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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999 Commission File Number 0-452
TECUMSEH PRODUCTS COMPANY
(Exact Name of Registrant as Specified in its Charter)
Michigan 38-1093240
(State of Incorporation) (I.R.S. Employer Identification No.)
100 East Patterson Street
Tecumseh, Michigan 49286
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (517) 423-8411
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Securities Registered Pursuant to Section 12(b) of the Act: Securities Registered Pursuant to Section12(g) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
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Class B Common Stock, $1.00 Par Value
None None Class A Common Stock, $1.00 Par Value
Class B Common Stock Purchase Rights
Class A Common Stock Purchase Rights
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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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---
Registrant disclaims the existence of control and, accordingly, believes that as
of March 3, 2000 all of the 5,470,146 shares of its Class B Common Stock, $1.00
par value, then issued and outstanding, were held by non-affiliates of
Registrant. Certain shareholders, which, as of March 3, 2000, held an aggregate
of 2,279,200 shares of Class B Common Stock might be regarded as "affiliates" of
Registrant as that word is defined in Rule 405 under the Securities Exchange Act
of 1934, as amended. If such persons are "affiliates," the aggregate market
value as of March 3, 2000 (based on the closing price of $43.063 per share, as
reported on the Nasdaq Stock Market on such date) of 3,190,946 shares then
issued and outstanding held by non-affiliates was approximately $137,411,708.
Numbers of shares outstanding of each of the Registrant's classes of Common
Stock at March 17, 2000:
Class B Common Stock, $1.00 Par Value: 5,470,146
Class A Common Stock, $1.00 Par Value: 13,993,938
Certain information contained in the Registrant's Annual Report to Shareholders
for the year ended December 31, 1999 has been incorporated herein by reference
in Parts I and II hereof. Certain information in the definitive proxy statement
to be used in connection with the Registrant's 2000 Annual Meeting of
Shareholders has been incorporated herein by reference in Part III hereof. The
Index to Exhibits is located on page 22.
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TABLE OF CONTENTS
Item Page
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PART I
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1. Business 2
Executive Officers of the Registrant 13
2. Properties 14
3. Legal Proceedings 14
4. Submission of Matters to a Vote of Security Holders 16
PART II
5. Market for the Company's Common Equity and Related Stockholder Matters 17
6. Selected Financial Data 17
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 17
7A. Quantitative and Qualitative Disclosures About Market Risk 17
8. Financial Statements and Supplementary Data 17
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 17
PART III
10. Directors and Executive Officers of the Company 18
11. Executive Compensation 18
12. Security Ownership of Certain Beneficial Owners and Management 18
13. Certain Relationships and Related Transactions 18
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 19
Signatures 20
Index to Exhibits 22
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PART I
ITEM 1. BUSINESS
GENERAL
Tecumseh Products Company (the "Company") is a full-line, independent global
manufacturer of hermetic compressors for air conditioning and refrigeration
products, gasoline engines and power train components for lawn and garden
applications, and pumps. The Company believes it is one of the largest
independent producers of hermetically sealed compressors in the world, as well
as one of the world's leading manufacturers of small gasoline engines and power
train products used in lawn and garden applications. The Company also produces a
variety of pump products with a wide range of applications. The Company's
products are sold in countries all around the world.
The Company groups its products into three principal industry segments:
Compressor Products, Engine and Power Train Products and Pump Products.
Compressor Products include a broad range of air conditioning and refrigeration
compressors, as well as refrigeration condensing units. The Company's compressor
products range from fractional horsepower models used in small refrigerators and
dehumidifiers to large compressors used in unitary air conditioning
applications. The Company sells compressors in all four compressor market
segments: (i) household refrigerators and freezers; (ii) room air conditioners;
(iii) commercial and residential unitary central air conditioning systems; and
(iv) commercial refrigeration applications including freezers, dehumidifiers,
water coolers and vending machines. The Company sells compressors to original
equipment manufacturers ("OEMs") and aftermarket distributors.
Engine and Power Train Products consist of (i) two- and four-cycle gasoline
engines for use in a wide variety of lawn and garden applications and other
consumer and light commercial applications and (ii) transmissions, transaxles
and related parts for use principally in lawn and garden tractors and riding
lawn mowers. The Company sells engine and power train products to OEMs and
aftermarket distributors.
Pump Products include (i) small submersible pumps used in a wide variety of
industrial, commercial, and consumer applications and (ii) heavy duty
centrifugal type pumps used in the construction, mining, agricultural, marine,
and transportation industries. The Company sells pump products to distributors,
mass merchants and OEMs.
FOREIGN OPERATIONS AND SALES
In recent years, international sales and manufacturing have become increasingly
important to the Company's business as a whole. In 1999, sales to customers
outside the United States represented 43% of total consolidated net sales. In
addition to North American operations, compressor products are produced in
Brazil, France and India, while engines are produced in Italy.
Products sold outside the United States are manufactured at both U.S. and
foreign plants. Tecumseh do Brasil, Ltda. ("Tecumseh do Brasil"), the Company's
Brazilian compressor subsidiary, sells its products principally in Latin
America, North America, Europe and the Middle East. The Brazilian
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operation represents a significant portion of the Company's compressor business.
In 1999, total sales generated by Tecumseh do Brasil amounted to over 21% of
total Compressor Products segment sales. Brazilian operating income amounted to
45% of total Compressor Products segment operating income and 21% of
consolidated operating income for the year.
The Company's European compressor subsidiary, Tecumseh Europe, S.A. ("Tecumseh
Europe"), generally sells the compressor products it manufactures in Europe, the
Middle East, Africa, Latin America and Asia. The Company also has two
manufacturing facilities in India which produce air conditioning and
refrigeration compressors for the Indian appliance markets.
In the engine business, the Company has two principal markets. The North
American market is served by the Company's U.S. manufacturing operations. The
European market is served by the manufacturing operations of the Company's
Italian engine subsidiary, Tecumseh Europa, S.p.A. ("Tecumseh Europa"), and to a
lesser extent, by U.S. export sales. Tecumseh Europa produces light-weight
engines primarily for lawn and garden applications along with some utility
applications.
The Company's dependence on sales in foreign countries entails certain
commercial and political risks, including currency fluctuations, unstable
economic or political conditions in some areas and the possibility of U.S.
government embargoes on sales to certain countries. The Company's foreign
manufacturing operations are subject to other risks as well, including
governmental expropriation, governmental regulations which may be
disadvantageous to businesses owned by foreign nationals and instabilities in
the work force due to changing political and social conditions. These
considerations are especially significant in the context of the Company's
Brazilian operations given the importance of Tecumseh do Brasil's performance to
the Company's total operating results.
INDUSTRY SEGMENT AND GEOGRAPHIC LOCATION INFORMATION
The results of operations and other financial information by industry segment
and geographic location (including the footnotes thereto) for each of the years
ended December 31, 1999, 1998 and 1997 appear under the caption "Business
Segment Data" of the Company's Annual Report to Shareholders for the year ended
December 31, 1999 and are incorporated herein by reference. This information and
the written discussion in the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" under the caption "Results of Operations"
in the Company's Annual Report to Shareholders for the year ended December 31,
1999 (incorporated herein by reference) should be read in conjunction with the
business segment information presented in the following sections entitled:
Compressor Products, Engine and Power Train Products and Pump Products.
COMPRESSOR PRODUCTS
The Compressor Products segment is the Company's largest business segment. A
compressor is a device that compresses a refrigerant gas. When the gas is later
permitted to expand, it absorbs and transfers heat, producing a cooling effect,
which forms the basis for a wide variety of refrigeration and air conditioning
products. All of the compressors produced by the Company are hermetically
sealed. The Company's current compressor line consists primarily of
reciprocating and rotary designs with a limited line of scroll models.
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PRODUCT LINE
The Company manufactures and sells a variety of traditional, reciprocating
piston compressors suitable for use in all four compressor market segments. This
line of compressors range in size from 12.5 HP models used for unitary air
conditioning applications to small fractional HP models used for refrigerators,
dehumidifiers and vending machines.
Rotary compressors ranging from 5,000 to 18,000 BTU/hour are produced by the
Company for room and mobile air conditioning applications. These compressors
generally provide increased operating efficiency, lower equipment space
requirements, and reduced sound levels when compared to reciprocating piston
models.
Scroll compressors generally offer improved energy efficiency and reduced noise
levels compared to traditional reciprocating designs and are generally preferred
by OEMs for certain products, including unitary central air conditioning systems
and certain commercial applications. The Company has a scroll compressor product
line for the unitary air conditioning market and sold limited quantities of
these compressors in 1999.
From 1994 to 1996, the Company invested approximately $55 million dollars in a
scroll compressor manufacturing facility in Tecumseh, Michigan. In 1996,
unacceptable field testing results led to the abandonment of that design. In
1997 and 1998, a new design was developed using improved and expanded
reliability testing methods. Customer sampling and field testing were initiated
in 1999 and will be completed in the first half of 2000. The Company will
release additional models of scroll compressors for production by the end of
June 2000. Limited product will be offered for sale, and the Company plans to
gauge market acceptance throughout the remainder of 2000.
In 1998, the Company recorded a fourth quarter asset impairment charge of $45.0
million ($28.8 million or $1.35 per share net of tax) to reduce the carrying
amount of assets dedicated to the production of scroll compressors to estimated
fair market value. Based on the Company's expected manufacturing costs, existing
market conditions and an anticipated lengthy introduction period, it was
estimated that the future cash flows from the scroll product line would not be
sufficient to cover the carrying amount of the Company's buildings, tooling,
machinery and equipment dedicated to its production. The amount of the asset
impairment charge represented the difference between the carrying value of the
scroll compressor long-lived assets and the estimated fair value of those assets
based on an independent appraisal.
MANUFACTURING OPERATIONS
Compressor Products manufactured in the Company's U.S. plants accounted for
approximately 58% of 1999 compressor sales. The balance was produced at the
Company's manufacturing facilities in Brazil, France and India. The compressor
operations are substantially vertically integrated, and the Company manufactures
a significant portion of its component needs internally, including electric
motors, metal stampings and glass terminals. Raw materials are purchased from a
variety of non-affiliated suppliers. The Company utilizes multiple sources of
supply and the required raw materials and components are generally available in
sufficient quantities.
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SALES AND MARKETING
The Company markets its U.S., Brazilian and Indian built compressors under the
"Tecumseh" brand and French built compressors under the "Tecumseh
Europe-L'Unite Hermetique" brand. The Company sells its compressor products in
North America primarily through its own sales staff. Major OEM customers are
assigned to sales staff on an account basis. Other customers (smaller commercial
OEMs) are served by sales personnel assigned to specified geographic regions,
and sales to aftermarket customers are made through independent sales
representatives. The Company's U.S. International division and the Brazilian,
French and Indian subsidiaries each have their own sales staff. In certain
foreign markets, the Company also uses local independent sales representatives
and distributors.
Substantially all of the Company's sales of compressor products for room air
conditioners and for household refrigerators and freezers are to original
equipment manufacturers. Sales of compressor products for unitary central air
conditioning systems and commercial applications include substantial sales to
both OEM and distributor customers.
The Company has over 1,200 customers for compressor products, the majority of
which are commercial customers. In 1999, the two largest customers for
compressor products accounted for 6.0% and 4.4%, respectively, of total segment
sales, or 3.2% and 2.3%, respectively, of consolidated net sales. Loss of either
of these customers could have a material adverse effect on the results of
operations of the Compressor Products segment and, at least temporarily, on the
Company's business as a whole. Generally, the Company does not enter into
long-term contracts with its customers in this segment. However, the Company
does pursue long-term agreements with selected major customers where a business
relationship has existed for a substantial period of time.
In 1999, approximately 34% of the Compressor Products produced by the Company in
its U.S. plants were exported to foreign countries. The Company exports to over
60 countries. Over three-quarters of these exported products were sold in the
Far and Middle East.
COMPETITION
All of the compressor market segments in which the Company operates are highly
competitive. Participants compete on the basis of delivery, efficiency, noise
level, price and reliability. The Company competes not only with other
independent compressor producers but also with manufacturers of end products,
which have internal compressor manufacturing operations.
North American Operations
The domestic unitary air conditioning compressor market consists of OEMs and a
significant compressor aftermarket. The Company competes primarily with two U.S.
manufacturers, Copeland Corporation, a subsidiary of Emerson Electric, Inc., and
Bristol Compressors, Inc., a subsidiary of York International Corporation.
Copeland Corporation enjoys a larger share of the domestic unitary air
conditioning compressor business than either Bristol Compressors, Inc. or the
Company.
Over the last several years there has been an industry trend toward the use of
scroll compressors in the high efficiency segment of the unitary air
conditioning market. Copeland Corporation and other compressor manufacturers
have had scroll compressors as part of their product offerings for some
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time. Along with its own manufacturing capabilities, Copeland Corporation is
also a member of the Alliance Scroll manufacturing joint venture with two major
U.S. central air conditioning manufacturers, American Standard's Trane air
conditioning division and Lennox International, Inc. Carrier Corporation, a
subsidiary of United Technologies and a major original equipment manufacturer,
has a joint venture to produce scroll compressors with Bristol Compressors, Inc.
As discussed in the product line section, the Company offered a limited line of
scroll compressor models for sale in 1999, and additional compressor models will
be approved for sale in limited quantities in 2000. Because the Company believes
that the scroll compressor is important to maintaining its position in the
unitary air conditioning market, it plans to pursue the development of the
scroll compressor in a manner that limits risk to the Company. The strategy will
be to continue slow market entry with the intention of limiting the exposure to
technical problems and with the intention of controlling any operating losses.
In the domestic room air conditioning compressor market, the Company competes
primarily with foreign companies, which export compressors to the United States,
but also have U.S. manufacturing capabilities. The Company also competes to a
lesser extent with U.S. manufacturers. Competitors include Matsushita Electric
Industrial Corporation, Rotorex, Inc., Sanyo Electric Trading Company, L.G.
Electronics, Inc. and others. The Company has increasingly struggled with price
competition from foreign companies during the last two years. Downward pressure
on prices, particularly in the room air conditioning market, has continued due
to world over-capacity and a market flooded by cheap Asian products both in
North America and in Europe.
In the domestic markets for water coolers, dehumidifiers, vending machines,
refrigerated display cases and other commercial refrigeration products, the
Company competes primarily with compressor manufacturers from the Far East,
Europe and South America, and to a lesser extent, the United States. Competitors
include Matsushita Electric Industrial Corporation, Danfoss, Inc., Embraco,
S.A., Copeland Corporation and others. In 1999, the Company's sales of
commercial refrigeration products decreased 10% compared to 1998 sales levels
largely due to a decline in the demand for equipment used in the beverage
marketing and vending segment.
The household refrigerator and freezer market is vertically integrated with many
white good producers manufacturing a substantial portion of their compressor
needs. The Company's competitors include AB Electrolux, Matsushita Electric
Industrial Corporation, Embraco, S.A., Danfoss, Inc., and others. The Company
has an extensive product line in this market which includes both reciprocating
piston and rotary type compressors with a reputation for reliable field
performance.
In an effort to address domestic competition and world over-capacity, the
Company has been evaluating courses of action to consolidate compressor
manufacturing capacity in North America. The objective is to reduce the cost
structure of the Company's domestically produced compressor models and improve
the quality performance, thereby offering a more competitively priced product to
our customers. It is likely that the Company will choose to close one or more
compressor and/or component manufacturing facilities, and that future results
will be impacted by one or more nonrecurring charges as these plans are
finalized. While the exact timing and amount of these
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charges cannot be estimated with any degree of precision, it is possible they
could be recorded in several different years and could range as high as $25 -
$35 million in the aggregate on a pre-tax basis.
