UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1997 Commission file number 1-996
OR
( ) TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
GENERAL SIGNAL CORPORATION
(Exact name of registrant as specified in its charter)
New York 16-0445660
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
High Ridge Park,
Box 10010, Stamford, Connecticut 06904-2010
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code (203) 329-4100
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.
X
(Yes) (No)
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, par value $1.00 49,754,965
(Class) (Outstanding at October 9, 1997)
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
INDEX
Page No.
PART I - FINANCIAL INFORMATION:
Statement of Earnings -
Three Months Ended September 30, 1997 and 1996 3
Statement of Earnings -
Nine Months Ended September 30, 1997 and 1996 4
Balance Sheet -
As of September 30, 1997 and December 31, 1996 5
Condensed Statement of Cash Flow -
Nine Months Ended September 30, 1997 and 1996 6
Notes to Financial Statements 7
Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
PART II - OTHER INFORMATION 21
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
Statement of Earnings
(In millions, except per-share data)
(Unaudited)
Three Months Ended
September 30,
1997 1996
Net sales $475.7 $521.6
------- ------
Cost of sales 346.5 356.2
Selling, general and administrative
expenses 99.6 97.5
Gain on disposition (63.7) - -
------ ------
382.4 453.7
------ ------
Operating earnings 93.3 67.9
Equity in earnings of EGS 1.9 - -
Interest expense, net (3.3) (5.5)
------ -------
Earnings from continuing operations
before 91.9 62.4
income taxes
55.9 25.0
Income taxes ------ --------
Earnings from continuing operations 36.0 37.4
Earnings from discontinued operations,
net of income taxes 2.3 - -
------ --------
Net earnings $38.3 $ 37.4
======== ========
Net earnings per share:
Continuing operations $ 0.71 $ 0.75
Discontinued operations 0.05 - -
------ --------
Net earnings $ 0.76 $ 0.75
======= ========
Dividends declared per share $0.255 $ 0.24
======= ========
Average shares outstanding 50.3 49.8
======= ========
See accompanying notes to financial statements.
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
Statement of Earnings
(In millions, except per-share data)
(Unaudited)
Nine Months Ended September 30,
1997 1996
Net sales $1,520.9 $1,518.3
--------- --------
Cost of sales 1,079.7 1,064.9
Selling, general and administrative
expenses 305.7 298.9
Gain on dispositions (63.7) (20.8)
--------- --------
1,321.7 1,343.0
Operating earnings 199.2 175.3
Equity in earnings of EGS 1.9 - -
Interest expense, net (11.3) (17.9)
--------- --------
Earnings from continuing operations
before income taxes 189.8 157.4
Income taxes 95.0 63.0
--------- --------
Earnings from continuing operations 94.8 94.4
Earnings from discontinued
operations, net of income taxes 2.3 - -
--------- --------
Net earnings $ 97.1 $ 94.4
========= ========
Net earnings per share:
Continuing operations $ 1.86 $ 1.90
Discontinued operations 0.05 - -
--------- --------
Net earnings $ 1.91 $ 1.90
========= ========
Dividends declared per share $ 0.765 $ 0.72
========= ========
Average shares outstanding 50.9 49.6
========= ========
See accompanying notes to financial statements.
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
Balance Sheet
(In millions)
(Unaudited) (Audited)
September 30, December 31,
Assets 1997 1996
Current assets:
Cash and cash equivalents $ 82.8 $ 17.7
Accounts receivable, net 282.2 353.0
Inventories, net 160.2 240.6
Prepaid expenses and other
current assets 28.0 24.7
Deferred income taxes 49.6 55.9
--------- --------
Total current assets 602.8 691.9
Property, plant and equipment, net of
accumulated depreciation and amortization 240.5 310.0
Intangibles, net of accumulated amortization 261.2 381.3
Investment in EGS 129.0 - -
Other assets 196.2 167.8
--------- ---------
Total assets $1,429.7 $1,551.0
=========== ==========
Liabilities and Shareholders' Equity
Current liabilities:
Short-term borrowings and current
maturities of long-term debt $ 9.7 $ 5.6
Accounts payable 139.0 187.3
Accrued expenses 180.9 214.6
Income taxes 74.2 31.7
-------- --------
Total current liabilities 403.8 439.2
-------- ---------
Long-term debt, less current maturities 89.8 201.3
Accrued post-retirement and post-employment
obligations 119.8 133.2
Deferred income taxes 47.8 17.3
Other liabilities 16.4 16.2
-------- --------
Total long-term liabilities 273.8 368.0
-------- --------
Shareholders' equity:
Common stock 78.5 78.2
Additional paid-in capital 364.2 337.1
Retained earnings 725.6 667.4
Cumulative translation adjustments (4.8) (1.4)
Common stock in treasury (411.4) (337.5)
-------- --------
Total shareholders' equity 752.1 743.8
-------- --------
Total liabilities and shareholders' equity $1,429.7 $1,551.0
========= ==========
See accompanying notes to financial statements
