SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT of 1934
For the quarterly period ended March 31, 2008
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT of 1934
For the transition period from ______to ______
COMMISSION FILE NUMBER: 0-452
TECUMSEH PRODUCTS COMPANY
(Exact name of registrant as specified in its charter)
MICHIGAN 38-1093240
(State of Incorporation) (IRS Employer Identification Number)
100 EAST PATTERSON STREET
TECUMSEH, MICHIGAN 49286
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code:
(517) 423-8411
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, 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 Exchange Act).
Yes [_] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Stock Outstanding at March 31, 2008
- ---------------------------------------------------------------------
Class B Common Stock, $1.00 par value 5,077,746
Class A Common Stock, $1.00 par value 13,401,938
Page 1
TABLE OF CONTENTS
Page
--------
Part I. Financial Information (unaudited)
Item 1. Financial Statements (unaudited)
Consolidated Condensed Balance Sheets (unaudited)................ 3
Consolidated Condensed Statements of Operations (unaudited)...... 4
Consolidated Condensed Statements of Cash Flows (unaudited)...... 5
Notes to Consolidated Condensed Financial Statements............. 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk.. 31
Item 4. Controls and Procedures..................................... 32
Part II. Other Information.............................................
Item 4. Submission of Matters to a Vote of Security Holders 33
Item 6. Exhibits 33
Signatures ............................................................ 34
Certification of CEO Pursuant to Section 302........................... Exh 31.1
Certification of CFO Pursuant to Section 302........................... Exh 31.2
Certification of CEO Pursuant to Section 906........................... Exh 32.1
Certification of CFO Pursuant to Section 906........................... Exh 32.2
Page 2
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 1
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
MARCH 31, December 31,
(Dollars in millions, except share data) 2008 2007
--------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 197.0 $ 76.8
Restricted cash 14.4 6.8
Short-term investments 5.0 5.0
Accounts receivable, trade, less allowance for
doubtful accounts of $5.8 in 2008 and $5.7 in 2007 118.5 93.2
Inventories 148.0 143.4
Deferred and recoverable income taxes 25.3 10.7
Recoverable non-income taxes 84.3 19.5
Assets held for sale 21.8 21.9
Other current assets 19.5 20.4
-------- --------
Total current assets 633.8 397.7
Property, plant, and equipment, net 345.5 353.3
Goodwill 21.1 20.2
Prepaid pension expense 128.4 233.4
Deferred and recoverable income taxes -- 13.9
Recoverable non-income taxes 42.9 102.2
Other assets 45.8 44.2
-------- --------
Total assets $1,217.5 $1,164.9
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable, trade $ 172.1 $ 123.0
Short-term borrowings 65.1 59.5
Liabilities held for sale 2.0 2.6
Accrued liabilities:
Employee compensation 32.3 31.1
Product warranty and self-insured risks 15.7 17.2
Other 34.0 35.9
-------- --------
Total current liabilities 321.2 269.3
Long-term debt 3.1 3.3
Deferred income taxes 10.5 10.2
Other postretirement benefit liabilities 43.9 74.3
Product warranty and self-insured risks 10.7 10.0
Pension liabilities 15.8 14.8
Other non-current liabilities 37.2 37.1
-------- --------
Total liabilities 442.4 419.0
-------- --------
Stockholders' Equity
Class A common stock, $1 par value; authorized
75,000,000 shares; issued and outstanding
13,401,938 shares in 2008 and 2007 13.4 13.4
Class B common stock, $1 par value; authorized
25,000,000 shares; issued and outstanding
5,077,746 shares in 2008 and 2007 5.1 5.1
Paid in capital 11.0 11.0
Retained earnings 569.6 547.9
Accumulated other comprehensive income 176.0 168.5
-------- --------
Total stockholders' equity 775.1 745.9
-------- --------
Total liabilities and stockholders' equity $1,217.5 $1,164.9
======== ========
The accompanying notes are an integral part of these Consolidated Condensed
Financial Statements.
Page 3
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 1
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
THREE MONTHS ENDED
(Dollars in millions, except per share data) MARCH 31,
2008 2007
------- -------
Net sales $ 280.1 $ 293.8
Cost of sales and operating expenses 238.5 264.0
Selling and administrative expenses 26.6 28.3
Impairments, restructuring charges, and other items 0.5 0.0
------- -------
Operating income 14.5 1.5
Interest expense 7.3 5.8
Interest income and other, net 1.8 1.7
------- -------
Income (loss) from continuing operations before taxes 9.0 (2.6)
Tax expense (benefit) 1.2 (0.6)
------- -------
Income (loss) from continuing operations 7.8 (2.0)
Income (loss) from discontinued operations, net of tax 9.2 (14.8)
------- -------
Net income (loss) $ 17.0 ($16.8)
======= =======
Basic earnings (loss) per share:
Income (loss) from continuing operations $ 0.42 ($0.11)
Income (loss) from discontinued operations, net of tax 0.50 (0.80)
------- -------
Net income (loss) per share, basic $ 0.92 ($0.91)
======= =======
Diluted earnings (loss) per share:*
Income (loss) from continuing operations $ 0.39 ($0.11)
Income (loss) from discontinued operations, net of tax 0.46 (0.80)
------- -------
Net income (loss) per share, diluted $ 0.85 ($0.91)
======= =======
Weighted average shares, basic (in thousands) 18,480 18,480
Weighted average shares, diluted (in thousands) 19,871 18,480
======= =======
Cash dividends declared per share $ 0.00 $ 0.00
======= =======
* On April 9, 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). Diluted
earnings per share for the three months ended March 31, 2008 are therefore
calculated based on a total of 19,870,628 shares.
The accompanying notes are an integral part of these Consolidated Condensed
Financial Statements.
Page 4
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 1
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in millions) THREE MONTHS ENDED
MARCH 31,
------------------
2008 2007
------------------
Cash Flows from Operating Activities:
Net income (loss) $ 17.0 ($16.8)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 11.2 18.4
Gain on disposal of property and equipment (4.5) --
Changes in assets and liabilities:
Accounts receivable (23.5) (42.4)
Inventories (1.7) 9.9
Payables and accrued expenses 41.0 2.4
Employee retirement benefits 79.4 (7.3)
Deferred and recoverable taxes (1.0) 1.3
Other 2.6 (16.3)
------ -------
Cash provided by (used in) operating activities 120.5 (50.8)
------ -------
Cash Flows from Investing Activities:
Cash effect of deconsolidation of TMT Motoco -- (0.3)
Proceeds from sale of assets 6.8 --
Capital expenditures (0.8) (1.9)
Change in restricted cash (7.6) --
------ -------
Cash used in investing activities (1.6) (2.2)
------ -------
Cash Flows from Financing Activities:
Proceeds / repayments from First Lien Credit Agreement, net -- 8.3
Debt amendment costs (1.6) --
Other borrowings / repayments, net 4.8 8.8
------ -------
Cash provided by financing activities 3.2 17.1
------ -------
Effect of exchange rate changes on cash (1.9) 2.7
------ -------
Increase (decrease) in cash and cash equivalents 120.2 (33.2)
Cash and Cash Equivalents:
Beginning of period 76.8 81.9
------ -------
End of period $197.0 $ 48.7
====== =======
Supplemental Schedule of Noncash Investing and Financing
Activities:
Paid-in-kind interest -- $ 0.4
The accompanying notes are an integral part of these Consolidated Condensed
Financial Statements.
