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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934
For the transition period from ______ to ______
COMMISSION FILE NUMBER: 0-452
TECUMSEH PRODUCTS COMPANY
(Exact name of registrant as specified in its charter)
MICHIGAN 38-1093240
(State of Incorporation) (IRS Employer Identification Number)
100 EAST PATTERSON STREET
TECUMSEH, MICHIGAN 49286
(Address of Principal Executive Offices)
Telephone Number: (517) 423-8411
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class of Stock Outstanding at August 2, 2002
- -------------------------------------------------------------------------------
Class B Common Stock, $1.00 par value 5,077,746
Class A Common Stock, $1.00 par value 13,401,938
- -------------------------------------------------------------------------------
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 1
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited and subject to year end adjustments)
(Dollars in millions) JUNE 30, DECEMBER 31,
ASSETS 2002 2001
------------------------
Current Assets:
Cash and cash equivalents $ 335.4 $ 317.6
Accounts receivable, less allowances for
doubtful accounts of $7.9 million in 2002
and $7.7 million in 2001 249.1 207.1
Inventories 259.1 261.9
Deferred and recoverable income taxes 44.8 58.0
Other current assets 19.7 14.9
--------- ----------
Total current assets 908.1 859.5
Property, plant, and equipment, at cost, net
of accumulated depreciation of $556.4
million in 2002 and $561.1 million in 2001 420.4 431.9
Goodwill 44.1 45.1
Deferred income taxes 34.2 29.7
Prepaid pension expense 151.7 137.3
Other assets 21.8 16.3
--------- ----------
Total assets $ 1,580.3 $ 1,519.8
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable, trade $ 144.5 $ 101.3
Income taxes payable 5.0 4.2
Short-term borrowings 8.0 11.6
Accrued liabilities 147.2 136.7
--------- ----------
Total current liabilities 304.7 253.8
Long-term debt 14.0 13.7
Deferred income taxes 3.1 3.0
Other postretirement benefit liabilities 205.1 203.0
Product warranty and self-insured risks 21.9 23.9
Accrual for environmental matters 28.4 29.4
Pension liabilities 17.4 15.3
--------- ----------
Total liabilities 594.6 542.1
--------- ----------
Stockholders' Equity:
Class A common stock, $1 par value;
authorized 75,000,000 shares; issued and
outstanding 13,401,938 shares in 2002 and 2001 13.4 13.4
Class B common stock, $1 par value; authorized
25,000,000 shares; issued and outstanding
5,077,746 shares in 2002 and 2001 5.1 5.1
Retained earnings 1,067.2 1,051.5
Accumulated other comprehensive income (100.0) (92.3)
--------- ----------
Total stockholders' equity 985.7 977.7
--------- ----------
Total liabilities and stockholders' equity $ 1,580.3 $ 1,519.8
========= ==========
The accompanying notes are an integral part of these Consolidated
Financial Statements.
Page 2
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 1
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited and subject to year end adjustments)
(Dollars in millions except per share data) THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------------------
2002 2001 2002 2001
---- ---- ---- ----
Net Sales $ 395.3 $ 382.0 $ 728.7 $ 786.7
Cost of sales and operating expenses 328.9 324.4 621.0 679.8
Selling and administrative expenses 31.9 31.1 59.5 61.6
Nonrecurring item -- -- 4.5 --
------- ------- ------- -------
Operating Income 34.5 26.5 43.7 45.3
Interest expense (1.2) (1.3) (2.1) (2.5)
Interest income and other, net 3.0 4.6 5.8 9.2
------- ------- ------- -------
Income before taxes and cumulative effect of change in 36.3 29.8 47.4 52.0
accounting principle
Taxes on income 12.9 12.3 16.8 20.5
------- ------- ------- -------
Income before cumulative effect of accounting change 23.4 17.5 30.6 31.5
Cumulative effect of accounting change for goodwill, net of tax -- -- (3.1) --
------- ------- ------- -------
Net Income $ 23.4 $ 17.5 $ 27.5 $ 31.5
======= ======= ======= =======
Basic and Diluted Earnings Per Share:
Income before cumulative effect of accounting change $ 1.27 $ 0.94 $ 1.66 $ 1.68
Change in accounting for goodwill -- -- (.17) --
------- ------- ------- -------
Net income $ 1.27 $ 0.94 $ 1.49 $ 1.68
Weighted Average Shares (in thousands of shares) 18,480 18,572 18,480 18,704
======= ======= ======= =======
Cash Dividends Declared Per Share $ 0.32 $ 0.32 $ 0.64 $ 0.64
======= ======= ======= =======
The accompanying notes are an integral part of these Consolidated
Financial Statements.
