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 JUNE 30, 1998 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 43,707,928
(Class) (Outstanding at July 24, 1998)
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
INDEX
Page No.
PART I - FINANCIAL INFORMATION:
Statement of Earnings -
Three Months Ended June 30, 1998 and 1997 3
Statement of Earnings -
Six Months Ended June 30, 1998 and 1997 4
Balance Sheet -
As of June 30, 1998 and December 31, 1997 5
Condensed Statement of Cash Flow -
Six Months Ended June 30, 1998 and 1997 6
Notes to Financial Statements 7
Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
PART II - OTHER INFORMATION 19
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
<TABLE>
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
Statement of Earnings
<CAPTION>
(In millions, except per-share data)
(Unaudited)
THREE MONTHS ENDED JUNE 30,
1998 1997
<S> <C> <C>
Net sales $401.6 $539.6
Cost of sales 273.6 375.9
Selling, general and administrative expenses 82.6 101.7
356.2 477.6
Operating earnings 45.4 62.0
Equity in earnings of EGS 10.0 - -
Interest expense, net (5.4) (4.6)
Earnings before income taxes 50.0 57.4
Income taxes 19.2 23.0
Net earnings $30.8 $34.4
Basic earnings per share $0.70 $0.68
Diluted earnings per share $0.70 $0.68
Dividends declared per share $0.27 $0.255
See accompanying notes to financial statements.
</TABLE>
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
<TABLE>
Statement of Earnings
<CAPTION>
(In millions, except per-share data)
(Unaudited)
SIX MONTHS ENDED JUNE 30,
1998 1997
<S> <C> <C>
Net sales $776.1 $1,045.2
Cost of sales 538.5 733.2
Selling, general and administrative expenses 161.1 206.1
699.6 939.3
Operating earnings 76.5 105.9
Equity in earnings of EGS 20.0 - -
Interest expense, net (8.6) (8.0)
Earnings before income taxes 87.9 97.9
Income taxes 33.8 39.2
Net earnings $54.1 $58.7
Basic earnings per share $1.20 $1.15
Diluted earnings per share $1.19 $1.14
Dividends declared per share $0.54 $0.51
See accompanying notes to financial statements.
</TABLE>
<TABLE>
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
Balance Sheet
(In millions)
<CAPTION>
(Unaudited) (Audited)
JUNE 30, DECEMBER 31,
ASSETS 1998 1997
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 39.5 $ 50.0
Accounts receivable, net 279.1 285.4
Inventories, net 163.5 156.8
Prepaid expenses and other current assets 13.7 23.2
Deferred income taxes 47.4 52.7
Total current assets 543.2 568.1
Property, plant and equipment, net of accumulated
depreciation and amortization 237.9 240.7
Intangibles, net of accumulated amortization 258.1 264.3
Investment in EGS 142.7 133.1
Pension asset 139.3 127.5
Other assets 55.1 54.3
Total assets $1,376.3 $1,388.0
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current
maturities of long-term debt $ 9.2 $ 9.0
Accounts payable 128.4 142.7
Accrued expenses 179.5 184.4
Income taxes 28.8 40.4
Total current liabilities 345.9 376.5
Long-term debt, less current maturities 364.8 207.4
Accrued post-retirement and post-employment
obligations 107.0 112.4
Deferred income taxes 57.8 50.3
Other liabilities 11.1 11.7
Total long-term liabilities 540.7 381.8
Shareholders' equity:
Common stock 78.7 78.5
Additional paid-in capital 368.9 367.2
Retained earnings 766.3 746.7
Accumulated other comprehensive loss (14.4) (11.8)
Common stock in treasury (709.8) (550.9)
Total shareholders' equity 489.7 629.7
Total liabilities and shareholders' equity $1,376.3 $1,388.0
See accompanying notes to financial statements.
