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 September 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 October 24, 1997,
was 28,157,999.
This document, including exhibits, contains 21 pages.
The Exhibit Index is located on page 18.
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 30, 1997
INDEX TO INFORMATION IN REPORT
Aeroquip-Vickers, Inc.
Page
Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Statement of Financial Position -
September 30, 1997 and December 31, 1996 3
Condensed Statement of Income -
Three Months and Nine Months Ended
September 30, 1997 and 1996 4
Condensed Statement of Cash Flows -
Nine Months Ended September 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 1. Legal Proceedings 16
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>
<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>
September 30 December 31
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 31,112 $ 23,934
Receivables 356,244 342,712
Inventories:
In-process and finished products 229,811 202,214
Raw materials and manufacturing supplies 54,928 59,955
---------- ----------
284,739 262,169
Other current assets 56,693 45,272
---------- ----------
TOTAL CURRENT ASSETS 728,788 674,087
Plants and properties 984,786 997,350
Less accumulated depreciation 536,728 559,867
---------- ----------
448,058 437,483
Goodwill 109,829 110,005
Other assets 78,616 67,912
---------- ----------
TOTAL ASSETS $1,365,291 $1,289,487
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Notes payable $ 80,339 $ 31,819
Accounts payable 114,367 106,205
Income taxes 39,430 21,150
Other current liabilities 215,676 188,973
Current maturities of long-term debt 1,413 76,809
---------- ----------
TOTAL CURRENT LIABILITIES 451,225 424,956
Long-term debt 257,628 257,727
Postretirement benefits other than pensions 121,978 121,793
Other liabilities 43,150 38,595
SHAREHOLDERS' EQUITY
Common stock - par value $5 a share
Authorized - 100,000,000 shares
Outstanding - 28,229,932 and 27,912,077 shares,
respectively(after deducting 6,050,914 and 6,297,819
shares, respectively, in treasury) 141,150 139,559
Additional paid-in capital 37,709 20,675
Retained earnings 349,326 307,398
Currency translation adjustments (36,875) (21,216)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 491,310 446,416
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,365,291 $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 Nine Months Ended
September 30 September 30
------------------------ ------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 494,777 $ 492,983 $1,589,481 $1,523,020
Cost of products sold 360,371 370,129 1,175,563 1,140,000
---------- ---------- ---------- ----------
MANUFACTURING INCOME 134,406 122,854 413,918 383,020
Selling and general administrative
expenses 63,271 62,557 197,245 193,466
Engineering, research and development
expenses 18,050 18,620 53,312 56,005
Special charge -- -- 30,000 --
---------- ---------- ---------- ----------
OPERATING INCOME 53,085 41,677 133,361 133,549
Interest expense (6,245) (6,234) (20,610) (19,361)
Other income (expenses) - net (3,136) (4,486) (11,523) 6,444
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 43,704 30,957 101,228 120,632
Income taxes 13,600 10,200 31,800 42,400
---------- ---------- ---------- ----------
NET INCOME $ 30,104 $ 20,757 $ 69,428 $ 78,232
========== ========== ========== ==========
NET INCOME PER SHARE $ 1.05 $ 0.72 $ 2.41 $ 2.66
========== ========== ========== ==========
Cash dividends per common share $ 0.20 $ 0.20 $ 0.60 $ 0.60
========== ========== ========== ==========
Average shares outstanding 29,036 30,258 29,705 30,501
========== ========== ========== ==========
<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>
Nine Months Ended
September 30
------------------------
1997 1996
------ ------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 69,428 $ 78,232
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 49,504 51,355
Gain on sale of affiliates - (17,300)
Special charge 30,000 -
Changes in certain components of working
capital other than debt (30,852) (46,800)
Dividends received from affiliates - 9,896
Other (15,534) (105)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 102,546 75,278
INVESTING ACTIVITIES
Capital expenditures (89,899) (60,877)
Businesses acquired - (6,227)
Sale of businesses and affiliates 33,158 40,261
Other 737 954
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (56,004) (25,889)
FINANCING ACTIVITIES
Net increase(decrease) in short- and long-term debt (25,165) 11,397
Cash dividends (16,833) (17,126)
Purchase of common stock (12,209) (26,612)
Stock issuance under stock plans 16,442 2,264
Other (860) (2,440)
-------- --------
NET CASH USED BY FINANCING ACTIVITIES (38,625) (32,517)
Effect of exchange rate changes on cash (739) 24
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 7,178 16,896
Cash and cash equivalents at beginning of period 23,934 16,186
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 31,112 $ 33,082
======== ========
<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 nine months ended September 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 nine-month period), comprised
principally of severance and lease termination costs. As of September 30,
1997, the Company had sold or closed seven facilities that had combined 1996
sales of approximately $92 million.
