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 September 30, 1999
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
101 Greenwood Avenue, Suite 470 Identification No.)
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 November 1, 1999 was 12,595,996.
1
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES
---------------------------------------
INDEX
-----
Part I. Financial Information
- -----------------------------
Item 1. Financial Statements
Statements of Consolidated Operations -
Three and Nine Months Ended September 30, 1999
and 1998 (Unaudited)
Consolidated Balance Sheets -
September 30, 1999 and December 31, 1998
(Unaudited)
Condensed Statements of Consolidated Cash Flows -
Nine Months Ended September 30, 1999 and 1998
(Unaudited)
Consolidated Statements of Comprehensive Income -
Three and Nine Months Ended September 30, 1999
and 1998(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 5. Other Information
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 Nine Months Ended
September 30, September 30,
------------------ -----------------
1999 1998 1999 1998
-------- -------- -------- --------
Net sales $195,728 $184,440 $592,763 $539,454
Cost of good sold 153,932 143,432 463,345 416,486
-------- -------- -------- --------
Gross Profit 41,796 41,008 129,418 122,968
Selling, general and
Administrative expense 19,940 21,926 59,365 63,285
-------- -------- -------- --------
Operating earnings 21,856 19,082 70,053 59,683
-------- -------- -------- --------
Other income (expense):
Interest income 183 157 661 709
Interest expense (3,919) (2,539) (10,523) (7,680)
Equity in losses
of affiliates 0 (545) (2,032) (1,328)
Minority interest (95) (64) (197) (486)
Other, net (15) (116) (112) (563)
--------- -------- -------- --------
(3,846) (3,107) (12,203) (9,348)
--------- -------- -------- --------
Earnings before income taxes 18,010 15,975 57,850 50,335
Provision for income taxes 5,700 4,950 19,210 16,670
-------- -------- -------- --------
Net earnings $ 12,310 $ 11,025 $ 38,640 $ 33,665
======== ======== ======== ========
Earnings per common share:
Basic $ 0.97 $ 0.87 $ 3.05 $ 2.69
======== ======== ======== ========
Diluted $ 0.95 $ 0.84 $ 2.97 $ 2.59
======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
3
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited-Thousands of dollars)
September 30, December 31,
1999 1998
------------- ------------
Assets
Current assets
Cash and cash equivalents $ 10,801 $ 8,414
Accounts and notes receivable,
less allowance for doubtful
receivables of $2,951 (1998-$2,960) 126,518 109,300
Inventories 140,752 127,366
Deferred income taxes 20,084 20,494
Prepaid expenses and other 7,201 6,366
--------- ---------
Total current assets 305,356 271,940
--------- ---------
Property, plant and equipment, net of
accumulated depreciation of $152,973
(1998-$150,657) 216,063 207,800
Other assets 147,046 127,495
--------- ---------
Total assets $ 668,465 $ 607,235
========= =========
See accompanying notes to condensed consolidated financial statements.
4
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited-Thousands of dollars, except share data)
September 30, December 31,
1999 1998
------------- ------------
Liabilities and shareholders' equity
Current liabilities
Notes payable and current portion of
long-term debt $ 14,582 $ 18,185
Accounts payable 59,787 51,777
Accrued expenses 56,867 62,062
Income taxes payable 9,547 5,889
--------- ---------
Total current liabilities 140,783 137,913
--------- ---------
Deferred income taxes 22,528 21,176
Long-term debt 182,157 154,010
Retirement obligations and other
long term liabilities 27,356 25,605
Minority interest 1,591 1,731
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 13,957,432 shares (13,812,138
shares in 1998) 6,979 6,906
Additional paid-in capital 109,569 106,093
Common stock in treasury, at cost,
1,311,736 shares (1,119,008 shares in (20,675) (12,943)
1998)
Retained earnings 216,601 177,961
Accumulated other comprehensive income
Minimum pension liability (2,025) (2,025)
Cumulative translation adjustments (16,399) (9,192)
---------- ----------
Total shareholders' equity 294,050 266,800
---------- ----------
Total liabilities and
shareholders' equity $ 668,465 $ 607,235
========== ==========
See accompanying notes to condensed consolidated financial statements.
