January 11, 2007
United States Securities and Exchange Commission
Division of Corporate Finance
100 F Street, N.E., Mail Stop 7010
Washington, DC 20549-7010
Attn: Ms. Nili Shah, Accounting Branch Chief
RE: Tecumseh Products Company
Form 10-K for the Fiscal Year Ended December 31, 2005
Filed March 15, 2006
Form 10-Q for the Fiscal Quarter Ended March 31, 2006
File No. 0-452
Dear Ms. Shah:
This letter is in response to your comment letter dated October 19, 2006,
addressed to Mr. Todd W. Herrick, Chief Executive Officer of Tecumseh Products
Company. Your comments are reproduced below, followed in each case by Tecumseh's
response in italics.
Form 10-K for the year ended December 31, 2005
Note 4. Goodwill and Other Intangible Assets, page 55 of annual report
1. We note your response to comments 5 and 6 in our letter dated July 26,
2006. Specifically, we note that you believe the last paragraph on page 8
of your March 31, 2005 form 10-Q, as quoted in your response letter,
provides investors with sufficient forewarning that goodwill may be
materially impaired three months later. However, we continue to believe
that the progression of events in 2004 and 2005, as well as the
uncertainties surrounding those events, required additional disclosures
that clearly and comprehensively alert readers to the reasonable
possibility of a material impairment charge. In particular, we note the
following:
- The disclosures do not state the reporting unit and/or reportable
segment that is not meeting the projections used in the December 31,
2004 goodwill impairment test. This lack of disclosure leaves an
investor without sufficient information as to the amount of long-lived
assets and goodwill that is at risk for impairment.
- The disclosure in your March 31, 2005 Form 10-Q does not state that
management is unaware as to whether the issues FASCO is facing in
terms of
Tecumseh Products Company
Response to SEC Letter of October 19, 2006
Page 2 of 13
its operating results are temporary or permanent, as you have
indicated is the actual case in the third paragraph on page 11 of your
August 23, 2006 response letter. Instead, your disclosure includes two
statements that appear to contradict each other: "While the Company
expects results in the second quarter to continue to lag those
forecasts, it is the forecasted results for the second half of the
year and subsequent years that remain key to the Company's impairment
test. While management does not believe the business decline
experienced during the first quarter will have a permanence which
would represent a triggering event for interim evaluation of the
recoverability of goodwill, further deterioration of results below
revised forecasts for the second quarter may require the Company to
conduct an impairment test during the second quarter 2005..." Your
disclosure should be concise and inform investors as to what is
happening with the operations as seen through the eyes of management.
- Your estimate of the fair value of the reporting units within the
Electrical Components reportable segment exceeded the carrying value
of the reporting units by $37 million as of December 31, 2004. As
such, the estimated fair values and the carrying values of the
reporting units are not materially different, as the estimated fair
values represented only 108.6% of the reporting units' book values.
Accordingly, we believe that these circumstances required disclosures
that clearly:
- Identified the deterioration in the fair value from 2003 to
2004,
- Stated the extent to which the estimated fair value of the
Electrical Components' reporting units exceeded their
carrying values as of December 31, 2004,
- Stated that goodwill and long-lived assets are at risk for
impairment,
- Discussed the assumptions and the basis for these
assumptions in estimating the fair value of the Electrical
Components' reporting units,
- Discussed any uncertainties or risks associated with these
assumptions, and
- Provided a sensitivity analysis of a change in these
assumptions.
Refer to Item 303 of Regulation S-K, Section 501.02 and 501.12.b.3 of
the Financial Reporting Codification, SAB Topic 5:P.4 and Section 216
of the Financial Reporting Codification for guidance.
Similarly, we also believe that your disclosures regarding the details
of your impairment charge in the second quarter of 2005 should have
included all of the information we requested in prior comment 6 and
any additional information to further explain to investors why you
recognized such a material goodwill impairment charge.
However, given that you have already recognized the goodwill
impairment charge, additional disclosures at this time regarding the
events leading to the
Tecumseh Products Company
Response to SEC Letter of October 19, 2006
Page 3 of 13
goodwill impairment will likely have minimal utility to investors.
