-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OP44/IvCzUQGpSZTk+g9fRoBRxVUZNTISt5RY5yKTu9+JCyy+E+2mR2Os2NaXQEV +53KF/CH/chaBu4oCIoYCw== 0000040834-97-000022.txt : 19971028 0000040834-97-000022.hdr.sgml : 19971028 ACCESSION NUMBER: 0000040834-97-000022 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971027 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENERAL SIGNAL CORP CENTRAL INDEX KEY: 0000040834 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRICAL INDUSTRIAL APPARATUS [3620] IRS NUMBER: 160445660 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-00996 FILM NUMBER: 97701099 BUSINESS ADDRESS: STREET 1: ONE HIGH RIDGE PARK CITY: STAMFORD STATE: CT ZIP: 06904 BUSINESS PHONE: 2033578800 MAIL ADDRESS: STREET 1: P O BOX 10010 CITY: STAMFORD STATE: CT ZIP: 06904 FORMER COMPANY: FORMER CONFORMED NAME: GENERAL RAILWAY SIGNAL CO DATE OF NAME CHANGE: 19710926 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 1997 Commission file number 1-996 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 GENERAL SIGNAL CORPORATION (Exact name of registrant as specified in its charter) New York 16-0445660 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) High Ridge Park, Box 10010, Stamford, Connecticut 06904-2010 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (203) 329-4100 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) Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, par value $1.00 49,754,965 (Class) (Outstanding at October 9, 1997) GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES INDEX Page No. PART I - FINANCIAL INFORMATION: Statement of Earnings - Three Months Ended September 30, 1997 and 1996 3 Statement of Earnings - Nine Months Ended September 30, 1997 and 1996 4 Balance Sheet - As of September 30, 1997 and December 31, 1996 5 Condensed Statement of Cash Flow - Nine Months Ended September 30, 1997 and 1996 6 Notes to Financial Statements 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 12 PART II - OTHER INFORMATION 21 PART I: FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES Statement of Earnings (In millions, except per-share data) (Unaudited) Three Months Ended September 30, 1997 1996 Net sales $475.7 $521.6 ------- ------ Cost of sales 346.5 356.2 Selling, general and administrative expenses 99.6 97.5 Gain on disposition (63.7) - - ------ ------ 382.4 453.7 ------ ------ Operating earnings 93.3 67.9 Equity in earnings of EGS 1.9 - - Interest expense, net (3.3) (5.5) ------ ------- Earnings from continuing operations before 91.9 62.4 income taxes 55.9 25.0 Income taxes ------ -------- Earnings from continuing operations 36.0 37.4 Earnings from discontinued operations, net of income taxes 2.3 - - ------ -------- Net earnings $38.3 $ 37.4 ======== ======== Net earnings per share: Continuing operations $ 0.71 $ 0.75 Discontinued operations 0.05 - - ------ -------- Net earnings $ 0.76 $ 0.75 ======= ======== Dividends declared per share $0.255 $ 0.24 ======= ======== Average shares outstanding 50.3 49.8 ======= ======== See accompanying notes to financial statements. GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES Statement of Earnings (In millions, except per-share data) (Unaudited) Nine Months Ended September 30, 1997 1996 Net sales $1,520.9 $1,518.3 --------- -------- Cost of sales 1,079.7 1,064.9 Selling, general and administrative expenses 305.7 298.9 Gain on dispositions (63.7) (20.8) --------- -------- 1,321.7 1,343.0 Operating earnings 199.2 175.3 Equity in earnings of EGS 1.9 - - Interest expense, net (11.3) (17.9) --------- -------- Earnings from continuing operations before income taxes 189.8 157.4 Income taxes 95.0 63.0 --------- -------- Earnings from continuing operations 94.8 94.4 Earnings from discontinued operations, net of income taxes 2.3 - - --------- -------- Net earnings $ 97.1 $ 94.4 ========= ======== Net earnings per share: Continuing operations $ 1.86 $ 1.90 Discontinued operations 0.05 - - --------- -------- Net earnings $ 1.91 $ 1.90 ========= ======== Dividends declared per share $ 0.765 $ 0.72 ========= ======== Average shares outstanding 50.9 49.6 ========= ======== See accompanying notes to financial statements. GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES Balance Sheet (In millions) (Unaudited) (Audited) September 30, December 31, Assets 1997 1996 Current assets: Cash and cash equivalents $ 82.8 $ 17.7 Accounts receivable, net 282.2 353.0 Inventories, net 160.2 240.6 Prepaid expenses and other current assets 28.0 24.7 Deferred income taxes 49.6 55.9 --------- -------- Total current assets 602.8 691.9 Property, plant and equipment, net of accumulated depreciation and amortization 240.5 310.0 Intangibles, net of accumulated amortization 261.2 381.3 Investment in EGS 129.0 - - Other assets 196.2 167.8 --------- --------- Total assets $1,429.7 $1,551.0 =========== ========== Liabilities and Shareholders' Equity Current liabilities: Short-term borrowings and current maturities of long-term debt $ 9.7 $ 5.6 Accounts payable 139.0 187.3 Accrued expenses 180.9 214.6 Income taxes 74.2 31.7 -------- -------- Total current liabilities 403.8 439.2 -------- --------- Long-term debt, less current maturities 89.8 201.3 Accrued post-retirement and post-employment obligations 119.8 133.2 Deferred income taxes 47.8 17.3 Other liabilities 16.4 16.2 -------- -------- Total long-term liabilities 273.8 368.0 -------- -------- Shareholders' equity: Common stock 78.5 78.2 Additional