FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission File Number 1-6948
SPX CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 38-1016240
(State of Incorporation) (I.R.S. Employer Identification No.)
700 Terrace Point Drive, Muskegon, Michigan 49443-3301
(Address of Principal Executive Office)
Registrant's Telephone Number including Area Code (616) 724-5000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Common shares outstanding October 23, 1997 - 12,560,521
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SPX CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
(Unaudited)
September 30 December 31
1997 1996
------------ -----------
ASSETS
Current assets:
Cash and temporary investments $ 15,350 $ 12,312
Receivables 143,040 96,495
Inventories 125,753 109,258
Deferred income tax asset and refunds 37,408 42,208
Net assets under agreement for sale - 133,795
Prepaid and other current assets 19,339 14,073
--------- ---------
Total current assets $ 340,890 $ 408,141
Investments - 3,464
Property, plant and equipment, at cost 262,811 251,310
Accumulated depreciation (139,825) (127,445)
--------- ---------
Net property, plant and equipment $ 122,986 $ 123,865
Goodwill 60,737 58,665
Other assets 16,283 21,908
--------- ---------
Total assets $ 540,896 $ 616,043
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities
of long-term debt $ 2,951 $ 1,430
Accounts payable 76,764 53,011
Accrued liabilities 105,491 115,016
Income taxes payable 32,440 4,973
--------- ---------
Total current liabilities $ 217,646 $ 174,430
Long-term liabilities 91,142 92,618
Deferred income taxes 22,690 15,219
Minority interest 1,633 -
Long-term debt 193,223 227,859
Shareholders' equity:
Common stock 167,099 163,969
Paid-in capital 66,237 60,756
Retained deficit (3,873) (48,688)
Common stock held in treasury (190,474) (50,000)
Unearned compensation (19,679) (20,797)
Cumulative translation adjustments (4,748) 677
--------- ---------
Total shareholders' equity $ 14,562 $ 105,917
--------- ---------
Total liabilities and shareholders' equity $ 540,896 $ 616,043
========= =========
The accompanying notes are an integral part of these statements.
SPX CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
--------- -------- -------- --------
Revenues $ 213,672 $254,979 $680,597 $857,910
Costs and expenses:
Cost of products sold 152,336 191,647 492,582 655,795
Selling, general and administrative 42,420 46,075 129,650 142,951
Goodwill/Intangible amortization 822 1,767 2,602 5,432
Minority and equity interests 132 (1,442) 229 (4,025)
Restructuring charge - 3,204 - 15,883
--------- -------- -------- --------
Operating income $ 17,962 $ 13,728 $ 55,534 $ 41,874
Other expense (income), net (437) (219) (66,631) 526
Interest expense, net 3,315 7,759 10,567 24,865
--------- -------- -------- --------
Income before income taxes $ 15,084 $ 6,188 $111,598 $ 16,483
Provision for income taxes 5,185 2,351 55,029 6,355
--------- -------- -------- --------
Income before extraordinary item $ 9,899 $ 3,837 $ 56,569 $ 10,128
Extraordinary item, net of tax - (774) (10,330) (1,153)
--------- -------- -------- --------
Net income $ 9,899 $ 3,063 $ 46,239 $ 8,975
========= ======== ======== ========
Income (loss) per share:
Before extraordinary item $ 0.80 $ 0.27 $ 4.17 $ 0.73
Extraordinary item, net of tax - (0.05) (0.76) (0.08)
--------- -------- -------- --------
Net income $ 0.80 $ 0.22 $ 3.41 $ 0.65
========= ======== ======== ========
Dividends per share $ - $ 0.10 $ 0.10 $ 0.30
Weighted average number of
common shares outstanding 12,406 14,209 13,547 13,881
The accompanying notes are an integral part of these statements.
SPX CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Nine Months Ended
September 30,
1997 1996
--------- ---------
Cash flows from operating activities:
Net income from operating activities $ 46,239 $ 8,975
Adjustments to reconcile net income to net
cash from operating activities -
Extraordinary loss 10,330 1,153
Depreciation and amortization 19,327 31,833
Minority and equity interests 229 (4,025)
Restructuring charge - 15,883
Gain on sale of business, net of taxes (31,160) -
Compensation recognized under employee stock plan 2,872 3,303
Deferred taxes 17,980 (10,462)
Change in operating assets and liabilities (net
of effect of acquired and disposed businesses):
Receivables (37,655) (21,459)
Inventories (10,327) 16,065
Prepaid and other assets (5,353) 7,647
Accounts payable and accrued liabilities (8,930) 1,473
Income taxes payable (12,912) 2,798
Long-term liabilities 43 (765)
Other, net 537 1,643
--------- ---------
Net cash provided by (used by) operating activities $ (8,780) $ 54,062
Cash flows from investing activities:
Proceeds from sale of business $ 223,000 $ -
Investments in businesses (5,109) -
Capital expenditures (15,588) (12,036)
--------- ---------
Net cash provided by (used by) investing activities $ 202,303 $ (12,036)
Cash flows from financing activities:
Net payments under debt agreements $ (37,504) $ (33,522)
Payment of costs related to debt extinguishment (16,397) (1,860)
Common stock purchased (140,474) -
Net shares sold under stock option plan 4,736 4,947
Dividends paid (1,424) (4,114)
--------- ---------
Net cash used by financing activities $(191,063) $ (34,549)
Effect of exchange rate changes on cash 578 693
--------- ---------
Net increase in cash and temporary investments $ 3,038 $ 8,170
Cash and temporary investments, beg. of period 12,312 17,069
--------- ---------
Cash and temporary investments, end of period $ 15,350 $ 25,239
========= =========
The accompanying notes are an integral part of these statements.
