Back to GetFilings.com

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2004

For the transition period from                      to                     

Commission File Number 1-6948

SPX CORPORATION

(Exact Name of Registrant as Specified in its Charter)

13515 Ballantyne Corporate Place, Charlotte, North Carolina 28277

(Address of Principal Executive Offices)

Registrant’s Telephone Number, including Area Code (704) 752-4400

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. x Yes ¨ No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

x Yes ¨ No

Common shares outstanding October 28, 2004    75,136,350

PART I—FINANCIAL INFORMATION

SPX CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

($ in millions)

(Unaudited)

The accompanying notes are an integral part of these statements.

2

SPX CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(in millions, except per share amounts)

The accompanying notes are an integral part of these statements.

3

SPX CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

($ in millions)

The accompanying notes are an integral part of these statements.

4

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2004

(Unaudited)

(Dollar and share amounts in millions, except per share and per LYON data)

(1) BASIS OF PRESENTATION

In our opinion, the accompanying condensed consolidated balance sheets and related interim statements of condensed consolidated income and cash flows include the adjustments (consisting of normal and recurring items) necessary for their fair presentation in conformity with United States generally accepted accounting principles (“GAAP”) and represent our accounts after the elimination of inter-company transactions. Investments in unconsolidated companies where we do not exercise control and are not the majority shareholder, but over which we exercise significant influence are accounted for using the equity method. Preparing financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from these estimates. The unaudited information included in this Form 10-Q should be read in conjunction with the Consolidated Financial Statements contained in our 2003 Annual Report on Form 10-K. Interim results are not necessarily indicative of results for a full year.

We report discontinued operations in accordance with the guidance from SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Accordingly, we report assets as discontinued operations when, among other things, we commit to a plan to divest the asset, actively begin marketing the asset and when the sale of the asset is deemed probable within the next 12 months. In May and August 2004, we made the determination that our municipal water valve product line and our compaction equipment business, respectively, met the criteria to be reported as discontinued operations. Accordingly, for all periods presented, the results of the municipal water valve product line and our compaction equipment business have been reported as discontinued operations in our condensed consolidated financial statements. The municipal water valve product line and the compaction equipment business were previously reported as components of the Flow Technology and Industrial Products and Services segments, respectively. Additionally, in May 2003, we sold our subsidiary Inrange Technologies Corporation (“Inrange”), a component of our Technical Products and Systems segment. Through the date of its sale, the results of Inrange are reported as discontinued operations. See Note 4 for more information on the divestitures of the municipal water valve product line, the compaction equipment business, and Inrange. Also, see Note 15 with regard to our entering into a definitive share sale agreement for our compaction equipment business. Unless otherwise indicated, amounts provided in these notes pertain to continuing operations.

We label our quarterly information using a calendar convention. Our first quarter is consistently labeled as ending on March 31, second quarter as ending on June 30, and third quarter as ending on September 30. It is our practice to establish actual interim closing dates using a “fiscal” calendar, which requires our businesses to close their books on the Saturday closest to the end of the calendar quarter for efficiency purposes. The interim closing dates for the first, second and third quarters of 2004 were April 3, July 3 and October 2, respectively, and March 29, June 28 and September 27 for 2003, respectively. The effects of this practice only impact the quarterly reporting periods and not the annual reporting period. We had six additional days in the first quarter of 2004 and will have five fewer days in the fourth quarter of 2004 when compared to the respective 2003 periods.

Certain prior period amounts have been reclassified to conform to current quarter presentation. These reclassifications had no impact on previously reported results of operations, in total, or on total shareholders’ equity.

(2) NEW ACCOUNTING PRONOUNCEMENTS

The following is a summary of new accounting pronouncements that apply or may apply to our business.

In January 2003, the Financial Accounting Standards Board (“FASB”) issued Financial Interpretation (“FIN”) No. 46, “Consolidation of Variable Interest Entities,” an interpretation of Accounting Research Bulletin 51, “Consolidated Financial Statements.” FIN 46 requires that unconsolidated variable interest entities be consolidated by their primary beneficiary and applies immediately to variable interest entities created after January 31, 2003. In December 2003, the FASB revised certain provisions of FIN 46 and modified the effective date for all variable interest entities existing before January 31, 2003 to the first period ending after March 15, 2004. Adoption of FIN 46 in the first quarter of 2004 did not have a material impact on our financial position or results of operations.

