Exhibit 99.1
TECUMSEH PRODUCTS COMPANY REPORTS FOURTH QUARTER 2006 RESULTS
Tecumseh, Michigan, April 10, 2007 . . . . Tecumseh Products Company
(NASDAQ-TECUA, TECUB) announced today its 2006 fourth quarter consolidated
results as summarized in the following Consolidated Condensed Statements of
Operations.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Twelve Months Ended
December 31, December 31,
------------------ -------------------
(Dollars in millions except per share amounts) 2006 2005 2006 2005
-------- ------- -------- --------
NET SALES $ 437.3 $ 417.8 $1,769.1 $1,740.7
Cost of sales 422.2 410.4 1,674.0 1,635.3
Selling and administrative expenses 48.6 47.3 180.5 168.7
Impairments, restructuring charges and other items 18.3 9.7 32.3 121.0
------- ------- -------- --------
OPERATING LOSS (51.8) (49.6) (117.7) (184.3)
Interest expense (16.6) (6.8) (46.0) (24.8)
Interest income and other, net 1.2 2.7 11.2 9.6
------- ------- -------- --------
LOSS FROM CONTINUING OPERATIONS BEFORE TAXES (67.2) (53.7) (152.5) (199.5)
Tax provision (benefit) (18.8) (1.4) (22.5) 26.9
------- ------- -------- --------
LOSS FROM CONTINUING OPERATIONS (48.4) (52.3) (130.0) (226.4)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAX (15.4) 0.4 49.7 2.9
------- ------- -------- --------
NET LOSS ($63.8) ($51.9) ($80.3) ($223.5)
------- ------- -------- --------
BASIC AND DILUTED INCOME (LOSS) PER SHARE:
CONTINUING OPERATIONS ($2.62) ($2.83) ($7.03) ($12.25)
DISCONTINUED OPERATIONS (0.83) $ 0.02 2.69 $ 0.16
------- ------- -------- --------
NET LOSS PER SHARE ($3.45) ($2.81) ($4.34) ($12.09)
------- ------- -------- --------
WEIGHTED AVERAGE SHARES (in thousands of shares) 18,480 18,480 18,480 18,480
======= ======= ======== ========
Consolidated net sales from continuing operations in the fourth quarter of 2006
increased to $437.3 million from $417.8 million in 2005. Excluding the increase
in sales due to the effects of foreign currency translation of $11.7 million,
2006 fourth quarter sales increased by 1.9%. Sales increases attributable to the
Compressor segment were offset by a decline in sales volume in the Engine &
Power Train segment.
Consolidated net sales from continuing operations for the full year 2006
increased to $1,769.1 million from $1,740.7 million. Excluding the increase in
sales due to the effects of foreign currency translation of $41.9 million, 2006
full year sales decreased by 0.8%. For the full year, increases in sales volume
attributable to the Compressor and Electrical Components segments were more than
offset by a substantial decline in the Engine & Power Train segment.
Consolidated net loss from continuing operations for the fourth quarter of 2006
was $48.4 million ($2.62 per share) compared to net loss of $52.3 million ($2.83
per share) in the fourth quarter of 2005. The change in loss from continuing
operations reflected a $2.2 million increase in operating loss. Improvements in
productivity and purchasing costs and reductions in fixed costs associated with
plant closures contributed $22.1 million to fourth quarter results. However,
unfavorable trends in foreign currency exchange resulted in a $3.5 million
decline when compared to the prior year. In addition, while increases in selling
prices have been implemented to offset increases in commodity pricing, these
factors did not fully offset in the fourth quarter, resulting in a $3.2 million
decline compared to 2005. As well,
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restructuring and asset impairment charges were $8.6 million higher in the
fourth quarter of 2006 compared to the fourth quarter of 2005.
Reported results for the fourth quarter of 2006 included restructuring and asset
impairment charges of $18.3 million. $15.8 million of this amount was recorded
by the Engine & Power Train Group, for impairment charges for long-lived assets
and other restructuring charges. The remainder was related to write-offs in our
Compressor ($2.2 million) and Electrical Components ($0.3 million) business
units for various restructuring initiatives.
Reported results for the fourth quarter of 2005 included restructuring, asset
impairment and other charges of $9.7 million. These charges included a goodwill
impairment in the Engine Group ($2.7 million), a write-off in our investment in
our Italian Engine operations ($3.0 million), and various restructuring actions
in our Engine ($0.4 million) Compressor ($0.5 million) and Electrical Components
($1.2 million) segments.
Interest expense amounted to $16.6 million in the fourth quarter of 2006,
compared to $6.8 million in the fourth quarter of 2005. The higher average
interest rates associated with our current borrowing arrangements accounted for
the majority of the increase. The remainder was primarily related to expenses of
$3.0 million for the write-off of previously capitalized loan origination costs.
In determining the loss from continuing operations, we recognized a tax benefit
of $18.8 million. This compares to a $1.4 million income tax benefit in the
fourth quarter of 2005. The unusual result in 2005 was the result, in part, of
not providing tax benefits on losses in jurisdictions where the preponderance of
negative evidence would indicate that deferred tax assets recorded in those
jurisdictions would not be recoverable.
