UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

 

 

 

OR

 

 

 

Commission File Number 333-48299

 

SAUER-DANFOSS INC.

(Exact name of registrant as specified in its charter)

 

Delaware		36-3482074
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)
250 Parkway Drive, Suite 270, Lincolnshire, Illinois		60069
(Address of principal executive office)		(Zip Code)
Registrant’s telephone number, including area code              (515) 239-6000

 

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  ý   No o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

Yes ý   No o

 

As of October 29, 2004, 47,445,768 shares of Sauer-Danfoss Inc. common stock, $.01 par value, were outstanding.

 

 

Table of Contents

 

PART I			FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Consolidated Statements of Income:
	Three and Nine Months Ended September 30, 2004 and 2003
	Consolidated Balance Sheets:
	As of September 30, 2004 and December 31, 2003
	Consolidated Statements of Stockholders’ Equity and Comprehensive Income:
	As of September 30, 2004 and December 31, 2003
	Consolidated Statements of Cash Flows:
	Nine Months Ended September 30, 2004 and 2003
	Notes to Consolidated Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risks
Item 4.	Controls and Procedures
PART II		OTHER INFORMATION
Item 4.	Submission of Matters to a Vote of Security Holders
Item 6.	Exhibits and Reports on Form 8-K
SIGNATURES
CERTIFICATIONS

 

2

 

Sauer-Danfoss Inc. and Subsidiaries

Consolidated Statements of Income

(in thousands, except per share data)

(Unaudited)

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2004			2003			2004			2003
Net Sales		$	324,729		$	255,370		$	1,064,900		$	864,257
Costs and Expenses:
Cost of sales		246,918			203,406			793,225			663,324
Selling, general and administrative		45,477			40,490			142,706			116,210
Research and development		11,814			10,702			37,934			32,035
Total costs and expenses		304,209			254,598			973,865			811,569
Operating income		20,520			772			91,035			52,688
Nonoperating Income (Expenses):
Interest expense, net		(4,191		)	(4,025		)	(13,057		)	(12,554		)
Other, net		(551		)	862			(105		)	(1,579		)
Nonoperating expenses, net		(4,742		)	(3,163		)	(13,162		)	(14,133		)
Income (Loss) Before Income Taxes and Minority Interest and Equity Income, net		15,778			(2,391		)	77,873			38,555
Minority Interest and Equity Income, net		(4,103		)	(2,448		)	(17,416		)	(11,898		)
Income (Loss) Before Income Taxes		11,675			(4,839		)	60,457			26,657
Income Tax (Expense) Benefit		(3,931		)	2,610			(20,083		)	(7,459		)
Net income (loss)		$	7,744		$	(2,229	)	$	40,374		$	19,198
Basic net income (loss) per common share		$	0.16		$	(0.05	)	$	0.85		$	0.40
Diluted net income (loss) per common share		$	0.16		$	(0.05	)	$	0.85		$	0.40
Dividends declared per common share		$	0.10		$	0.07		$	0.24		$	0.21

 

See accompanying notes to consolidated financial statements.

 

3

 

Sauer-Danfoss Inc. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except per share data)

 

		(Unaudited) September 30, 2004			December 31, 2003
Assets
Current Assets:
Cash and cash equivalents		$	14,860		$	15,086
Accounts receivable, net of allowances ($4,359 and $4,144 at September 30, 2004 and December 31,2003, respectively)		233,597			186,293
Inventories		202,960			198,870
Other current assets		41,247			34,637
Total current assets		492,664			434,886
Property, Plant and Equipment, net of accumulated depreciation
($683,373 and $656,210 at September 30, 2004 and December 31, 2003, respectively)		436,291			452,913
Other Assets:
Goodwill		123,691			119,654
Other intangible assets, net of accumulated amortization ($11,421 and $8,636 at September 30, 2004 and December 31, 2003, respectively)		29,964			35,265
Deferred income taxes		41,446			39,258
Other		9,698			19,778
Total other assets		204,799			213,955
		$	1,133,754		$	1,101,754
Liabilities and Stockholders’ Equity
Current Liabilities:
Notes payable and bank overdrafts		$	38,455		$	65,453
Long-term debt due within one year		189,305			159,590
Accounts payable		102,752			93,793
Accrued salaries and wages		34,388			28,558
Accrued warranty		16,999			17,196
Other accrued liabilities		60,496			36,208
Total current liabilities		442,395			400,798
Long-Term Debt		78,529			130,408
Other Liabilities:
Long-term pension liability		41,500			41,937
Postretirement benefits other than pensions		17,937			17,779
Deferred income taxes		57,198			56,126
Other		26,203			25,139
Total other liabilities		142,838			140,981
Minority Interest in Net Assets of Consolidated Companies		40,160			32,353
Stockholders’ Equity:
Common stock, par value $.01 per share, authorized 75,000 shares in 2004 and 2003; issued and outstanding 47,446 in 2004 and 47,432 in 2003		474			474
Additional paid-in capital		318,830			314,319
Retained earnings		74,190			45,202
Accumulated other comprehensive income		36,611			37,376
Unamortized restricted stock compensation		(273		)	(157		)
Total stockholders’ equity		429,832			397,214
		$	1,133,754		$	1,101,754

