SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 1998
Commission file number 1-9149
THE INTERLAKE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-3428543
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
550 Warrenville Road, Lisle, Illinois 60532-4387
(Address of Principal Executive Offices) (Zip Code)
(630) 852-8800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____
As of July 15, 1998, 23,175,142 shares of the registrant's common stock were
outstanding.
THE INTERLAKE CORPORATION
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following consolidated financial statements as of June 28, 1998 and for the
periods ended June 28, 1998 and June 29, 1997 are unaudited, but include all
adjustments which the Registrant considers necessary for a fair presentation of
results of operations and financial position for the applicable periods. Except
as noted, all adjustments are of a normal, recurring nature. Operating results
for the six month period ended June 28, 1998 are not indicative of the results
that may be expected for the entire 1998 fiscal year. The balance sheet as of
December 28, 1997 has been derived from the audited financial statements of the
Company. The statements included herein should be read in conjunction with the
audited financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 28, 1997.
2
THE INTERLAKE CORPORATION
Consolidated Statement of Operations
For the Periods Ended
June 28, 1998 and June 29, 1997
(In thousands except per share amounts)
Second Quarter Six Months
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Net Sales $134,515 $185,845 $268,497 $356,019
Cost of Products Sold 106,016 144,745 212,863 276,577
Selling & Administrative Expense 12,998 25,080 26,391 49,515
-------- -------- -------- --------
Operating Profit 15,501 16,020 29,243 29,927
Non-operating (Income) Expense (225) (78) (1,870) (533)
-------- -------- -------- --------
Earnings Before Interest & Taxes 15,726 16,098 31,113 30,460
Interest Expense 9,206 11,421 18,921 22,961
Interest Income (557) (621) (1,537) (1,389)
-------- -------- -------- --------
Income from Continuing Operations Before Taxes,
Minority Interest and Extraordinary Loss 7,077 5,298 13,729 8,888
Provision for Income Taxes 3,154 3,364 5,837 5,609
-------- -------- -------- --------
Income from Continuing Operations Before Minority
Interest and Extraordinary Loss 3,923 1,934 7,892 3,279
Minority Interest in Net Income of Subsidiaries 1,286 1,266 2,416 2,530
-------- -------- -------- --------
Income from Continuing Operations Before
Extraordinary Loss 2,637 668 5,476 749
Income from Discontinued Operations, Net of
Income Taxes -- -- -- 1,484
Extraordinary Loss, Net of Income Taxes -- -- (220) (1,482)
-------- -------- -------- --------
Net Income $ 2,637 $ 668 $ 5,256 $ 751
======== ======== ======== ========
Comprehensive Income (Loss) $ 2,651 $ (343) $ 5,263 $ (2,508)
======== ======== ======== ========
Income (Loss) Per Share of Common Stock-Basic:
Income from Continuing Operations Before
Extraordinary Loss $.11 $.03 $.24 $.03
Discontinued Operations -- -- -- .06
Extraordinary Loss -- -- (.01) (.06)
---- ---- ---- ----
Net Income $.11 $.03 $.23 $.03
==== ==== ==== ====
Income (Loss) Per Share of Common Stock-Diluted:
Income from Continuing Operations Before
Extraordinary Loss $.08 $.02 $.17 $.02
Discontinued Operations -- -- -- .05
Extraordinary Loss -- -- (.01) (.05)
---- ---- ---- ----
Net Income $.08 $.02 $.16 $.02
==== ==== ==== ====
Average Shares Outstanding - Basic 23,175 23,152 23,191 23,147
====== ====== ====== ======
Average Shares Outstanding - Diluted 33,485 32,458 33,545 32,385
====== ====== ====== ======
3
THE INTERLAKE CORPORATION
Consolidated Balance Sheet
June 28, 1998 and December 28, 1997
(Dollars in thousands)
Assets 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 30,449 $ 84,508
Receivables, less allowances for doubtful accounts of
$607 at June 28, 1998 and $542 at December 28, 1997 82,166 78,124
Inventories - Raw materials and supplies 23,938 20,029
- Semi-finished and finished products 22,174 16,700
Other current assets 6,192 5,962
-------- --------
Total Current Assets 164,919 205,323
-------- --------
Other Assets 38,510 41,379
