1
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, 1998
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 23, 1998,
was 27,730,520.
This document, including exhibits, contains 21 pages.
The Exhibit Index is located on page 19.
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 30, 1998
INDEX TO INFORMATION IN REPORT
Aeroquip-Vickers, Inc.
Page Number
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Statement of Financial Position -
September 30, 1998 and December 31, 1997 3
Condensed Statement of Income -
Three Months and Nine Months Ended September 30, 1998 and 1997 4
Condensed Statement of Cash Flows -
Nine Months Ended September 30, 1998 and 1997 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
EXHIBIT INDEX 19
EXHIBIT 12 - Statement re: Computation of Ratios 20
EXHIBIT 27 - Financial Data Schedule 21
-2-
<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
1998 1997
------------ -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 24,488 $ 18,736
Receivables 351,796 348,822
Inventories:
In-process and finished products 227,288 239,800
Raw materials and manufacturing supplies 79,210 54,967
---------- ----------
306,498 294,767
Other current assets 47,086 49,323
---------- ----------
TOTAL CURRENT ASSETS 729,868 711,648
Plants and properties 1,104,665 993,002
Less accumulated depreciation 563,840 518,860
---------- ----------
540,825 474,142
Goodwill 121,457 111,905
Other assets 86,543 78,901
---------- ----------
TOTAL ASSETS $1,478,693 $1,376,596
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 123,592 $ 84,044
Accounts payable 110,932 111,800
Income taxes 30,258 30,496
Other current liabilities 202,979 212,800
Current maturities of long-term debt 631 1,857
---------- ----------
TOTAL CURRENT LIABILITIES 468,392 440,997
Long-term debt 263,980 256,707
Postretirement benefits other than pensions 122,298 122,272
Other liabilities 45,218 46,421
SHAREHOLDERS' EQUITY
Common stock - par value $5 a share
Authorized - 100,000,000 shares
Outstanding - 27,982,520 and 28,064,981 shares,
respectively (after deducting 6,298,326 and 6,215,865
shares, respectively, in treasury) 139,913 140,325
Additional paid-in capital 46,370 41,288
Retained earnings 430,991 366,676
Accumulated other comprehensive income -
currency translation adjustments (38,469) (38,090)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 578,805 510,199
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,478,693 $1,376,596
========== ==========
<FN>
The Notes to Financial Statements are an integral part of this statement.
</FN>
</TABLE>
-3-
<PAGE>
[CAPTION]
CONDENSED STATEMENT OF INCOME
Aeroquip-Vickers, Inc.
(In thousands, except per share data)
(Unaudited)
<TABLE>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------ ------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales $ 508,974 $ 494,777 $1,630,343 $1,589,481
Cost of products sold 385,153 360,371 1,210,715 1,175,563
---------- ---------- ---------- ----------
MANUFACTURING INCOME 123,821 134,406 419,628 413,918
Selling and general administrative
expenses 64,263 63,271 200,457 197,245
Engineering, research and development
expenses 17,225 18,050 54,004 53,312
Special charge -- -- -- 30,000
---------- ---------- ---------- ----------
OPERATING INCOME 42,333 53,085 165,167 133,361
Interest expense (6,272) (6,245) (20,126) (20,610)
Other expense - net (930) (3,136) (8,396) (11,523)
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 35,131 43,704 136,645 101,228
Income taxes 11,200 13,600 43,700 31,800
---------- ---------- ---------- ----------
NET INCOME $ 23,931 $ 30,104 $ 92,945 $ 69,428
========== ========== ========== ==========
NET INCOME PER SHARE
Basic $ .85 $ 1.07 $ 3.30 $ 2.48
Diluted .85 1.05 3.28 2.41
========== ========== ========== ==========
Cash dividends per share $ .22 $ .20 $ .66 $ .60
========== ========== ========== ==========
<FN>
The Notes to Financial Statements are an integral part of this statement.
</FN>
</TABLE>
-4-
<PAGE>
<TABLE>
CONDENSED STATEMENT OF CASH FLOWS
Aeroquip-Vickers, Inc.