Accordingly, we have no further comment at this time.
However, because we believe that the circumstances resulting in an
impairment charge develop over time, please be advised that we expect
you to include more comprehensive disclosures in future filings
regarding the recoverability of your goodwill, as well as your other
intangible and tangible assets, where a material impairment is
reasonably likely in future periods. These disclosures should discuss
the progression of specific events that may give rise to an impairment
charge. Further, as stated in our prior comment letter, these
disclosures should include:
- Significant assumptions related to your fair value
estimates,
- The number of periods for which you are estimating future
cash flows,
- The basis for your assumptions,
- Uncertainties associated with your assumptions,
- Risks of changes to your assumptions, and
- A sensitivity analysis depicting the effect of a 1% change
in these assumptions.
Please also ensure that in addition to the discount rate you are
using, you discuss the sales growth rate and operating income's
percentage of sales. In addition, your disclosures should give readers
an indication of the likelihood of change in these assumptions, for
example, by way of disclosure of the extent to which your actual
results have differed from your assumptions.
ANSWER: We agree that the suggestions for more comprehensive disclosures
with regard to our valuation of goodwill would be useful information, and
have included such disclosures in our September 30, 2006 Form 10-Q and will
include such disclosures in our future filings. We have also incorporated
these additional disclosures in our Forms 10-Q/A, filed on December 19,
2006 to amend the Forms 10-Q for the periods ended March 31 and June 30,
2006.
The disclosure, as incorporated in the Company's September 30, 2006 Form
10-Q, is as follows:
"As discussed in the Significant Accounting Policies and Critical Accounting
Estimates sections of the Form 10-K for the year ended December 31, 2005, the
Company traditionally conducts its annual assessment of impairment for goodwill
in the fourth quarter by comparing the carrying value of the Company's reporting
units to their fair value. Fair value of the Company's goodwill and other
intangible assets is estimated based upon a present value technique using
discounted future cash flows, forecasted out over a six year period, with
residual growth rates forecasted at 3.0% thereafter. The Company uses management
business plans and projections as the basis for expected future cash flows. In
evaluating such business plans for reasonableness in the context of their use
for predicting discounted cash flows in our valuation model, the Company
Tecumseh Products Company
Response to SEC Letter of October 19, 2006
Page 4 of 13
evaluates whether there is a reasonable basis for differences between actual
results of the preceding year and projected results for the upcoming years. This
methodology can potentially yield significant improvements in growth rates in
the first few years of forecast data, due to multiple factors such as improved
efficiencies or incremental sales volume opportunities that are deemed to be
reasonably likely to be achieved. In the India reporting unit of the Compressor
Group, the goodwill analysis performed at the end of 2005 projected growth rates
of approximately 35.0% and 29.0% in 2007 and 2008 respectively, before
moderating to a 3.0% residual growth rate. For the reporting unit within the
Electrical Components Group, the rates were approximately 10.0% and 9.0% in 2007
and 2008, thereafter adjusting to 3.0%, and the Europe reporting unit of the
Compressor Group projected growth rates of approximately 5.0% in 2007 and 2008,
adjusted to 3.0% thereafter.
'While performance of the Europe reporting unit of the Compressor Group has been
relatively close to expectation during the first nine months of 2006, the India
reporting unit of the Compressor Group has seen its net profitability decline
$7.0 million against the forecasts made at the beginning of the year, and the
reporting unit within the Electrical Components Group with goodwill has reported
net profit results $20.5 million lower than forecast.
