<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
( ) 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 November 6, 2000- 31,716,655
1
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SPX CORPORATION
INDEX TO FORM 10Q
PAGE
NUMBER
------
PART I FINANCIAL INFORMATION
Item 1 Unaudited Financial Statements
Unaudited Consolidated Balance Sheets 3
Unaudited Consolidated Statements of Income 4
Unaudited Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
Item 2 Management's Discussion and Analysis of Results of Operations and
Financial Condition 13
Item 3 Quantitative and Qualitative Disclosures About Market Risk 19
PART II OTHER INFORMATION
Item 5 Other Information 20
Item 6 Exhibits and Reports on Form 8-K 20
SIGNATURES 21
2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SPX CORPORATION
CONSOLIDATED BALANCE SHEETS
($ in millions)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
--------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 46.6 $ 78.8
Accounts receivable 515.4 473.7
Inventories 301.5 274.0
Prepaid and other current assets 56.8 39.2
Deferred income tax assets and refunds 116.0 110.8
--------------------------------
Total current assets 1,036.3 976.5
Property, plant and equipment 869.0 799.8
Accumulated depreciation (400.4) (355.1)
--------------------------------
Net property, plant and equipment 468.6 444.7
Goodwill and intangible assets, net 1,207.8 1,103.6
Investment in EGS 83.4 82.6
Other assets 287.1 238.6
--------------------------------
Total assets $ 3,083.2 $ 2,846.0
================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current
maturities of long-term debt $ 105.0 $ 97.7
Accounts payable 276.1 238.3
Accrued expenses 331.8 343.5
Income taxes payable 68.5 75.4
--------------------------------
Total current liabilities 781.4 754.9
Long-term debt, less current maturities 1,093.8 1,017.0
Deferred income taxes 326.9 322.4
Other long-term liabilities 203.1 199.4
--------------------------------
Total long-term liabilities 1,623.8 1,538.8
Minority Interest 26.9 -
Shareholders' equity:
Common stock 357.6 354.9
Paid-in capital 494.9 489.7
Retained earnings (deficit) 128.5 (11.7)
Unearned compensation (11.7) (19.1)
Accumulated other comprehensive income (19.7) (13.0)
Common stock in treasury (298.5) (248.5)
--------------------------------
Total shareholders' equity 651.1 552.3
--------------------------------
Total liabilities and shareholders' equity $ 3,083.2 $ 2,846.0
================================
</TABLE>
The accompanying notes are an integral part of these statements.
3
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SPX CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
($ in millions, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------- -----------------------
2000 1999 2000 1999
------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 645.1 $ 668.9 $1,968.0 $1,987.2
Costs and expenses:
Cost of products sold 423.3 444.3 1,306.7 1,323.7
Selling, general and administrative 121.5 120.7 369.9 378.8
Goodwill/intangible amortization 10.3 10.4 29.4 31.4
Special charges 63.8 6.1 85.5 26.2
------- ------- -------- --------
Operating income 26.2 87.4 176.5 227.1
Gain on Issuance of Inrange Stock 98.0 -- 98.0 --
Other income(expense), net (1.7) 9.9 21.8 48.2
Equity in earnings of EGS 8.0 8.2 26.9 25.8
Interest expense, net (24.2) (28.7) (70.6) (90.8)
------- ------- -------- --------
Income before income taxes 106.3 76.8 252.6 210.3
Provision for income taxes (43.6) (32.7) (103.6) (93.7)
------- ------- -------- --------
Income before loss on early extinguishment of debt 62.7 44.1 149.0 116.6
Loss on early extinguishment of debt, net of tax -- -- (8.8) --
------- ------- -------- --------
Net income $ 62.7 $ 44.1 $ 140.2 $ 116.6
======= ======= ======== ========
Basic income per share of common stock
Income before loss on early extinguishment of debt $ 2.03 $ 1.43 $ 4.82 $ 3.80
Loss on early extinguishment of debt -- -- (0.28) --
------- ------- -------- --------
Net income per share $ 2.03 $ 1.43 $ 4.54 $ 3.80
======= ======= ======== ========
Weighted average number of basic
common shares outstanding 30.917 30.851 30.906 30.676
Diluted income per share of common stock
Income before loss on early extinguishment of debt $ 1.94 $ 1.40 $ 4.68 $ 3.75
Loss on early extinguishment of debt -- -- (0.28) --
------- ------- -------- --------
Net income per share $ 1.94 $ 1.40 $ 4.40 $ 3.75
======= ======= ======== ========
Weighted average number of diluted
common shares outstanding 32.254 31.398 31.894 31.063
</TABLE>
The accompanying notes are an integral part of these statements.
4
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SPX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
($ in millions)
<TABLE>
<CAPTION>
Nine months ended
September 30,
--------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from (used in) operating activities:
Net income $ 140.2 $ 116.6
Adjustments to reconcile net income to net
cash from operating activities:
Special charges 85.5 26.2
Earnings of EGS, net of distributions (0.8) (1.0)
Loss on early extinguishment of debt, net of tax 8.8 --
Gain on sale of Inrange stock (98.0)
Gain on business divestitures -- (31.7)
Deferred income taxes (0.7) 49.9
Depreciation 49.8 47.8
Amortization of goodwill and intangibles 33.7 31.4
Employee benefits (26.1) (14.1)
Other, net (6.7) 10.6
Change in operating assets and liabilities, net of
effect from acquisitions and divestitures:
Accounts receivable (12.4) (45.6)
Inventories (5.0) (31.2)
Accounts payable 27.2 42.2
Accrued expenses (40.7) (68.8)
Other, net 6.6 32.6
-------- --------
Net cash from operating activities before taxes on sale of Best Power 161.4 164.9
Taxes paid on the sale of Best Power (69.0) --
-------- --------
92.4 164.9
Cash flows from (used in) investing activities:
Business divestitures -- 91.2
Business acquisitions and investments (211.1) (86.0)
Capital expenditures (91.0) (79.8)
Other, net -- 15.7
-------- --------
Net cash used in investing activities (302.1) (58.9)
Cash flows from (used in) financing activities:
Net borrowings under revolving credit agreement 20.0 55.0
Borrowings under other debt agreements 509.4 --
Payments under other debt agreements (445.3) (228.5)
Proceeds from issuance of Inrange stock 128.2 --
Treasury stock purchased (47.2) --
Common stock issued under stock incentive programs 12.4 11.1
Treasury stock issued to benefit plans -- 28.5
-------- --------
Net cash from (used in) financing activities 177.5 (133.9)
-------- --------
Net decrease in cash and equivalents (32.2) (27.9)
Cash and equivalents, beginning of period 78.8 70.3
-------- --------
Cash and equivalents, end of period $ 46.6 $ 42.4
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
5
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SPX CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000 (Unaudited)
($ in millions, except share and per share data)
1. BASIS OF PRESENTATION
In the opinion of management, the accompanying balance sheets and
related interim statements of income and cash flows include all
adjustments (consisting only of normal and recurring items) necessary
for their fair presentation in conformity with generally accepted
accounting principles. Preparing financial statements requires
management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues, and expenses. Actual results
could differ from these estimates. Interim results are not necessarily
indicative of results for a full year. The information included in this
Form 10-Q should be read in conjunction with the consolidated financial
statements contained in the Company's 1999 Annual Report on Form 10-K.
