Tecumseh Products 2014 Annual Report Download

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2014 Annual Report

Table of contents

  • Page 1
    2014 Annual Report

  • Page 2

  • Page 3
    UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K (Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2014 Commission File Number TECUMSEH PRODUCTS COMPANY (Exact name of registrant ...

  • Page 4
    ... About Market Risk Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9A. Controls and Procedures Item 9B. Other Information Part III Item 10. Directors, Executive Officers and Corporate Governance...

  • Page 5
    ... refer to Tecumseh Products Company and its consolidated subsidiaries. We are a global manufacturer of hermetically sealed compressors for residential and specialty air conditioning, household refrigerators and freezers and commercial refrigeration applications. Our products include air conditioning...

  • Page 6
    ... in 2014, 2013, and 2012, respectively. The weakening of the EURO, Brazilian Real and the Indian Rupee have favorably impacted our competitiveness. We produce compressor products in North America in our Mississippi manufacturing facility and assembly plants in Canada and Mexico. Installed annual...

  • Page 7
    ... (e.g., compressors) and final products. We believe that we and Whirlpool, S.A (selling compressors under the brand name "Embraco") account for a majority of the compressors sold in Latin America for refrigeration and freezer applications. However, in prior years our market share in Brazil had...

  • Page 8
    ... the cost/benefit can be justified. We develop new product concepts at our research and development center in Ann Arbor, Michigan and in cooperation with project design teams located at our various regional manufacturing facilities. Compressor simulation software has been developed in-house which...

  • Page 9
    ...changing our current footprint, consolidating facilities, otherwise reducing our manufacturing capacity, selling assets or reducing the number of our employees. These actions could result in significant restructuring or asset impairment charges, severance costs, losses on asset sales and use of cash...

  • Page 10
    ...successfully develop products that comply with new regulations and timely identify, develop, manufacture, market, and sell new or improved products in these changing markets. If we fail to do so, our financial condition and results of operations could be adversely affected. Current and future global...

  • Page 11
    ...that were originally identified in 2013. We operate in highly competitive markets. All of the compressor and condensing unit markets in which we operate are highly competitive. We compete on the basis of efficiency, price, sound level, refrigerant, delivery, reliability, availability and service, as...

  • Page 12
    ...economic instability. International transactions may involve increased financial and legal risks due to differing legal systems and customs in foreign countries. The ability to manage these risks can be difficult and may limit our operations, as well as cause the manufacture and sale of our products...

  • Page 13
    ... global market for hedging against increases in the cost of steel. Continued volatility of commodities or failure of our initiatives to generate cost savings or improve productivity may negatively impact our results of operations. Our hedging activities might not be successful to manage our costs...

  • Page 14
    ...could significantly impact our reported financial results and the comparability of financial statements. We constantly monitor new accounting proposals under development by the standard setting bodies. Potential future changes in accounting rules and regulations could be time-consuming and costly to...

  • Page 15
    ... as of December 31, 2014. Location Square Feet Ownership Use United States: Verona, Mississippi Tupelo, Mississippi Tupelo, Mississippi Paris, Tennessee (a) Tecumseh, Michigan Ann Arbor, Michigan (b) Ann Arbor, Michigan Brazil: Sao Carlos, Brazil Plant 1 Sao Carlos, Brazil Plant 2 France: Cessieu...

  • Page 16
    ITEM 3. LEGAL PROCEEDINGS See "Note 16 - Commitments and Contingencies - Litigation" of the Notes to Financial Statements (Part II, Item 8 of this Form 10-K) for information regarding legal proceedings in which we are involved, which is incorporated into this Item 3 by reference. ITEM 4. MINE ...

  • Page 17
    ... Stock ceased trading on May 1, 2014. See "Note 9, Stockholders' Equity" of the Notes to Consolidated Financial Statements (Part II, Item 8 of this Form 10K), for additional information. Range of Common Stock Prices and Dividends for 2013 Sales Price Class A Class B Low High Low Quarter Ended March...

  • Page 18
    ... Industry Index for the five year period from December 31, 2009 through December 31, 2014. Base Company / Index Period 2009 2010 2011 INDEXED RETURNS Years Ending 2012 2013 2014 Tecumseh Products Company - Common Shares (a) Tecumseh Products Company - Class A (b) Tecumseh Products Company...

