FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission File Number 1-6948
SPX CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 38-1016240
(State of Incorporation) (I.R.S. Employer Identification No.)
700 Terrace Point Drive, Muskegon, Michigan 49443-3301
(Address of Principal Executive Office)
Registrant's Telephone Number including Area Code (616) 724-5000
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
Common shares outstanding July 30, 1999 -- 31,170,248
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
SPX CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in millions)
(Unaudited)
June 30, December 31,
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 49.3 $ 70.3
Accounts receivable 466.8 458.7
Inventories 289.2 282.1
Deferred income tax assets and refunds 87.1 124.1
Prepaid and other current assets 39.9 40.5
--------- ---------
Total current assets 932.3 975.7
Property, plant and equipment, at cost 828.2 791.1
Accumulated depreciation (385.0) (358.0)
--------- ---------
Net property, plant and equipment 443.2 433.1
Goodwill and intangible assets, net 1,187.5 1,219.5
Investment in EGS 81.3 81.5
Other assets 246.5 258.5
--------- ---------
Total assets $ 2,890.8 $ 2,968.3
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current
maturities of long-term debt $ 142.4 $ 49.1
Accounts payable 238.0 226.6
Accrued expenses 344.6 396.0
Income taxes payable 13.1 7.7
--------- ---------
Total current liabilities 738.1 679.4
Long-term liabilities 207.4 214.5
Deferred income taxes 231.0 217.4
Long-term debt 1,218.1 1,466.5
Shareholders' equity:
Common stock 353.0 351.7
Paid-in capital 485.7 481.7
Retained deficit (40.6) (113.2)
Common stock in treasury (259.0) (286.4)
Unearned compensation (25.0) (32.2)
Accumulated other comprehensive income (17.9) (11.1)
Total shareholders' equity 496.2 390.5
--------- ---------
Total liabilities and shareholders' $ 2,890.8 $ 2,968.3
equity
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<TABLE>
<CAPTION>
SPX CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in millions, except per share amounts)
(Unaudited)
Three months Ended Six months Ended
June 30, June 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 671.4 $ 401.7 $1,318.3 $ 776.1
Costs and expenses:
Cost of products sold 446.5 257.0 879.4 505.8
Selling, general and administrative 125.3 96.1 258.1 187.6
Goodwill/intangible amortization 10.4 3.2 21.0 6.1
Special charges 5.5 - 20.1 -
-------- -------- -------- --------
Operating income $ 83.7 $ 45.4 $ 139.7 $ 76.6
Other income (expense), net 8.0 - 38.3 -
Equity in earnings of EGS 8.3 10.0 17.6 20.0
Interest expense, net (30.0) (5.4) (62.1) (8.6)
-------- -------- -------- --------
Income before income taxes $ 70.0 $ 50.0 $ 133.5 $ 88.0
Provision for income taxes (28.4) (19.2) (61.0) (33.8)
-------- -------- -------- --------
Net income $ 41.6 $ 30.8 $ 72.5 $ 54.2
Basic income per share $ 1.35 $ 1.68 $ 2.37 $ 2.86
Weighted average number of basic
common shares outstanding 30.702 18.344 30.588 18.950
Diluted income per share $ 1.34 $ 1.67 $ 2.35 $ 2.84
Weighted average number of diluted
common shares outstanding 31.083 18.488 30.895 19.082
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
<TABLE>
<CAPTION>
SPX CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in millions)
(Unaudited)
Six Months Ended
June 30,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 72.5 $ 54.2
Adjustments to reconcile net income to net
cash from operating activities -
Special charges 20.1 -
Earnings of EGS, net of distributions 0.2 (20.0)
Gain on business divestitures (29.0) -
Deferred income taxes 18.8 12.9
Depreciation 31.2 23.2
Amortization of goodwill and intangibles 21.0 6.1
Pension credits (12.2) (9.0)
Other, net 8.1 (0.3)
Change in assets and liabilities, net of
effect from acquisitions and divestitures:
Accounts receivable (16.8) 6.3
Inventories (13.1) (6.7)
Accounts payable 14.7 (14.3)
Accrued expenses (53.1) (4.9)
Other, net 22.8 (12.6)
-------- --------
Net cash from operating activities 85.2 34.9
Cash flows from investing activities:
Proceeds from business divestitures 64.2 -
Capital expenditures (54.1) (24.6)
Other, net 6.6 2.7
-------- --------
Net cash from investing activities 16.7 (21.9)
Cash flows from financing activities:
Net payments under revolving credit agreement (10.0) -
Net borrowings (payments) under other debt agreements (145.1) 157.6
Purchases of common stock - (159.0)
Common stock issued under stock incentive programs 3.7 3.2
Treasury stock issued to defined benefit plans 28.5 -
Dividends paid - (25.3)
-------- --------
Net cash from financing activities (122.9) (23.5)
-------- --------
Net increase (decrease) in cash and equivalents (21.0) (10.5)
Cash and equivalents, beginning of period 70.3 50.0
-------- --------
Cash and equivalents, end of period $ 49.3 $ 39.5
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
SPX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
June 30, 1999 (Unaudited)
(in millions, except per share data)
1. The interim financial statements reflect the adjustments which are, in the
opinion of management, necessary to a fair statement of the results of the
interim periods presented. Adjustments are of a normal recurring nature.
The preparation of SPX Corporation's ("SPX" or the "company") consolidated
condensed financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the consolidated
condensed financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
The financial information as of June 30, 1999 should be read in conjunction
with the consolidated financial statements contained in the company's 1998
Annual Report on Form 10-K.
