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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, 2003
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) (Zip Code)
Registrant's telephone number, including area code:
(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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
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 September 30, 2003
- --------------------------------------------------------------------------------
Class B Common Stock, $1.00 par value 5,077,746
Class A Common Stock, $1.00 par value 13,401,938
Page 1
TABLE OF CONTENTS Page
Part I. Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheets 3
Consolidated Condensed Statements of Income 4
Consolidated Condensed Statements of Cash Flows 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition 13
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Item 4. Controls and Procedures 23
Part II. Other Information 24
Item 6. Exhibits and Reports on Form 8-K. 24
Signatures 25
Certification of CEO Pursuant to Section 302 Exh 31.1
Certification of CFO Pursuant to Section 302 Exh 31.2
Certification of CEO Pursuant to Section 906 Exh 32.1
Certification of CFO Pursuant to Section 906 Exh 32.2
Page 2
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 1
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(Dollars in millions, except par value) SEPTEMBER 30, December 31,
ASSETS 2003 2002
---------- ----------
Current Assets:
Cash and cash equivalents $ 280.5 $ 333.1
Accounts receivable, less allowance for doubtful accounts of
$6.7 in 2003 and $9.2 in 2002 252.3 242.4
Inventories 301.3 304.0
Deferred and recoverable income taxes 57.9 51.4
Other current assets 33.2 24.2
---------- ----------
Total current assets 925.2 955.1
Property, plant, and equipment, at cost, net of accumulated
depreciation of $776.2 in 2003 and $690.6 in 2002 553.5 570.5
Goodwill and other intangibles 349.1 329.1
Deferred income taxes 20.9 32.2
Prepaid pension expense 173.0 162.8
Other assets 53.6 13.3
---------- ----------
Total assets $ 2,075.3 $ 2,063.0
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable, trade $ 164.1 $ 172.6
Income taxes payable 4.3 8.6
Short-term borrowings 72.3 112.6
Accrued liabilities 157.0 157.6
---------- ----------
Total current liabilities 397.7 451.4
Long-term debt 314.2 298.2
Deferred income taxes 31.3 33.6
Other postretirement benefit liabilities 215.8 217.3
Product warranty and self-insured risks 22.7 21.3
Accrual for environmental matters 39.7 29.5
Pension liabilities 37.9 32.8
---------- ----------
Total liabilities 1,059.3 1,084.1
---------- ----------
Stockholders' Equity:
Class A common stock, $1 par value; authorized 75,000,000 shares;
issued and outstanding 13,401,938 shares in 2003 and 2002 13.4 13.4
Class B common stock, $1 par value; authorized 25,000,000 shares;
issued and outstanding 5,077,746 shares in 2003 and 2002 5.1 5.1
Retained earnings 1,076.2 1,078.9
Accumulated other comprehensive loss (78.7) (118.5)
---------- ----------
Total stockholders' equity 1,016.0 978.9
---------- ----------
Total liabilities and stockholders' equity $ 2,075.3 $ 2,063.0
========== ==========
The accompanying notes are an integral part of these Consolidated Condensed
Financial Statements.
Page 3
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 1
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(Dollars in millions except per share data) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- --------------------------
2003 2002 2003 2002
-------- --------- ---------- ----------
Net Sales $ 438.5 $ 310.9 $ 1,394.7 $ 1,039.6
Cost of sales and operating expenses 379.7 261.1 1,212.7 882.1
Selling and administrative expenses 37.2 29.4 123.3 88.9
Restructuring charges and other items (3.3) -- 38.8 4.5
-------- --------- ---------- ----------
Operating Income 24.9 20.4 19.9 64.1
Interest expense (6.8) (1.4) (18.3) (3.5)
Interest income and other, net 6.6 3.0 16.7 8.8
-------- --------- ---------- ----------
Income before taxes and cumulative effect of accounting change 24.7 22.0 18.3 69.4
Income tax expense 5.7 7.8 3.4 24.6
-------- --------- ---------- ----------
Income before cumulative effect of accounting change 19.0 14.2 14.9 44.8
======== ========= ========== ==========
Cumulative effect of accounting change for goodwill, net of tax -- -- -- (3.1)
-------- --------- ---------- ----------
Net Income $ 19.0 $ 14.2 $ 14.9 $ 41.7
Basic and Diluted Earnings Per Share:
Income before cumulative effect of accounting change $ 1.03 $ 0.77 $ 0.81 $ 2.42
Cumulative effect of accounting change for goodwill -- -- -- (0.17)
-------- --------- ---------- ----------
Net Income $ 1.03 $ 0.77 $ 0.81 $ 2.25
======== ========= ========== ==========
Weighted Average Shares (in thousands) 18,480 18,480 18,480 18,480
======== ========= ========== ==========
Cash Dividends Declared Per Share $ 0.32 $ 0.32 $ 0.96 $ 0.96
======== ========= ========== ==========
The accompanying notes are an integral part of these Consolidated Condensed
Financial Statements.