SPX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 (Unaudited)
1. The interim financial statements reflect the adjustments, which are, in the
opinion of management, necessary for a fair presentation of the results of
the interim periods. Adjustments are of a normal recurring nature.
The preparation of the company's consolidated condensed financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the consolidated condensed financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. Information regarding the company's segments was as follows:
Three months Nine months
ended September 30, ended September 30,
1997 1996 1997 1996
------- ------- ------- -------
(in millions)
Revenues:
Service Solutions $ 151.0 $ 132.8 $ 456.9 $ 463.5
Vehicle Components 62.7 122.2 223.7 394.4
------- ------- ------- -------
Total $ 213.7 $ 255.0 $ 680.6 $ 857.9
======= ======= ======= =======
Operating income (expense):
Service Solutions $ 15.3 $ 7.9 $ 43.0 $ 26.0
Vehicle Components 8.7 11.2 29.9 32.0
General Corporate (6.0) (5.4) (17.4) (16.1)
------- ------- ------- -------
Total $ 18.0 $ 13.7 $ 55.5 $ 41.9
======= ======= ======= =======
Capital expenditures:
Service Solutions $ 1.3 $ 1.7 $ 4.2 $ 3.1
Vehicle Components 3.6 2.2 11.0 8.3
General Corporate 0.1 0.3 0.4 0.6
------- ------- ------- -------
Total $ 5.0 $ 4.2 $ 15.6 $ 12.0
======= ======= ======= =======
Depreciation and amortization:
Service Solutions $ 2.8 $ 3.3 $ 8.3 $ 10.2
Vehicle Components 2.9 6.7 10.2 20.4
General Corporate 0.3 0.3 0.8 1.2
------- ------- ------- -------
Total $ 6.0 $ 10.3 $ 19.3 $ 31.8
======= ======= ======= =======
September 30, December 31,
1997 1996
------- -------
Identifiable Assets:
Service Solutions $ 325.0 $ 291.5
Vehicle Components 148.8 271.5
General Corporate 67.1 53.0
------- -------
Total $ 540.9 $ 616.0
======= =======
SPX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 (Unaudited)
3. On February 7, 1997, the company completed the sale of substantially all of
the assets and rights used in the manufacture and distribution of piston
rings and cylinder liners, known as the Sealed Power Division ("SPD"). The
sale to Dana Corporation was for $223 million gross cash proceeds. SPD
included the accounts of Sealed Power, a U.S. division, SP Europe Limited
Partnership, 70% owned, Allied Ring Corporation, 50% owned, and Promec, 40%
owned. In addition, the buyer assumed substantially all of the liabilities
and obligations of the business, excluding liabilities relating to income
and other taxes, certain liabilities arising outside the ordinary course of
business, debt, and certain employee related liabilities. The transaction
includes a ten-year noncompetition agreement precluding the company from
competing with SPD. The company recorded a pretax gain of $71.9 million
(included in other expense (income), net), or $31.2 million after-tax on
the transaction.
The accompanying consolidated condensed financial statements include the
results of SPD through February 7, 1997, and the results of the Hy-Lift
division through November 1, 1996, their dates of disposition. The
following unaudited proforma first nine months 1997 and 1996 selected
financial data reflects the disposition of these divisions as if they had
occurred as of the beginning of the periods, respectively. The unaudited
proforma selected results of operations do not purport to represent what
the company's results of operations would actually have been had the
dispositions in fact occurred as of January 1, 1997, or January 1, 1996, or
project the results for any future date or period.