2. BUSINESS SEGMENT INFORMATION
The Company is comprised of four business segments. Technical Products
and Systems primarily includes operations that design, manufacture and
market data networking equipment, building life-safety systems, digital
TV and radio transmission equipment and automated fare collection
systems. Major customers are computer manufacturers and users,
construction contractors, municipalities, and TV and radio broadcasters.
Industrial Products and Services includes operations that design,
manufacture and market power transformers, industrial valves, mixers,
electric motors, laboratory freezers and ovens, hydraulic systems,
industrial furnaces and coal feeders. Major customers include industrial
chemical companies, pulp and paper manufacturers, laboratories and
utilities. 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 and small engine markets, principally in
North America and Europe. Major customers are vehicle manufacturers and
aftermarket private brand distributors.
Inter-company sales among segments are not significant. Operating income
by segment does not include general corporate expenses.
Financial data for the Company's business segments are as follows:
<TABLE>
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
------------------- ----------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Technical Products and Systems $ 168.3 $ 202.3 $ 454.0 $ 580.0
Industrial Products and Services 236.3 201.5 709.0 614.6
Service Solutions 155.8 175.0 524.4 494.9
Vehicle Components 84.7 90.1 280.6 297.7
------- ------- --------- --------
Total $ 645.1 $ 668.9 $ 1,968.0 $1,987.2
======= ======= ========= ========
Operating Income: (1)
Technical Products and Systems $ 25.0 $ 35.0 $ 73.1 $ 71.1
Industrial Products and Services 25.0 37.0 92.5 100.1
Service Solutions (15.9) 14.3 22.0 42.5
Vehicle Components 2.3 10.2 25.4 38.2
Corporate Special Charges (1.1) - (9.3) -
General Corporate Expenses (9.1) (9.1) ( 27.2) (24.8)
------- ------- --------- --------
Total $ 26.2 $ 87.4 $ 176.5 $ 227.1
======= ======= ========= ========
</TABLE>
(1) Operating income for the three months ended September 30, 2000
and 1999 includes special charges of $63.8 and $6.1,
respectively. Operating income for the nine months ended
September 30, 2000 and 1999 includes charges of $85.5 and $26.2,
respectively. Operating income for the three and nine month
period ending September 30, 2000 also includes a charge against
cost of goods sold of $12.3 primarily associated with the Service
Solutions Segment. See Note 4 for further discussion.
6
<PAGE> 7
3. ACQUISITIONS & 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. Acquisitions and dispositions for the first
nine months of 2000 and 1999 are described below.
ACQUISITIONS 2000
In September of 2000, Revco Technologies, a business unit of SPX
Corporation, acquired Jewett, Inc., of Buffalo, New York for a cash
purchase price of $10.5. Jewett is a world leader in the manufacture and
sale of high quality medical refrigeration and pathology equipment.
Recognized for its blood bank, plasma and laboratory refrigerators, as
well as its equipment for medical examiners facilities, morgues, and
hospital autopsy suites, Jewett also produces nourishment and medicine
stations typically used on hospital patient floors, and surgical scrub
sinks for operating theaters. The Jewett acquisition provides increased
global presence, particularly in the blood and plasma markets.
In September of 2000, DeZurik, a business unit of SPX Corporation,
acquired the US and UK assets of Copes-Vulcan, located in Lake City,
Pennsylvania and Winsford, England for a cash purchase price of $35.0.
The acquisition of Copes-Vulcan provides Dezurik with new technology and
complementary products and services while expanding its customer base.
The combined business will better serve process industries around the
world with recognized quality process performance solutions.
In September of 2000, Edwards Systems Technology, a business unit of SPX
Corporation, acquired Ziton SA (Pty) Ltd. for a cash purchase price of
$20.0. The acquisition of Ziton adds complementary technology, expands
product and service offerings, bolsters Edwards Systems Technology's
global position, and provides internationally based manufacturing
capabilities for life safety systems.
In August of 2000, Inrange Technologies ("Inrange"), a business unit of
SPX Corporation, acquired Computerm Corporation of Pittsburgh,
Pennsylvania for a purchase price of $30.0, which includes a
non-interest bearing seller note of $3.0 due in August 2001. Computerm's
high performance channel extension products and services allow storage
networking applications to operate over wide area networks. Computerm's
suite of channel extension offerings complements Inrange's storage
networking systems and expands its virtual storage networking family of
channel directors, optical multiplexers, and channel extension products
and services.
In August of 2000, Inrange acquired Varcom Corporation located in
Fairfax, Virginia for a purchase price of $25.0, which includes a
non-interest bearing seller note of $1.5 due in August 2002. Varcom
Corporation is a provider of network management hardware, software, and
services. Two of Varcom's key network management offerings are fully
integrated into Inrange's Universal TouchPoint Architecture (TM) (UTA),
a management system used to monitor and assess quality of service levels
across the span of enterprise data networks.
In March of 2000, the Company completed the acquisition of Fenner Fluid
Power, a division of Fenner plc of Yorkshire, England for a cash
purchase price of $64.0. The Company's high pressure hydraulics business
is a market leader in the manufacture and distribution of high force
industrial tools and hydraulic power systems and components. The
addition of Fenner Fluid Power's medium pressure hydraulic power system
components provides new technology, complementary products, and
additional presence in the international market. Fenner Fluid Power has
facilities in Rockford, Illinois and Romford, England.
In the first nine months of 2000, the Company made several other
acquisitions with an aggregate purchase price of $31.1. These
acquisitions and the ones described above are not material individually
or in the aggregate.
Each acquisition in 2000 was accounted for using purchase accounting
and, accordingly, the purchase price was allocated on a preliminary
basis to the related assets acquired and liabilities assumed based on
their estimated fair values at the date of acquisition. The allocation
is expected to be finalized prior to the one-year anniversary of the
acquisitions and adjustments are not expected to be material.
ACQUISITIONS 1999
In September of 1999, the Company acquired North American Transformer,
Inc. ("NAT") from Rockwell International Corporation for a cash purchase
price of $86.0. NAT's expertise in large power transformers has expanded
the Company's existing product and service offering and positioned the
business for international expansion.