-------- --------
Property, Plant and Equipment, at cost 340,608 315,506
Less - Depreciation and amortization (196,067) (189,142)
-------- --------
144,541 126,364
-------- --------
Total Assets $347,970 $373,066
======== ========
Liabilities and Shareholders' Equity (Deficit)
Current Liabilities:
Accounts payable $ 44,615 $ 39,097
Accrued liabilities 19,799 20,551
Interest payable 9,805 10,439
Accrued salaries and wages 9,795 11,946
Income taxes payable 36,490 36,887
Debt due within one year 3,150 27,267
-------- --------
Total Current Liabilities 123,654 146,187
-------- --------
Long-Term Debt 291,108 296,365
Other Long-Term Liabilities and Deferred Credits 87,239 89,079
Preferred Stock - 20,000,000 shares authorized Convertible Exchangeable
Preferred Stock - Redeemable par value $1 per share, issued 40,000 shares
(liquidation value $68,044 at June 28, 1998 and $65,114 at
December 28, 1997) 39,155 39,155
Shareholders' Equity (Deficit):
Common stock, par value $1 per share, authorized 100,000,000 shares,
issued 23,530,455 shares at June 28, 1998
and 23,393,695 shares at December 28, 1997 23,530 23,394
Additional paid-in capital 3,039 2,604
Cost of Common stock held in treasury (355,313 shares at
June 28, 1998 and 106,153 shares at December 28, 1997) (3,777) (2,477)
Accumulated deficit (215,978) (221,234)
Accumulated other comprehensive income -- (7)
-------- --------
(193,186) (197,720)
-------- --------
Total Liabilities and Shareholders' Equity (Deficit) $347,970 $373,066
======== ========
4
THE INTERLAKE CORPORATION
Consolidated Statement of Cash Flows
For the Periods Ended June 28, 1998 and June 29, 1997
(In thousands)
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from (for) operating activities:
Net income $ 5,256 $ 751
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 8,497 9,851
Nonoperating provision for environmental matters 1,264 --
(Gain) on discontinued operations -- (1,484)
Extraordinary loss 220 1,482
Other operating adjustments (2,230) 1,232
(Increase) decrease in working capital:
Accounts receivable (3,891) 4,269
Inventories (9,381) (634)
Other current assets (230) (810)
Accounts payable 5,517 (3,057)
Other accrued liabilities (5,106) (7,851)
Income taxes payable (230) 2,601
-------- --------
Total working capital change (13,321) (5,482)
-------- --------
Net cash provided (used) by operating activities (314) 6,350
-------- --------
Cash flows from (for) investing activities:
Capital expenditures (25,296) (9,918)
Proceeds from disposal of PP&E -- 70
Acquisitions -- (4,853)
Divestitures -- 1,703
Other investment flows 528 194
-------- --------
Net cash provided (used) by investing activities (24,768) (12,804)
-------- --------
Cash flows from (for) financing activities:
Retirements of long-term debt (29,373) (21,682)
Debt retirement costs -- (1,504)
Other financing flows 396 345
-------- --------
Net cash provided (used) by financing activities (28,977) (22,841)
-------- --------
Effect of exchange rate changes -- (644)
Increase (Decrease) in cash and cash equivalents (54,059) (29,939)
Cash and cash equivalents, beginning of period 84,508 70,228
-------- --------
Cash and cash equivalents, end of period $ 30,449 $ 40,289
======== ========
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 -- Financial Statements
The interim information furnished in these financial statements is unaudited.
The Registrant and its subsidiaries are referred to herein on a consolidated
basis as the Company.
Note 2 -- Extraordinary Loss
In the first quarter of 1998, the Company repurchased $24.0 million in principal
amount of its Senior Subordinated Debentures. Deferred debt issuance costs of
$.3 million related to the repurchased Debentures were written off. An
extraordinary loss of $.2 million related to this repurchase, net of applicable
income taxes, was reported in the quarter.
In the first quarter of 1997, the Company repurchased $14.5 million in principal
amount of its Senior Notes at a premium of $1.5 million. In addition, deferred
debt issuance costs of $.3 million related to the repurchased Notes were written
off. An extraordinary loss of $1.5 million related to this repurchase, net of
applicable income taxes, was reported in the quarter.