</TABLE>
<TABLE>
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
Condensed Statement of Cash Flow
(In millions)
(Unaudited)
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1998 1997
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net earnings $ 54.1 $ 58.7
Adjustments to reconcile net earnings
to net cash from operating activities
Equity in earnings of EGS (20.0) - -
Deferred income taxes 12.9 14.8
Depreciation and amortization 29.3 35.6
Pension credits (9.0) (6.5)
Other, net (6.6) (1.1)
Changes in assets and liabilities, net of
effects from acquisitions and divestitures (25.8) (43.9)
Net cash from operating activities 34.9 57.6
CASH FLOW FROM INVESTING ACTIVITIES:
Divestitures 1.9 7.3
Capital expenditures (24.6) (26.3)
Other, net 0.8 1.5
Net cash from investing activities (21.9) (17.5)
CASH FLOW FROM FINANCING ACTIVITIES:
Net change in short and long-term
borrowings 157.6 84.7
Dividends paid (24.7) (26.5)
Issuance of common stock 3.2 8.3
Purchase of common stock (159.6) (100.0)
Net cash from financing activities (23.5) (33.5)
Net change in cash and cash equivalents (10.5) 6.6
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 50.0 17.7
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 39.5 $ 24.3
See accompanying notes to financial statements.
</TABLE>
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
1997 Annual Report on Form 10-K. The results of operations for the six-
month period ended June 30, 1998 are not necessarily indicative of the
results of operations that may be expected for the full year.
The financial information as of June 30, 1998 should be read in conjunction
with the financial statements contained in the company's 1997 Annual Report
on Form 10-K.
2. Certain reclassifications have been made to the 1997 financial statements
to conform with the 1998 presentation.
3. INVENTORIES
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
(In millions)
<S> <C> <C>
Finished goods $ 46.7 $43.9
Work in process 49.3 38.3
Raw material and purchased parts 80.3 87.3
Total FIFO cost 176.3 169.5
Excess of FIFO cost over LIFO
inventory value (12.8) (12.7)
Net carrying value $ 163.5 $ 156.8
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
(In millions)
<S> <C> <C>
Property, plant and equipment, at cost $ 584.6 $ 576.3
Accumulated depreciation and amortization (346.7) (335.6)
Property, plant and equipment, net $ 237.9 $ 240.7
</TABLE>
5. CAPITAL STOCK
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
(In millions)
<S> <C> <C>
COMMON STOCK:
Shares authorized 150.0 150.0
Shares issued 65.0 65.0
Held in treasury (21.4) (17.9)
</TABLE>
6. COMPREHENSIVE INCOME
As of January 1, 1998, the company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130). SFAS No.
130 establishes rules for the reporting and display of comprehensive income
and its components. The adoption of this statement had no impact on the
company's net income or shareholders' equity. SFAS No. 130 requires foreign
currency translation adjustments to be included in a presentation of other
comprehensive income. Prior year financial statements have been reclassified
to conform to the requirements of SFAS No. 130.
Total comprehensive income and its components, net of related tax, for the
three and six-month periods ended June 30 were as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
1998 1997 1998 1997
(In millions)
<S> <C> <C> <C> <C>
Net income $30.8 $34.4 $54.1 $58.7
Foreign currency translation
adjustments (3.7) - - (2.6) (4.1)
Comprehensive income $27.1 $34.4 $51.5 $54.6
</TABLE>
The components of accumulated other comprehensive loss, net of related tax,
were as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
(In millions)
<S> <C> <C>
Foreign currency translation adjustments $(12.7) $ (10.1)
Minimum pension liability adjustment (1.7) (1.7)
Accumulated other comprehensive loss $(14.4) $ (11.8)
</TABLE>
7. BUSINESS SEGMENT INFORMATION
<TABLE>
<CAPTION>
Three Months Ended June 30,
1998 1997
(In millions)
<S> <C> <C>
NET SALES:
Process Controls (a) $ 125.3 $ 193.7
Electrical Controls (b) 179.8 257.0
Industrial Technology 96.5 88.9
$ 401.6 $ 539.6
OPERATING EARNINGS:
Process Controls (a) $ 19.8 $ 28.3
Electrical Controls (b) 18.6 26.9
Industrial Technology 15.8 15.4
Total operating earnings before unallocated
expenses, equity earnings and interest 54.2 70.6
Equity in earnings of EGS (b) 10.0 - -
Net interest expense (5.4) (4.6)
Unallocated expenses (8.8) (8.6)
Earnings before income taxes $ 50.0 $ 57.4
(a) In August 1997, the company sold the General Signal Pump Group (GSPG), a
unit of the Process Controls sector.
