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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2007
Commission File Number 0-452
TECUMSEH PRODUCTS COMPANY
(Exact Name of Registrant as Specified in its Charter)
Michigan 38-1093240
(State of Incorporation) (I.R.S. Employer Identification No.)
100 East Patterson Street
Tecumseh, Michigan 49286
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (517) 423-8411
Securities Registered Pursuant to Securities Registered Pursuant to
Section 12(b) of the Act: Section 12(g) of the Act: None
Name of Each Exchange
Title of Each Class on Which Registered
- ------------------------------------- ---------------------------
Class B Common Stock, $1.00 Par Value The Nasdaq Stock Market LLC
Class A Common Stock, $1.00 Par Value The Nasdaq Stock Market LLC
Class B Common Stock Purchase Rights The Nasdaq Stock Market LLC
Class A Common Stock Purchase Rights The Nasdaq Stock Market LLC
Indicate by check mark if the Registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the Registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark if the Registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of "large accelerated filer," "accelerated filer," and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Smaller reporting company [ ]
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes [ ] No [X]
Certain shareholders, which, as of June 30, 2007, held an aggregate of 790,088
shares of Registrant's Class A Common Stock and 2,216,244 shares of its Class B
Common Stock might be regarded as "affiliates" of Registrant as that word is
defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended. If
such persons are "affiliates," the aggregate market value as of June 30, 2007
(based on the closing prices of $15.71 per Class A share and $14.86 per Class B
share, as reported on the Nasdaq Stock Market on such date) of 12,611,850 Class
A shares and 2,861,502 Class B shares held by non-affiliates was $240,654,083.
Numbers of shares outstanding of each of the Registrant's classes of Common
Stock at February 22, 2008:
Class B Common Stock, $1.00 Par Value: 5,077,746
Class A Common Stock, $1.00 Par Value: 13,401,938
Certain information in the definitive proxy statement to be used in connection
with the Registrant's 2008 Annual Meeting of Shareholders has been incorporated
herein by reference in Part III hereof.
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TABLE OF CONTENTS
Page
PART I
Item 1. Business......................................................................................... 5
Item 1A. Risk Factors..................................................................................... 11
Item 1B. Unresolved Staff Comments........................................................................ 15
Item 2. Properties....................................................................................... 15
Item 3. Legal Proceedings................................................................................ 15
Item 4. Submission of Matters to a Vote of Security Holders.............................................. 17
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities............................................................................. 18
Item 6. Selected Financial Data.......................................................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............ 20
Item 7A. Quantitative and Qualitative Disclosures About Market Risk....................................... 41
Item 8. Financial Statements and Supplementary Data...................................................... 46
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............. 85
Item 9A. Controls and Procedures.......................................................................... 85
Item 9B. Other Information................................................................................ 87
PART III
Item 10. Directors and Executive Officers of the Company.................................................. 89
Item 11. Executive Compensation........................................................................... 89
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters... 89
Item 13. Certain Relationships and Related Transactions, and Director Independence........................ 89
Item 14. Principal Accountant Fees and Services .......................................................... 89
PART IV
Item 15. Exhibits and Financial Statement Schedules....................................................... 90
Signatures................................................................................................... 98
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PART I
ITEM 1. BUSINESS
GENERAL
Tecumseh Products Company (the "Company") is a full-line, independent, global
manufacturer of hermetically sealed compressors for residential and commercial
refrigerators, freezers, water coolers, dehumidifiers, window air conditioning
units and residential and commercial central system air conditioners and heat
pumps. We believe we are one of the world's largest independent producers of
hermetically sealed compressors. Our products are sold in countries all around
the world.
Our compressor products include a broad range of air conditioning and
refrigeration compressors, as well as condensing units and complete
refrigeration systems. Our compressor products range from fractional horsepower
models used in small refrigerators and dehumidifiers to large compressors used
in unitary air conditioning applications. We sell compressors that are used in
four types of product lines: (i) commercial refrigeration applications including
freezers, dehumidifiers, display cases and vending machines; (ii) household
refrigerators and freezers; (iii) commercial and residential unitary central air
conditioning systems; and (iv) room air conditioners. We sell compressors to
original equipment manufacturers ("OEMs") and aftermarket distributors.
We formerly operated an Engine & Power Train Electrical Component business, as
well as an Electrical Component business. During 2007, we sold our entire Engine
& Power Train business, and the majority of the Electrical Component business.
The remaining portions of the Electrical Component business are classified as
held for sale.
The Company is a Michigan corporation organized in 1930.
FOREIGN OPERATIONS AND SALES
International sales and manufacturing are extremely important to our business as
a whole. In 2007, sales from continuing operations to customers outside the
United States represented approximately 80% of total consolidated net sales.
Products sold within and outside the United States are manufactured in locations
throughout the world including Brazil, France, India and Malaysia.
Our dependence on sales in foreign countries entails certain commercial and
political risks, including currency fluctuations, unstable economic or political
conditions in some areas and the possibility of U.S. government embargoes on
sales to certain countries. Our foreign manufacturing operations are subject to
other risks as well, 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. These considerations are especially significant in the context of
our Brazilian operations, given the importance of Tecumseh do Brasil's
performance to our total operating results.
COMPRESSOR PRODUCT LINES
A compressor is a device that compresses a refrigerant gas. When the gas is
later permitted to expand, it absorbs and transfers heat, producing a cooling
effect, which forms the basis for a wide variety of refrigeration and air
conditioning products. All of the compressors we produce are hermetically
sealed. Our current compressor line consists primarily of reciprocating and
rotary designs; in addition, we have recently introduced a growing line of
scroll models.
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We manufacture and sell compressor and refrigeration systems that are used in
four types of end products throughout the world - (i) commercial refrigeration
applications including freezers, dehumidifiers, display cases and vending
machines; (ii) household refrigerators and freezers; (iii) commercial and
residential unitary central air conditioning systems; and (iv) room air
conditioners. Our lines of compressors range in size from approximately 5,000 -
72,000 BTU/hour models used in stationary and mobile air conditioning
applications to 350 - 1,500 BTU/hour models used in household
refrigerators/freezers, along with 200 to 72,000 BTU/hour models for commercial
refrigeration applications, such as ice makers, vending machines, food service
equipment, display cases and refrigerated walk-in cold rooms.
We produce reciprocating compressors in the 200 - 72,000 BTU/hour for all
temperature ranges. We produce rotary compressors ranging from 5,000 to 32,000
BTU/hour for room and mobile air conditioning applications, as well as certain
commercial refrigeration applications. Rotary compressors generally provide
increased operating efficiency, lower equipment space requirements, and reduced
sound levels when compared to reciprocating piston models.
We have also started offering customers our scroll compressor and condensing
units utilizing scroll compressors especially designed for demanding commercial
refrigeration applications. The addition of scroll compressors to our product
portfolio provides greater versatility and options to our customers in a wider
range of applications and performance conditions. We are offering the scroll
compressor in the aftermarket product lines of the business, and are providing
samples to original equipment manufacturers.
We also produce value-added sub-assemblies and complete refrigeration systems
that utilize our compressors as components. Such products include indoor and
outdoor condensing units, and multi-cell units and complete refrigeration
systems that use both single speed and variable speed AC/DC powered compressors.
These products are sold to both OEM and aftermarket distributors.
MANUFACTURING OPERATIONS
We manufacture our products from facilities located in the United States,
Canada, Brazil, France, India and Malaysia. In addition, we have a joint venture
in China. Of our foreign manufacturing sources, our Brazilian compressor
subsidiary is the largest. It operates two manufacturing facilities producing
the Company's broadest product offerings, with an installed capacity of
approximately 17 million compressors. Products produced in Brazil are sold
throughout the world. Significant devaluations of the Brazilian Real in 1999 and
2002 set the stage for these operations to better compete in foreign markets,
resulting in approximately 59%, 66%, and 66% of its production being exported in
2007, 2006 and 2005, respectively. However, from the beginning of 2007 to the
end of 2007 the Brazilian Real appreciated against the U.S. Dollar by 17.2%, and
since the beginning of 2006 the Real has strengthened by 24.3%. This
strengthening of the Real has continued over more than a five year period, and
represents a significant departure from historical devaluation trends.
We also continue to manufacture products in North America in facilities in
Tupelo, Mississippi and Ontario, Canada. However, over the past several years we
have been consolidating the number of facilities operated in North America due
to both cost competitiveness with low cost countries as well as the relocation
of our customers' operations to low cost countries. During 2008 we will complete
the closure of two additional facilities in the United States, leaving just one
remaining facility in Tupelo, Mississippi. Installed capacity in Tupelo is
approximately 6 million compressors.
The Company also currently operates four manufacturing facilities in France.
Like North America, the Company is actively restructuring these operations,
through consolidation into fewer facilities
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and by moving production to lower cost countries. During 2008 we expect to cease
production in one of these facilities. These facilities have aggregate capacity
of 5 million units.
The Company operates two manufacturing facilities in India with a current total
capacity of 4 million units. However, given the current cost structure of our
Indian production and the potential growth of the Indian market, we are
expanding production capacity in India.
Our compressor manufacturing operations are vertically integrated and we
manufacture a significant portion of our component needs internally, including
electric motors and metal stampings. Raw materials are purchased from a variety
of non-affiliated suppliers. We utilize multiple sources of supply and the
required raw materials and components are generally available in sufficient
quantities, although the costs of commodity raw materials have increased
substantially in recent years and are expected to remain volatile in the future.
Given changes in relative currency values versus the dollar and the ability to
source components more cheaply we expect that we will be decreasing the amount
of vertical integration over the next several years. These actions may involve
the recognition of impairments and other costs as such plans are adopted.
SALES AND MARKETING
We market our North American, Brazilian and Indian built compressors under the
"Tecumseh" brand and French built compressors under the "L'Unite Hermetique by
Tecumseh" brand. Other brands under which we market include "SILENSYS by
Tecumseh" and VECTOR by Tecumseh." We sell our compressor products in North
America primarily through our own sales staff, although sales to aftermarket
customers are also made through independent sales representatives. In certain
foreign markets, we also use local independent sales representatives and
distributors.
A substantial portion of our sales of compressor products for room air
conditioners and for household refrigerators and freezers are to OEMs. Sales of
compressor products for unitary central air conditioning systems and commercial
refrigeration applications also include substantial sales to both OEM and
distributor customers.
We have over 1,200 customers for compressor products, the most significant of
which are customers for commercial compressor products. In 2007, the two largest
customers for compressor products accounted for 7.9% and 6.0%, respectively, of
consolidated net sales. Loss of either of these customers could have a material
adverse effect on our results of operations. Generally, we do not enter into
long-term contracts with our customers. However, we do pursue long-term
agreements with selected major customers where a business relationship has
existed for a substantial period of time.
COMPETITION
All of the compressor markets in which we operate are highly competitive.
Participants compete on the basis of delivery, efficiency, noise level, price
and reliability. We compete not only with other independent compressor producers
but also with manufacturers of end products that have internal compressor
manufacturing operations.
North American Markets
The domestic unitary air conditioning compressor market consists of OEMs and a
significant compressor aftermarket. We compete primarily with three U.S.
manufacturers; Copeland Corporation, a
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subsidiary of Emerson Electric, Inc., Danfoss, Inc., and Bristol Compressors,
Inc., a subsidiary of Johnson Controls. Copeland Corporation enjoys a larger
share of the domestic unitary air conditioning compressor business than either
Bristol Compressors, Inc. or Tecumseh.
Over the last several years there has been an industry trend toward the use of
scroll compressors in the high efficiency applications of the unitary air
conditioning market, led by Copeland Corporation. Our competition has had scroll
compressors as part of their product offerings for some time. Along with its own
manufacturing capabilities, Copeland Corporation is also a member of the
Alliance Scroll manufacturing joint venture with two major U.S. central air
conditioning manufacturers, American Standard's Trane air conditioning division
and Lennox International, Inc.
We believe that the rotary and scroll compressors are important to maintaining a
position in the unitary air conditioning and commercial refrigeration markets,
and we continue to pursue development of both technologies. While we are in the
early stages of offering scroll compressors to our customers, over the course of
2007 we have successfully released product into North America, both as part of
Tecumseh condensing units and systems as well as for aftermarket distribution.
We continue to broaden our product offerings for the scroll and expect to expand
our product outreach to Europe, South America, and Asia with scroll samples
beginning in the second half of 2008.
In the domestic room air conditioning compressor market, we compete primarily
with foreign companies, as a majority of room air conditioners are now
manufactured outside the United States. We also compete to a lesser extent with
U.S. manufacturers. Competitors include Matsushita Electric Industrial
Corporation, Sanyo Electric Trading Company, L.G. Electronics, Inc., Mitsubishi,
Daikin, and others. We have increasingly struggled with price competition from
foreign companies during the last several years. Downward pressure on prices,
particularly in the room air conditioning market, has continued due to global
manufacturing over-capacity and available supply of inexpensive Asian products
both in North America and in Europe.
In the domestic markets for water coolers, dehumidifiers, vending machines,
refrigerated display cases and other commercial refrigeration products, we
compete primarily with compressor manufacturers from the Far East, Europe and
South America and to a lesser extent, the United States. Competitors include
Matsushita Electric Industrial Corporation, Danfoss, Inc., Embraco, S.A.,
Copeland Corporation, ACC and others.
The household refrigerator and freezer market is vertically integrated with many
appliance producers manufacturing a substantial portion of their compressor
needs. Our competitors include ACC Group, Matsushita Electric Industrial
Corporation, Embraco, S.A., Danfoss, Inc., and others.
We sell our products in over 110 countries. In 2007, approximately 24% of the
compressor products produced in our North American operations were exported to
foreign countries.
Latin American Markets
Unlike North American and European markets, the markets in Latin America still
have some degrees of protection from outside competition, including import
duties. Accordingly, markets exist for products serving all four of the types of
applications. Tecumseh competes directly with Embraco, S.A. in Brazil and the
two competitors account for a majority of the share of compressors sold in Latin
America. However, this level of protection is slowly being reduced and the
strength of the Brazilian currency is making foreign imports cheaper despite the
presence of duties. As a result, Asian manufacturers are beginning to capture
additional share, and importation of the end products containing compressors has
begun to reduce local demand for compressors, particularly in the room air
conditioning product line.
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European Markets
The largest portion of the European market is commercial refrigeration, followed
by household refrigeration and freezers. Like North America, our primary
competitors in both of these product lines include ACC Group, Embraco, S.A.,
Danfoss, Inc., Emerson and a growing number of producers from the Far East.
European markets face the same competitive factors as those in North America,
including foreign competition and a shrinking local customer base as OEM's move
operations to low cost countries.
East Asian and Middle Eastern markets
Like Brazil, the East Asian/Middle Eastern market still has some levels of
protection for domestic manufactures, including import duties. This is
particularly the case in India, where these sales are concentrated. In addition,
given the absence of a robust cold chain in the region, the majority of the
market is for product used in air conditioning and household refrigerators.
Major competitors include the Indian manufacturers Copeland / Emerson., Carrier
Aircon Ltd., Godrej, Videocon, BPL and others. In addition, there are fewer end
product manufacturers in India. Accordingly, in 2007, approximately 24.0% and
23.2% of our sales in East Asian and Middle Eastern markets were made to our two
largest customers respectively and the loss of these customers would have a
significant impact on the results of operations of this facility, and to a
lesser extent, on the consolidated results of the Company as a whole.
Regulatory Requirements
Hydrochlorofluorocarbon compounds ("HCFCs") are still used as a refrigerant in
many air conditioning systems. Under a 1992 international agreement, HCFCs will
be banned from new equipment beginning in 2010. Some European countries began
HCFC phase-outs as early as 1998, and some have fully eliminated the use of
HCFCs. Within the last several years, we have approved and released a number of
compressor models utilizing U.S. government approved hydrofluorocarbons ("HFC")
refrigerants such as R410A, which are considered more environmentally safe than
the preceding refrigeration compounds. HFCs are also currently under global
scrutiny and subject to possible future restrictions.
In the last few years, there has been an even greater political and consumer
movement, particularly from northern European countries, toward the use of
hydrocarbons ("HCs") and CO(2) as alternative refrigerants, moving further away
from the use of chlorine (which depletes the ozone layer of the atmosphere) and
the use of fluorine (which contributes to the "green-house" effect).
Hydrocarbons are flammable compounds and have not been approved by the U.S.
government for air conditioning or household refrigerator and freezer
applications. CO(2) is still in limited production and is used in niche markets.
It is not presently possible to estimate the level of expenditures that will be
required to meet future industry requirements or the effect on our competitive
position. Nonetheless, we expect that our product development process will
address these changes in a timely manner.
The U.S. National Appliance Energy Conservation Act of 1987 (the "NAECA")
requires specified energy efficiency ratings on room air conditioners and
household refrigerator/freezers. Proposed energy efficiency requirements for
unitary air conditioners were published in the U.S. in January 2001 and became
effective in January 2006. The European and Brazilian manufacturing communities
have issued energy efficiency directives that specify the acceptable level of
energy consumption for refrigerators and freezers. These efficiency ratings
apply to the overall performance of the specific appliance, of which the
compressor is one component. We have ongoing projects
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aimed at improving the efficiency levels of our compressor products and have
products available to meet known energy efficiency requirements as determined by
our customers.
GEOGRAPHIC LOCATION INFORMATION
The results of operations and other financial information by geographic location
for each of the years ended December 31, 2007, 2006 and 2005 appear under the
caption "Business Segment Information" in Note 9 to the Consolidated Financial
Statements which appear in Part II, Item 8, of this report, "Financial
Statements and Supplementary Data," and that information is incorporated by
reference into this Item 1.
BACKLOG AND SEASONAL VARIATIONS
Most of our production is against short-term purchase orders and order backlog
is not significant.
Compressor products are subject to some seasonal variation among individual
product lines. In particular, sales for compressor products are higher in the
first and second quarters (for customer needs prior to the commencement of
warmer weather in the northern hemisphere, for both residential air conditioning
products and commercial applications). This seasonal effect is somewhat, though
not completely, offset by sales volumes in the southern hemisphere. Depending on
relative performance among the groups, and external factors such as foreign
currency changes and global weather, trends can vary. In the past three years,
consolidated sales in the aggregate have not exhibited any pronounced seasonal
trend.
PATENTS, LICENSES AND TRADEMARKS
We own a substantial number of patents, licenses and trademarks and deem them to
be important to certain lines of our business; however, the success of our
overall business is not considered primarily dependent on them. In the conduct
of our business, we own and use a variety of registered trademarks, the most
familiar of which is the trademark consisting of the word "Tecumseh" in
combination with a Native American Indian head symbol.
RESEARCH AND DEVELOPMENT
The ability to successfully bring new products to market in a timely manner has
rapidly become a critical factor in competing in the compressor products
business as a result of, among other things, the imposition of energy efficiency
standards and environmental regulations including those related to refrigerant
requirements as discussed above. We must continually develop new and improved
products in order to compete effectively and to meet evolving regulatory
standards in all of our major product lines. We spent approximately $28.1
million, $36.7 million, and $30.6 million during 2007, 2006, and 2005,
respectively, on research activities relating to the development of new products
and the development of improvements to existing products. None of this research
was customer sponsored.
EMPLOYEES
On December 31, 2007, we employed approximately 10,300 persons, 87% of whom were
employed in foreign locations. Approximately 210 of the U.S. employees were
represented by labor unions, with no more than 150 persons covered by the same
union contract. The majority of foreign location personnel are represented by
national trade unions. The number of our employees is subject to some seasonal
variation. During 2007, the maximum number of persons employed was approximately
13,400 (occurring while we still owned the Engine & Power Train and Electrical
Components
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groups) and the minimum was approximately 10,300. Overall, we believe we
generally have a good relationship with our employees.
OTHER MATTERS
On March 6, 2007, the Company and three members of its board of directors were
named as subjects of a lawsuit filed by Todd W. Herrick, our former Chief
Executive Officer, and Herrick Foundation (a Michigan non-profit corporation) in
the Circuit Court for the County of Lenawee, Michigan. The lawsuit sought to
overturn actions taken by our board of directors at their February 28, 2007
meeting. On March 15, 2007, the Company filed a separate lawsuit in the United
States District Court for the Eastern District of Michigan against Todd W.
Herrick, Herrick Foundation and its Board of Trustees (consisting of Todd
Herrick, Kent Herrick and Michael Indenbaum), and Toni Herrick (a trustee along
with Todd Herrick of various Herrick trusts) (collectively, "Herrick entities")
seeking the suspension of the Herrick entities' stock voting rights.
On April 2, 2007, a settlement agreement was signed by the Company, the three
members of the board of directors named in the suit, and the Herrick entities,
fully settling both lawsuits. The terms of the settlement agreement were
disclosed in a Current Report on Form 8-K that we filed on April 10, 2007. Under
the terms of the settlement agreement, the Herrick entities must vote in
accordance with the recommendations of the entire Board of Directors with regard
to Board nominees. This settlement agreement expires the day following our 2008
Annual Meeting of Shareholders, scheduled for April 30. At that time, the
Herrick entities will be entitled to exercise any and all rights of shareholders
as provided by the Company's bylaws.
On March 10, 2008, our Board of Directors received a letter from the Herrick
Foundation in which the Foundation requested, among other things, that the Board
form a committee to explore a possible sale of Tecumseh and take various actions
to change the Company's corporate governance posture, including seeking
shareholder approval at Tecumseh's 2008 annual shareholders meeting to eliminate
provisions contained in the Company's amended certificate of incorporation that
protect Class A shareholders. On March 10, 2008, the Herrick Foundation filed
with the SEC a Form 13D which among other disclosures includes a copy of the
letter received by the Board.
On March 11, 2008, Edwin L. Buker, Chairman of the Board, Chief Executive
Officer and President of Tecumseh, sent a letter to The Herrick Foundation
stating that the requests contained in the foundation's March 10 letter will be
appropriately considered by the Board in due course, consistent with its
fiduciary duties. Mr. Buker further advised The Herrick Foundation that neither
the foundation nor any of its representatives or affiliates has been authorized
by Tecumseh to pursue a sale of, or any other transaction involving, Tecumseh.
AVAILABLE INFORMATION
We provide public access to our annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and amendments to these reports filed
with or furnished to the Securities and Exchange Commission (SEC) under the 1934
Act. These documents may be accessed free of charge through our website at the
following address: http://www.tecumseh.com/investor.htm. These documents are
provided as soon as practicable after filing with the SEC, although not
generally on the same day. These documents may also be found at the SEC's
website at http://www.sec.gov.
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ITEM 1A. RISK FACTORS
Set forth below and elsewhere in this Annual Report on Form 10-K are some of the
principal risks and uncertainties that could cause our actual business results
to differ materially from any forward-looking statements contained in this
Report. These risk factors should be considered in addition to our cautionary
comments concerning forward-looking statements in this Report, including
statements related to markets for our products and trends in our business that
involve a number of risks and uncertainties. Our separate section in Item 7
below, "Disclosure Regarding Forward-Looking Statements," should be considered
in addition to the following statements.
WE ARE SUBJECT TO CURRENCY EXCHANGE RATE AND OTHER RELATED RISKS.
We conduct operations in many areas of the world involving transactions
denominated in a variety of currencies. We are subject to currency exchange rate
risk to the extent that our costs are denominated in currencies other than those
in which we earn revenues. In particular, this situation exists for us with
respect to our Brazilian operations, which have costs denominated in the
Brazilian Real, but the majority of its sales (approximately 60%) denominated in
other currencies, particularly the U.S. dollar and the Euro. Only one major
competitor 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 cost advantage over our business.
In the aggregate, approximately 80% of our total compressor sales are outside
the U.S. Our Brazilian, European and Indian operations comprised approximately
41%, 28% and 11% of total 2007 compressor sales respectively.
In addition, since our financial statements are denominated in U.S. dollars,
changes in currency exchange rates between the U.S. dollar and other currencies
have had, and will continue to have, an impact on our earnings. While we
customarily enter into currency hedging instruments to partially mitigate these
risks, we cannot assure that currency exchange rate fluctuations will not
adversely affect our results of operations and financial condition, particularly
over the long term. In addition, while the use of currency hedging instruments
may provide us with short-term protection from adverse fluctuations in currency
exchange rates, by utilizing these instruments we potentially forego the
benefits that might result from favorable fluctuations in currency exchange
rates.
