Tecumseh Products 2009 Annual Report Download

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Table of contents

  • Page 1
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  • Page 2
    UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K (Mark One) ; ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2009 Commission File Number 0-452 TECUMSEH PRODUCTS COMPANY (Exact Name of ...

  • Page 3
    ... Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ...Certain Relationships and Related Transactions, and Director Independence ...Principal Accountant Fees and Services ...Part IV Item 15. Exhibits and Financial Statement Schedules ...Signatures ...79 80 76 77...

  • Page 4
    ... ITEM 1. BUSINESS General Tecumseh Products Company (the "Company") is a Michigan corporation organized in 1930. We are a full-line, independent, global manufacturer of hermetically sealed compressors for residential and specialty air conditioning, household refrigerators and freezers and commercial...

  • Page 5
    ... refrigeration systems that use both single speed and variable speed AC/DC powered compressors. These products are sold to both OEM and authorized wholesale distributors. Manufacturing Operations We manufacture our products from facilities located in the United States, Brazil, France, India, Canada...

  • Page 6
    ... 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...

  • Page 7
    ...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...

  • Page 8
    ...consisting of the word "Tecumseh" in combination with a Native American Indian head symbol. Research and Development The ability to successfully bring new products to market in a timely manner has rapidly become a critical factor in competing in the compressor products business as a result of, among...

  • Page 9
    ... outside the United States. Our Brazilian, European and Indian manufacturing operations delivered approximately 35%, 30% and 12% of total 2009 compressor sales, respectively. As a result, our consolidated financial results are increasingly sensitive to changes in foreign currency exchange rates. Our...

  • Page 10
    ..., noise level, price, compliance with various global environmental standards and reliability. 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...

  • Page 11
    ...in countries where we operate, particularly in emerging markets. x x x x Our business success depends in part on our ability to anticipate and effectively manage these and other risks. Our operations and products are subject to extensive environmental laws and energy regulations. Our manufacturing...

  • Page 12
    ... 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...

  • Page 13
    ... located in seven countries outside the United States. Manufacturing 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...

  • Page 14
    ITEM 3. LEGAL PROCEEDINGS 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 ("...

  • Page 15
    ..."Tecumseh Power") in November, 2007. At the time of the sale, Tecumseh Power 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 washer and augers, among other applications...

  • Page 16
    ...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 2009. Market Price and Dividend Information Range of Common Stock Prices and Dividends for 2009 Sales Price Class...

  • Page 17
    ... / Index Tecumseh Products Company ...S&P 500 Index ...S&P Composite Industry Index ...* ** Base Period 2004 100 100 100 INDEXED RETURNS Years Ending 2005 44.46 104.91 105.41 2006 36.99 121.48 116.21 2007 43.90 128.16 128.29 2008 21.28 80.74 80.35 2009 25.85 102.11 117.93 Class B stock used in...

  • Page 18
    ... following is a summary of certain of our financial information. Prior year results 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...

  • Page 19
    ... anticipated sales and production in India, including potential military conflict with neighboring countries; xvii) increased or unexpected warranty claims; and xviii) the ongoing financial health of major customers. These forward-looking statements are made only as of the date of this report, and...

  • Page 20
    ...in international locations. During 2008 and 2009, approximately 77% of our compressor manufacturing activity took place outside the United States, primarily in Brazil, France, and India. As a result, our consolidated financial results are sensitive to changes in foreign currency exchange rates, most...

  • Page 21
    ... our various credit facilities at December 31, 2009 was $38.6 million. While we believe that current cash balances combined with available borrowings and the cash to be generated by the pension plan reversion and Brazilian tax refund will produce adequate liquidity to implement our business strategy...

  • Page 22
    ... 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...

  • Page 23
    ... 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...

  • Page 24
    ... decline in market demand. It is largely attributable to reduced access to consumer credit in many geographies where our business is concentrated, including India and Brazil, as well as lower housing starts on a global basis. Compressors for commercial refrigeration and aftermarket applications were...