(In thousands)
(Unaudited)
<CAPTION>
Nine Months Ended
September 30
------------------------
1998 1997
------ ------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 92,945 $ 69,428
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 52,268 49,504
Amortization 6,559 4,555
Special charge - 30,000
Changes in certain components of working
capital other than debt (12,879) (30,852)
Other (19,881) (20,089)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 119,012 102,546
INVESTING ACTIVITIES
Capital expenditures (109,440) (89,899)
Businesses acquired (23,544) -
Sale of businesses - 33,158
Other 2,022 737
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (130,962) (56,004)
FINANCING ACTIVITIES
Net increase (decrease) in short- and long-term debt 42,060 (25,165)
Cash dividends (18,600) (16,833)
Purchase of common stock (11,403) (12,209)
Stock issuance under stock plans 6,047 16,442
Other (680) (860)
-------- --------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 17,424 (38,625)
Effect of exchange rate changes on cash and
cash equivalents 278 (739)
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 5,752 7,178
Cash and cash equivalents at beginning of period 18,736 23,934
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 24,488 $ 31,112
======== ========
<FN>
The Notes to Financial Statements are an integral part of this statement.
</FN>
</TABLE>
-5-
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Aeroquip-Vickers, Inc.
(Unaudited)
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, 1998, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998. It is suggested that these financial statements be read in
conjunction with the audited 1997 financial statements and notes thereto
included in Aeroquip-Vickers, Inc.'s most recent annual report.
Note 2 - Redemption of Debt
In December 1997, the Company called its 9.55% senior sinking fund debentures
in the principal amount of $42 million for redemption on February 3, 1998.
The pretax loss from redemption of the 9.55% senior sinking fund debentures
amounting to $2.5 million was recognized in Other expense - net in the 1998
first quarter. In June 1997, the Company called its 6% convertible
subordinated debentures in the principal amount of $100 million for
redemption. The 6% convertible debentures, which were due to mature on
October 15, 2002, were convertible into common shares of the Company at a
conversion price of $52.50 per share.
Note 3 - Accounting Pronouncements
In the 1998 first quarter, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This
Statement requires that comprehensive income, which is the total of net income
and other comprehensive income, be reported in the financial statements.
Other comprehensive income consists of foreign currency items, minimum pension
liability adjustments and unrealized gains and losses on certain security
investments. Amounts that had previously been recognized in other
comprehensive income are to be reclassified to net income in the period
realized. Historically, the Company's only component of other comprehensive
income has been foreign currency items. On an annual basis, disclosure of
comprehensive income will be incorporated into the Statement of Shareholders'
Equity. Since this statement is not presented on a quarterly basis, following
are details of comprehensive income for the three- and nine-month periods
ended September 30, 1998 and 1997:
<TABLE>
<CAPTIION>
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net income $ 23,931 $ 30,104 $ 92,945 $ 69,428
Other comprehensive income
(loss) - currency translation
adjustments during the period 2,029 (8,459) (252) (17,791)
Reclassification of realized
amounts to net income -- -- (127) 2,133
--------- --------- --------- ---------
Comprehensive income $ 25,960 $ 21,645 $ 92,566 $ 53,770
========= ========= ========= =========
</TABLE>
-6-
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
Aeroquip-Vickers, Inc.
(Unaudited)
The Company is currently evaluating its segment disclosures and will adopt
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information," in the 1998 fourth
quarter. This Statement requires that operating segment financial information
be reported on a basis consistent with the Company's internal reporting that
is used for evaluating segment performance and allocating resources. In June
1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This Statement will become effective for fiscal years
beginning after June 15, 1999. Early application is permitted. The Company
is currently evaluating the effect of the provisions of this Statement on its
accounting and reporting policies, and has not determined when it will adopt
the Statement or the impact it will have on the Company's results upon
adoption.
Note 4 - Special Charge
In the 1997 first quarter, the Company announced plans to exit its automotive
interior plastics business and recorded a special charge of $30 million ($18.5
million net, or diluted net income per share of $.62 for the 1997 nine-month
period [$.63 for the year]), comprised principally of severance, lease
termination and asset disposition costs. As a result, the Company sold or
closed eight facilities during 1997 that had combined 1997 sales of
approximately $67 million (approximately $11.5 million in the 1997 third
quarter and $59.8 million in the nine-month period ended September 30, 1997).
