Attached files
file | filename |
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EX-31.2 - EX-31.2 - TECUMSEH PRODUCTS CO | k50588exv31w2.htm |
EX-31.1 - EX-31.1 - TECUMSEH PRODUCTS CO | k50588exv31w1.htm |
EX-32.1 - EX-32.1 - TECUMSEH PRODUCTS CO | k50588exv32w1.htm |
EXCEL - IDEA: XBRL DOCUMENT - TECUMSEH PRODUCTS CO | Financial_Report.xls |
EX-32.2 - EX-32.2 - TECUMSEH PRODUCTS CO | k50588exv32w2.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 June 30, 2011
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 incorporation or organization) |
38-1093240 (IRS Employer Identification Number) |
|
1136 Oak Valley Drive, Ann Arbor, Michigan (Address of Principal Executive Offices) |
48108 (Zip Code) |
(734) 585-9500
(Registrants telephone number, including area code)
(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 þ 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 July 27, 2011, 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
Class A Common Stock, $1.00 Par Value: 13,401,938
TABLE OF CONTENTS
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)
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
ASSETS |
||||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ | 54.9 | $ | 65.9 | ||||
Restricted cash and cash equivalents |
11.0 | 14.6 | ||||||
Accounts receivable, trade, less allowance for doubtful
accounts of $1.2 in 2011 and
2010 |
150.5 | 127.8 | ||||||
Inventories |
160.2 | 151.5 | ||||||
Deferred and recoverable income taxes |
1.7 | 1.7 | ||||||
Recoverable non-income taxes |
43.3 | 60.0 | ||||||
Fair value of hedge |
9.3 | 12.5 | ||||||
Other current assets |
13.9 | 13.7 | ||||||
Total current assets |
444.8 | 447.7 | ||||||
Property, Plant, and Equipment, net |
232.4 | 234.9 | ||||||
Prepaid pension expense |
8.8 | 9.5 | ||||||
Deferred income taxes |
4.9 | 3.5 | ||||||
Recoverable non-income taxes |
32.2 | 47.4 | ||||||
Other assets |
38.0 | 18.8 | ||||||
Total assets |
$ | 761.1 | $ | 761.8 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current Liabilities: |
||||||||
Accounts payable, trade |
$ | 148.4 | $ | 143.7 | ||||
Short-term borrowings |
56.3 | 52.2 | ||||||
Accrued liabilities: |
||||||||
Employee compensation |
31.7 | 30.7 | ||||||
Product warranty and self-insured risks |
9.3 | 12.0 | ||||||
Payroll taxes |
13.4 | 11.3 | ||||||
Other |
7.1 | 12.6 | ||||||
Total current liabilities |
266.2 | 262.5 | ||||||
Long-term debt |
12.3 | 13.2 | ||||||
Deferred income taxes |
3.7 | 3.7 | ||||||
Other postretirement benefit liabilities |
11.1 | 11.0 | ||||||
Product warranty and self-insured risks |
3.8 | 3.8 | ||||||
Pension liabilities |
27.0 | 25.9 | ||||||
Other |
7.6 | 6.8 | ||||||
Total liabilities |
331.7 | 326.9 | ||||||
Stockholders Equity |
||||||||
Class A common stock, $1 par value; authorized
75,000,000 shares; issued and outstanding
13,401,938 shares in 2011 and 2010 |
13.4 | 13.4 | ||||||
Class B common stock, $1 par value; authorized
25,000,000 shares; issued and outstanding
5,077,746 shares in 2011 and 2010 |
5.1 | 5.1 | ||||||
Paid in capital |
11.0 | 11.0 | ||||||
Retained earnings |
336.9 | 354.2 | ||||||
Accumulated other comprehensive income |
63.0 | 51.2 | ||||||
Total stockholders equity |
429.4 | 434.9 | ||||||
Total liabilities and stockholders equity |
$ | 761.1 | $ | 761.8 | ||||
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 | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net sales |
$ | 248.8 | $ | 249.3 | $ | 491.7 | $ | 488.0 | ||||||||
Cost of sales and operating expense |
229.1 | 218.3 | 449.4 | 428.3 | ||||||||||||
Gross Profit |
19.7 | 31.0 | 42.3 | 59.7 | ||||||||||||
Selling and administrative expenses |
26.8 | 29.6 | 52.7 | 58.1 | ||||||||||||
Impairments, restructuring charges, and other items |
2.1 | 8.5 | 5.4 | 48.5 | ||||||||||||
Operating loss |
(9.2 | ) | (7.1 | ) | (15.8 | ) | (46.9 | ) | ||||||||
Interest expense |
(3.1 | ) | (2.7 | ) | (5.5 | ) | (5.6 | ) | ||||||||
Interest income and other, net |
0.7 | 0.3 | 0.9 | 0.6 | ||||||||||||
Loss from continuing operations before taxes |
(11.6 | ) | (9.5 | ) | (20.4 | ) | (51.9 | ) | ||||||||
Tax benefit |
1.8 | 0.2 | 3.0 | 1.9 | ||||||||||||
Loss from continuing operations |
(9.8 | ) | (9.3 | ) | (17.4 | ) | (50.0 | ) | ||||||||
Income from discontinued operations, net of tax |
0.9 | 4.2 | 0.1 | 3.0 | ||||||||||||
Net loss |
$ | (8.9 | ) | $ | (5.1 | ) | $ | (17.3 | ) | $ | (47.0 | ) | ||||
Basic and diluted loss per share (a): |
||||||||||||||||
Loss from continuing operations |
$ | (0.53 | ) | $ | (0.50 | ) | $ | (0.94 | ) | $ | (2.71 | ) | ||||
Gain from discontinued operations, net of tax |
0.05 | 0.23 | 0.01 | 0.16 | ||||||||||||
Net loss per share |
$ | (0.48 | ) | $ | (0.27 | ) | $ | (0.93 | ) | $ | (2.55 | ) | ||||
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 2012, is not included in diluted earnings 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)
Six Months Ended | ||||||||
June 30, | ||||||||
2011 | 2010 | |||||||
Cash Flows from Operating Activities: |
||||||||
Net loss |
$ | (17.3 | ) | $ | (47.0 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Depreciation |
19.9 | 19.8 | ||||||
Amortization of debt-issuance costs |
| 1.1 | ||||||
Non-cash settlement of hourly pension plan reversion |
| 29.2 | ||||||
Non-cash settlement of post-retirement benefits |
| (7.0 | ) | |||||
Deferred income taxes |
(3.2 | ) | (7.8 | ) | ||||
Share based compensation |
(0.8 | ) | 0.9 | |||||
Investment impairment |
| 0.4 | ||||||
Gain on disposal of property and equipment |
(0.3 | ) | | |||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(14.6 | ) | (85.1 | ) | ||||
Inventories |
(2.5 | ) | (26.9 | ) | ||||
Payables and accrued expenses |
(9.6 | ) | 46.6 | |||||
Employee retirement benefits |
(3.5 | ) | (3.5 | ) | ||||
Hourly pension plan reversion |
| 54.5 | ||||||
Recoverable non-income taxes |
21.5 | (15.7 | ) | |||||
Other |
1.1 | 6.5 | ||||||
Cash used in operating activities |
(9.3 | ) | (34.0 | ) | ||||
Cash Flows from Investing Activities: |
||||||||
Capital expenditures |
(7.3 | ) | (3.1 | ) | ||||
Short and long term investments |
| 4.1 | ||||||
Change in restricted cash and cash equivalents |
3.5 | (7.8 | ) | |||||
Proceeds from sale of assets |
0.5 | 0.1 | ||||||
Cash used in investing activities |
(3.3 | ) | (6.7 | ) | ||||
Cash Flows from Financing Activities: |
||||||||
Proceeds from long-term debt |
4.9 | | ||||||
Payments of long-term debt |
(5.8 | ) | | |||||
Proceeds from Revolving credit agreement |
5.0 | | ||||||
Payments of Revolving credit agreement |
(5.0 | ) | | |||||
Debt issuance cost |
(0.3 | ) | | |||||
Other (repayments) borrowings, net |
1.0 | 29.8 | ||||||
Cash (used in) provided by financing activities |
(0.2 | ) | 29.8 | |||||
Effect of Exchange Rate Changes on Cash |
1.8 | (5.0 | ) | |||||
Decrease in cash and cash equivalents |
(11.0 | ) | (15.9 | ) | ||||
Cash and Cash Equivalents: |
||||||||
Beginning of Period |
65.9 | 90.7 | ||||||
End of Period |
$ | 54.9 | $ | 74.8 | ||||
Supplemental Schedule of Noncash Investing and Financing Activities: |
||||||||
Cash paid (refunds received) for taxes |
$ | 0.2 | $ | (0.2 | ) | |||
Cash paid for interest |
$ | 5.3 | $ | 4.3 |
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, we or us) 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 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, 2010. 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.
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; however, we
continue to incur legal fees, settlements and other expenses as purchasers of these businesses
continue to seek adjustments to purchase price through provisions in the agreements.
For the quarter ended June 30, 2011, total income from discontinued operations net of income taxes
was $0.9 million. This included $1.2 million for a reduction in anticipated claims related to
workers compensation and product liability, partially offset by $0.3 million of legal fees and
settlements for sold businesses. See Note 12 for a discussion of income taxes included in
discontinued operations.
For the quarter ended June 30, 2010, total income from discontinued operations before income taxes
was $6.0 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 $0.6
million of legal fees for the defense of claims by the purchaser of the Engine and Power Train
Group and insurance costs.
For the six months ended June 30, 2011, total income from discontinued operations net of income
taxes was $0.1 million. This included $0.9 million for a reduction in anticipated claims related to
workers compensation and product liability, partially offset by $0.7 million of legal fees and
settlements for sold businesses and a $0.1 million related to our Grafton facility for operating
costs. See Note 12 for a discussion of income taxes included in discontinued operations.
