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 September 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 (231) 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 October 31, 1999 - 31,181,557
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SPX CORPORATION
CONSOLIDATED BALANCE SHEETS
(in millions)
September 30, December 31,
1999 1998
------------ ------------
ASSETS (Unaudited)
Current assets:
Cash and equivalents $ 42.4 $ 70.3
Accounts receivable 490.0 458.7
Inventories 303.4 282.1
Deferred income tax assets and refunds 48.2 124.1
Prepaid and other current assets 40.8 40.5
------------ ------------
Total current assets 924.8 975.7
Property, plant and equipment, at cost 808.1 791.1
Accumulated depreciation (379.8) (358.0)
------------ ------------
Net property, plant and equipment 428.3 433.1
Goodwill and intangible assets, net 1,174.5 1,219.5
Investment in EGS 81.2 81.5
Net assets of business acquired 86.0 -
Other assets 251.9 258.5
------------ ------------
Total assets $ 2,946.7 $ 2,968.3
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current
maturities of long-term debt $ 68.7 $ 49.1
Accounts payable 260.4 226.6
Accrued expenses 329.5 396.0
Income taxes payable 6.0 7.7
------------ ------------
Total current liabilities 664.6 679.4
Long-term liabilities 199.1 214.5
Deferred income taxes 258.0 217.4
Long-term debt 1,273.4 1,466.5
Shareholders' equity:
Common stock 354.3 351.7
Paid-in capital 491.3 481.7
Retained earnings (deficit) 3.4 (113.2)
Common stock in treasury (259.0) (286.4)
Unearned compensation (22.5) (32.2)
Accumulated other comprehensive income (15.9) (11.1)
------------ ------------
Total shareholders' equity 551.6 390.5
------------ ------------
Total liabilities and shareholders' equity $ 2,946.7 $ 2,968.3
============ ============
The accompanying notes are an integral part of these statements.
<PAGE>
SPX CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share amounts)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
Revenues $ 668.9 $ 409.9 $1,987.2 $1,186.0
Costs and expenses:
Cost of products sold 444.3 271.5 1,323.7 777.3
Selling, general and administrative 120.7 102.4 378.8 290.0
Goodwill/intangible amortization 10.4 3.1 31.4 9.2
Special Charges 6.1 - 26.2 -
-------- -------- -------- --------
Operating income 87.4 32.9 227.1 109.5
Other income, net 9.9 - 48.2 -
Equity in earnings of EGS 8.2 10.4 25.8 30.4
Interest Expense, Net (28.7) (4.2) (90.8) (12.8)
-------- -------- -------- --------
Income before income taxes 76.8 39.1 210.3 127.1
PROVISION FOR INCOME TAXES (32.7) (15.0) (93.7) (48.8)
-------- -------- -------- --------
NET INCOME $ 44.1 $ 24.1 $ 116.6 $ 78.3
======== ======== ======== ========
Basic income per share $ 1.43 $ 1.32 $ 3.80 $ 4.19
Weighted average number of basic
common shares outstanding 30.851 18.228 30.676 18.709
Diluted income per share $ 1.40 $ 1.32 $ 3.75 $ 4.16
Weighted average number of diluted
common shares outstanding 31.398 18.321 31.063 18.828
The accompanying notes are an integral part of these statements.
