<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 3, 1999
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 November 16, 1999, 27,409,550 shares of Sauer Inc. common stock, $.01 par
value, were outstanding.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-------------
<S> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Income:
Thirteen Weeks and Thirty-Nine Weeks Ended
September 27, 1998 and October 3, 1999 3
Consolidated Balance Sheets:
As of December 31, 1998 and October 3, 1999 4
Consolidated Statements of Cash Flows:
Thirty-Nine Weeks Ended September 27, 1998 and October 3, 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 17
</TABLE>
2
<PAGE>
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 27, October 3, September 27, October 3,
1998 1999 1998 1999
------------- ----------- ------------- ----------
<S> <C> <C> <C> <C>
NET SALES $ 123,992 $ 115,068 $ 437,278 $ 416,129
------------- ----------- ------------- ----------
COSTS AND EXPENSES:
Cost of sales 92,163 87,659 328,685 312,196
Selling, general and administrative 13,382 13,501 40,469 42,634
Research and development 5,305 5,621 16,534 17,149
------------- ----------- ------------- ----------
Total costs and expenses 110,850 106,781 385,688 371,979
------------- ----------- ------------- ----------
Operating income 13,142 8,287 51,590 44,150
------------- ----------- ------------- ----------
NONOPERATING INCOME (EXPENSES):
Interest expense, net (1,873) (1,634) (6,512) (6,402)
Royalty income 151 175 604 547
Other, net (139) (138) (459) (650)
------------- ----------- ------------- ----------
Nonoperating expenses, net (1,861) (1,597) (6,367) (6,505)
------------- ----------- ------------- ----------
INCOME BEFORE INCOME TAXES AND
MINORITY INTEREST 11,281 6,690 45,223 37,645
PROVISION FOR INCOME TAXES (3,906) (2,137) (13,989) (11,449)
------------- ----------- ------------- ----------
INCOME BEFORE MINORITY INTEREST 7,375 4,553 31,234 26,196
MINORITY INTEREST IN INCOME OF
CONSOLIDATED COMPANIES (1,335) (919) (8,098) (6,701)
------------- ----------- ------------- ----------
Net income $ 6,040 $ 3,634 $ 23,136 $ 19,495
============= =========== ============= ==========
Basic and diluted net income per
common share outstanding $ 0.22 $ 0.14 $ 0.90 $ 0.72
============= =========== ============= ==========
Dividends declared per common share $ 0.07 $ 0.07 $ 0.22 $ 0.21
============= =========== ============= ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
3
<PAGE>
SAUER INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
December 31, October 3,
1998 1999
------------ ----------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 8,891 $ 5,932
Accounts receivable, less allowances 73,661 76,389
Inventories 89,195 74,276
Other current assets 9,984 10,519
------------ ----------
Total current assets 181,731 167,116
------------ ----------
PROPERTY, PLANT AND EQUIPMENT, NET 262,527 272,122
------------ ----------
OTHER ASSETS:
Intangible assets, net 3,769 2,501
Deferred income taxes 5,742 4,453
Other 6,002 4,780
------------ ----------
Total other assets 15,513 11,734
------------ ----------
$ 459,771 $ 450,972
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and bank overdrafts $ 41,767 $ 33,084
Long-term debt due within one year 2,398 1,812
Accounts payable 38,271 34,694
Accrued salaries and wages 7,683 8,976
Accrued warranty 8,601 8,118
Other accrued liabilities 12,884 22,213
------------ ----------
Total current liabilities 111,604 108,897
------------ ----------
LONG-TERM DEBT 106,862 95,096
------------ ----------
OTHER LIABILITIES:
