Tecumseh Products 2013 Annual Report Download

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2013 ANNUAL REPORT

Table of contents

  • Page 1
    2013 ANNUA L 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, 2013 Commission File Number 0-452 TECUMSEH PRODUCTS COMPANY (Exact name of ...

  • 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...

  • Page 5
    ... manufacturer of hermetically sealed compressors for residential and specialty air conditioning, household refrigerators and freezers and commercial refrigeration applications. Our products include air conditioning and refrigeration compressors, as well as condensing units, heat pumps and complete...

  • Page 6
    ... use in commercial refrigeration applications. Customer sales for these two products started in 2012. Major customers have tested these compressors and approved them for many of their applications. We expect to complete the transition from the prior models to the new products in 2014. Manufacturing...

  • Page 7
    ... for compressors and condensing units. The majority of our customers are for commercial refrigeration products, while our customer base for household refrigeration and freezer ("R&F") applications is much more concentrated. In 2013, our largest customers, Electrolux and Whirlpool Corporation, both...

  • Page 8
    ...Tecumseh" in combination with a blue Native American silhouette. Research and Development The ability to successfully bring new products to market in a timely manner has become a critical factor in competing in the compressor products business. System energy efficiency standards and new refrigerants...

  • Page 9
    ...as part of our overall efforts to restructure the business and improve our overall cost structure. We believe we generally have a good relationship with our employees. Available Information We provide public access to our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on...

  • Page 10
    ... 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. If we do not effectively improve productivity and restructure to reduce costs and...

  • Page 11
    ... replace defective products shipped to customers, compared to $6.4 million in 2012. 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...

  • Page 12
    ... 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 could be difficult and may limit our operations, as well as make the manufacture and sale of our products more...

  • Page 13
    ... the different geographic markets in which we sell our products. Future legislation may require substantial levels of expenditure to meet industry requirements, which could have a material adverse effect on our business, results of operations and financial condition. Price volatility of commodities...

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

  • Page 15
    ... our significant facilities by location, ownership and function as of December 31, 2013. Location Square Feet Ownership Use United States: Verona, Mississippi...Verona, Mississippi...Verona, Mississippi...Paris, Tennessee...Tecumseh, Michigan...Ann Arbor, Michigan (a)...Ann Arbor, Michigan...Brazil...

  • Page 16
    ... 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 SAFETY DISCLOSURES Not applicable. 14

  • Page 17
    ... Financial Statements (Part II, Item 8 of this Form 10-K) for a description of restrictions in our credit facility limiting our ability to pay dividends. As of the date of this report, we have no equity securities authorized for issuance under compensation plans, other than the 2014 Omnibus...

  • Page 18
    ... Index, and the S&P Composite Industry Index for the five year period from December 31, 2008 through December 31, 2013. Base Company / Index Period 2008 2009 2010 INDEXED RETURNS Years Ending 2011 2012 2013 Tecumseh Products Company - Class A...Tecumseh Products Company - Class B...S&P 500 Index...

  • Page 19
    ... 6. SELECTED FINANCIAL DATA The following is a summary of certain of our financial information. Years Ended December 31, (In millions, except share and per share data) 2013 2012 2011 (b) 2010 (a)(b) 2009 (a)(b) Net sales...$ 823.6 $ (745.5) Cost of sales ...Gross profit...78.1 (104.9) Selling and...

  • Page 20
    ... of countries where we operate. Furthermore, we continuously monitor future changes in local governmental regulations with regards to allowable refrigerants we can use in our compressors and condensing units. These future changes can also have a significant impact on our sales and our product costs...

  • Page 21
    ... that are served by manufacturing locations positioned throughout the world. Most of our manufacturing presence is in international locations. During each of 2013 and 2012, approximately 80% of our sales activity took place outside the U.S., including Brazil, Europe and India. As a result of these...

  • Page 22
    ... date of payment and the timing of receipt may be different than planned if the tax authorities change their pattern of payment or past practices. We realize that we may not generate cash flow from operating activities unless further restructuring activities are implemented or, sales or economic...

  • Page 23
    ... result of improved demand in Europe, partially offset by reduced sales 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...

  • Page 24
    ... unfavorable impact of these warranty claims was partially offset by other favorable changes in material and manufacturing costs of $1.9 million. Selling and administrative ("S&A") expenses decreased by $2.8 million from $107.7 million in 2012 to $104.9 million in 2013. As a percentage of net sales...

  • Page 25
    ... and freezers and the Midi compressor platform for use in commercial refrigeration have been launched and commercial sales started in the fourth quarter of 2011 to several customers. The full offering of these products to our remaining customers took longer than originally expected. Management...

  • Page 26
    ... former Tecumseh, Michigan facility, and $0.1 million of costs related to relocation of our corporate office. 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 $10.2 million in 2012...