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
Condensed Statement of Cash Flow
(In millions)
(Unaudited)
Nine Months Ended September 30,
1997 1996
CASH FLOW FROM OPERATING ACTIVITIES:
Net Earnings $ 97.1 $ 94.4
Adjustments to reconcile net earnings
to net cash from operating activities:
Equity in earnings of EGS (1.9) - -
Gain on dispositions (63.7) (20.8)
Asset write down and other non-cash
charges 12.2 19.7
Deferred income taxes 21.9 28.3
Depreciation and amortization 51.7 51.8
Pension income (11.3) (6.8)
Other, net (1.7) 6.7
Changes in assets and liabilities, net of
effects from acquisitions and divestitures (5.8) (36.7)
-------- -------
Net cash from operating activities 98.5 136.6
-------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Divestitures 197.8 79.2
Capital expenditures (39.3) (43.6)
Other, net 0.9 2.8
------ ------
Net cash from investing activities 159.4 38.4
-------- ------
CASH FLOW FROM FINANCING ACTIVITIES:
Net change in short and long-term
borrowings (64.5) (126.1)
Dividends paid (39.4) (35.6)
Issuance of common stock 11.1 11.3
Purchase of common stock (100.0) (1.2)
-------- -------
Net cash from financing activities (192.8) (151.6)
-------- ---------
Net change in cash and cash equivalents 65.1 23.4
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 17.7 1.0
-------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 82.8 $ 24.4
========= ==========
See accompanying notes to financial statements.
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
Notes to Financial Statements
(Unaudited)
1. In the opinion of management, the accompanying unaudited
financial statements reflect all adjustments (consisting of
normal, recurring items) necessary for the fair presentation
of results for these interim periods. These results are
based upon generally accepted accounting principles
consistently applied with those used in the preparation of
the company's 1996 Annual Report on Form 10-K. The results
of operations for the nine-month period ended September 30,
1997 are not necessarily indicative of the results of
operations that may be expected for the full year.
The financial information as of September 30, 1997 should be
read in conjunction with the financial statements contained
in the company's 1996 Annual Report on Form 10-K.
2. Certain reclassifications have been made to the 1996
financial statements to conform with the 1997 presentation.
3. Inventories September 30, December 31,
1997 1996
(In millions)
Finished goods $ 44.9 $ 80.8
Work in process 39.7 63.2
Raw material and purchased parts 89.2 117.1
-------- --------
Total FIFO cost 173.8 261.1
Excess of FIFO cost over LIFO
inventory value (13.6) (20.5)
--------- ----------
Net carrying value $ 160.2 $ 240.6
========== ==========
Included in the gain on sale of the General Signal Pump
Group (GSPG) was a LIFO liquidation of $2.0 million.
Additionally, $5.3 million of the excess of FIFO cost over
LIFO inventory value was transferred from the General Signal
Electrical Group (GSEG) to the investment in EGS joint
venture.
4. Property, Plant and Equipment September 30, December 31,
1997 1996
(In millions)
Property, plant and equipment, at
cost $ 597.6 $ 747.3
Accumulated depreciation and
amortization (357.1) (437.3)
-------- --------
Property, plant and equipment, net $ 240.5 $ 310.0
======== =========
5. Capital Stock September 30, December 31,
1997 1996
(In millions)
Common stock:
Shares authorized 150.0 150.0
Shares issued 64.9 64.6
Held in treasury (14.6) (13.2)
6. Business Segment Information Three Months Ended September 30,
1997 1996
Net sales: (In millions)
Process Controls $155.4 $192.1
Electrical Controls 230.8 239.3
Industrial Technology 89.5 90.2 (d)
------- -------
$475.7 $521.6
======= =======
Operating earnings:
Process Controls $ 80.9 (a) $ 31.0 (e)
Electrical Controls 9.4 (b) 26.7
Industrial Technology 12.1 (c) 18.9 (d)
------- ------
Total operating earnings before
unallocated expenses, equity
earnings and interest 102.4 76.6
Equity in earnings of EGS 1.9 - -
Net interest expense (3.3) (5.5)
Unallocated expenses (9.1) (8.7)
------- --------
Earnings before income taxes $ 91.9 $ 62.4
======== =========
(a)Includes $63.7 gain on disposition of GSPG, a $0.4 charge
related to a revision in the internal accounting methodology of
reserving for potentially uncollectible accounts receivable and
a $1.4 charge related to a revision in the internal accounting
methodology of reserving for potentially excess and obsolete inventory.
(b)Includes a $3.5 charge related to a revision in the internal accounting
methodology of reserving for potentially uncollectible accounts receivable,
a $7.3 charge related to a revision in the internal accounting
methodology of reserving for potentially excess and obsolete inventory,
a $2.9 restructuring charge related to Best Power, a $1.0 charge for
professional fees related to EGS and a $2.9 reversal of plant closure
reserve set up in first quarter 1996.