European Operations
Tecumseh Europe sells the major portion of its manufactured compressors in
Western Europe, and competes in those markets primarily with several large
European manufacturers, some of which are captive suppliers, and to a lesser but
increasing extent, with manufacturers from the Far East and Brazil. Competitors
include AB Electrolux, Embraco, S.A., Danfoss, Inc. and others. Tecumseh Europe
produces compressors primarily for the commercial refrigeration market.
In 1999, Tecumseh Europe experienced a decline in sales from 1998 levels largely
due to reduced exports and price competition in its domestic market. In response
to competitive pressures, Tecumseh Europe is planning to take a more global
approach to its manufacturing process by importing less expensive compressor
kits and condensing units from the Company's Brazilian and North American
facilities to be assembled in France and offered for sale in Europe, Asia and
the Far East. Tecumseh Europe has also developed plans for a number of
cost-cutting initiatives and improvements in its marketing and customer service
programs.
Brazilian Operations
Tecumseh do Brasil competes directly with Embraco, S.A. in Brazil and with
Embraco and several other foreign manufacturers in Latin America. Historically,
Tecumseh do Brasil has sold the major portion of its manufactured compressors in
Latin America, North America, Europe and the Middle East. The devaluation of the
Brazilian Real in early 1999 set the stage for Tecumseh do Brazil to better
compete in foreign markets, resulting in approximately 70% of its 1999
production being exported. These increased exports, combined with lower
manufacturing costs (due to currency devaluation) and continued cost cutting
efforts, resulted in an increase in operating margins from 8.9% in 1998 to 19.7%
in 1999.
Indian Operations
Tecumseh Products India Ltd. has two compressor manufacturing facilities in
India, which sell to regional markets. Major competitors include the Indian
manufacturers Kirloskar Copeland Ltd., Carrier Aircon Ltd., Godrej, Videocon,
BPL and others. Tecumseh Products India Ltd. produces compressors for the air
conditioning and refrigerator and freezer markets. In 1999, 46% of sales were
made to a single customer, and the loss of this customer would have a
significant impact on the results of operations of this facility, and to a
lesser extent, on the consolidated results of the company as a whole.
Tecumseh Products India Ltd. is nearing completion of its new manufacturing
facility in Ballabgarh, India. Construction of the building and placement of
manufacturing equipment was completed in 1999. The Company is currently training
local personnel to operate all functions of the compressor manufacturing
process. Year 2000 goals for this subsidiary include completing production
worker training, ramping up compressor manufacturing, further developing quality
and cost reduction programs, aggressively soliciting new business and expanding
both the customer base and product offerings.
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Research
Ongoing research and development is another method in which the Company strives
to meet its competition. The ability to successfully bring new products to
market in a timely manner has rapidly become a critical factor in competing in
the compressor products business as a result of, among other things, the
imposition of energy efficiency standards and environmental regulations
including those related to refrigerant requirements. These factors are discussed
below.
REGULATORY REQUIREMENTS
Chlorofluorocarbon compounds ("CFCs"), the primary refrigerants used in
household refrigerators and freezers and in commercial refrigeration equipment,
have been identified as one of the leading factors causing depletion of the
earth's ozone layer. Under a 1992 international agreement, production of CFCs in
developed countries was phased out January 1, 1996. The Company began producing
compressors using alternative refrigerants (approved by the U.S. government) for
the commercial refrigeration market in late 1992 and for the refrigerator and
freezer market during 1994. The Company believes that its rapid development of
product using non-CFC refrigerant technology has improved its competitive
position in these markets.
Hydrochlorofluorocarbon compounds ("HCFCs") are used as a refrigerant in air
conditioning systems. Under a 1992 international agreement, HCFCs will be banned
from new equipment beginning in 2010. Some European countries began HCFC
phase-outs as early as 1998, and a number of European countries have proposals
in place to eliminate the use of HCFCs within the next six years. Currently,
the Company is developing a number of compressor models that employ
hydrofluorocarbons, or "HFCs" which are considered more environmentally safe
than the preceding refrigeration compounds. Within the last year, the Company
has approved and released a number of compressor models utilizing U.S.
government approved HFC refrigerants.
In the last few years, there has been an even greater political and consumer
movement, particularly from northern European countries, toward the use of
hydrocarbons ("HCs") as alternative refrigerants, moving further away from the
use of chlorine (which depletes the ozone layer of our atmosphere) and the use
of fluorine (which contributes to the "green-house" effect). Both Tecumseh do
Brasil and Tecumseh Europe have compressor products available for sale that
utilize hydrocarbon refrigerants. Hydrocarbons are flammable compounds and have
not been approved by the U.S. government for air conditioning or household
refrigerator and freezer applications. It is not presently possible to estimate
the level of expenditures which will be required to meet future industry
requirements or the effect on the Company's competitive position.
The U.S. National Appliance Energy Conservation Act of 1987 (the "NAECA") will
require higher energy efficiency ratings on room air conditioners manufactured
after October 1, 2000 and on household refrigerator/freezers manufactured after
July 1, 2001. Energy efficiency requirements for unitary air conditioners are
expected to be published in the U.S. in October 2000 to be effective in the year
2005.
The European manufacturing community issued new energy efficiency directives
effective January 1, 2000 that lowered the acceptable level of energy
consumption for refrigerators and freezers. These efficiency ratings apply to
the overall performance of the specific appliance, of which the
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compressor is one component. The Company has ongoing projects aimed at improving
the efficiency levels of its compressor products and plans to have products
available to meet known energy efficiency requirements as determined by our
customers. Some of the Company's compressor products already meet or exceed the
new energy efficiency standards. It is not presently possible to estimate the
level of expenditures which will be required to meet the new standards or the
effect on the Company's competitive position.
ENGINE AND POWER TRAIN PRODUCTS
Small gasoline engines account for a majority of the net sales of the Company's
Engine and Power Train Products segment. These are used in a broad variety of
consumer products, including lawn mowers (both riding and walk-behind types),
snow throwers, small lawn and garden tractors, small power devices used in
outdoor chore products, generators, pumps and certain self-propelled vehicles.
The Company manufactures gasoline engines, both two- and four-cycle types, with
aluminum die cast bodies ranging in size from 2 through 22 horsepower and with
cast iron bodies ranging in size from 12 through 18 horsepower. The Company's
power train products include transmissions, transaxles and related parts used
principally in lawn and garden tractors and riding lawn mowers.
MANUFACTURING OPERATIONS
The Company manufactures engines and related components in its five plants in
the United States and one plant in Italy. All of the Company's power train
products are manufactured in one facility in the United States. Operations of
the Company in this segment are partially vertically integrated as the Company
produces most of its plastic parts and carburetors, as well as a substantial
portion of the aluminum die-castings used in its engines and power train
products.
SALES AND MARKETING
The Company markets its Engine and Power Train Products worldwide under the
"Tecumseh" and "Peerless" brands. A substantial portion of the Company's engines
are incorporated into lawn mowers sold under brand labels, including the
"Craftsman" brand of Sears, as well as other name brands sold through "do it
yourself" home centers, mass merchandisers and lawn and garden specialty
retailers.
A majority of the Company's Engine and Power Train Products are sold directly to
OEMs. The Company also sells engines and parts to its authorized dealers and
distributors, who service its engines both in the United States and abroad.
Marketing of Engine and Power Train Products is handled by the Company's own
sales staff and by local sales representatives in certain foreign countries.
North America and Europe are the principal markets for lawn and garden products.
In 1999, the Engine and Power Train Products Group enjoyed increased sales of
engines for portable generator applications as a result of Year 2000 concerns,
and increased sales of engines for snow throwers due to the heavy snow fall in
certain areas of North America. It is unlikely that 1999 sales levels for
generator applications will be sustained in the market in 2000; however, the
Company expects that consumer demand for products with other applications for
small utility engines, such as power washers, string trimmers and snow throwers,
will help to sustain this market.
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In 1999, the three largest (direct ship) customers for Engine and Power Train
Products accounted for 18.4%, 18.3% and 16.5%, respectively, of segment sales,
or 7.4%, 7.4% and 6.7%, respectively, of consolidated net sales. The engines
provided to one of these customers are incorporated into end consumer products
that are sold by Sears. Total sales to Sears and Sears affiliated suppliers in
1999 and 1998 amounted to 20.5% and 29.7%, respectively, of segment sales, or
8.3% and 10.0%, respectively, of consolidated net sales. Loss of any of this
segment's three largest customers, and/or the loss of Sears as a retail
distributor would have a material adverse effect on the results of operations of
this segment and, at least temporarily, on the Company and its business as a
whole.
COMPETITION
The Company believes it is the largest consolidated producer of engines and
transmissions for the outdoor power equipment industry. However, it remains the
second largest producer of small gasoline engines in the world. The largest such
producer, with a broader product range, is Briggs & Stratton Corporation. Other
producers of small gasoline engines include Kohler Corporation, Toro Company and
Honda Corporation, among others.
Competition in the Company's engine business is based principally on price,
service, product performance and features. As mass merchandisers have captured a
larger portion of the sales of lawn and garden products in the United States,
price competition and the ability to offer customized styling and feature
choices have become even more important. The Company believes that it competes
effectively on these bases.
NEW EMISSION STANDARDS
The U.S. Environmental Protection Agency ("EPA") is in the process of final rule
development of Phase II emission standards for handheld small off-road engines
which include the two-cycle engines produced by the Company. The Company already
produces competitively priced engines that comply with the current EPA and
California Air Resources Board ("CARB") Standards.
Phase II emission standards have been finalized for non-handheld four-cycle
engines. Phase-in of the rules for non-handheld four-cycle engines will take
place between the 2001 and 2006 model years. It is not possible at this time to
determine the related costs of compliance with these standards, nor the impact
on the competitive position of the Company.
The state of California began enforcing the CARB Tier II Emission Standards
effective January 1, 2000. All rotary mower engines now require overhead valve
technology in the state of California. All of the Company's overhead valve
engine models have been certified to comply with these emission standards.
Several Midwestern States are in the process of, or debating the merits of,
adopting the CARB Tier II Emission Standards. It is not possible at this time to
determine the effect of this change in regulatory requirements on the
competitive position or consolidated results of the Company.
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PUMP PRODUCTS
The Company manufactures and sells submersible pumps, centrifugal pumps and
related products through its two subsidiaries, Little Giant Pump Company
("Little Giant") and MP Pumps Inc. ("MP Pumps"). Little Giant pumps are used in
a broad range of commercial, industrial, and consumer products, including (1)
heating, (2) ventilating and cooling, (3) parts washers, (4) machine tools, (5)
evaporative coolers, (6) sump pumps, (7) statuary fountains and (8) water
gardening. Little Giant's products are sold worldwide to OEMs, distributors and
mass retailers. Sales and marketing is executed through Little Giant's own sales
management and through manufacturers' representatives under the "Little Giant"
brand name.
The pump industry is highly fragmented, with many relatively small producers
competing for sales. Little Giant has been particularly successful in competing
in the pump industry by targeting specific market niches where opportunities
exist and then designing and marketing corresponding products. In the last three
years, the "Little Giant" brand name has become more associated with consumer
products due to the success of the subsidiary's water-gardening product line.
However, the focus of this pump manufacturer has long been in the commercial and
industrial market channels of the pump industry, and Little Giant is pursuing
these markets through the development of complete pump systems utilizing larger
pump models.
MP Pumps manufactures and sells a variety of centrifugal pumps ranging in
capacity from 15 to 1,500 gallons per minute, that are used in the agricultural,
marine and transportation industries, and in a variety of commercial and
industrial applications and end products. MP Pumps sells both to OEMs, which
incorporate its pumps into their end products, and through an extensive network
of market segmented distributors located throughout the United States. The
distributors within the network both engineer and sell pump products to end
users and small OEMs. A limited number of pumps are also sold to departments and
agencies of the U.S. government. MP Pumps markets both custom and standard
catalog product through its own sales staff. Pumps sold through distribution
channels are branded under the "MP" and "Flomax" registered trade names. Some
pumps are privately labeled for specific customer use.
BACKLOG AND SEASONAL VARIATIONS
Most of the Company's production is against short-term purchase orders, and
backlog is not significant.
Both Compressor Products and Engine and Power Train Products are subject to some
seasonal variation. Generally, the Company's sales and operating profit are
stronger in the first two quarters of the year than in the last two quarters.
PATENTS, LICENSES AND TRADEMARKS
The Company owns a substantial number of patents, licenses and trademarks and
deems them to be important to certain of its lines of business; however, the
success of the Company's overall business is not considered primarily dependent
on them. In the conduct of its business, the Company owns and uses a variety of
registered trademarks, the most familiar of which is the trademark consisting of
the word "Tecumseh" in combination with a Native American Indian head symbol.
11
<PAGE> 13
RESEARCH AND DEVELOPMENT
The Company must continually develop new and improved products in order to
compete effectively and to meet evolving regulatory standards in all of its
major lines of business. The Company spent approximately $29.8, $32.4 and $32.6
million during 1999, 1998, and 1997, respectively, on research activities
relating to the development of new products and the development of improvements
to existing products. None of this research was customer sponsored.
EMPLOYEES
On December 31, 1999, the Company employed approximately 19,500 persons, 54% of
which were employed in foreign locations. Approximately 3,800 of the U.S.
employees were represented by labor unions, with no more than approximately
2,000 persons represented by the same union. The majority of foreign location
personnel are represented by national trade unions. The number of the Company's
employees is subject to some seasonal variation; during 1999, the maximum number
of persons employed was approximately 19,500 and the minimum was 17,000.
Overall, the Company believes it generally has a good relationship with its
employees.
12
<PAGE> 14
EXECUTIVE OFFICERS OF THE REGISTRANT
The following are the executive officers of the Company.
<TABLE>
<CAPTION>
PERIOD OF SERVICE
NAME AND AGE OFFICE OR POSITION HELD AS AN OFFICER
------------ ----------------------- -------------
<S> <C> <C>
Kenneth G. Herrick, 78 Chairman of the Board of Directors Since 1966
Todd W. Herrick, 57 President and Chief Executive Officer Since 1974
John H. Foss, 57 Vice President, Treasurer, and Chief Since 1979
Financial Officer
James E. Martinco, 54 Group Vice President, Engine and Since 1998
Power Train (1)
Dennis E. McCloskey, 57 Group Vice President, Compressors (2) Since 1998
</TABLE>
(1) Last five years of business experience--Vice President, Engine and
Power Train, Tecumseh Products Company 1996 to 1997; Vice President of
Operations and Vice President/General Manager of Engine Products 1990
to 1996. (Employed with Tecumseh Products Company since 1976.)
(2) Last five years of business experience--Vice President, Compressors,
Tecumseh Products Company, 1994 to 1997; Group Vice President
Refrigeration and Air Conditioning, Frigidaire Company, 1990 to 1993.
(Employed at Frigidaire from 1976 to 1993.)
13
<PAGE> 15
ITEM 2. PROPERTIES
The Company's headquarters are located in Tecumseh Michigan, approximately 50
miles southwest of Detroit. At December 31, 1999 the Company had 31 principal
properties worldwide occupying approximately 8.5 million square feet with the
majority, approximately 7.7 million square feet devoted to manufacturing. Eleven
facilities with approximately 3.4 million square feet were located in five
countries outside the United States. The following table shows the approximate
amount of space devoted to each of the Company's three principal business
segments.