<PAGE>
SPX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(Unaudited)
Nine Months Ended
September 30,
------------------------
1999 1998
---------- ----------
Cash flows from operating activities:
Net income $ 116.6 $ 78.3
Adjustments to reconcile net income to net
cash from operating activities -
Special charges 26.2 -
Earnings of EGS, net of distributions (1.0) (23.5)
Gain on business divestitures (31.7) -
Deferred income taxes 49.9 18.6
Depreciation 47.8 35.2
Amortization of goodwill and intangibles 31.4 9.2
Pension credits (21.0) (13.5)
Other, net 10.6 0.9
Change in operating assets and liabilities, net of
effect from acquisitions and divestitures:
Accounts receivable (45.6) 6.2
Inventories (31.2) (7.2)
Accounts payable 42.2 (4.4)
Accrued expenses (68.8) (3.0)
Other, net 39.5 (43.0)
---------- ----------
Net cash from operating activities 164.9 53.8
Cash flows from investing activities:
Proceeds from business divestitures 91.2 -
Business acquisitions (86.0) (10.9)
Capital expenditures (79.8) (39.6)
Other, net 15.7 (2.9)
---------- ----------
Net cash from investing activities (58.9) (53.4)
Cash flows from financing activities:
Net borrowings under revolving credit agreement 55.0 -
Net borrowings (payments) under other debt agreements (228.5) 207.5
Purchases of common stock - (159.6)
Common stock issued under stock incentive programs 11.1 3.9
Treasury stock issued to defined benefit plans 28.5 -
Dividends paid - (36.4)
---------- ----------
Net cash from financing activities (133.9) 15.4
---------- ----------
Net increase (decrease) in cash and equivalents (27.9) 15.8
Cash and equivalents, beginning of period 70.3 50.0
---------- ----------
Cash and equivalents, end of period $ 42.4 $ 65.8
========== ==========
The accompanying notes are an integral part of these statements.
<PAGE>
SPX CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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
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 financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Interim results are not necessarily indicative of results expected for the
full year.
The financial information as of September 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 the fair market value of its assets and liabilities at the
transaction date. The company accounted for the cash portion of the
consideration as a dividend.
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.
<PAGE>
The following unaudited 1998 pro forma selected financial data for the nine
months ended September 30, 1998 reflect the Merger and related financing as
if they had occurred at 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.
Nine months ended September 30,
1999 1998
---------- ----------
(Pro forma)
Revenues $ 1,987.2 $ 1,880.0
Cost of sales 1,323.7 1,277.9
Selling, general and administrative 378.8 416.1
Goodwill/intangible amortization 31.4 31.6
Special charges (gains) 26.2 (7.1)
---------- ----------
Operating income 227.1 161.5
Other income, net 48.2 1.5
Equity in earnings of EGS 25.8 30.4
Interest expense, net ( 90.8) (89.9)
Provision for income taxes ( 93.7) (41.5)
---------- ---------
Net income $ 116.6 $ 62.0
=========== =========
Diluted income per share $ 3.75 $ 2.00
Weighted average number of shares 31.063 31.043
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 manufacturing and 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, broadcasters 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
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.
Intercompany sales among segments are not significant. Operating income by
segment does not include general corporate expenses.
<PAGE>
Financial data for the company's business segments are as follows:
Three months Nine months
ended September 30, ended September 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
Revenues:
Industrial Products and Services $ 201.5 $ 192.5 $ 614.6 $ 564.2
Technical Products and Systems 202.3 189.8 580.0 530.0
Service Solutions (1) 175.0 - 494.9 -
Vehicle components (1) 90.1 27.6 297.7 91.8
-------- -------- -------- --------
$ 668.9 $ 409.9 $1,987.2 $1,186.0
======== ======== ======== ========
Operating income:(2)
Industrial Products and Services $ 37.0 $ 25.1 $ 100.1 $ 79.7
Technical Products and Systems 35.0 18.7 71.1 45.8
Service Solutions 14.3 - 42.5 -
Vehicle Components 10.2 4.8 38.2 18.3
General Corporate ( 9.1) (15.7) (24.8) (34.3)
-------- -------- -------- --------
$ 87.4 $ 32.9 $ 227.1 $ 109.5
======== ======== ======== ========
(1) Includes the results of SPX businesses in 1999.
(2) Includes special charges of $6.1 and $26.2 in the three and nine months
of 1999, respectively.
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 that 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 the low tax basis of the operations divested. These
operations were not material to the consolidated results.
5. On 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 was recorded in the third quarter of
1999, which resulted in no material gain or loss. The results of this
operation were not material to the consolidated financial statements of the
company.