(c)Includes a $1.3 charge related to a revision in the internal accounting
methodology of reserving for potentially excess and obsolete inventory.
(d)Includes $4.2 of royalty income.
(e)Includes a $1.8 insurance gain on the recovery of destroyed
assets.
Nine Months Ended September 30,
1997 1996
(In millions)
Net sales:
Process Controls $523.8 $554.0
Electrical Controls 723.8 696.6
Industrial Technology 273.3 267.7 (d)
------- ------
$1,520.9 $1,518.3
========= =========
Operating earnings:
Process Controls $126.3 (a) $97.1 (e)
Electrical Controls 55.0 (b) 61.1 (f)
Industrial Technology 45.8 (c) 41.8 (g)
-------- --------
Total operating earnings before
unallocated expenses, equity
earnings and interest 227.1 200.0
Equity in earnings of EGS 1.9 - -
Net interest expense (11.3) (17.9)
Unallocated expenses (27.9) (24.7)
--------- --------
Earnings before income taxes $189.8 $ 157.4
========== ========
(a)Includes $63.7 gain on disposition of GSPG, a $0.4 charge
related to a revision in the internal accounting methodology of reserving
for potentially uncollectible accounts receivable and a $1.4 charge
related to a revision in the internal accounting methodology of reserving
for potentially excess and obsolete inventory.
(b)Includes a $3.5 charge related to a revision in the internal accounting
methodology of reserving for potentially uncollectible accounts receivable,
a $7.3 charge related to a revision in the internal accounting methodology
of reserving for potentially excess and obsolete inventory, a $2.9
restructuring charge related to Best Power, a $1.0 charge for
professional fees related to EGS and a $3.7 reversal of plant
closure reserves set up in first quarter 1996.
(c)Includes a $1.3 charge related to a revision in the internal accounting
methodology of reserving for potentially excess and obsolete inventory.
(d)Includes $4.2 of royalty income.
(e)Includes a $20.8 gain on disposition of Kinney Vacuum, a charge of $4.0
for product warranty costs and a $1.8 insurance gain on the recovery of
destroyed assets.
(f)Includes an $11.1 charge related to plant closure costs, asset vaulations
and environmental costs.
(g)Includes $4.6 charge for asset valuations and $4.2 of royalty income.
7. Supplemental Information - Statement of Cash Flow
Nine Months Ended September 30,
1997 1996
Cash paid for: (In millions)
Interest $ 13.1 $19.0
======== ======
Income taxes $ 26.9 $25.3
======== ======
The company had the following non-
cash investing and financing activity:
Conversion of convertible debt
into common stock $ 39.3 $ - -
Contributions of net assets to
joint venture $ 127.1 $ - -
8. Repurchase of Shares
In December 1996, the Board of Directors approved a stock
buy-back program of up to $100.0 million to offset the
shares issued in relation to the call for the redemption of
the 5.75 percent convertible subordinated notes. On April
17, 1997, the program was completed with the total of 2.5
million shares repurchased for $100.0 million.
On June 19, 1997, the Board of Directors approved a stock
buyback program of up to $150.0 million subject to the
consummation of the GSPG divestiture. On September 18,
1997, the Board of Directors approved an increase of this
program to $300.0 million. The program is expected to be
completed by the end of 1998. As of October 22, 1997, 2.1
million shares were repurchased under this program for $89.4
million.
9. Medium Term Notes
On April 7, 1997, the company sold $25.0 million 7.114
percent medium-term senior notes that are due on April 8,
2002. On April 18, 1997, the company sold an additional
$25.0 million 7.00 percent medium-term senior notes that are
due on October 18, 2000. The proceeds were used to pay down
floating rate commercial paper.
10. Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share," which changes the
methodology of calculating earnings per share. The company
plans to adopt SFAS No. 128 in December 1997. Early adoption
is not permitted. Had the company adopted SFAS No. 128 as
of September 30, 1997, the related per share disclosure for
both basic and diluted earnings per share would have been:
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
Basic $0.76 $0.75 $1.91 $1.90
Diluted 0.76 0.73 1.90 1.86
In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income" and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". The
company must adopt these statements by 1998. While the company
is studying the application of the new statements, it does
not expect either of these statements to materially affect
its financial position or results of operations.