Long-term pension liability 33,044 32,203
Postretirement benefits other than pensions 13,608 13,608
Deferred income taxes 4,746 4,898
Other 5,419 4,966
------------ ----------
Total other liabilities 56,817 55,675
------------ ----------
MINORITY INTEREST IN NET ASSETS OF CONSOLIDATED COMPANIES 35,584 35,979
------------ ----------
STOCKHOLDERS' EQUITY:
Common stock, par value $.01 per share, authorized
45,000,000 shares in 1998 and 1999; issued 28,072,050
in 1998 and 28,084,550 in 1999; outstanding 27,397,050
in 1998 and 27,409,550 in 1999 281 281
Additional paid-in capital 120,092 120,217
Retained earnings 31,416 45,155
Accumulated other comprehensive income 1,813 (5,761)
Unamortized restricted stock compensation (1,998) (1,867)
Common stock in treasury (at cost),
675,000 shares in 1998 and 1999 (2,700) (2,700)
------------ ----------
Total stockholders' equity 148,904 155,325
------------ ----------
$ 459,771 $ 450,972
============ ==========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
4
<PAGE>
SAUER INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Thirty-Nine Weeks Ended
------------------------------
September 27, October 3,
1998 1999
------------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 23,136 $ 19,495
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization 22,977 27,405
Minority interest in income of consolidated companies 8,098 6,701
(Increase) decrease in working capital -
Accounts receivable, net (1,462) (5,771)
Inventories 1,052 10,559
Accounts payable (7,834) (1,619)
Accrued liabilities 12,209 10,285
Other (2,106) 3,550
------------- ----------
Net cash provided by operating activities 56,070 70,605
------------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (73,958) (45,834)
Proceeds from sales of property, plant and equipment 95 358
------------- ----------
Net cash used in investing activities (73,868) (45,476)
------------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments on notes payable and bank overdrafts (19,858) (5,818)
Net repayments of long-term debt (972) (8,722)
Cash dividends (5,774) (5,754)
Net proceeds from initial public offering 48,100 -
Distributions to minority interest partners (7,151) (6,049)
------------- ----------
Net cash provided by (used in) financing activities 14,345 (26,343)
------------- ----------
EFFECT OF EXCHANGE RATE CHANGES 665 (1,745)
------------- ----------
CASH AND CASH EQUIVALENTS:
Net decrease during the period (2,783) (2,959)
Beginning balance 7,363 8,891
------------- ----------
Ending balance $ 4,580 $ 5,932
============= ==========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $ 5,256 $ 4,452
Income taxes paid $ 7,031 $ 8,040
</TABLE>
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, assets were acquired at fair value
of $23,470, cash was paid of $15,680 and liabilities of $7,790 were assumed.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS.
5
<PAGE>
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, 1998 and October 3, 1999, and results of operations for
the thirteen weeks and thirty-nine weeks ended September 27, 1998, and
October 3, 1999, and cash flows for the thirty-nine weeks ended
September 27, 1998, and October 3, 1999. These financial statements and
notes are to be read in conjunction with the financial statements and
notes thereto included in the Company's latest annual report on Form
10-K as filed with the Securities and Exchange Commission dated March
31, 1999.
2) RECLASSIFICATION -
Certain previously reported amounts have been reclassified to conform
with the current period presentation.