Page 3
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 1
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited and subject to year end adjustments)
SIX MONTHS ENDED
(Dollars in millions) JUNE 30,
--------------------
2002 2001
------ -------
Cash Flows From Operating Activities:
Income before cumulative effect of change
in accounting principle $ 30.6 $ 31.5
Adjustments to reconcile income before
cumulative effect of change in accounting
principle to net cash provided by operating
activities:
Depreciation and amortization 32.6 37.3
Nonrecurring items 4.5 --
Accounts receivable (35.6) (12.5)
Inventories -- (4.1)
Payables and accrued expenses 51.0 24.1
Prepaid pension expense (14.4) (14.5)
Other (0.4) (5.0)
------ ------
Cash Provided By Operating Activities 68.3 56.8
------ ------
Cash Flows From Investing Activities:
Business acquisition, net of cash acquired (4.0) (15.5)
Capital expenditures (35.0) (30.8)
------ ------
Cash Used In Investing Activities (39.0) (46.3)
------ ------
Cash Flows From Financing Activities:
Dividends paid (11.8) (11.9)
(Decrease) increase in borrowings, net (3.4) 1.8
Repurchases of common stock -- (15.3)
------ ------
Cash Used In Financing Activities (15.2) (25.4)
------ ------
Effect Of Exchange Rate Changes On Cash 3.7 (8.3)
------ ------
Increase (Decrease) In Cash and Cash Equivalents 17.8 (23.2)
Cash and Cash Equivalents:
Beginning of Period 317.6 268.2
------ ------
End of Period $335.4 $245.0
====== ======
The accompanying notes are an integral part of these Consolidated
Financial Statements.
Page 4
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. The condensed consolidated financial statements of Tecumseh Products
Company and Subsidiaries (the "Company") are unaudited and reflect all
adjustments (consisting of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair presentation of the financial
position and operating results for the interim periods. The December 31,
2001 condensed balance sheet data was derived from audited financial
statements, but does not include all disclosures required by generally
accepted accounting principles. The condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto contained in the Company's Annual Report for
the fiscal year ended December 31, 2001. Due to the seasonal nature of the
Company's business, the results of operations for the interim period are
not necessarily indicative of the results for the entire fiscal year.
The financial data required in this Form 10-Q by Rule 10.01 of Regulation
S-X have been reviewed by Ciulla, Smith & Dale, LLP, the Company's
independent certified public accountants, as described in their report
contained elsewhere herein.
2. Inventories consisted of:
JUNE 30, DECEMBER 31,
(Dollars in millions) 2002 2001
-------------------------------------------------------------------
Raw material and work in process $138.1 $137.1
Finished goods 104.4 108.3
Supplies 16.6 16.5
-------------------------------------------------------------------
Total Inventories $259.1 $261.9
===================================================================
3. In an effort to more effectively compete in a business environment plagued
by worldwide production over-capacity and low cost foreign-sourced
product, the Company has undertaken a number of strategic initiatives
designed to reduce production costs and improve overall productivity and
product quality by consolidating and relocating production capabilities,
both domestically and internationally. These ongoing initiatives are being
implemented within both of the Company's primary business segments.
As a result of these initiatives, the Company recorded a $4.5 million
nonrecurring charge ($2.8 million or $0.15 per share, net of tax), during
the first quarter of 2002, in connection with the relocation of the
production of additional rotary compressor product lines to Brazil from
the United States and consists of the write-off of certain equipment which
cannot be used in Brazil.
