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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 September 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 October 31, 2002
-------------------------------------------------------------------------------------------------------
Class B Common Stock, $1.00 par value 5,077,746
Class A Common Stock, $1.00 par value 13,401,938
Page 1
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) SEPTEMBER 30, DECEMBER 31,
ASSETS 2002 2001
-------------------------------
Current Assets:
Cash and cash equivalents $ 369.2 $ 317.6
Accounts receivable, less allowances for doubtful accounts of $7.7 million in 2002
and 2001 203.0 207.1
Inventories 262.4 261.9
Deferred and recoverable income taxes 44.8 58.0
Other current assets 17.6 14.9
---------- ----------
Total current assets 897.0 859.5
Property, plant, and equipment, at cost, net of accumulated depreciation of $520.0
million in 2002 and $561.1 million in 2001 389.2 431.9
Goodwill 43.7 45.1
Deferred income taxes 52.6 29.7
Prepaid pension expense 158.9 137.3
Other assets 16.1 16.3
---------- ----------
Total assets $ 1,557.5 $ 1,519.8
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable, trade $ 121.3 $ 101.3
Income taxes payable 7.4 4.2
Short-term borrowings 10.0 11.6
Accrued liabilities 138.1 136.7
---------- ----------
Total current liabilities 276.8 253.8
Long-term debt 44.0 13.7
Deferred income taxes 3.0 3.0
Other postretirement benefit liabilities 206.4 203.0
Product warranty and self-insured risks 21.0 23.9
Accrual for environmental matters 28.4 29.4
Pension liabilities 17.3 15.3
---------- ----------
Total liabilities 596.9 542.1
---------- ----------
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 1,075.5 1,051.5
Accumulated other comprehensive income (133.4) (92.3)
---------- ----------
Total stockholders' equity 960.6 977.7
---------- ----------
Total liabilities and stockholders' equity $ 1,557.5 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Net Sales $ 310.9 $ 313.1 $ 1,039.6 $ 1,099.8
Cost of sales and operating expenses 261.1 263.4 882.1 943.2
Selling and administrative expenses 29.4 28.0 88.9 89.6
Nonrecurring charges --- 29.3 4.5 29.3
---------- ---------- ---------- ----------
Operating Income 20.4 (7.6) 64.1 37.7
Interest expense (1.4) (0.9) (3.5) (3.4)
Interest income and other, net 3.0 7.4 8.8 16.6
---------- ---------- ---------- ----------
Income before taxes and cumulative effect of change in
accounting principle 22.0 (1.1) 69.4 50.9
Taxes on income 7.8 (6.3) 24.6 14.2
---------- ---------- ---------- ----------
Income before cumulative effect of accounting change 14.2 5.2 44.8 36.7
Cumulative effect of accounting change for goodwill, net of tax --- --- (3.1) ---
---------- ---------- ---------- ----------
Net Income $ 14.2 $ 5.2 $ 41.7 $ 36.7
Basic and Diluted Earnings Per Share:
Income before cumulative effect of accounting change $ 0.77 $ 0.28 $ 2.42 $ 1.97
Change in accounting for goodwill --- --- (0.17) ---
---------- ---------- ---------- ----------
Net income $ 0.77 $ 0.28 $ 2.25 $ 1.97
========== ========== ========== ==========
Weighted Average Shares (in thousands of shares) 18,480 18,545 18,480 18,650
========== ========== ========== ==========
Cash Dividends Declared Per Share $ 0.32 $ 0.32 $ 0.96 $ 0.96
========== ========== ========== ==========
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)
(Dollars in millions) NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2002 2001
--------- --------
Cash Flows From Operating Activities:
Income before cumulative effect of change in accounting principle $ 44.8 $ 36.7
Adjustments to reconcile income before cumulative effect of change in
accounting principle to net cash provided by operating activities:
Depreciation and amortization 48.7 55.2
Nonrecurring charges 4.5 29.3
Accounts receivable (3.7) 30.1
Inventories (15.3) 6.0
Payables and accrued expenses 32.9 (20.7)
Prepaid pension expense (21.6) (21.6)
Other (10.3) (7.7)
-------- --------
Cash Provided By Operating Activities 80.0 107.3
-------- --------
Cash Flows From Investing Activities:
Business acquisition, net of cash acquired (4.0) (15.5)
Capital expenditures (41.3) (48.6)
-------- --------
Cash Used In Investing Activities (45.3) (64.1)
-------- --------
Cash Flows From Financing Activities:
Dividends paid (17.7) (17.9)
Increase in borrowings, net 40.8 0.7
Repurchases of common stock --- (18.0)
-------- --------
Cash Provided By (Used In) Financing Activities 23.1 (35.2)
-------- --------
Effect Of Exchange Rate Changes On Cash (6.2) (11.3)
-------- --------
Increase (Decrease) In Cash and Cash Equivalents 51.6 (3.3)
Cash and Cash Equivalents:
Beginning of Period 317.6 268.2
-------- --------
End of Period $ 369.2 $ 264.9
======== ========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
Page 4
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. 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:
SEPTEMBER 30, DECEMBER 31,
(Dollars in millions) 2002 2001
-------------------------------------------------------------------------------------------------------------
Raw material and work in process $132.6 $137.1
Finished goods 113.3 108.3
Supplies 16.5 16.5
-------------------------------------------------------------------------------------------------------------
