Aeroquip-Vickers Reports Best Quarter Ever
17 July 1998
Aeroquip-Vickers Reports Best Quarter Ever; Earnings Per Share Are $1.33
MAUMEE, Ohio--July 17, 1998--Aeroquip-Vickers, Inc. (ANV:NYSE) today announced that second-quarter earnings per share were a record $1.33 and a 16% increase over 1997 second-quarter earnings per share of $1.15. Sales increased to a quarterly high of $574.3 million, from $556.3 million in 1997. 1997 second-quarter sales included $17 million in sales from the automotive interior plastics business divested during the year, and the sales increase for the 1998 second quarter was 8.3% after adjusting for the divested business and the effect of exchange rate changes. After these adjustments, approximately 25% of the sales increase was due to acquisitions. Operating income increased $3.5 million, or 5.7%, to a record $65.1 million, and operating margin was a best-ever 11.3%."In addition to the record quarter, the first six months of 1998 were also our best ever," said Darryl F. Allen, Aeroquip-Vickers chairman, president and chief executive officer. "Sales grew to a record $1.12 billion. Operating income, operating margin, net income and net income per share exceeded previous highs for a six-month period. Within our operations, new highs were achieved in industrial sales; aerospace sales, operating income, operating margin and order intake; and automotive operating margin.
"Our aerospace business continued to lead the way in the 1998 second quarter with operating margin again exceeding 18% on record sales. We continue to win a significant majority share of the business we go after for our primary product lines. As one example, through the first six months of this year airlines had to make their choice for pumps and motorpumps on 384 new aircraft. Vickers was the choice on 76%, or 287, of the planes. Clearly, our aerospace product quality and reliability, technological expertise, and on-time delivery are valued highly in the marketplace and are driving our impressive results.
"In automotive, our sales improved over the 1998 first quarter but declined from a year ago due to the divestiture of our interior automotive plastics business in 1997. We recorded a double-digit operating margin for the fifth consecutive quarter as we have focused the business on our fluid connectors competencies. We strengthened our global capabilities to serve customers with the purchase of the assets of Aerotech South Africa, the largest hose and fittings manufacturer in South Africa. We also increased capacity for our book of U.S. business with the start-up of a facility in Mooresville, North Carolina. In addition, we aggressively began to bring on stream our new Wolfsburg, Germany, facility to meet our long-term book of business in Germany for air conditioning and power-assisted steering components and systems. The demand for these components and systems continues strong, especially in Europe. Our ability to globally source our fluid connector product lines wherever manufacturers choose to build their cars is a competitive advantage that continues to win us new business.
"Our industrial business continued to improve with sales a record for any quarter and operating income the second highest ever recorded," Mr. Allen said. "Especially encouraging was a 13.8% increase (exclusive of the effect of exchange rate changes) in our European industrial sales led by gains in stationary equipment, electronic systems and truck & bus sectors. During the second quarter, we completed the acquisition of Hydrokraft GmbH, a manufacturer of piston pump and motor products and systems, which we expect will further strengthen our position in European industrial markets. We also acquired Finimpresa S.r.l. to strengthen our penetration of residential and commercial air conditioning markets in Europe.
"We continue to successfully address the delivery and production inefficiencies at our Omaha, Nebraska, pump facility. Our new South Carolina piston pump manufacturing facility is coming on stream and combined with other initiatives under way makes for a positive outlook for the industrial and mobile markets we serve around the world.
"I am proud of our management team for leading another record performance and of our employees worldwide for embracing the quality and continuous improvement processes that are important to our success."
Industrial Segment
Industrial sales grew to $323.3 million from $317.5 million in 1997. U.S. industrial sales increased 3%. European sales volume increased 13.8% (exclusive of the effect of exchange rate changes). Sales in Asia-Pacific account for less than 5% of consolidated sales, and during the 1998 second quarter Asia-Pacific industrial sales declined approximately 27%, with about half of the decline due to the effect of exchange rate changes. U.S. sales to mobile equipment and truck & bus markets improved from a year ago. Residential and commercial air conditioning sales were flat with a year ago. In Europe, improvement was achieved in stationary equipment, electronic systems and truck & bus sectors.
Industrial operating income of $33.1 million compared with $32.6 million a year earlier.
