LucasVarity Reports First Quarter Results
4 June 1998
LucasVarity Reports First Quarter Results
LONDON, June 4 -- LucasVarity plc (London: LVA, NYSE: LVA)
today reports its results for the three month period ended 30 April 1998.
FIRST QUARTER HIGHLIGHTS
-- Sales from continuing operations up 7.6% over the prior year - up 11.6%
excluding currency translation effects.
-- Operating profit from continuing operations before exceptional items up
25.3% - up 30.7% excluding currency translation effects.
-- Margin improvements quarter one 1998 on quarter one 1997 in every
business segment.
-- Earnings per ordinary share from continuing operations of 4.0p,
(before exceptional items) up from 2.7p in the prior year.
-- VarityPerkins sale completed for gross proceeds of 803 million pounds
sterling.
-- Three businesses sold for 37 million pounds sterling, completing the
previously announced divestment programme.
Victor A. Rice, Chief Executive, commented:
"These results, which compare favourably with those of the prior year
quarter, demonstrate continued improvement in the underlying performance of
all our businesses. Our product and market leadership positions, cost and
restructuring programmes and the strength of light truck production in the
North American market continue to drive our improved financial performance.
We are in very good shape and, with our strong balance sheet following the
sale of VarityPerkins, are well placed to capitalise on the opportunities that
will become available to us in our chosen markets."
SUMMARY AND OUTLOOK
Summary
Group turnover from continuing operations for the first quarter of 1998
increased by 7.6% to 1,127 million pounds sterling and operating profit from
continuing operations before exceptional items increased 25.3% to 94 million
pounds sterling as compared to the prior year first quarter. Excluding the
effects of currency translation, which reduced reported sales by 41 million
pounds sterling, the underlying sales increase was 11.6%. This growth
included 50 million pounds sterling of incremental sales from four
acquisitions completed in 1997 which more than offset the loss in sales of
38 million pounds sterling from disposals of non-core businesses. Organic
sales growth before currency and acquisitions net of disposals was
10.4% quarter on quarter.
Likewise, excluding the effects of currency translation, which reduced
reported operating profit from continuing operations by 4 million pounds
sterling, the underlying operating profit increase was 30.7%. The significant
improvement in operating margin, from 7.2% in the prior year first quarter to
8.3% in 1998, resulted primarily from the continuing implementation of cost
improvement programmes and increased turnover levels.
Profit before tax and exceptional items from continuing operations of
84 million pounds sterling increased 37.7% compared to the prior year.
Contributing to the improvement was a 4 million pounds sterling decrease in
net interest expense as a result of cash proceeds received in the quarter from
the sale of VarityPerkins. After recording 135 million pounds sterling of
exceptional gains relating to business and asset sales, including the sale of
VarityPerkins, and operating losses of 2 million pounds sterling from
discontinued operations, profit before tax was 217 million pounds sterling.
Tax expense was 148 million pounds sterling which, after excluding
123 million pounds sterling of taxes associated with business and asset sales,
resulted in an effective tax rate of 30%.
First quarter profit attributable to shareholders from continuing
operations before exceptional items was 56 million pounds sterling, or
4.0p per ordinary share compared to 38 million pounds sterling, or 2.7p per
ordinary share in the prior year. After exceptional items and discontinued
operations, 1998 first quarter earnings per ordinary share were 4.7p compared
to 3.2p in the prior year.
First quarter earnings per American Depository Share (ADS) from continuing
operations before exceptional items (based on UK GAAP) was $0.66 compared to
$0.43 in the prior year. After exceptional items and discontinued operations,
1998 first quarter earnings per ADS were $0.78 compared to $0.52 in the prior
year.
Under US GAAP, earnings per ADS from continuing operations before
exceptional items was $1.01 compared to $0.79 in the prior year. Including
exceptional items and discontinued operations, 1998 first quarter earnings per
ADS were $1.54 compared to $0.73 in the prior year.
Key Events
During the first quarter the following key events occurred:
-- The sale of VarityPerkins to Caterpillar, Inc. was completed for gross
proceeds of 803 million pounds sterling. After taxes and transaction
costs, net proceeds were 647 million pounds sterling.
-- The remaining three of the thirteen businesses identified for sale at
the time of the merger were sold for total net proceeds of #37 million.
-- Significant contract awards were announced by the Light Vehicle Braking
Systems, Diesel Systems and Electrical and Electronic Systems
businesses.
-- The Electrical and Electronic Systems business entered into a joint
venture with TRW, Inc. to develop and manufacture electric power
assisted steering (EPAS).
