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| SHS > SEC Filings for SHS > Form 10-Q on 31-Jul-2009 | All Recent SEC Filings |
31-Jul-2009
Quarterly Report
This Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as other portions of this quarterly report, contain 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. Readers should bear in mind that past experience may not be a good guide to anticipating actual future results. The economies in the U.S., Europe, and Asia-Pacific are suffering from the global recession and credit crisis, continued weakness in the housing and residential construction markets, weakness in the commercial and public-sector construction markets, mounting job losses, and uncertainty surrounding the effects of government fiscal stimulus plans, interest rates, and crude oil prices. At this point, it appears that the worldwide economic recession will continue throughout 2009. A prolonged 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; the effectiveness of the Company's cost-reduction and productivity improvement 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; the ability and willingness of Danfoss A/S, the Company's majority stockholder, to lend money to the Company at sufficient levels and on terms favorable enough to enable the Company to meet its capital needs; the Company's ability to access the capital markets or traditional credit sources to supplement or replace the Company's borrowings from Danfoss A/S if the need should arise; claims, including, without limitation, warranty claims, field recall 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, especially in light of the current credit crisis; 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; credit market disruptions and significant changes in capital market liquidity and funding costs affecting the Company and its customers; general economic conditions, including interest rates, the rate of inflation, and commercial and consumer confidence; energy prices; the impact of new or changed tax and other legislation and regulations in jurisdictions in which the Company and its affiliates operate; actions by the U.S. Federal Reserve Board and the central banks of other nations; actions by other regulatory agencies, including those taken in response to the global credit crisis; actions by rating agencies; 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 this list of cautionary statements and risk factors is not exhaustive. The Company expressly disclaims any obligation or undertaking to release publicly any updates or changes to these forward-looking statements to reflect future events or circumstances. The foregoing risks and uncertainties are further described in Item1A (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 quarterly report.
About the Company
Sauer-Danfoss Inc. and subsidiaries (the Company) is a worldwide leader in the design, manufacture, and sale of engineered hydraulic and electronic systems and components that generate, transmit and control power in mobile equipment. The Company's products are used by original equipment manufacturers (OEMs) of mobile equipment, including construction, road building, agricultural, turf care, material handling, and specialty equipment. The Company designs, manufactures and markets its products in the Americas, Europe and the Asia-Pacific regions, and markets its products throughout the rest of the world either directly or through distributors.
Executive Summary - Three months ended June 30, 2009
The nature of the Company's operations as a global producer and supplier in the fluid power industry means the Company is impacted by changes in the local economies, including currency exchange rate fluctuations. In order to gain a better understanding of the
Company's base results, a financial statement user needs to understand the impact of those currency exchange rate fluctuations. The following table summarizes the Company's second quarter 2009 and 2008 results from operations, separately identifying the impact of currency fluctuations. This analysis is more consistent with how the Company internally evaluates its results.
Three months Three months
ended Currency Underlying ended
(in millions) June 30, 2008 fluctuations change June 30, 2009
Net sales $ 611.5 $ (23.4 ) $ (310.7 ) $ 277.4
Gross profit 138.0 (1.6 ) (105.6 ) 30.8
% of Sales 22.6 % 11.1 %
Selling, general and administrative 70.3 (5.3 ) (13.7 ) 51.3
Research & development 21.0 (1.6 ) (4.4 ) 15.0
Loss on sale of business and asset
disposals 0.4 (0.1 ) 4.7 5.0
Total operating costs 91.7 (7.0 ) (13.4 ) 71.3
Operating income (loss) $ 46.3 $ 5.4 $ (92.2 ) $ (40.5 )
% of Sales 7.6 % -14.6 %
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Net sales for the second quarter 2009 decreased 51 percent compared to the second quarter 2008, excluding the effects of currency. Net sales decreased in all regions and segments. Excluding the impact of currency, sales decreased 56 percent in Europe, 48 percent in the Americas and 39 percent in Asia-Pacific. Sales in the Controls segment were down 57 percent, sales in the Work Function segment decreased 56 percent, followed by a decrease of 45 percent in the Propel segment.
Operating income decreased primarily due to a 77 percent decrease in gross profit due to lower sales volumes, severance costs of $4.2 million, and restructuring charges of $0.7 million related to the closure of the Hillsboro location. Other factors contributing to the decrease in operating income included a $4.1 million loss on sale of the alternating current (AC) motor business to the material handling market, restructuring costs included in operating costs of $0.4 million, and severance costs in operating costs of $3.9 million. Offsetting the negative impact of these items were reductions in field recall costs of $4.5 million, a $1.7 million decrease in costs related to the implementation of a common business system, and a $1.9 million reduction in incentive plan costs.
