LucasVarity Reports Half Year and Second Quarter Results
12 September 1997
LucasVarity Half Year and Second Quarter Results to 31 July 1997; Underlying Growth According to Plan
LONDON, Sept. 12 -- LucasVarity plc (London: LVA; NYSE: LVA),
the global automotive, diesel engine, aftermarket and aerospace products
group, today reports its results for the six and three months ended 31 July
1997 (half year and second quarter of Fiscal 1997).
Highlights of the Half Year and Second Quarter of 1997
-- Half year sales up 2.2% to 2,352M British Pounds Sterling (pounds)
((US)$3,857M) - up 7.9% excluding currency translation effects
-- Half year profit before tax down 1.2% to #167M pounds ($274m) - up
5.3% excluding currency translation effects
-- Second quarter operating profit before exceptional income up 4.7% on
first quarter
-- Second quarter margin at 7.9% up 0.8 percentage points over the first
quarter
-- Interim dividend of 2.25p announced; share repurchase programme
continues
-- Three acquisitions and five disposals completed
-- Merger related cost savings and actions well on track
Victor A Rice, Chief Executive commented:
"The underlying results for the half year and second quarter confirm that
we are on track to achieve our objectives for the year as a whole. In
particular, the improving quarterly trend in earnings and margins is
encouraging. Although the strength of sterling and mixed trading conditions
are having an effect, the merger related benefits which we had previously
identified are being achieved and the reshaping of the group continues with
several disposals and bolt-on acquisitions completed".
LucasVarity plc's summary of financial results for the six month period
ended 31 July 1997 (half year) and three month period ended 31 July 1997
(second quarter) are as follows (results for the three month period ended 30
April 1997 (first quarter) and the six month period ended 31 July 1996 are
provided for comparative purposes):
GBP (pounds) millions 1997 1996
Qtr 1 Qtr 2 Half Year Half Year
Total sales 1,206 1,146 2,352 2,302
Operating profit before
exceptional items 86 90 176 199
Profit before tax (PBT) 72 95 167 169
Profit attributable to
shareholders 46 67 113 --
Earnings per ordinary share 3.2p 4.8p 8.0p --
USD ($) millions 1997 1996
Qtr 1 Qtr 2 Half Year Half Year
Total sales 1,954 1,903 3,857 3,775
Operating profit before
exceptional items 139 150 289 326
Profit before tax (PBT) 117 157 274 277
Profit attributable to
shareholders 75 110 185 --
Earnings per American
Depositary Share -
UK GAAP $0.52 $0.79 $1.31 --
Notes:
1) Amounts for 1996 reflect pro-forma combined results of Lucas Industries
plc (Lucas Industries) and Varity Corporation (Varity) before
exceptional items.
2) USD amounts are translated from GBP to USD at 1.64 for the half year
and 1.62 for the first quarter, the average exchange rates for the
periods.
3) All amounts are unaudited.
Summary and Outlook
Summary
Lucas Industries plc (Lucas Industries) and Varity Corporation (Varity)
were merged on 6 September 1996 to form LucasVarity plc (LucasVarity). The
half year results for the six months ended 31 July 1997, are compared to pro-
forma combined results for the same period in 1996 when the two companies were
not under common control and had different fiscal years.
1997 Half Year Compared to 1996
Pro-forma results for the 1996 half year reflect the 31 July 1996 fiscal
year end of Lucas Industries and include non-recurring income items.
Comparisons between the current year and prior year periods are distorted by
these items. The Braking Systems, other Automotive and Aerospace segments were
in particular affected by these factors.
Compared to the 1996 first half, sales increased by 2.2% from 2,302
million pounds ($3,775 million) to 2,352 million pounds ($3,857 million) and
operating profit before exceptional items declined 11.6% from
199 million pounds ($326 million) to 176 million pounds ($289 million).