Nine months ending September 30,
1997
Proforma Adj. 1996
Reported Divested Other Proforma Proforma
(in millions, except per share)
Revenues $ 680.6 $(23.5) $ 657.1 $ 648.8
Cost of products sold 492.6 (19.6) 473.0 469.6
------- ------ ------- -------
Gross margin $ 188.0 $ (3.9) $ 184.1 $ 179.2
SG&A 129.7 (1.0) 128.7 130.6
Goodwill/intangible amort. 2.6 (0.2) 2.4 4.1
Minority and equity 0.2 - 0.2 (0.6)
Restructuring charges - - - 11.7
------- ------ ------- -------
Operating income $ 55.5 $ (2.7) $ 52.8 $ 33.4
Other (income) expense (66.6) - (71.9)(a) 5.3 .4
Interest expense, net 10.6 - 1.0 (b) 9.6 20.1
------- ------ ------- ------- -------
Income before income taxes $ 111.5 $ (2.7) $ (70.9) $ 37.9 $ 12.9
Provision for income taxes 55.0 (1.0) (40.3)(c) 13.7 4.9
------- ------ ------- ------- -------
Income (d) $ 56.5 $ (1.7) $ (30.6) $ 24.2 $ 8.0
======= ====== ======= ======= =======
Income per share $ 4.17 $ 1.79 $ 0.58
Weighted average number
of shares 13.5 13.5 13.9
(a) Adjustment to exclude the gain on the sale of SPD.
(b) Adjustment to interest expense, net, assuming the use of net
proceeds to reduce revolving credit and other debt.
(c) Adjustment to income tax expense to reflect an effective tax rate of
36% in 1997 and 38% in 1996.
(d) Income excludes extraordinary item, net of taxes.
SPX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 (Unaudited)
4. During the first quarter of 1997, the company recorded a $6.5 million
charge ($4.2 million after-tax) in other expense (income), net. This charge
reflects anticipated future legal costs associated with the ongoing
litigation with Snap-on Incorporated.
5. On March 11, 1997, the company commenced a cash tender offer for all
$128,415,000 (principal amount) of its outstanding 11 3/4% Senior
Subordinated Notes, due 2002 (the "Notes"), at a purchase price determined
by reference to a fixed spread of 35 basis points over the yield to
maturity of the United States Treasury 5 3/8% Notes due May 31, 1998, on
March 25, 1997, of which an amount equal to 1% of principal amount of each
Note purchased constituted a consent payment that was paid for Notes
tendered on or prior to March 25, 1997.
The tender offer expired on April 9, 1997 and $126,734,000 of the Notes
were tendered. The company paid for these Notes on April 14, 1997. As a
result of the company's irrevocable agreement with note holders tendering
as of March 25 1997, the company recorded an extraordinary first quarter
pretax charge of $16.4 million, or $10.3 million after-tax, for the cost to
repurchase the notes.
6. On April 10, 1997, a Dutch Auction self-tender offer was announced for the
purchase of up to 2.7 million common shares of the company at a price
ranging from $48 to $56 per share. This tender offer expired on May 8, 1997
and 2.147 million shares were purchased at $56 per share. The purchase of
common stock tendered was financed with the revolving credit agreement. Had
the self-tender offer and related financing been completed as of the
beginning of the applicable year, nine months 1997 net income would have
been approximately $44.5 million, or $3.52 per share and nine months 1996
net income would have been approximately $5.6 million, or $.48 per share.
An additional 376,100 common shares were purchased after May 8, 1997 for
approximately $20.3 million.
7. During the first quarter of 1997, the company terminated its practice of
selling undivided fractional interests in domestic trade accounts
receivable. At December 31, 1996, approximately $26 million of accounts
receivable had been sold under this practice.
8. During the first quarter of 1997, the company made three strategic
investments totaling $5.1 million. Effective the beginning of 1997, the
company acquired an additional 30% of JATEK which raised the company's
ownership in this Japanese company to 80%. Also effective the beginning of
1997, the company purchased an additional 10% of IBS Filtran which raised
the company's ownership to 60% in this German company. Effective March 1,
1997, the company acquired A.R. Brasch Marketing Inc., which provides
technical service and training materials for vehicle manufacturers. A.R.
Brasch has annual sales approaching $10 million. Had these acquisitions
taken place on January 1 of the respective years, consolidated revenues and
income would not have been significantly different from reported results.
Item 2. Management's Discussion and Analysis of Results of Operations
and Financial Condition
The following unaudited information should be read in conjunction with the
company's unaudited consolidated financial statements and related footnotes.
Recent Developments
The company is reviewing a possible combination of certain operations within the
Service Solutions segment to respond to changing customer needs, technology, and
marketplace changes. These changing conditions have prompted new product
technology and a migration to smaller and lower priced equipment. Accordingly,
the review of Service Solution's operations will also focus on current product
offerings, principally the diagnostic and wheel service lines. Management
intends to complete this review during the fourth quarter of 1997 and will
decide upon a plan of action. This plan may require a fourth quarter charge for
the operational combination. An additional charge may be necessary for the
impaired carrying value of certain prior-generation inventory that may result
from a management decision to accelerate the introduction of new
technology/products or to change the manner in which the company meets customer
needs in this segment.
