SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT of 1934
For the quarterly period ended September 30, 2007
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934
For the transition period from __________ to __________
COMMISSION FILE NUMBER: 0-452
TECUMSEH PRODUCTS COMPANY
(Exact name of registrant as specified in its charter)
MICHIGAN 38-1093240
(State of Incorporation) (IRS Employer Identification Number)
100 EAST PATTERSON STREET
TECUMSEH, MICHIGAN 49286
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code:
(517) 423-8411
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Stock Outstanding at September 30, 2007
-------------- ---------------------------------
Class B Common Stock, $1.00 par value 5,077,746
Class A Common Stock, $1.00 par value 13,401,938
Page 1
TABLE OF CONTENTS
Page
----
Part I. Financial Information (unaudited)
Item 1. Financial Statements (unaudited)
Consolidated Condensed Balance Sheets (unaudited).............. 3
Consolidated Condensed Statements of Operations (unaudited).... 4
Consolidated Condensed Statements of Cash Flows (unaudited).... 5
Notes to Consolidated Condensed Financial Statements........... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 24
Item 3. Quantitative and Qualitative Disclosures About Market
Risk ..................................................... 42
Item 4. Controls and Procedures................................... 43
Part II. Other Information........................................... 45
Item 5. Other Information......................................... 45
Item 6. Exhibits.................................................. 45
Signatures........................................................... 46
Certification of CEO Pursuant to Section 302......................... Exh 31.1
Certification of CFO Pursuant to Section 302......................... Exh 31.2
Certification of CEO Pursuant to Section 906......................... Exh 32.1
Certification of CFO Pursuant to Section 906......................... Exh 32.2
Page 2
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 1
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
SEPTEMBER 30, December 31,
(Dollars in millions, except share data) 2007 2006
------------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 57.2 $ 81.9
Accounts receivable, trade, less allowance for
doubtful accounts of $7.1 in 2007 and $10.1
in 2006 162.2 219.5
Inventories 204.0 353.4
Deferred and recoverable income taxes 45.3 40.6
Recoverable non-income taxes 30.9 33.6
Assets held for sale 39.2 --
Other current assets 16.7 4.4
-------- --------
Total current assets 555.5 733.4
Property, plant, and equipment, net 373.1 552.4
Goodwill 19.8 127.0
Other intangibles -- 53.0
Prepaid pension expense 209.0 202.5
Assets held for sale 17.1 --
Recoverable non-income taxes 98.1 63.6
Other assets 49.3 50.8
-------- --------
Total assets $1,321.9 $1,782.7
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable, trade $ 175.2 $ 216.0
Short-term borrowings 68.6 163.2
Liabilities held for sale 19.4 --
Accrued liabilities 116.1 130.1
-------- --------
Total current liabilities 379.3 509.3
Long-term debt 34.7 217.3
Deferred income taxes 30.5 28.6
Other postretirement benefit liabilities 150.3 166.0
Product warranty and self-insured risks 16.0 13.6
Pension liabilities 15.7 14.9
Liabilities held for sale 2.2 --
Other non-current liabilities 34.4 34.6
-------- --------
Total liabilities 663.1 984.3
-------- --------
Stockholders' Equity
Class A common stock, $1 par value; authorized
75,000,000 shares; issued and outstanding
13,401,938 shares in 2007 and 2006 13.4 13.4
Class B common stock, $1 par value; authorized
25,000,000 shares; issued and outstanding
5,077,746 shares in 2007 and 2006 5.1 5.1
Paid in capital 11.0 3.7
Retained earnings 543.7 726.3
Accumulated other comprehensive income 85.6 49.9
-------- --------
Total stockholders' equity 658.8 798.4
-------- --------
Total liabilities and stockholders' equity $1,321.9 $1,782.7
======== ========
The accompanying notes are an integral part of these Consolidated Condensed
Financial Statements.
Page 3
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 1
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -------------------
(Dollars in millions, except per share data) 2007 2006 2007 2006
------- -------- -------- --------
Net sales $ 336.1 $ 319.5 $1,043.2 $1,004.6
Cost of sales 302.5 305.5 953.6 953.9
Selling and administrative expenses 27.6 33.8 97.1 103.8
Impairments, restructuring charges, and other items 26.2 8.4 25.3 11.6
------- ------- -------- --------
Operating loss (20.2) (28.2) (32.8) (64.7)
Interest expense (6.6) (5.7) (25.5) (16.8)
Interest income and other, net 1.1 2.3 4.8 10.6
------- ------- -------- --------
Loss from continuing operations before taxes (25.7) (31.6) (53.5) (70.9)
Tax expense (benefit) (3.1) 6.7 (6.3) (2.9)
------- ------- -------- --------
Loss from continuing operations (22.6) (38.3) (47.2) (68.0)
Income (loss) from discontinued operations, net of tax (54.6) 0.5 (135.0) 51.5
------- ------- -------- --------
Net loss ($77.2) ($37.8) ($182.2) ($16.5)
======= ======= ======== ========
Basic and diluted earnings (loss) per share*
Loss from continuing operations ($1.23) ($2.07) ($2.55) ($3.68)
Income (loss) from discontinued operations, net of tax (2.95) 0.02 (7.30) 2.79
------- ------- -------- --------
Net loss per share ($4.18) ($2.05) ($9.85) ($0.89)
======= ======= ======== ========
Weighted average shares (in thousands) 18,480 18,480 18,480 18,480
------- ------- -------- --------
Cash dividends declared per share $ 0.00 $ 0.00 $ 0.00 $ 0.00
------- ------- -------- --------
* On April 9, 2007, we issued a warrant to our Second Lien lender to purchase
1,390,944 shares of our Class A Common Stock, which is equivalent to 7% of
our fully diluted common stock. This warrant is not included in diluted
earnings per share for the three and nine month periods ended September 30,
2007, as the effect would be antidilutive.
The accompanying notes are an integral part of these Consolidated Condensed
Financial Statements.
Page 4
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 1
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
(Dollars in millions) 2007 2006
------- --------
Cash Flows from Operating Activities:
Cash used by operating activities ($24.5) ($129.4)
Cash Flows from Investing Activities:
Proceeds from sale of assets 205.9 132.4
Capital expenditures (5.9) (45.6)
Business acquisition -- (2.0)
------- --------
Cash provided by investing activities 200.0 84.8
------- --------
Cash Flows from Financing Activities:
Debt amendment costs (2.9) --
Repayment of Senior Guaranteed Notes -- (250.0)
Repayment of Industrial Development Revenue Bonds -- (10.5)
Proceeds (repayments) from First Lien Credit Agreement, net (82.8) 147.5
Proceeds from Second Lien Credit Agreement -- 100.0
Repayments of Second Lien Credit Agreement (100.0) (45.4)
Other borrowings (repayments), net (16.1) 45.6
------- --------
Cash used in financing activities (201.8) (12.8)
------- --------
Effect of exchange rate changes on cash 1.6 (0.5)
------- --------
Decrease in cash and cash equivalents (24.7) (57.9)
Cash and Cash Equivalents:
Beginning of period 81.9 116.6
------- --------
End of period $ 57.2 $ 58.7
======= ========
*Depreciation and Amortization 40.1 54.0
Supplemental Schedule of Noncash Investing and Financing Activities:
Warrant issued in conjunction with debt financing 7.3
The accompanying notes are an integral part of these Consolidated Condensed
Financial Statements.
Page 5
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. The consolidated condensed financial statements of Tecumseh Products Company
and Subsidiaries (the "Company") are unaudited and reflect all adjustments
(including normal recurring adjustments) which are, in the opinion of
management, necessary for a fair statement of the financial position and
operating results for the interim periods. The December 31, 2006 consolidated
condensed balance sheet data was derived from audited financial statements, but
does not include all disclosures required by generally accepted accounting
principles in the United States ("U.S. GAAP"). The consolidated condensed
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto contained in our Annual Report for the
fiscal year ended December 31, 2006. Due to the seasonal nature of certain
product lines, the results of operations for the interim period are not
necessarily indicative of the results for the entire fiscal year.
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. We are currently in negotiations with our creditors,
as well as a third party who is seeking to re-open the facility. If these
negotiations prove successful, we would release our shares in exchange for the
assumption of liabilities by that third party. The outcome of such negotiations
is uncertain, and would require the cooperation of the buyer of the remainder of
our Engine & Power Train business. If such arrangements were not to be
completed, the most likely outcome would be the declaration of bankruptcy by the
Brazilian court, and a subsequent liquidation of the assets.
TMT Motoco was removed from our consolidated balance sheets effective 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
September 30, 2007:
September 30,
(Dollars in millions) 2007
-------------
Accounts receivable, net $ 0.2
Inventories 21.7
Other current assets 8.8
Property, plant and equipment, net 70.9
------
Total Assets $101.6
======
Accounts payable, trade $ 8.3
Other current liabilities 99.0
------
Total Liabilities 107.3
Shareholders' Deficit (5.7)
------
Total Liabilities and Shareholders' Deficit $101.6
======
While TMT Motoco had no impact on our consolidated net loss for the three months
ended September 30, 2007, losses associated with TMT Motoco of $9.1 million,
including interest expense, were included in our consolidated net loss for the
three month period ended September
Page 6
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
30, 2006. Losses of $3.5 million and $16.3 million, including interest expense,
were included in our consolidated net loss for the nine months ended September
30, 2007 and 2006, respectively.
2. Liquidity and Management Plans
Management has implemented a financial plan for 2007 which reflects improvements
in operating income approximating $94 million over that reported for the year
ended December 31, 2006. For the period ended September 30, 2007, we fell short
against our financial plan projections by $36.9 million, after consideration for
the classification of the Electrical Components Group as discontinued
operations. This variance was attributable to volume shortfalls in our Engine
Group, impairments of Engine Group assets in accordance with the expected sale
price of the business segment, unfavorable currency exchange rates, and
professional fees in excess of those projected in the 2007 plan. After
consideration for the impact of the sale of portions of our business, we no
longer expect to achieve our original financial plan. However, after completing
the sale of the majority of the Electrical Components business operation and the
Engine & Power Train business, as well as the announced sale of the Automotive &
Specialty operations, we believe we have generated sufficient liquidity to fund
our remaining operations.
As referenced above, during the second quarter of 2007, our Board of Directors
approved a plan to sell our Electrical Components business segment. On August
31, 2007, we completed an agreement with Regal Beloit Corporation, selling the
Residential & Commercial and Asia Pacific operations of this business segment to
Regal Beloit for $220 million in cash, subject to customary closing adjustments.
Net proceeds of this sale transaction at closing were approximately $199
million. The proceeds were utilized to repay our Second Lien lender in full,
including principal, prepayment penalties and fees, and both cash and paid in
kind ("PIK") interest. The remainder of the proceeds, or approximately $93.6
million, was applied to reduce the outstanding balance on our First Lien debt.
In order to close the sale transaction with Regal Beloit, on August 27, 2007 we
entered into amendments to modify the credit agreements with our First Lien
lenders to permit actions necessary to prepare the asset for sale, in accordance
with the terms of the purchase agreement. The principal terms of this amendment
were described in a Current Report on Form 8-K that we filed on August 31, 2007,
and the amendment is filed herein as Exhibit 4.1. Among other things, the
amendment deleted the minimum adjusted EBITDA and fixed charge covenants for the
third and fourth quarters of 2007. However, beginning in 2008, the fixed charge
covenant will once again apply.
On October 22, 2007, we signed a Definitive Stock Purchase Agreement to sell our
Engine & Power Train business operations to affiliates of Platinum Equity, LLC
for $51 million in cash, subject to customary adjustments at closing. The
principal terms of this agreement were disclosed in a Current Report on Form 8-K
that we filed on October 26, 2007. The transaction was completed on November 9,
2007, and the proceeds were used to repay the balance remaining to our First
Lien lender, effectively eliminating all of our domestic debt.
In order to close the sale transaction with Platinum Equity, on November 8, 2007
we entered into an additional amendment to modify our First Lien Credit
Agreement. The amendment is filed herein as Exhibit 4.2. The principal terms of
the amendment reduced the minimum availability
Page 7
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
covenant to $30 million, and reduced the total facility size to $75 million. As
a result, after completion of the sale transaction, we had cash balances in the
U.S. of approximately $21.6 million and U.S availability under our First Lien
Credit Agreement of approximately $19.8 million.