We also face risks arising from the imposition of exchange controls and currency
devaluations. Exchange controls may limit our ability to convert foreign
currencies into U.S. dollars or to remit dividends and other payments by our
foreign subsidiaries or businesses located in or conducted within a country
imposing controls. Currency devaluations result in a diminished value of funds
denominated in the currency of the country instituting the devaluation. Actions
of this nature, if they occur or continue for significant periods of time, could
have an adverse effect on our results of operations and financial condition in
any given period.
MATERIAL COST INFLATION COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
We are experiencing material cost inflation in a number of our businesses. The
most significant inflationary impact to the business has been the price of
copper, a major cost component of compressors, which has increased by over 40%
since the beginning of 2006. We currently hold more than 62% of our total
projected copper requirements for 2008 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. We also expect the cost of steel
and other purchased materials to be more costly in 2008 versus 2007. We are
striving for greater productivity improvements and implementing increases in
selling prices
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to help mitigate cost increases in copper and other base materials including
aluminum, steel, and resins, as well as other input costs including ocean
freight, fuel, health care and insurance. We also are continuing to implement
operational initiatives in order to continuously reduce our costs. We cannot
assure you, however, that these actions will be successful to manage our costs
or increase our productivity. Continued cost inflation or failure of our
initiatives to generate cost savings or improve productivity may negatively
impact our results of operations.
WE MAY NOT MAINTAIN OUR CURRENT LEVEL OF LIQUIDITY.
Upon completion of the divestitures of the business operations as previously
discussed, we eliminated all our domestic debt. However, challenges remain with
respect to our ability to maintain appropriate levels of liquidity, particularly
those driven by currency exchange and commodity pricing. 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 in the final
phases of 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 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.
ANY FUTURE DIVESTITURES OF NON-CORE PORTIONS OF THE BUSINESS MAY RESULT IN
FURTHER LOSSES ON THE SALE OF ASSETS.
While we divested the majority of our non-core business operations in 2007,
certain remaining portions of the Electrical Components business are still
classified as held for sale. While management believes that the assets
associated with these businesses are appropriately recorded at their fair value,
further impairments associated with their eventual sale or expenses associated
with the sale transaction could occur, and could have an adverse effect on our
results of operations and financial condition in any given period.
OUR BUSINESSES OPERATE IN HIGHLY COMPETITIVE MARKETS.
Our businesses generally face substantial competition in each of their
respective markets. We compete on the basis of product design, quality,
availability, performance, customer service and price. Present or future
competitors may have greater financial, technical or other resources which could
put us at a disadvantage in the affected business or businesses. We cannot
assure you that these and other factors will not have a material adverse effect
on our results of operations.
In particular, we operate in environments where worldwide productive capacities
exceed global demand and customers and competitors are establishing new
productive capacities in low cost countries, including China. These trends have
resulted in the need for us to restructure our operations by removing excess
capacities, lowering our cost of purchased inputs and shifting productive
capacities to low cost countries in order to improve our overall cost structure,
restore margins and
13
improve our competitive position in our major markets. There is no guarantee
that these initiatives, which have included plant closures, headcount
reductions, expanded operations in low-cost countries (including China and
India) and global sourcing initiatives, will be successful in setting the stage
for improvement in profitability in the future.
OUR RESULTS OF OPERATIONS MAY BE NEGATIVELY IMPACTED BY LITIGATION.
Our business exposes us to potential litigation, especially product liability
suits that are inherent in the design, manufacture, and sale of our products.
These claims can be expensive to defend and can divert the attention of
management and other personnel for significant periods of time, regardless of
the ultimate outcome.
As we self-insure a portion of product liability claims, an unsuccessful defense
of a product liability claim or series of successful claims could materially and
adversely affect our product reputation and our financial condition, results of
operations, and cash flows. Even if we are successful in defending against a
claim relating to our products, claims of this nature could cause our customers
to lose confidence in our products and our Company.
WE ARE EXPOSED TO POLITICAL, REGULATORY, ECONOMIC, AND OTHER RISKS THAT ARISE
FROM OPERATING A MULTINATIONAL BUSINESS.
Sales outside of North America, including export sales from North American
businesses, accounted for approximately 76% of our net sales in 2007. Further,
certain of our businesses obtain raw materials and finished goods from foreign
suppliers. Accordingly, our business is subject to the political, economic and
other risks that are inherent in operating in numerous countries. These risks
include:
- the difficulty of enforcing agreements and collecting receivables
through foreign legal systems;
- required compliance with a variety of foreign laws and regulations;
- trade protection measures and import or export licensing
requirements;
- tax rates in certain foreign countries that exceed those in the U.S.
and the imposition of withholding requirements on foreign earnings;
- the imposition of tariffs, exchange controls or other restrictions;
- difficulty in staffing and managing widespread operations and the
application of foreign labor regulations;
- the protection of intellectual property in foreign countries; and
- changes in general economic and political conditions in countries
where we operate, particularly in emerging markets.
Our business success depends in part on our ability to anticipate and
effectively manage these and other risks.
OUR OPERATIONS AND PRODUCTS ARE SUBJECT TO EXTENSIVE ENVIRONMENTAL LAWS AND
ENERGY REGULATIONS.
Our plants and operations are subject to increasingly stringent environmental
laws and regulations in all of the countries in which we operate, including laws
and regulations governing emissions to air, discharges to water and the
generation, handling, storage, transportation, treatment and disposal of
14
waste materials. These regulations can vary widely across the countries in which
we do business. While we believe that we are in compliance in all material
respects with these environmental laws and regulations, we cannot assure that we
will not be adversely impacted by costs, liabilities or claims with respect to
existing, previously divested, or subsequently acquired operations, under either
present laws and regulations or those that may be adopted or imposed in the
future. We are also subject to laws requiring the cleanup of contaminated
property. If a release of hazardous substances occurs at or from any of our
current or former properties or at a landfill or another location where we have
disposed of hazardous materials, we may be held liable for the contamination and
the amount of such liability could be material.
In addition, governmental regulations affect the types of refrigerants that may
be utilized in our products, and this global scrutiny continues to evolve over
time. We have continued to address these changes in regulation by approving and
releasing new models that meet governmental and consumer requirements. We also
strive to have our products meet requirements for energy efficiency, which can
vary substantially across the global communities in which we sell our products.
Future legislation may require substantial levels of expenditure to meet
industry requirements, which could have a material adverse effect on our
business, results of operations and financial condition.
WE MAY BE ADVERSELY IMPACTED BY WORK STOPPAGES AND OTHER LABOR MATTERS.
As of December 31, 2007, we employed approximately 10,300 persons worldwide.
Approximately 210 of our U.S. employees are represented by various unions under
collective bargaining agreements with various unions. The majority of the nearly
9,000 people we employ in foreign locations are represented by national trade
unions. While we have no reason to believe that we will be impacted by work
stoppages and other labor matters, we cannot assure you that future issues with
our labor unions will be resolved favorably or that we will not encounter future
strikes, further unionization efforts or other types of conflicts with labor
unions or our employees. Any of these factors may have an adverse effect on us
or may limit our flexibility in dealing with our workforce. In addition, many of
our customers have unionized work forces. Work stoppages or slow-downs
experienced by our customers could result in slow-downs or closures at vehicle
assembly plants where our engines are installed. If one or more of our customers
experience a material work stoppage, it could have a material adverse effect on
our business, results of operations and financial condition.
OUR PRODUCTS ARE SUBJECT TO RECALL FOR PERFORMANCE RELATED ISSUES.
We incur product recall costs when we decide, either voluntarily or
involuntarily, to recall a product through a formal campaign to solicit the
return of specific products due to a known or suspected performance issue. Costs
typically include the cost of the product, part or component being replaced,
customer cost of the recall and labor to remove and replace the defective part
or component. When a recall decision is made, we estimate the cost of the recall
and record a charge to earnings in that period. In making this estimate,
judgment is required as to the quantity or volume to be recalled, the total cost
of the recall campaign, the ultimate negotiated sharing of the cost between us
and the customer and, in some cases, the extent to which the supplier of the
part or component will share in the recall cost. As a result, these estimates
are subject to change. Due to the nature of these actions, several recalls
experienced simultaneously or one of particular significance could materially
and adversely affect our financial condition, results of operation and cash
flows.
INCREASED OR UNEXPECTED PRODUCT WARRANTY CLAIMS COULD ADVERSELY AFFECT US.
We provide our customers a warranty on products we manufacture. Our warranty
generally provides that products will be free from defects for periods ranging
from 12 months to 36 months. If a product fails to comply with the warranty, we
may be obligated, at our expense, to correct any defect by
15
repairing or replacing the defective product. Although we maintain warranty
reserves in an amount based primarily on the number of units shipped and on
historical and anticipated warranty claims, there can be no assurance that
future warranty claims will follow historical patterns or that we can accurately
anticipate the level of future warranty claims. An increase in the rate of
warranty claims or the occurrence of unexpected warranty claims could materially
and adversely affect our financial condition, results of operations and cash
flows.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our headquarters are located in Tecumseh, Michigan, approximately 50 miles
southwest of Detroit. At December 31, 2007 we had 25 properties worldwide (7 of
which were classified as idled and held for sale) occupying approximately 6.1
million square feet (1.4 million idled) with the majority, approximately 4.5
million square feet, devoted to manufacturing. 12 facilities with approximately
4.1 million square feet (of which 2 facilities and 0.7 million square feet were
idled) were located in four countries outside the United States. All owned and
leased properties are suitable, well maintained and equipped for the purposes
for which they are used.
We recently announced that we will be relocating our global headquarters to a
facility near Ann Arbor, Michigan. We expect this move to commence in June of
2008, and be completed by the end of the year.
ITEM 3. LEGAL PROCEEDINGS
JUDICIAL RESTRUCTURING FOR BRAZILIAN ENGINE MANUFACTURING SUBSIDIARY
On March 22, 2007, TMT Motoco, our Brazil-based engine manufacturing subsidiary,
filed a request in Brazil for court permission to pursue a judicial
restructuring. The requested protection under Brazilian bankruptcy law is
similar to a U.S. filing for Chapter 11 protection in that during such a
restructuring TMT Motoco would remain in possession of its assets and its
creditors could not impose an involuntary restructuring on it. TMT's
restructuring request was granted by the court on March 28, 2007.
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. 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.
ENVIRONMENTAL PROCEEDINGS
Although the locations described below that have been affected by environmental
proceedings were associated with our Engine & Power Train business, which we
sold during 2007, we have retained certain potential liabilities that may arise
in connection with these locations.
We have been named by the U.S. Environmental Protection Agency ("EPA") as a
potentially responsible party ("PRP") in connection with the Sheboygan River and
Harbor Superfund Site in Wisconsin. In 2003, with the cooperation of the EPA,
the Company and Pollution Risk Services, LLC ("PRS") entered into a Liability
Transfer and Assumption Agreement (the "Liability Transfer
16
Agreement"). Under the terms of the Liability Transfer Agreement, PRS assumed
all of our responsibilities, obligations and liabilities for remediation of the
entire Site and the associated costs, except for certain specifically enumerated
liabilities. The EPA has the authority to enforce its Consent Decree directly
with PRS. Also, as required by the Liability Transfer Agreement, we purchased
Remediation Cost Cap insurance, with a 30 year term, in the amount of $100.0
million and Environmental Site Liability insurance in the amount of $20.0
million. While we believe such insurance coverage will provide sufficient
assurance for completion of the responsibilities, obligations and liabilities
assumed by PRS under the Liability Transfer Agreement, these arrangements do not
constitute a legal discharge or release of our liabilities with respect to the
Site. In conjunction with the Liability Transfer Agreement, we completed the
transfer of title to the Sheboygan Falls, Wisconsin property to PRS. We continue
to maintain an additional reserve of $0.5 million to reflect our potential
environmental liability arising from operations at the Site, including potential
residual liabilities not assumed by PRS pursuant to the Liability Transfer
Agreement.
We have also been voluntarily participating in a cooperative effort to
investigate and cleanup polychlorinated biphenyl ("PCB") contamination in the
watershed of the south branch of the Manitowoc River, at and downstream from our
New Holstein, Wisconsin facility. In 2004, the Company and TRC Companies and TRC
Environmental Corporation (collectively, "TRC") entered into a Consent Order
with the WDNR relating to this effort known as the Hayton Area Remediation
Project ("HARP"). Concurrently, the Company and two of its subsidiaries and TRC
entered into an Exit Strategy Agreement (the "Agreement"), whereby we
transferred to TRC substantially all of our obligations to complete the HARP
remediation pursuant to the Consent Order and in accordance with applicable
environmental laws and regulations. As required by the Agreement, we also
purchased a Pollution Legal Liability Select Cleanup Cost Cap Policy (the
"Policy"). The term of the Policy is 20 years with an aggregate combined policy
limit of $41 million. We believe that the Policy provides additional assurance
that the responsibilities, obligations, and liabilities transferred and assigned
by us and assumed by TRC under the Agreement will be completed. Although the
arrangements with TRC and the WDNR do not constitute a legal discharge or
release of our liabilities, we believe that the specific work substitution
provisions of the Consent Order and the broad coverage terms of the Policy,
collectively, are sufficient to satisfy substantially all of our environmental
obligations with respect to the HARP remediation.
In cooperation with the WDNR, we also conducted an investigation of soil and
groundwater contamination at our Grafton, Wisconsin plant. It was determined
that contamination from petroleum and degreasing products used at the plant were
contributing to an off-site groundwater plume. We began remediation of soils in
2001 on the east side of the facility. Additional remediation of soils began in
the fall of 2002 in two other areas on the plant site. At both December 31, 2007
and 2006, we had accrued $2.2 million for the total estimated cost associated
with the investigation and remediation of the on-site contamination.
Investigation efforts related to the potential off-site groundwater
contamination have to date been limited in their nature and scope. The extent,
timing and cost of off-site remediation requirements, if any, are not presently
determinable.
In addition to the above-mentioned sites, we are also currently participating
with the EPA and various state agencies at certain other sites to determine the
nature and extent of any remedial action that may be necessary with regard to
such other sites. At December 31, 2007 and 2006, we had accrued a total of $3.0
million and $3.3 million, respectively, for environmental remediation,
including, at both dates, $0.5 million relating to the Sheboygan River and
Harbor Superfund Site and $2.2 million respectively relating to the Grafton
site. As these matters continue toward final resolution, amounts in excess of
those already provided may be necessary to discharge us from our obligations for
these sites. Such amounts, depending on their amount and timing, could be
material to reported net income in the particular quarter or period that they
are recorded. In addition, the
17
ultimate resolution of these matters, either individually or in the aggregate,
could be material to the consolidated financial statements.
HORSEPOWER LABEL LITIGATION
A lawsuit filed against us and other defendants in Circuit Court in Illinois
alleges that the horsepower labels on the products the plaintiffs purchased were
inaccurate. Although this lawsuit was associated with our Engine & Power Train
business, which we sold in 2007, we have retained any potential liabilities that
may arise in connection with this action. 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 seeks an injunction, compensatory and punitive damages and attorneys'
fees. On March 30, 2007, the Court entered an order dismissing Plaintiffs'
complaint, subject to the ability to re-plead certain claims pursuant to a
detailed written order to follow. 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.
OTHER LITIGATION
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, 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 2007 to a vote of security
holders through the solicitation of proxies or otherwise.
18
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Our Class A and Class B common stock trades on The Nasdaq Stock Market LLC under
the symbols TECUA and TECUB, respectively. Total shareholders of record as of
February 22, 2008 were approximately 305 for Class A common stock and 300 for
Class B common stock. We have no current expectation to pay dividends. As of the
date of this report, we have no equity securities authorized for issuance under
compensation plans. We did not repurchase any of our equity securities during
2007.
MARKET PRICE AND DIVIDEND INFORMATION
Range of Common Stock Prices and Dividends for 2007
Sales Price
--------------------------------------
Class A Class B Cash
----------------- ------------------ Dividends
Quarter Ended High Low High Low Declared
- ------------- ------- ------- -------- ------- -----------
March 31 ......... $ 18.21 $ 9.31 $ 17.39 $ 9.25 $ -
June 30 .......... 16.38 9.81 15.71 9.76 -
September 30 ..... 23.77 15.83 21.78 14.41 -
December 31 ...... 25.93 15.47 22.79 13.97 -
Range of Common Stock Prices and Dividends for 2006
Sales Price
--------------------------------------
Class A Class B Cash
----------------- ------------------ Dividends
Quarter Ended High Low High Low Declared
- ------------------ ------- ------- -------- ------- ---------
March 31 ......... $ 25.66 $ 21.45 $ 22.53 $ 18.42 $ -
June 30 .......... 25.32 17.02 21.77 15.14 -
September 30 ..... 21.16 13.83 18.15 13.44 -
December 31 ...... 18.91 14.62 18.34 14.71 -
19
ITEM 6. SELECTED FINANCIAL DATA
The following is a summary of certain of our financial information. Prior year
results related to the Statements of Operations have been restated to reflect
the reclassification of the Electrical Components Group, the Engine & Power
Train Group, and Manufacturing Data Systems, Inc. as discontinued operations.
(Dollars in millions, except per share data)
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
2007 2006 2005 2004 2003
------------ ---------- ---------- ---------- ---------
Net sales ............................................ $ 1,133.4 $ 1,017.7 $ 924.6 $ 892.2 $ 808.4
Cost of sales and operating expenses ................. 1,011.7 943.2 822.9 742.6 687.1
Selling and administrative expenses .................. 109.5 99.2 94.1 105.3 72.0
Impairments, restructuring charges, and other
items ................................................ 7.2 2.4 4.3 2.4 29.5
----------- ---------- --------- ---------- ---------
Operating income (loss) .............................. 5.0 (27.1) 3.3 41.9 19.8
Interest expense ..................................... (22.3) (19.4) (3.0) (19.3) (21.3)
Interest income and other, net ....................... 6.2 10.9 9.0 13.0 21.0
----------- ---------- --------- ---------- ---------
Income (loss) before taxes ........................... (11.1) (35.6) 9.3 35.6 19.5
Tax provision (benefit) .............................. (8.2) 12.5 27.5 12.7 5.5
----------- ---------- --------- ---------- ---------
Net income (loss) from continuing operations ......... (2.9) (48.1) (18.2) 22.9 14.0
----------- ---------- --------- ---------- ---------
Income (loss) from discontinued operations, net of ... (175.2) (32.2) (205.3) (12.8) (13.9)
tax
Net income (loss) .................................... $ (178.1) $ (80.3) $ (223.5) $ 10.1 $ 0.1
=========== ========== ========= ========== =========
Basic and diluted (loss) earnings per share:*
(Loss) earnings per share from continuing
operations ........................................... $ (0.16) $ (2.60) $ (0.98) $ 1.24 $ 0.76
Loss per share from discontinued operations, net
of tax ............................................. (9.48) (1.75) (11.11) (0.69) (0.75)
----------- ---------- --------- ---------- ---------
Basic and diluted (loss) earnings per share .......... $ (9.64) $ (4.35) $ (12.09) $ 0.55 $ 0.01
=========== ========== ========= ========== =========
Cash dividends declared per share .................... -- -- $ 0.64 $ 1.28 $ 1.28
Weighted average number of shares outstanding (in
thousands) ......................................... 18,480 18,480 18,480 18,480 18,480
Cash and cash equivalents ............................ $ 76.8 $ 81.9 $ 116.6 $ 227.9 $ 344.6
Working capital ...................................... 128.4 226.3 402.0 505.7 545.5
Net property, plant and equipment .................... 353.3 552.4 578.6 554.8 554.6
Total assets ......................................... 1,164.9 1,782.7 1,800.5 2,062.8 2,105.8
Long-term debt ....................................... 3.3 217.3 283.0 317.3 327.6
Stockholders' equity ................................. 745.9 798.4 814.4 1,018.3 1,004.8
Capital expenditures ................................. 3.0 62.1 113.3 84.0 82.8
Depreciation and amortization ........................ 43.1 80.1 92.3 102.9 97.6
* In 2007, we issued a warrant to a lender to purchase 1,390,944 shares of
our Class A Common Stock, which is equivalent to 7% of our fully diluted
common stock (including both Class A and Class B shares). This warrant is
not included in diluted earnings per share for the year ended December 31,
2007, as the effect would be antidilutive.
Impairments, restructuring charges, and other items included:
2007 operating net loss included $7.2 million ($0.39 per share) of
restructuring, impairment and other charges. $4.2 million of these
restructuring charges related to the impairment of long-lived
20
compressor assets in India ($2.2 million) and North America ($2.0 million).
These assets were primarily impaired as a result of the global consolidation
of our manufacturing operations. We also incurred expense of $1.6 million
associated with reductions in force at several of our North American
facilities. The remaining charges reflect the impact of net losses on the
sale of buildings ($0.5 million) and related charges ($0.9 million) as a
result of the consolidation of non-compressor facilities.
2006 operating net loss included $2.4 million ($0.13 per share) of
restructuring, impairment and other charges. We recorded these restructuring
charges for impairment of long-lived compressor assets ($2.2 million) and
related charges ($0.2 million) at two of our facilities in Mississippi.
2005 net loss included $4.3 million ($0.23 per share) of restructuring,
impairment and other charges. These charges include $0.9 million recorded by
the North American Compressor operations related to moving costs for
previously announced actions, and $3.4 million of asset impairment charges
for manufacturing equipment idled through facility consolidations and the
reduction to fair value of land and buildings associated with closed plants.
2004 net income included $2.4 million ($0.13 per share) of restructuring,
impairment and other charges. These charges related to restructuring programs
for the North American and Indian compressor facilities.
2003 net income included $29.5 million ($1.60 per share) of restructuring,
impairment and other charges. This charge related to an impairment of
goodwill associated with our European operations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENTS RELATING TO FORWARD LOOKING STATEMENTS
The following information should be read in connection with the information
contained in the Consolidated Financial Statements and Notes to Consolidated
Financial Statements.
This discussion 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) weather conditions
affecting demand for replacement products; iv) availability and cost of
materials, particularly commodities, including steel, copper and aluminum, whose
cost can be subject to significant variation; v) financial market changes,
including fluctuations in interest rates and foreign currency exchange rates;
vi) actions of competitors; vii) changes in business conditions and the economy
in general in both foreign and domestic markets; viii) the effect of terrorist
activity and armed conflict; ix) economic trend factors such as housing starts;
x) emerging governmental regulations; xi) the ultimate cost of resolving
environmental and legal matters; xii) our ability to profitably develop,
manufacture and sell both new and existing products; xiii) the extent of any
business disruption that may result from the
21
restructuring and realignment of our manufacturing operations or system
implementations, the ultimate cost of those initiatives and the amount of
savings actually realized; xiv) the extent of any business disruption caused by
work stoppages initiated by organized labor unions; xv) potential political and
economic adversities that could adversely affect anticipated sales and
production in Brazil; xvi) potential political and economic adversities that
could adversely affect anticipated sales and production in India, including
potential military conflict with neighboring countries; xvii) the outcome of the
judicial restructuring of our Brazilian engine manufacturing subsidiary; xviii)
increased or unexpected warranty claims; and xix) 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.
EXECUTIVE SUMMARY
Until 2007, our business was focused upon three businesses: hermetically sealed
compressors, small gasoline engine and power train products, and fractional
horsepower motors. Over the course of 2007, we successfully executed a strategy
to divest operations that we did not consider to be core to our ongoing business
strategy. To that end, we sold the Residential & Commercial, Asia Pacific and
Automotive & Specialty portions of our Electrical Components business, and also
sold our Engine & Power Train business (with the exception of TMT Motoco, the
Brazilian engine facility currently undergoing a judicial restructuring). The
remaining portion of our Electrical Components business is included with assets
held for sale. As a result of these initiatives, we are now primarily focused on
our global compressor business.
The compressor business is characterized by global and regional markets that are
served by manufacturing locations positioned throughout the world. Accordingly,
an increasing portion of our manufacturing presence is in international
locations. During 2007, approximately 80% of our compressor manufacturing
activity took place outside the United States, primarily in Brazil, France, and
India (which comprise approximately 41%, 28% and 11% of total compressor final
assembly, respectively). Similarly, approximately 80% of our sales are to
destinations outside the U.S. 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 2007, the Brazilian Real strengthened by 17.2%, and in the
period from January 1, 2006 to December 31, 2007 the Real strengthened by 24.3%.
Recent movement in the Indian Rupee has also had an unfavorable effect on our
results of operations, as the Rupee strengthened by 12.8% during 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 to our compressor business 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 cost
advantage over our 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.
