- Rapid Growth Related Operational Inefficiencies and Ongoing
Business System Implementation Costs Hold Back Earnings CHICAGO,
Aug. 3 /PRNewswire-FirstCall/ -- Sauer-Danfoss Inc. (NYSE: SHS;
FSE: SAR) today announced its financial results for the second
quarter ended June 30, 2005. SECOND QUARTER REVIEW Record Sales
with Double Digit Growth in all Regions Net sales for the second
quarter increased 16 percent to $438.1 million, compared to sales
of $379. 1 million for the same period last year. Excluding the
impact of currency translation rate changes, sales increased by 13
percent over the prior year period. Comparison to the prior year's
sales result for the quarter was not impacted by acquisitions.
Regionally, sales increased 13 percent in the Americas, while
European and Asia-Pacific sales rose 12 percent and 10 percent,
respectively, excluding the impact of currency fluctuations. All
operating segments contributed to the sales increase year over
year. Excluding the impact of currency, sales increased 18 percent
in the Propel segment, followed by Controls with an 8 percent
increase, and Work Function with a 7 percent improvement over the
same quarter in 2004. David Anderson, President and Chief Executive
Officer, commented, "We are pleased to report another quarter of
record sales. Our substantial growth is a reflection of our ongoing
investment in new product development combined with our
longstanding ability to respond to our customers' short lead time
requirements, enabling us to capture market share in times of
strong market expansion." Second Quarter Results Reflect Higher
Costs Related to Operational Inefficiencies and Business Platform
Implementation Net income for the second quarter of 2005 was $19.6
million, or $0.41 per share, compared to a record second quarter
2004 net income of $21.6 million, or $0.46 per share. Anderson
stated, "While our sales growth is impressive, our earnings are
trailing our expectations. This is primarily related to an increase
in operational expenses in specific product areas associated with
our rapid growth as well as the cost of implementing our new
companywide business platform. With respect to operational
expenses, we continue to experience excessive costs associated with
the extraordinary efforts required to expedite production and
freight as we respond to our continuing opportunities for strong
sales growth and gains in market share. In addressing this issue we
have installed additional capacity to relieve our constraint areas
and are shifting the manufacturing to North America of select
products to achieve a better balance between the location of
production and the location of use. While these operational costs
are a drag on current earnings, they represent an investment in the
opportunity to capture significant market share during this growth
cycle and strengthen our competitive position going forward.
"Additionally, we have intensified the use of outside support for
the implementation of our SAP business platform in Europe and in
North America. Second quarter 2005 results were impacted by costs
of $0.10 per share for this implementation compared to related
costs of $0.01 per share in the second quarter of 2004. We expect
these higher costs to have a continuing impact on our results over
the next eighteen months as we roll out the implementation to our
remaining sites; however, it is important to note that we have now
successfully completed implementations in four locations, on
schedule and without negative impact to our operations. This
investment in a common global business platform is not only
necessary to replace 13 separate legacy systems, but it also will
provide future benefits from gains in internal process efficiencies
and greater connection to our customers and supply chain." Solid
Order and Backlog Levels Orders received for the second quarter of
2005 were $437.3 million, up 14 percent from the same period last
year. Excluding currency translation rate changes, orders were up
11 percent. Total backlog at the end of the second quarter of 2005
was $494.1 million, up 19 percent from the second quarter of 2004.
Excluding currency impact, backlog was up 18 percent compared with
the second quarter of 2004. Anderson commented, "Our growth in
orders and backlog over prior year continues to be strong, although
down slightly compared to the growth rates reported last quarter.
At the same time, there are indications that some customers have
altered their order patterns to provide suppliers longer-range
insight into their production requirements, thereby increasing the
reported backlog. This factor, to some degree, diminishes the
comparability of our order and backlog data to historical levels."
SIX MONTH REVIEW Record Sales for Six Months and Continued Strong
Cash Flow Net sales for the six months ended June 30, 2005, were
$860.7 million, an increase of 16 percent over sales of $740.2
million for the first six months of 2004. On a comparable basis,
excluding the impact of currency fluctuations, net sales were up 13
percent over last year. Net income for the first six months of 2005
was $30.4 million, or $0.64 per share, compared to net income for
the same period last year of $32.6 million, or $0.69 per share.