In December 2003, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 132R, “Employers’ Disclosures about Pension and Other Postretirement Benefits, an update of FASB Statements No. 87, 88, and 106.” SFAS No. 132R revises disclosure requirements for pension plans and other postretirement plans to provide additional information in both interim and annual financial statements regarding the type of plan assets, investment strategy, expected future cash flows and the general approach in developing plan assumptions. We have adopted the provisions of this statement as of and for all periods ending after December 31, 2003. Refer to Note 10 for the additional disclosures required by SFAS No. 132R.

5

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2004

(Unaudited)

(Dollar and share amounts in millions, except per share and per LYON data)

In March 2004, the FASB issued an Exposure Draft titled “Share-Based Payment, an Amendment of FASB Statements No. 123 and 95.” The Exposure Draft would require the recognition of compensation expense over the vesting period for all share-based payments, including stock options, based on the fair value of the payment at the grant date. The Exposure Draft is not final and was subject to a comment period that ended on June 30, 2004 and the FASB continues to deliberate and propose revisions to the Exposure Draft. Although the provisions of the Exposure Draft are not final, the Exposure Draft is proposed to be effective starting with the first interim period beginning after June 15, 2005. We are currently assessing the potential impact the proposed Exposure Draft could have on our financial position and results of operations.

In March 2004, the Emerging Issues Task Force (“EITF”) of the FASB ratified its consensus on the provisions of EITF Issue 03-06: “Participating Securities and the Two-Class Method Under FASB Statement No. 128.” The consensus included numerous issues regarding the calculation of earnings per share for an entity that has participating securities as defined by FAS 128. The adoption of the EITF had no impact on our current or previously reported earnings per share calculations.

In April 2004, the FASB issued Financial Staff Position (“FSP”) SFAS No. 129-1, “Disclosure of Information about Capital Structure, Relating to Contingently Convertible Securities.” FSP SFAS No. 129-1 requires that the significant terms of contingently convertible securities be disclosed, including the circumstances of the contingency and the potential impact of conversion. The guidance from FSP SFAS No. 129-1 was effective upon its issuance. Refer to Note 11 – “Indebtedness – Liquid Yield Option Notes” for the required disclosure regarding our contingent convertible securities.

In May 2004, the FASB issued FSP SFAS No. 106-2 “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (“the Act”). FSP SFAS No. 106-2 superceded FSP SFAS No. 106-1 and provides disclosure and accounting guidance for the federal subsidy that will be given to health care plan sponsors who provide specified levels of postretirement healthcare prescription benefits. Effective July 1, 2004, we adopted the provisions of FSP SFAS No. 106-2. The adoption of FSP SFAS 106-2 resulted in a year to date reduction in our net periodic benefit cost related to our postretirement plans of $2.5, all of which was recorded in the third quarter. Refer to Note 10 for additional disclosure regarding our adoption of FSP SFAS No. 106-2.

In October 2004, the EITF reached a consensus on EITF Issue No. 04-8, “Accounting Issues Related to Certain Features of Contingently Convertible Debt and the Effect on Diluted Earnings per Share.” Under the EITF’s conclusion, contingently convertible shares attached to a debt instrument are to be included in the calculation of diluted earnings per share regardless of whether the contingency has been met. The effective date for the EITF will be the same as the effective date for the revised version of SFAS No. 128, Earnings Per Share, which has yet to be issued by the FASB. However, the FASB’s recent discussions indicate that the revised SFAS No. 128 will be effective for reporting periods ending after December 15, 2004. We have reviewed the provisions of EITF 04-8 and have determined that the adoption will result in the reduction of our diluted earnings per share due to the inclusion of the contingently convertible common stock associated with our Liquid Yield Option Notes (“LYONs”). Refer to Note 11 for additional disclosure regarding the impact of EITF 04-8.

