UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2000
Commission file number 1-4416
SPS TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its Charter)
PENNSYLVANIA 23-1116110
(State of incorporation) (I.R.S. Employer
Two Pitcairn Place, Suite 200 Identification No.)
165 Township Line Road
Jenkintown, Pennsylvania 19046
(Address of principal executive offices) (Zip Code)
(215) 517-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the
past 90 days. Yes X No
The number of shares of Registrant's Common Stock outstanding
on August 7, 2000 was 12,679,377.
1
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES
---------------------------------------
INDEX
-----
Part I. Financial Information
- - -----------------------------
Item 1. Financial Statements
Statements of Consolidated Operations -
Three and Six Months Ended June 30, 2000 and 1999
(Unaudited)
Consolidated Balance Sheets -
June 30, 2000 and December 31, 1999
(Unaudited)
Condensed Statements of Consolidated Cash Flows -
Six Months Ended June 30, 2000 and 1999
(Unaudited)
Consolidated Statements of Comprehensive Income -
Three and Six Months Ended June 30, 2000 and 1999
(Unaudited)
Notes to Condensed Consolidated Financial
Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures
About Market Risk
Part II. Other Information
- - --------------------------
Item 4. Submission of Matters to Vote of Security
Holders
Item 6. Exhibits and Reports on Form 8-K
2
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
(Unaudited-Thousands of dollars, except share data)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
Net sales $228,003 $194,560 $444,733 $397,035
Cost of goods sold 183,326 151,792 357,432 309,413
-------- -------- -------- --------
Gross profit 44,677 42,768 87,301 87,622
Selling, general and
administrative expense 25,248 18,240 48,801 39,425
-------- -------- -------- --------
Operating earnings 19,429 24,528 38,500 48,197
-------- -------- -------- --------
Other income (expense):
Interest income 182 282 624 478
Interest expense (5,721) (3,270) (10,264) (6,604)
Equity in loss of
affiliates - (1,770) - (2,032)
Other, net 390 (100) 530 (199)
-------- -------- -------- --------
(5,149) (4,858) (9,110) (8,357)
-------- -------- -------- --------
Earnings before income taxes 14,280 19,670 29,390 39,840
Provision for income taxes 4,320 6,660 9,020 13,510
-------- -------- -------- --------
Net earnings $ 9,960 $ 13,010 $ 20,370 $ 26,330
======== ======== ======== ========
Earnings per common share:
Basic $ 0.79 $ 1.03 $ 1.61 $ 2.07
======== ======== ======== ========
Diluted $ 0.77 $ 1.00 $ 1.58 $ 2.02
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
3
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of dollars)
Unaudited
June 30, December 31,
2000 1999
---------- ------------
Assets
Current assets
Cash and cash equivalents $ 24,874 $ 50,479
Accounts and notes receivable,
less allowance for doubtful
receivables of $4,300
(1999-$3,363) 140,005 118,287
Inventories 150,675 138,121
Deferred income taxes 18,996 19,291
Prepaid expenses and other 7,722 6,971
-------- --------
Total current assets 342,272 333,149
Property, plant and equipment, net of
accumulated depreciation of $155,454
(1999-$152,865) 227,343 221,147
Other assets, principally goodwill 238,272 146,668
-------- --------
Total assets $807,887 $700,964
======== ========
See accompanying notes to condensed consolidated financial statements.
4
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of dollars, except share data)
Unaudited
June 30, December 31,
2000 1999
--------- ------------
Liabilities and shareholders' equity
Current liabilities
Notes payable and current portion of
long-term debt $ 18,946 $ 15,553
Accounts payable 67,741 63,698
Accrued expenses 66,846 56,354
Income taxes payable 8,418 7,165
-------- --------
Total current liabilities 161,951 142,770
-------- --------
Deferred income taxes 26,711 26,098
Long-term debt 271,388 201,895
Retirement obligations and other
long-term liabilities 25,889 25,162
Shareholders' equity
Preferred stock, par value $1 per share,
authorized 400,000 shares, issued none
Common stock, par value $0.50 per share,
authorized 60,000,000 shares,
issued 14,063,829 shares (13,986,882
shares in 1999) 7,032 6,993
Additional paid-in capital 113,741 110,261
Common stock in treasury, at cost,
1,395,798 shares (1,366,407 shares
in 1999) (24,997) (22,285)
Retained earnings 249,551 229,181
Accumulated other comprehensive income
Minimum pension liability (732) (732)
Cumulative translation adjustments (22,647) (18,379)
-------- --------
Total shareholders' equity 321,948 305,039
-------- --------
Total liabilities and
shareholders' equity $807,887 $700,964
======== ========
See accompanying notes to condensed consolidated financial statements.