3) COMPREHENSIVE INCOME -
Total comprehensive income, consisting of net income adjusted for
foreign currency translation, is as follows:
<TABLE>
<CAPTION>
Thirteen Weeks Ended Thirty-Nine Weeks Ended
-------------------- -----------------------
September 28, October 3, September 28, October 3,
1998 1999 1998 1999
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 6,040 $3,634 $23,136 $19,495
Translation adjustment 4,041 4,061 3,332 (7,574)
-----------------------------------------------------------------
Comprehensive income $10,081 $7,695 $26,468 $11,921
=================================================================
</TABLE>
4) 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 27, 1998,
and October 3, 1999:
6
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 27, 1998 OCTOBER 3, 1999
------------------ ---------------
NET INCOME SHARES EPS NET INCOME SHARES EPS
---------- ------ --- ---------- ------ ---
<S> <C> <C> <C> <C> <C> <C>
THIRTEEN WEEKS:
Basic net income $ 6,040 27,225,000 $.22 $ 3,634 27,226,050 $.14
Effect of dilutive
securities:
Restricted stock - - - - 32,011 -
------------------------------------ ------------------------------------
Diluted net income $ 6,040 27,225,000 $.22 $ 3,634 27,258,061 $.14
==================================== ====================================
THIRTY-NINE WEEKS:
Basic net income $23,136 25,769,444 $.90 $19,495 27,225,428 $.72
Effect of dilutive
securities:
Restricted stock - 2,723 - - 10,701 -
------------------------------------ ------------------------------------
Diluted net income $23,136 25,772,167 $.90 $19,495 27,236,129 $.72
==================================== ====================================
</TABLE>
5) 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 consist 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 27, 1998, and October 3, 1999, and balance
sheet data as of December 31, 1998 and October 3, 1999, respectively:
<TABLE>
<CAPTION>
NORTH ALL
AMERICA EUROPE OTHER ELIMINATIONS TOTAL
------- ------ ----- ------------ -----
<S> <C> <C> <C> <C> <C>
THIRTEEN WEEKS ENDED:
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 227,920 220,172 198,116 (186,437)(3) 459,771
OCTOBER 3, 1999
- ---------------
Trade sales $ 73,258 $ 40,459 $ 1,351 $ - $115,068
Intersegment sales 7,947 6,638 128 (14,713)(1) -
Net income (loss) 3,680 47 382 (475)(2) 3,634
Total assets 237,713 209,439 193,720 (189,900)(3) 450,972
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
ALL
NORTH AMERICA EUROPE OTHER ELIMINATIONS TOTAL
------------- ------ ----- ------------ -----
<S> <C> <C> <C> <C> <C>
THIRTY-NINE WEEKS ENDED:
SEPTEMBER 27, 1998
- ------------------
Trade sales $279,176 $157,009 $ 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 227,920 220,172 198,116 (186,437)(3) 459,771
OCTOBER 3, 1999
- ---------------
Trade sales $265,741 $145,840 $ 4,548 $ - $416,129
Intersegment sales 28,169 24,105 258 (52,532)(1) -
Net income (loss) 18,076 2,831 1,130 (2,542)(2) 19,495
Total assets 237,713 209,439 193,720 (189,900)(3) 450,972
</TABLE>
- ----------------------------
Reconciliations:
(1) Elimination of intersegment sales.
(2) Net income eliminations - minority interest in German Operating Company.
(3) Total assets eliminations:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Investment in subsidiaries $(144,391) $(145,106)
Intersegment receivables (40,244) (43,350)
Intersegment profit in inventory and other (1,802) (1,444)
--------- ----------
Total assets eliminations $(186,437) $(189,900)
========== ==========
</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
---------------------------- -----------------------------
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Hydrostatic transmissions $ 96,465 $ 90,420 $345,488 $337,190
Open circuit gear pumps and motors and piston pumps 17,971 16,153 60,417 50,973
Electrohydraulics and others 9,556 8,495 31,373 27,966
------------------------------------------------------------
Total $123,992 $115,068 $437,278 $416,129
============================================================
</TABLE>
A summary of the Company's net sales and long-lived assets by geographic area is
presented below:
<TABLE>
<CAPTION>
NET SALES (1)
-------------------------------------------------- LONG-LIVED ASSETS
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED ASSETS (2)
-------------------- ----------------------- ----------
1998 1999 1998 1999 1998 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
United States $ 69,318 $ 65,873 $256,181 $243,643 $141,021 $152,879
Germany 13,554 8,521 39,625 34,910 46,930 47,899
United Kingdom 8,450 6,901 28,203 22,411 21,279 25,477
Slovakia 231 368 1,788 770 39,856 36,912
Other countries 32,439 33,405 111,481 114,395 17,210 16,236
-------------- --------------- ------------- --------------- ------------------ --------------
Total $152,992 $115,068 $437,278 $416,129 $266,296 $279,403
============== =============== ============= =============== ================== ==============
</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.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT - THE INFORMATION DISCUSSED BELOW IN MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CONTAINS "FORWARD-LOOKING STATEMENTS," STATEMENTS REGARDING MATTERS THAT ARE
NOT HISTORICAL FACTS, BUT RATHER ARE SUBJECT TO RISKS AND UNCERTAINTIES.