  • Page 19
    ...of certain of our financial information. Years Ended December 31, (In millions, except share and per share data) 2014 (a) 2013 2012 2011 (b) 2010 (b)(c) Net sales Cost of sales Gross profit Selling and administrative expenses Other income (expense), net Impairments, restructuring charges, and other...

  • Page 20
    ...iii) current and future global or regional political and economic conditions, including housing starts, and the condition of credit markets, which may magnify other risk factors; iv) the success of our effort to effectively improve productivity and restructure our operations in order to reduce costs...

  • Page 21
    ... Chief Restructuring Officer as well as a new Chief Executive Officer. Additional restructuring actions may be necessary during the next several quarters. These restructuring actions could result in significant restructuring or asset impairment charges, severance costs, losses on asset sales and use...

  • Page 22
    ...Exchange The compressor industry, and our business in particular, are characterized by global and regional markets that are served by manufacturing locations positioned throughout the world. Most of our manufacturing presence is in international locations. During each of 2014 and 2013, approximately...

  • Page 23
    ... environment in Brazil and soft market conditions in North America. Sales at our North American location also declined as a result of ceasing production of a non-core product as we sold the related fixed assets in the first quarter of 2014. Sales of compressors used in commercial refrigeration and...

  • Page 24
    ...changes in currency exchange effects of $8.8 million and net price increases of $8.0 million. Warranty claims in 2014 compared to 2013 was favorable $3.4 million as we are experiencing lower claims in India and Europe related to quality concerns. Selling and administrative ("S&A") expenses decreased...

  • Page 25
    ... in North America due to soft market conditions in the first half of 2013, specifically in the trucking industry, as well as lower volumes in India in the second half of the year related to a warranty claim that originated in the second quarter. Sales of compressors used in household refrigeration...

  • Page 26
    ... million), Indian ($0.5 million) and Corporate ($0.3 million) locations. Refer to Note 11, "Impairments, Restructuring Charges and Other Items" of the Notes to Consolidated Financial Statements in Item 8 of this report. Interest expense was $9.2 million in 2013 compared to $10.2 million in 2012. Our...

  • Page 27
    ... benefit plans (see Note 5 "Pension and Other Postretirement Benefit plans" of the Notes to Consolidated Financial Statements in Item 8 of this report for additional information), non-cash share-based compensation of $0.8 million and a non-cash loss on the disposal of property and equipment of...

  • Page 28
    ... to severance and business re-engineering accruals, as well as increases in our product warranty accrual for new claims at our French and Indian locations in 2013. We saw a decrease in payable days outstanding of 4 days to 59 days at December 31, 2013. Recoverable non-income taxes provided cash of...

  • Page 29
    ... capital needs and government sponsored borrowings which provide advantageous lending rates. (See Note 8 "Debt", of the Notes to Consolidated Financial Statements in Item 8 of this report for additional information.) For the for the years ended December 31, 2014 and 2013 our average outstanding...

  • Page 30
    ..., Tennessee facility, which houses a non-core business that we sold during 2014, is also not included. We have not included, in the table above, other long-term liabilities net of current portion in the amount of $20.9 million which include product warranty and self-insured risk, deferred tax and...

  • Page 31
    ... position and future operating results. Such events could include a loss of a significant customer or market share, the decision to relocate production to other locations or the decision to cease production of specific models of products. We recognize losses related to the impairment of long-lived...

  • Page 32
    ... are recorded at fair value on the date of grant and, for cashsettled awards, re-measured quarterly over the life of the award. The awards are expensed in the Consolidated Statements of Operations over the requisite employee service period. Our plan prior to April 30, 2014 authorized two types of...

  • Page 33
    ... expected price increases to our customers, continued economic impact from the Indian quality issue, the changing regulatory landscape, estimated foreign currency exchange rate effects, as well as our continued efforts in sales and marketing. If our key markets become weaker than we currently expect...

  • Page 34
    ... next several quarters and might include changing our current footprint, consolidation of facilities, other reductions in manufacturing capacity, reductions in our workforce, sales of assets and other restructuring activities. These restructuring actions could result in significant restructuring or...

  • Page 35
    ... 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...

  • Page 36
    ...lower market prices of copper and steel at December 31, 2014, compared to December 31, 2013 and lower than expected sales. Based on our current level of commodity derivative contracts, a 10% decrease in the price as of December 31, of copper, or aluminum (there are currently no steel contracts) used...

