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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, 2004
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, 2004
- ----------------------------------------------------------------------------------------
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 Operations........................................... 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
and Results of Operations............................................................ 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................... 23
Item 4. Controls and Procedures.............................................................. 24
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K..................................................... 26
Signatures........................................................................................... 27
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 share data) SEPTEMBER 30, December 31,
ASSETS 2004 2003
--------------------- -------------------
Current Assets:
Cash and cash equivalents $ 272.9 $ 344.6
Accounts receivable, less allowance for doubtful accounts of $5.7 in 2004 and
$6.5 in 2003 245.6 235.0
Inventories 344.1 298.2
Deferred and recoverable income taxes 71.7 71.8
Other current assets 52.2 30.5
--------------------- -------------------
Total current assets 986.5 980.1
Property, plant, and equipment, at cost, net of accumulated depreciation of
$938.9 in 2004 and $797.8 in 2003 536.7 554.6
Goodwill 242.6 242.7
Other intangibles 65.5 74.8
Deferred income taxes 25.3 26.1
Prepaid pension expense 166.3 155.3
Other assets 71.2 72.2
--------------------- -------------------
Total assets $2,094.1 $2,105.8
===================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable, trade $ 177.4 $ 172.4
Income taxes payable 17.2 10.7
Short-term borrowings 53.1 89.6
Accrued liabilities 175.8 161.9
--------------------- -------------------
Total current liabilities 423.5 434.6
Long-term debt 326.3 327.6
Deferred income taxes 31.5 36.5
Other postretirement benefit liabilities 210.9 212.6
Product warranty and self-insured risks 25.4 24.4
Accrual for environmental matters 43.6 44.6
Pension liabilities 20.4 20.7
--------------------- -------------------
Total liabilities 1,081.6 1,101.0
--------------------- -------------------
Stockholders' Equity:
Class A common stock, $1 par value; authorized 75,000,000 shares; issued and
outstanding 13,401,938 shares in 2004 and 2003 13.4 13.4
Class B common stock, $1 par value; authorized 25,000,000 shares; issued and
outstanding 5,077,746 shares in 2004 and 2003 5.1 5.1
Retained earnings 1,061.0 1,055.4
Accumulated other comprehensive loss (67.0) (69.1)
--------------------- -------------------
Total stockholders' equity 1,012.5 1,004.8
--------------------- -------------------
Total liabilities and stockholders' equity $2,094.1 $2,105.8
===================== ===================
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 OPERATIONS
(Unaudited)
(Dollars in millions, except per share data) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
2004 2003 2004 2003
------------- ------------- -------------- -------------
Net sales $478.6 $438.5 $1,439.8 $1,394.7
Cost of sales and operating expenses 403.4 379.7 1,245.3 1,212.7
Selling and administrative expenses 49.6 37.2 145.4 123.3
Restructuring charges, impairments and
other items 2.0 (3.3) 5.6 38.8
------------- ------------- -------------- -------------
Operating income 23.6 24.9 43.5 19.9
Interest expense (5.3) (6.8) (16.5) (18.3)
Interest income and other, net 2.3 6.6 10.6 16.7
------------- ------------- -------------- -------------
Income before taxes 20.6 24.7 37.6 18.3
Tax provision 8.3 5.7 14.3 3.4
------------- ------------- -------------- -------------
Net income $12.3 $19.0 $23.3 $14.9
============= ============= ============== =============
Basic and diluted earnings per share $0.67 $1.03 $1.26 $0.81
============= ============= ============== =============
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,
---------------------------------------
2004 2003
------------------ ------------------
Cash flows from Operating activities:
------------------ ------------------
Cash provided by operating activities $34.5 $43.1
------------------ ------------------
Cash Flows from Investing Activities:
Business acquisition, net of cash acquired --- 10.6
Capital expenditures (55.6) (66.0)
------------------ ------------------
Cash used in investing activities (55.6) (55.4)
------------------ ------------------
Cash Flows from Financing Activities:
Dividends paid (17.7) (17.7)
Decrease in borrowings, net (35.4) (36.2)
------------------ ------------------
Cash used in financing activities (53.1) (53.9)
------------------ ------------------
Effect of exchange rate changes on cash 2.5 13.6
------------------ ------------------
Decrease in cash and cash equivalents (71.7) (52.6)
Cash and Cash Equivalents:
Beginning of period 344.6 333.1
------------------ ------------------
End of period $272.9 $280.5
================== ==================
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, 2003 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 included in Form 10-K
for the fiscal year ended December 31, 2003. 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. Comprehensive Income and Changes in Stockholders' Equity
THREE MONTHS ENDED NINE MONTHS ENDED
(Dollars in millions) SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -----------------------------
2004 2003 2004 2003
--------------- -------------- ------------- --------------
Total stockholders' equity
Beginning balance (b) $990.5 $1,000.6 $1,004.8 $978.9
Comprehensive income:
Net income $12.3 $19.0 $23.3 $14.9
Other comprehensive income:
Foreign currency translation adjustments 15.6 2.2 2.4 39.8
Loss on derivatives --- --- (0.3) ---
--------------- -------------- ------------- --------------
Total comprehensive income $27.9 $21.2 $25.4 $54.7
Cash dividends declared (5.9) (5.9) (17.7) (17.7)
--------------- -------------- ------------- --------------
Total stockholders' equity
Ending balance $1,012.5 $1,015.9 $1,012.5 $1,015.9
=============== ============== ============= ==============
(b) The June 30, 2004 Stockholder's Equity balance has been increased by $0.7
million from that previously reported to reflect the retroactive recognition of
the effects of the Medical Prescription Drug, Improvement and Modernization Act
of 2003, as permitted by the FASB Staff Position FAS 106-2.