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. 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, ABILITY OF
SUPPLIERS TO PROVIDE MATERIALS AS NEEDED, LABOR RELATIONS, THE COMPANY'S
EXECUTION OF INTERNAL PERFORMANCE PLANS, AND OTHER CHANGES TO BUSINESS
CONDITIONS.
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED OCTOBER 3, 1999 COMPARED TO THIRTEEN WEEKS ENDED
SEPTEMBER 27, 1998
NET SALES - Net sales for third quarter 1999 of $115.1 million decreased by
$8.9 million, or 7.2% from third quarter 1998 net sales of $124.0 million.
Net sales also decreased by 7.2% excluding the impact of currency
fluctuation. Third quarter 1999 sales for the specialty vehicle market were
up 16.5% and construction increased 22.6% over third quarter 1998. These
increases helped to offset, but did not fully compensate for decreases in the
Company's other markets. Agriculture sales were down 28.5% from third quarter
1998 while turf care sales declined 21.2% and road building sales declined
10.8%. North American net sales for third quarter 1999 of $73.3 million
decreased by $5.0 million, or 6.4% from third quarter 1998 net sales of $78.3
million. The Company's Sullivan, Illinois, operations experienced a decline
of $4.4 million in sales to the turf care market in the third quarter of
1999. Additionally, all of North America continues to be impacted by the
decline in the agriculture market. European net sales for third quarter 1999
of $40.5 million decreased by $4.7 million, or 10.4% from third quarter 1998
net sales of $45.2 million. European net sales decreased by the same 10.4%
excluding the impact of currency fluctuation. Sales in Europe were adversely
impacted by the agriculture market with sales down 5.1% from third quarter
1998. The Company's Swindon, England, operations experienced a sales decline
in the third quarter of $2.5 million from 1998 third quarter levels of $12.9
million due to the agriculture market decline. East Asia net sales for third
quarter 1999 increased by $0.9 million, or almost double third quarter 1998
sales.
The following table sets forth the Company's net sales by market, in dollars
(000's) and as a percentage of total net sales, for the thirteen weeks ended
October 3, 1999, and September 27, 1998:
<TABLE>
<CAPTION>
October 3, % of September 27, % of
1999 Total 1998 Total
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Agriculture $ 17,855 15.5 $ 24,962 20.1
Construction 20,018 17.4 16,331 13.2
Turf Care 16,678 14.5 21,172 17.1
Road-building 14,737 12.8 16,515 13.3
Specialty 10,913 9.5 9,364 7.6
Distribution and aftermarket 34,868 30.3 35,648 28.8
--------------------------------------------------------------
Total $115,068 100.0 $123,992 100.0
==============================================================
</TABLE>
COST OF SALES - Cost of sales for third quarter 1999 of $87.7 million was
76.2% of net sales, compared to 74.4% of net sales for third quarter 1998.
Cost of sales for third quarter 1999 increased due to underabsorbed overhead
costs related to the higher fixed costs in place for 1999 from the
significant capital spending in prior years for facilities and equipment. The
Company expects this trend to continue for the fourth quarter of 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses for third quarter 1999 of $13.5 million increased by
$0.1 million, or 0.7% from third quarter 1998 expenses of $13.4 million. The
increase reflects primarily the effects of inflation. The Company anticipates
this trend to continue during the fourth quarter of 1999.
9
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES - Research and development expenses for
third quarter 1999 of $5.6 million increased $0.3 million, or 5.7% from third
quarter 1998 expenses of $5.3 million. The increase reflects the Company's
commitment to continue to invest in new technology development for on-going
program development.