paid-in capital 364.2 337.1 Retained earnings 725.6 667.4 Cumulative translation adjustments (4.8) (1.4) Common stock in treasury (411.4) (337.5) -------- -------- Total shareholders' equity 752.1 743.8 -------- -------- Total liabilities and shareholders' equity $1,429.7 $1,551.0 ========= ========== See accompanying notes to financial statements GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES Condensed Statement of Cash Flow (In millions) (Unaudited) Nine Months Ended September 30, 1997 1996 CASH FLOW FROM OPERATING ACTIVITIES: Net Earnings $ 97.1 $ 94.4 Adjustments to reconcile net earnings to net cash from operating activities: Equity in earnings of EGS (1.9) - - Gain on dispositions (63.7) (20.8) Asset write down and other non-cash charges 12.2 19.7 Deferred income taxes 21.9 28.3 Depreciation and amortization 51.7 51.8 Pension income (11.3) (6.8) Other, net (1.7) 6.7 Changes in assets and liabilities, net of effects from acquisitions and divestitures (5.8) (36.7) -------- ------- Net cash from operating activities 98.5 136.6 -------- ------- CASH FLOW FROM INVESTING ACTIVITIES: Divestitures 197.8 79.2 Capital expenditures (39.3) (43.6) Other, net 0.9 2.8 ------ ------ Net cash from investing activities 159.4 38.4 -------- ------ CASH FLOW FROM FINANCING ACTIVITIES: Net change in short and long-term borrowings (64.5) (126.1) Dividends paid (39.4) (35.6) Issuance of common stock 11.1 11.3 Purchase of common stock (100.0) (1.2) -------- ------- Net cash from financing activities (192.8) (151.6) -------- --------- Net change in cash and cash equivalents 65.1 23.4 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 17.7 1.0 -------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 82.8 $ 24.4 ========= ========== See accompanying notes to financial statements. GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES Notes to Financial Statements (Unaudited) 1. In the opinion of management, the accompanying unaudited financial statements reflect all adjustments (consisting of normal, recurring items) necessary for the fair presentation of results for these interim periods. These results are based upon generally accepted accounting principles consistently applied with those used in the preparation of the company's 1996 Annual Report on Form 10-K. The results of operations for the nine-month period ended September 30, 1997 are not necessarily indicative of the results of operations that may be expected for the full year. The financial information as of September 30, 1997 should be read in conjunction with the financial statements contained in the company's 1996 Annual Report on Form 10-K. 2. Certain reclassifications have been made to the 1996 financial statements to conform with the 1997 presentation. 3. Inventories September 30, December 31, 1997 1996 (In millions) Finished goods $ 44.9 $ 80.8 Work in process 39.7 63.2 Raw material and purchased parts 89.2 117.1 -------- -------- Total FIFO cost 173.8 261.1 Excess of FIFO cost over LIFO inventory value (13.6) (20.5) --------- ---------- Net carrying value $ 160.2 $ 240.6 ========== ========== Included in the gain on sale of the General Signal Pump Group (GSPG) was a LIFO liquidation of $2.0 million. Additionally, $5.3 million of the excess of FIFO cost over LIFO inventory value was transferred from the General Signal Electrical Group (GSEG) to the investment in EGS joint venture. 4. Property, Plant and Equipment September 30, December 31, 1997 1996 (In millions) Property, plant and equipment, at cost $ 597.6 $ 747.3 Accumulated depreciation and amortization (357.1) (437.3) -------- -------- Property, plant and equipment, net $ 240.5 $ 310.0 ======== ========= 5. Capital Stock September 30, December 31, 1997 1996 (In millions) Common stock: Shares authorized 150.0 150.0 Shares issued 64.9 64.6 Held in treasury (14.6) (13.2) 6. Business Segment Information Three Months Ended September 30, 1997 1996 Net sales: (In millions) Process Controls $155.4 $192.1 Electrical Controls 230.8 239.3 Industrial Technology 89.5 90.2 (d) ------- ------- $475.7 $521.6 ======= ======= Operating earnings: Process Controls $ 80.9 (a) $ 31.0 (e) Electrical Controls 9.4 (b) 26.7 Industrial Technology 12.1 (c) 18.9 (d) ------- ------ Total operating earnings before unallocated expenses, equity earnings and interest 102.4 76.6 Equity in earnings of EGS 1.9 - - Net interest expense (3.3) (5.5) Unallocated expenses (9.1) (8.7) ------- -------- Earnings before income taxes $ 91.9 $ 62.4 ======== ========= (a)Includes $63.7 gain on disposition of GSPG, a $0.4 charge related to a revision in the internal accounting methodology of reserving for potentially uncollectible accounts receivable and a $1.4 charge related to a revision in the internal accounting methodology of reserving for potentially excess and obsolete inventory. (b)Includes a $3.5 charge related to a revision in the internal accounting methodology of reserving for potentially uncollectible accounts receivable, a $7.3 charge related to a revision in the internal accounting methodology of reserving for potentially excess and obsolete inventory, a $2.9 restructuring charge related to Best Power, a $1.0 charge for professional fees related to EGS and a $2.9 reversal of plant closure reserve set up in first quarter 1996. (c)Includes a $1.3 charge related to a revision in the internal accounting methodology of reserving for potentially excess and obsolete inventory. (d)Includes $4.2 of royalty