<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 27, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------------- ---------------
Commission File Number 333-48299
SAUER INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3482074
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2800 East 13th Street, Ames, Iowa 50010-8600
- --------------------------------------------------------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code (515) 239-6000
-----------------------------
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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
As of September 27, 1998, 27,397,050 shares of Sauer Inc. common stock were
outstanding.
<PAGE> 2
TABLE OF CONTENTS
Page
----
PART I FINANCIAL STATEMENTS
Item 1. Financial Statements:
Consolidated Statements of Income:
Thirteen Weeks and Thirty-Nine Weeks Ended
September 28, 1997 and September 27, 1998 3
Consolidated Balance Sheets:
As of December 31, 1997 and September 27, 1998 4
Consolidated Statements of Cash Flows:
Thirty-Nine Weeks Ended September 28, 1997 and September 27, 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 17
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 21
<PAGE> 3
SAUER INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
---------------------------- ----------------------------
September 28, September 27, September 28, September 27,
1997 1998 1997 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET SALES $ 118,906 $ 123,992 $ 401,039 $ 437,278
--------- --------- --------- ---------
COSTS AND EXPENSES:
Cost of sales 88,883 92,163 297,353 328,685
Selling, general and administrative 12,930 13,382 37,945 40,469
Research and development 4,700 5,305 14,964 16,534
--------- --------- --------- ---------
Total costs and expenses 106,513 110,850 350,262 385,688
--------- --------- --------- ---------
Operating income 12,393 13,142 50,777 51,590
--------- --------- --------- ---------
NONOPERATING INCOME (EXPENSES):
Interest expense, net (1,802) (1,873) (5,213) (6,512)
Royalty income 332 151 1,000 604
Other, net (462) (139) (944) (459)
--------- --------- --------- ---------
Nonoperating expenses, net (1,932) (1,861) (5,157) (6,367)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES AND
MINORITY INTEREST 10,461 11,281 45,620 45,223
PROVISION FOR INCOME TAXES (3,239) (3,906) (13,908) (13,989)
--------- --------- --------- ---------
INCOME BEFORE MINORITY INTEREST 7,222 7,375 31,712 31,234
MINORITY INTEREST IN INCOME OF
CONSOLIDATED COMPANIES (1,710) (1,335) (8,048) (8,098)
--------- --------- --------- ---------
Net income $ 5,512 $ 6,040 $ 23,664 $ 23,136
========= ========= ========= =========
Basic and diluted net income per
common share outstanding $ 0.23 $ 0.22 $ 0.98 $ 0.90
========= ========= ========= =========
Dividends declared per common share $ 0.08 $ 0.07 $ 0.24 $ 0.22
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 4
SAUER INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
(Unaudited)
December 31, September 27,
ASSETS 1997 1998
------ ------------ -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 7,363 $ 4,580
Accounts receivable, less allowances 77,170 81,394
Inventories 89,031 92,192
Other current assets 9,557 12,298
--------- ---------
Total current assets 183,121 190,464
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, net 191,690 246,610
--------- ---------
OTHER ASSETS
Intangible assets, net 2,964 2,416
Deferred income taxes 8,631 7,483
Other 4,497 7,057
--------- ---------
Total other assets 16,092 16,956
--------- ---------
$ 390,903 $ 454,030
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Notes payable and bank overdrafts $ 60,278 $ 32,998
Long-term debt due within one year 952 1,487
Accounts payable 46,392 39,725
Accrued salaries and wages 6,385 7,649
Accrued warranty 9,398 9,949
Other accrued liabilities 15,897 28,290
--------- ---------
Total current liabilities 139,302 120,098
--------- ---------
LONG-TERM DEBT 75,198 93,275
--------- ---------
OTHER LIABILITIES:
Long-term pension liability 28,959 31,277
Postretirement benefits other than pensions 11,989 12,462
Deferred income taxes 4,018 4,030
Other 13,337 10,203
--------- ---------
Total other liabilities 58,303 57,972
--------- ---------
MINORITY INTEREST IN NET ASSETS OF
CONSOLIDATED COMPANIES 32,799 33,745
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 per share,
authorized 4,500,000 shares in 1997 and 1998;
none outstanding in 1997 and 1998 -- --
Common stock, par value $.01 per share, authorized
45,000,000 shares in 1997 and 1998; issued 24,900,000 shares
in 1997 and 28,072,050 shares in 1998, outstanding 24,225,000
shares in 1997 and 27,397,050 in 1998 249 281
Additional paid-in capital 74,723 119,716
Cumulative translation adjustment 256 3,588
Retained earnings 12,773 30,136
Unamortized compensation - restricted stock -- (2,081)
Common stock in treasury (at cost),
675,000 shares in 1997 and 1998 (2,700) (2,700)
--------- ---------
Total stockholders' equity 85,301 148,940
--------- ---------
$ 390,903 $ 454,030
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 5
SAUER INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended
----------------------------
September 28, September 27,
1997 1998
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 23,664 $ 23,136
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization 19,703 22,977
Minority interest in income of
consolidated companies 8,048 8,098
(Increase) decrease in working capital -
Accounts receivable, net (19,481) (1,462)
Inventories (14,757) 1,052
Accounts payable 7,739 (7,834)
Accrued liabilities 5,072 12,209
Other 1,186 (2,106)
-------- --------