11. EGS Joint Venture
On September 15, 1997, the company and Emerson Electric
Company formed the Emerson General Signal Electrical Group
LLC, (EGS), a joint venture of Emerson's Appleton Electric
division and the company's Electrical Group. The company
contributed substantially all of the operating assets of its
GSEG in exchange for 47.5 percent of EGS. The company
accounts for its investment in EGS under the equity method
of accounting. The joint venture's operations and the
company's equity in earnings of the joint venture for the
period from September 15, 1997 to September 30, 1997
included the following (in millions):
Net sales $26.5
Gross profit 9.7
Income from continuing operations 4.3
The Company's equity in EGS income from
continuing operations $ 2.0
Amortization expense for the excess of cost
over the underlying net assets of the joint
venture (0.1)
-------
Equity in earnings of EGS $ 1.9
=======
The company's investment in the EGS joint venture includes
the unamortized excess of the company's investment over its
equity in the joint venture's net assets. The excess was
$38.2 at September 30, 1997, and is being amortized on a
straight-line basis over an estimated economic life of 40
years.
Condensed balance sheet information of the EGS joint venture
as of September 30, 1997 is as follows (in millions):
Current assets $147.3
Noncurrent assets 118.3
Current liabilities 60.2
Noncurrent liabilities 14.3
GSEG accounted for approximately 15 percent of the company's
1996 consolidated net sales.
12. Sale of General Signal Pump Division
On August 23, 1997, the company sold substantially all of
the assets of GSPG to Pentair, Inc. for approximately $200
million and recognized a pre-tax gain of $63.7 million.
Income tax expense on the gain was $46.5 million or 73
percent of the pretax gain. This rate differs from the
company's effective tax rate due to a difference in the book
and tax bases of GSPG. GSPG accounted for approximately 10
percent of the company's 1996 consolidated net sales.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in millions, except per-share data)
Results of Operations - Third Quarter 1997 Compared to Third
Quarter 1996
1997 1996
Reported Reported Change
Net sales $475.7 $521.6 (8.8%)
Gross profit 129.2 165.4 (21.9%)
Margin percent 27.2% 31.7%
Selling, general and
administrative 99.6 97.5 2.2%
expenses
Percent of sales 20.9% 18.7%
Gain on disposition (63.7) - - - -
Operating earnings 93.3 67.9 37.4%
Equity in earnings of 1.9 - - - -
EGS
Interest expense, net (3.3) (5.5) (40.0%)
Earnings from continuing
operations before
income 91.9 62.4 47.3%
taxes
Income taxes 55.9 25.0 123.6%
Net earnings from
continuing 36.0 37.4 (3.7%)
operations
Earnings per share from
continuing operations $0.71 $0.75 (5.3%)
Earnings per share from
discontinued 0.05 - - - -
operations
Net earnings per share $0.76 $0.75 1.3%
Net sales: Consolidated sales decreased 8.8 percent from 1996
levels primarily due to the sale of GSPG and contribution of the
net assets of GSEG to the EGS joint venture. Adjusted for the
disposition of GSPG and the contribution of GSEG to EGS, net
sales decreased approximately 2 percent. International sales
represented approximately 23 percent of total net sales in 1997
versus 22 percent in 1996.
Process Control sector sales were $155.4 in the third quarter of
1997 as compared to $192.1 in the same period in 1996. The
decrease was partly due to the sale of GSPG on August 23,
1997. GSPG recorded sales of approximately $21 in September of
1996. Sector sales were also impacted by lower volume of crystal
growing furnaces and mixers. The lower sales of crystal growing
furnaces is a result of a cyclical downturn in the semiconductor
equipment market. The lower mixer volume is due to fewer large
projects from an overcapacity in the chemical processing industry
and weaker gold prices during the quarter.
Sales in the Electrical Controls sector decreased 3.6 percent to
$230.8 from $239.3 in the same period of last year. The decrease
is primarily due to the company's contribution of GSEG's net
assets to the EGS joint venture on September 15, 1997. GSEG's
sales for the latter half of September 1997, of approximately
$15, are not included in sector sales because GSEG's operations
are included in the operations of EGS which is being accounted
for using the equity method. This decrease was partially offset
by higher sales of fire detection systems and medium power
transformers.
In July 1996, the company negotiated a royalty settlement related
to one of its previously divested semiconductor businesses and
received $4.2 in connection with this agreement (the "Royalty
Income Amount"). The company recognized this amount in
Industrial Technology sector sales. Adjusted for the Royalty
Income Amount, 1997 sales increased to $89.5 versus $86.0 in the
same period in 1996. Sales of the CD9000TM ESCON Director, new
application sales of an existing networking monitoring product
and growth in the bicycle original equipment manufacturer (OEM)
segment contributed to the increased sales.
Gross profit: In September 1997, the company revised its internal
accounting methodology for reserving for potentially excess and
obsolete inventory to a more conservative measure. In connection
therewith, the company recorded a $10.0 charge in cost of sales,
with $1.4 recorded in the Process Controls sector, $7.3 recorded
in the Electrical Controls sector and $1.3 recorded in the
Industrial Technology sector.
In August 1997, the company announced a restructuring plan of
Best Power, a unit in the Electrical Controls sector. In
connection with this plan, the company recorded a $1.1 charge to
cost of sales to write off assets related to discontinued product
lines.
