<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT of 1934
For the transition period from______to______
COMMISSION FILE NUMBER: 0-452
TECUMSEH PRODUCTS COMPANY
(Exact name of registrant as specified in its charter)
MICHIGAN 38-1093240
(State of Incorporation) (IRS Employer Identification Number)
100 EAST PATTERSON STREET
TECUMSEH, MICHIGAN 49286
(Address of Principal Executive Offices)
Telephone Number: (517) 423-8411
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [x] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
Class of Stock Outstanding at October 29, 1999
- --------------------------------------------------------------------------------
<S> <C>
Class B Common Stock, $1.00 par value 5,470,146
Class A Common Stock, $1.00 par value 14,484,438
</TABLE>
<PAGE> 2
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 1
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited and subject to year end adjustments)
<TABLE>
<CAPTION>
(Dollars in millions) September 30, December 31,
1999 1998
===================================================================================================================
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 297.6 $ 277.7
Accounts receivable, trade, less allowance for doubtful
accounts of $6.1 million in 1999 and 1998 267.9 256.7
Inventories 269.7 275.7
Deferred income taxes 41.9 42.2
Other current assets 22.3 25.5
- -------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 899.4 877.8
PROPERTY, PLANT AND EQUIPMENT, at cost, net of
accumulated depreciation of $539.8 million in 1999
and $564.5 million in 1998 468.9 508.9
EXCESS OF COST OVER ACQUIRED NET ASSETS 51.2 57.0
DEFERRED INCOME TAXES 53.5 24.6
PREPAID PENSION EXPENSE 92.5 76.5
OTHER ASSETS 11.1 11.4
- -------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,576.6 $1,556.2
===================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, trade $ 124.0 $ 121.5
Income taxes payable 16.8 9.7
Short-term borrowings 4.2 10.6
Accrued liabilities 139.5 130.1
- -------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 284.5 271.9
LONG-TERM DEBT 15.4 17.2
NON-PENSION POSTRETIREMENT BENEFITS 194.4 187.6
PRODUCT WARRANTY AND SELF-INSURED RISKS 34.7 32.5
ACCRUAL FOR ENVIRONMENTAL MATTERS 34.3 36.7
PENSION LIABILITIES 14.0 14.6
- -------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 577.3 560.5
- -------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Class A common stock, $1 par value; authorized 75,000,000 shares; issued and
outstanding 14,563,438 shares in 1999
and 15,410,438 shares in 1998 14.6 15.4
Class B common stock, $1 par value; authorized 25,000,000
shares; issued and outstanding 5,470,146 shares 5.5 5.5
Retained earnings 1,035.2 986.6
Accumulated other comprehensive income (56.0) (11.8)
- -------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 999.3 995.7
- -------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,576.6 $1,556.2
===================================================================================================================
</TABLE>
Page 2
The accompanying notes are an integral part of these
statements.
<PAGE> 3
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 1
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited and subject to year end adjustments)
<TABLE>
<CAPTION>
(Dollars in millions except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
1999 1998 1999 1998
============================================================================================================
<S> <C> <C> <C> <C>
NET SALES $ 407.8 $ 397.1 $1,400.8 $1,357.4
COSTS AND EXPENSES
Cost of sales and operating expense 337.5 343.7 1,159.2 1,164.1
Selling and administrative expense 27.5 27.6 89.2 85.8
- ------------------------------------------------------------------------------------------------------------
OPERATING INCOME 42.8 25.8 152.4 107.5
OTHER INCOME (EXPENSE)
Interest expense (1.9) (1.6) (6.6) (5.8)
Interest income and other, net 7.0 6.8 22.8 21.5
Nonrecurring gain on currency hedge -- -- 8.6 --
- ------------------------------------------------------------------------------------------------------------
INCOME BEFORE TAXES ON INCOME 47.9 31.0 177.2 123.2
Taxes on income 17.5 11.8 64.7 45.2
- ------------------------------------------------------------------------------------------------------------
NET INCOME $ 30.4 $ 19.2 $ 112.5 $ 78.0
============================================================================================================
BASIC AND DILUTED EARNINGS PER SHARE $ 1.51 $ 0.90 $ 5.51 $ 3.63
============================================================================================================
Weighted Average Shares
(In thousands of shares) 20,125 21,253 20,400 21,502
============================================================================================================
Cash dividends declared per share $ 0.30 $ 0.30 $ 0.90 $ 0.90
============================================================================================================
</TABLE>
Page 3
The accompanying notes are an integral part of these statements.
