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, 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 August
3, 1999 was 12,654,443.
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
Part I. Financial Information Page
----------------------------- ----
Item 1. Financial Statements
Statements of Consolidated Operations -
Three and Six Months Ended June 30, 1999 and 1998
(Unaudited) 3
Consolidated Balance Sheets -
June 30, 1999 and December 31, 1998
(Unaudited) 4-5
Condensed Statements of Consolidated Cash Flows -
Six Months Ended June 30, 1999 and 1998
(Unaudited) 6
Consolidated Statements of Comprehensive Income -
Three and Six Months Ended June 30, 1999 and 1998
(Unaudited) 7
Notes to Condensed Consolidated Financial
Statements 8-13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14-19
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 20
Part II. Other Information
--------------------------
Item 4. Submission of Matters to Vote of Security
Holders 21
Item 6. Exhibits and Reports on Form 8-K 21
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,
---------------------- -------------------
1999 1998 1999 1998
-------- --------- -------- ---------
Net sales $194,560 $ 175,149 $397,035 $ 355,014
Cost of goods sold 151,792 133,376 309,413 273,054
-------- --------- -------- ---------
Gross profit 42,768 41,773 87,622 81,960
Selling, general and
administrative expense 18,240 20,904 39,425 41,359
-------- --------- -------- ---------
Operating earnings 24,528 20,869 48,197 40,601
-------- --------- -------- ---------
Other income (expense):
Interest income 282 345 478 552
Interest expense (3,270) (2,561) (6,604) (5,141)
Equity in loss
of affiliates (1,770) (503) (2,032) (783)
Minority interest (76) (210) (102) (422)
Other, net (24) (320) (97) (447)
-------- --------- -------- ---------
(4,858) (3,249) (8,357) (6,241)
-------- --------- -------- ---------
Earnings before income taxes 19,670 17,620 39,840 34,360
Provision for income taxes 6,660 5,900 13,510 11,720
-------- --------- -------- ---------
Net earnings $ 13,010 $ 11,720 $ 26,330 $ 22,640
======== ========= ======== =========
Earnings per common share:
Basic $ 1.03 $ 0.94 $ 2.07 $ 1.82
======== ========= ======== =========
Diluted $ 1.00 $ 0.90 $ 2.02 $ 1.75
======== ========= ======== =========
See accompanying notes to condensed consolidated financial statements.
3
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited-Thousands of dollars)
June 30, December 31,
1999 1998
-------- --------
Assets
Current assets
Cash and cash equivalents $ 8,984 $ 8,414
Accounts and notes receivable,
less allowance for doubtful
receivables of $3,037 (1998-$2,960) 127,571 109,300
Inventories 135,757 127,366
Deferred income taxes 20,067 20,494
Prepaid expenses and other 7,193 6,366
-------- --------
Total current assets 299,572 271,940
-------- --------
Property, plant and equipment, net of
accumulated depreciation of $144,914
(1998-$150,657) 210,626 207,800
Other assets 144,137 127,495
-------- --------
Total assets $654,335 $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)
June 30, December 31,
1999 1998
-------- --------
Liabilities and shareholders' equity
Current liabilities
Notes payable and current portion of
long-term debt $ 18,098 $ 18,185
Accounts payable 65,032 51,777
Accrued expenses 57,525 62,062
Income taxes payable 7,541 5,889
-------- --------
Total current liabilities 148,196 137,913
-------- --------
Deferred income taxes 21,789 21,176
Long-term debt 175,165 154,010
Retirement obligations and other
long term liabilities 27,376 25,605
Minority interest 1,564 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
13,926,220 shares (13,812,138
shares in 1998) 6,963 6,906
Additional paid-in capital 108,943 106,093
Common stock in treasury, at cost,
1,271,352 shares (1,119,008 shares
in 1998) (19,067) (12,943)
Retained earnings 204,291 177,961
Accumulated other comprehensive income
Minimum pension liability (2,025) (2,025)
Cumulative translation adjustments (18,860) (9,192)
-------- --------
Total shareholders' equity 280,245 266,800
-------- --------
Total liabilities and