With respect to our liquidity, in addition to the factors described above, we
consider it necessary that our Brazilian compressor subsidiary, Tecumseh do
Brasil ("TdB"), secures normal credit terms, including long term committed
credit lines. While we have been successful to date in obtaining sufficient
lending arrangements to meet the operational needs of TdB, the majority of its
credit lines are not committed lines with lives beyond one year. We consider the
restoration of normal credit terms for TdB to be essential to ensuring that it
continues to maintain adequate liquidity. Refer to the Executive Summary in Part
1, Item 2 of this report for further discussion of the issues related to TdB's
credit agreements.
Although the EBITDA and fixed charge covenants for our domestic credit agreement
have been waived for the remainder of 2007, such covenants will again apply
beginning with the first quarter of 2008. At this time, we do not expect to be
in compliance with these covenants. While we also do not expect to have a need
to borrow under the credit agreement in the foreseeable future, we consider it
prudent to have a stand-by credit arrangement, and accordingly, we have been
exploring new financing arrangements for our North American operations.
Our expectation that we will not need to borrow in North America in the
foreseeable future is based upon the expectation of the completion of remaining
asset sales described elsewhere in this report, as well as the completion of the
reversion of our terminated salaried pension plan, as is further discussed in
Note 8.
Despite the improved liquidity created through the generation of these various
sources of proceeds, and the elimination of our domestic debt, current economic
conditions, including the weakness of the U.S. dollar versus currencies such as
the Brazilian Real, indicate that we will generate limited amounts of cash until
further restructuring activities are implemented or economic conditions improve.
While we believe that we have adequate liquidity to implement these changes over
a reasonable time horizon, there can be no assurance that such improvements will
ultimately be adequate if economic conditions continue to deteriorate and we are
not successful in generating free cash flow.
Refer to Note 2, "Liquidity and Management Plans," in our Annual Report on Form
10-K for the year ended December 31, 2006, for a discussion of the risks
associated with shortfalls to our plan and our covenant targets.
3. Discontinued Operations and Sale of Businesses
During the second quarter of 2007, our Board of Directors approved a plan to
sell our Electrical Components business segment. On August 31, 2007, we
completed an agreement with Regal Beloit Corporation, selling the Residential &
Commercial and Asia Pacific operations of this business segment to Regal Beloit
for $199 million in net cash proceeds. As a result of final adjustments made at
the closing of this transaction, additional losses on the sale transaction of
$11.3 million were recorded in the third quarter of 2007.
On November 1, 2007, we signed an agreement to sell our Automotive & Specialty
business operations to affiliates of Sun Capital Partners Group V, LLC for $10
million in cash, subject to
Page 8
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
customary adjustments at closing. As a result of the agreement, we reduced the
carrying value of the assets held for sale by $26.7 million, to reflect the net
proceeds expected to be realized upon consummation of the transaction.
Calculations of impairments or other expense on pending sale transactions are
based on best estimates, and may require further adjustment upon final closing.
The assets of the remaining businesses within the Electrical Components business
segment have been classified as held for sale as of September 30, 2007. The
segment's results for the three and nine months ended September 30, 2007 and
2006 are included in income (loss) from discontinued operations.
Interest expense of $21.5 million and $4.3 million was allocated to discontinued
operations for the three months ended September 30, 2007 and 2006, and interest
expense of $30.9 million and $12.5 million was allocated to the nine months
ended September 30, 2007 and 2006.
As noted above, due to the elimination of our second lien debt in the third
quarter of 2007, interest costs of $21.1 million and $30.9 million associated
with that debt were reclassified to loss from discontinued operations for the
three and nine months ended September 30, 2007, respectively. $17.8 million in
costs associated with the Second Lien debt, which we retired during the quarter,
were expensed as part of the interest costs allocated to discontinued operations
during the period.
Our First and Second Lien credit agreements required the proceeds from the
Residential & Commercial and Asia Pacific sale to be utilized to repay our
second lien credit agreement, as well as a substantial portion of our
outstanding first lien debt.
Following is a summary of loss from discontinued operations related to the
Electrical Components segment for the three months ended September 30, 2007 and
2006:
Three Months Three Months
Ended Ended
(Dollars in millions) September 30, September 30,
2007 2006
------------- -------------
Net sales $ 81.0 $109.3
Cost of sales 64.7 101.9
Selling and administrative expenses 6.5 7.9
Impairments, restructuring charges, and other items 26.3 --
------ ------
Operating loss (16.5) (0.5)
Interest expense, including allocated interest (21.6) (4.5)
------ ------
Loss from discontinued operations before income taxes (38.1) (5.0)
Tax provision (benefit) 0.4 1.4
Loss from discontinued operations, net of tax ($38.5) ($6.4)
------ ------
Loss on disposal ($18.6) --
Tax provision (benefit) on loss (2.0) --
------ ------
Loss on disposal, net (16.6) --
------ ------
Loss from discontinued operations ($55.1) ($6.4)
------ ------
Page 9
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Following is a summary of income (loss) from discontinued operations related to
the Electrical components segment for the nine months ended September 30, 2007
and 2006:
Nine Months Nine Months
Ended Ended
September 30, September 30,
(Dollars in millions) 2007 2006
------------- -------------
Net sales $ 286.0 $ 325.3
Cost of sales 252.5 296.4
Selling and administrative expenses 23.3 26.2
Impairments, restructuring charges, and other items 96.4 2.4
-------- -------
Operating income (loss) (86.2) 0.3
Interest expense, including allocated interest (31.3) (13.2)
-------- -------
Loss from discontinued operations before income taxes (117.5) (12.9)
Tax provision (benefit) -- (0.8)
-------- -------
Loss from discontinued operations, net of tax ($117.5) ($12.1)
-------- -------
Loss on disposal ($18.6) --
Tax provision (benefit) on loss (2.0) --
-------- -------
Loss on disposal, net (16.6) --
-------- -------
Loss from discontinued operations ($134.1) ($12.1)
-------- -------
During the third quarter of 2007, we also sold Manufacturing Data Systems Inc.,
a small subsidiary not associated with any of our major business segments. Sales
of $0.1 million and profit of $0.5 million were recorded for the three months
ended September 30, 2007, and sales of $0.8 million and losses of $0.9 million
were recorded for the nine months ended September 30, 2007. Sales of $0.6
million and losses of $0.6 million were recorded for the three month period
ended September 30, 2006, and sales of $1.9 million and losses of $1.5 million
were recorded for the nine months ended September 30, 2006.
Based upon the completion of the sale of the Engine & Power Train business
segment on November 9, 2007, these operations will be reported as discontinued
operations beginning with our reporting of results for the fourth quarter of
2007.
On April 21, 2006, we completed the sale of our 100% ownership interest in
Little Giant Pump Company for $120.7 million. Its results for the three and nine
months ended September 30, 2006 are included in loss from discontinued
operations. Interest expense of $2.9 million was allocated to discontinued
operations for the nine months ended September 30, 2006 because our financing
agreements required the proceeds from the sale to be utilized to repay portions
of our debt.
Page 10
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Following is a summary of income (loss) from discontinued operations related to
Little Giant Pump Company for the nine months ended September 30, 2006:
Nine Months
Ended
September 30,
(Dollars in millions) 2006
-------------
Net sales $ 32.9
Cost of sales 23.9
Selling and administrative expenses 6.9
------
Operating income 2.1
Interest expense allocated (2.9)
------
Loss from discontinued operations before income taxes (0.8)
Tax provision 0.2
------
Loss from discontinued operations, net of tax ($1.0)
------
Gain on disposal 77.9
Tax provision on gain 11.8
------
Gain on disposal, net 66.1
------
Income from discontinued operations $ 65.1
======
While no sales were reported for Little Giant Pump Company for the three
months ended September 30, 2006, a gain on the disposal of the business of
$7.5 million was recorded.
The following table summarizes income (loss) from discontinued operations, net
of tax, for the three and nine months ended September 30, 2007 and 2006:
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- --------------
(Dollars in millions, except per share data) 2007 2006 2007 2006
----- ---- ------ -----
Electrical Components segment (55.1) (6.4) (134.1) (12.1)
Manufacturing Data Systems, Inc. 0.5 (0.6) (0.9) (1.5)
Little Giant Pump Company -- 7.5 -- 65.1
----- ---- ------ -----
Income (loss) from discontinued operations,
net of tax (54.6) 0.5 (135.0) 51.5
===== ==== ====== =====
Page 11
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
The following summary balance sheet information is derived from the businesses
that are classified as held for sale as of September 30, 2007, which management
believes is representative of the net assets of the business held for disposal.
This balance sheet information includes the Automotive & Specialty business
operations, other operations within the Electrical Components Group, and other
long-lived assets that were held for sale at September 30, 2007.
SEPTEMBER 30,
(Dollars in millions) 2007
-------------
ASSETS:
Current Assets:
Accounts receivable, net $19.9
Inventories 18.4
Other current assets 0.9
-----
Total current assets held for sale $39.2
Property, plant, and equipment, net 17.1
Other assets 0.2
-----
Total assets held for sale $56.5
=====
LIABILITIES:
Current Liabilities:
Accounts payable, trade $14.9
Accrued liabilities 4.5
-----
Total current liabilities held for sale $19.4
Deferred income taxes 2.2
-----
Total liabilities held for sale 21.6
=====
Net assets held for sale $34.9
=====
Page 12
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
4. Comprehensive Income
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------- ----------------
2007 2006 2007 2006
(Dollars in millions) ------ ------ ------- -------
Net loss ($77.2) ($37.8) ($182.2) ($16.5)
Other comprehensive income (loss):
Foreign currency translation adjustments:
Reclassifications included in net loss
due to sale of business, net of tax (5.0) -- (5.0) --
Currency translation adjustments, net of tax 13.3 (2.4) 43.2 26.4
(Loss) gain on derivatives, net of tax (2.0) 0.4 1.6 (2.2)
Curtailment, net of tax (Note 8) (0.5) -- (4.0) --
Unrealized loss on investment holdings, net of tax -- -- -- (0.2)
Less: Reclassification adjustment for gains (losses)
realized in net loss, net of tax -- -- -- (3.6)
------ ------ ------- -------
Total comprehensive (loss) income ($71.4) ($39.8) ($146.4) $ 3.9
====== ====== ======= =======
5. Inventories
SEPTEMBER 30, December 31,
(Dollars in millions) 2007 2006
------------- ------------
Raw material $ 95.9 $159.0
Work in progress 29.9 60.1
Finished goods 70.7 121.5
Supplies 7.5 12.8
------ ------
Total inventories $204.0 $353.4
====== ======
$92.6 million of the inventory balance at December 31, 2006 was
attributable to the Electrical Components business segment. At September
30, 2007, inventory balances associated with the remaining operations
within the Electrical Components Group were included with assets held for
sale.
Page 13
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
6. Business Segments
We have two reportable segments based on the criteria set forth in SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information":
Compressor Products and Engine & Power Train Products. Previously, we also
reported an Electrical Component Products segment; however, as a result of
the decision made by our Board of Directors to sell all of the businesses
associated with that segment, its operations are no longer reported in
continuing operations before tax. Net sales and operating income (loss) by
segment for the periods indicated are as follows:
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
BUSINESS SEGMENT DATA ----------------- -------------------
(Dollars in millions) 2007 2006 2007 2006
------- ------- -------- --------
Net sales:
Compressor Products $ 278.4 $ 230.8 $ 864.7 $ 755.6
Engine & Power Train Products 53.8 85.2 165.9 237.6
Other (a) 3.9 3.5 12.6 11.4
------- ------- -------- --------
Total Net Sales $ 336.1 $ 319.5 $1,043.2 $1,004.6
======= ======= ======== ========
Operating income (loss):
Compressor Products $ 7.1 ($6.5) $ 28.4 ($3.7)
Engine & Power Train Products 0.1 (9.2) (16.4) (38.9)
Other (a) 0.7 0.6 2.4 2.2
Corporate expenses (1.9) (4.7) (21.9) (12.7)
Impairments, restructuring charges, and other items (26.2) (8.4) (25.3) (11.6)
------- ------- -------- --------
Total operating loss from continuing operations (20.2) (28.2) (32.8) (64.7)
Interest expense (6.6) (5.7) (25.5) (16.8)
Interest income and other, net 1.1 2.3 4.8 10.6
------- ------- -------- --------
Loss from continuing operations before taxes ($25.7) ($31.6) ($53.5) ($70.9)
======= ======= ======== ========
(a) "Other" consists of non-reportable business segments. A business within
that segment, Manufacturing Data Systems Inc., was sold and reclassified to
discontinued operations during the third quarter of 2007. Sales of $0.1
million and profit of $0.5 million were recorded for the three months ended
September 30, 2007, and sales of $0.8 million and losses of $0.9 million
were recorded for the nine months ended September 30, 2007. Sales of $0.6
million and losses of $0.6 million were recorded for the three month period
ended September 30, 2006, and sales of $1.9 million and losses of $1.5
million were recorded for the nine months ended September 30, 2006.
