Exhibit 99.1
TECUMSEH PRODUCTS COMPANY REPORTS SECOND QUARTER 2007 RESULTS
Tecumseh, Michigan, August 9, 2007 .... Tecumseh Products Company (NASDAQ-TECUA,
TECUB) announced today its 2007 second quarter consolidated results as
summarized in the following Consolidated Condensed Statements of Operations.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
(Dollars in millions except per share amounts) 2007 2006 2007 2006
------- -------- -------- -------
NET SALES $ 350.7 $ 349.4 $ 707.9 $ 686.4
Cost of sales 323.3 333.7 651.9 649.4
Selling and administrative expenses 34.7 34.3 70.4 71.2
Impairments, restructuring charges and other items 0.9 2.7 (0.5) 3.2
------- ------- -------- -------
OPERATING LOSS (8.2) (21.3) (14.0) (37.4)
Interest expense (10.3) (7.0) (18.9) (11.1)
Interest income and other, net 1.8 3.1 3.7 8.3
------- ------- -------- -------
LOSS FROM CONTINUING OPERATIONS BEFORE TAXES (16.7) (25.2) (29.2) (40.2)
Tax benefit (2.2) (6.9) (3.2) (9.6)
------- ------- -------- -------
LOSS FROM CONTINUING OPERATIONS (14.5) (18.3) (26.0) (30.6)
------- ------- -------- -------
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAX (73.7) 52.2 (79.0) 51.9
------- ------- -------- -------
NET INCOME (LOSS) ($88.2) $ 33.9 ($105.0) $ 21.3
------- ------- -------- -------
BASIC AND DILUTED INCOME (LOSS) PER SHARE:
CONTINUING OPERATIONS ($0.78) ($0.99) ($1.40) ($1.66)
------- ------- -------- -------
DISCONTINUED OPERATIONS ($3.99) $ 2.82 ($4.28) $ 2.81
------- ------- -------- -------
NET INCOME (LOSS) PER SHARE ($4.77) $ 1.83 ($5.68) $ 1.15
------- ------- -------- -------
WEIGHTED AVERAGE SHARES (in thousands of shares) 18,480 18,480 18,480 18,480
======= ======= ======== =======
Consolidated net sales from continuing operations in the second quarter of
2007 increased to $350.7 million from $349.4 million in 2006. Sales
increases attributable to the Compressor segment ($23.7 million, of which
$19.6 was due to the effect of currency translation) were offset by a
substantial decline ($22.4 million) in sales in the Engine & Power Train
segment.
Consolidated net loss from continuing operations for the second quarter of
2007 was $14.5 million ($0.78 per share) compared to net loss of $18.3
million ($0.99 per share) in the second quarter of 2006. The change in
pretax operating loss, excluding impairments, restructuring charges, and
other items, reflected a $11.3 million improvement. Improvements in
productivity and purchasing costs contributed $13.0 million to 2007 second
quarter results. Increases in selling price, net of volume impacts, also
improved results by $8.4 million when compared to the 2006 second quarter.
In addition, net losses of $1.7 million by our Brazilian engine subsidiary,
TMT Motoco, were recorded in 2006; since TMT Motoco is no longer included
in results from operations, and instead accounted for under the equity
method, no similar results were reported in the second quarter of 2007.
However, the higher cost of copper and other commodities created an
unfavorable variance of $6.7 million in the second quarter of 2007, and
unfavorable trends in foreign currency exchange resulted in a $5.4 million
decline when compared to the prior year.
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Included in the variances discussed above were increases in Selling,
General & Administrative ("SG & A") expense of $0.4 million. Reductions in
SG & A were attributable to overhead cost improvements that resulted from
our restructuring efforts over the past year, particularly at the Engine &
Power Train group, although these advances were somewhat offset by costs
associated with professional fees. Fees paid to AlixPartners were reduced
over the prior year; $2.2 million was expensed in the second quarter of
2007 for AlixPartners services, including the services of James Bonsall,
while $4.1 million was incurred in the second quarter of 2006 for their
consulting services provided to our Engine & Power Train business. However,
professional fees for the business as a whole were $10.9 million in the
second quarter of 2007 (as compared to $7.7 million in the same period of
2006), which included $6.2 million in fees associated with the amendments
to our First and Second Lien credit agreements, the legal proceedings
relating to governance issues, and our efforts to market portions of the
business.