7
<PAGE> 8
DIVESTITURES 1999
In July of 1999, the Company sold the assets of its Acutex division to
Hilite Industries for $27.0 in cash. The operation manufactured solenoid
valves used in automatic transmissions for motor vehicles. The
transaction was recorded in the third quarter of 1999, and resulted in
no gain or loss.
In March of 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 on this gain was due to the low tax basis of the
operations divested.
In December of 1999, the Company sold Best Power to Invensys for $240.0
and recognized a pretax gain of $23.8 and an after-tax loss of $45.2.
The large tax expense from this sale was caused by $132.2 of
nondeductible goodwill from the GSX acquisition of Best Power in 1995.
These dispositions are not material individually or in the aggregate.
4. SPECIAL CHARGES
SPECIAL CHARGES 2000
In the first nine months of 2000, the Company recorded special charges
associated with restructuring actions, in-process technology write-offs,
and asset impairments. Special charges for the three and nine months
ended September 30, 2000 and 1999 include the following:
Three Months Ended Nine Months Ended
2000 1999 2000 1999
---- ---- ---- ----
Severance and Other Cash Costs $ 21.7 $ 3.5 $ 25.6 $ 15.3
Asset Impairments 27.2 2.6 35.7 10.9
Goodwill Impairments 4.9 - 14.2 -
In-process technology 10.0 - 10.0 -
------ ------ ------ ------
Total $ 63.8 $ 6.1 $ 85.5 $ 26.2
====== ====== ====== ======
As part of the Company's Value Improvement Process(TM), the Company
recently completed its strategic review process within each segment of
the Company. As an outcome of this process, the Company announced and
recorded a restructuring charge and asset impairments in the third
quarter of 2000 of $53.8 to consolidate manufacturing and sales
facilities and rationalize certain product lines in the Service
Solutions, Industrial Products and Services, and Vehicle Components
segments. Due to the aggressive acquisition strategy of the Company,
from time to time alterations in the Company's business model are
required to better serve customer demand, fix or discontinue lower
margin product lines, and rationalize and consolidate manufacturing
capacity to maximize Economic Value Added ("EVA(R)") improvement. The
charge included $15.4 for severance and other benefits for approximately
600 hourly and salaried employees, $27.2 for the write-down of assets,
$4.9 for a write-down of goodwill and $6.3 for other cash costs
associated with the plan. The write-down of assets and goodwill was
required because the estimated fair value as measured by discounted cash
flow was less than the carrying value of the assets or business. The
Company also recorded a charge of $12.3 against costs of goods sold for
discontinued products associated with restructuring and other product
changes primarily within the Service Solutions segment. The impact of
these charges in the third quarter of 2000 was $0.99 and $0.22 per share
for the restructuring charge and cost of goods sold adjustment,
respectively.
The restructuring plan involves the consolidation or disposition of
eight manufacturing or sales offices and re-organization of various
sales, engineering and marketing teams within the Service Solutions,
Industrial Products and Services and Vehicle Components segments.
8
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Special charges of $20.3 were recorded in the Service Solutions segment
during the third quarter of 2000. These charges related primarily to the
closing of Service Solutions Wayland, Michigan facility and the
replacement of the financial and administrative operations at its
Kalamazoo, Michigan and Montpelier, Ohio locations. Service Solutions is
also consolidating several of its European operations into its Hainburg,
Germany location and reducing its manufacturing infrastructure in
Brazil.
Special charges of $22.4 were recorded in the Industrial Products and
Services segment during the third quarter of 2000. These charges related
primarily to the Company's acquisition of Fenner Fluid Power in April of
2000 and the consolidation of other manufacturing facilities. The
Company has committed to closing its Owatonna Minnesota, Power Team
facility and consolidating operations into Fenner Fluid Power's
Rockford, Illinois facility. The combined business is called SPX Fluid
Power.
Special charges of $10.0 were recorded in the Vehicle Components segment
during the third quarter of 2000. These charges related primarily to the
rationalization plan initiated by the Company's Contech Metal Forge
business unit in Clarksville, Tennessee.
During the quarter, the Company also recorded a pre-tax special charge
of $10.0 million for the write-off of in-process technology associated
with the acquisition of Varcom Corporation. This special charge is
included in operating income of the Technical Products and Systems
segment. In-process technology represents the value assigned in a
purchase business combination to research and development projects of
the acquired business that had commenced but had not yet been completed
at the date of acquisition and that have no alternative future use. The
allocation of the purchase price to identifiable intangible assets,
acquired in-process research and development and goodwill has been
determined by an independent appraisal firm and management based on an
analysis of factors such as historical operating results, discounts of
cash flow projections and specific evaluations of product, customer and
other information. In accordance with SFAS No. 2, "Accounting for
Research and Development Costs," as clarified by FASB Interpretation No.
4, amounts assigned to in-process technology meeting the above criteria
must be charged to expense as part of the allocation of the purchase
price of the business combination. The impact of this charge in the
third quarter of 2000 was $0.18 per share.
In the third quarter of 2000, the Company also recorded $1.1 of
corporate special charges associated with restructuring initiatives
throughout the businesses.
Reorganization and restructuring costs include costs directly related to
the Company's plan of reorganization. EITF No. 94-3 provides specific
requirements as to the appropriate recognition of costs associated with
employee termination benefits and other costs. Employee termination
costs are recognized when benefit arrangements are communicated to
affected employees in sufficient detail to enable the employees to
determine the amount of benefits to be received upon termination. Other
costs directly related to the reorganization of the Company that are not
eligible for recognition at the commitment date, such as relocation and
other integration costs, are expensed as incurred.
In the second quarter of 2000, management concluded that the investment
in certain software licenses was impaired and accordingly recorded an
$8.2 write-down. This write-down is included in corporate special
charges. The Company also recorded a $9.3 write-down of goodwill in the
Industrial Products segment. The write-down was required because the
estimated fair value was less than the carrying value of the assets or
business.
Additionally, during the second quarter of 2000, the Company announced
that it would close two Industrial Products and Services manufacturing
facilities located in Virginia and Pennsylvania primarily to consolidate
operations. As a result of these actions, the Company recorded special
charges of $4.2 including $1.3 for cash severance payments to 76 hourly
and salaried employees, $2.6 for cash facility holding costs and $0.3 of
asset write-downs.
SPECIAL CHARGES 1999
In the third quarter of 1999, the Company recorded special charges of
$6.1 associated with the commitment to close one facility in the Vehicle
Components segment and one facility in the Industrial Products and
Services segment, and other restructuring initiatives. As a result of
these actions the Company recorded cash termination benefits of $1.6 for
approximately 93 hourly and salaried employees, $1.9 of cash closing
costs for manufacturing facilities, and other non-cash asset write-downs
associated with the Company's overall restructuring initiative of $2.6.
These actions were completed in 2000.
