FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
Commission file number 1-924
Aeroquip-Vickers, Inc.
(Exact name of registrant as specified in its charter)
Ohio 34-4288310
(State of Incorporation) (I.R.S. Employer
Identification No.)
3000 Strayer, Maumee, OH 43537-0050
(Address of principal executive office)
Registrant's telephone number, including area code: (419) 867-2200
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
The number of Common Shares, $5 Par Value, outstanding as of July 25, 1997,
was 28,116,745.
This document, including exhibits, contains 21 pages.
The Exhibit Index is located on page 16.
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
FOR QUARTER ENDED JUNE 30, 1997
INDEX TO INFORMATION IN REPORT
Aeroquip-Vickers, Inc.
Page
Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Statement of Financial Position -
June 30, 1997 and December 31, 1996 3
Condensed Statement of Income -
Three Months and Six Months Ended
June 30, 1997 and 1996 4
Condensed Statement of Cash Flows -
Six Months Ended June 30, 1997 and 1996 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
EXHIBIT INDEX 18
EXHIBIT 11 - STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS 19
EXHIBIT 12 - STATEMENT RE: COMPUTATION OF RATIOS 20
EXHIBIT 27 - FINANCIAL DATA SCHEDULE 21
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<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. - Financial Statements
<TABLE>
STATEMENT OF FINANCIAL POSITION
Aeroquip-Vickers, Inc.
(Dollars in thousands, except share data)
(Unaudited)
<CAPTION>
June 30 December 31
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 26,718 $ 23,934
Receivables 373,311 342,712
Inventories:
In-process and finished products 205,987 202,214
Raw materials and manufacturing supplies 70,286 59,955
---------- ----------
276,273 262,169
Other current assets 56,511 45,272
---------- ----------
TOTAL CURRENT ASSETS 732,813 674,087
Plants and properties 984,471 997,350
Less accumulated depreciation 543,468 559,867
---------- ----------
441,003 437,483
Goodwill 108,207 110,005
Other assets 79,261 67,912
---------- ----------
TOTAL ASSETS $1,361,284 $1,289,487
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 36,950 $ 31,819
Accounts payable 127,023 106,205
Income taxes 33,243 21,150
Other current liabilities 225,434 188,973
Current maturities of long-term debt 51,420 76,809
---------- ----------
TOTAL CURRENT LIABILITIES 474,070 424,956
Long-term debt 257,763 257,727
Postretirement benefits other than pensions 121,960 121,793
Other liabilities 39,466 38,595
SHAREHOLDERS' EQUITY
Common stock - par value $5 a share
Authorized - 100,000,000 shares
Outstanding - 28,041,622 and 27,912,077 shares,
respectively (after deducting 6,168,274 and
6,297,819 shares, respectively, in treasury) 140,214 139,559
Additional paid-in capital 31,273 20,675
Retained earnings 324,953 307,398
Currency translation adjustments (28,415) (21,216)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 468,025 446,416
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,361,284 $1,289,487
========== ==========
<FN>
The Notes to Financial Statements are an integral part of this statement.
</FN>
</TABLE>
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<PAGE>
<TABLE>
CONDENSED STATEMENT OF INCOME
Aeroquip-Vickers, Inc.
(In thousands, except per share data)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------ ------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 556,278 $ 517,924 $1,094,704 $1,030,037
Cost of products sold 409,241 384,015 815,192 769,871
---------- ---------- ---------- ----------
MANUFACTURING INCOME 147,037 133,909 279,512 260,166
Selling and general administrative
expenses 68,027 64,308 133,974 130,909
Engineering, research and development
expenses 17,432 17,857 35,262 37,385
Special charge -- -- 30,000 --
---------- ---------- ---------- ----------
OPERATING INCOME 61,578 51,744 80,276 91,872
Interest expense (6,994) (6,842) (14,365) (13,127)
Other income (expenses) - net (3,654) 14,258 (8,387) 10,930
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 50,930 59,160 57,524 89,675
Income taxes 17,300 26,100 18,200 32,200
---------- ---------- ---------- ----------
NET INCOME $ 33,630 $ 33,060 $ 39,324 $ 57,475
========== ========== ========== ==========
NET INCOME PER SHARE $ 1.15 $ 1.11 $ 1.37 $ 1.94
========== ========== ========== ==========
Cash dividends per common share $ .20 $ .20 $ .40 $ .40
========== ========== ========== ==========
Average shares outstanding 30,020 30,528 30,026 30,629
========== ========== ========== ==========
<FN>
The Notes to Financial Statements are an integral part of this statement.