6

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2004

(Unaudited)

(Dollar and share amounts in millions, except per share and per LYON data)

(3) STOCK-BASED COMPENSATION

We have a stock-based compensation plan, including stock options, restricted stock and restricted stock unit awards. We account for our stock-based compensation under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and accordingly, except for awards of restricted stock and restricted stock units, we do not recognize any compensation expense. We have adopted the disclosure provisions of SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment of FASB Statement No. 123” and the following table illustrates the pro forma effect on income per share for both net income and income (loss) from continuing operations for the three and nine months ended September 30, 2004 and 2003 had the fair value recognition provisions of SFAS No. 123 been applied to employee grants of stock options from the date of grant:

(4) ACQUISITIONS AND DIVESTITURES

We continually review each of our businesses pursuant to our “grow, fix or sell” strategy. We use acquisitions as a part of our strategy to acquire access to new technologies, expand our geographic reach, penetrate new markets and leverage our existing product, market, manufacturing or technical expertise. We also look to sell business assets that we determine would strategically fit better with another company. During the third quarter, we announced that for the remainder of 2004 we expected less acquisition activity and the potential for business disposals. Business acquisitions and dispositions for the nine months ended September 30, 2004 and 2003 are described below.

All business acquisitions have been accounted for using the purchase method of accounting and, accordingly, the statements of condensed consolidated income include the results of each acquired business since the date of acquisition. The assets acquired and liabilities assumed are recorded at estimates of fair values as determined by management based on information available. We consider a number of factors, including third-party valuations or appraisals, when making these determinations. We finalize the allocation of purchase price to the fair value of the assets acquired and liabilities assumed when we obtain information sufficient to complete the allocation, but in any case, within one year after acquisition.

Acquisitions—2004

During the first quarter, we completed three acquisitions in our Technical Products and Systems segment. Our security and integrated building life-safety systems platform completed one acquisition, for a cash purchase price of $2.2. The acquired company had revenues of $4.2 in the twelve months prior to the date of acquisition. Our broadcast and communications systems and services platform completed one acquisition, for a cash purchase price of $4.0. The acquired company had revenues of $16.6 in the twelve months prior to the date of acquisition. Our laboratory and life sciences platform completed one acquisition for a cash purchase price of $8.1. The acquired company had revenues of $18.0 in the twelve months prior to the date of acquisition.

During the first quarter, our fluid systems platform in the Flow Technology segment completed the acquisition of McLeod Russel Holdings PLC (“McLeod”) for a purchase price of $54.5, which included the assumption of $30.5 in debt. McLeod had revenues of $118.6 in the twelve months prior to the date of acquisition.

During the first quarter, our Service Solutions segment completed one acquisition for a cash purchase price of $12.9. The acquired company had revenues of $6.7 in the twelve months prior to the date of acquisition.

7

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2004

(Unaudited)

(Dollar and share amounts in millions, except per share and per LYON data)

During the second quarter, our Industrial Products and Services segment completed one acquisition for a cash purchase price of $14.6. The acquired company had revenues of $11.9 in the twelve months prior to the date of acquisition.

During the second quarter of 2004, our Cooling Technologies and Services segment paid approximately $14.0 for a purchase price holdback relating to a 2002 acquisition.

During the third quarter of 2004, our laboratory and life sciences platform in the Technical Products and Systems segment completed the acquisition of Medical Air Technology Ltd. (“Medical Air”) for a cash purchase price of $12.6. Medical Air had revenues of $16.7 in the twelve months prior to the date of acquisition.

During the third quarter of 2004, our Service Solutions segment completed the acquisition of Actron Manufacturing Company (“Actron”) for a purchase price, net of cash acquired, of $36.9. Actron had revenues of $40.2 in the twelve months prior to the date of acquisition.

During the third quarter of 2004, our Cooling Technologies and Services segment received approximately $4.6 for the settlement of a purchase price contingency relating to a 2002 acquisition, which resulted in a reduction of goodwill.

These acquisitions are not material individually or in the aggregate.