During the second quarter of 2006, we completed the sale of 100% of our
ownership in Little Giant Pump Company. The operating results of Little Giant
Pump Company for 2006 and 2005 have been reclassified from continuing operations
to income from discontinued operations. Under accounting rules, we have also
allocated the portion of our interest expense associated with this operation to
the discontinued operations line item. Proceeds from the sale were approximately
$121.7 million. We recognized a pre-tax gain on the sale of $78.0 million. The
gain on the sale, plus earnings during our period of ownership, net of taxes and
interest, is presented in income from discontinued operations and amounted to
$49.7 million net of tax ($2.69 per share) for the full year. In the fourth
quarter, we made adjustments to allocate our full year income taxes between the
provision for the gain on this sale and the income tax benefit recorded for our
loss from continuing operations, which was greater than forecast at September
30. This re-allocation of taxes resulted in a loss from discontinued operations
in the fourth quarter of $15.4 million ($0.83 per share), net of tax. As
required by our lending agreements, the proceeds were utilized to repay a
portion of our debt.
Consolidated net loss from continuing operations for the fiscal year 2006 was
$130.0 million ($7.03 per share) compared to a loss of $226.4 million ($12.25
per share) for the same period in 2005. Full year results reflected a $66.6
million reduction in operating loss. The most significant improvement in 2006
was due to lower restructuring charges of $88.7 million. Gross profit was
negatively affected by the impact of commodity costs, which were $27.8 million
higher in the current year net of pricing adjustments. While pricing increases
helped to mitigate the impact of the commodity increases, due to the rapid
escalation of commodity pricing none of the segments were able to achieve
complete recovery for the full year. Gross profit was also negatively affected
by unfavorable foreign exchange rates, particularly the Brazilian Real. Currency
costs, net of hedging, impacted 2006 results unfavorably by $21.8 million.
Production and purchasing inefficiencies in our Juarez, Mexico facility, due to
Oracle implementation
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issues and improper material resource planning exacerbated by high levels of
personnel turnover, resulted in unfavorable costs year-on-year of approximately
$10.5 million. These unfavorable results were somewhat offset by purchasing and
other operational improvements of $19.0 million, driven primarily by
restructuring efforts in the Engine Group. A favorable court ruling resulting in
the reversal of a reserve for non-income taxes in Brazil also contributed $6.6
million to 2006 results.
Interest expense for the fiscal year ended December 31, 2006 amounted to $46.0
million, compared to $24.8 million in the year ended December 31, 2005. The
increase was primarily due to higher average interest rates associated with our
current borrowing arrangements. In addition, $6.7 million in one-time costs
associated with the write-off of previously capitalized loan origination costs
affected results. These write-offs were the result of our bank refinancing in
the first quarter ($3.7 million) and again in the fourth quarter ($3.0 million)
of 2006.
For the year ended December 31, 2006, we recognized a tax benefit of $22.5
million, which includes a U.S. federal tax benefit of $32.6 million, partially
offset by the valuation allowance of $5.9 million established against foreign
deferred tax assets in Brazil and other foreign tax provisions. The U.S. tax
benefit was offset by tax expense recorded in discontinued operations and Other
Comprehensive Income. This compares to a $26.9 million income tax provision for
the year ended December 31, 2005, which primarily reflected the effect of not
providing benefits on losses in jurisdictions where the preponderance of
negative evidence would indicate that these deferred tax assets would not be
recoverable.
COMPRESSOR BUSINESS
Fourth quarter 2006 sales in the Compressor business increased to $247.1 million
from $203.7 million in the prior year. Compressor business sales for the full
year 2006 increased to $1,002.7 million from $910.9 million in 2005. Excluding
the increase in sales due to the effects of foreign currency translation of
$10.7 million for the fourth quarter and $39.6 million for the full year, sales
increased by 16.1% and 5.7% in the fourth quarter and full year 2006,
respectively. In the fourth quarter, increases in sales for commercial
compressors (up $24.7 million) and refrigeration and freezer compressors (up
$15.5 million) were somewhat offset by declines of $8.8 million in compressors
for residential air conditioning. Full year results reflected year-on-year
increases in all of these product lines, with commercial compressors up $69.8
million, residential air conditioning up $23.2 million, and refrigeration and
freezer compressors up $21.9 million. While the sales increase in the commercial
product line was attributable to price advances, the increases in residential
air conditioning and in refrigeration and freezer compressors were due to higher
volumes, with unit sales improving by 25% and 20% respectively. The improvements
in compressors for residential air conditioning were attributable to increases
in volumes with key OEM's, due in part to new product introductions as well as
enhanced customer service programs. The increases in the refrigeration and
freezer product lines were primarily in India, where we are experiencing rapid
growth in new and profitable markets.
Compressor business operating results for the fourth quarter of 2006 amounted to
an operating loss of $0.8 million versus an operating loss of $4.8 million in
the fourth quarter of 2005. Operating loss for the year ended December 31, 2006
amounted to $4.5 million compared to operating income of $18.8 million for the
year ended December 31, 2005. The lower full year operating income was partially
attributable to unfavorable foreign currency rates, which reduced results by
$22.2 million year on year. During the fiscal year ended December 31, 2006, the
U.S. Dollar was on average 5.3% weaker versus the Brazilian Real and 11.9%
weaker versus the Euro than during 2005. Compressor segment operating margin
also deteriorated due to unfavorable commodity costs. Advances in selling price
to offset increases in commodity costs were primarily implemented in the latter
half of the year, and were not sufficient to
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mitigate the increase, with a net unfavorable impact to operating results of
$10.8 million. On the other hand, in the fourth quarter of 2006, the Compressor
Group's Brazilian facility received a favorable court ruling, deeming certain
non-income-based taxes it had accrued on its balance sheet as unconstitutional.
