<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 June 28, 1998
OR
( ) TRANSITION REPORT PRUSUANT 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
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(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 No X
------ ------
As of June 28, 1998, 27,397,050 shares of Sauer Inc. common stock were
outstanding.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I FINANCIAL STATEMENTS
Item 1. Financial Statements:
Consolidated Statements of Income:
Thirteen Weeks and Twenty-Six Weeks Ended June 29, 1997 and June 28, 1998 3
Consolidated Balance Sheets:
As of December 31, 1997 and June 28, 1998 4
Consolidated Statements of Cash Flows:
Twenty-Six Weeks Ended June 29, 1997 and June 28, 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 15
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 19
</TABLE>
<PAGE> 3
SAUER INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
------------------------ ------------------------
June 29, June 28, June 29, June 28,
1997 1998 1997 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET SALES $ 146,273 $ 160,410 $ 282,133 $ 313,286
--------- --------- --------- ---------
COSTS AND EXPENSES:
Cost of sales 107,130 118,385 208,470 236,522
Selling, general and administrative 12,987 13,687 25,015 27,087
Research and development 5,081 5,479 10,264 11,229
--------- --------- --------- ---------
Total costs and expenses 125,198 137,551 243,749 274,838
--------- --------- --------- ---------
Operating income 21,075 22,859 38,384 38,448
--------- --------- --------- ---------
NONOPERATING INCOME (EXPENSES):
Interest expense, net (2,059) (2,420) (3,411) (4,639)
Royalty income 418 203 668 453
Other, net 197 (261) (482) (320)
--------- --------- --------- ---------
Nonoperating expenses, net (1,444) (2,478) (3,225) (4,506)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES AND
MINORITY INTEREST 19,631 20,381 35,159 33,942
PROVISION FOR INCOME TAXES (6,028) (6,152) (10,669) (10,083)
--------- --------- --------- ---------
INCOME BEFORE MINORITY INTEREST 13,603 14,229 24,490 23,859
MINORITY INTEREST IN INCOME OF
CONSOLIDATED COMPANIES (3,345) (3,605) (6,338) (6,763)
--------- --------- --------- ---------
Net income $ 10,258 $ 10,624 $ 18,152 $ 17,096
========= ========= ========= =========
Basic and diluted net income per
common share outstanding $ 0.42 $ 0.41 $ 0.75 $ 0.68
========= ========= ========= =========
Dividends declared per common share $ 0.08 $ 0.07 $ 0.16 $ 0.15
========= ========= ========= =========
</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, June 28,
ASSETS 1997 1998
------ ------------ ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 7,363 $ 19,713
Accounts receivable, less allowances 77,170 92,248
Inventories 89,031 82,483
Other current assets 9,557 9,868
--------- ---------
Total current assets 183,121 204,312
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, net 191,690 229,320
--------- ---------
OTHER ASSETS
Intangible assets, net 2,964 2,477
Deferred income taxes 8,631 8,247
Other 4,497 6,383
--------- ---------
Total other assets 16,092 17,107
--------- ---------
$ 390,903 $ 450,739
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Notes payable and bank overdrafts $ 60,278 $ 57,886
Long-term debt due within one year 952 4,236
Accounts payable 46,392 47,947
Accrued salaries and wages 6,385 7,812
Accrued warranty 9,398 9,080
Other accrued liabilities 15,897 25,411
--------- ---------
Total current liabilities 139,302 152,372
--------- ---------
LONG-TERM DEBT 75,198 67,909
--------- ---------
OTHER LIABILITIES:
Long-term pension liability 28,959 29,318
Postretirement benefits other than pensions 11,989 12,462
Deferred income taxes 4,018 3,988
Other 13,337 10,851
--------- ---------
Total other liabilities 58,303 56,619
--------- ---------
MINORITY INTEREST IN NET ASSETS OF
CONSOLIDATED COMPANIES 32,799 33,145
--------- ---------
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 (453)
Retained earnings 12,773 26,013
Unamortized compensation - restricted stock -- (2,163)
Common stock in treasury (at cost),
675,000 shares in 1997 and 1998 (2,700) (2,700)
