10-Q 1 e10-q.txt UNITED DOMINION INDUSTRIES LIMITED 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 ----------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-8585 -------------------------------------------------------- UNITED DOMINION INDUSTRIES LIMITED ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Canada 98-0125322 ------------------------------- -------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 2300 One First Union Center, Charlotte, North Carolina 28202 ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) 704-347-6800 ------------------------------------------------------------------------------- (Registrant's telephone number, including area code) ------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) 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 [ ] Common Shares without par value outstanding as of June 30, 2000: 39,122,355 shares. Page 1 of 21 2 UNITED DOMINION INDUSTRIES LIMITED AND SUBSIDIARIES TABLE OF CONTENTS

2 3 United Dominion Industries Limited Consolidated Statements of Income ------------------------------------------------------------------------------- For the Quarters and Six Months Ended June 30, 2000 and 1999 (Stated in Thousands of U.S. Dollars)

See accompanying notes. 3 4 United Dominion Industries Limited Consolidated Statements of Cash Flow ------------------------------------------------------------------------------- For the Six Months Ended June 30, 2000 and 1999 (Stated in Thousands of U.S. Dollars)

See accompanying notes. 4 5 United Dominion Industries Limited Consolidated Statements of Financial Position ------------------------------------------------------------------------------- As of June 30, 2000 and December 31, 1999 (Stated in Thousands of U.S. Dollars)

See accompanying notes. 5 6 United Dominion Industries Limited Consolidated Statements of Retained Earnings ------------------------------------------------------------------------------- For the Six Months Ended June 30, 2000 and the Year Ended December 31,1999 (Stated in Thousands of U.S. Dollars)

See accompanying notes. 6 7 United Dominion Industries Limited Notes to Financial Statements (Stated in Thousands of U.S. Dollars) ------------------------------------------------------------------------------- 1. New accounting guidelines issued in Canada require accruing the cost of providing postretirement health care benefits during the years that the employee renders the necessary service. The company had previously recorded health care benefits on a "pay-as-you-go" basis. Additionally, the new guidelines require that for purposes of determining the pension liability, the discount rate must be based on current bond market yields rather than management's best estimate of the plan's long- term returns. The company has elected to retroactively adopt this new standard. The 1999 consolidated statements of income, cash flows and financial position and the accompanying 1999 segment results have been restated to reflect the retroactive application of the new rules. For the quarter and six months ended June 30, 1999, the adoption resulted in a decrease in net income of $645 and $1,290, respectively, or $.02 and $.03 per share, respectively. At December 31, 1999 the adoption resulted in increases in other current assets of $2,750 and accrued liabilities of $6,876 and decreases in other (non-current) assets of $14,142, other (non-current) liabilities of $1,355 and retained earnings of $16,913. 2. The company recorded pre-tax restructuring and other one-time charges totaling $26,695 and $34,313 during the quarter and six months ended June 30, 2000, respectively. This consisted principally of restructuring costs ($22,449 and $26,419 for the quarter and six months ended June 30, 2000, respectively) as part of the company's continuing initiative to improve operations. This initiative included plant consolidations, reductions in force, process improvements and asset write-downs. Other charges of $4,246 for the quarter ended June 30, 2000 arose primarily from a product replacement program and a legal matter. Other charges of $7,894 for the six months ended June 30, 2000 also includes a $3,648 one-time first quarter charge resulting from an unfavorable tax ruling. 3. Information about the company's operating segments is as follows:

7 8 United Dominion Industries Limited Notes to Financial Statements (Stated in Thousands of U.S. Dollars) ------------------------------------------------------------------------------- 4. In the opinion of management, these financial statements reflect all adjustments necessary for the fair statement of results of the interim periods presented. Certain prior year amounts have been reclassified to conform with current year presentation. Generally accepted accounting principles (GAAP) in Canada allow for the reduction of stated capital of outstanding common shares with a corresponding offset to retained earnings. This reclassification, which the company made in 1990, is not permitted by United States GAAP and would result in an increase in capital stock and a reduction in retained earnings of $128,093 at June 30, 2000 and December 31, 1999. Canadian GAAP also permits expenses related to the issuance of capital stock, net of income taxes, to be deducted from retained earnings while United States GAAP requires such expenses to be deducted from the proceeds of stock issuances credited to capital stock. This reclassification would reduce capital stock and increase retained earnings by $20,905 at June 30, 2000 and December 31, 1999. Canadian GAAP allows for the capitalization and subsequent amortization of start-up costs for new facilities and joint ventures. United States GAAP requires the expensing of these costs as incurred. United States GAAP requires the dual presentation of basic and diluted earnings per share. Diluted earnings per share reflects the assumed exercise of dilutive securities such as the company's stock options. The following table reflects the impact on net income, weighted average shares outstanding and net earnings per share of complying with United States GAAP as it pertains to the items noted above.

8 9 United Dominion Industries Limited Notes to Financial Statements (Stated in Thousands of U.S. Dollars) ------------------------------------------------------------------------------- The application of United States GAAP discussed above would result in an increase in common shares of approximately $107,000 and decreases in accrued liabilities of approximately $1,000, goodwill of approximately $2,000, other (non-current) assets of approximately $1,000 and retained earnings of approximately $109,000 as of June 30, 2000. United States GAAP requires reporting on comprehensive income which is defined as the change in equity of a company from transactions and other events from nonowner sources. The difference between net income and comprehensive income for the company arises principally from currency translation adjustments. Income taxes have not been provided on currency translation adjustments because the net assets invested in the company's foreign operations are considered to be permanently invested. For the three and six months ended June 30, 2000, comprehensive income totaled $3,508 and $1,882, respectively. For the three and six months ended June 30, 1999, comprehensive income totaled $23,060 and $36,713, respectively. 5. United Dominion Industries Limited and its wholly owned subsidiary, United Dominion Holdings, Inc., are guarantors of certain senior debt issued by United Dominion Industries, Inc. The following is summarized condensed consolidating financial information segregating the parent and guarantor subsidiaries from nonguarantor subsidiaries. The guarantor subsidiaries are wholly owned subsidiaries of the company and guarantees are full, unconditional and joint and several. Separate financial statements and other disclosures of the guarantor subsidiaries are not presented because management believes these financial statements would not provide relevant material additional information to users. 9 10 United Dominion Industries Limited Notes to Financial Statements (Stated in Thousands of U.S. Dollars) -------------------------------------------------------------------------------

10 11 United Dominion Industries Limited Notes to Financial Statements (Stated in Thousands of U.S. Dollars) --------------------------------------------------------------------------------

11 12 United Dominion Industries Limited Notes to Financial Statements (Stated in Thousands of U.S. Dollars) -------------------------------------------------------------------------------

12 13 United Dominion Industries Limited Notes to Financial Statements (Stated in Thousands of U.S. Dollars) --------------------------------------------------------------------------------

