Tecumseh Products 2014 Annual Report Download - page 35

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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 interest rates swaps, commodity futures contracts and foreign currency forward exchange 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 our 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, as well as credit insurance we obtain in certain regions.
A portion of accounts receivable at our Brazilian subsidiary is sold with limited recourse at a discount. 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 limited and without recourse amounts, were $25.1 million and $42.7 million at
December 31, 2014 and 2013, respectively and the weighted average discount rate was 8.5% in 2014 and 6.1% in 2013. The
amount of factored receivables sold with limited recourse, which results in a contingent liability to us, was $3.7 million and
$12.1 million as of December 31, 2014 and 2013, 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 $6.0 million that would otherwise have been outstanding as receivables, under both of
these programs at December 31, 2014 and December 31, 2013, respectively and the weighted average discount rate was 9.0%
and 10.7% in 2014 and 2013, 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 Interbank Offered Rate or the BNDES TJLP rate. Our current borrowings in the U.S.
primarily bear interest at either LIBOR or an alternative base 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. During 2014, we began using interest rate
swaps to help us manage our U.S. interest rate risk. As of December 31, 2014, we held a total notional value of $8.3 million in
interest rate swaps, which covers 100% of the outstanding interest rate exposure of our PNC variable rate Term Loan. Based on
our debt and invested cash balances at December 31, 2014, a 1% increase in interest rates would increase interest expense for
the year by approximately $0.5 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, 2013, a 1% increase in interest rates would increase interest
expense for the year by approximately $0.7 million and a 1% decrease in interest rates would have an immaterial effect on
investments.
Commodity Price Risk – Our exposure to commodity price risk is related primarily to the price of copper, steel and aluminum,
as these are major components of our product cost.
We use commodity derivatives to provide us with greater flexibility in managing the substantial volatility in commodity
pricing. Our policy allows management to utilize commodity derivative contracts for a limited percentage of projected raw
materials requirements up to 18 months in advance. At December 31, 2014 and 2013, we held a total notional value of $8.9
million and $12.2 million, respectively, in commodity derivative contracts. The decline in notional value of our commodity