ITEM 1. BUSINESS
GENERAL DEVELOPMENTS: General Signal Corporation (the company), incorporated in New York in 1904, is a manufacturer of equipment for the Process Controls, Electrical Controls and Industrial Technology industries. The company's key Process industry products include mixers, valves for municipal water supply and wastewater treatment, pulp, paper, food, pharmaceutical and chemical manufacturing, ultra low-temperature freezers for life science research and furnaces. In the Electrical industry, key products include uninterruptible power supply equipment, power transformers and fire detection systems. Products serving the Industrial Technology industry include auto and bicycle components, data networking equipment and fare collection and vending equipment.
During the last five years, the company invested approximately $394.4 million in cash and 4.4 million shares of common stock to acquire 12 businesses and/or product lines. The notes to the financial statements on page of this 10-K provide additional information concerning significant acquisitions during the last three years. Additionally, during the last five years, the company disposed of four units, two of which were accounted for as discontinued operations. Information regarding these dispositions is on pages through of this 10-K. In September 1997, the company contributed the net assets of the General Signal Electrical Group (GSEG) to the EGS Electrical Group LLC (EGS), a joint venture with Emerson Electric's Appleton Electric operations. See page of this 10-K for additional information.
FINANCIAL INFORMATION ABOUT BUSINESS SEGMENTS: Selected business segment information for the last five fiscal years is summarized on page of this 10-K. Net sales from the uninterruptible power systems (UPS) class of product accounted for 12.1%, 11.2% and 8.2% of consolidated net sales in 1997, 1996 and 1995, respectively.
A summary of information by geographic area for the last five fiscal years is included on page of this 10-K.
NARRATIVE DESCRIPTION OF BUSINESS
MAJOR MARKETS AND PRODUCTS AND METHOD OF DISTRIBUTION: A description of the registrant's business follows:
The company's products, except for EGS's products, are sold by its own sales organization and through distributors and manufacturers' representatives.
MATERIALS AND SUPPLIES: The company manufactures many of the components used in its products. It also purchases a variety of basic materials and component parts. The company believes that it will generally be able to obtain adequate supplies of major items or reasonable substitutes.
PATENTS: The company holds many patents and has continued to secure other patents that cover many of its products. While patents are important in the aggregate to the company's competitive position, the loss of any single patent, patent application or patent license agreement, or group thereof, would not materially affect the conduct of its business as a whole. The company is both a licensor and licensee of patents.
WORKING CAPITAL: A discussion of working capital is included on pages 13 through 14 of this 10-K.
BACKLOG: The amount of unfilled orders was approximately $363.1 million as of December 31, 1997 and $444.6 million as of December 31, 1996. In the third quarter of 1997, the company sold the General Signal Pump Group (GSPG) and contributed the net assets of GSEG to EGS, resulting in a decrease in backlog of approximately $64 million. Substantially all unfilled orders are expected to be filled within the next year.
COMPETITION: Although the businesses of the company are highly competitive, the competitive position cannot be determined accurately in the aggregate or by segment since none of its competitors offer all of the same product lines or serve all of the same markets, nor are reliable comparative figures available for its competitors. In most product groups, competition comes from numerous concerns, both large and small. The principal methods of competition are price, service, product performance and technical innovation. These methods vary with the type of product sold. The company believes that it can compete effectively on the basis of each of these factors as they apply to the various products offered.
RESEARCH AND DEVELOPMENT: Research and development information for the last three years is included on page of this 10-K.
ENVIRONMENTAL MATTERS: The company is involved in various stages of investigation and remediation relative to environmental protection matters, arising from its own initiative, from indemnification of purchasers of divested operations, or from legal or administrative proceedings, some of which involve waste disposal sites. The company has a comprehensive environmental compliance program which includes environmental audits conducted by internal and outside independent environmental professionals and regular communications with the company's operating units, regarding environmental compliance requirements and anticipated regulations.
The company has been notified that it has been named as a potentially responsible party or has received other notices of potential liability pursuant to various federal and state environmental laws (including, without limitation, the federal Comprehensive Environmental Response, Compensation and Liability Act of 1980 and similar state legislation) at 69 multi-party sites which are not present or former facilities of the company and for which the company may be jointly and severally liable. It is alleged that the company generated hazardous substances, pollutants or contaminants which are present at those sites. The company has resolved its liability by entering into de minimis settlements or other buyout agreements with governmental authorities or other parties at 32 of these sites and believes that it has no liability with respect to 17 of these sites. The company is of the opinion, based on information currently available, that its aggregate probable remaining liability at the other 20 sites is approximately $3 million.
The company is engaged in site investigation and/or remediation at the following sites presently or formerly owned by the company and has accrued for its expected future costs, as detailed below. It is the company's policy not to offset expected insurance recoveries against expected obligations when determining the amount of environmental accruals.
New York Air Brake Landfill/Kelsey Creek Site: In February 1990, the company entered into a consent order with the New York State Department of Environmental Conservation (NYSDEC) to conduct an investigation and remediation at the company's discontinued New York Air Brake facility in Watertown, New York. On March 30, 1994, NYSDEC issued a Record of Decision with respect to site remediation. The remedial action consists of consolidation of contamination in the existing industrial landfill, capping the landfill, collecting contaminated groundwater downgradient of the landfill, and the removal of certain sediments in Kelsey Creek. The future cost estimated by the company for site remediation is approximately $11 million. The company has filed litigation against the City of Watertown to challenge an increase in sewer discharge fees for leachate at the landfill and believes that it will ultimately prevail in such litigation.
Hevi-Duty Facility: The company is participating in a voluntary clean-up program sponsored by the state of North Carolina and has entered into an Administrative Order on Consent with the North Carolina Department of Environmental Health and Natural Resources. The company currently believes that the probable aggregate remaining liability for clean-up of this site will be approximately $4.5 million.
Fairbanks Morse Facility: On December 2, 1994, the company acquired Fairbanks Morse Pump Corporation (Fairbanks). Based on the company's pre- acquisition environmental assessment and site testing performed at the Fairbanks facility located in Kansas City, Kansas, the company determined that there is soil and groundwater contamination at the site. The company has entered into a Consent Order with the Kansas Department of Environment and Health with respect to additional site investigation. The company believes that up to $4.8 million could be required to investigate and remediate contaminated soil and groundwater at the site. The accrual to cover the expected costs was established at the time of acquisition.
The company is conducting investigations and remedial activities due to contamination at six additional present or former facilities of the company. Site contamination has been alleged with respect to two other former facilities. Based on information currently available, the company believes that the probable aggregate remaining liability for investigation and remediation at these eight sites will not exceed $1.5 million.
The potential costs related to the matters described above and the possible impact on future operations are uncertain due in part to the complexity of government laws and regulations and their interpretations, the varying costs and effectiveness of clean-up technologies, the uncertain level of insurance or other types of recovery and the questionable level of the company's responsibility. In management's opinion, after considering reserves established for such purposes, remedial actions for compliance with the present laws and regulations governing the protection of the environment are not expected to have a material adverse impact on the company's results of operations or financial position.
EMPLOYEES: At December 31, 1997, the company had approximately 9,900 employees. Approximately 1,400 employees are represented by 16 different collective bargaining units. Approximately 42 percent of the labor force that is covered by collective bargaining agreements have agreements that expire within one year. The company has generally experienced satisfactory labor relations at its various locations.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers are elected annually by the Board of Directors.
There are no family relationships between any of the directors or executive officers of the company.
ITEM 2.