Total Inventories $262.4 $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 1. 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 NINE MONTHS ENDED
(Dollars in millions) SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
------------------------------------------------------------------------------------------------------------------------
Net Income $14.2 $5.2 $41.7 $36.7
Other comprehensive income (expense):
Foreign currency translation adjustments (33.4) (8.9) (41.1) (31.2)
Deferred gain from hedging .4 .4
------------------------------------------------------------------------------------------------------------------------
Total Comprehensive Income (Loss) ($19.2) ($3.3) $ 0.6 $ 5.9
========================================================================================================================
5. 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. 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 September 30, 2002 and December 31, 2001, the Company had accrued $28.3
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 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 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 and remediation of two other on site source areas is
planned for 2003. 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.
Page 6
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION -- ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
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 with joint funding is scheduled to
occur in 2003 involving a stream segment downstream of the source area. The
Company has provided for these costs. Although participation in a
cooperative remedial effort after 2003 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 September 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.
6. 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.
Page 7
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION -- ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
7. 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
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 NINE MONTHS ENDED
(Dollars in millions) SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
-------------------------------------------------------------------------------------------------------------------------
NET SALES:
Compressor Products $184.6 $175.5 $ 621.5 $ 647.9
Engine & Power Train Products 97.9 111.4 320.7 357.7
Pump Products 28.4 26.2 97.4 94.2
-------------------------------------------------------------------------------------------------------------------------
Total Net Sales $310.9 $313.1 $1,039.6 $1,099.8
=========================================================================================================================
OPERATING INCOME:
Compressor Products $ 19.6 $ 15.2 $ 63.2 $ 52.0
Engine & Power Train Products 0.2 5.5 --- 9.9
Pump Products 3.3 2.7 12.4 10.7
Corporate expenses (2.7) (1.7) (7.0) (5.6)
Nonrecurring charges --- (29.3) (4.5) (29.3)
-------------------------------------------------------------------------------------------------------------------------
Total Operating Income 20.4 (7.6) 64.1 37.7
Interest expense (1.4) (0.9) (3.5) (3.4)
Interest income and other, net 3.0 7.4 8.8 16.6
-------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE TAXES AND CUMULATIVE EFFECT
OF ACCOUNTING CHANGE $ 22.0 ($1.1) $ 69.4 $ 50.9
=========================================================================================================================
8. 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 September 30, 2002 was $43.7
million. Amortization of goodwill amounted to approximately $1.1 million in
the first nine months of 2001.
On January 1, 2002, 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
Page 8
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION -- ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS -- (CONTINUED)
unusable assets in the Compressor group, recorded during the first quarter,
was determined in accordance with the provisions of SFAS No. 144.
9. On October 10, 2002, the Company announced a voluntary recall program to
correct engines for snow thrower, chipper-shredder and other applications
with regard to a potential leak in the fuel lines. While no reports of
accidents due to the damaged fuel lines have been received, the Company
contacted the Consumer Products Safety Commission regarding voluntarily
recalling and repairing all the potentially affected engines. Most of the
engines should be repaired before reaching the consumer. The Company has
adequate warranty reserves to cover the cost of the recall.
Page 9
INDEPENDENT ACCOUNTANTS' REPORT
November 5, 2002
Tecumseh Products Company
Tecumseh, Michigan
We have reviewed the consolidated condensed balance sheet of Tecumseh
Products Company and Subsidiaries as of September 30, 2002 and the related
consolidated condensed statements of income and cash flows for the three months
and nine months ended September 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 10
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION -- ITEM 2
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Consolidated sales for the third quarter of 2002 amounted to $310.9 million,
compared to sales of $313.1 million in the third quarter of 2001. Sales for the
nine months ended September 30, 2002 were $1,039.6 million compared to sales of
$1,099.8 million in the first nine months of 2001.
