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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2002
(_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission File Number 1-6948
SPX CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Delaware 38-1016240
(State of Incorporation) (I.R.S. Employer Identification No.)
13515 Ballantyne Corporate Place, Charlotte, North Carolina 28277
(Address of Principal Executive Office)
Registrant's Telephone Number including Area Code (704) 752-4400
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [_] No
Common shares outstanding August 12, 2002 40,861,085
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
SPX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in millions)
(Unaudited)
June 30, December 31,
2002 2001
---- ----
ASSETS
Current assets:
Cash and equivalents $ 381.3 $ 460.0
Accounts receivable, net 932.4 976.2
Inventories 670.4 625.5
Prepaid and other current assets 127.5 130.7
Deferred income taxes and refunds 260.6 236.6
-------- --------
Total current assets 2,372.2 2,429.0
Property, plant and equipment 1,339.0 1,279.2
Accumulated depreciation (498.2) (439.7)
-------- --------
Net property, plant and equipment 840.8 839.5
Goodwill 2,516.2 2,374.8
Intangible assets, net 525.6 686.9
Other assets 779.6 749.9
-------- --------
Total assets $7,034.4 $7,080.1
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 485.4 $ 514.3
Accrued expenses 872.7 856.9
Current maturities of long-term debt 157.1 161.6
-------- --------
Total current liabilities 1,515.2 1,532.8
Long-term debt 2,330.9 2,450.8
Deferred income taxes 794.0 752.6
Other long-term liabilities 611.7 603.6
-------- --------
Total long-term liabilities 3,736.6 3,807.0
Minority Interest 13.5 25.0
Shareholders' equity:
Common stock 426.5 416.5
Paid-in capital 1,218.0 1,139.0
Retained earnings 325.6 350.8
Accumulated other comprehensive loss (100.5) (90.5)
Common stock in treasury (100.5) (100.5)
-------- --------
Total shareholders' equity 1,769.1 1,715.3
-------- --------
Total liabilities and shareholders' equity $7,034.4 $7,080.1
======== ========
The accompanying notes are an integral part of these statements.
2
SPX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in millions, except per share amounts)
Three months ended Six months ended
June 30, June 30,
------- -------
2002 2001 2002 2001
---- ---- ---- ----
Revenues $ 1,257.5 $ 910.1 $2,388.0 $ 1,590.5
Costs and expenses:
Cost of products sold 832.8 623.4 1,590.5 1,086.7
Selling, general and administrative 245.6 171.0 476.4 300.3
Intangible/goodwill amortization 2.0 14.8 3.7 25.6
Special charges 50.8 40.5 57.2 43.9
--------- ------- -------- ---------
Operating income 126.3 60.4 260.2 134.0
Other (expense) income, net 1.2 (10.4) 0.4 (8.7)
Equity earnings in joint ventures 8.3 9.0 18.6 18.4
Interest expense, net (38.4) (30.3) (75.4) (55.0)
--------- ------- -------- ---------
Income before income taxes 97.4 28.7 203.8 88.7
Provision for income taxes (39.1) (15.3) (80.4) (39.9)
--------- ------- -------- ---------
Income before change in accounting principle 58.3 13.4 123.4 48.8
Change in accounting principle - - (148.6) -
--------- ------- -------- ---------
Net income (loss) $ 58.3 $ 13.4 $ (25.2) $ 48.8
========= ======= ======== =========
Basic income (loss) per share of common stock
Income before change in accounting principle $ 1.41 $ 0.38 $ 3.01 $ 1.47
Change in accounting principle - - (3.63) -
--------- ------- -------- ---------
Net income (loss) per share $ 1.41 $ 0.38 $ (0.62) $ 1.47
========= ======= ======== =========
Weighted average number of common shares outstanding 41.297 35.170 40.974 33.106
Diluted income (loss) per share of common stock
Income before change in accounting principle $ 1.38 $ 0.37 $ 2.94 $ 1.44
Change in accounting principle - - (3.54) -
--------- ------- -------- ---------
Net income (loss) per share $ 1.38 $ 0.37 $ (0.60) $ 1.44
========= ======= ======== =========
Weighted average number of common shares outstanding 42.335 36.093 42.033 33.944
The accompanying notes are an integral part of these statements
3
SPX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
($ in millions)
Six Months Ended
June 30,
--------
2002 2001
---- ----
Cash flows from (used in) operating activities:
Net (loss) income $ (25.2) $ 48.8
Adjustments to reconcile net (loss) income to net
cash from operating activities -
Loss on sale of businesses - 11.8
Change in accounting principle 148.6 -
Special charges 57.2 57.4
Deferred income taxes 71.6 8.1
Depreciation 56.6 39.4
Amortization of goodwill and intangibles 7.6 26.4
Amortization of original issue discount on LYONs 11.2 7.4
Employee benefits (6.9) (16.5)
Other, net (3.5) (2.9)
Changes in working capital, net of
effects from acquisitions and divestitures (89.1) (54.3)
Changes in working capital securitizations (14.7) (2.9)
Cash spending on restructuring actions (40.1) (6.8)
------- ---------
Net cash from operating activities 173.3 115.9
Cash flows from (used in) investing activities:
Business and fixed asset divestitures 9.2 123.0
Business acquisitions and investments, net of cash acquired (113.1) (181.2)
Capital expenditures (51.1) (81.0)
Other, net (4.1) -
------- ---------
Net cash (used in) investing activities (159.1) (139.2)
Cash flows from (used in) financing activities:
Borrowings under debt agreements - 1,466.9
Payments under debt agreements (135.6) (1,174.1)
Common stock issued under stock incentive programs 47.1 17.1
Common stock issued under exercise of stock warrants 24.2 -
Other, net (28.6) -
------- ---------
Net cash (used in) from financing activities (92.9) 309.9
------- ---------
Net (decrease) increase in cash and equivalents (78.7) 286.6
Cash and equivalents, beginning of period 460.0 73.7
------- ---------
Cash and equivalents, end of period $ 381.3 $ 360.3
======= =========
The accompanying notes are an integral part of these statements.
4
SPX CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
(Unaudited)
(in millions, except per share data)
1. BASIS OF PRESENTATION
In our opinion, the accompanying condensed consolidated balance sheets and
related interim statements of consolidated income and cash flows include the
adjustments (consisting of normal and recurring items) necessary for their fair
presentation in conformity with United States generally accepted accounting
principles ("GAAP"). Preparing financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues, and expenses. Actual results could differ from these
estimates. Interim results are not necessarily indicative of results for a full
year. Certain comparative amounts have been reclassified to conform to
current-quarter presentation. These reclassifications had no impact on
previously reported results of operations or total stockholders' equity. The
information included in this Form 10-Q should be read in conjunction with the
Consolidated Financial Statements contained in our 2001 Annual Report on Form
10-K, as amended by Form 10-K/A.
2. NEW ACCOUNTING PRONOUNCEMENTS
On July 20, 2001 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141 "Business
Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets." These
pronouncements change the accounting for business combinations, goodwill, and
intangible assets. The requirements of SFAS No. 141 are effective for any
business combination accounted for by the purchase method that is completed
after June 30, 2001 and the amortization provisions of SFAS No. 142 apply to
goodwill and intangible assets acquired after June 30, 2001. With respect to
goodwill and intangible assets acquired prior to July 1, 2001, we adopted the
provisions of SFAS No. 142, as required, on January 1, 2002. See Note 8 to the
Condensed Consolidated Financial Statements for further discussion on the impact
of adopting SFAS No. 141 and SFAS No. 142.
In August 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations." The provisions of SFAS No. 143 will change the way companies must
recognize and measure retirement obligations that result from the acquisition,
construction, development, or normal operation of a long-lived asset. We will
adopt the provisions of SFAS No. 143 as required on January 1, 2003 and at this
time have not yet assessed the impact that adoption might have on our financial
position and results of operations.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment and
Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121 "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" and also supersedes the provisions of APB Opinion No. 30 "Reporting the
Results of Operations--Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual, and Infrequently Occurring Events and
Transactions." SFAS No. 144 retains the requirements of SFAS No. 121 to (a)
recognize an impairment loss only if the carrying amount of a long-lived asset
is not recoverable from its undiscounted cash flow and (b) measure an impairment
loss as the difference between the carrying amount and the fair value of the
asset. SFAS No. 144 establishes a single model for accounting for long-lived
assets to be disposed of by sale. As required, we have adopted the provisions of
SFAS No. 144 effective January 1, 2002.
In April 2002, the FASB issued SFAS No. 145 "Rescission of Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections". This
Statement rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment
of Debt," and an amendment of that Statement, SFAS No. 64, "Extinguishments of
Debt Made to Satisfy Sinking-Fund Requirements." This Statement also rescinds
SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers." This
Statement amends SFAS No. 13, "Accounting for Leases," to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. This Statement also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. Effective July 1, 2002, we early adopted the provisions of SFAS No.
145. Except for the provisions regarding the gains and losses from the
extinguishment of debt, we do not believe the provisions of SFAS No.145 will
have an impact on our financial position and results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." The standard requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Examples of costs
covered by the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. Previous
accounting guidance was provided by EITF Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146
5
replaces EITF 94-3 and is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. We frequently engage in strategic
restructuring and integration initiatives that include exit and disposal
activities. Accordingly, we expect that SFAS No. 146 could impact the way in
which we account for certain restructuring costs; however, at this time, we have
not fully assessed the impact of adopting this statement.
3. ACQUISITIONS AND DIVESTITURES
We use acquisitions as a part of our strategy to acquire access to new
technologies, expand our geographical reach, penetrate new markets and leverage
our existing product, market, manufacturing or technical expertise. We
continually review each of our businesses pursuant to our "fix, sell or grow"
strategy. These reviews could result in selected acquisitions to expand an
existing business or result in the disposition of an existing business. Business
acquisitions and dispositions for the six months ended June 30, 2002 and 2001
are described below.
All acquisitions have been accounted for using the purchase method of accounting
and, accordingly, the condensed consolidated statements of income include the
results of each acquired business upon acquisition. The assets acquired and
liabilities assumed are recorded at estimates of fair values as determined by
independent appraisals and management based on information available and on
assumptions as to future operations. We complete our reviews and determinations
of the fair value of the assets acquired and liabilities assumed within one year
after acquisition. These reviews include finalizing any strategic reviews of the
businesses acquired and our plans to integrate their operations, evaluating the
contingent and actual liabilities assumed, and obtaining final appraisals of the
tangible and intangible assets acquired. The allocation of the purchase price is
subject to revision for up to one year from the acquisition date.
Acquisitions--2002
During the first quarter, in the Technical Products segment, we completed three
acquisitions for cash with an aggregate purchase price of $38.2. In aggregate,
the acquired companies had revenues of $46.3 in the twelve months prior to the
respective dates of acquisition. These acquisitions include the acquisition of
selected assets and liabilities of Dukane Communications Systems by Edwards
Systems Technology, our fire detection and integrated building life-safety
systems business unit based in Cheshire, CT.
During the first quarter, in the Industrial Products segment, we completed one
acquisition for a purchase price of $13.4, which included the issuance of common
stock valued at $11.5. The acquired company had revenue of $9.6 in the twelve
months prior to the respective date of acquisition. The acquisition was made by
Waukesha Electric Systems, our power systems business unit based in Waukesha,
WI.
During the second quarter, in the Technical Products, segment we completed one
acquisition for a purchase price of $3.9, which included the issuance of common
stock valued at $2.9. The acquired company had revenue of $3.0 in the twelve
months prior to the date of acquisition. The acquisition was made by our
Security & Investigations business unit based in Charlotte, NC.
During the second quarter, in the Flow Technology segment, we acquired Daniel
Valve Company for a cash purchase price of $72.0. Daniel Valve had revenue of
$46.7 in the twelve months prior to the date of acquisition. The acquisition was
made by SPX Valves and Controls, our industrial valves, instrumentation and
strainers business unit based in Sartell, Minnesota.
On July 31, 2002, we completed the acquisition of certain assets and
subsidiaries of the Balcke Cooling Products Group from Babcock Borsig AG for a
purchase price of approximately $47.0, which includes debt assumed. Based in
Oberhausen, Germany, Balcke Cooling is a leader in the design, manufacture and
marketing of dry and wet cooling system products in the global power, chemical,
petro chemical and process industries. Balcke has annual revenues in excess of
$245.0 million. This business will be integrated into our Marley Cooling
Technologies business, part of our Flow Technology segment.
These acquisitions are not material individually or in the aggregate.
Acquisitions--2001
During the first quarter, in the Technical Products segment, we completed four
acquisitions for cash with an aggregate purchase price of $74.8. In aggregate,
the acquired companies had revenues of $86.9 in the twelve months prior to the
respective dates of acquisition. These acquisitions included TCI International
and Central Tower by Dielectric Communications, our broadcast antenna and radio
frequency transmission systems business unit based in Raymond, ME.
During the first quarter, in the Industrial Products segment, we completed two
acquisitions for a cash purchase price of $32.4. In aggregate, the acquired
companies had revenues of $52.9 in the twelve months prior to the respective
dates of acquisition. These acquisitions included Carfel by Filtran, our
automotive filtration products business unit based in Des Plaines, IL.
6
During the first quarter, in the Flow Technology segment, we completed two
acquisitions for cash with an aggregate purchase price of $13.2. In aggregate,
the acquired companies had revenues of $16.7 in the twelve months prior to the
respective dates of acquisition.
During the second quarter, in the Technical Products segment, we completed one
acquisition for a cash purchase price of $10.4. The acquired company had revenue
of $17.7 in the twelve months prior to the date of acquisition. The acquisition
was made by Inrange Technologies, our subsidiary based in Lumberton, NJ. that
designs and manufactures high-end scalable storage networking solutions.
These acquisitions are not material individually or in the aggregate.
Divestitures--2001
During the second quarter, in the Industrial Products segment, we sold
substantially all the assets and liabilities of our GS Electric business for
$27.0 in cash and a $5.0 note due one year from the date of sale; this note was
collected in full during the second quarter of 2002. In the second quarter of
2001, a pre-tax loss of $11.8 was recorded on the sale. In 2000, this business
had revenues of $75.3.
UDI Acquisition--May 24, 2001
On May 24, 2001, we completed the acquisition of United Dominion Industries
Limited "UDI" in an all-stock transaction valued at $1,066.9 including $128.0 of
cash costs related to transaction fees and corporate change in control matters.
We issued a total of 9.385 shares (3.890 from treasury) to complete the
transaction. We also assumed or refinanced $884.1 of UDI debt bringing the total
transaction value to $1,951.0.