There were $0.9 million in impairments, restructuring charges or other
items in the three months ended June 30, 2007, compared to $2.7 million in
the three months ended June 30, 2006. As a result of the previously
announced closure of our Engine & Power Train facility in New Holstein,
Wisconsin and the associated curtailment of pension and retiree benefits of
its employees, we recognized a net gain of $6.9 million ($0.37 per share)
in the second quarter of 2007. We also recorded $5.7 million ($0.31 per
share) in obsolescence charges associated with the completion of our lawn
and garden selling season and the cessation of business sourced from Brazil
at the Engine & Power Train group, and $2.0 million ($0.11 per share) in
charges related to a reduction in force executed during the period across
several of our business units. During the second quarter of 2006, we
incurred asset impairment and other charges of $2.6 million ($0.14 per
share) related to the Engine & Power Train business for the consolidation
of transmission production into a single U.S. facility.
Interest expense amounted to $10.3 million in the second quarter of 2007
compared to 7.0 million in the second quarter of 2006. The increase was
primarily related to the amortization of debt costs ($2.1 million).
The consolidated condensed statement of operations reflects a $2.2 million
income tax benefit for the second quarter 2007 and a $6.9 million income
tax benefit for the second quarter 2006. Although we reported a 0% U.S.
federal tax provision in total, we allocate taxes across all categories of
income or loss, including continuing operations, discontinued operations,
and Other Comprehensive Income (OCI). In the three months ended June 30,
2007, we recorded net losses from continuing and discontinued operations,
but income in OCI. In the three months ended June 30, 2006, we reported
losses from continuing operations, but income in discontinued operations
and OCI.
At June 30, 2007 and 2006, full valuation allowances were recorded for net
operating loss carryovers for those tax jurisdictions in which we are in a
cumulative three year loss position. As of June 30, 2007, the valuation
allowance related to the Europe subsidiary of our Compressor business
segment was released, since this business now has cumulative three year
income and management believes that realization of the deferred tax asset
is more likely than not. The net impact of this change decreased income tax
by $0.4 million in the second quarter.
Consolidated net sales from continuing operations in the first six months
of 2007 increased to $707.9 million from $686.4 million in 2006. Excluding
the increase in sales due to the effects of currency fluctuation of $33.0
million, 2007 first half sales decreased by $11.5 million or 1.7%. Sales
increases attributable to the Compressor segment were more than offset by a
significant decline in sales in the Engine & Power Train segment.
Consolidated net loss from continuing operations for the first six months
of 2007 was $26.0 million ($1.41 per share) compared to a net loss of $30.6
million ($1.66 per share) in the first half of 2006. The change in pretax
operating loss, excluding impairments, restructuring charges, and other
items, reflected a $19.4
6
million improvement. Increases in selling price, net of volume impacts,
improved results by $32.8 million when compared to the same period of 2006.
Improvements in productivity and purchasing costs also contributed $26.5
million to 2007 year to date results. However, the higher cost of copper
and other commodities created an unfavorable variance of $17.6 million in
the second quarter of 2007, and unfavorable trends in foreign currency
exchange resulted in a $21.6 million decline when compared to the prior
year.
Selling, general and administrative expenses were $70.4 million in the six
months ended June 30, 2007, as compared to $71.2 million in the six months
ended June 30, 2006. As a percentage of net sales, selling, general and
administrative expenses were 9.9% and 10.4% in the first six months of 2007
and 2006, respectively. Reductions in SG & A were attributable to overhead
cost improvements that resulted from our restructuring efforts over the
past year, particularly at the Engine & Power Train group, although these
advances were somewhat offset by costs associated with professional fees.
Fees paid to AlixPartners were reduced over the prior year; $5.3 million
was expensed in the first six months of 2007 for AlixPartners services,
including the services of James Bonsall and other supporting personnel,
while $13.1 million was incurred in the same period of 2006 for their
consulting services provided to our Engine & Power Train business. However,
professional fees for the business as a whole were $22.1 million in the
first six months of 2007, (as compared to $18.9 million in the first six
months of 2006), which included $15.5 million in fees associated with the
amendments to our First and Second Lien credit agreements, the legal
proceedings relating to governance issues, and our efforts to market
portions of the business.
Impairments, restructuring charges and other items were a credit of $0.5
million ($0.03 per share) in the six months ended June 30, 2007, compared
to expense of $3.2 million ($0.17 per share) in the three months ended June
30, 2006. As a percentage of net sales, impairments, restructuring charges
and other items were (0.1%) and 0.5% respectively in 2007 and 2006. As a
result of the previously announced closure of our Engine & Power Train
facility in New Holstein, Wisconsin and the associated curtailment of
pension and retiree benefits of its employees, we recognized a net gain of
$6.9 million ($0.37 per share) in the second quarter of 2007. We also
recorded $5.7 million ($0.31 per share) in obsolescence charges associated
with the completion of our lawn and garden selling season and the cessation
of business sourced from Brazil at the Engine & Power Train group, and $2.0
million ($0.11 per share) in charges related to reductions in force
executed during the period across several of our business units.