Note 5 - Income Taxes
The effective income tax rate for the 1998 third quarter and nine-month period
was 32%. The income tax provision for the nine-month period ended September
30, 1997, included a credit of $11.5 million related to the special charge for
costs to exit the automotive interior plastics business. In the 1997 third
quarter, the estimated annual effective income tax rate exclusive of this item
was reduced from 34%, as reported through the 1997 second quarter, to 33%.
The rate reduction was primarily attributable to lower effective income tax
rates on non-U.S. income, including the effect of a statutory rate reduction
in the United Kingdom.
-7-
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
Aeroquip-Vickers, Inc.
(Unaudited)
Note 6 - Net Income per Share
Following is a reconciliation of income and average shares for purposes of
calculating basic and diluted net income per share (in thousands, except per
share amounts):
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
- ------ ------ ------ ------
Basic Net Income per Share
- --------------------------
Net income $ 23,931 $ 30,104 $ 92,945 $ 69,428
======== ======== ======== ========
Average common shares outstanding 28,166 28,153 28,160 28,026
======== ======== ======== ========
Basic Net Income per Share $ .85 $ 1.07 $ 3.30 $ 2.48
======== ======== ======== ========
Diluted Net Income per Share
- ----------------------------
Net income $ 23,931 $ 30,104 $ 92,945 $ 69,428
After-tax equivalent of interest
expense on 6% convertible debentures -- 332 -- 2,192
--------- -------- -------- --------
Income for purposes of computing
diluted net income per share $ 23,931 $ 30,436 $ 92,945 $ 71,620
========= ======== ======== ========
Average common shares outstanding 28,166 28,153 28,160 28,026
Dilutive stock options 136 255 211 200
Assumed conversion of 6% convertible
debentures -- 628 -- 1,479
--------- -------- -------- --------
Average common shares for purposes
of computing diluted net income
per share 28,302 29,036 28,371 29,705
========= ======== ======== ========
Diluted Net Income per Share $ .85 $ 1.05 $ 3.28 $ 2.41
========= ======== ======== ========
The 6% convertible debentures were redeemed in July 1997.
-8-
<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 1998 Compared with Third Quarter 1997
The following data provide highlights for the 1998 third quarter compared with
the 1997 third quarter.
<TABLE>
<CAPTION>
Percent
(dollars in thousands, Third Quarter Increaseexcept per share dat
a) 1998 1997
(Decrease)
<S> <C> <C> <C>
CONSOLIDATED
Net sales $ 508,974 $ 494,777 2.9%
Manufacturing income 123,821 134,406 (7.9)
Manufacturing margin (%) 24.3 27.2
Operating income 42,333 53,085 (20.3)
Operating margin (%) 8.3 10.7
Net income 23,931 30,104 (20.5)
Net income per share
Basic .85 1.07 (20.6)
Diluted .85 1.05 (19.0)
INDUSTRIAL
Net sales 275,476 278,131 (1.0)
Operating income 12,840 28,468 (54.9)
Operating margin (%) 4.7 10.2
Order intake 279,616 285,019 (1.9)
Order backlog at September 30 209,006 216,689 (3.5)
AUTOMOTIVE
Net sales 100,322 97,416 3.0
Operating income 10,208 10,189 0.2
Operating margin (%) 10.2 10.5
AEROSPACE
Net sales 133,176 119,230 11.7
Operating income 25,860 20,845 24.1
Operating margin (%) 19.4 17.5
Order intake 142,246 147,198 (3.4)
Order backlog at September 30 406,158 391,445 3.8
</TABLE>
Consolidated net sales for the 1998 third quarter increased $14.2 million, or
2.9%, over the 1997 third quarter. Sales for the automotive and aerospace
segments increased 3% and 11.7%, respectively, but sales for the industrial
segment declined 1% from the 1997 third quarter. U.S. sales increased $10.3
million, or 3.2%, and non-U.S. sales increased $3.9 million, or 2.2%. Sales
generated by companies acquired in 1998, which were principally outside the
U.S., amounted to $9 million for the quarter. Changes in currency exchange
rates lowered non-U.S. sales approximately $1 million.
