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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 September 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 November 8, 2002 80,526,723
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements
SPX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in millions)
(Unaudited)
September 30, December 31,
2002 2001
---- ----
ASSETS
Current assets:
Cash and equivalents $ 271.4 $ 460.0
Accounts receivable, net 1,033.9 976.2
Inventories 669.3 625.5
Prepaid and other current assets 97.7 130.7
Deferred income taxes and refunds 284.7 236.6
--------- ---------
Total current assets 2,357.0 2,429.0
Property, plant and equipment 1,386.8 1,279.2
Accumulated depreciation (551.2) (439.7)
--------- ---------
Net property, plant and equipment 835.6 839.5
Goodwill 2,562.6 2,374.8
Intangible assets, net 551.9 686.9
Other assets 798.6 749.9
--------- ---------
Total assets $ 7,105.7 $ 7,080.1
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 548.3 $ 514.3
Accrued expenses 861.7 856.9
Current maturities of long-term debt 155.8 161.6
--------- ---------
Total current liabilities 1,565.8 1,532.8
Long-term debt 2,248.5 2,450.8
Deferred income taxes 822.2 752.6
Other long-term liabilities 645.8 603.6
--------- ---------
Total long-term liabilities 3,716.5 3,807.0
Minority interest 11.8 25.0
Shareholders' equity:
Common stock 866.8 833.0
Paid-in capital 847.2 722.5
Retained earnings 401.4 350.8
Unearned compensation (47.5) -
Accumulated other comprehensive loss (78.3) (90.5)
Common stock in treasury (178.0) (100.5)
--------- ---------
Total shareholders' equity 1,811.6 1,715.3
--------- ---------
Total liabilities and shareholders' equity $ 7,105.7 $ 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 Nine months ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues $1,286.2 $1,216.7 $3,674.2 $2,807.2
Costs and expenses:
Cost of products sold 881.3 816.9 2,471.8 1,903.6
Selling, general and administrative 237.5 241.2 713.9 541.5
Intangible/goodwill amortization 2.2 20.9 5.9 46.5
Special charges 5.9 4.0 63.1 47.9
-------- -------- -------- --------
Operating income 159.3 133.7 419.5 267.7
Other income (expense), net 5.0 1.3 5.4 (7.4)
Equity earnings in joint ventures 8.6 8.5 27.2 26.9
Interest expense, net (48.6) (39.6) (124.0) (94.6)
-------- -------- -------- --------
Income before income taxes 124.3 103.9 328.1 192.6
Provision for income taxes (48.5) (44.7) (128.9) (84.6)
-------- -------- -------- --------
Income before change in accounting principle 75.8 59.2 199.2 108.0
Change in accounting principle - - (148.6) -
-------- -------- -------- --------
Net income $ 75.8 $ 59.2 $ 50.6 $ 108.0
======== ======== ======== ========
Basic income per share of common stock
Income before change in accounting principle $ 0.92 $ 0.74 $ 2.43 $ 1.53
Change in accounting principle - - (1.81) -
-------- -------- -------- --------
Net income per share $ 0.92 $ 0.74 $ 0.62 $ 1.53
======== ======== ======== ========
Weighted average number of common shares outstanding 81.968 80.178 81.954 70.420
Diluted income per share of common stock
Income before change in accounting principle $ 0.91 $ 0.72 $ 2.38 $ 1.50
Change in accounting principle - - (1.78) -
-------- -------- -------- --------
Net income per share $ 0.91 $ 0.72 $ 0.60 $ 1.50
======== ======== ======== ========
Weighted average number of common shares outstanding 83.194 81.756 83.772 71.992
The accompanying notes are an integral part of these statements.
3
SPX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
($ in millions)
Nine Months Ended
September 30,
-------------
2002 2001
---- ----
Cash flows from (used in) operating activities:
Net income $ 50.6 $ 108.0
Adjustments to reconcile net income to net cash from operating activities -
Change in accounting principle 148.6 -
Special charges 75.7 61.4
Loss on early extinguishment of debt 10.1 -
Loss on sale of assets 2.9 11.8
Deferred income taxes 90.4 60.0
Depreciation 87.0 64.7
Amortization of goodwill and intangibles 14.4 59.4
Amortization of original issue discount on LYONs 17.0 12.9
Employee benefits (1.4) (23.0)
Other, net 0.5 -
Changes in working capital, net of effects from acquisitions and divestitures
Accounts receivable and other (0.2) (109.6)
Inventories (20.6) 28.5
Accounts payable, accrued expenses, and other (110.8) (11.7)
Changes in working capital securitizations (21.0) (0.3)
Cash spending on restructuring actions (71.9) (25.5)
--------- ---------
Net cash from operating activities 271.3 236.6
Cash flows from (used in) investing activities:
Business and fixed asset divestitures 29.3 163.0
Business acquisitions and investments, net of cash acquired (148.4) (503.5)
Capital expenditures (69.7) (113.4)
Other, net (3.1) (16.0)
--------- ---------
Net cash used in investing activities (191.9) (469.9)
Cash flows from (used in) financing activities:
Borrowings under other debt agreements 1,201.0 1,724.2
Payments under other debt agreements (1,431.8) (1,252.7)
Purchase of common stock (77.5) -
Common stock issued under stock incentive programs 48.6 28.6
Common stock issued under exercise of stock warrants 24.2 -
Other, net (32.5) -
--------- ---------
Net cash (used in) from financing activities (268.0) 500.1
--------- ---------
Net (decrease) increase in cash and equivalents (188.6) 266.8
Cash and equivalents, beginning of period 460.0 73.7
--------- ---------
Cash and equivalents, end of period $ 271.4 $ 340.5
========= =========
The accompanying notes are an integral part of these statements.
4
SPX CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
(Unaudited)
(in millions, except per share and per LYON 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. In connection with the October 24, 2002 two-for-one stock split, the
capital accounts, all share data and earnings per share data in this report give
effect to the stock split, applied retroactively, as if the split had occurred
on January 1, 2001. 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 the 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. In accordance with the provisions regarding the gains and losses from the
extinguishment of debt, we recorded a charge, to interest expense, in the third
quarter as a result of our July 25, 2002 credit facility refinancing. See Note 9
to the Condensed Consolidated Financial Statements for further discussion.
5
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 activities. 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 assessed the impact of adopting this statement.
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions, an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9." SFAS 147 will not have an impact on our financial
position and results of operations.
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. Business acquisitions and dispositions for the nine months ended
September 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 since 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 and Systems 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 certain assets and liabilities of Dukane Communications Systems
by our building life-safety systems business based in Cheshire, CT.
During the first quarter, in the Industrial Products and Services 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 date of acquisition. The acquisition was
made by our power systems business based in Waukesha, WI.
During the second quarter, in the Technical Products and Systems 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 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 our valves and controls business based in Sartell, MN.
During the third quarter, we completed the acquisition of certain assets and
subsidiaries of the Balcke Cooling Products Group ("Balcke") from Babcock Borsig
AG for a net purchase price of approximately $44.3, which includes debt assumed.
Of the purchase price, $14.0 had not been paid as of September 30, 2002;
however, we expect that this amount will be paid in the fourth quarter of 2002,
subject to the resolution of certain purchase agreement matters. Based in
Oberhausen, Germany, Balcke 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 had revenues of approximately $226.0 in
the twelve months prior to the date of acquisition. This business is integrated
into our cooling towers business, which is part of our Flow Technology segment.
The integration actions planned for Balcke are more extensive than actions taken
at most of our bolt-on acquisitions, current plans call for the closure of nine
Balcke facilities and a reduction in employee headcount of approximately 250.
The costs associated with these actions are considered liabilities assumed and
are accounted for as part of the purchase price
6
allocation.
During the third quarter, in the Service Solutions segment, we completed one
acquisition for a purchase price of $5.0. The acquired company had revenues of
$4.8 in the twelve months prior to the date of acquisition. This acquisition
will become part of the technical information services business.
These acquisitions are not material individually or in the aggregate.
Acquisitions--2001
During the first quarter, in the Technical Products and Systems 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, made by our TV and radio transmission systems
business based in Raymond, ME.
During the first quarter, in the Industrial Products and Services 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, made by our
automotive filtration systems business based in Des Plaines, IL.
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 and Systems 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 our network and switching products
business based in Lumberton, NJ.
During the third quarter, in the Technical Products and Systems segment, we
completed the acquisition of Kendro Laboratory Products, L.P. of Newtown, CT for
$320.0 in cash. Kendro designs, manufactures, and markets sample-preparation and
processing products and services for life-sciences markets including
pharmaceuticals, genomics, proteomics and others. The acquired company had
revenue of $204.8 in the twelve months prior to the date of acquisition.
These acquisitions are not material individually or in the aggregate.
Divestitures--2001
During the second quarter, in the Industrial Products and Services segment, we
sold our electric motor product line 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 loss of $11.8 was recorded on
the sale. In 2000, this product line had revenues of $75.3.
On August 27, 2001, we sold all of our petroleum pump product lines, formerly of
United Dominion Industries Limited ("UDI"), for a cash purchase price of $40.0.
These product lines were held for sale as of the acquisition date of UDI and,
accordingly, no gain or loss was recorded on the sale of these product lines.
UDI Acquisition--May 24, 2001
On May 24, 2001, we completed the acquisition of 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 18.770 shares
(7.780 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 No.16 and 17, and, accordingly, the condensed consolidated
statements of 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
7
management. As of the second quarter 2002, we have completed our review and
determination of the fair value of the assets acquired and liabilities assumed.
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, involuntarily terminate UDI employees, and other costs to integrate
operating locations and other activities of UDI with SPX. GAAP requires that
these acquisition integration expenses, which are not 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 acquisition integration expenses, associated with integrating SPX
operations into UDI locations, to be recorded as expense. These expenses are
discussed in Note 5. The balances of the acquisition integration liabilities
included in the purchase price allocation for UDI are as follows:
Facility
Work force Non-cancelable Consolidation/
Reductions Leases Other Total
Balance at June 30, 2002 $14.8 $ 7.4 $ 14.3 $36.5
Payments 12.0 0.5 9.7 22.2
----- ----- ------ -----
Balance at September 30, 2002 $ 2.8 $ 6.9 $ 4.6 $14.3
===== ===== ===== =====
The acquisition of UDI significantly affects the comparability of the 2002 and
2001 results of operations. Unaudited pro forma results of operations for the
nine months ended September 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 no longer be 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 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, in
place as of the merger, 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 and
other charges and unusual items as well as increases in foreign income tax rates
due to the acquisition.