shareholders' equity $654,335 $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)
Six Months Ended
June 30,
1999 1998
-------- --------
Net cash provided by operating
activities (including depreciation
and amortization of $17,239 in
1999 and $14,328 in 1998) $ 31,648 $ 30,290
-------- --------
Cash flows provided by (used in)
investing activities:
Additions to property, plant and equipment (15,670) (13,960)
Proceeds from sale of property, plant
and equipment 7,369 122
Acquisitions of businesses, net of cash
acquired (28,537) (22,536)
Proceeds from sale of other assets 2,501
-------- ---------
Net cash used in investing activities (34,337) (36,374)
-------- --------
Cash flows provided by (used in) financing
activities:
Proceeds from borrowings 38,515 27,531
Reduction of borrowings (30,891) (26,461)
Purchases of treasury stock (4,481) (812)
Proceeds from exercise of stock options 573 1,389
-------- --------
Net cash provided by financing activities 3,716 1,647
-------- --------
Effect of exchange rate changes on cash (457) (255)
-------- --------
Net increase (decrease) in cash and cash
equivalents 570 (4,692)
Cash and cash equivalents at
beginning of period 8,414 18,659
-------- --------
Cash and cash equivalents at
end of period $ 8,984 $ 13,967
======== ========
Significant noncash investing
and financing activities:
Debt assumed with businesses acquired $ 15,060 $ 19,686
Acquisition of treasury shares for
stock options exercised $ 887 $ 1,243
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,
------------------- ------------------
1999 1998 1999 1998
------- ------- ------- ------
Net earnings $13,010 $11,720 $26,330 $22,640
Other comprehensive
income(expense):
Foreign currency
translation adjustments (1,372) (765) (9,668) (2,448)
------- ------- ------- ------
Total comprehensive income $11,638 $10,955 $16,662 $20,192
======= ======= ======= =======
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, 1999,
the results of operations for the three and six month periods ended
June 30, 1999 and 1998, and cash flows for the six month periods ended
June 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.
On October 28, 1998 the Company acquired all of the outstanding shares
of Chevron Aerospace Group Limited (Chevron) based in Wilford,
Nottingham, England for approximately $54,900. Chevron is a
manufacturer of aircraft structural assemblies, precision machined
components, avionic panels, wiring harnesses and turbine lockplates.
The excess of the purchase price over the fair values of the net assets
acquired was approximately $34,700 and has been recorded as goodwill,
which is being amortized on a straight-line basis over 40 years.
8
On July 31, 1998, the Company acquired all of the outstanding shares of
Nevada Bolt & Mfg. Co., doing business as Non-Ferrous Bolt & Mfg. Co.
(Non-Ferrous), located in Las Vegas, Nevada for $11,900. Approximately
$8,800 was paid with 203,935 shares of common stock from treasury and
the remainder in debt assumed by the Company. Non-Ferrous is a
manufacturer of non-standard, hot-forged bolts and nuts from stainless
steel and specialty alloy materials. The excess of the purchase price
over the fair values of the net assets acquired was approximately
$5,800 and has been recorded as goodwill, which is being amortized on a
straight-line basis over 40 years.
On June 30, 1998, the Company acquired the operating assets of Howell
Penncraft, Inc. (Penncraft), located in Howell, Michigan, for $3,500.
Penncraft is a manufacturer of fastener related tooling including trim
and nut dies, punches and heading dies. The purchase price approximated
the fair values of the net assets acquired.
On June 30, 1998, the Company acquired all of the outstanding shares of
Terry Machine Company (Terry), located in Waterford, Michigan, for
$22,100. Terry is a manufacturer of specialty cold headed fasteners for
the automotive industry. The excess of the purchase price over the fair
values of the net assets acquired was approximately $8,500 and has been
recorded as goodwill, which is being amortized on a straight-line basis
over 40 years.
