EXHIBIT 99.2
FOURTH QUARTER AND FULL YEAR 2003 INVESTOR PRESENTATION
DAVID W. KAY, VICE PRESIDENT, TREASURER AND CHIEF FINANCIAL OFFICER
JANUARY 29, 2004
Good morning and welcome to our fourth quarter and full year 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.
Following my comments, we will open up the call for your questions. First,
however, I would remind you that my prepared comments, and the answers to your
questions, will contain forward-looking statements within the meaning of the
securities law. 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 loss of $14.8
million, or $0.80 per share, compared to a net profit of $9.3 million, or $0.50
per share, in the fourth quarter a year ago. Included in the 2003 reported net
results is a goodwill impairment charge of $29.5 million or $1.60 per share on
both a before and after tax basis. This impairment charge is associated with the
Company's European compressor operations. The charge results primarily from the
impact of the strong Euro on the value of the French compressor operations when
translating its net assets back into dollars. An additional charge of $1.0
million gross, or $0.03 per share net of tax, was recorded during the quarter in
connection with the previously announced restructuring actions in the Engine &
Power Train business.
Results for the quarter benefited from a favorable tax provision
resulting primarily from adjustments to deferred taxes pertaining to the
utilization of foreign tax credits, adjustments related to unremitted earnings
of foreign subsidiaries, and the resolution of items from prior year tax audits.
Exclusive of the impairment and restructuring charges, earnings for the quarter
amounted to $15.3 million or $0.83 per share. Consolidated sales for the quarter
were $424.3 million, up from last year's fourth quarter sales of $304.2 million.
The largest factor for this increase was the inclusion of sales from the FASCO
Motors Group, which amounted to $102.9 million for the quarter. As you know, we
completed the FASCO acquisition on December 30, 2002, and this is the fourth
quarterly period in which we are reporting operating results for FASCO. Sales of
compressor products increased by $10.7 million, or approximately 6%, to $177.3
million from fourth quarter sales a year ago. Of this increase, approximately
$16.3 million is directly related to foreign currency translations. Sales of
Engine & Power Train products increased by $6.4 million to $118.0 million from
$111.6 million in the fourth quarter a year ago. Pump products sales increased
slightly to $23.7 million from $23.4 million in 2002.
Results for the quarter, exclusive of the goodwill impairment and
restructuring charges, decreased from fourth quarter results a year ago.
Consolidated operating profit, exclusive of the
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special charges amounted to $11.7 million versus $16.2 million a year ago. This
decrease is primarily driven by declining profits in the Compressor Group, which
were only partially offset by the addition of the FASCO Motors Group and
slightly improved results in the Engine & Power Train segment. Compressor
operating profit amounted to $5.6 million in the quarter versus $18.2 million a
year ago. This decline was driven by a number of factors including reduced
demand in a number of key markets, lower overall average selling prices, a
higher cost structure, and the continued negative impact of a weak U.S. dollar.
Although unit volumes and gross sales increased quarter over quarter,
Brazilian operations, while still strong, were unfavorably impacted by global
economic conditions, as well as continued deterioration of an already weak U.S.
dollar. Sales into the local Brazilian market increased slightly during the
quarter, as the Brazilian economy shows signs of improvement. However, interest
rates on consumer borrowing, which continue to restrain local consumer demand,
remain extremely high in an effort to control inflation within the country. 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. Operating margins decreased by nearly $5.6 million from
fourth quarter 2002 to 2003. As a percentage, operating margins declined from
approximately 30% in the fourth quarter of 2002 to around 17% this year.
Currencies were the primary driver in this decrease, although also contributing
to the decline in Brazilian margins was a poor mix of lower margin compressors,
higher operating costs for raw materials such as steel and copper, and continued
market-based pricing pressures, primarily from Asian competition.
Results in our European compressor operations remain very soft. The
stagnant European economy, combined with a very strong European currency,
resulted in significantly reduced operating results here versus a year ago. The
European compressor operations lost money on an operating income basis for the
first time in well over a decade. We do not anticipate significant improvement
here until the Euro weakens against the dollar, and there is sustained growth in
the major European economies.