During the first nine months of 1999, the Company recorded special
charges of $26.2. These charges were 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 of $10.1 for approximately 470 hourly and salaried employees,
$5.2 of cash closing costs for manufacturing facilities, $3.6 of other
non-cash costs associated with the Company's overall restructuring
initiatives, and $7.3 of other non-cash asset write-downs.
At September 30, 2000, a total of $25.6 of restructuring liabilities
remained on the Consolidated Balance Sheet. This restructuring reserve
relates primarily to restructuring actions initiated in 2000, and the
company anticipates that the remaining restructuring reserve will be
paid within one year of inception.
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The following table summarizes the restructuring reserve activity
through September 30, 2000:
<TABLE>
<CAPTION>
Employee Facility Other
Termination Holding Cash
Costs Costs Costs Total
----- ----- ----- -----
<S> <C> <C> <C> <C>
Balance at December 31, 1999 $ 6.5 $ 6.3 $ - $ 12.8
Special Charge 12.2 3.2 6.9 22.3
Payments (5.1) (3.6) (0.8) (9.5)
------ ----- ----- ------
Balance at September 30, 2000 $ 13.6 $ 5.9 $ 6.1 $ 25.6
====== ===== ===== ======
</TABLE>
5. GAIN ON ISSUANCE OF INRANGE STOCK
In September of 2000, Inrange Technologies, a business unit of SPX
Corporation, issued 8,855,000 shares of its class B common stock for
cash in an initial public offering. The Company owns 75,633,333 shares
of Inrange class A common stock. Holders of class B common stock
generally have identical rights as Class A common stock except for
voting and conversion rights. The holders of Class A common stock are
entitled to five votes per share and the holders of Class B common stock
are entitled to one vote per share. Holders of Class B common stock have
no conversion rights. As a result of the initial public offering, at
September 30, 2000 the Company owned 89.5% of the total number of
outstanding shares of Inrange common stock. The Company owns 100% of the
outstanding class A common stock, which represents 98% of the combined
voting power of all classes of Inrange voting stock. Proceeds from the
offering, based on the offering price of $16.00 per share, net of
expenses, were $128.2. The Company accounted for the proceeds of the
offering in accordance with Staff Accounting Bulletin ("SAB") 51,
"Accounting by the Parent in Consolidation for Sale of Stock in
Subsidiary." Accordingly, the Company recorded a pre-tax gain of $98.0
($57.6 after-tax) in the third quarter of 2000.
6. OTHER INCOME
On May 17, 2000, General Signal Power Systems, Inc. ("Best Power"),
settled its patent infringement suit against American Power Conversion
Corporation ("APC"). The Company received gross proceeds of $48.0 and
recognized a pre-tax gain of $23.2, net of legal costs and other related
expenses ($13.7 after-tax). The Company sold its Best Power business to
Invensys, plc in the fourth quarter of 1999, but retained its ownership
of the rights under the patent litigation. Invensys, plc obtained the
ownership of the patents that were the object of the litigation.
7. EARNINGS PER SHARE
The following table sets forth certain calculations used in the
computation of diluted earnings per share:
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
2000 1999 2000 1999
----- ----- ---- ----
<S> <C> <C> <C> <C>
Numerator:
Net Income $ 62.7 $ 44.1 $ 140.2 $ 116.6
------- -------- ------- -------
Denominator (shares in millions):
Weighted-average shares outstanding 30.917 30.851 30.906 30.676
Effect of dilutive securities:
Employee stock options 1.337 0.547 0.988 0.387
------- -------- ------- -------
Adjusted weighted-average shares and
Assumed conversions 32.254 31.398 31.894 31.063
======= ======== ======= =======
</TABLE>
10
<PAGE> 11
8. INVENTORY
Inventory consists of the following:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
---- ----
<S> <C> <C>
Finished goods $ 112.9 $ 132.4
Work in process 66.9 58.4
Raw material and purchased parts 134.7 96.2
-------- -------
Total FIFO cost 314.5 287.0
Excess of FIFO cost over LIFO inventory value (13.0) (13.0)
-------- -------
$ 301.5 $ 274.0
======== =======
</TABLE>
9. INVESTMENT IN EGS
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:
<TABLE>
<CAPTION>
Three months ended June 30, Nine months ended June 30,
(unaudited) 2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 114.9 $ 114.1 $ 354.0 $ 343.5
Gross margin 44.9 46.0 141.9 139.8
Pre-tax income 16.7 17.4 56.3 53.1
</TABLE>
Condensed balance sheet information of EGS as of June 30, 2000 and
September 30, 1999 was as follows:
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
---- ----
(unaudited)
<S> <C> <C>
Current assets $ 162.0 $ 170.7
Noncurrent assets 317.6 328.2
Current liabilities 56.2 67.7
Noncurrent liabilities 29.8 33.5
</TABLE>
The Company's recorded investment in EGS at September 30, 2000 was
approximately $95.1 less than its ownership of EGS's reported net assets
at September 30, 2000. This difference is being accreted on a
straight-line basis over 40 years.
10. DEBT
On February 10, 2000, the Company paid down its existing Tranche B debt of
$412.5 and revolver of $50.0, recorded a loss on early extinguishment of
debt of $15.0 pre-tax ($8.8 after-tax, or $0.28 per share), and replaced
the existing credit facility with a new $1,487.5 credit facility. The new
credit facility consists of a $562.5 Tranche A Loan ("Tranche A Loan")
maturing on September 30, 2004, a $500.0 Tranche B Loan ("Tranche B Loan")
maturing on December 31, 2006, and a $425.0 Revolving Credit Facility
("Revolving Facility") with a maturity date of September 30, 2004,
collectively hereinafter referred to as the "Credit Facility."
The Credit Facility bears interest at variable rates using a calculated
base borrowing rate ("Base Rate") or a Eurodollar Rate, plus an applicable
margin. The Tranche A Loan and the Revolving Facility have variable margins
between 0.5% and 1.5% for Base Rate loans and 1.5% and 2.5% for Eurodollar
Rate borrowings. The Tranche B Loan has variable margins between 1.25% and
1.5% for Base Rate
11
<PAGE> 12
loans and 2.25% and 2.5% for Eurodollar Rate borrowings. The Revolving
Facility also is subject to annual commitment fees of 0.25% to 0.5% on the
unused portion of the facility. The variable margins and commitment fees
are based on certain financial measurements of the Company as defined in
the Credit Facility.
The Credit Facility is secured by substantially all of the assets of the
Company (excluding EGS) and requires the Company to maintain certain
leverage and interest coverage ratios. Under the most restrictive of the
financial covenants, the Company is required to maintain (as defined) a
maximum debt to earnings before interest, taxes, depreciation and
amortization ratio and a minimum interest coverage ratio. Under the Credit
Facility, the operating covenants, which limit, among other things,
additional indebtedness by the Company and its subsidiaries, the sale of
assets, capital expenditures, mergers, acquisitions and dissolutions, and
share repurchases are less restrictive than those of the old credit
facility. At September 30, 2000, the Company was in compliance with its
financial covenants.