Aerospace Segment
Aerospace sales increased to $142.8 million, or 17.9% (exclusive of the effect of exchange rate changes), reflecting the strength of the market beyond just large commercial aircraft. Aerospace sales increased 19.1% in the United States. European sales volume increased 10.6% (exclusive of the effect of exchange rate changes). Increased sales were realized with OEM and aftermarket customers for both commercial and military markets.
Second-quarter operating income increased $4.8 million, or 22.1%, and operating margin was 18.5% compared with 17.8% a year ago.
Automotive Segment
1998 second-quarter sales from continuous operations increased 11.0% (exclusive of the effect of exchange rate changes) year over year. The 1997 divestiture of the automotive interior plastics business contributed $17.0 million in sales in the 1997 second quarter. Automotive operating income was a healthy 10.9%, even though the quarter included start-up costs for new facilities.
Fluid connector demand continued strong during the quarter with increased sales in the U.S. and Europe and the added contribution of a new operation in South Africa.
Aeroquip and Vickers Sales
Aeroquip's 1998 second-quarter sales were $280.8 million, compared with $285.0 million a year ago. Facilities that were sold or closed in 1997 contributed $17.0 million of Aeroquip's 1997 second-quarter sales. For the first six months, Aeroquip's sales were $546.8 million, compared with $568.2 million in 1997. Facilities that were sold or closed in 1997 contributed $48.3 million of 1997 six-month sales.
Vickers' sales were $293.5 million, compared with $271.3 million in the 1997 second quarter. For the first six months, Vickers' sales were $574.6 million, compared with $526.5 million a year ago.
Consolidated Results
(dollars in millions, except per share data; all per
share amounts are reported on a diluted basis)
2Q 98 2Q 97 1Q 98 4Q 97
----- ----- ----- -----
Sales $574.3 $556.3 $547.1 $522.8
Operating Income 65.1 61.6 57.8 58.3(b)
Operating Margin 11.3% 11.1% 10.6% 11.1%(b)
Net Income 37.8 33.6 31.2(a) 31.4(b)
Net Income Per Share 1.33 1.15 1.10(a) 1.11(b)
3Q 97 Six Months 98 Six Months 97
----- ------------- -------------
Sales $494.8 $1,121.4 $1,094.7
Operating Income 53.1 122.8 80.3(c)
Operating Margin 10.7% 11.0% 7.3%(c)
Net Income 30.1 69.0 39.3(c)
Net Income Per Share 1.05 2.43 1.37(c)
(a) Includes a charge of $2.5 million ($1.5 million net of tax),
or 5 cents per share, for the early retirement of debt.
(b) Includes a gain of $1.7 million ($1 million net of tax), or 4
cents per share, the net effect of income from recovery of previously
incurred development and pre-production costs arising from the
termination of a component design and production supply contract and a
charge to recognize a product liability claim from an industrial
customer for a unique product that is no longer manufactured.
(c) Includes a special charge of $30.0 million ($18.5 million net
of tax), or 62 cents per share, to exit the automotive interior
plastics business. Before the special charge, operating income and
operating margin were $110.3 million and 10.1%, and net income and net
income per share were $57.8 million and $1.99, for the first six
months of 1997.
Segment Analysis
(dollars in millions)
Industrial
2Q 98 2Q 97 1Q 98 4Q 97
----- ----- ----- -----
Sales $323.3 $317.5 $310.4 $282.8
Operating Income 33.1 32.6 27.1 21.4(a)
Operating Margin 10.3% 10.3% 8.7% 7.6%(a)
Order Intake 311.0 320.7 314.1 303.1
Order Backlog 210.5 216.1 232.4 232.7
3Q 97 Six Months 98 Six Months 97
----- ------------- -------------
Sales $278.1 $633.7 $609.3
Operating Income 28.5 60.2 57.2
Operating Margin 10.2% 9.5% 9.4%
Order Intake 285.0 625.1 638.3
Order Backlog 216.7 210.5 216.1
(a) Includes a charge of $2.6 million to recognize a product
liability claim from an industrial customer for a unique product that
is no longer manufactured.
