<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 July 2, 2000
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-DANFOSS 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 August 16, 2000, 45,310,618 shares of Sauer-Danfoss 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 Twenty-Six Weeks Ended July 2, 2000 and July 4, 1999 3
Consolidated Balance Sheets:
As of July 2, 2000 and December 31, 1999 4
Consolidated Statements of Cash Flows:
Twenty-Six Weeks Ended July 2, 2000 and July 4, 1999 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risks 13
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 18
</TABLE>
<PAGE>
SAUER-DANFOSS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
------------------------------- -------------------------------
July 2, July 4, July 2, July 4,
2000 1999 2000 1999
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
NET SALES $225,772 $147,964 $389,251 $301,061
------------- -------------- ------------- --------------
COSTS AND EXPENSES:
Cost of sales 165,484 110,455 286,057 224,537
Selling, general and administrative 25,965 14,449 43,078 29,133
Research and development 7,578 5,426 14,777 11,528
Restructuring charges 2,418 - 2,418 -
------------- -------------- ------------- --------------
Total costs and expenses 201,445 130,330 346,330 265,198
------------- -------------- ------------- --------------
Operating income 24,327 17,634 42,921 35,863
------------- -------------- ------------- --------------
NONOPERATING INCOME (EXPENSES):
Interest expense, net (2,844) (2,281) (5,000) (4,768)
Other, net (1,277) (199) (1,298) (141)
------------- -------------- ------------- --------------
Nonoperating expenses, net (4,121) (2,480) (6,298) (4,909)
------------- -------------- ------------- --------------
INCOME BEFORE INCOME TAXES AND
MINORITY INTEREST 20,206 15,154 36,623 30,954
PROVISION FOR INCOME TAXES (6,364) (4,670) (11,697) (9,312)
------------- -------------- ------------- --------------
INCOME BEFORE MINORITY INTEREST 13,842 10,484 24,926 21,642
MINORITY INTEREST IN INCOME OF
CONSOLIDATED COMPANIES (3,714) (2,688) (6,631) (5,782)
------------- -------------- ------------- --------------
Net income $10,128 $ 7,796 $ 18,295 $ 15,860
============= ============== ============= ==============
Basic and diluted net income per
common share outstanding $ 0.26 $ 0.28 $ 0.55 $ 0.58
============= ============== ============= ==============
Dividends declared per common share $ 0.07 $ 0.07 $ 0.14 $ 0.14
============= ============== ============= ==============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
SAUER-DANFOSS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
(Unaudited)
July 2, December 31,
2000 1999
---------------- ----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 23,358 $ 5,061
Accounts receivable, less allowances 163,107 73,305
Inventories 124,253 73,977
Other current assets 9,426 9,242
---------------- ----------------
Total current assets 320,144 161,585
---------------- ----------------
---------------- ----------------
PROPERTY, PLANT AND EQUIPMENT, NET 410,181 269,485
---------------- ----------------
OTHER ASSETS:
Goodwill and other intangible assets, net 75,640 2,663
Deferred income taxes 7,236 4,273
Other 4,297 4,509
---------------- ----------------
Total other assets 87,173 11,445
---------------- ----------------
$ 817,498 $ 442,515
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable and bank overdrafts $ 43,826 $ 19,312
Long-term debt due within one year 1,245 1,609
Accounts payable 58,098 39,064
Accrued salaries and wages 20,667 8,901
Accrued warranty 10,481 7,640
Other accrued liabilities 35,891 13,744
---------------- ----------------
Total current liabilities 170,208 90,270
---------------- ----------------
---------------- ----------------
LONG-TERM DEBT 197,976 110,934
---------------- ----------------
OTHER LIABILITIES:
Long-term pension liability 29,764 31,342
Postretirement benefits other than pensions 14,906 14,361
Deferred income taxes 27,331 5,448
Other 6,250 5,647
---------------- ----------------
Total other liabilities 78,251 56,798
---------------- ----------------
MINORITY INTEREST IN NET ASSETS OF CONSOLIDATED COMPANIES 28,641 33,761
---------------- ----------------
STOCKHOLDERS' EQUITY:
Common stock, par value $.01 per share, authorized 75,000,000 shares in 2000
and 45,000,000 in 1999; issued 46,482,362 in 2000 and 28,084,550 in
