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 September 27, 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 October 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 September 27, 1998 and for
the periods ended September 27, 1998 and September 28, 1997 are unaudited, but
include all adjustments which the Registrant considers necessary for a fair
presentation of financial position and results of operations for the applicable
periods. Except as noted, all adjustments are of a normal, recurring nature.
Operating results for the nine month period ended September 27, 1998 are not
necessarily 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
September 27, 1998 and September 28, 1997
(In thousands except per share amounts)
Third Quarter Nine Months
1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Net Sales $127,706 $195,490 $396,203 $551,509
Cost of Products Sold 101,433 156,641 314,296 433,218
Selling & Administrative Expense 13,011 24,778 39,402 74,293
------- ------- ------- -------
Operating Profit 13,262 14,071 42,505 43,998
Non-operating (Income) Expense 3,731 (450) 1,861 (983)
------- ------- ------- -------
Earnings Before Interest & Taxes 9,531 14,521 40,644 44,981
Interest Expense 9,162 11,318 28,083 34,279
Interest Income (497) (661) (2,034) (2,050)
------- ------- ------- -------
Income from Continuing Operations Before Taxes,
Minority Interest and Extraordinary Loss 866 3,864 14,595 12,752
Provision for (Benefit from) Income Taxes (1,186) 2,402 4,651 8,011
------- ------- ------- -------
Income from Continuing Operations Before Minority
Interest and Extraordinary Loss 2,052 1,462 9,944 4,741
Minority Interest in Net Income of Subsidiaries 866 971 3,282 3,501
------- ------- ------- -------
Income from Continuing Operations Before
Extraordinary Loss 1,186 491 6,662 1,240
Income from Discontinued Operations, Net of
Income Taxes -- 349 -- 1,833
Extraordinary Loss, Net of Income Taxes (245) -- (465) (1,482)
------- ------- ------- -------
Net Income $ 941 $ 840 $ 6,197 $ 1,591
======= ======= ======= =======
Comprehensive Income (Loss) $ 941 $ (451) $ 6,204 $(2,959)
======= ======= ======= =======
Income (Loss) Per Share of Common Stock-Basic:
Income from Continuing Operations Before
Extraordinary Loss $.05 $.02 $.29 $.05
Discontinued Operations -- .02 -- .08
Extraordinary Loss (.01) -- (.02) (.06)
---- ---- ---- ----
Net Income $.04 $.04 $.27 $.07
==== ==== ==== ====
Income (Loss) Per Share of Common Stock-Diluted:
Income from Continuing Operations Before
Extraordinary Loss $.04 $.02 $.20 $.04
Discontinued Operations -- .01 -- .06
Extraordinary Loss (.01) -- (.02) (.05)
---- ---- ---- ----
Net Income $.03 $.03 $.18 $.05
==== ==== ==== ====
Average Shares Outstanding - Basic 23,175 23,208 23,185 23,167
====== ====== ====== ======
Average Shares Outstanding - Diluted 33,641 33,349 33,577 32,706
====== ====== ====== ======
3
THE INTERLAKE CORPORATION
Consolidated Balance Sheet
September 27, 1998 and December 28, 1997
(Dollars in thousands)
Assets 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Current Assets:
Cash and cash equivalents $ 4,988 $ 84,508
Receivables, less allowances for doubtful accounts of
$640 at September 27, 1998 and $542 at December 28, 1997 76,711 78,124
Inventories - Raw materials and supplies 29,471 20,029
- Semi-finished and finished products 23,012 16,700
Other current assets 6,589 5,962
-------- --------
Total Current Assets 140,771 205,323
-------- --------
Other Assets 34,699 41,379
-------- --------
Property, Plant and Equipment, at cost 357,493 315,506
Less - Depreciation and amortization (198,497) (189,142)
-------- --------
158,996 126,364
-------- --------
Total Assets $334,466 $373,066
======== ========
Liabilities and Shareholders' Equity (Deficit)
Current Liabilities:
Accounts payable $ 43,820 $ 39,097
Accrued liabilities 19,348 20,551
Interest payable 5,804 10,439
Accrued salaries and wages 11,392 11,946
Income taxes payable 33,645 36,887
Debt due within one year 2,120 27,267
-------- --------
Total Current Liabilities 116,129 146,187
-------- --------
Long-Term Debt 283,502 296,365
Other Long-Term Liabilities and Deferred Credits 87,924 89,079
Preferred Stock - 2,000,000 shares authorized