'The majority of the profitability decline against the original 2006 plan for
the Electrical Components reporting unit occurred in the third quarter of the
year. Profitability in the first quarter of the year exceeded expectations; the
second quarter, while unprofitable and unfavorable to plan, still showed
forecasts that the full year would be profitable. By the end of the third
quarter, however, the decline against expectations had continued and become more
pronounced, and the full year forecast indicated a substantial loss for the
business unit was now anticipated. According to SFAS No. 142, "Goodwill and
other Intangible Assets," "goodwill of a reporting unit shall be tested for
impairment between annual tests if an event occurs or circumstances change that
would more likely than not reduce the fair value of a reporting unit below its
carrying amount." The profitability decline for the Electrical Components
reporting unit in the third quarter led the Company to conclude that it should
perform an interim goodwill impairment analysis, incorporating the 2006 year to
date results and updated cash flow forecasts. The sales growth rates utilized in
the interim analysis were 3.0% or less in each year, and operating profit as a
percentage of sales ranged from 0.8% to 7.8%. Based on the results of this
analysis, the Company determined that no impairment of the unit's goodwill had
taken place.
'Although the decline in sales and profitability in the current year for the
India reporting unit is considered to be temporary and due to a delay in the
launch of new products, the operating profit performance through the nine months
of 2006 led the Company to perform an interim goodwill analysis for that
business unit as well. The sales growth rates utilized in the interim analysis
were reduced to 21.5% in 2007, 2.2% in 2008, and 3.0% thereafter. The
operating profit percentages were modeled at 2.8% of sales. Based on the results
of this interim analysis, the Company determined that no impairment of the
unit's goodwill has taken place.
'Assumptions in estimating future cash flows are subject to a high degree of
judgment and complexity. The Company makes every effort to forecast these future
cash flows as
Tecumseh Products Company
Response to SEC Letter of October 19, 2006
Page 5 of 13
accurately as possible with the information available at the time the forecast
is developed. However, changes in the assumptions and estimates may affect the
carrying value of goodwill, and could result in additional impairment charges in
future periods. Factors that have the potential to create variances between
forecasted cash flows and actual results include but are not limited to (i)
fluctuations in sales volumes, which can be driven by multiple external factors,
including weather conditions affecting demand; (ii) product costs, particularly
commodities such as copper; (iii) currency exchange fluctuations; (iv)
acceptance of the Company's pricing actions undertaken in response to rapidly
changing commodity prices and other product costs; and (v) interest rate
fluctuations. Refer to "Cautionary Statements Relating to Forward-Looking
Statements" in Item 2 for other factors that have the potential to impact
estimates of future cash flows.
'Discount rates utilized in the goodwill valuation analysis are derived from
published resources such as Ibbotson. The rates utilized were 8.15% at September
30, 2006 and 9.25% at December 31, 2005 for all business units for which
goodwill is currently recorded.
'Operating Profit as a percentage of sales revenue is also a key assumption in
the fair value calculation. The range of assumptions used incorporates the
anticipated results of the Company's ongoing productivity improvements over the
life of the forecast model. The Europe reporting unit forecasted operating
profit percentages ranging from 1.3% up to 3.9%. The India reporting unit
forecasted 2.8% of sales, and the reporting unit within the Electrical
Components Group with goodwill forecasted a range of 0.8% to 7.8%.
'Based on the goodwill analysis performed for the year ended December 31, 2005,
changes of 1.0% in the discount rate utilized would increase (decrease) the fair
value calculated for the respective business units as follows:
Change in
valuation with Change in valuation
1.0% decrease in with 1.0% increase in
discount rate discount rate
---------------- ---------------------
Compressor Segment - Europe $14.8 ($10.6)
Compressor Segment - India 24.1 (17.3)
Electrical Components Segment 71.8 (52.2)
'For the Europe business unit within the Compressor segment, if the discount
rate were to increase by 1.0%, the fair value of the business unit would
decrease by approximately $11 million. Such an increase in the discount rate
would result in the need for management to perform a step 2 analysis on this
business unit and could result in an impairment."
Tecumseh Products Company
Response to SEC Letter of October 19, 2006
Page 6 of 13
2. We note on your statement that you expanded your disclosures in your June
30, 2006 Form 10-Q regarding your European Compressor reporting units'
estimated fair values not being materially different from the carrying
values. Please tell us where you expanded your disclosures in your June 30,
2006 Form 10-Q to disclose such information. Furthermore, please revise
your disclosure in your critical accounting estimates section in future
filings to include the disclosures listed above.