</FN>
</TABLE>
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<PAGE>
<TABLE>
CONDENSED STATEMENT OF CASH FLOWS
Aeroquip-Vickers, Inc.
(In thousands)
(Unaudited)
<CAPTION>
Six Months Ended
June 30
--------------------
1997 1996
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 39,324 $ 57,475
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 33,510 34,014
Gain on sale of affiliates - (17,300)
Special charge 30,000 --
Changes in certain components of working
capital other than debt (21,715) (47,755)
Dividends received from affiliates -- 9,896
Other (8,402) (2,512)
---------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 72,717 33,818
INVESTING ACTIVITIES
Capital expenditures (60,707) (40,125)
Businesses acquired - (6,227)
Sale of businesses and affiliates 26,785 40,216
Other (2,044) (21)
---------- ----------
NET CASH USED BY INVESTING ACTIVITIES (35,966) (6,157)
FINANCING ACTIVITIES
Net increase (decrease) in short- and long-term debt (22,653) 122
Cash dividends (11,189) (11,468)
Purchase of common stock (12,107) (13,825)
Stock issuance under stock plans 12,780 2,157
Other (452) (2,271))
---------- ----------
NET CASH USED BY FINANCING ACTIVITIES (33,621) (25,285)
Effect of exchange rate changes on cash (346) (24)
---------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS 2,784 2,352
Cash and cash equivalents at beginning of period 23,934 16,186
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 26,718 $ 18,538
========== ==========
<FN>
The Notes to Financial Statements are an integral part of this statement.
</FN>
</TABLE>
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<PAGE>
NOTES TO FINANCIAL STATEMENTS
Aeroquip-Vickers, Inc.
Note 1 - Basis of Presentation
The accompanying financial statements for the interim periods are unaudited.
In the opinion of management, all adjustments necessary for a fair
presentation of the results for the interim periods included herein have been
made. Operating results for the six months ended June 30, 1997, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997. It is suggested that these financial statements be read in
conjunction with the audited 1996 financial statements and notes thereto
included in Aeroquip-Vickers, Inc.'s most recent annual report.
Note 2 - 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 $.62 per share for the 1997 six-month period), comprised
principally of severance and lease termination costs. As of June 30, 1997,
the Company has sold or closed five facilities that had combined 1996 sales of
approximately $65 million. The Company is in various stages of negotiation
for the sale of other automotive facilities which also had combined 1996 sales
of approximately $65 million.
Note 3 - Gain on Sale of Unconsolidated Affiliates
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.
Note 4 - Income Taxes
The income tax provision for the 1997 six-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. The
effective income tax rate for the 1997 second quarter and six-month period
exclusive of this item was 33.9%. The income tax provision for the 1996 six-
month period includes a credit of $4 million recorded in the first quarter for
settlement of claims for prior years' research and development credits. The
1996 income tax provision also includes income taxes on $12.3 million
resulting from the gain on sale of unconsolidated affiliates. The effective
income tax rate for the 1996 second quarter and six-month period exclusive of
these items was 33%.
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<PAGE>
NOTES TO FINANCIAL STATEMENTS
Note 5 - Redemption of 6% Convertible Subordinated Debentures
On June 27, 1997, the Company issued a notice calling for redemption of its 6%
Convertible Subordinated Debentures on July 28, 1997. The Debentures were due
to mature on October 15, 2002. The Debentures were convertible into common
shares of Aeroquip-Vickers, Inc. 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 submitted for conversion into 70,950 shares of
common stock. The redemption price of the remaining Debentures outstanding in
the amount of $96.3 million, was equal to 100.6%. Because the company used
$50 million of its available borrowing capacity under its Medium Term Note
Program to redeem the Debentures, Debentures in the amount of $50 million were
classified as long-term debt at June 30, 1997. The pretax loss from
redemption of the Debentures amounting to $1.5 million will be recognized in
the 1997 third quarter.