22
Due to the high material content of copper and steel 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 have increased very
rapidly during 2006, 2007 and into 2008. 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 December 31,
2007, the price of copper increased by approximately 40.2%, and steel has
increased by 7.4% over the course of 2007. While we have been proactive in
addressing the volatility of these costs, including executing forward purchase
contracts to cover in excess of 60% of our anticipated copper requirements for
2008, 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 pressures on 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 80% of total compressor net
sales in 2007. 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 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 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
23
restructuring activities are implemented or economic conditions improve. As part
of our strategy to maintain sufficient liquidity, we are currently in the final
phases of 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 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 "Cautionary Statements Relating To Forward-Looking
Statements" above, "Results of Operations" below, and "Risk Factors" in Item 1A.
24
RESULTS OF OPERATIONS
A summary of our operating results as a percentage of net sales is shown below
(dollar amounts in millions):
YEAR ENDED DECEMBER 31, 2007 VS. YEAR ENDED DECEMBER 31, 2006
Year Ended December 31,
(dollars in millions) 2007 % 2006 %
Net sales.................................... $1,133.4 100.0% $1,017.7 100.0%
Cost of sales and operating expenses......... 1,011.7 89.3% 943.2 92.7%
Selling and administrative expenses.......... 109.5 9.7% 99.2 9.8%
Impairments, restructuring charges, and other
items...................................... 7.2 0.6% 2.4 0.2%
-------- --------
Operating income (loss)...................... 5.0 0.4% (27.1) (2.7%)
Interest expense............................. (22.3) (2.0%) (19.4) (1.9%)
Interest income and other, net............... 6.2 0.5% 10.9 1.1%
-------- --------
Loss before taxes............................ (11.1) (1.0%) (35.6) (3.5%)
Tax provision (benefit)...................... (8.2) 0.7% 12.5 (1.2%)
-------- --------
Net loss from continuing operations.......... $ (2.9) (0.3%) $ (48.1) (4.7%)
======== ========
Net sales in the year ended December 31, 2007 increased $115.7 million or 11.4%
versus the same period of 2006. Excluding the increase in sales due to the
effect of changes in foreign currency translation of $81.9 million, net sales
increased 3.3% from the prior year. The sales increases were primarily
attributable to price advances, which were implemented throughout the year
across all product lines except residential air conditioning. The increases in
commercial compressors were also associated with higher volumes, with unit sales
improving by approximately 6%, due both to increased demand from existing
customers and from growth in new markets, particularly in India This increase
was offset somewhat by volume declines in refrigeration and freezer compressors
(down 1%).
In total, full year sales reflected a year-on-year increase of $58.9 million in
commercial compressors, an increase of $36.8 million in refrigeration and
freezer compressors, and increases in compressors for central air of $10.8
million and residential air conditioning of $3.8 million. The remaining
increases were not attributable to any of our major product lines.
Gross profit and gross margin were $121.7 million and 10.7% in the year ended
December 31, 2007, as compared to $74.5 million and 7.3% in the fiscal year
ended December 31, 2006. The majority of this improvement was created by
increases in selling price, which improved 2007 results by $75.4 million
including volume and mix impacts. These selling price increases helped to offset
the unfavorable impacts of currency of $43.7 million and higher commodity costs
of $17.2 million. Productivity and purchasing improvements of $9.6 million also
contributed to the improved 2007 figure. Net improvements of $21.8 million were
also realized in overhead costs, warranty, and improved administrative costs
associated with lower headcounts.
Gross profit was favorably impacted in both periods by net pension benefit
income that was recorded as a result of the over-funding of the majority of our
pension plans. This income favorably affected continuing operations by $11.4
million and $10.9 million in 2007 and 2006 respectively. 2007 was also favorably
affected by $4.9 million in benefit income related to other postretirement
("OPEB")
25
benefits, while expense of $2.8 million related to OPEB plans was recorded in
2006. Refer to Note 4 in the Consolidated Financial Statements for further
discussion of our pension credits.
Selling, general and administrative expenses were $10.3 million or 10.4% higher
in the fiscal year ended December 31, 2007 compared to the prior fiscal year.
However, as a percentage of net sales, selling, general and administrative
expenses improved in 2007, at 9.7% and 9.8% in the fiscal years ended December
31, 2007 and December 31, 2006, respectively. Aggregate professional fees were
paid for items such as AlixPartners' services, litigation costs, and bank
amendments of $19.8 million which are not expected to continue into 2008. As
well, the reversal of accruals for non-income taxes in Brazil received in the
fourth quarter of 2006 of $6.9 million were not repeated in 2007. These
challenges were offset by administrative savings of $11.6 million, primarily
realized from restructuring activities.
2007 operating income included $7.2 million ($0.39 per share) of restructuring,
impairment and other charges. $4.2 million of these restructuring charges
related to the impairment of long-lived compressor assets in India ($2.2
million) and North America ($2.0 million). These assets were primarily impaired
as a result of the global consolidation of our manufacturing operations. We also
incurred expense of $1.6 million associated with reductions in force at several
of our North American facilities. The remaining charges reflect the impact of
net losses on the sale of buildings ($0.5 million) and related charges ($0.9
million) as a result of the consolidation of non-compressor facilities.
2006 operating loss included $2.4 million ($0.13 per share) of restructuring,
impairment and other charges. We recorded these restructuring charges for
impairment of long-lived compressor assets ($2.2 million) and related charges
($0.2 million) at our facilities in Mississippi.
Interest expense related to continuing operations amounted to $22.3 million in
the fiscal year ended December 31, 2007 compared to $19.4 million in the
comparable period of 2006. The increase was primarily related to higher interest
rates charged on our foreign borrowings when compared to the prior year.
Interest income and other, net amounted to $6.2 million in the fiscal year ended
December 31, 2007 compared to $10.9 million in the same period of 2006. In 2006,
we recognized a gain of $3.6 million on the sale of our interest in Kulthorn
Kirby Public Company Limited, a manufacturer of compressors based in Thailand.
The remainder of the decline in 2007 was due to lower interest rates and lower
average cash balances.
The consolidated statement of operations reflects a $8.2 million income tax
benefit for the fiscal year ended December 31, 2007. This benefit reflected a
$4.1 current tax provision ($1.3 million U.S. federal and $2.8 million foreign)
offset by a $12.3 million deferred tax benefit (consisting of a $13.4 million
U.S. federal benefit, a $1.3 million state and local provision, and a foreign
benefit of $0.2 million).
At December 31, 2007 and 2006, full valuation allowances are recorded for net
operating loss carryovers for those tax jurisdictions in which it is more likely
than not that these deferred tax assets would not be recoverable. In 2007, the
valuation allowance related to our Europe subsidiary 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 2007. Valuation allowances were established against remaining foreign
deferred tax assets in Brazil in 2006 (aggregating approximately $5.9 million)
due to negative evidence resulting in a determination that it is no longer more
likely than not that the assets will be realized. We recorded a tax provision of
$12.5 million on a loss of $35.6 million in 2006.
26
The effective tax rate in future periods may vary from the 35% used in prior
years based upon changes in the mix of profitability between the jurisdictions
where benefits on losses are not provided versus other jurisdictions where
provisions and benefits are recognized. In addition, circumstances could change
such that additional valuation allowances may become necessary on deferred tax
assets in various jurisdictions.
Net loss from continuing operations in the fiscal year ended December 31, 2007
was $2.9 million, or $0.16 per share, as compared to a net loss of $48.1
million, or $2.60 per share, in the fiscal year ended December 31, 2006. The
improvement was primarily the result of the improved gross margins and other
factors as discussed above.
YEAR ENDED DECEMBER 31, 2006 VS. YEAR ENDED DECEMBER 31, 2005
Year Ended December 31,
(dollars in millions) 2006 % 2005 %
Net sales.................................... $1,017.7 100.0% $924.6 100.0%
Cost of sales and operating expenses......... 943.2 92.7% 822.9 89.0%
Selling and administrative expenses.......... 99.2 9.8% 94.1 10.2%
Impairments, restructuring charges, and other
items...................................... 2.4 0.2% 4.3 0.5%
-------- ------
Operating income (loss)...................... (27.1) (2.7%) 3.3 0.4%
Interest expense............................. (19.4) (1.9%) (3.0) (0.3%)
Interest income and other, net............... 10.9 1.1% 9.0 1.0%
-------- ------
Income (loss) before taxes................... (35.6) (3.5%) 9.3 1.0%
Tax provision (benefit)...................... 12.5 (1.2%) 27.5 (3.0%)
-------- ------
Net income (loss) from continuing operations. $ (48.1) (4.7%) $(18.2) (2.0%)
======== ======
Net sales in the year ended December 31, 2006 increased $93.1 million or 10.1%
versus the same period of 2005, including an increase in sales of $39.6 million
resulting from the effect of changes in foreign currency exchange rates.
Compressor sales in the fiscal year of 2006 increased 10.1% to $1,002.7 million
from $910.9 million in 2005. Excluding the increase in sales due to the effects
of foreign currency translation, sales increased by 5.7% in 2006. Full year
sales reflected a year-on-year increase in commercial compressors (up $69.8
million), residential air conditioning (up $23.2 million), and refrigeration and
freezer compressors (up $21.9 million). While the sales increase was largely
attributable to price advances, the increases in residential air conditioning
and in refrigeration and freezer compressors were due to higher volumes, with
unit sales improving by 25% and 20% respectively. The improvements in
compressors for residential air conditioning were attributable to increases in
volumes with key OEM's, due in part to new product introductions as well as
enhanced customer service programs. The increases in the refrigeration and
freezer product lines were primarily in India, where we experienced rapid growth
in new and profitable markets.
Gross profit and gross margin were $74.5 million and 7.3% in the year ended
December 31, 2006, as compared to $101.7 million and 11.0% in the fiscal year
ended December 31, 2005. During the fiscal year ended December 31, 2006, the
U.S. Dollar was on average 5.3% weaker versus the Brazilian Real and 11.9%
weaker versus the Euro than during 2005. Operating margins also deteriorated due
to unfavorable commodity costs. Advances in selling prices to offset increases
in commodity costs were primarily implemented in the latter half of the year,
and were not sufficient to mitigate the increase, with a net unfavorable impact
to operating results of $10.8 million. On the other hand, in
27
the fourth quarter of 2006, our Brazilian facility received a favorable court
ruling, deeming certain non-income-based taxes it had accrued on its balance
sheet as unconstitutional. The reversal of this accrual resulted in a favorable
net impact to operating results of $6.6 million for the fourth quarter and full
year 2006. The implementation of other productivity improvements over the course
of the year also yielded a favorable impact to operating profitability of $2.8
million.
Gross profit was favorably impacted in both periods by net pension benefit
income that was recorded as a result of the over-funding of the majority of our
pension plans. This income totaled $10.9 million and $11.1 million in 2006 and
2005 respectively.
Selling, general and administrative expenses were $5.1 million or 5.4% higher in
the fiscal year ended December 31, 2006 compared to the prior fiscal year.
However, as a percentage of net sales, selling, general and administrative
expenses were lower in 2006, at 9.7% and 10.2% in the fiscal years ended
December 31, 2006 and December 31, 2005, respectively. The increase in dollar
terms was primarily attributable to increased corporate expenses for consulting
and auditing costs and the roll-out of our new ERP system.
2006 operating net loss included $2.4 million ($0.13 per share) of
restructuring, impairment and other charges. We recorded these restructuring
charges for impairment of long-lived compressor assets ($2.2 million) and
related charges ($0.2 million) at two of our facilities in Mississippi. The 2005
net loss included $4.3 million ($0.23 per share) of restructuring, impairment
and other charges. These charges include $0.9 million recorded by the North
American Compressor operations related to moving costs for previously announced
actions, and $3.4 million of asset impairment charges for manufacturing
equipment idled through facility consolidations and the reduction to fair value
of land and buildings associated with closed plants.
Interest expense amounted to $19.4 million in the fiscal year ended December 31,
2006 compared to $3.0 million in the comparable period of 2005. The increase was
primarily related to higher average interest rates applicable to our borrowings
both in the United States and in a number of our foreign locations, in addition
to reflecting the impact of the loss of benefit previously provided by interest
rate swaps exchanging fixed rates for variable.
Interest income and other, net amounted to $10.9 million in the fiscal year
ended December 31, 2006 compared to $9.0 million in the same period of 2005. In
2006, we recognized a gain of $3.6 million on the sale of our interest in
Kulthorn Kirby Public Company Limited, a manufacturer of compressors based in
Thailand. Excluding that gain, the decline of $1.7 million in 2006 was due to
lower interest rates and lower average cash balances.
We recorded income tax expense of $12.5 million on a loss before taxes of $35.6
million for the fiscal year ended December 31, 2006, as compared with tax
expense of $27.5 million on a profit before tax of $9.3 million for the
corresponding period in 2005. The unusual result in 2005 was the product of not
providing benefits on losses in jurisdictions where the preponderance of
negative evidence would indicate that these deferred tax assets would not be
recoverable.
Net loss from continuing operations in the fiscal year ended December 31, 2006
was $48.1 million, or $2.60 per share, as compared to net loss of $18.2 million,
or $0.98 per share, in the fiscal year ended December 31, 2005. The decline was
largely the result of the impact of the deferred tax asset valuation allowances
described above. Additional factors discussed above contributed to the operating
loss experienced, even after excluding the deferred tax asset valuation
allowances.
28
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.
At December 31, 2007 and December 31, 2006, we had accrued $3.0 million and $3.3
million, 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.
AlixPartners Engagement
We engaged AlixPartners during the third quarter of 2005 to assist in the
restructuring plans of the Engine & Power Train business. The plans focused on
improving the group's profitability through the elimination of significant
duplicate capacity, among other cost reduction efforts. On January 19, 2007, we
entered into an addendum to our agreement that, among other things, added
additional tasks to be performed, including providing the services of James J.
Bonsall, a Managing Director of AlixPartners, to serve as our interim President
and Chief Operating Officer until our permanent CEO was appointed. Services
provided by AlixPartners to the Company were completed with the closing of the
sale of the Automotive & Specialty division of the Electrical Components
business in December 2007.
29
During 2007 and 2006, we incurred $5.4 million and $21.1 million respectively
related to fees earned by AlixPartners during the year.
LIQUIDITY AND CAPITAL RESOURCES
Our primary liquidity needs are to fund capital expenditures, service
indebtedness and support working capital requirements. In general, our principal
sources of liquidity are cash flows from operating activities, when available,
and borrowings under available credit facilities. In 2007 and 2006, however, our
liquidity was predominantly obtained through proceeds from the sale of non-core
businesses.
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
2007 vs. 2006
Cash used by operations amounted to $14.8 million in 2007, as compared to cash
used by operations of $94.4 million in 2006. The 2007 results included a net
loss of $178.1 million. Accounts receivable decreased by $35.2 million from the
beginning of the year. This net decrease was the result of several factors.
First, an increase of $32.7 million in the amount of discounted receivables at
the end of 2007 compared to 2006 reflected the increasing use of discounting by
our European and Indian locations. In addition, when evaluating days to
collection for outstanding receivables, there was an improvement of four days to
collection as of December 31, 2007 when compared to the end of 2006. The days
sales outstanding ("DSO") for compressor operations decreased from 61 at the end
of 2006 to 57 at year-end 2007 (before consideration for discounted accounts
receivable), due to improved time to collection in North America, Europe, and
India. Inventories decreased by $30.2 million since the beginning of the year,
reflecting improvements of six days inventory on hand for the compressor
operations. These positive working capital results were offset by decreases to
accounts payable and other accrued expenses and liabilities (up $51.0 million
since the end of 2006). Most of the remainder of the cash adjustments to working
capital was due to the effects of foreign currency translation.
Cash provided by investing activities was $244.3 million in 2007 versus cash
provided by investing activities of $70.9 million for the same period of 2006.
$265.3 million in net proceeds were received from the sale of assets during
2007, while $135.0 million in proceeds were recorded in 2006. Net proceeds from
asset sales in 2007 included the sale of the Residential & Commercial portions
of our Electrical Components business for $199.0 million, the sale of the Engine
& Power Train business for $48.9 million, the sale of the Automotive & Specialty
division of the Electrical Components business for $8.3 million, the sale of an
aircraft for $3.4 million, the sale of other fixed assets for $4.7 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 operations. The
entire purchase price was allocated to amortizable intangible assets, which were
sold as part of the divestiture of the Electrical Component business
30
operations in 2007. Capital expenditures were reduced by $52.9 million from the
prior year, from $62.1 million in 2006 to $9.2 million in 2007.
Cash used by financing activities was $237.5 million in 2007 as compared to a
use of cash of $9.2 million in the same period of 2006. In 2007, we used the
proceeds from the sale of the Electrical Components and Engine & Power Train
businesses to pay off the entire balance of both our First and Second Lien
Credit Agreements.
2006 vs. 2005
Cash used by operating activities was $94.4 million in the fiscal year of 2006
as compared to cash provided by operations of $16.0 million in 2005. The use of
cash in 2006 reflected both our operating loss and net investments in working
capital. Included in operating loss for 2006 was the gain on the sale of the
Little Giant Pump Company of $49.7 million and the associated gain from the
curtailment of its pension plan of $8.5 million. In addition, inventories
increased by $18.9 million since the beginning of the year, attributable in part
to Oracle implementation issues and inefficient materials management exacerbated
by high levels of personnel turnover associated with an Electrical Components
facility in Mexico. Accounts receivable in 2006 increased by $7.4 million from
the beginning of the year. This increase was the result of receivables, on
average, requiring an additional four days to collect as of December 31, 2006 as
compared to the end of 2005. This increase was driven in part by the Engine &
Power Train business, whose days sales outstanding increased from 50 at the end
of the 2005 to 54 as of December 31, 2006. A key customer at the Engine Group,
comprising 49% and 50% of its total outstanding accounts receivable balance at
the end of 2006 and 2005 respectively, increased its average time to pay by six
days over the course of 2006, thus lengthening the average time to collection
for that business. Days sales outstanding also increased in the Electrical
Components Group, from 52 days at the end of 2005 to 58 days at the end of 2006.
A greater percentage of the accounts receivable balance for Electrical
Components at the end of 2006 was for automotive customers, who on average pay
on more extended payment terms than other customers for the group.
The cash used to fund operations, fund capital expenditures and repay amounts
originally borrowed under the new debt arrangements was predominantly provided
by proceeds from the sale of Little Giant Pump Company. The sale of our 100%
ownership interest in Little Giant Pump Company was completed on April 21, 2006
for $120.7 million. Approximately 63% of the gross proceeds were applied against
the First Lien borrowing and 37% against the Second Lien borrowing.
Average days sales outstanding were 59 days at December 31, 2006 versus 55 days
at December 31, 2005, before giving effect to receivables sold. Days inventory
on hand were 82 days at December 31, 2006, up from 79 days at December 31, 2005,
due to the factors discussed above.
Cash flows provided by investing activities were $70.9 million in fiscal 2006 as
compared to a use of cash of $109.8 million in 2005. Of the overall change of
$180.7 million, $51.2 million was related to lower capital expenditures in 2006
compared to significant new product expansions in India and Brazil in 2005, and
$131.5 million related to higher proceeds received from the sale of assets
during 2006. Included in such sales was our 100% interest in Little Giant Pump
Company for $120.7 million, the sale of our 7% interest in Kulthorn Kirby Public
Company Limited stock for $4.7 million and the sale of our former Douglas,
Georgia manufacturing facility for $3.5 million. In addition, during the first
quarter, we acquired a small Australian-based company, which owned patents
related to the manufacturing of certain types of electric motors, which were
applicable to both our Electrical Components and Compressor businesses. The
entire purchase price was allocated to amortizable intangible assets.
31
Cash flows used in financing activities were $9.2 million in fiscal 2006 as
compared to $24.0 million in 2005. During the first quarter 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 (amended in the fourth
quarter 2006 to $250 million) and a $100 million Second Lien Credit Agreement
(replaced in the fourth quarter of 2006 by a different Second Lien Credit
Agreement). During the second quarter 2006, proceeds from the sale of Little
Giant Pump Company were used to repay a portion of our borrowings under the
First and Second Lien Credit Agreements, based upon formulas contained in the
agreements.
CREDIT FACILITIES AND CASH ON HAND
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 fiscal years ended December 31, 2007 and December
31, 2006, our average outstanding debt balance was $210.2 million and $373.0
million, respectively. Our weighted average interest rate was 8.9% as of
December 31, 2007, as compared to a weighted average rate of 10.0% as of
December 31, 2006. The decline in the weighted average rate was attributable to
the elimination of our second lien debt in August of 2007.
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. The First and Second Lien Credit Agreements
provided for security interests in substantially all of our assets and
originally specified quarterly financial covenants related to EBITDA (as defined
under the agreement, which provided adjustments for certain items, and hereafter
referred to as "Adjusted EBITDA"), capital expenditures, and fixed charge
coverage. The Adjusted EBITDA covenant originally applied through September 30,
2007, and a fixed charge coverage covenant applied thereafter.
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. 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.
Effective with the closing of the sale of the Residential & Commercial and Asia
Pacific operations of the Electrical Components business on August 31, 2007, we
paid off the entire balance associated with our Second Lien Credit Agreement and
the majority of the balance under our First Lien Credit Agreement. The remainder
of the balance under the First Lien Credit Agreement was paid off effective with
the closing of the Engine & Power Train business on November 9, 2007.
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 lenders' total
32
commitment from $175 million to $75 million.
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.
In addition to our domestic lending arrangement, we have various borrowing
arrangements at our foreign subsidiaries to support working capital needs and
government sponsored borrowings that provide advantageous lending rates. Our
weighted average interest rate for all borrowings, including foreign borrowings,
was 8.9% at December 31, 2007. The interest rate on our U.S. credit agreement,
had balances been outstanding, would have been 7.5% at December 31, 2007.
In accordance with the amendments discussed above, we are currently in
compliance with the remaining 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 finalizing arrangements for
a stand-by credit facility under a new collateralized arrangement, although we
would not expect to require any outstanding borrowings to fund current
operations.
At December 31, 2007, we had cash balances in North America of approximately
$20.7 million, outstanding letters of credit of $6.8 million, and U.S.
availability under our First Lien Credit Agreement of approximately $9.4
million. We also had the capacity for additional borrowings of $95.5 million in
foreign jurisdictions under our U.S. credit agreement
For further discussion of our First and Second Lien Credit Agreements, refer to
Note 10, "Debt," of the Notes to the Consolidated Financial Statements.
Accounts Receivable Sales
Our Brazilian, European, and Indian subsidiaries periodically sell their
accounts receivable with financial institutions. Such receivables are factored
both without and with limited recourse to us and are excluded from accounts
receivable in our consolidated balance sheets. The amount of sold receivables
excluded from our balance sheet was $79.2 million and $46.5 million as of
December 31, 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 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.
33
As a result of the sale of the majority of the Electrical Components business
and the Engine & Power Train business, we completely eliminated our domestic
debt as of November 9, 2007. Accordingly, we expect our consolidated interest
expense in the future to be substantially reduced. Based on the amount of our
domestic debt 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 in the final phase
of 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 evaluating and executing 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 certain 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 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 $13.9 million. Receipt of such proceeds is
dependent upon final resolution of these audits. We continue to believe that we
will prevail in sustaining the deduction and carryback, and are in the process
of hiring legal counsel to pursue this refund. The timing of the recovery of the
refund is uncertain.
Finally, we have successfully executed a conversion of our Salaried Retirement
Plan to a new Plan. The prior Plan was substantially over-funded. This
conversion is expected to yield net cash to the Company in March 2008 of
approximately $80 million. The net proceeds were higher than we previously
expected because the old plan was able to purchase annuities to fund its future
obligations for a lower premium than we had estimated, due in part to the final
actuarial assumptions being more favorable than those we used for purposes of
our original estimate. The arrangements we have made will fully secure the
benefits payable under the old plan and will also fund the new plan, without
additional annual contributions, for approximately six to eight future years.
In the fourth quarter of 2007, as discussed above, we announced the relocation
of the manufacturing operations at our Tecumseh, Michigan facility to other
locations in North America. As a result of this consolidation, we will also be
executing a reversion of our Hourly pension plan. At December 31, 2007, this
Plan reported approximately $90 million in overfunding. We expect that the
conversion of this Plan will make net cash available of approximately $45 to $60
million. The timing of the distribution, however, will be dependent on the
length of time needed to meet IRS distribution requirements, and could extend to
2009 or later, which further increases the variability of the final distribution
amount.
As part of addressing the Company's liquidity needs, we made substantially lower
levels of capital expenditures in 2007, and expect to continue that trend in
2008. 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. We currently estimate that capital expenditures for 2008 will
range from $20 to $25 million.