3. Inventories
SEPTEMBER 30, December 31,
(Dollars in millions) 2004 2003
------------------------- ------------------------
Raw material and work in process $221.6 $170.6
Finished goods 112.4 122.7
Supplies 10.1 4.9
------------------------- ------------------------
Total inventories $344.1 $298.2
========================= ========================
Page 6
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
4. Business Segments
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. Revenues
and operating income by segment for the periods indicated are as
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
Business Segment Data ----------------------------- -----------------------------
(Dollars in millions) 2004 2003 2004 2003
----------------------------- -----------------------------
Net sales:
Compressor products $218.9 $193.8 $664.9 $620.6
Electrical Component products 102.1 101.5 314.3 315.8
Engine & Power Train products 128.6 113.2 356.9 357.1
Pump products 28.5 29.7 102.5 100.6
Other (a) 0.5 0.3 1.2 0.6
----------------------------- -----------------------------
Total Net Sales $478.6 $438.5 $1,439.8 $1,394.7
============================= =============================
Operating income:
Compressor products $22.5 $15.5 $53.7 $55.9
Electrical Component products 3.5 3.9 11.2 11.5
Engine & Power Train products 2.2 3.3 (11.2) (7.1)
Pump Products 3.1 3.3 11.3 11.7
Other (a) (0.9) (0.8) (2.7) (2.9)
Corporate expenses (4.8) (3.6) (13.2) (10.4)
Restructuring charges, impairments and other items (2.0) 3.3 (5.6) (38.8)
----------------------------- -----------------------------
Total operating income 23.6 24.9 43.5 19.9
Interest expense (5.3) (6.8) (16.5) (18.3)
Interest income and other, net 2.3 6.6 10.6 16.7
----------------------------- -----------------------------
Income before taxes $20.6 $24.7 $37.6 $18.3
============================= =============================
(a) "Other" consists of non-reportable business segments, primarily
MDSI.
The Electrical Component Products had inter-segment sales of $17.3
million and $17.2 million in the third quarter of 2004 and 2003,
respectively, and $50.8 million and $54.5 million for the first nine
months of 2004 and 2003, respectively.
Page 7
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
5. Goodwill and Other Intangible Assets
At September 30, 2004, goodwill by segment consisted of Electrical
Components - $217.7 million, Compressors - $17.2 million, Pumps - $5.1
million, and Engine & Power Train - $2.6 million.
Other intangible assets consisted of the following:
GROSS
CARRYING ACCUMULATED AMORTIZABLE
AMOUNT AMORTIZATION NET LIFE
------------------------------------------------------------------
Intangible assets subject to amortization:
Two year non-compete agreement $15.0 $13.1 $1.9 2 years
Customer relationships and contracts 39.3 4.7 34.6 6-15 years
Technology 15.4 3.8 11.6 3-10 years
Trade-name and trademarks 0.8 0.3 0.5 3-8 years
------------------------------------------------
Total 70.5 21.9 48.6
Intangible assets not subject to amortization:
Trade name 16.9 --- 16.9
------------------------------------------------
Total intangible assets $87.4 $21.9 $65.5
================================================
The estimated amortization expense over the next five years is $12.5
million for 2004 and approximately $5.0 million annually for 2005
through 2008. Amortization expense for the three months ended September
30 was $3.2 million and $3.2 million for 2004 and 2003, respectively.
Amortization expense for year-to-date ended September 30 was $9.4
million and $9.3 million for 2004 and 2003, respectively.
