Aeroquip-Vickers Reports Results
15 October 1998
Aeroquip-Vickers Reports Results
MAUMEE, Ohio--Oct. 15, 1998--Aeroquip-Vickers Inc. today announced that third-quarter earnings per share were 85 cents, compared with 1997 third-quarter earnings per share of $1.05. In September, the company announced that despite continued strong performance from its aerospace and automotive businesses, third-quarter earnings per share were expected to be between 80 cents and 87 cents, due primarily to lower sales and unfavorable sales mix in Vickers’ industrial and mobile business compared with a year ago.Sales in the third quarter increased to $509.0 million, a record for a third quarter, from $494.8 million in 1997. Operating income was $42.3 million and operating margin was 8.3%, compared with $53.1 million and 10.7% in the 1997 third quarter. Through the first nine months, sales, operating income, net income and net income per share all exceeded previous highs.
"Our strength continues to be our aerospace and automotive businesses," said Darryl F. Allen, Aeroquip-Vickers chairman, president and chief executive officer. "In the 1998 third quarter, our aerospace business achieved new third-quarter highs for sales, operating income and operating margin. Operating margin improved significantly to 19.4% in the 1998 third quarter. Our success in aerospace is due to a wide variety of factors, including:
-- Winning a significant majority share of the business we go after for our primary product lines. As one example, through the first nine months of this year airlines had to make their choice for pumps and motorpumps on 818 new aircraft. Vickers was the choice on 79%, or 643, of the planes. -- Diverse program wins. The large commercial airframe manufacturers are important major customers, but we are not dependent on their production schedules. We have significant business with the major regional and business jet manufacturers, and we have a strong presence on all the major military programs. -- Having an extensive installed base of product on the world’s aerospace programs that provides us with aftermarket business accounting for about 40% of our annual aerospace sales. With the average plane’s life about 25 years, our ability to win the initial order and supply the replacement parts essentially provides us an annuity with a value we estimate at $20 billion over the 25 years. -- Continually improving our processes. In the early 1990s, we implemented initiatives that made our aerospace operations much more efficient. These efforts have no end, as we continually work to lower costs and improve process efficiency.
Quality products, technological leadership and on-time delivery are helping us to realize our record aerospace results.
"In automotive, we again achieved double-digit operating margin, the sixth consecutive quarter, as our automotive sales increased over the previous-year quarter," Mr. Allen said. "The future of our automotive fluid connectors business continues bright as we have a significant book of business for the next several years. With capability in Europe, North America, South America and Africa, we are able to globally source our fluid connector products wherever manufacturers choose to build their cars. We are the market leader in Europe for air conditioning and power steering connectors and with our customers expanding to other parts of the world, we are poised to win additional business.
"While sales and operating income in our industrial fluid connectors business were comparable with a year ago, the performance in certain other sectors of our industrial business has been disappointing," Mr. Allen said. "Vickers’ industrial and mobile operations were negatively affected by lower sales, unfavorable sales mix and a decline in distributor business which decreased industrial segment sales, operating income and operating margin. The continued economic turmoil in Asia-Pacific, the abrupt steep decline in the agricultural equipment market, the negative effect of changes in currency exchange rates and start-up costs for the new Greenwood, South Carolina, pump facility also had a negative impact.
"Steps were immediately taken to improve performance and contain costs, including a significant work force reduction within Vickers’ industrial operations at a cost of approximately $2 million," Mr. Allen said. "Expenses are being more closely aligned with anticipated demand in these operations. In addition, Vickers’ industrial operations now report directly to me.
"We have improved service and delivery in this business, and the management team is focused on further improving manufacturing processes and lowering costs.
"During the quarter, cash flow from operations was $52.6 million, and our balance sheet continued strong with our debt-to-capitalization ratio reduced to 40.1%. We reactivated our stock purchase program and during the quarter purchased 270,500 shares at a cost of $11.2 million.
"In August, for the second consecutive year, we were named one of IndustryWeek magazine’s Best-Managed Companies in the World for 1997. It is an achievement our management and 15,000 employees worldwide earned and can be proud of."