34
Off-Balance Sheet Arrangements
We do not believe we have any off-balance sheet arrangements that have, or are
reasonably likely to have, a material effect on us; although, as disclosed in
Note 13 to the Consolidated Financial Statements, we are contingently liable
with respect to some export receivables sold in Brazil, Europe and India, and as
disclosed in Note 11, we are contingently liable if costs of remediation of the
Sheboygan Falls, Wisconsin plant site were to exceed the $100 million
Remediation Cost Cap insurance we purchased.
Contractual Obligations
We have minimal capital and operating leases, as substantially all employed
facilities and equipment are owned. Our payments by period as of December 31,
2007 for our long-term contractual obligations are as follows:
Payments by Period (in millions)
Less than 1
Total Year 1-3 Years Other
----- ----------- --------- -----
Debt Obligations $62.8 $59.5 $3.3 --
Interest Payments on Debt (1) 16.8 5.6 11.2 --
Other Long-Term Obligations(2) 1.0 0.4 -- 0.6
(1) Debt levels are assumed to remain constant. Interest rates on debt
obligations are assumed to remain constant at the current weighted average
rate of 8.9%.
(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
The preparation of financial statements requires that management make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and revenues and expenses during the
period. Management bases its estimates on historical experience and other
assumptions that it believes to be reasonable under the circumstances, the
results of which form the basis for making judgments about carrying values of
assets and liabilities that are not readily apparent from other sources.
Management continually evaluates the information used to make these estimates as
our business and the economic environment change. The use of estimates is
pervasive throughout our financial statements, but the accounting policies and
estimates management considers most critical are as follows:
Uncertainty in Income Taxes
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 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.
35
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 December 31, 2007, there is no reduction of deferred tax assets
relating to uncertain tax positions.
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 year ended December
31, 2007 were reduced by $0.4 million. The impact of FIN 48 for 2007 was a
benefit of $0.9 million.
At December 31, 2007, we anticipate a decrease in the total amount of
unrecognized tax benefits within the next twelve months in the range of zero to
$0.4 million.
Impairment of Long-Lived Assets
It is our policy to review our long-lived assets for possible impairment
whenever events and circumstances indicate that the carrying value of an asset
may not be recoverable. Such events could include loss of a significant customer
or market share, the decision to relocate production to other locations within
the Company, or the decision to cease production of specific models of product.
We recognize losses relating to the impairment of long-lived assets when the
future undiscounted cash flows are less than the asset's carrying value or when
the assets become permanently idle. Assumptions and estimates used in the
evaluation of impairment are consistent with our business plan, including
current and future economic trends, the effects of new technologies and foreign
currency movements are subject to a high degree of judgment and complexity. All
of these variables ultimately affect management's estimate of the expected
future cash flows to be derived from the asset or group of assets under
evaluation, as well as the estimate of their fair value. Changes in the
assumptions and estimates, or our inability to achieve our business plan, may
affect the carrying value of long-lived assets and could result in additional
impairment charges in future periods.
As discussed above, during the years ended December 31, 2007, 2006 and 2005 we
recognized impairments of our long-lived assets of $7.2 million, $2.4 million
and $4.3 million respectively, related to restructuring activities. As we
continue our plans to restructure our business and meet plan operating and
liquidity targets, a decision may be reached to sell certain assets for amounts
less than the carrying values that were established under a held and used model.
Deferred Tax Assets
As of December 31, 2007, we had $3.8 million of deferred tax assets recorded on
our financial statements related to foreign operations. In periods where such
assets are recorded, we are required to estimate whether recoverability of our
deferred tax assets is more likely than not, based on forecasts of taxable
earnings in the related tax jurisdiction. We use historical and projected future
operating results, based upon approved business plans, including a review of the
eligible carry-forward period, tax planning opportunities and other relevant
considerations. Examples of evidence that we consider when making judgments
about the deferred tax valuation includes tax law changes, a history of
cumulative losses, and variances in future projected profitability.
Full valuation allowances will be maintained against deferred tax assets in the
U.S. and other foreign countries until sufficient positive evidence exists to
reduce or eliminate them. During the quarter
36
ended June 30, 2007, the valuation allowance related to our European entity 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.
In the third quarter of 2006, valuation allowances were established against
remaining foreign deferred tax assets in Brazil (aggregating approximately $5.9
million) due to negative evidence (including a continuation of losses recognized
during 2006) which resulted in a determination that it was no longer more likely
than not that the assets would be realized.
Goodwill
We have goodwill recorded from acquisitions. These assets are subject to
periodic evaluation for impairment when circumstances warrant, or at least once
per year. Impairment is tested in accordance with SFAS No. 142, "Goodwill and
Other Intangibles" by comparison of the carrying value of the reporting unit to
its estimated fair value. As there are not quoted prices for our reporting
units, fair value is estimated based upon a present value technique using
estimated discounted future cash flows. Intangible assets other than goodwill
are also subject to periodic evaluation for impairment and are equally sensitive
to changes in the underlying assumptions and estimates.
Fair value of our goodwill is estimated based upon a present value technique
using discounted future cash flows, forecasted over a five year period, with
residual growth rates forecasted at 3.0% to 5.0% thereafter. We use management
business plans and projections as the basis for expected future cash flows. In
evaluating such business plans for reasonableness in the context of their use
for predicting discounted cash flows in our valuation model, we evaluate whether
there is a reasonable basis for differences between actual results of the
preceding year and projected results for the upcoming years. This methodology
can potentially yield significant improvements in growth rates in the first few
years of forecast data, due to multiple factors such as improved efficiencies or
incremental sales volume opportunities that are deemed to be reasonably likely
to be achieved. In the India reporting unit, for example, the goodwill analysis
performed at the end of 2007 projected growth rates of approximately 16.7% in
2008, before moderating to a 5.0% residual growth rate. This higher-than-average
growth rate is due to the introduction of new product in India. The Europe
reporting unit projected growth rates of approximately 8.9% in 2008, adjusted to
3.0% thereafter.
Assumptions in estimating future cash flows are subject to a high degree of
judgment and complexity. We make every effort to forecast these future cash
flows as accurately as possible with the information available at the time the
forecast is developed. However, changes in the assumptions and estimates may
affect the carrying value of goodwill, and could result in additional impairment
charges in future periods. Factors that have the potential to create variances
between forecasted cash flows and actual results include but are not limited to
(i) fluctuations in sales volumes, which can be driven by multiple external
factors, including weather conditions affecting demand; (ii) product costs,
particularly commodities such as copper; (iii) currency exchange fluctuations;
(iv) acceptance of the Company's pricing actions undertaken in response to
rapidly changing commodity prices and other product costs; (v) interest rate
fluctuations; and (vii) the intention to continue to operate the reporting unit.
Refer to "Cautionary Statements Relating to Forward-Looking Statements" in Item
2 for other factors that have the potential to impact estimates of future cash
flows.
Consistent with paragraph 24 of SFAS No. 142, "Goodwill and Other Intangible
Assets," discount rates utilized in the goodwill valuation analysis are derived
from published resources such as Ibbotson. The rates utilized were 11.23% at
December 31, 2007 and 8.16% at December 31, 2006 for all business units for
which goodwill is currently recorded. For purposes of our 2007 analysis, in
light of the Company's transition from a diversified concern to a global
compressor operation, we
37
utilized the discount rate from a SIC code specific to our compressor business.
Had we utilized the same SIC code that we employed in 2006, the result would
have been a discount rate of 10.08%.
Operating Profit before tax as a percentage of sales revenue is also a key
assumption in the fair value calculation. The range of assumptions used
incorporates the anticipated results of the Company's ongoing productivity
improvements over the life of the forecast model. The Europe reporting unit
forecasted operating profit percentages of 3.0% in 2008 and ranging from 3.1 to
3.5% thereafter, with operating profit in the terminal year forecasted at 3.4%.
The India reporting unit forecasted operating profit at 4.6% of sales in 2008
ranging from 3.1% to 4.0% thereafter, with operating profit in the terminal year
forecasted at 2.8%.
Based on the goodwill analysis performed for the year ended December 31, 2007,
changes of 1.0% in the discount rate utilized would increase (decrease) the fair
value calculated for the respective business units as follows:
Change in valuation with % Change in valuation
1.0 decrease in with 1.0% increase in
discount rate discount rate
Europe 4.1 (3.9)
India 4.8 (4.6)
Both business units that have goodwill show fair values sufficiently greater
than the carrying value such that a 1.0% increase in discount rate does not
place the goodwill at or near risk of impairment.
While we currently believe that the fair value of both reporting units exceeds
carrying value under the discounted cash flow model, materially different
assumptions regarding future performance of our reporting units, the selected
discount rate or the intention to continue to operate the reporting units could
result in significant impairment losses.
At December 31, 2007, we had $20.2 million of goodwill recorded in our
consolidated financial statements.
Accrued and Contingent Liabilities
We have established reserves for environmental, warranty and legal contingencies
in accordance with SFAS No. 5. We also have liabilities with regard to certain
post-closing adjustments related to divested operations, which could be
material. A significant amount of judgment and use of estimates is required to
quantify our ultimate exposure in these matters. The valuation of reserves for
contingencies is reviewed on a quarterly basis at the operating and corporate
levels to assure that we are properly reserved. Reserve balances are adjusted to
account for changes in circumstances for ongoing issues and the establishment of
additional reserves for emerging issues. While management believes that the
current level of reserves is adequate, changes in the future could impact these
determinations.
We are involved in a number of environmental sites where we are either
responsible for, or participating in, a cleanup effort. As of December 31, 2007,
we had accrued a total of $3.0 million on our balance sheet; we paid
approximately $0.1 million in connection with these sites during 2007. For
additional information on environmental liabilities, including the Sheboygan
River and Harbor Superfund and Hayton Area Remediation Project sites, see Note
11 to the Financial Statements.
38
Employee Related Benefits
Significant employee related benefit assumptions include, but are not limited
to, the expected rates of return on plan assets, determination of discount rates
for re-measuring plan obligations, determination of inflation rates regarding
compensation levels and health care cost projections. Differences among these
assumptions and our actual return on assets, financial market-based discount
rates, and the level of cost sharing provisions will impact future results of
operations.
We develop our demographics and utilize the work of actuaries to assist with the
measurement of employee related obligations. The discount rate assumption is
based on investment yields available at year-end on corporate long-term bonds
rated AA by Moody's. The expected return on plan assets reflects asset
allocations and investment strategy. The inflation rate for compensation levels
reflects our actual historical experience. The inflation rate for health care
costs is based on an evaluation of external market conditions and our actual
experience in relation to those market trends. Assuming no changes in any other
assumptions, a 0.5% decrease in the discount rate and the rate of return on plan
assets would increase 2007 expense by $1.5 million and $3.0 million,
respectively.
Due primarily to the significant over-funding of the majority of U.S. pension
plans and the resulting favorable return on plan assets, we recognized a net
periodic benefit for pensions in our financial statements of $14.2 million and
$12.8 million in 2007 and 2006, respectively. In the first quarter of 2007, we
announced revisions to our Salaried Retirement Plan. At December 31, 2007, this
Plan reported approximately $121 million in overfunding, out of a total of $231
million for all our pension plans that have plan assets in excess of
obligations. On May 1, 2007, we implemented a new retirement program for all
Tecumseh salaried employees. This conversion, which we expect to complete in
March of 2008, will yield cash proceeds to the Company of approximately $80
million. The net proceeds were higher than we previously expected because the
old plan was able to purchase annuities to fund its future obligations for a
lower premium than we had estimated, due in part to the final actuarial
assumptions being more favorable than those we used for purposes of our original
estimate. The new retirement program includes both defined benefit and defined
contribution plans. A portion of the overfunding for the old plan was utilized
to pre-fund the benefits for both of the replacement plans for approximately the
next six to eight years.
In the fourth quarter of 2007, we announced the relocation of the manufacturing
operations at our Tecumseh, Michigan facility to other locations in North
America. As a result of this consolidation, we will also be executing a
reversion of our Hourly pension plan. At December 31, 2007, this Plan reported
approximately $90 million in overfunding. We expect that the conversion of this
Plan will make net cash available of approximately $45 to $60 million. The
timing of the distribution, however, will be dependent on the length of time
needed to meet IRS distribution requirements, and will likely extend to 2009 or
later, which further increases the variability of the final distribution amount.
See Note 4 of the Notes to Consolidated Financial Statements for more
information regarding costs and assumptions for post-employment benefits.
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
39
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 do not currently
expect this pronouncement to have an impact 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. We do not currently expect this pronouncement to have an
impact on our consolidated financial statements.
Noncontrolling Interests in Consolidated Financial Statements
In December 2007, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 160, "Noncontrolling Interests in Consolidated Financial Statements," which
among other things, provides guidance and establishes amended accounting and
reporting standards for a parent company's noncontrolling interest in a
subsidiary. We are currently evaluating the impact of adopting the statement,
which is effective for fiscal years beginning on or after December 15, 2008.
Business Combinations
In December 2007, the FASB issued Statement No. 141R, "Business Combinations,"
("SFAS No.141R") which replaces SFAS No. 141, Business Combinations. SFAS 141R
establishes principles and requirements for how an acquirer entity recognizes
and measures in its financial statements the identifiable assets acquired, the
liabilities assumed (including intangibles) and any noncontrolling interests in
the acquired entity. We are currently evaluating the impact of adopting the
statement, which is effective for fiscal years beginning on or after December
15, 2008.
OUTLOOK
Information in this "Outlook" section should be read in conjunction with the
cautionary statements and discussion of risk factors included elsewhere in this
report.
The outlook for 2008 is subject to many of the same variables that have
negatively impacted us throughout 2007. Commodity costs, key currency rates,
weather and the overall growth rates of the respective economies around the
world are all important to future performance. Overall, we do not expect these
factors to become any more favorable in the foreseeable future. Certain key
commodities, including copper, continue to trade at elevated levels compared to
recent history. From January 1, 2007 through December 31, 2007, the price of
copper increased by approximately 6.2%; since the beginning of 2006, copper
prices have increased by 40.2%. We currently hold more than 62% of our total
projected copper requirements for 2008 in the form of forward purchase
contracts, which will provide us with substantial (though not total) protection
from further price increases during the year but also will detract from our
ability to benefit from any price decreases. In addition, we expect the cost of
steel and other purchased materials to be more costly in 2008 versus 2007. In
the aggregate, we expect the cost of our purchased materials to be approximately
$23 million more expensive than in the prior year.
40
The Brazilian Real and Indian Rupee continue to strengthen against the dollar,
and as of December 31, 2007 had strengthened 17.2% and 10.7% respectively since
the beginning of the year. While we have considerable forward purchase contracts
to cover our exposure to additional fluctuations in value during the year, the
average rate expected to be realized, giving consideration to our contracts,
will nonetheless have a negative financial impact of $35 million when compared
to 2007.
As part of our efforts to offset these worsening conditions, to improve
profitability and reduce the consumption of capital resources, our plans for
2008 include price increases as needed to cover our increased input costs,
additional cost reduction activities including, but not limited to, further
employee headcount reductions, consolidation of productive capacity and
rationalization of product platforms, and revised sourcing plans. In addition,
we estimate that the Company incurred approximately $19 million in professional
and other fees during 2007 that will not recur in 2008. After giving recognition
to these factors, we believe we will be challenged to maintain 2007 operating
profit levels in 2008. In addition, while not currently modeled in our
projections, we remain concerned about the general health of the economy and the
possibility of recession in the United States, which could further impact
expected earnings.
As a result of the sale of the majority of the Electrical Components business
and the Engine & Power Train business, 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 our
domestic debt prior to the sale of businesses, we expect that its elimination
will reduce our annualized interest expense by approximately $22 million. In
addition, recently we successfully completed the reversion of our Salaried
Retirement Plan. The reversion is expected to yield net cash in March 2008 of
approximately $80 million. Lastly, we are currently negotiating a new financing
arrangement for our North American based activities which will increase our
availability of funds, should they become necessary. With these and other
activities, we believe we have sufficient liquidity to affect the changes
necessary to restore our profitability over the near term.
We are also continuing to evaluate our corporate infrastructure in relation to
the level of business activity that remains now that the majority of 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 certain idle assets, we expect to realize proceeds of
approximately $12 million, with the majority received by the end of the first
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 $13.9 million. Receipt of such proceeds is
dependent upon final resolution of these audits, which are currently under
dispute with the IRS. We continue to believe that we will prevail in sustaining
the deduction and carryback and are in the process of hiring legal counsel to
pursue this refund. The timing of the recovery of the refund is uncertain.
41
As a result of the relocation of our manufacturing operations in Tecumseh,
Michigan, we will also be executing a reversion of our Hourly pension plan. At
December 31, 2007, this Plan reported approximately $90 million in overfunding.
We expect that the conversion of this Plan will make net cash available of
approximately $45 to $60 million. The timing of the distribution, however, will
be dependent on the length of time needed to meet IRS distribution requirements
and could extend to 2009 or later, which further increases the variability of
the final distribution amount.
As part of addressing the Company's liquidity needs, we made substantially lower
levels of capital expenditures in 2007, and expect to continue that trend in
2008. 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. We currently estimate that capital expenditures for 2008 will
range from $20 to $25 million.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market 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.
Credit Risk - Financial instruments which potentially subject us to
concentrations of credit risk are primarily cash investments and accounts
receivable. We place our cash investments, when available, in bank deposits and
investment grade, short-term debt instruments (predominately commercial paper)
with reputable credit-worthy counterparties and, by policy, limits the amount of
credit exposure to any one counterparty.
We use contemporary credit review procedures to approve customer credit.
Customer accounts are actively monitored, and collection efforts are pursued
within normal industry practice. Management believes that concentrations of
credit risk with respect to receivables are somewhat limited due to the large
number of customers in our customer base and their dispersion across different
industries and geographic areas.
A portion of export accounts receivable of our Brazilian, European, and Indian
subsidiaries are sold at a discount. Discounted receivables sold in these
subsidiaries at December 31, 2007 and 2006 were $79.2 million and $46.5 million,
respectively, and the discount rate was 9.1% in 2007 and 7.45% in 2006. We
maintain an allowance for losses based upon the expected collectability of all
accounts receivable, including receivables sold.
Interest Rate Risk - We are subject to interest rate risk, primarily associated
with our borrowings. Our $75 million First Lien Credit Agreement, when we have
borrowings outstanding against it, 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.
Based on our debt balances at December 31, 2007, a 1% increase in interest rates
would increase interest expense for the year by approximately $0.6 million.
42
Commodity Price Risk - We use commodity forward purchasing contracts to help
control the cost of traded commodities, primarily copper and, to a lesser
extent, aluminum. 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 our 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 December 31, 2007
and 2006, we held a total notional value of $64.4 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.
Based on our current level of activity, and before consideration for commodity
forward purchases, an increase in the price of copper of $100 per metric ton (an
increase of 1.5% from 2007 year-end pricing) would adversely affect our
operating profit by $1.6 million.
Foreign Currency Exchange Risk - 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
our 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 December 31, 2007 and 2006,
we held foreign currency forward contracts with a total notional value of $232.7
million and $130.4 million, respectively. Based on our current level of
activity, we believe that a $0.10 strengthening of the Brazilian Real against
the U.S. Dollar impacts our operating profit by approximately $10 million.
43
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Registered Public Accounting Firm................................................... 45
Financial Statements
Consolidated Statements of Operations for the years ended December 31, 2007, 2006 and 2005............. 47
Consolidated Balance Sheets at December 31, 2007 and 2006.............................................. 48
Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005............. 50
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2007, 2006 and 2005... 51
Notes to Consolidated Financial Statements............................................................. 52
All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
44
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Tecumseh Products Company
We have audited the accompanying consolidated balance sheet of Tecumseh Products
Company and subsidiaries (the "Company") as of December 31, 2007, and the
related consolidated statements of operations, cash flows and stockholders'
equity for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Tecumseh Products
Company and subsidiaries as of December 31, 2007, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
As discussed in Note 6 to the consolidated financial statements, the Company
adopted Financial Accounting Standards Board Interpretation No.48 "Accounting
for Uncertainty in Income Taxes" effective January 1, 2007.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Tecumseh
Products Company and subsidiaries' internal control over financial reporting as
of December 31, 2007, based on criteria established in Internal Control --
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) and our report dated March 14, 2008 expressed an
unqualified opinion.
Grant Thornton LLP
Southfield, Michigan
March 14, 2008
45
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Tecumseh Products Company:
In our opinion, the consolidated balance sheet as of December 31, 2006 and the
related consolidated statements of operations, of stockholders' equity and of
cash flows for each of two years in the period ended December 31, 2006 present
fairly, in all material respects, the financial position of Tecumseh Products
Company and its subsidiaries at December 31, 2006, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 2006, in conformity with accounting principles generally accepted
in the United States of America. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As discussed in Note 4 to the consolidated financial statements, the Company
changed the manner in which it accounts for defined benefit pension and other
postretirement plans effective December 31, 2006.
PricewaterhouseCoopers LLP
Detroit, MI
April 9, 2007, except for Note 2 as to which the date is March 14, 2008
46
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions, except per share data) FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
2007 2006 2005
-------- -------- ------
Net sales.................................................. $1,133.4 $1,017.7 $ 924.6
Cost of sales and operating expenses................... 1,011.7 943.2 822.9
Selling and administrative expenses.................... 109.5 99.2 94.1
Impairments, restructuring charges, and other items.... 7.2 2.4 4.3
-------- -------- ------
Operating income (loss).................................... 5.0 (27.1) 3.3
Interest expense....................................... (22.3) (19.4) (3.0)
Interest income and other, net......................... 6.2 10.9 9.0
-------- -------- ------
(Loss) income from continuing operations before taxes...... (11.1) (35.6) 9.3
Tax (benefit) provision ............................... (8.2) 12.5 27.5
-------- -------- ------
Net loss from continuing operations........................ $ (2.9) $ (48.1) $(18.2)
Loss from discontinued operations, net of tax (175.2) (32.2) (205.3)
-------- -------- ------
Net income (loss) $ (178.1) $ (80.3) $(223.5)
======== ======== =======
Basic and diluted loss per share*:.........................
Loss from continuing operations $ (0.16) $ (2.60) ($0.98)
Loss from discontinued operations, net of tax (9.48) (1.75) (11.11)
-------- -------- ------
Net loss per share $ (9.64) $ (4.35) $(12.09)
======== ======== =======
Weighted average shares (in thousands)..................... 18,480 18,480 18,480
======== ======== =======
Cash dividends declared per share.......................... $ 0.00 $ 0.00 $0.64
======== ======== =======
* In 2007, we issued a warrant to a lender to purchase 1,390,944 shares of
our Class A Common Stock, which is equivalent to 7% of our fully diluted
common stock (including both Class A and Class B shares). This warrant is
not included in diluted earnings per share for the year ended December 31,
2007, as the effect would be antidilutive.
The accompanying notes are an integral part of these Consolidated Financial
Statements.
47
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except share data) DECEMBER 31,
---------------------
2007 2006
-------- --------
ASSETS
Current Assets:
Cash and cash equivalents....................................................... $ 76.8 $ 81.9
Restricted cash................................................................. 6.8 --
Short term investments.......................................................... 5.0 --
Accounts receivable, trade, less allowance for doubtful accounts of $5.7
million in 2007 and $10.1 million in 2006...................................... 93.2 219.5
Inventories..................................................................... 152.0 353.4
Deferred and recoverable income taxes........................................... 10.7 40.6
Deferred and recoverable non-income taxes....................................... 19.5 33.6
Assets held for sale............................................................ 21.9 --
Other current assets............................................................ 11.8 4.4
-------- --------
Total current assets.................................................... 397.7 733.4
-------- --------
Property, Plant, and Equipment, net................................................ 353.3 552.4
Goodwill ........................................................................ 20.2 127.0
Other intangibles ................................................................. -- 53.0
Prepaid pension expense............................................................ 233.4 202.5
Deferred and recoverable income taxes.............................................. 13.9
Recoverable non-income taxes....................................................... 102.2 63.6
Other assets....................................................................... 44.2 50.8
-------- --------
Total assets............................................................ $1,164.9 $1,782.7
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable, trade......................................................... $ 123.0 $ 216.0
Short-term borrowings........................................................... 59.5 163.2
Liabilities held for sale....................................................... 2.6 --
Accrued liabilities:
Employee compensation...................................................... 31.1 35.2
Product warranty and self-insured risks.................................... 17.2 37.9
Other...................................................................... 35.9 57.0
-------- --------
Total current liabilities............................................... 269.3 509.3
Long-term debt..................................................................... 3.3 217.3
Deferred income taxes.............................................................. 10.2 28.6
Other postretirement benefit liabilities........................................... 74.3 166.0
Product warranty and self-insured risks............................................ 10.0 13.6
Accrual for environmental matters.................................................. 2.9 1.3
Pension liabilities................................................................ 14.8 14.9
Other ........................................................................... 34.2 33.3
-------- --------
Total liabilities....................................................... 419.0 984.3
-------- --------
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................................................................ 547.9 726.3
Accumulated other comprehensive income .......................................... 168.5 49.9
-------- --------
Total stockholders' equity................................................ 745.9 798.4
-------- --------
Total liabilities and stockholders' equity................................ $1,164.9 $1,782.7
======== ========
The accompanying notes are an integral part of these Consolidated Financial
Statements.