The reversal of this accrual resulted in a favorable net impact to operating
results of $6.6 million for the fourth quarter and full year 2006. The
implementation of other productivity improvements over the course of the year
also yielded a favorable impact to operating profitability of $2.8 million.
For the fourth quarter, currency fluctuations continued their unfavorable
impact, as the Brazilian real was on average 4.1% stronger against the U.S.
dollar in 2006 versus 2005. Including the effects of hedging activities, we
estimate that changes in foreign exchange rates decreased operating income by
approximately $3.5 million compared to the fourth quarter of 2005. Warranty
costs were also higher in the fourth quarter of 2006 by $1.4 million. On the
positive side, due to a moderation of copper pricing in the fourth quarter,
selling price advances enabled us to recoup a portion of the losses incurred due
to commodity costs earlier in the year, and improved year-on-year results by
$3.2 million in the quarter. Improvements in productivity also contributed $2.6
million to 2006 fourth quarter results, as did the $6.6 million in recovery of
non-income taxes in Brazil described above.
ELECTRICAL COMPONENTS BUSINESS
Electrical Components business sales were $104.6 million for the fourth quarter
of 2006, a slight increase of 0.4% over sales of $104.2 million in the same
quarter last year. Electrical Components business sales for the full year 2006
increased 4.8% to $429.9 million from $410.1 million. Sales were higher in the
residential and commercial markets (up 7.0% in 2006) due to HVAC-related sales
in the first three quarters of the year, although these advances were due to
pricing, as unit volumes were approximately flat year on year. Sales in the
automotive motor market, while improving in the latter half of the year (sales
in dollar terms in the automotive motor market in the fourth quarter were 9.8%
higher versus the same period of 2005), were lower in the first and second
quarters as a result of lower build schedules and market share losses by our
customer at their respective OEM's. Sales in the automotive market segment were
1.9% lower for 2006 in dollar terms and 8.9% lower in terms of units sold.
Electrical Components operating results for the fourth quarter of 2006 amounted
to a loss of $7.4 million compared to income of $3.5 million in the fourth
quarter of 2005. For the full year 2006, operating loss was $4.7 million
compared to operating income of $7.5 million in 2005. The fourth quarter decline
was primarily related to operational issues at our Juarez, Mexico facility of
$7.4 million, and a shortfall of price increases versus current commodity costs,
including copper. The cost of copper and other commodities was approximately
$6.1 million higher in the fourth quarter when compared to prices in the fourth
quarter of 2005, and less than half of this increase was recovered through
advances in selling prices. Full year results were impacted significantly by
commodity costs, resulting in a decline of $10.7 million net of price increases.
The group's Juarez, Mexico facility experienced significant productivity issues
in the latter half of the year, including Oracle implementation issues and
inefficient materials management exacerbated by high levels of personnel
turnover, affecting operating profitability unfavorably by $10.5 million.
However, other Electrical Components locations experienced gains in purchasing
initiatives and productivity improvements, contributing $8.9 million to results
for the current year.
Engine & Power Train Business
Engine & Power Train business sales were $81.4 million in the fourth quarter of
2006 compared to $106.3 million for the same period a year ago. Sales of engines
for riding and walk-behind mowers declined by $9.6 million when compared to the
prior quarter. The decline in sales was also attributable to lower sales
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of engines used for generators (down $6.5 million versus 2005) caused by a lack
of significant hurricane or other storm activity during the 2006 season. In
addition, sales volumes of engines used on snowthrowers declined $5.3 million as
compared to the fourth quarter of 2005, due to a shift by our customers to more
aggressive inventory management policies and an expected lack of significant
snowfall in most geographic areas. In relation to snowthrower engine units sold,
the fourth quarter of 2006 lagged the same period of 2005 by approximately
12.5%. Loss of sales into the European market from our former Italian subsidiary
also accounted for $5.2 million in the year-on-year decline.
Sales for the full year of 2006 amounted to $319.0 million compared to $404.1
million for the comparable period of 2005. The most significant decline in the
year was attributable to the loss of sales of $29.1 million into the European
market from our former Italian subsidiary, which was shut down at the end of
2005. A year-over-year decline in sales volumes of engines used for generators
reflected the lack of a significant hurricane or other storm activity during the
2006 season, and was down $22.7 million versus the same period in 2005. In
addition, sales volumes of engines for snowthrowers declined $18.6 million as
compared to the full year 2005, due to a shift by our customers to more
aggressive inventory management policies and expected lack of significant
snowfall in key geographic areas. The remaining sales decline was primarily
attributable to a decrease in transmission business, due to a reduction in
volume with a major customer.
Engine & Power Train business operating loss for the fourth quarter of 2006 was
$14.9 million compared to a loss of $33.5 million during the same period a year
ago. For the full year 2006, the business incurred an operating loss of $53.8
million compared to an operating loss of $75.1 million in 2005. Included in the
2006 loss were AlixPartners' fees of $2.3 million in the fourth quarter and
$21.1 million for 2006 (compared to $6.3 million in the fourth quarter and $7.8
million in the full year of 2005), and a $3.5 million gain from the sale of the
Douglas, Georgia engine facility in the first quarter of 2006. Excluding these
two items, operating results improved by approximately 53.7% and 46.2% in the
fourth quarter and full year of 2006, respectively, versus the comparable prior
year periods. The improvements in both the fourth quarter and the full year
reflected lower fixed costs associated with plant closures and other
productivity improvements, offset by the losses in margin from reduced sales
volume.
