Exco Technologies Limited - Fourth Quarter ended September 30, 2004 Quarterly Dividend Declared
TORONTO, Nov. 18, 2004 -- Exco Technologies Limited (TSX- XTC) today announced results for its fourth quarter ended September 30, 2004. In addition, the Company announced that a quarterly cash dividend of $0.0125 per share will be paid December 31, 2004 to shareholders of record on December 15, 2004.
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12 Months Ended 3 Months Ended
September 30 September 30
2004 2003 2004 2003
---- ---- ---- ----
Sales $216,114 $228,127 $53,826 $61,051
Net income from
continuing operations $16,408 $18,129 $4,990 $5,495
Net loss from
discontinued operations ($7,209) ($1,448) ($583) ($678)
Net income $9,199 $16,681 $4,407 $4,817
Diluted earnings per
share from continuing
operations $0.40 $0.44 $0.12 $0.13
Diluted loss per share
from discontinued
operations ($0.18) ($0.04) ($0.01) ($0.02)
Diluted earnings (loss)
per share $0.22 $0.40 $0.11 $0.11
EBIDTA $38,485 $45,125 $10,586 $12,839
Common shares
outstanding 40,817,000 40,352,000 40,817,000 40,352,000
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(refer to attached Financial Statements, Notes, and
Management Discussion and Analysis)
The financial results for 2003 have been restated to reflect the classification of Bantech Lasing as a discontinued operation. Results from this operation and losses realized on its sale have been isolated and classified as 'Discontinued Operations'.
Sales from continuing operations for the quarter ended September 30, 2004 were $53.8 million compared to $61.0 million in the prior year. Sales for the full year were $216.1 million compared to $228.1 million. This reduction is primarily due to the impact of two factors; the strengthening of the Canadian dollar which impacted sales by approximately $9 million for the year and significantly lower sales from our large mould businesses.
Net income from continuing operations for the quarter was $5.0 million compared to $5.5 million last year. For the year, net income declined by $1.7 million to $16.4 million. This reduction is in keeping with lower sales volumes as described above. In addition, during the fourth quarter the Company's evaluation of outstanding tax contingencies resulted in a reduction of the tax liability which was reflected as a reduction of current taxes on the income statement.
The Casting and Extrusion segment reported sales of $34.3 million in the quarter and $130.2 million for the year. This is down $6.2 million in the quarter and $11.8 million for the year. Sales of die-cast machines at Techmire and sales of extrusion dies and accessories were steady in fiscal 2004 despite the impact of an appreciating CDN dollar. However, die-cast mould sales were significantly lower at all three production facilities. Sales are expected to improve in this business in fiscal 2005 as previously announced new moulds are produced.
The Automotive Solutions segment reported steady sales of $19.5 million in the quarter compared to sales of $20.5 million last year. Full year sales in 2004 were $85.9 million and $86.1 million last year. Sales contracts in this segment are almost exclusively in US dollars. The stronger Canadian dollar had the effect of lowering this segment's sales by approximately $6 million for the year. Within the segment it is estimated Neocon and Polydesign sales have grown by 37% and 156% respectively over the prior year. Polytech's US dollar sales have remained relatively flat, reflecting the competitiveness of the business environment and management's focus on integrating the Neocon acquisition and developing the European market.
The Company's gross margin has remained steady in the quarter at 36.5% compared to 37.5% in last year's fourth quarter. Full year gross margin also remained relatively stable at 33.8% compared to 36.1% last year. The Company's sales and administrative costs were down by 10% or $1 million in the quarter and 7% or $2.5 million in the year. This reflects management's focus on cost reduction and the impact of lower earnings on incentive plans.
Cash flow has remained strong with total bank debt reducing to $21 million at year-end. This is down 31% from last year and reduced the Company's debt to equity ratio to 0.14:1. For a full discussion of the Company's operating results and other matters, refer to Management's discussion and Analysis included in this press release.
Management will hold a conference call to discuss the fourth quarter results on Friday November 19, 2004 at 11:00 am (EST). The dial in number for the call is (416) 640-4127 or 1-800-814-4859. To access the live audio webcast, please log on to www.excocorp.com or www.q1234.com a few minutes before the event. Real Player is required for access. For those unable to participate on November 19, 2004, an archived version will be available on the Exco website.
Exco Technologies Limited is a global supplier of innovative technologies servicing the die-cast, extrusion and automotive industries. Through our 13 strategic locations, we employ 1,950 people and service a diverse and broad customer base.
Information in this document relating to projected growth, improvements in productivity and future results constitutes forward-looking statements.
Readers are cautioned not to place undue reliance on forward-looking statements, as there can be no assurance that the plans, intentions or expectations upon which such statements are based will occur. Forward-looking statements include known and unknown risks, uncertainties, assumptions and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such statements. These risks, uncertainties and assumptions include, among other things: industry cyclicality; global economic conditions, causing decreases in automobile production volume and demand for capital goods; price reduction pressures; pressure to absorb certain fixed costs; dependence on major customers; technological changes; fluctuations in currency exchange and interest rates; employee work stoppages; dependence on key employees; the competitive nature of the automotive and capital goods industries, product supply and demand; and other risks, uncertainties and assumptions as described in the Company's 2003 Annual Information Form and, from time to time, in other reports and filings made by the Company with securities regulatory authorities.
While the company believes that the expectations represented by such forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be correct. Readers are cautioned that the foregoing list of important factors is not exhaustive. Furthermore, the Company disclaims any obligations to update any such factors or publicly announce the result of any such revisions to any of the forward-looking statements contained herein to reflect future events or developments.
