EXHIBIT 13
Selected Financial Data
(in thousands except per share data)
1994 1993 1992 1991 1990
For the Year
Net sales of continuing operations $752,592 $681,330 $708,199 $714,742 $786,279
Income (loss) from continuing operations
before extraordinary loss and
accounting change $(40,557)(F1) $(25,962)(F2) $(13,990)(F2) $(13,744)(F2) $(12,843)(F2)
(F3) (F3)
Net income (loss) $(40,751)(F1) $(25,962)(F2) $(27,698)(F2) $(13,744)(F2) $(21,751)(F2)
(F3) (F4) (F3) (F5)
Income (loss) from continuing operations
before extraordinary loss and
accounting change per common share $(1.84)(F1) $(1.18)(F2)(F3) $(.84)(F2) $(1.31)(F2)(F3) $(1.22)(F2)
Net income (loss) per common share $(1.85)(F1) $(1.18)(F2)(F3) $(1.67)(F2)(F4)$(1.31)(F2)(F3) $(2.07)(F2)(F5)
Average number of shares outstanding 22,027 22,027 16,574 10,484 10,516
At Year End
Working capital
cash and cash equivalents $ 39,708 $ 31,934 $ 38,640 $ 10,541 $ 18,473
other working capital 27,911 41,935 54,149 50,806 51,547
total working capital 67,619 73,869 92,789 61,347 70,020
current ratio 1.4 to 1 1.5 to 1 1.6 to 1 1.4 to 1 1.4 to 1
Total assets $444,953 $464,160 $511,292 $478,067 $518,997
Long-term debt, including current maturities 442,451 443,135 450,801 471,441 494,615
Convertible Exchangeable Preferred Stock 39,155 39,155 39,155
Common shareholders' equity (deficit) (296,435) (259,767) (232,718) (239,465) (226,808)
<FN>
(F1) includes a charge for goodwill write-down of $34,174 (see Note 2)
(F2) includes restructuring charges of $5,611, $2,523, $3,344, and $13,482 in
1993, 1992, 1991, and 1990 (see Note 3 )
(F3) includes nonoperating charges for environmental matters of $4,750 in 1993
and $6,000 in 1991 (see Note 15)
(F4) includes extraordinary loss on early extinguishment of debt of $7,567 (see
Note 5) and cumulative effect of changes in accounting principles of
$6,141 (see Note 4)
(F5) includes loss from discontinued operations of $8,908
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION
(dollars in millions except per share data)
Results of Operations
Net sales were $752.6, $681.3, and $708.2, respectively, in 1994, 1993, and
1992. Net sales in the Engineered Materials segment were up $23.9 in 1994 as
shipments of metal powders reached record levels on the continued strength of
North American auto and light truck production and the increased penetration by
powder metallurgy in automotive applications. Handling/Packaging Systems'
sales were up $47.4, primarily as a result of a robust market for material
handling equipment in the U.S. and Asia Pacific markets, coupled with higher
sales of strapping products in the U.S. and Canada. In 1993, in the Engineered
Materials segment, improved North American auto and light truck production led
to a $9.0 increase in sales of metal powders which was offset by a $6.5 decline
in Aerospace Components' sales. Handling/Packaging Systems' sales declined in
1993 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.
Operating income was $24.2, $38.2, and $50.4, respectively, in 1994, 1993, and
1992. In 1994, operating income declined $14.0 from 1993, reflecting a $34.2
charge to write down goodwill attributable to the Aerospace Components and
Packaging businesses. Based on a revised accounting policy for assessing the
valuation of long-lived assets and updated long-term projections for these
businesses as discussed in "Long-Lived Assets" and in Note 2, management
determined that the goodwill related to the Aerospace Components and Packaging
businesses was impaired. Record metal powder volume at Special Materials,
record Handling volumes in the U.S. and Asia Pacific, and improved sales of
packaging products primarily in the U.S. and Canada had a favorable effect on
1994 operating results. Restructuring charges of $5.6 and $2.5 reduced
operating income in 1993 and 1992, respectively, as discussed in "Restructuring
Charges" and Note 3. 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 Special Materials. These declines
were partially offset by higher domestic Handling profits. Excluding the
goodwill charge in 1994 and the restructuring charges in 1993 and 1992,
operating income was $58.4, $43.8, and $52.9 in 1994, 1993, and 1992,
respectively.
From 1992 to 1994, Special Materials' shipments of metal powders increased 24%
due to growth in North American auto and light truck production and increased
usage of metal powders in automotive parts. At Aerospace Components, reduced
U.S. defense spending resulted in a decline in military sales of $3.8 between
1992 and 1994. This decline in military fabrication sales was more than offset
by a $6.0 increase in sales for commercial fabrication. 1994 repair sales were
down $7.3 from 1992 reflecting continued weak demand from the airline industry.
In Handling/Packaging Systems, despite a decline in sales in 1993 in most
markets, 1994 sales exceeded those of 1992 in all markets other than
Continental Europe as demand for capital goods in most major economies improved.
Cost of sales as a percentage of sales was 77%, 76%, and 75%, respectively, in
1994, 1993, and 1992. The increase primarily reflects rising raw material
costs which were not fully recovered through price increases and cost
reductions. Although sales increased 10%, selling and administrative expenses
in 1994 were held to 1993 levels. As a percentage of sales, selling and
administrative expenses were 16% in 1994, 17% in 1993, and 18% in 1992.
The following business segment commentary reflects the 1994 goodwill write-down
and the 1993 and 1992 restructuring charges for each segment. However, the
discussion of individual business unit results is presented before these
charges and allocation of general corporate expenses. See Note 6 for further
information on business segments.
Net Sales and Operating Profit by Business Segment
(in millions)
Net Sales Operating Profit
1994 1993 1992 1994 1993 1992
Engineered Materials
Special Materials $153.9 $131.5 $122.5
Aerospace Components 62.5 61.0 67.5
216.4 192.5 190.0 $ 32.3 $ 26.3 $ 29.6
Goodwill Write-Down (13.2)
Restructuring Charge (1.8)
216.4 192.5 190.0 19.1 24.5 29.6
Handling/Packaging Systems
Handling 406.0 366.7 395.3
Packaging 130.2 122.1 122.9
536.2 488.8 518.2 28.1 19.1 24.0
Goodwill Write-Down (21.0)
Restructuring Charge (3.8) (2.5)
536.2 488.8 518.2 7.1 15.3 21.5
Corporate Items (2.0) (1.6) (0.7)
Total Net Sales $752.6 $681.3 $708.2
Total Operating Profit $ 24.2 $ 38.2 $ 50.4
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 12% in 1994 in the Engineered Materials segment reflecting
record shipments of metal powders which were up 17% from 1993, driven by
continued growth in North American auto and light truck production, increased
penetration by powder metallurgy in automotive applications and higher selling
prices. Aerospace Components' sales were up slightly as higher commercial
fabrication shipments were substantially offset by lower repair and defense
business.
Aerospace Components' defense-related business represented approximately 33%,
39%, and 36% of its sales in 1994, 1993, and 1992, respectively. Defense-
related sales as a percent of the Company's consolidated sales were
approximately 3% in each of the last three years. In anticipation of a long-
term slowdown in military procurement, Aerospace Components has developed and
executed a strategy of increasing its fabrication business' penetration of the
commercial and space sectors. Although Aerospace Components has experienced a
71% increase in sales to the commercial sector from 1990 to 1994, margins in
this area are generally lower than those on military business, particularly in
the light of weak conditions in commercial aviation which have led to
competitive pricing pressure. Weak demand in the airline industry also had a
negative impact on repair volumes with sales declining 24% in 1994 after an 11%
drop in 1993.
Operating profit for the segment fell 22% in 1994 as a result of the write-down
of goodwill as discussed in "Long-Lived Assets" and in Note 2. Excluding the
effect of the goodwill charge and the $1.8 restructuring charge in 1993,
operating profit increased 23% over 1993. Special Materials' operating profit
was up 20% primarily reflecting the record volume. Scrap steel costs increased
18% above 1993, about half of which was recovered with higher selling prices.