Page 8
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
6. Pension and Other Postretirement Benefit Plans
Components of net periodic benefit (income) cost are as follows:
PENSION BENEFITS OTHER BENEFITS
----------------------------- -----------------------------
THREE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
2004 2003 2004 2003
-------------- ------------- ------------- -------------
Service Cost $2.2 $2.0 $0.9 $1.2
Interest Cost 5.4 5.6 2.4 3.1
Expected return on plan assets (10.5) (9.8) --- ---
Amortization of prior service costs 0.3 0.4 (0.3) (0.3)
Amortization of net gain (1.1) (1.4) (1.6) (1.1)
-------------- ------------- ------------- -------------
Net periodic benefit (income) cost ($3.7) ($3.2) $1.4 $2.9
============== ============= ============= =============
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
2004 2003 2004 2003
-------------- ------------- ------------- -------------
Service Cost $6.6 $6.0 $3.0 $3.6
Interest Cost 16.2 16.8 7.5 9.3
Expected return on plan assets (31.5) (29.4) --- ---
Amortization of prior service costs 0.9 1.2 (0.9) (0.9)
Amortization of net gain (3.3) (4.2) (4.2) (3.3)
-------------- ------------- ------------- -------------
Net periodic benefit (income) cost ($11.1) ($9.6) $5.4 $8.7
============== ============= ============= =============
On December 8, 2003, President Bush signed into law a bill that expands
Medicare, primarily adding a prescription drug benefit for
Medicare-eligible retirees starting in 2006. In accordance with the
transition provisions under FASB Staff Position (FSP) 106-2, Accounting
and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 ("the Act"), the Company has
retroactively recognized the benefits of the Act beginning April 1,
2004. The effect of recognition lowered the net period cost of other
postretirement benefits by $1.1 million and $2.2 million (or $0.04 and
$0.08 per share) for the three month and nine month periods,
respectively.
7. Restructuring Charges, Impairments and Other Items
Third quarter 2004 results included a reduction in workforce at one of
the Company's Indian compressor facilities. The action affected
approximately 100 employees at the cost of $1.0 million. Year-to-date
2004 results also included restructuring and impairment charges
totaling $4.6 million related to previously announced facility
consolidation actions affecting several of the Company's facilities in
its North American Compressor and Electrical Components businesses.
The consolidation actions within the Compressor business include a move
of compressor machining and assembly operations from its Tecumseh,
Michigan facility to its existing
Page 9
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
compressor facility located in Tupelo, Mississippi. In conjunction,
aftermarket distribution operations located in Clinton, Michigan will
be relocated to the Tecumseh facility. Charges related to the
Compressor business action recognized during the third quarter included
relocation costs of $0.3 million. With the asset impairment charges of
$1.6 million recognized in the second quarter, year-to-date charges
totaled $1.9 million. Additional severance and relocation costs,
estimated to be approximately $1.2 million to $1.9 million, will be
recognized during the fourth quarter of 2004 as the consolidation
action is completed.
Actions in the Electrical Components business include the closure of
the Company's manufacturing facility in St. Clair, Missouri. Gear
machining operations will be consolidated into the Company's Salem,
Indiana facility and motor assembly operations will be consolidated
into the Company's Piedras Negras and Juarez, Mexico facilities.
Charges related to the Electrical Components business action recognized
during the third quarter totaled $0.7 million and included $0.4 million
of relocation costs incurred and employment related charges of $0.3
million. Total year-to-date costs of $2.7 million included asset
impairment charges of $1.7 million and employment-related charges of
$0.3 million recognized in the second quarter. Additional restructuring
and impairment charges, estimated to be approximately $2.0 million to
$3.1 million, will be recognized during the fourth quarter of 2004 and
first quarter of 2005 as the plant closure and consolidation action is
completed.
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
incurred both charges and gains, which were 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."
As of September 30, 2003, the Company recognized $31.0 million in
charges and $5.8 million in gains with respect to these restructuring
actions. Included in the charges were 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 included $0.8 million in
curtailment losses related to the pension plan at the Sheboygan Falls,
Wisconsin facility. The gains represented curtailment gains associated
with other post-employment benefits. Under U.S. GAAP, such gains were
not recognizable until the affected employees were 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
Page 10
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
incurred. Accordingly, $28.5 million and $2.5 million of the charges
were recognized in the second and third quarters, respectively.
