EXHIBIT 99.2
THIRD QUARTER 2003 INVESTOR PRESENTATION
DAVID W. KAY, VICE PRESIDENT, TREASURER AND CHIEF FINANCIAL OFFICER
OCTOBER 30, 2003
Good Morning and welcome to our third quarter 2003 conference call.
This call is being simultaneously broadcast on the internet and will also be
archived for replay starting this afternoon. The replay can be accessed at our
web site, www.tecumseh.com.
I will begin with some brief comments expanding on our press release in
terms of our results for the quarter. Following my comments, we will open up the
call for your questions. First, however, I would remind you that my prepared
comments this morning, and the answers to your questions, will contain
forward-looking statements within the meaning of the securities laws. I refer
you to the cautionary statements contained in our press release concerning
significant risks and uncertainties involved with forward looking statements
that could cause actual results to differ materially from projected results.
Reported results for the quarter amounted to a net profit of $19.0
million, or $1.03 per share, compared to a net profit of $14.2 million, or $0.77
per share, in the third quarter of 2002. Included in the 2003 reported net
results is a restructuring credit of $3.3 million gross, $2.1 million, or $0.11
per share, net of tax, related to the continuing consolidation of operations and
related plant closings in the Engine & Power Train Group. Also included in the
third quarter results is a tax credit resulting from a refund of prior years'
income taxes amounting to $1.9 million or $0.10 per share. Exclusive of the
restructuring charge, earnings for the quarter amounted to $0.81 per share.
Consolidated sales for the quarter amounted to $438.5 million, up from last
year's third quarter sales of $310.9 million. The largest factor for this
increase was the
1
inclusion of sales from the FASCO Motors Group, which amounted to $99.1 million
for the quarter. As you know, we completed the FASCO acquisition on December 30,
2002, and this is the third quarterly period in which we are reporting operating
results for FASCO. Sales of compressor products increased by $11.9 million, or
approximately 6.5%, to $193.8 million from third quarter sales a year ago. Of
this increase, approximately $11.3 million is directly related to foreign
currency translations. Sales of Engine & Power Train products increased by $15.3
million to $113.2 million from $97.9 million a year ago, while Pump products
sales increased by $1.3 million to $29.7 million from 2002 levels.
Results for the quarter, both in terms of sales and operating profits,
exclusive of special restructuring charges, have improved from third quarter
results a year ago. Consolidated operating profit, exclusive of the plant
closing and restructuring credit of $3.3 million, amounted to $21.6 million
versus $20.4 million a year ago. The improvement in the Engine & Power Train
Group, together with operating income provided by the addition of the FASCO
Motors Group, was offset by declines in the Compressor Products segment.
Compressor operating profit amounted to $15.5 million in the quarter versus
$22.6 million a year ago. This decline was driven by a number of factors,
including reduced demand in a number of key markets, lower overall selling
prices, a higher cost structure, and the impact of a weak U.S. dollar. Exports
from North America to Asia and the Middle East were up from third quarter last
year, but are still somewhat depressed as the market continues to suffer from a
glut of low cost Asian-produced product. Aftermarket sales into the distribution
and replacement markets were negatively affected by cool, wet weather declining
nearly 14% from third quarter 2002 levels. Unfortunately, summer never seemed to
happen in the aftermarket business. As a result, North American compressor sales
declined by $8.3 million or nearly 12% from year ago levels. On the
2
positive side, because of cost control measures and previous plant restructuring
actions, North American operating margins increased to 9.1% from 8.8% a year
ago.