48
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions) FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2007 2006 2005
-------- -------- ----------
Cash Flows from Operating Activities:
Net loss ....................................................... $ (178.1) $ (80.3) $ (223.5)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization ........................... 55.5 80.1 92.3
Non-cash restructuring charges and other items .......... 15.9 30.9 115.0
Impairment of long-lived assets ......................... 126.5 -- --
Loss (Gain) on sale of discontinued operations .......... 3.2 (49.7) --
Loss (Gain) on disposal of property and equipment ....... 1.0 (5.6) 2.4
Accounts receivable ..................................... 35.2 (7.4) 7.3
Inventories ............................................. 30.2 (18.9) 39.3
Payables and accrued expenses ........................... (51.0) 1.2 0.7
Employee retirement benefits ............................ (37.7) (24.2) (16.9)
Deferred and recoverable taxes .......................... (19.8) 7.1 41.5
Other ................................................... 4.3 (27.6) (42.1)
-------- -------- --------
Cash (Used in) Provided by Operating Activities ..... (14.8) (94.4) 16.0
-------- -------- --------
Cash Flows from Investing Activities:
Capital expenditures ........................................... (9.2) (62.1) (113.3)
Short term investments ......................................... (5.0) -- --
Restricted cash ................................................ (6.8) -- --
Business acquisitions, net of cash acquired .................... -- (2.0) --
Proceeds from sale of assets ................................... 265.3 135.0 3.5
-------- -------- --------
Cash Provided by (Used In) Investing Activities ..... 244.3 70.9 (109.8)
-------- -------- --------
Cash Flows from Financing Activities:
Dividends paid ................................................. -- -- (11.8)
Debt issuance / amendment costs ................................ (2.5) (14.4) --
Repayment of Senior Guaranteed Notes ........................... -- (250.0) (50.0)
Repayment of Industrial Development Revenue Bonds .............. -- (10.5) --
Proceeds from First Lien credit agreement ...................... 261.4 230.2 --
Repayments of First Lien credit agreement ...................... (374.5) (117.1) --
Proceeds from old Second Lien credit agreement ................. -- 100.0 --
Repayments of old Second Lien credit agreement ................. -- (100.0) --
Proceeds from new Second Lien credit agreement ................. -- 100.0 --
Repayments of new Second Lien credit agreement ................. (100.0) -- --
Other borrowings, (repayments), net ............................ (21.9) 52.6 37.8
-------- -------- --------
Cash Used In Financing Activities ................... (237.5) (9.2) (24.0)
-------- -------- --------
Effect of Exchange Rate Changes on Cash ............................ 2.9 (2.0) 6.5
-------- -------- --------
Decrease In Cash and Cash Equivalents .......................... (5.1) (34.7) (111.3)
Cash and Cash Equivalents:
Beginning of Period ................................. 81.9 116.6 227.9
-------- -------- --------
End of Period ....................................... $ 76.8 $ 81.9 $ 116.6
======== ======== ========
Supplemental Schedule of Noncash Investing and Financing Activities:
Shareholder Option issued in conjunction with debt refinancing $ 3.7
Warrant issued in conjunction with debt financing 7.3
Paid-In-Kind Interest 0.2
Cash paid for interest 37.1 47.2 35.9
Cash paid for taxes 3.3 1.6 (7.7)
The accompanying notes are an integral part of these Consolidated Financial
Statements.
49
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in millions)
ACCUMULATED
OTHER TOTAL
CLASS A CLASS B PAID IN RETAINED COMPREHENSIVE STOCKHOLDERS'
$1 PAR VALUE $1 PAR VALUE CAPITAL EARNINGS INCOME/(LOSS) EQUITY
------------ ------------ ------- --------- ------------- ------------
BALANCE, DECEMBER 31, 2004........................ $ 13.4 $ 5.1 -- $ 1,042.0 $ (42.2) $ 1,018.3
COMPREHENSIVE INCOME (LOSS):
Net loss.......................................... (223.5) (223.5)
Unrealized gain on investment holdings (net of
tax of $0.0) ..................................... 4.1 4.1
Minimum pension liability (net of tax of $0.0).... 0.2 0.2
Gain on derivatives (net of tax of $4.4) ......... 8.1 8.1
Translation adjustments (net of tax of $0.0)...... 19.0 19.0
-----------
TOTAL COMPREHENSIVE LOSS...................... (192.1)
Cash dividends.................................... (11.8) (11.8)
------------ ------------ ------- --------- ------------- -----------
BALANCE, DECEMBER 31, 2005........................ 13.4 5.1 -- 806.7 (10.8) 814.4
COMPREHENSIVE INCOME (LOSS):
Net loss.......................................... (80.3) (80.3)
Unrealized loss on investment holdings (net of
tax of $0.0) ..................................... (4.0) (4.0)
Loss on derivatives (net of tax of $2.8) ......... (6.3) (6.3)
Translation adjustments (net of tax of $7.6)...... 31.3 31.3
-----------
TOTAL COMPREHENSIVE LOSS...................... (59.3)
Shareholder Option* 3.7 3.7
Impact of the adoption of FAS 158 for pension
plans (net of tax of $0.0) 39.6 39.6
------------ ------------ ------- --------- ------------- -----------
BALANCE, DECEMBER 31, 2006........................ $ 13.4 $ 5.1 $ 3.7 $ 726.4 $ 49.8 $ 798.4
Net loss.......................................... (178.1) (178.1)
Impact of adoption of FIN 48 (0.4) (0.4)
Gain on derivatives (net of tax of $0.0) ......... 0.1 0.1
Translation adjustments (net of tax of $3.0)...... 28.4 28.4
-----------
TOTAL COMPREHENSIVE LOSS...................... (150.0)
Shareholder Warrant 7.3 7.3
Postretirement and postemployment benefits (net
of tax of $0.5) (see Note 4) 90.2 90.2
------------ ------------ ------- --------- ------------- -----------
BALANCE, DECEMBER 31, 2007........................ $ 13.4 $ 5.1 $ 11.0 $ 547.9 $ 168.5 $ 745.9
============ ============ ======= ========= ============= ===========
* Some of the Company's major shareholders (Herrick foundation, of which
former Chairman Emeritus Todd W. Herrick and Director Kent B. Herrick are
members of the Board of Trustees, and two Herrick family trusts, of which
Todd W. Herrick is one of the trustees) entered into option agreements
with a lender to induce the lender to make financing available to the
Company. These option agreements, valued at $3.7 million, were recorded as
loan origination fees and the expense was included with the loss from
discontinued operations upon repayment of the loan.
The accompanying notes are an integral part of these Consolidated
Financial Statements.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
NOTE 1. ACCOUNTING POLICIES
Business Description - Tecumseh Products Company (the "Company") is a full line,
independent global manufacturer of hermetic compressors for residential and
commercial refrigerators, freezers, water coolers, dehumidifiers, window air
conditioning units and residential and commercial central system air
conditioners and heat pumps.
We formerly operated an Engine & Power Train Electrical Component business, as
well as an Electrical Component business. During 2007, we sold our entire Engine
& Power Train business, and the majority of the Electrical Component business.
The remaining portions of the Electrical Component business are classified as
held for sale.
Principles of Consolidation - The consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant intercompany
transactions and balances have been eliminated.
Foreign Currency Translation - All of our foreign subsidiaries use the local
currency of the country of operation as the functional currency. Assets and
liabilities are translated into U.S. dollars at year-end exchange rates while
revenues and expenses are translated at average monthly exchange rates. The
resulting translation adjustments are recorded in other comprehensive income or
loss, a component of stockholders' equity. Realized foreign currency transaction
gains and losses are included in cost of sales and operating expenses and amount
to a net gain of $1.6 million in 2007, a net gain of $6.3 million in 2006, and a
net loss of $3.6 million in 2005.
Cash and Cash Equivalents - Cash equivalents consist of commercial paper and
other short-term investments that are readily convertible into cash with
original maturities of three months or less. Restricted cash represents cash
deposits related to letters of credit. Cash and cash equivalents in foreign
locations amounted to $62.4 million and $38.5 million at December 31, 2007 and
2006, respectively.
Short term investments - Investments with a maturity of greater than three
months to one year are classified as short-term investments. Investments with
maturities beyond one year may be classified as short-term if the Company
reasonably expects the investment to be realized in cash or sold or consumed
during the normal operating cycle of the business. Investments available for
sale are recorded at market value using the specific identification method.
Investments held to maturity are measured at amortized cost in the statement of
financial position if it is the Company's intent and ability to hold those
securities to maturity. Any unrealized gains and losses on available for sale
securities are reported as other comprehensive income as a separate component of
shareholders' equity until realized or until a decline in fair value is
determined to be other than temporary. At December 31, 2007, we held
auction-rate securities valued at $5.0 million.
Inventories - Inventories are valued at the lower of cost or market, on the
first-in, first-out basis. Cost in inventory includes purchased parts and
materials, direct labor and applied manufacturing overhead.
Property, Plant and Equipment - Expenditures for additions, major renewals and
betterments are capitalized and expenditures for maintenance and repairs are
charged to expense as incurred. For financial statement purposes, depreciation
is determined using the straight-line method at rates based
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS)
upon the estimated useful lives of the assets, which generally range from 15 to
40 years for buildings and from 2 to 12 years for machinery, equipment and
tooling.
Goodwill - In accordance with SFAS No. 142, "Goodwill and Other Intangible
Assets," goodwill deemed to have indefinite life is no longer amortized but is
subject to impairment testing on at least an annual basis. We perform our annual
impairment testing during the fourth quarter each year. The impairment test
compares the estimated fair value of the reporting unit to its carrying value to
determine if there is any potential impairment. If the estimated fair value is
less than the carrying value, an impairment loss is recognized to the extent
that the estimated fair value of the goodwill within the reporting unit is less
than the carrying value. See Note 5 for additional disclosures related to
goodwill.
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Revenue Recognition - Revenues from the sale of our products are recognized once
the risk and rewards of ownership have transferred to the customers, which, in
most cases, coincide with shipment of the products. For other cases involving
export sales, title transfers either when the products are delivered to the port
of embarkation or received at the port of the country of destination.
Shipping and Handling - Shipping and handling fee revenue is not significant.
Shipping and handling costs are included in cost of goods sold.
Income Taxes - Income taxes are accounted for using the liability method under
which deferred income taxes are determined based upon the estimated future tax
effects of differences between the financial statement and tax basis of assets
and liabilities, as measured by the currently enacted tax rates.
Derivative Financial Instruments - Derivative financial instruments are utilized
to manage risk exposure to movements in foreign exchange rates and commodity
prices. We enter into forward exchange contracts to obtain foreign currencies at
specified rates based on expected future cash flows for each currency. Changes
in the value of derivative financial instruments are measured at the balance
sheet date and recognized in current earnings or other comprehensive income
depending on whether the derivative is designated as part of a hedge transaction
and, if it is, the type of transaction. We do not hold derivative financial
instruments for trading purposes.
Product Warranty - Provision is made for the estimated cost of maintaining
product warranties at the time the product is sold based upon historical claims
experience by product line.
Self-Insured Risks - Provision is made for the estimated costs of known and
anticipated claims under the deductible portions of our health, liability and
workers' compensation insurance programs. In addition, provision is made for the
estimated cost of post-employment benefits.
Environmental Expenditures - Expenditures for environmental remediation are
expensed or capitalized, as appropriate. Costs associated with remediation
activities are expensed. Liabilities relating to probable remedial activities
are recorded when the costs of such activities can be reasonably estimated and
are not discounted or reduced for possible recoveries from insurance carriers.
Earnings (Loss) Per Share - Basic and diluted earnings (loss) per share are
currently equivalent. 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. However, this warrant is not
included in diluted earnings per share for the year ended December 31, 2007, as
the effect would be antidilutive. Earnings (loss) per share are computed based
on the weighted average number of common shares outstanding for the periods
reported. The weighted average number of common shares used in the computations
was 18,479,684 in 2007, 2006 and 2005.
Research, Development and Testing Expenses - Company sponsored research,
development and testing expenses related to present and future products are
expensed as incurred and were $28.1 million, $33.8 million, and $28.1 million in
2007, 2006 and 2005, respectively. Such expenses consist primarily of salary and
material costs and are included in cost of sales and operating expenses.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the reported amounts
during the reporting period and at the date of the financial statements.
Significant estimates include accruals for product warranty, deferred tax
assets, self-insured risks, pension and postretirement benefit obligations and
environmental matters, as well as the evaluation of goodwill and long-lived
asset impairment. Actual results could differ materially from those estimates.
NOTE 2. DISCONTINUED OPERATIONS
Electrical Components
During the second quarter of 2007, our Board of Directors approved a plan to
sell the assets of our Electrical Components business. On August 31, 2007, we
completed an agreement to sell the Residential & Commercial and Asia Pacific
operations of this business for $220 million in gross proceeds.
On November 1, 2007, we signed an agreement to sell our Automotive & Specialty
business operations for $10 million in cash, subject to 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 in the third quarter of 2007, to reflect
the net proceeds expected to be realized upon consummation of the transaction.
The sale transaction closed on December 7, 2007.
The assets of the remaining businesses within the Electrical Components business
have been classified as held for sale as of December 31, 2007. The results for
Electrical Components for the years ended December 31, 2007 and 2006 are
included in the loss from discontinued operations.
Engine & Power Train
On October 22, 2007, we signed a Definitive Stock Purchase Agreement to sell our
Engine & Power Train business operations for $51 million in cash, subject to
customary adjustments at closing. The transaction was completed on November 9,
2007. As a result of the agreement, we reduced the carrying value of the long
lived assets of the business by $28.1 million in the third quarter of 2007,
reflecting the net proceeds expected to be realized upon the completion of the
sale. Favorable adjustments of $1.8 million, attributable to post-closing
adjustments to the purchase price pursuant to the agreement, were recorded in
the fourth quarter.
Interest expense of $36.0 million, $18.2 million, and $14.0 million was
allocated to discontinued operations for the years ended December 31, 2007, 2006
and 2005, respectively, related to operations divested in 2007. Approximately
$17.8 million in deferred financing costs associated with the Second Lien debt,
which we retired during the third quarter 2007, were expensed as part of the
interest costs allocated to discontinued operations during that 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. The remainder of the balance under the First Lien
Credit agreement was repaid upon the closing of the sale of the Engine & Power
Train business on November 9, 2007.
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Following is a summary of loss from discontinued operations related to the
Electrical Components for the years ended December 31, 2007, 2006 and 2005:
(Dollars in millions) FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2007 2006 2005
-------- -------- --------
Sales $ 306.6 $ 429.9 $ 410.1
Cost of Sales 277.0 399.3 367.6
Selling and administrative expenses 25.7 35.3 35.0
Impairments, restructuring charges, and other items 96.5 2.9 109.6
-------- -------- --------
Operating loss (92.6) (7.6) (102.1)
Interest income (expense) 0.1 -- (0.5)
-------- -------- --------
Loss on disposal (5.5) -- --
-------- -------- --------
Loss from discontinued operations before income taxes $ (98.0) $ (7.6) $ (102.6)
======== ======== ========
Following is a summary of income (loss) from discontinued operations related to
the Engine & Power Train business for the years ended December 31, 2007, 2006
and 2005:
(Dollars in millions) FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
2007 2006 2005
-------- -------- --------
Sales $ 185.9 $ 319.0 $ 404.1
Cost of Sales 185.3 329.5 442.8
Selling and administrative expenses 16.4 43.3 36.4
Impairments, restructuring charges, and other items 26.0 27.0 4.5
-------- -------- --------
Operating loss (41.8) (80.8) (79.6)
Interest income (expense) 0.1 (8.1) (6.7)
-------- -------- --------
Gain on disposal 1.8 -- --
-------- -------- --------
Loss from discontinued operations before income taxes $ (39.9) $ (88.9) $ (86.3)
======== ======== ========
During the third quarter of 2007, we also sold Manufacturing Data Systems Inc.,
a small subsidiary not associated with any of our major business operations.
Sales of $0.8 million and pretax losses of $0.9 million were recorded for the
year ended December, 2007. Sales of $2.5 million and pretax losses of $2.2
million were recorded for the year ended December 31, 2006, and sales of $1.9
million and pretax losses of $5.9 million were recorded for the year ended
December 31, 2005.
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 year ended
December 31, 2006 are included in loss from discontinued operations. Interest
expense of $2.9 and $6.3 million was allocated to discontinued operations for
the years ended December 31, 2006 and 2005 respectively related to the Little
Giant divestiture, because our financing agreements required the proceeds from
the sale to be utilized to repay portions of our debt.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Following is a summary of income (loss) from discontinued operations related to
Little Giant Pump Company for the years ended December 31, 2006 and 2005:
Year Ended Year Ended
December 31, December 31,
(Dollars in millions) 2006 2005
------------ ------------
Net sales $ 32.9 $ 106.3
Cost of sales 23.9 77.6
Selling and administrative expenses 6.9 19.2
-------- --------
Operating income 2.1 9.5
Interest expense allocated 2.9 6.3
-------- --------
(Loss) gain from discontinued operations before income taxes (0.8) 3.2
-------- --------
Gain on disposal 78.0 --
-------- --------
Income from discontinued operations $ 77.2 $ 3.2
======== ========
The following table summarizes income (loss) from discontinued operations, net
of tax, for the years ended December 31, 2007, 2006 and 2005:
(Dollars in millions) FOR THE YEARS ENDED DECEMBER 31,
---------------------------------
2007 2006 2005
-------- -------- --------
Electrical Components $ (98.0) $ (7.6) $ (102.6)
Engine & Power Train (39.9) (88.9) (86.3)
Manufacturing Data Systems, Inc. (0.9) (2.2) (5.9)
Little Giant Pump Company -- 77.2 3.2
Allocated interest expense related to 2007 divestitures (36.0) (18.2) (14.0)
Tax (provision) benefit (0.4) 7.5 0.3
-------- -------- --------
Loss from discontinued operations, net of tax $ (175.2) $ (32.2) $ (205.3)
======== ======== ========
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following summary balance sheet information is derived from the businesses
that are classified as held for sale as of December 31, 2007, which management
believes is representative of the net assets of the business held for disposal.
This balance sheet information includes remaining operations within the
Electrical Components Group, and other long-lived assets that were held for sale
at December 31, 2007.
(Dollars in millions) DECEMBER 31,
2007
------------
ASSETS:
Current Assets:
Accounts receivable, net $ 2.1
Inventories 7.9
Property, plant, and equipment, net 11.9
-------
Total assets held for sale $ 21.9
=======
LIABILITIES:
Current Liabilities:
Accounts payable, trade $ 2.2
Accrued liabilities 0.4
-------
Total current liabilities held for sale $ 2.6
=======
Net assets held for sale $ 19.3
=======
NOTE 3. ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income is shown in the Consolidated Statements
of Stockholders' Equity and includes the following:
(in millions) 2007 2006
-------- --------
Foreign currency translation adjustments $ 36.2 $ 8.0
Gain (loss) on derivatives 2.5 2.4
Postretirement and postemployment benefits:
Prior Service Credit 82.4 36.6
Net Actuarial Gain 47.7 3.3
Net Transition Obligation (0.3) (0.4)
-------- --------
Total postretirement and postemployment benefits 129.8 39.5
-------- --------
$ 168.5 $ 49.9
======== ========
NOTE 4. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
The Company has defined benefit retirement plans that cover substantially all
domestic employees. Plans covering salaried employees generally provide pension
benefits that are based on average earnings and years of credited service. Plans
covering hourly employees generally provide pension benefits of stated amounts
for each year of service. We sponsor a retiree health care benefit plan,
including retiree life insurance, for eligible salaried employees and their
eligible dependents. At certain divisions, we also sponsor retiree health care
benefit plans for hourly retirees and their eligible dependents. The retiree
health care plans, which are unfunded, provide for coordination of benefits with
Medicare and any other insurance plan covering a participating retiree or
dependent, and have lifetime maximum benefit restrictions. Some of the retiree
health care plans are
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
contributory, with some retiree contributions adjusted annually. We have
reserved the right to interpret, change or eliminate these health care benefit
plans.
On September 29, 2006, SFAS No. 158, "Employers' Accounting for Defined Benefit
Pension and Other Postretirement Plans" (SFAS 158) was issued. SFAS 158 requires
companies to recognize the funded status of their defined postretirement benefit
plans as a net asset or liability on the balance sheet. Each overfunded plan is
recognized as an asset and each unfunded or underfunded plan is recognized as a
liability. Any unrecognized past service cost, experience gains/losses, or
transition obligations are reported as a component of accumulated other
comprehensive income in stockholders' equity.
SFAS 158 was effective with balance sheets reported as of December 31, 2006, and
its impact on our balance sheet was material, resulting in an increase to net
assets and shareholders' equity of $39.6 million.
The adoption of SFAS 158 has no impact on our net earnings, cash flow,
liquidity, debt covenants, or plan funding requirements.
We currently use September 30 as the measurement date (the date upon which plan
assets and obligations are measured) to facilitate the preparation and reporting
of pension and postretirement plan data. Information regarding the funded status
and net periodic benefit costs is reconciled to or stated as of the fiscal year
end of December 31. No significant events took place between September 30 and
December 31 that would have materially impacted the assumptions utilized at the
measurement date. SFAS 158 eliminates a company's ability to select a date to
measure plan assets and obligations that is prior to its year-end balance sheet
date. This provision of SFAS 158 will become effective with our fiscal year
ended December 31, 2008.
Amounts recognized for both U.S.-based and foreign pension and OPEB plans in the
consolidated balance sheets and in accumulated other comprehensive income as of
December 31 consist of:
(in millions) PENSION BENEFIT OTHER BENEFIT
---------------------- ------------------------
2007 2006 2007 2006
------ ------ ------- -------
Amounts recognized in the consolidated balance sheets:
Prepaid pension asset $233.4 $202.5 -- --
Accrued pension liability (14.8) (15.9) (82.1) (176.5)
------ ------ ------- -------
Net amount recognized $218.6 $186.6 $ (82.1) $(176.5)
====== ====== ======= =======
Accumulated other comprehensive income:
Prior Service Credit (3.8) (1.7) (78.6) (34.9)
------ ------ ------- -------
Net Actuarial Gain (20.1) (2.4) (27.6) (0.9)
------ ------ ------- -------
Net Transition Obligation 0.3 0.4 -- --
------ ------ ------- -------
Total postretirement and postemployment benefits $(23.6) $ (3.7) $(106.2) $ (35.8)
====== ====== ======= =======
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The net periodic benefit (credit) cost of the postretirement plan for the years
ended December 31 was:
PENSION BENEFIT OTHER BENEFIT
------------------ -------------------
(in millions) 2007 2006 2007 2006
------- ------ ------- -------
Accumulated other comprehensive income:
Prior Service Credit $ (2.1) $ (1.7) $ (43.7) $ (34.9)
------- ------ ------- -------
Net Actuarial Gain (17.7) (2.4) (26.7) (0.9)
------- ------ ------- -------
Net Transition Obligation (0.1) 0.4 -- --
------- ------ ------- -------
Total postretirement and postemployment benefits $ (19.9) $ (3.7) $ (70.4) $ (35.8)
======= ====== ======= =======
The estimated net experience gain and prior service credit that will be adjusted
from accumulated other comprehensive income into pension expense over the 2008
fiscal year are $2.1 million and $7.0 million, respectively.