EXCO TECHNOLOGIES LIMITED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
($ in thousands)
September September
30, 30,
2004 2003
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Restated
(note 1)
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ASSETS
Current
Accounts receivable $45,109 $44,725
Inventories 30,230 29,664
Prepaid expenses and deposits 3,587 2,724
Discontinued operations (note 3) 0 1,439
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Total Current Assets 78,926 78,552
Fixed assets 83,447 86,327
Discontinued operations (note 3) 0 4,122
Goodwill 43,428 44,430
Future tax assets 2,660 3,054
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$208,461 $216,485
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Bank indebtedness (note 2) $19,207 $28,066
Accounts payable & accrued liabilities 27,146 29,325
Income taxes payable 2,110 3,303
Customer advance payments 4,180 5,036
Current portion of long-term debt 974 494
Discontinued operations (note 3) 0 725
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Total Current Liabilities 53,617 66,949
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Long-term debt 794 1,825
Future tax liabilities 7,591 7,033
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Total Liabilities 62,002 75,807
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Shareholders' Equity
Share capital (note 4) 32,376 30,945
Contributed surplus (note 1) 1,128 643
Retained earnings (note 1) 121,746 114,573
Currency translation adjustment (8,791) (5,483)
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Total shareholders' equity 146,459 140,678
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$208,461 $216,485
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EXCO TECHNOLOGIES LIMITED
CONSOLIDATED STATEMENTS OF INCOME
AND RETAINED EARNINGS
(Unaudited)
3 Months ended 12 Months ended
September 30 September 30
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2004 2003 2004 2003
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Restated Restated
(note 1) (note 1)
Sales (note 3) $53,826 $61,051 $216,114 $228,127
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Cost of sales and operating
expenses before the following
(note 3) 34,207 38,168 142,968 145,860
Selling, general and
administrative (note 1) 9,033 10,044 34,661 37,142
Depreciation and amortization 3,224 3,458 12,788 14,070
Interest on long-term debt 25 39 61 184
Other interest 253 332 906 1,426
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46,742 52,041 191,384 198,682
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Income from continuing operations
before income tax 7,084 9,010 24,730 29,445
Provision for income taxes 2,094 3,515 8,322 11,316
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Net income from continuing
operations 4,990 5,495 16,408 18,129
Net loss from discontinued
operations, net of tax (note 3) (583) (678) (7,209) (1,448)
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Net Income for the period $4,407 $4,817 $9,199 $16,681
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Retained earnings, beginning of
period (note 1) 117,849 110,260 114,573 99,400
Dividend (510) (504) (2,026) (1,508)
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Retained earnings, end of period $121,746 $114,573 $121,746 $114,573
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Earnings per common share
From continuing operations
- Basic $0.12 $0.14 $0.41 $0.45
- Diluted $0.12 $0.13 $0.40 $0.44
Net income
- Basic $0.11 $0.12 $0.23 $0.42
- Diluted $0.11 $0.11 $0.22 $0.40
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EXCO TECHNOLOGIES LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
($ in thousands)
3 Months ended 12 Months ended
September 30 September 30
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2004 2003 2004 2003
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Restated Restated
(note 1) (note 1)
OPERATING ACTIVITIES:
Net income from continuing
operations $4,990 $5,495 $16,408 $18,129
Add items not involving a current
outlay of cash:
Depreciation 3,224 3,458 12,788 14,070
Stock option expense (note 1) 125 109 502 417
Deferred income taxes 406 419 406 419
Loss (gain) on sale of fixed
assets (45) 253 (32) 70
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8,700 9,734 30,072 33,105
Net change in non-cash working
capital balances related to
operations (819) 1,102 (6,259) (5,944)
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Cash provided by operating
activities of continuing
operations 7,881 10,836 23,813 27,161
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FINANCING ACTIVITIES:
Decrease in bank
indebtedness (2,735) (8,810) (11,375) (5,407)
Decrease in long-term
debt (6) 66 (377) (2,821)
Dividends (510) (504) (2,026) (1,508)
Issue of share capital
(note 4) 949 590 1,414 1,458
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Cash provided by (used in)
financing activities of
continuing operations (2,302) (8,658) (12,364) (8,278)
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INVESTING ACTIVITIES:
Acquisitions - - - (9,800)
Cash acquired on
acquisition - - - 60
Investment in fixed
assets (5,821) (2,194) (11,948) (9,348)
Proceeds on sale of fixed
assets and other 242 16 499 224
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Cash used in investing
activities of continuing
operations (5,579) (2,178) (11,449) (18,864)
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Net cash from continuing
operations - - - 19
Net cash used in
discontinued operations - - - (19)
Decrease in cash during
the period - - - -
Cash, beginning of the
period - - - -
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Cash, end of the period $ - $ - $ - $ -
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NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
($ 000's except per share amounts)
September 30, 2004
1. ACCOUNTING POLICIES
Basis of Presentation
These interim consolidated financial statements have been prepared in
accordance with Canadian generally accepted accounting principles and
follow the same accounting principles and methods of application as the
most recent annual consolidated financial statements. The interim
consolidated financial statements should be read in conjunction with the
Company's annual consolidated financial statements included in the 2003
Annual Report.
Accounting Policy Change
Effective October 1, 2003, the Company elected to follow the fair value
based method of accounting for stock-based compensation in accordance
with recommendations of the Canadian Institute of Chartered Accountants
concerning Stock-Based compensation and Other Stock-Based Payments to
options granted after October 1, 2001. This change in accounting policy
has been applied retroactively and prior periods have been restated. The
retroactive impact of adopting the new recommendations include a
reduction in retained earnings and an addition to contributed surplus of
$643 at September 30, 2003. In addition, for the period ended September
30, 2003, opening retained earnings was reduced $226 and compensation
expense increased $417. For the period ended September 30, 2004,
compensation expense increased $502. For the three-month period ended
September 30, 2004, compensation expense was $125 (three -month period
ended September 30, 2003 - $109).
The fair value of the options granted during the year ended September 30,
2004 was estimated at the date of grant using the Black-Scholes option
pricing model with the following weighted average assumptions: risk free
interest rate of 4.25% (2003 - 4.46%), expected dividend yield of 0.316%
(2003 - 0.026%), expected volatility of 0.273 (2003 - 0.273) and expected
option life of 5.46 years (2003 - 4.22 years). The weighted average fair
value of the options granted and shares issuable under the Employee Share
Purchase Plan during the year is $1.69 (2003 - $1.56).