UDI, which had sales of $2,366.2 for the twelve months ended December 31, 2000,
manufactured products including: electrical test and measurement solutions;
cable and pipe locating devices; laboratory testing chambers; industrial ovens;
electrodynamic shakers; air filtration and dehydration equipment; material
handling devices; electric resistance heaters; soil, asphalt and landfill
compactors; specialty farm machinery; pumps; valves; cooling towers; boilers;
leak detection equipment; and aerospace components.
The acquisition was accounted for using the purchase method of accounting in
accordance with APB 16 and APB 17, and accordingly, the statements of
consolidated income include the results of UDI beginning May 25, 2001. The
assets acquired and liabilities assumed were recorded at fair values with useful
lives as determined by independent appraisals and management. As of May 24,
2002, we have completed our review and determination of the fair value of this
assets acquired and liabilities assumed.
A final summary of the assets acquired and liabilities assumed in the
acquisition follows:
Estimated fair values
Assets acquired $ 1,917.1
Liabilities assumed (2,012.4)
Excess of cost over net assets acquired 1,162.2
---------
Purchase price $ 1,066.9
Less cash acquired (78.4)
---------
Net purchase price $ 988.5
Of the total assets acquired, $402.0 is allocated to identifiable intangible
assets, including trademarks and patents, based on the final assessment of fair
value.
For financial statement purposes, the excess of cost over net assets acquired
was amortized by the straight-line method over 40 years during the period from
the acquisition date through December 31, 2001. Intangible assets other than
goodwill were also amortized during this period according to their respective
useful lives varying from 5 to 40 years. Effective January 1, 2002, we have
adopted the provisions of SFAS No. 142 and this statement requires that goodwill
and indefinite-lived intangibles are no longer amortized but are reviewed for
impairment annually. See Note 2 and Note 8 for further discussion of the impact
of adopting SFAS No. 142.
As a result of the acquisition of UDI, we have incurred to date integration
expenses for the incremental costs to exit and consolidate activities at UDI
locations, to involuntarily terminate UDI employees, and for other costs to
integrate operating locations and other activities of UDI with SPX. GAAP
requires that these acquisition integration expenses, which are not
7
associated with the generation of future revenues and which do not benefit
activities that will be continued, be reflected as assumed liabilities in the
allocation of the purchase price to the net assets acquired. On the other hand,
these same principles require that acquisition integration expenses associated
with integrating SPX operations into UDI locations must be recorded as expense.
These expenses are discussed in Note 5. The components of the acquisition
integration liabilities included in the final purchase price allocation for UDI
are as follows:
Facility
Work force Non-cancelable Consolidation /
Reductions Leases Other Total
Balance at March 31, 2002 $ 13.4 $ 7.7 $ 11.7 $ 32.8
Payments (2.3) (0.3) (3.8) (6.4)
Adjustments 3.7 - 6.4 10.1
------- ------ ------ ------
Balance at June 30, 2002 $ 14.8 $ 7.4 $ 14.3 $ 36.5
The acquisition integration liabilities are based on our current integration
plan which focuses on three key areas of integration: (1) manufacturing process
and supply chain rationalization, including plant closings or sales, (2)
elimination of redundant administrative overhead and support activities, and (3)
restructuring and repositioning sales and marketing organizations to eliminate
redundancies in these activities. In total, we expect to close or sell
approximately 49 former UDI manufacturing, sales and administrative facilities.
As of June 30, 2002, all 49 facility closures or dispositions have been
announced and 48 have been completed. With the exception of certain multi-year
operating lease obligations at closed facilities, we anticipate that the
liabilities related to restructuring actions will be paid within one year from
the period in which the action was initiated.
Excluding businesses sold, we expected to reduce the former UDI work force by
approximately 2,500 employees. As of June 30, 2002, those reductions were
substantially completed. Terminated UDI employees who qualify will have their
severance benefits paid out of SPX pension plan assets. These special
termination benefits are accounted for as early retirement benefits and special
termination benefits in accordance with SFAS No. 87 and SFAS No. 88. During the
second quarter of 2002, approximately $2.2 of pension assets were used to fund
employee severance costs and of the remaining $14.8 work force reduction
obligation, we expect that approximately $7.2 of pension assets will be used to
fund these severance benefits. Other cash costs primarily represent facility
holding costs, supplier cancellation fees, and the relocation of UDI personnel
associated with plant closings and product rationalization. Anticipated savings
from these cost reduction and integration actions are expected to exceed $120.0
on an annualized basis.
Employee reductions associated with sold businesses approximate 851 as of June
30, 2002.
The acquisition of UDI significantly affects the comparison of the 2001 results
of operations. Unaudited pro forma results of operations for the six months
ended June 30, 2001 are presented below as if the acquisition of UDI, which was
acquired on May 24, 2001, took place on January 1, 2001. Effective January 1,
2002, we adopted the remaining provisions of SFAS No. 141 and SFAS No. 142. SFAS
No. 142 requires that goodwill and indefinite lived intangible assets are no
longer amortized. Accordingly, we discontinued amortization of these assets on
the date of adoption. The following 2001 pro forma results assume that the
cessation of the amortization of goodwill and indefinite lived intangible assets
had occurred on January 1, 2001. We believe that the following pro forma results
of operations will facilitate more meaningful analysis.
The pro forma results include estimates and assumptions that management believes
are reasonable. However, pro forma results do not include any anticipated cost
savings or expenses of the planned integration of UDI and SPX, and are not
necessarily indicative of the results that would have occurred if the business
combination had been in effect on the dates indicated, or that may result in the
future. The consolidated interest expense has been computed on assumptions that
the refinancing of UDI debt occurred entirely under the credit agreement and not
through the issuance of publicly traded or privately placed notes. Interest
income was not changed from historical amounts and debt issuance costs are
amortized over five years. The pro forma results assume the fair values and
lives of definite lived intangible assets as determined by independent
appraisals. The pro forma consolidated effective income tax rate for the
combined companies includes the impact of special charges and unusual items as
well as increases in foreign income tax rates due to the acquisition.
8
Six months ended
June 30,
--------
2002 2001
Actual Pro Forma
------ ---------
Revenues $2,388.0 $2,484.9
Income before change in accounting principle (1) 123.4 79.0
Net (loss) income (25.2) 79.0
Basic (loss) income per share:
Income before change in accounting principle $ 3.01 $ 1.98
Change in accounting principle (3.63) -
-------- --------
Net (loss) income per share $ (0.62) $ 1.98
Diluted (loss) income per share:
Income before change in accounting principle $ 2.94 $ 1.95
Change in accounting principle (3.54) -
-------- --------
Net (loss) income per share $ (0.60) $ 1.95
(1) We recorded a charge for a change in accounting principle of $148.6 as a
result of adopting the provisions of SFAS No. 142. See Note 8 to the
Condensed Consolidated Financial Statements for more detail.
4. BUSINESS SEGMENT INFORMATION
We are a global provider of technical products and systems, industrial products
and services, flow technology and service solutions. We offer a diverse
collection of products, which include scalable storage networking solutions,
fire detection and building life-safety products, TV and radio broadcast
antennas and towers, life science products and services, transformers,
compaction equipment, high-integrity die-castings, dock products and systems,
cooling towers, air filtration products, valves, back-flow prevention and fluid
handling devices, and metering and mixing solutions. Our products and services
also include specialty service tools, diagnostic systems, service equipment, and
technical information services. Our products are used by a broad array of
customers in various industries, including chemical processing, pharmaceuticals,
infrastructure, mineral processing, petrochemical, telecommunications, financial
services, transportation and power generation.
We have aggregated certain operating segments in accordance with the criteria
defined in SFAS No. 131 "Disclosures about Segments of an Enterprise and Related
Information." The primary aggregation factors considered in determining the
segments were the nature of products sold, production processes and types of
customers for these products. Our results of operations are reported in four
segments: Technical Products and Systems, Industrial Products and Services, Flow
Technology, and Service Solutions.
Technical Products and Systems
The Technical Products and Systems segment focuses on solving customer problems
with complete technology-based systems and services. Our emphasis is on growth
through investment in new technology, new product introductions, alliances, and
acquisitions. This segment includes operating units that design and manufacture
scalable storage networking solutions; fire detection and integrated building
life-safety systems; TV and radio transmission systems; automated fare
collection systems; laboratory centrifuges, incubators, ovens, testing chambers
and freezers; electrical test and measurement solutions; cable and pipe locating
devices; electrodynamic shakers; industrial ovens and equipment for the
manufacture of silicon crystals; and provide professional investigation and
security services.
Industrial Products and Services
The strategy of the Industrial Products and Services segment is to provide
"Productivity Solutions for Industry." This segment emphasizes introducing new
related services and products, as well as focusing on the replacement parts and
service elements of the segment. This segment includes operating units that
design, manufacture and market power transformers, hydraulic systems,
high-integrity aluminum and magnesium die-castings, automatic transmission
filters, industrial filtration products, dock equipment, material handling
devices, electric resistance heaters, soil, asphalt and landfill compactors,
specialty farm machinery, and components for the aerospace industry.
Flow Technology
The Flow Technology segment designs, manufactures, and markets solutions and
products that are used to process or transport fluids and in heat transfer
applications. This segment includes operating units that manufacture pumps and
other fluid handling machines, valves, cooling towers, boilers, and industrial
mixers.
9
Service Solutions
Service Solutions includes operations that design, manufacture and market a wide
range of specialty service tools, hand-held diagnostic systems and service
equipment, inspection gauging systems, and technical and training information,
primarily to the vehicle franchise dealer industry in North America and Europe.
Major customers are franchised dealers of motor vehicle manufacturers,
aftermarket vehicle service facilities, and independent distributors.
Inter-company sales among segments are not significant. Operating income by
segment includes segment special charges; however, it does not include general
corporate expenses or corporate special charges. See Note 5 to the Condensed
Consolidated Financial Statements for more detail on special charges by segment.
Financial data for the company's business segments are as follows:
Three months Six months
ended June 30 ended June 30
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues:
Technical Products and Systems $ 319.1 $252.0 $ 623.1 $ 460.0
Industrial Products and Services 430.8 316.7 815.0 566.3
Flow Technology 316.7 172.9 596.4 244.2
Service Solutions 190.9 168.5 353.5 320.0
-------- ------ -------- --------
$1,257.5 $910.1 $2,388.0 $1,590.5
======== ====== ======== ========
Operating Income:
Technical Products and Systems $ 33.8 $ 27.5 $ 77.5 $ 55.8
Industrial Products and Services 45.1 35.3 98.8 69.1
Flow Technology 42.0 25.6 79.1 34.3
Service Solutions 26.6 1.9 41.5 13.2
General Corporate (21.2) (29.9) (36.7) (38.4)
-------- ------ -------- --------
$ 126.3 $ 60.4 $ 260.2 $ 134.0
======== ====== ======== ========
5. SPECIAL CHARGES
Special charges for the three and six month periods ended June 30, 2002 and 2001
include the following:
Three months Six months
ended June 30, ended June 30,
-------------- --------------
2002 2001 2002 2001
---- ---- ---- ----
Employee Benefit Costs $23.7 $ 9.7 $ 27.1 $ 11.4
Facility Consolidation Costs 9.4 9.3 10.2 9.3
Other Cash Costs 0.9 8.7 3.1 8.7
Non-Cash Asset Write-downs 16.8 26.3 16.8 28.0
----- ----- ------ ------
Total $50.8 $54.0 $ 57.2 $ 57.4
===== ===== ====== ======
At June 30, 2002, a total of $53.7 of restructuring liabilities remained on the
Condensed Consolidated Balance Sheet as shown below. With the exception of
certain multi-year operating lease obligations at closed facilities, we
anticipate that the liabilities related to restructuring actions will be paid
within one year from the period in which the action was initiated. The following
table summarizes the restructuring accrual activity from December 31, 2001
through June 30, 2002:
Employee Facility Other Total Non-cash Total
Benefit Consolidation Cash Cash Asset Special
Costs Costs Costs Costs Write-downs Charges
----- ----- ----- ----- ----------- -------
Balance at December 31, 2001 $ 17.3 $ 12.3 $ 9.6 $ 39.2
Special Charges 27.1 10.2 3.1 40.4 $16.8 $57.2
===== =====
Cash Payments (13.2) (3.5) (9.2) (25.9)
------ ------ ----- ------
Balance at June 30, 2002 $ 31.2 $ 19.0 $ 3.5 $ 53.7
====== ====== ===== ======
Special Charges--2002
In the second quarter of 2002, we continued to employ our Value Improvement
Process(R) to right-size our businesses and keep pace with changes in economic
and market conditions. Consequently, we recorded special charges primarily
related to new and previously announced restructuring and integration
activities, which reduced operating income by $50.8. Of this amount, $12.7
10
was recorded in the Technical Products and Systems segment, $27.0 was recorded
in the Industrial Products and Services segment, $3.2 was recorded in the Flow
Technology segment, $0.2 was recorded in the Service Solutions segment, and $7.7
was recorded at Corporate.
The special charges recorded in the second quarter are primarily related to:
facility closures and workforce reductions at Waukesha Electric Systems and
Inrange Technologies, exiting certain machining operations at our hydraulic
systems business, the impairment of a corporate asset held for sale, the
completion of the relocation of our corporate headquarters to Charlotte, NC, and
the costs associated with previously announced restructuring and integration
initiatives. When completed, the restructuring initiatives announced in the
second quarter of 2002 will result in the closure of three sales and service
facilities and one manufacturing facility as well as reduce domestic hourly and
salaried headcount by approximately 738 employees. At June 30, 2002,
approximately 179 of the 738 employees had been terminated and we expect the
remaining 559 to be terminated by December 31, 2002.
Operating income for the six months ended June 30, 2002 was reduced by special
charges of $57.2 primarily related to the actions described below.
In the Technical Products and Systems segment, $13.1 of special charges have
been recorded for the six months ended June 30, 2002. These charges primarily
relate to the announced closure of three engineering and service facilities as
well as the restructuring of certain sales, marketing, and administrative
functions at Inrange Technologies. The affected facilities were located in
Shelton, CT, Pittsburgh, PA, and Fairfax, VA. This restructuring will result in
the consolidation of Inrange's research and development functions into its
headquarters in Lumberton, NJ. When completed, these restructuring actions will
result in the elimination of approximately 172 domestic salaried employees.
