SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________
FORM 8-K/A
AMENDMENT NO.1 TO
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
________________________
Date of Report (Date of earliest event reported): October 6, 1998
SPX Corporation
(Exact name of registrant as specified in its charter)
Delaware 1-6948 38-1016240
(State of incorporation) (Commission File Number) (IRS Employer
Identification No.)
700 Terrace Point Drive, Muskegon, Michigan 49443-3301
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (616) 724-5000
The undersigned registrant hereby amends its Current Report on Form 8-K
filed with the Securities and Exchange Commission on October 9, 1998 (the
"Form 8-K") as set forth below:
Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL
INFORMATION AND EXHIBITS
(a) Financial Statements
The Report of Independent Auditors and the accompanying
Financial Statements set forth in General Signal's Annual
Report on Form 10-K for the fiscal year ended December
31, 1997 and the Financial Statements set forth in
General Signal's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998 are attached hereto as
Exhibits 99.3 and 99.4, respectively, and are
incorporated herein by reference.
(b) Pro Forma Financial Information
The unaudited pro forma condensed combined financial data
of SPX and General Signal set forth in Amendment No. 1 to
Form S-4 filed with the Securities and Exchange
Commission on September 3, 1998 are attached hereto as
Exhibit 99.5 and are incorporated herein by reference.
(c) Exhibits
The following Exhibits are hereby added to the Form 8-K:
Exhibit 23 Consent of Ernst & Young
Exhibit 99.3 Report of Independent Auditors and
accompanying Financial Statements set forth
in General Signal's Annual Report on Form
10-K for the fiscal year ended December 31,
1997
Exhibit 99.4 Financial Statements set forth in General
Signal's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998
Exhibit 99.5 Unaudited pro forma condensed combined
financial data of SPX and General Signal
set forth in Amendment No. 1 to Form S-4
filed with the Securities and Exchange
Commission on September 3, 1998
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 hereunto duly authorized.
SPX CORPORATION
(Registrant)
By: /s/Patrick J. O'Leary
-----------------------------------
Patrick J. O'Leary
Vice President-Finance, Treasurer
and Chief Financial Officer
Date: November 5, 1998
Exhibit 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the SPX Corporation
Registration Statements on Form S-8 (Nos. 33-24043; 333-29843; 333-29851;
333-29857; 333-29855; 333-38443), and on Form S-4 (No. 333-60853), of our
report dated January 23, 1998, with respect to the financial statements of
General Signal Corporation included in the General Signal Corporation
Annual Report (Form 10-K) for the year ended December 31, 1997,
incorporated by reference in this Current Report on Form 8-K/A filed by SPX
Corporation.
/s/ Ernst & Young LLP
Stamford, Connecticut
November 2, 1998
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditors............................................F-3
Statement of Earnings for the Years Ended December 31, 1997, 1996 and
1995.....................................................................F-4
Balance Sheet as of December 31, 1997 and 1996............................F-5
Statement of Shareholders' Equity for the Years Ended December 31, 1997,
1996 and 1995............................................................F-6
Statement of Cash Flow for the Years Ended December 31, 1997, 1996 and
1995.....................................................................F-7
Notes to the Financial Statements............................F-8 through F-25
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
General Signal Corporation
We have audited the accompanying balance sheet of General Signal
Corporation and consolidated subsidiaries as of December 31, 1997 and 1996,
and the related statements of earnings, shareholders' equity, and cash flow
for each of the three years in the period ended December 31, 1997. Our
audits also included the financial statement schedule listed in Item 14(a).
These financial statements and schedule are the responsibility of the
company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of General Signal
Corporation and consolidated subsidiaries at December 31, 1997 and 1996,
and the results of their operations and their cash flow for each of the
three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects, the information set forth therein.
As discussed in the notes to the financial statements, in 1997 the
company changed its method of accounting for business process reengineering
costs.
/s/ Ernst & Young LLP
Stamford, Connecticut
January 23, 1998
F-3
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
(IN MILLIONS, EXCEPT PER-
SHARE DATA)
Net sales....................................... $1,954.6 $2,065.0 $1,863.2
-------- -------- --------
Cost of sales................................... 1,378.5 1,435.7 1,308.0
Selling, general and administrative expenses.... 394.6 406.2 354.4
Gains on dispositions........................... (72.7) (20.8) --
Transaction and consolidation charges........... -- -- 20.1
-------- -------- --------
Total operating costs and expenses.............. 1,700.4 1,821.1 1,682.5
-------- -------- --------
Operating earnings.............................. 254.2 243.9 180.7
Equity in earnings of EGS....................... 11.8 -- --
Interest expense, net........................... (13.2) (21.5) (24.3)
-------- -------- --------
Earnings from continuing operations before in-
come taxes..................................... 252.8 222.4 156.4
Income taxes.................................... 121.8 89.0 56.3
-------- -------- --------
Earnings from continuing operations............. 131.0 133.4 100.1
Earnings (loss) from disposal of discontinued
operations, net of income taxes................ 2.3 -- (64.0)
-------- -------- --------
Earnings before cumulative effect of accounting
change......................................... 133.3 133.4 36.1
Cumulative effect of accounting change.......... (3.7) -- --
-------- -------- --------
Net earnings.................................... $ 129.6 $ 133.4 $ 36.1
======== ======== ========
Basic earnings (loss) per share of common stock:
Continuing operations......................... $ 2.61 $ 2.68 $ 2.04
Disposal of discontinued operations........... 0.05 -- (1.30)
Cumulative effect of accounting change........ (0.08) -- --
-------- -------- --------
Basic earnings per share........................ $ 2.58 $ 2.68 $ 0.74
======== ======== ========
Diluted earnings (loss) per share of common stock:
Continuing operations......................... $ 2.60 $ 2.62 $ 2.01
Disposal of discontinued operations........... 0.05 -- (1.24)
Cumulative effect of accounting change........ (0.07) -- --
-------- -------- --------
Diluted earnings per share...................... $ 2.58 $ 2.62 $ 0.77
======== ======== ========
See accompanying notes to the financial statements.
F-4
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
BALANCE SHEET
DECEMBER 31,
------------------
1997 1996
-------- --------
(IN MILLIONS)
ASSETS
Current assets:
Cash and cash equivalents............................... $ 50.0 $ 17.7
Accounts receivable..................................... 285.4 353.0
Inventories............................................. 156.8 240.6
Prepaid expenses and other current assets............... 23.2 24.7
Deferred income taxes................................... 52.7 55.9
-------- --------
Total current assets.................................. 568.1 691.9
Property, plant and equipment, net of accumulated depreci-
ation and amortization................................... 240.7 310.0
Intangibles, net of accumulated amortization.............. 264.3 381.3
Investment in EGS......................................... 133.1 --
Pension asset............................................. 127.5 104.9
Other assets.............................................. 54.3 62.9
-------- --------
Total assets.......................................... $1,388.0 $1,551.0
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current maturities of long-
term debt.............................................. $ 9.0 $ 5.6
Accounts payable........................................ 142.7 187.3
Accrued expenses........................................ 184.4 214.6
Income taxes............................................ 40.4 31.7
-------- --------
Total current liabilities............................. 376.5 439.2
Long-term debt, less current maturities................... 207.4 201.3
Accrued post-retirement and post-employment obligations... 112.4 133.2
Deferred income taxes..................................... 50.3 17.3
Other liabilities......................................... 11.7 16.2
-------- --------
Total long-term liabilities........................... 381.8 368.0
Shareholders' equity:
Common stock............................................ 78.5 78.2
Additional paid-in capital.............................. 367.2 337.1
Retained earnings....................................... 746.7 667.4
Cumulative translation adjustments and other............ (11.8) (1.4)
-------- --------
1,180.6 1,081.3
Common stock in treasury................................ (550.9) (337.5)
-------- --------
Total shareholders' equity............................ 629.7 743.8
-------- --------
Total liabilities and shareholders' equity............ $1,388.0 $1,551.0
======== ========
See accompanying notes to the financial statements.
F-5
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF SHAREHOLDERS' EQUITY
CUMULATIVE
ADDITIONAL TRANSLATION COMMON
COMMON PAID-IN RETAINED ADJUSTMENTS STOCK IN
STOCK CAPITAL EARNINGS AND OTHER TREASURY
------ ---------- -------- ----------- --------
(IN MILLIONS, EXCEPT PER-SHARE DATA)
Balance at December 31, 1994... $77.4 $281.1 $620.5 $(12.1) $(419.0)
Restatement for Data Switch
merger...................... -- 4.8 (27.7) (0.1) 45.7
Net earnings................. -- -- 36.1 -- --
Dividends declared ($0.96 per
share)...................... -- -- (46.0) -- --
Purchase of common stock..... -- -- -- -- (18.0)
Exercise of stock options and
savings and stock ownership
plan funding................ 0.5 18.3 -- -- 8.3
Discontinued operations...... -- -- -- 7.4 --
Translation adjustments...... -- -- -- 0.9 --
----- ------ ------ ------ -------
Balance at December 31, 1995... 77.9 304.2 582.9 (3.9) (383.0)
Net earnings................. -- -- 133.4 -- --
Dividends declared ($0.975
per share).................. -- -- (48.9) -- --
Purchase of common stock..... -- -- -- -- (1.2)
Exercise of stock options and
savings and stock ownership
plan funding................ 0.3 12.4 -- -- 9.4
Conversion of 5.75 percent
convertible
subordinate notes........... -- 20.5 -- -- 37.3
Translation adjustments...... -- -- -- 2.5 --
----- ------ ------ ------ -------
Balance at December 31,1996.... 78.2 337.1 667.4 (1.4) (337.5)
Net earnings................. -- -- 129.6 -- --
Dividends declared ($1.035
per share).................. -- -- (50.3) -- --
Purchase of common stock..... -- -- -- -- (240.4)
Exercise of stock options and
savings and stock ownership
plan funding................ 0.3 16.1 -- -- 1.5
Conversion of 5.75 percent
convertible subordinate
notes....................... -- 14.0 -- -- 25.5
Minimum pension liability ad-
justment.................... -- -- -- (1.7) --
Translation adjustments...... -- -- -- (8.7) --
----- ------ ------ ------ -------
Balance at December 31, 1997... $78.5 $367.2 $746.7 $(11.8) $(550.9)
===== ====== ====== ====== =======
See accompanying notes to the financial statements.
F-6
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF CASH FLOW
INCREASE (DECREASE)
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
------ ------------- ------
(IN MILLIONS)
CASH FLOW FROM OPERATING ACTIVITIES:
Net earnings..................................... $129.6 $133.4 $ 36.1
Adjustments to reconcile net earnings to net
cash from operating activities:
Cumulative effect of accounting change......... 3.7 -- --
(Earnings) loss on disposal of discontinued
operations.................................... (2.3) -- 64.0
Equity in earnings of EGS...................... (11.8) -- --
Gains on dispositions.......................... (72.7) (20.8) --
Asset write downs, transaction, consolidation
and other charges............................. 22.9 19.7 20.1
Deferred income taxes.......................... 22.2 43.7 32.0
Depreciation................................... 50.7 52.6 50.3
Amortization................................... 14.6 16.6 12.5
Pension credits................................ (14.7) (8.8) (9.3)
Other, net..................................... (2.7) 5.5 4.4
Changes in assets and liabilities, net of effects from acquisitions and
divestitures:
Accounts receivable.......................... (17.5) (30.8) (15.4)
Inventories.................................. 8.4 (10.4) 21.4
Prepaid expenses and other current assets.... 5.8 11.0 18.1
Accounts payable............................. (8.8) 28.8 (14.2)
Accrued expenses and other................... (27.7) (49.0) (71.6)
Income taxes................................. 9.3 0.2 12.3
------ ------ ------
Net cash from operating activities............... 109.0 191.7 160.7
------ ------ ------
CASH FLOW FROM INVESTING ACTIVITIES:
Divestitures..................................... 216.9 94.4 53.4
Capital expenditures............................. (56.5) (59.3) (49.0)
Acquisitions, net of cash acquired............... (11.0) -- (272.4)
Other, net....................................... 5.5 (2.8) 15.3
------ ------ ------
Net cash from investing activities............... 154.9 32.3 (252.7)
------ ------ ------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of long-term debt....................... 170.5 115.3 273.2
Redemption of long-term debt..................... (118.1) (288.5) (134.0)
Purchase of common stock......................... (240.4) (1.2) (18.0)
Issuance of common stock......................... 11.4 14.7 17.1
Dividends paid................................... (51.7) (47.6) (45.6)
------ ------ ------
Net cash from financing activities............... (228.3) (207.3) 92.7
------ ------ ------
Effect of exchange rate changes on cash and cash
equivalents..................................... (3.3) -- --
------ ------ ------
Net changes in cash and cash equivalents......... 32.3 16.7 0.7
------ ------ ------
Cash and cash equivalents at beginning of year... 17.7 1.0 0.3
------ ------ ------
Cash and cash equivalents at end of year......... $ 50.0 $ 17.7 $ 1.0
====== ====== ======
Interest paid.................................... $ 11.6 $ 25.7 $ 27.3
Income taxes paid................................ 87.0 44.0 15.7
Noncash investing and financing activities:
Conversion of convertible debt into common
stock......................................... $ 39.3 $ 57.4 $ --
Contribution of GSEG's net assets to EGS joint
venture....................................... 119.4 -- --
See accompanying notes to the financial statements.
F-7
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS
(Dollars in millions, except per-share data)
1. ACCOUNTING POLICIES
CONSOLIDATION: The financial statements include the accounts of General
Signal Corporation and consolidated subsidiaries after elimination of
intercompany accounts and transactions. Investments in unconsolidated
companies where management exercises significant influence are accounted
for using the equity method.