income. (e)Includes a $1.8 insurance gain on the recovery of destroyed assets. Nine Months Ended September 30, 1997 1996 (In millions) Net sales: Process Controls $523.8 $554.0 Electrical Controls 723.8 696.6 Industrial Technology 273.3 267.7 (d) ------- ------ $1,520.9 $1,518.3 ========= ========= Operating earnings: Process Controls $126.3 (a) $97.1 (e) Electrical Controls 55.0 (b) 61.1 (f) Industrial Technology 45.8 (c) 41.8 (g) -------- -------- Total operating earnings before unallocated expenses, equity earnings and interest 227.1 200.0 Equity in earnings of EGS 1.9 - - Net interest expense (11.3) (17.9) Unallocated expenses (27.9) (24.7) --------- -------- Earnings before income taxes $189.8 $ 157.4 ========== ======== (a)Includes $63.7 gain on disposition of GSPG, a $0.4 charge related to a revision in the internal accounting methodology of reserving for potentially uncollectible accounts receivable and a $1.4 charge related to a revision in the internal accounting methodology of reserving for potentially excess and obsolete inventory. (b)Includes a $3.5 charge related to a revision in the internal accounting methodology of reserving for potentially uncollectible accounts receivable, a $7.3 charge related to a revision in the internal accounting methodology of reserving for potentially excess and obsolete inventory, a $2.9 restructuring charge related to Best Power, a $1.0 charge for professional fees related to EGS and a $3.7 reversal of plant closure reserves set up in first quarter 1996. (c)Includes a $1.3 charge related to a revision in the internal accounting methodology of reserving for potentially excess and obsolete inventory. (d)Includes $4.2 of royalty income. (e)Includes a $20.8 gain on disposition of Kinney Vacuum, a charge of $4.0 for product warranty costs and a $1.8 insurance gain on the recovery of destroyed assets. (f)Includes an $11.1 charge related to plant closure costs, asset vaulations and environmental costs. (g)Includes $4.6 charge for asset valuations and $4.2 of royalty income. 7. Supplemental Information - Statement of Cash Flow Nine Months Ended September 30, 1997 1996 Cash paid for: (In millions) Interest $ 13.1 $19.0 ======== ====== Income taxes $ 26.9 $25.3 ======== ====== The company had the following non- cash investing and financing activity: Conversion of convertible debt into common stock $ 39.3 $ - - Contributions of net assets to joint venture $ 127.1 $ - - 8. Repurchase of Shares In December 1996, the Board of Directors approved a stock buy-back program of up to $100.0 million to offset the shares issued in relation to the call for the redemption of the 5.75 percent convertible subordinated notes. On April 17, 1997, the program was completed with the total of 2.5 million shares repurchased for $100.0 million. On June 19, 1997, the Board of Directors approved a stock buyback program of up to $150.0 million subject to the consummation of the GSPG divestiture. On September 18, 1997, the Board of Directors approved an increase of this program to $300.0 million. The program is expected to be completed by the end of 1998. As of October 22, 1997, 2.1 million shares were repurchased under this program for $89.4 million. 9. Medium Term Notes On April 7, 1997, the company sold $25.0 million 7.114 percent medium-term senior notes that are due on April 8, 2002. On April 18, 1997, the company sold an additional $25.0 million 7.00 percent medium-term senior notes that are due on October 18, 2000. The proceeds were used to pay down floating rate commercial paper. 10. Accounting Pronouncements In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," which changes the methodology of calculating earnings per share. The company plans to adopt SFAS No. 128 in December 1997. Early adoption is not permitted. Had the company adopted SFAS No. 128 as of September 30, 1997, the related per share disclosure for both basic and diluted earnings per share would have been: Three Months Ended Nine Months Ended September 30, September 30, 1997 1996 1997 1996 Basic $0.76 $0.75 $1.91 $1.90 Diluted 0.76 0.73 1.90 1.86 In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". The company must adopt these statements by 1998. While the company is studying the application of the new statements, it does not expect either of these statements to materially affect its financial position or results of operations. 11. EGS Joint Venture On September 15, 1997, the company and Emerson Electric Company formed the Emerson General Signal Electrical Group LLC, (EGS), a joint venture of Emerson's Appleton Electric division and the company's Electrical Group. The company contributed substantially all of the operating assets of its GSEG in exchange for 47.5 percent of EGS. The company accounts for its investment in EGS under the equity method of accounting. The joint venture's operations and the company's equity in earnings of the joint venture for the period from September 15, 1997 to September 30, 1997 included the following (in millions): Net sales $26.5 Gross profit 9.7 Income from continuing operations 4.3 The Company's equity in EGS income from continuing operations $ 2.0 Amortization expense for the excess of cost over the underlying net assets of the joint venture (0.1) ------- Equity in earnings of EGS $ 1.9 ======= The company's investment in the EGS joint venture includes the unamortized excess of the company's investment over its equity in the joint venture's net assets. The excess was $38.2 at September 30, 1997, and is being amortized on a straight-line basis over an estimated economic life of 40 years. Condensed balance sheet information of the EGS joint venture as of September 30, 1997 is as follows (in millions): Current assets $147.3 Noncurrent assets 118.3 Current liabilities 60.2 Noncurrent liabilities 14.3 GSEG accounted for approximately 15 percent of the company's 1996 consolidated net sales. 