Acquisitions—2003

During the first quarter, we completed four acquisitions in our Technical Products and Systems segment. Our security and building life-safety systems platform completed two acquisitions, IDenticard Systems, Inc. and Upper Valley Fire Protection Ltd., for an aggregate cash purchase price of $52.8. The acquired companies had combined revenues of $40.6 in the twelve months prior to the respective dates of acquisition. The broadcast and communications systems and services platform completed two acquisitions, Brookstone and Flash Technology, for an aggregate purchase price of $62.1. The acquired companies had combined revenues of $72.9 in the twelve months prior to the respective dates of acquisition.

During the first quarter, our specialty engineered products platform in the Industrial Products and Services segment completed one acquisition for a cash purchase price of $3.2. The acquired company had revenues of $15.7 in the twelve months prior to the date of acquisition.

During the first quarter, our fluid systems platform in the Flow Technology segment completed the acquisition of Hankison International (“Hankison”) for a cash purchase price of $35.5. Hankison had revenues of $64.2 in the twelve months prior to the date of acquisition.

During the second quarter, our specialty engineered products platform in the Industrial Products and Services segment completed the acquisition of GenMech (“GenMech”) Aerospace for a cash purchase price of $15.4. GenMech had revenues of $15.5 in the twelve months prior to the date of acquisition.

During the second quarter, our Service Solutions segment completed the acquisition of Kitba Consulting Services, L.P. (“Kitba”) for a cash purchase price of $5.0. Kitba had revenues of $10.0 in the twelve months prior to the date of acquisition.

During the third quarter, our specialty engineered products platform in the Industrial Products and Services segment completed the acquisition of BHS Torin for a cash purchase price of $3.4. BHS Torin had revenues of $3.7 in the twelve months prior to the date of acquisition.

During the third quarter, our Cooling Technologies and Services segment completed the acquisition of Rothemuhle, for a cash purchase price of $4.9. Rothemuhle had revenues of $20.0 in the twelve months prior to the date of acquisition.

These acquisitions are not material individually or in the aggregate.

8

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2004

(Unaudited)

(Dollar and share amounts in millions, except per share and per LYON data)

Discontinued Operations

We report discontinued operations in accordance with the guidance from SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Accordingly, we report assets as discontinued operations when, among other things, we commit to a plan to divest the asset, actively begin marketing the asset and when the sale of the asset is deemed probable within the next 12 months. In May and August 2004, we made the determination that our municipal water valve product line and our compaction equipment business, respectively, met the criteria to be reported as discontinued operations. For all periods presented, the results of the municipal water valve product line and our compaction equipment business have been reported as discontinued operations in our condensed consolidated financial statements. The municipal water valve product line and the compaction equipment business were components of the Flow Technology and Industrial Products and Services segments, respectively. Revenues and pre-tax income (loss) for the municipal water valve product line and compaction equipment business are presented below for the three and nine months ended September 30, 2004 and 2003:

The major classes of assets and liabilities, excluding inter-company balances, of our municipal water valve business and our compaction equipment business, included in the accompanying consolidated balance sheets as of September 30, 2004 and December 31, 2003, respectively, are shown below.

See Note 15 with regard to our entering into a definitive share sale agreement for our compaction equipment business.

Additionally, in May 2003, we sold our ownership of the outstanding shares of Inrange, a subsidiary that was part of our Technical Products and Systems segment. Our portion of the cash proceeds from the sale was $149.0, after a $24.5 settlement of an

9

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2004

(Unaudited)

(Dollar and share amounts in millions, except per share and per LYON data)

inter-company note payable by us to Inrange. The results of Inrange through the date of the sale are included in the condensed consolidated financial statements as discontinued operations. Inrange had total revenues of $48.3 and a net loss of $28.6, which includes a loss on sale of $18.9.

(5) BUSINESS SEGMENT INFORMATION

We are a global provider of technical products and systems, industrial products and services, flow technology, cooling technologies and services and service solutions. We offer a diverse collection of products, which include fire detection and building life-safety products, TV and radio broadcast antennas and towers, life science products and services, power transformers, high-tech die castings, loading dock products and systems, cooling towers, air filtration products, valves, back-flow prevention and fluid handling equipment and metering and mixing solutions. Our products and services also include specialty service tools, diagnostic systems, service equipment and technical information services. Our products are used by a broad array of customers in various industries, including chemical processing, pharmaceuticals, infrastructure, mineral processing, petrochemical, telecommunications, transportation and power generation.

