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 March 31, 1998
( ) 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 April 30, 1998 -- 12,636,069
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
SPX CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands)
(Unaudited)
March 31, December 31,
1998 1997
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 8,096 $ 12,113
Receivables 156,293 172,783
Inventories 103,398 92,875
Deferred income tax asset and refunds 66,998 72,021
Prepaid and other current assets 80,843 33,753
---------- ----------
Total current assets $ 415,628 $ 383,545
Property, plant and equipment, at cost 270,707 263,821
Accumulated depreciation (145,868) (141,703)
---------- ----------
Net property, plant and equipment $ 124,839 $ 122,118
Goodwill 59,432 60,156
Other assets 18,661 17,988
---------- ----------
Total assets $ 618,560 $ 583,807
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable and current maturities
of long-term debt $ 2,941 $ 2,774
Accounts payable 90,518 91,491
Accrued liabilities 170,454 182,773
Income taxes payable 13,715 9,516
---------- ----------
Total current liabilities $ 277,628 $ 286,554
Long-term liabilities 90,104 90,205
Deferred income taxes 46,039 46,142
Minority interest 1,939 1,764
Long-term debt 227,292 202,490
Shareholders' equity:
Common stock 168,602 166,999
Paid in capital 69,450 68,400
Retained deficit (44,741) (63,837)
Common stock held in treasury (194,748) (191,413)
Unearned compensation (17,425) (17,704)
Cumulative translation adjustments (5,580) (5,793)
---------- ----------
Total shareholders' equity $ (24,442) $ (43,348)
---------- ----------
Total liabilities and shareholders' equity $ 618,560 $ 583,807
========== ==========
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
March 31
---------------------------
1998 1997
--------- ---------
Revenues $ 230,364 $ 236,662
Costs and expenses:
Cost of products sold 167,225 174,167
Selling, general and administrative 42,228 45,389
Goodwill/intangible amortization 810 962
Minority and equity interests 75 30
Special charges and gains (12,783) 6,500
--------- ---------
Operating income $ 32,809 $ 9,614
Other expense (income), net (747) (72,236)
Interest expense, net 3,718 4,328
--------- ---------
Income before income taxes $ 29,838 $ 77,522
Provision for income taxes 10,742 42,817
--------- ---------
Income before extraordinary item $ 19,096 $ 34,705
Extraordinary item, net of tax - (10,330)
--------- ---------
Net income $ 19,096 $ 24,375
Other comprehensive income (foreign currency
translation adjustment) 213 (6,470)
--------- ---------
Comprehensive income $ 19,309 $ 17,905
========= =========
Basic income (loss) per share:
Income before extraordinary item $ 1.59 $ 2.44
Extraordinary item, net of tax - (0.73)
--------- ---------
Net income $ 1.59 $ 1.71
========= =========
Weighted average number of
common shares outstanding 12,023 14,226
Diluted income (loss) per share:
Income before extraordinary item $ 1.54 $ 2.39
Extraordinary item, net of tax - (0.71)
--------- ---------
Net income $ 1.54 $ 1.68
========= =========
Weighted average number of
common shares outstanding 12,437 14,546
Dividends per share $ - $ 0.10
The accompanying notes are an integral part of these statements.
SPX CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Three Months Ended
March 31,
1998 1997
---------- ----------
Cash flows from operating activities:
Net income from operating activities $ 19,096 $ 24,375
Adjustments to reconcile net income to net
cash from operating activities -
Extraordinary item - 10,330
Depreciation and amortization 5,916 7,217
Special charges and gains (12,783) 6,500
Gain on sale of business - (71,895)
Compensation recognized under employee stock plan 1,637 1,161
Deferred taxes 4,927 (2,427)
Change in operating assets and liabilities
(net of effect of acquired and disposed businesses):
Receivables 16,573 (41,543)
Inventories (10,404) (10,588)
Prepaid and other assets (35,153) (2,196)
Accounts payable and accrued liabilities (13,318) 857
Income taxes payable 4,210 42,097
Other, net 144 474
---------- ----------
Net cash used by operating activities $ (19,155) $ (35,638)
Cash flows from investing activities:
Proceeds from sale of business $ - $ 223,000
Investment in businesses - (5,109)
Capital expenditures (8,351) (4,939)
---------- ----------
Net cash provided (used) by investing activities $ (8,351) $ 212,952
Cash flows from financing activities:
Net borrowings (payments) under debt agreements $ 24,934 $ (79,148)
Purchases of common stock (3,335) -
Net shares sold under stock option plan 1,970 1,945
Dividends paid - (1,424)
---------- ----------
Net cash provided by (used by) financing activities $ 23,569 $ (78,627)
Effect of exchange rate changes on cash (80) 457
---------- ----------
Net increase (decrease) in cash and cash equivalents $ (4,017) $ 99,144
Cash and cash equivalents, beg. of period 12,113 12,312
---------- ----------
Cash and cash equivalents, end of period $ 8,096 $ 111,456
========== ==========
The accompanying notes are an integral part of these statements.