Third-quarter 1998 industrial segment sales were $2.7 million, or 1%, lower
than in the 1997 third quarter. Third-quarter sales in the Asia-Pacific
region declined $8 million, or 33.2%, and sales in Brazil declined nearly $1
million. These declines were partially offset by higher U.S. industrial sales
of $1.7 million, or .9%, and higher sales in Europe of $4.6 million, or 8.1%.
The sales decline in the Asia-Pacific region was principally the result of the
economic downturn in the region, but was also due partly to changes in
-9-
<PAGE>
Analysis of Operations - Continued
exchange rates. Industrial order intake declined $5.4 million, or 1.9%, from
the 1997 third quarter, due to lower order intake in Brazil and the Asia-
Pacific region. Order backlog at September 30, 1998, was $7.7 million, or
3.5%, lower than at September 30, 1997. Higher backlog in Europe was more
than offset by declines in the U.S. and the Asia-Pacific region.
Automotive segment sales were $2.9 million, or 3%, higher than in the 1997
third quarter. During 1997, the Company sold or closed eight automotive
interior plastics facilities that had third-quarter 1997 sales of $11.5
million. After adjusting to exclude sales originating from those facilities,
third-quarter 1998 U.S. and non-U.S. sales were $.5 million and $13.9 million
higher, respectively, than in the 1997 third quarter. $2.9 million of the
1998 third-quarter non-U.S. sales growth was due to a company acquired in
1998. The growth in non-U.S. automotive sales reflects continued strong
demand in Europe for fluid connectors for use in automotive air conditioning
and power steering applications.
Third-quarter 1998 aerospace segment sales increased $13.9 million, or 11.7%,
over the 1997 third quarter. Sales were up 10.6% in the U.S. and 19% in
Europe. The 1998 third-quarter sales reflected increases over the 1997 third
quarter in sales for commercial and military OEM applications and commercial
aftermarket applications. Third-quarter 1998 aerospace order intake declined
$5 million from the 1997 third quarter, but order backlog at September 30,
1998, was $14.7 million, or 3.8%, higher than at September 30, 1997.
Consolidated manufacturing income declined $10.6 million, or 7.9%, from the
1997 third quarter, and manufacturing margin declined from 27.2% to 24.3%.
The decline was wholly attributable to the industrial segment where
manufacturing income declined $16.1 million from the comparable 1997 period,
and manufacturing margin declined more than 5 percentage points. Among other
things, the decline in industrial earnings was attributable to continued sales
volume erosion in the Asia-Pacific region due to the economic downturn,
changes in sales mix resulting in a decline in higher-margin business, start-
up costs associated with a new pump manufacturing facility, and severance and
related work force reduction costs. Manufacturing income for the automotive
segment increased slightly over the prior year, and manufacturing margin
remained steady. Manufacturing income for the aerospace segment increased
nearly 13%, along with a slight improvement in manufacturing margin.
Selling and general administrative and engineering, research and development
expenses were slightly higher than in the 1997 third quarter. As a percent of
sales, these costs declined from 16.4% to 16%. Costs related to companies
acquired during the year were nearly offset by reductions in the industrial
segment, where costs were pared corresponding to declining margins.
Interest expense of $6.3 million in the 1998 third quarter was nearly the same
as in the 1997 third quarter. Average debt levels were slightly higher in the
1998 third quarter, but the effect of the higher debt levels was offset by
lower interest rates. Certain debt obligations, principally the Company's
7.95% notes in the amount of $75 million that were repaid in 1997 and the
9.55% sinking fund debentures in the amount of $42 million that were repaid in
the 1998 first quarter, were replaced with debt bearing lower interest rates.
Other expense - net was $2.2 million lower in the 1998 third quarter,
principally due to lower foreign exchange losses, reduced minority interest
adjustments and lower corporate-owned life insurance costs.
-10-
<PAGE>
Net income for the 1998 third quarter amounted to $23.9 million, or diluted
net income per share of $.85, compared with 1997 third-quarter net income of
$30.1 million, or diluted net income per share of $1.05. The effective income
tax rate for the 1998 third quarter was 32%. In the 1997 third quarter, the
estimated annual effective income tax rate was reduced from 34% to 33%,
resulting in a third-quarter income tax rate of 31%. 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 1997 third-quarter net
income by $1.3 million, or $.05 per share.