  • Page 25
    ... released, since management now believes that realization of their deferred tax assets is more likely than not. The net impact of this change decreased income tax by $0.4 million in 2007. The effective tax rate in future periods may vary from the 35% United States statutory rate based upon changes...

  • Page 26
    ... of long-lived assets and goodwill. The net loss also included a working capital settlement with the purchaser of our former Engine & Powertrain business of $13.1 million, which was paid in cash in March of 2009. Refer to Note 2 of the Notes to the Consolidated Condensed Financial Statements for...

  • Page 27
    ... 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. Also, in the third quarter of 2009, we filed amended United States income tax returns, which we will expect will yield an additional...

  • Page 28
    ... For further discussion of our credit facilities, refer to Note 8, "Debt," of the Notes to the Consolidated Financial Statements. Accounts Receivable Sales Our Brazilian, European, and Indian subsidiaries periodically factor their accounts receivable with financial institutions. Such receivables are...

  • Page 29
    ...we completed the closure of our operating facilities in Tecumseh, Michigan. Cost savings from the closure of that facility, which were expected to be $7.6 million on an annualized basis, were $7.4 million in 2009, thereby yielding approximately the expected effects on our earnings and cash flows. We...

  • Page 30
    ... of companies in our industry group. The risk free interest rate is based upon quoted market yields for United States Treasury debt securities. The expected dividend yield is based upon our history of not having issued a dividend since the second quarter of 2005 and management's current expectation...

  • Page 31
    ... 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 product...

  • Page 32
    ..., as well as background information and the Board's basis for conclusions for new guidance. The new principle is effective for interim and annual reporting periods ending after September 15, 2009, and its adoption did not materially affect our financial statements or results of operations...

  • Page 33
    ... effect on our current outlook. The prices of key commodities, including copper, increased significantly during 2009; copper prices increased by 130% from December 2008 year end levels, in part due to a significant decline in copper prices in the 4th quarter of 2008. Our full year average cost...

  • Page 34
    ... RISK We are exposed to market risk during the normal course of business from credit risk associated with accounts receivable and from changes in interest rates, commodity prices and foreign currency exchange rates. The exposure to these risks is managed through a combination of normal operating...

  • Page 35
    ... to our compressor business faces similar exposure to the real. Other competitors, particularly those with operations in countries where the currency has been substantially pegged to the U.S. dollar, currently enjoy a cost advantage over our compressor operations. At December 31, 2009 and 2008...

  • Page 36
    ... of Stockholders' Equity for the years ended December 31, 2009, 2008 and 2007 ...Notes to Consolidated Financial Statements ...37 38 39 40 41 Page 36 All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. 35

  • Page 37
    ... 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 Products Company and subsidiaries' internal control over financial reporting as of December 31, 2009, based on criteria...

  • Page 38
    TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in millions, except share and per share data) For the Years Ended December 31, 2009 2008 2007 ... (173.1) ($178.1) Net sales...Cost of sales and operating expenses ...Selling and administrative expenses ...Impairments, ...

  • Page 39
    TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in millions, except share data) December 31, 2009 2008 ASSETS Current Assets: Cash and cash equivalents ...$90.7 $113.1 Restricted cash and cash equivalents ...10.5 12.5 Accounts receivable, trade, less allowance for doubtful ...

  • Page 40
    TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions) Cash Flows from Operating Activities: Net loss ...Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization...Non-cash restructuring charges ...

  • Page 41
    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, 2006 ...$13.4 $5.1 $3.7 ...

  • Page 42
    ... Policies Business Description - Tecumseh Products Company (the "Company") is a full line, independent global manufacturer of hermetically sealed compressors for (i) commercial refrigeration applications, including walk-in coolers and freezers, ice makers, dehumidifiers, water coolers, food service...

  • Page 43
    ... 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...

  • Page 44
    ... accepted in the United States requires management to make estimates and assumptions that affect the reported amounts during the reporting period and at the date of the financial statements. Significant estimates include accruals for product warranty, deferred tax assets, self-insured risks, pension...

  • Page 45
    ... sell the assets related to the last remaining Electrical Components business previously classified as held for sale, our Paris, Tennessee facility. This facility manufactures electric motors, a component of finished compressors and our future plans are to continue manufacturing this part internally...

  • Page 46
    ... First Lien Credit agreement was repaid upon the closing of the sale of the Engine & Power Train business on November 9, 2007. In 2008, the purchaser of the business, Platinum, sought an adjustment to the purchase price through provisions in the agreement based upon working capital as of the date of...

  • Page 47
    Following is a summary of income (loss) from discontinued operations related to the Engine & Power Train business for the years ended December 31, 2009, 2008 and 2007: (in millions) December 31, 2009 2008 2007 Sales ...Cost of sales ...Selling and administrative expenses ...Impairments, ...

  • Page 48
    ...Finished goods ...Reserve for obsolete and slow moving inventory ...Reserve for lower of cost or market ... 2009 $58.3 4.3 52.2 (4.3) (0.9) $109.6 2008 $65.0 13.0 59.3 (5.5) (0.5) $131.3 NOTE 4. Property, Plant and Equipment, net The components of property, plant and equipment, net are as follows...

  • Page 49
    ... of period ...Service cost ...Interest cost ...Plan change ...Actuarial loss (gain) ...Curtailment loss (gain)...Benefit payments ...Special termination benefits...Settlements...Effect of changes in exchange rate ...Benefit obligation at measurement date...Change in plan assets Fair value at...

  • Page 50
    ....8 $126.3 Accumulated benefit obligation ...149.5 125.7 Fair value of plan assets...123.3 117.8 Components of net periodic benefit (income) cost during the year: (in millions) Pension Benefits 2009 2008 Service cost ...Interest cost ...Expected return on plan assets ...Amortization of net loss (gain...

  • Page 51
    ... Year that the rate reaches the ultimate trend rate ...2015-2016 2008 8.0-11.5% 5.0% 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...

  • Page 52
    ... 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...

  • Page 53
    ... plan. 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...

  • Page 54
    ... accrued product warranty costs for the years ended December 31, 2009, 2008 and 2007 are summarized as follows: (in millions) Balance at January 1, 2007 ...Current year accruals for warranties ...Adjustments to preexisting warranties ...Settlements of warranty claims (in cash or in kind) ...Sale of...

  • Page 55
    ...operations. In addition to our United States credit agreement, we have various borrowing arrangements at our foreign subsidiaries to support working capital needs and government sponsored borrowings which provide advantageous lending rates. The borrowing arrangements in India are secured by the land...

  • Page 56
    ... 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...

  • Page 57
    ... in cash. A summary of activity under the plans during 2009, is as follows: SARs: Outstanding at January 1, 2009 ...Granted in 2009 ...Vested ...Forfeited ...Vested on Termination ...Outstanding at December 31, 2009 Nonvested Weighted average grant date Number of value awards per share 327,599 305...

  • Page 58
    ... to these awards is re-measured in each quarterly reporting period. The value of the phantom stock shares is determined by comparing the closing stock price on our Class A common stock on the last day of the period to the initial grant date value. At December 31, 2009 and 2008, the closing stock...

  • Page 59
    ... the years ended December 31 are as follows: ( in millions) Goodwill impairments ...Excise tax expense on proceeds from salaried retirement plan reversion ...Impairment of buildings and machinery ...Severance, restructuring costs, and special termination benefits ...Curtailment and settlement (gains...

  • Page 60
    ...), 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...

  • Page 61
    ... is as follows: (in millions) Income taxes (benefit) at U.S. statutory rate...Foreign tax differential (and withholding tax) ...Change in valuation allowance ...State and local income taxes ...Excise tax on pension reversion ...Expiration of statute on uncertain tax positions ...Tax Refunds ...Other...

  • Page 62
    ... tax credit and research credit carryforwards of approximately $47.2 million will expire from 2012 through 2017. Furthermore, we also had various state tax credit carryovers of $0.7 million, which expire at various dates from 2010 to 2020. For the years 2008 and 2009, a portion of certain tax credit...

  • Page 63
    ...December 31, 2009 and 2008, the Company had accrued interest and penalties of $0.6 million and $0.6 million, respectively. The tax reserves relate to federal refund claims filed during the year and potential state tax nexus issues. The entire amount would have an impact on our effective tax rate. We...

  • Page 64
    ... 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...

  • Page 65
    ... of December 31, 2009 and 2008, respectively¸ which is included in cost of sales and operating expenses. In October 2008, we agreed to an offer from UBS AG ("UBS") to sell at par value, at any time from June 30, 2010 through July 2, 2012, the ARC purchased from UBS. The Auction Rate Security Right...

  • Page 66
    ....1 12.5 4.3 0.5 $130.4 $113.1 12.5 - - $125.6 4.3 0.5 $4.8 Total Fair Value Level 1 Level 2 Level 3 The following table presents the changes in Level 3 assets for the year ended December 31, 2009: Auction Rate Auction Rate ( in millions) Certificates Securities Rights $4.3 $0.5 Balance at January...

  • Page 67
    ... of business, such as sales to foreign customers not denominated in the seller's functional currency, foreign plant operations, and purchases from suppliers. We actively manage the exposure of our foreign currency exchange rate market risk and market fluctuations in commodity prices by entering...

  • Page 68
    ... Company's derivatives designated as hedging instruments in our consolidated balance sheet as of December 31, 2009 and 2008 are as follows: ( in millions) Asset (Liability) Derivatives December 31, 2009 December 31, 2008 Financial Financial Position Location Fair Value Position Fair Value Location...

  • Page 69
    ...$6.7, 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...

  • Page 70
    ... 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...

  • Page 71
    ... 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 washer and augers, among other applications...

  • Page 72
    ... Consolidated Financial Statements. We previously reported three operating segments; Compressor Products, Electrical Components, and Engine & Power Train. However, as a result of the sale of the majority of the Electrical Components business and the entire Engine & Power Train business during 2007...

  • Page 73
    ... United States ...Brazil ...India ...Europe... NOTE 18. Quarterly Financial Data - Unaudited The following numbers have been restated to reflect a reclassification of our Paris, Tennessee facility from a discontinued operation held for sale to a continuing operation. (in millions, except per share...

  • Page 74
    ..., as well as background information and the Board's basis for conclusions for new guidance. The new principle is effective for interim and annual reporting periods ending after September 15, 2009, and its adoption did not materially affect our financial statements or results of operations...

  • Page 75
    ... as of December 31, 2009. 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...

  • Page 76
    ... 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...

  • Page 77
    ... Company Accounting Oversight Board (United States), the consolidated balance sheets of Tecumseh Products Company and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period...

  • Page 78
    ...www.tecumseh.com. 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 2010 annual meeting...

  • Page 79
    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. 78

  • Page 80
    ... by the undersigned thereunto duly authorized. TECUMSEH PRODUCTS COMPANY Date: March 11, 2010 . 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...

  • Page 81
    ... by reference to Exhibit 2 to registrant's Current Report on Form 8-K filed July 7, 2008, File No. 0-452) Restated Articles of Incorporation of Tecumseh Products Company (incorporated by reference to Exhibit (3) to registrant's Annual Report on Form 10-K for the year ended December 31, 1991, File No...

  • Page 82
    ... 10.26 to registrant's Annual Report on Form 10-K for the year ended December 31, 2008, File No. 0-452) 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...

  • Page 83
    ... statement for its 2010 annual meeting of shareholders: James S. Nicholson, James Wainright and Lynn Dennison. 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...

  • Page 84
    ...) 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 registrant's Current Report on Form 8-K dated October 29, 2009 and filed November 4, 2009, File No...

  • Page 85
    ...; and Managing Member of Peponides Associates, LLC, an investment vehicle for real estate, stocks and private companies Overnight Courier 250 Royall Street, Canton, MA 02021 (800) 254-5196 Annual Report, Proxy Statement, 10-K Tecumseh Products Company 1136 Oak Valley Drive, Ann Arbor, MI...