<PAGE> 4
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 1
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited and subject to year end adjustments)
<TABLE>
<CAPTION>
(Dollars in millions) Nine Months Ended
September 30,
------------------------
1999 1998
===============================================================================================================
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 112.5 $ 78.0
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 57.5 57.4
Accounts receivable (27.7) (51.3)
Inventories (7.9) 5.8
Payables and accrued expenses 39.0 34.9
Prepaid pension expense (16.0) (7.5)
Other --- 10.5
- ---------------------------------------------------------------------------------------------------------------
Cash Provided By Operating Activities 157.4 127.8
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (53.6) (46.4)
- ---------------------------------------------------------------------------------------------------------------
Cash Used in Investing Activities (53.6) (46.4)
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (18.3) (19.3)
Decrease in borrowings, net (7.2) (24.4)
Repurchases of common stock (46.4) (39.1)
- ---------------------------------------------------------------------------------------------------------------
Cash Used in Financing Activities (71.9) (82.8)
- ---------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (12.0) 3.3
- ---------------------------------------------------------------------------------------------------------------
Increase in Cash and Cash Equivalents 19.9 1.9
CASH AND CASH EQUIVALENTS:
Beginning of period 277.7 304.1
- ---------------------------------------------------------------------------------------------------------------
End of period $ 297.6 $ 306.0
===============================================================================================================
</TABLE>
The accompanying notes are in integral part of these statements.
<PAGE> 5
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. The condensed consolidated financial statements of Tecumseh Products
Company and subsidiaries (the "Company") are unaudited and reflect all
adjustments (consisting of normal recurring adjustments) which are, in
the opinion of management, necessary for a fair presentation of the
financial position and operating results for the interim periods. The
December 31, 1998 condensed balance sheet data was derived from audited
financial statements, but does not include all disclosures required by
generally accepted accounting principles. The condensed consolidated
financial statements should be read in conjunction with the
consolidated financial statements and notes thereto contained in the
Company's Annual Report for the fiscal year ended December 31, 1998.
Due to the seasonal nature of the Company's business, the results of
operations for the interim period are not necessarily indicative of the
results for the entire fiscal year.
The financial data required in this Form 10-Q by Rule 10.01 of
Regulation S-X have been reviewed by Ciulla, Smith & Dale, LLP, the
Company's independent certified public accountants, as described in
their report contained elsewhere herein.
2. Inventories consisted of:
<TABLE>
<CAPTION>
(Dollars in millions) SEPTEMBER 30, December 31,
1999 1998
------------------------------------------------------------------------------------------------
<S> <C> <C>
Raw material and work in process $156.3 $176.5
Finished goods 92.4 81.9
Supplies 21.0 17.3
------------------------------------------------------------------------------------------------
Total Inventories $269.7 $275.7
================================================================================================
</TABLE>
3. In anticipation of the devaluation of the Brazilian Real in early 1999,
the Company's Brazilian subsidiary invested in forward exchange
contracts denominated in U.S. dollars. This hedging activity was
settled in the first quarter of 1999, resulting in the recognition of
an $8.6 million nonrecurring gain ($5.6 million or $.27 per share after
tax). Under applicable accounting standards, foreign currency
transaction gains and losses are recorded in net income, and foreign
currency translation gains and losses are reflected in other
comprehensive income.