ITEM 2. PROPERTIES
The following is a list of the company's principal properties, classified by sector:
In addition to manufacturing plants, the company as lessee occupies executive offices in Stamford, Connecticut, and various sales and service locations throughout the world. All of these properties, as well as the related machinery and equipment, are considered to be well maintained and suitable and adequate for their intended purposes. Assets subject to lien are not significant.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The company and certain of its subsidiaries are defendants in legal proceedings incidental to their businesses. Although the ultimate disposition of these proceedings is not presently determinable, management does not expect the outcome to have a material adverse impact on the company's financial position.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The company's common stock is listed on the New York and Pacific stock exchanges under the symbol "GSX." Information as to quarterly prices for the last two years, and dividends paid, is included on page of this 10-K. There were approximately 10,052 holders of record of the company's common stock on February 13, 1998.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
SIX-YEAR FINANCIAL SUMMARY
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
- ------- (1) The earnings per share amounts prior to 1997 have been restated as required to comply with Statement of Financial Accounting Standards No. 128, Earnings Per Share. See pages and for further information. (2) Excludes the impact of after-tax charges related to dispositions of businesses. (3) Price-earnings ratio range is based on diluted earnings per share.
See pages through of the notes to the consolidated financial statements of this 10-K for information regarding the company's acquisition and divestiture activities.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (DOLLARS IN MILLIONS, EXCEPT PER-SHARE DATA)
The following discussion should be read in conjunction with the company's consolidated financial statements and notes thereto.
RESULTS OF OPERATIONS
Overview
BUSINESS COMBINATIONS AND DIVESTITURES: During the last three years, the company completed three significant business combinations and two divestitures. In June 1995, the company acquired Best Power Technology, Inc. (Best Power) for $206. In connection with this acquisition, the company recorded pre-tax charges of $7 for severance and other consolidation costs. In July 1995, the company acquired MagneTek Electric Inc. (Waukesha Electric) for $74. In November 1995, the company merged with Data Switch Corporation (Data Switch) and recorded a pre-tax charge of $13 for transaction costs, severance and balance sheet valuation adjustments. See page for additional information.
In August 1997, the company sold GSPG for approximately $200 and recognized a pre-tax gain of $64. Income tax expense on the gain was $46 or 72 percent of the pre-tax gain. The rate differs from the U.S. statutory tax rate due to a difference in the book and tax basis of GSPG. In January 1996, the company sold Kinney Vacuum Company (Kinney) for $29 and recorded a pre-tax gain of $21. See pages through for additional information.
In September 1997, the company contributed the net assets of GSEG to EGS, a joint venture with Emerson Electric's Appleton Electric operations. The company accounts for its investment in EGS under the equity method of accounting. See page for additional information.
NONRECURRING GAINS AND EXPENSES: In the fourth quarter of 1997, the company settled patent litigation and sold related patents for a gain of $10 (Patent Income) and sold its equity interest in a company in Mexico for a gain of $9 (Mexico Gain). Income tax expense on the gains totaled $11. The effective tax rate on the Mexico Gain differs from the U.S. statutory tax rate due to a difference in the book and tax basis of the equity investment sold. The company also recorded charges of $14 (Fourth Quarter 1997 Charges) for asset valuations, lease termination costs and other individually insignificant matters.
In September 1997, the company recorded charges for potentially excess and obsolete inventory and potentially uncollectible accounts receivable, as well as recorded professional fees in connection with the formation of EGS. The company also wrote off assets related to a discontinued product line and recorded a charge for cancellation of a facility lease due to a restructuring plan for Best Power. Additionally, the company reversed a restructuring reserve that was no longer needed due to the information of EGS. The net of these charges totaled $14 (Third Quarter 1997 Charges).
In July 1996, the company negotiated a royalty settlement related to one of its previously divested semiconductor businesses and received $4 in connection with this agreement (the Royalty Income Amount). In May 1996, a fire at a supplier facility destroyed certain assets of a business and in September 1996, the company received $2 in insurance proceeds (Insurance Proceeds), net of related expenses, and recognized a gain on the involuntary conversion of these assets.
In the first quarter of 1996, the company recorded charges totaling $20 (First Quarter 1996 Charges) for asset write-downs, lease termination costs, severance, warranty repairs and environmental matters.
1997 COMPARED WITH 1996
REVENUES: Sales decreased 5.3 percent from 1996 levels primarily due to the disposition of GSPG and the contribution of GSEG's net assets to EGS. Adjusted for these transactions, net sales increased approximately 2 percent due primarily to increased sales in the Electrical Controls sector as well as higher volume of industrial oven and laboratory products. International sales represented approximately 25 percent of total net sales in 1997 versus 23 percent in 1996. The overall decline in sales is the result of the following factors (percentages are expressed in relation to 1996 sales): dispositions, including EGS (6%); volume 2%; price (1%).
Process Controls sector sales decreased 10.7 percent to $672 primarily due to the sale of GSPG, which recorded sales of $73 in the four months ended December 31, 1996. Lower sales volume of crystal growing furnaces, as a result of a cyclical downturn in the semiconductor equipment market, and lower mixer volume, reflecting the impact of several significant projects in 1996, also contributed to the decrease. Offsetting these decreases were increased sales of industrial oven and laboratory products due in part to increased laboratory construction and renovations.
Sales in the Electrical Controls sector decreased 3.6 percent to $911 due primarily to the contribution of the GSEG business to EGS. Adjusted for the contribution of GSEG, net sales increased approximately 6.2 percent. Out of the five continuing business units, four experienced increased revenue over the prior year. The largest sales improvements were noted in the medium-power transformer, fire detection products and uninterruptible power systems products.
Industrial Technology sales increased 1.2 percent to $372. Included in 1996 sales was the Royalty Income Amount referred to above. Excluding the Royalty Income Amount from 1996 revenue, sales would have increased 2.4 percent. Increased demand from North American automotive producers as well as strong sales of General Signal Network's CD 9000(TM) Director contributed to the growth.
COSTS AND EXPENSES: Cost of sales included $11 of Third Quarter 1997 Charges in 1997 and $13 of First Quarter 1996 Charges in 1996. Adjusted for the items referred to above and the Royalty Income Amount, 1997 gross profit as a percentage of sales decreased from 31.0 percent to 30.0 percent. The decrease was due to a shift in sales to lower margin products in certain businesses, as well as the contribution of GSEG's net business assets to EGS, which carried a high gross margin. Research and development spending was two percent of sales in both years.
Selling, general and administrative expenses in 1997 included $10 of Patent Income, $14 of Fourth Quarter 1997 Charges and $3 of Third Quarter 1997 Charges. 1996 expenses included $7 of First Quarter 1996 Charges and $2 of Insurance Proceeds. Excluding these items in both 1997 and 1996 as well as the Royalty Income Amount, selling, general and administrative expenses as a percentage of sales increased from 19.5 percent to 19.8 percent, as cost reduction efforts did not match lower sales volume. 1996 operating expenses were positively impacted by environmental insurance recoveries and the collection of a previously written off receivable totaling $4. Also included in selling, general and administrative expenses were pension credits of $15 in 1997 and $9 in 1996. These credits resulted from the company's overfunded pension plans and favorable long-term investment results.
Net interest expense decreased 38.6 percent due to lower average debt levels. Cash generated from operations and divestitures was used to partially pay down debt.
The 1997 effective tax rate was 48.2 percent, which included $46 of income taxes from the sale of GSPG and $7 on the Mexico Gain. The company anticipates that its effective tax rate for 1998 will be 38.5 percent.