Note 6 - Net Income per Share
Net income per share (EPS) is computed using the average number of shares
outstanding, including common stock equivalents. The assumed conversion of
the Company's 6% convertible debentures was included in average shares
outstanding, increasing the average number of shares outstanding by 1,904,762
shares. 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 February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 "Earnings per Share" (FAS 128) which
must be adopted on December 31, 1997. At that time, the Company will be
required to change the method currently used to compute EPS and restate all
prior periods. Pro forma basic and diluted EPS computed in accordance with
FAS 128 are as follows:
1997 1996
Second Quarter:
Basic EPS $1.20 $1.16
Diluted EPS 1.15 1.11
Six Months Ended June 30:
Basic EPS 1.41 2.01
Diluted EPS 1.37 1.94
-7-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FINANCIAL REVIEW AND ANALYSIS OF OPERATIONS
Analysis of Operations
Second Quarter 1997 Compared with Second Quarter 1996
The following data provide highlights for the 1997 second quarter compared
with the 1996 second quarter.
Percent
(dollars in thousands, Second Quarter Increase
except per share data) 1997 1996 (Decrease)
CONSOLIDATED
Net sales $ 556,278 $ 517,924 7.4%
Manufacturing income 147,037 133,909 9.8
Manufacturing margin (%) 26.4 25.9
Operating income 61,578 51,744 19.0
Operating margin (%) 11.1 10.0
Net income 33,630 33,060(a) 1.7
Net income per share 1.15 1.11(a) 3.6
INDUSTRIAL
Net sales 317,455 292,626 8.5
Operating income 32,587 32,093 1.5
Operating margin (%) 10.3 11.0
Order intake 320,747 294,512 8.9
Order backlog at June 30 216,138 201,024 7.5
AUTOMOTIVE
Net sales 117,278 129,876 (9.7)
Operating income 13,141 11,941 10.0
Operating margin (%) 11.2 9.2
AEROSPACE
Net sales 121,545 95,423 27.4
Operating income 21,629 13,523 59.9
Operating margin (%) 17.8 14.2
Order intake 138,360 108,847 27.1
Order backlog at June 30 366,112 297,880 22.9
(a) Includes a net gain from sale of affiliates amounting to $17.3 million
($5 million net, or $.16 per share).
Consolidated net sales for the 1997 second quarter increased $38.4 million, or
7.4%, over the 1996 second quarter. Sales for the industrial and aerospace
segments increased 8.5% and 27.4%, respectively, while sales for the
automotive segment declined 9.7% from the 1996 second quarter because of the
sale or closure of certain plants as discussed later. Companies acquired in
1996 generated second-quarter 1997 sales, principally in the aerospace
segment, of $15.1 million. U.S. sales increased $25.4 million, and non-U.S.
sales increased $13 million. Changes in currency exchange rates reduced non-
U.S. sales by $7 million, principally in the automotive segment.
-8-
<PAGE>
Analysis of Operations - Continued
Second-quarter 1997 industrial sales grew to a new quarterly record of $317.5
million and were $24.8 million, or 8.5%, greater than in the 1996 second
quarter. U.S. industrial sales increased $19.8 million, or 10.2%, and
industrial sales in Asia-Pacific, Brazil and Mexico collectively increased
$6.8 million, or 22.5%, over the 1996 second quarter. Weak demand contributed
to a decline in industrial sales in Europe totaling $1.8 million, or 2.7%,
from the 1996 second quarter. Second-quarter 1997 industrial order intake of
$320.7 million set a new quarterly record, with increases over a year ago in
the U.S., Europe and Asia-Pacific. Order backlog increased $15.1 million, or
7.5%, as significant increases in backlog in the U.S. and Asia-Pacific were
partially offset by a reduction in Europe.
Automotive sales declined $12.6 million, or 9.7%, from the 1996 second
quarter. The sale or closing during 1997 of five automotive interior plastics
plants nearly accounted for the U.S. automotive sales decline of $17.2
million, or 32.7%. European automotive sales increased $4.6 million, or 6%,
net of the adverse effects of changes in currency exchange rates totaling
nearly $5.4 million. The growth in European automotive sales reflects
continuing strong demand for fluid connectors for use in automotive air
conditioning and power steering applications.
