<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, 2000
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.
Class of Stock Outstanding at November 13, 2000
--------------------------------------------------------------------------------
Class B Common Stock, $1.00 par value 5,470,146
Class A Common Stock, $1.00 par value 13,410,438
<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,
2000 1999
===============================================================================================================
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 275.9 $ 270.5
Accounts receivable, trade, less allowance for doubtful
accounts of $6.2 million in 2000 and $6.5 million in 1999 251.2 268.6
Inventories 280.0 266.3
Deferred income taxes 48.8 44.2
Other current assets 20.5 24.7
---------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 876.4 874.3
PROPERTY, PLANT AND EQUIPMENT, at cost, net of
accumulated depreciation of $578.8 million in 2000
and $545.1 million in 1999 444.7 477.4
EXCESS OF COST OVER ACQUIRED NET ASSETS 45.0 48.2
DEFERRED INCOME TAXES 50.6 39.2
PREPAID PENSION EXPENSE 117.4 98.6
OTHER ASSETS 14.1 15.6
---------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,548.2 $1,553.3
===============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, trade $ 118.4 $ 120.0
Income taxes payable 5.3 2.6
Short-term borrowings 5.3 7.9
Accrued liabilities 150.9 125.2
---------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 279.9 255.7
LONG-TERM DEBT 14.4 15.6
OTHER POSTRETIREMENT BENEFIT LIABILITIES 189.6 188.4
PRODUCT WARRANTY AND SELF-INSURED RISKS 26.4 28.8
ACCRUAL FOR ENVIRONMENTAL MATTERS 34.6 35.6
PENSION LIABILITIES 13.7 15.0
---------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 558.6 539.1
---------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Class A common stock, $1 par value; authorized 75,000,000 shares;
issued and outstanding 13,449,838 shares in 2000 and 14,322,938
shares in 1999 13.5 14.3
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 1,042.9 1,047.3
Accumulated other comprehensive income (72.3) (52.9)
---------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 989.6 1,014.2
---------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,548.2 $1,553.3
===============================================================================================================
</TABLE>
The accompanying notes are an 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 amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -----------------------
2000 1999 2000 1999
============================================================================================================
<S> <C> <C> <C> <C>
NET SALES $348.8 $407.8 $1,291.4 $1,400.8
COSTS AND EXPENSES
Cost of sales and operating expense 305.6 337.5 1098.7 1,159.2
Selling and administrative expense 27.1 27.5 90.6 89.2
Nonrecurring charges (a) -- -- 33.5 --
------------------------------------------------------------------------------------------------------------
OPERATING INCOME 16.1 42.8 68.6 152.4
OTHER INCOME (EXPENSE)
Interest expense (1.6) (1.9) (4.5) (6.6)
Interest income and other, net 6.8 7.0 19.8 22.8
Nonrecurring gain (b) -- -- -- 8.6
------------------------------------------------------------------------------------------------------------
INCOME BEFORE TAXES ON INCOME 21.3 47.9 83.9 177.2
Taxes on income 7.5 17.5 32.6 64.7
------------------------------------------------------------------------------------------------------------
NET INCOME $ 13.8 $ 30.4 $ 51.3 $ 112.5
============================================================================================================
BASIC AND DILUTED EARNINGS PER SHARE $ 0.73 $ 1.51 $ 2.65 $ 5.51
============================================================================================================
Weighted Average Shares
(In thousands of shares) 19,052 20,125 19,330 20,400
============================================================================================================
Cash dividends declared per share $ 0.32 $ 0.30 $ .096 $ 0.60
============================================================================================================
</TABLE>
(a) Nonrecurring charges of $33.5 million were recorded in the first quarter
of 2000 and include $15.5 million in severance pay and termination benefit
costs, $5.1 million in plant closing and exit costs, and $12.9 million in
asset impairment charges. This net charge is equivalent to $23.3 million
or $1.18 per share after taxes.
