Attached files
file | filename |
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EX-32.2 - EXHIBIT 32.2 - TECUMSEH PRODUCTS CO | c07602exv32w2.htm |
EX-31.1 - EXHIBIT 31.1 - TECUMSEH PRODUCTS CO | c07602exv31w1.htm |
EX-32.1 - EXHIBIT 32.1 - TECUMSEH PRODUCTS CO | c07602exv32w1.htm |
EX-31.2 - EXHIBIT 31.2 - TECUMSEH PRODUCTS CO | c07602exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 |
For the quarterly period ended September 30, 2010
OR
o | 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 | ||
(State or other jurisdiction of | 38-1093240 | |
incorporation or organization) | (IRS Employer Identification Number) | |
1136 OAK VALLEY DRIVE | ||
ANN ARBOR, MICHIGAN | 48108 | |
(Address of Principal Executive Offices) | (Zip Code) |
(734) 585-9500 (Registrants telephone number, including area code) |
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). Yes o No þ
As of October 29, 2010, the following shares of the registrants common stock were outstanding:
Class B Common Stock, $1.00 Par Value: |
5,077,746 | |||
Class A Common Stock, $1.00 Par Value: |
13,401,938 |
TABLE OF CONTENTS
Page | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
20 | ||||||||
28 | ||||||||
29 | ||||||||
31 | ||||||||
32 | ||||||||
33 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
Exhibit 32.2 |
Page 2
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements.
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited) (In Millions, Except Share Data)
September 30, | December 31, | |||||||
2010 | 2009 | |||||||
ASSETS |
||||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ | 70.8 | $ | 90.7 | ||||
Restricted cash and cash equivalents |
16.1 | 10.5 | ||||||
Accounts receivable, trade, less allowance for doubtful
accounts of $1.2 in 2010 and
2009 |
136.3 | 79.4 | ||||||
Inventories |
149.3 | 109.6 | ||||||
Deferred and recoverable income taxes |
6.9 | 7.4 | ||||||
Recoverable non-income taxes |
59.6 | 38.5 | ||||||
Fair value of hedge |
9.2 | 11.2 | ||||||
Other current assets |
17.0 | 13.4 | ||||||
Total current assets |
465.2 | 360.7 | ||||||
Property, Plant, and Equipment, net |
239.0 | 259.7 | ||||||
Long-term investments |
| 4.1 | ||||||
Prepaid pension expense |
8.2 | 80.3 | ||||||
Recoverable non-income taxes |
42.1 | 38.5 | ||||||
Other assets |
18.7 | 23.8 | ||||||
Total assets |
$ | 773.2 | $ | 767.1 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current Liabilities: |
||||||||
Accounts payable, trade |
$ | 142.0 | $ | 117.4 | ||||
Short-term borrowings |
47.7 | 23.0 | ||||||
Accrued liabilities: |
||||||||
Employee compensation |
33.0 | 29.0 | ||||||
Product warranty and self-insured risks |
12.3 | 10.6 | ||||||
Payroll taxes |
10.5 | 11.1 | ||||||
Fair value of hedge |
| 0.6 | ||||||
Other |
17.8 | 19.2 | ||||||
Total current liabilities |
263.3 | 210.9 | ||||||
Long-term debt |
16.2 | 8.0 | ||||||
Deferred income taxes |
0.1 | 7.2 | ||||||
Other postretirement benefit liabilities |
38.8 | 41.1 | ||||||
Product warranty and self-insured risks |
4.4 | 4.8 | ||||||
Pension liabilities |
24.8 | 25.2 | ||||||
Other |
8.1 | 6.5 | ||||||
Total liabilities |
355.7 | 303.7 | ||||||
Stockholders Equity |
||||||||
Class A common stock, $1 par value; authorized
75,000,000 shares; issued and outstanding
13,401,938 shares in 2010 and 2009 |
13.4 | 13.4 | ||||||
Class B common stock, $1 par value; authorized
25,000,000 shares; issued and outstanding
5,077,746 shares in 2010 and 2009 |
5.1 | 5.1 | ||||||
Paid in capital |
11.0 | 11.0 | ||||||
Retained earnings |
360.8 | 411.0 | ||||||
Accumulated other comprehensive income |
27.2 | 22.9 | ||||||
Total stockholders equity |
417.5 | 463.4 | ||||||
Total liabilities and stockholders equity |
$ | 773.2 | $ | 767.1 | ||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
Page 3
Table of Contents
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (In Millions, Except Share and per Share Data)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net sales |
$ | 221.6 | $ | 211.3 | $ | 709.6 | $ | 526.3 | ||||||||
Cost of sales and operating expenses |
196.9 | 192.3 | 625.2 | 493.8 | ||||||||||||
Gross Profit |
24.7 | 19.0 | 84.4 | 32.5 | ||||||||||||
Selling and administrative expenses |
27.5 | 29.6 | 85.6 | 95.3 | ||||||||||||
Impairments, restructuring charges, and other items |
0.9 | 3.6 | 49.4 | 10.6 | ||||||||||||
Operating loss |
(3.7 | ) | (14.2 | ) | (50.6 | ) | (73.4 | ) | ||||||||
Interest expense |
2.4 | 3.0 | 8.0 | 8.0 | ||||||||||||
Interest income and other, net |
0.3 | 0.5 | 0.9 | 1.9 | ||||||||||||
Loss from continuing operations before taxes |
(5.8 | ) | (16.7 | ) | (57.7 | ) | (79.5 | ) | ||||||||
Tax benefit |
2.8 | 1.2 | 4.7 | 14.9 | ||||||||||||
Loss from continuing operations |
(3.0 | ) | (15.5 | ) | (53.0 | ) | (64.6 | ) | ||||||||
Income (loss) from discontinued operations, net of tax |
(0.2 | ) | 1.4 | 2.8 | 1.7 | |||||||||||
Net loss |
$ | (3.2 | ) | $ | (14.1 | ) | $ | (50.2 | ) | $ | (62.9 | ) | ||||
Basic and diluted loss per share (a): |
||||||||||||||||
Loss from continuing operations |
$ | (0.16 | ) | $ | (0.84 | ) | $ | (2.87 | ) | $ | (3.50 | ) | ||||
Income (loss) from discontinued operations, net of tax |
(0.01 | ) | 0.08 | 0.15 | 0.10 | |||||||||||
Net loss per share |
$ | (0.17 | ) | $ | (0.76 | ) | $ | (2.72 | ) | $ | (3.40 | ) | ||||
Weighted average shares, basic and diluted (in thousands) |
18,480 | 18,480 | 18,480 | 18,480 | ||||||||||||
Cash dividends declared per share |
$ | 0.00 | $ | 0.00 | $ | 0.00 | $ | 0.00 | ||||||||
(a) | On April 9, 2007, we issued a warrant to a lender to purchase 1,390,944 shares of our Class A
Common Stock, which is equivalent to 7% of our fully diluted common stock (including both
Class A and Class B shares). This warrant, which expires in 2011, is not included in diluted
per share information, as the effect would be antidilutive. |
The accompanying notes are an integral part of these Consolidated Financial Statements.
Page 4
Table of Contents
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In Millions)
Nine Months Ended | ||||||||
September 30, | ||||||||
2010 | 2009 | |||||||
Cash Flows from Operating Activities: |
||||||||
Net loss |
$ | (50.2 | ) | $ | (62.9 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Depreciation |
29.8 | 30.5 | ||||||
Amortization of debt-issuance costs |
1.1 | 0.3 | ||||||
Impairment of long-lived assets and goodwill |
| 2.2 | ||||||
Impairment of prepaid asset |
| 1.5 | ||||||
Gain on disposal of property and equipment |
0.6 | 2.4 | ||||||
Non-cash settlement of hourly pension plan reversion |
29.4 | | ||||||
Non-cash curtailment of post-retirement benefits |
(7.0 | ) | | |||||
Deferred income taxes |
(6.6 | ) | 5.8 | |||||
Share based compensation |
1.3 | (4.4 | ) | |||||
Investment impairment |
0.4 | | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(56.0 | ) | 0.9 | |||||
Inventories |
(38.5 | ) | 31.0 | |||||
Payables and accrued expenses |
28.2 | (3.4 | ) | |||||
Employee retirement benefits |
(5.6 | ) | (10.0 | ) | ||||
Hourly pension plan reversion |
54.5 | | ||||||
Recoverable non-income taxes |
(21.7 | ) | (17.4 | ) | ||||
Other |
(1.6 | ) | 12.7 | |||||
Cash used in operating activities |
(41.9 | ) | (10.8 | ) | ||||
Cash Flows from Investing Activities: |
||||||||
Capital expenditures |
(5.3 | ) | (5.7 | ) | ||||
Short and long term investments |
4.1 | (0.2 | ) | |||||
Change in restricted cash and cash equivalents |
(5.7 | ) | 1.2 | |||||
Proceeds (payments made) from sale of assets |
0.2 | (13.3 | ) | |||||
Cash used in investing activities |
(6.7 | ) | (18.0 | ) | ||||
Cash Flows from Financing Activities: |
||||||||
Other borrowings (repayments), net |
30.7 | (3.0 | ) | |||||
Cash provided by (used in) financing activities |
30.7 | (3.0 | ) | |||||
Effect of Exchange Rate Changes on Cash |
(2.0 | ) | 3.6 | |||||
Decrease in cash and cash equivalents |
(19.9 | ) | (28.2 | ) | ||||
Cash and Cash Equivalents: |
||||||||
Beginning of Period |
90.7 | 113.1 | ||||||
End of Period |
$ | 70.8 | $ | 84.9 | ||||
Cash paid (refunds received) for taxes |
$ | 0.1 | $ | (13.2 | ) | |||
Cash paid for interest |
$ | 6.4 | $ | 9.1 |
The accompanying notes are an integral part of these Consolidated Financial Statements.
Page 5
Table of Contents
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. Accounting Policies
The accompanying unaudited consolidated financial statements of Tecumseh Products Company and
Subsidiaries (the Company) have been prepared in accordance with U.S. generally accepted
accounting principles (U.S. GAAP) for interim financial information and with the rules and
regulations of the Securities and Exchange Commission (SEC). Accordingly, they do not include
all of the information and notes required by U.S. GAAP for complete financial statements. Such
financial statements reflect all adjustments (all of which, except for the reclassification
described below, are of a normal recurring nature) which are, in the opinion of management,
necessary for a fair statement of the results for the interim periods presented. Interim results
are not necessarily indicative of the results that may be expected for a full year. The
accompanying unaudited financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the
year ended December 31, 2009. Due to the seasonal nature of certain product lines, the results of
operations for the interim period are not necessarily indicative of the results for the entire
fiscal year.
Reclassification
Results of operations for prior periods have been restated to report the Paris, Tennessee operation
as a continuing operation.
Use of Estimates
Management is required to make certain estimates and assumptions in preparing the consolidated
financial statements in accordance with U.S. GAAP. These estimates and assumptions impact the
reported amount of assets and liabilities and disclosures of contingent assets and liabilities as
of the date of the consolidated financial statements. They also impact the reported amount of net
earnings or losses during any period. Actual results could differ from those estimates.
Significant estimates and assumptions used in the preparation of the accompanying consolidated
financial statements include those related to: accruals for product warranty, deferred tax assets,
self-insured risks, pension and postretirement benefit obligations and environmental matters, as
well as the evaluation of long lived asset impairments and determination of stock based
compensation.
NOTE 2. Discontinued Operations
In 2007 and 2008, we completed the sale of the majority of our noncore businesses in our Electrical
Components (Residential & Commercial, Asia Pacific and Automotive & Specialty), Engine and Power
Train and Other (MP Pumps and Manufacturing Data Systems) operating segments. In addition, in June
2009, we completed the liquidation of a small division previously classified as held for sale for
$0.6 million in gross proceeds. As described in Note 1, results of operations for prior periods
have been restated to report the Paris, Tennessee operation as a continuing operation and to remove
it from discontinued operations.
The Company continues to incur legal fees, settlements and other expenses (recorded in the table
below in impairments, restructuring charges, and other items) as purchasers of these businesses
continue to seek adjustments to purchase price through provisions in the agreements, as well as
post-retirement benefit curtailments and settlements as the Company continues to review its
post-retirement benefits.
The net revenues and net losses for the aforementioned discontinued operations for the applicable
periods are as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(In Millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Net sales |
$ | | $ | | $ | | $ | 0.8 | ||||||||
Cost of sales |
| | | 0.6 | ||||||||||||
Selling and administrative expenses |
| | | 0.5 | ||||||||||||
Impairments, restructuring charges, and other items |
0.5 | (2.4 | ) | (4.6 | ) | (2.8 | ) | |||||||||
Operating (loss) income from discontinued operations before
income taxes |
(0.5 | ) | 2.4 | 4.6 | 2.5 | |||||||||||
Income tax (benefit) provision on discontinued operations |
(0.3 | ) | 1.0 | 1.8 | 0.8 | |||||||||||
Operating (loss) income from discontinued operations after
income taxes |
$ | (0.2 | ) | $ | 1.4 | $ | 2.8 | $ | 1.7 | |||||||
Page 6
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For the quarter ended September 30, 2010, impairments, restructuring charges and other items in the
table above were $0.5 million, $0.2 million related to our Grafton facility (formerly of the Engine
and Power Train Group) for environmental accruals ($0.1 million) and operating costs ($0.1 million)
and $0.3 million for legal fees and settlements for other sold businesses. See Note 12 for a
discussion of income taxes included in discontinued operations.