Nine Months 1998 Compared with Nine Months 1997
The following data provide highlights for the 1998 first nine months compared
with the first nine months of 1997.
<TABLE>
<CAPTION>
Nine Months Ended
Percent
(dollars in thousands, September 30 Increase
except per share data) 1998 1997 (Decrease)
<S> <C> <C> <C>
CONSOLIDATED
Net sales $1,630,343 $1,589,481 2.6%
Manufacturing income 419,628 413,918 1.4
Manufacturing margin (%) 25.7 26.0
Operating income 165,167 133,361 (a) 1.1(b)
Operating margin (%) 10.1 10.3 (b)
Net income 92,945 69,428(a) 5.7(b)
Net income per share
Basic 3.30 2.48 (a)5.1(b)
Diluted 3.28 2.41 (a) 8.3(b)
INDUSTRIAL
Net sales 909,219 887,425 2.5
Operating income 73,067 85,662 (14.7)
Operating margin (%) 8.0 9.7
Order intake 904,759 923,361 (2.0)
AUTOMOTIVE
Net sales 310,291 342,624 (9.4)
Operating income 34,728 4,819 (a)(.3)(b)
Operating margin (%) 11.2 10.2(b)
AEROSPACE
Net sales 410,832 359,432 14.3
Operating income 76,286 61,105 24.8
Operating margin (%) 18.6 17.0
Order intake 436,655 414,701 5.3
<FN>
(a) After deducting a special charge of $30 million ($18.5 million net, or
basic and diluted net income per share of $.66 and $.62, respectively).
(b) Before deducting a special charge of $30 million ($18.5 million net, or
basic and diluted net income per share of $.66 and $.62, respectively).
</FN>
</TABLE>
Consolidated net sales for the first nine months of 1998 increased $40.9
million, or 2.6%, over the comparable 1997 period. Sales for the industrial
and aerospace segments increased 2.5% and 14.3%, respectively. Automotive
sales declined 9.4% from the first nine months of 1997, primarily due to the
sale or closure of the Company's interior plastics facilities during 1997 that
had sales during the first nine months amounting to $59.8 million. U.S. sales
increased $48.7 million, or 4.8%, but non-U.S. sales declined $7.8 million, or
1.4%. Sales generated by companies acquired in 1998, which were principally
outside the U.S., amounted to $20.4 million. Changes in currency exchange
rates lowered non-U.S. sales more than $21 million.
-11-
<PAGE>
Analysis of Operations - Continued
Industrial sales for the first nine months of 1998 increased $21.8 million, or
2.5%, over sales during the comparable 1997 period. U.S. industrial sales
increased $30.3 million, or 5.1%, and sales in Europe increased $11.2 million,
or 5.9%. Sales in Brazil were down nearly $1 million and sales in the Asia-
Pacific region were down $18.6 million, or 25.3%. More than half of the sales
decline for the Asia-Pacific region was due to changes in exchange rates.
Industrial order intake declined $18.6 million, or 2%, from the 1997 nine-
month period due to significantly lower order intake in Brazil and the Asia-
Pacific region.
Automotive sales declined $32.3 million, or 9.4%, from the 1997 first nine-
month period. Sales for the first nine months of 1997 from facilities that
were sold or closed in 1997 amounted to $59.8 million. After adjusting to
exclude sales originating from those facilities, U.S. sales for the first nine
months of 1998 were down $.5 million from the prior year, but non-U.S. sales
were up $27.9 million, or 14.2%. The non-U.S. sales increase included the
adverse effects of changes in currency exchange rates amounting to more than
$6 million.
Aerospace segment sales grew $51.4 million, or 14.3%, over the comparable 1997
period. Sales were up 15.6% in the U.S. and 6.6% in Europe, reflecting
increases in sales for commercial and military OEM applications and commercial
aftermarket applications. Aerospace order intake increased $22 million, or
5.3%, from the 1997 nine-month period, with growth in both U.S. and European
orders.
Consolidated manufacturing income increased $5.7 million, or 1.4%, over the
comparable 1997 period. Consolidated manufacturing margin, however, declined
to 25.7% from 26% due to weakening performance in the industrial segment.