Note 3 -- Discontinued Operations
In the first quarter of 1997, the Company received additional proceeds from the
sale in 1996 of its Packaging businesses resulting in income from discontinued
operations of $1.5 million, net of applicable income taxes.
Note 4 -- Computation of Common Share Data
The weighted average number of common shares outstanding used to compute basic
per share amounts was 23,175,000 and 23,152,000 for the second quarters of 1998
and 1997, respectively. For the first six months, the weighted average number of
common shares was 23,191,000 for 1998 and 23,147,000 for 1997. For diluted per
share amounts, the weighted average number of common shares outstanding used was
33,485,000 and 32,458,000 for the second quarters of 1998 and 1997,
respectively. For the first six months, the weighted average number of common
shares was 33,545,000 for 1998 and 32,385,000 for 1997. The effect of the
dilutive Convertible Exchangeable Preferred Stock was to increase the weighted
average number of shares outstanding used in the computation of diluted earnings
per share by 10,025,000 and 9,174,000 shares in the second quarters of 1998 and
1997, respectively. For the first six months, the effect of the dilutive
Convertible Exchangeable Preferred Stock was to increase the weighted average
number of shares by 10,020,000 and 9,172,000, respectively. Stock options added
285,000 common shares in the second quarter and 334,000 in the first six months
of 1998 and 132,000 in the second quarter and 66,000 in the first six months of
1997.
Note 5 -- Income Taxes
The effective tax rate on income from continuing operations was 44.6% and 63.5%
for the second quarter of 1998 and 1997, respectively. For the first six months,
the effective rate was 42.5% for 1998 and 63.1% for 1997. In 1998, the Company
provided for U.S. federal and state income taxes as well as for additional
amounts related to open U.S. federal tax return years of 1982 through 1990.
In 1997, because most of the Company's interest expense was borne in the United
States at the parent company level, the Company had substantial taxable income
in foreign and state jurisdictions. Taxes due to foreign authorities were not
offset by U.S. federal income tax benefits.
6
Note 6 -- Comprehensive Income
In June of 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income". The
Statement, which the Company adopted in the first quarter of 1998, establishes
standards for reporting and displaying comprehensive income and its components
in a full set of general-purpose financial statements. Where applicable, earlier
periods have been restated to conform to the standards set forth in the
Statement. The Company's Comprehensive Income consists of net income and foreign
currency translation adjustments which are presented before tax. Comprehensive
Income in the second quarter and first six months of 1997 includes $1.0 million
and $3.3 million, respectively, of foreign currency exchange losses relating to
the foreign Handling businesses sold in the fourth quarter of 1997. The Company
does not provide for U.S. income taxes on foreign currency translation
adjustments because it does not provide for such taxes on undistributed earnings
of foreign subsidiaries, some of which were subject to statutory restrictions on
distribution.
Note 7 -- Acquisitions
In the first quarter of 1997, the Company acquired the assets of ARC Metals Inc.
for $5.0 million in cash and a promissory note in the amount of $2.8 million.
Note 8 -- 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. After taking a nonoperating charge of $10.5 million in the
fourth quarter of 1997 and $1.3 million in 1998 as discussed below, the
Company's reserves for environmental liabilities totaled $11.0 million as of
June 28, 1998, most of which relates to the Acme indemnification. Of these
amounts, $4.8 million was classified as a current liability as of June 28, 1998.
The nonoperating charges of $10.5 million in the fourth quarter of 1997 and $1.3
million in 1998 related to anticipated liabilities for environmental matters. Of
these amounts, $8.9 million related to anticipated costs of remediation of
certain underwater sediments at the Superfund site on the St. Louis River in
Duluth, Minnesota (the "Duluth Site"). The Company's liability with respect to
the Duluth Site arises out of the Acme indemnification discussed above. In June
1998, the Company submitted to the Minnesota Pollution Control Agency ("MPCA") a
Remedial Investigation/Feasibility Study (RI/FS) recommending a remedy for
certain underwater sediments at the Duluth Site and examining other potential
remedies. The Company believes that, if selected, the recommended remedy could
be implemented at a cost approximating the Company's remaining reserves for the
Duluth Site. Any of the other alternatives reviewed in the RI/FS would cost
more, potentially exceeding the cost of the Company's recommended alternative by
$5 to $25 million. The MPCA, together with other governmental agencies, is
presently reviewing the RI/FS, and is expected to indicate its preferred remedy
in August or September 1998. Although the MPCA has preliminarily indicated that
it does not favor the Company's recommended alternative, the parties are
continuing to discuss potential remediation alternatives.