Consolidated net income for the third quarter of 2002 amounted to $14.2 million
or $0.77 per share compared to $5.2 million or $0.28 per share in the third
quarter of 2001. Included in reported results for the third quarter of 2001 are
several one-time items such as a nonrecurring charge of $29.3 million ($18.9
million net of tax or $1.02 per share) for an early retirement incentive
program, a $5.2 million ($0.28 per share) tax credit resulting from a refund of
prior years' federal income taxes, and $2.0 million net of tax ($0.11 per share)
for interest income associated with the tax credit. On a proforma basis
(excluding one-time items), third quarter 2001 earnings would have been $0.91
per share.
Consolidated net income for the first nine months of 2002 amounted to $41.7
million or $2.25 per share compared to $36.7 million or $1.97 per share in the
same period of 2001. Included in the 2002 nine month 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." On a proforma basis, nine month results would have been
$47.6 million or $2.58 per share. For comparative purposes, 2001 proforma
earnings would have been $48.4 million or $2.60 per share for the nine month
period.
The decline in third quarter proforma results was due primarily to lower sales
and profits in the Company's Engine & Power Train segment, and to a lesser
extent, to increased research and development expenditures in the Compressor
segment and corporate spending. These items were partially offset by the
favorable effects of a 37% devaluation of the Brazilian Reais, most of which
occurred in the month of September. The net gain from re-measurement of foreign
denominated receivables and payables in Brazil at September 30, 2002 amounted to
$4.2 million or $0.15 per share after tax.
Compressor Products
Third quarter 2002 sales in the Company's Compressor business increased to
$184.6 million from $175.5 million in the third quarter of 2001. Sales in the
nine months ended September 30, 2002 amounted to $621.5 million compared to
$647.9 million in the first nine months of 2001. The increase in sales in the
third quarter is due to improved sales in almost all of the Compressor group
market segments, particularly the residential refrigeration market where sales
have improved year over year for two consecutive quarters. Foreign currency
translation reduced sales by $3.7 million in the quarter. For the nine month
period, sales declined as a result of lost
Page 11
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION -- ITEM 2
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
domestic and export market share for compressors used in room and unitary air
conditioning applications.
Compressor business operating profit for the third quarter of 2002 amounted to
$19.6 million compared to $15.2 million in the third quarter of 2001.
Year-to-date operating income for the nine months ended September 30, 2002 and
2001 amounted to $63.2 and $52.0 million, respectively. The improvement in
operating margins is attributable to greater coverage of fixed costs, the
positive effects of restructuring actions implemented over the last twelve
months, and the favorable effects that result from devaluation of the Brazilian
Reais. This improvement in operating margins was partially offset by declining
margins on high volume commodity-type compressors and accelerated spending on
new product development.
Results from the Company's Brazilian compressor operations for the third quarter
and for the nine month periods were mixed. While sales have increased
approximately 20% and 32% for the third quarter and nine month periods,
respectively, operating profits are flat. A continuing shift in production mix
to lower priced compressors, both in the refrigeration and air conditioning
markets, and upward pressures on costs are responsible for the lower earnings as
a percentage of sales. On the other hand, Brazilian operating margins have
benefited from the favorable effects of the weak Brazilian currency, as
approximately two-thirds of its year-to-date sales were exported and denominated
in other currencies. The Company's Brazilian operations contributed
approximately 74% of the Compressor business' operating profit in the third
quarter 2002, and approximately 52% of the business' operating profit for the
nine months ended September 30, 2002.
During the third quarter, the Brazilian operations utilized a government
sponsored program designed to promote increased exports. Under the program, the
Company borrowed approximately $40 million at favorable rates and reinvested the
proceeds in higher yielding certificates of deposit. The effect of this
arrangement increased the Company's net interest income by $0.1 million in the
third quarter 2002.
Results from operations in France and India improved during the quarter.
Together, these operations had a nearly 15% improvement in sales when compared
to a year ago and operating income improved by approximately $2 million.
Engine & Power Train Products
Sales in the third quarter of 2002 declined to $97.9 million from $111.4 million
in the third quarter of 2001. Engine & Power Train sales in the nine months
ended September 30, 2002 amounted to $320.7 million compared to $357.7 million
in the first nine months of 2001. Operating income for the three months ended
September 30, 2002 amounted to $0.2 million compared to $5.5 million in the
third quarter of 2001. For the nine months ended September 30, 2002, the Engine
& Power Train group broke even compared to an operating income of $9.9 million
in the first nine months of 2001. The decline in sales and profits for the three
month period ended September 30, 2002 is primarily attributable to lower demand
for engines for snow throwers compared to above average demand in the prior
year. A shift in mix to less profitable engines for walk behind rotary mowers
from engines for specialty lawn care products also contributed to lower earnings
in the quarter.
