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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, 1998
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
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(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)
_________________
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 April 24, 1998
- -------------------------------------- -----------------------------
Common Stock, par value $.50 per share 57,159,380
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SUNDSTRAND CORPORATION
FORM 10-Q
For the Quarter Ended March 31, 1998
INDEX
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Page
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Part I. Financial Information
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II. Other Information
Item 1. Legal Proceedings 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
</TABLE>
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
SUNDSTRAND CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EARNINGS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
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(Amounts in millions except per share data) 1998 1997
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<S> <C> <C>
Net sales $ 485 $ 389
Costs, expenses, and other income:
Costs of products sold 319 257
Marketing and administration 81 72
Interest expense 8 8
Interest income (1) (2)
Other, net - (1)
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407 334
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Earnings before income taxes 78 55
Less income taxes 27 20
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Net earnings $ 51 $ 35
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Weighted-average number of common shares outstanding 57.3 60.2
Weighted-average number of common shares outstanding --
assuming dilution 57.8 60.5
Basic net earnings per share $ .89 $ .58
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Diluted net earnings per share $ .88 $ .58
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Cash dividends per common share $ .17 $ .17
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SUNDSTRAND CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
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(Amounts in millions) 1998 1997
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<S> <C> <C>
Net earnings $ 51 $ 35
Other comprehensive income, net of taxes -- Foreign
currency translation adjustments (1) (2)
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Comprehensive income $ 50 $ 33
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</TABLE>
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SUNDSTRAND CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
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(Amounts in millions) 1998 1997
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<S> <C> <C>
Cash flow from operating activities:
Net earnings $ 51 $ 35
Adjustments to reconcile net earnings to cash
provided by operating activities:
Depreciation 16 15
Amortization 4 4
Deferred income taxes 2 -
Change in operating assets and liabilities excluding
the effects of acquisitions:
Accounts receivable 4 (7)
Inventories (19) (18)
Other assets 19 -
Accounts payable (2) 9
Accrued expenses 21 26
Other (3) (1)
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Total adjustments 42 28
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NET CASH PROVIDED BY OPERATING ACTIVITIES 93 63
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Cash flow from investing activities:
Cash paid for property, plant and equipment (23) (32)
Cash paid for acquisitions, net of cash acquired (37) (5)
Other investing activities (2) 1
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NET CASH USED FOR INVESTING ACTIVITIES (62) (36)
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Cash flow from financing activities:
Net borrowings (payments) supported by lines of credit 26 (5)
Principal payments on long-term debt (4) -
Additional debt for Industrial acquisitions 3 -
Proceeds from stock options exercised 2 4
Purchase of treasury stock (50) (21)
Dividends paid (10) (10)
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NET CASH USED FOR FINANCING ACTIVITIES (33) (32)
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Effect of exchange rate changes on cash 1 5
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Decrease in cash and cash equivalents (1) -
Cash and cash equivalents at January 1 13 18
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CASH AND CASH EQUIVALENTS AT MARCH 31 $ 12 $ 18
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Supplemental cash flow information:
Interest paid $ 4 $ 3
Income taxes paid $ 3 $ 2
</TABLE>
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SUNDSTRAND CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
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<CAPTION>
MARCH 31, December 31,
(Amounts in millions) 1998 1997
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<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 12 $ 13
Accounts receivable, net 322 326
Inventories, net of progress payments 482 462
Deferred income taxes 48 49
Other current assets 20 30
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Total current assets 884 880
Property, Plant, and Equipment, net 482 472
Intangible Assets, net 294 265
Deferred Income Taxes 33 34
Other Assets 44 49
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$ 1,737 $ 1,700
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Liabilities and Shareholders' Equity
Current Liabilities
Notes payable $ 169 $ 143
Long-term debt due within one year 5 9
Accounts payable 123 124
Accrued salaries, wages, and commissions 26 26
Accrued postretirement benefits other than pensions 18 17
Other accrued liabilities 158 148
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Total current liabilities 499 467
Long-Term Debt 216 213
Accrued Postretirement Benefits Other Than Pensions 353 357
Other Liabilities 135 121
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1,203 1,158
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Shareholders' Equity
Common stock, at par value 38 38
Other shareholders' equity 496 504
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534 542
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$ 1,737 $ 1,700
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</TABLE>
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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 Registrant's
Annual Report on Form 10-K for the year ended December 31, 1997.
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.
INVENTORIES
The components of inventories at March 31, 1998, and December 31, 1997, were:
<TABLE>
<CAPTION>
MARCH 31, December 31,
(Amounts in millions) 1998 1997
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Raw materials $ 60 $ 59
Work in process 171 160
Finished goods and parts 269 260
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500 479
Less progress payments 18 17
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$ 482 $ 462
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</TABLE>
Prior to the application of progress payments, the inventories shown above
included costs related to long-term contracts of $92 million and $82 million,
at March 31, 1998, and December 31, 1997, respectively.