Page 5
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
4. The following table reports the Company's comprehensive income:
COMPREHENSIVE INCOME THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
(Dollars in millions) 2002 2001 2002 2001
-----------------------------------------------------------------------------------------------
Net Income $23.4 $17.5 $27.5 $31.5
Other comprehensive income (expense):
Foreign currency translation adjustments (4.7) (8.2) (7.7) (22.3)
-----------------------------------------------------------------------------------------------
Total Comprehensive Income $18.7 $ 9.3 $19.8 $ 9.2
===============================================================================================
5. During the second quarter of 2002, the Company did not repurchase any
shares of its Class A common stock or its Class B common stock. The
authority to repurchase stock, which permitted the purchase of an
additional 1,099,100 shares of Class A or B in any combination, expired on
June 30, 2002. The Board of Directors has not renewed the authority to
repurchase shares.
6. The Company has been named by the U.S. Environmental Protection Agency
("EPA") as a potentially responsible party ("PRP") in connection with the
Sheboygan River and Harbor Superfund Site in Wisconsin. At the direction
of the EPA, the Company and its independent environmental consultants
conducted a remedial investigation and feasibility study. As a result of
this study, the Company believes the most appropriate course of action is
active remediation to the upper river near the Company's facility, and
that only monitored natural armoring should be required in the middle
river and the lower river and harbor.
In May 2000, the EPA issued a Record of Decision ("ROD") selecting the
remedy for the Site. The Company is one of several named PRP's in the
proposed cleanup action. The EPA has estimated the cost of cleanup at
$40.9 million. The Company believes that the EPA's remedy, as specified in
the ROD, goes well beyond what is environmentally protective and
cost-effective for the site and largely ignores the results of the
multi-million dollar remedial investigation and feasibility study that the
Company performed under EPA oversight. Additionally, the Wisconsin
Department of Natural Resources ("WDNR"), as a Natural Resource Trustee,
is investigating what additional requirements, if any, the state may have
beyond those specified under the ROD.
The EPA has indicated its intent to address the site in two phases, with
the plant site and upper river constituting the first phase and the middle
and lower river and harbor being the second phase. The Company anticipates
entering into a Consent Decree concerning the performance of remedial
design and remedial action for the plant site, the upper river and the
flood plain soils, deferring for an unspecified period any action
regarding Phase II.
At June 30, 2002 and December 31, 2001, the Company had accrued $28.4 and
$28.7 million, respectively, for estimated costs associated with the
cleanup of this site. The actual cost may be greater or lower than the
amount accrued and will be governed by numerous factors including the
requirements of the WDNR. These factors include the results of further
investigations, the details of the remedial actions required by the EPA
(in consultation with the WDNR), changes in remedial technologies, the
extent of any natural resource damages, and the outcome of any related
litigation. Other PRPs may contribute to the costs of any final
Page 6
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
remediation, and/or natural resource damage claims, regarding the middle
and lower river and harbor portions of the Site.
The Company, in cooperation with the WDNR, conducted an investigation of
soil and groundwater contamination at the Company's Grafton, Wisconsin
plant. It was determined that contamination from petroleum and degreasing
products used at the plant are contributing to an off-site groundwater
plume. The Company has undertaken remediation of soils in a source area on
the east side of its Grafton facility. While the Company has provided for
estimated investigation and on-site remediation costs, the extent and
timing of future off-site remediation requirements, if any, are not
presently determinable.
The WDNR requested that the Company join it in a cooperative effort to
investigate and clean up PCB contamination in the watershed of the south
branch of the Manitowoc River, downstream of the Company's New Holstein,
Wisconsin facility. Despite the fact that the WDNR's investigation does
not establish the parties responsible for the PCB contamination, the WDNR
has indicated that it believes the Company is a source and that it expects
the Company to participate in the cleanup. The Company has participated in
the first phase of a cooperative cleanup, consisting of joint funding of
the removal of soils and sediments in the source area near its facility.
The next phase of the cooperative effort is scheduled to occur in 2002
involving a stream segment downstream of the source area. The Company has
provided for these costs. Although participation in a cooperative remedial
effort after 2002 for the balance of the watershed is under consideration,
it is not possible to reasonably estimate the cost of any such
participation at this time.
