FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 8, 2000- 31,637,620
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SPX CORPORATION
CONSOLIDATED BALANCE SHEETS
($ in millions)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 30.0 $ 78.8
Accounts receivable 509.5 473.7
Inventories 298.5 274.0
Prepaid and other current assets 58.8 39.2
Deferred income tax assets and refunds 115.4 110.8
--------- ---------
Total current assets 1,012.2 976.5
Property, plant and equipment 853.5 799.8
Accumulated depreciation (388.1) (355.1)
--------- ---------
Net property, plant and equipment 465.4 444.7
Goodwill and intangible assets, net 1,148.9 1,103.6
Investment in EGS 83.2 82.6
Other assets 261.6 238.6
--------- ---------
Total assets $ 2,971.3 $ 2,846.0
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current
maturities of long-term debt $ 117.9 $ 97.7
Accounts payable 266.3 238.3
Accrued expenses 341.1 343.5
Income taxes payable 27.4 75.4
--------- ---------
Total current liabilities 752.7 754.9
Long-term debt, less current maturities 1,090.3 1,017.0
Deferred income taxes 329.4 322.4
Other long-term liabilities 195.6 199.4
--------- ---------
Total long-term liabilities 1,615.3 1,538.8
Shareholders' equity:
Common stock 356.9 354.9
Paid-in capital 499.4 489.7
Retained earnings (deficit) 65.8 (11.7)
Unearned compensation (13.4) (19.1)
Accumulated other comprehensive income (16.4) (13.0)
Common stock in treasury (289.0) (248.5)
--------- ---------
Total shareholders' equity 603.3 552.3
--------- ---------
Total liabilities and shareholders' equity $ 2,971.3 $ 2,846.0
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
SPX CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
($ in millions, except per share amounts)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 695.1 $ 671.4 $1,322.9 $1,318.3
Costs and expenses:
Cost of products sold 461.8 446.5 883.4 879.4
Selling, general and administrative 129.0 125.3 248.4 258.1
Goodwill/intangible amortization 9.5 10.4 19.1 21.0
Special charges 21.7 5.5 21.7 20.1
-------- -------- -------- --------
Operating income 73.1 83.7 150.3 139.7
Other income, net 23.6 8.0 23.5 38.3
Equity in earnings of EGS 9.6 8.3 18.9 17.6
Interest expense, net (24.1) (30.0) (46.4) (62.1)
-------- -------- -------- --------
Income before income taxes 82.2 70.0 146.3 133.5
Provision for income taxes (33.7) (28.4) (60.0) (61.0)
-------- -------- -------- --------
Income before loss on early extinguishment of debt 48.5 41.6 86.3 72.5
Loss on early extinguishment of debt, net of tax - - (8.8) -
-------- -------- -------- --------
Net income $ 48.5 $ 41.6 $ 77.5 $ 72.5
======== ======== ======== ========
Basic income per share of common stock
Income before loss on early extinguishment of debt $ 1.57 $ 1.35 $ 2.79 $ 2.37
Loss on early extinguishment of debt - - (0.28) -
-------- -------- -------- --------
Net income per share $ 1.57 $ 1.35 $ 2.51 $ 2.37
======== ======== ======== ========
Weighted average number of basic
common shares outstanding 30.896 30.702 30.908 30.588
Diluted income per share of common stock
Income before loss on early extinguishment of debt $ 1.53 $ 1.34 $ 2.73 $ 2.35
Loss on early extinguishment of debt - - (0.28) -
-------- -------- -------- --------
Net income per share $ 1.53 $ 1.34 $ 2.45 $ 2.35
======== ======== ======== ========
Weighted average number of diluted
common shares outstanding 31.690 31.083 31.639 30.895
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
SPX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
($ in millions)
<TABLE>
<CAPTION>
Six months ended
June 30,
---------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 77.5 $ 72.5
Adjustments to reconcile net income to net
cash from operating activities -
Special charges 21.7 20.1
Earnings of EGS, net of distributions (0.6) 0.2
Loss on early extinguishment of debt, net of tax 8.8 -
Gain on business divestitures - (29.0)
Deferred income taxes 2.5 18.8
Depreciation 34.2 31.2
Amortization of goodwill and intangibles 21.8 21.0
Employee benefits (14.2) (7.8)
Other, net (3.4) 8.1
Change in operating assets and liabilities,
net of effect from acquisitions and divestitures:
Accounts receivable (21.9) (16.8)