12. Sale of General Signal Pump Division On August 23, 1997, the company sold substantially all of the assets of GSPG to Pentair, Inc. for approximately $200 million and recognized a pre-tax gain of $63.7 million. Income tax expense on the gain was $46.5 million or 73 percent of the pretax gain. This rate differs from the company's effective tax rate due to a difference in the book and tax bases of GSPG. GSPG accounted for approximately 10 percent of the company's 1996 consolidated net sales. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in millions, except per-share data) Results of Operations - Third Quarter 1997 Compared to Third Quarter 1996 1997 1996 Reported Reported Change Net sales $475.7 $521.6 (8.8%) Gross profit 129.2 165.4 (21.9%) Margin percent 27.2% 31.7% Selling, general and administrative 99.6 97.5 2.2% expenses Percent of sales 20.9% 18.7% Gain on disposition (63.7) - - - - Operating earnings 93.3 67.9 37.4% Equity in earnings of 1.9 - - - - EGS Interest expense, net (3.3) (5.5) (40.0%) Earnings from continuing operations before income 91.9 62.4 47.3% taxes Income taxes 55.9 25.0 123.6% Net earnings from continuing 36.0 37.4 (3.7%) operations Earnings per share from continuing operations $0.71 $0.75 (5.3%) Earnings per share from discontinued 0.05 - - - - operations Net earnings per share $0.76 $0.75 1.3% Net sales: Consolidated sales decreased 8.8 percent from 1996 levels primarily due to the sale of GSPG and contribution of the net assets of GSEG to the EGS joint venture. Adjusted for the disposition of GSPG and the contribution of GSEG to EGS, net sales decreased approximately 2 percent. International sales represented approximately 23 percent of total net sales in 1997 versus 22 percent in 1996. Process Control sector sales were $155.4 in the third quarter of 1997 as compared to $192.1 in the same period in 1996. The decrease was partly due to the sale of GSPG on August 23, 1997. GSPG recorded sales of approximately $21 in September of 1996. Sector sales were also impacted by lower volume of crystal growing furnaces and mixers. The lower sales of crystal growing furnaces is a result of a cyclical downturn in the semiconductor equipment market. The lower mixer volume is due to fewer large projects from an overcapacity in the chemical processing industry and weaker gold prices during the quarter. Sales in the Electrical Controls sector decreased 3.6 percent to $230.8 from $239.3 in the same period of last year. The decrease is primarily due to the company's contribution of GSEG's net assets to the EGS joint venture on September 15, 1997. GSEG's sales for the latter half of September 1997, of approximately $15, are not included in sector sales because GSEG's operations are included in the operations of EGS which is being accounted for using the equity method. This decrease was partially offset by higher sales of fire detection systems and medium power transformers. In July 1996, the company negotiated a royalty settlement related to one of its previously divested semiconductor businesses and received $4.2 in connection with this agreement (the "Royalty Income Amount"). The company recognized this amount in Industrial Technology sector sales. Adjusted for the Royalty Income Amount, 1997 sales increased to $89.5 versus $86.0 in the same period in 1996. Sales of the CD9000TM ESCON Director, new application sales of an existing networking monitoring product and growth in the bicycle original equipment manufacturer (OEM) segment contributed to the increased sales. Gross profit: In September 1997, the company revised its internal accounting methodology for reserving for potentially excess and obsolete inventory to a more conservative measure. In connection therewith, the company recorded a $10.0 charge in cost of sales, with $1.4 recorded in the Process Controls sector, $7.3 recorded in the Electrical Controls sector and $1.3 recorded in the Industrial Technology sector. In August 1997, the company announced a restructuring plan of Best Power, a unit in the Electrical Controls sector. In connection with this plan, the company recorded a $1.1 charge to cost of sales to write off assets related to discontinued product lines. Adjusted for the items referred to above and the Royalty Income Amount included in 1996 net sales, 1997 gross profit as a percentage of sales decreased to 29.5 percent from 31.1 percent in the third quarter of 1996. The decrease was due to a shift in sales to lower margin products in certain businesses, higher labor costs, higher warranty costs and the impact of fixed overhead costs on lower sales. These increases were partially offset by lower material costs due to sourcing initiatives. Selling, general and administrative expenses: In September 1997, the company revised its internal accounting methodology for reserving for potentially uncollectible accounts receivable to a more conservative measure. In connection therewith, the company recorded a $3.9 charge in selling, general and administrative expense, with $0.4 