Adjusted for the items referred to above and the Royalty Income
Amount included in 1996 net sales, 1997 gross profit as a
percentage of sales decreased to 29.5 percent from 31.1 percent
in the third quarter of 1996. The decrease was due to a shift in
sales to lower margin products in certain businesses, higher
labor costs, higher warranty costs and the impact of fixed
overhead costs on lower sales. These increases were partially
offset by lower material costs due to sourcing initiatives.
Selling, general and administrative expenses: In September 1997,
the company revised its internal accounting methodology for
reserving for potentially uncollectible accounts receivable to a
more conservative measure. In connection therewith, the company
recorded a $3.9 charge in selling, general and administrative
expense, with $0.4 recorded in the Process Controls sector and
$3.5 recorded in the Electrical Controls sector.
The Best Power restructuring plan referred to above resulted in
the cancellation of a facility lease in Texas and the payment of
a $1.8 settlement charge. This charge has been included in
selling, general and administrative expenses.
In September 1997, the company and Emerson Electric formed EGS, a
joint venture that combined the two companies' electrical
distributor product businesses. The company contributed
substantially all of the operating assets and liabilities of GSEG
to EGS in exchange for 47.5 percent ownership of the joint
venture. As a result of the formation of the joint venture, a
previously announced restructuring plan of the company was no
longer required and the reserve of $2.9 was reversed. This
income has been included in selling, general and administrative
expenses. $1.0 of professional fees were incurred in 1997 in
connection with setting up EGS.
In May 1996, a fire at a supplier facility destroyed certain assets of a
business in the Process Controls sector. In September 1996, the
company received $1.8 in insurance proceeds, net of related
expenses, and recognized a gain on the involuntary conversion of
these assets. This amount is included as an offset to selling,
general and administrative expenses.
Adjusted for the items referred to above and the Royalty Income
Amount included in 1996 net sales, 1997 selling, general and
administrative expenses as a percentage of sales increased to
20.1 percent compared to 19.2 percent in the third quarter of
1996. Third quarter 1997 expenses were higher due primarily to
the impact of fixed expenses on lower sales volume. Included in
selling, general and administrative expenses was pension income
of $4.8 in 1997 and $2.0 in 1996.
Gain on disposition: In August 1997, the company sold GSPG, a
unit of the Process Controls sector, for approximately $200 and
recognized a pre-tax gain of $63.7. Included in the gain was a
LIFO liquidation of approximately $2.0. Income tax expense on
the gain was $46.5 or 73 percent of the pretax gain. This rate
differs from the company's effective tax rate due to a difference
in the book and tax bases of GSPG.
Operating earnings: Operating earnings for the Process Controls
sector was $80.9 compared to $31.0 for the same period in 1996.
The increase is due to the $63.7 gain on sale of GSPG partially
offset by the absence of GSPG September income in 1997, charges
related to the revisions in accounts receivable and inventory
reserve methodologies of $0.4 and $1.4, respectively, the $1.8
insurance settlement gain on destroyed assets recognized in 1996
and lower volume in the crystal growing furnace and mixer
businesses.
Electrical Controls sector operating earnings decreased to $9.4,
versus $26.7 in the same period in 1996. The decrease was due to
charges related to the revisions in accounts receivable and
inventory reserve methodologies of $3.5 and $7.3, respectively,
charges related to the Best Power restructuring plan of $2.9,
$1.0 of professional fees incurred in connection with EGS,
a shift toward lower margin products in certain businesses, higher
warranty costs and the company's contribution of GSEG's net assets
to the EGS joint venture (the company records the equity in earnings
of EGS under the equity method of accounting below operating income).
These decreases were partially offset by the $2.9 reversal of a
restructuring reserve that was no longer required with the company's
contribution of GSEG to EGS.
Industrial Technology sector operating earnings decreased to
$12.1 versus $18.9 in the same period in 1996. The decrease is
due to the Royalty Income Amount recognized in 1996, the charge
related to the revision in inventory reserve methodology of $1.3,
and a shift to lower margin products at GS Networks.
Interest expense: Net interest expense decreased 40.0 percent to
$3.3 versus $5.5 in the same period of 1996. Cash generated from
operations and divestitures was used to pay down debt.
Income Tax Expense: 1997 income tax expense includes $46.5 of
income taxes from the sale of GSPG. Adjusted for this charge,
the company's effective tax rate in 1997 is 38.5 percent. An
adjustment of $1.5 ($0.03 per share) to decrease the 1997 full
year effective tax rate from 40 percent to 38.5 percent was
recorded in the third quarter reflecting increased tax credits.
Discontinued operations: During 1995, the company recorded
losses on the divestitures of the Leeds & Northrup Company and
Dynapower/Stratopower and set up reserves to cover potential
remaining obligations. In September 1997, $2.3 of this amount,
net of tax, was no longer required and accordingly, was reversed
through discontinued operations.