Inventories (14.8) (13.1)
Accounts payable 20.1 14.7
Accrued expenses (24.1) (53.1)
Other, net (7.2) 18.4
-------- --------
Net cash from operating activities
before taxes on sale of Best Power 100.4 85.2
Taxes paid on the sale of Best Power (69.0) -
-------- --------
31.4 85.2
Cash flows from (used in) investing activities:
Business divestitures - 64.2
Business acquisitions and investments (90.6) -
Capital expenditures (60.0) (54.1)
Other, net - 6.6
-------- --------
Net cash from (used in) investing activities (150.6) 16.7
Cash flows from (used in) financing activities:
Net borrowings (payments) under
revolving credit agreement 35.0 (10.0)
Borrowings under other debt agreements 503.7 -
Payments under other debt agreements (445.2) (145.1)
Treasury stock purchased (37.7) -
Common stock issued under stock incentive programs 14.6 3.7
Treasury stock issued to defined benefit plans - 28.5
-------- --------
Net cash from (used in) financing activities 70.4 (122.9)
-------- --------
Net (decrease) in cash and equivalents (48.8) (21.0)
Cash and equivalents, beginning of period 78.8 70.3
-------- --------
Cash and equivalents, end of period $ 30.0 $ 49.3
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE>
SPX CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 (Unaudited)
($ in millions, except per share data)
1. BASIS OF PRESENTATION
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 June 30, 2000 should be read in conjunction
with the consolidated financial statements contained in the company's 1999
Annual Report on Form 10-K.
The interim financial statements reflect 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.
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.
Intercompany 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:
Three months Six months
ended June 30, ended June 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
Revenues:
Technical Products and Systems $ 149.8 $ 188.5 $ 285.7 $ 377.7
Industrial Products and Services 247.8 207.3 472.7 413.1
Service Solutions 170.3 368.6 199.7 319.9
Vehicle Components 97.8 105.3 195.9 207.6
-------- -------- -------- --------
$ 695.1 $ 671.4 $1,322.9 $1,318.3
======== ======== ======== ========
Operating income:(1)
Technical Products and Systems $ 25.6 $ 32.2 $ 48.1 $ 47.8
Industrial Products and Services 42.6 35.2 81.0 70.3
Service Solutions 24.3 15.0 37.9 28.2
Vehicle Components 11.8 14.9 23.1 29.2
General Corporate (9.5) (8.1) (18.1) (15.7)
-------- -------- -------- --------
$ 94.8 $ 89.2 $ 172.0 $ 159.8
======== ======== ======== ========
(1) Operating Income for the three months ended June 30, 2000 and 1999
does not include special charges of $21.7 and $5.5, respectively.
Operating income for the six months ended June 30, 2000 and 1999 does
not include special charges of $21.7 and $20.1, respectively.
<PAGE>
3. ACQUISITIONS & DIVESTITURES
On March 31, 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 and additional presence in the international market. Fenner
Fluid Power has facilities in Rockford, Illinois and Romford, England. This
acquisition 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 will be finalized prior
to the one-year anniversary of the acquisition and adjustments are not
expected to be material.
In the first six months of 2000, the company made several other
acquisitions with an aggregate purchase price of $26.6. Each of the
acquisitions for the six months ended June 30, 2000 was accounted for using
purchase accounting. All of these acquisitions are not material
individually or in the aggregate.
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 on
this gain was due to the low tax basis of the operations divested.
4. SPECIAL CHARGES
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. The company also recorded a $9.3 write-off of goodwill. The
write-off was required because the estimated fair value as measured by
discounted cash flow was less than the carrying value of the business.
Additionally, during the second quarter of 2000, the company announced that
it would close two Industrial Products 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 62 hourly and 14 salaried employees,
$2.6 for cash facility holding costs and $0.3 of asset write-downs.
