Tecumseh Products 2011 Annual Report Download

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Annual Report 2011Annual R
e
®

Table of contents

  • Page 1
    ® Annual Re Report 2011

  • Page 2

  • Page 3
    ... Ended December 31, 2011 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) 1136 Oak Valley Drive, Ann Arbor, Michigan (Address of Principal Executive Offices) (734) 585...

  • Page 4
    ...About Market Risk ...Financial Statements and Supplementary Data ...Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...Controls and Procedures ...Other Information ...Part III Item 10. Item 11. Item 12. Item 13. Item 14. Directors, Executive Officers and Corporate...

  • Page 5
    ... air conditioners. Tecumseh's 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...

  • Page 6
    ... and freezers and the Midi compressor platform for use in commercial refrigeration have been launched and commercial sales started in the fourth quarter to several customers. The full offering of these products to our remaining customers is taking longer than originally expected. Management has...

  • Page 7
    ... 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 and we believe that Embraco is capturing additional market share. In 2011...

  • Page 8
    ... commercial refrigeration applications. Tecumseh builds compressors in Europe, Brazil and India utilizing isobutane for sale into European, Latin American and Indian markets. We are also supplying U.S. customers for export markets and some U.S. trials of HC applications are currently underway...

  • Page 9
    ...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...

  • Page 10
    ... have an adverse effect on our sales volumes and our resulting profitability and liquidity. In 2011, one of the reasons for our decline in sales of compressors used in R&F applications was due to a customer shifting its production to manufacture more of its products internally. Generally, we do not...

  • Page 11
    ... timely identify, develop, manufacture, market, and sell new or improved products in these changing markets. If we fail to do so, our financial condition and results of operations could be adversely affected. We operate in highly competitive markets. All of the compressor and condensing unit markets...

  • Page 12
    ... impact as there is currently no well-established global market for hedging against increases in the cost of steel. These hedging activities might not be successful to manage our costs. Continued volatility of commodities or failure of our initiatives to generate cost savings or improve productivity...

  • Page 13
    ... 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...

  • Page 14
    ... 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...

  • Page 15
    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, 2011 we had 24 properties in the United States, Canada, Mexico, France, Brazil, India, Malaysia and China occupying approximately 5.1 ...

  • Page 16
    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. MINE SAFETY...

  • Page 17
    ... our credit facility limiting our ability 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 2011. Market Price and Dividend Information Range...

  • Page 18
    ...Company / Index Tecumseh Products Company ...S&P 500 Index ...S&P Composite Industry Index ...* ** Base Period 2006 100 100 100 INDEXED RETURNS Years Ending 2007 118.67 105.49 110.39 2008 57.53 66.46 69.14 2009 69.88 84.05 101.48 2010 78.61 96.71 132.29 2011 26.81 98.76 100.43 Class B stock used...

  • Page 19
    ... of the Paris, Tennessee operations), the Engine & Power Train Group, MP Pumps, and Manufacturing Data Systems, Inc. as discontinued operations. (In millions, except share and per share data) Net sales ...Cost of sales ...Gross Profit...Selling and administrative expenses ...Other income (expense...

  • Page 20
    ... 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; our product costs, especially the price of copper and steel; and the relative value against the...

  • Page 21
    ... by manufacturing locations positioned throughout the world. Most of our manufacturing presence is in international locations. During 2011 and 2010, approximately 80% and 82%, respectively, of our compressor sales activity took place outside the United States, primarily in Brazil, Europe, and India...

  • Page 22
    ... to future sales levels, global economic conditions, currency exchange rates and commodity pricing as discussed above. In 2011, we used $5.3 million of cash flow in operations, which included $41.7 million of cash provided by net receipts of refundable non-income taxes and significant decreases in...

  • Page 23
    ... our Latin America market where we continue to see positive growth, although it slowed in the fourth quarter, particularly in residential air-conditioning market over the same period in the prior year. Sales of compressors used in household refrigeration and freezer ("R&F") applications represented...

  • Page 24
    ... and freezers and the Midi compressor platform for use in commercial refrigeration have been launched and commercial sales started in the fourth quarter to several customers. The full offering of these products to our remaining customers is taking longer than originally expected. Management has...

  • Page 25
    ... 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...

  • Page 26
    ... 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...

  • Page 27
    ... 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...

  • Page 28
    ...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. Liquidity Sources Credit Facilities...

  • Page 29
    ...We expect capital expenditures will average $20.0 million to $25.0 million annually, although the timing of expenditures may result in higher investment in some years and lower amounts in others. For 2012, we plan to invest approximately $22.0 million as we continue to re-engineer our products to be...

  • Page 30
    ... 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 2012, therefore; the amount of...

  • Page 31
    ... 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...

  • Page 32
    ... events could include a loss of a significant customer or market share, the decision to relocate production to other locations or the decision to cease production of specific models of products. We recognize losses related to the impairment of long-lived assets when the estimated future undiscounted...

  • Page 33
    ... existing orders from our customers, our internal projections about the market and related economic conditions, price increases to our customers, foreign currency exchange rate effects, as well as our continued efforts in sales, marketing, and the re-engineering of our products. We cannot currently...

  • Page 34
    .... These actions could result in significant restructuring or asset impairment charges, severance costs, losses on asset sales and use of cash. Accordingly, these restructuring activities could have a significant effect on our consolidated financial position, operating profit, cash flows and...

  • Page 35
    ... 41.0% of our anticipated copper requirements for 2012. 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...

  • Page 36
    ... ($21.4) Based on our current level of commodity futures contracts, a 10% decrease in the price of copper, steel or aluminum used in production of our products would have resulted in losses under these contracts that would adversely impact our annual operating results for 2011 and 2010 as indicated...

  • Page 37
    ...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...

  • Page 38
    ... of Stockholders' Equity for the Years ended December 31, 2011, 2010 and 2009 ...Notes to Consolidated Financial Statements ...38 39 40 41 42 Page 37 All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. 36

  • Page 39
    ...period ended December 31, 2011 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), the Company's internal control over financial reporting...

  • Page 40
    ...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. 38

  • Page 41
    ...liabilities ...7.3 11.0 Product warranty and self-insured risks...3.5 3.8 Pension liabilities...35.1 25.9 Other ...8.8 6.8 Total liabilities ...277.8 326.9 Stockholders' Equity Class A common stock, $1 par value; authorized 75,000,000 shares; issued and outstanding 13,401,938 shares in 2011 and 2010...

  • Page 42
    ...-issuance costs ...Impairment of long-lived assets and goodwill ...(Gain) loss on disposal of property and equipment ...Non-cash employee retirement benefits ...Non-cash settlement of hourly pension plan reversion ...Non-cash curtailment of post-retirement benefits ...Deferred income taxes ...Share...

  • Page 43
    TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in millions) Accumulated Other Class A Class B Total $1 Par $1 Par Paid in Retained Comprehensive Stockholders' Value Value Capital Earnings Income/(Loss) Equity Balance, December 31, 2008...$13.4 $5.1 $11.0 ...

  • Page 44
    ... FINANCIAL STATEMENTS 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...

  • Page 45
    ... 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...

  • Page 46
    ... 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...

  • Page 47
    ...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), $1.8 million for legal fees and settlements for other sold businesses, and income taxes of $1.6 million. For the year ended December 31...

  • Page 48
    ...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...

  • Page 49
    ....2 $160.4 Accumulated benefit obligation ...$173.3 $156.3 Fair value of plan assets...$142.1 $143.7 Components of net periodic expense (benefit) during the year: (in millions) Pension Benefits 2011 2010 Service cost ...Interest cost ...Expected return on plan assets ...Amortization of net loss (gain...

  • Page 50
    ... trend rate) ...Year that the rate reaches the ultimate trend rate ...8.4% 5.0% 2019 2010 8.4% 5.0% 2019 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...

  • Page 51
    ... markets, investing in companies that fund managers believe have above-average growth potential. Comprised of investment grade bonds of U.S. issuers from various industries. Assets are invested with the Life Insurance Corporation of India, a government body and 100% insured. In India, fund managers...

  • Page 52
    ... 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...

  • Page 53
    ...carrying amount and accrued product warranty costs for the years ended December 31, 2011, 2010 and 2009 are summarized as follows: (in millions) Balance at January 1, 2009...Current year accruals for warranties ...Adjustments to preexisting warranties ...Settlements of warranty claims (in cash or in...

  • Page 54
    ... working capital needs and government sponsored borrowings which provide advantageous lending rates. In Europe, based upon exchange rates as of December 31, 2011, we have several unsecured, uncommitted discretionary credit facilities for a total of $10.8 million that expire between January 31, 2012...

  • Page 55
    ... 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 56
    ... closing price of our common stock on the date of the grant, as reported by the NASDAQ Stock Market. SARs and phantom shares were generally granted to nonemployee directors and key employees in the first quarter of each year and vest one-third each year over a three year period and have a seven year...

  • Page 57
    ... 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, 2011 and 2010, the closing stock price on our Class A common...

  • Page 58
    ... 7, 2011, our President and Chief Executive Officer and our Board of Directors mutually determined to separate our President and Chief Executive Officer's employment with us after a transition period. The $3.5 million severance associated with a reduction in force at our Corporate location includes...

  • Page 59
    ...), 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 60
    ... as follows: (in millions) Deferred tax assets: Other postretirement liabilities...Product warranty and self-insured risks ...Tax Carryforwards ...Other accruals and miscellaneous ...Valuation allowance ...Total deferred tax assets...Deferred tax liabilities: Property, Plant & Equipment ...Pension...

  • Page 61
    ..., valuation allowances have been recorded against our U.S. net deferred tax assets and certain international net deferred tax assets, specifically Brazil, France and India, Canada & China, where we believe it is not more likely than not the deferred taxes will be realized. The amount of the deferred...

  • Page 62
    ...statues of limitations. We have open tax years from 2005 to 2010, 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. NOTE 14. Fair Value Measurements...

  • Page 63
    ...course of business, such as sales to foreign customers not denominated in the seller's 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...

  • Page 64
    ... - (13.1) ($16.4) Fair value of hedge asset Fair value of hedge liability Fair value of hedge asset Fair value of hedge liability $7.3 - 5.2 - $12.5 Asset (Liability) Derivatives December 31, 2011 December 31, 2010 Financial Financial Position Location Fair Value Position Location Fair Value 62

  • Page 65
    ... $12.8 Cost of Sales 21.6 Cost of Sales Amount of Gain (Loss) Reclassified from AOCI into Income (Effective Portion) Years Ended December 31, 2011 $5.8 6.7 2010 $8.8 7.5 Location of Gain (Loss) Recognized in Income (Ineffective 2009 Portion) 2011 2010 $5.9 Cost of Sales ($1.3) $- 9.6 Cost of Sales...

  • Page 66
    ... quarter of 2011, and the majority our extended warranty period ends in March 2012. We accrued the expected costs of our performance of our settlement obligations in prior periods and, as such, management does not currently expect that the settlement will have a material adverse effect on our 2012...

  • Page 67
    ... 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...

  • Page 68
    ... 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 from both the scope of the case and the Settlement...

  • Page 69
    ... 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...

  • Page 70
    ..., from our former Engine and Power Train Group. External customer sales by geographic area are based upon the destination of products sold. In 2011 and 2010 one household refrigeration and freezer customer accounted for 10.0% and 10.1% of our consolidated sales. Long-lived assets by geographic area...

  • Page 71
    ....9 Net Fixed Assets United States ...Brazil ...India ...Europe... 2011 $35.3 110.7 30.0 13.4 $189.4 2010 $39.0 144.2 39.9 11.8 $234.9 2009 $47.0 158.6 39.7 14.4 $259.7 NOTE 18. Quarterly Financial Data - Unaudited (in millions, except per share data) First 2011 Net sales ...Gross profit* ...Net...

  • Page 72
    ... information about fair value measurements, including a consistent meaning of the term "fair value". This amendment is effective during interim and annual periods beginning after December 15, 2011. Management believes the adoption of this amendment will have no material effect on our financial...

  • Page 73
    ... 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. Management has evaluated the effectiveness of our internal control...

  • Page 74
    ...management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal...

  • Page 75
    ... years in the period ended December 31, 2011 and our report dated March 12, 2012 expressed an unqualified opinion. /s/ GRANT THORNTON LLP Southfield, Michigan March 12, 2012 ITEM 9B. OTHER INFORMATION None. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The information...

  • Page 76
    ... Concerning the Board of Directors" in our definitive proxy statement relating to our 2012 annual meeting of shareholders scheduled to be held April 25, 2012 and is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required to be reported pursuant to...

  • Page 77
    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. 75

  • Page 78
    ... by the undersigned thereunto duly authorized. TECUMSEH PRODUCTS COMPANY /s/ James J. Connor . James J. Connor President, Chief Executive Officer and Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of...

  • Page 79
    ... Credit and Security Agreement, dated as of April 21, 2011, among Tecumseh Products Company, Tecumseh Compressor Company, Tecumseh Products of Canada, Limited, Evergy, Inc. and PNC Bank, National Association (incorporated by reference to Exhibit 10.1 to registrant's Current Report on Form 8-K dated...

  • Page 80
    ... caption "Executive Compensation - Director Compensation" in registrant's definitive proxy statement relating to its 2011 annual meeting of shareholders held April 27, 2011, File No. 0452) General Release of All Claims, dated as of May 4, 2011 between Tecumseh Products Company and James E. Wainright...

  • Page 81
    ... 19, 2007 to agreement with AP Services, LLC dated December 7, 2006 (incorporated by reference to Exhibit 10.1 to registrant's Current Report on Form 8-K filed January 25, 2007, File No. 0-452) Warrant to Purchase Class A Common Stock of Tecumseh Products Company issued to Tricap Partners II L.P. on...

  • Page 82

  • Page 83
    ...585-9507 Reports and information are also available through our web site at www.tecumseh.com Investment Community Questions Investor Relations Tecumseh Products Company 1136 Oak Valley Drive, Ann Arbor, MI 48108 (734) 585-9507 Annual Meeting For more information about the date, time and location of...

  • Page 84
    ...Tecumseh Products Company is a global manufacturer of hermetically sealed compressors for residential and specialty air conditioning, household refrigerators and freezers, and commercial refrigeration applications, including air conditioning and refrigeration compressors, as well as condensing units...