4. The following table reports the Company's comprehensive income which is
comprised of net earnings and net currency translation gains and
losses:
<TABLE>
<CAPTION>
COMPREHENSIVE INCOME Three Months Ended Nine Months Ended
(Dollars in millions) September 30, September 30,
----------------------------------------------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
=======================================================================================================================
Net Income $ 30.4 $ 19.2 $ 112.5 $ 78.0
Other comprehensive expense:
Foreign currency
translation adjustments (4.1) 6.7 (44.2) (3.6)
- -----------------------------------------------------------------------------------------------------------------------
Comprehensive Income $ 26.3 $ 25.9 $ 68.3 $ 74.4
=======================================================================================================================
</TABLE>
Page 5
<PAGE> 6
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, CONTINUED
5. During the third quarter of 1999, the Company repurchased 189,167
shares of its Class A common stock at a cost of $11.4 million. For the
nine months ended September 30, 1999, the Company repurchased 847,000
shares at a cost of $46.4 million.
6. The Company has been named by the U.S. Environmental Protection Agency
("EPA") as a potentially responsible party ("PRP") in connection with
the Sheboygan River and Harbor Superfund Site in Wisconsin. At the
direction of the EPA, the Company and its independent environmental
consultants conducted a remedial investigation and feasibility study.
As a result of this study, the Company believes the most appropriate
course of action is to limit active remediation to the upper river near
the Company's facility, and that only monitored natural armoring should
be required in the middle river and the lower river and harbor. At
September 30, 1999, the Company had accrued $32 million ($33.8 million
at December 31, 1998) for estimated costs associated with the cleanup
of this site.
In May 1999, the EPA issued a proposed remedial action plan ("PRAP")
for the Sheboygan River and Harbor Site. The PRAP proposed remedial
action in both the upper river and the harbor, at an estimated cost of
approximately $66 million. In August 1999, the Company filed extensive
comments in opposition to this proposal. The EPA has not yet issued a
Record of Decision ("ROD") for the cleanup of the Sheboygan River and
Harbor Site. The Company anticipates receiving a ROD by the end of
1999; however, the ultimate resolution of the matter will likely take
much longer. In addition, the Wisconsin Department of Natural
Resources ("WDNR"), as a Natural Resource Trustee is investigating what
additional requirements, if any, the state may have beyond those
specified under the EPA plan.
The ultimate costs to the Company will be dependent upon factors
beyond its control. These factors include the scope and methodology of
the remedial action requirements to be established by the EPA (in
consultation with the WDNR), required cleanup standards, rapidly
changing remediation technology, the extent of any natural resource
damages, and the outcome of any related litigation. Other PRPs may
contribute to the costs of any final remediation, and/or natural
resource damage claims, regarding the middle river, lower river and
harbor portions of the Site.
The Company, in cooperation with the WDNR, is conducting an
investigation of soil and groundwater contamination at the Company's
Grafton, Wisconsin plant. Certain test procedures are underway to
assess the extent of contamination and to develop remedial options for
the site. While the Company has provided for estimated investigation
and on-site remediation costs, the extent and timing of future off-site
remediation requirements, if any, are not presently determinable.
The WDNR has requested that the Company and other interested parties
join it in a cooperative effort to clean up PCB contamination in the
watershed of the south branch of the Manitowoc River, downstream of the
Company's New Holstein, Wisconsin facility.
Page 6
<PAGE> 7
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, CONTINUED
To date, the Company has cooperated with the WDNR in investigating the
scope and range of the contamination. The Company has received the
results of an updated feasibility study which details estimated costs
of the Company's preferred remedial alternative. The Company's
environmental consultant has estimated that adequate remediation can be
achieved within a cost range of $3 to $5 million. Based on available
information, the Company has accrued an amount sufficient to cover its
anticipated costs. It is expected that the WDNR will demand a greater
amount, but there is not presently enough information to determine a
range or specific dollar amount.
In addition to the above sites, the Company is also participating with
the EPA and various state agencies at certain other sites to determine
the nature and extent of any remedial action, which may be necessary
with regard to such other sites. Based on limited preliminary data and
other information currently available, the Company has no reason to
believe that the level of expenditures for potential remedial action
which may be necessary at these other sites will have a material effect
on its consolidated financial position or results of operations.
7. The Company is also the subject of, or a party to, a number of other
pending or threatened legal actions involving a variety of matters
incidental to its business. Although the ultimate outcome of these
matters cannot be predicted with certainty, and some may be disposed of
unfavorably to the Company, management has no reason to believe that
their disposition will have a materially adverse effect on the
consolidated financial position or results of operations of the
Company.
8. In 1998, the Financial Accounting Standards Board (FASB) issued a
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities." Initially, this
statement was to become effective for the Company's calendar year 2000;
however, in July 1999 the FASB postponed the effective date of SFAS No.
133 for one year to become effective for the year ending December 2001.
SFAS No. 133 establishes new standards for recognizing all derivatives
as either assets or liabilities, and measuring those instruments at
fair value. The Company plans to adopt the new standard with the first
quarter of fiscal year 2001, as required. Management is currently
evaluating the impact SFAS No. 133 will have on reported results of
operations and on consolidated financial position. Based on the
Company's current policies and procedures for the use of financial
derivatives and hedging instruments, it is management's opinion that
SFAS No. 133 will not have a material effect on the Company's
consolidated financial statements.
Page 7
<PAGE> 8
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, CONTINUED
9. The Company has three reportable segments based on the similarity of
products produced: Compressor Products, Engine & Power Train Products,
and Pump Products. There has been no change since the prior year-end in
the methods used to determine reportable segments or in measuring
segment income. There has been no material change in total assets for
each reportable segment (other than changes due to normal, cyclical
business operations) since December 31, 1998. Revenues and operating
income by segment for the periods indicated are as follows:
<TABLE>
<CAPTION>
BUSINESS SEGMENT DATA
Three Months Ended Nine Months Ended
(Dollars in millions) September 30, September 30,
---------------------- -----------------
1999 1998 1999 1998
=========================================================================================================================
<S> <C> <C> <C> <C>
NET SALES:
Compressor Products $ 224.3 $ 256.2 $ 754.9 $ 829.7
Engine and Power Train Products 157.4 118.2 553.7 436.0
Pump Products 26.1 22.7 92.2 91.7
- -------------------------------------------------------------------------------------------------------------------------
Total Net Sales $ 407.8 $ 397.1 $1,400.8 $1,357.4
- -------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME:
Compressor Products $ 21.9 $ 17.1 $ 79.4 $ 69.0
Engine and Power Train Products 20.6 9.8 69.0 36.8
Pump Products 3.0 1.3 11.6 9.3
Corporate and consolidating items (2.7) (2.4) (7.6) (7.6)
- -------------------------------------------------------------------------------------------------------------------------
Total Operating Income 42.8 25.8 152.4 107.5
Interest expense (1.9) (1.6) (6.6) (5.8)
Interest income and other, net 7.0 6.8 22.8 21.5
Nonrecurring gain -- -- 8.6 --
- -------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE TAXES ON INCOME $ 47.9 $ 31.0 $177.2 $ 123.2
=========================================================================================================================
</TABLE>
Page 8
<PAGE> 9
INDEPENDENT ACCOUNTANTS' REPORT
November 5, 1999
Tecumseh Products Company
Tecumseh, Michigan
We have reviewed the consolidated condensed balance sheet of Tecumseh
Products Company and Subsidiaries as of September 30, 1999, and the related
consolidated condensed statements of income and cash flows for the three months
and nine months ended September 30, 1999 and 1998. These financial statements
are the responsibility of the Company's management.
We have conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the consolidated condensed financial statements referred
to above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted
auditing standards, the consolidated balance sheet as of December 31, 1998, and
the related consolidated statements of income, stockholders' equity, and cash
flows for the year then ended (not presented herein); and in our report dated
January 29, 1999, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying consolidated condensed balance sheet as of December 31, 1998, is
fairly stated in all material respects in relation to the consolidated balance
sheet from which it has been derived.
CIULLA, SMITH & DALE, LLP
Certified Public Accountants
Southfield, Michigan
Page 9
<PAGE> 10
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Consolidated net sales for the third quarter of 1999 were $407.8
million, compared to $397.1 million in the third quarter of 1998, an increase of
$10.7 million or 3%. Net income for the third quarter of 1999 increased by 58%
to $30.4 million or $1.51 per share from net income of $19.2 million or $0.90
per share in the third quarter of 1998. These results represent the Company's
best third quarter in its history in terms of both sales and net income. Strong
sales of engine and power train products, as well as excellent results in
Brazilian compressor operations, were the major drivers behind this performance.
Net sales for the nine month period ended September 30, 1999 also grew
by 3% to $1,400.8 million compared to sales of $1,357.4 million in the first
nine months of 1998. Net income for the first nine months of 1999 amounted to
$112.5 million or $5.51 per share and included a nonrecurring gain of $8.6
million ($5.6 million or $.27 per share after tax) on currency hedging recorded
in the first quarter. These results compare to net income of $78 million or
$3.63 per share in the same period of 1998.
Compressor Products
Sales of Compressor Products for the third quarter of 1999 decreased
12% to $224.3 million as compared to $256.2 million in the third quarter of
1998. For the nine months, compressor sales of $754.9 million declined 9% from
1998 sales of $829.7 million. Declines in the dollar value of foreign
currencies, primarily Brazil, had the effect of reducing reported sales by
approximately $11 million for the quarter and approximately $27 million
year-to-date. Selling prices in the U.S. and Europe declined due to increased
competition from Asian imports, particularly in room air conditioning products.
Generally, commercial refrigeration markets were weaker than in the previous
year reflecting lower bottler demand and inventory adjustments in the
aftermarket business. Sales of unitary air conditioning product were also lower
due to competition from scroll compressors.
Despite the overall sales decline, compressor operating income for the
third quarter of 1999 improved 28% over the 1998 third quarter. For the first
nine months, operating income improved from $69 million in 1998 to $79.4 million
in 1999. Brazilian operations were the most significant factor in the earnings
improvements for the quarter and nine months. The devaluation of the Brazilian
currency early in 1999 allowed for an expansion of our Brazilian exports at
considerably improved margins. Significant margin improvements were also
achieved in North America principally as the result of cost reductions and lower
net pension costs. Earnings from European operations were reduced as the result
of lower sales volume and increased competition.
Page 10
<PAGE> 11
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Engine and Power Train Products
The Company's Engine and Power Train business continued on its record
pace in the third quarter. Sales in the third quarter of 1999 amounted to $157.4
million, up 33% from $118.2 million for the same period last year. Sales in the
first nine months increased by 27% from $436 million in 1998 to $553.7 million
in 1999. The Company recorded strong growth in sales of engines for snow
throwers, generators and utility applications. Sales of snow thrower engines in
the quarter were up approximately 50% from 1998 levels. Sales of engines for
electric power generation in each of the first three quarters were approximately
$15 million higher than in the corresponding quarters of 1998.
Third quarter operating income grew to $20.6 million, more than double
the $9.8 million earned in the 1998 third quarter. Operating income for the
first nine months of 1999 amounted to $69 million, representing an increase of
87% over last year's results. Nonrecurring product recall expenses of $1.7
million were accrued in the third quarter of 1999. The strong engine and power
train earnings result from better absorption of overhead due to higher volume,
and from a more favorable product mix which was impacted by greater demand for
engines for snow throwers and generators than a year ago.
Pump Products
Sales of our Pump Products increased from $22.7 million in the third
quarter of 1998 to $26.1 million in third quarter 1999, an improvement of
approximately 15%, reflecting continued growth in water gardening applications.
The pump segment also received a boost in the sales of de-watering pumps used in
response to the flooding caused by Hurricane Floyd in the southeastern United
States during the later part of the third quarter. Segment operating income
improved from $1.3 million in third quarter 1998 to $3.0 million in third
quarter 1999.
Sales of Pump Products in the first nine months of 1999 were flat
compared to 1998. However, operating income increased 25% from $9.3 million in
1998 to $11.6 million in 1999 primarily due to changes in the product mix
combined with reduced advertising and promotional costs.
Outlook
We expect earnings in the fourth quarter to improve somewhat over those
reported in the fourth quarter of 1998, exclusive of nonrecurring and unusual
items. (Reported earnings for the fourth quarter of 1998 included a nonrecurring
charge of $28.8 million or $1.37 per share after tax for asset impairment and
favorable adjustments to pension expense of $3.7 million or $.18 per share.)
Page 11
<PAGE> 12
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Compressor markets continue to be affected by worldwide
over-capacity. This should result in lower earnings from North American and
European operations. However, we expect this to be partially offset by improving
Brazilian results.
The Engine and Power Train business is expected to be strong through
the fourth quarter aided by sales of snow thrower and generator engines at
levels higher than in the fourth quarter of 1998.
LIQUIDITY, CAPITAL RESOURCES AND RISKS
The Company continued to maintain a strong and liquid financial
position. Working capital of $614.9 million at September 30, 1999 was up
slightly from $605.9 million at the end of 1998, and the ratio of current assets
to current liabilities was approximately 3.2. Third quarter capital spending was
$21.6 million. Total capital spending for 1999 should approximate $70 - 80
million of which approximately half will be spent on capacity expansion,
primarily in India and Brazil. Working capital requirements, planned capital
investment and stock repurchase expenditures for 1999 and early 2000 are
expected to be financed primarily through internally available funds. However,
the Company may also utilize long-term financing arrangements in connection with
state investment incentives and may, from time to time, utilize short-term
borrowings to hedge currency risk and to finance foreign working capital
requirements. The Company maintains a $100 million revolving credit facility
that is available for general corporate purposes.
As part of a previously announced share repurchase program, the Company
purchased 189,167 shares of Class A common stock during the third quarter of
1999 at an approximate cost of $11.4 million. Existing authority permits the
repurchase of an additional 153,000 shares through the end of the year. In the
nine months ended September 30, 1999, the Company repurchased 847,000 shares at
an approximate cost of $46.4 million.
Environmental Matters
The Company is subject to various federal, state and local laws
relating to the protection of the environment, and is actively involved in
various stages of investigation or remediation for sites where contamination has
been alleged. (See Note 6 to the financial statements.) Liabilities, relating to
probable remediation activities, are recorded when the costs of such activities
can be reasonably estimated based on the facts and circumstances currently
known. Difficulties exist estimating the future timing and ultimate costs to be
incurred due to uncertainties regarding the status of laws, regulations, levels
of required remediation, changes in remediation technology and information
available. At September 30, 1999 and 1998 the Company had accrued $41 million
and $42.5 million, respectively for environmental remediation, including $32
million and $33.8 million, respectively relating to the Sheboygan River and
Harbor Superfund Site. As these matters continue toward final resolution,
amounts in excess of those
Page 12
<PAGE> 13
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
already provided may be necessary to discharge the Company from its 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 which they
are recorded. In addition, the ultimate resolution of these matters, either
individually or in the aggregate, could be material to the consolidated
financial statements.
Year 2000
In 1997, the Company began reviewing its manufacturing, financial and
administrative information systems and determined that it needed to modify or
replace several of its software and hardware systems that were not Year 2000
compliant. The Company developed a plan for the timely completion of
modifications related to the Year 2000.
To date, the Company has installed and implemented Year 2000 compliant
hardware and software for its critical business systems in substantially all its
facilities, both domestic and foreign. The Company is continuing system testing
and will conduct date roll-forward tests throughout the fourth quarter. All
Tecumseh facilities have made efforts to replace or update their PC/desktop
systems, and all are substantially completed. All the Company's production
facilities are in various stages of testing equipment for imbedded chips and
surveying and evaluating Year 2000 compliance in critical suppliers. Contingency
plans for unexpected system (or supplier) failures have been formulated, and are
being reviewed by corporate management. Where possible, the Company has begun
efforts to identify alternative suppliers.
The Company has obtained, or is in the process of obtaining, Year 2000
compliance certifications from suppliers of externally developed or purchased
software. Purchased software which has not, or will not be restructured to
address the date change problem will be replaced before year end.
The total anticipated cost to inventory, assess, modify and test both
information and non-information technology requirements is currently estimated
at approximately $9 million. As of September 30, 1999, the Company had spent
approximately $7.1 million to accomplish this goal and had provided the
necessary resources to complete the projects. The financial impact of making
the remaining required system changes and completing all testing is not
expected to have a material effect on the Company's consolidated financial
position, results of operations or cash flows. However, if
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
modifications of the Company's systems, and those of its customers and
suppliers, are not successfully completed on a timely basis, the Year 2000 issue
could have a materially adverse impact on the operations of the Company. The
Company believes it has allocated appropriate resources to identify and fix
anticipated Year 2000 problems; however, there can be no assurances that all
Year 2000 problems will be corrected in advance, and it is possible that some
Year 2000 problems could go undetected until after January 1, 2000.
The most likely worst case Year 2000 event would be the inability of
third party suppliers such as public utilities, critical material suppliers,
telecommunication suppliers, and financial institutions to continue providing
their goods and services to the Company. The inability of these vendors to
continue supplying the Company could, in the absence of alternative sources,
have a potentially material adverse impact on the Company's operations and/or
financial position. Although it is difficult for the Company to evaluate all of
the potential risks related to the Year 2000 problem (particularly in terms
third party suppliers), the Company's management believes that these risks to
the Company are no greater or different than the risk to other manufacturing
companies with similar operations.
This statement regarding the Company's Year 2000 compliance program is
a Year 2000 Readiness Disclosure as defined under the Year 2000 Information and
Readiness Disclosure Act of 1998.
Euro Currency
In January 1999, the European Monetary Union (EMU) entered into a
three-year transition phase during which a common currency called the "euro" is
being introduced in the participating countries. Initially, this new currency is
being used for financial transactions, and it will progressively replace the old
national currencies that will be withdrawn by July 2002. The transition to the
euro currency will involve changing all currency denominated contracts,
budgetary records and financial reporting systems, as well as simultaneous
handling of dual currencies and the conversion of historical data. Much concern
and uncertainty exists regarding the effects that the conversion to the euro may
have on the market place. As currency differentials are removed, selling prices
could potentially become equalized between customers located in the various
participating countries. The impact of this phenomenon and other possible
effects could change the competitive arena for companies in the same line of
business. As the Company has limited experience with the new currency,
management is not able to predict what effect conversion to the euro will have
on Company operations, cash flows or financial condition in the future.
The Company's European subsidiaries are in the process of evaluating
their options for (or are implementing) the conversion of data and financial
systems to make them euro currency compliant. The Company's Italian subsidiary
is currently using Year 2000 compliant financial reporting software that will be
upgraded in November 1999 to also make it euro currency compliant, and is
reviewing options in regards to their manufacturing cost systems. The Company's
French subsidiaries have postponed making their decision on euro compliant
systems until after they have completed all work on the Year 2000 systems due to
resource constraints. The estimated costs to complete the conversion to the euro
compliant systems and the actual costs incurred to date have been combined with
the stated amounts for the Year 2000 project. The Company does not currently
expect to incur any costs in addition to these stated amounts.
As our European facilities are already conducting normal business
transactions in multiple currencies, the Company believes that there is minimal
risk of future operating or reporting errors associated with the current systems
used during the transition period and with the eventual conversion to euro
compliant systems. The most difficult task will
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
be that of converting historical data into euro denominated data for future
comparison. Though the Company will continue to incur costs for implementation,
system testing, and other costs associated with the adjustment to the new
currency over time, management does not expect that such costs will have a
material impact on the consolidated operations, cash flows, and financial
condition of the Company in future periods.
UNCERTAINTIES RELATING TO FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of
the securities laws. In addition, forward-looking statements may be made orally
in the future by or on behalf of the Company. Forward-looking statements can be
identified by the use of terms such as "expects", "should", "may", "believes",
"anticipates", "will" and other future tense and forward-looking terminology.
Investors are cautioned that forward-looking statements involve risks
and uncertainties, including, but not limited to, changes in business conditions
and the economy in general in both foreign and domestic markets; weather
conditions affecting demand for air conditioners, lawn and garden products and
snow throwers; the extent to which the demand for generators will continue;
financial market changes, including interest rates and foreign exchange rates;
economic trend factors such as housing starts; governmental regulations;
availability of materials; actions of competitors; the ultimate cost of
resolving environmental matters; the extent to which the Company and its
critical suppliers are successful in remediating Year 2000 and Euro compliant
computer issues; and the Company's ability to profitably develop, manufacture
and sell both new and existing products.
PART I. FINANCIAL INFORMATION - Item 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, the Company is exposed to market risk
and price fluctuations related to the purchase of certain raw materials and
supplies used in its manufacturing operations, both domestic and foreign. The
Company obtains competitive prices for material and supplies when available. To
the extent possible, the Company attempts to obtain long-term supply
arrangements at advantageous negotiated prices.
Certain of the Company's long and short-term debt is based on rates
that are variable or that fluctuate. The carrying value of the Company's debt
approximates fair value.
The Company is also subject to foreign currency exchange exposure for
operations whose assets and liabilities are denominated in currencies other than
the U.S. dollar. The Company, from time to time, enters into forward exchange
contracts to obtain foreign
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
currencies at specified rates based on expected future cash flows for each
currency. On a normal basis, the results of this hedging activity offset the
currency exchange exposure of the foreign currency transactions being hedged and
net results are recognized in net income when the transactions are settled. In
anticipation of the devaluation of the Brazilian Real in early 1999, the
Company's Brazilian subsidiary invested in forward exchange contracts
denominated in U.S. dollars. This hedging contract was settled in the first
quarter of 1999 resulting in a nonrecurring gain of $8.6 million ($5.6 million
or $.27 per share after tax).
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
Number Description
10(a) Third Amendment to Class A Rights Agreement, dated as of
August 25, 1999, between Tecumseh Products Company and
State Street Bank and Trust Company, N.A., as successor
Class A Rights Agent (filed as Exhibit 4.1 to the
Company's Current Report on Form 8-K filed August 26,
1999 (Commission File No. 0-452) and incorporated herein
by reference).
10(b) Third Amendment to Amended and Restated Class B Rights
Agreement, dated as of August 25, 1999, between Tecumseh
Products Company and State Street Bank and Trust Company,
N.A., as successor Class B Rights Agent (filed as Exhibit
4.2 to the Company's Current Report on Form 8-K filed
August 26, 1999 (Commission File No. 0-452) and
incorporated herein by reference).
27 Financial Data Schedule
(b) The Company filed a Current Report on Form 8-K, reporting certain
amendments to its Class A and Class B rights agreements under items 5 and
7, on August 26, 1999.
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized:
TECUMSEH PRODUCTS COMPANY
-------------------------
(Registrant)
Dated: November 10, 1999 BY: /s/ JOHN H. FOSS
---------------------------- --------------------------------
John H. Foss
Vice President, Treasurer
and Chief Financial Officer
Page 17
<PAGE> 18
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 297,600
<SECURITIES> 0
<RECEIVABLES> 274,000
<ALLOWANCES> 6,100
<INVENTORY> 269,700
<CURRENT-ASSETS> 899,400
<PP&E> 1,008,700
<DEPRECIATION> 539,800
<TOTAL-ASSETS> 1,576,600
<CURRENT-LIABILITIES> 284,500
<BONDS> 0
0
0
<COMMON> 20,100
<OTHER-SE> 979,200
<TOTAL-LIABILITY-AND-EQUITY> 1,576,600
<SALES> 1,400,800
<TOTAL-REVENUES> 1,400,800
<CGS> 1,159,200
<TOTAL-COSTS> 1,159,200
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,600
<INCOME-PRETAX> 177,200
<INCOME-TAX> 64,700
<INCOME-CONTINUING> 112,500
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 112,500
<EPS-BASIC> 5.51
<EPS-DILUTED> 5.51
</TABLE>