Outlook
The outlook for vehicle sales in both North America and Europe remains
encouraging. The favorable conditions in the North American light truck
market (pick-ups, vans and sport utility vehicles) and the French automotive
market, should continue to provide a solid basis for LucasVarity's future
growth and financial performance. The Aerospace markets continue to be
strong.
Within these markets, overall revenue growth for 1998 should be
satisfactory and continued progress on cost and total quality programmes will
have a positive impact on earnings and margins.
OPERATING AND FINANCIAL REVIEW
Review of continuing operations (million in pound sterling except
margin %'s):
Three months
ended 30 April
SALES 1998 1997
Braking Systems 490 409
Other Automotive 469 481
Aerospace 168 151
Corporate / Other -- 6
Totals 1,127 1,047
OPERATING PROFIT
Braking Systems 45 33
Other Automotive 41 37
Aerospace 18 16
Corporate / Other (10) (11)
Totals 94 75
OPERATING MARGIN
Braking Systems 9.2% 8.1%
Other Automotive 8.7% 7.7%
Aerospace 10.7% 10.6%
Totals 8.3% 7.2%
BRAKING SYSTEMS
Turnover in the Braking Systems' segment, comprising the light (LVBS) and
heavy vehicle braking businesses, improved 19.8% to 490 million pounds
sterling. Excluding the effects of currency translation, which reduced 1998
reported sales by 18 million pounds sterling, turnover improved 24.2%. The
January 1998 acquisition of Freios Varga, South America's largest brake
company contributed 38 million pounds sterling to the 1998 first quarter sales
while the remaining increase resulted primarily from LVBS leading position in
the robust North American light-truck market and strong automotive sales in
Europe. In addition, the prior year first quarter had been adversely affected
by strikes at GM and Chrysler. Production of light vehicles in North America
for the first fiscal quarter rose 3.9% from last year, with light trucks
increasing 11.6% and passenger car production declining 2.9%. Car
registrations in Europe rose 7.3% in the first quarter as compared to last
year. The segment's operating margin increased significantly, from 8.1% in
1997 to 9.2% in 1998. This improvement was due primarily to the realisation
of cost savings and productivity improvements and increased turnover levels.
Significant contracts announced by LVBS during the quarter included an
award to supply General Motors with advanced control systems for certain
future passenger cars to be sold in global markets which will include anti-
lock braking systems (ABS), traction control and vehicle stability control
systems. In addition, LVBS announced a contract with Chrysler Corporation to
supply customised braking systems for certain future sport utility vehicles, a
contract valued at $50 million annually.
OTHER AUTOMOTIVE
The Other Automotive segment comprises the Diesel Systems, Electrical and
Electronic Systems and Aftermarket businesses. Turnover in this segment
declined by 2.5% to 469 million pounds sterling. Excluding the effects of
currency translation, which reduced 1998 reported sales by 19 million pounds
sterling, and the net revenue of businesses disposed of and acquired
subsequent to the prior year first quarter totaling 25 million pounds,
underlying sales improved 6.7%. Each of the three businesses contributed to
the sales increase. The Diesel Systems business was the strongest
contributor, reflecting increased diesel car and van sales in Europe.
Excluding the effects of currency translation, which reduced reported
operating profit by 2 million pounds sterling compared to the prior year
quarter, the underlying profit increased by 16.2%, resulting in an operating
margin of 8.7% as compared to 7.7% in the previous year. The improvement in
margin resulted primarily from cost reduction and manufacturing improvement
programmes and the sale of 11 lower margin businesses subsequent to the prior
year first quarter. In addition, the prior year quarter included an increased
level of investment in R&D on the development of common rail diesel fuel
systems.
In the quarter, Diesel Systems secured a significant customer award from
Kia Motors of Korea for its common rail high-speed direct injection (HSDI)
system, valued at 125 million pounds sterling. This follows the announcement
in December last year of customer commitments from Ford Motor Company and
Renault S.A. worth 500 million pounds sterling.
Lucas Electrical and Electronic Systems (E&ES) entered into a joint
venture with TRW, Inc. to develop and manufacture electric power assisted
steering (EPAS), and secured a 80 million pounds sterling contract to supply
Land Rover's new FreeLander model range with electrical wiring systems. Lucas
Body Systems, a business of E&ES received Chrysler Corporation's "Gold
Pentastar" quality supplier award in the quarter. This prestigious award
recognises world class performance in product design, manufacturing quality,
delivery, warranty and customers service.
