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EX-32.1 - EXHIBIT 32.1 - TECUMSEH PRODUCTS CO | c13891exv32w1.htm |
EX-31.1 - EXHIBIT 31.1 - TECUMSEH PRODUCTS CO | c13891exv31w1.htm |
EX-32.2 - EXHIBIT 32.2 - TECUMSEH PRODUCTS CO | c13891exv32w2.htm |
EX-23.1 - EXHIBIT 23.1 - TECUMSEH PRODUCTS CO | c13891exv23w1.htm |
EX-31.2 - EXHIBIT 31.2 - TECUMSEH PRODUCTS CO | c13891exv31w2.htm |
EX-10.7 - EXHIBIT 10.7 - TECUMSEH PRODUCTS CO | c13891exv10w7.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended December 31, 2010
Commission File Number 0-452
TECUMSEH PRODUCTS COMPANY
(Exact Name of Registrant as Specified in its Charter)
Michigan (State or other jurisdiction of incorporation or organization) |
38-1093240 (I.R.S. Employer Identification No.) |
|
1136 Oak Valley Drive, Ann Arbor, Michigan | 48108 | |
(Address of Principal Executive Offices) | (Zip Code) |
Registrants telephone number, including area code: (734) 585-9500
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered |
|
Class B Common Stock, $1.00 Par Value Class A Common Stock, $1.00 Par Value |
The Nasdaq Stock Market LLC The Nasdaq Stock Market LLC |
Securities Registered Pursuant to Section 12(g) of the Act:
None
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act.
Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.
Yes o No þ
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
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 o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if 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 o No þ
As of June 30, 2010, directors and executive officers of the Registrant and holders of more
than 10% of our Class B Common Stock held an aggregate of 6,700 shares of the Registrants Class A
Common Stock and 1,696,245 shares of its Class B Common Stock. The aggregate market value as of
June 30, 2010 (based on the closing prices of $11.12 per Class A share and $11.03 per Class B
share, as reported on the Nasdaq Stock Market on such date) of the 13,395,238 Class A shares and
3,381,501 Class B shares held by non-affiliates was $186,253,003.
Numbers of shares outstanding of each of the registrants classes of Common Stock at March 1, 2011:
Class B Common Stock, $1.00 Par Value: | 5,077,746 | |
Class A Common Stock, $1.00 Par Value: | 13,401,938 |
DOCUMENTS INCORPORATED BY REFERENCE
Certain information in the definitive proxy statement to be used in connection with the
registrants 2011 Annual Meeting of Shareholders scheduled to be held on April 27, 2011 has been
incorporated herein by reference in Part III hereof.
TABLE OF CONTENTS
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Table of Contents
PART I
ITEM 1. | BUSINESS |
General
Tecumseh Products Company (the Company) is a Michigan corporation organized in 1934. We are a
global manufacturer of hermetically sealed compressors for residential and specialty air
conditioning, household refrigerators and freezers and commercial refrigeration applications.
Our products include air conditioning and refrigeration compressors, as well as condensing units,
heat pumps and complete refrigeration systems. Products range from fractional horsepower
reciprocating compressors used in small refrigerators and dehumidifiers to large reciprocating,
rotary and scroll compressors used in commercial air conditioning and refrigeration systems. We
sell compressors for three primary applications: (i) commercial refrigeration, including walk-in
coolers and freezers, ice makers, dehumidifiers, water coolers, food service equipment and
refrigerated display cases and vending machines; (ii) household refrigerators and freezers; and
(iii) residential and specialty air conditioning and heat pumps, including window air conditioners,
packaged terminal air conditioners and recreational vehicle and mobile air conditioners.
Tecumsehs products are sold to original equipment manufacturers (OEMs) and authorized wholesale
distributors.
Foreign Operations and Sales
We maintain manufacturing plants in the United States (U.S.), Brazil, France, and India as well
as assembly plants in Canada, Mexico, Malaysia and a joint venture in China. In 2010, sales to
customers outside the United States represented approximately 82% of total sales.
Our dependence on sales, assembly and manufacturing in foreign countries entails certain commercial
and political risks, including currency fluctuations, unstable economic or political conditions in
some areas and the possibility of U.S. government embargoes on sales to certain countries. Our
foreign manufacturing operations are subject to other risks as well, including governmental
expropriation, governmental regulations that may be disadvantageous to businesses owned by foreign
nationals and instabilities in the workforce due to changing political and social conditions.
These considerations exist in all of our foreign countries, but are especially significant in the
context of our Brazilian operations, given the importance of Tecumseh do Brasils overall size and
performance in relation to our total operating results.
Compressor Product Lines
A compressor is a device that compresses a refrigerant gas. In applications that utilize
compressors, when the gas is later permitted to expand, it removes heat from the room or appliance
by absorbing and transferring it, producing a cooling effect. This technology forms the basis for a
wide variety of refrigeration and air conditioning products. All of the compressors we produce are
hermetically sealed. Our current compressor line consists primarily of reciprocating, rotary, and
scroll designs.
Our lines of compressors range in size from approximately 5,000 to 60,000 BTU/hour models used in
stationary and mobile air conditioning applications; from 145 to 1,100 BTU/hour models used in
household refrigerators and freezers; and 365 to 73,000 BTU/hour models for commercial
refrigeration applications, such as ice makers, vending machines, food service equipment, display
cases and refrigerated walk-in cold rooms.
We produce reciprocating compressors in the 365 to 73,000 BTU/hour for residential and commercial
refrigeration applications. We produce rotary compressors ranging from 2,200 to 35,000 BTU/hour
for residential and mobile air conditioning applications, as well as certain commercial
refrigeration applications. We produce scroll compressors ranging from 7,500 to 44,000 BTU/hour
that are designed specifically for demanding commercial refrigeration applications. Rotary and
scroll compressors generally provide increased operating efficiency, lower equipment space
requirements, and reduced sound levels when compared to reciprocating piston models. We also
produce variable speed compressors for a wide range of uses, including military, medical,
telecommunications, aircraft, transportation and automotive applications. These compressors use a
variety of refrigerants for different applications, including hydrocarbon refrigerants.
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Table of Contents
We also produce sub-assemblies and complete refrigeration systems that utilize our compressors as
components. Such products include indoor and outdoor condensing units, multi-cell units, and
complete refrigeration systems that use both single speed and variable speed AC/DC powered
compressors. These products are sold to both OEMs and authorized wholesale distributors.
Manufacturing and Assembly Operations
We manufacture our products from facilities located in the United States, Brazil, France and India.
We also have assembly plants located in Canada, Mexico, Malaysia and a joint venture located in
China. Our Brazilian compressor operations are the largest of our manufacturing sources. Brazilian
operations include two manufacturing facilities producing our broadest product offerings, with an
installed capacity of approximately 13.2 million compressors a year. Products produced in Brazil
are sold throughout the world. The general strengthening of the Brazilian Real since 2003,
continuing into 2010, has caused our compressor products to be more expensive, making us less
competitive. Brazilian exports were approximately 35%, 36%, and 48% of Brazilian production in
2010, 2009 and 2008, respectively.
We produce compressor products in North America in our Mississippi manufacturing facility and
assembly plants in Canada and Mexico. Over the past several years, we have reduced the number of
facilities operated in North America and moved some of our production to other countries because
(1) the products can be produced at lower cost in those countries, and (2) some of our customers
have relocated their operations to these countries. Installed capacity in Mississippi is
approximately 3.0 million compressors a year. We also manufacture electric motors, a component of
finished compressors, at a facility in Tennessee. In 2010, approximately 21% of the compressor
products produced in our North American operations were exported to foreign countries.
We operate three manufacturing facilities in France. As in North America, we have restructured
these operations, through consolidation into fewer facilities and by moving production to lower
cost countries. The facilities in France have aggregate capacity of 3.7 million units a year.
We operate two manufacturing facilities in India with a current total capacity of 5.0 million units
a year.
We produce a significant portion of our component needs internally; however we also make
concentrated purchases, particularly of raw materials, from a few suppliers. The principle raw
materials used in our manufacturing processes are steel and copper. In recent years, the
volatility of commodity prices and related components has impacted us and the industry in general.
We potentially mitigate the impact of higher commodity prices through a combination of price
increases, commodity hedging contracts, improved production efficiency and cost reduction
initiatives. We also partially mitigate volatility in the prices of these commodities by entering
into futures contracts and other types of derivative instruments as deemed necessary.
Our required raw materials and components are generally available in sufficient quantities from a
variety of non-affiliated suppliers. To the extent possible, we concentrate purchases with one to
two suppliers and develop long-term relationships with these vendors. By developing these
relationships, we leverage our material needs to help in reducing costs.
Sales and Marketing
We market our compressor and condensing unit products under the following brand names; Tecumseh,
LUnité Hermétique by Tecumseh, Masterflux by Tecumseh, Silensys by Tecumseh, Celseon and
Vector. We sell our products in over 105 countries primarily through our own sales staff as well
as independent sales representative and authorized wholesale distributors.
A substantial portion of our sales of compressor products for room air conditioners and for
household refrigerators and freezers are to OEMs. Sales of compressor products for unitary central
air conditioning systems and commercial refrigeration applications include substantial sales to
both OEM and distributor customers.
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The breakdown of sales by class of similar products for 2010, 2009 and 2008 is set forth in the
table below:
% of Total Sales Volume | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Commercial Refrigeration |
49 | % | 55 | % | 52 | % | ||||||
Residential Refrigerator and Freezer |
28 | % | 30 | % | 30 | % | ||||||
Residential and Specialty Air Conditioning |
23 | % | 15 | % | 18 | % | ||||||
Total |
100 | % | 100 | % | 100 | % | ||||||
We have over 1,500 customers for compressor and condensing units. The majority of our customers are
for commercial refrigeration products, while our customer base for household refrigeration and
freezer (R&F) applications is much more concentrated. In 2010, our largest customers, Whirlpool
Corporation and Electrolux, both of whom were R&F customers, accounted for 10.1% and 9.0%,
respectively of consolidated net sales. Loss of either of these customers could have a material
adverse effect on our results. Generally, we do not enter into long-term contracts with our
customers. However, we do pursue long-term agreements with selected major customers where a
business relationship has existed for a substantial period of time.
Competition
All of the compressor and condensing unit markets in which we operate are highly competitive. We
compete with other compressor producers, including manufacturers of end products and other
manufacturers that have internal compressor manufacturing operations. Most of these competitors
manufacture their products outside the United States in countries where customers are manufacturing
products that use compressors and where manufacturing costs are lower, including Asia and Eastern
Europe. Worldwide productive capacities exceed global demand, which has put downward pressure on
prices.
Participants compete on the basis of delivery, efficiency, sound level, price, reliability,
availability and service, as well as compliance with various global environmental and safety
standards and regulations. Due to the robustness of our compressors for specialty air conditioning
applications, they are particularly well suited for specialized, niche markets located in parts of
the Middle East and Asia. For most applications there are numerous competitors, some of which have
larger product lines and greater financial, technical, manufacturing, research and development and
management resources than we do. The household refrigerator and freezer market is vertically
integrated with many appliance producers manufacturing a substantial portion of their compressor
needs. In the United States and Europe specialty air conditioning compressor markets, we compete
primarily with two U.S. manufacturers, Copeland Corporation and Danfoss, Inc.
In Brazil, domestic compressor manufacturers have some protection from outside competition,
including import duties for compressors delivering up to 18,000 BTU/hour of cooling capacity. This
protection only pertains to components (e.g., compressors) and not equipment. We believe that we
and Whirlpool, S.A (selling compressors under the brand name Embraco) account for a majority of
the compressors sold in Latin America for refrigeration and freezer applications. However, our
market share in Brazil is slowly being reduced, as the strength of the Brazilian currency in recent
years has made foreign imports relatively cheap despite the presence of duties. As a result, Asian
manufacturers are beginning to capture additional share, including small shares of the market for
compressors for refrigeration and freezer applications, and importation of the end products
containing compressors, particularly in the room air conditioning market. In addition, our Latin
American sales are concentrated. In 2010, approximately 50% of the sales from our Brazilian
facilities were made to its three largest customers, and the loss of any of these customers would
have a significant impact on the results of operations of these facilities, and to a lesser extent,
on our consolidated results as a whole.
In East Asia and the Middle East, domestic compressor manufacturers also have some protection from
outside competition, including import duties. We have manufacturing facilities in India, where our
sales in this region are concentrated. We compete in this market primarily for compressors used in
air conditioning and household refrigerator applications. This region has not yet fully developed
a cold chain with temperature-controlled storage and distribution facilities. Our Indian sales are
concentrated because there are fewer end product manufacturers in India. Accordingly, in 2010,
approximately 53% of the sales from our Indian facilities into East Asian and Middle Eastern
markets were made to its three largest customers, and the loss of any of these customers would have
a significant impact on the results of operations of our Indian facilities, and to a lesser extent,
on our consolidated results as a whole.
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Regulatory Requirements
Hydrochlorofluorocarbon compounds (HCFCs) are still used as a refrigerant in many air
conditioning systems in some regions of the world. Under a 1992 international agreement, the use
of virgin HCFCs in new pre-charged equipment was banned beginning January 1, 2010 in the United
States. Some European countries began HCFC phase-outs as early as 1998, and some have fully
eliminated the use of HCFCs. Within the last several years, we have approved and released a number
of compressor models utilizing U.S. government approved hydrofluorocarbons (HFC) refrigerants.
HFCs are also currently under global scrutiny and subject to possible future restrictions. We
believe we are positioned to react in a timely manner to expected changes in the regulatory
landscape.
In the last few years, there has been an even greater political and consumer movement, toward the
use of hydrocarbons (HCs) and CO2 as alternative refrigerants, moving further away
from the use of chlorine (which depletes the ozone layer of the atmosphere) and the use of fluorine
(which contributes to the green-house effect). The most common HC refrigerants are isobutene and
propane. HCs are flammable compounds and are not approved for use as acceptable refrigerants by
the US Government. As part of the US Governments Significant New Alternatives Policy (SNAP), HC
refrigerants are being considered for approval in household refrigerator and freezers and,
self-contained commercial refrigeration applications. The proposed SNAP rulemaking limits the
charge size of Isobutene to a maximum of 57 grams (2 ounces) for household refrigerator and
freezers applications; and not to exceed a charge of 150 grams (5.3 ounces) of Propane for
self-contained commercial refrigeration applications. Tecumseh builds compressors in Europe,
Brazil and India utilizing Isobutene for sale into European, Latin American and Indian markets. We
are also supplying US customers for export market and some US trials of HC applications are
currently underway. In February 2011, we launched a New AE2 compressor to target best-in-class
HC performance. It is not presently possible to estimate the level of expenditures that will be
required to meet future industry requirements or the effect on our earnings or competitive
position. Nonetheless, we expect that our product development process will address these changes
in a timely manner.
The U.S. National Appliance Energy Conservation Act of 1987 (the NAECA) requires specified energy
efficiency ratings on room air conditioners and household refrigerators/freezers. The European,
Brazilian and Indian, as well as most of the world markets, manufacturing communities have issued
energy efficiency directives that specify the acceptable level of energy consumption for
refrigerators and freezers. These efficiency ratings apply to the overall performance of the
specific appliance, of which the compressor is one component. We have ongoing projects aimed at
improving the efficiency levels of our compressor products and have products available to meet
known energy efficiency requirements as determined by our customers.
Geographic Location Information
The results of operations and other financial information by geographic location for each of the
years ended December 31, 2010, 2009, and 2008 appear under the caption Business Segment
Information in Note 17 of the Notes to the Consolidated Financial Statements which appear in Part
II, Item 8, of this report, Financial Statements and Supplementary Data, and that information is
incorporated by reference into this Item 1.
Backlog and Seasonal Variations
Most of our production is against short-term purchase orders and order backlog is not significant.
Compressor products are subject to some seasonal variation among individual product lines. In
particular, sales for compressor products are higher in the first and second quarters (for customer
needs prior to the commencement of warmer weather in the northern hemisphere, for both residential
air conditioning products and commercial refrigeration applications). This seasonal effect is
somewhat, though not completely, offset by sales volumes in the southern hemisphere. Depending on
relative performance among the groups, and external factors such as foreign currency changes and
global weather, trends can vary. In the past three years, consolidated sales in the aggregate have
not exhibited any pronounced seasonal trend.
Patents, Licenses and Trademarks
We own a substantial number of patents, licenses and trademarks and deem them to be important to
certain lines of our business; however, the success of our overall business is not considered
primarily dependent on them. In the conduct of our business, we own and use a variety of
registered trademarks, the most familiar of which is the trademark consisting of the word
Tecumseh in combination with a Native American silhouette.
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Research and Development
The ability to successfully bring new products to market in a timely manner has rapidly become a
critical factor in competing in the compressor products business as a result of, among other
things, the imposition of energy efficiency standards and environmental regulations including those
related to refrigerant requirements as discussed above. We must continually develop new and
improved products in order to compete effectively and to meet evolving regulatory standards in all
of our major product lines. In 2009, we began shifting our research personnel from high cost
countries to low cost countries which has resulted in higher productivity of dollars spent. We
spent approximately $18.6 million, $17.7 million, and $20.4 million during 2010, 2009, and 2008,
respectively, on research activities relating to the development of new products and the
development of improvements to existing products.
Employees
On February 25, 2011, we employed approximately 8,600 persons, 90% of whom were employed in foreign
locations. While none of our U.S. employees were represented by labor unions, the majority of
foreign location personnel are represented by national trade unions. Over the course of the past
few years, we have focused on reducing our global workforce as part of our overall efforts to
restructure the business and improve our overall cost structure. We believe we generally have a
good relationship with our employees.
Available Information
We provide public access to our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K, and amendments to these reports filed with or furnished to the Securities and
Exchange Commission (SEC) under the Securities Exchange Act of 1934. These documents may be
accessed free of charge through our website at the following address:
http://www.tecumseh.com/investor-relations. These documents are provided as soon as reasonably
practicable after filing with, or furnishing to, the SEC, although not generally on the same day.
These documents may also be found at the SEC website at http://www.sec.gov.
ITEM 1A. | RISK FACTORS |
Set forth below and elsewhere in this Annual Report on Form 10-K are material risks and
uncertainties that could cause our actual business results to differ materially from any
forward-looking statements contained in this Report. These risk factors should be considered in
addition to our cautionary comments concerning forward-looking statements in this Report, including
statements related to markets for our products and trends in our business that involve a number of
risks and uncertainties. Our separate section in Item 7 below, Cautionary Statements Relating To
Forward-Looking Statements, should be considered in addition to the following statements.
Price volatility for commodities we purchase could have an adverse effect on our cash flow or
results of operations. |
One of the most significant cost and cash flow impacts on our business has been the price of raw
materials, such as steel, copper and aluminum. The prices of these commodities have remained
extremely volatile over the past few years and due to competitive markets, we are typically not
able to quickly recover product cost increases through price increases or other cost savings.
While we have been proactive in addressing volatility of these costs by using derivatives to hedge
price risk associated with forecasted purchase of certain raw materials, our hedged price could
result in our paying higher or lower prices for commodities as compared to the market prices for
those commodities when purchased and will not protect us against longer term price increases.
Decreases in spot prices below our hedged prices can put us at a competitive disadvantage compared
to less hedged competitors and can also require us to post cash collateral with our hedge
counterparties, which could impact our liquidity and cash flows. At December 31, 2010, we were
required to post $0.6 million of cash collateral on our hedges. In addition, increases in steel
prices have a particularly negative impact as there is currently no well-established global market
for hedging against increases in the cost of steel. These actions might not be successful to
manage our costs or increase our productivity. Continued volatility of commodities or failure of
our initiatives to generate cost savings or improve productivity may negatively impact our results
of operations. See Item 7-Managements Discussion and Analysis of Financial Condition and
Results of Operations Executive Summary Commodities and Outlook and Item
7A-Quantitative and Qualitative Disclosures about Market Risk-Commodity Price Risk for a
description raw material price volatility and description of our hedging activity.
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Significant supply interruptions could have an adverse effect on our cash flow or results of
operations.
We generally concentrate purchases for a given raw material or component with a small number of
suppliers. Although we believe there are alternative suppliers for all of our key raw material and
components needs, if a supplier is unable or unwilling to meet our supply requirements, we could
experience supply interruptions or cost increases, either of which could have an adverse effect on
our results of operations.
Our international operations subject us to risks associated with foreign currency
fluctuations. |
We are exposed to significant exchange rate risk because the majority of our revenues, expenses,
assets and liabilities are derived from operations conducted outside the U.S. in local and other
currencies and, for purposes of financial reporting, the results are translated into U.S. dollars
based on currency exchange rates prevailing during or at the end of the reporting period. During
times of a strengthening U.S. dollar, our reported net revenues and net income (loss) and assets
are reduced because the local currency will translate into fewer U.S. dollars, and during times of
a weakening U.S. dollar, our reported expenses and liabilities are increased because the local
currency will translate into more U.S. dollars. During periods of local economic crises non-U.S.
currencies may be devalued significantly against the U.S. dollar, thereby reducing our reported
revenues, income (loss) and assets. Because of the geographic diversity of our operations,
weaknesses in some currencies might be offset by strengths in others over time. However,
fluctuations in foreign currency exchange rates, particularly the strengthening of the U.S. dollar
against major currencies could materially affect our financial results.
We are also exposed to significant exchange rate risk when an operation has sales or expense
transactions in a currency that differs from its local, functional currency or when the sales and
expenses are denominated in different currencies. Since our primary risk stems from sales
transacted at foreign locations that have the resulting receivable denominated in U.S. dollars,
this risk affects our business adversely when the Real, Euro or Rupee strengthens against the
dollar, which has been the case for the last several years for the Real. In those cases, when the
receivable is ultimately paid in less valuable dollars, the foreign location realizes less net
revenue in its local currency, which can adversely impact its margins. We have developed
strategies to mitigate or partially offset these impacts, primarily hedging against transactional
exposure where the risk of loss is greatest. While the use of currency hedging instruments may
provide us with short-term protection from adverse fluctuations in currency exchange rates, by
utilizing these instruments we potentially forego the benefits that might result from favorable
fluctuations in currency exchange rates.
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. See Item 7-Managements Discussion and Analysis of Financial Condition and Results of
Operations Executive Summary Currency Exchange and Outlook and Item 7A-Quantitative and
Qualitative Disclosures about Market Risk-Foreign Currency Exchange Risk for a description foreign
currency volatility and description of our hedging activity.
Our international operations subject us to risks associated changes in local government
regulations.
Our international sales and operations, including our purchases of raw materials from international
suppliers, are subject to risks associated with changes in local government laws, regulations and
policies, including those related to tariffs and trade barriers, investments, taxation, exchange
controls, employment regulations, 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. Our international sales and operations are also
sensitive to changes in foreign national priorities, including government budgets, as well as to
political and economic instability. International transactions may involve increased financial and
legal risks due to differing legal systems and customs in foreign countries. The ability to manage
these risks could be difficult and may limit our operations and make the manufacture and sale of
our products internationally more difficult, which could negatively affect our business and results
of operations. See Item 7-Managements Discussion and Analysis of Financial Condition and Results
of Operations Executive Summary Liquidity and Liquidity Sources-Cash inflows related to
taxes for a description of our outstanding refundable non-income taxes in Brazil.
We also face risks arising from the imposition of exchange controls and currency devaluations.
Exchange controls may limit our ability to convert foreign currencies into U.S. dollars or to remit
dividends and other payments by our foreign subsidiaries or businesses located in or conducted
within a country imposing controls. Currency devaluations result in a diminished value of funds
denominated in the currency of the country instituting the devaluation. Actions of this nature, if
they occur or continue for significant periods of time, could have an adverse effect on our results
of operations and financial condition in any given period.
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We operate in highly competitive markets. |
All of the compressor and condensing unit markets in which we operate are highly competitive. We
compete on the basis of delivery, efficiency, sound level, price, reliability, availability and
service, as well as compliance with various global environmental standards and regulations. For
most applications there are numerous competitors, some of which have larger product lines and
greater financial, technical, manufacturing, research and development and management resources than
we do. If our products do not meet or exceed the attributes of our competitors offerings, we
could be at a disadvantage in the affected product lines. These and other factors might have a
material adverse effect on our results of operations.
In particular, we operate in environments where worldwide productive capacities exceed global
demand and customers and competitors are establishing new productive capacities in low cost
countries. These trends may put downward pressure on prices and reduce our margins. These trends
may also result in the need for us to restructure our operations further by removing excess
capacities, lowering our cost of purchased inputs and shifting productive capacities to low cost
countries in order to improve our overall cost structure, restore margins and improve our
competitive position in our major markets. There is no guarantee that these initiatives, which
have included plant closures, headcount reductions and expanded operations in low cost countries,
will be successful in setting the stage for improvement in profitability in the future.
Current and future global economic conditions could have an adverse effect on our sales
volumes, liquidity and profitability. |
The global recession, precipitated by the financial crisis, had a detrimental effect on our sales
volumes during 2009 and to a lesser extent in 2010. Given that the slowdown in economic activity,
including housing starts, has affected all of the geographic regions where we sell our products
with nearly equal severity, the impact on our financial results in these periods has been
significant.
Beginning in the latter part of 2009, while our results began to benefit from improved economic
activity, we continued to focus on overall cost containment as the depth and extent of the global
economic conditions could not be forecasted with certainty and any further declines would have an
adverse effect on our financial condition and results of operation.
We may not maintain our current level of liquidity.
With the proceeds of divestitures of our former engine and power train and electrical components
business operations, we eliminated all our North American debt, and accumulated substantial net
cash on our balance sheet. In addition, our pension plan reversion in 2010 was a significant
source of cash to the company. This cash balance has become increasingly important in light of
constrained capital markets and the current economic environment. However, we may not be able to
maintain our current levels of liquidity. We have incurred significant net losses and operating
losses in each of the last three years and used significant cash in operations in 2010. Challenges
remain with respect to our ability to generate appropriate levels of liquidity solely from cash
flows from operations, particularly challenges related to global economic conditions, currency
exchange effects and commodity pricing. We may not be able to generate cash from operations unless
further restructuring activities are implemented and/or economic conditions improve. While we
believe that current cash balances combined with available borrowings will produce adequate
liquidity to implement our business strategy over at least the next twelve months, there can be no
assurance that such improvements will ultimately be adequate if economic conditions deteriorate.
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. See Item 3
Legal Proceedings Platinum for a description of a lawsuit by the buyer of our gas-powered
engine subsidiary. Future events could result in the recognition of additional liabilities that
could consume available liquidity and management attention.
Our results of operations may be negatively impacted by litigation. |
Our business exposes us to potential litigation, such as product liability suits that are inherent
in the design, manufacture, and sale of our products. We are also potentially exposed to
litigation related to prior sales of businesses, securities law or other types of business
disputes. These claims can be expensive to defend and can divert the attention of management and
other personnel for significant periods of time, regardless of the ultimate outcome.
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As we self-insure a portion of product liability claims, an unsuccessful defense of a product
liability claim or series of successful claims could materially and adversely affect our product
reputation and our financial condition, results of operations, and cash flows. Even if we are
successful in defending against a claim relating to our products, claims of this nature could cause
our customers to lose confidence in our products and our company.
Given the inherent uncertainty of litigation, we cannot be certain that existing litigation or any
future adverse legal developments will not have a material adverse impact on our financial
condition. See Item 3-Legal Proceedings for a description of our legal matters.