SPX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1998 (Unaudited)
1. The interim financial statements reflect the adjustments which are, in the
opinion of management, necessary to a fair statement of the results of the
interim periods presented. Adjustments are of a normal recurring nature.
The preparation of SPX Corporation's (the "Company") consolidated condensed
financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated condensed
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
2. Information regarding the Company's segments was as follows:
Three months
ended March 31,
1998 1997
------- -------
(in millions)
Revenues:
Service Solutions $ 162.4 $ 143.8
Vehicle Components (1) 68.0 92.9
------- -------
Total $ 230.4 $ 236.7
======= =======
Operating income (loss):
Service Solutions (2) $ 15.7 $ 3.6
Vehicle Components 9.5 11.6
General Corporate (3) 7.6 (5.6)
------- -------
Total $ 32.8 $ 9.6
======= =======
Capital Expenditures:
Service Solutions $ 2.5 $ 1.5
Vehicle Components 5.8 3.2
General Corporate 0.1 0.2
------- -------
Total $ 8.4 $ 4.9
======= =======
Depreciation and Amortization:
Service Solutions $ 2.5 $ 2.7
Vehicle Components 3.1 4.1
General Corporate 0.3 0.4
------- -------
Total $ 5.9 $ 7.2
======= =======
March 31, December 31,
1998 1997
------- -------
Identifiable Assets:
Service Solutions $ 313.1 $ 320.0
Vehicle Components 147.7 147.6
General Corporate 157.8 116.2
------- -------
Total $ 618.6 $ 583.8
======= =======
(1) The Company sold its Sealed Power division in February 1997, see Note 3.
(2) 1997 includes a $6.5 million special charge, see Note 4.
(3) 1998 includes a $12.8 million special gain, see Note 10.
SPX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 31, 1998 (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 gain on the sale of SPD, $71.9 million, reflects
the gross cash proceeds of $223.0 million, less the net assets of the
business at February 7, 1997 and transaction related costs. The change in
net assets under agreement for sale did not significantly change between
December 31, 1996 and the date of sale. Transaction related costs include
legal, accounting and other selling fees, certain employee benefits arising
from the sale, and other contractual obligations of the Company arising
from the sale. On an after-tax basis, the gain was $31.2 million, which
reflects the effect of the write-off of non-deductible goodwill
attributable to SPD of $59.4 million.
The accompanying consolidated condensed financial statements include the
results of SPD through February 7, 1997, its date of disposition. The
following unaudited proforma first quarter 1997 selected financial data
reflects the disposition of this division as if it had occurred as of the
beginning of the period. 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 disposition in fact occurred as
of January 1, 1997, or project the results for any future date or period
(in millions, except per share):
First
Quarter
1997
Proforma
Revenues $ 213.2
Cost of products sold 154.6
-------
Gross margin $ 58.6
SG&A 44.4
Goodwill/intangible amortization 0.8
Minority and equity -
Special charges 6.5
-------
Operating income $ 6.9
Other (income) expense (0.3)
Interest expense, net 3.3
-------
Income before income taxes $ 3.9
Provision for income taxes 1.5
-------
Income (d) $ 2.4
=======
Diluted income per share $ 0.17
Weighted average number
of shares 14.5
4. During the first quarter of 1997, the Company recorded a $6.5 million
special charge ($4.1 million after-tax). This charge reflects anticipated
future legal costs associated with the ongoing litigation with Snap-on
Incorporated. This charge was previously classified as other expense
(income), net, in the Company's 1997 filing on Form 10-Q for the three
months ended March 31, 1997.