Excluding the effects of currency translation, which reduced reported
sales by 132 million pounds ($216 million), the underlying sales increase was
7.9%. This increase included contributions from two acquisitions completed in
late 1996 and one during the first quarter of 1997 which in aggregate
contributed 78 million pounds ($128 million) of sales. A fourth acquisition
(the engine controls business of Smiths Industries plc) was made late in the
second quarter (July 1997) and did not have an impact on the sales comparison.
Interest expense decreased to 28 million pounds ($46 million) in the first
half of 1997 compared to 30 million pounds ($49 million) in the prior period
due to a lower level of average debt, partially offset by higher interest
rates experienced in the 1997 first half.
Profit before tax (PBT) of 167 million pounds ($274 million) declined 1.2%
as compared to the 1996 first half. The 1997 half year PBT included
19 million pounds($31 million) of gains relating to business and asset sales.
Tax expense was 46 million pounds ($75 million) which, when excluding taxes
associated with the business and asset sales, resulted in an effective tax
rate of 30% reflecting the achievement of merger related tax savings. The tax
expense includes overseas taxation of 38 million pounds ($62 million).
Profit attributable to shareholders for the 1997 half year was
113 million pounds ($185 million). Earnings per ordinary share were 8.0p
($1.31 per ADS based on UK GAAP). During the 1997 half year, the company
repurchased 30 million of its ordinary shares at an average price of 193p per
share. The Board of Directors announces an interim dividend of 2.25p per
ordinary share in respect of the half year results to 31 July 1997.
Second Quarter 1997 Compared to First Quarter 1997
Sales of 1,146 million pounds ($1,903 million) for the second quarter
declined 5.0% compared to the first quarter. However, operating profit before
exceptional items improved by 4.7% to 90 million pounds ($150 million) and
operating margins improved from 7.1% in the first quarter to 7.9% in the
second quarter.
Excluding the effects of currency translation, sales declined over the
first quarter by 2.7% reflecting the effect of the North American vehicle
manufacturers' summer annual shut down periods which occur during the second
quarter. The profit improvement is driven by the continuing realisation of
merger related cost savings.
Profit Before Tax (PBT) of 95 million pounds ($157 million) improved 31.9%
compared to the first quarter. Second quarter PBT included 18 million pounds
($30 million) of gains relating to business and asset sales in the quarter.
Excluding these gains, profit before tax was 77 million pounds ($128 million)
for the second quarter of 1997, up 8.5% from 71 million pounds ($115 million)
in the first quarter.
Tax expense was 23 million pounds ($38 million) which included taxes
relating to the business and asset sales and the adjustment necessary to
reflect an effective annual tax rate of 30%.
Profit attributable to shareholders was 67 million pounds ($110 million).
Earnings per ordinary share for the quarter were 4.8p ($0.79 per ADS based on
UK GAAP) up strongly from 3.2p ($0.52 per ADS based on UK GAAP) earned in the
first quarter.
Key Events
During the 1997 half year, substantial progress has been made in
strengthening each of the businesses' strategic positions through acquisitions
and disposals, improving relationships with key customers and putting in place
the actions necessary to achieve the merger related cost savings, all of which
will assure long-term profitable growth for LucasVarity.
Since the beginning of the 1997 fiscal year, LucasVarity has made three
business acquisitions (Remsa, an aftermarket friction business, the engine
controls business of Smiths Industries plc and a brake operation in Mexico).
Four of the thirteen businesses previously identified for divestiture have
been sold. In addition, the Aerospace division's Geared Systems, Inc.
business and the company's remaining interest in Hayes Wheels International,
Inc. have been sold. Total net proceeds of business and asset sales, after
acquisitions aggregated 74 million pounds ($121 million).
VarityPerkins entered into a joint venture agreement with Tianjin Engine
Works and has announced an engine and parts supply agreement with NACCO
Materials Handling Group, Inc.
Outlook
The automotive markets in both Europe and North America for the remainder
of 1997 are expected to continue to be relatively flat. Within Europe, the
Italian, Spanish and UK markets are likely to out-perform last year, whilst
the French and German markets continue to be weak. Within North America, the
light trucks sector (sport utilities, vans and pick-ups) in which LucasVarity
has a leading position, should continue to show good growth. The markets for
Diesel Engines are generally strong except for some weakness in the demand for
large engines, while the commercial Aerospace markets continue to be robust.