For the quarter ended September 30, 2009, impairments, restructuring charges and other items in the
table above were $(2.4) million, which primarily relates to receipt of $3.0 million for settlement
of amounts previously held in escrow related to resolution of certain contingent liabilities from
the sale of the Residential & Commercial portion of the Electrical Components business. This gain
was somewhat offset by various expenses totaling $0.6 million, which included legal fees and
settlements and costs of settling a dispute with the purchaser of the Automotive & Specialty
portion of the business.
For the nine months ended September 30, 2010, impairments, restructuring charges and other items in
the table above were ($4.6) million, which primarily relates to a non-cash curtailment gain of $6.6
million as a result of terminating post retirement benefits for a sold business, partially offset
by $0.8 million related to our Grafton facility (formerly of the Engine and Power Train Group) for
environmental accruals ($0.5 million) and operating costs ($0.3 million) and $1.2 million for
legal fees and settlements for other sold businesses.
For the nine months ended September 30, 2009, impairments, restructuring charges, and other items
in the table above were $(2.8) million, which primarily relates to receipt of $5.4 million related
to the sale of the Residential & Commercial portion of the Electrical Components business. This
amount represented the settlement of amounts previously held in escrow related to the resolution of
certain contingent liabilities. This gain was somewhat offset by various expenses totaling $2.6
million, which included legal fees and costs of settling a dispute with the purchaser of the
Automotive & Specialty portion of the business.
Our Grafton facility, an asset held from our former Engine and Power Train Group, is classified as
held for sale on our consolidated balance sheet under the caption other current assets in the
amount of $0.5 million.
NOTE 3. Inventories
The components of inventories are as follows:
September 30, | December 31, | |||||||
(In Millions) | 2010 | 2009 | ||||||
Raw materials, net of reserves |
$ | 75.5 | $ | 54.9 | ||||
Work in progress |
2.3 | 4.3 | ||||||
Finished goods, net of reserves |
71.5 | 50.4 | ||||||
$ | 149.3 | $ | 109.6 | |||||
Raw materials are net of a $3.6 million and $3.4 million reserve for obsolete and slow moving
inventory at September 30, 2010 and December 31, 2009, respectively. Finished goods are net of a
$1.8 million reserve for obsolete and slow moving inventory, and lower of cost or market at
September 30, 2010 and December 31, 2009, respectively.
NOTE 4. Property, Plant and Equipment, net
The components of property, plant and equipment, net are as follows:
September 30, | December 31, | |||||||
(In Millions) | 2010 | 2009 | ||||||
Land and land improvements |
$ | 16.3 | $ | 16.5 | ||||
Buildings |
97.4 | 107.5 | ||||||
Machinery and Equipment |
888.6 | 892.1 | ||||||
1,002.3 | 1,016.1 | |||||||
Less accumulated depreciation |
765.9 | 759.4 | ||||||
236.4 | 256.7 | |||||||
Construction in process |
2.6 | 3.0 | ||||||
Property, plant and equipment, net |
$ | 239.0 | $ | 259.7 | ||||
Depreciation expense associated with property, plant and equipment was $10.0 million and $10.9
million for the three months ended September 30, 2010, and 2009, respectively and $29.8 million and
$30.5 million for the nine months ended September 30, 2010 and 2009, respectively.
Page 7
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NOTE 5. Pension and Other Postemployment Benefit (OPEB) Plans
The following tables present the components of net periodic expense (benefit) of the Companys
Pension and OPEB plans:
Pension Benefits | Other Benefits | |||||||||||||||
Three Months | Three Months | |||||||||||||||
Ended | Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(In Millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Service cost |
$ | 0.5 | $ | 0.6 | $ | 0.1 | $ | 0.1 | ||||||||
Interest cost |
2.0 | 2.9 | 0.5 | 0.6 | ||||||||||||
Expected return on plan assets |
(2.1 | ) | (4.1 | ) | | | ||||||||||
Amortization of net loss (gain) |
0.4 | | (1.2 | ) | (2.4 | ) | ||||||||||
Amortization of actuarial transition obligation |
| | | (0.1 | ) | |||||||||||
Additional expense due to curtailments,
settlements and terminations (see below) |
0.2 | | | | ||||||||||||
Net periodic expense (benefit) |
$ | 1.0 | $ | (0.6 | ) | $ | (0.6 | ) | $ | (1.8 | ) | |||||
Pension Benefits | Other Benefits | |||||||||||||||
Nine Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(In Millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Service cost |
$ | 1.5 | $ | 1.8 | $ | 0.3 | $ | 0.4 | ||||||||
Interest cost |
6.7 | 8.8 | 1.6 | 1.9 | ||||||||||||
Expected return on plan assets |
(8.2 | ) | (12.2 | ) | | | ||||||||||
Amortization of net loss (gain) |
1.1 | (0.1 | ) | (3.7 | ) | (7.4 | ) | |||||||||
Amortization of actuarial transition obligation |
| | | (0.3 | ) | |||||||||||
Additional expense (income) due to
curtailments, settlements and terminations
(see below) |
29.6 | 0.5 | (6.8 | ) | | |||||||||||
Net periodic expense (benefit) |
$ | 30.7 | $ | (1.2 | ) | $ | (8.6 | ) | $ | (5.4 | ) | |||||
For the three months ended September 30, 2010, Additional expense due to curtailments, settlements
and terminations in pension benefits includes an additional non-cash settlement expense of $0.2
million related to the first quarter reversion of our hourly pension plan.
For the nine months ended September 30, 2010, Additional expense (income) due to curtailments,
settlements and terminations in pension benefits includes the reversion of our hourly pension plan
in the first quarter of 2010 that yielded $43.6 million, net of excise tax, in net proceeds to us.
The reversion resulted in a non-cash charge of $29.4 million ($15.6 million of previously deferred
settlement losses and $13.8 million of enhanced termination benefits given to covered employees)
and $10.9 million for federal excise tax levied on the gross amount of cash returned to the
Company, all of which are recorded as a net expense of $40.3 million in impairments, restructuring
charges and other items in our Statement of Operations. The final settlement of the plan will take
place within the next year and could result in additional charges or additional income, but we
dont expect the amount to be material.
In addition to the $29.4 million of settlement charges included in the table above, our salary plan
included $0.2 million in costs for special termination benefits.
For the nine months ended September 30, 2010, Additional expense (income) due to curtailments,
settlements and terminations in other benefits includes the impact of post-retirement benefits
that were terminated for a plant closing and a sold business. These terminations resulted in a
non-cash curtailment gain of $7.0 million ($6.6 million recorded in discontinued operations and
$0.4 million recorded in Impairments, restructuring charges, and other items), partially offset by
$0.2 million of other expenses.
We have defined contribution retirement plans that cover substantially all domestic employees. The
combined expense for these plans was $0.6 million and $0.5 million for each of the three months
ended September 30, 2010 and 2009, respectively and $1.7 million for each of the nine months ended
September 30, 2010 and 2009. All contributions were funded from the proceeds obtained from the
reversion of our former salaried pension plan.
Page 8
Table of Contents
NOTE 6. Recoverable Non-income Taxes
We pay various value-added taxes in jurisdictions outside of the United States. These include
taxes levied on material purchases, fixed asset purchases, and various social taxes. The majority
of these taxes are creditable when goods are sold to customers domestically or against income taxes
due. Since the taxes are recoverable upon completion of these procedures, they are recorded as
assets upon payment of the taxes.
Historically, due to the concentration of exports, such taxes were typically credited against
income taxes. However, with reduced profitability, primarily in Brazil, we instead sought these
refunds via alternate proceedings.
Following is a summary of the recoverable non-income taxes recorded on our balance sheet at
September 30, 2010 and December 31, 2009:
September 30, | December 31, | |||||||
(In Millions) | 2010 | 2009 | ||||||
Brazil |
$ | 81.6 | $ | 67.7 | ||||
India |
12.8 | 7.1 | ||||||
Europe |
7.3 | 2.2 | ||||||
Total recoverable non-income taxes |
$ | 101.7 | $ | 77.0 | ||||
At September 30, 2010, a receivable of $59.6 million was included in current assets and $42.1
million was included in non-current assets and is expected to be recovered through 2012. The
actual amounts received as expressed in U.S. dollars will vary depending on the exchange rate at
the time of receipt or future reporting date.
NOTE 7. Warranties
Reserves are recorded on the consolidated balance sheet to reflect our contractual liabilities
relating to warranty commitments to customers.
Changes in accrued product warranty costs for the periods ended September 30, 2010 and 2009 are
summarized as follows:
Nine Months | Nine Months | |||||||
Ended | Ended | |||||||
(In Millions) | September
30, 2010 |
September
30, 2009 |
||||||
Balance at January 1, |
$ | 5.1 | $ | 6.6 | ||||
Settlements made (in cash or in kind) |
(3.6 | ) | (4.1 | ) | ||||
Current year accrual |
4.2 | 3.6 | ||||||
Adjustments to preexisting warranties |
| (1.1 | ) | |||||
Effect of foreign currency translation |
| 0.3 | ||||||
Balance at September 30, |
$ | 5.7 | $ | 5.3 | ||||
Warranty expense was $4.2 million and $2.8 million for the nine months ended September 30, 2010 and
2009, respectively. At September 30, 2010, $4.9 million was included in current liabilities and
$0.8 million was included in non-current liabilities. At December 31, 2009, $4.6 million was
included in current liabilities and $0.5 million was included in non-current liabilities.
NOTE 8. Debt
On June 24, 2010 we voluntarily terminated the Lenders commitments to lend under our Credit
Agreement with JPMorgan Chase Bank, N.A. as administrative agent (Chase), and J.P. Morgan
Securities Inc. as lead arranger, dated March 20, 2008, and amended March 18, 2009, October 20,
2009 and February 19, 2010. This agreement provided a $30 million revolving line of credit until
January 31, 2011 and was secured by accounts receivable and inventories in the U.S. and Canada, as
well as certain fixed assets and 65% of the stock of our foreign subsidiaries. These security
interests were released upon termination. The agreement had restrictive covenants, including a
fixed charge coverage ratio covenant, which had not become applicable at the time of termination,
and restrictions on our ability to pay cash dividends.
As of the date of termination, there was no outstanding indebtedness (except as described below),
we were in compliance with all the covenants of this agreement and no termination fees were
incurred.
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At the time of termination, we granted Chase and its affiliates a security interest in
approximately $8.9 million, reduced to $7.4 million as of September 30, 2010, of cash collateral
(the Cash Collateral), to secure all obligations under existing letters of credit issued by Chase
($4.6 million), a guarantee of availability of funds for ACH transactions by Chase ($2.0 million),
derivative obligations with Chase ($0.4 million), and foreign subsidiary overdraft protection
guarantees by Tecumseh to Chase ($0.4 million). The Cash Collateral will remain in a restricted
account until these obligations are paid in full or they are replaced with third parties and is
included in restricted cash and cash equivalents on our balance sheet. All other obligations of
Tecumseh to Chase and its affiliates have been paid in full. Tecumseh Products will have no ability
to withdraw, or have any other control over, the Cash Collateral, and acknowledged that Chase and
its affiliates shall have sole control over the Cash Collateral.
We wrote off approximately $0.6 million of remaining deferred financing costs originally incurred
in connection with this agreement. These costs were being amortized over the life of the
agreement.
We have various borrowing arrangements at our foreign subsidiaries to support working capital needs
and government sponsored borrowings which provide advantageous lending rates.
In Europe, based upon exchange rates as of September 30, 2010, we have an unsecured, uncommitted
discretionary credit facility of $2.7 million that expires on January 27, 2011. Historically we
have been able to extend this facility when it expires, but such extension is at the discretion of
the bank. Our borrowings under this facility, based the exchange rate as of September 30, 2010,
totaled $2.7 million with no availability for additional borrowings. There are no restrictive
covenants on this credit facility.
In Brazil, based upon the exchange rates as of September 30, 2010, we have uncommitted,
discretionary revolving credit facilities with several local private Brazilian banks (most of which
are guaranteed by the Brazilian government) for an aggregate maximum of $61.4 million, subject to a
borrowing base formula computed on a monthly basis. These facilities are secured by a portion of
our accounts receivable and inventory balances and expire at various times from November 18, 2010
through July 13, 2013. Historically we have been able to enter into replacement facilities when
these facilities expire, but such replacements are at the discretion of the banks. Lenders
determine, in their discretion, whether to make new advances with respect to each draw on such
facility and there are no restrictive covenants on these credit facilities. Our borrowings under
these facilities totaled $47.4 million based upon exchange rate as of September 30, 2010, with an
additional $14.0 million available for borrowing, based on our accounts receivable and inventory
balances and exchange rates as of September 30, 2010.
In India, based upon exchange rates as of September 30, 2010, we have an aggregate maximum of $15.3
million of revolving credit facilities subject to a borrowing base formula computed on a monthly
basis and secured by land, building and equipment, inventories and receivables. The arrangements
expire at various times from January 2011 through April 2011. Historically we have been able to
renew these facilities when they expire, but such renewal is at the discretion of the banks. Our
borrowings under these facilities, based the exchange rate as of September 30, 2010, totaled $13.8
million, and based on the exchange rate and our borrowing base as of September 30, 2010, we had an
additional $1.5 million available for borrowing under these facilities. There are no restrictive
covenants on these credit facilities, except that permission must be received from the bank in
order to dispose of certain assets.