Record Cash Flow Cash flow from operations for the first six months
of 2005 was $69.8 million, up slightly over the cash flow of $69.7
million for the same period last year. The second quarter
contributed a record $64.3 million, up from $58.4 million in the
same period last year. Capital expenditures for the six-month
period were $38.8 million, up from $29.5 million for the comparable
period in 2004. Debt to total capital ratio, or leverage ratio,
improved to 39 percent at the end of the second quarter from 43
percent at the end of the first quarter. "Our cash flow has been
very strong, and we established new records for the quarter and six
months," stated David Anderson. "Even though our capital
expenditures are increasing as planned over last year in support of
our continued sales growth, the strong cash flow has allowed us to
further reduce our debt levels." Anderson continued, "Our leverage
ratio, at 39 percent, represents a considerable improvement over
our historical levels." OUTLOOK Downward Revision to Earnings
Expectations for 2005 Anderson concluded, "Our growth has continued
to significantly outpace our market, however at the same time, our
costs have exceeded our original expectations in three primary
areas. First, we have incurred substantial extraordinary
operational costs as we responded to and seized on our continued
opportunities for growth. These costs are primarily centered on
manufacturing inefficiencies, including expediting and freight
costs combined with the burden of producing US-consumed products in
European-based currencies. We expect this cost picture to moderate
during the second half of the year as we continue to turn on
production capacity in North America; however we will not be in a
position to make up for these year-to-date margin losses, thereby
impacting our full-year expectation by $0.10 to $0.15 per share.
"Second, in the process of implementing our new common business
platform we are incurring higher costs for outside resources, which
will continue throughout this year. We now estimate the total
implementation cost for 2005 to be between $0.25 and $0.30 per
share. Although we will continue to manage the costs of this major
project closely, our first priority is to stay on the path of
successful site implementations while maintaining our aggressive
schedule. Finally, we experienced higher Sarbanes-Oxley compliance
costs at the beginning of this year related to the completion of
our 2004 compliance work. These costs are coming down to a lower
ongoing level, as we move into the second year of compliance.
Offsetting these factors driving our costs is an intense focus on
price management across all markets and regions. We will realize an
increased impact from our earlier efforts in this area during the
second half of 2005. "We remain confident that our cost and system
improvement efforts together with an appropriate level of price
management will lead to more earnings improvements year over year
as well as to a further increase in our return on net assets, our
principal metric for measuring our long- term success. Taking all
of these factors into account, we are expecting our earnings for
the full year to come in at $0.85 to $0.95 per share."
Sauer-Danfoss Inc. is a worldwide leader in the design,
manufacture, and sale of engineered hydraulic and electronic
systems and components, for use primarily in applications of mobile
equipment. Sauer-Danfoss, with approximately 8,500 employees
worldwide and revenue of more than $1.5 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. 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, including the fact that the U.S. economy generally, and
the agriculture, construction, road building, turf care, material
handling and specialty vehicle markets specifically, has, in recent
months, been stronger than in recent years. It is difficult to
determine if past experience is a good guide to the future. While
the economy in the U.S. has been improving, it 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 not necessarily
followed the improvement that has occurred in the U.S., and the
economy in China has been slowed through government intervention.