The company is participating in an alliance that is developing a comprehensive
set of technical standards to allow the integration of computer-based, repair
shop products by vehicle service providers. These standards are called
PASSPORT(TM) and will provide an open architecture for networking of
computer-based products, including diagnostics, wheel alignment, repair
information systems and point-of-sale systems. The standards will be available
in early 1998 to all suppliers of computer-based products and services. The
alliance currently includes the company, Alldata Corporation, Anderson BDG
Corporation, Hunter Engineering, Reynolds & Reynolds and Vetronix Corporation.
Results of Operations
Consolidated:
Three months ended Nine months ended
September 30, September 30,
------------------ ------------------
1997 1996 1997 1996
------- ------- ------- -------
(in millions)
Revenues:
Service Solutions $ 151.0 $ 132.8 $ 456.9 $ 463.5
Vehicle Components 62.7 122.2 223.7 394.4
------- ------- ------- -------
Total $ 213.7 $ 255.0 $ 680.6 $ 857.9
======= ======= ======= =======
Operating income (loss):
Service Solutions $ 15.3 $ 7.9 $ 43.0 $ 26.0
Vehicle Components 8.7 11.2 29.9 32.0
General corporate expense (6.0) (5.4) (17.4) (16.1)
------- ------- ------- -------
Total $ 18.0 $ 13.7 $ 55.5 $ 41.9
Other expense (income), net (0.4) (0.3) (66.6) 0.5
Interest expense, net 3.3 7.8 10.6 24.9
------- ------- ------- -------
Income before income taxes $ 15.1 $ 6.2 $ 111.5 $ 16.5
Provision for income taxes 5.2 2.4 55.0 6.4
------- ------- ------- -------
Income before extraordinary item $ 9.9 $ 3.8 $ 56.5 $ 10.1
Extraordinary item, net of tax - (0.7) (10.3) (1.1)
------- ------- ------- -------
Net income $ 9.9 $ 3.1 $ 46.2 $ 9.0
======= ======= ======= =======
Capital expenditures $ 15.6 $ 12.0
Depreciation and amortization 19.3 31.8
September 30, 1997 December 31, 1996
(in millions)
Identifiable assets $ 540.9 $ 616.0
General corporate expenses and other consolidated items that are not allocated
to the segments are explained below, followed by segment information.
Third Quarter 1997 vs. Third Quarter 1996
General Corporate expense
The third quarter of 1997 expense was greater than the third quarter of 1996 due
to higher incentive compensation costs.
Other expense (income), net
These expense and income items represent expenses and income not included in the
determination of operating results and include gains or losses on currency
exchange, translation gains or losses of financial statements in highly
inflationary countries, fees incurred on the sale of accounts receivable under
the company's accounts receivable securitization program (discontinued during
the first quarter of 1997), gains or losses on the sale of fixed assets, and
unusual non-operational gains or losses.
Interest Expense, net
Third quarter 1997 interest expense was less than the third quarter 1996
interest expense due to lower debt levels and interest rates.
Provision for Income Taxes
The effective income tax rate for the third quarter of 1997 was 34.4%. The third
quarter effective income tax rate included an amount to adjust the year-to-date
rate (excluding unusual items) to 36%, the estimated effective income tax rate
for the year.
Extraordinary item, net of taxes
In the third quarter of 1996, the company recorded a pretax charge of $1.2
million, $0.7 million after-tax, to reflect the costs to repurchase $17.3
million of its 11 3/4% Senior Subordinated Notes.
First Nine Months of 1997 vs. First Nine Months of 1996
General Corporate expense
The first nine months of 1997 expense was greater than the first nine months of
1996 due to higher incentive compensation costs.
Other expense (income), net
In the first quarter of 1997, the company completed the sale of the Sealed Power
division to Dana Corporation for $223 million in cash. The company recorded a
$71.9 million gain on the sale ($31.2 million after-tax). The results of
operations of Sealed Power are included in the company's consolidated results
through the date of divestiture, February 7, 1997. The first nine months of 1997
includes a $6.5 million charge for estimated costs of pending litigation with
Snap-on Incorporated. These costs reflect future legal costs to defend this
litigation through its conclusion.
Interest Expense, net
First nine months 1997 interest expense was less than the first nine months 1996
interest expense due to lower debt levels.
Provision for Income Taxes
The overall income tax provision includes $40.7 million provided on the sale of
the Sealed Power division. Without this item, the effective income tax rate for
the first nine months of 1997 was 36% which represents the company's current
estimated effective income tax rate for the year.