CASH EQUIVALENTS: The company considers its highly liquid money market
investments with original maturities of three months or less to be cash
equivalents.
INVENTORIES: Inventories are stated at the lower of cost or market. Cost
is primarily determined using the first-in, first-out (FIFO) method. All
other inventories are valued using the last-in, first-out (LIFO) method.
PROPERTY: Property, plant and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and amortization
are provided using the straight-line method over the estimated useful lives
of assets, which do not exceed 40 years for buildings and range from 3 to
10 years for machinery and equipment. Leasehold improvements are amortized
over the life of the related asset or the life of the lease, whichever is
shorter.
INTANGIBLES: Intangible assets (primarily the excess of purchase price
over the fair value of net assets acquired) are amortized on a
straight-line basis over periods not exceeding 40 years. Intangibles assets
are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. Impairment losses
are recognized if expected cash flows of the related assets are less than
their carrying values.
REVENUE RECOGNITION: Revenues are primarily recognized as products are
shipped and services are rendered. The percentage-of-completion method of
accounting is followed for long-term contracts. Under this method, earnings
accrue as contracts progress toward completion, generally based on the
percentage of costs incurred or the units of product delivered.
FINANCIAL INSTRUMENTS: The company does not enter into financial
instruments for speculation or trading purposes. The net amount to be paid
or received under interest rate swap agreements is accrued over the life of
the agreement as a separate component of interest expense. Gains and losses
related to forward foreign exchange and option contracts that qualify for
hedge accounting treatment are deferred and offset against losses and gains
when the underlying transaction occurs. Gains or losses at the time of
maturity, termination, sale or repayment of a financial instrument contract
designated as a hedge are included in earnings. The fair values of interest
rate swap agreements and forward foreign exchange and option contracts are
not recognized in the financial statements.
ENVIRONMENTAL: The company's environmental accruals cover all anticipated
costs, including investigation, remediation, and operation and maintenance
of clean-up sites. Environmental obligations generally are not discounted
and are not reduced by anticipated insurance recoveries.
STOCK COMPENSATION: The company accounts for the options granted under
its stock incentive program by recognizing as compensation any excess of
quoted market price over exercise price at the date of grant.
ACCOUNTING CHANGES: In February 1997, the Financial Accounting Standards
Board (the FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 128, "Earnings Per Share" (SFAS No. 128), which revises the methodology
of calculating earnings per share. The company adopted SFAS No. 128 in the
fourth quarter of 1997. Earnings per share amounts for all periods have
been presented, and where appropriate, restated to conform to the SFAS No.
128 requirements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" (SFAS No. 130) and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No. 131). SFAS No. 130 and SFAS
No. 131 are effective for financial statements for fiscal years beginning
after December 15, 1997. The company is studying the application of the new
statement. The adoption of these statements will have no impact on the
company's consolidated results of operations, financial position or cash
flow.
F-8
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
In November 1997, the Emerging Issues Task Force (EITF) of the FASB
issued consensus 97-13, "Accounting for Costs Incurred in Connection with a
Consulting Engagement or an Internal Project that Combines Business Process
Reengineering and Information Technology Transformation" (EITF 97-13). EITF
97-13 requires all previously capitalized business process reengineering
costs to be expensed as a cumulative effect of a change in accounting
principle. The company recorded a charge of $3.7, net of tax, in connection
with EITF 97-13 in the fourth quarter of 1997.
In December 1997, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" (SFAS No. 132), which
revises disclosure requirements for employers' pensions and other retiree
benefits. The statement is effective for financial statements for fiscal
years beginning after December 15, 1997. The company is studying the
application of the new statement. The adoption of this statement will have
no impact on the company's consolidated results of operations, financial
position or cash flow.
USE OF ESTIMATES: The preparation of financial statements in accordance
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 financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
RECLASSIFICATIONS: Certain reclassifications were made to conform prior
years' data to the current presentation.
2. ACCOUNTS RECEIVABLE
Accounts receivable were net of allowances for doubtful accounts of $12.3
and $10.0 at December 31, 1997 and 1996, respectively.
3. INVENTORIES
DECEMBER 31,
--------------
1997 1996
------ ------
Finished goods............................................. $ 43.9 $ 80.8
Work in process............................................ 38.3 63.2
Raw material and purchased parts........................... 87.3 117.1
------ ------
Total FIFO cost............................................ 169.5 261.1
Excess of FIFO cost over LIFO inventory value.............. (12.7) (20.5)
------ ------
$156.8 $240.6
====== ======
Inventories valued using LIFO were approximately $48.6 and $61.9 at
December 31, 1997 and 1996, respectively. In 1996, the company recorded a
LIFO liquidation, which increased net income by $1.0. In 1997, included in
the gain on sale of General Signal Pump Group (GSPG) was a LIFO liquidation
of $2.0. Additionally, $5.3 of the excess of FIFO cost over LIFO inventory
value was transferred from General Signal Electrical Group (GSEG) to the
investment in EGS Electrical Group LLC (EGS). In 1996, included in the gain
on sale of the Kinney Vacuum Company (Kinney) was a LIFO liquidation of
approximately $1.1. Progress payments, netted against work in process at
year end, were $10.1 in 1997 and $11.0 in 1996.
4. CONTRACTS IN PROGRESS
Prepaid expenses and other current assets include contracts in progress
of $3.4 and $7.8 at December 31, 1997 and 1996, respectively. Contracts in
progress represent revenue recognized on a percentage-of-completion basis
over related progress billings of $60.5 and $36.0 at December 31, 1997 and
1996, respectively. Substantially all contracts in progress at year end are
billed during the subsequent year.
F-9
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31,
----------------
1997 1996
------- -------
Land..................................................... $ 9.5 $ 12.2
Buildings and leasehold improvements..................... 150.7 173.7
Machinery and equipment.................................. 416.1 561.4
------- -------
576.3 747.3
Accumulated depreciation and amortization................ (335.6) (437.3)
------- -------
$ 240.7 $ 310.0
======= =======
6. INTANGIBLES
DECEMBER 31,
----------------
1997 1996
------- -------
Excess of cost over net assets acquired.................. $ 298.0 $ 465.3
Other intangibles........................................ 34.3 40.4
------- -------
332.3 505.7
Accumulated amortization................................. (68.0) (124.4)
------- -------
$ 264.3 $ 381.3
======= =======
In the third quarter of 1997, the company sold GSPG and contributed the
net assets of GSEG to EGS. As a result of these transactions, intangible
assets decreased by approximately $102.
7. EGS JOINT VENTURE
In the fourth quarter of 1997, the company and Emerson Electric Company
formed EGS, a joint venture combining Emerson Electric's Appleton Electric
operations and the company's GSEG. The company contributed substantially
all of the operating assets of GSEG in exchange for 47.5 percent of EGS.
The company accounts for its investment in EGS under the equity method of
accounting. EGS operates primarily in the United States, Canada and Mexico.
EGS's operations for the period from September 15, 1997 to December 31,
1997 were the following:
EGS:
----
Net sales...........................................................$162.0
Gross profit........................................................ 62.5
Net income.......................................................... 24.5
The company's equity in earnings of EGS at December 31, 1997 was $11.8.
The company's investment in EGS is approximately $17 less than its equity
in the joint venture's net assets at December 31, 1997. This difference is
being amortized on a straight-line basis over an estimated economic life of
40 years.
Condensed balance sheet information of EGS as of December 31, 1997 is as
follows:
Current assets..................................................... $149.0
Noncurrent assets.................................................. 241.7
Current liabilities................................................ 59.4
Noncurrent liabilities............................................. 16.0
F-10
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
8. ACCRUED EXPENSES
DECEMBER 31,
-------------
1997 1996
------ ------
Payroll and compensation.................................... $ 53.5 $ 62.5
Environmental and legal..................................... 25.3 26.9
Dispositions and special items.............................. 9.2 23.0
Other....................................................... 96.4 102.2
------ ------
$184.4 $214.6
====== ======
9. INCOME TAXES
For financial reporting purposes, earnings from continuing operations
before income taxes includes the following components:
YEAR ENDED DECEMBER 31,
-------------------------
1997 1996 1995
------- ------- -------
Pretax income:
United States............................... $ 236.0 $ 205.6 $ 151.5
Foreign..................................... 16.8 16.8 4.9
------- ------- -------
$252.8 $ 222.4 $ 156.4
======= ======= =======
The reconciliation of income tax from continuing operations computed at
the U.S. federal statutory tax rate to the company's effective income tax
rate is as follows:
YEAR ENDED DECEMBER 31,
-------------------------
1997 1996 1995
------- ------- -------
Tax at U.S. federal statutory rate............ 35.0% 35.0% 35.0%
State and local income taxes, net of U.S. fed-
eral benefit................................. 5.3 4.2 5.5
Foreign sales corporation..................... (1.8) (1.3) (1.7)
Goodwill amortization......................... 1.6 1.9 2.1
Income from Puerto Rican operations........... (0.2) (0.2) (0.7)
Foreign rates and foreign dividends........... 0.6 0.4 (1.4)
Reduction in valuation allowance.............. (0.9) -- (4.5)
Disposition basis differences................. 8.6 -- --
Other......................................... -- -- 1.7
------- ------- -------
48.2% 40.0% 36.0%
======= ======= =======
The components of the provision for income taxes are as follows:
YEAR ENDED DECEMBER 31,
-------------------------
1997 1996 1995
-------- ------- --------
Current:
Federal...................................... $ 74.3 $ 32.8 $ 14.2
Foreign...................................... 8.5 4.9 3.4
State........................................ 16.0 7.6 6.7
-------- ------- --------
Total current.............................. 98.8 45.3 24.3
-------- ------- --------
Deferred:
Federal...................................... 17.5 34.2 (6.5)
Foreign...................................... 0.5 1.9 (2.6)
State........................................ 4.2 7.6 5.2
-------- ------- --------
Total deferred............................. 22.2 43.7 (3.9)
-------- ------- --------
$121.0 $ 89.0 $ 20.4
======== ======= ========
F-11
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
Income tax expense (income) is included in the financial statements as
follows:
YEAR ENDED
DECEMBER 31,
--------------------
1997 1996 1995
------ ----- ------
Continuing operations................................ $121.8 $89.0 $ 56.3
Discontinued operations.............................. 1.5 -- (35.9)
Cumulative effect of accounting change............... (2.3) -- --
------ ----- ------
Total income tax expense............................. $121.0 $89.0 $ 20.4
====== ===== ======
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the company's deferred tax assets and liabilities
are as follows:
DECEMBER 31,
--------------
1997 1996
------ ------
Deferred tax assets:
Acquired tax benefits and basis differences............. $ 21.0 $ 29.0
Other post-retirement and post-employment benefits...... 53.7 58.3
Losses on dispositions and restructuring................ 4.0 11.7
Inventories............................................. 16.2 14.8
NOL and credit carry-forwards........................... 21.2 32.9
Other................................................... 38.9 32.0
------ ------
Total deferred tax assets............................. 155.0 178.7
Valuation allowance..................................... (16.7) (30.0)
------ ------
Net deferred tax assets............................... 138.3 148.7
Deferred tax liabilities:
Accelerated depreciation................................ 27.9 35.7
Pension credits......................................... 49.1 39.0
Reliance gain........................................... 19.8 19.8
Basis difference in EGS................................. 23.2 --
Other................................................... 15.9 15.6
------ ------
Total deferred tax liabilities........................ 135.9 110.1
------ ------
$ 2.4 $ 38.6
====== ======
Realization of deferred tax assets associated with the net operating loss
(NOL) and credit carry-forwards is dependent upon generating sufficient
taxable income prior to their expiration. Management believes that there is
a risk that certain of these NOL and credit carry-forwards may expire
unused and, accordingly, has established a valuation allowance against
them. Although realization is not assured for the remaining deferred tax
assets, management believes it is more likely than not that the net
deferred tax assets will be realized through future taxable earnings or
alternative tax strategies. However, the net deferred tax assets could be
reduced in the near term if management's estimates of taxable income during
the carry-forward period are significantly reduced or alternative tax
strategies are no longer viable. The valuation allowance decreased in 1997
and 1996 by $13.3 and $3.6, respectively.
At December 31, 1997, the following net federal operating loss and tax
credit carry-forwards were available:
OPERATING TAX
EXPIRATION DATES LOSSES CREDITS
---------------- --------- -------
1998-1999............................................... $5.0 $8.7
2000-2001............................................... 2.1 --
2002-2003............................................... 0.6 --
F-12
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
Undistributed earnings of the company's foreign subsidiaries amounted to
approximately $62.3 at December 31, 1997. Those earnings are considered to
be indefinitely reinvested and, accordingly, no provision for U.S. federal
and state income taxes or foreign withholding taxes has been made. If these
earnings were distributed, the company would be subject to U.S. income
taxes (subject to a reduction for foreign tax credits) and withholding
taxes payable to the various foreign countries. Determination of the amount
of unrecognized deferred U.S. income tax liability is not practicable;
however, unrecognized foreign tax credit carry-overs would be available to
reduce some portion of the U.S. liability. Withholding taxes of
approximately $4.0 would be payable upon remittance of all previously
unremitted earnings at December 31, 1997.