Against this background, the positive performance of our major businesses
in the half year and second quarter periods, despite adverse currency
movements, is encouraging. Although top-line growth is likely to be modest
this year, LucasVarity remains on track to deliver a significant improvement
in margins as merger cost savings are realised.
Operating and Financial Review
As comparisons to the prior year pro-forma information are not meaningful,
the results have been analysed for the half year between quarters one and two
by segment in the following table and commentary. Operating profits are
before exceptional items. The half year USD amounts have been translated from
GBP to USD using a rate of 1.64, the average exchange rate for the six month
period.
Review of operations (unaudited):
GBP (pounds) millions 1997 SALES
Qtr 1 Qtr 2 Half Year
Braking Systems 409 356 765
Other Automotive 481 467 948
Diesel Engines 159 164 323
Aerospace 151 157 308
Corporate / Other 6 2 8
Totals 1,206 1,146 2,352
GBP (pounds) millions 1997 OPERATING PROFIT
Qtr 1 Qtr 2 Half Year
Braking Systems 33 30 63
Other Automotive 37 40 77
Diesel Engines 11 14 25
Aerospace 16 17 33
Corporate / Other (11) (11) (22)
Totals 86 90 176
1997 OPERATING MARGIN
Qtr 1 Qtr 2 Half Year
Braking Systems 8.1% 8.4% 8.2%
Other Automotive 7.7% 8.6% 8.1%
Diesel Engines 6.9% 8.5% 7.7%
Aerospace 10.6% 10.8% 10.7%
Totals 7.1% 7.9% 7.5%
Braking Systems
Second quarter sales declined by 13.0% to 356 million pounds($591 million)
compared to the first quarter. However, despite the sales decline, operating
margin improved from 8.1% in the first quarter to 8.4% in the second quarter.
The decline in sales between the second and first quarters is primarily
due to the North American OEM shut downs which occurred during the second
quarter and to a lesser extent, the effect of translation between quarters.
The operating margin increase is primarily driven by the realisation of merger
related cost savings. The effect of the GM and Chrysler strikes were
consistent between the two quarters.
During the second quarter, the Light Vehicle Braking Systems division
acquired the Mexican brake manufacturer Frenos y Mecanismos which produces
foundation brakes for Chrysler and GM vehicles assembled in Mexico and
announced a significant contract award to supply caliper brake components for
future models of Chrysler's popular Dodge Ram pick-up trucks.
Within Heavy Vehicle Braking Systems, sales and operating profits were
flat comparing the second quarter to the first. The North American market has
shown some improvement while European sales continue to be weak. This pattern
appears to be continuing during the second half and should result in trading
results in line with first half performance.
Other Automotive
Second quarter sales declined by 2.9% to 467 million pounds ($775 million)
compared to the first quarter and operating profit improved resulting in an
operating margin of 8.6% in the second quarter, up strongly from 7.7% in the
first quarter. The decline in sales results primarily from the North American
OEM shut downs during the second quarter and to a lesser extent, weakness in
Aftermarket sales due to the strength of sterling. The improvement in
operating profit and margins results from the successful integration of the
two Aftermarket acquisitions (Autospecialty in December 1996 and Remsa in
April 1997) and merger related cost savings.
During the quarter, the Aftermarket division sold its Lucas Assembly and
Test Systems (LATS) business which had annual sales of approximately
69 million pounds ($113 million). The Electrical and Electronic Systems
division sold its Lucas Industrial Components and Lucas Nitrotec businesses as
well as its Keighley, UK plant during the second quarter and its interest in
Lucas Yuasa in the first quarter. The businesses and plant had aggregate
annual sales of approximately 36 million pounds ($59 million). None of these
sales had a material effect on the half year or second quarter reported
results.