Extraordinary item, net of taxes
In the first nine months of 1997, the company recorded a pretax charge of $16.4
million, $10.3 million after-tax, to reflect the costs to repurchase $126.7
million of its 11 3/4% Senior Subordinated Notes tendered pursuant to the
company's irrevocable tender offer for these notes.
Service Solutions (formerly Specialty Service Tools):
Three months ended Nine months ended
September 30, September 30,
------------------ ------------------
1997 1996 1997 1996
------- ------- ------- -------
(in millions)
Revenues......................... $ 151.0 $ 132.8 $ 456.9 $ 463.5
Gross Profit..................... 48.9 45.3 145.2 144.6
% of revenues.................. 32.4% 34.1% 31.8% 31.2%
Selling, general & administrative 33.0 33.1 100.5 103.7
% of revenues.................. 21.9% 24.9% 22.0% 22.4%
Goodwill/intangible amortization. 0.6 1.0 1.7 3.2
Minority and equity interests.... 0.0 0.1 0.0 0.0
Restructuring charge............. - 3.2 - 11.7
------- ------- ------- -------
Operating income................. $ 15.3 $ 7.9 $ 43.0 $ 26.0
======= ======= ======= =======
Capital expenditures............. $ 4.2 $ 3.1
Depreciation and amortization.... 8.3 10.2
September 30, 1997 December 31, 1996
Identifiable assets.............. $ 325.0 $ 291.5
Third Quarter 1997 vs. Third Quarter 1996
Revenues
Third quarter 1997 revenues increased $18.2 million, or 13.7%, from the third
quarter of 1996. The most significant reason for the higher revenues was
improved program tool sales over 1996 and the initial impact of gas emissions
sales, principally in Pennsylvania and California. Third quarter 1997 revenues
also included approximately $8 million of sales due to the consolidation of
JATEK and the purchase of A.R. Brasch. Offsetting these incremental 1997 sales,
were lower sales of engine diagnostic and wheel service equipment and air
conditioning repair tools and equipment.
Gross margin
Third quarter 1997 gross margin of 32.4% was lower than the 34.1% gross margin
in 1996. Third quarter 1997 gross margin was impacted by general revenue mix
towards lower margin product sold during the quarter. Also, productivity
improvements and cost reductions from the 1996 restructuring increased both 1997
and 1996 gross margins.
Selling, General and Administrative ("SG&A")
Third quarter 1997 SG&A expense was $33.0 million, or 21.9% of revenues,
compared to $33.1 million, or 24.9% of revenues, in 1996. The lower SG&A expense
to revenues percentage reflects continuing cost controls.
Goodwill/Intangible Amortization
Third quarter of 1997 expense was lower than 1996 due to the recording of an
impairment of certain goodwill during the fourth quarter of 1996.
Minority and equity interests
In 1996, this line represented the equity (earnings) or losses of JATEK,
previously 50% owned. Effective the beginning of 1997, the company acquired an
additional 30% of JATEK and its results are now consolidated. Beginning in 1997,
the 20% minority interest in JATEK's results is reflected in this line.
Restructuring Charge
During the third quarter of 1996, the company incurred $3.2 million of
restructuring costs to consolidate five Specialty Service Tool divisions into
two divisions.
Operating Income
1997 third quarter operating income of $15.3 million compares to third quarter
1996 operating income of $11.1 million, excluding the $3.2 million restructuring
charge in 1996. The increase was primarily attributable to higher revenues and
reduced goodwill amortization.
First Nine Months of 1997 vs. First Nine Months of 1996
Revenues
First nine months 1997 revenues decreased $6.6 million, or 1.4%, from the first
nine months of 1996. The most significant reason for the lower revenues was that
1996 included approximately $32 million in dealer equipment sales to one
customer. First nine months 1997 revenues include approximately $27 million of
sales due to the consolidation of JATEK and the purchase of A.R. Brasch.
Offsetting these incremental 1997 sales, were lower sales of essential program
tools, engine diagnostic and wheel service equipment, and air conditioning
repair tools and equipment.
Gross margin
First nine months 1997 gross margin of 31.8% was higher than the 31.2% gross
margin in 1996. The increase in the gross margin was a direct result of the
significant dealer equipment sales in 1996, which have a relatively low gross
margin. Also, productivity improvements and cost reductions from the 1996
restructuring increased the 1997 gross margin.
Selling, General and Administrative ("SG&A")
First nine months 1997 SG&A expense was $100.5 million, or 22.0% of revenues,
compared to $103.7 million, or 22.4% of revenues, in 1996. The lower SG&A
spending was primarily due to lower revenues, reduced incentive compensation
expense, and cost control. Additionally, the significant dealer equipment sales
in the first six months of 1996 had relatively low SG&A costs, which lowered the
1996 SG&A percent to revenues.
Goodwill/Intangible Amortization
First nine months of 1997 expense was lower than 1996 due to the recording of an
impairment of certain goodwill during the fourth quarter of 1996.