Net cash provided by operating activities 31,174 56,070
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchases of property, plant and equipment (38,653) (73,958)
Proceeds from sales of property,
plant and equipment 25 95
-------- --------
Net cash used in investing activities (38,628) (73,863)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) on notes
payable and bank overdrafts 2,631 (19,858)
Net borrowings (repayments) of long-term debt 9,633 (972)
Cash dividends (5,814) (5,774)
Net proceeds from initial public offering -- 48,100
Distributions to minority interest partners (4,133) (7,151)
-------- --------
Net cash provided by financing activities 2,317 14,345
-------- --------
EFFECT OF EXCHANGE RATE CHANGES (999) 665
-------- --------
CASH AND CASH EQUIVALENTS:
Net decrease during the period (6,136) (2,783)
Beginning balance 12,029 7,363
-------- --------
Ending balance $ 5,893 $ 4,580
======== ========
Supplemental Cash Flow Disclosures:
Interest paid $ 4,777 $ 5,256
Income taxes paid $ 15,020 $ 7,031
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the thirty-nine week period ending September 27, 1998 the Company
purchased the real estate and building of its main facility in Germany for
$23,470. In conjunction with the acquisition, liabilities were assumed as
follows:
Fair value of assets acquired $ 23,470
Cash paid for the real estate and building (15,680)
--------
Liabilities assumed $ 7,790
========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 6
SAUER INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
1) BASIS OF PRESENTATION AND USE OF ESTIMATES -
The consolidated financial statements of Sauer Inc. and subsidiaries (the
"Company") included herein have been prepared by the Company without
audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in the financial statements, prepared in accordance with
generally accepted accounting principles, have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that
the disclosures are adequate to make the information presented not
misleading. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses. Actual results could differ from those
estimates. In the opinion of management, the statements reflect all
adjustments, which are of a normal recurring nature, necessary to present
fairly the Company's financial position as of December 31, 1997 and
September 27, 1998, and results of operations for the thirteen weeks and
thirty-nine weeks ended September 28, 1997 and September 27, 1998 and cash
flows for the thirty-nine weeks ended September 28, 1997 and September 27,
1998. These financial statements and notes are to be read in conjunction
with the financial statements and notes included in the Company's Initial
Public Offering prospectus as filed with the Securities and Exchange
Commission dated May 11, 1998.
2) NEW ACCOUNTING PRINCIPLES -
In the first quarter of 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income."
Total comprehensive income, consisting of net income and foreign currency
translation adjustments, amounted to $4,265 and $10,081 for the
thirteen-week period ended September 28, 1997 and September 27, 1998,
respectively, and $17,767 and $26,468 for the thirty-nine week period
ended September 28, 1997 and September 27, 1998, respectively.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
requires an entity to recognize all derivatives as either assets or
liabilities in the balance sheet and to measure those instruments at fair
value. As the Company does not currently have any such instruments
outstanding, the Company does not believe that this statement will have
any material effect on the Company's results of operations.
3) BASIC AND DILUTED PER SHARE DATA -
Basic net income per common share data has been computed by dividing net
income by the weighted average number of shares of common stock
outstanding for the period less those restricted stock shares issued in
connection with the Company's long-term incentive plan and subject to risk
of forfeiture. The dilutive effect of the restricted stock shares is
calculated using the treasury stock method which applies the unamortized
compensation expense to repurchase shares of common stock. The
reconciliation of basic net income per common share to diluted net income
per common share is shown in the following table for the thirteen week and
thirty-nine week periods ending September 28, 1997 and September 27, 1998:
<PAGE> 7
<TABLE>
<CAPTION>
September 28, 1997 September 27,1998
------------------ -----------------
Net Income Net Income
---------- ----------
Net Income Shares Per Share Net Income Shares Per Share
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Thirteen Weeks:
Basic net income per
share $ 5,512 24,225,000 $ .23 $ 6,040 27,225,000 $ .22
Effect of Dilutive
Securities:
Restricted stock
------- ---------- ---------- ---------- ---------- ----------
Diluted net income
per share $ 5,512 24,225,000 $ .23 $ 6,040 27,225,000 $ .22
======= ========== ========== ========== ========== ==========
Thirty-Nine Weeks:
Basic net income per
share $23,664 24,225,000 $ .98 $ 23,136 25,769,444 $ .90
Effect of Dilutive
Securities:
Restricted stock 2,723
------- ---------- ---------- ---------- ---------- ----------
Diluted net income
per share $23,664 24,225,000 $ .98 $ 23,136 25,772,167 $ .90
======= ========== ========== ========== ========== ==========
</TABLE>
4) SEGMENT AND GEOGRAPHIC INFORMATION -
The Company's two reportable segments are defined by geographic region due
to the difference in economic characteristics in which these segments
operate. The activities of each reportable segment consists of the design,
manufacture and sale of hydraulic systems and other related components.