Page 14
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
7. Goodwill and Other Intangible Assets
At September 30, 2007, goodwill by segment consisted of the following:
COMPRESSOR COMPRESSOR ELECTRICAL
EUROPE INDIA COMPONENTS TOTAL
---------- ---------- ---------- ------
Balance at 1/1/2007 $11.2 $7.0 $108.8 $127.0
Foreign currency translation 0.8 0.8 2.6 4.2
Impairment -- -- (39.3) (39.3)
Sale of Residential & Commercial and
Asia Pacific operations -- -- (72.1) (72.1)
----- ---- ------ ------
Balance at 9/30/2007 $12.0 $7.8 -- $ 19.8
===== ==== ====== ======
In light of the classification of the Electrical Components business as a
discontinued operation as of the end of the second quarter, we performed an
interim analysis of the fair value of the business unit at June 30, 2007.
We utilized the final purchase price agreed upon with Regal Beloit as an
indication of fair market valuation of the Residential & Commercial and
Asia Pacific operations of the Electrical Components business. With respect
to the remaining divisions of the Electrical Components business, we
considered initial indications of interest from potential acquirers of
those businesses to evaluate the overall marketplace value of the business
unit. Based on the outcome of this analysis, we determined that $39.3
million of the goodwill balance associated with the Electrical Components
business had become impaired. The remainder of the goodwill balance
associated with the Electrical Components business was associated with the
Residential & Commercial operations and was included with the sale to Regal
Beloit, which was completed on August 31.
We also performed a fair value analysis of the other long-lived assets of
the Electrical Components business segment, and determined that $3.4
million of the intangible assets associated with the Automotive & Specialty
division of the Electrical Components business had become impaired. All of
the other intangible assets of the Company were associated with the
Residential & Commercial operations and were included with the sale to
Regal Beloit, which was completed on August 31.
At December 31, 2006, goodwill by segment consisted of the following:
COMPRESSOR COMPRESSOR ELECTRICAL
EUROPE INDIA COMPONENTS OTHER TOTAL
---------- ---------- ---------- ----- ------
Balance at 1/1/2006 $10.0 $6.9 $108.9 $ 5.1 $130.9
Sale of Little Giant Pump Company -- -- -- (5.1) (5.1)
Foreign currency translation 1.2 0.1 (0.1) -- 1.2
----- ---- ------ ----- ------
Balance at 12/31/2006 $11.2 $7.0 $108.8 $ 0.0 $127.0
On April 21, 2006, the Company completed the sale of its 100% ownership in
Little Giant Pump Company. The only other changes in goodwill during 2006
were due to foreign currency fluctuations.
Page 15
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
8. Pension and Other Postretirement Benefit Plans
Components of net periodic benefit (income) cost are as follows:
PENSION OTHER
BENEFITS BENEFITS
--------------- ---------------
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------- ---------------
2007 2006 2007 2006
------ ------ ------ ------
Service Cost $ 1.6 $ 2.1 $ 0.8 $ 0.8
Interest Cost 5.7 5.4 1.5 2.4
Expected return on plan assets (11.3) (11.1) (0.1) --
Amortization of prior service costs (0.1) 0.1 (2.8) (1.2)
Amortization of net gain -- (0.1) -- --
Curtailment (income) cost -- -- (2.0) --
------ ------ ------ ------
Net periodic benefit (income) cost ($4.1) ($3.6) ($2.6) $ 2.0
Curtailment gain - discontinued operations -- (1.0) -- (7.5)
------ ------ ------ ------
Total Pension (Income) Expense ($4.1) ($4.6) ($2.6) ($5.5)
====== ====== ====== ======
PENSION OTHER
BENEFITS BENEFITS
---------------- ----------------
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------- ----------------
2007 2006 2007 2006
------ ------- ------- ------
Service Cost $ 6.0 $ 6.8 $ 2.7 $ 2.5
Interest Cost 16.9 15.9 5.6 7.3
Expected return on plan assets (33.9) (33.4) (0.2) --
Amortization of prior service costs (0.4) 0.4 (8.0) (3.7)
Amortization of net gain -- (0.1) -- (0.1)
Curtailment (income) cost 3.8 -- (12.7) --
------ ------- ------ ------
Net periodic benefit (income) cost ($7.6) ($10.4) ($12.6) $ 6.0
Curtailment gain - discontinued operations -- (1.0) -- (7.5)
------ ------- ------- ------
Total Pension (Income) Expense ($7.6) ($11.4) ($12.6) ($1.5)
====== ======= ======= ======
As a result of the completion of the previously announced closure of our
Engine & Power Train facility in New Holstein, Wisconsin and the associated
curtailment of other postretirement ("OPEB") benefits of its employees, we
recognized a net gain of $2.0 million in the third quarter of 2007. The
curtailment gain realized for OPEB consists of a $1.4 million reduction in
liabilities and a reduction of $0.6 million in prior service costs, which
was recognized in accumulated other comprehensive income upon the adoption
of SFAS 158 in 2006. We also expect to recognize a net gain of $4.9 million
in the fourth quarter due to the curtailment of this plan. In addition to
this net curtailment
Page 16
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
gain, future pension and retiree health care expense will decrease by $0.9
million per quarter. As we complete the divestitures of the business units
within our Electrical Components and Engine & Power Train business
segments, we expect that further curtailment gains will also be recognized.
In the first quarter of 2007, we announced revisions to our Salaried
Retirement Plan. The original 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. The pension reversion
will adversely affect the Company's results of operations due to the
recognition of the cost of the termination, estimated to be $20 million, as
well as a reduction in net period income. The reduction in income, however,
has been more than mitigated by other actions taken to reduce the overall
cost of benefits and due to personnel reductions.
We expect to contribute $0.1 million to our pension plans in 2007.
9. Guarantees and Warranties
A portion of accounts receivable at our Brazilian, European, and Indian
compressor subsidiaries are sold without recourse. The amount of these
receivables sold at September 30, 2007 and December 31, 2006 were $81.1
million and $46.5 million, respectively. We estimate the fair value of the
contingent liability related to these receivables to be $0.5 million, which
is included in operating profit (loss) and allowance for doubtful accounts.
Changes in the carrying amount and accrued product warranty costs for the
nine months ended September 30, 2007 and 2006 are summarized as follows:
Nine Months Nine Months
Ended Ended
September 30, September 30,
(Dollars in millions) 2007 2006
------------- -------------
Balance at January 1 $26.2 $29.4
Settlements made (in cash or in kind) (9.2) (11.5)
Current year accrual 6.4 12.9
Adjustments to preexisting warranties (2.6) (0.7)
Effect of foreign currency translation 0.4 0.2
Reclassification to held for sale* (2.0) --
Sale of Little Giant Pump Company -- (2.7)
----- -----
Balance at September 30 $19.2 $27.6
===== =====
* At September 30, 2007, balances for the Electrical Components business
segment were removed from our consolidated balance sheet and reclassified
as held for sale.
At March 31, 2007, balances for TMT Motoco were removed from our
consolidated balance sheet.
At September 30, 2007, $13.4 million was included in current liabilities
and $5.8 million was included in non-current liabilities.
Page 17
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
10. Debt
Through the second quarter of 2007, our domestic credit facilities
consisted of a financing package that included a $250 million First Lien
Credit Agreement and a $100 million Second Lien Credit Agreement. On August
27, 2007, we entered into an amendment to our First Lien Credit Agreement,
in anticipation of the closing of the sale transaction for the Residential
& Commercial and Asia Pacific operations of the Electrical Components
business segment. Among other things, the amendment deleted the minimum
adjusted EBITDA and fixed charge coverage covenants for the third and
fourth quarters of 2007, and reduced the lenders' total commitment from
$250 million to $175 million. The amendment also imposed a new covenant
requiring us to maintain a minimum of $50 million in credit availability;
after giving effect to the existing $10 million availability reserve, we
are in effect required to maintain a minimum of $60 million of credit
availability. Consistent with the terms of the original First Lien Credit
Agreement, the amendment provides for security interests in substantially
all of our assets, and places limits on additional foreign borrowings and
fees paid for professional services. We paid the first lien lender fees
totaling $425,000 in connection with the amendment. Our First Lien Credit
Agreement expires in November 2009. The interest rate of our outstanding
borrowings under the First Lien Credit Agreement was 7.9% at September 30,
2007.
On August 31, 2007, we paid off the entire balance associated with our
Second Lien Credit Agreement effective with the closing of the sale of
portions of our Electrical Components business segment as referenced above.
At September 30, 2007, we had outstanding letters of credit of $6.7 million
and the capacity for additional borrowings under the borrowing base formula
of $25.2 million in the U.S. and $89.7 million in foreign jurisdictions
under our $175 million First Lien Credit Agreement.
On November 8, 2007 we entered into an additional amendment to modify our
First Lien Credit Agreement, in anticipation of the closing of the sale
transaction of the Engine & Power Train business. The principle terms of
the amendment reduced the covenant requiring us to maintain minimum levels
of availability under the line of credit to $30 million, and reduced the
total facility size to $75 million. As a result, after completion of the
transaction, we had cash balances in the U.S. of approximately $21.6
million, and U.S availability under our First Lien Credit Agreement of
approximately $19.8 million. We paid the first lien lender fees totaling
$36,000 in connection with the amendment.
In addition, we have various borrowing arrangements at our foreign
subsidiaries to support working capital needs and government sponsored
borrowings that provide advantageous lending rates. During the quarter, we
had net repayments on these arrangements totaling $16.1 million. Our
weighted average interest rate for all borrowings, including foreign
borrowings, is 8.8%.
Although our Second Lien debt has been eliminated, the former lender still
possesses 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 in April of 2012. The
costs associated with this warrant, while originally accounted for as
additional interest to be expensed over the remaining terms of the credit
agreement, were accelerated upon full repayment of the debt, and resulted
in expense of $6.2 million in the third quarter of 2007, which is included
in the loss from discontinued operations.
Page 18
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
In accordance with the amendments discussed above, we are currently in
compliance with the covenants of our domestic debt agreement. After giving
effect to the sale transactions and the negative impacts of continued
unfavorable currency movements, we do not expect to be in compliance with
the fixed charge covenant of our First Lien credit agreement at March 31,
2008. However, we do not expect to have any amounts outstanding under the
agreement at that time. In anticipation of this condition, we are pursuing
a stand-by credit facility under a new collateralized arrangement, although
we would not expect to require any outstanding borrowings to fund current
operations.
11. Environmental Matters
We are involved in a number of environmental sites where we are either
responsible for or participating in a cleanup effort. We had accrued $3.0
million and $3.3 million at September 30, 2007 and December 31, 2006
respectively for environmental remediation. Although these liabilities are
associated with locations included with our Engine & Power Train business
segment, we will retain these liabilities after the sale of that business
segment, which is expected to be completed in the fourth quarter of 2007.
As these matters continue toward final resolution, amounts in excess of
those already provided may be necessary to discharge us from our
obligations for these sites. Such amounts, depending on their magnitude and
timing, could be material to reported net income in the particular quarter
or period that they are recorded. In addition, the ultimate resolution of
these matters, either individually or in the aggregate, could be material
to the consolidated financial statements. For additional information on our
potential environmental liabilities, including the Sheboygan River and
Harbor Superfund and Hayton Area Remediation Project sites, see Note 11 to
the Financial Statements in our Annual Report on Form 10-K for the year
ended December 31, 2006.
12. Income Taxes
Under Accounting Principles Board Opinion No. 28, "Interim Financial
Reporting," we are required to adjust our effective tax rate for each
quarter to be consistent with the estimated annual effective tax rate. We
are also required to record the tax impact of certain discrete items
(unusual or infrequently occurring), including changes in judgment about
valuation allowances and effects of changes in tax laws or rates in the
interim period in which they occur.
In addition, income taxes are allocated between continuing, discontinued
operations and other comprehensive income in accordance with SFAS No. 109,
"Accounting for Income Taxes," particularly paragraph 140, which states
that all items, including discontinued operations, should be considered for
purposes of determining the amount of tax benefit that results from a loss
from continuing operations and that could be allocated to continuing
operations. SFAS No. 109 is applied by tax jurisdiction, and in periods in
which there is a pre-tax loss from continuing operations and pre-tax income
in another category, such as discontinued operations, tax expense is first
allocated to the other sources of income, with a related benefit recorded
in continuing operations.