Minority and equity interests
In 1996, this line represented the equity (earnings) or losses of JATEK,
previously 50% owned. Effective the beginning of 1997, the company acquired an
additional 30% of JATEK and its results are now consolidated. Beginning in 1997,
the 20% minority interest in JATEK's results is reflected in this line.
Restructuring Charge
During 1996, the company incurred $11.7 million of restructuring costs to
consolidate five Specialty Service Tool divisions into two divisions.
Operating Income
1997 first nine months operating income of $43.0 million compares to first nine
months 1996 operating income of $37.7 million, excluding the $11.7 million
restructuring charge in 1996. The increase was primarily attributable to cost
reductions and reduced goodwill amortization.
Capital Expenditures
First nine months 1997 capital expenditures were $4.2 million compared to first
nine months of 1996 capital expenditures of $3.1 million. Capital expenditures
for 1997 are expected to approximate $10 million. Starting in 1997, the company
has begun implementation of a new business system designed to improve systems
capabilities at its worldwide Service Solutions businesses.
Identifiable Assets
Identifiable assets at September 30, 1997 increased approximately $34 million
from year-end 1996 and included the increase due to the purchase of A.R. Brasch
and the consolidation of JATEK. The balance of the increase was predominately in
receivables and inventories. The increase in receivables was a result of higher
revenues in August and September of 1997 compared to November and December of
1996. The increase in inventories was a result of a buildup of inventory to
support fourth quarter business activity.
Vehicle Components (formerly Original Equipment Components:
Three months ended Nine months ended
September 30, September 30,
------------------ ------------------
1997 1996 1997 1996
------- ------- ------- -------
(in millions)
Revenues......................... $ 62.7 $ 122.2 $ 223.7 $ 394.4
Gross Profit..................... 12.5 17.2 42.9 56.6
% of revenues.................. 19.9% 14.1% 19.2% 14.4%
Selling, general & administrative 3.4 6.8 11.8 22.2
% of revenues.................. 5.4% 5.6% 5.3% 5.6%
Goodwill/intangible amortization. 0.3 0.7 1.0 2.2
Minority and equity interests.... 0.1 (1.5) 0.2 (4.0)
Restructuring charge ............ - - - 4.2
------- ------- ------- -------
Operating income................. $ 8.7 $ 11.2 $ 29.9 $ 32.0
======= ======= ======= =======
Capital expenditures............. $ 11.0 $ 8.3
Depreciation and amortization.... 10.2 20.4
September 30, 1997 December 31, 1996
Identifiable assets.............. $ 148.8 $ 271.5
Third Quarter 1997 vs. Third Quarter 1996
Revenues
Third quarter 1997 revenues were down $59.5 million from the third quarter 1996
revenues due to the divestitures of the Sealed Power and Hy-Lift divisions. The
third quarter of 1996 included $64.0 million of revenues from Sealed Power and
Hy-Lift.
Gross Profit
Third quarter 1997 gross margin of 19.9% compares favorably to the third quarter
1996 gross margin of 14.1%. The increase was due to the disposal of Hy-Lift and
Sealed Power, both lower margin businesses.
Selling, General and Administrative ("SG&A")
SG&A was $3.4 million, or 5.4% of revenues, in the third quarter of 1997
compared to $6.8 million, or 5.6% of revenues, in 1996, reflecting continuing
cost containment efforts and the effect of the divestitures.
Goodwill/Intangible Amortization
Goodwill and intangible amortization expense was lower in 1997 due to the sale
of Sealed Power.
Minority and equity interests
In 1996, minority and equity interests reflected the equity earnings of Promec
and Allied Ring Corporation (both sold as part of the Sealed Power divestiture
in February 1997) and IBS Filtran, 50% owned during 1996. In 1997, this amount
represents the 40% minority interest in IBS Filtran's results. The company
acquired an additional 10% of IBS Filtran as of the beginning of 1997 and is now
consolidating its results.
Operating Income
Third quarter 1997 operating income was $8.7 million compared to $11.2 million
in the third quarter of 1996.
First Nine Months of 1997 vs. First Nine Months of 1996
Revenues
First nine months 1997 revenues were down $170.7 million from the first nine
months of 1996 due to the divestitures of the Sealed Power and Hy-Lift
divisions. The first nine months of 1997 includes $23.5 million of revenues from
Sealed Power and the first nine months of 1996 includes $209.0 million of
revenues from Sealed Power and Hy-Lift.
Gross Profit
First nine months 1997 gross margin of 19.2% compares favorably to the first
nine months 1996 gross margin of 14.4%. The increase was due to the disposal of
Hy-Lift and Sealed Power, both lower margin businesses.