Nine months ended
September 30,
-----------------------
2002 2001
Actual Pro Forma
-------- ---------
Revenues $3,674.2 $3,701.6
Income before change in accounting principle (1) 199.2 153.1
Net income 50.6 153.1
Basic income per share:
Income before change in accounting principle $ 2.43 $ 1.92
Change in accounting principle (1.81) -
-------- --------
Net income per share $ 0.62 $ 1.92
======== ========
Diluted income per share:
Income before change in accounting principle $ 2.38 $ 1.88
Change in accounting principle (1.78) -
-------- --------
Net income per share $ 0.60 $ 1.88
======== ========
(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-tech die castings, dock products and systems, cooling
towers, air filtration products, valves, back-flow prevention and fluid handling
equipment, 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. In determining our segments, we apply the
threshold criteria of SFAS No. 131 to operating income or loss of each segment
before considering special and other charges, including those recorded in cost
of products sold. This is consistent with the way our chief operating decision
maker evaluates the results of each segment. 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, lab ovens, testing
chambers and freezers; electrical test and measurement solutions; cable and pipe
locating devices; electrodynamic shakers; industrial ovens; 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
equipment, electric resistance heaters, soil, asphalt and landfill
compactors 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 heat transfer
applications. This segment includes operating units that manufacture pumps and
other fluid handling machines, valves, cooling towers, boilers and industrial
mixers.
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 excludes special and other charges, including those recorded in cost of
products sold, general corporate expenses and corporate special charges to be
consistent with the reporting basis on which management internally evaluates
segment performance. See Note 5 to the Condensed Consolidated Financial
Statements for more detail on special and other charges by segment.
9
Financial data for our business segments are as follows:
Three months Nine months
ended September 30, ended September 30,
-------------------- --------------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues:
Technical Products and Systems $ 338.3 $ 301.5 $ 961.4 $ 761.5
Industrial Products and Services 411.7 422.7 1,226.7 989.0
Flow Technology 370.1 315.9 966.5 560.1
Service Solutions 166.1 176.6 519.6 496.6
-------- -------- -------- --------
$1,286.2 $1,216.7 $3,674.2 $2,807.2
======== ======== ======== ========
Operating Income:
Technical Products and Systems $ 59.0 $ 41.0 $ 149.6 $ 111.1
Industrial Products and Services 57.0 53.4 184.7 132.2
Flow Technology 58.1 43.0 142.6 77.6
Service Solutions 18.5 13.3 60.4 40.6
-------- -------- ------- --------
Total Segment Operating Income 192.6 150.7 537.3 361.5
General Corporate (14.8) (13.0) (42.1) (32.4)
Special and Other Charges (18.5) (4.0) (75.7) (61.4)
-------- -------- ------- --------
$ 159.3 $ 133.7 $ 419.5 $ 267.7
======== ======== ======== ========
5. SPECIAL AND OTHER CHARGES
Special and Other Charges--2002
As part of our Value Improvement Process(R), we right size and consolidate
operations to drive results. Additionally, due to our acquisition strategy, from
time to time we alter our business model to better serve customer demand, fix or
discontinue lower-margin product lines, and rationalize and consolidate
manufacturing capacity to maximize EVA(R) improvement. As a result of our
strategic review process, we recorded special charges of $63.1 and $47.9 in the
nine months ended 2002 and 2001, respectively. These special charges are
primarily for restructuring initiatives to consolidate manufacturing and sales
facilities, reduce our work force, rationalize certain product lines, and
recognize asset and goodwill impairments. Additionally, in the first nine
months, we recorded other charges to cost of products sold of $12.6 in 2002 and
$13.5 in 2001 primarily for discontinued product lines and other product changes
primarily associated with restructuring initiatives.
The purpose of our restructuring initiatives is to improve profitability,
streamline operations, reduce costs, and improve efficiency. We estimate that we
will achieve operating cost reductions in 2002 and beyond through reduced
employee and manufacturing costs and other facility overhead.
The components of the charges have been computed based on actual cash payouts,
our estimate of the realizable value of the affected tangible assets and
estimated exit costs including severance and other employee benefits based on
existing severance policies and local laws.
EITF No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)," provides specific requirements as to the appropriate
recognition of costs associated with employee termination benefits and other
exit costs. Employee termination costs are recognized when management having the
appropriate level of authority to involuntarily terminate employees approves and
commits us to the plan of termination, establishes the benefits that current
employees will receive upon termination, and prior to the date of the financial
statements, the benefit arrangement is communicated to employees. The
communication of the benefit arrangement includes sufficient detail to enable
employees to determine the type and amount of benefits they will receive if they
are terminated. Other exit costs are costs resulting from an exit plan that are
not associated with or do not benefit activities that will be continued. We
record that cost if it is not associated with or is not incurred to generate
revenues after the exit plan's commitment date, and it meets either of the
following criteria: (1) the cost is incremental to other costs that we incur in
the conduct of our activities prior to the commitment date and will be incurred
as a direct result of the exit plan, or (2) the cost represents amounts that we
will incur under a contractual obligation that existed prior to the commitment
date and will either continue after the exit plan is completed with no economic
benefit to us or be a penalty incurred by us to cancel the contractual
obligation. All employee termination and other exit costs associated with the
restructuring actions described below were accounted for in accordance with EITF
No. 94-3.
Non-cash asset impairments are accounted for in accordance with SFAS No. 144,
"Accounting for the Impairment and Disposal of Long-Lived Assets." Typically,
our non-cash asset impairments arise from business restructuring decisions that
lead to the disposition of assets no longer required in the restructured
business. For these situations, we recognize an impairment loss when the
carrying amount of an asset exceeds the sum of the cash flows expected to result
from the use and eventual disposition of the
10
asset. Realization values for assets subject to impairment testing are primarily
determined by third-party appraisals, quoted market prices or previous
experience. If an impaired asset remains in service at the decision date, the
remaining net book value is depreciated until the asset is no longer used in
operating activities. When an impaired asset is removed from service, sale of
the asset is probable, and the asset is made available for sale, depreciation of
the asset is discontinued and the asset is determined to be an asset held for
sale.
Special and other charges for the three and nine month periods, including
charges recorded in cost of products sold, ended September 30, 2002 and 2001
include the following:
Three months Nine months
ended September 30 ended September 30
------------------ ------------------
2002 2001 2002 2001
---- ---- ---- ----
Employee Benefit Costs $ 5.6 $ - $32.7 $10.8
Facility Consolidation Costs 0.3 1.3 10.5 11.5
Other Cash Costs - - 3.1 8.7
Non-Cash Asset Write-downs 12.6 2.7 29.4 30.4
----- ------ ----- -----
Total Special and Other Charges $18.5 $ 4.0 $75.7 $61.4
===== ====== ===== =====
In the third quarter of 2002, we recorded $18.5 of charges, of which $12.6 was
recorded as a component of cost of products sold. Excluding the charges recorded
in cost of products sold, $2.5 was recorded in the Technical Products and
Systems segment, $1.5 was recorded in the Industrial Products and Services
segment, $0.8 was recorded in the Flow Technology segment, and $1.1 was recorded
in the Service Solutions segment. Of the $12.6 recorded in cost of products
sold, $3.1 was recorded in Flow Technology and $9.5 was recorded in Service
Solutions.
The charges recorded in the third quarter are primarily related to employee
benefit costs for work force reductions at our dock products business and
specialty tools business, and previously announced facility consolidation
actions at our network and switching products business. In addition, the
inventory charges recorded in cost of products sold are associated with the
realignment of certain inventory related primarily to market conditions, our
decision to outsource non-core components, mechanical tool assemblies, and
portions of our air conditioning product lines and the closure of a facility.
The new restructuring initiatives announced in the third quarter of 2002
resulted in the elimination of approximately 52 hourly and 26 salaried domestic
employees.
Operating income for the nine months ended September 30, 2002 was reduced by
$75.7 of charges, primarily related to the actions described below. Of this
charge, $12.6 is recorded as a component of cost of products sold.
In the Technical Products and Systems segment, $15.6 of charges was recorded for
the nine months ended September 30, 2002. These charges related primarily to
employee benefit costs and facility consolidation costs for the announced
closure of three engineering and service facilities, as well as the
restructuring of certain sales, marketing, and administrative functions at our
network and switching products business. The affected facilities are located in
Shelton, CT, Pittsburgh, PA, and Fairfax, VA. This restructuring will result in
the consolidation of our network and switching products business research and
development functions into its headquarters in Lumberton, NJ. Substantially
completed, these restructuring actions resulted in the elimination of
approximately 172 domestic salaried employees.
In the Industrial Products and Services segment, $30.4 of charges was recorded
for the nine months ended September 30, 2002. These charges represented employee
benefit costs, facility consolidation costs, and asset impairments and are
primarily associated with the announced closure of the Milpitas, CA
manufacturing facility at our power systems business, a restructuring action at
our hydraulic systems business that will result in the exiting of certain
machining operations, and a work force reduction at our dock products business.
Currently, the impaired assets are being depreciated and will remain in service
until the first half of 2003. When completed, these restructuring actions will
result in the elimination of approximately 374 hourly and 201 salaried domestic
employees.
In the Flow Technology segment, $9.3 of charges was recorded for the nine months
ended September 30, 2002. Of these charges, $6.2 related to employee benefit
costs for work force reduction initiatives taken at our process and fluid
handling business as well as facility consolidation costs for additional
business consolidation actions taken by our valves and controls business. The
actions taken at our valves and controls business are predominantly for the
integration of existing valve businesses into our newly acquired Daniel Valve
business. These restructuring and integration initiatives resulted in the
termination of approximately 128 hourly and 38 salaried domestic employees. In
addition, $3.1 of this charge was recorded in cost of products sold for
inventory disposed of as part of our decision to discontinue a product line. In
connection with the exit of this product line, we finalized other restructuring
actions, primarily headcount reductions. The announcements to the impacted
employees will occur in October of 2002 and we will recognize the associated
costs in the fourth quarter of 2002.
In the Service Solutions segment, $11.0 of charges was recorded for the nine
months ended September 30, 2002. Of these
11
charges, $1.5 related to as-incurred exit costs associated with previously
announced business integration actions as well as employee benefit costs for a
work force reduction initiative that eliminated approximately 36 hourly domestic
employees. Of this charge, $9.5 was recorded in cost of products sold, which is
associated with the realignment of certain inventory related primarily to market
conditions, our decision to outsource non-core components, mechanical tool
assemblies, and portions of our air conditioning product lines and the closure
of a facility. In connection with these outsourcing initiatives, we have
formalized other restructuring actions, primarily headcount reductions. The
announcements to the impacted employees will occur in October of 2002 and we
will recognize the associated costs in the fourth quarter of 2002.
The Corporate special charges for the nine months ended September 30, 2002 of
$9.4 relate to the final costs to complete the relocation of our corporate
headquarters to Charlotte, NC, and the impairment of a corporate asset no longer
in use and held for sale.
Special and Other Charges--2001
In the third quarter of 2001, we recorded charges that reduced operating income
by $4.0. A special charge of $2.7 was recorded in the Technical Products and
Systems segment to write-down the value of an investment held in a third party.
