Tecumseh Products 2014 Annual Report Download - page 22

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We have additional credit facilities in Brazil, as well as in most other jurisdictions in which we operate outside the U.S. (See
Note 8 “Debt”, of the Notes to Consolidated Financial Statements in Item 8 of this report, for additional information.) Our
Brazilian and European subsidiaries periodically factor their accounts receivable with financial institutions for seasonal and
other working capital needs. Such receivables are factored both with limited and without recourse to us. Our Indian location
also has 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 from this location 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.
While we believe that current cash balances and available borrowings under our credit facilities and cash inflows related to
non-income tax refunds will produce adequate liquidity to implement our business strategy over the foreseeable future, there
can be no assurance that such amounts will ultimately be adequate if sales or economic conditions deteriorate. We anticipate
that we will continue to monitor non-essential uses of our cash balances until cash provided by normal operations improves.
Our business exposes us to potential litigation, such as product liability lawsuits or other lawsuits related to anti-competitive
practices and securities law or other types of business disputes. These claims can be expensive to defend and an unfavorable
outcome from any such litigation could adversely affect our cash flows and liquidity.
In addition, while our past business dispositions have improved our liquidity position, many of the sale agreements provide for
certain retained liabilities and indemnities including liabilities that relate to environmental issues and product warranties. While
we believe we have properly accounted for such contingent liabilities based on currently available information, future events
could result in the recognition of additional liabilities that could consume available liquidity and management attention.
For further information related to other factors that have had, or may in the future have, a significant impact on our business,
financial condition or results of operations, see “Cautionary Statements Relating To Forward-Looking Statements” above,
“Results of Operations” below, and “Risk Factors” in Item 1A of this report.
Commodities
Our results of operations are very sensitive to the prices of commodities due to the high content of copper and steel and the
increasing usage of aluminum in our compressor products.
The average market costs for the types of copper, steel and aluminum used in our products in 2014 as compared to 2013
fluctuated, with copper decreasing by 10.7%, steel decreasing by 8.8% and aluminum increasing by 10.0%. After consideration
of our hedge positions our average cost of copper and aluminum decreased in 2014 by 8.7% and 4.6%, respectively, compared
to 2013. Our average cost of copper in 2014 is lower and aluminum is higher in our results of operations when compared to
2013, primarily due to market price fluctuations. Volatility in market prices of these commodities create substantial challenges
to our ability to control the cost of our products, as the final product cost can depend greatly on our ability to secure optimally
priced derivative contracts.
Any increase in steel prices may have a negative impact on our product costs, as there is currently no well-established global
market for hedging against increases in the price of steel.
We have been proactive in addressing the volatility of copper and aluminum costs, by executing derivative contracts. As of
December 31, 2014, we had derivative contracts outstanding to cover approximately 31.9% and 22.0% of our projected 2015
copper and aluminum usage, respectively. Continued volatility of these costs could nonetheless have an adverse effect on our
results of operations both in the near and long term as our anticipated needs are not 100% hedged.
We expect to continue our approach of mitigating the effect of short-term price swings of commodities through the appropriate
use of hedging instruments, price increases and modified pricing structures with our customers, where available, to allow us to
recover our costs in the event that the prices of commodities escalate. Due to competitive markets for our finished products, we
are typically not able to quickly recover product cost increases through price increases or other cost savings. For a discussion
of the risks to our business associated with commodity price risk fluctuations, refer to “Quantitative and Qualitative
Disclosures about Market Risk – Commodity Price Risk” in Part II, Item 7A of this report.
Currency 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 80% of our sales activity originated outside the U.S., specifically Brazil, Europe