Convertible Exchangeable Preferred Stock - Redeemable
par value $1 per share, issued 40,000 shares (liquidation
value $69,525 at September 27, 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 September 27, 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
September 27, 1998 and 106,153 shares at December 28, 1997) (3,777) (2,477)
Accumulated deficit (215,036) (221,234)
Accumulated other comprehensive income (loss) -- (7)
-------- --------
(192,244) (197,720)
-------- --------
Total Liabilities and Shareholders' Equity (Deficit) $334,466 $373,066
======== ========
4
THE INTERLAKE CORPORATION
Consolidated Statement of Cash Flows
For the Periods Ended September 27, 1998 and September 28, 1997
(In thousands)
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from (for) operating activities:
Net income $ 6,197 $ 1,591
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 12,785 14,768
Non-operating valuation allowance 4,409 --
Non-operating provision for environmental matters 1,264 --
(Gain) on discontinued operations -- (1,833)
Extraordinary loss 465 1,482
Other operating adjustments (2,642) 127
(Increase) decrease in working capital:
Accounts receivable 1,327 (1,140)
Inventories (15,754) (2,196)
Other current assets (628) (812)
Accounts payable 4,724 6,347
Other accrued liabilities ( 8,027) (7,615)
Income taxes payable (2,920) 3,848
---------- -----------
Total working capital change (21,278) (1,568)
---------- ----------
Net cash provided (used) by operating activities 1,200 14,567
---------- ---------
Cash flows from (for) investing activities:
Capital expenditures (43,429) (18,115)
Proceeds from disposal of PP&E 6 550
Acquisitions -- (4,853)
Divestitures -- 1,703
Other investment flows 573 121
---------- -------------
Net cash provided (used) by investing activities (42,850) (20,594)
---------- ----------
Cash flows from (for) financing activities:
Proceeds from issuance of long-term debt -- 6,476
Retirements of long-term debt (38,008) (29,134)
Debt retirement costs (268) (1,504)
Other financing flows 406 926
---------- ----------
Net cash provided (used) by financing activities (37,870) (23,236)
---------- ----------
Effect of exchange rate changes -- (742)
Increase (Decrease) in cash and cash equivalents (79,520) (30,005)
Cash and cash equivalents, beginning of period 84,508 70,228
---------- ----------
Cash and cash equivalents, end of period $ 4,988 $ 40,223
========== ==========
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 third quarter of 1998, the Company repurchased $6.8 million in principal
amount of its Senior Notes at a premium of $.3 million. In addition, deferred
debt issuance costs of $.1 million related to the repurchased Notes 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 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
Certain adjustments to the gain recorded in connection with the October 1996
sale of the packaging businesses resulted in additional income of $.3 million,
net of income taxes, in the third quarter of 1997. In the first quarter of 1997,
the Company received additional proceeds from the sale of its packaging
businesses resulting in income from discontinued operations of $1.5 million, net
of 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 23,208,000 for the third quarters of 1998
and 1997, respectively. For the first nine months, the weighted average number
of common shares was 23,185,000 for 1998 and 23,167,000 for 1997. For diluted
per share amounts, the weighted average number of common shares outstanding used
was 33,641,000 and 33,349,000 for the third quarters of 1998 and 1997,
respectively. For the first nine months, the weighted average number of common
shares was 33,577,000 for 1998 and 32,706,000 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 10,466,000 and 9,592,000 shares in the third quarters of 1998 and
1997, respectively. For the first nine months, the effect of the dilutive
Convertible Exchangeable Preferred Stock was to increase the weighted average
number of shares by 10,169,000 and 9,312,000, respectively. Stock options had no
affect on the 1998 third quarter and added 223,000 common shares in the first
nine months of 1998, 549,000 in the 1997 third quarter and 227,000 in the first
nine months of 1997.