Note 3 - Redemption of 6% Convertible Subordinated Debentures
In June 1997, the Company called its 6% Convertible Subordinated Debentures
for redemption on July 28, 1997. The debentures, which were due to mature on
October 15, 2002, 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
converted into 70,950 shares of common stock.
Note 4 - 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 5 - Income Taxes
The income tax provision for the 1997 nine-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. 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. The change in the effective
income tax rate increased third-quarter 1997 net income by $1.3 million, or
$.05 per share. The income tax provision for the 1996 nine-month period
includes income taxes of $12.3 million resulting from the gain on sale of
unconsolidated affiliates, and a credit of $4 million ($.13 per share) for
settlement of claims for prior years' research and development credits. The
- -6-
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Aeroquip-Vickers, Inc.
effective income tax rate for the 1996 third quarter and nine-month period
exclusive of these items was 33%.
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 as follows: 1,904,762 shares in the 1996 third quarter and nine-
month period, 627,667 shares in the 1997 third quarter and 1,479,064 shares in
the 1997 nine-month period. 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
Third Quarter:
Basic EPS $1.07 $.73
Diluted EPS 1.05 .72
Nine Months Ended September 30:
Basic EPS 2.48 2.74
Diluted EPS 2.41 2.66
The effect of special items included in net income per share for the nine
months ended September 30 is as follows:
Basic:
Special charge to exit the automotive
interior plastics business $(.66)
Gain on sale of unconsolidated affiliates $.17
Settlement of claims for prior years' research
and development tax credits .14
Diluted:
Special charge to exit the automotive
interior plastics business $(.62)
Gain on sale of unconsolidated affiliates $.16
Settlement of claims for prior years' research
and development tax credits .13
- -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
Third Quarter 1997 Compared with Third Quarter 1996
The following data provide highlights for the 1997 third quarter compared with
the 1996 third quarter.
Third Quarter Percent
(dollars in thousands, ----------------------- Increase
except per share data) 1997 1996 (Decrease)
-------- -------- ---------
CONSOLIDATED
Net sales $494,777 $492,983 .4%
Manufacturing income 134,406 122,854 9.4
Manufacturing margin (%) 27.2 24.9
Operating income 53,085 41,677 27.4
Operating margin 10.7 8.5
Net income 30,104 20,757 45.0
Net income per share 1.05 0.72 45.8
INDUSTRIAL
Net sales 278,131 275,786 .9
Operating income 28,468 26,848 6.0
Operating margin (%) 10.2 9.7
Order intake 285,019 270,829 5.2
Order backlog at September 30 216,689 194,054 11.7
AUTOMOTIVE
Net sales 97,416 118,602 (17.9)
Operating income 10,189 4,548 124.0
Operating margin (%) 10.5 3.8
AEROSPACE
Net sales 119,230 98,595 20.9
Operating income 20,845 15,822 31.7
Operating margin (%) 17.5 16.0
Order intake 147,198 114,332 28.7
Order backlog at September 30 391,445 314,241 24.6
Consolidated net sales for the 1997 third quarter increased $1.8 million, or
.4%, over the 1996 third quarter. Sales for the industrial and aerospace
segments increased .9% and 20.9%, respectively, while sales for the automotive
segment declined 17.9% from the 1996 third quarter. The sales decline for the
automotive segment was primarily due to the sale or closure of certain plants
as discussed later. A company acquired in the 1996 fourth quarter generated
third-quarter 1997 aerospace segment sales of $10.1 million. U.S. sales
increased $4.4 million, but non-U.S. sales declined $2.6 million as a result
of adverse changes in currency exchange rates totaling nearly $15 million.