Although unit volumes increased quarter over quarter, Brazilian
operations, while still very strong, were negatively impacted by global economic
conditions, as well as the unfavorable effects of a weak U.S. dollar. Sales into
the local Brazilian market increased somewhat during the quarter, as the
Brazilian economy started to show early signs of improvement; however, interest
rates on consumer borrowing remain extremely high in an effort to control
inflation within the Country, which continues to restrain consumer demand. The
weakness of the U.S. dollar against the Real has negatively impacted margins in
Brazil as a result of translating operating costs incurred in local currency
into U.S. dollars. In addition, last years' third quarter results were favorably
impacted by a $3.7 million dollar gain resulting from the re-measurement of
foreign-denominated receivables and payables as the Real weakened against the
dollar. Brazilian operations also suffered from a poor mix of lower margin
compressors, higher operating costs, and continued market-based pricing
pressures.
Results in our European compressor operations remain extremely soft.
The stagnant European economy, combined with a strengthening European currency,
resulted in reduced operating profits here versus a year ago.
Compressor operations in India were also below last year's third
quarter results, primarily due to reduced sales in the refrigerator and freezer
markets.
The outlook in the Compressor Group for the balance of the year is
soft. Demand is spotty in most major markets; the exception being the
lower-priced household refrigeration and freezer market. There continues to be
an excess capacity situation, which has put heavy pressure
3
on selling prices. The worldwide economy remains very soft, particularly in
Europe. Additionally, the continuing weakening of the U.S. dollar has put
increasing pressure on sales and margins at our overseas compressor operations.
Overall, we expect fourth quarter operating results in the Compressor
segment will be down from 2002 levels. Brazilian results, while still strong,
will be negatively impacted by a uncertain South American market, a product mix
slanted heavily toward lower margin household refrigerator and freezer
compressors, and the significant strength of the Brazilian currency against the
dollar when compared to fourth quarter exchange rates a year ago. As you may
recall, in the fourth quarter of 2002, the Real versus the dollar was
approximately 3.5 to one. We are currently experiencing exchange rates of
approximately 2.85 to one, an appreciation of approximately 20%. This dramatic
change will continue to negatively impact operating margins as costs incurred in
local currency are translated into dollars.
Capital spending and investment in the Compressor Group will continue
to be focused primarily on expanding existing overseas operations in India and
Brazil, where operating costs, in spite of currencies, remain comparatively low
compared to U.S. and European costs, and where we can more effectively compete.
We continue to evaluate investments in Asia, although the nature and timing of
these potential investments, if any, cannot be predicted.
Turning our attention to the Engine & Power Train Group, results here
have shown significant improvement over third quarter 2002 levels. The Group
generated an operating profit for the quarter of $3.3 million compared to a
profit of $0.3 million a year ago. Sales in the Group increased from $97.9
million a year ago to $113.2 million this year. This improvement is driven
primarily from a 29% improvement in unit volumes of engines used for snow
throwers.
4
Engine demand at our European operations continues to be negatively impacted by
weather conditions - namely record high temperatures and near drought conditions
in some areas of the continent. Inventory levels of unsold product there are at
record highs. European operations have also been negatively impacted by the weak
economy and the strength of the Euro. As a result, European volumes decreased
nearly 15% from third quarter a year ago. In spite of the increase in snow
volumes, overall total volume remains weighted toward an unfavorable mix of low
margin, walk-behind rotary mower applications where average selling prices
continue to deteriorate year over year. Operating results were also negatively
impacted by startup costs at our new Curitiba, Brazil operations and increased
engineering costs related to the development of new product offerings. Margins
were also negatively impacted by increased costs for hourly health care,
tooling, freight, general overhead expenses, and inefficiencies as production
wound down at the now closed manufacturing plants.
In connection with our efforts to reduce manufacturing costs and realign
our productive capacity to meet both current and future operational needs, we
previously announced our intent to close our Douglas, Georgia and Sheboygan
Falls, Wisconsin manufacturing facilities and the relocation of certain
production capacity from those facilities to our new Curitiba, Brazil operation
and other existing U.S. locations. Production at the Douglas plant effectively
ceased by June 30th of this year. The majority of useable equipment was removed
from the facility and either has been or will be installed at Curitiba or other
U.S. facilities. The Sheboygan Falls Diecasting facility was substantially
closed on September 30th. In connection with these actions, we recorded
restructuring charges in both the third and second quarters.