Aerospace
2Q 98 2Q 97 1Q 98 4Q 97
----- ----- ----- -----
Sales $142.8 $121.5 $134.9 $128.6
Operating Income 26.4 21.6 24.0 28.9(a)
Operating Margin 18.5% 17.8% 17.8% 22.5%(a)
Order Intake 141.9 138.4 152.5 115.8
Order Backlog 395.7 366.1 396.7 379.2
3Q 97 Six Months 98 Six Months 97
----- ------------- -------------
Sales $119.2 $277.7 $240.2
Operating Income 20.8 50.4 40.3
Operating Margin 17.5% 18.2% 16.8%
Order Intake 147.2 294.4 267.5
Order Backlog 391.4 395.7 366.1
(a) Includes income of $4.3 million from recovery of previously
incurred development and pre-production costs with an aerospace
customer arising from the termination of a component design and
production supply contract.
Automotive
2Q 98 2Q 97 1Q 98 4Q 97
----- ----- ----- -----
Sales $ 108.2 $117.3 $101.7 $111.5
Operating Income 11.8 13.1 12.7 14.2
Operating Margin 10.9% 11.2% 12.5% 12.7%
3Q 97 Six Months 98 Six Months 97
----- ------------- -------------
Sales $ 97.4 $210.0 $245.2
Operating Income 10.2 24.5 (5.4)(a)
Operating Margin 10.5% 11.7% --%(a)
(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 $24.6 million
and 10.0% for the first six months of 1997.
STATEMENT OF FINANCIAL POSITION
Aeroquip-Vickers, Inc.
(Dollars in thousands, except share data)
(Unaudited)
June 30 December 31
1998 1997
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 27,806 $ 18,736
Receivables 379,584 348,822
Inventories 304,650 294,767
Other current assets 49,892 49,323
---------- ----------
TOTAL CURRENT ASSETS 761,932 711,648
Plants and properties 1,060,986 993,002
Less accumulated depreciation 542,628 518,860
---------- ----------
518,358 474,142
Goodwill 122,116 111,905
Other assets 83,553 78,901
---------- ----------
TOTAL ASSETS $1,485,959 $1,376,596
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 128,271 $ 84,044
Accounts payable 119,619 111,800
Income taxes 38,806 30,496
Other current liabilities 196,857 212,800
Current maturities of long-term debt 864 1,857
---------- ----------
TOTAL CURRENT LIABILITIES 484,417 440,997
Long-term debt 264,160 256,707
Postretirement benefits other than
pensions 122,769 122,272
Other liabilities 45,677 46,421
SHAREHOLDERS' EQUITY
Common stock - par value $5 a share
Authorized - 100,000,000 shares
Outstanding - 28,216,414 and
28,064,981 shares,
respectively (after deducting
6,064,432 and 6,215,865 shares,
respectively, in treasury) 141,082 140,325
Additional paid-in capital 45,276 41,288
Retained earnings 423,076 366,676
Currency translation adjustments (40,498) (38,090)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 568,936 510,199
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $1,485,959 $1,376,596
---------- ----------
---------- ----------
CONDENSED STATEMENT OF INCOME
Aeroquip-Vickers, Inc.
(In thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
Net sales $ 574,314 $ 556,278 $1,121,369 $1,094,704
Cost of products
sold 422,739 409,241 825,562 815,192
---------- ---------- ---------- ----------
MANUFACTURING INCOME 151,575 147,037 295,807 279,512
Selling and general
administrative
expenses 68,042 68,027 136,193 133,974
Engineering, research
and development
expenses 18,469 17,432 36,780 35,262
Special charge -- -- -- 30,000
---------- ---------- ---------- ----------
OPERATING INCOME 65,064 61,578 122,834 80,276
Interest expense (7,126) (6,994) (13,853) (14,365)
Other income (expense)
- net (2,297) (3,654) (7,467) (8,387)
---------- ---------- ---------- ----------
INCOME BEFORE
INCOME TAXES 55,641 50,930 101,514 57,524
Income taxes 17,800 17,300 32,500 18,200
---------- ---------- ---------- ----------
NET INCOME $ 37,841 $ 33,630 $ 69,014 $ 39,324
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
NET INCOME PER SHARE
Basic $ 1.34 $ 1.20 $ 2.45 $ 1.41
Diluted 1.33 1.15 2.43 1.37
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Cash dividends per
common share $ .22 $ .20 $ .44 $ .40
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
CONDENSED STATEMENT OF CASH FLOWS
Aeroquip-Vickers, Inc.