For the six months ended June 30, 2010, total income from discontinued operations before income
taxes was $5.1 million. This included $6.6 million of post-retirement benefit curtailment gains,
partially offset by $1.0 million related to our Grafton facility (formerly of the Engine and Power
Train Group) for environmental accruals ($0.4 million) and operating costs ($0.6 million). Legal
expense of $0.5 million for defense of claims by the purchaser of the Engine and Power Train Group
was also incurred in the first half of 2010.
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.
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NOTE 3. Inventories
The components of inventories are as follows:
June 30, | December 31, | |||||||
(In Millions) | 2011 | 2010 | ||||||
Raw materials, net of reserves |
$ | 82.8 | $ | 79.0 | ||||
Work in progress |
2.0 | 1.0 | ||||||
Finished goods, net of reserves |
75.4 | 71.5 | ||||||
$ | 160.2 | $ | 151.5 | |||||
Raw materials are net of $3.6 million and $3.5 million reserve for obsolete and slow moving
inventory at June 30, 2011 and December 31, 2010, respectively. Finished goods are net of $2.9
million and $2.2 million reserve for obsolete and slow moving inventory and lower of cost or market
at June 30, 2011 and December 31, 2010, respectively.
NOTE 4. Property, Plant and Equipment, net
The components of property, plant and equipment, net are as follows:
June 30, | December 31, | |||||||
(In Millions) | 2011 | 2010 | ||||||
Land and land improvements |
$ | 16.6 | $ | 16.3 | ||||
Buildings |
102.3 | 97.4 | ||||||
Machinery and Equipment |
933.5 | 892.0 | ||||||
1,052.4 | 1,005.8 | |||||||
Less accumulated depreciation |
828.9 | 776.0 | ||||||
223.5 | 229.8 | |||||||
Construction in process |
8.9 | 5.1 | ||||||
Property, plant and equipment, net |
$ | 232.4 | $ | 234.9 | ||||
Depreciation expense associated with property, plant and equipment was $9.8 million for the three
months ended June 30, 2011, and 2010, respectively and $19.9 million and $19.8 million for the six
months ended June 30, 2011 and 2010, respectively.
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 Ended | Three Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(In Millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Service cost |
$ | 0.5 | $ | 0.5 | $ | 0.2 | $ | 0.1 | ||||||||
Interest cost |
2.0 | 2.0 | 0.2 | 0.5 | ||||||||||||
Expected return on plan assets |
(2.1 | ) | (2.1 | ) | | | ||||||||||
Amortization of net loss (gain) |
0.3 | 0.4 | (2.4 | ) | (1.2 | ) | ||||||||||
Additional expense due to curtailments, settlements
and terminations (see below) |
| | | (6.8 | ) | |||||||||||
Net periodic expense (benefit) |
$ | 0.7 | $ | 0.8 | $ | (2.0 | ) | $ | (7.4 | ) | ||||||
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Pension Benefits | Other Benefits | |||||||||||||||
Six Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(In Millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Service cost |
$ | 1.0 | $ | 1.0 | $ | 0.4 | $ | 0.2 | ||||||||
Interest cost |
4.0 | 4.7 | 0.4 | 1.1 | ||||||||||||
Expected return on plan assets |
(4.2 | ) | (6.1 | ) | | | ||||||||||
Amortization of net loss (gain) |
0.6 | 0.7 | (4.8 | ) | (2.5 | ) | ||||||||||
Additional expense (income)
due to curtailments,
settlements and terminations
(see below) |
| 29.4 | | (6.8 | ) | |||||||||||
Net periodic expense (benefit) |
$ | 1.4 | $ | 29.7 | $ | (4.0 | ) | $ | (8.0 | ) | ||||||
In the second quarter of 2010, Additional expense due to curtailments, settlements and
terminations in other benefits included 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.
For the six months ended June 30, 2010, Additional expense due to curtailments, settlements and
terminations in pension benefits included reversion of our hourly pension plan that yielded $43.6
million, net of excise taxes, in net proceeds to us. The reversion resulted in a non-cash charge
of $29.2 million. In addition, our salary plan incurred $0.2 million in costs for special
termination benefits.
We have defined contribution retirement plans that cover substantially all domestic employees. The
combined expense for these plans was $0.4 million and $0.6 million for the three months ended June
30, 2011 and 2010, respectively and $1.5 million for the six months ended June 30, 2011 and 2010,
respectively. All contributions were funded from the proceeds obtained from the reversion of our
former salaried pension plan.
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 June
30, 2011 and December 31, 2010:
June 30, | December 31, | |||||||
(In Millions) | 2011 | 2010 | ||||||
Brazil |
$ | 61.7 | $ | 84.7 | ||||
India |
13.0 | 14.2 | ||||||
Europe |
0.8 | 8.5 | ||||||
Total recoverable non-income taxes |
$ | 75.5 | $ | 107.4 | ||||
At June 30, 2011, a receivable of $43.3 million was included in current assets and $32.2 million
was included in non-current assets and is expected to be recovered through 2014. 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.
In Brazil, $15.0 million of the previously classified current portion of refundable non-income
taxes at December 31, 2010 was deposited in a court appointed cash account in the first quarter of
2011 until resolution of an unrelated social security tax matter. This deposit is reflected as a
long term receivable in Other Assets on our balance sheet as the timing of resolution of this tax
dispute is uncertain and might take several years.
Page 8
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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 June 30, 2011 and 2010 are
summarized as follows:
Six Months | Six Months | |||||||
Ended | Ended | |||||||
(In Millions) | June 30, 2011 | June 30, 2010 | ||||||
Balance at January 1, |
$ | 5.9 | $ | 5.1 | ||||
Settlements made (in cash or in kind) |
(2.5 | ) | (2.3 | ) | ||||
Current year accrual |
3.1 | 2.6 | ||||||
Adjustments to preexisting warranties |
| 0.1 | ||||||
Effect of foreign currency translation |
0.1 | (0.1 | ) | |||||
Balance at June 30, |
$ | 6.6 | $ | 5.4 | ||||
Warranty expense was $3.2 million and $2.6 million for the six months ended June 30, 2011 and 2010,
respectively. At June 30, 2011, $5.9 million was included in current liabilities and $0.7 million
was included in non-current liabilities. At December 31, 2010, $5.3 million was included in
current liabilities and $0.6 million was included in non-current liabilities.
NOTE 8. Debt
On April 21, 2011, we entered into a Revolving Credit and Security Agreement with PNC Bank,
National Association (PNC). Subject to the terms and conditions of the agreement, PNC agreed to
provide us with up to a $45.0 million revolving line of credit, including up to $10.0 million in
letters of credit, subject to a borrowing base formula, lender reserves and PNCs reasonable
discretion, expiring on April 15, 2015 and bearing interest at either LIBOR or an alternative base
rate, plus a margin that varies with borrowing availability. The facility is guaranteed by
Tecumseh Products Company and its U.S. and Canadian subsidiaries and is secured by substantially
all of the assets of the borrowers, with some exclusions
The agreement contains various covenants, including limitations on dividends, investments and
additional indebtedness and liens, and a minimum fixed charge coverage ratio, which would apply
only if average undrawn borrowing availability, as defined by the credit agreement, were to fall
below a specified level.
As of June 30, 2011, we had no borrowings outstanding against this agreement, and our average
undrawn borrowing availability was such that the covenant did not apply. At June 30, 2011, we had
outstanding letters of credit of $2.0 million under this facility and the capacity for borrowings
under the borrowing base formula of $40.6 million under this facility. We paid $330,000 in fees
associated with the new agreement, which were capitalized and will be amortized over the term of
the agreement. We must also pay a facility fee of 0.375% a year on the unused portion of the
facility.
At June 30, 2011, JPMorgan Chase Bank, N.A. (Chase) and its affiliates hold a security interest
in approximately $2.3 million of cash collateral (the Cash Collateral), to secure letters of
credit, and derivative obligations. The Cash Collateral will remain in a restricted account until
these obligations are paid in full or they are replaced with third parties and are included in
restricted cash and cash equivalents on our balance sheet. 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 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 June 30, 2011, we have an unsecured, uncommitted
discretionary credit facility of $2.9 million that expires on October 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 on the exchange rate as of June 30, 2011,
totaled $2.9 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 June 30, 2011, 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 $98.0 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 mid September, 2011
through July 15, 2013. Historically we have been able to enter into replacement facilities when
these facilities expire, but such replacements are at the
Page 9
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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 $49.6 million based upon exchange rate
as of June 30, 2011, with an additional $48.4 million available for borrowing, based on our
accounts receivable and inventory balances and exchange rates as of June 30, 2011.
In India, based upon exchange rates as of June 30, 2011, we have an aggregate maximum of $17.0
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 February 2012 through May 2012. 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 on the exchange rate as of June 30, 2011, totaled $16.1
million, and based on the exchange rate and our borrowing base as of June 30, 2011; we had an
additional $0.9 million available for borrowing under these facilities. There are no restrictive
covenants on these credit facilities, except that consent must be received from the bank in order
to dispose of certain assets.
Our consolidated borrowings under these arrangements totaled $68.6 million at June 30, 2011 and
$65.4 million at December 31, 2010. Our weighted average interest rate for these borrowings was
8.9% for the six months ended June 30, 2011 and 7.4% for the year ended December 31, 2010.