In the Industrial Products and Services segment, $28.9 of special charges have
been recorded for the six months ended June 30, 2002. These charges are
primarily associated with employee benefit costs and asset impairments related
to work force reductions and the announced closure of the Milpitas, CA.
manufacturing facility at Waukesha Electric Systems. Additionally, Fluid Power
initiated a restructuring action that will result in the exiting of certain
machining operations. When completed, these actions will result in the
elimination of approximately 374 hourly and 175 salaried domestic employees.
In the Flow Technology segment, $5.4 of special charges have been recorded for
the six months ended June 30, 2002. These charges primarily relate to workforce
reduction initiatives taken at our industrial mixer business as well as
additional business consolidation actions taken by SPX Valves and Controls. The
actions taken at SPX Valves and Controls are predominantly for the planned
integration of existing valve businesses into our newly acquired Daniel Valve
business. These restructuring and integration initiatives resulted in the
termination of approximately 112 hourly and 38 salaried domestic employees.
In the Service Solutions segment, $0.4 of special charges have been recorded for
the six months ended June 30, 2002. These charges relate to as-incurred exit
costs associated with previously announced business integration actions.
The Corporate special charges for the six months ended June 30, 2002 of $9.4,
relate to the impairment of a corporate asset held for sale and the final costs
to complete the relocation of our corporate headquarters to Charlotte, NC.
Special Charges -- 2001
In the second quarter of 2001, we recorded special charges of $54.0, $13.5 of
which relates to inventory write-downs recorded in cost of products sold. Of
this amount, $13.0 was recorded in the Technical Products and Systems segment,
$8.8 was recorded in the Industrial Products and Services segment, $13.2 was
recorded in the Service Solutions segment, and $19.0 was recorded at Corporate.
Operating income for the six months ended June 30, 2001, was reduced by special
charges of $57.4, $13.5 of which relates to inventory write-downs recorded in
cost of products sold. These charges relate to work force reductions, asset
write-downs, and other cash costs associated with plant consolidation, exiting
certain product lines and facilities, and other restructuring actions. The costs
of employee termination benefits relate to the elimination of approximately 597
positions, primarily manufacturing, sales and administrative personnel located
in the United States.
In the Technical Products segment, $14.1 of special charges were recorded for
the six months ended June 30, 2001. These charges were primarily due to work
force reductions and asset impairments associated with our data storage networks
business exiting the telecom business. We recorded $4.9 of these charges in cost
of products sold.
In the Industrial Products and Services segment, $10.2 of special charges were
recorded for the six months ended June 30, 2001. These charges were primarily
due to work force reductions, plant consolidation costs and asset impairments
associated with
11
exiting a product line in our industrial ovens business and closing an
industrial mixers facility in the UK. We recorded $1.8 of these charges in cost
of products sold.
In the Service Solutions segment, $14.1 of special charges were recorded for the
six months ended June 30, 2001. These charges were primarily due to work force
reductions and asset impairments associated with exiting the dynometer-based
emissions business in North America and closing a facility in France. We
recorded $6.8 of these charges as a component of cost of products sold.
For the six months ended June 30, 2001, other special charges of $19.0 were
recorded at the Corporate level. Of these charges, $4.1 primarily relates to the
abandonment of an internet-based software system and the remaining charges of
$14.9 include costs associated with the announced relocation of our corporate
headquarters from Muskegon, MI. to Charlotte, NC. In addition to severance,
these relocation costs include non-cancelable lease obligations,
facility-holding costs and asset impairments associated with a leased facility
in Muskegon, MI.
6. EARNINGS PER SHARE
The following table sets forth certain calculations used in the computation of
diluted earnings per share:
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
Numerator:
Net income (loss) $ 58.3 $ 13.4 $ (25.2) $ 48.8
------- ------- ------- -------
Denominator (shares in millions):
Weighted-average shares outstanding 41.297 35.170 40.974 33.106
Effect of dilutive securities:
Employee stock options and warrants 1.038 0.923 1.059 0.838
------- ------- ------- -------
Adjusted weighted-average shares and
assumed conversions 42.335 36.093 42.033 33.944
======= ======= ======= =======
7. INVENTORY
Inventory consists of the following amounts (reduced when necessary to estimated
realizable values):
June 30, December 31,
2002 2001
---- ----
Finished goods $ 327.4 $265.6
Work in process 128.0 149.9
Raw material and purchased parts 230.3 224.7
------- ------
Total FIFO cost $ 685.7 $640.2
Excess of FIFO cost over LIFO inventory value (15.3) (14.7)
------- ------
Total Inventory $ 670.4 $625.5
======= ======
8. GOODWILL AND OTHER INTANGIBLE ASSETS
On July 20, 2001, the Financial Accounting Standards Board issued SFAS No. 141
"Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets."
These pronouncements change the accounting for business combinations, goodwill,
and intangible assets. SFAS No. 141 eliminates the pooling-of-interests method
of accounting for business combinations and further clarifies the criteria to
recognize intangible assets separately from goodwill. SFAS No. 142 states
goodwill and intangible assets deemed to have indefinite lives are no longer
amortized but are reviewed for impairment annually (or more frequently if
impairment indicators arise). Separable intangible assets that are not deemed to
have an indefinite life will continue to be amortized over their useful lives
and assessed for impairment under the provisions of SFAS No. 121 "Accounting for
the Impairment of Long-Lived Assets and for Long Lived Assets to be Disposed
Of" as superceded by SFAS No. 144.
The requirements of SFAS No. 141 and amortization provisions of SFAS No. 142
were effective for any business combination initiated after July 1, 2001. We
have not amortized goodwill and indefinite-lived intangibles for acquisitions
completed after this date. With respect to goodwill and intangible assets
acquired prior to July 1, 2001, companies are required to adopt SFAS No. 142 in
their fiscal year beginning after December 15, 2001. We adopted the remaining
provisions of SFAS No. 142 effective January 1, 2002. Upon adoption of this
standard, we ceased amortizing all remaining goodwill and intangible assets
deemed to have indefinite useful lives. The pro forma impact of this change is
presented below.
12
Transitional Disclosures
Three months ended Six months ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Reported net (loss) income $ 58.3 $ 13.4 $ (25.2) $ 48.8
Add back: goodwill amortization, net of tax - 10.5 - 18.1
Add back: trademarks/tradenames amortization, net of tax - 1.3 - 1.8
------ ------ ------- ------
Adjusted net income $ 58.3 $ 25.2 $ (25.2) $ 68.7
====== ====== ======= ======
Basic earnings per share:
Reported $ 1.41 $ 0.38 $ (0.62) $ 1.47
Add back: goodwill amortization, net of tax - 0.30 - 0.55
Add back: trademarks/tradenames amortization, net of tax - 0.04 - 0.05
------ ------ ------- ------
Adjusted earnings per share $ 1.41 $ 0.72 $ (0.62) $ 2.07
====== ====== ======= ======
Diluted earnings per share:
Reported $ 1.38 $ 0.37 $ (0.60) $ 1.44
Add back: goodwill amortization, net of tax - 0.29 - 0.53
Add back: trademarks/tradenames amortization, net of tax - 0.04 - 0.05
------ ------ ------- ------
Adjusted earnings per share $ 1.38 $ 0.70 $ (0.60) $ 2.02
====== ====== ======= ======
In accordance with the transition rules of SFAS No. 142 effective January 1,
2002, we established our reporting units based on our current reporting
structure. We then assigned all existing goodwill to the reporting units, as
well as other assets and liabilities that relate to the reporting unit.
We performed our transition impairment testing as of January 1, 2002. Step 1
involved comparing the carrying values of the reported net assets of our
reporting units to their fair values. Fair value was based on discounted cash
flow projections but we also considered factors such as market capitalization
and comparable industry price multiples. The net assets of Filtran and Fluid
Power, two reporting units in our Industrial Products segment, had carrying
values in excess of their fair values. For these reporting units, we performed
Step 2 of the impairment testing provisions.
We engaged an independent valuation and appraisal firm to assist us with the
Step 2 testing. The assets and liabilities of Filtran, our automotive filtration
products business, and Fluid Power, our medium and high pressure hydraulic
equipment business, were appraised at their current fair value to calculate
implied goodwill for these reporting units. The recorded goodwill exceeded the
implied goodwill by $148.6, and, accordingly, this amount was required to be
written-off as a transition impairment charge and recorded as a change in
accounting principle. The impaired goodwill was not deductible for income tax
purposes.
The following tables reflect the initial assignment of goodwill and intangible
assets to the reporting units as of January 1, 2002. Thereafter, activity
reflects (1) the initial allocation of purchase price for acquisitions completed
during the first six months of 2002, and subsequent purchase price adjustments
for acquisitions completed not more than one year prior to the date of
adjustment, (2) disposals, (3) amortization, and (4) impairment charges. This
information is presented first on a consolidated basis and second on a segment
basis.
13
Consolidated:
Unamortized Amortized Total
-------------------------- --------------------------------------- -----
Trademarks/
Goodwill Tradenames Patents Licenses Other
-------- ---------- ------- -------- -----
Weighted average useful life in years 10 4 7
January 1, 2002 gross balance $ 2,481.5 $ 452.0 $ 45.1 $ 16.7 $ 10.8 $ 3,006.1
Acquisitions and related adjustments 183.3 7.4 (1.9) 4.4 3.9 197.1
Disposals - - - - - -
Impairment charge (148.6) - - - - (148.6)
--------- ------- ------- ------- ------- ---------
June 30, 2002 gross balance $ 2,516.2 $ 459.4 $ 43.2 $ 21.1 $ 14.7 $ 3,054.6
========= ======= ======= ======= ======= =========
January 1, 2002 accumulated amortization $ (2.4) $ (3.1) $ (1.5) $ (7.0)
Amortization* (2.7) (2.1) (1.0) (5.8)
Disposals - - - -
------- ------- ------- ---------
June 30, 2002 accumulated amortization $ (5.1) $ (5.2) $ (2.5) $ (12.8)
======= ======= ======= =========
* $2.1 has been recorded as a component of cost of products sold
Estimated amortization expense:
For year ended 12/31/02 $11.3
For year ended 12/31/03 $11.7
For year ended 12/31/04 $10.9
For year ended 12/31/05 $ 8.6
For year ended 12/31/06 $ 5.5
14
Segments:
Unamortized Amortized Total
--------------------------- ------------------------------ -----
Trademarks/
Goodwill Tradenames Patents Licenses Other
-------- ---------- ------- -------- -----
Technical Products and Systems
January 1, 2002 gross balance $ 574.4 $ 62.9 $ 19.3 $ 16.3 $ 9.0 $ 681.9
Acquisitions and related adjustments 44.7 7.4 (2.3) 4.4 1.6 55.8
Disposals - - - - - -
Impairment charge - - - - - -
------- ------- ------- ------- ------- --------
June 30, 2002 gross balance $ 619.1 $ 70.3 $ 17.0 $ 20.7 $ 10.6 $ 737.7
======= ======= ======= ======= ======= ========
January 1, 2002 accumulated amortization $ (0.7) $ (3.1) $ (1.3) $ (5.1)
Amortization* (1.4) (2.1) (0.7) (4.2)
Disposals - - - -
------- ------- ------- --------
June 30, 2002 accumulated amortization $ (2.1) $ (5.2) $ (2.0) $ (9.3)
======= ======= ======= ========
* $2.1 has been recorded as a component of cost
of products sold
Industrial Products and Services
January 1, 2002 gross balance $ 921.5 $ 158.3 $ 15.4 $ 0.4 $ 1.7 $1,097.3
Acquisitions and related adjustments 25.4 - - - 2.3 27.7
Disposals - - - - - -
Impairment charge (148.6) - - - - (148.6)
------- ------- ------- ------- ------- --------
June 30, 2002 gross balance $ 798.3 $ 158.3 $ 15.4 $ 0.4 $ 4.0 $ 976.4
======= ======= ======= ======= ======= ========
January 1, 2002 accumulated amortization $ (0.9) $ - $ (0.2) $ (1.1)
Amortization (0.8) - (0.3) (1.1)
Disposals - - - -
------- ------- ------- --------
June 30, 2002 accumulated amortization $ (1.7) $ - $ (0.5) $ (2.2)
======= ======= ======= ========
Flow Technology
January 1, 2002 gross balance $ 728.5 $ 180.3 $ 9.4 $ - $ 0.1 $ 918.3
Acquisitions and related adjustments 88.9 - 0.4 - - 89.3
Disposals - - - - - -
Impairment charge - - - - - -
------- ------- ------- ------- ------- --------
June 30, 2002 gross balance $ 817.4 $ 180.3 $ 9.8 $ - $ 0.1 $1,007.6
======= ======= ======= ======= ======= ========
January 1, 2002 accumulated amortization $ (0.6) $ - $ - $ (0.6)
Amortization (0.4) - - (0.4)
Disposals - - -
------- ------- --------
June 30, 2002 accumulated amortization $ (1.0) $ - $ - $ (1.0)
======= ======= ======= ========
Service Solutions
January 1, 2002 gross balance $ 257.1 $ 50.5 $ 1.0 $ - $ - $ 308.6
Acquisitions and related adjustments 24.3 - - - - 24.3
Disposals - - - - - -
Impairment charge - - - - - -
------- ------- ------- ------- ------- --------
June 30, 2002 gross balance $ 281.4 $ 50.5 $ 1.0 $ - $ - $ 332.9
======= ======= ======= ======= ======= ========
January 1, 2002 accumulated amortization $ (0.2) $ - $ - $ (0.2)
Amortization (0.1) - - (0.1)
Disposals - - - -
------- ------- ------- --------
June 30, 2002 accumulated amortization $ (0.3) $ - $ - $ (0.3)
======= ======= ======= ========
As a policy, we will conduct annual impairment testing of goodwill and
indefinite-lived intangibles during the fourth quarter, after our reporting
units have submitted their long-range operating plans. Goodwill and
indefinite-lived intangibles will be reviewed for impairment more frequently if
impairment indicators arise. Intangible assets that are subject to amortization
will be reviewed for impairment in accordance with the provisions of SFAS No.
121 as superceded by SFAS No. 144.
15
9. DEBT
Our long-term debt as of June 30, 2002 and December 31, 2001 consists of the
following principal amounts:
June 30, December 31,
2002 2001
-------- --------
Tranche A loan $ 331.3 $ 393.7
Tranche B loan 487.5 490.0
Tranche C loan 808.9 823.0
LYONs, net of unamortized discount of $562.9 and $574.1, respectively 846.9 835.7
Industrial revenue bond due 2002 1.0 1.0
Other borrowings 12.4 69.0
-------- --------
$2,488.0 $2,612.4
Less current maturities of long-term debt (157.1) (161.6)
-------- --------
Total long-term debt $2,330.9 $2,450.8
======== ========
Credit Facility
As of June 30, 2002, we had outstanding under our Credit Agreement:
(a) $331.3 of aggregate principal amount of Tranche A term loans,
(b) $487.5 of aggregate principal amount of Tranche B term loans, and
(c) $808.9 of aggregate principal amount of Tranche C term loans.