DISCONTINUED OPERATIONS: During 1995, the company recorded losses on the divestitures of the Leeds & Northrup Company (L&N) and Dynapower/Stratopower (Dynapower) and set up reserves to cover potential remaining obligations. In September 1997, it was determined that $2 of this amount, net of tax, was no longer required and accordingly, was reversed through discontinued operations.
1996 COMPARED WITH 1995
REVENUES: Sales increased 10.8 percent over 1995 levels, approximately half of which was due to the acquisitions of Best Power and Waukesha Electric in June and July of 1995, respectively. Adjusted for acquisitions and dispositions, sales improved approximately five percent. International sales in 1996 totaled approximately 23 percent of the company's net sales versus 22 percent in 1995. Price changes, volume changes, acquisitions, net of dispositions, and new product introductions accounted for 2 percent, 50 percent, 47 percent and 1 percent of the revenue increase, respectively.
Process Controls sector sales improved 4.5 percent to $752 on strong second half volume activity in pumps, mixers and crystal growing furnaces. These increases were partially offset by the disposition of Kinney, sold in January 1996, which generated revenues of $25 in 1995.
Sales in the Electrical Controls sector increased 21.7 percent to $945. The addition of Best Power and Waukesha Electric accounted for approximately 75 percent of the increase. A strong UPS market and North American market share gains in GSEG's electrical fittings also contributed to the improvement.
Industrial Technology sector sales increased 0.2 percent to $367. Included in 1996 sales was the Royalty Income Amount. Excluding the Royalty Income Amount from 1996 revenue, sales would have decreased 0.5 percent. Sales from new products introduced in the fourth quarter of 1996 as well as higher product sales of matrix switch systems to the telecommunication and datacommunication industries were offset by the completion of several large farebox contracts in 1995.
COSTS AND EXPENSES: In 1996, cost of sales included $13 of First Quarter 1996 Charges. Adjusted for these items and the Royalty Income Amount, gross profit as a percentage of sales increased from 29.8 percent to 31.0 percent. Improved cost structures at several operating units were the primary reasons for the increase. Margin improvements were strongest for mixer, coal feeder, broadcast antenna, electrical fitting, power transformer and automotive products. Gross profit in 1996 included $1.7 related to liquidations of LIFO inventory quantities. Research and development spending ranged from two to three percent in both years.
Selling, general and administrative expenses in 1996 included $7 of First Quarter 1996 Charges offset by $2 of Insurance Proceeds. Excluding these items from 1996 expenses and the Royalty Income Amount, selling, general and administrative expenses increased from 19.0 percent to 19.5 percent. The inclusion of a full year's operating expenses related to Best Power, which has a higher rate of operating expenses than the rest of the company, as well as lower credits in connection with the settlement of insured matters, were the primary reasons for the increase. 1996 operating expenses were positively impacted by environmental insurance recoveries and the collection of a previously written off receivable totaling $4. 1995 operating expenses were positively impacted by environmental insurance recoveries and gains on the sale of assets of totaling $11. Also included in selling, general and administrative expenses were pension credits of $9 in both 1996 and 1995. These credits resulted from the company's overfunded pension plans and favorable long-term investment results.
Net interest expense decreased 11.5 percent due to lower average debt levels. Cash generated from operations and divestitures was used to pay down the debt incurred in connection with 1995 acquisitions.
The 1996 effective tax rate rose to 40 percent from 36 percent in 1995, due largely to reductions in the deferred tax valuation allowance recorded in the prior year.
DISCONTINUED OPERATIONS: The company adopted a plan to sell L&N and Dynapower in November 1994. In 1995, the company recorded after-tax net losses totaling $64 ($1.30 per share) in connection with the divestitures of these businesses.
LIQUIDITY AND CAPITAL RESOURCES
The following information was derived from the Consolidated Financial Statements:
1997 operating cash flow decreased due to lower earnings, after adjusting for non-operating activities, lower accounts receivable collections and lower accrued expenses due to the decrease in disposition and restructuring accruals as well as payment of other non-operating accruals. Included in operating cash flows for 1997 and 1996 were expenditures of $9 and $25, respectively, related to previously divested operations and $8 and $6, respectively, for severance pay.
1997 capital expenditures were primarily comprised of upgrades to manufacturing facilities. The company anticipates capital expenditures in 1998 to be approximately one-and-a-half times depreciation.
1997 divestitures included $191 for the sale of GSPG, $19 for the sale of the company's equity interest in a company in Mexico and $7 for other. 1996 dispositions included $65 related to discontinued operations and $29 on the sale of Kinney.
On June 19, 1997, the Board of Directors approved a stock buy-back program of up to $150 subject to the consummation of the GSPG divestiture. On September 18, 1997, the Board of Directors approved an increase of this program to $300. The program is expected to be completed by the end of 1998. As of January 23, 1998, 3.4 million shares were repurchased under this program for $145.
On December 12, 1996, the company called for the redemption of its $100 5.75 percent convertible subordinated notes. As of December 31, 1996, notes with a face value of $57 had been converted into 1.5 million shares of the company's common stock, with an additional $40 converted into 1.0 million shares on January 2, 1997. The balance of the notes of $3 was redeemed for cash.
On December 12, 1996 the Board of Directors approved a stock buy-back program of up to $100 to offset any shares issued as a result of the call for the redemption of the 5.75 percent convertible subordinated notes. On April 17, 1997, the program was completed with the total of 2.5 million shares repurchased for $100.
Total debt to capitalization increased over the prior year due to lower equity at year-end as a result of the stock buy-back programs.
At the end of 1997, the company had credit agreements of $605, consisting primarily of committed revolving credit agreements of $180 and $360 that expire in May 1998 and May 2002, respectively. The company also has a $300 financing program under a universal shelf registration with the Securities and Exchange Commission, providing the flexibility to issue a broad variety of securities from time to time. At December 31, 1997, $50 had been issued under the shelf registration. The company expects to use available borrowing facilities to finance, in whole or in part, its buy-back of common stock. Other than the buy-back program, the company expects that cash provided from operations will be sufficient to provide for the company's 1998 financing needs.
At December 31, 1997, the company's balance sheet reflected deferred tax assets of $155 that were reduced by deferred tax liabilities of $136 and a valuation allowance of $17. The carrying amount of the net deferred tax asset was based on management's assessment of the realizability of the net operating loss and credit carry-forwards and deductible items through future taxable earnings or alternative tax planning strategies.
In September 1997, the company announced its intention to explore the spin off of its GS Networks unit and the possible disposition of three other units. These four units accounted for approximately 19 percent of the company's 1997 net sales.
READINESS FOR YEAR 2000
The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the company's computer programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities.
Based on a recent assessment, the company determined that it will be required to undertake projects to modify or replace significant portions of its software so that its computer systems will properly utilize dates beyond December 31, 1999. These projects will provide the company with numerous benefits only one of which is becoming Year 2000 compliant. The implementation or remediation plans are in various stages of completion. While total expenditures related to these programs have not been finalized, the company estimates, on a preliminary basis, that $8 will be charged to expense in 1998 related to these programs and a similar amount will be expensed in 1999. The company presently believes that with these modifications, the Year 2000 issue will not pose significant operational problems for its computer systems.