For the three and nine month periods ended September 30, 2007, we reported
losses from continuing operations and discontinued operations, but income
in other comprehensive income. Pursuant to SFAS No. 109, Paragraph 140, we
allocated income taxes between continuing operations, discontinued
operations and OCI. The consolidated condensed statement of operations
reflects a $6.3 million income tax benefit for the nine months ended
September 30, 2007 and a $2.9 million income tax benefit for the nine
months ended September 30, 2006. Both
Page 19
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
periods reflect tax benefits in the statement of operations and tax expense
in other comprehensive income.
At September 30, 2007 and December 31, 2006, full valuation allowances were
recorded against deferred tax assets for those tax jurisdictions in which
we believe it is not more likely than not that the deferred taxes will be
realized. During the quarter ended June 30, 2007, the valuation allowance
related to the Europe subsidiary of our Compressor business segment was
released, since management now believes that realization of their deferred
tax assets is more likely than not. The net impact of this change decreased
income tax by $0.4 million in the second quarter.
On July 12, 2007, the State of Michigan enacted the Michigan Business Tax
(MBT) as a replacement for the Single Business Tax (SBT), which expires at
the end of 2007. The MBT is effective on January 1, 2008 and is comprised
of two components: an income tax and a modified gross receipts tax. The two
components of the MBT are accounted for in accordance with the provisions
of SFAS No. 109. As a result of the MBT enactment, we recorded a one-time
income tax expense of approximately $2.2 million in the quarter ended
September 30, 2007.
We adopted FASB Interpretation No. 48, "Accounting for Uncertainty in
Income Taxes - an Interpretation of FASB Statement No. 109" (FIN 48) on
January 1, 2007. FIN 48 clarifies the accounting and reporting for
uncertainties in income tax positions. This interpretation prescribes a
comprehensive model for the financial statement recognition, measurement,
presentation and disclosure of uncertain tax positions taken or expected to
be taken in income tax returns.
As a result of adopting FIN 48, an increase in tax reserves and a decrease
of retained earnings of $0.4 million were recorded. Upon adoption, the
liability for income taxes associated with uncertain tax positions at
January 1, 2007 was $3.0 million. In addition, consistent with the
provisions of FIN 48, we reclassified $1.8 million of income tax
liabilities from current to non-current income taxes, because payment of
cash is not anticipated within one year of the balance sheet date. At
September 30, 2007, the amount of gross unrecognized tax benefits, and
therefore the amount that would favorably affect the effective income tax
rate in future periods, was $3.0 million.
Interest and penalties related to income tax liabilities are included in
income tax expense. The balance of accrued interest and penalties recorded
in the Consolidated Balance Sheet at January 1, 2007 was $1.1 million; of
this amount, $0.7 million was reclassified from current to non-current
liabilities upon adoption of FIN 48. Accrued interest and penalties for the
three and nine months ended September 30, 2007 was reduced by $0.7 million
and $0.9 million, respectively. The impact of FIN 48 for the first nine
months of 2007 is a benefit of $1.8 million; we recognized this benefit due
to the expiration of the statue of limitations on a tax issue.
We have open tax years from primarily 2003 to 2006, with various
significant taxing jurisdictions including the U.S., Canada, France and
Brazil. In the U.S., our federal income tax returns through 2002 have been
examined by the Internal Revenue Service. In addition, 2003 and 2004 U.S.
federal income tax returns are currently under review.
At September 30, 2007, we anticipate a decrease in the total amount of
unrecognized tax benefits within the next twelve months of approximately
$0.6 million.
Page 20
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
13. Commitments and Contingencies
A lawsuit filed against us and other defendants alleged that the horsepower
labels on the products the plaintiffs purchased were inaccurate. The
plaintiffs seek certification of a class of all persons in the United
States who, beginning January 1, 1995 through the present, purchased a
lawnmower containing a two stroke or four stroke gas combustible engine up
to 20 horsepower that was manufactured by defendants. The complaint sought
an injunction, compensatory and punitive damages, and attorneys' fees. On
March 30, 2007, the Court entered an order dismissing the complaint subject
to the ability to re-plead certain claims, pursuant to a detailed written
order to follow. We expect the plaintiffs will appeal the dismissal order,
and that even if it is upheld, they will re-plead their claims to the
extent permitted by the order. While we believe we have meritorious
defenses and intend to assert them vigorously, there can be no assurance
that we will prevail. We also may pursue settlement discussions. It is not
possible to reasonably estimate the amount of our ultimate liability, if
any, or the amount of any future settlement, but the amount could be
material to our financial position, consolidated results of operations and
cash flows. Although this claim is related to our Engine & Power Train
segment, our purchase agreement for the sale of this business requires us
to retain the responsibility for the eventual outcome of this lawsuit.
We are also the subject of, or a party to, a number of other pending or
threatened legal actions involving a variety of matters, including class
actions and asbestos-related claims, incidental to our business. Although
their ultimate outcome cannot be predicted with certainty, and some may be
disposed of unfavorably to us, management does not believe that the
disposition of these other matters will have a material adverse effect on
our consolidated financial position or results of operations.
14. Impairments, Restructuring Charges, and Other Items
We recorded expense of $26.2 million in impairments, restructuring charges,
or other items in the three months ended September 30, 2007, and expense of
$25.3 million in the nine months ended September 30, 2007. In light of the
agreement reached on October 22, 2007 to sell the assets of our Engine &
Power Train business segment to Platinum Equity LLC, we performed an
interim analysis of the fair value of the assets of the business unit at
September 30, 2007. We utilized the final purchase price agreed upon with
Platinum Equity as our indication of the fair market valuation of the
business. As a result, we recorded an impairment to the long-term assets of
the business segment of $28.1 million. Further adjustment to the loss on
sale may result due to post-closing adjustments to the purchase price
pursuant to the agreement. 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 $2.0 million in the third quarter of 2007. A net
gain of $6.9 million related to this pension curtailment was also
recognized in the second quarter of 2007. In addition, we recorded $5.7
million in obsolescence charges in the second quarter 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. The
remaining charges primarily related to reductions in force executed during
the second quarter across several of our business units.
We recognized asset impairment charges of $8.4 million and $11.6 million
for the three and nine months ended September 30, 2006, respectively. In
the third quarter of 2006, we incurred asset impairment and restructuring
charges of $8.4 million related to the Engine & Power Train business for
the write-down of assets that had become idled as part of the segment's
overall restructuring
Page 21
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
program. During the second quarter of 2006, we incurred asset impairment
and other charges of $2.6 million related to the Engine & Power Train
business for the consolidation of transmission production into a single
U.S. facility. The remainder of the 2006 impairment charges related to the
completion of programs initiated in 2005.
15. Recently Issued Accounting Pronouncements
Fair Value Measurements
In September 2006, the FASB issued Statement No. 157, "Fair Value
Measurements" ("SFAS 157), to provide enhanced guidance for using fair
value to measure assets and liabilities. The Standard also expands
disclosure requirements for assets and liabilities measured at fair value,
how fair value is determined, and the effect of fair value measurements on
earnings. The Standard applies whenever other authoritative literature
requires (or permits) certain assets or liabilities to be measured at fair
value but does not expand the use of fair value. SFAS 157 is effective
beginning January 1, 2008. We are currently evaluating the impact of this
pronouncement on our consolidated financial statements.
Fair Value Option for Financial Assets and Financial Liabilities
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 permits
entities to choose to measure financial assets and liabilities (except for
those that are specifically exempted from SFAS 159) at fair value. The
election to measure a financial asset or liability at fair value can be
made on an instrument-by-instrument basis and is irrevocable. The
difference between carrying value and fair value at the election date is
recorded as a transition adjustment to opening retained earnings.
Subsequent changes in fair value are recognized in earnings. SFAS 159 is
effective for fiscal years beginning after November 15, 2007. At this time,
we do not intend to adopt SFAS 159.
16. Recoverable Non-income Taxes
We pay various value-added taxes in jurisdictions outside of the United
States. These include taxes levied on material purchases, fixed asset
purchases, and various social taxes. The majority of these taxes are
creditable when goods are sold to customers domestically or against income
taxes due. Since the taxes are recoverable upon completion of these
procedures, they are recorded as assets upon payment of the taxes.
Historically, due to the concentration of exports, such taxes were
typically credited against income taxes due. However, with reduced
profitability, primarily in Brazil, we must seek refunds via procedures
that can be lengthy. As a result, there has been a substantial increase in
the balance of these recoverable taxes. We have instituted these
procedures, which include audits of the recoverable amounts that are
currently underway. We currently expect to recover the majority of these
balances in the second half of 2008.
Page 22
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Following is a summary of the recoverable non-income taxes recorded on our
balance sheet at September 30, 2007 and December 31, 2006:
SEPTEMBER 30, December 31,
(Dollars in millions) 2007 2006
------------- ------------
Brazil $118.9 $88.2
India 9.1 9.0
All other 1.0 --
------ -----
Total recoverable non-income taxes $129.0 $97.2
====== =====
At September 30, 2007, $30.9 million was included in current assets and
$98.1 million was included in non-current assets.
Page 23
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Executive Summary
Our business has recently centered around three business segments: hermetically
sealed compressors, small gasoline engine and power train products, and
fractional horsepower motors. However, over the course of 2007, we have
successfully executed a strategy to divest operations that were not considered
to be core to our ongoing business strategy. To that end, we have sold the
Residential & Commercial and Asia Pacific portions of our Electrical Components
business segment, and have also sold our Engine & Power Train business segment.
In addition, we have signed an agreement to sell the Automotive & Specialty
portion of our Electrical Components business. Upon completion of this
transaction, which we anticipate will occur before the end of the year, we will
be primarily focused on our compressor business.
As we evolve from a diversified manufacturer to a compressor business, our
manufacturing presence in international locations becomes a much greater
proportion of our overall business. Based on results through the first three
quarters of 2007, approximately 80% of our compressor manufacturing activity
takes place outside the United States, primarily in Brazil, France, and India
(which comprise approximately 41%, 27% and 12% of total compressor
manufacturing, respectively). Accordingly, our consolidated financial results
are increasingly sensitive to changes in foreign currency exchange rates.
Changes in the Brazilian Real have been especially adverse to our results of
operations; during the first three quarters of 2007, the Brazilian Real
strengthened by 14.0%, and in the period from January 1, 2006 to September 30,
2007 the Real strengthened by 21.4%. Recent movement in the Indian Rupee has
also had an unfavorable effect on our results of operations, as the Rupee
strengthened by 10.1% during the first nine months of 2007. We have developed
strategies to mitigate or partially offset these impacts, primarily hedging
where the risk of loss is greatest. In particular, we have entered into foreign
currency forward purchases to hedge the Brazilian export sales denominated in
both U.S. Dollars and Euros. To a lesser extent, we have also entered into
foreign currency forward purchases to mitigate the effect of fluctuations in the
Indian Rupee. However, these hedging programs only reduce exposure to currency
movements over the limited time frame of three to fifteen months. Ultimately,
long term changes in currency exchange rates have lasting effects on the
relative competitiveness of operations located in certain countries versus
competitors located in different countries. Only one major competitor in the
compressor segment faces similar exposure to the Real. Other competitors,
particularly those with operations in countries where the currency has been
substantially pegged to the U.S. dollar, currently enjoy a pronounced cost
advantage over our primary compressor operations.
Our foreign manufacturing operations are subject to many other risks, including
governmental expropriation, governmental regulations that may be disadvantageous
to businesses owned by foreign nationals, and instabilities in the workforce due
to changing political and social conditions.
Due to the high material content of copper (and, to a lesser extent, aluminum)
in compressor products, our results of operations are very sensitive to the
prices of these commodities. Overall, commodity prices increased very rapidly
during 2005, 2006 and into 2007. Due to competitive markets, we are typically
not able to quickly recover these cost increases through price increases and
other cost savings. From January 1, 2006 through October 31, 2007, the price of
copper increased by approximately 60.4%. While we have been proactive in
addressing the volatility of these costs, including executing forward purchase
contracts to cover more than 75% of our anticipated copper
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requirements for 2007, continued rapid escalation of these costs would
nonetheless have an adverse affect on our results of operations both in the near
and long term.
Aside from our efforts to manage increasing commodity costs with forward
purchase contracts, we have executed other strategies to mitigate or partially
offset the impact of these rising costs, which include aggressive cost reduction
actions, cost optimization engineering strategies, selective out-sourcing of
components where internal supplies are not cost competitive, continued
consolidation of our supply base, and acceleration of low-cost country sourcing.