2. On October 6, 1998 (the "Merger Date"), General Signal Corporation ("GSX")
merged into a subsidiary of SPX Corporation (the "Merger"). On an aggregate
basis, GSX shareholders received 0.4186 share of SPX common stock and
$18.00 in cash for each share owned of GSX common stock. In total,
approximately 18.236 shares of SPX common stock and $784.2 in cash were
exchanged for the outstanding common stock of GSX. Outstanding restricted
stock and stock options of GSX were either redeemed through change of
control payments or terminated.
The Merger was accounted for as a reverse acquisition whereby GSX was
treated as the acquirer and SPX as the acquiree, because GSX shareholders
owned a majority of the company as of the Merger Date and GSX was
approximately twice the size of SPX. Purchase accounting was performed on
SPX based upon its fair market value at the transaction date. The cash
portion of the consideration was accounted for as a dividend by the
company.
The fair market value of SPX was based on the average per share value of
SPX's common stock near July 17, 1998, the date that the merger agreement
was signed. Additionally, since the stock options of SPX continued to be
outstanding, the fair value of these options was included in determining
the valuation of SPX.
The valuation of SPX was $776.6. A summary of assets and liabilities
acquired, at estimated fair market value was as follows:
Current assets $ 357.2
PP&E 174.3
In-process technology 9.0
Goodwill 679.0
Intangibles 276.8
Other assets 13.0
---------
Total assets 1,509.3
Current liabilities (240.0)
Long-term liabilities (240.8)
Long-term debt (251.9)
---------
Fair market value of SPX $ 776.6
=========
The accompanying consolidated financial statements include the results of
GSX for all periods and the results of SPX beginning on the Merger Date.
The following unaudited 1998 pro forma selected financial data for the six
months ended June 30, 1998 reflect the Merger and related financing as if
they had occurred as the beginning of 1998. The unaudited pro forma
financial data does not purport to represent what the company's results
would actually have been had the transactions in fact occurred as of an
earlier date, or project the results for any future date or period.
<PAGE>
Six months ended June 30,
1999 1998
(Pro forma)
--------- ---------
Revenues $ 1,318.3 $ 1,238.2
Cost of sales 879.4 839.5
Selling, general and administrative 258.1 271.4
Goodwill/intangible amortization 21.0 20.7
Special charges and (gains) 20.1 (7.1)
--------- ---------
Operating income $ 139.7 $ 113.7
Other (expense) income, net 38.3 1.5
Equity in earnings of EGS 17.6 20.0
Interest expense, net (62.1) (57.8)
Income taxes` (61.0) (30.8)
--------- ---------
Net income $ 72.5 $ 46.6
========= =========
Diluted income per share $ 2.35 $ 1.48
Weighted average number of shares 30.895 31.423
Unless otherwise noted, historical share and earnings per share disclosures
have been adjusted to reflect the 0.4186 share of SPX common stock that GSX
shareholders received for each share of GSX common stock upon the Merger.
3. The company is comprised of four business segments. Industrial Products and
Services includes operations that design, manufacture and market industrial
valves, mixers, power transformers, electric motors, laboratory freezers
and ovens, industrial furnaces and coal feeders. Major customers include
industrial chemical companies, pulp and paper manufacturers, laboratories
and utilities. Technical Products and Systems includes operations that
design, manufacture and market uninterruptible power supply equipment, fire
detection systems, data networking equipment, broadcast antennas, fare
collection systems and crystal growing furnaces. Major customers are
computer manufacturers and users, construction contractors, municipalities
and semiconductor manufacturers. Service Solutions includes operations that
design, manufacture and market a wide range of specialty service tools,
equipment and services primarily to the motor vehicle industry in North
America and Europe. Major customers are franchised dealers of motor vehicle
manufacturers, aftermarket vehicle service facilities and independent
distributors. Vehicle Components includes operations that design,
manufacture and market transmission and steering components for light and
heavy duty vehicle markets, principally in North America and Europe. Major
customers are vehicle manufacturers and aftermarket private brand
distributors.
Revenues by business segment represent sales to unaffiliated customers, no
one or group of which accounted for more than 10% of consolidated sales.
Intercompany sales among segments are not significant. Operating income
(loss) by segment does not include general corporate expenses, special
charges and gains or incremental costs to implement previously identified
restructuring plans.
<PAGE>
Financial data for the company's business segments are as follows:
Three months Six months
ended June 30, ended June 30,
1999 1998 1999 1998
-------- -------- -------- --------
Revenues:
Industrial Products and Services $ 207.3 $ 190.5 $ 413.1 $ 371.7
Technical Products and Systems 188.5 179.9 377.7 340.2
Service Solutions (1) 170.3 - 319.9 -
Vehicle Components (1) 105.3 31.3 207.6 64.2
-------- -------- -------- --------
$ 671.4 $ 401.7 $1,318.3 $ 776.1
======== ======== ======== ========
Operating income:
Industrial Products and Services $ 35.2 $ 31.5 $ 70.3 $ 54.6
Technical Products and Systems 32.2 16.0 47.8 27.1
Service Solutions 15.0 - 28.2 -
Vehicle Components 14.9 6.7 29.7 13.5
General Corporate (2) (13.6) (8.8) (35.8) (18.6)
-------- -------- -------- --------
$ 83.7 $ 45.4 $ 139.7 $ 76.6
======== ======== ======== ========
(1) Includes the results of SPX businesses in 1999.