Our operations and products are subject to extensive environmental laws and energy
regulations. |
Our manufacturing operations are subject to increasingly stringent environmental laws and
regulations in all of the countries in which we operate, including laws and regulations governing
emissions to air, discharges to water and the generation, handling, storage, transportation,
treatment and disposal of waste materials. These regulations can vary widely across the countries
in which we do business. While we believe that we are in compliance in all material respects with
these environmental laws and regulations, we could still be adversely impacted by costs,
liabilities or claims with respect to existing, previously divested, or subsequently acquired
operations, under either present laws and regulations or those that may be adopted or imposed in
the future. We are also subject to laws requiring the cleanup of contaminated property. If a
release of hazardous substances occurs at or from any of our current or former properties or at a
landfill or another location where we have disposed of hazardous materials, we may be held liable
for the contamination and the amount of such liability could be material. See Item 8 Financial
Statements and Supplemental Data Note 16 of Notes to Consolidated Financial Statements for a
description of our environmental matters.
In addition, governmental regulations affect the types of refrigerants that may be utilized in our
products, and this global scrutiny continues to evolve over time. We have continued to address
these changes in regulation by approving and releasing new models that meet governmental and
consumer requirements. We also strive to have our products meet requirements for energy
efficiency, which can vary substantially in the different geographic markets in which we sell our
products. Future legislation may require substantial levels of expenditure to meet industry
requirements, which could have a material adverse effect on our business, results of operations and
financial condition.
Increased or unexpected product warranty claims could adversely affect us. |
We provide our customers a warranty on products we manufacture. Our warranty generally provides
that products will be free from defects for periods ranging from 12 months to 36 months. If a
product fails to comply with the warranty, we may be obligated, at our expense, to correct any
defect by repairing or replacing the defective product. Although we maintain warranty reserves in
an amount based primarily on the number of units shipped and on historical and anticipated warranty
claims, future warranty claims might not follow historical patterns or we might not accurately
anticipate the level of future warranty claims. An increase in the rate of warranty claims or the
occurrence of unexpected warranty claims could materially and adversely affect our financial
condition, results of operations and cash flows.
We may be adversely impacted by work stoppages and other labor matters. |
As of December 31, 2010, we employed approximately 8,000 persons worldwide. The majority of people
we employ in foreign locations, approximately 7,200, are represented by national trade unions.
While we do not believe that we will be impacted by work stoppages and other labor matters, future
issues with our labor unions might not be resolved favorably and we might encounter future strikes,
further unionization efforts or other types of conflicts with labor unions or our employees. Any
of these factors may have an adverse effect on us or may limit our flexibility in dealing with our
workforce. In addition, many of our customers have unionized work forces. Work stoppages or
slow-downs experienced by our customers could result in slow-downs or closures at their plants
where our products are installed. If one or more of our customers experience a material work
stoppage, it could have a material adverse effect on our business, results of operations and
financial condition.
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ITEM 2. | PROPERTIES |
Our headquarters are located in the United States of America in Ann Arbor, Michigan, approximately
40 miles west of Detroit. At December 31, 2010 we had 24 properties in the United States, Canada,
Mexico, France, Brazil, India, Malaysia and China occupying approximately 5.1 million square feet
(0.5 million idled) with the majority, approximately 3.8 million square feet, devoted to
manufacturing and assembly. Fourteen facilities with approximately 3.6 million square feet were
located in seven countries outside the United States. Manufacturing and assembly facility
utilization varies during the year depending on the production cycle. All owned and leased
properties are adequate and suitable, well maintained and equipped for the purposes for which they
are used. Management believes we have sufficient manufacturing capacity for fiscal 2011 and
beyond. The schedule below outlines our significant facilities by location, ownership and function
as of December 31, 2010.
Square | ||||||||
Location | Feet | Ownership | Use | |||||
United States: |
||||||||
Verona, Mississippi (Tupelo Division) |
530,000 | Leased | Manufacturing | |||||
Verona, Mississippi (Tupelo Warehouse 1) |
70,200 | Leased | Distribution | |||||
Verona, Mississippi (Tupelo Warehouse 2) |
100,000 | Leased | Distribution | |||||
Paris, Tennessee |
190,000 | Owned | Manufacturing | |||||
Emerson Building, Tecumseh, MI |
26,343 | Owned | Storage | |||||
Grafton, Wisconsin |
343,484 | Owned | Idle | |||||
Toledo, Ohio (Acklin Building) |
150,000 | Owned | Idle | |||||
Ann Arbor, MI Corporate Office |
32,400 | Leased | Office | |||||
Ann Arbor, MI Building |
49,500 | Owned | Technical Center | |||||
Brazil: |
||||||||
Sao Carlos, Brazil Plant 1 |
431,905 | Owned | Manufacturing | |||||
Sao Carlos, Brazil Plant 2 |
1,001,249 | Owned | Manufacturing | |||||
France: |
||||||||
Cessieu, France |
316,925 | Owned | Manufacturing | |||||
Barentin, France |
312,363 | Owned | Manufacturing | |||||
La Mure, France |
114,379 | Owned | Manufacturing | |||||
La Verpilliere, France |
341,415 | Owned | Technical Center | |||||
Vaulx Milieu, France |
167,766 | Leased | Office and Distribution | |||||
Canada: |
||||||||
London, Ontario, Canada |
8,282 | Leased | Office | |||||
Aylmer, Ontario, Canada |
77,700 | Owned | Assembly | |||||
India: |
||||||||
Hyderabad, India |
374,802 | Owned | Manufacturing | |||||
Ballabgarh, India |
310,000 | Owned | Manufacturing | |||||
Mexico: |
||||||||
Monterrey, Mexico |
50,000 | Leased | Assembly | |||||
China: |
||||||||
Song Jiang Joint Venture |
72,000 | Leased | Assembly | |||||
Shanghai |
2,793 | Leased | Office | |||||
Malaysia: |
||||||||
Port Klang, Malaysia |
53,792 | Leased | Assembly |
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ITEM 3. | LEGAL PROCEEDINGS |
See
Note 16 Commitments and Contingencies Litigation of the Notes to Financial Statements
(Part II, Item 8 of this Form 10-K) for information regarding legal proceedings in which we are
involved, which is incorporated into this Item 3 by reference.
ITEM 4. | [RESERVED] |
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PART II
ITEM 5. | MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES |
Our Class A and Class B common stock trade on The Nasdaq Stock Market LLC under the symbols TECUA
and TECUB, respectively. Total shareholders of record as of March 1, 2011 were approximately 250
for Class A Common Stock and 256 for Class B common stock. As of March 1, 2011, the closing price
per share of our Class A Common Stock was $11.63 and the closing price per share of our Class B
Common Stock was $11.72. We have no current expectation to pay dividends. As of the date of this
report, we have no equity securities authorized for issuance under compensation plans. We did not
repurchase any of our equity securities during the fourth quarter of 2010.
Market Price and Dividend Information
Range of Common Stock Prices and Dividends for 2010
Sales Price | Cash | |||||||||||||||||||
Class A | Class B | Dividends | ||||||||||||||||||
Quarter Ended | High | Low | High | Low | Declared | |||||||||||||||
March 31 |
$ | 14.00 | $ | 10.43 | $ | 13.16 | $ | 10.31 | $ | | ||||||||||
June 30 |
15.55 | 10.88 | 14.30 | 10.82 | | |||||||||||||||
September 30 |
14.21 | 10.47 | 13.05 | 10.10 | | |||||||||||||||
December 31 |
14.06 | 11.26 | 14.20 | 11.10 | |
Range of Common Stock Prices and Dividends for 2009
Sales Price | Cash | |||||||||||||||||||
Class A | Class B | Dividends | ||||||||||||||||||
Quarter Ended | High | Low | High | Low | Declared | |||||||||||||||
March 31 |
$ | 11.39 | $ | 3.00 | $ | 13.60 | $ | 3.70 | $ | | ||||||||||
June 30 |
12.74 | 4.25 | 13.87 | 4.82 | | |||||||||||||||
September 30 |
13.68 | 7.85 | 13.45 | 8.71 | | |||||||||||||||
December 31 |
13.32 | 9.94 | 13.10 | 10.06 | |
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Stock Performance Graph
The following graph and table depict the cumulative total shareholder return (assuming reinvestment
of dividends) on $100 invested in each of Tecumseh common stock, S&P 500 Index, and the S&P
Composite Industry Index for the five year period from December 31, 2005 through December 31, 2010.
Base | INDEXED RETURNS | |||||||||||||||||||||||
Period | Years Ending | |||||||||||||||||||||||
Company / Index | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | ||||||||||||||||||
Tecumseh Products Company |
100 | 83.21 | 98.75 | 47.87 | 58.15 | 65.41 | ||||||||||||||||||
S&P 500 Index |
100 | 115.79 | 122.16 | 76.96 | 97.33 | 111.99 | ||||||||||||||||||
S&P Composite Industry Index |
100 | 110.24 | 121.70 | 76.22 | 111.88 | 145.84 |
* | Class B stock used in calculation of returns |
|
** | S&P Composite Industry Index comprises the S&P Household Appliances Index (50%), the S&P
Industrial Machinery Index (25%) and the S&P Electrical Components and Equipment Index (25%). |
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ITEM 6. | SELECTED FINANCIAL DATA |
The following is a summary of certain of our financial information. Prior year results from 2006
through 2008 related to the Consolidated Statements of Operations have been restated to reflect the
reclassification of the Electrical Components Group (with the exception of the Paris, Tennessee
operations), the Engine & Power Train Group, MP Pumps, and Manufacturing Data Systems, Inc. as
discontinued operations.
Years Ended December 31, | ||||||||||||||||||||
(In millions, except share and per share data) | 2010 | 2009 | 2008(a) | 2007(a) | 2006(a) | |||||||||||||||
Net sales |
$ | 933.8 | $ | 735.9 | $ | 996.4 | $ | 1,136.1 | $ | 1,024.5 | ||||||||||
Cost of sales and operating expenses |
835.2 | 680.2 | 891.3 | 994.0 | 925.4 | |||||||||||||||
Gross Profit |
98.6 | 55.7 | 105.1 | 142.1 | 99.1 | |||||||||||||||
Selling and administrative expenses |
114.1 | 125.2 | 129.6 | 131.8 | 125.1 | |||||||||||||||
Impairments, restructuring charges, and other items |
50.3 | 24.4 | 43.8 | 7.4 | 2.4 | |||||||||||||||
Operating (loss) income |
(65.8 | ) | (93.9 | ) | (68.3 | ) | 2.9 | (28.4 | ) | |||||||||||
Interest expense |
(10.6 | ) | (10.8 | ) | (24.4 | ) | (22.3 | ) | (19.4 | ) | ||||||||||
Interest income and other, net |
1.2 | 2.3 | 9.7 | 6.2 | 10.9 | |||||||||||||||
Loss from continuing operations before taxes |
(75.2 | ) | (102.4 | ) | (83.0 | ) | (13.2 | ) | (36.9 | ) | ||||||||||
Tax (benefit) provision |
(16.6 | ) | (10.6 | ) | (5.0 | ) | (8.2 | ) | 12.3 | |||||||||||
Net loss from continuing operations |
(58.6 | ) | (91.8 | ) | (78.0 | ) | (5.0 | ) | (49.2 | ) | ||||||||||
Income (loss) from discontinued operations, net of tax |
1.8 | (1.6 | ) | 27.5 | (173.1 | ) | (31.1 | ) | ||||||||||||
Net loss |
$ | (56.8 | ) | $ | (93.4 | ) | $ | (50.5 | ) | $ | (178.1 | ) | $ | (80.3 | ) | |||||
Basic and diluted income (loss) per share (b): |
||||||||||||||||||||
Loss from continuing operations |
$ | (3.17 | ) | $ | (4.97 | ) | $ | (4.22 | ) | $ | (0.27 | ) | $ | (2.66 | ) | |||||
Income (loss) from discontinued operations, net of tax |
0.10 | (0.09 | ) | 1.49 | (9.37 | ) | (1.68 | ) | ||||||||||||
Net loss per share |
$ | (3.07 | ) | $ | (5.06 | ) | $ | (2.73 | ) | $ | (9.64 | ) | $ | (4.35 | ) | |||||
Cash dividends declared per share |
| | | | | |||||||||||||||
Weighted average shares, basic and diluted (in thousands) |
18,480 | 18,480 | 18,480 | 18,480 | 18,480 | |||||||||||||||
Cash and cash equivalents |
$ | 65.9 | $ | 90.7 | $ | 113.1 | $ | 77.0 | $ | 82.0 | ||||||||||
Working capital |
185.2 | 149.8 | 164.0 | 145.1 | 241.4 | |||||||||||||||
Net property, plant and equipment |
234.9 | 259.7 | 253.7 | 362.6 | 562.9 | |||||||||||||||
Total assets |
761.8 | 767.1 | 798.5 | 1,193.3 | 1,811.6 | |||||||||||||||
Long-term debt |
13.2 | 8.0 | 0.4 | 3.3 | 217.3 | |||||||||||||||
Stockholders equity |
434.9 | 463.4 | 477.4 | 742.6 | 794.6 | |||||||||||||||
Capital expenditures |
9.2 | 7.9 | 8.0 | 4.2 | 62.7 | |||||||||||||||
Depreciation and amortization |
40.4 | 45.2 | 42.5 | 55.5 | 81.8 |
(a) | Adjusted from amounts reported in prior periods to reclassify our Paris, Tennessee operations
from discontinued operations to continuing operations to conform to current year consolidated
statements of operations presentation. The reclassification has the effect on income (loss) from
continuing operations, net of tax, of $1.9 million, $1.0 million, and $1.6 million for the years
ended December 31, 2008, 2007, and 2006, respectively. |
|
(b) | In 2007, we issued a warrant to a lender to purchase 1,390,944 shares of our Class A Common
Stock, which is equivalent to 7% of our fully diluted common stock (including both Class A and
Class B shares). This warrant is not included in diluted earnings per share for the years ended
December 31, 2010, 2009, 2008 and 2007, as the effect would be antidilutive. |
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ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Cautionary Statements Relating To Forward Looking Statements
The following information should be read in connection with the information contained in the
Consolidated Financial Statements and Notes to Consolidated Financial Statements.
This 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. Our forward-looking statements
generally relate to our future performance, including our anticipated operating results and
liquidity sources and requirements, our business strategies and goals, and the effect of laws,
rules, regulations, and new accounting pronouncements and outstanding litigation, on our business,
operating results, and financial condition.
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) availability and volatility in
the cost of materials, particularly commodities, including steel and copper, whose cost can be
subject to significant variation; ii) financial market changes, including fluctuations in foreign
currency exchange rates and interest rates; iii) local governmental, environmental and energy
regulations; iv) actions of competitors in highly competitive markets with intense competition; v)
current and future global economic conditions, including housing starts, and the condition of
credit markets, which may magnify other risk factors; vi) potential political and economic
adversities that could adversely affect anticipated sales and production in Brazil; vii) potential
political and economic adversities that could adversely affect anticipated sales and production in
India, including potential military conflict with neighboring countries; viii) our ability to
maintain adequate liquidity in total and within each foreign operation; ix) the ultimate cost of
defending and resolving legal and environmental matters, including any liabilities resulting from
the regulatory antitrust investigations commenced by the United States Department of Justice
Antitrust Division, the Secretariat of Economic Law of the Ministry of Justice of Brazil or the
European Commission, any of which could preclude commercialization of products or adversely affect
profitability and/or civil litigation related to such investigations; x) increased or unexpected
warranty claims; xi) the extent of any business disruption caused by work stoppages initiated by
organized labor unions; 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 success of
our ongoing effort to bring costs in line with projected production levels and product mix; xv)
weather conditions affecting demand for replacement products; xvi) the effect of terrorist activity
and armed conflict. See Risk Factors in Item 1A of this report. These forward-looking
statements are made only as of the date of this report, and we undertake no obligation to update or
revise the forward-looking statements, whether as a result of new information, future events or
otherwise.
EXECUTIVE SUMMARY
Until 2007, our business was focused upon three businesses: hermetically sealed compressors, small
gasoline engine and power train products, and electrical components. Over the course of 2007 and
2008, we successfully executed a strategy to divest operations that we did not consider to be core
to our ongoing business strategy. As part of that strategy, 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, which recently completed
a judicial restructuring and is in the process of finalizing its liquidation). 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 and
compressor-related condensing unit business.
In addition to the relative competitiveness of our products, our business is significantly
influenced by several specific economic factors: the strength of the overall global economy, which
can have a significant impact on our sales; the drivers of product cost, especially the price of
copper and steel; and the relative value against the U.S. dollar of those foreign currencies of
countries where we operate.
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Economy
With respect to global economic activity, the recent global recession precipitated by the financial
crisis had a detrimental effect on our sales in 2009. Sales increased in 2010 due to stronger
economic conditions and higher availability of credit. Exclusive of the effects of currency
translation, overall, sales in 2010 were approximately 22.5% higher than 2009. While the recent
increases in order activity suggest that sales have improved compared to 2010, we cannot currently
project whether market conditions will improve or decline on a sustained or significant basis.
Commodities
Due to the high content of copper and steel in compressor products, our results of operations are
very sensitive to the prices of these commodities. Overall, commodity prices have been extremely
volatile in 2010 and the fourth quarter of 2010 continued the upward trend on steel prices.
From January 1 to December 31, 2010, market copper prices increased by 31%. The average market
cost of copper in 2010 was 46% higher than the average market cost in 2009, including a higher
increase in the fourth quarter of 2010 compared to the previous nine months of 2010. After
consideration of our hedge position, our average cost of copper was 4% lower in our 2010 results of
operations when compared to 2009, primarily due to high cost hedges in 2009. Such extreme
volatilities create substantial challenges to our ability to control the cost of our products, as
the final product cost can depend greatly on our ability to secure optimally priced futures
contracts.
Our average price in 2010 for the types of steel utilized in our products was 14% higher than the
average cost in 2009, however in the fourth quarter of 2010 we continued to see an upward trend on
pricing with our average steel prices 18% higher than for the nine months ending September 30,
2010.
The rapid increase of steel prices has a particularly negative impact, as there is currently no
well-established global market for hedging against increases in the price of steel. Although we
have been successful at securing a few contracts to help mitigate the risk of the rising steel
market, this market is not very liquid and only available against our U.S. purchases of steel.
Based upon the introduction of redesigned products, we expect to use more aluminum in our motors in
2011 and have proactively addressed the volatility by executing future contracts to help mitigate
the risk of rising aluminum prices.
Due to competitive markets for our finished products, we are typically not able to quickly recover
product cost increases through price increases or other cost savings. We have been proactive in
addressing the volatility of these costs, including executing futures contracts as of December 31,
2010 that cover approximately 32% of our anticipated copper, 3% of our anticipated steel in the
U.S. and 17% of our anticipated aluminum usage in 2011. However, renewed rapid escalation of these
costs would nonetheless have an adverse affect on our results of operations both in the near and
long term as our anticipated needs are not 100% hedged.
While the use of futures can mitigate the risks of price increases associated with these
commodities by locking in prices at a specific level, they also reduce the benefits of price
decreases associated with these commodities. In addition, declines in the prices of the underlying
commodities can result in downward pressure in selling prices, particularly if competitors have
lesser future purchase positions, thus causing a contraction of margins.
We expect to continue our approach of mitigating the effect of short term swings through the
appropriate use of hedging instruments, price increases and modified pricing structures with our
customers, where available, to allow us to recover our costs in the event that the prices of
commodities escalate in a manner similar to what we experienced in 2010 For a discussion of the
risks to our business associated with commodity price risk fluctuations, refer to Quantitative and
Qualitative Disclosures about Market Risk in Part II, Item 7A of this report.
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Currency Exchange
The compressor industry and our business in particular are characterized by global and regional
markets that are served by manufacturing locations positioned throughout the world. Most of our
manufacturing presence is in international locations. During 2010 and 2009, approximately 82% and
77%, respectively, of our compressor sales activity took place outside the United States, primarily
in Brazil, Europe, and India. As a result, our consolidated financial results are sensitive to
changes in foreign currency exchange rates, including the Brazilian Real, the Euro and the Indian
Rupee. 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 of 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 Brazilian manufacturing and sales presence are significant and changes
in the Brazilian Real have been especially adverse to our results of operations when compared to
prior periods. In 2010, the Brazilian Real strengthened against the dollar by 4.3% compared to
2009. For a discussion of the risks to our business associated with currency fluctuations, refer
to Quantitative and Qualitative Disclosures about Market Risk in Part II, Item 7A of this report.
Liquidity
We have received cash inflows from non-operating activities and expect to receive further cash
inflows from taxes through the end of 2011. We received approximately $43.6 million, net of excise
tax, from the reversion of our over-funded hourly pension plan and $1.7 million in U.S. tax refunds
in 2010. In addition, we expect to receive refunds of outstanding refundable Brazilian non-income
taxes. Due to the recent volatility in the exchange rate between the U.S. dollar and the Brazilian
Real, the actual amounts received as expressed in U.S. dollars will vary depending on the exchange
rate at the time of receipt or future reporting date. As of December 31, 2010, $40.4 million of
the outstanding refundable Brazilian non-income tax was included in current assets and $44.3
million was included in non-current assets. We expected to receive approximately $25.4 million of
the current amount by December 31, 2010, however, in connection with an unrelated social security
tax matter, the Brazilian government filed a motion to require a cash deposit be posted with the
court of approximately $15.0 million to replace letters of credit that were previously in place and
did not pay any tax refunds to us in the fourth quarter of 2010, contrary to historical payment
patters and indications of the Brazilian tax authorities. We disagreed with their motion and
requested a hearing in 2011.
Subsequent to December 31, 2010, the Brazilian government was successful in obtaining a court order
to require $15.0 million of our tax refund be held in a court appointed cash account until
resolution of the social security tax matter. The timing of resolution of this tax dispute is
uncertain and might take several years. We will reclassify the $15.0 million of refundable
non-income taxes from current to long term in the first quarter of 2011.
Based on historical payment patterns and indication of the Brazilian tax authorities and the cash
deposit described above, and based on the U.S. dollar to Real exchange rate as of December 31,
2010, we expect to recover approximately $40.4 million of the $84.7 million outstanding refundable
taxes in Brazil in 2011. We received $8.0 in January 2011 and expect to receive an additional $6.0
million in the first quarter of 2011. The Brazilian tax authorities will not commit to an actual
date of payment and the timing of receipt may be different than planned if the Brazilian
authorities change their pattern of payment or past practices.
Challenges remain with respect to our ability to generate appropriate levels of liquidity solely
from cash flows from operations, particularly uncertainties related to global economic conditions,
currency exchange rates and commodity pricing as discussed above. In 2010, we used $46.0 million
of cash in operations, which included the net inflow after payment of the excise tax of $43.6
million related to the reversion of the hourly pension plan and significant increases in
inventories and receivables. While we expect continued improvement as our restructuring activities
take effect, we still may not generate cash from normal operations unless further restructuring
activities are implemented and/or economic conditions improve.
We terminated our U.S. credit facility in 2010, although we continue to maintain various credit
facilities in most other jurisdictions in which we operate, and we are currently in the process of
exploring a new credit facility to provide additional liquidity in 2011. While we believe that
current cash balances and the cash to be generated by the Brazilian tax refund will produce
adequate liquidity to implement our business strategy over the foreseeable future, there can be no
assurance that such amounts will ultimately be adequate if economic conditions deteriorate. We
anticipate that we will restrict non-essential uses of our cash balances until cash production from
normal operations improves.
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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 properly accounted for such contingent liabilities 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 Cautionary
Statements Relating To Forward-Looking Statements above, Results of Operations below, and Risk
Factors in Item 1A.
RESULTS OF OPERATIONS
A summary of our operating results as a percentage of net sales is shown below (dollars in
millions):
Year Ended December 31, 2010 vs. Year Ended December 31, 2009
Year Ended December 31, | ||||||||||||||||
(in millions) | 2010 | % | 2009 | % | ||||||||||||
Net sales |
$ | 933.8 | 100.0 | % | $ | 735.9 | 100.0 | % | ||||||||
Cost of sales and operating expenses |
835.2 | 89.4 | % | 680.2 | 92.4 | % | ||||||||||
Gross Profit |
98.6 | 10.6 | % | 55.7 | 7.6 | % | ||||||||||
Selling and administrative expenses |
114.1 | 12.2 | % | 125.2 | 17.0 | % | ||||||||||
Impairments, restructuring charges, and
other items |
50.3 | 5.4 | % | 24.4 | 3.3 | % | ||||||||||
Operating loss |
(65.8 | ) | (7.0 | %) | (93.9 | ) | (12.7 | %) | ||||||||
Interest expense |
(10.6 | ) | (1.1 | %) | (10.8 | ) | (1.5 | %) | ||||||||
Interest income and other, net |
1.2 | 0.1 | % | 2.3 | 0.3 | % | ||||||||||
Loss from continuing operations before taxes |
(75.2 | ) | (8.0 | %) | (102.4 | ) | (13.9 | %) | ||||||||
Tax benefit |
(16.6 | ) | (1.8 | %) | (10.6 | ) | (1.4 | %) | ||||||||
Net loss from continuing operations |
$ | (58.6 | ) | (6.2 | %) | $ | (91.8 | ) | (12.5 | %) | ||||||
Net sales in the year ended December 31, 2010 increased $197.9 million, or 26.9%, versus the same
period of 2009. Excluding the increase in sales due to the effect of changes in foreign currency
translation of $32.5 million, net sales increased by 22.5% from 2009. Sales of compressors used in
commercial refrigeration and aftermarket applications increased by $93.9 million, or 26.2%, when
compared to 2009. For the commercial refrigeration and aftermarket business, sales increases were
primarily driven by volume increases due to stronger economic conditions as well as higher
shipments to customers as they increased inventory balances to better reflect current sales levels.
The increase in sales of compressors used in household refrigeration and freezer (R&F)
applications was $25.1 million, or 10.5%, versus the same period of 2009, primarily due to higher
units sold. Sales for R&F product were also substantially affected by the stronger global economic
conditions, as credit became available compared to 2009. Sales of compressors for air conditioning
applications and all other applications also increased by $78.9 million, or 56.7%, primarily due to
volume increases caused by unusually hotter and more humid weather in our Brazilian market along
with customers beginning to increase their inventory levels based upon their current forecasted
demands.
Gross profit increased by $42.9 million from $55.7 million, or 7.6%, in 2009 to $98.6 million, or
10.6%, in 2010. The increase in gross profit in 2010 included the effect of volume and sales mix
increases of $36.7 million and $22.2 million, respectively, as compared to the same period of 2009,
including the effect of higher sales on fixed costs. Changes in productivity of $2.5 million and
other raw material purchases of $7.9 million had favorable impacts on gross profit as compared to
the same period of 2009. In contrast, changes in commodity costs of $11.4 million and currency of
$2.1 million had unfavorable impacts on gross profit as compared to the same period of 2009. In
addition, $8.2 million of net favorable items in 2009 results did not recur in 2010. These include
a favorable legal opinion that resulted in $8.4 million of additional recoverable income tax
refunds from our Brazilian operation, change in estimate for warranty claims of $2.3 million and a
favorable litigation settlement of $1.0 million. These favorable items were offset by the one time
cumulative catch up depreciation expense adjustment of $3.5 million recorded in 2009 as a result of
reclassification of our Paris, Tennessee facility from a discontinued operation to
continuing operation. We also recorded $8.1 million lower pension and OPEB credits in the current
year. The effect of all other income and expense items included in gross profit was favorable to
2010 results by $3.4 million.
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Selling and administrative (S&A) expenses decreased by $11.1 million from $125.2 million in 2009
to $114.1 million in 2010. As a percentage of net sales, S&A expenses were 12.2% in 2010 compared
to 17.0% in 2009. Professional fees decreased by $8.5 million, of which $6.6 million was mainly
due to a reduction in professional fees incurred in 2009 outside the ordinary course of business.
Payroll, benefits and other related employee expenses decreased by $4.9 million as a result of our
continued restructuring efforts and termination of our previous CEO. All other selling and
administrative expenses increased in the aggregate by $2.3 million.