We recorded $1.3 of special charges in the Industrial Products and Services
segment. These charges related primarily to previously announced plant
consolidation costs.
Operating income for the nine months ended September 30, 2001, was reduced by
charges of $61.4, $13.5 of which related to inventory write-downs recorded in
cost of products sold. These charges related 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 and Systems segment, $16.8 of charges was recorded for
the nine months ended September 30, 2001. These charges were due primarily to
work force reductions, asset impairments associated with our network and
switching products business exiting the telecom business and the impairment of
an investment held in a supplier. Of this charge, $4.9 was recorded in cost of
products sold.
In the Industrial Products and Services segment, $11.5 of charges was recorded
for the nine months ended September 30, 2001. These costs related primarily to
work force reductions, plant consolidations, asset impairments associated with
exiting a product line and the closing of a manufacturing facility in Toledo, OH
and the United Kingdom. Of this charge, $1.8 was recorded in cost of products
sold.
In the Service Solutions segment, $14.1 of charges were recorded for the nine
months ended September 30, 2001. These charges were due primarily 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 nine months ended September 30, 2001, charges of $19.0 were recorded at
the Corporate level. Of these charges, $4.1 primarily related to the abandonment
of an internet-based software system and the remaining charges of $14.9 included
costs associated with the relocation of our corporate headquarters from
Muskegon, MI to Charlotte, NC. In addition to severance, these relocation costs
included non-cancelable lease obligations, facility-holding costs and asset
impairments associated with a leased facility in Muskegon, MI.
At September 30, 2002, a total of $48.7 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 September 30, 2002:
Special and Other Charge Accruals
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 and Other Charges 32.7 10.5 3.1 46.3 $29.4 $75.7
Cash Payments (21.2) (4.4) (11.2) (36.8) ===== =====
------ ----- ------ ------
Balance at September 30, 2002 $ 28.8 $18.4 $ 1.5 $ 48.7
====== ===== ====== ======
12
6. EARNINGS PER SHARE
The following table sets forth certain calculations used in the computation of
diluted earnings per share:
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
---- ---- ---- ----
Numerator:
Net income $ 75.8 $ 59.2 $ 50.6 $ 108.0
------ ------ ------ -------
Denominator (shares in millions):
Weighted-average shares outstanding 81.968 80.178 81.954 70.420
Effect of dilutive securities:
Employee stock options and warrants 1.226 1.578 1.818 1.572
------ ------ ------ ------
Adjusted weighted-average shares and assumed conversions 83.194 81.756 83.772 71.992
====== ====== ====== ======
Stock Split
On August 28, 2002, the Board of Directors approved a two-for-one stock split of
our common stock. The stock split was payable in the form of a stock dividend
and entitled each stockholder of record at the close of business on October 1,
2002 to receive one share of common stock for every outstanding share of common
stock held on that date. The 100% stock dividend was distributed on October 24,
2002. The capital stock accounts, all share data and earnings per share data in
this report give effect to the stock split, applied retroactively, as if the
split occurred on January 1, 2001.
7. INVENTORY
Inventory consists of the following amounts (reduced when necessary to estimated
realizable values):
September 30, December 31,
2002 2001
---- ----
Finished goods $339.6 $ 265.6
Work in process 120.8 149.9
Raw material and purchased parts 224.2 224.7
------ -------
Total FIFO cost $684.6 $ 640.2
Excess of FIFO cost over LIFO inventory value (15.3) (14.7)
------ -------
Total inventory $669.3 $ 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. 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 amortization of all remaining goodwill and intangible assets
deemed to have indefinite useful lives. The pro forma impact of this change is
presented below.
13
Transitional Disclosures
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
2002 2001 2002 2001
---- ---- ---- ----
Reported net income $75.8 $59.2 $50.6 $108.0
Add back: goodwill amortization, net of tax - 12.0 - 30.1
Add back: trademarks/tradenames amortization, net of tax - 3.0 - 4.8
----- ----- ----- ------
Adjusted net income $75.8 $74.2 $50.6 $142.9
===== ===== ===== ======
Basic earnings per share:
Reported $0.92 $0.74 $0.62 $ 1.53
Add back: goodwill amortization, net of tax - 0.15 - 0.43
Add back: trademarks/tradenames amortization, net of tax - 0.04 - 0.07
----- ----- ------ ------
Adjusted earnings per share $0.92 $0.93 $0.62 $ 2.03
===== ===== ===== ======
Diluted earnings per share:
Reported $0.91 $0.72 $0.60 $ 1.50
Add back: goodwill amortization, net of tax - 0.15 - 0.42
Add back: trademarks/tradenames amortization, net of tax - 0.04 - 0.07
----- ----- ----- ------
Adjusted earnings per share $0.91 $0.91 $0.60 $ 1.99
===== ===== ===== ======
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 our automotive
filtration systems business and hydraulic systems business, both in our
Industrial Products and Services 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 our automotive filtration systems
business and our hydraulic systems 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 nine 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.
Consolidated:
Unamortized Amortized
----------- ---------
Trademarks/
Goodwill Tradenames Patents Licenses Other Total
-------- ----------- ------- -------- ----- -----
Weighted average useful life in years 9 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 245.6 19.4 15.4 4.3 4.4 289.1
Disposals (15.9) - - - - (15.9)
Impairment charge (148.6) - - - - (148.6)
-------- ------ ------ ----- ----- --------
September 30, 2002 gross balance $2,562.6 $471.4 $ 60.5 $21.0 $15.2 $3,130.7
======== ====== ====== ===== ===== ========
January 1, 2002 accumulated amortization $(2.4) $(3.1) $(1.5) $ (7.0)
Amortization* (4.2) (3.3) (1.7) (9.2)
Disposals - - - -
----- ----- ------ -------
September 30, 2002 accumulated amortization $(6.6) $(6.4) $(3.2) $ (16.2)
===== ===== ====== ========
* $3.3 has been recorded as a component of cost of products sold
14
Estimated amortization expense:
For year ended 2002 $12.0
For year ended 2003 $13.8
For year ended 2004 $12.2
For year ended 2005 $10.2
For year ended 2006 $ 7.1
Segments:
Unamortized Amortized
----------- ---------
Trademarks/
Goodwill Tradenames Patents Licenses Other Total
-------- ----------- ------- -------- ------ --------
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 69.9 8.3 (1.3) 4.3 1.5 82.7
Disposals - - - - - -
Impairment charge - - - - - -
------- ------ ----- ----- ------ --------
September 30, 2002 gross balance $ 644.3 $ 71.2 $18.0 $20.6 $ 10.5 $ 764.6
======= ====== ===== ===== ====== ========
January 1, 2002 accumulated amortization $(0.7) $(3.1) $ (1.3) $ (5.1)
Amortization* (2.0) (3.3) (0.9) (6.2)
Disposals - - - -
----- ----- ------ --------
September 30, 2002 accumulated amortization $(2.7) $(6.4) $ (2.2) $ (11.3)
===== ===== ====== ========
* $3.3 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 17.0 - - - 2.3 19.3
Disposals (15.9) - - - - (15.9)
Impairment charge (148.6) - - - - (148.6)
------- ------ ----- ----- ------ --------
September 30, 2002 gross balance $ 774.0 $158.3 $15.4 $ 0.4 $ 4.0 $ 952.1
======= ====== ===== ===== ====== ========
January 1, 2002 accumulated amortization $(0.9) $ - $ (0.2) $ (1.1)
Amortization (1.2) - (0.5) (1.7)
Disposals - - - -
----- ----- ------ --------
September 30, 2002 accumulated amortization $(2.1) $ - $ (0.7) $ (2.8)
===== ===== ====== ========
Flow Technology
January 1, 2002 gross balance $ 728.5 $180.3 $ 9.4 $ - $ 0.1 $ 918.3
Acquisitions and related adjustments 129.8 11.1 16.6 - 0.6 158.1
Disposals - - - - - -
Impairment charge - - - - - -
-------- ------ ----- ----- ------ --------
September 30, 2002 gross balance $ 858.3 $191.4 $26.0 $ - $ 0.7 $1,076.4
======= ====== ===== ===== ====== ========
January 1, 2002 accumulated amortization $(0.6) $ - $ - $ (0.6)
Amortization (0.8) - (0.3) (1.1)
Disposals - - - -
----- ----- ------ --------
September 30, 2002 accumulated amortization $(1.4) $ - $ (0.3) $ (1.7)
===== ===== ====== ========
Service Solutions
January 1, 2002 gross balance $ 257.1 $ 50.5 $ 1.0 $ - $ - $ 308.6
Acquisitions and related adjustments 28.9 - 0.1 - - 29.0
Disposals - - - - - -
Impairment charge - - - - - -
------- ------ ----- ------ ------ -------
September 30, 2002 gross balance $ 286.0 $ 50.5 $ 1.1 $ - $ - $ 337.6
======= ====== ===== ===== ====== =======
January 1, 2002 accumulated amortization $(0.2) $ - $ - $ (0.2)
Amortization (0.2) - - (0.2)
Disposals - - - -
----- ------ ------ -------
September 30, 2002 accumulated amortization $(0.4) $ - $ - $ (0.4)
===== ===== ====== =======
15
As a policy, we will conduct annual impairment testing of goodwill and
indefinite-lived intangibles during the fourth quarter. 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.
144.
9. DEBT
Our long-term debt as of September 30, 2002 and December 31, 2001 consists of
the following principal amounts:
September 30, December 31,
2002 2001
---- ----
Tranche A loan $ 331.3 $ 393.7
Tranche B loan 450.0 490.0
Tranche C loan 750.0 823.0
LYONs, net of unamortized discount of $557.1 and $574.1, respectively 852.7 835.7
Industrial revenue bond due 2002 1.0 1.0
Other borrowings 19.3 69.0
-------- --------
$2,404.3 $2,612.4
Less current maturities of long-term debt (155.8) (161.6)
-------- --------
Total long-term debt $2,248.5 $2,450.8
======== ========
Credit Facility
As of September 30, 2002, we had outstanding under our Credit Agreement:
(a) $331.3 of aggregate principal amount of Tranche A term loans,
(b) $450.0 of aggregate principal amount of Tranche B term loans, and
(c) $750.0 of aggregate principal amount of Tranche C term loans.
In addition, the Credit Facility provides for a commitment to provide revolving
credit loans of up to $600.0. As of September 30, 2002, the revolving credit
loans stand unused; however, the aggregate available borrowing capacity was
reduced by $73.4 of letters of credit outstanding as of September 30, 2002.
Restated Credit Agreement
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 of 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 recorded a charge of $10.1 associated with
the early extinguishment of debt as a result of the refinancing. This charge was
recorded as a component of interest expense. $4.8 of this charge relates to 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 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%
16
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 September 30, 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 September 30, 2002, our Consolidated
Leverage Ratio was 2.64 to 1.00 and our Consolidated Interest Coverage Ratio was
6.85 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 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.
