Aeroquip-Vickers Reports Q3 Earnings
16 October 1997
Aeroquip-Vickers Reports Record Third-Quarter EPS of $1.05
MAUMEE, Ohio, Oct. 16 -- Aeroquip-Vickers, Inc.
today announced record third-quarter earnings per share of $1.05, a 46%
increase over 1996 third-quarter earnings per share of 72 cents. Sales of
$494.8 million were only slightly above a year ago, primarily due to the
divestiture of the automotive interior plastics business. Operating income
increased $11.4 million, or 27%, to $53.1 million.
"Operating income increased in each of our three segments -- industrial,
automotive and aerospace," said Darryl F. Allen, Aeroquip-Vickers chairman,
president and chief executive officer. "Our aerospace business continued to
soar, with sales, operating income and operating margin significantly improved
over a year ago and nearly matching the record sales and income of the 1997
second quarter. The success profile is straightforward - we are winning a
majority share of the business we go after for our primary product lines, and
we are reaping the rewards of our quality and dependability.
"In automotive, the results are just what we said they would be when we
announced our strategy to focus on fluid connectors and exit our interior
plastics business. Sales were down from a year ago due to the divestiture of
the plastics facilities, but operating income was vastly improved and
operating margin exceeded 10% for the second successive quarter.
"In industrial we continued to make headway, with sales, operating income
and operating margin improved from a year ago. We achieved this despite
lessened demand, due to cooler weather than normal during the spring and
summer, for residential air conditioning components, a traditionally strong
business for us. Industrial order intake was a record for a third quarter,
with increases across all geographical markets from a year ago. At the end of
the third quarter, industrial order backlog was at its highest level in seven
years. We still have considerable upside potential in our industrial
business.
"Our successes on various fronts and our track record of several
successive years of earnings improvement led to our being named during the
quarter one of IndustryWeek magazine's Best-Managed Companies in the World for
1996. It is an achievement by our management team that I am proud of and one
that will challenge us to stay at the forefront."
Best Third Quarter, Best Nine Months On Record
Bests for a third quarter were achieved in sales, manufacturing income,
operating income, operating margin, net income and earnings per share. As
with the 1997 second quarter, operating margin exceeded 10% for each of our
segments. Net income was $30.1 million, a 45% increase over the previous high
for a third quarter. Consolidated order intake was 12% greater than the
previous third-quarter high.
"The first nine months of 1997 were also our best ever," Mr. Allen said.
"Sales grew to a record $1.59 billion. Operating income, operating margin and
income per share exceeded previous highs for a nine-month period, before
deducting the special charge of $30 million, $18.5 million net, or 66 cents
per share, recorded in the 1997 first quarter (62 cents per share for the nine
months). Cash generated from operations was $102.5 million, a 36% increase
from operating cash flow for the first nine months last year."
Industrial Segment
"Industrial sales grew to $278.1 million, their highest level for a third
quarter," Mr. Allen said. "U.S. industrial sales were up slightly from a year
ago, while European sales were down 6.4%, due almost entirely to the effect of
exchange rate changes. Cooler summer temperatures had a negative effect on
our residential air conditioning business, which kept the quarter from being
even stronger.
"Our U.S. sales to mobile equipment, truck & bus and in-plant machinery
markets improved from a year ago. In Europe the greatest gains were realized
by our electronic systems product line.
"Going forward, there are several areas in which we expect to continue to
grow and which have been beneficiaries of strategic investments over the past
18 months. One example is the mobile equipment market. We have made
significant investment in our Asian-Pacific operations, including a new
operations center in Singapore, an increased ownership position in our Indian
joint venture and a new global alliance that will enhance our penetration of
worldwide markets, including Asia-Pacific, over the long term. We are also
investing in a new state-of-the-art pump factory in South Carolina which will
produce the next generation of piston pumps. Each of these initiatives is
expected to increase our share of the worldwide mobile equipment market.
"The general weakness in Europe continued during the quarter, with some
signs of recovery in September. We also continued to be affected by an
unfavorable product mix in the U.S. However, we are convinced that the
aggressive steps we are taking to increase market share and the actions we are
taking to further drive down costs will continue profitable growth for our
industrial segment. A boost from the European and Asia-Pacific economies
would be a bonus."