Aerospace sales of $121.5 million represented a new quarterly record and were
$26.1 million, or 27.4%, higher than in the 1996 second quarter. Nearly $11
million of this increase was due to a 1996 acquisition. Sales were up 28.1%
in the U.S. and 23.5% in Europe, reflecting positive increases in sales to
commercial OEM and aftermarket customers and to the military aftermarket.
Order intake of $138.4 million was also an all-time quarterly record,
representing an increase of $29.5 million, or 27.1%, over the prior year. All
of the new order increase was in the U.S. Order backlog of $366.1 million
represented an increase of $68.2 million, or 22.9%, over 1996.
Consolidated manufacturing income of $147 million was also a quarterly record,
increasing $13.1 million, or 9.8%, over the 1996 second quarter.
Manufacturing margin of 26.4% in the 1997 second quarter improved over the
25.9% margin realized in the 1996 second quarter. Manufacturing income for
the industrial segment increased over the comparable prior-year period,
principally due to higher sales in the U.S., Asia-Pacific and Brazil.
Manufacturing margin for the industrial operations declined, however, due to
the general weakness of the European economy and an unfavorable product mix in
the U.S. Lower sales and the adverse effects of changes in currency exchange
rates reduced manufacturing income for the automotive segment slightly from
that of the 1996 second quarter, but manufacturing margin improved 1.4
percentage points. The automotive segment margin improvement is primarily
attributable to the divestiture of certain interior automotive plastics
facilities. Manufacturing income and margin for the aerospace segment improved
over the 1996 second quarter due principally to higher sales and continued
improvements in manufacturing processes.
-9-
<PAGE>
Analysis of Operations - Continued
Selling and general administrative and engineering, research and development
expenses were $3.3 million higher in the 1997 second quarter than in the
comparable 1996 period, but as a percent of sales were 15.4% in 1997, compared
with 15.9% in 1996. Selling and general administrative expenses were reduced
sharply in Europe from 1996 through organizational realignments and continuing
process improvements. Such costs, however, were higher in the U.S. and the
Asia-Pacific region in the 1997 second quarter, primarily due to increased
levels of business activity and the expansion of operations. Second-quarter
1997 engineering, research and development costs were down slightly from the
prior year.
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, which
was reported in Other Income (Expenses) - Net in the Statement of Income. The
combined pretax gain from sales of unconsolidated affiliates included net
translation gains of $6.4 million previously deferred in the currency
translation component of equity. Interest expense for the 1997 second quarter
amounted to $7 million, compared with $6.8 million in the 1996 second quarter.
Net income for the 1997 second quarter amounted to $33.6 million, or $1.15 per
share, compared with net income of $33.1 million, or $1.11 per share, in the
1996 second quarter. Net income for the 1996 second quarter included an
after-tax gain of $5 million, or $.16 per share, from the sales of
unconsolidated affiliates. The effective income tax rate for the 1997 second
quarter was 33.9% compared with 33%, exclusive of the tax associated with the
gain on sales of unconsolidated affiliates, in the 1996 second quarter.
-10-
<PAGE>
Analysis of Operations - Continued
Six Months 1997 Compared with Six Months 1996
The following data provide highlights for the 1997 first six months compared
with the 1996 first six months.
Six Months Ended Percent
(dollars in thousands, June 30 Increase
except per share data) 1997 1996 (Decrease)
CONSOLIDATED
Net sales $1,094,704 $1,030,037 6.3%
Manufacturing income 279,512 260,166 7.4
Manufacturing margin (%) 25.5 25.3
Operating income 80,276(a) 91,872 (12.6)
Operating margin (%) 7.3(a) 8.9
Net income 39,324(a) 57,475(b) (31.6)
Net income per share 1.37(a) 1.94(b) (29.4)
INDUSTRIAL
Net sales 609,294 584,531 4.2
Operating income 57,192 56,672 .9
Operating margin (%) 9.4 9.7
Order intake 638,342 592,638 7.7
AUTOMOTIVE
Net sales 245,208 253,965 (3.4)
Operating income (loss) (5,370)(a) 20,726
Operating margin (%) (2.2)(a) 8.2
AEROSPACE & DEFENSE
Net sales 240,202 191,542 25.4
Operating income 40,260 25,771 56.2
Operating margin (%) 16.8 13.5
Order intake 267,503 224,622 19.1
(a) After deducting a special charge of $30 million ($18.5 million net, or
$.62 per share).