Industrial Segment
Industrial sales volume increased slightly year over year, but the effect of exchange rate changes decreased 1998 third-quarter industrial sales to $275.5 million from $278.1 million in 1997. U.S. industrial sales were slightly improved over a year ago. European sales increased 8.1%, with 26% of the increase due to the effect of exchange rate changes. Sales in Asia-Pacific account for less than 5% of consolidated sales, and during the 1998 third quarter, Asia-Pacific industrial sales declined approximately 33%, with about 42% of the decline due to the effect of exchange rate changes.
U.S. sales to construction equipment, truck and bus, and residential and commercial air conditioning markets improved from a year ago. Sales to U.S. distributors and in U.S. stationary machinery, agricultural equipment and electronic systems markets declined from a year ago. In Europe, improvement was achieved in electronic systems and residential and commercial air conditioning markets, with declines in distributor, truck and bus, and construction and agricultural equipment sectors.
Industrial operating income of $12.8 million compared with $28.5 million a year earlier.
Aerospace Segment
Aerospace sales increased to $133.2 million, an increase of 11.3% (exclusive of the slight positive effect of exchange rate changes), reflecting the continued strength of both U.S. and European aerospace markets. Aerospace sales increased 10.6% in the U.S. and 16.1% in Europe (exclusive of the effect of exchange rate changes). Increased aerospace sales were realized with both OEM and aftermarket customers.
Third-quarter operating income increased $5.0 million, or 24.1%, and operating margin was 19.4% compared with 17.5% a year ago.
Automotive Segment
1998 third-quarter automotive sales from continuous operations increased 15.4% (exclusive of the effect of exchange rate changes) year over year. Sales from automotive interior plastics facilities divested in 1997 contributed $11.5 million in sales in the 1997 third quarter. Automotive operating income was 10.2%, even though the quarter included start-up costs for new facilities in Mooresville, North Carolina, and Wolfsburg, Germany, costs that will carry into the fourth quarter.
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 third-quarter sales were $255.7 million, compared with $237.9 million a year ago. Facilities that were sold or closed in 1997 contributed $11.5 million of Aeroquip’s 1997 third-quarter sales. For the first nine months, Aeroquip's sales were $802.4 million, compared with $806.1 million in 1997. Facilities that were sold or closed in 1997 contributed $59.8 million of 1997 nine-month sales.
Vickers' sales were $253.3 million, compared with $256.9 million in the 1997 third quarter. For the first nine months, Vickers' sales were $827.9 million, compared with $783.4 million a year ago.
Forward-Looking Statements
Portions of this release, which are not historical in nature, are forward-looking statements. These statements are based on projections and estimates of the company and its customers regarding automotive and aircraft production and shipment schedules which are dependent on the performance of the domestic and international economies and the industrial, aerospace and automotive industries in which Aeroquip-Vickers does business. The company’s actual performance may differ from that contemplated by the forward-looking statements as a result of unexpected changes in the production and shipment schedules of the company’s customers. Other factors which could affect Aeroquip-Vickers’ actual performance include its ability to continually improve margins by achieving anticipated cost reductions in manufacturing processes, to consistently win new business in each of its industries by delivering quality product and maintaining competitive pricing, and to successfully implement its growth strategies.
Consolidated Results
(dollars in millions, except per share data; all per
share amounts are reported on a diluted basis )
3Q 98 3Q 97 2Q 98 1Q 98
----- ----- ----- -----
Sales $509.0 $494.8 $574.3 $547.1
Operating Income 42.3 53.1 65.1 57.8
Operating Margin 8.3% 10.7% 11.3% 10.6%
Net Income 23.9 30.1 37.8 31.2(a)
Net Income Per Share .85 1.05 1.33 1.10(a)
4Q 97 Nine Months 98 Nine Months 97
----- -------------- --------------
Sales $522.8 $1,630.3 $1,589.5
Operating Income 58.3(b) 165.2 133.4(c)
Operating Margin 11.1%(b) 10.1% 8.4%(c)
Net Income 31.4(b) 92.9 69.4(c)
Net Income Per Share 1.11(b) 3.28 2.41(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 $163.4 million and 10.3%, and net income
and net income per share were $87.9 million and $3.03, for the first
nine months of 1997.