Our consolidated borrowings under these arrangements totaled $63.9 million at September 30, 2010.
Our weighted average interest rate for these borrowings was 6.1% for the nine months ended
September 30, 2010 and 8.9% for the year ended December 31, 2009.
NOTE 9. Comprehensive Income (Loss)
A summary of comprehensive (loss) income is as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
(In Millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Net loss |
$ | (3.2 | ) | $ | (14.1 | ) | $ | (50.2 | ) | $ | (62.9 | ) | ||||
Other comprehensive income (loss), net of tax |
||||||||||||||||
Foreign currency translation adjustments |
19.6 | 18.0 | 5.6 | 53.3 | ||||||||||||
Gain(Loss) on derivatives, net of tax |
6.0 | 3.9 | (3.1 | ) | 31.1 | |||||||||||
Total comprehensive income (loss) |
$ | 22.4 | $ | 7.8 | $ | (47.7 | ) | $ | 21.5 | |||||||
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NOTE 10. Share-Based Compensation Arrangements
Under our Long-Term Incentive Cash Award Plan, two types of incentives are awarded, both of which
are based upon the value of our Class A shares; stock appreciation rights (SARs) and phantom
stock units.
SARs are granted with an exercise price equal to the closing price of the Companys common stock on
the date of the grant, as reported by the NASDAQ Stock Market. SARs and phantom shares are
generally granted to non-employee directors and key employees in the first quarter of each year and
vest one-third each year over a three year period and have a seven year term.
In the first quarter of 2010, we granted 102,696 phantom stock units with a weighted average grant
price of $12.86 and 117,601 SARs with a weighted average grant price of $10.41.
We measure the fair value of the phantom stock units based upon the closing stock price of our
Class A common stock on the last day of the reporting period. At September 30, 2010 and December
31, 2009, the closing stock price on our Class A common stock was $11.47 and $11.69 respectively.
We measure the fair value of each SAR, also based on the closing stock price of Class A common
stock on the last day of the period, using a Black-Scholes valuation model. The fair value of each
SAR was estimated as of September 30, 2010 using the following assumptions:
September 30, 2010 | September 30, 2009 | |||
Risk-free interest rate |
1.07-1.70% | 2.93% | ||
Dividend yield |
0.0% | 0.0% | ||
Expected life (years) |
4.4-6.3 years | 5.4-6.8 years | ||
Volatility |
88.33% | 91.65% |
Since both the SARs and the phantom stock units are settled in cash rather than by issuing equity
instruments; we record them as expense with a corresponding liability on our balance sheet. The
expense is based on the fair value of the awards on the last day of the reporting period and
represents an amortization of that fair value over the vesting period of the awards. Total
compensation expense related to the plan for the three months ended September 30, 2010 and 2009 was
$0.4 million and $(1.9) million, respectively, and total compensation expense for the nine months
ended September 30, 2010 and 2009 was $1.3 million and $(4.4) million respectively. The balance
of the fair value that has not yet been recorded as expense is considered an unrecognized
liability. The unrecognized compensation as calculated at September 30, 2010 and December 31, 2009
was $2.5 million and $2.1 million, respectively.
NOTE 11. Impairments, Restructuring Charges, and Other Items
The charges (gains) recorded as restructuring, impairment and other charges for three and nine
months ended September 30, 2010 and 2009 are as follows:
Three Months | Nine Months | |||||||||||||||
Ended September 30, | Ended September 30, | |||||||||||||||
(In Millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Legal Settlement |
$ | | $ | | $ | 7.3 | $ | | ||||||||
Environmental reserve on held-for-sale building |
| | 1.2 | 2.3 | ||||||||||||
Severance, restructuring costs, and special termination benefits |
0.7 | 1.1 | 1.7 | 5.5 | ||||||||||||
Curtailment Gain |
| | (0.4 | ) | | |||||||||||
Settlement loss on the hourly pension plan reversion |
0.2 | | 29.4 | | ||||||||||||
Excise tax expense on proceeds from hourly retirement plan reversion |
| | 10.9 | | ||||||||||||
Impairment of Investment |
| 1.0 | 0.3 | 1.0 | ||||||||||||
Final settlement of previously terminated salary retirement plan,
net of excise tax |
| | (1.0 | ) | | |||||||||||
Loss on transfer of surplus land |
| | | 0.3 | ||||||||||||
Impairment of prepaid outside sales expense |
| 1.5 | | 1.5 | ||||||||||||
Total impairments, restructuring charges, and other items |
$ | 0.9 | $ | 3.6 | $ | 49.4 | $ | 10.6 | ||||||||
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Impairments, Restructuring Charges, and Other Items for the third quarter of 2010 include $0.7
million related to severance associated with a reduction in force at our Brazilian ($0.1 million)
and Corporate ($0.6 million) locations; and a $0.2 million non-cash settlement charge related to
the reversion of our hourly pension plan (as more fully described in Note 5 of the notes to
consolidated financial statements).
Impairments, Restructuring Charges, and Other Items for the third quarter of 2009 include severance
payments associated with a reduction in force at our Brazilian ($1.0 million) and Corporate ($0.1
million) locations; and $1.0 million related to the impairment of an investment; and a $1.5 million
write-off of pre-paid expenses for outside sales support.
For the nine months ended September 30, 2010, Impairments, Restructuring Charges, and Other Items
include a legal settlement of $7.3 million; an environmental reserve increase of $1.2 million; a
curtailment gain of $0.4 million; the non-cash settlement charges and excise tax related to the
reversion of our hourly pension plan (as more fully described in Note 5 of the notes to
consolidated financial statements); impairment of an investment, and severance payments associated
with a reduction in force at our Brazilian ($0.6 million) and Corporate ($1.1 million) locations.
In addition, a final settlement gain of $1.0 million, net of excise tax, was received in February
2010 from our previous salaried pension plan that was terminated in 2008.
Impairments, Restructuring Charges, and Other Items for the nine months ended September 30, 2009
include severance payments, payroll taxes and other benefit-related costs associated with a
reduction in force at our Brazilian ($3.7 million), North American ($1.2 million) and Indian ($0.6
million) locations, the environmental reserve associated with the remediation activities at our
former Tecumseh, Michigan facility (as more fully described in Note 15 of the notes to consolidated
financial statements); the impairment of an investment, and a write-off of pre-paid expenses for
outside sales support.
The following table reconciles cash activities for the nine months ended September 30, 2010 for
accrued impairment, restructuring charges and other items.
(In Millions) | Severance | Excise Tax | Legal | Other | Total | |||||||||||||||
Balance at January 1, 2010 |
$ | 9.7 | $ | | $ | | $ | 1.8 | $ | 11.5 | ||||||||||
Accruals |
1.3 | 10.9 | 7.3 | 1.2 | 20.7 | |||||||||||||||
Payments |
(10.4 | ) | (10.9 | ) | (7.3 | ) | (0.5 | ) | (29.1 | ) | ||||||||||
Balance at September 30, 2010 |
$ | 0.6 | $ | | $ | | $ | 2.5 | $ | 3.1 | ||||||||||
The severance reserve established in the last quarter of 2009 represents the remaining payments to
be made related to our European reduction in force and is expected to be paid in the first quarter
of 2011. The excise tax on the pension reversion was paid in the second quarter and the legal
accrual was paid in the third quarter. The environmental reserve (included in other) established
in the first quarter of 2009, increased $1.2 million in 2010 and represents estimated costs
associated with remediation activities at our former Tecumseh, Michigan facility, and is expected
to be paid over the next 15-21 months.
NOTE 12. Income Taxes
We record the tax impact of certain discrete items (unusual or infrequently occurring), including
changes in judgment about valuation allowances and effects of changes in tax laws or rates in the
interim period in which they occur. We adjust our effective tax rate for each quarter to be
consistent with the estimated annual effective tax rate. For periods ending in 2010, we calculated
our tax provision based on the estimate of the annual effective tax rate. Prior to the current
year, a reliable estimate of U.S. ordinary income was not available so a discrete period
computation was used. The switch from the discrete method to the effective method did not have an
impact for the nine months ended September 30, 2010.
In addition, income taxes are allocated between continuing operations, discontinued operations and
other comprehensive income because all items, including discontinued operations, should be
considered for purposes of determining the amount of tax benefit that results from a loss from
continuing operations and that could be allocated to continuing operations.
We apply this concept by tax jurisdiction, and in periods in which there is a pre-tax loss from
continuing operations and pre-tax income in another category, such as discontinued operations or
other comprehensive income, the tax benefit allocated to continuing operations is determined by
taking into account the pre-tax income of other categories.
For the three months ended September 30, 2010, we reported a loss from continuing and discontinued
operations and income in other comprehensive income (OCI) in U.S. jurisdictions. The
consolidated statement of operations reflects a $2.8 million
income tax benefit from continuing operations for the three months ended September 30, 2010. This
tax benefit is comprised of benefits of $0.9 million in foreign taxes and $1.9 million in U.S.
federal taxes. The $1.2 million in tax benefit from continuing operations for the third quarter of
2009 is comprised of an expense of $7.0 million in foreign taxes (including the establishment of a
valuation allowance of $5.0 million) and a benefit of $8.2 million in U.S. federal taxes.
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For the nine months ended September 30, 2010, we recorded a tax benefit of $4.7 million from
continuing operations. This tax benefit is comprised of $0.2 million in foreign tax expense and a
tax benefit of $4.9 million in U.S. federal taxes. The $14.9 million in tax benefit recorded
against continuing operations for the nine months ended September 30, 2009 represented a tax
benefit of $8.7 million for U.S. federal taxes, a tax benefit of $4.7 million for foreign taxes,
and a tax benefit of $1.5 million for state taxes. The state tax benefit was the result of a
change in tax law.
The receipt of $54.5 million in gross proceeds from the reversion of our hourly retirement plan in
the first quarter of 2010 generated a tax gain that was fully offset for federal tax purposes by
our NOL carryforwards.
At September 30, 2010 and December 31, 2009, full valuation allowances were recorded against
deferred tax assets for those tax jurisdictions, specifically the U.S., Brazil, France and India,
in which we believe it is not more likely than not that the deferred taxes will be realized.
We have open tax years from 2005 to 2009, with various significant taxing jurisdictions including
the U.S., Canada, France and Brazil. In the U.S., our federal income tax returns through 2005 have
been examined by the Internal Revenue Service.
U.S. federal tax refund claims were filed during the second quarter of 2010 and resulted in the
receipt of tax refunds of $1.2 million. These refunds were recognized as a tax benefit during the
period. The IRS is currently auditing a refund claim and upon completion of that audit, the amount
of the unrecognized tax benefits could be reduced by $5.5 million within the next 12 months.
NOTE 13. Fair Value
We categorize assets and liabilities at fair value in three levels, based on the markets in which
the assets and liabilities are traded and the reliability of the assumptions used to determine fair
value. These levels are as follows:
Level 1
|
Valuation is based upon quoted prices for identical instruments traded in active markets. | |
Level 2
|
Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. | |
Level 3
|
Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. |
The following table presents the amounts recorded on our balance sheet for assets and liabilities
measured at fair value on a recurring basis as of September 30, 2010.
Total Fair | ||||||||||||||||
(In Millions) | Value | Level 1 | Level 2 | Level 3 | ||||||||||||
Assets: |
||||||||||||||||
Commodity futures contracts |
$ | 4.7 | $ | | $ | 4.7 | $ | | ||||||||
Foreign currency derivatives |
4.5 | | 4.5 | | ||||||||||||
Balance as of September 30, 2010 |
$ | 9.2 | $ | | $ | 9.2 | $ | | ||||||||
The following table presents the changes in Level 3 assets for the nine months ended September 30,
2010:
Auction Rate | Auction Rate | |||||||
(In Millions) | Certificates | Securities Rights | ||||||
Balance at January 1, 2010 |
$ | 3.9 | $ | 0.2 | ||||
Payments on principal |
(4.2 | ) | | |||||
Gains (losses) included in investment income |
0.3 | (0.2 | ) | |||||
Balance at September 30, 2010 |
$ | | $ | | ||||
We sold our investment in our Auction Rate Certificate (ARC) and Auction Rate Securities Right
(ARSR) that were previously classified as level 3 assets in the second quarter of 2010.
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NOTE 14. Derivative Instruments and Hedging Activities
We are exposed to foreign currency exchange rate risk arising from transactions in the normal
course of business, such as sales to foreign customers not denominated in the sellers functional
currency, foreign plant operations, and purchases from suppliers. We actively manage the exposure
of our foreign currency exchange rate market risk and market fluctuations in commodity prices by
entering into various hedging instruments, authorized under our policies that place controls on
these activities, with counterparties that are highly rated financial institutions. We are exposed
to credit-related losses in the event of non-performance by these counterparties; however, our
exposure is generally limited to the unrealized gains in our contracts should any of the
counterparties fail to perform as contracted.