Following is a discussion of the Company's operating results by market, region, and business segment.
Operating Results -Three Months Ended June 30, 2009 Compared to Three Months
Ended June 30, 2008
Sales Growth by Market
The following table summarizes the Company's sales growth by market. The table
and following discussion is on a comparable basis, which excludes the effects of
currency fluctuations.
Asia-
Americas Pacific Europe Total
Agriculture/Turf Care (25 )% (23 )% (34 )% (29 )%
Construction/Road Building (65 ) (50 ) (74 ) (66 )
Specialty (79 ) (21 ) (62 ) (63 )
Distribution (53 ) (37 ) (46 ) (47 )
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Agriculture/Turf Care
Sales into the agriculture/turf care market decreased in all regions during the second quarter of 2009. The Americas began to experience the anticipated slowdown in the agricultural market as sales declined sharply during the second quarter, particularly in Brazil. Agricultural sales in Europe continued to decline in the second quarter as a result of the economic crisis. Turf care sales continue to suffer from the severely depressed housing market and reduced customer spending. The Asia-Pacific region contributes less than 5 percent of the sales in the agriculture / turf care market, and therefore does not significantly impact the total.
Construction/Road Building
All regions experienced decreased sales into the construction/road building
markets during the second quarter of 2009 compared to the second quarter of
2008. Reduced sales were driven by depressed economic conditions worldwide,
reduced housing starts, and customers' focus on reducing inventory levels.
Non-residential construction is slowing rapidly in the Americas, while state
government budget problems are causing road building to drop to low levels. The
Asia-Pacific region experienced increased sales to
customers in China, but this was more than offset by slow markets in Japan.
Specialty
Specialty vehicles are comprised of a variety of markets including forestry, material handling, marine, waste management and waste recycling. Overall sales into the specialty vehicle market decreased 63 percent compared to second quarter of 2008. Sales in Europe were down as the material handling, forestry, mining, and marine markets followed the downward trend in the construction/road building market. The Americas experienced a significant sales decrease in the material handling market in response to the decline in non-residential construction, as well as reduced capital expenditures by rental companies. Specialty sales in the Asia-Pacific region were helped by increased sales in China related to the carrier business for railroad construction, however material handling sales were down in the region due to the weakened construction business. Also negatively impacting sales in the specialty market was the divestiture of the electric drives business.
Distribution
Products related to all of the above markets are also sold to distributors, who then serve smaller OEMs.
Business Segment Results
The following discussion of operating results by segment relates to information as presented in Note 15 in the Notes to the Consolidated Financial Statements. Segment income is defined as the respective segment's portion of the total Company's net income, excluding net interest expense, income taxes, and global services expenses. Propel products include hydrostatic transmissions and related products that transmit power from the engine to the wheel to propel a vehicle. Work Function products include steering motors as well as gear pumps and motors that transmit power for the work functions of the vehicle. Controls products include electrohydraulic controls, microprocessors, electric drives and valves that control and direct the power of a vehicle. The following table provides a summary of each segment's sales and segment income, separately identifying the impact of currency fluctuations.
Three months Three months
ended Currency Underlying ended
(in millions) June 30, 2008 fluctuation change June 30, 2009
Net sales
Propel $ 293.1 $ (7.3 ) $ (130.9 ) $ 154.9
Work Function 162.9 (8.2 ) (91.5 ) 63.2
Controls 155.5 (7.9 ) (88.3 ) 59.3
Segment income (loss)
Propel $ 51.4 $ 1.8 $ (51.6 ) $ 1.6
Work Function 0.3 5.1 (26.3 ) (20.9 )
Controls 6.5 2.7 (24.4 ) (15.2 )
Global Services and other
expenses, net (12.0 ) (4.1 ) 10.5 (5.6 )
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Propel Segment
The Propel segment experienced a 45 percent decrease in sales, excluding the effects of currency fluctuations, during the second quarter 2009 compared to 2008, due to weakened economic conditions globally. The Propel segment experienced an 11 percentage point decrease in operating profit margin during the three months ended June 30, 2009 compared to the three months ended June 30, 2008, mainly due to reduced sales volume resulting in less absorption of fixed production costs. Contributing to the decrease in segment income was recognition of $4.5 million of severance costs during the second quarter of 2009, partially offset by a $3.9 million reduction in operating costs.