Page 4
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 1
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in millions) NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2003 2002
-------- --------
Cash Flows from Operating Activities:
Income before cumulative effect of accounting change $ 14.9 $ 44.8
Adjustments to reconcile income before cumulative effect of
accounting change to net cash provided by operating activities:
Depreciation and amortization 68.7 48.7
Non-cash restructuring charges and other items 22.4 4.5
Accounts receivable 2.8 (3.7)
Inventories 19.5 (15.3)
Payables and accrued expenses (48.8) 32.9
Prepaid pension expense (12.0) (21.6)
Deferred and recoverable taxes 3.1 (11.5)
Net effect of environmental payment (25.6) --
Other (6.6) 1.2
-------- --------
Cash Provided By Operating Activities 38.4 80.0
-------- --------
Cash Flows from Investing Activities:
Business acquisition, net of cash acquired 10.6 (4.0)
Capital expenditures (61.3) (41.3)
-------- --------
Cash Used In Investing Activities (50.7) (45.3)
-------- --------
Cash Flows from Financing Activities:
Dividends paid (17.7) (17.7)
Decrease in borrowings, net (36.2) 40.8
-------- --------
Cash Provided By (Used In) Financing Activities (53.9) 23.1
-------- --------
Effect Of Exchange Rate Changes On Cash 13.6 (6.2)
-------- --------
Increase (Decrease) In Cash and Cash Equivalents (52.6) 51.6
Cash and Cash Equivalents:
Beginning of Period 333.1 317.6
-------- --------
End of Period $ 280.5 $ 369.2
======== ========
The accompanying notes are an integral part of these Consolidated Condensed
Financial Statements.
Page 5
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. The consolidated condensed financial statements of Tecumseh Products
Company and Subsidiaries (the "Company") are unaudited and reflect all
adjustments (including 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, 2002 condensed balance sheet data was derived from audited
financial statements, but does not include all disclosures required by
generally accepted accounting principles in the United States ("U.S.
GAAP"). The consolidated condensed 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, 2002. 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.
2. Inventories consisted of:
SEPTEMBER 30, DECEMBER 31,
(Dollars in millions) 2003 2002
-----------------------------------------------------------------------
Raw material and work in process $ 157.4 $ 164.3
Finished goods 129.3 123.5
Supplies 14.6 16.2
-----------------------------------------------------------------------
Total Inventories $ 301.3 $ 304.0
=======================================================================
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.
As part of these initiatives, the Company began a restructuring action
during the second quarter of 2003 related to the Engine & Power Train
business. The restructuring includes the closure of the Company's
Douglas, Georgia and Sheboygan Falls, Wisconsin production facilities,
and the relocation of certain production capacities to the new
Curitiba, Brazil facility and other existing U.S. locations. The
closings affected approximately 550 and 250 people at the Douglas and
Sheboygan Falls facilities, respectively. As a result of these actions,
the Company has incurred both charges and gains which have been
recognized over the second and third quarters of 2003 in accordance
with Statement of Financial Accounting Standards (SFAS) No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets," SFAS
No. 146 "Accounting for Costs Associated with Exit or Disposal
Activities," and SFAS No. 88 "Employer's Accounting for Settlements &
Curtailments of Defined Benefit Pension Plans and Termination
Benefits."
Through September 30, 2003, the Company has recognized a total of $31.0
million in charges and $5.8 million in gains with respect to these
restructuring actions. Included in the charges are approximately $7.5
million in earned severance pay and future benefit costs relating to
manpower reductions, $3.2 million in plant closing and exit costs
incurred through September 30, 2003, and $20.3 million in asset
impairment charges for idled equipment and facilities. The amount of
severance pay and future benefit costs mentioned above includes $0.8
million in curtailment losses related to the pension plan at the
Sheboygan Falls, Wisconsin facility.
Page 6
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
The gains represent curtailment gains associated with other
post-employment benefits. Under U.S. GAAP, such gains are not
recognizable until the affected employees have been severed and,
accordingly, were recorded in the third quarter of 2003.
Under SFAS No. 146, severance payments that require future service to
be received is accrued as earned and other costs are only recognized to
the extent a liability has been incurred. Accordingly, $28.5 million
and $2.5 million of the charges were recognized in the second and third
quarters, respectively. Additionally, the Company expects to incur
further charges of approximately $3.2 million in the fourth quarter of
2003.
As of September 30, 2003, manufacturing operations at both the Douglas,
Georgia and Sheboygan Falls, Wisconsin operations had ceased. With
respect to the Douglas Facility, substantially all the employees had
been dismissed and all related severance costs paid. With respect to
the Sheboygan Falls facility, substantially all the employees had been
dismissed and approximately 13% of the estimated $1.0 million severance
costs had been paid.
Nine month 2003 results were also adversely affected by a $13.6 million
($8.7 million net of tax or $0.47 per share) charge, recognized in the
first quarter, related to environmental costs at the Company's
Sheboygan Falls, Wisconsin facility. On March 25, 2003, with the
cooperation of the Environmental Protection Agency, the Company entered
into a Liability Transfer and Assumption Agreement (the "Liability
Transfer Agreement") with Pollution Risk Services, LLC ("PRS"), whereby
PRS assumed substantially all of the Company's responsibilities,
obligations and liabilities for remediation of the Sheboygan River and
Harbor Superfund Site (the "Site"). While the Company believes the
Liability Transfer Agreement with PRS is sufficient to satisfy
substantially all of the Company's environmental responsibilities with
respect to the Site, Liability Transfer Agreement does not constitute a
legal discharge or release of the Company's liabilities with respect to
the Site. The cost of the Liability Transfer Agreement was $39.2
million. The charge consists of the difference between the cost of the
Liability Transfer Agreement and amounts previously accrued for the
cleanup. The Company also maintains a reserve of $0.5 million to
reflect its potential residual environmental liability arising from
operations at the Site, including potential liabilities not assumed by
PRS pursuant to the Liability Transfer Agreement. Additional
information is available in the Company's Form 8-K filed on April 9,
2003.