(2) Includes special charges of $5.5 for the three months ended June 30,
1999 and $20.1 for the six months ended June 30, 1999 related primarily to
closing costs for two manufacturing facilities and termination benefits for
approximately 350 employees.
4. On March 29, 1999, the company completed the sale of its Dual-Lite
business, which it received from EGS Electrical Group LLC ("EGS") on
October 6, 1998 in a partial rescission of the original EGS venture
formation in the third quarter of 1997. Additionally, the company completed
the sale of a 50% interest in a Japanese joint venture during the quarter.
The company received combined proceeds of $64.2 and recognized a pre-tax
gain of $29.0 ($10.4 after-tax). The relatively high effective tax rate of
this gain was due to a low tax basis of the operations divested. These
operations were not material to the consolidated results. Additionally, a
$7.6 gain was recorded in the second quarter of 1999 on the sale of
marketable securities obtained in connection with a recent technology
acquisition.
5. In the second quarter 1999, the company recorded special charges of $5.5
which included termination benefits ($2.2) for approximately 100 employees,
closing costs for a manufacturing facility ($0.3 for rental and other
holding costs) and other costs associated with the company's overall
restructuring initiative ($3.0). In the first six months of 1999, the
company recorded special charges of $20.1. The first six months charges
included termination benefits ($8.5) for approximately 350 employees,
closing costs for two manufacturing facilities ($1.0 for rental and other
holding costs), other costs associated with the company's overall
restructuring initiative ($3.5) and other non-cash asset writedowns ($7.1).
As of June 30, 1999, approximately 130 of these employee terminations had
been completed. The facilities are expected to close and the balance of the
employee terminations will be completed by the end of the third quarter of
1999.
Of the approximately 325 hourly and salaried employees who accepted the
company's early retirement offer during the fourth quarter of 1998, all
such employees were retired by March 31, 1999. Additionally, during the
fourth quarter of 1998, the company committed to close eighteen
manufacturing, sales and administrative facilities primarily to consolidate
various GSX operations. As a result of these actions, the company recorded
charges of $10.1 for severance payments to approximately 800 other
employees (approximately 750 of which were terminated by June 30, 1999 with
the remaining expected to be terminated by the end of the third quarter)
and $8.1 for facility closing costs. Fifteen of the facilities were closed
as of June 30, 1999 and the balance are expected to close by the end of the
third quarter of 1999. There have been no significant changes to the
estimated costs or timing of the company's restructuring initiatives.
<PAGE>
A rollforward of the company's special charge, disposition and special item
accruals was as follows:
Balance as of December 31, 1998 $ 39.9
Special charges 20.1
Charges against reserves (34.0)(1)
------
Balance as of June 30, 1999 $ 26.0
(1) Includes severance related payments of $16.9, facility costs of $5.0
and other non-cash asset write downs of $7.1.
6. In 1997, the former GSX Board of Directors approved a stock- buyback
program of up to $300.0. During the first six months of 1998, 1.469 shares
were repurchased under the program for $159.0. As of April 15, 1998, the
program was completed.
7. The company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS No. 130") in 1998. SFAS No. 130
requires certain items of other comprehensive income to be presented as a
separate component of shareholders' equity.
The components of comprehensive income, net of related tax, were as
follows:
Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
------ ------ ------ ------
Net income $ 41.6 $ 30.8 $ 72.5 $ 54.2
Foreign currency translation
adjustments (1.5) (3.7) (6.8) (2.7)
------ ------ ------ ------
Comprehensive income $ 40.1 $ 27.1 $ 65.7 $ 51.5
====== ====== ====== ======
The components of accumulated other comprehensive income, net of related
tax, were as follows:
June 30, December 31,
1999 1998
------ ------
Foreign currency translation adjustments $ 15.5 $ 8.7
Minimum pension liability adjustment,
net of tax of $1.5 in 1999 and 1998 2.4 2.4
------ ------
Accumulated other comprehensive income $ 17.9 $ 11.1
====== ======
8. In the first quarter of 1999, the company issued 0.439 shares of treasury
stock at market value to its Retirement Savings Plan and Employee Stock
Ownership Plan in exchange for $28.5 in cash. The proceeds were used to
reduce outstanding debt obligations.
<PAGE>
9. Inventory consists of the following:
June 30, December 31,
1999 1998
------- -------
Finished goods $ 127.5 $ 115.5
Work in process 61.8 66.2
Raw material and purchased parts 112.3 112.1
------- -------
Total FIFO cost 301.6 293.8
Excess of FIFO cost over LIFO
inventory value (12.4) (11.7)
------- -------
$ 289.2 $ 282.1
10. The following table sets forth certain calculations used in the computation
of diluted earnings per share:
Three months ended June 30,
1999 1998
-------- --------
Numerator:
Net Income $ 41.6 $ 30.8
Denominator (shares in millions):
Weighted-average shares outstanding 30.702 18.344
Effect of dilutive securities:
Employee stock options 0.381 0.096
Restricted stock compensation - 0.048
-------- --------
Adjusted weighted-average shares
and assumed conversions 31.083 18.488
Six months ended June 30,
1999 1998
-------- --------
Numerator:
Net Income $ 72.5 $ 54.2
Denominator (shares in millions):
Weighted-average shares outstanding 30.588 18.950
Effect of dilutive securities:
Employee stock options 0.307 0.087
Restricted stock compensation - 0.045
-------- --------
Adjusted weighted-average shares
and assumed conversions 30.895 19.082
11. The company owns a 44.5% interest in EGS and accounts for its investment in
EGS under the equity method of accounting. The company accounts for its
investment in EGS on a three-month lag basis. EGS operates primarily in the
United States, Canada and Mexico. EGS's results of operations were as
follows:
Three months ended Six months ended
March 31, March 31,
1999 1998 1999 1998
-------- -------- -------- --------
Net sales $ 112.8 $ 136.6 $ 229.4 $ 272.1
Gross margin 45.5 52.9 93.8 105.7
Pre-tax income 16.5 20.7 35.7 41.6
EGS' pre-tax income for the quarter ended June 30, 1999 was not materially
different than the pre-tax income earned the previous quarter.