5
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited-Thousands of dollars)
Six Months Ended
June 30,
----------------
2000 1999
----- -----
Net cash provided by operating
activities (including depreciation
and amortization of $24,050 in
2000 and $17,239 in 1999) $ 31,490 $ 31,648
-------- --------
Cash flows provided by (used in)
investing activities
Additions to property, plant and equipment (15,148) (15,670)
Proceeds from sale of property, plant
and equipment 4,332 7,369
Acquisitions of businesses, net of cash
acquired (116,111) (28,537)
Proceeds from sale of other assets - 2,501
-------- -------
Net cash used in investing activities (126,927) (34,337)
-------- -------
Cash flows provided by (used in) financing
activities
Proceeds from borrowings 101,506 38,515
Reduction of borrowings (27,694) (30,891)
Purchases of treasury stock (4,240) (4,481)
Proceeds from exercise of stock options 569 573
-------- -------
Net cash provided by financing activities 70,141 3,716
-------- -------
Effect of exchange rate changes on cash (309) (457)
-------- -------
Net increase (decrease) in cash and cash
equivalents (25,605) 570
Cash and cash equivalents at
beginning of period 50,479 8,414
-------- --------
Cash and cash equivalents at
end of period $ 24,874 $ 8,984
======== ========
Significant noncash investing
and financing activities
Issuance (refund) of treasury shares
for businesses acquired $ 3,600 $ (756)
Debt assumed with businesses acquired $ 483 $ 15,060
Acquisition of treasury shares for
stock options exercised $ 336 $ 887
See accompanying notes to condensed consolidated financial statements.
6
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited - Thousands of dollars)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2000 1999 2000 1999
---- ---- ---- ----
Net earnings $ 9,960 $13,010 $20,370 $26,330
Other comprehensive
income(expense):
Foreign currency
translation adjustments (2,530) (1,372) (4,268) (9,668)
------- ------- ------- -------
Total comprehensive income $ 7,430 $11,638 $16,102 $16,662
======= ======= ======= =======
See accompanying notes to condensed consolidated financial statements.
7
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited-Thousands of dollars, except share data)
1. Financial Statements
In the opinion of the Company's management, the accompanying unaudited,
condensed consolidated financial statements contain all adjustments
necessary to present fairly the financial position as of June 30, 2000,
the results of operations for the three and six month periods ended
June 30, 2000 and 1999, and cash flows for the six month periods ended
June 30, 2000 and 1999. The December 31, 1999 balance sheet data was
derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles. The
accompanying financial statements contain only normal recurring adjustments.
All financial information has been prepared in conformity with the
accounting principles reflected in the financial statements included in the
1999 Annual Report filed on Form 10-K applied on a consistent basis.
2. Business Acquisitions
All acquisitions have been accounted for under the purchase method. The
results of operations of the acquired businesses are included in the
consolidated financial statements from the dates of acquisition.
On March 14, 2000 the Company acquired all of the outstanding shares of
Avibank Mfg., Inc. (Avibank) based in Burbank, California for approximately
$115,800. Consideration consisted of approximately $112,200 in cash and
110,652 shares of the Company's common stock in treasury valued at $3,600.