The significant costs associated with excess capacities in the U.S. and Europe
contributed substantially to the Engine & Power Train losses in 2005. The excess
capacity situation was exacerbated by the shift of production to our Brazilian
manufacturing facility resulting in duplicate capacities. We completed this
transition in 2006.
Impairments and Other Restructuring Items
The fourth quarter ended December 31, 2006 included restructuring and asset
impairment charges of $18.3 million ($0.99 per share). $15.8 million of this
amount was recorded by the Engine & Power Train Group, for impairment charges
for long-lived assets and other restructuring charges, including the impending
close, as previously announced, of the New Holstein, Wisconsin facility. The
remainder of the charges taken in the fourth quarter were attributable to the
write-down of the Compressor Group's facility in Shannon, Mississippi ($2.2
million) and asset impairments for the Electrical Components Group's facilities
in Mexico ($0.3 million). With the charges taken in the fourth quarter, the
Engine Group restructuring charges are essentially complete, although minor
charges are expected in 2007 to complete the severance costs related to the
upcoming closure of the New Holstein facility.
Impairments, restructuring charges and other items were $32.3 million in 2006.
$27.1 million of this amount was recorded by the Engine Group, for impairment
charges for long-lived assets ($24.1 million)
8
and other restructuring charges ($3.0 million). $2.8 million in asset
impairments were recorded by the Electrical Components Group for various plant
consolidation initiatives. Finally, the Compressor Group recorded $2.4 million
in restructuring charges, for impairment of long-lived assets ($2.2 million) and
related charges ($0.2 million) at two of its facilities in Mississippi.
2005 results were adversely impacted by a total of $121.0 million ($6.55 per
share) of restructuring, impairment and other charges. The majority of these
charges were attributable to goodwill and other intangible impairments, as
projected cash flows in several businesses did not support their carrying
values. We recorded an impairment charge of $108.0 million related to the
goodwill associated with the 2002 acquisition of FASCO, which is included in the
Electrical Components segment. We also recorded a goodwill impairment of $2.7
million related to the 2001 acquisition of the Engine & Power Train's Czech
Republic operations, and a $2.7 million impairment charge related to the
intangible assets associated with the 2001 acquisition of Manufacturing Data
Systems, Inc., a technology business not associated with any of our three main
segments, both representing the entire carrying value recorded.
In addition to these impairments, we incurred $7.6 million in asset impairment
and restructuring charges during the fiscal year ended December 31, 2005. The
Italian Engine & Power Train operations recorded $1.4 million of termination
costs during the third quarter related to its previously announced intent to
reduce its workforce by 115 persons. We then recorded a $3.0 million write down
of the net investment in this operation upon the closure of this operation at
the end of December 2005, reflecting our entire remaining carrying value.
The remaining 2005 charges included $0.9 million recorded by the North American
Compressor operations related to additional moving costs for previously
announced actions and $1.6 million, $0.5 million and $0.2 million of asset
impairment charges at Electrical Components, North American Compressor and
Engine & Power Train, respectively, for manufacturing equipment idled through
facility consolidations and the reduction of carrying value of closed plants to
fair value.
Pension and Other Postretirement Benefit Plans
The Company has defined benefit retirement plans that cover substantially all
domestic employees. Plans covering salaried employees generally provide pension
benefits that are based on average earnings and years of credited service. Plans
covering hourly employees generally provide pension benefits of stated amounts
for each year of service. We sponsor a retiree health care benefit plan,
including retiree life insurance, for eligible salaried employees and their
eligible dependents. At certain divisions, we also sponsor retiree health care
benefit plans for hourly retirees and their eligible dependents. The retiree
health care plans, which are unfunded, provide for coordination of benefits with
Medicare and any other insurance plan covering a participating retiree or
dependent, and have lifetime maximum benefit restrictions. Some of the retiree
health care plans are contributory, with some retiree contributions adjusted
annually. We have reserved the right to interpret, change or eliminate these
health care benefit plans.
On September 29, 2006, SFAS No. 158, "Employers' Accounting for Defined Benefit
Pension and Other Postretirement Plans" (SFAS 158) was issued. SFAS 158 requires
companies to recognize the funded status of their defined postretirement benefit
plans as a net asset or liability on the balance sheet. Any unrecognized past
service cost, experience gains/losses, or transition obligations are reported as
a component of accumulated other comprehensive income, net of tax, in
stockholders' equity.
9
SFAS 158 was effective with balance sheets reported as of December 31, 2006, and
its impact on our balance sheet was material. As of December 31, 2006, we had
net unrecognized assets totaling $39.6 million (consisting of $2.5 million
related to the U.S. pension plans, $1.2 million related to foreign pension
plans, and $35.9 million related to other postretirement benefit (OPEB) plans).
Due to the adoption of SFAS 158, this unrecognized amount was recorded in
Accumulated Other Comprehensive Income, thereby increasing consolidated net
assets and shareholders' equity by approximately $39.6 million. The change in
accounting principle has no impact on our net earnings, cash flow, liquidity,
debt covenants, or plan funding requirements.
The following table summarizes the effect of the adoption of SFAS 158 as of
December 31, 2006:
Prior to SFAS 158 Post
(in millions) SFAS 158 adjustments SFAS 158
-------- ----------- --------
Prepaid benefit costs ..................... $ 200.1 $ 2.4 $ 202.5
Accrued benefit cost ...................... (228.0) 37.2 (190.8)
Accumulated other comprehensive income .... 0.1 (39.6) (39.5)
------- ------ -------
Net amount recognized ..................... ($27.8) -- ($27.8)
======= ====== =======
In the first quarter of 2007, we announced revisions to our Salaried Retirement
Plan. At December 31, 2006, this Plan reported approximately $132 million in
overfunding, out of a total of $220 million for all our pension plans that have
plan assets in excess of obligations. On May 1, 2007, we will implement a new
retirement program for all Tecumseh salaried employees. We expect that this
conversion will make net cash available in late 2007 or 2008 to the Company of
approximately $55 million, while still fully securing the benefits under the old
Plan and funding the new Plan for several future years.