Diesel Engines
Sales at VarityPerkins for the second quarter increased by 3.1% to
164 million pounds ($272 million) and operating profits increased to
14 million pounds ($23 million) from 11 million pounds ($18 million) in the
first quarter. Operating margin was 8.5% in the second quarter compared to
6.9% in the first quarter.
Sales have improved due principally to higher demand for diesel engines by
leading OEMs in the agricultural and construction sectors in North America and
Asia as well as sales relating to new contracts awarded last year, partially
off-set by continued weakness in the large engine business. Operating profit
has improved given the volume increase partially offset by the effects of the
strength of sterling.
During the half year, VarityPerkins entered into a joint venture agreement
with Tianjin Engine Works to manufacture more than 50,000 engines a year in
China by 2001. Also announced was an engine and parts supply agreement with
NACCO Materials Handling Group, Inc. worth in total 80 million pounds
($131 million).
Aerospace
Second quarter sales increased 4.0% to 157 million pounds ($261 million)
and operating profit improved 6.3% to 17 million pounds ($28 million) from the
first quarter, resulting in an operating margin of 10.8% in the second
quarter, up from 10.6% in the first quarter. Both the first and second
quarter margins are above the 1996 full year margin level of 9.6%.
The increase in sales was due to the rise in commercial airline deliveries
and greater spares demand, while the increase in operating margins was due to
the successful integration of the Boeing Georgia cargo handling systems
business acquired in October 1996 and other operational efficiencies.
During the quarter, the Aerospace division acquired the engine controls
business of Smiths Industries plc and disposed of its Geared Systems, Inc.
business.
Corporate/Other
Corporate/Other expense was consistent between the second and first
quarters. During the second quarter, the company sold its remaining shares in
Hayes Wheels International, Inc. for gross proceeds of 29 million pounds
($48 million), recognising a gain of approximately 13 million pounds
($22 million).
Cash flow and debt
At 31 July 1997, net debt amounted to 491.8 million pounds ($807 million).
Net debt has increased by 29.4 million pounds ($48 million) from the beginning
of the fiscal year resulting primarily from the timing of the company's share
repurchase programme and restructuring actions, the majority of which have
fallen in the first half of the fiscal year. In the half year period,
30 million ordinary shares were repurchased for 57.9 million pounds
($95 million) and cash expended on restructuring actions was
59.5 million pounds ($98 million). Cash generated in the half year period
included the proceeds from the disposal of five businesses, net of
acquisitions and the sale of the remaining investment in Hayes Wheels
International, Inc. totaling 60.1 million pounds ($99 million). Net assets,
including minority interests, at 31 July 1997 were 549.2 million pounds
($901 million). Gearing is expected to decline over the remainder of fiscal
1997.
Dividend
The Board of Directors announces an interim dividend of 2.25p in respect
of the first half results to 31 July 1997. The dividend will be paid on
5 January 1998 to shareholders of record on 28 November 1997. The share
repurchase programme is continuing as previously outlined.
Future results announcements
Results announcements for the remainder of fiscal year 1997 will be
announced as follows:
Quarter For the Period Ended Announcement Date
3 31 October 1997 11 December 1997
4 31 January 1998 31 March 1998
For further information: Investors & Analysts: Joseph S. Cantie,
+ 44 (0)171 465 0610, or media, Nicholas Jones, + 44 (0)171 465 0617.