(d) In addition, the Credit Facility provides for a commitment to
provide revolving credit loans of up to $600.0. As of June 30,
2002 the revolving credit loans stand unused; however, the
aggregate available borrowing capacity is reduced by $61.6 of
letters of credit outstanding as of June 30, 2002. We also have
$1.2 of letters of credit outstanding as of June 30, 2002, which
do not reduce our revolver borrowing capacity. We expect that our
outstanding letters of credit will increase by approximately
$55.0 in future periods due to the July 31, 2002, acquisition of
Balcke Cooling Products.
Liquid Yield Option Notes (in millions, except per LYONs amounts)
On February 6, 2001, we issued Liquid Yield Option(TM) Notes ("February LYONs")
at an original price of $579.12 per $1,000 principal amount at maturity, which
represents an aggregate initial issue price of $576.1 and an aggregate principal
amount of $994.8 due at maturity on February 6, 2021. On May 9, 2001, we issued
Liquid Yield Option(TM) Notes ("May LYONs") at an original price of $579.12 per
$1,000 principal amount at maturity, which represents an aggregate initial issue
price including the over allotment exercised by the original purchaser of $240.3
and an aggregate principal amount $415.0 due at maturity on May 9, 2021.
The LYONs have a yield to maturity of 2.75% per year, computed on a semi-annual
bond equivalent basis, calculated from the date of issuance. We will not pay
cash interest on the LYONs prior to maturity unless contingent interest becomes
payable. The LYONs are unsecured and unsubordinated obligations and are debt
instruments subject to United States federal income tax contingent payment debt
regulations. Even if we do not pay any cash interest on the LYONs, bondholders
are required to include interest in their gross income for United States federal
income tax purposes. This imputed interest, also referred to as tax original
issue discount, accrues at a rate equal to 9.625% on the February LYONs and
8.75% on the May LYONs. The rate at which the tax original issue discount
accrues for United States federal income tax purposes exceeds the stated yield
of 2.75% for the accrued original issue discount.
The LYONs are subject to conversion to SPX common shares only if certain
contingencies are met. These contingencies include:
(1) Our average stock price exceeding predetermined accretive values
of SPX's stock price each quarter (see below);
(2) During any period in which the credit rating assigned to the LYONs
by either Moody's or Standard & Poor's is at or below a specified
level;
(3) Upon the occurrence of certain corporate transactions, including
change in control.
16
In addition, a holder may surrender for conversion a LYON called for redemption
even if it is not otherwise convertible at such time. The conversion rights
based on predetermined accretive values of SPX's stock include, but are not
limited to, the following provisions:
February May
LYONs LYONS
------------ ----------
Initial Conversion Rate (shares of common stock per LYON) 4.8116 4.4294
Initial Stock Price $ 100.30 $ 110.80
Initial Accretion Percentage 135% 120%
Accretion Percentage Decline Per Quarter 0.3125% 0.125%
Conversion Trigger Prices - Next Twelve Months:
2002 Third Quarter $ 166.88 $ 161.20
2002 Fourth Quarter $ 167.63 $ 162.14
2003 First Quarter $ 168.38 $ 163.08
2003 Second Quarter $ 169.14 $ 164.02
Holders may surrender LYONs for conversion into shares of common stock in any
calendar quarter, if, as of the last day of the preceding calendar quarter, the
closing sale price of our common stock for at least 20 trading days in a period
of 30 consecutive trading days ending on the last trading day of such preceding
calendar quarter is more than the specified percentage, beginning at 135% and
declining 0.3125% per quarter thereafter for the February LYONs, beginning at
120% and declining 0.125% per quarter thereafter for the May LYONs, of the
accreted conversion price per share of common stock on the last trading day of
such preceding calendar quarter. The accreted conversion price per share as of
any day will equal the issue price of a LYON plus the accrued original issue
discount to that day, divided by the number of shares of common stock issuable
upon conversion of a LYON on that day.
We may redeem all or a portion of the February LYONs for cash at any time on or
after February 6, 2006 at predetermined redemption prices. February LYONs
holders may require us to purchase all or a portion of their LYONs on February
6, 2004 for $628.57 per LYON, February 6, 2006 for $663.86 per LYON, or February
6, 2011 for $761.00 per LYON. We may redeem all or a portion of the May LYONs
for cash at any time on or after May 9, 2005. May LYONs holders may require us
to purchase all or a portion of their LYONs on May 9, 2003 for $611.63 per LYON,
May 9, 2005 for $645.97 per LYON or May 9, 2009 for $720.55 per LYON. For either
the February LYONs or May LYONs, we may choose to pay the purchase price in
cash, shares of common stock or a combination of cash and common stock.
Under GAAP, the LYONs are not included in the diluted income per share of common
stock calculation unless a LYON is expected to be converted for stock or one of
the three contingent conversion tests summarized above are met. If the LYONs
were to be put, we expect to settle them for cash and none of the contingent
conversion tests have been met, accordingly, they are not included in the
diluted income per share of common stock calculation. If converted, the February
LYONs and May LYONs would be exchanged for 4.787 and 1.838 shares of our common
stock, respectively. If the LYONs had been converted as of January 1, 2002, the
diluted income per share of common stock from continuing operations would have
been $1.27 and $2.69 for the three and six month periods ended June 30, 2002,
respectively.
Financial Derivatives
We have entered into various interest rate protection agreements ("swaps") to
reduce the potential impact of increases in interest rates on floating rate
long-term debt. As of June 30, 2002, we had ten outstanding swaps that
effectively convert $1,500.0 of our floating rate debt to a fixed rate, based
upon LIBOR, of approximately 7.47%. These swaps are accounted for as cash flow
hedges, and expire at various dates the longest expiring in November 2004. As of
June 30, 2002, the pre-tax accumulated derivative loss recorded in accumulated
other comprehensive loss was $53.1 and a liability of $53.2 has been recorded to
recognize the fair value of these swaps. The ineffective portion of these swaps
has been recognized in earnings as a component of interest expense and is not
material. We do not enter into financial instruments for speculative or trading
purposes.
We settled two interest rate swaps with a notional amount of $200.0 at a cash
cost of $8.3 in February 2002. These interest rate swaps were previously
designated as cash flow hedges and the settlement cost approximated the fair
value of the swaps previously recorded as a liability and deferred loss recorded
in other comprehensive income. The deferred loss recorded in other comprehensive
income will be reclassified into earnings over the remaining forecasted variable
rate payments on the underlying debt. Through June 30, 2002, $2.6 of the
deferred loss has been recognized as a component of interest expense and we
estimate that in total, $5.9 will be charged to earnings in 2002 with the
remaining loss of $2.4 recorded in 2003 prior to June 30.
17
Restated Credit Agreement (subsequent event)
On July 25, 2002, we refinanced our existing Tranche B and Tranche C term loans
and amended and restated our Credit Agreement ("Restated Credit Agreement"). The
primary purpose of the refinancing and amendment to our Credit Agreement was to
modify certain covenant provisions to provide for enhanced overall flexibility,
as well as increased flexibility for international growth, and to extend the
maturity of our Tranche B and Tranche C term loans. The refinancing did not
impact the terms or applicable rates on our Tranche A term loans or our
revolver. We received proceeds of $450.0 from our new Tranche B term loans and
$750.0 from our new Tranche C term loans. These proceeds and $96.4 of cash on
hand were used to pay off our existing Tranche B and Tranche C term loans.
During the third quarter of 2002, we will record a charge of approximately $5.2
associated with the early extinguishment of debt as a result of the refinancing.
During the third quarter of 2002, we will also record a charge of approximately
$4.8 for the early termination of an interest rate swap with a notional amount
of $100.0. This swap was designated as a cash flow hedge of underlying variable
rate debt that was paid off in connection with the refinancing. The charge
represents the cash cost to terminate the swap and approximates the fair value
of the swaps previously recorded as a liability and deferred loss in accumulated
other comprehensive income.
Under the Restated Credit Agreement, the term loans bear interest, at our option
at either LIBOR (referred to in our Restated Credit Agreement as the Eurodollar
Rate) plus the Applicable Rate or the ABR plus the Applicable Rate. The
Applicable Rate for term loans is based upon the Consolidated Leverage Ratio as
defined in the Restated Credit Agreement. The Applicable Rate for the term loans
is as follows:
LIBOR based borrowings ABR based borrowings
---------------------- --------------------
Tranche A term loans Between 1.5% and 2.5% Between 0.5% and 1.5%
Tranche B term loans 2.25% 1.25%
Tranche C term loans 2.50% 1.50%
Our $600.0 of revolving loans available under the Restated Credit Agreement are
also subject to annual commitment fees between 0.25% and 0.5% on the unused
portion of the loans. At June 30, 2002, and as of July 25, 2002, no amounts were
borrowed against the $600.0 revolver.
The Restated Credit Agreement contains covenants, the most restrictive of which
are two financial condition covenants. The first financial condition covenant
does not permit the Consolidated Leverage Ratio (as defined in the Restated
Credit Agreement) on the last day of any period of four consecutive fiscal
quarters to exceed 3.5 to 1.00 for the period ending June 30, 2002 and 3.25 to
1.00 thereafter. The second financial condition covenant does not permit the
Consolidated Interest Coverage Ratio (as defined in the Restated Credit
Agreement) for any period of four consecutive fiscal quarters to be less than
3.50 to 1.00. For the quarter ending June 30, 2002, our Consolidated Leverage
Ratio was 2.65 to 1.00 and our Consolidated Interest Coverage Ratio was 6.72 to
1.00.
The Restated Credit Agreement also includes covenant provisions regarding
indebtedness, liens, investments, guarantees, acquisitions, dispositions, sales
and leaseback transactions, restricted payments and transactions with
affiliates. As stated earlier, these provisions were modified to further enable
us to execute our growth strategy, including growth in international markets.
Based on available information, we do not expect these covenants to restrict our
liquidity, financial condition or access to capital resources in the foreseeable
future.
We may voluntarily repay the Tranche A, Tranche B and the Tranche C term loans
in whole or in part at any time without penalty or premium. We are not allowed
to reborrow any amounts that we repay on the Tranche A, Tranche B, or Tranche C
term loans. The maturity for each loan is as follows:
Date of Maturity
----------------
Revolving loans (currently not utilized) September 30, 2004
Tranche A term loans September 30, 2004
Tranche B term loans September 30, 2009
Tranche C term loans March 31, 2010
The revolving loans may be borrowed, prepaid and reborrowed. Letters of credit
and swing line loans are also available under the revolving credit facility. On
the date of the closing of the Restated Credit Agreement, the entirety of the
revolving loans was available and no revolving loans were outstanding. The
facility provides for the issuance of letters of credit in U.S. Dollars, Euros,
18
and Pounds Sterling at any time during the revolving availability period, in an
aggregate amount not exceeding $250.0. Standby letters of credit issued under
this facility reduce the aggregate amount available under the revolving loan
commitment.
We believe that current cash and equivalents, cash flows from operations and our
unused revolving credit facility will be sufficient to fund working capital
needs, planned capital expenditures and other operational cash requirements. We
were in full compliance with all covenants included in our capital financing
instruments at June 30, 2002 and at July 25, 2002, the date of the refinancing.
We have not paid dividends in 2001 or 2000, and we do not intend to pay
dividends on our common stock.
10. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss), were as follows:
Three months Six months
ended June 30, ended June 30,
-------------- --------------
2002 2001 2002 2001
----- ----- ---- ----
Net income (loss) $ 58.3 $ 13.4 $(25.2) $ 48.8
Foreign currency translation adjustments 23.7 (3.3) (3.8) 9.9
Unrealized gain (loss) on qualifying cash flow hedges, net of (19.6) (3.4) (6.2) (15.3)
related tax
SFAS 133 transition adjustment, net of related tax - - - 9.9
------ ------ ------ ------
Comprehensive income (loss) $ 62.4 $ 6.7 $(35.2) $ 53.3
====== ====== ====== ======
The components of the balance sheet caption accumulated other comprehensive
(loss) are as follows:
June 30, December 31,
2002 2001
---- ----
Foreign currency translation adjustments $ (62.5) $(58.7)
Unrealized losses on qualifying cash flow hedges, net of related tax (31.8) (25.6)
Minimum pension liability adjustment, net of related tax (6.2) (6.2)
------- ------
Accumulated other comprehensive (loss) $(100.5) $(90.5)
======= ======
19
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (dollars in millions)
RESULTS OF OPERATIONS
On May 24, 2001, we completed the acquisition of United Dominion Industries
Limited ("UDI"). UDI manufactured proprietary engineered and flow technology
products primarily for industrial and commercial markets worldwide. UDI, which
had sales of $2,366.2 for the twelve months ended December 31, 2000, is included
in our financial statements beginning May 25, 2001. Accordingly, the acquisition
of UDI significantly impacts the results of operations in 2002, which include
the results of UDI for the entire period including cost reductions associated
with the integration of the UDI businesses, compared to 2001, which include the
results of UDI from May 25, 2001. As of May 24, 2002, we have completed our
review and determination of the fair values of the assets acquired and
liabilities assumed with the UDI acquisition.
The requirements of Statement of Financial Accounting Standards ("SFAS") No. 141
"Business Combinations" and the amortization provisions of SFAS No. 142
"Goodwill and Other Intangible Assets" were effective for any business
combination initiated after July 1, 2001. We have not amortized goodwill and
indefinite-lived intangibles for acquisitions completed after this date. With
respect to goodwill and intangible assets acquired prior to July 1, 2001,
companies were required to adopt SFAS No. 142 in their fiscal year beginning
after December 15, 2001. We adopted the remaining provisions of SFAS No. 142
effective January 1, 2002. Upon adoption of this standard, we ceased amortizing
all remaining goodwill and intangible assets deemed to have indefinite useful
lives. In connection with the transition provisions of SFAS No. 142, we have
recorded a change in accounting principle, which resulted in a non-cash charge
to earnings of $148.6 in the first quarter of 2002.
CONSOLIDATED RESULTS OF OPERATIONS
The following unaudited information should be read in conjunction with our
unaudited condensed consolidated financial statements and related notes.
