were decreased short-term assets of $8,260, increased short-term liabilities of
$7,314, increased long-term assets of $22,323, and decreased long-term
liabilities of $1,148.
Pretax income (loss) consisted of:
__1993__ __1992__ __1991__
Domestic $(25,482) $(16,854) $(14,363)
Foreign ___9,258 __15,328 __14,790
$(16,224) $ (1,526) $ 427
The provisions for taxes on income consisted of:
__1993__ __1992__ __1991__
Current:
U.S. Federal $ 602 $ 1,080 $ 2,041
State 2,343 689 1,674
Foreign ___3,697 __8,614 __6,856
Total ___6,642 _10,383 _10,571
Deferred:
U.S. Federal - - -
State - - -
Foreign (31) 121 (41)
Translation adjustment _____(69) _(1,464) ______-
Total ____(100) _(1,343) ____(41)
Tax Provision $ 6,542 $ 9,040 $10,530
In 1993, 1992, and 1991, high levels of net interest expense caused
domestic losses which were not currently eligible for federal tax benefits. As
a result, U.S. federal taxes in 1993, 1992, and 1991 were essentially the
result of tax adjustments related to earlier years. The benefit of the federal
tax net operating loss carryforwards and alternative minimum tax carryforwards
were $10,450 and $2,078, respectively, and will not begin to expire until 2005.
(Existing losses can be carried forward and tax benefits realized in future
years to the extent that domestic income is earned.)
State and foreign taxes were essentially the result of income earned
in those jurisdictions. Actual cash disbursements for income taxes and other
tax assessments were $8,586, $16,151, and $13,369 in 1993, 1992, and 1991,
respectively. Because of the Company's tax situation in 1993, 1992, and 1991,
effective tax rate analysis would not be meaningful.
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PAGE
Deferred tax liabilities and assets are comprised of the following:
__1993__ __1992__
Deferred tax liabilities
Depreciation $ 19,771 $ 20,233
Other ___3,156 ___4,068
$ 22,927 $ 24,301
Deferred tax assets
Deferred employee benefits $ 16,400 $ 16,266
Net operating loss carryforward 12,681 9,386
AMT carryforwards 2,078 2,303
Inventory 4,188 4,510
Recapitalization costs 2,419 2,709
Environmental reserves 2,884 2,230
Other ___5,681 ___3,959
46,331 41,363
Valuation allowances _(23,489) _(17,178)
$ 22,842 $ 24,185
As of December 26, 1993, U.S. federal income tax returns for the years
1988 through 1990 were in the process of examination. Resolution of years
1982-1987 is pending with the Appeals Division of the Internal Revenue Service.
The Company believes that adequate provision has been made for possible
assessments of additional taxes.
No provision has been made for U.S. income taxes on approximately
$25,648 of undistributed earnings of foreign subsidiaries. Due to federal tax
loss carryforwards and foreign tax credits, the Company anticipates that no
material tax cost will be incurred upon distribution of these earnings.
NOTE_10_-_Pensions
The Company has various defined benefit and defined contribution pension plans
which between them cover substantially all employees.
The provision for defined benefit pension costs includes current
costs, interest costs, actual return on plan assets, amortization of the
unrecognized net asset existing at the date of transition and net unrealized
gains and losses. Benefits are computed based mainly on years of service and
compensation during the latter years of employment. Company contributions are
determined according to the funding requirements set forth by ERISA.
Approximately two-thirds of the Company's defined benefit plans relate
to foreign locations which are denominated in currencies other than U.S.
dollars. The following table sets forth the funded status of the ongoing,
domestic and foreign defined benefit plans and the amounts included in the
year-end balance sheet. The Company's plans were generally overfunded and the
underfunded plans which existed were not significant.
