Tecumseh Products 2012 Annual Report Download - page 32

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk during the normal course of business from credit risk associated with cash investments and 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 futures contracts. Commodity prices and
foreign currency exchange rates can be volatile, and our risk management activities do not totally eliminate these risks.
Consequently, these fluctuations can have a significant effect on results.
Credit Risk – Financial instruments which potentially subject us to concentrations of credit risk are primarily cash investments,
both restricted and unrestricted, and accounts receivable. In the U.S. only a small portion of our cash balances are insured by
the FDIC. Any cash we hold in the U.S. that is not utilized for day-to-day working capital requirements is primarily invested in
secure, institutional money market funds, which are strictly regulated by the U.S. Securities and Exchange Commission and
operate under tight requirements for the liquidity, creditworthiness, and diversification of their assets.
We utilize 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 somewhat limited due to the large number of customers in our customer base and their dispersion across
different industries and geographic areas.
A portion of accounts receivable of our Brazilian subsidiary is sold with limited recourse at a discount. Under our factoring
program in Europe, we may discount receivables with recourse; however, at December 31, 2012, there were no receivables sold
with recourse. Our European and Brazilian subsidiaries also discount certain receivables without recourse. Such receivables
factored by us, both with and without limited recourse, are excluded from accounts receivable in our consolidated balance
sheets. Discounted receivables sold in these subsidiaries, including both with and without recourse amounts, was $49.3 million
and $34.3 million at December 31, 2012 and 2011, respectively and the weighted average discount rate was 6.7% in 2012 and
9.0% in 2011. The amount of factored receivables sold with limited recourse, which results in a contingent liability to us, was
$11.9 million and $10.1 million as of December 31, 2012 and 2011, respectively.
In India, we have the ability to collect receivables that are backed by letters of credit sooner than the receivables would
otherwise be paid by the customer. Furthermore, some of our large customers offer a non-recourse factoring program relating to
their receivables only, under which we can collect these receivables, at a discount, sooner than they would otherwise be paid by
the customer. We consider these programs similar to the factoring programs in Brazil and Europe as it relates to our liquidity.
We collected a total of $4.0 million and $3.8 million that would otherwise have been outstanding as receivables, under both of
these programs at December 31, 2012 and December 31, 2011, respectively and the weighted average discount rate was 11.6%
and 10.8% in 2012 and 2011, respectively.
We maintain an allowance for losses based upon the expected collectability of all accounts receivable, including receivables
sold with recourse and without recourse.
Interest Rate Risk – We are subject to interest rate risk, primarily associated with our borrowings and our investments of excess
cash. Our current borrowings by our foreign subsidiaries consist of variable and fixed rate loans that are based on either the
London Interbank Offered Rate, European Offered Interbank Rate or the BNDES TJLP fixed rate. We also record interest
expense associated with the accounts receivable factoring facilities described above. While changes in interest rates do not
affect the fair value of our variable-interest rate debt or cash investments, they do affect future earnings and cash flows. Based
on our debt and invested cash balances at December 31, 2012, a 1% increase in interest rates would increase interest expense
for the year by approximately $0.6 million and a 1% decrease in interest rates would have an immaterial effect on investments.
Based on our debt and invested cash balances at December 31, 2011, a 1% increase in interest rates would increase interest
expense for the year by approximately $0.6 million and a 1% decrease in interest rates would have an immaterial effect on
investments.
Commodity Price Risk – Our exposure to commodity cost risk is related primarily to the price of copper, steel and aluminum, as
these are major components of our product cost.
We use commodity futures to provide us with greater flexibility in managing the substantial volatility in commodity pricing.
Our policy allows management to contract commodity futures for a limited percentage of projected raw materials requirements
up to 18 months in advance. At December 31, 2012 and 2011, we held a total notional value of $19.1 million and $39.3 million,
respectively, in commodity futures contracts. The decline in notional value of our commodity contracts is primarily due to
downward trends in base metal market values and increased aluminum usage, which is lower in cost and less volatile than
copper. These futures are designated at the inception of the contract as cash flow hedges against the future prices of copper,