10. DEBT
DECEMBER 31,
-------------
1997 1996
------ ------
5.75% Convertible Subordinated Notes....................... $ -- $ 42.6
Commercial paper: 1997 at 6.1% and 1996 at 5.6%............ 116.4 114.5
Medium-term Notes: $25 at 7.0% due 2000, $25 at 7.114% due
2002...................................................... 50.0 --
Industrial Revenue Bonds due 2000-2008;
no stipulated principal repayments prior to maturity
(primarily variable rate)................................. 32.5 36.0
Other long-term borrowings................................. 14.0 12.8
------ ------
212.9 205.9
Less current maturities.................................... 5.5 4.6
------ ------
$207.4 $201.3
====== ======
Short-term notes payable to banks.......................... $ 3.5 $ 1.0
====== ======
On December 12, 1996, the company called for the redemption of its 5.75
percent convertible subordinated notes. Through December 31, 1996, notes
with a face value of $57.4 had been converted into 1.5 million shares of
the company's common stock, with an additional $39.3 converted into 1.0
million shares on January 2, 1997. The balance of the notes of $3.3 was
redeemed for cash.
Long-term debt maturing during each of the four years after 1998 is $2.7,
$35.7, $3.6 and $144.2.
The company maintains credit arrangements with banks in the U.S. and
abroad which aggregated approximately $605 and $604 at December 31, 1997
and 1996, respectively. At December 31, 1997, the company had a committed
revolving credit agreement of $180.0 that matures on May 28, 1998, and a
committed revolving credit agreement of $360.0 that matures on May 28,
2002. The agreements permit domestic and Eurodollar borrowings at interest
rates offered to investment grade customers. The agreements also are
convertible into one- year term loans at maturity.
Commercial paper is classified as long-term debt as the company maintains
long-term committed credit agreements to support these borrowings and
intends to refinance them on a long-term basis, either through continued
commercial paper borrowings or the issuance of medium-term notes.
The company has a $300.0 financing program under a universal shelf
registration that permits the issuance of junior or senior debt,
convertible securities, equity warrants and preferred shares under one
filing without specifying any dollar amounts for any security. On April 30,
1996, the company filed a prospectus supplement which allows the company to
issue medium-term senior notes or medium-term subordinated notes under the
shelf registration. As of December 31, 1997, $50.0 had been issued under
the shelf registration.
The company has an interest rate exchange agreement, expiring in March
2000, with a financial institution to limit exposure to interest rate
volatility on the commercial paper. The transaction has a notional
principal amount of $25.0 at December 31, 1997 and 1996. The company
monitors the risk of default by the swap counterparty and does not
anticipate non-performance. At December 31, 1997, termination of this
agreement would result in a $1.5 loss.
F-13
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
11. FOREIGN EXCHANGE CONTRACTS
The company conducts its business in various foreign currencies.
Accordingly, the company is subject to the typical currency risks and
exposures that arise as a result of changes in the relative value of
currencies. The risks are often referred to as transactional, commitment,
translational and economic currency exposures. The company's policy
stresses risk reduction and specifically prohibits speculation. The
policy's three basic objectives are to reduce currency risk on a
consolidated basis, to protect the functional currency value of foreign
currency-denominated cash flows and to reduce the volatility that changes
in foreign exchange rates may present to operating income.
The company utilizes natural hedges and offsets to reduce exposures and
also combines positions to reduce the cost of hedging. The company entered
into forward foreign exchange contracts to hedge net consolidated currency
transaction exposure for periods consistent with the terms of the
underlying transactions, extending through September 17, 1998.
Foreign currency forward or option contracts are not used for trading
purposes, and these contracts do not subject the company to currency risk
from exchange rate movements. At December 31, 1997, the company had
approximately $15.1 of such contracts outstanding.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and cash equivalents, short- and long-term debt, and foreign
currency contracts had fair values, based upon quoted prices or discounted
cash flow analyses, that approximated their carrying amounts. Financial
guarantees and letters of credit were issued by the company in the ordinary
course of business, and had a fair value of approximately $104.3 as of
December 31, 1997. The fair values of financial guarantees and letters of
credit were based on the face value of the underlying instruments, after
deducting the amount related to those instruments that are recorded as
liabilities, and the related amounts accrued.
13. CONTINGENCIES AND COMMITMENTS
LITIGATION: The company and certain of its subsidiaries are defendants in
legal proceedings incidental to its business. Although the ultimate
disposition of these proceedings is not presently determinable, management
does not expect the outcome to have a material adverse impact on the
company's financial position or results of operations.
LEASES: The future minimum rental payments under leases with remaining
noncancelable terms in excess of one year are:
Year ending December 31,
------------------------
1998.............................................................. $10.5
1999.............................................................. 8.2
2000.............................................................. 5.8
2001.............................................................. 2.6
2002.............................................................. 3.6
Subsequent to 2002................................................ 4.6
-----
Total minimum payments.......................................... $35.3
=====
Total rent expense in 1997, 1996 and 1995 was $19.2, $20.3 and $21.1,
respectively.
F-14
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
14. ENVIRONMENTAL MATTERS
The company is involved in various stages of investigation and
remediation relative to environmental protection matters, arising from its
own initiative, from indemnification of purchasers of divested operations,
or from legal or administrative proceedings, some of which include waste
disposal sites. In certain instances, the company may be exposed to joint
and several liability for remedial action or damages. The company, along
with several other entities, has been named as a potentially responsible
party for remedial costs at certain third-party sites listed on the
National Priorities List under CERCLA and state counterpart statutes.
The potential costs related to such matters and the possible impact on
future operations are uncertain due in part to the complexity of government
laws and regulations and their interpretations, the varying costs and
effectiveness of clean-up technologies, the uncertain level of insurance or
other types of recovery, and the questionable level of the company's
responsibility. The company estimates that costs of investigation and
remediation will be approximately $25 and has included this amount in
accrued expenses in the accompanying balance sheet. It is at least
reasonably possible, however, that a change in this estimate will occur. In
management's opinion, after considering reserves established for such
purposes, remedial actions for compliance with the present laws and
regulations governing the protection of the environment are not expected to
have a material adverse impact on the company's results of operations or
financial position.
15. CAPITAL STOCK
PREFERRED STOCK: 10 million shares of cumulative preferred stock, par
value $1.00 per share, are authorized but unissued.
COMMON STOCK: 150 million shares are authorized, with 65.0 million issued
in 1997 and 64.6 million issued in 1996. The 1.96 million shares issued
through 1969 have a par value of $6.67 per share. Shares issued since then
have a par value of $1.00 per share.
TREASURY STOCK:
NUMBER OF
SHARES
----------------
1997 1996 1995
---- ---- ----
(IN MILLIONS)
Balance at beginning of year............................ 13.2 15.0 16.6
Restatement for Data Switch merger...................... -- -- (1.8)
Common stock reacquired................................. 5.8 -- 0.5
Common stock issued under the company's incentive com-
pensation and savings and stock ownership plans........ (0.1) (0.3) (0.3)
Conversion of convertible subordinated notes............ (1.0) (1.5) --
---- ---- ----
Balance at end of year.................................. 17.9 13.2 15.0
==== ==== ====
On June 19, 1997, the Board of Directors approved a stock buy-back
program of up to $150.0 subject to the consummation of the GSPG
divestiture. On September 18, 1997, the Board of Directors approved an
increase of this program to $300.0. The program is expected to be completed
by the end of 1998. As of January 23, 1998, 3.4 million shares were
repurchased under this program for $145.1.
On December 12, 1996, the Board of Directors approved a stock buy-back
program of up to $100.0 to offset any shares issued as a result of the call
for the redemption of the 5.75 percent convertible subordinated notes. On
April 17, 1997, the program was completed with the total of 2.5 million
shares repurchased for $100.0.
F-15
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
In March 1994, the company's Board of Directors approved a program, which
concluded in March 1996, to repurchase up to 3.4 percent or 1.6 million
shares of the common stock outstanding at that time. These shares were
purchased systematically in open market transactions after the Board's
approval and were used to offset dilution from the increased exercise of
employee stock options arising from the company's executive stock ownership
program. Approximately 1.1 million shares were repurchased under this
program.
WARRANTS: In connection with the Data Switch merger, the company assumed
1,452 warrants that are redeemable at $34.83 per share and 14,357 warrants
that are redeemable at $16.54 per share. In 1997 and 1996, 718 and 13,639,
respectively, of these warrants were redeemed for shares of common stock.
SHAREHOLDER RIGHTS PLAN: On February 1, 1996, the Board of Directors
declared a dividend distribution of one common stock purchase right for
each share of common stock. The rights trade with the common stock and are
not currently exercisable. Each right entitles the shareholder to buy the
company's or the acquiring company's stock valued at $300 per share for a
price of $150 per share upon the occurrence of specific events. The company
may redeem the rights for 10 days (subject to a further 20-day extension)
for one cent per right, after a person or entity acquires 20 percent or
more of the common stock. The provisions do not apply to rights that are
beneficially owned by the acquirer.
16. EMPLOYEE BENEFIT PLANS
PENSION PLANS: The company's pension plans cover substantially all
salaried and hourly paid employees, including certain employees in foreign
countries. The plans generally provide benefit payments using a formula
based on an employee's compensation and length of service or, in some
cases, stated amounts for each year of service. The company funds United
States pension plans in amounts equal to the minimum funding requirements
of the Employee Retirement Income Security Act of 1974, plus additional
amounts that may be approved from time to time. Substantially all plan
assets are invested in cash and short-term investments or listed stocks and
bonds and real estate. Plan assets and obligations of non-U.S. subsidiaries
are not material. The periodic net pension income related to continuing
operations is comprised of the following:
YEAR ENDED
DECEMBER 31,
----------------------
1997 1996 1995
------ ------ ------
Service cost - benefits earned during the
period......................................... $ 11.7 $ 14.6 $ 8.9
Interest cost on projected benefit obligation... 32.8 32.7 32.6
Actual return on assets......................... (89.5) (77.4) (45.7)
Net amortization and deferral................... 30.3 21.3 (5.1)
------ ------ ------
Net pension income............................ $(14.7) $ (8.8) $ (9.3)
====== ====== ======
The actuarial assumptions used were:
Discount rate................................... 7.60% 7.60% 7.00%
Rate of increase in compensation levels......... 5.00% 5.00% 5.00%
Expected long-term rate of return on assets..... 9.50% 9.50% 9.50%
F-16
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth the plans' funded status and amounts
recognized in the balance sheet:
DECEMBER 31,
--------------------------------
1997 1996
--------------- ---------------
OVER UNDER OVER UNDER
FUNDED FUNDED FUNDED FUNDED
------- ------ ------- ------
Actuarial present value of obligations:
Vested benefit obligation.............. $(445.0) $(4.6) $(343.0) $(71.2)
------- ----- ------- ------
Accumulated benefit obligation......... (464.8) (5.0) (361.2) (73.7)
------- ----- ------- ------
Fair value of plan assets.............. 633.8 -- 522.9 62.4
Projected benefit obligation........... (483.6) (4.4) (377.7) (76.1)
------- ----- ------- ------
Plan assets in excess of (less than)
projected benefit obligation.......... 150.2 (4.4) 145.2 (13.7)
Unrecognized net (gain) loss........... (3.2) 2.2 (10.5) 4.0
Prior service cost not yet recognized
in net pension cost................... 4.9 1.1 6.0 3.1
Unrecognized net asset................. (19.4) 0.2 (24.5) (4.7)
Adjustment to recognize minimum liabil-
ity................................... -- (4.1) -- --
------- ----- ------- ------
Prepaid (accrued) pension.............. $ 132.5 $(5.0) $ 116.2 $(11.3)
======= ===== ======= ======
A minimum pension liability adjustment is required when the actuarial
present value of accumulated benefits exceeds plan assets and accrued
pension liabilities. The minimum liability adjustment, less allowable
intangible assets, net of tax benefit, is reported as a reduction of
shareholders' equity. At December 31, 1997, the company recorded a minimum
pension liability adjustment, net of tax, of $1.7.
Under the Savings and Stock Ownership Plan and other supplemental plans,
the company matches employee contributions in cash and common stock equal
to a percentage of certain amounts contributed by employees. The company's
contributions under these plans amounted to $13.2 in 1997, $10.6 in 1996
and $8.2 in 1995. Effective July 1, 1997, the contributions were invested
in funds based on employee direction. Prior to July, the contributions were
invested in shares of the company's common stock. At December 31, 1997, the
plans held 2.4 million shares and 0.6 million shares were reserved for
issuance.
NON-PENSION RETIREMENT BENEFITS: The company and its U.S. subsidiaries
have post-retirement plans that provide health and life insurance benefits
for retirees. Some of these plans require employee contributions at varying
rates. Not all employees are eligible to receive these benefits, with
eligibility governed by the plan(s) in effect at a particular location.
The accumulated post-retirement benefit obligation at December 31, 1997
was determined using the terms of the company's various plans, together
with relevant actuarial assumptions and health care cost trend rates
projected at estimated annual rates ranging from 6.6 percent in 1997 and
6.4 percent in 1998, to 5.0 percent through the year 2006, and a weighted
average discount rate of 7.0 percent. Generally, where applicable, the
discount rate and the actuarial assumptions used for pension plans also
apply to the non-pension retirement plans. A one percent annual increase in
these assumed cost trend rates would increase the accumulated
post-retirement benefit obligation by approximately $0.9, and annual
service costs by approximately $0.1. Certain of the company's non-U.S.
subsidiaries have similar plans for retirees. The company's obligations for
such plans are not material.