13 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is management's discussion and analysis of significant factors that have affected the results of operations and financial condition of United Dominion Industries Limited (the "Company") during the quarter and six months ended June 30, 2000. All amounts are stated in U. S. dollars. As described in Note 1 to the accompanying financial statements, the Company's financial statements for 1999 have been restated due to the retroactive adoption of new accounting rules. Results of Operations - Quarters Ended June 30, 2000 and 1999 Sales of $627 million for the quarter ended June 30, 2000 were 14% higher than the $549 million reported in the comparable quarter of 1999. Net income of $14.3 million in 2000 compared to $26.7 million in 1999 while per share earnings were $.36 per share versus $.67 per share for 1999. Excluding non-recurring items, second quarter net income would have been $30.8 million in 2000, or $.79 per share, compared to $27.5 million in 1999, or $.69 per share, a 12% year-over-year increase in net income and a 14% increase in earnings per share. Earnings per share before goodwill charges and non-recurring items would have been $.92 per share in 2000 compared to $.81 per share for 1999, an increase of 14%. The increased earnings related primarily to an increase in segment profit, excluding non-recurring items, and lower corporate expenses. Segment profit for 2000 includes $26.3 million of non-recurring items. These non-recurring costs consist of $22.4 million in restructuring charges to support the company's operations improvement initiatives, UDXcellence, and $3.8 million of charges related to a product replacement program and a legal matter. Segment profit for 1999 included $1.4 million of restructuring charges. Excluding these costs, segment profit increased 14% from 1999 to 2000, while segment operating margins increased slightly to 11.3% from 11.2% last year. Excluding non-recurring items, corporate and other expenses declined 7% in the second quarter reflecting the continuing benefits of cost reduction initiatives previously implemented. Net interest increased 43% in 2000 to $13.3 million due to increased interest rates and higher debt levels which were used to fund acquisitions. The Company's effective tax rate was approximately 38% in both 2000 and 1999. 14 15 The following is a summary of the factors that impacted operating results for each segment. Flow Technology - Sales of $258 million were 13% higher than the $229 million reported in 1999. Despite the increase in sales, segment profit (excluding non-recurring items of $13.4 million in 2000 and $1.2 million in 1999) declined 4% year over year to $21.1 million in 2000 from $22.0 million in 1999. Accordingly, operating margins declined from 9.6% in 1999 to 8.2% in 2000. Weil-McLain and Flair showed year-over-year improvement and the segment benefited from the contribution of Bran+Luebbe which was acquired in the third quarter of 1999. Weil-McLain has experienced strong markets due to pent-up demand and oil to gas boiler conversions. Flair is also benefiting from higher year-over-year volumes and lower selling, general and administrative expenses. However, the results of Marley Cooling Tower and Marley Pump were particularly disappointing in the quarter as both of these divisions were impacted by softness in the petrochemical market and operating issues. Additionally, Marley Pump suffered from the uncertainty surrounding the proposed joint venture with Franklin Electric. Improvement at Mueller Steam was offset by a small shortfall at Waukesha Cherry-Burrell while CMB's results were virtually unchanged from a year ago. Machinery - Sales, segment profit and operating margins were all up from the prior year. Total sales of $161 million were 5% ahead of last year while segment profit of $26.9 million (excluding non-recurring charges of $350 thousand) was 14% higher. Operating margins increased from 15.4% last year to 16.7% in 2000. Compaction has continued to experience strong markets world-wide, especially in Europe and the Far East, but there is some indication of softness in North America. Despite this softness and the weakness of the Deutsche Mark versus the U. S. dollar, this year's second quarter results were an all-time record for the Compaction Division. Increased sales of new machines in almost all product lines have contributed to the year-over-year improvement. The Agricultural Equipment division also showed better results in 2000. There are indications that the weak agricultural economy has hit bottom and that a recovery may have begun. Specialty Engineered Products - Excluding non-recurring items totaling $5.3 million, segment profit of $14.1 million in 2000 was up 51% over 1999 while sales of $125 million were 50% higher than the prior year. Operating margins increased slightly to 11.3% in 2000 from 11.2% in 1999. Most of the year-over-year increase in results was due to acquisitions. However, excluding 15 16 the impact of acquisitions, sales and segment profit were still up 18% over last year. Marley Engineered Products (formerly known as Marley Electric Heating) benefited from strong demand for its heating related products. The Dock Products division continued to experience strong markets and benefited from the acquisition of the Kelley Company in January 2000 and TKO Doors in the third quarter of 