The following table presents the significant items by segment for the
results of operations for each of the thirteen and thirty-nine week
periods ending September 28, 1997 and September 27, 1998 and balance sheet
data as of December 31, 1997 and September 27, 1998, respectively:
<TABLE>
<CAPTION>
Thirteen Weeks Ended Corporate
September 28, 1997 North America Europe And Other Eliminations Total
------------- -------- --------- ------------ --------
<S> <C> <C> <C> <C> <C>
Trade sales $ 73,328 $ 45,262 $ 316 -- $118,906
Intersegment sales 9,441 9,250 251 (18,942)(1) --
Net income (loss) 6,643 468 (786) (813)(2) 5,512
Total assets (December 31, 1997) 202,335 184,533 159,223 (155,188)(3) 390,903
September 27, 1998
Trade sales $ 78,290 $ 45,245 $ 457 -- $123,992
Intersegment sales 7,584 9,606 389 (17,579)(1) --
Net income (loss) 6,211 537 84 (792)(2) 6,040
Total assets 220,734 226,441 194,504 (187,649)(3) 454,030
</TABLE>
<PAGE> 8
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended Corporate
September 28, 1997 North America Europe And Other Eliminations Total
------------- ------ --------- ------------ -----
<S> <C> <C> <C> <C> <C>
Trade Sales $247,243 $153,077 $ 719 $ -- $401,039
Intersegment sales 27,287 26,146 358 (53,791)(1) --
Net income (loss) 22,047 7,030 (1,923) (3,490)(2) 23,664
Total assets (December 31, 1997) 202,335 184,533 159,223 (155,188)(3) 390,903
September 27, 1998
Trade Sales $279,176 $147,009 $ 1,093 $ -- $437,278
Intersegment sales 26,167 30,134 502 (56,803)(1) --
Net income (loss) 21,369 6,242 (1,242) (3,233)(2) 23,136
Total assets 220,734 226,441 194,504 (187,649)(3) 454,030
</TABLE>
Reconciliations:
(1) Elimination of intersegment sales.
(2) Net income eliminations - minority interest in German Operating Company.
(3) Total assets eliminations:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Investment in subsidiaries $(137,095) $(141,411)
Intersegment receivables (16,230) (45,767)
Intersegment profit in inventory and other (1,863) (471)
--------- ---------
Total assets eliminations $(155,188) $(187,649)
========= =========
</TABLE>
A summary of the Company's net sales by product line is presented below:
<TABLE>
<CAPTION>
Net Sales
---------
Thirteen Weeks Ended Thirty-Nine Weeks Ended
-------------------- -----------------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Hydrostatic transmissions $ 91,683 $ 94,890 $311,575 $339,369
Gear pumps and motors 15,406 17,129 54,529 58,148
Eletrohydraulics and others 11,817 11,973 34,935 39,761
-------- -------- -------- --------
$118,906 $123,992 $401,039 $437,278
======== ======== ======== ========
</TABLE>
<PAGE> 9
A summary of the Company's net sales and long-lived assets by geographic area is
presented below :
<TABLE>
<CAPTION>
Long-Lived
Net sales (1) Assets (2)
------------- ----------
Thirteen Weeks Ended Thirty-Nine Weeks Ended
--------------------- -----------------------
1997 1998 1997 1998 1997 1998
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
United States $ 60,203 $ 65,812 $227,321 $262,779 $106,120 $128,711
Germany 23,986 24,017 79,365 82,387 26,517 45,765
United Kingdom 9,495 9,091 32,495 31,844 19,400 21,211
Other countries 25,222 25,072 61,858 60,268 44,067 57,394
-------- -------- -------- -------- -------- --------
Total $118,906 $123,992 $401,039 $437,278 $196,104 $253,081
======== ======== ======== ======== ======== ========
</TABLE>
(1) Net sales are attributed to countries based on location of customer.
(2) Long-lived assets include property, plant and equipment net of accumulated
depreciation, intangible assets net of accumulated amortization and
certain other long-term assets.
No single customer accounted for 10% or more of total consolidated sales
in any period presented.
5) LONG-TERM INCENTIVE PLAN
The Company's Long-Term Incentive Plan provides for the grant of stock
options, stock appreciation rights, restricted stock, performance units,
performance shares and other incentive awards to officers and key
employees and for the reimbursement to certain participants for the
personal income tax liability resulting from such awards.
On June 1, 1998 the Company awarded 172,050 shares of restricted stock to
a group of employees. The restricted stock award entitles the participants
to full dividend and voting rights. Unvested shares are restricted as to
disposition and subject to forfeiture under certain circumstances. The
value of the award was established based on the market value of the stock
as of the grant date. The shares vest beginning in year five after the
date of grant at a rate of 20% per year thereafter.
Unearned compensation was charged for the market value of the restricted
shares. The unearned compensation is shown as a reduction of stockholders'
equity in the accompanying consolidated balance sheets and is being
amortized ratably over the life of the grant. Compensation expense
recognized in the thirteen-week and thirty-nine week periods ended
September 27, 1998 amounted to $82 and $110, respectively.
6) PURCHASE OF GERMAN FACILITY
On May 1, 1998, the Company acquired the real estate and building of its
main facility in Germany, which was previously leased, from Sauer
Hydraulik which is owned by the Murmann family. The transaction was
accounted for under rules governing transactions occurring between
entities under common control. As such, the assets were recorded at their
historical cost basis of $17,697, debt outstanding of $7,790 was assumed,
cash of $15,680 was paid to Sauer Hydraulik and the excess of the
facility's fair market value, as determined by an independent appraisal,
paid over the seller's historical cost basis of $5,773 was recorded as a
reduction in additional paid-in-capital.
<PAGE> 10
7) NON-RECURRING ITEM
Previously, the Company has been self-insured for losses and liabilities
related to its long-term disability plan covering its U.S. employees. The
Company had accrued an amount based upon the Company's experience and
estimate of future claims to be incurred. During the thirteen week period
ended September 27, 1998 the Company made the decision to purchase
insurance to cover losses and liabilities related to long-term disability.
This resulted in a reversal into income of $750 before taxes of reserves
no longer needed. This reversal increased both basic and diluted net
income per common share for the thirteen and thirty-nine week periods
ending September 27, 1998 by $.01 and $.02, respectively.