Three months Six months
ended June 30, Ended June 30,
-------------- --------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues $ 1,257.5 $ 910.1 $ 2,388.0 $ 1,590.5
Gross margin 424.7 286.7 797.5 503.8
% of revenues 33.8% 31.5% 33.4% 31.7%
Selling, general and administrative expense 245.6 171.0 476.4 300.3
% of revenues 19.5% 18.8% 19.9% 18.9%
Goodwill/intangible amortization 2.0 14.8 3.7 25.6
Special charges 50.8 40.5 57.2 43.9
---------- -------- ---------- ----------
Operating income 126.3 60.4 260.2 134.0
Other (expense) income, net 1.2 (10.4) 0.4 (8.7)
Equity earnings in joint ventures 8.3 9.0 18.6 18.4
Interest expense, net (38.4) (30.3) (75.4) (55.0)
---------- -------- ---------- ----------
Income before income taxes $ 97.4 $ 28.7 $ 203.8 $ 88.7
Provision for income taxes (39.1) (15.3) (80.4) (39.9)
---------- -------- ---------- ----------
Income before change in accounting principle $ 58.3 $ 13.4 $ 123.4 $ 48.8
Change in accounting principle (1) - - (148.6) -
---------- -------- ---------- ----------
Net (loss) income $ 58.3 $ 13.4 $ (25.2) $ 48.8
========== ======== ========== ==========
Capital expenditures $ 23.6 $ 48.0 $ 51.1 $ 81.0
Depreciation and amortization 33.4 34.6 64.2 65.8
(1) We recorded a charge for a change in accounting principle of $148.6 as a
result of adopting the provisions of SFAS No. 142. See Note 8 to the
Condensed Consolidated Financial Statements for more detail on this charge.
20
SEGMENT RESULTS OF OPERATIONS:
Three months Six months
ended June 30, ended June 30,
-------------- --------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues:
Technical Products and Systems $ 319.1 $ 252.0 $ 623.1 $ 460.0
Industrial Products and Services 430.8 316.7 815.0 566.3
Flow Technology 316.7 172.9 596.4 244.2
Service Solutions 190.9 168.5 353.5 320.0
-------- ------- -------- --------
$1,257.5 $ 910.1 $2,388.0 $1,590.5
======== ======= ======== ========
Operating Income (1):
Technical Products and Systems $ 46.5 $ 40.5 $ 90.6 $ 69.9
Industrial Products and Services 72.1 44.1 127.7 79.3
Flow Technology 45.2 25.6 84.5 34.3
Service Solutions 26.8 15.1 41.9 27.3
General Corporate (13.5) (10.9) (27.3) (19.4)
-------- ------- -------- --------
$ 177.1 $ 114.4 $ 317.4 $ 191.4
======== ======= ======== ========
(1) Operating income excludes special charges, including those recorded in cost
of products sold.
SECOND QUARTER 2002 COMPARED TO THE SECOND QUARTER 2001
Revenues -- In the second quarter of 2002, revenues of $1,257.5 increased by
$347.4, or 38.2%, from $910.1 in 2001. By segment, revenues increased by 26.6%
in the Technical Products and Systems segment, 36.0% in the Industrial Products
and Services segment, 83.2% in the Flow Technology segment and 13.3% in the
Service Solutions segment. The increase in revenues is primarily due to the
acquisition of UDI on May 24, 2001. Revenues in the second quarter of 2001 only
included one month of the UDI businesses. Excluding the impact of all
acquisitions or divestitures, the primary businesses that experienced growth in
the quarter included our high-tech die-casting business in the Industrial
Products and Services segment, our TV and radio transmission systems and
building life safety systems businesses in the Technical Products and Systems
segment and our Service Solutions segment. A decline in revenue, excluding the
impact of any acquisitions or divestitures, resulted from a decline in sales of
our power transformer and medium and high-pressure hydraulic equipment, which
affected the Industrial Products and Services segment, a decline in demand for
mixers, which influenced the Flow Technology segment, and a decline in demand
for network and switching products, and the timing of contracts at our automated
fare collection system and life sciences business, both of which are reported in
our Technical Products and Services segment.
Operating Income -- Excluding special charges, operating income in the second
quarter of 2002 was $177.1 compared to $114.4 in 2001. The increase in operating
income is primarily due to the acquisition of UDI on May 24, 2001, cost
reduction actions across the company and a favorable product mix at our Service
Solutions segment. In addition, positive operating margins as a percentage of
revenues were experienced in our high-tech die-casting business due to higher
revenues and operating efficiencies, which affected the Industrial Products and
Services segment. We also had strong revenues and favorable product mix in our
TV and radio transmission systems business, which affected our Technical
Products and Services segment.
FIRST SIX MONTHS OF 2002 COMPARED TO THE FIRST SIX MONTHS OF 2001
Revenues -- In the first six months of 2002, revenues of $2,388.0 increased by
$797.5, or 50.1%, from $1,590.5 in 2001. By segment, revenues increased by 35.4%
in the Technical Products and Systems segment, 43.9% in the Industrial Products
and Services segment, 144.2% in the Flow Technology segment and 10.5% in the
Service Solutions segment. The increase in revenues is primarily due to the
acquisition of UDI on May 24, 2001. Revenues in the first six months of 2001
only included one month of the UDI businesses. Excluding the impact of all
acquisitions or divestitures, the primary businesses that experienced growth in
the quarter included our high-tech die-casting business in the Industrial
Products and Services segment, our TV and radio transmission systems and
building life safety systems businesses in the Technical Products and Systems
segment. A decline in revenue, excluding the impact of any acquisitions or
divestitures, resulted from a decline in sales of our power transformer and
medium and high-pressure hydraulic equipment, which affected the Industrial
Products and Services segment, a decline in demand for mixers, which influenced
the Flow Technology segment, a decline in demand for network and switching
products business, which is reported in our Technical Products and Services
segment, and lower revenues in our Service Solutions segment.
Operating Income -- Excluding special charges, operating income in the first six
months of 2002 was $317.4 compared to $191.4 in 2001. The increase in operating
income is primarily due to the acquisition of UDI on May 24, 2001, cost
reduction actions
21
across the company and a more favorable product mix at our Service Solutions
segment. In addition, positive operating margins as a percentage of revenues
were experienced in our high-tech die-casting business due to higher revenues
and operating efficiencies, which affected the Industrial Products and Services
segment. We also had strong revenues and favorable product mix in our TV and
radio transmission systems business, which affected our Technical Products and
Services segment.
PRO FORMA CONSOLIDATED RESULTS OF OPERATIONS
Unaudited pro forma results of operations for the three and six month periods
ended June 30, 2001 are presented below as if the acquisition of UDI, which was
acquired on May 24, 2001, took place on January 1, 2001. On January 1, 2002, we
adopted Statement of Financial Accounting Standards ("SFAS") No. 141 "Business
Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets." SFAS No.
142 requires that goodwill and indefinite lived intangible assets are no longer
amortized, accordingly we discontinued amortization of these assets on the date
of adoption. The following 2001 pro forma results assume that the cessation of
goodwill and indefinite lived intangible assets had occurred on January 1, 2001.
We believe that the following pro forma results of operations will facilitate
more meaningful analysis of our results of operations.
The pro forma results include estimates and assumptions that management believes
are reasonable. However, pro forma results do not include any anticipated cost
savings or expenses of the planned integration of UDI and SPX, and are not
necessarily indicative of the results that would have occurred if the business
combination had been in effect on the dates indicated, or that may result in the
future. The consolidated interest expense has been computed on assumptions that
the refinancing of UDI debt occurred entirely under the credit agreement and not
through the issuance of publicly traded or privately placed notes. Interest
income was not changed from historical amounts and debt issuance costs are
amortized over five years. The pro forma results assume the fair values and
lives of definite lived intangible assets as determined by independent
appraisals. The pro forma consolidated effective income tax rate for the
combined companies includes the impact of special charges and unusual items as
well as increases in foreign income tax rates due to the acquisition.
Three months Six months
ended June 30, ended June, 30
-------------- --------------
2002 2001 2002 2001
Actual Pro-Forma Actual Pro-Forma
------ --------- ------ ---------
Revenues $1,257.5 $1,274.5 $2,388.0 $2,484.9
Gross margin 424.7 380.0 797.5 744.7
% of revenues 33.8% 29.8% 33.4% 30.0%
Selling, general and administrative expense 245.6 252.9 476.4 506.3
% of revenues 19.5% 19.8% 19.9% 20.4%
Goodwill/intangible amortization 2.0 1.2 3.7 2.4
Special charges 50.8 40.5 57.2 43.9
-------- -------- -------- --------
Operating income 126.3 85.4 260.2 192.1
Other (expense) income, net 1.2 (14.4) 0.4 (8.4)
Equity earnings in joint ventures 8.3 9.0 18.6 18.4
Interest expense, net (38.4) (39.4) (75.4) (77.6)
-------- -------- -------- --------
Income before income taxes $ 97.4 $ 40.6 $ 203.8 $ 124.5
Provision for income taxes (39.1) (14.5) (80.4) (45.5)
-------- -------- -------- --------
Income before change in accounting principle $ 58.3 $ 26.1 $ 123.4 $ 79.0
======== ======== ======== ========
Capital expenditures $ 23.6 $ 66.8 $ 51.1 $ 118.2
Depreciation and amortization 33.4 34.7 64.2 75.4
SECOND QUARTER 2002 COMPARED TO PRO FORMA SECOND QUARTER 2001
Revenues -- In the second quarter of 2002, revenues of $1,257.5 decreased by
$17.0, or 1.3%, from $1,274.5 in 2001. Organic revenues, which are revenues
excluding acquisitions or dispositions, declined 4.4% in the second quarter of
2002 compared to the same period in 2001. The decrease in revenues was primarily
attributable to a decline in demand for dock equipment, large power
transformers, medium and high-pressure hydraulic equipment and industrial and
residential heating units, which affected the Industrial Products and Services
segment, a decline in demand for mixers and analyzers, which influenced the Flow
Technology segment, a decline in demand at our network and switching products
business, and the timing of contracts at our automated fare collection system
and life sciences business, all of which are reported in our Technical Products
and Services segment. The primary businesses that experienced growth in the
quarter included our high-tech die-casting and compaction equipment businesses
in the Industrial Products and Services segment, our cooling tower and boiler
business in the Flow Technology segment, our TV and radio transmission systems
and building life safety systems businesses in the Technical Products and
Systems segment and our Service Solutions segment.
Gross margin -- In the second quarter, gross margin increased from 29.8% in 2001
to 33.8% in 2002. The improvement was primarily due to cost reduction actions
implemented in each segment, restructuring actions to integrate the UDI
businesses, and a more favorable product mix in our Service Solutions segment.
22
Selling, general, and administrative expense ("SG&A") -- In the second quarter,
SG&A declined from $252.9 in 2001 to $245.6 in 2002, a $7.3 decline. The
improvement is primarily driven by cost reduction and containment actions
implemented throughout the company.
Special charges -- In the second quarter of 2002, we recorded special charges of
$50.8 primarily associated with facility closures and workforce reductions at
Waukesha Electric Systems and Inrange Technologies, exiting certain machining
operations at our hydraulic systems business, the impairment of a corporate
asset held for sale, and the completion of the relocation of our corporate
headquarters to Charlotte, NC. Although rising demand for energy and an aging
domestic electrical grid still present good longer-term prospects for our
Waukesha Electric Systems business, current conditions indicate intermediate
challenges in demand and pricing for power related products. Accordingly,
Waukesha is closing its Milpitas, CA. manufacturing facility and moving capacity
for large power transformers to Waukesha, WI. Inrange Technologies is closing
three engineering and service facilities, restructuring certain sales, marketing
and administrative functions, and is consolidating the research and development
function to its headquarters in Lumberton, NJ. In the second quarter of 2001, we
recorded special charges of $54.0, which includes $13.5 recorded in cost of
products sold, associated with restructuring actions and asset impairments.
These charges are primarily related to work force reductions, discontinuance of
certain product lines and costs associated with the announced move of our
corporate headquarters.
Other (expense) income, net -- In the second quarter of 2002, other income was
$1.2 compared to other expense of ($14.4) in 2001. In 2001, other expense
primarily includes losses on the disposal of businesses. In the second quarter
of 2001, we sold substantially all of the assets and liabilities of our GS
Electric business and recorded a pre-tax loss of $11.8. Also in the second
quarter of 2001, UDI sold the assets and liabilities of a product line in the
Marley Pump business and recorded a pre-tax loss of $4.0.
Interest expense, net -- In the second quarter of 2002, interest expense was
$38.4 compared to $39.4 in 2001.
Income taxes -- The effective income tax rate for the second quarter of 2002 was
40.1%. This is higher than the statutory income tax rate primarily due to
lower marginal state tax rates on special charges taken during the period.
FIRST SIX MONTHS OF 2002 COMPARED TO PRO FORMA FIRST SIX MONTHS OF 2001
Revenues -- In the first six months of 2002, revenues of $2,388.0 decreased by
$96.9, or 3.9%, from $2,484.9 in 2001. Organic revenues, which are revenues
excluding acquisitions or dispositions, declined 5.1% in the first six months of
2002 compared to the same period in 2001. The decrease in revenues was primarily
attributable to a decline in demand for dock equipment, medium and high-pressure
hydraulic equipment, large power transformers and industrial and residential
heating units, which affected the Industrial Products and Services segment, a
decline in demand for mixers, analyzers and air filtration and dehydration
equipment, which influenced the Flow Technology segment, a decline in demand for
network and switching products compared to the prior year, which impacted our
Technical Products and Services segment, and lower revenues in our Service
Solutions segment. The primary businesses that experienced growth in the first
six months included our high-tech die-casting business in the Industrial
Products and Services segment, our cooling tower and boiler business in the Flow
Technology segment and our TV and radio transmission systems and building life
safety systems businesses in the Technical Products and Systems segment.
Gross margin -- In the first six months, gross margin increased from 30.0% in
2001 to 33.4% in 2002. The improvement was primarily due to cost reduction
actions implemented in each segment, restructuring actions to integrate the UDI
businesses, and a more favorable product mix in our Service Solutions segment.
Selling, general, and administrative expense ("SG&A") -- In the first six
months, SG&A declined from $506.3 in 2001 to $476.4 in 2002, a $29.9 decline.
The improvement is primarily driven by cost reduction and containment actions
implemented throughout the company.