6. In the third quarter of 1999, the company recorded special charges of $6.1
associated with the commitment to close a Vehicle Components facility
located in Ohio, Industrial Products and Services facilities located in
Tennessee and Minnesota and other restructuring initiatives. As a result of
these actions the company recorded cash termination benefits ($1.6) for
approximately 29 hourly and 64 salaried employees, cash closing costs for
the manufacturing facilities ($.8 for rental and other holding costs) other
cash restructuring costs of $1.1 (primarily stay bonuses and moving
machinery) ,and other non-cash costs associated with the company's overall
restructuring initiatives ($2.6). In the first nine months of 1999, the
company recorded special charges of $26.2. These charges are associated
with the commitment to close Vehicle Components manufacturing and
administrative facilities, Industrial Products and Services manufacturing
facilities, and other restructuring initiatives. The charges included cash
termination benefits ($10.1) for approximately 162 hourly and 308 salaried
employees, cash closing costs ($1.8 for rental and other holding costs),
other cash restructuring costs of $3.4 (primarily stay bonuses and moving
machinery), non-cash costs associated with the company's restructuring
initiatives ($3.6), and other non-cash asset write-downs ($7.3).
<PAGE>
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 780 of which were terminated by September 30,
1999) and $8.1 for facility closing costs. Seventeen of the facilities were
closed as of September 30, 1999 and the remaining facility is expected to
close by the end of the fourth quarter of 1999. There have been no
significant changes to the estimated costs or timing of the company's
restructuring initiatives.
A rollforward of the company's special charge, disposition and special item
accruals was as follows:
Employee Facility Property
Termination Holding Write
Costs Costs Offs Total
------ ------ ------ ------
Balance as of December 31, 1999 $ 17.1 $ 5.6 $ - $ 22.7
Special Charge 10.1 1.8 14.3 26.2
Non-cash asset write-offs - - (11.3) (11.3)
------ ------ ------ ------
27.2 7.4 3.0 37.6
Payments (20.8) (4.6) (25.4)
------ ------ ------ ------
Remaining balance September 30, 1999 $ 6.4 $ 2.8 $ 3.0 $ 12.2
====== ====== ====== ======
7. In 1997, the former GSX Board of Directors approved a stock-buyback program
of up to $300.0. During the first nine months of 1998, the program was
completed with 1.469 shares repurchased for $159.6.
8. The components of comprehensive income, net of related tax, were as
follows:
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
------ ------ ------ ------
Net income $ 44.1 $ 24.1 $116.6 $ 78.3
Foreign currency translation
adjustments 2.0 (1.2) (4.8) (3.9)
------ ------ ------ ------
Comprehensive income $ 46.1 $ 22.9 $111.8 $ 74.4
====== ====== ====== ======
The components of the balance sheet caption Accumulated other comprehensive
income, net of related tax, were as follows:
September 30, December 31,
1999 1998
-------- --------
Foreign currency translation adjustments $ (13.5) $ (8.7)
Minimum pension liability adjustment,
net of tax of $1.5 in 1999 and 1998 (2.4) (2.4)
-------- --------
Accumulated other comprehensive income $ (15.9) $ (11.1)
======== ========
<PAGE>
9. 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.
10. Inventory consists of the following:
September 30, December 31,
1999 1998
-------- --------
Finished goods $ 97.0 $ 115.5
Work in process 68.6 66.2
Raw material and purchased parts 148.1 112.1
-------- --------
Total FIFO cost 313.7 293.8
Excess of FIFO cost over LIFO inventory value (10.3) (11.7)
-------- --------
$ 303.4 $ 282.1
======== ========
11. The following table sets forth certain calculations used in the computation
of diluted earnings per share:
Three months ended September 30,
1999 1998
------ ------
Numerator:
Net income $ 44.1 $ 24.1
------ ------
Denominator (shares in millions):
Weighted-average shares outstanding 30.851 18.228
Effect of dilutive securities:
Employee stock options .547 .053
Restricted stock compensation - .040
------ ------
Adjusted weighted-average shares and
assumed conversions 31.398 18.321
====== ======
Nine months ended September 30,
1999 1998
------ ------
Numerator:
Net income $116.6 $ 78.3
------ ------
Denominator (shares in millions):
Weighted-average shares outstanding 30.676 18.709
Effect of dilutive securities:
Employee stock options .387 .076
Restricted stock compensation - .043
------ ------
Adjusted weighted-average shares and
assumed conversions 31.063 18.828
====== ======
<PAGE>
12. The company owns a 44.5% interest in EGS and accounts for its investment in
EGS under the equity method of accounting, 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 June 30, Nine months ended June 30,
1999 1998 1999 1998
------ ------ ------ ------
Net sales $114.1 $132.3 $343.5 $404.4
Gross margin 46.0 53.7 139.8 159.4
Pre-tax income 17.4 21.9 53.1 63.5
EGS' pre-tax income for the quarter ended September 30, 1999 was not
materially different than the pre-tax income earned the previous quarter.