The Company believes that based on its current estimate of its potential
environmental liabilities, including all contingent liabilities, individually
and in the aggregate, asserted and unasserted, that subject to the remaining
uncertainty with respect to the Duluth Site discussed above, the costs of
environmental matters have been fully provided for or are unlikely to have a
material adverse effect on the Company's business, results of operations,
liquidity or financial condition. In arriving at its current estimate of its
potential environmental liabilities, the Company has relied upon the estimates
and analyses 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. The Company's estimate has
not been discounted to reflect the time-value of money, although a significant
7
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 do
not reflect any anticipated recoveries from third parties. The Company believes
that the successors to certain coal tar processors at the Duluth Site (the "tar
companies"), who have been named as additional responsible parties for a portion
of the underwater sediments by the MPCA, are the cause of a significant portion
of the underwater contamination at the site. The tar companies have maintained
that their contributions were minimal. In addition, the Company has pending an
action seeking a declaratory judgment and recoveries from insurers under
policies covering various periods during the 1960's, 1970's and 1980's. In the
first half of 1998, the Company's net income benefitted by $1.6 million in
insurance recoveries, net of increases in reserves, all relating to historical
environmental issues.
The Company's current expectation is that cash outlays related to its
outstanding reserves for environmental matters will be made during the period
from 1998 through 2000 with the most significant expenditures expected in 1999
and 2000.
Note 9 -- 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,
results of operations, liquidity or financial condition.
On March 10, 1995, SC Holdings, Inc., a subsidiary of Waste Management
International plc ("SC Holdings"), filed a complaint in federal district court
in Trenton, New Jersey, against Hoeganaes Corporation, an Interlake subsidiary,
and numerous other defendants, seeking to recover amounts expended or to be
expended in the remediation of the Cinnaminson Groundwater Contamination Site in
Burlington County, New Jersey. SC Holdings claims to have spent approximately
$10.0 million in investigation and remediation, and estimates the total costs of
investigation and remediation to be approximately $60.0 million. The site is a
broadly- defined Superfund site which encompasses a landfill formerly operated
by SC Holdings and may also include the groundwater under Hoeganaes' Riverton,
New Jersey facility.
Hoeganaes may have shipped certain materials to the landfill. SC Holdings
alleges that Hoeganaes has liability as both an owner/operator and a generator.
On June 1, 1998, the court granted Hoeganaes Corporation's motion for partial
summary judgment, dismissing all claims related to generator liability. Earlier
in 1998, as part of a non-binding mediation process, the mediator had concluded
that Hoeganaes Corporation ought not to be liable as an owner/operator. SC
Holdings and Hoeganaes Corporation are presently engaged in discussions
regarding the settlement of the matter.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Results of Operations
Interlake's foreign Handling businesses were sold in the fourth quarter of 1997.
The results of their operations and cash flow are included in the Company's
consolidated statement of operations and consolidated statement of cash flows
for the 1997 periods, but were excluded for the 1998 periods.
Second Quarter 1998 Compared with Second Quarter 1997
Net sales were $134.5 million in the quarter ended June 28, 1998 compared with
sales of $185.8 million in the prior year period. Net sales without the results
of the sold foreign Handling businesses were $121.4 million in the 1997 quarter.
Sales in the Engineered Materials segment increased 12% to $86.8 million in the
1998 quarter due to increased unit volume at Special Materials and increased
shipments of fabricated components and additional blade repair activity at
Aerospace Components. Handling segment sales declined 56% to $47.7 million in
the 1998 quarter reflecting the sale of the foreign Handling businesses. Sales
at the remaining Handling business in North America increased 7% reflecting
increased volume. Operating profit was $15.5 million in the 1998 quarter
compared to $16.0 million in the prior year period. Excluding the results of the
sold foreign Handling businesses, operating profit in the second quarter of 1997
was $13.3 million. Interest expense was $9.2 million compared to $11.4 million
in the 1997 quarter reflecting lower levels of borrowing after the required
application of proceeds from the sale of the foreign Handling businesses. Net
income of $2.6 million in the second quarter of 1998 compared to $.7 million in
the 1997 quarter.