2. BANK INDEBTEDNESS
Effective April 7, 2004, the Company entered into an interest rate swap
agreement whereby the rate of interest on a portion of amounts
outstanding under its demand credit facility be fixed at 3.88% plus
applicable margin. The notional principal amount of the swap agreement is
$20,000 on the date of the agreement and declines by $714 quarterly to
$6,400 in April 2009 at which time the balance will be absorbed into our
demand credit facility. The Company has designated this interest rate
swap agreement as a hedge of the underlying debt and accordingly defers
gains and losses. As of September 30, 2004, the notional principal amount
of this swap was $18,571 and the fair value loss was insignificant.
3. DISCONTINUED OPERATIONS
Effective August 30, 2004, the Company sold Exco Lasing (formerly
Bancroft Lasing Technologies Limited) which operated within the Company's
Automotive Solutions segment. Management concluded that the technical
requirements of the business and the need to vertically integrate the
business were best left to industry players that were fully focused on
and engaged in this segment of the automotive interior trim market.
The Company recorded non-cash charges in the order of $4,500 comprised of
approximately $1,000 reduction in goodwill, approximately $1,000
reduction in future income tax assets and approximately $2,500 of non-
cash charges related to fixed assets. Revenue and pre-tax losses for the
year ended September 30, 2004 are $5,112 and $8,564 (2003 - $2,428 and
$2,336). The income tax benefit relating to discontinued operations for
the year ended September 30, 2004 is $1,355 (2003 - $888). Basic and
diluted loss per share from discontinued operations for the year ended
September 30, 2004 is $0.18 (2003 - $0.03 and $0.04).
4. SHARE CAPITAL
Authorized
The Company's authorized share capital consists of an unlimited number of
common shares, an unlimited number of non-voting preference shares
issuable in one or more series and 275 special shares.
Issued
The Company has not issued any non-voting preference shares or special
shares. Changes to the issued common shares are shown in the following
table:
Common Shares
Number of Stated
shares value
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Issued and outstanding at September 30, 2002 39,478,118 $26,707
Issued in exchange for Neocon shares on
acquisition 130,000 780
Issued for cash under Employee Stock Purchase
Plan 246,408 891
Issued in exchange for Bantech shares and
debenture on its acquisition 265,746 2,000
Issued for cash under Stock Option Plan 231,600 660
Share issue expense (93)
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Issued and outstanding at September 30, 2003 40,351,872 $30,945
Issued for cash under Stock Option Plan 465,166 1,431
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Issued and outstanding at September 30, 2004 40,817,038 $32,376
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5. SEGMENTED INFORMATION FROM CONTINUING OPERATIONS
The Company operates in two business segments: Casting and Extrusion
Technology and Automotive Solutions. The accounting policies followed in
the operating segments are consistent with those outlined in Note 1 of
the Annual Consolidated Financial Statements. The Casting and Extrusion
Technology segment designs and engineers tooling and other manufacturing
equipment. Its operations are substantially for automotive and other
industrial markets in North America. The Automotive Solutions segment
produces automotive interior components and assemblies primarily for
storage and restraint for sale to automotive manufacturers and Tier 1
suppliers (suppliers to automakers).
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3 Months ended September 30, 2004
Casting and
Extrusion Automotive
Technology Solutions Total
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Sales $34,324 $19,502 $53,826
Depreciation $2,565 $659 $3,224
Segment income $3,022 $4,340 $7,362
Interest expense $278
Income before income taxes from
continuing operations $7,084
Fixed asset additions $4,934 $887 $5,821
Total fixed assets, net $65,888 $17,559 $83,447
Goodwill $8,345 $35,083 $43,428
Total assets $117,198 $91,263 $208,461
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3 Months ended September 30, 2003 (Restated Note 1)
Casting and
Extrusion Automotive
Technology Solutions Total
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Sales $40,544 $20,507 $61,051
Depreciation $2,814 $644 $3,458
Segment income $5,727 $3,654 $9,381
Interest expense $371
Income before income taxes from
continuing operations $9,010
Fixed asset additions $1,643 $551 $2,194
Total fixed assets, net $69,065 $17,262 $86,327
Goodwill $8,345 $36,085 $44,430
Assets, continuing operations $130,517 $80,407 $210,924
Assets, discontinued operations - $5,561 $5,561
Total assets $130,517 $85,968 $216,485
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12 Months ended September 30, 2004
Casting and
Extrusion Automotive
Technology Solutions Total
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Sales $130,225 $85,889 $216,114
Depreciation $10,429 $2,359 $12,788
Segment income $9,783 $15,914 $25,697
Interest expense $967
Income before income taxes from
continuing operations $24,730
Fixed asset additions $8,528 $3,420 $11,948
Total fixed assets, net $65,888 $17,559 $83,447
Goodwill $8,345 $35,083 $43,428
Total assets $117,198 $91,263 $208,461
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12 Months ended September 30, 2003 (Restated Note 1)
Casting and
Extrusion Automotive
Technology Solutions Total
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Sales $142,003 $86,124 $228,127
Depreciation $11,475 $2,595 $14,070
Segment income $15,830 $15,225 $31,055
Interest expense $1,610
Income before income taxes from
continuing operations $29,445
Fixed asset additions $7,621 $1,727 $9,348
Total fixed assets, net $69,065 $17,262 $86,327
Goodwill $8,345 $36,085 $44,430
Assets, continuing operations $130,517 $80,407 $210,924
Assets, discontinued operations - $5,561 $5,561
Total assets $130,517 $85,968 $216,485
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MANAGEMENT DISCUSSION AND ANALYSIS
----------------------------------
This Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A") of Exco Technologies Limited ("Exco" or the "Company") should be read in conjunction with its consolidated financial statements presented elsewhere in this press release. This MD&A has been prepared as at November 15, 2004.
This MD&A has been prepared by reference to the new MD&A disclosure requirements established under National Instrument 51-102 "Continuous Disclosure Obligations" ("NI 51-102") of the Canadian Securities Administrators. Additional information regarding Exco, including copies of its continuous disclosure materials such as its annual information form, is available on its website at www.excocorp.com or through the SEDAR website at www.sedar.com.