35
PAGE
__1993__ __1992__
Plan assets at fair value $142,009 $122,190
Actuarial present value of accumulated benefit obligation:
Vested benefits 110,693 98,369
Non-vested benefits _____907 _____757
111,600 99,126
Effect of assumed future compensation increases __10,010 ___9,780
Projected benefit obligation for service to date _121,610 _108,906
Plan assets in excess of projected benefit obligation __20,399 __13,284
Items not yet recognized in earnings:
Unrecognized net asset at December 28, 1986
(being recognized over 15 years) 15,704 17,853
Unrecognized net actuarial gain (loss) 3,834 (4,785)
Unrecognized prior service cost __(5,033) __(4,539)
__14,505 ___8,529
Prepaid (Accrued) pension liability $ 5,894 $ 4,755
Net pension cost (income) included in operating income for these plans
consists of the following components:
__1993__ __1992__ __1991__
Service cost 3,068 3,232 3,357
Interest cost 9,298 9,596 8,961
Actual return on plan assets [(income) loss] (12,107) (9,923) (14,134)
Net amortization and deferred items _____(434) ___(3,177) ____1,545
Net pension cost (income) $ (175) $ (272) $ (271)
Assumptions used in the computations:
Assumed discount rate 7-9% 7-9% 7-9%
Expected long-term rate of return on plan assets 7-9% 7-9% 7-9%
Rate of increase in future compensation levels 4-6% 5-7% 5-7%
36
PAGE
Pension plan assets are primarily invested in common and preferred stock,
short and intermediate term cash investments, and corporate bonds.
The expense for the Company's defined contribution pension plans was
$2,267, $2,307, and $2,332 in 1993, 1992, and 1991, respectively. Annual
contributions to defined contribution plans are equal to the amounts accrued
during the year.
In 1989, the Company established a non-contributory, defined
contribution employee stock ownership plan (ESOP) covering all domestic
employees not covered by collective bargaining agreements. Company
contributions are allocated to participants based on the ratio each
participant's compensation bears to the total compensation of all eligible
participants. The Company makes contributions to the plan in the amount
necessary to enable the plan to make its regularly scheduled payments of
principal and interest on its term loan under the bank credit agreement (see
Note 15). Amounts charged to employee benefits and interest during the year
totalled $1,508 and $703, respectively, in 1993, $1,307 and $846, respectively,
in 1992, and $1,207 and $1,254, respectively, in 1991.
NOTE_11_-_Postretirement_Benefits_Other_Than_Pensions
The Company has unfunded postretirement health care and death benefit plans
covering certain domestic employees. Effective as of the beginning of 1992,
the Company adopted FAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions", for these domestic retiree benefit plans. Under
FAS No. 106, the Company is required to accrue the estimated cost of retiree
benefit payments, other than pensions, during the employee's active service
period. The cost of postretirement benefits historically has been actuarially
determined and accrued over the working lives of employees expected to receive
benefits with prior service costs being accrued over periods not exceeding
twenty-five years.
The Company elected to recognize this change in accounting on the
immediate recognition basis. The difference between the estimated accumulated
postretirement benefit obligation under FAS No. 106 ($34,477) and the unfunded
obligation accrued under the Company's previous accounting method ($20,439) was
charged against earnings as of the beginning of fiscal 1992 ($14,038). The
related balance sheet effect was an increase to long-term liabilities of
$14,038.
The following table sets forth the status of the plans, reconciled to
the accrued postretirement benefit cost recognized in the Company's balance
sheet.
__1993__ __1992__
Accumulated postretirement benefit obligation:
Retirees $ 26,171 $ 26,178
Fully eligible active plan participants 2,436 3,419
Other active plan participants ___2,245 ___5,870
Total accumulated postretirement benefit obligation 30,852 35,467
Unrecognized prior service cost 2,341 -
Unrecognized gain (loss) ___1,511 _____(25)
Accrued postretirement benefit cost $ 34,704 $ 35,442
37
PAGE
Net periodic postretirement benefit cost included the following components:
_1993_ _1992_
Service cost on benefits earned $ 242 $ 464
Interest cost on accumulated postretirement
benefit obligation 2,389 2,808
Unrecognized prior service cost (123) -
Unrecognized (gain) loss ____(57) ______-
Net periodic postretirement benefit cost
charged to results from operations $ 2,451 $ 3,272
For measuring the expected postretirement benefit obligation, a 15%
annual rate of increase in the per capita claims cost was assumed for 1993.