CHANGES IN ACCOUNTING PRINCIPLES
As of January 1, 1998, the Registrant adopted Financial Accounting Standards
Board Statement No. 130, "Reporting Comprehensive Income". Statement No. 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption of this Statement had no impact on the
Registrant's net income or shareholders' equity. Statement No. 130 requires
foreign currency translation adjustments, which prior to adoption were reported
separately in shareholders' equity, to be included in other comprehensive
income. Prior year financial statements have been reclassified to conform to
the requirements of Statement No. 130.
During the first quarter of 1998 and 1997, total comprehensive income amounted
to $50 million and $33 million, respectively.
RESTRUCTURINGS
In December 1996, the Registrant initiated a restructuring plan related
primarily to the operations of Sullair Europe S.A. which resulted in a pretax
charge of $32 million. The restructuring was undertaken as a result of
continuing losses at this operation, weakness in the European economy, and
significant competitive pressures in the European markets. The charge included
$11 million in cash termination benefits for approximately 140 employees,
primarily consisting of workers at Sullair Europe's St. Priest, France,
facility. The charge also included $14 million for the partial write-down of
assets of Sullair Europe and $7 million (primarily cash
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related charges) for disposition of the St. Priest facility and professional
fees. Operations previously at the St. Priest facility were transferred to
other Sullair plant sites in Europe and the United States. The shutdown of
the St. Priest facility and the termination or transfer of the employees was
completed during 1997, and it is anticipated that the sale of the facility will
be completed by the end of 1999.
Since the charge was recorded in 1996, approximately $9 million has been paid
and charged against the restructuring liability, including costs to terminate
121 employees.
During 1995, the Registrant's Board of Directors approved a restructuring plan
which resulted in a pretax charge of $58 million. The charge was taken to
reduce excess Aerospace manufacturing capacity caused by reductions in
manufacturing volume and increases in manufacturing productivity, and to
write-down the assets of the Industrial segment's Spectronic Instruments
business (Spectronic) and the Aerospace segment's Advanced Power Technology,
Inc. (APT) in anticipation of their divestiture. The charge included $24
million in termination benefits ($9 million in cash related charges and $15
million in non-cash related charges), including recognition of certain
long-term retirement benefits, for approximately 350 employees, primarily
consisting of workers at the Registrant's Lima, Ohio, facility. Also included
in the charge was $29 million for the write-down of the assets of the Lima
facility, Spectronic, and APT, as well as $5 million (cash related charges) for
the disposition of the Lima facility. The shutdown of the Lima facility was
completed during 1996 and the disposition of the facility was completed in the
first quarter of 1998. The sales of Spectronic and a majority interest in APT
were completed in the third quarter of 1995.
Since the 1995 restructuring charge was recorded, approximately $10 million has
been paid and charged against the restructuring liability, including costs to
terminate 360 employees. As of March 31, 1998, all planned restructuring
activities from the 1995 restructuring plan were substantially complete.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The financial information for the quarter ended March 31, 1998, as compared
with the financial information for the quarter ended March 31, 1997, and the
balance sheet at December 31, 1997, 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, 1997, and the financial data as presented in Item 1 above.
RESULTS OF OPERATIONS
Sales in the first quarter of 1998 were $485 million, an increase of $96
million from first quarter 1997 sales of $389 million. Both Aerospace and
Industrial segment sales were higher with significant growth in both Aerospace
commercial and military shipments.
First quarter 1998 net earnings were $51 million, or $.88 per share, assuming
dilution, compared with net earnings of $35 million, or $.58 per share,
assuming dilution, in the first quarter of 1997. This quarter over quarter
earnings increase was attributable to the higher sales.
ORDERS
Unfilled orders totaled $1,270 million at March 31, 1998, and $1,226 million at
December 31, 1997. Incoming orders were $529 million in the first quarter of
1998, a $111 million increase compared with incoming orders of $418 million in
the first quarter of 1997. While orders for both the Aerospace and Industrial
segments advanced, the increase was primarily in the Aerospace segment.
AEROSPACE OVERVIEW
First quarter sales for the Aerospace segment were $289 million, an increase of
$77 million or 36 percent from the first quarter of 1997 primarily as a result
of a 68 percent increase in military OEM sales and a 32 percent increase in
commercial sales. Operating profit increased $23 million or 61 percent to $61
million and operating profit margins increased to 21.1 percent from 17.9
percent during the first quarter of 1998 compared with the first quarter of
1997, primarily as a result of the increase in sales.
Incoming orders in the first quarter were $317 million, an increase of $91
million or 40 percent compared with the first quarter of 1997, due primarily to
higher commercial OEM and military OEM and aftermarket orders.
INDUSTRIAL OVERVIEW
First quarter 1998 sales for the Industrial segment were $196 million, an
increase of $19 million or 11 percent compared with the first quarter of 1997.