Selling, General and Administrative ("SG&A")
SG&A was $11.8 million, or 5.3% of revenues, in the first nine months of 1997
compared to $22.2 million, or 5.6% of revenues, in 1996, reflecting continuing
cost containment efforts and the effect of the divestitures.
Goodwill/Intangible Amortization
Goodwill and intangible amortization expense was lower in 1997 due to the sale
of Sealed Power.
Minority and equity interests
In 1996, minority and equity interests reflected the equity earnings of Promec
and Allied Ring Corporation (both sold as part of the Sealed Power divestiture
in February 1997) and IBS Filtran, 50% owned during 1996. In 1997, this amount
represents the 40% minority interest in IBS Filtran's results. The company
acquired an additional 10% of IBS Filtran as of the beginning of 1997 and is now
consolidating its results.
Operating Income
First nine months 1997 operating income was $29.9 million compared to $32.0
million in the first nine months of 1996. The first nine months of 1996 included
a $4.2 million restructuring charge for an early retirement program at the
Sealed Power division.
Capital Expenditures
Capital expenditures in the first nine months of 1997 were $11.0 million and
$8.3 million in the first nine months of 1996. Capital expenditures for 1997 are
expected to approximate $20 million and will be focused upon certain capacity
expansions, cost reductions and maintenance of the operations.
Identifiable Assets
Identifiable assets decreased approximately $123 million from year-end 1996
reflecting the sale of Sealed Power.
Liquidity and Financial Condition
The company's liquidity needs arise primarily from capital investment in
equipment, working capital requirements to support business growth initiatives
and to meet debt service obligations. Management believes that operations and
the credit arrangements will be sufficient to supply funds needed by the company
through 1998.
Cash Flow Nine months ended Sept. 30,
1997 1996
---------- ---------
(in millions)
Cash flow from:
Operating activities...... $ (8.8) $ 54.1
Investing activities...... 202.3 (12.0)
Financing activities...... (190.5) (33.9)
--------- ---------
Net Cash Flow............ $ 3.0 $ 8.2
========= =========
Cash flow from operating activities in the first nine months of 1997 was an
outflow of $8.8 million. The 1997 cash outflow includes the $26 million effect
of terminating the accounts receivable securitization program during the first
quarter. The 1997 outflow also includes additional increases in accounts
receivable and increases in inventory totaling $22 million. The company has
accelerated its efforts to reduce current inventory levels of engine diagnostic
and wheel service equipment within Service Solutions. Such inventory has a
carrying value of approximately $41 million at September 30, 1997, down $4
million from June 30, 1997. The success of this inventory reduction effort is
dependent upon the timing of many factors, including new product technology,
migration to lower priced hand-held equipment, new product introductions
(including products designed to the new PASSPORT(TM) standards), and competition
for customer demand given various gas emissions programs.
Cash flow from investing activities during the first nine months of 1997
includes the $223 million of cash received on the sale of Sealed Power, offset
by $5.1 million invested in A.R. Brasch, and in IBS Filtran (acquired additional
10% ownership) and capital expenditures of $15.6 million. Capital expenditures
for 1997 should approximate $30 million for the year.
Cash flow from financing activities for the first nine months of 1997 reflects
the company's first quarter dividend payment (see discussion below), shares sold
under the stock option plan, $16.4 million of extinguishment costs paid in the
second quarter to repurchase $126.7 million of 11 3/4% senior subordinated
notes, $120.2 million to purchase 2.147 million shares of common stock in the
"Dutch" auction, $20.3 million to purchase common stock in the open market
during the third quarter, and a $37.5 million reduction in borrowings.
Total Debt
During the first nine months of 1997, the company completed a new financial
capital plan. This plan included:
1. A tender offer, dated March 11, 1997, to purchase all outstanding 11
3/4% Senior Subordinated Notes. This tender offer expired April 9, 1997
and $126.7 million of the notes were purchased. The company used
existing cash and cash equivalents and its revolving credit facility to
fund the purchase of the notes.
2. Obtained a new $400 million unsecured revolving credit agreement on May
7, 1997 with a syndicate of banks. The agreement provides debt capacity
for business operations, acquisitions, and the repurchase of common
stock.
3. Announced, on April 10, 1997, a Dutch Auction self-tender offer for up
to 2.7 million common shares of the company at a price ranging from $48
to $56 per share. This tender offer expired on May 8, 1997 and 2.147
million shares were repurchased at $56 per share. The purchase of the
common stock tendered was financed with the new revolving credit
agreement.
4. Concurrent with the announcement of the Dutch Auction, the company
announced the elimination of the quarterly cash dividend and that
common stock would be purchased in the open market if future
distributions to shareholders are deemed appropriate by management.
During the third quarter of 1997, the company purchased 376,100 shares
of common stock at an average purchase price of $54 per share, which
have been recorded as treasury stock. At September 30, 1997, the
company is authorized to purchase approximately 659,000 additional
shares.