NONOPERATING EXPENSES, NET - Net nonoperating expenses for third quarter 1999
of $1.6 million were $0.3 million less than third quarter 1998 net expenses
of $1.9 million. Net interest expense accounted for all of this decline. Net
interest expense for third quarter 1999 of $1.6 million decreased by $0.3
million from third quarter 1998 net expense of $1.9 million due to reduced
borrowings. Net borrowings have declined due to better management of working
capital in 1999 compared to 1998.
PROVISION FOR INCOME TAXES - Provision for income taxes for third quarter
1999 of $2.1 million decreased by $1.8 million from third quarter 1998
provision for income taxes of $3.9 million. The decrease comes from the
decrease in net income before income taxes of $4.1 million and the decrease
in the effective tax rate for third quarter 1999 of 37% from the third
quarter 1998 rate of 39.3%. The 1998 effective rate was higher due to the
effect of earnings mix from various taxing jurisdictions.
NET INCOME - Net income for third quarter 1999 of $3.6 million decreased by
$2.4 million, or 40% from third quarter 1998 net income of $6.0 million. Net
income was adversely impacted by the decline in sales for the quarter driven
primarily by the decline in the agriculture, road building and turf care
markets as discussed above. North American third quarter 1999 net income of
$3.7 million decreased by $2.5 million, or 40%, from third quarter 1998 net
income of $6.2 million. North American net income was unfavorably impacted by
the decline in the agriculture, road building and turf care markets in
addition to the higher fixed costs from capital investments as discussed
above. European third quarter 1999 net income of $0.05 million decreased by
$0.45 million, or 90%, from third quarter 1998 net income of $.5 million. The
decline in European net income results directly from the decline in the
agriculture market related to the Company's Swindon, England operation
mentioned above coupled with the additional fixed costs that have been added
in other locations to increase production capability and capacity previously
discussed.
THIRTY-NINE WEEKS ENDED OCTOBER 3, 1999 COMPARED TO THIRTY-NINE WEEKS ENDED
SEPEMBER 27, 1998
NET SALES - Net sales for the first nine months of 1999 of $416.1 million
decreased by $21.2 million, or 4.8% from the first nine months of 1998 net
sales of $437.3 million. Net sales decreased by 3.8% excluding the impact of
currency fluctuation. Sales of all of the Company's product categories have
declined as a result of the weak agriculture market. North American net sales
for the first nine months of 1999 of $265.7 million decreased by $13.5
million, or 4.8% from the first nine months of 1998 net sales of $279.2
million, driven primarily by the decrease in turf care sales of $11.5 million
at the Company's Sullivan, Illinois, operations mentioned above. The decline
in agriculture sales in North America of $11.1 million was partially offset
by increases in construction of $7.2 million and specialty markets of $4.7
million. European net sales for the first nine months of 1999 of $145.8
million decreased by $11.2 million, or 7.1% from the first nine months of
1998 net sales of $157.0 million. European net sales decreased by 4.1%
excluding the impact of currency fluctuation. Sales in Europe were adversely
impacted by the agriculture market. The Company's Swindon, England, operation
has experienced a sales decline of $10.7 million from 1998 levels of $43.6
million due to the agriculture market decline. Net sales to East Asia for the
first nine months of 1999 increased by $3.2 million from the first nine
months of 1998.