The company's equity in earnings of EGS was $8.2 and $10.4 for the quarters
ended September 30, 1999 and 1998, respectively, and $25.8 and $30.4 for
the nine months ended September 30, 1999 and 1998, respectively. The
company's recorded investment in EGS at September 30, 1999 was
approximately $97.4 less than its ownership of EGS's net assets at June 30,
1998. This difference is being amortized on a straight-line basis over an
estimated economic life of 40 years.
Condensed balance sheet information of EGS as of June 30, 1999 and
September 30, 1998 was as follows:
June 30, September 30,
1999 1998
------ ------
(unaudited)
Current assets $162.7 $200.4
Noncurrent assets 324.3 364.0
Current liabilities 58.6 72.7
Noncurrent liabilities 33.4 34.3
13. On September 20, 1999, the company completed the $86.0 acquisition of North
American Transformer Inc.("NAT") NAT's expertise in large power
transformers will broaden the company's existing product line in the
Industrial Products and Services segment. The valuation of NAT's assets and
liabilities using APB 16 has not been completed by the end of the third
quarter and accordingly the net assets are presented as a single line item
in the accompanying balance sheet. The acquisition will be accounted for
using purchase accounting, which will be completed in the fourth quarter of
1999.
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial 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 nine 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 to the 1998
pro forma operating results in addition to the historical actual results.
Results of Operations
Consolidated: Three months Nine months
ended September 30, ended September 30,
---------------------- ----------------------------
Pro forma Pro forma
1999 1998 1998 1999 1998 1998
------ ------ ------ -------- -------- --------
Revenues $668.9 $409.9 $641.8 $1,987.2 $1,186.0 $1,880.0
Gross margin 224.6 138.4 203.4 663.5 408.7 602.1
%of revenues 33.6% 33.8% 31.7% 33.4% 34.5% 32.0%
Selling, general and
admin expense 120.7 102.4 144.7 378.8 290.0 416.1
%of revenues 18.0% 25.0% 22.5% 19.1% 24.5% 22.1%
Goodwill/intangible
amortization 10.4 3.1 10.9 31.4 9.2 31.6
Special charges(gains) 6.1 - - 26.2 - (7.1)
------ ------ ------ -------- -------- --------
Operating income 87.4 32.9 47.8 227.1 109.5 161.5
Other income, net 9.9 - - 48.2 - 1.5
Equity in earnings of EGS 8.2 10.4 10.4 25.8 30.4 30.4
Interest expense, net (28.7) (4.2) (32.1) (90.8) (12.8) (89.9)
------ ------ ------ -------- -------- --------
Income before income taxes 76.8 39.1 26.1 210.3 127.1 103.5
Provision for income taxes (32.7) (15.0) (10.7) (93.7) (48.8) (41.5)
------ ------ ------ -------- -------- --------
Net income $ 44.1 $ 24.1 $ 15.4 $ 116.6 $ 78.3 $ 62.0
====== ====== ====== ======== ======== ========
Capital expenditures $ 25.7 $ 15.0 $ 24.0 $ 79.8 $ 39.6 $ 63.2
Depreciation
and amortization 27.0 15.1 27.5 79.2 44.4 81.7
Third Quarter 1999 vs. Third Quarter 1998
Revenues - 1999 revenues increased $259.0, or 63.2%, from actual 1998, primarily
due to the Merger. 1999 revenues increased 4.2% 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 33.6% from pro forma gross
margin of 31.7% in 1998. The 1999 gross margin increase was primarily driven by
the benefits of the restructuring actions underway throughout the business.