During the second quarter 2006, we incurred asset impairment and
restructuring charges of $2.6 million ($0.14 per share) related to the
Engine & Power Train business for the consolidation of transmission
production into a single U.S. facility. First quarter 2006 charges amounted
to $0.6 million ($0.03 per share) and were the result of the continuation
of previously announced programs.
Included in Selling, General and Administrative expenses are corporate
expenses of $20.0 million for the first six months of 2007. These expenses
have increased from $8.2 million in the prior year, primarily as a result
of increases in professional fees as discussed above.
Interest expense amounted to $18.9 million in the first six months of 2007
compared to $11.1 million in the first six months of 2005. The increase was
primarily related to the amortization of debt costs ($3.4 million), and the
higher average interest rates associated with our current borrowing
arrangements as compared to the same period in 2006.
The results of the Electrical Components business segment for the three and
six months ended June 30, 2007 and 2006 are included in income (loss) from
discontinued operations. Our board of directors has approved a plan to sell
our Electrical Components business segment. On July 3, 2007, we signed an
agreement with Regal Beloit Corporation to sell the Residential &
Commercial and Asia Pacific divisions of this business segment to Regal
Beloit for $220 million in cash, subject to normal adjustments for working
capital changes and a hold back of certain proceeds in escrow for up to
eighteen months to cover
7
any potential claims that may arise from any breach of representations and
warranties as well as the resolution of certain contingencies. We continue
to pursue the sale of the remaining businesses within the Electrical
Components segment, including the Automotive & Specialty divisions.
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 are also classified under 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. As required by our lending agreements, the proceeds
were utilized to repay a portion of our debt.
Compressor Business
Second quarter 2007 sales in the Compressor segment increased to $297.0
million from $273.3 million in the prior year. $19.6 million of the $23.7
million increase in sales was due to the effects of foreign currency
translation. Sales increases in this segment were led by the refrigeration
and freezer product lines (up $16.3 million), an increase of 17.3%. The
majority of this increase is attributable to pricing advances and foreign
currency translation; however, growth in new markets in India also
contributed to the increase. Sales were also higher for the commercial
compressor product lines (up $8.4 million). This sales increase was
attributable to pricing advances rather than unit volumes.
Compressor business operating results for the second quarter of 2007 were
income of $10.8 million compared to an operating loss of $3.8 million in
the second quarter of 2006. The higher operating income of $14.6 million
was attributable to the net favorable impact of volume and pricing changes
($18.7 million) and productivity and other improvements ($7.0 million).
These year-on-year improvements were partially offset by unfavorable
foreign currency exchange rates ($5.5 million). For the second quarter, the
Brazilian Real was on average 9.0% stronger against the U.S. Dollar in 2007
versus 2006. The price of copper and other commodities also contributed
unfavorably to results in the second quarter of 2007. Including the effects
of hedging activities, the Company estimates that the continued escalation
in commodity pricing decreased operating income by approximately $6.6
million compared to the second quarter of 2006.
Compressor business sales in the first six months of 2007 increased to
$586.3 million from $524.8 million in the first six months of 2006.
Excluding the increase in sales due to the effects of foreign currency
translation of $31.5 million, sales increased by 5.7% in the first six
months of 2007. Sales increases in this segment were led by the
refrigeration and freezer product lines (up $36.8 million), an increase of
20.3%. As was the case in the second quarter of 2007, the majority of this
increase is attributable to pricing advances and foreign currency
translation, although growth in new markets in India also contributed to
the increase. While sales were also higher for the commercial compressor
product lines (up $20.3 million or 8.3%), this sales increase was
attributable to pricing advances rather than unit volumes.
Operating income for the six months ended June 30, 2007 amounted to $21.3
million compared to $2.8 million for the first six months of 2006. The
higher operating income was attributable to price advances, net of volume
impacts ($41.9 million) and productivity, purchasing, and other
improvements ($16.0 million). These improvements were offset by unfavorable
currency exchange impacts ($21.8 million) and higher commodity costs ($17.5
million). Through the first six months of 2007, the Brazilian Real was on
average 7.1% stronger against the U.S. Dollar compared to the same period
in 2006, and the average price of copper increased by 10.8% over the same
period.