In addition, the sharing of increased raw material costs has been, and will
continue to be, the subject of negotiations with our customers, including
seeking mechanisms that would result in more timely adjustment of pricing in
reaction to changing material costs. While we believe that our mitigation
strategies have offset a substantial portion of the financial impact of these
increased costs, no assurances can be given that the magnitude and duration of
these increased costs will not have a continued material adverse impact on our
operating results. As we raise prices to cover cost increases, it is possible
that customers may react by choosing to purchase their requirements from
alternative suppliers. Any increases in cost that could not be recovered through
increases in selling prices would make it more difficult for us to achieve our
business plans.
Notwithstanding these specific challenges to our business, our operating results
are also indicative of the environment that manufacturers face in today's global
economy. The addition of new productive capacities in low-cost locations, like
China, has resulted in deflationary pricing in many of the product lines in
which we operate. Like many of our customers and competitors, we have
restructured older operations to remain cost competitive, including the movement
of productive capacities to low-cost locations or nearer to customer facilities.
These restructuring programs involve significant costs, in both financial and
human terms. In addition, many of our markets are subject to macroeconomic
trends, which expand and contract, and other external factors which affect
demand for our products, such as weather.
International sales are important to our business, with sales to customers
outside the United States representing approximately 79% of total compressor net
sales in 2006. We sell compressors in over 110 countries throughout the world.
Our dependence on sales in foreign countries entails certain commercial and
political risks, including currency fluctuations as discussed above, unstable
economic or political conditions in some areas and the possibility of various
government interventions into trade policy. We have experienced some of these
factors and continue to carefully pursue these markets.
Upon completion of the divestitures of the business operations discussed above,
we have eliminated all our domestic debt. Accordingly, interest expense for our
business in the foreseeable future will be substantially reduced. Based on the
amount of domestic debt we held prior to the sale of businesses, we expect that
its elimination will reduce our annualized interest expense by approximately $22
million. However, challenges will remain with respect to our ability to maintain
appropriate levels of liquidity, particularly those driven by currency exchange
and commodity pricing as discussed above. With expected further weakness of the
U.S. dollar versus key currencies such as the Brazilian Real and the Indian
Rupee we expect that we will generate a limited amount of cash until further
restructuring activities are implemented or economic conditions improve. As part
of our strategy to maintain sufficient liquidity, we are currently negotiating a
new financing arrangement for our North American based activities, and seeking
longer term committed financing arrangements in Brazil. In addition, we
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FINANCIAL CONDITION AND RESULTS OF OPERATIONS
are generating other sources of cash through activities such as the termination
and reversion of our vastly over-funded pension plans and collection of
refundable non-income taxes in Brazil. While we believe that these and other
activities will produce adequate liquidity to implement our business strategy
over a reasonable time horizon, there can be no assurance that such improvements
will ultimately be adequate if economic conditions continue to deteriorate. In
addition, while our business dispositions have improved our liquidity, each of
the sale agreements provide for certain retained liabilities or indemnities,
including liabilities that relate to environmental issues and product
warranties. While we currently believe we have adequately provided for such
contingent liabilities, future events could result in the recognition of
additional liabilities that could consume available liquidity and management
attention.
For further information related to other factors that have had, or may in the
future have, a significant impact on our business, financial condition or
results of operations, see "Adequacy of Liquidity," "Outlook," and "Cautionary
Statements Relating To Forward-Looking Statements" below.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
A summary of our operating results as a percentage of net sales is shown below
(dollar amounts in millions):
THREE MONTHS ENDED SEPTEMBER 30,
(dollars in millions) 2007 % 2006 %
------ ----- ------ -----
Net sales $336.1 100.0% $319.5 100.0%
Cost of sales 302.5 90.0% 305.5 95.6%
Selling and administrative expenses 27.6 8.2% 33.8 10.6%
Impairments, restructuring charges, and other items 26.2 7.8% 8.4 2.6%
------ ------
Operating loss (20.2) (6.0%) (28.2) (8.8%)
Interest expense (6.6) (2.0%) (5.7) (1.8%)
Interest income and other, net 1.1 0.3% 2.3 0.7%
------ ------
Loss from continuing operations before taxes (25.7) (7.6%) (31.6) (9.9%)
Tax (benefit) expense (3.1) (0.9%) 6.7 2.1%
------ ------
Loss from continuing operations ($22.6) (6.7%) ($38.3) (12.0%)
====== ======
Three Months Ended September 30, 2007 vs. Three Months Ended September 30, 2006
Consolidated net sales from continuing operations in the third quarter of 2007
increased to $336.1 million from $319.5 million in 2006. Sales increases
attributable to the Compressor segment ($47.6 million, of which $22.0 was due to
the effect of currency translation) were offset by a substantial decline ($31.4
million) in sales in the Engine & Power Train segment. The remaining increase of
$0.4 million was attributable to businesses that are not associated with our
reportable business segments.
Cost of sales was $302.6 million in the three months ended September 30, 2007,
as compared to $305.5 million in the three months ended September 30, 2006. As a
percentage of net sales, cost of sales was 90.0% and 95.6% in the third quarters
of 2007 and 2006, respectively. Efficiency improvements and overhead reductions,
particularly at the Engine & Power Train segment, were offset by unfavorable
foreign currency exchange rates and higher commodity costs.
Selling, general and administrative ("SG&A") expenses were $27.6 million in the
three months ended September 30, 2007, as compared to $33.8 million in the three
months ended September 30, 2006. As a percentage of net sales, selling, general
and administrative expenses were 8.2% and 10.6% in the third quarters of 2007
and 2006, respectively. Reductions in SG & A were in part attributable to
overhead cost improvements that resulted from our restructuring efforts over the
past year, including $2.0 million in savings at the Engine & Power Train group.
Costs associated with professional fees improved by $4.0 million, primarily due
to reductions in fees paid to AlixPartners. $1.8 million was expensed in the
third quarter of 2007 for AlixPartners services, including the services of James
Bonsall, while $5.5 million was incurred in the third quarter of 2006 for their
consulting services provided to our Engine & Power Train business.
Expense of $26.2 million was recorded in impairments, restructuring charges or
other items in the three months ended September 30, 2007, compared to charges of
$8.4 million in the three months ended
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FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 30, 2006. As a result of the agreement signed on October 22, 2007 to
sell the assets of our Engine & Power Train business segment to Platinum Equity
LLC, we performed an interim analysis of the fair value of the assets of the
business unit at September 30, 2007. We utilized the final purchase price agreed
upon with Platinum as our indication of the fair market valuation of the
business. As a result, we impaired the long-term assets of the business segment
by $28.1 million. In contrast, 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 $2.0 million in the third quarter of 2007. In the third
quarter of 2006 we incurred charges of $8.4 million related to the Engine &
Power Train business for the write-down of assets that had become idled under
the segment's overall restructuring program.
Interest expense amounted to $6.6 million in the third quarter of 2007 compared
to $5.7 million in the third quarter of 2006. The increase is primarily
attributable to higher interest rates in our foreign subsidiaries.
Interest income and other, net was $1.1 million in the third quarter of 2007
compared to $2.3 million in the third quarter of 2006. The decline was
attributable to lower cash deposits outside the U.S.
The consolidated condensed statement of operations reflects a $3.1 million
income tax benefit for the third quarter of 2007 and a $6.7 million income tax
expense for the third quarter of 2006. Income taxes are recorded pursuant to
SFAS No. 109, "Accounting for Income Taxes," and are applied on a jurisdiction
by jurisdiction basis. In the three months ended September 30, 2007, we recorded
federal taxes benefits on net losses from continuing and discontinued
operations, but federal tax expense based on income in other comprehensive
income ("OCI"). In the three months ended September 30, 2006, we reported
federal tax benefits on losses from continuing operations, but federal tax
expense on income in OCI, as well as on income from discontinued operations.
These allocations are in accordance with the requirements of SFAS No. 109,
paragraph 140.
Since we pay taxes in various states there is also an expense recorded in the
U.S. that is related to separate company state tax liabilities, including state
tax expense that is recorded in discontinued operations. On July 12, 2007, the
State of Michigan enacted the Michigan Business Tax (MBT) as a replacement for
the Single Business Tax (SBT), which expires at the end of 2007. The MBT is
effective on January 1, 2008 and is comprised of two components: an income tax
and a modified gross receipts tax. The two components of the MBT are accounted
for in accordance with the provisions of SFAS No. 109. As a result of the MBT
enactment, we recorded a one-time income tax expense of approximately $2.2
million in the quarter ended September 30, 2007.
As of September 30, 2007, the valuation allowance of $2.8 million 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.
Net loss from continuing operations in the third quarter of 2007 was $22.6
million ($1.22 per share) as compared to net loss of $38.3 million ($2.07 per
share) in the third quarter of 2006. The improvement was the result of the
factors described above.
Reportable Operating Segments
The segment financial information presented in this report is for our two
reportable operating segments for the periods presented: Compressor and Engine &
Power Train. Previously, we also reported an
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Electrical Components product segment; however, as a result of the decision made
by our Board of Directors to sell all of the businesses associated with that
segment, its operations are no longer reported in continuing operations before
tax. Financial measures regarding each segment's income (loss) before interest,
other expense, income taxes, and impairments, restructuring charges, and other
items ("operating income") and income (loss) before interest, other expense and
income taxes and impairments, restructuring charges, and other items divided by
net sales ("operating margin") are not measures of performance under accounting
principles generally accepted in the United States ("U.S. GAAP"). Such measures
are presented because we evaluate the performance of our reportable operating
segments, in part, based on income (loss) before interest, other expense, income
taxes, and impairments, restructuring charges, and other items. These measures
should not be considered in isolation or as a substitute for net income, net
cash provided by operating activities or other income statement or cash flow
statement data prepared in accordance with U.S. GAAP or as measures of
profitability or liquidity. In addition, these measures, as we determine them,
may not be comparable to related or similarly titled measures reported by other
companies. For a reconciliation of consolidated income (loss) before interest,
other expense and income taxes, impairments, restructuring charges, and other
items to income before provision for income taxes, see Note 6 in the Notes to
our Consolidated Condensed Financial Statements.
Compressor Products
Third quarter 2007 sales in the Compressor segment increased to $278.4 million
from $230.8 million in the prior year. $22.0 million of the $47.6 million
increase in sales was due to the effects of foreign currency translation. Sales
increases in this segment were led by the commercial product lines (up $27.5
million), an increase of 26.2%. Sales increases were also reported in
residential air conditioning product lines (up $14.7 million or 67.7%) and
refrigeration and freezer product lines (up $5.3 million or 5.9%). The majority
of these increases were attributable to pricing advances and foreign currency
translation.
Compressor business income for the third quarter of 2007 was $7.1 million
compared to an operating loss of $6.5 million in the third quarter of 2006. The
$13.6 million improvement was attributable to the net favorable impact of volume
and pricing changes ($20.1 million) and productivity and other improvements
($4.8 million). Including the effects of favorable hedging activities, the price
of copper and other commodities also contributed favorably to results by
approximately $2.1 million in the third quarter of 2007. These year-on-year
improvements were partially offset by unfavorable foreign currency exchange
rates ($13.4 million). For the third quarter, the Brazilian Real was on average
9.0% stronger against the U.S. Dollar in 2007 versus 2006.
Engine & Power Train Products
Engine & Power Train business sales were $53.8 million in the third quarter of
2007 compared to $85.2 million for the same period a year ago. Declines were led
by engines for snowthrowers (down $31.0 million), a decline of 50.0%. This
decline was due to the carryover of excess inventories from the prior season by
our customers and retailers, as well as conservative buying patterns by those
same customers as we enter the current selling season. The remaining decreases
in the Engine & Power Train Group were spread across multiple product lines.
Despite the decline in sales volume, the Engine & Power Train business recorded
an operating profit of $0.1 million for the third quarter of 2007, compared to a
loss of $9.2 million during the same period a
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
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FINANCIAL CONDITION AND RESULTS OF OPERATIONS
year ago. Productivity, purchasing and other improvements accounted for $15.1
million of the favorable results. As well, losses associated with TMT Motoco of
$6.9 million in the third quarter of 2006 were not repeated in 2007. In
addition, while $5.5 million in fees were paid to AlixPartners in the third
quarter of 2006, no such expense was recorded in the same period of 2007. These
improvements to third quarter 2007 results were offset by the impact of volume
declines of $18.2 million.