Note 5 -- Income Taxes
The 1998 third quarter's provision for income taxes included a $2.0 million
reduction due to the reconciliation of the 1997 provision to the liability
determined in preparation of the returns filed relating to taxes due on the 1997
sale of the Dexion businesses, thereby making the effective tax rate on the
income from continuing
6
operations meaningless. The effective tax rate on income from continuing
operations was 62.2% in the 1997 quarter. For the first nine months, the
effective rate was 31.9% for 1998 and 62.8% 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, domestic and foreign subsidiaries of the Company had substantial
taxable income while the parent Company had a loss because it incurred most of
the consolidated interest expense. The domestic and foreign subsidiaries
incurred state and foreign taxes, respectively, despite the high levels of
consolidated interest expense.
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 third quarter and first nine months of 1997 includes $1.3 million
and $4.6 million, respectively, of foreign currency exchange losses relating to
the foreign Handling businesses sold in the fourth quarter of 1997. The Company
has not provided for U.S. income taxes on foreign currency translation
adjustments because it has not provided 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. On September 28, 1998, Acme and its affiliated companies filed
for protection under Chapter 11 of the United States Bankruptcy Code. The
Company has retained legal counsel to advise it with respect to the effect of
this filing on the Company's indemnification obligation to Acme, but has not yet
come to any conclusion in this regard.
After taking non-operating charges related to environmental matters of $10.5
million in the fourth quarter of 1997 and $1.3 million in 1998, the Company's
reserves for environmental liabilities totaled $10.3 million as of September 27,
1998, most of which relates to the Acme indemnification. Of these amounts, $4.2
million was classified as a current liability as of September 27, 1998. The
anticipated costs of remediation of certain underwater sediments at the
Superfund site on the St. Louis River in Duluth, Minnesota (the "Duluth Site")
represented $8.9 million of the $11.8 million of charges. 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,
7
and is expected to indicate its preferred remedy sometime in 1998. The MPCA has
preliminarily indicated that it does not favor the Company's recommended
alternative, but it is still in the process of receiving input from other
governmental agencies.
The Company believes, 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
delay in implementation of certain of the remedies thought to be probable could
result in cost estimates increasing due to inflation. The Company's estimate of
its potential environmental liabilities also does not reflect the effects, if
any, of the Acme bankruptcy discussed in Note 9 and above.
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 nine months 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. If the Company ultimately determines that additional charges are
necessary in connection with the Duluth Site, the Company believes it is likely
that cash outlays would occur later.
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
On September 28, 1998, Acme Steel Company ("Acme") and its affiliated companies
filed for protection under Chapter 11 of the United States Bankruptcy Code.
Prior to 1986, Acme was known as Interlake, Inc. In connection with the
reorganization of Acme (the old Interlake) in 1986, the Company, then
newly-formed, indemnified Acme against certain environmental, tax and other
liabilities. In addition, at the time of the reorganization Acme became
obligated to the Company with respect to certain pollution control bonds assumed
at that time by the Company but pertaining to facilities of Acme. As of
September 27,1998, the principal amount of Acme's obligation to the Company
related to such bonds was $5.5 million. In the third quarter, the Company
recorded a non-operating charge of $4.4 million for a valuation allowance
against this receivable to a level consistent with the post-filing trading range
of Acme's parent corporation's unsecured public debt. The Company has retained
legal counsel to advise it as to the other effects of the filing on the Company,
including among others any effect upon the Company's obligation to indemnify
Acme with respect to certain liabilities.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Results of Operations
Interlake's foreign Handling businesses in Europe and Asia Pacific 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.
Third Quarter 1998 Compared with Third Quarter 1997
Net sales were $127.7 million in the quarter ended September 27, 1998 compared
with sales of $195.5 million in the prior year period. Net sales without the
sales of the sold foreign Handling businesses were $119.6 million in the 1997
quarter. Sales in the Engineered Materials segment increased 11% to $81.9
million in the 1998 quarter due to increased shipments of fabricated components
and additional blade repair activity at Aerospace Components. Sales at Special
Materials were comparable to 1997 as the strike at certain General Motors'
facilities limited volume in the current quarter. Handling segment sales
declined 62% to $45.8 million in the 1998 quarter reflecting the sale of the
foreign Handling businesses. Sales at the remaining Handling business in North
America increased 1% over the 1997 quarter. Operating profit was $13.3 million
in the 1998 quarter compared to $14.1 million in the prior year period.