Page 12
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION -- ITEM 2
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
For the first nine months of 2002, domestic unit sales were 13% below the same
period 2001, primarily due to the snow thrower and specialty lawn care product
segments, as noted above. To a small extent, these declines were offset by
increased engine unit sales in the portable power generation and pressure washer
categories, where the Company has captured share at OEM's not affiliated with
other engine manufacturers. However, third quarter sales in the generator market
did not meet previous expectations due to lack of severe storm activity.
Pump Products
Sales in the third quarter of 2002 increased to $28.4 million from $26.2 million
in the third quarter of 2001. Pump business sales in the nine month period ended
September 30, 2002 increased to $97.4 million compared to $94.2 million in 2001.
Operating profit in the third quarter of 2002 and 2001 respectively amounted to
$3.3 million and $2.7 million. Year-to-date operating profit amounted to $12.4
million in 2002 compared to $10.7 million in 2001. The improvements in sales and
operating income for the quarter and nine month periods 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.
Nonrecurring Charges
Nine month 2002 results were adversely affected by a $4.5 million ($2.8 million
net of tax or $0.15 per share) nonrecurring charge in the Compressor segment.
The charge, which was recorded in the first quarter, relates to the decision to
relocate the production of additional rotary compressor product lines to Brazil
from the United States and consists of the write-off of certain equipment which
cannot be used in Brazil.
Third quarter and nine month 2001 results were adversely affected by a $29.3
million pretax ($18.9 million net of tax) nonrecurring charge for an early
retirement incentive plan. The plan was available to eligible Corporate, North
American Compressor Group and Engine & Power Train Group employees. 250
employees, representing approximately 78% of those eligible, or approximately
20% of the total salaried workforce in the eligible groups, elected early
retirement. Ongoing cost savings from this action were estimated to be in a
range of $10 to $12 million annually.
Subsequent Event
On October 10, 2002, the Company announced a voluntary recall program to correct
engines for snow thrower, chipper-shredder and other applications with regard to
a potential leak in the fuel lines. While no reports of accidents due to the
damaged fuel lines have been received, the Company contacted the Consumer
Products Safety Commission regarding voluntarily recalling and repairing all the
potentially affected engines. Most of the engines should be repaired before
reaching the consumer. The Company has adequate warranty reserves to cover the
cost of the recall.
Page 13
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION -- ITEM 2
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 September 30,
2002, was $43.7 million. Amortization of goodwill amounted to approximately $1.1
million in the first nine months of 2001.
On January 1, 2002, 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 third quarter of
2002 compared to $7.4 million in the third quarter of 2001. Interest income and
other, net amounted to $8.8 million in the first nine months of 2002 compared to
$16.6 million in the first nine months of 2001. This reduction resulted
primarily from lower overall interest rates as well as lower available invested
cash in Brazil.
Taxes on Income
The effective income tax rate for the first nine months of 2002 was 35.5%,
compared to 35.5% for the same period in 2001 after eliminating the effects of
the $5.2 million tax refund and the resolution of a $1.3 million foreign tax
claim in Italy.
Outlook
On a proforma basis (excluding one-time items), full year results are expected
to lag behind the prior year. Anticipated improvements in the Compressor and
Pump segments are expected to be more than offset by the declining performance
of the Engine & Power Train group.
In spite of the continuing erosion in the room and unitary air conditioning
markets, the Compressor group is expected to achieve improved operating results
for the full year. 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
Page 14
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION -- ITEM 2
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
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 pending change in political leadership has been cited
as the cause of the declining economic situation in Brazil, including rapid
currency devaluation, slowing economic growth and the possibility of rising
inflation. While currency devaluation has a positive effect on reported results
due to the operation's significant export volumes, poor local conditions may
adversely affect the peak selling season in Brazil. In addition, there is a high
degree of uncertainty with respect to the magnitude and direction of further
currency movements, making it very difficult to predict overall financial
results. Furthermore, while second and third quarter refrigeration and freezer
markets have been improved, recent announcements by white good manufacturers
suggest these improvements may not continue into the fourth quarter.