 

See accompanying notes to consolidated financial statements.

 

4

 

Sauer-Danfoss Inc. and Subsidiaries

Consolidated Statement of Stockholders’ Equity and Comprehensive Income

(in thousands, except per share data)

 

		Number of Shares Outstanding		Common Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income			Unamortized Restricted Stock Compensation			Total
Beginning Balance, December 31, 2003		47,432		$	474		$	314,319		$	45,202		$	37,376		$	(157	)	$	397,214
Period Ended September 30, 2004 (Unaudited):
Comprehensive income:
Net income		—		—			—			40,374			—			—
Unrealized losses on foreign currency exchange contracts		—		—			—			—			(67		)	—
Translation adjustment		—		—			—			—			(698		)	—
Total comprehensive income		—		—			—			—			—			—			39,609
Restricted stock grant		14		—			208			—			—			(208		)	—
Restricted stock and performance unit compensation		—		—			4,303			—			—			92			4,395
Cash dividends, ($.24 per share)		—		—			—			(11,386		)	—			—			(11,386		)
Ending balance		47,446		$	474		$	318,830		$	74,190		$	36,611		$	(273	)	$	429,832

 

See accompanying notes to consolidated financial statements.

 

5

 

Sauer-Danfoss Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

		Nine Months Ended September 30,
		2004			2003
Cash Flows From Operating Activities:
Net income		$	40,374		$	19,198
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization		60,626			61,313
Minority interest and equity income, net		17,416			11,898
Changes in working capital:
Accounts receivable, net		(45,718		)	(20,961		)
Inventories		(2,935		)	5,634
Accounts payable		4,565			(5,486		)
Accrued liabilities		27,871			7,972
Change in deferred income taxes		(454		)	1,113
Other		13,513			1,309
Net cash provided by operating activities		115,258			81,990
Cash Flows From Investing Activities:
Purchases of property, plant and equipment		(46,915		)	(36,012		)
Proceeds from sale of property, plant and equipment		636			301
Payments for acquisitions, net of cash acquired		(4,156		)	(5,824		)
Net cash used in investing activities		(50,435		)	(41,535		)
Cash Flows From Financing Activities:
Net repayments on notes payable and bank overdrafts		(27,285		)	(29,428		)
Net borrowings (repayments) on revolving credit facility		(15,650		)	57,473
Net repayments of long-term debt		(3,177		)	(29,159		)
Cash dividends		(9,962		)	(9,960		)
Distributions to minority interest partners		(9,960		)	(12,882		)
Net cash used in financing activities		(66,034		)	(23,956		)
Effect of Exchange Rate Changes		985			1,650
Cash and Cash Equivalents:
Net increase (decrease) during the period		(226		)	18,149
Beginning balance		15,086			12,397
Ending balance		$	14,860		$	30,546
Supplemental Cash Flow Disclosures:
Interest paid		$	11,324		$	6,162
Income taxes paid		$	2,875		$	7,304

 

See accompanying notes to consolidated financial statements.

 

6

 

Sauer-Danfoss Inc. and Subsidiaries

Notes To Consolidated Financial Statements

(in thousands except per share data)

(Unaudited)

 

1)                                     Summary of Significant Accounting Policies -

 

Basis of Presentation and Principles of Consolidation –

 

The consolidated financial statements of Sauer-Danfoss Inc. and subsidiaries (the Company) included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission, and represent the consolidation of all companies in which the Company has a controlling financial ownership interest or a majority of the interest in earnings or losses.  Certain information and disclosures normally included in comprehensive financial statements, prepared in accordance with accounting principles generally accepted in the United States, have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.  In the opinion of management, the financial statements reflect all adjustments, which are of a normal recurring nature, necessary to present fairly the Company’s consolidated financial position, results of operations and cash flows for the periods presented.   It is suggested that these interim financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s latest annual report on Form 10-K as filed with the Securities and Exchange Commission on March 15, 2004.