1999. Earnings from the Door Products division were basically flat year over year despite higher sales. Pricing pressures and an unfavorable shift in demand to lower margin products hurt results. C&M benefited from higher sales and earnings, primarily due to growth in its international business. Fenn reported lower sales and earnings primarily due to volume shortfalls in its Machinery division. Test Instrumentation - Sales of $81 million were up only 1% over 1999; however, segment profit (excluding non-recurring items) of $8.2 million was 30% higher than last year. Accordingly, operating margins improved from 8.0% in 1999 to 10.2% in 2000. All operations showed year-over-year improvement in earnings, most notably the Test Measurement division and Lunaire/LDS. Radiodetection is benefiting from recent acquisitions and strong telecommunication markets. Lunaire/LDS has experienced very strong bookings and its backlog is at an all-time high. The Atmospheric Air Division reported lower sales, primarily due to weak automotive markets at TMI, but cost reduction initiatives enabled this division to still increase year-over-year earnings. RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2000 AND 1999 Sales for the six months ended June 30, 2000 of $1.2 billion were 15% higher than 1999's sales of $1.0 billion while net income of $21.5 million ($.55 per share) in 2000 compared to $40.0 million ($1.00 per share) in 1999. Excluding non-recurring items, net income and earnings per share would have been $42.8 million, or $1.09 per share, in 2000 compared to $40.9 million, or $1.02 per share, in 1999, a 5% and 7% increase in net income and earnings per share, respectively. The factors impacting the results during the six months were substantially the same as those discussed for the second quarter. Excluding non-recurring items, segment profit of $109.5 million in 2000 was 10% higher than the $99.7 million reported in 1999. The increase in sales and segment profit was primarily attributable to acquisitions. Excluding the results of businesses acquired during the last year, sales and segment profit would have increased 3% from a year ago. Corporate expenses have declined 2% from last year while other expense increased by $4.0 million in 2000. The increase in other expense 16 17 was due entirely to non-recurring charges in 2000, primarily a one-time charge resulting from an unfavorable tax ruling in the first quarter. Net interest expense increased 38% in 2000 to $25.7 million due to higher debt levels which were used to fund acquisitions and last year's common share repurchase program. The Company's effective income tax rate was unchanged at 38% in 2000 and 1999. LIQUIDITY AND CAPITAL RESOURCES The Company generated only $1 million of cash from operating activities during the first six months of 2000 as the combination of net income, depreciation and amortization were offset by a $63 million increase in working capital. Total "operating" working capital balances (excluding cash and borrowings) increased to $450 million at June 30, 2000 from $412 million at December 31, 1999, but declined from $501 million at March 31, 2000. Free cash flow totaled a negative $35 million during the first six months after factoring in $28 million for capital and other expenditures and $8 million for common share dividends. Free cash flow for the first six months of 1999 amounted to a negative $24 million. The year-over-year decline in free cash flow is primarily due to lower net income in 2000. The Company's ratio of net debt (borrowings less cash on hand) to total capital (net debt plus shareholders' equity) increased to 45% at June 30, 2000 from 41% at year-end. At June 30, 2000, the Company had available $172 million of unused credit facilities. Management believes that the combination of cash available, the remaining unused credit facilities and proceeds from the previously announced divestitures (see "Other Items") and a possible debt offering will be adequate to provide for short-term cash needs and to support internal growth and future acquisitions. The Company's operating plants from time to time make changes or modifications to comply with current regulatory provisions governing the discharge of materials into the environment. The Company believes that capital expenditures for environmental control facilities in 2000 will not be material. The Company maintains an environmental policy that requires the performance of environmental audits, the conducting of seminars and other actions necessary to ensure compliance with environmental laws. Management believes that compliance with regulatory requirements and its environmental policy will have no 17 18 material adverse effect on the business or the consolidated financial position of the Company. YEAR 2000 INFORMATION In 1997, the Company initiated a comprehensive review of its computer systems, equipment and facilities to identify any Year 2000 problems. By the end of 1999, all of the Company's essential computer applications and systems were Year 2000 compliant and, to date, the Company has not experienced, nor does it expect to experience, any significant Year 2000 consequences. However, there can be no assurance that all aspects of the Year 2000 issue that may yet affect the Company, including those related to vendors, customers or other companies with which the Company deals, have been fully resolved. OTHER ITEMS