Approximate Floor
Industry Segment Area in Square Feet
---------------- -------------------
Compressor Products 6,127,000
Engine and Power Train Products 1,928,000
Pump Products and Other 442,000
Five domestic facilities, including land, building and certain machinery and
equipment were financed and leased through industrial revenue bonds. All owned
and leased properties are suitable, well maintained and equipped for the
purposes for which they are used. The Company considers that its facilities are
suitable and adequate for the operations involved.
ITEM 3. LEGAL PROCEEDINGS
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 December 31, 1999 and 1998, the Company had accrued $31.5 and $33.8 million,
respectively, 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 in the first quarter of year 2000; however, the ultimate
resolution of this 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.
14
<PAGE> 16
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 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 ground water 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 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 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 preliminary investigation expenses and for a portion of
source area remediation costs 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 December 31, 1999 and 1998, the Company had
accrued $42.4 million and $43.3 million, 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 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.
15
<PAGE> 17
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 the
various lawsuits and claims asserted or pending against the Company or its
subsidiaries cannot be predicted with certainty, some may be disposed of
unfavorably to the Company. Management has no reason to believe that the
ultimate disposition of these pending legal issues will have a materially
adverse effect on the future consolidated financial position or results of
operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of 1999 to a vote of security
holders through the solicitation of proxies or otherwise.
16
<PAGE> 18
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The information under the captions "Financial Summary" and "Information
Concerning Equity Securities" of the Company's Annual Report to Shareholders for
year ended December 31, 1999 is incorporated herein by reference. As of a March
3, 2000, there were 671 holders of record of the Company's Class A common stock
and 646 holders of the Class B common stock. There were no equity securities
sold by the Company during the period covered by this report.
ITEM 6. SELECTED FINANCIAL DATA
The information under the caption "Selected Financial Data" of the Company's
Annual Report to Shareholders for the year ended December 31, 1999 is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" of the Company's Annual Report to
Shareholders for the year ended December 31, 1999 is incorporated herein by
reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Quantitative and qualitative information regarding the Company's exposure to
market risk included under the caption "Management's Discussion and Analysis of
Financial Condition - Quantitative and Qualitative Disclosures About Market
Risk" and in Note 11 of the Notes to Consolidated Financial Statements in the
Company's Annual Report to Shareholders for the year ended December 31, 1999 is
incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information on pages 2, 14 and 23 through 33, inclusive, and the information
under the caption of "Quarterly Financial Data" on page 34 of the Company's
Annual Report to Shareholders for the year ended December 31, 1999 is
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
17
<PAGE> 19
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information pertaining to directors under the caption "Election of
Directors" in the Company's definitive Proxy Statement relating to its 2000
Annual Meeting of Shareholders is incorporated herein by reference. Information
regarding executive officers required by Item 401 of Regulation S-K is furnished
in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
The information under the captions "Appendix B - Executive Compensation,"
"Compensation Committee Interlocks and Insider Participation" and "Election of
Directors - Director Compensation" in the Company's definitive Proxy Statement
relating to its 2000 Annual Meeting of Shareholders is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The information under the caption "Appendix A - Share Ownership" in the
Company's definitive Proxy Statement relating to its 2000 Annual Meeting of
Shareholders is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information under the caption "Compensation Committee Interlocks and Insider
Participation" in the Company's definitive Proxy Statement relating to its 2000
Annual Meeting of Shareholders is incorporated herein by reference.
18
<PAGE> 20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial statements, notes and reports on pages 23 through 33
of the Company's Annual Report to Shareholders for the year
ended December 31, 1999:
- Statements of Consolidated Income for the years ended
December 31, 1999, 1998 and 1997
- Statements of Consolidated Stockholders' Equity for
the years ended December 31, 1999, 1998 and 1997
- Consolidated Balance Sheets as of December 31, 1999
and 1998
- Statements of Consolidated Cash Flows for the years
ended December 31, 1999, 1998 and 1997
- Notes to Consolidated Financial Statements
- Management's Report
- Independent Accountant's Report
(2) All financial statement schedules are omitted because they are
not applicable or the required information is shown in the
financial statements or notes thereto.
(3) See Index to Exhibits.
(b) No Reports on Form 8-K were filed by the Company during the last
quarter of the period covered by this Report.
(c) The exhibits listed in the Index to Exhibits are filed herewith or are
incorporated by reference.
19
<PAGE> 21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
/s/ TODD W. HERRICK
By
-----------------------------
Todd W. Herrick
President and
Chief Executive Officer
Dated: March 22, 2000
20
<PAGE> 22
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Date
Signature Office of signing
--------- ------ ----------
<S> <C> <C>
/s/ KENNETH G. HERRICK
- --------------------------- Chairman of the March 22, 2000
Kenneth G. Herrick Board of Directors
/s/ TODD W. HERRICK
- --------------------------- President, Chief March 22, 2000
Todd W. Herrick Executive Officer
(Principal Executive
Officer) and Director
/s/ RALPH W. BABB, JR.
- --------------------------- Director March 22, 2000
Ralph W. Babb, Jr.
/s/ PETER M. BANKS
- --------------------------- Director March 22, 2000
Peter M. Banks
/s/ JON E. BARFIELD
- --------------------------- Director March 22, 2000
Jon E. Barfield
/s/ JOHN H. FOSS
- --------------------------- Vice President, Treasurer March 22, 2000
John H. Foss and Chief Financial Officer
(Principal Accounting
and Principal Financial
Officer) and Director
/s/ J. RUSSELL FOWLER
- --------------------------- Director March 22, 2000
J. Russell Fowler
/s/ JOHN W. GELDER
- --------------------------- Director March 22, 2000
John W. Gelder
/s/ STEPHEN L. HICKMAN
- --------------------------- Director March 22, 2000
Stephen L. Hickman
</TABLE>
21
<PAGE> 23
Index to Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
3.1 The Company's Restated Articles of Incorporation as
in effect prior to April 22, 1992, filed as Exhibit
(3) to Annual Report on Form 10-K for the year ended
December 31, 1991, are incorporated herein by
reference.
3.2 Certificate of Amendment to the Company's Restated
Articles of Incorporation adopted April 22, 1992,
filed as Exhibit B-5 to Form 8 Amendment No. 1 dated
April 22, 1992 to Form 10 Registration Statement
dated April 24, 1965, is incorporated herein by
reference.
3.3 Certificate of Amendment to the Company's Restated
Articles of Incorporation adopted April 27, 1994,
filed as Exhibit (4)(c) to Quarterly report on Form
10-Q for the quarterly period ended March 31, 1994,
is incorporated herein by reference.
3.4 Company's Amended and Restated Bylaws as amended
through October 22, 1997, filed as Exhibit (3) to
Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1997, are incorporated
herein by reference.
4 No instruments defining the rights of holders of
long-term debt are being filed because no such
instrument authorizes a total amount of securities
which exceeds 10% of the total assets of the Company
and its subsidiaries on a consolidated basis. The
Company hereby agrees to furnish a copy of any such
instrument to the Commission upon request.
10.1 Amended and Restated Class B Rights Agreement, filed
as Exhibit 4 to Form 8 Amendment No. 1 dated April
22, 1992 to Form 8-A registering Common Stock
Purchase Rights dated January 23, 1991, is
incorporated herein by reference.
10.2 Amendment No. 1 to Amended and Restated Class B
Rights Agreement, filed as Exhibit 4 to Form 8
Amendment No. 2 dated October 2, 1992 to Form 8-A
registering Common Stock Purchase Rights dated
January 23, 1991, is incorporated herein by
reference.
10.3 Amendment No. 2 to Amended and Restated Class B
Rights Agreement, filed as Exhibit 4 to Form 8-A/A
Amendment No. 3 dated June 22, 1993 to Form 8-A
registering Common Stock Purchase Rights dated
January 23, 1991, is incorporated herein by
reference.
</TABLE>
22
<PAGE> 24
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
10.4 Third Amendment to Amended and Restated Class B
Rights Agreement, filed as Exhibit 4.2 to Current
Report on Form 8-K filed August 26, 1999, is
incorporated herein by reference.
10.5 Class A Rights Agreement, filed as Exhibit 4 to Form
8-A registering Class A Common Stock Purchase Rights
dated April 22, 1992, is incorporated herein by
reference.
10.6 Amendment No. 1 to Class A Rights Agreement, filed as
Exhibit 4 to Form 8 Amendment No. 1 dated October 2,
1992 to Form 8-A registering Class A Common Stock
Purchase Rights dated April 22, 1992, is incorporated
herein by reference.
10.7 Amendment No. 2 to Class A Rights Agreement, filed as
Exhibit 4 to Form 8-A/A Amendment No. 2 dated June
22, 1993 to Form 8-A registering Class A Common Stock
Purchase Rights dated April 22, 1992, is incorporated
herein by reference.
10.8 Third Amendment to Class A Rights Agreement, filed as
Exhibit 4.1 to Current Report on Form 8-K filed
August 26, 1999, is incorporated herein by reference.
10.9 Description of Death Benefit Plan (management
contract or compensatory plan or arrangement), filed
as Exhibit (10)(f) to Annual Report on Form 10-K for
the year ended December 31, 1992, is incorporated
herein by reference.
10.10 Management Incentive Plan, as amended through
November 22, 1995 (management contract or
compensatory plan or arrangement), filed as Exhibit
(10)(h) to Annual Report on Form 10-K for the year
ended December 31, 1995, is incorporated herein by
reference.
10.11 Third Amendment to Management Incentive Plan, adopted
January 22, 1997 (management contract or compensatory
plan or arrangement), filed as Exhibit (10)(i) to
Annual Report on Form 10-K for the year ended
December 31, 1996, is incorporated herein by
reference.
10.12 Fourth Amendment to Management Incentive Plan
effective January 1, 2000 (management contract or
compensatory plan or arrangement).
</TABLE>
23
<PAGE> 25
<TABLE>
Exhibit
Number Description
------ -----------
<S> <C>
10.13 Supplemental Executive Retirement Plan effective
January 1, 1995 (management contract or compensatory
plan or arrangement), filed as Exhibit (10)(l) to
Annual Report on Form 10-K for the year ended
December 31, 1994, is incorporated herein by
reference.
10.14 Outside Directors' Voluntary Deferred Compensation
Plan adopted November 25, 1998 (management contract
or compensatory plan or arrangement), filed as
Exhibit (10)(k) to Annual Report on Form 10-K for the
year ended December 31, 1998, is incorporated herein
by reference.
10.15 Voluntary Deferred Compensation Plan adopted November
25, 1998 (management contract or compensatory plan or
arrangement), filed as Exhibit (10)(l) to Annual
Report on Form 10-K for the year ended December 31,
1998, is incorporated herein by reference.
10.16 First Amendment to Voluntary Deferred Compensation
Plan effective January 1, 2000 (management contract
or compensatory plan or arrangement).
13 Portions of Tecumseh Products Company Annual Report
to Shareholders for the year ended December 31, 1999.
21 Subsidiaries of the Company.
23 Consent of Certified Public Accountants.
27 Financial Data Schedule.
</TABLE>
24
<PAGE> 1
EXHIBIT 10.12
FOURTH AMENDMENT TO
TECUMSEH PRODUCTS COMPANY
MANAGEMENT INCENTIVE PLAN
Effective January 1, 2000, Tecumseh Products Company (the "Company")
amends the Company's Management Incentive Plan as follows:
1. Article II(a) of the Plan is amended to read:
(a) "Account" means the cumulative record of an Employee's
Phantom Share allocations as adjusted in the manner described in the
Plan. The cash award portion of a Phantom Share allocation for 2000 and
subsequent Class Years shall be fully vested as of the Allocation Date
and shall not become part of an Employee's Account.
2. Article II(k) of the Plan is amended to read:
(k) "Phantom Share allocation" or "allocation" includes, where
the context so requires, the cash portion of an allocation awarded for
2000 and subsequent Class Years, as provided by Article VI.
and former Article II(k) is redesignated as Article II(l)
3. Article IV(a)(ii) of the Plan is amended to read:
(ii) Each Phantom Share, which has been allocated as
of the record date applicable to a declared dividend on Class
A Common Stock, shall be credited with the amount of any such
per-share cash dividend paid to Class A shareholders, and the
total amount credited shall thereupon be deemed reinvested in
additional Phantom Shares at the Class A Common Stock's
closing price on the date said dividend is paid. Any such
dividends (and/or additional dividends thereon) shall vest
when and only if the associated Phantom Shares vest.
4. Article V(c) of the Plan is amended to read:
(c) Except as provided herein with respect to
transfers to the Company or another Employer, an Employee's
interest in his Account and in the cash portion of any
allocation shall not be transferable other than by will or the
laws of descent and distribution. During the Employee's
lifetime, an Account and the cash portion of any allocation
shall be paid only to the Employee, except that, in the event
of the Employee's incapacity, the Committee may permit payment
to the Employee's guardian or legal representative. The
Committee also shall permit the payment, upon the Employee's
death, to one or more beneficiaries designated by the Employee
in a manner authorized by the Committee, and otherwise to his
estate.
5. Article VI of the Plan is amended to read:
VI. Vesting and Payment
(a) Each Phantom Share allocation made by the Company shall be
assigned a "Class Year" corresponding to the calendar year in which the
Allocation Date occurs.
<PAGE> 2
Class Years 1994 - 1999 - Allocations for Class Years 1994 -
1999 (both inclusive) shall be 0% vested in the year for which they are
made, and shall not become vested until the fifth December 31 following
the end of the Class Year. For example: Allocations made with respect
to Class Year 1994 shall be 0% vested when allocated, 0% vested on
December 31, 1995, 0% vested on December 31, 1996, etc., but shall
become 100% vested on December 31, 1999.
Class years 2000 and thereafter - Allocations for Class Years
2000 and thereafter shall be vested as follows:
One-third of each Employee's allocation shall be fully vested
as of December 31st in the Class Year for which such
allocation is made, one-third of such allocation shall become
vested as of the third December 31 following the end of such
Class Year and the remaining one-third of such allocation
shall become vested as of the fifth December 31 following the
end of such Class Year. For example: Allocations made with
respect to Class Year 2000 shall be one-third vested as of
December 31, 2000 (and promptly payable in cash pursuant to
Article VI(b)), one-third vested on December 31, 2003, and the
remaining one-third vested on December 31, 2005.
The provisions of Article VII shall generally govern the
forfeiture of allocations which are not vested and, in certain
circumstances, even those which are otherwise fully vested. Except as
otherwise provided in Article VII, allocations to the Account of an
Employee shall not be forfeited during his continued employment with an
Employer.
(b) Within 60 days following December 31st of 2000 and each
subsequent Class Year, the one-third cash portion of each active
Employee's allocation, vested in accordance with Article VII(A), shall
be paid. Upon each active Employee's completion of three (3) and five
(5) full calendar years of service with an Employer following the end
of the Class Year for which a Phantom Share award was made, the portion
of his Account which became vested in accordance with Article VI(a)
shall be valued in accordance with Article IV(b) and paid within 60
days.
6. Article VII(c) of the Plan is amended to read:
(c) Notwithstanding Article VI(a), an Employee's Phantom
Share allocations shall be 100% vested as of the first day of the month
that includes his last day of active work prior to normal or early
retirement under the pension or retirement plan sponsored by his
Employer. However, such vested allocations shall only become payable
following the date they would have otherwise vested under Article VI,
i.e. within 30 days after the third and/or fifth December 31st
following each Allocation Date.
7. Except as amended above, the Plan continues in full force and effect.
WITNESS execution of this amendment on behalf of the Company.
