Aeroquip-Vickers Reports Fourth-Quarter and 1998 Results
28 January 1999
Aeroquip-Vickers Reports Fourth-Quarter and 1998 Results
MAUMEE, Ohio--Jan. 28, 1999--Aeroquip-Vickers, Inc. today announced 1998 fourth-quarter net income of $7.4 million, or 27 cents per share, after a restructuring charge of $5 million ($3.1 million net of tax), or 11 cents per share. Fourth-quarter 1997 net income was $31.4 million, or $1.11 per share. 1998 fourth-quarter sales were $519.1 million, compared with $522.8 million in 1997. On December 14, the company announced that it expected 1998 fourth-quarter earnings per share to be between 25 cents and 30 cents (before the restructuring charge of 11 cents), which was below the then consensus estimate of 85 cents per share. The per-share improvement above this forecast was due to better-than-anticipated sales and margin performance in December.As announced earlier this week, Aeroquip-Vickers has changed its reporting segments to its two operating companies - Aeroquip Corporation and Vickers, Incorporated. In addition to this segment reporting, Aeroquip-Vickers will supply sales and operating income for the markets it serves - industrial, aerospace and automotive.
"Our sales in the fourth quarter were led by an improvement year-over-year in Aeroquip's sales, as sales in each of Aeroquip's major markets improved from the 1997 fourth quarter," said Darryl F. Allen, Aeroquip-Vickers' chairman, president and chief executive officer. "Vickers' sales declined from the 1997 fourth quarter, but sales to Vickers' aerospace markets improved. Aeroquip and Vickers continued to win a majority share of the aerospace business they bid on for their primary product lines, testimony to their product quality, reliability and customer service.
"As we announced in December, our lower earnings in the fourth quarter compared to a year ago are principally related to sales in Vickers' industrial markets which began to slow in the third quarter," Mr. Allen said. "In the U.S., agriculture, an important sector for Vickers, continued its steep decline, with orders nearly non-existent. This led to a 16.4% decrease in Vickers' U.S. industrial sales in the 1998 fourth quarter compared with a year ago. The Brazilian economy also began to weaken in the fourth quarter, and Asia-Pacific markets continued to be depressed.
"In response to these market conditions, in the 1998 fourth quarter we recorded restructuring expenses amounting to $5 million ($3.1 million net of tax), or 11 cents per share, to resize operations to reflect current business levels. These expenses are principally for incurred severance costs and other costs associated with reconfiguring the business. During 1999, we will continue our cost-reduction efforts to improve manufacturing and operating efficiencies."
The Year 1998
Sales in 1998 reached a new high of $2.15 billion, a 1.8% increase over a year ago. Sales increased 2.8% in the U.S., increased 2.3% in Europe and declined 12% in the Rest of the World, due almost entirely to the effect of exchange rate changes. Facilities sold or closed in 1997 as a result of exiting the automotive interior business contributed $67 million in 1997 sales. After excluding these sales, 1998 consolidated sales increased 5.1%.
Operating income for the year 1998 was $186.4 million, and compares with operating income for the year 1997 of $221.6 million before a special charge of $30 million to exit the automotive interior plastics business.
In 1998, as required by new accounting rules, Aeroquip-Vickers recognized the cumulative effect of an accounting change of $4.8 million ($3.3 million net of tax), or 12 cents per share, to charge to income previously deferred start-up costs for new facilities. 1998 income per share was $3.67 before the cumulative effect of accounting change of 12 cents per share and the fourth-quarter restructuring charge of 11 cents per share. This compares with income of $4.14 before a special charge of 63 cents per share in 1997.
Aeroquip
Aeroquip's 1998 fourth-quarter sales increased 3.9%, with about 40% of the increase due to the effect of exchange rate changes. U.S. sales improved 4% from a year ago, with increases in each of Aeroquip's major markets. European sales increased 3.1%, as a decline in fourth-quarter sales volumes in industrial and automotive markets was more than offset by an increase in aerospace sales volume and the favorable effect of exchange rate changes. Aeroquip's sales in the Rest of the World increased due to an acquisition made in 1998.
An increase in Aeroquip's U.S. manufacturing income and operating income was more than offset by declines in Europe and the Rest of the World. 1998 fourth-quarter operating income was $25.3 million, compared with $29.2 million in 1997.