During the first six months of 1999, the company announced that it would
close an Industrial Products manufacturing facility located in Ireland and
a Vehicle Components manufacturing facility located in Ohio primarily to
consolidate operations. As a result of these actions, the company recorded
charges of $8.5 for cash severance payments to 133 hourly and 244 salaried
employees. The company also recorded cash facility holding costs of $3.3,
and related asset write-downs of $8.3. These facilities were closed in
1999.
At June 30, 2000, a total of $10.8 of restructuring liabilities remained on
the Consolidated Balance Sheet. During the first six months of 2000, the
company made payments of $5.9 primarily related to restructuring actions
initiated in the third and fourth quarter of 1999 as discussed in the 1999
10K. The company anticipates that the remaining liability related to
restructuring actions initiated in the fourth quarter of 1999 will be paid
be before the end of the year.
The following table summarizes restructuring activity through June 30,
2000:
Employee Facility Other
Termination Holding Property Cash
Costs Costs Write-downs Costs Total
-------- -------- -------- -------- --------
Balance at
December 31, 1999 $ 6.5 $ 6.3 $ - $ - $ 12.8
Special Charge 1.3 2.6 0.3 - 4.2
Non-Cash asset
write-downs - - (0.3) - (0.3)
Payments (2.7) (3.2) - - (5.9)
-------- -------- -------- -------- --------
Balance at
June 30, 2000 $ 5.1 $ 5.7 $ - $ - $ 10.8
======== ======== ======== ======== ========
<PAGE>
5. 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.
6. EARNINGS PER SHARE
The following table sets forth certain calculations used in the computation
of diluted earnings per share:
Three months ended June 30,
2000 1999
-------- --------
Numerator:
Net Income $ 48.5 $ 41.6
-------- --------
Denominator (shares in millions):
Weighted-average shares outstanding 30.896 30.702
Effect of dilutive securities:
Employee stock options 0.794 0.381
-------- --------
Adjusted weighted-average shares and
assumed conversions 31.690 31.083
======== ========
Six months ended June 30,
2000 1999
-------- --------
Numerator:
Net Income $ 77.5 $ 72.5
-------- --------
Denominator (shares in millions):
Weighted-average shares outstanding 30.908 30.588
Effect of dilutive securities:
Employee stock options 0.731 0.307
-------- --------
Adjusted weighted-average shares and
assumed conversions 31.639 30.895
======== ========
7. INVENTORY
Inventory consists of the following:
June 30, December 31,
2000 1999
-------- --------
Finished goods $ 140.1 $ 132.4
Work in process 65.3 58.4
Raw material and purchased parts 106.0 96.2
-------- --------
Total FIFO cost 311.4 287.0
Excess of FIFO cost over LIFO inventory value (12.9) (13.0)
-------- --------
$ 298.5 $ 274.0
======== ========
<PAGE>
8. 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:
Three months ended March 31, Six months ended March 31,
2000 1999 2000 1999
-------- -------- -------- --------
Net sales $ 121.1 $ 112.8 $ 239.0 $ 229.4
Gross margin 48.9 45.5 97.0 93.8
Pre-tax income 19.7 16.5 38.7 35.7
Condensed balance sheet information of EGS as of March 31, 2000 and
September 30, 1999 was as follows:
March 31, September 30,
2000 1999
(unaudited)
-------- --------
Current assets $ 171.3 $ 170.7
Noncurrent assets 320.3 328.2
Current liabilities 58.0 67.7
Noncurrent liabilities 31.9 33.5
The company's recorded investment in EGS at June 30, 2000 was approximately
$95.6 less than its ownership of EGS's reported net assets at June 30,
2000. This difference is being accreted on a straight-line basis over 40
years.
9. 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 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 new
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 June 30, 2000 the company was in compliance with its financial
covenants.
<PAGE>
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
$30.7 reduce the aggregate amount available under the Revolving Facility
commitment.
10. 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. In
the first six months of 2000, the company purchased 0.475 shares at a cost
of $37.7.
11. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income, net of related tax, were as
follows:
Three months ended Six months ended
June 30, June 30,
--------------- ---------------
2000 1999 2000 1999
------ ------ ------ ------
Net income $ 48.5 $ 41.6 $ 77.5 $ 72.5
Foreign currency translation adjustments 0.2 (1.5) (3.4) (6.8)
------ ------ ------ ------
Comprehensive income $ 48.7 $ 40.1 $ 74.1 $ 65.7
====== ====== ====== ======
The components of the balance sheet caption Accumulated Other Comprehensive
Income, net of related tax, were as follows:
June 30, December 31,
2000 1999
-------- --------
Foreign currency translation adjustments $ 14.0 $ 10.6
Minimum pension liability adjustment,
net of tax of $1.5 in 2000 and 1999 2.4 2.4
-------- --------
Accumulated other comprehensive income $ 16.4 $ 13.0
======== ========
12. RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN
In the first quarter of 1999, the company issued 0.439 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.
<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.
Results of Operations
Consolidated:
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
Revenues $ 695.1 $ 671.4 $1,322.9 $1,318.3
Gross margin 233.3 224.9 439.5 438.9
% of revenues 33.6% 33.5% 33.2% 33.3%
Selling, general and admin expense 129.0 125.3 248.4 258.1
% of revenues 18.6% 18.7% 18.8% 19.6%
Goodwill/intangible amortization 9.5 10.4 19.1 21.0
Special charges 21.7 5.5 21.7 20.1
-------- -------- -------- --------
Operating income (1) 73.1 83.7 150.3 139.7
Other income, net 23.6 8.0 23.5 38.3
Equity in earnings of EGS 9.6 8.3 18.9 17.6
Interest expense, net (24.1) (30.0) (46.4) (62.1)
-------- -------- -------- --------
Income before income taxes $ 82.2 $ 70.0 $ 146.3 $ 133.5
Provision for income taxes (33.7) (28.4) (60.0) (61.0)
-------- -------- -------- --------
Income before loss
on early extinguishment of debt $ 48.5 $ 41.6 $ 86.3 $ 72.5
Loss on early extinguishment of
debt, net of tax - - (8.8) -
-------- -------- -------- --------
Net Income $ 48.5 $ 41.6 $ 77.5 $ 72.5
======== ======== ======== ========
Capital expenditures $ 30.4 $ 27.9 $ 60.0 $ 54.1
Depreciation and amortization 25.2 25.7 52.0 52.2
Second Quarter 2000 vs. Second Quarter 1999
Revenues - In the second quarter of 2000, revenues increased $23.7 or 3.5% from
1999. Excluding the effect of acquisitions and divestitures, revenues increased
$54.0 or 8.9% from 1999 due to growth in all four business segments.
Gross margin - In the second quarter of 2000, gross margin increased slightly to
33.6% of revenues from 33.5% of revenues in 1999. The increase is a result of
restructuring actions initiated in 1999.
Selling, general and administrative expense ("SG&A") - In the second quarter of
2000, SG&A decreased to 18.6% of revenues from 18.7% of revenues in 1999. This
decrease is primarily a result of restructuring actions initiated in 1998 and
1999.
<PAGE>
Goodwill/intangible amortization - In the second quarter of 2000, amortization
decreased primarily due to the disposition of Best Power in the fourth quarter
of 1999.
Special charges - 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. The company also recorded a $9.3 write-off of goodwill. The
write-off was required because the estimated fair value as measured by
discounted cash flow was less than the carrying value of the business.
Additionally, during the second quarter of 2000, the company announced that it
would close two Industrial Products 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 62 hourly and 14 salaried employees, $2.6 for cash
facility holding costs and $0.3 of asset write-downs.
During the second quarter of 1999, the company announced that it would close an
Industrial Products and Services manufacturing facility located in Ireland
primarily to consolidate operations, as well as other restructuring actions. As
a result of these actions, the company recorded charges of $2.2 for cash
severance payments to 13 hourly and 91 salaried employees. The company also
recorded cash facility holding costs of $3.3. These facilities were closed in
1999.
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.
In the second quarter of 1999, the company recorded a $7.6 gain on the sale of
marketable securities obtained in connection with a technology acquisition.
Interest expense, net - Interest expense decreased significantly in 2000
primarily due to operating cash flow improvements resulting from restructuring
actions, legal settlements, and the proceeds from 1999 business divestitures
which were used to pay down debt.
Income taxes - The effective rate for the second quarter of 2000 was 41.0% which
represents the company's anticipated effective tax rate for 2000.