SPX CORPORATION AND SUBSIDIARIES NOTES TO
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS MARCH 31, 1998 (Unaudited)
5. During the first quarter of 1997, the Company commenced a cash tender offer
for all $128.4 million (principal amount) of its outstanding 11 3/4% Senior
Subordinated Notes, due 2002. The tender offer expired on April 9, 1997 and
$126.7 million 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 pretax charge of $16.4 million, or $10.3 million after-tax,
for the cost to repurchase the Notes.
6. During 1997, the Company purchased 2.147 million shares of its common stock
through a Dutch auction self-tender offer for $56.00 per share. As of March
31, 1998, the Company had purchased an additional 435,600 shares through
open market purchases. Also, concurrent with the Dutch auction, the Company
announced the elimination of quarterly cash dividends and stated that
future distributions to shareholders would be in the form of open purchases
of common stock, when deemed appropriate by management.
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 $26.0 million 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, 1997, consolidated revenues and income would not
have been significantly different from reported results.
9. Late in 1997, the Company recorded additional special charges totaling
$110.0 million. These charges included a $99.0 million restructuring
charge, a $4.1 million charge for corporate executive staff reductions, and
$6.9 million of costs associated with various legal matters, including
legal costs associated with a settled case in California.
The Company recorded the $99.0 million restructuring charge to combine two
divisions within the Service Solution segment and to recognize reduced
carrying value of certain assets resulting from the decision to combine the
divisions and exit certain manufactured diagnostic equipment product lines.
The restructuring of the two Service Solutions businesses was in response
to changing market dynamics and changing needs of customers. The Company
decided to combine its OE Tool and Equipment business with its Aftermarket
Tool and Equipment business to provide a single business focused on the
combined market and customer needs. Additionally, the Company decided to
exit certain products to focus upon new generation products that will
better meet customer needs. The decision results in a reduction of
workforce and closing of certain facilities. The components of the charge
have been computed based on management's estimate of the realizable value
of the affected tangible and intangible assets and estimated exit costs
including severance and other employee benefits based on existing severance
policies and local laws.
SPX CORPORATION AND SUBSIDIARIES NOTES TO
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS MARCH 31, 1998 (Unaudited)
The $99.0 million charge included $63.7 million of restructuring costs,
$25.8 million of reduced inventory value and $9.5 million of reduced value
of other tangible and intangible assets related to exiting certain product
lines. These restructuring costs included $13.7 million of severance
related costs for approximately 800 people, $20.3 million for incremental
repossession and distribution exit costs (including the termination of
lease financing and distributor agreements), $21.2 million for incremental
service and software update obligations resulting from the Company's
decision to maintain adequate service capabilities and appropriate software
updates of the exited products for customers who have previously purchased
the exited products, and $8.5 million of costs associated with idled
facilities. The implementation of this restructuring is expected to be
substantially complete by the end of 1998.
Of the special charges of $116.5 million (including the special charge
described in Note 4), the components of the charge that will require the
future payment of cash total $80.9 million. Cash payments through March 31,
1998 related to the special charges were $10.3 million. The expected future
cash payments include an estimated $40.0 million over the balance of 1998
with the remainder, principally repossession costs and service and software
update obligations, over the following two years. As there is some
uncertainty associated with the timing of the cash payments, the remaining
accrual at March 31, 1998 of $70.6 million has all been classified as
current liabilities. Management estimates that savings from the
restructuring will increase operating income by $3.0 million in 1998 and
$10.0 million in 1999. The savings result primarily from the reduction in
headcount and facilities. Through the first quarter of 1998, approximately
240 employees had been terminated. Savings associated with the
restructuring were not significant during the first quarter 1998.
10. As of March 31, 1998, the Company had recorded an investment of $60.3 in
the common stock of Echlin, which includes a $17.3 million unrealized gain
recorded during the first quarter 1998, $28.1 million of Echlin common
stock purchased during the first quarter 1998, and $14.9 million of Echlin
common stock purchased during the fourth quarter of 1997. This investment
represents 1.150 million shares, or approximately 1.8% ownership of Echlin.