Operating profit was $30 million, an increase of $3 million or 11 percent from
the first quarter of 1997. The first quarter operating profit margin of 15.3
percent was flat compared to first quarter of 1997.
Incoming orders in the first quarter were $212 million, an increase of $20
million or 10 percent when compared with the first quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES
Working capital decreased $28 million to $385 million at March 31, 1998,
compared with $413 million at December 31, 1997, due primarily to an increase
in notes payable resulting from the Registrant's acquisitions and share
repurchase activity.
Net cash provided by operating activities increased to $93 million for the
first quarter of 1998 from $63 million for the first quarter of 1997. The
increase was due primarily to higher net earnings and a larger reduction in
other assets due primarily to the utilization of a previously funded trust for
incurred but not reported health care claims.
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In the quarters ended March 31, 1998 and 1997, the Registrant used $62 million
and $36 million of cash, respectively, for investing activities primarily for
the purchase of fixed assets and small product-line acquisitions. Net cash
used for financing activities was $33 million in the first three months of 1998
and consisted primarily of cash used to repurchase common stock and to pay
dividends, partially offset by borrowings supported by lines of credit. Net
cash used for financing activities totaled $32 million in the first quarter of
1997 and consisted primarily of cash used to repurchase common stock and to pay
dividends.
The Registrant repurchased approximately 1 million shares of its common stock
in the first quarter of 1998. To date, the Registrant has repurchased
approximately 17 million shares of the 30 million shares authorized for
repurchase by the Registrant's Board of Directors. The Registrant plans to
continue to repurchase stock on an opportunistic basis.
On March 31, 1998, the Registrant's ratio of total debt to total capital was
42.2 percent compared with 40.2 percent at December 31, 1997.
On April 21, 1998, the Registrant's Board of Directors declared a quarterly
cash dividend of $.17 per share payable on June 16, 1998, to holders of record
on June 2, 1998.
INCOME TAX ISSUES
As previously disclosed by the Registrant, the Internal Revenue Service (IRS)
had informed the Registrant in 1994 that it was disallowing a deduction for
$115 million in payments pursuant to the agreement dated August 29, 1988, which
settled the previously disclosed government contracts dispute. This issue has
now been resolved as a result of an agreement between the Registrant and the
IRS and will not have a material impact on the results of operations, financial
position or liquidity of the Registrant.
OUTLOOK
The following discussion contains forward-looking information which is subject
to market risks and opportunities that could have a material impact on actual
results, and accordingly should be considered in conjunction with the
cautionary language set forth in the Registrant's most recent report on Form
8-K which is on file with the Securities and Exchange Commission.
Significant strength across the Registrant's Aerospace business coupled with
double digit Industrial revenue growth resulted in an exceptionally strong
first quarter. Based on strong first quarter performance, coupled with the
continued strength of incoming orders, the Registrant raised its earnings per
share forecast for 1998 to between $3.70 and $3.95, excluding the effect of any
additional share repurchases. This range includes a reduction of approximately
$.15 per share due to the continued uncertainty of the economic situation in
Asia.
Because of the strong first quarter results, the Registrant is increasing the
1998 Aerospace forecast. The current outlook for 1998 is for overall Aerospace
sales to grow by approximately 20 percent, with commercial OEM sales increasing
between 30 percent and 35 percent. The previous forecast for commercial
aftermarket sales growth of approximately 5 percent for the year now appears a
bit conservative. In light of this, the Registrant is forecasting that
commercial aftermarket sales will increase by approximately 10 percent during
1998. Military OEM sales are still expected to grow between 25 percent and 30
percent, and military aftermarket sales are now projected to grow between 10
percent and 15 percent for the year. Aerospace operating profit is now
projected to increase between 25 percent and 30 percent in 1998, with operating
profit margins exceeding 20 percent of sales.
The Registrant's Industrial segment had solid first quarter results. While the
Industrial segment's operating profit performance in the first quarter was
slightly depressed by investments in strategic initiatives, the Registrant
continues to believe these initiatives, together with additional "niche-type"
acquisitions, will allow the Industrial businesses to achieve faster and more
sustainable growth in the future. The Registrant continues to project
Industrial segment sales growth between 5 percent and 10 percent in 1998, with
an operating profit margin of 16.5 percent to 17 percent of sales.
10
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Registrant has disclosed various legal proceedings in its Annual Report on
Form 10-K for the fiscal year ended December 31, 1997. There have been no
material changes in those proceedings or other material legal developments
since that time.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K.
On January 21, 1998, the Registrant filed a report on Form 8-K
containing the Registrant's updated cautionary statement for purposes
of the "Safe Harbor for Forward-Looking Statements" provision of the
Private Securities Litigation Reform Act of 1995.
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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: May 5, 1998 /s/ Mary Ann Hynes
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Mary Ann Hynes
Vice President and General
Counsel and Secretary
Date: May 5, 1998 /s/ DeWayne J. Fellows
------------------------------------
DeWayne J. Fellows
Vice President and Controller
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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