of the DC Electric Motor Business
- New Orders and Backlog Remain Strong
CHICAGO, May 2 /-/ -- Sauer-Danfoss Inc. (NYSE: SHS) today announced its financial results for the first quarter ended March 31, 2007.
FIRST QUARTER REVIEW
Earnings Reflect Restructuring and Other Costs
Net income for the first quarter 2007 was $15.4 million, or $0.32 per share, compared to net income of $25.6 million, or $0.54 per share for the first quarter 2006. Earnings for 2007 were impacted by restructuring costs of $11.9 million, or $0.21 per share, compared to $5.1 million, or $0.07 per share, in the first quarter 2006, an increase of $6.8 million, or $0.14 per share. The 2007 restructuring cost relates primarily to the sale of the DC electric motor business. The comparison to prior year earnings was also impacted by a reduction of income tax benefits of $3.1 million, or $0.06 per share.
David Anderson, President and Chief Executive Officer, stated, "Although we achieved record sales levels for the quarter, our operational performance does not reflect any margin increases because of three significant operating issues during the quarter. First, our Nordborg, Denmark operations were affected by work stoppages relating to contract negotiations, which have since been successfully concluded. Second, the operating efficiency of our Odense, Denmark AC electric motor operations was negatively impacted by a major increase in demand coinciding with the consolidation of our global AC motor business into this location as part of the sale of the DC business. These factors drove heavy overtime and excessive expediting costs. And finally, we continued our planned investment in a major lean project involving the majority of our Nordborg plant. Together these issues impacted first quarter 2007 earnings by $5.0 million, or $0.07 per share."
Anderson continued, "While our earnings for the quarter suffered, we felt it was very important to complete the sale of our DC business as quickly as possible. This leaves us with only one more non-core product line to divest as part of our product portfolio rationalization plans announced last year. As a result of the sale we incurred restructuring costs of $9.1 million, or $0.17 per share. The sale, which closed in April, will generate positive cash flow."
Record Sales Continue, Driven by Europe
Net sales for the first quarter 2007 increased 8 percent to $523.1 million, compared to net sales of $484.0 million for first quarter 2006. Excluding the impact of currency translation rate changes, sales increased 3 percent over the prior year period. Sales in Europe increased a strong 9 percent, were level in the Asia-Pacific region and down 1 percent in the Americas.
Excluding the impact of currency, sales in the Controls segment increased 13 percent, with a 4 percent increase in the Work Function segment, while sales in the Propel segment were down 1 percent compared with the prior year.
Anderson commented, "We continue our string of record quarter sales, driven by ongoing strength in Europe. The decline in the U.S. region is driven by the effects of weak housing starts and high oil prices. The impact is seen primarily in the turf care, construction and road building markets."
Orders and Backlog Support Growth Over Prior Year
Orders received for the first quarter 2007 were $568.7 million, up 12 percent from the same period last year. Excluding currency translation rate changes, orders were up 7 percent.
Total backlog at the end of first quarter 2007 was $668.1 million, a 28 percent increase from the end of first quarter 2006. Excluding currency impact, backlog was up 19 percent.
Anderson stated, "Our strong orders and backlog reflect the strength in the European and Asian-Pacific markets, which are offsetting the current softness in the U.S. market."
First Quarter Cash Flow Reflects Higher Investments for Capacity in Europe
Cash flow from operations for the first quarter 2007 was $2.1 million compared to last year's record level of $25.4 million. Capital expenditures for the first quarter 2007 were $24.9 million, an increase from last year's $16.9 million. The debt to total capital ratio, or leverage ratio, was 42 percent at the end of the first quarter 2007 compared to 39 percent at the end of the first quarter 2006.
OUTLOOK
Revised Earnings Expectation for Full Year Reflects Higher Restructuring
Costs
Anderson concluded, "Our strong first quarter sales, along with a strong backlog, reconfirm our sales outlook for the full year. We expect that our overall operational performance will remain in line with the previous earnings guidance. The sale of the DC motor business allows us to focus on our AC business which is the preferred technology for the future. However, the associated restructuring cost has negatively impacted our earnings; therefore, we are reducing our earnings expectation accordingly."