The Company has announced that it intends to divest several non-core businesses, including the Door Products division and Fenn Manufacturing (which are part of the Specialty Engineered Products segment), TMI (which is part of the Test Instrumentation segment), and the Company's Agricultural Equipment division (which is part of the Machinery segment). In 1999, proforma full year sales and earnings from these companies totaled approximately $300 million and $31 million, respectively. FORWARD-LOOKING STATEMENTS The foregoing discussion and analysis contains "forward-looking statements" within the meaning of Section 27A of the United States Securities Exchange Act of 1934, as amended, that represent the Company's current expectations or beliefs concerning future events. Such forward-looking statements are about matters that are inherently subject to risks and uncertainties. Factors that could influence the matters discussed in such forward-looking statements include global economic conditions, the current business environment, both in North America and abroad, including interest rates and consumer and capital spending, competitive factors, pricing pressures, new product development, changes in laws and regulations, and the continuation of the favorable environment in which to make acquisitions, in North America and internationally, including regulatory requirements and the availability of acquisition candidates at affordable prices. Such factors, and other factors, could cause actual results or events to differ materially from expectations. 18 19 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's exposure to market risks from changes in interest rates relates primarily to the fair value of its long-term fixed interest rate debt and the effects that changes in interest rates have on floating rate debt and short-term investments and cash equivalents. Generally, the fair market value of fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise. A 50 basis point increase in interest rates would have a $5.1 million effect on the fair value of the Company's long-term debt as of June 30, 2000. A 50 basis point movement in the interest rate on the Company's floating rate debt and short-term investments and cash equivalents would result in an approximate $2.6 million annualized increase or decrease in net interest expense and cash flows. The Company does not trade in derivative financial instruments for trading or speculative purposes. However, it does enter into a limited range and number of derivative financial instrument contracts. The Company has operations in several foreign countries and conducts business in numerous foreign currencies. Changes in foreign currency exchange rates affect the Company's translation of its foreign companies' results into United States dollars and can impact the transaction costs of specific transactions denominated in foreign currencies. The Company has a program in place to manage foreign currency risk and as part of that program enters into a limited number of foreign currency foreign exchange contracts to hedge anticipated or specific foreign currency transactions. These foreign exchange contracts do not subject the Company to market risk due to exchange rate movement because gains and losses on these contracts offset losses and gains on the transactions being hedged. The Company has also mitigated its exposure to changes in foreign currency exchange rates by denominating certain long-term borrowings in foreign currencies. A 10% change in the value of all foreign currencies would not have a material effect on the Company's financial position, liquidity or results of operations. 19 20 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Although the registrant and its subsidiaries are involved in a number of pending legal proceedings in which damages and other relief are sought, management is of the opinion, based upon information presently available to it, that it is unlikely that any liability, to the extent not provided for through insurance or otherwise, would be material in relation to the registrant's consolidated financial position. The registrant has been named along with several other parties in a number of administrative proceedings maintained by federal and state agencies arising out of alleged releases or contributions of hazardous substances into the environment. None of the proceedings is, in the opinion of management, either individually or viewed in connection with all the proceedings, material to the business or consolidated financial condition of the registrant. While the registrant has participated and in the future will participate in the funding of clean up costs in connection with certain of the proceedings, it does not believe that monetary sanctions exceeding $100,000 will be imposed on it as a result of any of the proceedings. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. None. (b) Reports on Form 8-K There were no Reports on Form 8-K filed in the first quarter. 20 21 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. UNITED DOMINION INDUSTRIES LIMITED Date: August 9, 2000 /s/ Richard L. Magee --------------------------------- Richard L. Magee Sr. Vice President, Secretary and General Counsel Date: August 9, 2000 /s/ C. Theodore Leinbach, III --------------------------------- C. Theodore Leinbach, III Vice President and Controller 21

UNITED DOMINION INDUSTRIES LIMITED 10-Q