NOTE 9. Comprehensive Income (Loss)
A summary of comprehensive income (loss) is as follows:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
(In Millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Net loss |
$ | (8.9 | ) | $ | (5.1 | ) | $ | (17.3 | ) | $ | (47.0 | ) | ||||
Other comprehensive income (loss), net of tax |
||||||||||||||||
Foreign currency translation adjustments |
10.0 | (5.9 | ) | 18.1 | (14.0 | ) | ||||||||||
Loss on derivatives, net of tax |
(3.3 | ) | (5.6 | ) | (3.0 | ) | (9.1 | ) | ||||||||
Total comprehensive loss |
$ | (2.2 | ) | $ | (16.6 | ) | $ | (2.2 | ) | $ | (70.1 | ) | ||||
NOTE 10. Share-Based Compensation Arrangements
Prior to March 7, 2011, under our Long-Term Incentive Cash Award Plan, two types of incentives were
awarded, both of which were based upon the value of our Class A shares; stock appreciation rights
(SARs) and phantom shares. SARs were granted with an exercise price equal to the closing price
of our common stock on the date of the grant, as reported by the NASDAQ Stock Market. SARs and
phantom shares were 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. For the six months ended June 30, 2011, we did not grant any SARs or phantom shares under
this plan and 35,793 phantom shares vested and were paid at an average price of $11.14 per share
reducing our unrecognized liability by $0.4 million.
We measure the fair value of the phantom shares based upon the closing stock price of our Class A
common stock on the last day of the reporting period. At June 30, 2011 and December 31, 2010,
the closing stock price on our Class A common stock was $10.20 and $13.05 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 June 30, 2011 and 2010 using the following assumptions:
June 30, 2011 | June 30, 2010 | |||
Risk-free interest rate |
1.17-1.97% | 1.69-2.29% | ||
Dividend yield |
0.0% | 0.0% | ||
Expected life (years) |
3.7-5.5 years | 4.7-6.5 years | ||
Volatility |
83.21% | 91.91% |
Since both the SARs and the phantom shares are settled in cash rather than by issuing equity
instruments, we record them as expense with a corresponding liability on our balance sheet.
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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 June 30, 2011 and 2010 was $0.2
million and $0.5 million, respectively, and total compensation expense for the six months ended
June 30, 2011 and 2010 was $(0.8) million and $0.9 million respectively. The balance of the fair
value that has not yet been recorded as expense is considered an unrecognized liability. The
unrecognized compensation liability as calculated at June 30, 2011 and December 31, 2010 was $0.6
million and $2.0 million, respectively.
Effective March 7, 2011, we granted performance phantom shares to make our annual equity incentives
reflect our performance during the year. The actual phantom share award amounts for 2011 will be
determined based on specified performance targets with respect to performance in 2011 and 25% of
the potential awards will be determined at the discretion of our Board of Directors. We record
these performance phantom shares as an expense and corresponding liability only when we estimate
that it is more likely than not that we will achieve the threshold level of performance necessary
for any phantom shares to be awarded. As of June 30, 2011 our estimate of the likelihood of
achieving the threshold level of performance resulted in no compensation expense being recorded in
this period for performance phantom shares. Our target compensation expense for these awards at
June 30, 2011, should we achieve our target at 100%, is estimated to be $1.9 million.
NOTE 11. Impairments, Restructuring Charges, and Other Items
The charges (gains) recorded as restructuring, impairment and other charges for three and six
months ended June 30, 2011 and 2010 are as follows:
Three Months | Six Months | |||||||||||||||
Ended June 30, | Ended June 30 | |||||||||||||||
(In Millions) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Severance, restructuring costs, and special termination benefits |
$ | 2.0 | $ | 0.4 | $ | 5.3 | $ | 0.9 | ||||||||
Legal Settlement |
| 7.3 | | 7.3 | ||||||||||||
Environmental reserve on held-for-sale building |
0.1 | 1.2 | 0.1 | 1.2 | ||||||||||||
Curtailment Gain |
| (0.4 | ) | | (0.4 | ) | ||||||||||
Settlement loss on the hourly pension plan reversion |
| | | 29.2 | ||||||||||||
Excise tax expense on proceeds from hourly retirement plan reversion |
| | | 10.9 | ||||||||||||
Impairment of Investment |
| | | 0.4 | ||||||||||||
Final settlement of previously terminated salary retirement plan,
net of excise tax |
| | | (1.0 | ) | |||||||||||
Total impairments, restructuring charges, and other items |
$ | 2.1 | $ | 8.5 | $ | 5.4 | $ | 48.5 | ||||||||
Impairments, Restructuring Charges, and Other Items for the second quarter of 2011 include $2.0
million related to severance associated with a reduction in force at our Brazilian ($1.6 million),
North American ($0.1 million), French ($0.2 million) and Indian ($0.1 million) locations; and an
increase of $0.1 million for costs related to the environmental reserve associated with the
remediation activities at our former Tecumseh, Michigan facility.
Impairments, Restructuring Charges, and Other Items for the second quarter of 2010 include $7.3
million related to a legal settlement; a $1.2 million increase in our environmental reserve
associated with the remediation activities at our former Tecumseh, Michigan facility; a $0.4
million curtailment gain as a result of terminating post-retirement benefits at our former Tecumseh
Michigan facility, and severances associated with a reduction in force at our Brazilian ($0.3
million) and corporate ($0.1 million) locations.
Impairments, Restructuring Charges, and Other Items for the six months ended June 30, 2011 include
$5.3 million related to severance associated with a reduction in force at our Brazilian ($1.8
million), North American ($0.1 million), French ($0.2 million), Indian ($0.1 million) and Corporate
($3.1 million) locations; and an increase of $0.1 million for costs related to the environmental
reserve associated with the remediation activities at our former Tecumseh, Michigan facility. On
March 7, 2011, our President and Chief Executive Officer and our Board of Directors mutually
determined to separate our President and Chief Executive Officers employment with us after a
transition period. The $3.1 million severance associated with a reduction in force at our
Corporate location includes $1.35 million relating to our former President and Chief Executive
Officers separation and paid on July 31, 2011.
Impairments, Restructuring Charges, and Other Items for the six months ended June 30, 2010 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 of $40.1 million; impairment of an investment of $0.4 million,
and
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severance payments associated with a reduction in force at our Brazilian ($0.4 million) and
Corporate ($0.5 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.
The following table reconciles cash activities for the six months ended June 30, 2011 for accrued
impairment, restructuring charges and other items.
(In Millions) | Severance | Other | Total | |||||||||
Balance at January 1, 2011 |
$ | 0.6 | $ | 2.4 | $ | 3.0 | ||||||
Accruals |
5.3 | 0.1 | 5.4 | |||||||||
Payments |
4.0 | 0.2 | 4.2 | |||||||||
Balance at June 30, 2011 |
$ | 1.9 | $ | 2.3 | $ | 4.2 | ||||||
The accrued severance balance at June 30, 2011 includes $1.4 million for payments to be made
related to our reduction in force at our corporate locations and was paid in the third quarter of
2011. The remaining $0.5 million of accrued severance relates to payments to be made related to our
European reduction in force and is expected to be paid in 2011. The environmental reserve balance
at June 30, 2011, included in other, represents the estimated costs associated with remediation
activities at our former Tecumseh, Michigan facility, and is expected to be paid over the next 9-12
months ($0.2 million of which was paid in July 2011).
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 the period ended June 30, 2011, we
calculated our tax provision based on the estimate of the annual effective tax rate.
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.
At June 30, 2011 and December 31, 2010, 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 2010, 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.
We have recorded unrecognized tax benefits for uncertain tax positions reported on returns that are
currently being examined by the tax authorities. We expect that the tax authorities will complete
their review of these positions during calendar year 2011; therefore, the amount of the
unrecognized tax benefit 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. |
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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 June 30, 2011.
Total Fair | ||||||||||||||||
(In Millions) | Value | Level 1 | Level 2 | Level 3 | ||||||||||||
Assets: |
||||||||||||||||
Commodity futures contracts |
$ | 2.6 | $ | | $ | 2.6 | $ | | ||||||||
Foreign currency derivatives |
6.7 | | 6.7 | | ||||||||||||
Balance as of June 30, 2011 |
$ | 9.3 | $ | | $ | 9.3 | $ | | ||||||||
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.
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.
Our hedging activities involve the use of foreign currency forward exchange contracts, options and
commodity futures contracts. These 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.
At June 30, 2011 and December, 31 2010, 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 $73.1 million and $109.6
million at June 30, 2011 and December 31, 2010, respectively.