For accounting purposes, the Company would not have been considered the
acquiring company if the proposed business combination with Echlin was
consummated. An objective of acquiring the common stock of Echlin was to
minimize the costs associated with pursuing the former offer to purchase
Echlin by the expected short-term appreciation in Echlin's stock price.
Consequently, the shares are considered to be trading securities and are
carried on the consolidated balance sheet in Prepaid and other current
assets at market value.
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.
Results of Operations - First Quarter 1998 vs. First Quarter 1997
Consolidated: Three months ended
March 31,
------------------
1998 1997
---------- ----------
(in millions)
Revenues:
Service Solutions $ 162.4 $ 143.8
Vehicle Components 68.0 92.9
---------- ----------
Total $ 230.4 $ 236.7
========== ==========
Operating income (loss):
Service Solutions $ 15.7 $ 3.6
Vehicle Components 9.5 11.6
General corporate expense 7.6 (5.6)
---------- ----------
Total $ 32.8 $ 9.6
Other expense (income), net (0.7) (72.2)
Interest expense, net 3.7 4.3
---------- ----------
Income before income taxes $ 29.8 $ 77.5
Provision for income taxes 10.7 42.8
---------- ----------
Income from continuing operations $ 19.1 $ 34.7
Extraordinary item, net of tax - (10.3)
---------- ----------
Net income $ 19.1 $ 24.4
========== ==========
Capital expenditures $ 8.4 $ 4.9
Depreciation and amortization 5.9 7.2
March 31, 1998 December 31, 1997
(in millions)
Identifiable assets $ 618.6 $ 583.8
General corporate expenses and other consolidated items that are not
allocated to the segments are explained below, followed by segment information.
General Corporate expense
These expenses represent general unallocated expenses. The first quarter
1998 includes a $17.3 million unrealized gain on the Company's investment in
Echlin Inc. ("Echlin") and $4.5 million of expenses associated with the
Company's former offer to acquire Echlin Inc. This net gain is classified as
special charges and gains on the consolidated statement of income. Excluding
this net gain, first quarter 1998 corporate expenses were comparable to the
first quarter of 1997.
Other expense (income), net
These expense and income items represent expenses and income not included
in the determination of operating results. Included are gains or losses on
currency exchange, translation gains or losses of financial statements in highly
inflationary countries, gains or losses on the sale of fixed assets, and unusual
non-operational gains or losses.
In the first quarter of 1997, the Company completed the sale of the Sealed
Power division for $223.0 million in cash. The Company recorded a $71.9 million
gain on the sale, and the after-tax gain was $31.2 million. The results of
operations of Sealed Power are included in the Company's consolidated results
through the date of divestiture, February 7, 1997.
Interest expense, net
First quarter 1998 interest expense was less than the first quarter 1997
interest expense due to lower debt levels and interest rates.
Provision for Income Taxes
The overall first quarter 1998 effective income tax rate was 36% and
represents the Company's estimated rate for the year. The first quarter 1997
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
quarter of 1997 was 37%.
Extraordinary item, net of taxes
In the first quarter of 1997, the Company recorded a pretax charge of $16.4
million, $10.3 million after-tax, to reflect the costs to repurchase $126.4
million of its 11 3/4% Senior Subordinated Notes tendered as of March 25, 1997,
pursuant to the Company's tender offer for these notes.
Service Solutions: Three months ended
March 31,
-------------------
1998 1997
---------- ----------
(in millions)
Revenues............................. $ 162.4 $ 143.8
Gross Profit......................... 49.0 45.5
% of revenues...................... 30.2% 31.7%
Selling, general & administrative.... 32.7 34.9
% of revenues...................... 20.1% 24.3%
Goodwill/intangible amortization..... 0.6 0.5
Minority and equity interests........ 0.0 0.0
Special charge....................... - 6.5
---------- ----------
Operating income..................... $ 15.7 $ 3.6
========== ==========
Capital expenditures................. $ 2.5 $ 1.5
Depreciation and amortization........ 2.5 2.7
March 31, 1998 December 31, 1997
(in millions)
Identifiable assets.................. $ 313.1 $ 320.0
Revenues
First quarter 1998 revenues increased $18.6 million, or 12.9%, from the
first quarter of 1997. The increase was due to higher hand-held diagnostic
equipment, dealer equipment and gas emission testing equipment revenues. Sales
of air conditioning tools were down from 1997, but are expected to reach 1997
levels by year-end. During the first quarter 1998, the Company enhanced its
dealer equipment program with a major vehicle manufacturer and is now recording
revenues and related cost of goods sold from this program.