Avibank is a manufacturer of latches, hold open rods, quick release pins,
structural panel fasteners, self-retaining bolts and expandable fasteners
for aerospace markets. Avibank, through its AVK Industrial Products
Division, also manufactures threaded inserts for the automotive and
industrial markets. The excess of the purchase price over the fair values
of the net assets acquired was approximately $90,800 and has been recorded
as goodwill, patents, trademarks and other intangibles which are being
amortized on a straight-line basis over 15 to 40 years.
On June 30, 1999 the Company acquired all of the outstanding shares of
National Set Screw Corporation, doing business as NSS Technologies, Inc.
(NSS), based in Plymouth, Michigan for approximately $43,700. NSS
manufactures highly specialized, cold-formed steel components for the
automotive, heavy truck, mining/road construction and waterworks
industries. The excess of the purchase price over the fair values of the
net assets acquired was approximately $25,000 and has been recorded as
goodwill, which is being amortized on a straight-line basis over 40 years.
The following unaudited pro forma consolidated results of operations are
presented as if the Avibank and NSS acquisitions had been made at the
beginning of the periods presented.
8
Six Months Ended
June 30,
----------------
2000 1999
---- ----
Net sales $461,540 $467,786
Net earnings 20,272 21,427
Basic earnings
per common share 1.60 1.67
Diluted earnings
per common share 1.57 1.63
The pro forma consolidated results of operations include adjustments
to give effect to amortization of goodwill and other intangibles, interest
expense on acquisition debt, shares of common stock issued and the related
income tax effects. The unaudited pro forma information is not necessarily
indicative of the results of operations that would have occurred had the
purchase been made at the beginning of the periods presented or the future
results of the combined operations.
3. Inventories
June 30, December 31,
2000 1999
--------- ------------
Finished goods $ 63,957 $ 57,292
Work-in-process 47,780 41,853
Raw materials
and supplies 32,660 33,454
Tools 6,278 5,522
-------- --------
$150,675 $138,121
======== ========
4. Long-term Debt
On March 10, 2000, the Company entered into a Bank Credit Agreement to
borrow up to $75,000 in either United States Dollars or certain European
currencies. Borrowings bear interest at either a) an overnight base rate
equal to the higher of the prime rate of the agent bank or the federal funds
rate plus .5 percentage points, b) a rate equal to the effective interbank
rate plus a margin ranging from .75 to 1.30 percentage points based on the
consolidated Leverage Ratio, as defined, or c) at a rate and term negotiated
between the agent bank and the Company, as applicable. Borrowings
outstanding under the 2000 Bank Credit Agreement at June 30, 2000 were
$10,640 with an interest rate of 7.23 percent. This agreement expires March
9, 2005. The Company is required to pay a fee on unborrowed amounts of the
facility ranging from .175 to .30 percentage points based on the
consolidated Leverage Ratio.
On February 25, 2000, the Company entered into a long-term Note Purchase
Agreement with one insurance company for $15,000 at a fixed interest rate
of 8.37 percent due in annual installments from February 28, 2004 to
February 28, 2010.
9
On February 24, 2000, the Company received the proceeds of the Michigan
Strategic Fund Variable Rate Demand Limited Obligation Revenue Bonds, Series
2000. The proceeds of the Series 2000 Bonds of $6,000 were issued to
finance the acquisition and installation of machinery and equipment at a
precision fastener and components segment manufacturing facility in Canton,
Michigan and are to be repaid on February 1, 2010. The Bonds are secured by
a bank letter of credit. At June 30, 2000, the interest rate on the
Series 2000 bonds was 4.9 percent.
The Company is subject to a number of restrictive covenants under its
various debt agreements. Covenants associated with the Company's Note
Purchase Agreements are generally more restrictive than those of the Bank
Credit Agreements. The following significant covenants are currently in
place under the Note Purchase Agreements: maintenance of a consolidated
debt-to-total capitalization (shareholders' equity plus total debt) ratio
of not more than 55 percent and maintenance of a consolidated net worth of
at least $200,000 plus 50 percent of adjustable consolidated net income for
quarters ended after December 31, 1998. Under these covenants, restricted
payments, which include all dividends and purchases or retirements of
capital stock, paid by the Company may not exceed $40,000 plus 50 percent of
consolidated net income (or minus 100 percent of the consolidated net loss)
from January 1, 1999 to the date of the restricted payment. Certain of the
Company's debt agreements contain cross default and cross acceleration
provisions. At June 30, 2000, the Company was in compliance with all
covenants of these existing credit agreements. As of June 30, 2000, under
the terms of these existing credit agreements, the Company is permitted to
incur an additional $103,300 in debt.