5
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(Unaudited-Thousands of dollars)
Nine Months Ended
September 30,
---------------------
1999 1998
--------- ---------
Net cash provided by operating
activities (including depreciation
and amortization of $25,809 in
1999 and $22,161 in 1998) $ 42,602 $ 56,480
-------- --------
Cash flows provided by (used in)
investing activities:
Additions to property, plant and equi pment (27,915) (19,631)
Proceeds from sale of property, plant
and equipment 7,675 291
Acquisitions of businesses, net of cash
acquired (28,537) (25,132)
Proceeds from sale of other assets 2,501 0
--------- ---------
Net cash used in investing activities (46,276) (44,472)
--------- ---------
Cash flows provided by (used in) financing
activities:
Proceeds from borrowings 95,767 35,372
Reduction of borrowings (84,460) (42,048)
Purchases of treasury stock (5,502) (3,579)
Proceeds from exercise of stock options 730 1,450
--------- ---------
Net cash used by financing activities 6,535 (8,805)
--------- ---------
Effect of exchange rate changes on cash (474) 108
--------- ---------
Net increase in cash and cash
equivalents 2,387 3,311
Cash and cash equivalents at
beginning of period 8,414 18,659
--------- ---------
Cash and cash equivalents at
end of period $ 10,801 $ 21,970
========= =========
Significant noncash investing
and financing activities:
Issuance of treasury shares for
business acquired $ 0 $ 8,828
Debt assumed with businesses acquired $ 15,060 $ 24,838
Acquisition of treasury shares through
stock options exercised $ 1,076 $ 1,778
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 Nine Months Ended
September 30, September 30,
-------------------- --------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Net earnings $ 12,310 $ 11,025 $ 38,640 $ 33,665
Other comprehensive
income (expense):
Foreign currency
translation adjustments 2,461 3,230 (7,207) 782
--------- --------- --------- ---------
Total comprehensive income $ 14,771 $ 14,255 $ 31,433 $ 34,447
========= ========= ========= =========
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 September 30, 1999, the results of operations for
the three and nine month periods ended September 30, 1999 and
1998, and cash flows for the nine month periods ended September
30, 1999 and 1998. The December 31, 1998 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 1998 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 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 $43,600. 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 $24,800 and has been recorded as
goodwill, which is being amortized on a straight-line basis over
40 years.
In 1998, the Company acquired four businesses in the Precision
Fasteners and Components Segment and one business in the
Specialty Materials and Alloy Segment for an aggregate purchase
price of $108,300. Approximately $8,800 of the aggregate
purchase price was paid with 203,935 shares of common stock from
treasury and the remainder in cash and debt assumed by the
Company. The excess of purchase price over the estimated fair
values of the net assets acquired, in the amount of $56,800 in
1998, has been recorded as goodwill and is being amortized on a
straight-line basis over 40 years.
8
The following unaudited pro forma consolidated results of
operations are presented as if the acquisitions discussed above
had been made at the beginning of the periods presented.
Nine Months Ended
September 30,
-------------------
1999 1998
-------- --------
Net sales $622,546 $649,335
Net earnings 38,981 30,433
Basic earnings
per common share 3.08 2.40
Diluted earnings
per common share 3.00 2.31
The pro forma consolidated results of operations include
adjustments to give effect to amortization of goodwill, 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
September 30, December 31,
1999 1998
------------- ------------
Finished goods $ 53,196 $ 53,748
Work-in-process 45,756 39,192
Raw materials
and supplies 34,833 28,412
Tools 6,967 6,014
------------- -------------
$ 140,752 $ 127,366
============= =============
The September 30, 1999 inventory balances include inventories in
the amount of $12,100 for NSS, a business acquired on June 30,
1999.