Special charges -- In the first six months of 2002, we recorded special charges
of $57.2. Of this amount, $13.1 was recorded in the Technical Products and
Systems segment, $28.9 was recorded in the Industrial Products and Services
segment, $5.4 was recorded in the Flow Technology segment, $0.4 was recorded in
the Service Solutions segment, and $9.4 was recorded at Corporate. These charges
are primarily for workforce reductions, the consolidation of facilities and
charges associated with the integration of UDI. Corporate special charges were
primarily associated with the completion of the relocation of our corporate
headquarters to Charlotte, NC. and the impairment of an asset held for sale. In
the first six months of 2001, we recorded special charges of $57.4, which
includes $13.5 recorded as a component of cost of products sold. Of this amount,
$14.1 was recorded in the Technical Products and Systems segment, $10.2 was
recorded in the Industrial Products and Services segment, $14.1 was recorded in
the Service Solutions segment, and $19.0 was recorded at Corporate. These
charges were primarily associated with workforce reductions, discontinuance of
certain product lines, the consolidation of facilities and charges associated
with the
23
integration of the UDI. Corporate special charges were primarily associated with
the announcement of the relocation of our corporate headquarters and abandonment
of an internet based software system.
Other (expense) income, net -- In the first six months of 2002, other income was
$0.4 compared to other expense of ($8.4) in 2001. In 2001, other expense
primarily includes losses on the disposal of businesses. On May 18, 2001, we
sold substantially all of the assets and liabilities of our GS Electric business
and recorded a pre-tax loss of $11.8. In April 2001, UDI sold the assets and
liabilities of a product line in the Marley Pump business and recorded a pre-tax
loss of $4.0. In March 2001, UDI sold other operating assets for a pre-tax gain
of $4.3.
Interest expense, net -- In the first six months of 2002, interest expense was
$75.4 compared to $77.6 in 2001.
Income taxes -- The effective income tax rate for the first six months of 2002
was 39.5%. This is higher than the statutory income tax rate primarily due
to lower marginal state tax rates on special charges taken during the period.
SEGMENT PRO FORMA RESULTS OF OPERATIONS:
Pro forma results are presented below to allow for more meaningful analysis. The
pro forma results assume that the UDI acquisition had occurred on January 1,
2001 and assume that we adopted SFAS No. 142 on January 1, 2001.
Three months Three months
ended June 30, ended June 30,
-------------- --------------
2002 2001 2002 2001
Actual Pro-Forma Actual Pro-Forma
------ --------- ------ ---------
Revenues:
Technical Products and Systems $ 319.1 $ 275.8 $ 623.1 $ 523.6
Industrial Products and Services 430.8 486.4 815.0 957.3
Flow Technology 316.7 324.1 596.4 631.1
Service Solutions 190.9 188.2 353.5 372.9
-------- -------- -------- --------
$1,257.5 $1,274.5 $2,388.0 $2,484.9
======== ======== ======== ========
Operating Income (1):
Technical Products and Systems $ 46.5 $ 43.2 $ 90.6 $ 74.5
Industrial Products and Services 72.1 63.4 127.7 115.9
Flow Technology 45.2 26.9 84.5 48.8
Service Solutions 26.8 20.7 41.9 39.7
General Corporate (13.5) (14.8) (27.3) (29.4)
-------- -------- -------- --------
$ 177.1 $ 139.4 $ 317.4 $ 249.5
======== ======== ======== ========
(1) Pro forma operating income excludes special charges, including those
recorded in cost of products sold.
SECOND QUARTER 2002 COMPARED TO PRO FORMA SECOND QUARTER 2001
Technical Products and Systems
Revenues -- Revenues in the second quarter of 2002 increased to $319.1 from
$275.8 in the second quarter of 2001, an increase of $43.3. The increase was due
to the acquisition of Kendro Laboratory Products, L.P. in July 2001. Organic
revenues declined 8.8% primarily due to a decline in demand for network and
switching products for storage and data networks and the timing of contracts at
our automated fare collection system and life sciences businesses compared to
the second quarter of 2002. The primary businesses that experienced growth in
the quarter included our and radio transmission systems and building life safety
systems businesses.
Operating Income -- Operating income as a percentage of revenue declined from
15.7% in 2001 to 14.6% in 2002. Lower operating margins were primarily due to
lower volumes, pricing and an unfavorable product mix at our network and
switching products business and the acquisition in July 2001 of Kendro
Laboratory Products, L.P., which has lower average margins then the existing
technology products and systems businesses. Partially offsetting these
unfavorable impacts were stronger margins at our TV and radio transmission
systems business, which had higher revenues, and a favorable product mix and
cost reduction actions at the acquired UDI businesses.
24
Industrial Products and Services
Revenues -- In the second quarter, revenues decreased from $486.4 in 2001 to
$430.8 in 2002. The decrease was primarily due to the divestiture on May 31,
2001 of the door products business, which was contributed to a joint venture
with Assa Abloy AB and the sale of GS Electric on May 18, 2001. Organic revenues
declined 3.7% primarily due to a decline in demand for dock equipment, large
power transformers, medium and high-pressure hydraulic equipment and industrial
and residential heating units. Revenue declines were partially offset by the
performance of our high-tech die-casting business, which continued to experience
strong growth, and our compaction equipment businesses, which gained market
share during the quarter.
Operating Income -- Operating income as a percentage of revenues improved from
13.0% in 2001 to 16.7% in 2002. Other than our dock leveling systems business
and our aerospace components business, each business in the Industrial Products
and Services segment had improved operating margins compared to the same period
last year. Operating income primarily improved due to restructuring actions and
the disposal of non-performing product lines at the acquired UDI businesses, as
well as improvement in operating efficiencies and higher revenues at our
high-tech die-casting business.
On July 8, 2002, a labor contract involving hourly employees at our aerospace
components business expired without resolution. Based on current information, we
believe that it is reasonably possible that the contract will remain unresolved
in the foreseeable future. Although this event will unfavorably impact the
future results of this business until the labor contract is finalized, we do not
expect it to have a material unfavorable impact on the company as a whole.
Flow Technology
Revenues -- Revenues in the second quarter of 2002 decreased to $324.1 from
$316.7 in the second quarter of 2001. The decrease is primarily due to the
divestiture of the Marley Pump business, which was completed in the third
quarter of 2001. Organic revenues declined 5.3% primarily due to a decline in
demand for mixers and analyzers. Revenue declines were partially offset by
strong demand for our cooling tower and boiler products.
Operating Income -- Second quarter operating income increased 68% to $45.2 in
2002. Operating income as a percentage of revenues was 14.3% in 2002 compared to
8.3% in 2001. Operating income improved due to restructuring initiatives and
integration actions at former UDI businesses, particularly at our cooling tower
business and our valves and controls business.
Service Solutions
Revenues -- In the second quarter of 2002, revenues increased to $190.9 from
$188.2 in the second quarter of 2001. Organic revenues increased by
approximately 1.4% in the quarter.
Operating Income -- Operating income as a percentage of revenues increased from
11.0% in 2001 to 14.0% in 2002. The increase in operating margins was primarily
due to lower distribution sales and strong warranty tool program revenues
resulting in a positive product mix in the quarter and cost reduction actions
associated with the integration of UDI businesses.
FIRST SIX MONTHS OF 2002 COMPARED TO PRO FORMA FIRST SIX MONTHS OF 2001
Technical Products and Systems
Revenues -- Revenues in the first six months of 2002 increased to $623.1 from
$523.6 in the first six months of 2001, an increase of $99.5. The increase was
due to the acquisition of Kendro Laboratory Products, L.P. in July 2001. Organic
revenues declined 6.5% primarily due to a decline in demand for network and
switching products for storage and data networks. The primary businesses that
experienced growth in the period included our TV and radio transmission systems
and building life safety systems businesses.
Operating Income -- Operating income as a percentage of revenue improved from
14.2% in 2001 to 14.5% in 2002. Improvement in operating margins was primarily
due to cost reduction actions, mainly in the acquired UDI businesses, higher
revenues and improved product mix. Unfavorable impacts on operating margins
included lower volumes, pricing and an unfavorable product mix at our network
and switching products business and the acquisition in July 2001 of Kendro
Laboratory Products, L.P., which has lower average margins then the existing
technology products and systems businesses.
Industrial Products and Services
Revenues -- In the first six months, revenues decreased from $957.3 in 2001 to
$815.0 in 2002. The decrease was primarily due to the divestiture, on May 31,
2001, of the door products business that was contributed to a joint venture with
Assa Abloy AB,
25
and the sale of GS Electric on May 18, 2001. Organic revenues declined 3.9%
primarily due to a decline in demand for dock equipment, medium and
high-pressure hydraulic equipment, large power transformers, and industrial and
residential heating units. Revenue declines were partially offset by our
high-tech die-casting business, which continued to experience strong organic
growth.
Operating Income -- Operating income as a percentage of revenues improved from
12.1% in 2001 to 15.7% in 2002. Operating income primarily improved due to
restructuring actions and the disposal of non-performing product lines at the
acquired UDI businesses as well as improvement in operating efficiencies and
higher revenues at our high-tech die-casting business.
Flow Technology
Revenues -- Revenues in the first six months of 2002 decreased to $596.4 from
$631.0 in the first six months of 2001. The decrease is primarily due to the
divestiture of the Marley Pump business, which was completed in the third
quarter of 2001, and a decline in organic revenues. Organic revenues declined
5.5% primarily due to a decline in demand for mixers and analyzers. Revenue
declines were partially offset by strong demand for our cooling tower and boiler
products.
Operating Income -- Operating income for the first six months increased 73.2% to
$84.5 in 2002. Operating income as a percentage of revenues was 14.2% in 2002
compared to 7.7% in 2001. Operating income improved due to restructuring
initiatives and integration actions at former UDI businesses, particularly at
our cooling tower business and our valves and controls business.
Service Solutions
Revenues -- In the first six months of 2002, revenues decreased to $353.5 from
$372.9 in the first six months of 2001. Despite an increase in organic revenues
of approximately 1.4% in the second quarter, revenues were lower for the
cumulative six month period due to a decline in daily tool orders.
Operating Income -- Operating income as a percentage of revenues increased from
10.6% in 2001 to 11.9% in 2002. The increase in operating margins was primarily
due to a positive product mix in the period and cost reduction actions
associated with the integration of UDI businesses.
LIQUIDITY AND FINANCIAL CONDITION
Our liquidity needs arise primarily from capital investment in equipment and
facilities, funding working capital requirements to support business growth
initiatives, debt service costs, and acquisitions.
Cash Flow
Six months ended June 30,
-------------------------
2002 2001
---- ----
Cash flows from (used in):
Operating activities $ 173.3 $ 115.9
Investing activities (159.1) (139.2)
Financing activities (92.9) 309.9
------- -------
Net change in cash balances $ (78.7) $ 286.6
======= =======
Operating Activities -- In the first six months of 2002, cash flow from
operating activities increased by $57.4 from the first six months of 2001.
Operating cash flow in the first six months of 2002 includes the positive
contribution of cash flow from the UDI business acquired on May 24, 2001, cash
received from a legal award and improved working capital performance primarily
in our mixer, TV and radio transmission systems, filtration systems and
high-precision die-castings businesses as well as our Service Solutions segment.
Operating cash flows included the payment of $40.1 of cash restructuring charges
in 2002 compared to $6.8 in 2001. This increase is primarily due to
restructuring actions associated with the integration of UDI as well as the
completion of actions initiated in the second and fourth quarters of 2001.
Investing Activities -- In the first six months of 2002 we used $159.1 of cash
in investing activities compared to a use of $139.2 in 2001. In 2002, we used
$113.1 of cash to acquire five companies; whereas, in 2001, we used $181.2 of
cash to acquire nine companies. In addition, in 2002 we used $14.4 of common
stock for certain acquisitions. Capital expenditures were $51.1 in the first six
months of 2002 compared to $81.0 during the same period in 2001. The lower
capital expenditures in 2002 is primarily due to a disciplined capital
containment program to reduce capital spending in businesses that are
experiencing intermediate reductions in organic revenues. Proceeds from
investing activities in the first six months of 2001 were $113.8 higher than the
same period in 2002, primarily as a result of the divestiture of GS Electric in
the second quarter of 2001, as well as cash proceeds
26
obtained from the sale of certain businesses and assets acquired in the UDI
acquisition.
Financing Activities -- In the first six months of 2002, cash flows used in
financing activities were $92.9 compared to cash flows from financing activities
of $309.9 in 2001. In the first six months of 2002, we paid down $135.6 of debt
and we received $71.3 of cash for common stock issued under stock incentive
programs and the exercise of stock warrants. In the first six months of 2001,
cash flow from financing activities reflects net proceeds of $292.8 from the
January and May amendment to the credit facility and the issuance of LYONs in
February and May of 2001, the payoff of the revolving credit facility and
the payment of other scheduled debt.
Total Debt
The following summarizes the total debt outstanding and unused credit
availability, as of June 30, 2002:
Available
Total Amount Credit
Commitment Outstanding Facility
---------- ----------- --------
Revolving loan (1) $ 600.0 $ - $ 538.4
Tranche A loan 331.3 331.3 -
Tranche B loan 487.5 487.5 -
Tranche C loan 808.9 808.9 -
LYON's, net of unamortized discount of $562.9 846.9 846.9 -
Industrial revenue bond due 2002 1.0 1.0 -
Other borrowings 12.4 12.4 -
-------- --------- -------
Total $3,088.0 $ 2,488.0 $ 538.4
======== ========= =======
(1) Decreased by $61.6 of certain facility letters of credit outstanding
at June 30, 2002, which reduce the unused credit availability. We also
have $1.2 of letters of credit outstanding as of June 30, 2002 which do
not reduce our unused credit availability. We expect that our outstanding
letters of credit will increase by approximately $55.0 in future periods
due to the July 31, 2002, acquisition of Balcke Cooling Products.
Our credit facility is secured by substantially all of our assets and our
domestic subsidiaries' assets (excluding, however, the assets of Inrange
Technologies Corporation and our interest in our EGS and door product joint
ventures) and requires us to maintain certain leverage and interest coverage
ratios. It is further secured by a pledge of 100% of the stock of substantially
all of our domestic subsidiaries and 66% of the stock of our foreign
subsidiaries.
Other Financing Agreements
Our BOMAG business, part of the Industrial Products and Services segment,
utilizes an accounts receivable securitization facility pursuant to which the
unit has an agreement to sell, on a revolving basis without recourse, certain
qualified receivables, of which $40.3 had been sold under the agreement at June
30, 2002. The agreement continues to the end of 2002, with a notice period of
three months. We expect to utilize the agreement up to the contract date, at
which time we will evaluate the facility based on overall cost and our treasury
strategy in Europe, where the facility resides. If we do not renew the contract,
the impact on our financial condition or cash flows will not be material.