Legal Proceedings
On March 6, 2007, the Company and three members of its board of directors were
named as subjects of a lawsuit filed by Todd W. Herrick, our former Chief
Executive Officer, and Herrick Foundation (a Michigan non-profit corporation) in
the Circuit Court for the County of Lenawee, Michigan. The lawsuit sought to
overturn actions taken by our board of directors at their February 28, 2007
meeting. On March 15, 2007, the Company filed a separate lawsuit in the United
States District Court for the Eastern District of Michigan against Todd W.
Herrick, Herrick Foundation and its Board of Trustees (consisting of Todd
Herrick, Kent Herrick and Michael Indenbaum), and Toni Herrick (a trustee along
with Todd Herrick of various Herrick trusts) (collectively, "Herrick entities")
seeking the suspension of the Herrick entities' stock voting rights.
On April 2, 2007, a settlement agreement was signed by the Company, the three
members of the board of directors named in the suit, and the Herrick entities,
fully settling both lawsuits. The terms of the settlement agreement were
disclosed in a Current Report on Form 8-K that we filed on April 10, 2007. The
settlement agreement was a necessary precursor to the amendments to our First
and Second Lien credit agreements, the details of which are discussed below.
Liquidity and Capital Resources
Historically, cash flows from operations and borrowing capacity under previous
credit facilities were sufficient to meet our long-term debt maturities,
projected capital expenditures and anticipated working capital requirements.
However, in 2006 cash flows from operations were negative and the Company has
had to rely on existing cash balances, proceeds from credit facilities and asset
sales to fund its needs.
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Throughout the first three quarters of 2006, our main domestic credit facilities
were provided under two credit agreements we signed on February 6, 2006: a $275
million First Lien Credit Agreement and a $100 million Second Lien Credit
Agreement. Both agreements provided for security interests in substantially all
of our assets and specific financial covenants related to EBITDA (as defined
under the agreements and hereafter referred to as our "Adjusted EBITDA"),
capital expenditures, fixed charge coverage, and limits on additional foreign
borrowings.
During 2006 our results from operations continued to be impacted by unfavorable
events that caused actual Adjusted EBITDA for the twelve-month period ended
September 30, 2006, calculated to be $5.1 million, to fall short of the $21.0
million required under the credit agreements before the amendments and
replacement second lien agreement described below. As a result, we sought, and
on November 3, 2006 signed, amendments to our lending arrangements with our
first and second lien lenders. The principal terms of the November 3 amendments
were described in a Current Report on Form 8-K we filed on November 8, 2006.
On November 13, 2006 we signed a new $100 million Second Lien Credit Agreement
with Tricap Partners LLC and a corresponding further amendment to our February
6, 2006 First Lien Credit Agreement. The principal terms of the November 13
amendments were described in a Current Report on Form 8-K we filed on November
15, 2006.
Some of our major shareholders (Herrick Foundation, of which Todd W. Herrick and
Kent B. Herrick are members of the Board of Trustees, and two Herrick family
trusts, of which Todd W. Herrick is one of the trustees) entered into option
agreements with Tricap to induce Tricap to make the new second lien financing
available to us. We have recorded these option agreements, valued at $3.7
million, as part of the loan origination fees, with a credit to paid in capital,
associated with the new Second Lien credit agreement with Tricap. Those loan
costs are being amortized as interest expense over the remaining term of the
debt.
The new Second Lien Credit Agreement includes a commitment to create an advisory
committee to assist our board of directors in working with a nationally
recognized executive recruiting firm and to recommend to the board qualified
candidates for various executive management positions, including the Chief
Executive Officer position. The committee, consisting of Mr. Risley and Mr.
Banks of our board of directors, as well as a representative from our second
lien lender, has engaged a search firm and is currently in the process of
interviewing candidates for this position.
On January 19, 2007, a special committee of our board of directors appointed
James J. Bonsall interim President and Chief Operating Officer, a new position.
Mr. Bonsall will function as our principal executive officer until a new Chief
Executive Officer is appointed.
As we disclosed in a press release issued on March 22, 2007, our Brazilian
engine subsidiary, TMT Motoco, has filed a request in Brazil for court
permission to pursue a judicial restructuring, similar to a U.S. filing for
Chapter 11 bankruptcy protection. The court granted its permission to TMT Motoco
on March 28. The filing in Brazil constituted an event of default with our
domestic lenders. On April 9, 2007 we obtained further amendments to our First
and Second Lien Credit Agreements that cured the cross-default provisions
triggered by the filing in Brazil. The principal terms of these amendments were
described on a Current Report on Form 8-K we filed on April 10, 2007.