The following table presents the fair value of the Companys derivatives designated as hedging
instruments in our consolidated balance sheet as of June 30, 2011 and December 31, 2010:
Asset (Liability) Derivatives | ||||||||||||
June 30, 2011 | December 31, 2010 | |||||||||||
Financial | Financial | |||||||||||
(In Millions) | Position Location | Fair Value | Position Location | Fair Value | ||||||||
Derivatives designated as
hedging instruments |
||||||||||||
Commodity futures contracts |
Fair value of hedge | $ | 2.6 | Fair value of hedge | $ | 7.3 | ||||||
Foreign currency derivatives |
Fair value of hedge | 6.7 | Fair value of hedge | 5.2 | ||||||||
Total |
$ | 9.3 | $ | 12.5 | ||||||||
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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 six months ended June 30, 2011 and 2010:
Location of | ||||||||||||||||||||
Gain (Loss) | ||||||||||||||||||||
Reclassified | ||||||||||||||||||||
from AOCI | ||||||||||||||||||||
Amount of Gain (Loss) | into Income | Amount of Gain reclassified | ||||||||||||||||||
recognized in OCI (Effective | (Effective | from AOCI into Income | ||||||||||||||||||
(In Millions) | Portion) | Portion) | (Effective Portion) | |||||||||||||||||
Three Months Ended | June 30, 2011 | June 30, 2010 | June 30, 2011 | June 30, 2010 | ||||||||||||||||
Commodity futures
contracts |
$ | 0.2 | $ | (0.8 | ) | Cost of sales | $ | 2.3 | $ | 2.3 | ||||||||||
Foreign currency
derivatives |
1.7 | (0.7 | ) | Cost of sales | 3.3 | 1.8 | ||||||||||||||
Total |
$ | 1.9 | (1.5 | ) | $ | 5.6 | $ | 4.1 | ||||||||||||
Six Months Ended | June 30, 2011 | June 30, 2010 | June 30, 2011 | June 30, 2010 | ||||||||||||||||
Commodity futures
contracts |
$ | 1.7 | $ | 0.2 | Cost of sales | $ | 5.3 | $ | 3.3 | |||||||||||
Foreign currency
derivatives |
5.5 | (1.3 | ) | Cost of sales | 5.0 | 4.7 | ||||||||||||||
Total |
$ | 7.2 | $ | (1.1 | ) | $ | 10.3 | $ | 8.0 | |||||||||||
Location of | ||||||||||||||||||||
Gain | ||||||||||||||||||||
Reclassified | ||||||||||||||||||||
from AOCI | ||||||||||||||||||||
into Income | Amount of Gain reclassified | |||||||||||||||||||
Amount of Gain recognized in | (Ineffective | from AOCI into Income | ||||||||||||||||||
(In Millions) | OCI (Ineffective Portion) | Portion) | (Ineffective Portion) | |||||||||||||||||
Three Months Ended | June 30, 2011 | June 30, 2010 | June 30, 2011 | June 30, 2010 | ||||||||||||||||
Commodity futures
contracts |
$ | | $ | | Cost of sales | $ | | $ | | |||||||||||
Foreign currency
derivatives |
1.1 | | Cost of sales | | | |||||||||||||||
Total |
$ | 1.1 | $ | | $ | | $ | | ||||||||||||
Six Months Ended | June 30, 2011 | June 30, 2010 | June 30, 2011 | June 30, 2010 | ||||||||||||||||
Commodity futures
contracts |
$ | | $ | | Cost of sales | $ | | $ | | |||||||||||
Foreign currency
derivatives |
1.5 | | Cost of sales | 0.4 | | |||||||||||||||
Total |
$ | 1.5 | $ | | $ | 0.4 | $ | | ||||||||||||
NOTE 15. Commitments and Contingencies
Accounts Receivable
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. The amount of
factored receivables sold with limited recourse, which results in a contingent liability to us, was
$18.2 million and $19.4 million as of June 30, 2011 and December 31, 2010, respectively.
Discounted receivables sold, including both with and without recourse, were $38.4 million and $34.8
million at June 30, 2011 and December 31, 2010, respectively, and the discount rate was 9.1% and
8.7%, respectively.
Purchase Commitments
As of December 31, 2010, we had $12.1 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 June 30, 2011.
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Letters of credit
We issue letters of credit in the normal course of business, as required by some vendor contracts.
As of June 30, 2011 and December 31, 2010, we had $4.3 million and $6.4 million, respectively, in
outstanding letters of credit.
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. With the exception of the settlement of the working
capital adjustment made with the purchaser of our former Engine & Power Train business segment, our
reserves for contingent liabilities have not historically differed materially from estimates upon
their final outcomes. 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 64 class action matters in 48 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 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 us, of $51.0
million was accepted in principle with the actual settlement terms to be negotiated. On February
24, 2010, we, 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 $51.0 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 August 16, 2010, the District Court entered orders
approving each of the settlements. A number of objectors filed appeals regarding the settlement
approval orders and other related orders in the United States Court of Appeals for the Seventh
Circuit, but as of February 16, 2011, all of those appeals have been dismissed. Accordingly, our
settlement agreement is final and we paid the balance of our $6.2 million allocable portion of the
settlement in the first quarter of 2011. We accrued the expected costs of our performance of our
settlement obligations in prior periods and, as such, management does not currently expect that the
settlement will have a material adverse effect on our 2011 consolidated operating results or
financial condition.
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
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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 Labeling 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.
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 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 the 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 us and our 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 us relating to the Covered Products, we 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 of 2010 (and paid in the third quarter of 2010) in the line item captioned
Impairments, restructuring charges, and other items. On June 13, 2011, the Court issued an order
denying without prejudice a motion for preliminary approval of
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Tecumsehs proposed settlement with the direct purchaser plaintiffs because the time frame and
products covered by the proposed settlement class were inconsistent with the Courts rulings of the
same day, granting in part, a motion by the other defendants to dismiss claims by the direct
purchaser plaintiffs. The direct purchaser plaintiffs have filed a motion for reconsideration of
the Courts ruling dismissing these claims. As a result of these rulings, both Tecumseh and the
direct purchaser plaintiffs have the option to rescind the Settlement Agreement, in which case the
settlement amount will be returned to Tecumseh. Alternatively, Tecumseh and the direct purchaser
plaintiffs may agree to amend the Settlement Agreement to be consistent with the Courts rulings on
the motion to dismiss. Even if the court approves the Settlement Agreement, if our customers
representing a significant percentage of purchases of Covered Products choose not to participate in
the settlement (opt-out), we have 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. We and other defendants filed motions
to dismiss the indirect purchaser class action on August 30, 2010. Briefing on the motions has
been completed and the motions are still pending before the Court.
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 their joint
conduct. As a conditional amnesty recipient, however, our civil liability will be limited pursuant
to the Antitrust Criminal Penalty Enhancement and Reform Act of 2004, as amended (ACPERA). As
long as we continue to cooperate with the civil claimants and comply 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 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 we are obligated to indemnify Snowstorm for
certain other claims and losses allegedly related to the subject matter of the complaint. An
answer on behalf of us 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 we are obligated to defend and indemnify them in connection with this lawsuit. We
intend to vigorously defend the lawsuit. The parties are currently conducting written discovery,
which is scheduled to be completed by March 31, 2012. A pretrial conference is scheduled for June
5, 2012, and trial is set to begin on June 18, 2012. A court ordered mediation is scheduled for
October 5, 2011 and Snowstorm will be required to provide a settlement demand by September 1, 2011.
This claim has been submitted and approved under our D&O insurance as we have met our deductible
limits and we expect to begin receiving reimbursement for future expense incurred in this matter.
At this time, we do not have a reasonable estimate 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.
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Environmental Matters
At June 30, 2011 and December 31, 2010 we had accrued $3.9 million and $4.2 million, respectively,
for environmental remediation. Included in the June 30, 2011 balance was an accrual of $2.3
million for the remaining estimated costs associated with remediation activities our former
Tecumseh, Michigan facility. Remediation efforts are ongoing, most of which will be completed in
the next 9 to 15 months while monitoring activities are anticipated to be completed by the end of
2019.
We were named by the USEPA as a potentially responsible party in connection with the Sheboygan
River and Harbor Superfund Site in Wisconsin. In 2003, with the cooperation of the USEPA, the
Company and Pollution Risk Services, LLC (PRS) entered into a Liability Transfer and Assumption
Agreement (the Liability Transfer Agreement). Under the terms of the Liability Transfer
Agreement, PRS assumed all of our responsibilities, obligations and liabilities for remediation of
the entire Site and the associated costs, except for certain specifically enumerated liabilities.
Also, as required by the Liability Transfer Agreement, we purchased Remediation Cost Cap insurance,
with a 30 year term, in the amount of $100.0 million and Environmental Site Liability insurance in
the amount of $20.0 million. We believe such insurance coverage will provide sufficient assurance
for completion of the responsibilities, obligations and liabilities assumed by PRS under the
Liability Transfer Agreement. In conjunction with the Liability Transfer Agreement, we completed
the transfer of title to the Sheboygan Falls, Wisconsin property to PRS.
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 2010, the
remainder of the work required by the WDNR was completed subject to two years of monitoring to be
completed by the end of 2012. 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. We
completed the remediation of this small area in the fourth quarter of 2010 and will be subject to
two years of monitoring through 2013. We had accrued $0.1 at June 30, 2011 and $0.2 million at
December 31, 2010 for the total estimated cost associated with the investigation and remediation of
the on-site contamination.
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 2011, the Financial Accounting Standards Board (FASB) issued an Accounting Standards
Update (ASU) No. 2011-05, to amend Accounting Standards Codification ASC 220, Presentation of
Comprehensive Income. This amendment will require companies to present the components of net
income and other comprehensive income either in a single continuous statement or as two consecutive
statements. It eliminates the option to present components of other comprehensive income as part of
the statement of changes in stockholders equity. This amendment, which should be applied
retrospectively, is effective for fiscal years, and interim periods within those years, beginning
after December 15, 2011. This Accounting Standards Update (ASU) No. 2011-05 impacts presentation
only and management believes it will have no material effect on our financial statements.
In May 2011, the Financial Accounting Standards Board (FASB) issued an Accounting Standards
Update (ASU) No. 2011-04, to amend Accounting Standards Codification ASC 820, Fair Value
Measurement. This amendment is intended to represent the converged guidance of US GAAP and IFRS on
fair value measurements. This guidance clarifies the result in common requirements for measuring
fair value and for disclosing information about fair value measurements, including a consistent
meaning of the term fair value. This amendment is effective during interim and annual periods
beginning after December 15, 2011. Management believes the adoption of this amendment will have no
material effect on our financial statements.
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, 2010 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) availability and volatility in
the cost of materials, particularly commodities, including steel and copper, whose cost can be
subject to significant variation; ii) financial market changes, including fluctuations in foreign
currency exchange rates and interest rates; iii) local governmental, environmental and energy
regulations; iv) actions of competitors in highly competitive markets with intense competition; v)
current and future global economic conditions, including housing starts, and the condition of
credit markets, which may magnify other risk factors; vi) potential political and economic
adversities that could adversely affect anticipated sales and production in Brazil; vii) potential
political and economic adversities that could adversely affect anticipated sales and production in
India, including potential military conflict with neighboring countries; viii) our ability to
maintain adequate liquidity in total and within each foreign operation; ix) the ultimate cost of
defending and resolving legal and environmental 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) increased or unexpected
warranty claims; xi) the extent of any business disruption caused by work stoppages initiated by
organized labor unions; 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 success of
our ongoing effort to bring costs in line with projected production levels and product mix; xv)
weather conditions affecting demand for replacement products; and xvi) the effect of terrorist
activity and armed conflict. 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
We expect global economic volatility to continue in the near term. While demand remains positive
globally, we expect to see continued global demand volatility as a result of uncertainties in
current events around the world coupled with the effect of high inflation in the emerging markets.