The company has started to communicate with its significant suppliers to determine the extent to which the company's interface systems are vulnerable to those third parties' failure to remediate their own Year 2000 issues. The projects referred to in the previous paragraph address the impact of third party Year 2000 issues based on presently available information. However, there can be no guarantee that the systems of other companies on which the company's systems rely will be timely converted and would not have an adverse effect on the company's systems. The company is also exploring whether it has any exposure to contingencies related to the Year 2000 issue for the products it has sold.
The above information is based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes and similar uncertainties.
ENVIRONMENTAL MATTERS
The company is involved in various stages of investigation and remediation relative to environmental protection matters. A more detailed discussion of environmental matters appears on pages 6 through 7 of this 10-K.
SAFE HARBOR; FORWARD-LOOKING STATEMENTS
This 10-K contains various forward-looking statements and includes assumptions concerning the company's operations, future results and prospects. The company's forward-looking statements are based on the company's current expectations, which are subject to a number of risks and uncertainties that could materially affect or reduce such operations and earnings. In connection with the "safe harbor" provisions of the Private Securities Reform Act of 1995, the company provides the following cautionary statement identifying important economic, political and technological factors, among others the absence of which could cause the actual results to differ materially from those set forth in or implied by the forward-looking statements and related assumptions. Such factors include the failure of: (1) a continuation of the increased order rate experienced during 1997, (2) productivity improvements meeting or exceeding budget, (3) new products under development being produced and accepted as anticipated, (4) stable governments and business conditions in emerging economies and (5) stable exchange rates between currencies in which the company is buying or selling materials and products. Further, since the company is a producer of capital goods and equipment, its results can vary with the relative strength of the economy. Demand for products in the Process Controls sector follows the demand for capital goods orders. The Electrical Controls sector depends upon several markets, principally the nonresidential construction and computer equipment industries. The Industrial Technology sector depends on several markets, primarily automotive, mass transportation, and telecommunications equipment. Mass transportation depends upon continued federal and local government spending, and telecommunications is dependent upon continued research and development and the continued success of new product introductions. While no one marketplace or industry has a major impact on the company's operations or results, the inherent pace of technological changes presents certain risks that the company monitors carefully.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The company is exposed to market risk related to changes in interest rates and foreign currency exchange rates, and selectively uses financial instruments to manage these risks. The company does not enter into financial instruments for speculation or trading purposes. The company has an interest rate exchange agreement with a financial institution to limit exposure to interest rate volatility. Additionally, the company enters into foreign currency forward or option contracts to mitigate the risks of doing business in foreign currencies. The company hedges currency exposures of firm commitments and specific assets and liabilities denominated in non-functional currencies to protect against the possibility of diminished cash flow and adverse impact on earnings. The company's currency exposures vary, but are primarily concentrated in the Canadian dollar, British pound, Australian dollar, German mark, French franc and Singapore dollar. Translation exposures generally are not hedged.
The value of market risk sensitive financial instruments is subject to change as a result of movement in market rates and prices. Sensitivity analysis is one technique used to evaluate the impact of such possible movements on the valuation of these instruments. Based on a hypothetical one- percentage point increase in interest rates or ten-percent weakening in the U.S. dollar across all currencies, the potential losses in future earnings, fair value and cash flows are immaterial.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is submitted in a separate section of this report. See page.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
This information is incorporated herein by reference to the Board of Directors Section of the Proxy Statement for the 1998 annual meeting of shareholders. Also see pages 7 through 8 of this 10-K as to information related to executive officers.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
This information is incorporated herein by reference to the Executive Compensation section of the Proxy Statement for the 1998 annual meeting of shareholders, except for the Report of the Personnel and Compensation Committee on Executive Compensation and the Performance Graph on Comparison of Five-Year Cumulative Total Return, which are specifically not incorporated herein.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is incorporated herein by reference to the Security Ownership of Certain Beneficial Holders and Security Ownership of Management sections of the Proxy Statement for the 1998 annual meeting of shareholders.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) and (2) The response to these portions of Item 14 are submitted as a separate section of this report. See page.
All other schedules are omitted as the required information is not applicable or the information is presented in the financial statements or related notes.
(3) Listing of Exhibits.
(b) Reports on Form 8-K filed in the fourth quarter of 1997 No reports were filed on Form 8-K.
(c) Exhibits The response to this portion of Item 14 is submitted as a separate section of this report.
(d) Financial Statement Schedules The response to this portion of Item 14 is submitted as a separate section of this report.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
General Signal Corporation
By: /s/ Michael D. Lockhart ________________________________________ (MICHAEL D. LOCKHART, CHAIRMAN) MARCH 20, 1998
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW ON MARCH 20, 1998 BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
FORM 10-K--ITEMS 14(A)(1) AND (2)
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS, SCHEDULE AND EXHIBITS
Management's Responsibility for Financial Statements...................... Report of Independent Auditors............................................ Statement of Earnings for the Years Ended December 31, 1997, 1996 and 1995..................................................................... Balance Sheet as of December 31, 1997 and 1996............................ Statement of Shareholders' Equity for the Years Ended December 31, 1997, 1996 and 1995............................................................ Statement of Cash Flow for the Years Ended December 31, 1997, 1996 and 1995..................................................................... Notes to the Financial Statements............................ through
Schedule:
II--Valuation and Qualifying Accounts..................................
All other schedules required by Regulation S-X have been omitted because they are not applicable or because the required information is included in the financial statements or notes thereto.
Exhibits: 12--Calculations of Ratio of Earnings to Fixed Charges................. 21--Subsidiaries of Registrant............................ through 23--Consent of Ernst & Young LLP.......................................
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation of the company's consolidated financial statements and related information appearing in this 10-K. Management considers that the consolidated financial statements fairly reflect the form and substance of transactions and that the financial statements reasonably present the company's financial position and results of operations in conformity with generally accepted accounting principles. Management also has included in the company's financial statements amounts that are based on estimates and judgments which it views as reasonable under the circumstances.
The independent auditors perform an audit of the company's consolidated financial statements in accordance with generally accepted auditing standards and provide an objective, independent review of the fairness of reported operating results and financial position.
The Board of Directors of the company has an Audit Committee composed of four non-management Directors. The Committee meets at least three times annually with financial management, the internal auditors and the independent auditors to review accounting, control, auditing and financial reporting matters.
/s/ Michael D. Lockhart
Michael D. Lockhart Chairman and Chief Executive Officer
/s/ Terence D. Martin
Terence D. Martin Executive Vice President, Chief Financial Officer and Treasurer
/s/ Raymond L. Arthur
Raymond L. Arthur Vice President and Controller
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders General Signal Corporation
We have audited the accompanying balance sheet of General Signal Corporation and consolidated subsidiaries as of December 31, 1997 and 1996, and the related statements of earnings, shareholders' equity, and cash flow for each of the three years in the period ended December 31, 1997. Our audits also included the financial statement schedule listed in Item 14(a). These financial statements and schedule are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of General Signal Corporation and consolidated subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flow for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects, the information set forth therein.
As discussed in the notes to the financial statements, in 1997 the company changed its method of accounting for business process reengineering costs.
/s/ Ernst & Young LLP
Stamford, Connecticut January 23, 1998
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF EARNINGS
See accompanying notes to the financial statements.
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
BALANCE SHEET
See accompanying notes to the financial statements.
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF SHAREHOLDERS' EQUITY
See accompanying notes to the financial statements.
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
STATEMENT OF CASH FLOW
See accompanying notes to the financial statements.
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS (Dollars in millions, except per-share data)
1. ACCOUNTING POLICIES
CONSOLIDATION: The financial statements include the accounts of General Signal Corporation and consolidated subsidiaries after elimination of intercompany accounts and transactions. Investments in unconsolidated companies where management exercises significant influence are accounted for using the equity method.
