FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1994
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 1-5358
Sundstrand Corporation
(Exact name of registrant as specified in its charter)
Delaware 36-1840610
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4949 Harrison Avenue, P.O. Box 7003, Rockford, IL 61125-7003
(Address of principal executive offices and zip code)
(815) 226-6000
(Registrant's telephone number, including area code)
______________
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 [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at July 29, 1994
Common Stock, par value $.50 per share 32,845,929
<PAGE>
SUNDSTRAND CORPORATION
FORM 10-Q
For the Quarter Ended June 30, 1994
INDEX
Part I. Financial Information Page
----
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Part II. Other Information
Item 1. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
2
<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Sundstrand Corporation and Subsidiaries
Condensed Consolidated Statement of Earnings (Unaudited)
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
(Amounts in millions except ---------------------- -----------------------
per share data) 1994 1993 1994 1993
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 331.1 $ 341.8 $ 655.4 $ 682.5
Costs, expenses and other income:
Costs of products sold 221.3 226.1 444.9 439.1
Marketing and administration 72.7 75.2 142.0 154.3
Interest expense 7.5 9.8 14.0 20.8
Interest income (1.2) (1.0) (2.4) (2.4)
Other, net .9 2.0 (.7) 2.3
-------- -------- -------- --------
301.2 312.1 597.8 614.1
-------- -------- -------- --------
Earnings from continuing operations
before income taxes 29.9 29.7 57.6 68.4
Less income taxes 10.8 10.4 20.7 23.9
-------- -------- -------- --------
Earnings from continuing operations 19.1 19.3 36.9 44.5
Loss from discontinued SDC business,
prior to discontinuance, net of taxes - - - (.7)
Earnings from discontinued SDC business,
subsequent to discontinuance, net of taxes - .5 - .5
-------- -------- -------- --------
Net earnings $ 19.1 $ 19.8 $ 36.9 $ 44.3
======== ======== ======== ========
Weighted-average number of common
shares outstanding 33.0 35.9 33.0 35.9
Earnings (loss) per share:
Earnings from continuing operations $ .58 $ .54 $ 1.12 $ 1.24
Loss from discontinued SDC business,
prior to discontinuance - - - (.02)
Earnings from discontinued SDC business,
subsequent to discontinuance - .01 - .01
-------- -------- -------- --------
Net earnings $ .58 $ .55 $ 1.12 $ 1.23
======== ======== ======== ========
Cash dividends per common share $ .30 $ .30 $ .60 $ .60
======== ======== ======== ========
</TABLE>
3
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<TABLE>
Sundstrand Corporation and Subsidiaries
Condensed Consolidated Statement of Cash Flows (Unaudited)
<CAPTION>
Six Months Ended
June 30,
----------------------
(Amounts in millions) 1994 1993
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Cash flow from operating activities:
Net earnings $ 36.9 $ 44.3
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 40.4 43.7
Deferred income taxes (11.1) (1.3)
Change in operating assets and liabilities excluding
the effects of acquisitions and divestitures:
Accounts receivable 13.5 50.7
Inventory 10.0 (6.8)
Other assets (0.5) 3.3
Accounts payable 0.6 (1.8)
Accrued expenses (50.4) (33.5)
Cash provided by discontinued SDC business - 16.5
Other 5.5 6.3
-------- --------
Total adjustments 8.0 77.1
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 44.9 121.4
-------- --------
Cash flow from investing activities:
Cash paid for property, plant and equipment (22.5) (34.1)
Proceeds from sale of property, plant and equipment 4.3 3.7
Cash paid for HMD and Kontro, net of cash acquired (24.5) -
Cash used by discontinued SDC business - (3.9)
-------- --------
NET CASH USED FOR INVESTING ACTIVITIES (42.7) (34.3)
-------- --------
Cash flow from financing activities:
Net borrowings (payments) under lines of credit 80.5 (9.7)
Principal payments on long-term debt (1.2) (2.7)
Additional debt for HMD and Kontro acquisitions 24.5 -
Purchase of treasury stock (37.9) (44.8)
Dividends paid (19.7) (21.6)
-------- --------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 46.2 (78.8)