1999; outstanding 45,310,618 in 2000 and 27,409,550 in 1999 465 281
1999
Additional paid-in capital 301,624 120,053
Retained earnings 55,061 41,863
Accumulated other comprehensive income (6,661) (7,038)
Unamortized restricted stock compensation (58) (1,707)
Common stock in treasury (at cost),
1,171,744 in 2000 and 675,000 shares in 1999 (8,009) (2,700)
---------------- --------------
Total stockholders' equity 342,422 150,752
---------------- --------------
$ 817,498 $ 442,515
================ ==============
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
SAUER-DANFOSS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Twenty-Six Weeks Ended
---------------------------------------
July 2, July 4,
2000 1999
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 18,295 $15,860
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization 23,947 17,850
Minority interest in income of
consolidated companies 6,631 5,782
(Increase) decrease in working capital
excluding effects of acquisitions -
Accounts receivable, net (11,886) (25,299)
Inventories 1,898 15,540
Accounts payable (24,381) 5,368
Accrued liabilities 16,905 13,348
Other (440) 606
---------------- ----------------
Net cash provided by operating activities 30,969 49,055
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (24,282) (34,469)
Proceeds from sales of property, plant and equipment 62 296
Payments for acquisitions, net of cash acquired 5,126 -
---------------- ----------------
Net cash used in investing activities (19,094) (34,173)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments)
on notes payable and bank overdrafts 17,694 (437)
Net borrowings (repayments) of long-term debt 5,928 (557)
Cash dividends (5,097) (3,837)
Repurchase of common stock (5,722) -
Distributions to minority interest partners (4,874) (5,439)
---------------- ----------------
Net cash provided by (used in) financing activities 7,929 (10,270)
---------------- ----------------
EFFECT OF EXCHANGE RATE CHANGES (1,507) (806)
---------------- ----------------
CASH AND CASH EQUIVALENTS:
Net increase during the period 18,297 3,806
Beginning balance 5,061 8,891
---------------- ----------------
Ending balance $23,358 $12,697
================ ================
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid $3,019 $3,336
Income taxes paid $6,973 $3,357
</TABLE>
<PAGE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
<TABLE>
<S> <C>
Acquisition of Danfoss Fluid Power Companies:
Common stock issued $180,232
Long-term debt assumed 81,180
Other liabilities assumed 66,648
----------------
$328,060
Allocated to:
Cash acquired $ 12,563
Inventory 46,686
Other current assets 81,066
Property, plant and equipment 119,970
Goodwill and other intangibles 67,775
----------------
$328,060
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE>
SAUER-DANFOSS 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-Danfoss 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 July 2, 2000 and December 31, 1999, and results of operations for the
thirteen weeks and twenty-six weeks ended July 2, 2000 and July 4, 1999,
and cash flows for the twenty-six weeks ended July 2, 2000 and July 4,
1999. These consolidated financial statements and notes are to be read in
conjunction with the consolidated 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 on March 30, 2000.
2) BUSINESS COMBINATIONS -
On May 3, 2000, the Company issued 16,149,812 shares of common stock in
exchange for all of the outstanding shares of Danfoss Fluid Power
Companies, which designs and manufactures orbital motors, hydrostatic
steering units, proportional load-sensing valves, gear pumps and
electrohydraulics for use by OEMs of off-highway mobile equipment. The
transaction has been accounted for under the purchase method of
accounting for business combinations in accordance with Accounting
Principles Board Opinion No. 16, "Business Combinations". A preliminary
purchase price allocation has been performed based on independent
appraisals resulting in goodwill of $67,775 being recorded. Since the
independent appraisals are not yet complete, the final purchase price
allocations will result in changes to the amount of recorded assets and
goodwill. Accordingly, the accompanying consolidated statements of income
and cash flows include the effects of the Danfoss Fluid Power Companies
since May 3, 2000.