"Aeroquip had record sales and operating income for the year 1998, led by best-ever results in Aeroquip's industrial and aerospace markets," Mr. Allen said. "The continuous improvement initiatives throughout Aeroquip's global operations have made processes more reliable, reduced costs and dramatically increased on-time delivery. These initiatives were recognized globally through numerous customer and governmental quality awards in 1998."
Vickers
Vickers' 1998 fourth-quarter sales declined 5.2%. U.S. sales declined 8.3%, as an increase in aerospace sales was more than offset by a decline in industrial sales. Vickers' European sales increased 17.6%, with about 20% of the increase due to the effect of exchange rate changes. European sales increased in both industrial and aerospace markets. Vickers' sales in the Rest of the World declined compared with the 1997 fourth quarter.
Vickers' 1998 fourth-quarter manufacturing income declined significantly from the prior year, as an increase in Europe was more than offset by a decline in the U.S. and the Rest of the World year over year. 1998 fourth-quarter operating income was $3.1 million, compared with $36.6 million in 1997. Operating income declined in the U.S., Europe and the Rest of the World compared with a year ago.
Lower global demand, combined with the fact that Vickers essentially eliminated its past due industrial orders in the first half of 1998, reduced pump production levels by 40% in the second half of the year. This significant reduction occurred just as Vickers commenced pump manufacturing operations at a new facility in Greenwood, South Carolina.
"For the year 1998, Vickers' performance in its aerospace markets was its best ever, as Vickers continued to win a significant majority of the business it bid on," Mr. Allen said. "Vickers' industrial business has work to do to get back on track for profitable growth. Initiatives have been implemented to reduce costs and resize operations to reflect demand and market conditions, and we will continue to evaluate additional restructuring alternatives."
Industrial Market
Sales to industrial markets declined significantly in the 1998 fourth quarter from the previous year. A 10.5% increase in European sales (37% of the increase due to the effect of exchange rate changes) was more than offset by decreases in the U.S. and the Rest of the World.
In U.S. industrial markets, sales to truck & bus and air conditioning & refrigeration customers improved from a year ago, while sales to distributors, construction and agricultural equipment, stationary equipment and electronic systems customers declined. In Europe, sales to distributors and electronic systems customers improved, while sales to construction equipment, stationary equipment and truck & bus customers declined. Sales in Europe also improved due to the acquisition of an air conditioning & refrigeration business in 1998.
The operating loss in industrial markets was $5.0 million, compared with operating income of $22.2 million in the 1997 fourth quarter.
"Although certain sectors of global industrial markets have weakened, we are confident that our strong customer and supplier relationships, our improving manufacturing processes and our dedicated employees will foster growth in our industrial markets," Mr. Allen said.
Aerospace Market
Sales to aerospace markets increased 6.3% in the 1998 fourth quarter from the previous year. Sales improved 4.5% in the U.S. and 17% in Europe. Aerospace sales increased to commercial OEM customers, while sales to military customers were flat.
Aerospace operating income declined to $21.8 million from $29.2 million in the 1997 fourth quarter. 1998 fourth-quarter aerospace operating income includes a charge of $2.0 million for product warranty claims, while the 1997 fourth quarter includes a gain of $4.3 million from recovery of previously incurred development and pre-production costs with an aerospace customer. Margins for the 1998 fourth quarter were also weakened by a change in product mix and startup costs for a machining center in Charleston, South Carolina.
"Sales in our aerospace markets should remain near or above 1998's levels, and the market should continue as a strong profit contributor in 1999," Mr. Allen said. "We also expect an additional boost in the future as the new military programs begin to increase production."
Automotive Market
Sales to automotive markets increased 5.4%, with about half of the increase due to the effect of exchange rate changes. Part of the increase in sales volume was due to the acquisition of a South African fluid connectors business in 1998. Sales to U.S. automotive markets were flat with a year ago, and a 2.5% increase in European automotive markets was due to the effect of exchange rate changes. Sales for automotive air conditioning and power-assisted steering fluid connectors continued strong.
Operating income in automotive markets was $11.6 million in the 1998 fourth quarter, compared with $14.4 million in 1997.
"Sales to our automotive markets should continue to grow in 1999 based on booked business and automotive manufacturers' planned production," Mr. Allen said. "With the further expansion of our capabilities through initiatives in South Africa, Germany and the U.S. in 1998, we have additional leverage to increase our automotive sales worldwide."
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.
Aeroquip-Vickers is two companies, Aeroquip Corporation and Vickers, Incorporated, world leaders in the design, manufacture and distribution of engineered components and systems to industrial, aerospace and automotive markets.