--------- ---------
Total stockholders' equity 85,301 140,694
--------- ---------
$ 390,903 $ 450,739
========= =========
</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>
Twenty-Six Weeks Ended
----------------------
June 29, June 28,
1997 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 18,152 $ 17,096
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization 13,171 14,668
Minority interest in income of
consolidated companies 6,338 6,763
(Increase) decrease in working capital -
Accounts receivable, net (24,373) (15,301)
Inventories (496) 6,266
Accounts payable 11,358 2,060
Accrued liabilities 6,967 10,637
Other 1,280 241
-------- --------
Net cash provided by operating activities 32,397 42,430
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES -
Purchases of property, plant and equipment (24,909) (53,438)
Proceeds from sales of property,
plant and equipment 23 --
-------- --------
Net cash used in investing activities (24,886) (53,438)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) on notes
payable and bank overdrafts (6,301) 7,515
Net borrowings (repayments) of long-term debt 6,769 (21,271)
Cash dividends (3,876) (3,856)
Net proceeds from initial public offering -- 48,100
Distributions to minority interest partners (3,643) (6,416)
-------- --------
Net cash provided by (used in)
financing activities (7,051) 24,072
-------- --------
EFFECT OF EXCHANGE RATE CHANGES (868) (714)
-------- --------
CASH AND CASH EQUIVALENTS:
Net increase (decrease) during the period (408) 12,350
Beginning balance 12,029 7,363
-------- --------
Ending balance $ 11,621 $ 19,713
======== ========
Supplemental Cash Flow Disclosures:
Interest paid $ 4,121 $ 5,413
Income taxes paid $ 9,678 $ 5,222
</TABLE>
Supplemental schedule of noncash investing and financing activities:
During the thirteen-week period ending June 28, 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:
<TABLE>
<S> <C>
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 June
28, 1998, and results of operations for the thirteen weeks and twenty-six
weeks ended June 29, 1997 and June 28, 1998 and cash flows for the
twenty-six weeks ended June 29, 1997 and June 28, 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 $9,260 and $9,978 for the
thirteen-week period ended June 29, 1997 and June 28, 1998, respectively,
and $13,502 and $16,387 for the twenty-six week period ended June 29, 1997
and June 28, 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 twenty-six week periods ending June 29, 1997 and June 28, 1998:
<PAGE> 7
<TABLE>
<CAPTION>
June 29, 1997 June 28,1998
------------- ------------
Net Income Shares EPS Net Income Shares EPS
---------- ------ --- ---------- ------ ---
<S> <C> <C> <C> <C> <C> <C>
Thirteen Weeks:
- ---------------
Basic net income $10,258 24,225,000 $ .42 $10,624 25,807,418 $ .41
Effect of Dilutive
Securities:
Restricted stock 8,077
------- ---------- ----- ------- ---------- -----
Diluted net income $10,258 24,225,000 $ .42 $10,624 25,815,495 $ .41
======= ========== ===== ======= ========== =====
Twenty-Six Weeks:
- -----------------
Basic net income $18,152 24,225,000 $ .75 $17,096 25,029,469 $ .68
Effect of Dilutive
Securities:
Restricted stock 4,107
------- ---------- ----- ------- ---------- -----
Diluted net income $18,152 24,225,000 $ .75 $17,096 25,033,576 $ .68
======= ========== ===== ======= ========== =====
</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 twenty-six week periods
ending June 29, 1997 and June 28, 1998 and balance sheet data as of
December 31, 1997 and June 28, 1998, respectively:
<TABLE>
<CAPTION>
Thirteen Weeks Ended All
June 29, 1997 North America Europe Other Eliminations Total
------------- ------------- ------ ----- ------------ -----
<S> <C> <C> <C> <C> <C>
Trade sales $ 91,061 $ 54,937 $ 275 -- $ 146,273
Intersegment sales 9,417 8,911 107 (18,435)(1) --
Net income (loss) 8,428 3,160 (483) (847)(2) 10,258
Total assets 202,335 184,533 159,223 (155,188)(3) 390,903
June 28, 1998
Trade sales $ 103,368 $ 56,701 $ 341 -- $ 160,410
Intersegment sales 9,261 9,745 224 (19,230)(1) --
Net income (loss) 8,691 4,053 (829) (1,291)(2) 10,624