(b) In September 1997, the company contributed the net assets of General Signal
Electrical Group (GSEG), a unit of the Electrical Controls sector, to the
EGS Electrical Group (EGS).
Six Months Ended June 30,
1998 1997
(In millions)
<S> <C> <C>
NET SALES:
Process Controls (a) $ 244.4 $ 368.4
Electrical Controls (b) 343.2 493.0
Industrial Technology 188.5 183.8
$ 776.1 $ 1,045.2
OPERATING EARNINGS:
Process Controls (a) $ 33.5 $ 45.4
Electrical Controls (b) 31.0 45.6
Industrial Technology 30.6 33.7
Total operating earnings before unallocated
expenses, equity earnings and interest 95.1 124.7
Equity in earnings of EGS (b) 20.0 - -
Net interest expense (8.6) (8.0)
Unallocated expenses (18.6) (18.8)
Earnings before income taxes $ 87.9 $ 97.9
(a) In August 1997, the company sold the General Signal Pump Group (GSPG), a
unit of the Process Controls sector.
(b) In September 1997, the company contributed the net assets of General Signal
Electrical Group (GSEG), a unit of the Electrical Controls sector, to the
EGS Electrical Group (EGS).
</TABLE>
8. SUPPLEMENTAL INFORMATION - STATEMENT OF CASH FLOW
<TABLE>
<CAPTION>
Six Months Ended June 30,
1998 1997
(In millions)
<S> <C> <C>
The company had the following non-cash
financing activity:
Conversion of convertible debt into
common stock $ - - $ 39.3
</TABLE>
9. EARNINGS PER SHARE
The following tables set forth the computation of basic and diluted
earnings per share (in millions, except for per-share data):
<TABLE>
<CAPTION>
Three Months Ended June 30,
1998 1997
<S> <C> <C>
Numerator:
Numerator for basic and diluted earnings
per share - net income $ 30.8 $ 34.4
Denominator:
Denominator for basic earnings per
share - weighted-average shares 43.8 50.3
Effect of dilutive securities:
Employee stock options 0.2 0.2
Restricted stock 0.2 (0.1)
Dilutive potential common shares 0.4 0.1
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 44.2 50.4
Basic earnings per share $ 0.70 $ 0.68
Diluted earnings per share $ 0.70 $ 0.68
Six Months Ended June 30,
1998 1997
<S> <C> <C>
Numerator:
Numerator for basic and diluted earnings
per share - net income $ 54.1 $ 58.7
Effect of dilutive securities:
5.75 percent convertible
subordinated notes - - 0.2
Numerator for diluted earnings per
share - income available to common
shareholders after assumed
conversion $ 54.1 $ 58.9
Denominator:
Denominator for basic earnings per
share - weighted-average shares 45.2 51.2
Effect of dilutive securities:
Employee stock options 0.2 0.2
5.75 percent convertible
subordinated notes - - 0.1
Restricted stock 0.2 - -
Dilutive potential common shares 0.4 0.3
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 45.6 51.5
Basic earnings per share $ 1.20 $ 1.15
Diluted earnings per share
$ 1.19 $ 1.14
</TABLE>
10. REPURCHASE OF SHARES
On June 19, 1997 the Board of Directors approved a stock buy-back program
of up to $150.0 million and on September 18, 1997, the Board of Directors
approved an increase of this program to $300.0 million. As of April 15,
1998, the program was completed with the total of 6.8 million shares
repurchased for $300.0 million.
11. EGS JOINT VENTURE
The company owns a 47.5 percent interest in EGS Electrical Group, LLC
(EGS), a joint venture with Emerson Electric Company. The company accounts
for its investment in EGS under the equity method of accounting. Effective
January 1, 1998, the company began accounting for its investment in EGS on
a three-month lag basis. EGS' fiscal year-end is September 30, 1998. EGS'
results of operations were the following (in millions):
<TABLE>
<CAPTION>
EGS: Jan. 1, 1998 to October 1, 1997 to March
March 31, 1998 31, 1998
<S> <C> <C>
Net sales $136.6 $272.1
Gross profit 52.9 105.7
Pre-tax income 20.7 41.6
</TABLE>
The company's investment in EGS at June 30, 1998 was approximately $17
million less than its equity in the joint venture's net assets at March 31,
1998. The difference between the company's investment and EGS' net assets
is being amortized on a straight-line basis over an estimated economic life
of 40 years.