Operating profit was up 27% at Aerospace Components due to a one-time gain from
settlement of a real estate matter (see "Nonoperating Items") and slightly
improved margins in the aviation repair business.
In 1993, segment sales increased 1% over 1992. Metal powder shipments were up
8% in 1993 on higher North American automobile and light truck production.
Aerospace Components' sales declined 10% in 1993 due to the slowdown in
military procurement and the weak conditions in the airline industry.
Operating profit for the segment fell 17% in 1993. Excluding the $1.8 of
restructuring charges, segment operating profit 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. Scrap steel costs increased 20% in 1993, only a
small portion of which was recovered with higher selling prices. Aerospace
Components' operating profit was 37% lower in 1993 than in 1992. In addition
to the volume shortfall noted above, depressed conditions in the commercial
aerospace and airline industries led to excess capacity resulting in 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.
The Engineered Materials segment's order backlog at year-end 1994 was $148.4,
double the year-end 1993 balance of $73.6. Special Materials' backlog, which is
generally short-term in nature, was up 51% to a near record level. Aerospace
Components' backlog increased 127% from unusually low levels in 1993 due mainly
to new, multi-year fabrication orders received for commercial, military and
space applications.
Handling/Packaging Systems
Total segment sales in 1994 were up 10% above 1993. Handling sales increased
11% from the prior year. Demand for material handling products in the U.S.
continued to be strong, resulting in record volumes, higher pricing and a 14%
increase in sales. Strong Australian and Pacific Rim demand, together with
sales of the newly acquired Hong Kong distributor, led to a 52% increase in
Asia Pacific sales to record levels. European Handling sales were up slightly
as improvements in the U.K. were offset by the effects of a slow economy in
Continental Europe. Packaging sales were up 7% with higher sales in all
locations, especially in Canada where, on a local currency basis, sales were up
13% on strong domestic and export demand.
Segment operating profit fell 54% to $7.1 due to the $21.0 write-down of the
goodwill related to the Packaging unit as discussed in "Long-Lived Assets" and
in Note 2. Excluding the effects of the goodwill write-down and the $3.8
restructuring charge in 1993, operating profit was up 47%. U.S. Handling
profits were up 43% reflecting the record volumes and better pricing which were
partially offset by an 11% increase in steel costs. The improved volume at
Handling Asia Pacific returned that unit to profitability and was a significant
contributor to the increase in segment income. Operating profit for the
European Handling business was up 18% as higher volume in the U.K. and cost
savings throughout Europe were partially offset by lower volume and pricing in
Continental Europe and higher steel costs in the U.K. Despite a decline in
operating profit in the newspaper-related business, Packaging operating profit
was up 25%, due primarily to higher strapping volume and selling price and LIFO
inventory liquidation benefits in Canada and the U.K.
In 1993, Handling/Packaging Systems' sales were down 6% from 1992. Domestic
Handling sales were up 17% as the market for material handling equipment in the
U.S. 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.
Segment operating profit in 1993 was 29% 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.
Handling/Packaging Systems ended 1994 with an order backlog of $93.1, up from
$74.0 at the end of 1993 (at the same exchange rates), due mainly to improved
order rates at all Handling operations. Order intake at U.S. Handling reached
a record level in 1994.
Restructuring Charges
In 1993, the Company provided $5.6 for restructuring costs related to: the
exit from certain lines of businesses that were part of Handling North America;
reorganization and downsizing of portions of the European Handling operation;
and, in the Aerospace Components business, the abandonment of certain product
lines which resulted in idled equipment and the provision for severance costs
related to a downsizing of the Aviation Repair workforce. The $5.6 consisted
of $1.7 in severance costs, $1.5 of idled equipment written down to fair market
value, $1.4 of inventory related to the exited businesses and $1.0 of other
costs. Quantification of the effects of the restructuring on future operating
results is not practical because some of the actions were taken to avoid future
costs while other actions were strategic in nature and implemented to limit
exposure to changing market dynamics. These restructuring activities are
substantially complete and the remaining reserves are immaterial.
In 1992, the Company recorded $2.5 of additional costs related to unfavorable
adjustments on assets held for sale as part of an asset sale program adopted in
1989 as part of an overall restructuring program which modified its strategic
operating plan. The modified strategic operating plan identified certain
businesses and corporate assets to be disposed of and implemented significant
corporate cost reductions. Most of the designated businesses were sold or
shut down in 1990. The 1992 adjustment reflected the decline in value of two
pieces of real estate held for sale, both of which were sites of former
Handling operations.
Long-Lived Assets
Prior to the fourth quarter of 1994, impairment with respect to the Company's
assets was determined by comparing the sum of the undiscounted projected future
cash flows attributable to each business to the carrying value of the assets of
that business. In the fourth quarter of 1994, the Company concluded that, in
light of its highly leveraged capital structure, a preferable accounting policy
for analyzing the valuation of long-lived assets would be to reflect its cost
of capital in computing the present value of the expected cash flows of its
businesses. In addition, the long-term cash flow projections were updated to
reflect current information. Applying this new policy to all of its long-lived
assets, the Company determined that with respect to its Aerospace Components
and newspaper-related Packaging businesses, in light of the significant
deterioration in business climates in the aerospace and newspaper industries
over recent years, the values of the discounted cash flows were insufficient to
recover the carrying value of the long-lived assets. Therefore, the goodwill
component of those assets was deemed to be impaired. As a result, a charge of
$34.2 was taken for the write-down of goodwill established in connection with
the acquisitions of the Aerospace Components and newspaper-related Packaging
businesses. As of December 25, 1994, the remaining net investment in these
businesses was approximately equal to the value of the discounted projected
cash flows attributable to them, and consisted primarily of tangible assets.
The Company intends to continue to annually assess the carrying values of its
long-lived assets using the analysis described above. (See Note 2.)
Interest Expense
The Company has a highly leveraged capital structure with substantial net
interest expense of $50.2, $49.1, and $51.4 in 1994, 1993, and 1992,
respectively. In 1994, the increase in net interest expense was caused
primarily by higher rates on bank debt. The decline in 1993 was largely the
result of lower average outstanding borrowings. The Company has long-term
interest rate agreements as required under its bank credit agreement, which
effectively provided fixed rates of interest on 57% of its bank obligations at
the end of 1994, all of which bore interest at floating rates.
Nonoperating Items
The Company has certain income and expenses which are not related to its
ongoing operations. In 1994, these items included a $1.1 one-time gain for
settlement of a real estate matter with a local transportation authority at
Aerospace Components. In 1993, a charge of $4.8 was recorded for anticipated
costs for environmental matters as discussed below and in Note 15. Ongoing
postretirement expenses attributable to disposed or discontinued operations are
also shown as nonoperating items.
The Company has been identified as a potentially responsible party in
connection with the investigation and remediation of a site in Duluth,
Minnesota. Based on the Company's current estimates of its potential
liabilities related to the site, the Company believes that this matter is
unlikely to have a material adverse effect on the Company's liquidity or
consolidated financial condition. However, the Company's current estimate of
its potential environmental liabilities at this site is subject to considerable
uncertainty related to both the clean-up of certain contaminated soils at the
site, as well as the possible remediation of certain underwater sediments.
The Company is a defendant in an action in federal district court in Toledo,
Ohio, in which the City of Toledo alleges various claims in connection with the
alleged contamination of a 1.7 acre parcel of land (the "right-of-way") owned
by the City and an adjacent piece of land which formerly was the site of a coke
plant and related by-products facilities. The City of Toledo is seeking an
order compelling the defendants to perform a remedy of the right-of-way which
it asserts would cost approximately $4 million. The Company believes the
right-of-way could be remedied for much less, although remediation of the
entire site, if it were required, could cost more. The Company also believes
it is entitled to indemnification by one of the other defendants in the matter,
Beazer Materials and Services Inc., under the terms of a 1978 sale agreement.
