Mark IV Adjusts Earnings Expectations
AMHERST, NEW YORK, April 20, 1998, -- Mark IV Industries, Inc. (NYSE: IV) today announced that it expects earnings for the fiscal year ending February 28, 1999, will be below analysts' expectations. Sal H. Alfiero, chairman and chief executive officer of Mark IV, indicated that street estimates should be adjusted to a range of $1.68 to $1.75 per diluted share, from $1.80 to $1.85 currently. The company earned $1.66 per diluted share in its last fiscal year. Mr. Alfiero said that two primary factors will deflect Mark IV's earnings in fiscal 1999 from original estimates. First, and most significant in impact, the company increased its capital spending related to new product and market opportunities and completion of its restructuring program. This has resulted in an increase in the company's non-cash depreciation expense rate from 3.6% of fiscal 1998 revenue, to 4.2% of fiscal 1999 forecasted revenue. This will negatively affect expected earnings by 13 cents per diluted share, while the company begins to realize the benefits of the new products and capacity, and overcomes the six month delay in completing its restructuring.
Second, the company has increased its rate of spending on research and development to 2.5% of fiscal 1999 revenue, from 2.2% of revenue last year. Mark IV is launching a number of new product and system initiatives, as well as bringing new technology to the North American Automotive OEM market from acquisitions recently made in Europe. Historically, the company has been at or near the top of rubber products companies' spending on R&D as a percentage of revenue. These practices have helped produce operating margins in the upper range of peer group performance in the past, and are expected to add to the revenue stream and profit growth in fiscal 2000 and beyond. However, expected earnings will be negatively impacted by six cents per diluted share in fiscal 1999.
In detailing the company's expectations for fiscal 1999, Mr. Alfiero indicated that results for the first and second quarters of the fiscal year (ending May 31 and August 31, respectively) will not compare favorably with the like periods of last year by three to five cents per share per period. However, by the third or fourth quarter of fiscal 1999, Mr. Alfiero fully expects quarterly comparisons to turn positive, and that final results for the year will represent the company's 19th consecutive year of growth in earnings per share. He also believes that fiscal 2000 results will demonstrate the company's return to meeting its goal of double-digit earnings per share growth.
Further analyzing the year, Mr. Alfiero added, "Cash flow from operations in fiscal 1999 is expected to increase substantially over last year, despite the modest improvement in earnings anticipated this year, based on several factors.
"First, during fiscal 1998, we had capital expenditures of approximately $157 million, representing our third consecutive year of capital spending significantly in excess of depreciation and amortization. As a result, we have upgraded manufacturing facilities to world class levels, expanded capacity and product capabilities, and entered new markets. In fiscal 1999, capital expenditure rates will return to more normal levels of about $80 million. A by-product of our capital program is the increase in non-cash charges for depreciation and amortization of approximately $21 million in fiscal 1999 over last year as mentioned earlier. Finally, we expect to reduce working capital by $40-$50 million in fiscal 1999, based upon completion of our restructuring program. These items, combined with expected earnings, will generate a $250 million improvement in cash flow from operations."
Mr. Alfiero added, "To help ensure the desired results for fiscal 1999, our management team is incentivized by a new compensation plan focused on cash flow generation. We view the current fiscal year as the beginning of the pay-off from significant capital investments made over the past three years. Now, we can and are reducing the rate of capital invested, and will obtain better returns on our capital.
We are looking at everything from an EVA (economic value added) point of view, and expect our operating performance and balance sheet characteristics to reflect this focus.
"Given the anticipated improvement in cash flow and expected return to normal earnings growth, coupled with the current price of the company's stock, management believes the best use of the cash flow will be to complete the purchase of the 3.8 million shares of stock remaining under its current share buyback authorization; and, if current low price levels persist, it will recommend to its Board an increase in the authorization to repurchase additional Mark IV shares."
In further discussing expected fiscal 1999 results, Mr. Alfiero stated, "There are other factors affecting Mark IV's earnings, all of which we will be able to more than overcome. Continuing strength of the U.S. dollar, which is causing unfavorable foreign currency exchange rate movements, cost the company seven cents per diluted share last year - and we are experiencing continuing, although reduced, currency pressure on earnings in the current year, with our best estimate for the year falling in the range of four to six cents per share in comparison to fiscal 1998. The downturn in the Asian marketplace, while not directly affecting us, is having a dampening effect on economies in other areas in which we operate. In particular, the Asian experience has caused a slow-down in economic growth rates in South America over the past few months, thus slowing our growth plans in Brazil and Argentina. Another external factor is the effect of El Nino weather patterns on domestic sales of the company's lawn and garden products (primarily garden hose) in certain sectors of the country where extreme precipitation has occurred. The lawn and garden production and procurement season runs from October to June - and based upon order flows and year-to-year comparisons through March 1998, our expectations for the balance of the season have been reduced.
"Internally, progress in the restructuring during fiscal 1998 was slower than originally anticipated. While the closing of operations moved along according to plan, unusual weather conditions in Nebraska and North Carolina delayed construction at two of our facilities, slowing the relocation and start-up of product lines and distribution activities. In addition, the delay in receipt of certain required customer approvals also put a significant drag on our schedule. However, at this point, substantially all necessary approvals have been received.
Ramp-ups in the new locations are taking longer and, therefore, costing more than originally planned, and the accounting rules relating to restructuring require the recognition of these expenses as incurred. We expect to complete the program and to see net benefit flow from our restructuring activities beginning in the last half of fiscal 1999 - about six months behind our original estimates.
"Another drag on earnings and margin improvement has been our Automotive Aftermarket business, which represents 20 percent of Mark IV's total annual sales over the past two years. Revenue growth rates and margins in the Aftermarket have declined due to fundamental changes taking place in that market. Slowing demand and increasing inventory levels - stemming from the extended lifetime of OEM vehicles - are arising from improvements in the quality and performance of components and systems being supplied to the Automotive OEM, and extending or, in some cases, eliminating the need for replacement parts. In addition, the growth of mass merchandisers is causing consolidation of Aftermarket distribution channels, reducing the number of wholesalers and jobbers and increasing pricing pressure in the marketplace. We must respond to these changes accordingly.
"Therefore, we are studying a repositioning of the company's Aftermarket business. It is our intention to take an appropriate charge during fiscal 1999 to facilitate margin improvement and reduce capital requirements. We believe that the primary driver for growth in the company's Automotive business lies with the OEM customer, and that long-term success in the Aftermarket sector of the industry is dependent on providing OEM-approved products to our Aftermarket customers.
"Upon completion of our analysis," Mr. Alfiero added, "we will disclose the details of the company's plans. While we can't specify the amount at this time, it is expected to fall within a range of $25-$40 million, net of taxes, or 35-56 cents per diluted share."
In closing, Mr. Alfiero stated, "While our earnings expectation is being revised downward, most of that revision, or 13 cents per share, is a result of increased non-cash depreciation expense. So, coupled with reduced capital expenditures, cash flow is being significantly increased. As a result, we are confident that the adjustments we are making in the immediate term, will strengthen Mark IV, provide nearer-term benefits to the company's operations, and improve shareholder value."
This press release contains forward-looking statements that involve risk and uncertainties as detailed from time to time in the company's SEC reports, including its report on Form 10-K for its fiscal year ended February 28, 1997. These risks and uncertainties could affect the company's actual results and cause them to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the company.
Mark IV Industries, Inc. is a $2.2 billion global manufacturing company headquartered in the Buffalo suburb of Amherst, New York, employing 17,000 people worldwide. The company's core technologies include power transmission, fluid transfer and filtration systems and components for global industrial and automotive markets.