3) RECLASSIFICATION -
Certain previously reported amounts have been reclassified to conform to
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 Twenty-six Weeks Ended
--------------------------- --------------------------
July 2, July 4, July 2, July 4,
2000 1999 2000 1999
-------------- ------------ --------------- --------------
<S> <C> <C> <C> <C>
Net income $10,128 $7,796 $18,295 $15,860
Translation adjustment 2,889 (5,293) 377 (11,635)
-------------- ------------ --------------- --------------
Comprehensive income $13,017 $2,503 $18,672 $4,225
============== ============ =============== ==============
</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 twenty-six week periods ending July 2, 2000, and July 4, 1999:
<PAGE>
<TABLE>
<CAPTION>
JULY 2, 2000 JULY 4, 1999
------------ ------------
NET INCOME SHARES EPS NET INCOME SHARES EPS
---------- ------ --- ---------- ------ ---
<S> <C> <C> <C> <C> <C> <C>
THIRTEEN WEEKS:
Basic net income $ 10,128 39,203,658 $.26 $ 7,796 27,225,247 $.28
Effect of dilutive
securities:
Restricted stock - 811 - - 446 -
========== =========== ===== ======== =========== =====
Diluted net income $ 10,128 39,204,469 $.26 $ 7,796 27,225,693 $.28
========== =========== ===== ======== =========== =====
TWENTY-SIX WEEKS:
Basic net income $ 18,295 33,194,651 $.55 $15,860 27,225,122 $.58
Effect of dilutive
securities:
Restricted stock - 1,397 - - 219 -
========== =========== ===== ======== =========== =====
Diluted net income $ 18,295 33,196,048 $.55 $15,860 27,225,341 $.58
========== =========== ===== ======== =========== =====
</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 twenty-six week
periods ending July 2, 2000 and July 4, 1999, and balance sheet data as
of July 2, 2000 and December 31, 1999, respectively:
<TABLE>
<CAPTION>
THIRTEEN WEEKS ENDED:
JULY 2, 2000 NORTH AMERICA EUROPE ALL OTHER ELIMINATIONS TOTAL
-------------------- ------------- ------ --------- ------------ -----
<S> <C> <C> <C> <C> <C>
Trade sales $ 133,632 $ 90,836 $ 1,304 $ - $ 225,772
Intersegment sales 11,347 16,184 500 (28,031)(1) -
Net income (loss) 6,575 3,803 127 (377)(2) 10,128
Total assets 343,259 434,272 404,176 (364,209)(3) 817,498
JULY 4, 1999
--------------------
Trade sales $ 94,381 $ 51,677 $1,906 $ - $ 147,964
Intersegment sales 9,633 8,609 84 (18,326)(1) -
Net income (loss) 6,597 1,719 503 (1,023)(2) 7,796
Total assets 252,153 203,429 191,831 (188,529)(3) 458,884
TWENTY-SIX WEEKS ENDED:
JULY 2, 2000 NORTH AMERICA EUROPE ALL OTHER ELIMINATIONS TOTAL
------------------------ -------------- ------ ---------- -------------- -----
Trade sales $ 241,014 $145,812 $ 2,425 $ - $ 389,251
Intersegment sales 22,984 25,435 880 (49,299)(1) -
Net income (loss) 13,696 6,001 84 (1,486)(2) 18,295
Total assets 343,259 442,580 404,176 (372,517)(3) 817,498
JULY 4, 1999
------------------
Trade sales $ 192,483 $105,381 $ 3,197 $ - $ 301,061
Intersegment sales 20,222 17,467 130 (37,819)(1) -
Net income (loss) 14,396 2,784 747 (2,067)(2) 15,860
Total assets 252,153 203,429 191,831 (188,529)(3) 458,884
</TABLE>
<PAGE>
Reconciliations:
(1) Elimination of intersegment sales.
(2) Net income eliminations - minority interest in German Operating Company.
(3) Total assets eliminations:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Investment in subsidiaries $(300,465) $(144,926)
Intersegment receivables (60,987) (42,279)
Intersegment profit in inventory and other (2,757) (1,324)
--------- ---------
Total assets eliminations $(364,209) $(188,529)
========= =========
</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
---------------------------- -----------------------------
2000 1999 1999 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Hydrostatic transmissions $156,868 $121,320 $288,434 $246,770
Open circuit gear pumps and motors and piston pumps 37,302 16,882 57,060 34,820
Electrohydraulics and others 31,602 9,762 43,757 19,471
---------------------------------------------------------
Total $225,772 $147,964 $389,251 $301,061
=========================================================
</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 Twenty-Six Weeks Ended Assets (2)
-------------------- ---------------------- ----------
2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
United States $135,443 $ 86,744 $234,533 $177,770 $199,077 $153,921
Germany 18,289 12,462 31,546 26,389 50,157 45,460
United Kingdom 11,279 7,719 19,582 15,510 22,944 24,896
Denmark (3) 32 - 32 - 71,140 -
Slovakia (3) 147 213 263 402 33,973 36,092
Other countries 60,582 40,826 103,295 80,990 112,827 16,288
-----------------------------------------------------------------------------------------
Total $225,772 $147,964 $389,251 $301,061 $490,118 $276,657
=========================================================================================
</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.