CASH EQUIVALENTS: The company considers its highly liquid money market investments with original maturities of three months or less to be cash equivalents.
INVENTORIES: Inventories are stated at the lower of cost or market. Cost is primarily determined using the first-in, first-out (FIFO) method. All other inventories are valued using the last-in, first-out (LIFO) method.
PROPERTY: Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of assets, which do not exceed 40 years for buildings and range from 3 to 10 years for machinery and equipment. Leasehold improvements are amortized over the life of the related asset or the life of the lease, whichever is shorter.
INTANGIBLES: Intangible assets (primarily the excess of purchase price over the fair value of net assets acquired) are amortized on a straight-line basis over periods not exceeding 40 years. Intangibles assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment losses are recognized if expected cash flows of the related assets are less than their carrying values.
REVENUE RECOGNITION: Revenues are primarily recognized as products are shipped and services are rendered. The percentage-of-completion method of accounting is followed for long-term contracts. Under this method, earnings accrue as contracts progress toward completion, generally based on the percentage of costs incurred or the units of product delivered.
FINANCIAL INSTRUMENTS: The company does not enter into financial instruments for speculation or trading purposes. The net amount to be paid or received under interest rate swap agreements is accrued over the life of the agreement as a separate component of interest expense. Gains and losses related to forward foreign exchange and option contracts that qualify for hedge accounting treatment are deferred and offset against losses and gains when the underlying transaction occurs. Gains or losses at the time of maturity, termination, sale or repayment of a financial instrument contract designated as a hedge are included in earnings. The fair values of interest rate swap agreements and forward foreign exchange and option contracts are not recognized in the financial statements.
ENVIRONMENTAL: The company's environmental accruals cover all anticipated costs, including investigation, remediation, and operation and maintenance of clean-up sites. Environmental obligations generally are not discounted and are not reduced by anticipated insurance recoveries.
STOCK COMPENSATION: The company accounts for the options granted under its stock incentive program by recognizing as compensation any excess of quoted market price over exercise price at the date of grant.
ACCOUNTING CHANGES: In February 1997, the Financial Accounting Standards Board (the FASB) issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share" (SFAS No. 128), which revises the methodology of calculating earnings per share. The company adopted SFAS No. 128 in the fourth quarter of 1997. Earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the SFAS No. 128 requirements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" (SFAS No. 130) and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS No. 131). SFAS No. 130 and SFAS No. 131 are effective for financial statements for fiscal years beginning after December 15, 1997. The company is studying the application of the new statement. The adoption of these statements will have no impact on the company's consolidated results of operations, financial position or cash flow.
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
In November 1997, the Emerging Issues Task Force (EITF) of the FASB issued consensus 97-13, "Accounting for Costs Incurred in Connection with a Consulting Engagement or an Internal Project that Combines Business Process Reengineering and Information Technology Transformation" (EITF 97-13). EITF 97-13 requires all previously capitalized business process reengineering costs to be expensed as a cumulative effect of a change in accounting principle. The company recorded a charge of $3.7, net of tax, in connection with EITF 97-13 in the fourth quarter of 1997.
In December 1997, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" (SFAS No. 132), which revises disclosure requirements for employers' pensions and other retiree benefits. The statement is effective for financial statements for fiscal years beginning after December 15, 1997. The company is studying the application of the new statement. The adoption of this statement will have no impact on the company's consolidated results of operations, financial position or cash flow.
USE OF ESTIMATES: The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS: Certain reclassifications were made to conform prior years' data to the current presentation.
2.ACCOUNTS RECEIVABLE
Accounts receivable were net of allowances for doubtful accounts of $12.3 and $10.0 at December 31, 1997 and 1996, respectively.
3.INVENTORIES
Inventories valued using LIFO were approximately $48.6 and $61.9 at December 31, 1997 and 1996, respectively. In 1996, the company recorded a LIFO liquidation, which increased net income by $1.0. In 1997, included in the gain on sale of General Signal Pump Group (GSPG) was a LIFO liquidation of $2.0. Additionally, $5.3 of the excess of FIFO cost over LIFO inventory value was transferred from General Signal Electrical Group (GSEG) to the investment in EGS Electrical Group LLC (EGS). In 1996, included in the gain on sale of the Kinney Vacuum Company (Kinney) was a LIFO liquidation of approximately $1.1. Progress payments, netted against work in process at year end, were $10.1 in 1997 and $11.0 in 1996.
4.CONTRACTS IN PROGRESS
Prepaid expenses and other current assets include contracts in progress of $3.4 and $7.8 at December 31, 1997 and 1996, respectively. Contracts in progress represent revenue recognized on a percentage-of-completion basis over related progress billings of $60.5 and $36.0 at December 31, 1997 and 1996, respectively. Substantially all contracts in progress at year end are billed during the subsequent year.
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
5.PROPERTY, PLANT AND EQUIPMENT
In the third quarter of 1997, the company sold GSPG and contributed the net assets of GSEG to EGS. As a result of these transactions, intangible assets decreased by approximately $102.
7.EGS JOINT VENTURE
In the fourth quarter of 1997, the company and Emerson Electric Company formed EGS, a joint venture combining Emerson Electric's Appleton Electric operations and the company's GSEG. The company contributed substantially all of the operating assets of GSEG in exchange for 47.5 percent of EGS. The company accounts for its investment in EGS under the equity method of accounting. EGS operates primarily in the United States, Canada and Mexico. EGS's operations for the period from September 15, 1997 to December 31, 1997 were the following:
The company's equity in earnings of EGS at December 31, 1997 was $11.8. The company's investment in EGS is approximately $17 less than its equity in the joint venture's net assets at December 31, 1997. This difference is being amortized on a straight-line basis over an estimated economic life of 40 years.
Condensed balance sheet information of EGS as of December 31, 1997 is as follows:
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
8.ACCRUED EXPENSES
9.INCOME TAXES
For financial reporting purposes, earnings from continuing operations before income taxes includes the following components:
The components of the provision for income taxes are as follows:
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
Income tax expense (income) is included in the financial statements as follows:
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the company's deferred tax assets and liabilities are as follows:
Realization of deferred tax assets associated with the net operating loss (NOL) and credit carry-forwards is dependent upon generating sufficient taxable income prior to their expiration. Management believes that there is a risk that certain of these NOL and credit carry-forwards may expire unused and, accordingly, has established a valuation allowance against them. Although realization is not assured for the remaining deferred tax assets, management believes it is more likely than not that the net deferred tax assets will be realized through future taxable earnings or alternative tax strategies. However, the net deferred tax assets could be reduced in the near term if management's estimates of taxable income during the carry-forward period are significantly reduced or alternative tax strategies are no longer viable. The valuation allowance decreased in 1997 and 1996 by $13.3 and $3.6, respectively.
At December 31, 1997, the following net federal operating loss and tax credit carry-forwards were available:
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
Undistributed earnings of the company's foreign subsidiaries amounted to approximately $62.3 at December 31, 1997. Those earnings are considered to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state income taxes or foreign withholding taxes has been made. If these earnings were distributed, the company would be subject to U.S. income taxes (subject to a reduction for foreign tax credits) and withholding taxes payable to the various foreign countries. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable; however, unrecognized foreign tax credit carry-overs would be available to reduce some portion of the U.S. liability. Withholding taxes of approximately $4.0 would be payable upon remittance of all previously unremitted earnings at December 31, 1997.