 

Use of Estimates –

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States, requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.  Actual results may differ from those estimates.

 

New Accounting Principles –

 

The FASB issued Interpretation (FIN) No. 46R, “Consolidation of Variable Interest Entities” in December 2003, which requires variable interest entities to be consolidated by the party determined to be the primary beneficiary. A primary beneficiary of a variable interest entity (VIE) is the party that absorbs a majority of the entity’s expected losses, receives a majority of its expected residual returns, or both, as a result of holding the variable interest. The Company adopted FIN No. 46R in the first quarter of 2004, consolidating one entity which was previously accounted for under the equity method of accounting, with no material effect on the financial statements.

 

In May 2004 the FASB issued Staff Position (FSP) 106-2 “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug Improvement and Modernizaton Act of 2003” (the Act), which superceded FSP 106-1 of the same name. The Act introduced a prescription drug benefit under Medicare Part D, as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D.  The Company has determined that impact ot the Act on the financial statements is not material and therefore is not considered a significant event.  The post retirement benefit liability on the consolidated balance sheets does not reflect any amount associated with the subsidy as the effects of the Act will be incorporated in the next measurement of plan assets and obligations that will be completed as of December 31, 2004.

 

Reclassifications –

 

Certain previously reported amounts have been reclassified to conform to the current period presentation.

 

7

 

2)                                     Business Combinations –

 

During the second quarter 2004, the Company exercised its option to acquire the remaining 15% of Comatrol S.p.A, for approximately $4,300.  In the second quarter 2003 the Company purchased 40% of the outstanding shares of Comatrol, raising its ownership percentage to 85%, and therefore began to consolidate the financial results of the business.  Prior to purchasing the controlling interest in Comatrol, the Company accounted for the results of its ownership interest under the equity method of accounting. The total purchase price paid to acquire Comatrol was approximately $22,100. The Company recognized intangible assets of approximately $600 and $2,200 for technology and customer relationships, respectively, in connection with the Comatrol acquisition.  The transactions also resulted in recognizing approximately $14,500 of goodwill.  The Company acquired Comatrol, located in Reggio Emilia, Italy, with approximately 100 employees and $22,000 in annual sales, for its development technology.

 

3)                                     Basic and Diluted Per Share Data -

 

Basic net income per common share data has been computed by dividing net income by the weighted average number of shares of common stock outstanding for the period, excluding restricted stock shares issued in connection with the Company’s long-term incentive plan that are subject to risk of forfeiture.  The dilutive effect of the stock options, restricted stock shares and performance units is calculated using the treasury stock method. The treasury stock method assumes the balance of the unamortized compensation expense as of the balance sheet date is used to repurchase shares of common stock.  Performance units not yet meeting related performance targets have been excluded from the dilutive calculation.  The reconciliation of basic net income per common share to diluted net income per common share is shown in the following table for the three month period ended September 30, 2004 and the nine month periods ended September 30, 2004 and 2003.  The stock options and restricted stock shares were anti-dilutive for the three month period ended September 30, 2003 and therefore are not presented.

 

		September 30, 2004
		Net Income			Shares		EPS
Three Months:
Basic net income		$	7,744		47,412		$	0.16
Effect of dilutive securities:
Stock options		—			—		—
Restricted stock		—			18		—
Performance units		—			49		—
Diluted net income		$	7,744		47,479		$	0.16

 

		September 30, 2004								September 30, 2003
		Net Income			Shares		EPS			Net Income			Shares		EPS
Nine Months:
Basic net income		$	40,374		47,409		$	0.85		$	19,198		47,400		$	0.40
Effect of dilutive securities:
Stock options		—			—		—			—			184		—
Restricted stock		—			17		—			—			11		—
Performance units		—			29		—			—			—		—
Diluted net income		$	40,374		47,455		$	0.85		$	19,198		47,595		$	0.40

 

8

 

4)                                     Inventories:

 

The composition of inventories is as follows:

 

		September 30, 2004			December 31, 2003
Raw materials		$	79,823		$		73,311
Work in process		49,639			38,862
Finished goods and parts		84,304			95,781
LIFO allowance		(10,806		)	(9,084			)
Total		$	202,960		$	198,870

 

5)                                     Long-Term Incentive Plans -

 

Under the 1998 Long-Term Incentive Plan (the Plan), the Board of Directors is authorized to grant non-qualified stock options, incentive stock options, performance units, stock appreciation rights, restricted stock and performance shares to employees.  Refer to Note 12 in the Notes to Consolidated Financial Statements in the Company’s 2003 annual report filed on Form 10-K for additional information.