Condensed balance sheet information of EGS as of March 31, 1998 was as
follows (in millions):
Current assets $152.8
Noncurrent assets 262.9
Current liabilities 64.3
Noncurrent liabilities 16.0
12. MERGER WITH SPX CORPORATION
On July, 20, 1998, the company announced that it had signed a definitive
merger agreement for SPX Corporation (SPX) to acquire the company for cash
and SPX shares. The aggregate purchase price is valued at approximately $2
billion based on the last reported trading price of SPX's common stock
immediately prior to the public announcement of the execution of the merger
agreement. SPX will also assume approximately $335 million of the
company's debt, net of cash. Under the terms of the merger agreement, the
merger consideration to be paid to the company's shareholders will consist
of 60 percent of SPX stock and 40 percent of cash in the aggregate, with
each shareholder able to choose among three options - all cash ($45.00 per
share), all SPX stock (0.6977 shares of SPX common stock per share of the
company's common stock), or a 40/60 cash/stock combination ($18.00 and
0.4186 shares of SPX common stock per share of the company's common stock),
subject to proration if the all cash or all stock elections are over
subscribed. SPX has received commitments, underwritten by Chase Manhattan
Bank, to provide up to $1.7 billion of financing to be used to fund the
cash portion of the merger and to refinance existing indebtedness of the
company and SPX. The transaction, which is subject to shareholder
approvals, antitrust clearance and other customary conditions, is expected
to close early in the fourth quarter of 1998.
The transaction will be accounted for as a reverse acquisition as the
shareholders of the company will own a majority of the shares of the
combined company upon completion of the transaction. Accordingly, for
accounting purposes, SPX will be treated as the acquired company and the
company will be considered to be the acquiring company. The purchase price
will be allocated to the assets and liabilities of SPX based on their
estimated fair market values at the acquisition date. Under reverse
acquisition accounting, the purchase price of SPX will be based on the fair
market value of SPX's common stock at July 19, 1998, the date of the
signing of the definitive merger agreement. The cash portion of the
purchase price will be accounted for as a dividend by the combined company.
SPX is a global provider of Vehicle Service Solutions to franchised dealers
and independent service locations, Service Support to vehicle manufacturers
and Vehicle Components to the worldwide motor vehicle industry.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in millions, except per-share data)
RESULTS OF OPERATIONS - SECOND QUARTER 1998 COMPARED TO SECOND QUARTER 1997
<TABLE>
<CAPTION>
1998 1997 Change
<S> <C> <C> <C>
Net sales $401.6 $539.6 (25.6%)
Gross profit 128.0 163.7 (21.8%)
Margin percent 31.9% 30.3%
Selling, general and
administrative expenses 82.6 101.7 (18.8%)
Percent of sales 20.6% 18.8%
Operating earnings 45.4 62.0 (26.8%)
Equity in earnings of EGS 10.0 - - - -
Interest expense, net (5.4) (4.6) 17.4%
Earnings before income taxes 50.0 57.4 (12.9%)
Income taxes 19.2 23.0 (16.5%)
Net earnings 30.8 34.4 (10.5%)
Net earnings per share:
Basic $0.70 $0.68 2.9%
Diluted $0.70 $0.68 2.9%
</TABLE>
BUSINESS DIVESTITURES: In August 1997, the company sold the General Signal Pump
Group (GSPG), a unit of the Process Controls sector, and in September 1997, the
company contributed the net assets of General Signal Electrical Group (GSEG), a
unit of the Electrical Controls sector, to the EGS Electrical Group (EGS), a
joint venture with Emerson Electric's Appleton Electric operations. The company
accounts for its investment in EGS under the equity method of accounting.
Effective January 1, 1998, the company began accounting for its investment in
EGS on a three-month lag basis. This change did not have a material impact on
the company's results of operations.