The Company has brought an indemnification cross-claim against Beazer which may
be decided on motions for summary judgment in 1995.
In May 1994, the Company instituted an action seeking a declaratory judgment
against and recoveries from insurers in connection with environmental claims
under policies covering nearly 30 years. The parties are in discovery and
trial is tentatively set for October 1996.
Provision for Income Taxes
In 1993 and 1992, high levels of interest expense resulted in losses for U.S.
federal tax purposes. Because most of the interest expense is borne in the
United States at the parent company level, the Company had taxable income in
foreign and state jurisdictions despite the high levels of consolidated
interest expense. Foreign taxes paid did not result in a benefit in the U.S.
and, as a result, the Company had tax expense in 1994, 1993, and 1992,
notwithstanding consolidated pretax losses in each of those years.
In 1994, a small amount of domestic taxable income was generated as the write-
down of goodwill in 1994 did not increase the deduction allowable for tax
purposes. This taxable income was offset with the carryforward of prior year
losses. The Company also provided for additional amounts related to open
federal tax returns for the years 1982 through 1990. In addition, in 1994 the
Company had a small amount of income subject to Alternative Minimum Tax (AMT)
in the U.S. because of certain restrictions on the amount of net operating loss
that can be carried forward for purposes of calculating that tax.
At the end of 1994, the Company's U.S. federal income tax returns for the years
1988 through 1990 were in the process of examination. Resolution of tax years
1982-1984 is pending at the U.S. Tax Court following receipt in 1994 by the
Company of a statutory notice of deficiency for $17.0 plus interest and
penalties. Resolution of tax years 1985-1987 is pending at the Appeals
Division of the Internal Revenue Service. The Company believes that its
positions with respect to the contested matters for these years are strong, and
that adequate provision has been made for the possible assessments of
additional taxes and interest. 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 or, alternatively, they could be settled for either
more or less than what has been provided.
In 1992, the Company adopted a new method of accounting for income taxes (see
"Cumulative Effect of Accounting Changes" and Note 4).
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 State-
ments of Financial Accounting Standards ("FAS") No. 106 "Employers' Accounting
for Postretirement Benefits Other Than Pensions" and No. 109 "Accounting
for Income Taxes". The Company's foreign operations adopted FAS No. 106 in
1994. The cumulative effects of these adoptions were recognized in 1992 and
1994, respectively, as of the beginning of the year. The adoption of FAS No.
106 resulted in a charge of $9.3 (net of taxes) in 1992 and $.2 in 1994, while
the adoption of FAS No. 109 resulted in a credit of $3.1. (See Note 4.)
Liquidity and Capital Resources
Interlake's total debt at year-end 1994 was $442.5, down $.7 from year-end
1993. Cash totaled $39.7 at the end of the year, up $7.8 from year-end 1993.
During 1995, the Company will have long-term debt amortization requirements of
$24.6. Based on current levels of performance, and the availability of
additional revolver borrowings under the Company's bank credit agreement, the
Company believes that it will have adequate liquidity to meet its debt service
and operating requirements in 1995. Under the bank credit agreement, the
Company will be able to borrow under its revolving facility up to an additional
$44.0 over the year-end revolving indebtedness. However, outstanding revolver
borrowings at the end of each of the Company's fiscal 1995 quarters will be
limited to between $17.0 and $29.0 above the year-end 1994 revolver borrowings.
In addition, the Company will have up to $6.0 of deferred term loan
availability during the year for amounts that may be incurred on certain
environmental matters.
In the first quarter of 1995, the Company completed an amendment of certain
covenants under its bank credit agreement. Although there can be no
assurances, based on current levels of performance the Company believes it will
be able to comply with all bank credit agreement covenants in 1995. In 1996,
the Company has long-term debt amortization requirements of $88.8 and,
potentially, significant payments related to tax matters (see "Provision for
Income Taxes") which it does not expect to be able to meet from operating cash
flow. The Company continues to evaluate alternative actions to refinance some
or all of its long-term bank obligations including among others the raising of
new equity capital and the issuance of replacement debt.
Cash Flow (see Consolidated Statement of Cash Flows)
Cash inflows provided by operating activities were $21.9 and $8.0 in 1994 and
1993, respectively, while operating activities used cash of $7.2 in 1992. Cash
provided by operating activities was up in 1994 from 1993 primarily as a result
of higher operating earnings before the $34.2 goodwill charge which did not
affect cash. Working capital needs were $6.5 in 1994 versus an inflow of $5.8
in 1993 which resulted from the decline in sales in 1993. In 1994, other
operating adjustments reflect the movement of certain expected tax liabilities
from current to long-term. Excluding debt issuance costs related to the 1992
financing plan, cash inflows provided by operating activities were $4.8 in
1992.
Cash outflows used by investing activities were $14.6, $13.1, and $26.3,
respectively, in 1994, 1993, and 1992. Capital expenditures for expansion
projects totaled $4.1, $6.1, and $8.8, respectively, in 1994, 1993, and 1992.
Expansion spending in 1994 and 1993 included the addition of two annealing
furnaces to expand capacity at the Special Materials operation and, in 1993, 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. 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 1994, the unexpended balance on
approved capital expenditure projects was $6.4. The Company anticipates that
1995 capital spending will be approximately $20.0.
Cash inflows from financing activities were $.7 in 1994 and $67.5 in 1992. The
1992 inflow resulted from implementation of the 1992 debt refinancing. The
cash outflow from financing activities of $1.3 in 1993 resulted primarily from
scheduled amortization of long-term debt.
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 and 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 which could have
a material effect on the Company's results of operations. In 1994, the dollar
was somewhat weaker against most currencies and had a $5.2 favorable impact on
sales but an insignificant impact on operating income. 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 profit. (For additional information about the Company's
operations by geographic area, see Note 6.)
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.
Report of Independent Accountants
To the Board of Directors
and Shareholders of
The Interlake Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of cash flows and of shareholders'
equity (deficit) present fairly, in all material respects, the financial
position of The Interlake Corporation and its subsidiaries at December 25, 1994
and December 26, 1993, and the results of their operations and their cash flows
for each of the three years in the period ended December 25, 1994, 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 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 2 to the consolidated financial statements, the Company
changed its method of evaluating the recoverability of goodwill and other long-
lived assets in 1994. As discussed in Note 4 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.