Excluding the results of the sold foreign Handling businesses, operating profit
in the third quarter of 1997 was $10.6 million. As discussed below under the
heading Non-operating Items, non-operating expense in the third quarter of 1998
included a $4.4 million charge relating to certain Acme obligations. Interest
expense was $9.2 million compared to $11.3 million in the 1997 quarter
reflecting lower levels of borrowing after the required application of proceeds
from the sale of the foreign Handling businesses. The 1998 quarter's provision
for taxes included a $2.0 million reduction due to the reconciliation of the
1997 provision to the liability determined in preparation of the returns filed
relating to taxes due on the 1997 sale of the Dexion businesses. Net income of
$.9 million in the 1998 quarter included an extraordinary loss of $.2 million
related to the early retirement of a portion of the Company's debt. Net income
in the 1997 third quarter was $.8 million and included $.3 million of income
from discontinued operations.
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 only the North
American operations in the 1998 periods, while the sold foreign Handling
businesses were also included in 1997.
Third Quarter Segment Results
Net Sales Operating Profit
1998 1997 1998 1997
----- ----- ----- -----
(in millions)
Engineered Materials
Special Materials $ 46.3 $ 46.5
Aerospace Components 35.6 27.6
------ ------
81.9 74.1 $11.5 $10.8
Handling 45.8 121.4 1.6 3.6
------ ------
Corporate Items .2 (.3)
----- -----
Consolidated Totals $127.7 $195.5 $13.3 $14.1
====== ====== ===== =====
10
Engineered Materials
Third quarter sales in the Engineered Materials segment increased 11% to $81.9
million, due to higher fabrication shipments and improved blade repair activity
at Aerospace Components, while powder metal sales at Special Materials were
comparable to 1997. Operating profit for the segment increased 7% in the 1998
quarter compared to the 1997 period.
Special Materials' metal powder sales were comparable with the same period last
year as an auto industry strike during the quarter limited volume to 1997
levels. Earnings declined 5% as higher depreciation and increased personnel
costs relating to the startup of the expansion facilities at the Gallatin,
Tennessee plant, higher annual maintenance costs, unfavorable inventory
valuation adjustments and 1997 insurance proceeds were only partially offset by
increased sales of higher margin products and lower scrap costs. The company
expects the expanded facility at Gallatin to be in full production by early
1999. Earnings in the third quarter of 1998 were reduced approximately $1.0
million due to lost volume from the labor strike at General Motors.
Aerospace Components' sales increased 29% from the 1997 third quarter due to
increased fabrication shipments on key commercial and military engine programs
as well as higher blade repair activity. Earnings for the quarter increased 48%
over the 1997 quarter as increased volume, improved manufacturing performance
and favorable operating variances resulting from improved direct labor
utilization were partially offset by administrative costs related to the volume
increase and litigation expense.
Order backlogs in this segment were $220.2 million at the end of the quarter
compared to $178.6 million at the end of the 1997 period. Special Materials'
backlog, which is generally short term in nature, declined 8%. Aerospace
Components' backlog increased 30% to a record level, reflecting continued strong
order intake on key engine programs.
Handling
Sales in the Handling segment declined 62% to $45.8 million, compared with
$121.4 million in the 1997 quarter, due to the sale of the foreign Handling
businesses. North American Handling sales increased 1% as improved selling
prices were partially offset by reduced volume.
Handling segment operating profit decreased 54% to $1.6 million reflecting the
disposition of the foreign units. Handling North America's earnings increased
258% over 1997 reflecting the benefits of favorable sales pricing, lower
material costs and reduced factory administration which were partially offset by
lower volume.
Order backlogs in this segment were $24.8 million at the end of the third
quarter compared to $125.2 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 37% from the order backlogs of $39.1 million
in the prior year because of reduced order intake; however, order rates during
1998 have remained strong.