5. Environmental Contingency
The Company has been identified as a potentially responsible party by
various federal and state authorities for clean up or removal of waste from
various disposal sites. At June 30, 2000, the accrued liability for
environmental remediation represents management's best estimate of the
undiscounted costs related to environmental remediation which are considered
probable and can be reasonably estimated. Management believes the overall
costs of environmental remediation will be incurred over an extended period
of time. The Company has not included any insurance recovery in the accrued
environmental liability. The measurement of the liability is evaluated
quarterly based on currently available information. As the scope of the
Company's environmental liability becomes more clearly defined, it is
possible that additional reserves may be necessary. Accordingly, it is
possible that the Company's results of operations in future quarterly or
annual periods could be materially affected. Management does not anticipate
that its consolidated financial condition will be materially affected by
environmental remediation costs in excess of amounts accrued.
10
6. Per Share Data
Basic earnings per common share is calculated using the average shares
of common stock outstanding, while diluted earnings per common share
reflects the potential dilution that could occur if stock options were
exercised. Earnings per share are computed as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ------------------
2000 1999 2000 1999
---- ---- ---- ----
Net earnings $ 9,960 $ 13,010 $ 20,370 $ 26,330
=========== =========== =========== ===========
Average shares of
common stock
outstanding used
to compute basic
earnings per
common share 12,681,612 12,687,477 12,650,218 12,689,568
Additional common
shares to be
issued assuming
exercise of stock
options, net of
shares assumed
reacquired 220,767 311,816 221,507 344,017
---------- ---------- ---------- ----------
Shares used to
compute dilutive
effect of stock
options 12,902,379 12,999,293 12,871,725 13,033,585
========== ========== ========== ==========
Basic earnings per
common share $0.79 $1.03 $1.61 $2.07
===== ===== ===== =====
Diluted earnings per
common share $0.77 $1.00 $1.58 $2.02
===== ===== ===== =====
7. Segment Information
The Company has three reportable segments: Precision Fasteners and
Components, Specialty Materials and Alloys and Magnetic Products. The
Precision Fasteners and Components segment consists of business units which
produce precision fasteners, components and consumable tools for the
aerospace, automotive and industrial machinery markets. The Specialty
Materials and Alloys segment produces specialty metals, superalloys and
ceramic cores for aerospace, industrial gas turbine, medical and other
general industrial applications. The Magnetic Products segment produces
magnetic materials and products used in automotive, telecommunications,
aerospace, reprographic, computer and advertising specialty applications.
PAGE<11>
Sales and Operating Earnings by Segment
(Unaudited-Thousands of dollars)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2000 1999 2000 1999
---- ---- ---- ----
Net sales:
Precision Fasteners
and Components $161,017 $133,020 $309,179 $270,914
Specialty Materials
and Alloys 32,186 26,890 64,768 56,329
Magnetic Products 34,800 34,650 70,786 69,792
-------- -------- -------- --------
Total net sales $228,003 $194,560 $444,733 $397,035
======== ======== ======== ========
Operating earnings:
Precision Fasteners
and Components $ 13,965 $ 19,130 $ 28,109 $ 37,257
Specialty Materials
and Alloys 4,479 3,504 $ 8,830 7,796
Magnetic Products 3,945 4,344 7,321 8,344
Unallocated
Corporate Costs (2,960) (2,450) (5,760) (5,200)
-------- -------- -------- --------
Total operating earnings $ 19,429 $ 24,528 $ 38,500 $ 48,197
======== ======== ======== ========
8. Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income, depending on the use of the
derivative and whether it qualifies for hedge accounting. This Statement is
effective for all interim period financial statements for fiscal years
beginning after June 15, 2000. The Company will adopt SFAS No. 133 in the
first quarter of 2001. The Company anticipates that, due to its limited use
of derivative instruments, the adoption of SFAS No. 133 will not have a
material effect on the Company's results of operations or its financial
position.
