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 March 31, 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
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(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
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(Address of principal executive offices and zip code)
(815) 226-6000
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(Registrant's telephone number, including area code)
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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 May 6, 1994
- - -------------------------------------- --------------------------
Common Stock, par value $.50 per share 32,850,850
<PAGE>
SUNDSTRAND CORPORATION
FORM 10-Q
For the Quarter Ended March 31, 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 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
2
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<TABLE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Sundstrand Corporation and Subsidiaries
Condensed Consolidated Statement of Earnings (Unaudited)
<CAPTION>
Three Months Ended
March 31,
----------------------
(Amounts in millions except per share data) 1994 1993
- - ------------------------------------------------------------------------------------------
<S> <C> <C>
Net sales $324.3 $340.7
Costs, expenses and other income:
Costs of products sold 223.6 213.0
Marketing and administration 69.3 79.1
Interest expense 6.5 11.0
Interest income (1.2) (1.4)
Other, net (1.6) .3
------ ------
296.6 302.0
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Earnings from continuing operations before income taxes 27.7 38.7
Less income taxes 9.9 13.5
------ ------
Earnings from continuing operations 17.8 25.2
Loss from discontinued SDC business,
prior to discontinuance, net of taxes - (.7)
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Net earnings $ 17.8 $ 24.5
====== ======
Weighted-average number of common shares outstanding 33.1 36.1
Earnings (loss) per share:
Earnings from continuing operations $ .54 $ .70
Loss from discontinued SDC business, prior to
discontinuance - (.02)
------ ------
Net earnings $ .54 $ .68
====== ======
Cash dividends per common share $ .30 $ .30
====== ======
</TABLE>
3
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<TABLE>
Sundstrand Corporation and Subsidiaries
Consolidated Statement of Cash Flows (Unaudited)
<CAPTION>
Three Months Ended
March 31,
----------------------
(Amounts in millions) 1994 1993
- - ------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flow from operating activities:
Net earnings $ 17.8 $ 24.5
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation 17.5 17.6
Amortization 4.5 4.0
Deferred income taxes (1.7) (.6)
Settlements of losses on long-term contracts (1.3) (.8)
Change in operating assets and liabilities excluding
the effects of acquisitions and divestitures:
Accounts receivable 8.9 39.3
Inventories 1.5 (16.4)
Other assets 3.5 10.9
Accounts payable 4.4 (8.6)
Accrued expenses (20.5) (8.0)
Cash provided by discontinued SDC business - 15.0
Other 2.3 3.9
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Total adjustments 19.1 56.3
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NET CASH PROVIDED BY OPERATING ACTIVITIES 36.9 80.8
------ ------
Cash flow from investing activities:
Cash paid for property, plant and equipment (9.2) (16.7)
Proceeds from sale of property, plant and equipment 1.6 2.4
Cash paid for HMD and Kontro, net of cash acquired (24.5) -
Cash used for discontinued SDC business - (2.5)
------ ------
NET CASH USED FOR INVESTING ACTIVITIES (32.1) (16.8)
------ ------
Cash flow from financing activities:
Net borrowings (payments) under lines of credit 22.1 (43.3)
Principal payments on long-term debt (0.8) (1.0)
Additional debt for HMD and Kontro acquisitions 24.5 -
Purchase of treasury stock (37.9) (5.1)
Dividends paid (9.9) (10.8)
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NET CASH USED FOR FINANCING ACTIVITIES (2.0) (60.2)
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Effect of exchange rate changes on cash (2.1) (2.5)
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Increase in cash and cash equivalents 0.7 1.3
Cash and cash equivalents at January 1 15.4 5.2
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CASH AND CASH EQUIVALENTS AT MARCH 31 $ 16.1 $ 6.5
====== ======
Supplemental cash flow information:
Interest paid $ 1.4 $ 2.8
Income taxes paid $ 37.4 $ 30.8
</TABLE>
4
<PAGE>
<TABLE>
Sundstrand Corporation and Subsidiaries
Condensed Consolidated Balance Sheet (Unaudited)
<CAPTION>
March 31, December 31,
(Amounts in millions) 1994 1993
- - -------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 16.1 $ 15.4
Accounts receivable, net 277.0 283.7
Inventories, net of progress payments 315.1 312.6
Deferred income taxes 53.9 71.8
Other current assets 6.1 9.4
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Total current assets 668.2 692.9
Property, Plant and Equipment, net 467.1 471.5