Total assets 218,315 222,382 189,792 (179,750)(3) 450,739
</TABLE>
<PAGE> 8
<TABLE>
<CAPTION>
Twenty-Six Weeks Ended All
June 29, 1997 North America Europe Other Eliminations Total
------------- ------------- ------ ----- ------------ -----
<S> <C> <C> <C> <C> <C>
Trade sales $ 173,915 $ 107,815 $ 403 -- $ 282,133
Intersegment sales 17,846 16,896 107 (34,849)(1) --
Net income (loss) 15,404 6,562 (1,136) (2,678)(2) 18,152
Total assets 202,335 184,533 159,223 (155,188)(3) 390,903
June 28,1998
Trade sales $ 200,886 $ 111,764 $ 636 -- $ 313,286
Intersegment sales 18,583 20,528 389 (39,500)(1) --
Net income (loss) 15,158 5,705 (1,326) (2,441)(2) 17,096
Total assets 218,315 222,382 189,792 (179,750)(3) 450,739
</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) (38,261)
Intersegment profit in inventory and other (1,863) (78)
--------- ---------
Total assets eliminations $(155,188) $(179,750)
========= =========
</TABLE>
A summary of the Company's net sales by product line is presented below:
<TABLE>
<CAPTION>
Net sales
---------
Thirteen Weeks Ended Twenty-Six Weeks Ended
-------------------- ----------------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Hydrostatic transmissions $114,775 $125,789 $219,892 $244,479
Gear pumps and motors 19,277 20,544 39,123 41,019
Electrohydraulics and others 12,221 14,077 23,118 27,788
-------- -------- -------- --------
$146,273 $160,410 $282,133 $313,286
======== ======== ======== ========
</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 Assets
Net sales (1) Assets (2)
------------- ----------
Thirteen Weeks Ended Twenty-Six Weeks Ended
--------------------- ----------------------
1997 1998 1997 1998 1997 1998
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
United States $ 87,625 $101,036 $167,118 $196,967 $106,120 $120,413
Germany 28,441 28,408 55,379 58,370 26,517 39,511
United Kingdom 10,313 10,608 23,000 22,753 19,400 20,519
Other countries 19,894 20,358 36,636 35,196 44,067 51,354
-------- -------- -------- -------- -------- --------
Total $146,273 $160,410 $282,133 $313,286 $196,104 $231,797
======== ======== ======== ======== ======== ========
</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 period ended June 28, 1998 amounted to
$28.
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
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 JUNE 28, 1998 COMPARED TO THIRTEEN WEEKS ENDED JUNE 29,
1997
Net sales - Net sales for second quarter 1998 of $160.4 million increased by
$14.1 million, or 9.7% from second quarter 1997 net sales of $146.3 million. Net
sales increased by 11.2% excluding the impact of currency fluctuation. Sales of
electrohydraulics and other products and hydrostatic transmissions continue to
account for the major portion of the growth in net sales. North American net
sales for the second quarter 1998 of $103.4 million increased by $12.3 million,
or 13.5% from second quarter 1997 net sales of $91.1 million. European net sales
for the second quarter 1998 of $56.7 million increased by $1.8 million, or 3.2%
from second quarter 1997 net sales of $54.9 million. European net sales
increased by 7.2% excluding the impact of currency fluctuation. Net sales to
East Asia for the second quarter 1998 decreased by $1.5 million, or 33.7% from
the second quarter of 1997, reflecting the impact of the Asian crisis.
Cost of sales - Cost of sales for second quarter 1998 of $118.4 million were
73.8% of net sales, compared to 73.2% of net sales for second quarter 1997. The
second quarter 1998 cost of sales were adversely impacted by costs relating to
the significant investments being made in manufacturing processes and capacity,
including construction of the Lawrence plant 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. 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 second quarter 1998 of $13.7 million increased by
$.7 million, or 5.1% from second quarter 1997 expenses of $13.0 million. The
increase reflects the investment being 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 second
quarter 1998 of $5.5 million increased by $.4 million, or 7.8% from second
quarter 1997 expenses of $5.1 million.