This rate was assumed to decrease 1% per year to 6% in 2002 and remain at that
level thereafter. The weighted-average discount rate used in determining the
accumulated postretirement benefit obligation was 7.5% at December 31, 1993 and
8.5% at December 31, 1992.
If the health care cost trend rate were increased 1%, the accumulated
postretirement benefit obligation as of December 31, 1993 would have increased
by 7%. The effect of this change on the aggregate of service and interest cost
for 1993 would be an increase of 6%.
The provision for postretirement benefits other than pensions included
in operating income was $167, $1,958, and $1,505 in 1993, 1992, and 1991,
respectively. In 1993, costs were down from 1992 because of benefit changes
made by the Company in the second quarter which resulted in a curtailment gain
of $1,141. The provision for such costs included in nonoperating income was
$1,143, $1,314, and $225 in 1993, 1992, and 1991, respectively. The increase
in costs between 1992 and 1991 was largely the result of increased per capita
claims cost (caused by an increase in actual claims experience) and
nonrecurrence of favorable nonoperating accrual adjustments.
NOTE_12_-_Convertible_Exchangeable_Preferred_Stock
In connection with the 1992 Financing Plan, the Company issued 40,000 shares of
Series A Preferred Stock. The preferred stock is convertible into common stock
at an initial conversion price of $6.50 per share and bears a 9% per annum
dividend payable semi-annually beginning December 31, 1992. To the extent
dividends are not paid in cash on a semi-annual dividend payment date, an
adjustment will be made which reduces the per share conversion price. Upon
such an adjustment, all accrued and unpaid dividends on the shares of preferred
stock through the date of adjustment will cease to be accrued and unpaid. Due
to restrictions in the bank credit agreement and the indenture under which the
Senior Subordinated Debentures were issued, it is not expected that cash
dividends will be paid on the preferred stock for the foreseeable future.
Accordingly, it is expected that the conversion price of the preferred stock
will decline approximately 4.5% on each semi-annual dividend payment date,
resulting in an increase in the aggregate number of shares of common stock
issuable upon conversion of the preferred stock. As a result of the operation
of these dividend adjustment provisions of the preferred stock, the conversion
price of the preferred stock was reduced to $5.67 per share as of December 31,
1993. In addition, to the extent dividends are not paid on the preferred stock
in cash, the liquidation preference on the preferred stock will increase at a
rate of 9% per year, compounded semi-annually.
38
PAGE
NOTE_13_-_Shareholders'_Equity
In connection with the 1992 Financing Plan, the Company sold 11,488,000 shares
(including the underwriters' over-allotment option) of common stock, par value
$1 per share, in an underwritten public offering at an initial public offering
price of $4.00 per share. The net proceeds of this sale of $41,759 were added
to common stock and additional paid-in capital in the amounts of $11,488 and
$30,271, respectively. Each share of common stock has the right to one vote
per share on all matters submitted to a vote of the shareholders of the
Company.
A new class of Non-Voting Common Stock with a par value of $1 per
share was created, of which 15,000,000 shares were authorized and none have
been issued. Shares of Non-Voting Common Stock would not entitle the holder
thereof to any votes except as otherwise provided or as required by law.
No dividend payments were made in 1993, 1992, and 1991 and, due to
restrictions in the bank credit agreement and the indenture for the Senior
Subordinated Debentures, it is not expected that cash dividends will be paid in
the foreseeable future.
The Company established an ESOP in 1989 with an initial contribution
of 10,000 shares, followed by the sale of 1,100,000 shares to the ESOP. Under
a related stock purchase program, Interlake undertook to purchase the lesser of
1,100,000 shares or the number of shares purchasable for $16,088 in the open
market or in privately negotiated transactions. As of December 26, 1993 a
total of 893,739 shares had been acquired at a cost of $11,083, unchanged from
the prior year end.
Unearned compensation represents estimated future charges to income by
reason of the ESOP and stock awards previously granted. Principal and interest
payments on the ESOP borrowings are charged against earnings as employee
compensation and interest expenses, respectively. Payments are made to the
ESOP trustee which pays the principal and interest to the banks and uses the
amount of such payments to determine the allocation of Interlake common shares
to the employee participants' accounts.