Intangible Assets, net 296.1 274.4
Deferred Income Taxes 50.9 31.3
Other Assets 40.1 41.8
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$1,522.4 $1,511.9
Liabilities and Shareholders' Equity
Current Liabilities
Notes payable $ 73.2 $ 26.6
Long-term debt due within one year 7.7 8.2
Accounts payable 88.3 82.1
Income taxes payable 6.8 34.6
Accrued salaries, wages and commissions 30.8 26.4
Accrued postretirement benefits other than pensions 19.5 19.5
Other accrued liabilities 130.0 130.2
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Total current liabilities 356.3 327.6
Long-Term Debt 246.7 246.8
Accrued Postretirement Benefits Other Than Pensions 350.8 348.7
Other Liabilities 78.1 76.6
Shareholders' Equity
Common stock, at par value 18.9 18.9
Other shareholders' equity 471.6 493.3
-------- --------
490.5 512.2
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$1,522.4 $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 Consolidated Financial Statements
(Unaudited)
Accounting Policies
The financial statements 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 March 31, 1994, and December 31,
1993, were:
<CAPTION>
March 31, December 31,
(Amounts in millions) 1994 1993
- - ----------------------------------------------------------------------------
<S> <C> <C>
Raw materials. . . . . . . . . . . . . . . . . . . . $ 47.9 $ 43.8
Work in process. . . . . . . . . . . . . . . . . . . 126.2 135.8
Finished goods and parts . . . . . . . . . . . . . . 158.6 156.4
------ ------
332.7 336.0
Less progress payments . . . . . . . . . . . . . . . 17.6 23.4
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$315.1 $312.6
====== ======
Prior to the application of progress payments, the inventories
shown above included costs related to long-term contracts of $59.5
million and $61.4 million, at March 31, 1994, and December 31, 1993,
respectively.
</TABLE>
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
The financial information for the quarter ended March 31, 1994, as
compared to the financial information for the quarter ended March 31,
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
First quarter 1994 sales of $324.3 million decreased by 5 percent
compared with first quarter 1993 sales of $340.7 million. Aerospace
segment sales decreased $12.2 million to $167.0 million in the first
quarter of 1994, from $179.2 million in the first quarter of 1993.
Industrial segment sales of $157.3 million for the first quarter of
1994 decreased by $4.2 million, compared with sales of $161.5 million
for the first quarter of 1993.
Earnings from continuing operations were $17.8 million, or $.54 per
share, in the first quarter of 1994 compared with $25.2 million, or
$.70 per share, in the first quarter of 1993. This decrease was
attributable primarily to lower sales, less profitable product mix,
and short-term manufacturing inefficiencies in the aerospace segment.
The short-term manufacturing inefficiencies related primarily to the
transfer of production from the Brea, California, plant to the Puerto
Rico plant and to the realignment of manufacturing activities at
other aerospace plants. The decrease was partially offset by lower
marketing and administrative expenses which resulted primarily from
the aerospace segment restructuring and from lower interest costs due
to the early retirement of high-interest debt in the fourth quarter
of 1993.
Orders
Unfilled orders increased from $682.4 million at December 31, 1993,
to $692.6 million at March 31, 1994. Incoming orders increased by
$48.9 million, to $334.5 million in the first quarter of 1994, from
$285.6 million in the first quarter of 1993.
Aerospace Overview
Orders were $164.7 million in the first quarter of 1994, compared
with $124.5 million in the first quarter of 1993. The increase was
primarily the result of the uneven nature of order activity in the
aerospace military original equipment market. Aerospace unfilled
orders at March 31, 1994, were $569.9 million, compared with $744.3
million at March 31, 1993, and $572.2 million at December 31, 1993.
7
<PAGE>
The decrease in aerospace sales for the first quarter of 1994
compared with the first quarter of 1993 resulted primarily from a 36
percent decline in military aftermarket sales and a 10 percent
decline in commercial aftermarket sales. Original equipment
manufacturer (OEM) sales to commercial customers were flat, while OEM
sales to military customers were up 5 percent. For the full year,
aerospace sales in 1994 are expected to decline to $710 million from
$753.6 million in 1993 as a result of reduced military sales. As a
result of the ongoing reductions in defense spending, military OEM
sales are expected to decline approximately 15 percent in 1994 from
$226.5 million in 1993, despite the moderate increase in the first
quarter. Military aftermarket sales are expected to fall more than 20
percent in 1994 from $92.9 million in 1993, consistent with the first
quarter decline.