(In thousands)
(Unaudited)
Six Months Ended
June 30
------------------------
1998 1997
------ ------
OPERATING ACTIVITIES
Net income $ 69,014 $ 39,324
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation 33,835 33,510
Amortization 4,290 2,911
Special charge - 30,000
Changes in certain components of
working capital other than debt (30,394) (21,715)
Other (10,317) (11,313)
-------- --------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 66,428 72,717
INVESTING ACTIVITIES
Capital expenditures (74,229) (60,707)
Businesses acquired (23,544) -
Sale of businesses - 26,785
Other 1,783 (2,044)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (95,990) (35,966)
FINANCING ACTIVITIES
Net increase (decrease) in short- and
long-term debt 47,553 (22,653)
Cash dividends (12,400) (11,189)
Purchase of common stock (248) (12,107)
Stock issuance under stock plans 4,769 12,780
Other (680) (452)
-------- --------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 38,994 (33,621)
Effect of exchange rate changes on cash (362) (346)
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 9,070 2,784
Cash and cash equivalents at beginning
of period 18,736 23,934
-------- --------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 27,806 $ 26,718
-------- --------
-------- --------
NOTES TO FINANCIAL STATEMENTS Aeroquip-Vickers, Inc. June 30, 1998 (Unaudited)
Redemption of Debt
In December 1997, the Company called its 9.55% senior sinking fund debentures in the principal amount of $42 million for redemption on February 3, 1998. The pretax loss from redemption of the 9.55% senior sinking fund debentures amounting to $2.5 million was recognized in Other income (expense) - net in the 1998 first quarter.
In June 1997, the Company called its 6% convertible subordinated debentures in the principal amount of $100 million for redemption. The 6% convertible debentures, which were due to mature on October 15, 2002, were convertible into common shares of the Company at a conversion price of $52.50 per share.
Special Charge
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 diluted net income per share of $.62 for the 1997 six-month period [$.63 for the year]), comprised principally of severance, lease termination and asset disposition costs. As a result, the Company sold or closed eight facilities during 1997 that had combined 1997 sales of approximately $67 million (approximately $17 million in the 1997 second quarter and $48 million in the six-month period ended June 30, 1997).
Income Taxes
The effective income tax rate for the 1998 second quarter and six-month period was 32%. The income tax provision for the six-month period ended June 30, 1997 included a credit of $11.5 million related to the special charge for costs to exit the automotive interior plastics business. The effective income tax rate for the 1997 second quarter and six-month period exclusive of this item was 33.9%.
Net Income per Share
Following is a reconciliation of income and average shares for purposes of calculating basic and diluted net income per share (in thousands, except per share amounts):
Three Months Ended Six Months Ended
June 30 June 30
--------------------- --------------------
1998 1997 1998 1997
-------- -------- ------- -------
Basic Net Income per Share
Net income $ 37,841 $ 33,630 $ 69,014 $ 39,324
--------- --------- --------- ---------
--------- --------- --------- ---------
Average common shares
outstanding 28,199 27,948 28,158 27,966
--------- --------- --------- ---------
--------- --------- --------- ---------
Basic Net Income
per Share $ 1.34 $ 1.20 $ 2.45 $ 1.41
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted Net Income
per Share
Net income $ 37,841 $ 33,630 $ 69,014 $ 39,324
After-tax equivalent
of interest expense
on 6% convertible
debentures -- 930 -- 1,860
--------- --------- --------- ---------
Income for purposes
of computing
diluted net income
per share $ 37,841 $ 34,560 $ 69,014 $ 41,184
--------- --------- --------- ---------
--------- --------- --------- ---------
Average common shares
outstanding 28,199 27,948 28,158 27,966
Dilutive stock options 255 167 240 155
Assumed conversion of
6% convertible
debentures -- 1,905 -- 1,905
--------- --------- --------- ---------
Average common shares
for purposes of
computing diluted
net income per share 28,454 30,020 28,398 30,026
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted Net Income
per Share $ 1.33 $ 1.15 $ 2.43 $ 1.37
--------- --------- --------- ---------
--------- --------- --------- ---------
The 6% convertible debentures were redeemed in July 1997.
Aeroquip-Vickers is two companies, Aeroquip Corporation and Vickers, Incorporated, worldwide leaders in the design, manufacture and distribution of engineered components to the industrial, aerospace and automotive markets.