Nine month 2002 results were adversely affected by a $4.5 million ($2.9
million net of tax or $0.16 per share) restructuring charge in the
Compressor segment recognized in the first quarter. The charge 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-down of certain equipment, which will not be used in other
operations.
Page 7
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:
THREE MONTHS ENDED NINE MONTHS ENDED
COMPREHENSIVE INCOME SEPTEMBER 30, SEPTEMBER 30,
(Dollars in millions) 2003 2002 2003 2002
-------------------------------------------------------------------------------------------------------
Net Income $ 19.0 $ 14.2 $ 14.9 $ 41.7
Other comprehensive income (loss):
Foreign currency translation adjustments 2.2 (33.4) 39.8 (41.1)
Minimum pension liability -- -- -- --
-------------------------------------------------------------------------------------------------------
Total Comprehensive Income (Loss) $ 21.2 ($ 19.2) $ 54.7 $ 0.6
=======================================================================================================
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. 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
("Phase I") and the middle and lower river and harbor being the second
phase ("Phase II"). In March 2003, the Company entered into a Consent
Decree concerning the performance of remedial design and remedial
action for Phase I. This Consent Decree is awaiting final approval by
the U.S. Department of Justice. Negotiation of a Consent Decree
regarding Phase II has yet to commence.
On March 25, 2003, with the cooperation of the EPA, the Company and
Pollution Risk Services, LLC ("PRS") entered into a Liability Transfer
and Assumption Agreement (the "Liability Transfer Agreement"). Under
the terms of the Liability Transfer Agreement, PRS assumed all of the
Company's responsibilities, obligations and liabilities for remediation
of the entire Site and the associated costs, except for certain
specifically enumerated liabilities. Also, as required by the Liability
Transfer Agreement, the Company has purchased Remediation Cost Cap
insurance, with a thirty (30) year term, in the amount of $100,000,000
and Environmental Site Liability insurance in the amount of
$20,000,000. The Company believes such insurance coverage will provide
sufficient assurance for completion of the responsibilities,
obligations and liabilities assumed by PRS under the Liability Transfer
Agreement. On October 10, 2003, in conjunction with the Liability
Transfer Agreement, the Company completed the transfer of title to the
Sheboygan Falls, Wisconsin property to PRS.
In connection with the Liability Transfer Agreement, the Company has
received an opinion from its outside tax counsel that substantially
all of the payment made to PRS should be currently deductible for
federal purposes.
The total cost of the Liability Transfer Agreement to the Company,
including the cost of the insurance policies, was $39.2 million. The
Company recognized a nonrecurring charge of $13.6 million ($8.7 million
net of tax ) in the first quarter of 2003. The charge consists of the
difference between the cost of the Liability Transfer Agreement and
amounts previously accrued for the cleanup. The Company continues to
maintain an additional reserve of $0.5 million to reflect its potential
residual environmental liability arising from operations at the Site,
including potential liabilities not assumed by PRS pursuant to the
Liability Transfer Agreement.
Page 8
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
It is the intent of the Company, PRS and the EPA to negotiate
provisions that would add PRS as a PRP by amendment to the Consent
Decree, which requires the approval of the U.S. Department of Justice.
Until such approval is received, U.S. GAAP requires that the Company
continue to record the full amount of the estimated remediation
liability of $39.7 million and a corresponding asset of $39.2 million
included in Other Assets in the balance sheet. While the Company
believes the arrangements with PRS are sufficient to satisfy
substantially all of the Company's environmental responsibilities with
respect to the Site, these arrangements do not constitute a discharge
or release of the Company's liabilities with respect to the Site. The
actual cost of this obligation will be governed by numerous factors,
including the requirements of the WDNR, and may be greater or lower
than the amount accrued.
With respect to other environmental matters, 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 began remediation of soils in 2001 on the east side
of the facility. Additional remediation of soils began in the fall of
2002 in two other areas on the plant site. At September 30, 2003, the
Company had accrued $2.7 million for the total estimated cost
associated with the investigation and remediation of the on-site
contamination. Investigative efforts related to the potential off-site
groundwater contamination have to date been limited in their nature and
scope. The extent, timing, and cost of 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 mid-2004 involving a segment
downstream of the source area. The Company has provided for these
estimated costs. Although participation in a cooperative remedial
effort after this phase 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, 2003
and December 31, 2002, the Company had accrued $46.5 million and $36.3
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.
Page 9
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
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 material adverse effect on the
consolidated financial position or results of operations of the
Company.