The following tables provide a reconciliation of the changes in the United
States based pension and postretirement plans' benefit obligations, fair value
of assets and funded status for 2007 and 2006:
PENSION BENEFIT OTHER BENEFIT
------------------- -------------------
(in millions) 2007 2006 2007 2006
------- ------- ------- -------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of period....... $ 410.6 $ 423.1 $ 175.2 $ 194.5
Service cost ................................. 8.2 10.2 3.2 3.9
Interest cost ................................ 22.7 22.5 6.8 10.3
Plan change .................................. 1.3 -- (59.8) --
Actuarial gain ............................... (8.8) (14.9) (27.7) (15.2)
Curtailment gain ............................. (2.8) (1.7) (11.2) (8.2)
Benefit payments ............................. (33.5) (28.6) (7.7) (10.1)
Special termination benefits ................. 1.8 -- -- --
Effect of changes in exchange rate ........... 2.6 -- -- --
------- ------- ------- -------
Benefit obligation at measurement date ......... $ 402.1 $ 410.6 $ 78.8 $ 175.2
======= ======= ======= =======
CHANGE IN PLAN ASSETS
Fair value at beginning of period .............. $ 598.4 $ 596.1
Actual return on plan assets ................. 52.2 29.6
Employer contributions ....................... 0.5 0.1
Benefit payments ............................. (32.2) (27.4)
Effect of changes in exchange rate ........... 0.1 --
------- -------
Fair value at measurement date ................. $ 619.0 $ 598.4
======= =======
As a result of the sale of the Residential & Commercial division of our
Electrical Components business in August of 2007, and the associated curtailment
of the pension and other postretirement ("OPEB") benefits of its employees, we
recognized a net gain of $2.8 million for pension and an expense of $0.6 million
for OPEB in the fourth quarter of 2007.
As a result of the completion of the previously announced closure of our Engine
& Power Train facility in New Holstein, Wisconsin and the associated plan
changes and curtailment of the OPEB benefits of its employees, we recognized a
net gain of $41.5 million over the course of 2007. $29.6 million of the gain is
related to a plan change associated with the elimination of future retiree
medical benefits, while $11.9 million relates to the curtailment associated with
the active employees affected
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
by the closure of the facility. In addition to the curtailment gain, based on
current actuarial assumptions, all future pension and retiree health care
expense will decrease by $0.9 million per quarter.
We also recorded other gains of $30.2 million related to OPEB plan changes
during 2007. These plan changes related to the elimination of certain drug
benefits effective February 1, 2007.
Due to the completion of the divestitures of the Engine & Power Train business
and the Automotive & Specialty division of our Electrical Components business in
the fourth quarter of 2007, we expect that further curtailment gains will also
be recognized in 2008. The actual amount of these gains will be dependent on the
outcome of actuarial assumptions associated with each curtailment, which are
currently under evaluation.
The following table provides the funded status of the plans for 2007 and 2006:
PENSION BENEFITS OTHER BENEFITS
------------------- --------------------
(in millions) 2007 2006 2007 2006
------- ------- ------- --------
FUNDED STATUS
Funded status at measurement date .... $ 216.8 $ 186.5 $ (78.8) $ (175.2)
------- ------- ------- --------
Net amount recognized ............... $ 216.8 $ 186.5 $ (78.8) $ (175.2)
======= ======= ======= ========
The accumulated benefit obligation for all defined benefit pension plans was
$389.3 million and $378.1 million at September 30, 2007 and 2006, respectively.
Information for pension plans with an accumulated benefit obligation in excess
of plan assets:
SEPTEMBER 30,
-----------------
(in millions) 2007 2006
------ ------
Projected benefit obligation ... $ 19.0 $ 17.8
Accumulated benefit obligation . 19.0 10.9
Fair value of plan assets ...... 3.3 3.0
Components of net periodic benefit (income) cost during the year:
PENSION BENEFITS OTHER BENEFITS
-------------------- ------------------
(in millions) 2007 2006 2007 2006
------- -------- ------- ------
Service cost ........................................... $ 8.2 $ 10.2 $ 3.2 $ 3.9
Interest cost .......................................... 22.7 22.5 6.8 10.3
Expected return on plan assets ......................... (45.4) (45.1) -- --
Amortization of net gain ............................... 0.7 (0.2) (0.4) (0.1)
Amortization of actuarial transition obligation......... 0.1 0.1 -- --
Amortization of unrecognized prior service costs........ (0.5) 1.0 (10.4) (4.9)
Additional income due to curtailments .................. -- (1.3) (17.6) (7.5)
------- -------- ------- ------
Net periodic benefit (income) cost ..................... $ (14.2) $ ($12.8) $ (18.4) $ 1.7
======= ======== ======= ======
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
ADDITIONAL INFORMATION
ASSUMPTIONS
Weighted-average assumptions used to determine benefit obligations;
PENSION BENEFITS OTHER BENEFITS
-------------------------- -------------------------
2007 2006 2007 2006
--------- ----- ---------- -----
U.S.-Based Plans - at September 30,
Discount rate ...................... 6.03-6.27% 5.69% 5.21-6.20% 5.63%
Rate of compensation increase ...... 4.25% 4.25% N/A N/A
Europe-Based Plans - at December 31, 2007 2006 2007 2006
Discount rate ...................... 4.80% 4.10% N/A N/A
Rate of compensation increase ...... 2.10% 2.10% N/A N/A
India-Based Plans - at December 31, 2007 2006 2007 2006
Discount rate ...................... 7.50% 8.25% N/A N/A
Rate of compensation increase ...... 5.50% 5.00% N/A N/A
Weighted-average assumptions used to determine net periodic benefit costs for
the years ended December 31:
PENSION BENEFITS OTHER BENEFITS
-------------------------- -------------------------
2007 2006 2007 2006
--------- ----- ---------- ------
U.S.-Based Plans:
Discount rate .............................. 5.56-5.71% 5.50% 5.39-5.69% 5.50%
Expected long-term return on plan assets ... 7.50% 7.50% N/A N/A
Rate of compensation increase .............. 4.25% 4.25% N/A N/A
Europe.-Based Plans: 2007 2006 2007 2006
Discount rate .............................. 4.80% 4.10% N/A N/A
Expected long-term return on plan assets ... N/A N/A N/A N/A
Rate of compensation increase .............. 2.10% 2.10% N/A N/A
India.-Based Plans: 2007 2006 2007 2006
Discount rate .............................. 7.50% 8.25% N/A N/A
Expected long-term return on plan assets ... 9.00% 8.20% N/A N/A
Rate of compensation increase .............. 5.50% 5.00% N/A N/A
The expected long-term return, variance, and correlation of return with other
asset classes are determined for each class of assets in which the plan is
invested. That information is combined with the target asset allocation to
create a distribution of expected returns. The selected assumption falls within
the best estimate range, which is the range in which it is reasonably
anticipated that the actual results are more likely to fall than not.
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Assumed health care cost trend rates:
SEPTEMBER 30,
------------------------
2007 2006
--------- ----------
Health care cost trend rate assumed for next year .................................. 8.5-12.0% 9.5-13.5%
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)... 5.0% 5.0%
Year that the rate reaches the ultimate trend rate ................................. 2015-2016 2015-2016
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. The health care cost trend rates are based
on an evaluation of external market conditions and adjusted to reflect our
actual experience in relation to those market trends. A one-percentage-point
increase in the assumed health care cost trend rate would increase the
postretirement benefit obligation by $7.8 million, and a one-percentage-point
decrease in the assumed health care cost trend rate would decrease the
postretirement benefit obligation by $6.7 million.
Plan Assets
The following table provides pension plan asset allocations:
PLAN ASSETS AT SEPTEMBER 30,
----------------------------
2007 2006
---------- ---------------
ASSET CATEGORY:
Debt securities ......... 23% 49%
Equity securities ....... 28% 51%
Cash* ................... 49% --
--- ---
Total ................ 100% 100%
=== ===
* The cash balances as of September 30, 2007 were due to the anticipated
reversion of our Salaried Retirement plan. In the first quarter of 2007,
we announced revisions to this Plan. At December 31, 2007, this Plan
reported approximately $121 million in overfunding, out of a total of $231
million for all our pension plans that have plan assets in excess of
obligations. On May 1, 2007, we implemented a new retirement program for
all Tecumseh salaried employees. This conversion, which is expected to be
completed in March of 2008, yielded cash proceeds to the Company of
approximately $80 million, which represents gross proceeds of $100 million
net of excise tax of $20 million. The new retirement program includes both
defined benefit and defined contribution plans. A portion of the
overfunding for the old plan was utilized to pre-fund the benefits for
both of the replacement plans for approximately the next six to eight
years.
The estimated impact will amount to net expense of $11 million. This net expense
results from the recognition of $20 million of federal excise tax that is levied
on the gross amount of cash returned to the Company, net of recognition of
previously deferred actuarial gains of $9 million dollars. The $100 million in
gross proceeds from the reversion generates a tax gain that will be fully offset
against our existing NOL carryforwards. In addition, we expect a reduction in
net period income. 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 $12
million versus $15 million in 2007.
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Our investment objective is to provide pension payments. This is accomplished by
investing the estimated payment obligations into fixed income portfolio where
maturities match the expended benefit payments. This portfolio consists of
investments rated "A" or better by Moody's or Standard & Poor's. Funds in excess
of the estimated ten-year payment obligations are invested in equal proportions
in a separate bond portfolio and an equity portfolio.
Equity securities include Tecumseh Products Company common stock in the amounts
of $3.5 million (0.6% of total plan assets) at both September 30, 2007 and 2006.
We expect to make contributions of $0.3 million to our pension plans in 2008.
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid.
(in millions) PROJECTED BENEFIT PROJECTED BENEFIT PAYMENTS
PAYMENTS FROM FROM POSTRETIREMENT MEDICAL
PENSION PLANS AND LIFE INSURANCE PLANS
-------------------------------------------------------
GROSS CLAIMS EXPECTED SUBSIDY
------------ ----------------
YEAR
2008 .................. $ 25.2 $ 7.9 $ 0.1
2009 .................. 26.0 6.5 0.1
2010 .................. 26.1 6.7 0.1
2011 .................. 26.0 6.8 0.1
2012 .................. 26.0 6.6 0.1
Aggregate for 2013-2017 129.6 29.9 0.6
FOREIGN PENSION PLANS
Our foreign subsidiaries provide for defined benefits that are generally based
on earnings at retirement date and years of credited service. The net pension
and OPEB liability recorded in the consolidated balance sheet was $14.1 million
and $13.3 million for 2007 and 2006, respectively. Our foreign subsidiaries also
record liabilities for certain retirement benefits that are not defined benefit
plans. The net liability for those other postretirement employee benefit plans
recorded in the consolidated balance sheet was $1.5 million for both 2007 and
2006. The combined expense for these plans was $1.7 million and $1.5 million in
2007 and 2006, respectively.
DEFINED CONTRIBUTION PLANS
We have defined contribution retirement plans that cover substantially all
domestic employees. The combined expense for these plans was $2.2 million and
$2.4 million in 2007 and 2006, respectively.
NOTE 5. GOODWILL
Our primary goodwill relates to the assignment of purchase price following the
acquisition of certain of our subsidiaries. We account for these assets under
SFAS 142, "Goodwill and Other Intangible Assets," subjecting the recorded
amounts to impairment testing on at least an annual basis. SFAS 142 requires
that we estimate the fair value of the reporting unit as compared to its
recorded book value. If the estimated fair value is less than the book value,
then an impairment is deemed to have occurred. As required by SFAS 142, we
measure the amount of goodwill impairment by allocating the estimated fair value
to the tangible and intangible assets within the reporting unit.
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
We traditionally conduct our annual assessment of impairment in the fourth
quarter by comparing the carrying value of our reporting units to their
estimated fair value. Estimated fair value of our goodwill is estimated based
upon a present value technique using discounted future cash flows, forecasted
over a five year period, with residual growth rates forecasted at 3.0% to 5.0%
thereafter. We use management business plans and projections as the basis for
expected future cash flows. In evaluating such business plans for reasonableness
in the context of their use for predicting discounted cash flows in our
valuation model, we evaluate whether there is a reasonable basis for differences
between actual results of the preceding year and projected results for the
upcoming years. This methodology can potentially utilize significant
improvements in growth rates in the first few years of forecast data, due to
multiple factors such as projected improved efficiencies or incremental sales
volume opportunities that are deemed to be reasonably likely to be achieved.
Assumptions in estimating future cash flows are subject to a high degree of
judgment and complexity. We make every effort to forecast these future cash
flows as accurately as possible with the information available at the time the
forecast is developed. However, changes in the assumptions and estimates may
affect the carrying value of goodwill, and could result in additional impairment
charges in future periods. Factors that have the potential to create variances
between forecasted cash flows and actual results include but are not limited to
(i) acceptance of the Company's pricing actions undertaken in response to
rapidly changing commodity prices and other product costs; (ii) product costs,
particularly commodities such as copper; (iii) currency exchange fluctuations;
(iv) successful implementation of our plan to increase or enhance productivity;
(v) fluctuations in sales volumes, which can be driven by multiple external
factors, including weather conditions affecting demand; (vi) interest rate
fluctuations; and (vii) the intention to continue to operate the reporting unit.
Refer to "Cautionary Statements Relating to Forward-Looking Statements" in Item
2 for other factors that have the potential to impact estimates of future cash
flows.
Discount rates utilized in the goodwill valuation analysis are derived from
published resources such as Ibbotson. The rates utilized were 11.23% at December
31, 2007 and 8.16% at December 31, 2006 respectively for all business units for
which goodwill is currently recorded. For purposes of our 2007 analysis, in
light of the Company's transition from a diversified concern to a global
compressor business, we utilized the discount rate from a SIC code specific to
our compressor business. Had we utilized the same SIC code as was employed in
2006, the result would have been a discount rate of 10.08%.
Based on the goodwill analysis performed for the year ended December 31, 2007,
changes of 1.0% in the discount rate utilized would increase (decrease) the fair
value calculated for the respective business units as follows:
Change in valuation with Change in valuation
1.0% decrease in with 1.0% increase in
discount rate discount rate
Europe $4.1 $(3.9)
India 4.8 (4.6)
Both business units that have goodwill show a fair value sufficiently greater
than the carrying value such that a 1.0% increase in discount rate does not
place the goodwill at or near risk of impairment.
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Pretax operating profit as a percentage of sales revenue is also a key
assumption in the fair value calculation. The range of assumptions used
incorporates the anticipated results of our ongoing productivity improvements
over the life of the forecast model. The Europe reporting unit forecasted
operating profit percentages of 3.0% in 2008 and ranging from 3.1 to 3.5%
thereafter, with operating profit in the terminal year forecasted at 3.4%. The
India reporting unit forecasted operating profit at 4.6% of sales in 2008
ranging from 3.1% to 4.0% thereafter, with operating profit in the terminal year
forecasted at 2.8%.
On April 21, 2006, we completed the sale of our 100% ownership in Little Giant
Pump Company, for which we had recorded $5.1 million in goodwill. The only other
changes in goodwill during 2006 were due to foreign currency fluctuations.
In light of the classification of the Electrical Components business as a
discontinued operation as of the end of the second quarter of 2007, we performed
an interim analysis of the fair value of the business unit at June 30. 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. The only other
changes in goodwill during 2007 were due to foreign currency fluctuations.
The changes in the carrying amount of goodwill by reporting unit follow:
ELECTRICAL
(in millions) EUROPE INDIA COMP. PUMPS TOTAL
------ ------ ---------- ------ ------
Balance at Jan. 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 Dec. 31, 2006 ............... 11.2 7.0 108.8 -- 127.0
------ ------ -------- ------ ------
Impairment ............................. -- -- (39.3) -- (39.3)
Sale of Residential & Commercial and
Asia Pacific operations ................ -- -- (72.1) -- (72.1)
Foreign currency translation ........... 1.2 0.8 2.6 -- 4.6
------ ------ -------- ------ ------
Balance at Dec. 31, 2007 ............... $ 12.4 $ 7.8 -- -- $ 20.2
====== ====== ======== ====== ======
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 6. INCOME TAXES
Consolidated income (loss) from continuing operations before taxes consists of
the following:
(in millions) 2007 2006 2005
------ ------ -----
U.S. ...... $(29.5) $(24.6) $ 6.9
Foreign ... 18.4 (11.0) 2.4
------ ------ -----
$(11.1) $(35.6) $ 9.3
====== ====== =====
Provision for (benefit from) income taxes from continuing operations consists of
the following:
(in millions) 2007 2006 2005
------ ------ ------
Current:
U.S. federal ........................................... $ 1.3 $ 1.0 $(14.9)
State and local ........................................ -- -- (0.5)
Foreign income and withholding taxes ................... 2.8 2.6 6.8
------ ------ ------
4.1 3.6 (8.6)
------ ------ ------
Deferred:
U.S. federal ........................................... (13.4) -- 32.2
State and Local ........................................ 1.3 -- --
Foreign ................................................ (0.2) 8.9 3.9
------ ------ ------
(12.3) 8.9 36.1
------ ------ ------
Provision for (benefit from) income taxes from continuing
operations .............................................. $ (8.2) $ 12.5 $ 27.5
====== ====== ======
Income taxes paid, net .................................. $ 3.3 $ 1.6 $ (7.7)
====== ====== ======
A reconciliation between the actual income tax expense (benefit) provided and
the income tax expense (benefit) computed by applying the statutory federal
income tax rate of 35% to income before tax is as follows:
(in millions) 2007 2006 2005
------ ------ ------
Income taxes (benefit) at U.S. statutory rate ......... $ (3.9) $(12.5) $ 3.3
Foreign tax differential (and withholding tax) ........ 0.6 5.0 7.1
Change in valuation allowance ......................... (3.5) 9.7 14.2
State and local income taxes .......................... 1.3 -- (0.5)
Medicare reimbursement ................................ -- -- (0.8)
Federal credits ....................................... -- -- (0.8)
Expiration of statute on uncertain tax positions....... (2.2) -- --
Other ................................................. (0.5) 10.3 5.0
------ ------ ------
$ (8.2) $ 12.5 $ 27.5
====== ====== ======
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Deferred income taxes reflect the effect of temporary differences between the
tax basis of an asset or liability and its reported amount in the financial
statements. Provisions are also made for estimated taxes which may be incurred
on the remittance of subsidiaries' undistributed earnings, none of which are
deemed to be permanently reinvested.
Significant components of our deferred tax assets and liabilities as of December
31 were as follows:
(in millions) 2007 2006
------ ------
Deferred tax assets:
Other postretirement liabilities ....................................... $ 22.1 $ 65.6
Product warranty and self-insured risks ................................ 8.4 14.5
Net operating loss carryforwards ....................................... 231.8 88.6
Translation adjustments ................................................ 0.5 (13.3)
Tax credit carryovers .................................................. 53.8 47.1
Other accruals and miscellaneous ....................................... 37.2 73.5
------ ------
353.8 276.0
Valuation allowance .................................................... (229.5) (119.4)
------ ------
Total deferred tax assets .............................................. 124.3 156.6
------ ------
Deferred tax liabilities:
Tax over book depreciation ............................................. 21.1 32.1
Pension ................................................................ 75.8 73.3
Unremitted foreign earnings ............................................ 20.6 36.1
Intangibles ............................................................ -- 16.9
Other .................................................................. 5.1 --
------ ------
Total deferred tax liabilities ......................................... 122.6 158.4
------ ------
Net deferred tax (liabilities) assets .................................. $ 1.7 $ (1.8)
====== ======
Deferred tax detail is included in the consolidated balance sheet as follows:
Tax assets (including refundable of $13.9 and $13.8) ................... $ 24.6 $ 40.6
Non-current deferred tax liabilities ................................... 10.2 28.6
------ ------
Total .................................................................. $ 14.4 $ 12.0
====== ======
At December 31, 2007, we had the following loss carryforwards:
Carryforward amount Expiration
U.S. Federal $ 578.0 2025 to 2027
U.S. State 366.5 2008 to 2027
Brazil 65.9 None
India 17.0 None
Federal Capital Loss 44.4 2012
In 2008, the $100 million in gross proceeds from the reversion of our Salaried
Retirement plan will generate a tax gain that will be fully offset against our
existing NOL carryforwards.
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Foreign tax credit and research credit carryforwards of approximately $53.4
million will expire from 2012 through 2017. Furthermore, we also had various
state tax credit carryovers of $0.9 million, which expire at various dates from
2008 to 2020.
Income taxes are recorded pursuant to SFAS No. 109, "Accounting for Income
Taxes," which specifies the allocation method of income taxes between categories
of income defined by that statement as those that are included in net income
(continuing operations and discontinued operations) and those included in
comprehensive income but excluded from net income.
SFAS 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 other comprehensive income or discontinued operations), tax expense is
allocated to the other sources of income with a related benefit recorded in
continuing operations. The full year results of 2007 reflected a tax benefit in
continuing operations, tax expense in other comprehensive income and no US
federal income tax impact for discontinued operations.
We evaluate our deferred income taxes quarterly to determine if valuation
allowances are required or should be adjusted. SFAS 109 requires that companies
assess whether valuation allowances should be established against their deferred
tax assets based on consideration of all available evidence, both positive and
negative, using a "more likely than not" standard.
The valuation allowance for deferred tax assets relates to all net U.S. federal
deferred tax assets, state deferred tax assets and certain tax assets arising in
foreign tax jurisdictions, and in the judgment of management, these tax assets
are not likely to be realized in the foreseeable future. The valuation allowance
increased by $110.1 million and $29.2 million in 2007 and 2006 respectively. The
2007 change is the result of the release of a valuation allowance for our
operations in France of $3.8 million, $133.0 million for current year losses and
credits and a net decrease of $19.1 million in the balance of other deferred tax
assets. The 2006 change is the result of a valuation allowance of $5.9 million
established against remaining tax assets in Brazil and $25.7 million for current
year losses and credits which are reflected in the provision and a net decrease
of $2.4 million in the balance of other deferred tax assets.
Upon adoption of FIN 48 as of January 1, 2007, we recognized an increase of $0.4
million in the liability for unrecognized tax benefits as a cumulative effect of
a change in accounting principle, with a corresponding change to retained
earnings. At January 1, 2007, we had $1.9 million of total gross unrecognized
tax benefits, of which $1.9 million represents the amount of unrecognized tax
benefits that, if recognized, would favorably affect the effective income tax
rate in future periods. At December 31, 2007, the amount of gross unrecognized
tax benefits before valuation allowances and the amount that would favorably
affect the effective income tax rate in future periods after valuation
allowances was $0.9 million. At December 31, 2007, there is no reduction of
deferred tax assets relating to uncertain tax positions.
We accrue interest and penalties related to unrecognized tax benefits in our
provision for income taxes. At December 31, 2007, we had accrued interest and
penalties of $0.7 million. The tax reserves relate to transfer pricing and state
tax nexus, and the entire amount would have an impact on our effective tax rate.
We expect a decrease in the range of zero to $0.4 million in the unrecognized
tax benefits in the next twelve months.
A reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows:
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(in millions)
Balance at January 1, 2007 ........ $1.9
Lapse of statute of limitations ... (0.9)
----
Balance at December 31, 2007 ...... $1.0
====
We file U.S., state and foreign income tax returns in jurisdictions with varying
statues of limitations. We are currently under audit for our U.S. federal income
tax returns for 2003 and 2004. The years 2004 through 2007 generally remain
subject to examination by most state tax authorities. In significant foreign
jurisdictions, tax years before 2003 are no longer subject to audit.
NOTE 7. INVENTORIES
The components of inventories at December 31 were:
(in millions) 2007 2006
------ ------
Raw materials ...... $ 79.6 $159.0
Work in progress ... 9.0 60.1
Finished goods ..... 54.8 121.5
Supplies ........... 8.6 12.8
------ ------
$152.0 $353.4
====== ======
$194.9 million of the inventory balance at December 31, 2006 was associated with
the Electrical Components and Engine & Power Train businesses, as well as
Manufacturing Data Systems, Inc.
NOTE 8. PROPERTY, PLANT AND EQUIPMENT, NET
The components of property, plant and equipment, net are as follows:
DECEMBER 31,
---------------------
(Dollars in millions, except share data) 2007 2006
-------- --------
Land and land improvements ........... $ 21.6 $ 31.9
Buildings ............................ 121.9 204.4
Machinery and equipment .............. 935.9 1,239.1
-------- --------
1,079.4 1,475.4
Less accumulated depreciation ...... 730.6 945.2
-------- --------
348.8 530.2
Assets in process .................... 4.5 22.2
-------- --------
Property, plant and equipment, net ... $ 353.3 $ 552.4
-------- --------
$194.2 million of the net property, plant and equipment at December 31, 2006 was
associated with the Electrical Components and Engine & Power Train businesses.
NOTE 9. BUSINESS SEGMENTS
Operating segments are defined as components of an enterprise for which separate
financial information is available that is evaluated regularly by the chief
operating decision maker(s) in
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
deciding how to allocate resources and in assessing performance. The accounting
policies of the reportable segments are the same as those described in Note 1 of
Notes to the Consolidated Financial Statements. In accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," we
previously reported three operating segments; Compressor Products, Electrical
Components, and Engine & Power Train. However, as a result of the sale of the
majority of the Electrical Components business and the entire Engine & Power
Train business during 2007, these segments are no longer reported. The remaining
unsold businesses within Electrical Components are included in discontinued
operations.