In the first half of 2011, sales improved slightly due to favorable currency impacts and price
increases, partially offset by lower volumes and mix decreases. Exclusive of the effects of
currency translation, sales in the first half of 2011 decreased 3.7% compared to the first half of
2010. In our household and refrigeration and freezer application markets, we believe that our
volume declines are a result of the price increases we implemented to offset higher commodity costs
and the weakening U.S. dollar, both of which in turn have intensified competition from Asian supply
sources. In addition, a
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customer in this market shifted its production to manufacture more of its products internally.
The launches of the new Mini compressor platform for use in household refrigerators and freezers
and the Midi compressor platform for use in commercial refrigeration are progressing, with
commercial sales expected to begin in the fourth quarter. We believe these product families will
improve the quality, sound, and performance of our products and lower their manufacturing cost with
enhanced internal design and the use of lower cost materials, such as aluminum motor windings.
Customers are currently testing these platforms and some order conversions from the current to new
products are taking place. We believe that these new products are better positioning us by
providing efficiency improvements required by customers as well as providing products designed for
more environmentally friendly hydrocarbon refrigerants.
While we believe that full year sales in 2011 will increase compared to 2010, we cannot currently
project whether market conditions will improve on a sustained or significant basis.
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. Overall, we have seen some decreases in copper
pricing during the second quarter, as compared to the first quarter and an increase in the price of
steel. The average market costs in the second quarter of 2011 was 30.2% higher for copper and
30.5% higher for the types of steel utilized in our products compared to the second quarter of
2010. After consideration of our hedge positions during the second quarter of 2011 and 2010, our
average cost of copper and steel in the second quarter of 2011 was 44.4% and 30.5%, respectively,
higher in our results of operations when compared to the second quarter of 2010, primarily due to
lower cost hedges in 2010.
From January 1, to June 30, 2011, average market costs for copper and the types of steel utilized
in our products increased 1.7% and 11.1%, respectively. After consideration of our hedge positions
during the first half of 2011 and 2010, our average cost of copper and steel in the first half of
2011 was 44.1% and 25.2%, respectively, higher in our results of operations when compared to the
first half of 2010, primarily due to lower cost hedges under our 2010 hedging agreements.
The rapid increase in steel prices has a particularly negative impact, as there is currently no
well-established global market for hedging against increases in the price of steel. Although we
have been successful in securing a few contracts to help mitigate the risk of the rising steel
market, this market is not very liquid and only available against our U.S. purchases of steel. Such
extreme volatilities create substantial challenges to our ability to control the cost of our
products, as the final product cost can depend greatly on our ability to secure optimally priced
futures contracts.
Based upon the introduction of redesigned products, we expect to use more aluminum in our motors in
2011. While aluminum is not as volatile as copper and steel, we have proactively executed futures
contracts and options for aluminum to help mitigate the risk of rising aluminum prices.
We have been proactive in addressing the volatility of these costs, including executing futures
contracts and options, as of June 30, 2011 to cover approximately 52.1%, 3.4% and 45.7% of our
remaining anticipated copper, steel and aluminum, respectively, usage in 2011. 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.
We expect to continue our approach of mitigating the effect of short term swings through the
appropriate use of hedging instruments, price increases and modified pricing structures with our
customers, where available, to allow us to recover our costs in the event that the prices of
commodities continue to escalate in a manner similar to what we experienced in 2010 and the first
half of 2011. For a discussion of the risks to our business associated with commodity price risk
fluctuations, refer to Quantitative and Qualitative Disclosures about Market Risk in Part I, Item
3 of this report.
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 half of 2011 and 2010,
approximately 81% and 83%, respectively, of our compressor sales activity took place outside the
United States, primarily in Brazil, Europe, 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. Our Brazilian manufacturing and sales presence are significant and
changes in the Brazilian Real have been especially adverse to our results of operations when
compared to prior periods. In the first half of 2011, the Brazilian Real strengthened against the
dollar by 13.3% compared to the first half of 2010. 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.
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Liquidity
We have received cash inflows from non-operating activities and expect to receive further cash
inflows from taxes through the end of 2011. We have received and expect to receive refunds of
outstanding Brazilian non-income taxes. We received approximately $19.7 million of outstanding
refundable Brazilian non-income taxes in the first half of 2011. An additional $15.0 million of
our refundable non-income taxes is being held in a court appointed cash account until resolution of
an unrelated social security tax matter. The timing of resolution of this tax dispute is uncertain
and might take several years to resolve. This deposit is reflected as a long term asset on our
balance sheet.
Based on historical payment patterns and indication of the Brazilian tax authorities and the cash
deposit described above, and based on the U.S. dollar to Real exchange rate as of June 30, 2011, we
expect to recover approximately $32.8 million of the $61.7 million outstanding refundable taxes in
Brazil over the next twelve months. 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 or past practices.
Challenges remain with respect to our ability to generate appropriate levels of liquidity solely
from cash flows from operations, particularly uncertainties related to future sales levels, global
economic conditions, currency exchange rates and commodity pricing as discussed above. In the
first two quarters of 2011, we used $9.3 million of cash flow in operations. While we expect
continued improvement as our restructuring activities take effect, we may not generate cash from
normal operations unless further restructuring activities are implemented and/or sales and economic
conditions improve. We reduced our workforce in the second quarter of 2011 to reduce salary, wages
and employee benefits on an annual basis by approximately $10.9 million and incurred an additional
charge of $2.0 million associated with this restructuring plan.
On April 21, 2011, we entered into a Revolving Credit and Security Agreement with PNC Bank,
National Association (PNC). Subject to the terms and conditions of the agreement, PNC agreed to
provide us with up to a $45.0 million revolving line of credit, including up to $10.0 million in
letters of credit, subject to a borrowing base formula, lender reserves and PNCs reasonable
discretion. The facility expires on April 15, 2015 and bears interest at either LIBOR or an
alternative base rate, plus a margin that varies with borrowing availability. As of June 30, 2011,
based upon the borrowing base formula, we had $40.6 million available and $2.0 million in
outstanding letters of credit under this facility.
We also continue to maintain various credit facilities in most other jurisdictions in which we
operate, and we are currently in the process of exploring a new credit facility to provide
additional liquidity in 2011 for some of our foreign subsidiaries. While we believe that current
cash balances, and when available, borrowings under available credit facilities and cash inflows
related to tax refunds 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
sales or 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 accounted 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 June 30, 2011 vs. Three Months Ended June 30, 2010
A summary of our operating results as a percentage of net sales is shown below:
Three Months Ended June 30, | ||||||||||||||||
(Dollars In Millions) | 2011 | % | 2010 | % | ||||||||||||
Net sales
|
$ | 248.8 | 100.0 | % | $ | 249.3 | 100.0 | % | ||||||||
Cost of sales and operating expenses
|
229.1 | 92.1 | % | 218.3 | 87.6 | % | ||||||||||
Gross Profit
|
19.7 | 7.9 | % | 31.0 | 12.4 | % | ||||||||||
Selling and administrative expenses
|
26.8 | 10.8 | % | 29.6 | 11.9 | % | ||||||||||
Impairments, restructuring charges, and other items
|
2.1 | 0.8 | % | 8.5 | 3.4 | % | ||||||||||
Operating loss
|
(9.2 | ) | (3.7 | )% | (7.1 | ) | (2.9 | )% | ||||||||
Interest expense
|
(3.1 | ) | (1.2 | )% | (2.7 | ) | (1.0 | )% | ||||||||
Interest income and other, net
|
0.7 | 0.3 | % | 0.3 | 0.1 | % | ||||||||||
Loss from continuing operations before taxes
|
(11.6 | ) | (4.6 | )% | (9.5 | ) | (3.8 | )% | ||||||||
Tax benefit
|
1.8 | 0.7 | % | 0.2 | 0.1 | % | ||||||||||
Net loss from continuing operations
|
$ | (9.8 | ) | (3.9 | )% | $ | (9.3 | ) | (3.7 | )% | ||||||
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Net sales in the second quarter of 2011 decreased $0.5 million, or 0.2%, versus the same period of
2010. Excluding the increase in sales due to the effect of changes in foreign currency translation
of $15.4 million, net sales decreased by 6.4% compared to the second quarter of 2010, with volume
and mix decreases partially offset by price increases.
Sales of compressors used in commercial refrigeration and aftermarket applications represented 58%
of our total sales and increased by 1.7% to $146.5 million in the second quarter of 2011 when
compared to the second quarter of 2010. This increase was primarily driven by price increases of
$4.2 million and changes in currency exchange rates of $9.0 million, partially offset by $10.8
million due to lower volumes and unfavorable changes in sales mix. The volume/sales mix decrease
is mainly attributable to customers reducing their inventory levels based upon their current
forecasted demands as market conditions softened.
Sales of compressors for air conditioning applications and all other applications represented 22%
of our total sales and increased by 40.0% to $52.5 million, when compared to the second quarter of
2010. This increase is primarily due to volume and mix increases of $11.1 million, price
increases of $1.2 million and $2.7 million of favorable currency exchange rate changes. Volume
increases are primarily in our Latin America market where we continue to see positive growth,
particularly in residential air-conditioning market over the same period in the prior year.
Sales of compressors used in household refrigeration and freezer (R&F) applications represented
20% of our total sales and declined by 26.5% to $49.8 million when compared to the second quarter
of 2010. This decrease is primarily due to volume and mix decreases of $21.8 million, partially
offset by $0.2 million of price increases and $3.7 million due to changes in currency exchange
rates. We continue to see intensified competition from Asian supply sources in this market and we
believe that our volume declines are a result of the price increases we implemented to offset
higher commodity costs and the weakening U.S. dollar. In addition, a customer in this market
shifted their production to manufacture more of its products internally.