TECUMSEH PRODUCTS COMPANY
By /s/ Todd W. Herrick
----------------------------
Its President and
Chief Executive Officer
Dated: January , 2000
--
-2-
<PAGE> 1
EXHIBIT 10.16
FIRST AMENDMENT TO
TECUMSEH PRODUCTS COMPANY
VOLUNTARY DEFERRED COMPENSATION PLAN
Effective January 1, 2000, Tecumseh Products Company (the "Company")
amends the Company's Management Incentive Plan as follows:
1. Section 4.6 of the Plan is amended to read:
4.6 Deferrals in 5% Increments. The minimum amount which may
be deferred by an Eligible Participant for any Plan Year is 5% of
Compensation. Deferrals in excess of the minimum amount shall be in
further 5% increments of Compensation. Elections to convert MIP Phantom
Shares or to defer MIP cash awards pursuant to Section 6.10 are not
subject to this Section 4.6.
2. Section 6.10 of the Plan is amended to read:
6.10 Election to Convert MIP Awards.
Phantom Shares - An Eligible Participant (including a former
officer or Key Employee who has a Deferred Compensation Account under
the Plan) may, upon written election, choose to convert all or part of
his/her Account under the Tecumseh Products Company Management
Incentive Plan (the "MIP")), attributable to phantom share allocations
("MIP Phantom Shares") first becoming vested at the end of a Plan Year,
into the Phantom Share Investment Option, the Corporate Bond Investment
Option, any other Investment Option that the Committee has made
available, or a combination of the foregoing, under this Plan. Such
conversion privilege is irrevocable (subject to the Participant's right
to elect a different Investment Option under Section 6.9) and is
subject to all provisions of this Plan. Also, any such written
election, as well as any elections under Sections 8.1 - 8.3 with
respect to the time, method of payment and payment period for the
portion of the Participant's Deferred Compensation Account attributable
to such conversion, must be made --
i) at least 365 calendar days prior to the date the
Participant becomes vested in the MIP Phantom Shares,
and
ii) on a Deferred Compensation Election Form, an example
of which is attached as EXHIBIT 1.1.
However, the above 365-day restriction will not apply in the situation
where --
- a Participant has made an election with respect to MIP Phantom
Shares at least 365 days before he would become vested in
those Shares under Article VI(a) of the MIP, and
- he subsequently becomes vested in those Shares under any other
provision of the MIP before the end of the Plan Year and
within 365 days of the date of the original election.
In that situation, those MIP Phantom Shares which had been subject to
the earlier election, and whose vesting was thereafter accelerated,
shall be covered by the earlier election, even though they became
vested within 365 days of the election.
The conversion shall be effective as of the date the
Participant becomes vested in the applicable MIP Phantom Shares. The
conversion value of the MIP Phantom Shares used to calculate the number
of Phantom Share units to be allocated to the Participant's Phantom
Share Investment Option or the dollar amount to be allocated to the
Participant's Corporate Bond Investment Option or to any other
Investment Option that the Committee has made available shall generally
be the value of the applicable MIP Phantom Shares as of the date the
Participant became vested in such MIP Phantom Shares as determined
under the MIP. However, the number
<PAGE> 2
of units allocated to a Participant's Phantom Share sub-account under
this Plan as the result of a conversion pursuant to this Section 6.10
shall not be less than A x B, where "A" represents the total number of
MIP Phantom Shares being converted and "B" represents the percentage of
such converted MIP Phantom Shares being allocated to the Participant's
Phantom Share sub-account under this Plan.
MIP Cash Awards - Effective for Class Years (as defined in the
MIP) beginning on and after January 1, 2000, the MIP was amended to
provide that one-third of each annual award under the MIP would be
fully vested as of the December 31 of each such Class Year, and paid in
cash within 60 days thereafter. An eligible Participant who is covered
by the MIP may elect to defer all or some portion of a MIP cash award
(in 25% increments of the award) by completing, executing and filing
with the Committee, before the commencement of such Class Year, the
relevant [cash award] portion of the Deferred Compensation Election
Form, previously attached hereto as EXHIBIT 1.1. However, for the Class
Year that begins January 1, 2000, such election form may be filed
within 30 days following the date on which the Board approved the MIP
amendment which authorized cash awards under the MIP. Such deferred
amounts shall be credited (as of the date such amount(s) would
otherwise have been paid to the Participant) to one or more of the
Investment Option sub-accounts which the Committee shall make available
under the Plan.
3. Except as amended above, the Plan continues in full force and effect.
WITNESS execution of this amendment on behalf of the Company.
TECUMSEH PRODUCTS COMPANY
By /s/ Todd W. Herrick
------------------------------
Its President and
Chief Executive Officer
Dated: January 26, 2000
-2-
<PAGE> 1
EXHIBIT 13
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
FINANCIAL SUMMARY
(Dollars in millions except per share data)
<TABLE>
<CAPTION>
1999 (B) 1998 (C) 1997
---------- ---------- ---------
<S> <C> <C> <C>
Net sales $ 1,814.3 $ 1,750.2 $1,728.3
- --------------------------------------------------------------------------------
Operating income 189.3 141.6 145.2
% of net sales (a) 10.4% 8.1% 8.4%
- --------------------------------------------------------------------------------
Net income 142.0 74.2 100.5
% of net sales 7.8% 4.2% 5.8%
- --------------------------------------------------------------------------------
Capital expenditures 73.0 64.4 90.6
- --------------------------------------------------------------------------------
Total assets 1,553.3 1,556.2 1,537.4
- --------------------------------------------------------------------------------
Average number of shares
outstanding (in thousands) 20,277 21,366 21,879
- --------------------------------------------------------------------------------
Per share of common stock:
Basic and diluted earnings
Net income $ 7.00 $ 3.47 $ 4.59
Net income exclusive of
nonrecurring items 6.56 4.82 4.59
Cash dividends declared 1.22 1.20 1.20
Book value 51.24 47.69 45.80
- --------------------------------------------------------------------------------
Cash provided by operating activities $ 163.3 $ 130.6 $ 186.7
- --------------------------------------------------------------------------------
Average number of employees 18,900 17,500 17,400
- --------------------------------------------------------------------------------
</TABLE>
(a) Operating income exclusive of the nonrecurring items referred to below.
(b) 1999 net income includes $14.1 million of nonrecurring gains equivalent to
$9.0 million or $.44 per share after taxes.
(c) 1998 results include a $45 million nonrecurring charge for asset
impairment. This charge was equivalent to $28.8 million or $1.35 per share
after taxes.
<PAGE> 2
TECUMSEH PRODUCTS COMPANY and SUBSIDIARIES
INDUSTRY SEGMENT INFORMATION 1999
(Dollars in millions)
<TABLE>
<CAPTION>
Engine &
Compressor Power Train Pump Nonrecurring Total
1999 Products Products Products Other (1) Items (2) Consolidated
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales - external customers $ 967.0 $734.3 $113.0 $ -- $ -- $1,814.3
Operating income 91.5 93.1 14.1 (9.4) 5.5 194.8
Net interest income (expense) 10.7 (0.1) 1.2 8.4 -- 20.2
Other non-operating income -- -- -- -- 8.6 8.6
Income before taxes 102.2 93.0 15.3 (1.0) 14.1 223.6
Assets 716.1 317.8 63.8 455.6 -- 1,553.3
Depreciation & amortization 52.7 17.6 1.5 0.6 -- 72.4
Capital expenditures 50.3 20.5 2.0 0.2 -- 73.0
- ----------------------------------------------------------------------------------------------------------------
1998
Sales - external customers $1,048.1 $592.2 $109.9 $ -- $ -- $1,750.2
Operating income 82.2 57.2 11.5 (9.3) (45.0) 96.6
Net interest income (expense) 10.8 (0.3) 1.9 8.5 -- 20.9
Income before taxes 93.0 56.9 13.4 (0.8) (45.0) 117.5
Assets 800.3 284.6 99.8 371.5 -- 1,556.2
Depreciation & amortization 56.0 16.8 1.2 0.6 -- 74.6
Non-cash asset impairment (45.0) -- -- -- -- (45.0)
Capital expenditures 45.8 16.1 1.5 1.0 -- 64.4
- ----------------------------------------------------------------------------------------------------------------
1997
Sales - external customers $1,050.1 $576.8 $101.4 $ -- $ -- $1,728.3
Operating income 82.7 61.9 11.1 (10.5) -- 145.2
Net interest income (expense) 6.3 (0.4) 2.0 7.7 -- 15.6
Income before taxes 89.0 61.5 13.1 (2.8) -- 160.8
Assets 847.4 295.1 92.9 302.0 -- 1,537.4
Depreciation & amortization 54.5 15.3 1.3 -- -- 71.1
Capital expenditures 68.0 21.0 1.6 -- -- 90.6
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The "Other" column includes corporate related items, consolidating
reclassifications and eliminations, and income and expense items not
allocated to reportable segments.
(2) 1999 results include a $14.1 net nonrecurring gain equivalent to $9.0
million or $.44 per share after taxes. This gain is comprised of a $4.6
million gain on curtailment of employee benefit plans at a closed plant, a
$4.0 gain on an insurance settlement, and an $8.6 million gain from
currency hedging at the Company's Brazilian subsidiary. These gains were
partially offset by charges for a plant closing and environmental costs
totaling $3.1 million. 1998 results include a $45 million nonrecurring
charge for the impairment of assets developed for production of the scroll
compressor. This charge was equivalent to $28.8 million or $1.35 per share
after taxes.
GEOGRAPHIC SEGMENT INFORMATION
<TABLE>
<CAPTION>
-------------------------------- -------------------------- -------------------------
External Customer Sales Operating Income Net Long-Lived Assets
1999 1998 1997 1999 1998 1997 1999 1998 1997
-------------------------------- -------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United States $1,032.8 $948.5 $935.0 $146.2 $59.8 $111.3 $317.6 $336.3 $398.2
Brazil 76.4 121.4 140.7 41.2 22.6 22.3 71.7 82.5 94.4
Canada 58.0 56.8 51.6 3.7 4.3 3.4 0.8 0.7 0.7
France 44.6 51.3 42.5 1.4 9.1 9.8 34.5 40.2 37.7
India 48.4 43.6 11.9 (0.9) -- (0.8) 42.7 38.1 27.8
Italy 88.1 78.5 51.2 3.2 0.8 (0.8) 10.1 11.1 10.9
All Others 466.0 450.1 495.4 -- -- -- -- -- --
-------------------------------- -------------------------- -------------------------
Totals $1,814.3 $1,750.2 $1,728.3 $194.8 $96.6 $145.2 $477.4 $508.9 $569.7
================================ ========================== =========================
</TABLE>
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Tecumseh Products Company is a full-line, independent global manufacturer
of hermetic compressors for air conditioning and refrigeration products,
gasoline engines and power train components for lawn and garden applications,
and pumps. The Company's products are sold in countries all around the world.
Products are grouped into three principal industry segments: Compressor
Products, Engine and Power Train Products, and Pump Products.
Net sales in 1999 amounted to $1,814.3 million, an increase of more than 3%
over 1998 net sales of $1,750.2 million. Net income for 1999 amounted to $142.0
million, or $7.00 per share compared to net income of $74.2 million, or $3.47
per share in 1998. The 1999 results represent the best annual results in the
Company's history both in terms of sales and net income. The earnings results
from 1999 include nonrecurring credits totaling $14.1 million ($9.0 million or
$.44 per share net of taxes), while 1998 results included a nonrecurring charge
of $45.0 million ($28.8 million or $1.35 per share). Exclusive of nonrecurring
items, net income of $133.0 million ($6.56 per share) in 1999 was 29% greater
than net income of $103.0 million ($4.82 per share) in 1998. The improved 1999
results can be attributed to greater sales in Engine and Power Train products
and improved full year operating margins in all major business segments.
Results of Operations
Compressor Products
1999 vs. 1998
Worldwide Compressor Products sales declined 7.7% to $967.0 million in 1999
from 1998 sales of $1,048.1 million. Approximately half of this decline can be
attributed to the translation of sales at lower foreign currency values,
primarily the Brazilian Real. The other primary factor leading to the decline in
sales is the continuing downward pressure on prices brought about by a market
flooded with cheap Asian products both in North America and in Europe. Declines
in sales of compressors for the commercial refrigeration market was significant
in North America and Europe.
In spite of lower sales, operating income for the Compressor Products Group
increased 11% to $91.5 million in 1999 from $82.2 million in 1998. Operating
margins improved from 7.8% in 1998 to 9.5% in 1999. This improvement was largely
driven by Tecumseh do Brasil, which benefited from increased profit margins
resulting from continued cost cutting efforts and the January 1999 devaluation
of the Brazilian Real. As a result of the devaluation, margins on the Brazilian
operation's U.S. dollar denominated export sales, which accounted for
approximately 70% of the unit's 1999 sales, increased significantly when
compared to the pre-devaluation results of 1998. Brazilian operating income
nearly doubled in 1999 compared to 1998 and more than offset weakness in the
European and North American compressor businesses. Indian operations showed
improved sales volume in 1999. However, because of competitive pricing pressures
in the refrigerator compressor market, and a relatively high level of
manufacturing expenses, the Indian operations remained unprofitable.
<PAGE> 4
1998 vs. 1997
The Company's worldwide Compressor Products sales amounted to $1,048.1
million in 1998 compared to $1,050.1 million in 1997. Sales increased in North
America and Europe reflecting strong economies and good demand for the Company's
commercial refrigeration products. Sales growth from the Company's new
operations in India offset reduced export sales to Southeast Asia which resulted
from economic difficulties in that area of the world. Sales in the Brazilian
domestic market declined as the result of deepening economic problems.
Compressor Products operating margins in 1998 were 7.8% compared to 7.9% in
1997. The downward trend in selling prices continued, but was partially offset
by lower commodity costs and aggressive cost savings programs.
Engine and Power Train Products
1999 vs. 1998
The Engine and Power Train Products Group achieved record results in 1999.
Annual sales increased 24% from $592.2 million in 1998 to $734.3 million in
1999. This increase is due primarily to large gains in the sales of medium frame
engines for snow throwers and generators. Unit shipments of snow thrower engines
increased approximately 80% in 1999 from 1998 levels. Engine demand for
electrical power generators was particularly strong, driven not only by normal
increases in demand, but also by concerns over the potential year 2000 power
situation. Also contributing to this improvement was the combined results of the
Italian manufacturing facility and the U.S. transmission production facility,
both of which achieved record shipping levels during the year.
Operating earnings grew 63% to $93.1 million in 1999 from $57.2 million in
1998. Group operating profit margins increased from 9.7% in 1998 to 12.7% in
1999, due in large part to the increased production of value added medium frame
engines with greater profit margins. These results were somewhat offset by
losses at the Douglas, Georgia engine manufacturing facility due to start-up
costs for a second engine assembly line which is scheduled to start production
in February 2000.
1998 vs. 1997
Engine and Power Train Products sales for 1998 grew 3% to $592.2 million
compared to 1997 sales of $576.8 million. Unit sales of engines for snow thrower
applications fell nearly 45% in 1998 reflecting light snowfall in key urban
areas of the country. However, strong demand for walk-behind lawn mower engines
and engines for utility applications resulted in total unit sales of engines
increasing 14% for the year.
The 1998 operating income of the Engine and Power Train segment was $57.2
million, down from $61.9 million earned in 1997. The positive impact of higher
overall unit sales volume was more than offset by the decline in higher margin,
value added snow thrower engines.
Pump Products
Pump Product sales in 1999 amounted to $113.0 million compared to $109.9
million in 1998, an increase of 2.8%. In 1998, this segment experienced an 8%
increase in sales over 1997 sales of $101.4 million. Increased penetration in
water gardening markets has been largely
<PAGE> 5
responsible for this growth. Pump products operating margins amounted to 12.5%
in 1999 compared to 10.5% in 1998. In 1999, operating income of $14.1 million
increased 22.6% from 1998 operating income of $11.5 million. This improvement is
due to increased industrial pump contribution margins and reduced expenditures
in 1999 for marketing and promotion of the water gardening product line.