The net periodic post-retirement benefit cost related to continuing
operations is composed of the following:
YEAR ENDED
DECEMBER 31,
-----------------
1997 1996 1995
---- ---- -----
Service cost for benefits attributed to service during
the period........................................... $0.4 $0.6 $ 0.4
Interest cost on the accumulated post-retirement
benefit obligation................................... 6.2 6.0 4.5
Net amortization and deferral......................... (4.3) (4.5) (5.5)
---- ---- -----
Net periodic post-retirement benefits............... $2.3 $2.1 $(0.6)
==== ==== =====
F-17
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
The following table shows the plans' funded status and amounts recognized
in the balance sheet:
DECEMBER 31,
--------------------------------
1997 1996
--------------- ---------------
HEALTH LIFE HEALTH LIFE
------- ------ ------- ------
Accumulated post-retirement benefit obligation:
Retirees............................ $ (58.9) $(16.2) $ (55.8) $(15.3)
Fully-eligible active plan
participants....................... (3.1) (1.2) (1.3) (0.2)
Other active plan participants...... (3.2) (1.4) (8.2) (3.1)
------- ------ ------- ------
Total............................. (65.2) (18.8) (65.3) (18.6)
Unrecognized net gain................. (13.8) (1.2) (20.4) (1.7)
Unrecognized prior service cost....... (12.6) -- (19.5) --
------- ------ ------- ------
Accrued post-retirement benefit cost.. (91.6) (20.0) (105.2) (20.3)
Less amounts classified as current.... 7.3 1.3 7.3 1.3
------- ------ ------- ------
$ (84.3) $(18.7) $ (97.9) $(19.0)
======= ====== ======= ======
During 1997, the company's accrued post-retirement benefit cost was
reduced by curtailment gains and settlement gains of approximately $7.9
related to the disposition of GSPG and the formation of EGS. The
curtailment gain recognized on the disposition of GSPG is included in the
gain on sale amount. The curtailment and settlement gains resulting from
the formation of EGS were included in the investment in EGS.
The unrecognized prior service cost at December 31, 1997 and 1996
represents unamortized amounts for plan amendments, resulting from
revisions to company- sponsored health plans, which reduced benefit levels.
STOCK INCENTIVE PROGRAM: The company has a stock incentive program
whereby executive officers and designated employees have been or may be
granted restricted stock and options to purchase shares of company common
stock. Restricted stock awards were granted during 1997 and 1996 for 25,000
shares and 11,568 shares of company common stock with a weighted-average
price of $43.50 per share and $40.31 per share, respectively. The
restricted stock awards granted in 1997 and 1996 vest at certain rates over
a three-to-five- year period. Non-employee directors may elect to defer all
or part of their cash compensation as directors and to receive in lieu
thereof restricted stock. No restricted stock awards granted in 1997 were
received by non-employee directors. In 1996, of the 11,568 shares granted,
3,068 shares of company common stock were received by three non-employee
directors, subject to a five-year restriction period. Total compensation
expense for restricted stock for 1997 and 1996 was $1.0 and $1.2,
respectively.
Options are exercisable during specified dates at prices at least equal
to 100 percent of the fair market value on the date of grant. The exercise
price of General Signal stock options granted in 1997 and 1996 equaled the
market value on the date of grant. All options granted have 10-year terms,
and vest and become fully exercisable at the end of four years of continued
employment, except for options granted to non-employee directors which vest
immediately. In 1997, of the 532,000 shares granted, 14,000 shares of
company common stock were received by seven non-employee directors. No
options were granted to non- employee directors in 1996. As of December 31,
1997 and 1996, 4.3 million and 4.6 million shares, respectively, of company
common stock were reserved for issuance under the stock incentive program.
The company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of the company's employee stock options equals
the market price of the underlying stock on the date of the grant, no
compensation expense has been recognized.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS
No. 123), which also requires that the information be determined as if the
company had accounted for its employee stock options granted subsequent to
December 31, 1994, under the fair-value method of SFAS No. 123. The fair
value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following assumptions:
F-18
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
1997 1996 1995
------- ------- -------
Risk-free interest rate....................... 5.71% 4.77% 5.39%
Dividend yield................................ 2.40% 2.54% 2.76%
Expected volatility of market price of
company's common stock....................... 0.233 0.235 0.20
Expected option life.......................... 5 years 5 years 5 years
The risk-free interest rate is based on treasury bill rates. For the
purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The company's pro
forma information is as follows:
1997 1996 1995
------- ------- -------
Pro forma net income.......................... $128.0 $132.5 $35.7
Pro forma basic earnings per share............ $ 2.55 $ 2.67 $0.73
Pro forma diluted earnings per share.......... $ 2.55 $ 2.60 $0.76
These pro forma effects may not be representative of the effects on
future years because of the prospective application required by SFAS No.
123, and the fact that options vest over several years and new grants
generally are made each year.
OPTION ACTIVITY: The following table shows the option activity for the
three years ended December 31, 1997. Options granted and exercised by Data
Switch prior to the merger date are included in the 1995 activity.
WEIGHTED-
AVERAGE
OPTION PRICE EXERCISE
SHARES PER SHARE PRICE
------------- ------------- ---------
(IN MILLIONS)
Options outstanding at December 31, 1994. 2.2 $19.44-$37.25 $29.32
Restatement for Data Switch merger....... 0.2 13.94-56.63 27.46
Options granted.......................... 0.7 21.80-38.25 35.82
Options exercised........................ (0.5) 13.94-35.38 25.03
Options terminated....................... (0.2) 13.94-53.98 32.71
---- ------------- ------
Options outstanding at December 31, 1995. 2.4 $13.94-$56.63 $31.30
Options granted.......................... 0.4 36.50-42.63 41.26
Options exercised........................ (0.3) 13.94-39.64 26.71
Options terminated....................... (0.1) 13.94-53.98 31.42
---- ------------- ------
Options outstanding at December 31, 1996. 2.4 $13.94-$56.63 $33.73
Options granted.......................... 0.5 37.25-51.00 43.09
Options exercised........................ (0.4) 13.94-47.02 27.20
Options terminated....................... (0.1) 13.94-56.63 36.81
---- ------------- ------
Options outstanding at December 31, 1997. 2.4 $13.94-$53.98 $36.70
==== ============= ======
Options exercisable:
1997................................... 1.3 $13.94-$53.98 $32.91
1996................................... 1.4 13.94-56.63 31.13
1995................................... 1.1 13.94-56.63 29.16
The weighted-average fair value of options granted during 1997, 1996 and
1995 was $10.85 per share, $9.08 per share and $7.36 per share,
respectively.
F-19
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information concerning currently
outstanding and exercisable options:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- --------------------- ---
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
-------- ----------- ----------- --------- ----------- ---------
(NUMBER OF SHARES IN THOUSANDS)
$10-$20....... 20 5.81 $16.23 18 $16.19
$20-$30....... 232 2.46 25.61 224 25.72
$30-$40....... 1,279 4.94 34.24 996 33.89
$40-$50....... 883 9.09 43.56 106 41.43
$50-$60....... 5 6.48 52.02 2 53.98
----- -----
2,419 1,346
===== =====
17. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share from continuing operations:
YEAR ENDED
DECEMBER 31,
----------------------
1997 1996 1995
------ ------ ------
Numerator:
Numerator for basic earnings per share-earnings from
continuing
operations.......................................... $131.0 $133.4 $100.1
Effect of dilutive securities:
5.75 percent convertible subordinated notes........ 0.2 3.5 3.8
------ ------ ------
Numerator for diluted earnings per share-income
available to common shareholders after assumed
conversion........................................ $131.2 $136.9 $103.9
====== ====== ======
Denominator (shares in millions):
Denominator for basic earnings per share-weighted-av-
erage shares........................................ 50.2 49.7 49.2
Effect of dilutive securities:
Employee stock options............................. 0.2 0.2 0.1
5.75 percent convertible subordinated notes........ 0.1 2.5 2.5
Restricted stock compensation...................... (0.1) (0.1) (0.1)
Contingent restricted stock awards................. -- -- 0.1
------ ------ ------
Dilutive potential common shares..................... 0.2 2.6 2.6
------ ------ ------
Denominator for diluted earnings per share-adjusted
weighted-average shares and assumed conversions... 50.4 52.3 51.8
====== ====== ======
Basic earnings per share from continuing operations.... $ 2.61 $ 2.68 $ 2.04
====== ====== ======
Diluted earnings per share from continuing operations.. $ 2.60 $ 2.62 $ 2.01
====== ====== ======
For additional disclosures regarding the 5.75 percent subordinated notes
and the employee stock options, see pages F-13 and F-18 through F-20.
F-20
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
18. BUSINESS COMBINATIONS
During the three-year period ended December 31, 1997, the company
acquired four entities for cash and common stock valued at $350.7 plus the
assumption of liabilities. The acquisitions, except Data Switch Corporation
(Data Switch), were accounted for as purchases, and, accordingly, the
results of operations of the acquired companies are included in the
statement of earnings for the periods during which they were owned by the
company. Data Switch was accounted for as pooling of interests. The
following paragraphs discuss significant mergers and acquisitions made
during the three years ended December 31, 1997.
On June 13, 1995, the company completed a cash-tender offer for Best
Power Technology, Inc. (Best Power). Best Power is a manufacturer of
uninterruptible power supply products, which provide backup power to
protect computers, information networks and other critical systems from
power line disturbances. The aggregate purchase price was $206.3, creating
goodwill of $167.1. The purchase price was financed through the issuance of
commercial paper. The company recorded a $7.4 before-tax charge ($4.8
after-tax) during the second quarter of 1995, primarily for severance and
other consolidation costs relating to the combination of General Signal and
Best Power locations.
On July 27, 1995, the company acquired MagneTek Electric Inc. (Waukesha
Electric) for $73.9, creating goodwill of $46.2. Waukesha Electric designs,
manufactures and installs medium-power transformers and related products.
The purchase price was financed through the issuance of commercial paper.
Unaudited pro forma data for the year ended December 31, 1995 giving
effect to the acquisitions of Best Power and Waukesha Electric as if they
had been acquired at the beginning of 1995 are shown below:
1995
--------
Net sales........................................................ $1,974.3
Net earnings..................................................... $ 36.2
Basic earnings per share......................................... $ 0.74
Diluted earnings per share....................................... $ 0.77
On November 9, 1995, the company merged with Data Switch by exchanging
1.8 million shares of company common stock and 0.2 million rights to
receive company common stock for all of the outstanding common stock and
related options and warrants of Data Switch. Data Switch designs, develops,
manufactures, markets and services products for large-scale data center
networks. As a result of the merger, the company incurred transaction
costs, severance and balance sheet valuation adjustments of $12.7 ($8.1
after-tax). The transaction costs included investment banker and other
professional fees. The consolidation costs included severance pay primarily
for Data Switch and asset valuation adjustments.
19. DISCONTINUED OPERATIONS
In November 1994, the company adopted a plan to sell Leeds & Northrup
Company (L&N), formerly a part of the Process Controls sector, and
Dynapower/Stratopower (Dynapower), formerly a part of the Industrial
Technology sector. These operations have been accounted for as discontinued
operations, and the consolidated financial statements have reported
separately their net assets and operating results. In the second and third
quarters of 1995, the company recorded a total of $99.9 before-tax charges
($64.0 after- tax) for additional expected losses relating to the disposal
of L&N and Dynapower. Through December 31, 1996, substantially all related
assets were sold. In September 1997, $3.8 of this amount ($2.3 after-tax)
was no longer required and accordingly, was reversed.
20. DISPOSITION OF BUSINESS AND OTHER SPECIAL ITEMS
In the fourth quarter of 1997, the company settled patent litigation and
sold related patents for a pre-tax gain of $10.0 and sold its equity
interest in a company in Mexico for a gain of $9.0. Income tax expense on
the gains totaled $10.6. The effective tax rate on the Mexico gain differs
from the U.S. statutory tax rate due to a difference in the book and tax
basis of the equity investment sold. Additionally in the fourth quarter of
1997, the company recorded $13.8 of pre-tax charges in selling, general and
administrative expenses for asset valuations, lease termination costs and
other individually insignificant matters.
F-21
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
In August 1997, the company sold substantially all of the assets of GSPG,
a unit of the Process Controls sector, to Pentair, Inc. for approximately
$200 and recognized a pre-tax gain of $63.7 ($17.2 after-tax). The
effective tax rate differs from the U.S. statutory tax rate due to a
difference in the book and tax basis of GSPG. Additionally, during the
third quarter of 1997, the company recorded charges for inventory and
accounts receivable policy changes, asset write-offs, professional fees and
cancellation of a facility lease. Additionally, the company reversed a
restructuring reserve that was no longer needed due to the formation of
EGS. The net of these charges of $14.1 were included in cost of sales
($11.1) and selling, general and administrative expenses ($3.0), with an
associated income tax benefit of $5.4.
In January 1996, the company sold Kinney, a unit of the Process Controls
sector, for $29.0 and recognized a pre-tax gain of $20.8. Included in the
gain were transaction costs of approximately $0.5. Also during the first
quarter of 1996, the company recognized $19.7 of pre-tax charges for asset
write-downs, lease termination costs, severance, warranty repairs and
environmental matters. The charges were included in cost of sales ($13.0)
and selling, general and administrative expenses ($6.7), with an associated
income tax benefit of $7.9.
F-22
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
21. BUSINESS SECTOR INFORMATION
The company manufactures industrial products and components in the
Process Control, Electrical Control and Industrial Technology (primarily
transportation and telecommunication) industries. See pages 3 through 5 of
this 10-K for a description of major products and markets served.