We recorded expense of $50.3 million in impairments, restructuring charges, and other items in 2010
compared to $24.4 million in 2009. In 2010, these expenses included $40.3 million in expenses
related to the reversion of our hourly pension plan, primarily settlement losses, increased
benefits costs and excise tax on the proceeds from the reversion, $7.3 million in expenses related
to settlement of a portion of our anti-trust litigation, $1.2 million for additional estimated
environmental costs associated with remediation activities at our former Tecumseh, Michigan
facility, $2.5 million related to severance associated with the reduction in force at our Brazilian
($0.7 million), Indian ($0.1 million) and Corporate ($1.7 million) locations, and a $0.4 million
impairment of an investment, partially offset by a $1.0 million gain from our previous salaried
pension plan that was terminated in 2008 and a $0.4 million curtailment gain. For a more detailed
discussion of these charges, refer to Notes 12 and 16 of the Notes to the Consolidated Financial
Statements in Item 8 of this report.
Interest expense was $10.6 million in 2010 compared to $10.8 million in 2009. The weighted average
interest rate on discounted accounts receivable decreased from 11.6% in 2009 to 8.7% in 2010, on
lower balances being discounted. This decrease in factoring was offset by an increase in other
foreign debt borrowings. The weighted average interest rate on debt at December 31, 2010 was 7.4%
compared to 8.9% at December 31, 2009. The decrease in debt interest rate is the result of new
loans that were put in place in Brazil at an interest rate of 4.5%. In addition, amortization of
$0.6 million deferred financing costs originally incurred in connection with our credit agreement
were expensed upon termination of our credit agreement in the second quarter of 2010.
Interest income and other income, net was $1.2 million in 2010 compared to $2.3 million in 2009,
primarily reflecting lower interest rates, and lower average levels of cash and short-term
investments held in 2010.
For 2010, we recorded a tax benefit of $16.6 million from continuing operations. This tax benefit
is comprised of $0.4 million in foreign tax benefit, a tax benefit of $16.3 million in U.S. federal
tax and a tax expense of $0.1 million for U.S. state taxes. The $10.6 million in tax benefit
recorded against continuing operations for 2009 represented a tax benefit of $2.6 million for U.S.
federal taxes, a tax benefit of $6.2 million for foreign taxes, and a tax benefit of $1.8 million
for U.S. state taxes.
Net loss from continuing operations for the year ended December 31, 2010 was $58.6 million, or
$3.17 per share, as compared to $91.8 million, or $4.97 per share, for the year ended December 31,
2009. The change was primarily the result of factors discussed above.
A summary of our operating results as a percentage of net sales is shown below (dollars in
millions):
Year Ended December 31, 2009 vs. Year Ended December 31, 2008
Year Ended December 31, | ||||||||||||||||
(in millions) | 2009 | % | 2008* | % | ||||||||||||
Net sales |
$ | 735.9 | 100.0 | % | $ | 996.4 | 100.0 | % | ||||||||
Cost of sales and operating expenses |
680.2 | 92.4 | % | 891.3 | 89.5 | % | ||||||||||
Selling and administrative expenses |
125.2 | 17.0 | % | 129.6 | 13.0 | % | ||||||||||
Impairments, restructuring charges, and
other items |
24.4 | 3.3 | % | 43.8 | 4.4 | % | ||||||||||
Operating loss |
(93.9 | ) | (12.7 | %) | (68.3 | ) | (6.9 | %) | ||||||||
Interest expense |
(10.8 | ) | (1.5 | %) | (24.4 | ) | (2.4 | %) | ||||||||
Interest income and other, net |
2.3 | 0.3 | % | 9.7 | 1.0 | % | ||||||||||
Loss from continuing operations before taxes |
(102.4 | ) | (13.9 | %) | (83.0 | ) | (8.3 | %) | ||||||||
Tax benefit |
10.6 | 1.4 | % | 5.0 | 0.5 | % | ||||||||||
Net loss from continuing operations |
$ | (91.8 | ) | (12.5 | %) | $ | (78.0 | ) | (7.8 | %) | ||||||
* | The Paris operation reclassification decreases net loss from continuing operations, net of tax,
by $1.9 million for the year ended December 31, 2008. |
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Net sales in the year ended December 31, 2009 decreased $260.5 million, or 26.1%, versus the same
period of 2008. Excluding the decrease in sales due to the effect of changes in foreign currency
translation of $44.4 million, net sales decreased 21.7% from the prior year. Sales of compressors
used in commercial refrigeration and aftermarket applications decreased by $114.8 million, or
22.1%. For the commercial refrigeration and aftermarket business, volume declines were driven by
softer economic conditions as well as lower shipments to customers as they too reduced inventory
balances to better reflect current sales levels. The dollar volume decline in sales of compressors
used in R&F applications was $74.1 million, or 25.1%, primarily due to lower units sold. Volumes
for R&F product were also substantially affected by the global economic contraction, as consumer
credit became more constrained than in 2008 and the rate of housing starts declined. The downturn
in market volumes for R&F applications was the end result of the effect of these economic
conditions; a decreased demand by consumers, combined with lower demand from our R&F customers as
they brought their own inventories in line with lower volumes. Sales of compressors for air
conditioning applications and all other applications also declined by $71.6 million, or 39.4%,
primarily due to customers having large on-hand inventory of air conditioners resulting in lower
demand for compressors compounded by unusually cool weather in many of the geographic locations
served.
Cost of sales and operating expenses were $680.2 million in the year ended December 31, 2009, as
compared to $891.3 million in the fiscal year ended December 31, 2008. Expressed as a percentage
of sales, these costs increased to 92.4% in 2009 compared to 89.5% in 2008. Gross profit (defined
as net sales less cost of sales and operating expenses) in 2009 declined by $49.4 million from
$105.1 million, or 10.5%, in 2008 to $55.7 million, or 7.6% in 2009. The current year decline is
mostly attributable to the materially lower levels of sales volume in 2009, which resulted in lower
absorption of fixed costs, although reductions in our fixed cost structure during 2009 helped to
mitigate this effect.
Volume declines reduced 2009 gross profit (including the effect of lower sales on fixed costs) by
$60.4 million as compared to 2008. Current year margin was also unfavorably impacted by changes in
sales mix of $34.1 million. Other raw material variances were also unfavorable by $0.6 million.
An unfavorable one-time cumulative catch up depreciation expense of $3.5 million was recorded in
the fourth quarter of 2009 as a result of a reclassification of our Paris, Tennessee facility from
a discontinued operation held for sale to a continuing operation. In addition, items that were
favorable to 2008 results did not recur in 2009. These amounts included a gain on the sale of an
airplane and our former airport facility of $4.2 million and favorable litigation settlement costs
of $2.2 million. We also recorded $6.1 million less in pension and OPEB credits in the current
year. In contrast, productivity improvements of $30.5 million, favorable currency effects of $24.2
million and lower commodity costs of $11.3 million improved 2009 gross profit when compared to the
same period in 2008. The effect of all other income and expense items included in cost of sales
was unfavorable to 2009 results by $4.3 million.
Selling and administrative expenses were $125.2 million in the year ended December 31, 2009, as
compared to $129.6 million in the fiscal year ended December 31, 2008. Expressed as a percentage
of sales, these selling and administrative expenses were 17.0% in 2009 compared to 13.0% in 2008.
We incurred approximately $8.6 million in 2009 for professional fees outside the ordinary course of
business representing a decrease of $2.3 million when compared to the $10.9 million incurred in
2008. Payroll, benefits and other related employee expenses decreased by $8.3 million as a result
of our continued restructuring efforts and termination of our previous CEO. Recurring professional
fees were reduced by $2.2 million mainly related to accounting fees. In contrast, reversal of an
accrual for environmental expenses of $1.7 million and a favorable change in estimate of $1.9
million recorded in 2008 were not repeated in 2009. All other selling and administrative expenses
increased in the aggregate by $4.8 million.
We recorded expense of $24.4 million in impairments, restructuring charges, and other items in 2009
compared to $43.8 million in 2008. For a more detailed discussion of these charges, refer to Note
12 of the Notes to the Consolidated Financial Statements in Item 8 of this report and Outlook
below.
Interest expense from continuing operations was $10.8 million in the fiscal year ended December 31,
2009 compared to $24.4 million in 2008. The decrease is primarily attributable to reduced
borrowings, particularly in Brazil, including both debt balances and accounts receivable factoring,
as well as slightly lower interest rates charged on our borrowings. 2008 also included $1.4 million
related to a write-off of previously capitalized debt issuance costs for our previous credit
facility.
Interest income and other income, net were $2.3 million in the fiscal year ended December 31, 2009
compared to $9.7 million in 2008, primarily reflecting the lower levels of cash and short-term
investments held in 2009 and lower interest rates.
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We recorded a $10.6 million income tax benefit from continuing operations for the fiscal year ended
December 31, 2009. This benefit includes a $10.3 million deferred tax benefit ($6.8 million
foreign tax credit, $1.8 million U.S. federal, and $1.7 million state and local) and a $0.3 million
current tax credit.
The consolidated statement of operations reflects a $5.0 million income tax benefit for the fiscal
year ended December 31, 2008. This benefit reflected a $7.6 million deferred tax benefit
(consisting of a $8.0 million U.S. federal benefit and a foreign provision of $0.4 million),
partially offset by a $2.6 current tax provision ($0.8 million U.S. federal, $0.1 million state and
local credit and $1.9 million foreign).
At December 31, 2009 and 2008, full valuation allowances are recorded for net operating loss
carryovers and other deferred tax assets for those tax jurisdictions in which it is more likely
than not that these deferred tax assets would not be recoverable.
The effective tax rate in future periods may vary from the 35% United States statutory rate based
upon changes in the mix of profitability between the jurisdictions where benefits on losses are not
provided versus other jurisdictions where provisions and benefits are recognized. In addition,
circumstances could change such that additional valuation allowances may become necessary on
deferred tax assets in various jurisdictions.
Net loss from continuing operations in the fiscal year ended December 31, 2009 was $91.8 million,
or $4.97 per share, as compared to a net loss of $78.0 million, or $4.22 per share, in the fiscal
year ended December 31, 2008. The change was primarily the result of volume declines in the current
year and other factors as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Our primary liquidity needs are to fund capital expenditures, service indebtedness, support working
capital requirements, and, when needed, fund operating losses. In general, our principal sources
of liquidity are cash and cash equivalents on hand, cash flows from operating activities, when
available, borrowings under available foreign credit facilities and cash inflows related to taxes.
In addition, we believe that factoring our receivables is an alternative way of freeing up working
capital and providing sufficient cash to pay off debt that may mature within a year.
A substantial portion of our operating income is 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. While there are no significant restrictions on the
ability of our subsidiaries to pay dividends or make other distributions, we are focusing on our
global treasury strategy to allow us to transfer cash around the world in a cost efficient manner.
We have implemented a portion of our strategy in 2010 and will continue to review and implement it
in 2011.
Cash Flow
2010 vs. 2009
Cash used in operations amounted to $46.0 million in 2010, as compared to $1.6 million of cash
provided by operations in 2009. A significant element of the change in cash in 2010 was the net
proceeds of $43.6 million (after payment of excise tax) realized from the reversion of our hourly
pension plan, offset by a significant use of cash for increased working capital. Another use of
cash was our net loss of $56.8 million less the non-cash impacts of the settlement charges of the
hourly pension plan reversion of $29.4 million, and depreciation of $39.3 million. Other non-cash
items included a write off of debt issuance costs of $1.1 million, investment impairment of $0.4
million, loss on disposal of property and equipment of $0.6 million and share-based compensation of
$1.5 million, plus a deferred tax benefit of $15.8 million, and the curtailment of our post
retirement benefits of $7.0 million.
With respect to working capital, inventory levels were higher using $41.1 million of cash primarily
due to increased sales, building of inventory to support higher levels of anticipated sales, and
our increased in-transit inventory into North America from our foreign subsidiaries (which require
longer lead times) as a result of our continued implementation of our best cost strategy.
Inventory days on hand increased fourteen days to seventy-one days at December 31, 2010.
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Increased accounts receivable required a use of cash of $47.8 million during the year primarily as
a result of an increase in sales in the fourth quarter of 2010 compared to the fourth quarter of
2009. In addition, the increase is due in part to our cash management strategy of reducing our
accounts receivable discounting programs in our Brazilian operations (thereby increasing the amount
of accounts receivable reported on our consolidated balance sheet) and instead using government
sponsored credit lines, which have a lower interest rate. This shift from discounting to short
term debt increased our days sales outstanding by twelve days to sixty-one days at December 31,
2010.
Payables and accrued expenses increased by $22.9 million mainly as a result of increased purchases
of inventories. In addition, payable days outstanding increased eight days to seventy-four days at
December 31, 2010.
Recoverable non-income taxes were a net use of cash of $22.7 million primarily for additional
receivables recorded for non-income taxes in foreign jurisdictions.
Employee retirement benefits were a use of cash of $4.8 million for year to date contributions and
activity relating to our retiree medical plans.
Cash used by investing activities was $9.0 million in 2010 as compared to cash used in investing
activities of $18.3 million in 2009. The 2010 use of cash in investing activities is primarily
related to $9.2 million of capital expenditures, and an increase in restricted cash funds of $6.4
million to secure obligations as a result of terminating our U.S. line of credit, partially offset
by $2.3 million of formerly restricted cash that became available to fund our 401(k) matching
contributions. We also received $4.1 million upon maturity of a long term investment and $0.2
million of proceeds from the sale of assets. Cash used in investing activities in 2009 was
primarily due to the payment of $13.1 million relating to a working capital settlement with the
purchaser of our former Engine & Powertrain business and $7.9 million of capital expenditures,
partially offset by $0.6 million change in long term investments, and $2.1 million of formerly
restricted cash that became available to fund our 401(k) matching contributions.
Cash provided by financing activities was $31.5 million in 2010 compared to $7.8 million used in
financing activities in 2009. The increase in borrowings in 2010 compared to the 2009 is mainly
due to our cash management strategy of reducing our accounts receivable discounting programs and
instead using government sponsored credit lines, which have a lower interest rate, to finance our
increased working capital requirements to support higher levels of anticipated sales.
2009 vs. 2008
Cash provided by operations amounted to $1.6 million in 2009, as compared to cash provided by
operations of $70.6 million in 2008. The most significant use of cash during 2009 was our net loss
of $93.4 million less the non-cash impacts of depreciation and amortization of $45.2 million;
impairment of long-lived assets of $1.2 million, and loss on disposal of property and equipment of
$1.8 million. Non cash items included in the caption impairments, restructuring charges, and
other items include an impairment of an asset for pre-paid outside sales service of $1.5 million
and $1.0 million impairment of our investment in an unconsolidated subsidiary (included in other
assets). Elimination of certain benefits from our retirement plans resulted in a non cash increase
in our income, and a negative effect on our cash flows from operations, of approximately $9.5
million (included in employee retirement benefits).
Deferred and recoverable taxes were a net use of cash of $6.3 million, reflecting the receipt of
$12.2 million in U.S. Federal tax refunds, more than offset by additional receivables recorded for
non-income taxes in foreign jurisdictions.
With respect to working capital, our continued efforts to reduce inventory balances, combined with
lower inventory requirements reflective of reduced sales volumes, yielded cash of $34.4 million
during the year ended December 31, 2009. The lower levels of inventory also reflect a decrease in
days inventory on hand of thirty-four days compared to December 31, 2008. Decreased accounts
receivable provided cash of $21.3 million during the year. An effort to decrease the use of
discounting receivables (thereby increasing the amount of account receivable reported on our
consolidated balance sheet) at our foreign locations resulted in a use of cash of $18.1 million.
However, this was offset by more aggressive collection efforts and lower sales volumes, resulting
in an improvement in days sales outstanding of sixteen days as of the end of 2009 compared to the
end of 2008. Payables and accrued expenses
increased by $6.4 million primarily related to accruals for severance and special termination
benefits of $10.0 million, a $6.2 million accrual for potential settlement of the Horsepower
litigation, a net increase of $1.8 million in the reserve for environmental expenses an increase in
payable days outstanding of five days partially offset by reduced purchases as a result of lower
inventory levels.
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Other changes provided $2.9 million of cash, primarily due to the receipt in 2009 of $2.7 million
of accrued interest on our U.S. Federal income tax refund.
Cash used by investing activities was $18.3 million in 2009 compared to cash provided by investing
activities of $9.7 million in 2008. Cash used in 2009 is primarily due to the payment of $13.1
million relating to a working capital settlement with the purchaser of our former Engine and
Powertrain business and capital expenditures of $7.9 million, partially offset by $2.1 million of
formerly restricted cash that became available to fund our 401(k) matching contributions in 2009.
In 2008, cash provided by investing activities was primarily related to the net proceeds from the
sale of assets of $23.2 million, partially offset by capital expenditures of $8.0 million and an
increase in restricted cash of $5.7 million from cash received on the Salary Pension reversion
plan.
Cash used by financing activities was $7.8 million in 2009 as compared to a use of cash of $23.4
million in 2008. The cash used in 2009 was due to reductions in borrowing at foreign facilities,
while in 2008 we continued to reduce our debt levels in response to higher interest rates.
Liquidity Sources
Credit Facilities and Cash on Hand
In addition to cash on hand, cash provided by operating activities and cash inflows related to
non-operating activities, when available, we also use foreign bank debt and other foreign credit
facilities such as accounts receivable discounting programs to fund our working capital
requirements. We also use these cash resources to fund capital expenditures, and when necessary,
to address operating losses. For the year ended December 31, 2010 and 2009, our average
outstanding debt balance was $50.0 million and $34.8 million respectively. The weighted average
interest rate was 7.4% and 8.9% for the year ended December 31, 2010 and 2009, respectively.
As of December 31, 2010, our cash and cash equivalents on hand was $65.9 million. Our borrowings
under current credit facilities at foreign subsidiaries totaled $65.4 million at December 31, 2010,
with an uncommitted additional borrowing capacity of $6.5 million. For a more detailed discussion
of our foreign credit facilities, refer to Notes 8 of the Notes to Consolidated Financial
Statements in Item 8 of this report. Any cash we hold that is not utilized for day-to-day working
capital requirements is primarily invested in secure, institutional money market funds, the
majority of which are with JPMorgan Chase Bank, N.A. Money market funds are strictly regulated by
the U.S. Securities and Exchange Commission and operate under tight requirements for the liquidity,
creditworthiness, and diversification of their assets.
Cash inflows related to taxes
We expect to receive refunds of outstanding refundable Brazilian non-income taxes. Due to the
recent volatility in the exchange rate between the U.S. dollar and the Brazilian Real, the actual
amounts received as expressed in U.S. dollars will vary depending on the exchange rate at the time
of receipt or future reporting date. As of December 31, 2010, $40.4 million of the outstanding
refundable Brazilian non-income tax was included in current assets and $44.3 million was included
in non-current assets. We expected to receive approximately $25.4 million of the current amount by
December 31, 2010, however, in connection with an unrelated social security tax matter, the
Brazilian government filed a motion to require a cash deposit be posted with the court of
approximately $15.0 million to replace letters of credit that were previously in place and did not
pay any tax refunds to us in the fourth quarter of 2010, contrary to historical payment patters and
indications of the Brazilian tax authorities. We disagreed with their motion and requested a
hearing in 2011.
Subsequent to December 31, 2010, the Brazilian government was successful in obtaining a court order
to require $15.0 million of our tax refund be held in a court appointed cash account until
resolution of the social security tax matter. The timing of resolution of this tax dispute is
uncertain and might take several years. As a result, we will reclassify the $15.0 million of
refundable non-income taxes from current to long term in the first quarter of 2011.
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Based on historical payment patterns and indication of the Brazilian tax authorities and the cash
deposit described above, and based on the U.S. dollar to Real exchange rate as of December 31,
2010, we expect to recover approximately $40.4 million of the $84.7 million outstanding refundable
taxes in Brazil in 2011. We received $8.0 in January 2011 and expect to receive an additional $6.0
million in the first quarter of 2011. The Brazilian tax authorities will not commit to an actual
date of payment and the timing of receipt may be different than planned if the Brazilian
authorities change their pattern of payment or past practices.
Potential cash inflows related to outstanding Warrant
In 2007, the Company issued a warrant to purchase 1,390,944 shares of Class A Common Stock at $6.05
per share to a former creditor. The warrant expires in April of 2012. The former creditors
exercise of the warrant could raise approximately $8.4 million in gross proceeds for us; however
the warrant contains a provision for a cashless exercises, which would require us to issue shares
of Class A common stock to the former creditor with a value equal to the difference in the market
price of the underlying shares at the exercise date less the $6.05 per share exercise price.
Accounts Receivable Sales
Our Brazilian and Indian subsidiaries periodically factor 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 factored
receivables, including both with limited and without recourse amounts, was $34.8 million and $43.3
million at December 31, 2010 and 2009, respectively. The amount of factored receivables sold with
limited recourse, which results in a contingent liability to us, was $19.4 million and $21.2
million as of December 31, 2010 and 2009, respectively. In addition to the credit facilities
described above, our Brazilian subsidiary also has an additional $60.0 million uncommitted,
discretionary factoring credit facility with respect to its local (without recourse) and foreign
(with recourse) accounts receivable, subject to the availability of its accounts receivable
balances eligible for sale under the facility. These facilities might not be available or used in
the future.
Adequacy of Liquidity Sources
In the near term, and in particular over the next twelve months, we expect that our liquidity
sources described above will be sufficient to meet our liquidity requirements, including debt
service, capital expenditure and working capital requirements, and, when needed, cash to fund
operating losses. However, in the same period, we anticipate challenges with respect to our
ability to generate positive cash flows from operations, most significantly due to challenges
driven by possible volume declines, as well as currency exchange and commodity pricing factors
discussed above.
In addition, our business exposes us to potential litigation, such as product liability suits or
other suits related to anti-competitive practices, past business sales, securities law or other
types of business disputes. These claims can be expensive to defend and an unfavorable outcome
from any such litigation could adversely affect our cash flows and liquidity.
As of December 31, 2010, we had $65.9 million of cash and cash equivalents, and $65.4 million in
debt, of which $13.2 million was long-term in nature. The short-term debt primarily consists of
uncommitted revolving lines of credit, which we intend to maintain for the foreseeable future.
Accordingly, we believe our cash on hand is sufficient to meet our debt service requirements. We
do not expect any material differences between cash availability and cash outflows.
We made substantially lower levels of capital expenditures in 2010 and 2009 as compared to
historical levels. In the future, we expect capital expenditures will average $20.0 to $25.0
million annually, although the timing of expenditures may result in higher investment in some years
and lower amounts in others. For 2011, we plan to invest approximately $10.0 million in machinery
and equipment as we re-engineer our products to be more efficient, and we plan to invest an
additional $10.0 million to catch up on deferred spending from previous years. These 2011
expenditures are projected to be incurred toward the end of 2011 and may be adjusted based upon
achieving expected results described in the Outlook section.
We announced in 2009 restructuring initiatives related to reductions in force at our European
facilities, which were completed in 2010. Based on the value of the dollar versus the Euro as of
December 31, 2009, we expected that
restructuring to have a favorable impact of $2.8 million on our earnings and cash flows on an
annualized basis, beginning in 2010, and the annualized impact on our earnings and cash flows in
2010 from this reduction in force was $3.0 million based on the value of the dollar versus the Euro
as of December 31, 2010.
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Any additional restructuring actions taken in 2011 will be based upon our assessment of ongoing
economic activity at that time and any such additional actions, if warranted, 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, future operating results
and cash flows.
Off-Balance Sheet Arrangements
We do not believe we have any off-balance sheet arrangements that have, or are reasonably likely to
have, a material effect on us. However, a portion of accounts receivable at our Brazilian and
Indian subsidiaries are sold with limited recourse at a discount, which creates a contingent
liability for the business. Our Brazilian subsidiary also sells portions of its accounts
receivable without recourse. Discounted receivables sold with limited recourse were $19.4 million
and $21.2 million at December 31, 2010 and 2009, respectively. We maintain a reserve for
anticipated losses against these sold receivables, and losses have not historically resulted in the
recording of a liability greater than the reserved amount.
Contractual Obligations
Our payments by period as of December 31, 2010 for our long-term contractual obligations are as
follows:
Payments due by Period
(in millions) | Total | 2011 | 2012/2013 | 2014/2015 | After 2015 | |||||||||||||||
Debt Obligations |
$ | 65.4 | $ | 52.2 | $ | 13.2 | $ | | $ | | ||||||||||
Purchase Obligations |
$ | 12.1 | $ | 12.1 | | | | |||||||||||||
Operating leases (1) |
$ | 13.4 | $ | 2.2 | $ | 4.0 | $ | 3.6 | $ | 3.6 | ||||||||||
Other Long-Term Liabilities (2) |
$ | 51.2 | | | | |
(1) | Operating lease obligations do not include payments to landlords covering real
estate taxes and common area maintenance. |
|
(2) | Includes deferred income taxes, other postretirement benefit liabilities, product
warranty and self-insured risks, pension liabilities and other |
As of December 31, 2010, we also had $6.4 million in outstanding letters of credit issued in the
normal course of business, as required by some vendor contracts. In addition to the above
contractual obligations, we have unrecognized tax benefits for uncertain tax positions reported on
returns that are currently being examined by the tax authorities. We expect that the tax
authorities will complete their review of these positions during calendar year 2011, therefore; the
amount of the unrecognized tax benefit could be reduced by $5.5 million within the next 12 months.
CRITICAL ACCOUNTING ESTIMATES
In preparing our consolidated financial statements in accordance with generally accepted accounting
principles and pursuant to the rules and regulations of the SEC, we make assumptions, judgments and
estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosures of contingent assets and liabilities. We base our assumptions, judgments and
estimates on historical experience and various other factors that we believe to be reasonable under
the circumstances. Actual results could differ materially from these estimates under different
assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments and
estimates.
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We believe that the assumptions, judgments and estimates involved in the accounting for Share-based
Compensation, Income Taxes, Impairment of Long-Lived Assets, Accrued and Contingent Liabilities,
and Employee Related Benefits have the greatest potential impact on our consolidated financial
statements. These areas are key components of our results of operations and are based on complex
rules which require us to make judgments and estimates, so we consider these to be our critical
accounting policies. Historically, our assumptions, judgments and estimates relative to our
critical accounting policies have not differed materially from actual results.
Share-based Compensation
The Company records share-based payment awards exchanged for employee services at fair value on the
date of grant, that are re-measured quarterly, and expenses the awards in the consolidated
statement of operations over the requisite employee service period which is generally the vesting
period. Our plan authorizes two types of incentive awards, both of which are based upon the value
of our class A shares; stock appreciation rights and phantom stock units. Both types of awards are
settled in cash. Stock-based compensation expense includes an estimate for forfeitures and is
generally recognized over the expected term of the award on a straight-line basis. 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
managements 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 11, Share-Based Compensation Arrangements, of the Notes to the
Consolidated Financial Statements in Item 8 of this report.
Income Taxes
We use the asset and liability method of accounting for income taxes. Under this method, income tax
expense is recognized for the amount of taxes payable or refundable for the current year. In
addition, deferred tax assets and liabilities are recognized for the expected future tax
consequences of temporary differences between the financial reporting and tax bases of assets and
liabilities, and for operating loss and tax credit carryforwards. Management must make
assumptions, judgments and estimates to determine our current provision for income taxes and also
our deferred tax assets and liabilities and any valuation allowance to be recorded against a
deferred tax asset.
Our assumptions, judgments and estimates relative to the current provision for income taxes take
into account current tax laws, our interpretation of current tax laws and possible outcomes of
current and future audits conducted by foreign and domestic tax authorities. We have established
reserves for income taxes to address potential exposures involving tax positions that could be
challenged by tax authorities. Although we believe our assumptions, judgments and estimates are
reasonable, changes in tax laws or our interpretation of tax laws, the resolution of the current
and any future tax audits could significantly impact the amounts provided for income taxes in our
consolidated financial statements.