(b) A nonrecurring gain of $8.6 million from currency hedging was recorded in
the first quarter of 1999. This gain is equivalent to $5.6 million or $.27
per share after taxes.
The accompanying notes are an 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>
Nine Months Ended
(Dollars in millions) September 30,
---------------------------
2000 1999
===============================================================================================================
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 51.3 $112.5
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 55.0 57.5
Nonrecurring charges 33.5 --
Accounts receivable 8.0 (27.7)
Inventories (21.0) (7.9)
Payables and accrued expenses 24.0 39.0
Prepaid pension expense (18.8) (16.0)
Deferred income taxes and other (15.1) --
---------------------------------------------------------------------------------------------------------------
Cash Provided By Operating Activities 116.9 157.4
---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (45.7) (53.6)
---------------------------------------------------------------------------------------------------------------
Cash Used in Investing Activities (45.7) (53.6)
---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (18.5) (18.3)
Decrease in borrowings, net (2.8) (7.2)
Repurchases of common stock (38.1) (46.4)
---------------------------------------------------------------------------------------------------------------
Cash Used in Financing Activities (59.4) (71.9)
---------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (6.4) (12.0)
---------------------------------------------------------------------------------------------------------------
Increase in Cash and Cash Equivalents 5.4 19.9
CASH AND CASH EQUIVALENTS:
Beginning of period 270.5 277.7
---------------------------------------------------------------------------------------------------------------
End of period $ 275.9 $ 297.6
===============================================================================================================
</TABLE>
The accompanying notes are an 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 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,
1999 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, 1999. 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,
2000 1999
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Raw material and work in process $147.4 $151.7
Finished goods 114.0 96.1
Supplies 18.6 18.5
-----------------------------------------------------------------------------------------------------------
Total Inventories $280.0 $266.3
===========================================================================================================
</TABLE>
3. NONRECURRING CHARGES - During the quarter ended March 31, 2000, the
Company recorded $33.5 million in nonrecurring charges ($23.3 million or
$1.18 per share net of tax) related to the restructuring and realignment
of its compressor manufacturing operations both domestically and
internationally. The nonrecurring charges consisted of the following items
and activities:
<TABLE>
<CAPTION>
===========================================================================================================
(Dollars in millions) Projected After Tax
RESTRUCTURING AND REALIGNMENT CHARGES: Costs Costs
--------- ---------
<S> <C> <C>
Closing and relocation of Somerset, KY facility:
Employee termination costs $ 9.5 $ 6.0
Plant closing and decommissioning costs 5.1 3.2
Write-off, removal and storage of obsolete or
idle equipment 4.2 2.6
Indian work force reduction program 6.0 6.0
--------- ---------
Total restructuring and realignment charges 24.8 17.8
ASSET IMPAIRMENT CHARGE 8.7 5.5
--------- ---------
TOTAL NONRECURRING CHARGES $33.5 $23.3
===========================================================================================================
</TABLE>
Page 5
<PAGE> 6
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, CONTINUED
The closing of the Somerset plant is expected to result in the elimination
of approximately 895 hourly and salaried employees. As of September 30,
2000, $.5 million had been charged against the accrual for employee
termination costs. Additionally, no amounts have been charged against the
accrual for plant closing and decommissioning costs. Management estimates
that the relocation will be completed and the plant permanently closed by
the third quarter of 2001.
The transfer of production from an old Whirlpool facility in Faridabad,
India to the Company's new facility in Ballabgarh is expected to eliminate
approximately 600 employees. The exact amount and timing of the
termination payments will be dependent upon a number of factors, including
the successful ramp up of production and the actual number of employees
required to operate the new facility. Through the third quarter of 2000,
approximately $3.8 million had been expended under the program affecting
approximately 500 employees.
4. The following table reports the Company's comprehensive income which is
comprised of net earnings, net currency translation gains and losses, and
deferred gains and losses from hedging.
