Sauer-Danfoss Inc. Reports Third Quarter 2003 Results
Continued Strong Cash Flow, Earnings Impacted by Restructuring Costs
CHICAGO, Oct. 29 -- Sauer-Danfoss Inc. today announced its financial results for the third quarter ended September 28, 2003.
THIRD QUARTER REVIEW Third Quarter Earnings Impacted by Restructuring Costs
For the third quarter 2003, the Company reported a net loss of $2.2 million, or $0.05 per share, compared to a third quarter 2002 net loss of $0.5 million, or $0.01 per share. Third quarter 2003 results were impacted by pre-tax charges of $2.5 million, or $0.03 per share, related to restructuring costs.
Increased Sales in Every Region Despite Continued Market Weakness
Net sales for the third quarter increased 14 percent to $255.4 million, compared to sales of $223.9 million for the same period last year. Excluding sales from acquisitions completed in 2003 and the impact of currency translation rate changes, sales increased by 5 percent over the prior year period. On a comparable basis, sales increased 8 percent in the Americas while sales in Europe and Asia-Pacific increased 2 percent and 16 percent, respectively. By segment, Propel and Work Function sales increased 12 percent and 2 percent, respectively, for the quarter compared to the prior year. The Controls segment, excluding the impact of acquisitions completed in 2003 and currency translation rate changes, experienced a sales decline of 2 percent from the same quarter in 2002.
David Anderson, President and Chief Executive Officer, stated, "Our third quarter results were mixed. We are particularly pleased with the 5 percent increase in relative sales compared to our markets, which we believe were down by up to 2 percent. We have consistently demonstrated our ability to build market share. We will increasingly focus on means of achieving corresponding improvements in our earnings which will become visible in the coming quarters."
Restructuring
During the third quarter the Company continued to make significant investment in restructuring within several areas of the business.
The previously announced closing and relocation of its operations in Sturtevant, Wisconsin, was completed in the third quarter.
The Company also made the decision to close its plant in West Branch, Iowa, and relocate those operations to existing facilities in North America. Additionally, the Company remains on schedule with the restructuring of its sales, marketing, and distribution logistics activities in Europe.
Anderson stated, "Our focus and resources through the first years of the Sauer and Danfoss Fluid Power merger were directed toward assuring that we were able to capitalize on our dramatically expanded product portfolio and geographic reach." He continued, "Six continuous quarters of sales growth, excluding acquisitions and currency, which exceeded that of our industry and our served markets, is a solid indication of the impact market share growth has had on our top line.
"This success in the market puts us on a solid foundation to address our earnings performance and returns," stated Anderson. "Moving forward, we have significant opportunities available to us through the reduction of both assets and expenses. To seize these opportunities, it is our intention to continue investing resources in additional restructuring through the end of 2004 with an expected two-year payback on these investments.
"In addition, we will continue to invest $6 to $7 million, or $0.08 to $0.10 per share, annually for the next two to three years in implementing common business system software and processes."
Orders Increase 7 Percent and Backlog Up 3 Percent
Orders received for the third quarter 2003 were $246.2 million, up 7 percent from the same period last year. Excluding acquisitions and currency translation rate changes, orders were level with last year.
Total backlog at the end of the third quarter 2003 was $352.7 million, up 3 percent from the third quarter of 2002. Excluding acquisitions and currency impact, backlog was down 4 percent compared to the third quarter 2002.
Anderson commented, "The relative softness of orders and backlog has not changed from prior quarters, reflecting our customers' more recent practice of placing their orders closer to their production requirement dates. As a result, our backlog data currently gives an incomplete picture of how our customers view their future business environment."
NINE MONTH REVIEW Double Digit Improvement for Nine Month Sales and Earnings
Net sales for the nine months ended September 28, 2003, were $864.3 million, an increase of 18 percent over sales of $731.1 million for the first nine months of 2002. On a comparable basis, excluding companies acquired in 2003 and the impact of currency fluctuations, net sales were up 6 percent over last year.
Net income for the first nine months of 2003 was $19.2 million, or $0.40 per share, compared to net income for the same period last year of $15.6 million, or $0.33 per share. Earnings year-to-date for 2003 were impacted by pre-tax charges of $3.3 million, or $0.04 per share, related to restructuring costs.
Strong Cash Flow Continues, $250 Million Debt Facility Completed
Cash flow from operations for the first nine months of 2003 was $82.0 million, compared with $89.7 million generated in the same period last year. Capital expenditures for the nine-month period were $36.0 million, up from $23.0 million for the comparable period in 2002. The Company's debt to total capital ratio, or leverage ratio, was 44 percent at the end of the third quarter 2003, an increase from 42 percent at the end of the second quarter 2003. The Company completed its $250 million multi-currency revolving facility in September, refinancing certain existing indebtedness.
"We continue to generate positive cash flow, although slightly below last year's high level," stated David Anderson. "In addition, we completed our new debt facility which will lower our borrowing costs and increase our flexibility in funding our global operations. In the transition phase of paying off our prior debt arrangements and drawing funds under our new facility, we had an unusually high level of cash on hand in some of our bank accounts at the end of the quarter causing a temporary increase in the leverage ratio."
OUTLOOK Anticipate Meeting Earnings Expectation
Anderson stated, "There is increasing optimism with respect to the overall economy and our markets, even though there is not clear evidence of this in our orders and backlog data. However, we remain confident that we can continue to report increased sales and earnings."
Anderson concluded, "At the beginning of the year we stated our expected earnings per share for 2003 of $0.40 to $0.50. Excluding restructuring costs, we anticipate meeting this expectation."