(b) Includes a net gain from sale of affiliates amounting to $17.3 million
($5 million net, or $.16 per share) and an income tax credit of $4
million, or $.13 per share.
Consolidated net sales of $1.1 billion for the first six months of 1997 were a
record for the Company and were $64.7 million, or 6.3%, greater than in the
comparable 1996 period. Sales for the industrial and aerospace segments
increased 4.2% and 25.4%, respectively, but automotive sales declined 3.4%
because of the sale or closure of certain plants as discussed later.
Companies acquired in late 1996 generated six-month 1997 sales, principally in
the aerospace segment, of $28.9 million. Including the results of
acquisitions, U.S. sales increased $42.6 million, or 6.5%, and non-U.S. sales
increased $22.1 million, or 5.9%. Changes in currency exchange rates reduced
non-U.S. sales by more than $13 million, principally in the automotive
segment.
-11-
<PAGE>
Analysis of Operations - Continued
Industrial sales for the first six months of 1997 amounting to $609.3 million
were also a record and were $24.8 million, or 4.2%, greater than during the
comparable 1996 period. U.S. industrial sales increased $19.8 million, or
5.1%, Asia-Pacific sales increased $8.9 million, or 22%, and industrial sales
in Brazil increased $1.8 million, or 12.4%. European industrial sales
declined $8.1 million, or 5.8%
Automotive sales declined $8.8 million, or 3.4%, from the first six months of
1996 after the adverse effects of changes in currency exchange rates amounting
to nearly $11 million. U.S. automotive sales were $19.9 million, or 18.9%,
lower than in the comparable 1996 period. The sale or closing during the
first six months of 1997 of five automotive interior plastics facilities more
than accounted for the decline in U.S. automotive sales. European automotive
sales increased $11.1 million, net of the effects of changes in currency
exchange rates, over the 1996 six-month period.
Aerospace sales grew $48.7 million, or 25.4%, over the comparable 1996 period
to a first-half record of $240.2 million. Sales were up 26.3% in the U.S. and
20.6% in Europe. These worldwide sales increases resulted from continued
strong demand for commercial aerospace OEM and aftermarket products.
Consolidated manufacturing income increased $19.3 million, or 7.4%, over the
first six months of 1996, and manufacturing margin increased to 25.5%.
Manufacturing income and margin for the industrial segment declined from the
prior year primarily as a result of the general weakness of the European
economy and changes in sales mix. Manufacturing income and margin for the
automotive segment improved modestly primarily as a result of the sale or
closing of certain automotive interior plastics facilities. Manufacturing
income and margin for the aerospace segment increased significantly over the
prior year six-month period principally because of strong sales growth and
continued process improvements.
Selling and general administrative and engineering, research and development
expenses were nearly $1 million higher than in the comparable 1996 six-month
period, but as a percent of sales were 15.5% in 1997 compared with 16.3% in
1996. Selling and general administrative expenses were reduced sharply in
Europe from 1996 through organizational realignments and continuing process
improvements. Such costs, however, were higher in the U.S. and the Asia-
Pacific region in the 1997 six-month period. Engineering, research and
development costs were down $2.1 million from the prior year, driven by more
focused program direction.
In the 1997 first quarter, the Company announced its plans to exit the
automotive interior plastics business and recorded a special charge of $30
million, comprised principally of severance and lease termination costs. A
significant portion of this charge related to exiting operations in Germany.
During the first six months of 1997, the Company sold or closed five
facilities that had combined 1996 annual sales of approximately $65 million.
Subsequent to June 30, 1997, the Company disposed of another facility that had
1996 sales of $15 million, and announced that an additional facility will be
closed during the 1997 third quarter that also had 1996 sales of $15 million.