8. Guarantees and Warranties
A portion of accounts receivable at the Company's Brazilian subsidiary
are sold with recourse. Brazilian receivables sold at September 30,
2004 and December 31, 2003 were $88.5 million and $64.5 million,
respectively. The Company estimates the fair value of the contingent
liability related to these receivables to be $0.7 million, which is
included in operating income and the 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, 2004
-------------------------------
Balance at January 1, 2004 $34.0
Accruals for warranties 17.4
Settlements made (in cash or in kind) (12.9)
Effect of foreign currency translation ---
-------------------------------
Balance at September 30, 2004 $38.5
===============================
9. Environmental Matters
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. The Consent Decree has also been approved by the
U.S. Department of Justice, and became a final judgment during the
second quarter 2004. 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
Page 11
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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 30 year term, in the amount of $100.0 million and
Environmental Site Liability insurance in the amount of $20.0 million.
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.
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
environmental liability arising from operations at the Site, including
potential residual liabilities not assumed by PRS pursuant to the
Liability Transfer Agreement.
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 legal
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, without limitation, 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, 2004, 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 cleanup 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
Page 12
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
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 during 2004 involving a segment downstream of the source area.
The Company has provided approximately $1.9 million for these 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, 2004
and December 31, 2003, the Company had accrued $45.6 million and $46.6
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.
10. Commitments and Contingencies
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,
including class actions, 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.
11. Fixed Assets
The components of fixed assets were:
SEPTEMBER 30, December 31,
(Dollars in millions) 2004 2003
------------------------- ------------------------
Land and land improvements $28.3 $26.3
Buildings 246.5 238.3
Machinery and equipment 1,159.7 1,059.6
Assets in process 41.1 28.2
------------------------- ------------------------
Gross property, plant and equipment 1,475.6 1,352.4
Less accumulated depreciation 938.9 797.8
------------------------- ------------------------
Property, plant and equipment, net $536.7 $554.6
========================= ========================
During the third quarter of 2004, the Company recorded an adjustment of $105.1
million to increase fixed assets and accumulated depreciation which did not have
an affect on net fixed assets, income or cash flows. The increase was $1.9
million to land improvements, $7.4 million to buildings and $95.8 to machinery
and equipment.
The adjustments to fixed assets and accumulated depreciation were necessary to
present fully depreciated assets that are currently in use on a consistent basis
for all the Company's global operations. Additionally, in connection with the
Company's acquisition of FASCO in December, 2002, the historical net book value
of FASCO's fixed assets were adjusted in purchase accounting to estimated fair
value, but still reflected their historical accumulated depreciation. However,
as the appropriate depreciation and amortization had been recorded based upon
adjusted fixed asset values, this adjustment did not have an affect on income or
cash flows.
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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 in the third quarter of 2004 increased to $478.6 million
from $438.5 million in 2003. Consolidated net sales year-to-date 2004 amounted
to $1,439.8 million compared to $1,394.7 million in the same period of 2003. The
effects of foreign currency translation increased sales by $7.6 million in
comparison to the third quarter 2003 and $24.7 million in comparison to the
first nine months of 2003. Excluding the effects of currency translation, sales
in the third quarter and year-to-date 2004 increased primarily due to increased
sales in the Company's Compressor and Engine & Power Train businesses.
Consolidated net income for the third quarter of 2004 amounted to net income of
$12.3 million or $0.67 per share compared to net income of $19.0 million or
$1.03 per share in the third quarter of 2003. Reported results for the third
quarter 2004 included restructuring charges of $2.0 million ($1.3 million net of
tax or $0.07 per share) resulting from the continuation of the previously
announced program related to the North American Compressor and Electrical
Components businesses, as well as a new program related to the Company's Indian
compressor operations. During the quarter, the Company also gave recognition to
the benefits created by the Medical Prescription Drug, Improvement and
Modernization Act of 2003. The effect of adoption increased three month and nine
month earnings by $0.7 million and $1.4 million or $0.04 and $0.08 per share,
respectively. Third quarter 2004 net income also reflected a higher effective
tax rate which resulted from changes in the full year estimate of the
relationship of losses in foreign jurisdictions, where the Company does not
recognize a related tax benefit, to worldwide pretax income as compared to the
previous quarter's estimates.
Included in reported results for the third quarter of 2003 was 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 or $0.10 per share. 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.
Consolidated net income for the nine months ended September 30, 2004 amounted to
$23.3 million or $1.26 per share compared to a $14.9 million or $0.81 per share
for the same period in 2003. In addition to the 2004 third quarter charges noted
above, reported results for the first nine months of 2004 included restructuring
and asset impairment charges of $3.6 million ($2.3 million net of tax or $0.13
per share) from the previously announced actions involving the Compressor and
Electrical Components businesses. In addition to the 2003 third quarter net
gains from restructuring actions and the federal income tax-related items
mentioned above, results for the first nine months of 2003 included a charge of
$28.5 million ($18.2 million net of tax or $0.99 per share) related to the
consolidation of operations in the Engine & Power Train business and 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.