4. Long-Term Debt
On August 4, 1999, the Company entered into a long-term Note
Purchase Agreement with five insurance companies for $80,000 at
fixed interest rates of 7.75 percent to 7.85 percent. The
Company received $50,000 of the debt proceeds on August 4, 1999
and the balance of the proceeds of $30,000 was received in
October 1999. Of the total proceeds, $50,000 is due in annual
installments from August 1, 2004 to August 1, 2014 and $30,000 is
due on August 1, 2009. Effective August 4, 1999, the Company
also amended the 1996 long-term Note Purchase Agreement to
include the same restrictive covenants as the 1999 long-term Note
Purchase Agreement.
9
The Company is subject to a number of restrictive covenants under
its various debt agreements. As of September 30, 1999, the
following are the most significant covenants in place under the
Company's debt agreements: maintenance of a consolidated debt-
to-total capitalization (shareholder's equity plus total debt)
ratio of not more than 55 percent and maintenance of a minimum
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
September 30, 1999, the Company was in compliance with all
covenants. As of September 30, 1999, under the terms of the
existing credit agreements, the Company is permitted to incur an
additional $162,600 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 September 30,
1999, 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.
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
outstanding stock options were exercised. Earnings per common
shares are computed as follows:
10
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
1999 1998 1999 1998
========= ========= ========= =========
Net earnings $ 12,310 $ 11,025 $ 38,640 $ 33,665
========= ========= ========= =========
Average shares of
common stock
outstanding used
to compute basic
earnings per
common share 12,643,726 12,647,054 12,674,701 12,499,041
Additional common
shares to be
issued assuming
exercise of stock
options, net of
shares assumed
reacquired 280,244 455,523 322,760 488,899
--------- --------- --------- ---------
Shares used to
compute dilutive
effect of stock
options 12,923,970 13,102,577 12,997,461 12,987,940
========== ========== ========== ==========
Basic earnings per
common share $0.97 $0.87 $3.05 $2.69
===== ===== ===== =====
Diluted earnings per
common share $0.95 $0.84 $2.97 $2.59
===== ===== ===== =====
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.
11
Sales and Operating Earnings by Segment
(Unaudited-Thousands of dollars)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------
1999 1998 1999 1998
--------- --------- -------- --------
Net sales:
Precision Fasteners
and Components $135,018 $120,561 $405,932 $343,965
Specialty Materials
and Alloys 26,184 30,083 82,513 86,199
Magnetic Products 34,526 33,796 104,318 109,290
--------- --------- -------- --------
Total Net Sales $195,728 $184,440 $592,763 $539,454
======== ========= ======== ========
Operating earnings:
Precision Fasteners
and Components $ 16,467 $ 13,361 $ 53,724 $ 41,804
Specialty Materials
and Alloys 3,289 4,002 11,085 11,943
Magnetic Products 4,660 4,249 13,004 13,851
Unallocated
Corporate Costs (2,560) (2,530) (7,760) (7,915)
--------- --------- --------- ---------
Total Operating
Earnings $ 21,856 $ 19,082 $ 70,053 $ 59,683
========= ========= ======== ========
8. Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB)
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 treatment. Originally, this statement was effective
for all interim period financial statements for fiscal years
beginning after June 15, 1999. However, in July 1999, the FASB
issued SFAS No. 137, which delayed the effective date of SFAS No.
133 for one year to 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 sales and net earnings improved in 1999 compared to the
corresponding periods in the prior year. This improvement was
primarily due to the impact of businesses acquired in 1999 and 1998.
Certain businesses had lower earnings due to the soft demand for their
products in the North American and European industrial manufacturing
markets. The Company completed one acquisition in 1999 which expands
the range of products offered to the automotive market.
Net Sales
---------
Net sales increased $11.3 million, or 6.1 percent, in the third
quarter of 1999 and $53.3 million, or 9.9 percent, for the nine month
period ended September 30, 1999 compared to the same periods in 1998.