<TABLE>
<CAPTION>
===========================================================================================================
COMPREHENSIVE INCOME Three Months Ended Nine Months Ended
(Dollars in millions) September 30, September 30,
----------------------------------------------------
2000 1999 2000 1999
===========================================================================================================
<S> <C> <C> <C> <C>
Net Income $ 13.8 $ 30.4 $ 51.3 $ 112.5
Other comprehensive expense:
Foreign currency
translation adjustments (9.6) (4.1) (17.7) (44.2)
Deferred loss from hedging (1.6) -- (1.6) --
-----------------------------------------------------------------------------------------------------------
Comprehensive Income $ 2.6 $ 26.3 $ 32.0 $ 68.3
===========================================================================================================
</TABLE>
5. During the third quarter of 2000, the Company repurchased 276,100 shares
of its Class A common stock at an approximate cost of $10.6 million.
Existing authority permits the purchase of an additional 39,400 shares
through the end of the year. For the nine months ended September 30, 2000,
the Company has repurchased 873,100 shares at a cost of $38.1 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
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, 2000 and December
31, 1999, the Company had accrued $30.7 and $31.5 million, respectively
for estimated costs associated with the cleanup of this site.
Page 6
<PAGE> 7
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, CONTINUED
In May 2000 the EPA issued its Record of Decision ("ROD") for the
Sheboygan River and Harbor Superfund Site. The Company is one of several
named PRPs in the proposed cleanup action. The EPA has estimated the cost
of cleanup at $40.9 million. The cost to the Company could be more or less
than that depending on a number of factors including the accuracy of EPA
estimates, the results of further investigations required by the ROD,
changes in technology, the extent of contributions by other PRPs, and
other factors beyond the Company's control. The Company believes that the
EPA's remedy, as specified in the ROD, goes well beyond what is
environmentally protective and cost-effective for the site and largely
ignores the results of the multimillion-dollar remedial investigation and
feasibility study that the Company performed under EPA oversight.
Additionally, 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 ROD. The
ultimate costs to the Company for potential natural resource damage claims
is currently not determinable and would be dependent upon factors beyond
its control. These factors include the results of future investigations
required by the ROD, potential changes to the remedial action requirements
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 and lower river and
harbor portions of the Site.
The Company, in cooperation with the WDNR, conducted an investigation of
soil and groundwater contamination at the Company's Grafton, Wisconsin
plant. It was determined that contamination from petroleum and degreasing
products used at the plant are contributing to an off-site groundwater
plume. 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 and the Company's environmental engineers have been concurrently
investigating PCB contamination in the watershed of the south branch of
the Manitowoc River, downstream of the Company's New Holstein, Wisconsin
engine plant. The Company has cooperated to date with the WDNR in
investigating the scope of the contamination. Although the WDNR's
investigation has not established the parties responsible for the
contamination, the WDNR has indicated that it believes the Company is a
source of the PCB contamination and that it expects the Company to
participate in a cooperative cleanup effort. The Company has provided for
investigation expenses and for a portion of source area remediation costs
that it is likely to agree to share with federal and state authorities.
Although participation in a cooperative remediation effort for the balance
of the watershed is under consideration, it is not possible to reasonably
estimate the cost of any such participation at this time.
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. At September 30, 2000 and
December 31, 1999, the Company had accrued $41.3 million and $42.4
million,
Page 7
<PAGE> 8
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, CONTINUED
respectively for environmental remediation, including the amounts noted
above relating to the Sheboygan River and Harbor Superfund Site. As these
matters continue toward final resolution, amounts in excess of those
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 in 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.