12
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
- - -----------------------------------------------------------------------
Results of Operations
- - ---------------------
Introduction
- - ------------
Net earnings decreased in 2000 compared to the corresponding periods in
the prior year. The decrease in operating earnings is primarily attributable
to lower earnings from the Company's aerospace fastener and component
operations and the amortization of the step-up of inventory related to
purchase accounting adjustments for a business acquired in March of 2000.
These decreases were partially offset by the earnings of businesses acquired
in 1999 and 2000 and by strong demand for the Company's products sold to the
automotive and industrial gas turbine markets. The Company completed two
acquisitions in 2000 which expand the range of products offered to the
aerospace, automotive and industrial markets.
Net Sales
- - ---------
Net sales increased $33.4 million, or 17.2 percent, in the second
quarter of 2000 and $47.7 million, or 12.0 percent, for the six month period
ended June 30, 2000 compared to the same periods in 1999.
Sales of products by recently acquired businesses (NSS Technologies,
ULMA S.p.A. and Avibank Mfg., Inc.) increased Precision Fasteners and
Components segment sales by $40.1 million in the second quarter of 2000
and $62.9 million for the six month period ended June 30, 2000 compared to
the same periods in 1999. Excluding the sales from these recently acquired
businesses, this segment's sales decreased $12.1 million, or 9.1 percent,
in the second quarter of 2000 and $24.6 million, or 9.1 percent, for the six
months ended June 30, 2000. Sales of aerospace fasteners and components
declined by $13.3 million, or 16.5 percent, in the second quarter of 2000
and $29.0 million, or 17.4 percent, for the six months ended June 30,
2000. These decreases reflect the reduced demand from North American
commercial aerospace markets and the impact of inventory consolidation
activities by a major aerospace engine manufacturer in Europe. While the
Company is encouraged by a $4.6 million, or 8.9 percent, increase in
incoming orders for aerospace fasteners in the second quarter of 2000,
compared to the second quarter of 1999, it expects lower sales of aerospace
fasteners and components for the full year 2000 compared to 1999.
Excluding recently acquired businesses, the Company's automotive and
industrial fastener sales increased $1.9 million, or 4.3 percent, in the
second quarter of 2000 and $5.4 million, or 6.2 percent, for the six months
ended June 30, 2000 compared to the same periods in 1999. These increases
are the result of a strong automotive market in the United States and a
moderate recovery of the automotive demand in Brazil. The Company continues
to benefit from new orders for fasteners and components used in high
performance and safety-critical automotive applications.
13
Specialty Materials and Alloys segment sales increased $5.3 million, or
19.7 percent, in the second quarter of 2000 and $8.4 million, or 15.0
percent, for the six months ended June 30, 2000 compared to the same periods
in 1999. These higher sales are primarily the result of strong demand from
the industrial gas turbine and medical markets combined with higher material
prices (principally, cobalt and nickel) which are reflected in higher
selling prices to customers. The Company expects the demand for its alloys
from these markets to remain relatively strong throughout 2000.
The Magnetic Products segment sales were approximately the same in the
second quarter of 2000 and higher by $1.0 million, or 1.4 percent, for the
six months ended June 30, 2000 compared to the same periods in 1999. These
results are attributed to strong demand from the United States automotive,
telecommunications, computers and advertising markets. Sales of magnetic
products for reprographic applications decreased by approximately $0.7
million in the second quarter and $1.7 million for the six month period
and partially offset the increase in sales to other markets served by the
Material Products segment.