PRICE WATERHOUSE LLP
Chicago, Illinois
January 25, 1995, except as to Note 18, which is as of March 8, 1995
The Interlake Corporation
Consolidated Statement of Operations
For the Years Ended December 25, 1994,
December 26, 1993 and December 27, 1992
(in thousands except per share data)
1994 1993 1992
Net Sales $752,592 $681,330 $708,199
Cost of Products Sold 576,929 520,508 527,857
Selling and Administrative Expense 117,264 117,025 127,436
Restructuring Charge (See Note 3) 5,611 2,523
Goodwill Write-down (See Note 2) 34,174
Operating Profit 24,225 38,186 50,383
Interest Expense 51,609 50,906 54,284
Interest Income (1,369) (1,855) (2,859)
Nonoperating (Income) Expense (see Note 15) (481) 5,359 484
Income (Loss) Before Taxes, Minority Interest,
Extraordinary Loss and Accounting Changes (25,534) (16,224) (1,526)
Provision for Income Taxes (See Note 7) 10,888 6,542 9,040
Income (Loss) Before Minority Interest, Extraordinary
Loss and Accounting Changes (36,422) (22,766) (10,566)
Minority Interest in Net Income of Subsidiaries 4,135 3,196 3,424
Income (Loss) Before Extraordinary Loss
and Accounting Changes (40,557) (25,962) (13,990)
Extraordinary Loss on Early Extinguishment of Debt,
Net of Applicable Income Taxes (See Note 5) (7,567)
Cumulative Effect of Changes in Accounting Principles (See Note 4) (194) (6,141)
Net Income (Loss) $(40,751) $(25,962) $(27,698)
Income (Loss) Per Share of Common Stock:
Income (Loss) Before Extraordinary Loss
and Accounting Changes $ (1.84) $ (1.18) $ (0.84)
Extraordinary Loss (0.46)
Accounting Changes (.01) (0.37)
Net Income (Loss) $ (1.85) $ (1.18) $ (1.67)
Average Shares Outstanding 22,027 22,027 16,754
(See notes to consolidated financial statements)
The Interlake Corporation
Consolidated Balance Sheet
December 25, 1994 and December 26, 1993
(Dollars in thousands)
1994 1993
Assets
Current Assets:
Cash and cash equivalents $ 39,708 $ 31,934
Receivables less allowances of $2,977 in 1994
and $2,775 in 1993 129,089 107,861
Inventories 73,853 77,025
Other current assets 6,340 9,720
Total Current Assets 248,990 226,540
Goodwill and Other Assets:
Goodwill, less accumulated amortization of $6,622
in 1994 and $20,141 in 1993 (See Note 2) 4,667 38,916
Other assets 45,562 49,013
Total Goodwill and Other Assets 50,229 87,929
Property, Plant and Equipment, net 145,734 149,691
Total Assets $444,953 $464,160
Liabilities and Shareholders' Equity (Deficit)
Current Liabilities:
Accounts payable $ 71,957 $ 60,382
Accrued liabilities 42,563 43,272
Interest payable 13,910 13,913
Accrued salaries and wages 18,060 14,713
Income taxes payable 10,328 17,866
Debt due within one year (See Note 13) 24,553 2,525
Total Current Liabilities 181,371 152,671
Long-Term Debt (See Note 13) 417,898 440,610
Other Long-Term Liabilities 75,753 65,765
Deferred Tax Liabilities (See Note 7) 6,038 6,896
Commitments and Contingencies (See Note 16)
Minority Interest 21,173 18,830
Preferred Stock 2,000,000 shares authorized
Convertible Exchangeable Preferred Stock - Redeemable,
par value $1 per share, issued 40,000 shares (See Note 10) 39,155 39,155
Shareholders' Equity (Deficit): (See Note 11)
Common stock, par value $1 per share, authorized
100,000,000 shares, issued 23,228,695 in 1994 and 1993 23,229 23,229
Additional paid-in capital 30,248 30,248
Cost of common stock held in treasury (1,202,000 shares in
1994 and 1993) (28,047) (28,047)
Retained earnings (Accumulated deficit) (293,966) (253,215)
Unearned compensation (10,058) (11,279)
Accumulated foreign currency translation adjustments (17,841) (20,703)
Total Shareholders' Equity (Deficit) (296,435) (259,767)
Total Liabilities and Shareholders' Equity (Deficit) $444,953 $464,160
(See notes to consolidated financial statements)
The Interlake Corporation
Consolidated Statement of Cash Flows
For the Years Ended December 25, 1994,
December 26, 1993 and December 27, 1992
(in thousands)
1994 1993 1992
Cash Flows from (for) Operating Activities:
Net income (loss) $(40,751) $(25,962) $(27,698)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Restructuring charge 5,611
Goodwill write-down 34,174
Depreciation and amortization 23,102 25,040 27,535
Extraordinary item 7,488
Debt issuance costs (1,264) (11,952)
Accounting changes 6,141
Nonoperating environmental matters 4,750
Other operating adjustments 13,172 (7,231) (4,412)
(Increase) Decrease working capital:
Accounts receivable (18,754) 16,233 (6,469)
Inventories 5,880 (4,190) (3,616)
Other current assets 3,249 (1,642) 190
Accounts payable 9,897 519 2,724
Other accrued liabilities 758 (2,708) 10,779
Income taxes payable (7,560) (2,432) (7,866)
Total Working Capital Change (6,530) 5,780 (4,258)
Net Cash Provided (Used) by Operating Activities 21,903 7,988 (7,156)
Cash Flows from (for) Investing Activities:
Capital expenditures (15,485) (14,540) (24,588)
Proceeds from disposal of PP&E 477 284 636
Acquisitions (746) (2,319)
Other investment flows 1,137 1,122
Net Cash Provided (Used) by Investing Activities (14,617) (13,134) (26,271)
Cash Flows from (for) Financing Activities:
Proceeds from issuance of long-term debt 10,656 104 267,832
Retirements of long-term debt (11,970) (7,582) (282,430)
Proceeds from issuance of common stock 41,759
Proceeds from issuance of preferred stock 39,155
Other financing flows 1,982 6,158 1,217
Net Cash Provided (Used) by Financing Activities 668 (1,320) 67,533
Effect of Exchange Rate Changes on Cash (180) (240) (6,007)
Increase (Decrease) in Cash and Cash Equivalents 7,774 (6,706) 28,099
Cash and Cash Equivalents, Beginning of Year 31,934 38,640 10,541
Cash and Cash Equivalents, End of Year $ 39,708 $ 31,934 $ 38,640
(See notes to consolidated financial statements)
The Interlake Corporation
Consolidated Statement of Shareholders' Equity (Deficit)
For the Years Ended December 25, 1994,
December 26, 1993 and December 27, 1992
(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 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 (See Note 11) 11,488 41,759 41,759
Stock incentive plans (See Note 12) 55 649 (1,146) 273 (224)
ESOP transactions (See Note 11) 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 (See Note 12) (23) 13 (1) 46 35
ESOP transactions (See Note 11) 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)
Net income (loss) (40,751) (40,751)
Stock incentive plans (See Note 12) 15 15
ESOP transactions (See Note 11) 1,206 1,206
Translation gain 2,862 2,862
Balance December 25, 1994 23,229 $53,477 (1,202) $(28,047) $(293,966) $(10,058) $(17,841) $(296,435)
(See notes to consolidated financial statements)
The Interlake Corporation
Notes to Consolidated Financial Statements
For the Years Ended December 25, 1994, December 26, 1993 and December 27, 1992
(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. All
significant intercompany transactions are eliminated.
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 Aerospace Components unit periodically enters into long-
term agreements with customers on major programs 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 41% and 44%
of gross inventories and 50% and 55% of domestic gross inventories at December
25, 1994 and December 26, 1993, respectively. The current cost of these
inventories exceeded their valuation determined on a LIFO basis by $15,513 at
December 25, 1994 and by $16,628 at December 26, 1993.
During 1994, 1993, and 1992, 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 1994, 1993, and 1992. As a result, pretax income in 1994, 1993,
and 1992 was increased by $951, $1,201, and $1,948, respectively.
Inventories by category at December 25, 1994 and December 26, 1993 were:
1994 1993
Raw materials $ 14,703 $ 13,443
Semi-finished and finished products 50,978 54,795
Supplies 8,172 8,787
$ 73,853 $ 77,025
Leases - The Company frequently enters into operating leases in the normal
course of business. Amounts due under noncancelable operating leases in the
next five fiscal years are as follows:
1995 1996 1997 1998 1999
$5,875 $5,357 $4,866 $3,939 $3,577
Rent expense charged to operating income was $11,853, $11,271, and $13,473
in 1994, 1993, and 1992, respectively.
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.
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, gains and losses on disposals related to the 1989 restructuring
program were included in operating income as restructuring charges.) (See Note
3).
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 25, 1994 and
December 26, 1993 were:
1994 1993
At Cost:
Land $ 6,946 $ 6,729
Buildings 75,788 74,175
Equipment 294,239 284,060
Construction in progress 5,867 4,222
382,840 369,186
Less-Depreciation (237,106) (219,495)
$145,734 $149,691
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
goodwill assets at their purchase prices, less amortized amounts, but subject
to annual review for impairment. During the fourth quarter of 1994, the
Company changed its accounting policy for valuation of its long-lived assets,
primarily goodwill, to reflect its cost of capital in calculating the present
value of the projected future cash flows expected to be generated over the
lives of those assets. Previously, the cash flows were used without
discounting or allocation of interest cost. Under the new policy, projections
of cash flows for individual business units are discounted at the approximate
incremental cost of borrowing for the Company. This discounted amount is then
compared to the carrying value of the long-lived assets to determine if their
value is impaired. (See Note 2).