7. The Company has four reportable segments based on the criteria set
forth in SFAS No. 131 "Disclosures about Segments of an Enterprise and
Related Information": Compressor Products, Electrical Component
Products, Engine & Power Train Products, and Pump Products. With the
acquisition of the FASCO Motors Group ("FASCO") on December 30, 2002,
the Company created the Electrical Component Products operating
segment. In addition to FASCO, the segment includes certain North
American electrical component manufacturing that was previously
reported in the Compressor Business. Prior year business segment data
has been reclassified to conform to the Company's current presentation.
Revenues and operating income by segment for the periods indicated are
as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
BUSINESS SEGMENT DATA SEPTEMBER 30, SEPTEMBER 30,
(Dollars in millions) 2003 2002 2003 2002
--------------------------------------------------------------------------------------------------------------------
NET SALES:
Compressor Products $ 193.8 $ 181.9 $ 620.6 $ 615.0
Electrical Component Products (a) 101.5 2.3 315.8 5.8
Engine & Power Train Products 113.2 97.9 357.1 320.7
Pump Products 29.7 28.4 100.6 97.4
Other (b) 0.3 0.4 0.6 0.7
--------------------------------------------------------------------------------------------------------------------
Total Net Sales $ 438.5 $ 310.9 $ 1,394.7 $ 1,039.6
====================================================================================================================
OPERATING INCOME:
Compressor Products $ 15.5 $ 22.6 $ 55.9 $ 65.7
Electrical Component Products 3.9 (2.1) 11.5 (1.5)
Engine & Power Train Products 3.3 0.2 (7.1) 0.0
Pump Products 3.3 3.3 11.7 12.4
Other (b) (0.8) (0.9) (2.9) (1.3)
Corporate expenses (3.6) (2.7) (10.4) (6.7)
Restructuring charges and other items 3.3 -- (38.8) (4.5)
--------------------------------------------------------------------------------------------------------------------
Total Operating Income 24.9 20.4 19.9 64.1
Interest expense (6.8) (1.4) (18.3) (3.5)
Interest income and other, net 6.6 3.0 16.7 8.8
--------------------------------------------------------------------------------------------------------------------
INCOME BEFORE TAXES AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE $ 24.7 $ 22.0 $ 18.3 $ 69.4
====================================================================================================================
(a) Electrical Component Products also has inter-segment sales.
Such sales were $54.5 million and $17.2 million for the nine
and three month periods ended September 30, 2003,
respectively, and $46.1 million and $12.2 million for the nine
and three month periods ended September 30, 2002,
respectively.
(b) "Other" consists of non-reportable business segments,
primarily MDSI.
8. The cumulative effect from an accounting change of $4.8 million ($3.1
million net of tax) recorded in the first quarter of 2002, resulted
from the Company adopting SFAS No. 142
Page 10
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
"Goodwill and Other Intangible Assets" effective January 1, 2002. Under
SFAS No. 142, goodwill is no longer amortized, but is subject to
impairment testing on at least an annual basis. As required by SFAS No.
142, 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.
9. On March 5, 2003, the Company completed a private placement of $300
million Senior Guaranteed Notes due March 5, 2011. These notes bear
interest at a fixed rate of 4.66%. Proceeds from the private placement
were used to repay a $250 million bridge loan and pay down borrowings
under the Company's revolving credit facility. On March 31, 2003, the
remaining $25 million outstanding under the revolver was repaid from
available cash resources.
In addition, during the third quarter 2003, the Company entered into
two pay variable, receive fixed interest rate swap agreements to lower
the Company's overall borrowing costs. The agreements have a total
notional principle amount of $125 million with maturity terms that
match the Company's Senior Guaranteed Notes. The variable interest
payments are based upon 60 day LIBOR.
10. On December 30, 2002, the Company acquired FASCO from Invensys Plc for
cash of $396.6 million and the assumption of approximately $14.5
million in debt. During the second quarter of 2003, the Company
received $14.1 million in cash for purchase price adjustments relating
to working capital and employee benefit related items. These proceeds
are reflected in the Statement of Cash Flows under "Business
acquisition, net of cash acquired."
Page 11
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (CONTINUED)
Also during the second quarter, the Company completed formal tangible
and intangible asset valuations for FASCO. Adjustments to preliminary
amounts recorded in purchase accounting are reflected in the September
30, 2003 balance sheet. The effect of these adjustments decreased net
property, plant and equipment by $35.2 million, increased
definite-lived intangibles subject to amortization by $31.6 million,
and increased goodwill and indefinite-lived intangibles by $3.6
million. The changes in intangible assets were as follows:
Preliminary
Values
Estimated at
Time of Revised Estimated Life
Acquisition Values
---------------------------------------------------
Definite-lived Intangibles:
Non-Compete Agreement $ 15.0 $ 15.0 2 years
Customer Relationships and Contracts 20.0 39.3 6-15 years
Technology -- 12.3 3-10 years
Indefinite-lived Intangibles:
Trade Name 20.0 16.9
------------------------------
$ 55.0 $ 83.5
==============================
11. A portion of export accounts receivable at the Company's Brazilian
subsidiary are sold with recourse. Brazilian export receivables sold at
September 30, 2003 and December 31, 2002 were $55.0 million and $41.2
million, respectively. The Company estimates the fair value of the
contingent liability related to these receivables to be $0.1 million,
which is included in operating income and allowance for doubtful
accounts.