We believe that current cash and equivalents, cash flows from operations and our
revolving credit facility will be sufficient to fund working capital needs,
planned capital expenditures, other operational cash requirements, and required
debt service obligations. We were in full compliance with all covenants included
in our capital financing instruments at September 30, 2002 and at July 25, 2002,
the date of the refinancing. We have not paid cash dividends in 2002, 2001 or
2000, and we do not currently intend to pay cash dividends on our common stock.
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);
17
(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:
February May
LYONs LYONS
-------- ------
Initial Conversion Rate (shares of common stock per LYON) 9.6232 8.8588
Initial Stock Price $50.15 $55.40
Initial Accretion Percentage 135% 120%
Accretion Percentage Decline Per Quarter 0.3125% 0.125%
Conversion Trigger Prices - For the Next Twelve Months:
2002 Fourth Quarter $83.82 $81.07
2003 First Quarter $84.19 $81.54
2003 Second Quarter $84.57 $82.01
2003 Third Quarter $84.95 $82.49
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 a total of 13.2 shares of our common
stock. 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 $0.84 and
$2.18 for the three and nine month periods ended September 30, 2002,
respectively.
Financial Derivatives
We have entered into various interest rate protection agreements ("swaps") to
reduce the potential impact of increases in interest rate floating rate
long-term debt. As of September 30, 2002, we had nine outstanding swaps with
maturities to November 2004 at rates ranging from 4.65% to 5.03% that
effectively convert $1,400.0 of our floating rate debt to a fixed rate of
approximately 6.92%. As a result of our July 2002 credit facility refinancing,
we extended the maturity of our variable rate Tranche B term loans to September
2009 and our variable rate Tranche C terms loans to March 2010. Associated with
these extended tenors, we entered into $500.0 notional of variable to fixed rate
interest rate swap agreements beginning in 2004 and maturing in the second half
of 2009 at rates ranging from 4.51% to 4.83%. Our swaps are accounted for as
cash flow hedges, and expire at various dates the longest expiring in November
2009. As of September 30, 2002, the pre-tax accumulated derivative loss recorded
in accumulated other comprehensive loss was $83.8 and a liability of $83.8 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.
In February 2002, we settled two interest rate swaps with a notional amount of
$200.0 at a cash cost of $8.3. 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
18
comprehensive income will be reclassified into earnings over the remaining
forecasted variable rate payments on the underlying debt. Through September 30,
2002, $4.4 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. In
connection with our recent credit facility refinancing in July 2002, we settled
one interest rate swap with a notional amount of $100.0 and recognized a $4.8
charge to interest expense in the third quarter of 2002. 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 swap previously
recorded as a liability and deferred loss in accumulated other comprehensive
income.
Other
As of September 30, 2002, except for the following items, 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 10-K/A: 1) $144.1 of certain standby letters of credit
outstanding, of which $73.4 reduce the available borrowing capacity on our
revolver and 2) approximately $126.8 of surety bonds. Of the total letters of
credit and surety bonds outstanding at September 30, 2002, $178.0 is commercial
bid, performance or warranty arrangements related to sales contracts with
customers of which the fees are reimbursed by the customer.
10. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) were as follows:
Three months Nine months
ended September 30, ended September 30,
------------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
Net income $ 75.8 $ 59.2 $ 50.6 $108.0
Foreign currency translation adjustments 41.5 (22.3) 37.7 (12.4)
Unrealized loss on qualifying cash flow hedges, net of related tax (19.3) (47.3) (25.5) (62.6)
SFAS 133 transition adjustment, net of related tax - - - 9.9
------ ------ ------ ------
Comprehensive income (loss) $ 98.0 $(10.4) $ 62.8 $ 42.9
====== ====== ====== ======
The components of the balance sheet caption accumulated other comprehensive loss
are as follows:
September 30, December 31,
2002 2001
---- ----
Foreign currency translation adjustments $(21.0) $ (58.7)
Unrealized losses on qualifying cash flow hedges, net of related tax (51.1) (25.6)
Minimum pension liability adjustment, net of related tax (6.2) (6.2)
------ -------
Accumulated other comprehensive loss $(78.3) $ (90.5)
====== =======
11. STOCKHOLDERS' EQUITY
On July 3, 2002, our Board of Directors amended the employment agreement of our
Chairman, President, and Chief Executive Officer by granting him 1,000,000
restricted shares of our stock at the market price of $48.85 per share pursuant
to the shareholder approved plan. The shares vest in five annual installments of
200,000 shares commencing on July 3, 2007. The grant will be fully vested on
July 3, 2011. The deferred compensation is being amortized on a straight line
basis over the vesting period.
On August 28, 2002, our Board of Directors authorized a share repurchase program
for up to $250.0. For the nine months ended September 30, 2002, we repurchased
1.6 shares of our common stock on the open market, for a total cash
consideration of $77.5. Based on our current consolidated leverage ratio of
2.64 to l.0, our credit facility allows for an additional $104.9 of share
repurchases.
On August 28, 2002, the Board of Directors approved a two-for-one stock split of
our common stock. The stock split was payable in the form of a stock dividend
and entitled each stockholder of record at the close of business on October 1,
2002 to receive one share of common stock for every outstanding share of common
stock held on that date. The 100% stock dividend was distributed on October 24,
2002. The capital stock accounts, all share data and earnings per share data in
this report give effect to the stock split, applied retroactively, as if the
split occurred on January 1, 2001.
19
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations ("MD&A")
(dollars in millions, except per share and per LYON data)
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, whereas 2001 only includes the
results of UDI from May 25, 2001. As of the second quarter 2002, we have
completed our review and determination of the fair values of the assets acquired
and liabilities assumed with the UDI acquisition.
Excluding the acquisition of UDI, during the first nine months of 2001, we
completed ten acquisitions for an aggregate purchase price of $450.8, net of
cash acquired. In the aggregate, the acquired companies had revenues of $309.4,
$52.9 and $16.7 in the twelve months prior to the respective dates of
acquisition in the Technical Products and Systems, Industrial Products and
Services and Flow Technology segments, respectively. During the first nine
months of 2002, we completed eight acquisitions for an aggregate purchase price
of $176.8, net of cash acquired. In the aggregate, the companies had revenues of
$49.3, $9.6, $272.7 and $4.8 in the twelve months prior to the respective dates
of acquisition in the Technical Products and Systems, Industrial Products and
Services, Flow Technology and Service Solutions segments, respectively. These
acquisitions are not material individually or in the aggregate. For further
discussion on acquisitions and divestitures, see Note 3 to the Condensed
Consolidated Financial Statements.
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
amortization of 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 Nine months
ended September 30, ended September 30,
----------------------- -----------------------
2002 2001 2002 2001
-------- -------- -------- --------
Revenues $1,286.2 $1,216.7 $3,674.2 $2,807.2
Gross margin 404.9 399.8 1,202.4 903.6
% of revenues 31.5% 32.9% 32.7% 32.2%
Selling, general and administrative expense 237.5 241.2 713.9 541.5
% of revenues 18.5% 19.8% 19.4% 19.3%
Goodwill/intangible amortization 2.2 20.9 5.9 46.5
Special charges 5.9 4.0 63.1 47.9
-------- -------- -------- --------
Operating income 159.3 133.7 419.5 267.7
Other income (expense), net 5.0 1.3 5.4 (7.4)
Equity earnings in joint ventures 8.6 8.5 27.2 26.9
Interest expense, net (48.6) (39.6) (124.0) (94.6)
-------- -------- -------- --------
Income before income taxes $ 124.3 $ 103.9 $ 328.1 $ 192.6
Provision for income taxes (48.5) (44.7) (128.9) (84.6)
-------- -------- -------- --------
Income before change in accounting principle $ 75.8 $ 59.2 $ 199.2 $ 108.0
Change in accounting principle (1) - - (148.6) -
-------- -------- -------- --------
Net income $ 75.8 $ 59.2 $ 50.6 $ 108.0
======== ======== ======== ========
Capital expenditures $ 18.6 $ 32.4 $ 69.7 $ 113.4
Depreciation and amortization 37.2 58.3 101.4 124.1
20
(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.
SEGMENT RESULTS OF OPERATIONS: Three months Nine months
ended September 30 ended September 30
---------------------- ----------------------
2002 2001 2002 2001
-------- -------- -------- --------
Revenues:
Technical Products and Systems $ 338.3 $ 301.5 $ 961.4 $ 761.5
Industrial Products and Services 411.7 422.7 1,226.7 989.0
Flow Technology 370.1 315.9 966.5 560.1
Service Solutions 166.1 176.6 519.6 496.6
-------- -------- -------- --------
$1,286.2 $1,216.7 $3,674.2 $2,807.2
======== ======== ======== ========
Operating Income:
Technical Products and Systems $ 59.0 $ 41.0 $ 149.6 $ 111.1
Industrial Products and Services 57.0 53.4 184.7 132.2
Flow Technology 58.1 43.0 142.6 77.6
Service Solutions 18.5 13.3 60.4 40.6
-------- -------- -------- --------
Total Segment Operating Income 192.6 150.7 537.3 361.5
General Corporate (14.8) (13.0) (42.1) (32.4)
Special and Other Charges (18.5) (4.0) (75.7) (61.4)
-------- -------- -------- --------
$ 159.3 $ 133.7 $ 419.5 $ 267.7
======== ======== ======== ========
FIRST NINE MONTHS OF 2002 COMPARED TO THE FIRST NINE MONTHS OF 2001
Revenues -- In the first nine months of 2002, revenues of $3,674.2 increased by
$867.0, or 30.9%, from $2,807.2 in 2001. By segment, revenues increased by 26.3%
in the Technical Products and Systems segment, 24.0% in the Industrial Products
and Services segment, 72.6% in the Flow Technology segment and 4.6% 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 nine months of 2001
only included four months of the UDI businesses. Excluding the impact of all
acquisitions or divestitures, the primary businesses that experienced growth in
the period included our high-tech die-casting and machinery equipment businesses
in the Industrial Products and Services segment, and our TV and radio
transmission systems, building life-safety systems and security and
investigation 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 systems, dock products, hydraulic
systems and industrial and residential heating and ventilation businesses, which
affected the Industrial Products and Services segment. A reduced demand for
process and air filtration, dehydration equipment and process and fluid handling
equipment influenced the Flow Technology segment, while a decline in demand for
network and switching products and cable location and inspection systems
businesses, impacted our Technical Products and Services segment, along with
lower revenues in our Service Solutions segment.
Operating Income -- Excluding special and other charges, operating income in the
first nine months of 2002 was $495.2 compared to $329.1 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, the cessation of the amortization of
goodwill and indefinite lived intangible assets with the adoption of SFAS No.