Until 2006, we also reported a Pump Products business segment; however, as a
result of the decision, during the first quarter of 2006, to sell 100% of our
ownership in Little Giant Pump Company, such operations are no longer reported
in income (loss) from continuing operations before tax. Little Giant operations
represented approximately 90% of that previously reported segment. Since our
remaining pump business does not meet the definition of a reporting segment as
defined by SFAS 131, we no longer report a Pump Products segment, and operating
results of the remaining pump business are included in Other for segment
reporting purposes.
Another business within Other, Manufacturing Data Systems Inc., was sold and
reclassified to discontinued operations during the third quarter of 2007.
External customer sales by geographic area are based upon the destination of
products sold. We have no single customer that accounts for 10% or more of
consolidated net sales. Long-lived assets by geographic area are based upon the
physical location of the assets.
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
BUSINESS SEGMENT INFORMATION (in millions)
2007 2006 2005
-------- -------- --------
External customer sales:
Compressor Products ..................................................... $1,116.8 $1,002.7 $ 910.9
Other ................................................................... 16.6 15.0 13.7
-------- -------- --------
Total external customer sales ..................................... $1,133.4 $1,017.7 $ 924.6
======== ======== ========
Operating income (loss):
Compressor Products ..................................................... $ 45.2 $ (4.5) $ 18.8
Other ................................................................... 3.1 2.7 3.4
Corporate and consolidating items ....................................... (36.1) (22.9) (14.6)
Impairments, restructuring charges, and other items (see Note
15) ................................................................... (7.2) (2.4) (4.3)
-------- -------- --------
Total operating income (loss) ..................................... $ 5.0 $ (27.1) $ 3.3
======== ======== ========
Reconciliation to income (loss) from continuing operations before taxes:
Operating income (loss) ................................................. $ 5.0 $ (27.1) $ 3.3
Interest expense and other, net ......................................... (16.1) (8.5) 6.0
-------- -------- --------
Income (loss) from continuing operations before taxes ............. $ (11.1) $ (35.6) $ 9.3
======== ======== ========
Assets:
Compressor Products ..................................................... $ 833.4 $ 738.6 $ 678.7
Electrical Component Products ........................................... -- 412.4 389.9
Engine & Power Train Products ........................................... -- 237.3 294.8
Corporate and consolidating items ....................................... 302.3 387.1 374.2
Assets held for sale .................................................... 21.9 -- --
Other ................................................................... 7.3 7.3 62.9
-------- -------- --------
Total assets ...................................................... $1,164.9 $1,782.7 $ 1800.5
======== ======== ========
Capital expenditures:
Compressor Products ..................................................... $ 2.7 $ 37.9 $ 68.4
Electrical Component Products ........................................... -- 4.7 7.7
Engine & Power Train Products ........................................... -- 7.7 18.9
Corporate and consolidating items ....................................... 0.1 11.7 17.8
Other ................................................................... 0.2 0.1 0.5
-------- -------- --------
Total capital expenditures ........................................ $ 3.0 $ 62.1 $ 113.3
======== ======== ========
Depreciation and amortization:
Compressor Products ..................................................... $ 36.2 $ 33.4 $ 48.5
Electrical Component Products ........................................... -- 19.4 21.0
Engine & Power Train Products ........................................... -- 18.3 18.8
Corporate and consolidating items ....................................... 6.6 0.4 2.2
Other ................................................................... 0.3 8.6 1.8
-------- -------- --------
Total depreciation and amortization ............................... $ 43.1 $ 80.1 $ 92.3
======== ======== ========
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
GEOGRAPHIC INFORMATION (in millions)
2007 2006 2005
-------- -------- --------
Customer Sales by Destination
North America
United States .................. $ 228.5 $ 225.6 $ 231.0
Other North America ............ 41.1 29.7 29.2
-------- -------- --------
Total North America ................ 269.6 255.3 260.2
-------- -------- --------
Brazil ......................... 194.1 143.3 128.2
Other South America ............ 121.7 92.8 80.7
-------- -------- --------
Total South America ................ 315.8 236.1 208.9
Europe ............................. 322.7 337.1 284.9
Middle East and Asia ............... 225.3 189.2 170.6
-------- -------- --------
$1,133.4 $1,017.7 $ 924.6
======== ======== ========
2007 2006 2005
-------- -------- --------
Net Fixed Assets
United States ...................... $ 67.0 $ 165.1 $ 211.1
Brazil ............................. 206.7 248.2 234.2
Rest of world ...................... 79.6 139.1 133.3
-------- -------- --------
$ 353.3 $ 552.4 $ 578.6
======== ======== ========
NOTE 10. DEBT
(in millions) 2007 2006
------ ------
Short-term borrowings consist of the following:
Borrowings by foreign subsidiaries under revolving credit agreements,
advances on export receivables and overdraft arrangements with banks used
in the normal course of business; interest rate at December 31 of 9.0% in
2007 and 8.2% in 2006 ............................................................ $ 55.7 $ 80.6
Current maturities of long-term debt .................................................... 3.8 82.6
------ ------
Total short-term borrowings ......................................................... $ 59.5 $163.2
====== ======
Long-term debt consists of the following:
Unsecured borrowings, primarily with banks, by foreign subsidiaries with
interest rate at December 31 of 11.0% in 2007 and 9.2% in 2006 and
maturing in 2008 through 2012 .................................................... $ 7.1 $ 85.6
First Lien Credit Agreement, interest rate as of December 31 of 7.5% in 2007 and
7.4% in 2006, maturing November, 2009 ............................................ -- 113.1
Second Lien Credit Agreement, 13.5% interest rate as of December 31, 2006,
maturing November, 2009 .......................................................... -- 100.0
------ ------
298.7
Plus: Unamortized net premiums (*) .................................................. -- 1.2
Less: Current maturities of long-term debt .......................................... (3.8) (82.6)
------ ------
Total long-term debt ......................................................... $ 3.3 $217.3
====== ======
(*) We refinanced these obligations on February 6, 2006. The Senior Guaranteed
Notes, Revolving Credit Facility, and Industrial Development Revenue Bonds
were replaced by a new financing package that included a $275 million
First Lien Credit Agreement (amended to $250 million in the fourth quarter
of 2006, $175 million in the third quarter of 2007 and $75 million
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
in the fourth quarter of 2007) and a $100 million Second Lien Credit
Agreement (replaced in the fourth quarter of 2006 by a different Second
Lien Credit Agreement, and repaid in the fourth quarter of 2007). The
agreements provided for security interests in certain of our assets and
specific financial covenants related to EBITDA, capital expenditures and
fixed charge coverage. Additionally under the terms of the agreements
(prior to later amendments), no dividends could be paid prior to December
31, 2006 and minimum amounts of credit availability were required
thereafter. The First Lien Credit Agreement as originally structured was
available for five years and bore interest at LIBOR plus a margin tied to
excess availability. The Second Lien Credit Agreement as originally
structured had a seven year term and bore interest at LIBOR plus 7.5%. The
weighed average interest rate at funding was 9%.
The repayment of the Senior Guaranteed Notes, Revolving Credit Facility and
Industrial Revenue Bonds was accounted for as an extinguishment of debt, and
$0.9 million of unamortized debt issuance costs net of unamortized gains from
related swap agreements were written off to interest expense. Costs of $7.0
million associated with the origination of our new lending arrangements were
capitalized and were amortized as interest expense over the terms of the
agreements until the outstanding balances of those loans were paid off. At that
time, the remainder of the capitalized loan costs was written off to interest
expense (which is included in discontinued operations), as is further discussed
below.
The First and Second Lien Credit Agreements provided for security interests in
substantially all of our assets and originally specified quarterly financial
covenants related to EBITDA (as defined under the agreement, which provided
adjustments for certain items, and hereafter referred to as "Adjusted EBITDA"),
capital expenditures, and fixed charge coverage. The Adjusted EBITDA covenant
originally applied through September 30, 2007, and a fixed charge coverage
covenant applied thereafter.
On August 27, 2007, we entered into an amendment to our First Lien Credit
Agreement. 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.
Effective with the closing of the sale of the Residential & Commercial and Asia
Pacific operations of the Electrical Components business on August 31, 2007, we
paid off the entire balance associated with our Second Lien Credit Agreement and
the majority of the balance under our First Lien Credit Agreement. The remainder
of the balance under the First Lien Credit Agreement was paid off effective with
the closing of the Engine & Power Train business on November 9, 2007.
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
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
minimum levels of availability under the line of credit to $30 million, and
reduced the lenders' total commitment from $175 million to $75 million.
At December 31, 2007, we had cash balances in North America of approximately
$20.7 million, outstanding letters of credit of $6.8 million, and U.S.
availability under our First Lien Credit Agreement of approximately $9.4
million. We also had the capacity for additional borrowings of $95.5 million in
foreign jurisdictions under the First Lien Credit Agreement. The interest rate
on our First Lien Credit Agreement, had balances been outstanding, would have
been 7.5% at December 31, 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. 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 addition to our domestic credit agreement, we have various borrowing
arrangements at our foreign subsidiaries to support working capital needs and
government sponsored borrowings which provide advantageous lending rates. Our
weighted average interest rate for all borrowings, including foreign borrowings,
was 8.9% at December 31, 2007.
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.
Scheduled maturities of debt for each of the five years subsequent to December
31, 2007 are as follows:
(in millions)
2008................................................................................. $ 59.5
2009................................................................................. 2.2
2010 ................................................................................ 1.1
Thereafter........................................................................... --
-------
$ 62.8
=======
Cash interest paid was $37.1 million in 2007, $47.2 million in 2006, and $35.9
million in 2005.
NOTE 11. ENVIRONMENTAL MATTERS
Although the locations described below that have been affected by environmental
proceedings were associated with our Engine & Power Train business, which we
sold during 2007, we have retained any potential liabilities that may arise in
connection with these locations.
The Company has been named by the U.S. Environmental Protection Agency ("EPA")
as a potentially responsible party ("PRP") in connection with the Sheboygan
River and Harbor Superfund Site in Wisconsin. The EPA has indicated its intent
to address the site in two phases, with our
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Sheboygan Falls plant site and the upper river constituting the first phase
("Phase I") and the middle and lower river and harbor being the second phase
("Phase II"). In 2003, we concluded a Consent Decree with the EPA concerning the
performance of remedial design and remedial action for Phase I, deferring for an
unspecified period any action regarding Phase II.
In 2003, with the cooperation of the EPA, the Company and Pollution Risk
Services, LLC ("PRS") entered into a Liability Transfer and Assumption Agreement
(the "Liability Transfer Agreement"). Under the terms of the Liability Transfer
Agreement, PRS assumed all of our responsibilities, obligations and liabilities
for remediation of the entire Site and the associated costs, except for certain
specifically enumerated liabilities. Also, as required by the Liability Transfer
Agreement, we purchased Remediation Cost Cap insurance, with a 30 year term, in
the amount of $100.0 million and Environmental Site Liability insurance in the
amount of $20.0 million. We believe such insurance coverage will provide
sufficient assurance for completion of the responsibilities, obligations and
liabilities assumed by PRS under the Liability Transfer Agreement. In
conjunction with the Liability Transfer Agreement, we completed the transfer of
title to the Sheboygan Falls, Wisconsin property to PRS. We continue to maintain
an additional reserve of $0.5 million to reflect our potential environmental
liability arising from operations at the Site, including potential residual
liabilities not assumed by PRS pursuant to the Liability Transfer Agreement.
In 2005, PRS assumed full responsibility for complying with the terms of the
Consent Decree, which allows the EPA to enforce the Consent Decree directly with
PRS. While we believe the arrangements with PRS are sufficient to satisfy
substantially all of our environmental responsibilities with respect to the
Site, these arrangements do not constitute a legal discharge or release of our
liabilities with respect to the Site. The actual cost of this obligation will be
governed by numerous factors, including, without limitation, the requirements of
the Wisconsin Department of Natural Resources (the "WDNR"), and may be greater
or lower than the amount accrued.
With respect to other environmental matters, we have been voluntarily
participating in a cooperative effort to investigate and cleanup PCB
contamination in the watershed of the south branch of the Manitowoc River, at
and downstream from our New Holstein, Wisconsin facility. In 2004, the Company
and TRC Companies and TRC Environmental Corporation (collectively, "TRC")
entered into a Consent Order with the WDNR relating to this effort known as the
Hayton Area Remediation Project ("HARP"). The Consent Order provides a framework
for the completion of the remediation and regulatory closure at HARP.
Concurrently, the Company and two of its subsidiaries and TRC entered into an
Exit Strategy Agreement (the "Agreement"), whereby we transferred to TRC
substantially all of our obligations to complete the HARP remediation pursuant
to the Consent Order and in accordance with applicable environmental laws and
regulations. TRC's obligations under the Agreement include any ongoing
monitoring or maintenance requirements and certain off-site mitigation or
remediation, if required. TRC will also manage any third-party remediation
claims that might arise or otherwise be filed against us.
As required by the Agreement, we also purchased a Pollution Legal Liability
Select Cleanup Cost Cap Policy (the "Policy") from American International
Specialty Lines Company. The term of the Policy is 20 years with an aggregate
combined policy limit of $41 million. The policy lists us and TRC as named
insureds and includes a number of first and third party coverages for
remediation costs and bodily injury and property damage claims associated with
the HARP remediation and contamination. We believe that the Policy provides
additional assurance that the responsibilities, obligations, and liabilities
transferred and assigned by us and assumed by TRC under the Agreement will be
completed. Although the arrangements with TRC and the WDNR do not constitute a
legal
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
discharge or release of our liabilities, we believe that the specific work
substitution provisions of the Consent Order and the broad coverage terms of the
Policy, collectively, are sufficient to satisfy substantially all of our
environmental obligations with respect to the HARP remediation.
In cooperation with the WDNR, we also conducted an investigation of soil and
groundwater contamination at our Grafton, Wisconsin plant. It was determined
that contamination from petroleum and degreasing products used at the plant were
contributing to an off-site groundwater plume. We began remediation of soils in
2001 on the east side of the facility. Additional remediation of soils began in
the fall of 2002 in two other areas on the plant site. At both December 31, 2007
and 2006, we had accrued $2.2 million for the total estimated cost associated
with the investigation and remediation of the on-site contamination.
Investigation efforts related to the potential off-site groundwater
contamination have to date been limited in their nature and scope. The extent,
timing and cost of off-site remediation requirements, if any, are not presently
determinable.
In addition to the above-mentioned sites, we are also currently participating
with the EPA and various state agencies at certain other sites to determine the
nature and extent of any remedial action that may be necessary with regard to
such other sites. At December 31, 2007 and 2006, we had accrued a total of $3.0
million and $3.3 million, respectively, for environmental remediation, including
$0.5 million in each period relating to the Sheboygan River and Harbor Superfund
Site and $2.2 million in both 2007 and 2006 respectively relating to the Grafton
site.
NOTE 12. COMMITMENTS AND CONTINGENCIES
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, incidental to our business. Although their ultimate outcome cannot be
predicted with certainty, and some may be disposed of unfavorably to us,
management considers that appropriate reserves have been established and 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.
A lawsuit filed against us and other defendants alleges 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 seeks an injunction, compensatory and
punitive damages, and attorneys' fees. On March 30, 2007, the Court entered an
order dismissing Plaintiffs' complaint subject to the ability to re-plead
certain claims, pursuant to a detailed written order to follow. 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.
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 13. FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and the estimated fair values
of financial instruments at December 31, 2007 and 2006:
2007 2006
------------------ ------------------
CARRYING FAIR CARRYING FAIR
(in millions) AMOUNT VALUE AMOUNT VALUE
- ------------- -------- ------ -------- ------
Cash and cash equivalents ...... $ 88.6 $ 88.6 $ 81.9 $ 81.9
Short-term borrowings .......... 59.5 59.5 163.2 163.2
Long-term debt ................. 3.3 3.3 217.3 217.3
Foreign currency contracts ..... 7.8 7.8 5.5 5.5
Commodity contracts ............ -- (0.5) -- (1.1)
The carrying amount of cash equivalents approximates fair value due to their
liquidity and short-term maturities. The carrying value of any variable interest
rate debt approximates fair value. The fair values of foreign currency and
commodity contracts reflect the differences between the contract prices and the
forward prices available at the balance sheet date.
We do not utilize financial instruments for trading or other speculative
purposes. We generally do not hedge the net investment in our subsidiaries. All
derivative financial instruments held at December 31, 2007 will mature within
twelve months. All such instruments held at December 31, 2006 matured in 2007.
Our derivative financial instruments consist of foreign currency forward
exchange contracts. These contracts are recognized on the balance sheet at their
fair value, which is the estimated amount at which they could be settled based
on forward market exchange rates. Our foreign subsidiaries use forward exchange
contracts to hedge foreign currency receivables, payables, and other known and
forecasted transactional exposures for periods consistent with the expected cash
flow of the underlying transactions. The contracts generally mature within one
year and are designed to limit exposure to exchange rate fluctuations. On the
date a forward exchange contract is entered into, it is designated as a foreign
currency cash flow hedge. Subsequent changes in the fair value of the contract
that is highly effective and qualifies as a foreign currency cash flow hedge are
recorded in other comprehensive income. Our European subsidiaries had contracts
for the sale of $29.2 million and $13.5 million at December 31, 2007 and 2006,
respectively. Our India subsidiary had contracts for the sale of $20.3 million
and $2.1 million at 2007 and 2006, respectively. Finally, the Brazilian
subsidiaries had contracts for the sale of $183.3 million and $114.8 million at
December 31, 2007 and 2006, respectively.
We use commodity forward purchasing contracts to help control the cost of
commodities (primarily copper and, to a lesser extent, aluminum) used in the
production of compressor motors and components and engines. Company policy
allows managers to contract commodity forwards for a limited percentage of raw
material requirements up to fifteen months in advance. These contracts are not
recorded in the balance sheet as they do not require an initial cash outlay and
do not represent a liability until delivery of the commodity. Commodity forwards
outstanding at December 31, 2007 and 2006 were $64.4 million and $62.1 million,
respectively.
A portion of accounts receivable at our Brazilian, European, and Indian
subsidiaries are sold with limited recourse and without recourse at a discount.
Our Brazilian subsidiary also sells portions of its
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
accounts receivable with recourse. Sold receivable balances at December 31, 2007
and 2006 were $79.2 million and $46.5 million, respectively, and the discount
rate was 9.1% in 2007 and 7.45% in 2006. We estimate the fair value of the
contingent liability related to these receivables to be $0.5 million, which is
included in operating income and allowance for doubtful accounts.
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 14. WARRANTIES
Reserves are recorded on the Consolidated Balance Sheet to reflect our
contractual liabilities relating to warranty commitments to customers. Warranty
coverage is provided for a period of twenty months to two years from date of
manufacture for compressors; ninety days to three years from date of purchase
for electrical components, and one year from date of delivery for engines. An
estimate for warranty expense is recorded at the time of sale, based on
historical warranty return rates and repair costs.
Changes in the carrying amount and accrued product warranty costs for the years
ended December 31, 2007 and 2006 are summarized as follows:
(in millions)
Balance at January 1, 2006 ............................ $ 26.7
Current year accruals for warranties .................. 16.5
Adjustments to preexisting warranties ................. (0.8)
Settlements of warranty claims (in cash or in kind) ... (16.5)
Effect of foreign currency translation ................ 0.3
-------
Balance at December 31, 2006 .......................... $ 26.2
=======
Current year accruals for warranties .................. 7.5
Adjustments to preexisting warranties ................. 0.4
Settlements of warranty claims (in cash or in kind) ... (9.3)
Effect of foreign currency translation ................ 0.4
Sale of businesses / reclass to held for sale* ........ (15.5)
-------
Balance at December 31, 2007 .......................... $ 9.7
=======
* Reflects the impact of the sale of the Engine & Power Train business, the
sale of portions of the Electrical Components business, and the
classification of the remaining Electrical Components business as held for
sale.
At December 31, 2007, $8.7 million was included in current liabilities and $1.0
million was included in non-current liabilities.
NOTE 15. STOCKHOLDERS' EQUITY
The shares of Class A common stock and Class B common stock are substantially
identical except as to voting rights. Class A common stock has no voting rights
except the right to i) vote on any amendments that could adversely affect the
Class A Protection Provision in the articles of incorporation and ii) vote in
other limited circumstances, primarily involving mergers and acquisitions, as
required by law.
A Shareholders' Rights Plan is in effect for each class of stock. These plans
protect shareholders against unsolicited attempts to acquire control of the
Company that do not offer an adequate price to all shareholders. The rights are
not currently exercisable, but would become exercisable at an exercise price of
$180 per share, subject to adjustment, if certain events occurred relating to a
person
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
or group acquiring or attempting to acquire 10% or more of the outstanding
shares of Class B common stock. The rights have no voting or dividend privileges
and are attached to, and do not trade separately from, the Class A and Class B
common stock. The rights expire on August 25, 2009. As of December 31, 2007,
13,401,938 shares of authorized but unissued Class A common stock and 5,077,746
shares of authorized but unissued Class B common stock were reserved for future
exercise under the plans.
We have no current expectation to resume payment of dividends.
In April of 2007, as part of the amendment to our Second Lien credit agreements,
we granted a warrant to purchase a number of shares of Class A Common Stock
equal to 7% of our fully diluted common stock. This warrant, valued at $7.3
million, expires five years from the date of the execution of the amendment to
the Second Lien credit agreement.
In 2006, certain of the Company's major shareholders (Herrick foundation, of
which former Chairman Emeritus Todd W. Herrick and Director Kent B. Herrick are
members of the Board of Trustees, and two Herrick family trusts, of which Todd
W. Herrick is one of the trustees) entered into option agreements with a lender
to induce the lender to make financing available to the Company. These option
agreements, valued at $3.7 million, were recorded as loan origination fees, and
the expense was included with the loss from discontinued operations upon
repayment of the loan.
80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 16. IMPAIRMENTS, RESTRUCTURING CHARGES, AND OTHER ITEMS
2007
2007 operating net loss included $7.2 million ($0.39 per share) of
restructuring, impairment and other charges. $4.2 million of these restructuring
charges related to the impairment of long-lived compressor assets in India ($2.2
million) and North America ($2.0 million). These assets were primarily impaired
as a result of the global consolidation of our manufacturing operations. We also
incurred expense of $1.6 million associated with reductions in force at several
of our North American facilities. The remaining charges reflect the impact of
net losses on the sale of buildings ($0.5 million) and related charges ($0.9
million) as a result of the consolidation of corporate and other non-compressor
facilities.
2006
2006 net loss included $2.4 million ($0.13 per share) of restructuring,
impairment and other charges. We recorded these restructuring charges for
impairment of long-lived compressor assets ($2.2 million) and related charges
($0.2 million) at two of its facilities in Mississippi.
2005
2005 results were adversely impacted by a total of $4.3 million ($0.23 per
share) of restructuring, impairment and other charges. The charges include $0.9
million recorded by the North American Compressor operations related to
additional moving costs for previously announced actions and $3.4 million of
asset impairment charges for manufacturing equipment idled through facility
consolidations and the reduction of carrying value of closed plants to fair
value.
NOTE 17. 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 the necessary refund procedures, which
include audits of the recoverable amounts that are currently underway. We
currently expect to recover more than half of the outstanding refundable taxes
within the second half of 2008, and the remainder in 2009.
81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Following is a summary of the recoverable non-income taxes recorded on our
balance sheet at December 31, 2007 and 2006:
DECEMBER 31, December 31,
(Dollars in millions) 2007 2006
- --------------------- ------------ ------------
Brazil $114.5 $88.2
India 7.2 9.0
------ -----
Total recoverable non-income taxes $121.7 $97.2
====== =====
At December 31, 2007, $19.5 million was included in current assets and
$102.2 million was included in non-current assets.
NOTE 18. NEW ACCOUNTING STANDARDS
Accounting for Uncertainty in Income Taxes
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 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 December 31, 2007, there is no reduction of deferred tax assets
relating to uncertain tax positions.
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 year ended December
31, 2007 were reduced by $0.4 million. The impact of FIN 48 for 2007 was a
benefit of $0.9 million.
At December 31, 2007, we anticipate a decrease in the total amount of
unrecognized tax benefits within the next twelve months in the range of zero to
$0.4 million.