LucasVarity plc
Consolidated Profit and Loss Accounts
For the 6 and 3 month periods ended 31 July 1997
(Half Year and Second Quarter)
Half Second
Year Quarter
(millions) (millions)
(of) (of)
(pounds) (pounds)
Turnover 2,351.5 1,145.6
Cost of sales (2,178.9) (1,056.7)
Surplus on trading 172.6 88.9
Share of profits less losses
of associated undertakings 3.0 1.0
Total operating profit before
exceptional items 175.6 89.9
Profit on the sale of current
asset investment 13.2 13.2
Total operating profit 188.8 103.1
Profits less losses on
business and fixed
assets disposals 5.5 4.7
Profit on ordinary activities
before interest 194.3 107.8
Interest payable less
receivable (27.8) (13.4)
Profit on ordinary activities
before taxation 166.5 94.4
Taxation (45.9) (22.8)
Profit on ordinary activities
after taxation 120.6 71.6
Minority interests (7.3) (3.9)
Profit attributable to
shareholders 113.3 67.7
Earnings per ordinary share 8.0p 4.8p
LucasVarity plc
Balance Sheets
At 31 July and 31 January 1997
31 July 31 January
(millions) (millions)
(of) (of)
(pounds) (pounds)
Fixed assets:
Tangible assets 1,289.1 1,301.9
Investments 47.5 49.0
1,336.6 1,350.9
Current assets:
Investments -- 16.3
Stocks 500.6 517.5
Debtors 841.0 884.1
Cash 192.9 227.3
1,534.5 1,645.2
Creditors:
Amounts falling due within
one year
Borrowings (373.9) (367.7)
Other creditors (998.7) (976.3)
(1,372.6) (1,344.0)
Net current assets 161.9 301.2
Total assets less current
liabilities 1,498.5 1,652.1
Creditors:
Amounts falling due after
one year
Borrowings (310.8) (322.0)
Accruals and deferred income (54.0) (34.0)
(364.8) (356.0)
Provisions for liabilities and
charges (584.5) (707.4)
Net Assets 549.2 588.7
Capital & Reserves:
Total shareholders' funds 501.4 546.0
Minority interests 47.8 42.7
549.2 588.7
LucasVarity plc
Consolidated Cash Flow Statements
For the 6 and 3 month periods ended 31 July 1997
(Half Year and Second Quarter)
Half Second
Year Quarter
(millions) (millions)
(of) (of)
(pounds) (pounds)
Cash flow from operating activities:
Group operating profit 188.8 103.1
Share of profit less dividends of
associated undertakings (2.7) (0.9)
Depreciation 81.2 40.1
Profit on sale of current asset investment (13.2) (13.2)
Utilisation of provision for restructuring (59.5) (29.4)
Decrease in other provisions (24.6) (9.1)
Decrease / (increase) in working capital 12.8 (1.6)
Net cash inflow from operating activities 182.8 89.0
Interest paid (32.6) (17.1)
Tax paid (20.6) (10.1)
Capital expenditure and financial investment
Purchase of tangible fixed assets (139.6) (80.0)
Disposal of tangible fixed assets 13.5 8.7
Net cash outflow for capital expenditure and
financial investment (126.1) (71.3)
Net cash inflow for acquisitions and disposals 31.0 23.8
Equity dividends paid (32.3) (32.3)
Net cash inflow / (outflow) before management
of liquid resources and financing 2.2 (18.0)
Management of liquid resources and financing
Proceeds from sale of current asset investment 29.1 29.1
Issue of ordinary share capital 9.7 8.9
Purchase of ordinary share capital (57.9) (27.8)
Increase in bank loans 57.0 12.1
Decrease / (increase) in short-term deposits 0.5 (3.5)
Capital element of finance lease rental
payments (11.5) (9.2)
Net cash inflow from management of liquid
resources and financing 26.9 9.6
Increase / (decrease) in cash in the period 29.1 (8.4)
LucasVarity plc
Reconciliation of net cash flow
to movement in net debt
For the 6 month period ended 31 July 1997
(Half Year)
Half
Year
(millions)
(of)
(pounds)
Increase in cash in the period 29.1
Cash inflow from increase in debt and lease financing (45.5)
Cash inflow from decrease in short-term deposits (0.5)
Change in net debt resulting from cash flows (16.9)
New finance lease commitments (9.5)