In this MD&A, reference is made to gross margin which is not a measure of financial performance under Canadian generally accepted accounting principles ("GAAP"). The Company calculates gross margin as sales less cost of sales. The Company has included information concerning this measure because it is used by management as a measure of performance and management believes it is used by certain investors and analysts as a measure of the Company's financial performance. This measure is not necessarily comparable to similarly titled measures used by other companies.
OVERALL PERFORMANCE -------------------
Exco is a global designer, developer and manufacturer of dies, moulds, equipment, components and assemblies to the die-cast, extrusion and automotive industries. Exco operates and reports in two business segments. The traditional business segment conducted by Exco since its incorporation in the 1950's is the Casting and Extrusion Technology segment. It was supplemented by the acquisition of Techmire Limited in fiscal 2001. The other business segment is Automotive Solutions. Exco launched this business segment by acquiring Polytech Netting in Fiscal 2000 and added to it in fiscal 2003 with the acquisition of Neocon International.
The Casting and Extrusion Technology segment designs, develops and manufactures die-casting and extrusion tooling and equipment. In fiscal 2004, total sales were $130 million or 60% of consolidated revenue. Operations are based in North America and primarily serve automotive and industrial markets throughout the world. Exco is a recognized leader in these markets and is further entrenching itself by reducing lead times and cost through design enhancements which our competitors are unable to meet. This segment will leverage its leadership position by coordinating its marketing initiatives and bundling its numerous extrusion and die-cast products and services. The United States market continues to be a primary focus for die-cast moulds, extrusion dies and accessories, while Asia is the primary market for the sale of die- cast machinery.
The Automotive Solutions segment designs, develops and manufactures automotive interior trim components and assemblies primarily for passenger and light truck vehicles. In fiscal 2004, this segment achieved total sales of $85.9 million or 40% of consolidated sales. Our facilities are located in Canada, Mexico and Morocco and supply the North American, European and Asian markets. In this segment, our objective is twofold. With our location in Tangier, Morocco we are committed to making significant inroads in the European market for interior trim components and netting products while continuing to prosper in the more mature North American market by exploiting our superior design and development capabilities. Furthermore, our capabilities in rigid storage systems ideally positions the Company to be an integrator of both soft and rigid interior trim assemblies while continuing to offer low cost solutions to our customers. While labour intensive products are already manufactured in countries where labour costs are lower, we continually strive for productivity improvement and efficiency.
In accordance with recommendations of the Canadian Institute of Chartered Accountants ("CICA"), our results have been restated to reflect the financial results of Bantech Lasing as discontinued operations. This operation, which was purchased on February 3, 2003, was sold for cash on August 30, 2004. Results from this operation and losses realized on its sale have been isolated and classified as 'Discontinued Operations' in the Consolidated Financial Statements (see Note 3 of the Consolidated Financial Statements). All references in the MD&A are to continuing operations unless otherwise stated.
Exco's continuing operations experienced a year of retrenchment in fiscal 2004. After peaking in fiscal 2003 when the Company made its latest acquisitions, sales contracted by 5% in fiscal 2004 to $216.1 million. There were several factors contributing to this turnover contraction. Weak demand for the Company's large mould products throughout the year was caused by automotive customers' focus on developing new transmissions and engine blocks rather than ordering or maintaining tools for current generation products. The situation has improved markedly. In the second quarter of this year Exco announced that it had been awarded production orders for moulds relating to four new transmission programs from several North American automakers. These programs are for next generation 6 speed transmissions and confirm Exco's place at the leading edge of powertrain development and design.
The strengthening Canadian dollar has also impacted revenue by depressing the value of our US dollar sales by $9 million. The average exchange rate for fiscal 2004 was $1.32 compared to $1.46 in the prior year. This continues a trend that began in fiscal 2002 when the average exchange rate for the year was $1.57. In such times of currency appreciation the Company has focused on protecting its earnings in the short term by naturally hedging its exposure with US dollar denominated purchases of raw material and equipment and forward contract instruments. The real thrust, however, has been to generally reduce costs wherever possible in order to remain competitive. This initiative commenced in 2003 and resulted this year in significantly lower selling, general and administrative costs, depreciation costs and interest charges as the Company reduced staffing, cut back on capital expenditures and debt.
Despite these overall trends sales grew from new product launches at Polydesign in Morocco and at Neocon, which is now in the process of expanding its operation in Huntsville, Alabama.
Selected Annual Information
The following table sets out selected financial data relating to the Company's years ended September 30, 2004, 2003 and 2002. This financial data should be read in conjunction with the Company's audited consolidated financial statements for these years:
($ millions except per share amounts)
2004 2003 2002
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Sales 216.1 228.1 213.1
Earnings from Continuing Operations 16.4 18.1 16.8
Net Earnings for the Year 9.2 16.7 16.8
Total Assets 208.5 216.5 204.4
Total Long Term Liabilities .8 1.8 .9
Cash Dividend Declared per share(x) $0.05 $0.0375 0
Earnings per share from Continuing Operations
Basic $0.41 $0.45 $0.43
Diluted $0.40 $0.44 $0.42
Earnings per share from Net Earnings
Basic $0.23 $0.42 $0.43
Diluted $0.22 $0.40 $0.42
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(x)Based on monthly weighted average number of common shares outstanding
RESULTS OF OPERATIONS
---------------------
Segment Operating Results -
For the year ended September 30, 2004, consolidated sales decreased 5% to $216.1 million. The Casting and Extrusion Technology segment reported sales of $130 million. This is $11.8 million less than last year. Sales of die-cast machines at Techmire and sales of extrusion dies and accessories were steady in fiscal 2004 despite the impact of an appreciating CND dollar. However, lower die-cast mould sales were significantly lower than the prior year at all three production facilities.