During the third quarter, the company completed the closure of 2 of the 21
manufacturing, sales and administrative facilities that were identified to be
closed in the fourth quarter of 1998 and in the first nine months of 1999,
bringing the total facilities closed to 17 as of September 30, 1999. During the
third quarter, approximately 93 headcount reductions were completed bringing the
total to approximately 1,298 reductions through September 30, 1999 out of the
1,568 headcount reductions identified in the restructuring initiatives. 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.
<PAGE>
Selling, general and administrative expense ("SG&A") - SG&A in 1999 increased to
$120.7 primarily as a result of the Merger. SG&A as a percentage of revenues
decreased from 22.5% in pro forma 1998 to 18.0% in 1999. The decrease was
primarily due to cost savings realized from restructuring actions initiated in
late 1998.
Goodwill/intangible amortization - The increased amortization in 1999 is a
result of the Merger.
Special charges - In the third quarter 1999, the company recorded special
charges of $6.1 associated with the commitment to close a Vehicle Components
facility located in Ohio, Industrial Products and Services facilities located in
Tennessee and Minnesota and other restructuring initiatives. As a result of
these actions the company recorded cash termination benefits ($1.6) for
approximately 29 hourly and 64 salaried employees, cash closing costs for the
manufacturing facilities ($.8 for rental and other holding costs) , other cash
restructuring costs of $1.1 (primarily stay bonuses and moving machinery),and
other non-cash costs associated with the company's overall restructuring
initiative ($2.6). The facility and employee termination is expected to be
completed by the first quarter of 2000.
Other income, net - 1999 primarily includes a $6.2 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 as a result of the
Merger.
Income taxes - The third quarter effective income tax rate was 42.6%, which was
impacted by non-deductible goodwill associated with the sale of the Acutex
division. Excluding the impact of this sale, the effective income tax rate was
40.5%, which represents the company's anticipated effective tax rate for 1999
before the impact of business divestitures.
Nine Months 1999 Vs. Nine Months 1998
Revenues - 1999 revenues increased $801.2, or 67.6%, from actual 1998, primarily
due to the Merger. 1999 revenues increased 5.7% over pro forma 1998 driven
primarily by strength in sales of products in the Technical Products and Systems
and Service Solutions segments.
Gross Margin - In 1999, gross margin increased to 33.4% from pro forma gross
margin of 32.0% in 1998. The 1999 gross margin increase was primarily driven by
the benefits of the restructuring actions underway throughout the business.
Selling, general and administrative expense ("SG&A") - SG&A in 1999 increased to
$378.8 primarily as a result of the Merger. SG&A as a percentage of revenues
decreased from 22.1% in pro forma 1998 to 19.1% in 1999. The decrease was
primarily due to cost savings realized from restructuring actions initiated
since late 1998.
Goodwill/intangible amortization - The increased amortization in 1999 is a
result of the Merger.
Special charges - In the first quarter of 1999, the company recorded special
charges of $14.6 associated with the commitment to close a Vehicle Components
manufacturing facility located in Ohio, and other restructuring initiatives.
This location was closed to improve efficiency and to eliminate duplicate
functions. As a result of these actions, the company recorded cash termination
benefits of $6.3 for approximately 120 hourly and 153 salaried employees, cash
closing costs of $.7, other cash restructuring cost of $.3 (primarily stay
bonuses and moving machinery) and non-cash asset writedowns of $7.3. This
manufacturing facility was closed by the end of the third quarter with no
material revision to the $14.6 recorded special charge.
<PAGE>
In the second quarter of 1999, the company recorded special charges of $5.5
associated with the commitment to close an Industrial Products and Services
manufacturing facility located in Ireland and other restructuring initiatives.