-------- --------
Effect of exchange rate changes on cash (10.8) (8.3)
-------- --------
Increase in cash and cash equivalents 37.6 -
Cash and cash equivalents at January 1 15.4 5.2
-------- --------
CASH AND CASH EQUIVALENTS AT JUNE 30 $ 53.0 $ 5.2
======== ========
Supplemental cash flow information:
Interest paid $ 15.0 $ 23.1
Income taxes paid $ 64.5 $ 60.0
</TABLE>
4
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<TABLE>
Sundstrand Corporation and Subsidiaries
Condensed Consolidated Balance Sheet (Unaudited)
<CAPTION>
June 30, December 31,
(Amounts in millions) 1994 1993
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 53.0 $ 15.4
Accounts receivable, net 275.8 283.7
Inventories, net of progress payments 304.9 312.6
Deferred income taxes 63.7 71.8
Other current assets 9.1 9.4
--------- ---------
Total current assets 706.5 692.9
Property, Plant and Equipment, net 462.8 471.5
Intangible Assets, net 292.9 274.4
Deferred Income Taxes 50.4 31.3
Other Assets 40.9 41.8
--------- ---------
$1,553.5 $1,511.9
========= =========
Liabilities and Shareholders' Equity
Current Liabilities
Notes payable $ 131.6 $ 26.6
Long-term debt due within one year 7.7 8.2
Accounts payable 82.2 82.1
Income taxes payable - 34.6
Accrued salaries, wages and commissions 27.3 26.4
Accrued postretirement benefits other than pensions 19.3 19.5
Other accrued liabilities 104.6 130.2
--------- ---------
Total current liabilities 372.7 327.6
Long-Term Debt 246.6 246.8
Accrued Postretirement Benefits Other Than Pensions 353.8 348.7
Other Liabilities 78.9 76.6
Shareholders' Equity
Common stock, at par value 18.9 18.9
Other shareholders' equity 482.6 493.3
--------- ---------
501.5 512.2
--------- ---------
$1,553.5 $1,511.9
========= =========
</TABLE>
5
<PAGE>
The financial information contained herein is unaudited but, in the
opinion of the management of the Registrant, includes all adjustments
(all of which are normal recurring adjustments) necessary for a fair
presentation of the results of operations for the periods indicated.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Accounting Policies
The financial statements are condensed and should be read in
conjunction with the Annual Report on Form 10-K for the year ended
December 31, 1993.
Principles of Consolidation provide for the inclusion of the accounts
of Sundstrand Corporation and all subsidiaries. All intercompany
transactions are eliminated in consolidation.
Cash Equivalents are considered by the Registrant to be all highly
liquid debt instruments purchased with original maturities of three
months or less.
<TABLE>
Inventories
The components of inventories at June 30, 1994, and December 31,
1993, were as follows:
<CAPTION>
June 30, December 31,
(Amounts in millions) 1994 1993
- ------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 45.8 $ 43.8
Work in process 121.1 135.8
Finished goods and parts 155.9 156.4
--------- ---------
322.8 336.0
Less progress payments 17.9 23.4
--------- ---------
$ 304.9 $ 312.6
========= =========
Prior to the application of progress payments, the inventories
shown above included costs related to long-term contracts of $57.2
million and $61.4 million, at June 30, 1994, and December 31, 1993,
respectively.
</TABLE>
Property, Plant and Equipment
During 1994, the Company changed its estimate of the average useful
lives used to compute depreciation for certain fixed assets. This
change resulted from internal asset management procedures that are
designed to ensure continued compliance with government contract
accounting requirements and was made to better reflect the estimated
periods during which such assets will remain in service. The change
had the effect of increasing net earnings by $1.8 million, or $.05
per share, in the three months and six months ended June 30, 1994.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
The financial information for the quarter ended June 30, 1994, as
compared to the financial information for the quarter ended June 30,
1993, and the balance sheet at December 31, 1993, is discussed below,
and should be read in conjunction with the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1993, and the financial
data as presented in Item 1 above.