NET SALES: Consolidated sales decreased 25.6 percent from 1997 levels primarily
due to the sale of GSPG and contribution of the net assets of GSEG to EGS.
Adjusted for the disposition of GSPG and the contribution of GSEG's net assets
to EGS, net sales decreased approximately one percent, reflecting lower volume
in the Process Controls sector, offset somewhat by increased volume in the
Electrical Controls and Industrial Technology sectors. International sales
represented approximately 27 percent of total net sales in 1998 versus 22
percent in 1997. The increase resulted from the disposition of GSPG and the
contribution of GSEG to EGS. Historically, international sales for GSPG and GSEG
were a small portion of their total sales. Additionally, international sales
increased due to higher sales of new channel switch products and feed systems to
Japan.
Process Controls sector sales were $125.3 in the second quarter of 1998 as
compared to $193.7 in the same period in 1997. The majority of the decrease was
due to the sale of GSPG, which recorded sales of approximately $55 in the second
quarter of 1997. Sector sales were also impacted by lower volume of mixers and
industrial furnaces and ovens.
Sales in the Electrical Controls sector decreased 30.0 percent to $179.8 from
$257.0 in the same period of last year. The decrease was due to the company's
contribution of GSEG's net assets to EGS. GSEG's sales in the second quarter of
1997 were approximately $79. Adjusted for the contribution of GSEG's net assets
to EGS, net sales increased approximately one percent, as a result of market
share gains in U.S. fire detection systems and strong sales of broadcast systems
and equipment. This increase was partially offset by lower volume of electrical
motors.
Industrial Technology sector sales increased 8.5 percent to $96.5 versus $88.9
in the same period in 1997. Growth in new channel switch product sales was
marginally offset by lower sales of automotive components due to the General
Motors strike.
GROSS PROFIT: 1998 gross profit as a percentage of sales increased to 31.9
percent from 30.3 percent in the second quarter of 1997. Adjusted for the
disposition of GSPG and the contribution of GSEG's net assets to EGS, second
quarter 1997 gross profit as a percentage of sales was 30.9 percent. The
increase was due to productivity improvements, material cost reductions and
favorable mix of products sold.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses as a percentage of sales increased to 20.6 percent in
1998 compared to 18.8 percent in the second quarter of 1997. Second quarter 1998
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 $5.0 in 1998 and $2.9 in 1997.
OPERATING EARNINGS: Consolidated operating earnings decreased 26.8 percent from
second quarter 1997 due to the sale of GSPG and contribution of the net assets
of GSEG to EGS. Excluding these factors, operating earnings increased
approximately one percent.
Operating earnings for the Process Controls sector was $19.8 compared to $28.3
for the same period in 1997. Adjusting for the sale of GSPG, operating earnings
decreased approximately ten percent. The decrease was primarily due to lower
sales volume.
Electrical Controls sector operating earnings decreased to $18.6, versus $26.9
in the same period in 1997. The decrease was due to the company's contribution
of GSEG's net assets to EGS. Adjusting for the GSEG contribution to EGS,
operating earnings increased approximately 15 percent over the prior year,
reflecting higher volume and productivity improvements.
Industrial Technology sector operating earnings increased 2.6 percent to $15.8
versus $15.4 in the same period in 1997. The higher sales volume resulted in the
increased operating earnings.
INTEREST EXPENSE: Net interest expense increased 17.4 percent to $5.4 versus
$4.6 in the same period of 1997 due to higher debt balances resulting from the
stock buy-back program.
NET EARNINGS: Net earnings were $30.8 or $0.70 per share in 1998 compared to
$34.4 or $0.68 per share in 1997. 1998 earnings per share reflect lower average
shares versus the second quarter of 1997 due to the use of asset sale proceeds
and incremental borrowings to fund the stock buy-back program. The company's
effective tax rate for the quarter was 38.5 percent in 1998 versus 40.0 percent
in the second quarter of 1997. The effective tax rate decreased due to increased
tax credits.