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. CONDENSED CONSOLIDATED STATEMENTS OF INCOME Three
Months Ended Six Months Ended (Dollars in thousands June 30, June
30, June 30, June 30, except per share data) 2005 2004 2005 2004
Net sales 438,096 379,117 860,681 740,171 Cost of sales 328,720
272,930 652,317 546,307 Gross profit 109,376 106,187 208,364
193,864 Research and development 15,516 12,907 30,922 26,120
Selling, general and administrative 57,005 50,006 114,073 97,229
Total operating expenses 72,521 62,913 144,995 123,349 Income from
operations 36,855 43,274 63,369 70,515 Nonoperating income
(expenses): Interest expense, net (4,028) (4,332) (8,347) (8,866)
Minority interest in income of consolidated companies (6,507)
(7,490) (13,890) (13,313) Other, net 1,656 (52) 3,267 446 Income
before income taxes 27,976 31,400 44,399 48,782 Income taxes
(8,414) (9,793) (14,027) (16,152) Net income 19,562 21,607 30,372
32,630 Net income per share: Basic net income per common share 0.41
0.46 0.64 0.69 Diluted net income per common share 0.41 0.46 0.64
0.69 Weighted average shares outstanding (in thousands): Basic
47,456 47,409 47,453 47,407 Diluted 47,701 47,462 47,680 47,443
Cash dividends per common share 0.12 0.07 0.24 0.14 BUSINESS
SEGMENT INFORMATION Three Months Ended Six Months Ended June 30,
June 30, June 30, June 30, (Dollars in thousands) 2005 2004 2005
2004 Net sales Propel 218,725 182,045 428,587 353,379 Work Function
119,630 107,935 235,362 213,892 Controls 99,741 89,137 196,732
172,900 Total 438,096 379,117 860,681 740,171 Segment Income (Loss)
Propel 36,848 35,521 67,027 56,615 Work Function 2,386 10,112 5,835
16,369 Controls 9,212 8,604 16,073 16,601 Global Services and Other
Expenses, net (9,935) (11,015) (22,299) (18,624) Total 38,511
43,222 66,636 70,961 CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS Six Months Ended June 30, June 30, (Dollars in thousands)
2005 2004 Cash flows from operating activities: Net income 30,372
32,630 Depreciation and amortization 45,183 41,156 Minority
interest in income of consolidated companies 13,890 13,313 Net
change in receivables, inventories, and payables (60,538) (49,038)
Other, net 40,937 31,604 Net cash provided by operating activities
69,844 69,665 Cash flows from investing activities: Purchases of
property, plant and equipment (38,841) (29,537) Payments for
acquisitions, net of cash acquired -- (4,156) Proceeds from sales
of property, plant and equipment 724 405 Net cash used in investing
activities (38,117) (33,288) Cash flows from financing activities:
Net borrowings (repayments) on notes payable and bank overdrafts
9,935 (14,680) Net repayments of long-term debt (22,553) (10,326)
Cash dividends (10,439) (6,641) Distribution to minority interest
partners (4,006) (4,840) Net cash used in financing activities
(27,063) (36,487) Effect of exchange rate changes (2,705) 825 Net
increase in cash and cash equivalents 1,959 715 Cash and cash
equivalents at beginning of year 11,273 15,086 Cash and cash
equivalents at end of period 13,232 15,801 CONDENSED CONSOLIDATED
BALANCE SHEETS June 30, Dec. 31, (Dollars in thousands) 2005 2004
ASSETS Current assets: Cash and cash equivalents 13,232 11,273
Accounts receivable, net 276,718 233,146 Inventories 231,610
241,562 Other current assets 32,669 40,131 Total current assets
554,229 526,112 Property, plant and equipment, net 441,085 478,543
Other assets 189,587 206,926 Total assets 1,184,901 1,211,581
LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes
payable and bank overdrafts 30,849 23,609 Long-term debt due within
one year 214,623 244,987 Accounts payable 128,585 130,071 Other
accrued liabilities 112,748 99,320 Total current liabilities
486,805 497,987 Long-term debt 70,752 76,496 Long-term pension
liability 52,843 57,148 Deferred income taxes 46,117 48,454 Other
liabilities 41,725 47,494 Minority interest in net assets of
consolidated companies 49,536 39,927 Stockholders' equity 437,123
444,075 Total liabilities and stockholders' equity 1,184,901
1,211,581 Number of employees at end of period 8,715 8,275 Debt to
total capital ratio (1) 39% 42% (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. DATASOURCE: Sauer-Danfoss Inc. CONTACT:
Kenneth D. McCuskey, Vice President and Chief Accounting Officer,
+1-515-239-6364, Fax: +1-515-239-6443, , or John N. Langrick,
Director of Finance Europe, +49-4321-871-190, Fax:
+49-4321-871-121, , both of Sauer-Danfoss Inc. Web site:
http://www.sauer-danfoss.com/
Copyright