Results of Operations
- ---------------------
Second quarter 1994 sales decreased by 3 percent to $331.1 million
from $341.8 million in 1993. Aerospace segment sales for the second
quarter of 1994 were $165.7 million, a decrease of 8 percent,
compared with $180.9 million in the same period of 1993. The
aerospace decrease, as expected, is due primarily to a decline in
military business. Industrial segment sales increased by 3 percent
to $165.4 million in the second quarter of 1994 from $160.9 million
in the second quarter of 1993, reflecting improvement at Falk and
Sullair and the first quarter acquisitions of HMD Group Limited (HMD)
and the business of The Kontro Company (Kontro), partially offset by
lower sales at Milton Roy and by the divestiture of Falk's Brazilian
operation.
Earnings from continuing operations were $19.1 million, or $.58 per
share, in the second quarter of 1994 compared with $19.3 million, or
$.54 per share, in the second quarter of 1993. The decrease in
second quarter 1994 earnings from continuing operations was due to
the sales decline and short-term manufacturing inefficiencies in the
aerospace segment, offset by increased industrial segment sales and
earnings and by a $1.8 million benefit from a decrease in
depreciation expense. The lower depreciation expense was due to an
increase in the depreciable lives of certain fixed assets based on a
study which was initiated by the Registrant to ensure continued
compliance with government contract accounting requirements, which
deal with the depreciation of tangible capital assets. Earnings per
share in the second quarter of 1994 also benefitted from the effects
of the share repurchase program.
Sales for the first six months of 1994 were $655.4 million compared
with $682.5 million for the first six months of 1993. Aerospace
segment sales for the first half of 1994 declined to $332.7 million
from $360.1 million for the same period of 1993, due primarily to the
decrease in military business. Industrial segment sales for the
first six months of 1994, including the effects of the HMD and Kontro
acquisitions and the divestiture of Sundstrand do Brasil, were $322.7
million compared with $322.4 million for the first six months of
1993.
Earnings from continuing operations were $36.9 million, or $1.12 per
share, for the first six months of 1994 compared with $44.5 million,
or $1.24 per share, in the same period of 1993. The decrease was due
primarily to the sales decrease and short-term manufacturing
inefficiencies in the aerospace segment, partially offset by improved
industrial segment performance and by the aforementioned benefit from
the decrease in depreciation expense. Earnings per share for the
first half of 1994 also benefitted from the effects of the share
repurchase program.
7
<PAGE>
Incoming orders for second quarter 1994 were $323.4 million compared
with $294.1 million in the second quarter of 1993. New orders for
the six months ended June 30, 1994, were $657.9 million, up from
$579.7 million for the same period last year. Total unfilled orders
at June 30, 1994, were $684.9 million, compared with $811.2 million
at June 30, 1993, and $682.4 million at December 31, 1993.
Industrial Overview
- -------------------
Excluding sales for Falk's Brazilian operation, in which a majority
interest was sold during the second quarter, sales for Falk increased
6 percent in the second quarter of 1994 compared with the second
quarter of 1993, reflecting improvements in both the custom and
standard products businesses. Second quarter 1994 sales at Sullair
were up 6 percent compared with the prior year quarter, reflecting
improved U.S. sales of construction compressors. Excluding sales for
HMD and Kontro of $6.8 million, second quarter 1994 Milton Roy sales
were down 9 percent compared with the second quarter of 1993, as
weakness continued in the water treatment and hydrocarbon processing
industries.
Industrial incoming orders, excluding orders for HMD and Kontro and
Falk-Brazil, were up 8 percent in the second quarter and 4 percent in
the first half of 1994, compared with the same periods in 1993.
Excluding Falk-Brazil, orders were up 17 percent at Falk in the
second quarter and up 16 percent in the first half of 1994, compared
with the same periods in the prior year. Most of the improvement at
Falk was in custom-engineered products, with deliveries expected
primarily in 1995.
At Sullair, orders were up 4 percent in the second quarter and up 3
percent in the first six months, compared with the same periods in
1993. U.S. demand for construction compressors showed improvement in
the first half of 1994, while orders for industrial compressors were
flat and European activity remained depressed.