Segment Analysis
(dollars in millions)
Industrial
3Q 98 3Q 97 2Q 98 1Q 98
----- ----- ----- -----
Sales $275.5 $278.1 $323.3 $310.4
Operating Income 12.8 28.5 33.1 27.1
Operating Margin 4.7% 10.2% 10.3% 8.7%
Order Intake 279.6 285.0 311.0 314.1
Order Backlog 209.0 216.7 210.5 232.4
4Q 97 Nine Months 98 Nine Months 97
----- -------------- --------------
Sales $282.8 $909.2 $887.4
Operating Income 21.4(a) 73.1 85.7
Operating Margin 7.6%(a) 8.0% 9.7%
Order Intake 303.1 904.8 923.4
Order Backlog 232.7 209.0 216.7
(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
3Q 98 3Q 97 2Q 98 1Q 98
----- ----- ----- -----
Sales $133.2 $119.2 $142.8 $134.9
Operating Income 25.9 20.8 26.4 24.0
Operating Margin 19.4% 17.5% 18.5% 17.8%
Order Intake 142.2 147.2 141.9 152.5
Order Backlog 406.2 391.4 395.7 396.7
4Q 97 Nine Months 98 Nine Months 97
----- -------------- --------------
Sales $128.6 $410.8 $359.4
Operating Income 28.9(a) 76.3 61.1
Operating Margin 22.5%(a) 18.6% 17.0%
Order Intake 115.8 436.7 414.7
Order Backlog 379.2 406.2 391.4
(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
3Q 98 3Q 97 2Q 98 1Q 98
----- ----- ----- -----
Sales $ 100.3 $ 97.4 $108.2 $101.7
Operating Income 10.2 10.2 11.8 12.7
Operating Margin 10.2% 10.5% 10.9% 12.5%
4Q 97 Nine Months 98 Nine Months 97
----- -------------- --------------
Sales $111.5 $310.3 $342.6
Operating Income 14.2 34.7 4.8(a)
Operating Margin 12.7% 11.2% 1.4%(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 $34.8 million
and 10.2% for the first nine months of 1997.
STATEMENT OF FINANCIAL POSITION
Aeroquip-Vickers Inc.
(Dollars in thousands, except share data)
(Unaudited)
September 30 December 31
1998 1997
------------ -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 24,488 $ 18,736
Receivables 351,796 348,822
Inventories 306,498 294,767
Other current assets 47,086 49,323
------------ -----------
TOTAL CURRENT ASSETS 729,868 711,648
Plants and properties 1,104,665 993,002
Less accumulated depreciation 563,840 518,860
------------ -----------
540,825 474,142
Goodwill 121,457 111,905
Other assets 86,543 78,901
------------ -----------
TOTAL ASSETS $ 1,478,693 $ 1,376,596
------------ -----------
------------ -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable $ 123,592 $ 84,044
Accounts payable 110,932 111,800
Income taxes 30,258 30,496
Other current liabilities 202,979 212,800
Current maturities of long-term debt 631 1,857
------------ -----------
TOTAL CURRENT LIABILITIES 468,392 440,997
Long-term debt 263,980 256,707
Postretirement benefits other than
pensions 122,298 122,272
Other liabilities 45,218 46,421
SHAREHOLDERS' EQUITY
Common stock - par value $5 a share
Authorized - 100,000,000 shares
Outstanding - 27,982,520 and 28,064,981
shares, respectively (after deducting
6,298,326 and 6,215,865 shares,
respectively, in treasury) 139,913 140,325
Additional paid-in capital 46,370 41,288
Retained earnings 430,991 366,676
Currency translation adjustments (38,469) (38,090)
------------ -----------
TOTAL SHAREHOLDERS' EQUITY 578,805 510,199
------------ -----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 1,478,693 $ 1,376,596
------------ -----------
------------ -----------
CONDENSED STATEMENT OF INCOME
Aeroquip-Vickers Inc.