The location was closed to improve efficiency and to eliminate duplicate
functions. As a result of these actions the company recorded cash termination
benefits ($2.2) for approximately 13 hourly and 91 salaried employees, cash
closing costs for the manufacturing facilities (0.3 for rental and other holding
costs), other cash restructuring cost of $2.0 (primarily stay bonuses and
moving machinery) and $1.0 non-cash costs associated with the overall
restructuring initiatives. This manufacturing facility is expected to be closed
by the fourth quarter of 1999.
In the third quarter of 1999, the company recorded special charges of $6.1
associated with the commitment to close a Vehicle Components facility located in
Ohio, Industrial Products and Services facilities located in Tennessee and
Minnesota, and other restructuring initiatives. As a result of these actions the
company recorded cash termination benefits ($1.6) for approximately 29 hourly
and 64 salaried employees, cash closing costs for the manufacturing facilities
($0.8 for rental and other holding costs), other cash restructuring costs of
$1.1 (primarily stay bonuses and moving machinery) and other non-cash costs
associated with the company's overall restructuring initiative ($2.6).
In summary, in the first nine months of 1999, the company recorded special
charges of $26.2. These charges are associated with the commitment to close
Vehicle Components manufacturing and administrative facilities, Industrial
Products and Services manufacturing facilities, and other restructuring
initiatives. The charges included cash termination benefits ($10.1) for
approximately 162 hourly and 308 salaried employees, cash closing costs for
manufacturing facilities ($1.8 for rental and other holding costs), other cash
restructuring costs of $3.4 (primarily stay bonuses and moving machinery), other
non-cash costs associated with the company's overall restructuring initiatives
($3.6), and other non-cash asset writedowns ($7.3).
Restructuring activities have been occuring since late 1998 to improve
profitability, streamline operations, reduce costs, and improve efficiencies.
Special charges for the fourth quarter of 1999 could range from $10.0 to $15.0,
and will be recognized as 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 nine months pro forma 1998, SPX recognized a net $7.1 gain on the
sale of an investment in Echlin Inc.
Other 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
$13.9 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 as a result of the
Merger.
Income taxes - The company's effective tax rate was 44.6% 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 nine months. Excluding the impact of these
divestitures, the effective income tax rate was 40.5%.
<PAGE>
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 $110.0 to $115.0.
Segment Review: Three months Nine months
ended September 30, ended September 30,
---------------------- ----------------------------
Pro forma Pro forma
1999 1998 1998 1999 1998 1998
------ ------ ------ -------- -------- --------
Revenues:
Industrial Products
and Services $201.5 $192.5 $209.2 $ 614.6 $ 564.2 $ 615.7
Technical Products
and Systems 202.3 189.8 189.8 580.0 530.0 530.0
Service Solutions 175.0 . 155.8 494.9 . 454.3
Vehicle Components 90.1 27.6 87.0 297.7 91.8 280.0
------ ------ ------ -------- -------- --------
Total $668.9 $409.9 $641.8 $1,987.2 $1,186.0 $1,880.0
====== ====== ====== ======== ======== ========
Operating Income: (1)
Industrial Products
and Services $ 37.0 $ 25.1 $ 28.0 $ 100.1 $ 79.7 $ 88.8
Technical Products
and Systems 35.0 18.7 18.7 71.1 45.8 45.8
Service Solutions 14.3 . 11.1 42.5 . 32.0
Vehicle Components 10.2 4.8 10.4 38.2 18.3 37.1
General Corporate Expenses (9.1) (15.7) (20.4) (24.8) (34.3) (42.2)
------ ------ ------ -------- -------- --------
Total $ 87.4 $ 32.9 $ 47.8 $ 227.1 $ 109.5 $ 161.5
====== ====== ====== ======== ======== ========
(1) Includes special charges of $6.1 and $26.2 in the three and nine months of
1999, respectively.
Third Quarter 1999 vs Third Quarter 1998
Industrial Products and Services
Revenues for 1999 decreased $7.7, or 3.7%, from pro forma 1998. The decrease
from pro forma 1998 was caused by exiting the transformer remanufacturing
business, and lower sales of primarily industrial valves and high pressure
hydraulic equipment.