The restructuring charges have been recognized in accordance with SFAS No.
144 "Accounting for the Impairment or Disposal of Long-Lived Assets" and SFAS
No. 146
5
"Accounting for Costs Associated with Exit or Disposal Activities." Expenses
recorded so far in connection with these closings amounted to $31.0 million,
which includes approximately $7.5 million in earned severance pay and future
benefit costs relating to manpower reductions, $3.2 million in plant closing and
exit costs incurred through September 30, 2003, $20.3 million in asset
impairment charges for idled equipment and facilities, and $5.8 million in gains
resulting from the curtailment of other Post-retirement Benefit Plans. The net
amount of the restructuring items recorded in the third quarter was a gain of
$3.3 million. We expect to incur future additional shutdown expenses of
approximately $3.2 million in connection with these actions.
Looking forward to the balance of the year, the bottom line results are
difficult to predict with any degree of accuracy. While profitable snow product
is expected to continue to have a positive impact on results, other factors will
have a negative effect. Volume will continue to be skewed toward a mix of low
margin walk-behind rotary mower engines. Additionally, total demand for engines
is far from certain. Timing of new product offerings and customer acceptance of
these products are unknown at this time. We currently don't see anything on the
horizon which would lead us to believe that demand in the fourth quarter will be
particularly robust. The 2004 lawn and garden season begins in earnest during
the fourth quarter of the year. As of today, we still don't have a final fix on
exactly which OEM models we will be placed on for the upcoming 2004 season,
although we don't expect our walk-behind volume to differ significantly from the
2003 season. On the plus side, we have retained our position on the Toro/Home
Depot line of walk-behinds. Continued startup expenses at the new Curitiba
facility will continue to depress operating results in the Engine & Power Train
Group. The Curitiba plant is now in operation and has begun producing component
parts and subassemblies for use in our U.S. engine manufacturing and assembly
plants. With the exception of some larger
6
diecasting equipment, the relocation and installation of equipment from the
closed North American plants is substantially completed; however, because of
engineering, testing and acceptance requirements, full production of components
at the new facility is not planned until late fourth quarter. Nonetheless, we
have sufficient inventory of components and engines on hand to meet anticipated
production requirements during the Brazilian production ramp up period. The
benefit of the lower Brazilian cost structure will not begin to be fully
realized until the first quarter of 2004.
Now lets take a look at our newest segment - the Electrical Components
Group. As previously mentioned, we completed the acquisition of the FASCO Motors
Group on December 30, 2002. This is the third full quarter in which the FASCO
results are included in our consolidated earnings. FASCO has been combined with
certain other legacy electrical component businesses which were previously
included in the Compressor segment. For the quarter, the Electrical Components
Group reported an operating profit of $3.9 million on net sales of $101.5
million. Of these amounts, FASCO's sales amounted to $99.1 million and its
operating profit was $4.9 million. FASCO's results were negatively impacted by
$1.6 million in amortization of a non-compete agreement arising from the
acquisition. The $15 million dollar total cost of the non-compete agreement is
being amortized over a two year period. Sales of the other component companies
in the Electrical Components Group are primarily either intercompany or
inter-segment, leaving FASCO as the largest single operation in the Group.
FASCO's results for the quarter were slightly below our expectations, primarily
as a result of softness in two of its major markets - HVAC and linear
actuators/gear motors markets. Sales to the HVAC and water heater OEM sector
were off somewhat as a result of soft demand and a slow start to the heating
season. Sales to the aftermarket replacement and distribution markets
7
have also been negatively impacted by the cool, wet weather. Sales to the gear
motor/linear actuator markets continue to be down significantly from forecasted
amounts, primarily in the healthcare equipment sector, as well as the recreation
exercise and fitness markets. Product sourced from China has negatively impacted
both of these markets. FASCO's operating results were also negatively impacted
by increased costs of an ongoing plant closing and restructuring action designed
to relocate certain motor production from the U.S. to Mexico. The move from the
U.S. and the ramp up of Mexican production took longer than expected. These
actions commenced prior to Tecumseh's purchase of the Company and have now been
substantially completed. FASCO's results for the fourth quarter are anticipated
to improve significantly from the levels of the first three quarters; however,
the slow start to the heating season and apparent reluctance of some major OEMs
to finalize their requirements give us some concern.