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. The Company has three reportable segments based on the similarity of
products produced: Compressor Products, Engine and 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, 1999. Revenues and operating income by
segment for the periods indicated are as follows:
BUSINESS SEGMENT DATA
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(Dollars in millions) September 30, September 30,
------------------- -------------------
2000 1999 2000 1999
===================================================================================================================
<S> <C> <C> <C> <C>
NET SALES:
Compressor Products $207.0 $224.3 $ 720.2 $ 754.9
Engine and Power Train Products 116.6 157.4 475.3 553.7
Pump Products 25.2 26.1 95.9 92.2
-------------------------------------------------------------------------------------------------------------------
Total Net Sales $348.8 $407.8 $1,291.4 $1,400.8
-------------------------------------------------------------------------------------------------------------------
OPERATING INCOME:
Compressor Products $ 9.4 $ 21.9 $ 57.7 $ 79.4
Engine and Power Train Products 5.6 20.6 36.9 69.0
Pump Products 3.0 3.0 14.3 11.6
Corporate and consolidating items (1.9) (2.7) (6.8) (7.6)
Nonrecurring items -- -- (33.5) --
-------------------------------------------------------------------------------------------------------------------
Total Operating Income 16.1 42.8 68.6 152.4
Interest expense (1.6) (1.9) (4.5) (6.6)
Interest income and other, net 6.8 7.0 19.8 22.8
Nonrecurring gain -- -- -- 8.6
-------------------------------------------------------------------------------------------------------------------
INCOME BEFORE TAXES ON INCOME $ 21.3 $ 47.9 $ 83.9 $ 177.2
===================================================================================================================
</TABLE>
Page 8
<PAGE> 9
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION - ITEM 1
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, CONTINUED
9. Effective July 1, 2000, the Company elected early adoption of Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133). At September 30, 2000,
the Company had unrealized losses of $1.6 million, net of tax, classified
in accumulated other comprehensive income for its outstanding foreign
currency cash flow hedge contracts. The Company expects to reclassify this
amount to earnings during the next twelve months. For the three months
ended September 30, 2000 the losses reported in other income (expense)
related to the ineffective portion of the Company's outstanding foreign
currency hedge contracts amounted to approximately $0.3 million, net of
tax. The cumulative effect of the change in accounting principle from the
adoption of SFAS No. 133 resulted in an insignificant impact on reported
earnings and a $1.6 million loss reported as a component of other
comprehensive income. No amounts were reclassified from other
comprehensive income to earnings during the three-month period ended
September 30, 2000.
Page 9
<PAGE> 10
INDEPENDENT ACCOUNTANTS' REPORT
November 9, 2000
Tecumseh Products Company
Tecumseh, Michigan
We have reviewed the consolidated condensed balance sheet of Tecumseh
Products Company and Subsidiaries as of September 30, 2000 and the related
consolidated condensed statements of income and cash flows for the three months
and nine months ended September 30, 2000 and 1999. 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, 1999, 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 28, 2000, 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, 1999, 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 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
RESULTS OF OPERATIONS
Net income for the third quarter of 2000 amounted to $13.8 million or
$0.73 per share compared with net income of $30.4 million or $1.51 per share in
the third quarter of 1999. Net income before nonrecurring items amounted to
$74.6 million or $3.86 per share for the first nine months of 2000 compared to
$106.9 million or $5.24 per share in the same period of 1999. Nonrecurring
charges of $33.5 million ($23.3 million net of tax) had the effect of reducing
reported earnings for the first nine months of 2000 to $51.3 million or $2.65
per share while nonrecurring gains in the first nine months of 1999 increased
reported earnings to $112.5 million or $5.51 per share. Consolidated sales for
the third quarter of 2000 amounted to $348.8 million, compared to sales of
$407.8 million in the third quarter of 1999. Sales for the nine months ended
September 30, 2000 were $1,291.4 million compared to sales of $1,400.8 million
in the first nine months of 1999.
These lower 2000 results reflect reduced sales and earnings in the
Company's two major business segments, Engine and Power Train Products and
Compressor Products.
Compressor Products
Third quarter 2000 Compressor sales declined to $207.0 million from
$224.3 million in the third quarter of 1999. Compressor sales in the nine months
ended September 30, 2000 declined to $720.2 million from $754.9 million in the
first nine months of 1999. Compressor Products sales in both the three and nine
month periods ended September 30, 2000 were adversely impacted by reduced demand
as well as accelerating competition in the air conditioning markets. Intense
price competition, primarily from Asian producers, continued to negatively
impact the room air conditioning market. Additionally, the continued weakness of
foreign currencies, particularly the EURO, had a negative impact on sales. In
the three and nine months ended September 30, 2000, the impact of foreign
currency translation adjustments reduced reported sales by $2.8 million and
$14.0 million respectively.