Our hedging activities involve the use of foreign currency forward exchange contracts and options;
we also use commodity forward and futures contracts. These contracts, other than commodity forward
contracts, are designated as cash flow hedges. We use derivative instruments only in an attempt to
limit underlying exposure from foreign currency exchange rate fluctuations and commodity price
fluctuations to minimize earnings and cash flow volatility associated with these risks. Decisions
on whether to use such contracts are made based on the amount of exposure to the currency or
commodity involved, and an assessment of the near-term market value for each risk. Our policy is
not to allow the use of derivatives for trading or speculative purposes. Our primary foreign
currency exchange rate exposures are with the Brazilian Real, the Euro, and the Rupee, against the
U.S. dollar.
Premiums paid on options are initially recorded as deferred charges. The Company assesses the
effectiveness of options based on the total cash flow method and records changes in the options
fair value to other comprehensive income to the degree they are effective.
At September 30, 2010 and December, 31 2009, there were no gains or losses on contracts
reclassified into earnings as a result of the discontinuance of cash flow hedges. The notional
amount outstanding of forward contracts designated as cash flow hedges was $61.8 million and $59.9
million at September 30, 2010 and December 31, 2009, respectively.
The following table presents the fair value of the Companys derivatives designated as hedging
instruments in our consolidated balance sheet as of September 30, 2010 and December 31, 2009:
Asset (Liability) Derivatives | ||||||||||||
September 30, 2010 | December 31, 2009 | |||||||||||
Financial | Financial | |||||||||||
(In Millions) | Position Location | Fair Value | Position Location | Fair Value | ||||||||
Derivatives designated as hedging instruments |
||||||||||||
Commodity futures contracts |
Fair value of hedge (asset) | $ | 4.7 | Fair value of hedge (asset) | $ | 5.4 | ||||||
Commodity futures contracts |
Fair value of hedge (liability) | | Fair value of hedge (liability) | (0.4 | ) | |||||||
Foreign currency derivatives |
Fair value of hedge (asset) | 4.5 | Fair value of hedge (asset) | 5.8 | ||||||||
Foreign currency derivatives |
Fair value of hedge (liability) | | Fair value of hedge (liability) | (0.2 | ) | |||||||
Total derivatives designated as hedging
instruments |
$ | 9.2 | $ | 10.6 | ||||||||
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The following table presents the impact of derivatives designated as hedging instruments on our
consolidated financial statements for the three and nine months ended September 30, 2010 and 2009:
Location of | ||||||||||||||||||
Gain (Loss) | ||||||||||||||||||
Amount of Gain (Loss) | Reclassified | Amount of Gain (Loss) | ||||||||||||||||
recognized in OCI (effective | from AOCI | Reclassified from AOCI into | ||||||||||||||||
Portion) | into Income | Income (Effective Portion) | ||||||||||||||||
(In Millions) | September 30, | September 30, | (Effective | September 30, | September 30, | |||||||||||||
Three Months Ended | 2010 | 2009 | Portion) | 2010 | 2009 | |||||||||||||
Commodity futures
contracts |
$ | 4.1 | $ | (5.5 | ) | Cost of sales | $ | 2.0 | $ | 1.4 | ||||||||
Foreign currency
derivatives |
5.9 | 11.6 | Net sales | 0.9 | 0.2 | |||||||||||||
Total |
$ | 10.0 | $ | 6.1 | $ | 2.9 | $ | 1.6 | ||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||||
Nine Months Ended | 2010 | 2009 | 2010 | 2009 | ||||||||||||||
Commodity futures
contracts |
$ | 4.2 | $ | 10.5 | Cost of sales | $ | 5.4 | $ | (2.5 | ) | ||||||||
Foreign currency
derivatives |
4.5 | 26.4 | Net sales | 5.6 | (6.1 | ) | ||||||||||||
Total |
$ | 8.7 | $ | 36.9 | $ | 11.0 | $ | (8.6 | ) | |||||||||
Location of | ||||||||||||||||||
Gain (Loss) | ||||||||||||||||||
Amount of Gain (Loss) | Reclassified | Amount of Gain (Loss) | ||||||||||||||||
recognized in OCI (Ineffective | from AOCI | Reclassified from AOCI into | ||||||||||||||||
Portion) | into Income | Income (Ineffective Portion) | ||||||||||||||||
(In Millions) | September 30, | September 30, | (Ineffective | September 30, | September 30, | |||||||||||||
Three Months Ended | 2010 | 2009 | Portion) | 2010 | 2009 | |||||||||||||
Commodity futures
contracts |
$ | | $ | (0.4 | ) | Cost of sales | $ | | $ | 0.3 | ||||||||
Foreign currency
derivatives |
| | Net sales | | | |||||||||||||
Total |
$ | | $ | (0.4 | ) | $ | | $ | 0.3 | |||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||||
Nine Months Ended | 2010 | 2009 | 2010 | 2009 | ||||||||||||||
Commodity futures
contracts |
$ | | $ | 0.6 | Cost of sales | $ | | $ | 0.6 | |||||||||
Foreign currency
derivatives |
| | Net sales | | | |||||||||||||
Total |
$ | | $ | 0.6 | $ | | $ | 0.6 | ||||||||||
As of September 30, 2010, there were no contracts that were deemed ineffective.
NOTE 15. Commitments and Contingencies
Accounts Receivables
A portion of accounts receivable at our Brazilian and Indian subsidiaries are sold with limited
recourse at a discount, which creates a contingent liability for the business. Our Brazilian
subsidiary also sells portions of its accounts receivable without recourse. Discounted receivables
sold with limited recourse were $17.6 million and $21.2 million at September 30, 2010 and December
31, 2009, respectively, and the average discount rate including both with and without recourse was
7.2% and 11.6%, respectively.
Purchase Commitments
As of December 31, 2009, we had $19.1 million of noncancelable purchase commitments with some
suppliers for materials and supplies in the normal course of business. There has been no material
change as of September 30, 2010.
Letters of Credit
We issue letters of credit in the normal course of business, as required by some vendor contracts.
We have $4.6 million and $4.9 million in outstanding letters of credit at September 30, 2010 and
December 31, 2009, respectively.
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Litigation
General
We are party to litigation in the ordinary course of business. Litigation occasionally involves
claims for punitive as well as compensatory damages arising out of use of our products. Although
we are self-insured to some extent, we maintain insurance against certain product liability losses.
We are also subject to administrative proceedings with respect to claims involving the discharge
of hazardous substances into the environment. Some of these claims assert damages and liability
for remedial investigation and clean-up costs. We are also typically involved in commercial and
employee disputes in the ordinary course of business. Although their ultimate outcome cannot be
predicted with certainty, and some may be disposed of unfavorably to us, management considers that
appropriate reserves have been established and, except as described below does not believe that the
disposition of these matters will have a material adverse effect on our consolidated financial
position, cash flows or results of operations. However, discovery of new facts, developments in
litigation, or settlement negotiations could cause estimates to differ materially from current
expectations in the future. Except as disclosed below, we do not believe we have any pending loss
contingencies that are probable or reasonably possible of having a material impact to our
consolidated financial position, results of operations or cash flows.
U.S. Horsepower label litigation
A nationwide class-action lawsuit filed against us and other defendants (Ronnie Phillips et al v.
Sears Roebuck Corporation et al., No. 04-L-334 (20th Judicial Circuit, St. Clair County,
IL)) alleged that the horsepower labels on the products the plaintiffs purchased, which included
products manufactured by our former Engine & Power Train business, were inaccurate. The plaintiffs
sought certification of a class of all persons in the United States who, beginning January 1, 1995
through the present, purchased a lawnmower containing a two stroke or four stroke gas combustible
engine up to 20 horsepower that was manufactured by defendants. On March 30, 2007, the Court
issued an order granting the defendants motion to dismiss, and on May 8, 2008 the Court issued an
opinion that (i) dismissed all the claims made under the Racketeer Influenced and Corrupt
Organization (RICO) Act with prejudice; (ii) dismissed all claims of the 93 non-Illinois
plaintiffs with instructions to re-file amended claims in individual state courts; and
(iii) ordered that any amended complaint for the three Illinois plaintiffs be re-filed by May 30,
2008. Since that time, eleven plaintiffs firms have filed 65 class action matters in all 50
states, the District of Columbia, and Puerto Rico asserting claims on behalf of consumers in each
of those jurisdictions with respect to lawnmower purchases from January 1, 1994 to the present. We
have joined the joint defense group with other lawnmower and component manufacturers who are
defendants. In the fourth quarter of 2009, a conceptual offer by a group of the defendants,
including Tecumseh, of $51.0 million was accepted in principle with the actual settlement terms to
be negotiated. On February 24, 2010, Tecumseh, along with the other settling defendants, executed
a settlement agreement (the group settlement) with plaintiffs resolving claims against the group
of settling defendants in exchange for a group payment of $51 million, a one-year warranty
extension for qualifying class members and injunctive relief regarding future lawnmower engine
labeling practices. On February 26, 2010, the Court entered an Order preliminarily approving the
group settlement, certifying the settlement class, appointing settlement class counsel and staying
proceedings against the settling defendants. The settlement class consists of all persons or
entities in the United States who, beginning January 1, 1994, up to the date when notice of the
preliminary approval was published (April 12, 2010) purchased, for their own use and not for
resale, a lawn mower containing a gas combustible engine up to 30 horsepower provided that either
the lawn mower or the engine of the lawn mower was manufactured or sold by a Defendant. On June
22, 2010, the Court conducted a hearing to determine the fairness, reasonableness and adequacy of
the group settlement and to determine whether the group settlement and the settlements plaintiffs
reached with other defendants should be finally approved and a final judgment entered. The Court
heard argument from objectors to the settlements and the parties to the settlements. On August 16,
2010, the District Court entered orders approving each of the settlements. A number of objectors
have filed appeals regarding the settlement approval orders and other related orders in the United
States Court of Appeals for the Seventh Circuit, and these appeals remain pending. We believe that
it is probable that we will achieve final settlement and Tecumseh has paid $3.1 million of its
allocable portion of approximately $6.2, and the balance has been reserved.
Canadian Horsepower label litigation
On March 19, 2010 Robert Foster and Murray Davenport filed a lawsuit under the Class Proceedings
Act in the Ontario Superior Court of Justice against us and several other defendants (including
Sears Canada Inc., Sears Holdings Corporation, John Deere
Limited, Platinum Equity, LLC, Briggs & Stratton Corporation, Kawasaki Motors Corp., USA, MTD
Products Inc., The Toro Company, American Honda Motor Co., Electrolux Home Products, Inc.,
Husqvarna Consumer Outdoor Products N.A., Inc. and Kohler Co.), alleging that defendants conspired
to fix prices of lawnmowers and lawn mower engines in Canada, to lessen competition in lawnmowers
and lawn mower engines in Canada, and to mislabel the horsepower of lawnmower engines and
lawnmowers in violation of the Canadian Competition Act, civil conspiracy prohibitions and the
Consumer Packaging and Labelling Act. Plaintiffs seek to represent a class of all persons in
Canada who purchased, for their own use and not for resale, a lawnmower containing a gas
combustible engine of 30 horsepower or less provided that either the lawnmower or the engine
contained within the lawnmower was manufactured and/or sold by a Defendant or their predecessors
between January 1, 1994 and the date of judgment. Plaintiffs seek undetermined money damages,
punitive damages, interest, costs and equitable relief. In addition, Snowstorm Acquisition
Corporation and Platinum Equity, LLC, the purchasers of Tecumseh Power Company and its subsidiaries
and Motoco a.s. in November 2007, have notified us that they claim indemnification with respect to
this lawsuit under our Stock Purchase Agreement with them.
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At this time, we do not have a reasonable estimate of the amount of our ultimate liability, if any,
or the amount of any potential future settlement, but the amount could be material to our financial
position, consolidated results of operations and cash flows.
On May 3, 2010, a class action was commenced in the Superior Court of the Province of Quebec by
Eric Liverman and Sidney Vadish against us and several other defendants (including those listed
above) advancing allegations similar to those outlined immediately above. Plaintiffs seek
undetermined money damages, punitive damages, interest, costs, and equitable relief. As above,
Snowstorm Acquisition Corporation and Platinum Equity, LLC, the purchasers of Tecumseh Power
Company and its subsidiaries and Motoco a.s. in November 2007, have notified us that they claim
indemnification with respect to this lawsuit under our Stock Purchase Agreement with them.
At this time, we do not have a reasonable estimate of the amount of our ultimate liability, if any,
or the amount of any potential future settlement, but the amount could be material to our financial
position, consolidated results of operations and cash flows.
Compressor industry antitrust investigation
On February 17, 2009, we received a subpoena from the United States Department of Justice Antitrust
Division (DOJ) and a formal request for information from the Secretariat of Economic Law of the
Ministry of Justice of Brazil (SDE) related to investigations by these authorities into possible
anti-competitive pricing arrangements among certain manufacturers in the compressor industry. The
European Commission began an investigation of the industry on the same day.
We are cooperating fully with these investigations. In addition, we have entered into a
conditional amnesty agreement with the DOJ under the Antitrust Divisions Corporate Leniency
Policy. Pursuant to the agreement, the DOJ has agreed to not bring any criminal prosecution or
impose any monetary fines with respect to the investigation against the Company as long as we,
among other things, continue our full cooperation in the investigation. We have received similar
conditional immunity from the European Commission, the SDE, and competition authorities in other
jurisdictions.