Revised 2007 Expectations for the Full Year Are:
* Earnings per share of $1.15 to $1.30 (after deducting restructuring
costs) (previous expectation $1.30 to $1.45)
- Restructuring costs of $0.25 to $0.29 per share (previous expectation
$0.08 to $0.12)
* Sales up 6 to 9 percent (unchanged)
* Capital expenditures of approximately 7 percent of sales (unchanged)
Sauer-Danfoss Inc. is a worldwide leader in the design, manufacture, and sale of engineered hydraulic, electric and electronic systems and components, for use primarily in applications of mobile equipment. Sauer-Danfoss, with approximately 9,000 employees worldwide and revenue of more than $1.7 billion, has sales, manufacturing, and engineering capabilities in Europe, the Americas, and the Asia-Pacific region. The Company's executive offices are located near Chicago in Lincolnshire, Illinois and in Neumunster, Germany. More details online at http://www.sauer-danfoss.com.
This press release contains certain statements that constitute "forward- looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. All statements regarding future performance, growth, sales and earnings projections, conditions or developments are forward-looking statements. Words such as "anticipates," "in the opinion," "believes," "intends," "expects," "may," "will," "should," "could," "plans," "forecasts," "estimates," "predicts," "projects," "potential," "continue," and similar expressions may be intended to identify forward-looking statements.
Actual future results may differ materially from those described in the forward-looking statements due to a variety of factors. It is difficult to determine if past experience is a good guide to the future. While the economy in the U.S. remains unstable due to the uncertainty surrounding continued job creation, interest rates, crude oil prices, and the U.S. government's stance on the weaker dollar, the economic situation in Europe has been improving in recent months. Any downturn in the Company's business segments could adversely affect the Company's revenues and results of operations. Other factors affecting forward-looking statements include, but are not limited to, the following: specific economic conditions in the agriculture, construction, road building, turf care, material handling and specialty vehicle markets and the impact of such conditions on the Company's customers in such markets; the cyclical nature of some of the Company's businesses; the ability of the Company to win new programs and maintain existing programs with its original equipment manufacturer (OEM) customers; the highly competitive nature of the markets for the Company's products as well as pricing pressures that may result from such competitive conditions; the continued operation and viability of the Company's significant customers; the Company's execution of internal performance plans; difficulties or delays in manufacturing; cost-reduction and productivity efforts; competing technologies and difficulties entering new markets, both domestic and foreign; changes in the Company's product mix; future levels of indebtedness and capital spending; claims, including, without limitation, warranty claims, field retrofit claims, product liability claims, charges or dispute resolutions; ability of suppliers to provide materials as needed and the Company's ability to recover any price increases for materials in product pricing; the Company's ability to attract and retain key technical and other personnel; labor relations; the failure of customers to make timely payment; any inadequacy of the Company's intellectual property protection or the potential for third-party claims of infringement; global economic factors, including currency exchange rates; general economic conditions, including interest rates, the rate of inflation, and commercial and consumer confidence; energy prices; governmental laws and regulations affecting operations, including tax obligations; changes in accounting standards; worldwide political stability; the effects of terrorist activities and resulting political or economic instability; natural catastrophes; U.S. military action overseas; and the effect of acquisitions, divestitures, restructurings, product withdrawals, and other unusual events.
The Company cautions the reader that these lists of cautionary statements and risk factors may not be exhaustive. The Company expressly disclaims any obligation or undertaking to release publicly any updates or changes to these forward-looking statements that may be made to reflect any future events or circumstances. The foregoing risks and uncertainties are further described in Item 1A (Risk Factors) in the Company's latest annual report on Form 10-K filed with the SEC, which should be reviewed in considering the forward- looking statements contained in this press release.