In addition to the above-mentioned sites, the Company is also currently
participating with the EPA and various state agencies at certain other
sites to determine the nature and extent of any remedial action which may
be necessary with regard to such other sites. At June 30, 2002 and
December 31, 2001, the Company had accrued $35.1 million and $36.1
million, respectively, for environmental remediation, including the
amounts noted above relating to the Sheboygan River and Harbor Superfund
Site. As these matters continue toward final resolution, amounts in excess
of those already provided may be necessary to discharge the Company from
its obligations for these sites. Such amounts, depending on their amount
and timing, could be material to reported net income in the particular
quarter or period which they are recorded. In addition, the ultimate
resolution of these matters, either individually or in the aggregate,
could be material to the consolidated financial statements.
7. The Company is also the subject of, or a party to, a number of other
pending or threatened legal actions involving a variety of matters
incidental to its business. Although the ultimate outcome of these matters
cannot be predicted with certainty, and some may be disposed of
unfavorably to the Company, management has no reason to believe that their
disposition will have a materially adverse effect on the consolidated
financial position or results of operations of the Company.
8. The Company has three reportable segments based on the similarity of
products produced: Compressor Products, Engine & Power Train Products, and
Pump Products. There has been no change since the prior year-end in the
methods used to determine reportable segments or in measuring segment
income. There has been no material change in total assets for each
Page 7
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
reportable segment (other than changes due to normal, cyclical business
operations) since December 31, 2001. Revenues and operating income by
segment for the periods indicated are as follows:
BUSINESS SEGMENT DATA THREE MONTHS ENDED SIX MONTHS ENDED
(Dollars in millions) JUNE 30, JUNE 30,
2002 2001 2002 2001
-------------------------------------------------------------------------------------------------------
NET SALES:
Compressor Products $243.3 $236.1 $436.9 $472.4
Engine & Power Train Products 111.3 109.2 222.8 246.3
Pump Products 40.7 36.7 69.0 68.0
-------------------------------------------------------------------------------------------------------
Total Net Sales $395.3 $382.0 $728.7 $786.7
=======================================================================================================
OPERATING INCOME:
Compressor Products $ 28.6 $ 23.3 $ 43.6 $ 36.8
Engine & Power Train Products 2.1 (0.1) (0.2) 4.4
Pump Products 6.2 5.0 9.1 8.0
Corporate expenses (2.4) (1.7) (4.3) (3.9)
Nonrecurring item --- --- (4.5) ---
-------------------------------------------------------------------------------------------------------
Total Operating Income 34.5 26.5 43.7 45.3
Interest expense (1.2) (1.3) (2.1) (2.5)
Interest income and other, net 3.0 4.6 5.8 9.2
-------------------------------------------------------------------------------------------------------
INCOME BEFORE TAXES AND CUMULATIVE EFFECT
OF ACCOUNTING CHANGE $ 36.3 $ 29.8 $ 47.4 $ 52.0
=======================================================================================================
9. On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 142 "Goodwill and Other Intangible Assets." Under
SFAS No. 142, goodwill is no longer amortized, but is subject to
impairment testing on at least an annual basis. As of December 31, 2001,
the net book value of the Company's goodwill was $45.1 million. However,
as required by the statement, 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. Accordingly, goodwill
amounting to $4.8 million ($3.1 million net of tax) has been written-off
and recognized as a cumulative effect from an accounting change. The net
book value of the Company's goodwill at June 30, 2002 was $44.1 million.
Amortization of goodwill amounted to approximately $0.5 and $0.9 million
in the second quarter and first half of 2001, respectively.
The Company also adopted SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-lived Assets." This statement, which supersedes SFAS No.
121, addresses accounting and financial reporting for the impairment or
disposal of long-lived assets. There was no material effect on the results
of operations or financial position as a result of adopting this standard.
The nonrecurring charge related to the impairment of unusable assets in
the Compressor group, recorded during the first quarter, was determined in
accordance with the provisions of SFAS No. 144.
Page 8
INDEPENDENT ACCOUNTANTS' REPORT
August 12, 2002
Tecumseh Products Company
Tecumseh, Michigan
We have reviewed the consolidated condensed balance sheet of Tecumseh
Products Company and Subsidiaries as of June 30, 2002 and the related
consolidated condensed statements of income and cash flows for the three months
and six months ended June 30, 2002 and 2001. These financial statements are the
responsibility of the Company's management.