In 1989, the Board of Directors declared a stock right dividend
distribution. The purpose of these rights is to protect the Company against
certain unfair and abusive takeover tactics. In certain circumstances,
shareholders, other than the holder of 15% or more of Interlake's stock, have
the right to purchase Interlake stock from Interlake for less than its market
price. In certain circumstances, Interlake shareholders can purchase, for less
than market value, shares of a company which acquires The Interlake
Corporation.
NOTE_14_-_Stock_Incentive_Plans
The Company has in place two stock incentive programs adopted by its Board of
Directors and approved by the shareholders - the 1986 Stock Incentive Program
(the "1986 Program") and the 1989 Stock Incentive Program (the "1989 Program"
and, together with the 1986 Program, the "Stock Incentive Programs"). The
Stock Incentive Programs provide for the grant of awards of and options for
shares of the Company's common stock to officers, key employees and outside
directors of the Company and its subsidiaries. The 1989 Program also provides
for the grant of shares of common stock in lieu of cash bonuses and the 1986
Program also provides for the grant of stock appreciation rights.
39
PAGE
A summary of stock option activity under the Stock Incentive Programs
follows:
________1993_______ _______1992________
Average Average
_Shares_ _Price_ _Shares_ _Price_
Stock Options:
Outstanding-beginning of year 1,331,955 $6.81 1,419,221 $13.47
Granted 106,000 4.09 857,250 4.25
Exercised - - - -
Canceled or expired _(249,793) 8.77 _(944,516) 14.49
Outstanding-end of year 1,188,162 6.15 1,331,955 6.81
Exercisable-end of year 427,937 9.95 494,705 11.56
Available shares 796,655 652,818
NOTE_15_-_Long-Term_Debt_and_Credit_Arrangements
Long-term debt of the Company consists of the following:
December 26, December 27,
____1993____ ____1992____
Senior Subordinated Debentures $ 220,000 $ 220,000
Term Loans 94,136 94,258
Delayed Draw Term Loan 11,125 11,716
Deferred Term Loans 7,500 7,500
Revolving Loans 76,031 76,171
ESOP Note 11,261 12,870
Obligations under long-term
lease agreements 10,230 11,155
Pollution control and industrial
development loan agreements 12,150 15,650
Other ______702 ____1,481
443,135 450,801
Less-current maturities ____2,525 ____6,727
$ 440,610 $ 444,074
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PAGE
During 1992, the Company implemented a comprehensive Financing Plan
which included sale of $220,000 of 12 1/8% Senior Subordinated Debentures due
in 2002, redemption of $200,000 of subordinated increasing rate notes,
repayment of $51,074 of long-term bank debt, and entering into an agreement
with its bank group which amended and restated the Company's bank credit
agreement to modify payment and other terms. Certain terms of the agreement
were further modified in 1993.
At the end of 1993, the bank credit agreement provided facilities for
term loans of $118,545, revolving loans of up to $97,031, and ESOP loans of
$11,261. Principal repayments for term and revolving loans are due in varying
annual amounts from 1995 through 1998. Principal amounts for ESOP loans are
due in varying amounts through 1999.
Under the terms of the bank credit agreement, the Company pays a
commitment fee of 1/2 percent on unused credit facilities and, in 1994, has the
option to borrow funds under the revolving and term facilities at the prime
rate plus 1 3/4 percent, or various London Interbank Offered Rates (LIBOR) plus
2 3/4 percent, with such rates adjusted periodically. The bank credit
agreement borrowing rates at December 26, 1993 ranged from 5.6875% to 8.4375%.
The bank credit agreement also required the Company to enter into long-term
interest rate swap agreements to reduce the impact of changes in interest rates
on its floating rate long-term debt. At the end of 1993, the Company had
interest rate hedging arrangements limiting interest rates on $134,000 of debt
under the bank credit agreement to 8.55% plus the applicable spread. The
expiration dates of the various interest rate hedging arrangements correlate to
the original schedule of principal term loan repayment dates and extend, on a
declining basis, through the final maturity of the term loans.
The long-term lease obligations relate principally to capitalized
pollution control facilities. The interest rates on these obligations vary
from 6.125% to 7.875%. Principal repayments are due in varying amounts through
2002.