PRODUCT SECTORS 1997 1996 1995 1994 1993
- --------------- -------- -------- -------- -------- --------
NET SALES:
Process Controls........ $ 671.9 $ 752.4 $ 719.7 $ 606.4 $ 545.8
Electrical Controls..... 910.9 945.3 777.0 618.6 547.1
Industrial Technology... 371.8 367.3(/2/) 366.5 302.7 261.3
-------- -------- -------- -------- --------
$1,954.6 $2,065.0 $1,863.2 $1,527.7 $1,354.2
======== ======== ======== ======== ========
OPERATING EARNINGS:
Process Controls........ $ 149.9(/1/) $ 128.9(/3/) $ 92.0 $ 66.8(/5/) 45.1(/6/)
Electrical Controls..... 66.4(/1/) 86.4(/3/) 62.1(/4/) 30.7(/5/) 29.2(/6/)
Industrial Technology... 64.3(/1/) 62.5(/3/) 51.1(/4/) 47.4(/5/) 44.8
Other charges and cred-
its.................... -- -- -- 46.2 48.0(/7/)
-------- -------- -------- -------- --------
280.6 277.8 205.2 191.1 167.1
Equity income........... 11.8 1.1 0.9 1.0 0.2
Interest expense, net... (13.2) (21.5) (24.3) (11.8) (16.6)
Unallocated expenses.... (26.4)(/1/) (35.0) (25.4) (20.0) (11.6)
-------- -------- -------- -------- --------
Earnings from continuing
operations before in-
come taxes............. $ 252.8 $ 222.4 $ 156.4 $ 160.3 $ 139.1
======== ======== ======== ======== ========
IDENTIFIABLE ASSETS:
Process Controls........ $ 299.7 $ 434.9 $ 420.9 $ 391.4 $ 474.3
Electrical Controls..... 532.5 700.7 692.0 399.4 326.5
Industrial Technology... 191.0 205.9 209.0 181.3 167.2
-------- -------- -------- -------- --------
1,023.2 1,341.5 1,321.9 972.1 968.0
General corporate as-
sets................... 220.2 183.1 210.3 211.8 213.1
Assets held for sale at
estimated realizable
value.................. -- 4.9 60.4 153.6 25.7
Investments in and ad-
vances to affiliates... 144.6 21.5 20.6 20.4 18.1
-------- -------- -------- -------- --------
Total assets............ $1,388.0 $1,551.0 $1,613.2 $1,357.9 $1,224.9
======== ======== ======== ======== ========
DEPRECIATION OF PROPER-
TY, PLANT AND EQUIP-
MENT(/8/):
Process Controls........ $ 17.2 $ 17.8 $ 17.9 $ 16.6 $ 12.4
Electrical Controls..... 20.3 22.1 19.0 14.5 13.0
Industrial Technology... 10.9 10.6 11.4 6.4 6.4
Corporate and other..... 2.3 2.1 2.0 4.2 3.6
CAPITAL EXPENDITURES(/8/):
Process Controls........ $ 18.8 $ 21.8 $ 15.0 $ 28.7 $ 23.1
Electrical Controls..... 20.9 25.1 21.1 21.8 22.3
Industrial Technology... 11.2 10.5 11.0 11.4 7.7
Corporate and other..... 5.6 1.9 1.9 12.9 2.0
(1) Includes 1997 income in Process Controls ($63.7) and unallocated
expenses ($19.0) for the gain on sale of GSPG, settlement of patent
litigation and sale of patents and gain on sale of equity interest in
a company in Mexico. Also recorded were charges in Process Controls
($2.8), Electrical Controls ($16.7), Industrial Technology ($1.9) and
unallocated expenses ($6.5) for asset valuations, restructuring
charges, lease termination costs and other matters.
(2) Includes $4.2 of royalty income.
(3) Includes 1996 income in Process Controls ($22.6) and Industrial
Technology ($4.2) for the gain on sale of Kinney, insurance gain on
the recovery of destroyed assets and royalty income. Also recorded
were charges in Process Controls ($4.0), Electrical Controls ($11.1)
and Industrial Technology ($4.6) for asset write-downs, lease
termination costs, severance, warranty repairs and environmental
matters.
(4) Includes 1995 charges in Electrical Controls ($7.4) and Industrial
Technology ($12.7) for the acquisition of Best Power and merger with
Data Switch.
(5) Includes 1994 charges in Process Controls ($11.9), Electrical Controls
($19.2) and Industrial Technology ($9.9) for the consolidation of
operations, asset valuations, environmental and other.
(6) Includes 1993 charges in Process Controls ($22.1) and Electrical
Controls ($10.5) for asset valuations, restructuring and transaction
and consolidation charges related to Revco.
(7) Represents credits for the divested semiconductor operations ($53.2)
and charges for the transportation businesses ($5.2).
(8) Excludes discontinued operations.
F-23
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
22. GEOGRAPHIC AREAS
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
NET SALES:
United States............... $1,764.3 $1,901.0 $1,699.8 $1,390.0 $1,218.9
Foreign..................... 273.0 274.6 239.9 180.7 173.7
Intergeographic............. (82.7) (110.6) (76.5) (43.0) (38.4)
-------- -------- -------- -------- --------
$1,954.6 $2,065.0 $1,863.2 $1,527.7 $1,354.2
======== ======== ======== ======== ========
OPERATING EARNINGS(/1/):
United States............... $ 193.5 $ 234.7 $ 212.0 $ 135.7 $ 113.4
Other charges and credits... 72.7 20.8 (20.1) 46.2 48.0
Foreign..................... 14.4 22.3 13.3 9.2 5.7
-------- -------- -------- -------- --------
$ 280.6 $ 277.8 $ 205.2 $ 191.1 $ 167.1
======== ======== ======== ======== ========
IDENTIFIABLE ASSETS(/2/):
United States............... $ 866.4 $1,201.0 $1,175.6 $ 875.8 $ 822.5
Foreign..................... 156.8 140.5 146.3 96.3 145.5
-------- -------- -------- -------- --------
$1,023.2 $1,341.5 $1,321.9 $ 972.1 $ 968.0
======== ======== ======== ======== ========
Export sales to unaffiliated
customers(/3/)............. $ 176.8 $ 215.2 $ 199.1 $ 125.4 $ 110.9
- -------
(1) Excludes equity income, net interest expense and unallocated expenses.
(2) Excludes general corporate assets and investments in affiliates. (3)
Included in United States sales.
23. SUPPLEMENTARY INFORMATION
YEAR ENDED
DECEMBER 31,
------------------
1997 1996 1995
----- ----- ------
Liabilities assumed in conjunction with acquisitions:
Fair value of assets acquired............................. $11.0 $ -- $332.1
Cash paid................................................. 11.0 -- (280.2)
----- ----- ------
$ -- $ -- $ 51.9
===== ===== ======
Research and development.................................... $45.7 $47.5 $ 46.9
Advertising expense......................................... $16.1 $17.9 $ 14.1
F-24
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
24. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FIRST SECOND THIRD FOURTH
--------------- --------------- -------------------- --------------------
1997 1996 1997 1996 1997 1996 1997 1996
------- ------- ------- ------- ------- ------- ------- -------
Net sales............... $ 505.6 $ 481.7 $ 539.6 $ 515.0 $ 475.7 $ 521.6 $ 433.7 $ 546.7
Gross profit............ 148.3 130.3 163.7 157.7 129.2 165.4 134.9 175.9
Earnings from continuing
operations............. 24.3 25.4(/3/) 34.4 31.6 36.0(/1/) 37.4 36.3(/2/) 39.0
Disposal of discontinued
operations............. -- -- -- -- 2.3 -- -- --
Cumulative effect of
accounting change...... -- -- -- -- -- -- (3.7) --
------- ------- ------- ------- ------- ------- ------- -------
Net earnings............ $ 24.3 $ 25.4 $ 34.4 $ 31.6 $ 38.3 $ 37.4 $ 32.6 $ 39.0
======= ======= ======= ======= ======= ======= ======= =======
Basic earnings (loss)
per share of common
stock(/4/):
Continuing
operations........... $ 0.47 $ 0.51 $ 0.68 $ 0.64 $ 0.71 $ 0.75 $ 0.75 $ 0.78
Disposal of
discontinued
operations........... -- -- -- -- 0.05 -- -- --
Cumulative effect of
accounting change.... -- -- -- -- -- -- (0.08) --
------- ------- ------- ------- ------- ------- ------- -------
Net earnings.......... $ 0.47 $ 0.51 $ 0.68 $ 0.64 $ 0.76 $ 0.75 $ 0.67 $ 0.78
======= ======= ======= ======= ======= ======= ======= =======
Diluted earnings (loss)
per share of common
stock(/4/):
Continuing
operations........... $ 0.47 $ 0.51 $ 0.68 $ 0.62 $ 0.71 $ 0.73 $ 0.75 $ 0.76
Disposal of
discontinued
operations........... -- -- -- -- 0.05 -- -- --
Cumulative effect of
accounting change.... -- -- -- -- -- -- (0.08) --
------- ------- ------- ------- ------- ------- ------- -------
Net earnings.......... $ 0.47 $ 0.51 $ 0.68 $ 0.62 $ 0.76 $ 0.73 $ 0.67 $ 0.76
======= ======= ======= ======= ======= ======= ======= =======
Common stock price
range:
High.................. $46 3/4 $37 3/4 $46 3/4 $40 1/8 $ 53 $44 1/4 $44 7/8 $44 1/2
Low................... 38 1/2 32 36 1/8 35 1/4 37 3/16 36 1/4 36 5/8 39 3/4
Dividends declared per
share.................. $ 0.255 $ 0.24 $ 0.255 $ 0.24 $ 0.255 $ 0.24 $ 0.27 $ 0.255
Dividends paid per
share.................. $ 0.255 $ 0.24 $ 0.255 $ 0.24 $ 0.255 $ 0.24 $ 0.255 $ 0.24
- -------
Earnings before cumulative effect of accounting change was $38.3 ($0.76 per
share) in the third quarter of 1997.
Note: The sum of the quarters' earnings per share may not equal the full year
per-share amounts.
(1) Included $63.7 gain on sale of GSPG. The company also recorded $14.1
of special charges for asset valuations, restructuring charges and
other matters.
(2) Included $10.0 gain on settlement of a patent litigation and sale of
patents and $9.0 gain on sale of an investment in Mexico. The company
also recorded $13.8 of special charges for asset valuations, lease
termination costs and other matters.
(3) Included $20.8 gain on sale of Kinney and $6.0 related to a royalty
contract and an insurance gain. The company also recorded $19.7 of
charges for asset write-downs, lease termination costs, severance,
warranty repairs and environmental matters.
(4) The 1996 and first three quarters of 1997 earnings per share amounts
have been restated to comply with SFAS No. 128.
F-25
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
INDEX
Page No.
Statement of Earnings -
Three Months Ended June 30, 1998 and 1997 [3]
Statement of Earnings -
Six Months Ended June 30, 1998 and 1997 [4]
Balance Sheet -
As of June 30, 1998 and December 31, 1997 [5]
Condensed Statement of Cash Flow -
Six Months Ended June 30, 1998 and 1997 [6]
Notes to Financial Statements [7]
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
Statement of Earnings
(In millions, except per-share data)
(Unaudited)
THREE MONTHS ENDED JUNE 30,
1998 1997
Net sales $ 401.6 $ 539.6
Cost of sales 273.6 375.9
Selling, general and
administrative expenses 82.6 101.7
356.2 477.6
Operating earnings 45.4 62.0
Equity in earnings of EGS 10.0 --
Interest expense, net (5.4) (4.6)
Earnings before income taxes 50.0 57.4
Income taxes 19.2 23.0
Net earnings $ 30.8 $ 34.4
Basic earnings per share $ 0.70 $ 0.68
Diluted earnings per share $ 0.70 $ 0.68
Dividends declared per share $ 0.27 $ 0.255
See accompanying notes to financial statements.
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
Statement of Earnings
(In millions, except per-share data)
(Unaudited)
SIX MONTHS ENDED JUNE 30,
1998 1997
Net sales $ 776.1 $1,045.2
Cost of sales 538.5 733.2
Selling, general and
administrative expenses 161.1 206.1
699.6 939.3
Operating earnings 76.5 105.9
Equity in earnings of EGS 20.0 --
Interest expense, net (8.6) (8.0)
Earnings before income taxes 87.9 97.9
Income taxes 33.8 39.2
Net earnings $ 54.1 $ 58.7
Basic earnings per share $ 1.20 $ 1.15
Diluted earnings per share $ 1.19 $ 1.14
Dividends declared per share $ 0.54 $ 0.51
See accompanying notes to financial statements.
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
Balance Sheet
(In millions)
(Unaudited) (Audited)
JUNE 30, DECEMBER 31,
1998 1997
--------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 39.5 $ 50.0
Accounts receivable, net 279.1 285.4
Inventories, net 163.5 156.8
Prepaid expenses and other current assets 13.7 23.2
Deferred income taxes 47.4 52.7
Total current assets 543.2 568.1
Property, plant and equipment,
net of accumulated depreciation
and amortization 237.9 240.7
Intangibles, net of accumulated
amortization 258.1 264.3
Investment in EGS 142.7 133.1
Pension asset 139.3 127.5
Other assets 55.1 54.3
Total assets $ 1,376.3 $ 1,388.0
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current
maturities of long-term debt $ 9.2 $ 9.0
Accounts payable 128.4 142.7
Accrued expenses 179.5 184.4
Income taxes 28.8 40.4
Total current liabilities 345.9 376.5
Long-term debt, less current maturities 364.8 207.4
Accrued post-retirement and post-employment
obligations 107.0 112.4
Deferred income taxes 57.8 50.3
Other liabilities 11.1 11.7
Total long-term liabilities 540.7 381.8
Shareholders' equity:
Common stock 78.7 78.5
Additional paid-in capital 368.9 367.2
Retained earnings 766.3 746.7
Accumulated other comprehensive loss (14.4) (11.8)
Common stock in treasury (709.8) (550.9)
Total shareholders' equity 489.7 629.7
Total liabilities and shareholders' equity $ 1,376.3 $ 1,388.0
See accompanying notes to financial statements.