- -8-
<PAGE>
Analysis of Operations - Continued
Third-quarter 1997 industrial sales set a third-quarter record, topping the
previous record set in 1996. Third-quarter 1997 industrial segment sales were
up $2.3 million, or .9%, over the 1996 third quarter. U.S. industrial sales
increased $2.0 million, or 1.1%. U.S. sales to mobile equipment, truck and
bus, and stationary industrial machinery markets remained strong while sales
to distributors were flat. Sales of residential air conditioning components
were down in the 1997 third quarter due to cooler than normal spring and
summer temperatures. Industrial sales in Asia-Pacific, Brazil and Mexico
collectively increased $4.2 million, or 13.4%, over the 1996 third quarter.
Excluding the effects of adverse changes in currency exchange rates amounting
to nearly $4 million, European industrial sales were flat compared with the
1996 third quarter. The industrial segment third-quarter order intake and
backlog also set third-quarter records, increasing $14.2 million and $22.6
million, or 5.2% and 11.7%, respectively, over last year.
Automotive sales declined $21.2 million, or 17.9%, from the 1996 third
quarter. The sale or closing of seven automotive interior plastics plants
during 1997 accounted for nearly $17 million of the third-quarter sales
decline. Changes in currency exchange rates reduced European sales nearly $9
million. Third-quarter sales reflected continuing strong demand for fluid
connectors for use in automotive air conditioning and power steering
applications.
Aerospace sales of $119.2 million also set a third-quarter record and were
$20.6 million, or 20.9%, higher than in the comparable 1996 period. $10.1
million of this increase resulted from sales generated by a business acquired
in the 1996 fourth quarter All of the sales increase was attributable to
U.S. operations, as European sales were flat compared with the 1996 third
quarter. The 1997 third-quarter sales reflected strong increases over the
prior year in sales to commercial OEM and aftermarket customers and to the
military aftermarket. Aerospace order intake set a record for any quarter,
topping the previous record set in the 1997 second quarter. Third-quarter
1997 orders were up $32.9 million, or 28.7%, over the 1996 third quarter.
Aerospace order backlog of $391.4 million increased $77.2 million, or 24.6%,
over the 1996 third quarter and $25.3 million, or 6.9%, over the 1997 second
quarter.
Consolidated manufacturing income of $134.4 million increased $11.6 million,
or 9.4%, over the 1996 third quarter. Third-quarter 1997 manufacturing margin
was 27.2% compared with 24.9% in the 1996 third quarter. Manufacturing income
and margin for the industrial segment were flat compared with the prior year
as strong increases in the U.S. were offset by declines in Europe.
Manufacturing income and margin for the automotive segment improved over the
prior year, reflecting the effects of divestiture of certain automotive
interior plastics facilities. Manufacturing income and margin for the
aerospace segment also improved over the prior year primarily due to the
substantial increase in sales volume.
Selling and general administrative and engineering, research and development
expenses were nearly the same as in the prior year. Selling and general
administrative expenses for the industrial segment's European operations were
lower than in 1996 primarily due to organizational realignments and continuing
process improvements. Such costs, however, were higher in the U.S. and the
Asia-Pacific region due to increased levels of business activity and the
expansion of operations.
- -9-
<PAGE>
Analysis of Operations - Continued
Net income for the 1997 third quarter amounted to $30.1 million, or $1.05 per
share, compared with net income of $20.8 million, or $.72 per share, in the
1996 third quarter. In the 1997 third quarter, the estimated annual effective
income tax rate, exclusive of the effects of the special charge, was reduced
from 34% 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. The change in the effective
income tax rate increased third-quarter net income by $1.3 million, or $.05
per share. The effective income tax rate for the 1996 third quarter was 33%.
- -10-
<PAGE>
Analysis of Operations - Continued
Nine months 1997 Compared with Nine Months 1996
The following data provide highlights for the 1997 first nine months compared
with the 1996 first nine months.