RESULTS OF OPERATIONS - SIX MONTHS 1998 COMPARED TO SIX MONTHS 1997
<TABLE>
<CAPTION>
1998 1997 Change
<S> <C> <C> <C>
Net sales $776.1 $1,045.2 (25.7%)
Gross profit 237.6 312.0 (23.8%)
Margin percent 30.6% 29.9%
Selling, general and
administrative expenses 161.1 206.1 (21.8%)
Percent of sales 20.8% 19.7%
Operating earnings 76.5 105.9 (27.8%)
Equity in earnings of EGS 20.0 - - - -
Interest expense, net (8.6) (8.0) 7.5%
Earnings before income taxes 87.9 97.9 (10.2%)
Income taxes 33.8 39.2 (13.8%)
Net earnings 54.1 58.7 (7.8%)
Net earnings per share:
Basic $1.20 $1.15 4.3%
Diluted $1.19 $1.14 4.4%
</TABLE>
NET SALES: Consolidated sales decreased 25.7 percent from 1997 levels primarily
due to the sale of GSPG and contribution of the net assets of GSEG to EGS.
Adjusted for the disposition of GSPG and the contribution of GSEG's net assets
to EGS, net sales decreased approximately one percent, reflecting lower volume
in the Process Controls sector. International sales represented approximately 27
percent of total net sales in 1998 versus 23 percent in 1997. The increase
resulted from the disposition of GSPG and the contribution of GSEG to EGS.
Historically, international sales for GSPG and GSEG were a small portion of
their total sales. Additionally, international sales increased due to higher
sales of new channel switch products.
Process Controls sector sales were $244.4 in the first half of 1998 as compared
to $368.4 in the same period in 1997. The majority of the decrease was due to
the sale of GSPG, which recorded sales of approximately $104 in the first half
of 1997. Sector sales were also impacted by lower volume of mixers.
Sales in the Electrical Controls sector decreased 30.4 percent to $343.2 from
$493.0 in the same period of last year. The decrease was due to the company's
contribution of GSEG's net assets to EGS. GSEG's sales in the first half of 1997
were approximately $155. Adjusted for the contribution of GSEG's net assets to
EGS, net sales increased approximately two percent, as a result of strong sales
of fire detection systems, medium power transformers and broadcast systems and
equipment in the U.S. Partially offsetting these increases was lower volume of
electrical motors.
Industrial Technology sector sales increased 2.5 percent to $188.5 versus $183.8
in the same period in 1997. An increase in new channel switch product sales were
partially offset by lower telecommunication equipment sales and lower sales of
automotive components due to the General Motors strike.
GROSS PROFIT: 1998 gross profit as a percentage of sales increased to 30.6
percent from 29.9 percent in the first half of 1997. Adjusted for the
disposition of GSPG and the contribution of GSEG's net assets to EGS, gross
profit as a percentage of sales for the first half of 1997 was 30.4 percent. The
increase was due to productivity improvements, material cost reductions and a
favorable mix of products sold.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES: Selling, general and
administrative expenses as a percentage of sales increased to 20.8 percent in
1998 compared to 19.7 percent in the first half of 1997. 1998 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
$9.0 in 1998 and $6.5 in 1997.
OPERATING EARNINGS: Consolidated operating earnings decreased 27.8 percent from
the first half of 1997 primarily due to the sale of GSPG and contribution of the
net assets of GSEG to EGS. Excluding these factors, operating earnings decreased
approximately two percent.
Operating earnings for the Process Controls sector was $33.5 compared to $45.4
for the same period in 1997. Adjusting for the sale of GSPG, operating earnings
decreased approximately 12 percent. The decrease was due to the lower sales
volume.
Electrical Controls sector operating earnings decreased to $31.0, versus $45.6
in the same period in 1997. The decrease was due to the company's contribution
of GSEG's net assets to EGS. Adjusting for the GSEG contribution to EGS,
operating earnings increased approximately 22 percent over the prior year,
reflecting higher volume and productivity improvements.
Industrial Technology sector operating earnings decreased to $30.6 versus $33.7
in the same period in 1997. The decrease was due to lower sales of high margin
telecommunication equipment as well as higher product demonstration fees,
professional services, travel and staffing related expenses.
INTEREST EXPENSE: Net interest expense increased 7.5 percent to $8.6 versus $8.0
in the same period of 1997. Higher average debt levels, resulting from the stock
buy-back program, caused the increase in interest expense.