Engine & Power Train Business
Engine & Power Train business sales were $49.1 million in the second
quarter of 2007 compared to $71.5 million for the same period a year ago.
Declines were led by engines for walk behind mowers (down $7.2
8
million), a decline of 26.9%. Sales of engines for snowthrowers declined by
$7.1 or 44.0% when compared to the second quarter of 2006. This decline is
due to the carryover of excess inventories from the prior season by our
customers, as well as conservative buying patterns by those same customers
as we enter the current selling season. Engines for generators were also
down by $3.1 million, declining by 66.0%, due to the lack of significant
hurricane or other storm activity in recent months. Engines for riding
mowers were down by $1.6 million or 30.9%. Reductions in both walk behind
and riding mower engines were a result of the disruption in supply from
Brazil, as customers sought alternative supply sources. The remaining
decreases in the Engine & Power Train Group were spread across multiple
product lines.
Engine & Power Train business operating loss for the second quarter of 2007
was $8.5 million compared to a loss of $11.2 million during the same period
a year ago. Productivity and purchasing improvements accounted for $12.7
million of the favorable results. In addition, while $4.1 million in fees
were paid to AlixPartners in the second quarter of 2006, no such expense
was recorded in the same period of 2007. These improvements to second
quarter 2007 results were offset by the impact of volume declines of $13.0
million.
First half 2007 sales amounted to $112.1 million compared to $152.4 million
in the first half of 2006. The decline in sales for the first half of the
year was primarily due to the lower sales of $12.3 million or 19.8% in
engines for walk behind mowers. Sales of engines for snowthrowers declined
by $7.4 million or 43.8% when compared to the first six months of 2006.
Engines for generators were also down by $7.8 million, a decline of 67.3%.
Engines for riding mowers were also down by $4.1 million or 24.1%.
Reductions in sales volumes in all categories were attributable to the same
factors that drove the decreases in the second quarter. The remaining
decreases in the Engine & Power Train Group were spread across multiple
product lines.
For the first half of 2007, the business incurred an operating loss of
$16.5 million compared to an operating loss of $29.7 million in 2006.
Productivity and purchasing improvements of $15.0 million contributed to
the favorable result; in addition, fees paid to AlixPartners were reduced
by $11.8 million year-on-year. These improvements were offset by the effect
of volume declines, net of pricing impacts, of $9.2 million. In addition, a
gain of $3.5 million was recorded in the first half of 2006 on the sales of
our facility in Douglas, Georgia, whereas no similar gain was realized in
2007.
Impairments and Other Restructuring Items
We recorded $0.9 million in impairments, restructuring charges, or other
items in the three months ended June 30, 2007, and a net credit of $0.5
million in the six months ended June 30, 2007. As a result of the
previously announced closure of our Engine & Power Train facility in New
Holstein, Wisconsin and the associated curtailment of pension and retiree
benefits of its employees, we recognized a net gain of $6.9 million in the
second quarter of 2007. We also recorded $5.7 million ($0.31 per share) in
obsolescence charges associated with the completion of our lawn and garden
selling season and the cessation of business sourced from Brazil at the
Engine & Power Train group, and $2.0 million ($0.11 per share) in charges
related to a reduction in force executed during the period across several
of our business units.
We also recorded impairment charges as part of our loss from discontinued
operations in the three and six months ended June 30, 2007. These
impairments included $39.3 million of the goodwill balance associated with
the Electrical Components business, as well as $25.8 million in long-lived
assets and $3.4 million in intangible assets associated with the Automotive
& Specialty division of the Electrical Components business.
We recognized asset impairment charges of $2.7 million and $3.2 million for
the three and six months ended June 30, 2006, respectively. During the
second quarter 2006, we incurred asset impairment and other charges of $2.6
million ($0.14 per share) related to the Engine & Power Train business for
the
9
consolidation of transmission production into a single U.S. facility. The
remainder of the impairment charges through the first six months of 2006
related to the completion of programs initiated in 2005.
Legal Proceedings
On March 28, 2007, our Brazilian engine subsidiary, TMT Motoco, was granted
permission by the Brazilian court to pursue a judicial restructuring, which
is similar to U.S. Chapter 11 bankruptcy protection. TMT Motoco filed its
restructuring plan with the court on May 28, and the court is currently
evaluating this plan. The facility suspended operations on the date it
filed for the judicial restructuring, and it has not been determined
whether or when it will re-open in the future.