While we have taken steps to avoid fines, penalties and other sanctions as the result of
proceedings brought by regulatory authorities, the amnesty grants do not extend to civil actions
brought by private plaintiffs. The public disclosure of these investigations has resulted in class
action lawsuits filed in Canada and numerous class action lawsuits filed in the United States,
including by both direct and indirect purchaser groups. All of the U.S. actions have been
transferred to the U.S. District Court for the Eastern District of Michigan for coordinated or
consolidated pretrial proceedings under Multidistrict Litigation (MDL) procedures.
On June 24, 2010, Tecumseh Products Company, Tecumseh Compressor Company, Tecumseh do Brasil, Ltda,
and Tecumseh do Brasil U.S.A. LLC entered into a settlement agreement with the direct-purchaser
plaintiffs (the Settlement Agreement) to resolve claims in the action in order to avoid the costs
and distraction of this ongoing class action litigation. The Settlement Agreement was made by and
between Tecumseh and its subsidiaries and affiliates, and plaintiffs, both individually and on
behalf of a class of persons who purchased in the United States, its territories and possessions,
directly from a defendant during the period from January 1, 2004 through December 31, 2008: (a)
compressors of less than one horsepower used for refrigeration, freezing or cooling purposes,
and/or (b) refrigeration products, including condensers, containing compressors of less than one
horsepower used for refrigeration, freezing or cooling purposes (the Covered
Products).Compressors used for air-conditioning applications are specifically excluded.
Under the terms of the Settlement Agreement, in exchange for plaintiffs full release of all U.S.
direct-purchaser claims against Tecumseh relating to the Covered Products, Tecumseh agreed to pay a
settlement amount of $7.0 million and, in addition, agreed
to pay up to $250,000 for notice and administrative costs associated with administering the
settlement. These costs were accrued as an expense in the second quarter ended June 30, 2010 in
the line item captioned Impairments, restructuring charges, and other items. Tecumseh also
agreed to assist plaintiffs in obtaining the Courts approval of the settlement and to share with
plaintiffs information relating to the anti-competitive conduct alleged in the action. If the
Court refuses to approve the Settlement Agreement or if the Settlement Agreement is modified or set
aside on appeal, plaintiffs and Tecumseh each may rescind the Settlement Agreement and the
settlement amount will be returned to Tecumseh. In addition, if Tecumseh customers representing a
significant percentage of purchases of Covered Products choose not to participate in the settlement
(opt-out), Tecumseh has the right under certain circumstances to withdraw from the Settlement
Agreement and have the settlement funds returned.
In the United States, the remaining indirect purchaser class actions are in a preliminary stage. A
consolidated amended complaint was filed on June 30, 2010. Tecumseh filed a motion to dismiss the
indirect purchaser class action on August 30, 2010. The briefing on that motion is still pending.
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Persons who engage in price-fixing in violation of U.S. antitrust law generally are jointly and
severally liable to private claimants for three times the actual damages caused by the joint
conduct. As a conditional amnesty recipient, however, Tecumsehs civil liability will be limited
pursuant to the Antitrust Criminal Penalty Enhancement and Reform Act of 2004, as amended
(ACPERA). As long as Tecumseh continues to cooperate with the civil claimants and complies with
the requirements of ACPERA, we will be liable only for actual, as opposed to treble, damages and
will not be jointly and severally liable for claims against other participants in the alleged
anticompetitive conduct being investigated.
In Canada, the class actions are in a preliminary stage. Due to uncertainty of our liability in
these cases, or other cases that may be brought in the future; we have not accrued any liability in
our financial statements, other than for the claims subject to the Settlement Agreement. Our
ultimate liability, if any, or the amount of any potential future settlements or resolution of
these claims could be material to our financial position, consolidated results of operations and
cash flows.
We anticipate that we will incur additional expenses as we continue to cooperate with the
investigations and defend the remaining lawsuits. We expense all legal costs as incurred in the
consolidated statements of operations. Such expenses and any restitution payments could negatively
impact our reputation, compromise our ability to compete and result in financial losses in an
amount, which could be material to our financial position, consolidated results of operations and
cash flows.
Platinum
On November 20, 2009 Snowstorm Acquisition Corporation (Snowstorm), a Delaware corporation
affiliated with Platinum Equity Capital Partners, L.P. (Platinum), filed a lawsuit against
Tecumseh Products Company, Alix Partners LLP, AP Services LLC and James Bonsall in the United
States District Court for the District of Delaware, alleging breach of contract, violation of
Section 10(b) of the Securities Exchange Act and Rule 10b-5, violation of Section 20(a) of the
Exchange Act, Common Law Fraud and Negligent Misrepresentation in connection with Snowstorms
purchase of the issued and outstanding capital stock of Tecumseh Power Company and its subsidiaries
and Motoco a.s. (collectively Tecumseh Power) in November, 2007. At the time of the sale,
Tecumseh Power Company was a wholly-owned subsidiary of Tecumseh Products Company engaged in the
manufacture and sale of Tecumseh gas-powered engines used in snow throwers, lawnmowers, generators,
power washers and augers, among other applications. Snowstorm seeks unspecified compensatory and
punitive damages and a declaratory judgment that Tecumseh Products is obligated to indemnify
Snowstorm for certain other claims and losses allegedly related to the subject matter of the
complaint. An Answer on behalf of Tecumseh Products Company was filed on January 27, 2010. On
January 20, 2010, Alix Partners, LLP, AP Services LLC and James Bonsall filed a Motion to Dismiss
Snowstorms complaint in its entirety. On September 21, 2010, the United States District Court for
the District of Delaware issued an Opinion and Order granting in part, and denying in part, Alix
Partners, LLP, AP Services LLC and James Bonsalls Motion to Dismiss. In addition, Alix Partners,
LLP, AP Services LLC, and James Bonsall allege that Tecumseh Products is obligated to defend and
indemnify them in connection with this lawsuit. We intend to vigorously defend the lawsuit. At
this time, we do not have a reasonable estimate of the amount of our ultimate liability, if any, or
the amount of any potential future settlement, but the amount could be material to our financial
position, consolidated results of operations and cash flows.
Environmental Matters
At September 30, 2010 and December 31, 2009 we had accrued $3.2 million and $2.7 million,
respectively for environmental remediation. Included in the September 30, 2010 balance was an
accrual of $2.5 million, which is reflective of remaining estimated costs associated with
remediation activities at our former Tecumseh, Michigan facility. This estimate included an
increase of $1.2 million in the second quarter of 2010 as a result of additional work required by
the United States Environmental Protection Agency (USEPA) as required by the Agreed Order of
Consent between USEPA and Tecumseh approved on June 22,
2010. Remediation efforts are ongoing, most of which will be completed in the next 15 to 21 months
while monitoring activities are anticipated to be completed by the end of 2014.
In cooperation with the Wisconsin Department of Natural Resources (WDNR), we also conducted an
investigation of soil and groundwater contamination at our Grafton, Wisconsin plant. In 2008, the
remainder of the work required by the WDNR was completed subject to two years of monitoring to be
completed by the end of October 2009. The monitoring results showed no contamination in the
building except for one small area which showed values that exceeded initial values sought by the
WDNR. At September 30, 2010 and December 31, 2009, we had accrued $0.4 million and $0.2 million,
respectively for the total estimated cost associated with the investigation and remediation of the
on-site contamination.
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In addition to the above-mentioned sites, we are also currently participating with the EPA and
various state agencies at certain other sites to determine the nature and extent of any remedial
action that may be necessary with regard to such other sites. As these matters continue toward
final resolution, amounts in excess of those already provided may be necessary to discharge us from
our 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 that 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.
NOTE 16. Recently Issued Accounting Pronouncements
In June, 2009, The FASB adopted new rules to improve financial reporting by enterprises involved
with variable interest entities and to provide more relevant and reliable information to users of
financial statements. The new principle is effective for the first annual reporting period
beginning after November 15, 2009 and for the interim periods within that year. The adoption of
this principle did not affect our financial statements or results of operations.
NOTE 17. Subsequent Events
We perform review procedures for subsequent events, and determine any necessary disclosures that
arise from such evaluation, up to the date of issuance of our annual and interim reports.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
CAUTIONARY STATEMENTS RELATING TO FORWARD LOOKING STATEMENTS
This Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A)
should be read in conjunction with the MD&A and the cautionary statements and discussion of risk
factors included in our Annual Report on Form 10-K for the year ended December 31, 2009 and the
information contained in the Consolidated Financial Statements and Notes to Consolidated Statements
in Part 1, Item 1 of this report
This report contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act 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 us.
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. Our forward-looking statements
generally relate to our future performance, including our anticipated operating results and
liquidity sources and requirements, our business strategies and goals, and the effect of laws,
rules, regulations, and new accounting pronouncements and outstanding litigation, on our business,
operating results, and financial condition.
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) current and future global
economic conditions and the condition of credit markets, which may magnify other risk factors; ii)
the success of our ongoing effort to bring costs in line with projected production levels and
product mix; iii) financial market changes, including fluctuations in foreign currency exchange
rates and interest rates; iv) availability and volatility in the cost of materials, particularly
commodities, including steel and copper, whose cost can be subject to significant variation; v)
actions of competitors in highly competitive markets with intense competition; vi) our ability to
maintain adequate liquidity in total and within each foreign operation; vii) the effect of
terrorist activity and armed conflict; viii) economic trend factors such as housing starts; ix) the
ultimate cost of defending and resolving environmental and legal matters, including any liabilities
resulting from the regulatory antitrust investigations commenced by the United States Department of
Justice Antitrust Division, the Secretariat of Economic Law of the Ministry of Justice of Brazil or
the European Commission, any of which could preclude commercialization of products or adversely
affect profitability and/or civil litigation related to such investigations; x) weather conditions
affecting demand for replacement products; xi) emerging governmental regulations; xii) our ability
to profitably develop, manufacture and sell both new and existing products; xiii) the extent of any
business disruption that may result from the restructuring and realignment of our manufacturing
operations or system implementations, the ultimate cost of those initiatives and the amount of
savings actually realized; xiv) the extent of any business disruption caused by work stoppages
initiated by organized labor unions; xv) potential political and economic adversities that could
adversely affect anticipated sales and production in Brazil; xvi) potential political and economic
adversities that could adversely affect anticipated sales and production in India, including
potential military conflict with neighboring countries; xvii) increased or unexpected warranty
claims; and xviii) the ongoing financial health of major customers. These forward-looking
statements are made only as of the date of this report, and we undertake no obligation to update or
revise the forward-looking statements, whether as a result of new information, future events or
otherwise.
For more information regarding these and other uncertainties and factors that could cause our
actual results to differ materially from what we have anticipated in our forward-looking statements
or otherwise could materially adversely affect our business, financial condition, or operating
results, see our most recently filed Annual Report on Form 10-K, Part I, Item 1A, Risk Factors.
EXECUTIVE SUMMARY
In addition to the relative competitiveness of our products, our business is significantly
influenced by several specific economic factors: the strength of the overall global economy, which
can have a significant impact on our sales; the drivers of product cost, especially the price of
copper and steel; and the relative value against the U.S. dollar of those foreign currencies of
countries where we operate.
Economy
With respect to global economic activity, the recent global recession precipitated by the financial
crisis had a detrimental effect on our sales in the first three quarters of 2009. In the first
three quarters of 2010, sales increased due to stronger economic conditions and higher availability
of credit. Exclusive of the effects of currency translation, overall, sales in the first three
quarters of 2010 across all product lines were approximately 28.2% higher than the first three
quarters of 2009 (3.9% in the third quarter of 2010
compared to the third quarter of 2009). While the recent increases in order activity suggest that
sales have improved compared to 2009, we cannot currently project whether market conditions will
improve on a sustained or significant basis.
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Commodities
Due to the high content of copper and steel in compressor products, our results of operations are
very sensitive to the prices of these commodities. From January 1 to September 30, 2010, market
copper prices increased by 10.4%. The average market cost of copper in the third quarter of 2010
was 23.6% higher than the average market cost in the third quarter of 2009. After consideration of
our hedge positions during the third quarter of 2010 and 2009, our average cost of copper in the
third quarter of 2010 was 4.4% lower in our results of operations when compared to the third
quarter of 2009. The average market cost of copper in the first three quarters of 2010 was 54.1%
higher than the average market cost in the first three quarters of 2009. After consideration of
our hedge positions during the first three quarters of 2010 and 2009, our average cost of copper in
the first three quarters of 2010 was 6.0% lower in our results of operations when compared to the
first three quarters of 2009, primarily due to the prices under our 2009 hedging agreements.
From January 1 to September 30, 2010, prices for the types of steel utilized in our products
increased by 6.6%. The average market cost of steel in the third quarter of 2010 was 11.6% higher
than the average cost in the third quarter of 2009. The average market cost of steel in the first
three quarters of 2010 was 18.7% higher than the average cost in the first three quarters of 2009.
We have been proactive in addressing the volatility of these costs, including executing forward
purchase and futures contracts, as of September 30, 2010, that cover approximately 59.4% of our
remaining anticipated copper usage in the fourth quarter of 2010. Renewed rapid escalation of
these costs would nonetheless have an adverse affect on our results of operations both in the near
and long term as our anticipated needs are not 100% hedged.
Changes in steel prices have a more immediate impact, as there is currently no well-established
market for hedging against increases in the price of steel. In addition, while the use of forwards
and futures can mitigate the risks of price increases associated with these commodities by locking
in prices at a specific level, they also reduce the benefits of price decreases associated with
these commodities. In addition, declines in the prices of the underlying commodities can result in
downward pressure in selling prices, particularly if competitors have lesser future purchase
positions, thus causing a contraction of margins.