Gross margin
First quarter 1998 gross margin of 30.2% was lower than the 31.7% gross
margin in 1997. The decrease in the gross margin was a result of the higher gas
emissions testing equipment and dealer equipment sales during the first quarter
1998, which carry lower gross margins.
Selling, General and Administrative ("SG&A")
First quarter 1998 SG&A expense was $32.7 million, or 20.1% of revenues,
compared to $34.9 million, or 24.3% of revenues, in 1997. The reduction in costs
resulted from the revenue mix towards dealer equipment sales which have
relatively low SG&A costs and continuing cost reductions due to initiatives
undertaken over the past years.
Goodwill/Intangible Amortization
First quarter 1998 expense was comparable to first quarter 1997.
Minority and equity interests
This line represents the 20% minority interest in JATEK's results. Such
minority interest was immaterial in both quarters.
Special Charge
During the first quarter 1997, recorded a $6.5 million special charge ($4.1
million after-tax). This charge reflects anticipated future legal costs
associated with the ongoing litigation with Snap-on Incorporated.
Operating Income
The increase in 1998 first quarter operating income to $15.7 million from
$3.6 million in the first quarter 1997 was primarily attributable to increased
revenues and cost reductions. Additionally, first quarter 1997 was reduced by
the $6.5 million special charge related to the Snap-on litigation.
Capital Expenditures
First quarter 1998 capital expenditures were $2.5 million compared to first
quarter of 1997 capital expenditures of $1.5 million. Capital expenditures for
1998 are expected to approximate $12 million and include further expenditures
for new information systems.
Identifiable Assets
First quarter 1998 identifiable assets decreased approximately $7 million
from year-end 1997. The decrease was predominately in accounts receivable offset
by a net increase in inventories. The decrease in receivables was a result of
lower revenues in February and March of 1998 compared to November and December
of 1997. The increase in inventories was a result of the normal seasonal buildup
of inventory to support second quarter business activity.
During the first quarter of 1998, inventory of engine diagnostic and wheel
service equipment was reduced from approximately $14.0 million at December 31,
1997 to approximately $11.0 million at March 31, 1998. This decrease reflects
the continuing reduction of this inventory in connection with management's
strategic decision to exit certain manufactured diagnostic equipment product
lines. The remaining inventory is expected to be sold during 1998.
Vehicle Components: Three months ended
March 31,
-------------------
1998 1997
---------- ----------
(in millions)
Revenues........................... $ 68.0 $ 92.9
Gross Profit....................... 14.1 17.0
% of revenues.................... 20.8% 18.3%
Selling, general & administrative.. 4.3 4.9
% of revenues.................... 6.3% 5.3%
Goodwill/intangible amortization... 0.2 0.4
Minority and equity interests...... 0.1 0.1
---------- ----------
Operating income................... $ 9.5 $ 11.6
========== ==========
Capital expenditures............... $ 5.8 $ 3.2
Depreciation and amortization...... 3.1 4.1
March 31, 1998 December 31, 1997
(in millions)
Identifiable assets.................. $ 147.7 $ 147.6
Revenues
First quarter 1998 revenues were down $24.9 million from the first quarter
1997 revenues primarily due to the February 7, 1997 divestiture of the Sealed
Power division. The first quarter of 1997 includes $23.5 million of revenues
from Sealed Power. The remaining decrease from 1997 was due primarily to the
elimination of a product at the die-casting operation. The reduction in
die-casting revenues will be offset over the balance of 1998 as the Company's
new die-casting facility ramps up production.