The world's airlines continue to experience excess capacity and
resultant competitive pricing that have restricted demand for new
commercial aircraft over the past several years. Sundstrand delivery
forecasts for large commercial transport aircraft from the three
major manufacturers total approximately 410 planes annually in both
1994 and 1995, compared with approximately 530 in 1993 and 750 in
1992. Commercial OEM sales were $204.6 million in 1993 and are
expected to remain flat in 1994, consistent with the first quarter.
Commercial aftermarket sales were $229.6 million in 1993 and are
expected to increase moderately in 1994, despite the first quarter
decline.
Industrial Overview
In the industrial segment, incoming orders were $169.8 million in the
first quarter of 1994, compared with $161.1 million in the first
quarter of 1993. Orders were strong in Falk's custom-engineered
product lines and in Sullair's construction markets, and orders for
Sullair's industrial compressors are improving. Industrial unfilled
orders at March 31, 1994, were $122.7 million, compared with $114.6
million at March 31, 1993, and $110.2 million at December 31, 1993.
The strengthening orders in selected industrial markets support the
Registrant's expectations of continued domestic recovery, although
most European markets are not expected to begin improving until late
in the year, resulting in anticipated total-year industrial segment
sales of $650 million, compared with $629.5 million in 1993.
Sullair's sales were flat in the first quarter, and are expected to
increase less than 5 percent in 1994 from $193.3 million in 1993.
Sales for Falk were slightly higher in the first quarter, but are
expected to remain flat compared with $195.6 million in 1993 as a
result of the sale of a majority interest in Falk's Brazilian
operation. Milton Roy sales were down moderately in the first
quarter, but are expected to increase approximately 5 percent in 1994
from $240.6 million in 1993, as a result of the recent acquisitions
of HMD Group Limited (HMD) and the business of The Kontro Company, Inc.
(Kontro).
8
<PAGE>
Liquidity & Capital Resources
Working capital decreased $53.4 million, or 15 percent, from December
31, 1993, to March 31, 1994. The decrease was due primarily to
higher notes payable partially offset by a reduction of income taxes
payable. The increase in notes payable was due primarily to the
purchase of stock under the stock repurchase program and the HMD and
Kontro acquisitions. The decrease in income taxes payable was due to
payments of $34.9 million related to the gain on the sale of
Sundstrand Data Control (SDC).
Net cash provided by operating activities was $36.9 million for the
first quarter of 1994 compared with $80.8 million for the first
quarter of 1993. The decrease was due in part to lower net earnings,
taxes paid on the gain from the sale of SDC and the absence of cash
flows from SDC in the first quarter of 1994, which was reflected as a
discontinued operation in the first quarter of 1993. Also affecting
cash provided by operations were fluctuations in the levels of
accounts receivable and inventories which generated $10.4 million in
cash flows during the quarter ended March 31, 1994, compared with
$22.9 million during the quarter ended March 31, 1993.
In the quarter ended March 31, 1994, the Registrant used $32.1
million of cash for investing activities, an increase of $15.3
million from the first quarter of 1993. The increase was due
primarily to the HMD and Kontro acquisitions partially offset by
lower purchases of fixed assets. Cash flows used for financing
activities decreased to $2.0 million in the first three months of
1994 compared with $60.2 million in the same period of 1993. This
decrease was due primarily to the increase in net borrowings,
including the debt resulting from the HMD and Kontro acquisitions,
partially offset by the increase in the purchase of treasury stock.
During the first quarter of 1994 the Registrant purchased 682,500
shares of its common stock, for $30.9 million, under its share
repurchase program. As of March 31, 1994, the Registrant had
repurchased approximately 4 million shares of the 10 million shares
authorized for repurchase by the Board of Directors. Funds for the
repurchase were provided by the Registrant's 4(2) commercial paper
program and operating activities.
On April 19, 1994, the Board of Directors declared a quarterly cash
dividend of $.30 per share payable on June 21, 1994, to holders of
record on June 7, 1994. It will be the 200th consecutive quarter
that the Registrant has paid a dividend.
On March 31, 1994, the Registrant's ratio of total debt to total
capital was 40.0 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.