Lucas Aftermarket Operations (LAO) completed the disposals of Lucas
Service UK, its UK distribution chain, LAO's starters and alternators
remanufacturing business and LAO's wiper motor and emergency lighting
business. Total proceeds of #37 million, net were raised from the sale of
these businesses which had 1997 revenues of #62 million.
AEROSPACE
Turnover in the Aerospace segment increased 11.3% to #168 million.
Excluding the effects of currency translation, which reduced 1998 reported
sales by #4 million, Aerospace's first quarter sales increased 13.9% from the
previous year quarter. Operating profit improved 12.5% to #18 million
resulting in an operating margin of 10.7% as compared to 10.6% in 1997. The
sales growth resulted from the continuing increase in deliveries relating to
the large commercial aircraft segment. This was partially offset by a lower
level of spare parts sales in the 1998 first quarter following an unusually
strong level of spares sales in the preceding quarter (Q4) and the run-off of
certain military programmes during 1997. This unfavourable mix of sales also
constrained margin improvement quarter on quarter.
OTHER FINANCIAL HIGHLIGHTS
Discontinued Operations
In the quarter, LucasVarity completed the sale of VarityPerkins, which
constituted 100% of the Diesel Engines Segment, to Caterpillar Inc. for gross
proceeds of 803 million pounds sterling. After deducting 156 million pounds
sterling of tax and transaction costs relating to the disposal, net cash
received amounted to 647 million pounds sterling. A net accounting loss of
3 million pounds sterling was recorded on the sale after considering net
assets disposed and the write-back of 453 million pounds sterling of
VarityPerkins goodwill, which resulted from the purchase accounting treatment
of the acquisition of Varity Corporation by Lucas Industries in
September 1996. In the 1998 first quarter, prior to completion of the
transaction, VarityPerkins had sales of 42 million pounds sterling and an
operating loss of 2 million pounds sterling.
Exceptional items
In the 1998 first quarter, 12 million pounds sterling of net exceptional
after tax gains were realised. In addition to the net loss of 3 million
pounds sterling on the sale of VarityPerkins, gains of 10 million pounds
sterling were recognised on the sale of Lucas Services UK, Aftermarket's
starters and alternators remanufacturing business and the wiper motor and
emergency lighting business. With the sale of these three businesses,
LucasVarity has completed the divestment programme announced in September 1996
which included 13 businesses. The remaining exceptional gain related to
Electrical and Electronic System's joint venture agreement with TRW, Inc. to
develop and manufacture EPAS. Net proceeds of #18 million were received
which, after subtracting related assets, taxes and provisions, resulted in a
net gain of 5 million pounds sterling.
Cash flow and debt
Net cash flow from operating activities in the quarter after interest, tax
and dividends paid to minority shareholders was 37 million pounds sterling.
This amount included cash outflows for restructuring activities of 16 million
pounds sterling, and working capital of 44 million pounds. Investments of
54 million pounds sterling were made for capital expenditures and 17 million
pounds sterling for acquisitions while proceeds from disposals including the
sale of VarityPerkins, amounted to 700 million pounds sterling. As a result
of these cash flows, the Company has moved from a net borrowings position of
574 million pounds sterling at the beginning of the quarter to a net cash
position of 103 million pounds sterling at 30 April 1998.