  • Page 27
    ... 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 28
    ... 31, 2011 and continued cost containment measures. Increased accounts receivable resulted in a use of cash of $15.4 million during the year primarily as a result of our increased sales in the fourth quarter of 2012 compared to the fourth quarter of 2011. Our days sales outstanding increased by one...

  • Page 29
    ...8 of this report. In the U.S., we have also entered into an agreement with the Mississippi Development Authority for low interest rate financing up to $1.5 million in aggregate draws to be utilized to purchase specific capital equipment. This loan is to encourage business development in the State of...

  • Page 30
    ...as set forth in the agreement. The Factoring Facility is a limited recourse facility, which provides non-recourse (amounts covered by a credit insurance policy) and with-recourse financing (subject to GE's prior review and acceptance). We began using this facility in the fourth quarter of 2013. This...

  • Page 31
    ...other long-term liabilities net of current portion in the amount of $21.0 million which include product warranty and self-insured risk, deferred tax and environmental liabilities, because they do not have a definite payout by year. As of December 31, 2013, we had $3.2 million in outstanding domestic...

  • Page 32
    ...periods. See Note 5, "Pension and Other Postretirement Benefit Plans" of the Notes to Consolidated Financial Statements in Item 8 of this report for more information regarding costs and assumptions for postretirement benefits. Impairment of Long-Lived Assets It is our policy to review our long-lived...

  • Page 33
    ... periods. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements. OUTLOOK Information in this "Outlook" section should be read...

  • Page 34
    ... in manufacturing capacity, reductions in our workforce, completing sales margin review and rationalizing loss generating products, sales of assets, and other restructuring activities. These actions could result in significant restructuring or asset impairment charges, severance costs, losses...

  • Page 35
    ... covered by a credit insurance policy) and with-recourse financing (subject to GE's prior review and acceptance). We began using this facility in the fourth quarter of 2013. This committed factoring facility replaced a previously existing uncommitted factoring facility in Europe. In India, we have...

  • Page 36
    ... Based on our current level of commodity derivative 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 2013 and 2012 as indicated in...

  • 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
    ... of Stockholders' Equity for the Years Ended December 31, 2013, 2012 and 2011...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 statements or notes thereto. 36

  • Page 39
    ... with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2013, based on criteria...

  • Page 40
    ...Product warranty and self-insured risks...Pension liabilities ...Other liabilities...Total liabilities...Stockholders' Equity Class A common stock, $1 par value; authorized 75,000,000 shares; issued and outstanding 13,401,938 shares in 2013 and 2012...Class B common stock, $1 par value; authorized...

  • 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) 2013 2012 2011 Net sales ...Cost of sales...Gross profit ...Selling and administrative expenses...Other income (expense), net ......

  • Page 42
    TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in millions) For the Years Ended December 31, 2013 2012 2011 Net (loss) income ...$ 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) 2013 2012 2011 Cash Flows from Operating Activities: Net (loss) income ...Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities...

  • Page 44
    TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Accumulated Other Comprehensive Income/(Loss) (in millions) Class A $1 Par Value Class B $1 Par Value Paid in Capital Retained Earnings Total Stockholders' Equity Balance, January 1, 2011...$ Net loss ...

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

  • 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
    ...Gain on sale of Grafton ...Total (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...

  • Page 48
    ... hourly employees generally provide benefits of stated amounts 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...

  • Page 49
    ... in the pension and postretirement plan benefit obligations and fair value of plan assets for 2013 and 2012: Pension Benefit (in millions) 2013 2012 2013 Other Benefit 2012 Change in benefit obligation Benefit obligation at beginning of period ...$ Service cost ...Interest cost ...Plan amendments...

  • Page 50
    ... used to determine net periodic benefit costs for the years ended December 31: Pension Benefits 2013 2012 2013 Other Benefits 2012 U.S.-Based Plans: Discount rate ...Expected long-term return on plan assets ...Rate of compensation increase...Europe-Based Plans: Discount rate ...Expected long...

  • Page 51
    ... The following tables provide pension plan assets based on nature and risks as of December 31, 2013 and 2012 (See Note 13, "Fair Value Measurements", for additional information): Plan Assets at December 31, 2013 Total Fair Value Measurement Quoted Prices in Active Markets (Level 1) Significant Other...

  • Page 52
    ... 31, 2012, a receivable of $20.7 million was included in current assets and $18.8 million was included in non-current assets. The actual amounts received as expressed in U.S. dollars will vary depending on the exchange rate at the time of receipt or future reporting date. NOTE 7. Warranties Reserves...

  • Page 53
    ... amount and accrued product warranty costs for the years ended December 31, 2013, 2012 and 2011 are summarized as follows: (in millions) Balance at January 1, 2011 ...Settlements of warranty claims (in cash or in kind)...Current year accruals for warranties ...Effect of foreign currency translation...

  • Page 54
    ... borrowings under the PNC revolving facility totaled $8.0 million, borrowings under the PNC term loan were $15.0 million and we had $3.2 million in outstanding letters of credit. In April 2013, we signed a loan agreement with the Mississippi Development Authority ("MDA") for draws up to $1.5 million...