Milton Roy orders excluding HMD and Kontro were down 5 percent in the
first six months, compared with the same period in 1993, with weak
orders at Milton Roy's European Dosapro operations partially offset
by improved Fluid Handling orders. Orders were up 4 percent in the
second quarter, however, compared with the second quarter of 1993, on
the strength of demand for process pumps in Far East fertilizer
production markets.
Industrial unfilled orders at June 30, 1994, were $129.2 million,
compared with $113.8 million at June 30, 1993, and $110.2 million at
December 31, 1993.
Aerospace Overview
- ------------------
Aerospace segment sales in the second quarter of 1994 decreased 8
percent from the second quarter of 1993, reflecting a $14.7 million
decline in military sales. Commercial sales were flat with a $2.6
million decline in OEM activity nearly offset by a $2.1 million
increase in aftermarket business driven by air traffic growth and the
depletion of airline parts inventories.
8
<PAGE>
Aerospace incoming orders increased 13 percent in the second quarter
and 22 percent in the first half of 1994, compared with the same
periods in 1993, with increasing commercial orders more than
offsetting declining military orders. Commercial OEM orders began
recovering after last year's cancellations. Growth came from initial
orders on new programs and increasing stability in aircraft
production schedules. Commercial aftermarket orders improved 7
percent in the second quarter and 8 percent in the first six months
of 1994.
Aerospace unfilled orders at June 30, 1994, were $555.7 million,
compared with $697.4 million at June 30, 1993, and $572.2 million at
December 31, 1993.
Liquidity & Capital Resources
- -----------------------------
Working capital of $333.8 million at June 30, 1994, was $31.5 million
lower than working capital of $365.3 million at December 31, 1993.
The decrease was due primarily to an increase in notes payable,
partially offset by an increase in cash and reductions in income
taxes payable and other accrued liabilities. The increase in cash
and a portion of the increase in notes payable was due to the
discontinuation of the Registrant's policy to temporarily reduce
notes payable at quarter end using available foreign cash. Notes payable
also increased due to the repurchase of common stock under the stock
repurchase program and the acquisitions of HMD and Kontro.
Net cash provided by operating activities for the first half of 1994
was $44.9 million compared with $121.4 million for the first six
months of 1993. The decrease was due primarily to $34.9 million of
taxes paid in the first quarter of 1994 relating to the gain on the
sale of SDC and the absence of cash flows in the first six months of
1994 from SDC, which was reflected as a discontinued operation during
the same period of 1993. Also affecting cash provided by operations
were fluctuations in the levels of accounts receivable and
inventories which generated $23.5 million of cash flow during the
first six months of 1994, compared with $43.9 million during the same
period of 1993.
In the six months ended June 30, 1994, the Registrant used $42.7
million of cash for investing activities, primarily for the
acquisitions of HMD and Kontro and for the purchase of fixed assets.
In the first six months of 1993 the Registrant used $34.3 million of
cash for investing activities, primarily for the purchase of fixed
assets. In the first six months of 1994, $46.2 million of cash was
provided by financing activities, primarily net borrowings under
lines of credit and borrowings for the HMD and Kontro acquisitions,
partially offset by the repurchase of common stock and dividend
payments. In the first half of 1993, $78.8 million of cash was
used for financing activities, primarily for debt and dividend
payments and for the repurchase of common stock.
The Registrant did not purchase any of its common stock during the
second quarter under its ongoing share repurchase program. As of
June 30, 1994, the Registrant had purchased a total of approximately
4 million shares of the 10 million shares authorized for repurchase
by the Board of Directors.
9
<PAGE>
On June 21, 1994, the Board of Directors declared a quarterly cash
dividend of $.30 per common share payable on September 20, 1994, to
holders of record on September 6, 1994. It will be the 201st
consecutive quarter that the Registrant has paid a dividend.
At June 30, 1994, the Registrant's ratio of total debt to total
capital was 43.5 percent compared with 35.5 percent at December 31,
1993. The increase was due primarily to the previously mentioned
increase in notes payable and stock repurchases.