Results of Operations - Nine Months 1997 Compared With Nine
Months 1996
1997 1996
Reported Reported Change
Net sales $1,520.9 $1,518.3 0.2%
Gross profit 441.2 453.4 (2.7%)
Margin percent 29.0% 29.9%
Selling, general and
administrative 305.7 298.9 2.3%
expenses
Percent of sales 20.1% 19.7%
Gain on dispositions (63.7) (20.8) 206.3%
Operating earnings 199.2 175.3 13.6%
Equity in earnings of 1.9 - - - -
EGS
Interest expense, net (11.3) (17.9) (36.9%)
Earnings from continuing
operations before
income 189.8 157.4 20.6%
taxes
Income taxes 95.0 63.0 50.8%
Net earnings from
continuing 94.8 94.4 0.4%
operations
Earnings per share from
continuing operations $ 1.86 $ 1.90 (2.1%)
Earnings per share from
discontinued 0.05 - - - -
operations
Net earnings per share $ 1.91 $ 1.90 0.5%
Net sales: Consolidated sales in the first nine months of 1997
increased 0.2 percent over the first nine months of 1996 due
primarily to increased sales in the Electrical Controls sector
partially offset by the sale of GSPG and contribution of the net
assets of GSEG to the EGS joint venture. Adjusted for the
disposition of GSPG and the contribution of GSEG to EGS, net
sales increased approximately 2.5 percent. International sales
in 1997 increased 3.0 percent over the same period of 1996 and
represented approximately 23 percent of total net sales versus 22
percent in the same period of 1996.
Process Control sector sales were $523.8 in the first nine months
of 1997 as compared to $554.0 in the same period in 1996. The
decrease was partly the result of the sale of GSPG on August
23, 1997. GSPG recorded sales of approximately $21 in September
of 1996. Sector sales also decreased due to lower sales volume
of crystal growing furnaces, as a result of a cyclical downturn
in the semiconductor equipment market, and decreased sales of
coal feeders. The decreases were partially offset by higher
demand for industrial oven and laboratory products.
Sales in the Electrical Controls sector increased 3.9 percent to
$723.8 from $696.6, as compared to the same period last year.
Sales increases were reported by all six units within the sector.
The largest improvements were in the construction material,
medium power transformer, treadmill motor and fire detection
products. GSEG sales for the latter half of September, of
approximately $15, are not included in sector sales because GSEG's
operations are included in the operations of EGS which is being
accounted for using the equity method.
In July 1996, the company received the Royalty Income Amount of
$4.2, which was recognized in Industrial Technology sector sales.
Adjusted for the Royalty Income Amount, Industrial Technology
sector sales increased 3.7 percent to $273.3 versus $263.5 in the
same period in 1996. Sales of the CD9000TM ESCON Director as
well as new application sales of an existing networking
monitoring product were the primary causes for the increase.
Increased demand from North American automotive producers also
contributed to the growth. These increases were partially offset
by lower sales of older technology telecommunication products.
Gross profit: In September 1997, the company revised its internal
accounting methodology for reserving for potentially excess and
obsolete inventory to a more conservative measure. In connection
therewith, the company recorded a $10.0 charge in cost of sales,
with $1.4 recorded in the Process Controls sector, $7.3 recorded
in the Electrical Controls sector and $1.3 recorded in the
Industrial Technology sector.
In August 1997, the company announced a restructuring plan of
Best Power, a unit in the Electrical Controls sector. In
connection with this plan, the company recorded a $1.1 charge to
cost of sales to write off assets related to discontinued product
lines.
In March 1996, the company extended warranty service to certain
products sold by the Process Controls sector which were not covered
by warranty. The company recorded $4.0 to cover the cost of such
repairs. Through September 30, 1997, substantially all of this
reserve had been paid.
The company reviews on an ongoing basis the carrying amount of
company assets. As part of this review, in the first quarter of
1996, the future market potential of capitalized software in the
Industrial Technology sector was determined to be impaired.
Accordingly the company wrote off $4.6 of such software.
As part of the company's ongoing review of operations, the
company identified property, plant and equipment that will not be
utilized in future operations, and, therefore, recorded a $4.4
charge in March 1996 to write off the assets.
Adjusted for the items referred to above and the Royalty Income
Amount included in 1996 net sales, 1997 gross profit as a
percentage of sales decreased to 29.7 percent from 30.5 percent
in the nine months of 1996. The decrease was due to a shift in
sales to lower margin products in certain businesses as well as
higher labor, new product development and warranty costs. These
increases were partially offset by lower material costs due to
sourcing initiatives.
Selling, general and administrative expenses: In September 1997,
the company revised its internal accounting methodology for
reserving for potentially uncollectible accounts receivable to a
more conservative measure. In connection therewith, the company
recorded a $3.9 charge in selling, general and administrative
expense, with $0.4 recorded in the Process Controls sector and
$3.5 recorded in the Electrical Controls sector.