Manufacturing income for the industrial segment declined 4.3% and
manufacturing margin slipped 1.7 percentage points. The industrial segment's
performance weakened because of, among other things, the effects of the
economic downturn in the Asia-Pacific region, resulting in lower sales and
higher costs in that region; a change in sales mix resulting in a decline in
higher margin business; start-up costs associated with a new pump
manufacturing facility in the U.S; and severance and related work force
reduction costs. Manufacturing income for the automotive segment declined
slightly from the prior year, but manufacturing margin improved 1.4 percentage
points. Manufacturing income for the aerospace segment increased nearly 15%,
with a slight improvement in manufacturing margin.
Selling and general administrative and engineering, research and development
expenses were $3.9 million, or 1.6%, higher than in the comparable 1997 nine-
month period. Higher costs in the Asia-Pacific region during the first half
of the year and additional costs associated with companies acquired in 1998
contributed to an overall increase, while disposition of the interior plastics
business in 1997 contributed to a reduction of such costs within the
automotive segment.
In the 1997 first quarter, the Company announced plans to exit its automotive
interior plastics business and recorded a special charge of $30 million ($18.5
million net, or diluted net income per share of $.62 for the 1997 nine-month
period [$.63 for the year]), comprised principally of severance, lease
termination and asset disposition costs. As a result the Company sold or
closed eight facilities during 1997 that had combined 1997 sales of
approximately $67 million ($59.8 million in the nine-month period ended
September 30, 1997).
-12-
<PAGE>
Analysis of Operations - Continued
Interest expense for the 1998 nine-month period was $.5 million lower than in
1997, primarily due to lower average interest rates in the first nine months
of 1998. Other expense - net for the first nine months of 1998 included a
loss of $2.5 million resulting from the first-quarter redemption of the
Company's 9.55% sinking fund debentures. Other expense - net for 1998 also
included lower foreign exchange losses, minority interest adjustments and
corporate-owned life insurance costs than in 1997.
Net income for the 1998 nine-month period amounted to $92.9 million, or
diluted net income per share of $3.28, which compares with income for the 1997
nine-month period of $87.9 million, or $3.03 per share, before deducting the
special charge to exit the automotive interior plastics business. Net income
per share for 1998 included a charge of $.05 per share for redemption of the
9.55% debentures. Net income for the 1997 first nine months, after deducting
the special charge of $18.5 million net of tax, or $.62 per share for the nine-
month period, was $69.4 million, or diluted net income per share of $2.41.
The effective income tax rate for the 1998 nine-month period was 32%, compared
with 33% for the 1997 nine-month period exclusive of the special charge.
Liquidity and Capital Resources
Cash provided by operating activities for the first nine months of 1998
amounted to $119 million, compared with $102.5 million for the comparable 1997
period. Working capital requirements in the first nine months of 1998
amounted to $12.9 million and included $3.2 million for growth in inventories
and $15.5 million to reduce payables and accruals. These cash requirements
were partially offset by the effect of an increase in the liability for income
taxes. Working capital requirements during the first nine months of 1997
totaled $30.9 million and included $29.8 million to finance a higher level of
receivables and $30.5 million for growth in inventories. These cash
requirements in 1997 were partially offset by the effects of increases in
payables, accruals and taxes.
Capital expenditures during the first nine months of 1998 totaled $109.4
million compared with $89.9 million in the first nine months of 1997. In
addition, the Company spent $23.5 million during 1998 to acquire four
businesses in the industrial segment and a business in the automotive segment.
In the first nine months of 1997, the Company received $33.2 million from
sales of certain of its automotive interior plastics facilities.
During the first nine months of 1998, the Company purchased 275,500 shares of
its common stock at a cost of $11.4 million. As of September 30, 1998, $69.5
million of additional common stock may be purchased under the current Board of
Directors' authorization. The Company may make further purchases during 1998,
but is not committed to purchase a specific number of shares.
Dividend payments in 1998 were $.22 per share in each of the first three
quarters, totaling $18.6 million for the nine-month period. Dividends
declared for the 1998 fourth quarter to be paid in December were $.22 per
share. The debt-to-capitalization ratio (debt divided by debt plus equity)
was 40.1% at September 30, 1998, compared with 40.2% at December 31, 1997.