Operating Earnings
- - ------------------
Operating earnings decreased $5.1 million, or 20.8 percent, in the
second quarter of 2000 and $9.7 million, or 20.1 percent, for the six months
ended June 30, 2000 compared to the same periods in 1999. Operating
earnings in 2000 include a non-recurring charge related to purchase
accounting for the acquisition of Avibank Mfg., Inc (Avibank) on March 14,
2000. Operating earnings declined by $3.8 million in the second quarter of
2000 and $4.6 million for the six months ended June 30, 2000 due to the
amortization of the inventory step-up that resulted from the acquisition of
Avibank. Operating earnings for the six months ended June 30, 2000 include
a non-recurring gain related to the sale of an automotive fastener
manufacturing facility. On March 31, 2000 the Company sold its Coventry,
England facility for $2.5 million, resulting in a gain of $.9 million. The
Company's automotive fastener operation located in the building will
continue to occupy a portion of the facility under a lease arrangement.
Operating earnings for the second quarter and six month periods in 1999
include a non-recurring gain related to the sale leaseback of an aerospace
fastener manufacturing facility. Pursuant to the exercise of a purchase
option granted in a lease agreement dated November 30, 1994, the Company
sold its Santa Ana, California facility for $6.8 million on June 11, 1999,
resulting in a realized gain of $3.4 million. The Company's aerospace
fastener operation located in this building have remained there under a
leaseback arrangement. A deferred gain of $1.8 million is being amortized
into operating earnings over the 10 year leaseback period.
14
Excluding the non-recurring charge and gains described above, the
operating earnings of the Precision Fasteners and Components segment
decreased from $33.9 million or 12.5 percent of sales, for the six months
ended June 30, 1999 to $31.7 million, or 10.3 percent of sales, for the six
months ended June 30, 2000. The decrease in earnings is due primarily to
the decrease in sales of aerospace fasteners and components discussed above.
The decrease in operating profit margin (12.5 percent to 10.3 percent)
reflects a shift in the mix of sales from higher margin aerospace products
to lower margin automotive products. Operating earnings of companies
acquired in 1999 and 2000 (NSS Technologies, ULMA S.p.A. and Avibank Mfg.,
Inc.) increased Precision Fasteners and Components operating earnings by
$6.3 million for the six month period ended June 30, 2000. In response to
decreased demand for certain fastener products, the Company has incurred
certain charges for downsizing and consolidating fastener manufacturing
operations that are included in the 2000 and 1999 operating earnings of this
segment. These costs were approximately $1.4 million for the six month
period ended June 30, 2000 and 1999 and related primarily to cost of
employee separations in certain manufacturing operations in North America,
England and Ireland.
In the second half of 2000, the Company's aerospace components
manufacturing operations in Nottingham, England (part of Chevron Aerospace
Group Limited) will be moved to a larger facility in the same area. This
move will allow for a more consolidated and efficient manufacturing
operation and for future expansion of current operations. While the
short-term impact will result in some production disruptions that may
adversely affect the second half of 2000, the Company expects the long-term
benefits of improved manufacturing efficiencies to begin in 2001.
The operating earnings of the Specialty Materials and Alloys segment
increased from $7.8 million, or 13.8 percent of sales, for the six months
ended June 30, 1999 to $8.8 million, or 13.6 percent of sales, for the six
months ended June 30, 2000. The increase in earnings is due primarily to
the increase in sales discussed above. The decrease in the operating profit
margin is the result of higher material prices for cobalt and nickel and
production problems associated with the manufacture of new ceramic core
products for the industrial gas turbine market.
Operating earnings of the Magnetic Products segment decreased from $8.3
million, or 12.0 percent of sales, for the six months ended June 30, 1999
to $7.3 million, or 10.3 percent of sales, for the six months ended June 30,
2000. The decrease in earnings is attributed to decreased sales of
reprographic magnetic products and the operating loss of approximately
$1.5 million incurred by the Company's majority owned joint venture
manufacturing facility in Adelanto, California. The Company has assumed an
increase in management control and has initiated actions to return this
facility to profitability.
15
Other Income and Expense
- - ------------------------
Due to higher levels of debt, interest expense increased from $6.6
million in the first six months of 1999 to $10.3 million in the first six
months of 2000. In the second quarter of 1999, the Company recorded losses
from its Indian affiliate in the amount of $1.1 million which reduced its
investment balance to zero. The Company withdrew its last on-site
representative from its fastener joint venture in China and, due to ongoing
losses incurred by that operation, wrote off the residual carrying value of
that investment of $0.6 million. No tax benefit was available on the write
off of the Company's joint venture in China.