Gross Profit
First quarter 1998 gross margin of 20.8% compares to first quarter 1997
gross margin of 18.3% as favorable product mix and operational improvements at
the solenoid operation are being realized. A portion of the increase was due to
the disposal of Sealed Power that was a lower margin business.
Selling, General and Administrative ("SG&A")
SG&A was $4.3 million, or 6.3% of revenues, in the first quarter of 1998
compared to $4.9 million, or 5.3% of revenues, in 1997. The increased percentage
of revenues reflected costs associated with increasing market penetration and
business expansion efforts.
Goodwill/Intangible Amortization
Goodwill and intangible amortization expense was lower in 1998 due to the
sale of the Sealed Power division.
Minority and equity interests
This represents the 40% minority interest in IBS Filtran's results.
Operating Income
First quarter 1998 operating income was $9.5 million compared to $11.6
million in the first quarter of 1997. The first quarter of 1997 operating income
included $2.7 million attributable to the Sealed Power division (which was sold
effective February 7, 1997).
Capital Expenditures
Capital expenditures in the first quarter of 1998 were $5.8 million and
$3.2 million in the first quarter of 1997. Capital expenditures for 1998 are
expected to approximate $18 million and will be focused upon certain capacity
expansions (including a new die-casting facility), cost reductions and
maintenance of the operations.
Identifiable Assets
Identifiable assets were comparable to year-end 1997.
Liquidity and Financial Condition
The Company's liquidity needs arise primarily from capital investment in
equipment, funding working capital requirements to support business growth
initiatives and to meet interest costs. Management believes that cash flow from
operations and the credit arrangements will be sufficient to supply funds needed
in 1998.
Cash Flow Three months ended March 31,
1998 1997
---------- ---------
(in millions)
Cash flow from:
Operating activities...... $ (19.2) $ (35.6)
Investing activities...... (8.4) 213.0
Financing activities...... 23.6 (78.3)
--------- ---------
Net Cash Flow............ $ (4.0) $ 99.1
========= =========
Operating Activities - The principal elements that contributed to the first
quarter 1998 cash outflow were $28.1 million invested in an additional 734,000
shares of Echlin, a $10.4 million increase in inventory to meet higher second
quarter revenue expectations, and a $13.3 reduction in current liabilities due
to incentive compensation and restructuring payments. Offsetting these uses of
cash were a $16.6 million reduction in accounts receivable due to lower revenues
in the first quarter of 1998 than in the fourth quarter of 1997 and nominal
income tax payments in the first quarter of 1998. At March 31, 1998, days sales
outstanding of accounts receivable were 61 days compared to 64 days at December
31, 1997. Days sales outstanding of inventory was 40 days at March 31, 1998
compared to 35 days at December 31, 1997. The first quarter of 1997 cash outflow
of $35.6 million was principally due to seasonal buildups of accounts receivable
and inventories. The cash outflow included the $26.0 million effect of
terminating the accounts receivable securitization program during the first
quarter of 1997.
Investing Activities - First quarter 1998 cash flow from investing activities
reflected $8.4 million in capital expenditures. Capital expenditures for 1998
should approximate $30 million. Cash flow from investing activities during the
first quarter of 1997 included $223.0 of cash received on the sale of Sealed
Power, offset by $5.1 million invested in A.R. Brasch, JATEK and IBS Filtran,
and capital expenditures of $4.9 million.
Financing Activities - First quarter 1998 cash flow from financing activities
consists of borrowings, $3.3 million to purchase 45,400 shares of common stock
in the open market, and proceeds from shares sold under the stock option plan.
Cash flow from financing activities during the first quarter of 1997 reflects
the Company's former quarterly dividend payment, shares sold under the stock
option plan and a $79.1 million reduction in borrowings.
Total Debt
At March 31, 1998, the following summarizes the debt outstanding and unused
credit availability:
Total Amount Unused Credit
Commitment Outstanding Availability
(in millions)
Revolving credit............ $ 400.0 $ 206.0 $ 186.1(a)
Swingline loan facility..... 5.0 - 5.0
Senior Subordinated Notes... 1.7 1.7 -
Industrial Revenues Bonds... 15.1 15.1 -
Other....................... 13.2 7.4 5.8
---------- ----------- ----------
Total debt................ $ 435.0 $ 230.2 $ 196.9
========== =========== ==========
(a) Decreased by $7.9 million of facility letters of credit
outstanding at March 31, 1998, which reduce the unused credit
availability.