Shipments will continue at reduced levels from an inventory bank at one of
-12-
<PAGE>
Analysis of Operations - Continued
these facilities through the remainder of the year. Negotiations continue for
the sale of a remaining facility that had 1996 sales of more than $35 million.
Following the sale or closure of these facilities, which is expected to be
substantially completed during 1997, fluid connectors will be the Company's
primary automotive focus. Automotive fluid connectors (hose and the attached
fittings), used for conveying fluids in air conditioning, power steering and
oil cooling systems in cars, light trucks, vans and sport utility vehicles, is
a business generated from Aeroquip's industrial fluid power expertise.
On April 11, 1997, the Company announced that it entered into a joint-venture
and global product and technology alliance with Komatsu Ltd., a world leader
in the construction equipment market. This agreement is intended to extend
the Company's product offering into the Japanese mobile equipment market and
to provide opportunities for the development of new products for mobile
equipment customers. The Company expects that this agreement will also enable
the Company to sell the full range of hydraulic products of Komatsu and
Komatsu Zenoah under the Vickers brand name on a worldwide basis through the
Vickers global sales network. The Company also entered into a joint-venture
agreement with Sturman Industries for development of integrated digital
electrohydraulic systems.
Interest expense for the 1997 six-month period was $1.2 million higher than in
the comparable 1996 period and was attributable to a higher interest rate on
long-term debt that was issued in the 1996 second quarter. Other Income
(Expenses) - Net for the 1996 six-month period included a gain of $17.3
million resulting from the sales of investments in unconsolidated affiliates.
Net income for the first six months of 1997 amounted to $39.3 million, or
$1.37 per share, and is after deducting a special charge amounting to $18.5
million net of tax, or $.62 per share, recorded in the first quarter to exit
the automotive interior plastics business . This compares with net income for
the six months ended June 30, 1996, of $57.5 million, or $1.94 per share,
which included income from special items net of tax totaling $9 million, or
$.29 per share. The income tax provision for the 1997 six-month period
included 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. The effective income tax rate for the 1997 six-month
period exclusive of this item was 33.9%. The income tax provision for the
1996 six-month period included a credit of $4 million recorded in the first
quarter for settlement of claims for prior years' research and development
credits. The 1996 income tax provision also included income taxes of $12.3
million resulting from the gain on sales of unconsolidated affiliates. The
effective income tax rate for the 1996 six-month period exclusive of these
items was 33%
In the first half of 1997, the Financial Accounting Standards Board issued
final statements that change the method for calculating and reporting earnings
per share (EPS), that require the disclosure of total comprehensive income,
and that change the method for determining and reporting business segment
information. The Company will adopt FAS 128, "Earnings per Share," on
-13-
<PAGE>
Analysis of Operations - Continued
December 31, 1997, and quarterly EPS amounts will be restated as specified by
the Statement. Pro forma EPS for the three- and six-month periods ended June
30, 1997 and 1996, calculated in accordance with provisions of this Statement,
are provided in the Notes to Financial Statements. The Company has not
determined when it will adopt the disclosure requirements of FAS 130,
"Reporting Comprehensive Income," and FAS 131, "Disclosures about Segments of
an Enterprise and Related Information." Historically, the Company's only
component of other comprehensive income is foreign currency items.
Liquidity, Working Capital and Capital Investment
Cash provided by operating activities for the first six months of 1997
amounted to $72.7 million, compared with $33.8 million for the comparable 1996
period. Working capital requirements for 1997 of $21.7 million included $37.8
million to finance a higher level of receivables and $18.5 million for growth
in inventories. These cash requirements were partially offset by the effects
of increases in payables and taxes. Working capital requirements for the
first six months of 1996 totaling $47.8 million included $62.3 million to
finance an increase in receivables. The 1996 receivables increase reflected
the growth in receivable balances to normal operating levels for a company
acquired in late 1995 for which receivables were not part of the assets
purchased. Inventory reductions during the first six months of 1996 provided
cash of $12.7 million. Cash provided by operating activities in 1996 included
dividends received from affiliates amounting to $9.9 million.
During the first six months of 1997, the Company received $26.8 million from
sales of certain automotive interior plastics facilities. Proceeds from sales
of the remaining automotive interior plastics facilities are projected to be
received during the 1997 third and fourth quarters. During the first half of
1996, the Company received $40.2 million from the sales of investments in two
unconsolidated affiliates.