9
<PAGE>
Income 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 to reduce
taxable income in the years in which the revenues from these
contracts were reported. In May 1993, the Registrant filed its
notice of appeal related to this matter in the United States Court of
Appeals for the Seventh Circuit. During the first quarter of 1994,
the United States Court of Appeals for the Seventh Circuit affirmed
the position of the Tax Court denying the Registrant's ability to
allocate certain settlement payments to reduce taxable income in the
years in which the related revenues had been reported. The
Registrant then filed a Motion for Rehearing, which challenged the
correctness of the Court of Appeals opinion, which was subsequently
denied. The Registrant is presently considering whether it should
take further action, including a possible appeal. The Registrant
believes that the recorded tax and interest provisions are sufficient
to cover the resolution of these tax issues.
Acquisitions and Dispositions
During the quarter ended March 31, 1994, Milton Roy Company, an
industrial segment subsidiary of the Registrant, acquired HMD and
Kontro. These acquisitions will expand Milton Roy Company's position
in the sealless pump markets. The combined sales of these two
companies were approximately $27 million in 1993.
On March 29, 1994, the Registrant announced that The Falk
Corporation, an industrial segment subsidiary of the Registrant, had
signed a definitive agreement to sell an 85 percent majority interest
in Sundstrand do Brasil Equipamentos S.A., Falk's Brazilian
subsidiary, to local management. The Registrant expects no
significant effect on earnings as a result of this transaction, which
was consummated on April 29, 1994. Sundstrand do Brasil had sales of
approximately $17 million in 1993.
Auxiliary Power Units
As previously disclosed, the Registrant is a participant along with
Labinal, Inc. in a joint venture, Auxiliary Power International
Corporation (APIC), which markets, sells and supports auxiliary power
units (APUs) developed and manufactured by the Registrant and Labinal
for commercial aerospace applications worldwide. This business has
experienced operating losses as a result of substantial research,
development and marketing expenditures and a weak commercial airline
market.
The Registrant and Labinal have initiated activities to restructure
this business so as to reduce current levels of expenditures
consistent with the size of the available market while continuing to
provide the highest level of support to APIC and APU customers as an
important long-term participant in this market. The restructuring of
this business is expected to reduce operating losses.
10
<PAGE>
Outlook
The Registrant expects sales for 1994 to be approximately $1,360
million, essentially flat compared with 1993 sales. Aerospace segment
sales are expected to decline moderately in 1994. This decline will
be partially offset by a slight increase in 1994 industrial segment
sales. Operating profit expectations for each of the segments and
the Registrant as a whole remain unchanged from those discussed in
the Annual Report on Form 10-K for the year ended December 31, 1993.
The Registrant is comfortable with current analyst earnings estimates
ranging between $2.70 and $3.00 per share for 1994. This anticipated
increase from 1993 is due primarily to cost reductions from aerospace
segment restructuring and the impact of reducing common shares
outstanding as a result of the stock repurchase program.
The Registrant's expectations for capital expenditures (excluding
leased equipment) and research and development expenditures remain
unchanged from those previously disclosed in the Annual Report on
Form 10-K for the year ended December 31, 1993.
11
<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 "Income Tax Issues" in Part I, Item 2 herein, there have
been no material legal developments since that time.
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 March 31, 1994
and 1993.
(b) Reports on Form 8-K.
None
12
<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.
Sundstrand Corporation
---------------------------------
(Registrant)
Date: May 9, 1994 /s/ Richard M. Schilling
---------------------------------
Richard M. Schilling
Vice President and General
Counsel and Secretary
Date: May 9, 1994 /s/ DeWayne J. Fellows
---------------------------------
DeWayne J. Fellows
Vice President and Controller
13
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<TABLE>
Exhibit (11)(a)
Computation of Fully Diluted Earnings Per Share (Unaudited)
<CAPTION>
Quarter Ended
March 31,
--------------------
(Amounts in millions except per share data) 1994 1993
- - ------------------------------------------------------------------------------------
<S> <C> <C>
Earnings
Earnings from continuing operations $ 17.8 $ 25.2
Loss from discontinued SDC business,
prior to discontinuance, net of income taxes - (0.7)
------ ------
Net earnings $ 17.8 $ 24.5
====== ======
====================================================================================
Shares
Weighted average number of common shares
outstanding 33.1 36.1
Additional shares assuming conversion
of stock options 0.1 -
------ ------
Proforma shares 33.2 36.1
====== ======
====================================================================================
Fully diluted earnings (loss) per share
Earnings from continuing operations $ .54 $ .70
Loss from discontinued SDC business,
prior to discontinuance, net of income taxes - (.02)
------ ------
Net earnings $ .54 $ .68
====== ======
</TABLE>