NET EARNINGS: Net earnings were $54.1 or $1.20 per share ($1.19 diluted
earnings per share) in 1998 compared to $58.7 or $1.15 per share ($1.14 diluted
earnings per share) in 1997. 1998 earnings per share reflects lower average
shares versus the first half of 1997 due to the use of asset sale proceeds and
incremental borrowings to fund the stock buy-back program. The company's
effective tax rate for the first half of 1998 was 38.5 percent versus 40.0
percent in the first half of 1997. The effective tax rate decreased due to
increased tax credits.
FINANCIAL CONDITION - JUNE 30, 1998 COMPARED TO DECEMBER 31, 1997
The following summarizes the cash flow activity for the first six months of 1998
compared to the first six months of 1997.
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Cash flow from operating activities $34.9 $57.6
Divestitures 1.9 7.3
Capital expenditures (24.6) (26.3)
Other investing activities 0.8 1.5
Cash flow from investing activities (21.9) (17.5)
Debt borrowings/(repayments), net 157.6 84.7
Dividends paid (24.7) (26.5)
Issuance of common stock 3.2 8.3
Purchase of common stock (159.6) (100.0)
Cash flow from financing activities (23.5) (33.5)
Net changes in cash and cash equivalents (10.5) 6.6
Total debt to capitalization 43.3% 25.9%
</TABLE>
Included in operating cash flow for 1998 and 1997 were expenditures of $2.7 and
$3.4, respectively, related to previously divested operations and $4.7 and $3.7,
respectively, for severance pay.
Operating cash flow for the first six months of 1998 decreased in comparison to
the first six months of 1997 primarily due to the reinvestment of EGS' earnings
into the business and lower change in working capital.
On June 19, 1997, the Board of Directors approved a stock buy-back program of up
to $150.0 and on September 18, 1997, the Board of Directors approved an increase
of this program to $300.0. The program was completed in the second quarter with
a total of 6.8 million shares repurchased for $300.0.
Total debt-to-total capitalization was 43.3 percent at June 30, 1998, up from
25.6 percent at year-end. Higher debt levels and lower equity since year-end,
due to the stock buy-back program, caused the ratio to increase. The company is
well positioned to finance future working capital requirements and capital
expenditures through current earnings and available credit facilities.
OTHER MATTERS
On July, 20, 1998, the company announced that it had signed a definitive merger
agreement for SPX Corporation (SPX) to acquire the company for cash and SPX
shares. The aggregate purchase price is valued at approximately $2 billion
based on the last reported trading price of SPX's common stock immediately prior
to the public announcement of the execution of the merger agreement. SPX will
also assume approximately $335 million of the company's debt, net of cash.
Under the terms of the merger agreement, the merger consideration to be paid to
the company's shareholders will consist of 60 percent of SPX stock and 40
percent of cash in the aggregate, with each shareholder able to choose among
three options - all cash ($45.00 per share), all SPX stock (0.6977 shares of SPX
common stock per share of the company's common stock), or a 40/60 cash/stock
combination ($18.00 and 0.4186 shares of SPX common stock per share of the
company's common stock), subject to proration if the all cash or all stock
elections are over subscribed. SPX has received commitments, underwritten by
Chase Manhattan Bank, to provide up to $1.7 billion of financing to be used to
fund the cash portion of the merger and to refinance existing indebtedness of
the company and SPX. The transaction, which is subject to shareholder
approvals, antitrust clearance and other customary conditions, is expected to
close early in the fourth quarter of 1998.
The transaction will be accounted for as a reverse acquisition as the
shareholders of the company will own a majority of the shares of the combined
company upon completion of the transaction. Accordingly, for accounting
purposes, SPX will be treated as the acquired company and the company will be
considered to be the acquiring company. The purchase price will be allocated to
the assets and liabilities of SPX based on their estimated fair market values at
the acquisition date. Under reverse acquisition accounting, the purchase price
of SPX will be based on the fair market value of SPX's common stock at July 19,
1998, the date of the signing of the definitive merger agreement. The cash
portion of the purchase price will be accounted for as a dividend by the
combined company.