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. Results of
operations are translated at the average rates 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 ex-
change contracts to hedge specific 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 25, 1994, the Company had outstanding currency contracts to
exchange $1,918 for foreign currency (including Canadian dollars, Australian
dollars, deutsche marks, pounds sterling, Japanese yen and Belgian francs).
The Company's exposure to loss in the event of nonperformance by the other
parties to these contracts is limited to the effect of the currency
fluctuations related to the amounts to be exchanged; however, the Company does
not anticipate nonperformance by the counterparties.
Interest Rate Hedges - The Company utilizes swap agreements to hedge a portion
of its interest rate exposure on floating rate obligations (see Note 14).
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
$2,107, $2,153, and $2,209 for the Engineered Materials segment in 1994, 1993,
and 1992, respectively, and $1,303, $1,092, and $607 for the Handling/Packaging
Systems segment in 1994, 1993, and 1992, respectively.
Deferred Taxes - Certain prior year deferred tax amounts were reclassified
to conform to current year presentation.
NOTE 2 Goodwill Write-down
Prior to the fourth quarter of 1994, impairment with respect to the Company's
long-lived assets was determined by comparing the sum of the undiscounted
projected future cash flows attributable to each business unit to the carrying
value of the assets of that business. Projected future cash flows for each
business unit were estimated for a period approximating the remaining lives of
that business' long-lived assets, based on earnings history, market conditions
and assumptions reflected in internal operating plans and strategies. In 1993,
under this analysis, the Company determined that the cash flows from each
business unit would be sufficient to recover the carrying value of its long-
lived assets and, therefore, that the value of such assets was not impaired.
In the fourth quarter of 1994, the Company concluded that, in the light of its
highly leveraged capital structure, a preferable accounting policy for analy-
zing the potential impairment of long-lived assets would be to reflect the cost
of capital in computing the present value of the expected cash flows of its
businesses. Applying this new policy to all of its long-lived assets the
Company determined, with respect to its Aerospace Components and newspaper-
related Packaging businesses, that in the light of the significant deteriora-
tion in business climates in the aerospace and newspaper industries over recent
years, the values of the discounted cash flows were insufficient to recover the
carrying value of the long-lived assets. Therefore, the goodwill included among
those assets was deemed to be impaired. As a result, a charge of $34,174 was
recorded for the write-down of goodwill established in connection with the
acquisitions of the Aerospace Components and newspaper-related Packaging
businesses. As of December 25, 1994, the remaining net investment in these
businesses was approximately equal to the value of the discounted projected
cash flows attributable to them, and consisted primarily of tangible assets.
The Company intends to continue to annually assess the carrying values of its
long-lived assets using the analysis described above.
NOTE 3 Restructuring Charges
In 1993, the Company provided $5,611 for restructuring costs related to: the
exit from certain lines of business that were part of Handling North America;
reorganization and downsizing of portions of the European Handling operation;
and, in the Aerospace Components business, the abandonment of certain product
lines which resulted in idled equipment and severance costs related to a
downsizing of the Aviation Repair workforce. The $5,611 consisted of $1,676 in
severance costs, $1,515 of idled equipment written-down to fair market value,
$1,367 of inventory related to the exited businesses and $1,053 of other costs.
Quantification of the effects of the restructuring on future operating results
is not practical because some of the actions were taken to avoid future costs
while other actions were strategic in nature and implemented to limit exposure
to changing market dynamics. These restructuring activities are substantially
complete and the remaining reserves are immaterial to the Company as a whole.
In 1992, the Company recorded $2,523 of additional costs related to unfavorable
adjustments on assets held for sale as part of an asset sale program. The
Company developed this program in 1989 as part of an overall restructuring
program which modified its strategic operating plan. The modified strategic
operating plan identified certain businesses and Corporate assets to be dis-
posed of and implemented major Corporate cost reductions. Most of the desig-
nated businesses were sold or shut-down in 1990. The 1992 adjustment reflected
the rapid decline in real-estate value of two properties held for sale, both of
which were former Handling operations.
NOTE 4 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 the fourth quarter of 1994, the Company elected to adopt FAS No. 106 for its
foreign plans. Adoption is mandatory for foreign plans for fiscal years
beginning after December 15, 1994. The one-time cumulative effect of this
adoption on income was a net charge of $194 ($.01 per share) which was reported
retroactively to the beginning of fiscal 1994.
In 1992, the Company changed its method of accounting for income taxes by adop-
ting 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 5 Extraordinary Loss
In 1992, the Company refinanced certain long-term debt and entered into a
comprehensive amendment and restatement of its bank 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 had a negative cash flow consequence of
$11,952 in 1992 which was deducted in determining net cash provided (used) by
operating activities in the Consolidated Statement of Cash Flows.
NOTE 6 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 is 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 1994, 1993, and 1992. Operating profit consists of net sales of the
segment less all costs and expenses related to the segment. "Corporate Items"
includes items which are not related to either of the two business segments.
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.
Information About The Company's Business Segments
(in millions)
Net Sales Operating Profit (Loss) Identifiable Assets
1994 1993 1992 1994 1993 1992 1994 1993 1992
Engineered Materials
Special Materials $153.9 $131.5 $122.5
Aerospace Components 62.5 61.0 67.5
216.4 192.5 190.0 $ 32.3 $ 26.3 $ 29.6
Goodwill Write-down (13.2)
Restructuring Charge (1.8)
216.4 192.5 190.0 19.1 24.5 29.6 $166.6 $178.3 $173.5
Handling/Packaging Systems
Handling 406.0 366.7 395.3
Packaging 130.2 122.1 122.9
536.2 488.8 518.2 28.1 19.1 24.0
Goodwill Write-down (21.0)
Restructuring Charge (3.8) (2.5)
536.2 488.8 518.2 7.1 15.3 21.5 252.1 265.6 279.4
Corporate Items (2.0) (1.6) (0.7) 26.3 20.3 58.4
Operating Profit 24.2 38.2 50.4
Net Interest Expense (50.2) (49.1) (51.4)
Nonoperating Income (Expense) 0.5 (5.3) (0.5)
Consolidated Totals $752.6 $681.3 $708.2 $(25.5) $(16.2) $ (1.5) $445.0 $464.2 $511.3
Depreciation and Amortization
Engineered Materials $ 11.7 $ 12.2 $ 11.8
Handling/Packaging Systems 11.2 12.6 15.5
Corporate Items 0.2 0.2 0.2
Consolidated Total $ 23.1 $ 25.0 $ 27.5
Capital Expenditures
Engineered Materials $ 8.3 $ 9.0 $ 15.5
Handling/Packaging Systems 7.2 5.5 9.1
Consolidated Total $ 15.5 $ 14.5 $ 24.6
Liquidation of LIFO Inventory Quantities
Engineered Materials $ $ $ .4
Handling/Packaging Systems 1.0 1.2 1.5
Information About The Company's Operations by Geographic Region
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 that area. Export sales to unaffiliated customers
included in the United States' sales are not material. Sales to domestic and
foreign government agencies are not material.