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As part of the April 9, 2007 amendment to our First and Second Lien Credit
Agreements, the minimum cumulative Adjusted EBITDA levels (measured from October
1, 2006) for the fourth quarter 2006 and 2007 quarterly periods (in millions)
were set at:
Quarterly Period Ending First Lien Agreement Second Lien Agreement
- ----------------------- -------------------- ---------------------
December 31, 2006 ($14.9) ($16.9)
March 31, 2007 ($8.0) ($10.0)
June 30, 2007 $ 17.0 $ 15.0
September 30, 2007 $ 42.0 $ 40.0
December 31, 2007 $ 62.0 $ 60.0
These levels of Adjusted EBITDA are subject to further adjustment if certain
business units or products lines are sold during the period. In addition, other
terms of the amendments included limitations on the amounts of capital
expenditures and professional fees during the term of the agreements. If a
permanent Chief Executive Officer has not been hired by May 1, 2007, the
amendment to our Second Lien credit agreement also includes a 2.5% per annum
step-up in cash interest rate from that day forward until such time as a
permanent CEO is hired. However, the additional interest is not assessed if the
CEO candidate has not assumed his or her duties due either to a personal
emergency or inability to reach agreement on terms of employment.
We paid $625,000 in fees, plus expenses, to the First Lien lender upon execution
of the agreement. In addition to fees paid of $750,000, plus expenses, to the
Second Lien lender, we also granted warrants to purchase a number of shares of
Class A Common Stock equal to 7% of our fully diluted common stock. These
warrants, valued at $7.7 million, expire five years from the date of the
execution of this amendment to the Second Lien credit agreement. This cost will
be recorded as interest expense in the second quarter of 2007.
As discussed above, the First and Second Lien agreements contain cumulative
Adjusted EBITDA covenants for which measurement occurs at each of the five
quarterly periods beginning October 1, 2006 and ending December 31, 2007. We
were in compliance with these covenants at December 31, 2006, and in order to
remain in compliance during 2007 we will need to realize net improvements in our
reported results.
Eighteen months ago, we began the implementation of a plan to restore the
business to a better financial condition, which began with the hiring of an
outside consultant, AlixPartners, to turn around the Engine & Power Train Group.
AlixPartners implemented a restructuring plan that reduced the reported 2005
operating loss for the Engine & Power Train Group from $75.1 million to $53.8
million in 2006 (2006 segment operating loss also included $21.1 million in
expense for fees to AlixPartners). An improvement approximating that realized in
2006 for the Engine Group is expected for 2007. As mentioned above, a Managing
Director with AlixPartners, James Bonsall, has recently been appointed as
interim President and Chief Operating Officer of the Company, and he will be
responsible, until such time as these responsibilities are transitioned to a
permanent Chief Executive Officer, for leading our management toward our goal of
achieving identified improvements aggregating $50 million for the Compressor,
Electrical and Corporate Groups.
While we expect to meet our plan during 2007 and thereby maintain compliance
with the Adjusted EBITDA covenants and our other covenants for the next twelve
months (attainment of the 2007 budget would result in exceeding the Adjusted
EBITDA covenant for the year ending December 31, 2007 by approximately $35
million), there are a number of factors that could potentially arise that could
result in
12
shortfalls to our plan and our covenant targets. These factors include
continued unfavorable macroeconomic trends, such as increases in commodity
prices or further strengthening of the Brazilian real, the inability to obtain
sales price increases from customers, and the inability to restructure
operations in a manner that generates sufficient positive operational cash
flows. Non-compliance with such covenants would allow our lenders to demand
immediate repayment of all outstanding borrowings under the agreements. Any
inability on our part to comply with our financial covenants, obtain waivers for
non-compliance or obtain alternative financing to replace the current agreements
would have a material adverse effect on our financial position, results of
operations and cash flows. We are also concerned about the amount of debt we are
carrying in this challenging operating environment as we seek to improve our
Company's financial performance. As a result, we will continue to evaluate the
feasibility of asset sales as a means to reduce our total indebtedness and to
increase liquidity. In addition to improving financial results, the 2007 plan
also includes a reduction of capital expenditures by approximately fifty percent
from the 2006 expenditure level.
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.
The outlook for 2007 is subject to the same variables that have negatively
impacted us throughout 2006. Commodity costs, key currency rates, weather and
the overall growth rates of the respective economies around the world are all
important to future performance. Overall, we do not expect these factors to
become any more favorable in the foreseeable future. Certain key commodities,
including copper and aluminum, continue to trade at elevated levels compared to
recent history. From January 1, 2006 through December 31, 2006, the price of
aluminum increased approximately 19%. Despite a moderation of copper pricing in
the last quarter of the year, cost for that commodity has nonetheless increased
approximately 32% since the beginning of 2006. We currently hold more than 75%
of our total projected copper requirements for 2007 in the form of forward
purchase contracts, which will provide us with substantial (though not total)
protection from further price increases during the year but also will detract
from our ability to benefit from any price decreases. In any case, the cost of
copper to the business will continue to run significantly higher than in 2005
and prior years. Lack of storm activity has significantly reduced sales of
engines used for generators and has left us and the industry with above normal
inventory levels. The Brazilian Real continues to strengthen against the dollar,
and as of December 31, 2006 had strengthened 5.3% since the beginning of the
year.
Accordingly, we expect to continue to incur losses in the first quarter of 2007,
as we do not expect improvements in any of the key factors noted above.
Specifically, the Compressor and Electrical Components groups' first quarter
results are expected to lag the results of the comparable 2006 period.
On the other hand, despite the expectation of continued lower levels of sales in
the Engine group because of unfavorable market conditions, results in the Engine
Group are expected to improve over the first quarter of 2006 excluding
restructuring charges. This improvement continues to be driven by the overall
restructuring efforts undertaken by AlixPartners. As part of these efforts, as
previously mentioned, we have recently announced the upcoming closure of our
engine facility in New Holstein, Wisconsin. Although the impairments taken in
the fourth quarter of 2006 represent substantially all of the expected charges
related to the Engine Group restructuring, some charges, expected to be
relatively minor, will be incurred in 2007 in order to account for employee
severance costs at the New Holstein facility. The restructuring plan for our
Brazilian engine subsidiary, TMT Motoco, is in its earliest stages; however, at
this time there is no expectation that there will be any impact on the closure
of the New Holstein facility.