On March 23, 1998, the Company acquired all of the outstanding shares
of Greenville Metals, Inc. (Greenville), located in Transfer,
Pennsylvania, for $15,900. Greenville is a manufacturer of specialty
metals and alloys. The excess of the purchase price over the fair
values of the net assets acquired was approximately $7,800 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 acquisitions discussed above had been made at
the beginning of the periods presented.
Six Months Ended
June 30,
----------------------
1999 1998
---- ----
Net sales $426,818 $437,935
Net earnings 26,670 20,066
Basic earnings
per common share 2.10 1.59
Diluted earnings
per common share 2.05 1.53
9
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
June 30, December 31,
1999 1998
--------- ------------
Finished goods $ 54,611 $ 53,748
Work-in-process 44,581 39,192
Raw materials
and supplies 30,475 28,412
Tools 6,090 6,014
-------- --------
$135,757 $127,366
======== ========
The June 30, 1999 inventory balances include $11,100 of inventory
related to the acquisition of NSS on June 30, 1999.
4. 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, 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.
10
5. 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 common shares are computed as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1999 1998 1999 1998
---- ---- ---- ----
Net earnings $ 13,010 $ 11,720 $ 26,330 $ 22,640
=========== =========== =========== ===========
Average shares of
common stock
outstanding used
to compute basic
earnings per
common share 12,687,477 12,454,097 12,689,568 12,415,615
Additional common
shares to be
issued assuming
exercise of stock
options, net of
shares assumed
reacquired 311,816 527,941 344,017 505,587
----------- ------------ ----------- ------------
Shares used to
compute dilutive
effect of stock
options 12,999,293 12,982,038 13,033,585 12,921,202
=========== ============ =========== ============
Basic earnings per
common share $1.03 $0.94 $2.07 $1.82
===== ===== ===== =====
Diluted earnings per
common share $1.00 $0.90 $2.02 $1.75
===== ===== ===== =====
6. 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 Six Months Ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
-------- --------- -------- ---------
Net sales:
Precision Fasteners
and Components $133,020 $110,362 $270,914 $223,404
Specialty Materials
and Alloys 26,890 29,576 56,329 56,116
Magnetic Products 34,650 35,211 69,792 75,494
-------- -------- -------- --------
Total Net Sales $194,560 $175,149 $397,035 $355,014
======== ======== ======== ========
Operating Earnings:
Precision Fasteners
and Components $ 19,130 $ 14,829 $ 37,257 $ 28,443
Specialty Materials
and Alloys 3,504 4,096 7,796 7,941
Magnetic Products 4,344 4,679 8,344 9,602
Unallocated
Corporate Costs (2,450) (2,735) (5,200) (5,385)
-------- -------- -------- --------
Total Operating
Earnings $ 24,528 $ 20,869 $ 48,197 $ 40,601
======== ======== ======== ========
7. 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
8. Subsequent Event - 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 will be 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 Note Purchase
Agreement.
The Company is subject to a number of restrictive covenants under its
various debt agreements. Covenants associated with the 1996 and 1999
Note Purchase Agreements are generally the most restrictive. Effective
August 4, 1999, the following significant covenants are in place under
the Note Purchase Agreements: maintenance of a consolidated
debt-to-total capitalization (net worth 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, dividends 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
dividend. Certain of the Company's debt agreements contain cross
default and cross acceleration provisions. At August 4, 1999, the
Company was in compliance with all financial covenants. If the Company
had entered into the 1999 Note Purchase Agreement and received the
$50,000 in debt proceeds on June 30, 1999, the Company (as restricted
by the loan covenants described above)would have been allowed to borrow
an additional $100,000.