TMT Motoco at June 30, 2007 was removed from our consolidated balance
sheets at March 28, 2007, and TMT Motoco is now being accounted for under
the equity method. The following is a summary of the assets, liabilities
and equity of TMT Motoco at June 30, 2007:
June 30,
(Dollars in millions) 2007
--------
Accounts receivable, net $ 0.2
Inventories 25.6
Other current assets 8.6
Property, plant and equipment, net 67.7
------
Total Assets $102.1
======
Accounts payable, trade $9.7
Other current liabilities 94.3
------
Total Liabilities 104.0
Shareholders' Deficit (1.9)
------
Total Liabilities and Shareholders' Equity $102.1
======
Adequacy of Liquidity Sources
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 and through the second quarter of 2007 cash flows from
operations were negative and we have had to rely on existing cash balances,
proceeds from credit facilities and asset sales to fund our needs.
Throughout the second quarter, our main domestic credit facilities were provided
under a $250 million First Lien Credit Agreement and a $100 million Second Lien
Credit Agreement. Both agreements provide for security interests in
substantially all of the Company's 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. The Adjusted EBITDA covenant applies through
December 31, 2007, and a four-quarter fixed charge coverage ratio
10
covenant applies beginning on December 31, 2007. During the second quarter, the
weighted average annual interest rate on our borrowings under these agreements
was 9.3%.
Under the terms of the First Lien Credit Agreement, as of June 30, 2007 we had
the capacity for additional borrowings under the borrowing base formula of $30.7
million in the U.S. and $24.9 million in foreign jurisdictions. Both the First
Lien Credit Agreement and the Second Lien Credit Agreement have terms expiring
in November, 2009.
On July 3, 2007, we signed an agreement with Regal Beloit Corporation to sell
the Residential & Commercial and Asia Pacific divisions of the Electrical
Components business segment to Regal Beloit for $220 million in cash, subject to
adjustments for working capital changes and a hold back of certain proceeds in
escrow for up to eighteen months to cover any potential claims that may arise
from any breach of representations and warranties as well as the resolution of
certain contingencies. Net proceeds of this sale transaction at closing are
estimated to be approximately $195 million. The proceeds will be utilized to
repay our Second Lien lender in full, including principal, prepayment penalties
and fees, and both cash and PIK interest. The remainder of the proceeds, or
approximately $90 million, will be utilized to reduce the outstanding balance on
our First Lien debt.
In March of 2007, our Brazilian engine subsidiary, TMT Motoco, was granted
permission by the Brazilian courts to pursue a judicial restructuring, similar
to a U.S. filing for Chapter 11 bankruptcy protection. The TMT Motoco filing in
Brazil constituted an event of default with our domestic lenders. On April 9,
2007 we obtained amendments to our First and Second Lien Credit Agreements that
cured the cross-defaults triggered by the filing in Brazil.
As part of the April 9, 2007 amendments to our First and Second Lien Credit
Agreements, the minimum cumulative Adjusted EBITDA levels (measured from October
1, 2006) for the 2007 quarterly periods (in millions) were set at:
Quarterly Period Ending First Lien Agreement Second Lien Agreement
- ----------------------- -------------------- ---------------------
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
As defined by the credit agreements, as of June 30, 2007 our cumulative Adjusted
EBITDA was $23.6 million or $6.6 million in excess of the covenant levels.
Upon the closing of the sale transaction of the Residential & Commercial and
Asia Pacific portions of our Electrical Components business, we expect our
minimum cumulative Adjusted EBITDA levels to be modified to reflect the removal
of a pro-rata share of a percentage of the 2007 forecasted financial results of
those business units, as follows (in millions):
Quarterly Period Ending First Lien Agreement
- ----------------------- --------------------
September 30, 2007 $41.1
December 31, 2007 $57.3
These levels of Adjusted EBITDA are subject to further adjustment if certain
business units or product 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.
11
If a permanent Chief Executive Officer was not hired by May 1, 2007, the
amendment to our Second Lien credit agreement provided for a 2.5% per annum
step-up in cash interest rate from that day forward until such time as a
permanent CEO was hired. However, the agreement also provided that the
additional interest would not be assessed beginning May 1 if the CEO candidate
had not assumed his or her duties due either to a personal emergency or
inability to reach agreement on terms of employment, or if the Company continued
to apply its best efforts to engage the new CEO. On August 1, 2007, we announced
that we had appointed a permanent Chief Executive Officer. Since the conditions
of the credit agreement were met through the date of the CEO's appointment, the
additional interest was not assessed.