The Best Power restructuring plan referred to above resulted in
the cancellation of a facility lease in Texas and the payment of
a $1.8 settlement charge. This charge has been included in
selling, general and administrative expenses.
In March 1996, the company adopted a plan to close a factory in
the Electrical Controls sector and provided $4.7 primarily for
lease termination costs, asset write-downs and severance. In June
1997, the company determined that $0.8 of this reserve was no
longer required and reversed this amount into income. In
September 1997, the company and Emerson Electric formed EGS, a
joint venture that combined the two companies' electrical
distributor product businesses. The company contributed
substantially all of the operating assets and liabilities of GSEG
to EGS in exchange for 47.5 percent ownership of the joint
venture. As a result of the formation of the joint venture, the
previously announced restructuring plan of the company was no
longer required and the remaining reserve of $2.9 was reversed
into income. $1.0 of professional fees were incurred in 1997 in
connection with setting up EGS.
Also in March 1996, the company changed its estimate of
environmental costs to be incurred at one of its facilities in
the Electrical Controls sector and recorded a $2.0 charge.
In May 1996, a fire at a supplier facility destroyed certain
assets of a business in the Process Controls sector. In
September 1996, the company received $1.8 in insurance proceeds,
net of related expenses, and recognized a gain on the involuntary
conversion of these assets. This amount is included as an offset
to selling, general and administrative expenses.
Adjusted for the items referred to above and the Royalty Income
Amount included in 1996 net sales, 1997 selling, general and
administrative expenses as a percentage of sales increased to
19.9 percent compared to 19.4 percent in the nine months of 1996.
First quarter 1997 expenses were higher due to higher marketing,
sales commission, and information system costs. Included in
selling, general and administrative expenses was pension income
of $11.3 in 1997 and $6.8 in 1996.
Gain on disposition: In August 1997, the company sold GSPG, a
unit of the Process Controls sector, for approximately $200 and
recognized a pre-tax gain of $63.7. Included in the gain was a
LIFO liquidation of approximately $2.0. Income tax expense on
the gain was $46.5 or 73 percent of the pretax gain. This rate
differs from the company's effective tax rate due to a difference
in the book and tax bases of GSPG.
In January 1996, the company disposed of Kinney Vacuum Company
(Kinney), a unit previously included in the Process Controls
sector, for $29.0 and recorded a pre-tax gain of $20.8. Included
in the gain was a LIFO liquidation of approximately $1.1.
Operating earnings: Process controls operating earnings increased
30.1 percent to $126.3, versus $97.1 in the same period in 1996.
The increase is due to the $63.7 gain on sale of GSPG, higher
volume of industrial oven and laboratory product sales and a $4.0
charge for product warranty costs recorded in 1996, partially
offset by the absence of GSPG September income in 1997, charges
related to revisions in accounts receivable and inventory reserve
methodologies of $0.4 and $1.4, respectively, the $20.8 gain on
the sale of Kinney in 1996, the $1.8 insurance settlement gain on
destroyed assets recognized in 1996 and lower volume in the
crystal growing furnace and coal feeder businesses. 1996
operating earnings of the Process Controls sector included $0.7
of environmental insurance recoveries.
Electrical Controls operating earnings decreased 10.0 percent to
$55.0, versus $61.1 in the same period in 1996. The decrease was
due to charges related to the revisions in accounts receivable
and inventory reserve methodologies of $3.5 and $7.3,
respectively, charges related to the Best Power restructuring
plan of $2.9, $1.0 of professional fees incurred in connection
with EGS, a shift toward lower margin products in certain
businesses and the company's contribution of GSEG to the EGS
joint venture (the company records the equity in earnings of EGS
under the equity method of accounting below operating income).
These decreases were partially offset by the $3.7 reversal of
restructuring reserves no longer required, and 1996 charges for
lease termination costs, asset write-downs, and severance of
$4.7, write off of property, plant and equipment of $4.4 and a
change in estimate of environmental costs of $2.0.
Industrial Technology sector operating earnings increased to
$45.8 versus $41.8 in the same period in 1996. The increase is
due mainly to higher sales volume, a shift toward the higher
margin CD9000TM ESCON Director product, productivity
improvements in automotive product lines, and a $4.6
charge taken in 1996 for impairment of capitalized software.
Partially offsetting this increase is the Royalty Income Amount
recognized in 1996 and the charge related to the revision in
inventory reserve methodology of $1.3.
Unallocated expenses increased 13.0 percent to $27.9 in the third
quarter of 1997 from $24.7 in the same period in 1996. 1996
unallocated expenses were positively impacted by the collection
of a $1.3 previously written off receivable. The increase is
primarily the result of higher expenses due to divested
businesses and higher benefit cost accruals.
Interest expense: Net interest expense decreased 36.9 percent to
$11.3 versus $17.9 in the same period of 1996. Cash generated
from operations and divestitures was used to pay down debt.