Compressor operations in India also swung to a loss in the quarter when
compared to the fourth quarter a year ago. Sales into the refrigeration and
freezer markets, as well as the air conditioning sector, have been particularly
hard hit by a glut of cheap Asian imports.
The overall outlook in the Compressor Group for the 2004 year is
somewhat unclear, but guardedly optimistic. Demand will continue to be spotty in
most some markets; the exception being the lower-priced household refrigeration
and freezer market, which is almost exclusively price-based. There continues to
be an excess capacity situation, which has put heavy pressure on selling prices.
In the near term, the European economy will remain somewhat stagnant,
exacerbated by a strong Euro. Brazilian operations will continue to perform
well, but results here will continue to be impacted by currencies. Any weakening
of the Real against the dollar would be good news for us. Results in India will
be dependent on the success of new product offerings, which have recently been
introduced to the local refrigeration and freezer markets, as well as
maintaining our strong presence in the local, as well as export, air
conditioning markets.
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,
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in spite of currencies, remain comparatively low against 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. A large part of our future strategy
will focus more on value-added customer solutions, such as complete
refrigeration systems and condensing units, while relying less on commodity
products.
Turning our attention to the Engine & Power Train Group, results here
have shown slight improvement over fourth quarter 2002 levels. The Group
generated an operating profit for the quarter of $1.8 million compared to a
profit of $1.4 million a year ago. Sales in the Group increased from $111.6
million a year ago to $118.0 million in 2003. This increase is driven primarily
from an improvement of approximately 38% in unit volumes of engines used for
snow throwers. Engine demand at our European operations continues to be
negatively impacted by reduced demand and the effects of a strong Euro on our
European cost structure. European volumes decreased nearly 44% from fourth
quarter shipments a year ago. In North America, the increase in snow volumes was
offset by decreased shipments into the lawn and garden segment. On an overall
basis, North American unit shipping volumes decreased by approximately 3% from
fourth quarter a year ago. The improvement in fourth quarter operating results
comes primarily from the increase in snow product shipments and the reduced
fixed cost burden resulting from the closure of the Douglas, Georgia and
Sheboygan Falls, Wisconsin plants, partially offset by start up costs at the
Curitiba, Brazil facility, increased product development costs and lower
shipping volumes of non-snow product, as well as the unfavorable results in
Europe.
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 the closing of 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. While both facilities had ceased production in prior
quarters, some relocation costs were still incurred during the fourth quarter.
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 "Accounting for Costs Associated with Exit or Disposal Activities."
Expenses recorded so far in connection with these closings amounted to $32.0
million, which includes approximately $7.5 million in earned severance pay and
future benefit costs relating to manpower reductions, $4.0 million in plant
closing and exit costs incurred in 2003, and $20.3 million in asset impairment
charges for idled equipment and facilities. In addition, $5.8 million in gains
resulting from the curtailment of other Post-retirement Benefit Plans was also
recognized. The amount of the restructuring expense recorded in the fourth
quarter was $1.0 million. As of December 31, 2003, these activities are
substantially complete.
Looking forward to 2004, we expect improvement in the Engine & Power Train
group as cost cutting activities undertaken in 2003 are realized. Absent
significant weather related events that can effect sales in either direction,
volumes are expected to remain relatively stable in the U.S. Europe, on the
other hand, is a different story. The hot summer has left the distribution
channel full, and the strong Euro has negatively impacted the competitiveness of
our European operations. Accordingly, unit volumes of the European operations
are expected to remain below
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breakeven levels. Additionally, we have experienced some delay in our new
product launches. Given the seasonality of the respective summer and winter
product sales, this could further slow improvement in Engine & Power Train
results. The Curitiba plant is now in operation and has begun producing
component parts and subassemblies for use in the U.S. engine manufacturing and
assembly plants. As the year progresses, the operation will increase the breadth
and quantity of its production. The rate at which this expansion occurs is
important, as existing inventories of engines and parts on hand will need to be
replenished from Brazilian-based production.