ANSWER: We acknowledge that further disclosures beyond those incorporated
in our June 30, 2006 Form 10-Q are appropriate. We incorporated such
disclosures in our September 30, 2006 Form 10-Q and will include similar
disclosures in subsequent filings, as noted in the response to #1 above. We
have also included this enhanced disclosure in our amended Form 10-Q/A for
the period ended June 30, 2006.
We will also revise our critical accounting estimates section in future
filings. The language, as incorporated in our September 30, 2006 Form 10-Q,
is also noted in our response to #1 above. We have also incorporated
additional disclosures in our Forms 10-Q/A, filed to amend our Forms 10-Q
for the periods ended March 31 and June 30, 2006.
Note 5. Income Taxes, page 58
3. We note your response to comment 7 in our letter dated July 26, 2006. In
future filings, please ensure your disclosures clearly identify the
specific factors that result in any material increases or decreases in your
deferred tax asset valuation allowance. For example, your 2005 Form 10-K
should have included the detailed disclosure you provided to us in your
response letter regarding the increase in the valuation allowance for your
US deferred tax assets. Please include such disclosures in future filings.
Further, to the extent that you are primarily relying on tax planning
strategies to realize material portions of your deferred tax assets, please
ensure your critical accounting policy discloses:
- The amount of deferred tax assets whose realizability is based on tax
planning strategies,
- The nature of the tax planning strategies,
- The jurisdictions involved,
- Any uncertainties, risks, or assumptions related to these tax planning
strategies, and
- The extent to which the taxable income your tax planning strategies
are estimated to generate exceeds the amount of your deductible
temporary differences and carryforwards.
ANSWER: As of September 30, 2006, we no longer recorded deferred tax assets
on our balance sheet, and therefore no tax planning strategies with regard
to
Tecumseh Products Company
Response to SEC Letter of October 19, 2006
Page 7 of 13
realizing such assets were applicable. If, in the future, we record such
assets, we will make the appropriate disclosures as requested above.
In the third quarter of 2006, we disclosed that we had established a
valuation allowance against our remaining foreign deferred tax assets in
Brazil. The disclosure, as reported in our September 30, 2006 Form 10-Q, is
as follows:
"Valuation allowances were established against remaining foreign deferred
tax assets in Brazil in the third quarter of 2006 (aggregating
approximately $5.9 million or $0.32 per share) due to negative evidence
resulting in a determination that it is no longer more likely than not that
the assets will be realized. It became apparent during this quarter that
the Brazilian Compressor Operations would not return to historical
profitability levels, and current forecasted levels would not be sufficient
to realize the net deferred tax assets."
Any changes made to valuation allowances in future periods will be
similarly disclosed in future filings.
4. The reasons for the $25.4 million valuation allowance against your
Brazilian deferred tax assets remain unclear. In this regard, it does not
appear as though the Brazilian compressor operations had a history of
pre-tax losses, but rather one year of pre-tax losses. As such, please
provide us with a more comprehensive explanation as to how you determined
it was more likely than not that the Brazilian deferred tax assets would
not be realizable. This information should also be included in future
filings.
ANSWER: The $25.4 million valuation allowance recorded in the third quarter
of 2005 related to the recognition of deferred tax asset valuation
allowances against amounts previously recorded in the U.S. federal
jurisdiction ($18.3 million) and the Brazilian Engine operations ($7.1
million).
During 2002, a new Brazilian company was formed as part of the engine
operations. As expected, this new company had losses for the first few
years as the business was starting in Brazil. It was expected that this
operation would soon be profitable and accumulated losses would be offset
by future income. In the event that future income was insufficient, a
prudent and feasible tax planning strategy was to merge the compressor and
engine operations into one Brazilian company, which would allow for the
accumulated and current losses of the engine operation to be offset by the
profits of the compressor operation.