Tax Issues
- ----------
As previously disclosed, during 1992, the Tax Court issued an opinion
adverse to the Registrant related to the allocation of payments made
upon the resolution of government contracts disputes. In June 1994,
after having its appeal rejected by the Seventh Circuit Court of
Appeals in the first quarter, the Registrant filed a Petition for
Writ of Certioari with the United States Supreme Court for review of
this matter. The Registrant believes that the recorded tax and
interest provisions are sufficient to cover the resolution of this
tax issue.
Outlook
- -------
The Registrant expects industrial segment sales to increase slightly
and industrial segment operating profit to increase significantly, in
1994 compared with 1993. The previously mentioned decrease in
depreciation expense, due to the change in depreciable lives, is
expected to positively impact net income for the year by
approximately $5.5 million, or $.17 per share. Based on the strength
of orders during the first six months, the Registrant is maintaining
its outlook for 1994 earnings to be between $2.70 and $3.00 per
share, exclusive of the impact on earnings of the change in
depreciable lives.
Depending on the number of common shares purchased under the share
repurchase program, the total-debt-to-total-capital ratio is expected
to be between 41 and 45 percent by the end of 1994.
10
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Registrant has disclosed various legal proceedings in its Form
10-K for the fiscal year ended December 31, 1993. Except as set
forth in "Tax Issues" in Part I, Item 2 herein, there have been no
material legal developments since that time.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders of Sundstrand
Corporation was held on April 19, 1994.
(c) Stockholders voted on the election of four directors for
a term of three years. Results of said vote were as follows:
Name For Withheld
---- --- --------
Donald E. Nordlund 28,653,041 48,307
John A. Puelicher 28,347,960 353,388
Don R. O'Hare 28,647,252 54,096
Charles Marshall 28,155,820 545,528
No broker nonvotes were cast with respect to this matter.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(11) Statement Re Computation of Per Share Earnings
(a) Computation of Fully Diluted Earnings Per
Share (Unaudited) for the quarters ended
June 30, 1994, and 1993, and for the six
months ended June 30, 1994, and 1993.
(b) Reports on Form 8-K
None
11
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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.
Sundstrand Corporation
-----------------------------
(Registrant)
Date: August 1, 1994 /s/ Richard M. Schilling
-----------------------------
Richard M. Schilling
Vice President and General
Counsel and Secretary
Date: August 1, 1994 /s/ DeWayne J. Fellows
------------------------------
DeWayne J. Fellows
Vice President and Controller
12
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<TABLE>
Exhibit (11)(a)
Computation of Fully Diluted Earnings Per Share (Unaudited)
<CAPTION>
Quarter Ended Six Months
June 30, Ended June 30,
------------------- ---------------------
(Amounts in millions except per share data) 1994 1993 1994 1993
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Earnings
Earnings from continuing operations $ 19.1 $ 19.3 $ 36.9 $ 44.5
Loss from discontinued SDC business,
prior to discontinuance, net of taxes - - - (.7)
Earnings from discontinued SDC business,
subsequent to discontinuance, net of taxes - .5 - .5
-------- -------- -------- --------
Net earnings $ 19.1 $ 19.8 $ 36.9 $ 44.3
======== ======== ======== ========
=======================================================================================================
Shares
Weighted average number of common shares
outstanding 33.0 35.9 33.0 35.9
Additional shares assuming conversion
of stock options .1 .1 .1 .1
-------- -------- -------- --------
Fully diluted shares 33.1 36.0 33.1 36.0
======== ======== ======== ========
=======================================================================================================
Fully diluted earnings per share
Earnings from continuing operations $ .58 $ .54 $ 1.12 $ 1.24
Loss from discontinued SDC business,
prior to discontinuance, net of taxes - - - (.02)
Earnings from discontinued SDC business,
subsequent to discontinuance, net of taxes - .01 - .01
-------- -------- -------- --------
Net earnings $ .58 $ .55 $ 1.12 $ 1.23
======== ======== ======== ========
</TABLE>