Condensed Consolidated Statements of Income
Three Months Ended
(Dollars in thousands March 31, March 31,
except share and per share data) 2007 2006
Net sales 523,132 483,959
Cost of sales 398,547 367,987
Gross profit 124,585 115,972
Research and development 16,850 14,534
Selling, general and administrative 62,104 55,664
Loss on sale of business 6,230 --
Total operating expenses 85,184 70,198
Income from operations 39,401 45,774
Nonoperating expenses:
Interest expense, net (5,356) (4,584)
Minority interest in income of consolidated
companies (8,384) (8,118)
Other, net (1,112) (1,161)
Income before income taxes 24,549 31,911
Income taxes (9,180) (6,337)
Net income 15,369 25,574
Net income per share:
Basic net income per common share 0.32 0.54
Diluted net income per common share 0.32 0.54
Weighted average shares outstanding
Basic 48,085 47,692
Diluted 48,269 47,796
Cash dividends per common share 0.18 0.14
Business Segment Information
Three Months Ended
March 31, March 31,
(Dollars in thousands) 2007 2006
Net sales
Propel 256,970 251,944
Work Function 138,373 124,939
Controls 127,789 107,076
Total 523,132 483,959
Segment Income (Loss)
Propel 45,673 40,250
Work Function 2,479 5,684
Controls 5,002 14,322
Global Services and Other Expenses, net (14,865) (15,643)
Total 38,289 44,613
Condensed Consolidated Statements of Cash Flows
Three Months Ended
March 31, March 31,
(Dollars in thousands) 2007 2006
Cash flows from operating activities:
Net income 15,369 25,574
Depreciation and amortization 24,530 22,001
Minority interest in income of consolidated
companies 8,384 8,118
Net change in receivables, inventories, and
payables (59,123) (50,426)
Other, net 12,957 20,141
Net cash provided by operating activities 2,117 25,408
Cash flows from investing activities:
Purchases of property, plant and equipment (24,876) (16,883)
Proceeds from sales of property, plant and
equipment 542 406
Net cash used in investing activities (24,334) (16,477)
Cash flows from financing activities:
Net borrowings on notes payable and debt
instruments 36,336 6,267
Cash dividends (7,639) (5,700)
Distribution to minority interest partners (2,613) (2,028)
Net cash provided by (used in) financing
activities 26,084 (1,461)
Effect of exchange rate changes 1,617 (4,445)
Net increase in cash and cash equivalents 5,484 3,025
Cash and cash equivalents at beginning of year 29,112 14,194
Cash and cash equivalents at end of period 34,596 17,219
Condensed Consolidated Balance Sheets
March 31, Dec. 31,
(Dollars in thousands) 2007 2006
Assets
Current assets:
Cash and cash equivalents 34,596 29,112
Accounts receivable, net 339,936 259,976
Inventories 274,819 272,286
Other current assets 48,122 43,931
Total current assets 697,473 605,305
Property, plant and equipment, net 510,019 503,977
Other assets 199,302 199,873
Total assets 1,406,794 1,309,155
Liabilities and stockholders' equity
Current liabilities:
Notes payable and bank overdrafts 41,992 46,952
Long-term debt due within one year 164,970 120,243
Accounts payable 160,392 142,234
Other accrued liabilities 147,365 128,533
Total current liabilities 514,719 437,962
Long-term debt 186,734 182,388
Long-term pension liability 82,893 80,607
Deferred income taxes 30,582 30,590
Other liabilities 58,955 58,169
Minority interest in net assets of
consolidated companies 59,595 53,448
Stockholders' equity 473,316 465,991
Total liabilities and stockholders' equity 1,406,794 1,309,155
Number of employees at end of period 9,655 9,178
Debt to total capital ratio (1) 42% 40%
(1) The debt to total capital ratio is calculated by dividing total interest bearing debt by total capital. Total interest bearing debt is the sum of notes payable and bank overdrafts, long-term debt due within one year, and long-term debt. Total capital is the sum of total interest bearing debt, minority interest in net assets of consolidated companies, and stockholders' equity.