The company's equity in earnings of EGS was $8.3 and $10.0 for the quarters
ended June 30, 1999 and 1998, respectively and $17.6 and $20.0 for the six
months ended June 30, 1999 and 1998, respectively. The company's recorded
investment in EGS at June 30, 1999 was approximately $117.0 less than its
ownership of EGS's net assets at March 31, 1998. This difference is being
amortized on a straight-line basis over an estimated economic life of 40
years.
<PAGE>
Condensed balance sheet information of EGS as of March 31, 1999 and
September 30, 1998 was as follows:
March 31, September 30,
1998 1998
------ ------
(unaudited)
Current assets $167.3 $200.4
Noncurrent assets 327.7 364.0
Current liabilities 60.8 72.7
Noncurrent liabilities 33.7 34.3
12. Effective July 30, 1999, the company sold the assets of its Acutex division
to Hilite Industries for $27.0 in cash. The operation manufactures solenoid
valves primarily for the vehicle industry and had annual sales of
approximately $45.0. The transaction will be recorded in the third quarter
of 1999 and company expects that no material gain or loss will be incurred
on the transaction. Additionally, the transaction includes an earnout
provision that, subject to the performance of the operation over the
balance of 1999, could generate up to $6.0 of additional proceeds. Such
proceeds will be recorded in future quarters only if realized. The results
of this operation were not material to the consolidated financial
statements of the company. Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition (dollars in millions)
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Finandial Condition (dollars in millions)
The following unaudited information should be read in conjunction with the
company's unaudited consolidated financial statements and related notes.
On October 6, 1998, SPX merged with GSX in a reverse acquisition. As a result,
the historical financial statements of GSX became the accounting history of the
combined company through the third quarter of 1998. Accordingly, the comparison
of the historical financial results for the first six months does not provide a
basis for meaningful analysis of the operating trends of the business.
Consequently, the following discussion and analysis of "Results of Operations"
on a consolidated basis and by segment will focus on a comparison of the 1998
pro forma operating results in addition to the historical actual results.
Results of Operations
Consolidated:
Three months Ended June 30, Six months Ended June 30,
Pro forma Pro forma
1999 1998 1998 1999 1998 1998
------ ------ ------ -------- -------- --------
Revenues $671.4 $401.7 $633.4 $1,318.3 $ 776.1 $1,238.2
Gross margin 224.9 144.7 210.5 438.9 270.3 398.7
%of revenues 33.5% 36.0% 33.2% 33.3% 34.8% 32.2%
Selling, general and
admin expense 125.3 96.1 137.6 258.1 187.6 271.4
%of revenues 18.9% 23.9% 21.7% 19.6% 24.2% 21.9%
Goodwill/intangible
amortization 10.4 3.2 10.5 21.0 6.1 20.7
Special charges(gains) 5.5 - 5.7 20.1 - (7.1)
------ ------ ------ -------- -------- --------
Operating income $ 83.7 $ 45.4 $ 56.7 $ 139.7 $ 76.6 113.7
Other (expense)income,net 8.0 - 0.8 38.3 - 1.5
Equity in earnings of EGS 8.3 10.0 10.0 17.6 20.0 20.0
Interest expense, net (30.0) (5.4) (30.0) (62.1) (8.6) (57.8)
------ ------ ------ -------- -------- --------
Income before income taxes $ 70.0 $ 50.0 $ 37.5 $ 133.5 $ 88.0 $ 77.4
Provision for income taxes (28.4) (19.2) (15.1) (61.0) (33.8) (30.8)
------ ------ ------ -------- -------- --------
Net income $ 41.6 $ 30.8 $ 22.4 $ 72.5 $ 54.2 $ 46.6
====== ====== ====== ======== ======== ========
Capital expenditure $ 27.9 $ 14.4 $ 20.6 $ 54.1 $ 24.6 $ 39.2
Depreciation and
amortization 25.7 14.1 26.7 52.2 29.3 54.2
Second Quarter 1999 vs. Second Quarter 1998
Revenues - 1999 revenues increased $269.7, or 67.1%, from actual 1998, primarily
due to the Merger. 1999 revenues increased 6.0% over pro forma 1998 driven by
strength in sales of products in the Technical Products and Systems, Service
Solutions, and Vehicle Component segments.
Gross Margin - In 1999, gross margin increased to 33.5% from pro forma gross
margin of 33.2% in 1998. The 1999 gross margin increase was primarily driven by
the benefits of the restructuring actions underway throughout the business.