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Exclusive of these respective restructuring charges, impairments and other
items, third quarter 2004 operating results improved from the respective 2003
period, primarily due to better results in the Compressor business offset by
lower results in the Company's other businesses and higher corporate expenses,
reflecting costs incurred in order to comply with the Sarbanes-Oxley Act of
2002. Nine month 2004 results were lower than the respective prior year period
in all business segments.
Compressor Business
Third quarter 2004 sales in the Company's compressor business increased by $25.1
million to $218.9 million from $193.8 million in the third quarter of 2003. The
increase over the comparable quarter from the prior year was attributable to a
favorable global market for compressor products sold into the original equipment
markets of residential refrigerators and freezers and room air conditioners.
Strong worldwide demand for small, high efficiency compressors used in
refrigerators and freezers, such as those manufactured by the Company in Brazil
and India, had a positive effect on volumes and pricing. Sales of compressors
utilized in room air conditioning also increased, due in part to growth in
exports from the Company's Indian operations. Alternatively, aftermarket volumes
in North America were down from the prior year due to a mostly mild cooling
season. The effect of foreign translation increased sales by $6.3 million.
Compressor business sales in the first nine months of 2004 increased by $44.3
million, or approximately 7.1%, from the first nine months of 2003. The effects
of foreign currency translation accounted for $16.6 million of the increase. In
addition, declines in sales of compressors used in unitary air conditioning
applications and aftermarket distribution in the U.S. were more than offset by
higher levels of sales of compressors used in refrigeration and room air
conditioning due to strong global demands.
Compressor business operating income for the third quarter of 2004 amounted to
$22.5 million compared to $15.5 million in the third quarter of 2003. The
increase in operating income in 2004 versus the comparable 2003 quarter
reflected the overall higher sales volumes in the quarter and cost cutting
initiatives in North America, partially offset by increases in commodity costs
that were not fully recovered through pricing actions. Operating income for the
first nine months of 2004 amounted to $53.7 million compared to $55.9 million
for the first nine months of 2003. The decrease in operating income for the
first nine months of 2004 versus the comparable 2003 period reflected the impact
of commodity price increases, an unfavorable exchange rate in Brazil, and
rapidly falling prices in India from lower import duties.
Electrical Components Business
Electrical Components business sales were $102.1 million in the third quarter of
2004 compared to $101.5 million in the third quarter of 2003. Year-to-date 2004
sales amounted to $314.3 million compared to $315.8 million in the same period
of 2003. Third quarter and year-to-date volume declines in gear motor and
actuator sales were partially offset by higher sales to the automotive market
and foreign currency-related increases in the Asian region.
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Electrical Components operating income for the third quarter of 2004 amounted to
$3.5 million compared to $3.9 million in the third quarter of 2003. Segment
operating profit year-to-date was $11.2 million compared to $11.5 million for
the same period in 2003. The decline in third quarter operating income largely
resulted from commodity cost increases. Year-to-date results were also impacted
by warranty, response and expediting costs, incurred as a result of a product
design change for an automotive segment customer. These costs were partially
offset by the absence in 2004 of the $4.2 million write-up of FASCO inventory,
recorded at December 31, 2002 in connection with purchase accounting that was
subsequently recognized in cost of sales during the first quarter of 2003.
Engine & Power Train Business
Engine & Power Train business sales amounted to $128.6 million in the third
quarter of 2004 compared to $113.2 million in the third quarter of 2003. Sales
year-to-date in 2004 were $356.9 million compared to $357.1 million in the same
period of 2003. The increase in sales for the third quarter reflected strong,
early season demand of engines used in snow blowers and an extended season for
engines used in walk behind rotary lawn mowers. This third quarter improvement
was offset by the year-to-date decline of sales volume in Europe.
Engine & Power Train business operating income in the third quarter of 2004
amounted to $2.2 million compared to $3.3 million in the third quarter of 2003.
Despite the increase in sales, higher commodity and freight costs negatively
impacted quarter results. For the first nine months of 2004, the Engine & Power
Train business incurred an operating loss of $11.2 million compared to an
operating loss of $7.1 million in 2003. The decline in third quarter and
year-to-date results reflected many factors including currency losses of $1.6
million on dollar-dominated borrowings in Brazil, start up costs and ramp up
inefficiencies at the Curitiba, Brazil facility, the impact of increased
commodity costs, reduced profitability at the European operations due to the
lower sales volumes, and product rework involving engines produced in the
Company's facility in the Czech Republic that was necessitated by defective
parts received from a supplier. The declines were partially offset by the
improvement in the operating results of the North American engine operations due
to the cost reductions achieved with the closure of the Douglas, Georgia and
Sheboygan Falls, Wisconsin facilities last year.