Previously, BOMAG also utilized a vendor financing program that was discontinued
during the second quarter of 2002.
Current Liquidity and Concentration of Credit Risk
We believe that current cash and equivalents, cash flows from operations and our
unused revolving credit facility will be sufficient to fund working capital
needs, planned capital expenditures, other operational cash requirements, and
debt service obligations. We were in full compliance with all covenants included
in our capital financing instruments at June 30, 2002 and at July 25, 2002, the
date of the credit facility refinancing. We have not paid dividends in 2001 or
2000, and we do not intend to pay dividends on our common stock. Except for
$62.8 of certain standby letters of credit outstanding as of June 30, 2002, we
do not have any other material guarantees, off-balance sheet arrangements or
purchase commitments other than those described in our 2001 Annual Report on
Form 10-K, as amended by Form 10K/A. We expect that our outstanding letters
of credit will increase by approximately $55.0 in future periods due to the July
31, 2002, acquisition of Balcke Cooling Products.
Financial instruments that potentially subject us to significant concentrations
of credit risk consist of cash and temporary investments, trade accounts
receivable and interest rate protection agreements.
Cash and temporary investments are placed with various high-quality financial
institutions throughout the world, and exposure is limited at any one
institution. We periodically evaluate the credit standing of these financial
institutions.
27
Concentrations of credit risk arising from trade accounts receivable are due to
selling to a large number of customers in a particular industry. We perform
ongoing credit evaluations of our customers' financial conditions and obtain
collateral or other security when appropriate.
We are exposed to credit losses in the event of nonperformance by counterparties
to our interest rate protection agreements, but have no other off-balance-sheet
credit risk of accounting loss. We anticipate, however, that counterparties will
be able to fully satisfy their obligations under the contracts. We do not obtain
collateral or other security to support financial instruments subject to credit
risk, but we do monitor the credit standing of counterparties.
In addition "Factors That May Affect Future Results," included in Management's
Discussion and Analysis of Financial Condition and Results of Operations in our
2001 Annual Report on Form 10-K, as amended by Form 10-K/A, and in any future
filings, should be read for an understanding of the risks, uncertainties, and
trends facing our businesses.
Financial Derivatives
We have entered into various interest rate protection agreements ("swaps") to
reduce the potential impact of increases in interest rates on floating rate
long-term debt. As of June 30, 2002, we had ten outstanding swaps that
effectively convert $1,500.0 of our floating rate debt to a fixed rate, based
upon LIBOR, of approximately 7.47%. These swaps are accounted for as cash flow
hedges, and expire at various dates the longest expiring in November 2004. As of
June 30, 2002, the pre-tax accumulated derivative loss recorded in accumulated
other comprehensive loss was $53.1 and a liability of $53.2 has been recorded to
recognize the fair value of these swaps. The ineffective portion of these swaps
has been recognized in earnings as a component of interest expense and is not
material. We do not enter into financial instruments for speculative or trading
purposes.
We settled two interest rate swaps with a notional amount of $200.0 at a cash
cost of $8.3 in February 2002. These interest rate swaps were previously
designated as cash flow hedges and the settlement cost approximated the fair
value of the swaps previously recorded as a liability and deferred loss recorded
in other comprehensive income. The deferred loss recorded in other comprehensive
income will be reclassified into earnings over the remaining forecasted variable
rate payments on the underlying debt. Through June 30, 2002, $2.6 of the
deferred loss has been recognized as a component of interest expense and we
estimate that, in total, $5.9 will be charged to earnings in 2002 with the
remaining loss of $2.4 recorded in 2003 prior to June 30.
Liquid Yield Option Notes (in millions, except per LYONs amounts)
On February 6, 2001, we issued Liquid Yield Option(TM) Notes ("February LYONs")
at an original price of $579.12 per $1,000 principal amount at maturity, which
represents an aggregate initial issue price of $576.1 and an aggregate principal
amount of $994.8 due at maturity on February 6, 2021. On May 9, 2001, we issued
Liquid Yield Option(TM) Notes ("May LYONs") at an original price of $579.12 per
$1,000 principal amount at maturity, which represents an aggregate initial issue
price including the over allotment exercised by the original purchaser of $240.3
and an aggregate principal amount $415.0 due at maturity on May 9, 2021.
The LYONs have a yield to maturity of 2.75% per year, computed on a semi-annual
bond equivalent basis, calculated from the date of issuance. We will not pay
cash interest on the LYONs prior to maturity unless contingent interest becomes
payable. The LYONs are unsecured and unsubordinated obligations and are debt
instruments subject to United States federal income tax contingent payment debt
regulations. Even if we do not pay any cash interest on the LYONs, bondholders
are required to include interest in their gross income for United States federal
income tax purposes. This imputed interest, also referred to as tax original
issue discount, accrues at a rate equal to 9.625% on the February LYONs and
8.75% on the May LYONs. The rate at which the tax original issue discount
accrues for United States federal income tax purposes exceeds the stated yield
of 2.75% for the accrued original issue discount.
The LYONs are subject to conversion to SPX common shares only if certain
contingencies are met. These contingencies include:
(1) Our average stock price exceeding predetermined accretive values
of SPX's stock price each quarter (see below);
(2) During any period in which the credit rating assigned to the LYONs
by either Moody's or Standard & Poor's is at or below a specified
level;
(3) Upon the occurrence of certain corporate transactions, including
change in control.
In addition, a holder may surrender for conversion a LYON called for redemption
even if it is not otherwise convertible at such time. The conversion rights
based on predetermined accretive values of SPX's stock include, but are not
limited to, the following provisions:
28
February May
LYONs LYONs
----------- -----------
Initial Conversion Rate (shares of common stock per LYON) 4.8116 4.4294
Initial Stock Price $ 100.30 $ 110.80
Initial Accretion Percentage 135% 120%
Accretion Percentage Decline Per Quarter 0.3125% 0.125%
Conversion Trigger Prices - Next Twelve Months:
2002 Third Quarter $ 166.88 $ 161.20
2002 Fourth Quarter $ 167.63 $ 162.14
2003 First Quarter $ 168.38 $ 163.08
2003 Second Quarter $ 169.14 $ 164.02
Holders may surrender LYONs for conversion into shares of common stock in any
calendar quarter, if, as of the last day of the preceding calendar quarter, the
closing sale price of our common stock for at least 20 trading days in a period
of 30 consecutive trading days ending on the last trading day of such preceding
calendar quarter is more than the specified percentage, beginning at 135% and
declining 0.3125% per quarter thereafter for the February LYONs, beginning at
120% and declining 0.125% per quarter thereafter for the May LYONs, of the
accreted conversion price per share of common stock on the last trading day of
such preceding calendar quarter. The accreted conversion price per share as of
any day will equal the issue price of a LYON plus the accrued original issue
discount to that day, divided by the number of shares of common stock issuable
upon conversion of a LYON on that day.
We may redeem all or a portion of the February LYONs for cash at any time on or
after February 6, 2006 at predetermined redemption prices. February LYONs
holders may require us to purchase all or a portion of their LYONs on February
6, 2004 for $628.57 per LYON, February 6, 2006 for $663.86 per LYON, or February
6, 2011 for $761.00 per LYON. We may redeem all or a portion of the May LYONs
for cash at any time on or after May 9, 2005. May LYONs holders may require us
to purchase all or a portion of their LYONs on May 9, 2003 for $611.63 per LYON,
May 9, 2005 for $645.97 per LYON or May 9, 2009 for $720.55 per LYON. For either
the February LYONs or May LYONs, we may choose to pay the purchase price in
cash, shares of common stock or a combination of cash and common stock.
Under GAAP, the LYONs are not included in the diluted income per share of common
stock calculation unless a LYON is expected to be converted for stock or one of
the three contingent conversion tests summarized above are met. If the LYONs
were to be put, we expect to settle them for cash and none of the contingent
conversion tests have been met, accordingly, they are not included in the
diluted income per share of common stock calculation. If converted, the February
LYONs and May LYONs would be exchanged for 4.787 and 1.838 shares of our common
stock, respectively. If the LYONs had been converted as of January 1, 2002, the
diluted income per share of common stock from continuing operations would have
been $1.27 and $2.69 for the three and six month periods ended June 30, 2002,
respectively.
Restated Credit Agreement (subsequent event)
On July 25, 2002, we refinanced our existing Tranche B and Tranche C term loans
and amended and restated our Credit Agreement ("Restated Credit Agreement"). The
primary purpose of the refinancing and amendment to our Credit Agreement was to
modify certain covenant provisions to provide for enhanced overall flexibility,
as well as increased flexibility for international growth, and to extend the
maturity of our Tranche B and Tranche C term loans. The refinancing did not
impact the terms or applicable rates on our Tranche A term loans or our
revolver. We received proceeds of $450.0 from our new Tranche B term loans and
$750.0 from our new Tranche C term loans. These proceeds and $96.4 of cash on
hand were used to pay off our existing Tranche B and Tranche C term loans.
During the third quarter of 2002, we will record a charge of approximately $5.2
associated with the early extinguishment of debt as a result of the refinancing.
During the third quarter of 2002, we will also record a charge of approximately
$4.8 for the early termination of an interest rate swap with a notional amount
of $100.0. This swap was designated as a cash flow hedge of underlying variable
rate debt that was paid off in connection with the refinancing. The charge
represents the cash cost to terminate the swap and approximates the fair value
of the swaps previously recorded as a liability and deferred loss in accumulated
other comprehensive income.
Under the Restated Credit Agreement, the term loans bear interest, at our
option at either LIBOR (referred to in our Restated Credit Agreement as the
Eurodollar Rate) plus the Applicable Rate or the ABR plus the Applicable Rate.
The Applicable Rate
29
for term loans is based upon the Consolidated Leverage Ratio as defined in the
Restated Credit Agreement. The Applicable Rate for the term loans is as follows:
LIBOR based borrowings ABR based borrowings
---------------------- --------------------
Tranche A term loans Between 1.5% and 2.5% Between 0.5% and 1.5%
Tranche B term loans 2.25% 1.25%
Tranche C term loans 2.50% 1.50%
Our $600.0 of revolving loans available under the Restated Credit Agreement are
also subject to annual commitment fees between 0.25% and 0.5% on the unused
portion of the loans. At June 30, 2002, and as of July 25, 2002, no amounts were
borrowed against the $600.0 revolver.
The Restated Credit Agreement contains covenants, the most restrictive of which
are two financial condition covenants. The first financial condition covenant
does not permit the Consolidated Leverage Ratio (as defined in the Restated
Credit Agreement) on the last day of any period of four consecutive fiscal
quarters to exceed 3.5 to 1.00 for the period ending June 30, 2002 and 3.25 to
1.00 thereafter. The second financial condition covenant does not permit the
Consolidated Interest Coverage Ratio (as defined in the Restated Credit
Agreement) for any period of four consecutive fiscal quarters to be less than
3.50 to 1.00. For the quarter ending June 30, 2002, our Consolidated Leverage
Ratio was 2.65 to 1.00 and our Consolidated Interest Coverage Ratio was 6.72 to
1.00.
The Restated Credit Agreement also includes covenant provisions regarding
indebtedness, liens, investments, guarantees, acquisitions, dispositions, sales
and leaseback transactions, restricted payments and transactions with
affiliates. As stated earlier, these provisions were modified to further enable
us to execute our growth strategy, including growth in international markets.
Based on available information, we do not expect these covenants to restrict our
liquidity, financial condition or access to capital resources in the foreseeable
future.
We may voluntarily repay the Tranche A, Tranche B and the Tranche C term loans
in whole or in part at any time without penalty or premium. We are not allowed
to reborrow any amounts that we repay on the Tranche A, Tranche B, or Tranche C
term loans. The maturity for each loan is as follows:
Date of Maturity
----------------
Revolving loans (currently not utilized) September 30, 2004
Tranche A term loans September 30, 2004
Tranche B term loans September 30, 2009
Tranche C term loans March 31, 2010
The revolving loans may be borrowed, prepaid and reborrowed. Letters of credit
and swing line loans are also available under the revolving credit facility. On
the date of the closing of the Restated Credit Agreement, the entirety of the
revolving loans was available and no revolving loans were outstanding. The
facility provides for the issuance of letters of credit in U.S. Dollars, Euros,
and Pounds Sterling at any time during the revolving availability period, in an
aggregate amount not exceeding $250.0. Standby letters of credit issued under
this facility reduce the aggregate amount available under the revolving loan
commitment.
Other Matters
Acquisitions and Divestitures -- We continually review each of our businesses
pursuant to our "fix, sell or grow" strategy. These reviews could result in
selected acquisitions to expand an existing business or result in the
disposition of an existing business. Additionally, we have stated that we would
consider a larger acquisition, more than $1,000.0 in revenues, if certain
criteria are met. There can be no assurances that these acquisitions will not
have an impact on our capital financing instruments, will be integrated
successfully, or that they will not have a negative effect on our operations.
Environmental and Legal Exposure -- We are subject to various environmental
laws, ordinances, regulations, and other requirements of government authorities
in the United States and other nations. These requirements may include, for
example, those governing discharges from and materials handled as part of our
operations, the remediation of soil and groundwater contaminated by petroleum
products or hazardous substances or wastes, and the health and safety of our
employees. Under certain of these laws, ordinances or regulations, a current or
previous owner or operator of property may be liable for the costs of
investigation, removal or remediation of certain hazardous substances or
petroleum products on, under, or in its property, without regard to whether the
owner or operator knew of, or caused, the presence of the contaminants, and
regardless of whether the practices that resulted in the contamination were
legal at the time they occurred. The presence of, or failure to remediate
properly, these substances may have adverse effects, including, for example,
substantial investigative or remedial obligations and
30
limitations on the ability to sell or rent that property or to borrow funds
using that property as collateral. In connection with our acquisitions and
divestitures, we may assume or retain significant environmental liabilities,
some of which we may not be aware. In particular, we assumed additional
environmental liabilities in connection with the UDI acquisition. Future
developments related to new or existing environmental matters or changes in
environmental laws or policies could lead to material costs for environmental
compliance or cleanup. There can be no assurance that these liabilities and
costs will not have a material adverse effect on our results of operations or
financial position in the future.