Page 5
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. The consolidated condensed financial statements of Tecumseh Products Company
and Subsidiaries (the "Company") are unaudited and reflect all adjustments
(including normal recurring adjustments) which are, in the opinion of
management, necessary for a fair statement of the financial position and
operating results for the interim periods. The December 31, 2007 consolidated
condensed balance sheet data was derived from audited financial statements, but
does not include all disclosures required by generally accepted accounting
principles in the United States ("U.S. GAAP"). The consolidated condensed
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto contained in our Annual Report for the
fiscal year ended December 31, 2007. Due to the seasonal nature of certain
product lines, the results of operations for the interim period are not
necessarily indicative of the results for the entire fiscal year.
2. Restricted Cash
Restricted cash as of December 31, 2007 represented cash deposits related to
letters of credit. These restrictions were lifted upon the termination of our
previous First Lien credit agreement.
As is further discussed in Note 9, a portion of the overfunding for the
terminated salaried retirement plan was utilized to pre-fund the benefits for
both the defined benefit and defined contribution replacement plans for
approximately the next six to eight years. As part of this pre-funding, a
reserve was established to allow the Company to fund future company matching
contributions to its defined contribution plan. This fund is 100% invested in
money market accounts. The balance in this reserve is estimated to be more than
sufficient to provide all Company matching funds for the next seven years. At
March 31, 2008, the balance of cash restricted for this purpose was $14.4
million.
3. Discontinued Operations and Sale of Businesses
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. 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 March 31, 2008. The results for
Electrical Components for the periods ended March 31, 2008 and 2007 are included
in the income (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
Page 6
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
closing. The transaction was completed on November 9, 2007. The results for the
Engine & Power Train business for the periods ended March 31, 2008 and 2007 are
included in the income (loss) from discontinued operations.
Interest expense of $3.9 million was allocated to discontinued operations for
the period ended March 31, 2007 related to the divested operations.
Following is a summary of pretax income (loss) from discontinued operations
related to the Electrical Components business for the three months ended March
31, 2008 and 2007:
Three Months Ended Three Months
Ended Ended
(Dollars in millions) March 31, 2008 March 31, 2007
------------------ --------------
Net sales $ 6.5 $103.3
Cost of sales 5.9 93.8
Selling and administrative expenses 0.2 8.4
Impairments, restructuring charges, and other items 1.0 --
----- ------
Operating (loss) income (0.6) 1.1
Interest expense -- (0.2)
----- ------
(Loss) income from discontinued operations before income taxes ($0.6) $ 0.9
===== ======
Following is a summary of pretax income (loss) from discontinued operations
related to the Engine & Power Train business for the three months ended
March 31, 2007:
Three Months Ended Three Months
Ended Ended
(Dollars in millions) March 31, 2008 March 31, 2007
------------------ --------------
Net sales $ -- $ 63.0
Cost of sales -- 64.2
Selling and administrative expenses -- 6.8
Impairments, restructuring charges, and other items (9.8) --
----- ------
Operating income (loss) 9.8 (8.0)
Interest expense -- (3.4)
----- ------
Income (loss) from discontinued operations before income taxes $ 9.8 ($11.4)
===== ======
The amounts recorded in impairments, restructuring charges, and other items in
the first quarter of 2008 for the Engine & Power Train business represented a
curtailment gain on the salaried retirement plan of $2.9 million and a
curtailment gain on the salaried other postretirement benefit plan of $6.9
million.
During the third quarter of 2007, we also sold Manufacturing Data Systems Inc.,
a small subsidiary not associated with any of our major business segments. Sales
of $0.4 million and loss of $0.7 million were recorded for the three months
ended March 31, 2007.
Page 7
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
The following summary balance sheet information is derived from the businesses
that are classified as held for sale as of March 31, 2008, 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 March 31, 2008.
(Dollars in millions) MARCH 31,
2008
---------
ASSETS:
Accounts receivable, net $ 2.7
Inventories 8.2
Property, plant, and equipment, net 10.9
-----
Total assets held for sale $21.8
LIABILITIES:
Accounts payable, trade $ 1.4
Accrued liabilities 0.6
-----
Total liabilities held for sale 2.0
Net assets held for sale $19.8
=====
4. Comprehensive Income
THREE MONTHS
(Dollars in millions) ENDED
MARCH 31,
2008 2007
----- ------
Net income (loss) $17.0 ($16.8)
Other comprehensive income (loss):
Foreign currency translation adjustments: 8.7 6.5
(Loss) gain on derivatives, net of tax (1.4) 2.1
----- ------
Total comprehensive income (loss) $24.3 ($ 8.2)
===== ======
5. Inventories
MARCH 31, December 31,
(Dollars in millions) 2008 2007
--------- ------------
Raw material $ 78.0 $ 79.6
Work in progress 10.3 9.0
Finished goods 59.7 54.8
------ ------
Total inventories $148.0 $143.4
====== ======
Page 8
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
6. 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.
Following is a summary of the recoverable non-income taxes recorded on our
balance sheet at March 31, 2008 and December 31, 2007:
MARCH 31, December 31,
(Dollars in millions) 2008 2007
--------- ------------
Brazil $117.6 $114.5
India 9.6 7.2
------ ------
Total recoverable non-income taxes $127.2 $121.7
====== ======
At March 31, 2008, $84.3 million was included in current assets and $42.9
million was included in non-current assets.
Page 9
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
7. Business Segments
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.
Net sales and operating income (loss) by segment for the periods indicated are
as follows:
BUSINESS SEGMENT DATA THREE MONTHS ENDED
(Dollars in millions) MARCH 31,
2008 2007
------ ------
Net sales:
Compressor Products $275.2 $289.3
Other (a) 4.9 4.5
------ ------
Total Net Sales $280.1 $293.8
====== ======
Operating income (loss):
Compressor Products $18.2 $ 10.5
Other (a) 1.1 1.0
Corporate expenses (4.3) (10.0)
Impairments, restructuring charges, and other
items (0.5) --
------ ------
Total operating income 14.5 1.5
from continuing operations
Interest expense (7.3) (5.8)
Interest income and other, net 1.8 1.7
------ ------
Income (loss) from continuing operations before taxes $ 9.0 ($ 2.6)
====== ======
(a) "Other" consists of non-reportable business segments.