-13-
<PAGE>
Liquidity and Capital Resources - Continued
In the 1998 first quarter, the Company retired its 9.55% senior sinking fund
debentures in the amount of $42 million. Additional borrowings under the
Company's Medium Term Note program and short-term debt were used to redeem the
debentures and to meet other funding requirements. The remaining borrowing
capacity at September 30, 1998, under provisions of current shelf registration
statements for the Medium Term Note program, was $200 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, 1998, was $96.7 million. In addition to this agreement, the Company has
uncommitted arrangements with various banks to provide short-term financing as
necessary.
The Company expects that cash flow from operating activities and remaining
available credit lines will be sufficient to meet normal operating
requirements including debt obligations maturing in the near term and planned
capital expenditures.
Other
The Company is currently evaluating its segment disclosures and will adopt
Statement of Financial Accounting Standards No. 131, "Disclosures About
Segments of an Enterprise and Related Information," in the 1998 fourth
quarter. This Statement requires that operating segment financial information
be reported on a basis consistent with the Company's internal reporting that
is used for evaluating segment performance and allocating resources. In June
1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This Statement will become effective for fiscal years
beginning after June 15, 1999. Early application is permitted. The Company
is currently evaluating the effect of the provisions of this Statement on its
accounting and reporting policies, and does not presently expect that adoption
of this Statement will have a material adverse effect on the Company's
consolidated financial position or results of operations.
The Company is continuing its efforts to assess and remediate problems caused
by the inability of certain of its information systems to properly process
transactions using dates in the Year 2000 and beyond, or to operate at the
turn of the century. During the 1998 first quarter, the Company completed an
inventory and identification of its mission critical information systems
relative to Year 2000 related deficiencies. Each operating unit of the
Company is now engaged in the remediation of its year 2000 issues.
A Year 2000 steering committee has been formed composed of the Company's
information technology leadership and other key executives to review and
provide oversight of all Year 2000 related activities. A Year 2000 program
office has also been established as an adjunct to the steering committee to
facilitate Year 2000 communications and coordinate Year 2000 efforts among the
Company's operating units.
During the 1998 third quarter, the Company engaged an independent consultant
to conduct a review of the Year 2000 program office and gauge operating unit
progress to date on Year 2000 related issues. The independent consultant
reported to the Company's senior management and board of directors that the
Year 2000 program office management is sound and that the Company is managing
Year 2000 projects to plan.
-14-
<PAGE>
Other - Continued
The Company will commence testing of its mission critical systems for Year
2000 compliance in the 1998 fourth quarter. The independent consultant is now
assisting the Company in the preparation of the test plans and will provide
oversight and guidance during the testing process. Following the successful
conclusion of the Year 2000 compliance testing, the Year 2000 program office
and the independent consultant will report the test results to the Company
senior management and the board of directors. Year 2000 compliance testing is
expected to conclude in the 1999 second quarter.
The Company is also testing its embedded systems used in the manufacture and
distribution of its products for Year 2000 compliance to avert any disruption
in the supply of product to its customers. All remediation efforts and audits
for the embedded systems are targeted to be completed in the 1999 third
quarter. The Company has recently concluded testing of its microprocessor
based product line and has certified its Year 2000 compliance to the customer
base.
In order to assure continuous flow of products to end customers, the Company
has surveyed and is now assessing Year 2000 readiness on the part of the
Company's supply chain. The majority of suppliers responding to the Company's
initial survey indicated that they were in the process of implementing their
own Year 2000 compliance programs. As a result of the preliminary nature of
the initial survey results, the Company is planning a supplemental survey and
plans to conduct on-site assessments of its critical suppliers. Based upon
the outcome of the Company's final assessment of its external supply chain
components, any business process or systems contingency plan will be developed
and implemented accordingly.
The Company is responding to Year 2000 inquiries from customers and financial
institutions. The Company will conduct on-site assessments of selected
independent distributors during the first half of 1999. The Company is also
preparing for Year 2000 on-site assessments conducted by major OEM customers
and industry groups. These assessments are expected during the latter part of
1998 and early 1999.