The following table sets forth the Company's net sales by market, in dollars
(000's) and as a percentage of total net sales, for the thirty-nine weeks
ended October 3, 1999, and September 27, 1998:
<TABLE>
<CAPTION>
October 3, % of September 27, % of
1999 Total 1998 Total
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Agriculture $ 66,713 16.0 $ 83,019 19.0
Construction 67,354 16.2 59,616 13.6
Turf Care 83,313 20.0 96,316 22.0
Road-building 55,975 13.5 54,749 12.5
Specialty 35,673 8.6 30,073 6.9
Distribution and aftermarket 107,100 25.7 113,505 26.0
---------------------------------------------------------------
Total $416,129 100.0 $437,278 100.0
================== ============ =================== ===========
</TABLE>
10
<PAGE>
COST OF SALES - Cost of sales for the first nine months of 1999 of $312.2
million was 75.0% of net sales, compared to 75.2% of net sales for the first
nine months of 1998. Cost of sales for 1999 has been impacted by the higher
fixed costs offset by the Company's efforts to control manufacturing costs,
particularly in its European operations. In addition, the first nine months
of 1998 cost of sales was adversely impacted by costs relating to the move of
the Minneapolis operations to a larger facility, the construction of the
plant in Lawrence, Kansas, equipment repair and removal costs in the German
operation and the production start-up costs of a new product line in Slovakia.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses for the first nine months of 1999 of $42.6 million
increased by $2.1 million, or 5.2% from the first nine months of 1998
expenses of $40.5 million. The increase reflects the effects of the
investments made during 1998 in sales and marketing, information technology,
and training to support the Company's growth plans in manufacturing and
research and development. As stated above, the Company expects this trend to
continue for the remainder of 1999.
RESEARCH AND DEVELOPMENT EXPENSES - Research and development expenses for the
first nine months of 1999 of $17.1 million increased by $0.6 million, or 3.6%
from the first nine months of 1998 expenses of $16.5 million.
NONOPERATING EXPENSES, NET - Net nonoperating expenses for the first nine
months of 1999 of $6.5 million increased by $0.1 million from the first nine
months of 1998 net expenses of $6.4 million. Net interest expense for the
first nine months of 1999 of $6.4 million decreased by $0.1 million from the
first nine months of 1998 net expense of $6.5 million. This decrease is
beginning to reflect the reduced debt levels due to decreased capital
expenditures from the high 1998 levels. Other expense, net, for the first
nine months of 1999 increased by $0.2 million from the first nine months of
1998 relating primarily to a decrease in royalty income from the Company's
Japanese licensee and numerous other immaterial items.
PROVISION FOR INCOME TAXES - Provision for income taxes for the first nine
months of 1999 of $11.4 million decreased by $2.6 million from the first nine
months of 1998 provision for income taxes of $14.0 million. The decrease
comes primarily from the decrease in net income before income taxes of $6.2
million coupled with a slight decrease in the effective tax rate for the
first nine months of 1999 of 37.0% from the first nine months of 1998 rate of
37.7%.
NET INCOME - Net income for the first nine months of 1999 of $19.5 million
decreased by $3.6 million, or 15.6% from the first nine months of 1998 net
income of $23.1 million. North American net income for the first nine months
of 1999 of $18.1 million decreased by $3.3 million, or 15.4% from the first
nine months of 1998 net income of $21.4 million. North American net income
was unfavorably impacted primarily by the decline in the agriculture and turf
care markets mentioned above. European net income for the first nine months
of 1999 of $2.8 million decreased by $3.4 million, or 54.8%, from the first
nine months of 1998 net income of $6.2 million. The primary reason for the
decline in European net income results directly from the decline in the
agriculture market related to the Company's Swindon, England, operation
coupled with higher fixed costs mentioned above.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity have been from internally
generated funds and from borrowings under it's credit facilities.
Net cash provided by operating activities for the thirty-nine week period
ended October 3, 1999 of $70.6 million increased by $14.5 million from the
thirty-nine week period ended September 27, 1998 of $56.1 million. The
increase in operating cash flow resulted from better overall management of
working capital, specifically in the areas of inventories and accounts
payable, offset by the increase in receivables.
Net repayments of borrowings under short and long term credit facilities for
the thirty-nine week period ended October 3, 1999 were $14.5 million compared
to the net repayments in the thirty-nine week period ended September 27, 1998
of $20.8 million. Net repayments of borrowings were higher for the first nine
months of 1998 due primarily to the net proceeds received from the initial
public offering in the second quarter of 1998.