(3) Majority of this country's sales are shipped outside of the home country
where the product is produced.
No single customer accounted for 10% or more of total consolidated sales
in any period presented.
<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 JULY 2, 2000 COMPARED TO THIRTEEN WEEKS ENDED JULY 4, 1999
On May 3, 2000 the Company completed the acquisition of Danfoss Fluid Power
("DFP") by issuing 16,149,812 shares of common stock in exchange for all of the
shares of DFP and changed its name from Sauer Inc. to Sauer-Danfoss Inc. The
acquisition has been accounted for by the purchase method of accounting, and
accordingly, the consolidated statements of income and consolidated statements
of cash flows include the operations and cash flow of the acquisition of DFP
beginning May 3, 2000.
NET SALES - The Company reported record sales for second quarter 2000 of $225.8
million, an increase of $77.8 million, or 52.6% from second quarter 1999 net
sales of $148.0 million. On a comparable basis, Sauer-only net sales increased
by 13.6% or $20.1 million and increased by 16% excluding the effects of foreign
currency. Net sales increased in all markets the Company serves except for
road-building, which declined 6.9% from second quarter 1999. Agriculture
increased 5.9%, construction increased 10.5%, specialty increased 17.5% and turf
care increased 41.7% from comparable amounts in second quarter 1999. North
American net sales, Sauer-only, for second quarter 2000 of $114.6 million
increased by $20.2 million, or 21.4% from second quarter 1999 net sales of $94.4
million. European net sales, Sauer-only, for second quarter 2000 of $51.2
million decreased by $0.5 million, or 1.0% from second quarter 1999 net sales of
$51.7 million. European net sales increased by 6.4% excluding the impact of
currency fluctuation. East Asia net sales for second quarter 2000 decreased by
$0.6 million from second quarter 1999.
The following table sets forth the Company's Sauer-only net sales by market for
comparable purposes, in dollars (000's) and as a percentage of total Sauer-only
net sales, for the thirteen weeks ended July 2, 2000 and July 4, 1999:
<TABLE>
<CAPTION>
July 2, 2000 % of Total July 4, 1999 % of Total
------------------- -------------- ------------------ -------------
<S> <C> <C> <C> <C>
Agriculture $ 25,370 15.1 $ 23,946 16.2
Construction 26,768 15.9 24,217 16.4
Turf Care 42,778 25.5 30,190 20.4
Road-building 18,701 11.1 20,094 13.6
Specialty 14,486 8.6 12,325 8.3
Distribution and aftermarket 40,043 23.8 37,192 25.1
-------------------------------------------------------------------
Total $168,146 100.0 $147,964 100.0
===================================================================
</TABLE>
COST OF SALES - Cost of sales for second quarter 2000 of $165.5 million was
73.3% of net sales, compared to 74.7% of net sales for second quarter 1999. The
lower cost of sales percentage in relation to sales reflects the higher
absorption rates experienced due to the higher sales levels offset partially by
the $1.4 million flow through of the fair market value write-up of DFP inventory
associated with products sold during the quarter. The Company anticipates an
additional $0.7 million of inventory flow-through for the DFP inventory in the
third quarter of 2000. Cost of sales as a percentage of net sales for the former
DFP companies were comparable to those of Sauer for the second quarter.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses for second quarter 2000 of $26.0 million increased by
$11.6 million, or 80.6% from second quarter 1999 expenses of $14.4 million.
$8.1 million of this increase is due to the inclusion of two months of DFP
results. The majority of the remaining $3.5 million increase is due to
vesting of outstanding restricted stock which was triggered by the merger and
other merger-related integration costs.
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES - Research and development expenses for
second quarter 2000 of $7.6 million increased $2.2 million or 40.7% from
second quarter 1999 expenses of $5.4 million. The inclusion of DFP for two
months accounts for $0.8 million of this increase. The remaining increase
relates to significant development activities for new programs including
material for prototypes and increased headcount to support these programs.
RESTRUCTURING CHARGES - During the second quarter of 2000, the Company recorded
$2.4 million of restructuring charges related to the closing of its Newtown,
Pennsylvania, facility; the operations were relocated to Easley, South Carolina.
This charge related to severance costs, lease cancellation and asset impairment
of certain assets. The Company anticipates an additional $1.6 to $2.0 million
charge related to this move to occur in the third quarter 2000.