Compressor Products operating profit for the third quarter of 2000
amounted to $9.4 million compared to $21.9 million in the third quarter of 1999.
Year-to-date operating income for the nine months ended September 30, 2000 and
1999 amounted to $57.7 million and $79.4 million respectively. Operating margins
were adversely impacted by a number of factors including lower overall average
selling prices, reduced fixed cost coverage as a result of lower production
volumes and inefficiencies as well as increased spending resulting from the
transfer of production from the Somerset plant to other production facilities.
The Company's Brazilian operations continued to be the bright spot in
worldwide compressor operations. Although operating margins were considerably
lower than in 1999, the Brazilian operations contributed over 90% of the
Compressor segment's operating profit in the third quarter of 2000, and
approximately 54% of the segment's operating profits for the nine months ended
September 30, 2000. Brazilian margins also were negatively impacted by the
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
competitive worldwide pricing situation as well as upward pressure on
manufacturing costs. In 1999, operating margins benefited from the favorable
effects that the Brazilian currency devaluation had on export sales. Indian
compressor operations continue to suffer from start-up costs associated with
bringing a new manufacturing plant on line.
Engine and Power Train Products
Engine and Power Train products sales in the third quarter of 2000
declined to $116.6 million from $157.4 million in the third quarter of 1999.
Sales in the nine months ended September 30, 2000 amounted to $475.3 million
compared to $553.7 million in the first nine months of 1999. Operating income
for the three months ended September 30, 2000 amounted to $5.6 million compared
to $20.6 million in the third quarter of 1999. For the nine months ended
September 30, 2000, operating income was $36.9 million compared to $69.0 million
in the first nine months of 1999.
Both sales and profits in the Engine and Power Train business segment
for the three and nine months ended September 30, 2000 were adversely impacted
by significant reductions in engine demand for various utility applications,
such as portable power generators, reduced snow thrower engine demand and lower
than anticipated sales of lawn and garden engines and transmissions. An
unfavorable product mix has resulted in lower than expected sales and profits
from the higher margin utility engines. Approximately 80% of the third quarter
2000 decline in sales from 1999 related directly to engines for generators and
snow throwers. Additionally, unit product costs were adversely impacted by
reduced production and shipping levels. This reduced demand resulted in
production imbalances and excess engine production capacity. 1999 results were
favorably impacted by robust demand for higher margin utility engines used in
portable electrical generators. The unusually high demand for these products
resulted primarily from concerns relating to Y2K uncertainties.
Pump Products
Sales in the third quarter of 2000 declined slightly to $25.2 million
from $26.1 million in the third quarter of 1999. Pump business sales in the nine
month period ended September 30, 2000 increased to $95.9 million compared to
$92.2 million in 1999. Operating profit in both the third quarter of 2000 and
1999 amounted to $3.0 million. Year-to-date operating profit amounted to $14.3
million in 2000 compared to $11.6 million in 1999.
During the third quarter of 2000, the Pump segment entered the
residential wastewater collection, transfer and disposal market by acquiring the
assets of Interon Corporation. This market, while currently in its infancy, is
expected to grow rapidly as it provides an economical alternative to
conventional gravity wastewater disposal systems. The acquisition of Interon
assets did not have a material impact on reported results of operations,
financial position, or cash flows during the third quarter.
Nonrecurring Charges
Management, in an effort to better meet changing customer requirements,
reduce
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
production costs and improve overall productivity and product quality, has
undertaken a number of strategic initiatives designed to consolidate, streamline
and realign production capabilities in its compressor manufacturing operations,
both domestically and internationally.
As a result of these initiatives, the Company recorded nonrecurring
charges of $33.5 million ($23.3 million or $1.18 per share net of tax) in the
first quarter of 2000 as described in Note 3 to the financial statements.