Numerous claims, complaints and proceedings arising in the ordinary course of
business, including but not limited to those relating to environmental matters,
competitive issues, contract issues, intellectual property matters, personal
injury and product liability claims, and workers' compensation have been filed
or are pending against us and certain of our subsidiaries. Additionally, in
connection with our acquisitions, we may become subject to significant claims of
which we were unaware at the time of the acquisition or the claims that we were
aware of may result in our incurring a significantly greater liability than we
anticipated. We maintain property, cargo, auto, product, general liability, and
directors' and officers' liability insurance to protect us against potential
loss exposures. In addition, in connection with acquisitions, we have acquired
certain rights to insurance coverage applicable to claims or litigation
associated with businesses we have acquired. We expect this insurance to cover a
portion of these claims. In addition, we believe we are entitled to
indemnification from third parties for some of these claims.
In our opinion, these matters are either without merit or are of a kind as
should not have a material adverse effect individually and in the aggregate on
our financial position, results of operations, or cash flows if disposed of
unfavorably. However, we cannot assure you that recoveries from insurance or
indemnification claims will be available or that any of these claims or other
matters will not have a material adverse effect on our financial position,
results of operations or cash flows.
It is our policy to comply fully with applicable environmental requirements. An
estimate of loss, including expenses, from legal actions or claims is accrued
when events exist that make the loss or expenses probable and we can reasonably
estimate them. Our environmental accruals cover anticipated costs, including
investigation, remediation, and operation and maintenance of clean-up sites. We
do not discount environmental or other legal accruals and do not reduce them by
anticipated insurance recoveries. We believe that our accruals related to
environmental litigation and claims are sufficient and that these items will be
resolved without material effect on our financial position, results of
operations and liquidity, individually and in the aggregate.
Pending Litigation -- We believe that we should ultimately prevail on a pending
litigation claim with VSI Holdings, Inc. On or about October 29, 2001, we were
served with a complaint by VSI Holdings, Inc. (VSI) seeking enforcement of a
merger agreement that we had terminated. In its complaint, VSI asked the court
to require us to complete the $197.0 acquisition of VSI, and/or award damages to
VSI and its shareholders. We do not believe the suit has merit and are defending
the claim vigorously. On December 26, 2001, we filed our answer denying VSI's
allegations, raising affirmative defenses and asserting a counterclaim against
VSI for breach of contract. There can be no assurance that we will be successful
in the litigation and if we are not successful, the outcome could have a
material adverse effect on our financial condition and results of operations.
Employment -- On July 8, 2002, a labor contract involving hourly employees at
our aerospace components business expired without renewal. As a result, 117
employees at this business are now on strike. Based on current information, we
believe that it is reasonably possible that negotiations for a new contract will
remain unresolved for the foreseeable future. Although this event will
unfavorably impact the future results of this business until the labor contract
is finalized, we do not expect it to have a material unfavorable impact on the
company as a whole.
On July 3, 2002, our Board of Directors amended the employment agreement of our
Chairman, President, and Chief Executive Officer by granting him 500,000
restricted shares of our stock at the market price of $97.70 per share pursuant
to the shareholder approved plan. The shares vest in five annual installments of
100,000 shares commencing on July 3, 2007. The grant will be fully vested on
July 3, 2011. If the grant of shares had been awared on January 1, 2002, the
impact on diluted income per share of common stock for the entire year would be
approximately $0.12 per share.
As previously disclosed in our most recent proxy statement dated March 21, 2002,
in connection with the relocation of our corporate headquarters to Charlotte,
North Carolina, we offered relocating employees the opportunity to borrow money
from us, in varying amounts depending on level of employment, to finance the
purchase of his or her primary residence in the greater Charlotte area. We have
completed the issuance of these loans in conjunction with the completion of our
corporate headquarters relocation. As of July 30, 2002, we have made offers of
relocation home loans to 37 employees, including loans to four of our executive
officers with an aggregate principal amount of $7.0.
Stock Buyback -- On February 2000, our Board of Directors authorized a share
repruchase program for up to $250.0 and as of June 30, 2002 we had $111.2
unused. Since June 30, 2002, and through August 12, 2002, we have repurchased
0.668 shares of our stock on the open market for a total consideration of $64.4.
31
Inrange Technolgies Corporation, our publicly traded subsidiary, has been
authorized by its Board of Directors to repurchase up to $20.0 of its common
stock. As of August 12, 2002, Inrange has repurchased $11.6 of common stock
under this program. These share repurchases are reflected as financing
activities in our Condensed Consolidated Statement of Cash Flows.
Pension Income -- Our domestic pension plans have plan assets in excess of plan
obligations. This over-funded position results in pension income as the increase
in market value of the plans' assets exceeds costs associated with annual
employee service. In the first six months of 2002, we recorded net pension
income of $14.2 compared to $18.6 in the first six months of 2001. There can be
no assurance that future periods will include similar amounts of net pension
income.
Significance of Goodwill and Intangibles -- We had goodwill of $2,516.2, net
intangible assets of $525.6 and shareholders' equity of $1,769.1 at June 30,
2002. In accordance with SFAS No.142, we amortize our definite lived intangible
assets on a straight-line basis over lives ranging from 4 to 10 years. There can
be no assurance that circumstances will not change in the future that will
affect the useful lives or the carrying value of our goodwill and intangible
assets.
On July 20, 2001 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141 "Business
Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets." These
pronouncements change the accounting for business combinations, goodwill, and
intangible assets. The requirements of SFAS No. 141 are effective for any
business combination accounted for by the purchase method that is completed
after June 30, 2001 and the amortization provisions of SFAS No. 142 apply to
goodwill and intangible assets acquired after June 30, 2001. With respect to
goodwill and intangible assets acquired prior to July 1, 2001, we adopted the
provisions of SFAS No. 142, as required, on January 1, 2002. See Note 8 to the
Condensed Consolidated Financial Statements for further discussion on the impact
of adopting SFAS No. 141 and SFAS No. 142.
In August 2001, the FASB issued SFAS No. 143 "Accounting for Asset Retirement
Obligations." The provisions of SFAS No. 143 will change the way companies must
recognize and measure retirement obligations that result from the acquisition,
construction, development, or normal operation of a long-lived asset. We will
adopt the provisions of SFAS No. 143 as required on January 1, 2003 and at this
time have not yet assessed the impact that adoption might have on our financial
position and results of operations.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment and
Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121 "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" and also supersedes the provisions of APB Opinion No. 30 "Reporting the
Results of Operations--Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual, and Infrequently Occurring Events and
Transactions." SFAS No. 144 retains the requirements of SFAS No. 121 to (a)
recognize an impairment loss only if the carrying amount of a long-lived asset
is not recoverable from its undiscounted cash flow and (b) measure an impairment
loss as the difference between the carrying amount and the fair value of the
asset. SFAS No. 144 establishes a single model for accounting for long-lived
assets to be disposed of by sale. As required, we have adopted the provisions of
SFAS No. 144 effective January 1, 2002.
In April 2002, the FASB issued SFAS No. 145 "Rescission of Statements No. 4, 44,
and 64, Amendment of FASB Statement No. 13, and Technical Corrections". This
Statement rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment
of Debt," and an amendment of that Statement, SFAS No. 64, "Extinguishments of
Debt Made to Satisfy Sinking-Fund Requirements." This Statement also rescinds
SFAS No. 44, "Accounting for Intangible Assets of Motor Carriers." This
Statement amends SFAS No. 13, "Accounting for Leases," to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. This Statement also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. Effective July 1, 2002, we early adopted the provisions of SFAS No.
145. Except for the provisions regarding the gains and losses from the
extinguishment of debt, we do not believe the provisions of SFAS No.145 will
have an impact on our financial position and results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." The standard requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Examples of costs
covered by the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. Previous
accounting guidance was provided by EITF Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 replaces
EITF 94-3 and is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. We frequently engage in strategic
restructuring and integration initiatives that include exit and disposal
activities. Accordingly, we expect that SFAS No. 146 could impact the way in
which we account for certain restructuring costs; however, at this time, we have
not fully assessed the impact of adopting this statement.
32
Economic Value Added "EVA" -- EVA is an integral part of our culture. EVA is a
measure of residual income. Put most simply, EVA is net operating profit
after-tax minus a charge for the cost of all capital invested in an enterprise.
As such, EVA is an estimate of economic profit, or the amount by which after-tax
earnings exceed or fall short of the required minimum rate of return that both
shareholders and lenders could get by investing in other securities of
comparable risk. The equation to calculate EVA is net operating profit after
taxes less the expression of the weighted average cost of capital of the firm
multiplied by total operating capital. The EVA evaluation model is important to
investors because it is the system that management uses to make investment
decisions and because we base our variable compensation system on the model.
______________
Some of the statements in this document and any documents incorporated by
reference constitute "forward-looking statements" within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended. These statements relate
to future events or our future financial performance and involve known and
unknown risks, uncertainties and other factors that may cause our or our
industries' actual results, levels of activity, performance or achievements to
be materially different from those expressed or implied by any forward-looking
statements. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "could," "would," "should," "expect," "plan,"
"anticipate," "intend," "believe," "estimate," "predict," "potential" or
"continue" or the negative of those terms or other comparable terminology. These
statements are only predictions. Actual events or results may differ materially
because of market conditions in our industries or other factors. All of the
forward-looking statements are qualified in their entirety by reference to the
factors discussed under the heading "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Factors That May Affect Future
Results" in our 2001 Annual Report on Form 10-K, as amended by Form 10-K/A, and
in any future filings that describe risks and factors that could cause results
to differ materially from those projected in these forward-looking statements.
We caution you that these risk factors may not be exhaustive. We operate in a
continually changing business environment, and new risk factors emerge from time
to time. We cannot predict these new risk factors, and we cannot assess the
impact, if any, of these new risk factors on our businesses or the extent to
which any factor, or combination of factors, may cause actual results to differ
materially from those projected in any forward-looking statements. Accordingly,
you should not rely on forward-looking statements as a prediction of actual
results. In addition, our estimates of future operating results are based on our
current complement of businesses, which is constantly subject to change as we
implement our fix, sell or grow strategy.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Management does not believe our exposure to market risk has significantly
changed since December 31, 2001 and does not believe that such risks will result
in significant adverse impacts to financial condition or our results of
operations.
PART II -- OTHER INFORMATION
ITEM 1. Legal Proceedings
Numerous claims, complaints and proceedings arising in the ordinary course of
business, including but not limited to those relating to environmental matters,
competitive issues, contract issues, intellectual property matters, personal
injury and product liability claims, and workers' compensation have been filed
or are pending against us and certain of our subsidiaries. Additionally, in
connection with our acquisitions, we may become subject to significant claims of
which we were unaware at the time of the acquisition or the claims that we were
aware of may result in our incurring a significantly greater liability than we
anticipated. We maintain property, cargo, auto, product, general liability, and
directors' and officers' liability insurance to protect us against potential
loss exposures. In addition, in connection with acquisitions, we have acquired
certain rights to insurance coverage applicable to claims or litigation
associated with businesses we have acquired. We expect this insurance to cover a
portion of these claims. In addition, we believe we are entitled to
indemnification from third parties for some of these claims.
In our opinion, these matters are either without merit or are of a kind as
should not have a material adverse effect individually and in the aggregate on
our financial position, results of operations, or cash flows if disposed of
unfavorably. However, we cannot assure you that recoveries from insurance or
indemnification claims will be available or that any of these claims or other
matters will not have a material adverse effect on our financial position,
results of operations or cash flows.
On or about October 29, 2001, we were served with a complaint by VSI Holdings,
Inc. (VSI) seeking enforcement of a merger agreement that we had terminated. In
its complaint, VSI asked the court to require us to complete the $197.0
acquisition of VSI, and/or award damages to VSI and its shareholders. We do not
believe the suit has merit and are defending the claim vigorously. On December
26, 2001, we filed our answer denying VSI's allegations, raising affirmative
defenses and asserting a counterclaim against VSI for breach of contract. There
can be no assurance that we will be successful in the litigation. If we are not
successful, the outcome could have a material adverse effect on our financial
condition and results of operations.
33
ITEM 4. Submission of Matters to a Vote of Security Holders
We held our Annual Meeting of Shareholders on April 24, 2002 at which
shareholders elected two directors to three-year terms expiring in 2005,
approved an amendment to our Certificate of Incorporation that increased the
number of shares of authorized common stock from 100,000,000 to 200,000,000, and
approved the amendment and restatement of the 1992 Stock Compensation Plan to,
among other things, extend the period during which awards may be granted to
December 31, 2011.
The results of the voting in connection with the above items were as follows:
Broker Withheld /
For non-vote Against Abstain
--- -------- ------- -------
Proposal 1 - Election of Directors
J. Kermit Campbell 34,272,673 - - 406,427
Emerson U. Fullwood 34,272,673 - - 406,427
Proposal 2 - Amendment to the SPX 30,991,242 - 3,504,212 183,646
Certificate of Incorporation
Proposal 3 - Amendment and Restatement 16,083,561 2,882,909 15,479,627 233,003
of the SPX 1992 Stock Compensation Plan
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Restated Certificate of Incorporation, as amended.
4.1 Amendment No. 2 to Rights Agreement dated as of June 26, 2002.
10.1 Amended and Restated Credit Agreement dated as of July 24,
2002.*
10.2 SPX Corporation 2002 Stock Compensation Plan, as amended and
restated.
99.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
99.2 Sworn Statements Pursuant to Section 21(a)(1) of the Securities
Exchange Act of 1934.
* The exhibits and schedules are not filed, but SPX
undertakes to furnish a copy of any exhibit or schedule
to the Securities and Exchange Commission upon request.
(b) Reports on Form 8-K
On April 25, 2002, we filed a Form 8-K containing our press release
dated April 23, 2002. This press release contained our first quarter
2002 earnings information.
On June 10, 2002, we filed a Form 8-K announcing that we dismissed
Arthur Andersen LLP as our principal public accountants and engaged
Deloitte & Touche LLP to serve as our principal public accountants for
fiscal year 2002. We also announced that we dismissed KPMG LLP and Conn
Geneva & Robinson as the public accountants for certain of our defined
contribution benefit plans and engaged Plante & Moran LLP as the public
accountants for those plans for the plan years ended December 31, 2001.
On July 25, 2002, we filed a Form 8-K containing our press release
dated July 24, 2002. This press release contained our second quarter
2002 earnings information.
34
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPX CORPORATION
-----------------------------
(Registrant)
Date: August 13, 2002 By /s/ John B. Blystone
-----------------------------
John B. Blystone
Chairman, President and
Chief Executive Officer
Date: August 13, 2002 By /s/ Patrick J. O'Leary
-----------------------------
Patrick J. O'Leary
Vice President Finance,
Treasurer and Chief
Financial Officer
Date: August 13, 2002 By /s/ Ron Winowiecki
-----------------------------
Ron Winowiecki
Corporate Controller and
Chief Accounting Officer
35