NONOPERATING EXPENSES, NET - Net nonoperating expenses for second quarter 2000
of $4.1 million increased by $1.6 million from second quarter 1999 net expenses
of $2.5 million. Net interest expense for second quarter 2000 of $2.8 million
increased by $0.5 million from second quarter 1999 net expense of $2.3 million.
The increase in net interest expense relates to the increased debt related to
the DFP acquisition. Other expense, net, for second quarter 2000 increased by
$1.1 million from second quarter 1999 due primarily to currency exchange losses,
and losses on disposal of property, plant and equipment in the ordinary course
of business.
PROVISION FOR INCOME TAXES - Provision for income taxes for second quarter 2000
of $6.4 million increased by $1.7 million from second quarter 1999 provision for
income taxes of $4.7 million. The increase comes from the increase in income
before income taxes of $4.0 million as well as an increase in the effective tax
rate for second quarter 2000 of 38.6% from the second quarter 1999 rate of
37.5%.
NET INCOME - Net income for second quarter 2000 of $10.1 million increased by
$2.3 million, or 29.5% from second quarter 1999 net income of $7.8 million. The
increase in net income was driven by the increased sales volumes and the effects
of the two months of DFP results, offset partially by the one-time charges and
merger-related costs discussed above. North American second quarter 2000 net
income of $6.6 million remained level with second quarter 1999 net income of
$6.6 million, despite all of the restructuring and merger-related charges
discussed above. European second quarter 2000 net income of $3.8 million
increased by $2.1 million, or 123%, from second quarter 1999 net income of $1.7
million. The increase in European net income results from the improved economic
conditions currently being experienced in Europe as well as the two months of
DFP results.
TWENTY-SIX WEEKS ENDED JULY 2, 2000 COMPARED TO TWENTY-SIX WEEKS ENDED JULY 4,
1999
NET SALES - Net sales for first half 2000 of $389.3 million increased by $88.2
million, or 29.3% from first half 1999 net sales of $301.1 million. On a
comparable basis, Sauer-only net sales of $331.6 million increased by $30.5
million or 10.1% from first half of 1999. Sauer-only net sales increased 13.0%
from first half 1999 excluding the impact of currency fluctuation. North
American net sales for the first half 2000 of $241.0 million increased by $48.5
million, or 25.2% from first half 1999 net sales of $192.5 million. On a
comparable basis, Sauer-only net sales in North America increased $30.5 million
or 15.9% from first half 1999. This increase was driven by the increases in
agriculture, construction, turf care and specialty markets offset somewhat by
the decline in the road-building market as mentioned above. European net sales
for the first half 2000 of $145.8 million increased by $40.4 million, or 38.3%
from first half 1999 net sales of $105.4 million. Sauer-only European net sales
increased by $0.8 million or 0.8% from first half 1999. Net sales, Sauer-only,
for East Asia for the first half 2000 decreased by $0.8 million from the higher
first half 1999 levels.
The following table sets forth the Company's Sauer-only net sales by market for
comparable purposes, in dollars (000's) and as a percentage of total Sauer-only
net sales, for the twenty-six weeks ended July 2, 2000, and July 4, 1999:
<TABLE>
<CAPTION>
July 2, % of July 4, % of
2000 Total 1999 Total
--------------- --------- ------------ --------
<S> <C> <C> <C> <C>
Agriculture $ 51,600 15.6 $48,873 16.2
Construction 52,115 15.7 47,302 15.7
Turf Care 84,387 25.4 66,792 22.2
Road-building 38,569 11.6 41,256 13.7
Specialty 27,053 8.2 24,734 8.2
Distribution and aftermarket 77,901 23.5 72,104 24.0
---------- ----- -------- ------
Total $331,625 100.0 $301,061 100.0
========== ===== ======== ======
</TABLE>
<PAGE>
COST OF SALES - Cost of sales for the first half 2000 of $286.1 million was
73.5% of net sales, compared to 74.6% of net sales for first half 1999. As
mentioned above, this improvement in cost absorption relates to the higher sales
volumes offset partially by the inventory impact of $1.4 million related to the
DFP inventory. In addition, the Company is experiencing production efficiencies
from the previous high levels of capital expenditures.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - Selling, general and
administrative expenses for the first half 2000 of $43.1 million increased by
$14.0 million, or 48.1% from first half 1999 expenses of $29.1 million. The
increase reflects $8.1 million from two months of DFP results as mentioned above
in addition to the other merger-related costs being incurred to integrate the
former DFP companies with the former Sauer organization.