Operating income in 1998 increased 3.6% over the 1997 operating income of $11.1
million primarily due to the increased market for water gardening products,
partially offset by increased marketing and promotional expenses.
Nonrecurring Items
In 1999, the Company recorded nonrecurring credits amounting to $14.1
million ($9.0 million or $.44 per share net of tax). An $8.6 million ($5.6
million or $.27 per share net of tax) nonrecurring gain resulting from currency
hedging at the Brazilian subsidiary was recorded in the first quarter. A fourth
quarter net credit of $5.5 million ($3.4 million or $.17 per share after tax)
was comprised of a $4.6 million gain on the curtailment of employee benefit
plans at the Company's now closed Acklin Stamping Plant, a gain of $4.0 million
resulting from the settlement of insurance claims and a charge for plant closing
and environmental costs amounting to $3.1 million.
In 1998, the Company recorded a fourth quarter asset impairment charge of
$45.0 million ($28.8 million or $1.35 per share) to reduce the carrying amount
of assets dedicated to the production of scroll compressors to estimated fair
market value. Based on the Company's expected manufacturing costs, existing
market conditions and an anticipated lengthy introduction period, it was
estimated that the future cash flows from the scroll product line would not be
sufficient to cover the carrying amount of the Company's buildings, tooling,
machinery and equipment dedicated to its production.
Interest Income and Income Tax
Interest income and other, net amounted to $28.1 million, $27.8 million and
$21.9 million in 1999, 1998 and 1997, respectively. The significant increase
from 1997 to 1998 was attributable to increased Brazilian interest rates in 1998
prior to the devaluation of the Real. The Company's effective income tax rate in
1999 was 36.5% compared to 36.9% in 1998 and 37.5% in 1997. The lower effective
tax rate in 1999 when compared to 1998 results primarily from increased tax
benefits arising from the Company's Foreign Sales Corporation (FSC). The lower
effective tax rate in 1998 compared to 1997 results primarily from reduced
foreign income tax rates.
Liquidity and Capital Resources
Historically, the Company's primary source of cash has been net cash
provided by operations. For the year ended 1999, operations generated cash flows
of $163.3 million, an increase of 25% over 1998. This increase results primarily
from improved operating results partially offset by increased working capital
requirements.
Capital expenditures for 1999 amounted to $73.0 million compared to $64.4
million in 1998. Approximately $50 million was spent on capacity expansion
primarily in the Brazilian and French compressor facilities
<PAGE> 6
along with expenditures to further the completion of the compressor plant in
Ballabgarh, India. Approximately $20 million was spent on capacity expansion at
the Company's engine manufacturing plants in Italy and in New Holstein,
Wisconsin.
Net cash used by financing activities amounted to $85.2 million in 1999
compared to $93.1 million in 1998. During 1999, the Company repurchased
1,087,500 shares of its Class A common stock for $57.7 million and paid
dividends on its common stock amounting to $24.7 million. Net repayments of
long-term debt amounted to $2.8 million.
The Company continued to preserve its strong liquid financial position by
maintaining a cash and cash equivalent balance of $270.5 million at December
31,1999. Working capital of $618.6 million at December 31, 1999 was up from
$605.9 million at December 31, 1998. The ratio of current assets to current
liabilities increased from 3.2 in 1998 to 3.4 in 1999.
Projected Cash Requirements
On November 24, 1999, the Company announced its intention to repurchase up
to one million shares of Class A common stock over the next year. This was the
third stock repurchase program initiated by the Company since November 1997. As
of February 4, 2000, a total of 193,500 shares had been acquired under the new
authority leaving a balance of up to 806,500 shares that may be repurchased
during the remainder of 2000. A total of 2,193,500 shares have been repurchased
since November 1997. The Company intends to continue open market stock purchases
depending on market conditions and other factors.
Capital expenditures for 2000 are projected to be approximately $100
million with a significant amount targeted for further capacity expansion in
Brazil. The Company has been evaluating courses of action to consolidate
compressor manufacturing capacity in North America in an effort to reduce the
cost structure of its compressor models and produce a more competitively priced
product. It is likely that the Company will choose to close one or more
compressor and/or component manufacturing facilities. The total cost of these
actions has not yet been determined. However, certain of these costs are likely
to require cash outlays, and although an exact amount and timing of the outlays
cannot be precisely estimated at this time, the majority of these expenditures
are expected to be made in 2000 and 2001.
Working capital requirements, planned capital investment, capacity
consolidation, restructuring costs and stock repurchase costs for 2000 are
expected to be financed primarily through internally available funds,
supplemented, if necessary, by borrowings and other sources of external
financing.
Long-Term Liquidity
The Company anticipates that it will be able to continue to fund its
long-term liquidity requirements, including capital expenditures and working
capital needs, from internally generated funds supplemented by borrowings and
other financing arrangements, as required. The Company maintains a $100 million
revolving credit facility which is available for general corporate purposes.
Other available financing sources include long-term financing arrangements in
connection with state sponsored investment incentive programs, short-term
borrowing and various financial instruments to finance foreign working capital
requirements and hedge
<PAGE> 7
exposure to foreign currency exchange risks.
The Company regularly considers various strategic business opportunities
including acquisitions. Tecumseh evaluates such potential acquisitions on the
basis of their ability to enhance the Company's existing products, operations,
or capabilities, as well as provide access to new products, markets and
customers. Although no assurances can be given that any acquisition will be
consummated, the Company may finance such acquisitions through a number of
sources including available cash resources, new debt financing, the issuance of
equity securities or any combination of the above.
International Operations
As of December 31, 1999, approximately 40% of the Company's consolidated
net sales and 32% of the Company's total assets were outside of North America,
primarily in Brazil, France, Italy and India. Additionally, the Company's North
American Compressor Group imports approximately $59.9 million of compressors and
components from the Company's Brazilian subsidiary for sale in North America and
for re-export. Management believes that international operations have been, and
will continue to be a significant benefit to overall Company performance.
However, the Company's international operations are subject to a number of risks
inherent with operating abroad, including, but not limited to, world economic
conditions, political instability and currency rate fluctuations. There can be
no assurances that these risks will not have a material adverse impact on the
Company's foreign or consolidated net sales, or on its results of operations or
financial condition. For further information, see "Quantitative and Qualitative
Disclosures About Market Risk" and "Euro Conversion" below.
Euro Conversion
On January 1, 1999, certain member nations of the European Economic and
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 the 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 marketplace. The
Company is in the process of analyzing the potential effects of the conversion
on competitive conditions, contracts, currency risks, financial instruments, as
well as the accounting and tax consequences of the conversion.
Additionally, 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. Implementation plans
have been developed, and the Company expects that all necessary actions will be
taken in a timely manner. Currently, the Company's European operations have the
capability to conduct their financial transactions in multiple currencies. The
primary concern is the conversion of manufacturing accounting systems,
purchasing systems,
<PAGE> 8
historical data bases and system interfaces to handle the reporting in the new
Euro currency. The Company estimates that an additional $1.0 million will be
spent during 2000 and 2001 to complete the conversion to Euro compliant systems.
The actual costs incurred through December 31, 1999 have been combined with the
stated amounts for the Year 2000 project. The Company does not expect the costs
associated with the conversion will be material to its results of operations,
financial condition, or liquidity.
Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk during the normal course of business
from credit risk associated with accounts receivable and from changes in
interest rates, commodity prices and foreign currency exchange rates. The
exposure to these risks is managed through a combination of normal operating 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.
Credit Risk - Financial instruments which potentially subject the Company
to concentrations of credit risk are primarily cash investments and accounts
receivable. The Company places its cash investments in bank deposits and
investment grade, short-term debt instruments (predominately commercial paper)
with reputable credit-worthy counterparties and, by policy, limits the amount of
credit exposure to any one counterparty.
The Company uses contemporary credit review procedures to approve customer
credit. Customer accounts are actively monitored and collection efforts are
pursued within normal industry practice. Management believes that concentrations
of credit risk with respect to receivables are limited due to the large number
of customers in the Company's customer base, and their dispersion across
different industries and geographic areas.
A portion of export accounts receivable of the Company's Brazilian
subsidiary is sold at a discount. Discounted receivable balances in the
Brazilian subsidiary at December 31, 1999 and 1998 were $18.0 and $15.4 million,
respectively, and the discount rate was 7.3% in both 1999 and 1998. The Company
maintains an allowance for losses based upon the expected collectability of all
accounts receivable, including receivables sold.
Interest Rate Risk - The Company is subject to minimal interest rate risk
in relation to a variable rate, long-term Industrial Development Revenue Bonds
payable and to short-term variable rate borrowings used by our foreign
subsidiaries to manage their working capital needs. The Company's debt profile
is insignificant compared to the liquid cash assets held by the Company, and if
interest rates were to decrease substantially, the Company would simply pay off
the debt. The Company is also subject to interest rate risk relating to interest
earned on its short-term funds invested.
Commodity Price Risk - 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. Company policy allows local management to contract
commodity forwards for a limited percentage of projected raw material
requirements up to one year in advance. At December 31, 1999 and 1998, the
Company held a total notional value of $39.5 and $32.5 million, respectively in
commodity forward purchasing contracts. These
<PAGE> 9
contracts were not recorded on the balance sheet as they did not require an
initial cash outlay and do not represent a liability until delivery of the
commodities are accepted.
Foreign Currency Exchange Risk - The Company is subject to foreign currency
exchange exposure for operations whose assets and liabilities are denominated in
currencies other than U.S. dollars. On a normal basis, the Company does not
attempt to hedge the foreign currency translation fluctuations in the net
investments in its foreign subsidiaries. The Company does from time to time
enter into short-term forward exchange contracts to sell or purchase foreign
currencies at specified rates based on estimated foreign currency cash flows.
Company policy allows local management to hedge known receivables or payables
and forecasted cash flows up to a year in advance. Under the provisions of
Statement of Financial Accounting Standards (SFAS) No. 52, "Foreign Currency
Translation", the results of 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. It is the policy of
the Company not to purchase financial and/or derivative instruments for
speculative purposes. At December 31, 1999 and 1998, the Company held foreign
currency forward contracts with a total notional value of $67.5 and $76.3
million, respectively.
Impact of Foreign Currencies
In January 1999, the Brazilian currency, the Real, was allowed by the
Brazilian government to freely rise and fall according to prevailing market
conditions. This resulted in a rapid and substantial reduction in market value
of the Real, which had been trading at approximately .83 U.S. dollars (83 cents)
for each Real at December 31, 1998. At December 31, 1999, the Real was trading
at .55 U.S. dollars (55 cents) for each Real. This decline in the market value
of the Real had the effect of reducing the U.S. dollar value of the Company's
beginning of the year investment in the Brazilian net assets by $43.6 million at
December 31, 1999.
In anticipation of the devaluation of the Brazilian Real in early 1999, the
Company's Brazilian subsidiary invested in a forward exchange contract
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).
Currency fluctuations in Europe have also had a fairly significant impact
on the dollar value of the Company's investments in its French (compressor) and
Italian (engine) subsidiaries. At December 31, 1999, the Company's investment in
the European beginning balance of net assets have declined in U.S. dollar value
by $17.1 and $2.9 million for the French and Italian subsidiaries, respectively.
Under applicable accounting standards, translation adjustments relating to the
Company's investments in foreign affiliates are reflected in other comprehensive
income (part of stockholder's equity) in the period in which they arise.
Because of exchange rate differences between the U.S. dollar and the French
franc at December 31, 1999, the Company's French subsidiary recorded a $2.3
million pretax ($1.5 million or $.07 per share after tax) charge against
income for unrealized losses on forward exchange contracts which did not qualify
for hedge accounting (deferral) treatment under the provisions of SFAS No. 52.
These unrealized losses will reverse in year 2000 when the contracts are
settled, and the actual gain
<PAGE> 10
or loss on the contracts will be recognized in income along with the hedged
forecasted foreign currency transactions which actually occur.
Environmental
The U.S. Environmental Protection Agency (EPA) is in the process of final
rule development of Phase II emission standards for handheld small off-road
engines which include the two-cycle engines produced by the Company. The Company
already produces competitively priced engines that comply with current EPA and
California Air Resources Board (CARB) Standards. The Phase II standards have
been finalized for non-handheld four-cycle engines. Phase-in of the rules for
non-handheld four-cycle engines will take place between the 2001 and 2006 model
years. It is not possible at this time to determine the related costs of
compliance, nor the impact on the competitive position of the Company.
The state of California began enforcing the CARB Tier II Emission Standards
effective January 1, 2000. All rotary mower engines now require overhead valve
technology in the state of California. All of the Company's overhead valve
engine models have been certified to comply with these emission standards.
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 8 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 December 31, 1999 and 1998, the Company had accrued $42.4 million and
$43.3 million, respectively for environmental remediation, including $31.5 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 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 Readiness Results
In 1997, the Company began reviewing its manufacturing, financial and
administrative information systems in development of a plan to make timely
modifications related to the Year 2000. The costs of making the required systems
changes were estimated to be approximately $9 million. These costs were
generally not incremental to existing information technology budgets but rather
related to internal resources that were re-assigned and implementation time
tables that were accelerated. As of December 31, 1999, the Company had spent
approximately $8.4 million to complete the modifications to become Year 2000
compliant.
As of the end of January 2000, several minor incidences of hardware or
<PAGE> 11
software malfunction had been reported relating to the Year 2000 issue. Most of
the reported problems were corrected within three working days at the beginning
of January. The remaining issues were handled with temporary clock roll-backs or
manual procedures until corrective software could be implemented or hardware
replaced. There were no significant work or operation delays associated with the
Year 2000 issue, and none are expected going forward.
Outlook
In the year 2000, growth in sales and profitability in our Brazilian
compressor factories should continue as the local economy continues to improve
and as we gain business in other parts of the world. North American compressor
results will continue to face world over-capacity from low-cost foreign
competition especially in the room air conditioner market. The Company is adding
some room air compressor capacity at its low-cost Brazilian facility for export
to the U.S. in order to compete effectively with low-priced compressors
currently being exported from Korea into the U.S. In addition, the Company will
continue its efforts to increase competitiveness in world markets by focusing on
cost reduction programs, product quality, delivery and service. To achieve these
objectives, the Company anticipates undertaking several initiatives to realign
and consolidate production worldwide. It is likely that future results will be
impacted by one or more nonrecurring charges as these plans are finalized. While
the exact timing and amount of these potential charges cannot be estimated with
any degree of accuracy, it is possible they could be recorded over a one to
three year period and could range as high as $25-$35 million in aggregate on a
pre-tax basis.
Tecumseh expects the coming year to include a different mix of engine
business as it is likely that the demand for snow thrower and generator engines
will moderate in 2000. This will put pressure on Engine and Power Train margins,
and the task will be to find and develop other engine applications, product
designs and cost control avenues to maintain profitability. In February 2000,
the Douglas, Georgia plant is scheduled to double its engine producing capacity
with the completion of the second engine assembly line. With the start-up costs
behind them, management anticipates this facility will show improved
productivity and profitability. This additional capacity along with planned year
2000 capital investments should provide a platform from which the Company can
increase its market share and competitiveness in the Engine and Power Train
business.
Management expects results in 2000 could be equal to or greater than those
achieved in 1999. The Company faces a highly competitive world market in all its
major business segments. Although the Company is well positioned and prepared to
meet these challenges in the coming year, there can be no assurances that the
growth and record results experienced in 1999 will be repeated in 2000.