<PAGE> 11
Nonoperating expenses, net - Net nonoperating expenses for second quarter 1998
of $2.5 million increased by $1.1 million from second quarter 1997 net expenses
of $1.4 million. Net interest expense for second quarter 1998 of $2.4 million
increased by $.4 million from second quarter 1997 net expense of $2.1 million,
reflecting higher bank borrowings from increased capital expenditures and
working capital to support growth in sales. Other, net expenses for the second
quarter 1998 increased by $.6 million from second quarter 1997 relating to
numerous immaterial items.
Provision for income taxes - Provision for income taxes for second quarter 1998
of $6.1 million increased by $.1 million from second quarter 1997 expenses of
$6.0 million. The increase comes from the increase in net income before income
taxes and minority interest of $.8 million partially offset by the decrease in
the effective tax rate for second quarter 1998 of 30.2% from the second quarter
1997 rate of 30.7%.
Net income - Net income for the second quarter 1998 of $10.6 million increased
by $.4 million, or 3.6% from second quarter 1997 net income of $10.2 million.
Net income was aided by the higher sales volumes while partially offset 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 $.4
million. North American second quarter 1998 net income of $8.7 million increased
by $.3 million, or 3.1%, from second quarter 1997 net income of $8.4 million.
European second quarter 1998 net income of $4.1 million increased by $.9
million, or 28%, from second quarter 1997 net income of $3.2 million.
TWENTY-SIX WEEKS ENDED JUNE 28, 1998 COMPARED TO TWENTY-SIX WEEKS ENDED JUNE 29,
1997
Net sales - Net sales for first half 1998 of $313.3 million increased by $31.2
million, or 11.1% from first half 1997 net sales of $282.1 million. Net sales
increased by 12.8% excluding the impact of currency fluctuation. Sales of
electrohydraulics and other products and hydrostatic transmissions continue to
account for the major portion of the growth in net sales. North American net
sales for the first half 1998 of $200.9 million increased by $27.0 million, or
15.5% from first half 1997 net sales of $173.9 million. European net sales for
the first half 1998 of $111.8 million increased by $3.9 million, or 3.7% from
first half 1997 net sales of $107.8 million. European net sales increased by
8.2% excluding the impact of currency fluctuation. Net sales to East Asia for
the first half 1998 decreased by $4.6 million, or 46.0% from the first half
1997, reflecting the impact of the Asian crisis.
Cost of sales - Cost of sales for the first half 1998 of $236.5 million were
75.5% of net sales, compared to 73.9% of net sales for first half 1997. The
first half 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, 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 first half 1998 of $27.1 million increased by $2.0
million, or 8.1% from first half 1997 expenses of $25.1 million. The increase
reflects the investment being 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 first
half 1998 of $11.2 million increased by $.9 million, or 9.4% from first half
1997 expenses of $10.3 million.
<PAGE> 12
Nonoperating expenses, net - Net nonoperating expenses for first half 1998 of
$4.5 million increased by $1.3 million from first half 1997 net expenses of $3.2
million. Net interest expense for first half 1998 of $4.6 million increased by
$1.2 million from first half 1997 net interest expense of $3.4 million,
reflecting higher bank borrowings from increased capital expenditures and
working capital to support growth in sales. Other, net expenses for the first
half 1998 decreased by $.1 million from first half 1997 relating to numerous
immaterial items.
Provision for income taxes - Provision for income taxes for first half 1998 of
$10.1 million decreased by $.6 million from first half 1997 provision of $10.7
million. The decrease comes from the decrease in net income before income taxes
and minority interest of $1.2 million and by the decrease in the effective tax
rate for first half 1998 of 29.7% from the first half 1997 rate of 30.3%.