Nine Months Ended September 30, 2007 vs. Nine Months Ended September 30, 2006
NINE MONTHS ENDED SEPTEMBER 30,
(dollars in millions) 2007 % 2006 %
-------- ----- -------- -----
Net sales $1,043.2 100.0% $1,004.6 100.0%
Cost of sales 953.6 91.4% 953.9 95.0%
Selling and administrative expenses 97.1 9.3% 103.8 10.3%
Impairments, restructuring charges, and other items 25.3 2.4% 11.6 1.1%
-------- --------
Operating loss (32.8) (3.1%) (64.7) (6.4%)
Interest expense (25.5) 2.4% (16.8) 1.7%
Interest income and other, net 4.8 0.5% 10.6 1.0%
-------- --------
Loss from continuing operations before taxes (53.5) (5.1%) (70.9) (7.1%)
Tax benefit (6.3) (0.6%) (2.9) (0.3%)
-------- --------
Loss from continuing operations ($47.2) (4.5%) ($68.0) (6.8%)
======== ========
Consolidated net sales from continuing operations in the first nine months of
2007 increased to $1,043.2 million from $1,004.6 million in 2006. Excluding the
increase in sales due to the effects of currency fluctuation of $53.5 million,
sales for the first three quarters of 2007 decreased by $14.9 million or 1.5%.
Sales increases of $109.1 million attributable to the Compressor segment were
offset by a decline of $71.7 million in sales in the Engine & Power Train
segment. The remaining increase of $1.2 million was attributable to businesses
that are not associated with our reportable business segments.
Cost of sales was $953.6 million in the nine months ended September 30, 2007, as
compared to $953.9 million in the nine months ended September 30, 2006. As a
percentage of net sales, cost of sales was 91.4% and 95.0% in the first nine
months of 2007 and 2006, respectively. Productivity and purchasing improvements
contributed favorably to 2007 results; however, these favorable results were
offset by unfavorable foreign currency rates and higher commodity costs.
Selling and administrative expenses were $97.1 million in the nine months ended
September 30, 2007, as compared to $103.8 million in the nine months ended
September 30, 2006. As a percentage of net sales, selling and administrative
expenses were 9.3% and 10.3% in the first nine months of 2007 and 2006,
respectively. Cost reductions were primarily attributable to reduced salary and
wage expense as a result of lower headcounts when compared to the same period of
2006.
Expense of $25.3 million was recorded in impairments, restructuring charges and
other items in the nine months ended September 30, 2007, compared to expense of
$11.6 million in the nine months ended September 30, 2006. In light of the
agreement signed on October 22, 2007 to sell the assets of our Engine & Power
Train business segment to Platinum Equity LLC, we performed an interim analysis
of the fair value of the assets of the business unit at September 30, 2007. We
utilized the final
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FINANCIAL CONDITION AND RESULTS OF OPERATIONS
purchase price agreed upon with Platinum as our indication of the fair market
valuation of the business. As a result, we impaired the long-term assets of the
business segment by $28.1 million. In contrast, 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 $8.9 million in the second and third
quarters of 2007. We also recorded $5.7 million in obsolescence charges in the
second quarter 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, The remaining charges primarily related to reductions in force
executed during the second quarter across several of our business units.
During the third quarter of 2006, we incurred asset impairment and restructuring
charges of $8.4 million related to the Engine & Power Train business for the
write-down of assets that had become idled as part of the segment's overall
restructuring program, and $2.3 million for the consolidation of transmission
production into a single U.S. facility. First quarter 2006 charges amounted to
$0.6 million and were the result of the continuation of previously announced
programs.
Interest expense amounted to $25.5 million in the first nine months of 2007
compared to $16.8 million in the first nine months of 2006. The increase was
primarily related to higher average interest rates associated with our current
borrowing arrangements as compared to the same period in 2006.
Interest income and other, net was $4.8 million in the first nine months of 2007
compared to $10.6 million in the first nine months of 2006. In 2006, we
recognized a gain of $3.6 million ($2.6 million net of tax or $0.14 per share)
on the sale of our interest in Kulthorn Kirby Public Company Limited, a
manufacturer of compressors based in Thailand during the first quarter. The sale
of the stock was completed in conjunction with the end of a licensing agreement
between the Company's Compressor operations and Kulthorn Kirby. The remainder of
the decrease in 2007 was due to lower interest income on lower cash balances.
The consolidated statement of operations reflects a $6.3 million income tax
benefit for the first nine months of 2007 and a $2.9 million income tax benefit
for the first nine months of 2006. Income taxes are recorded pursuant to SFAS
No. 109, "Accounting for Income Taxes." The first nine months of 2007 reflects a
tax benefit in both continuing and discontinued operations, and a tax expense in
OCI. The first nine months of 2006 reflects a tax benefit in the statement of
operations and tax expense in OCI and discontinued operations.
The $6.3 million tax benefit in the nine months ended September 30, 2007
included a U.S. Federal tax benefit of $11.6 million in continuing operations,
and a foreign tax expense of $2.8 million ($5.6 million in foreign taxes less
the $2.8 million reversal of the European valuation allowance). in addition,
since we pay taxes in various states there was also $0.3 million in expense
recorded in the U.S. that was related to separate company state tax liabilities.
As well, as a result of the MBT enactment described above, we recorded a
one-time income tax expense of approximately $2.2 million in the quarter ended
September 30, 2007.
At September 30, 2007 and December 31, 2006, full valuation allowances are
recorded for net operating loss carryovers for those tax jurisdictions in which
the Company believes it is not more likely than not that the deferred taxes will
be realized.
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
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FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The net loss from continuing operations in the first nine months of 2007 was
$47.2 million ($2.55 per share) as compared to a net loss of $68.0 million
($3.68 per share) in the first nine months of 2006. The change was primarily the
result of the factors described above.
Compressor Products
Compressor business sales in the first nine months of 2007 increased to $864.7
million from $755.6 million in the first nine months of 2006. Excluding the
increase in sales due to the effects of foreign currency translation of $53.5
million, sales increased by 7.4% in the first nine months of 2007. Sales
increases in this segment were led by the commercial product lines (up $52.7
million), an increase of 15.1%. Sales increases were also reported in
refrigeration and freezer product lines (up $46.4 million or 17.2%), while
residential air conditioning declined (down $5.8 million or 5.7%). The majority
of the increases were attributable to pricing advances and foreign currency
translation. In the aggregate, the remainder of the compressor product lines
increased by $15.8 million.
Operating income for the nine months ended September 30, 2007 amounted to $28.4
million compared to operating loss of $3.7 million for the first nine months of
2006. The higher operating income was attributable to price advances and volume
impacts ($62.0 million) and productivity, purchasing, and other improvements
($20.8 million). These improvements were offset by unfavorable currency exchange
impacts ($35.2 million) and higher commodity costs ($15.5 million). Through the
first nine months of 2007, the Brazilian Real was on average 8.7% stronger
against the U.S. Dollar compared to the same period in 2006, and the average
price of copper increased by 7.5% over the same period.
Engine & Power Train Products
Engine & Power Train sales through the first nine months of 2007 amounted to
$165.9 million compared to $237.6 million in the same period of 2006. The
decline in sales for the first nine months of the year was primarily due to the
lower sales of $38.4 million or 48.9% in engines for snowthrowers. This decline
was 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. Sales of engines for walk behind and riding
mowers declined by $19.3 million or 23.1% when compared to the first nine months
of 2006. Reductions in both walk behind and riding mower engines were a result
of our disruption in supply from TMT Motoco in Brazil, as customers sought
alternative supply sources. Engines for generators were also down by $10.3
million, a decline of 70.5%, due to lack of significant hurricane or other storm
activity in recent months. The remaining decreases in the Engine & Power Train
Group were spread across multiple product lines.
For the first nine months of 2007, the business incurred an operating loss of
$16.4 million compared to an operating loss of $38.9 million in 2006.
Productivity, purchasing, and other improvements of $25.8 million contributed to
the favorable result; in addition, fees paid to AlixPartners for their
assistance in implementing restructuring efforts were reduced by $18.8 million
year-on-year. As well, losses associated with TMT Motoco of $8.8 million through
three quarters of 2006 were not repeated in 2007. These improvements were offset
by the effect of volume declines and pricing impacts of $27.4 million. In
addition, a gain of $3.5 million was recorded in the first nine months of 2006
on the sale of our facility in Douglas, Georgia, whereas no similar gain was
realized in 2007.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OTHER MATTERS
Environmental Matters
We are subject to various federal, state and local laws relating to the
protection of the environment and are actively involved in various stages of
investigation or remediation for sites where contamination has been alleged.
(See Note 11 to the financial statements.) Liabilities relating to probable
remediation activities are recorded when the costs of such activities can be
reasonably estimated based on the facts and circumstances currently known.
Difficulties exist estimating the future timing and ultimate costs to be
incurred due to uncertainties regarding the status of laws, regulations, levels
of required remediation, changes in remediation technology and information
available.
We had accrued $3.0 million and $3.3 million at September 30, 2007 and December
31, 2006, respectively, for environmental remediation. As these matters continue
toward final resolution, amounts in excess of those already provided may be
necessary to discharge our obligations for these sites. Such amounts, depending
on their amount and timing, could be material to reported net income in the
particular quarter or period in which they are recorded. In addition, the
ultimate resolution of these matters, either individually or in the aggregate,
could be material to the consolidated financial statements.
Management Changes
On August 1, 2007, we announced the appointment of Edwin "Ed" L. Buker as our
permanent Chief Executive Officer. Mr. Buker's appointment was effective on
August 13, 2007. The principal terms of our employment agreement with Mr. Buker
were disclosed in a Current Report on Form 8-K that we filed on August 6, 2007.
Given that a significant portion of Mr. Buker's compensation will be based upon
performance objectives, we cannot say with certainty whether his compensation
costs will be greater than or less than fees paid to AlixPartners during the
tenure of Mr. James Bonsall as our principal executive officer.
LIQUIDITY AND CAPITAL RESOURCES
Our primary liquidity needs are to fund capital expenditures, service
indebtedness, and support working capital requirements. Our principal sources of
liquidity are cash flows from operating activities, when available, and
borrowings under available credit facilities. A substantial portion of our
operating income can be generated by foreign operations. In those circumstances,
we are dependent on the earnings and cash flows of and the combination of
dividends, distributions and advances from our foreign operations to provide the
funds necessary to meet our obligations in each of our legal jurisdictions.
There are no significant restrictions on the ability of our subsidiaries to pay
dividends or make other distributions.
Cash Flow
For the first nine months of 2007, cash used by operations amounted to $24.5
million, reflecting a net loss of $182.2 million offset by adjustments to
working capital of $157.7 million. Accounts receivable decreased by $8.6 million
from the beginning of the year. This net decrease was the result of several
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
factors. The seasonality of the Company's sales patterns resulted in higher
sales in the third quarter of the year when compared to the fourth quarter of
2006. More specifically, sales in the last two months of the respective quarters
- - which is a primary driver of the accounts receivable balance - increased by
$39.2 million in the August 1 to September 30, 2007 period when compared to
November and December of 2006. However, an increase of $34.6 million in the
amount of discounted receivables across the two periods offset these higher
sales when comparing the net receivables balances. In addition, when evaluating
days to collection for outstanding receivables, there was an improvement of four
days to collection as of September 30, 2007 when compared to the end of 2006.
This decrease was driven by the Compressor segment, whose days sales outstanding
("DSO") decreased from 61 at the end of the year to 54 at September 30 (before
consideration for discounted accounts receivable at the segment's foreign
subsidiaries), due primarily to improved time for collection in North America
and Europe. The Engine & Power Train segment, however, increased its DSO, from
53 at the end of the year to 68 as of September 30. DSO trends at the Engine
Group were driven primarily by North America, increasing by 16 days when
compared to the end of 2006. The increase is related to sales of snowthrower
engines; extended terms are provided to those customers to accommodate their
cash flow requirements, by allowing adequate lead time for purchase of
snowthrower engines ahead of snowthrower sales to end customers. The net impact
of these fluctuations was a decrease in DSO from 60 days at the end of 2006 to
56 days at the end of the third quarter of 2007.
Inventories decreased by $49.8 million since the beginning of the year,
reflecting improvements in days inventory on hand at the Compressor (five days)
and Engine & Power Train (eight days) business segments. Decreases to accounts
payable and other accrued expenses and liabilities (down $32.0 million since
January 1, 2007) were also included in working capital adjustments. Most of the
remainder of the cash adjustments to working capital was due to the effects of
foreign currency translation.
In evaluating its balance sheet metrics, the Company considers the days sales
outstanding and days inventory on hand metrics to be more relevant when
comparing year-over-year periods than when comparing the current period to
year-end, as it removes any seasonality of our sales patterns from the
comparison. Average days sales outstanding were 56 days at September 30, 2007
versus 60 days at September 30, 2006, before giving effect to receivables sold.
Days inventory on hand were 71 days at September 30, 2007, down from 81 days at
September 30, 2006, due to improving management of inventory balances.