10.DEBT
On December 12, 1996, the company called for the redemption of its 5.75 percent convertible subordinated notes. Through December 31, 1996, notes with a face value of $57.4 had been converted into 1.5 million shares of the company's common stock, with an additional $39.3 converted into 1.0 million shares on January 2, 1997. The balance of the notes of $3.3 was redeemed for cash.
Long-term debt maturing during each of the four years after 1998 is $2.7, $35.7, $3.6 and $144.2.
The company maintains credit arrangements with banks in the U.S. and abroad which aggregated approximately $605 and $604 at December 31, 1997 and 1996, respectively. At December 31, 1997, the company had a committed revolving credit agreement of $180.0 that matures on May 28, 1998, and a committed revolving credit agreement of $360.0 that matures on May 28, 2002. The agreements permit domestic and Eurodollar borrowings at interest rates offered to investment grade customers. The agreements also are convertible into one- year term loans at maturity.
Commercial paper is classified as long-term debt as the company maintains long-term committed credit agreements to support these borrowings and intends to refinance them on a long-term basis, either through continued commercial paper borrowings or the issuance of medium-term notes.
The company has a $300.0 financing program under a universal shelf registration that permits the issuance of junior or senior debt, convertible securities, equity warrants and preferred shares under one filing without specifying any dollar amounts for any security. On April 30, 1996, the company filed a prospectus supplement which allows the company to issue medium-term senior notes or medium-term subordinated notes under the shelf registration. As of December 31, 1997, $50.0 had been issued under the shelf registration.
The company has an interest rate exchange agreement, expiring in March 2000, with a financial institution to limit exposure to interest rate volatility on the commercial paper. The transaction has a notional principal amount of $25.0 at December 31, 1997 and 1996. The company monitors the risk of default by the swap counterparty and does not anticipate non-performance. At December 31, 1997, termination of this agreement would result in a $1.5 loss.
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
11.FOREIGN EXCHANGE CONTRACTS
The company conducts its business in various foreign currencies. Accordingly, the company is subject to the typical currency risks and exposures that arise as a result of changes in the relative value of currencies. The risks are often referred to as transactional, commitment, translational and economic currency exposures. The company's policy stresses risk reduction and specifically prohibits speculation. The policy's three basic objectives are to reduce currency risk on a consolidated basis, to protect the functional currency value of foreign currency-denominated cash flows and to reduce the volatility that changes in foreign exchange rates may present to operating income.
The company utilizes natural hedges and offsets to reduce exposures and also combines positions to reduce the cost of hedging. The company entered into forward foreign exchange contracts to hedge net consolidated currency transaction exposure for periods consistent with the terms of the underlying transactions, extending through September 17, 1998.
Foreign currency forward or option contracts are not used for trading purposes, and these contracts do not subject the company to currency risk from exchange rate movements. At December 31, 1997, the company had approximately $15.1 of such contracts outstanding.
12.FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash and cash equivalents, short- and long-term debt, and foreign currency contracts had fair values, based upon quoted prices or discounted cash flow analyses, that approximated their carrying amounts. Financial guarantees and letters of credit were issued by the company in the ordinary course of business, and had a fair value of approximately $104.3 as of December 31, 1997. The fair values of financial guarantees and letters of credit were based on the face value of the underlying instruments, after deducting the amount related to those instruments that are recorded as liabilities, and the related amounts accrued.
13.CONTINGENCIES AND COMMITMENTS
LITIGATION: The company and certain of its subsidiaries are defendants in legal proceedings incidental to its business. Although the ultimate disposition of these proceedings is not presently determinable, management does not expect the outcome to have a material adverse impact on the company's financial position or results of operations.
LEASES: The future minimum rental payments under leases with remaining noncancelable terms in excess of one year are:
Total rent expense in 1997, 1996 and 1995 was $19.2, $20.3 and $21.1, respectively.
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
14.ENVIRONMENTAL MATTERS
The company is involved in various stages of investigation and remediation relative to environmental protection matters, arising from its own initiative, from indemnification of purchasers of divested operations, or from legal or administrative proceedings, some of which include waste disposal sites. In certain instances, the company may be exposed to joint and several liability for remedial action or damages. The company, along with several other entities, has been named as a potentially responsible party for remedial costs at certain third-party sites listed on the National Priorities List under CERCLA and state counterpart statutes.
The potential costs related to such matters and the possible impact on future operations are uncertain due in part to the complexity of government laws and regulations and their interpretations, the varying costs and effectiveness of clean-up technologies, the uncertain level of insurance or other types of recovery, and the questionable level of the company's responsibility. The company estimates that costs of investigation and remediation will be approximately $25 and has included this amount in accrued expenses in the accompanying balance sheet. It is at least reasonably possible, however, that a change in this estimate will occur. In management's opinion, after considering reserves established for such purposes, remedial actions for compliance with the present laws and regulations governing the protection of the environment are not expected to have a material adverse impact on the company's results of operations or financial position.
15.CAPITAL STOCK
PREFERRED STOCK: 10 million shares of cumulative preferred stock, par value $1.00 per share, are authorized but unissued.
COMMON STOCK: 150 million shares are authorized, with 65.0 million issued in 1997 and 64.6 million issued in 1996. The 1.96 million shares issued through 1969 have a par value of $6.67 per share. Shares issued since then have a par value of $1.00 per share.
TREASURY STOCK:
On June 19, 1997, the Board of Directors approved a stock buy-back program of up to $150.0 subject to the consummation of the GSPG divestiture. On September 18, 1997, the Board of Directors approved an increase of this program to $300.0. The program is expected to be completed by the end of 1998. As of January 23, 1998, 3.4 million shares were repurchased under this program for $145.1.
On December 12, 1996, the Board of Directors approved a stock buy-back program of up to $100.0 to offset any shares issued as a result of the call for the redemption of the 5.75 percent convertible subordinated notes. On April 17, 1997, the program was completed with the total of 2.5 million shares repurchased for $100.0.
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
In March 1994, the company's Board of Directors approved a program, which concluded in March 1996, to repurchase up to 3.4 percent or 1.6 million shares of the common stock outstanding at that time. These shares were purchased systematically in open market transactions after the Board's approval and were used to offset dilution from the increased exercise of employee stock options arising from the company's executive stock ownership program. Approximately 1.1 million shares were repurchased under this program.
WARRANTS: In connection with the Data Switch merger, the company assumed 1,452 warrants that are redeemable at $34.83 per share and 14,357 warrants that are redeemable at $16.54 per share. In 1997 and 1996, 718 and 13,639, respectively, of these warrants were redeemed for shares of common stock.
SHAREHOLDER RIGHTS PLAN: On February 1, 1996, the Board of Directors declared a dividend distribution of one common stock purchase right for each share of common stock. The rights trade with the common stock and are not currently exercisable. Each right entitles the shareholder to buy the company's or the acquiring company's stock valued at $300 per share for a price of $150 per share upon the occurrence of specific events. The company may redeem the rights for 10 days (subject to a further 20-day extension) for one cent per right, after a person or entity acquires 20 percent or more of the common stock. The provisions do not apply to rights that are beneficially owned by the acquirer.