In 2005, a strengthening of the Brazilian Real against the U.S. dollar
changed our expectations regarding future profit margins of the Brazilian
engine and compressor operations. Since the majority of sales are
denominated in dollars or euros, and costs are primarily paid in Brazilian
Real, the Brazilian operations were not able to increase their prices to
customers to account for the foreign
Tecumseh Products Company
Response to SEC Letter of October 19, 2006
Page 8 of 13
exchange losses. As a result of the stronger Real, as well as other factors
discussed in our response to the SEC dated August 23, 2006 related to the
Brazilian compressor operation, the tax planning strategy for the Brazilian
engine operations deferred tax assets was no longer deemed prudent and
feasible as of September 30, 2005. Because of the confluence of these
events, management concluded that it was not more likely than not that the
deferred tax assets of the Brazilian engine operations would be realized,
and a full valuation allowance was recorded against these deferred tax
assets.
Note 11. Commitments and Contingencies, page 66 of annual report
5. We note that your response to comment 9 in our letter dated July 26, 2006.
To help us better understand how you determined that the asbestos claims
are of no significance to your consolidated financial statements, please
provide us with the following additional information:
- The quarter in which you were first named in an asbestos claim,
- A rollforward of lawsuits for each of the periods presented (new
lawsuits, settlements, and dismissals),
- The amount or range of amounts claimed for each lawsuit for each
period presented, and
- The quarter in which the only settlement was made for $35,000.
Please also confirm to us that the $35,000 you refer to as the amount of
your only settlement represents the total amount of the settlement and not
the portion which your insurance policies did not cover. If not, please
provide us with the gross amount of the settlement, excluding any insurance
recoveries.
ANSWER: The Company was first named in an asbestos claim in the fourth
quarter of 1993, in the Samuel Gordon claim. This claim was eventually
closed nearly five years after the original notice, with no payments
required, due to a lack of prosecutorial action by the claimant.
A rollforward of asbestos lawsuit activity, from January 1, 2003 through
December 31, 2006, is as follows:
January 1, 2003 8 Cases outstanding
2003 activity:
Cases filed 10
Cases settled (1) (Amount: $35,000)
Cases dismissed 0
December 31, 2003 17 Cases outstanding
Tecumseh Products Company
Response to SEC Letter of October 19, 2006
Page 9 of 13
2004 activity:
Cases filed 16
Cases settled (1) (Amount: $0)
Cases Dismissed (4)
December 31, 2004 28 Cases outstanding
2005 activity:
Cases filed 4
Cases settled 0
Cases dismissed (4)
December 31, 2005 28 Cases outstanding
2006 activity:
Cases filed 14
Cases settled (4) (Amount: $8,000)
Cases dismissed (13)
Summary judgments (2)
December 31, 2006 23 Cases outstanding
Typically, no specific claim amount for damages is made by the plaintiff
when an asbestos lawsuit is filed. In the stated opinion of our external
counsel, there is no single case that is expected upon settlement to exceed
$100,000.
The settlement of $35,000 was made in the second quarter of 2003. That
amount does represent the gross amount of the settlement, without regard to
any insurance reimbursement.
As noted in the rollforward that appears above, subsequent to the
submission of our previous response letter to you on August 23, 2006, four
additional asbestos cases were settled. The total gross settlement amount
for these four cases combined was $8,000.
Form 10-Q for the Fiscal Quarter Ended June 30, 2006
Management's Discussion and Analysis of the Financial Condition and Results of
Operations, page 28
Liquidity and Capital Resources, page 28
Tecumseh Products Company
Response to SEC Letter of October 19, 2006
Page 10 of 13
6. We note the disclosures you included in your June 30, 2006 Form 10-Q in
response to comment 17 from our letter dated July 26, 2006. In future
filings, please expand upon your explanation for the increase in the
average days sales outstanding. It may be unclear to investors what you
mean by "the seasonal pattern of the Company's sales," especially in light
of the fact that net sales for the first half of fiscal years 2005 and 2004
do not materially exceed net sales of the second half of fiscal years 2005
and 2004. In this regard, we note your disclosure on page 11 of your 2005
annual report that your sales and operating profit typically are stronger
in the first two quarters of the year than in the last two quarters.