Net Sales Operating Profit (Loss) Identifiable Assets
1994 1993 1992 1994 1993 1992 1994 1993 1992
(in millions)
United States
Customer Sales $439.1 $390.0 $363.5
Inter-geographic 3.3 2.6 3.6
Subtotal 442.4 392.6 367.1 $ 43.1 $ 32.1 $ 32.7
Goodwill Write-down (34.2)
Restructuring Charge (3.8)
442.4 392.6 367.1 8.9 28.3 32.7 $240.1 $275.1 $274.4
Europe
Customer Sales 210.1 206.5 256.5
Inter-geographic 2.8 1.4 1.2
Subtotal 212.9 207.9 257.7 11.4 9.6 17.3
Restructuring Charge (1.1) (1.6)
212.9 207.9 257.7 11.4 8.5 15.7 100.8 94.7 106.3
Canada and Asia Pacific
Customer Sales 103.4 84.8 88.2
Inter-geographic 2.9 1.2 2.2
Subtotal 106.3 86.0 90.4 5.9 3.7 3.6
Restructuring Charge (0.7) (0.9)
106.3 86.0 90.4 5.9 3.0 2.7 77.8 74.1 72.2
Corporate Items/Eliminations (9.0) (5.2) (7.0) (2.0) (1.6) (0.7) 26.3 20.3 58.4
Operating Profit 24.2 38.2 50.4
Net Interest Expense (50.2) (49.1) (51.4)
Nonoperating Income (Expense) 0.5 (5.3) (0.5)
Consolidated Totals $752.6 $681.3 $708.2 $(25.5) $(16.2) $ (1.5) $445.0 $464.2 $511.3
Liquidation of LIFO Inventory Quantities
United States $ 0.1 $ $ 1.1
Europe 0.6 1.1 0.7
Canada and Asia Pacific 0.3 0.1 0.1
NOTE 7 Income Taxes
Pretax income (loss) consisted of:
1994 1993 1992
Domestic $(39,187) $(25,482) $(16,854)
Foreign 13,654 9,258 15,328
$(25,533) $(16,224) $ (1,526)
The provisions for taxes
on income consisted of:
1994 1993 1992
Current:
U.S. Federal $ 2,688 $ 602 $ 1,080
State 2,892 2,343 689
Foreign 3,001 3,697 6,527
Total 8,581 6,642 8,296
Deferred:
U.S. Federal (3,493)
State
Foreign 1,676 (100) 744
Total (1,817) (100) 744
Benefit of Net Operating
Loss Carryforwards:
U. S. Federal 3,172
Foreign 952
Total 4,124
Tax Provision $ 10,888 $ 6,542 $ 9,040
In 1993 and 1992, high levels of interest expense resulted in losses for U.S.
federal tax purposes. Because most of the interest expense is borne in the
United States at the parent company level, throughout the period the Company
had taxable income in foreign and state jurisdictions despite the high levels
of consolidated interest expense. Foreign taxes paid did not result in a ben-
efit in the U.S. and, as a result, the Company had tax expense in 1994, 1993,
and 1992, notwithstanding consolidated pretax losses in each of those years.
In 1994, a small amount of domestic taxable income was generated as the write-
down of goodwill did not increase the deduction allowable for tax purposes.
This taxable income was offset with the carryforward of prior year losses. The
Company also provided for additional amounts related to open federal tax
returns for the years 1982 through 1990. In addition, in 1994 the Company had
a small amount of income subject to Alternative Minimum Tax (AMT) in the U.S.
because of certain restrictions on the amount of net operating loss that can be
carried forward for purposes of calculating that tax.
The federal tax net operating loss carryforward, which was $19,878 at the end
of 1994, will not begin to expire until 2006. (The tax effect of this benefit
was fully reserved for in the valuation allowance.)
Actual cash disbursements for income taxes and other tax assessments were
$4,844, $8,586, and $16,151 in 1994, 1993, and 1992, respectively. Because of
the Company's tax situation in 1994, 1993, and 1992, effective tax rate
analysis would not be meaningful.
Deferred tax liabilities and assets are comprised of the following:
1994 1993
Deferred tax liabilities
Depreciation $ 20,123 $ 19,771
Other 3,034 3,156
$ 23,157 $ 22,927
Deferred tax assets
Deferred employee benefits $ 16,905 $ 16,400
Net operating loss carryforward 8,557 12,681
AMT credit carryforwards 2,168 2,078
Inventory 3,407 4,188
Recapitalization costs 2,049 2,419
Environmental reserves 2,189 2,884
Other 3,795 5,681
39,070 46,331
Valuation allowances (18,165) (23,489)
$ 20,905 $ 22,842
As of December 25, 1994, U.S. federal income tax returns for the years 1988
through 1990 were in the process of examination. Resolution of tax years 1982-
1984 is pending with the U.S. Tax Court following receipt in 1994 by the
Company of a statutory notice for $17,000 plus penalties and interest.
Resolution of tax years 1985-1987 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 $25,967 of
undistributed earnings of foreign subsidiaries, some of which are subject to
statutory restrictions on distribution.
NOTE 8 Pensions
The Company has various defined benefit and defined contribution pension plans
which among 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 compen-
sation during the latter years of employment. Company contributions are
determined according to the funding requirements set forth by ERISA and in the
case of foreign plans local statutory requirements.
Certain of the Company's defined benefit plans relate to foreign locations and
are denominated in currencies other than U.S. dollars. All plans use similar
economic assumptions. 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.
1994 1993
Plan assets at fair value $131,387 $142,009
Actuarial present value of
accumulated benefit obligation:
Vested benefits 108,143 110,693
Non-vested benefits 1,243 907
109,386 111,600
Effect of assumed future compensation increases 13,452 10,010
Projected benefit obligation for service to date 122,838 121,610
Plan assets in excess of projected benefit
obligation 8,549 20,399
Items not yet recognized in earnings:
Unrecognized net asset at December 28, 1986
(being recognized over 15 years) 13,881 15,704
Unrecognized net actuarial gain (loss) (6,231) 3,834
Unrecognized prior service cost (6,456) (5,033)
1,194 14,505
Prepaid (Accrued) pension liability $ 7,355 $ 5,894
Net pension cost (income) included in operating profit for these plans consists
of the following components:
1994 1993 1992
Service cost $ 3,679 $ 3,068 $ 3,232
Interest cost 9,747 9,298 9,596
Actual return on plan assets [(income) loss] (6,795) (12,107) (9,923)
Net amortization and deferred items (7,657) (434) (3,177)
Net pension cost (income) $(1,026) $ (175) $ (272)
Assumptions used in the computations:
Assumed discount rate 7.5-9% 7-9% 7-9%
Expected long-term rate of return on plan assets 8.5-9% 7-9% 7-9%
Rate of increase in future compensation levels 4-7% 4-6% 5-7%
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 covering
certain domestic employees was $1,835, $2,267, and $2,307 in 1994, 1993, and
1992, 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 13). Amounts charged to employee
benefits and interest during the year totalled $1,307 and $741, respectively,
in 1994, $1,508 and $703, respectively, in 1993, and $1,307 and $846,
respectively, in 1992.
NOTE 9 Postretirement Benefits Other Than Pensions
The Company has unfunded postretirement health care and death benefit plans
covering certain domestic employees and retirees. 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.
Effective as of the beginning of fiscal 1994, the Company adopted FAS No. 106
for its foreign plans. This change in accounting principle required restatement
of previously reported first quarter 1994 results by a charge of $194.
The following table sets forth the status of the plans, reconciled to the
accrued postretirement benefit cost recognized in the Company's year-end
balance sheet.
1994 1993
Accumulated postretirement benefit obligation:
Retirees $22,751 $26,171
Fully eligible active plan participants 2,203 2,436
Other active plan participants 1,975 2,245
Total accumulated postretirement benefit obligation 26,929 30,852
Unrecognized prior service cost 2,177 2,341
Unrecognized gain (loss) 5,595 1,511
Accrued postretirement benefit cost $34,701 $34,704
Net periodic postretirement benefit cost included the following components:
1994 1993 1992
Service cost on benefits earned $ 205 $ 242 $ 464
Interest cost on accumulated postretirement
benefit obligation 2,062 2,389 2,808
Unrecognized prior service cost (164) (123)
Unrecognized gain (loss) (118) (57)
Net periodic postretirement benefit cost charged
to results from operations $ 1,985 $ 2,451 $ 3,272
For measuring the expected postretirement benefit obligation, a 14% annual rate
of increase in the per capita claims cost was assumed for 1994. 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 8.5% at December 31, 1994 and
7.5% at December 31, 1993. The rate of compensation increase used to measure
the accumulated postretirement benefit obligation for the death benefit plans
was 4% in both 1994 and 1993.