  • Page 37
    ... Dollars. However, these hedging programs only reduce exposure to currency movements over the limited time frame of up to eighteen months. Ultimately, long-term changes in currency exchange rates have lasting effects on the relative competitiveness of operations located in certain countries versus...

  • Page 38
    ... 2014, 2013 and 2012 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2014, 2013 and 2012 Notes to Consolidated Financial Statements 37 38 39 40 41 42 43 All schedules are omitted because they are not applicable or the required information is shown in the financial...

  • Page 39
    ... the financial position of Tecumseh Products Company and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 in conformity with accounting principles generally accepted in the United...

  • Page 40
    ... liabilities Total current liabilities Long-term borrowings Product warranty and self-insured risks Pension liabilities Other liabilities Total liabilities Stockholders' Equity Common Shares, no par value; authorized 100,000,000 shares; issued and outstanding 18,479,684 shares in 2014 Class A common...

  • Page 41
    TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 31, (in millions, except share and per share data) 2014 2013 2012 Net sales Cost of sales Gross profit Selling and administrative expenses Other income (expense), net Impairments, ...

  • Page 42
    TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in millions) For the Years Ended December 31, 2014 2013 2012 Net (loss) income Paid in capital Other comprehensive (loss) income, before tax: Foreign currency translation adjustments Pension and ...

  • Page 43
    TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, (in millions) 2014 2013 2012 Cash Flows from Operating Activities: Net (loss) income Adjustments to reconcile net (loss) income to net cash provided by operating activities: ...

  • Page 44
    TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Accumulated Other Comprehensive Income/(Loss) (in millions) Common Shares Class A $1 Par Value Class B $1 Par Value Paid in Capital Retained Earnings Total Stockholders' Equity Balance, January 1, 2012...

  • Page 45
    ... Business Description - Tecumseh Products Company and Subsidiaries (the "Company", "we", "us" or "our") is a global manufacturer primarily of hermetically sealed compressors for (i) commercial refrigeration applications, including walk-in coolers and freezers, ice makers, dehumidifiers, water...

  • Page 46
    ...estimated cost of maintaining product warranties at the time the product is sold based upon historical claims experienced for each major product line. For most of our customers, warranty coverage on our compressors is provided for a period of twelve months to three years from the date of manufacture...

  • Page 47
    ... loss from discontinued operations, net of tax $ For the year ended December 31, 2012, legal fee reimbursements were for the Platinum lawsuit received under our Directors and Officers insurance. We sold our Grafton facility in the fourth quarter of 2012 for net cash consideration of $0.9 million...

  • Page 48
    ... in 2014 is due to one of our U.S. locations disposing of some previously reserved inventory in the second quarter of 2014. Finished goods are net of a $2.0 million and $1.7 million reserve for obsolete and slow moving inventory and lower of cost or market at December 31, 2014 and 2013, respectively...

  • Page 49
    ... for each year of service. With regard to our retiree health care benefit plan, in the second quarter of 2012 we informed employees and current retirees that (1) effective May 1, 2012 we would no longer provide life insurance benefits to eligible current and future salaried retirees of the Company...

  • Page 50
    ...period Service cost Interest cost Plan amendments Actuarial loss (gain) Benefit payments Special termination benefits Reclassification adjustment Settlements Curtailments Effect of changes in exchange rate Benefit obligation at measurement date Change in plan assets Fair value at beginning of period...

  • Page 51
    ... Accumulated benefit obligation Fair value of plan assets Components of net periodic expense (benefit) during the year: $ $ $ 176.8 172.6 146.2 $ $ $ 164.8 160.9 144.0 Pension Benefits (in millions) 2014 2013 Other Benefits 2012 2014 2013 2012 Service cost Interest cost Expected return on...

  • Page 52
    ... The following tables provide pension plan assets based on nature and risks as of December 31, 2014 and 2013 (See Note 13, "Fair Value Measurements", for additional information): Plan Assets at December 31, 2014 Total Fair Value Measurement Quoted Prices in Active Markets (Level 1) Significant Other...