Operating Margins increased from 13.4% in pro forma 1998 to 18.4% in 1999 due to
the restructuring actions initiated since late 1998.
Technical Products and Systems
Revenues for 1999 were up $12.5, or 6.6%, over pro forma 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 $35.0 was improved from 1998 primarily by the
increased revenues and cost savings realized from restructuring actions
initiated since late 1998.
Service Solutions
Revenues increased $19.2, or 12.3%, over pro forma 1998. The increase in
revenues is primarily a result of several new specialty tool programs.
Operating Margins improved from 7.1% in pro forma 1998 to 8.2% in 1999. The
improvement in operating margins was principally due to the benefits of
restructuring actions.
Vehicle Components
Revenues for 1999 were up $3.1, or 3.6% 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, offset by the divestiture of the Acutex
division near the end of July 1999.
Operating Margins in 1999 decreased from 12.0% in pro forma 1998 to 11.3% in
1999, primarily due to changes in product mix.
General Corporate Expenses
General corporate expenses decreased $11.3 or 55.4% from pro forma 1998. The
decrease from pro forma 1998 to 1999 is due to the closing of the former General
Signal corporate headquarters. This closing was a result of the restructuring
actions initiated in late 1998.
Nine Months 1999 vs Nine Months 1998
Industrial Products and Services
Revenues for 1999 decreased $1.1, or .2%, from pro forma 1998. The decrease from
pro forma 1998 was caused by exiting the transformer remanufacturing business,
and lower sales of industrial valves and high pressure hydraulic equipment.
Operating Margins increased from 14.4% in pro forma 1998 to 16.3% in 1999 due to
the restructuring actions initiated in late 1998.
Technical Products and Systems
Revenues for 1999 were up $50.0, or 9.4%, over pro forma 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.
Operating Income in 1999 of $71.1 was improved from 1998 primarily by the
increased revenues and cost savings realized from restructuring actions
initiated in late 1998.
Service Solutions
Revenues increased $40.6 or 8.9%, over pro forma 1998. The increase in revenues
is primarily a result of several new specialty tool programs.
Operating Margins improved from 7.0% in pro forma 1998 to 8.6% in 1999. The
improvement in operating margins was principally due to the benefits of the
restructuring actions.
<PAGE>
Vehicle Components
Revenues for 1999 were up $17.7 from pro forma 1998 revenues, driven by
increased sales to European manufacturers. The divestiture of the solenoid valve
operation in late July with annual sales of approximately $45 will offset
expected revenue growth during the fourth quarter of 1999.
Operating Margins in 1999 decreased from 13.3% in pro forma 1998 to 12.8% in
1999, primarily due to changes in product mix.
General Corporate Expenses
Corporate expenses decreased $17.4, or 41.2% from pro forma 1998. The decrease
from pro forma 1998 to 1999 is due to the closing of the former General Signal
corporate headquarters. This closing was a result of the 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, debt service costs and acquisitions. Management believes that cash
flow from operations and the company's credit arrangements will be sufficient to
supply funds needed in 1999.
Cash Flow Nine months ended September 30,
1999 1998
-------- --------
Cash flow from:
Operating activities $ 164.9 $ 53.8
Investing activities (58.9) (53.4)
Financing Activities (133.9) 15.4
-------- --------
Net Cash Flow $ (27.9) $ 15.8
======== ========
Operating Activities - The principal elements that contributed to the $111.1
increase in 1999 cash flow from operating activities were increased earnings
after non-cash charges and credits, such as deferred income taxes and gains on
the divestiture of businesses, offset by an increase in net operating
receivables and inventories from increased revenues and a decrease in cash for
restructuring activities.
Investing Activities - 1999 cash flow from investing activities reflected $91.2
of proceeds from the divestitures of the Dual-Lite business, the Acutex division
and a Japanese joint venture investment and $79.8 in capital expenditures. The
North American Transformer business was purchased from Rockwell International
for $86.0 in late September 1999. Capital expenditures for 1999 should
approximate $110 to $115. Cash flow from investing activities during the first
nine months of 1998 primarily reflected $39.6 of capital expenditures and a
small acquisition.