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
Condensed Statement of Cash Flow
(In millions)
(Unaudited)
SIX MONTHS ENDED JUNE 30,
1998 1997
CASH FLOW FROM OPERATING ACTIVITIES:
Net earnings $ 54.1 $ 58.7
Adjustments to reconcile net earnings
to net cash from operating activities
Equity in earnings of EGS (20.0) --
Deferred income taxes 12.9 14.8
Depreciation and amortization 29.3 35.6
Pension credits (9.0) (6.5)
Other, net (6.6) (1.1)
Changes in assets and liabilities, net of
effects from acquisitions and
divestitures (25.8) (43.9)
Net cash from operating activities 34.9 57.6
CASH FLOW FROM INVESTING ACTIVITIES:
Divestitures 1.9 7.3
Capital expenditures (24.6) (26.3)
Other, net 0.8 1.5
Net cash from investing activities (21.9) (17.5)
CASH FLOW FROM FINANCING ACTIVITIES:
Net change in short and long-term borrowings 157.6 84.7
Dividends paid (24.7) (26.5)
Issuance of common stock 3.2 8.3
Purchase of common stock (159.6) (100.0)
Net cash from financing activities (23.5) (33.5)
Net change in cash and cash equivalents (10.5) 6.6
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 50.0 17.7
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 39.5 $ 24.3
See accompanying notes to financial statements.
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
Notes to Financial Statements
(Unaudited)
1. In the opinion of management, the accompanying unaudited financial
statements reflect all adjustments (consisting of normal, recurring
items) necessary for the fair presentation of results for these
interim periods. These results are based upon generally accepted
accounting principles consistently applied with those used in the
preparation of the company's 1997 Annual Report on Form 10-K. The
results of operations for the six-month period ended June 30, 1998 are
not necessarily indicative of the results of operations that may be
expected for the full year. The financial information as of June 30,
1998 should be read in conjunction with the financial statements
contained in the company's 1997 Annual Report on Form 10-K.
2. Certain reclassifications have been made to the 1997 financial
statements to conform with the 1998 presentation.
3. INVENTORIES
June 30, December 31,
1998 1997
(In millions)
Finished goods $ 46.7 $ 43.9
Work in process 49.3 38.3
Raw material and purchased parts 80.3 87.3
Total FIFO cost 176.3 169.5
Excess of FIFO cost over LIFO
inventory value (12.8) (12.7)
Net carrying value $ 163.5 $ 156.8
4. PROPERTY, PLANT AND EQUIPMENT
June 30, December 31,
1998 1997
(In millions)
Property, plant and equipment, at
cost $ 584.6 $ 576.3
Accumulated depreciation and
amortization (346.7) (335.6)
Property, plant and equipment, net $ 237.9 $ 240.7
5. CAPITAL STOCK
June 30, December 31,
1998 1997
(In millions)
COMMON STOCK:
Shares authorized 150.0 150.0
Shares issued 65.0 65.0
Held in treasury (21.4) (17.9)
6. COMPREHENSIVE INCOME
As of January 1, 1998, the company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
No. 130). SFAS No. 130 establishes rules for the reporting and display
of comprehensive income and its components. The adoption of this
statement had no impact on the company's net income or shareholders'
equity. SFAS No. 130 requires foreign currency translation adjustments
to be included in a presentation of other comprehensive income. Prior
year financial statements have been reclassified to conform to the
requirements of SFAS No. 130.
Total comprehensive income and its components, net of related tax, for
the three and six-month periods ended June 30 were as follows:
Three Months Ended Six Months Ended
1998 1997 1998 1997
(In millions)
Net income $ 30.8 $ 34.4 $ 54.1 $ 58.7
Foreign currency
translation
adjustments (3.7) -- (2.6) (4.1)
Comprehensive income $ 27.1 $ 34.4 $ 51.5 $ 54.6
The components of accumulated other comprehensive loss, net of related
tax, were as follows:
June 30, December 31,
1998 1997
(In millions)
Foreign currency translation
adjustments $ (12.7) $ (10.1)
Minimum pension liability
adjustment (1.7) (1.7)
Accumulated other comprehensive loss $ (14.4) $ (11.8)
7. BUSINESS SEGMENT INFORMATION
Three Months Ended June 30,
1998 1997
(In millions)
NET SALES:
Process Controls (a) $ 125.3 $ 193.7
Electrical Controls (b) 179.8 257.0
Industrial Technology 96.5 88.9
$ 401.6 $ 539.6
OPERATING EARNINGS:
Process Controls (a) $ 19.8 $ 28.3
Electrical Controls (b) 18.6 26.9
Industrial Technology 15.8 15.4
Total operating earnings before
unallocated expenses, equity
earnings and interest 54.2 70.6
Equity in earnings of EGS (b) 10.0 --
Net interest expense (5.4) (4.6)
Unallocated expenses (8.8) (8.6)
Earnings before income taxes $ 50.0 $ 57.4
(a) In August 1997, the company sold the General Signal Pump Group (GSPG),
a unit of the Process Controls sector.
(b) In September 1997, the company contributed the net assets of General
Signal Electrical Group (GSEG), a unit of the Electrical Controls
sector, to the EGS Electrical Group (EGS).
Six Months Ended June 30,
1998 1997
(In millions)
NET SALES:
Process Controls (a) $ 244.4 $ 368.4
Electrical Controls (b) 343.2 493.0
Industrial Technology 188.5 183.8
$ 776.1 $ 1,045.2
OPERATING EARNINGS:
Process Controls (a) $ 33.5 $ 45.4
Electrical Controls (b) 31.0 45.6
Industrial Technology 30.6 33.7
Total operating earnings before
unallocated expenses, equity
earnings and interest 95.1 124.7
Equity in earnings of EGS (b) 20.0 --
Net interest expense (8.6) (8.0)
Unallocated expenses (18.6) (18.8)
Earnings before income taxes $ 87.9 $ 97.9
(a) In August 1997, the company sold the General Signal Pump Group (GSPG),
a unit of the Process Controls sector.
(b) In September 1997, the company contributed the net assets of General
Signal Electrical Group (GSEG), a unit of the Electrical Controls
sector, to the EGS Electrical Group (EGS).
8. SUPPLEMENTAL INFORMATION - STATEMENT OF CASH FLOW
Six Months Ended June 30,
1998 1997
(In millions)
The company had the following
non-cash financing activity:
Conversion of convertible
debt into common stock $ -- $ 39.3
9. EARNINGS PER SHARE
The following tables set forth the computation of basic and diluted
earnings per share (in millions, except for per-share data):
Three Months Ended June 30,
1998 1997
Numerator:
Numerator for basic and diluted
earnings per share - net income $ 30.8 $ 34.4
Denominator:
Denominator for basic earnings
per share - weighted-average
shares 43.8 50.3
Effect of dilutive securities:
Employee stock options 0.2 0.2
Restricted stock 0.2 (0.1)
Dilutive potential common
shares 0.4 0.1
Denominator for diluted earnings
per share - adjusted weighted-
average shares and assumed
conversions 44.2 50.4
Basic earnings per share $ 0.70 $ 0.68
Diluted earnings per share $ 0.70 $ 0.68
Six Months Ended June 30,
1998 1997
Numerator:
Numerator for basic and
diluted earnings per
share - net income $ 54.1 $ 58.7
Effect of dilutive securities:
5.75 percent convertible
subordinated notes -- 0.2
Numerator for diluted earnings per
share - income available to common
shareholders after assumed
conversion $ 54.1 $ 58.9
Denominator:
Denominator for basic earnings per
share - weighted-average shares 45.2 51.2
Effect of dilutive securities:
Employee stock options 0.2 0.2
5.75 percent convertible
subordinated notes -- 0.1
Restricted stock 0.2 --
Dilutive potential common shares 0.4 0.3
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions 45.6 51.5
Basic earnings per share $ 1.20 $ 1.15
Diluted earnings per share $ 1.19 $ 1.14
10. REPURCHASE OF SHARES
On June 19, 1997 the Board of Directors approved a stock buy-back
program of up to $150.0 million and on September 18, 1997, the Board
of Directors approved an increase of this program to $300.0 million.
As of April 15, 1998, the program was completed with the total of 6.8
million shares repurchased for $300.0 million.
11. EGS JOINT VENTURE
The company owns a 47.5 percent interest in EGS Electrical Group, LLC
(EGS), a joint venture with Emerson Electric Company. The company
accounts for its investment in EGS under the equity method of
accounting. Effective January 1, 1998, the company began accounting
for its investment in EGS on a three-month lag basis. EGS' fiscal
year-end is September 30, 1998. EGS' results of operations were the
following (in millions):
EGS: Jan. 1, 1998 to October 1, 1997 to
March 31, 1998 March 31, 1998
Net sales $ 136.6 $ 272.1
Gross profit 52.9 105.7
Pre-tax income 20.7 41.6
The company's investment in EGS at June 30, 1998 was approximately $17
million less than its equity in the joint venture's net assets at
March 31, 1998. The difference between the company's investment and
EGS' net assets is being amortized on a straight-line basis over an
estimated economic life of 40 years.
Condensed balance sheet information of EGS as of March 31, 1998 was as
follows (in millions):
Current assets $ 152.8
Noncurrent assets 262.9
Current liabilities 64.3
Noncurrent liabilities 16.0
12. MERGER WITH SPX CORPORATION
On July, 20, 1998, the company announced that it had signed a
definitive merger agreement for SPX Corporation (SPX) to acquire the
company for cash and SPX shares. The aggregate purchase price is
valued at approximately $2 billion based on the last reported trading
price of SPX's common stock immediately prior to the public
announcement of the execution of the merger agreement. SPX will also
assume approximately $335 million of the company's debt, net of cash.
Under the terms of the merger agreement, the merger consideration to
be paid to the company's shareholders will consist of 60 percent of
SPX stock and 40 percent of cash in the aggregate, with each
shareholder able to choose among three options - all cash ($45.00 per
share), all SPX stock (0.6977 shares of SPX common stock per share of
the company's common stock), or a 40/60 cash/stock combination ($18.00
and 0.4186 shares of SPX common stock per share of the company's
common stock), subject to proration if the all cash or all stock
elections are over subscribed. SPX has received commitments,
underwritten by Chase Manhattan Bank, to provide up to $1.7 billion of
financing to be used to fund the cash portion of the merger and to
refinance existing indebtedness of the company and SPX. The
transaction, which is subject to shareholder approvals, antitrust
clearance and other customary conditions, is expected to close early
in the fourth quarter of 1998.
The transaction will be accounted for as a reverse acquisition as the
shareholders of the company will own a majority of the shares of the
combined company upon completion of the transaction. Accordingly, for
accounting purposes, SPX will be treated as the acquired company and
the company will be considered to be the acquiring company. The
purchase price will be allocated to the assets and liabilities of SPX
based on their estimated fair market values at the acquisition date.
Under reverse acquisition accounting, the purchase price of SPX will
be based on the fair market value of SPX's common stock at July 19,
1998, the date of the signing of the definitive merger agreement. The
cash portion of the purchase price will be accounted for as a dividend
by the combined company.
SPX is a global provider of Vehicle Service Solutions to franchised
dealers and independent service locations, Service Support to vehicle
manufacturers and Vehicle Components to the worldwide motor vehicle
industry.
PRO FORMA FINANCIAL DATA INDEX
Page No.
Pro Forma Condensed Combined Financial Data of SPX and
General Signal........................................... 97
Pro Forma Adjusted Historical Financial Data of SPX.......... 106
Pro Forma Adjusted Historical Financial Data of
General Signal........................................... 108
Capitalized terms used but not defined herein shall have the meaning
ascribed to them in the registration statement on Form S-4 of SPX
Corporation, as amended (Registration No. 333-60853).
PRO FORMA CONDENSED COMBINED
FINANCIAL DATA OF SPX AND GENERAL SIGNAL
(unaudited)
(in millions, except per share data)
The following table presents selected pro forma condensed combined
statement of income and other financial data of SPX and General Signal. The
information is presented as if the Merger had occurred on January 1, 1997
for statement of income and related data and on June 30, 1998 for balance
sheet data. The pro forma data assumes that the Merger is effected by the
exchange of 0.4186 of a share of SPX Common Stock and $18.00 in cash for
each share of General Signal Common Stock, whereby an aggregate of 18.227
shares of SPX Common Stock are issued and $783.8 in cash is paid in
exchange for all outstanding shares of General Signal Common Stock. Because
the General Signal stockholders will own a majority of the outstanding
shares of SPX Common Stock upon completion of the transaction, the Merger
will be accounted for as a reverse acquisition. Accordingly, for accounting
purposes, SPX is treated as the acquired company and General Signal is
considered to be the acquiring company. The purchase price will be
allocated to the assets and liabilities assumed of SPX based on their
estimated fair market values at the acquisition date. Under reverse
acquisition accounting, the purchase price of SPX is based on the fair
market value of SPX Common Stock at the date that the Merger Agreement was
signed. The cash portion of the Merger Consideration will be accounted for
as a dividend by the combined company. SPX's financial position and results
of operations will not be included in General Signal's consolidated
financial statements prior to the date the Merger is consummated.