Consolidated Results
(dollars in millions, except per share data; all per share amounts
are reported on a diluted basis)
4Q 98 4Q 97 3Q 98 2Q 98
----- ----- ----- -----
Sales $519.1 $522.8 $509.0 $574.3
Operating Income 21.2(a) 58.3(b) 42.3 65.1
Operating Margin 4.1%(a) 11.1%(b) 8.3% 11.3%
Income before
Cumulative Effect of
Accounting Change(f) 7.4(a) 31.4(b) 23.9 37.8
Income Per Share before
Cumulative Effect of
Accounting Change(f) .27(a) 1.11(b) .85 1.33
1Q 98 Year 98 Year 97
----- ------- -------
Sales $547.1 $2,149.5 $2,112.3
Operating Income 57.8 186.4(a) 191.6(b)(d)
Operating Margin 10.6% 8.7%(a) 9.1%(b)(d)
Income before
Cumulative Effect of
Accounting Change(f) 31.2(c) 100.3(a)(c) 100.9(b)(d)(e)
Income Per Share before
Cumulative Effect of
Accounting Change(f) 1.10(c) 3.56(a)(c) 3.51(b)(d)(e)
(a) Includes a restructuring charge of $5 million ($3.1 million net
of tax), or 11 cents per share.
(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 charge of $2.5 million ($1.5 million net of tax), or
5 cents per share, for the early retirement of debt.
(d) Includes a special charge of $30.0 million ($18.5 million net of
tax), or 63 cents per share, to exit the automotive interior
plastics business. Before the special charge, operating income
and operating margin were $221.6 million and 10.5%, respectively,
for the year 1997.
(e) Includes a charge of $1.5 million ($900,000 net of tax), or
3 cents per share, for the early retirement of convertible debt.
(f) The cumulative effect of accounting change amounted to $4.8
million ($3.3 million net of tax), or 12 cents per share.
Segment Analysis
(dollars in millions)
Aeroquip
4Q 98 4Q 97 3Q 98 2Q 98
----- ----- ----- -----
Sales $269.1 $259.1 $255.7 $280.8
Operating Income 25.3 29.2(a) 28.1 38.5
Operating Margin 9.4% 11.3%(a) 11.0% 13.7%
1Q 98 Year 98 Year 97
----- ------- -------
Sales $266.0 $1,071.6 $1,065.2
Operating Income 32.4 124.3 89.5(a)(b)
Operating Margin 12.2% 11.6% 8.4%(a)(b)
(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.
(b) Includes a special charge of $30.0 million to exit the automotive
interior plastics business. Before the special charge, operating
income and operating margin were $119.5 million and 11.2%,
respectively, for the year 1997.
Vickers
4Q 98 4Q 97 3Q 98 2Q 98
----- ----- ----- -----
Sales $250.0 $263.7 $253.3 $293.5
Operating Income 3.1 36.6(a) 21.2 33.5
Operating Margin 1.2% 13.9%(a) 8.4% 11.4%
1Q 98 Year 98 Year 97
----- ------- -------
Sales $281.1 $1,077.9 $1,047.1
Operating Income 32.7 90.4 132.6(a)
Operating Margin 11.6% 8.4% 12.7%(a)
(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.
Market Analysis
(dollars in millions)
Industrial
4Q 98 4Q 97 3Q 98 2Q 98
----- ----- ----- -----
Sales $264.9 $282.8 $275.5 $323.3
Operating Income (5.0) 22.2(a) 12.9 33.5
Operating Margin (1.9)% 7.8%(a) 4.7% 10.4%
1Q 98 Year 98 Year 97
----- ------- -------
Sales $310.4 $1,174.2 $1,170.2
Operating Income 27.3 68.7 110.7(a)
Operating Margin 8.8% 5.9% 9.5%(a)
(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
4Q 98 4Q 97 3Q 98 2Q 98
----- ----- ----- -----
Sales $136.7 $128.6 $133.2 $ 142.8
Operating Income 21.8 29.2(a) 26.0 26.5
Operating Margin 15.9% 22.7%(a) 19.5% 18.6%
1Q 98 Year 98 Year 97
----- ------- -------
Sales $134.9 $547.5 $488.0
Operating Income 24.7 99.0 91.4(a)
Operating Margin 18.3% 18.1% 18.7%(a)
(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
4Q 98 4Q 97 3Q 98 2Q 98
----- ----- ----- -----
Sales $117.5 $111.5 $100.3 $108.2
Operating Income 11.6 14.4 10.3 12.0
Operating Margin 9.9% 12.9% 10.3% 11.1%
1Q 98 Year 98 Year 97
----- ------- -------
Sales $101.7 $427.8 $454.1
Operating Income 13.1 47.0 20.0(a)
Operating Margin 12.8% 11.0% 4.4%(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 $50.0 million and
11.0%, respectively, for the year 1997.