Our assumptions, judgments and estimates relative to the value of a deferred tax asset take into
account predictions of the amount and category of future taxable income, such as income from
operations or capital gains income. Actual operating results and the underlying amount and
category of income in future years could render our current assumptions, judgments and estimates of
recoverable net deferred taxes inaccurate. Any of the assumptions, judgments and estimates
mentioned above could cause our actual income tax obligations to differ from our estimates, thus
materially impacting our financial position and results of operations.
Impairment of Long-Lived Assets
It is our policy to review our long-lived assets for possible impairment whenever events and
circumstances indicate that the carrying value of an asset may not be recoverable. At December 31,
2010 and 2009, other than those assets for which impairment charges had been taken, we do not
believe there was a material amount of assets that had associated undiscounted projected cash flows
that were materially less than their carrying values. If there are in the future, we will disclose
the fact and the carrying amount of the assets at risk of impairment. Additional restructuring
actions taken will be based upon our assessment of ongoing economic activity and any such
additional actions, if warranted, 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. Such events could include loss of a significant customer or market share, the
decision to relocate production to other locations within the company, or the decision to cease
production of specific models of products.
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We recognize losses relating to the impairment of long-lived assets when the future undiscounted
cash flows are less than the assets carrying value or when the assets become permanently idle.
Assumptions and estimates used in the evaluation of impairment are consistent with our business
plan, including current and future economic trends, the effects of new technologies and foreign
currency movements, and are subject to a high degree of judgment and complexity. All of these
variables ultimately affect managements estimate of the expected future cash flows to be derived
from the asset or group of assets under evaluation, as well as the estimate of their fair value.
Changes in the assumptions and estimates, or our inability to achieve our business plan, may affect
the carrying value of long-lived assets and could result in additional impairment charges in future
periods.
Accrued and Contingent Liabilities
We have established reserves for environmental, warranty and legal contingencies in accordance with
generally accepted accounting principles. We also have liabilities with regard to certain
indemnification claims and litigation related to divested operations, which could be material. A
significant amount of judgment and use of estimates is required to quantify our ultimate exposure
in these matters. The valuation of reserves for contingencies is reviewed on a quarterly basis at
the operating and corporate levels to assure that we are properly reserved. Reserve balances are
adjusted to account for changes in circumstances for ongoing issues and the establishment of
additional reserves for emerging issues. While management believes that the current level of
reserves is adequate, changes in the future could impact these determinations. Historically,
reserves for accrued and contingent liabilities typically have not differed materially from actual
results; however, unanticipated events such as the discovery of new facts could result in material
changes to our reserves in future periods.
Employee Related Benefits
Significant employee related benefit assumptions include, but are not limited to, the expected
rates of return on plan assets, determination of discount rates for re-measuring plan obligations,
determination of inflation rates regarding compensation levels and health care cost projections.
Differences among these assumptions and our actual return on assets, financial market-based
discount rates, and the level of cost sharing provisions will impact future results of operations.
We develop our demographics and utilize the work of actuaries to assist with the measurement of
employee related obligations. The discount rate assumption is based on investment yields available
at year-end on corporate long-term bonds rated AA by Moodys. The expected return on plan assets
reflects asset allocations and investment strategy. The inflation rate for compensation levels
reflects our actual historical experience. The inflation rate for health care costs is based on an
evaluation of external market conditions and our actual experience in relation to those market
trends. Assuming no changes in any other assumptions, a 0.5% decrease in the discount rate and a
0.5% decrease in the rate of return on plan assets would increase 2010 expense by $0.2 million and
$0.7 million, respectively.
See Note 5 of the Notes to Consolidated Financial Statements in Item 8 of this report for more
information regarding costs and assumptions for post-employment benefits.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June, 2009, The FASB adopted new rules to improve financial reporting by enterprises involved
with variable interest entities and to provide more relevant and reliable information to users of
financial statements. The new principle is effective for the first annual reporting period
beginning after November 15, 2009 and for the interim periods within that year. The adoption of
this principle did not affect our financial statements or results of operations.
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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.
Sales improved in 2010 due to stronger global economic conditions compared to 2009. For 2011, we
currently expect net sales could increase in the range of approximately 5 percent to 10 percent
from 2010 levels. The potential improvement is based on 2010 sales, our existing pipeline of
orders, our internal projections about the market and related economic conditions, price increases
to our customers, as well as our continued efforts in sales, marketing and the re-engineering of
our products. We cannot currently project whether market conditions will improve on a sustained or
significant basis and if the economic improvement in our key markets does not occur as expected,
this could have an adverse impact on our current outlook.
The prices of key commodities, including copper and steel, increased significantly during 2010,
especially in the fourth quarter, and copper has continued to increase at historically unfavorable
levels in the first quarter of 2011; see Executive Summary Commodities. We expect the full
year average cost of our purchased materials in 2011, including the impact of our hedging
activities, to exceed that of 2010, depending on commodity cost levels and the level of our hedging
over the course of the year. We expect to continue our approach of mitigating the effect of short
term swings through the appropriate use of hedging instruments, price increases, and modified
pricing structures.
The Brazilian Real, the Euro and the Indian Rupee continue to be volatile against the U.S. dollar.
We have considerable forward purchase contracts to cover a portion of our exposure to additional
fluctuations in value during 2011. See Executive Summary-Currency. In the aggregate, we expect
the changes in foreign currency exchange rates, after giving consideration to our contracts and
including the impact of balance sheet remeasurement, to have an unfavorable impact totaling
approximately $2.0 million to $3.0 million in 2011 when compared to 2010.
After giving recognition to the factors discussed above, we expect that the full year 2011
operating profit could improve from 2010 if we are successful at offsetting the expected increase
in commodity costs. Our primary offsets are expected to include lower expected impairments,
restructuring charges and other items in 2011, re-engineering of our product line to reduce our
costs, price increases and continued focus on cost reductions.
We also expect that our operating cash flow could be sufficient to maintain current cash balances
and fund ongoing business requirements if we are successful at achieving the improved margins
discussed above.
Based upon our assessment of ongoing economic activity, our plans for 2011 may include additional
cost reduction activities including further employee headcount reductions and rationalization of
product platforms. Additional restructuring actions could result in further restructuring and/or
asset impairment charges, and, accordingly, could have a significant effect on our consolidated
financial position, operating profit, cash flows and future operating results.
Expected results remain subject to many of the same variables that we have experienced in recent
years, and which can have significant impacts. The condition of the global economy, commodity
costs, and key currency rates are all important to future performance, as is our ability to match
hedge activity to actual levels of transactions. We can give no guarantees regarding what impact
future exchange rates, commodity price and other economic changes will have on our 2011 results.
For a discussion of the sensitivity analysis associated with our key commodities and currency
hedges see Quantitative and Qualitative Disclosures about Market Risk in Part II, Item 7A.
As we look to the first quarter of 2011, we expect sales to show a slight improvement over the
first quarter of 2010. Operating losses in the first quarter of 2010 had significant non-recurring
expenses of $40.1 million, primarily related to the reversion of our hourly pension plan, that are
not expected to recur in the first quarter of 2011. In addition, favorable sales volume, mix and
price increases, offset by unfavorable commodity costs, coupled with the non-recurring expenses,
could improve our operating results by $32.0 million to $35.0 million compared to the first quarter
of 2010.
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ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are exposed to market risk during the normal course of business from credit risk associated with
cash investments and 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 options, and commodity
futures contracts. Commodity prices and foreign currency exchange rates can be volatile, and our
risk management activities do not totally eliminate these risks. Consequently, these fluctuations
can have a significant effect on results.
Credit Risk Financial instruments which potentially subject us to concentrations of credit risk
are primarily cash investments, both restricted and unrestricted, and accounts receivable. Any
cash we hold that is not utilized for day-to-day working capital requirements is primarily invested
in secure, institutional money market funds, the majority of which are with JPMorgan Chase Bank,
N.A. Money market funds are strictly regulated by the U.S. Securities and Exchange Commission and
operate under tight requirements for the liquidity, creditworthiness, and diversification of their
assets.
We utilize credit review procedures to approve customer credit. Customer accounts are actively
monitored, and collection efforts are pursued within normal industry practice. Management believes
that concentrations of credit risk with respect to receivables are somewhat limited due to the
large number of customers in our customer base and their dispersion across different industries and
geographic areas.
A portion of accounts receivable of our Brazilian and Indian subsidiaries are sold with limited
recourse at a discount. Our Brazilian operations also discount certain receivables without
recourse. Discounted receivables sold in these subsidiaries, including both with and without
recourse amounts, were $34.8 million and $43.3 million, at December 31, 2010 and 2009,
respectively, and the weighted average discount rate was 8.7% in 2010 and 11.6% in 2009.
Discounted receivables sold with limited recourse comprised $19.4 million and $21.2 million of this
amount at December 31, 2010 and December 31, 2009, respectively. We maintain an allowance for
losses based upon the expected collectability of all accounts receivable, including receivables
sold.
Interest Rate Risk We are subject to interest rate risk, primarily associated with our
borrowings and our investments of excess cash. Our current borrowings by our foreign subsidiaries
consist of variable and fixed rates that are based on either the London Interbank Offered Rate,
European Offered Interbank Rate or the BNDES TJLP fixed rate. We also record interest expense
associated with the accounts receivable discounting facilities described above. While changes in
interest rates do not affect the fair value of our variable-interest rate debt or cash investments,
they do affect future earnings and cash flows. Based on our debt and invested cash balances at
December 31, 2010, a 1% increase in interest rates would increase interest expense for the year by
approximately $0.7 million and a 1% decrease in interest rates would have an immaterial effect on
investments. Based on our debt and invested cash balances at December 31, 2009, a 1% increase in
interest rates would increase interest expense for the year by approximately $0.3 million (due to
lower debt balances) and a 1% decrease in interest rates would decrease interest income for the
year by approximately $0.9 million.
Commodity Price Risk Our exposure to commodity cost risk is related primarily to the price of
copper and steel and to a lesser degree aluminum, as these are major components of our product
cost.
We use commodity futures contracts to provide us with greater flexibility in managing the
substantial volatility in copper pricing. Company policy allows management to contract commodity
futures for a limited percentage of projected raw materials requirements up to 18 months in
advance. At December 31, 2010 and 2009, we held a total notional value of $34.7 million and $11.8
million, respectively, in commodity futures contracts. These futures are designated as cash flow
hedges against the price of copper, steel, and aluminum, and are accounted for as hedges on our
balance sheet.
As of December 31, 2010, we have been proactive in addressing the volatility of copper prices,
including executing futures contracts to cover approximately 32% of our anticipated copper
requirements for 2011. While the use of futures can mitigate the risks of short-term price
increases associated with these commodities by locking in prices at a specific level, we do not
realize the full benefit of a rapid decrease in commodity prices. As a result, if market pricing
becomes deflationary, our level of commodity hedging could result in lower operating margins and
reduced profitability. Based on our current level of activity, and before consideration of
commodity futures contracts, a 10% increase in the price of copper used in production of our
products from prices at December 31, 2010 would adversely affect our annual operating profit by
$10.2 million. Conversely, based on our current level of commodity futures contracts, a decrease
in the price of copper used in production of our products of 10% would result in losses under these
contracts that would adversely impact our operating results by $2.9 million. Based on our then
current
level of activity, and before consideration of commodity forward contracts and commodity futures
contracts, a 10% increase in the price of copper used in production of our products from prices at
December 31, 2009 would have adversely affected our annual operating profit by $6.2 million,
primarily due to lower prices and lower expected copper needs. Conversely, based on our then
current level of commodity forward purchase contracts and commodity futures contracts, a decrease
in the price of copper used in production of our products of 10% would have resulted in losses
under these contracts that would adversely impact our operating results by $3.1 million.
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The rapid increase of steel prices has a particularly negative impact, as there is currently no
well-established global market for hedging against increases in the cost of steel; however we have
been successful at securing a few steel futures contracts in the U.S. to help mitigate this risk.
These futures are designed as cash flow hedges against the price of steel, and are accounted for as
hedges on our balance sheet. These futures contacts cover approximately 3% of our anticipated
steel requirements in the U.S. for 2011; however the steel market is not considered a liquid market
and is not available outside the U.S. These futures contracts have similar benefits and risks to
us as the copper futures described above. Based on our current level of activity, and before
consideration of commodity futures contracts, a 10% increase in the price of steel used in
production of our products from prices at December 31, 2010 would adversely affect our annual
operating profit by $10.6 million. Conversely, based on our current level of commodity futures
contracts, a decrease in the price of steel used in production of our products of 10%, would result
in losses under these contracts that would adversely impact our operating results by $0.3 million.
Based on our then current level of activity, and before consideration of commodity futures
contracts, a 10% increase in the price of steel used in production of our products from prices at
December 31, 2009 would have adversely affected our annual
operating profit by $9.1 million,
primarily due to lower prices. We did not have any steel futures contracts at December 31, 2009.
Based upon the introduction of redesigned products, we expect to use more aluminum in our motors in
2011. Similar to copper and steel, but to a much lesser degree, our results of operations are
sensitive to the price of aluminum and we have proactively addressed the volatility by executing
future contracts that cover 17% of our projected usage in 2011. These futures are designed as cash
flow hedges against the price of aluminum, and are accounted for as hedges on our balance sheet.
These futures contracts have similar benefits and risks to us as the copper futures described
above. Based on our current level of activity, and before consideration of commodity futures
contracts, a 10% increase in the price of aluminum used in production of our products from prices
at December 31, 2010 would adversely affect our annual operating profit by $0.6 million.
Conversely, based on our current level of commodity futures contracts, a decrease in the price of
aluminum used in production of our products of 10% would result in losses under these contracts
that would adversely impact our operating results by $0.1 million. Based on our then current level
of activity, and before consideration of commodity futures contracts, a 10% increase in the price
of aluminum used in production of our products from prices at December 31, 2009 would have
adversely affected our annual operating profit by an immaterial amount. We did not have any
aluminum futures contracts at December 31, 2009.
Foreign Currency Exchange Risk We are exposed to significant exchange rate risk since the
majority of all our revenues, expenses, assets and liabilities are derived from operations
conducted outside the U.S. in local and other currencies and, for purposes of financial reporting,
the results are translated into U.S. dollars based on currency exchange rates prevailing during or
at the end of the reporting period. We are also exposed to significant exchange rate risk when an
operation has sales or expense transactions in a currency that differs from its local, functional
currency or when the sales and expenses are denominated in different currencies. This risk applies
to all our foreign locations since a large percentage of their receivables and payables are
transacted in a currency other than their local currency, mainly U.S. dollars. In those cases,
when the receivable is ultimately paid in less valuable dollars, the foreign location realizes less
net revenue in its local currency, which can adversely impact its margins. The periodic
re-measurement of these receivables and payables are recognized in the consolidated statements of
operations. As the U.S. dollar strengthens, our reported net revenues, operating profit (loss) and
assets are reduced because the local currency will translate into fewer U.S. dollars, and during
times of a weakening U.S. dollar, our reported expenses and liabilities are increased because the
local currency will translate into more U.S. dollars. Translation of our Statement of Operations
into U.S. dollars affects the comparability of revenue, expenses, operating income (loss), and
earnings (loss) per share between years. Because of the geographic diversity of our operations,
weaknesses in some currencies might be offset by strengths in others over time. However,
fluctuations in foreign currency exchange rates, particularly the strengthening of the U.S. dollar
against major currencies could materially affect our financial results.
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We have developed strategies to mitigate or partially offset these impacts, primarily hedging
against transactional exposure where the risk of loss is greatest. This involves entering into
short-term forward exchange contracts to sell or purchase U.S. dollars at specified rates based on
estimated currency cash flows. In particular, we have entered into foreign currency forward
purchases to hedge the Brazilian, European and Indian export sales, some of which are denominated
in U.S. dollars. However, these hedging programs only reduce exposure to currency movements over
the limited time frame of three to eighteen 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. Additionally, if the
currencies weaken against the dollar, any hedge contracts that have been entered into at higher
rates result in losses to our consolidated statements of operations when they are settled. From
January 1 to December 31, 2010, the Real strengthened against the dollar by 4.3%, the Rupee
strengthened by 3.7%, and the Euro weakened by 7.1%.
At December 31, 2010 and 2009, we held foreign currency forward contracts with a total notional
value of $109.6 million and $59.9 million, respectively. Based on our current level of activity,
and including any mitigation as the result of hedging activities, we believe that a 10%
strengthening of the Real, Euro, or the Rupee against the U.S. dollar would negatively impact our
operating profit on an annual basis for 2010 and 2009 as indicated in the table below:
10% Strengthening against U.S. $ | ||||||||
(in millions) | 2010 | 2009 | ||||||
Real |
$ | 2.6 | $ | 1.4 | ||||
Euro |
1.5 | 3.9 | ||||||
Rupee |
0.6 | 2.9 | ||||||
Total |
$ | 4.7 | $ | 8.2 |
However, based on our current foreign currency forward contracts, a 10% weakening in the value of
the Real, Euro or the Rupee would result in losses under such foreign currency forward contracts
that would adversely impact our operating results in 2010 and 2009 as indicated in the table below:
10% Weakening against U.S. $ | ||||||||
(in millions) | 2010 | 2009 | ||||||
Real |
$ | 2.0 | $ | 4.5 | ||||
Euro |
2.8 | 0.1 | ||||||
Rupee |
2.1 | 1.3 | ||||||
Total |
$ | 6.9 | $ | 5.9 |
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ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | ||||
35 | ||||
Financial Statements |
||||
36 | ||||
37 | ||||
38 | ||||
39 | ||||
40 |
All schedules are omitted because they are not applicable or the required information is shown in
the financial statements or notes thereto.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Tecumseh Products Company
Tecumseh Products Company
We have audited the accompanying consolidated balance sheets of Tecumseh Products Company (a
Michigan Corporation) and subsidiaries as of December 31, 2010 and 2009, and the related
consolidated statements of operations, stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2010. These financial statements are the responsibility of
the Companys management. Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Tecumseh Products Company and subsidiaries as of
December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2010 in conformity with accounting principles
generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Tecumseh Product Company and subsidiaries internal control over financial
reporting as of December 31, 2010, based on criteria established in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and
our report dated March 14, 2011 expressed an unqualified opinion on the effectiveness of the
Companys internal control over financial reporting.
/s/ GRANT THORNTON LLP
Southfield, Michigan
March 14, 2011
March 14, 2011
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, | ||||||||||||
(in millions, except share and per share data) | 2010 | 2009 | 2008 | |||||||||
Net sales |
$ | 933.8 | $ | 735.9 | $ | 996.4 | ||||||
Cost of sales and operating expenses |
835.2 | 680.2 | 891.3 | |||||||||
Gross Profit |
98.6 | 55.7 | 105.1 | |||||||||
Selling and administrative expenses |
114.1 | 125.2 | 129.6 | |||||||||
Impairments, restructuring charges, and other items |
50.3 | 24.4 | 43.8 | |||||||||
Operating loss |
(65.8 | ) | (93.9 | ) | (68.3 | ) | ||||||
Interest expense |
(10.6 | ) | (10.8 | ) | (24.4 | ) | ||||||
Interest income and other, net |
1.2 | 2.3 | 9.7 | |||||||||
Loss from continuing operations before taxes |
(75.2 | ) | (102.4 | ) | (83.0 | ) | ||||||
Tax benefit |
(16.6 | ) | (10.6 | ) | (5.0 | ) | ||||||
Loss from continuing operations |
(58.6 | ) | $ | (91.8 | ) | $ | (78.0 | ) | ||||
Income (loss) from discontinued operations, net of tax |
1.8 | (1.6 | ) | 27.5 | ||||||||
Net loss |
$ | (56.8 | ) | $ | (93.4 | ) | $ | (50.5 | ) | |||
Basic and diluted loss per share(a): |
||||||||||||
Loss from continuing operations |
$ | (3.17 | ) | $ | (4.97 | ) | $ | (4.22 | ) | |||
Income (loss) from discontinued operations, net of tax |
0.10 | (0.09 | ) | 1.49 | ||||||||
Net loss per share |
$ | (3.07 | ) | $ | (5.06 | ) | $ | (2.73 | ) | |||
Weighted average shares, basic and diluted (in thousands) |
18,480 | 18,480 | 18,480 | |||||||||
Cash dividends declared per share |
$ | 0.00 | $ | 0.00 | $ | 0.00 | ||||||
(a) | 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). This warrant, which expires in 2012, is not included in diluted
earnings per share information, as the effect would be antidilutive. |
The accompanying notes are an integral part of these Consolidated Financial Statements.
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, | ||||||||
(in millions, except share data) | 2010 | 2009 | ||||||
ASSETS |
||||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ | 65.9 | $ | 90.7 | ||||
Restricted cash and cash equivalents |
14.6 | 10.5 | ||||||
Accounts receivable, trade, less allowance for
doubtful accounts of $1.2 million in 2010 and 2009 |
127.8 | 79.4 | ||||||
Inventories |
151.5 | 109.6 | ||||||
Deferred and recoverable income taxes |
1.7 | 7.4 | ||||||
Recoverable non-income taxes |
60.0 | 38.5 | ||||||
Fair value of hedge |
12.5 | 11.2 | ||||||
Other current assets |
13.7 | 13.4 | ||||||
Total current assets |
447.7 | 360.7 | ||||||
Property, Plant, and Equipment, net |
234.9 | 259.7 | ||||||
Long-term investments |
| 4.1 | ||||||
Prepaid pension expense |
9.5 | 80.3 | ||||||
Deferred income taxes |
3.5 | | ||||||
Recoverable non-income taxes |
47.4 | 38.5 | ||||||
Other assets |
18.8 | 23.8 | ||||||
Total assets |
$ | 761.8 | $ | 767.1 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current Liabilities: |
||||||||
Accounts payable, trade |
$ | 143.7 | $ | 117.4 | ||||
Short-term borrowings |
52.2 | 23.0 | ||||||
Accrued liabilities: |
||||||||
Employee compensation |
30.7 | 29.0 | ||||||
Product warranty and self-insured risks |
12.0 | 10.6 | ||||||
Payroll taxes |
11.3 | 11.1 | ||||||
Fair value of hedge |
| 0.6 | ||||||
Other |
12.6 | 19.2 | ||||||
Total current liabilities |
262.5 | 210.9 | ||||||
Long-term debt |
13.2 | 8.0 | ||||||
Deferred income taxes |
3.7 | 7.2 | ||||||
Other postretirement benefit liabilities |
11.0 | 41.1 | ||||||
Product warranty and self-insured risks |
3.8 | 4.8 | ||||||
Pension liabilities |
25.9 | 25.2 | ||||||
Other |
6.8 | 6.5 | ||||||
Total liabilities |
326.9 | 303.7 | ||||||
Stockholders Equity |
||||||||
Class A common stock, $1 par value; authorized
75,000,000 shares; issued and outstanding
13,401,938 shares in 2010 and 2009 |
13.4 | 13.4 | ||||||
Class B common stock, $1 par value; authorized
25,000,000 shares; issued and outstanding
5,077,746 shares in 2010 and 2009 |
5.1 | 5.1 | ||||||
Paid in capital |
11.0 | 11.0 | ||||||
Retained earnings |
354.2 | 411.0 | ||||||
Accumulated other comprehensive income |
51.2 | 22.9 | ||||||
Total stockholders equity |
434.9 | 463.4 | ||||||
Total liabilities and stockholders equity |
$ | 761.8 | $ | 767.1 | ||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, | ||||||||||||
(in millions) | 2010 | 2009 | 2008 | |||||||||
Cash Flows from Operating Activities: |
||||||||||||
Net loss |
$ | (56.8 | ) | $ | (93.4 | ) | $ | (50.5 | ) | |||
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities: |
||||||||||||
Depreciation |
39.3 | 44.8 | 42.4 | |||||||||
Amortization of debt-issuance costs |
1.1 | 0.4 | 0.1 | |||||||||
Impairment of long-lived assets and goodwill |
| 1.2 | 32.4 | |||||||||
Gain on sale of discontinued operations |
| | (7.9 | ) | ||||||||
Loss (gain) on disposal of property and equipment |
0.6 | 1.8 | (4.6 | ) | ||||||||
Non-cash settlement of hourly pension plan reversion |
29.4 | | | |||||||||
Non-cash curtailment of post-retirement benefits |
(7.0 | ) | | | ||||||||
Deferred income taxes |
(15.8 | ) | (1.4 | ) | 5.8 | |||||||
Share based compensation |
1.5 | 0.8 | 1.4 | |||||||||
Investment impairment |
0.4 | | | |||||||||
Changes in operating assets and liabilities: |
||||||||||||
Accounts receivable |
(47.8 | ) | 21.3 | (10.9 | ) | |||||||
Inventories |
(41.1 | ) | 34.4 | 8.3 | ||||||||
Payables and accrued expenses |
22.9 | 6.4 | (28.4 | ) | ||||||||
Employee retirement benefits |
(4.8 | ) | (12.7 | ) | 29.5 | |||||||
Hourly pension plan reversion |
54.5 | | | |||||||||
Recoverable non income tax |
(22.7 | ) | (4.9 | ) | 55.2 | |||||||
Other |
0.3 | 2.9 | (2.2 | ) | ||||||||
Cash provided by (used in) operating activities |
(46.0 | ) | 1.6 | 70.6 | ||||||||
Cash Flows from Investing Activities: |
||||||||||||
Capital expenditures |
(9.2 | ) | (7.9 | ) | (8.0 | ) | ||||||
Short and long term investments |
4.1 | 0.6 | 0.2 | |||||||||
Change in restricted cash and cash equivalents |
(4.1 | ) | 2.1 | (5.7 | ) | |||||||
Proceeds (payments made) from sale of assets |
0.2 | (13.1 | ) | 23.2 | ||||||||
Cash provided by (used in) investing activities |
(9.0 | ) | (18.3 | ) | 9.7 | |||||||
Cash Flows from Financing Activities: |
||||||||||||
Debt issuance / amendment costs |
| | (1.6 | ) | ||||||||
Proceeds from long-term debt |
14.7 | | | |||||||||
Other borrowings (repayments), net |
16.8 | (7.8 | ) | (21.8 | ) | |||||||
Cash provided by (used in) financing activities |
31.5 | (7.8 | ) | (23.4 | ) | |||||||
Effect of Exchange Rate Changes on Cash |
(1.3 | ) | 2.1 | (20.6 | ) | |||||||
Increase (decrease) in cash and cash equivalents |
(24.8 | ) | (22.4 | ) | 36.3 | |||||||
Cash and Cash Equivalents: |
||||||||||||
Beginning of Period |
90.7 | 113.1 | 76.8 | |||||||||
End of Period |
$ | 65.9 | $ | 90.7 | $ | 113.1 | ||||||
Supplemental Schedule of Noncash Investing and Financing Activities: |
||||||||||||
Cash paid for interest |
$ | 8.7 | $ | 11.9 | $ | 21.0 | ||||||
Cash paid (refunds received) for taxes |
$ | 0.2 | $ | (13.9 | ) | $ | 6.8 |
The accompanying notes are an integral part of these Consolidated Financial Statements.
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in millions)
Accumulated | ||||||||||||||||||||||||
Class A | Class B | Other | Total | |||||||||||||||||||||
$1 Par | $1 Par | Paid in | Retained | Comprehensive | Stockholders | |||||||||||||||||||
Value | Value | Capital | Earnings | Income/(Loss) | Equity | |||||||||||||||||||
Balance, December 31, 2007 |
$ | 13.4 | $ | 5.1 | $ | 11.0 | $ | 547.9 | $ | 168.5 | $ | 745.9 | ||||||||||||
Net loss |
(50.5 | ) | (50.5 | ) | ||||||||||||||||||||
Loss on derivatives (net of tax of $1.9) |
(42.9 | ) | (42.9 | ) | ||||||||||||||||||||
Translation adjustments (net of tax of $0.0) |
(84.2 | ) | (84.2 | ) | ||||||||||||||||||||
Total Comprehensive Loss |
(177.6 | ) | ||||||||||||||||||||||
Change in pension measurement date |
7.0 | 7.0 | ||||||||||||||||||||||
Postretirement and postemployment benefits
(net of tax of $0.6)(see Note 5) |
(97.9 | ) | (97.9 | ) | ||||||||||||||||||||
Balance, December 31, 2008 |
$ | 13.4 | $ | 5.1 | $ | 11.0 | $ | 504.4 | $ | (56.5 | ) | $ | 477.4 | |||||||||||
Net loss |
(93.4 | ) | (93.4 | ) | ||||||||||||||||||||
Gain on derivatives (net of tax of $14.6) |
35.7 | 35.7 | ||||||||||||||||||||||
Translation adjustments (net of tax of $1.0) |
63.1 | 63.1 | ||||||||||||||||||||||
Total Comprehensive Income |
5.4 | |||||||||||||||||||||||
Postretirement and postemployment benefits
(net of tax of $0.0)(see Note 5) |
(19.4 | ) | (19.4 | ) | ||||||||||||||||||||
Balance, December 31, 2009 |
$ | 13.4 | $ | 5.1 | $ | 11.0 | $ | 411.0 | $ | 22.9 | $ | 463.4 | ||||||||||||
Net loss |
(56.8 | ) | (56.8 | ) | ||||||||||||||||||||
Loss on derivatives (net of tax of $0.9) |
(0.2 | ) | (0.2 | ) | ||||||||||||||||||||
Translation adjustments (net of tax of $1.5) |
8.0 | 8.0 | ||||||||||||||||||||||
Total Comprehensive Loss |
(49.0 | ) | ||||||||||||||||||||||
Postretirement and postemployment benefits
(net of tax of $12.2)(see Note 5) |
20.5 | 20.5 | ||||||||||||||||||||||
Balance, December 31, 2010 |
$ | 13.4 | $ | 5.1 | $ | 11.0 | $ | 354.2 | $ | 51.2 | $ | 434.9 | ||||||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
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NOTE 1. Accounting Policies
Business Description Tecumseh Products Company (the Company) is a global manufacturer of
hermetically sealed compressors for (i) commercial refrigeration applications, including walk-in
coolers and freezers, ice makers, dehumidifiers, water coolers, food service equipment and
refrigerated display cases and vending machines; (ii) household refrigerator and freezer
applications; and (iii) residential and specialty air conditioning and heat pump applications,
including window air conditioners, packaged terminal air conditioners and recreational vehicle and
mobile air conditioners.
We formerly operated an Engine & Power Train business, as well as an Electrical Component business.
During 2007, we sold our entire Engine & Power Train business, and the majority of the Electrical
Component business. On June 30, 2008 we sold our MP Pumps business for $14.6 million in gross cash
proceeds. 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.
Principles of Consolidation The consolidated financial statements include the accounts of the
Company and its subsidiaries, including Tecumseh do Brasil, Ltda., Tecumseh Products Company of
Canada, Ltd., Tecumseh Europe S.A., and Tecumseh Products India Private Ltd. All significant
intercompany transactions and balances have been eliminated.
Foreign Currency Translation and Transaction Gains and Losses The financial position and
operating results of substantially all foreign operations are consolidated using the local currency
as the functional currency. Local currency assets and liabilities are translated at the rates of
exchange as of the balance sheet date, and local currency revenue and expenses are translated at
average rates of exchange during the period. Resulting translation gains or losses are included as
a component of accumulated other comprehensive income, a separate component of stockholders
equity. Transaction gains and losses arising from transactions denominated in a currency other
than the functional currency of the entity involved are included in the consolidated statement of
operations.
Cash and Cash Equivalents and Restricted Cash and Cash Equivalents Cash equivalents consist of
bank deposits and other short-term investments that are readily convertible into cash with original
maturities of three months or less.
We also had restricted cash of $14.6 million at December 31, 2010 and $10.5 million at December 31,
2009. At December 31, 2010, approximately $6.4 million of these funds are restricted to secure
letters of credit, guarantee availability of funds for ACH transactions and derivative obligations.
The remaining balance of $8.2 million will be used to fund both our defined benefit and defined
contribution retirement plans for approximately the next four to six years.
Cash and cash equivalents outside of North America locations amounted to $27.0 million and $49.3
million at December 31, 2010 and 2009, respectively.
We maintain cash balances at various high credit quality financial institutions. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation up to certain limits. The
companys balances exceeded these limits. The Company does not consider this a material risk.
Short and long-term investments Investments with a maturity of greater than three months to one
year are classified as short-term investments. Investments with maturities beyond one year may be
classified as short-term if we reasonably expect the investment to be realized in cash or sold or
consumed during the normal operating cycle of the business; otherwise, they are classified as
long-term. Investments available for sale are recorded at market value using the specific
identification method. Investments held to maturity are measured at amortized cost in the
consolidated balance sheets if it is our intent and ability to hold those securities to maturity.
Any unrealized gains and losses on available for sale securities are reported as other
comprehensive income (loss) as a separate component of stockholders equity until realized or until
a decline in fair value is determined to be other than temporary.
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Accounts Receivable Accounts receivable are stated at amounts due from customers, net of an
allowance for doubtful accounts. The Company determines its allowance by considering a number of
factors, including the length of time trade accounts receivable are past due and the customers
current ability to pay its obligation.
Inventories Inventories are valued at the lower of cost or market, on the first-in, first-out
basis. Cost in inventory includes purchased parts and materials, direct labor and applied
manufacturing overhead. We maintain an allowance for slow-moving inventory for inventory items
which we do not expect to sell within the next 24 months.
Property, Plant and Equipment Property and equipment, including significant improvements, are
recorded at cost. Repairs and maintenance and any gains or losses on disposition are included in
operations. Depreciation is recorded on a straight-line basis to allocate the cost of depreciable
assets and leasehold improvements over their estimated service lives, which generally range from 15
to 40 years for buildings and from 2 to 12 years for machinery, equipment and tooling.
Impairment of Long-Lived Assets We review our long-lived assets for possible impairment whenever
events and circumstances indicate that the carrying value of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of
an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the
carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the fair value of the
asset. Assumptions and estimates used in the evaluation of impairment are consistent with our
business plan, including current and future economic trends, the effects of new technologies and
foreign currency movements, are subject to a high degree of judgment and complexity. All of these
variables ultimately affect managements estimate of the expected future cash flows to be derived
from the asset or group of assets under evaluation, as well as the estimate of their fair value.
Changes in the assumptions and estimates, or our inability to achieve our business plan, may affect
the carrying value of long-lived assets and could result in additional impairment charges in future
periods.
Revenue Recognition Revenues from the sale of our products are recognized once the risk and
rewards of ownership have transferred to the customers, which, in most cases, coincides with
shipment of the products. For other cases involving export sales, title transfers either when the
products are delivered to the port of embarkation or received at the port of the country of
destination.
Shipping and Handling Shipping and handling fee revenue is not significant. Shipping and
handling costs are included in cost of sales.
Income Taxes Income taxes are accounted for using the liability method under which deferred
income taxes are determined based upon the estimated future tax effects of differences between the
financial statement and tax basis of assets and liabilities, as measured by the currently enacted
tax rates.
Derivative Financial Instruments In the normal course of business, the Company employs
established policies and procedures to manage its exposure to changes in foreign exchange rates and
commodity prices using financial instruments deemed appropriate by management. As part of its risk
management strategy, the Company may use derivative instruments, including currency forward
exchange contracts and options, and commodity futures contracts to hedge certain foreign exchange
exposures and commodity prices. The Companys objective is to offset gains and losses resulting
from these exposures with losses and gains on the derivative contracts used to hedge them,
respectively, thereby reducing volatility of earnings and protecting fair values of assets and
liabilities. Derivative positions are used only to manage underlying exposures of the Company. The
Company does not use derivative financial instruments for speculative purposes. The Company
formally designates and documents all of its hedging relationships as either fair value hedges or
cash flow hedges, as applicable, although all of our current commodity futures contracts are cash
flow hedges, and documents the strategy for undertaking the hedge transactions and its method of
assessing ongoing effectiveness. The Company applies hedge accounting based upon the criteria
established by United States generally accepted accounting principles and records all derivative
instruments at fair value. Changes in the fair value (i.e., gains or losses) of the derivatives are
recorded each period in the consolidated statements of operations or other comprehensive income
(loss). For a derivative designated as a cash flow hedge, the gain or loss on the derivative is
initially reported as a component of other comprehensive income (loss) and subsequently
reclassified into the statement of operations when the hedged transaction affects earnings. For a
derivative designated as a fair value hedge, the gain or loss on the derivative in the period of
change and the offsetting loss or gain of the hedged item attributed to the hedged risk are
recognized in the statement of operations. See Note 15 for a description of derivative instruments.
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Table of Contents
Product Warranty Provision is made for the estimated cost of maintaining product warranties at
the time the product is sold based upon historical claims experience by product line. Warranty
coverage on our compressors is provided for a period of twelve months to three years from date of
manufacture.
Self-Insured Risks Provision is made for the estimated costs of known and anticipated claims
under the deductible portions of our health, liability and workers compensation insurance
programs. In addition, provision is made for the estimated cost of post-employment benefits.
Environmental Expenditures Expenditures for environmental remediation are expensed or
capitalized, as appropriate. Liabilities relating to probable remedial activities are recorded
when the costs of such activities can be reasonably estimated, in accordance with generally
accepted accounting principles. Liabilities are not discounted or reduced for possible recoveries
from insurance carriers.
Earnings (Loss) Per Share Basic income (loss) per share is computed by dividing net income
(loss) by the weighted average number of common shares outstanding during the period. Diluted
income (loss) per share reflects the potential dilution that could occur if warrants to issue
common stock were exercised. Due to net losses recorded from continuing operations, an outstanding
warrant issued to a former lender is not included in diluted loss per share for the years ended
December 31, 2010, 2009, and 2008 as the effect would be antidilutive.
Research, Development and Testing Expenses Company sponsored research, development and testing
expenses related to present and future products are expensed as incurred and were $18.6 million,
$17.7 million, and $20.4 million in 2010, 2009 and 2008, respectively. Such expenses consist
primarily of salary and material costs and are included in selling and administrative expenses.
Share-Based Compensation The Company accounts for share-based compensation using fair value for
awards issued (See Note 11).
Reclassification In the fourth quarter of 2009, the Company changed its plans and decided not to
sell its Paris, Tennessee facility, which was previously classified as held for sale. As a result
of the Companys decision, the asset has been reclassified as held and used at its carrying value,
adjusted for depreciation expense as if the asset has been continuously classified as held and
used, which approximates fair value. Results of operations for the prior periods have been
restated to report the Paris, Tennessee facility as a continuing operation (See Note 2).
Estimates Management is required to make certain estimates and assumptions in preparing the
consolidated financial statements in accordance with U.S. GAAP. These estimates and assumptions
impact the reported amount of assets and liabilities and disclosures of contingent assets and
liabilities as of the date of the consolidated financial statements. They also impact the reported
amount of net earnings or losses during any period. Actual results could differ from those
estimates. Significant estimates and assumptions used in the preparation of the accompanying
consolidated financial statements include those related to: accruals for product warranty, deferred
tax assets, self-insured risks, pension and postretirement benefit obligations and environmental
matters, as well as the evaluation of long-lived asset impairments and determination of stock based
compensation.
NOTE 2. Discontinued Operations
In 2007 and 2008, we completed the sale of the majority of our noncore businesses in our Electrical
Components (Residential & Commercial, Asia Pacific and Automotive & Specialty), Engine and Power
Train and Other (MP Pumps and Manufacturing Data Systems) operating segments. In addition, in June
2009, we completed the liquidation of a small division previously classified as held for sale for
$0.6 million in gross proceeds. As described in Note 1, results of operations for prior periods
have been restated to report the Paris, Tennessee operation, previously reported in discontinued
operations as a continuing operation.
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The Company continues to incur legal fees, settlements and other expenses (recorded in the table
below in impairments, restructuring charges, and other items) as purchasers of these businesses
continue to seek adjustments to purchase price through provisions in the agreements, as well as
post-retirement benefit curtailments and settlements as the Company continues to review its
post-retirement obligations.
The net revenues and net losses for the aforementioned discontinued operations for the applicable
periods are as follows:
Years Ended December 31, | ||||||||||||
(in millions) | 2010 | 2009 | 2008 | |||||||||
Net sales |
$ | | $ | 0.8 | $ | 11.5 | ||||||
Cost of sales |
| 0.6 | 8.9 | |||||||||
Selling and administrative expenses |
| 0.5 | 1.0 | |||||||||
Impairments, restructuring charges, and other items |
(3.4 | ) | 1.3 | (34.2 | ) | |||||||
Income (loss) from discontinued operations before income taxes |
3.4 | (1.6 | ) | 35.8 | ||||||||
Income taxes on discontinued operations |
1.6 | | 8.3 | |||||||||
Income (loss) from discontinued operations after income taxes |
$ | 1.8 | $ | (1.6 | ) | $ | 27.5 | |||||
For the year ended December 31, 2010, impairments, restructuring charges and other items in the
table above were ($3.4) million, which primarily relates to a non-cash curtailment gain of $6.6
million as a result of terminating post retirement benefits for a sold business, partially offset
by $1.4 million related to our Grafton and New Holstein facilities (formerly of the Engine and
Power Train Group) for environmental accruals ($1.0 million) and operating costs ($0.4 million) and
$1.8 million for legal fees and settlements for other sold businesses.
For the year ended December 31, 2009, impairments, restructuring charges and other items in the
table above were $1.3 million. We received $5.9 million of amounts previously held in escrow
related to the sale of the Residential & Commercial portion of the Electrical Component business
and a reversal of accrued costs that are no longer expected to be incurred for the TMT Motoco plant
of $1.7 million. These gains were offset by various items which included settlement for the
horsepower lawsuit of $6.2 million, product liability and workers compensation expense of $1.0
million and legal fees and other of $1.7 million.
For the year ended December 31, 2008, impairments, restructuring charges and other items in the
table above included curtailment gains on our salaried retirement other postretirement benefit
plans of $44.7 million and a gain of $7.9 million related to the sale of MP Pumps. These gains
were offset in part by a $13.1 million working capital adjustment to settle a dispute with the
purchaser of one of the Engine Power Train businesses, as well as other expenses incurred
post-closing including legal fees, adjustments to the workers compensation obligation, and other
miscellaneous expenses totaling $5.3 million.
Our Grafton facility, an asset held from our former Engine and Power Train Group, is classified as
held for sale on our consolidated balance sheet under the caption other current assets in the
amount of $0.5 million.
NOTE 3. Inventories
The components of inventories at December 31 were:
(in millions) | 2010 | 2009 | ||||||
Raw materials, net of reserves |
$ | 79.0 | $ | 54.9 | ||||
Work in progress |
1.0 | 4.3 | ||||||
Finished goods, net of reserves |
71.5 | 50.4 | ||||||
$ | 151.5 | $ | 109.6 | |||||
Raw materials are net of a $3.5 million and $3.4 million reserve for obsolete and slow moving
inventory at December 31, 2010 and December 31, 2009, respectively. Finished goods are net of a
$2.2 million and $1.8 million reserve for obsolete and slow moving inventory and lower of cost or
market at December 31, 2010 and December 31, 2009, respectively.
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NOTE 4. Property, Plant and Equipment, net
The components of property, plant and equipment, net are as follows:
December 31, | ||||||||
(in millions) | 2010 | 2009 | ||||||
Land and land improvements |
$ | 16.3 | $ | 16.5 | ||||
Buildings |
97.4 | 107.5 | ||||||
Machinery and equipment |
892.0 | 892.1 | ||||||
1,005.8 | 1,016.1 | |||||||
Less accumulated depreciation |
776.0 | 759.4 | ||||||
229.8 | 256.7 | |||||||
Construction in process |
5.1 | 3.0 | ||||||
Property, plant and equipment, net |
$ | 234.9 | $ | 259.7 | ||||
Depreciation expense associated with property, plant and equipment was $39.3 million, $44.8 million
and $42.4 million for the years ended December 31, 2010, 2009, and 2008, respectively.
NOTE 5. Pension and Other Postretirement Benefit Plans
We have defined benefit retirement plans that cover substantially all domestic employees. Plans
covering salaried employees generally provide pension benefits that are based on average earnings
and years of credited service. Plans covering hourly employees generally provide pension benefits
of stated amounts for each year of service. We sponsor a retiree health care benefit plan,
including retiree life insurance, for eligible salaried employees and their eligible dependents.
At certain divisions, we also used to sponsor retiree health care benefits for hourly retirees and
their eligible dependents. The retiree health care plans, which are unfunded, provide for
coordination of benefits with Medicare and any other insurance plan covering a participating
retiree or dependent, and have lifetime maximum benefit restrictions. The retiree health care plans
are contributory, with retiree contributions adjusted annually. We have reserved the right to
interpret, change or eliminate these health care benefit plans. Our foreign subsidiaries also
record liabilities for certain retirement benefits that are not defined benefit plans.
We use December 31 as the measurement date for determining pension and other post-retirement
benefits. Information regarding the funded status and net periodic benefit costs was reconciled to
or stated as of the year end of December 31.
Amounts recognized for both U.S. based and foreign pension and other post-retirement benefit plans
in the consolidated balance sheets and in accumulated other comprehensive income as of December 31
consist of:
Pension Benefit | Other Benefit | |||||||||||||||
(in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Noncurrent pension assets |
$ | 9.5 | $ | 80.3 | $ | | $ | | ||||||||
Liability current |
| | (1.3 | ) | (3.7 | ) | ||||||||||
Liability long term |
(25.9 | ) | (25.2 | ) | (11.0 | ) | (41.1 | ) | ||||||||
Accumulated other comprehensive income: |
||||||||||||||||
Prior service credit |
$ | 0.2 | $ | (3.1 | ) | $ | (48.3 | ) | $ | (20.0 | ) | |||||
Net actuarial loss (gain) |
28.6 | 43.4 | (25.7 | ) | (32.8 | ) | ||||||||||
Total postretirement and postemployment benefits |
$ | 28.8 | $ | 40.3 | $ | (74.0 | ) | $ | (52.8 | ) | ||||||
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The amounts recognized in other comprehensive income for the years ended December 31 were:
Pension Benefit | Other Benefit | |||||||||||||||
(in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Amounts recognized in other comprehensive income: |
||||||||||||||||
Prior service cost (credit) |
$ | 3.3 | $ | (0.5 | ) | $ | (28.3 | ) | $ | (8.7 | ) | |||||
Net actuarial loss (gain) |
(14.8 | ) | (9.0 | ) | 7.1 | (1.8 | ) | |||||||||
Total postretirement and postemployment benefits |
$ | (11.5 | ) | $ | (9.5 | ) | $ | (21.2 | ) | $ | (10.5 | ) | ||||
The estimated net actuarial loss (gain) and prior service cost (credit) for the defined benefit
pension plans that will be amortized from accumulated other comprehensive income into net periodic
benefit cost over the next year are $1.3 million and ($0.1) million, respectively. The estimated
net actuarial loss (gain) and prior service cost (credit) for the other defined benefit
postretirement plans that will be amortized from accumulated other comprehensive income into net
periodic benefit cost over the next year is ($9.3) million.
The following table provides a reconciliation of the changes in the pension and postretirement
plans benefit obligations and fair value of plan assets for 2010 and 2009:
Pension Benefit | Other Benefit | |||||||||||||||
(in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Change in benefit obligation |
||||||||||||||||
Benefit obligation at beginning of period |
$ | 208.2 | $ | 200.9 | $ | 41.9 | $ | 42.8 | ||||||||
Service cost |
0.0 | 2.4 | 2.6 | 0.5 | ||||||||||||
Interest cost |
5.7 | 11.7 | 5.3 | 2.4 | ||||||||||||
Plan change |
2.7 | | (31.0 | ) | | |||||||||||
Actuarial loss |
3.9 | 13.1 | 2.7 | 0.8 | ||||||||||||
Curtailment gain |
(0.4 | ) | | | | |||||||||||
Benefit payments |
(22.0 | ) | (20.1 | ) | (6.7 | ) | (4.6 | ) | ||||||||
Special termination benefits |
13.9 | 0.8 | | | ||||||||||||
Settlements |
(50.9 | ) | (1.0 | ) | (1.5 | ) | | |||||||||
Effect of changes in exchange rate |
(0.7 | ) | 0.4 | 0.2 | | |||||||||||
Benefit obligation at measurement date |
$ | 160.4 | $ | 208.2 | $ | 13.5 | $ | 41.9 | ||||||||
Change in plan assets |
||||||||||||||||
Fair value at beginning of period |
$ | 260.9 | $ | 262.0 | $ | | $ | | ||||||||
Actual return on plan assets |
13.3 | 17.5 | 1.9 | | ||||||||||||
Employer contributions |
(54.0 | ) | 0.5 | 2.9 | 4.5 | |||||||||||
Benefit payments |
(25.6 | ) | (19.2 | ) | (2.8 | ) | (4.5 | ) | ||||||||
Settlements |
(50.9 | ) | | | | |||||||||||
Effect of changes in exchange rate |
| 0.1 | 0.1 | | ||||||||||||
Fair value at measurement date |
$ | 143.7 | $ | 260.9 | $ | 2.1 | $ | | ||||||||
In the first quarter of 2010, we completed the reversion of our hourly pension plan. This
reversion yielded gross cash proceeds to us in March 2010 of approximately $54.5 million. We
retained net cash proceeds of $43.6 million after payment of excise taxes of $10.9 million,
recorded in impairments, restructuring charges and other items in our Statements of Operations.
The settlement of this plan reduced our benefit obligations and the value of our plan assets by
$50.9 million.
Plan changes of $31.0 million in Other Benefits are a result of eliminating our post-65
retirement benefits coupled with increased retiree contributions. The settlement of $1.5 million
is the result of terminated benefits for a plant closing and previously sold business. The plan
changes and settlements reduced our benefit obligation and liability by $32.5 million
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The accumulated benefit obligation for all defined benefit pension plans was $156.3 million and
$203.9 million at December 31, 2010 and 2009, respectively.
Information for pension plans with an accumulated benefit obligation in excess of plan assets:
December 31, | ||||||||
(in millions) | 2010 | 2009 | ||||||
Projected benefit obligation |
$ | 160.4 | $ | 150.8 | ||||
Accumulated benefit obligation |
$ | 156.3 | $ | 149.5 | ||||
Fair value of plan assets |
$ | 143.7 | $ | 123.3 |
Components of net periodic benefit (income) cost during the year:
Pension Benefits | Other Benefits | |||||||||||||||
(in millions) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Service cost |
$ | | $ | 2.4 | $ | 2.6 | $ | 0.5 | ||||||||
Interest cost |
5.7 | 11.7 | 5.3 | 2.5 | ||||||||||||
Expected return on plan assets |
(10.5 | ) | (16.1 | ) | 0.2 | | ||||||||||
Amortization of net loss (gain) |
1.3 | 2.2 | (1.8 | ) | (0.7 | ) | ||||||||||
Amortization of actuarial transition obligation |
| 0.1 | | | ||||||||||||
Amortization of unrecognized prior service costs |
(0.3 | ) | (0.5 | ) | (2.8 | ) | (8.7 | ) | ||||||||
Additional expense (income) due to curtailments,
settlements and terminations (see below) |
29.2 | 0.6 | (7.0 | ) | (0.3 | ) | ||||||||||
Net periodic expense (benefit) income |
$ | 25.4 | $ | 0.4 | $ | (3.5 | ) | $ | (6.7 | ) | ||||||
Additional expense (income) due to curtailments, settlements and terminations in the table above,
are a result of the hourly pension plan settlement and reversion that resulted in a non-cash charge
of $29.4 million ($15.6 million of previously deferred settlement losses and $13.8 million of
enhanced termination benefits given to covered employees), offset by $0.2 of other income and are
recorded in impairments, restructuring charges and other items in our Statements of Operations.
The final settlement of the reversion will be determined in the future, however we dont expect any
adjustments to be material.
The termination of our post retirement benefits for a plant closing and a sold business resulted in
a non-cash curtailment gain of $7.0 million ($6.6 million recorded in discontinued operations and
$0.4 million recorded in Impairments, restructuring charges, and other items).
Additional Information
Assumptions
Weighted-average assumptions used to determine benefit obligations as of December 31;
Pension Benefits | Other Benefits | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
U.S.-Based Plans: |
||||||||||||||||
Discount rate |
5.25 | % | 5.50 | % | 5.25 | % | 5.50 | % | ||||||||
Rate of compensation increase |
4.25 | % | 4.25 | % | N/A | N/A | ||||||||||
Europe-Based Plans: |
||||||||||||||||
Discount rate |
4.30 | % | 4.30 | % | N/A | N/A | ||||||||||
Rate of compensation increase |
2.10 | % | 2.10 | % | N/A | N/A | ||||||||||
India-Based Plans: |
||||||||||||||||
Discount rate |
8.30 | % | 8.50 | % | N/A | N/A | ||||||||||
Rate of compensation increase |
6.00 | % | 6.00 | % | N/A | N/A |
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Weighted-average assumptions used to determine net periodic benefit costs for the years ended
December 31:
Pension Benefits | Other Benefits | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
U.S.-Based Plans: |
||||||||||||||||
Discount rate |
5.50 | % | 6.25 | % | N/A | 6.25 | % | |||||||||
Expected long-term return on plan assets |
6.30 | % | 6.30 | % | N/A | N/A | ||||||||||
Rate of compensation increase |
4.25 | % | 4.25 | % | N/A | N/A | ||||||||||
Europe-Based Plans: |
||||||||||||||||
Discount rate |
4.30 | % | 4.30 | % | N/A | N/A | ||||||||||
Expected long-term return on plan assets |
N/A | N/A | N/A | N/A | ||||||||||||
Rate of compensation increase |
2.10 | % | 2.10 | % | N/A | N/A | ||||||||||
India-Based Plans: |
||||||||||||||||
Discount rate |
8.30 | % | 8.50 | % | N/A | N/A | ||||||||||
Expected long-term return on plan assets |
9.40 | % | 9.40 | % | N/A | N/A | ||||||||||
Rate of compensation increase |
6.00 | % | 6.00 | % | N/A | N/A |
The expected long-term return, variance, and correlation of return with other asset classes are
determined for each class of assets in which the plan is invested. That information is combined
with the target asset allocation to create a distribution of expected returns. The selected
assumption falls within the best estimate range, which is the range in which it is reasonably
anticipated that the actual results are more likely to fall than not.
Assumed health care cost trend rates, at December 31, 2010 and 2009:
2010 | 2009 | |||||||
Health care cost trend rate assumed for next year |
8.4 | % | 7.5-11.0 | % | ||||
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) |
5.0 | % | 5.0 | % | ||||
Year that the rate reaches the ultimate trend rate |
2019 | 2015-2016 |
Assumed health care cost trend rates have a significant effect on the amounts reported for the
health care plans. The health care cost trend rates are based on an evaluation of external market
conditions and adjusted to reflect our actual experience in relation to those market trends. A
one-percentage-point increase in the assumed health care cost trend rate would increase the
postretirement benefit obligation by $9.5 million, and a one-percentage-point decrease in the
assumed health care cost trend rate would decrease the postretirement benefit obligation by $8.5
million.
Plan Assets
The following table provides pension and other benefit plan assets based on nature and risks as of
December 31, 2010 (See Note 14 for fair value assumptions):
Fair Value measurements at December 31, 2010 | ||||||||||||||||
Total Fair | ||||||||||||||||
(in millions) | Value | Level 1 | Level 2 | Level 3 | ||||||||||||
Assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 23.2 | $ | 23.2 | $ | | $ | | ||||||||
Mutual Funds: |
||||||||||||||||
U.S. large cap (a) |
11.2 | 11.2 | | | ||||||||||||
U.S. small cap(b) |
3.8 | 3.8 | | | ||||||||||||
International growth(c) |
3.6 | 3.6 | | | ||||||||||||
Fixed Income Securities: |
||||||||||||||||
Corporate bonds(d) |
78.6 | | 78.6 | | ||||||||||||
U.S. Treasuries |
23.3 | | 23.3 | | ||||||||||||
Other: |
||||||||||||||||
India Government backed funds(e) |
2.1 | 2.1 | ||||||||||||||
Total |
$ | 145.8 | $ | 43.9 | $ | 101.9 | $ | | ||||||||
(a) | Comprised of mutual funds investing in at least 90% of assets in common stock of companies
with large market capitalizations similar to companies in the Standard & Poors (S&P) 500 Index. |
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(b) | Comprised of mutual funds investing in at least 90% of assets in common stock of companies
with small market capitalizations similar to companies in the S&P SmallCap 600 Index |
|
(c) | Comprised of mutual funds investing primarily in non-U.S. common stock, including securities
of issuers located in emerging markets, investing in companies that fund managers believe have
above-average growth potential. |
|
(d) | Comprised of investment grade bonds of U.S. issuers from various industries. |
|
(e) | Assets are invested with the Life Insurance Corporation of India, a government body and
100% insured. In India, fund managers are not required to disclose investment details as
they consider this information proprietary. As a result of the assets being insured with a
government body, we consider them to be level 1 investments. |
Our primary investment objectives are 1) preservation of principal, 2) minimizing the volatility of
our assets and liabilities from changes in interest rates and market conditions, and 3) providing
liquidity to meet benefit payments and expenses. These objectives are accomplished by investing
the estimated payment obligations into fixed income portfolio where maturities match the expected
benefit payments. This portfolio consists of investments rated A or better by Moodys or
Standard & Poors. Funds in excess of the estimated ten-year payment obligations are invested in
equal proportions in a separate bond portfolio and an equity portfolio.
We expect to make contributions of $0.2 million to our pension plans in 2011.
The following benefit payments, which reflect expected future service, as appropriate, are expected
to be paid:
Projected Benefit | Projected Benefit Payments | |||||||
Payments from | From Postretirement Medical | |||||||
(in millions) | Pension Plans | And Life Insurance Plans | ||||||
Year |
||||||||
2011 |
$ | 9.3 | $ | 9.6 | ||||
2012 |
$ | 9.3 | $ | 11.9 | ||||
2013 |
$ | 9.3 | $ | 14.1 | ||||
2014 |
$ | 9.5 | $ | 15.3 | ||||
2015 |
$ | 9.7 | $ | 16.3 | ||||
Aggregate for 2016-2020 |
$ | 51.0 | $ | 60.0 |
Defined Contribution Plans
We have defined contribution retirement plans that cover substantially all domestic employees. The
combined expense for these plans was $2.3 million, $2.7 million and $2.8 million in 2010, 2009 and
2008, respectively. Contributions were 100% funded from the proceeds obtained from the reversion of
our former Salaried pension plan, beginning in 2009.
NOTE 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.
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Historically, such taxes were typically credited against income taxes due. However, with reduced
profitability, primarily in Brazil, we instead sought these refunds via alternate proceedings.
Following is a summary of the recoverable non-income taxes recorded on our balance sheet at
December 31, 2010 and 2009:
December 31, | ||||||||
(in millions) | 2010 | 2009 | ||||||
Brazil |
$ | 84.7 | $ | 67.7 | ||||
India |
14.2 | 7.1 | ||||||
Europe |
8.5 | 2.2 | ||||||
Total recoverable non-income taxes |
$ | 107.4 | $ | 77.0 | ||||
At December 31, 2010, a receivable of $60.0 million was included in current assets and $47.4
million was included in non-current assets and is expected to be recovered through 2013. The
actual amounts received as expressed in U.S. dollars will vary depending on the exchange rate at
the time of receipt or future reporting date.
NOTE 7. Warranties
Reserves are recorded on the consolidated balance sheet to reflect our contractual liabilities
relating to warranty commitments to customers. Historically, estimates of warranty commitments
have not differed materially from actual results; however, unanticipated product quality issues
could result in material changes to estimates in future periods. Changes in the carrying amount
and accrued product warranty costs for the years ended December 31, 2010, 2009 and 2008 are
summarized as follows:
(in millions) | ||||
Balance at January 1, 2008 |
$ | 9.7 | ||
Current year accruals for warranties |
5.5 | |||
Adjustments to preexisting warranties |
(0.3 | ) | ||
Settlements of warranty claims (in cash or in kind) |
(7.5 | ) | ||
Effect of foreign currency translation |
(0.7 | ) | ||
Sale of MP Pumps |
(0.1 | ) | ||
Balance at December 31, 2008 |
$ | 6.6 | ||
Current year accruals for warranties |
5.2 | |||
Adjustments to preexisting warranties |
(1.5 | ) | ||
Settlements of warranty claims (in cash or in kind) |
(5.4 | ) | ||
Effect of foreign currency translation |
0.2 | |||
Balance at December 31, 2009 |
$ | 5.1 | ||
Current year accruals for warranties |
4.5 | |||
Adjustments to preexisting warranties |
0.4 | |||
Settlements of warranty claims (in cash or in kind) |
(4.0 | ) | ||
Effect of foreign currency translation |
(0.1 | ) | ||
Balance at December 31, 2010 |
$ | 5.9 | ||
Warranty expenses were $4.8 million, $3.9 million and $4.5 million for the years ended December 31,
2010, 2009 and 2008, respectively. At December 31, 2010, $5.3 million was included in current
liabilities and $0.6 million was included in non-current liabilities. At December 31, 2009, $4.6
million was included in current liabilities and $0.5 million was included in non-current
liabilities.
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NOTE 8. Debt
(in millions) | 2010 | 2009 | ||||||
Short-term borrowings consist of the following: |
||||||||
Borrowings by foreign subsidiaries under revolving
credit agreements, advances on export receivables
and overdraft arrangements with banks used in the
normal course of business; weighted average interest
rate at December 31 of 8.1% in 2010 and 9.8% in 2009 |
$ | 42.1 | $ | 17.2 | ||||
Current maturities of long-term debt |
10.1 | 5.8 | ||||||
Total short-term borrowings |
52.2 | $ | 23.0 | |||||
Long-term debt consists of the following: |
||||||||
Unsecured borrowings, primarily with banks, by
foreign subsidiaries with weighted average
interest rate at December 31 of 3.8% in 2010 and
6.4% in 2009 and maturing in 2012 through 2013 |
$ | 23.3 | $ | 13.8 | ||||
Less: Current maturities of long-term debt |
(10.1 | ) | (5.8 | ) | ||||
Total long-term debt |
$ | 13.2 | $ | 8.0 | ||||
On June 24, 2010 we voluntarily terminated the Lenders commitments to lend under our Credit
Agreement with JPMorgan Chase Bank, N.A. as administrative agent (Chase), and J.P. Morgan
Securities Inc. as lead arranger, dated March 20, 2008, and amended March 18, 2009, October 20,
2009 and February 19, 2010.
As of the date of termination, and at December 31, 2009, there was no outstanding indebtedness, we
were in compliance with all the covenants of this agreement and no termination fees were incurred.
At December 31, 2010, Chase and its affiliates hold a security interest in approximately $6.4
million of cash collateral (the Cash Collateral), to secure letters of credit, a guarantee of
availability of funds for ACH transactions and derivative obligations. The Cash Collateral will
remain in a restricted account until these obligations are paid in full or they are replaced with
third parties and is included in restricted cash and cash equivalents on our balance sheet.
Tecumseh Products will have no ability to withdraw, or have any other control over, the Cash
Collateral, and acknowledged that Chase and its affiliates shall have sole control over the Cash
Collateral.
We wrote off approximately $0.6 million of remaining deferred financing costs originally incurred
in connection with this agreement. These costs were being amortized over the life of the
agreement.
We have various borrowing arrangements at our foreign subsidiaries to support working capital needs
and government sponsored borrowings which provide advantageous lending rates.
In Europe, based upon exchange rates as of December 31, 2010, we have an unsecured, uncommitted
discretionary credit facility of $2.7 million that expires on April 27, 2011. Historically we have
been able to extend this facility when it expires, but such extension is at the discretion of the
bank. Our borrowings under this facility, based on the exchange rate as of December 31, 2010,
totaled $2.7 million with no availability for additional borrowings. There are no restrictive
covenants on this credit facility.
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In Brazil, based upon the exchange rates as of December 31, 2010, we have uncommitted,
discretionary revolving credit facilities with several local private Brazilian banks (most of which
are guaranteed by the Brazilian government) for an aggregate maximum of $54.0 million, subject to a
borrowing base formula computed on a monthly basis. These facilities are secured by a portion of
our accounts receivable and inventory balances and expire at various times from April, 2011 through
July 13, 2013. Historically we have been able to enter into replacement facilities when these
facilities expire, but such replacements are at the discretion of the banks. Lenders determine, in
their discretion, whether to make new advances with respect to each draw on such facility and there
are no restrictive covenants on these credit facilities. Our borrowings under these facilities
totaled $48.0 million based upon exchange rate as of December 31, 2010, with an additional $6.0
million available for borrowing, based on our accounts receivable and inventory balances and
exchange rates as of December 31, 2010.
In India, based upon exchange rates as of December 31, 2010, we have an aggregate maximum of $15.2
million of revolving credit facilities subject to a borrowing base formula computed on a monthly
basis and secured by land, building and equipment, inventories and receivables. The arrangements
expire at various times from March 2011 through May 2011. Historically we have been able to renew
these facilities when they expire, but such renewal is at the discretion of the banks. Our
borrowings under these facilities, based on the exchange rate as of December 31, 2010, totaled
$14.7 million, and based on the exchange rate and our borrowing base as of December 31, 2010, we
had an additional $0.5 million available for borrowing under these facilities. There are no
restrictive covenants on these credit facilities, except that consent must be received from the
bank in order to dispose of certain assets.
Our consolidated borrowings under these arrangements totaled $65.4 million and $31.0 at December
31, 2010 and 2009, respectively. Our weighted average interest rate for these borrowings was 7.4%
and 8.9% for the year ended December 31, 2010 and 2009, respectively.
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 at $8.4 million, or $6.05 per share,
expires in April of 2012.
Scheduled maturities of debt for each of the five years subsequent to December 31, 2010 are as
follows:
(in millions) | ||||
2011 |
$ | 52.2 | ||
2012 |
2.9 | |||
2013 |
10.3 | |||
2014 |
| |||
Thereafter |
| |||
$ | 65.4 | |||
NOTE 9. Stockholders Equity
The shares of Class A common stock and Class B common stock are substantially identical except as
to voting rights. Class A common stock has no voting rights except the right to i) vote on any
amendments that could adversely affect the Class A Protection Provision in the articles of
incorporation and ii) vote in other limited circumstances, primarily involving mergers and
acquisitions, as required by law.
We have no current expectation to resume payment of dividends.
In April of 2007, as part of the amendment to our Second Lien credit agreements, we granted a
warrant to purchase a number of shares of Class A Common Stock equal to 7% of our fully diluted
common stock, or 1,390,944 shares. This warrant, valued at $8.4 million, expires in April 2012.
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NOTE 10. Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income is shown in the Consolidated Statements of Stockholders
Equity and includes the following:
(in millions) | 2010 | 2009 | ||||||
Foreign currency translation adjustments |
$ | 22.0 | $ | 14.1 | ||||
Loss on derivatives |
(3.8 | ) | (3.7 | ) | ||||
Postretirement and postemployment benefits: |
||||||||
Prior Service Credit |
48.1 | 23.1 | ||||||
Net Actuarial Gain |
(2.9 | ) | (10.6 | ) | ||||
Net Transition Obligation |
| | ||||||
U.S. deferred income tax |
(12.2 | ) | | |||||
Total postretirement and postemployment benefits |
33.0 | 12.5 | ||||||
Total Accumulated other comprehensive income |
$ | 51.2 | $ | 22.9 | ||||
NOTE 11. Share-based Compensation Arrangements
Under our Long-Term Incentive Cash Award Plan, two types of incentives have been awarded, both of
which are based upon the value of our Class A shares: stock appreciation rights (SARs) and
phantom stock units. Both types of awards are settled in cash. Under our Outside Director
Deferred Stock Unit Plan, deferred stock units have been awarded, which are essentially the same as
phantom stock units.
SARs or phantom shares have generally been granted to non-employee directors and key employees in
the first quarter of each year. SARs are granted with an exercise price equal to the closing price
of the Companys common stock on the date of the grant, as reported by The Nasdaq Stock Market. In
general, 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. Phantom shares granted to key employees vest on
the third anniversary of the grant date, and phantom shares granted to non-employee directors vest
on the date of grant.
A summary of activity under the plans during 2010 is as follows:
Nonvested | Vested | |||||||||||||||||||
Weighted | Weighted | |||||||||||||||||||
average | average | |||||||||||||||||||
grant | grant | |||||||||||||||||||
date | date | Total | ||||||||||||||||||
Number of | value | Number of | value | Number of | ||||||||||||||||
awards | per share | awards | per share | awards | ||||||||||||||||
SARs: |
||||||||||||||||||||
Outstanding at January 1, 2010 |
164,403 | $ | 8.05 | 99,294 | $ | 10.09 | 263,697 | |||||||||||||
Granted in 2010 |
123,447 | $ | 10.41 | | $ | | 123,447 | |||||||||||||
Vested |
(67,119 | ) | $ | 8.38 | 67,119 | $ | 8.38 | 0 | ||||||||||||
Exercised |
| $ | | (67,291 | ) | $ | 5.88 | (67,291 | ) | |||||||||||
Forfeited |
(44,307 | ) | $ | 6.70 | (37,017 | ) | $ | 15.16 | (81,324 | ) | ||||||||||
Outstanding at December 31, 2010 |
176,424 | $ | 9.91 | 62,105 | $ | 9.78 | 238,529 | |||||||||||||
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Nonvested | Vested | |||||||||||||||||||
Weighted | Weighted | |||||||||||||||||||
average | average | |||||||||||||||||||
grant | grant | |||||||||||||||||||
date | date | Total | ||||||||||||||||||
Number of | value | Number of | value | Number of | ||||||||||||||||
awards | per share | awards | per share | awards | ||||||||||||||||
Phantom Stock Units: |
||||||||||||||||||||
Outstanding at January 1, 2010 |
139,963 | $ | 13.35 | 41,185 | $ | 12.29 | 181,148 | |||||||||||||
Granted |
104,248 | $ | 12.86 | | $ | | 104,248 | |||||||||||||
Vested |
(14,509 | ) | $ | 14.17 | 14,509 | $ | 14.17 | | ||||||||||||
Settled |
| $ | | (55,694 | ) | $ | 12.78 | (55,694 | ) | |||||||||||
Forfeited |
(30,929 | ) | $ | 19.70 | | $ | | (30,929 | ) | |||||||||||
Outstanding at December 31, 2010 |
198,773 | $ | 12.04 | 0 | $ | 0 | 198,773 | |||||||||||||
The initial value of the phantom shares was based on the closing price of our Class A shares as of
the grant date. The SARs, which are the economic equivalent of options, were valued as of the
grant date using a Black-Scholes model. The assumptions used in the Black-Scholes model for the
SARs awarded as of the grant date shown below are as follows:
Award | Risk-free | Dividend | Expected | Initial value | ||||||||||||||||||||
Date | Strike price | interest rate | yield | life (years) | Volatility | per award | ||||||||||||||||||
3/4/08 |
$ | 28.82 | 3.37 | % | 0.0 | % | 7 | 51.18 | % | $ | 15.16 | |||||||||||||
1/2/09 |
$ | 10.07 | 1.87 | % | 0.0 | % | 7 | 62.78 | % | $ | 6.24 | |||||||||||||
3/16/09 |
$ | 4.17 | 2.50 | % | 0.0 | % | 7 | 84.70 | % | $ | 3.17 | |||||||||||||
6/15/09 |
$ | 9.31 | 3.45 | % | 0.0 | % | 7 | 90.20 | % | $ | 7.40 | |||||||||||||
1/4/10 |
$ | 12.86 | 3.36 | % | 0.0 | % | 7 | 93.72 | % | $ | 10.41 |
Our liability with regard to these awards is re-measured in each quarterly reporting period. The
value of the phantom shares is determined by comparing the closing stock price on our Class A
common stock on the last day of the period to the initial grant date value. At December 31, 2010
and 2009, the closing stock price on our Class A common stock was $13.05 and $11.69, respectively.
We measure the fair value of each SAR, also based on the closing stock price of Class A common
stock on the last day of the period, using a Black-Scholes model. That result is then compared to
the original calculated value. At December 31, 2010 this measurement yielded the following values
for the SARs, by award date:
Award | Risk-free | Dividend | Remaining | Value per | ||||||||||||||||||||
Date | Strike price | interest rate | Yield | life (years) | Volatility | award | ||||||||||||||||||
3/4/08 |
$ | 28.82 | 1.65 | % | 0.0 | % | 4.2 | 85.95 | % | $ | 6.24 | |||||||||||||
1/2/09 |
$ | 10.07 | 2.01 | % | 0.0 | % | 5.0 | 85.95 | % | $ | 9.41 | |||||||||||||
6/15/09 |
$ | 9.31 | 2.21 | % | 0.0 | % | 5.5 | 85.95 | % | $ | 9.84 | |||||||||||||
1/4/10 |
$ | 12.86 | 2.39 | % | 0.0 | % | 6.0 | 85.95 | % | $ | 9.53 |
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As both the SARs and the phantom 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 years ended December 31, 2010 and 2009 was
$1.5 million and $0.8 million, respectively. The balance of the fair value that has not yet been
recorded as expense is considered an unrecognized liability. The total unrecognized compensation
liability as calculated at December 31, 2010 and 2009 was $2.0 million and $2.1 million,
respectively.
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.
NOTE 12. Impairments, Restructuring Charges and Other Items
The charges (gains) recorded as restructuring, impairment and other charges for the years ended
December 31 are as follows:
(in millions) | 2010 | 2009 | 2008 | |||||||||
Legal Settlement |
$ | 7.3 | $ | | $ | | ||||||
Environmental reserve on held-for-sale building |
1.2 | 2.3 | | |||||||||
Severance, restructuring costs, and special termination
benefits |
2.5 | 18.1 | 12.5 | |||||||||
Curtailment Gain |
(0.4 | ) | | (21.5 | ) | |||||||
Settlement loss on the hourly pension plan reversion |
29.4 | | | |||||||||
Excise tax expense on proceeds from hourly retirement
plan reversion |
10.9 | | | |||||||||
Impairment of investment |
0.4 | 1.0 | | |||||||||
Final settlement of previously terminated salary
retirement plan, net of excise tax |
(1.0 | ) | | | ||||||||
Goodwill impairments |
| | 18.2 | |||||||||
Excise tax expense on proceeds from salaried retirement
plan reversion |
| | 20.0 | |||||||||
Impairment of buildings and machinery |
| | 14.6 | |||||||||
Impairment of prepaid outside sales expense |
| 1.5 | | |||||||||
Repayment of Legal Fees |
| 1.1 | | |||||||||
Loss on transfer of surplus land |
| 0.4 | | |||||||||
Total impairments, restructuring charges, and other items |
$ | 50.3 | $ | 24.4 | $ | 43.8 | ||||||
2010
2010 operating net loss included $50.3 million of impairments, restructuring charges and other
items. This included a legal settlement of $7.3 million; an environmental reserve increase of $1.2
million; a curtailment gain of $0.4 million; the $40.3 million of non-cash settlement charges and
excise tax related to the reversion of our hourly pension plan (as more fully described in Note 5
of the notes to consolidated financial statements); a $0.4 million impairment of an investment, and
severance payments associated with a reduction in force at our Brazilian ($0.7 million), Indian
($0.1 million) and Corporate ($1.7 million) locations. In addition, a final settlement gain of
$1.0 million, net of excise tax, was received in February 2010 from our previous salaried pension
plan that was terminated in 2008.
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2009
2009 operating net loss included $24.4 million of impairments, restructuring charges and other
items. The amounts reported under severance, restructuring costs, and special termination
benefits of $18.1 million represent severance payments made to employees, payroll taxes, and other
benefit-related costs for employees terminated during the period. This amount includes the $2.6
million severance payment to our former Chief Executive Officer and $1.8 million for certain key
employees covered by severance agreements. The remaining severance expense was a result of
restructuring costs at our European ($7.9 million), Brazilian ($3.8 million), North America ($1.3
million), and Indian ($0.7 million) locations during the year.
The other expenses include an environmental reserve of $2.3 million, which was established in the
first quarter of 2009 and represents estimated costs associated with remediation activities at some
of our former facilities based on information derived from a Phase II environmental study. The
timing and amount of cash expenditures related to this estimated liability cannot currently be
determined. Also included in other is $1.1 million for reimbursements to the Herrick Foundation
for its expenses in connection with our 2009 annual meeting of shareholders and the $0.4 million
relates to a loss on the sale of surplus land in 2009.
Also included in impairments, restructuring charges and other items are non-cash items of $2.5
million for the write-off of prepaid outside sales expense determined to no longer provide benefit
to us in the future of $1.5 million and impairment of our investment in an unconsolidated
subsidiary of $1.0 million.
2008
2008 operating net loss included $43.8 million of impairments, restructuring charges and other
items. The $14.6 million recognized for impairments of buildings and machinery was due to the
decision made in the third quarter of 2008 to relocate and consolidate certain of our global
manufacturing capabilities, in light of the pronounced softening of demand resulting from the
current global financial conditions. The expense was recognized in Brazil ($11.0 million), North
America ($3.0 million), and India ($0.6 million). The severance expense of $12.2 million
represents severance payments made to employees, payroll taxes, and other benefit-related costs for
employees terminated during the period. For the year ended, December 31, 2008, these costs include
costs recognized at our Brazilian ($5.2 million), North American ($3.7 million), Indian ($2.7
million) and European ($0.6 million) locations during the year. Other charges (gains) recognized
in 2008 related to our pension and other postemployment benefit plans. See Note 5 for further
discussion of these charges (gains). The cash outlays for these expenses were incurred in 2008.
The majority of severance costs were included on our balance sheet as part of accrued payroll until
paid in cash. The unpaid liabilities associated with the Tecumseh facility closure were included
in our balance sheet under pension liabilities, as the payments were associated with
post-employment benefits and covered under collective bargaining agreements requiring these
payments to be made out of the pension plan.
The following table reconciles cash activities for the years ended December 31, 2010 and 2009 for
accrued impairment, restructuring charges and other items.
(In Millions) | Severance | Excise Tax | Legal | Other | Total | |||||||||||||||
Balance at January 1, 2009 |
$ | | $ | | $ | | $ | | $ | | ||||||||||
Accruals |
18.1 | | | 3.8 | 21.9 | |||||||||||||||
Payments |
(8.4 | ) | | | (2.0 | ) | (10.4 | ) | ||||||||||||
Balance at December 31, 2009 |
$ | 9.7 | $ | | $ | | $ | 1.8 | $ | 11.5 | ||||||||||
Accruals |
2.1 | 10.9 | 7.3 | 1.2 | 21.5 | |||||||||||||||
Payments |
(11.2 | ) | (10.9 | ) | (7.3 | ) | (0.6 | ) | (30.0 | ) | ||||||||||
Balance at December 31, 2010 |
$ | 0.6 | $ | | $ | | $ | 2.4 | $ | 3.0 | ||||||||||
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The accrued severance balance at December 31, 2010 represents the remaining payments to be made
related to our European reduction in force and is expected to be paid in the first quarter of 2011.
The environmental reserve balance at December 31, 2010, included in other, represents the
estimated costs associated with remediation activities at our former Tecumseh, Michigan facility,
and is expected to be paid over the next 15-21 months.
NOTE 13. Income Taxes
Consolidated income (loss) from continuing operations before taxes consists of the following:
(in millions) | 2010 | 2009 | 2008 | |||||||||
U.S. |
$ | (73.6 | ) | $ | (61.0 | ) | $ | (20.8 | ) | |||
Foreign |
(5.1 | ) | (41.4 | ) | (62.2 | ) | ||||||
$ | (78.7 | ) | $ | (102.4 | ) | $ | (83.0 | ) | ||||
Provision for (benefit from) income taxes from continuing operations consists of the following:
(in millions) | 2010 | 2009 | 2008 | |||||||||
Current: |
||||||||||||
U.S. federal |
$ | (1.2 | ) | $ | (0.8 | ) | $ | 0.8 | ||||
State and local |
0.1 | (0.1 | ) | (0.1 | ) | |||||||
Foreign income and withholding taxes |
(0.3 | ) | 0.6 | 1.9 | ||||||||
$ | (1.4 | ) | $ | (0.3 | ) | $ | 2.6 | |||||
Deferred: |
||||||||||||
U.S. federal |
(15.1 | ) | (1.8 | ) | (8.0 | ) | ||||||
State and local |
| (1.7 | ) | | ||||||||
Foreign |
(0.1 | ) | (6.8 | ) | 0.4 | |||||||
(15.2 | ) | (10.3 | ) | (7.6 | ) | |||||||
Benefit from income taxes from continuing operations |
$ | (16.6 | ) | $ | (10.6 | ) | $ | (5.0 | ) | |||
A reconciliation between the actual income tax expense (benefit) provided and the income tax
expense (benefit) computed by applying the statutory federal income tax rate of 35% to income
before tax is as follows:
(in millions) | 2010 | 2009 | 2008 | |||||||||
Income taxes (benefit) at U.S. statutory rate |
$ | (27.5 | ) | $ | (35.8 | ) | $ | (29.0 | ) | |||
State and local income taxes |
0.1 | (1.7 | ) | (0.1 | ) | |||||||
Foreign tax rate differential |
(0.1 | ) | (0.1 | ) | 2.3 | |||||||
Valuation allowance |
9.9 | 27.8 | 14.6 | |||||||||
Nondeductible excise tax |
3.9 | | 7.0 | |||||||||
Tax loss carry back |
(1.2 | ) | (2.5 | ) | | |||||||
Other |
(1.7 | ) | 1.7 | 0.2 | ||||||||
$ | (16.6 | ) | $ | (10.6 | ) | $ | (5.0 | ) | ||||
Deferred income taxes reflect the effect of temporary differences between the tax basis of an asset
or liability and its reported amount in the financial statements. Provisions are also made for
estimated taxes which may be incurred on the remittance of subsidiaries undistributed earnings,
none of which are deemed to be permanently reinvested.
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Significant components of our deferred tax assets and liabilities as of December 31 were as
follows:
(in millions) | 2010 | 2009 | ||||||
Deferred tax assets: |
||||||||
Other postretirement liabilities |
$ | 29.5 | $ | 14.7 | ||||
Product warranty and self-insured risks |
5.0 | 4.4 | ||||||
Tax Carryforwards |
379.5 | 377.6 | ||||||
Other accruals and miscellaneous |
7.8 | 12.9 | ||||||
421.8 | 409.6 | |||||||
Valuation allowance |
(380.1 | ) | (367.0 | ) | ||||
Total deferred tax assets |
$ | 41.7 | $ | 42.6 | ||||
Deferred tax liabilities: |
||||||||
Property, Plant & Equipment |
$ | 23.4 | $ | 9.8 | ||||
Pension |
8.6 | 22.9 | ||||||
Unremitted foreign earnings |
| 4.4 | ||||||
Unrealized gains on securities |
4.4 | 4.6 | ||||||
Other |
5.1 | 1.5 | ||||||
Total deferred tax liabilities |
41.5 | 43.2 | ||||||
Net deferred tax (liabilities) assets |
$ | 0.2 | $ | (0.6 | ) | |||
Deferred tax detail is included
in the consolidated balance sheet as follows: |
||||||||
Tax assets |
$ | 3.9 | $ | 7.4 | ||||
Non-current deferred tax liabilities |
3.7 | 7.2 | ||||||
Total |
$ | 0.2 | $ | 0.2 | ||||
Certain reclassifications have been made to prior year amounts to conform to the current year
presentation.
At December 31, 2010, we had the following tax carryforwards:
Amounts | Expiration | |||||
U.S. Federal Net Operating Loss |
$ | 187.8 | 2027 to 2030 | |||
U.S Federal Capital Loss |
68.5 | 2012 | ||||
U.S. State Net Operating Loss |
18.0 | 2015 to 2029 | ||||
Foreign Net Operating Losses |
57.2 | Unlimited | ||||
U.S. Tax Credits |
47.7 | 2011 to 2029 | ||||
U.S. Alternative Minimum Tax Credit |
0.3 | Unlimited | ||||
Total operating loss and tax credit carryforwards |
$ | 379.5 | ||||
Income taxes are allocated between continuing operations, discontinued operations and other
comprehensive income because 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. We apply this concept 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,
the tax benefit allocated to continuing operations is determined by taking into account the pre-tax
income of other categories.
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The receipt of $54.5 million in gross proceeds from the reversion of our hourly retirement plan in
2010 generated a tax gain that was fully offset for federal tax purposes by our NOL carryforwards.
In 2008, the $100.0 million in gross proceeds from the reversion of our Salaried Retirement plan
was fully offset against our existing NOL carryforwards.
Deferred income tax assets are evaluated quarterly to determine if valuation allowances are
required or should be adjusted. All available evidence, both positive and negative using a more
likely than not standard, is considered to determine if valuation allowances should be established
against deferred tax assets. This assessment considers, among other matters, the nature, frequency
and severity of recent losses, forecasts of future profitability, the duration of statutory
carryforward periods, previous experience with tax attributes expiring unused and tax planning
alternatives. In making such judgments, significant weight is given to evidence that can be
objectively verified. A significant piece of objective negative evidence evaluated was the
cumulative loss incurred over the three-year period ended December 31, 2010. This objective
negative evidence limits the ability to consider other subjective evidence such as our projections
for future growth.
Based on this assessment, valuation allowances have been recorded against our US net deferred tax
assets and certain international net deferred tax assets, specifically Brazil, France and India.
The amount of the deferred tax assets considered realizable, however, could be adjusted if
estimates of future taxable income during the carryforward period are reduced or if objective
negative evidence in the form of cumulative losses is no longer present and additional weight may
be given to subjective evidence such as our projections for growth.
At December 31, 2010 and 2009, the amount of gross unrecognized tax benefits before valuation
allowances and the amount that would favorably affect the effective income tax rate in future
periods after valuation allowances were $5.5 million and $5.9 million, respectively. At December
31, 2010, there was a reduction of deferred tax assets relating to uncertain tax positions for $0.4
million related to state tax nexus issue.
The Company accrues interest and penalties related to unrecognized tax benefits in its provision
for income taxes. At December 31, 2010 the Company had no accrued interest and penalties and had
$0.6 million of accrued interest and penalties at December 31, 2009.
The following reconciliation illustrates the unrecognized tax benefits for the years ended December
31:
(in millions) | 2010 | 2009 | ||||||
Unrecognized tax benefits beginning of period |
$ | 5.9 | $ | 0.6 | ||||
Payments |
| (0.2 | ) | |||||
Decreases |
(0.4 | ) | ||||||
Additions |
| 5.5 | ||||||
Unrecognized tax benefits end of period |
$ | 5.5 | $ | 5.9 | ||||
As part of the process of finalizing the audit of our 2003 tax year, we reached an agreement with
the IRS in December 2008 regarding the refund of federal income taxes previously paid related to
that period. We received the $14.9 million refund, which represented $12.2 million in refund and
$2.7 million in interest, in July 2009. Amended returns were filed during 2009 relating to a
similar issue for other years resulting in the recognition of a net tax benefit of $1.9 million.
The Company has recorded unrecognized tax benefits for uncertain tax positions reported on returns
that are currently being examined by the tax authorities. The Company expects that the tax
authorities will complete their review of these positions during calendar year 2011, therefore; the
amount of the unrecognized tax benefit could be reduced by $5.5 million within the next 12 months.
We file U.S., state and foreign income tax returns in jurisdictions with varying statues of
limitations. During 2008, the Company closed the audits for its U.S. federal income tax returns
for 2003. A tax benefit of $0.6 million was recognized in the consolidated statements of
operations (for additional interest received) and there was no impact on the unrecognized tax
benefits as a result of the completion of this audit. We have open tax years from 2005 to 2009,
with various significant taxing jurisdictions including the U.S., Canada, France and Brazil. In
the U.S., our federal income tax returns through 2005 have been examined by the Internal Revenue
Service.
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NOTE 14. Fair Value Measurements
We utilize fair value measurements to record fair value adjustments to certain assets and
liabilities and to determine fair value disclosures.
We categorize 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. |
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.
Short and long-term investments
Investments with a maturity of greater than three months up to one year are classified as
short-term investments. Investments with maturities beyond one year may be classified as short-term
if we reasonably expect the investment to be realized in cash or sold or consumed during the normal
operating cycle of the business; otherwise, they are classified as long-term. Investments
available for sale are recorded at market value. Investments held to maturity are measured at
amortized cost in the statement of financial position if it is our intent and ability to hold those
securities to maturity. Any unrealized gains and losses on available for sale securities are
reported as other comprehensive income as a separate component of shareholders equity until
realized or until a decline in fair value is determined to be other than temporary.
Foreign currency forward purchases and commodity futures contracts
Derivative instruments recognized on our balance sheet consist of foreign currency forward exchange
contracts and commodity futures contracts. These contracts are recognized at the estimated amount
at which they could be settled based on market observable inputs, such as forward market exchange
rates and are recorded on our consolidated balance sheet as part of current assets and liabilities
under the heading Fair value of hedge. We classify our derivative instruments as Level 2.
The following table presents the amounts recorded on our balance sheet for assets and liabilities
measured at fair value on a recurring basis as of December 31, 2010.
(in millions) | Total Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||
Assets: |
||||||||||||||||
Commodity futures contracts |
$ | 7.3 | $ | | $ | 7.3 | $ | | ||||||||
Foreign currency derivatives |
5.2 | | 5.2 | | ||||||||||||
Balance as of December 31, 2010 |
$ | 12.5 | $ | | $ | 12.5 | $ | | ||||||||
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The following table presents the amounts recorded on our balance sheet for assets and liabilities
measured at fair value on a recurring basis as of December 31, 2009.
(in millions) | Total Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||||
Assets: |
||||||||||||||||
Auction rate certificates |
$ | 3.9 | $ | | $ | | $ | 3.9 | ||||||||
Auction rate securities rights |
0.2 | | | 0.2 | ||||||||||||
Commodity futures contracts |
5.4 | | 5.4 | | ||||||||||||
Foreign currency derivatives |
5.8 | | 5.8 | | ||||||||||||
Balance as of December 31, 2009 |
$ | 15.3 | $ | | $ | 11.2 | $ | 4.1 | ||||||||
Liabilities: |
||||||||||||||||
Commodity futures contracts |
$ | 0.4 | $ | | $ | 0.4 | $ | | ||||||||
Foreign currency derivatives |
0.2 | | 0.2 | |||||||||||||
Balance as of December 31, 2009 |
$ | 0.6 | $ | | $ | 0.6 | $ | | ||||||||
The following table presents the changes in Level 3 assets for the year ended December 31, 2010:
Auction Rate | Auction Rate | |||||||
(in millions) | Certificates | Securities Rights | ||||||
Balance at January 1, 2010 |
$ | 3.9 | $ | 0.2 | ||||
Payments on principal |
(4.2 | ) | | |||||
Gains (losses) included in investment income |
0.3 | (0.2 | ) | |||||
Balance at December 31, 2010 |
$ | | $ | | ||||
We sold our investment in our Auction Rate Certificate (ARC) and Auction Rate Securities (ARSR)
that were previously classified as level 3 assets in the second quarter of 2010.
NOTE 15. Derivative Instruments and Hedging Activities
We are exposed to foreign currency exchange rate risk arising from transactions in the normal
course of business, such as sales to foreign customers not denominated in the sellers functional
currency, foreign plant operations, and purchases from foreign suppliers. We actively manage the
exposure of our foreign currency exchange rate market risk and market fluctuations in commodity
prices by entering into various hedging instruments, authorized under our policies that place
controls on these activities, with counterparties that are highly rated financial institutions. We
are exposed to credit-related losses in the event of non-performance by these counterparties;
however, our exposure is generally limited to the unrealized gains in our contracts should any of
the counterparties fail to perform as contracted.
Premiums paid on options are initially recorded as deferred charges. The Company assesses the
effectiveness of options based on the total cash flow method and records changes in options fair
value to other comprehensive income to the degree they are effective.
Our hedging activities primarily involve use of foreign currency forward exchange contracts,
options and commodity futures contracts. These contracts are designated as cash flow hedges. We
use derivative instruments only in an attempt to limit underlying exposure from foreign currency
exchange rate fluctuations and commodity price fluctuations to minimize earnings and cash flow
volatility associated with these risks. Decisions on whether to use such contracts are made based
on the amount of exposure to the currency or commodity involved, and an assessment of the near-term
market value for each risk. Our policy is not to allow the use of derivatives for trading
or speculative purposes. Our primary foreign currency exchange rate exposures are with the
Brazilian Real, Euro, and the Rupee, against the U.S. dollar.
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Cash flow hedges. We recognize all derivative instruments as either assets or liabilities at fair
value on the consolidated balance sheet and formally document relationships between cash flow
hedging instruments and hedged items, as well as our risk-management objective and strategy for
undertaking hedge transactions. This process includes linking all derivatives to the forecasted
exposure, such as sales to third parties denominated in a non-local currency and commodity
purchases. For derivative instruments that are designated and qualify as a cash flow hedge, all
changes in fair values of outstanding cash flow hedge derivatives, except the ineffective portion,
are recorded in other comprehensive income (OCI), until the hedged exposure affects earnings upon
settlement of the contracts. Gains and losses on the derivative representing either ineffective
hedges or hedge components excluded from the assessment of effectiveness are recognized immediately
in earnings. In either case, the derivatives affect cash flow at the time the contract is settled.
The consolidated statement of operations classification of effective hedge results is the same as
that of the underlying exposure. Results of hedges of sales and raw materials are recorded in net
sales and cost of sales, respectively, when the underlying hedged transaction affects net earnings.
The maximum amount of time we hedge our exposure to the variability in future cash flows for
forecasted trade sales and purchases is eighteen months.
We formally assess at a hedges inception and on a quarterly basis, whether the derivatives that
are used in the hedging transaction have been highly effective in offsetting changes in the cash
flows of the hedged items and whether those derivatives may be expected to remain highly effective
in future periods. When it is determined that a derivative is not, or has ceased to be, highly
effective as a hedge, we discontinue hedge accounting prospectively and carry the derivative at its
fair value on the balance sheet, recognizing future changes in the fair value in earnings. For the
fiscal years ended December, 31 2010 and 2009, there were no gains or losses on contracts
reclassified into earnings as a result of the discontinuance of cash flow hedges. The notional
amount outstanding of forward contracts designated as cash flow hedges was $109.6 million and $59.9
million at December 31, 2010 and 2009, respectively.
The following table presents the fair value of the Companys derivatives designated as hedging
instruments in our consolidated balance sheet as of December 31, 2010 and 2009:
Asset (Liability) Derivatives | ||||||||||||
December 31, 2010 | December 31, 2009 | |||||||||||
Financial | Financial | |||||||||||
(in millions) | Position Location | Fair Value | Position Location | Fair Value | ||||||||
Derivatives designated as
hedging instruments |
||||||||||||
Commodity futures contracts |
Fair value of hedge | $ | 7.3 | Fair value of hedge | $ | 5.4 | ||||||
Commodity futures contracts |
Fair value of hedge | | Fair value of hedge | (0.4 | ) | |||||||
Foreign currency derivatives |
Fair value of hedge | 5.2 | Fair value of hedge | 5.8 | ||||||||
Foreign currency derivatives |
Fair value of hedge | | Fair value of hedge | (0.2 | ) | |||||||
Total |
$ | 12.5 | $ | 10.6 | ||||||||
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The following table presents the impact of derivatives designated as hedging instruments on our
consolidated statements of operations for our derivatives designated as cash flow hedging
instruments for the year ended December 31, 2010 and 2009.
Amount of Gain | ||||||||||
Reclassified from | ||||||||||
Amount of Gain | Location of Gain | Accumulated OCI into | ||||||||
Recognized in OCI | Reclassified from | Income (Effective | ||||||||
(Effective Portion) | Accumulated | Portion) | ||||||||
Twelve Months Ended | OCI into Income | Twelve Months Ended | ||||||||
(in millions) | December 31, 2010 | (Effective Portion) | December 31, 2010 | |||||||
Derivatives designated as
hedging instruments |
||||||||||
Commodity futures contracts |
$ | 10.4 | Cost of sales | $ | 8.8 | |||||
Foreign currency derivatives |
6.6 | Cost of sales | 7.5 | |||||||
Total |
$ | 17.0 | $ | 16.3 | ||||||
As of December 31, 2010, we expect to reclassify pretax gains of $11.7 million from accumulated
other comprehensive income into net income during the next twelve months. As of December 31, 2010,
there were no contracts that were deemed ineffective.
Amount of Gain | ||||||||||
Reclassified from | ||||||||||
Amount of Gain | Location of Gain | Accumulated OCI into | ||||||||
Recognized in OCI | Reclassified from | Income (Effective | ||||||||
(Effective Portion) | Accumulated | Portion) | ||||||||
Twelve Months Ended | OCI into Income | Twelve Months Ended | ||||||||
(in millions) | December 31, 2009 | (Effective Portion) | December 31, 2009 | |||||||
Derivatives designated as
hedging instruments |
||||||||||
Commodity futures contracts |
$ | 12.8 | Cost of sales | $ | 5.9 | |||||
Foreign currency derivatives |
21.6 | Cost of sales | 9.6 | |||||||
Total |
$ | 34.4 | $ | 15.5 | ||||||
Amount of Gain | ||||||||||||
Reclassified from | ||||||||||||
Amount of Gain | Location of Gain | Accumulated OCI into | ||||||||||
Recognized in OCI | Reclassified from | Income (Ineffective | ||||||||||
(Ineffective Portion) | Accumulated | Portion) | ||||||||||
Twelve Months Ended | OCI into Income | Twelve Months Ended | ||||||||||
(in millions) | December 31, 2009 | (Ineffective Portion) | December 31, 2009 | |||||||||
Derivatives designated as
hedging instruments |
||||||||||||
Commodity futures contracts |
$ | 1.3 | Cost of sales | $ | 1.3 | |||||||
Foreign currency derivatives |
| Cost of sales | | |||||||||
Total |
$ | 1.3 | $ | 1.3 | ||||||||
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NOTE 16. Commitments and Contingencies
Operating leases
Total rental expense for operating leases was $7.3 million, $4.5 million, and $3.6 million for the
fiscal years ended December 31, 2010, 2009, and 2008, respectively. As of December 31, 2010,
future minimum lease payments under noncancelable operating leases amounted to $13.4 million as
follows: 2011, $2.2 million; 2012, $2.0 million, 2013, $2.0 million, 2014, $1.8 million, and after
2014, $5.4 million.
Accounts Receivable
A portion of accounts receivable at our Brazilian, European, and Indian subsidiaries are sold with
limited recourse at a discount, which creates a contingent liability for the business. Our
Brazilian subsidiary also sells portions of its accounts receivable without recourse. Discount
receivables sold, including both with and without recourse amounts, were $34.8 million and $43.3
million at December 31, 2010 and 2009, respectively, and the discount rate was 8.7% and 11.6% in
2010 and 2009, respectively.
Purchase Commitments
As of December 31, 2010, we had $12.1 million of noncancelable purchase commitments with some
suppliers for materials and supplies in the normal course of business.
Letters of credit
We issue letters of credit in the normal course of business, as required by some vendor contracts.
As of December 31, 2010 and 2009, we had $6.4 million and $4.9 million, respectively in outstanding
letters of credit.
Litigation
General
We are party to litigation in the ordinary course of business. Litigation occasionally involves
claims for punitive as well as compensatory damages arising out of use of our products. Although
we are self-insured to some extent, we maintain insurance against certain product liability losses.
We are also subject to administrative proceedings with respect to claims involving the discharge
of hazardous substances into the environment. Some of these claims assert damages and liability
for remedial investigation and clean-up costs. We are also typically involved in commercial and
employee disputes in the ordinary course of business. Although their ultimate outcome cannot be
predicted with certainty, and some may be disposed of unfavorably to us, management considers that
appropriate reserves have been established and, except as described below, does not believe that
the disposition of these matters will have a material adverse effect on our consolidated financial
position, cash flows or results of operations. With the exception of the settlement of the working
capital adjustment made with the purchaser of our former Engine & Power Train business segment, our
reserves for contingent liabilities have not historically differed materially from estimates upon
their final outcomes. However, discovery of new facts, developments in litigation, or settlement
negotiations could cause estimates to differ materially from current expectations in the future.
Except as disclosed below, we do not believe we have any pending loss contingencies that are
probable or reasonably possible of having a material impact to our consolidated financial position,
results of operations or cash flows.
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U.S. Horsepower label litigation
A nationwide class-action lawsuit filed against us and other defendants (Ronnie Phillips et al v.
Sears Roebuck Corporation et al., No. 04-L-334 (20th Judicial Circuit, St. Clair County,
IL)) 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. On
March 30, 2007, the Court issued an order granting the defendants motion to dismiss, and on May 8, 2008 the Court issued an
opinion that (i) dismissed all the claims made under the Racketeer Influenced and Corrupt
Organization (RICO) Act with prejudice; (ii) dismissed all claims of the 93 non-Illinois
plaintiffs with instructions to re-file amended claims in individual state courts; and (iii)
ordered that any amended complaint for the three Illinois plaintiffs be re-filed by May 30, 2008.
Since that time, eleven plaintiffs firms have filed 64 class action matters in 48 states, the
District of Columbia and Puerto Rico, asserting claims on behalf of consumers in each of those
jurisdictions with respect to lawnmower purchases from January 1, 1994 to the present. We have
joined the joint defense group with other lawnmower and component manufacturers who are defendants.
In the fourth quarter of 2009, a conceptual offer by a group of the defendants, including Tecumseh,
of $51.0 million was accepted in principle with the actual settlement terms to be negotiated. On
February 24, 2010, Tecumseh, along with the other settling defendants, executed a settlement
agreement (the group settlement) with plaintiffs resolving claims against the group of settling
defendants in exchange for a group payment of $51 million, a one-year warranty extension for
qualifying class members and injunctive relief regarding future lawnmower engine labeling
practices. On February 26, 2010, the court entered an order preliminarily approving the group
settlement, certifying the settlement class, appointing settlement class counsel and staying
proceedings against the settling defendants. The settlement class consists of all persons or
entities in the United States who, beginning January 1, 1994, up to the date when notice of the
preliminary approval was published (April 12, 2010) purchased, for their own use and not for
resale, a lawn mower containing a gas combustible engine up to 30 horsepower provided that either
the lawn mower or the engine of the lawn mower was manufactured or sold by a defendant. On August
16, 2010, the District Court entered orders approving each of the settlements. A number of
objectors filed appeals regarding the settlement approval orders and other related orders in the
United States Court of Appeals for the Seventh Circuit, but as of February 16, 2011, all of those
appeals have now been dismissed. As of December 31, 2010, Tecumseh has paid $3.1 million of its
allocable portion of approximately $6.2, and the balance was paid on March 1, 2011.
Canadian Horsepower label litigation
On March 19, 2010 Robert Foster and Murray Davenport filed a lawsuit under the Class Proceedings
Act in the Ontario Superior Court of Justice against us and several other defendants (including
Sears Canada Inc., Sears Holdings Corporation, John Deere Limited, Platinum Equity, LLC, Briggs &
Stratton Corporation, Kawasaki Motors Corp., USA, MTD Products Inc., The Toro Company, American
Honda Motor Co., Electrolux Home Products, Inc., Husqvarna Consumer Outdoor Products N.A., Inc. and
Kohler Co.), alleging that defendants conspired to fix prices of lawnmowers and lawn mower engines
in Canada, to lessen competition in lawnmowers and lawn mower engines in Canada, and to mislabel
the horsepower of lawnmower engines and lawnmowers in violation of the Canadian Competition Act,
civil conspiracy prohibitions and the Consumer Packaging and Labeling Act. Plaintiffs seek to
represent a class of all persons in Canada who purchased, for their own use and not for resale, a
lawnmower containing a gas combustible engine of 30 horsepower or less provided that either the
lawnmower or the engine contained within the lawnmower was manufactured and/or sold by a defendant
or their predecessors between January 1, 1994 and the date of judgment. Plaintiffs seek
undetermined money damages, punitive damages, interest, costs and equitable relief. In addition,
Snowstorm Acquisition Corporation and Platinum Equity, LLC, the purchasers of Tecumseh Power
Company and its subsidiaries and Motoco a.s. in November 2007, have notified us that they claim
indemnification with respect to this lawsuit under our Stock Purchase Agreement with them.
At this time, we do not have a reasonable estimate of the amount of our ultimate liability, if any,
or the amount of any potential future settlement, but the amount could be material to our financial
position, consolidated results of operations and cash flows.
On May 3, 2010, a class action was commenced in the Superior Court of the Province of Quebec by
Eric Liverman and Sidney Vadish against us and several other defendants (including those listed
above) advancing allegations similar to those outlined immediately above. Plaintiffs seek
undetermined money damages, punitive damages, interest, costs, and equitable relief. As above,
Snowstorm Acquisition Corporation and Platinum Equity, LLC, the purchasers of Tecumseh Power
Company and its subsidiaries and Motoco a.s. in November 2007, have notified us that they claim
indemnification with respect to this lawsuit under our Stock Purchase Agreement with them.
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At this time, we do not have a reasonable estimate of the amount of our ultimate liability, if any,
or the amount of any potential future settlement, but the amount could be material to our financial
position, consolidated results of operations and cash flows.
Compressor industry antitrust investigation
On February 17, 2009, we received a subpoena from the United States Department of Justice Antitrust
Division (DOJ) and a formal request for information from the Secretariat of Economic Law of the
Ministry of Justice of Brazil (SDE) related to investigations by these authorities into possible
anti-competitive pricing arrangements among certain manufacturers in the compressor industry. The
European Commission began an investigation of the industry on the same day.
We are cooperating fully with these investigations. In addition, we have entered into a
conditional amnesty agreement with the DOJ under the Antitrust Divisions Corporate Leniency
Policy. Pursuant to the agreement, the DOJ has agreed to not bring any criminal prosecution with
respect to the investigation against the Company as long as we, among other things, continue our
full cooperation in the investigation. We have received similar conditional immunity from the
European Commission, the SDE, and the competition authorities in other jurisdictions.
While we have taken steps to avoid fines, penalties and other sanctions as the result of
proceedings brought by regulatory authorities, the amnesty grants do not extend to civil actions
brought by private plaintiffs. The public disclosure of these investigations has resulted in class
action lawsuits filed in Canada and numerous class action lawsuits filed in the United States,
including by both direct and indirect purchaser groups. All of the U.S. actions have been
transferred to the U.S. District Court for the Eastern District of Michigan for coordinated or
consolidated pretrial proceedings under Multidistrict Litigation (MDL) procedures.
On June 24, 2010, Tecumseh Products Company, Tecumseh Compressor Company, Tecumseh do Brasil, Ltda,
and Tecumseh do Brasil U.S.A. LLC entered into a settlement agreement with the direct-purchaser
plaintiffs (the Settlement Agreement) to resolve claims in the action in order to avoid the costs
and distraction of this ongoing class action litigation. The Settlement Agreement was made by and
between Tecumseh and its subsidiaries and affiliates, and plaintiffs, both individually and on
behalf of a class of persons who purchased in the United States, its territories and possessions,
directly from a defendant during the period from January 1, 2004 through December 31, 2008: (a)
compressors of less than one horsepower used for refrigeration, freezing or cooling purposes,
and/or (b) refrigeration products, including condensers, containing compressors of less than one
horsepower used for refrigeration, freezing or cooling purposes (the Covered Products).
Compressors used for air-conditioning applications are specifically excluded.
Under the terms of the Settlement Agreement, in exchange for plaintiffs full release of all U.S.
direct-purchaser claims against Tecumseh relating to the Covered Products, Tecumseh agreed to pay a
settlement amount of $7.0 million and, in addition, agreed to pay up to $250,000 for notice and
administrative costs associated with administering the settlement. These costs were accrued as an
expense in the second quarter of 2010 (and paid in the third quarter of 2010) in the line item
captioned Impairments, restructuring charges, and other items. Tecumseh also agreed to assist
plaintiffs in obtaining the Courts approval of the settlement and to share with plaintiffs
information relating to the anti-competitive conduct alleged in the action. If the Court refuses
to approve the Settlement Agreement or if the Settlement Agreement is modified or set aside on
appeal, plaintiffs and Tecumseh each may rescind the Settlement Agreement and the settlement amount
will be returned to Tecumseh. In addition, if Tecumseh customers representing a significant
percentage of purchases of Covered Products choose not to participate in the settlement (opt-out),
Tecumseh has the right under certain circumstances to withdraw from the Settlement Agreement and
have the settlement funds returned. The Court has not yet scheduled a hearing for preliminary
approval of the Settlement Agreement.
In the United States, the remaining indirect purchaser class actions are in a preliminary stage. A
consolidated amended complaint was filed on June 30, 2010. Tecumseh and other defendants filed
motions to dismiss the indirect purchaser class action on August 30, 2010. Briefing on the motions
has been completed and the motions are still pending before the Court.
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Persons who engage in price-fixing in violation of U.S. antitrust law generally are jointly and
severally liable to private claimants for three times the actual damages caused by their joint
conduct. As a conditional amnesty recipient, however, Tecumsehs civil liability will be limited
pursuant to the Antitrust Criminal Penalty Enhancement and Reform Act of 2004, as amended
(ACPERA). As long as Tecumseh continues to cooperate with the civil claimants and complies with
the requirements of ACPERA, we will be liable only for actual, as opposed to treble, damages and
will not be jointly and severally liable for claims against other participants in the alleged
anticompetitive conduct being investigated.
In Canada, the class actions are in a preliminary stage. Due to uncertainty of our liability in
these cases, or other cases that may be brought in the future, we have not accrued any liability in
our financial statements, other than for the claims subject to the Settlement Agreement. Our
ultimate liability, if any, or the amount of any potential future settlements or resolution of
these claims could be material to our financial position, consolidated results of operations and
cash flows.
We anticipate that we will incur additional expenses as we continue to cooperate with the
investigations and defend the lawsuits. We expense all legal costs as incurred in the consolidated
statements of operations. Such expenses and any restitution payments could negatively impact our
reputation, compromise our ability to compete and result in financial losses in an amount which
could be material to our financial position, consolidated results of operations and cash flows.
Platinum
On November 20, 2009 Snowstorm Acquisition Corporation (Snowstorm), a Delaware Corporation
affiliated with Platinum Equity Capital Partners, L.P. (Platinum), filed a lawsuit against
Tecumseh Products Company, Alix Partners LLP, AP Services LLC and James Bonsall in the United
States District Court for the District of Delaware, alleging breach of contract, violation of
Section 10(b) of the Securities Exchange Act and Rule 10b-5, violation of Section 20(a) of the
Exchange Act, common law fraud and negligent misrepresentation in connection with Snowstorms
purchase of the issued and outstanding capital stock of Tecumseh Power Company and its subsidiaries
and Motoco a.s. (collectively Tecumseh Power) in November, 2007. At the time of the sale,
Tecumseh Power Company was a wholly-owned subsidiary of Tecumseh Products Company engaged in the
manufacture and sale of Tecumseh gas-powered engines used in snow throwers, lawnmowers, generators,
power washers and augers, among other applications. Snowstorm seeks unspecified compensatory and
punitive damages and a declaratory judgment that Tecumseh Products is obligated to indemnify
Snowstorm for certain other claims and losses allegedly related to the subject matter of the
complaint. An answer on behalf of Tecumseh Products Company was filed on January 27, 2010. On
January 20, 2010, Alix Partners, LLP, AP Services LLC and James Bonsall filed a Motion to Dismiss
Snowstorms complaint in its entirety. On September 21, 2010, the United States District Court for
the District of Delaware issued an Opinion and Order granting in part, and denying in part, Alix
Partners, LLP, AP Services LLC and James Bonsalls Motion to Dismiss. In addition, Alix Partners,
LLP, AP Services LLC, and James Bonsall allege that Tecumseh Products is obligated to defend and
indemnify them in connection with this lawsuit. We intend to vigorously defend the lawsuit. The
parties are currently conducting written discovery, which is scheduled to be completed by March 31,
2012. A pretrial conference is scheduled for June 5, 2012, and trial is set to begin on June 18,
2012. At this time, we do not have a reasonable estimate the amount of our ultimate liability, if
any, or the amount of any potential future settlement, but the amount could be material to our
financial position, consolidated results of operations and cash flows.
Environmental Matters
At December 31, 2010 and 2009 we had accrued $4.2 million and $2.7 million, respectively, for
environmental remediation. Included in the December 31, 2010 balance was an accrual of $2.4
million for the remaining estimated costs associated with remediation activities our former
Tecumseh, Michigan facility. This estimate included an increase of $1.2 million in the second
quarter of 2010 as a result of additional work required by the United States Environmental
Protection Agency (USEPA) as required by the Agreed Order of Consent between USEPA and Tecumseh
approved on June 22, 2010. Remediation efforts are ongoing, most of which will be completed in the
next 15 to 21 months while monitoring activities are anticipated to be completed by the end of
2014.
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We were named by the USEPA as a potentially responsible party in connection with the Sheboygan
River and Harbor Superfund Site in Wisconsin. In 2003, with the cooperation of the USEPA, the
Company and Pollution Risk Services, LLC (PRS) entered into a Liability Transfer and Assumption
Agreement (the Liability Transfer Agreement). Under the terms of the Liability Transfer
Agreement, PRS assumed all of our responsibilities, obligations and liabilities for remediation of
the entire Site and the associated costs, except for certain specifically enumerated liabilities.
Also, as required by the Liability Transfer Agreement, we purchased Remediation Cost Cap insurance,
with a 30 year term, in the amount of $100.0 million and Environmental Site Liability insurance in
the amount of $20.0 million. We believe such insurance coverage will provide sufficient assurance
for completion of the responsibilities, obligations and liabilities assumed by PRS under the
Liability Transfer Agreement. In conjunction with the Liability Transfer Agreement, we completed
the transfer of title to the Sheboygan Falls, Wisconsin property to PRS.
In cooperation with the Wisconsin Department of Natural Resources (WDNR), we also conducted an
investigation of soil and groundwater contamination at our Grafton, Wisconsin plant. In 2008, the
remainder of the work required by the WDNR was completed subject to two years of monitoring to be
completed by the end of October 2009. The monitoring results showed no contamination in the
building except for one small area which showed values that exceeded initial values sought by the
WDNR. We completed the remediation of this small area in the fourth quarter of 2010 and will be
subject to two years of monitoring through 2013. We had $0.2 million accrued at December 31, 2010
and 2009, the total estimated cost associated with the investigation and remediation of the on-site
contamination.
In addition to the above-mentioned sites, we are also currently participating with the EPA and
various state agencies at certain other sites to determine the nature and extent of any remedial
action that may be necessary with regard to such other sites. As these matters continue toward
final resolution, amounts in excess of those already provided may be necessary to discharge us from
our obligations for these sites. Such amounts, depending on their amount and timing, could be
material to reported net income in the particular quarter or period that they are recorded. In
addition, the ultimate resolution of these matters, either individually or in the aggregate, could
be material to the consolidated financial statements.
NOTE 17. Business Segments
Operating segments are defined as components of an enterprise for which separate financial
information is available that is evaluated regularly by the chief operating decision maker(s) in
deciding how to allocate resources and in assessing performance. The accounting policies of the
reportable segments are the same as those described in Note 1 of Notes to the Consolidated
Financial Statements.
Assets held for sale as of December 31, 2010 consist of our Grafton facility, from our former
Engine and Power Train Group. Assets held for sale as of December 31, 2008 consist of the Vitrus
Division, a small subsidiary within the previous Electrical Component business.
External customer sales by geographic area are based upon the destination of products sold. In
2010 one household refrigeration and freezer customer accounted for 10.1% of our consolidated
sales. Long-lived assets by geographic area are based upon the physical location of the assets.
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Assets, capital expenditures and depreciation and amortization from continuing operations for the
years ended December 31, 2010, 2009 and 2008 were as follows:
Business Segment Information (in millions)
2010 | 2009 | 2008 | ||||||||||
Assets: |
||||||||||||
Compressor products |
$ | 745.0 | $ | 617.4 | $ | 604.4 | ||||||
Corporate and consolidating items |
16.3 | 149.7 | 193.1 | |||||||||
Assets held for sale |
0.5 | | 1.0 | |||||||||
Other |
| | | |||||||||
Total assets |
$ | 761.8 | $ | 767.1 | $ | 798.5 | ||||||
Capital expenditures: |
||||||||||||
Compressor products |
$ | 6.8 | $ | 5.5 | $ | 5.3 | ||||||
Corporate and consolidating items |
2.4 | 2.4 | 2.7 | |||||||||
Other |
| | | |||||||||
Total capital expenditures |
$ | 9.2 | $ | 7.9 | $ | 8.0 | ||||||
Depreciation and amortization: |
||||||||||||
Compressor products |
$ | 33.8 | $ | 37.9 | $ | 35.6 | ||||||
Corporate and consolidating items |
6.6 | 7.3 | 6.9 | |||||||||
Total depreciation and amortization |
$ | 40.4 | $ | 45.2 | $ | 42.5 | ||||||
Geographic Information (in millions)
2010 | 2009 | 2008 | ||||||||||
Customer Sales by Destination |
||||||||||||
North America |
||||||||||||
United States |
$ | 171.8 | $ | 139.3 | $ | 200.7 | ||||||
Other North America |
25.4 | 18.0 | 28.0 | |||||||||
Total North America |
197.2 | 157.3 | 228.7 | |||||||||
Brazil |
216.3 | 168.6 | 194.4 | |||||||||
Other South America |
80.9 | 63.8 | 105.1 | |||||||||
Total South America |
297.2 | 232.4 | 299.5 | |||||||||
Europe |
209.9 | 184.1 | 248.8 | |||||||||
China |
28.9 | 14.4 | | * | ||||||||
India |
82.1 | 60.5 | | * | ||||||||
Rest of Asia |
26.9 | 18.7 | 219.4 | |||||||||
Total Asia |
109.0 | 79.2 | 219.4 | |||||||||
Middle East and Africa |
91.6 | 68.5 | | * | ||||||||
$ | 933.8 | $ | 735.9 | $ | 996.4 | |||||||
* | Included in the Rest of Asia for 2008 |
2010 | 2009 | 2008 | ||||||||||
Net Fixed Assets |
||||||||||||
United States |
$ | 39.0 | $ | 47.0 | $ | 60.7 | ||||||
Brazil |
144.2 | 158.6 | 134.7 | |||||||||
India |
39.9 | 39.7 | 40.9 | |||||||||
Europe |
11.8 | 14.4 | 17.4 | |||||||||
$ | 234.9 | $ | 259.7 | $ | 253.7 | |||||||
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NOTE 18. Quarterly Financial Data Unaudited
The prior year numbers have been restated to reflect a reclassification of our Paris, Tennessee
facility from a discontinued operation held for sale to a continuing operation.
Quarter | ||||||||||||||||||||
(in millions, except per share data) | First | Second | Third | Fourth | Total | |||||||||||||||
2010(a) |
||||||||||||||||||||
Net sales |
$ | 238.7 | $ | 249.3 | $ | 221.6 | $ | 224.2 | $ | 933.8 | ||||||||||
Gross profit |
28.7 | 31.0 | 24.7 | 14.2 | 98.6 | |||||||||||||||
Net loss |
(41.9 | ) | (5.1 | ) | (3.2 | ) | (6.6 | ) | (56.8 | ) | ||||||||||
Basic and diluted earnings (loss) per share |
$ | (2.26 | ) | $ | (0.27 | ) | $ | (0.17 | ) | $ | (0.37 | ) | $ | (3.07 | ) | |||||
2009(b) |
||||||||||||||||||||
Net sales |
$ | 151.3 | $ | 163.7 | $ | 211.3 | $ | 209.6 | $ | 735.9 | ||||||||||
Gross profit |
9.5 | 4.0 | 19.0 | 23.2 | 55.7 | |||||||||||||||
Net loss |
$ | (23.9 | ) | $ | (24.9 | ) | $ | (14.1 | ) | $ | (30.5 | ) | $ | (93.4 | ) | |||||
Basic and diluted earnings (loss) per share |
$ | (1.29 | ) | $ | (1.35 | ) | $ | (0.76 | ) | $ | (1.65 | ) | $ | (5.06 | ) | |||||
(a) | Includes the effects of $40.3 million in expenses related to the reversion of our hourly
pension plan, $7.3 million in expenses related to settlement of a portion of our anti-trust
litigation, $1.2 million for additional estimated environmental costs, $2.5 million related
to severance associated with reductions in force, and a $0.4 million impairment of an
investment, partially offset by a $1.0 million gain from our previous salaried pension plan
that was terminated in 2008 and a $0.4 million curtailment gain. |
|
(b) | Includes the effects of $18.1 million of severance and special termination benefits,
$2.3 million for additional estimated environmental costs, $1.1 million repayment of legal
fees, a $1.5 million write-off of prepaid outside sales expense, a $1.0 million investment
impairment, a $0.4 million loss on the sale of surplus land, and a one time cumulative catch
up depreciation expense of $3.5 million as a result of a reclassification of our Paris,
Tennessee facility from a discontinued operation held for sale to a continuing operation in
the fourth quarter of 2009. |
NOTE 19. New Accounting Standards
In June, 2009, the FASB adopted new rules to improve financial reporting by enterprises involved
with variable interest entities and to provide more relevant and reliable information to users of
financial statements. The new principle is effective for the first annual reporting period
beginning after November 15, 2009 and for the interim periods within that year. The adoption of
this principle did not affect our financial statements or results of operations.
NOTE 20. Subsequent Events
Subsequent to December 31, 2010, we received $8.0 million of the outstanding refundable non-income
taxes in Brazil, however the Brazilian government was successful in obtaining a court order to
require $15.0 million of our tax refund be held in a court appointed cash account until resolution
of the social security tax matter. The timing of resolution of this tax dispute is uncertain and
might take several years. As a result, we will reclassify the $15.0 million of refundable
non-income taxes from current to long term in the first quarter of 2011.
On March 7, 2011, the company and our
President and Chief Executive Officer mutually determined to have a separation of employment. The terms of
separation have not yet been determined. Our President and Chief Executive
Officer will remain employed by us for an approximately 90-day transition period.
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We perform review procedures for subsequent events, and determine any necessary disclosures that
arise from such evaluation, up to the date of issuance of our annual and interim reports.
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
Not applicable.
ITEM 9A. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information
required to be disclosed by us 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 SECs rules and forms, and that such information is accumulated and communicated to our
management, including our President and Chief Executive Officer and Vice President, Secretary and
Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Our management evaluated, with the participation of our President and Chief Executive Officer and
our Vice President, Secretary and Chief Financial Officer, the effectiveness of our disclosure
controls and procedures and our internal control over financial reporting as of December 31, 2010,
pursuant to Exchange Act Rule 13a-15. Based upon such evaluation, and as of December 31, 2010, our
President and Chief Executive Officer along with our Vice President, Secretary and Chief Financial
Officer concluded that our disclosure controls and procedures were effective at the reasonable
assurance level as of December 31, 2010.
Limitations on the Effectiveness of Controls and Procedures
Management of the Company, including the Chief Executive Officer and Chief Financial Officer, does
not expect that our disclosure controls and procedures or internal control over financial reporting
will detect or prevent all error and all fraud. A control system, no matter how well designed and
implemented, can provide only reasonable, not absolute, assurance that the control systems
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.
Managements Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over our
financial reporting. Our internal control over financial reporting is a process designed by, or
under the supervision of, our principal executive and principal financial officers, and effected by
our board of directors, management and other personnel, to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and includes policies and
procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of our assets, (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that our receipts and expenditures
are being made only in accordance with authorizations of our management and directors, and (3)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of our assets that could have a material effect on the financial statements.
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Management has evaluated the effectiveness of our internal control over financial reporting as of
December 31, 2010. In making its assessment, management used the framework described in Internal
Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Based on this evaluation, management has concluded that the Company maintained
effective internal control over financial reporting as of December 31, 2010.
The effectiveness of the Companys internal control over financial reporting as of December 31,
2010 has been audited by Grant Thornton LLP, our independent registered public accounting firm, as
stated in their report which is included in this Item 9A of this report on Form 10-K.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting identified in
connection with our evaluation that occurred during the fourth quarter of 2010 that have materially
affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Tecumseh Products Company
Tecumseh Products Company
We have audited Tecumseh Products Company (a Michigan Corporation) and subsidiaries internal
control over financial reporting as of December 31, 2010, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Tecumseh Products Company and subsidiaries management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying
Managements Report on Internal Control over Financial Reporting. Our responsibility is to express
an opinion on Tecumseh Products Company and subsidiaries internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
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In our opinion, Tecumseh Products Company and subsidiaries maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2010, based on criteria
established in Internal ControlIntegrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Tecumseh Products Company and
subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of
operations, stockholders equity, and cash flows for each of the three years in the period ended
December 31, 2010 and our report dated March 14, 2011 expressed an unqualified opinion.
/s/ GRANT THORNTON LLP
Southfield, Michigan
March 14, 2011
March 14, 2011
ITEM 9B. | OTHER INFORMATION |
None.
PART III
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information pertaining to directors required by Item 401 of Regulation S-K will be set forth
under the caption Proposal No. 1- Election of Directors Our Nominees in our definitive proxy
statement relating to our 2011 annual meeting of shareholders scheduled to be held April 27, 2011
and is incorporated herein by reference. The information pertaining to executive officers required
by Item 401 of Regulation S-K will be set forth under the caption Executive Officers in our
definitive proxy statement relating to our 2011 annual meeting of shareholders scheduled to be held
April 27, 2011 and is incorporated herein by reference. The information required to be reported
pursuant to Item 405 of Regulation S-K will be set forth under the caption Information Concerning
the Board of Directors Section 16(a) Beneficial Ownership Reporting Compliance in our
definitive proxy statement relating to our 2011 Annual Meeting of Shareholders scheduled to be held
April 27, 2011 and is incorporated herein by reference.
The information required to be reported pursuant to Item 406 of Regulation S-K will be set forth
under the caption Information Concerning the Board of Directors Code of Conduct in our
definitive proxy statement relating to our 2011 Annual Meeting of Shareholders scheduled to be held
April 27, 2011 and is incorporated herein by reference. The information required to be reported
pursuant to paragraphs (d)(4) and (d)(5) of Item 407 of Regulation S-K will be set forth under the
caption Information Concerning the Board of Directors Audit Committee in our definitive proxy
statement relating to our 2011 annual meeting of shareholders scheduled to be held April 27, 2011
and is incorporated herein by reference. No information is required to be reported pursuant to
paragraph (c)(3) of Item 407 of Regulation S-K.
ITEM 11. | EXECUTIVE COMPENSATION |
The information required to be reported pursuant to Item 402 of Regulation S-K and paragraph (e)(5)
of Item 407 of Regulation S-K will be set forth under the caption Executive Compensation, and the
information required by paragraph (e)(4) of Item 407 of Regulation S-K will be set forth under the
sub-caption Compensation Committee Interlocks and Insider Participation under the caption
Information Concerning the Board of Directors in our definitive proxy statement relating to our
2011 annual meeting of shareholders scheduled to be held April 27, 2011 and is incorporated herein
by reference.
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ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS |
The information required to be reported pursuant to Item 403 of Regulation S-K will be set forth
under the caption Share Ownership in our definitive proxy statement relating to our 2011 annual
meeting of shareholders scheduled to be held April 27, 2011 and is incorporated herein by
reference. No information is required to be reported pursuant to Item 201(d) of Regulation S-K.
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required to be reported pursuant to Item 404 of Regulation S-K and paragraph (a) of
Item 407 of Regulation S-K will be set forth under the sub-captions Board Independence,
Compensation Committee Interlocks and Insider Participation and Transactions with Related
Persons under the caption Information Concerning the Board of Directors in our definitive proxy
statement relating to our 2011 annual meeting of shareholders scheduled to be held April 27, 2011
and is incorporated herein by reference.
ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information required to be reported pursuant to Item 9(e) of Schedule 14A will be set forth
under the caption Proposal No. 2 Ratification of Appointment of Independent Accountant Audit
and Non-Audit Fees in our definitive proxy statement relating to our 2011 annual meeting of
shareholders scheduled to be held April 27, 2011 and is incorporated herein by reference.
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PART IV
ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
(a)(1) Financial Statements
See Index to Consolidated Financial Statements in Item 8 of this report.
(a)(2) Financial Statement Schedules
None
(a)(3) Exhibits
See Exhibit Index following the signature page of this report.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
TECUMSEH PRODUCTS COMPANY | ||||||
Date: March 14, 2011
|
By | /s/ James E. Wainright
|
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities and on the dates
indicated.
Signature | Office | Date of Signing | |||
/s/ James E. Wainright
|
President and Chief Executive Officer (Principal Executive Officer) |
March 14, 2011 | |||
/s/ James J. Connor
|
Vice President, Secretary and Chief Financial Officer (Principal Accounting and Principal Financial Officer) | March 14, 2011 | |||
*
|
Chairman of the Board, Director | March 14, 2011 | |||
*
|
Director | March 14, 2011 | |||
*
|
Director | March 14, 2011 | |||
*
|
Director | March 14, 2011 | |||
*
|
Director | March 14, 2011 | |||
* By: | /s/ James J. Connor
Attorney-in-Fact |
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10-K EXHIBIT INDEX
Exhibit | ||||
No. | Description of Exhibit | |||
2.1 | Purchase Agreement dated as of October 22, 2007 by and between Snowstorm
Acquisition Corporation and Tecumseh Products Company (incorporated by
reference to Exhibit 10.1 to registrants Quarterly Report on Form 10-Q for
the quarter ended September 30, 2007, File No. 0-452) [NOTE: Schedules,
annexes, and exhibits are omitted. The registrant agrees to furnish
supplementally a copy of any omitted schedule, annex, or exhibit to the
Securities and Exchange Commission upon request.] |
|||
3(i).1 | Restated Articles of Incorporation of Tecumseh Products Company (incorporated
by reference to Exhibit (3) to registrants Annual Report on Form 10-K for
the year ended December 31, 1991, File No. 0-452) |
|||
3(i).2 | Certificate of Amendment to the Restated Articles of Incorporation of
Tecumseh Products Company (incorporated by reference to Exhibit B-5 to
registrants Form 8 Amendment No. 1 dated April 22, 1992 to Form 10
Registration Statement dated April 24, 1965, File No. 0-452) |
|||
3(i).3 | Certificate of Amendment to the Restated Articles of Incorporation of
Tecumseh Products Company (incorporated by reference to Exhibit (4) to
registrants Quarterly Report on Form 10-Q for the quarter ended March 31,
1994, File No. 0-452) |
|||
3(ii) | Amended and Restated Bylaws of Tecumseh Products Company as amended through
June 29, 2010 (incorporated by reference to Exhibit 3(ii) to registrants
Current Report on Form 8-K, dated June 29, 2010 and filed March 1, 2011, File
No. 0-452) |
|||
4.1 | Letter Agreement, dated June 24, 2010, between Tecumseh Products Company and
JPMorgan Chase Bank, N.A. terminating Credit Agreement, (incorporated by
reference to Exhibit 99.1 to the companys Current Report on Form 8-K, dated
June 24, 2010 and filed June 28, 2010, File No. 0-452) |
|||
Note: Other instruments defining the rights of holders of long-term debt are
not filed because the total amount authorized thereunder does not exceed 10%
of the total assets of the registrant and its subsidiaries on a consolidated
basis. The registrant hereby agrees to furnish a copy of any such agreement
to the Commission upon request. |
||||
10.1 | Description of Death Benefit Plan (management contract or compensatory plan
or arrangement) (incorporated by reference to Exhibit (10)(f) to registrants
Annual Report on Form 10-K for the year ended December 31, 1992, File No.
0-452) |
|||
10.2 | Annual Incentive Plan adopted December 17, 2007 (management contract or
compensatory plan or arrangement) (incorporated by reference to Exhibit 10.15
to registrants Annual Report on Form 10-K For the year ended December 31,
2007, File No. 0-452) |
|||
10.3 | Description of 2010 terms of Tecumseh Product Companys Annual Incentive Plan
(management contract or compensatory plan or arrangement) (incorporated by
reference to the disclosures in Item 5.02 of the Companys Current Report on
Form 8-K, dated March 8, 2010 and filed March 12, 2010, File No. 0-452) |
|||
10.4 | Long-Term Term Incentive Cash Award Plan adopted March 4, 2008 (management
contract or compensatory plan or arrangement) (incorporated by reference to
Exhibit 10.1 to registrants Current Report on Form 8-K filed March 10, 2008,
File No. 0-452) |
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Exhibit | ||||
No. | Description of Exhibit | |||
10.5 | Form of Award Agreement (Phantom Shares) under Long-Term Incentive Cash Award
Plan (management contract or compensatory plan or arrangement) (incorporated
by reference to Exhibit 10.2 to registrants Current Report on Form 8-K filed
March 10, 2008, File No. 0-452) |
|||
10.6 | Form of Award Agreement (SARs) under Long-Term Incentive Cash Award Plan
(management contract or compensatory plan or arrangement) (incorporated by
reference to Exhibit 10.3 to registrants Current Report on Form 8-K filed
March 10, 2008, File No. 0-452) |
|||
10.7 | * | Amended and Restated Outside Directors Deferred Stock Unit Plan adopted
December 14, 2010 (management contract or compensatory plan or arrangement) |
||
10.8 | Settlement Agreement and Waiver of all Rights and Claims, dated as of October
5, 2009 between Tecumseh Products Company and Edwin L. Buker (management
contract or compensatory plan or arrangement) (incorporated by reference to
Exhibit 10.1 to registrants Current Report on Form 8-K dated October 2, 2009
and filed October 8, 2009, File No. 0-452) |
|||
10.9 | Letter dated September 17, 2007 and accompanying term sheet setting forth
terms of employment of James Wainright (management contract or compensatory
plan or arrangement) (incorporated by reference to Exhibit 10.31 to
registrants Annual Report on Form 10-K for the year ended December 31, 2008,
File No. 0-452) |
|||
10.10 | Form of Amended and Restated Change in Control and Severance Agreement
(management contract or compensatory plan or arrangement) (incorporated by
reference to Exhibit 10.5 to registrants Current Report on Form 8-K filed
November 18, 2008, File No. 0-452) The registrant has entered into
agreements substantially in this form with several of its executives,
including the following executive officer named in the Summary Compensation
Table in the registrants proxy statement for its 2011 annual meeting of
shareholders: James Wainright. |
|||
10.11 | Settlement Agreement and Waiver of all Rights and Claims, dated as of January
19, 2010 between Tecumseh Products Company and James S. Nicholson (management
contract or compensatory plan or arrangement) (incorporated by reference to
Exhibit 10.12 to registrants Annual Report on Form 10-K for the year ended
December 31, 2009, File No. 0-452) |
|||
10.12 | Employment term sheet setting forth terms of employment of Michael A. Noelke
dated December 8, 2009 (management contract or compensatory plan or
arrangement) (incorporated by reference to Exhibit 10.13 to registrants
Annual Report on Form 10-K for the year ended December 31, 2009, File No.
0-452) |
|||
10.13 | Employment term sheet setting forth terms of employment of James J. Conner
dated December 17, 2009 (management contract or compensatory plan or
arrangement). .(incorporated by reference to Exhibit 10.14 to registrants
Annual Report on Form 10-K for the year ended December 31, 2009, File No.
0-452) |
|||
10.14 | Liability Transfer and Assumption Agreement for Sheboygan River and Harbor
Superfund Site dated March 25, 2003, by and between Tecumseh Products Company
and Pollution Risk Services, LLC (incorporated by reference to Exhibit 10.1
to registrants Current Report on Form 8-K filed April 9, 2003, File No.
0-452) |
|||
10.15 | Consent Order entered into on December 9, 2004 with Wisconsin Department of
Natural Resources and TRC Companies, Inc. (incorporated by reference to
Exhibit 10.26 to registrants Annual Report on Form 10-K for the year ended
December 31, 2004, File No. 0-452) |
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Exhibit | ||||
No. | Description of Exhibit | |||
10.16 | Exit Strategy Agreement dated December 29, 2004 with TRC Companies, Inc.
(incorporated by reference to Exhibit 10.27 to registrants Annual Report on
Form 10-K for the year ended December 31, 2004, File No. 0-452) |
|||
10.17 | Agreement with AP Services, LLC and AlixPartners, LLP dated December 7, 2006
(incorporated by reference to Exhibit 10.1 to registrants Current Report on
Form 8-K filed December 14, 2006, File No. 0-452) |
|||
10.18 | First addendum dated January 19, 2007 to agreement with AP Services, LLC
dated December 7, 2006 (incorporated by reference to Exhibit 10.1 to
registrants Current Report on Form 8-K filed January 25, 2007, File No.
0-452) |
|||
10.19 | Warrant to Purchase Class A Common Stock of Tecumseh Products Company issued
to Tricap Partners II L.P. on April 9, 2007 (incorporated by reference to
Exhibit 10.1 to registrants Current Report on Form 8-K filed April 10, 2007,
File No. 0-452) |
|||
10.20 | Registration Rights Agreement dated as of April 9, 2007 between Tecumseh
Products Company and Tricap Partners II L.P. (incorporated by reference to
Exhibit 10.2 to registrants Current Report on Form 8-K filed April 10, 2007,
File No. 0-452) |
|||
10.21 | Reimbursement Agreement, dated as of October 28, 2009, effective as of
October 29, 2009, by and between Tecumseh Products Company and Herrick
Foundation (incorporated by reference to Exhibit 10.1 to registrants Current
Report on Form 8-K dated October 29, 2009 and filed November 4, 2009, File
No. 0-452) |
|||
21 | * | Subsidiaries of the Company |
||
23.1 | * | Consent of Independent Registered Public Accounting Firm Grant Thornton LLP |
||
24 | * | Power of Attorney |
||
31.1 | * | Certification of the Principal Executive Officer pursuant to Rule 13a-14(a). |
||
31.2 | * | Certification of the Principal Financial Officer pursuant to Rule 13a-14(a). |
||
32.1 | * | Certification of Principal Executive Officer pursuant to Rule 13a-14(b) and
Section 1350 of Chapter 63 of Title 18 of the United States Code. |
||
32.2 | * | Certification of Principal Financial Officer pursuant to Rule 13a-14(b) and
Section 1350 of Chapter 63 of Title 18 of the United States Code. |
* | Filed herewith |
78