16. EMPLOYEE BENEFIT PLANS
PENSION PLANS: The company's pension plans cover substantially all salaried and hourly paid employees, including certain employees in foreign countries. The plans generally provide benefit payments using a formula based on an employee's compensation and length of service or, in some cases, stated amounts for each year of service. The company funds United States pension plans in amounts equal to the minimum funding requirements of the Employee Retirement Income Security Act of 1974, plus additional amounts that may be approved from time to time. Substantially all plan assets are invested in cash and short-term investments or listed stocks and bonds and real estate. Plan assets and obligations of non-U.S. subsidiaries are not material. The periodic net pension income related to continuing operations is comprised of the following:
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth the plans' funded status and amounts recognized in the balance sheet:
A minimum pension liability adjustment is required when the actuarial present value of accumulated benefits exceeds plan assets and accrued pension liabilities. The minimum liability adjustment, less allowable intangible assets, net of tax benefit, is reported as a reduction of shareholders' equity. At December 31, 1997, the company recorded a minimum pension liability adjustment, net of tax, of $1.7.
Under the Savings and Stock Ownership Plan and other supplemental plans, the company matches employee contributions in cash and common stock equal to a percentage of certain amounts contributed by employees. The company's contributions under these plans amounted to $13.2 in 1997, $10.6 in 1996 and $8.2 in 1995. Effective July 1, 1997, the contributions were invested in funds based on employee direction. Prior to July, the contributions were invested in shares of the company's common stock. At December 31, 1997, the plans held 2.4 million shares and 0.6 million shares were reserved for issuance.
NON-PENSION RETIREMENT BENEFITS: The company and its U.S. subsidiaries have post-retirement plans that provide health and life insurance benefits for retirees. Some of these plans require employee contributions at varying rates. Not all employees are eligible to receive these benefits, with eligibility governed by the plan(s) in effect at a particular location.
The accumulated post-retirement benefit obligation at December 31, 1997 was determined using the terms of the company's various plans, together with relevant actuarial assumptions and health care cost trend rates projected at estimated annual rates ranging from 6.6 percent in 1997 and 6.4 percent in 1998, to 5.0 percent through the year 2006, and a weighted average discount rate of 7.0 percent. Generally, where applicable, the discount rate and the actuarial assumptions used for pension plans also apply to the non-pension retirement plans. A one percent annual increase in these assumed cost trend rates would increase the accumulated post-retirement benefit obligation by approximately $0.9, and annual service costs by approximately $0.1. Certain of the company's non-U.S. subsidiaries have similar plans for retirees. The company's obligations for such plans are not material.
The net periodic post-retirement benefit cost related to continuing operations is composed of the following:
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
The following table shows the plans' funded status and amounts recognized in the balance sheet:
During 1997, the company's accrued post-retirement benefit cost was reduced by curtailment gains and settlement gains of approximately $7.9 related to the disposition of GSPG and the formation of EGS. The curtailment gain recognized on the disposition of GSPG is included in the gain on sale amount. The curtailment and settlement gains resulting from the formation of EGS were included in the investment in EGS.
The unrecognized prior service cost at December 31, 1997 and 1996 represents unamortized amounts for plan amendments, resulting from revisions to company- sponsored health plans, which reduced benefit levels.
STOCK INCENTIVE PROGRAM: The company has a stock incentive program whereby executive officers and designated employees have been or may be granted restricted stock and options to purchase shares of company common stock. Restricted stock awards were granted during 1997 and 1996 for 25,000 shares and 11,568 shares of company common stock with a weighted-average price of $43.50 per share and $40.31 per share, respectively. The restricted stock awards granted in 1997 and 1996 vest at certain rates over a three-to-five- year period. Non-employee directors may elect to defer all or part of their cash compensation as directors and to receive in lieu thereof restricted stock. No restricted stock awards granted in 1997 were received by non- employee directors. In 1996, of the 11,568 shares granted, 3,068 shares of company common stock were received by three non-employee directors, subject to a five-year restriction period. Total compensation expense for restricted stock for 1997 and 1996 was $1.0 and $1.2, respectively.
Options are exercisable during specified dates at prices at least equal to 100 percent of the fair market value on the date of grant. The exercise price of General Signal stock options granted in 1997 and 1996 equaled the market value on the date of grant. All options granted have 10-year terms, and vest and become fully exercisable at the end of four years of continued employment, except for options granted to non-employee directors which vest immediately. In 1997, of the 532,000 shares granted, 14,000 shares of company common stock were received by seven non-employee directors. No options were granted to non- employee directors in 1996. As of December 31, 1997 and 1996, 4.3 million and 4.6 million shares, respectively, of company common stock were reserved for issuance under the stock incentive program.
The company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the company's employee stock options equals the market price of the underlying stock on the date of the grant, no compensation expense has been recognized.
Pro forma information regarding net income and earnings per share is required by SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), which also requires that the information be determined as if the company had accounted for its employee stock options granted subsequent to December 31, 1994, under the fair-value method of SFAS No. 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions:
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
These pro forma effects may not be representative of the effects on future years because of the prospective application required by SFAS No. 123, and the fact that options vest over several years and new grants generally are made each year.
OPTION ACTIVITY: The following table shows the option activity for the three years ended December 31, 1997. Options granted and exercised by Data Switch prior to the merger date are included in the 1995 activity.
The weighted-average fair value of options granted during 1997, 1996 and 1995 was $10.85 per share, $9.08 per share and $7.36 per share, respectively.
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information concerning currently outstanding and exercisable options:
17.EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share from continuing operations:
For additional disclosures regarding the 5.75 percent subordinated notes and the employee stock options, see pages and through.
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
18.BUSINESS COMBINATIONS
During the three-year period ended December 31, 1997, the company acquired four entities for cash and common stock valued at $350.7 plus the assumption of liabilities. The acquisitions, except Data Switch Corporation (Data Switch), were accounted for as purchases, and, accordingly, the results of operations of the acquired companies are included in the statement of earnings for the periods during which they were owned by the company. Data Switch was accounted for as pooling of interests. The following paragraphs discuss significant mergers and acquisitions made during the three years ended December 31, 1997.
On June 13, 1995, the company completed a cash-tender offer for Best Power Technology, Inc. (Best Power). Best Power is a manufacturer of uninterruptible power supply products, which provide backup power to protect computers, information networks and other critical systems from power line disturbances. The aggregate purchase price was $206.3, creating goodwill of $167.1. The purchase price was financed through the issuance of commercial paper. The company recorded a $7.4 before-tax charge ($4.8 after-tax) during the second quarter of 1995, primarily for severance and other consolidation costs relating to the combination of General Signal and Best Power locations.
On July 27, 1995, the company acquired MagneTek Electric Inc. (Waukesha Electric) for $73.9, creating goodwill of $46.2. Waukesha Electric designs, manufactures and installs medium-power transformers and related products. The purchase price was financed through the issuance of commercial paper.
Unaudited pro forma data for the year ended December 31, 1995 giving effect to the acquisitions of Best Power and Waukesha Electric as if they had been acquired at the beginning of 1995 are shown below:
On November 9, 1995, the company merged with Data Switch by exchanging 1.8 million shares of company common stock and 0.2 million rights to receive company common stock for all of the outstanding common stock and related options and warrants of Data Switch. Data Switch designs, develops, manufactures, markets and services products for large-scale data center networks. As a result of the merger, the company incurred transaction costs, severance and balance sheet valuation adjustments of $12.7 ($8.1 after-tax). The transaction costs included investment banker and other professional fees. The consolidation costs included severance pay primarily for Data Switch and asset valuation adjustments.