Results of the Engine & Power Train group for the full year are expected to
significantly lag behind the prior year, partly 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. The decline is also attributable to deteriorating margins due to
competitive pricing pressures. In recognition of the continued trend toward big
box retailers, the Company has initiated strategies to win market share at those
OEM's positioned to deliver future growth. While the Company has had some
success, as evidenced by its recent placement on the entire White(R) tractor
product line, overall cost improvements are still needed to achieve
substantially improved returns. Recently, the Company entered into an agreement,
subject to a number of conditions, to purchase a facility in Brazil to establish
a low cost manufacturing center for certain engines and component parts. It is
expected that the Company will finalize plans for the restructuring of the
Engine & Power Train group in the fourth quarter and will likely incur a
nonrecurring charge as a result.
In addition to the initiative being pursued in the Engine & Power Train group,
the Company is studying alternatives for improving the Company's overall return
to its investors. These alternatives include further 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 acquisitions. Efforts to study
and implement these strategies have been accelerating through the year.
Corporate expenses in the third quarter 2002 exceeded the previous year third
quarter by $1.1 million primarily as a result of expenditures necessary to
create and implement these developing plans.
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 nine months of 2002 generated cash
flows of $80.0 million compared to $107.3 million in 2001. The decline resulted
primarily from decreased earnings before nonrecurring charges. Working capital
of $620.2 million at September 30, 2002 was up slightly from $605.7 million at
the end of 2001. First nine months 2002 capital spending was $41.3 million
compared to $48.6 million in the first nine months of 2001. Total capital
spending for 2002 is projected to remain near 2001 levels.
Page 15
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION -- ITEM 2
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Working capital requirements and planned capital investment 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
Brazilian operations borrowed approximately $40 million during the third quarter
2002 to utilize government sponsored programs to promote exports.
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 and business acquisitions.
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 5 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 September 30, 2002 and December 31, 2001, the Company had accrued $35.1 and
$36.1 million, respectively, for environmental remediation, including $28.3 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.
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",
Page 16
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION -- ITEM 2
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
"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, portable power generators 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 17
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 nine 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 September 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 $4.7 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 September 30, 2002 and December 31, 2001 were
$16.8 and $25.8 million, respectively.
Page 18
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 4
CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this Form 10-Q, the Company carried out
an evaluation under the supervision and with the participation of the Company's
management, including the Company's President and Chief Executive Officer and
the Company's Vice President, Treasurer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation,
the Company's President and Chief Executive Officer along with the Company's
Vice President, Treasurer and Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective in timely alerting
them to material information relating to the Company (including its consolidated
subsidiaries) required to be included in the Company's periodic SEC filings.
There have been no significant changes in the Company's internal controls or in
other factors which could significantly affect internal controls subsequent to
the date the Company carried out its evaluation.
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit
Number Description
------ -----------
99.1 Certification of President and Chief Executive
Officer
99.2 Certification of Vice President, Treasurer and
Chief Financial Officer
(b) On August 13, 2002, the Company filed a report on Form 8-K
reporting the submission of the Certification of its chief
executive officer and its chief financial officer of the
Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 2002.
On October 1, 2002, the Company filed a report on Form 8-K
reporting its earnings expectation for the quarter ended
September 30, 2002.
On October 10, 2002, the Company filed a report on Form 8-K
reporting an engine product recall.
Page 20
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: November 7, 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 21
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
CERTIFICATIONS
I, Todd W. Herrick, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Tecumseh Products
Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the Registrant's auditors and the Audit
Committee of Registrant's Board of Directors (or persons performing the
equivalent function);
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the Registrant's
ability to record, process, summarize and report financial data
and have identified for the Registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
Page 22
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
CERTIFICATIONS (CONTINUED)
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 7, 2002 BY: /s/ TODD W. HERRICK
---------------------- -------------------------
Todd W. Herrick
President and Chief Executive Officer
Page 23
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
CERTIFICATIONS (CONTINUED)
I, David W. Kay, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Tecumseh Products
Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this quarterly report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the Registrant's auditors and the Audit Committee of
Registrant's Board of Directors (or persons performing the equivalent function);
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
Page 24
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
CERTIFICATIONS (CONTINUED)
6. The Registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 7, 2002 BY: /s/ DAVID W. KAY
------------------ ----------------------
David W. Kay
Vice President, Treasurer and
Chief Financial Officer
Page 25
Exhibit Index
Exhibit No. Description
99.1 Certification of President
and Chief Executive Officer
99.2 Certification of Vice President,
Treasurer and Chief Financial
Officer