The Company has borrowed funds under several loan agreements with
state and county pollution control and industrial development authorities to
finance certain environmental and facility expansion and improvement projects.
Interest rates on these obligations vary from 6.25% to 7.125%. Principal
repayments are to be made in various amounts from 1998 to 2009. At the time of
the spin-off of Acme Metals, Inc. from the Company in 1986, Acme assumed an
obligation to pay the Company for pollution control bonds related to its
facilities, which are currently outstanding for $6,000.
The schedule of debt repayment requirements for the five years
following 1993 are as follows:
1994 $ 2,525
1995 24,709
1996 88,178
1997 79,848
1998 11,412
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PAGE
Under the bank credit agreement the Company is limited in its ability
to pay cash dividends and repurchase its common stock. There are no plans to
pay dividends in the immediate future and stock repurchases will be limited to
those related to the ESOP. In addition to scheduled repayments of debt, the
bank credit agreement requires certain mandatory prepayments in connection with
asset dispositions, issuances of stock, incurrence of indebtedness and
generation of annual excess cash flows. The bank credit agreement contains
covenants relating to earnings before interest, taxes and depreciation and
amortization, capital expenditures and net worth, and limits the amount of
revolving loan balance outstanding. Substantially all of the Company's assets
are pledged under the bank credit agreement.
Actual cash disbursements for interest were $48,326, $41,179, and
$59,551 in 1993, 1992, and 1991, respectively.
At December 26, 1993 the Company had unamortized deferred debt
issuance costs of $9,978 which are being amortized as part of interest expense
over the lives of the related debt issues.
Under the amended credit agreement, during 1994 the Company will be
able to borrow for general corporate purposes up to an additional $36,700.
However, outstanding bank borrowings at the end of each fiscal quarter will be
limited to between $9,700 and $16,700 above its year end 1993 bank borrowings
of $200,100. In addition, $5,784 will be available for use in connection with
the Duluth Superfund site.
NOTE_16_-_Fair_Value_of_Financial_Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate
that value:
Cash and cash equivalents - The carrying amount approximates fair
value because of the short maturities of such instruments.
Other assets - The fair values for financial instruments included in
other assets were estimated based on quoted market prices for the same or
similar issues.
Long-term debt (See Note 15) - The interest rate on the Company's bank
debt is reset every quarter to reflect current market rates. Consequently, the
carrying value of the bank debt approximates fair value. The fair values of
the long-term debt, other than bank debt, were estimated based on quoted market
prices for the same or similar issues.
Convertible exchangeable preferred stock (See Note 12) - The fair
value of the preferred stock, which was issued in a private placement, is
estimated at carrying value as such stock is not traded in the open market and
a market price is not readily available.
Foreign exchange contracts (See Note 1) - The fair value associated
with the foreign currency contracts has been estimated by valuing the net
position of the contracts using spot rates as of the end of the fiscal year.
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Interest rate swap agreements (See Note 15) - The fair value of
interest rate swaps (used for hedging purposes) is the estimated amount that
the Company would pay to terminate the swap agreements at the reporting date,
taking into account current interest rates and the present creditworthiness of
the swap counterparties. Under the restrictions of the bank credit agreement,
the Company does not expect to cancel these agreements, and expects them to
expire as originally contracted.
The estimated fair values of the Company's financial instruments are
as follows:
December 26,
_______1993__________
Carrying Fair
_Amount_ _Value_
Cash and cash equivalents $ 31,934 $ 31,934
Other assets* 6,942 6,996
Long-term debt** 432,905 435,754
Convertible exchangeable preferred stock 39,155 39,155
Foreign currency contract assets - (75)
Interest rate swap liabilities 1,824 12,226
* Includes current maturities
** Includes current maturities and excludes capitalized long-term leases
NOTE_17_-_Environmental_Matters
The Company has been identified by the United States Environmental Protection
Agency and the Minnesota Pollution Control Agency ("MPCA") as a potentially
responsible party in connection with the investigation and remediation of a
site on the St. Louis River in Duluth, Minnesota. The Site has been listed on
the National Priorities List (also known as the "Superfund" list) pursuant to
the Comprehensive Environmental Response, Compensation and Liability Act
(CERCLA). The iron and steel division of a predecessor of the Company operated
a facility on a portion of the Site before shutting it down in 1961.