Pump Business
Pump business sales in the third quarter of 2004 amounted to $28.5 million
compared to $29.7 million in third quarter of 2003. Year-to-date sales amounted
to $102.5 million in 2004 compared to $100.6 million the previous year. The 4.4%
decrease in third quarter sales was primarily attributed to lower sales of water
gardening products as retailers worked down inventories. Year-to-date increases
reflected robust sales in the plumbing markets due to wet spring weather and
strong OEM demand in the HVAC market.
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operating income amounted to $3.1 million in the third quarter of 2004 compared
to $3.3 million in the same period in 2003. Operating income in the first nine
months of 2004 was $11.3 million compared to $11.7 million in 2003. The slight
decrease in operating income was primarily attributable to higher engineering,
administrative and promotional costs.
Restructuring Charges, Impairments and Other Items
Third quarter 2004 results included a reduction in workforce at one of the
Company's Indian compressor facilities. The action affected approximately 100
employees at the cost of $1.0 million. Year-to-date 2004 results also included
restructuring and impairment charges totaling $4.6 million related to previously
announced facility consolidation actions affecting several of the Company's
facilities in its North American Compressor and Electrical Components
businesses.
The consolidation actions within the Compressor business include a move of
compressor machining and assembly operations from its Tecumseh, Michigan
facility to its existing compressor facility located in Tupelo, Mississippi. In
conjunction, aftermarket distribution operations located in Clinton, Michigan
will be relocated to the Tecumseh facility. Charges related to the Compressor
business action recognized during the third quarter included relocation costs of
$0.3 million. With the asset impairment charges of $1.6 million recognized in
the second quarter, year-to-date charges totaled $1.9 million. Additional
severance and relocation costs, estimated to be approximately $1.2 million to
$1.9 million, will be recognized during the fourth quarter of 2004 as the
consolidation action is completed.
Actions in the Electrical Components business include the closure of the
Company's manufacturing facility in St. Clair, Missouri. Gear machining
operations will be consolidated into the Company's Salem, Indiana facility and
motor assembly operations will be consolidated into the Company's Piedras Negras
and Juarez, Mexico facilities. Charges related to the Electrical Components
business action recognized during the third quarter totaled $0.7 million and
included $0.4 million of relocation costs incurred and employment related
charges of $0.3 million. Total year-to-date costs of $2.7 million included asset
impairment charges of $1.7 million and employment-related charges of $0.3
million recognized in the second quarter. Additional restructuring and
impairment charges, estimated to be approximately $2.0 million to $3.1 million,
will be recognized during the fourth quarter of 2004 as the plant closure and
consolidation action is completed.
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
incurred both charges and gains, which were 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
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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."
As of September 30, 2003, the Company recognized $31.0 million in charges and
$5.8 million in gains with respect to these restructuring actions. Included in
the charges were 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 included $0.8 million in
curtailment losses related to the pension plan at the Sheboygan Falls, Wisconsin
facility. The gains represented curtailment gains associated with other
post-employment benefits. Under U.S. GAAP, such gains were not recognizable
until the affected employees were 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.
Interest Expense
Interest expense amounted to $5.3 million in the third quarter of 2004 compared
to $6.8 million in the third quarter of 2003. Interest expense amounted to $16.5
million in the first nine months of 2004 compared to $18.3 million in the same
period of 2003. The decrease in third quarter interest expense is the result of
debt repayments throughout 2004. This is somewhat offset by the rate applicable
to the bridge financing in effect between December 30, 2002, the date of the
FASCO acquisition, and March 5, 2003, the date of the Senior Guaranteed Note
Issuance for the year-to-date comparison.
Interest Income and Other, Net
Interest income and other, net amounted to $2.3 million in the third quarter of
2004 compared to $6.6 million in the third quarter of 2003. Interest income and
other, net amounted to $10.6 million in the first nine months of 2004 compared
to $16.7 million in the same period of 2003. This decrease resulted primarily
from lower average interest rates applicable to deposits in Brazil.