During the second quarter, the Company completed the closure of 4 of the 20
manufacturing, sales and administrative facilities that were identified to be
closed in the fourth quarter of 1998 and in the first six months of 1999
bringing the total facilities closed to 15 as of June 30, 1999. During the
second quarter, approximately 440 headcount reductions were completed bringing
the total to approximately 1,205 reductions during the first six months out of
the 1,475 headcount reductions identified in the fourth quarter 1998 and in the
first six months of 1999. The restructuring actions are on schedule to achieve
the estimated $100 of annual cost of sales and SG&A savings in 1999. There have
been no significant changes to the estimated cost or timing of the company's
restructuring initiatives. Selling, general and administrative expense ("SG&A")
- - SG&A in 1999 increased to $125.3 primarily as a result of the Merger. SG&A as
a percentage of revenues decreased from 21.7% in pro forma 1998 to 18.9% in
1999. The decrease was a result of increased revenues and lower pro forma
expenses due to cost savings realized from restructuring actions initiated in
late 1998.
<PAGE>
Goodwill/intangible amortization - The increased amortization in 1999 is a
result of the Merger.
Special charges - In the second quarter 1999, the company recorded special
charges of $5.5. The second quarter charges included termination benefits ($2.2)
for approximately 100 employees, closing costs for a manufacturing facility
($0.3 for rental and other holding costs) and other costs associated with the
company's overall restructuring initiative ($3.0). The facility is expected to
close and the employee termination will be complete by the end of the third
quarter of 1999.
In the second quarter pro forma 1998, SPX recognized a $5.7 charge related to an
acquisition offer for Echlin Inc.
Other expense (income), net - 1999 primarily includes a $7.6 gain on the sale of
marketable securities obtained in connection with a recent technology
acquisition.
Interest expense, net - Interest expense, net, increased significantly in 1999
over actual 1998 primarily due to increased debt incurred on the Merger Date as
a result of the Merger.
Income taxes - The second quarter effective income tax rate was 40.5%, which
represents the company's anticipated effective tax rate for 1999.
Six Months 1999 vs. Six Months 1998
Revenues - 1999 revenues increased $542.2, or 69.9%, from actual 1998, primarily
due to the Merger. 1999 revenues increased 6.5% over pro forma 1998 driven
primarily by strength in sales of products in the Technical Products and Systems
segment.
Gross Margin - In 1999, gross margin increased to 33.3% from pro forma gross
margin of 32.2% in 1998. The 1999 gross margin increase was primarily driven by
the benefits of the restructuring actions underway throughout the business.
During the first six months, the company completed the closure of 15 of the 20
manufacturing, sales and administrative facilities that were identified to be
closed in the fourth quarter of 1998 and in the first six months of 1999.
Approximately 1,205 of the 1,475 headcount reductions identified in the fourth
quarter 1998 and in the first six months of 1999 were completed. The
restructuring actions are on schedule to achieve the estimated $100 of annual
cost of sales and SG&A savings in 1999. There have been no significant changes
to the estimated cost or timing of the company's restructuring initiatives.
Selling, general and administrative expense ("SG&A") - SG&A in 1999 increased to
$258.1 primarily as a result of the Merger. SG&A as a percentage of revenues
decreased from 21.9% in pro forma 1998 to 19.6% in 1999. The decrease was a
result of increased revenues and lower pro forma expenses due to cost savings
realized from restructuring actions initiated in late 1998.
<PAGE>
Goodwill/intangible amortization - The increased amortization in 1999 is a
result of the Merger.
Special charges - In the first six months of 1999, the company recorded special
charges of $20.1. The charges included termination benefits ($8.5) for
approximately 350 employees, closing costs for two manufacturing facilities
($1.0 for rental and other holding costs), other costs associated with the
company's overall restructuring initiative ($3.5) and other non- cash asset
writedowns ($7.1). The facilities are expected to close and the employee
termination will be complete by the end of the third quarter of 1999.
Special charges for the remaining quarters of 1999 could range from $15.0 to
$25.0, and would be recognized in the period in which management approves and
commits the company to further restructuring actions or when incremental costs
associated with restructuring actions that did not qualify to be accrued
previously are incurred.
In the first six months pro forma 1998, SPX recognized a net $7.1 gain on the
sale of an investment in Echlin Inc.
Other expense (income), net - 1999 primarily includes the $29.0 gain on the sale
of Dual-Lite and the company's 50% investment in a Japanese joint venture and a
$7.6 gain on the sale of marketable securities obtained in connection with a
recent technology acquisition.
Interest expense, net - Interest expense, net, increased significantly in 1999
over actual 1998 primarily due to increased debt incurred on the Merger Date as
a result of the Merger.
Income taxes - The company's effective tax rate was 45.7% and 38.4% in 1999 and
1998, respectively. The relatively high rate in 1999 was due to a low tax basis
of the operations divested during the quarter. Excluding the impact of these
divestitures, the first six months effective income tax rate was 40.5%, which
represents the company's normal anticipated effective tax rate for 1999.
Capital expenditures - Capital expenditures in 1999 were higher than actual 1998
primarily due to the Merger and significant expenditures for new business
information systems. For the year ending December 31, 1999, the company
anticipates capital expenditures will be approximately $100.0 to $110.0.