Outlook
Conditions in the Company's major business segments are not expected to
improve for the balance of the year. Competitive pricing pressures and a
worldwide excess production capacity will continue to impact the Compressor
business, while selling prices are expected to remain soft. Brazilian sales are
expected to remain strong, but cost pressures likely will cause year over year
declines in margins. Adverse market conditions, particularly a weak generator
market, will persist throughout the balance of the year in the Engine and Power
Train Products segment. Fourth quarter 2000 sales and earnings per share are
expected to be below those of the third quarter and significantly below those of
fourth quarter 1999.
LIQUIDITY, CAPITAL RESOURCES AND RISKS
The Company continues to maintain a strong and liquid financial
position. Working capital of $596.5 million at September 30, 2000 was down
slightly from $618.6 million at the end of 1999. The ratio of current assets to
current liabilities was approximately 3.0 to 1.0. Capital spending in the first
nine months of 2000 was $45.7 million. Total capital spending for 2000 should
approximate $60 - $70 million of which the major portion will be spent on
capacity expansion in Brazil.
Working capital requirements, planned capital investment and stock
repurchase expenditures for 2000 are expected to be financed primarily through
internally generated funds; however, short-term borrowings and various financial
instruments are utilized from time to time to hedge currency risk and finance
foreign working capital requirements. The Company maintains a $100 million
revolving credit facility that is available for general corporate purposes. The
Company may also utilize long-term financing arrangements in connection with
state investment incentive programs.
The Company intends to continue focusing its efforts on improving the
profitability and competitiveness of its worldwide Compressor operations in
connection with the planned phase-out of production at the Somerset Plant. The
Company has begun the implementation of certain lean manufacturing initiatives
at other production facilities which are expected to improve product quality,
improve material through put, and result in reduced production costs. In the
Engine and Power Train operations, the Company is realigning its existing
manufacturing capacity and capabilities to address market-driven product demand
and mix conditions. Additionally, efforts are underway to reduce manufacturing
and overhead costs through aggressive cost cutting strategies, process
improvements and facility utilization. It is possible that production
realignment
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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
and consolidation initiatives in both the Compressor and Engine and Power Train
Operations could take place which could have a material effect on the
consolidated financial position and future results of operations of the Company.
As part of a previously announced share repurchase program, the Company
purchased 873,100 shares of Class A common stock during the first nine months of
2000 at an approximate cost of $38.1 million.
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.
The Company's European subsidiaries have identified their preferred
options for the conversion of data and financial systems to make them Euro
currency compliant. Implementation plans have been developed, and the target for
conversion has been set for the first quarter of 2001. The Company expects that
all necessary actions will be taken to complete a timely conversion and to
ensure uninterrupted operations to the extent possible. Costs incurred through
the end of 1999 were stated in combination with amounts spent for the Year 2000
project. The Company expects that an additional $1.0 million will be spent
during 2000 and 2001 to complete the conversion to Euro compliant systems.
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.
In May 2000 the EPA issued its Record of Decision for the Sheboygan
River and Harbor Superfund Site. The Company is one of several named potentially
responsible parties in the proposed cleanup action. The EPA has estimated the
cost of cleanup at $40.9 million. The ultimate cost to the Company could be more
or less than that depending on a number of factors including the accuracy of EPA
estimates, changes in technology, the extent of contributions by other
potentially responsible parties and other factors beyond the Company's control.
At September 30, 2000 and December 31, 1999, the Company had accrued
$41.3 million
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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
and $42.4 million, respectively for environmental remediation, including $30.7
million and $31.5 million, respectively relating to the Sheboygan River and
Harbor Superfund Site. As these matters continue toward final resolution,
amounts in excess of those 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 in 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.