Capital expenditures - Capital expenditures in the second quarter of 2000 were
higher than the second quarter of 1999 primarily due to expenditures for
expansion of manufacturing facilities in the Vehicle Components segment and for
new business information systems.
Six Months 2000 vs. Six Months 1999
Revenues -In the first six months of 2000, revenues increased $4.6 or 0.3% from
1999. Excluding the effect of acquisitions and divestitures revenues increased
$94.3 or 8.0% from 1999 due to growth in all four business segments.
Gross margin - In the first six months of 2000, gross margin decreased slightly
to 33.2% of revenues from to 33.3% of revenues in 1999. This decrease was
primarily due to a change in product mix in the Service Solutions and Vehicle
Components segments.
Selling, general and administrative expense ("SG&A") - SG&A decreased to 18.8%
of revenues in 2000 from 19.6% of revenues in 1999. This decrease is primarily a
result of restructuring actions initiated in 1999.
Goodwill/intangible amortization - In the first six months of 2000, amortization
decreased primarily due to the disposition of Best Power in the fourth quarter
of 1999.
Special charges-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. The company also recorded a $9.3 write-off of goodwill. The
write-off was required because the estimated fair value as measured by
discounted cash flow was less than the carrying value of the business.
Additionally, during the second quarter of 2000, the company announced that it
would close two Industrial Products 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 62 hourly and 14 salaried employees, $2.6 for cash
facility holding costs and $0.3 of asset write-downs.
<PAGE>
During the first six months of 1999, the company announced that it would close
an Industrial Products and a Vehicle components manufacturing facility located
in Ireland and Ohio primarily to consolidate operations, as well as other
restructuring actions. As a result of these actions, the company recorded
charges of $8.5 for cash severance payments to approximately 133 hourly and 244
salaried employees. The company also recorded cash facility holding costs of
$3.3 and related asset write-downs of 8.3. These facilities were closed in 1999.
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.
1999 primarily includes the $29.0 gain on the sale of Dual-Lite and the
company's 50% investment in a Japanese joint venture and a $7.6 gain on the sale
of marketable securities obtained in connection with a technology acquisition.
Interest expense, net -- Interest expense decreased significantly in the first
six months of 2000 primarily due to operating cash flow improvements resulting
from restructuring actions, legal settlements, and the proceeds from 1999
business divestitures which were used to pay down debt.
Income taxes - The effective income tax rate during the first six months was
41.0% which represents the company's anticipated effective tax rate for 2000.
The 1999 effective tax rate of 45.7% was relatively high due to the low tax
basis of operations divested during the period.
Capital expenditures - Capital expenditures in the first six months of 2000 were
higher when compared to the first six months of 1999 primarily due to
expenditures for expansion of a manufacturing facility in the Vehicle Components
segment and expenditures for new business information systems.
Segment Review
Three months Six months
ended June 30, ended June 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
Revenues:
Technical Products and Systems $ 149.8 $ 188.5 $ 285.7 $ 377.7
Industrial Products and Services 247.8 207.3 472.7 413.1
Service Solutions 170.3 368.6 199.7 319.9
Vehicle Components 97.8 105.3 195.9 207.6
-------- -------- -------- --------
$ 695.1 $ 671.4 $1,322.9 $1,318.3
======== ======== ======== ========
Operating income:(1)
Technical Products and Systems $ 25.6 $ 32.2 $ 48.1 $ 47.8
Industrial Products and Services 42.6 35.2 81.0 70.3
Service Solutions 24.3 15.0 37.9 28.2
Vehicle Components 11.8 14.9 23.1 29.2
General Corporate (9.5) (8.1) (18.1) (15.7)
-------- -------- -------- --------
$ 94.8 $ 89.2 $ 172.0 $ 159.8
======== ======== ======== ========
(1) Operating Income for the three months ended June 30, 2000 and 1999
does not include special charges of $21.7 and $5.5, respectively.
Operating income for the six months ended June 30, 2000 and 1999 does
not include special charges of $21.7 and $20.1, respectively.