Under reverse acquisition accounting, the purchase price of SPX is
based on the fair market value of SPX Common Stock. For purposes of
accounting for this business combination, the fair market value of SPX
Common Stock is $64.50 per share, which was the closing price of SPX Common
Stock on July 17, 1998, the last trading date prior to the date the Merger
Agreement was signed. The Merger Consideration includes 0.4186 of a share
of SPX Common Stock for each share of General Signal Common Stock. This is
a fixed exchange ratio which will not be adjusted in the event of any
increase or decrease in the market price of SPX Common Stock. Consequently,
changes in the market price of SPX Common Stock will not impact these pro
forma financial statements.
The pro forma condensed combined financial data are intended for
information purposes, and do not purport to represent what the combined
entity's results of continuing operations or financial position would
actually have been had the transaction in fact occurred at an earlier date,
or project the results for any future date or period. Upon consummation of
the Merger, the actual financial position and results of operations of the
combined company will differ, perhaps significantly, from the pro forma
amounts reflected herein due to a variety of factors, including changes in
operating results between the date of the pro forma condensed combined
financial data and the date on which the Merger is consummated and
thereafter, as well as the factors discussed under "Risk Factors."
The pro forma condensed combined balance sheet reflects the estimated
costs associated with change of control agreements and other costs
associated with closing the corporate office of General Signal. Certain
other change of control agreement costs which are triggered by the Merger
and are attributable to General Signal employees who are not affected by
the corporate office closing are also reflected in the pro forma condensed
combined balance sheet. The pro forma condensed combined income statement
does not reflect a charge for these costs as they are non-recurring and
have no continuing impact. Following the Effective Time, SPX will be
finalizing its strategic review of the combined company and its plans to
integrate the operations of General Signal. The pro forma condensed
combined financial data do not give effect to any additional integration or
restructuring costs that could result from that review and the finalization
of those plans. Any additional integration and rationalization of the
operations of General Signal may include certain costs that in turn would
result in a charge to earnings of the combined company. Such a charge,
which cannot now be quantified fully, may be material and would be
recognized in the period in which such a charge occurs. The costs may
include severance and related employee benefits costs, costs to consolidate
manufacturing and distribution facilities, facility rearrangement costs,
relocation and moving costs, training costs, and gains or losses on
business divestitures, among others.
97
The pro forma condensed combined financial data do not give effect to
any cost savings that could result from the combination of the companies.
SPX's and General Signal's management estimate that the combined company
can achieve approximately $55.0 to $60.0 of annualized cost savings in the
first full year following the acquisition. These cost savings include
estimated annual savings of $35.0 associated with duplicative corporate
office costs, $10.0 to $15.0 associated with combining material sourcing of
the combined company, and $10.0 to $15.0 of cost reductions at the General
Signal business units.
In the pro forma condensed combined financial data, SPX's and General
Signal's historical information for the six months ended June 30, 1998 were
derived from SPX's Second Quarter Form 10-Q and General Signal's Second
Quarter Form 10-Q, respectively. For SPX's and General Signal's pro forma
adjusted historical financial data for the year ended December 31, 1997,
see "Pro Forma Adjusted Historical Financial Data of SPX" and "Pro Forma
Adjusted Historical Financial Data of General Signal," respectively,
wherein certain divestitures by the respective companies are reflected as
having occurred as of January 1, 1997.
98
PRO FORMA CONDENSED COMBINED
FINANCIAL DATA OF SPX AND GENERAL SIGNAL
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(unaudited)
(in millions, except per share data)
GENERAL
SPX SIGNAL PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
STATEMENT OF INCOME DATA:
Revenues...................................... $ 462.0 $776.1 $ -- $1,238.1
Cost of products sold......................... 332.7 505.7 1.7(d) 840.1
Selling, general and administrative expense... 83.4 186.6 1.7(d) 271.7
Other operating expenses, net................. 1.7 7.3 9.0(d) 18.0
Special charges and (gains)(k)................ (7.1) -- -- (7.1)
------- ------ ------- --------
Operating income.............................. 51.3 76.5 (12.4) 115.4
Other expense (income), net................... (1.4) -- -- (1.4)
Equity earnings of EGS........................ -- (20.0) -- (20.0)
Interest expense, net......................... 7.9 8.6 44.2(f) 60.7
------- ------ ------- --------
Income before income taxes.................... 44.8 87.9 (56.6) 76.1
Provision for income taxes.................... 16.1 33.8 (18.1)(g) 31.8
------- ------ ------- --------
Income from continuing operations............. $ 28.7 $ 54.1 $ (38.5) $ 44.3
======= ====== ======= ========
Income per share:
Basic....................................... $ 2.40 $ 1.43
Diluted..................................... 2.33 1.42
Weighted average number of common
shares outstanding:
Basic....................................... 11.972 18.921(h) 30.893
Diluted..................................... 12.342 18.921(h) 31.263
Dividends per share (l)....................... $ -- $ --
OTHER FINANCIAL DATA:
Capital expenditures.......................... $ 14.6 $ 24.6 $ -- $ 39.2
Depreciation and amortization................. 12.0 29.3 11.5 52.8
Note: The accompanying notes are an integral part of the pro forma condensed
combined financial data.
99
PRO FORMA CONDENSED COMBINED
FINANCIAL DATA OF SPX AND GENERAL SIGNAL
FOR THE YEAR ENDED DECEMBER 31, 1997
(unaudited)
(in millions, except per share data)
SPX GENERAL
PRO FORMA SIGNAL
ADJUSTED PRO FORMA PRO FORMA
HISTORICAL(a) HISTORICAL(b) ADJUSTMENTS PRO FORMA
------------- ------------- ----------- ---------
STATEMENT OF INCOME DATA:
Revenues..................................... $ 898.8 $1,601.5 $ -- $2,500.3
Cost of products sold........................ 649.4 1,066.3 3.3(d) 1,719.0
Selling, general and administrative
expense.................................... 174.3 376.9 3.3(d) 554.5
Other operating expenses, net................ 3.7 12.5 18.0(d) 34.2
Special charges and (gains)(k)............... 116.5 -- -- 116.5
------- -------- ------- --------
Operating income (loss)...................... (45.1) 145.8 (24.6) 76.1
Other expense (income), net.................. (2.3) (9.0) -- (11.3)
Equity earnings of EGS....................... -- (38.8) -- (38.8)
Interest expense, net........................ 12.9 8.2 82.0(f) 103.1
------- -------- ------- --------
Income (loss) before income taxes............ (55.7) 185.4 (106.6) 23.1
Provision (benefit) for income taxes......... (20.0) 73.9 (33.7)(g) 20.2
------- -------- ------- --------
Income (loss) from continuing
operations(c).............................. $ (35.7) $ 111.5 $ (72.9) $ 2.9
======= ======== ======= ========
Income (loss) per share:
Basic...................................... $ (2.80) $ 0.09
Diluted.................................... (2.80) 0.08
Weighted average number of common shares outstanding:
Basic...................................... 12.754 21.014(h) 33.768
Diluted.................................... 12.754 21.565(h) 34.319
Dividends per share(l)....................... $ 0.10 $ 0.10
OTHER FINANCIAL DATA:
Capital expenditures......................... $ 21.6 $ 48.3 $ -- $ 69.9
Depreciation and amortization................ 23.8 55.8 23.0 102.6
Note: The accompanying notes are an integral part of the pro forma condensed
combined financial data.
100
PRO FORMA CONDENSED COMBINED
BALANCE SHEET OF SPX AND GENERAL SIGNAL
AS OF JUNE 30, 1998
(unaudited)
(in millions)
GENERAL
SPX SIGNAL PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------
ASSETS:
Current assets.................................. $392.1 $ 543.2 $ 10.5(i) $ 945.8
Property, plant and equipment, net.............. 132.9 237.9 40.1(i) 410.9
Goodwill and intangible assets.................. 96.1 258.1 (96.1)(i) 1,096.3
838.2(i)
Other assets.................................... 21.8 337.1 32.0(i) 470.6
80.3(i)
(0.6)(i)
------ -------- ------- --------
Total assets.......................... $642.9 $1,376.3 $ 904.4 $2,923.6
====== ======== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Notes payable and current maturities of
long-term debt................................ $ 3.2 $ 9.2 $ -- $ 12.4
Other current liabilities....................... 279.8 336.7 -- 616.5
Total long-term liabilities, excluding long-term
debt.......................................... 139.5 175.9 (19.4)(i) 348.4
52.4(i)
Long-term debt.................................. 258.8 364.8 890.2(e) 1,513.8
Total stockholders' equity (deficit)............ (38.4) 489.7 794.0(j) 432.5
(783.8)(j)
(57.4)(m)
38.4(j)
(10.0)(i)
------ -------- ------- --------
Total liabilities and stockholders'
equity.............................. $642.9 $1,376.3 $ 904.4 $2,923.6
====== ======== ======= ========
Note: The accompanying notes are an integral part of the pro forma condensed
combined balance sheet.
101
NOTES TO PRO FORMA CONDENSED COMBINED
FINANCIAL DATA OF SPX AND GENERAL SIGNAL
(unaudited)
(in millions, except per share data)
(a) Pro forma information for the year ended December 31, 1997 includes
the pro forma adjusted historical results of SPX for the year then
ended which reflects SPX's February 1997 disposition of the Sealed
Power division as if such disposition has occurred on January 1, 1997.
See "Pro Forma Adjusted Historical Financial Data of SPX."
(b) Pro forma information for the year ended December 31, 1997 includes
the pro forma adjusted historical results of General Signal for the
year then ended which reflects General Signal's August 1997
disposition of GSPG and General Signal's September 1997 contribution
of GSEG to a 47.5% owned joint venture as if such transactions
occurred on January 1, 1997. See "Pro Forma Adjusted Historical
Financial Data of General Signal."
(c) The pro forma condensed combined financial data of SPX and General
Signal reflect only results from continuing operations. SPX recorded a
$10.3 extraordinary item in the year ended December 31, 1997. General
Signal recorded earnings from discontinued operations of $2.3 and a
charge for the cumulative effect of accounting change of $3.7 in the
year ended December 31, 1997.
(d) These pro forma adjustments reflect the impact of the allocation of
the purchase price to the assets and liabilities of SPX on the pro
forma condensed combined statement of income and other financial data.
The ultimate allocation of the purchase price to the net assets
acquired, goodwill and other intangible assets, liabilities assumed
and in process technology of SPX is subject to final determination of
their respective fair values, and as a result, these adjustments could
change. The following table reflects the pro forma condensed combined
statement of income impact of the purchase accounting adjustments:
COST OF SELLING, OTHER
PRODUCTS GENERAL OPERATING
SOLD & ADMIN. EXPENSES TOTAL
-------- -------- --------- -----
Additional depreciation.............. $2.5 $2.5 $ -- $ 5.0
Pension expense adjustment........... 0.3 0.3 -- 0.6
Amortization of previously recorded
goodwill........................... -- -- (3.0) (3.0)
Goodwill and intangible amortization
on transaction..................... -- -- 21.0 21.0
Postretirement expense adjustment.... 0.5 0.5 -- 1.0
---- ---- ----- -----
Year ended December 31, 1997......... $3.3 $3.3 $18.0 $24.6
==== ==== ===== =====
Six months ended June 30, 1998....... $1.7 $1.7 $ 9.0 $12.4
==== ==== ===== =====
Upon consummation of the transaction, an estimated $10.0 charge for in
process technology will occur. However, this charge is not reflected
in the pro forma data as the charge is non-recurring and has no
significant continuing impact.
(e) This pro forma adjustment reflects the borrowings for the cash portion
of the Merger Consideration, payments under change of control
agreements and of other costs associated with closing the corporate
office of General Signal of $57.4, and estimated transaction fees of
$49.0. The cash portion of the Merger Consideration is $783.8, which
represents $18.00 per share of General Signal Common Stock multiplied
by 43.543 shares of General Signal Common Stock to be exchanged.
(f) These pro forma adjustments reflect the interest expense associated
with the incremental borrowings ($890.2) to effect the Merger, as if
the incremental borrowings had occurred at January 1, 1997. The pro
forma interest expense adjustment also reflects the refinancing of
existing debt under the new financing agreements as of January 1,
1997. The interest expense has been computed on an assumption that
borrowings under the new credit facility will bear interest at a rate
of LIBOR plus 2.65% (8.35% was used
102
NOTES TO PRO FORMA CONDENSED COMBINED
FINANCIAL DATA OF SPX AND GENERAL SIGNAL (CONTINUED)
(unaudited)
(in millions, except per share data)
in these pro forma financial statements) and that debt issuance costs
are amortized over seven years. If the interest rate used in the pro
forma financial data were assumed to increase by 1/8%, the impact
would be to decrease earnings by $0.5 ($0.02 per share) and by $1.2
($0.03 per share) for the six months ended June 30, 1998 and for the
year ended December 31, 1997, respectively. Average combined
historical outstanding debt of SPX and General Signal, as used in this
pro forma presentation, was $507.9 and $290.3 for the six months ended
June 30, 1998 and for the year ended December 31, 1997, respectively.
(g) These adjustments represent the estimated income tax effect of the pro
forma adjustments, excluding goodwill expense which will not be
deductible for tax purposes, using an effective income tax rate of
38%.
(h) These pro forma adjustments reflect the additional shares of SPX Common
Stock to be issued in the transaction. The additional shares to be
issued are calculated assuming that the stock component of the Merger
Consideration is 0.4186 of a share of SPX Common Stock, which converts
weighted average outstanding shares of General Signal Common Stock to
weighted average outstanding shares of SPX Common Stock. The shares of
General Signal Common Stock used in these calculations include reported
weighted average outstanding shares of General Signal Common Stock.