Segment Results
The Company's businesses are organized into two segments: Engineered Materials
and Handling. Businesses in Engineered Materials are Special Materials (ferrous
metal powders) and Aerospace Components (precision aerospace component
fabrication and aviation repair). The Handling segment includes the North
American operations in the 1998 periods, while the sold foreign Handling
businesses in Europe and Asia Pacific were also included in 1997.
Second Quarter Segment Results
Net Sales Operating Profit
1998 1997 1998 1997
----- ----- ----- -----
(in millions)
Engineered Materials
Special Materials $ 51.7 $ 50.7
Aerospace Components 35.1 26.7
------ ------
86.8 77.4 $13.8 $13.6
Handling 47.7 108.4 1.7 2.5
------ ------
Corporate Items -- (.1)
Consolidated Totals $134.5 $185.8 $15.5 $16.0
====== ====== ===== =====
9
Engineered Materials
Second quarter sales in the Engineered Materials segment increased 12% to $86.8
million, due to higher fabrication shipments and improved blade repair activity
at Aerospace Components and increased metal powder sales at Special Materials.
Operating profit for the segment increased 1% in the 1998 quarter compared to
the 1997 period.
Special Materials' metal powder sales increased 2% compared with the same period
last year due to increased volume which was minimally affected by an auto
industry strike in the current quarter. Earnings declined 2% as increased volume
and improved sales of higher margin products were more than offset by higher
material, freight and manufacturing costs and increased depreciation due to
plant expansion.
Aerospace Components' sales increased 32% from the 1997 second quarter due to
increased fabrication shipments on key commercial and military engine programs
and improved blade repair activity. Earnings for the quarter increased 11%
reflecting increased volume and improved manufacturing performance which were
partially offset by increased administrative costs to respond to growth demands
as well as relatively higher increases in indirect labor, repairs and
maintenance and production supplies for fabricated components.
Order backlogs in this segment were $174.9 million at the end of the quarter
compared to $176.7 million at the end of the 1997 period. Special Materials'
backlog, which is generally short term in nature, declined 12%. Aerospace
Components' backlog increased 2% reflecting continued strong order intake.
The labor strike at General Motors which occurred late in the second quarter has
not had a material effect on the results of operations of Special Materials
through the end of the quarter. However, the strike is ongoing, and the Company
cannot predict when the parties will reach a resolution of the work stoppage. In
the event the strike is prolonged, the results for Special Materials could be
adversely affected in future periods.
Handling
Sales in the Handling segment for the second quarter decreased 56% to $47.7
million, compared with $108.4 million in the 1997 quarter, due to the sale of
the foreign Handling businesses. North American Handling sales increased 7%,
principally from additional volume.
Handling segment operating profit declined 31% to $1.7 million reflecting the
disposition of the foreign Handling businesses. Handling North America's
earnings increased 119% over 1997 reflecting the benefit of favorable pricing,
increased volume, favorable operating variances and lower administrative costs
which were partially offset by the effect of higher sales of lower margin
products.
Order backlogs in this segment were $22.2 million at the end of the second
quarter compared to $121.7 million in 1997 which included the backlog of the
sold foreign Handling businesses. The order backlog at the remaining Handling
business in North America decreased 31% from order backlogs of $32.4 million in
the prior year because of reduced order intake in the 1998 second quarter.
First Half 1998 Compared with First Half 1997
For the first six months of 1998, net sales of $268.5 million were down 25%,
compared with net sales of $356.0 million in the 1997 period. Net sales were
$236.0 million in the first six months of 1997 without the results of the sold
foreign Handling businesses. Sales in the Engineered Materials segment increased
14% to $170.6 million, due to higher unit volume at Special Materials and
increased shipments of fabricated components at Aerospace Components. In the
Handling segment, sales declined 52% to $97.9 million in 1998 reflecting the
sale of the foreign Handling businesses. Sales at the remaining Handling
business in North America increased 13% principally due to increased volume.