The cash provided by operating activities of $70.6 million have funded 1999
capital expenditures during the first nine months of $45.8 million, dividends
of $5.8 million, distributions to minority interest partners of $6.0 million
and net repayments of borrowings of $14.5 million.
11
<PAGE>
Capital expenditures for the first nine months of 1999 of $45.8 million
decreased by $28.2 million from the first nine months of 1998 capital
expenditures of $74.0 million. The first nine months of 1998 capital
expenditures were impacted by the purchase of the Company's Neumunster,
Germany, facility for $15.7 million as well as the construction of the
Company's new Lawrence, Kansas, facility . In light of the agriculture and
turf care market conditions mentioned above, the Company is continuing to
evaluate its capital expenditure requirements for the next few years. The
Company anticipates 1999 capital expenditures to approximate $65.0 million, a
decrease of $24.0 million from 1998 levels. The primary emphasis will be on
adding capacity for new programs, to continue to improve efficiency and for
quality improvements. The Lawrence, Kansas, plant completed in early 1999 is
now in production of the Company's medium power hydrostatic transmissions.
This additional plant space has provided incremental capacity at the
Company's Ames facility which is planned for expanding the production of high
power hydrostatic transmissions for new programs as well as production of a
new product for the aerial lift market introduced in the second quarter 1999.
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, although this will be done in
consideration of economic conditions. The Company plans to continue to fund
its capital expenditures from internally generated funds and increased
borrowings under its credit facilities which have been reduced with the funds
obtained from the Company's initial public offering of common stock in 1998.
These sources of funds are expected to be sufficient to support the planned
capital expenditures and the Company's working capital requirements.
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.
To mitigate this risk, in 1998 the Company directed each location to pursue
Year 2000 remediation locally. 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>
STAGE OF
DESCRIPTION OF APPROACH COMPLETION TIMETABLE FOR COMPLETION
- ----------------------- ------------------- ------------------------
<S> <C> <C>
Inventory and assessment for Y2K impact of 95% All feasible work has been
all systems completed
Compliance of operational and 95% All feasible work has been
financial systems completed
Compliance of computer-dependent machine 95% November 30, 1999
tools and equipment
Compliance of personal computers 95% November 30, 1999
Compliance of building-related systems 95% November 30, 1999
</TABLE>
The Company now feels that all mission-critical systems have been made Y2K
ready and either have already been successfully tested or are in the process
of completing testing. Any remaining equipment yet to be upgraded will be
addressed during the fourth quarter of 1999.
12
<PAGE>
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 is being 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
performed periodic evaluations of all of the Company's business units to
assess Year 2000 readiness. On-site Year 2000 reviews were completed at the
end of 1998. Follow-up reviews for the manufacturing locations were completed
during the second quarter of 1999. The results of these reviews have shown
that all locations have substantially completed their Year 2000 preparations.
The cost of the Company's information technology and internal audit staff to
evaluate and upgrade the systems has not been separately accounted for or
estimated as the Company does not believe 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, although resource priority has been given to
the Year 2000 project. 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. The majority of the necessary changes to make
these systems Year 2000 ready were made as of December 31, 1998. Testing of
these systems continued through the summer of 1999. 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 is not certain of
the impact on operations.
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 have completed the
essential Year 2000 changes 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 it's 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 been handling transactions in the
Euro currency since the beginning of 1999. The Company`s business systems are
multi-currency functional and the Company's European operations transact
business today in various European currencies, including the Euro. The
Company does not have an estimate of the cost it incurred to implement the
Euro currency, but does not believe the costs have had a material effect on
the Company's financial condition or results of operations.
ASIAN CRISIS IMPACT - Prior to 1999, several countries in Asia had
experienced 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 were affected by the
economic crisis, however, the Company continues to see improvement in 1999
over 1998 business levels. Total sales into Asia for the first nine months of
1999 increased $3.2 million over the first nine months of 1998 sales. With
total assets of $12.5 million located in China and total Asian sales for 1998
of $12.2 million, the Company experienced some adverse effect on the results
of its operations in 1998, particularly given the higher margins attributable
to such sales. 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.