Information contained in this "Outlook" section should be read in conjunction
with the cautionary language and discussion of risks included in the
"Uncertainty Relating to Forward Looking Statements" section below.
New Accounting Pronouncement
In 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting
<PAGE> 12
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. The
Company plans to adopt the new standard in the first quarter of calendar year
2001, as required.
SFAS No. 133 establishes new standards requiring companies to measure and
record the fair value of most derivative financial instruments and include those
amounts as assets and liabilities in the balance sheet. Forward contracts for
purchases of raw materials (such as copper and aluminum) that require delivery
of the commodity are exempt from this treatment. However, contracts which
contain elements of derivative financial instruments, such as net settlement
terms, are subject to the provisions of the statement. Gains and losses that
result from changes in the fair value of derivatives will be recognized in the
income statement. Gains and losses that qualify for hedge accounting will have
different treatment depending on their classification as a fair value hedge, a
cash flow hedge, or a net investment hedge. Treatment can also vary if a
derivative is used to hedge foreign currency denominated assets, transactions or
an investment in a foreign investee.
The Company is currently reviewing its policies with regard to forward
exchange (hedge) contracts both from a perspective of what transaction types and
amounts to hedge, and how far out into the future currency risk should be
hedged. However, based on the Company's current policies and procedures for the
use of financial derivatives and hedging instruments, it is management's opinion
that the implementation of SFAS No. 133 should not have a material impact on the
Company's consolidated reported results of operations or financial position.
Uncertainties Relating to Forward-Looking Statements
This report contains forward-looking statements within the meaning of the
"Private Securities Litigation Reform Act of 1995" and 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.
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 demand for
generators will continue; 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; and xi) the Company's ability to profitably develop,
manufacture and sell both new and existing products. 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.
<PAGE> 13
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(Dollars in millions except per share data)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
NET SALES $1,814.3 $1,750.2 $1,728.3
Cost of sales and operating expenses 1,507.4 1,492.8 1,478.7
Selling and administrative expenses 117.6 115.8 104.4
Nonrecurring (gain) charges (5.5)(a) 45.0 (b) --
--------- --------- ---------
OPERATING INCOME 194.8 96.6 145.2
Interest expense (7.9) (6.9) (6.3)
Interest income and other, net 28.1 27.8 21.9
Nonrecurring gain 8.6 (c) -- --
--------- --------- ---------
INCOME BEFORE TAXES ON INCOME 223.6 117.5 160.8
Taxes on income 81.6 43.3 60.3
--------- --------- ---------
NET INCOME $142.0 $74.2 $100.5
- ------------------------------------------------------------ --------- ---------
BASIC AND DILUTED EARNINGS PER SHARE $7.00 $3.47 $4.59
- ---------------------------------------------------------------------------------------
</TABLE>
(a) 1999 operating income includes a net $5.5 million nonrecurring gain
which consisted of a $4.6 million gain from the curtailment of employee
benefit plans at a closed plant, a $4.0 million gain on an insurance
settlement and offsetting charges for plant closing and environmental
costs totaling $3.1 million. This net gain was equivalent to $0.17 per
share after taxes.
(b) 1998 operating income includes a $45 million nonrecurring charge for
asset impairment. This charge was equivalent to $1.35 per share after
taxes.
(c) 1999 net income includes a nonrecurring gain of $8.6 million from
currency hedging. This gain was equivalent to $0.27 per share after
taxes.
The accompanying notes are an integral part of these statements.
<PAGE> 14
TECUMSEH PRODUCT COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED STOCKHOLDERS' EQUITY
(Dollars in millions)
<TABLE>
<CAPTION>
COMMON STOCK
----------------------- ACCUMULATED
CAPITAL OTHER TOTAL
CLASS A CLASS B IN EXCESS RETAINED COMPREHENSIVE STOCKHOLDERS'
$1 PAR VALUE $1 PAR VALUE OF PAR VALUE EARNINGS INCOME/(LOSS) EQUITY
------------ ------------ ------------ -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $16.4 $5.5 $29.9 $883.8 $11.9 $947.5
COMPREHENSIVE INCOME:
Net income 100.5 100.5
Translation adjustments (19.6) (19.6)
TOTAL COMPREHENSIVE INCOME 80.9
Cash dividends (26.3) (26.3)
Stock repurchase (1.9) (1.9)
----------- ----------- ------------ -------- ------------- --------------
BALANCE, DECEMBER 31, 1997 16.4 5.5 28.0 958.0 (7.7) 1,000.2
COMPREHENSIVE INCOME:
Net income 74.2 74.2
Translation adjustments (4.1) (4.1)
TOTAL COMPREHENSIVE INCOME 70.1
Cash dividends (25.6) (25.6)
Stock repurchase (1.0) (28.0) (20.0) (49.0)
----------- ----------- ------------ -------- ------------- --------------
BALANCE, DECEMBER 31, 1998 15.4 5.5 0.0 986.6 (11.8) 995.7
COMPREHENSIVE INCOME:
Net income 142.0 142.0
Minimum pension liability (1.5) (1.5)
Translation adjustments (39.6) (39.6)
TOTAL COMPREHENSIVE INCOME 100.9
Cash dividends (24.7) (24.7)
Stock repurchase (1.1) (56.6) (57.7)
----------- ----------- ------------ -------- ------------- --------------
BALANCE, DECEMBER 31, 1999 $14.3 $5.5 $0.0 $1,047.3 $(52.9) $1,014.2
=========== =========== ============ ======== ============= ==============
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 15
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
ASSETS 1999 1998
--------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $270.5 $277.7
Accounts receivable, trade, less allowance for doubtful
accounts of $6.5 million in 1999 and $6.1 million in 1998 268.6 256.7
Inventories 266.3 275.7
Deferred and recoverable income taxes 44.2 42.2
Other current assets 24.7 25.5
--------- ---------
TOTAL CURRENT ASSETS 874.3 877.8
--------- ---------
PROPERTY, PLANT, AND EQUIPMENT, at cost:
Land and land improvements 19.9 20.0
Buildings 167.4 173.9
Machinery and equipment 788.7 780.0
Construction in progress 46.5 99.5
--------- ---------
1,022.5 1,073.4
Less accumulated depreciation 545.1 564.5
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, net 477.4 508.9
--------- ---------
EXCESS OF COST OVER ACQUIRED NET ASSETS, less accumulated
amortization of $21.8 million in 1999 and $20.0 million in 1998 48.2 57.0
DEFERRED INCOME TAXES 39.2 24.6
PREPAID PENSION EXPENSE 98.6 76.5
OTHER ASSETS 15.6 11.4
--------- ---------
TOTAL ASSETS $1,553.3 $1,556.2
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, trade $120.0 $121.5
Income taxes payable 2.6 9.7
Short-term borrowings 7.9 10.6
Accrued liabilities:
Employee compensation 38.1 36.4
Product warranty and self-insured risks 33.5 34.6
Other 53.6 59.1
--------- ---------
TOTAL CURRENT LIABILITIES 255.7 271.9
LONG-TERM DEBT 15.6 17.2
OTHER POSTRETIREMENT BENEFIT LIABILITIES 188.4 187.6
PRODUCT WARRANTY AND SELF-INSURED RISKS 28.8 32.5
ACCRUAL FOR ENVIRONMENTAL MATTERS 35.6 36.7
PENSION LIABILITIES 15.0 14.6
--------- ---------
TOTAL LIABILITIES 539.1 560.5
--------- ---------
STOCKHOLDERS' EQUITY
Class A common stock, $1 par value; authorized 75,000,000 shares;
issued 14,322,938 and 15,410,438 shares in 1999 and 1998, respectively 14.3 15.4
Class B common stock, $1 par value; authorized 25,000,000 shares;
issued 5,470,146 shares in 1999 and 1998 5.5 5.5
Retained earnings 1,047.3 986.6
Accumulated other comprehensive income (loss) (52.9) (11.8)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 1,014.2 995.7
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,553.3 $1,556.2
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 16
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(Dollars in millions)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $142.0 $74.2 $100.5
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 72.4 74.6 71.1
Impaired asset write-down -- 45.0 --
Accounts receivable (29.9) (50.0) (6.3)
Inventories (5.3) (15.1) 11.9
Payables and accrued expenses 10.0 23.4 8.4
Prepaid pension expense (22.1) (18.1) (11.8)
Other (3.8) (3.4) 12.9
------- ------- -------
Cash Provided By Operating Activities 163.3 130.6 186.7
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (73.0) (64.4) (90.6)
Business acquisition, net of cash acquired -- -- (46.9)
------- ------- -------
Cash Used In Investing Activities (73.0) (64.4) (137.5)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid (24.7) (25.6) (26.3)
Proceeds from borrowings 0.5 5.4 25.3
Repayments of borrowings (3.3) (23.9) (11.8)
Repurchases of common stock (57.7) (49.0) (1.9)
------- ------- -------
Cash Used In Financing Activities (85.2) (93.1) (14.7)
------- ------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (12.3) 0.5 (8.1)
------- ------- -------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (7.2) (26.4) 26.4
CASH AND CASH EQUIVALENTS:
Beginning of period 277.7 304.1 277.7
------- ------- -------
End of period $270.5 $277.7 $304.1
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 17
Tecumseh Products Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Accounting Policies
BUSINESS DESCRIPTION -- Tecumseh Products Company (the "Company") is a
full-line, independent global manufacturer of hermetic compressors for air
conditioning and refrigeration products, gasoline engines and power train
components for lawn and garden applications, and pumps. The Company's products
are sold in countries all around the world.
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements include
the accounts of the Company and its subsidiaries. The Company's investments in
unconsolidated affiliates are generally accounted for on the equity basis. All
significant intercompany transactions and balances have been eliminated.
CASH EQUIVALENTS -- Cash equivalents consist of commercial paper and other
short-term investments that are readily convertible into cash.
INVENTORIES -- Inventories are valued at the lower of cost or market,
generally on the first-in, first-out basis.
PROPERTY, PLANT AND EQUIPMENT -- Expenditures for additions, major renewals
and betterments are capitalized and expenditures for maintenance and repairs are
charged to expense as incurred. For financial statement purposes, depreciation
is determined using the straight-line method at rates based upon the estimated
useful lives of the assets. Depreciation expense was $70.5, $72.3, and $68.4
million in 1999, 1998 and 1997, respectively.
EXCESS OF COST OVER ACQUIRED NET ASSETS -- Assets and liabilities related to
business combinations accounted for as purchases are recorded at fair value. The
excess of cost over the net tangible assets acquired is being amortized on a
straight-line basis over forty years.
DERIVATIVE FINANCIAL INSTRUMENTS -- Derivative financial instruments are
occasionally utilized by the Company to manage risk exposure to movements in
foreign exchange rates. The Company, from time to time, enters into forward
exchange contracts to obtain foreign currencies at specified rates based on
expected future cash flows for each currency. The premium or discount on the
contracts is amortized over the life of the contract, and the unrealized gain or
loss on the balance sheet date is recognized in net income. The Company does not
hold derivative financial instruments for trading purposes.
PRODUCT WARRANTY -- Provision is made for the estimated cost of maintaining
product warranties at the time the product is sold.
SELF-INSURED RISKS -- Provision is made for the estimated costs of known and
anticipated claims under the deductible portions of the Company's liability and
workers' compensation insurance policies. In addition, provision is made for the
estimated cost of post-employment benefits at employment separation.
ENVIRONMENTAL EXPENDITURES -- Expenditures for environmental safekeeping are
expensed or capitalized as appropriate. Costs associated with remediation
activities are expensed. Liabilities relating to probable remedial activities
are recorded when the costs of such activities can be reasonably estimated and
are not discounted or reduced for possible recoveries from insurance carriers.
COMPREHENSIVE INCOME -- Accumulated other comprehensive income or loss shown
in the consolidated statement of shareholders' equity at December 31, 1999 is
net of tax effects and includes accumulated foreign currency translation
adjustments of $51.4 million and an adjustment for a minimum
<PAGE> 18
pension liability of $1.5 million. The December 31, 1998 and 1997 accumulated
other comprehensive income is comprised solely of accumulated foreign currency
translation adjustments, net of tax effects.
EARNINGS PER SHARE -- Basic and diluted earnings per share are equivalent.
Earnings per share are 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 was 20,276,925 in 1999, 21,365,958 in
1998, and 21,878,995 in 1997.
RESEARCH, DEVELOPMENT AND TESTING EXPENSES -- Company sponsored research,
development, and testing expenses related to present and future products are
expensed as incurred and were $29.8, $32.4, and $32.6 million in 1999, 1998 and
1997, respectively.
ESTIMATES -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts during the reporting period and
at the date of the financial statements. Significant estimates include accruals
for product warranty, self-insured risks, pension and postretirement benefit
obligations and environmental matters. Actual results could differ materially
from those estimates.
RECLASSIFICATIONS -- Certain amounts included in the prior years' financial
statements have been reclassified to conform to the 1999 presentation.
NEW ACCOUNTING STANDARDS -- In June 1998, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The Company
plans to adopt the new standard with the first quarter of 2001, as required.
SFAS No. 133 establishes new standards for recognizing all derivatives as
either assets or liabilities, and measuring those instruments at fair value.
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.
NOTE 2. Foreign Currency Translation
At December 31, 1999 all of the Company's foreign subsidiaries use the
local currency of the country of operation as the functional currency. Assets
and liabilities are translated into U.S. dollars at year-end exchange rates
while revenues and expenses are translated at average monthly exchange rates.
The resulting translation adjustments are recorded as a component of
stockholders' equity:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
(Dollars in millions)
Balance at January 1 $(11.8) $ (7.7)
Effect of balance sheet translations:
Amount (65.4) (6.8)
Tax effect 25.8 2.7
---------------------
Balance at December 31 $(51.4) $(11.8)
=====================
</TABLE>
<PAGE> 19
Aggregate gains and losses on foreign currency transactions and balances
denominated in foreign currencies are recognized in current income. Net gains of
$6.0 million were recorded in 1999. Amounts for 1998 and 1997 were not
significant.
During early 1999, the value of the Brazilian Real was allowed to float
according to market conditions. This resulted in a rapid and substantial
reduction in market value of the Real from its trading value of .83 U.S.
dollars (83 cents) at December 31, 1998.
Note 3: Pension and Other Postretirement Benefit Plans
The Company has defined benefit retirement plans that cover substantially
all domestic employees. Plans covering salaried employees generally provide
pension benefits that are based on average earnings and years of credited
service. Plans covering hourly employees generally provide pension benefits of
stated amounts for each year of service. The Company sponsors a retiree health
care benefit plan, including retiree life insurance, for eligible salaried
employees and their eligible dependents. At certain divisions, the Company also
sponsors retiree health care benefit plans for hourly retirees and their
eligible dependents. The retiree health care plans, which are unfunded, provide
for coordination of benefits with Medicare and any other insurance plan covering
a participating retiree or dependent, and have lifetime maximum benefit
restrictions. Some of the retiree health care plans are contributory, with
retiree contributions adjusted annually. The Company has reserved the right to
interpret, change or eliminate these health care benefit plans.
At the beginning of 1999, the Company changed the measurement date (the date
upon which plan assets and obligations are measured) from December 31 to
September 30 to facilitate the preparation and reporting of pension and
postretirement plan data. Information regarding the funded status and net
periodic benefit costs are reconciled to or stated as of the fiscal year end at
December 31.