Nine Months 1998 Compared with Nine Months 1997
For the first nine months of 1998, net sales of $396.2 million were down 28%,
compared with net sales of $551.5 million in the 1997 period. Net sales were
$356.2 million in the first nine months of 1997 without the results of the sold
foreign Handling businesses. Sales in the Engineered Materials segment increased
13% to $252.5 million, due to increased volume at Special Materials which was
limited by the strike at certain General Motors' facilities and increased
shipments of fabricated components and additional blade repair activity at
Aerospace Components. In the Handling segment, sales declined 56% to $143.7
million in 1998 reflecting the sale of the foreign Handling businesses. Sales at
the remaining Handling business in North America increased 9% principally due to
increased volume. Operating profit was $42.5 million in 1998 compared with
11
$44.0 million in the prior year period. Excluding the results of the sold
foreign Handling businesses, operating profit in the first nine months of 1997
was $37.8 million. As discussed below under the heading Non-operating Items,
non-operating (income) expense in 1998 included a $4.4 million charge relating
to certain Acme obligations. This charge is partially offset by a $1.6 million
benefit from insurance recoveries, net of increases in reserves, all relating to
historical environmental issues. Interest expense was $28.1 million compared to
$34.3 million in the first nine months of 1997 reflecting lower levels of
indebtedness after the required application of proceeds from the sale of the
foreign Handling businesses. The provision for taxes in the first nine months of
1998 included a $2.0 million reduction due to the reconciliation of the 1997
provision to the liability determined in preparation of the returns filed
related to taxes due on the 1997 sale of the Dexion businesses. Net income of
$6.2 million for the first nine months of 1998 includes an extraordinary loss of
$.5 million related to the early retirement of a portion of the Company's debt.
Net income of $1.6 million in the 1997 period included income of $1.8 million
from discontinued operations and an extraordinary loss of $1.5 million on the
early retirement of a portion of the Company's debt.
Segment Results
Nine Month Segment Results
Net Sales Operating Profit
1998 1997 1998 1997
----- ----- ----- -----
(in millions)
Engineered Materials
Special Materials $150.7 $147.7
Aerospace Components 101.8 76.5
------ ------
252.5 224.2 $37.7 $36.7
Handling 143.7 327.3 4.7 8.1
------ ------
Corporate Items .1 (.8)
----- -----
Consolidated Totals $396.2 $551.5 $42.5 $44.0
====== ====== ===== =====
Engineered Materials
Notwithstanding the effects of the labor strike at certain General Motors'
facilities on volume at Special Materials, sales in the Engineered Materials
segment increased 13% to $252.5 million, reflecting increased volume primarily
due to increased shipments of fabricated components and higher blade repair
activity at Aerospace Components. Operating profit for the segment increased 3%.
Special Materials' metal powder sales increased 2% due to increased unit volume
in the first nine months of 1998 as compared to 1997. Earnings decreased 2% in
the nine-month period, reflecting increased personnel costs and higher
depreciation relating to the startup of expansion facilities at the Gallatin,
Tennessee plant, higher freight costs, higher annual maintenance costs and 1997
insurance proceeds which were only partially offset by increased volume and
improved sales of higher margin products.
Aerospace Components' sales increased 33% compared with the same period last
year, as shipments on key commercial and military programs and blade repair
activity were higher. Earnings for the 1998 period increased 26% due to the
increased volume and third quarter improvements in manufacturing performance
which were partially offset by higher administrative costs related to the volume
increase and litigation expense.
12
Handling
Sales in the Handling segment in the first nine months of 1998 declined 56% to
$143.7 million, compared with $327.3 million in the 1997 period, due to the sale
of the foreign Handling businesses. North American Handling sales increased 9%
in the 1998 period over 1997 due to increased shipments which were partially
offset by lower selling prices.
Operating profit decreased 42% to $4.7 million reflecting the disposition of the
foreign units. Handling North America's earnings increased 70% in the 1998
period over 1997 as the effect of the increased volume, a favorable settlement
with a supplier and lower material costs were only partially offset by sales
pricing weakness on 1997 bookings shipped in 1998 and favorable accrual
adjustments recorded in the first quarter of 1997.
Non-operating 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. Based on the Company's recommended remedy for certain
underwater sediments at the Duluth Site, 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.
