Exhibit 99.1
TECUMSEH PRODUCTS COMPANY REPORTS THIRD QUARTER 2007 RESULTS
Tecumseh, Michigan, November 14, 2007 . . . . Tecumseh Products Company
(NASDAQ-TECUA, TECUB) announced today its 2007 third quarter consolidated
results as summarized in the following Consolidated Condensed Statements of
Operations.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Nine Months Ended
September 30, June 30,
------------------- ---------------------
(Dollars in millions except per share amounts) 2007 2006 2007 2006
-------- -------- --------- ---------
NET SALES $ 336.1 $ 319.5 $1,043.2 $1,004.6
Cost of sales 302.5 305.5 953.6 953.9
Selling and administrative expenses 27.6 33.8 97.1 103.8
Impairments, restructuring charges and other items 26.2 8.4 25.3 11.6
------- ------- -------- --------
OPERATING LOSS (20.2) (28.2) (32.8) (64.7)
Interest expense (6.6) (5.7) (25.5) (16.8)
Interest income and other, net 1.1 2.3 4.8 10.6
------- ------- -------- --------
LOSS FROM CONTINUING OPERATIONS BEFORE TAXES (25.7) (31.6) (53.5) (70.9)
Tax (benefit) expense (3.1) 6.7 (6.3) (2.9)
------- ------- -------- --------
Loss from continuing operations (22.6) (38.3) (47.2) (68.0)
------- ------- -------- --------
Income (loss) from discontinued operations, net of tax (54.6) 0.5 (135.0) 51.5
------- ------- -------- --------
NET LOSS ($77.2) ($37.8) ($182.2) ($16.5)
------- ------- -------- --------
Basic and diluted income (loss) per share:
Continuing operations ($1.23) ($2.07) ($2.55) ($3.68)
------- ------- -------- --------
Discontinued operations (2.95) 0.02 (7.30) 2.79
------- ------- -------- --------
NET LOSS PER SHARE ($4.18) ($2.05) ($9.85) ($0.89)
------- ------- -------- --------
WEIGHTED AVERAGE SHARES (in thousands of shares) 18,480 18,480 18,480 18,480
======= ======= ======== ========
Consolidated net sales from continuing operations in the third quarter of 2007
increased to $336.1 million from $319.5 million in 2006. Sales increases
attributable to the Compressor segment ($47.6 million, of which $22.0 was due to
the effect of currency translation) were offset by a substantial decline ($31.4
million) in sales in the Engine & Power Train segment. The remaining increase of
$0.4 million was attributable to businesses that are not associated with our
reportable business segments.
Consolidated net loss from continuing operations for the third quarter of 2007
was $22.6 million ($1.23 per share) compared to net loss of $38.3 million ($2.07
per share) in the third quarter of 2006. The change in pretax operating
profit/(loss), excluding impairments, restructuring charges, and other items,
reflected a $25.8 million improvement. Improvements in productivity and
purchasing costs and other cost reductions contributed $28.4 million to 2007
third quarter results. Increases in selling price, net of volume impacts, also
improved results by $1.9 million when compared to the 2006 third quarter. In
addition, net losses of $6.9 million by our Brazilian engine subsidiary, TMT
Motoco, were recorded in 2006; since TMT Motoco is no longer included in results
from operations, and was idled during the period, no similar results were
reported in the third quarter of 2007. In addition, despite higher commodity
costs, particularly for copper,
favorable hedging activities created a favorable variance of $2.0 million when
compared to the same period of 2006. However, unfavorable trends in foreign
currency exchange resulted in a $13.4 million decline when compared to the prior
year.
Selling, general and administrative ("SG&A") expenses were $27.6 million in the
three months ended September 30, 2007, as compared to $33.8 million in the three
months ended September 30, 2006. As a percentage of net sales, selling, general
and administrative expenses were 8.2% and 10.6% in the third quarters of 2007
and 2006, respectively. Reductions in SG & A were in part attributable to
overhead cost improvements that resulted from our restructuring efforts over the
past year, including $2.0 million in savings at the Engine & Power Train group.
Costs associated with professional fees improved by $4.0 million, primarily due
to reductions in fees paid to AlixPartners. $1.8 million was expensed in the
third quarter of 2007 for AlixPartners services, including the services of James
Bonsall, while $5.5 million was incurred in the third quarter of 2006 for their
consulting services provided to our Engine & Power Train business.
Expense of $26.2 million was recorded in impairments, restructuring charges or
other items in the three months ended September 30, 2007, compared to charges of
$8.4 million in the three months ended September 30, 2006. These amounts are
described below in "Impairments and Other Restructuring Items."
Interest expense amounted to $6.6 million in the third quarter of 2007 compared
to $5.7 million in the third quarter of 2006. The increase is primarily
attributable to higher interest rates in our foreign subsidiaries. The
consolidated condensed statement of operations reflects a $3.1 million income
tax benefit for the third quarter of 2007 and a $6.7 million income tax expense
for the third quarter 2006. Income taxes are recorded pursuant to SFAS No. 109,
"Accounting for Income Taxes," and are applied on a jurisdiction by jurisdiction
basis. In the three months ended September 30, 2007, we recorded federal tax
benefits on net losses from continuing and discontinued operations, but federal
tax expense based on income in other comprehensive income ("OCI"). In the three
months ended September 30, 2006, we reported federal tax benefits on losses from
continuing operations, but federal tax expense on income in OCI as well as on
income from discontinued operations.
Since we pay taxes in various states there is also an expense recorded in the
U.S. that is related to separate company state tax liabilities, including state
tax expense that is recorded in discontinued operations. On July 12, 2007, the
State of Michigan enacted the Michigan Business Tax (MBT) as a replacement for
the Single Business Tax (SBT), which expires at the end of 2007. The MBT is
effective on January 1, 2008 and is comprised of two components: an income tax
and a modified gross receipts tax. The two components of the MBT are accounted
for in accordance with the provisions of SFAS No. 109. As a result of the MBT
enactment, we recorded an income tax expense of approximately $2.2 million in
the quarter ended September 30, 2007.
Consolidated net sales from continuing operations in the first nine months of
2007 increased to $1,043.2 million from $1,004.6 million in 2006. Excluding the
increase in sales due to the effects of currency fluctuation of $53.5 million,
sales for the first three quarters of 2007 decreased by $14.9 million or 1.5%.
Sales increases of $109.1 million attributable to the Compressor segment were
more than offset by a significant decline in sales of $71.7 million in the
Engine & Power Train segment. The remaining increase of $1.2 million is
attributable to businesses that are not associated with our reportable business
segments.
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Consolidated net loss from continuing operations for the first nine months of
2007 was $47.2 million ($2.55 per share) compared to a net loss of $68.0 million
($3.68 per share) in the first nine months of 2006. The change in pretax
operating loss, excluding impairments, restructuring charges, and other items,
reflected a $45.6 million improvement. Increases in selling price, net of volume
impacts, improved results by $34.9 million when compared to 2006. Improvements
in productivity and purchasing costs contributed $31.3 million to 2007 year to
date results, and other cost reductions (including reductions in fees paid to
AlixPartners of $11.7 million) improved 2007 year to date results by $21.1
million. In addition, net losses of $8.8 million by our Brazilian engine
subsidiary, TMT Motoco, were recorded in 2006; since TMT Motoco is no longer
included in results from operations, no similar results were reported in 2007.
However, unfavorable trends in foreign currency exchange resulted in a $35.0
million decline when compared to the prior year, and the higher cost of copper
and other commodities created a net unfavorable variance of $15.5 million
through three quarters of 2007.
Selling and administrative expenses were $97.1 million in the nine months ended
September 30, 2007, as compared to $103.8 million in the nine months ended
September 30, 2006. As a percentage of net sales, selling and administrative
expenses were 9.3% and 10.3% in the first nine months of 2007 and 2006,
respectively. Cost reductions were primarily attributable to reduced salary and
wage expense, as a result of lower headcounts when compared to the same period
of 2006.
Expense of $25.3 million was recorded in impairments, restructuring charges and
other items in the nine months ended September 30, 2007, compared to expense of
$11.6 million in the nine months ended September 30, 2006. These amounts are
described below in "Impairments and Other Restructuring Items."
Interest expense amounted to $25.5 million in the first nine months of 2007
compared to $16.8 million in the first nine months of 2006. The increase was
primarily related to higher average interest rates associated with our current
borrowing arrangements as compared to the same period in 2006.
The consolidated condensed statement of operations reflects a $6.3 million
income tax benefit for the first three quarters of 2007 and a $2.9 million
income tax benefit for the first three quarters of 2006.
The results of the Electrical Components business segment for the three and nine
months ended September 30, 2007 and 2006 are included in income (loss) from
discontinued operations, as our board of directors has approved a plan to sell
the entire segment. On August 31, 2007, we completed an agreement with Regal
Beloit Corporation, selling the Residential & Commercial and Asia Pacific
divisions of this business segment to Regal Beloit for $220 million in cash,
subject to customary adjustments at closing. The proceeds were utilized to pay
off our Second Lien credit agreement in full, as well as the majority of the
balance outstanding under our First Lien credit agreement. On November 1, 2007,
we signed an agreement to sell our Automotive & Specialty business operations to
affiliates of Sun Capital Partners Group V, LLC for $10 million in cash, subject
to customary adjustments at closing.
On October 22, 2007, we signed a Definitive Stock Purchase Agreement to sell our
Engine & Power Train business operations to affiliates of Platinum Equity, LLC
for $51 million in cash, subject to customary adjustments at closing. The
principal terms of this agreement were disclosed in a Current Report on Form 8-K
that we filed on October 26, 2007. The transaction was completed on November 9,
2007, and the proceeds were used to repay the balance remaining to our First
Lien lender, effectively eliminating all of our domestic debt. While the Engine
& Power Train business operations were included as part of continuing operations
in our third quarter results, they will be included with discontinued operations
effective with the fourth quarter of 2007.
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With the execution of the respective completed and pending sale transactions
described above, we have successfully divested our non-core business segments in
order to focus on our compressor operations. One of the benefits of these
transactions has been the elimination of our domestic debt, which we estimate
will reduce our annualized interest expense by approximately $22 million.
However, with the transition of the business to a compressor company, certain
challenges become more pronounced, particularly exposure to fluctuations in
foreign currency, as approximately 80% of our remaining manufacturing presence
as well as our sales activity is now conducted outside the U.S. Accordingly,
further declines in the value of the dollar or overall economic conditions could
result in further stresses upon the cash flows of the remaining business. We
expect that the improved liquidity provided by these divestures and other
actions will enable the business to address these challenges over the near term
should they arise.
During the second quarter of 2006, we completed the sale of 100% of our
ownership in Little Giant Pump Company. The operating results of Little Giant
Pump Company for 2006 are also classified under discontinued operations. Under
accounting rules, we have also allocated the portion of our interest expense
associated with this operation to the discontinued operations line item. As
required by our lending agreements, the proceeds were utilized to repay a
portion of our debt.
Compressor Business
Third quarter 2007 sales in the Compressor segment increased to $278.4 million
from $230.8 million in the prior year. $22.0 million of the $47.6 million
increase in sales was due to the effects of foreign currency translation. Sales
increases in this segment were led by the commercial product lines (up $27.5
million), an increase of 26.2%. Sales increases were also reported in
residential air conditioning product lines (up $14.7 million or 67.7%) and
refrigeration and freezer product lines (up $5.3 million or 5.9%). The majority
of these increases were attributable to pricing advances and foreign currency
translation.
Compressor business income for the third quarter of 2007 was $7.1 million
compared to an operating loss of $6.5 million in the third quarter of 2006. The
$13.6 million improvement was attributable to the net favorable impact of volume
and pricing changes ($20.1 million) and productivity and other improvements
($4.8 million). Including the effects of favorable hedging activities, the price
of copper and other commodities also contributed favorably to results by
approximately $2.1 million in the third quarter of 2007. These year-on-year
improvements were partially offset by unfavorable foreign currency exchange
rates ($13.4 million). For the third quarter, the Brazilian Real was on average
9.0% stronger against the U.S. Dollar in 2007 versus 2006.
Compressor business sales in the first nine months of 2007 increased to $864.7
million from $755.6 million in the first nine months of 2006. Excluding the
increase in sales due to the effects of foreign currency translation of $53.5
million, sales increased by 7.4% in the first nine months of 2007. Sales
increases in this segment were led by the commercial product lines (up $52.7
million), an increase of 15.1%. Sales increases were also reported in
refrigeration and freezer product lines (up $46.4 million or 17.2%), while
residential air conditioning declined (down $5.8 million or 5.7%). The majority
of these increases were attributable to pricing advances and foreign currency
translation. In the aggregate, the remainder of the compressor product lines
increased by $15.8 million.
Operating income for the nine months ended September 30, 2007 amounted to $28.4
million compared to operating loss of $3.7 million for the first nine months of
2006. The higher operating income was attributable to price advances and volume
impacts ($62.0 million) and productivity, purchasing, and other improvements
($20.8 million). These improvements were offset by unfavorable currency exchange
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impacts ($35.2 million) and higher commodity costs ($15.5 million). Through the
first nine months of 2007, the Brazilian Real was on average 8.7% stronger
against the U.S. Dollar compared to the same period in 2006, and the average
price of copper increased by 7.5% over the same period.
Engine & Power Train Business
Engine & Power Train business sales were $53.8 million in the third quarter of
2007 compared to $85.2 million for the same period a year ago. Declines were led
by engines for snowthrowers (down $31.0 million), a decline of 50.0%. This
decline was due to the carryover of excess inventories from the prior season by
our customers and retailers, as well as conservative buying patterns by those
same customers as we enter the current selling season. The remaining decreases
in the Engine & Power Train Group were spread across multiple product lines.
Despite the decline in sales volume, the Engine & Power Train business recorded
an operating profit of $0.1 million for the third quarter of 2007, compared to a
loss of $9.2 million during the same period a year ago. Productivity, purchasing
and other improvements accounted for $15.1 million of the favorable results. As
well, losses associated with TMT Motoco of $6.9 million in the third quarter of
2006 were not repeated in 2007. In addition, while $5.5 million in fees were
paid to AlixPartners in the third quarter of 2006, no such expense was recorded
in the same period of 2007. These improvements to third quarter 2007 results
were offset by the impact of volume declines of $18.2 million.
Engine & Power Train sales through the first nine months of 2007 amounted to
$165.9 million compared to $237.6 million in the same period of 2006. The
decline in sales for the first nine months of the year was primarily due to the
lower sales of $38.4 million or 48.9% in engines for snowthrowers. This decline
was due to the carryover of excess inventories from the prior season by our
customers, as well as conservative buying patterns by those same customers as we
enter the current selling season. Sales of engines for walk behind and riding
mowers declined by $19.3 million or 23.1% when compared to the first nine months
of 2006. Reductions in both walk behind and riding mower engines were a result
of our disruption in supply from TMT Motoco in Brazil, as customers sought
alternative supply sources. Engines for generators were also down by $10.3
million, a decline of 70.5%, due to lack of significant hurricane or other storm
activity in recent months. The remaining decreases in the Engine & Power Train
Group were spread across multiple product lines.
For the first nine months of 2007, the business incurred an operating loss of
$16.4 million compared to an operating loss of $38.9 million in 2006.
Productivity, purchasing, and other improvements of $25.8 million contributed to
the favorable result; in addition, fees paid to AlixPartners for their
assistance in implementing our restructuring efforts were reduced by $18.8
million year-on-year. As well, losses associated with TMT Motoco of $8.8 million
through three quarters of 2006 were not repeated in 2007. These improvements
were offset by the effect of volume declines and pricing impacts of $27.4
million. In addition, a gain of $3.5 million was recorded in the first nine
months of 2006 on the sale of our facility in Douglas, Georgia, whereas no
similar gain was realized in 2007.
Impairments and Other Restructuring Items
We recorded expense of $26.2 million in impairments, restructuring charges, or
other items in the three months ended September 30, 2007, and expense of $25.3
million in the nine months ended September 30, 2007. In light of the agreement
reached on October 22, 2007 to sell the assets of our Engine & Power Train
business segment to Platinum Equity LLC, we performed an interim analysis of the
fair value of the assets of the business unit at September 30, 2007. We utilized
the final purchase price agreed upon with
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Platinum Equity as our indication of the fair market valuation of the business.
As a result, we recorded an impairment to the long-term assets of the business
segment of $28.1 million. Further adjustment to the loss on sale may result due
to post-closing adjustments to the purchase price pursuant to the agreement. In
contrast, as a result of the previously announced closure of our Engine & Power
Train facility in New Holstein, Wisconsin and the associated curtailment of
pension and retiree benefits of its employees, we recognized a net gain of $2.0
million in the third quarter of 2007. A net gain of $6.9 million related to this
pension curtailment was also recognized in the second quarter of 2007. In
addition, we recorded $5.7 million in obsolescence charges in the second quarter
associated with the completion of our lawn and garden selling season and the
cessation of business sourced from Brazil at the Engine & Power Train group. The
remaining charges primarily related to reductions in force executed during the
second quarter across several of our business units.
We recognized asset impairment charges of $8.4 million and $11.6 million for the
three and nine months ended September 30, 2006, respectively. In the third
quarter of 2006, we incurred asset impairment and restructuring charges of $8.4
million related to the Engine & Power Train business for the write-down of
assets that had become idled as part of the segment's overall restructuring
program. During the second quarter of 2006, we incurred asset impairment and
other charges of $2.6 million related to the Engine & Power Train business for
the consolidation of transmission production into a single U.S. facility. The
remainder of the 2006 impairment charges related to the completion of programs
initiated in 2005.
Legal Proceedings
On March 28, 2007, our Brazilian engine subsidiary, TMT Motoco, was granted
permission by the Brazilian court to pursue a judicial restructuring, which is
similar to U.S. Chapter 11 bankruptcy protection. TMT Motoco filed its
restructuring plan with the court on May 28, and the court is currently
evaluating this plan. The facility suspended operations on the date it filed for
the judicial restructuring, and it has not been determined whether or when it
will re-open in the future. We are currently in negotiations with our creditors,
as well as a third party who is seeking to re-open the facility. If these
negotiations prove successful, we would release our shares in exchange for the
assumption of liabilities by that third party. The outcome of such negotiations
is uncertain, and would require the cooperation of the buyer of the remainder of
our Engine & Power Train business. If such arrangements were not to be
completed, the most likely outcome would be the declaration of bankruptcy by the
Brazilian court, and a subsequent liquidation of the assets.
6
TMT Motoco was removed from our consolidated balance sheets effective March 28,
2007, and is now being accounted for under the equity method. The following is a
summary of the assets, liabilities and equity of TMT Motoco at September 30,
2007:
September 30,
(Dollars in millions) 2007
-------------
Accounts receivable, net $ 0.2
Inventories 21.7
Other current assets 8.8
Property, plant and equipment, net 70.9
------
Total Assets $101.6
======
Accounts payable, trade $ 8.3
Other current liabilities 99.0
------
Total Liabilities 107.3
Shareholders' Deficit (5.7)
------
Total Liabilities and Shareholders' Equity $101.6
======
Adequacy of Liquidity Sources
Historically, cash flows from operations and borrowing capacity under previous
credit facilities were sufficient to meet our long-term debt maturities,
projected capital expenditures and anticipated working capital requirements.
However, in 2006 and through the third quarter of 2007 cash flows from
operations were negative and we have had to rely on existing cash balances,
proceeds from credit facilities and asset sales to fund our needs.
Through second quarter of 2007, our main domestic credit facilities were
provided under a $250 million First Lien Credit Agreement and a $100 million
Second Lien Credit Agreement. On August 27, 2007, we entered into an amendment
to our First Lien Credit Agreement, in anticipation of the closing of the sale
of the Residential & Commercial and Asia Pacific operations to Regal Beloit
Corporation. The principal terms of this amendment were described in a Current
Report on Form 8-K dated August 31, 2007. Among other things, the amendment
deleted the minimum adjusted EBITDA and fixed charge coverage covenants for the
third and fourth quarters of 2007, and reduced the lenders' total commitment
from $250 million to $175 million. The amendment also imposed a new covenant
requiring us to maintain a minimum of $50 million in credit availability; after
giving effect to an existing $10 million availability reserve, we were in effect
required to maintain a minimum of $60 million of credit availability. Consistent
with the terms of the original First Lien Credit Agreement, the amendment
provides for security interests in substantially all of our assets, and places
limits on additional foreign borrowings and fees paid for professional services.
We paid the first lien lender fees totaling $425,000 in connection with the
amendment. As of September 30, 2007, the weighted average annual interest rate
on our First Lien credit agreement was 7.9%.
7
Under the terms of the First Lien Credit Agreement, as of September 30, 2007 we
had the capacity for additional borrowings under the borrowing base formula of
$114.9 million ($25.2 million in the U.S. and $89.7 million in foreign
jurisdictions). The First Lien Credit Agreement expires in November, 2009. On
August 31, 2007, we paid off the entire balance associated with our Second Lien
Credit Agreement, effective with the closing of the sale of portions of our
Electrical Components business segment as referenced above. Net proceeds of this
sale transaction at closing were approximately $199 million. The proceeds were
utilized to repay our Second Lien lender in full, including principal,
prepayment penalties and fees, and both cash and PIK interest. The remainder of
the proceeds, or approximately $93.6 million, was utilized to reduce the
outstanding balance on our First Lien debt.
On November 8, 2007 we entered into an additional amendment to modify our First
Lien Credit Agreement, in anticipation of the closing of the sale transaction of
the Engine & Power Train business. The principle terms of the amendment reduced
the covenant requiring us to maintain minimum levels of availability under our
line of credit to $30 million, and reduced the total facility size to $75
million. As a result, after completion of the transaction, we had cash balances
in the U.S. of $21.6 million, and U.S availability under our First Lien Credit
Agreement of approximately $19.8 million. We paid the first lien lender fees
totaling $36,000 in connection with the amendment.
In addition, we have various borrowing arrangements at our foreign subsidiaries
to support working capital needs and governmental sponsored borrowings that
provide advantageous lending rates. During the quarter, we had net repayments on
these arrangements totaling $16.1 million. Our weighted average interest rate
for all borrowings, including foreign borrowings, was 8.8% at September 30,
2007.
Although our Second Lien debt has been eliminated, the former lender still
possesses a warrant to purchase 1,390,944 shares of Class A Common Stock, which
is equivalent to 7% of our fully diluted common stock. This warrant, valued at
$7.3 million or $5.29 per share, expires in April of 2012. Based on the terms of
the warrant, the exercise price is currently calculated at $6.05 per share. The
final exercise price could be lower if the closing price of our common stock
drops below $9.31 per share on or before March 27, 2008. The costs associated
with this warrant, while originally accounted for as additional interest to be
expensed over the remaining terms of the credit agreement, were accelerated upon
full repayment of the debt, and resulted in expense of $6.2 million in the third
quarter of 2007, which is included in the loss from discontinued operations.
In March of 2007, our Brazilian engine subsidiary, TMT Motoco, was granted
permission by the Brazilian courts to pursue a judicial restructuring, similar
to a U.S. filing for Chapter 11 bankruptcy protection. The TMT Motoco filing in
Brazil constituted an event of default with our domestic lenders. On April 9,
2007 we obtained amendments to our First and Second Lien Credit Agreements that
cured the cross-defaults triggered by the filing in Brazil. We paid $625,000 in
fees, plus expenses, to the First Lien lender on April 9, 2007 upon execution of
the April 9 amendment, and fees of $750,000, plus expenses, to the Second Lien
lender.
In accordance with the amendments discussed above, we are currently in
compliance with the covenants of our domestic debt agreement. After giving
effect to the sale transactions and the negative impacts of continued
unfavorable currency movements, we do not expect to be in compliance with the
fixed charge covenant of our First Lien credit agreement at March 31, 2008.
However, we do not expect to have any amounts outstanding under the agreement at
that time. In anticipation of this condition, we are pursuing a stand-by line of
credit under a new collateralized arrangement, although we would not expect to
require any outstanding borrowings under that arrangement to fund current
operations.
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Outlook
Information in this "Outlook" section should be read in conjunction with the
cautionary language and discussion of risks included below.
The outlook for the fourth quarter of 2007 is subject to the same variables that
have negatively impacted us throughout 2006 and the first nine months of 2007.
Commodity costs, key currency rates, weather and the overall growth rates of the
respective economies around the world are all important to future performance.
Overall, we do not expect these factors to become any more favorable in the
foreseeable future; in fact, as we complete our transition from a diversified
manufacturer to a compressor business, we expect our business to become more
sensitive to key risks, particularly commodity pricing and currency exchange
rates. Certain key commodities, including copper and aluminum, continue to trade
at elevated levels compared to recent history. From January 1, 2006 through
October 31, 2007, the price of aluminum increased approximately 7.8%, and the
price of copper increased 60.4% in the same time frame. In the first nine months
of 2007 alone, copper prices escalated by 27.2%. While copper forward purchase
contracts obtained prior to the cost increase have allowed us to maintain costs
consistent with, or slightly better than, our 2007 business plan, future costs
are expected to continue to rise. We currently hold approximately 70% of our
total projected copper requirements for the remainder of 2007 in the form of
forward purchase contracts, which will provide us with substantial (though not
total) protection from further price increases during the year but also will
detract from our ability to benefit from any price decreases. The continued
escalation of copper prices through 2007 and into 2008 and beyond could have a
long-term unfavorable impact on our results of operations, if adequate pricing
increases cannot be obtained from our customers.
The Brazilian Real strengthened 25.5% against the U.S. dollar from January 1,
2006 to October 31, 2007. From July 1 through September 30, 2007, the Real
strengthened by 4.7%. Recently, we have also been unfavorably affected by the
strengthening of the Indian Rupee, which strengthened by 8.0% in the second and
third quarters of 2007. Net of currency hedging activities, this continued
strengthening of the Real and the recent strengthening of the Rupee affected our
operating results unfavorably by approximately $19.8 million during the first
nine months when compared to our 2007 plan.
As a result, we expect the operating results of our compressor business to be
slightly unfavorable in the fourth quarter of 2007 when compared to the results
of the comparable 2006 period. Improvements in our North American Compressor
operations, primarily due to higher sales volumes and overhead cost
improvements, will be offset by lower results in Brazil that are attributable to
the stronger Real.
As part of our efforts to improve profitability and reduce the consumption of
capital resources, we continue to seek price increases to cover our increased
input costs, and expect that further employee headcount reductions,
consolidation of productive capacity and rationalization of product platforms
will be necessary. We believe that such actions will contribute to restoring our
profitability, will help to mitigate such negative external factors as currency
fluctuation and increased commodity costs, and will result in improved operating
performance in the remainder of 2007 and forward.
As a result of the sale of portions of the Electrical Components business
segment as well as the Engine & Power Train business, and the impending sale of
the Automotive & Specialty business operations, we have completely eliminated
our domestic debt as of November 9, 2007.. As a result, we expect our
consolidated interest expense in the future to be substantially reduced. Based
on the amount of domestic debt we held prior to the sale of businesses, we
expect that its elimination will reduce our annualized interest expense by
approximately $22 million. However, challenges will remain with respect to our
ability to maintain appropriate levels of liquidity, particularly those driven
by currency exchange and commodity pricing as discussed above. With expected
further weakness of the U.S. dollar versus key
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currencies such as the Brazilian Real, we expect that we will generate a limited
amount of cash until further restructuring activities are implemented, or
economic conditions improve. As part of our strategy to maintain sufficient
liquidity, we are currently negotiating a new financing arrangement for our
North American based activities, and seeking longer term committed financing
arrangements in Brazil. In addition, we are generating other sources of cash
through various activities as noted below.
We are also engaged in the process of re-evaluating our corporate infrastructure
in relation to the level of business activity that remains after our
restructuring plans are completed. Such actions could result in further
restructuring and/or asset impairment charges in the foreseeable future, and,
accordingly, could have a significant effect on our consolidated financial
position and future operating results.
We are evaluating further potential sales of product lines, divisions, and
various idle assets of the Company, including real estate, equipment, and
Company aircraft. The proceeds from any such sales would be used to improve our
liquidity. With respect to idle assets, we expect to realize proceeds of
approximately $12 million, which we expect to receive in full by the second
quarter of 2008.
We recently announced our intent to close one of our U.S. operating facilities,
located in Tecumseh, Michigan. The costs associated with this closure will be
dependent on the outcome of negotiations with our union. The closure, once
completed, is expected to reduce annual costs by $5.6 million.
We are in the process of finalizing the audit of our 2003 tax year, the
resolution of which is expected to result in the refund of federal income taxes
previously paid of approximately $13.0 million. Receipt of such proceeds is
dependent upon final resolution of these audits, estimated to occur within
approximately six months.
Finally, we are in the process of executing a conversion of our Salaried
Retirement Plan to a new Plan. The existing Plan is substantially over-funded.
We expect that this conversion will make net cash available in late 2007 or 2008
to the Company of approximately $55 million, while still fully securing the
benefits under the old Plan and funding the new Plan, without additional annual
contributions, for six to eight future years. The pension reversion will
adversely affect the company's results of operations due to the recognition of
the cost of the termination, estimated to be $20 million, as well as a reduction
in net period income. The reduction in income, however, has been more than
mitigated by other actions taken to reduce the overall cost of benefits and due
to personnel reductions. Taking into account the cost of all retiree benefits,
both pensions and other post-retirement benefits, total expected income to be
recognized in 2008, other than curtailment gains and losses and excluding
potential changes in actuarial assumptions, is expected to be approximately $16
million versus $14 million in 2007.
As part of addressing the Company's liquidity needs, we have made substantially
lower levels of capital expenditures to date in 2007, and expect to continue
that trend throughout the remainder of the year. Capital expenditures in 2007
are projected to be approximately $54 million less than in 2006 and $105.3
million less than in 2005. Looking ahead, we expect capital expenditures in 2008
and beyond to remain at levels far less than historical averages, due to the
elimination of non-core businesses and due to a shift away from capital
intensive vertical integration to higher levels of outside sourcing of
components from suppliers located in low cost countries.
11
RESULTS BY BUSINESS SEGMENTS (UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- -------------------
(Dollars in millions) 2007 2006 2007 2006
------- ------- -------- --------
NET SALES:
Compressor Products $ 278.4 $ 230.8 $ 864.7 $ 755.6
Engine & Power Train Products 53.8 85.2 165.9 237.6
Other (a) 3.9 3.5 12.6 11.4
------- ------- -------- --------
Total net sales $ 336.1 $ 319.5 $1,043.2 $1,004.6
======= ======= ======== ========
OPERATING INCOME (LOSS):
Compressor Products $ 7.1 ($6.5) $ 28.4 ($3.7)
Engine & Power Train Products 0.1 (9.2) (16.4) (38.9)
Other (a) 0.7 0.6 2.4 2.2
Corporate expenses (1.9) (4.7) (21.9) (12.7)
Impairments, restructuring charges, and other items (26.2) (8.4) (25.3) (11.6)
------- ------- -------- --------
Total operating loss from continuing operations (20.2) (28.2) (32.8) (64.7)
Interest expense (6.6) (5.7) (25.5) (16.8)
Interest income and other, net 1.1 2.3 4.8 10.6
------- ------- -------- --------
LOSS FROM CONTINUING OPERATIONS BEFORE TAXES ($25.7) ($31.6) ($53.5) ($70.9)
======= ======= ======== ========
(a) "Other" consists of non-reportable business segments.
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CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
SEPTEMBER 30, December 31,
(Dollars in millions) 2007 2006
------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 57.2 $ 81.9
Accounts receivable, net 162.2 219.5
Inventories 204.0 353.4
Assets held for sale 39.2 --
Other current assets 92.9 78.6
-------- --------
TOTAL CURRENT ASSETS 555.5 733.4
Property, plant and equipment - net 373.1 552.4
Goodwill and other intangibles 19.8 180.0
Assets held for sale 17.1 --
Other assets 356.4 316.9
-------- --------
TOTAL ASSETS $1,321.9 $1,782.7
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, trade $ 175.2 $ 216.0
Short-term borrowings 68.6 163.2
Liabilities held for sale 19.4 --
Accrued liabilities 116.1 130.1
-------- --------
TOTAL CURRENT LIABILITIES 379.3 509.3
Long-term debt 34.7 217.3
Deferred income taxes 30.5 28.6
Pension and postretirement benefits 166.0 180.9
Product warranty and self-insured risks 16.0 13.6
Liabilities held for sale 2.2 --
Other non-current liabilities 34.4 34.6
-------- --------
TOTAL LIABILITIES 663.1 984.3
STOCKHOLDERS' EQUITY 658.8 798.4
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,321.9 $1,782.7
======== ========
13
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
(Dollars in millions) 2007 2006 2007 2006
------ ------ ------- -------
TOTAL STOCKHOLDERS' EQUITY
BEGINNING BALANCE $730.3 $858.1 $ 798.4 $814.4
Impact of the adoption of FIN 48 -- -- (0.4) --
Comprehensive income (loss):
Net income (loss) (77.2) (37.8) (182.2) (16.5)
Reclassifications included in net loss due to sale of business (5.0) -- (5.0) --
Other comprehensive income 10.7 (2.1) 40.7 20.3
------ ------ ------- ------
Total comprehensive income (loss) (71.5) (39.9) (146.5) 3.8
Warrants issued -- -- 7.3 --
------ ------ ------- ------
TOTAL STOCKHOLDERS' EQUITY ENDING BALANCE $658.8 $818.2 $ 658.8 $818.2
====== ====== ======= ======
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CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
(DOLLARS IN MILLONS) 2007 2006
------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash used by operating activities ($24.5) ($129.4)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 205.9 132.4
Capital expenditures (5.9) (45.6)
Business acquisition -- (2.0)
------- --------
Cash provided by (used in) investing activities 200.0 84.8
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt amendment costs (2.9) --
Repayment of Senior Guaranteed Notes -- (250.0)
Repayment of Industrial Development Revenue Bonds -- (10.5)
Proceeds (Repayments) from First Lien Credit Agreement, net (82.8) 147.5
Proceeds from Second Lien Credit Agreement -- 100.0
Repayments from Second Lien Credit Agreement (100.0) (45.4)
Other proceeds (repayments), net (16.1) 45.6
------- --------
Cash used in financing activities (201.8) (12.8)
------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 1.6 (0.5)
------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (24.7) (57.9)
CASH AND CASH EQUIVALENTS:
Beginning of period 81.9 116.6
------- --------
End of period $ 57.2 $ 58.7
======= ========
CAUTIONARY STATEMENT RELATING TO FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 that are subject to the safe
harbor provisions created by that Act. In addition, forward-looking statements
may be made orally in the future by or on behalf of the Company. Forward-looking
statements can be identified by the use of terms such as "expects", "should",
"may", "believes", "anticipates", "will", and other future tense and
forward-looking terminology.
Readers are cautioned that actual results may differ materially from those
projected as a result of certain risks and uncertainties, including, but not
limited to i) our ability to maintain adequate liquidity in total and within
each foreign operation; ii) the success of our ongoing effort to bring costs in
line with projected production levels and product mix; iii) our success in
consummating the transaction for the sale of our Automotive & Specialty
business, or the timing for doing so; (iv) weather conditions affecting demand
for air conditioners; v) availability and cost of materials,
15
particularly commodities, including steel, copper and aluminum, whose cost can
be subject to significant variation; vi) financial market changes, including
fluctuations in interest rates and foreign currency exchange rates; vii) actions
of competitors; viii) changes in business conditions and the economy in general
in both foreign and domestic markets; ix) the effect of terrorist activity and
armed conflict; x) economic trend factors such as housing starts; xi) emerging
governmental regulations; xii) the ultimate cost of resolving environmental and
legal matters; xiii) our ability to profitably develop, manufacture and sell
both new and existing products; xiv) the extent of any business disruption that
may result from the restructuring and realignment of our manufacturing
operations or system implementations, the ultimate cost of those initiatives and
the amount of savings actually realized; xv) the extent of any business
disruption caused by work stoppages initiated by organized labor unions; xvi)
potential political and economic adversities that could adversely affect
anticipated sales and production in Brazil; xvii) potential political and
economic adversities that could adversely affect anticipated sales and
production in India, including potential military conflict with neighboring
countries; xviii) the outcome of the judicial restructuring of our Brazilian
engine manufacturing subsidiary; xix) increased or unexpected warranty claims;
and xx) the ongoing financial health of major customers. These forward-looking
statements are made only as of the date of this report, and we undertake no
obligation to update or revise the forward-looking statements, whether as a
result of new information, future events or otherwise.
Tecumseh Products Company will host a conference call to report on the third
quarter 2007 results on Thursday, November 15, 2007 at 11:00 a.m. ET. The call
will be broadcast live over the Internet and then available for replay through
the Investor Relations section of Tecumseh Products Company's website at
www.tecumseh.com.
Press releases and other investor information can be accessed via the Investor
Relations section of Tecumseh Products Company's Internet web site at
http://www.tecumseh.com.
Contact: Teresa Hess
Director, Investor Relations
Tecumseh Products Company
517-423-8455
16