The following tables provide a reconciliation of the changes in the plans'
benefit obligations, fair value of assets and funded status for 1999 and 1998:
<TABLE>
<CAPTION>
(Dollars in millions) Pension Other
-------------------- --------------------
1999 1998 1999 1998
-------------------- --------------------
<S> <C> <C> <C> <C>
Reconciliation of benefit
obligation:
Benefit obligation at
beginning of period $277.5 $280.9 144.0 $139.5
Service cost 7.7 6.6 5.0 4.6
Interest cost 17.8 17.4 8.9 9.0
Actuarial (gain)loss (20.8) (11.0) (17.4) (3.8)
Curtailment (gain)loss -- -- (5.5) --
Benefit payments (13.4) (16.4) (5.8) (5.3)
-------------------- --------------------
Benefit obligation at
measurement date $268.8 $277.5 $129.2 $ 44.0
==================== ====================
</TABLE>
<PAGE> 20
<TABLE>
<CAPTION>
(Dollars in millions) Pension Other
--------------------------- -------------------------------
1999 1998 1999 1998
---------------------------- -------------------------------
<S> <C> <C> <C> <C>
Reconciliation of fair value of plan assets:
Fair value at beginning
of period $ 572.4 $ 502.4
Actual return on plan
assets 8.0 86.2
Employer contributions 0.1 0.2
Benefit payments (13.4) (16.4)
----------------------------
Fair value at
measurement date $ 567.1 $ 572.4
============================
Funded status:
Funded status at
measurement date $ 298.3 $ 294.9 $(129.2) $(144.0)
Unrecognized transition
(asset) obligation (8.8) (10.7) -- --
Unrecognized prior
service cost 13.5 8.6 (10.4) (12.2)
Unrecognized (gain) (204.4) (216.3) (53.2) (37.7)
---------------------------- -------------------------------
Prepaid (accrued)
benefits $ 98.6 $ 76.5 $(192.8) $(193.9)
============================ ===============================
</TABLE>
The following tables provide the components of net periodic benefit cost for
1999, 1998 and 1997:
<TABLE>
<CAPTION>
(Dollars in millions) 1999 1998 1997
------------ --------------- ----------------
<S> <C> <C> <C>
Pension Benefits:
Service cost $ 7.7 $ 6.6 $ 6.8
Interest cost 17.8 17.4 17.6
Expected return on plan assets (39.2) (34.8) (30.9)
Amortization of net (gain)loss (9.0) (7.3) (4.6)
Curtailment (gain)loss 1.0 -- --
------------ --------------- ----------------
Net periodic benefit cost $(21.7) $(18.1) $(11.1)
============ =============== ================
Other Benefits:
Service cost $ 5.0 $ 4.6 $ 4.5
Interest cost 8.9 9.0 8.6
Curtailment (gain)loss (5.5) 0.0 0.0
Amortization of net (gain)loss (3.5) (3.8) (3.7)
------------ --------------- ----------------
Net periodic benefit cost $ 4.9 $ 9.8 $ 9.4
============ =============== ================
</TABLE>
Assumptions used in measuring the benefit obligations were:
<TABLE>
<CAPTION>
Pension Other
---------------------------- ------------------------------
1999 1998 1999 1998
------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Discount rate 7.25% 6.50% 7.25% 6.50%
Long-term rate of:
Compensation increases 5.0% 5.0% N/A N/A
Return on plan assets 7.5% 7.5% N/A N/A
</TABLE>
<PAGE> 21
For measurement purposes a 6.50% annual rate of increase in the cost of covered
health care benefits was assumed for 1999. The rate was assumed to decrease each
year to a rate of 5.25% for 2004 and remain at that rate thereafter.
In 1999, the Company closed its Acklin Stamping plant which resulted in the
recognition of a net curtailment gain of approximately $4.5 million. The
accumulated other postretirement benefit obligation was reduced by $5.5 million
(income effect) and additional pension expense of $1.0 million was recorded.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one percentage point change in
assumed health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
+1% -1%
-------------------
<S> <C> <C>
Accumulated postretirement
benefit obligation $17.8 $(14.8)
Net postretirement benefit cost 2.3 (1.9)
</TABLE>
The Company's foreign subsidiaries provide for defined benefits that are
generally based on earnings at retirement date and years of credited service.
The combined expense for these unfunded plans was $2.7, $2.9 and $2.7 million in
1999, 1998 and 1997, respectively. The net liability recorded in the
consolidated balance sheet was $15.0 and $14.6 million for 1999 and 1998,
respectively. In 1999, Tecumseh Europe, S.A. recorded a minimum pension
liability of $2.5 million ($1.5 million net of tax effects), the charge for
which is recognized in other comprehensive income.
The Company has defined contribution retirement plans that cover
substantially all domestic employees. The combined expense for these plans was
$3.6, $3.1 and $3.4 million in 1999, 1998 and 1997, respectively.
NOTE 4. Income Taxes
Consolidated income before taxes consists of the following:
<TABLE>
<CAPTION>
(Dollars in millions) 1999 1998 1997
------------------ --------------- ----------------
<S> <C> <C> <C>
United States $159.2 $ 65.9 $124.6
Foreign 64.4 51.6 36.2
------------------ --------------- ----------------
$223.6 $117.5 $160.8
================== =============== ================
<CAPTION>
Provision for income taxes consists of the following:
(Dollars in millions) 1999 1998 1997
------------------ --------------- ----------------
<S> <C> <C> <C>
Current:
U.S. federal $40.5 $35.6 $37.5
State and local 5.4 5.0 3.8
Foreign income and withholding taxes 23.4 16.0 9.0
------------------ --------------- ----------------
69.3 56.6 50.3
------------------ --------------- ----------------
Deferred:
U.S. federal 14.5 (13.2) 8.6
Foreign (2.2) (0.1) 1.4
------------------ --------------- ----------------
12.3 (13.3) 10.0
------------------ --------------- ----------------
Provision for income taxes $81.6 $43.3 $60.3
================== =============== ================
Income taxes paid $78.6 $52.7 $39.6
================== =============== ================
</TABLE>
<PAGE> 22
A reconciliation between the actual income tax expense provided and the
income tax expense computed by applying the statutory federal income tax rate of
35% to income before tax is as follows:
<TABLE>
<CAPTION>
(Dollars in millions) 1999 1998 1997
------------------ --------------- ----------------
<S> <C> <C> <C>
Income taxes at U.S. statutory rate $78.3 $41.1 $56.3
Excess of foreign taxes over the
U.S. statutory rate 2.7 0.1 2.2
State and local income taxes 3.5 3.2 2.4
Tax benefits from Foreign Sales
Corporation (1.9) (1.0) (1.0)
Other (1.0) (0.1) 0.4
------------------ --------------- ----------------
$81.6 $43.3 $60.3
================== =============== ================
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
as of December 31 were as follows:
<TABLE>
<CAPTION>
(Dollars in millions) 1999 1998
--------------- ----------------
<S> <C> <C>
Deferred tax assets:
Other postretirement liabilities $72.2 $71.9
Product warranty and self-insured risks 21.9 25.2
Net operating loss carryforwards 0.9 2.6
Provision for environmental matters 15.7 16.0
Other accruals and miscellaneous 38.7 27.2
--------------- ----------------
149.4 142.9
Valuation allowance (1.2) (1.7)
--------------- ----------------
Total deferred tax assets 148.2 141.2
--------------- ----------------
Deferred tax liabilities:
Tax over book depreciation 25.7 28.1
Pension 36.7 25.3
Other 3.6 21.0
--------------- ----------------
Total deferred tax liabilities 66.0 74.4
=============== ================
Net deferred tax assets $82.2 $66.8
=============== ================
</TABLE>
The Company's share of accumulated unremitted earnings of foreign
subsidiaries at December 31, 1999 and 1998 was $203.1 and $172.9 million,
respectively.
At December 31, 1999, the Company had net operating loss carryforwards
attributable to foreign operations for income tax purposes of $8.8 million which
expire from 2000 to 2006 if not offset against future taxable income. For
financial reporting purposes, a valuation allowance has been established to
offset the deferred tax assets related to those loss carryforwards.
NOTE 5. Inventories
The components of inventories at December 31, were:
<TABLE>
<CAPTION>
(Dollars in millions) 1999 1998
--------------- ----------------
<S> <C> <C>
Raw materials and work in process $151.7 $176.5
Finished goods 96.1 81.9
Supplies 18.5 17.3
--------------- ----------------
$266.3 $275.7
=============== ================
</TABLE>
<PAGE> 23
NOTE 6. Business Segment Data
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" establishes standards for the
reporting of information about operating segments in annual and interim
financial statements. Operating segments are defined as components of an
enterprise for which separate financial information is available that is
evaluated regularly by the chief operating decision maker(s) in deciding how to
allocate resources and in assessing performance.
The Company has three reportable segments based on the similarity of
products produced: Compressor Products, Engine & Power Train Products, and Pump
Products. A full-line of hermetic compressors for residential and commercial air
conditioning and refrigeration products are manufactured and marketed through
the Compressor Products Group. Gasoline engines and power train components for
lawn and garden and utility applications are produced and marketed by the Engine
& Power Train Products Group. The Pump Products Group manufactures and sells
centrifugal, sump and small submersible pumps for industrial, commercial, marine
and agricultural applications.
The accounting policies of the reportable segments are the same as those
described in Note 1 of Notes to Consolidated Financial Statements. Transfers
between segments are accounted for at cost plus a reasonable profit. There were
no accounting changes in the years presented. Net sales by geographic area are
attributed to individual countries by the location of our customers to whom we
have shipped product. Under net long-lived assets, the Company indicates the
location of its property, plant and equipment net of depreciation by country.
In 1999, the Company did not have sales equal to or greater than 10% of
consolidated net sales to any single customer. Business segment data is
presented on page 14 of this report.
NOTE 7. Debt
Short-term debt consists of borrowings by foreign subsidiaries at varying
interest rates under revolving credit agreements, advances on export receivables
and overdraft arrangements with banks used in the normal course of business. The
U.S. dollar equivalent of this debt was $7.2 million at December 31, 1999, and
$9.8 million at December 31, 1998. The weighted average interest rate was 4.1%
in 1999 and 8.3% in 1998.
Long-term debt consists of the following:
1. Unsecured borrowings, primarily with banks, by foreign subsidiaries
with interest at 6.0% and maturing in 2000 through 2007. The U.S.
dollar equivalent of these borrowings was $1.7 and $2.7 million at
December 31, 1999 and 1998, respectively.
2. $14.6 million ($15.3 million in 1998) variable rate Industrial
Development Revenue Bonds (effective interest rate of 5.8% at December
31, 1999) payable in quarterly installments from 2000 to 2021.
Scheduled maturities of long-term debt outstanding at December 31, 1999, are
as follows:
2000--$ .7 million; 2001--$1.5 million;
2002--$ .7 million; 2003--$1.1 million;
2004 and beyond--$12.3 million.
Interest paid was $3.9 million in 1999, $4.0 million in 1998 and $6.5
million in 1997.
<PAGE> 24
The Company has a $100 million revolving credit facility for general
corporate purposes. The facility has a three-year term which may be extended
annually with the consent of the participating banks. Under the facility, the
Company may select among various interest rate arrangements. As of December 31,
1999, the Company had not made any borrowings under this facility.
NOTE 8. Environmental Matters
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 December 31, 1999 and 1998, the Company had accrued $31.5 and $33.8 million,
respectively 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 Superfund 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 in the first quarter of year 2000; however, the ultimate
resolution of this 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 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 ground water 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 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 of the contamination. Although the WDNR's investigation
has not established the parties
<PAGE> 25
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
preliminary investigation expenses and for a portion of source area remediation
costs 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 December 31, 1999 and 1998, the Company had
accrued $42.4 million and $43.3 million, 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 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.
NOTE 9. Commitments and Contingencies
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 of them 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.
NOTE 10. Financial Instruments
The following table presents the carrying amounts and the estimated fair
values of financial instruments at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
(Dollars in millions) 1999 1998
------------------------ -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------------ -------------------------
<S> <C> <C> <C> <C>
Cash & cash equivalents $270.5 $270.5 $277.7 $277.7
Short-term borrowings 7.2 7.2 9.8 9.8
Long-term debt 16.3 16.3 18.0 18.0
Foreign currency
contracts (2.3) (2.3) (0.2) 4.8
Commodity contracts -- 4.4 -- (1.4)
</TABLE>
The carrying amount of cash equivalents approximates fair value due to their
liquidity and short-term maturities. The carrying value of the Company's debt
approximates fair value due to the variable interest rate on the majority of the
debt. The fair values of foreign currency and commodity contracts reflect the
differences between the contract prices and the forward prices available on the
balance sheet date.
<PAGE> 26
The Company does not utilize financial instruments for trading or other
speculative purposes. The Company generally does not hedge the net investment in
its subsidiaries. All derivative financial instruments held at December 31, 1999
will mature within six months. All such instruments held at December 31, 1998
matured in 1999.
The Company enters into foreign currency forward exchange contracts to hedge
receivables, payables and other known transactional exposures for periods
consistent with the expected cash flows of the underlying transactions. Company
policy allows local management to hedge forecasted foreign currency transactions
up to a year in advance. 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. The
following table shows the notional amounts of the foreign currency forward
exchange contracts at December 31, 1999 and 1998, translated into U.S. dollars
at rates current at the reporting date. The majority of the contracts are
denominated in U.S. dollars, although some contracts involve one foreign
currency traded for another. The "buy" amounts represent the U.S. dollar
equivalent of commitments to purchase foreign currencies, and the "sell" amounts
represent the U.S. dollar equivalent of commitments to sell foreign currencies.
<TABLE>
<CAPTION>
(Dollars in millions) 1999 1998
--------------------- ----------------------
Buy Sell Buy Sell
--------------------- ----------------------
<S> <C> <C> <C> <C>
French francs $60.5 $ -- $37.0 $12.3
Italian lira -- 6.0 -- 1.9
Brazilian reais -- -- -- 25.0
Others -- 1.0 -- 0.1
===================== ======================
$60.5 $7.0 $37.0 $39.3
===================== ======================
</TABLE>
The Company uses commodity forward purchasing contracts to help control the
cost of commodities (copper and aluminum) used in the production of compressor
motors and components and engines. Company policy allows local managers to
contract commodity forwards for a limited percentage of raw material
requirements up to one year in advance. These contracts are not recorded in the
balance sheet as they do not require an initial cash outlay and do not represent
a liability until delivery of the commodity. Commodity forwards outstanding at
December 31, 1999 and 1998 were $39.5 and $32.5 million, respectively.
A portion of export accounts receivable at the Company's Brazilian
subsidiary are sold at a discount. Discounted Brazilian receivable balances at
December 31, 1999 and 1998 were $18.0 and $15.4, respectively, and the discount
rate was 7.3% in 1999 and 1998.
NOTE 11. Stockholders Equity
The shares of Class A common stock and Class B common stock are
substantially identical except as to voting rights. Class A common stock has no
voting rights except the right to i) vote on any amendments that could adversely
affect the Class A Stock Protection Provision in the articles of incorporation
and ii) vote in other limited circumstances, primarily involving mergers and
acquisitions, as required by law.
A Shareholders' Rights Plan is in effect for each class of stock. These
plans protect shareholders against unsolicited attempts to acquire control of
the Company that do not offer an adequate price to all
<PAGE> 27
shareholders. The rights are not currently exercisable, but would become
exercisable at an exercise price of $80 per share, subject to adjustment, if
certain events occurred relating to a person or group acquiring or attempting to
acquire 10% or more of the outstanding shares of Class B common stock. The
rights have no voting or dividend privileges and are attached to, and do not
trade separately from, the Class A and Class B common stock. The rights expire
on January 23, 2001. As of December 31, 1999, 16,410,438 shares of Class A
common stock and 5,470,146 shares of Class B common stock were reserved for
future exercise under the plans.