As discussed in Note 9 of Notes to Consolidated Financial Statements, on
September 28, 1998, Acme Steel Company and its affiliates filed for relief under
Chapter 11 of the United States Bankruptcy Code. Prior to 1986, Acme was known
as Interlake, Inc. In connection with the reorganization of Acme (the old
Interlake) in 1986, the Company, then newly-formed, indemnified Acme against
certain environmental, tax and other liabilities. In addition, at the time of
the reorganization Acme became obligated to the Company with respect to certain
pollution control bonds assumed at that time by the Company but pertaining to
facilities of Acme. As of September 27,1998, the principal amount of Acme's
obligation to the Company related to such bonds was $5.5 million. In the third
quarter, the Company recorded a non-operating charge of $4.4 million for a
valuation allowance against this receivable to a level consistent with the
post-filing trading range of Acme's parent corporation's unsecured public debt.
The Company has retained legal counsel to advise it as to the other effects of
the filing on the Company, including among others any effect upon the Company's
obligation to indemnify Acme with respect to certain liabilities.
Discontinued Operations
Certain adjustments to the gain recorded in connection with the October 1996
sale of the packaging businesses resulted in additional income of $.3 million,
net of income taxes, in the third quarter of 1997. In the first quarter of 1997,
the Company received additional proceeds from the sale of its packaging
businesses resulting in income from discontinued operations of $1.5 million, net
of income taxes.
Extraordinary Loss
During the third quarter of 1998, the Company recorded an extraordinary loss of
$.2 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
$6.8 million of the Company's Senior Notes.
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.
13
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 $285.6 million at the end of the third quarter of
1998, down $38.0 million from the 1997 year-end. Cash and equivalents totaled
$5.0 million at the end of the quarter, compared with $84.5 million at the end
of 1997, reflecting the repurchase of $6.8 million of Senior Notes and $24.0
million of Senior Subordinated Debentures, the $4.0 million payoff of the ESOP
note, the increase in working capital requirements and capital expenditures.
Capital expenditures of $43.4 million in the first nine months of 1998 compared
with $18.1 million in 1997, reflecting increased spending for expansion,
particularly in the Engineered Materials segment. The Company anticipates that
1998 capital spending will be approximately $59.0 million.
The Company entered into an agreement for a two-year $75 million revolving
credit facility on July 31, 1998. If current levels of performance are
maintained, the Company anticipates it will be in compliance with the covenants
under its bank credit agreement and it will have adequate liquidity to meet its
debt service and operating requirements, based on expected operating cash flow,
cash on hand, and the availability of borrowings under the Company's bank credit
agreement.
The Company has substantial debt repayment requirements in the years 2001 and
2002.
Year 2000 Issues and Status
The Company recognizes the importance of the Year 2000 issues and has initiated
a program of evaluating, remediating and testing the systems and equipment
serving its businesses for Year 2000 readiness. The Company is also assessing
the readiness of external parties, including its suppliers, vendors, bankers,
insurers and other service providers as well as its customers. The evaluation
phase is intended to determine the readiness of internal systems and equipment
as well as third parties. The remediation phase includes reprogramming of
software with testing of specific modifications, replacement of computer
software and hardware and operating equipment as well as identifying solutions
to possible third party noncompliance. The testing phase includes integrated
testing of all systems which are modified.
The current status of the Company's state of readiness and expected completion
dates for evaluation, remediation and testing related to Year 2000 issues are
summarized below:
Business Unit/Category Evaluation Remediation Testing
Phase Phase Phase
(Percent completed at the end of the
current reporting period/Projected
completion date)
Special Materials
Information Systems 100% 65%/December 1998 0%/June 1999
Non-Information Systems 100% 25%/December 1998 0%/June 1999
Third Parties 70%/March 1999 Contingency plans to be developed
beginning October 1998
Aerospace Components
Information Systems 95%/December 1998 10%/June 1999 10%/June 1999
Non-Information Systems 60%/December 1998 0%/March 1999 0%/June 1999
Third Parties 40%/December 1998 Contingency plans to be developed
beginning October 1998
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Business Unit/Category Evaluation Remediation Testing
Phase Phase Phase
(Percent completed at the end of the
current reporting period/Projected
completion date)
(continued)
Handling
Information Systems 100% 75%/December 1998 50%/March 1999
Non-Information Systems 90%/December 1998 20%/March 1999 30%/March 1999
Third Parties 10%/December 1998 Contingency plans to be developed
beginning October 1998
Corporate
Information Systems 60%/December 1998 10%/June 1999 0%/June 1999
Non-Information Systems 100% 0%/March 1999 0%/March 1999
Third Parties 30%/December 1998 Contingency plans to be developed
beginning October 1998
Expenditures for Year 2000 readiness are principally the costs to modify
existing information system software or microprocessors embedded in equipment in
the Company's manufacturing systems. These costs are expected to be minor, and
$.3 million has been incurred to date through the end of the third quarter in
addressing Year 2000 readiness. Total costs are expected to approximate $1.0
million, including $.2 million to replace existing hardware and equipment.