In the fall of 1993, the Company completed the excavation and removal
of certain tar seeps located on the portion of the Site owned by the Company's
predecessors, thereby complying with the terms of a Request for Response Action
(RFRA) issued by the MPCA in March 1991 with respect to the tar seeps operable
unit, one of three operable units identified by the MPCA at the Site.
In May, 1993, the MPCA issued a Request for Response Action (RFRA) to
the Company requesting it to undertake, for the portion of the Site owned and
operated by its predecessors, studies and remedial actions for the second
operable unit being addressed, the soils operable unit. The Company has
commenced these studies, including a study outlining a broad range of remedial
alternatives and associated costs. The alternatives favored by the Company
assume that the Site will be used for industrial purposes, and the costs of
those alternatives range from approximately $1,500 to $4,000. Other possible
alternatives assume that the Site will be used for residential purposes, and
the costs of those alternatives may be significantly higher than the industrial
use alternatives. The Company expects to oppose the selection of any remedy
that assumes future residential use of the Site.
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In December 1993, the Company and other potentially responsible
parties received a letter from the MPCA informing them that it intends to issue
another Request for Response Action requesting that they undertake studies and
remedial action for the third and final operable unit, the underwater sediments
operable unit. The scope of these studies and remedial action have yet to be
defined.
During 1991, the Company reviewed all of its environmental matters
involving nonoperating locations and took a special charge of $6,000, $4,500 of
which was attributable to its estimate at that time of its share of the
potential costs related to the Site. This estimate was partially based on the
Company's expectation that it would not be identified as a responsible party for
underwater sediments in Stryker Bay, an embayment which is a portion of the
Site. Based on its experience at the Site since that time, including the
completion of the tar seeps remediation, substantial investigation of the soils,
and the indication of the MPCA that it intends to issue a RFRA identifying the
Company as a responsible party for the underwater sediments, including those in
Stryker Bay, the Company has taken an additional special charge of $3,850 for
environmental matters in the fourth quarter of fiscal year 1993. This charge is
based on the Company's estimate of the likely costs to complete remediation of
the soils at the Site consistent with industrial use alternatives, and the
likely costs of further investigation of the underwater sediments. The charge
does not attempt to account for potential costs of remediation of the underwater
sediments, which the Company believes are not reasonably determinable absent
further investigation and indication by governmental agencies as to what level
of remediation, if any, will be required.
Based on information available as of December 26, 1993, including an
evaluation of all locations where the Company may have environmental liability,
including the Site, the Company believes that, except as indicated above with
respect to the underwater sediments at the Site, the costs of known
environmental matters either have been fully provided for or are unlikely to
have a material adverse effect on the Company's business or consolidated
financial condition.
NOTE_18_-_Commitments_and_Contingencies
The Company is engaged in certain routine litigation arising in the ordinary
course of business. Based upon its evaluation of available information,
management does not believe that any such matters are likely, individually or
in the aggregate, to have a material adverse effect upon the Company's business
or consolidated financial condition.
