Tecumseh Reports Net Loss
Tecumseh Products Company announced its 2003 second quarter
consolidated results. The company reports second quarter 2003 net loss of $0.35 per share after restructuring charge of $0.99.
Consolidated net loss for the second quarter of 2003 amounted to $6.5 million or $0.35 per share compared to net income of $23.4 million or $1.27 per share in the second quarter of 2002. Included in the 2003 second quarter results is a restructuring charge of $28.5 million ($18.2 million net of tax or $0.99 per share) related to the consolidation of operations in the Engine & Power Train business and related plant closings. Second quarter 2003 results include the income of the FASCO Motors Group ("FASCO"), which was acquired on December 30, 2002. FASCO's operating income for the quarter was $6.6 million.
Consolidated net loss for the six months ended June 30, 2003 amounted to $4.1 million or $0.22 per share compared to net income of $27.5 million or $1.49 per share for the same period in 2002. In addition to the second quarter restructuring charge noted above, the 2003 first half results also include a charge of $13.6 million ($8.7 million net of tax or $0.47 per share), recorded in the first quarter, related to environmental costs at the Company's Sheboygan Falls, Wisconsin facility. First half 2003 operating results were also reduced by $4.2 million ($2.7 million net of tax or $0.15 per share) due to the expensing of inventory write-ups recorded as part of purchase accounting for the FASCO acquisition. Under U.S. Generally Accepted Accounting Principles, inventory acquired in a purchase transaction is required to be written up to "fair market" value from cost then recognized in cost of sales as the inventory is sold. This one time event occurring during the first quarter 2003 will not impact future results. Included in the 2002 first half results is a restructuring charge of $4.5 million ($2.8 million net of tax or $0.15 per share) related to the relocation of certain compressor manufacturing operations from the United States to Brazil, and the cumulative effect of a change in accounting for goodwill ($3.1 million net of tax or $0.17 per share) related to the adoption of Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other Intangible Assets."
Exclusive of restructuring and other one-time charges, second quarter results were lower than the prior year due to: weaker results in all of the Company's business segments, the unfavorable impact of a weak U.S. dollar, interest charges on the Company's acquisition related debt, and increased corporate spending primarily related to the integration of FASCO.
Consolidated net sales for the second quarter of 2003 were $482.3 million, compared to $395.3 million in the second quarter of 2002. Consolidated net sales for the six months ended June 30, 2003 amounted to $956.2 million compared to $728.7 million in the first half of 2002. The net increase in sales of $87.0 million for the second quarter is attributable to FASCO sales of $104.0 million offset by lower sales in the Compressor and Pump segments.
The net increase of $227.5 million for the first half is attributable to FASCO sales of $209.3 million, and higher sales in the Engine & Power Train segment offset by a decline in the Compressor segment.
Pump business sales in the second quarter of 2003 amounted to $39.0 million compared to $40.7 million in 2002. Year-to-date sales amounted to $70.9 million in 2003 compared to $69.0 million the previous year. The decline in second quarter sales was primarily attributed to weaker sales in water gardening products due to the cool, wet spring weather. The improvement in first half 2003 sales was due to increased volumes in condensate products sold to the HVAC and plumbing markets, and in industrial products sold through the aftermarket distribution channel.
Operating income amounted to $4.9 million in the quarter ended June 30, 2003 compared to $6.2 million in the same period of 2002. Operating income in the first half of 2003 decreased to $8.4 million from $9.1 million in 2002. The decrease in operating income in the second quarter 2003 compared to 2002 is attributable to lower sales volumes and increased administrative costs.
Restructuring Charges and Other Items
Second quarter 2003 results were adversely affected by a restructuring charge of $28.5 million ($18.2 million net of tax or $0.99 per share) related to the consolidation of operations in the Engine & Power Train business. As previously announced, the restructuring includes the closure of the Company's Douglas, Georgia and Sheboygan Falls, Wisconsin production facilities, and the relocation of certain productive capacities to the new Curitiba, Brazil facility and other existing U.S. locations. The restructuring charge, which has 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," includes approximately $6.8 million in earned severance pay and future benefit costs relating to manpower reductions, $2.0 million in plant closing and exit costs incurred through June 30, 2003, and $19.7 million in asset impairment charges for idled equipment and facilities. The amount of severance pay and future benefit costs mentioned above includes $0.8 million in curtailment losses related to the pension plan at the Sheboygan Falls, Wisconsin facility.