Funding for the Company's Year 2000 program will be generated from current
operating activities, and IT department costs to address Year 2000 issues
represent 30% of the Company's total IT budget. No other IT projects have been
deferred which would have a material effect on future financial condition and
results of operations.
The Company also plans to replace certain non-IT systems at one of its Special
Materials facilities. While the replacement of these systems does address some
Year 2000 issues, the Company does not consider the investment in new systems to
be related to the Year 2000 issue as such costs are a necessary expenditure to
enhance future operations which will be incurred regardless of Year 2000
considerations. Total costs to replace these systems will be $1.7 million.
The Company believes that in the most likely, worst case scenario, internal
remediation and testing of information technology systems and non-information
technology systems will be completed as indicated above and will have minimal
unfavorable impact on the results of operations and financial condition. If any
or all of these efforts are delayed, there could be disruption of the financial
and operating systems at one or more of the business units. Critical third party
vendors, suppliers and service providers have been contacted to evaluate their
Year 2000 readiness. However, external parties providing materials and services
to the Company have been reluctant to fully disclose information about their
readiness. Accordingly, the Company cannot be assured there will be no
disruption of operations because of vendors and service providers who are not
fully Year 2000 compliant. Contingency plans will be developed, where necessary,
as part of the remediation phases indicated above, to provide a continued supply
of goods and various services. The Company has also begun contacting significant
customers to determine their compliance. However, the Company has not completed
these evaluations and cannot determine whether there are vendors, suppliers and
customers who will not be compliant on a timely basis or whether the failure of
any of these entities to become compliant could have a material, adverse effect
on its consolidated results of operations and consolidated financial position.
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 requires 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
15
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 performance 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, the bankruptcy of Acme Steel Company and its affiliates and
the effects of the Year 2000 computer issues. 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 comply with covenants under its bank credit
agreement, (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, (iv) the effect of the filing by Acme Steel company and its
affiliates for relief under Chapter 11 of the Bankruptcy Code and (v) the
timing, nature and consequences of the resolution of Year 2000 issues.
16
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. The
Company is also an unsecured creditor in the bankruptcy proceedings of Acme
Steel and its affiliated companies. 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.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 4.1 Third Amended and Restated Credit Agreement dated as
of July 31, 1998 among the Registrant, Various Banks,
The Chase Manhattan Bank and The First National Bank
of Chicago
Exhibit 4.2 Amendment No. 1 dated as of August 31, 1998 to Third
Amended and Restated Credit Agreement
Exhibit 4.3 Note dated July 31, 1998, payable from the Registrant
to The Chase Manhattan Bank
Exhibit 4.4 Note dated July 31, 1998, payable from the
Registrant to The First National Bank of Chicago
Exhibit 4.5 Note dated July 31, 1998, payable from the Registrant
to The Bank of Nova Scotia
Exhibit 4.6 Note dated July 31, 1998, payable from the Registrant
to National Bank of Canada
Exhibit 4.7 Note dated July 31, 1998, payable from the Registrant
to KZH-IV Corporation
Exhibit 4.8 Consent and Reaffirmation Agreement dated July 31,
1998 among the Registrant,Various Banks, The Chase
Manhattan Bank and The First National Bank of Chicago
Exhibit 27 Financial Data Schedule for the quarter ended
September 27, 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
October 22, 1998 /s/STEPHEN GREGORY
Stephen Gregory
Vice President - Finance
and Chief Financial Officer
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