Correspondence
November 2, 2010
United States Securities and Exchange Commission
Division of Corporation Finance
100 F Street, N.E., Mail Stop 4631
Washington, DC 20549-4631
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Attn:
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Al Pavot, Staff
Terence OBrien, Branch Chief |
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RE:
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Tecumseh Products Company |
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Form l0-K filed March 11, 2010 |
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Form 10-Q filed /August 5, 2010 |
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File No. 0-452 |
Dear Mr. Pavot and Mr. OBrien:
This letter is in response to your comment letter dated October 19, 2010 to Tecumseh Products
Company. Your comments are reproduced below, followed in each case by Tecumsehs response in
italics.
June 30, 2010 Form 10-Q
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1. |
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Based on the disclosures in Note 5, it appears that the $7 million curtailment gain and
the $29.2 million reversion charge materially impacted your operating results. Please
provide us with an analysis which clearly shows how these amounts were calculated. For
example, please describe the nature of the $15.6m in previously deferred settlement losses
and the basis for recognition in the March 31, 2010 quarter. Please also discuss the
enhanced termination benefits and the factors considered in determining the timing of this
charge. Please provide relevant details concerning the reversion. Please reference the
applicable accounting literature in a manner which clearly indicates your compliance
therewith regarding the curtailment and the reversion. We may have further comments. |
Answer:
a) $7m Curtailment Gain
In 2010, we amended two of our Post Employment Benefit Plans to terminate all future benefit
(medical and life insurance) for employees at a plant that closed and a business that was
sold. In accordance with ASC 715-60-, a curtailment is an event that significantly reduces
the expected years of future service of active plan participants or eliminates the accrual
of defined benefits for some or all of the future services of a significant number of active
plan participants and the obligation under these plans is complete. Our obligations under
these plans were completed during the second quarter. As a result we recorded a $7.0
million curtailment gain as follows:
Securities and Exchange Commission
November 2, 2010
Page 2 of 4
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Elimination of liability for future benefits |
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$ |
1.5m |
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Reversal of Accumulated Other Comprehensive Income
(prior service cost being amortized into income) |
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$ |
5.5m |
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Total curtailment gain |
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$ |
7.0m |
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The detailed analysis of the amounts involved actuarial calculations performed by our
independent actuaries, Watson Wyatt & Company (a Towers Watson company).
b) Pension Reversion Hourly Plan
Tecumseh Products made a decision to terminate its hourly pension plan as a result of plant
closings. The Company sought approval from the PBGC and the IRS to terminate the plan. Due
to the overfunded status of the Plan at termination, the Company decided to provide the
participants of the plan with enhanced termination benefits; specifically certain
participants were granted a flat percentage increase in their accrued benefits in an amount
such that the cost of such enhanced termination benefits would equal 20% of the excess
assets.
Participants were provided with the option to receive their benefits (both their original
benefits and the enhanced termination benefits) in either a lump sum payment or in the form
of an annuity. Annuity contracts were purchased on March 17, 2010 for participants who did
not elect lump sum payments. Per ASC 715 Compensation Retirement Benefits: recognition
of gains or losses relating to settlements when a non-participating annuity is used as the
means for settling the plan is appropriate once the employer has been irrevocably relieved
of primary responsibility of the plan (it should also be noted that a non-participating
annuity satisfies the settlement criteria of absolving the Company from significant future
risk and primary responsibility related to the obligations arising from the pension).
After the payment of all plan benefits upon the plans termination, including the
enhanced benefits, which occurred on March 17, 2010, the remaining excess assets reverted to
the Company in accordance with the terms of the plan document.
The impact of the reversion of the Hourly Union Pension Plan on our financial statements can
be summarized as follows:
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Q1 |
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Enhanced |
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12/31/09 |
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activity |
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Benefits |
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Settlement |
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Reversion |
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3/31/10 |
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Assets |
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$ |
71.2M |
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$ |
1.3 |
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(13.6 |
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(4.4 |
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(54.5 |
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- |
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Liabilities |
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- |
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AOCI |
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$ |
11.2 |
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$ |
(11.2 |
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- |
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P&L-Operating Costs |
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$ |
(1.3 |
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$ |
(1.3 |
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P&L-Impairments, restructuring
charges, and other
items |
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$ |
13.6 |
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$ |
15.6 |
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$ |
29.2 |
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Securities and Exchange Commission
November 2, 2010
Page 3 of 4
The charge to our operating results can be summarized as follows from the table above:
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Enhanced termination benefits |
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13.6m |
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Losses included in Accumulated Other Comprehensive Income
(Previously deferred settlement losses which represent prior service
costs and actuarial losses that were being amortized into income over
time; the expense was accelerated upon termination and settlement of the plan) |
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$ |
11.2m |
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Settlement cost of annuity contract purchase |
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$ |
4.4m |
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Total expense recognized |
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$ |
29.2m |
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The detailed analysis of the amounts involved actuarial calculations performed by our
independent actuaries, Watson Wyatt & Company (a Towers Watson company) and the cost of
annuities based on market prices quoted by insurance companies.