Orders and Backlog
- - ------------------
Incoming orders for the second quarter of 2000 were $237.1 million
compared to $178.9 million for the second quarter of 1999, a 32.6 percent
increase. Incoming orders for the six months ended June 30, 2000 were
$460.3 million compared to $383.7 million for the same period in 1999, a
20.0 percent increase. Businesses acquired after June 29, 1999 received
orders of $40.2 million for the quarter and $63.7 million for the six month
period. Incoming orders for the Specialty Materials and Alloys segment
increased $13.5 million for the quarter and $12.3 million for the six month
period. The backlog of orders, which represent firm orders with delivery
scheduled within 12 months, at June 30, 2000 was $290.2 million compared to
$270.8 million on the same date a year ago and $255.9 million at December
31, 1999.
Acquisitions
- - ------------
As discussed in Note 2 to the financial statements, the Company acquired
all of the outstanding shares of Avibank Mfg., Inc. (Avibank) based in
Burbank, California for approximately $115.8 million on March 14, 2000. The
shareholders of Avibank and SPS will elect to have the transaction treated
as an asset purchase for tax purposes. Avibank is a leading manufacturer of
latches, hold open rods, quick release pins, structural panel fasteners,
self-retaining bolts and expandable fasteners for aerospace markets.
Avibank, through its AVK Industrial Products Division, also manufactures
threaded inserts for the automotive and industrial markets. A large number
of Avibank's products are proprietary. For the year ended December 31,
1999, Avibank reported sales of approximately $77.5 million. The
acquisition of Avibank represents another step in the execution of the
Company's strategy of acquiring technically sophisticated, strong niche
companies which are extensions of its existing businesses.
On January 10, 2000, the Company acquired certain operating assets of
ULMA S.p.A. (ULMA) based in Milan, Italy for approximately $2.3 million.
ULMA is a full range manufacturer of flat, planetary and cylindrical thread
roll dies used in metal forming. Sales for the year ended December 31, 1999
were approximately $5.2 million. The acquisition of ULMA expands the
Company's precision tool product offering and establishes a precision tool
manufacturing presence in Continental Europe.
16
Liquidity and Capital Resources
- - -------------------------------
Management considers liquidity to be the ability to generate
adequate amounts of cash to meet its needs and capital resources
to be the resources from which such cash can be obtained, principally from
operating and external sources. The Company believes that capital resources
available to it will be sufficient to meet the needs of its business, both
on a short-term and long-term basis.
Cash flow provided or used by operating activities, investing activities
and financing activities is summarized in the condensed statements of
consolidated cash flows. Net cash provided by operating activities was
approximately the same for the six months ended June 30, 2000 compared to
the same period in 1999. The decrease in net earnings ($6.0 million) was
offset by higher non-cash charges for depreciation and amortization ($6.8
million).
Cash flows provided by or used in investing activities for 2000 include
the cash payment for the acquisition of Avibank ($112.2 million) and the net
proceeds from the sale of the Coventry, England facility ($2.5 million).
Cash flows provided by or used in investing activities for 1999 include the
cash payment for the acquisition of NSS Technologies, Inc. ($28.5 million)
and the net proceeds from the sale of the Santa Ana, California facility
($6.6 million). The Company spent $15.1 million for capital expenditures in
the first six months of 2000 and has budgeted $34.5 million for the full
year of 2000, as reported on Form 10-K for the year ended December 31, 1999.
The Company's total debt to equity ratio was 90 percent at June 30, 2000,
compared to 71 percent at December 31, 1999. Total debt was $290.3 million
at June 30, 2000 and $217.4 million at December 31, 1999. As of June 30,
2000, under the terms of its existing credit agreements, the Company is
permitted to incur an additional $103.3 million in debt. Additional
information related to financing activities is provided in Note 4 to the
financial statements.