recorded in the Process Controls sector and $3.5 recorded in the Electrical Controls sector. The Best Power restructuring plan referred to above resulted in the cancellation of a facility lease in Texas and the payment of a $1.8 settlement charge. This charge has been included in selling, general and administrative expenses. In September 1997, the company and Emerson Electric formed EGS, a joint venture that combined the two companies' electrical distributor product businesses. The company contributed substantially all of the operating assets and liabilities of GSEG to EGS in exchange for 47.5 percent ownership of the joint venture. As a result of the formation of the joint venture, a previously announced restructuring plan of the company was no longer required and the reserve of $2.9 was reversed. This income has been included in selling, general and administrative expenses. $1.0 of professional fees were incurred in 1997 in connection with setting up EGS. In May 1996, a fire at a supplier facility destroyed certain assets of a business in the Process Controls sector. In September 1996, the company received $1.8 in insurance proceeds, net of related expenses, and recognized a gain on the involuntary conversion of these assets. This amount is included as an offset to selling, general and administrative expenses. Adjusted for the items referred to above and the Royalty Income Amount included in 1996 net sales, 1997 selling, general and administrative expenses as a percentage of sales increased to 20.1 percent compared to 19.2 percent in the third quarter of 1996. Third quarter 1997 expenses were higher due primarily to the impact of fixed expenses on lower sales volume. Included in selling, general and administrative expenses was pension income of $4.8 in 1997 and $2.0 in 1996. Gain on disposition: In August 1997, the company sold GSPG, a unit of the Process Controls sector, for approximately $200 and recognized a pre-tax gain of $63.7. Included in the gain was a LIFO liquidation of approximately $2.0. Income tax expense on the gain was $46.5 or 73 percent of the pretax gain. This rate differs from the company's effective tax rate due to a difference in the book and tax bases of GSPG. Operating earnings: Operating earnings for the Process Controls sector was $80.9 compared to $31.0 for the same period in 1996. The increase is due to the $63.7 gain on sale of GSPG partially offset by the absence of GSPG September income in 1997, charges related to the revisions in accounts receivable and inventory reserve methodologies of $0.4 and $1.4, respectively, the $1.8 insurance settlement gain on destroyed assets recognized in 1996 and lower volume in the crystal growing furnace and mixer businesses. Electrical Controls sector operating earnings decreased to $9.4, versus $26.7 in the same period in 1996. The decrease was due to charges related to the revisions in accounts receivable and inventory reserve methodologies of $3.5 and $7.3, respectively, charges related to the Best Power restructuring plan of $2.9, $1.0 of professional fees incurred in connection with EGS, a shift toward lower margin products in certain businesses, higher warranty costs and the company's contribution of GSEG's net assets to the EGS joint venture (the company records the equity in earnings of EGS under the equity method of accounting below operating income). These decreases were partially offset by the $2.9 reversal of a restructuring reserve that was no longer required with the company's contribution of GSEG to EGS. Industrial Technology sector operating earnings decreased to $12.1 versus $18.9 in the same period in 1996. The decrease is due to the Royalty Income Amount recognized in 1996, the charge related to the revision in inventory reserve methodology of $1.3, and a shift to lower margin products at GS Networks. Interest expense: Net interest expense decreased 40.0 percent to $3.3 versus $5.5 in the same period of 1996. Cash generated from operations and divestitures was used to pay down debt. Income Tax Expense: 1997 income tax expense includes $46.5 of income taxes from the sale of GSPG. Adjusted for this charge, the company's effective tax rate in 1997 is 38.5 percent. An adjustment of $1.5 ($0.03 per share) to decrease the 1997 full year effective tax rate from 40 percent to 38.5 percent was recorded in the third quarter reflecting increased tax credits. Discontinued operations: During 1995, the company recorded losses on the divestitures of the Leeds & Northrup Company and Dynapower/Stratopower and set up reserves to cover potential remaining obligations. In September 1997, $2.3 of this amount, net of tax, was no longer required and accordingly, was reversed through discontinued operations. Results of Operations - Nine Months 1997 Compared With Nine Months 1996 1997 1996 Reported Reported Change Net sales $1,520.9 $1,518.3 0.2% Gross profit 441.2 453.4 (2.7%) Margin percent 29.0% 29.9% Selling, general and administrative 305.7 298.9 2.3% expenses Percent of sales 20.1% 19.7% Gain on dispositions (63.7) (20.8) 206.3% Operating earnings 199.2 175.3 13.6% Equity in earnings of 1.9 - - - - EGS Interest expense, net (11.3) (17.9) (36.9%) Earnings from continuing operations before income 189.8 157.4 20.6% taxes Income taxes 95.0 63.0 50.8% Net earnings from continuing 94.8 94.4 0.4% operations Earnings per share from continuing operations $ 1.86 $ 1.90 (2.1%) Earnings per share from discontinued 0.05 - - - - operations Net earnings per share $ 1.91 $ 1.90 0.5% Net sales: Consolidated sales in the first nine months of 1997 increased 0.2 percent over the first nine months of 1996 due primarily to increased sales in the Electrical Controls sector partially offset by the sale of GSPG and contribution of the net assets of GSEG to the EGS joint venture. Adjusted for the disposition of GSPG and the contribution of GSEG to EGS, net sales increased approximately 2.5 percent. International sales in 1997 increased 3.0 percent over the same period of 1996 and represented approximately 23 percent of total net sales versus 22 percent in the same period of 1996. Process Control sector sales were $523.8 in the first nine months of 1997 as compared to $554.0 in the same period in 1996. The decrease was partly the result of the sale of GSPG on August 23, 1997. GSPG recorded sales of approximately $21 in September of 1996. Sector sales also decreased due to lower sales volume of crystal growing furnaces, as a result of a cyclical downturn in the semiconductor equipment market, and decreased sales of coal feeders. The decreases were partially offset by higher demand for industrial oven and laboratory products. Sales in the Electrical Controls sector increased 3.9 percent to $723.8 from $696.6, as compared to the same period last year. Sales increases were reported by all six units within the sector. The largest improvements were in the construction material, medium power transformer, treadmill motor and fire detection products. GSEG sales for the latter half of September, of approximately $15, are not included in sector sales because GSEG's operations are included in the operations of EGS which is being accounted for using the equity method. In July 1996, the company received the Royalty Income Amount of $4.2, which was recognized in Industrial Technology sector sales. Adjusted for the Royalty Income Amount, Industrial Technology sector sales increased 3.7 percent to $273.3 versus $263.5 in the same period in 1996. Sales of the CD9000TM ESCON Director as well as new application sales of an existing networking monitoring product were the primary causes for the increase. Increased demand from North American automotive producers also contributed to the growth. These increases were partially offset by lower sales of older technology telecommunication products. Gross profit: In September 1997, the company revised its internal accounting methodology for reserving for potentially excess and obsolete inventory to a more conservative measure. In connection therewith, the company recorded a $10.0 charge in cost of sales, with $1.4 recorded in the Process Controls sector, $7.3 recorded in the Electrical Controls sector and $1.3 recorded in the Industrial Technology sector. In August 1997, the company announced a restructuring plan of Best Power, a unit in the Electrical Controls sector. In connection with this plan, the company recorded a $1.1 charge to cost of sales to write off assets related to discontinued product lines. In March 1996, the company extended warranty service to certain products sold by the Process Controls sector which were not covered by warranty. The company recorded $4.0 to cover the cost of such repairs. Through September 30, 1997, substantially all of this reserve had been paid. The company reviews on an ongoing basis the carrying amount of company assets. As part of this review, in the first quarter of 1996, the future market potential of capitalized software in the Industrial Technology sector was determined to be impaired. Accordingly the company wrote off $4.6 of such software. As part of the company's ongoing review of operations, the company identified property, plant and equipment that will not be utilized in future operations, and, therefore, recorded a $4.4 charge in March 1996 to write off the assets. Adjusted for the items referred to above and the Royalty Income Amount included in 1996 net sales, 1997 gross profit as a percentage of sales decreased to 29.7 percent from 30.5 percent in the nine months of 1996. The decrease was due to a shift in sales to lower margin products in certain businesses as well as higher labor, new product development and warranty costs. These increases were partially offset by lower material costs due to sourcing initiatives. Selling, general and administrative expenses: In September 1997, the company revised its internal accounting methodology for reserving for potentially uncollectible accounts receivable to a more conservative measure. In connection therewith, the company recorded a $3.9 charge in selling, general and administrative expense, with $0.4 recorded in the Process Controls sector and $3.5 recorded in the Electrical Controls sector. The Best Power restructuring plan referred to above resulted in the cancellation of a facility lease in Texas and the payment of a $1.8 settlement charge. This charge has been included in selling, general and administrative expenses. In March 1996, the company adopted a plan to close a factory in the Electrical Controls sector and provided $4.7 primarily for lease termination costs, asset write-downs and severance. In June 1997, the company determined that $0.8 of this reserve was no longer required and reversed this amount into income. In September 1997, the company and Emerson Electric formed EGS, a joint venture that combined the two companies' electrical distributor product businesses. The company contributed