ANSWER: We made the following statement in our September 30, 2006 Form
10-Q:
"Accounts receivable increased by $36.3 million from the beginning of the
year. This increase was the result of several factors. First, the
seasonality of the Company's sales patterns resulted in higher sales in the
third quarter of the year when compared to the fourth quarter of 2005. More
specifically, sales in the last two months of the respective quarters -
which is the primary driver of the accounts receivable balance - increased
by $31.0 million in the August 1 to September 30, 2006 period when compared
to November and December of 2005. Finally, receivables, on average,
required an additional three days to collect as of September 30, 2006 as
compared to the end of 2005. This increase was driven by the Engine & Power
Train segment, whose days sales outstanding increased from 50 at the end of
the year to 60 as of September 30, due to more extended payment terms to
certain key customers..."
"In evaluating its balance sheet metrics, the Company considers the days
sales outstanding and days inventory on hand metrics to be more relevant
when comparing year-over-year periods than when comparing the current
period to year-end, as it removes any seasonality of the Company's sales
patterns from the comparison. Average days sales outstanding were 58 days
at September 30, 2006 versus 53 days at September 30, 2005, before giving
effect to receivables sold."
The Company will carefully evaluate statements made with regard to
seasonality in its annual report on Form 10-K, and will determine the
appropriate disclosures, if any, that should be made in 2006 and in future
filings.
7. We note your disclosures on pages 30 and 31 with regard to your current and
future compliance with your financial debt covenants. Please tell us and
disclose in future filings why you believe your lenders would agree to a
further amendment to your debt instruments if you are unable to meet your
September 30, 2006 financial covenants or those of other future periods.
For example, tell us and disclose in future filings if you have notified
your lenders of the possibility that you may not be able to meet your
financial covenants in the future periods due to either your inability to
reverse the $7 million tax accrual and/or the rising raw material costs
that are not recovered through price increases and discussed with them your
options upon default. Also, tell us and disclose in future filings what
Tecumseh Products Company
Response to SEC Letter of October 19, 2006
Page 11 of 13
other options are available to you if you are unable to meet your financial
debt covenants in future periods and the lenders call the debt.
ANSWER: We made the following statement in our June 30, 2006 Form 10-Q:
"If the Company is permitted to reverse an accrual for Brazilian non-income
taxes deemed unconstitutional by the Brazilian Supreme Court of $7.0
million during the third quarter, it will comply with its Adjusted EBITDA
requirement at September 30, 2006 but ... if it cannot reduce the accrual
during this quarter, it will not be in compliance at September 30 unless
its lenders agree to amend the credit agreements."
Because of the uncertainty that this reversal would occur in the third
quarter of 2006, we were already in discussions with our lenders as of the
filing date of the June 30, 2006 Form 10-Q. In the course of those
discussions, our lenders had indicated a willingness to work with us to
formulate amended agreements. We signed amendments to our lending
arrangements with our first and second lien lenders on November 3, 2006.
The principal terms of these amendments were described in a Current Report
on Form 8-K filed by the Company on November 8, 2006. On November 13, 2006,
we signed a more favorable second lien credit arrangement with a different
group of lenders and a corresponding amendment with our first lien lenders,
the principal terms of which were described in a Current Report on Form 8-K
filed on November 15, 2006. Finally, we signed an additional amendment with
both our first and second lien credit holders on December 11, 2006,
approving a restructuring agreement with the majority of the lenders on
debt held by our Brazilian engine subsidiary. The principal terms of these
amendments were described in a Current Report on Form 8-K filed on December
15, 2006.
In the event that we are unable to meet our financial debt covenants in
future periods, and our lenders are not willing to provide further
amendments, we will pursue other alternatives to generate capital.