A provision for estimated future warranty costs and estimated returns
for credit relating to warranty are recorded when products are sold and
revenue recognized. A reconciliation of the changes in the Company's
product warranty liability follows:
Nine Months Ended
(Dollars in millions) September 30, 2003
----------------------
Balance at January 1, 2003 $ 30.5
Accruals for warranties 12.6
Settlements made (in cash or in kind) (12.0)
Effect of foreign currency translation 0.5
----------------------
Balance at September 30, 2003 $ 31.6
======================
Page 12
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Consolidated net sales for the third quarter of 2003 amounted to $438.5 million
compared to sales of $310.9 million in the third quarter of 2002. Consolidated
sales for the nine months ended September 30, 2003 were $1,394.7 million
compared to sales of $1,039.6 million in the first nine months of 2002. The net
increase in sales of $127.6 million for the third quarter includes FASCO sales
of $99.1 million as well as moderate increases in all other business segments.
The net increase of $355.1 million for the first nine months also includes FASCO
sales of $308.4 million, as well as moderate increases in all other business
segments.
Consolidated net income for the third quarter of 2003 amounted to $19.0 million
or $1.03 per share compared to $14.2 million or $0.77 per share in the third
quarter of 2002. Included in reported results for the third quarter of 2003 is a
net gain of $3.3 million ($2.1 million net of tax or $0.11 per share) resulting
from the restructuring actions in the Engine & Power Train business announced in
the second quarter of 2003. Third quarter results were also favorably impacted
by several income tax related items. The resolution of prior years' federal
income tax audits reduced the Company's currently payable provision for income
taxes by $1.9 million. The Company's effective federal income tax rate was
further reduced by adjustments to the provision for deferred taxes pertaining to
unremitted earnings of foreign subsidiaries. Third quarter 2003 results include
the income of the FASCO Motors Group ("FASCO"), which was acquired on December
30, 2002. FASCO's operating income for the quarter was $4.9 million.
Consolidated net income for the first nine months of 2003 amounted to $14.9
million or $0.81 per share compared to $41.7 million or $2.25 per share in the
same period of 2002. In addition to the third quarter net gain from
restructuring actions and the federal income tax-related items mentioned above,
results for the first nine months of 2003 include a charge of $13.6 million
($8.7 million net of tax or $0.47 per share) recorded in the first quarter
related to environmental costs at the Company's Sheboygan Falls, Wisconsin
facility and a restructuring charge of $28.5 million ($18.2 million net of tax
or $0.99 per share) recorded in the second quarter related to the consolidation
of operations in the Engine & Power Train business and related plant closings.
Year-to-date 2003 operating results were also reduced by $4.2 million ($2.7
million net of tax or $0.15 per share) due to the expensing of inventory
write-ups recorded as part of purchase accounting for the FASCO acquisition as
required by U.S. Generally Accepted Accounting Principles. Year-to-date results
have also been negatively impacted by a $5.6 million charge related to the
amortization of a non-compete agreement arising from the FASCO acquisition.
Included in the 2002 first half results is a restructuring charge of $4.5
million ($2.9 million net of tax or $0.16 per share) related to the relocation
of certain compressor manufacturing operations from the United States to Brazil
and the cumulative effect of an accounting change 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 restructuring and other one-time items, third quarter operating
income was slightly lower than the prior year due to weaker results in the
Compressor business segment and interest
Page 13
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
charges on the Company's acquisition related debt, partially offset by
improvement in the Engine & Power Train business and the addition of FASCO.
Compressor Products
Third quarter 2003 sales in the Company's Compressor business increased to
$193.8 million from $181.9 million in the third quarter of 2002. This increase
was primarily attributable to effects of foreign currency translation which
increased sales by approximately $11.3 million. Otherwise, gains in sales of
compressors used in refrigeration applications and, to a lesser extent, gains in
U.S. export sales of compressors used in air conditioning that rebounded after
the second quarter slowdown caused by the war in Iraq were offset by declines in
sales of compressors used in unitary air conditioning and commercial
applications. In addition, aftermarket sales into the distribution and
replacement markets were negatively affected by cool, wet weather declining
nearly 14% from third quarter 2002 levels. Compressor business sales in the
first nine months of 2003 increased $5.6 million, or approximately 0.9%, from
the first nine months of 2002. The relatively flat sales reflect an increase due
to currency translation and a 36% increase in sales of compressors utilized in
refrigeration applications, more than offset by declines in sales of compressors
used in air conditioning.
Compressor business operating income for the third quarter of 2003 amounted to
$15.5 million compared to $22.6 million in the third quarter of 2002. Operating
income for the nine months ended September 30, 2003 amounted to $55.9 million
compared to $65.7 million for the first nine months of 2002. The decrease in
operating income for the third quarter of 2003 versus the comparable 2002
quarter reflects several factors, including an unfavorable sales mix,
unfavorable foreign currency movements, and lower product margins. The continued
decline in overall U.S. manufactured volumes reduced the profitability of the
segment's U.S. operations. Results in Brazil were also lower in the third
quarter of 2003 versus 2002, partially due to $3.7 million of net re-measurement
gains from foreign currency-denominated transactions in the third quarter of
2002 that did not recur in 2003. The weak U.S. dollar narrowed margins on U.S.
dollar denominated sales sourced from Brazil and other foreign operations.