Future results announcements
Results announcements for the remainder of fiscal year 1998 will be made
as follows:
Quarter For the Period Ended Announcement Date
2 31 July 1998 10 September 1998
3 31 October 1998 08 December 1998
4 31 January 1999 25 March 1999
LucasVarity plc
Consolidated Profit and Loss Accounts
For the 3 month periods ended 30 April 1998 and 1997
(million pounds sterling except per share amounts)
1998 1997
Turnover:
Continuing operations 1,127 1,047
Discontinued operations 42 159
Total turnover 1,169 1,206
Cost of sales (1,078) (1,122)
Surplus on trading 91 84
Share of profits less losses
of associated undertakings 1 2
Total operating profit before
exceptional items:
Continuing operations 94 75
Discontinued operations (2) 11
Total operating profit
before exceptional items 92 86
Profit on business and
fixed asset disposals 135 1
Profit on ordinary activities
before interest and taxation 227 87
Interest payable less receivable (10) (14)
Profit on ordinary activities
before taxation 217 73
Taxation - ordinary activities (25) (23)
- exceptional items (123) --
Profit on ordinary activities
after taxation 69 50
Minority interests and other (3) (4)
Profit attributable
to shareholders 66 46
Earnings per ordinary share 4.7p 3.2p
Average shares outstanding
(millions) 1,406 1,430
LucasVarity plc
Balance Sheets
At 30 April and 31 January 1998
(million pounds sterling)
30 Apr 31 Jan
Fixed assets:
Tangible assets 1,189 1,362
Intangible assets 29 27
Investments 37 47
1,255 1,436
Current assets:
Stocks 431 489
Debtors 823 869
Cash 525 155
1,779 1,513
Creditors:
Amounts falling due within
one year:
Borrowings (111) (414)
Other creditors (1,037) (1,097)
(1,148) (1,511)
Net current assets 631 2
Total assets less
current liabilities 1,886 1,438
Creditors:
Amounts falling due after
one year:
Borrowings (311) (315)
Accruals and deferred income (23) (52)
(334) (367)
Provisions for liabilities
and charges (498) (545)
Net Assets 1,054 526
Capital & Reserves:
Total shareholders' funds 985 458
Minority interests 69 68
1,054 526
LucasVarity plc
Consolidated Cash Flow Statements
For the 3 month periods ended 30 April 1998 and 1997
(million pounds sterling)
1998 1997
Cash flow from operating
activities:
Group operating profit 92 86
Share of profit less dividends
of associated undertakings (1) (2)
Depreciation / amortisation 39 41
Utilisation of provision
for restructuring (16) (30)
Decrease in other provisions (8) (15)
(Increase) / decrease
in working capital (44) 14
Net cash inflow from
operating activities 62 94
Interest paid and dividends paid to
minority shareholders (10) (16)
Tax paid (15) (10)
Capital expenditure and
financial investment:
Purchase of tangible
fixed assets (54) (60)
Disposal of tangible
fixed assets 4 5
Investment in intangible
fixed assets (2) --
Net cash outflow for
capital expenditure
and financial investment (52) (55)
Net cash inflow for acquisitions
and disposals 683 7
Net cash inflow before management
of liquid resources
and financing 668 20
Management of liquid resources
and financing:
Issue of ordinary share capital 5 1
Purchase of ordinary share capital -- (30)
(Decrease) / Increase
in bank loans (301) 45
(Increase) / Decrease
in short-term deposits (358) 4
Capital element of finance
lease rental payments (2) (3)
Net cash (outflows) / inflow
from management of liquid
resources and financing (656) 17
Increase in cash in the period 12 37
LucasVarity plc
Reconciliation of net cash flow
to movement in net debt
For the 3 month period ended 30 April 1998
(million pounds sterling)
million pounds
Increase in cash in the period 12
Cash outflow from decrease
in debt and lease financing 303
Cash outflow from increase
in short-term deposits 358
Change in net debt resulting from cash flows 673
Exchange movements 4
Movement in net debt in the period 677
Net debt at 31 January 1998 (574)
Net cash at 30 April 1998 103
LucasVarity plc
Reconciliation of movements in shareholders' funds
For the 3 month period ended 30 April 1998
million pounds
Profit attributable to shareholders 66
Currency translation differences 3
New share capital subscribed 5
Goodwill on disposals transferred
to profit and loss account 453
Net increase in shareholders' funds 527
Opening shareholders' funds 458
Closing shareholders' funds 985
LucasVarity plc
UK to US GAAP Reconciliations
For the 3 month periods ended 30 April 1998 and 1997
1998 1997
m pounds m dollars m pounds m dollars
Net Income - UK GAAP 66 110 46 74
Adjustments to conform with US GAAP:
Goodwill amortisation (8) (13) (11) (17)
Profit on business disposal 39 65 -- --
Pension credit 33 55 29 47
Provisions for
restructuring (5) (8) (13) (21)
Exchange gains relating
to forward exchange
contracts 25 42 15 24
Deferred tax (19) (32) (2) (4)
Other (2) (3) 1 2
Net Income - US GAAP 129 216 65 105
Earnings per ADS (US GAAP) $1.54 $0.73
A reconciliation of shareholders' funds at 30 April 1998 is as follows:
m pounds m dollars
Shareholders' funds (UK GAAP) 985 1,645
Adjustments to conform
with US GAAP:
Goodwill 870 1,453
Revaluation of tangible
fixed assets (112) (187)
Entry fees (17) (28)
Prepaid pension cost 482 805
Exchange gains relating
to forward exchange
contracts 72 120
Proposed final dividend
including Advanced
Corporation Tax 39 65
Restructuring provision 31 52
Deferred taxation (4) (7)
Other (17) (29)
Shareholders' equity (US GAAP) 2,329 3,889