We have aggregated certain operating segments in accordance with the criteria defined in SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” The primary aggregation factors considered in determining the segments were the nature of products sold, production processes and types of customers for these products. In determining our segments, we apply the threshold criteria of SFAS No. 131 to operating income or loss of each segment before considering special charges. This is consistent with the way our chief operating decision maker evaluates the results of each segment. Our results of operations are reported in five segments: Technical Products and Systems, Industrial Products and Services, Flow Technology, Cooling Technologies and Services and Service Solutions.

In 2003, revenues in our cooling technologies business, which was previously reported in our Flow Technology segment, exceeded ten percent of total segment revenue. As a result, we now report the results of cooling technologies and services as a separate reportable business segment. Segment data for 2003 has been restated to separate Cooling Technologies and Services from our Flow Technology segment.

Technical Products and Systems

The Technical Products and Systems segment focuses on solving customer problems with complete technology-based systems and services. Our emphasis is on growth through investment in new technology, new product introductions, alliances and acquisitions. This segment includes operating units that design, manufacture and market laboratory and life science products and services, security and integrated building life-safety systems, broadcast and communication systems and services and electrical test and measurement solutions.

Industrial Products and Services

The strategy of the Industrial Products and Services segment is to provide “Productivity Solutions for Industry.” This segment emphasizes introducing new related services and products, as well as focusing on the replacement parts and service elements of the segment. This segment includes operating units that design, manufacture and market power systems and specialty-engineered products, including engineered components and subsystems, loading dock products and systems, and heating and ventilation products.

Flow Technology

Our Flow Technology segment designs, manufactures and markets solutions and products that are used to process or transport fluids, as well as solutions and products that are used in heat transfer applications and air flow treatment systems. In the Flow Technology segment, we have businesses that supply process and fluid handling equipment, filtration and dehydration products, services for compressed air and process gas systems, and boilers and hydronic products. Our Flow Technology businesses focus on innovative, highly engineered new product introductions and expansion from products to systems and services to create total customer solutions.

Cooling Technologies and Services

Our Cooling Technologies and Services segment designs, manufactures and services cooling products for markets throughout the world. Offering both dry and wet cooling systems, this segment provides a diverse offering of products for power generation,

10

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2004

(Unaudited)

(Dollar and share amounts in millions, except per share and per LYON data)

refrigeration, HVAC and industrial markets. This segment is currently focused on expanding its global reach, including expanding its dry cooling manufacturing capacity, as well as increasing reconstruction service offerings. The segment has long-term contracts whereby revenue is recognized under the percentage-of-completion method. It often provides its customers warranties under these long-term contracts. Estimates associated with the profit margins on these contracts, including warranty costs, are continuously reviewed and subject to adjustment. These adjustments are a normal part of the segment’s business process and can be both favorable and unfavorable.

Service Solutions

Our Service Solutions segment consists of: diagnostic systems and service equipment, specialty tools and technical information and services. The strategy of this segment is to focus on the design, manufacture and marketing of a wide range of specialty service tools, hand-held diagnostic systems and service equipment, inspection gauging systems, and technical and training information, primarily for the franchised vehicle dealer industry in North America and Europe. Major customers are franchised dealers of motor vehicle manufacturers, aftermarket vehicle service facilities and independent distributors.

Financial data for our business segments, including the results of acquisitions from the dates of the respective acquisitions, are as follows:

(6) SPECIAL CHARGES

As part of our Value Improvement Process^®, we right size and consolidate operations to drive results. Additionally, in connection with our acquisition strategy, from time to time we alter our business model to better serve customer demand, fix or discontinue lower-margin product lines and rationalize and consolidate manufacturing capacity. Our restructuring and integration decisions are based on discounted cash flows to achieve our goals of increased outsourcing, reduced structural footprint, and profitability in any economic environment. As a result of our strategic review process, we recorded net special charges of $30.1 and $47.1 in the first nine months of 2004 and 2003, respectively. These special charges include cash costs and asset impairments associated with work force reduction, initiatives to divest or consolidate manufacturing and sales facilities, asset divestitures, and the exit of other operations.