substantially all of the operating assets and liabilities of GSEG to EGS in exchange for 47.5 percent ownership of the joint venture. As a result of the formation of the joint venture, the previously announced restructuring plan of the company was no longer required and the remaining reserve of $2.9 was reversed into income. $1.0 of professional fees were incurred in 1997 in connection with setting up EGS. Also in March 1996, the company changed its estimate of environmental costs to be incurred at one of its facilities in the Electrical Controls sector and recorded a $2.0 charge. In May 1996, a fire at a supplier facility destroyed certain assets of a business in the Process Controls sector. In September 1996, the company received $1.8 in insurance proceeds, net of related expenses, and recognized a gain on the involuntary conversion of these assets. This amount is included as an offset to selling, general and administrative expenses. Adjusted for the items referred to above and the Royalty Income Amount included in 1996 net sales, 1997 selling, general and administrative expenses as a percentage of sales increased to 19.9 percent compared to 19.4 percent in the nine months of 1996. First quarter 1997 expenses were higher due to higher marketing, sales commission, and information system costs. Included in selling, general and administrative expenses was pension income of $11.3 in 1997 and $6.8 in 1996. Gain on disposition: In August 1997, the company sold GSPG, a unit of the Process Controls sector, for approximately $200 and recognized a pre-tax gain of $63.7. Included in the gain was a LIFO liquidation of approximately $2.0. Income tax expense on the gain was $46.5 or 73 percent of the pretax gain. This rate differs from the company's effective tax rate due to a difference in the book and tax bases of GSPG. In January 1996, the company disposed of Kinney Vacuum Company (Kinney), a unit previously included in the Process Controls sector, for $29.0 and recorded a pre-tax gain of $20.8. Included in the gain was a LIFO liquidation of approximately $1.1. Operating earnings: Process controls operating earnings increased 30.1 percent to $126.3, versus $97.1 in the same period in 1996. The increase is due to the $63.7 gain on sale of GSPG, higher volume of industrial oven and laboratory product sales and a $4.0 charge for product warranty costs recorded in 1996, partially offset by the absence of GSPG September income in 1997, charges related to revisions in accounts receivable and inventory reserve methodologies of $0.4 and $1.4, respectively, the $20.8 gain on the sale of Kinney in 1996, the $1.8 insurance settlement gain on destroyed assets recognized in 1996 and lower volume in the crystal growing furnace and coal feeder businesses. 1996 operating earnings of the Process Controls sector included $0.7 of environmental insurance recoveries. Electrical Controls operating earnings decreased 10.0 percent to $55.0, versus $61.1 in the same period in 1996. The decrease was due to charges related to the revisions in accounts receivable and inventory reserve methodologies of $3.5 and $7.3, respectively, charges related to the Best Power restructuring plan of $2.9, $1.0 of professional fees incurred in connection with EGS, a shift toward lower margin products in certain businesses and the company's contribution of GSEG to the EGS joint venture (the company records the equity in earnings of EGS under the equity method of accounting below operating income). These decreases were partially offset by the $3.7 reversal of restructuring reserves no longer required, and 1996 charges for lease termination costs, asset write-downs, and severance of $4.7, write off of property, plant and equipment of $4.4 and a change in estimate of environmental costs of $2.0. Industrial Technology sector operating earnings increased to $45.8 versus $41.8 in the same period in 1996. The increase is due mainly to higher sales volume, a shift toward the higher margin CD9000TM ESCON Director product, productivity improvements in automotive product lines, and a $4.6 charge taken in 1996 for impairment of capitalized software. Partially offsetting this increase is the Royalty Income Amount recognized in 1996 and the charge related to the revision in inventory reserve methodology of $1.3. Unallocated expenses increased 13.0 percent to $27.9 in the third quarter of 1997 from $24.7 in the same period in 1996. 1996 unallocated expenses were positively impacted by the collection of a $1.3 previously written off receivable. The increase is primarily the result of higher expenses due to divested businesses and higher benefit cost accruals. Interest expense: Net interest expense decreased 36.9 percent to $11.3 versus $17.9 in the same period of 1996. Cash generated from operations and divestitures was used to pay down debt. Income Tax Expense: 1997 income tax expense includes $46.5 of income taxes from the sale of GSPG. Adjusted for this charge, the company's effective tax rate in 1997 is 38.5 percent compared to 40 percent in 1996. The decrease reflects increased tax credits. Discontinued operations: During 1995, the company recorded losses on the divestitures of the Leeds & Northrup Company and Dynapower/Stratopower and set up reserves to cover potential remaining obligations. In September 1997, $2.3 of this amount, net of tax, was no longer required and accordingly, was reversed through discontinued operations. Financial Condition - September 30, 1997 Compared to December 31,1996 The following summarizes the cash flow activity for the first nine months of 1997 compared to the first nine months of 1996. 