Segment Review
Three months Ended June 30, Six months Ended June 30,
Pro forma Pro forma
1999 1998 1998 1999 1998 1998
------ ------ ------ -------- -------- --------
Revenues:
Industrial Products
and Services $207.5 $190.5 $208.6 $ 413.1 $ 371.7 $ 406.5
Technical Products
and Systems 188.5 179.9 179.9 377.7 340.2 340.2
Service Solutions 170.3 - 152.8 319.9 - 298.5
Vehicle Components 105.3 31.3 92.1 207.6 64.2 193.0
------ ------ ------ -------- -------- --------
Total $671.4 $401.7 $633.4 $1,318.3 $ 776.1 $1,238.2
====== ====== ====== ======== ======== ========
Operating Income:
Industrial Products
and Services $ 35.2 $ 31.5 $ 34.9 $ 70.3 $ 54.6 $ 60.8
Technical Products
and Systems 32.2 16.0 16.0 47.8 27.1 27.1
Service Solutions 15.0 - 12.6 28.2 - 20.9
Vehicle Components 14.9 6.7 12.8 29.2 13.5 26.7
General Corporate Expenses (13.6) (8.8) (19.6) (35.8) (18.6) (21.8)
------ ------ ------ -------- -------- --------
Total $ 83.7 $ 45.4 $ 56.7 $ 139.7 $ 76.6 $ 113.7
====== ====== ====== ======== ======== ========
<PAGE>
Second Quarter 1999 vs Second Quarter 1998
Industrial Products and Services
Revenues for 1999 decreased $1.3, or 0.6%, from pro forma 1998. The decrease
from pro forma 1998 was driven by revenue improvements in transformers, motors
and lab equipment, offset by lower sales of industrial valves and high-pressure
hydraulic equipment. Additionally, 1999 revenues were down due to the closure of
certain operations identified in the fourth quarter 1998 restructuring plan.
Operating Margins increased from 16.7% in pro forma 1998 to 17.0% in 1999 due to
the restructuring actions initiated in late 1998.
Technical Products and Systems
Revenues for 1999 were up $8.6, or 4.8%, over 1998 primarily as a result of
strength in sales of building life safety systems, digital TV transmission
systems and fare collection systems.
Operating Income in 1999 of $32.2 was impacted primarily by the increased
revenues and cost savings realized from restructuring actions initiated in late
1998.
Service Solutions
Revenues increased $17.4, or 11.4%, over pro forma 1998. Excluding the impact of
acquisitions completed in mid-1998 and the discontinuance of a product line in
1998, revenues for existing product lines were up modestly for the quarter.
Operating Margins improved from 8.2% in pro forma 1998 to 8.8% in 1999. The
improvement in operating margins was principally due to the benefits of the
restructuring actions initiated in late 1997.
Vehicle Components
Revenues for 1999 were up $13.2 from pro forma 1998 revenues. The increase was
driven by increased sales to European manufacturers and the impact of the
General Motors strike in 1998.
Operating Margins in 1999 increased from 13.9% in pro forma 1998 to 14.2% in
1999, primarily due to changes in product mix.
General Corporate Expenses
These expenses are not allocated to the business segment level. The increase
from actual 1998 to 1999 is due to the 1999 recording of $5.5 of special
charges. The second quarter charges primarily included closing costs for a
manufacturing facility and termination benefits for approximately 100 employees.
Excluding the $5.5 of special charges, general corporate expenses decreased
$0.7, or 8.0% from actual 1998 to 1999 as a result of benefits from
restructuring actions initiated in late 1998.
<PAGE>
Six Months 1999 vs Six Months 1998
Industrial Products and Services
Revenues for 1999 increased $6.6, or 1.6%, over pro forma 1998. The increase
over pro forma 1998 was driven by strength in sales of transformers, motors and
material handling units.
The company expects 1999 revenues to continue to be relatively stable with
modest growth over pro forma 1998.
Operating Margins increased from 15.0% in pro forma 1998 to 17.0% in 1999 due to
the restructuring actions initiated in late 1998.
Operating Income for the remainder of 1999 is expected to continue to improve
over pro forma 1998 primarily due to savings associated with the restructuring
initiatives.
Technical Products and Systems
Revenues for 1999 were up $37.5, or 11.0%, over 1998 primarily as a result of
strength in sales of building life safety systems, digital TV transmission
systems and fare collection systems, as well as the inclusion of Dual-Lite's
sales in 1999 until its sale in late March.
The company expects full year 1999 revenues to modestly exceed 1998 revenues due
to continuing demand for broadcast antenna systems and fire detection products
and recovery in demand for uninterruptible power supply equipment and crystal
growing furnaces.
Operating Income in 1999 of $47.8 was impacted primarily by the increased
revenues and cost savings realized from restructuring actions initiated in late
1998.
Operating income in 1999 is expected to continue to improve over 1998 primarily
due to savings associated with the restructuring initiatives.
Service Solutions
Revenues increased $21.4, or 7.2%, over pro forma 1998. Excluding the impact of
acquisitions completed in mid-1998 and the discontinuance of a product line in
1998, revenues for existing product lines were relatively flat for the first six
months.
Growth in this segment is primarily program driven. Revenue growth of
approximately 10% is anticipated for 1999.
Operating Margins improved from 7.0% in pro forma 1998 to 8.8% in 1999. The
improvement in operating margins was principally due to the benefits of the
restructuring actions initiated in late 1997.
<PAGE>
Vehicle Components
Revenues for 1999 were up $14.6 from pro forma 1998 revenues. The company
expects growth to accelerate during the remainder of 1999 due to a combination
of new business and the impact of the General Motors strike in 1998. However,
the divestiture of the solenoid valve operation in late July with annual sales
of approximately $45 million will offset the revenue growth during the last half
of 1999.
Operating Margins in 1999 increased from 13.8% in pro forma 1998 to 14.1% in
1999, primarily due to changes in product mix.