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information discussed below in Management's Discussion and Analysis of
Financial Condition and Results of Operations contains statements regarding
matters that are not historical facts, but rather are forward-looking
statements. These statements are based on current financial and economic
conditions and rely heavily on the Company's interpretations of what it
considers key economic assumptions, and involve risks and uncertainties. Actual
future results may differ materially depending on a variety of factors. These
factors, some of which are identified in the discussion accompanying such
forward-looking statements , include, but are not limited to, general economic
conditions, foreign currency movements, pricing and product initiatives and
other actions taken by competitors, labor relations, the Company's execution of
internal performance plans, and other changes to business conditions.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED SEPTEMBER 27, 1998 COMPARED TO THIRTEEN WEEKS ENDED
SEPTEMBER 28, 1997
Net sales - Net sales for third quarter 1998 of $124.0 million increased by $5.1
million, or 4.3% from third quarter 1997 net sales of $118.9 million. Net sales
increased by 3.2% excluding the impact of currency fluctuation. For the third
quarter, sales of gear pumps and motors as well as hydrostatic transmissions
accounted for the major portion of the growth in net sales. North American net
sales for the third quarter 1998 of $78.3 million increased by $5.0 million, or
6.8% from third quarter 1997 net sales of $73.3 million. European net sales for
the third quarter 1998 of $45.2 million were essentially level with third
quarter 1997 net sales of $45.3 million. European net sales decreased by 2.8%
excluding the impact of currency fluctuation. Net sales to East Asia for the
third quarter 1998 decreased by $1.8 million, or 40.9% from the third quarter of
1997, reflecting the impact of the Asian crisis.
Cost of sales - Cost of sales for third quarter 1998 of $92.2 million were 74.4%
of net sales, compared to 74.8% of net sales for third quarter 1997. The third
quarter 1998 cost of sales were aided by the Company's efforts to reduce and
control manufacturing costs in light of the softening in the global economy. In
addition, the third quarter 1998 cost of sales was benefited by the reversal of
an accrual of $.75 million, no longer needed, related to long-term disability
which the Company had previously self-insured.
Selling, general and administrative expenses - Selling, general and
administrative expenses for third quarter 1998 of $13.4 million increased by $.5
million, or 3.9% from third quarter 1997 expenses of $12.9 million. The increase
reflects the investment which has been made in sales and marketing, information
technology, and training to support the Company's growth plans and investments
being made in manufacturing and research and development as well as general
inflation. The Company anticipates these costs to level off as a percentage of
sales as the Company focuses on keeping expenses in line with future sales
projections.
Research and development expenses - Research and development expenses for third
quarter 1998 of $5.3 million increased by $.6 million, or 12.8% from third
quarter 1997 expenses of $4.7 million. See above comments related to selling,
general and administrative expenses.
Nonoperating expenses, net - Net nonoperating expenses for third quarter 1998 of
$1.9 million were level with third quarter 1997 net expenses of $1.9 million.
Net interest expense for third quarter 1998 of $1.9 million increased slightly
by $.1 million from third quarter 1997 net expense of $1.8 million, reflecting
higher bank borrowings from increased capital expenditures and working capital
to support growth in sales. Other, net expenses for the third quarter 1998
decreased by $.4 million from third quarter 1997 relating to numerous immaterial
items.
<PAGE> 12
Provision for income taxes - Provision for income taxes for third quarter 1998
of $3.9 million increased by $.7 million from third quarter 1997 expenses of
$3.2 million. The increase comes from the increase in net income before income
taxes and minority interest of $.8 million and by the increase in the effective
tax rate for third quarter 1998 of 39.3% from the third quarter 1997 rate of
37.0%.
Net income - Net income for the third quarter 1998 of $6.0 million increased by
$.5 million, or 9.1% from third quarter 1997 net income of $5.5 million. Net
income was aided by the higher sales volumes and the Company's efforts to
control operating expenses while partially offset by the higher selling, general
and administrative expenses, and research and development expenses, all relating
to the investments being made as detailed above. Net income was also impacted by
the increase in interest expense of $.1 million. North American third quarter
1998 net income of $6.2 million decreased by $.4 million, or 6.1%, from third
quarter 1997 net income of $6.6 million. European third quarter 1998 net income
of $.5 million was level with third quarter 1997 net income of $0.5 million.
THIRTY-NINE WEEKS ENDED SEPTEMBER 27, 1998 COMPARED TO THIRTY-NINE WEEKS ENDED
SEPTEMBER 28, 1997
Net sales - Net sales for the first nine months of 1998 of $437.3 million
increased by $36.3 million, or 9.1% from the first nine months of 1997 net sales
of $401.0 million. Net sales increased by 9.9% excluding the impact of currency
fluctuation. Sales of all of the Company's products contributed to the growth in
net sales. North American net sales for the first nine months of 1998 of $279.2
million increased by $32.0 million, or 12.9% from the first nine months of 1997
net sales of $247.2 million. European net sales for the first nine months of
1998 of $157.0 million increased by $3.9 million, or 2.6% from the first nine
months of 1997 net sales of $153.1 million. European net sales decreased by 2.8%
excluding the impact of currency fluctuation. Net sales to East Asia for the
first nine months of 1998 decreased by $6.3 million, or 44.0% from the first
nine months of 1997, reflecting the impact of the Asian crisis.