The Company has effectively fixed the underlying Eurodollar rate at
approximately 4.8% on $800.0 of indebtedness through interest rate
protection agreements expiring November 9, 2001.
The Company may also request the issuance of letters of credit not
exceeding $150.0. Standby letters of credit issued under this facility of
$29.9 at September 30, 2000 reduce the aggregate amount available under the
Revolving Facility commitment.
11. SHAREHOLDERS' EQUITY
On February 10, 2000, the Company announced that its Board of Directors
authorized an increase in its share repurchase program for up to $250.0.
During the quarter, the Company purchased 70,000 shares of its stock in the
open market for a total consideration of $9.5. This brings the total number
of shares purchased during the first nine months of the year to 544,600 for
a total consideration of $47.2.
12. COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, were as
follows:
Three months ended Nine months ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
Net income $ 62.7 $ 44.1 $140.2 $ 116.6
Foreign currency translation
adjustments (3.3) 2.0 (6.7) (4.8)
------ ------ ------ -------
Comprehensive income $ 59.4 $ 46.1 $133.5 $ 111.8
====== ====== ====== =======
The components of the balance sheet caption Accumulated Other Comprehensive
Income, net of related tax, were as follows:
September 30, December 31,
2000 1999
---- ----
Foreign currency translation adjustments $ 17.3 $ 10.6
Minimum pension liability adjustment,
net of tax of $1.5 in 2000 and 1999 2.4 2.4
------ ------
Accumulated other comprehensive income $ 19.7 $ 13.0
====== ======
13. RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN
In the first quarter of 1999, the Company issued 438,600 shares of treasury
stock at market value to its Retirement Savings and Stock Ownership Plan in
exchange for $28.5 in cash. The proceeds were used to reduce outstanding
debt obligations.
12
<PAGE> 13
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.
RESULTS OF OPERATIONS
CONSOLIDATED:
<TABLE>
<CAPTION>
Three months Nine months
Ended September 30, Ended September 30
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 645.1 $ 668.9 $ 1,968.0 $ 1,987.2
Gross margin 221.8 224.6 661.3 663.5
% of revenues 34.4% 33.6% 33.6% 33.4%
Selling, general and admin expense 121.5 120.7 369.9 378.8
% of revenues 18.8% 18.0% 18.8% 19.1%
Goodwill/intangible amortization 10.3 10.4 29.4 31.4
Special charges 63.8 6.1 85.5 26.2
-------- -------- ---------- ----------
Operating income (1) 26.2 87.4 176.5 227.1
Gain on Issuance of Inrange Stock 98.0 - 98.0 -
Other income (expense), net (1.7) 9.9 21.8 48.2
Equity in earnings of EGS 8.0 8.2 26.9 25.8
Interest expense, net (24.2) (28.7) (70.6) (90.8)
-------- -------- ---------- ----------
Income before income taxes $ 106.3 $ 76.8 $ 252.6 $ 210.3
Provision for income taxes (43.6) (32.7) (103.6) (93.7)
-------- -------- ---------- ----------
Income before loss on early extinguishment of debt $ 62.7 $ 44.1 $ 149.0 $ 116.6
Loss on early extinguishment of debt, net of tax - - (8.8) -
-------- -------- ---------- ----------
Net Income $ 62.7 $ 44.1 $ 140.2 $ 116.6
-------- -------- ---------- ----------
Capital expenditures $ 31.0 $ 25.7 $ 91.0 $ 79.8
Depreciation and amortization 27.5 27.0 83.5 79.2
</TABLE>
(1) Operating Income for the three and nine month period ending September 30,
2000 includes a charge against cost of goods sold of $12.3 primarily associated
with the Service Solutions Segment. See Note 4 for further discussion.
13
<PAGE> 14
THIRD QUARTER 2000 VS. THIRD QUARTER 1999
Revenues - In the third quarter of 2000, revenues decreased $23.8 or 3.6% from
1999. The decrease was primarily attributable to a decline in the Service
Solutions and Technical Products and Systems segments. The decline in the
Service Solutions segment was a result of timing of several specialty tool
programs, including the Worldwide Diagnostic System (WDS) for Ford and emissions
programs. The decline in the Technical Products and Systems segment was due to
the disposition of Best Power in the fourth quarter of 1999. Excluding the
effect of acquisitions and divestitures, revenues increased $5.1 or 0.9% from
1999 due to growth in the Technical Products and Systems, and Industrial
Products and Services segments.
Gross margin - In the third quarter of 2000, gross margin increased to 34.4% of
revenues from 33.6% of revenues in 1999. This increase is a result of
restructuring actions initiated in 2000 and 1999 and changes in product mix.
Selling, general and administrative expense ("SG&A") - In the third quarter of
2000, SG&A increased to 18.8% of revenues from 18.0% of revenues in 1999. This
increase is primarily a result of increased spending on the FC9000 product in
the Technical Products and Systems segment combined with lower revenues in the
Service Solutions segment.
Goodwill/intangible amortization - In the third quarter of 2000, goodwill and
intangible amortization remained relatively constant. The decline in
amortization from the divestiture of Best Power in the fourth quarter of 1999
was offset by an increase in amortization associated with acquisitions in the
Technical Products and Systems and Industrial Products and Services segments.
Special charges- In the third quarter of 2000, the Company recorded special
charges associated with restructuring actions, in-process technology write-offs,
and asset impairments. Special charges for the three months ended September 30,
2000 and 1999 include the following:
Three Months Ended
2000 1999
---- ----
Severance and other cash costs $ 21.7 $ 3.5
Assets impairments 27.2 2.6
Goodwill impairments 4.9 -
In-process technology 10.0 -
------ -----
Total $ 63.8 $ 6.1
====== =====
Refer to Note 4 for further discussion.
Gain on issuance of Inrange Stock- In September of 2000, Inrange issued
8,855,000 shares of its class B common stock for cash in an initial public
offering. Proceeds from the offering, based on the offering price of $16.00 per
share, net of expenses, were $128.2. The Company accounted for the proceeds of
the offering in accordance with Staff Accounting Bulletin ("SAB") 51,
"Accounting by the Parent in Consolidation for Sale of Stock in Subsidiary."
Accordingly the Company recorded a pre-tax gain of $98.0 ($57.6 after-tax) in
the third quarter of 2000. See Note 5 for further discussion.
Other income, net - In the third quarter of 2000, other income declined
primarily due to a $6.2 gain on the sale of marketable securities recorded in
the third quarter of 1999.