Page 10
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
8. Goodwill and Other Intangible Assets
At March 31, 2008, the following entities reported goodwill:
(Dollars in millions) EUROPE INDIA TOTAL
------ ----- -----
Balance at 1/1/2008 $12.4 $7.8 $20.2
Foreign currency translation 1.0 (0.1) 0.9
----- ---- -----
Balance at 3/31/2008 $13.4 $7.7 $21.1
===== ==== =====
The only changes in goodwill during 2008 have been due to the effects of foreign
currency fluctuations.
At December 31, 2007, goodwill consisted of the following:
ELECTRICAL
(Dollars in millions) EUROPE INDIA COMPONENTS TOTAL
------ ----- ---------- ------
Balance at 1/1/2007 $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 12/31/2007 $12.4 $7.8 -- $ 20.2
===== ==== ====== ======
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, 2007. The only other
changes in goodwill during 2007 were due to foreign currency fluctuations.
Page 11
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
9. Pension and Other Postretirement Benefit (OPEB) Plans
Components of net periodic benefit (income) cost are as follows:
(Dollars in millions) PENSION BENEFITS OTHER BENEFITS
------------------ ------------------
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
2008 2007 2008 2007
------ -------- ------ ----
Service Cost $ 0.6 $ 2.2 $ 0.3 $ 1.0
Interest Cost 4.8 5.6 1.2 2.1
Expected return on plan assets (7.9) (11.3) (0.1) (0.1)
Amortization of prior service costs -- (0.1) (2.6) (2.6)
Amortization of net gain -- -- (0.5) --
------ ------ ------ -----
Net periodic benefit (income) cost ($ 2.5) ($ 3.6) ($ 1.7) $ 0.4
Curtailment gains, settlement gains
and special termination benefits (2.0) -- (26.0) --
------ ------ ------ -----
Total Pension (Income) Expense ($ 4.5) ($ 3.6) ($27.7) $ 0.4
====== ====== ====== =====
A summary of the curtailment losses (gains), settlement gains and special
termination charges under the various plans is as follows:
(Dollars in millions) PENSION BENEFITS OTHER BENEFITS
------------------ ------------------
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, MARCH 31,
2008 2007 2008 2007
------ ---- ------- ----
Recorded in continuing operations:
Hourly pension plan curtailment loss $ 3.9 $-- $ -- $--
Hourly plan special termination benefit charge 2.4 -- -- --
Salaried plan settlement gain on annuities (6.3) -- -- --
Salaried plan special termination benefit charge 1.0 -- -- --
Hourly plan OPEB curtailment gain -- -- (19.1) --
------ --- ------- ---
Total - continuing operations 1.0 -- (19.1) --
------ --- ------- ---
Recorded in discontinued operations:
Salaried plan curtailment gain (2.9) -- -- --
Consolidated plan curtailment gain (0.1) -- -- --
Salaried OPEB plan curtailment gain -- -- (6.9) --
------ --- ------- ---
Total - discontinued operations (3.9) -- (6.9) --
------ --- ------- ---
Total - curtailment gains, settlement gains and
special termination benefits ($ 2.0) -- ($ 26.0) --
====== === ======= ===
Page 12
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
All of the curtailment losses (gains), settlement gains and special termination
charges that are recorded as part of continuing operations are included in
impairments, restructuring, and other items.
Under SFAS No. 158, "Employers; Accounting for Defined Benefit Pension and Other
Postretirement Plans" (SFAS 158), plan sponsors who use a measurement date other
than the end of the fiscal year must change to a fiscal year end. We made this
change as of December 31, 2007. As a result of this measurement date change, we
recognized a special recognition gain of $3.1 million for pension plans and $1.6
million for OPEB plans, which is recorded to retained earnings.
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 of 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
was completed in March of 2008, yielded cash proceeds to the Company of
approximately $100 million and will net $80 million after consideration for
excise tax of $20 million, which has been accrued and is payable in the second
quarter of 2008. The replacement retirement program includes both defined
benefit and defined contribution plans.
The impact to net income of the reversion of the salaried retirement plan
amounted to net expense of $13.7 million in the first quarter of 2008. This net
expense resulted 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 the
recognition of previously deferred settlement gains of $6.3 million dollars as
discussed above. The $100 million in gross proceeds from the reversion generates
a tax gain that will be fully offset against our existing net operating loss
("NOL") carryforwards. Taking into account the cost of all retiree benefits,
both pension and OPEB, 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 $15 million - the same amount as in
2007.
A portion of the overfunding for the old plan was utilized to pre-fund the
benefits for both the defined benefit and defined contribution replacement plans
for approximately the next six to eight years.
We also expect to recognize curtailment gains associated with two of our OPEB
plans over the remainder of this year. We expect to recognize a curtailment gain
of $4.8 million in the second quarter related to one of those plans. The
benefits associated with another of our OPEB plans will expire in the third
quarter of 2008 and we expect to recognize a curtailment gain of $30.2 million
at that time.
We expect to make contributions of $0.3 million to our pension plans in 2008.
Page 13
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
10. Guarantees and Warranties
A portion of accounts receivable at our Brazilian, European, and Indian
compressor subsidiaries are sold with limited recourse and without recourse at a
discount. Our Brazilian subsidiary also sells portions of its accounts
receivable with recourse. The amount of these receivables sold at March 31, 2008
and December 31, 2007 were $71.8 million and $79.2 million, respectively. We
estimate the fair value of the contingent liability related to these receivables
to be $0.5 million, which is included in operating profit (loss) and allowance
for doubtful accounts.
Changes in the carrying amount and accrued product warranty costs for the three
months ended March 31, 2008 and 2007 are summarized as follows:
Three Months Ended Three Months Ended
(Dollars in millions) March 31, 2008 March 31, 2007
------------------ ------------------
Balance at January 1 $ 9.7 $26.2
Settlements made (in cash or in kind) (1.4) (4.1)
Current year accrual 1.4 2.3
Adjustments to preexisting warranties 0.2 (1.3)
Effect of foreign currency translation 0.1 0.1
Other* -- (0.4)
----- -----
Balance at March 31 $10.0 $22.8
===== =====
* At March 31, 2007, balances for TMT Motoco were removed from our
consolidated balance sheet.
At March 31, 2008, $8.9 million was included in current liabilities and $1.1
million was included in non-current liabilities.
11. Debt
On March 20, 2008, we terminated our previous $75 million First Lien Credit
Agreement and entered into a $50 million First Lien Credit Agreement with
JPMorgan Chase Bank, N.A. as administrative agent and J.P. Morgan Securities
Inc. as sole lead arranger. The agreement provides us with a $50 million
revolving line of credit expiring on March 20, 2013. The agreement contains
certain covenants, including a minimum fixed charge ratio, which would apply
only if liquidity, as defined by the credit agreement, were to fall below a
specified level. A copy of the agreement is filed with this Report as Exhibit
4.1. As of March 31, 2008, we had no borrowings outstanding against this
agreement, and our level of liquidity was such that the covenants did not apply.
We paid $1.6 million in fees associated with the new agreement, which were
capitalized and will be amortized over the term of the agreement. $1.4 million
in fees associated with the previous First Lien Credit Agreement were expensed
as interest cost upon its termination.
Although we have terminated our former Second Lien Credit Agreement, 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 as of the date of issuance 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
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
agreement, were expensed as interest cost upon full repayment of the debt in the
third quarter of 2007.
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
borrowings under these arrangements totaled $68.2 million at March 31, 2008. Our
weighted average interest rate for all borrowings was 10.3% at March 31, 2008.
At March 31, 2008, we had outstanding letters of credit of $6.4 million and the
capacity for borrowings under the borrowing base formula of $41.4 million in the
U.S. and $157.9 million in foreign jurisdictions under our U.S. credit
agreement.
12. Environmental Matters
We are involved in a number of environmental sites where we are either
responsible for or participating in a cleanup effort. We had accrued $2.9
million and $3.0 million at March 31, 2008 and December 31, 2007 respectively
for environmental remediation. Although these liabilities are associated with
our Engine & Power Train business segment, which we sold during 2007, we have
retained any liabilities that may arise in connection with these locations. As
these matters continue toward final resolution, amounts in excess of those
already provided may be necessary to discharge us from our obligations for these
sites. Such amounts, depending on their magnitude and timing, could be material
to reported net income in the particular quarter or period that they are
recorded. In addition, the ultimate resolution of these matters, either
individually or in the aggregate, could be material to the consolidated
financial statements.
For additional information on our potential environmental liabilities, including
the Sheboygan River and Harbor Superfund and Hayton Area Remediation Project
sites, see Note 11 to the Financial Statements in our Annual Report on Form 10-K
for the year ended December 31, 2007.
13. Income Taxes
Under Accounting Principles Board Opinion No. 28, "Interim Financial Reporting,"
we are required to adjust our effective tax rate for each quarter to be
consistent with the estimated annual effective tax rate. We are also required to
record the tax impact of certain discrete items (unusual or infrequently
occurring), including changes in judgment about valuation allowances and effects
of changes in tax laws or rates in the interim period in which they occur.
In addition, income taxes are allocated between continuing, discontinued
operations and other comprehensive income in accordance with SFAS No. 109,
"Accounting for Income Taxes," particularly paragraph 140, which states that all
items, including discontinued operations, should be considered for purposes of
determining the amount of tax benefit that results from a loss from continuing
operations and that could be allocated to continuing operations. SFAS No. 109 is
applied by tax jurisdiction, and in periods in which there is a pre-tax loss
from continuing operations and pre-tax income in another category, such as
discontinued operations or other comprehensive income, tax expense is first
allocated to the other sources of income, with a related benefit recorded in
continuing operations.
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PART 1. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
For the three month period ended March 31, 2008, we reported income from
continuing operations, discontinued operations and other comprehensive income.
Pursuant to SFAS No. 109, Paragraph 140, we allocated income taxes between
continuing operations, discontinued operations and OCI. The consolidated
condensed statement of operations reflects a $1.2 million income tax expense
from continuing operations for the three months ended March 31, 2008 and a $0.6
million income tax benefit from continuing operations for the three months ended
March 31, 2007. The current year reflects tax expense in the statement of
operations and no income taxes for other comprehensive income. The prior year
reflects tax benefits in the statement of operations and tax expense in other
comprehensive income.
The receipt of $100 million in gross proceeds from the reversion of our salaried
retirement plan in the first quarter of 2008 generated a tax gain that was fully
offset by our NOL carryforwards.
At March 31, 2008 and December 31, 2007, full valuation allowances were recorded
against deferred tax assets for those tax jurisdictions in which we believe it
is not more likely than not that the deferred taxes will be realized.
We have open tax years from primarily 2004 to 2007, with various significant
taxing jurisdictions including the U.S., Canada, France and Brazil. In the U.S.,
our federal income tax returns through 2002 have been examined by the Internal
Revenue Service. Our 2003 and 2004 U.S. federal income tax returns are currently
under review.
14. Commitments and Contingencies
A lawsuit filed against us and other defendants alleged that the horsepower
labels on the products the plaintiffs purchased were inaccurate. The plaintiffs
seek certification of a class of all persons in the United States who, beginning
January 1, 1995 through the present, purchased a lawnmower containing a two
stroke or four stroke gas combustible engine up to 20 horsepower that was
manufactured by defendants. The complaint sought an injunction, compensatory and
punitive damages, and attorneys' fees. On March 30, 2007, the Court entered an
order dismissing the complaint subject to the ability to re-plead certain
claims, pursuant to a detailed written order to follow. We expect the plaintiffs
will appeal the dismissal order, and that even if it is upheld, they will
re-plead their claims to the extent permitted by the order. While we believe we
have meritorious defenses and intend to assert them vigorously, there can be no
assurance that we will prevail. We also may pursue settlement discussions. It is
not possible to reasonably estimate the amount of our ultimate liability, if
any, or the amount of any future settlement, but the amount could be material to
our financial position, consolidated results of operations and cash flows.
We are also the subject of, or a party to, a number of other pending or
threatened legal actions involving a variety of matters, including class actions
and asbestos-related claims, incidental to our business. Although their ultimate
outcome cannot be predicted with certainty, and some may be disposed of
unfavorably to us, management does not believe that the disposition of these
other matters will have a material adverse effect on our consolidated financial
position or results of operations.
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PART 1. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
15. Impairments, Restructuring Charges, and Other Items
We recorded expense of $0.5 million in impairments, restructuring charges, or
other items in the three months ended March 31, 2008. A summary of these charges
(gains) is as follows:
Three Months Ended
March 31, 2008
------------------
(Dollars in millions)
Excise tax expense on proceeds from salaried retirement plan reversion $ 20.0
Curtailment loss, hourly pension plan 3.9
Severance, restructuring costs, and special termination benefits 2.6
Curtailment gain, hourly OPEB plan (19.1)
Settlement gain, salaried retirement plan (6.3)
Gain on sale of Dundee, Michigan facility (0.6)
------
Total impairments, restructuring charges, and other items $ 0.5
======
We did not record any impairments, restructuring charges, or other items in the
three months ended March 31, 2007.
16. Recently Issued Accounting Pronouncements
Derivative Instruments and Hedging Activities
In March 2008, the FASB issued Statement No. 161, "Disclosures about Derivative
Instruments and Hedging Activities," ("SFAS 161"), which revised the disclosure
requirements of Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities." Among other things, SFAS 161 requires enhanced qualitative
disclosures about an entity's objectives and strategies for using derivatives,
requires tabular quantitative disclosures about 1) the fair value of derivative
instruments and 2) gains and losses on derivatives during the reporting period,
and requires disclosures about contingent features in derivative instruments
that relate to credit risk. SFAS 161 is effective for fiscal years and interim
periods beginning on or after November 15, 2008, and we are currently evaluating
the impact of adopting the statement.
17. Share-Based Compensation Arrangements
In the first quarter of 2008, we approved a new Long-Term Incentive Cash Award
Plan for members of our senior management. The plan consists of two types of
incentive plans, both of which are based upon our Class A shares; stock
appreciation rights ("SARs") and phantom stock shares. We granted all the SARs
and phantom stock shares associated with the plans on March 4, 2008, and none
will vest or expire during the current year. Both plans are settled in cash.
The SARs vest in equal amounts on the first, second, and third anniversaries of
the grant date, and expire seven years from the grant date. The phantom stock
shares vest in full on the third anniversary. In the aggregate, we had 147,377
phantom stock shares and 434,932 SARs outstanding as of March 31, 2008. The
phantom stock shares have an initial grant date value of $28.82 and the SARs,
which are the economic equivalent of options, were valued as of the grant date
at $15.61 using a Black-Scholes model. The assumptions used in the Black-Scholes
model included a risk-free interest rate of 3.37%, a dividend yield of 0%, an
expected life of seven years and a volatility of 51.18%.
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Total compensation expense related to the plan for the first quarter of 2008 was
$0.4 million. As both the SARs and the phantom stock shares are settled in cash
rather than by issuing equity instruments, we record them as expense with a
corresponding liability on our balance sheet based on the current fair value of
the awards.
Our liability with regard to these awards will be remeasured for each quarterly
reporting period. The value of the phantom stock shares is determined by
comparing the closing stock price on our Class A common stock on the last day of
the quarter to the initial grant date value of $28.82. We measure the fair value
of each SAR, also on the last day of the quarter, using a Black-Scholes model,
and comparing that result to the original calculated value of $15.61. At March
31, this calculation yielded a value per SAR of $17.64. The total unrecognized
liability as calculated at March 31, 2008 was $12.2 million.
The SARs and phantom stock shares do not entitle recipients to receive any
shares of our common stock, nor do they provide recipients with any voting or
other stockholder rights. Similarly, since the awards are not paid out in the
form of equity, they do not change the number of shares we have available for
any future equity compensation we may elect to grant, and they do not create
stockholder dilution. However, because the value of the awards is tied to the
price of our Class A common stock, we believe they align employee and
stockholder interests, and provide retention benefits in much the same way as
would stock options and restricted stock awards.
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Executive Summary
Until 2007, our business was focused upon three activities: 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 North America. 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, 2007 to March 31, 2008 the Real strengthened by 18.2%.
Recent movement in the Euro and the Indian Rupee have also had an unfavorable
effect on our results of operations, strengthening 16.4% and 9.2% respectively
against the dollar since the beginning of 2007. We have developed strategies to
mitigate or partially offset these impacts, primarily hedging where the risk of
loss is greatest. In particular, we have entered into foreign currency forward
purchases to hedge the Brazilian export sales denominated in both U.S. Dollars
and Euros. To a lesser extent, we have also entered into foreign currency
forward purchases to mitigate the effect of fluctuations in the Euro and 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.
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 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, 2007 through March 31, 2008, the price of
copper increased by
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
approximately 35.4%. Steel has increased by 48.1% over the same time frame, with
the majority of the increase (37.9%) occurring in the first quarter of 2008.
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 the remainder of 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.
Upon completion of the divestitures of the business operations discussed above,
we eliminated all our domestic debt. Accordingly, consolidated interest expense
for our business, including amounts allocated to both continuing and
discontinued operations, in the foreseeable future will be substantially
reduced. 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
restructuring activities are implemented or economic conditions improve. As part
of our strategy to maintain sufficient liquidity, we have negotiated a new
financing arrangement for our North American based activities and are 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, indemnities and/or
purchase price adjustments including liabilities that relate to environmental
issues and product warranties. While we have provided for such contingent
liabilities, future events could result in the recognition of additional
liabilities that could consume available liquidity and management attention.
For further information related to other factors that have had, or may in the
future have, a significant impact on our business, financial condition or
results of operations, see "Adequacy of Liquidity," "Outlook," and "Cautionary
Statements Relating To Forward-Looking Statements" below.
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
A summary of our operating results as a percentage of net sales is shown below
(dollar amounts in millions):
THREE MONTHS ENDED MARCH 31,
(dollars in millions) 2008 % 2007 %
---------------- ----------------
Net sales $280.1 100.0% $293.8 100.0%
Cost of sales 238.5 85.1% 264.0 89.9%
Selling and administrative expenses 26.6 9.5% 28.3 9.6%
Impairments, restructuring charges, and other items 0.5 0.2% 0.0 --
------ ------
Operating profit 14.5 5.2% 1.5 0.5%
Interest expense (7.3) (2.6%) (5.8) (2.0%)
Interest income and other, net 1.8 0.6 1.7 0.6%
------ ------
Income (loss) from continuing operations before taxes 9.0 3.2% (2.6) (0.9%)
Tax expense (benefit) 1.2 (0.4%) (0.6) 0.2%
------ ------
Income (loss) from continuing operations $ 7.8 2.8% ($2.0) (0.7%)
====== ======
Three Months Ended March 31, 2008 vs. Three Months Ended March 31, 2007
Consolidated net sales from continuing operations in the first quarter of 2008
decreased to $280.1 million from $293.8 million in 2007. Compressor sales
decreased by $14.1 million; after consideration for the effect of currency
translation, which increased sales by $32.5 million, compressor sales declined
by $46.6 million. Sales of commercial compressors increased by $15.1 million;
while this was due in part to price increases when compared to the same period
of 2007, it was also associated with a reduction in order backlog from the
fourth quarter of 2007. These increases in sales were offset by declines in
refrigeration & freezer compressors of $21.2 million, associated primarily with
a downturn in market volumes as well as market share in North America and
Europe. Some of these declines in market share were deliberate, in instances
where profit margins were unacceptable due to the declining value of other
currencies against the Brazilian real. Sales of compressors for air conditioning
and all other applications also declined by $8.0 million. The remaining sales
increase of $0.4 million was attributable to a business that is not associated
with our compressor operations.
Cost of sales was $238.5 million in the three months ended March 31, 2008, as
compared to $264.0 million in the three months ended March 31, 2007. As a
percentage of net sales, cost of sales was 85.1% and 89.9% in the first quarters
of 2008 and 2007, respectively.
Gross margin contributed an additional $11.8 million to 2008 operating profit
when compared to the same period of 2007, improving from $29.8 million in 2007
to $41.6 million in 2008. Current year margin was favorably impacted by selling
price advances of $8.1 million. In addition, although sales volumes declined
when compared to the first quarter of 2007, these declines were more than offset
by an improved mix of higher-margin product, which contributed a net improvement
of $1.6 million to 2008 results. Gains in productivity, reduced engineering
costs and other improvements of $5.8 million and gains from the sale of our
airport facility and an airplane of $4.2 million were somewhat offset by
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
increased expense for the weakening of the U.S. dollar ($5.4 million) and higher
commodity costs ($2.5 million).
Selling, general and administrative ("SG&A") expenses were $26.6 million in the
three months ended March 31, 2008 as compared to $28.3 million in the three
months ended March 31, 2007. As a percentage of net sales, selling, general and
administrative expenses were 9.5% and 9.6% in the first quarters of 2008 and
2007, respectively. A $5.1 million reduction in professional fees incurred for
one-time projects was the primary factor in the decline. This improvement was
offset by $3.4 million in increased administrative costs recognized in
continuing operations that were previously allocated to discontinued operations.
We recorded expense of $0.5 million in impairments, restructuring charges, or
other items in the three months ended March 31, 2008. This included $20.0
million in excise tax expense on the proceeds received from the reversion of our
former salaried retirement plan, and a curtailment loss on our hourly pension
plan of $3.9 million. We also recorded expense of $1.4 million and $1.2 million
in North America and Brazil respectively related to severance costs for on-going
restructuring activities. Offsetting these expenses were a curtailment gain on
our hourly OPEB plans ($19.1 million) due to reductions in future service cost
related to the impending closure of our manufacturing operations in Tecumseh,
Michigan, a settlement gain on the sale of annuity contracts for our former
salaried retirement plan ($6.3 million), and a gain on the sale of our facility
in Dundee, Michigan ($0.6 million). We did not record any impairments,
restructuring charges, or other items in the three months ended March 31, 2007.
Interest expense amounted to $7.3 million in the first quarter of 2008 compared
to $5.8 million in the first quarter of 2007. The increase was primarily
attributable to $1.4 million in capitalized debt amendment costs associated with
our former First Lien credit agreement, which were expensed in the first quarter
of 2008 upon its termination.
Interest income and other, net was $1.8 million in the first quarter of 2008
compared to $1.7 million in the first quarter of 2007. The increase was due to
the higher levels of cash and short-term investments held in 2008.
Our results of operations reflect a $1.2 million income tax expense from
continuing operations for the first quarter of 2008 and a $0.6 million income
tax benefit from continuing operations for the first quarter of 2007. Income
taxes are recorded pursuant to SFAS No. 109, "Accounting for Income Taxes," and
are applied on a jurisdiction by jurisdiction basis. For the three month period
ended March 31, 2008, we reported income from continuing operations,
discontinued operations and other comprehensive income. Pursuant to SFAS No.
109, Paragraph 140, we allocated income taxes between continuing operations,
discontinued operations and OCI. The current year reflects tax expense in the
statement of operations and no income taxes for other comprehensive income. This
tax expense results from income in tax jurisdictions where we do not have NOL's
or valuation allowances. In the U.S., Brazil, and India, we have substantial
NOL's, for which valuation allowances have been recorded. As a result, future
taxable income in these jurisdictions will not result in tax expense for the
foreseeable future. The prior year reflects tax benefits in the statement of
operations and tax expense in other comprehensive income.
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Since we pay taxes in various states there is also an expense recorded in the
U.S. that is related to separate company state tax liabilities, including state
tax expense that is recorded in discontinued operations.
As a result of the factors described above, net income from continuing
operations in the first quarter of 2008 was $7.8 million ($0.42 per share basic,
$0.39 per share diluted) as compared to net loss of $2.0 million ($0.11 per
share basic and diluted) in the first quarter of 2007.
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 12 to the financial statements.) Liabilities relating to probable
remediation activities are recorded when the costs of such activities can be
reasonably estimated based on the facts and circumstances currently known.
Difficulties exist estimating the future timing and ultimate costs to be
incurred due to uncertainties regarding the status of laws, regulations, levels
of required remediation, changes in remediation technology and information
available.
We had accrued $2.9 million and $3.0 million at March 31, 2008 and December 31,
2007, 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.
LIQUIDITY AND CAPITAL RESOURCES
Our primary liquidity needs are to fund capital expenditures, service
indebtedness and support working capital requirements. In general, our principal
current sources of liquidity are cash flows from operating activities, when
available, borrowings under available credit facilities, and cash on hand
representing proceeds of last year's sales of non-core businesses and
over-funded pension plan reversions.
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,
although there are tax consequences to such activities.
Cash Flow
For the first three months of 2008, cash provided by operations amounted to
$120.5 million. The most significant elements of this increase in cash were the
gross proceeds of $100.0 million realized from the reversion of our salaried
retirement plan and net income of $17.0 million. Accounts receivable increased
by $23.5 million from the beginning of the year. This increase was the result of
the seasonality of our sales patterns, which typically results in higher sales
in the first quarter of the year
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
when compared to the fourth quarter. Compressor sales in the last two months of
the respective quarters - which is a primary driver of the accounts receivable
balance - increased by $26.3 million in the February 1 to March 31, 2008 period
when compared to November and December of 2007. In addition, a reduction of $7.4
million in the amount of discounted receivables across the two periods
contributed to the net receivables balance at March 31. On the other hand, when
evaluating days to collection for outstanding receivables, there was an
improvement of two days to collection as of March 31, 2008 when compared to the
end of 2007. The days sales outstanding ("DSO") for compressors decreased from
57 at the end of the year to 55 at March 31 (before consideration for discounted
accounts receivable), due to increased focus on timely collection.
Inventories increased by $1.7 million since the beginning of the year. This
primarily reflected an increase in days inventory on hand of two days. Accounts
payable and other accrued expenses and liabilities also increased since December
31, 2007 (up $41.0 million). These increases were attributable to $20.0 million
in excise taxes accrued related to the salaried retirement plan reversion, which
are payable in the second quarter of 2008, as well as to increases in trade
payables related both to a seasonal increase and to the effects of foreign
currency exchange rates.
In evaluating balance sheet metrics, we consider the days sales outstanding and
days inventory on hand metrics to be more relevant when comparing year-over-year
periods than when comparing the current period to year-end, as it removes any
seasonality of our sales patterns from the comparison. When comparing sales
patterns for the compressor business, average days sales outstanding were 55
days at March 31, 2008 versus 67 days at March 31, 2007, before giving effect to
receivables sold. Compressor days inventory on hand were 58 days at March 31,
2008, up from 52 days at March 31, 2007, due to inventory bank builds as we
prepare to consolidate manufacturing facilities.
Cash used in investing activities was $1.6 million in the first three months of
2008 versus cash used in investing activities of $2.2 million for the same
period of 2007. $6.8 million in proceeds were received from the sale of assets
during 2008, while no such proceeds were recorded in the first three months of
2007. Asset sales in 2008 included an airplane for $3.4 million, our Dundee,
Michigan facility for $1.6 million, excess equipment for $1.0 million, and our
airport facility for $0.8 million.
Cash provided by financing activities was $3.2 million in the first three months
of 2008 as compared to cash provided of $17.1 million in the comparable period
of 2007. The change in 2008 was due to fluctuations in borrowing at foreign
facilities.
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 three months ended March 31, 2008 and the full
year ended December 31, 2007, our average outstanding debt balance was $68.2
million and $210.2 million, respectively. The weighted average long-term
interest rate was 10.3% and 8.9% at March 31, 2008 and December 31, 2007,
respectively.
On March 20, 2008, we terminated our previous First Lien Credit Agreement and
entered into a $50 million First Lien Credit Agreement with JPMorgan Chase Bank,
N.A. as administrative agent and J.P. Morgan Securities Inc. as sole lead
arranger. The agreement provides us with a $50 million revolving line of credit
expiring on March 20, 2013. The agreement contains certain covenants,
including a
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
minimum fixed charge ratio, which would apply only if liquidity, as defined by
the credit agreement, were to fall below a specified level. A copy of the
agreement is filed with this Report as Exhibit 4.1. As of March 31, 2008, we had
no borrowings outstanding against this agreement, and our level of liquidity was
such that the covenants did not apply.
Although we have terminated our former Second Lien Credit Agreement, 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 as of the date of issuance 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 expensed upon full repayment of
the debt in the third quarter of 2007.
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
borrowings under these arrangements totaled $68.2 million at March 31, 2008.
At March 31, 2008, we had cash balances in North America of approximately $119.5
million, outstanding letters of credit of $6.4 million and the capacity for
borrowings under the borrowing base formula of $41.4 million in the U.S. and
$157.9 million in foreign jurisdictions under our U.S. credit agreement.
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 $71.8 million and $79.2 million as of March
31, 2008 and December 31, 2007, 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 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.
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 in the fourth quarter of 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, including amounts
recognized in both continuing and discontinued operations, 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, the Euro 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 have
negotiated a new financing arrangement
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
for our North American based activities, and are 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 in the process of finalizing the tax audit of our 2003 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 this audit. We continue to believe that we
will prevail in this matter and we have hired legal counsel to pursue this
refund. The timing of the recovery of the refund is uncertain.
We have successfully executed a conversion of our salaried retirement plan to a
new retirement program, which includes both defined benefit and defined
contribution plans. This conversion yielded 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 plans,
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.
Our payments by period as of March 31, 2008 for our long-term contractual
obligations are as follows:
Payments by Period (in millions)
Total Less than 1 Year 1-3 Years Other
----- ---------------- --------- -----
Debt Obligations $68.2 $65.1 $ 3.1 --
Interest Payments on Debt(1) 21.0 7.0 14.0 --
Other Long-Term Obligations(2) 1.0 0.4 -- 0.6
- (1) Debt levels are assumed to remain constant. Interest rate debt
obligations are assumed to remain constant at the current weighted
average rate of 10.3%.
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- (2) Other long-term obligations included in the above table consist
solely of reserves for uncertain tax positions recognized under
FIN 48.
SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES
Some of our accounting policies require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. These estimates and
assumptions are subject to an inherent degree of uncertainty. They are based on
our historical experience, the terms of existing contracts, our evaluation of
trends in the industry, information provided by our customers and suppliers, and
information available from other outside sources, as appropriate. Actual results
in these areas could differ from our estimates. For a discussion of our
significant accounting policies and critical accounting estimates, see Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Significant Accounting Policies and Critical Accounting
Estimates," and Note 1, "Accounting Policies," to the consolidated financial
statements included in our Annual Report on Form 10-K for the year ended
December 31, 2007.
In the first quarter of 2008, we adopted a share-based cash compensation plan.
This plan requires us to begin applying FASB Statement 123R, "Share Based
Payment" ("SFAS 123R"). SFAS 123R requires all share-based payments to
employees, including our grants of SARs, which are the economic equivalents of
employee stock options, to be recognized in the financial statements as
compensation expense based upon the fair value on the date of grant. We
determined the fair value of these awards using the Black-Scholes option pricing
model. The Black-Scholes option pricing model incorporates certain assumptions,
such as risk-free interest rate, expected volatility, expected dividend yield
and expected life of the SARs, in order to arrive at a fair value estimate.
Expected volatilities are based on the historical volatility of our common stock
and that of an index of companies in our industry group. The risk free interest
rate is based upon quoted market yields for United States Treasury debt
securities. The expected dividend yield is based upon our history of not having
issued a dividend since the second quarter of 2005 and management's current
expectation of future action surrounding dividends. We believe that the
assumptions selected by management are reasonable; however, significant changes
could materially impact the results of the calculation of fair value. For
further discussion of this share-based compensation plan, see Note 17,
"Share-Based Compensation Arrangements," to the consolidated condensed financial
statements.
Recently Issued Accounting Pronouncements
Derivative Instruments and Hedging Activities
In March 2008, the FASB issued Statement No. 161, "Disclosures about Derivative
Instruments and Hedging Activities," ("SFAS 161"), which revised the disclosure
requirements of Statement No. 133, "Accounting for Derivative Instruments and
Hedging Activities." Among other things, SFAS 161 requires enhanced qualitative
disclosures about an entity's objectives and strategies for using derivatives,
requires tabular quantitative disclosures about 1) the fair value of derivative
instruments and 2) gains and losses on derivatives during the reporting period,
and requires disclosures about contingent features in derivative instruments
that relate to credit risk. SFAS 161 is effective for fiscal years and interim
periods beginning on or after November 15, 2008, and we are currently evaluating
the impact of adopting the statement.
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 and in our Annual Report on Form 10-K for the year ended December 31,
2007.
The outlook for the rest of 2008 is subject to many of the same variables that
negatively impacted us in the first quarter and 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
March 31, 2008, the spot price of copper increased by approximately 35.4%; in
the three months since the beginning of 2008 alone, copper spot prices have
increased by 27.5%. As of March 31, 2008, we held more than 60% of our total
projected copper requirements for the remainder of 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 aluminum, steel and other purchased materials to be more costly in 2008
versus 2007. As of March 31, 2008, aluminum costs had risen by 24.1% when
compared to January 1, 2008 and steel costs had risen by 37.9% since the
beginning of this year and by 48.1% when compared to January 1, 2007. In the
aggregate, we expect the total 2008 cost of our purchased materials for the full
year, net of hedging activities, to be approximately $23 to $35 million more
than the prior year, depending on commodity cost levels in the second half of
2008.
The Brazilian Real, Euro and Indian Rupee continue to strengthen against the
dollar, and as of March 31, 2008 had strengthened 18.2%, 16.4% and 9.2%
respectively since the beginning of 2007. While we have considerable forward
purchase contracts to cover our exposure to additional fluctuations in value
during the year, we expect the strengthening of foreign currencies, after giving
consideration to our contracts, will have a negative financial impact of
approximately $19 million when compared to 2007.
We are also concerned about maintaining our expected level of sales volumes,
particularly in light of current global economic conditions. Volumes in the
first quarter of 2008 were consistent with our expectations; as anticipated, we
are starting to see a slowdown when compared to prior quarters. If a
greater-than-expected decline in volume occurs in our key markets, this could
have an adverse effect on our current outlook.
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. Included with
these plans is our recently announced intent to close one of our U.S. operating
facilities located in Tecumseh, Michigan. The closure, once completed, is
expected to reduce annual costs by $5.6 million. 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. In addition, we estimate that the Company incurred
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
approximately $19 million in professional and other fees during 2007 that will
not recur in 2008. For further discussion of issues impacting our liquidity and
cash flows, refer to "Adequacy of Liquidity" elsewhere in Part 1, Item 2.
Even after giving recognition to these factors, however, we believe we will be
challenged to maintain 2007 operating profit levels in 2008. As discussed above,
we also remain concerned about the general health of the economy and the
possibility of recession in the United States, which could also expand to other
global economies.
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENTS RELATING TO FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act that are subject to the safe harbor
provisions created by that Act. In addition, forward-looking statements may be
made orally in the future by or on behalf of us. Forward-looking statements can
be identified by the use of terms such as "expects," "should," "may,"
"believes," "anticipates," "will," and other future tense and forward-looking
terminology, or by the fact that they appear under the caption "Outlook."
Readers are cautioned that actual results may differ materially from those
projected as a result of certain risks and uncertainties, including, but not
limited to, i) our ability to maintain adequate liquidity in total and within
each foreign operation; ii) the success of our ongoing effort to bring costs in
line with projected production levels and product mix; (iii) 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 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.
Page 30
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to risk during the normal course of business from credit risk
associated with accounts receivable and from changes in interest rates,
commodity prices, and foreign currency exchange rates. The exposure to these
risks is managed through a combination of normal operating and financing
activities which include the use of derivative financial instruments in the form
of foreign currency forward exchange contracts and commodity forward purchasing
contracts. Fluctuations in commodity prices and foreign currency exchange rates
can be volatile, and our risk management activities do not totally eliminate
these risks. Consequently, these fluctuations can have a significant effect on
results. A discussion of our policies and procedures regarding the management of
market risk and the use of derivative financial instruments was provided in our
2007 Annual Report on Form 10-K in Item 7A and in Notes 1 and 13 of the Notes to
Consolidated Financial Statements. We do not utilize financial instruments for
trading or other speculative purposes. There have been no changes in these
policies or procedures during the first three months of 2008.
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 March 31, 2008 and December 31, 2007, we held foreign currency
forward contracts with a total notional value of $279.2 million and $232.7
million, respectively. We have a particularly concentrated exposure to the
Brazilian Real. Based on our current level of activity, and excluding any
mitigation as the result of hedging activities, we believe that a strengthening
in the value of the Real of 0.10 per U.S. Dollar negatively impacts our
operating profit by approximately $10 million on an annual basis.
We use commodity forward purchasing contracts to help control the cost of traded
commodities, 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 15 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 March 31, 2008 and December 31, 2007, we held a
total notional value of $49.8 million and $64.4 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 annual
operating profit by $1.6 million.
We are subject to interest rate risk, primarily associated with our borrowings
of $68.2 million at March 31, 2008. Our $50 million First Lien Credit Agreement,
if we had borrowings against it, would be variable-rate debt. Our current debt
consists 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 March 31, 2008, a 1% increase in interest rates would increase interest
expense for the year by approximately $0.7 million.
Page 31
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 4
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the reports that we file or submit under
the Securities Exchange Act of 1934 is recorded, processed, summarized, and
reported within the time periods specified in the SEC's rules and forms, and
that such information is accumulated and communicated to our management,
including our President and Chief Executive Officer and Vice President,
Treasurer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
As of the end of the fiscal quarter covered by this report, we carried out an
evaluation, under the supervision and with the participation of our Disclosure
Committee and management, including the President and Chief Executive Officer
and our Vice President, Treasurer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-15. Based upon such evaluation, our
President and Chief Executive Officer along with our Vice President, Treasurer
and Chief Financial Officer have concluded that our disclosure controls and
procedures were effective at the reasonable assurance level as of March 31,
2008. As noted in management's annual report as of December 31, 2007, our
disclosure controls and procedures were also effective at the reasonable
assurance level as of December 31, 2007.
Changes In Internal Control Over Financial Reporting
During the three months ended March 31, 2008, there have been no changes 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.
Page 32
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of Tecumseh Products Company was held on
April 30, 2008. Proxies for the meeting were solicited pursuant to Section 14(a)
of the Securities Exchange Act of 1934, and there was no solicitation in
opposition to management's solicitation. A total of 4,833,768 shares were
represented in person or by proxy, representing 95.2% of the 5,077,746 shares of
Class B Common stock outstanding and entitled to vote.
All of management's nominees for directors as listed in the proxy statement were
elected with the following votes:
Votes Votes
Director For Withheld
- ------------------ --------- --------
William E. Aziz 4,618,546 215,222
Peter M. Banks 4,627,299 206,469
Edwin L. Buker 4,617,772 215,996
Kent B. Herrick 4,626,156 207,612
Steven J. Lebowski 4,618,086 215,682
Jeffry N. Quinn 4,617,836 215,932
David M. Risley 4,628,336 205,432
The selection of Grant Thornton LLP as the Company's independent registered
public accounting firm was also ratified, with 4,763,732 votes for, 68,769 votes
against and 1,267 votes withheld.
ITEM 6. EXHIBITS
(a) Exhibit
Number Description
------- -----------
4.1 Credit Agreement dated as of March 20, 2008 among Tecumseh
Products Company, the Lenders Party thereto, and JPMorgan
Chase Bank, N.A. as Administrative Agent.
31.1 Certification of the President and Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the President and Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Page 33
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TECUMSEH PRODUCTS COMPANY
(Registrant)
Dated: May 8, 2008 BY: /s/ JAMES S. NICHOLSON
------------------------------------
James S. Nicholson
Vice President, Treasurer and
Chief Financial Officer (on behalf
of the Registrant and as principal
financial officer)
Page 34