The launches of the new Mini compressor platform for use in household refrigerators and freezers
and the Midi compressor platform for use in commercial refrigeration are progressing, with
commercial sales expected to begin in the fourth quarter. We believe these product families will
improve the quality, sound, and performance of our products and lower their manufacturing cost with
enhanced internal design and the use of lower cost materials, such as aluminum motor windings.
Customers are currently testing these platforms and some order conversions from the current to new
products are taking place. We believe that these new products are better positioning us by
providing efficiency improvements required by customers as well as providing products designed for
more environmentally friendly hydrocarbon refrigerants.
Gross profit decreased by $11.3 million from $31.0 million, or 12.4%, in the second quarter of 2010
to $19.7 million, or 7.9%, in the second quarter of 2011. The decrease in gross profit in the
second quarter of 2011 was primarily attributable to unfavorable changes in commodity costs of $8.6
million, lost margin from volume and sales mix of $9.8 million, and productivity of $3.8 million
which is mainly a result of unfavorable absorption of fixed overhead costs due to lower volume.
These decreases were partially offset by the favorable effect of price increases of $5.5 million,
favorable currency exchange effects of $1.8 million, favorable impact of OPEB charges of $1.6
million, changes in other material cost of $0.9 million and all other income and expense items
included in gross profit of $1.1 million.
Selling and administrative (S&A) expenses decreased by $2.8 million from $29.6 million in the
second quarter of 2010 to $26.8 million in the second quarter of 2011. As a percentage of net
sales, S&A expenses were 10.8% in the second quarter of 2011 compared to 11.9% in the second
quarter of 2010. The decrease is mainly due to a reduction in payroll, benefits and other related
employee expenses of $1.6 million as a result of our continued restructuring efforts and decrease
of professional fees by $0.5 million. All other selling and administrative expenses decreased by
$0.7 million for the quarter.
We recorded expense of $2.1 million in impairments, restructuring charges, and other items in the
second quarter of 2011 compared to $8.5 million in the same period of 2010. In the second quarter
of 2011, these expenses included severance costs associated with a reduction in force at our
Brazilian ($1.6 million), North American ($0.1 million), French ($0.2 million), and Indian ($0.1
million) locations; and $0.1 million of costs related to the environmental reserve associated with
the remediation activities at our former Tecumseh, Michigan facility. For a more detailed
discussion of these charges, refer to note 11 of the notes to the consolidated financial statements
in Item 1 of this report.
Interest expense was $3.1 million in the second quarter of 2011 compared to $2.7 million in the
same period of 2010. The increase is primarily due to higher average debt and an increase in the
discounting rate in Brazil during the second quarter of 2011 as compared to the second quarter of
2010. The weighted average interest rate on debt was 8.4% at June 30, 2011 compared to 13.4% at
June 30, 2010. The reduction in rate is mainly a result of our continued efforts in Brazil to
utilize longer term debt, which has a more favorable interest rate against discounting accounts
receivable.
Interest income and other income, net was $0.7 million in the second quarter of 2011 compared to
$0.3 million in the second quarter of 2010.
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For the second quarter of 2011, we recorded a tax benefit of $1.8 million from continuing
operations. This tax benefit is comprised of $1.3 million in foreign tax benefit and a U.S.
federal tax benefit of $0.5 million. The $0.2 million income tax benefit from continuing
operations for the second quarter of 2010 is comprised of a tax expense of $0.7 million in foreign
jurisdictions and a benefit of $0.9 million in U.S. federal taxes.
Net loss from continuing operations for the quarter ended June 30, 2011 was $9.8 million, or $0.53
per share, as compared to $9.3 million, or $0.50 per share, in the same period of 2010. The change
was primarily the result of volume decreases in the current year, and other factors as discussed
above.
Six Months Ended June 30, 2011 vs. Six Months Ended June 30, 2010
A summary of our operating results as a percentage of net sales is shown below:
Six Months Ended June 30, | ||||||||||||||||
(Dollars In Millions) | 2011 | % | 2010 | % | ||||||||||||
Net sales
|
$ | 491.7 | 100.0 | % | $ | 488.0 | 100.0 | % | ||||||||
Cost of sales and operating expenses
|
449.4 | 91.4 | % | 428.3 | 87.8 | % | ||||||||||
Gross Profit
|
42.3 | 8.6 | % | 59.7 | 12.2 | % | ||||||||||
Selling and administrative expenses
|
52.7 | 10.7 | % | 58.1 | 11.9 | % | ||||||||||
Impairments, restructuring charges, and other items
|
5.4 | 1.1 | % | 48.5 | 9.9 | % | ||||||||||
Operating loss
|
(15.8 | ) | (3.2 | )% | (46.9 | ) | (9.6 | )% | ||||||||
Interest expense
|
(5.5 | ) | (1.1 | )% | (5.6 | ) | (1.1 | )% | ||||||||
Interest income and other, net
|
0.9 | 0.2 | % | 0.6 | 0.1 | % | ||||||||||
Loss from continuing operations before taxes
|
(20.4 | ) | (4.1 | )% | (51.9 | ) | (10.6 | )% | ||||||||
Tax benefit
|
3.0 | 0.6 | % | 1.9 | 0.4 | % | ||||||||||
Net loss from continuing operations
|
$ | (17.4 | ) | (3.5 | )% | $ | (50.0 | ) | (10.2 | )% | ||||||
Net sales in the first two quarters of 2011 increased $3.7 million, or 0.8%, versus the same period
of 2010. Excluding the increase in sales due to the effect of changes in foreign currency
translation of $21.7 million, net sales decreased by 3.7% compared to the first two quarters of
2010, with volume and mix decreases partially offset by price increases.
Sales of compressors used in commercial refrigeration and aftermarket applications represented 57%
of our total sales and increased by 1.7% to $281.6 million in the first two quarters of 2011, when
compared to the first two quarters of 2010. This increase was primarily driven by price increases
of $7.6 million and changes in currency exchange rates of $10.2 million, partially offset by $13.1
million due to lower volumes and unfavorable changes in sales mix. The volume/ sales mix decrease
is mainly attributable to customers reducing their inventory levels based upon their forecasted
demands as market conditions softened.
Sales of compressors for air conditioning applications and all other applications represented 21%
of our total sales and increased by 36.9% to $101.5 million in the first two quarters of 2011, when
compared to the first two quarters of 2010. This increase is primarily due to volume and mix
increases of $19.5 million, price increases of $3.0 million and $4.9 million of favorable currency
exchange rate changes. Volume increases are primarily in our Latin America market where we
continue to see positive growth, particularly in residential air-conditioning market over the same
period in the prior year.
Sales of compressors used in household refrigeration and freezer (R&F) applications represented
22% of our total sales and declined by 20.8% to $108.5 million in the first two quarters of 2011,
when compared to the first two quarters of 2010. This decrease is primarily due to volume and mix
decreases of $36.8 million, partially offset by $1.8 million of price increases and $6.6 million
due to changes in currency exchange rates. We continue to see intensified competition from Asian
supply sources in this market and we believe that our volume declines are a result of the price
increases we implemented to offset higher commodity costs and the weakening U.S. dollar. In
addition, a customer in this market shifted its production to manufacture more of its products
internally.
The launches of the new Mini compressor platform for use in household refrigerators and freezers
and the Midi compressor platform for use in commercial refrigeration are progressing, with
commercial sales expected to begin in the fourth quarter. We believe these product families will
improve the quality, sound, and performance of our products and lower their manufacturing cost with
enhanced internal design and the use of lower cost materials, such as aluminum motor windings.
Customers are currently testing these platforms and some order conversions from the current to new
products are taking place. We believe that these new products are better positioning us by
providing efficiency improvements required by customers as well as providing products designed for
more environmentally friendly hydrocarbon refrigerants.
Gross profit decreased by $17.4 million from $59.7 million, or 12.2%, in the first two quarters of
2010 to $42.3 million, or 8.6%, in the first two quarters of 2011. The decrease in gross profit in
the first two quarters of 2011 was primarily attributable to unfavorable changes in commodity costs
of $17.0 million, unfavorable currency exchange effects of $2.4 million, lost margin from
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volume and sales mix of $11.4 million, and productivity of $8.1 million, which is mainly a result
of unfavorable absorption of fixed overhead costs due to lower volume. These decreases were
partially offset by the favorable effect of price increases of $12.3 million, changes in other
material cost of $5.2 million, favorable impact of OPEB charges of $1.6 million, and all other
income and expense items included in gross profit of $2.4 million.
Selling and administrative (S&A) expenses decreased by $5.4 million from $58.1 million in the
first two quarters of 2010 to $52.7 million in the first two quarters of 2011. As a percentage of
net sales, S&A expenses were 10.7% in the first two quarters of 2011 compared to 11.9% in the first
two quarters of 2010. The decrease is mainly due to a reduction in payroll, benefits and other
related employee expenses of $4.2 million as a result of our continued restructuring efforts and
reduction in professional fees by $0.1 million. All other selling and administrative expenses
decreased by $1.1 million in the aggregate.
We recorded expense of $5.4 million in impairments, restructuring charges, and other items in the
first two quarters of 2011 compared to $48.5 million in the same period of 2010. In the first two
quarters of 2011, these expenses included $5.4 million related to severance associated with a
reduction in force at our Brazilian ($1.8 million), North American ($0.1 million), French ($0.2
million), Indian ($0.1 million) and Corporate ($3.1 million, including $1.35 million relating to
our former President and Chief Executive Officers separation) locations; and an increase of $0.1
million for costs related to environmental reserve associated with the remediation activities at
our former Tecumseh, Michigan facility. For a more detailed discussion of these charges, refer to
note 11 of the notes to the consolidated financial statements in Item 1 of this report.