The increase in sales of the Precision Fasteners and Components
segment is primarily attributable to the impact of businesses acquired
in 1999 and 1998. Sales by those businesses (NSS Technologies,
Chevron Aerospace Group Limited, Terry Machine Company, Non-Ferrous
Bolt & Mfg. Co. and Howell Penncraft, Inc.) increased segment sales by
$31.0 million in the third quarter of 1999 and $90.8 million for the
nine months ended September 30, 1999. Chevron Aerospace continues to
benefit from improved demand for its aerospace products in Europe due
to a growing market position with Airbus Industrie. NSS Technologies
and Terry Machine continue to benefit from strong demand for their
products from the North American automotive market and increased
capacity due to recent capital investments.
Excluding sales by the businesses acquired in 1999 and 1998,
Precision Fasteners and Components segment sales decreased $16.6
million, or 15.4 percent, in the third quarter of 1999 and $28.8
million, or 8.7 percent, for the nine months ended September 30, 1999
compared to the same periods in 1998. Total aerospace fastener sales
in North America declined by $11.2 million (22.9 percent) in the third
quarter of 1999 and $15.3 million (10.6 percent) for the nine months
ended September 30, 1999, consistent with reductions in incoming order
rates experienced in the second half of 1998 and first half of 1999.
These reductions reflect the decline in new aircraft production at
Boeing forecasted for 2000 as well as inventory reduction activities
in the aerospace industry at the OEM and distributor levels. The
Company's automotive and industrial fastener sales decreased $5.5
million, or 13.8 percent, in the third quarter and $19.3 million, or
15.2 percent, in the nine month period ended September 30, 1999. The
devaluation of the Brazilian Real, overall weakness of the Brazilian
economy, downsizing of the Company's automotive manufacturing
operation in Coventry, England and decreased demand for Unbrako
fasteners all contributed to this decrease.
13
Historically, the Company has manufactured Unbrako socket screws
in Cleveland, Ohio and Shannon, Ireland. Decreased demand from the
industrial machinery markets and a strong dollar have reduced demand
for the Unbrako line of socket screws. Because of lower wage and tax
rates in Ireland and the need for more automotive manufacturing
capacity in Cleveland, the Company consolidated its Unbrako socket
screw manufacturing operations into its Shannon, Ireland facility in
the third quarter of 1999. In Cleveland, the skilled labor force and
production equipment was transferred to the automotive fastener
operations already located in that facility.
Specialty Materials and Alloys segment sales decreased $3.9
million, or 13.0 percent, in the third quarter of 1999 and $3.7
million, or 4.3 percent, for the nine months ended September 30, 1999
compared to the same periods in 1998. This segment was negatively
impacted by lower raw material prices, weak demand for stainless steel
products for general industrial markets, a push out in delivery
schedules for aerospace proprietary superalloys and vacuum furnace
downtime for repairs. The installation of a new vacuum furnace is
expected to be completed in the fourth quarter and should reduce cost
and increase superalloy sales capacity. This segment continues to
benefit from strong demand from the industrial gas turbine markets.
Magnetic Products segment sales increased $0.7 million, or 2.2
percent, in the third quarter but decreased $5.0 million, or 4.5
percent, for the nine months ended September 30, 1999 compared to the
same periods in 1998. The year to date sales decline is attributed to
sluggish conditions in the United States and European industrial
manufacturing markets, soft automotive manufacturing demand in the
United Kingdom and declines in certain base metal prices. Improved
sales of low energy bonded magnets and continued strong demand from
the computer, telecommunications and United States automotive markets
partially offset the year to date sales decline and contributed to the
third quarter sales increase. In the third quarter of 1998, magnetic
product sales to the automotive market were adversely affected by the
General Motors strike.
Operating Earnings
------------------
Operating earnings of the total Company increased $2.8 million,
or 14.5 percent, in the third quarter of 1999 and $10.4 million, or
17.4 percent, for the nine month period ended September 30, 1999
compared to the same periods in 1998. Operating earnings for the nine
month period 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 will remain there under a leaseback
arrangement. A deferred gain of $1.8 million will be amortized into
operating earnings over the 10 year leaseback period.