Interest expense, net -In the third quarter of 2000, interest expense decreased
$4.5 primarily due to lower rates on the Credit Facility negotiated in February
2000.
Income taxes - The effective rate for the third quarter of 2000 was 41.0%, which
represents the Company's anticipated effective tax rate for 2000. The effective
rate in 2000 and 1999 is higher than the U.S. statutory rate primarily due to
the amortization of nondeductible goodwill and state taxes.
Capital expenditures - Capital expenditures in the third quarter of 2000 were
higher when compared to the third quarter of 1999 primarily due to expenditures
for expansion of manufacturing facilities, expenditures for new business
information systems, and capital investments to support new business programs.
NINE MONTHS 2000 VS. NINE MONTHS 1999
Revenues -In the first nine months of 2000, revenues decreased $19.2 or 1.0%
from 1999. Excluding the effect of acquisitions and divestitures, revenues
increased $99.5 or 5.6% from 1999 due to growth in all four business segments.
Gross margin - In the first nine months of 2000, gross margin increased to 33.6%
of revenues from 33.4% of revenues in 1999. This increase was due to cost
reduction actions initiated throughout the businesses as well as changes in
product mix and productivity improvements in the Technical Products and Systems,
Industrial Products and Services and Service Solutions segments.
Selling, general and administrative expense ("SG&A") - SG&A decreased to 18.8%
of revenues in 2000 from 19.1% of revenues in 1999. This decrease is primarily a
result of restructuring actions initiated in 1999 and other cost reduction
actions initiated throughout the businesses.
14
<PAGE> 15
Goodwill/intangible amortization - In the first nine months of 2000,
amortization decreased primarily due to the disposition of Best Power in the
fourth quarter of 1999 offset by acquisitions in the Technical Products and
Systems, and Industrial Products and Services segments.
Special charges- In the first nine months of 2000 the Company recorded special
charges associated with restructuring actions, in-process technology write-offs,
and asset impairments. Special charges for the nine months ended September 30,
2000, and 1999 include the following:
Nine Months Ended
2000 1999
---- ----
Severance and other cash costs $ 25.6 $ 15.3
Assets impairments 35.7 10.9
Goodwill impairments 14.2 -
In-process technology 10.0 -
------ ------
Total $ 85.5 $ 26.2
====== ======
Refer to Note 4 for further discussion.
Gain on issuance of Inrange Stock- In September of 2000, Inrange issued
8,855,000 shares of its class B common stock for cash in an initial public
offering. Proceeds from the offering, based on the offering price of $16.00 per
share, net of expenses, were $128.2. The Company accounted for the proceeds of
the offering in accordance with Staff Accounting Bulletin ("SAB") 51,
"Accounting by the Parent in Consolidation for Sale of Stock in Subsidiary."
Accordingly the Company recorded a pre-tax gain of $98.0 ($57.6 after-tax) in
the third quarter of 2000. See Note 5 for further discussion.
Other income, net - On May 17, 2000, General Signal Power Systems, Inc., ("Best
Power"), settled its patent infringement suit against American Power Conversion
Corporation ("APC"). The Company received gross proceeds of $48.0 and recognized
a pre-tax gain of $23.2, net of legal costs and other related expenses ($13.7
after-tax). The Company sold its Best Power business to Invensys, plc in the
fourth quarter of 1999, but retained its ownership of the rights under the
patent litigation. Invensys, plc obtained the ownership of the patents that were
the object of the litigation.
Other income in 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 technology
acquisition.
Interest expense, net -- Interest expense decreased significantly in the first
nine months of 2000 primarily due to lower rates on the Credit Facility
negotiated in February 2000.
Income taxes - The effective income tax rate during the first nine months was
41.0%, which represents the Company's anticipated effective tax rate for 2000.
The effective rate in 2000 is higher than the U.S. statutory rate primarily due
to the amortization of nondeductible goodwill and state taxes. The 1999
effective tax rate of 44.6% was higher than the statutory rate due to the
amortization of nondeductible goodwill and the low tax basis of operations
divested during the first nine months.
Capital expenditures - Capital expenditures in the first nine months of 2000
were higher when compared to the first nine months of 1999 primarily due to
expenditures for expansion of manufacturing facilities, expenditures for new
business information systems, and capital requests to support new business
programs.
SEGMENT REVIEW
Three months Nine months
Ended September 30, Ended September 30,
------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
Revenues:
Technical Products and Systems $ 168.3 $ 202.3 $ 454.0 $ 580.0
Industrial Products and Services 236.3 201.5 709.0 614.6
Service Solutions 155.8 175.0 524.4 494.9
Vehicle Components 84.7 90.1 280.6 297.7
-------- ------- --------- --------
Total $ 645.1 $ 668.9 $ 1,968.0 $1,987.2
======== ======= ========= ========
Operating Income: (1)
Technical Products and Systems $ 25.0 $ 35.0 $ 73.1 $ 71.1
Industrial Products and Services 25.0 37.0 92.5 100.1
Service Solutions (15.9) 14.3 22.0 42.5
Vehicle Components 2.3 10.2 25.4 38.2
Corporate Special Charges (1.1) - (9.3) -
General Corporate Expenses (9.1) (9.1) (27.2) (24.8)
-------- ------- --------- --------
Total $ 26.2 $ 87.4 $ 176.5 $ 227.1
======== ======= ========= ========
(1) Operating income for the three months ended September 30, 2000 and 1999
includes special charges of $63.8 and $6.1, respectively. Operating income
for the nine months ended September 30, 2000 and 1999 includes special
charges of $85.5 and $26.2, respectively. Operating income for the three
and nine month period ending September 30, 2000 includes a charge against
cost of goods sold of $12.3 primarily associated with the Service
Solutions segment. See Note 4 for further discussion.
15
<PAGE> 16
THIRD QUARTER 2000 VS. THIRD QUARTER 1999
Technical Products and Systems
Revenues - In the third quarter of 2000, revenues decreased $34.0 or 16.8% from
1999 primarily due to the disposition of Best Power in the fourth quarter of
1999. Excluding the effect of acquisitions and divestitures revenues increased
$22.7 or 16.2% from 1999 due to the introduction of the FC/9000 fibre channel
director, international demand for fire detection and building life-safety
products, increased domestic demand from the renovation market for building
life-safety system service, and sales of vending machines used by the US Postal
Service.
Operating Income - In the third quarter of 2000, operating income decreased
$10.0 from 1999 primarily due to special charges of $10.0 recorded in the third
quarter of 2000 and the disposition of Best Power in the fourth quarter of 1999.
See Note 4 for further discussion. Excluding special charges, operating margins
increased to 20.8% of revenues from 18.9% in 1999 primarily due to higher
revenues, adjusted for the sale of Best Power and improvements throughout the
segment offset by increased spending on sales and marketing expenses associated
with the FC/9000 product.