13
As further continuous improvement initiatives are executed across all our
business segments, it is possible that additional assets will become impaired.
While no such actions have been approved, they could have a significant effect
on our consolidated financial position and future results of operations.
To respond to the continued losses and consumption of capital resources, we
continue to seek price increases to cover our increased input costs, and expect
that further employee headcount reductions, consolidation of productive capacity
and rationalization of product platforms will be necessary. While no specific
actions have been approved, we believe that such actions will contribute to
restoring our profitability, will help to mitigate such negative external
factors as currency fluctuation and increased commodity costs, and will result
in improved operating performance in all business segments in 2007. These
actions also could result in restructuring and/or asset impairment charges in
the foreseeable future and accordingly, could have a significant effect on our
consolidated financial position and future results of operations.
In addition, we are also concerned about the amount of debt we are carrying
during this period of unfavorable operating environment. Our weighted average
interest rate for long-term debt in 2006 was 3% higher than in 2005, resulting
in significantly higher interest expense on approximately similar levels of
debt. As well, the new Second Lien Credit Agreement provides for additional paid
in kind ("PIK") interest at the rate of 5.0% if outstanding debt balances are
not reduced by certain specified dates.
The new Second Lien Credit Agreement also provides for an additional 2.5% in PIK
interest if certain assets are not sold by December 31, 2007. Sources of funds
to make the principal reductions could include, but are not limited to, cash
from operations, reductions in working capital, or asset sales.
Our success in generating cash flow will depend, in part, on our ability to
efficiently manage working capital. Seasonal patterns and the need to build
inventories to manage production transfers during restructuring programs have
recently caused higher working capital needs. As we complete these restructuring
programs, we expect our need for these higher working capital levels to be
reduced.
As part of addressing the company's liquidity needs, we are planning
substantially lower levels of capital expenditures in 2007. Capital expenditures
in the upcoming year are projected to be approximately $28 million less than in
2006 and $80 million less than in 2005. This reduction in capital expenditures,
while still meeting the ongoing operational needs of the business, will further
conserve our cash flows, allowing for additional potential to reduce our
outstanding debt.
We are also evaluating the potential sale of product lines or divisions of the
Company. The proceeds from any such sales would be used to reduce our
indebtedness.
Finally, we are in the process of executing a conversion of our Salaried
Retirement Plan to a new Plan. The existing Plan is substantially over-funded.
We expect that this conversion will make net cash available to the Company of
approximately $55 million in late 2007 or in 2008, while still fully securing
the benefits under the old Plan and funding the new Plan for several future
years.
14
RESULTS BY BUSINESS SEGMENTS (UNAUDITED)
Three Months Ended Twelve Months Ended
December 31, December 31,
------------------ -------------------
(Dollars in millions) 2006 2005 2006 2005
------- ------- -------- --------
NET SALES:
Compressor Products $ 247.1 $ 203.7 $1,002.7 $ 910.9
Electrical Components Products 104.6 104.2 429.9 410.1
Engine & Power Train Products 81.4 106.3 319.0 404.1
Other (a) 4.2 3.6 17.5 15.6
------- ------- -------- --------
Total net sales $ 437.3 $ 417.8 $1,769.1 $1,740.7
======= ======= ======== ========
OPERATING INCOME (LOSS):
Compressor Products ($0.8) ($4.8) ($4.5) $ 18.8
Electrical Components Products (7.4) 3.5 (4.7) 7.5
Engine & Power Train Products (14.9) (33.5) (53.8) (75.1)
Other (a) (0.2) (0.1) 0.5 0.1
Corporate expenses (10.2) (5.0) (22.9) (14.6)
Impairments, restructuring charges, and other items (18.3) (9.7) (32.3) (121.0)
------- ------- -------- --------
Total operating income (loss) from continuing operations (51.8) (49.6) (117.7) (184.3)
Interest expense (16.6) (6.8) (46.0) (24.8)
Interest income and other, net 1.2 2.7 11.2 9.6
------- ------- -------- --------
LOSS FROM CONTINUING OPERATIONS BEFORE TAXES ($67.2) ($53.7) ($152.5) ($199.5)
======= ======= ======== ========
(a) "Other" consists of non-reportable business segments.
Previously, we also reported a Pump Products business segment. However, as a
result of the decision to sell Little Giant Pump Company, which represented
approximately 90% of the previously reported segment, such operations are no
longer included in loss from continuing operations before tax. As our remaining
pump business does not meet the definition of an operating segment as defined by
SFAS No. 131, "Segment Reporting," we no longer report a Pump Products segment,
and operating results of the remaining pump business are included in Other for
segment reporting purposes.