Financing Activities -1999 cash flow from financing activities consisted
primarily of net debt repayments of $228.5 offset by $28.5 of proceeds from the
issuance of treasury stock to employee benefit plans. Cash flow from investing
activities during the first nine months of 1998 includes $207.5 in net debt
borrowings, $159.6 in repurchases of common stock and $36.4 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 September 30, 1999:
Total Amount Unused Credit
Commitment Outstanding Availability
-------- -------- --------
Revolving loan $ 250.0 $ 90.0 $ 126.6 (1)
Tranche A loan 575.0 575.0 -
Tranche B loan 594.0 594.0 -
Medium term notes 50.0 50.0 -
Industrial revenue bonds 16.1 16.1 -
Other Borrowings 17.0 17.0 -
-------- -------- --------
Total $1,502.1 $1,342.1 $ 126.6
======== ======== ========
(1) Decreased by $33.4 of facility letters of credit outstanding at
September 30, 1999, which reduce the unused credit availability.
The Revolving loan, Tranche A loan and Tranche B 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
September 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.
The company believes it has sufficient access to capital markets for internal
growth and acquisition activity.
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 has substantially completed the correction of its
critical systems and is in the testing stage of its year 2000 plan. 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 new systems across
<PAGE>
many of its businesses. The company estimates that it will spend approximately
$25 in 1999 to acquire and install new systems. 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 has
developed contingency plans to mitigate the risks associated with the year 2000
problem. The statements set forth in the foregoing paragraph are year 2000
readiness disclosures (as defined under the Year 2000 Information and Readiness
Disclosure Act) and shall be treated as such for all purposes permissible under
such Act.
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 indicated that
it would consider a larger acquisition (more than $1 billion in revenues,) if
certain criteria were 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 number of pending patent infringement claims that it is pursuing
which could result in significant judgements 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.
Pension Income- The company's pension plans have plan assets significantly in
excess of plan obligations. This overfunded position results in pension income
as the increase in market value of the plans' assets exceeds costs associated
with annual employee service. There can be no assurance that future periods will
include significant amounts of net pension income.
Significance of Goodwill and Intangibles - The company had net goodwill and
intangibles of $1,174.5 and shareholders' equity of $551.6 at September 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 lives or carrying value of the company's goodwill and intangibles.
<PAGE>
Eva Incentive Compensation - The company utilizes a measure known as Economic
Value Added ("EVA(R)") for its incentive compensation plans. EVA is internally
computed by the company based on Net Operating Profit After Tax 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.
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.
Item 3 Quantitative and Qualitative Disclosures about Market Risk
Management does not believe the Company's exposure to market risk has
significantly changed since year-end 1998 and does not believe that such risks
will result in significant adverse impacts to the company's results of
operations.
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
None.
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
11 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: November 11, 1999 By /s/ John B. Blystone
---------------------------------
John B. Blystone
Chairman, President and
Chief Executive Officer
Date: November 11, 1999 By /s/ Patrick J. O'Leary
---------------------------------
Patrick J. O'Leary
Vice President, Finance,
Treasurer and Chief
Financial Officer
Date: November 11, 1999 By /s/ James C. Benjamin
---------------------------------
Corporate Controller and
Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 42,400
<SECURITIES> 0
<RECEIVABLES> 512,100
<ALLOWANCES> (22,100)
<INVENTORY> 300,400
<CURRENT-ASSETS> 924,800
<PP&E> 808,100
<DEPRECIATION> (379,800)
<TOTAL-ASSETS> 2,946,700
<CURRENT-LIABILITIES> 664,600
<BONDS> 0
0
0
<COMMON> 354,300
<OTHER-SE> 197,300
<TOTAL-LIABILITY-AND-EQUITY> 2,946,700
<SALES> 1,987,200
<TOTAL-REVENUES> 1,987,200
<CGS> 1,323,700
<TOTAL-COSTS> 1,760,100
<OTHER-EXPENSES> (48,200)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 90,800
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<INCOME-TAX> 93,700
<INCOME-CONTINUING> 116,600
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