  • Page 53
    ... these refunds via alternate proceedings. In India, we participate in a number of government sponsored tax incentive programs, which result in refundable non-income taxes. Following is a summary of the recoverable non-income taxes recorded on our balance sheet at December 31, 2014 and 2013: 51

  • Page 54
    ... in the carrying amount and accrued product warranty costs for the years ended December 31, 2014, 2013 and 2012 are summarized as follows: (in millions) Balance at January 1, 2012 Settlements made (in cash or in kind) Current year accrual Effect of foreign currency translation Balance at December...

  • Page 55
    ... (in millions) 2014 Weighted Avg. Int. Rate 2013 Weighted Avg. Int. Rate Short-term borrowings Lines of credit Revolving credit facility Capital lease obligations Other debt Current maturities of long-term debt Total short-term borrowings Long-term borrowings Lines of credit Term Loan Capital lease...

  • Page 56
    ... credit facilities. In the second quarter of 2014, our Brazilian location was approved for a special term low interest rate loan from a governmental agency: FINEP. This agency provides funding to companies to further innovation and research and development spending in Brazil. Our Brazilian location...

  • Page 57
    ... on the last day of the period. At December 31, 2014 and December 31, 2013, the applicable closing stock price was $3.09 and $9.05, respectively. A summary of activity under the plans during 2014 is as follows: SARs: Number of awards Weighted average exercise price per share Outstanding at January...

  • Page 58
    ...last day of the period, using a Black-Scholes valuation model. The fair value of each SAR was estimated as of December 31, 2014, 2013 and 2012 using the following assumptions: 2014 0.04%-0.67% 0.0% 0.2-2.0 years 53.58% 2013 0.16%-0.78% 0.0% 1.2-3.0 years 62.21% 2012 0.27%-0.52% 0.0% 2.2-4.0 years 63...

  • Page 59
    ..., and other items are as follows: For the years ended December 31, (in millions) 2014 2013 2012 Severance, restructuring costs, and special termination benefits Business process re-engineering Environmental reserve for sold building Curtailment and settlement gain on postretirement benefits Refund...

  • Page 60
    ... tax is as follows: (in millions) 2014 2013 2012 Income taxes expense (benefit) at U.S. statutory rate State and local income taxes, net of federal benefit Foreign tax rate differential Valuation allowances Tax attribute expiration Intra-period allocation Release of uncertain tax positions Tax...

  • Page 61
    ... as follows: (in millions) 2014 2013 Deferred tax assets: Other postretirement liabilities Product warranty and self-insured risks Tax carry forwards Other accruals and miscellaneous Subtotal Valuation allowance Total deferred tax assets Deferred tax liabilities: Property, plant & equipment Pension...

  • Page 62
    ... assumptions that market participants would use in pricing the asset or liability. Level 3 Except for derivative instruments, pension liabilities and pension plan assets, the Company has no financial assets and liabilities that are carried at fair value at December 31, 2014 and 2013. The carrying...

  • Page 63
    ...the Euro, and the Indian Rupee, against the U.S. Dollar. Our primary commodity risk is the price risk associated with forecasted purchases of materials used in our manufacturing process. Our primary variable interest rate exposure is with the PNC term loan. We assess the effectiveness of our futures...

  • Page 64
    ... following table presents the fair value of our derivatives designated as hedging instruments in our Consolidated Balance Sheets as of December 31, 2014 and 2013: Asset (Liability) Derivatives December 31, 2014 December 31, 2013 (in millions) Financial Position Location Fair Value Financial Position...

  • Page 65
    ... recognized partially as a part of "Cost of sales" and "Other income" on our Consolidated Statements of Operations and partially capitalized as part of "Inventories" on our Consolidated Balance Sheets. (See Note 5, "Pension and Other Postretirement Benefit Plans" for additional information.) NOTE 16...

  • Page 66
    ... $7.9 million outstanding letters of credit at December 31, 2014 and 2013, respectively. Litigation General We are party to litigation in the ordinary course of business. Litigation occasionally involves claims for punitive as well as compensatory damages arising out of use of our products. Although...

  • Page 67
    ... reported, Tecumseh Products Company, Tecumseh Compressor Company, Tecumseh do Brasil, Ltda, and Tecumseh do Brasil U.S.A. LLC entered into a settlement agreement with the direct purchaser plaintiffs in the U.S. actions on June 24, 2010 to resolve claims in the action in order to avoid the costs...

