Consolidated Financial Statements–
First Quarter 2003 Management’s Discussion and Analysis
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Overview
Automodular Corporation is a sequencer and sub-assembler of modules that are installed in cars and trucks assembled by General Motors at plants in Canada and the United States. Following the acquisition of Tec-Mar Distribution Services Inc. in January 2003, Automodular now operates through three plants in Canada and five in the United States employing 1,000 people.
Sales and Net Income
Automodular Corporation’s (“Automodular”) net sales for the quarter ended March 31, 2003 were $24.7 million an increase of $11.1 million or 81.5% over the period ended March 31, 2002. Net income was $0.8 million or $0.04 per share versus $1.7 million or $0.09 per share. Automodular’s first quarter 2003 income statement ratios compare to the same quarter in 2002 as set out below:
|
2003 |
2002 |
| Sales |
100.0% |
100.0% |
| Operating income |
12.6% |
16.6% |
| Foreign exchange |
3.1% |
- % |
| Other income |
0.6% |
6.3% |
| Amortization |
4.4% |
6.2% |
| EBIT |
5.8% |
16.7% |
| Interest expense |
0.5% |
0.5% |
| Income tax |
2.0% |
3.7% |
| Net Earnings |
3.3% |
12.5% |
Foreign Exchange
The foreign exchange translation loss of approximately $0.8 million arose from the strongsurge in the Canadian dollar in February and March. The translation loss amounts to anadjustment in the carrying value of certain of Automodular’s assets and liabilities and didnot result in a cash loss.
Other Income
Other income declined by 5.7% of sales, reflecting lower securities gains. Automodular nolonger maintains an investment portfolio, and does not expect material amounts of otherincome in the rest of 2003 or in future years.
Depreciation and amortization
Depreciation and amortization declined from 6.2% of sales in the first quarter of 2002 to4.4% of sales in the same quarter of 2003.
Earnings before interest and tax
March 31, 2003 EBIT of 5.8% was down from 16.7% in March 31, 2002. The primarycause was the foreign currency translation loss referred to above and a gain on sale ofsecurities of $0.8 million in the prior year.
Interest expense
Automodular borrowed approximately $17.5 million in early 2003 to fund the Tec-Maracquisition, and expects commensurately higher interest charges in the rest of 2003.
Income taxes
Income tax ratios fell in the first quarter of 2003 as a result of lower tax rates applied tolower taxable income. The effective tax rate has increased in 2003 due to the fact that therewas $0.8 million in non-taxable securities gains in 2002. Automodular expects theremaining 2003 income tax rates to be slightly lower than 2002 on operating income, butanticipates no material amount of non-taxable gains.
Net Income
Net income as a percentage of sales dropped to 3.3% in the first quarter in 2003 from12.5% in the same quarter in 2002. This decline is due to the consolidation of the lowermargin Tec-Mar acquisition and the absence of any material amounts of non-operatingincome.
Operating Income
Operating income declined from 16.6% of sales to 12.6% of sales. The lower operating income reflects the consolidation of Tec-Mar and the effect of a combination of lower volumes in the Saturn L program and lower prices for a number of commodities.
Liquidity and Capital Resources
Cash used in operating activities of $1.9 million for the current quarter compared to cashprovided by operating activities of $1.2 million in the first quarter of 2002, largely as aresult of increased accounts receivable balance. At quarter end, the Corporation had $2million cash or equivalent on hand. The Tec-Mar acquisition consumed approximately $35million cash, funded by the usage of available cash and a $17.5 million term loan. TheCorporation also has a $5 million operating line and believes it has sufficient liquidity tomeet all plans and programs contemplated for the remainder of 2003, while continuing topay regular quarterly dividends.
Capital Expansion
In the current period, the Company expended $0.9 million on capital and other assets,compared to $1.1 million in the same quarter of 2002.
Dividends
Dividends paid in the current period were $1.3 million, consistent with the amount paid inthe prior year. In 2002 the Directors of Automodular approved a policy of paying regularquarterly dividends and set the current rate at $0.28 annually. Automodular’s operationsare expected to generate sufficient cash flow to fund this dividend while meeting alloperating requirements and the terms of the Corporation’s banking agreements.
Equity
Shareholders' equity decreased from $38.5 million to $38.1 million.
Outlook
The automotive parts industry will continue to face slower volumes in the remainder of2003. The Tec-Mar acquisition broadens and strengthens Automodular as it will more thandouble our annual sales and will make a meaningful contribution to net income and cashflow despite the industry slow down. The Company’s balance sheet reflects management’sjudgment on the valuation of the assets and management believes the Company is poisedfor further growth through expansion of its automotive parts sequencing operations bothinternally and through selective acquisitions. |
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