Pump operations were nearly flat when compared to the third quarter of
2002. Sales in this segment were up slightly, but operating profits were
unchanged from third quarter results a year ago. At Little Giant Pumps, soft
economic conditions impacted sales at retail; although, water gardening product
saw an up-tick late in the quarter. Additionally, recent severe weather on the
East coast resulted in an increase in retail plumbing product sales. Sales and
operating profits at MP Pumps, which is a producer of commercial and industrial
pumps, were below expectations and continue to be negatively impacted by a soft
economy and weak demand for commercial pumps.
The Company continues to maintain a very strong balance sheet and a
favorable cash position. At September 30, we had approximately $280 million in
available cash on our balance sheet. Capital spending for the first nine months
of 2003 amounted to slightly under $62 million compared to $41 million in 2002.
The majority of this increase relates to the new engine facility
8
in Curitiba, Brazil, as well as spending at FASCO. Most of our capital
investments continue to be made in lower cost countries, such as Brazil and
India. We continue to analyze strategic acquisition and investment opportunities
or alternatives, which would complement and/or improve our core businesses,
markets and strategies, but have no imminent plan or opportunities in this area
at this time.
Looking out at the fourth quarter, we continue to face soft demand,
intense competition, and uncertain economic conditions in each of our major
segments. Forecasting in this environment has become extremely difficult for us.
It is difficult to see out 30 to 45 days, let alone three to six months. As a
result, we will continue our previously stated policy of not providing specific
or detailed guidance. In general, we now expect fourth quarter results will be
below those of a year ago, exclusive of any potential restructuring charges. We
do not currently see anything that would lead us to believe that there will be
any dramatic improvements in the near term. Compressor operations, because of
competitive pricing pressures, worldwide economic conditions, particularly in
Europe and South America, and the continued weakness of the U. S. dollar, are
expected to be soft and are not expected to perform as well in the fourth
quarter as they did in the fourth quarter last year. Brazilian operations will
continue to do reasonably well, but because of the currency situation and South
American economic conditions, we will see further pressure on margins.
FASCO is expected to perform well, but results look to be below our
original expectations for the quarter. While results are expected to far outpace
third quarter numbers, soft demand and economic conditions in major markets,
such as HVAC and gear motors/linear actuators, may have a dampening effect.
Demand in the automotive sector, while still holding up reasonably well, is
subject to rapid change.
9
Results in the Engine & Power Train Group are even less predictable. The
strength and duration of the snow season will have a significant impact on
fourth quarter results. While the snow season has been strong to date, how it
will hold up for the balance of the year is uncertain. The European engine
operation has been severely impacted by some of the most extreme summer weather
in history. Extreme heat and near-drought conditions severely reduced demand for
our European produced engines and have left the inventory channel full.
Additionally, the strength of the European currency has put us in a
competitively disadvantaged situation versus our domestic competitors. The
ability of this Group to bring newly designed product into production and into
the marketplace will be key to the long term profitability of the Group, but we
do not currently expect any significant impact until mid-2004.
We continue to generate strong operating cash flows and maintain a strong
balance sheet. We anticipate generating sufficient cash flows to fund the
balance of our capital spending requirements for the year and maintain our
dividend payment to our shareholders at its current level.
In general, our primary focus is to improve our competitive position in
all the markets and segments we serve by lowering cost, developing new or unique
products for niche markets or applications, and moving up the value chain by
offering value-added subassemblies or complete systems to our customers, rather
than just commodity products.
That concludes my prepared comments for this morning, and we will now open
the call to your questions.
10