Die-cast mould sales have been soft for several years in the North American powertrain market. The decline in replacement mould sales reflects customer expectation of changes to their powertrain design. Automakers reduced orders for replacement moulds as redesigned moulds for next generation powertrain components were expected. Consequently, the business relied heavily on revenue from maintenance on existing moulds, which was also soft as customers were not motivated to diligently maintain existing moulds, which would soon be obsolete. In this environment of weak demand pricing also came under pressure. However, as previously announced, Exco was awarded significant production orders for next generation transmission and engine moulds by several North American original equipment manufacturers and their tier one die-casters. We anticipate that over the next several years, as automakers' continue to finalize powertrain planning, sales of die-cast moulds and maintenance will increase.
This segment's income was $9.8 million as compared to $15.8 million in fiscal 2003. Segment income was negatively impacted by the reduced sales activity in the die-cast mould business, which operated well below available capacity throughout the fiscal year. Income from the extrusion die and equipment business was stable although slightly lower due to the impact of the strengthening Canadian dollar. Income from the sale of die-cast machines was also modestly lower in fiscal 2004 as this business expensed development costs associated with aluminium and larger zinc die-casting machines.
The Automotive Solutions segment reported sales of $85.9 million for the year. This is effectively unchanged from last year. Sales contracts in this segment are almost exclusively in US dollars. The stronger Canadian dollar had the effect of lowering this segment's sales by approximately $6 million for the year. Within the segment it is estimated Neocon and Polydesign sales have grown by 37% and 156% respectively over the prior year. Polytech's US dollar sales have remained relatively flat, reflecting the competitiveness of the business environment and management's focus on integrating the Neocon acquisition and developing the European market.
Gross Margin -
Gross margin was 34%, down from 36% in fiscal 2003. Overall gross margin in the Automotive Solutions segment was stable with the segment benefiting from increasing sales and production efficiency at our Moroccan facility. This offset slightly lower margins from product mix variation in our rigid storage system business. However, overall gross margin in the Casting and Extrusion Technology segment was impacted by a combination of competitive pricing pressures, increasing steel prices and weak demand for our large mould products. Gross margin was also impacted at several Canadian business units in both segments that sell in US dollars. Foreign exchange has no impact on gross margin in our US operations.
Selling, general and administrative expenses -
Selling, general and administrative expenses were down 6% from $37.1 million to $34.7 million in the prior year. This decrease reflects the Company's determination to control costs at all levels. Administrative staffing at most operations has been reduced and certain incentive costs have declined with lower profits. The Company also relies heavily on commission sales agents in numerous foreign and niche markets who receive varying commission rates on various products. Depending on the geographic and product mix of sales, commission payments may vary significantly from year to year. In fiscal 2004 it is estimated that the geographic and product mix was such that total commission payments declined by $1 million from the prior year.
Depreciation and amortization -
Depreciation and amortization expenses were $12.8 million (5.9% of sales) as compared to $14.1 million (6.2% of sales) in the prior year. Depreciation expense declined in both segments. This reflects the maturing of the Company's assets and recent investment in building and physical plant, which has a longer life than machinery and equipment, and is therefore depreciated over a longer period. In addition, fixed asset additions in recent years have been less than depreciation expense.
Interest -
Interest expense was $1 million as compared to $1.6 million in fiscal 2003. The decrease is primarily attributable to the Company's lower net debt level, which fell by approximately 31% from $30.3 million on September 30, 2003 to $20.9 million at the end of fiscal 2004. The Company's average cost of borrowing also declined throughout fiscal 2004 by 50 basis points. Midway through the fiscal year the Company entered into an interest rate swap agreement whereby the rate of interest on most of the Company's bank indebtedness is effectively capped at 3.88% plus applicable margin (see Note 2 to the Consolidated Financial Statements).
Income taxes -
Exco's effective income tax rate was 33.7% compared to 38.4% in fiscal 2003. As Exco's Moroccan facility has achieved profitability in 2004, non- deductible losses have been eliminated. The impact of this business unit's tax-exempt status will continue to reduce Exco's effective tax rate in an amount proportionate with Exco's other taxable earnings. Taxes in other jurisdictions where the Company carries on business have remained relatively stable. In addition, during the fourth quarter the Company's evaluation of outstanding tax contingencies resulted in a reduction of the tax liability which was reflected as a reduction of current taxes on the income statement.
Foreign exchange -
During the year, the Canadian dollar appreciated approximately 7%. As a result of foreign currency hedges and U.S. dollar debt, the impact of this appreciation on Exco's Canadian working capital was negligible at -$103 thousand. However, the translation of profits earned from Exco's U.S. operations was negatively affected, reducing net income by approximately $1 million or $0.02 per share. For further discussion of the Company's foreign exchange see 'Risks and Uncertainties' below.
Quarterly results -
The following table sets out certain financial information for each of the eight fiscal quarters up to and including the fiscal year ended September 30, 2004:
($ thousands except per share amounts)
2004 Sept/04 June/04 Mar/04 Dec/03 Total
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Sales $ 53,826 $ 57,014 $ 52,754 $ 52,520 $216,114
Net income from
continuing operations $ 4,990 $ 4,794 $ 3,391 $ 3,233 $ 16,408
Earnings Per Share from
continuing operations
Basic $ 0.12 $ 0.12 $ 0.09 $ 0.08 $ 0.41
Diluted $ 0.12 $ 0.12 $ 0.08 $ 0.08 $ 0.40
Net income $ 4,407 ($265) $ 2,714 $ 2,343 $ 9,199
Earnings per share
Basic $ 0.11 ($0.01) $ 0.07 $ 0.06 $ 0.23
Diluted $ 0.11 ($0.01) $ 0.06 $ 0.06 $ 0.22
2003 Sept/03 June/03 Mar/03 Dec/02 Total
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Sales $ 61,051 $ 56,991 $ 55,454 $ 54,631 $228,127
Net Income from
continuing operations $ 5,495 $ 4,188 $ 4,951 $ 3,495 $ 18,129
Earnings Per Share from
continuing Operations
Basic $ 0.14 $ 0.10 $ 0.12 $ 0.09 $ 0.45
Diluted $ 0.13 $ 0.10 $ 0.12 $ 0.09 $ 0.44
Net Income $ 4,817 $ 3,578 $ 4,790 $ 3,496 $ 16,681
Earnings per share
Basic $ 0.12 $ 0.09 $ 0.12 $ 0.09 $ 0.42
Diluted $ 0.11 $ 0.09 $ 0.11 $ 0.09 $ 0.40
Exco typically experiences softer sales and profit in the first quarter. This quarter coincides with reduced business activity associated with our customers' plant shutdown in North America during the summer. Profits translated to Canadian dollars are generally lower as a result of the strengthening of the Canadian dollar in relation to the U.S. dollar. This impact was most acute in the last quarter of fiscal 2004 during which virtually all the appreciation in the Canadian dollar in fiscal 2004 took place. Sales in the Casting and Extrusion Technology segment were also down in the last quarter with most erosion occurring in the casting businesses.