Operating profit was $29.2 million in 1998 compared with $29.9 million in the
prior year period. Excluding the results of the sold foreign Handling
businesses, operating profit in the first half of 1997 was $26.1 million. 1998
non-operating income in the first half includes a $1.6 million benefit from
insurance recoveries, net of increases in reserves, all relating to historical
environmental issues. Interest expense was $18.9 million compared to $23.0
million in the first half of 1997 reflecting lower levels of indebtedness after
the required application of proceeds from the sale of the foreign Handling
businesses. Net income of $5.3 million for the 1998 period includes an
extraordinary loss of $.2 million, net of tax, related to the early retirement
10
of a portion of the Company's debt. Net income of $.8 million in the first half
of 1997 included income from discontinued operations of $1.5 million and an
extraordinary loss of $1.5 million related to early debt retirement.
Segment Results
First Half Segment Results
Net Sales Operating Profit
1998 1997 1998 1997
----- ----- ----- -----
(in millions)
Engineered Materials
Special Materials $104.4 $101.2
Aerospace Components 66.2 49.0
------ ------
170.6 150.2 $26.2 $25.8
Handling 97.9 205.8 3.1 4.6
------ ------
Corporate Items (.1) (.5)
----- -----
Consolidated Totals $268.5 $356.0 $29.2 $29.9
====== ====== ===== =====
Engineered Materials
First half 1998 sales in the Engineered Materials segment increased 14%
reflecting increased unit volume at Special Materials and increased fabrication
shipments and improved blade repair activity at Aerospace Components. Operating
profit for the segment increased 2%.
Special Materials' metal powder sales increased 3% due to increased unit volume
in the first half of 1998 as compared to the 1997 period. Earnings in the first
half of 1998 decreased 1% from 1997 as higher volume and improved sales of
higher margin products were more than offset by higher material, freight and
manufacturing costs and increased depreciation due to plant expansion.
Aerospace Components' sales increased 35% compared with the same period in 1997
reflecting increased fabrication shipments on key commercial and military
programs as well as improved blade repair activity. Earnings for the period
increased 14% reflecting increased volume which was partially offset by
additional administrative costs to respond to growth demands and increased
operating costs.
Handling
Sales in the Handling segment in the first half declined 52% to $97.9 million,
compared with $205.8 million in the 1997 first half due to the sale of the
foreign Handling businesses. North American Handling sales increased 13% due to
increased shipments in the 1998 period.
Operating profit decreased 33% to $3.1 million reflecting the disposition of the
foreign units. Handling North America's earnings increased 34% in the 1998
period as the effect of the increased volume, a favorable settlement with a
supplier and favorable operating variances were partially offset by sales
pricing weakness on 1997 bookings shipped in 1998, increased sales of lower
margin products and favorable accrual adjustments recorded in the first quarter
of 1997.
Nonoperating Items
As discussed in Note 8 of Notes to Consolidated Financial Statements, the
Company continues to attempt to resolve certain anticipated liabilities for
environmental matters. If the Company's recommended remedy for certain
underwater sediments at the Duluth Site is accepted, 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, results of
operations, liquidity or financial condition. However, there is no assurance
that the Company's preferred remedy will be recommended by the relevant
government agencies.
11
Discontinued Operations
In the first quarter of 1997, the Company received additional proceeds in
respect of the October 1996 sale of its Packaging businesses. Income from
discontinued operations of $1.5 million, net of income taxes, was recorded to
reflect the adjustment to the gain.
Extraordinary Loss
During the first quarter of 1998, the Company recorded an extraordinary loss of
$.2 million, net of income taxes, for the write-off of deferred debt issuance
costs related to the repurchase and early retirement of $24.0 million of the
Company's Senior Subordinated Debentures.
During the first quarter of 1997, the Company recorded an extraordinary loss of
$1.5 million, net of income taxes, for the premium incurred and the write-off of
deferred debt issuance costs related to the repurchase and early retirement of
$14.5 million of the Company's Senior Notes.