13
SPS TECHNOLOGIES, INC. AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
Net sales, net earnings and net cash provided by operating activities
improved in 1999 compared to the corresponding periods in the prior year. This
improvement was primarily due to the impact of businesses acquired in 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 $19.4 million, or 11.1 percent, in the second
quarter of 1999 and $42.0 million, or 11.8 percent, for the six month period
ended June 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 1998. Sales by
those businesses (Chevron, Terry, Non-Ferrous and Penncraft) increased segment
sales by $31.2 million in the second quarter of 1999 and $59.7 million for the
six months ended June 30, 1999. Chevron Aerospace continues to benefit from
improved demand for aerospace products in Europe due to market share gains by
Airbus Industrie. Terry Machine continues to benefit from strong demand for its
fasteners from the North American automotive market and increased capacity due
to recent capital investments.
Excluding sales by the businesses acquired in 1998, Precision Fasteners
and Components segment sales decreased $8.5 million, or 7.7 percent, in the
second quarter of 1999 and $12.2 million, or 5.5 percent, for the six months
ended June 30, 1999 compared to the same periods in 1998. Total aerospace
fastener sales in North America declined by $4.6 million (9.5 percent) in the
second quarter of 1999 and $4.1 million (4.3 percent) for the six months ended
June 30, 1999 consistent with reductions in incoming order rates experienced in
the second half of 1998. There 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 $5.4 million, or
14
12.7 percent, in the second quarter and $13.9 million, or 15.9 percent, in the
six month period ended June 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 manufactured in North America and Europe all contributed to
this decrease.
Specialty Materials and Alloys segment sales decreased $2.7 million, or
9.1 percent, in the second quarter of 1999 although sales were approximately the
same for the six months ended June 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 and a push
out in delivery schedules for aerospace superalloy products. This segment
continues to benefit from strong demand from the industrial gas turbine markets.
Magnetic Products segment sales decreased $0.6 million, or 1.6 percent,
in the second quarter and $5.7 million, or 7.6 percent, in the six months ended
June 30, 1999 compared to the same periods in 1998. The sales decline is
attributed to sluggish conditions in the United States and European industrial
manufacturing markets, soft automotive manufacturing demand in England and
decreases in certain base metal prices. Partially offsetting these declines were
strong demand from the computer, telecommunications and United States automotive
markets.
Operating Earnings
Operating earnings increased $3.7 million, or 17.5 percent, in the
second quarter of 1999 and $7.6 million, or 18.7 percent, for the six month
period ended June 30, 1999 compared to the same periods in 1998. 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 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 $28.4 million, or 12.7 percent of sales, for the six months ended June 30,
1998 to $33.9 million, or 12.5 percent of sales, for the six months ended June
30, 1999. Businesses acquired after June 29, 1998 contributed $4.5 million of
15
operating earnings to the six month period ended June 30, 1999. In response to
weak demand for certain fastener products, the Company has incurred certain
charges for downsizing and consolidating fastener manufacturing operations that
are included in the 1999 and 1998 operating earnings of this segment. These
costs were approximately $1.4 million for the six month period ended June 30,
1999 and 1998 and related primarily to cost of employee separations in certain
manufacturing operations in North America and England.
Operating earnings of the Specialty Materials and Alloys segment and
Magnetic Products segment declined in the second quarter and six months ended
June 30, 1999 compared to the same periods in 1998. The decline in earnings
performance in both segments is attributed primarily to the lower sales volume
discussed above. The Specialty Materials and Alloys segment expects to receive
benefits in the second half of 1999 from stronger demand for its products as
well as improved manufacturing performance at its operating facilities, as
capital investments in capacity additions come on-line which will also reduce
operating costs. Certain facilities in the Magnetic Products segment have
instituted shorter weekly work hours and other cost reduction programs in
response to the lower volume of sales.
Other Income and Expense
Due to higher levels of debt, interest expense increased from $5.1
million in the first six months of 1998 to $6.6 million in the first six months
of 1999. In the second quarter of 1999, the Company recorded its share of 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 is available on the write off of the Company's joint
venture in China.