Cost of sales - Cost of sales for the first nine months of 1998 of $328.7
million were 75.2% of net sales, compared to 74.2% of net sales for the first
nine months of 1997. The first nine months of 1998 cost of sales were adversely
impacted by costs relating to the significant investments being made in
manufacturing processes and capacity, including the move of the Minneapolis
electrohydraulics operations to a larger facility in the first quarter, on-going
construction of the Lawrence plant, equipment repair and removal costs in the
German operations, and production start-up costs of a new cam lobe motor in
Slovakia, as well as the decrease in the higher margin East Asia net sales. With
the exception of the costs relating to the Minneapolis and German operations,
the Company expects that cost of sales will continue to be negatively impacted
by the above mentioned items for the remainder of 1998.
Selling, general and administrative expenses - Selling, general and
administrative expenses for the first nine months of 1998 of $40.5 million
increased by $2.6 million, or 6.9% from the first nine months of 1997 expenses
of $37.9 million. The increase reflects the investments made in sales and
marketing, information technology, and training to support the Company's growth
plans and investments being made in manufacturing and research and development
as well as general inflation.
Research and development expenses - Research and development expenses for the
first nine months of 1998 of $16.5 million increased by $1.5 million, or 10.0%
from the first nine months of 1997 expenses of $15.0 million.
Nonoperating expenses, net - Net nonoperating expenses for the first nine months
of 1998 of $6.4 million increased by $1.2 million from the first nine months of
1997 net expenses of $5.2 million. Net interest expense for the first nine
months of 1998 of $6.5 million increased by $1.3 million from the first nine
months of 1997 net interest expense of $5.2 million, reflecting higher bank
borrowings from increased capital expenditures and working capital to support
growth in sales. Royalty income for the first nine months of 1998 decreased by
$.4 million from the first nine months of 1997 reflecting the Company's Japanese
licensee's lower sales. Other, net expenses for the first nine months of 1998
decreased by $.4 million from the first nine months of 1997 relating to numerous
immaterial items.
<PAGE> 13
Provision for income taxes - Provision for income taxes for the first nine
months of 1998 of $14.0 million increased by $.1 million from the first nine
months of 1997 provision of $13.9 million. The increase comes from the slight
increase in the effective tax rate for the first nine months of 1998 of 37.7%
from the first nine months of 1997 rate of 37.0% offset partially by the
decrease in net income before income taxes and minority interest of $.4 million.
Net income - Net income for the first nine months of 1998 of $23.1 million
decreased by $.6 million, or 2.5% from the first nine months of 1997 net income
of $23.7 million. Net income was impacted by the higher cost of sales, selling,
general and administrative expenses, and research and development expenses, all
relating to the investments being made as detailed above. Net income was also
impacted by the increase in interest expense of $1.3 million. North American net
income for the first nine months of 1998 of $21.4 million decreased by $.6
million, or 3.1%, from the first nine months of 1997 net income of $22.0
million. European net income for the first nine months of 1998 of $6.2 million
decreased by $.8 million, or 11.2%, from the first nine months of 1997 net
income of $7.0 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity have been from internally generated
funds, from borrowings under it's credit facilities and from the Company's
recent initial public offering.
Net cash provided by operating activities for the thirty-nine week period ended
September 27, 1998 of $56.1 million increased by $24.9 million from the
thirty-nine week period ended September 28, 1997 of $31.2 million. The increase
between periods arises primarily from cash flow relating to improved management
of inventories and receivables and increases in accrued liabilities.
Net borrowing decreases under short and long term credit facilitates for the
thirty-nine week period ended September 27, 1998 were $20.8 million compared to
the net increases in the thirty-nine week period ended September 28, 1997 of
$12.3 million. Net borrowings decreased during the first nine months of 1998 due
to the net proceeds from the Company's initial public offering of $48.1 million
during the second quarter.
The cash provided by operating activities and the initial public offering have
funded 1998 capital expenditures during the first nine months of $74.0 million,
dividends of $5.8 million, distributions to minority interest partners of $7.2
million and reduction of debt as mentioned above.
Capital expenditures for the first nine months of 1998 of $74.0 million
increased by $35.3 million from the first nine months of 1997 capital
expenditures of $38.7 million. The increase relates to investments made in
manufacturing equipment, the acquisition of the real estate and building of the
Company's main facility in Germany during the second quarter and the building of
the manufacturing plant in Lawrence, Kansas, currently under construction and
expected to be in production during the first half of 1999.
<PAGE> 14
The Company is in the process of reevaluating its capital expenditure
requirements over the next three years in light of the global economic slowdown.
The Company still expects significant capital expenditures will be required to
expand capacity in order to handle additional new programs, to continue to
improve long-term efficiency and to remain competitive. Capital expenditures
will be applied primarily to completing the building of a new manufacturing
facility in Lawrence, to the purchase of manufacturing equipment for each of its
manufacturing plants and to increase production capacity for new and existing
products, to increase production efficiencies, to improve product quality and
for replacement purposes. The Lawrence plant will produce medium power
hydrostatic transmissions. The additional plant will free up capacity at the
Company's Ames facility which will be used to expand the production of high
power hydrostatic transmissions. The Company's manufacturing plants in Slovakia
and China, which started production in 1995 and 1997, respectively, are still
under development and will require further investment in production machinery to
increase their operating capacity and efficiency. The Company plans to continue
to fund this increased level of capital expenditures from internally generated
funds and increased borrowings under its credit facilities which have been
reduced with the funds obtained from the sale of shares. These sources of funds
are expected to be sufficient to support the planned capital expenditures and
the Company's working capital requirements.