 

On February 25, 2004, the Board of Directors approved granting 323 performance units under the Plan to replace all performance units and stock options outstanding, as the original targets established for those grants were no longer reasonable due to unforeseen economic conditions.  In addition, on that date, the Board of Directors approved granting an additional 385 performance units under the Plan.  The performance units vest over one to three years.  The settlement of performance units is in shares of company stock or cash as determined by the Compensation Committee of the Board of Directors.   The Company has no prior experience of such awards being paid out, but estimates that it will settle one-third of the units in cash and two-thirds of the units by distributing stock. Compensation expense for the portion expected to be settled in cash is recognized over the vesting period, with the offsetting accrued liability adjusted based on fluctuations in the market price of shares over the vesting period. Compensation expense for the portion estimated to be settled in stock is also recognized over the vesting period, but is measured based on the market price of the stock at date of grant, with an offsetting increase to additional paid in capital.  The performance units also entitle the participants to receive an amount equal to the Company’s dividends during the vesting period.

 

6)                                     Pension Plans -

 

The Company has noncontributory defined benefit plans covering a significant number of its employees. The benefits under these plans are based primarily on years of service and compensation levels.  Pension expense for the three and nine month periods ended September 30, 2004 and 2003 for the defined benefit plans consists of the following components:

 

		Three months ended September 30,						Nine months ended September 30,
		2004			2003			2004			2003
Service cost		$	1,240		$	937		$	3,581		$	2,851
Interest cost		2,684			2,128			7,727			6,499
Expected return on plan assets		(2,171		)	(1,585		)	(6,193		)	(4,854		)
Amortization of prior service cost		156			154			445			469
Amortization of net loss		328			153			941			460
Net periodic pension expense		$	2,237		$	1,787		$	6,501		$	5,425

 

9

 

7)                                     Segment and Geographic Information -

 

The Company’s operating segments are organized around its various product lines of Propel, Work Function and Controls.  Propel products include hydrostatic transmissions and related products that transmit the power from the engine to the wheel to propel a vehicle.  Work Function products include steering motors, as well as gear pumps and motors, which 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 presents the significant items by operating segment for the results of operations for the three and nine month periods ended September 30, 2004 and 2003 and balance sheet data as of those dates:

 

Three Months Ended:

 

		Propel				Work Function			Controls				Other				Total
September 30, 2004
Trade sales		$	145,053			$	99,943		$	79,733			$	—			$		324,729
Segment income (expense)		19,787				5,119			6,727				(11,664			)	19,969
Depreciation expense		8,039				5,449			3,436				1,803				18,727
Capital expenditures		7,937				3,505			2,545				3,391				17,378
September 30, 2003
Trade sales		$		107,897		$	83,865		$		63,608		$		—		$	255,370
Segment income (expense)		4,803				453			1,873				(5,495			)	1,634
Depreciation expense		7,967				5,710			3,823				1,853				19,353
Capital expenditures		2,556				4,795			3,206				274				10,831

 

Nine Months Ended:

 

		Propel				Work Function			Controls				Other				Total
September 30, 2004
Trade sales		$	498,432			$	313,835		$	252,633			$	—			$	1,064,900
Segment income (expense)		76,402				21,488			23,328				(30,288			)	90,930
Depreciation expense		26,081				17,007			10,320				4,959				58,367
Capital expenditures		16,894				12,357			7,263				10,401				46,915
Total assets		382,652				314,985			252,739				183,378				1,133,754
September 30, 2003
Trade sales		$		391,600		$	262,995		$		209,662		$		—		$	864,257
Segment income (expense)		41,633				15,484			14,433				(20,441			)	51,109
Depreciation expense		25,491				17,407			10,865				5,619				59,382
Capital expenditures		9,299				10,032			9,084				7,597				36,012
Total assets		341,128				285,419			228,255				185,137				1,039,939

 

Segment income (expense) is defined as the respective segment’s portion of the total Company’s operating income less “other, net” included in nonoperating income (expense).