The purpose of our restructuring initiatives is to improve profitability, streamline operations, reduce costs and improve efficiency. We estimate that we will achieve operating cost reductions in 2004 and beyond through reduced employee and manufacturing costs and other facility overhead reductions.

11

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2004

(Unaudited)

(Dollar and share amounts in millions, except per share and per LYON data)

In addition to the net special charges resulting from our strategic review process, we recorded a special charge during the third quarter of 2004 of $71.5 for the impairment of goodwill and an indefinite lived intangible asset relating to our loading dock products and systems business (see Note 8), resulting in $101.6 of total special charges for the first nine months of 2004.

The components of the net special charges have been computed based on actual cash payouts or receipts, our estimate of the realizable value of the affected tangible and intangible assets, and estimated exit costs, including severance and other employee benefits based on existing severance practices and local laws.

Special charges, net for the three and nine months ended September 30, 2004 and 2003 include the following:

At September 30, 2004, a total of $11.8 of restructuring liabilities remained on the condensed consolidated balance sheet as shown below. With the exception of certain multi-year operating lease obligations and other contractual obligations, we anticipate that the liabilities related to restructuring actions will be paid within one year from the period in which the action was initiated. The following table summarizes the restructuring accrual activity from December 31, 2002 through September 30, 2004:

Special Charges—2004

In the third quarter of 2004, we recorded special charges of $79.7, including the previously mentioned impairment charge of $71.5 for the loading dock products and systems business (see Note 8). We recorded $2.1 related to the Technical Products and

12

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2004

(Unaudited)

(Dollar and share amounts in millions, except per share and per LYON data)

Systems segment, $72.5 related to the Industrial Products and Services segment, $2.4 related to the Flow Technology segment, $1.4 related to the Cooling Technologies and Services segment, $0.8 related to the Service Solutions segment and $0.5 at Corporate.

The charges recorded in the third quarter were primarily the impairment of goodwill and an indefinite lived intangible asset related to our loading dock products and systems business and cash costs and asset impairments related to divestitures, facility consolidation actions and work force reductions at many of our businesses, including our fluid systems, boiler and hydronic products business, service solutions, and laboratory and life sciences platforms. The new restructuring initiatives announced in the third quarter of 2004 will result in the termination of approximately 9 hourly and 30 salaried employees located in the United States and the United Kingdom and the closure of manufacturing and administrative offices located in the United States.

Operating income for the nine months ended September 30, 2004 was reduced by $101.6 of net charges, primarily related to the actions described below.

In the Technical Products and Systems segment, we recorded $11.0 of charges for the nine months ended September 30, 2004 primarily for asset impairments related to asset divestitures, facility consolidation actions and work force reductions at many of our businesses. During the third quarter, we recorded employee severance costs in our laboratory and life science platform as part of the consolidation of administrative functions in Asheville, NC of $0.7, employee severance costs in our security and building life-safety systems platform for the closure and consolidation of certain sales offices in Ontario, Canada of $0.3, and a $0.5 impairment charge relating to the closure of another facility within our lab and life science platform. During the second quarter, we recorded asset write-downs of approximately $5.9 in our laboratory and life sciences platform associated with the planned divestiture of bioprocessing assets and land in Williamsport, PA. In the first quarter of 2004, we also recognized facility closure and holding costs in our laboratory and life science platform associated with the previously initiated closure of the Newtown, CT administrative and manufacturing facility. We also recorded charges in our broadcast and communications systems and services platform for costs related to employee work force reductions at our Bristol, United Kingdom and Raymond, ME facilities of $0.9. These restructuring actions resulted in the termination of approximately 88 hourly and 25 salaried domestic and foreign employees.