We have conducted our review in accordance with standards established by
the American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the consolidated condensed financial statements referred to
above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with auditing standards
generally accepted in the United States of America, the consolidated balance
sheet as of December 31, 2001, and the related consolidated statements of
income, stockholders' equity, and cash flows for the year then ended (not
presented herein); and in our report dated January 25, 2002, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying consolidated condensed balance
sheet as of December 31, 2001, is fairly stated in all material respects in
relation to the consolidated balance sheet from which it has been derived.
CIULLA, SMITH & DALE, LLP
Certified Public Accountants
Southfield, Michigan
Page 9
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Consolidated net sales for the second quarter of 2002 were $395.3 million,
compared to $382.0 million in the second quarter of 2001. Consolidated net sales
for the six months ended June 30, 2002 amounted to $728.7 million compared to
$786.7 million in the first half of 2001.
Consolidated net income for the second quarter of 2002 amounted to $23.4 million
or $1.27 per share compared to $17.5 million or $0.94 per share in the second
quarter of 2001. Consolidated net income for the six months ended June 30, 2002
amounted to $27.5 million or $1.49 per share compared to $31.5 million or $1.68
per share for the same period in 2001. Included in the 2002 first half results
are nonrecurring charges 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 nonrecurring charges and
the cumulative effect of the accounting change, first half results would have
been $33.4 million or $1.81 per share. Results for 2001 were unfavorably
impacted by the settlement of a $1.3 million foreign tax claim, which had the
effect of increasing the effective tax rate to 41% and 39% for the second
quarter and first half respectively.
Sales and profits for the second quarter 2002 improved over the prior year in
all the Company's segments with the largest improvement occurring in the
compressor segment. Despite the improved year over year sales in the second
quarter, sales for the first half of the year still lagged the prior year in the
Compressor and Engine & Power Train Groups.
Compressor Products
Second quarter 2002 sales in the Company's Compressor business increased to
$243.3 million from $236.1 million in the second quarter of 2001. This increase
was attributable to greater sales of compressors for refrigeration & freezer
applications. Improved marketing efforts and more competitive pricing afforded
by the Company's low cost manufacturing centers have helped the Company to
capitalize on the improving market conditions in the refrigeration and freezer
compressor sector. Compressor business sales in the first six months of 2002
declined $35.5 million or approximately 7.5% from the first six months of 2001.
This decline is primarily attributable to lower sales for compressors used in
unitary and room air conditioning applications. While some sales were lost in
the first quarter due to ramp up and production problems experienced at the
Company's Tupelo facility, the main impetus continues to be competitive
pressures from Asian producers and a decline in sales of compressors for unitary
applications.
Compressor business operating income for the second quarter of 2002 amounted to
$28.6 million compared to $23.3 million in the second quarter of 2001. Operating
income for the six months ended June 30, 2001 amounted to $43.6 million compared
to $36.8 million in the first six months of 2001. The increase in operating
income for the second quarter and first half of 2002 over the comparable 2001
periods reflects the effect of cost reduction efforts implemented over the past
12-18 months.
Page 10
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results from the Company's Brazilian compressor operations for the second
quarter and first six months of 2002 have declined from the comparable prior
year periods, reflecting a shift in mix to lower priced compressors and
increased material and operating costs. While the Brazilian export market
remains strong, sales in the local Brazilian and certain South American markets,
where margins are typically higher, have declined due to weaker economic
conditions and unfavorable weather. Despite these declines, Brazilian operations
remain a key to future competitiveness and for the three and six-month periods
ended June 30, 2002 represented 35% and 41% of operating income for the
Compressor business.
Operations in India had the most successful quarter since operations commenced,
contributing 9% of the Compressor Group's operating income for the second
quarter 2002. Increases in both domestic and export volumes were responsible for
the improvement in these operations.
Engine & Power Train Products
Engine & Power Train business sales amounted to $111.3 million in the second
quarter of 2002 compared to $109.2 million in the second quarter of 2001. Sales
in the first half of 2002 were $222.8 million compared to $246.3 million in the
first half of 2001. The Engine & Power Train business operating income was $2.1
million in the second quarter of 2002 compared to an operating loss of $0.1
million in the second quarter of 2001. For the first half of 2002 the Group
incurred an operating loss of $0.2 million compared to an operating profit of
$4.4 million in 2001.