  • Page 55
    ... phantom shares were generally granted to key employees in the first quarter of each year and vested one-third each year over a 3 year period. SARs were granted with an exercise price equal to the closing price of our common stock on the date of the grant, as reported by the Nasdaq Stock Market and...

  • Page 56
    ... model as of the grant date. Our liability with regard to these awards is re-measured in each quarterly reporting period. The fair value of the phantom shares is based on the closing stock price on our Class A Common Stock on the last day of the period. At December 31, 2013 and December 31, 2012...

  • Page 57
    ... associated with a reduction in force at our Corporate location includes $1.35 million relating to our former President and Chief Executive Officer's separation. The following table reconciles cash activities for the years ended December 31, 2013 and 2012 for accrued impairments, restructuring...

  • Page 58
    ... statutory federal income tax rate of 35% to income before tax is as follows: (in millions) 2013 2012 2011 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...

  • Page 59
    ...) 2013 2012 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 60
    ... in the second quarter of 2012. Management is not aware of any uncertain tax positions taken or expected to be taken that would require recognition of a liability or asset for disclosure in the financial statements. On September 16, 2013, the Internal Revenue Service released final regulations...

  • Page 61
    ... for trading or speculative purposes. Our primary foreign currency exchange rate exposures are with the Brazilian Real, 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...

  • Page 62
    ... following table presents the fair value of our derivatives designated as hedging instruments in our Consolidated Balance Sheets as of December 31, 2013 and 2012: Asset (Liability) Derivatives December 31, 2013 December 31, 2012 (in millions) Financial Position Location Fair Value Financial Position...

  • Page 63
    ... 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 64
    ... & Power Train business segment, our reserves for contingent liabilities have not historically differed materially from estimates upon their final outcomes. However, discovery of new facts, developments in litigation, or settlement negotiations could cause estimates to differ materially from current...

  • Page 65
    ... from the United States Department of Justice Antitrust Division ("DOJ") and a formal request for information from the Secretariat of Economic Law of the Ministry of Justice of Brazil ("SDE") related to investigations by these authorities into possible anti-competitive pricing arrangements among...

  • Page 66
    ... the claim is time barred due to the expiration of the applicable statute of limitations. We intend to continue to vigorously contest the claim. On March 20, 2013, a proceeding was commenced by Electrolux Home Products Corporation N.V. in the Regional Court of Kiel, Germany against Tecumseh Europe...

  • Page 67
    ...External customer sales by geographic area are based upon the destination of products sold. In 2013 and 2012 one household refrigeration and freezer customer accounted for 8.3% and 7.2% of our consolidated sales, respectively. Long-lived assets by geographic area are based upon the physical location...

  • Page 68
    ... location for the years ended December 31, were as follows: (in millions) 2013 2012 2011 Customer sales by destination: North America United States ...Other North America...Total North America...South America Brazil...Other South America...Total South America...Europe ...Asia China ...India...

  • Page 69
    Property, plant and equipment at December 31, were as follows: (in millions) 2013 2012 2011 Property, plant and equipment, net: North America...$ Brazil ...India ...Europe ...Total property, plant and equipment, net...$ NOTE 18. Quarterly Financial Data - Unaudited 27.1 60.1 20.4 15.2 122.8 $ $...

  • Page 70
    ...timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. Management has evaluated the effectiveness of our internal control over financial reporting as of December 31, 2013. In making its assessment, management used...

  • Page 71
    ...management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal...

  • Page 72
    ... 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/prospectus relating to our 2014 annual meeting of shareholders scheduled to be held April...

  • Page 73
    ... 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 /prospectus relating to our 2014 annual...

  • Page 74
    ... thereunto duly authorized. TECUMSEH PRODUCTS COMPANY Date: March 4, 2014 By /s/ James J. Connor James J. Connor President, Chief Executive Officer and Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on...

  • Page 75
    ... to registrant's Annual Report on Form 10-K for the year ended December 31, 2011, File No. 0-452) Amendment No. 2 to Revolving Credit and Security Agreement, dated as of November 6, 2013, among Tecumseh Products Company, Tecumseh Compressor Company, Tecumseh Products of Canada, Limited, Evergy, Inc...

  • Page 76
    ... the year ended December 31, 2010, File No. 0-452) General Release of All Claims, dated as of March 6, 2013 between Tecumseh Products Company and Michael Nolke (management contract or compensatory plan or arrangement) (incorporated by reference to Exhibit 99.1 to registrant's Current Report on Form...

  • Page 77
    ... 99.2 to registrant's Current Report on Form 8-K dated March 1, 2014 and filed March 4, 2014, File No. 0-452) Liability Transfer and Assumption Agreement for Sheboygan River and Harbor Superfund Site dated March 25, 2003, by and between Tecumseh Products Company and Pollution Risk Services, LLC...

  • Page 78

  • Page 79
    ... 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 80
    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...