Based upon the introduction of redesigned products, we expect to use more aluminum in our motors in
2011. Similar to copper and steel, but to a much lesser degree, our results of operations are
sensitive to the price of aluminum and we have proactively addressed the volatility by executing
future contracts in the third quarter of 2010 that cover 19% of our projected usage in 2011.
We expect to continue our approach of mitigating the effect of short term swings through the
appropriate use of hedging instruments and modified pricing structures with our customers, where
available, to allow us to recover our costs in the event that the prices of commodities escalate in
a manner similar to what we experienced in the first three quarters of 2010, although we have not
materially changed our prices in 2010 so far.
Currency Exchange
The compressor industry and our business in particular are characterized by global and regional
markets that are served by manufacturing locations positioned throughout the world. Most of our
manufacturing presence is in international locations. During the first three quarters of 2010 and
2009, approximately 81% and 79%, respectively, of our compressor sales activity took place outside
the United States, primarily in Brazil, France, and India. As a result, our consolidated financial
results are sensitive to changes in foreign currency exchange rates, including the Brazilian Real,
the Euro and the Indian Rupee. Due to our significant manufacturing and sales presence in Brazil,
changes in the Brazilian Real have had a significant impact on our results of operations when
compared to prior periods. In the first three quarters of 2010, the Brazilian Real strengthened
against the dollar by 14.1% compared to the first three quarters of 2009. For a discussion of the
risks to our business associated with currency fluctuations, refer to Quantitative and Qualitative
Disclosures about Market Risk in Part I, Item 3 of this report. We are continuing to execute
strategies to continue to shift production to low cost countries such as India.
Liquidity
We have received and expect to receive further cash inflows from taxes through the end of 2010. We
received approximately $43.6 million, net of excise tax, from the reversion of our over-funded
hourly pension plan in the first quarter of 2010 and $1.7 million in U.S. tax refunds in the second
quarter of 2010. In addition, based on historical payment pattern of the Brazilian tax
authorities, and based on the U.S. dollar to Real exchange rate as of September 30, 2010, we expect
to recover approximately $39.5 million of the $81.6 million outstanding refundable taxes in Brazil
before the end of 2010. The Brazilian tax authorities will
not commit to an actual date of payment and the timing of receipt may be different than planned if
the Brazilian authorities change their pattern of payment. We also expect an additional U.S.
income tax refund of $1.4 million; however the timing of receipt is uncertain.
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Challenges remain with respect to our ability to generate appropriate levels of liquidity solely
from cash flows from operations, particularly challenges related to global economic conditions,
currency exchange rates and commodity pricing as discussed above. In the first three quarters of
2010, we used $41.9 million of cash flow in operations, which included the net inflow after payment
of the excise tax of $43.6 million related to the reversion of the hourly pension plan. While we
expect continued improvement as our restructuring activities take effect, we still may not generate
cash from normal operations unless further restructuring activities are implemented and/or economic
conditions improve.
We terminated our U.S. credit facility in the second quarter of 2010, although we continue to
maintain various credit facilities in most other jurisdictions in which we operate. While we
believe that current cash balances and the cash to be generated by the Brazilian tax refund will
produce adequate liquidity to implement our business strategy over the foreseeable future, there
can be no assurance that such amounts will ultimately be adequate if economic conditions
deteriorate. We anticipate that we will restrict non-essential uses of our cash balances until
cash production from normal operations improves.
In addition, while our business dispositions have improved our liquidity, many of the sale
agreements provide for certain retained liabilities, indemnities and/or purchase price adjustments
including liabilities that relate to environmental issues and product warranties. While we believe
we have adequately provided for such contingent liabilities based on currently available
information, future events could result in the recognition of additional liabilities that could
consume available liquidity and management attention.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2010 vs. Three Months Ended September 30, 2009
A summary of our operating results as a percentage of net sales is shown below:
Three Months Ended September 30, | ||||||||||||||||
(Dollars In Millions) | 2010 | % | 2009* | % | ||||||||||||
Net sales |
$ | 221.6 | 100.0 | % | $ | 211.3 | 100.0 | % | ||||||||
Cost of sales and operating expenses |
196.9 | 88.9 | % | 192.3 | 91.0 | % | ||||||||||
Gross Profit |
24.7 | 11.1 | % | 19.0 | 9.0 | % | ||||||||||
Selling and administrative expenses |
27.5 | 12.4 | % | 29.6 | 14.0 | % | ||||||||||
Impairments, restructuring charges, and other items |
0.9 | 0.4 | % | 3.6 | 1.7 | % | ||||||||||
Operating loss |
(3.7 | ) | (1.7 | )% | (14.2 | ) | (6.7 | )% | ||||||||
Interest expense |
2.4 | 1.0 | % | 3.0 | 1.4 | % | ||||||||||
Interest income and other, net |
0.3 | 0.1 | % | 0.5 | 0.2 | % | ||||||||||
Loss from continuing operations before taxes |
(5.8 | ) | (2.6 | )% | (16.7 | ) | (7.9 | )% | ||||||||
Tax benefit |
2.8 | 1.3 | % | 1.2 | 0.6 | % | ||||||||||
Net loss from continuing operations |
$ | (3.0 | ) | (1.3 | )% | $ | (15.5 | ) | (7.3 | )% | ||||||
* | The Paris Tennessee operation reclassification decreases net loss from continuing
operations, net of tax, by $0.7 million for the quarter ended September 30, 2009. |
Net sales in the third quarter of 2010 increased $10.3 million, or 4.9%, versus the same period of
2009. Excluding the increase in sales due to the effect of changes in foreign currency translation
of $2.1 million, net sales increased by 3.9% from the third quarter of 2009. Sales of compressors
used in commercial refrigeration and aftermarket applications increased by $12.3 million, or 12.1%,
when compared to the third quarter of 2009. For the commercial refrigeration and aftermarket
business, sales increases were primarily driven by volume increases due to stronger economic
conditions as well as higher shipments to customers as they too increased inventory balances to
better reflect current sales levels. The sales of compressors used in household refrigeration and
freezer (R&F) applications declined by $17.5 million, or 24.1%, versus the same period of 2009,
primarily due to volume decreases due to decreased demand by consumers in our Brazilian market as
they brought their own inventories in line with lower volumes. Sales of compressors for air
conditioning applications and all other applications increased by $15.5 million, or 40.9%,
primarily due to volume increases and customers beginning to increase their inventory levels based
upon their current forecasted demands.
Gross profit increased by $5.7 million from $19.0 million, or 9.0%, in the third quarter of 2009 to
$24.7 million, or 11.1%, in the third quarter of 2010. The increase in gross profit in the third
quarter of 2010 included the effect of volume and sales mix increases of $4.6 million and $10.7
million, respectively, as compared to the same quarter of 2009, including the effect of higher
sales on fixed costs and the effect of the sales increase being primarily attributable to higher
margin compressors for commercial
refrigeration and air conditioning products. Changes in other raw material costs of $1.0 million
also had favorable impact on gross profit as compared to the same quarter of 2009. In contrast,
unfavorable changes in commodity costs of $4.4 million, productivity of $0.7 million, currency of
$3.0 million and lower pension and OPEB credits of $2.5 million in the current quarter reduced
gross profit by $10.6 million.
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Selling and administrative (S&A) expenses decreased by $2.1 million from $29.6 million in the
third quarter of 2009 to $27.5 million in the third quarter of 2010. As a percentage of net sales,
S&A expenses were 12.4% in the third quarter of 2010 compared to 14.0% in the third quarter of
2009. Professional fees decreased by $2.3 million due to a reduction in professional fees outside
the ordinary course of business incurred in the prior year. Payroll, benefits and other related
employee expenses decreased by $0.8 million as a result of our continued restructuring efforts.
All other selling and administrative expenses increased by $1.0 million for the quarter.
We recorded expense of $0.9 million in impairments, restructuring charges, and other items in the
third quarter of 2010 compared to $3.6 million in the same period of 2009. In the third quarter of
2010, these expenses included $0.7 million related to severance costs associated with a reduction
in force at our Brazilian ($0.1 million) and corporate ($0.6 million) locations and $0.2 million in
non-cash settlement charges related to the reversion of our hourly pension plan. For a more
detailed discussion of these charges, refer to Notes 5 and 11 of the notes to the consolidated
financial statements in Item 1 of this report.
Interest expense was $2.4 million in the third quarter of 2010 compared to $3.0 million in the same
period of 2009. The weighted average interest rate on discounted accounts receivable decreased
from 8.7% for the quarter ended September 30, 2009 to 7.3% for the quarter ended September 30,
2010, on lower balances being discounted, partially offset by higher debt balances with a weighted
average interest rate of 7.3% at September 30, 2010 compared to 8.9% at September 30, 2009.
Interest income and other income, net was $0.3 million in the third quarter of 2010 compared to
$0.5 million in the third quarter of 2009, primarily reflecting lower interest rates and lower
levels of cash and short-term investments held in 2010.
Our results of operations reflect a $2.8 million income tax benefit from continuing operations for
the third quarter of 2010 and $1.2 million for the third quarter of 2009. For further discussion
of the factors that affect our tax benefits and expenses, refer to Note 12, Income Taxes, of the
Notes to the consolidated financial statements in Item 1 of this report.
Net loss from continuing operations for the quarter ended September 30, 2010 was $3.0 million, or
$0.16 per share, as compared to $15.5 million, or $0.84 per share, in the same period of 2009. The
change was primarily the result of sales increases in the current quarter, and other factors as
discussed above.
Nine Months Ended September 30, 2010 vs. Nine Months Ended September 30, 2009
A summary of our operating results as a percentage of net sales is shown below:
Nine Months Ended September 30, | ||||||||||||||||
(Dollars In Millions) | 2010 | % | 2009* | % | ||||||||||||
Net sales |
$ | 709.6 | 100.0 | % | $ | 526.3 | 100.0 | % | ||||||||
Cost of sales and operating expenses |
625.2 | 88.1 | % | 493.8 | 93.8 | % | ||||||||||
Gross Profit |
84.4 | 11.9 | % | 32.5 | 6.2 | % | ||||||||||
Selling and administrative expenses |
85.6 | 12.1 | % | 95.3 | 18.1 | % | ||||||||||
Impairments, restructuring charges, and other items |
49.4 | 6.9 | % | 10.6 | 2.0 | % | ||||||||||
Operating loss |
(50.6 | ) | (7.1 | )% | (73.4 | ) | (13.9 | )% | ||||||||
Interest expense |
8.0 | 1.1 | % | 8.0 | 1.5 | % | ||||||||||
Interest income and other, net |
0.9 | 0.1 | % | 1.9 | 0.3 | % | ||||||||||
Loss from continuing operations before taxes |
(57.7 | ) | (8.1 | )% | (79.5 | ) | (15.1 | )% | ||||||||
Tax benefit |
4.7 | 0.7 | % | 14.9 | 2.8 | % | ||||||||||
Net loss from continuing operations |
$ | (53.0 | ) | (7.4 | )% | $ | (64.6 | ) | (12.3 | )% | ||||||
* | The Paris Tennessee operation reclassification increases net loss from continuing
operations, net of tax, by $0.6 million for the nine months ended September 30, 2009. |
Net sales in the first three quarters of 2010 increased $183.3 million, or 34.8%, versus the same
period of 2009. Excluding the increase in sales due to the effect of changes in foreign currency
translation of $34.8 million, net sales increased by 28.2% from the first three quarters of 2009.
Sales of compressors used in commercial refrigeration and aftermarket applications increased by
$95.2 million, or 37.1%, when compared to the first three quarters of 2009. For the commercial
refrigeration and aftermarket business, sales increases were primarily driven by volume increases
due to stronger economic conditions as well as higher shipments to customers as they too increased
inventory balances to better reflect current sales levels. The increase in sales of compressors
used in household refrigeration and freezer (R&F) applications was $28.5 million, or 16.9%,
versus the same period of 2009, primarily due to higher units sold. Sales for R&F product were
also substantially affected by the stronger global
economic conditions, as credit became available compared to 2009. Sales of compressors for air
conditioning applications and all other applications also increased by $59.6 million, or 58.9%,
primarily due to volume increases caused by unusually hotter and more humid weather in our
Brazilian market along with customers beginning to increase their inventory levels based upon their
current forecasted demands.
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Gross profit increased by $51.9 million from $32.5 million, or 6.2%, in the first three quarters of
2009 to $84.4 million, or 11.9%, in the first three quarters of 2010. The increase in gross profit
in the first three quarters of 2010 included the effect of volume and sales mix increases of $31.6
million and $13.6 million, respectively, as compared to the same period of 2009, including the
effect of higher sales on fixed costs. Changes in commodity costs of $0.9 million, productivity of
$11.0 million, other raw material purchases of $4.8 million, and currency of $0.9 million, also had
favorable impacts on gross profit as compared to the same period of 2009. In contrast, items that
were favorable to the first three quarters of 2009 results did not recur in the first three
quarters of 2010. These include a favorable change in estimate for warranty claims of $2.3 million
and a favorable litigation settlement of $1.0 million. We also recorded $6.1 million lower pension
and OPEB credits in the first three quarters of 2010. The effect of all other income and expense
items included in gross profit was unfavorable to 2010 results by $1.5 million.