In the Industrial Products and Services segment, we recorded $73.5 of special charges for the nine months ended September 30, 2004 related primarily to and asset write-downs and facility closure costs, offset by a gain on the disposition of a manufacturing facility. In the third quarter of 2004, we recorded a $71.5 special charge for the impairment of goodwill and indefinite lived intangible assets related to our loading dock products and systems business. See Note 8 for further information relating to this charge. During the first nine months, our specialty engineered products platform recorded charges associated with the previously announced consolidation of certain manufacturing operations at our loading dock products and systems business from Milwaukee, WI to Reynosa, Mexico of $0.8. In our power systems platform, we recorded facility closure costs, including equipment moving and certain other costs of $1.0 associated with our facility in Milpitas, CA. Our industrial tools and hydraulic power tools unit recorded facility closure costs offset by a $1.9 gain related to the closure and sale of a manufacturing facility in the United Kingdom.

In the Flow Technology segment, we recorded $6.3 of special charges in the nine months ended September 30, 2004 related primarily to asset write-downs and employee severance costs associated with our boiler and hydronic products business. In the second quarter, we announced plans to close and relocate manufacturing activities at our Benton Harbor, MI facility and relocate certain manufacturing operations from our Michigan City, IN facility. As a result of this announcement, we recorded impairment charges for assets that will not be used in the continuing operations. The closure and termination announcements for the impacted employees occurred in June 2004. During the quarter ended September 30, 2004 we recorded $1.2 in employee severance costs associated with these plans, while total charges for the first nine months of 2004 were $5.4. Additionally we will recognize approximately $6.3 of the associated employee severance and facility closure costs in the following twelve to fifteen months. These restructuring actions will result in the termination of approximately 179 hourly and 49 salaried domestic employees. During the first nine months, employee benefit, lease cancellation and facility consolidation costs were also recorded in our fluid systems platform related primarily to work force reductions in the United Kingdom and the previously announced integration of existing air treatment facilities into the facilities of recently acquired businesses. In connection with facility consolidations at our air treatment business, we sold a manufacturing facility in Ireland and recorded a corresponding gain of $1.3. These restructuring actions resulted in the termination of approximately three hourly and 12 salaried foreign employees.

In the Cooling Technologies and Services segment, we recorded $3.2 of charges for the nine months ended September 30, 2004 related primarily to employee termination costs, asset write-downs and losses on asset sales. Additionally, we recognized facility closure costs associated with previously initiated closures of two manufacturing and administrative facilities. These restructuring actions resulted in the termination of approximately 14 hourly and 31 salaried foreign and domestic employees.

13

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2004

(Unaudited)

(Dollar and share amounts in millions, except per share and per LYON data)

In the Service Solutions segment, we recorded $6.3 of charges for the nine months ended September 30, 2004 related primarily to asset write-downs associated with the planned divestiture of inspection gauging system assets and work force reductions. These actions resulted in the termination of approximately 49 hourly and 30 salaried domestic employees.

The Corporate special charges of $1.3 related primarily to a work force reduction and outsourcing of certain information technology support activities. During the three months ended September 30, 2004, we also recorded cash costs associated with the exiting of certain administrative offices totaling $0.4. These restructuring actions resulted in the termination of approximately seven salaried domestic employees.

Special Charges—2003

In the third quarter of 2003, we recorded special charges of $13.5. We recorded charges of $0.8 in the Technical Products and Systems segment, $8.0 in the Industrial Products and Services segment, $4.4 in the Flow Technology segment, and $0.7 in the Service Solutions segment, offset by a credit of $0.4 in the Cooling Technologies and Services segment.

The charges recorded in the third quarter related primarily to employee benefit costs and asset impairments related to facility consolidation actions and work force reductions at many of our businesses, including our fluid systems, specialty engineered products, and laboratory and life sciences platforms. The new restructuring initiatives announced in the second quarter of 2003 resulted in the termination of approximately 413 hourly and 300 salaried employees located in the United States, Canada, France, the United Kingdom, and South Africa and the closure of eight manufacturing and administrative offices located in the United States.

Operating income for the nine months ended September 30, 2003 was reduced by $47.1 of charges, related primarily to the actions described below.