Adoption of New Accounting Standard
Effective July 1, 2000 the Company elected early adoption of Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS No. 133). During the third quarter 2000, the
Company reported a loss of $0.3 million, net of tax, as a component of other
income (expense) relating to the ineffective portion of the Company's
outstanding foreign currency hedge position. A $1.6 million loss was recorded as
a component of other comprehensive income. This amount is expected to be
reclassified to earnings over the next twelve months as the hedging instruments
mature. The cumulative effect of the change in accounting principle resulting
from the adoption of SFAS No. 133 had an immaterial effect on reported earnings.
The Company does not believe that the provisions of SFAS No. 133 will have a
material impact on future reported results of operations or financial position.
CAUTIONARY STATEMENTS RELATING TO FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act that are subject to the safe harbor
provisions created by that Act. In addition, forward-looking statements may be
made orally in the future by or on behalf of 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 or by the fact that they appear under the caption
"Outlook".
Investors are cautioned that actual results may differ materially from
those projected as a result of certain risks and uncertainties, including, but
not limited to: i) changes in business conditions and the economy in general in
both foreign and domestic markets; ii) weather conditions affecting demand for
air conditioners, lawn and garden products and snow throwers; iii) the extent to
which the decline in demand for lawn and garden and utility engines and the
unfavorable product mix in that segment of the Company's business will continue,
and the success of the Company's ongoing efforts to bring costs in line with
projected production levels and product mix; iv) financial market changes,
including fluctuations in interest rates and foreign currency exchange rates; v)
economic trend factors such as housing starts; vi) governmental regulations;
vii) availability of materials; viii) actions of competitors; ix) the ultimate
cost of resolving environmental matters; x) the extent of any business
disruption resulting from the conversion to the Euro; xi) the Company's ability
to profitably develop, manufacture and sell both
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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
new and existing products; xii) the extent of any business disruption that may
result from the restructuring and realignment of the Company's manufacturing
operations and the ultimate cost of those initiatives; and xiii) political and
economic uncertainties that could adversely affect anticipated sales and
production increases in Brazil. These forward-looking statements are made only
as of the date hereof, and the Company undertakes no obligation to update or
revise the forward-looking statements, whether as a result of new information,
future events or otherwise.
PART I. FINANCIAL INFORMATION - ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to risk during the normal course of business
from credit risk associated with accounts receivable and from changes in
interest rates, commodity prices and foreign currency exchange rates. The
exposure to these risks is managed through a combination of normal operating and
financing activities which include the use of derivative financial instruments
in the form of foreign currency forward exchange contracts and commodity forward
purchasing contracts. The Company does not utilize financial instruments for
trading or other speculative purposes. A discussion of the Company's policies
and procedures regarding the management of market risk and the use of derivative
financial instruments was provided in its Annual Report for year ended December
31, 1999 under the caption of "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Quantitative and Qualitative Disclosures
About Market Risk" and in Notes 1 and 10 of the Notes to Consolidated Financial
Statements. There have been no changes in these policies or procedures during
the current year.
The Company utilizes foreign currency forward exchange contracts to
hedge foreign currency receivables, payables and other known transactional
exposures for periods consistent with the expected cash flows of the underlying
transactions. The contracts generally mature within one year and are designed to
limit exposure to exchange rate fluctuations because gains and losses on the
hedged transactions offset gains and losses on the contracts. At September 30,
2000 and December 31, 1999, the Company held foreign currency forward exchange
contracts and foreign currency call options with total notional values in the
amount of $46.4 and $67.5 million, respectively.
The Company uses commodity forward purchasing contracts to help control
the cost of traded commodities, primarily copper and aluminum, used as raw
material in the production of compressor motors and components and engines.
Local management is allowed to contract commodity forwards for a limited
percentage of projected raw material requirements up to one year in advance. The
total notional values of commodity forwards outstanding at September 30, 2000
and December 31, 1999 were $28.8 and $39.5 million, respectively.
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TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit
Number Description
------- -----------
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter ended September
30, 2000.
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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 13, 2000 BY: /s/ JOHN H. FOSS
------------------------------ -------------------------------
John H. Foss
Vice President, Treasurer and
Chief Financial Officer
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Exhibit Index
-------------
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