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Based on the disclosure in Note 8 it is not clear whether you have any additional
borrowing capacity under your existing credit facilities. Given your substantial operating
cash flow deficit, this issue should be clarified in your future filings so that readers can
fully understand your available sources of liquidity. See Section 501.13 of Financial
Reporting Codification. |
Answer:
We expect to make the following disclosure in Note 8 of our Notes to Consolidated Financial
Statements in our Quarterly Report on Form 10-Q for the quarter ended September 30, 2010:
We have various borrowing arrangements at our foreign subsidiaries to support working
capital needs and government sponsored borrowings which provide advantageous lending rates.
In Europe, based upon exchange rates as of September 30, 2010, we have an unsecured,
uncommitted discretionary credit facility of $2.7 million that expires on January 27, 2011.
Historically we have been able to extend this facility when it expires, but such extension
is at the discretion of the bank. Our borrowings under this facility, based the exchange
rate as of September 30, 2010, totaled $2.7 million with no availability for additional
borrowings. There are no restrictive covenants on this credit facility.
In Brazil, based upon the exchange rates as of September 30, 2010, we have uncommitted,
discretionary revolving credit facilities with several local private Brazilian banks (most
of which are guaranteed by the Brazilian government) for an aggregate maximum of $61.4
million, subject to a borrowing base formula computed on a monthly basis. These facilities
are secured by a portion of our accounts receivable and inventory balances and expire at
various times from November 18, 2010 through July 13, 2013. Historically we have been able
to enter into replacement facilities when these facilities expire, but such replacements are
at the discretion of the banks. Lenders determine, in their discretion, whether to make new
advances with respect to each draw on such facility and there are no restrictive covenants
on these credit facilities. Our borrowings under these facilities totaled $47.4 million
based upon exchange rate as of September 30, 2010, with an additional $14.0 million
available for borrowing, based on our accounts receivable and inventory balances and
exchange rates as of September 30, 2010.
Securities and Exchange Commission
November 2, 2010
Page 4 of 4
In India, based upon exchange rates as of September 30, 2010, we have an aggregate maximum
of $15.3 million of revolving credit facilities subject to a borrowing base formula computed
on a monthly basis and secured by land, building and equipment, inventories and receivables. The arrangements
expire at various times from January 2011 through April 2011. Historically we have been
able to renew these facilities when they expire, but such renewal is at the discretion of
the banks. Our borrowings under these facilities, based the exchange rate as of September
30, 2010, totaled $13.8 million, and based on the exchange rate and our borrowing base as of
September 30, 2010, we had an additional $1.5 million available for borrowing under these
facilities. There are no restrictive covenants on these credit facilities, except that
permission must be received from the bank in order to dispose of certain assets.
Our consolidated borrowings under these arrangements totaled $63.9 million at September 30,
2010. Our weighted average interest rate for these borrowings was 6.1% for the nine months
ended September 30, 2010 and 8.9% for the year ended December 31, 2009.
In addition, we plan to include a cross-reference in our liquidity section to Note 8 in our
financials as follows:
Liquidity Sources
Credit Facilities and Cash on Hand
In addition to cash on hand, cash provided by operating activities and cash inflows related
to taxes, when available, we use foreign bank debt and other foreign credit facilities such
as accounts receivable discounting programs to fund our capital expenditures and working
capital requirements and, when necessary, to address operating losses. For the three and
nine months ended September 30, 2010 and the full year ended December 31, 2009, our average
outstanding debt balance was $62.6 million, $45.1 million and $34.8 million, respectively.
The weighted average interest rate was 7.3% and 6.1% for the three and nine months ended
September 30, 2010 and 8.9% for the year ended December 31, 2009.
As of September 30, 2010, our cash and cash equivalents on hand was $70.8 million. Our
borrowings under current credit facilities at foreign subsidiaries totaled $63.9 million at
September 30, 2010, with an uncommitted additional borrowing capacity of $15.5 million. For
a more detailed discussion of our foreign credit facilities, refer to Notes 8 to the
consolidated financial statements in Item 1 of this report. Any cash we hold that is not
utilized for day-to-day working capital requirements is primarily invested in secure,
institutional money market funds, the majority of which are with JPMorgan Chase Bank, N.A.
Money market funds 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.
Tecumseh Products Company acknowledges that:
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The Company is responsible for the adequacy and accuracy of the disclosure in the
filing; |
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Staff comments or changes to disclosure in response to staff comments do not foreclose
the Commission from taking any action with respect to the filing; and |
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The Company may not assert staff comments as a defense in any proceeding initiated by
the Commission or any person under the federal securities laws of the United States. |
Regards,
TECUMSEH PRODUCTS COMPANY
James J. Conner,
Vice President, Treasurer and
Chief Financial Officer
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Cc:
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V. Tomkinson, Grant Thornton LLP |
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R. Krueger, Honigman Miller Schwartz and Cohn LLP |