142 and a more favorable product mix at our Service Solutions segment. In the
Industrial Products and Services segment, we experienced positive operating
margins, as a percentage of revenues, in our high-tech die-casting business, due
to higher revenues and operating efficiencies, and our machinery equipment
businesses due primarily to progressive cost reduction actions. Our power
systems, dock products, and hydraulic systems businesses all experienced lower
operating margins in the period due primarily to lower revenues. In the Flow
Technology segment, positive operating margins were experienced in our valves
and controls, cooling tower and process and fluid handling equipment businesses,
due primarily to cost reductions achieved during the last twelve months. The
Technical Products and Services segment recorded favorable margins in the TV and
radio transmission systems and security and investigation business, due
primarily to stronger revenues. Service Solutions recorded higher margins due to
the integration of UDI businesses and a favorable product mix.
PRO FORMA CONSOLIDATED RESULTS OF OPERATIONS
Unaudited pro forma results of operations for the three and nine month periods
ended September 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.
21
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. Consolidated interest expense has been computed on assumptions that the
refinancing of UDI debt occurred entirely under the credit agreement, in place
as of the merger, 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 and other charges,
including those recorded in cost of products sold, and unusual items as well as
increases in foreign income tax rates due to the acquisition.
Three months Nine months
ended September 30, ended September 30,
------------------------- ------------------------
2002 2001 2002 2001
Actual Pro Forma Actual Pro Forma
-------- --------- -------- ---------
Revenues $1,286.2 $1,216.7 $3,674.2 $3,701.6
Gross margin 404.9 399.8 1,202.4 1,144.5
% of revenues 31.5% 32.9% 32.7% 30.9%
Selling, general and administrative expense 237.5 241.2 713.9 747.5
% of revenues 18.5% 19.8% 19.4% 20.2%
Goodwill/intangible amortization 2.2 1.7 5.9 4.1
Special charges 5.9 4.0 63.1 47.9
-------- --------- -------- ---------
Operating income 159.3 152.9 419.5 345.0
Other income (expense), net 5.0 1.3 5.4 (7.1)
Equity earnings in joint ventures 8.6 8.5 27.2 26.9
Interest expense, net (48.6) (39.6) (124.0) (117.2)
-------- --------- -------- ---------
Income before income taxes $ 124.3 $ 123.1 $ 328.1 $ 247.6
Provision for income taxes (48.5) (49.0) (128.9) (94.5)
-------- --------- -------- ---------
Income before change in accounting principle $ 75.8 $ 74.1 $ 199.2 $ 153.1
======== ========= ======== =========
Capital expenditures $ 18.6 $ 32.4 $ 69.7 $ 150.6
Depreciation and amortization 37.2 35.7 101.4 111.1
THIRD QUARTER 2002 COMPARED TO PRO FORMA THIRD QUARTER 2001
Revenues -- In the third quarter of 2002, revenues increased by $69.5, or 5.7%,
to $1,286.2 from $1,216.7 in 2001. By segment, reported revenues increased by
12.2% in the Technical Products and Systems segment and 17.2% in the Flow
Technology segment. Revenues decreased in the Industrial Products and Services
and Service Solutions segments by 2.6% and 5.9%, respectively. Organic revenues,
which are revenues excluding acquisitions or dispositions, declined 0.6% in the
third quarter of 2002 compared to the same period in 2001. Primary businesses
that experienced organic revenue growth in the third quarter are summarized
below.
Definition of forecasted trends: `Soften' - Future organic revenues are expected
to have an unfavorable trend compared to the same period in the prior year;
`Continue' - Future trends are expected to be similar compared to the same
period in the prior year; `Strengthen' - Future organic revenues are expected to
have a favorable trend compared to the same period in the prior year.
Forecasted
Segment Business Trend Comments
------- -------- ---------- --------
Technical Products and Systems Building life-safety Continue Business is expected to realize mid-single digit
systems organic revenue increases for the year.
TV and radio Continue Business is expected to realize mid-single digit
transmission systems organic revenue increases for the year driven by the
High-Definition TV rollout in the U.S.
Automated fare Soften Demand for automated fare collection systems is
collection systems highly correlated to contract timing on large
municipal contracts, which causes fluctuations from
quarter to quarter.
Industrial Products and Services Machinery equipment Continue Our machinery product lines have experienced gains in
market share in the first nine months of 2002. These
trends are expected to continue with low single digit
organic
22
growth expected for the year. The compaction business
is highly cyclical by quarter, with the fourth
quarter traditionally the lowest revenue period in
the year.
High-tech die Continue Business is expected to realize high single digit
castings organic growth for the year.
Flow Technology Process and fluid Continue Demand for analyzers and sanitary process equipment
handling equipment has offset a reduction in demand for mixers. This
trend is expected to continue for the balance of the
year.
Cooling towers Continue Low single digit organic revenue growth is expected in
2002. Increased international demand has offset
declining demand fordomestic power generation products.
Primary businesses that experienced organic revenue declines in the third
quarter are summarized below.
Definition of forecasted trends: `Soften' - Future organic revenues are expected
to have an unfavorable trend compared to the same period in the prior year;
`Continue' - Future trends are expected to be similar compared to the same
period in the prior year; `Strengthen' - Future organic revenues are expected to
have a favorable trend compared to the same period in the prior year.
Forecasted
Segment Business Trend Comments
------- -------- ---------- --------
Technical Products and Systems Network and switching Continue Demand and pricing behavior of storage networking
products customers is expected to remain below prior year
levels through 2002.
Cable location and Continue Demand for telecommunication line management systems
inspection systems is expected to remain below prior year levels through
2002.
Industrial Products and Services Power systems Soften Power generation end markets continue to experience
reduced demand and pricing pressures. Revenues from
large power transformers are expected to decline in
the early part of 2003.
Dock products Continue Organic revenues have improved from double-digit
declines in the first half of 2002 to single digit
declines in the third quarter, which are expected to
continue for non-residential construction markets.
Hydraulic systems Continue Softness generally driven by reduced industrial demand.
Flow Technology Compressed air Continue Demand for short-cycle products in power and industrial
filtration and markets are expected to remain.
dehydration
equipment
Cast iron boilers Strengthen Organic decline in the quarter expected to be temporary
with low single digit organic revenue growth expected
for the entire 2002 year.
Service Solutions OEM dealer and Continue/ The primary decline in the third quarter was driven by
aftermarket tools and Strengthen the demand for aftermarket handheld diagnostic
services equipment. While the market for OEM dealer and
aftermarket tools remains, when compared to a reduced
2001, higher revenues are expected in the fourth
quarter.
23
Gross margin -- In the third quarter, gross margin decreased from 32.9% in 2001
to 31.5% in 2002. The decrease was primarily due to a $12.6 charge associated
with inventory disposals, lower pension income in the period, an unfavorable
product mix and lower revenues at our Service Solutions segment and the
acquisition of Balcke Cooling Products Group ("Balcke"), which has lower gross
profit margins than our other businesses. In the third quarter, we recorded
$12.6 of other charges associated with inventory disposals for realignment of
certain inventory related primarily to our decision to exit certain product
lines, outsource non-core components, mechanical tool assemblies and portions of
our air conditioning product lines and the closure of a facility.
Selling, general, and administrative expense ("SG&A") -- In the third quarter,
SG&A declined from $241.2 in 2001 to $237.5 in 2002, a $3.7 decline. The
improvement is driven primarily by cost reduction and containment actions
implemented throughout the company.
Special and other charges -- In the third quarter of 2002, we recorded charges
of $18.5, which includes $12.6 recorded in cost of products sold. These charges
are primarily related to employee benefit costs for work force reductions at our
dock products business and specialty tools business, and previously announced
facility consolidation actions at our network and switching products business.
In addition, the inventory charges recorded in cost of products sold is
associated with the realignment of certain inventory related primarily to our
decision to exit certain product lines, outsource non-core components,
mechanical tool assemblies, and portions of our air conditioning product lines
and the closure of a facility. The new restructuring initiatives announced in
the third quarter of 2002 resulted in the elimination of approximately 52 hourly
and 26 salaried domestic employees. In the third quarter of 2001, we recorded
charges of $4.0 associated with restructuring actions and asset impairments.
These charges are related primarily to facility consolidations and the write
down in value of an investment held in a third party.
Other income, net -- In the third quarter of 2002, other income was $5.0
compared to other income of $1.3 in 2001. In 2002, other income primarily
included a $6.3 gain on the settlement of a contract dispute.
Interest expense, net -- In the third quarter of 2002, interest expense was
$48.6 compared to $39.6 in 2001. In the quarter, we recorded $10.1 of expense
associated with the credit refinancing completed on July 25, 2002. $5.3 of the
charge represents fees associated with the early extinguishment of debt and $4.8
related to 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.
Income taxes -- The effective income tax rate for the third quarter of 2002 was
39.0%. This is higher than the statutory income tax rate due primarily to lower
marginal state tax rates on special charges taken during the period.
FIRST NINE MONTHS OF 2002 COMPARED TO PRO FORMA FIRST NINE MONTHS OF 2001
Revenues -- In the first nine months of 2002, revenues decreased by $27.4, or
0.7%, to $3,674.2 from $3,701.6 in 2001. Organic revenues, which are revenues
excluding acquisitions or dispositions, declined 3.6% in the first nine months
of 2002 compared to the same period in 2001. Excluding the impact of all
acquisitions and divestitures, the primary businesses that experienced growth in
the period included our high-tech die-casting and machinery equipment businesses
in the Industrial Products and Services segment, and our TV and radio
transmission systems, building life-safety systems and security and
investigation businesses in the Technical Products and Systems segment. A
decline in revenue, excluding the impact of any acquisitions and divestitures,
resulted from lower demand at our power systems, dock products, hydraulic
systems and industrial and residential heating and ventilation businesses, which
affected the Industrial Products and Services segment, a decline in demand for
mixers, air filtration and dehydration equipment and process and fluid handling
equipment, 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.
Gross margin -- In the first nine months, gross margin increased from 30.9% in
2001 to 32.7 % 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.
In the third quarter, we recorded $12.6 of other charges associated with
inventory disposals for realignment of certain inventory related primarily to
our decision to exit certain product lines, outsource non-core components,
mechanical tool assemblies and portions of our air conditioning product lines
and the closure of a facility. In the second quarter of 2001, we recorded a
charge of $13.5 associated with the discontinuance of certain telecommunication
products at our network and switching products business.
Selling, general, and administrative expense ("SG&A") -- In the first nine
months, SG&A declined from $747.5 in 2001 to $713.9 in 2002, a $33.6 decline.
The improvement is driven primarily by cost reduction and containment actions
implemented throughout the company.