Sauer-Danfoss Inc. is a worldwide leader in the design, manufacture, and sale of engineered hydraulic and electronic systems and components, for use primarily in applications of mobile equipment. Sauer-Danfoss, with more than 7,000 employees worldwide and revenue of more than $1 billion, has sales, manufacturing, and engineering capabilities in Europe, the Americas, and the Asia-Pacific region. The Company's executive offices are located near Chicago in Lincolnshire, Illinois. More details online at www.sauer-danfoss.com .
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
13 Weeks Ended 39 Weeks Ended
(Dollars in thousands September September September September
except per share data) 28, 2003 29, 2002 28, 2003 29, 2002
Net sales 255,370 223,920 864,257 731,085
Cost of sales 203,406 176,337 663,324 556,368
Gross profit 51,964 47,583 200,933 174,717
Selling 20,181 17,708 58,304 49,740
Research and development 10,702 9,522 32,035 28,558
Administrative 18,953 15,502 55,589 48,318
Total operating expenses 49,836 42,732 145,928 126,616
Income from operations 2,128 4,851 55,005 48,101
Nonoperating income
(expense):
Interest expense, net (4,025) (4,361) (12,554) (13,047)
Minority interest (2,472) (1,681) (12,319) (9,208)
Equity in net earnings
of affiliates 24 337 421 602
Other, net (494) (13) (3,896) (1,443)
Income (loss) before
income taxes (4,839) (867) 26,657 25,005
Income taxes 2,610 348 (7,459) (8,680)
Net income (loss) before
cumulative effect of
change in accounting
principle (2,229) (519) 19,198 16,325
Cumulative effect of
change in accounting
principle -- -- -- (695)
Net income (loss) (2,229) (519) 19,198 15,630
Net income (loss)
per share:
Basic and diluted net
income (loss) per
common share, before
cumulative effect of
change in accounting
principle (0.05) (0.01) 0.40 0.34
Cumulative effect of
change in accounting
principle (1) -- -- -- (0.01)
Basic and diluted net
income (loss) per
common share (0.05) (0.01) 0.40 0.33
Basic weighted average
shares outstanding 47,405 47,395 47,400 47,395
Diluted weighted
average shares
outstanding 47,683 47,395 47,595 47,404
Cash dividends per
common share 0.07 0.07 0.21 0.21
(1) In 2002, the Company adopted SFAS No. 142 and completed an analysis
of goodwill that resulted in recognition of an impairment of $695
related to a reporting unit within the Work Function segment.
Business Segment Information
13 Weeks Ended 39 Weeks Ended
September September September September
(Dollars in thousands) 28, 2003 29, 2002 28, 2003 29, 2002
Net sales
Propel 107,897 92,763 391,600 342,673
Work Function 83,865 75,632 262,995 225,748
Controls 63,608 55,525 209,662 162,664
Total 255,370 223,920 864,257 731,085
Segment Income (Loss)
Propel 4,803 8,164 41,633 39,825
Work Function 453 3,246 15,484 18,007
Controls 1,873 (940) 14,433 5,587
Global Services and
Other Expenses, net (5,495) (5,632) (20,441) (17,456)
Total (1) 1,634 4,838 51,109 45,963
(1) Segment income is defined as income from operations less other, net
included in nonoperating income (expense).
Condensed Consolidated StatementS of Cash Flows
39 Weeks Ended
September 28, September 29,
(Dollars in thousands) 2003 2002
Cash flows from operating activities:
Net income 19,198 15,630
Cumulative effect of change in
accounting principle -- 695
Depreciation and amortization 61,628 53,401
Minority interest in income of
consolidated companies 12,319 9,208
Equity in net earnings of affiliates (421) (602)
Net change in receivables, inventories,
and payables (20,813) 2,255
Other, net 10,079 9,142
Net cash provided by operating activities 81,990 89,729
Cash flows from investing activities:
Purchases of property, plant and equipment (36,012) (22,981)
Payments for acquisitions, net of
cash acquired (5,824) (22,312)
Proceeds from sales of property, plant
and equipment 301 848
Net cash used in investing activities (41,535) (44,445)
Cash flows from financing activities:
Net repayments on notes payable and
bank overdrafts (29,428) (20,078)
Net borrowings (repayments) of long-term debt 28,314 (10,092)
Cash dividends (9,960) (9,957)
Distribution to minority interest partners (12,882) (8,825)
Net cash used in financing activities (23,956) (48,952)
Effect of exchange rate changes 1,650 (1,107)
Net increase (decrease) in cash and
cash equivalents 18,149 (4,775)
Cash and cash equivalents at beginning of year 12,397 14,324
Cash and cash equivalents at end of period 30,546 9,549
Condensed Consolidated Balance SheetS
September 28, December 31,
(Dollars in thousands) 2003 2002
Assets
Current assets:
Cash and cash equivalents 30,546 12,397
Accounts receivable, net 192,223 153,643
Inventories 173,688 164,686
Other current assets 18,534 23,057
Total current assets 414,991 353,783
Property, plant and equipment, net 438,219 443,147
Other assets 187,307 174,163
Total assets 1,040,517 971,093
Liabilities and stockholders' equity
Current liabilities:
Notes payable and bank overdrafts 30,145 56,010
Long-term debt due within one year 13,791 27,085
Accounts payable 75,538 69,441
Other accrued liabilities 73,453 62,301
Total current liabilities 192,927 214,837
Long-term debt 292,247 235,198
Long-term pension liability 43,614 42,747
Deferred income taxes 47,503 44,778
Other liabilities 40,336 37,456
Minority interest in net assets of
consolidated companies 29,269 27,118
Stockholders' equity 394,621 368,959
Total liabilities and stockholders' equity 1,040,517 971,093
Number of employees at end of period 7,198 7,207