RESEARCH AND DEVELOPMENT EXPENSES - Research and development expenses for the
first half 2000 of $14.8 million increased by $3.3 million, or 28.7% from first
half 1999 expenses of $11.5 million. On-going product development activity in
the agriculture, construction and specialty markets is driving a significant
amount of increased cost in this area for proto-type development, as well as
including two months of DFP results. In addition, the Company continues to add
engineers to support these product development programs.
RESTRUCTURING CHARGES - Year to date restructuring charges of $2.4 million
occurred in the second quarter of 2000 as discussed above.
NONOPERATING EXPENSES, NET - Net nonoperating expenses for first half 2000 of
$6.3 million increased by $1.4 million from first half 1999 net expenses of $4.9
million. Net interest expense for first half 2000 of $5.0 million increased by
$0.2 million from the first half 1999 net expense of $4.8 million, reflecting
higher overall borrowings associated with the DFP acquisition. Other expense,
net, for first half 2000 increased by $1.2 million from first half 1999 relating
primarily to currency exchange losses and losses on disposals of fixed assets
offset partially by an increase in royalty income from the Company's Japanese
licensee.
PROVISION FOR INCOME TAXES - Provision for income taxes for first half 2000 of
$11.7 million increased by $2.4 million from first half 1999 provision for
income taxes of $9.3 million. The increase comes primarily from the increase in
income before income taxes of $4.8 million coupled with an increase in the
effective tax rate for first half 2000 of 39.0% from the first half 1999 rate of
37.0%.
NET INCOME - Net income for the first half of 2000 of $18.3 million increased by
$2.4 million, or 15.1% from first half 1999 net income of $15.9 million. North
American first half 2000 net income of $13.7 million decreased by $0.7 million,
or 4.9% from first half 1999 net income of $14.4 million. North American net
income was unfavorably impacted primarily by the restructuring charges related
to the closing of the Newtown, Pennsylvania facility as mentioned above as well
as other merger integration costs. European first half 2000 net income of $6.0
million increased by $3.2 million, or 114%, from first half 1999 net income of
$2.8 million, aided by two months of DFP net income totaling $1.6 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal sources of liquidity have been from internally generated
funds and from borrowings under its credit facilities.
Net cash provided by operating activities for the first half 2000 of $31.0
million decreased by $18.1 million from the first half 1999 of $49.1 million.
The decrease in operating cash flow resulted primarily from higher overall
receivables due to the record sales levels in addition to a reduction in
accounts payable.
Net borrowings under short and long term credit facilities for the first half of
2000 were $23.6 million compared to the first half 1999 net repayments of $1.0
million. Net borrowings have increased from 1999 to support the higher overall
level of sales activity as well as to support the DFP acquisition.
The cash provided by operating activities of $31.0 million have funded 2000
first half capital expenditures of $24.3 million, dividends of $5.1 million,
distributions to minority interest partners of $4.9 million and common stock
repurchases of $5.7 million with net borrowings of $23.6 million and net cash
acquired of $5.1 million covering the balance of these cash outflows.
<PAGE>
Capital expenditures for the first half of 2000 of $24.3 million decreased by
$10.2 million from the first half 1999 capital expenditures of $34.5 million. On
a comparable basis, Sauer-only capital expenditures are down $15.1 million from
1999 levels. The decrease is in line with the Company's expectations. The higher
level of capital expenditures in prior years is now in place to support the
Company's future growth plans. Additional capital expenditures will be made
after considering current economic conditions, the pace of on-going product
development, and the need for production efficiencies. The Company plans to
continue to fund its capital expenditures from internally generated funds and
increased borrowings under its credit facilities. These sources of funds are
expected to be sufficient to support the planned capital expenditures and the
Company's working capital requirements into 2001.
OTHER MATTERS
ACQUISITIONS - The Company has announced that it has entered into a memorandum
of understanding to purchase Compact Controls, Inc., a manufacturer of cartridge
valves and manifolds based in Portland, Oregon. With sales of approximately $33
million and approximately 275 employees, Compact Controls is expected to further
expand the Company's systems capabilities.
OUTLOOK - The Company continues to be optimistic with respect to 2000 sales
levels being slightly higher than 1999 levels on a Sauer-only comparable basis.