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NOTE_19_-_Quarterly_Results_(Unaudited)
Quarterly results of operations for 1993 and 1992 were as follows:
(in millions except per share data)
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
1993
Net sales
Engineered Materials $ 51.5 $ 48.7 $ 46.9 $ 45.4
Handling/Packaging Systems _117.0 _124.4 _122.1 _125.3
_168.5 _173.1 _169.0 _170.7
Gross profit 41.7 41.4 37.8 39.9
Operating profit
Engineered Materials 7.7 7.3 6.2 3.3
Handling/Packaging Systems 4.3 5.6 3.7 1.7
Corporate Items _(12.8) _(13.5) _(12.4) _(17.3)
___(.8) ___(.6) __(2.5) _(12.3)
Interest expense 13.0 12.7 12.6 12.6
Provision for income taxes 1.9 1.6 1.4 1.6
Net income (loss) (3.6) (3.1) (4.7) (14.6)
Net income (loss) per common share (.16) (.14) (.22) (.66)
Average number of shares outstanding 22.0 22.0 22.0 22.0
1992
Net sales
Engineered Materials $ 46.9 $ 47.4 $ 47.0 $ 48.7
Handling/Packaging Systems _125.0 _124.2 _137.0 _132.0
_171.9 _171.6 _184.0 _180.7
Gross profit 44.9 45.1 44.1 46.2
Operating profit
Engineered Materials 7.8 7.2 7.2 7.4
Handling/Packaging Systems 6.3 6.1 5.0 4.1
Corporate Items _(13.6) _(13.0) _(12.5) _(13.5)
___0.5 ___0.3 __(0.3) __(2.0)
Interest expense 13.1 13.5 12.3 12.5
Provision for income taxes 1.5 2.3 1.9 3.3
Income (loss) before extraordinary loss
and accounting changes (1.9) (2.9) (3.1) (6.1)
Extraordinary loss - (7.6) - -
Accounting changes (6.1) - - -
Net income (loss) (8.0) (10.5) (3.1) (6.1)
Income (loss) before extraordinary loss
and accounting changes
per common share (.18) (.25) (.14) (.28)
Extraordinary loss per common share - (.64) - -
Accounting changes per common share (.58) - - -
Net income (loss) per common share (.76) (.89) (.14) (.28)
Average number of shares outstanding 10.5 11.7 22.0 22.0
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In the fourth quarter of 1993, the Company took a restructuring charge of
$5,611 to provide for costs associated with closure of several small
facilities, personnel reductions and write-offs of certain obsolete equipment
and inventory (see Note 2).
Nonoperating expenses consist of items which are not related to
activities that constitute the Company's ongoing major operations. In 1993,
nonoperating expenses included a special charge of $3,850 in the fourth quarter
and $900 in the second quarter for environmental matters involving nonoperating
locations (see Note 17).
In 1993, benefits to pretax income due to reductions in LIFO
inventories were $1,000 in the first quarter and $200 in the fourth quarter.
In the first and fourth quarters of 1992, the liquidation of LIFO inventories
benefited pretax income from core businesses by $400 and $1,500, respectively.
Effective as of the beginning of fiscal 1992, the Company changed its
method of accounting for both income taxes and postretirement benefits by
adopting the Financial Accounting Standards Board's FAS No. 109, "Accounting
for Income Taxes" and No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions". These changes in accounting principles required
restatement of previously reported first quarter 1992 results by a charge of
$6,141 or $.58 per share. The ongoing effects of these changes in 1992 were
not material and did not require restatement of quarterly results (see Note 3).
Unusual items of expense, reflecting unfavorable adjustments with
respect to non-core businesses designated to be divested within the
Handling/Packaging Systems segment, were $2,523 in the fourth quarter of 1992.
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SELECTED FINANCIAL DATA
(in thousands except per share data)
__1993__ __1992__ __1991__ __1990__ ___1989___
For_the_Year
Net sales of continuing
operations $681,330 $708,199 $714,742 $786,279 $827,739
Income(loss) from continuing
operations before extraordinary
loss and accounting change $(25,962)<F1><F3> $(13,990)<F2> $(13,744)<F2><F3> $(12,843)<F2> $ 2,397<F2>
Income(loss) from continuing
operations before extraordinary
loss and accounting change per
common share $ (1.18)<F1><F3> $ (.84)<F2> $ (1.31)<F2><F3> $ (1.22)<F2> $ .23<F2>
Cash dividends per common share - - - - 45.75<F4>
Average number of shares
outstanding 22,027 16,574 10,484 10,516 10,291
At_Year_End
Working capital
- cash and cash equivalents $ 31,934 $ 38,640 $ 10,541 $ 18,473 $ 16,181
- other working capital __41,935 __54,149 __50,806 __51,547 _100,495
- total working capital 73,869 92,789 61,347 70,020 116,676
- current ratio 1.5 to 1 1.6 to 1 1.4 to 1 1.4 to 1 1.6 to 1
Total assets $477,035 $511,292 $478,067 $518,997 $594,509
Long-term debt, including current
maturities 443,135 450,801 471,441 494,615 555,193
Convertible Exchangeable
Preferred Stock 39,155 39,155 - - -
Common shareholders' equity (259,767) (232,718) (239,465) (226,808) (202,971)
<FN>
<F1> includes a restructuring charge of $5,611 (see Note 2 of Notes to
Consolidated Financial Statements)
<F2> includes unusual items of expense of $2,523, $3,344, $13,482 and
$26,146 in 1992, 1991, 1990 and 1989, respectively, due to the 1989
restructuring program (see Note 6 of Notes to Consolidated Financial
Statements)
<F3> includes nonoperating charges for environmental matters of $4,750 and
$6,000 in 1993 and 1991, respectively (see Note 17 of Notes to
Consolidated Financial Statements)
<F4> includes a special cash dividend of $45 per share paid in connection
with the 1989 restructuring program
1989 was a 53-week year while all other periods were 52-week years.
