Tecumseh Products 2014 Annual Report Download - page 36

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contracts is primarily due to downward trends in base metal market prices and increased aluminum usage, which is lower in
cost. Derivatives are designated at the inception of the contract as cash flow hedges against the future prices of copper and
aluminum, and are accounted for as hedges on our Consolidated Balance Sheets unless they are subsequently de-designated.
While the use of derivatives 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, 2014, we have been proactive in addressing the volatility of copper and aluminum prices, including
executing derivative contracts to cover approximately 31.9% and 22.0% of our anticipated copper and aluminum requirements
for 2015, respectively.
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.
Based on our current level of activity, and before consideration of our outstanding commodity derivatives contracts, a 10%
increase in the price, as of December 31, of copper, steel or aluminum used in production of our products would have adversely
affected our annual operating profit on an annual basis as indicated in the table below:
10% increase in commodity prices
(in millions) 2014 2013
Copper $(2.2)$ (4.4)
Steel (7.2)(10.0)
Aluminum (0.5)(0.6)
Total $(9.9)$ (15.0)
The decreases shown in the table above are primarily due to 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 in production of our products would have resulted in losses under these
contracts that would adversely impact our annual operating results for 2014 and 2013 as indicated in the table below:
10% decrease in commodity prices
(in millions) 2014 2013
Copper $ (0.7)$ (1.1)
Steel ——
Aluminum (0.1)(0.2)
Total $(0.8)$ (1.3)
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. 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
are transacted in a currency other than their local currency, mainly U.S. Dollars. In those cases, if the receivable is ultimately
paid in less valuable U.S. Dollars, the foreign location realizes less proceeds in its local currency, which can adversely impact
its margins. The periodic adjustment of these receivable balances based on the prevailing foreign exchange rates is 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 Statements 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
materially affect our financial results.