1997 1996 Cash flow from operating activities $98.5 $136.6 Divestitures 197.8 79.2 Capital expenditures (39.3) (43.6) Other investing activities 0.9 2.8 Cash flow from investing activities 159.4 38.4 Debt borrowings/(repayments) (64.5) (126.1) Dividends paid (39.4) (35.6) Purchase of common stock (100.0) (1.2) Issuance of common stock 11.1 11.3 Cash flow from financing activities (192.8) (151.6) Included in operating cash flow for 1997 and 1996 were expenditures of $6.1 and $19.3, respectively, related to previously divested operations and $6.2 and $4.3, respectively, for severance pay. Operating cash flow for the first nine months of 1997 decreased in comparison to the first nine months of 1996 primarily due to lower earnings, after adjusting for non-operating activities, lower accounts receivable collections and lower accrued expenses due to the decrease in disposition and restructuring accruals as well as payment of other non-operating accruals. In September 1997, the company announced its intention to spin off its GS Networks unit and look at the possible disposition of three other units. These four units accounted for approximately 18 percent of the company's 1996 net sales. In December 1996, the Board of Directors approved a stock buy- back program of up to $100.0 to offset the dilutive impact of shares issued in connection with the convertible subordinated notes redemption. On April 17, 1997, the company concluded the buy-back program which resulted in the repurchase of approximately 2.5 million shares. On June 19, 1997, the Board of Directors approved a stock buy-back program of up to $150.0 subject to the consummation of the GSPG divestiture. On September 18, 1997, the Board of Directors approved an increase of this program to $300.0. As of October 22, 1997, the company had repurchased 2.1 million shares under this program for $89.4. Total debt-to-total capitalization was 11.7 percent at September 30, 1997, down from 21.8 percent at year-end. Cash received from operations and divestitures was used to pay down outstanding commercial paper. Debt levels will increase as the company repurchases shares under the current share repurchase program. The company is well positioned to finance future working capital requirements and capital expenditures through current earnings and available credit facilities. On April 7, 1997, the company sold $25.0 7.114 percent medium- term senior notes that are due on April 8, 2002. On April 18, 1997, the company sold an additional $25.0 7.00 percent medium- term senior notes that are due on October 18, 2000. The proceeds were used to pay down floating rate commercial paper. Other Matters Since the company is a producer of capital goods and equipment, its results can vary with the relative strength of the economy. Demand for products in the Process Controls sector follows the demand for capital goods orders. The Electrical Controls sector depends upon several markets, principally the nonresidential construction and computer equipment industries. The Industrial Technology sector depends on several markets, primarily automotive, mass transportation, and telecommunications equipment. Mass transportation depends upon continued federal and local government spending, and telecommunications is dependent upon continued research and development and the continued success of new products. While no one marketplace or industry has a significant impact on the company's operations or results, the inherent pace of technological changes presents certain risks that the company monitors carefully. Success within all of the company's businesses is dependent upon the timely introduction and acceptance of new products. Forward-looking Statements The company may from time to time make projections concerning future operations and earnings. The company's forward-looking statements are based on the company's current expectations, which are subject to a number of risks and uncertainties that could materially affect or reduce such operations and earnings. In addition to the general factors identified in "Other Matters" above, the primary factors that could specifically affect the company's expectations include the failure of: (1) order rates increasing as expected, (2) productivity improvements meeting or exceeding budget, and (3) new products under development being produced and accepted as anticipated. PART II: OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: 27.0 Financial Data Schedule (b) Reports on Form 8-K: Form 8-K dated September 9, 1997 related to the disposition of the General Signal Pump Group 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. GENERAL SIGNAL CORPORATION /s/ Raymond L. Arthur Raymond L. Arthur Vice President and Controller Chief Accounting Officer DATE: October 24, 1997 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. GENERAL SIGNAL CORPORATION Raymond L. Arthur Vice President and Controller Chief Accounting Officer DATE: October 24, 1997 EX-27 2
5 0000040834 GENERAL SIGNAL CORPORATION 1000 9-MOS DEC-31-1997 SEP-30-1997 82800 90 297500 15300 160200 602800 597600 357100 1429700 403800 89800 0 0 78500 673600 1429700 1520900 1520900 1079700 1319800 0 1900 11300 189800 95000 94800 2300 0 0 97100 1.91 0
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