The Company believes that its 1999 results in its Asian operations will
surpass 1998 results. As a result, 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.
13
<PAGE>
BUSINESS COMBINATIONS - On September 14, 1999, the Company and Danfoss A/S
announced that the Boards of Directors of the two companies have approved
entering into discussions to merge the operations of Danfoss Fluid Power A/S,
a Danish manufacturer of hydraulics products, which is wholly owned by
Danfoss A/S, with the operations of Sauer Inc. As a result of this merger, it
is expected that Danfoss A/S would exchange shares of the companies
comprising its fluid power business for shares of Sauer Inc. Sauer Inc. would
be renamed Sauer-Danfoss Inc. and would continue to be listed under SHS in
New York and SAR in Frankfurt. Both companies are currently involved in the
due diligence process and negotiations of final agreements. The transaction
will be accounted for by the purchase method of accounting for business
combinations. The transaction is subject to regulatory approvals in the
United States and Europe, and stockholder approvals and customary closing
conditions.
OUTLOOK - The Company now expects 1999 sales to be 3-4% lower than 1998
sales. The agriculture and turf care markets continue to be weak. Several of
the Company's major agriculture OEM's have shut down production operations
during the third and fourth quarters of 1999 to help bring their inventory
levels in line with their reduced sales levels. In addition, European
economies as a whole, are weaker that what was projected in late 1998. These
economic impacts are offset by the continued strong North American economy,
as well as new program production startups such as occurred in the specialty
market during the second quarter. Net income for 1999 is expected to be less
than 1998.
14
<PAGE>
PART II. OTHER INFORMATION
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 October 3, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
<TABLE>
<CAPTION>
Exhibit
No. Description of Document
- ------- -----------------------
<C> <S>
3.1 The Restated Certificate of Incorporation of the Company dated March
13, 1998, is attached as Exhibit 3.1 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 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.
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.
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description of Document
- ------- -----------------------
<C> <S>
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. 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(m) 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(n) 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.
10.1(o) 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(p) 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(q) 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(r) 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(s) 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(t) 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(u) The Sauer Inc. Non-employee Director Stock Option and Restricted Stock
Plan is attached as Exhibit 10.1(q) 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 1999 Sauer Inc. Bonus Plan is attached as Exhibit 10.1 (a) to the
Company's Form 10-Q filed on August 13, 1999, and is incorporated
herein by reference.
27.1 Financial data schedule.
</TABLE>
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed for the quarter ended
October 3, 1999.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Sauer Inc.
By /s/ Kenneth D. McCuskey
-------------------------------
Kenneth D. McCuskey, Secretary/Treasurer and
Chief Accounting Officer
Sauer Inc.
November 16, 1999
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> OCT-03-1999
<EXCHANGE-RATE> 1
<CASH> 5,932
<SECURITIES> 0
<RECEIVABLES> 76,389
<ALLOWANCES> 3,456
<INVENTORY> 74,276
<CURRENT-ASSETS> 167,116
<PP&E> 508,289
<DEPRECIATION> (236,167)
<TOTAL-ASSETS> 450,972
<CURRENT-LIABILITIES> 108,897
<BONDS> 0
0
0
<COMMON> 281
<OTHER-SE> 155,044
<TOTAL-LIABILITY-AND-EQUITY> 450,972
<SALES> 416,129
<TOTAL-REVENUES> 416,129
<CGS> 312,196
<TOTAL-COSTS> 371,979
<OTHER-EXPENSES> 103
<LOSS-PROVISION> 551
<INTEREST-EXPENSE> 6,402
<INCOME-PRETAX> 37,645
<INCOME-TAX> 11,449
<INCOME-CONTINUING> 26,196
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,495
<EPS-BASIC> .72
<EPS-DILUTED> .72
</TABLE>