19.DISCONTINUED OPERATIONS
In November 1994, the company adopted a plan to sell Leeds & Northrup Company (L&N), formerly a part of the Process Controls sector, and Dynapower/Stratopower (Dynapower), formerly a part of the Industrial Technology sector. These operations have been accounted for as discontinued operations, and the consolidated financial statements have reported separately their net assets and operating results. In the second and third quarters of 1995, the company recorded a total of $99.9 before-tax charges ($64.0 after- tax) for additional expected losses relating to the disposal of L&N and Dynapower. Through December 31, 1996, substantially all related assets were sold. In September 1997, $3.8 of this amount ($2.3 after-tax) was no longer required and accordingly, was reversed.
20.DISPOSITION OF BUSINESS AND OTHER SPECIAL ITEMS
In the fourth quarter of 1997, the company settled patent litigation and sold related patents for a pre-tax gain of $10.0 and sold its equity interest in a company in Mexico for a gain of $9.0. Income tax expense on the gains totaled $10.6. The effective tax rate on the Mexico gain differs from the U.S. statutory tax rate due to a difference in the book and tax basis of the equity investment sold. Additionally in the fourth quarter of 1997, the company recorded $13.8 of pre-tax charges in selling, general and administrative expenses for asset valuations, lease termination costs and other individually insignificant matters.
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
In August 1997, the company sold substantially all of the assets of GSPG, a unit of the Process Controls sector, to Pentair, Inc. for approximately $200 and recognized a pre-tax gain of $63.7 ($17.2 after-tax). The effective tax rate differs from the U.S. statutory tax rate due to a difference in the book and tax basis of GSPG. Additionally, during the third quarter of 1997, the company recorded charges for inventory and accounts receivable policy changes, asset write-offs, professional fees and cancellation of a facility lease. Additionally, the company reversed a restructuring reserve that was no longer needed due to the formation of EGS. The net of these charges of $14.1 were included in cost of sales ($11.1) and selling, general and administrative expenses ($3.0), with an associated income tax benefit of $5.4.
In January 1996, the company sold Kinney, a unit of the Process Controls sector, for $29.0 and recognized a pre-tax gain of $20.8. Included in the gain were transaction costs of approximately $0.5. Also during the first quarter of 1996, the company recognized $19.7 of pre-tax charges for asset write-downs, lease termination costs, severance, warranty repairs and environmental matters. The charges were included in cost of sales ($13.0) and selling, general and administrative expenses ($6.7), with an associated income tax benefit of $7.9.
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
21.BUSINESS SECTOR INFORMATION
The company manufactures industrial products and components in the Process Control, Electrical Control and Industrial Technology (primarily transportation and telecommunication) industries. See pages 3 through 5 of this 10-K for a description of major products and markets served.
(1) Includes 1997 income in Process Controls ($63.7) and unallocated expenses ($19.0) for the gain on sale of GSPG, settlement of patent litigation and sale of patents and gain on sale of equity interest in a company in Mexico. Also recorded were charges in Process Controls ($2.8), Electrical Controls ($16.7), Industrial Technology ($1.9) and unallocated expenses ($6.5) for asset valuations, restructuring charges, lease termination costs and other matters. (2) Includes $4.2 of royalty income. (3) Includes 1996 income in Process Controls ($22.6) and Industrial Technology ($4.2) for the gain on sale of Kinney, insurance gain on the recovery of destroyed assets and royalty income. Also recorded were charges in Process Controls ($4.0), Electrical Controls ($11.1) and Industrial Technology ($4.6) for asset write-downs, lease termination costs, severance, warranty repairs and environmental matters. (4) Includes 1995 charges in Electrical Controls ($7.4) and Industrial Technology ($12.7) for the acquisition of Best Power and merger with Data Switch. (5) Includes 1994 charges in Process Controls ($11.9), Electrical Controls ($19.2) and Industrial Technology ($9.9) for the consolidation of operations, asset valuations, environmental and other. (6) Includes 1993 charges in Process Controls ($22.1) and Electrical Controls ($10.5) for asset valuations, restructuring and transaction and consolidation charges related to Revco. (7) Represents credits for the divested semiconductor operations ($53.2) and charges for the transportation businesses ($5.2). (8) Excludes discontinued operations.
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
22.GEOGRAPHIC AREAS
- ------- (1) Excludes equity income, net interest expense and unallocated expenses. (2) Excludes general corporate assets and investments in affiliates. (3) Included in United States sales.
23.SUPPLEMENTARY INFORMATION
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
NOTES TO THE FINANCIAL STATEMENTS--(CONTINUED)
24. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
- ------- Earnings before cumulative effect of accounting change was $38.3 ($0.76 per share) in the third quarter of 1997. Note: The sum of the quarters' earnings per share may not equal the full year per-share amounts. (1) Included $63.7 gain on sale of GSPG. The company also recorded $14.1 of special charges for asset valuations, restructuring charges and other matters. (2) Included $10.0 gain on settlement of a patent litigation and sale of patents and $9.0 gain on sale of an investment in Mexico. The company also recorded $13.8 of special charges for asset valuations, lease termination costs and other matters. (3) Included $20.8 gain on sale of Kinney and $6.0 related to a royalty contract and an insurance gain. The company also recorded $19.7 of charges for asset write-downs, lease termination costs, severance, warranty repairs and environmental matters. (4) The 1996 and first three quarters of 1997 earnings per share amounts have been restated to comply with SFAS No. 128.
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
- ------- (1) Includes $1.9 due to the sale of GSPG and the contribution of GSEG's net assets to EGS. (2) Includes reclassification of $4.8 credit balance from assets held for sale reserve to discontinued operations reserve. (3) Write-off of bad debts, net of recoveries. (4) Reflects reclassification to accruals. (5) Charges to reserve for related costs incurred during the year. (6) Includes $0.6 of reserves recorded by Data Switch which were consolidated effective January 1, 1995.
EXHIBIT (12)
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
CALCULATIONS OF RATIO OF EARNINGS TO FIXED CHARGES
EXHIBIT (21)
GENERAL SIGNAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
SUBSIDIARIES OF REGISTRANT
1. CONSOLIDATED SUBSIDIARIES
2. OTHER SUBSIDIARIES
EGS Electrical Group LLC, organized under the laws of Delaware, is 7.21 percent owned by G.S. Building Corporation, 40.29 percent owned by General Signal Corporation and 52.5 percent owned by Emerson Electric. The subsidiaries of EGS Electrical Group LLC are as follows:
The following foreign subsidiaries and the investment of 50 percent or less owned companies are carried at cost plus equity in undistributed earnings since acquisition. These subsidiaries and companies are not material individually or in the aggregate in relation to the financial statements.
EXHIBIT (23) CONSENT OF ERNST & YOUNG LLP
The Board of Directors and Shareholders General Signal Corporation
We consent to the incorporation by reference in the Registration Statements (Form S-3 No. 33-33929) pertaining to the universal shelf registration dated May, 1994, (Form S-8 No. 33-46613) pertaining to the General Signal Corporation Savings and Stock Ownership Plan, (Form S-8 No. 33-05181) pertaining to General Signal Corporation's stock incentive plans, (Form S-8 to Form S-4 No. 33-62437-01) pertaining to stock options assumed as a result of the merger with Data Switch Corporation (Form S-3 to Form S-4 No. 33-62437-02) pertaining to the outstanding stock warrants as a result of the merger with Data Switch Corporation and related prospectuses of our report dated January 23, 1998, with respect to the financial statements and schedules of General Signal Corporation included in this Annual Report (Form 10-K) for the year ended December 31, 1997.
/s/ Ernst & Young LLP
Stamford, Connecticut March 20, 1998