Special and other charges -- In the first nine months of 2002, we recorded
charges of $75.7, which includes $12.6 recorded in cost of products sold. Of
this amount, $15.5 was recorded in the Technical Products and Systems segment,
$30.2 was recorded in the Industrial Products and Services segment, $9.0 was
recorded in the Flow Technology segment, $10.9 was recorded in the Service
Solutions segment, and $10.1 was recorded at Corporate. These charges are
primarily associated with facility closures and work force reductions at our
power systems business and network and switching products business, exiting
certain machining operations at our hydraulic systems business, charges
associated with the integration of UDI, the impairment of a corporate asset held
for sale, and the completion of the relocation of our corporate headquarters to
Charlotte, NC. Although an increasing demand for energy and an aging domestic
electrical grid present good longer-term prospects for our power systems
business, current conditions indicate intermediate challenges in demand and
pricing for power related products. Accordingly, our power systems business is
closing its Milpitas, CA manufacturing facility and moving capacity for large
power transformers to
24
Waukesha, WI. Our network and switching products business is closing three
engineering and service facilities, restructuring certain sales, marketing and
administrative functions, and consolidating the research and development
function to its headquarters in Lumberton, NJ. Additionally, the charges
recorded in cost of products sold primarily relate to the realignment of certain
inventory related primarily to market conditions, our decision to exit certain
product lines, outsource non-core components, mechanical tool assemblies, and
portions of our air conditioning product lines and the closure of a facility. In
the first nine months of 2001, we recorded charges of $61.4, which includes
$13.5 recorded as a component of cost of products sold. Of this amount, $16.8
was recorded in the Technical Products and Systems segment, $11.5 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 associated primarily with work force reductions, discontinuance of certain
product lines, the consolidation of facilities and charges associated with the
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. The purpose of our restructuring
initiatives is to improve profitability, streamline operations, reduce costs,
and improve efficiency. We estimate that we will achieve operating cost
reductions in 2002 and beyond through reduced employee and manufacturing costs
and other facility overhead. The estimated period in which we realize savings on
our cash special charges is on average approximately twelve months from the date
of completion. For special charges incurred in the first nine months of this
year, we estimate that costs savings in the next twelve months following the
date of completion will be approximately $46.0 per year. Estimated costs savings
will be realized in cost of products sold and selling, general, and
administrative expenses.
Other (expense) income, net -- In the first nine months of 2002, other income
was $5.4 compared to expense of $7.1 in 2001. In 2001, other expense primarily
includes losses on the disposal of businesses. On May 18, 2001, we sold our
electric motor product line and recorded a loss of $11.8. In April 2001, UDI
sold a submersible pump product line and recorded a loss of $4.0. In March 2001,
UDI sold other operating assets for a gain of $4.3. In 2002, other income
primarily includes a $6.3 gain on the settlement of a contract dispute.
Interest expense, net -- In the first nine months of 2002, interest expense was
$124.0 compared to $117.2 in 2001. Excluding the impact of the $10.1 charge
associated with the credit refinancing completed on July 25, 2002, interest
expense was lower by $3.3.
Income taxes -- The effective income tax rate for the first nine months of 2002
was 39.3%. This is higher than the statutory income tax rate due primarily 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 Nine months
ended September 30, ended September 30,
------------------- -------------------
2002 2001 2002 2001
Actual Pro Forma Actual Pro Forma
------ --------- ------ ---------
Revenues:
Technical Products and Systems $ 338.3 $ 301.5 $ 961.4 $ 825.1
Industrial Products and Services 411.7 422.7 1,226.7 1,380.0
Flow Technology 370.1 315.9 966.5 947.0
Service Solutions 166.1 176.6 519.6 549.5
-------- -------- -------- --------
$1,286.2 $1,216.7 $3,674.2 $3,701.6
======== ======== ======== ========
Operating Income:
Technical Products and Systems $ 59.0 $ 44.8 $ 149.6 $ 119.3
Industrial Products and Services 57.0 60.8 184.7 176.7
Flow Technology 58.1 46.7 142.6 95.5
Service Solutions 18.5 17.6 60.4 57.3
-------- -------- -------- --------
Total Segment Operating Income 192.6 169.9 537.3 448.8
General Corporate (14.8) (13.0) (42.1) (42.4)
Special and Other Charges (18.5) (4.0) (75.7) (61.4)
-------- -------- -------- --------
$ 159.3 $ 152.9 $ 419.5 $ 345.0
======== ======== ======== ========
25
THIRD QUARTER 2002 COMPARED TO PRO FORMA THIRD QUARTER 2001
Technical Products and Systems
Revenues -- Revenues in the third quarter of 2002 increased to $338.3 from
$301.5 in the third quarter of 2001, an increase of $36.8. The increase was due
to the acquisition of Kendro Laboratory Products, L.P. in July 2001 and an
increase in organic revenues of 3.6% due primarily to growth in TV and radio
transmission systems, building life-safety systems and automated fare collection
systems, offset by a decline in demand for network and switching products for
storage and data networks and telecommunication line management system products.
Operating Income -- Operating income as a percentage of revenue increased from
14.9% in 2001 to 17.4 % in 2002. Each business reported higher operating margins
in the quarter led by improvements at our life sciences business due to
integration cost savings from the acquisition of Kendro Laboratory Products,
L.P. Our TV and radio transmission systems and automated fare collection systems
businesses each recorded improved margins primarily from higher revenues in the
quarter.
Industrial Products and Services
Revenues -- In the third quarter, revenues decreased from $422.7 in 2001 to
$411.7 in 2002. Organic revenues declined 0.3% due primarily to a decline in
demand for power transformers, dock equipment, and medium and high-pressure
hydraulic equipment. Revenue declines were partially offset by the performance
of our high-tech die-casting business, which continued to experience strong
growth, and our machinery equipment business, as these product lines continued
to gain market share during the quarter. Early in the fourth quarter, we have
sold one of our machinery product lines, which had revenues less than 1% of
total condensed consolidated revenues.
Operating Income -- Operating income as a percentage of revenues was 13.8%
compared to 14.4% in 2001. Our machinery equipment, automotive filtration
systems and heating and ventilation businesses all experienced moderate margin
improvements from cost reduction actions taken in the last twelve months. Our
high-tech die casting business also reported stronger margins due to higher
revenues and operating efficiencies in the period. However, these improvements
were more than offset by lower margins in our power systems and dock products
businesses due primarily to lower volumes and pricing pressures.
On July 8, 2002, a labor contract involving hourly employees at our aerospace
components business expired without resolution resulting in an employee strike.
The labor contract dispute affects 177 employees. In the quarter, we recorded
$2.5 of incremental labor, security and other consulting costs associated with
the labor contract dispute. Based on current information, we believe that it is
reasonably possible that the contract will remain unresolved in the foreseeable
future. For the duration of the strike, we expect to incur incremental costs
consistent with the amount recorded in the third quarter.
Flow Technology
Revenues -- Revenues in the third quarter of 2002 increased to $370.1 from
$315.9 in the third quarter of 2001. The increase is primarily due to the
acquisition of Balcke. Balcke 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 and will be integrated into our cooling
tower business. Organic revenues declined 2.0% due primarily to a decline in
demand for air filtration and dehydration equipment and cast iron boilers.
Revenue declines were partially offset by strong demand for our process and
fluid handling equipment and our cooling tower products.
Operating Income -- Third quarter operating income increased 24.4% to $58.1 in
2002. Operating income as a percentage of revenues was 15.7% in 2002 compared to
14.8% in 2001. Operating income improved due to restructuring initiatives and
integration actions at former UDI businesses, particularly at our process and
fluid handling equipment and valves and controls businesses.
Service Solutions
Revenues -- In the third quarter of 2002, revenues decreased to $166.1 from
$176.6 in the third quarter of 2001. Organic revenues declined by approximately
5.9% in the quarter.
Operating Income -- Operating income as a percentage of revenues increased from
10.0% in 2001 to 11.1% in 2002. The increase in operating margins was due
primarily 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.
26
FIRST NINE MONTHS OF 2002 COMPARED TO PRO FORMA FIRST NINE MONTHS OF 2001
Technical Products and Systems
Revenues -- Revenues in the first nine months of 2002 increased to $961.4 from
$825.1 in the first nine months of 2001, an increase of $136.3. The increase was
due to the acquisition of Kendro Laboratory Products, L.P. in July 2001. Organic
revenues declined 2.8% due primarily to a decline in demand for network and
switching products for storage and data networks and telecommunication systems
businesses. The primary businesses that experienced growth in the period
included our TV and radio transmission systems, building life-safety systems and
security and investigations businesses.
Operating Income -- Operating income as a percentage of revenue improved from
14.5% in 2001 to 15.6% in 2002. Improvement in operating margins was due
primarily to cost reduction actions, mainly in the acquired UDI businesses,
higher revenues largely driven from acquisitions in the segment and an improved
product mix. Unfavorable factors impacting 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 had lower average margins than the existing technology
products and systems businesses.
Industrial Products and Services
Revenues -- In the first nine months, revenues decreased from $1,380.0 in 2001
to $1,226.7 in 2002. The decrease was due primarily to the divestiture, on May
31, 2001, of the door products business that was contributed to a joint venture
with Assa Abloy AB, and the sale of our electric motor product line on May 18,
2001. Organic revenues declined 2.7% due primarily to a decline in demand for
power transformers, dock equipment, medium and high-pressure hydraulic
equipment, and industrial and residential heating and ventilation units. Revenue
declines were partially offset by our high-tech die-casting business, which
continued to experience strong organic growth, and our machinery equipment
business as these product lines continued to gain market share. Early in the
fourth quarter, we have sold one of our machinery product lines, which had
revenues less than 1% of total condensed consolidated revenues.
Operating Income -- Operating income as a percentage of revenues improved from
12.8% in 2001 to 15.1% 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 nine months of 2002 increased to $966.5 from
$947.0 in the first nine months of 2001. The increase is due primarily to the
acquisition of Balcke. Balcke 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 and will be integrated into our cooling
tower business. Offsetting this acquisition was the divestiture of our petroleum
pump product lines, which was completed in the third quarter of 2001, and a
decline in organic revenues. Organic revenues declined 4.3% primarily due to a
decline in demand for air filtration and dehydration equipment and process and
fluid handling equipment. Revenue declines were partially offset by strong
demand for our cooling tower and boiler products.
Operating Income -- Operating income for the first nine months increased 49.3%
to $142.6 in 2002. Operating income as a percentage of revenues was 14.8% in
2002 compared to 10.1% 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 nine months of 2002, revenues decreased to $519.6 from
$549.5 in the first nine months of 2001. Organic revenues declined 5.4% due to
lower OEM dealer tool orders in the first quarter and reduced demand for
aftermarket handheld diagnostic equipment in the third quarter of 2002.
Operating Income -- Operating income as a percentage of revenues increased from
10.4% in 2001 to 11.6% 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.