  • Page 68
    .../ Warranty Claim On July 31, 2014, Tecumseh Europe S.A. was served a writ (on the merits) before the Commercial court of La Roche-sur-Yon by the five companies of the Atlantic Industrie SAS group. The dispute alleges product failures associated with the supply by Tecumseh Europe of evaporating units...

  • Page 69
    ... estimated costs associated with remediation activities at our former Tecumseh, Michigan facility. We have met with the United States Environmental Protection Agency ("USEPA") several times and most recently in early 2014, to discuss the overall project at this site. On September 30, 2013, we...

  • Page 70
    ... of products sold. In 2014 and 2013 one household refrigeration and freezer customer accounted for 6.3% and 8.3% of our consolidated sales, respectively. Long-lived assets by geographic area are based upon the physical location of the assets. Business Segment Information Assets, capital expenditures...

  • Page 71
    ... Information Customer sales by geographic location for the years ended December 31, were as follows: (in millions) 2014 2013 2012 Customer sales by destination: North America United States Other North America Total North America South America Brazil Other South America Total South America Europe...

  • Page 72
    ... ASU No. 2014-08, Presentation of Financial Statements and Property, Plant, and Equipment: Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This ASU is effective in the first quarter of 2015 for public with calendar year ends. Management believes that ASU No...

  • Page 73
    ... have a material effect on the financial statements. Management has evaluated the effectiveness of our internal control over financial reporting as of December 31, 2014. In making its assessment, management used the framework described in Internal Control - Integrated Framework (2013 version) issued...

  • Page 74
    ... FIRM Board of Directors and Stockholders Tecumseh Products Company We have audited the internal control over financial reporting of Tecumseh Products Company (a Michigan corporation) and subsidiaries (the "Company") as of December 31, 2014, based on criteria established in the 2013 Internal Control...

  • Page 75
    ... pursuant to Item 405 of Regulation S-K will be set forth under the caption "Information Concerning the Board of Directors - Section 16(a) Beneficial Ownership Reporting Compliance" in our definitive proxy statement relating to our 2015 annual meeting of shareholders scheduled to be held April 29...

  • Page 76
    ... AND SERVICES The information required to be reported pursuant to Item 9(e) of Schedule 14A will be set forth under the caption "Proposal No. 3 - Ratification of Appointment of Independent Accountant - Audit and Non-Audit Fees" in our definitive proxy statement relating to our 2015 annual meeting...

  • Page 77
    ... 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 Date: March 4, 2015 By /s/ Harold M. Karp Harold M. Karp President and Chief Executive Officer Pursuant to the requirements of the Securities...

  • Page 78
    ... dated as of January 22, 2014, among Tecumseh Products Company, Tecumseh Compressor Company, Tecumseh Products of Canada, Limited, Evergy, Inc. and PNC Bank, National Association (incorporated by reference to Exhibit 4.7 to registrant's Annual Report on Form 10-K for the year ended December 31, 2013...

  • Page 79
    ... Compressor Company, Tecumseh Products of Canada, Limited, Evergy, Inc. and PNC Bank, National Association (incorporated by reference to Exhibit 4.3 to registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, File No. 001-36417) Factoring Agreement, dated June 19, 2013...

  • Page 80
    ... to Exhibit 99.2 to registrant's Current Report on Form 8-K dated March 1, 2014 and filed March 4, 2014, File No. 0-452) General Release of All Claims dated June 27, 2014 between Tecumseh Products Company and James J. Connor (management contract or compensatory plan or arrangement) (incorporated by...

  • Page 81
    ...Companies, Inc. (incorporated by reference to Exhibit 10.27 to registrant's Annual Report on Form 10-K for the year ended December 31, 2004, File No. 0-452) Agreement with AP Services, LLC and AlixPartners, LLP dated December 7, 2006 (incorporated by reference to Exhibit 10.1 to registrant's Current...

  • Page 82

  • Page 83
    ... Reports and information are also available through our web site at www.tecumseh.com Investment Community Questions Investor Relations Tecumseh Products Company 5683 Hines Drive, Ann Arbor, MI 48108 (734) 585-9507 Annual Meeting For more information about the date, time and location of our Annual...

  • Page 84
    Tecumseh Products Company is a global manufacturer of hermetically sealed compressors for residential and specialty air conditioning, household refrigerators and freezers, and commercial refrigeration applications, including air conditioning and refrigeration compressors, as well as condensing units...