Work Function Segment
Sales in the Work Function segment decreased 56 percent during the second quarter of 2009 compared with the same period in 2008, excluding the effects of currency fluctuations, due to depressed economic conditions worldwide. Reduced sales were the primary driver for the reduction in segment income, which decreased $26.3 million compared to the second quarter of 2008, excluding the effects of currency fluctuations. Expedited freight costs were $3.3 million lower in 2009 and total operating expenses were reduced by $4.0 million.
Controls Segment
Net sales in the Controls segment decreased 57 percent during the second quarter of 2009 compared with the same period in 2008, excluding the effects of currency fluctuations. Segment income decreased $24.4 million during the second quarter of 2009 mainly due to decreased sales. In addition, costs of $4.1 million related to the sale of the alternating current (AC) product line, restructuring costs of $1.1 million related to the closure of the Hillsboro, Oregon facility and the exit of the electric drives business, and severance costs of $0.6 million related to employee headcount reductions were recognized in 2009. Excluding the restructuring and severance costs, operating expenses were reduced by $3.6 million.
Global Services and other expenses, net
Segment costs in Global Services and other expenses, net, relate to internal global service departments, along with the operating costs of the Company's executive office. Global services include such costs as consulting for special projects, tax and accounting fees paid to outside third parties, internal audit, certain insurance premiums, and the amortization of intangible assets from certain business combinations. Global services and other expenses decreased $10.5 million excluding the impacts of currency. A $2.2 million reduction of expense for the long term incentive plan and a $1.7 million reduction in costs associated with the implementation of a common business system contributed to the expense reduction.
Income Taxes
The Company recorded $61.6 million of tax expense for the second quarter of 2009. The Company recognized tax expense on a pre-tax loss due to recording a $13.0 million and a $65.5 million valuation allowance on the net deferred tax assets in Denmark and the U.S., respectively. The Company's effective tax rate can also vary significantly from quarter to quarter due to the mix of earnings between countries.
Executive Summary - Six months ended June 30, 2009
The following table summarizes the Company's results from operations for the six months ended June 30, 2009 and 2008, separately identifying the impact of currency fluctuations. This analysis is more consistent with how the Company internally evaluates its results.
Six months Six months
ended Currency Underlying ended
(in millions) June 30, 2008 fluctuations change June 30, 2009
Net sales $ 1,228.9 $ (53.9 ) $ (547.9 ) $ 627.1
Gross profit 285.7 (6.0 ) (190.9 ) 88.8
% of Sales 23.2 % 14.2 %
Selling, general and
administrative 138.3 (11.2 ) (19.4 ) 107.7
Research & development 40.3 (3.2 ) (5.3 ) 31.8
Impairment charge - - 50.8 50.8
Loss (gain) on sale of business
and asset disposals (0.8 ) (0.4 ) 9.8 8.6
Total operating costs 177.8 (14.8 ) 35.9 198.9
Operating income (loss) $ 107.9 $ 8.8 $ (226.8 ) $ (110.1 )
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Net sales for the six months ended June 30, 2009 decreased 45 percent compared to the six months ended June 30, 2008, excluding the effects of currency. Net sales decreased in all regions and all segments. Excluding the impacts of currency, sales declined 49 percent in Europe, 42 percent in the Americas and 36 percent in Asia-Pacific. Sales in the Work Function segment decreased by 49 percent, sales in the Controls segment were down 48 percent, followed by a reduction of 41 percent in the Propel segment.
Gross profit decreased 67 percent due to reduced sales volume, severance costs of $8.2 million, and restructuring charges of $1.5 million related to the closure of the Hillsboro location and the exit from the electric drives business. Other factors contributing to the reduced operating income include the impairment charge of $50.8 million related to the valves reporting unit, costs of $5.6 million related to the loss on sale of the alternating current (AC) motor business associated with the material handling market, restructuring costs of $3.6 million in operating costs related to the closure of the Hillsboro location and the exit from the electric drives business, and severance costs of $9.2 million in operating costs. In 2008 the company recognized a gain on sale of the LaSalle facility of $1.4 million, with no similar gain recognized in 2009. Offsetting the negative impact of these items were reductions related to incentive plan costs of $7.4 million, field recall costs of $7.0 million, and $3.9 million of costs related to the implementation of a common business system.
Following is a discussion of the Company's operating results by market, region, and business segment.