Excluding the sale leaseback gain of $3.4 million described
above, the operating earnings of the Precision Fasteners and
Components segment improved from $41.8 million, or 12.2 percent of
sales, for the nine months ended September 30, 1998 to $50.4 million
14
or 12.4 percent of sales, for the nine months ended September 30,
1999. The improvement in operating earnings is the result of
businesses acquired in 1999 and 1998 and the 1998 cost incurred to
downsize the automotive fastener manufacturing operation in Coventry,
England. The results of businesses acquired in 1999 and 1998
increased operating earnings by $6.7 million for the nine months ended
September 30, 1999 compared to 1998. The Company incurred a third
quarter 1998 charge of $1.6 million related to the downsizing of its
manufacturing operation in Coventry, England. For the nine months
ended September 30, 1999, the Coventry facility has reached breakeven
performance compared to the nine months ended September 30, 1998 when
the facility lost $3.1 million, which included operating losses of $.6
million, cost of employee separations of $1.5 million, inventory
write-offs of $.6 million and other costs of $.4 million. The 1999
operating earnings of the Precision Fasteners and Components segment
also includes certain charges for the downsizing and consolidation of
fastener manufacturing operations. These costs were approximately
$1.4 million for the nine month period ended September 30, 1999 and
related primarily to cost of employee separations in fastener
operations in North America.
Operating earnings of the Specialty Materials and Alloys segment
declined by $.7 million in the third quarter and $.9 million in the
nine months ended September 30, 1999 compared to the same periods in
1998. Operating earnings of the Magnetic Products segment increased
by $.4 million in the third quarter but decreased by $.8 million for
the nine months ended September 30, 1999 compared to the same periods
in 1998. These changes in operating earnings compared to 1998 are
consistent with the changes in sales volume discussed above. The
trend of the 1999 performance of the Magnetic Products segment
reflects the Company's efforts to reduce cost in response to lower
sales. This segment's operating earnings have improved in each
quarter of 1999 due to on-going cost management actions implemented in
response to soft demand conditions in certain markets.
Other Income and Expense
------------------------
Due to higher levels of debt, interest expense increased from
$7.7 million in the first nine months of 1998 to $10.5 million in the
first nine months of 1999. In 1999, the Company recorded its share of
losses from its Indian affiliate in the amount of $1.2 million which
reduced its investment balance to zero. Also in 1999, 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
$.8 million. No tax benefit is available on the write off of the
Company's joint venture in China.
Orders and Backlog
------------------
Incoming orders for the third quarter of 1999 were $179.8 million
compared to $175.2 million for the third quarter of 1998, a 2.6
percent increase. Incoming orders for the nine months ended September
30, 1999 were $563.5 compared to $525.8 million for the same period in
15
1998, a 7.2 percent increase. Businesses acquired in 1999 and 1998
increased orders by $35.0 million for the quarter and $103.8 million
for the nine month period. The Company is experiencing lower demand
for its products in certain geographic regions and served markets
which partially offsets the benefit of the order increases due to the
impact of businesses acquired. For the third quarter, orders for
aerospace fasteners were $9.0 million, or 17.2 percent lower than the
same period a year ago. This decline is consistent with the
forecasted drop in U.S. commercial aircraft production rates for next
year, along with inventory management activities. The Company
continues to benefit from improved demand for aerospace fasteners and
components in Europe as well as market share increases. Orders for
automotive fasteners for the third quarter were $2.3 million, or 10.4
percent, lower than the same period a year ago. The majority of this
decline is attributable to soft automotive demand in the United
Kingdom and Europe as well as the impact of downsizing the Coventry
facility. Orders for automotive fasteners in Brazil, expressed in
United States dollars, were down 31.3 percent for the quarter, but
this decline is due to the devaluation of the Brazilian Real, as
orders on a local currency basis increased by 1.7 percent. Industrial
fastener orders were $2.0 million, or 11.7 percent, lower than the
third quarter of 1998, reflecting continued soft demand for industrial
hardware in the United States and Europe. Orders for the Specialty
Materials and Alloy segment were $17.2 million, or 54.2 percent, lower
than third quarter of 1998 reflecting the timing of orders related to
first quarter 2000 shipments, lower raw material pricing, continuing
soft demand for stainless product and reduced commercial aerospace
demand that could not be offset by the strength in demand from the
industrial gas turbine and medical product markets. The backlog of
orders, which represents firm orders with delivery scheduled within 12
months, at September 30, 1999 was $270.5 million compared to $238.1
million on the same date a year ago and $296.1 million at December 31,
1998.