If the health care cost trend rate were increased 1%, the accumulated
postretirement benefit obligation as of December 31, 1994 would have increased
by 5%. The effect of this change on the aggregate of service and interest cost
for 1994 would be an increase of 5%.
The provision for postretirement benefits other than pensions included in
operating profit was $1,107, $167, and $1,958 in 1994, 1993, and 1992,
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
$878, $1,143, and $1,314 in 1994, 1993, and 1992, respectively.
NOTE 10 Convertible Exchangeable Preferred Stock
As part of its 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 is 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 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 continue to 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 $5.20 per share as of December 31, 1994. In
addition, to the extent dividends are not paid on the preferred stock in cash,
the liquidation preference on the preferred stock increases at a rate of 9% per
year, compounded semi-annually, and as of December 31, 1994 was $50,000. Upon
certain events defined as "changes in control" or fundamental changes, the
holders of the convertible preferred stock have the right to require the
Company to purchase the shares, subject to certain limitations.
NOTE 11 Shareholders' Equity (Deficit)
As part of its 1992 financing plan, the Company sold 11,488,000 shares 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. None has been issued.
Shares of non-voting common stock have no voting rights except as otherwise
provided or as required by law.
No dividend payments were made in 1994, 1993, and 1992 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 25, 1994, 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.
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 certain holders 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 12 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.
A summary of stock option activity under the Stock Incentive Programs follows:
1994 1993
Average Average
Shares Price Shares Price
Stock Options:
Outstanding-beginning of year 1,188,162 $6.15 1,331,955 $6.81
Granted 106,000 4.09
Exercised
Canceled or expired (111,874) 6.13 (249,793) 8.77
Outstanding-end of year 1,076,288 6.15 1,188,162 6.15
Exercisable-end of year 535,663 8.31 427,937 9.95
Available shares 908,529 796,655
NOTE 13 Long-Term Debt and Credit Arrangements
Long-term debt of the Company consists of the following:
December 25, Interest December 26, Interest
1994 Rates 1993 Rates
Senior Subordinated Debentures $220,000 12.13% $220,000 12.13%
Term Loans 94,383 8.00-8.63 94,136 5.69-8.44
Delayed Draw Term Loan 11,125 8.00 11,125 5.69
Deferred Term Loans 7,500 8.00 7,500 5.69
Revolving Loans 76,314 8.00-8.63 76,031 5.69-8.44
ESOP Note 10,055 8.00 11,261 5.69
Obligations under long-term lease agreements 8,930 6.13-7.88 10,230 6.13-7.88
Pollution control and industrial development
loan agreements 12,150 6.25-7.13 12,150 6.25-7.13
Other 1,994 702
442,451 443,135
Less-current maturities 24,553 2,525
$417,898 $440,610
Weighted average interest rate 11.66% 11.39%
During 1992, the Company implemented a financing plan which included the 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 covenants in the agreement were further modified in 1993
and again early in 1995.
At the end of 1994, the bank credit agreement provided facilities for term
loans of $118,792, revolving loans of up to $102,114 (subject to limitations
described below), and ESOP loans of $10,055. 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, had 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 bor-
rowing rates at December 25, 1994 ranged from 8.00% to 8.625%. 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 1994, the Company had interest rate hedging
arrangements with members of the bank group limiting interest rates on $113,000
of debt under the bank credit agreement to 8.57% plus the applicable spread.
These agreements mature on a quarterly basis through 1997. Without the swap
agreements, the weighted average cost of borrowing would have been 1.2
percentage points lower in 1994, 1.6 lower in 1993 and 1.4 lower in 1992. The
expiration dates of the swap agreements 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 Steel Company 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 1994
are as follows:
1995 $24,553
1996 88,824
1997 80,262
1998 11,544
1999 4,095
Although there can be no assurances, based on current levels of performance the
Company believes it will be able to comply with all bank credit agreement
covenants in 1995. In 1996, the Company has long-term debt amortization
requirements of $88,824 and, potentially, significant payments related to tax
matters (see "Provision for Income Taxes") which it does not expect to be able
to meet from operating cash flow. The Company continues to evaluate alternative
actions to refinance some or all of its long-term bank obligations including
among others the raising of new equity capital and the issuance of replacement
debt.
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 $49,413, $48,326, and $41,179 in
1994, 1993, and 1992, respectively.
At December 25, 1994 the Company had unamortized deferred debt issuance costs
of $9,021 included in other assets which are being amortized as part of
interest expense over the lives of the related debt issues. Amortization
included in interest expense was $2,199, $1,786, and $1,594, in 1994, 1993,
and 1992, respectively.
Under the bank credit agreement, the Company will be able to borrow under its
revolving facility up to an additional $44,000 over the year-end revolving
indebtedness. However, outstanding revolver borrowings at the end of each of
the Company's fiscal 1995 quarters will be limited to between $17,000 and
$29,000 above the year-end 1994 revolver borrowings. In addition, the Company
will have up to $6,000 of deferred term loan availability during the year for
amounts incurred on certain environmental matters.
NOTE 14 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 13) - 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 10) - The fair value of
the preferred stock, which was issued in a private placement, is estimated at
its 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 applicable spot rates and thirty day forward rates as of
the end of the fiscal year.
Interest rate swap agreements (See Note 13) - 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 25, December 26,
1994 1993
Carrying Fair Carrying Fair
Amount Value Amount Value
Cash and cash equivalents $ 39,708 $ 39,708 $ 31,934 $ 31,934
Other assets 6,000 5,220 6,942 6,996
Long-term debt<F1> 433,521 418,440 432,905 435,754
Convertible exchangeable preferred stock 39,155 39,155 39,155 39,155
Foreign currency contract assets (43) (75)
Interest rate swap liabilities 932 1,838 1,824 12,226
<FN>
<F1> Includes current maturities and excludes capitalized long-term leases
NOTE 15 Environmental Matters
In connection with the reorganization of the old Interlake, Inc. (now Acme
Steel Company ("Acme")) in 1986, the Company, then newly-formed, indemnified
Acme against certain environmental liabilities relating to properties which had
been shut down or disposed of by Acme's iron and steel division prior to the
1986 reorganization. The Company recorded a charge of $6 million in 1991 and
charges of $4.8 million in 1993 for anticipated liabilities for environmental
matters relating to nonoperating sites. As of December 25, 1994, the Company's
reserves for environmental liabilities totalled $6.2 million.
Based on its current estimate of its potential environmental liabilities,
including all contingent liabilities, individually and in the aggregate,
asserted and unasserted, the Company believes that the costs of environmental
matters have been fully provided for or are unlikely to have a material adverse
effect on the Company's business, future results of operations, liquidity or
consolidated financial condition. In arriving at its current estimate of its
potential environmental liabilities, the Company has relied upon the estimates
and analysis of its environmental consultants and legal advisors, as well as
its own evaluation, and has considered: the probable scope and cost of
investigations and remediations for which the Company expects to have
liability; the likelihood of the Company being found liable for the claims
asserted or threatened against it; and the risk of other responsible parties
not being able to meet their obligations with respect to clean-ups. In
estimating its potential environmental liabilities, the Company has not taken
into consideration any potential recoveries from insurance companies, although
in May 1994 the Company instituted an action seeking a declaratory judgment
against and recoveries from insurers under policies covering nearly 30 years.
The Company's estimate has not been discounted to reflect the time-value of
money, although a significant delay in implementation of certain of the
remedies thought to be probable could result in cost estimates increasing due
to inflation.
The Company's current estimates of its potential environmental liabilities are
subject to considerable uncertainty due to the continuing uncertainty
surrounding one of the sites for which the Company is responsible pursuant to
its indemnity of Acme -- namely, the Superfund site on the St. Louis River in
Duluth, Minnesota (the "Duluth Site"). These uncertainties relate to both the
clean-up of certain contaminated soils at the site, as well as the remediation
of certain underwater sediments. In the light of these uncertainties, the
Company's estimates could be subject to change in the future.