Under SFAS No. 146, severance payments that require future service to be received is accrued as earned and other costs are only recognized to the extent a liability has been incurred. Accordingly, under the restructuring plan, the Company expects to recognize additional plant closing and exit costs of $3.4 million, and a curtailment gain of $4.4 million related to other post-employment benefits at the Sheboygan Falls, Wisconsin facility in the third, and possibly, fourth quarters.
First half 2003 results were adversely affected by a $13.6 million ($8.7 million net of tax or $0.47 per share) charge, recognized in the first quarter, related to environmental costs at the Company's Sheboygan Falls, Wisconsin facility. On March 25, 2003, with the cooperation of the Environmental Protection Agency, the Company entered into a liability transfer agreement with Pollution Risk Services, LLC ("PRS"), whereby PRS assumed substantially all of the Company's responsibilities, obligations and liabilities for remediation of the Sheboygan River and Harbor Superfund Site (the "Site"). While the Company believes the arrangements with PRS are sufficient to satisfy substantially all of the Company's environmental responsibilities with respect to the Site, these arrangements do not constitute a legal discharge or release of the Company's liabilities with respect to the Site. The cost of the liability transfer arrangement was $39.2 million. The charge consists of the difference between the cost of the arrangement and amounts previously accrued for the cleanup. The Company also maintains a reserve of $0.5 million to reflect its potential environmental liability arising from operations at the Site, including potential liabilities not assumed by PRS pursuant to the arrangement. Additional information is available in the Company's Form 8-K filed on March 25, 2003. First half 2002 results were adversely affected by a $4.5 million ($2.8 million net of tax or $0.15 per share) restructuring charge in the Compressor segment recognized in the first quarter. The charge relates to the decision to relocate the production of additional rotary compressor product lines to Brazil from the United States and consists of the write-down of certain equipment, which will not be used in other operations.
On December 30, 2002, the Company acquired FASCO from Invensys Plc for cash of $396.6 million and the assumption of approximately $14.5 million in debt. The acquisition was financed, in part, with proceeds from new bank borrowings including $250 million from a six-month bridge loan and $75 million from a new three-year $125 million revolving credit facility. On March 5, 2003, the Company completed a private placement of $300 million Senior Guaranteed Notes maturing 2008 through 2011. Proceeds from the private placement were used to repay the bridge loan and pay down borrowings under the revolving credit facility.
The cumulative effect from an accounting change of $4.8 million ($3.1 million net of tax) recorded in the first quarter of 2002, resulted from the Company adopting SFAS No. 142 "Goodwill and Other Intangible Assets" on January 1, 2002. Under SFAS No. 142, goodwill is no longer amortized, but is subject to impairment testing on at least an annual basis. As required by SFAS No. 142, the Company tested for impairment at the date of adoption and found that the goodwill associated with the Engine & Power Train European operations had been impaired.
The outlook for the balance of the year remains somewhat uncertain. The accretive impact of FASCO's results are expected to be positive, but results from the Company's traditional Compressor, Engine & Power Train and Pump segments are expected to be soft in relation to the prior year, reflecting little economic growth, higher costs and the unfavorable effects of a weak U.S. dollar.
Each of the Company's business segments operates in highly competitive environments characterized by excess worldwide production capacity, new competitors located in countries with lower labor costs, resulting in overall price deflation. The Company's fundamental strategy to remain competitive is to manufacture high volume commodity-like components in low cost manufacturing locations, while providing final customization of engineered products to niche markets near the point of consumption. As a result, it is still possible that further restructuring actions will be necessary to realign the Company's productive capabilities. Plans continue to be developed to determine how best to further reorganize the Company's operations and product offerings in light of current and rapidly changing market conditions.
Source Tecumseh Products Company
Source: Tecumseh Products Company LLC