Nine Months Ended
September 30 Percent
(dollars in thousands, ----------------------- Increase
except per share data) 1997 1996 (Decrease)
-------- -------- ---------
CONSOLIDATED
Net sales $1,589,481 $1,523,020 4.4%
Manufacturing income 413,918 383,020 8.1
Manufacturing margin (%) 26.0 25.1
Operating income 133,361(a) 133,549 (.1)
Operating margin 8.4(a) 8.8
Net income 69,428(a) 78,232(b)(11.3)
Net income per share 2.41(a) 2.66(b) (9.4)
INDUSTRIAL
Net sales 887,425 860,317 3.2
Operating income 85,660 83,520 2.6
Operating margin (%) 9.7 9.7
Order intake 923,361 863,467 6.9
Order backlog at September 30 216,689 194,054 11.7
AUTOMOTIVE
Net sales 342,624 372,567 (8.0)
Operating income 4,819(a) 25,274 (80.9)
Operating margin (%) 1.4(a) 6.8
AEROSPACE
Net sales 359,432 290,137 23.9
Operating income 61,105 41,592 46.9
Operating margin (%) 17.0 14.3
Order intake 414,701 338,954 22.3
Order backlog at September 30 391,445 314,241 24.6
(a) After deducting a special charge of $30 million ($18.5 million net, or
$.62 per share).
(b) Includes a net gain from sales 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 $1.6 billion for the first nine months of 1997 were
a record for the Company and were $66.5 million, or 4.4%, higher than in the
comparable 1996 period. Sales for the industrial and aerospace segments
increased 3.2% and 23.9%, respectively, but automotive sales declined 8%.
Companies acquired in 1996 generated 1997 period-to-date sales (during the
period for which there were no comparable 1996 sales and principally in the
aerospace segment) totaling $39 million. Including the results of
acquisitions, U.S. sales increased $47 million, or 4.8%, and non-U.S. sales
increased $19.5 million, or 3.5%. Changes in currency exchange rates reduced
non-U.S. sales, principally in the automotive segment, by nearly $28 million.
- -11-
<PAGE>
Analysis of Operations - Continued
Industrial sales for the first nine months of 1997 amounting to $887.4 million
were also a record and were $27.1 million, or 3.2%, greater than during the
comparable 1996 period. U. S. industrial sales increased $21.8 million, or
3.8%; Asia-Pacific sales increased $10.4 million, or 16.5%; and industrial
sales in Brazil increased $3 million, or 12.8%. European industrial sales
declined $12 million, or 6%.
Including the adverse effects of changes in currency exchange rates amounting
to nearly $20 million, automotive sales declined $29.9 million, or 8%, from
the first nine months of 1996. U.S. automotive sales were down $38.8 million,
or 25.1%, from the 1996 nine-month period. The sale or closing of six U.S.
automotive interior plastics facilities during the first nine months of 1997
accounted for nearly $32 million of this decline. European automotive sales
increased $8.9 million, or 4.1%, net of the effects of changes in currency
exchange rates and the closing of an automotive interior plastics facility.
Aerospace sales grew $69.3 million, or 23.9%, over the comparable 1996 period
to a first nine-month record of $359.4 million. Sales were up 26.2% in the
U.S. and 11.6% in Europe.
Consolidated manufacturing income increased $30.9 million, or 8.1%, over the
first nine months of 1996 and manufacturing margin increased to 26% from
25.1%. Manufacturing income and margin for the industrial segment declined
slightly 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 showed good improvement, primarily the
result of the sale or closure of certain automotive interior plastics
facilities. Manufacturing income and margin for the aerospace segment
increased significantly over the 1996 nine-month period principally because of
the segment's strong sales growth and continuing process improvements.
Selling and general administrative and engineering, research and development
expenses were $1.1 million higher than in the comparable 1996 nine-month
period, but as a percent of sales were 15.8% in 1997 compared with 16.4% in
1996. Selling and general administrative expenses in Europe were
substantially lower in 1997 as a result of organizational realignments and
continuing process improvements. Such costs were, however, higher in the U.S.
and the Asia-Pacific region in the 1997 nine-month period. Engineering,
research and development costs were down $2.7 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 nine months of 1997, the Company sold or closed seven
facilities that had combined 1996 annual sales of $92 million. Shipments will
continue at reduced levels from an inventory bank at one of these facilities
through the remainder of the year. Negotiations continue for the sale of a
remaining facility that had full-year 1996 sales of approximately $38 million.
The sale of this facility, which is expected to be finalized in the 1997
fourth quarter, will complete initiatives to make fluid connectors 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.