With respect to the contaminated soils, the Company has conducted certain
investigations at the request of the Minnesota Pollution Control Agency
("MPCA"), including a study outlining a broad range of remedial alternatives
and associated costs. The alternatives studied have included both those that
assume that the Duluth Site will be used for industrial purposes, consistent
with its current and historical uses, and those that would meet standards for
unrestricted use. The Company and the MPCA are engaged in discussions regarding
the development of a work plan for clean-up to industrial use standards. The
costs of the alternatives for clean-up to industrial use standards believed to
be most appropriate by the Company range from $3 million to $4 million.
However, the Company has reviewed other remedial plans for the contaminated
soils which also contemplate the continued industrial use of the property but
which could cost as much as $20 million, due to their being based upon certain
risk assessments and other assumptions which the Company believes to be overly
conservative. The Company expects to arrive at an agreed-upon work plan with
the MPCA, based on appropriate assumptions, sometime during 1995, but there can
be no assurance it will do so.
With respect to the underwater sediments, the MPCA has requested the Company to
undertake an investigation and to evaluate remedial alternatives. The Company
is presently negotiating with the MPCA the scope of the sediments
investigation. The Company believes that any estimate of the potential costs of
remediating the underwater sediments will not be meaningful until the
investigation is completed and possible remedial alternatives are reviewed by
the Company and the MPCA. To date, there have been few sites in the United
States involving the clean-up of underwater sediments, and none in which the
MPCA has acted as lead agency. On a preliminary basis, the Company believes
that the range of reasonable remedial alternatives for the underwater sediments
includes that of taking no action, thereby avoiding the disruption of the
natural remediation of the underwater sediments which has been under way for
over 30 years. Thus, the Company believes the minimum of the range of costs of
remedial alternatives to be zero, and to date has made provision for only the
investigation, and not for the clean-up, of underwater sediments.
In March 1994, the citizen board of the MPCA, contrary to the recommendation of
the MPCA professional staff, named only the Company as a responsible party with
respect to the underwater sediments at the Duluth Site. The MPCA staff had
recommended that the successors to certain coal tar processors at the site (the
"tar companies") also be named as responsible parties. The Company believes
that the tar companies are the cause of a major portion of the underwater
contamination of the site, and is reviewing its options for either obtaining
the inclusion of the tar companies as responsible parties or recovering a
portion of the Company's costs from the tar companies.
The Company's current expectation is that cash outlays related to its
outstanding reserves for environmental matters will be made over the period of
1995 to 1997, or later. If the Company ultimately determines that additional
charges beyond its present reserves are necessary in connection with the Duluth
Site, the Company believes it is likely that cash outlays would occur near the
end of the decade, or later.
NOTE 16 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
future, results of operations, liquidity or consolidated financial condition.
On July 9, 1990, the City of Toledo, Ohio, brought an action in Federal
district court in Toledo, Ohio, against the Company, Acme Steel Company
("Acme" or the "old Interlake"), Beazer Materials and Services, Inc. ("Beazer")
and Toledo Coke Corporation ("Toledo Coke") in connection with the alleged
contamination of a 1.7 acre parcel of land the City had purchased from Toledo
Coke for purposes of building a road. The City has alleged various claims,
both with respect to the 1.7 acres of right-of-way it purchased and owns and
the entire coke facility owned by Toledo Coke which adjoins the right-of-way.
These claims seek a judgment finding the Company and the other defendants
liable for the environmental remediation costs and other relief. The Company's
alleged liability arises from its indemnification obligations with respect to
Acme, which as the old Interlake operated coke ovens and by-product recovery
facilities on the site from 1930 through 1978. In 1978 the old Interlake sold
the coke plant to Koppers Company, Inc., which was later acquired by Beazer,
and which indemnified Interlake against environmental liabilities. Koppers, in
turn, sold the facility to Toledo Coke. Interlake has cross-claimed against
Beazer under its indemnity.
Prior to the filing of the preliminary injunction described below, the City of
Toledo and the defendants had been discussing possible remedial plans which the
defendants believe would enable the City to build the road in question. Under
these plans, the amounts required to be contributed by the Company would not
have been material to the business or financial condition of the Company. On or
about January 31, 1994, the City filed a motion seeking a preliminary injunc-
tion under the Resource Conservation Recovery Act ordering the defendants to
take certain remedial actions with respect to the right-of-way. A hearing on
the City's motion was completed in October 1994. The City is seeking an order
compelling the defendants to perform a remedy which the City asserts would cost
approximately $4 million. The Company believes that the right-of-way could be
remedied to a degree sufficient to enable the building of the road at a cost
far less than $4 million. Although the Company believes that it is entitled to
be indemnified by Beazer, to the extent the Company incurs any liabilities or
costs by virtue of the ongoing injunction hearing, the Company could be
compelled to incur costs prior to having its indemnification cross-claim
against Beazer decided by the court.
In January 1995, Beazer filed a motion for summary judgment seeking to have the
Company's indemnification cross-claim denied. The Company intends to resist
such motion, and to file its own motion for summary judgment seeking the
enforcement of the indemnification from Beazer.
NOTE 17 Quarterly Results (Unaudited)
Quarterly results of operations for 1994 and 1993 were as follows:
(in millions except per share data)
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
1994
Net sales
Engineered Materials $ 48.2 $ 54.4 $ 54.2 $ 59.6
Handling/Packaging Systems 121.1 127.7 139.5 147.9
169.3 182.1 193.7 207.5
Gross Profit 39.5 43.4 42.9 49.9
Operating profit
Engineered Materials 7.8 8.1 6.8 9.6
Handling/Packaging Systems 5.5 5.8 7.9 8.9
Corporate Items (1.3) (.3) (.3) (.1)
Operating profit before goodwill write-down 12.0 13.6 14.4 18.4
Goodwill write-down (34.2)
Operating profit 12.0 13.6 14.4 (15.8)
Income (loss) before accounting change (2.4) (2.4) (1.9) (33.9)
Net income (loss) (2.6) (2.4) (1.9) (33.9)
Income (loss) before accounting change
per common share (.11) (.11) (.08) (1.54)
Net income (loss) per common share (.12) (.11) (.08) (1.54)
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 5.1
Handling/Packaging Systems 4.3 5.6 3.7 5.5
Corporate Items (.3) (.1) (.2) (1.0)
Operating profit before restructuring charge 11.7 12.8 9.7 9.6
Restructuring charge (5.6)
Operating profit 11.7 12.8 9.7 4.0
Net income (loss) (3.6) (3.1) (4.7) (14.6)
Net income (loss) per common share (.16) (.14) (.22) (.66)
In the fourth quarter 1994, the Company revised its accounting policy for
valuing its long-lived assets to include the cost of capital in estimating the
total projected future cash flows from its business units. Previously, the cash
flows were computed without discounting or allocation of interest cost. In the
fourth quarter 1994, the Company determined that in the case of certain
businesses, the projected cash flows on a discounted basis were insufficient to
recover the carrying value of the assets. As a result, certain goodwill assets
totalling $34,174 were written off in full (see Note 2).
In the fourth quarter of 1993, the Company took a restructuring charge of
$5,611 (see Note 3).
Nonoperating expenses consist of items which are not related to activities that
constitute the Company's ongoing operations. Nonoperating income was recorded
in the first quarter of 1994 in the amount of $1,100 related to a one-time gain
from settlement of a real-estate matter with a local transportation authority.
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 15).
In 1994 and 1993, benefits to pretax income due to reductions in LIFO
inventories were $626 and $1,000, respectively, in the first quarter and $325
and $200, respectively, in the fourth quarter.
Effective as of the beginning of fiscal 1994, the Company changed its method of
accounting for postretirement benefits for its foreign plans by adopting the
Financial Accounting Standards Board's FAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions". This change in accounting
principle required restatement of previously reported first quarter 1994
results by a charge of $194 or $.01 per share.
NOTE 18 Subsequent Event
In March of 1995, the Company amended its bank credit agreement to modify
certain covenants as they relate to 1995.