STATEMENT OF FINANCIAL POSITION
Aeroquip-Vickers, Inc.
(Dollars in thousands, except share data)
(Unaudited)
December 31 December 31
1998 1997
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 17,310 $ 18,736
Receivables 341,825 348,822
Inventories 302,236 294,767
Other current assets 52,146 49,323
---------- ----------
TOTAL CURRENT ASSETS 713,517 711,648
Plants and properties 1,119,557 993,002
Less accumulated depreciation 571,340 518,860
---------- ----------
548,217 474,142
Goodwill 124,890 111,905
Other assets 72,177 78,901
---------- ----------
TOTAL ASSETS $1,458,801 $1,376,596
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 101,829 $ 84,044
Accounts payable 113,698 111,800
Income taxes 27,167 30,496
Other current liabilities 197,726 212,800
Current maturities of long-term
debt 1,035 1,857
---------- ----------
TOTAL CURRENT LIABILITIES 441,455 440,997
Long-term debt 278,343 256,707
Postretirement benefits other
than pensions 121,715 122,272
Other liabilities 48,469 46,421
SHAREHOLDERS' EQUITY
Common stock - par value $5 a share
Authorized - 100,000,000 shares
Outstanding - 27,600,520 and
28,064,981 shares, respectively
(after deducting 6,680,326 and
6,215,865 shares, respectively,
in treasury) 138,003 140,325
Additional paid-in capital 47,841 41,288
Retained earnings 419,178 366,676
Accumulated other comprehensive
income - currency translation
adjustments (36,203) (38,090)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 568,819 510,199
---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $1,458,801 $1,376,596
---------- ----------
---------- ----------
CONDENSED STATEMENT OF INCOME
Aeroquip-Vickers, Inc.
(In thousands, except per share data)
(Unaudited)
Three Months Ended Year Ended
December 31 December 31
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
Net sales $ 519,131 $ 522,812 $2,149,474 $2,112,293
Cost of products
sold 409,190 379,105 1,619,905 1,554,668
---------- ---------- ---------- ----------
MANUFACTURING INCOME 109,941 143,707 529,569 557,625
Selling and general
administrative
expenses 71,261 66,579 271,718 263,824
Engineering, research
and development
expenses 17,467 18,849 71,471 72,161
Special charge -- -- -- 30,000
---------- ---------- ---------- ----------
OPERATING INCOME 21,213 58,279 186,380 191,640
Interest expense (6,888) (6,561) (27,013) (27,171)
Other expense - net (3,433) (4,793) (11,830) (16,316)
---------- ---------- ---------- ----------
INCOME BEFORE INCOME
TAXES AND CUMULATIVE
EFFECT OF ACCOUNTING
CHANGE 10,892 46,925 147,537 148,153
Income taxes 3,500 15,500 47,200 47,300
---------- ---------- ---------- ----------
INCOME BEFORE
CUMULATIVE EFFECT
OF ACCOUNTING CHANGE 7,392 31,425 100,337 100,853
Cumulative effect of
accounting change, net
of income tax benefit -- -- 3,283 --
---------- ---------- ---------- ----------
NET INCOME $ 7,392 $ 31,425 $ 97,054 $ 100,853
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
NET INCOME PER SHARE
BASIC INCOME PER SHARE
Before cumulative
effect of
accounting change $ .27 $ 1.12 $ 3.58 $ 3.60
Cumulative effect
of accounting
change -- -- (.12) --
---------- ---------- ---------- ----------
Basic net income
per share $ .27 $ 1.12 $ 3.46 $ 3.60
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
DILUTED INCOME PER
SHARE
Before cumulative
effect of
accounting change $ .27 $ 1.11 $ 3.56 $ 3.51
Cumulative effect
of accounting
change -- -- (.12) --
---------- ---------- ---------- ----------
Diluted net income
per share $ .27 $ 1.11 $ 3.44 $ 3.51
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
CASH DIVIDENDS PER
COMMON SHARE $ .22 $ .20 $ .88 $ .80
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
CONDENSED STATEMENT OF CASH FLOWS
Aeroquip-Vickers, Inc.