- -12-
<PAGE>
Analysis of Operations - Continued
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 nine-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 nine-month period included a gain of $17.3
million resulting from the sales of investments in unconsolidated affiliates.
Net income for the first nine months of 1997 amounted to $69.4 million, or
$2.41 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 nine months ended September 30, 1996, of $78.2 million, or $2.66 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 nine-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 nine-
month period exclusive of this item was 33%. The income tax provision for the
1996 nine-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 attributable to the gain on sales of unconsolidated affiliates. The
effective income tax rate for the 1996 nine-month period exclusive of these
items was 33%.
During 1997, the Financial Accounting Standards Board issued final statements
that change the method for calculating and reporting earnings per share (EPS),
require the disclosure of total comprehensive income, and change the method
for determining and reporting business segment information. The Company will
adopt FAS 128, "Earnings per Share," on December 31, 1997, and quarterly EPS
amounts will be restated as specified by the Statement. Pro forma EPS for the
three- and nine-month periods ended September 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 has
been foreign currency items.
- -13-
<PAGE>
Liquidity, Working Capital and Capital Investment
Cash provided by operating activities for the first nine months of 1997
amounted to $102.5 million, compared with $75.3 million for the comparable
1996 period. Working capital requirements for 1997 totaling $30.9 million
included $29.8 million to finance a higher level of receivables and $30.5
million for growth in inventories. These cash requirements were partially
offset by the effects of increases in payables, accruals and taxes. Working
capital requirements for the first nine months of 1996 totaling $46.8 million
included $68.7 million to finance an increase in receivables. The 1996
receivables increase reflected, in part, the result of higher sales in 1996,
and the growth in receivable balances to normal operating levels for a company
acquired in late 1995 for which receivables were not a part of the assets
purchased. Inventory reductions during the first nine months of 1996 provided
cash of $16.7 million. Cash provided by operating activities in 1996 included
dividends received from affiliates amounting to $9.9 million.
During the first nine months of 1997, the Company received $33.2 million from
sales of certain automotive interior plastics facilities. Proceeds from sale
of the remaining facility is expected to be received in the 1997 fourth
quarter. During the first nine months of 1996, the Company received $40.3
million from the sales of investments in two unconsolidated affiliates
operating as joint ventures in Japan and Mexico, and an injection-molding
plastics products facility.
During the first nine months of 1997, the Company purchased 308,500 shares of
its common stock at a cost of $12.2 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 September 30,
1997, $90.3 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 three
quarters, totaling $16.8 million for the nine-month period. Dividends
declared for the 1997 fourth quarter to be paid in December were $.20 per
share. The debt-to-capitalization ratio (debt divided by debt plus equity)
was 40.9% at September 30, 1997, compared with 45.1% at December 31, 1996.
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. On August 29, 1997, the
Company filed a shelf registration statement in the amount of $200 million
which was subsequently committed to the Medium Term Note Program. Upon
issuance, each series of notes may mature nine months or more from date of
issuance and may have either a fixed or floating rate of interest. The
remaining borrowing capacity under the Medium Term Note Program at September
30, 1997, was $250 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 September 30, 1997, was $120.3 million. In
addition to this agreement, the Company has uncommitted arrangements with
various banks to provide short-term financing as necessary.
- -14-
<PAGE>
Liquidity, Working Capital and Capital Investment - Continued
In June 1997, the Company called its 6% Convertible Subordinated Debentures
for redemption on July 28, 1997. The debentures, which were due to mature on
October 15, 2002, 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
converted into 70,950 shares of common stock.
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 1. Legal Proceedings
A Vickers motor pump, which is a component of the hydraulic systems provided
by Aerospatiale for Airbus Industries for use in the A330/340 aircraft, was
involved in two separate fires which occurred on aircraft during ground
maintenance and cargo unloading procedures. No personal injuries occurred, and
Aerospatiale and Airbus Industries indicate that interim steps have been taken
to prevent further incidents.
A French court has appointed a panel of experts to investigate and report on
the cause of the fires, related technical issues and damages. Vickers is
participating in the hearings held by the panel. The report of the panel will
be of an advisory nature and is not legally binding, but would serve as
evidence of the facts in the event that claims are subsequently made on the
merits. No claims for recovery of damages have been made at this time.