15
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
DECEMBER 31, December 31,
(Dollars in millions) 2006 2005
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 81.9 $ 116.6
Accounts receivable, net 219.5 211.1
Inventories 353.4 346.8
Other current assets 78.6 132.6
-------- --------
Total current assets 733.4 807.1
PROPERTY, PLANT AND EQUIPMENT -- NET 552.4 578.6
GOODWILL AND OTHER INTANGIBLES 180.0 185.7
OTHER ASSETS 316.9 229.1
-------- --------
TOTAL ASSETS $1,782.7 $1,800.5
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, trade $ 216.0 $ 187.3
Short-term borrowings 163.2 82.5
Accrued liabilities 130.1 135.3
-------- --------
Total current liabilities 509.3 405.1
LONG-TERM DEBT 217.3 283.0
DEFERRED INCOME TAXES 28.6 25.0
PENSION AND POSTRETIREMENT BENEFITS 180.9 226.1
PRODUCT WARRANTY AND SELF-INSURED RISKS 13.6 14.5
OTHER NON-CURRENT LIABILITIES 34.6 32.4
-------- --------
Total liabilities 984.3 986.1
STOCKHOLDERS' EQUITY 798.4 814.4
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,782.7 $1,800.5
======== ========
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
Three Months Ended Twelve Months Ended
December 31, December 31,
------------------ -------------------
(Dollars in millions) 2006 2005 2006 2005
------ ------ ------ --------
TOTAL STOCKHOLDERS' EQUITY
BEGINNING BALANCE $818.2 $892.2 $814.4 $1,018.3
Comprehensive income (loss):
Net loss (63.8) (51.9) (80.3) (223.5)
Other comprehensive income (loss) 0.7 (25.9) 21.0 31.4
------ ------ ------ --------
Total comprehensive income (loss) (63.1) (77.8) (59.3) (192.1)
Cash dividends declared -- -- -- (11.8)
Shareholder option 3.7 3.7
Impact of adoption of FAS 158 on pension plans 39.6 39.6
------ ------ ------ --------
TOTAL STOCKHOLDERS' EQUITY ENDING BALANCE $798.4 $814.4 $798.4 $ 814.4
====== ====== ====== ========
16
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
TWELVE MONTHS ENDED
DECEMBER 31,
-------------------
(Dollars in millions) 2006 2005
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
------- -------
Cash used by operating activities ($94.4) $ 16.0
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 135.0 3.5
Capital expenditures (62.1) (113.3)
Business acquisition (2.0) --
------- -------
Cash provided by (used in) investing activities 70.9 (109.8)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid -- (11.8)
Debt issuance costs (14.4)
Repayment of Senior Guaranteed Notes (250.0) (50.0)
Repayment of Industrial Development Revenue Bonds (10.5) --
Proceeds from First Lien Credit Agreement 230.2 --
Repayments of First Lien Credit Agreement (117.1)
Proceeds from old Second Lien Credit Agreement 100.0 --
Repayments of old Second Lien Credit Agreement (100.0)
Proceeds from new Second Lien Credit Agreement 100.0 --
Other borrowings, net 52.6 37.8
------- -------
Cash used in financing activities (9.2) (24.0)
------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (2.0) 6.5
------- -------
DECREASE IN CASH AND CASH EQUIVALENTS (34.7) (111.3)
CASH AND CASH EQUIVALENTS:
Beginning of period 116.6 227.9
------- -------
End of period $ 81.9 $ 116.6
======= =======
Cautionary Statement Relating to Forward-Looking Statements
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 that are subject to the safe
harbor provisions created by that Act. In addition, forward-looking statements
may be made orally in the future by or on behalf of the Company. Forward-looking
statements can be identified by the use of terms such as "expects", "should",
"may", "believes", "anticipates", "will", and other future tense and
forward-looking terminology.
Readers are cautioned that actual results may differ materially from those
projected as a result of certain risks and uncertainties, including, but not
limited to, i) changes in business conditions and the economy in general in both
foreign and domestic markets; ii) the effect of terrorist activity and armed
conflict; iii) weather conditions affecting demand for air conditioners, lawn
and garden products, portable power generators and snow throwers; iv) the
success of our ongoing effort to bring costs in line with projected production
levels and product mix; v) financial market changes, including fluctuations in
interest rates and foreign currency exchange rates; vi) economic trend factors
such as housing starts; vii) emerging governmental regulations; viii)
availability and cost of materials, particularly commodities, including steel,
copper and aluminum, whose cost can be subject to significant variation; ix)
actions of competitors; x) the ultimate cost of resolving environmental and
legal matters; xi) our ability to profitably develop, manufacture and sell both
new and existing products; xii) the extent of any business disruption that may
result from the restructuring and realignment of our manufacturing operations or
system implementations,
17
the ultimate cost of those initiatives and the amount of savings actually
realized; xiii) the extent of any business disruption caused by work stoppages
initiated by organized labor unions; xiv) our ability to maintain adequate
liquidity in total and within each foreign operation; xv) potential political
and economic adversities that could adversely affect anticipated sales and
production in Brazil; xvi) potential political and economic adversities that
could adversely affect anticipated sales and production in India, including
potential military conflict with neighboring countries; xvii) our ability to
reduce a substantial amount of costs in the Engine & Power Train group
associated with excess capacity, and xviii) the ongoing financial health of
major customers. These forward-looking statements are made only as of the date
of this report, and we undertake no obligation to update or revise the
forward-looking statements, whether as a result of new information, future
events or otherwise.
Tecumseh Products Company will host a conference call to report on the fourth
quarter 2006 results on Wednesday, April 11, 2007 at 11:00 a.m. ET. The call
will be broadcast live over the Internet and then available for replay through
the Investor Relations section of Tecumseh Products Company's website at
www.tecumseh.com.
Press releases and other investor information can be accessed via the Investor
Relations section of Tecumseh Products Company's Internet web site at
http://www.tecumseh.com.
Contact: Teresa Hess
Director, Investor Relations
Tecumseh Products Company
517-423-8455
18