Despite flat sales and an unfavorable product sales mix, second quarter results
in the Engine & Power Train Group were improved over the prior year second
quarter due to the favorable impact of operational improvements and cost cutting
efforts. Unit sales of engines for walk behind rotary mowers were improved in
the second quarter 2002 compared to the same period in 2001as a result of strong
sell through of Toro products with Tecumseh engines that are marketed through
Home Depot and Toro's dealer distribution network. These products have
experienced a high degree of consumer acceptance and the Company's
industry-leading use of Sentinel(R) equipment for quality assurance has been
highly successful. The increase in second quarter unit sales volume of engines
for walk behind rotary motors was offset by declines in engines sold for snow
throwers and specialty lawn care products. These declines are primarily due to
lower overall market demand for these product categories.
For the first half of 2002, North American unit sales of engines are 11% below
the same period 2001, primarily due to the snow thrower and specialty lawn care
product segments, as noted above. Declines in these segments were partially
offset by increased unit sales in the generator and pressure washer product
categories where the Company has captured share at OEM's not affiliated with
other engine manufacturers. With respect to engines for walk behind rotary
mowers, the strong second quarter has resulted in first half unit sales being
approximately equal to first half 2001.
Pump Products
Sales and operating profits in the Pump business both reflected increases over
2001 levels. Sales in the second quarter of 2002 amounted to $40.7 million
compared to $36.7 million in 2002.
Page 11
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Year-to-date sales amounted to $69.0 million in 2002 compared to $68.0 million
the previous year. Operating income amounted to $6.2 million in the quarter
ended June 30, 2002 compared to $5.0 million in the same period of 2001.
Operating income in the first half of 2002 increased to $9.1 million from $8.0
million in 2001.
The improvements in sales and operating income for the quarter are attributable
to the residential pump sector, particularly water gardening products, which
benefited from the introduction of a new line of products, partially offset by
weakness in the general market for industrial products. Operating results were
improved for the first half, despite flat sales, through effective cost control.
Nonrecurring Item
First half 2002 results were adversely affected by a $4.5 million ($2.8 million
net of tax or $0.15 per share) nonrecurring charge recorded in the first quarter
in the Compressor segment. The charge related to the decision to relocate the
production of additional rotary compressor product lines to Brazil from the
United States and consists of the write-off of certain equipment which cannot be
used in Brazil.
Accounting Changes
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 142 "Goodwill and Other Intangible Assets." Under SFAS No.
142, goodwill is no longer amortized, but is subject to impairment testing on at
least an annual basis. As of December 31, 2001, the net book value of the
Company's goodwill was $45.1 million. However, as required by the statement, 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. Accordingly, goodwill amounting to $4.8 million ($3.1 million net of
tax) has been written-off and recognized as a cumulative effect from an
accounting change. The net book value of the Company's goodwill at June 30, 2002
was $44.1 million. Amortization of goodwill amounted to approximately $0.5 and
$0.9 the second quarter and first half of 2001, respectively.
The Company also adopted SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-lived Assets." This statement, which supersedes SFAS No. 121,
addresses accounting and financial reporting for the impairment or disposal of
long-lived assets. There was no material effect on the results of operations or
financial position as a result of adopting this standard. The nonrecurring
charge related to the impairment of unusable assets in the Compressor group,
recorded during the first quarter, was determined in accordance with the
provisions of SFAS No. 144.
Interest Income and Other, Net
Interest income and other, net amounted to $3.0 million in the second quarter of
2002 compared to $4.6 million in the second quarter of 2001. Interest income and
other, net amounted to $5.8 million in the first half of 2002 compared to $9.2
million in the first half of 2001. This reduction resulted primarily from lower
overall interest rates as well as lower available invested cash in Brazil.
Page 12
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Taxes on Income
The effective income tax rate was 35.5% in the second quarter of 2002 and 35.4%
for the first half of the year, compared to 41.3% and 39.4% in the comparable
periods of 2001. The higher effective rate in the second quarter of 2001
reflects the resolution of a $1.3 million foreign tax claim in Italy.