Lastly, margins were adversely affected by unfavorable product sales mix,
material cost increases in some locations, and lower average sales prices in
certain product categories. The decline in profitability experienced in the
second and third quarters of 2003 compared to the same periods in 2002 is in
contrast to the improvement experienced in the first quarter of 2003 where
volumes were up over the prior year first quarter and the effects of cost
reduction efforts produced positive results. As a result of these two
contrasting periods, the Compressor business' operating results for the first
nine months of 2003 were down 14.9% in comparison to the same period in 2002.
Results from the Company's Brazilian compressor operations for the third quarter
of 2003 declined from the comparable prior year period, reflecting a shift in
sales mix to lower priced compressors, increased material and operating costs,
and the foreign currency effects noted above. Despite these declines, Brazilian
operations remain a key to future competitiveness, and for the three and nine
month periods ended September 30, 2003, represented 64% and 59% of operating
income
Page 14
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
for the Compressor business compared to 64% and 50%, respectively for the
comparable periods in 2002.
The stagnant European economy combined with the strengthening European currency
resulted in reduced operating profits at the Company's European Compressor
operations versus a year ago. Compressor operations in India were also below
last year's third quarter results, primarily due to reduced sales in the
refrigerator and freezer markets.
Electrical Component Products
With the acquisition of FASCO, the Company has created a new operating segment.
In addition to FASCO, the segment includes certain North American electrical
component manufacturing that was previously reported in the Compressor business.
Prior year business segment data, as presented in the table titled "Results by
Business Segments (Unaudited)," has been reclassified to conform to the
Company's current presentations.
Electrical Components sales were $101.5 million in the third quarter of 2003,
including $99.1 million of sales from FASCO, compared to $2.3 million in the
third quarter of 2002. Year-to-date sales amounted to $315.8 million, including
$308.4 million of sales from FASCO, compared to $5.8 million in the first nine
months of 2002.
Segment operating profit for the quarter was $3.9 million compared to a loss of
$2.1 million in 2002. FASCO contributed $4.9 million in operating profit to the
third quarter of 2003. Segment operating profit for the first nine months of the
year was $11.5 million compared to a loss of $1.5 million for the same period in
2002. FASCO contributed $14.6 million in operating profit to the first nine
months of 2003. FASCO's results for the three and nine month periods have been
reduced by $1.9 million ($1.2 million net of tax or $0.07 per share) and $5.6
million ($3.6 million net of tax or $0.19 per share), respectively,
respectively, for amortization of a non-compete agreement arising from the
acquisition. The non-compete agreement is being amortized over a two year
period. In addition, during the first quarter of 2003, FASCO's results were
reduced by $4.2 million ($2.7 million net of tax or $0.15 per share) for
inventory adjustments required by purchase accounting rules.
Engine & Power Train Products
Engine & Power Train business sales amounted to $113.2 million in the third
quarter of 2003 compared to $97.9 million in the third quarter of 2002. Sales in
the first nine months of 2003 were $357.1 million compared to $320.7 million in
the first nine months of 2002. The improvement in sales for the third quarter
reflects a 29% improvement in unit volume of engines used for snow throwers.
Sales for the first nine months of the year reflect overall higher U.S. shipment
volumes and the effects of translation from a weaker U.S. dollar, partially
offset by lower volumes in Europe where the dry, hot summer has dramatically
slowed sales.
Page 15
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
Exclusive of restructuring charges and gains, the Engine & Power Train business
operating income in the third quarter of 2003 amounted to $3.3 million compared
to $0.2 million in the third quarter of 2002. For the first nine months of 2003,
the business incurred an operating loss of $7.1 million compared to breakeven in
2002. The improvement in third quarter results is attributable to the increased
volume of engines for snow throwers and lower fixed costs resulting from the
closure of the Douglas, Georgia facility. Offsets include higher engineering
costs associated with new product development and startup costs associated with
the new facility in Curitiba, Brazil. The substantial decline in profitability
of the segment for the first nine months is attributable to numerous factors,
including less favorable sales mix, lower average selling prices, higher costs
of purchased parts, excess capacity and production inefficiency costs, rising
health care expenses and startup expenses associated with the new facility in
Curitiba, Brazil, as well as weak sales volumes in Europe.
Pump Products
Pump business sales in the third quarter of 2003 amounted to $29.7 million
compared to $28.4 million in 2003. Year-to-date sales amounted to $100.6 million
in 2003 compared to $97.4 million the previous year. The increase in third
quarter sales was primarily attributed to higher volumes in the retail and
plumbing sectors, which were spurred by the inclement weather in the eastern
United States. The slight improvement in the first nine months of 2003 sales was
due to the same third quarter factors, plus increased volumes in condensate
products sold to the HVAC and plumbing markets and in industrial products sold
through the aftermarket distribution channel, offset by lower volumes in the
heavy industrial market.