 

10

 

A summary of the Company’s net sales and long-lived assets by geographic area is presented below:

 

		Net sales (1)												Long-Lived Assets (2)
		Three Months Ended September 30,						Nine Months Ended September 30,						September 30,
		2004			2003			2004			2003			2004				2003
United States		$	118,391		$	95,563		$	435,021		$	353,048		$	168,527			$		186,800
Germany		31,356			24,921			101,983			87,640			66,710				63,231
Italy		21,253			16,819			75,931			62,016			31,166				25,817
France		16,941			12,142			57,937			44,371			462				542
United Kingdom		14,934			12,580			43,872			37,942			21,418				23,502
Japan		15,002			14,744			43,557			30,357			4,706				473
Sweden		11,333			8,002			39,006			31,557			6,090				5,824
Denmark (3)		5,076			7,486			16,612			23,879			184,696				181,453
Slovakia (3)		315			197			882			689			50,678				48,403
Other countries		90,128			62,916			250,099			192,758			65,191				68,197
Total		$	324,729		$	255,370		$	1,064,900		$	864,257		$		599,644		$	604,242

 

(1)                                  Net sales are attributed to countries based on location of customer.

 

(2)                                  Long-lived assets include property, plant and equipment net of accumulated depreciation, intangible

assets net of accumulated amortization, and certain other long-term assets.

 

(3)                                  Majority of this country’s sales are shipped outside of the home country where the product is produced.

 

No single customer accounted for 10% or more of total consolidated sales in any period presented.

 

11

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Sauer-Danfoss Inc. and Subsidiaries (the Company)

 

Safe Harbor Statement - This Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as other portions of this quarterly report, contain 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 and specialty vehicle markets specifically, has been improving over the past several months, making it 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.  The economic situation in the rest of the world has not necessarily followed the improvement which occurred in the U.S.  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 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; business relationships with significant customers and suppliers; 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 the Company’s 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 domestic and foreign operation, including tax obligations; changes in accounting standards; worldwide political stability; the effects of terrorist activities and resulting political or economic instability; 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.

 

About the Company

 

Sauer-Danfoss Inc. and subsidiaries (the Company) is a leading international supplier of components and systems that generate, transmit and control fluid 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 and specialty equipment.  The Company designs, manufactures and markets its products in the Americas, Europe and the Asia-Pacific region, and markets its products throughout the rest of the world either directly or through distributors.

 

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Executive Summary – Three months ended September 30, 2004

 

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.  The following table summarizes the Company’s third quarter 2004 and 2003 results from operations on a comparable basis, by excluding the impact of acquisitions and currency fluctuations, to allow the financial statement user to gain a better understanding of the Company’s results.  This analysis is more consistent with how the Company internally evaluates its results.

 

		Three months ended September 30,
(in millions)		2004 – As reported			2004 – Comparable basis (1)			2003			Comparable basis change			Percent change
Net sales		$	324.7		$	309.5		$	255.4		$	54.1		21	%
Gross profit		77.8			70.6			52.0			18.6			36
% of Sales		24.0		%	22.8		%	20.4		%
Selling, general and administrative		45.5			43.3			40.5			2.8			7
Research and development		11.8			11.2			10.7			0.5			5
Total operating costs		57.3			54.5			51.2			3.3			6
Operating income		20.5			16.1			0.8			15.3			NM
% of Sales		6.3		%	5.2		%	0.3		%

 

(1)          Excludes the impact of currency fluctuations and an entity previously accounted for under the equity method of accounting.

 

NM – Percentage change is not meaningful.

 

Net sales for the third quarter of 2004 were at a record level, which resulted in strong earnings.  Net sales for the third quarter 2004 increased 21 percent over 2003, on a comparable basis.  The strong sales are primarily due to increased demand in the Americas, however sales in Europe are beginning to strengthen due to exports into the U.S. The Company began to pass the increased cost of metals used to manufacture its products on to customers in the third quarter, resulting in $5.0 million of additional revenue.  The Company is recognizing the benefits of spreading its fixed production costs over a higher volume of units produced, which, combined with reduced costs related to resolving field recalls, improved the operating margin percentage by 2.4 percentage points for the quarter over the third quarter of 2003.

 

The 7 percent increase in selling, general and administrative costs is partially due to incentive plan expense resulting from the improved financial performance of the Company in the current year, costs of implementing the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, and increased costs related to the European sales and distribution operations restructuring.  These increased costs are offset by reduced losses on disposal of fixed assets, which were incurred in 2003 in connection with the relocation of operations from the West Branch, Iowa location.  Operating income, as reported, for the third quarter 2004 increased $19.7 million, which is approximately thirty percent of the increase in net sales, as reported. Earnings for the third quarter of $0.16 per share are significantly improved over the prior year’s loss of $0.05 per share in the third quarter.

 

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