Effective May 15, 1998, the Company completed its initial public offering of
common stock. The net proceeds to the Company from the sale amounted to
approximately $48.1 million. The net proceeds were used to repay $15.0 million
of long-term indebtedness, $15.7 million to fund the purchase of the real estate
and building for the Company's main facility in Germany, and the balance has
been used to fund capital expenditures.
OTHER MATTERS
Year 2000 Compliance - The Year 2000 computer issue is the result of computer
programs being written using two digits rather than four to define the
applicable year. Any of the Company's systems or applications that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000, which could result in a range of issues from system failures
to miscalculations. Incomplete or untimely resolution of the Year 2000 issue by
the Company or critically important suppliers or customers of the Company could
have a materially adverse effect on the Company's business, operations or
financial condition in the future.
To mitigate this risk, the Company has established a company-wide initiative to
identify, evaluate and address Year 2000 issues. Included in the scope of this
initiative are the operational and financial information technology systems,
embedded software contained in machinery and equipment, and other end-user
computing resources and building systems. In addition, the project includes a
review and evaluation of the Year 2000 compliance efforts of the Company's key
suppliers and customers.
The Company's overall Year 2000 project approach and status is as follows:
<TABLE>
<CAPTION>
DESCRIPTION OF APPROACH STAGE OF COMPLETION TIMETABLE FOR COMPLETION
----------------------- ------------------- ------------------------
<S> <C> <C>
Inventory and assessment for Y2K impact 75% December 31, 1998
of all systems
Compliance of operational and financial
systems 75% December 31, 1998
Compliance of computer-dependent machine
tools and equipment 20% June 30, 1999
Compliance of personal computers 50% June 30, 1999
Compliance of building-related systems 0% June 30, 1999
</TABLE>
<PAGE> 15
In addition to assessing the Company's Year 2000 readiness, the Company has
contacted its major production suppliers via a confirmation letter program and
received responses from approximately 95% of all those suppliers stating that
Year 2000 readiness will be achieved by December 31, 1999. The Company cannot
guarantee that third parties on whom it depends for essential supplies and
materials will convert their critical systems and processes in a timely manner.
Failure or delay by any of these parties could significantly disrupt the
Company's business. Although no specific testing of the readiness of the
Company's suppliers is currently planned, an on-going evaluation of the
Company's suppliers will be continued.
The Company's Year 2000 project is being completed primarily through the use of
its internal information technology staff, with support from outside contractors
where necessary. In addition, the Company's internal audit staff is performing
periodic evaluations of all of the Company's business units to assess Year 2000
readiness. On-site Year 2000 reviews were largely completed at the end of the
third quarter with follow up reviews scheduled to be completed by the end of the
second quarter of 1999. The cost of the Company's information technology and
internal audit staff to upgrade and evaluate the systems has not been
separately accounted for or estimated as the Company does not feel this to be
material. Although the Year 2000 project is a primary focus for each business
unit, there have not been any material information technology projects which
have been deferred due to the Year 2000 efforts. The cost of obtaining the
operational and business system upgrades is part of the on-going maintenance of
the systems to remain current with new releases and accordingly, has not been
separately accounted for or estimated.
The Company believes its greatest risk lies within its operating and financial
computer systems which it feels will by Year 2000 ready by December 31, 1998. If
these systems were to fail, the Company would encounter difficulty performing
functions such as compiling financial data, invoicing customers, paying
suppliers and communicating production requirements to its manufacturing plants.
While some of these functions could be performed manually, the Company presently
is not certain what the extent of the impact on operations would be.
Individual Company locations are adding Year 2000 specifics to standard
contingency plans where warranted. There is no company-wide contingency plan
relating purely to the Year 2000 as the Company intends to be fully Year 2000
compliant by December 31, 1999. The Company's plans and the date on which the
Company believes it will complete its Year 2000 computer modifications are based
on its best estimates, which, in turn, are based on numerous assumptions of
future events, including third-party modification plans, continued availability
of resources and other factors. The Company cannot be sure that these
assumptions are accurate or that these estimates will be achieved and actual
results could differ materially from those anticipated.
Euro Currency Conversion - The Company has formed a team to evaluate and plan
for the Euro currency conversion. The team has met with customers and suppliers
in order to define necessary requirements. The required internal changes are
currently being researched and specified. The Company's business systems are
already multi-currency functional and the Company's European operations transact
business today in various European currencies. The Company does not have an
estimate of the cost to implement the Euro currency, but does not expect the
cost to have a material effect on the Company's financial condition or results
of operations.
<PAGE> 16
Asian Crisis Impact - Several countries in Asia have been experiencing a severe
economic crisis during the past year, characterized by reduced economic
activity, lack of liquidity, highly volatile foreign currency exchange and
interest rates and unstable stock markets. The Company has a 60% interest in a
joint venture located in Shanghai, China, which manufactures and sells high
power hydrostatic transmissions, and the Company also has export sales into
Asia. The joint venture business and export sales have been and will continue to
be affected by the economic crisis. Sales for the third quarter were down 41%
from 1997 and year to date sales are down 44% from 1997 levels. With total
assets of $10.5 million located in China and total Asian sales for 1997 of $15.5
million, the Company has experienced some adverse effect on the results of its
operations, particularly given the higher margins of such sales. The Company
expects this crisis to continue to have some adverse effect on results from
operations for the remainder of 1998 and well into 1999. In addition, many of
the Company's customers also sell into Asia. Any impact on their sales could
have an adverse impact on the Company's sales. However, the Company does not
believe the impact on its sales, either individually or together with the impact
of the Asian crisis on export sales and the joint venture business, will have a
material adverse effect on its financial condition or results of operations,
although there can be no assurance in this regard.