Income Tax Expense: 1997 income tax expense includes $46.5 of
income taxes from the sale of GSPG. Adjusted for this charge,
the company's effective tax rate in 1997 is 38.5 percent compared
to 40 percent in 1996. The decrease reflects increased tax
credits.
Discontinued operations: During 1995, the company recorded
losses on the divestitures of the Leeds & Northrup Company and
Dynapower/Stratopower and set up reserves to cover potential
remaining obligations. In September 1997, $2.3 of this amount,
net of tax, was no longer required and accordingly, was reversed
through discontinued operations.
Financial Condition - September 30, 1997 Compared to December 31,1996
The following summarizes the cash flow activity for the first
nine months of 1997 compared to the first nine months of 1996.
1997 1996
Cash flow from operating activities $98.5 $136.6
Divestitures 197.8 79.2
Capital expenditures (39.3) (43.6)
Other investing activities 0.9 2.8
Cash flow from investing activities 159.4 38.4
Debt borrowings/(repayments) (64.5) (126.1)
Dividends paid (39.4) (35.6)
Purchase of common stock (100.0) (1.2)
Issuance of common stock 11.1 11.3
Cash flow from financing activities (192.8) (151.6)
Included in operating cash flow for 1997 and 1996 were
expenditures of $6.1 and $19.3, respectively, related to
previously divested operations and $6.2 and $4.3, respectively,
for severance pay.
Operating cash flow for the first nine months of 1997 decreased
in comparison to the first nine months of 1996 primarily due to
lower earnings, after adjusting for non-operating activities,
lower accounts receivable collections and lower accrued expenses
due to the decrease in disposition and restructuring accruals as
well as payment of other non-operating accruals.
In September 1997, the company announced its intention to spin
off its GS Networks unit and look at the possible disposition of
three other units. These four units accounted for approximately
18 percent of the company's 1996 net sales.
In December 1996, the Board of Directors approved a stock buy-
back program of up to $100.0 to offset the dilutive impact of
shares issued in connection with the convertible subordinated
notes redemption. On April 17, 1997, the company concluded the
buy-back program which resulted in the repurchase of
approximately 2.5 million shares. On June 19, 1997, the Board of
Directors approved a stock buy-back program of up to $150.0
subject to the consummation of the GSPG divestiture. On September
18, 1997, the Board of Directors approved an increase of this
program to $300.0. As of October 22, 1997, the company had
repurchased 2.1 million shares under this program for $89.4.
Total debt-to-total capitalization was 11.7 percent at September
30, 1997, down from 21.8 percent at year-end. Cash received from
operations and divestitures was used to pay down outstanding
commercial paper. Debt levels will increase as the company
repurchases shares under the current share repurchase program.
The company is well positioned to finance future working capital
requirements and capital expenditures through current earnings
and available credit facilities.
On April 7, 1997, the company sold $25.0 7.114 percent medium-
term senior notes that are due on April 8, 2002. On April 18,
1997, the company sold an additional $25.0 7.00 percent medium-
term senior notes that are due on October 18, 2000. The proceeds
were used to pay down floating rate commercial paper.
Other Matters
Since the company is a producer of capital goods and equipment,
its results can vary with the relative strength of the economy.
Demand for products in the Process Controls sector follows the
demand for capital goods orders. The Electrical Controls sector
depends upon several markets, principally the nonresidential
construction and computer equipment industries. The Industrial
Technology sector depends on several markets, primarily
automotive, mass transportation, and telecommunications
equipment. Mass transportation depends
upon continued federal and local government spending, and
telecommunications is dependent upon continued research and
development and the continued success
of new products. While no one marketplace or industry has a
significant impact on the company's operations or results, the
inherent pace of technological changes presents certain risks
that the company monitors carefully. Success within all of the
company's businesses is dependent upon the timely introduction
and acceptance of new products.
Forward-looking Statements
The company may from time to time make projections concerning
future operations and earnings. The company's forward-looking
statements are based on the company's current expectations, which
are subject to a number of risks and uncertainties that could
materially affect or reduce such operations and earnings. In
addition to the general factors identified in "Other Matters"
above, the primary factors that could specifically affect the
company's expectations include the failure of: (1) order rates
increasing as expected, (2) productivity improvements meeting or
exceeding budget, and (3) new products under development being
produced and accepted as anticipated.
PART II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
27.0 Financial Data Schedule
(b) Reports on Form 8-K:
Form 8-K dated September 9, 1997 related to the
disposition of the General Signal Pump Group
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
GENERAL SIGNAL CORPORATION
/s/ Raymond L. Arthur
Raymond L. Arthur
Vice President and Controller
Chief Accounting Officer
DATE: October 24, 1997
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
GENERAL SIGNAL CORPORATION
Raymond L. Arthur
Vice President and Controller
Chief Accounting Officer
DATE: October 24, 1997
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