Acquisitions
------------
As discussed in Note 2 to the financial statements, 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 $43.6 million on June 30, 1999. NSS
manufactures highly specialized cold-formed steel components for the
automotive, heavy truck, mining/road construction and waterworks
industries. NSS' sales for the twelve months ended June 30, 1999 were
approximately $57.4 million. This acquisition expands the Company's
manufacturing and technical capabilities and broadens the range of
products offered to its automotive customers.
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.
16
Cash flow provided or used by operating activities, investing
activities and financing activities is summarized in the condensed
statements of consolidated cash flows. For the nine months ended
September 30, 1999, net cash provided by operating activities
decreased by $13.9 million compared to the first nine months of 1998
due primarily to the $15.7 million increase in cash used to fund
working capital.
Cash flows provided by or used in investing activities for 1999
include the net proceeds from the sale leaseback of the Santa Ana,
California facility ($6.6 million) and the cash payment for the
acquisition of NSS ($28.5 million). Cash flows used in investing
activities for 1998 include cash payments for the acquisitions of
Greenville Metals ($9.7 million), Terry Machine ($8.4 million) and
Howell Penncraft ($3.5 million). The Company spent $27.9 million for
capital expenditures in the first nine months of 1999 and is
forecasting $40.4 million for the full year of 1999, an increase of
$2.4 million from the 1999 forecasted amount reported on Form 10-K for
the year ended December 31, 1998.
The Company's total debt to equity ratio was 67 percent at
September 30, 1999, compared to 65 percent at December 31, 1998.
Total debt was $196.7 million at September 30, 1999 and $172.2 million
at December 31, 1998. As of September 30, 1999, under the terms of
the existing credit agreements, the Company is permitted to incur an
additional $162.6 million in debt. Additional information related to
financing activities is provided in Note 4 to the financial
statements.
Year 2000 Readiness Disclosures
-------------------------------
The following statements include "Year 2000 Readiness Disclosure"
within the meaning of the Year 2000 Information and Readiness
Disclosure Act of 1998. The Company has identified, evaluated and
implemented changes to computer systems and applications necessary to
achieve a year 2000 (Y2K) date conversion with no material effect on
customers or disruption to business operations. These actions were
necessary to ensure that information technology (IT) and non-IT
systems and applications would recognize and process the year 2000 and
beyond. Major areas of potential business impact were identified and
conversion efforts are substantially completed. All mainframe based
IT systems have been assessed and required Y2K conversion of these
computer programs was substantially completed by April 1999. All PC
and LAN based IT systems and non-IT systems have been assessed and
required Y2K conversion of these systems was substantially completed
by September 1999. The Company has communicated with suppliers,
customers, financial institutions and others it does business with to
coordinate Y2K conversion. The Company has not completed its
assessment and evaluation of the state of readiness of its customers
and vendors, although major customers have requested from the Company
information regarding its Y2K readiness and certain key suppliers have
confirmed their own internal Y2K readiness.
17
The cost specifically associated with addressing Y2K issues
incurred in the first nine months of 1999 were capitalizable costs of
$1.2 million and costs expensed as incurred of $500 thousand. The
Company's cost to complete its Y2K readiness actions is estimated to
be additional capitalizable cost of $200 thousand and cost expensed as
incurred of $100 thousand. Costs expensed as incurred include the
cost of resources within the Company and external resources which have
been directed toward Y2K activities. Total Y2K readiness costs are
estimated to be $3.6 million.