Operating income amounted to $3.3 million in the quarter ended September 30,
2003 compared to $3.3 million in the same period of 2002. Operating income in
the first nine months of 2003 decreased to $11.7 million from $12.4 million in
2002. The slight decrease in operating income for the first nine months of 2003
compared to 2002 is primarily attributable to increased administrative costs and
unfavorable sales mix.
Restructuring Charges and Other Items
Third quarter 2003 results were favorably affected by $3.3 million ($2.1 million
net of tax or $0.11 per share) for net gains recognized pursuant to the
restructuring actions announced in the second quarter involving the Engine &
Power Train business. These actions included the closure of the Company's
Douglas, Georgia and Sheboygan Falls, Wisconsin production facilities and the
relocation of certain production capacities to the new Curitiba, Brazil facility
and other existing U.S. locations. As a result of these actions, the Company has
incurred both charges and gains, which have been recognized over the second and
third quarters of 2003 in accordance with SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets," SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities," and SFAS No. 88 "Employer's
Accounting for Settlements & Curtailments of Defined Benefit Pension Plans and
Termination Benefits."
Page 16
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
As of September 30, 2003, the Company has recognized $31.0 million in charges
and $5.8 million in gains with respect to these restructuring actions. Included
in the charges are approximately $7.5 million in earned severance pay and future
benefit costs relating to manpower reductions, $3.2 million in plant closing and
exit costs incurred through September 30, 2003, and $20.3 million in asset
impairment charges for idled equipment and facilities. The amount of severance
pay and future benefit costs mentioned above includes $0.8 million in
curtailment losses related to the pension plan at the Sheboygan Falls, Wisconsin
facility. The gains represent curtailment gains associated with other
post-employment benefits. Under U.S. GAAP, such gains are not recognizable until
the affected employees have been severed and, accordingly, were recorded in the
third quarter of 2003.
Under SFAS No. 146, severance payments that require future service to be
received is accrued as earned and other costs are only recognized to the extent
a liability has been incurred. Accordingly, $28.5 million and $2.5 million of
the charges were recognized in the second and third quarters, respectively.
Additionally, the Company expects to incur further charges of approximately $3.2
million in the fourth quarter of 2003.
Nine month 2003 results were also adversely affected by a $13.6 million ($8.7
million net of tax or $0.47 per share) charge, recognized in the first quarter,
related to environmental costs at the Company's Sheboygan Falls, Wisconsin
facility. On March 25, 2003, with the cooperation of the Environmental
Protection Agency, the Company entered into a Liability Transfer and Assumption
Agreement (the "Liability Transfer Agreement") with Pollution Risk Services, LLC
("PRS"), whereby PRS assumed substantially all of the Company's
responsibilities, obligations and liabilities for remediation of the Sheboygan
River and Harbor Superfund Site (the "Site"). While the Company believes the
Liability Transfer Agreement with PRS is sufficient to satisfy substantially all
of the Company's environmental responsibilities with respect to the Site,
Liability Transfer Agreement does not constitute a legal discharge or release of
the Company's liabilities with respect to the Site. The cost of the Liability
Transfer Agreement was $39.2 million. The charge consists of the difference
between the cost of the Liability Transfer Agreement and amounts previously
accrued for the cleanup. The Company also maintains a reserve of $0.5 million to
reflect its potential residual environmental liability arising from operations
at the Site, including potential liabilities not assumed by PRS pursuant to the
Liability Transfer Agreement. Additional information is available in the
Company's Form 8-K filed on April 9, 2003.
Nine month 2002 results were adversely affected by a $4.5 million ($2.9 million
net of tax or $0.16 per share) restructuring charge in the Compressor segment
recognized in the first quarter. The charge 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-down of certain equipment, which will
not be used in other operations.
Accounting Changes
The cumulative effect from an accounting change of $4.8 million ($3.1 million
net of tax) recorded in the first quarter of 2002, resulted from the Company
adopting SFAS No. 142 "Goodwill and
Page 17
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
Other Intangible Assets" on January 1, 2002. Under SFAS No. 142, goodwill is no
longer amortized, but is subject to impairment testing on at least an annual
basis. As required by SFAS No. 142, 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.
Interest Expense
Interest expense amounted to $6.8 million in the third quarter of 2003 compared
to $1.4 million in the third quarter of 2002. Interest expense amounted to $18.3
million in the first nine months of 2003 compared to $3.5 million in the same
period of 2002. The increase is primarily related to the temporary and permanent
financing added in connection with the acquisition of FASCO. See "LIQUIDITY,
CAPITAL RESOURCES AND RISKS" for further information regarding this debt.
Interest Income and Other, Net
Interest income and other, net amounted to $6.6 million in the third quarter of
2003 compared to $3.0 million in the third quarter of 2002. Interest income and
other, net amounted to $16.7 million in the first nine months of 2003 compared
to $8.8 million in the same period of 2002. This increase resulted primarily
from higher cash balances in Brazil and $1.2 million in interest received in the
third quarter 2003 in connection with the federal income tax refund.