Financial Condition
The Company's total debt was $294.3 million at the end of the second quarter of
1998, down $29.4 million from the 1997 year-end. Cash and equivalents totaled
$30.4 million at the end of the quarter, compared with $84.5 million at the end
of 1997 reflecting the repurchase of $24.0 million of Senior Subordinated
Debentures, the $4.0 million payoff of the ESOP note, increased working capital
requirements and capital expenditures. Capital expenditures of $25.3 million in
the first half of 1998 compared with $9.9 million in 1997, reflecting increased
spending for expansion, particularly in the Engineered Materials segment. The
Company anticipates that 1998 capital spending will be approximately $55.0
million.
The Company has received commitments for the replacement of its existing bank
credit facilities with a two-year $75 million revolving credit facility. It
expects to finalize the documentation of the new facility by the end of July
1998. Were it unable to finalize the new facility, and its current bank group
did not agree to extend the existing facility, the Company would not have
adequate liquidity to fund its operations and carry out its 1998 capital
spending plan.
The Company has substantial debt repayment requirements in the years 2001 and
2002.
Hedging Activities
On June 15, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999 (beginning of
fiscal year 2000 for the Company). SFAS 133 requries that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are to be recorded each period in current earnings or
other comprehensive income, depending on whether a derivative is designated as
part of a hedge transaction and, if it is, the type of hedge transaction.
Management of the Company has not yet determined the impact that the adoption of
SFAS 133 will have on its earnings or statement of financial position. However,
management anticipates that, due to its limited use of derivative instruments,
the adoption of SFAS 133 will not have a significant effect on the Company's
results of operations or its financial position.
Forward Looking Statements
This Form 10-Q contains "forward looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995, including (without limitation)
statements as to expectations, beliefs and future financial perforamnce and
assumptions underlying the foregoing relating to the adequacy of the Company's
future liquidity, the selection of and cost of implementing environmental
remedial activities and the effects of current labor strikes affecting certain
customers. Actual results or outcomes could differ materially from those
discussed in the particular forward looking statement based on a number of
factors, including (i) the Company's future operating results and its ability to
put in place new or replacement credit facilities, (ii) government actions or
initiatives with respect to environmental matters either generally or with
respect to specific instances involving the Company, particularly with respect
to the MPCA's remediation recommendation at the Duluth Site, (iii)the Company's
ability to resolve legal proceedings on favorable terms and (iv) the length and
severity of work stoppages currently affecting certain domestic automotive
manufacturing customers.
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PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The nature of the Company's business is such that it is regularly involved in
legal proceedings incidental to its business. None of these proceedings is
material within the meaning of regulations of the Securities and Exchange
Commission.
The Company is a party in certain litigation and a proceeding before a
governmental agency which relate to the contamination of the environment. These
matters are described in Note 8 and Note 9 of Notes to Consolidated Financial
Statements included herein. Reference is also made to the Company's Annual
Report on Form 10-K for the fiscal year ended December 28, 1997, Part I, Item
3--Legal Proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 23, 1998, at the annual meeting of the Corporation, John E. Jones and
W. Robert Reum were reelected as directors to serve until the year 2001 annual
meeting of the Corporation. The vote tally was:
Election of Directors For Withheld Broker non-votes
John E. Jones 19,644,196 492,261 0
W. Robert Reum 19,674,636 461,821 0
On April 23, 1998, at the annual meeting of the Corporation, the 1998 Stock
Incentive Program was approved. The vote tally was:
For Against Abstain
19,232,899 793,074 110,484
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 4.1 Extension Amendment, dated as of June 24, 1998, to the
Second Amended and Restated Credit Agreement
Exhibit 10.1 Form of Stock Option Agreement Under the 1989 Stock
Incentive Program dated as of June 25, 1998
Exhibit 10.2 1998 Stock Incentive Program
Exhibit 10.3 First Amendment to Trust Agreement dated as of February
17, 1998 between the Corporation and U.S. Trust Company of
California, N.A. regarding Frederick C.Langenberg
Exhibit 10.4 First Amendment to Trust Agreement dated as of February
17, 1998 between the Corporation and U.S. Trust Company of
California, N.A. regarding The Interlake Corporation
Restated Directors' Post-Retirement Income Plan
Exhibit 27 Financial Data Schedule for the quarter ended June 28,
1998
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter for which
this report is filed.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE INTERLAKE CORPORATION
July 23, 1998 /s/STEPHEN GREGORY
Stephen Gregory
Vice President - Finance
and Chief Financial Officer
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