Accordingly, we made the following disclosure in our September 30, 2006
Form 10-Q:
"After giving effect to the refinancing, waivers and amendments discussed
above, we are currently in compliance with the covenants of our domestic
debt agreements. Achieving the level of future financial performance
required by our lending arrangements will depend on a variety of factors,
including customer price increases to cover increases in commodity costs,
further employee headcount reductions, consolidation of productive capacity
and rationalization of various product platforms. While we are currently
moving forward with these actions, there can be no assurance that any of
these initiatives will be sufficient if certain risks continue to impede
our progress. Those risks include currency fluctuations, weather, the
extent to which the Company may lose sales in reaction to higher product
prices, or adverse publicity.
"In the event that we fail to improve performance through these measures,
our ability to raise additional funds through debt financing will be
limited. We are also concerned
Tecumseh Products Company
Response to SEC Letter of October 19, 2006
Page 12 of 13
about the amount of debt we are carrying in this challenging operating
environment and as we seek to improve our company's financial performance.
As a result, we are evaluating the feasibility of asset sales as a means to
reduce our total indebtedness and to increase liquidity."
We also expanded our discussion of the financial risks of the business in
Part II, Item 1A, "Risk Factors", in our September 30, 2006 Form 10-Q. That
disclosure included a discussion of the following risk factor:
"We may not have sufficient liquidity to continue operating as a going
concern."
"If we default under our U.S. credit agreements, either through failing to
meet financial covenants or in some other way, our lenders could elect to
stop making the advances we need to fund daily operations, could declare
all the debt we owe them immediately due and payable, and could proceed
against their collateral. Under those circumstances, we might elect or be
compelled to enter bankruptcy proceedings, in which case our shareholders
could lose the entire value of their investment in our common stock."
Note 10. Income Taxes, page 14
8. We note your disclosure that the tax benefit you reported for your current
year losses attributable to US continuing operations is not equal to the
tax expense reflected in discontinued operations and other comprehensive
income reported in the same periods. However, we note that in the quarter
ended March 31, 2006, this tax benefit equaled the tax expense recognized
in other comprehensive income. Please help us understand why the tax
benefit and expense were the same in the first quarter, but different in
the second quarter of 2006.
ANSWER:
Subsequent to the initial filing of our March 31, 2006 Form 10-Q, we
restated the quarterly financial data contained in that report for errors
in the interim period tax provisions. The Company in error combined the
income from foreign jurisdictions with losses from foreign jurisdictions
for which tax benefits are not expected to be realizable. These corrections
were reflected in the Form 10-Q/A for the period ended March 31, 2006 that
we filed on December 19, 2006. As a result of these corrections, tax
benefit and expense are no longer equal in the first quarter.
The filing of our June 30, 2006 Form 10-Q was also restated for errors in
the interim period tax provisions. In addition to improperly combining the
income from foreign jurisdictions with losses from foreign jurisdictions
for which tax benefits are not expected to be realizable, as was noted
above for the first quarter, we also erroneously did not record state tax
expense on the gain from the sale of a division. Further, we improperly
allocated income tax expense between continuing and discontinued
operations. These corrections were reflected in the Form 10-Q/A for the
period ended June 30, 2006 that we filed on December 19, 2006.
Tecumseh Products Company
Response to SEC Letter of October 19, 2006
Page 13 of 13
Item 4. Controls and Procedures, page 37
9. We note your disclosure that "[t]here have been no changes in the Company's
internal controls over financial reporting . . . other than the system
implementations noted above . . ." In future filings, please revise to
state clearly, if correct, that there were changes in your internal control
over financial reporting that occurred during the quarter that have
materially affected, or are reasonably likely to materially affect, your
internal control over financial reporting. Refer to Item 308(c) of
Regulation S-K for guidance.
ANSWER: In our September 30, 2006 Form 10-Q, we affirmatively stated that
implementing our global ERP system had resulted in changes that had
materially affected or were reasonably likely to materially effect internal
control over financial reporting. We will modify our Controls and
Procedures disclosures in future filings to provide further clarity with
regard to our changes in internal controls, if any, in accordance with your
request.
Regards,
TECUMSEH PRODUCTS COMPANY
/s/ James S. Nicholson
- -------------------------------------
James S. Nicholson
Vice President, Treasurer and
Chief Financial Officer