Tecumseh Products 2012 Annual Report Download - page 33

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steel, and aluminum, and are accounted for as hedges on our balance sheet unless they are subsequently de-designated. While
the use of futures can mitigate the risks of short-term price increases associated with these commodities by “locking in” prices
at a specific level, we do not realize the full benefit of a rapid decrease in commodity prices. If market pricing becomes
significantly deflationary, our level of commodity hedging could result in lower operating margins and reduced profitability.
As of December 31, 2012, we have been proactive in addressing the volatility of copper prices, including executing futures
contracts to cover approximately 32.6% of our anticipated copper requirements for 2013.
Any rapid increases in steel prices has a particularly negative impact, as there is currently no well-established global market for
hedging against increases in the cost of steel. We have been successful at securing a few steel futures contracts in the U.S. to
help mitigate this risk, although at the end of 2012 and 2011 we had no outstanding steel futures contracts.
Based upon the introduction of redesigned products, we are utilizing more aluminum in our motors in 2013. Similar to copper
and steel, our results of operations are sensitive to the price of aluminum and we have proactively addressed the volatility by
executing future contracts that cover 30.7% of our projected usage in 2013.
Based on our current level of activity, and before consideration of our outstanding commodity futures contracts, a 10% increase
in the price, as of December 31, of copper, steel or aluminum used in production of our products would adversely affect our
annual operating profit on an annual basis as indicated in the table below:
10% increase in commodity prices
(in millions) 2012 2011
Copper......................................................................................................................................... $(5.3)$ (7.0)
Steel ............................................................................................................................................ (11.0)(10.6)
Aluminum................................................................................................................................... (0.7)(0.7)
Total............................................................................................................................................ $ (17.0)$ (18.3)
The decrease for copper is primarily due to the decrease in usage of copper in our products as we move to utilizing more
aluminum in our motors. The increase for steel is primarily due to the increase in usage in 2012 compared to 2011.
Based on our current level of commodity futures contracts, a 10% decrease in the price of copper, steel or aluminum used in
production of our products would have resulted in losses under these contracts that would adversely impact our annual
operating results for 2012 and 2011 as indicated in the table below:
10% decrease in commodity prices
(in millions) 2012 2011
Copper......................................................................................................................................... $ (1.7)$ (2.9)
Steel ............................................................................................................................................ — —
Aluminum................................................................................................................................... (0.2)(0.4)
Total............................................................................................................................................ $ (1.9)$ (3.3)
The decrease for copper and aluminum is primarily due to the lower level of commodity futures contracts held in 2012
compared to 2011.
Foreign Currency Exchange Risk – We are exposed to significant exchange rate risk since the majority of all our revenue,
expenses, assets and liabilities are derived from operations conducted outside the U.S. in local and other currencies and for
purposes of financial reporting, the results are translated into U.S. Dollars based on currency exchange rates prevailing during
or at the end of the reporting period. We are also exposed to significant exchange rate risk when an operation has sales or
expense transactions in a currency that differs from its local, functional currency or when the sales and expenses are
denominated in different currencies. This risk applies to all of our foreign locations since a large percentage of their receivables
and payables are transacted in a currency other than their local currency, mainly U.S. Dollars. In those cases, when the
receivable is ultimately paid in less valuable Dollars, the foreign location realizes less proceeds in its local currency, which can
adversely impact its margins. The periodic re-measurement of these receivables and payables are recognized in our
Consolidated Statements of Operations. As the U.S. Dollar strengthens, our reported net revenues, operating profit (loss) and
assets are reduced because the local currency will translate into fewer U.S. Dollars, and during times of a weakening
U.S. Dollar, our reported expenses and liabilities are increased because the local currency will translate into more U.S. Dollars.
Translation of our Consolidated Statement of Operations into U.S. Dollars affects the comparability of revenue, expenses,
operating income (loss), and earnings (loss) per share between years. Because of the geographic diversity of our operations,
weaknesses in some currencies might be offset by strengths in others over time. However, fluctuations in foreign currency
exchange rates, particularly the weakening of the U.S. Dollar against major currencies, as shown in the table below, could