Cash provided by investing activities was $200.0 million in the first nine
months of 2007 versus cash provided by investing activities of $84.8 million for
the same period of 2006. $132.4 million in proceeds were received from the sale
of assets during 2006, while $205.9 million in proceeds were recorded in the
first nine months of 2007. Asset sales in 2007 included the sale of our
Residential & Commercial product lines for $199.0 in net proceeds, the sale of
an aircraft for $3.4 million, the sale of other fixed assets for $2.5 million,
and the sale of Manufacturing Data Systems, Inc. for $1.0 million. Included in
the 2006 sales was the sale of Little Giant Pump Company for $120.7 million, the
Company's 7% interest in Kulthorn Kirby Public Company Limited stock for $4.7
million and the sale of the Company's former Douglas, Georgia manufacturing
facility for $3.5 million. In addition, the Company acquired a small
Australian-based company in the first quarter of 2006, which owned patents
related to the manufacturing of certain types of electric motors, which were
applicable to both our Electrical Components and Compressor segments. The entire
purchase price was allocated to amortizable intangible assets, which were sold
as part of the divestiture of the Electrical Component business
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
operations in 2007. Capital expenditures were reduced by $39.7 million from the
prior year, from $45.6 million in 2006 to $5.9 million in 2007.
Cash used by financing activities was $201.8 million in the first nine months of
2007 as compared to a use of cash of $12.8 million in the same period of 2006.
During the third quarter of 2007, we used the proceeds from the sale of our
residential & commercial product lines to pay off the entire balance of our
Second Lien Credit Agreement and the majority of the balance under our First
Lien Credit Agreement. During the first quarter of 2006, the remaining
outstanding balances of our Senior Guaranteed Notes, Revolving Credit Facility
and Industrial Revenue Bonds were replaced by a new financing package that
included a $275 million First Lien Credit Agreement (later revised to $175
million) and a $100 million Second Lien Credit Agreement.
Capitalization
In addition to cash provided by operating activities when available, we use a
combination of our revolving credit arrangement under our First Lien Credit
Agreement and foreign bank debt to fund our capital expenditures and working
capital requirements. For the nine months ended September 30, 2007 and the full
year ended December 31, 2006, our average outstanding debt balance was $265.2
million (excluding debt for TMT Motoco) and $373.0 million, respectively. The
weighted average long-term interest rate, including the effect of hedging
activities, was 8.8% and 10.0% at September 30, 2007 and December 31, 2006,
respectively.
Accounts Receivable Sales
Certain of our Brazilian, Asian, and European subsidiaries periodically sell
their accounts receivable to financial institutions. Such receivables are
factored with recourse to us and are excluded from accounts receivable in our
consolidated balance sheets. The amount of sold receivables excluded from our
balance sheet was $81.1 million and $46.5 million as of September 30, 2007 and
December 31, 2006, respectively. We cannot provide any assurances that these
facilities will be available or utilized in the future.
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 third quarter of 2007 cash flows from
operations were negative and we had to rely on existing cash balances, proceeds
from credit facilities and asset sales to fund our needs.
Through the second quarter of 2007, our main domestic credit facilities were
provided under a $250 million First Lien Credit Agreement and a $100 million
Second Lien Credit Agreement. On August 27, 2007, we entered into an amendment
to our First Lien Credit Agreement, in anticipation of the closing of the sale
of the Residential & Commercial and Asia Pacific operations to Regal Beloit
Corporation. The principal terms of this amendment were described in a Current
Report on Form 8-K dated August 31, 2007, and the amendment is filed herein as
Exhibit 4.1. Among other things, the amendment deleted the minimum adjusted
EBITDA and fixed charge coverage covenants for the third and fourth quarters of
2007 and reduced the lenders' total commitment from $250 million to $175
million. The amendment also imposed a new covenant requiring us to maintain a
minimum of $50 million in credit availability; after giving effect to a $10
million availability reserve, we were in effect required to maintain
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
a minimum of $60 million of credit availability. Consistent with the terms of
the original First Lien Credit Agreement, the amendment provides for security
interests in substantially all of our assets, and places limits on additional
foreign borrowings and fees paid for professional services. We paid the first
lien lender fees totaling $425,000 in connection with the amendment. As of
September 30, 2007, the weighted average annual interest rate on our First Lien
credit agreement was 7.9%.
Under the terms of the First Lien Credit Agreement, as of September 30, 2007 we
had the capacity for additional borrowings under the borrowing base formula of
$114.9 million ($25.2 million in the U.S. and $89.7 million in foreign
jurisdictions). The First Lien Credit Agreement expires in November, 2009.
On August 31, 2007, we paid off the entire balance associated with our Second
Lien Credit Agreement, effective with the closing of the sale of portions of our
Electrical Components business segment as referenced above. Net proceeds of this
sale transaction at closing were approximately $199 million. The proceeds were
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 $93.6 million, was utilized to reduce the
outstanding balance on our First Lien debt.
On November 8, 2007 we entered into an additional amendment to modify our First
Lien Credit Agreement, in anticipation of the closing of the sale transaction of
the Engine & Power Train business. The amendment is filed herein as Exhibit 4.2.
The principal terms of the amendment reduced the covenant requiring us to
maintain minimum levels of availability under the line of credit to $30 million,
and reduced the total facility size to $75 million. As a result, after
completion of the transaction, we had cash balances in the U.S. of $21.6
million, and U.S availability under our First Lien Credit Agreement of
approximately $19.8 million. We paid the First Lien lender fees totaling $36,000
in connection with the amendment.
In addition, we have various borrowing arrangements at our foreign subsidiaries
to support working capital needs and government sponsored borrowings that
provide advantageous lending rates. During the quarter, we had net repayments on
these arrangements totaling $16.1 million. Our weighted average interest rate
for all borrowings, including foreign borrowings, was 8.8% at September 30,
2007.
Although our Second Lien debt has been eliminated, the former lender still
possesses 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 in April of 2012. Based on the terms of
the warrant, the exercise price is currently calculated at $6.05 per share. The
final exercise price could be lower if the closing price of our common stock
drops below $9.31 per share on or before March 27, 2008. The costs associated
with this warrant, while originally accounted for as additional interest to be
expensed over the remaining terms of the credit agreement, were accelerated upon
full repayment of the debt, and resulted in expense of $6.2 million in the third
quarter of 2007, which is included in the loss from discontinued operations.
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. We paid $625,000 in
fees, plus expenses, to the First Lien lender on April 9, 2007 upon execution of
the April 9 amendment, and fees of $750,000, plus expenses, to the Second Lien
lender.
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In accordance with the amendments discussed above, we are currently in
compliance with the covenants of our domestic debt agreement. After giving
effect to the sale transactions and the negative impacts of continued
unfavorable currency movements, we do not expect to be in compliance with the
fixed charge covenant of our First Lien credit agreement at March 31, 2008.
However, we do not expect to have any amounts outstanding under the agreement at
that time. In anticipation of this condition, we are pursuing a stand-by credit
facility under a new collateralized arrangement, although we would not expect to
require any outstanding borrowings under that arrangement to fund current
operations.
As a result of the judicial restructuring, all the debt associated with TMT
Motoco ($96.1 million) has been removed from our Consolidated Balance Sheet at
September 30, 2007. After giving effect to this reclassification, as well as the
amendments to the First and Second Lien agreements, our payments by period as of
September 30, 2007 for our long-term contractual obligations are as follows:
Payments by Period (in millions)
--------------------------------------
Less than
Total 1 Year 1-3 Years Other
------ --------- --------- -----
Debt Obligations $103.3 $68.6 $34.7 --
Interest Payments on Debt (1) 27.3 9.1 18.2 --
Other Long-Term Obligations(2) 1.0 0.6 -- 0.4
- - (1) Debt levels are assumed to remain constant. Interest rate debt
obligations are assumed to remain constant at the current weighted
average rate of 8.8%.
- - (2) Other long-term obligations included in the above table consist solely
of reserves for uncertain tax positions recognized under FIN 48.
SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES
Some of our accounting policies require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. These estimates and
assumptions are subject to an inherent degree of uncertainty. They are based on
our historical experience, the terms of existing contracts, our evaluation of
trends in the industry, information provided by our customers and suppliers, and
information available from other outside sources, as appropriate. Actual results
in these areas could differ from our estimates. For a discussion of our
significant accounting policies and critical accounting estimates, see Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Significant Accounting Policies and Critical Accounting
Estimates," and Note 1, "Accounting Policies," to the consolidated financial
statements included in our Annual Report on Form 10-K for the year ended
December 31, 2006.
In addition to the significant accounting policies described in our Annual
Report on Form 10-K for the period ended December 31, 2006, we adopted FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
Interpretation of FASB Statement No. 109" (FIN 48) on January 1, 2007. FIN 48
clarifies the accounting and reporting for uncertainties in income tax law. This
interpretation prescribes
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
a comprehensive model for the financial statement recognition, measurement,
presentation and disclosure of uncertain tax positions taken or expected to be
taken in income tax returns.
As a result of adopting FIN 48, an increase in tax reserves and a decrease of
retained earnings of $0.4 million was recorded. Upon adoption, the liability for
income taxes associated with uncertain tax positions at January 1, 2007 was $3.0
million. In addition, consistent with the provisions of FIN 48, we reclassified
$1.8 million of income tax liabilities from current to non-current income taxes,
because payment of cash is not anticipated within one year of the balance sheet
date. At September 30, 2007, the amount of gross unrecognized tax benefits, and
therefore the amount that would favorably affect the effective income tax rate
in future periods, was $3.0 million.
Interest and penalties related to income tax liabilities are included in income
tax expense. The balance of accrued interest and penalties recorded in the
Consolidated Balance Sheet at January 1, 2007 was $1.1 million; of this amount,
$0.7 million was reclassified from current to non-current liabilities upon
adoption of FIN 48. Accrued interest and penalties for the three and nine months
ended September 30, 2007 were reduced by $0.7 million and $0.9 million,
respectively. The impact of FIN 48 for the first nine months of 2007 was a
benefit of $1.8 million.
At September 30, 2007, we anticipate a decrease in the total amount of
unrecognized tax benefits within the next twelve months of approximately $0.6
million.
Recently Issued Accounting Pronouncements
Fair Value Measurements
In September 2006, the FASB issued Statement No. 157, "Fair Value Measurements"
("SFAS 157"), to provide enhanced guidance for using fair value to measure
assets and liabilities. The Standard also expands disclosure requirements for
assets and liabilities measured at fair value, how fair value is determined, and
the effect of fair value measurements on earnings. The Standard applies whenever
other authoritative literature requires (or permits) certain assets or
liabilities to be measured at fair value, but does not expand the use of fair
value. SFAS 157 is effective beginning January 1, 2008, and we are currently
evaluating the impact of this pronouncement on our consolidated financial
statements.
Fair Value Option for Financial Assets and Financial Liabilities
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 permits
entities to choose to measure financial assets and liabilities (except for those
that are specifically exempted from SFAS 159) at fair value. The election to
measure a financial asset or liability at fair value can be made on an
instrument-by-instrument basis and is irrevocable. The difference between
carrying value and fair value at the election date is recorded as a transition
adjustment to opening retained earnings. Subsequent changes in fair value are
recognized in earnings. SFAS 159 is effective for fiscal years beginning after
November 15, 2007. At this time, we do not intend to adopt SFAS 159.
OUTLOOK
Information in this "Outlook" section should be read in conjunction with the
cautionary language and discussion of risks included below.
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The outlook for the fourth quarter of 2007 is subject to the same variables that
have negatively impacted us throughout 2006 and the first nine months 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; in fact, as we complete our transition from a diversified
manufacturer to a compressor business, we expect our business to become more
sensitive to key risks, particularly commodity pricing and currency exchange
rates. Certain key commodities, including copper and aluminum, continue to trade
at elevated levels compared to recent history. From January 1, 2006 through
October 31, 2007, the price of aluminum increased approximately 7.8%, and the
price of copper increased 60.4% in the same time frame. In the first nine months
of 2007 alone, copper prices escalated by 27.2%. 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 strengthened 25.5% against the U.S. dollar from January 1,
2006 to October 31, 2007. From July 1 through September 30, 2007, the Real
strengthened by 4.7%. Recently, we have also been unfavorably affected by the
strengthening of the Indian Rupee, which strengthened by 8.0% in the second and
third quarters 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 $19.8 million during the first
nine months when compared to our 2007 plan.
As a result, we expect the operating results of our compressor business to be
slightly unfavorable in the fourth quarter of 2007 when compared to the results
of the comparable 2006 period. Improvements in our North American Compressor
operations, primarily due to higher sales volumes and overhead cost
improvements, will be offset by lower results in Brazil that are attributable to
the stronger Real.