Selling and administrative (S&A) expenses decreased by $9.7 million from $95.3 million in the
first three quarters of 2009 to $85.6 million in the first three quarters of 2010. As a percentage
of net sales, S&A expenses were 12.1% in the first three quarters of 2010 compared to 18.1% in the
same period of 2009, primarily due to increased sales. Professional fees decreased by $7.6 million
due to a reduction in professional fees outside the ordinary course of business incurred in the
prior year. Payroll, benefits and other related employee expenses decreased by $5.0 million as a
result of our continued restructuring efforts and termination of our previous CEO. All other
selling and administrative expenses increased in the aggregate by
$2.9 million.
We recorded expense of $49.4 million in impairments, restructuring charges, and other items in the
first three quarters of 2010 compared to $10.6 million in the same period of 2009. In the first
three quarters of 2010, these expenses included $40.3 million in expenses related to the reversion
of our hourly pension plan, primarily settlement losses, increased benefits costs and excise tax on
the proceeds from the reversion, $7.3 million in expenses related to settlement of a portion of our
anti-trust litigation, $1.2 million for additional estimated environmental costs associated with
remediation activities at our former Tecumseh, Michigan facility, $1.7 million related to
severance associated with the reduction in force at our Brazilian ($0.6 million) and Corporate
($1.1 million) locations, and a $0.3 million impairment of an investment, partially offset by a
$1.0 million gain from our previous salaried pension plan that was terminated in 2008 and a $0.4
million curtailment gain. For a more detailed discussion of these charges, refer to Note 11 and 15
of the notes to the consolidated financial statements in Item 1 of this report.
Interest expense was $8.0 million in the first three quarters of 2010 compared to $8.0 million in
the same period of 2009. The weighted average interest rate on discounted accounts receivable
decreased from 9.9% for the nine months ended September 30, 2009 to 7.2% for the nine months ended
September 30, 2010, on lower balances being discounted. This decrease in factoring was offset by
an increase in foreign debt borrowings. The weighted average interest rate on debt at September
30, 2010 was 6.1% compared to 9.4% at September 30, 2009. The decrease in debt interest rate is
the result of new loans that were put in place in Brazil at an interest rate of 4.5%. We are using
these new loans in addition to factoring programs to take advantage of the lower interest rate. In
addition, amortization of $0.6 million deferred financing costs originally incurred in connection
with our credit agreement were expensed upon termination of our credit agreement in the second
quarter of 2010.
Interest income and other income, net was $0.9 million in the first three quarters of 2010 compared
to $1.9 million in the first three quarters of 2009, primarily reflecting lower interest rates,
partially offset by the higher average levels of cash and short-term investments held in 2010.
Our results of operations reflect a $4.7 million income tax benefit from continuing operations for
the nine months ended September 30, 2010 and $14.9 million for the nine months ended September 30,
2009. For further discussion of the factors that affect our tax benefits and expenses, refer to
Note 12, Income Taxes, of the Notes to the consolidated financial statements in Item 1 of this
report.
Net loss from continuing operations for the nine months ended September 30, 2010 was $53.0 million,
or $2.87 per share, as compared to $64.6 million, or $3.50 per share, for the nine months ended
September 30, 2009. The change was primarily the result of sales increases in the current year,
partially offset by the hourly pension plan reversion and the excise taxes on the proceeds from the
reversion of $40.3 million, the legal settlement of $7.3 million and environmental expenses of $1.2
million, and other factors as discussed above.
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LIQUIDITY AND CAPITAL RESOURCES
Our primary liquidity needs are to fund capital expenditures, service indebtedness, support working
capital requirements, and, when needed, fund operating losses. In general, our principal sources
of liquidity are cash and cash equivalents on hand, cash flows from operating activities, when
available, borrowings under available foreign credit facilities and cash inflows related to taxes.
In addition, we believe that factoring our receivables is an alternative way of freeing up working
capital and providing sufficient cash to pay off debt that may mature within a year.
A substantial portion of our operating income is generated by foreign operations. In those
circumstances, we are dependent on the earnings and cash flows of and the combination of dividends,
distributions and advances from our foreign operations to provide the funds necessary to meet our
obligations in each of our legal jurisdictions. While there are no significant restrictions on the
ability of our subsidiaries to pay dividends or make other distributions, we are focusing on our
global treasury strategy to allow us to transfer cash around the world in a cost efficient manner.
We have implemented a portion of our strategy and expect to complete it in the fourth quarter of
2010. We plan to review a longer term solution in 2011 to allow us to move cash seamlessly around
the world in a cost efficient manner.
Cash Flow
In the first three quarters of 2010, cash used in operations amounted to $41.9 million as compared
to $10.8 million of cash used in operations in the first three quarters of 2009. A significant
element of the change in cash in the first three quarters was the net proceeds of $43.6 million
(after payment of excise tax) realized from the reversion of our hourly pension plan. A
significant use of cash was for increased working capital and our net loss of $50.2 million plus
the non-cash impacts of the settlement charges of the hourly pension plan reversion of $29.4
million, depreciation of $29.8 million, write off of debt issuance costs of $1.1 million,
investment impairment of $0.4 million, loss on disposal of property and equipment of $0.6 million
and share-based compensation of $1.3 million, partially offset by a deferred tax benefit of $6.6
million, and the curtailment of our post retirement benefits of $7.0 million.
With respect to working capital, inventory levels were higher primarily due to increased sales and
because inventory days on hand increased by fourteen days compared to December 31, 2009, resulting
in a use of cash of $38.5 million for the nine months ended September 30, 2010. The increase in
inventory days on hand of fourteen days compared to December 31, 2009 is due in part to timing of
purchases to accommodate our suppliers holiday shutdown schedules and our increased in-transit
inventory into North America from our foreign subsidiaries (which require longer lead times) as a
result of our continued implementation of our best cost strategy.
Increased accounts receivable was a use of cash of $56.0 million during the quarter primarily as a
result of our increased sales over the prior year, lower sales toward the end of the fourth
quarter of 2009 compared to the third quarter of 2010, and an increase in days sales outstanding of
fifteen days compared to December 31, 2009, primarily due to lower discounting of receivables in
Brazil. The increase in day sales is due in part to our cash management strategy of reducing our
accounts receivable discounting programs in our Brazilian operations and instead using government
sponsored credit lines, which have a lower interest rate.
Payables and accrued expenses increased by $28.2 million mainly as a result of increased purchases
of inventories and an increase in payable days outstanding of five days compared to December 31,
2009.
Recoverable non-income taxes were a net use of cash of $21.7 million primarily for additional
receivables recorded for non-income taxes in foreign jurisdictions.
Employee retirement benefits were a use of cash of $5.6 million for year to date contributions and
activity relating to our retiree medical plans.
Cash used by investing activities was $6.7 million in the first three quarters of 2010 as compared
to cash used in investing activities of $18.0 million for the same period of 2009. The 2010 use of
cash in investing activities is primarily related to an increase in restricted cash funds of $8.9
million to secure obligations as a result of terminating our U.S. line of credit partially offset
by the release of $1.5 million of the restricted funds in the third quarter, and $1.7 million of
cash that became available to fund our 401(k) matching contributions. In addition, capital
expenditures of $5.3 million were incurred in the first three quarters of 2010. We also received
$4.1 million upon maturity of a long term investment. Cash used in investing activities in 2009
was primarily due to $13.3 million of working capital settlement made to the purchaser of our
former Engine & Powertrain business, $5.7 million of capital expenditures and a $0.2 million change
in long term investments, partially offset by $1.2 million of formerly restricted cash that became
available to fund our 401(k) matching contributions.
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Cash provided by financing activities was $30.7 million in the first three quarters of 2010
compared to $3.0 million used in financing activities for the same period of 2009. The increase in
borrowings in the first three quarters of 2010 compared to the first three quarters of 2009 is
mainly due to our cash management strategy of reducing our accounts receivable discounting programs
in our Brazilian operations and instead using government sponsored credit lines, which have a lower
interest rate.
Liquidity Sources
Credit Facilities and Cash on Hand
In addition to cash on hand, cash provided by operating activities and cash inflows related to
taxes, when available, we use foreign bank debt and other foreign credit facilities such as
accounts receivable discounting programs to fund our capital expenditures and working capital
requirements and, when necessary, to address operating losses. For the three and nine months ended
September 30, 2010 and the full year ended December 31, 2009, our average outstanding debt balance
was $62.6 million, $45.1 million and $34.8 million, respectively. The weighted average interest
rate was 7.3% and 6.1% for the three and nine months ended September 30, 2010 and 8.9% for the year
ended December 31, 2009.
As of September 30, 2010, our cash and cash equivalents on hand was $70.8 million. Our borrowings
under current credit facilities at foreign subsidiaries totaled $63.9 million at September 30,
2010, with an uncommitted additional borrowing capacity of $15.5 million. For a more detailed
discussion of our foreign credit facilities, refer to Notes 8 to the consolidated financial
statements in Item 1 of this report. Any cash we hold that is not utilized for day-to-day working
capital requirements is primarily invested in secure, institutional money market funds, the
majority of which are with JPMorgan Chase Bank, N.A. Money market funds are strictly regulated by
the U.S. Securities and Exchange Commission and operate under tight requirements for the liquidity,
creditworthiness, and diversification of their assets.
Cash inflows related to taxes
We expect to receive refunds of outstanding refundable Brazilian non-income taxes. Due to the
recent volatility in the exchange rate between the U.S. dollar and the Brazilian Real, the actual
amounts received as expressed in U.S. dollars will vary depending on the exchange rate at the time
of receipt or future reporting date. Currently, based on the historical payment pattern of the
Brazilian tax authorities, and based on the U.S. dollar to Real exchange rate as of September 30,
2010, we expect to recover approximately $39.5 million of the $81.6 million outstanding refundable
taxes in Brazil before the end of 2010. The Brazilian tax authorities will not commit to an actual
date of payment and the timing of receipt may be different than planned if the Brazilian
authorities change their pattern of payment.
In the third quarter of 2009, we filed amended United States income tax returns, which we expect
will yield an additional tax refund of $1.4 million; however timing of receipt is uncertain.
Accounts Receivable Sales
Our Brazilian and Indian subsidiaries periodically factor their accounts receivable with financial
institutions. Such receivables are factored both without and with limited recourse to us and are
excluded from accounts receivable in our consolidated balance sheets. The amount of factored
receivables, including both with limited and without recourse amounts, was $32.0 million and $43.3
million at September 30, 2010 and December 31, 2009, respectively. The amount of factored
receivables sold with limited recourse, which results in a contingent liability to us, was $17.6
million and $21.2 million as of September 30, 2010 and December 31, 2009, respectively. In
addition to the credit facilities described above, our Brazilian subsidiary also has an additional
$121.0 million uncommitted, discretionary factoring credit facility with respect to its local
(without recourse) and foreign (with recourse) accounts receivable, subject to the availability of
its accounts receivable balances eligible for sale under the facility.
Adequacy of Liquidity Sources
In the near term, and in particular over the next twelve months, we expect that our liquidity
sources described above will be sufficient to meet our liquidity requirements, including debt
service, capital expenditure and working capital requirements, and, when needed, cash to fund
operating losses. As of September 30, 2010, we had $63.9 million in debt, of which $16.2 million
was long term in nature, and $70.8 million in cash and cash equivalents. We do not expect any
material difference from cash availability and cash outflows previously described in our Annual
Report on Form 10-K for the year ended December 31, 2009. We expect that working capital will be a
source of cash in the fourth quarter due to normal seasonal contractions and will require $50.0-
$55.0 million of cash flows in 2010, primarily as a result of our decreased factoring of accounts
receivables in Brazil and increased inventories due to higher sales.
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OFF-BALANCE SHEET ARRANGEMENTS
We do not believe we have any off-balance sheet arrangements that have, or are reasonably likely to
have, a material effect on us. However, discounted receivables sold with limited recourse were
$17.6 million at September 30, 2010 and $21.2 million at December 31, 2009.
CONTRACTUAL OBLIGATIONS
As of September 30, 2010, there have been no material changes outside the ordinary course of
business in the contractual obligations disclosed in our Annual Report on Form 10-K for the year
ended December 31, 2009 under the caption Contractual Obligations.
SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES
For a discussion of our significant accounting policies and critical accounting estimates, see Item
7, Managements Discussion and Analysis of Financial Condition and Results of Operations
Significant Accounting Policies and Critical Accounting Estimates, and Note 1, Accounting
Policies, to the consolidated financial statements included in our Annual Report on Form 10-K for
the year ended December 31, 2009.
There have been no significant changes to our significant accounting policies or critical
accounting estimates during the first three quarters of 2010.
OUTLOOK
Information in this Outlook section should be read in conjunction with the cautionary statements
and discussion of risk factors included elsewhere in this report and in our Annual Report on Form
10-K for the year ended December 31, 2009 and in conjunction with the Outlook section in our
Annual Report on Form 10-K for the year ended December 31, 2009.
Expected results remain subject to many of the same variables that we have experienced in recent
years, and which can have significant impacts. The condition of the global economy, commodity
costs, key currency rates and weather are all important to future performance, as is our ability to
match our hedging activity to actual levels of transactions. The extent to which adverse trends in
2009 continue will ultimately determine our 2010 results.