Interest expense was $5.5 million in the first two quarters of 2011 compared to $5.6 million in the
same period of 2010. The reduction is due to securing longer term debt at more favorable rates,
which is partially offset by higher average debt and an increase in the discounting rate in Brazil
during the first two quarters of 2011 as compared to the first two quarters of 2010. The weighted
average interest rate on debt was 8.9% at June 30, 2011 compared to 12.0% at June 30, 2010. The
reduction in rate is mainly a result of our continued efforts in Brazil to utilize longer term
debt, which has a more favorable interest rate against discounting accounts receivable.
Interest income and other income, net was $0.9 million in the first two quarters of 2011 compared
to $0.6 million in the first two quarters of 2010.
For the first two quarters of 2011, we recorded a tax benefit of $3.0 million from continuing
operations. This tax benefit is comprised of $2.4 million in foreign tax benefit and a U.S.
federal tax benefit of $0.6 million. The $1.9 million income tax benefit from continuing
operations for the first two quarters of 2010 is comprised of a tax expense of $1.0 million in
foreign jurisdictions and a benefit of $2.9 million in U.S. federal taxes.
Net loss from continuing operations for the six months ended June 30, 2011 was $17.4 million, or
$0.94 per share, as compared to $50.0 million, or $2.71 per share, in the same period of 2010. The
change was primarily the result of volume decreases in the current year, and other factors as
discussed above.
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 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 in 2010 and will continue to review and implement it
in 2011.
Cash Flow
In the first two quarters of 2011, cash used in operations amounted to $9.3 million as compared to
$34.0 million of cash used in operations in the first two quarters of 2010. Significant elements
of the first two quarters of cash used in operations included the increase in working capital,
offset by the receipt of recoverable non-income taxes and cash used in our net loss, net of
non-cash items for the first two quarters.
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With respect to working capital, inventory levels were higher primarily due to our planned seasonal
increased sales volumes,
partially offset by a reduction of inventory days on hand by four days compared to December 31,
2010, together resulting in a use of cash of $2.5 million for the six months ended June 30, 2011.
The reduction of inventory days on hand is a result of our initiative to reduce inventory levels.
Increased accounts receivable was a use of cash of $14.6 million during the first two quarters
primarily as a result of our increased sales over the fourth quarter of the prior year and lower
sales toward the end of the fourth quarter of 2010 compared to the second quarter of 2011,
partially offset by an improvement in days sales outstanding of two days when compared to December
31, 2010 and increased factoring of our receivables.
Payables and accrued expenses decreased by $9.6 million, mainly as a result of decreased purchases
of inventories, and a decrease in payable days outstanding of seven days compared to December 31,
2010. This reduction in days outstanding is mainly a result of a conscious effort to pay down our
payables in our Brazilian and European locations to reduce interest charges.
Recoverable non-income taxes provided cash of $21.5 million primarily due to refunds of outstanding
Brazilian non-income taxes.
Employee retirement benefits was a use of cash of $3.5 million for year to date contributions and
activity relating to our retiree medical plans.
Cash used in investing activities was $3.3 million in the first two quarters of 2011 as compared to
cash used in investing activities of $6.7 million for the same period of 2010. The 2011 use of
cash in investing activities is primarily related to capital expenditures of $7.3 million,
partially offset by a release of restricted cash of $3.5 million, and proceeds from the sale of
assets of $0.5 million.
Cash used in financing activities was $0.2 million in the first two quarters of 2011 compared to
$29.8 million provided by financing activities for the same period of 2010. The decrease in
borrowings in the first two quarters of 2011 compared to the first two quarters of 2010 is mainly
due to our cash management strategy to increase our usage of accounts receivable discounting
programs from December 31, 2010 levels to support our seasonal working capital needs instead of
using longer term debt.
Liquidity Sources
Credit Facilities and Cash on Hand
In addition to cash on hand, cash provided by operating activities and cash inflows related to
non-operating activities, when available, we use bank debt and other foreign credit facilities such
as accounts receivable discounting programs to fund our working capital requirements. On April 21,
2011, we entered into an agreement with PNC Bank pursuant to which PNC Bank provides senior secured
revolving credit financing up to an aggregate of $45.0 million to us, including up to $10.0 million
in letters of credit. The agreement contains various covenants, including limitations on
dividends, investments and additional indebtedness and liens, and a minimum fixed charge coverage
ratio, which would apply only if average undrawn borrowing availability, as defined by the credit
agreement, were to fall below a specified level. As of June 30, 2011, we had no borrowings
outstanding under this facility, and our average undrawn borrowing availability was such that the
covenant did not apply. At June 30, 2011, we had outstanding letters of credit of $2.0 million and
the capacity for borrowings under the borrowing base formula of $40.6 million under this facility.
For a more detailed description of this facility, see Note 8 to the consolidated financial
statements in Item 1 of this report. We also use these cash resources to fund capital
expenditures, and when necessary, to address operating losses.
As of June 30, 2011, our cash and cash equivalents on hand was $54.9 million. Our borrowings under
current credit facilities at foreign subsidiaries totaled $68.6 million at June 30, 2011, with an
uncommitted additional borrowing capacity of $49.3 million. For a more detailed discussion of our
foreign credit facilities, refer to Note 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. Based on the historical payment patterns and indication of
the Brazilian tax authorities, and based on the U.S. dollar to Real exchange rate as of June 30,
2011, we expect to recover approximately $32.8 million of the $61.7 million outstanding refundable
taxes in Brazil in the next twelve months. The Brazilian
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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 or past
practices.
Potential cash inflows related to outstanding Warrant
In 2007, we issued a warrant to purchase 1,390,944 shares of Class A Common Stock at $6.05 per
share to a former creditor. The warrant expires in April of 2012. The former creditors exercise
of the warrant could raise approximately $8.4 million in gross proceeds for us; however the warrant
contains a provision for cashless exercises, which would require us to issue shares of Class A
common stock to the former creditor with a value equal to the difference in the market price of the
underlying shares at the exercise date less the $6.05 per share exercise price.
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 $38.4 million and $34.8
million at June 30, 2011 and December 31, 2010, respectively. The amount of factored receivables
sold with limited recourse, which results in a contingent liability to us, was $18.2 million and
$19.4 million as of June 30, 2011 and December 31, 2010, respectively. In addition to the credit
facilities described above, our Brazilian subsidiary also has an additional $98.0 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. We utilize these facilities, when
available for seasonal working capital needs.
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. However, in the same period, we anticipate challenges with respect to our
ability to generate positive cash flows from operations, most significantly due to challenges
driven by possible additional volume declines, as well as currency exchange and commodity pricing
factors discussed above. While we expect continued improvement as our restructuring activities
take effect, we realize that we may not generate cash from normal operations unless further
restructuring activities are implemented and/or economic conditions improve.
As of June 30, 2011, we had $54.9 million of cash and cash equivalents, and $68.6 million in debt,
of which $12.3 million was long-term in nature. The short-term debt primarily consists of
uncommitted revolving lines of credit, which we intend to maintain for the foreseeable future.
Accordingly, we believe our cash on hand and availability under our borrowing facilities is
sufficient to meet our debt service requirements. We do not expect any material differences from
cash availability and cash outflows previously described in our Annual Report on from 10-K for the
year ended December 31, 2010, except as described above.
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
$18.2 million at June 30, 2011 and $19.4 million at December 31, 2010.
CONTRACTUAL OBLIGATIONS
As of June 30, 2011, 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, 2010 under the caption Contractual Obligations.
CRITICAL ACCOUNTING ESTIMATES
For a discussion of our critical accounting estimates, see Item 7, Managements Discussion and
Analysis of Financial Condition and Results of Operations 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, 2010.
There have been no significant changes to our critical accounting estimates during the first half
of 2011.
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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, 2010 and in conjunction with the Outlook section in our
Annual Report on Form 10-K for the year ended December 31, 2010.
Consistent with other industry forecasts, current global market conditions, and demand around the
world, we remain positive on the global economy. We expect to see continued demand volatility as a
result of uncertainties in current events around the world coupled with the effect of high
inflation in the emerging markets. The high inflation is beginning to impact some growth in the
emerging markets, especially a slowing of growth in India. While we expect to see demand growth
globally in the second half of the year, we have lowered our previous estimates. We currently
expect that net sales for the full year 2011 could increase up to 5 percent from 2010 levels. The
potential improvement is based on 2010 sales, our existing pipeline of orders, our internal
projections about the market and related economic conditions, price increases to our customers,
currency impact as well as our continued efforts in sales, marketing and the re-engineering of our
products. We cannot currently project whether market conditions will improve on a sustained or
significant basis and if the economic improvement in our key markets does not occur as expected,
this could have an adverse impact on our current outlook.
The prices of key commodities, including copper and steel, have reached record levels of inflation.
We expect the full year average cost of our purchased materials in 2011, including the impact of
our hedging activities, to exceed that of 2010, depending on commodity cost levels and the level of
our hedging over the course of the year. We expect the changes in commodity costs, after giving
consideration to our contracts to have an unfavorable impact totaling approximately $27.0 million
when compared to full year 2010. We expect to continue our approach of attempting to mitigate the
effect of short term swings through the appropriate use of hedging instruments, price increases,
and modified pricing structures.
The Brazilian Real, the Euro and the Indian Rupee continue to be volatile against the U.S. dollar.
We have considerable forward purchase contracts to cover a portion of our exposure to additional
fluctuations in value during 2011. See Executive Summary-Currency. 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 remeasurement, to have an unfavorable impact totaling
approximately $8.0 million to $10.0 million in 2011 when compared to 2010.
After giving recognition to the factors discussed above, we expect that the full year 2011
operating profit could improve from 2010. Our primary offsets are expected to include lower
expected impairments, restructuring charges and other items in 2011, re-engineering of our product
line to reduce our costs, price increases and continued focus on cost reductions.