Automotive Segment (Predominantly Fluid Connectors)
"The positive effects of divesting our interior plastics business
continued in the third quarter," Mr. Allen said. "Although sales were down
17.9% from the 1996 third quarter, operating income more than doubled to
$10.2 million and operating margin was 10.5%.
"Our emphasis on fluid connectors, the core competency of Aeroquip and the
foundation of our industrial business, is keeping our automotive business
strong and growing. Fluid connectors is a higher-margin business for us, and
we are well-positioned on major programs. During the first half of 1998, we
will begin production at a new fluid connectors facility in Wolfsburg,
Germany, to enhance our just-in-time delivery to Volkswagen. With auto
manufacturers looking for suppliers with global design, production and
delivery capabilities, we are showing that with our extensive capabilities in
North and South America and Europe, we are the source to choose for fluid
connectors."
Aerospace Segment
"Even though the third quarter is traditionally our slowest quarter of the
year, sales and operating income for our aerospace business were not too far
off the all-time highs set last quarter," Mr. Allen said. "Aerospace sales,
operating income, operating margin and order intake easily eclipsed the
previous highs for a third quarter. Sales grew $20.6 million, or 20.9%,
compared with last year. Operating income increased $5.0 million, or 31.7%.
Order intake increased $32.9 million, or 28.7%.
"Sales, operating income, operating margin and order intake were also new
highs for a nine-month period.
"It's a story I enjoy repeating quarter after quarter -- strong growth in
aerospace sales, impressive operating income and margin, and increasing
orders. Our aerospace business is expected to continue strong due to our
extensive presence on all major commercial aerospace programs. New defense
programs are also slowly coming on stream and should begin to have an impact
sometime in 1999. This continues to bode well for our long-term success in
aerospace."
Tax Rates
In the 1997 third quarter, the estimated annual effective income tax rate,
exclusive of the effects of the special charge, was reduced to 33% due
primarily to a lower income tax rate on non-U.S. income, including the effect
of a statutory rate reduction in the United Kingdom. This change increased
third-quarter 1997 net income by $1.3 million, or 5 cents per share. Through
the first two quarters of 1997, the estimated annual effective income tax rate
was 34%, exclusive of the effects of the special charge. The effective income
tax rate for the 1996 third quarter and nine-month period was 33% exclusive of
special items.
Aeroquip and Vickers Sales
Aeroquip's 1997 third-quarter sales were $237.9 million, compared with
$262.3 million a year ago. Facilities that now have been sold or closed
contributed $5.1 million of 1997 third-quarter sales, compared with
$24.1 million of 1996 third-quarter sales. For the first nine months,
Aeroquip's sales were $806.1 million, compared with $829.5 in 1996.
Facilities that now have been sold or closed contributed $37.9 million of 1997
nine-month sales, compared with $83.8 million of 1996 nine-month sales.
Vickers' sales were $256.9 million, compared with $230.7 million in the
1996 third quarter. For the first nine months, Vickers' sales were
$783.4 million, compared with $693.5 million a year ago.
Consolidated Results
(dollars in millions, except per share data)
3Q 97 3Q 96 2Q 97 1Q 97
Sales $494.8 $493.0 $556.3 $538.4
Operating Income 53.1 41.7 61.6 18.7(a)
Operating Margin 10.7% 8.5% 11.1% 3.5%(a)
Net Income 30.1 20.8 33.6 5.7(a)
Net Income Per Share 1.05 .72 1.15 .20(a)
4Q 96 Nine Months 97 Nine Months 96
Sales $509.9 $1,589.5 $1,523.0
Operating Income 43.0 133.4(a) 133.5
Operating Margin 8.4% 8.4%(a) 8.8%
Net Income 24.5 69.4(a) 78.2(b)
Net Income Per Share .85 2.41(a) 2.66(b)
(a) Includes a special charge of $30.0 million ($18.5 million net of tax,
or 66 cents per share in the first quarter; 62 cents per share for
the nine-month period) to exit the automotive interior plastics
business.
(b) Includes a net gain of $5 million, or 16 cents per share, from the
sale of affiliates and an R&D tax credit of $4 million, or 13 cents
per share.