On November 24, 1999 the Company announced an extension of its share
repurchase program, begun in 1997, for the Class A common stock. Under the
program, the Company is authorized to repurchase an additional one million Class
A shares on the open market through December 31, 2000, depending upon market
conditions and other factors. The repurchase program is expected to be financed
primarily through internally available funds. In fiscal years 1997 through 1999,
the Company repurchased and retired 2,087,500 shares of Class A common stock at
a cost of approximately $108.8 million. As of February 4, 2000, and subsequent
to December 31, 1999, the Company has repurchased and retired an additional
106,000 shares at a cost of approximately $4.9 million.
NOTE 12. Business Acquisitions
In July 1997, the Company completed the acquisition of two compressor
manufacturing facilities in India for $46.9 million. The transactions were
accounted for as a purchase and the excess of cost over the acquired net assets
is being amortized over 40 years. Results of operations for the last six months
of 1997 are included in the Company's statement of consolidated income.
NOTE 13. Asset Impairment Loss
In accordance with SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company
recorded an impairment loss on the buildings, tooling, machinery and equipment
dedicated to the production of the scroll compressor. Due to the anticipated
lengthy introduction period involving limited production, expected manufacturing
costs and probable market conditions, it was estimated that the future cash
flows from this product line would not be sufficient to cover the carrying value
of the long-lived assets related to that business. Accordingly, the Company
recognized an asset impairment loss of $45 million ($28.8 million or $1.35 per
share after taxes) in the fourth quarter of 1998. This loss was the difference
between the carrying value of the scroll compressor long-lived assets and the
estimated fair value of those assets based on an independent appraisal.
<PAGE> 28
MANAGEMENT'S REPORT
TO THE SHAREHOLDERS OF
TECUMSEH PRODUCTS COMPANY
The primary responsibility for the integrity and objectivity of the
financial statements and other information included in this annual report rests
with management. The financial information was prepared in accordance with
generally accepted accounting principles and, where necessary, includes
management's best estimates and judgments, giving due consideration to
materiality. Financial information elsewhere in this annual report is consistent
with that in the financial statements.
Management has established and maintains a system of internal accounting
controls designed to provide reasonable assurance that assets are safeguarded
and transactions are executed in accordance with management's authorization.
These controls are documented by written policies and procedures that are
communicated to employees with significant roles in the financial reporting
process. This system is continually reviewed, evaluated and modified to reflect
current conditions.
The Audit Committee of the Board of Directors, composed of outside
Directors, is responsible for monitoring the Company's accounting and reporting
practices. The Audit Committee meets regularly with management, the internal
auditors, and the independent public accountants to review the work of each and
to assure that each is carrying out its responsibilities. Both the independent
public accountants and the internal auditors have unrestricted access to the
Audit Committee with and without management's representative present, to discuss
the results of their examinations and their opinions on the adequacy of internal
accounting controls and quality of financial reporting.
Independent public accountants are engaged to express an opinion on the
Company's financial statements. Their audit is conducted in accordance with
generally accepted auditing standards, and includes a review of internal
controls and selective tests of transactions. Their opinion is based on
procedures which they believe to be sufficient to provide reasonable assurance
that the financial statements contain no material errors.
Todd W. Herrick
President and Chief Executive Officer
John H. Foss
Vice President, Treasurer and
Chief Financial Officer
INDEPENDENT ACCOUNTANT'S REPORT
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF
TECUMSEH PRODUCTS COMPANY
We have audited the accompanying consolidated balance sheets of Tecumseh
Products Company and Subsidiaries as of December 31, 1999 and 1998, and the
related statements of consolidated income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Tecumseh
Products Company and Subsidiaries at December 31, 1999 and 1998 and the
consolidated results of operations and cash flows for each of the three years in
the period ended December 31, 1999, in conformity with generally accepted
accounting principles.
Ciulla, Smith & Dale, LLP
Certified Public Accountants
January 28, 2000
Southfield, Michigan
<PAGE> 29
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
(Dollars in millions except per share data)
<TABLE>
<CAPTION>
1999 (a) 1998 (b) 1997 1996 (c) 1995
----------- --------- --------------- --------------- --------------
INCOME STATEMENT DATA:
<S> <C> <C> <C> <C> <C>
Net sales $1,814.3 $1,750.2 $1,728.3 $1,784.6 $1,716.0
.......................................................................................................................
Net income before accounting
changes 142.0 74.2 100.5 112.6 119.2
.......................................................................................................................
Cumulative effect of changes
in accounting principles -- -- -- -- --
.......................................................................................................................
Net income (loss) 142.0 74.2 100.5 112.6 119.2
- -----------------------------------------------------------------------------------------------------------------------------
PER SHARE OF COMMON STOCK (f)
Net income before accounting
changes $7.00 $3.47 $4.59 $5.15 $5.45
.......................................................................................................................
Cumulative effect of accounting
changes -- -- -- -- --
.......................................................................................................................
Net income (loss) 7.00 3.47 4.59 5.15 5.45
.......................................................................................................................
Cash dividends declared 1.22 1.20 1.20 1.68 1.61
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents $270.5 $277.7 $304.1 $277.7 $261.6
.......................................................................................................................
Working capital (g) 618.6 605.9 554.8 549.7 521.3
.......................................................................................................................
Net property, plant and equipment 477.4 508.9 569.7 529.1 477.0
.......................................................................................................................
Total assets 1,553.3 1,556.2 1,537.4 1,472.6 1,407.6
.......................................................................................................................
Long-term debt 15.6 17.2 17.5 14.4 14.7
.......................................................................................................................
Stockholders' equity 1,014.2 995.7 1,000.2 947.5 877.1
- -----------------------------------------------------------------------------------------------------------------------------
OTHER DATA:
Capital expenditures $73.0 $64.4 $90.6 $115.2 $127.4
.......................................................................................................................
Depreciation and amortization 72.4 74.6 71.1 64.6 59.2
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: The above per share amounts have been adjusted as necessary to reflect the
100% stock dividend paid June 30, 1993 and the stock dividend paid May 29, 1992.
(a) 1999 results include a $14.1 million net nonrecurring gain equivalent to
$9.0 million or $.44 per share after taxes. This gain is comprised of a
$4.6 million gain on curtailment of employee benefit plans at a closed
plant, a $4.0 million gain on an insurance settlement, and an $8.6 million
gain from currency hedging at the Company's Brazilian subsidiary. These
gains were partially offset by charges for plant closing and environmental
costs totaling $3.1 million.
(b) 1998 results include a $45 million nonrecurring charge for asset
impairment. This charge was equivalent to $1.35 per share after taxes.
<PAGE> 30
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
SELECTED FINANCIAL DATA
(Dollars in millions except per share data)
<TABLE>
<CAPTION>
1994 1993 1992 (d) 1991 1990 (e)
---------- --------- ---------- ---------- ----------
INCOME STATEMENT DATA:
<S> <C> <C> <C> <C> <C>
Net sales $1,533.4 $1,314.2 $1,258.5 $1,197.2 $1,318.1
......................................................................................................
Net income before accounting
changes 120.3 81.4 52.3 42.5 14.2
......................................................................................................
Cumulative effect of changes
in accounting principles -- -- (95.0) -- --
......................................................................................................
Net income (loss) 120.3 81.4 (42.7) 42.5 14.2
- ------------------------------------------------------------------------------------------------------------
PER SHARE OF COMMON STOCK (F)
Net income before accounting
changes $5.50 $3.72 $2.39 $1.94 $0.65
......................................................................................................
Cumulative effect of accounting
changes -- -- (4.34) -- --
......................................................................................................
Net income (loss) 5.50 3.72 (1.95) 1.94 0.65
......................................................................................................
Cash dividends declared 1.35 1.15 0.80 0.80 0.80
- ------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents $283.2 $313.2 $263.6 $256.4 $240.3
......................................................................................................
Working capital (g) 504.2 473.6 420.4 403.1 414.3
......................................................................................................
Net property, plant and equipment 402.4 320.4 322.9 324.3 304.9
......................................................................................................
Total assets 1,289.8 1,132.7 1,078.6 1,055.4 1,032.2
......................................................................................................
Long-term debt 9.1 11.2 14.4 17.9 23.6
......................................................................................................
Stockholders' equity 785.5 686.8 639.8 712.8 692.2
- ------------------------------------------------------------------------------------------------------------
OTHER DATA:
Capital expenditures $136.2 $51.1 $56.6 $85.8 $64.8
......................................................................................................
Depreciation and amortization 55.7 52.5 53.6 49.9 49.6
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(c) 1996 results include a $5.1 million nonrecurring charge for environmental
and litigation costs, or $.15 per share after taxes.
(d) 1992 results reflect the cumulative effect of adoption of Statement of
Financial Accounting Standards (SFAS) No. 106, Accounting for Non-pension
Postretirement Benefits and SFAS No. 109, Accounting for Income Taxes.
(e) 1990 results include a nonrecurring provision for environmental cleanup of
$19.2 million after income taxes or $.88 per share.
(f) Basic and diluted earnings per share are equivalent.
(g) Working capital is the excess of current assets over current liabilities.
<PAGE> 31
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
QUARTERLY FINANCIAL DATA
(Dollars in millions except per share data)
<TABLE>
<CAPTION>
QUARTER
---------------------------------------------------
FIRST (a) SECOND THIRD FOURTH (b)(c) TOTAL
----------- ------- ------- ------------- --------
1999
<S> <C> <C> <C> <C> <C>
Net sales $489.4 $503.6 $407.8 $413.5 $1,814.3
Gross profit 83.5 87.8 70.3 70.8 312.4
Net income $42.5 $39.6 $30.4 $29.5 $142.0
====== ====== ====== ====== ========
Basic and diluted earnings (loss) per share $2.05 $1.95 $1.51 $1.48 $3.47
====== ====== ====== ====== ========
1998
Net sales $459.9 $500.4 $397.1 $392.8 $1,750.2
Gross profit 62.5 77.4 53.4 19.1 212.4
Net income $24.9 $33.9 $19.2 ($3.8) $74.2
====== ====== ====== ====== ========
Basic and diluted earnings (loss) per share $1.15 $1.57 $0.90 ($0.18) $3.47
====== ====== ====== ====== ========
</TABLE>
(a) First quarter 1999 results include a nonrecurring gain of $8.6 million from
currency hedging at the Company's Brazilian subsidiary. This gain is
equivalent to $.27 per share after tax.
(b) Fourth quarter 1999 results include a net $5.5 million nonrecurring gain
which consisted of a $4.6 million gain from the curtailment of employee
benefit plans at a closed plant, a $4.0 million gain on an insurance
settlement and offsetting charges for a plant closing and environmental
costs totaling $3.1 million. This net gain is equivalent to $.17 per share
after taxes.
(c) Fourth quarter 1998 results include a $45 million nonrecurring charge for
asset impairment. This charge is equivalent to $1.37 per share after taxes
in the fourth quarter. Favorable fourth quarter adjustments to net pension
expense increased 1998 fourth quarter net income by $3.7 million or $.18
per share.
<PAGE> 32
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
- --------------------------------------------------------------------------------
INFORMATION CONCERNING EQUITY SECURITIES
The Company's Class A and Class B common stock trades on the Nasdaq Stock Market
under the symbols TECUA and TECUB, respectively. Total shareholders as of
February 4, 2000 were approximately 5,700 for Class A common stock and 4,300 for
Class B common stock.
<TABLE>
<CAPTION>
1999 1998
-------------------------------------------------- -------------------------------------------------
Sales Price Sales Price
------------------------------------- ------------------------------------
Class A Class B Cash Class A Class B Cash
------- ------- Dividends ------- ------- Dividends
Quarter Ended High Low High Low Declared High Low High Low Declared
- ------------- ---- --- ---- --- -------- ---- --- ---- --- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
March 31 51.5 41.5 48 41.813 $0.30 53.75 52.5 56.625 55 $0.30
June 30 67.75 49.5 61.5 43.25 0.30 54.625 52.125 58.75 56.75 0.30
September 30 66.875 48.625 59.75 45 0.30 51 49.063 52.5 51.5 0.30
December 31 50.25 41.625 45.875 37.5 0.32 46.625 44 45.25 43.25 0.30
</TABLE>
<PAGE> 1
EXHIBIT (21)
Tecumseh Products Company Report on
Form 10-K for the period ended December 31, 1999
Subsidiaries of the Company
The following is a list of subsidiaries of the Company as of December
31, 1999 except that certain subsidiaries, the sole function of which is to hold
the stock of operating subsidiaries, which in the aggregate do not constitute
significant subsidiaries, have been omitted. Subject to the foregoing in each
case, 100% of the voting securities (except for directors' qualifying shares, if
required) are owned by the subsidiary's immediate parent as indicated by
indentation.
<TABLE>
<CAPTION>
State or Country
Name of Organization
---- ----------------
<S> <C>
MP Pumps, Inc. Michigan
Tecumseh do Brasil, Ltd. Brazil
Compela Componentes Eletrico, Ltda. Brazil
Tec Kold International Company, Ltd. Liechtenstein
Tecumseh do Brasil Europe Srl Italy
Tecumseh Products Company of Canada, Ltd. Canada
Tecumseh Products Company, Engine & Transmission
Group, Dunlap Operations, Inc. Tennessee
Douglas Products, Inc. Georgia
Tecumseh France S.A. France
Tecumseh Europe S.A. France
L'Unite Hermetique-Far East SDN. BHD. Malaysia
Societe Des Moteurs Electriques
de Normandie S.A. France
Societe Immobiliere De Construction
de La Verpilliere France
Tecumseh Services EURL S.A. France
Tecumseh Products Company, International
Division, Inc. (FSC) Virgin Islands
Tecumseh Europa, S.p.A. Italy
Societe T.I.G.E.R. France
Tecumseh Deutschland GmbH Germany
Tecumseh Service France France
Tecumseh U.K. Limited United Kingdom
Little Giant Pump Co. Oklahoma
Trenton Division, Inc. Tennessee
Vitrus, Inc. Rhode Island
Tecumseh Products India Ltd. India
</TABLE>
<PAGE> 1
EXHIBIT (23)
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of Tecumseh Products Company
We hereby consent to the incorporation by reference in this Annual Report on
Form 10-K of Tecumseh Products Company for the year ended December 31, 1999 of
our report dated January 28, 2000 which appears on page 33 of the Annual Report
to Shareholders for the year ended December 31, 1999.
CIULLA, SMITH & DALE, LLP
Southfield, Michigan
March 22, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 270,500
<SECURITIES> 0
<RECEIVABLES> 275,100
<ALLOWANCES> 6,500
<INVENTORY> 266,300
<CURRENT-ASSETS> 874,300
<PP&E> 1,022,500
<DEPRECIATION> 545,100
<TOTAL-ASSETS> 1,553,300
<CURRENT-LIABILITIES> 255,700
<BONDS> 14,600
0
0
<COMMON> 19,800
<OTHER-SE> 994,400
<TOTAL-LIABILITY-AND-EQUITY> 1,553,300
<SALES> 1,814,300
<TOTAL-REVENUES> 1,851,000
<CGS> 1,507,400
<TOTAL-COSTS> 1,507,400
<OTHER-EXPENSES> 3,100
<LOSS-PROVISION> 900
<INTEREST-EXPENSE> 7,900
<INCOME-PRETAX> 223,600
<INCOME-TAX> 81,600
<INCOME-CONTINUING> 142,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 142,000
<EPS-BASIC> 7.00
<EPS-DILUTED> 7.00
</TABLE>