Exchange movements (3.0)
Movement in net debt in the period (29.4)
Net debt at 31 January 1997 (462.4)
Net debt at 31 July 1997 (491.8)
LucasVarity plc
Reconciliation of movements in shareholders' funds
For the 6 month period ended 31 July 1997
(Half Year)
(millions)
(of)
(pounds)
Profit attributable to shareholders 113.3
Dividend in respect of current period (31.8)
Currency translation differences (42.0)
New share capital subscribed 9.7
Repurchase of shares (57.9)
Goodwill set off on acquisitions (37.8)
Goodwill on disposals transferred to profit and loss account 1.9
Net decrease in shareholders' funds (44.6)
Opening shareholders' funds 546.0
Closing shareholders' funds 501.4
LucasVarity plc
UK to US GAAP Reconciliations
31 July 1997
Results are based on United Kingdom accounting principles and are
unaudited. Under US Generally Accepted Accounting Principles (GAAP), net
income for the half year and second quarter ended 31 July 1997 were:
Half Year Second Quarter
m(pounds) $m m(pounds) $m
UK GAAP income 113.3 185.8 67.7 111.9
Adjustments to conform
with US GAAP:
Goodwill amortisation (20.7) (33.9) (10.2) (16.9)
Goodwill written off
on divestments 1.1 1.8 1.1 1.8
Pension credit 58.5 95.9 29.2 48.5
Restructuring and
integration costs (23.1) (37.9) (10.3) (17.2)
Exchange gains relating
to forward exchange
contracts (5.3) (8.7) (20.1) (32.7)
Deferred tax (0.7) (1.1) 1.8 3.0
Other 1.7 2.8 0.9 1.5
US GAAP net income 124.8 204.7 60.1 99.9
Earnings per ADS
(US GAAP) 0.88p $1.44 0.43p $0.71
A reconciliation of shareholders' funds based on UK GAAP to shareholders'
equity based on US GAAP at 31 July 1997 is as follows:
m(pounds) $m
Shareholders' funds (UK GAAP) 501.4 822.3
Adjustments to conform with US GAAP:
Goodwill 1,239.2 2,032.3
Revaluation of tangible fixed assets (120.9) (198.3)
Prepaid pension cost 395.8 649.1
Exchange gains relating to forward exchange
contracts 39.7 65.1
Proposed interim dividend including
Advanced Corporation Tax 39.8 65.3
Restructuring provision 107.9 176.9
Deferred taxation (53.6) (87.9)
Other (13.8) (22.6)
Shareholders' equity as adjusted to accord
with US GAAP 2,135.5 3,502.2
LucasVarity plc
Pro-forma Quarterly Information
for the year ended 31 January 1997 (Fiscal 1996)
(millions of pounds)
LucasVarity and Lucas Industries merged and subsequently acquired Varity
with effect from 6 September 1996. The following quarterly information for
the year ended 31 January 1997 (Fiscal 1996) is based on the pro-forma
combined operating results of Lucas Industries and Varity. These results are
presented by the segments that the Group will report going forward and exclude
exceptional items. As these results reflect pro-forma information when the
two companies were not under common control and the companies previously had
different fiscal years, they do not illustrate the trend in underlying trading
performance that will occur in future quarters.
1996 Quarters
Qtr 1 Qtr 2 Qtr 3 Qtr 4 Full Year
Braking Systems
Sales 393 387 391 383 1,554
Operating Profit 31 42 23 25 121
Operating Margin 7.9% 10.9% 5.9% 6.5% 7.8%
Other Automotive
Sales 446 490 439 466 1,841
Operating Profit 38 58 34 39 169
Operating Margin 8.5% 11.8% 7.7% 8.4% 9.2%
Diesel Engines
Sales 144 158 158 195 655
Operating Profit 10 13 13 23 59
Operating Margin 6.9% 8.2% 8.2% 11.8% 9.0%
Aerospace
Sales 120 145 104 141 510
Operating Profit 14 23 (1) 13 49
Operating Margin 11.7% 15.9% (1.0%) 9.2% 9.6%
Corporate/other
Sales 8 11 8 13 40
Operating Profit (16) (14) (15) (17) (62)
Totals
Sales 1,111 1,191 1,100 1,198 4,600
Operating Profit 77 122 54 83 336
Operating Margin 6.9% 10.2% 4.9% 6.9% 7.3%
Interest (15) (15) (11) (13) (54)
Profit Before Tax (PBT) 62 107 43 70 282
SOURCE LucasVarity plc