Segment Analysis
(dollars in millions)
Industrial
3Q 97 3Q 96 2Q 97 1Q 97
Sales $278.1 $275.8 $317.5 $291.8
Operating Income 28.5 26.8 32.6 24.6
Operating Margin 10.2% 9.7% 10.3% 8.4%
Order Intake 285.0 270.8 320.7 317.6
Order Backlog 216.7 194.1 216.1 212.6
4Q 96 Nine Months 97 Nine Months 96
Sales $278.2 $887.4 $860.3
Operating Income 22.2 85.7 83.5
Operating Margin 8.0% 9.7% 9.7%
Order Intake 272.4 923.4 863.5
Order Backlog 184.9 216.7 194.1
Automotive
3Q 97 3Q 96 2Q 97 1Q 97
Sales $ 97.4 $118.6 $117.3 $127.9
Operating Income 10.2 4.5 13.1 (18.5)(a)
Operating Margin 10.5% 3.8% 11.2% -- %(a)
4Q 96 Nine Months 97 Nine Months 96
Sales $131.2 $342.6 $372.6
Operating Income 9.8 4.8(a) 25.3
Operating Margin 7.5% 1.4%(a) 6.8%
(a) Includes a special charge of $30.0 million to exit the automotive
interior plastics business. Before the special charge, automotive
operating income and operating margin were $11.5 million and 9.0% in
the 1997 first quarter, and $34.8 million and 10.2% for the first
nine months of 1997.
Aerospace
3Q 97 3Q 96 2Q 97 1Q 97
Sales $119.2 $ 98.6 $121.5 $118.7
Operating Income 20.8 15.8 21.6 18.6
Operating Margin 17.5% 16.0% 17.8% 15.7%
Order Intake 147.2 114.3 138.4 129.1
Order Backlog 391.4 314.2 366.1 349.2
4Q 96 Nine Months 97 Nine Months 96
Sales $100.5 $359.4 $290.1
Operating Income 18.0 61.1 41.6
Operating Margin 18.0% 17.0% 14.3%
Order Intake 92.5 414.7 339.0
Order Backlog 341.0 391.4 314.2
STATEMENT OF FINANCIAL POSITION
Aeroquip-Vickers, Inc.
(Dollars in thousands, except share data)
(Unaudited)
September 30 December 31
1997 1996
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 31,112 $ 23,934
Receivables 356,244 342,712
Inventories:
In-process and finished products 229,811 202,214
Raw materials and manufacturing supplies 54,928 59,955
Total 284,739 262,169
Other current assets 56,693 45,272
TOTAL CURRENT ASSETS 728,788 674,087
Plants and properties 984,786 997,350
Less accumulated depreciation 536,728 559,867
Total 448,058 437,483
Goodwill 109,829 110,005
Other assets 78,616 67,912
TOTAL ASSETS $1,365,291 $1,289,487
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Notes payable $ 80,339 $ 31,819
Accounts payable 114,367 106,205
Income taxes 39,430 21,150
Other current liabilities 215,676 188,973
Current maturities of long-term debt 1,413 76,809
TOTAL CURRENT LIABILITIES 451,225 424,956
Long-term debt 257,628 257,727
Postretirement benefits other than pensions 121,978 121,793
Other liabilities 43,150 38,595
SHAREHOLDERS' EQUITY
Common stock - par value $5 a share
Authorized - 100,000,000 shares
Outstanding - 28,229,932 and 27,912,077
shares, respectively(after deducting
6,050,914 and 6,297,819 shares,
respectively, in treasury) 141,150 139,559
Additional paid-in capital 37,709 20,675
Retained earnings 349,326 307,398
Currency translation adjustments (36,875) (21,216)
TOTAL SHAREHOLDERS' EQUITY 491,310 446,416
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $1,365,291 $1,289,487
CONDENSED STATEMENT OF INCOME
Aeroquip-Vickers, Inc.
(In thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
1997 1996 1997 1996
Net sales $ 494,777 $ 492,983 $1,589,481 1,523,020
Cost of products sold 360,371 370,129 1,175,563 1,140,000
MANUFACTURING INCOME 134,406 122,854 413,918 383,020
Selling and general
administrative expenses 63,271 62,557 197,245 193,466
Engineering, research and
development expenses 18,050 18,620 53,312 56,005
Special charge -- -- 30,000 --
OPERATING INCOME 53,085 41,677 133,361 133,549
Interest expense (6,245) (6,234) (20,610) (19,361)
Other income (expenses)
- net (3,136) (4,486) (11,523) 6,444
INCOME BEFORE INCOME TAXES 43,704 30,957 101,228 120,632
Income taxes 13,600 10,200 31,800 42,400
NET INCOME $ 30,104 $ 20,757 $ 69,428 $ 78,232
NET INCOME PER SHARE $ 1.05 $ 0.72 $ 2.41 $ 2.66
Cash dividends per common
share $ 0.20 $ 0.20 $ 0.60 $ 0.60
Average shares outstanding 29,036 30,258 29,705 30,501
Notes:
In June 1997, the Company called its 6% Convertible Subordinated
Debentures for redemption on July 28, 1997. The debentures, which were due to
mature on October 15, 2002, were convertible into common shares until the
redemption date at a conversion price of $52.50 per share. Prior to the
redemption date, debentures in the amount of $3.7 million were converted into
70,950 shares of common stock.