General Corporate Expenses
These expenses are not allocated to the business segment level. The increase
from actual 1998 to 1999 is due to the 1999 recording of $20.1 of special
charges. The first six months charges primarily included closing costs for two
manufacturing facilities and termination benefits for approximately 350
employees. Excluding the $20.1 of special charges, general corporate expenses
decreased $2.9, or 15.6% from actual 1998 to 1999 as a result of benefits from
restructuring actions initiated in late 1998.
Liquidity and Financial Condition
The Company's liquidity needs arise primarily from capital investment in
equipment, funding working capital requirements to support business growth
initiatives and to meet debt service costs. Management believes that cash flow
from operations and the company's credit arrangements will be sufficient to
supply funds needed in 1999.
Cash Flow Six months ended June 30,
1999 1998
-------- --------
Cash flow from:
Operating activities...... $ 85.2 $ 34.9
Investing activities...... 16.7 (21.9)
Financing activities...... (122.9) (23.5)
-------- --------
Net Cash Flow............ $ (21.0) $ (10.5)
Operating Activities - The principal elements that contributed to the $50.3
increase in first six months 1999 cash flow from operating activities were
primarily increased earnings after non- cash items, such as deferred income
taxes and gains on the divestiture of businesses, offset by a larger use of cash
related to the change in operating assets and liabilities.
Investing Activities - First six months 1999 cash flow from investing activities
reflected $64.2 of proceeds from the divestitures of the Dual-Lite business and
a Japanese joint venture investment and $54.1 in capital expenditures. Capital
expenditures for 1999 should approximate $100 to $110. Cash flow from investing
activities during the first six months of 1998 primarily reflected $24.6 of
capital expenditures.
Financing Activities - First six months 1999 cash flow from financing activities
consisted primarily of net debt repayments of $155.1 offset by $28.5 of proceeds
from the issuance of treasury stock to an employee benefit plan. Cash flow from
investing activities during the first six months of 1998 includes $157.6 in net
debt borrowings, $159.0 in repurchases of common stock and $25.3 of dividend
payments. As of July 17, 1998, the date the Merger was announced, the former GSX
discontinued quarterly dividend payments in-line with SPX's policy.
<PAGE>
Total Debt
The following summarizes the debt outstanding and unused credit availability, as
of June 30, 1999:
Total Amount Unused Credit
Commitment Outstanding Availability
--------- --------- ---------
Revolving loan $ 250.0 $ 25.0 $ 191.7 (1)
Tranche A loan 581.3 581.3 -
Tranche B loan 595.5 595.5 -
Interim loan 75.0 75.0 -
Medium term notes 50.0 50.0 -
Industrial revenue bonds 16.1 16.1 -
Other borrowings 17.6 17.6 -
--------- --------- ---------
Total $ 1,585.5 $ 1,360.5 $ 191.7
========= ========= =========
(1) Decreased by $33.3 of facility letters of credit outstanding at June
30, 1999, which reduce the unused credit availability.
The Revolving loan, Tranche A loan, Tranche B loan and the Interim loan,
collectively referred to as the Credit Facility, are secured by substantially
all of the assets of the company (excluding EGS) and require the company to
maintain certain leverage and interest coverage ratios. The Credit Facility also
requires compliance with certain operating covenants which limit, among other
things, the incurrence of additional indebtedness by the company and its
subsidiaries, sales of assets, the distribution of dividends, capital
expenditures, mergers, acquisitions and dissolutions. Under the most restrictive
of the financial covenants, the company was required to maintain (as defined) a
maximum debt to earnings before income taxes, depreciation and amortization
ratio and a minimum interest coverage ratio beginning as of March 31, 1999 and
becoming more restrictive thereafter. At June 30, 1999, the company was in
compliance with its financial covenants.
Management believes that cash flow from operations and the Credit Facility will
be sufficient to meet operating cash needs, including working capital
requirements, capital expenditures and debt service costs in 1999. In 2000, the
$75.0 Interim Loan becomes due and the company believes that cash flow from
operations, proceeds from certain asset dispositions and the Revolving loan will
be sufficient to service these obligations. The $27.0 proceeds from the
divestiture of the Acutex division received in July 1999 were used to pay down
the Interim loan.
Other Matters
Readiness for Year 2000 - The company utilizes software and related computer
technology essential to its operations and to certain products that use two
digits rather than four to specify the year, which could result in a date
recognition problem with the transition to the year 2000. In 1997, the company
established a plan, utilizing both internal and external resources, to assess
the potential impact of the year 2000 problem on its systems, including embedded
technology, and operations and to implement solutions to address this issue. The
company has completed the assessment phase of its year 2000 plan, and is
continuing to survey its suppliers and service providers for year 2000
compliance. The company is in the renovation and testing stage of its year 2000
plan and has substantially completed the correction of most of its critical
systems. The target completion date of certain other critical systems is
September 30, 1999. Third party compliance and other factors could adversely
affect these target dates. The company does not believe the cost to remediate
software and computer technologies for the year 2000 problem will exceed $5.0 in
1999 and $10.0 in total, which does not include costs to replace certain
existing enterprise resource planning systems. The company has implemented such
a new system across many of its businesses. The company estimates that it will
spend approximately $25 in 1999 to acquire and install this new system. There
can be no assurances that the costs of remediation and testing will not be
material. Moreover, there can be no assurances that the company will not
experience material unanticipated costs and/or business interruption due to year
2000 problems in its products, its internal systems, its supply chain or from
customer product migration issues. Based upon currently available information,
the company believes that the greatest risk associated with the year 2000
problem relates to compliance of third parties including, but not limited to,
electrical power and other utilities. A worst case scenario could result in
business interruptions, which could have a material effect on the company's
operations. The company is developing contingency plans to mitigate the risks
associated with the year 2000 problem and expects to complete these plans by
September 1999. The statements set forth in the foregoing paragraph are year
2000 readiness disclosures (as defined under the Year 2000 Information and
Readiness Act) and shall be treated as such for all purposes permissible under
such Act.