We paid $625,000 in fees, plus expenses, to the First Lien lender on April 9,
2007 upon execution of the April 9 amendment. In addition to fees paid of
$750,000, plus expenses, to the Second Lien lender, on April 9 we also granted
the Second Lien lender a warrant to purchase 1,390,944 shares of Class A Common
Stock, which is equivalent to 7% of our fully diluted common stock. This
warrant, valued at $7.3 million or $5.29 per share, expires five years from the
date of the execution of this amendment to the Second Lien credit agreement.
These costs are being accounted for as additional interest expense over the
remaining terms of the credit agreements, subject to acceleration upon full
repayment of the debt, which we expect to occur in the third quarter of 2007.
Interest on the Second Lien Agreement is equal to LIBOR plus 6.75% plus paid in
kind ("PIK") interest of 1.5%. PIK interest accrues monthly on the outstanding
debt balance and is paid when the associated principal is repaid.
The Second Lien Credit Agreement provides for additional PIK interest at the
rate of 5.0% if outstanding debt balances are not reduced by certain specified
dates. This additional PIK interest would apply to the difference between a
target amount of aggregate reduction in debt and the actual amount of first and
second lien debt reduction according to the following milestones:
Milestone Date Aggregate Reduction
- -------------- -------------------
June 30, 2007 $20.0 million
September 30, 2007 $40.0 million
December 31, 2007 $60.0 million
As of June 30, 2007, there had been no reduction in the balance of the Second
Lien Credit Agreement. Therefore, the additional PIK interest will apply
effective beginning July 1, 2007 until such time as those debt balances are
reduced by $20 million. We expect this reduction to occur upon the closing of
the sale transaction of the Residential & Commercial and Asia Pacific portions
of our Electrical Components business to Regal Beloit Corporation as referenced
above.
The 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.
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.
12
With the completion of the sale of the Residential and Commercial division of
our Electrical Components business to Regal Beloit Corporation, we will achieve
substantial debt reduction in the United States. To complete the transaction, we
will need to obtain additional modifications to the terms of our credit
agreements to close the sale transaction. We will be seeking additional
modifications to our debt arrangements with our First Lien lender to provide for
more favorable terms in light of the substantial debt reduction. Accordingly, we
would expect to remain in compliance with the terms of our debt agreements.
However, in the event that we fail to close the sale transaction and we fail to
improve performance through the measures noted above, our ability to raise
additional funds through debt financing or further modifications to our lending
arrangements will be limited.
Outlook
Information in this "Outlook" section should be read in conjunction with the
cautionary language and discussion of risks included below.
The outlook for the balance of 2007 is subject to the same variables that have
negatively impacted us throughout 2006 and the first half of 2007. 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 July 31, 2007, the price of aluminum increased approximately 12%,
and the price of copper increased 69% in the same time frame. In the first six
months of 2007 alone, copper prices escalated by 21%. While copper forward
purchase contracts obtained prior to the cost increase have allowed us to
maintain costs consistent with, or slightly better than, our 2007 business plan,
future costs are expected to continue to rise. We currently hold approximately
70% of our total projected copper requirements for the remainder of 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. The
continued escalation of copper prices through 2007 and into 2008 and beyond
could have a long-term unfavorable impact on our results of operations, if
adequate pricing increases cannot be obtained from our customers.
The Brazilian Real continues to strengthen against the dollar, and strengthened
12.2% from January 1, 2007 to July 31, 2007. From April 1 through June 30, 2007,
the Real strengthened by 6.4%. Recently, we have also been unfavorably affected
by the strengthening of the Indian Rupee, which strengthened by 6.0% in the
second quarter of 2007. Net of currency hedging activities, this continued
strengthening of the Real and the recent strengthening of the Rupee affected our
operating results unfavorably by approximately $9.5 million when compared to our
2007 plan.
Lack of storm activity has significantly reduced sales of engines used for
generators and snowthrowers, and has left us and the industry with above normal
inventory levels.
Nonetheless, we expect the operating results of both of our business segments to
improve in the third quarter of 2007 when compared to the results of the
comparable 2006 period. Pricing adjustments in the Compressor group, implemented
to offset the escalating price of copper, are the most significant improvement
expected in that segment when compared to the prior year. In addition,
operational efficiencies and productivity improvements in the Compressor Group
are expected to improve operational margins when compared to the third quarter
of 2006.
Despite the expectation of continued lower levels of sales in the Engine & Power
Train group because of unfavorable market conditions, results in that group are
expected to improve over the third quarter of 2006
13
excluding restructuring charges. The improvement continues to be driven by the
overall restructuring efforts implemented under the direction of AlixPartners.