Evidence was recently presented to the panel through which Airbus and
Aerospatiale allege that the property damage to the aircraft involved is in
excess of $45 million and that the cost of retrofitting other A330/340
aircraft will be approximately $45 million. Any property damage claims which
might ultimately be brought against Vickers as a result of the fires would be
covered by Vickers' aviation insurance. Vickers denies responsibility for any
damages and will vigorously defend its position. The proceedings are very
preliminary and, accordingly, it is impossible for Vickers to assess its
exposure at this time. Vickers has been advised that it may take in excess of
two years for the panel to submit its report.
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 September 30, 1997, in connection with the commencement if its
Medium-Term Note Program, the Company filed a report on Form 8-K
reporting that the Company had entered into a distribution agreement
with Morgan Stanley & Co. Incorporated and J.P. Morgan Securities Inc.,
relating to the issuance and sale of $250,000,000 aggregate amount of
Medium-Term Notes. The notes are to be issued from time to time on or
after September 30, 1997.
- -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
--------------------------------------
November 10, 1997 Darryl F. Allen
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
By /S/ DAVID M. RISLEY
--------------------------------------
November 10, 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 Nine Months Ended
September 30 September 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 28,153 28,286 28,026 28,529
Assumed conversion of the 6%
convertible debentures 628 1,905 1,479 1,905
Net effect of dilutive stock
options based upon treasury stock
method using average market price 255 67 200 67
-------- -------- -------- --------
Average shares of common stock
and common stock equivalents
outstanding 29,036 30,258 29,705 30,501
======== ======== ======== ========
INCOME ATTRIBUTABLE TO COMMON STOCK (NOTE A)
Net income $ 30,104 $ 20,757 $ 69,428 $ 78,232
After-tax equivalent of interest
expense on the 6% convertible
debentures 332 930 2,192 2,790
-------- -------- -------- --------
Income attributable to common stock $ 30,436 $ 21,687 $ 71,620 $ 81,022
======== ======== ======== ========
Net Income per Share $ 1.05 $ .72 $ 2.41 $ 2.66
======== ======== ======== ========
<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: 1,904,762 shares in the 1996 third quarter and nine-month
period, 627,667 shares in the 1997 third quarter and 1,479,064 shares in the
1997 nine-month period. 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>
Nine Months
Ended Year Ended December 31
September 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 $101,228 $153,421 $128,196 $101,255$ 17,111 $ 24,042
Dividends received, net of equity
in earnings (loss) of
unconsolidated affiliates 1,433 9,961 (3,704) 1,213 1 (1,931)
Fixed charges 33,445 41,712 31,762 30,249 33,370 34,623
-------- -------- -------- ---------------- --------
Income before cumulative effect
of accounting change for
computation purposes $136,106 $205,094 $156,254 $132,717$ 50,482 $ 56,734
======== ======== ======== ================ ========
FIXED CHARGES
Interest expense, including
interest related to corporate
owned life insurance $ 28,712 $ 34,963 $ 24,477 $ 22,582$ 25,516 $ 26,313
Portion of rent expense
representing interest 4,461 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 $ 33,445 $ 41,712 $ 31,762 $ 30,249$ 33,370 $ 34,623
======== ======== ======== ================ ========
Ratio of Earnings to
Fixed Charges 4.1x 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 31,112
<SECURITIES> 0
<RECEIVABLES> 370,415
<ALLOWANCES> (14,171)
<INVENTORY> 284,739
<CURRENT-ASSETS> 728,788
<PP&E> 984,786
<DEPRECIATION> 536,728
<TOTAL-ASSETS> 1,365,291
<CURRENT-LIABILITIES> 451,225
<BONDS> 257,628
<COMMON> 141,150
0
0
<OTHER-SE> 350,160
<TOTAL-LIABILITY-AND-EQUITY> 1,365,291
<SALES> 1,589,481
<TOTAL-REVENUES> 1,589,481
<CGS> 1,175,563
<TOTAL-COSTS> 1,175,563
<OTHER-EXPENSES> 30,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,610
<INCOME-PRETAX> 101,228
<INCOME-TAX> 31,800
<INCOME-CONTINUING> 69,428
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 69,428
<EPS-PRIMARY> 2.41
<EPS-DILUTED> 2.41
</TABLE>