From a cost perspective, the Company has budgeted the necessary funds to
address Year 2000 related projects. The Company believes that the incremental
cost of Year 2000 compliance activities is not material due to its extensive
use of packaged software which is now date compliant or can be made compliant
by installing vendor-supplied updates.
The Company anticipates that its mission critical systems will be Year 2000
compliant by the end of the 1999 third quarter. Failure to reach this
anticipated goal, however, could have a material effect on the Company's
business, results of operations or financial condition. Risk factors which
may affect the Company's ability to meet its Year 2000 project plan and the
ability of the Company's information systems to operate properly into the next
century include, but are not limited to, the availability and adequacy of date
compliant software from vendors and the availability of necessary resources,
both internal and external, to install new purchased software or reprogram
existing systems and complete the necessary testing. In addition, the Company
cannot predict the outcome of the Year 2000 assessment of its supply chain or
the ability of its customers to achieve Year 2000 compliance by the end of
1999 nor the impact of either on the future operating results of the Company.
-15-
<PAGE>
Other - Continued
Portions of this report, which are not historical in nature, are forward-
looking statements. The forward-looking statements made in this report, as
well as all other forward-looking statements or information provided by the
Company or its officers and employees, whether written or oral, are made in
reliance upon the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements of the Company are based on,
among other things, the performance of the domestic and international
economies and the industrial, aerospace and automotive industries in which
Aeroquip-Vickers does business. These statements should be considered in
light of risks and uncertainties and other factors which may affect the
Company's actual performance including 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 products and maintaining competitive pricing and to successfully
implement its growth strategies.
PART II - OTHER INFORMATION
Aeroquip-Vickers, Inc.
Item 1. 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 steps have been taken to prevent further incidents.
The panel of experts which was appointed to investigate and report on
the cause of the fires, related technical issues and damages has
issued a preliminary draft report to the parties and to the French
court. When finalized, 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. In its preliminary draft report, the panel expresses
its belief that the Aerospatiale/Airbus system design, the Air
Malaysia maintenance practices and the Vickers pump design were all
causes of the incidents. The purpose of the report is to provide the
parties opportunity for additional comment and the presentation of
additional evidence in anticipation of the issuance of the final
report. Vickers has undertaken to comment on the draft report and
plans to present additional evidence to the panel in the near future.
No claims for recovery of damages have been made at this time.
Evidence was presented to the panel through which Airbus and
Aerospatiale allege that the property damage to the aircraft involved
is in excess of $45 million. Based upon the evidence presented
supporting potential airline claims against Airbus, the alleged cost
of retrofitting other A330/340 aircraft cannot exceed $23 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, including
the draft report, 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 an additional year for the panel to
finalize its report.
-16-
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibit is filed hereunder as part of Part I:
Exhibit (12) Statement re: Computation of Ratios
The following exhibit is filed as part of Part II:
Exhibit (27) Financial Data Schedule
(b) There were no reports on Form 8-K filed for the quarter ended September
30, 1998.
-17-
<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 6, 1998 Darryl F. Allen
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
By /S/ DAVID M. RISLEY
--------------------------------------
November 6, 1998 David M. Risley
Vice President - Finance and
Chief Financial Officer
(Principal Financial Officer)
-18-
_______________________________
1
EXHIBIT INDEX
Exhibit No. Page No.
(12) Statement re: Computation of Ratios 20
(27) Financial Data Schedule 21
-19-
EXHIBIT INDEX
Exhibit No. Page No.
(12) Statement re: Computation of Ratios 20
(27) Financial Data Schedule 21
-19-
<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-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 24,488
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<RECEIVABLES> 365,187
<ALLOWANCES> 13,391
<INVENTORY> 306,498
<CURRENT-ASSETS> 729,868
<PP&E> 1,104,665
<DEPRECIATION> 563,840
<TOTAL-ASSETS> 1,478,693
<CURRENT-LIABILITIES> 468,392
<BONDS> 263,980
<COMMON> 139,913
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<OTHER-SE> 438,892
<TOTAL-LIABILITY-AND-EQUITY> 1,478,693
<SALES> 1,630,343
<TOTAL-REVENUES> 1,630,343
<CGS> 1,210,715
<TOTAL-COSTS> 1,210,715
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