FINANCIAL RESOURCES, LIQUIDITY AND CAPITAL RESOURCES ---------------------------------------------------- Cash flow from operating activities -
Cash flow from operations before changes in non-cash working capital was $30.1 million as compared to $33.1 million in 2003. The reduction of $3 million was primarily caused by lower net income from continuing operations ($1.7 million) and lower depreciation expense ($1.3 million). The net change in non-cash working capital has remained relatively stable at $6.3 million, as the Company's sales throughout the fiscal year have remained relatively flat. While customers of the casting businesses are modifying their traditional practise of making advance payments the Company has concentrated on collecting receivables more effectively.
Cash flow from financing activities - The most dramatic feature of Exco's cash flow from financing activities is the reduction in both short and long term debt in amounts of $6 million and $2.4 million respectively. The reduction in long-term debt resulted from Exco's repayment of certain Neocon financing shortly after its acquisition. Dividend payments increased approximately $500 thousand in the fiscal year reflecting four quarterly payments as opposed to three quarterly payments in the prior fiscal year.
Cash flow from investing activities - Cash used in investing activities fell by $7.4 million as the Company made no acquisition in the fiscal year compared to $9.8 million in the prior year. Investment in fixed assets increased by $2.6 million reflecting investment in Techmire's new facility.
Capital expenditures -
Investment in fixed assets totalled $11.9 million as compared to $9.3 million in the prior year. The investment in the Automotive Solutions segment was $3.4 million and investment in Casting and Extrusion Technology segment was $8.5 million. These investments related primarily to upgrades and the replacement of existing equipment, ensuring we continue to benefit from the employment of the most efficient technology. Approximately $1.8 million of the Casting and Extrusion Technologies investment was spent on a new production facility in Montreal for Techmire. Total expenditures for Exco were budgeted to be $19 million. In light of existing market conditions and construction delays at Techmire, the actual level of capital expenditures in the fiscal 2004 year were much less.
For fiscal 2005, Exco plans to invest $18 million. Approximately $4 million of this amount relates to the completion of the Techmire facility. While the construction of the Techmire facility will increase capacity, its primary purpose is to increase operating efficiency by consolidating three production facilities and one warehouse into one location. The balance of the capital investment will be used to introduce blow-moulding capability at Neocon (approximately $1.5 million) and either replace aging equipment or upgrade existing equipment.
Dispositions -
On August 30, 2004 Exco sold its paint and lasing business in London Ontario, which it acquired on February 3, 2003. Bantech Lasing was a start-up operation that encountered numerous technical production challenges. Its inability to build a profitable revenue base in the near term prompted management to reassess its position and sell this business to an industry participant possessing the necessary technical expertise and long term commitment to the sector. Note 3 to the Consolidated Financial Statements outlines the accounting impact of the discontinuation of this business unit. Cash losses from operations (including changes in non cash working capital) of this business are estimated to be $2.2 million for fiscal 2004 and $4.8 million for fiscal 2003.
Financial position and financing activities -
Exco's financial position continues to strengthen despite the above capital investments, and, at year-end, the total debt to equity ratio was .14:1, with combined current and long term borrowings of $21 million. In the past, we have satisfied the majority of our funding requirements by using our operating lines rather than term debt. Given our ability to quickly repay debt from free cash flow, the Company has been reluctant to term out its debt. However, recognizing that the record low interest rate environment experienced in the early part of the fiscal year would not continue indefinitely, the Company entered into an interest rate swap effectively capping the interest rate charged on operating debt at 3.88% plus margin.
Exco has operating lines of credit totalling $63.1 million of which $43.3 million was unused and available at year-end. We expect that in fiscal 2005 our cash flow from operations will exceed anticipated capital expenditures and, accordingly, the lines of credit will be sufficient to meet our operating requirements.
At the end of the second quarter of fiscal 2003 Exco commenced payment of a quarterly dividend at the rate of $0.0125 per share or $0.05 per share annually. During fiscal 2004, four quarterly payments were made totalling $2 million. While the dividend is declared quarterly, it is expected that the dividend payments will be at this level throughout fiscal 2005.
In addition to the obligations disclosed on our balance sheet, Exco also enters into operating lease arrangements from time to time. Although we own 10 of our 11 manufacturing facilities and virtually all our production equipment, Exco does lease its Mexican manufacturing facility and an aircraft. Our lease commitments diminished with the sale of the Bantech Lasing business. The Company obtained a termination and release of the manufacturing plant lease relating to this business' production facility. The expense associated with these obligations is recorded in Exco's income statement. We anticipate continuing to lease equipment currently under commitment to purchase and accordingly, our future payment obligations are expected to be higher than shown.
CRITICAL ACCOUNTING POLICIES ----------------------------
The preparation of Exco's financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amount of revenue and expenses during the reporting period. The most critical accounting principle upon which our financial status depends is our revenue recognition policy. Exco recognizes revenue upon product completion. Completion for large die-cast moulds and die-cast machines is defined as completion of manufacturing of the mould or machine. For extrusion and other tooling products and the Automotive Solutions segment products, completion is defined as shipment to customers.
In 2003, the CICA amended Handbook Section 3870 "Stock-based compensation and other stock-based payments". The Company elected to follow the fair value based method of accounting for stock-based compensation concerning options granted after October 1, 2001. The change of accounting policy has been applied retroactively and prior periods have been restated. The retroactive impact of adopting the new recommendations include a reduction in retained earnings and an addition to contributed surplus of $643 thousand at September 30, 2003. In addition, for fiscal 2003, opening retained earnings was reduced $226 thousand and compensation expense increased $417 thousand.
