Spectra Premium Reports 2002 Results

Spectra Premium Industries Inc., manufacturer of automobile, light-truck and heavy-duty truck aftermarket parts, today announced its results for the 2002-2003 fiscal year ended January 31, 2003.
For the fiscal year, the Corporation generated $237.6 million in sales, up 1.5% over the previous fiscal year, while operating income before rationalization and integration costs (“rationalization costs”) reached $11,638,000, compared to $16,122,000 a year earlier. Earnings before interest, amortization, income taxes and rationalization costs amounted to $24,088,000, compared to $28,321,000 a year earlier.
Rationalization costs in the amount of $6,946,000 before income taxes were charged to the results of the fiscal year. These rationalization costs namely consist of the following: (i) write-offs of inventories, equipment, molds and tooling and severance premiums related to the cessation of manufacturing activities of complete brass & copper radiators at the Debert plant in Nova Scotia and the Stratford plant in Ontario, (ii) asset write- offs, following the cessation of manufacturing activities of remanufactured A/C compressors at the Laval plant in Quebec, and (iii) costs related to the closure of some distribution centers in Canada and the United States and inventory write-offs of enterprises acquired over the past years.
For fiscal year 2002-2003, net earnings stood at $525,000, or $0.02 per share, compared to $7,397,000, or $0.23 per share a year earlier, if we exclude amortization of goodwill.
Net earnings before rationalization costs reached $4,957,000 this year, or $0.16 per share, compared to $7,994,000, or $0.25 per share a year earlier, excluding amortization of goodwill. During the fourth quarter of fiscal year 2002-2003, the corporation’s sales declined by 6.3%, as a result of a drop in fuel tank sales due to intense competition from Asia.
An operating loss before rationalization costs stood at $2,090,000, compared to an operating income before rationalization costs of $647,000 a year earlier. This variance is mainly attributable to a decline in fuel tank sales. “As forecasted, the North American market for fuel tanks remained difficult during the last quarter, as sales of this product line dropped 24%, following a drop in sales volume and unit pricing pressure. The majority of our other product lines generated steady sales growth, particularly on aluminum radiators. For fiscal year 2002-2003, if we exclude fuel tanks, our product lines generated an 8% sales growth and profitability increased on each product line,” declared Jacques Mombleau, president and CEO of Spectra Premium.

Manufacturing Division
During the fourth quarter, this division recorded a 2% drop in sales, compared to the previous fiscal year. This decline resulted from a drop in fuel tank sales and a sales contract to produce radiators for generators in the amount of $1.3 million that was not renewed this year. Radiator sales rose 13%, mainly stimulated by a sharp rise in aluminum radiator sales with U.S. warehouse distributors.
This division recorded an operating loss before rationalization costs of $858,000 for the fourth quarter, compared to an operating income of $1,071,000 a year earlier. This decline is attributable to a drop in fuel tank sales. During this quarter, the Corporation completed the implementation of ISO-9000 standards at its Stratford and Laval plants, which notably enabled the conclusion of an initial original equipment manufacturer (O.E.M.) contract for aluminum radiators with Bombardier.
For fiscal year 2002-2003, sales of this division rose 2% to reach $155.9 million, whereas operating income before rationalization costs declined by 34%, to stand at $9,643,000, compared to $14,574,000 a year earlier, as a result of a 3.6% drop in gross profit in this division, following a decline in profitability on fuel tanks.

Distribution Division
For the fourth quarter, sales of the Distribution Division were down 2.8%, as this division was also affected by a decline in fuel tank sales. However, if we compare to a year earlier, radiator unit sales in this division rose 15% during the fourth quarter, which represents the first quarterly increase in more than two years. Operating loss before rationalization costs stood at $1,232,000, compared to $425,000 a year earlier, as a result of a drop in the gross profit margin of close to 2%.
During the last fiscal year, this division, which includes operations of U.S. distribution centers and European operations, generated $128.0 million in sales, a 1.8% decline over the preceding year. Operating income before rationalization costs rose 29% to reach $1,996,000, compared to $1,547,000 a year earlier.

Outlook
As of the next fiscal year, O.E.M. operations will begin contributing towards sales and profitability, as sales of more than $10 million are forecasted with O.E.M.’s in 2003-2004 and sales are expected to reach close to $20 million in 2004-2005. Recent developments in our O.E.M operations led to the conclusion of a partnership agreement with an engineering firm specializing in fuel system design. This very strategic partnership now enables the Corporation to directly offer a turnkey service to O.E.M.’s covering design, tooling development and manufacturing of fuel tanks. This initiative gives the Corporation a competitive edge to gain large-scale O.E.M. contracts for steel fuel tanks.
As for the aftermarket, the corporation anticipates steady sales growth on such product lines as automobile and industrial radiators, sending units, oil pans and air-conditioning parts, a growth that will be stimulated by an increase in the number of models available for each product line and by the expansion of its clientele.
Management forecasts a 6% consolidated sales growth for fiscal year 2003- 2004 (while taking into account a lower conversion rate of sales in U.S. territory and a drop in fuel tank sales). This sales growth, combined with increased productivity in its main plants and the pursuit of its rationalization program, will enable the Corporation to increase its profitability, despite the fact that management foresees that the intense competition from Asia on fuel tanks in the North American aftermarket will persist during upcoming quarters.
Management of the corporation has observed that the penetration of Asian products seems to have stabilized over the past few months. The corporation continues to support its clientele, while preserving its market share, and considers that it will be difficult in the long term for Asian manufacturers and their restricted group of North-American importers to subsist in the actual market conditions by maintaining their reduced pricing policy.
After taking into account all of these factors, management of the corporation anticipates net earnings before rationalization costs net of income taxes of between $8 and $10 million, or between $0.24 and $0.31 per share, for fiscal year 2003-2004. The corporation recommends that all readers consult the note below concerning prospective financial information. During this fiscal year, the corporation forecasts rationalization costs before income taxes of $2.5 million, as a result of warehouse closures, the integration of its distribution activities and the cessation of its manufacturing activities for copper & brass radiators.