27
Cash Flow
Nine months ended September 30,
-------------------------------
2002 2001
---- ----
Cash flows from (used in):
Operating activities $ 271.3 $ 236.6
Investing activities (191.9) (469.9)
Financing activities (268.0) 500.1
------- -------
Net change in cash balances $(188.6) $ 266.8
======= =======
Operating Activities -- In the first nine months of 2002, cash flow from
operating activities increased by $34.7 from the first nine months of 2001.
Operating cash flow in the first nine 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, measured
as a percent of revenues, primarily in our Service Solutions segment, process
and fluid handling equipment business and our machinery equipment businesses.
Operating cash flows included the payment of $71.9 of cash restructuring charges
in 2002 compared to $25.5 in 2001. This increase is due primarily to
restructuring actions associated with the integration of UDI as well as the
completion of actions initiated in the fourth quarter of 2001 and the first half
of 2002.
Investing Activities -- In the first nine months of 2002 we used $191.9 of cash
in investing activities compared to a use of $469.9 in 2001. In 2002, we used
$148.4 of cash to acquire eight companies; whereas, in 2001, we used $450.8 of
cash to acquire ten companies, which included $320 for the acquisition of
Kendro. . In addition, in 2002, we used $14.4 of common stock for certain
acquisitions. Capital expenditures were $69.7 in the first nine months of 2002
compared to $113.4 during the same period in 2001. The lower capital
expenditures in 2002 was due primarily to a disciplined capital containment
program to reduce capital spending in businesses that are experiencing
intermediate reductions in organic revenues. In the first nine months of 2002,
proceeds from investing activities were $29.3, which includes $17.2 for the sale
of one of our material handling product lines. Proceeds from investing
activities in the first nine months of 2001 were $133.7 higher than the same
period in 2002, primarily as a result of the divestiture of GS Electric in the
third quarter of 2001, as well as cash proceeds obtained from the sale of
certain businesses and assets acquired in the UDI acquisition.
Financing Activities -- In the first nine months of 2002, cash flows used in
financing activities were $268.0 compared to cash flows from financing
activities of $500.1 in 2001. In the first nine months of 2002, we paid down
$230.8 of debt, including the debt refinancing completed on July 25, 2002, and
received $72.8 of cash for common stock issued under stock incentive programs
and the exercise of stock warrants. In the first nine months of 2001, cash flow
from financing activities reflects net proceeds of $471.5 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 credit facility
availability, as of September 30, 2002:
Available
Total Amount Credit
Commitment Outstanding Facility
---------- ----------- --------
Revolving loan (1) $ 600.0 $ - $526.6
Tranche A loan 331.3 331.3 -
Tranche B loan 450.0 450.0 -
Tranche C loan 750.0 750.0 -
LYONs, net of unamortized discount of $557.1 852.7 852.7 -
Industrial revenue bond due 2002 1.0 1.0 -
Other borrowings 19.3 19.3 -
-------- -------- ------
Total $3,004.3 $2,404.3 $526.6
======== ======== ======
(1) Decreased by $73.4 of certain facility letters of credit outstanding at
September 30, 2002, which reduce the credit facility availability.
Our credit facility is secured by substantially all of our assets and our
domestic subsidiaries' assets (excluding 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.
Restated Credit Agreement
On July 25, 2002, we refinanced our existing Tranche B and Tranche C term loans
and amended and restated our Credit
28
Agreement ("Restated Credit Agreement"). The primary purpose of the refinancing
and amendment of 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 recorded a charge of $10.1 associated with
the early extinguishment of debt as a result of the refinancing. This charge was
recorded as a component of interest expense. $4.8 of this charge relates to 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 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 September 30, 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 September 30, 2002, our Consolidated
Leverage Ratio was 2.64 to 1.00 and our Consolidated Interest Coverage Ratio was
6.85 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 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.
We believe that current cash and equivalents, cash flows from operations and our
revolving credit facility will be sufficient to fund working capital needs,
planned capital expenditures, other operational cash requirements and required
debt service obligations. We were in full compliance with all covenants included
in our capital financing instruments at September 30, 2002 and at July 25, 2002,
the date of the refinancing. We have not paid cash dividends in 2002, 2001 or
2000, and we do not currently
29
intend to pay cash dividends on our common stock.
Other Financing Agreements
Our machinery equipment 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 $34.0 had been sold under the agreement
at September 30, 2002. The agreement continues on an evergreen revolving basis
unless we provide a three month notice under the agreement to discontinue the
facility. We expect to utilize the agreement in the foreseeable future. If we
did not renew the contract, the impact on our financial condition or cash flows
would not be material. Previously, our compaction equipment business 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
required debt service obligations. We were in full compliance with all covenants
included in our capital financing instruments at September 30, 2002. We have not
paid cash dividends in 2002, 2001, or 2000 and we do not intend to pay cash
dividends on our common stock. As of September 30, 2002, except for the
following items, 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: 1) $144.1 of certain
standby letters of credit outstanding, of which $73.4 reduce the available
borrowing capacity on our revolver and 2) approximately $126.8 of surety bonds.
Of the total letters of credit and surety bonds outstanding at September 30,
2002, $178.0 is commercial bid, performance or warranty arrangements related to
sales contracts with customers of which the fees are reimbursed by the customer.
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.
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 counter
parties to our interest rate protection agreements, but have no other
off-balance-sheet credit risk of accounting loss. We anticipate, however, that
counter parties 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
counter parties.
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.
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.
30
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:
February May
LYONs LYONS
----- -----
Initial Conversion Rate (shares of common stock per LYON) 9.6232 8.8588
Initial Stock Price $50.15 $55.40
Initial Accretion Percentage 135% 120%
Accretion Percentage Decline Per Quarter 0.3125% 0.125%
Conversion Trigger Prices - For the Next Twelve Months:
2002 Fourth Quarter $83.82 $81.07
2003 First Quarter $84.19 $81.54
2003 Second Quarter $84.57 $82.01
2003 Third Quarter $84.95 $82.49
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 13.2 shares of our common stock 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 $0.84 and $2.18 for
the three and nine month periods ended September 30, 2002, respectively.
Financial Derivatives
We have entered into various interest rate protection agreements ("swaps") to
reduce the potential impact of increases in interest rate floating rate
long-term debt. As of September 30, 2002, we had nine outstanding swaps with
maturities to November 2004 at rates ranging from 4.65% to 5.03% that
effectively convert $1,400.0 of our floating rate debt to a fixed rate of
approximately 6.92%. As a result of our July 2002 credit facility refinancing,
we entended the maturity of our variable rate Tranche B term loans to September
2009 and our variable rate Tranche C terms loans to March 2010. Associated with
these extended tenors, we entered into $500.0 notional of variable to fixed rate
interest rate swap agreements beginning in 2004 and maturing in the second half
of 2009 at rates ranging from 4.51% to 4.83%. Our swaps are accounted for as
cash flow hedges, and expire at various dates the longest expiring in November
2009. As of September 30, 2002, the pre-tax accumulated derivative loss recorded
in accumulated other comprehensive loss was $83.8 and a liability of $83.8 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.
31
In February 2002, we settled two interest rate swaps with a notional amount of
$200.0 at a cash cost of $8.3. 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 September 30, 2002, $4.4 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. In connection with our
recent credit facility refinancing in July 2002, we settled one interest rate
swap with a notional amount of $100.0 and recognized a $4.8 charge to interest
expense in the third quarter of 2002. 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 swap previously recorded as a liability and
deferred loss in accumulated other comprehensive income.
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 limitations on the ability
to sell or rent that property or to borrow funds using that property as
collateral. Under certain of these laws, ordinances or regulations, a party that
disposes of hazardous substances or wastes at a third party disposal facility
may also become a responsible party required to share in the costs of site
investigation and remediation. In connection with our acquisitions and
divestitures, we may assume or retain significant environmental liabilities. In
particular, we assumed additional environmental liabilities in connection with
the UDI acquisition. Although we perform extensive due diligence with respect to
acquisitions, divestitures, and continuing operations, there may be
environmental liabilities of which we are not aware. 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, we may
become subject to significant claims of which we are unaware of currently or the
claims that we are aware of may result in our incurring a significantly greater
liability than we anticipate. 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. Our
estimates are primarily based on investigations and remediation plans
established by independent consultants and regulatory agencies. Accordingly, our
estimates may change based on future developments including new or changes in
environmental laws or policies, a difference in costs required to complete
anticipated actions from estimates provided, future findings of investigation or
remediation actions, or alteration to the expected remediation plans. It is our
policy to realize a change in estimate one it becomes probable and can be
reasonably estimated. We do not discount environmental or other legal
32
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 resolution resulting in an
employee strike. The labor contract dispute affects 177 employees. In the third
quarter of 2002, we recorded $2.5 of incremental labor, security and other
consulting costs associated with the labor contract dispute. Based on current
information, we believe that it is reasonably possible that the contract will
remain unresolved in the foreseeable future. For the duration of the strike, we
expect to incur incremental costs consistent with the amount recorded in the
third quarter.
On July 3, 2002, our Board of Directors amended the employment agreement of our
Chairman, President, and Chief Executive Officer by granting him 1,000,000
restricted shares of our stock at the market price of $48.85 per share pursuant
to the shareholder approved plan. The shares vest in five annual installments of
200,000 shares commencing on July 3, 2007. The grant will be fully vested on
July 3, 2011. If the grant of shares had been awarded on January 1, 2002, the
impact on diluted income per share of common stock for the entire year would be
approximately $0.04 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,
NC, 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. At the completion of the program, we had made
relocation home loans to 37 employees, including loans to four of our executive
officers, with an aggregate principal amount of $7.0.
Stock Split -- On August 28, 2002, the Board of Directors approved a two-for-one
stock split of our common stock. The stock split was payable in the form of a
stock dividend and entitled each stockholder of record at the close of business
on October 1, 2002 to receive one share of common stock for every outstanding
share of common stock held on that date. The 100% stock dividend was distributed
on October 24, 2002. The capital stock accounts, all share data and all earnings
per share data in this report give effect to the stock split, applied
retroactively, as if the split occurred on January 1, 2001.
Stock Buyback -- On August 28, 2002, our Board of Directors authorized a share
repurchase program for up to $250.0. Since the beginning of the year and through
November 8, 2002, we have repurchased 3.6 shares of our common stock on the open
market, for a total cash consideration of $172.9, of which 1.6 shares were
purchased during the third quarter. Based on our current consolidated leverage
ratio of 2.64 to 1.0, our credit facility allows for an additional $104.9 of
share repurchases.
Inrange Technologies 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 November 8, 2002, Inrange has repurchased $12.6 of common stock
under this program. These share repurchases are reflected as financing
activities in our Condensed Consolidated Statement of Cash Flows.
Pension Plans -- At December 31, 2001 our pension plans had plan assets in
excess of plan obligations of approximately $86.1. This over-funded position
results in pension income as the market value of the plans' assets exceeded the
expected costs associated with annual employee service. In the first nine months
of 2002, we recorded net pension income of $19.9 compared to $27.8 in the first
nine months of 2001.