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 fourth 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 $5.4 million on net sales of $105.1
million. Of these amounts, FASCO's sales amounted to $102.9 million, and its
operating profit was $6.9 million. FASCO's results were negatively impacted by
$1.9 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 are an improvement over the third quarter of
this year reflecting the seasonality of sales into certain markets. Overall,
results were somewhat below our original expectations due to softness in two of
its major segments -- primarily the HVAC aftermarket business and linear
actuators/gear motors. Sales to the linear actuator/gear motor markets continue
to be down significantly from the beginning of the year, primarily in the
healthcare equipment sector, as well as the recreation exercise and fitness
markets.
We expect FASCO's results for 2004 to improve as protracted restructuring
actions, which lingered through most of 2003, are substantially completed and
improvement in certain market segments, particularly the healthcare equipment
sector, are expected.
Pump operations were nearly flat when compared to the fourth quarter of
2002. Sales in this segment were up approximately 2%, but operating profits were
unchanged from fourth quarter results a year ago. At Little Giant Pumps, soft
economic conditions impacted sales at retail; although, water gardening product
saw an up-tick in the second half of the year. On the positive side, recent
severe weather on the East coast resulted in an increase in retail plumbing
products sales, which is continuing into the first quarter of 2004. 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 December 31, we had approximately $345 million in
available cash on our balance sheet. Capital spending for the year 2003 amounted
to approximately $79 million compared to $74 million in 2002. The majority of
this increase related to the new engine facility in Curitiba, Brazil, as well as
spending at FASCO, offset by decreases at our older operations. 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
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would complement and/or improve our core businesses, markets and strategies, but
have no imminent plans or opportunities in this area at this time.
Looking out at 2004, we continue to face soft demand, intense competition,
and uncertain economic conditions in each of our major segments. Forecasting in
this environment has remained extremely difficult. As a result, we will continue
our previously stated policy of not providing specific or detailed guidance for
the first quarter or full year. In general, we look at 2004 with some optimism
as we expect to benefit from the restructuring actions of 2003. At the same
time, the weakness of the U.S. dollar, rising material and labor costs, and
declining sales prices in most of our business segments will be significant
challenges to overcome in order to realize improvement. Brazilian operations, in
particular, will continue to do reasonably well, but are vulnerable to currency
rates if the Real does not devalue sufficiently to offset cost increases for
labor and raw materials, particularly steel and copper. Operations in India also
face new challenges as lower import duties in India are increasing competition
in that market, particularly from Chinese suppliers.
Results in the Engine & Power Train Group should improve, particularly in
the Americas. We believe volumes will be stable, and cost reduction actions will
improve results. However, the severity of our problems in Europe and how the
2004 snow season shapes up will have a significant impact on our ultimate
results. In addition, 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, at the earliest.
Overall, most of our major operating segments worldwide are faced with
potential increased costs for raw materials such as copper, steel and aluminum.
Recently, we have seen steel prices escalate rapidly, with some suppliers
refusing to honor existing fixed price contracts. The amount and duration of
these increases will undoubtedly have some impact on 2004 results, although we
cannot quantify the effect at this time.
We continue to generate strong operating cash flows and maintain a strong
balance sheet. We anticipate generating sufficient cash flows to fund our
capital spending requirements for 2004 and maintain our dividend payment to our
shareholders at its current level.
We continue to focus on actions to improve our competitive position in all
the markets and segments we serve by lowering cost, developing new or unique
products for niche markets and applications, and moving up the value chain by
offering value-added subassemblies or complete systems to our customers, rather
than just commodity products. Such actions could include further restructuring
or relocation actions, as well as potential acquisitions, joint ventures, or
teaming arrangements with strategic partners.
That concludes my prepared comments for this morning, and we will now open
the call to your questions.
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