Continued strength in the construction, turf care and specialty markets
contributes to this optimism, although there is a definite weakness developing
in the road-building market. The expected impact from the U.S. Government's
funding of the TEA-21 bill for road construction has not currently been felt at
the OEM level. Agricultural markets are showing signs of improvement worldwide,
but the Company remains cautious in this area. Net income for 2000 is expected
to be somewhat higher than the 1999 reported amounts.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See the Company's most recent annual report filed on Form 10-K (Item 7A). There
has been no material change in this information.
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company issued 103,256 shares of its common stock and paid $3.6 million on
January 24, 2000 to acquire all of the shares of Custom Design Electronics of
Sweden AB ("CDE") and its subsidiary NOB Electronik AB, which manufactures and
sells electronic control panels and related software. The shares of the
Company's common stock were issued to three shareholders of CDE as follows:
Sture Bernhardsson - 41,220 shares; Goran Nilson - 41,220 shares; and Krister
Lindkvist - 20,816 shares. No underwriter was involved and the shares of the
Company's common stock were not registered under the Securities Act of 1933
("1933 Act") for the reasons that the persons acquiring the shares are
accredited investors under the 1933 Act and the shares were issued in a private
offering exempt from registration pursuant to Section 4(2) of the 1933 Act.
The Company issued 16,149,812 shares of its common stock on May 3, 2000 to
acquire all of the shares of Danfoss Fluid Power A/S and Danfoss Fluid Power
Inc., which design and manufacture orbital motors, hydrostatic steering units,
proportional load-sensing valves, gear pumps and electrohydraulics for use by
OEMs of off-highway mobile equipment. The shares of the Company's common stock
were issued to Danfoss Murmann Holding A/S, a Danish company formed by the
entities and persons under the control of Danfoss A/S and Klaus H. Murmann. The
Danfoss transaction and issuance of shares were described in the proxy statement
furnished to the stockholders of the Company in connection with the Special
Meeting held on May 3, 2000, the voting results of which are set forth below in
Item 4.
The Company issued 2,250,000 shares of its common stock upon termination of
the Limited Partnership among the Company, its German operating subsidiary
and three entities owned by the Klaus Murmann family (such three entities
referred to herein as the "Limited Partners"). Pursuant to the Limited
Partnership Agreement, upon termination, the Company was required to issues
these shares of common stock, together with other consideration, in complete
satisfaction of all Limited Partners' claims. The shares of the Company's
common stock were issued to the three Limited Partners as follows: Sauer
GmbH & Co. Hydraulik KG - 1,912,500 shares; Sauer GmbH - 112,500 shares; and
EMF Europaeische Marketing und Finanzmanagement Aktiengesellschaft -225,000
shares.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company held a Special Meeting of Stockholders on May 3, 2000 and the voting
results with respect
to each issue presented before the meeting were as follows:
1. Issuance of 16,149,812 shares of the Company's Common Stock in connection
with the Danfoss transaction:
<TABLE>
<CAPTION>
<S> <C>
In Favor 22,986,481
Against 17,713
Abstain 5,410
</TABLE>
2. Amend Certificate of Incorporation to increase number of authorized
shares of Common Stock:
<TABLE>
<CAPTION>
<S> <C>
In Favor 22,556,450
Against 450,667
Abstain 5,410
</TABLE>
3. Amend Certificate of Incorporation to remove the classification of the
Company's Board of Directors and related matters:
<TABLE>
<CAPTION>
<S> <C>
In Favor 22,978,647
Against 25,506
Abstain 5,451
</TABLE>
The Company held its Annual Meeting of Stockholders on May 3, 2000, at which
stockholders elected nine directors to serve until the next annual meeting of
stockholders.
Results of the voting were as follows:
<TABLE>
<CAPTION>
VOTING ON DIRECTORS FOR WITHHELD TOTAL
------------------- --- -------- -----
<S> <C> <C> <C>
Ole Steen Andersen 21,078,025 10,366 21,088,391
Jorgen M. Clausen 21,010,510 77,881 21,088,391
Nicola Keim 21,019,280 69,111 21,088,391
Johannes F. Kirchhoff 21,079,604 8,787 21,088,391
Hans Kirk 21,078,025 10,366 21,088,391
Klaus H. Murmann 20,674,789 413,602 21,088,391
Sven Murmann 21,079,180 9,211 21,088,391
David L. Pfeifle 21,079,480 8,911 21,088,391
Richard M. Schilling 21,078,480 9,911 21,088,391
</TABLE>
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
Exhibit
No. Description of Document
------- -----------------------
3.1 The Amended and Restated Certificate of Incorporation of
the Company dated May 3, 2000, is attached hereto.