The funded status of our pension plans is dependent upon many factors, including
returns on invested assets and the level of market interest rates. The recent
dramatic declines in the performance of the U.S. financial markets coupled with
declines in long-term interest rates have had a negative impact on the funded
status of our primary domestic pension plans. As a result of these factors we
expect that pension income will be significantly lower next year and in the
near-term. Additionally, it is likely that at December 31, 2002 we will be
required to recognize a minimum pension liability and transfer the prepaid
pension asset, which was recorded as a result of the historical over-funded
position at December 31, 2001, after tax to Other Comprehensive Income (Loss) in
the Consolidated Statement of Shareholders' Equity. Based on data available at
September 30, 2002, the non-cash Other Comprehensive Loss would be approximately
$219.5 and would be recorded in the fourth quarter of 2002. This loss would not
impact reported net income and may vary based on asset performance and final
actuarial assumptions. Further, in future periods the loss is subject to change
based on market performance or interest rate changes or the loss would be
required to be reversed in the event that either market performance of plan
assets improves or interest rates increase.
33
The final measurement of the plans' funded status will be determined in the
fourth quarter of 2002 and will be affected by the performance of U.S. financial
markets, performance of plan assets, and the level of market interest rates at
December 31, 2002. Regardless of the outcome, at this time we do not expect to
make any regulatory mandated plan contributions for our primary domestic pension
plans in 2003. All other required contributions to other pension plans are
expected to be immaterial.
There can be no assurance that future periods will include similar pension
funding status, net pension income or regulatory mandated plan contributions.
Significance of Goodwill and Intangibles -- We had goodwill of $2,562.6, net
intangible assets of $551.9 and shareholders' equity of $1,811.6 at September
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 the 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. In accordance with the provisions regarding the gains and losses from the
extinguishment of debt, we recorded a charge, to interest expense, in the third
quarter as a result of our July 25, 2002 credit facility refinancing. See Note 9
to the Condensed Consolidated Financial Statements for further discussion.
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 activities. 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 assessed the impact of adopting this statement.
34
In October 2002, the FASB issued SFAS No. 147, "Acquisitions of Certain
Financial Institutions, an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation No. 9." SFAS 147 will not have an impact on our financial
position and results of operations.
Economic Value Added "EVA" -- EVA is an integral part of our culture. EVA is a
measure of residual income. 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 we use to make investment decisions and because we
base our variable compensation system on the model.
Forward-looking Statements
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," "forecast," "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 our financial condition or results of
operations.
ITEM 4. Controls and Procedures
SPX management, including the Chief Executive Officer and Chief Financial
Officer, have conducted an evaluation, which was completed within 90 days of the
filing of this Form 10-Q, of the effectiveness of disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the
disclosure controls and procedures are effective in ensuring that all material
information required to be filed in this quarterly report has been made known to
them in a timely fashion and no changes are required at this time.
There have been no significant changes in internal controls, or in factors that
could significantly affect internal controls, subsequent to the date the Chief
Executive Officer and Chief Financial Officer completed their evaluation. There
have been no significant deficiencies or material weaknesses in internal
controls requiring corrective action, and no corrective actions have been taken.
35
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, we may
become subject to significant claims of which we are unaware currently or the
claims that we are aware of may result in our incurring a significantly greater
liability than we anticipate. 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.
36
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 -- Merger Agreement, dated March 10, 2001 between SPX
Corporation and United Dominion Industries Limited,
incorporated herein by reference from our Current Report on
Form 8-K filed on March 15, 2001 (file no. 1-6948).
3.1 -- Restated Certificate of Incorporation, as amended,
incorporated herein by reference from our Quarterly Report
on Form 10-Q for the quarter ended June 30, 2002 (file no.
1-6948).
3.2 -- By-Laws as amended through October 25, 1995, incorporated
herein by reference from our Quarterly Report on Form 10-Q
for the quarter ended September 30, 1995 (file no. 1-6948).
4.1 -- Indenture between SPX Corporation and The Chase Manhattan
Bank, dated as of February 6, 2001, incorporated herein by
reference from our Form S-3 Registration Statement (No.
333-56364) filed on February 28, 2001.
4.2 -- Form of Liquid Yield Option (TM) Note due 2021 (Zero
Coupon-Senior), incorporated herein by reference from our
Form S-3 Registration Statement (No. 333-56364) filed on
February 28, 2001.
4.3 -- Registration Rights Agreement dated as of February 6, 2001,
by and between SPX Corporation and Merrill Lynch & Co.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated,
incorporated herein by reference from our Form S-3
Registration Statement (No. 333-56364) filed on February 28,
2001.
4.4 -- Rights Agreement, dated as of June 25, 1996 between SPX
Corporation and The Bank of New York, as Rights Agent,
relating to Rights to purchase preferred stock under certain
circumstances, incorporated herein by reference from our
Registration Statement on Form 8-A filed on June 26, 1996
(file no. 1-6948).
4.5 -- Amendment No. 1 to Rights Agreement, effective October 22,
1997, between SPX Corporation and The Bank of New York,
incorporated herein by reference from our Registration
Statement on Form 8-A filed on January 9, 1998 (file no.
1-6948).
4.6 -- Indenture between SPX Corporation and The Chase Manhattan
Bank, dated as of May 9, 2001, incorporated herein by
reference from our Form S-3 Registration Statement (No.
333-68648) filed on August 29, 2001.
4.7 -- Form of Liquid Yield Option(TM) Note due 2021 (Zero
Coupon-Senior), incorporated herein by reference from our
Form S-3 Registration Statement (No. 333-68648) filed on
August 29, 2001.
4.8 -- Registration Rights Agreement dated as of May 9, 2001, by
and between SPX Corporation and Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated, incorporated
herein by reference from our Form S-3 Registration Statement
(No. 333-68648) filed on August 29, 2001.
4.9 -- Form of Senior Indenture, incorporated herein by reference
from our Form S-3 Registration Statement (No. 333-68652)
filed on August 29, 2001.
4.10 -- Form of Subordinated Indenture, incorporated herein by
reference from our Form S-3 Registration Statement (No.
333-68652) filed on August 29, 2001.
4.11 -- Form of Debt Security, incorporated herein by reference from
our Form S-3 Registration Statement (No. 333-68652) filed on
August 29, 2001.
4.12 -- Warrant Agreement, dated as of April 23, 1987 (the "Warrant
Agreement") among GCA Corporation, The Hallwood Group
Incorporated and the banks and insurance companies set forth
therein, incorporated herein by reference from our Form S-3
Registration Statement (No. 333-76978) filed on January 18,
2002.
37
4.13 -- Warrant Agreement, dated as of September 1, 1987 (the "Zeiss
Warrant Agreement") between GCA Corporation and Carl Zeiss,
Inc., incorporated herein by reference from our Form S-3
Registration Statement (No. 333-76978) filed on January 18,
2002.
4.14 -- Registration Agreement, dated as of April 23, 1987, among
GCA Corporation, the banks and insurance companies set forth
therein and Carl Zeiss, Inc., incorporated herein by
reference from our Form S-3 Registration Statement
(No. 333-76978) filed on January 18, 2002.
4.15 -- Registration Agreement, dated as of September 1, 1987, among
GCA Corporation and Carl Zeiss, Inc., incorporated herein by
reference from our Form S-3 Registration Statement (No.
333-76978) filed on January 18, 2002.
4.16 -- Form of Warrant Certificate pursuant to the Warrant
Agreement, incorporated herein by reference from our Form
S-3 Registration Statement (No. 333-76978) filed on
January 18, 2002.
4.17 -- Form of Warrant Certificate for Carl Zeiss, Inc. pursuant to
the Zeiss Warrant Agreement, incorporated herein by
reference from our Form S-3 Registration Statement (No.
333-76978) filed on January 18, 2002.
4.18 -- Amendment No. 2 to Rights Agreement dated as of June 26,
2002, incorporated herein by reference from our Quarterly
Report on Form 10-Q for the quarter ended June 30, 2002
(file no. 1-6948).
4.19 -- Copies of the instruments with respect to our other
long-term debt are available to the Securities and Exchange
Commission upon request.
10.1 -- Amended and Restated Credit Agreement dated as of July 24,
2002, incorporated herein by reference from our Quarterly
Report on Form 10-Q for the quarter ended June 30, 2002
(file no. 1-6948).
*10.2 -- Amendment to Employment Agreement between SPX Corporation
and John B. Blystone dated August 28, 2002.
99.1 -- Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
* Denotes management contract.
(b) Reports on Form 8-K
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.
On August 29, 2002, we filed a Form 8-K announcing the Board of
Directors approval of a two-for-one stock split payable on October 24,
2002 to stockholders of record on October 1, 2002 in the form of a
stock dividend. We also announced the Board of Directors authorized a
new share repurchase program for up to $250 million. The new
repurchase was initiated in conjunction with a new financing agreement
led by JP Morgan Securities Inc.
On October 7, 2002, we filed a Form 8-K announcing pursuant to Rule
416(b) under the Securities Act of 1933, as amended, that, as a result
of our stock split, the number of shares offered pursuant to the
Registration Statements remaining unsold as of October 1, 2002 will be
doubled.
On October 23, 2002, we filed a Form 8-K containing our press release
dated October 22, 2002. This press release contained our third quarter
2002 earnings information.
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SPX CORPORATION
----------------
(Registrant)
Date: November 12, 2002 By /s/ John B. Blystone
-----------------------
John B. Blystone
Chairman, President and
Chief Executive Officer
Date: November 12, 2002 By /s/ Patrick J. O'Leary
-------------------------
Patrick J. O'Leary
Vice President Finance,
Treasurer and Chief
Financial Officer
Date: November 12, 2002 By /s/ Ronald L. Winowiecki
---------------------------
Ronald L. Winowiecki
Corporate Controller and
Chief Accounting Officer
39
Certification
- -------------
I, John B. Blystone, certify that:
1. I have reviewed this quarterly report on Form 10-Q of SPX Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weakness in internal
controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 12, 2002 /s/ John B. Blystone
---------------------------------------
Chairman, President and
Chief Executive Officer
40
Certification
I, Patrick J. O'Leary, certify that:
1. I have reviewed this quarterly report on Form 10-Q of SPX Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weakness in internal
controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weakness.
Date: November 12, 2002 /s/ Patrick J. O'Leary
----------------------------------------
Vice President Finance,
Treasurer and Chief
Financial Officer
41
INDEX TO EXHIBITS
Item No. Description
- -------- -----------
10.2-- Amendment to Employment Agreement between SPX Corporation and John B.
Blystone dated August 28, 2002.
99.1-- Certification Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
For exhibits not filed herewith, see Item 6 for exhibits
incorporated by reference.