At September 30, 1997, the following summarizes the debt outstanding and unused
credit availability:
Total Amount Unused Credit
Commitment Outstanding Availability
(in millions)
Revolving credit facility... $ 400.0 $ 170.0 $ 213.1(a)
Swingline loan facility..... 5.0 - 5.0
Senior subordinated notes... 1.7 1.7 -
Industrial revenues bonds... 15.1 15.1 -
Other....................... 13.8 9.4 4.4
---------- ---------- ----------
Total debt................ $ 435.6 $ 196.2 $ 222.5
========== ========== ==========
(a) Decreased by $16.9 million of facility letters of credit
outstanding at September 30, 1997, which reduce the unused credit
availability.
The company is required to maintain compliance with restrictive covenants
contained in the revolving credit agreement. Under the most restrictive
financial covenants, the company is required to maintain the following ratios:
(1) Maintain a Debt - EBITDA Ratio less than 3.75 to 1.0 for fiscal
quarters ending September and December of 1997, a ratio less than
3.5 to 1.0 for fiscal quarters ending March, June and September
of 1998, and a ratio less than 3.0 to 1.0 thereafter. At
September 30,1997, the ratio was 2.24 to 1.0.
(2) Maintain a Fixed Charge Coverage Ratio greater than 1.5 to 1.0
for the fiscal quarter ending in September of 1997, a ratio
greater than 1.75 to 1.0 for fiscal quarters ending December 1997
and March, June, and September of 1998, and a ratio greater than
2.0 to 1.0 thereafter. At September 30, 1997, the ratio was 2.95
to 1.0.
Management believes that the unused credit availability on the revolving credit
facility is sufficient to meet operational cash requirements, working capital
requirements and capital expenditures for 1997. Aggregate future maturities of
total debt are not material for the next five years. The revolving credit
agreement will expire in 2002 and borrowings on the revolver would become due,
however, management believes that the revolving credit agreement would likely be
extended or that alternate financing will be available to the company.
Other Matters
The company continues to review and assess potential acquisition candidates. The
objective to grow the company includes acquisitions within Service Solutions to
expand service and product offerings, and, potentially, complementary
acquisitions within Vehicle Components. Additionally, the company could consider
an acquisition not directly related to either segment. At this time, the company
is not in a position to comment on the status of any specific acquisition
investigation.
As of the end of 1997, the company must adopt Statement of Financial Accounting
Standards No. 128, "Earnings Per Share." This standard will require presentation
of basic and diluted earnings per share information instead of the current
primary and fully diluted earnings per share required by APB Opinion No.15. The
company's review indicates that the new basic earnings per share would have been
insignificantly higher than the reported primary earnings per share for the
first nine months of 1997 and 1996. This is due to the exclusion of the effect
of outstanding options in the basic earnings per share computation versus the
primary earnings per share computation. The company estimates that the diluted
earnings per share for the first nine months of 1997 and 1996 would have been
virtually the same as the reported primary earnings per share for these periods.
Beginning in 1998, the company must adopt Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" and No. 131, "Disclosures
about Segments of an Enterprise and Related Information." No. 130 will require
the company to report comprehensive income as part of the consolidated financial
statements. The company expects that foreign currency translation adjustments
will be the principal additional item to present comprehensive income. No. 131
will require the company to report certain information about operating segments
in the consolidated financials statements. The company is currently evaluating
the provisions of this statement to determine its impact upon current segment
disclosures.
--------------------
The foregoing discussion in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" contains forward looking statements which
reflect management's current views with respect to future events and financial
performance. These forward looking statements 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 1996 Annual Report on Form 10-K for
additional cautionary statements and discussion of certain important factors as
they relate to forward looking statements.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(2) None.
(4) None.
(10) None.
(11) Statement regarding computation of earnings per share. See
Consolidated Condensed Statements of Income.
(15) None.
(18) None.
(19) None.
(20) None.
(22) None.
(23) None.
(24) None.
(27) Financial data schedule.
(99) None.
(b) Reports on Form 8-K
None.
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 12, 1997 By /s/ John B. Blystone
---------------------
John B. Blystone
Chairman, President and
Chief Executive Officer
Date: November 12, 1997 By /s/ Patrick J. O'Leary
-----------------------
Patrick J. O'Leary
Vice President, Finance,
Treasurer and Chief
Financial and Accounting
Officer
5
9-MOS
DEC-31-1997
SEP-30-1997
15,350
0
152,211
(9,171)
125,753
340,890
262,811
(139,825)
540,896
217,646
1,681
0
0
167,099
(152,537)
540,896
680,597
680,597
492,582
625,063
(66,631)
0
10,567
111,598
55,029
56,569
0
(10,330)
0
46,239
3.41
3.41