<PAGE>
Acquisitions and Divestitures - The company continually reviews each of its
businesses pursuant to its "fix, sell or grow" strategy. These reviews could
result in selected acquisitions to expand an existing business or result in the
disposition of an existing business. Additionally, management has expressed that
it would consider a larger acquisition, more than $1 billion in revenues, if
certain criteria are met.
Environmental and Legal Exposure - The company's operations and properties are
subject to various regulatory requirements relating to environmental protection.
It is the company's policy to comply fully with applicable environmental
requirements. Also from time to time, the company becomes involved in lawsuits
arising from various commercial matters, including but not limited to
competitive issues, contract issues, intellectual property matters, workers'
compensation and product liability.
The company maintains property, cargo, auto, product, general liability and
directors' and officers' liability insurance to protect itself against potential
loss exposures. There can be no assurance that such costs for environmental and
legal exposures could not have a material adverse effect on the company's
results of operations or financial position in the future.
Pending Patent Litigation - The company believes that it should ultimately
prevail on a pending patent infringement lawsuit which could result in a
significant judgement favorable to the company. However, since the amount of the
damages cannot be fully quantified until the legal discovery process proceeds
further and no assurances can be made as to the final timing and outcome of any
litigation, no gain has been recorded. See Note 16 to the consolidated financial
statements included in the company's 1998 Annual Report on Form 10-K for further
discussion.
Significance of Goodwill and Intangibles - The company had net goodwill and
intangibles of $1,187.5 and shareholders' equity of $496.2 at June 30, 1999. The
company amortizes its goodwill and intangible assets on a straight-line basis
over lives ranging from 10 to 40 years. There can be no assurance that
circumstances will not change in the future that will affect the useful life or
carrying value of the company's goodwill.
EVA Incentive Compensation - The company utilizes a measure known as Economic
Value Added ("EVA") for its incentive compensation plans. EVA is internally
computed by the company based on Net Operating Profit aftertax less a charge on
the capital invested in the company. These computations use certain assumptions
that vary from generally accepted accounting principles ("GAAP"). EVA is not a
measure under GAAP and is not intended to be used as an alternative to net
income and measuring operating performance presented in accordance with GAAP.
The company believes that EVA, as internally computed, does represent a strong
correlation to the ultimate returns of the company's shareholders. Annual
incentive compensation expense is dependent upon the annual change in EVA,
relative to preestablished improvement targets and the expense can vary
significantly.
<PAGE>
Accounting Pronouncements - Statement of Position 98-1 "Accounting for Computer
Software Developed for or Obtained for Internal Use" ("SOP 98-1") provides
guidance for accounting for software developed for internal use. SOP 98-1, which
the company adopted as of January 1, 1999, did not have a material effect on the
company's results of operations and financial position.
Statement of Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities," which, as amended, will become effective
January 2001, establishes accounting and reporting standards for derivative
instruments and hedging contracts. It also requires all derivatives to be
recognized as either assets or liabilities in the balance sheet at fair value
and changes in fair value to be recognized in income. Management is currently
analyzing the impact of this statement, but does not anticipate that the effect
on the company's results of operations and financial position will be material.
--------------------
The foregoing discussion in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contains forward looking statements, within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended,
and are subject to the safe harbor created thereby. These forward looking
statements, which reflect management's current views with respect to future
events and financial performance, are subject to certain risks and
uncertainties, including but not limited to those matters discussed above. Due
to such uncertainties and risks, readers are cautioned not to place undue
reliance on such forward looking statements, which speak only as of the date
hereof. Reference is made to the company's 1998 Annual Report on Form 10-K for
additional cautionary statements and discussion of certain important factors as
they relate to forward looking statements. In addition, management's estimates
of future operating results are based on the current compliment of businesses,
which is constantly subject to change as management implements its fix, sell or
grow strategy.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The company held the Annual Meeting of Shareholders on April 28, 1999
at which shareholders elected two directors to three year terms
expiring in 2002 and approved the amendment and restatement of the
1992 Stock Compensation Plan to increase the number of shares reserved
for issuance under the Plan from 3,000,000 to 5,000,000.
The results of the voting in connection with the above items were as
follows:
Voting on: For Withheld/Against Abstain
--------- --------- ---------
Directors 27,152,589 84,905 133,974
Amendment and restatement
of shares reserved for
issuance under the Plan 20,124,862 7,074,864 171,742
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(2) None.
(4) None.
(10) None.
(11) Statement regarding computation of earnings per share. See Note
10 to the Consolidated Financial Statements.
(15) None.
(18) None.
(19) None.
(20) None.
(22) None.
(23) None.
(24) None.
(27) Financial data schedule.
(99) None.
(b) Reports on Form 8-K
None.
<PAGE>
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.
SPX CORPORATION
(Registrant)
Date: August 12, 1999 By /s/ John B. Blystone
John B. Blystone
Chairman, President and
Chief Executive Officer
Date: August 12, 1999 By /s/ Patrick J. O'Leary
Patrick J. O'Leary
Vice President, Finance,
Treasurer and Chief
Financial Officer and Chief
Accounting Officer
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