Taxes on Income
The effective income tax rate was 40% for the third quarter and 38% year-to-date
2004 compared to 23.1% and 18.6% in the 2003 comparable periods. The higher
effective tax rates in 2004 were the result of changes in the full year estimate
of the relationship of losses in foreign jurisdictions, where the Company does
not recognize a related tax benefit, to worldwide pretax income as compared to
the previous quarter's estimates. The lower rates in 2003 is the result of the
resolution of prior years' federal income tax audits and a prospective revision
to the full year
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 balance of the year is subject to many variables which could
significantly impact the Company's results. While the general economic climate
is improving and past restructuring actions are providing positive
contributions, the high level of commodity costs, weakness in the U.S. Dollar,
and pricing pressures from Asian-based competition will challenge each of the
Company's businesses in various ways making any predictions difficult. The
Company mitigates only a portion of its exposure to future material price
increases through forward contracts. Given the competitive nature of the
industries in which the Company competes, the Company most likely will not be
able to fully recover such cost increases through product pricing actions. The
Company expects overall fourth quarter 2004 operating results to be lower than
those of the fourth quarter 2003, excluding restructuring charges. Compressor
segment results are expected to be improved over the prior year while other
segments are expected to deteriorate.
The Company has taken significant actions over the last several years to improve
its cost position, product competitiveness, and value proposition to its
customers. Alternatives continue to be evaluated on how best to compete in the
highly competitive segments in which the Company operates. As further actions
are taken, it is possible that additional restructuring charges will be
incurred, particularly outside North America. While the amount and timing of
these charges cannot currently be accurately predicted, they may affect several
quarterly periods or years, and they could be material to the reported results
in the particular quarter or year in which they are recorded.
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 2004 provided cash
of $34.5 million compared to $43.1 million in cash used during the same period
of 2003. The improvement in 2004 resulted primarily from the absence of the
$39.2 cash payment for the Liability Transfer and Assumption Agreement. Working
capital of $563.0 million at September 30, 2004 was up slightly from $545.5
million at the end of 2003 due in part to higher inventory balances.
Working capital requirements and planned capital investments for 2004 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 $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 or federal investment incentive programs.
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
The Company will continue to focus its efforts on improving the profitability
and competitiveness of its worldwide operations. As indicated under the caption
"Restructuring Charges, Impairments and Other Items," the Company will be
completing previously announced actions over the remainder of the year that will
result in the recognition of charges throughout the balance of 2004. It is also
possible that additional restructuring initiatives could be announced,
particularly outside North America, during 2004 that could have a material
effect on the consolidated financial position and future results of operations
of the Company. Other potential 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 9 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, 2004 and December 31, 2003, the Company had accrued $45.6 and
$46.6 million, respectively, for environmental remediation. 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.
Internal Controls
Among the provisions of the Sarbanes-Oxley Act of 2002 (the "Act") is the
requirement under Section 404 for management to assess the effectiveness of the
Company's internal control structure and procedures for financial reporting as
of the end of the fiscal year. In addition, the Section requires the Company's
auditors to attest to and report on the assessment made by management.
During the second quarter, the Securities and Exchange Commission approved
Auditing Standard No. 2 issued by the Public Company Accounting Oversight Board
("PCAOB") establishing rules regarding both management's responsibilities and
procedures to be completed by the auditors. The specified rules are
comprehensive and require an unprecedented level of documentation and evaluation
that goes beyond the procedures historically utilized by management to assess
its internal controls. The Company has a program in place designed to comply
with these requirements.
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As noted under Item 4, "Controls and Procedures," the Company has completed a
substantial portion of management's evaluation. In the course of its evaluation,
management has identified certain deficiencies, some of which may be
significant, in the internal controls over financial reporting, which the
Company is addressing through remediation actions. In addition, it is possible
that the Company may identify additional deficiencies in the course of
completing its Section 404 compliance testing that would require remediation.
Management will consider these and other matters when assessing the
effectiveness of the Company's internal controls over financial reporting at
year end. The ultimate outcome of that assessment will depend on the Company's
ability to remediate the deficiencies in a timely manner to allow for adequate
retesting by both management and the Company's external auditors. While the
Company expects to complete its work, if management is not able to meet a
reasonable timetable, there is no guarantee that the Company's external auditors
will have sufficient resources to retest all remediated controls prior to year
end. In such an event, they would be unable to complete their assessment and
report on internal control over financial reporting.
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, particularly commodities, including
steel, cooper and aluminum, whose cost can be subject to significant variation;
ix) actions of competitors; x) the ultimate cost of resolving environmental and
legal matters; xi) the Company's ability to profitably develop, manufacture and
sell both 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) potential political and economic adversities
that could adversely affect anticipated sales and production in Brazil; and xiv)
potential political and economic adversities that could adversely affect
anticipated sales and production in India, including potential military conflict
with neighboring countries. These forward-looking statements are made only as of
the date hereof,
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 22
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. Fluctuations in commodity prices and foreign currency exchange rates
can be volatile, and the Company's risk management activities do not totally
eliminate these risks. Consequently, these fluctuations can have a significant
effect on results. 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
third quarter of 2004.