Forward-Looking Statements
- - --------------------------
Certain statements in Management's Discussion and Analysis of Financial
Condition and Results of Operations contain "forward-looking" information,
within the meaning of the Private Securities Litigation Reform Act of 1995,
that involve risk and uncertainty. Statements such as the Company's
expectations of lower sales of aerospace fasteners and components, demand
for its alloys from the industrial gas turbine and medical markets to remain
relatively strong throughout 2000, future benefits of the Company's
downsizing and consolidating fastener manufacturing operations, long-term
benefits of moving aerospace component manufacturing operations into a
larger facility, plans to return the Adelanto, California facility to
profitability and future benefits from operational synergies with newly
acquired companies are "forward-looking" statements contained in
Management's Discussion and Analysis of Financial Condition and Results of
Operations. Actual future results may differ materially depending on a
variety of factors, such as: the effects of competition on products and
pricing, fluctuations in raw material prices, customer satisfaction and
qualification issues, labor disputes, worldwide political and economic
stability and changes in fiscal policies, laws and regulations on a national
and international basis. The Company undertakes no obligation to publicly
release any forward-looking information to reflect anticipated or
unanticipated events or circumstances after the date of this document.
17
SPS TECHNOLOGIES, INC AND SUBSIDIARIES
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's primary market risk exposures are foreign currency
exchange rate and interest rate risk. Fluctuations in foreign currency
exchange rates affect the Company's results of operations and financial
position. As discussed in Note 1 to the financial statements on Form
10-K for the year ended December 31, 1999, the Company uses forward exchange
contracts and one currency swap agreement to minimize exposure and reduce
risk from exchange rate fluctuations affecting the results of operation.
Because the largest portion of the Company's foreign operations are located
in countries with relatively stable currencies, namely, England, Ireland and
Canada, the foreign currency exchange rate risk to the Company's financial
position is not material. However, the Company has expanded into Brazil,
China and other foreign countries which has increased its exposure to foreign
currency fluctuations. Fluctuations in interest rates primarily affect the
Company's results of operations. Because a majority of the Company's debt
is in fixed rate obligations (as disclosed in Note 8 to the financial
statements on Form 10-K for the year ended December 31, 1999), the Company
has effectively limited its exposure to fluctuations in interest rates.
A description of the Company's financial instruments is provided in Notes 1
and 16 to the financial statements on Form 10-K for the year ended December
31, 1999. Assuming an instantaneous 10 percent strengthening of the United
States dollar versus foreign currencies for which forward exchange contracts
and currency rate swap agreements existed and a 10 percent change in the
interest rate on the Company's variable rate debt had all occurred on June
30,2000, the Company's results of operations, cash flow and financial
position would not have been materially affected.
18
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES
PART II
OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders
(a) The Annual Meeting of Shareholders was held on April 27, 2000.
(b) The name of each director elected at the Annual Meeting as the Company's
two Class II directors, each to hold office until the 2003 Annual
Meeting of Shareholders, is as follows:
Raymond P. Sharpe
James F. O'Connor
The name of each other director whose term of office continued after the
meeting is as follows:
Howard T. Hallowell, III
Charles W. Grigg
Richard W. Kelso
Harry J. Wilkinson
Eric M. Ruttenberg
John S. Thompson
(c) 1. The results of the election of directors with respect to each
nominee for office was as follows:
For Withheld
---------- -----------
Raymond P. Sharpe 10,955,473 437,078
James F. O'Connor 10,954,938 437,613
2. A proposal to amend the SPS 1988 Long Term Incentive Stock Plan
received 9,841,242 votes for and 1,533,674 votes against, with 17,635
abstentions and 0 broker non-votes.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended June 30, 2000.
19
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES
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.
SPS TECHNOLOGIES, INC.
----------------------
(Registrant)
Date: August 7, 2000 William M. Shockley
----------------------
William M. Shockley
Vice President,
Chief Financial Officer
Mr. Shockley is signing on behalf of the registrant and as the Chief
Financial Officer of the registrant.
20
EXHIBIT INDEX
27 Financial Data Schedule.
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