Additionally, the pro forma adjustment for diluted weighted average
number of common shares outstanding for the year ended December 31,
1997 includes 0.551 equivalent shares of SPX Common Stock related to
SPX stock options. These equivalent shares of SPX Common Stock are not
included in the SPX Pro Forma Adjusted Historical Financial Data of SPX
diluted loss per share calculation as their effect was antidilutive.
(i) These pro forma adjustments reflect the allocation to the assets and
liabilities of SPX of the difference between the market value of SPX and
SPX's book value (the "excess purchase price"). The market value of SPX is
assumed to be the sum of the fair market value of the outstanding SPX
Common Stock (less unallocated SPX Common Stock held by SPX's KSOP and
restricted shares of SPX Common Stock) and the fair value of SPX's
outstanding options. SPX's book value is assumed to be its stockholders'
deficit adjusted by estimated transaction fees of $49.0 which are assumed
to have been incurred by SPX and General Signal prior to the combination.
SPX's Market Value:
Shares of SPX Common Stock outstanding.................... 12.311
Unallocated SPX Common Stock held in KSOP and Restricted
SPX Common Stock....................................... (0.621)
-------
Adjusted SPX Common Stock outstanding..................... 11.690
Market price per share of SPX Common Stock................ 64.50
Market value of SPX Common Stock outstanding.............. $ 754.0
Market value of outstanding options....................... 40.0
SPX's Market Value........................................ $794.0
SPX's Book Value:
June 30, 1998 stockholders' deficit....................... $ (38.4)
Assumed transaction fees.................................. (49.0)
SPX's Book Value.......................................... (87.4)
------
Excess Purchase Price..................................... $881.4
======
103
NOTES TO PRO FORMA CONDENSED COMBINED
FINANCIAL DATA OF SPX AND GENERAL SIGNAL (CONTINUED)
(unaudited)
(in millions, except per share data)
This excess purchase price has been allocated to the assets and
liabilities of SPX as follows:
Inventories................................................. $ 10.5
Property, plant and equipment............................... 40.1
Prepaid pension (other assets).............................. 80.3
Transaction costs (other assets)............................ 32.0
Deferred financing fees (other assets)...................... (0.6)
Goodwill -- previously recorded............................. (96.1)
Goodwill and intangible assets.............................. 838.2
In process technology....................................... 10.0
Postretirement health and life insurance liability.......... 19.4
Deferred tax liability...................................... (52.4)
------
$881.4
======
The preliminary allocations of the excess purchase price are based
upon current estimates and information available to SPX. Property,
plant and equipment reflect the adjustment to estimated fair market
values of these assets. Prepaid pension reflects the adjustment to the
fair market value of the plan assets less the projected benefit
obligation. Transaction costs include fees to consummate the Merger.
Goodwill, previously recorded, reflects the elimination of goodwill
that is included in SPX's historical balance sheet. Goodwill and
intangible assets reflects the amount of excess purchase price
remaining after allocations to all other assets and liabilities. In
process technology represents the estimated fair market value of in
process product development costs. Postretirement health and life
insurance liability reflects the adjustment of the liability to the
accumulated benefit obligation. The deferred tax liability reflects
the deferred tax liabilities related to these allocations.
The goodwill recorded as a result of these allocations will be
amortized over a 40 year life. In determining the estimated useful
life, management considered the nature, competitive position, life
cycle position, and historical and expected future operating income of
SPX, as well as management's commitment to support SPX through
continued investment in capital expenditures, operational
improvements, and research and development. After the transaction, the
combined company will continually review 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 combined company will
use 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.
The ultimate allocation of the purchase price to the net assets
acquired, goodwill, other intangible assets, liabilities assumed and
in process technology is subject to final determination of their
respective fair values. This final allocation will be based upon the
results of appraisals and other studies that will be performed upon
the consummation of the transaction. SPX's management believes the
above preliminary allocations of the purchase price are reasonable and
will not materially change upon completion of the appraisals and other
studies.
As of June 30, 1998, there were no intercompany transactions that
required elimination.
(j) These pro forma adjustments reflect the effect of reverse acquisition
accounting by adding the market value of SPX ($794.0), subtracting
SPX's June 30, 1998 stockholder deficit ($38.4), and subtracting the
cash payout ($783.8) which is treated as a dividend by the combined
company.
104
NOTES TO PRO FORMA CONDENSED COMBINED
FINANCIAL DATA OF SPX AND GENERAL SIGNAL (CONTINUED)
(unaudited)
(in millions, except per share data)
(k) The pro forma condensed combined financial data of SPX and General
Signal for the six months ended June 30, 1998 include SPX's special
gain of $13.7 realized on SPX's investment in Echlin Inc. which was
liquidated during the second quarter of 1998 and $6.6 of expenses
associated with SPX's offer to acquire Echlin Inc.
The pro forma condensed combined financial data of SPX and General
Signal for the year ended December 31, 1997 include special charges of
$110.0 recorded by SPX primarily to combine two divisions and to
recognize reduced carrying value of certain assets resulting from the
decision to combine the divisions and exit certain product lines and a
$6.5 special charge recorded by SPX of anticipated future legal costs
associated with the ongoing litigation with Snap-on Incorporated. See
"Selected Historical Financial Data of SPX."
(l) Represents the historical quarterly cash dividend per share of SPX for
the periods presented. In April 1997, SPX eliminated its quarterly
cash dividend and stated that future distributions to stockholders
would be in the form of open market purchases of SPX Common Stock when
deemed appropriate by management.
(m) Represents estimated charge of $72.4, or $57.4 after-tax, that will be
recorded by the combined company at the Effective Time for costs
associated with change of control agreements and the closing of
General Signal's corporate office. Included in this pre-tax amount are
$23.7 of payments representing the difference between the exercise
price and $45.00 (the per share deemed value of the General Signal
Common Stock for purposes of the Merger) to cancel the General Signal
Options, $11.3 of payments representing $45.00 multiplied by the
number of outstanding Restricted Shares, $35.4 for salary
continuation, financial planning and health care for General Signal's
affected employees, and $2.0 for holding costs associated with the
vacated General Signal's corporate office building. It is possible
that certain of General Signal's corporate office employees will
relocate to other operations of the combined company and the
associated salary continuation amounts included in the disclosures
above will not be paid. This aggregate charge is not reflected in the
pro forma statement of income data as the charge is non-recurring and
has no continuing impact. The charge does not include a pre-tax amount
of $15.5 related to salary continuation benefits available under
change of control agreements with General Signal's unit presidents. It
is SPX's intention that these individuals will continue in their
positions after the Merger is consummated.
105
PRO FORMA ADJUSTED HISTORICAL FINANCIAL DATA OF SPX
(unaudited)
(in millions, except per share data)
In February 1997, SPX 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 gross
cash sales proceeds were $223.0.
The following historical financial data include the results of SPD
through February 7, 1997, its date of disposition. The following unaudited
pro forma adjusted historical financial data for the year ended December
31, 1997 reflect the disposition of this division as if it had occurred as
of January 1, 1997. The pro forma adjusted historical financial data do not
purport to represent what SPX's results of continuing operations would
actually have been had the transaction in fact occurred as of January 1,
1997, or project the results for any future period.
The pro forma adjusted historical financial data of SPX should be read
in conjunction with the financial statements and notes thereto included in
SPX's 1997 Form 10-K.
106
PRO FORMA ADJUSTED HISTORICAL FINANCIAL DATA OF SPX
FOR THE YEAR ENDED DECEMBER 31, 1997
(unaudited)
(in millions, except per share data)
PRO FORMA
ADJUSTMENTS PRO
------------------- FORMA
HISTORICAL DIVEST(a) OTHER ADJUSTED
---------- --------- ------ --------
STATEMENT OF INCOME DATA:
Revenues............................................ $922.3 $(23.5) $ -- $898.8
Cost of products sold............................... 669.0 (19.6) -- 649.4
Selling, general and administrative................. 175.3 (1.0) -- 174.3
Other operating expenses, net....................... 3.9 (0.2) -- 3.7
Special charges(e).................................. 116.5 -- -- 116.5
------ ------ ------ ------
Operating income (loss)............................. (42.4) (2.7) -- (45.1)
Other (income) expense.............................. (74.2) -- 71.9(b) (2.3)
Interest expense, net............................... 13.9 -- (1.0)(c) 12.9
------ ------ ------ ------
Income (loss) before income taxes................... 17.9 (2.7) (70.9) (55.7)
Provision (benefit) for income taxes................ 21.3 (1.0) (40.3)(d) (20.0)
------ ------ ------ ------
Income (loss) from continuing operations(f)......... $ (3.4) $ (1.7) $(30.6) $(35.7)
====== ====== ====== ======
Income (loss) per share:
Basic............................................. $(0.27) $(2.80)
Diluted........................................... (0.27) (2.80)
Weighted average number of common shares
outstanding:
Basic............................................. 12.754 12.754
Diluted........................................... 12.754 12.754
OTHER FINANCIAL DATA:
Capital expenditures................................ $22.6 $ (1.0) $21.6
Depreciation and amortization....................... 25.0 (1.2) 23.8
- ---------------
(a) This column removes the operating results of SPD for the period January 1,
1997 to February 7, 1997, its date of disposition.
(b) Adjustment to exclude the gain on the sale of SPD.
(c) Adjustment to interest expense, net assuming the use of net proceeds to
reduce revolving credit and other debt.
(d) Adjustment to income tax expense to reflect the tax effect of the
adjustments.
(e) Reflects a reclassification to special charges of $6.5 of legal costs to
special charges that were previously classified as other expense (income), net
in SPX's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
(f) Income excludes extraordinary item of $10.3, net of taxes.
107
PRO FORMA ADJUSTED HISTORICAL FINANCIAL DATA OF GENERAL SIGNAL
(unaudited)
(in millions, except per share data)
In August 1997, General Signal sold substantially all of the assets of
GSPG, a unit of the Process Controls sector. The gross cash proceeds were
approximately $200.0.
In September 1997, General Signal and Emerson formed EGS, a joint
venture combining Emerson's Appleton Electric operations and GSEG's
operations. General Signal contributed substantially all of the operating
assets of GSEG in exchange for 47.5 percent of EGS.
The following historical financial data include the results of GSPG
through August 23, 1997 (its date of disposition) and the results of GSEG
through September 15, 1997 (the date of contribution of the operations to
the joint venture). The following unaudited pro forma adjusted historical
financial data for the year ended December 31, 1997 reflect these
transactions as if they had occurred as of January 1, 1997. The pro forma
adjusted historical financial data do not purport to represent what General
Signal's results of continuing operations would actually have been had the
transactions in fact occurred as of January 1, 1997, or project the results
of any future period.
The pro forma adjusted historical financial data should be read in
conjunction with the financial statements and notes thereto included in
General Signal's 1997 Form 10-K.
108
PRO FORMA ADJUSTED HISTORICAL FINANCIAL DATA OF GENERAL SIGNAL
FOR THE YEAR ENDED DECEMBER 31, 1997
(unaudited)
(in millions, except per share data)
PRO FORMA ADJUSTMENTS PRO
----------------------- FORMA
HISTORICAL DIVEST(a) OTHER ADJUSTED
---------- --------- ------ --------
STATEMENT OF INCOME DATA:
Net sales.......................................... $1,954.6 $(353.1) $ -- $1,601.5
Cost of sales...................................... 1,313.6 (247.3) -- 1,066.3
Selling, general and administrative................ 444.9 (68.0) -- 376.9
Other operating expenses, net...................... 14.6 (2.1) -- 12.5
-------- ------- ------ -------
Operating earnings................................. 181.5 (35.7) -- 145.8
Other expense (income)............................. (72.7) -- 63.7(b)
(9.0)
Equity in earnings of EGS.......................... (11.8) -- (27.0)(c) (38.8)
Interest expense, net.............................. 13.2 -- (5.0)(d) 8.2
-------- ------- ------ --------
Earnings from continuing operations before income
taxes............................................ 252.8 (35.7) (31.7) 185.4
Income taxes....................................... 121.8 (13.7) (34.2)(e) 73.9
-------- ------- ------ --------
Earnings from continuing operations(f)............. $ 131.0 $ (22.0) $ 2.5 $ 111.5
======== ======= ====== ========
Income per share:
Basic............................................ $ 2.61 $ 2.22
Diluted.......................................... 2.60 2.21
Weighted average number of common shares
outstanding:
Basic............................................ 50.2 50.2
Diluted.......................................... 50.4 50.4
OTHER FINANCIAL DATA:
Capital expenditures............................... $ 56.5 $ (8.2) -- $ 48.3
Depreciation and amortization...................... 65.3 (9.5) -- 55.8
- ---------------
(a) This column removes the operating results of GSPG for the period January 1,
1997 to August 23, 1997, its date of disposition. This column also removes the operating
results of GSEG for the period January 1, 1997 to September 15, 1997, its date of
contribution to EGS.
(b) Adjustment to exclude the gain on GSPG. No gain or loss was recorded on the contribution of
GSEG to EGS.
(c) Adjustment to recognize General Signal's estimated share of EGS' pro forma earnings from
January 1, 1997 to September 15, 1997.
(d) Adjustment to interest expense, net assuming the use of net proceeds to reduce debt.
(e) Adjustment to income tax expense to reflect the tax effect of the adjustments.
(f) Earnings from continuing operations excludes earnings from discontinued operations of $2.3,
and a charge for the cumulative effect of accounting changes of $3.7.
109