While sales improved in the first three quarters of 2010 compared to 2009, we cannot currently
project whether market conditions will improve on a sustained or significant basis. Based on
results in the first three quarters of 2010, we currently expect that 2010 sales could be
approximately 25% higher compared to 2009 levels. The potential improvement is based on year to
date sales, our existing pipeline of orders and our internal projections about the market and
related economic conditions. If the economic improvement in our key markets does not occur as
anticipated, this could have a further adverse effect on our current outlook.
We expect our operating loss in the fourth quarter of 2010 to be higher than our operating loss in
the fourth quarter of 2009. In the fourth quarter of 2009 we received a favorable legal opinion
that resulted in $8.4 million of additional recoverable income tax refunds from our Brazilian
operation that will not recur in the fourth quarter of 2010.
We expect 2010 profitability to be reduced from historical levels due to lower than historical
sales. However, due to cost cutting activities that occurred last year and improved sales volumes
that occurred in the first three quarters of 2010, we expect 2010 results to improve over 2009
results.
The prices of key commodities, including copper, increased significantly during 2009 and the price
of steel has continued to increase at historically unfavorable levels in the first three quarters
of 2010; See Executive Summary Commodities. We expect the full year average cost of our
purchased materials in 2010, including the impact of our hedging activities, to exceed that of the
prior year, depending on commodity cost levels and the level of our hedging over the course of the
year. We expect to continue our approach of mitigating the effect of short term swings through the
appropriate use of hedging instruments. Our current hedging position will limit the benefits to us
of favorable commodity and currency fluctuations in 2010. As of September 30, 2010, approximately
59.4% of our estimated copper requirements for the fourth quarter of 2010 are covered by hedging
instruments.
The Brazilian Real, the Euro and the Indian Rupee continue to have significant volatility against
the U.S. dollar. We have considerable forward purchase contracts to cover a portion of our
exposure to additional fluctuations in value during the year. In the aggregate, we expect the
changes in foreign currency exchange rates, after giving consideration to our contracts and
including
the impact of balance sheet re-measurement, to have an unfavorable financial impact totaling
approximately $4.0 to $8.0 million in 2010 when compared to 2009.
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Our plans for 2010 may include additional cost reduction activities including further employee
headcount reductions, consolidation of productive capacity and rationalization of product platforms
and revised sourcing plans. Ultimately, any additional restructuring actions taken will be based
upon our assessment of ongoing economic activity at the time and any such additional actions, if
warranted, could result in further restructuring and/or asset impairment charges, and, accordingly,
could have a significant effect on our consolidated financial position and future operating
results.
After giving recognition to these factors, we believe that results in the full year 2010 will be
improved compared to 2009 as a result of the cost reduction actions that have been implemented over
the past 24 months. However, these results are highly dependent on the general health of the
global economy and whether we have seen the bottom of the recession, as we suspect, as well as the
stability in currency and commodity prices.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to market risk during the normal course of business from credit risk associated with
cash investments and 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 options, commodity
forward purchasing contracts and commodity futures contracts. Commodity prices and foreign
currency exchange rates can be volatile, and our risk management activities do not totally
eliminate these risks. Consequently, these fluctuations can have a significant effect on results.
Credit Risk Financial instruments which potentially subject us to concentrations of credit risk
are primarily cash investments, both restricted and unrestricted, and accounts receivable. There
have been no material changes in these market risks from those described in our Annual Report on
Form 10-K for the year ended December 31, 2009, in Part II, Item 7A under the caption Credit
Risk.
A portion of accounts receivable of our Brazilian and Indian subsidiaries are sold with limited
recourse at a discount. Our Brazilian operations also discount certain receivables without
recourse. Discounted receivables sold in these subsidiaries, including both with and without
recourse amounts, were $32.0 million and $43.3 million, at September 30, 2010 and December 31,
2009, respectively, and the weighted average discount rate was 7.3% and 7.2% for the three and nine
months ended September 30, 2010 and 11.6% in 2009. Discounted receivables sold with limited
recourse comprised $17.6 million and $21.2 million of this amount at September 30, 2010 and
December 31, 2009, respectively. We maintain an allowance for losses based upon the expected
collectability of all accounts receivable, including receivables sold.
Interest Rate Risk We are subject to interest rate risk, primarily associated with our borrowings
and our investments of excess cash. Based on our debt balances at September 30, 2010, a 1%
increase in interest rates would increase interest expense for the year by approximately $0.6
million and a 1% decrease in interest rates would have an immaterial effect on investments.
Commodity Price Risk Our exposure to commodity cost risk is related primarily to the price of
copper and steel, as these are major components of our product cost. The rapid increase of steel
prices has a particularly negative impact, as there is currently no well-established market for
hedging against increases in the cost of steel. We use commodity forward purchasing contracts as
well as commodity futures to help control the cost of other traded commodities, primarily copper.
Commodity forward contracts at our divisions and subsidiaries are essentially purchase contracts
designed to fix the price of the commodities during the operating cycle. Our practice with regard
to forward contracts has been to accept delivery of the commodities and consume them in
manufacturing activities. At September 30, 2010 and December 31, 2009, we held a total notional
value of $0.2 million and $4.3 million, respectively, in commodity forward purchasing contracts.
These contracts were not recorded on the balance sheet as they did not require an initial cash
outlay and do not represent a liability until delivery of the commodities is accepted.
We also use commodity futures contracts to provide us with greater flexibility in managing the
substantial volatility in copper pricing. These futures are designated as cash flow hedges against
the price of copper, and are accounted for as hedges on our balance sheet. As of September 30,
2010, we have executed forward purchase contracts and futures contracts to cover approximately
59.4% of our anticipated copper requirements in the fourth quarter of 2010 and 16.6% of our copper
requirements for 2011.
Based on our current level of activity, and before consideration of commodity forward purchases and
futures contracts, an increase in the price of copper of 10%, or $775 per metric tonne, from prices
at September 30, 2010 would adversely affect our annual operating profit by $7.7 million.
Conversely, based on our current level of commodity forward purchase contracts and commodity
futures contracts, a decrease in the price of copper of 10%, or $775 per metric tonne, would result
in losses under these contracts that would adversely impact our operating results by $1.2 million.
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Based upon the introduction of redesigned products, we expect to use more aluminum in our motors in
2011. Similar to copper and steel, but to a much lesser degree, our results of operations are
sensitive to the price of aluminum and we have proactively addressed the volatility by executing
future contracts in the third quarter of 2010 that cover 19% of our projected usage in 2011. An
increase of 10% in the price of aluminum would have an immaterial effect on our annual operating
profit.
Foreign Currency Exchange Risk Our results of operations are substantially affected by several
types of foreign exchange risk. One type is balance sheet re-measurement risk, which results when
assets and liabilities are denominated in currencies other than the functional currencies of the
respective operations. This risk applies to all our foreign locations but is greater for our
Brazilian operation, which denominates certain of its receivables in U.S. dollars. The periodic
re-measurement of these assets and liabilities is recognized in the consolidated statements of
operations.
Another significant foreign currency exchange risk for our business is transaction risk, which
occurs when our foreign entities transact sales in currencies other than their functional currency
and the foreign currency exchange rate changes between the date that a transaction is expected and
when it is executed, such as collection of sales or purchase of goods. Since our primary risk stems
from sales transacted in Brazil that have the resulting receivable denominated in U.S. dollars,
this risk affects our business adversely when the Real strengthens against the dollar, which has
been the case for the last several years.
We have developed strategies to mitigate or partially offset these impacts, primarily hedging
against transactional exposure where the risk of loss is greatest. This involves entering into
short-term forward exchange contracts to sell or purchase foreign currencies at specified rates
based on estimated foreign currency cash flows. In particular, we have entered into foreign
currency forward purchases to hedge the Brazilian export sales, some of which are denominated in
U.S. dollars and some in Euros. To a lesser extent, we have also entered into foreign currency
forward purchases to mitigate the effect of fluctuations in the Euro and the Indian Rupee, for
sales transacted in Europe and India in currencies other than the functional currency of the
respective locations. However, these hedging programs only reduce exposure to currency movements
over the limited time frame of three to eighteen months. Additionally, if the currencies weaken
against the dollar, any hedge contracts that have been entered into at higher rates result in
losses to our consolidated statements of operations when they are settled. From January 1 to
September 30, 2010, the Real strengthened against the dollar by 2.7%, the Rupee strengthened by
4.0%, and the Euro weakened by 5.0%.
A third type of foreign currency exchange exposure affects operations whose assets and liabilities
are denominated in currencies other than U.S. dollars. On a normal basis, we do not attempt to
hedge the foreign currency translation fluctuations in the net investments in our foreign
subsidiaries
At September 30, 2010 and December 31, 2009, we held foreign currency forward contracts with a
total notional value of $61.8 million and $59.9 million, respectively. Our risk is a particularly
concentrated exposure to the Brazilian Real. Based on our current level of activity, and including
any mitigation as the result of hedging activities, we believe that a strengthening in the value of
the Real of 0.10 per U.S. dollar would negatively impact our operating profit by approximately $6.0
million on an annual basis for the three currency risks described above. However, based on our
current foreign currency forward contracts, a weakening in the value of the Real of $0.10 per U.S.
dollar would result in losses under such foreign currency forward contracts that would adversely
impact our operating results by $0.2 million for the three currency risks described above.
Item 4. Controls and Procedures.
Our management has evaluated, with the participation of our principal executive and principal
financial officers, the effectiveness of our disclosure controls and procedures as of September 30,
2010 and any change in our internal control over financial reporting that occurred during our third
quarter ended September 30, 2010 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting, Based on their evaluation, our
principal executive and principal financial officers have concluded that our disclosure controls
and procedures were effective at the reasonable assurance level as of September 30, 2010.
Disclosure controls and procedures are our controls and other procedures that are designed to
ensure that information required to be disclosed by us in the reports that we file or submit under
the Exchange Act is recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commissions rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that information required
to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated
and communicated to our management, including our principal executive and principal financial
officers, as appropriate to allow timely decisions regarding required disclosure.
Internal control over financial reporting is a process designed by, or under the supervision of,
our principal executive and principal financial officers, and effected by our board of directors,
management and other personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles and includes those policies and procedures that: 1)
pertain to the maintenance of records
that in reasonable detail accurately and fairly reflect our transactions and dispositions of
assets, 2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures are being made only in accordance with authorizations of
management and directors, and 3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisitions, use or disposition of our assets that could have a material
effect on the financial statements.
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Changes In Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting identified in connection with
such evaluation described above that occurred during our third quarter ended September 30, 2010
that has materially affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
Limitations On The Effectiveness Of Controls And Procedures
Management, including our principal executive and principal financial officers, does not expect
that our disclosure controls and procedures or internal control over financial reporting will
detect or prevent all error and all fraud. A control system, no matter how well designed and
implemented, can provide only reasonable, not absolute, assurance that the control systems
objective will be met. Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues within a company are detected.
In addition, projection of any evaluation of the effectiveness of internal control over financial
reporting to future periods is subject to the risk that controls may become inadequate because of
changes in condition, or that the degree of compliance with policies and procedures included in
such controls may deteriorate.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Kahn shareholder lawsuit
A description of the termination of the shareholder class action lawsuit filed by Alan Kahn is
contained in Part II, Item 1 of our Quarterly Report on Form 10-Q for the Quarter Ended June 30,
2010.
Canadian Horsepower label litigation
For a description of the Canadian Horsepower label litigation, see Litigation Canadian
Horsepower label litigation in Note 15 of the Notes to Financial Statements in Part I, Item I of
this report.
U.S. Horsepower label litigation
For a description of the U.S. Horsepower label litigation, see Litigation U.S. Horsepower label
litigation in Note 15 of the Notes to Financial Statements in Part I, Item I of this report.
Compressor industry antitrust investigation
For a description of the Compressor industry antitrust investigation and litigation, including a
settlement with some plaintiffs of one of the putative class actions, see Litigation Compressor
industry antitrust investigation in Note 15 of the Notes to Financial Statements in Part I, Item
I of this report.
Platinum
For a description of the Platinum litigation, see Litigation Platinum in Note 15 of the Notes
to Financial Statements in Part I, Item I of this report.
Other litigation
We are 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 our business. Although
their ultimate outcome cannot be predicted with certainty, settlements may be pursued in some cases
and some may be disposed of unfavorably to us, management does not believe that the disposition of
these other matters will have a material adverse effect on our consolidated financial position,
cash flows or results of operations.
These proceedings and developments in these proceedings were also described in Part II, Item 1 of
our Quarterly Reports on Form
10-Q for the quarters ended March 31, 2010 and June 30, 2010.
Page 31
Table of Contents
Item 6. Exhibits
Exhibit | ||||
Number | Description | |||
31.1 | Certifications of the Principal Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
|||
31.2 | Certifications of the Principal Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
|||
32.1 | Certification of the Principal Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
|||
32.2 | Certification of the Principal Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
Page 32
Table of Contents
SIGNATURES
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) | ||||||
Date: November 4, 2010
|
By: | /s/ James J. Connor | ||||
James J. Connor | ||||||
Vice President, Treasurer and Chief Financial Officer | ||||||
(Duly Authorized and Principal Financial Officer) |
Page 33
Table of Contents
EXHIBIT INDEX
Exhibit | ||||
Number | Description | |||
31.1 | Certifications of the Principal Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
|||
31.2 | Certifications of the Principal Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002. |
|||
32.1 | Certification of the Principal Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
|||
32.2 | Certification of the Principal Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |