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 June 30, 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)
1136 OAK VALLEY DRIVE
ANN ARBOR, MICHIGAN 48108
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code:
(734) 585-9500
100 East Patterson Street
Tecumseh, Michigan 49286
(former address)
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 June 30, 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..................................... 21
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 36
Item 4. Controls and Procedures....................................... 37
Part II. Other Information...............................................
Item 1. Legal Matters 38
Item 6. Exhibits 39
Signatures............................................................... 40
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)
JUNE 30, December 31,
(Dollars in millions, except share data) 2008 2007
-------- ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 178.6 $ 76.8
Restricted cash 14.3 6.8
Short-term investments 5.0 5.0
Accounts receivable, trade, less allowance for doubtful accounts of $1.4
in 2008 and $5.7 in 2007 118.0 93.2
Inventories 156.0 143.4
Deferred and recoverable income taxes 25.5 10.7
Recoverable non-income taxes 95.3 19.5
Assets held for sale 19.5 21.9
Other current assets 35.3 20.4
-------- --------
Total current assets 647.5 397.7
Property, plant, and equipment, net 350.1 353.3
Goodwill 20.5 20.2
Prepaid pension expense 128.3 233.4
Deferred and recoverable income taxes -- 13.9
Recoverable non-income taxes 52.7 102.2
Other assets 48.7 44.2
-------- --------
Total assets $1,247.8 $1,164.9
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable, trade $ 158.8 $ 123.0
Short-term borrowings 68.3 59.5
Liabilities held for sale 2.5 2.6
Accrued liabilities:
Employee compensation 35.8 31.1
Product warranty and self-insured risks 16.0 17.2
Other 35.9 35.9
-------- --------
Total current liabilities 317.3 269.3
Long-term debt 1.2 3.3
Deferred income taxes 11.4 10.2
Other postretirement benefit liabilities 34.0 74.3
Product warranty and self-insured risks 9.7 10.0
Pension liabilities 15.7 14.8
Other non-current liabilities 40.6 37.1
-------- --------
Total liabilities 429.9 419.0
-------- --------
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 578.6 547.9
Accumulated other comprehensive income 209.8 168.5
-------- --------
Total stockholders' equity 817.9 745.9
-------- --------
Total liabilities and stockholders' equity $1,247.8 $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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
(Dollars in millions, except per share data) 2008 2007 2008 2007
------------------ ------------------
Net sales $ 273.8 $ 297.0 $ 549.0 $ 586.3
Cost of sales 240.3 261.4 469.9 516.1
Selling and administrative expenses 34.3 34.8 65.9 68.9
Impairments, restructuring charges, and other items 3.3 1.7 3.8 1.7
------- -------- ------- --------
Operating (loss) income (4.1) (0.9) 9.4 (0.4)
Interest expense 6.2 10.8 13.5 16.6
Interest income and other, net 3.3 1.6 5.1 3.3
------- -------- ------- --------
(Loss) income from continuing operations before taxes (7.0) (10.1) 1.0 (13.7)
Tax (benefit) expense (0.4) (2.7) 0.8 (3.3)
------- -------- ------- --------
(Loss) income from continuing operations (6.6) (7.4) 0.2 (10.4)
Income (loss) from discontinued operations, net of tax 15.6 (80.8) 25.8 (94.6)
------- -------- ------- --------
Net income (loss) $ 9.0 ($88.2) $ 26.0 ($105.0)
======= ======== ======= ========
Basic earnings (loss) per share:*
(Loss) income from continuing operations (0.36) (0.40) 0.01 (0.56)
Income (loss) from discontinued operations, net of tax 0.85 (4.37) 1.40 (5.12)
------- -------- ------- --------
Net income (loss) per share, basic $ 0.49 ($4.77) $ 1.41 ($5.68)
======= ======== ======= ========
Diluted earnings (loss) per share:**
(Loss) income from continuing operations (0.36) (0.40) 0.01 (0.56)
Income (loss) from discontinued operations, net of tax 0.85 (4.37) 1.30 (5.12)
------- -------- ------- --------
Net income (loss) per share, diluted $ 0.49 ($4.77) $ 1.31 ($5.68)
======= ======== ======= ========
Weighted average shares, basic (in thousands) 18,480 18,480 18,480 18,480
Weighted average shares, diluted (in thousands) 19,871 19,748 19,871 19,114
------- -------- ------- --------
Cash dividends declared per share $ 0.00 $ 0.00 $ 0.00 $ 0.00
------- -------- ------- --------
* Based on 18,479,684 shares issued and outstanding throughout all periods
presented.
** 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 six months ended June 30, 2008 are therefore
calculated based on a total of 19,870,628 shares. For the three months
ended June 30, 2008 and 2007, however, this warrant is not included in
diluted earnings (loss) per share, as the effect would be antidilutive due
to the losses recorded in continuing operations.
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)
SIX MONTHS ENDED
JUNE 30,
-----------------
(Dollars in millions) 2008 2007
------ --------
Cash Flows from Operating Activities:
Net income (loss) $ 26.0 ($105.0)
Adjustments to reconcile net income (loss) to net cash provided by
(used in)operating activities:
Depreciation and amortization 22.6 35.3
Impairment of long-lived assets and goodwill -- 68.5
Gain on sale of discontinued operations (7.9) --
Gain on disposal of property and equipment (4.2) (1.2)
Changes in assets and liabilities:
Accounts receivable (23.7) (19.2)
Inventories (8.5) 34.3
Payables and accrued expenses 30.3 35.7
Employee retirement benefits 69.7 (13.3)
Deferred and recoverable taxes (13.5) 1.3
Other (11.1) (60.4)
------ --------
Cash provided by (used in) operating activities 79.7 (24.0)
------ --------
Cash Flows from Investing Activities:
Proceeds from sale of assets 22.6 2.0
Capital expenditures (2.7) (5.4)
Change in restricted cash (7.6) --
------ --------
Cash provided by (used in) investing activities 12.3 (3.4)
------ --------
Cash Flows from Financing Activities:
Proceeds / (repayments) from First Lien Credit Agreement, net -- 1.9
Debt issuance / amendment costs (1.6) (2.5)
Other borrowings / (repayments), net 2.5 (0.9)
------ --------
Cash provided by (used in) financing activities 0.9 (1.5)
------ --------
Effect of exchange rate changes on cash 9.0 (4.3)
------ --------
Increase (decrease) in cash and cash equivalents 101.8 (33.2)
Cash and Cash Equivalents:
Beginning of period 76.8 81.9
------ --------
End of period $178.6 $ 48.7
====== ========
Supplemental Schedule of Noncash Investing and Financing Activities:
Warrants issued in conjunction with debt financing -- $ 7.3
Paid-in-kind interest -- 0.8
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.
Prior period results of operations have been reclassed to reflect engineering
expense as part of selling and administrative ("S&A") expenses; previously,
engineering expense was included in cost of sales. The amount of expense
reclassed to S&A was $5.9 million and $12.3 million for the three and six months
ended June 30, 2007 respectively.
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
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 contributions for the next seven years. At
June 30, 2008, the balance of cash restricted for this purpose was $14.3
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 net assets of the remaining businesses within the Electrical Components
business have been classified as held for sale as of June 30, 2008. The results
for Electrical Components for the three and six month periods ended June 30,
2008 and 2007 are included in the income (loss) from discontinued operations.
Page 6
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Following is a summary of pretax income (loss) from discontinued operations
related to the Electrical Components business for the three months ended June
30, 2008 and 2007:
Three Months Three Months
Ended Ended
(Dollars in millions) June 30, 2008 June 30, 2007
------------- -------------
Net sales $ 7.9 $ 101.7
Cost of sales 6.6 93.9
Selling and administrative expenses 0.1 8.4
Impairments, restructuring charges, and other items (1.5) 68.8
----- -------
Operating income (loss) 2.7 (69.4)
Interest expense, including allocated interest -- 4.8
----- -------
Income (loss) from discontinued operations before income taxes $ 2.7 ($74.2)
===== =======
Following is a summary of pretax income (loss) from discontinued operations
related to the Electrical Components business for the six months ended June 30,
2008 and 2007:
Six Months Six Months
Ended Ended
(Dollars in millions) June 30, 2008 June 30, 2007
------------- -------------
Net sales $14.4 $205.0
Cost of sales 12.5 187.8
Selling and administrative expenses 0.3 16.8
Impairments, restructuring charges, and other items (0.5) 68.7
----- ------
Operating income (loss) 2.1 (68.3)
Interest expense, including allocated interest -- 9.7
----- ------
Income (loss) from discontinued operations before income taxes $ 2.1 ($78.0)
===== ======
Post-closing sales price adjustments related to the divestiture of the
businesses, which netted additional proceeds to the Company of $1.3 million, are
included in impairments, restructuring charges, and other items in the three and
six months ended June 30, 2008.
We recorded impairment charges as part of our loss from discontinued operations
in the three and six months ended June 30, 2007. These impairments included
$39.3 million of the goodwill balance associated with the Electrical Components
business segment, as well as $25.8 million in long-lived assets and $3.4 million
in intangible assets associated with the Automotive & Specialty division of that
business segment.
Engine & Power Train
On October 22, 2007, we signed a Definitive Stock Purchase Agreement to sell our
Engine & Power Train business operations for $51 million in cash, subject to
customary adjustments at closing. The transaction was completed on November 9,
2007. The results for the Engine &
Page 7
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Power Train business for the three and six month periods ended June 30, 2008 and
2007 are included in the income (loss) from discontinued operations.
Following is a summary of pretax income (loss) from discontinued operations
related to the Engine & Power Train business for the three months ended June 30,
2008 and 2007:
Three Months Three Months
Ended Ended
(Dollars in millions) June 30, 2008 June 30, 2007
------------- -------------
Net sales $ -- $ 49.1
Cost of sales -- 52.8
Selling and administrative expenses -- 4.8
Impairments, restructuring charges, and other items (4.1) (1.1)
----- ------
Operating income (loss) 4.1 (7.4)
Interest expense -- 0.3
----- ------
Income (loss) from discontinued operations before income taxes $ 4.1 ($7.7)
===== ======
Following is a summary of pretax income (loss) from discontinued operations
related to the Engine & Power Train business for the six months ended June 30,
2008 and 2007:
Six Months Six Months
(Dollars in millions) Ended Ended
June 30, 2008 June 30, 2007
------------- -------------
Net sales $ -- $ 112.1
Cost of sales -- 117.0
Selling and administrative expenses -- 11.6
Impairments, restructuring charges, and other items (13.9) (1.1)
------ -------
Operating income (loss) 13.9 (15.4)
Interest expense -- 3.7
------ -------
Income (loss) from discontinued operations before income taxes $ 13.9 ($19.1)
====== =======
The amounts recorded in impairments, restructuring charges, and other items in
2008 for the Engine & Power Train business included a curtailment gain on the
salaried retirement plan of $2.9 million, a curtailment gain on the salaried
other postretirement benefit plan of $6.9 million and a curtailment gain on an
OPEB plan of $4.8 million.
Other businesses
On June 30, 2008 we sold our MP Pumps business for $14.6 million in gross cash
proceeds. We recorded a gain of $7.9 million upon the sale of the business. MP
Pumps was a small subsidiary which was not associated with our Compressor
business or our former Electrical Components or Engine & Power Train business
segments. MP Pumps recorded sales of $4.6 million and $4.2 million and profit of
$0.9 million and $0.7 million for the three months ended June 30, 2008 and
Page 8
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
2007 respectively. Sales of $9.5 million and $8.7 million and profit of $1.9
million and $1.7 million were recorded in MP Pumps for the six months ended June
30, 2008 and 2007.
The following summary balance sheet information is derived from the businesses
that are classified as held for sale as of June 30, 2008, which management
believes is representative of the net assets of the remaining businesses within
the former Electrical Components business.
JUNE 30,
(Dollars in millions) 2008
--------
ASSETS:
Accounts receivable, net $ 3.3
Inventories 5.8
Other assets 0.8
Property, plant, and equipment, net 9.6
-----
Total assets held for sale $19.5
=====
LIABILITIES:
Accounts payable, trade $ 1.9
Accrued liabilities 0.6
-----
Total liabilities held for sale $ 2.5
=====
Net assets held for sale $17.0
=====
4. Comprehensive Income
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
(Dollars in millions) 2008 2007 2008 2007
----- ------ ----- --------
Net income (loss) $ 9.0 ($88.2) $26.0 ($105.0)
Other comprehensive income (loss):
Foreign currency translation adjustments 23.8 23.3 32.5 29.9
Curtailments (Note 9) -- (3.5) -- (3.5)
Gain on derivatives, net of tax 10.0 1.5 8.6 3.6
----- ------ ----- ------
Total comprehensive income (loss) $42.8 ($66.9) $67.1 ($75.0)
===== ====== ===== ======
5. Inventories
JUNE 30, December 31,
(Dollars in millions) 2008 2007
-------- -----------
Raw material $ 75.7 $ 79.6
Work in progress 10.4 9.0
Finished goods 69.9 54.8
------ ------
Total inventories $156.0 $143.4
====== ======
Page 9
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 June 30, 2008 and December 31, 2007:
JUNE 30, December 31,
(Dollars in millions) 2008 2007
-------- ------------
Brazil $136.6 $114.5
India 11.4 7.2
------ ------
Total recoverable non-income taxes $148.0 $121.7
====== ======
At June 30, 2008, $95.3 million was included in current assets and $52.7 million
was included in non-current assets.
7. Fair Value
In accordance with SFAS No. 157, "Fair Value Measurements" ("SFAS 157"), we
utilize fair value measurements to record fair value adjustments to certain
assets and liabilities and to determine fair value disclosures. Derivative
instruments, including foreign currency forward purchases, are recorded at fair
value on a recurring basis. From time to time, we may also record other assets
or liabilities at fair value.
We group assets and liabilities at fair value in three levels, based on the
markets in which the assets and liabilities are traded and the reliability of
the assumptions used to determine fair value. These levels are as follows:
Level 1 Valuation is based upon quoted prices for identical instruments traded
in active markets.
Level 2 Valuation is based upon quoted prices for similar instruments in
active markets, quoted prices for identical or similar instruments in
markets that are not active, and model-based valuation techniques for
which all significant assumptions are observable in the market.
Page 10
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Level 3 Valuation is generated from model-based techniques that use at least
one significant assumption not observable in the market. These
unobservable assumptions reflect estimates of assumptions that market
participants would use in pricing the asset or liability.
The following is a description of valuation methodologies used for our assets
and liabilities recorded at fair value.
Foreign currency forward purchases
Our derivative instruments consist of foreign currency forward exchange
contracts. These contracts are recognized on our balance sheet at the estimated
amount at which they could be settled based on market observable inputs, such as
forward market exchange rates. We classify our derivative instruments as Level
2.
Assets and liabilities recorded at fair value on a recurring basis
The table below presents the recorded amount of assets measured at fair value on
a recurring basis as of June 30, 2008. We did not have any material liabilities
that were required to be measured at fair value on a recurring basis at June 30,
2008.
TOTAL FAIR
(Dollars in millions) VALUE LEVEL 1 LEVEL 2 LEVEL 3
---------- ------- ------- -------
Assets:
Foreign currency derivatives $17.8 $-- $17.8 $--
8. 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.
We also previously reported sales and operating income in "Other," which
included information about businesses not included with any major business
segment. MP Pumps, which we sold on June 30, 2008, was the only business
categorized within "Other."
Accordingly, our remaining operations consist solely of businesses formerly
reported under our Compressor Products segment.
Page 11
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
9. Goodwill and Other Intangible Assets
At June 30, 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 0.9 (0.6) 0.3
----- ----- -----
Balance at 6/30/2008 $13.3 $ 7.2 $20.5
===== ===== =====
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 as an indication of fair market value 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 of those
operations, which was completed on August 31, 2007. The only other changes in
goodwill during 2007 were due to foreign currency fluctuations.
Page 12
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
10. Pension and Other Postretirement Benefit (OPEB) Plans
Components of net periodic benefit (income) cost are as follows:
PENSION BENEFITS OTHER BENEFITS
THREE MONTHS THREE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------- ----------------
(Dollars in millions) 2008 2007 2008 2007
------ ------- ------ -------
Service cost $ 0.6 $ 2.2 $ 0.3 $ 0.9
Interest cost 3.0 5.6 1.0 2.1
Expected return on plan assets (4.5) (11.3) -- --
Amortization of prior service costs (0.2) (0.1) (2.8) (2.7)
Amortization of net gain -- -- (0.5) --
------ ------ ------ -------
Net periodic benefit (income) cost ($1.1) ($3.6) ($2.0) $0.3
Curtailment gains, settlement gains
and special termination benefits -- 3.8 (4.8) (10.7)
------ ------ ------ -------
Total Pension (Income) Expense ($1.1) $0.2 ($6.8) ($10.4)
====== ====== ====== =======
PENSION BENEFITS OTHER BENEFITS
SIX MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------- -----------------
2008 2007 2008 2007
------ ------- ------- -------
Service cost $ 1.2 $ 4.4 $ 0.7 $ 1.9
Interest cost 7.9 11.2 2.2 4.2
Expected return on plan assets (12.4) (22.6) (0.1) (0.1)
Amortization of prior service costs (0.3) (0.2) (5.6) (5.3)
Amortization of net gain -- -- (1.0) --
------ ------ ------- -------
Net periodic benefit (income) cost ($3.6) ($7.2) ($3.8) $0.7
Curtailment gains, settlement gains
and special termination benefits (2.0) 3.8 (30.8) (10.7)
------ ------ ------- -------
Net periodic benefit (income) cost ($5.6) ($3.4) ($34.6) ($10.0)
====== ====== ======= =======
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
A summary of the curtailment losses (gains), settlement gains and special
termination charges under the various plans for the three and six months ended
June 30 is as follows:
PENSION BENEFITS OTHER BENEFITS
THREE MONTHS THREE MONTHS
ENDED JUNE 30, ENDED JUNE 30,
---------------- --------------
(Dollars in millions) 2008 2007 2008 2007
------- ------ ----- ------
Recorded in discontinued operations:
Engine & Power train curtailment loss (gain) $-- $3.8 ($4.8) ($10.7)
--- ---- ----- ------
Total - curtailment gains, settlement gains and
special termination benefits $-- $3.8 ($4.8) ($10.7)
=== ==== ===== ======
PENSION BENEFITS OTHER BENEFITS
SIX MONTHS ENDED SIX MONTHS
JUNE 30, ENDED JUNE 30,
---------------- -----------------
(Dollars in millions) 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) --
Engine & Power Train curtailments -- 3.8 (4.8) (10.7)
------ ---- ------- -------
Total - discontinued operations (3.0) 3.8 (11.7) (10.7)
------ ---- ------- -------
Total - curtailment gains, settlement gains and
special termination benefits ($2.0) $3.8 ($30.8) ($10.7)
====== ==== ======= =======
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.
Page 14
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
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
had 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 net cash proceeds to the Company of
approximately $80 million, after consideration for excise taxes of $20 million
which were paid in cash in the second quarter of 2008. The replacement
retirement program includes both defined benefit and defined contribution plans.
A portion of the overfunding for the old plan was utilized to pre-fund the
benefits for both the defined benefit and defined contribution replacement plans
for approximately the next six to eight years.
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
was 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 generated
a tax gain that has been 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.
The benefits associated with one 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.
Excluding an hourly pension plan of MP Pumps, which was included with the sale
of the business, we expect to make contributions of $0.2 million to our pension
plans in 2008.
11. 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 June 30, 2008
and December 31, 2007 and excluded from our balance sheet were $70.4 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.
Page 15
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Changes in the carrying amount and accrued product warranty costs for the six
months ended June 30, 2008 and 2007 are summarized as follows:
Six Months Six Months
Ended June Ended June
(Dollars in millions) 30, 2008 30, 2007
---------- ----------
Balance at January 1 $ 9.7 $26.2
Settlements made (in cash or in kind) (3.0) (6.8)
Current year accrual 3.5 5.4
Adjustments to preexisting warranties (0.3) (1.7)
Effect of foreign currency translation 0.2 0.5
Reclassification to held for sale* -- (2.6)
Sale of MP Pumps (0.1) --
Other** -- (0.4)
----- -----
Balance at June 30 $10.0 $20.6
===== =====
* At June 30, 2007, balances for the Electrical Components business were
removed from our consolidated balance sheet and reclassified as held for
sale.
** At March 31, 2007, balances for TMT Motoco, our former Brazilian engine
manufacturing facility, were removed from our consolidated balance sheet.
At June 30, 2008, $9.0 million was included in current liabilities and $1.0
million was included in non-current liabilities.
12. Debt
On March 20, 2008, we terminated our previous $75 million First Lien Credit
Agreement and entered into a $50 million 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. As of June 30, 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 agreement, were expensed as interest cost upon
full repayment of the debt in the third quarter of 2007.
In addition to our North American credit agreement, we have various borrowing
arrangements at our foreign subsidiaries to support working capital needs and
government sponsored borrowings
Page 16
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
which provide advantageous lending rates. Our borrowings under these
arrangements totaled $69.5 million at June 30, 2008. Our weighted average
interest rate for all borrowings was 9.7% at June 30, 2008.
At June 30, 2008, we had outstanding letters of credit of $6.4 million and the
capacity for borrowings under the borrowing base formula of $34.3 million in the
U.S. and $98.5 million in foreign jurisdictions under our U.S. credit agreement.
13. Environmental Matters
We are involved in a number of environmental sites where we are either
responsible for or participating in a cleanup effort. We had accrued $3.0
million at both June 30, 2008 and December 31, 2007 for environmental
remediation. Although the majority of 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.
14. 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.
For the three and six month periods ended June 30, 2008, we reported loss from
continuing operations in U.S. jurisdictions, and income in discontinued
operations and other comprehensive income ("OCI"). 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 $0.4 million income tax benefit from continuing operations
for the three months ended June 30, 2008 and a $0.8 million income tax expense
from continuing operations for
Page 17
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
the six months ended June 30, 2008. The tax expense for the six month period
relates primarily to state and foreign income taxes. The foreign income tax
expense includes expense in several jurisdictions and a benefit for Brazilian
income taxes, which results from the allocation of taxes between the loss in
continuing operations and income in OCI.
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 June 30, 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.
15. Commitments and Contingencies
A nationwide class-action lawsuit filed against us and other defendants alleged
that the horsepower labels on the products the plaintiffs purchased, which
included products manufactured by our former Engine & Power Train business, were
inaccurate. The plaintiffs sought 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. In April of 2008, the court
issued a written opinion dismissing the complaint but subject to the ability to
re-plead certain claims. In July, 2008, the plaintiffs re-filed a class action
complaint in Illinois and have filed new class action complaints in federal
courts in New Jersey and California asserting claims on behalf of consumers in
each of those states with respect to lawnmower purchases from January 1, 1994 to
the present. 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.
The purchaser of our former Engine & Power Train business has sought a working
capital adjustment of $20.0 million. Both parties have engaged financial experts
and are exchanging information in the pre-arbitration phase of this matter. It
is not possible at this time to reasonably estimate the final amount of the
working capital adjustment, if any, 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.
Page 18
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
16. Impairments, Restructuring Charges, and Other Items
We recorded expense of $3.3 million and $3.8 million in impairments,
restructuring charges, or other items in the three and six months ended June 30,
2008, respectively. A summary of these charges (gains) is as follows:
Three Months Six Months
Ended Ended
(Dollars in millions) June 30, 2008 June 30, 2008
------------- -------------
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 3.3 5.9
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 $3.3 $ 3.8
==== ======
The expense of $3.3 million recorded in the three months ended June 30, 2008 was
as a result of severance and restructuring costs from previously announced
actions recognized at our North American ($1.6 million), European ($0.9 million)
and Brazilian ($0.8 million) locations during the quarter. For the six months
ended June 30, 2008, these restructuring costs amounted to $3.0 million, $0.9
million, and $2.0 million for North America, Europe, and Brazil respectively.
We recorded $1.7 million in impairments, restructuring charges, and other items
in the three and six months ended June 30, 2007. These charges related to
reductions in force executed during the second quarter of 2007 across several of
our business units.
17. 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.
Classification and Measurement of Redeemable Securities
On May 1, 2008, the SEC staff announced revisions to EITF Topic D-98,
"Classification and Measurement of Redeemable Securities" ("Topic D-98"). Among
other things, the revisions 1) clarified that the guidance applies to
noncontrolling interests, 2) outlined the SEC's views on the interaction between
Topic D-98 and SFAS 160, "Noncontrolling Interests in Consolidated Financial
Page 19
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Statements," and 3) clarified other provisions of Topic D-98. These revisions
are not expected to have an impact on our financial statements or results of
operations.
18. 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 authorizes two types of
incentive awards, 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 types of awards 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 June 30, 2008. The
phantom stock shares had 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 and a strike price of $28.82. 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%.
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. At June 30, the closing
stock price on our Class A common stock was $32.78. We measure the fair value of
each SAR, also on the last day of the quarter, using a Black-Scholes model, and
compare that result to the original calculated value of $15.61. At June 30, this
calculation yielded a value per SAR of $19.36.
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. The expense is based on the fair value of the
awards on the last day of the reporting period and represents an amortization of
that fair value over the three-year vesting period of the awards. Total
compensation expense related to the plan for the three and six months ended June
30, 2008 was $1.1 million and $1.5 million respectively. The balance of the fair
value that has not yet been recorded as expense is considered an unrecognized
liability. The total unrecognized liability as calculated at June 30, 2008 was
$11.8 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.
Page 20
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, our
former Brazilian engine facility, which was subject to a judicial
restructuring and is in the process of finalizing its liquidation). The
remaining portion of our Electrical Components business is included with assets
held for sale. We also completed the sale of MP Pumps, a business not associated
with any of our major business segments. 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 in 2007 were
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 June 30, 2008 the real strengthened by 25.5%.
Recent movement in the euro and the Indian rupee have also had an unfavorable
effect on our results of operations, strengthening 16.1% and 2.7% 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, some of which are denominated in
U.S. dollars and some in 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 2008. Due to competitive markets, we are typically not
able to quickly recover all of these cost increases through price increases or
other cost savings. From January 1, 2007 through June 30, 2008, the price of
copper increased by approximately
Page 21
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
36.5%. Steel prices have doubled over the same time frame, with the majority of
the increase (86.2%) occurring in the first half of 2008; we expect further
substantial increases in the second half of the year. While we have been
proactive in addressing the volatility of these costs, including executing
forward purchase contracts to cover in excess of 50% 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. The rapid increase of steel prices has a particularly
negative impact, as there is currently no well-established market for hedging
against increases in the cost of steel.
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 North American 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 generate
appropriate levels of liquidity via results of operations, 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 euro we expect that we will generate a limited amount of
cash from normal operations 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, although we have not drawn upon that line due
to our favorable liquidity position. 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. We anticipate that we
will continue to maintain our cash balances as an effective source of liquidity
given the condition of current credit markets, low levels of cash production
from normal operations and uncertain conditions regarding the overall global
economy. In addition, while our business dispositions have improved our
liquidity, many 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 believe we have
adequately provided for such contingent liabilities
Page 22
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
based on currently available information, 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 "Other Matters - Adequacy of Liquidity Sources,"
"Outlook," and "Cautionary Statements Relating To Forward-Looking Statements"
below.
Page 23
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 JUNE 30,
(dollars in millions) 2008 % 2007 %
------ ----- ------ -----
Net sales $273.8 100.0% $297.0 100.0%
Cost of sales 240.3 87.8% 261.4 88.0%
------ ------
Gross margin 33.5 12.2% 35.6 12.0%
Selling and administrative expenses 34.3 12.5% 34.8 11.7%
Impairments, restructuring charges, and other items 3.3 1.2% 1.7 0.6
------ ------
Operating loss (4.1) (1.5%) (0.9) (0.3%)
Interest expense (6.2) (2.3%) (10.8) (3.6%)
Interest income and other, net 3.3 1.2% 1.6 0.5%
------ ------
(Loss) income from continuing operations before taxes (7.0) (2.6%) (10.1) (3.4%)
Tax benefit (0.4) 0.2% (2.7) 0.9%
------ ------
Loss from continuing operations ($6.6) (2.4%) ($7.4) (2.5%)
====== ======
Three Months Ended June 30, 2008 vs. Three Months Ended June 30, 2007
Consolidated net sales from continuing operations in the second quarter of 2008
decreased to $273.8 million from $297.0 million in 2007. After consideration for
the effect of currency translation, which increased sales in U.S. dollars by
$27.8 million, sales declined by $51.0 million. Sales for refrigeration &
freezer applications declined by $25.9 million, associated primarily with a
downturn in market volumes as well as market share, most substantially in North
America and Europe. As was the case in the first quarter of 2008, 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. This decline was offset by a $2.7 million increase in sales of
compressors for air conditioning and commercial applications. For these
applications, price increases and currency effects more than offset declines in
unit volumes due to softer economic conditions, cooler weather in many of our
markets and lower shipments to customers in light of higher inventory balances.
Cost of sales was $240.3 million in the three months ended June 30, 2008, as
compared to $261.4 million in the three months ended June 30, 2007. As a
percentage of net sales, cost of sales was 87.8% and 88.0% in the second
quarters of 2008 and 2007, respectively. Although the gross margin as a
percentage of sales improved slightly over the same period of 2007, in dollar
terms it represented a decline of $2.1 million to 2008 operating profit when
compared to the same period of 2007, declining from $35.6 million in 2007 to
$33.5 million in 2008.
Current year margin was favorably impacted by selling price advances of $17.7
million. However, as discussed above, volumes declined substantially when
compared to the second quarter of 2007. These declines were partially offset by
an improved mix of higher-margin product, but the net impact of these factors
resulted in a decline of $13.9 million in 2008 when compared to 2007 results.
Gains in
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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
productivity, purchasing savings and other improvements of $10.5 million were
offset by the effects of a weakening U.S. dollar ($9.6 million) and higher
commodity costs ($6.8 million).
Selling, general and administrative ("SG&A") expenses were $34.3 million in the
three months ended June 30, 2008 as compared to $34.8 million in the three
months ended June 30, 2007. As a percentage of net sales, SG&A expenses were
12.5% and 11.7% in the second quarters of 2008 and 2007, respectively. Despite
expenditures of approximately $3.9 million in the second quarter of 2008 for
one-time professional fees, which included consulting services for strategic
planning and legal fees for corporate governance issues, we nonetheless achieved
a $3.8 million reduction in professional fees incurred for one-time projects
when compared to the second quarter of 2007. This improvement was offset by $3.3
million in increased administrative costs; this included $2.1 million in losses
recognized in our income statement for currency forward contracts undertaken at
our Indian facilities that are not afforded hedge accounting treatment, as the
rupee weakened against the U.S. dollar during the period. The remainder of the
increase in administrative cost was largely reflective of costs recognized in
continuing operations that were previously allocated to businesses that are now
discontinued operations.
We recorded expense of $3.3 million in impairments, restructuring charges, and
other items in the three months ended June 30, 2008. These expenses were as a
result of severance and restructuring costs from previously announced actions
recognized at our North American ($1.6 million) European ($0.9 million) and
Brazilian ($0.8 million) locations during the quarter. We recorded $1.7 million
in impairments, restructuring charges, and other items in the three months ended
June 30, 2007; these charges were the result of reductions in force at multiple
locations.
Interest expense amounted to $6.2 million in the second quarter of 2008 compared
to $10.8 million in the second quarter of 2007. The higher interest cost in 2007
was partly reflective of the $2.1 million in amortization of capitalized debt
amendment costs in the period. The remainder of the reduction in interest costs
in 2008 was largely due to the lower levels of discounted accounts receivable in
the current year. Interest income and other, net was $3.3 million in the second
quarter of 2008 compared to $1.6 million in the second 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 $0.4 million income tax benefit from
continuing operations for the second quarter of 2008 and a $2.7 million income
tax benefit from continuing operations for the second 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 June 30, 2008, we reported a loss from continuing operations in U.S.
jurisdictions, and net income in discontinued operations and other comprehensive
income ("OCI"). Pursuant to SFAS No. 109, Paragraph 140, we allocated income
taxes between continuing operations, discontinued operations and OCI.
In the U.S., Brazil, and India, we have substantial net operating losses
("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.
Since we pay taxes in various states there is also an expense recorded in the
U.S. that is related to state tax liabilities, including state tax expense that
is recorded in discontinued operations.
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As a result of the factors described above, net loss from continuing operations
in the second quarter of 2008 was $6.6 million ($0.36 per share basic and
diluted) as compared to net loss of $7.4 million ($0.40 per share basic and
diluted) in the second quarter of 2007.
SIX MONTHS ENDED JUNE 30,
(dollars in millions) 2008 % 2007 %
------ ----- ------ -----
Net sales $549.0 100.0% $586.3 100.0%
Cost of sales 469.9 85.6% 516.1 88.0%
------ ------
Gross margin 79.1 14.4% 70.2 12.0%
Selling and administrative expenses 65.9 12.0% 68.9 11.8%
Impairments, restructuring charges, and other items 3.8 0.7% 1.7 0.3%
------ ------
Operating profit (loss) 9.4 1.7% (0.4) (0.1%)
Interest expense (13.5) (2.5%) (16.6) (2.8%)
Interest income and other, net 5.1 0.9% 3.3 0.6%
------ ------
Income (loss) from continuing operations before taxes 1.0 0.1% (13.7) (2.3%)
Tax expense (benefit) 0.8 (0.1%) (3.3) 0.6%
------ ------
Income (loss) from continuing operations $ 0.2 ** ($10.4) (1.7%)
====== ======
** Less than 0.1%
Six Months Ended June 30, 2008 vs. Six Months Ended June 30, 2007
Consolidated net sales from continuing operations in the first two quarters of
2008 decreased to $549.0 million from $586.3 million in 2007. After
consideration for the effect of currency translation, which increased sales in
U.S. dollars by $60.3 million, compressor sales declined by $97.6 million. Sales
of compressors used in commercial applications increased by $17.4 million; these
increases were primarily the result of pricing advances and currency impacts.
These increases in sales were offset by dollar volume declines in sales of
compressors used in refrigeration & freezer applications of $46.4 million,
associated primarily with a downturn in market volumes as well as market share,
most substantially in North America and Europe. A portion of these declines in
market share were deliberate, where certain products or markets yielded
unacceptable profit margins, in many cases due to the declining value of other
currencies against the Brazilian real. Sales of compressors for air conditioning
applications and all other applications also declined by $8.3 million.
Cost of sales was $469.9 million in the six months ended June 30, 2008, as
compared to $516.1 million in the same period of 2007. As a percentage of net
sales, cost of sales was 85.6% and 88.0% in the first six months of 2008 and
2007, respectively. Although sales volumes have declined, gross margin
contributed an additional $8.9 million to 2008 year-to-date operating profit
when compared to the same period of 2007, improving from $70.2 million in 2007
to $79.1 million in 2008.
Current year margin was favorably impacted by selling price advances of $25.7
million. Gains in productivity, purchasing costs and other improvements of $15.7
million as well as gains on the sale of an airplane and our former airport
facility of $4.2 million were somewhat offset by increased expense for the
weakening of the U.S. dollar ($15.0 million) and higher commodity costs ($9.3
million). In addition, although an improved mix of higher-margin product
contributed favorably to 2008 year-to-date
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
results, this favorable mix was not sufficient to fully offset volume declines,
resulting in a net reduction to 2008 margin of $12.4 million.
Selling, general and administrative ("SG&A") expenses were $65.9 million in the
first two quarters of 2008 as compared to $68.9 million in the six months ended
June 30, 2007. As a percentage of net sales, SG&A expenses were 12.0% and 11.8%
in 2008 and 2007, respectively. While we incurred approximately $6.1 million in
2008 for one-time professional fees, which included consulting services for
strategic planning and legal fees for corporate governance issues, we
nonetheless achieved an $8.9 million reduction in professional fees incurred for
one-time projects when compared to 2007. This improvement was offset by $5.9
million in increased administrative costs, which included $2.0 million in losses
recognized in the Company's income statement for currency forward contracts
undertaken at our Indian facilities, as the rupee has weakened against the U.S.
dollar during 2008. The remainder of the increase in administrative cost is
primarily reflective of costs recognized in continuing operations that were
previously allocated to businesses that are now discontinued operations.
We recorded expense of $3.8 million in impairments, restructuring charges, and
other items in the six months ended June 30, 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 $5.9 million related to severance
costs for previously announced on-going restructuring activities at our North
American ($3.0 million) Brazilian ($2.0 million) and European ($0.9 million)
locations. 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 recorded $1.7 million in impairments,
restructuring charges, and other items in the six months ended June 30, 2007;
these charges were the result of reductions in force at multiple locations.
Interest expense amounted to $13.5 million through June 30, 2008 compared to
$16.6 million in the six months ended June 30, 2007. A portion of the 2008
expense was attributable to the amortization of $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. The
amortization of capitalized debt amendment costs accounted for interest expense
of $3.4 million in 2007. Aside from these factors, the lower levels of
discounted accounts receivable over the course of 2008 have contributed to the
reduction in interest costs.
Interest income and other, net was $5.1 million in the first six months of 2008
compared to $3.3 million in the same period of 2007. The increase was due to the
higher levels of cash and short-term investments held in 2008, primarily in the
second quarter.
Our results of operations reflect a $0.8 million income tax expense from
continuing operations for the six months ended June 30, 2008 and a $3.3 million
income tax benefit from continuing operations for the six months ended June 30,
2007. Income taxes are recorded pursuant to SFAS No. 109, "Accounting for Income
Taxes," and are applied on a jurisdiction by jurisdiction basis. Through June
30, 2008, we reported loss from continuing operations in U.S. jurisdictions, and
income in 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 tax expense for the six month
period ended June 30, 2008 related primarily to state and foreign income taxes.
The
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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
foreign income tax expense includes expense in several jurisdictions and a
benefit for Brazilian income taxes, which results from the allocation of taxes
between the loss in continuing operations and income in OCI. 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.
Since we pay taxes in various states there is also an expense recorded in the
U.S. that is related to state tax liabilities, including state tax expense that
is recorded in discontinued operations.
After considering the factors outlined above, net income from continuing
operations for the six months ended June 30, 2008 was $0.2 million ($0.01 per
share basic and diluted) as compared to net loss of $10.4 million ($0.56 per
share basic and diluted) for the same period of 2007.
OTHER MATTERS
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. For the remainder of 2008 and 2009, we also
expect the recovery of non-income taxes in Brazil to generate substantial
liquidity.
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 six months of 2008, cash provided by operations amounted to $79.7
million. The most significant elements of this increase in cash were the net
proceeds of $80.0 million realized from the reversion of our salaried retirement
plan and net income of $26.0 million. In contrast, accounts receivable increased
by $23.7 million from the beginning of the year. A portion of the increase was
the result of a reduction of $8.8 million in the amount of discounted
receivables across the two periods, which increased the net receivables recorded
on our balance sheet at June 30. The effects of currency exchange also increased
the balance by $4.3 million from the beginning of the year. The remainder of the
increase in the accounts receivables balance was reflective of the greater sales
volumes in June when compared to December. On the other hand, when evaluating
days to collection for outstanding receivables, there was an improvement of five
days to collection as of June 30, 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 52 at June 30 (before consideration for discounted accounts
receivable), due to a change in the composition of customer sales in outstanding
receivables.
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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
Inventories increased by $8.5 million since the beginning of the year. The
higher levels reflect an increase in days inventory on hand of seven days, which
was largely attributable to delayed shipping of product as a result of a strike
in the harbors in France. The increase was also due to currency exchange rate
impacts of approximately $6.4 million. Accounts payable and other accrued
expenses and liabilities also increased since December 31, 2007 (up $30.3
million). These increases were attributable 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 52
days at June 30, 2008 versus 64 days at June 30, 2007, before giving effect to
receivables sold. Compressor days inventory on hand were 63 days at June 30,
2008, up from 52 days at June 30, 2007, largely due to the French harbor strike,
inventory bank builds as we continue to consolidate manufacturing facilities,
and the effects of currency translation.
Cash provided by investing activities was $12.3 million in the first six months
of 2008 versus cash used in investing activities of $3.4 million for the same
period of 2007. $22.6 million in proceeds were received from the sale of assets
during 2008, while $2.0 million in proceeds were recorded in the first six
months of 2007. Asset sales in 2008 included MP Pumps for net initial cash
proceeds of $14.2 million ($14.6 million less up-front expenses of $0.4
million), an airplane for $3.4 million, our Dundee, Michigan facility for $1.6
million, our Shannon, Mississippi facility for $1.2 million, excess equipment
for $1.4 million, and our airport facility for $0.8 million.
Cash provided by financing activities was $0.9 million in the first six months
of 2008 as compared to cash used of $1.5 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 North American credit
agreement and foreign bank debt to fund our capital expenditures and working
capital requirements. For the six months ended June 30, 2008 and the full year
ended December 31, 2007, our average outstanding debt balance was $69.3 million
and $210.2 million, respectively. The weighted average long-term interest rate
was 9.7% and 8.9% at June 30, 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 minimum fixed charge ratio, which would apply only if liquidity, as defined by
the credit agreement, were to fall below a specified level. As of June 30, 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
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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
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 North American 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 $69.5 million at June 30, 2008.
At June 30, 2008, we had cash and short-term investments in North America of
approximately $111.4 million, outstanding letters of credit of $6.4 million and
the capacity for borrowings under the borrowing base formula of $34.3 million in
the U.S. and $98.5 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 $70.4 million and $79.2 million as of June
30, 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 North
American 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 North American debt prior to the sale of those 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 generate appropriate levels of liquidity from operations,
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 euro 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. 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, the principal issue in which is
the timing of a deduction. Given that the IRS is currently disputing the timing
of the deduction, the timing of the
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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
expected refund is uncertain. We continue to believe that we will prevail in
this matter and we have hired legal counsel to pursue this refund.
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 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 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 $35 to $45 million. The
timing of the distribution is dependent on the length of time needed to meet IRS
distribution requirements, and is currently expected to take place in 2009.
As part of addressing our 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.
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 $3.0 million at both June 30, 2008 and December 31, 2007 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.
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
Payments" ("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
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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 third and fourth quarters of 2008 is subject to many of the
same variables that negatively impacted us in the first two quarters 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 steel
and copper, continue to trade at elevated levels compared to recent history.
From January 1, 2007 through June 30, 2008, the spot price of copper increased
by approximately 36.5%; in the six months since the beginning of 2008 alone,
copper spot prices have increased by 28.5%. As of June 30, 2008, we held more
than 52% 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 June 30, 2008, aluminum costs had
risen by 32.5% when compared to January 1, 2008 and steel costs had risen by
86.2% since the beginning of this year and by 100.0% when compared to January 1,
2007. Increases in the price of steel are particularly detrimental to our
profitability, as there is currently no well-established market for hedging the
cost of steel. In the aggregate, and after consideration for the recent rapid
escalation in steel costs, we expect the total 2008 cost of our purchased
materials for the full year, including the impact of our hedging activities, to
be approximately $50 million more than the prior year, depending on commodity
cost levels in the second half of 2008. As a partial means of addressing the
escalating costs of commodities, we have implemented price increases which will
take effect during various times over the remainder of this year.
The Brazilian real and the euro continue to strengthen against the dollar, and
as of June 30, 2008 had strengthened 10.1% and 7.3% respectively since the
beginning of 2008, and 25.5% and 16.1% 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
began to see a slowdown when compared to prior quarters. This trend continued at
an accelerated pace in the second quarter of the year. 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 completed initiative to close one of
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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
our U.S. operating facilities located in Tecumseh, Michigan. The closure 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, although the we incurred approximately $6.1 million
through the first six months of 2008 for one-time professional fees, which
included consulting services for strategic planning and legal fees for corporate
governance issues, we nonetheless achieved a $8.9 million year to date reduction
in professional fees incurred for one-time projects when compared to 2007 We
expect this trend to continue, and currently estimate a reduction of $10.0
million in one-time professional fees in 2008 compared to 2007; however,
additional costs that we may need to incur for corporate governance issues could
detract from those savings. 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) increased or unexpected warranty claims; and xviii) the ongoing
financial health of major customers. These forward-looking statements are made
only as of the date of this report, and we undertake no obligation to update or
revise the forward-looking statements, whether as a result of new information,
future events or otherwise.
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to risk during the normal course of business from credit risk
associated with accounts receivable and from changes in interest rates,
commodity prices, and foreign currency exchange rates. The exposure to these
risks is managed through a combination of normal operating and financing
activities which include the use of derivative financial instruments in the form
of foreign currency forward exchange contracts and commodity forward purchasing
contracts. Fluctuations in commodity prices and foreign currency exchange rates
can be volatile, and our risk management activities do not totally eliminate
these risks. Consequently, these fluctuations can have a significant effect on
results. A discussion of our policies and procedures regarding the management of
market risk and the use of derivative financial instruments was provided in our
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 six 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, however,
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 June 30,
2008 and December 31, 2007, we held foreign currency forward contracts with a
total notional value of $237.7 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 June 30, 2008 and December 31, 2007, we held a
total notional value of $45.7 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. Given that copper prices increased by 28.5%
from January 1 to June 30 of 2008, the annualized impact to our operating profit
is approximately $30.4 million before consideration for commodity forward
purchases.
We are subject to interest rate risk, primarily associated with our borrowings
of $69.5 million at June 30, 2008. Our $50 million North American 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 June 30, 2008, a 1% increase in interest rates
would increase interest expense for the year by approximately $0.7 million.
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART 1. FINANCIAL INFORMATION - ITEM 4
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the reports that we file or submit under
the Securities Exchange Act of 1934 is recorded, processed, summarized, and
reported within the time periods specified in the SEC's rules and forms, and
that such information is accumulated and communicated to our management,
including our President and Chief Executive Officer and Vice President,
Treasurer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure.
As of the end of the fiscal quarter covered by this report, we carried out an
evaluation, under the supervision and with the participation of our Disclosure
Committee and management, including the President and Chief Executive Officer
and our Vice President, Treasurer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-15. Based upon such evaluation, our
President and Chief Executive Officer along with our Vice President, Treasurer
and Chief Financial Officer have concluded that our disclosure controls and
procedures were effective at the reasonable assurance level as of June 30, 2008.
Changes In Internal Control Over Financial Reporting
During the three months ended June 30, 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, including our 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.
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM1. LEGAL PROCEEDINGS
A nationwide class-action lawsuit filed against us and other defendants alleged
that the horsepower labels on the products the plaintiffs purchased, which
included products manufactured by our former Engine & Power Train business, were
inaccurate. The plaintiffs sought 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. In April of 2008, the court
issued a written opinion dismissing the complaint but subject to the ability to
re-plead certain claims. In July, 2008, the plaintiffs re-filed a class action
complaint in Illinois and have filed new class action complaints in federal
courts in New Jersey and California asserting claims on behalf of consumers in
each of those states with respect to lawnmower purchases from January 1, 1994 to
the present. 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.
On June 13, 2008, Herrick Foundation, the owner of 25% of our Class B shares,
sued Tecumseh Products Company in the Circuit Court for the County of Lenawee,
Michigan. The directors of Herrick Foundation are Kent B. Herrick, who is a
Tecumseh Products Company director, his father, Todd W. Herrick, and their
lawyer, Michael A. Indenbaum. The complaint alleges that the April 4, 2008
amendment to our bylaws, which increased the percentage of Class B shares
required to call a special meeting from 50% to 75%, violated Michigan law.
Herrick Foundation seeks to have the amendment set aside and also requests the
court to order a special meeting of shareholders for the purpose of removing Dr.
Peter Banks and Mr. David Risley from our board of directors. We filed a
counterclaim against Herrick Foundation alleging that Herrick Foundation's
actions violate the settlement agreed to by it and others to end litigation in
April 2007. The court refused to grant Herrick Foundation's request for a
preliminary injunction, and if the case is unresolved by an agreement between
the parties, the parties will proceed with discovery. We believe Herrick
Foundation's allegations are without merit and are defending vigorously against
them.
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
(a) Exhibit
Number Description
------- -----------
3.1 Amended and Restated Bylaws of Tecumseh Products Company as
amended through April 4, 2008 (incorporated by reference to
Exhibit 3.1 to registrant's Current Report on Form 8-K filed
April 8, 2008, File No. 0-452)
10.1 Stock purchase agreement between Tecumseh Products Company and
MP Pumps Acquisition Corp. dated as of June 30, 2008
(incorporated by reference to Exhibit 2 to registrant's Current
Report on Form 8-K filed July 7, 2008, File No. 0-452)
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.
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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: August 7, 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)
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