In the Technical Products and Systems segment, we recorded $14.0 of special charges for the nine months ended September 30, 2003 related primarily to employee benefit costs and asset impairments. In the second quarter our laboratory and life science products platform announced the closure of a manufacturing and administrative facility in Newtown, CT. As a result of the facility closure, we recorded impairment charges for certain machinery and equipment. We consolidated facilities and product lines at our broadcast and communication systems and services platform, which resulted in the closure of a manufacturing facility in Palmyra, MO. We also completed the closure of the Mahwah, NJ manufacturing facility at our electrical test and measurement solutions platform. In addition, we recorded charges at our security and building life safety systems platform for rightsizing actions that included a worldwide work force reduction and the consolidation of an existing administrative facility in Falls Church, VA into a facility acquired with our Vance International acquisition. These restructuring actions resulted in the termination of approximately 363 hourly and 181 salaried employees located in the United States, Canada, the United Kingdom, and South Africa.

In the Industrial Products and Services segment, we recorded $18.1 of special charges for the nine months ended September 30, 2003. These charges represent primarily employee benefit costs and asset impairments for initiatives taken to right size manufacturing and administrative operations and the exit of a product line at our specialty engineered products platform. In the second quarter, we formalized plans to consolidate and relocate to Mexico certain manufacturing operations of our loading dock products and systems business by closing a manufacturing facility in Milwaukee, WI. As a result of the facility closure, we recorded impairment charges for certain plant and equipment that will not be used in the continuing operations. The closure and termination announcements to the impacted employees occurred in July 2003 and we recognized a majority of the associated costs in the third quarter. In the third quarter, our hydraulic power tools unit announced the closure of a manufacturing facility in the United Kingdom with certain operations being outsourced or relocated to another facility. In addition, our power systems platform implemented a strategy to exit certain of its breaker repair and service operations which resulted in work force reductions and the closure of three field service offices located in Rochester, NY, Cincinnati, OH, and Cleveland, OH. These restructuring actions resulted in the termination of approximately 300 hourly and 112 salaried domestic employees.

In the Flow Technology segment, we recorded $9.1 of special charges for the nine months ended September 30, 2003. Of these charges, $3.0 relates to employee benefit and facility consolidation costs resulting from the implementation of our process equipment platform consolidation strategy. This business consolidation resulted in work force reductions, the closure of a manufacturing facility in Reading, PA, and the closure of an administrative office in Roselle, IL. The actions taken at our fluid systems platform were predominantly for the integration of existing air treatment operations into the recently acquired Hankison operations. In total, these restructuring and integration initiatives resulted in the termination of approximately 105 hourly and 119 salaried domestic employees.

14

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2004

(Unaudited)

(Dollar and share amounts in millions, except per share and per LYON data)

In the Cooling Technologies and Services segment we recorded $3.8 of special charges for the nine months ended September 30, 2003. These charges related to employee benefit and facility closure costs associated with the closure of a manufacturing facility, located in Eloy, AZ, and three sales and administrative offices, located in Santa Rosa, CA, Atlanta, GA and Philadelphia, PA. In addition, $1.9 of this charge represents an asset impairment as a result of our decision to close the Eloy, AZ manufacturing facility. In total, these restructuring initiatives resulted in the termination of approximately 52 hourly and 41 salaried domestic employees.

In the Service Solutions segment, we recorded $2.1 of special charges for the nine months ended September 30, 2003. These charges relate primarily to as-incurred exit costs associated with the closure of our Montpelier, OH manufacturing facility. In addition, employee benefit costs were recorded for a work force reduction at our technical information and services product line. This rightsizing action resulted in the termination of approximately 12 hourly and 22 salaried employees in the United States, France, and the United Kingdom.

(7) INVENTORY

Inventory consists of the following amounts:

Inventories include material, labor and factory overhead costs and are reduced, when necessary, to estimated realizable values. Progress payments, which are netted against work in process, were $17.5 and $14.8 at September 30, 2004 and December 31, 2003, respectively.

(8) GOODWILL AND OTHER INTANGIBLE ASSETS

The following tables reflect goodwill and other intangible assets as of December 31, 2003 and the activity thereafter through September 30, 2004. The activity reflects the initial allocation of purchase price for acquisitions completed in the first nine months of 2004, subsequent purchase price adjustments for acquisitions completed not more than one year prior to the date of adjustment, currency translation adjustments and amortization. This information is presented first on a consolidated basis and second on a segment basis.

Consolidated: