<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 June 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 July 30, 1999
- --------------------------------------------------------------------------------
<S> <C>
Class B Common Stock, $1.00 par value 5,470,146
Class A Common Stock, $1.00 par value 14,694,438
</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) JUNE 30, December 31,
1999 1998
=======================================================================================================
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 297.8 $ 277.7
Accounts receivable, trade, less allowance for doubtful 307.7 256.7
accounts of $5.9 million in 1999 and $6.1 million in 1998
Inventories 264.2 275.7
Deferred income taxes 41.9 42.2
Other current assets 24.9 25.5
- -------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 936.5 877.8
PROPERTY, PLANT AND EQUIPMENT, at cost, net of
accumulated depreciation of $528.5 million in 1999 469.2 508.9
and $564.5 million in 1998
EXCESS OF COST OVER ACQUIRED NET ASSETS 50.2 57.0
DEFERRED INCOME TAXES 50.9 24.6
PREPAID PENSION EXPENSE 85.3 76.5
OTHER ASSETS 11.2 11.4
- -------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,603.3 $ 1,556.2
=======================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, trade $ 147.0 $ 121.5
Income taxes payable 15.3 9.7
Short-term borrowings 8.5 10.6
Accrued liabilities 152.3 130.1
- -------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 323.1 271.9
LONG-TERM DEBT 15.5 17.2
NON-PENSION POSTRETIREMENT BENEFITS 193.3 187.6
PRODUCT WARRANTY AND SELF-INSURED RISKS 32.1 32.5
ACCRUAL FOR ENVIRONMENTAL MATTERS 35.6 36.7
PENSION LIABILITIES 13.5 14.6
- -------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 613.1 560.5
- -------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Class A common stock, $1 par value; authorized 75,000,000
shares; issued and outstanding 14,752,605 shares in 1999 and 14.8 15.4
15,410,438 shares in 1998
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 1,022.0 986.6
Accumulated other comprehensive income (52.1) (11.8)
- -------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 990.2 995.7
- -------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,603.3 $ 1,556.2
=======================================================================================================
</TABLE>
The accompanying notes are in integral part of these statements. Page 2
<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 Three Months Ended Six Months Ended
amounts) June 30, June 30,
------------------- -------------------
1999 1998 1999 1998
=====================================================================================
<S> <C> <C> <C> <C>
NET SALES $ 503.6 $ 500.4 $ 993.0 $ 960.3
COSTS AND EXPENSES
Cost of sales and operating expense 415.8 423.7 821.7 821.1
Selling and administrative expense 30.1 29.3 61.7 57.5
- -------------------------------------------------------------------------------------
OPERATING INCOME 57.7 47.4 109.6 81.7
OTHER INCOME (EXPENSE)
Interest expense (1.3) (1.8) (4.7) (4.2)
Interest income and other, net 6.0 7.2 15.8 14.7
Nonrecurring gain on currency hedge -- -- 8.6 --
- -------------------------------------------------------------------------------------
INCOME BEFORE TAXES ON INCOME 62.4 52.8 129.3 92.2
Taxes on income 22.8 18.9 47.2 33.4
- -------------------------------------------------------------------------------------
NET INCOME $ 39.6 $ 33.9 $ 82.1 $ 58.8
=====================================================================================
BASIC AND DILUTED EARNINGS PER SHARE $ 1.95 $ 1.57 $ 4.00 $ 2.72
=====================================================================================
CASH DIVIDENDS DECLARED PER SHARE $ 0.30 $ 0.30 $ 0.60 $ 0.60
=====================================================================================
</TABLE>
The accompanying notes are in integral part of these statements. Page 3
<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>
Six Months Ended
(Dollars in millions) June 30,
------------------
1999 1998
<S> <C> <C>
============================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 82.1 $ 58.8
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 39.0 38.7
Accounts receivable (68.9) (102.4)
Inventories (1.7) 12.6
Payables and accrued expenses 75.0 74.3
Prepaid pension expense (8.8) (5.0)
Other (3.4) 9.3
- --------------------------------------------------------------------------------------------
Cash Provided By Operating Activities 113.3 86.3
- --------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (32.0) (28.4)
- --------------------------------------------------------------------------------------------
Cash Used in Investing Activities (32.0) (28.4)
- --------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (12.3) (12.9)
Decrease in borrowings, net (2.4) (21.8)
Repurchases of common stock (35.2) (22.6)
- --------------------------------------------------------------------------------------------
Cash Used in Financing Activities (49.9) (57.3)
- --------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (11.3) (2.0)
- --------------------------------------------------------------------------------------------
Increase (Decrease) in Cash & Cash Equivalents 20.1 (1.4)
CASH AND CASH EQUIVALENTS:
Beginning of period 277.7 304.1
- --------------------------------------------------------------------------------------------
End of period $ 297.8 $ 302.7
============================================================================================
</TABLE>
The accompanying notes are in integral part of these statements. Page 4
<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 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) June 30, December 31,
1999 1998
=================================================================
<S> <C> <C>
Raw material and work in process $ 156.8 $ 176.5
Finished goods 88.3 81.9
Supplies 19.1 17.3
-----------------------------------------------------------------
Total Inventories $ 264.2 $ 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 Six Months Ended
(Dollars in millions) June 30, June 30,
---------------------------------------
1999 1998 1999 1998
=========================================================================
<S> <C> <C> <C> <C>
Net Income $39.6 $33.9 $82.1 $58.8
Other comprehensive expense:
Foreign currency
translation adjustments (5.0) (4.3) (40.1) (10.3)
-------------------------------------------------------------------------
Comprehensive Income $34.6 $29.6 $42.0 $48.5
=========================================================================
</TABLE>
Page 5
<PAGE> 6
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, CONTINUED
5. Basic and diluted earnings per share are equivalent. Earnings per share is
computed based on the weighted average number of common shares outstanding
for the periods reported. The weighted average number of common shares used
in the computations for the three months ended June 30, 1999 and 1998, were
20,359,476 and 21,517,573, respectively. The weighted average number of
common shares used in the computations for the six months ended June 30,
1999 and 1998 were 20,534,924 and 21,629,197, respectively.
6. During the second quarter of 1999, Tecumseh Products Company repurchased
317,500 shares of its Class A common stock at a cost of $18.7 million. For
the six months ended June 30, 1999, the Company has repurchased
approximately 658,000 shares at a cost of $35.2 million.
7. The Company has been named by the EPA as a potentially responsible party in
connection with the Sheboygan River and Harbor Superfund Site in Wisconsin.
At June 30, 1999, the Company had an accrual of $32.9 million ($33.8
million at December 31, 1998) for estimated costs associated with the
cleanup of certain polychlorinated biphenyl (PCB) contamination at this
Superfund Site. The Company has based the estimated cost of cleanup on the
results of the EPA-overseen remediation investigation and feasibility study
and on various assumptions concerning the areas that will be required to
undergo active remediation. Significant assumptions underlying the
estimated costs are that active remediation will be limited to the upper
river near the Company's facility and that only monitored natural armoring
will be required in the middle river and the lower river and harbor.
At the end of May 1999, the EPA issued a proposed remedial action plan
("PRAP") for the Sheboygan River and Harbor Site. The PRAP proposes
remedial action in both the upper river and the harbor, at a total
estimated cost of about $66 million. The proposal is subject to a comment
period that ends August 13. The Company anticipates filing extensive
comments on the proposal, which it believes is not supported by the
administrative record for the Site.
The EPA has indicated it expects to issue a record of decision on the
cleanup of the Sheboygan River and Harbor Site in 1999, but the ultimate
resolution of the matter may take much longer. 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 Wisconsin Department of
Natural Resources (WDNR)), rapidly changing technology, the extent of any
natural resource damages, and the outcome of any related litigation. Other
potentially responsible parties may contribute to the costs of any final
remedy selected, and /or natural resource damages claimed, regarding the
middle river and lower river/harbor portions of the Site.
Page 6
<PAGE> 7
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, CONTINUED
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. The Company has cooperated to date with the
WDNR in investigating the scope and range of the contamination. Although
results of ongoing feasibility studies are not yet available, the Company
has provided for preliminary investigation expenses. It is not possible at
this time to reasonably estimate the cost of participation in any
remediation effort.
In addition to the above mentioned sites, the Company is also currently
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
necessary at these other sites will have a material effect on its financial
position.
8. Various lawsuits and claims, including those involving ordinary routine
litigation incidental to its business, to which the Company is a party, are
pending, or have been asserted, against the Company. Although the 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 of the Company.
9. 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. The Company is in the process of
evaluating the impact of SFAS No. 133. 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
10. 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 segment total assets (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:
BUSINESS SEGMENT DATA
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
(Dollars in millions) June 30, June 30,
----------------- -------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
==========================================================================
NET SALES:
Compressor Products $ 281.1 $ 310.7 $ 530.6 $ 573.5
Engine and Power Train Products 186.9 153.8 396.3 317.8
Pump Products 35.6 35.9 66.1 69.0
--------------------------------------------------------------------------
Total Net Sales $ 503.6 $ 500.4 $ 993.0 $ 960.3
--------------------------------------------------------------------------
OPERATING INCOME:
Compressor Products $ 32.9 $ 32.7 $ 57.5 $ 51.9
Engine and Power Train Products 21.7 13.3 48.4 27.0
Pump Products 5.6 4.2 8.6 8.0
Corporate and consolidating
items (2.5) (2.8) (4.9) (5.2)
--------------------------------------------------------------------------
Total Operating Income 57.7 47.4 109.6 81.7
Interest expense (1.3) (1.8) (4.7) (4.2)
Interest income and other, net 6.0 7.2 15.8 14.7
Nonrecurring gain -- -- 8.6 --
--------------------------------------------------------------------------
INCOME BEFORE TAXES ON INCOME $ 62.4 $ 52.8 $ 129.3 $ 92.2
==========================================================================
</TABLE>
Page 8
<PAGE> 9
INDEPENDENT ACCOUNTANTS' REPORT
August 10, 1999
Tecumseh Products Company
Tecumseh, Michigan
We have reviewed the consolidated condensed balance sheet of Tecumseh
Products Company and Subsidiaries as of June 30, 1999, and the related
consolidated condensed statements of income and cash flows for the three months
and six months ended June 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 sales for the second quarter of 1999 were $503.6 million, up
from $500.4 million in the 1998 second quarter. First half sales grew 3% to
$993.0 million compared to sales of $960.3 million in the first half of 1998.
Net income for the second quarter of 1999 increased by 17% to a record $39.6
million or $1.95 per share as compared with net income of $33.9 million or $1.57
per share in the second quarter of 1998. Earnings for the first half of 1999
were equivalent to $4.00 per share including a nonrecurring gain of $8.6 million
($5.6 million or $.27 per share after tax) on currency hedging recorded in the
first quarter.
The favorable earnings growth has been the result of substantial increases
in engine and power train sales as well as improvement in operating margins in
our compressor and pump businesses.
Compressor Products
Second quarter compressor sales declined 9.6% relative to the second
quarter of 1998. Declines in the dollar value of foreign currencies in Europe
and Brazil had the effect of reducing reported sales by approximately $10
million. Compressor Products sales continue to be influenced by the economic
recession in Brazil and other geographic regions. The economic slowdown within
Brazil reduced Brazilian domestic demand for refrigeration and air conditioning
products that utilize our components. On the other hand, the devaluation of the
Real (at the beginning of the year) had a beneficial impact on margins earned on
our products exported from Brazil.
Due to lower average selling prices and somewhat weakened demand for
commercial refrigeration products in the U.S. and Europe, second quarter sales
declined in these sectors compared to the second quarter last year. Despite the
decline in sales, second quarter margins improved from 10.5% to 11.7% overall
for our Compressor Products business due to cost improvement programs and the
higher margins on Brazilian exports.
First half Compressor Products sales declined 7.5% as compared to the first
half of 1998, primarily due to the lower Brazilian domestic sales and reduced
sales to our European customers. Operating earnings increased $5.6 million in
the first half with operating margins increasing from 9.0% in 1998 to 10.8% in
1999 due to the favorable margins on our Brazilian export sales and as a result
of cost improvement programs at various compressor facilities.
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
Our Engine and Power Train business continued to set new records in the
second quarter. Sales grew to $186.9 million for a 22% improvement over the 1998
second quarter. Operating income was up 63% to $21.7 million. Though sales of
our traditional walk-behind lawn mower engines were essentially flat in
comparison with the 1998 second quarter, we recorded strong gains in sales of
engines for snow thrower, generator and riding lawn equipment applications.
Second quarter margins in the Engine and Power Train business reached 11.6%
as compared with year ago margins of 8.6%. The earnings increase is a result of
the effect of the higher sales volume and a favorable sales mix which included a
move toward sales of snow thrower engines in anticipation of the coming winter
season. In addition, there were improvements in the operating margin at the
Company's new engine plant in Douglas, Georgia. The plant ran at roughly
breakeven levels during the 1999 second quarter, whereas last year's second
quarter recorded a loss of more than $2 million.
Year-to-date Engine and Power Train sales recorded a 24.7% increase from
$317.8 million in 1998 to $396.3 million in 1999. Operating income for the first
half of 1999 climbed to $48.4 million from $27 million in 1998 reflecting the
improved operating margins which increased from 8.5% to 12.2% year over year.
This improvement in the Engine and Power Train business was influenced by heavy
snowfall in the last winter season, which caused inventories of snow throwers to
be sold off. Therefore, the demand for snow thrower engines is greater this year
as the industry prepares for the upcoming season. Also, the concern over recent
shortages of electrical power and possible shortages resulting from Year 2000
computer problems has increased the demand for generator engines. Improvements
in this year's net earnings were attributable to the same factors that have
influenced the second quarter, i.e. greater sales volume, favorable sales mix
and better operating margins in the Douglas, Georgia facility.
Pump Products Second quarter pump sales were essentially flat in comparison
with last year. Operating margins, however improved from 11.7% to 15.7% in the
absence of costs incurred in 1998 relative to intensive water garden marketing
programs. Year-to-date sales in 1999 declined 4.2% as compared to the first half
in 1998 reflecting the presence of carryover inventories of water gardening
products at large retailers. However, operating earnings increased 7.5% for the
first half of 1999 compared to the same period in 1998 primarily due to reduced
advertising and promotional expenses.
Outlook Present business conditions suggest that the fundamentals
influencing the first half results likely will continue at least through the
third quarter. It is likely that reported Compressor Products sales will be off
somewhat from last year's third quarter, principally
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
because of currency changes and a continuation of the Brazilian recession. On
the other hand, compressor margins should continue to show improvement over the
prior year on the strength of Brazilian export margins. We expect the Engine and
Power Train business to record another excellent quarter with stronger sales of
snow thrower and generator engines as compared to last year. In short, it should
be another very good quarter for the Company.
It is difficult at this time to state solid expectations for the fourth
quarter. The big issues that we are aware of are (1) the timing and extent of a
possible Brazilian economic recovery and (2) the timing of our engine customers'
production for next year's season. We are hopeful of seeing some additional
requirements for room air conditioning compressors during this period as the
recent heat wave in the Northern Midwest and Northeastern United States seems
to have cleared out inventories in the distribution channels.
LIQUIDITY, CAPITAL RESOURCES AND RISKS
The Company continued to maintain a strong and liquid financial position.
Working capital of $613.4 million at June 30, 1999 was up slightly from $605.9
million at the end of 1998, and the ratio of current assets to current
liabilities was 2.9. Second quarter capital spending was $16.3 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.
The Company purchased 317,500 shares of Class A common stock during the
second quarter of 1999, as part of the previously announced share repurchase
program. Existing authority covers the purchase of an additional 342,000 shares
through the end of this year.
Environmental Matters
The Company is subject to various laws relating to the protection of the
environment and is in various stages of investigation or remediation for sites
where contamination has been alleged. (See Note 7 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
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
the status of laws, regulations, negotiated levels of required remediation,
technology and information available. At June 30, 1999 and 1998 the Company had
accrued $42.3 million and $42.9 million respectively for environmental
remediation.
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.
The Company's objective is to have all its critical systems Year 2000
compliant and to have completed contingency plans by October 1999. This
objective allows time for further testing and verification of these systems as
necessary and the conversion of less critical systems. 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 the system testing and will conduct date
roll-forward tests in the third quarter. All Tecumseh facilities have made
efforts to replace or update their PC/desk-top systems, and all are in the range
of 80 to 100% completed. All the Company's production facilities are in various
stages of testing equipment for imbedded chips, surveying and evaluating Year
2000 compliance in critical suppliers, and completing their contingency plans
for unexpected system (or supplier) failures.
The total expected cost of implementing Year 2000 compliant systems is
estimated at $9 million. As of June 30, 1999, the Company had spent
approximately $7 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 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. Though it is difficult for the Company to evaluate
the possible effect of all risks related to the Year 2000 problem (particularly
in terms of suppliers, public utilities, transportation systems and government
agencies), the Company's management believes that these risks to the Company are
no greater or different than the risks 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.
Page 13
<PAGE> 14
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 software that will be upgraded in November
1999 to also make it euro currency compliant. The Company's French subsidiaries
are scheduled to make their decision regarding the optimal method to accomplish
the conversion to euro compliant systems by the end of the third quarter 1999.
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 expect to incur any costs in
addition to these stated amounts.
As our European facilities are already conducting normal business
transactions in various 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 the euro
compliant systems. The most difficult task will 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.
Page 14
<PAGE> 15
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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
No information is presented in response to this item because the Company
has no material market risk relating to derivative financial instruments,
derivative commodity instruments, or other financial instruments.
Page 15
<PAGE> 16
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of Tecumseh Products Company was held on
April 28, 1999. Proxies for the meeting were solicited pursuant to Section 14(a)
of the Securities Exchange Act of 1934, and there was no solicitation in
opposition to management's solicitation.
All of management's nominees for directors as listed in the proxy statement were
elected with the following votes.
<TABLE>
<CAPTION>
VOTES
DIRECTOR VOTES FOR WITHHELD
-------- --------- --------
<S> <C> <C>
Kenneth G. Herrick 4,827,387 37,685
Todd W. Herrick 4,762,517 102,555
John H. Foss 4,828,417 36,655
Peter M. Banks 4,828,417 36,655
Jon E. Barfield 4,828,413 36,659
J. Russell Fowler 4,827,694 37,378
John W. Gelder 4,828,417 36,655
Stephen L. Hickman 4,828,417 36,655
Ralph W. Babb, Jr. 4,828,104 36,968
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) None.
(b) The Company did not file any reports on Form 8-K during the three months
ended June 30, 1999.
Page 16
<PAGE> 17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized:
TECUMSEH PRODUCTS COMPANY
(Registrant)
Dated: August 11, 1999 BY: /s/ JOHN H. FOSS
---------------------------- ----------------------------
John H. Foss
Vice President, Treasurer
and Chief Financial Officer
Page 17
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