Industrial Products and Services
Revenues - In the third quarter of 2000, revenues increased $34.8 or 17.3% from
1999 primarily due to the acquisition of North American Transformer in September
1999 and the acquisition of Fenner Fluid Power in March 2000. Excluding the
effect of acquisitions and divestitures, revenues increased $4.6 or 2.3% from
1999 due to strong demand for laboratory equipment and medium-power
transformers.
Operating Income - In the third quarter of 2000, operating income decreased
$12.0 from 1999 primarily due to special charges recorded in the third quarter
of 2000. See Note 4 for further discussion. Excluding special charges and other
product changes, operating income increased $10.5 to 20.5% of revenues from
18.9% of revenues in 1999 due to cost reductions as a result of sourcing and
engineering efforts and restructuring actions.
Service Solutions
Revenues - In the third quarter of 2000, revenues decreased $19.2 or 11.0% from
1999 primarily due to the timing of several specialty tool programs, including
the Worldwide Diagnostic System (WDS) for Ford and emissions programs.
Operating Income - In the third quarter of 2000, operating income declined $30.2
from 1999 primarily due to special charges of $20.3 and $11.2 of charges
included in cost of goods sold associated with discontinued product lines and
other product changes. See Note 4 for further discussion. Excluding the effect
of restructuring and other product changes operating income increased $1.3 to
10.0% of revenues from 8.2% of revenues in 1999. This increase was driven by
demand for higher margin diagnostic tools.
Vehicle Components
Revenues - In the third quarter of 2000, revenues decreased $5.4 or 6.0% from
1999 primarily due to the disposition of Acutex in the third quarter of 1999.
Excluding acquisitions and divestitures, revenues declined $3.0 or 3.4% from
1999 primarily due to a decline in revenues from the forging business offset by
new orders for P-2000 die castings.
Operating Income - In the third quarter of 2000, operating income decreased $7.9
from 1999 primarily due to special charges of $10.0 recorded in the third
quarter of 2000. Excluding special charges operating income increased to 14.5%
of revenues from 13.4% of revenues in 1999 due to changes in product mix.
NINE MONTHS 2000 VS. NINE MONTHS 1999
Technical Products and Systems
Revenues - In the first nine months of 2000, revenues decreased $126.0 or 21.7%
from 1999 primarily due to the disposition of Best Power and Dual-Lite in 1999.
Excluding the effect of acquisitions and divestitures, revenues increased $43.1
or 10.7% from 1999 due to the introduction of the FC/9000 fibre channel
director, international demand for fire detection and building life-safety
products, increased domestic demand from the renovation market for building life
safety system service, growth in the cable pressurization product line and sales
of vending machines used by the US Postal Service.
16
<PAGE> 17
Operating Income - In the first nine months of 2000, operating income increased
$2.0 from 1999 primarily due to special charges of $10.0 recorded in the third
quarter of 2000. See Note 4 for further discussion. Excluding special charges,
operating income increased to 18.3% of revenues from 14.8% in 1999 due to
process improvements and the divestiture of lower margin businesses offset by
increased spending associated with the FC/9000 product.
Industrial Products and Services
Revenues - In the first nine months of 2000, revenues increased $94.4 or 15.4%
from 1999 primarily due to internal growth, the acquisition of North American
Transformer in September 1999 and the acquisition of Fenner Fluid Power in March
2000. Excluding the effect of acquisitions and divestitures, revenues increased
$17.7 or 2.9% from 1999.
Operating Income - In the first nine months of 2000, operating income decreased
$7.6 from 1999 primarily due to special charges of $35.9 recorded in the second
and third quarter of 2000. See Note 4 for further discussion. Excluding special
charges and other product charges, operating income increased $21.2 to 18.3% of
revenues from 17.6% in 1999 primarily due to restructuring, sourcing and
engineering actions initiated to reduce the structure and cost base of the
Company's industrial businesses.
Service Solutions
Revenues - In the first nine months of 2000, revenues increased $29.5 or 6.0%
from 1999 primarily due to sales of new electronic diagnostic tools and new
warranty tools.
Operating Income - In the first nine months of 2000, operating income decreased
$20.5 from 1999 primarily due to special charges of $20.3 and $11.2 of charges
included in cost of goods sold associated with discontinued product lines and
other product changes. These charges were recorded in the third quarter of 2000.
See Note 4 for further discussion. Excluding the effect of special charges and
other product changes, operating income increased $11.0 to 10.2% of revenues
from 8.6% of revenues in 1999. This increase was driven by demand for higher
margin diagnostic tools.
Vehicle Components
Revenues - In the first nine months of 2000, revenues decreased $17.1 or 5.7%
from 1999 primarily due to the disposition of Acutex in the third quarter of
1999. Excluding acquisitions and divestitures, revenues increased $9.2 or 3.4%
from 1999.
Operating Income - In the first nine months of 2000, operating income decreased
$12.8 from 1999 primarily due to special charges of $10.0 recorded in the third
quarter of 2000. See Note 4 for further discussion. Excluding special charges,
operating income decreased to 12.6% of revenues from 13.9% of revenues in 1999
due to changes in product mix and costs associated with the expansion of a
manufacturing facility.
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.
CASH FLOW Nine months ended September 30,
2000 1999
----------------- -------------
Cash flow from:
Operating activities $ 161.4 $ 164.9
Tax on sale of Best Power (69.0) -
Investing activities (302.1) (58.9)
Financing activities 177.5 (133.9)
--------- -----------
Net change in cash balances $ (32.2) $ (27.9)
========= ===========
Operating Activities - In the first nine months of 2000, cash flow from
operating activities before taxes on the sale of Best Power was at the same
level as 1999.
Tax on sale of Best Power - In the fourth quarter of 1999, the Company sold Best
Power to Invensys plc for $240.0. The $69.0 reduction in cash flow represents
the taxes associated with the sale. The large tax expense from this sale was
primarily due to $132.2 of non-deductible goodwill from the General Signal
acquisition of Best Power in 1995.
17
<PAGE> 18
Investing Activities - In the first nine months of 2000, the Company used $211.1
of cash to acquire businesses within the Technical Products and Systems, and
Industrial Products and Services segments. These acquisitions provide the
businesses with the appropriate size, scale, and position in markets that offer
opportunities for generating growth and superior results. Capital Expenditures
of $91.0 in 2000 were primarily for expansion of manufacturing facilities, new
business information systems, and capital investments to support new business
programs.
Financing Activities - In the nine months of 2000, cash flow from financing
activities consisted primarily of $128.2 net proceeds from the Inrange initial
public offering, net borrowings of $84.1 and share purchases of $47.2.