Orders and Backlog
Incoming orders for the second quarter of 1999 were $178.9 million
compared to $166.9 million for the second quarter of 1998, a 7.2 percent
increase. Incoming orders for the six months ended June 30, 1999 were $383.7
compared to $350.6 million for the same period in 1998, a 9.4 percent increase.
Businesses acquired after June 29, 1998 increased orders by $32.6 million for
the quarter and $65.2 million for the six 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 second quarter, orders for aerospace
fasteners were $10.3 million, or 18.9 percent lower than the same period a year
ago. This decline is consistent with the forecasted drop in U.S. commercial
aircraft
16
production rates for next year and forward, 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 second quarter were $4.3 million, or 16.7 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 35 percent
for the quarter, but the majority of this decline is due to the devaluation of
the Brazilian Reais, as orders on a local currency basis are down only 10
percent. Industrial fastener orders were $3.8 million, or 20.4 percent, lower
than the second quarter of 1998, reflecting continued soft demand for industrial
hardware in the United States and Europe. Excluding the backlog for NSS
Technologies, Inc. (acquired on June 30, 1999), the backlog of orders, which
represents firm orders with delivery scheduled within 12 months, at June 30,
1999 was $270.8 million compared to $245.9 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.
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 six months ended June 30, 1999, net cash
provided by operating activities increased by $1.4 million compared to the first
six months of 1998 due primarily to the $3.7 million improvement in net
earnings.
17
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 ($4.0 million). The Company spent $15.7 million for capital
expenditures in the first six months of 1999 and has budgeted $38.0 million for
the full year of 1999, as reported on Form 10-K for the year ended December 31,
1998.
The Company's total debt to equity ratio was 69 percent at June 30,
1999, compared to 65 percent at December 31, 1998. Total debt was $193.3 million
at June 30, 1999 and $172.2 million at December 31, 1998. As of June 30, 1999,
under the terms of the existing credit agreements, the Company is permitted to
incur an additional $85.9 million in debt. Additional information related to
financing activities subsequent to June 30, 1999 is provided in Note 8 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 is identifying, evaluating and implementing 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 are necessary to ensure that information technology
(IT) and non-IT systems and applications will recognize and process the year
2000 and beyond. Major areas of potential business impact have been identified
and conversion efforts are underway. All mainframe based IT systems have been
assessed, plans have been put into place and required Y2K conversion of these
computer programs was substantially completed in April 1999. The process of
assessing the various PC and LAN based IT systems and non-IT systems is
substantially complete. The Company has converted and tested many of these
systems and expects that the balance of testing and any necessary remediation
will be completed by September 30, 1999. The Company is communicating 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.
The cost specifically associated with addressing Y2K issues incurred in
the first six months of 1999 were capitalizable costs of $1.1 million and costs
expensed as incurred of $300 thousand. The Company's cost to complete its Y2K
readiness actions
18
is estimated to be additional capitalizable cost of $600 thousand and cost
expensed as incurred of $300 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
$3.9 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 all internal IT and non-IT systems will be converted
prior to January 1, 2000, the Company is in the process of generating
contingency plans and identifying 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, identifying 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
stronger demand for its products and improved manufacturing performance from
capital investments, 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.
19
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 June 30, 1999, the
Company's results of operations, cash flow and financial position would not have
been materially affected.
20
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, 1999.
(b) The name of each director elected at the Annual Meeting as the Company's
two Class III directors, each to hold office until the 2001 Annual
Meeting of Shareholders, is as follows:
Harry J. Wilkinson
Eric M. Ruttenberg
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
Raymond P. Sharpe
James F. O'Connor
(c) 1. The results of the election of directors with respect to each nominee
for office was as follows:
For Withheld
---------- ---------
Harry J. Wilkinson 10,324,836 466,186
Eric M. Ruttenberg 10,327,339 463,683
2. A proposal to amend the SPS Long Term Incentive Stock Plan received
9,073,022 votes for and 1,260,128 votes against, with 11,928
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, 1999.
21
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 3, 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.
22
EXHIBIT INDEX
27 Financial Data Schedule.
23