The most reasonably likely worst case Y2K scenario would be the
failure of either the Company or a third party to correct a material
Y2K problem that would cause an interruption in, or failure of, normal
business activities or operations. In the event that the worst case
scenario occurs, the impact of the Company's financial position or
results of operations cannot be estimated. While the Company believes
that the Y2K conversion of all internal IT and non-IT systems was
substantially completed as of September 30, 1999, the Company has
generated certain contingency plans and identified additional actions
which would be implemented in the event of Y2K failure, including but
not limited to: utilization of outside (third-party) mainframe
processing resources, utilization of backup capacity within the
operating groups, development of manual procedures to process critical
transactions and other appropriate measures. To the extent that the
Company experiences a Y2K failure related to a third party's lack of
readiness, alternate sources of supply are being identified, however,
certain resources are not easily replaceable and there are limited
contingency planning options for such resources. At this time, the
Company has not identified a Y2K problem that it believes cannot be
remediated prior to it having a material impact on operations. The
Company will continue to assess the readiness of its own systems and,
if a problem is identified that cannot be remediated in the
appropriate time period, a specific plan to address that issue will be
developed.
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. The
Company's expectations of future benefits from the installation of new
capital equipment, future benefits from operational synergies with
newly acquired companies and completing the Y2K date conversion with
no material adverse effect on operations and at no material cost to
the Company's results of operations 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, 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.
18
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, 1998, 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 9 to the financial statements on Form 10-K for the
year ended December 31, 1998), the Company has effectively limited its
interest expense exposure to fluctuation 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, 1998. 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 interest rate on the Company's debt
had all occurred on September 30, 1999, the Company's results of
operations, cash flow and financial position would not have been
materially affected.
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES
---------------------------------------
PART II
-------
OTHER INFORMATION
-----------------
Item 5. Other Information
- --------------------------
On July 20, 1999, the Company announced that its Board of Directors
authorized the repurchase of up to 500,000 shares of the Company's
common stock through open market and private purchases. The actual
number of shares to be purchased and the timing of purchases will
be at the discretion of Company management.
On September 1, 1999, the Company announced the appointment of John
S. Thompson as President and Chief Operating Officer effective
October 1, 1999. Prior to joining SPS, Mr. Thompson spent 24 years
at BTR PLC, a diversified engineered products company traded on the
London Stock Exchange. BTR PLC recently merged with Siebe PLC to
form a new controls and automation company - Invensys. Mr.
Thompson was a member of BTR PLC's Board of Directors and Executive
Committee. He was Chief Executive of BTR Inc., the U.S. holding
company, and responsible for a number of BTR's product groups.
These included Automotive Systems, Paper Technology, Meters,
Building Products, and Motors. Headquartered in Stamford,
Connecticut, BTR Inc. had sales of approximately U.S. $4.5 billion
and employed 40,000 employees.
Mr. Thompson received a Bachelor of Science in mechanical
engineering from Worcester Polytechnical Institute in 1969 and an
MBA from the Harvard Business School in 1971. His earlier years at
BTR were involved in both manufacturing and financial functional
areas at a number of BTR's subsidiary companies.
Charles W. Grigg, Chairman, Chief Executive Officer and President
of SPS said that with SPS Technologies approaching $1 billion in
sales, the added complexity of managing its different businesses
and the time required to pursue SPS' active acquisition program, he
felt it was important to re-establish the position of President and
Chief Operating Officer. Mr. Grigg will retain the title of
Chairman and Chief Executive Officer.
On October 28, 1999, the Company purchased the remaining 15% of the
capital stock of Mecair Aerospace Industries, Inc. of Pointe-Claire
(Montreal), Quebec, Canada, for C$1.5 million (approximately $1.0
million) to increase its ownership from 85% to 100%. Mecair
manufactures and sells high strength fasteners and precision
components for commercial and military aircraft and for land-based
power generation systems. For the twelve month period ended
September 30, 1999, Mecair had sales of C$11.4 million
(approximately $7.7 million).
19
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
September 30, 1999.
20
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: November 1, 1999 William M. Shockley
---------------------
William M. Shockley
Vice President,
Chief Financial Officer
And Treasurer
Mr. Shockley is signing on behalf of the registrant and as the
Chief Financial Officer of the registrant.
21
EXHIBIT INDEX
27 Financial Data Schedule.
22
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