Taxes on Income
The effective income tax rate for the first nine months of 2003 was 18.6%
compared to 35.5% for the same period in 2002. The lower rate in 2003 is the
result of the resolution of prior years' federal income tax audits and a
prospective revision to the full year forecasted effective tax rate to reflect
lower levels of deferred taxes on the unremitted earnings of foreign
subsidiaries. The resolution of the income tax audits pertained to tax years
1998 and 1999 and resulted in a total refund of $6.9 million, including $1.2
million in interest. The effect of the refund on the provision for income taxes
was $1.9 million.
Outlook
The outlook for the fourth quarter of 2003 is unfavorable in comparison to 2002.
The accretive impact of FASCO's results are expected to be positive, but results
from the Company's traditional Compressor, Engine & Power Train and Pump
segments are expected to be soft in relation to the prior year, reflecting
little economic growth, higher costs and the unfavorable effects of a weak U.S.
dollar. The weakness in the U.S. dollar will be most evident on the results of
the Brazilian Compressor operations where the Real was particularly weak in the
fourth quarter of 2002 due to the national election and European Engine
operations where the strength of the Euro has resulted in a loss of share to
non-European suppliers.
Page 18
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
Each of the Company's business segments operates in highly competitive
environments characterized by excess worldwide production capacity, new
competitors located in countries with lower labor costs, resulting in overall
price deflation. The Company's fundamental strategy to remain competitive is to
manufacture high volume commodity-like components in low cost manufacturing
locations, while providing final customization of engineered products to niche
markets near the point of consumption. As a result, it is still possible that
further restructuring actions will be necessary to realign the Company's
productive capabilities. Plans continue to be developed to determine how best to
further reorganize the Company's operations and product offerings in light of
current and rapidly changing market conditions.
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 2003 provided cash
of $38.4 million compared to $80.0 million in 2002. The lower generation of cash
in 2003 resulted primarily from lower profitability, higher net working capital
needs, and the $39.2 cash payment for the Liability Transfer and Assumption
Agreement. Working capital of $527.5 million at September 30, 2003 was up
slightly from $503.7 million at the end of 2002.
Capital spending during the first nine months of 2003 was $61.3 million compared
to $41.3 million for the same period of 2002. The increase relates to the new
engine facility in Curitiba, Brazil, as well as spending at FASCO. Total capital
spending for 2003 is projected to be in the range of $75 to $80 million,
depending on the timing of approved asset purchases.
On December 30, 2002, the Company acquired FASCO from Invensys Plc for cash of
$396.6 million and the assumption of approximately $14.5 million in debt. The
acquisition was financed, in part, with proceeds from new bank borrowings,
including $250 million from a six-month bridge loan and $75 million from a new
three-year $125 million revolving credit facility. On March 5, 2003, the Company
completed a private placement of $300 million Senior Guaranteed Notes due March
5, 2011. These notes bear interest at a fixed rate of 4.66%. Proceeds from the
private placement were used to repay the bridge loan and pay down borrowings
under the revolving credit facility. On March 31, 2003, the remaining $25
million outstanding on the revolver was repaid from available cash resources.
Working capital requirements, planned capital investment and stock repurchase
expenditures, if any, for 2003 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. As noted above, the Company maintains a
$125 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
Page 19
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
initiatives will take place during 2003 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.
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, 2003 and December 31, 2002, the Company had accrued $46.5 and
$36.3 million, respectively, for environmental remediation, including $40.1 and
$29.2 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", "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; ii) the effect of terrorist activity and armed
conflict; iii) weather conditions affecting demand for air conditioners, lawn
and garden products, portable power generators and snow throwers; iv) the
success of the Company's ongoing effort to bring costs in line with projected
production levels and product mix; v) financial market changes, including
fluctuations in interest rates and foreign currency exchange rates; vi) economic
trend factors such as housing starts; vii) emerging governmental regulations;
viii) availability and cost of materials; ix) actions of competitors; x) the
ultimate cost of resolving environmental matters; xi) the Company's ability to
profitably develop, manufacture and sell both
Page 20
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
new and existing products; xii) 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; xiii) the integration of the FASCO Motors business into the
Company and the ultimate cost associated therewith; xiv) potential political and
economic adversities that could adversely affect anticipated sales and
production in Brazil; and xv) potential political and economic adversities that
could adversely affect anticipated sales and production in India. 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 21
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. 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 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 2003.
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,
2003 and December 31, 2002, the Company held foreign currency forward exchange
contracts and foreign currency call options with total notional values in the
amount of $12.4 and $4.9 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, electrical 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, 2003 and December 31, 2002
were $10.8 and $14.6 million, respectively.
Page 22
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 4
CONTROLS AND PROCEDURES
As of the end of the fiscal quarter covered by this report, 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-15. 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.
Page 23
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit
Number Description
------ -----------
31.1 Certification of the President and Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the President and Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) On September 24, 2003, the Company filed a report on Form 8-K announcing
the appointment of David M. Risley to the Board of Directors.
On October 30, 2003, the Company filed a report on Form 8-K announcing
the appointment of Virginia A. Kamsky to the Board of Directors.
On October 31, 2003, the Company filed a report on Form 8-K reporting
its third quarter 2003 financial data and investor presentation.
Page 24
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
CERTIFICATION OF CHIEF FINANCIAL OFFICER
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 13, 2003 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 25
10-Q EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
31.1 Certification of the President and Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the President and Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.