The Company is required to maintain compliance with restrictive covenants
contained in the revolving credit agreement, as amended. At March 31, 1998, the
Company was in compliance with all restrictive covenants contained in the
revolving credit agreement. Under the most restrictive financial covenants, the
Company is required to:
(1) Maintain a Debt/EBITDA Ratio less than 3.5/1.0 for fiscal quarters
ending March, June, and September of 1998 and a ratio less than
3.0/1.0 thereafter. At March 31, 1998, the ratio was 2.04/1.0.
(2) Maintain a Fixed Charge Coverage Ratio greater than 1.75/1.0 through
September of 1998 and a ratio greater than 2.0/1.0 thereafter. At
March 31, 1998, the ratio was 4.10/1.0.
Management believes that the unused credit availability is sufficient to meet
operating cash needs, including working capital requirements and capital
expenditures planned for 1998. Aggregate future maturities of total debt are not
material through 2001. In 2002, the revolving credit agreement expires 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
Status of Echlin Transaction - On May 6, 1998, the Company announced that it was
withdrawing its exchange offer to acquire Echlin Inc. because it was not in the
best interests of SPX shareholders to compete with the terms of Dana
Corporation's merger agreement with Echlin. At March 31, 1998, the Company owned
approximately 1.15 million Echlin shares, or approximately 1.8% of Echlin's
shares outstanding.
Significance of Goodwill - The Company had goodwill of $59.4 million and
shareholders' deficit of $24.4 million at March 31, 1998. The Company amortizes
its goodwill on a straight-line method over the estimated periods benefited, not
to exceed 40 years. In determining the estimated useful life, management
considers the nature, competitive position, life cycle position, and historical
and expected future operating income of each acquired company, as well as the
Company's commitment to support these acquired companies through continued
investment in capital expenditures, operational improvements, and research and
development. After an acquisition, the Company continually reviews whether
subsequent events and circumstances have occurred that indicate the remaining
estimated useful life of goodwill may warrant revision or that the remaining
balance of goodwill may not be recoverable. If events and circumstances indicate
that goodwill related to a particular business should be reviewed for possible
impairment, the Company uses projections to assess whether future operating
income on a non-discounted basis (before goodwill amortization) of the unit is
likely to exceed the goodwill amortization over the remaining life of the
goodwill, to determine whether a write-down of goodwill to recoverable value is
appropriate. There can be no assurance that circumstances will not change in the
future that will effect the useful life or carrying value of goodwill.
EVA Incentive Compensation - The Company utilizes a measure known as Economic
Value Added ("EVA") for its incentive compensation plans for a majority of
employees. EVA is internally computed by the Company based upon 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. EVA is not a measure under generally accepted accounting
principles and is not intended to be used as an alternative to net income and
measuring operating performance presented in accordance with generally accepted
accounting principles. The Company believes that EVA, as internally computed,
does represent a strong correlation to the ultimate returns of the Company's
shareholders. Annual incentive compensation expense is dependent upon the annual
change in EVA relative to pre-established improvement targets and the expense
can vary significantly."
Accounting Pronouncements - In 1998, the Company must adopt Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" and Statement No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." Statement 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. Statement No. 132 will require the Company to standardize its
disclosures and other information for pensions and other postretirement
benefits.
--------------------
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 1997 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
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: May 8, 1998 By /s/ John B. Blystone
---------------------
John B. Blystone
Chairman, President and
Chief Executive Officer
Date: May 8, 1998 By /s/ Patrick J. O'Leary
-----------------------
Patrick J. O'Leary
Vice President, Finance,
Treasurer and Chief
Financial and Accounting Officer
5
3-MOS
DEC-31-1998
MAR-31-1998
8,096
0
165,187
(8,894)
103,398
415,628
270,707
(145,868)
618,560
277,628
1,681
0
0
168,602
(193,044)
618,560
230,264
230,264
167,225
197,455
(747)
0
3,718
29,838
10,742
19,096
0
0
0
19,096
1.54
1.54