TOTAL DEBT
The following summarizes the total debt outstanding and unused credit
availability, as of September 30, 2000:
Total Amount Unused Credit
Commitment Outstanding Availability
------------ ----------- -------------
Revolving loan $ 425.0 $ 85.0 $ 310.1(1)
Tranche A loan 537.5 537.5 -
Tranche B loan 497.5 497.5 -
Medium term notes 50.0 50.0 -
Industrial revenue bonds 16.1 16.1 -
Other borrowings 12.7 12.7 -
------------ --------- ---------
Total $ 1,538.8 $ 1,198.8 $ 310.1
============ ========= =========
(1) Decreased by $29.9 of facility letters of credit outstanding at
September 30, 2000, which reduce the unused credit
availability.
The Credit Facility is secured by substantially all of the assets of the Company
(excluding EGS) and requires the Company to maintain certain leverage and
interest coverage ratios. Under the most restrictive of the financial covenants,
the Company is required to maintain (as defined) a maximum debt to earnings
before interest, income taxes, depreciation and amortization ratio and a minimum
interest coverage ratio. Under the Credit Facility, the operating covenants
limit, among other things, additional indebtedness by the Company and its
subsidiaries, the sale of assets, capital expenditures, mergers, acquisitions
and dissolutions, and share repurchases. At September 30, 2000, 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 the next twelve
months. The Company believes it has sufficient access to capital markets for
internal growth and acquisition activity.
OTHER MATTERS
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 pending patent infringement claim that it is pursuing against Snap
On, Inc. which could result in a significant judgment 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 1999
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.
18
<PAGE> 19
Significance of Goodwill and Intangibles - The Company had net goodwill and
intangibles of $1,207.8 and shareholders' equity of $651.1 at September 30,
2000. 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.
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 bear a strong
correlation to the ultimate returns to 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 Financial Accounting Standards No. 133
"Accounting for Derivative Instruments and Hedging Activities," as amended by
FAS 137 and FAS 138, will become effective January 2001, and establishes
accounting and reporting standards for derivative instruments and hedging
contracts. FAS 133 requires that all derivative instruments be recorded on the
balance sheet at their fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income.
Management is currently analyzing the impact of this statement, but does not
anticipate that the effect on the Company's results of operations will be
material.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial
Statements." SAB 101 provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements of all public registrants. SAB 101
is effective for the fourth quarter ended December 31, 2000. Changes, if any, in
our revenue recognition policy resulting from SAB 101 generally would not
involve the restatement of prior period financial statements, but would, to the
extent applicable, be reported as a change in accounting principle in the
quarter ending December 31, 2000, as if SAB 101 had been adopted on January 1,
2000. Management does not anticipate that the effect on the Company's results of
operations and financial position will be material.
In July of 2000, the Emerging Issues Task Force released Issue No. 00-10 ("EITF
00-10"), "Accounting for Shipping and Handling Revenues and Costs". The EITF
reached final consensus in September 2000 noting that amounts billed, if any,
for shipping and handling should be included in revenue. If shipping and
handling costs are significant and are not included in cost of sales, a company
should disclose both the amount of such costs and which line item on the income
statement includes that amount. EITF 00-10 is effective in the fourth quarter of
2000. Management is currently analyzing the impact of this statement, but does
not anticipate that the effect on the Company's results of operations 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,
that 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 1999 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 complement 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 1999 and does not believe that such risks
will result in significant adverse impacts to the Company's results of
operations
19
<PAGE> 20
PART II - OTHER INFORMATION
Item 5. Other Information
On August 22, 2000, the Board of Directors approved the grant of options to
purchase an aggregate of 2,500,000 shares of the Company's Common Stock to
certain executive officers. The exercise prices of the options are significantly
above the fair market value of the Company's Common Stock on the date of grant.
Each individual Stock Option Award is comprised of four equal tranches with
exercise prices of $210, $240, $270 and $300. These options vest on the earliest
of August 22, 2005, the date of a change of control, and the date of termination
of employment (each as described in the individual Stock Option Awards). In
addition, these options expire on August 21, 2010 (or earlier in the event of
termination of employment), contain a reload feature and provide tax withholding
rights.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(2) None.
(3) None.
(4) None
10(i) Stock Option Award dated as of August 22, 2000 between SPX
Corporation and Thomas J. Riordan.
(ii) Stock Option Award dated as of June 23, 1999 between SPX
Corporation and John B. Blystone.
(iii) Stock Option Award dated as of August 22, 2000 between SPX
Corporation and John B. Blystone.
(iv) Stock Option Award dated as of May 10, 1999 between SPX
Corporation and Robert B. Foreman.
(v) Stock Option Award dated as of August 22, 2000 between SPX
Corporation and Robert B. Foreman.
(vi) Stock Option Award dated as of August 26, 1998 between SPX
Corporation and Christopher J. Kearney.
(vii) Stock Option Award dated as of August 22, 2000 between SPX
Corporation and Christopher J. Kearney.
(viii) Stock Option Award dated as of August 22, 2000 between
SPX Corporation and Lewis M. Kling.
(ix) Stock Option Award dated as of April 23, 1997 between SPX
Corporation and Patrick J. O'Leary.
(x) Stock Option Award dated as of June 23, 1999 between SPX
Corporation and Patrick J. O'Leary.
(xi) Stock Option Award dated as of August 22, 2000 between SPX
Corporation and Patrick J. O'Leary.
(xii) Stock Option Award dated as of December 10, 1997 between
SPX Corporation and Thomas J. Riordan.
(xiii) Stock Option Award dated as of February 26, 1997 between
SPX Corporation and John B. Blystone.
(xiv) Nonqualified Stock Option Agreement dated as of October
14, 1996 between SPX Corporation and Patrick J. O'Leary.
(xv) FIRST AMENDMENT, dated as of August 22, 2000, to the
Credit Agreement, dated as of October 6, 1998 and as
amended and restated as of February 10, 2000, among SPX
CORPORATION, a Delaware corporation, the several banks and
other financial institutions or entities parties thereto,
BANK ONE, NA, as documentation agent, and THE CHASE
MANHATTAN BANK, as administrative agent for the Lenders.
(11) Statement regarding computation of earnings per share. See
Note 7 to the Consolidated Financial Statements.
(15) None.
(18) None.
(19) None.
(22) None.
(23) None.
(24) None.
(27) Financial data schedule.
(99) None.
(b) Reports on Form 8-K
None.
20
<PAGE> 21
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 13, 2000 By /s/ John B. Blystone
--------------------------------
John B. Blystone
Chairman, President and
Chief Executive Officer
Date: November 13, 2000 By /s/ Patrick J. O'Leary
--------------------------------
Patrick J. O'Leary
Vice President, Finance,
Treasurer and Chief
Financial Officer
Date: November 13, 2000
By /s/ Ron Winowiecki
--------------------------------
Ron Winowiecki
Chief Accounting Officer
21