Operating Results -Six Months Ended June 30, 2009 Compared to Six Months Ended June 30, 2008
Sales Growth by Market
The following table summarizes the Company's sales growth by market. The table
and following discussion is on a comparable basis, which excludes the effects of
currency fluctuations.
Asia-
Americas Pacific Europe Total
Agriculture/Turf Care (22 )% (9 )% (24 )% (22 )%
Construction/Road Building (64 ) (54 ) (72 ) (66 )
Specialty (74 ) (11 ) (53 ) (55 )
Distribution (45 ) (32 ) (40 ) (41 )
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Agriculture/Turf Care
Sales into the agriculture/turf care market decreased in all regions during the six months ended June 30, 2009 compared to the same period in 2008. Sales into the agriculture market in the Americas remained strong during the first quarter, but declined sharply during the second quarter as commodity prices leveled off and customers focused on inventory reduction. The European agriculture market continued to decline due to falling commodity prices and the worldwide economic crisis. Turf care sales continue to suffer from the depressed housing market and reduced consumer spending. The Asia-Pacific region contributes less than 5 percent of the sales in the agriculture/turf care market, and therefore does not significantly impact the total.
Construction/Road Building
Construction/road building sales were down in all regions during the six months ended June 30, 2009 compared to the same period in 2008. The sales decline was due to poor economic conditions worldwide, depressed housing and non-residential construction markets, and customers' focus on reducing inventory levels.
Specialty
Specialty vehicles are comprised of a variety of markets including forestry, material handling, marine, waste management and waste recycling. Overall sales into the specialty vehicle market decreased 55 percent compared to 2008. Material handling sales were down across all regions as sales followed the downward trend in the construction/road building markets. Offsetting the reduced material handling sales in the Asia-Pacific region was an increase in specialty sales in China due to investments made by the Chinese government, as well as increased sales related to the carrier business for railroad construction. The divestiture of the electric drives business also had a negative impact on sales in Europe and Asia Pacific.
Distribution
Products related to all of the above markets are also sold to distributors, who then serve smaller OEMs.
Business Segment Results
The following discussion of operating results by segment relates to information as presented in Note 15 in the Notes to the Consolidated Financial Statements. Segment income is defined as the respective segment's portion of the total Company's net income, excluding net interest expense, income taxes, and global services expenses.
The following table provides a summary of each segment's sales and segment income, separately identifying the impact of currency fluctuations.
Six months Six months
ended Currency Underlying ended
(in millions) June 30, 2008 fluctuations change June 30, 2009
Net sales
Propel $ 604.8 $ (15.5 ) $ (246.5 ) $ 342.8
Work Function 323.4 (18.9 ) (158.7 ) 145.8
Controls 300.7 (19.5 ) (142.7 ) 138.5
Segment income (loss)
Propel $ 116.8 $ 0.9 $ (98.6 ) $ 19.1
Work Function 4.7 5.8 (46.3 ) (35.8 )
Controls 11.5 5.7 (96.8 ) (79.6 )
Global Services and
other expenses, net (29.0 ) 0.1 17.3 (11.6 )
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Propel Segment
The Propel segment experienced a 41 percent decrease in sales, excluding the effects of currency fluctuations, during the six months ended June 30, 2009 compared to the same period in 2007, due to weakened economic conditions globally. Segment income decreased 84 percent during the quarter. The Propel segment experienced a 9 percentage point decrease in operating profit margin during the six months ended June 30, 2009 compared to the same period in 2008, mainly due to reduced sales volume resulting in less absorption of fixed production costs. Contributing to the decrease in segment income was recognition of $7.2 million of severance costs in 2009. Operating expenses were reduced by $7.4 million, due to a focus on reducing costs, lower ongoing payroll costs and a reduction in annual incentive plan costs of $1.0. In addition, in 2008 the Propel segment recognized a gain on sale of a building of $1.4 million.
Work Function Segment
Sales in the Work Function segment decreased 49 percent during the six months ended June 30, 2009 compared with the same period in 2008, excluding the effects of currency fluctuations, due to depressed economic conditions worldwide. The reduction in segment income of $46.3 million, excluding the effects of currency fluctuations, was driven by reduced sales as well as severance costs of $1.2 million. Offsetting the reduced sales volume was a reduction in expedited freight costs of $6.0 million, reduced depreciation of $2.2 million due to the impairment of long-lived assets at December 31, 2008, and a reduction in total operating expenses of $8.1 million.
Controls Segment
Net sales in the Controls segment decreased 47 percent during the six months . . .
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