<PAGE>
Second Quarter 2000 vs. Second Quarter 1999
Technical Products and Systems
Revenues - In the second quarter of 2000, revenues decreased $38.7 or 20.5% from
1999 primarily due to the disposition of Best Power. Excluding the effect of
acquisitions and divestitures revenues increased $11.6 or 8.5% from 1999 due to
increased demand for fire detection and building-life safety systems, sales of a
new generation automated transit fare collection system and growth in the TV and
radio transmission cable pressurization product line.
Operating Income - In the second quarter of 2000, operating income remained
constant at 17.1% of revenues primarily due to process improvements offset by
increased spending on sales and marketing expenses associated with the FC/9000
product.
Industrial Products and Services
Revenues - In the second quarter of 2000, revenues increased $40.5, or 19.5%
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
$8.7 or 4.2% due to increased sales of medium power transformers, industrial
ovens and increased demand in the hydraulic systems market.
Operating Income - Operating income increased $7.4 or 21.0% from 1999 due to
increased revenues as described above and cost reductions as a result of
sourcing and engineering efforts.
Service Solutions
Revenues - In the second quarter of 2000, revenues increased $29.4, or 17.3%
from 1999 primarily due to sales of new electronic diagnostic tools and new
warranty tools.
Operating Income - In the second quarter of 2000, operating income increased to
12.2% of revenues from 8.8% of revenues in 1999. This increase was driven by
demand for higher margin diagnostic tools.
Vehicle Components
Revenues - In the second quarter of 2000, revenues decreased $7.5, or 7.1% from
1999 primarily due to the disposition of Acutex in the third quarter of 1999.
Excluding the effect of acquisitions and divestitures, revenues increased $4.3
or 4.7% compared to 1999.
Operating Income - In the second quarter of 2000, operating income decreased to
12.1% of revenues from 14.2% of revenues in 1999 due to changes in product mix
and costs associated with the expansion of a manufacturing facility.
Six Months 2000 vs. Six Months 1999
Technical Products and Systems
Revenues - In the first six months of 2000, revenues decreased $92.0 or 24.4%
from 1999 primarily due to the disposition of Best Power and Dual-Lite.
Excluding the effect of acquisitions and divestitures, revenues increased $20.4
or 7.7% from 1999 due to increased demand for fire detection and building
life-safety systems, TV and radio transmission systems, sales of a new
generation automated transit fare collection system and growth in the cable
pressurization product line.
Operating Income - In the first six months of 2000, operating income increased
to 16.8% of revenues from 12.7% in 1999 due to process improvements and the
divestiture of lower margin businesses.
Industrial Products and Services
Revenues - In the first six months of 2000, revenues increased $59.6, or 14.4%
from 1999 primarily due to internal growth, the acquisition of North American
Transformer and the acquisition of Fenner Fluid Power. Excluding the effect of
acquisitions and divestitures, revenues increased $13.0 or 3.2%.
Operating Income - In the first six months of 2000, operating income increased
to 17.1% of revenues from 17.0% in 1999 primarily due to increased revenues as
described above and cost reductions due to sourcing and engineering efforts.
<PAGE>
Service Solutions
Revenues - In the first six months of 2000, revenues increased $48.7, or 15.2%
from 1999 primarily due to sales of new electronic diagnostic tools and new
warranty tools.
Operating Income - In the first six months of 2000, operating income increased
to 10.3% of revenues from 8.8% of revenues in 1999. This increase was driven by
demand for higher margin diagnostic tools.
Vehicle Components
Revenues - In the first six months of 2000, revenues decreased $11.7 or 5.6%
from 1999 primarily due to the disposition of Acutex in the third quarter of
1999. Excluding the effect of acquisitions and divestitures revenues increased
$12.2 or 6.7% from 1999.
Operating Income - In the first six months of 2000, operating margins decreased
to 11.8% of revenues from 14.1% 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. Management believes that cash
flow from operations and the company's credit arrangements will be sufficient to
supply funds needed in 2000.
Cash Flow Six months ended June 30,
2000 1999
-------- --------
Cash flow from:
Operating activities $ 100.4 $ 85.2
Tax on sale of Best Power (69.0) -
Investing activities (150.6) 16.7
Financing activities 70.4 (122.9)
-------- --------
Net change in cash balances $ (48.8) $ (21.0)
======== ========
Operating Activities - In the first six months of 2000, cash flow from operating
activities before taxes on the sale of Best Power increased primarily due to
increased earnings after non-cash items.