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,
2004 and December 31, 2003, the Company held foreign currency forward exchange
contracts and foreign currency call options with total notional values in the
amount of $11.8 and $16.3 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 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, 2004 and December 31, 2003 were $15.4 and
$16.1 million, respectively.
The Company is subject to interest rate risk, primarily associated with its
borrowings. The Company's $300 million Senior Guaranteed Notes are fixed-rate
debt. The Company has entered into fixed to variable interest rate swaps with
notional amounts totaling $125.0 million. The Company's remaining borrowings,
which consist of bank borrowings by its foreign subsidiaries and Industrial
Development Revenue Bonds, are variable-rate debt. Currently, including the
effect of the interest rate swaps, 46% of the Company's total debt is
fixed-rate. While changes in interest rates impact the fair value of this debt,
there is no impact to earnings and cash flow because the Company intends to hold
these obligations to maturity unless refinancing conditions are favorable.
Alternatively, while changes in interest rates do not affect the fair value of
the Company's variable-interest rate debt, they do affect future earnings and
cash flows. A 1% increase in interest rates would increase interest expense for
the year by approximately $2.0 million.
Page 23
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.
Since the date of the most recent evaluation of the Company's internal controls
by the Chief Executive Officer and the Chief Financial Officer, management has
taken corrective and proactive actions to enhance internal controls. Such
actions have significantly affected controls with regard to accounting for fixed
assets as well as control deficiencies in various areas that have been
identified during management's assessment and testing of internal controls
pursuant to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002.
During the third and fourth quarters of 2004, the Company commenced the
implementation of new fixed asset software for certain of its recently acquired
subsidiaries which required the input of fixed assets and related accumulated
depreciation and reconciliation to the applicable general ledger accounts.
During this process, management identified certain adjustments to fixed asset
and accumulated depreciation balances which did not affect previously reported
income or cash flows. Management has determined that this control issue
constitutes a significant deficiency as defined under standards established by
the Public Company Accounting Oversight Board and has implemented controls to
strengthen the recording and tracking of fixed assets, including:
- implementation of a common fixed asset software package, and
- the refinement of policies and procedures regarding the recording and
tracking of fixed assets, including those acquired as part of the
acquisition of a business.
In addition, the Company is currently undergoing a comprehensive effort in
preparation for compliance with Section 404 of the Sarbanes-Oxley Act of 2002.
This effort has included evaluating the adequacy of the Company's documentation
of controls, evaluating the effectiveness of control design, and testing the
operation of the controls as designed. A substantial amount of testing has been
completed and, in the course of its evaluation, management has identified
certain deficiencies, some of which may be significant, in its internal controls
over financial reporting which the Company is addressing through remediation
actions. Specifically, the Company is improving controls with respect to general
computer controls, documentary evidence of controls in operation, segregation of
duties, accounting for income taxes, and other isolated areas. In addition, it
is possible that the Company may identify additional deficiencies in the course
of completing its Section 404 compliance testing that would require remediation.
Page 24
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 4
CONTROLS AND PROCEDURES
Management has communicated to the company's Audit Committee and external
auditors the deficiencies noted above, as well as the remediation efforts.
Company management, with the oversight of the Audit Committee, is committed to
effectively remediating known deficiencies as expeditiously as possible and
continuing its efforts to comply with Section 404 of the Sarbanes-Oxley Act of
2002 by December 31, 2004.
Management will consider these and other matters when assessing the
effectiveness of the Company's internal controls over financial reporting at
year end. The ultimate outcome of that assessment will depend on the Company's
ability to remediate the deficiencies in a timely manner to allow for adequate
retesting by both management and the Company's external auditors. While the
Company expects to complete its work, if management is not able to meet a
reasonable timetable, there is no guarantee that the Company's external auditors
will have sufficient time to complete their assessment of the effectiveness of
the Company's internal control over financial reporting within a timely basis.
Page 25
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
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.
Page 26
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 9, 2004 BY: /s/ JAMES S. NICHOLSON
---------------------- ------------------------------
James S. Nicholson
Vice President, Treasurer and
Chief Financial Officer (on behalf
of the Registrant and as principal
financial officer)
Page 27
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
EX- 31.1 Certification of Chief Executive Officer pursuant to Section 302
EX- 31.2 Certification of Chief Financial Officer pursuant to Section 302
EX- 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act
EX- 32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act