Outlook - Since the end of the Company's second quarter, the general level of
global economic confidence appears to have fallen considerably. In particular,
the agriculture market has been severely hit with falling commodity prices,
Asia continues to struggle and there are concerns for the general economy in
North America. The Company derives less than 20% of its worldwide sales from the
agriculture market. While the Company expects to see a downturn in its core
business of perhaps 10% in 1999, some overall sales growth is expected in 1999
due to a number of new customer programs starting production in 1999. The
Company expects to experience pressure on profit margins, although steps have
already been taken to contain operating expenses and other fixed costs in order
to lessen this pressure. The Company feels that the ever-growing opportunities
in a broad range of applications coupled with an emphasis on controlling
operating costs will allow it to continue to outpace the growth in its markets.
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(d) The following information relates to the registration statement
filed by the Company under the Securities Act of 1933 on Form S-1
(the "Registration Statement").
The Registration Statement was declared effective on May 11, 1998,
and the Commission File No. is 333-48299. The offering commenced
on May 12, 1998. The offering has terminated with all registered
securities being sold. The managing underwriters were Credit
Suisse First Boston Corporation, global lead manager, Smith Barney
Inc., and Deutsche Morgan Grenfell Inc.
All securities registered were shares of the Company's Common Stock,
par value $.01 per share. The following information relates to
securities sold by the Company and the selling stockholders:
<TABLE>
<CAPTION>
AGGREGATE
AGGREGATE OFFERING
AMOUNT OFFERING PRICE OF
REGISTERED PRICE AMOUNT SOLD AMOUNT SOLD
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Company 3,000,000 shares $ 54,000,000 3,000,000 shares $ 54,000,000
Selling Stockholders 6,000,000 shares $108,000,000 6,000,000 shares $108,000,000
</TABLE>
From the May 11, 1998 effective date of the Registration Statement
through November 11, 1998, the following expenses have been incurred
for the Company's account in connection with the issuance and
distribution of the common stock registered:
<TABLE>
<CAPTION>
Amount
------
<S> <C>
Underwriting Discounts and Commissions $2,700,000
Other Expenses (including accounting, legal, and printing) $3,200,000(1)
----------
Total $5,900,000
==========
</TABLE>
(1) These expenses are based upon reasonable estimates.
None of the above expenses were paid directly or indirectly to
directors or officers of the Company, or to persons owning 10% or more
of the Company's common stock, or to affiliates of the Company.
The net offering proceeds to the issuer after deducting the total
expenses described in the preceding paragraph were $48,100,000. From
the May 11, 1998 effective date of the Registration Statement through
November 11, 1998, the net offering proceeds to the Company have been
used as follows:
<TABLE>
<CAPTION>
Amount
------
<S> <C>
Repayment of long-term indebtedness $15,000,000
Purchase of real estate, plant, and building for the Company's
main facility in Germany $15,680,000(1)
Other capital expenditures $17,420,000
-----------
Total $48,100,000
===========
</TABLE>
<PAGE> 18
(1) The real estate and improvements were purchased from, and the
proceeds were paid to, Sauer Hydraulik, which is wholly-owned by Klaus
Murmann and his family. Klaus Murmann is Chairman of the Board of
Directors and Chief Executive Officer and a 10% stockholder of the
Company.
All payments other than the payment to Sauer Hydraulik were made to
others.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to the security holders for vote during the
quarter ended September 27, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit
No. Description of Document
- ------- -----------------------
3.1 The Restated Certificate of Incorporation of the Company dated April
23, 1998, is attached as Exhibit 3.1(C) to the Company's Form S-1
Registration Statement filed on March 20, 1998, and is incorporated
herein by reference.
3.2 The Restated Bylaws of the Company dated March 13, 1998, are attached
as Exhibit 3.2 to the Company's Form S-1 Registration Statement filed
on March 20, 1998, and is incorporated herein by reference.
4.1 The form of Certificate of the Company's Common Stock, $.01 Par Value,
is attached as Exhibit 4.1 to Amendment No. 1 to the Company's Form S-1
Registration Statement filed on April 23, 1998, and is incorporated
herein by reference.
10.1(a) The Amended and Restated Agreement Regarding the Establishment of a
Silent Partnership Agreement is attached as Exhibit 10.1(a) to
Amendment No. 1 to the Company's Form S-1 Registration Statement filed
on April 23, 1998, and is incorporated herein by reference.
10.1(b) The Registration Rights Agreement is attached as Exhibit 10.1(b) to
Amendment No. 1 to the Company's Form S-1 Registration Statement filed
on April 23, 1998, and is incorporated herein by reference.
10.1(c) The form of Indemnification Agreement entered into between the Company
and each of its directors and certain officers is attached as Exhibit
10.1(c) to Amendment No. 1 to the Company's Form S-1 Registration
Statement filed on April 23, 1998, and is incorporated herein by
reference.
10.1(d) The Lease Agreement for the Company's Dubnica, Slovakia facility is
attached as Exhibit 10.1(f) to Amendment No. 1 to the Company's Form
S-1 Registration Statement filed on April 23, 1998, and is incorporated
herein by reference.
10.1(e) The Lease Agreement for the Company's Swindon, England facility is
attached as Exhibit 10.1(g) to Amendment No. 1 to the Company's Form
S-1 Registration Statement filed on April 23, 1998, and is incorporated
herein by reference.