We also expect that our operating cash flow could be sufficient to maintain current cash balances
and fund ongoing business requirements if we are successful at achieving the improved margins
discussed above.
While we expect continued improvement as our restructuring activities take effect, we realize that
we may not generate cash from normal operations unless further restructuring activities are
implemented and/or sales or economic conditions improve. As a result, we further reduced our
workforce in the second quarter of 2011 to reduce salary, wages and employee benefits on an annual
basis by approximately $10.9 million. Additional restructuring actions could result in further
restructuring and/or asset impairment charges, and, accordingly, could have a significant effect on
our consolidated financial position, operating profit, cash flows and future operating results.
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, and key currency rates are all important to future performance, as is our ability to match
hedge activity to actual levels of transactions. We can give no guarantees regarding what impact
future exchange rates, commodity price and other economic changes will have on our 2011 results.
For a discussion of the sensitivity analysis associated with our key commodities and currency
hedges see Quantitative and Qualitative Disclosures about Market Risk in Part I, Item 3 of this
report.
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, 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
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described in our Annual Report on
Form 10-K for the year ended December 31, 2010, 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 $38.4 million and $34.8 million, at June 30, 2011 and December 31, 2010,
respectively. The weighted average discount rate was 8.4% and 8.9% for the three and six months
ended June 30, 2011 and 6.6% and 7.4% in the same periods in 2010. Discounted receivables sold
with limited recourse comprised $18.2 million and $19.4 million of this amount at June 30, 2011 and
December 31, 2010, 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 and invested cash balances at
June 30, 2011, a 1% increase in interest rates would increase interest expense for the year by
approximately $0.7 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 and to a lesser degree aluminum, as these are major components of our product
cost.
We use commodity futures and options contracts to provide us with greater flexibility in managing
the substantial volatility in copper pricing. Our policy allows management to contract commodity
futures for a limited percentage of projected raw materials requirements up to 18 months in
advance. At June 30, 2011 and December 31, 2010, we held a total notional value of $25.7 million
and $34.7 million, respectively, in commodity futures contracts. These futures are designated as
cash flow hedges against the price of copper, steel, and aluminum, and are accounted for as hedges
on our balance sheet.
As of June 30, 2011, we have been proactive in addressing the volatility of copper prices,
including executing options and futures contracts to cover approximately 52.1% of our anticipated
copper requirements for 2011. While the use of futures can mitigate the risks of short-term price
increases associated with these commodities by locking in prices at a specific level, we do not
realize the full benefit of a rapid decrease in commodity prices. As a result, if market pricing
becomes deflationary, our level of commodity hedging could result in lower operating margins and
reduced profitability. Based on our current level of activity, and before consideration of
commodity futures contracts, a 10% increase in the price of copper used in production of our
products from prices at June 30, 2011 would adversely affect our annual operating profit by $8.8
million. Conversely, based on our current level of commodity futures contracts, a decrease in the
price of copper used in production of our products of 10% would result in losses under these
contracts that would adversely impact our operating results by $2.0 million.
The rapid increase in steel prices has a particularly negative impact, as there is currently no
well-established global market for hedging against increases in the cost of steel; however we have
been successful at securing a few steel futures contracts in the U.S. to help mitigate this risk.
These futures are designed as cash flow hedges against the price of steel, and are accounted for as
hedges on our balance sheet. These futures contacts cover approximately 3.4% of our anticipated
steel requirements in 2011; however the steel market is not considered a liquid market and is not
available outside the U.S. These futures contracts have similar benefits and risks to us as the
copper futures described above. Based on our current level of activity, and before consideration
of commodity futures contracts, a 10% increase in the price of steel used in production of our
products from prices at June 30, 2011 would adversely affect our annual operating profit by $11.3
million. Conversely, based on our current level of commodity futures contracts, a decrease in the
price of steel used in production of our products of 10% would result in losses under these
contracts that would adversely impact our operating results by $0.4 million.
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 that cover 45.7% of our projected usage in 2011. These futures are designed as
cash flow hedges against the price of aluminum, and are accounted for as hedges on our balance
sheet. These futures contracts have similar benefits and risks to us as the copper futures
described above. Based on our current level of activity, and before consideration of commodity
futures contracts, a 10% increase in the price of aluminum used in production of our products from
prices at June 30, 2011 would adversely affect our annual operating profit by $0.6 million.
Conversely, based on our current level of commodity futures contracts, a decrease in the price of
aluminum used in production of our products of 10% would result in losses under these contracts
that would adversely impact our operating results by $0.2 million.
Foreign Currency Exchange Risk We are exposed to significant exchange rate risk since the
majority of all our revenues, expenses, assets and liabilities are derived from operations
conducted outside the U.S. in local and other currencies and, for purposes of financial reporting,
the results are translated into U.S. dollars based on currency exchange rates prevailing during or
at the end of the reporting period. We are also exposed to significant exchange rate risk when an
operation has sales or expense transactions in a currency that differs from its local, functional
currency or when the sales and expenses are denominated in
different currencies. This risk applies to all our foreign locations since a large percentage of
their receivables and payables are transacted in a currency other than their local currency, mainly
U.S. dollars. In those cases, when the receivable is ultimately paid
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in less valuable dollars, the
foreign location realizes less net revenue in its local currency, which can adversely impact its
margins. The periodic re-measurement of these receivables and payables are recognized in the
consolidated statements of operations. As the U.S. dollar strengthens, our reported net revenues,
operating profit (loss) and assets are reduced because the local currency will translate into fewer
U.S. dollars, and during times of a weakening U.S. dollar, our reported expenses and liabilities
are increased because the local currency will translate into more U.S. dollars. Translation of our
Statement of Operations into U.S. dollars affects the comparability of revenue, expenses, operating
income (loss), and earnings (loss) per share between years. Because of the geographic diversity of
our operations, weaknesses in some currencies might be offset by strengths in others over time.
However, fluctuations in foreign currency exchange rates, particularly the strengthening of the
U.S. dollar against major currencies could materially affect our financial results.
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 U.S. dollars at specified rates based on
estimated currency cash flows. In particular, we have entered into foreign currency forward
purchases to hedge the Brazilian, European and Indian export sales, some of which are denominated
in U.S. dollars. However, these hedging programs only reduce exposure to currency movements over
the limited time frame of three to eighteen months. Ultimately, long term changes in currency
exchange rates have lasting effects on the relative competitiveness of operations located in
certain countries versus competitors located in different countries. 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 June 30, 2011, the Real strengthened against the dollar by 6.3%, the Euro strengthened
by 7.8% and the Rupee weakened by 0.2%.
At June 30, 2011 and December 31, 2010, we held foreign currency forward contracts with a total
notional value of $73.1 million and $109.6 million, respectively. Based on our current level of
activity, and including any mitigation as the result of hedging activities, we believe that a 10%
strengthening of the Real, the Euro, or the Rupee against the U.S. dollar would negatively impact
our operating profit on an annual basis as indicated in the table below:
10% Strengthening against U.S. $ | ||||
(in millions) | June 30, 2011 | |||
Real |
$ | (5.4 | ) | |
Euro |
(6.9 | ) | ||
Rupee |
(0.7 | ) | ||
Total |
$ | (13.0 | ) |
However, based on our current foreign currency forward contracts, a 10% weakening in the value of
the Real, the Euro or the Rupee would result in losses under such foreign currency forward
contracts that would adversely impact our operating results as indicated in the table below:
10% Weakening against U.S. $ | ||||
(in millions) | June 30, 2011 | |||
Real |
$ | (2.0 | ) | |
Euro |
(2.6 | ) | ||
Rupee |
| |||
Total |
$ | (4.6 | ) |
Item 4. Controls and Procedures.
Our management evaluated, with the participation of our President, Chief Executive Officer and
Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of June 30,
2011 and any change in our internal control over financial reporting that occurred during our
second quarter ended June 30, 2011 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting. Based on this evaluation, our
President, Chief Executive Officer and Chief Financial Officer has concluded that our disclosure
controls and procedures were effective at the reasonable assurance level as of June 30, 2011.
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
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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 President, Chief Executive Officer and Chief
Financial Officer, 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 President, Chief Executive Officer and Chief Financial Officer, 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.
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 second quarter ended June 30, 2011 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 President, Chief Executive Officer and Chief Financial Officer, 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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For a discussion of our legal proceedings, see Litigation in Note 15 of the Notes to Consolidated
Financial Statements in Part I, Item 1 of this report, which is incorporated into this Part II,
Item 1 by reference. These proceedings were also described in Part II, Item 1 (by incorporation by
reference to Note 15 of the Notes to Consolidated Financial Statements in Part I, Item 1) of our
Quarterly Report on Form 10-Q for the quarter ended March 31, 2011.
Page 30
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 | Certifications of the Principal Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
|
32.2 | Certifications of the Principal Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
|
101.INS | XBRL Instance Document |
|
101.SCH | XBRL Schema Document |
|
101.CAL | XBRL Calculation Linkbase Document |
|
101.DEF | XBRL Definition Linkbase Document |
|
101.LAB | XBRL Labels Linkbase Document |
|
101.PRE | XBRL Presentation Document |
Page 31
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: August 4, 2011 | By | /s/ James J. Connor | ||
James J. Connor | ||||
President, Chief Executive Officer, Secretary and Chief Financial Officer (Duly Authorized and Principal Financial Officer) |
||||
Page 32
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 | Certifications of the Principal Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
|
32.2 | Certifications of the Principal Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. |
|
101.INS * | XBRL Instance Document |
|
101.SCH * | XBRL Schema Document |
|
101.CAL * | XBRL Calculation Linkbase Document |
|
101.DEF * | XBRL Definition Linkbase Document |
|
101.LAB * | XBRL Labels Linkbase Document |
|
101.PRE * | XBRL Presentation Document |
* | Furnished with this Form 10-Q |