During the fiscal year the Company adopted CICA 3475 "Disposal of Long-Lived Assets and Discontinued Operations" with respect to the sale of its Bantech Lasing business. As a result of this section, assets and liabilities of this business unit have been classified as discontinued on the Company's balance sheet. The income statement has also been reclassified removing the impact of this business unit and reporting it as Net Loss from Discontinued Operations Net of Income Tax (see Note 3 of the Consolidated Financial Statements).
In 2003, the CICA finalized proposed amendments to Accounting Guideline, AcG-13 "Hedging Relationships" ("AcG-13"). AcG-13 requires that companies comply with changes effective for years beginning on or after July 1, 2003. The Company has adopted the new recommendations. The most significant change is the establishment of certain conditions for when hedge accounting may be applied. Hedge accounting modifies the normal basis for recognizing the gains, losses, revenues and expenses associated with a hedged item or a hedging item in a company's income statement. Accordingly, the Company will apply hedge accounting only under conditions that justify its use. The adoption of AcG-13 is not expected to have an effect on the Company's business.
RISKS AND UNCERTAINTIES -----------------------
Exco's financial results are affected by the prevailing global economic environment and demand for the Company's products. Exco's Automotive Solutions segment consists of automotive component suppliers to the worldwide automotive manufacturers and tier one suppliers. Therefore, the results of this segment depend on demand for automobiles and the level of automobile production, which may fluctuate with economic cycles or the financial condition of automotive customers.
This segment's results also depend on its ability to continue winning new production contracts while retaining existing business. In some cases, the nature of the Company's products is such that they may be decontented. Exco believes its focus on evolving from component supplier to a designer and integrator of automotive interiors and trunks minimizes the risk of decontenting, however, the risk cannot be entirely eliminated.
The Casting and Extrusion Technology segment is a capital goods business. Interest rates, corporate capital spending, the general economic climate and business confidence are factors affecting the demand for Exco's dies, moulds and equipment. As these factors fluctuate, demand for and pricing of the Company's products may change with abrupt changes often bringing about dramatic changes in demand and pricing. The Company believes that its broad product line, geographic diversification and leadership position tends to mitigate this risk.
In addition to internal growth, Exco has and may continue to seek out acquisition opportunities. Despite Exco's best efforts, acquisitions inherently involve risk. While Exco has concluded numerous acquisitions that have been very successful, Bantech Lasing is a recent example of the risk inherent in even small acquisitions.
The cost of manufacturing our products is a critical factor in determining our success over the long term. Manufacturing has generally expanded to developing countries where competing technologies and lower labour structures exist. The Company must compete against competitors doing business in these developing countries. The Company has met this challenge by manufacturing certain labour intensive products in Mexico and Morocco, however there are still numerous operations based in North America that must compete with products manufactured in developing countries.
Exco's Canadian operations negotiate sales contracts with customers in both Canadian and U.S. dollars. We also purchase material in both currencies. U.S. dollar purchases provide a natural hedge against US dollar sales of Exco's Canadian operations. With respect to the remaining foreign exchange exposure not naturally hedged, Exco enters into forward contracts and incurs US dollar debt, from time to time. However, forward contracts are only short term mitigating instruments. In the final analysis, Exco is structurally a net seller of US dollars with foreign exchange exposure increasing as the US dollar declines in value against the Canadian dollar.
During fiscal 2004, the Canadian dollar appreciated 7% with virtually all the appreciation taking place in the last month of the fiscal year. While the rate of appreciation has slowed to approximately half that experienced in the prior year, the appreciation is continuing in fiscal 2005 and it is still a challenge to the Company. In order to remain competitive, Exco is engaged in a number of initiatives. Wherever possible, at its Canadian operations, the Company is attempting to sell in Canadian dollars and source inputs and equipment in US dollars thereby improving the natural hedge described above. It is however in some instances, such as sales to Asia and China, extremely difficult to dislodge the dominance of the US dollar as commercial currency of choice. Therefore, the Company is committed to reducing its overall costs in order to mitigate the impact of the appreciating Canadian dollar.
For fiscal 2005, we estimate that our Canadian operations will be exposed to fluctuation in the value of the Canadian dollar relative to the US dollar on approximately $US 26.5 million. This figure represents the estimated net exposure calculated as U.S. dollar revenue less U.S. dollar expenses and U.S. dollar forward foreign exchange contracts. For example, if the Canadian dollar strengthens or weakens by 1%, pre-tax profit would decrease or increase respectively by $265 thousand or, after tax, approximately $175 thousand.
Exco's U.S. operations earn profits in U.S. dollars. Although a stronger Canadian dollar results in lower Canadian dollar profit on translation, it does not affect the competitiveness of these operations in the US market as their revenue and costs are primarily in U.S. dollars. For fiscal 2005, it is estimated that the Company's U.S. operations will be exposed to foreign exchange risk on the translation of pre tax profit of US$15 million. For example, if the Canadian dollar strengthens or weakens by 1%, pre tax profit would decrease or increase respectively by $150 thousand or, after tax, approximately $100 thousand.
Although Exco's Automotive Solutions segment has manufacturing facilities in Mexico and Morocco, these operations incur some operating expenses, primarily labour, in their local currency. In Mexico, sales contracts and major purchases, such as material and equipment, are negotiated in U.S. dollars. In Morocco, sales contracts and major purchases are typically negotiated in Euro. Significant long-term fluctuations in the relative value of the local currencies against the U.S. dollar and Euro have the potential to affect Exco's operating results. With respect to the Moroccan currency, the Moroccan government does not maintain a transparent exchange rate mechanism and it is difficult to anticipate such fluctuations.