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 do not currently
expect this pronouncement to have an impact on our consolidated financial
statements.
82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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. We do not currently expect this pronouncement to have an
impact on our consolidated financial statements.
Noncontrolling Interests in Consolidated Financial Statements
In December 2007, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 160, "Noncontrolling Interests in Consolidated Financial Statements," which
among other things, provides guidance and establishes amended accounting and
reporting standards for a parent company's noncontrolling interest in a
subsidiary. We are currently evaluating the impact of adopting the statement,
which is effective for fiscal years beginning on or after December 15, 2008.
Business Combinations
In December 2007, the FASB issued Statement No. 141R, "Business Combinations,"
("SFAS No.141R") which replaces SFAS No. 141, Business Combinations. SFAS 141R
establishes principles and requirements for how an acquirer entity recognizes
and measures in its financial statements the identifiable assets acquired, the
liabilities assumed (including intangibles) and any noncontrolling interests in
the acquired entity. We are currently evaluating the impact of adopting the
statement, which is effective for fiscal years beginning on or after December
15, 2008.
83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
NOTE 19. QUARTERLY FINANCIAL DATA - UNAUDITED
QUARTER
---------------------------------------------------
(in millions, except per share data) FIRST SECOND THIRD FOURTH TOTAL
--------- --------- --------- --------- ---------
2007
Net sales ..................................... $ 293.8 $ 301.2 $ 282.3 $ 256.1 $ 1,133.4
Gross profit .................................. 29.8 31.1 29.7 31.1 121.7
--------- --------- --------- --------- ---------
Net income (loss) ............................. (16.8) (88.2) (77.2) 4.1 (178.1)
========= ========= ========= ========= =========
Basic and diluted earnings (loss) per share ... $ (0.91) $ (4.77) $ (4.18) $ 0.22 $ (9.64)
========= ========= ========= ========= =========
2006 (A)
Net sales ..................................... $ 255.6 $ 277.1 $ 234.3 $ 250.7 $ 1,017.7
Gross profit .................................. 29.0 14.0 11.8 19.7 74.5
--------- --------- --------- --------- ---------
Net income (loss) ............................. (12.6) 33.9 (37.8) (63.8) (80.3)
========= ========= ========= ========= =========
Basic and diluted earnings (loss) per share ... $ (0.68) $ 1.83 $ (2.04) $ (3.46) $ (4.35)
========= ========= ========= ========= =========
(a) Restated to reflect the reclassification of the Electrical Components
Group, the Engine & Power Train Group, and Manufacturing Data Systems,
Inc. as discontinued operations.
84
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. 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 year 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, and
as of December 31, 2007, our President and Chief Executive Officer along with
our Vice President, Treasurer and Chief Financial Officer concluded that our
disclosure controls and procedures were effective at the reasonable assurance
level as of December 31, 2007. Management believes that the financial statements
included in this report fairly present in all material respects our financial
condition, results of operations and cash flows for the periods presented.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting. Our internal control over financial reporting
is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles.
Management has assessed the effectiveness of its internal control over financial
reporting as of December 31, 2007. In making its assessment, management used the
criteria described in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based
on these criteria, management has concluded that the Company maintained
effective internal control over financial reporting as of December 31, 2007.
The effectiveness of the Company's internal control over financial reporting as
of December 31, 2007 has been audited by Grant Thornton LLP, our independent
registered public accounting firm, as stated in their report which is included
in Item 8 of this report on Form 10-K.
85
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no changes in our internal control over financial reporting that
occurred during the fourth quarter of 2007 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
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.
Our independent registered public accounting firm, Grant Thornton LLP, has
issued an attestation report on our internal control over financial reporting.
Their report appears below.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Tecumseh Products Company
We have audited Tecumseh Products Company and subsidiaries' internal control
over financial reporting as of December 31, 2007, based on criteria established
in Internal Control -- Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). Tecumseh Products
Company and subsidiaries' management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the
accompanying Management's Report on Internal Control Over Financial Reporting.
Our responsibility is to express an opinion on Tecumseh Products Company and
subsidiaries' internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
86
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, Tecumseh Products Company and subsidiaries maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2007, based on criteria established in Internal Control --
Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet of
Tecumseh Products Company and subsidiaries as of December 31, 2007, and the
related consolidated statements of operations, cash flows and stockholders'
equity for the year then ended and our report dated March 14, 2008 expressed an
unqualified opinion.
Grant Thornton LLP
Southfield, Michigan
March 14, 2008
ITEM 9B. OTHER INFORMATION
None.
87
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
EXECUTIVE OFFICERS OF THE COMPANY
The following are our executive officers:
PERIOD OF SERVICE
NAME AND AGE OFFICE OR POSITION HELD AS AN OFFICER
- ------------ ----------------------- -----------------
Edwin L. Buker, 54 President and Chief Executive Officer (1) Since August 13, 2007
James S. Nicholson, 46 Vice President, Treasurer, and Chief Financial Since 2003
Officer (2)
James Wainright, 53 Vice President of Global Operations (3) Since October 8, 2007
(1) Last five years of business experience - Present position since August 13,
2007. President and Chief Executive Officer of Citation Corporation, a
leading supplier of metal components based in Birmingham, Alabama, 2002 -
2007.
(2) Last five years of business experience - Present position since 2004.
Corporate Controller, Tecumseh Products Company 2002 - 2004.
(3) Last five years of business experience - Present position since October 8,
2007. Senior Vice President of Operations, A.O. Smith Corporation -
Electrical Products Division, 2001 - 2007.
The information pertaining to directors required by Item 401 of Regulation S-K
will be set forth under the caption "Proposal 1: Election of Directors" in our
definitive Proxy Statement relating to our 2008 Annual Meeting of Shareholders
and is incorporated herein by reference. The information required to be reported
pursuant to Item 405 of Regulation S-K will be set forth under the caption
"Appendix A - Share Ownership - Section 16(a) Beneficial Ownership Reporting
Compliance" in our definitive Proxy Statement relating to our 2008 Annual
Meeting of Shareholders and is incorporated herein by reference.
We have adopted a Code of Ethics for Financial Managers, which applies to our
Chief Executive Officer, Chief Financial Officer, Corporate Controller, Director
of Corporate Compliance, and Director of Financial Reporting, and the controller
or principal accounting manager of each business unit, as well as a Code of
Conduct for All Directors, Officers, and Employees and an Ethics Reporting
Policy. Current copies of both codes and the reporting policy are posted at the
Investor Relations section of our website at www.tecumseh.com.
88
The information required to be reported pursuant to paragraphs (d)(4) and (d)(5)
of Item 407 of Regulation S-K will be set forth under the caption "Audit
Committee" in our definitive Proxy Statement relating to our 2008 Annual Meeting
of Shareholders and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information under the captions "Appendix B - Executive Compensation," and
the information under the sub-captions "Compensation Committee Interlocks and
Insider Participation" and "Compensation Committee Report" under the caption
"Compensation Committee" in our definitive Proxy Statement relating to our 2008
Annual Meeting of Shareholders is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information under the caption "Appendix A - Share Ownership" in our
definitive Proxy Statement relating to our 2008 Annual Meeting of Shareholders
is incorporated herein by reference. No information is required to be reported
pursuant to Item 201(d) of Regulation S-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
The information under the sub-captions "Director Independence" and "Related
Party Transactions" under the caption "Corporate Governance" and the information
under the sub-caption "Compensation Committee Interlocks and Insider
Participation" under the caption "Compensation Committee" in our definitive
Proxy Statement relating to our 2008 Annual Meeting of Shareholders is
incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information under the caption "Appendix C -- Audit and Non-Audit Fees" in
our definitive Proxy Statement relating to our 2008 Annual Meeting of
Shareholders is incorporated herein by reference.
89
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) and (2) Financial Statements
See "Financial Statements"
(3) See Index to Exhibits (See Item 15 (b), below)
(b) Exhibits
EXHIBIT
NO. DESCRIPTION
2.1 Purchase Agreement dated as of July 3, 2007 among Regal Beloit
Corporation, Tecumseh Products Company, Fasco Industries, Inc., and
Motores Fasco de Mexico, S. de R.L. de C.V. (incorporated by reference
to Exhibit 2 to registrant's Current Report on Form 8-K filed September
7, 2007, File No. 0-452) [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.]
2.2 Purchase Agreement dated as of October 22, 2007 by and between
Snowstorm Acquisition Corporation and Tecumseh Products Company
(incorporated by reference to Exhibit 10.1 to registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2007, File No.
0-452) [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.]
2.3* Contribution and Purchase Agreement dated as of November 1, 2007 among
Tecumseh Products Company, Von Weise USA, Inc., Specialty Motors
Operations, Inc., and Specialty Motors Holding Corp. [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.]
3.1 Restated Articles of Incorporation of Tecumseh Products Company
(incorporated by reference to Exhibit (3) to registrant's Annual Report
on Form 10-K for the year ended December 31, 1991, File No. 0-452)
3.2 Certificate of Amendment to the Restated Articles of Incorporation of
Tecumseh Products Company (incorporated by reference to Exhibit B-5 to
registrant's Form 8 Amendment No. 1 dated April 22, 1992 to Form 10
Registration Statement dated April 24, 1965, File No. 0-452)
90
3.3 Certificate of Amendment to the Restated Articles of Incorporation of
Tecumseh Products Company (incorporated by reference to Exhibit (4)(c)
to registrant's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1994, File No. 0-452)
3.4 Amended and Restated Bylaws of Tecumseh Products Company as amended
through December 17, 2007 (incorporated by reference to Exhibit 3.1 to
registrant's Current Report on Form 8-K, filed December 21, 2007, File
No. 0-452)
4.1 First Lien Credit Agreement dated February 6, 2006 by and among
Tecumseh Products Company and certain Lenders and Issuers listed
therein and Citicorp USA, Inc. as Administrative Agent and Collateral
Agent (incorporated by reference to Exhibit 4.1 to registrant's Current
Report on Form 8-K filed February 9, 2006, File No. 0-452)
4.2 Amendment No. 1 dated May 5, 2006 to First Lien Credit Agreement
(incorporated by reference to Exhibit 4.1 to registrant's Current
Report on Form 8-K filed March 31, 2006, File No. 0-452)
4.3 Amendment No. 2 dated November 3, 2006 to First Lien Credit Agreement
(incorporated by reference to Exhibit 4.1 to registrant's Current
Report on Form 8-K filed November 8, 2006, File No. 0-452)
4.4 Amendment No. 3 dated November 13, 2006 to First Lien Credit Agreement
(incorporated by reference to Exhibit 4.1 to registrant's Current
Report on Form 8-K filed November 15, 2006, File No. 0-452)
4.5 Amendment No. 4 dated December 7, 2006 to First Lien Credit Agreement
(incorporated by reference to Exhibit 4.1 to registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 2006, File No.
0-452)
4.6 Amendment No. 5 dated April 9, 2007 to First Lien Credit Agreement
(incorporated by reference to Exhibit 4.1 to registrant's Current
Report on Form 8-K filed April 10, 2007, File No. 0-452)
4.7 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 (incorporated by reference to Exhibit 4.1 to
registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2007, File No. 0-452).
4.8 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(incorporated by reference to Exhibit 4.2 to
registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2007, File No. 0-452).
91
Note: Other instruments defining the rights of holders of long-term
debt are not filed because the total amount authorized thereunder does
not exceed 10% of the total assets of the registrant and its
subsidiaries on a consolidated basis. The registrant hereby agrees to
furnish a copy of any such agreement to the Commission upon request.
9 Not applicable
10.1 Amended and Restated Class B Rights Agreement (incorporated by
reference to Exhibit 4 to Form 8 Amendment No. 1 dated April 22, 1992
to Form 8-A registering Common Stock Purchase Rights dated January 23,
1991, File No. 0-452)
10.2 Amendment No. 1 to Amended and Restated Class B Rights Agreement
(incorporated by reference to Exhibit 4 to Form 8 Amendment No. 2 dated
October 2, 1992 to Form 8-A registering Common Stock Purchase Rights
dated January 23, 1991, File No. 0-452)
10.3 Amendment No. 2 to Amended and Restated Class B Rights Agreement
(incorporated by reference to Exhibit 4 to Form 8-A/A Amendment No. 3
dated June 22, 1993 to Form 8-A registering Common Stock Purchase
Rights dated January 23, 1991, File No. 0-452)
10.4 Amendment No. 3 to Amended and Restated Class B Rights Agreement
(incorporated by reference to Exhibit 4.2 to registrant's Current
Report on Form 8-K as filed August 26, 1999, File No. 0-452)
10.5 Amendment No. 4 to Amended and Restated Class B Rights Agreement, dated
as of August 22, 2001, between Tecumseh Products Company and State
Street Bank and Trust Company, N.A., as successor Class B Rights Agent
(incorporated by reference to Exhibit 4.4 to Form 8-A/A Amendment No. 5
dated September 19, 2001 to Form 8-A registering Common Stock Purchase
Rights dated January 23, 1991, File No. 0-452)
10.6 Amendment No. 5 to Amended and Restated Class B Rights Agreement, dated
as of July 15, 2002, between Tecumseh products Company, State Street
Bank and Trust Company, N.A. as the existing agent, and Equiserve Trust
Company, N.A. as successor Class B Rights Agent (incorporated by
reference to Exhibit 10.6 to registrant's Annual Report on Form 10-K
for the year ended December 31, 2002, File No. 0-452)
10.7 Class A Rights Agreement (incorporated by reference to Exhibit 4 to
Form 8-A registering Class A Common Stock Purchase Rights dated April
22, 1992, File No. 0-452)
92
10.8 Amendment No. 1 to Class A Rights Agreement (incorporated by reference
to Exhibit 4 to Form 8 Amendment No. 1 dated October 2, 1992 to Form
8-A registering Class A Common Stock Purchase Rights dated April 22,
1992, File No. 0-452)
10.9 Amendment No. 2 to Class A Rights Agreement (incorporated by reference
to Exhibit 4 to Form 8-A/A Amendment No. 2 dated June 22, 1993 to Form
8-A registering Class A Common Stock Purchase Rights dated April 22,
1992, File No. 0-452)
10.10 Amendment No. 3 to Class A Rights Agreement (incorporated by reference
to Exhibit 4.1 to registrant's Current Report on Form 8-K filed August
26, 1999, File No. 0-452)
10.11 Amendment No. 4 to Class A Rights Agreement dated as of August 22,
2001, between Tecumseh products Company and State Street Bank and Trust
Company, N.A., as successor Class A Rights Agent (incorporated by
reference to Exhibit 4.4 to Form 8-A/A Amendment No. 4 dated September
19, 2001 to Form 8-A registering Class A Common Stock Purchase Rights
dated April 22, 1992, File No. 0-452)
10.12 Amendment No. 5 to Class A Rights Agreement, dated as of July 15, 2002,
between Tecumseh products Company, State Street Bank and Trust Company,
N.A. as the existing agent, and Equiserve Trust Company, N.A. as
successor Class A Rights Agent (incorporated by reference to Exhibit
10.12 to registrant's Annual Report on Form 10-K for the year ended
December 31, 2002, File No. 0-452)
10.13 Description of Death Benefit Plan (management contract or compensatory
plan or arrangement) (incorporated by reference to Exhibit (10)(f) to
registrant's Annual Report on Form 10-K for the year ended December 31,
1992, File No. 0-452)
10.14 Key employee bonus plan(management contract or compensatory plan or
arrangement) (incorporated by reference to Exhibit 10.1 to registrant's
Current Report on Form 8-K filed April 16, 2007, File No. 0-452)
10.15* Annual Incentive Plan adopted December 17, 2007 (management contract or
compensatory plan or arrangement)
10.16 Long-Term Term Incentive Cash Award Plan adopted March 4, 2008
(management contract or compensatory plan or arrangement) (incorporated
by reference to Exhibit 10.1 to registrant's Current Report on Form 8-K
filed March 10, 2008, File No. 0-452)
10.17 Form of Award Agreement (Phantom Shares) under Long-Term Incentive Cash
Award Plan (management contract or compensatory plan or arrangement)
(incorporated by reference to Exhibit 10.2 to registrant's Current
Report on Form 8-K filed March 10, 2008, File No. 0-452)
93
10.18 Form of Award Agreement (SARs) under Long-Term Incentive Cash Award
Plan (management contract or compensatory plan or arrangement)
(incorporated by reference to Exhibit 10.3 to registrant's Current
Report on Form 8-K filed March 10, 2008, File No. 0-452)
10.19 Amended and Restated Supplemental Executive Retirement Plan effective
June 27, 2001 (management contract or compensatory plan or arrangement)
(incorporated by reference to Exhibit 10.16 to registrant's Annual
Report on Form 10-K for the year ended December 31, 2001, File No.
0-452)
10.20 Amendment No. 1 to the Supplemental Executive Retirement Plan adopted
September 26, 2001 (management contract or compensatory plan or
arrangement) (incorporated by reference to Exhibit 10.17 to
registrant's Annual Report on Form 10-K for the year ended December 31,
2001, File No. 0-452)
10.21 Outside Directors' Voluntary Deferred Compensation Plan adopted
November 25, 1998 (management contract or compensatory plan or
arrangement) (incorporated by reference to Exhibit (10)(k) to
registrant's Annual Report on Form 10-K for the year ended December 31,
1998, File No. 0-452)
10.22 Amendment No. 1 to Outside Directors' Voluntary Deferred Compensation
Plan adopted August 28, 2002 (management contract or compensatory plan
or arrangement) (incorporated by reference to Exhibit 10.21 to
registrant's Annual Report on Form 10-K for the year ended December 31,
2002, File No. 0-452)
10.23 Executive Deferred Compensation Plan adopted on March 29, 2006,
effective as of January 1, 2005 (management contract or compensatory
plan or arrangement) (incorporated by reference to Exhibit 10.2 to
registrant's Quarterly Report on Form 10-Q for the quarter ended March
31, 2006, File No. 0-452)
10.24 Director Retention Phantom Share Plan as amended and restated on March
29, 2006 effective as of January 1, 2005 (management contract or
compensatory plan or arrangement) (incorporated by reference to Exhibit
10.3 to registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2006, File No. 0-452)
10.25* Outside Directors' Deferred Stock Unit Plan adopted December 17, 2007
effective as of January 1, 2008 (management contract or compensatory
plan or arrangement)
10.26 Employment Agreement dated as of August 1, 2007 with Edwin L. Buker
(management contract or compensatory plan or arrangement) (incorporated
by reference to Exhibit 10.1 to registrant's Current Report on Form 8-K
filed August 6, 2007, File No. 0-452)
10.27 First Amendment dated as of March 4, 2008 to Employment Agreement dated
as of August 1, 2007 with Edwin L. Buker (management contract or
compensatory plan or arrangement) (incorporated by reference to Exhibit
10.4 to registrant's Current Report on Form 8-K filed March 10, 2008,
File No. 0-452)
94
10.28 Severance Agreement with James S. Nicholson dated March 29, 2007
(management contract or compensatory plan or arrangement) (incorporated
by reference to Exhibit 10.2 to registrant's Current Report on Form 8-K
filed January 25, 2007, File No. 0-452) [Note: superseded by Change in
Control and Severance Agreement.]
10.29* Letter dated September 17, 2007 and accompanying term sheet setting
forth terms of employment of James Wainright (management contract or
compensatory plan or arrangement)
10.30 Form of Change in Control and Severance Agreement (management contract
or compensatory plan or arrangement) (incorporated by reference to
Exhibit 10.5 to registrant's Current Report on Form 8-K filed March 10,
2008, File No. 0-452)
10.31 List of executive officers with Change in Control and Severance
Agreements (incorporated by reference to Exhibit 10.6 to registrant's
Current Report on Form 8-K filed March 10, 2008, File No. 0-452)
10.32 Liability Transfer and Assumption Agreement for Sheboygan River and
Harbor Superfund Site dated March 25, 2003, by and between Tecumseh
Products Company and Pollution Risk Services, LLC (incorporated by
reference to Exhibit 10.1 to registrant's Current Report on Form 8-K
filed April 9, 2003, File No. 0-452)
10.33 Consent Order entered into on December 9, 2004 with Wisconsin
Department of Natural Resources and TRC Companies, Inc. (incorporated
by reference to Exhibit 10.26 to registrant's Annual Report on Form
10-K for the year ended December 31, 2004, File No. 0-452)
10.34 Exit Strategy Agreement dated December 29, 2004 with TRC Companies,
Inc. (incorporated by reference to Exhibit 10.27 to registrant's Annual
Report on Form 10-K for the year ended December 31, 2004, File No.
0-452)
10.35 Stock Purchase Agreement dated as of March 17, 2006 between Tecumseh
Products Company and Franklin Electric Co, Inc. relating to Little
Giant Pump Company (schedules and exhibits omitted) (incorporated by
reference to Exhibit 10-1 to registrant's Current Report on Form 8-K
filed March 21, 2006, File No. 0-452)
10.36 Out-of-Court Restructuring Agreement dated November 21, 2006 among
Tecumseh Products Company, Tecumseh Power Company, TMT Motoco do
Brasil, Ltda., and the banks named therein (incorporated by reference
to Exhibit 10.1 to registrant's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2006, File No. 0-452)
10.37 Agreement with AP Services, LLC and AlixPartners, LLP dated December 7,
2006 (incorporated by reference to Exhibit 10.1 to registrant's Current
Report on Form 8-K filed December 14, 2006, File No. 0-452)
95
10.38 First addendum dated January 19, 2007 to agreement with AP Services,
LLC dated December 7, 2006 (incorporated by reference to Exhibit 10.1
to registrant's Current Report on Form 8-K filed January 25, 2007, File
No. 0-452)
10.39 Settlement and Release Agreement dated as of April 2, 2007 among
Tecumseh Products Company; Herrick Foundation; Todd W. Herrick and Toni
Herrick, each in their capacity as trustee for specified Herrick family
trusts; Todd W. Herrick, Kent B. Herrick, and Michael Indenbaum, each
in their capacity as members of the Board of Trustees of Herrick
Foundation; Todd W. Herrick, Kent B. Herrick, Michael Indenbaum, and
Toni Herrick, each in their individual capacities; and Albert A. Koch,
Peter Banks, and David M. Risley, each in their capacity as directors
of Tecumseh Products Company (incorporated by reference to Exhibit 10.3
to registrant's Current Report on Form 8-K filed April 10, 2007, File
No. 0-452)
10.40 Warrant to Purchase Class A Common Stock of Tecumseh Products Company
issued to Tricap Partners II L.P. on April 9, 2007 (incorporated by
reference to Exhibit 10.1 to registrant's Current Report on Form 8-K
filed April 10, 2007, File No. 0-452)
10.41 Registration Rights Agreement dated as of April 9, 2007 between
Tecumseh Products Company and Tricap Partners II L.P. (incorporated by
reference to Exhibit 10.2 to registrant's Current Report on Form 8-K
filed April 10, 2007, File No. 0-452)
11 Not applicable
12 Not applicable
13 Not applicable
14 Not applicable
16 Not applicable
18 Not applicable
21* Subsidiaries of the Company
22 Not applicable
23 Not applicable
24* Power of Attorney
31.1* Certification of President and Chief Executive Officer pursuant to Rule
13a-14(a).
31.2* Certification of Chief Financial Officer pursuant to Rule 13a-14(a).
96
32.1* Certification of President and Chief Executive Officer pursuant to Rule
13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United
States Code.
32.2* Certification of Chief Financial Officer pursuant to Rule 13a-14(b) and
Section 1350 of Chapter 63 of Title 18 of the United States Code.
33. Not applicable
34 Not applicable
35 Not applicable
99 Not applicable
100 Not applicable
* Filed herewith
(c) Financial Statement Schedules
None.
97
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Date: March 14, 2008 By /s/ Edwin L. Buker
-------------------------------
Edwin L. Buker
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE OFFICE DATE OF SIGNING
--------- ------ ---------------
/s/ EDWIN L. BUKER President and Chief Executive Officer March 14, 2008
Edwin L. Buker (Principal Executive Officer)
/s/ JAMES S. NICHOLSON Vice President, Treasurer and March 14, 2008
James S. Nicholson Chief Financial Officer
(Principal Accounting and Principal Financial
Officer)
* Director March 14, 2008
Peter M. Banks
* Director March 14, 2008
William E. Aziz
* Director March 14, 2008
Kent B. Herrick
* Director March 14, 2008
Jeffry N. Quinn
* Director March 14, 2008
David M. Risley
* Director March 14, 2008
Steven J. Lebowski
*By: /s/ JAMES S. NICHOLSON
James S. Nicholson
Attorney-in-Fact