(In thousands)
(Unaudited)
Year Ended
December 31
------------------------
1998 1997
------ ------
OPERATING ACTIVITIES
Net income $ 97,054 $100,853
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation 70,661 66,562
Amortization 8,986 6,639
Cumulative effect of accounting
change, net of income tax benefit 3,283 --
Special charge -- 30,000
Changes in certain components of
working capital other than debt (3,301) (34,283)
Other 800 (32,087)
-------- --------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 177,483 137,684
INVESTING ACTIVITIES
Capital expenditures (142,243) (139,811)
Businesses acquired (30,741) --
Sale of businesses -- 43,381
Other 1,532 1,561
-------- --------
NET CASH USED BY INVESTING
ACTIVITIES (171,452) (94,869)
FINANCING ACTIVITIES
Net increase (decrease) in
short- and long-term debt 33,105 (21,803)
Cash dividends (24,673) (22,465)
Purchase of common stock (23,166) (21,590)
Stock issuance under stock plans 7,518 20,133
Other (773) (924)
-------- --------
NET CASH USED BY FINANCING
ACTIVITIES (7,989) (46,649)
Effect of exchange rate changes
on cash and cash equivalents 532 (1,364)
-------- --------
INCREASE IN CASH AND CASH
EQUIVALENTS (1,426) (5,198)
Cash and cash equivalents at
beginning of period 18,736 23,934
-------- --------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 17,310 $ 18,736
-------- --------
-------- --------
NOTES TO FINANCIAL STATEMENTS
Aeroquip-Vickers, Inc.
December 31, 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 1998.
In June 1997, the Company called its 6% convertible subordinated
debentures in the principal amount of $100 million for redemption and
recognized a loss of $1.5 million in Other expense - net.
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 $.63 for the year), comprised principally of severance, lease
termination and asset disposition costs.
Income Taxes
The effective income tax rate for the 1998 fourth quarter and
year was 32%. The income tax provision for the year ended December 31,
1997, included a credit of $11.5 million related to the special charge
for costs to exit the automotive interior plastics business. Exclusive
of this item, the effective income tax rate for the 1997 fourth
quarter and year was 33%.
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 Year Ended
December 31 December 31
1998 1997 1998 1997
-------- -------- -------- --------
Basic Income per Share
Income before cumulative
effect of accounting
change $ 7,392 $ 31,425 $100,337 $100,853
Cumulative effect of
accounting change -- -- (3,283) --
-------- -------- -------- --------
Net income $ 7,392 $ 31,425 $ 97,054 $100,853
-------- -------- -------- --------
-------- -------- -------- --------
Average common shares
outstanding 27,669 28,150 28,036 28,050
-------- -------- -------- --------
-------- -------- -------- --------
Basic income per share
Before cumulative effect
of accounting change $ .27 $ 1.12 $ 3.58 $ 3.60
Cumulative effect of
accounting change -- -- (.12) --
-------- -------- -------- --------
Basic net income per
share $ .27 $ 1.12 $ 3.46 $ 3.60
-------- -------- -------- --------
-------- -------- -------- --------
Diluted Income per Share
Income before cumulative
effect of accounting
change $ 7,392 $ 31,425 $100,337 $100,853
After-tax equivalent of
interest expense on 6%
convertible debentures -- -- -- 2,192
-------- -------- -------- --------
Income for purposes of
computing diluted income
per share before cumulative
effect of accounting
change 7,392 31,425 100,337 103,045
Cumulative effect of
accounting change -- -- (3,283) --
-------- -------- -------- --------
Income for purposes of
computing diluted net
income per share $ 7,392 $ 31,425 $ 97,054 $103,045
-------- -------- -------- --------
-------- -------- -------- --------
Average common shares
outstanding 27,669 28,150 28,036 28,050
Dilutive stock options 5 222 157 210
Assumed conversion of 6%
convertible debentures -- -- -- 1,109
-------- -------- -------- --------
Average common shares for
purposes of computing
diluted income per share 27,674 28,372 28,193 29,369
-------- -------- -------- --------
-------- -------- -------- --------
Diluted income per share
Before cumulative effect
of accounting change $ .27 $ 1.11 $ 3.56 $ 3.51
Cumulative effect of
accounting change -- -- (.12) --
-------- -------- -------- --------
Diluted net income per
share $ .27 $ 1.11 $ 3.44 $ 3.51
-------- -------- -------- --------
-------- -------- -------- --------