(In thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1998 1997 1998 1997
------ ------ ------ ------
Net sales $ 508,974 $ 494,777 $1,630,343 $1,589,481
Cost of products
sold 385,153 360,371 1,210,715 1,175,563
---------- ---------- ---------- ----------
MANUFACTURING INCOME 123,821 134,406 419,628 413,918
Selling and general
administrative
expenses 64,263 63,271 200,457 197,245
Engineering, research
and development
expenses 17,225 18,050 54,004 53,312
Special charge -- -- -- 30,000
---------- ---------- ---------- ----------
OPERATING INCOME 42,333 53,085 165,167 133,361
Interest expense (6,272) (6,245) (20,126) (20,610)
Other expense - net (930) (3,136) (8,396) (11,523)
---------- ---------- ---------- ----------
INCOME BEFORE
INCOME TAXES 35,131 43,704 136,645 101,228
Income taxes 11,200 13,600 43,700 31,800
---------- ---------- ---------- ----------
NET INCOME $ 23,931 $ 30,104 $ 92,945 $ 69,428
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
NET INCOME PER SHARE
Basic $ .85 $ 1.07 $ 3.30 $ 2.48
Diluted .85 1.05 3.28 2.41
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Cash dividends per
common share $ .22 $ .20 $ .66 $ .60
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Condensed Statement of Cash Flows
Aeroquip-Vickers Inc.
(In thousands)
(Unaudited)
Nine Months Ended
September 30
-----------------
1998 1997
------ ------
OPERATING ACTIVITIES
Net income $ 92,945 $ 69,428
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation 52,268 49,504
Amortization 6,559 4,555
Special charge - 30,000
Changes in certain components of
working capital other than debt (12,879) (30,852)
Other (19,881) (20,089)
--------- ---------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 119,012 102,546
INVESTING ACTIVITIES
Capital expenditures (109,440) (89,899)
Businesses acquired (23,544) -
Sale of businesses - 33,158
Other 2,022 737
--------- ---------
NET CASH USED BY INVESTING
ACTIVITIES (130,962) (56,004)
FINANCING ACTIVITIES
Net increase (decrease) in short-
and long-term debt 42,060 (25,165)
Cash dividends (18,600) (16,833)
Purchase of common stock (11,403) (12,209)
Stock issuance under stock plans 6,047 16,442
Other (680) (860)
--------- ---------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES 17,424 (38,625)
Effect of exchange rate changes on
cash and cash equivalents 278 (739)
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 5,752 7,178
Cash and cash equivalents at beginning
of period 18,736 23,934
--------- ---------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 24,488 $ 31,112
--------- ---------
--------- ---------
NOTES TO FINANCIAL STATEMENTS Aeroquip-Vickers Inc. September 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 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 $.62 for the 1997 nine-month period [$.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 $11.5 million in the 1997 third quarter and $59.8 million in the nine-month period ended September 30, 1997).
Income Taxes
The effective income tax rate for the 1998 third quarter and nine-month period was 32%. The income tax provision for the nine-month period ended September 30, 1997, included a credit of $11.5 million 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.
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 Nine Months Ended
September 30 September 30
------------------ -----------------
1998 1997 1998 1997
------ ------ ------ ------
Basic Net Income
per Share
Net income $ 23,931 $ 30,104 $ 92,945 $ 69,428
-------- -------- -------- --------
-------- -------- -------- --------
Average common shares
outstanding 28,166 28,153 28,160 28,026
-------- -------- -------- --------
-------- -------- -------- --------
Basic Net Income
per Share $ .85 $ 1.07 $ 3.30 $ 2.48
-------- -------- -------- --------
-------- -------- -------- --------
Diluted Net Income
per Share
Net Income $ 23,931 $ 30,104 $ 92,945 $ 69,428
After-tax equivalent
of interest expense
on 6% convertible
debentures -- 332 -- 2,192
-------- -------- -------- --------
Income for purposes
of computing
diluted net income
per share $ 23,931 $ 30,436 $ 92,945 $ 71,620
-------- -------- -------- --------
Average common shares
outstanding 28,166 28,153 28,160 28,026
Dilutive stock options 136 255 211 200
Assumed conversion of
6% convertible
debentures -- 628 -- 1,479
-------- -------- -------- --------
Average common shares
for purposes of
computing diluted
net income per share 28,302 29,036 28,371 29,705
-------- -------- -------- --------
-------- -------- -------- --------
Diluted Net Income
per Share $ .85 $ 1.05 $ 3.28 $ 2.41
-------- -------- -------- --------
-------- -------- -------- --------
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.