Outlook
On a consolidated basis, the second half of 2002 is expected to improve over the
comparable 2001 period with the expected improvement attributable to the
Compressor and Pump segments.
In spite of the continuing erosion in the air conditioning markets, both room
air and unitary applications, the Compressor Group is expected to achieve
improved operating results in the second half of 2002. These results will
continue to be driven by cost improvements recognized as a result of prior year
restructuring actions and, to a lesser extent, sales that are expected to be
improved over last year's weak fourth quarter. There are several cautionary
risks that could impact these results, particularly with the Company's greater
dependency on its operations in Brazil. The weakness of the Brazilian and
Argentinean economies, the upcoming presidential elections in Brazil and the
weather in the fourth quarter are all key factors that could affect the results
in Brazil.
Results of the Engine & Power Train Group for the second half of 2002 are
expected to lag behind the prior year, largely due to an anticipated reduction
in demand for snow applications to more historical levels from last year's
record year. The Company continues to maintain a dominant market share in
engines for this application, therefore, fluctuations in market demand, which
are highly dependent on weather, have a direct impact on the volumes of engines
sold.
As a result of past performance trends and market conditions that include
production over-capacity and inexpensive Asian-based production sources, the
Company will continue to undertake actions designed to improve its competitive
position in all of its major markets. These actions will likely include
production relocation and consolidation, development of new strategic
relationships with customers, development of new products, and expansion into
new product segments. These actions could involve joint ventures and business
combinations. The Company expects that some of these initiatives will still
occur in 2002, particularly with respect to the Engine & Transmission
operations, although the exact timing will depend on the conclusion and outcome
of negotiations with outside parties, which cannot be predicted at this time.
Accordingly, future results will likely be impacted by one or more nonrecurring
charges. While the amount and timing of these charges cannot currently be
accurately predicted, they may affect several quarterly periods or years, and
they could be material to the reported results in the particular quarter or year
in which they are recorded.
Page 13
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY, CAPITAL RESOURCES AND RISKS
Historically, the Company's primary source of cash has been net cash provided by
operations. Operating activities in the first half of 2002 generated cash flows
of $68.3 million compared to $56.8 million in 2001. This improvement resulted
primarily from a greater source of cash from working capital items. Working
capital from $603.4 million at June 30, 2002 was down slightly from $605.7
million at the end of 2001. First half 2002 capital spending was $35.0 million
compared to $30.8 million in the first half of 2001. Total capital spending for
2002 is projected to remain near 2001 levels.
Working capital requirements, planned capital investment and stock repurchase
expenditures, if any, for 2002 are expected to be financed primarily through
internally generated funds; however, short-term borrowings and various financial
instruments are utilized from time to time to hedge currency risk and finance
foreign working capital requirements. The Company maintains a $100 million
revolving credit facility that is available for general corporate purposes. The
Company may also utilize long-term financing arrangements in connection with
state investment incentive programs.
The Company will continue to focus its efforts on improving the profitability
and competitiveness of its worldwide operations. It is likely that additional
production relocation and consolidation initiatives will take place during 2002
that could have a material effect on the consolidated financial position and
future results of operations of the Company. These initiatives could include
joint ventures or business combinations.
The Company currently has no board authorization to repurchase shares of Class A
or B stock.
Environmental Matters
The Company is subject to various federal, state and local laws relating to the
protection of the environment, and is actively involved in various stages of
investigation or remediation for sites where contamination has been alleged.
(See Note 6 to the financial statements.) Liabilities, relating to probable
remediation activities, are recorded when the costs of such activities can be
reasonably estimated based on the facts and circumstances currently known.
Difficulties exist estimating the future timing and ultimate costs to be
incurred due to uncertainties regarding the status of laws, regulations, levels
of required remediation, changes in remediation technology and information
available.