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. 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 the remainder of 2007 and forward.
As a result of the sale of portions of the Electrical Components business
segment as well as the Engine & Power Train business, and the impending sale of
the Automotive & Specialty business operations, we completely eliminated our
domestic debt as of November 9, 2007. As a result, we expect our consolidated
interest expense in the future to be substantially reduced. Based on the amount
of domestic debt we held prior to the sale of businesses, we expect that its
elimination will reduce our annualized interest expense by approximately $22
million. However, challenges will remain with respect to our ability to maintain
appropriate levels of liquidity, particularly those driven by currency exchange
and commodity pricing as discussed above. With expected further weakness of the
U.S. dollar versus key currencies such as the Brazilian Real, we expect that we
will generate a limited
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
amount of cash until further restructuring activities are implemented, or
economic conditions improve. As part of our strategy to maintain sufficient
liquidity, we are currently negotiating a new financing arrangement for our
North American based activities, and seeking longer term committed financing
arrangements in Brazil. In addition, we are generating other sources of cash
through various activities as noted below.
We are also engaged in the process of re-evaluating our corporate infrastructure
in relation to the level of business activity that remains after our
restructuring programs are completed. Such actions could result in further
restructuring and/or asset impairment charges in the foreseeable future, and,
accordingly, could have a significant effect on our consolidated financial
position and future operating results.
We are 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 improve our
liquidity. With respect to idle assets, we expect to realize proceeds of
approximately $12 million, which we expect to receive in full by the second
quarter of 2008.
We recently announced our intent to close one of our U.S. operating facilities,
located in Tecumseh, Michigan. The costs associated with this closure will be
dependent on the outcome of negotiations with our union. The closure, once
completed, is expected to reduce annual costs by $5.6 million.
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 $13.0 million. Receipt of such proceeds is
dependent upon final resolution of these audits, estimated to occur within
approximately six 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. The pension reversion will
adversely affect the Company's results of operations due to the recognition of
the cost of the termination, estimated to be $20 million, as well as a reduction
in net period income. The reduction in income, however, has been more than
mitigated by other actions taken to reduce the overall cost of benefits and due
to personnel reductions. Taking into account the cost of all retiree benefits,
both pensions and other post-retirement benefits, total expected income to be
recognized in 2008, other than curtailment gains and losses and excluding
potential changes in actuarial assumptions, is expected to be approximately $16
million versus $14 million in 2007.
As part of addressing the Company's liquidity needs, we have made substantially
lower levels of capital expenditures to date in 2007, and expect to continue
that trend throughout the remainder of the year. Capital expenditures in 2007
are projected to be approximately $54 million less than in 2006 and $105.3
million less than in 2005. Looking ahead, we expect capital expenditures in 2008
and beyond to remain at levels far less than historical averages, due to the
elimination of non-core businesses and due to a shift away from capital
intensive vertical integration to higher levels of outside sourcing of
components from suppliers located in low cost countries.
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENTS RELATING TO FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act that are subject to the safe harbor
provisions created by that Act. In addition, forward-looking statements may be
made orally in the future by or on behalf of us. Forward-looking statements can
be identified by the use of terms such as "expects," "should," "may,"
"believes," "anticipates," "will," and other future tense and forward-looking
terminology, or by the fact that they appear under the caption "Outlook."
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) our ability to maintain adequate liquidity in total and within
each foreign operation; ii) the success of our ongoing effort to bring costs in
line with projected production levels and product mix; iii) our success in
consummating the transaction for the sale of our Automotive & Specialty
business, or the timing for doing so; (iv) weather conditions affecting demand
for air conditioners; v) availability and cost of materials, particularly
commodities, including steel, copper and aluminum, whose cost can be subject to
significant variation; vi) financial market changes, including fluctuations in
interest rates and foreign currency exchange rates; vii) actions of competitors;
viii) changes in business conditions and the economy in general in both foreign
and domestic markets; ix) the effect of terrorist activity and armed conflict;
x) economic trend factors such as housing starts; xi) emerging governmental
regulations; xii) the ultimate cost of resolving environmental and legal
matters; xiii) our ability to profitably develop, manufacture and sell both new
and existing products; xiv) 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; xv) the extent of any business disruption caused by
work stoppages initiated by organized labor unions; xvi) potential political and
economic adversities that could adversely affect anticipated sales and
production in Brazil; xvii) potential political and economic adversities that
could adversely affect anticipated sales and production in India, including
potential military conflict with neighboring countries; xviii) the outcome of
the judicial restructuring of our Brazilian engine manufacturing subsidiary;
xix) increased or unexpected warranty claims; and xx) 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.
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to risk during the normal course of business from credit risk
associated with accounts receivable and from changes in interest rates,
commodity prices, and foreign currency exchange rates. The exposure to these
risks is managed through a combination of normal operating and financing
activities which include the use of derivative financial instruments in the form
of foreign currency forward exchange contracts and commodity forward purchasing
contracts. Fluctuations in commodity prices and foreign currency exchange rates
can be volatile, and our risk management activities do not totally eliminate
these risks. Consequently, these fluctuations can have a significant effect on
results. A discussion of our policies and procedures regarding the management of
market risk and the use of derivative financial instruments was provided in our
Annual Report on Form 10-K in Item 7A and in Notes 1 and 13 of the Notes to
Consolidated Financial Statements. We do not utilize financial instruments for
trading or other speculative purposes. There have been no changes in these
policies or procedures during the first nine months of 2007.
We are subject to foreign currency exchange exposure for operations whose assets
and liabilities are denominated in currencies other than U.S. Dollars. On a
normal basis, we do not attempt to hedge the foreign currency translation
fluctuations in the net investments in its foreign subsidiaries. We do, from
time to time, enter into short-term forward exchange contracts to sell or
purchase foreign currencies at specified rates based on estimated foreign
currency cash flows. Company policy allows management to hedge known receivables
or payables and forecasted cash flows up to a year in advance. It is our policy
not to purchase financial and/or derivative instruments for speculative
purposes. At September 30, 2007 and December 31, 2006, we held foreign currency
forward contracts with a total notional value of $98.4 million and $130.4
million, respectively. We have a particularly concentrated exposure to the
Brazilian Real. Based on our current level of activity, and excluding any
mitigation as the result of hedging activities, we believe that a strengthening
in the value of the Real of 0.10 per U.S. Dollar negatively impacts our
operating profit by approximately $10 million on an annual basis.
We use commodity forward purchasing contracts to help control the cost of traded
commodities, namely copper and aluminum, used as raw material in the production
of motors, electrical components and engines. Company policy allows management
to contract commodity forwards for a limited percentage of projected raw
material requirements up to fifteen months in advance. Commodity contracts at
most of the Company's divisions and subsidiaries are essentially purchase
contracts designed to fix the price of the commodities during the operating
cycle. Our practice has been to accept delivery of the commodities and consume
them in manufacturing activities. At September 30, 2007 and December 31, 2006,
the Company held a total notional value of $60.4 million and $62.1 million,
respectively, in commodity forward purchasing contracts. These contracts were
not recorded on the balance sheet as they did not require an initial cash outlay
and do not represent a liability until delivery of the commodities is accepted.
We are subject to interest rate risk, primarily associated with our borrowings
of $103.3 million at September 30, 2007. Our $175 million First Lien Credit
Agreement is variable-rate debt. Our remaining borrowings consist of
variable-rate borrowings by our foreign subsidiaries. While changes in interest
rates do not affect the fair value of our variable-interest rate debt, they do
affect future earnings and cash flows. A 1% increase in interest rates would
increase interest expense for the year by approximately $1.0 million.
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 4
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the reports that we file or submit under
the Securities Exchange Act of 1934 is recorded, processed, summarized, and
reported within the time periods specified in the SEC's rules and forms, and
that such information is accumulated and communicated to our management,
including our President and Chief Executive Officer and Vice President,
Treasurer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
As of the end of the fiscal quarter covered by this report, we carried out an
evaluation, under the supervision and with the participation of our Disclosure
Committee and management, including the President and Chief Executive Officer
and our Vice President, Treasurer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-15. Based upon such evaluation, our
President and Chief Executive Officer along with our Vice President, Treasurer
and Chief Financial Officer have concluded that our disclosure controls and
procedures were effective at the reasonable assurance level as of September 30,
2007.
As outlined in management's annual report as of December 31, 2006, the Company
did not maintain effective controls over the completeness and accuracy of
interim income taxes. Specifically, the Company did not maintain effective
controls to ensure the completeness and accuracy of (i) state income tax expense
associated with a division accounted for as a discontinued operation in 2006,
(ii) the effective tax rates applied to foreign operations, and (iii) the
allocation of federal income tax expense between continuing and discontinued
operations. This control deficiency resulted in the restatement of the Company's
2005 quarterly consolidated financial statements, the consolidated financial
statements for the first and second quarters of 2006 and adjustments to the
consolidated financial statements for the third quarter of 2006, affecting
accrued liabilities, tax expense (benefit), and income from discontinued
operations, net of tax. Additionally, this control deficiency could have
resulted in a misstatement of the aforementioned accounts that would result in a
material misstatement of the Company's interim and annual consolidated financial
statements that would not be prevented or detected. Accordingly, management
determined that as of December 31, 2006, this control deficiency represented a
material weakness.
Management believes that this material weakness has been remediated as of
September 30, 2007. We have corrected our methodologies to comply with generally
accepted accounting principles. We have also instituted additional review
procedures relating to these processes that include additional management
reviews and review by our outside tax advisors prior to the finalization of the
income tax provision for the period. However, management has not yet completed
testing of its updated procedures.
Changes In Internal Control Over Financial Reporting
As noted above, management believes that the material weakness that existed as
of December 31, 2006 related to the calculation of interim period income taxes
has been remediated. During the three months ended September 30, 2007, there
have been no other changes that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
Page 43
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 4
CONTROLS AND PROCEDURES
Limitations On The Effectiveness Of Controls And Procedures
Management of the Company, including the Chief Executive Officer and Chief
Financial Officer, does not expect that our disclosure controls and procedures
or internal control over financial reporting will detect or prevent all error
and all fraud. A control system, no matter how well designed and implemented,
can provide only reasonable, not absolute, assurance that the control system's
objective will be met. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues within a company are detected.
In addition, projection of any evaluation of the effectiveness of internal
control over financial reporting to future periods is subject to the risk that
controls may become inadequate because of changes in condition, or that the
degree of compliance with policies and procedures included in such controls may
deteriorate.
Page 44
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
- On November 8, 2007, we entered into an amendment to our domestic
first lien credit agreement. We entered into the amendment in
anticipation of closing the previously announced sale of our Engine &
Power Train business operations. The principal terms of the amendment
reduced the minimum availability covenant to $30 million, and reduced
the total facility size to $75 million. The amendment is filed herein
as Exhibit 4.2. We paid the first lien lenders fees totaling $36,000
in connection with the amendment.
- On November 9, 2007, we completed our previously announced sale
transaction with Platinum Equity, LLC ("Platinum"), selling Platinum
our Engine & Power Train business operations for $51 million in cash.
The purchase agreement is filed herewith as Exhibit 10.1. We used the
proceeds of the transaction to pay in full the outstanding debt
associated with our first lien credit agreement.
ITEM 6. EXHIBITS
(a) Exhibit
Number Description
------- -----------
4.1 Amendment No. 6 to First Lien Credit Agreement dated as of August
27, 2007 by and among Tecumseh Products Company, certain Lenders
and Issuers listed therein, and Citicorp USA, Inc. as
Administrative Agent and Collateral Agent
4.2 Amendment No. 7 to First Lien Credit Agreement dated as of
November 8, 2007 by and among Tecumseh Products Company, certain
Lenders and Issuers listed therein, and Citicorp USA, Inc. as
Administrative Agent and Collateral Agent
10.1 Purchase Agreement dated as of October 22, 2007 by and between
Snowstorm Acquisition Corporation and Tecumseh Products Company.
(NOTE: Schedules, annexes, and exhibits are omitted. The
registrant agrees to furnish supplementally a copy of any omitted
schedule, annex, or exhibit to the Securities and Exchange
Commission upon request.)
31.1 Certification of the President and Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the President and Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
Page 45
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TECUMSEH PRODUCTS COMPANY
(Registrant)
Dated: November 14, 2007 BY: /s/ JAMES S. NICHOLSON
------------------------------------
James S. Nicholson
Vice President, Treasurer and
Chief Financial Officer (on behalf
of the Registrant and as principal
financial officer)
Page 46