Tax on sale of Best Power - In the fourth quarter of 1999 the company sold Best
Power to Invensys 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 caused by $132.2 of non-deductible goodwill from the General Signal
acquisition of Best Power in 1995.
Investing Activities - In the first six months of 2000, business acquisitions
primarily include the $64.0 acquisition of Fenner Fluid Power as well as several
other acquisitions with an aggregate purchase price of $26.6. Capital
expenditures of $60.0 in 2000 primarily represent expenditures for expansion of
a manufacturing facility in the Vehicle Components segment and for new business
information systems.
Financing Activities - In the first six months of 2000, cash flow from financing
activities consisted primarily of net borrowings of $93.5 and share purchases of
$37.7.
Total Debt
The following summarizes the total debt outstanding and unused credit
availability, as of June 30, 2000:
Total Amount Unused Credit
Commitment Outstanding Availability
--------- --------- --------
Revolving loan $ 425.0 $ 100.0 $ 294.3(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 7.1 7.1 -
--------- --------- ---------
Total $ 1,533.2 $ 1,208.2 $ 294.3
========= ========= =========
(1) Decreased by $30.7 of facility letters of credit outstanding at June 30,
2000, which reduce the unused credit availability.
<PAGE>
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 new 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 June 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 2000.
The company believes it has sufficient access to capital markets for internal
growth and acquisition activity.
Inrange Technologies-Ancor Communications Technology License Agreement
In April 2000, Inrange Technologies Corporation ("Inrange"), a subsidiary of the
company, announced initial shipments of its 64-port Fibre Channel Director, the
IN-VSN FC/9000.
On September 24, 1998, Inrange entered into a technology license agreement with
Ancor Communications, Inc. ("Ancor"). Under the agreement, Inrange has licensed
from Ancor the right to use certain ASICs and software in fibre channel
connectivity products for the high end data center networking and data center
storage area network markets for IBM and IBM-compatible environments. Also, as
part of the agreement, Ancor has agreed not to sell or license its ASICs or
software to any third party for use in the above-described Inrange market nor to
sell products in configurations that compete directly with Inrange's products in
that market. Additionally, Inrange has entered into a reseller agreement with
Ancor under which Ancor will purchase 64- and 128-port systems from Inrange and
resell them to Ancor's OEM customers. Inrange has also signed an OEM agreement
with Ancor under which Ancor will provide Inrange its GigWorks MKII family of
switches, in both 8- and 16-port configurations, to integrate into Inrange's
products.
Inrange Technologies-Initial Public Offering
On June 5, 2000, the company announced that its Inrange Technologies subsidiary
has filed a registration statement with the U.S. Securities and Exchange
Commission for a proposed initial public offering (IPO) of its common stock.
Shares will be offered by Inrange. Salomon Smith Barney is acting as lead
manager and Bear, Stearns & Co. and Chase H&Q are acting as co-managers for the
offering. Inrange Technologies designs, manufactures, markets and services
solutions for storage, data and telecommunications networks used in Fortune 1000
businesses and other large enterprises.
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.
<PAGE>
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 judgement favorable to the company.
However, since the amount of the damages cannot be fully quantified until the
legal discovery process proceeds further and no assurances can be made as to the
final timing and outcome of any litigation, no gain has been recorded. See Note
16 to the consolidated financial statements included in the company's 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.
Significance of Goodwill and Intangibles - The company had net goodwill and
intangibles of $1,148.9 and shareholders' equity of $603.3 at June 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 effect 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 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 Financial Accounting Standards No. 133
"Accounting for Derivative Instruments and Hedging Activities," as amended, will
become effective January 2001, and 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 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
<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.
(3) None.
(4) None
(10) None.
(11) Statement regarding computation of earnings per share. See Note 6
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.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPX CORPORATION
---------------
(Registrant)
Date: August 15, 2000 By /s/ John B. Blystone
---------------------
John B. Blystone
Chairman, President and
Chief Executive Officer
Date: August 15, 2000 By /s/ Patrick J. O'Leary
-----------------------
Patrick J. O'Leary
Vice President, Finance,
Treasurer and Chief
Financial Officer