OUTLOOK ------- Casting and Extrusion Technology -
During fiscal 2004, Exco received mould orders for four next generation six speed transmissions. This represents approximately $30 million in sales. The financial impact of this new business will be felt in fiscal 2005 and beyond. This should help increase capacity utilization in this segment, although recent competitive pressures on selling prices and steel related input costs are beginning to be increasingly prevalent. Over the long-term, it is anticipated that the rise in energy costs will continue to spur design and development by the automakers of new powertrain architecture. Exco's involvement in the early stages of these prototype transmission programs significantly improves our opportunity to be the producer of choice. This is demonstrated by Exco's recently awarded programs and its prototype work on others.
The ramifications of this dynamic powertrain, design and development environment means that the engineering and design costs are increasing before Exco can profit from manufacturing the product. Once programs are awarded, the expected increase in revenue should have a positive impact on Exco's future earnings as capacity is already in place. We continue to expect that new aluminum and magnesium die-cast components will replace existing components manufactured from steel and other materials. This view is further reinforced by the recent high prices of steel. Aluminum and magnesium die-cast components provide automakers with weight savings and fewer manufacturing operations. We believe that this transition should result in further growth for Exco's casting technology business, albeit, at more modest margins as the marketplace is becoming increasingly competitive.
In fiscal 2002, Exco developed a multiple slide magnesium die-cast machine that operates much faster and can produce a broader range of casting products than conventional systems. The attributes of magnesium and Exco's proprietary die-casting technology make these machines particularly attractive for electronic devices. In fiscal 2003, full-scale marketing of this new product began. Today some 20 machines have been sold primarily in Asia. As reported last year we are continuing our efforts to apply this technology to aluminum die-casting. Prototype completion is expected in the 2nd half of fiscal 2005. If successful, the potential market is expected to be significant. This business is also engaged in the introduction of larger die-cast machines, which should also be introduced midway through the fiscal year. This should allow Techmire's customers to increase the range of components they produce using multiple-slide technology. These development programs are all designed to improve the competitive position of our customers and increase their share of the die-casting market. With the market recovery in fiscal 2004, machine sales were relatively strong, however, the appreciating Canadian dollar continued to work against this business unit. We fully expect that the technological leadership shown by this business and the lower costs associated with the consolidation of production in one facility will enable it to prosper, despite the adverse effect of an inhospitable exchange rate environment.
In fiscal 2004, sales of our extrusion tooling products were relatively unchanged from the previous year, despite an extremely soft first quarter. The consolidation trend among Exco's extrusion tooling customers continues. Exco has benefited from this trend since larger customers prefer to work with stable and accomplished suppliers. Exco's extrusion business has introduced new design methodologies, which have substantially reduced lead times and thereby allowed us to differentiate ourselves in the marketplace. Recent price shocks in steel costs present a serious challenge to this business and will tend to squeeze margins until such time as circumstances warrant an industry review of selling prices. We believe that we continue to be the largest North American supplier, although our market share in the United States leaves considerable room for growth. Exco has targeted the US for expansion, and to this end, is coordinating its marketing efforts on a North American basis.
Automotive Solutions -
This segment has been a consistent performer for Exco since its acquisition in late 2000. The Polytech business, which operates primarily in North America, has written business with virtually every automotive manufacturer and today its customer base is the most diversified of all Exco's business units. Polytech has also successfully diversified its product offerings in order to insulate itself from decontenting and relying too heavily on any particular product or program. It has further differentiated itself by offering design capabilities, which its customers can draw on in order to quickly and economically, develop and introduce new products.
Several years ago this segment made a commitment to secure business in the larger and growing European car market. The Moroccan production facility, which began production in Fiscal 2003, is the key to our success in Europe. As asserted last year this facility achieved a small profit in fiscal 2004 and it is expected to be a consistent contributor in the years to come, as sales grow exponentially with expected launches.
Neocon was acquired at the start of last fiscal year. This business achieved revenue growth of 37% in fiscal 2004. Demand for Neocon's vehicle interior organizers and trays continue to be strong. Neocon will introduce blow-moulding capability and commence manufacturing in Alabama this year. This will lower its production costs and further increase its competitiveness in the growing automobile assembly cluster in the Southeastern region of the US. Neocon's ability to access and leverage Polytech's design and marketing channels will also ensure its competitiveness, however, prices for resin based inputs will impact Neocon's profitability.
CONCLUSION ----------
Our traditional focus on maintaining best quality, technological leadership, achieving strong market position and being the low-cost producer are factors that drive our success. The upcoming year, however, presents particular challenges. Rising commodity and oil costs are impacting costs while the appreciating dollar is depressing sales. The resulting margin pressure will require constant vigilance. In these circumstances our strong balance sheet allows us to differentiate ourselves from our competitors and finance growth and strategic opportunities. Exco is confident that it will prosper despite this inclement environment.
CAUTIONARY STATEMENT
Information in this document relating to projected growth, improvements in productivity and future results constitutes forward-looking statements.
Readers are cautioned not to place undue reliance on forward-looking statements as there can be no assurance that the plans, intentions or expectations upon which such statements are based will occur. Forward-looking statements include known and unknown risks, uncertainties, assumptions and other factors which may cause actual results, performance or achievement to be materially different from any future results, performance or achievements expressed or implied by such statements. These risks, uncertainties and assumptions include, among other things: industry cyclicality; global economic condition, causing decreases in automobile production volumes and demand for capital goods; price reduction pressures; pressure to absorb certain fixed costs; dependence on major customers; technological changes; fluctuations in currency exchange and interest rates; employee work stoppages; dependence on key employees, the competitive nature of the automotive and capital goods industries, product supply and demand; and other risks, uncertainties and assumption as described in the Company's 2004 Annual Information Form and, from time to time, in other reports and filings made by the Company with securities regulatory authorities. Additional information relating to the Company, including the Company's Annual Information Form, is available at www.sedar.com.
While the Company believes that the expectations represented by such forward-looking statements are reasonable, there can be no assurance that such expectations will prove to be correct. Readers are cautioned that the foregoing list of important factors is not exhaustive. Furthermore, the Company disclaims any obligations to update any such factors or publicly announce the result of any such revisions to any of the forward-looking statements contained herein to reflect future events or developments.