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MARKET FOR INTERLAKE'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The principal market for Interlake's common stock is the New York Stock
Exchange (ticker symbol IK). The common stock is also listed on the Chicago
Stock Exchange and is admitted to unlisted trading on the Pacific Coast
Exchange and the Boston Exchange.
Interlake has not paid a dividend or made a distribution with respect to its
common stock since the third quarter of 1989. Restrictions under Interlake's
bank credit agreement (see Note 15 of Notes to Consolidated Financial
Statements) will prevent it from paying any cash dividends in 1994 or in the
foreseeable future.
On December 26, 1993 there were approximately 7,884 holders of record of
Interlake's common stock.
High and low prices of Interlake's common stock during each of the eight
calendar quarters ending on December 31, 1993 were:
_______1993_________ ________1992________
_______Price________ _______Price________
__High________Low___ __High________Low___
Calendar Quarter Ended
March 31 $4 3/4 3 5/8 $9 3/8 $5 3/8
June 30 4 3/8 3 1/8 6 3/8 3 7/8
September 30 4 5/8 3 3/8 4 1/2 3 1/2
December 31 4 1/8 2 1/2 4 1/4 3 1/4
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The Interlake Corporation
Directors
John A. Canning, Jr.
President, Madison Dearborn Partners, Inc. [1993]
James C. Cotting
Chairman and Chief Executive Officer, Navistar International Corporation
(manufacturer of medium and heavy duty trucks) [1989]
Arthur G. Hansen
Higher Education Consultant [1984]
John E. Jones
Chairman of the Board, President and Chief Executive Officer, CBI Industries,
Inc. (industrial gases, construction services and investments) [1988]
Frederick C. Langenberg
Retired Chairman of the Board, The Interlake Corporation [1979]
Quentin C. McKenna
Chairman of the Board, Kennametal, Inc. (manufacturer of metal cutting tools
made from cemented carbides and ceramics, machining systems and materials for
applications requiring wear resistance) [1986]
William G. Mitchell
Retired Vice Chairman, Centel Corporation (communications and electric
services) [1984]
W. Robert Reum
Chairman of the Board, President and Chief Executive Officer, The Interlake
Corporation [1987]
Erwin E. Schulze
Retired Chairman of the Board, President and Chief Executive Officer, The Ceco
Corporation (manufacturer of building products and provider of concrete forming
services for the construction industry) [1981]
[ ] Brackets indicate the year when an individual became a director of The
Interlake Corporation or a predecessor company. Directors serve on one or more
of the following committees: Audit Review, Compensation, Executive, Finance and
Nominating.
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Officers
W. Robert Reum
Chairman of the Board, President and Chief Executive Officer
Craig A. Grant
Vice President - Human Resources
John J. Greisch
Vice President - Finance, Treasurer and Chief Financial Officer
John P. Miller
Controller
Stephen R. Smith
Vice President, Secretary and General Counsel
Operating_Executives
Stephen Gregory
President, Interlake Material Handling Division
James Legler
President, Chem-tronics, Inc.
Robert A. Pedersen
President, Interlake Packaging Corporation
Bernd Stiller
Managing Director, Dexion Group plc
Ian A. White
President, Hoeganaes Corporation
50