Net income - Net income for the first half 1998 of $17.1 million decreased by
$1.1 million, or 5.8% from first half 1997 net income of $18.2 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 $1.2 million. North American first half 1998
net income of $15.2 million decreased by $.2 million, or 1.6%, from first half
1997 net income of $15.4 million. European first half 1998 net income of $5.7
million decreased by $.9 million, or 13%, from first half 1997 net income of
$6.6 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 twenty-six week period ended
June 28, 1998 of $42.4 million increased by $10.0 million from the twenty-six
week period ended June 29, 1997 of $32.4 million. The increase between periods
arises primarily from a reduction in inventories and increases in accrued
liabilities.
Net borrowing decreases under short and long term credit facilitates for the
twenty-six week period ended June 28, 1998 were $13.8 million compared to the
net increases in the twenty-six week period ended June 29, 1997 of $.5 million.
Net borrowings decreased during the first half 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 first half 1998 capital expenditures of $53.4 million, dividends of $3.9
million and distributions to minority interest partners of $6.4 million.
Capital expenditures for the first half of 1998 of $53.4 million increased by
$28.5 million from the first half 1997 capital expenditures of $24.9 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 and the building of the manufacturing plant in Lawrence, Kansas,
currently under construction.
<PAGE> 13
The Company believes that increased levels of capital expenditures will be
required over the next three years to expand capacity, improve efficiency and
remain competitive. As a result, the Company expects capital expenditures to be
in the range of $150-$230 million during 1998-2000. Capital expenditures will be
applied primarily to 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 Company is currently in the process of evaluating its
information technology infrastructure for Year 2000 compliance. The Company
believes it has successfully upgraded its business systems software in both the
U.S. and Europe to make the systems Year 2000 compliant. The upgrades were
obtained from the Company's software vendors under the normal ongoing
maintenance agreements. The upgrades have been implemented primarily by the
Company's information technology staff, with support from outside contractors
as needed. The cost of the Company's information technology staff to upgrade
the business systems software has not been separately accounted for or
estimated. The cost of outside contractors was not material to the Company's
results of operations. The Company's manufacturing operations make extensive
use of computer controlled machine tools. The Company is currently evaluating
Year 2000 compliance impact on these machine tools and has determined they will
need to be upgraded to make them Year 2000 compliant. The Company does not have
an estimate of the cost of upgrading these machine tools. As part of the
evaluation the Company is working with suppliers of the machine tools to
understand their plans. The Company's products are not affected by the Year
2000 issue. The Company is currently contacting its suppliers and customers
regarding their year 2000 status and anticipates completing this survey during
the third quarter of 1998. In the event that any of the Company's significant
suppliers or customers does not successfully and timely achieve Year 2000
compliance, the Company's business or operations could be adversely affected.
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> 14
Asian Crisis Impact - Several countries in Asia are experiencing a severe
economic crisis, 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 second quarter were down 34% from 1997 and year to date sales are
down 46% 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 expects the crisis
to continue to have some adverse effect on results of operations, particularly
given the higher margins of such sales. 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 this
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.
<PAGE> 15
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 August 12, 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
August 12, 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> 16
(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.
At the 1998 annual meeting of stockholders held on April 22, 1998, the
stockholders of the Company approved the Amendment of Certificate of
Incorporation which increased the authorized capital stock of the
Company from 3,000 shares of Common Stock and 300 shares of Preferred
Stock to 45,000,000 shares of Common Stock and 4,500,000 shares of
Preferred Stock, reclassified and converted the existing issued stock
pursuant to a 12,500-for-one stock split, and reduced the par value of
the Company's stock from $5,000 per share to $.01 per share. The
amendment was approved by stockholders owning approximately 99% of the
Company's outstanding capital stock.
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.
<PAGE> 17
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.
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> 18
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 June 28,
1998.
<PAGE> 19
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.
August 12, 1998
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-28-1998
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<ALLOWANCES> 3,760
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<PP&E> 434,158
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<TOTAL-ASSETS> 450,739
<CURRENT-LIABILITIES> 152,372
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0
0
<COMMON> 281
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<TOTAL-LIABILITY-AND-EQUITY> 450,739
<SALES> 313,286
<TOTAL-REVENUES> 313,286
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<TOTAL-COSTS> 274,838
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