Net income per share is computed using the average number of shares
outstanding, including common stock equivalents. The assumed conversion
of the 6% convertible debentures was included in average shares
outstanding as follows: 1,904,762 shares in the 1996 third quarter and
nine-month period, 627,667 shares in the 1997 third quarter and 1,479,064
shares in the 1997 nine-month period. For purposes of computing net income
per share, net income was increased for the after-tax equivalent of interest
expense on the 6% convertible debentures.
In the 1997 first quarter, the Company announced plans to exit its
automotive interior plastics business and recorded a special charge of $30
million ($18.5 million net, or $.62 per share, for the 1997 nine-month
period), comprised principally of severance and lease termination costs. As
of September 30, 1997, the Company had sold or closed seven facilities that
had combined 1996 sales of approximately $92 million.
In the 1996 second quarter, the Company sold its 35% interest in Yokohama
Aeroquip K.K. and its 49% interest in Aeroquip Mexicana S.A. The two
transactions resulted in a net combined pretax gain of $17.3 million
($5 million net, or $.16 per share). The combined pretax gain included
$6.4 million of net gains previously deferred in the currency translation
component of equity.
The income tax provision for the 1997 nine-month period includes a credit
of $11.5 million that was recorded in the first quarter related to the special
charge for costs to exit the automotive interior plastics business. In the
1997 third quarter, the estimated annual effective income tax rate exclusive
of this item was reduced from 34%, as reported through the 1997 second
quarter, to 33%. The rate reduction was primarily attributable to lower
effective income tax rates on non-U.S. income, including the effect of a
statutory rate reduction in the United Kingdom. The change in the effective
income tax rate increased third-quarter 1997 net income by $1.3 million, or
$.05 per share. The income tax provision for the 1996 nine-month period
includes income taxes of $12.3 million resulting from the gain on sale of
unconsolidated affiliates, and a credit of $4 million ($.13 per share) for
settlement of claims for prior years' research and development credits. The
effective income tax rate for the 1996 third quarter and nine-month period
exclusive of these items was 33%.
CONDENSED STATEMENT OF CASH FLOWS
Aeroquip-Vickers, Inc.
(In thousands)
(Unaudited)
Nine Months Ended
September 30
1997 1996
OPERATING ACTIVITIES
Net income $ 69,428 $ 78,232
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 49,504 51,355
Gain on sale of affiliates -- (17,300)
Special charge 30,000 --
Changes in certain components of
working capital other than debt (30,852) (46,800)
Dividends received from affiliates - 9,896
Other (15,534) (105)
NET CASH PROVIDED BY OPERATING ACTIVITIES 102,546 75,278
INVESTING ACTIVITIES
Capital expenditures (89,899) (60,877)
Businesses acquired -- (6,227)
Sale of businesses and affiliates 33,158 40,261
Other 737 954
NET CASH USED BY INVESTING ACTIVITIES (56,004) (25,889)
FINANCING ACTIVITIES
Net increase(decrease) in short- and
long-term debt (25,165) 11,397
Cash dividends (16,833) (17,126)
Purchase of common stock (12,209) (26,612)
Stock issuance under stock plans 16,442 2,264
Other (860) (2,440)
NET CASH USED BY FINANCING ACTIVITIES (38,625) (32,517)
Effect of exchange rate changes on cash (739) 24
INCREASE IN CASH AND CASH EQUIVALENTS 7,178 16,896
Cash and cash equivalents at beginning
of period 23,934 16,186
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 31,112 $ 33,082
Note: Aeroquip-Vickers is two companies, Aeroquip Corporation and
Vickers, Incorporated, worldwide industrial manufacturers and distributors of
engineered components and systems to industrial, automotive and aerospace
markets.
SOURCE Aeroquip-Vickers, Inc.