At June 30, 2002 and December 31, 2001, the Company had accrued $35.1 and $36.1
million, respectively, for environmental remediation, including $28.4 and $28.7
million, respectively, relating to the Sheboygan River and Harbor Superfund
Site. As these matters continue toward final resolution, amounts in excess of
those already provided may be necessary to discharge the Company from its
obligations for these sites. Such amounts, depending on their amount and timing,
could be material to reported net income in the particular quarter or period in
which they are recorded. In addition, the ultimate resolution of these matters,
either individually or in the aggregate, could be material to the consolidated
financial statements.
Page 14
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENTS RELATING TO FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 that are subject to the safe
harbor provisions created by that Act. In addition, forward-looking statements
may be made orally in the future by or on behalf of the Company. Forward-looking
statements can be identified by the use of terms such as "expects", "should",
"may", "believes", "anticipates", "will", and other future tense and
forward-looking terminology, or by the fact that they appear under the caption
"Outlook."
Readers are cautioned that actual results may differ materially from those
projected as a result of certain risks and uncertainties, including, but not
limited to, i) changes in business conditions and the economy in general in both
foreign and domestic markets and the effect of terrorist activity and armed
conflict; ii) weather conditions affecting demand for air conditioners, lawn and
garden products and snow throwers; iii) the extent to which the decline in
demand for lawn and garden and utility engines will continue, and the success of
the Company's ongoing effort to bring costs in line with projected production
levels and product mix; iv) financial market changes, including fluctuations in
interest rates and foreign currency exchange rates; v) economic trend factors
such as housing starts; vi) emerging governmental regulations; vii) availability
of materials; viii) actions of competitors; ix) the ultimate cost of resolving
environmental matters; x) the Company's ability to profitably develop,
manufacture and sell both new and existing products; xi) the extent of any
business disruption that may result from the restructuring and realignment of
the Company's manufacturing operations, the ultimate cost of those initiatives
and the amount of savings actually realized; xii) the extent of savings actually
realized from the Company's early retirement program; and xiii) potential
political and economic adversities that could adversely affect anticipated sales
and production in Brazil. These forward-looking statements are made only as of
the date hereof, and the Company undertakes no obligation to update or revise
the forward-looking statements, whether as a result of new information, future
events or otherwise.
Page 15
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - Item 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to risk during the normal course of business from credit
risk associated with accounts receivable and from changes in interest rates,
commodity prices and foreign currency exchange rates. The exposure to these
risks is managed through a combination of normal operating and financing
activities which include the use of derivative financial instruments in the form
of foreign currency forward exchange contracts and commodity forward purchasing
contracts. A discussion of the Company's policies and procedures regarding the
management of market risk and the use of derivative financial instruments was
provided in its Annual Report on Form 10-K for year ended December 31, 2001 in
Item 7A and in Notes 1 and 10 of the Notes to Consolidated Financial Statements.
The Company does not utilize financial instruments for trading or other
speculative purposes. There have been no changes in these policies or procedures
during the first six months of 2002.
The Company utilizes foreign currency forward exchange contracts to hedge
foreign currency receivables, payables and other known transactional exposures
for periods consistent with the expected cash flows of the underlying
transactions. The contracts generally mature within one year and are designed to
limit exposure to exchange rate fluctuations because gains and losses on the
hedged transactions offset gains and losses on the contracts. At June 30, 2002
and December 31, 2001, the Company held foreign currency forward exchange
contracts and foreign currency call options with total notional values in the
amount of $6.8 and $15.0 million, respectively.
The Company uses commodity forward purchasing contracts to help control the cost
of traded commodities, primarily copper and aluminum, used as raw material in
the production of compressor motors and components and engines. Local management
is allowed to contract commodity forwards for a limited percentage of projected
raw material requirements up to one year in advance. The total values of
commodity forwards outstanding at June 30, 2002 and December 31, 2001 were $14.8
and $25.8 million, respectively.
Page 16
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit
Number Description
None
(b) On June 28, 2002 the Company filed a report on Form 8-K reporting
Item 5, Other Events; a press release regarding the retirement of a
member of the Board of Directors.
Page 17
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TECUMSEH PRODUCTS COMPANY
-------------------------
(Registrant)
Dated: August 13, 2002 BY: /s/ DAVID W. KAY
--------------------------- ------------------------------
David W. Kay
Vice President, Treasurer and
Chief Financial Officer (on behalf
of the Registrant and as principal
financial officer)
Page 18