3.2 The Amended and Restated Bylaws of the Company dated May 3,
2000, is attached hereto.
4 The form of Certificate of the Company's Common Stock, $.01 Par
Value, is attached hereto.
10.1(a) The Termination Agreement and Release dated May 3, 2000 relating to
the termination of a Silent Partnership Agreement is attached hereto.
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.
10.1(j) The Agreement and Amendment to Employment Agreement, effective
May 3, 2000, relating to the Employment Contract referred to in
10.1(i) above with Klaus Murmann is attached hereto.
10.1(k) The Employment Contract with David L. Pfeifle is attached as Exhibit
10.1(x) to the Company's Form 10-Q filed on May 18, 2000 and is
incorporated herein by reference.
10.1(l) The Executive Employment Agreement with Neils Erik Hansen dated
May 3, 2000 is attached hereto.
10.1(m) 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(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.
<PAGE>
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.
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 Amended and Restated Post-Retirement Care Agreement for Klaus
Murmann, effective May 3, 2000, is attached hereto.
10.1(t) 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(u) The Sauer-Danfoss 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(v) The Amendment, effective May 3, 2000, to the Sauer-Danfoss Inc. 1998
Long-Term Incentive Plan referred to in 10.1(u) above is attached
hereto.
10.1(w) The Sauer-Danfoss 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 Registration Statement filed on April 23, 1998
and is incorporated herein by reference.
10.1(x) The Amendment, effective May 3, 2000, to the Sauer-Danfoss Inc.
Non-employee Director Stock Option and Restricted Stock Plan referred
to in 10.1(w) above is attached hereto.
10.1(y) 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.
10.1(z) The Amendment, effective May 3, 2000, to the 1999 Sauer-Danfoss Inc.
Bonus Plan referred to in 10.1(y) above is attached hereto.
10.1(aa) The form of the Sauer-Danfoss Inc. Change in Control Agreement for
U.S. Participants dated May 3, 2000 is attached hereto.
10.1(ab) The form of the Sauer-Danfoss Inc. Change in Control Agreement for
European Participants dated May 3, 2000 is attached hereto.
10.1(ac) The Trademark and Trade Name Agreement dated May 3, 2000 between the
Company and Danfoss A/S is attached hereto.
10.1(ad) The Stock Purchase and Transfer Agreement dated January 24, 2000
related to the acquisition of all of the stock of Custom Design
Electronics of Sweden AB is attached as Exhibit 10.1(w) to the
Company's Form 10-Q filed on May 18, 2000 and is incorporated herein
by reference.
10.1(ae) The Termination Agreement with Tonio P. Barlage dated March 31, 2000
is attached as Exhibit 10.1(y) to the Company's Form 10-Q filed on
May 18, 2000 and is incorporated herein by reference.
10.1(af) The Stock Exchange Agreement dated January 22, 2000 by and among the
Registrant, Danfoss A/S, Danfoss Murmann Holding A/S. and K. Murmann
Verwaltungsgesellschaft mbH is attached as Annex A to the Company's
Proxy Statement filed on March 28, 2000 and is incorporated herein by
reference.
<PAGE>
10.1(ag) The Stock Purchase Agreement with Tonio P. Barlage and Maria Barlage
dated March 31, 2000 is attached as Exhibit 10.1(aa) to the Company's
Form 10-Q filed on May 18, 2000 and is incorporated herein by
reference.
27.1 Financial data schedule.
(b) REPORTS ON FORM 8-K
1. On April 12, 2000 the Company filed a Current Report on
Form 8-K for the purpose of disclosing one press release
dated March 30, 2000 related to the proposed combination
with Danfoss Fluid Power clearing U.S. and German
regulatory reviews.
2. On May 16, 2000 the Company filed a Current Report on Form
8-K related to the consummation of the acquisition of the
Danfoss Fluid Power.
3. On June 29, 2000 the Company filed a Current Report on Form
8-K for the purpose of disclosing a change in the Company's
independent auditing firm.
4. On June 30, 2000 the Company filed a Current Report on Form
8-K for the purpose of disclosing one press release dated
June 13, 2000 announcing the second quarter dividend.
<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-Danfoss Inc.
By /s/ Kenneth D. McCuskey
-------------------------------
Kenneth D. McCuskey,
Vice President Finance and
Chief Accounting Officer
Sauer-Danfoss Inc.
August 16, 2000