10.1(f) The Lease Agreement for the Company's Minneapolis, Minnesota facility
is attached as Exhibit 10.1(h) to Amendment No. 1 to the Company's Form
S-1 Registration Statement filed on April 23, 1998, and is incorporated
herein by reference.
<PAGE> 19
10.1(g) The Lease Agreement for the Company's Newtown, Pennsylvania facility is
attached as Exhibit 10.1(i) to Amendment No. 1 to the Company's Form
S-1 Registration Statement filed on April 23, 1998, and is incorporated
herein by reference.
10.1(h) The Lease Agreement for the Company's Shanghai/Pudong, China facility
is attached as Exhibit 10.1(j) to Amendment No. 1 to the Company's Form
S-1 Registration Statement filed on April 23, 1998, and is incorporated
herein by reference.
10.1(i) The Employment Contract with Klaus Murmann is attached as Exhibit
10.1(k) to Amendment No. 1 to the Company's Form S-1 Registration
Statement filed on April 23, 1998, and is incorporated herein by
reference.
10.1(j) The Employment Contract with Tonio Barlage is attached as Exhibit
10.1(l) to Amendment No. 1 to the Company's Form S-1 Registration
Statement filed on April 23, 1998, and is incorporated herein by
reference.
10.1(k) The Employment Contract with Thomas Kittel is attached as Exhibit
10.1(m) to Amendment No. 1 to the Company's Form S-1 Registration
Statement filed on April 23, 1998, and is incorporated herein by
reference.
10.1(l) The Sauer Inc. Phantom Share Plan is attached as Exhibit 10.1(n) to
Amendment No. 1 to the Company's Form S-1 Registration Statement filed
on April 23, 1998, and is incorporated herein by reference.
10.1(m) The Sauer Inc. Bonus Plan is attached as Exhibit 10.1(o) to Amendment
No. 1 to the Company's Form S-1 Registration Statement filed on April
23, 1998, and is incorporated herein by reference.
10.1(n) The Sauer Inc. Management Incentive Plan is attached as Exhibit 10.1(r)
to Amendment No. 1 to the Company's Form S-1 Registration Statement
filed on April 23, 1998, and is incorporated herein by reference.
10.1(o) The Sauer-Sundstrand Employees' Retirement Plan is attached as Exhibit
10.1(s) to Amendment No. 1 to the Company's Form S-1 Registration
Statement filed on April 23, 1998, and is incorporated herein by
reference.
10.1(p) The Sauer-Sundstrand Company Supplemental Retirement Benefit Plan for
Certain Key Executives is attached as Exhibit 10.1(t) to Amendment No.
1 to the Company's Form S-1 Registration Statement filed on April 23,
1998, and is incorporated herein by reference.
<PAGE> 20
10.1(q) The Sauer-Sundstrand Company Supplemental Retirement Benefit Plan for
Certain Key Executives Previously Employed by the Sundstrand
Corporation is attached as Exhibit 10.1(u) to Amendment No. 1 to the
Company's Form S-1 Registration Statement filed on April 23, 1998, and
is incorporated herein by reference.
10.1(r) The Sauer-Sundstrand Employees' Savings & Retirement Plan is attached
as Exhibit 10.1(v) to Amendment No. 1 to the Company's Form S-1
Registration Statement filed on April 23, 1998, and is incorporated
herein by reference.
10.1(s) The Retirement Benefits Agreement for Klaus Murmann is attached as
Exhibit 10.1(w) to Amendment No. 1 to the Company's Form S-1
Registration Statement filed on April 23, 1998, and is incorporated
herein by reference.
10.1(t) The Retirement Benefits Agreement for Tonio Barlage is attached as
Exhibit 10.1(x) to Amendment No. 1 to the Company's Form S-1
Registration Statement filed on April 23, 1998, and is incorporated
herein by reference.
10.1(u) The European Employees' Pension Plan is attached as Exhibit 10.1(y) to
Amendment No. 1 to the Company's Form S-1 Registration Statement filed
on April 23, 1998, and is incorporated herein by reference.
10.1(v) The Sauer Inc. 1998 Long-Term Incentive Plan is attached as Exhibit
10.1(p) to Amendment No 1. to the Company's Form S-1 Registration
Statement filed on April 23, 1998, and is incorporated herein by
reference.
10.1(w) The Sauer Inc. Non-employee Director Stock Option and Restricted Stock
Plan is attached as Exhibit 10.1(q) to the Company's Form S-1
Registration Statement filed on April 23, 1998, and is incorporated
herein by reference.
10.1(x) The Purchase Agreement for the Neumunster, Germany Facility is attached
as Exhibit 10.1(d) to Amendment No. 1 to the Company's Form S-1
Registration Statement filed on April 23, 1998, and is incorporated
herein by reference.
27.1 Financial data schedule.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed for the quarter ended September
27, 1998.
<PAGE> 21
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.
Sauer Inc.
By /s/ Kenneth D. McCuskey
------------------------
Kenneth D. McCuskey
Secretary/Treasurer and
Chief Accounting Officer
Sauer Inc.
November 11, 1998
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-27-1998
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<CASH> 4,580
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<RECEIVABLES> 81,394
<ALLOWANCES> 3,760
<INVENTORY> 92,192
<CURRENT-ASSETS> 190,464
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0
0
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<TOTAL-LIABILITY-AND-EQUITY> 454,030
<SALES> 437,278
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<TOTAL-COSTS> 385,688
<OTHER-EXPENSES> 6,367
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