As part of these efforts, as previously mentioned, we will be completing the
closure of our engine facility in New Holstein, Wisconsin in the third quarter
of 2007. As a result of the associated curtailment of pension and retiree
benefits of the New Holstein employees, future pension and retiree health care
expense will decrease by $0.9 million per quarter.
The restructuring plan for our Brazilian engine subsidiary, TMT Motoco, was
submitted in late May, and the plan is currently under the consideration of the
Brazilian court. Deliveries for the 2007 lawn and garden season are essentially
complete. Based on the Brazilian court's evaluation of our submitted
restructuring plan, we may implement one of several alternatives for the future
of TMT Motoco and the products that have been manufactured at that facility. The
range of potential outcomes includes resuming full scale production, minimal
production and/or rental of the facility, or a controlled liquidation. At this
time, we expect that the most likely outcome will be a controlled liquidation.
As part of our efforts to improve profitability and reduce the 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. As part of these efforts, we announced certain operational
actions and staff reductions on April 27, 2007 at both the Compressor and Engine
& Power Train business units. While no specific further 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. Upon the completion of the
divestiture of the respective divisions of the Electrical Components business
segment and other potential divestitures, we will be re-evaluating our corporate
infrastructure in relation to the level of business activity that remains. This
analysis could result in new restructuring programs. While no such activities
have been planned at this time, these and other potential actions 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.
Our weighted average interest rate for long-term debt through the first six
months of 2007 was substantially higher than the same period a year ago,
contributing to higher interest expense on approximately similar levels of debt.
As well, the 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. We began incurring this interest cost on
July 1, 2007.
The 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. In this regard, improvements in inventory
management practices, including the completion of restructuring programs which
required temporary increases in inventory levels to accommodate production
transfers, have resulted in positive working capital as of June 30, 2007.
As part of addressing the company's liquidity needs, we are planning
substantially lower levels of capital expenditures in 2007. Capital expenditures
in 2007 are projected to be approximately $28 million less than in 2006 and $80
million less than in 2005. This reduction in capital expenditures will further
conserve our cash flows, allowing for additional potential to reduce our
outstanding debt.
14
Due to the continued strengthening of the Brazilian Real, declines in sales
volumes at the Engine & Power Train business segment, and continued increases in
the cost of commodities such as copper, we no longer expect to achieve our
original financial plan, nor can we provide assurance that the business would
meet our EBITDA covenants after adjustment for the sale to Regal Beloit
Corporation or other potential asset sales, due to our inability to project when
such sales may close. In order to close the sale transaction with Regal Beloit,
we will be entering into amendments to modify the credit agreements with our
First and Second Lien lenders to permit actions necessary to prepare the sold
asset for sale, in accordance with the terms of the purchase agreement. As part
of this process, we will also seek additional amendments that will re-define our
EBITDA covenants, to align those requirements with businesses that can
reasonably be expected to remain part of our continuing operations.
We are also evaluating further potential sales of product lines, divisions, and
various idle assets of the Company, including real estate, equipment, and
Company aircraft. The proceeds from any such sales would be used to reduce our
indebtedness. With respect to idle assets, we expect to realize proceeds of
approximately $12 million prior to the end of the year.
In addition, we are in the process of finalizing the audit of our 2003 tax year,
the resolution of which is expected to result in the refund of federal income
taxes previously paid of approximately $13 million. Receipt of such proceeds is
dependent upon final resolution of these audits, estimated to occur within the
next four to seven months.
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 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, without additional annual
contributions, for six to eight future years.
15
RESULTS BY BUSINESS SEGMENTS (UNAUDITED)
Three Six
Months Ended Months Ended
June 30, June 30,
----------------- ----------------
(Dollars in millions) 2007 2006 2007 2006
------- ------- ------- -------
NET SALES:
Compressor Products $ 297.0 $ 273.3 $ 586.3 $ 524.8
Engine & Power Train Products 49.1 71.5 112.1 152.4
Other (a) 4.6 4.6 9.5 9.2
------- ------- ------- -------
Total net sales $ 350.7 $ 349.4 $ 707.9 $ 686.4
======= ======= ======= =======
OPERATING INCOME (LOSS):
Compressor Products $ 10.8 ($3.8) $ 21.3 $ 2.8
Engine & Power Train Products (8.5) (11.2) (16.5) (29.7)
Other (a) 0.4 0.4 0.7 0.7
Corporate expenses (10.0) (4.0) (20.0) (8.0)
Impairments, restructuring charges, and other items (0.9) (2.7) 0.5 (3.2)
------- ------- ------- -------
Total operating loss from continuing operations (8.2) (21.3) (14.0) (37.4)
Interest expense (10.3) (7.0) (18.9) (11.3)
Interest income and other, net 1.8 3.1 3.7 8.3
------- ------- ------- -------
LOSS FROM CONTINUING OPERATIONS BEFORE TAXES ($16.7) ($25.2) ($29.2) ($40.2)
======= ======= ======= =======
(a) "Other" consists of non-reportable business segments.