SPX is a global provider of Vehicle Service Solutions to franchised dealers and
independent service locations, Service Support to vehicle manufacturers and
Vehicle Components to the worldwide motor vehicle industry.
In September 1997, the company announced its intention to explore the spin-off
of its GS Networks unit. As a result of the proposed merger with SPX, the spin-
off has been terminated.
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." Statement No.
133 will require the company to record derivatives on the balance sheet as
assets or liabilities, measured at fair value, and gains or losses resulting
from the changes in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it qualifies for hedge
accounting. The company is evaluating the standard and does not expect it to
have a material impact on the financial results or condition of the company.
SAFE HARBOR; FORWARD-LOOKING STATEMENTS
This 10-Q contains various forward-looking statements and includes assumptions
concerning the company's operations, future results and prospects. 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 connection with the "safe
harbor" provisions of the Private Securities Reform Act of 1995, the company
provides the following cautionary statement identifying important economic,
political and technological factors, among others the absence of which could
cause the actual results to differ materially from those set forth in or implied
by the forward-looking statements and related assumptions. Such factors include
the failure of: (1) a continuation of the increased order rate experienced
during 1997 and first half of 1998, (2) productivity improvements meeting or
exceeding budget, (3) new products under development being produced and accepted
as anticipated, (4) stable governments and business conditions in emerging
economies and (5) stable exchange rates between currencies in which the company
is buying or selling materials and products. Further, 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 product
introductions. While no one marketplace or industry has a major impact on the
company's operations or results, the inherent pace of technological changes
presents certain risks that the company monitors carefully.
PART II: OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders of the Registrant (the "Meeting") was
held on April 16, 1998.
(b) The Registrant solicited proxies for the Meeting pursuant to Regulation
14; there was no solicitation in opposition to management's nominees for
directors as listed in the Proxy Statement, and all such nominees were
elected.
(c) The following describes the matters voted upon at the Meeting and sets
forth the number of votes cast for, against or withheld and the number
of abstentions as to each such matter:
(i) Election of directors:
<TABLE>
<CAPTION>
Nominee For Withheld
<S> <C> <C>
H. Kent Bowen 39,980,594 638,540
Michael D. Lockhart 39,866,020 753,114
Ursula F. Fairbairn 39,979,174 639,960
</TABLE>
The directors whose term of office as a director continued after the
Meeting are Van C. Campbell, Michael A. Carpenter, Robert D. Kennedy,
Ronald. E. Ferguson and John R. Selby.
(ii) Authorization of appointment of Ernst & Young LLP as independent
auditors for 1998:
For Against Abstain
40,371,102 163,964 84,067
ITEM 5. OTHER INFORMATION
Shareholders wishing to bring a proposal before the 1999 Annual Meeting
of the Shareholders (but not include it in the company's Proxy
Statement) must cause written notice of the proposal to be received by
the Secretary of the company at the principal executive offices at One
High Ridge Park, P.O. Box 10010, Stamford, Connecticut 06904 by no
later than February 2, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
27.0 Financial Data Schedule
Reports on Form 8-K:
Form 8-K dated July 23, 1998 related to merger with SPX Corporation.
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: JULY 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND THE STATEMENT OF EARNINGS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 39,500
<SECURITIES> 0
<RECEIVABLES> 293,100
<ALLOWANCES> 14,000
<INVENTORY> 163,500
<CURRENT-ASSETS> 543,200
<PP&E> 584,600
<DEPRECIATION> 346,700
<TOTAL-ASSETS> 1,376,300
<CURRENT-LIABILITIES> 345,900
<BONDS> 364,800
0
0
<COMMON> 78,700
<OTHER-SE> 411,000
<TOTAL-LIABILITY-AND-EQUITY> 1,376,300
<SALES> 776,100
<TOTAL-REVENUES> 776,100
<CGS> 538,500
<TOTAL-COSTS> 699,600
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 700
<INTEREST-EXPENSE> 8,600
<INCOME-PRETAX> 87,900
<INCOME-TAX> 33,800
<INCOME-CONTINUING> 54,100
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 54,100
<EPS-PRIMARY> 1.20
<EPS-DILUTED> 1.19
</TABLE>