During the first six months of 1997, the Company purchased 306,500 shares of
its common stock at a cost of $12.1 million. At its April 17, 1997, meeting,
the Company's Board of Directors authorized a new program to purchase up to
$100 million of the Company's outstanding common stock. As of June 30, 1997,
$90.4 million of additional common stock may be purchased under this
authorization. The Company may make further purchases during 1997, but is not
committed to purchase a specific number of shares.
Dividend payments in 1997 were $.20 per share in each of the first two
quarters, totaling $11.2 million for the six-month period. Dividends declared
for the 1997 third quarter to be paid in September were also $.20 per share.
The debt-to-capitalization ratio (debt divided by debt plus equity) was 42.5%
at June 30, 1997, compared with 45.1% at December 31, 1996.
-14-
<PAGE>
Liquidity, Working Capital and Capital Investment - Continued
On April 18, 1997, the Company established a $150 million Medium Term Note
Program, committing to this program the remaining amount available under an
existing shelf registration statement filed in 1996. Upon issuance, each
series of notes may mature nine months or more from date of issue and may have
either a fixed or floating rate of interest. The remaining borrowing capacity
under this program at June 30, 1997, was $100 million. The Company also
maintains a revolving credit agreement with a consortium of U.S. and non-U.S.
banks expiring in 2001 under which the Company may borrow up to $175 million.
The agreement is intended to support the Company's commercial paper borrowings
and, to the extent not so utilized, provide domestic borrowing capacity. The
remaining borrowing capacity under this agreement at June 30, 1997, was $143.5
million. In addition to this agreement, the Company has uncommitted
arrangements with various banks to provide short-term financing as necessary.
On June 27, 1997, the Company issued a notice calling for redemption of its 6%
Convertible Subordinated Debentures on July 28, 1997. The Debentures were due
to mature on October 15, 2002. The Debentures were convertible into common
shares of Aeroquip-Vickers, Inc. through 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 submitted for conversion into 70,950 shares of
common stock. The redemption price of the remaining Debentures, outstanding
in the amount of $96.3 million, was equal to 100.6%. The Company used $50
million of available borrowing capacity under its Medium Term Note Program and
short-term borrowings to redeem the Debentures. The pretax loss from
redemption of the Debentures amounting to $1.5 million will be recognized in
the 1997 third quarter.
The Company expects that cash flow from operating activities and remaining
available credit lines will be sufficient to meet normal operating
requirements, including payment of debt obligations maturing in the near term,
and planned capital expenditures.
-15-
<PAGE>
PART II - OTHER INFORMATION
Aeroquip-Vickers, Inc.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed hereunder as part of Part I:
Exhibit (11) Statement re: Computation of Per Share Earnings
Exhibit (12) Statement re: Computation of Ratios
The following exhibit is filed as part of Part II:
Exhibit (27) Financial Data Schedule
(b) On April 25, 1997, the Company filed a report on Form 8-K reporting the
commencement of its medium-term note program and its name change from
TRINOVA Corporation to Aeroquip-Vickers, Inc.
-16-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Aeroquip-Vickers, Inc.
By /S/ DARRYL F. ALLEN
-----------------------------------------
August 7, 1997 Darryl F. Allen
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
By /S/ DAVID M. RISLEY
August 7, 1997 -----------------------------------------
David M. Risley
Vice President - Finance and
Chief Financial Officer
(Principal Financial Officer)
-17-
EXHIBIT INDEX
Exhibit No. Page No.
(11) Statement re: Computation of Per Share Earnings 19
(12) Statement re: Computation of Ratios 20
(27) Financial Data Schedule 21
-18-
EXHIBIT 11
<TABLE>
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
Aeroquip-Vickers, Inc.