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CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
JUNE 30, December 31,
(Dollars in millions) 2007 2006
-------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 48.7 $ 81.9
Accounts receivable, net 172.3 219.5
Inventories 213.6 353.4
Assets held for sale 148.6 --
Other current assets 101.8 78.6
-------- --------
TOTAL CURRENT ASSETS 685.0 733.4
Property, plant and equipment - net 405.8 552.4
Goodwill and other intangibles 19.1 180.0
Assets held for sale 180.1 --
Other assets 346.9 316.9
-------- --------
TOTAL ASSETS $1,636.9 $1,782.7
======== ========
CURRENT LIABILITIES:
Accounts payable, trade $ 188.9 $ 216.0
Short-term borrowings 70.3 163.2
Liabilities held for sale 63.8 --
Accrued liabilities 113.2 130.1
-------- --------
TOTAL CURRENT LIABILITIES 436.2 509.3
Long-term debt 220.3 217.3
Deferred income taxes 29.7 28.6
Pension and postretirement benefits 169.6 180.9
Product warranty and self-insured risks 15.3 13.6
Liabilities held for sale 2.7 --
Other non-current liabilities 32.8 34.6
-------- --------
TOTAL LIABILITIES 906.6 984.3
STOCKHOLDERS' EQUITY 730.3 798.4
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,636.9 $1,782.7
======== ========
17
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
Three Six
Months Ended Months Ended
June 30, June 30,
--------------- ----------------
(Dollars in millions) 2007 2006 2007 2006
------ ------ ------- ------
Total Stockholders' Equity
Beginning balance $789.8 $820.2 $ 798.4 $814.4
IMPACT OF THE ADOPTION OF FIN 48 -- -- (0.4) --
COMPREHENSIVE INCOME (LOSS):
NET INCOME (LOSS) (88.2) 33.9 (105.0) 21.3
OTHER COMPREHENSIVE INCOME 21.4 4.0 30.0 22.4
------ ------ ------- ------
TOTAL COMPREHENSIVE INCOME (LOSS) (66.8) 37.9 (75.0) 43.7
WARRANTS ISSUED 7.3 -- 7.3 --
------ ------ ------- ------
Total stockholders' equity
Ending balance $730.3 $858.1 $ 730.3 $858.1
====== ====== ======= ======
18
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX
MONTHS ENDED
JUNE 30,
-----------------
(DOLLARS IN MILLIONS) 2007 2006
------- -------
Cash flows from operating activities:
CASH USED BY OPERATING ACTIVITIES ($24.0) ($93.8)
------- -------
Cash flows from investing activities:
PROCEEDS FROM SALE OF ASSETS 2.0 130.9
CAPITAL EXPENDITURES (5.4) (32.8)
BUSINESS ACQUISITION -- (2.0)
------- -------
CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (3.4) 96.1
------- -------
Cash flows from financing activities:
DEBT AMENDMENT COSTS (2.5) --
REPAYMENT OF SENIOR GUARANTEED NOTES -- (250.0)
REPAYMENT OF INDUSTRIAL DEVELOPMENT REVENUE BONDS -- (10.5)
PROCEEDS FROM FIRST LIEN CREDIT AGREEMENT -- 133.1
REPAYMENTS OF FIRST LIEN CREDIT AGREEMENT -- --
PROCEEDS FROM SECOND LIEN CREDIT AGREEMENT 1.9 100.0
REPAYMENTS FROM SECOND LIEN CREDIT AGREEMENT -- (45.1)
OTHER PROCEEDS (REPAYMENTS), NET (0.9) 57.2
------- -------
CASH USED IN FINANCING ACTIVITIES (1.5) (15.3)
------- -------
Effect of exchange rate changes on cash (4.3) 0.9
------- -------
Decrease in cash and cash equivalents (33.2) (12.1)
Cash and cash equivalents:
BEGINNING OF PERIOD 81.9 116.6
------- -------
END OF PERIOD $ 48.7 $ 104.5
======= =======
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.
19
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, 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 second
quarter 2007 results on Thursday, August 9, 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
20