(In thousands, except per share data)
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------ -------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
AVERAGE SHARES OF COMMON STOCK
AND COMMON STOCK EQUIVALENTS
OUTSTANDING (NOTE A)
Average shares outstanding 27,948 28,551 27,966 28,652
Assumed conversion of the 6%
convertible debentures 1,905 1,905 1,905 1,905
Net effect of dilutive stock
options based upon treasury stock
method using average market price 167 72 155 72
--------- ---------- --------------------
Average shares of common stock
and common stock equivalents
outstanding 30,020 30,528 30,026 30,629
========== ========== ====================
INCOME ATTRIBUTABLE TO COMMON STOCK (NOTE A)
Net income $ 33,630 $ 33,060 $ 39,324$ 57,475
After-tax equivalent of interest
expense on the 6% convertible
debentures 930 930 1,860 1,860
---------- ---------- --------------------
Income attributable to common stock$ 34,560 $ 33,990 $ 41,184$ 59,335
========== ========== ====================
Net Income per Share $ 1.15 $ 1.11 $ 1.37$ 1.94
========== ========== ====================
<FN>
Note A - Net income per share is computed using the average number of common
shares outstanding, including common stock equivalents. The assumed
conversion of the Company's 6% convertible debentures was included in average
shares outstanding, increasing the average number of shares outstanding by
1,904,762 shares. 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.
</FN>
</TABLE>
-19-
EXHIBIT 12
<TABLE>
STATEMENT RE: COMPUTATION OF RATIOS
Aeroquip-Vickers, Inc.
(In thousands, except per share data)
<CAPTION>
Six Months
Ended Year Ended December 31
June 30, ----------------------------------------
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
RATIO OF EARNINGS TO FIXED
CHARGES
Income before income taxes and
cumulative effect of accounting
change $ 57,524 $153,421 $128,196 $101,255 $ 17,111 $ 24,042
Dividends received, net of equity
in earnings (loss) of
unconsolidated affiliates 1,305 9,961 (3,704) 1,213 1 (1,931)
Fixed charges 23,112 41,712 31,762 30,249 33,370 34,623
-------- -------- -------- -------- -------- ---------
Income before cumulative effect
of accounting change for
computation purposes $ 81,941 $205,094 $156,254 $132,717 $ 50,482 $ 56,734
======== ======== ======== ======== ======== =========
FIXED CHARGES
Interest expense, including
interest related to corporate
owned life insurance $ 19,762 $ 34,963 $ 24,477 $ 22,582 $ 25,516 $ 26,313
Portion of rent expense
representing interest 3,078 6,288 6,903 7,303 7,490 7,987
Amortization of debt expense and
debt discount 272 461 382 364 364 323
-------- -------- -------- -------- -------- --------
Total fixed charges $ 23,112 $ 41,712 $ 31,762 $ 30,249 $ 33,370 $ 34,623
======== ======== ======== ======== ======== ========
Ratio of Earnings to Fixed Charges 3.5x 4.9x 4.9x 4.4x 1.5x 1.6x
======== ======== ======== ======== ======== ========
<FN>
For the purpose of computing the ratio of earnings to fixed charges,
"earnings" consist of income before income taxes and cumulative effect of
accounting change, plus fixed charges and dividends received, net of equity in
earnings (loss) of unconsolidated affiliates. Fixed charges consists of
interest expense, the portion of rent expense representing interest and
amortization of debt discount.
</FN>
</TABLE>
-20-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF FINANCIAL POSITION AND THE CONDENSED STATEMENT OF OPERATIONS AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 26,718
<SECURITIES> 0
<RECEIVABLES> 388,062
<ALLOWANCES> 14,751
<INVENTORY> 276,273
<CURRENT-ASSETS> 732,813
<PP&E> 984,471
<DEPRECIATION> 543,468
<TOTAL-ASSETS> 1,361,284
<CURRENT-LIABILITIES> 474,070
<BONDS> 257,763
<COMMON> 140,214
0
0
<OTHER-SE> 327,811
<TOTAL-LIABILITY-AND-EQUITY> 1,361,284
<SALES> 1,094,704
<TOTAL-REVENUES> 1,094,704
<CGS> 815,192
<TOTAL-COSTS> 815,192
<OTHER-EXPENSES> 30,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,365
<INCOME-PRETAX> 57,524
<INCOME-TAX> 18,200
<INCOME-CONTINUING> 39,324
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,324
<EPS-PRIMARY> 1.37
<EPS-DILUTED> 1.37
</TABLE>
