10-Q 1 k65990e10-q.txt FORM 10-Q FOR QUARTER ENDING SEPTEMBER 30, 2001 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 For the quarterly period ended September 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 For the transition period from ______to ______ COMMISSION FILE NUMBER: 0-452 TECUMSEH PRODUCTS COMPANY (Exact name of registrant as specified in its charter) MICHIGAN 38-1093240 (State of Incorporation) (IRS Employer Identification Number) 100 EAST PATTERSON STREET TECUMSEH, MICHIGAN 49286 (Address of Principal Executive Offices) Telephone Number: (517) 423-8411 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class of Stock Outstanding at November 1, 2001 -------------------------------------------------------------------------------- Class B Common Stock, $1.00 par value 5,077,746 Class A Common Stock, $1.00 par value 13,401,938
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART I. FINANCIAL INFORMATION - ITEM 1 CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited and subject to year end adjustments)
(Dollars in millions) September 30, December 31, 2001 2000 ---------------------------- ASSETS Current Assets: Cash and cash equivalents $ 264.9 $ 268.2 Accounts receivable, less allowances of $6.7 million and $6.3 million 227.5 265.6 Inventories 260.9 274.9 Deferred and recoverable income taxes 68.5 56.4 Other current assets 16.1 17.6 -------- -------- Total current assets 837.9 882.7 Property, plant, and equipment, net 430.2 444.7 Goodwill 44.9 46.8 Deferred income taxes 58.1 41.1 Prepaid pension expense 128.8 123.8 Other assets 14.9 14.0 -------- -------- Total assets $1,514.8 $1,553.1 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable, trade $ 105.0 $ 123.5 Income taxes payable 8.7 5.5 Short-term borrowings 7.4 6.3 Accrued liabilities 141.4 145.0 -------- -------- Total current liabilities 262.5 280.3 Long-term debt 13.8 14.2 Other postretirement benefit liabilities 202.6 189.9 Product warranty and self-insured risks 22.3 24.5 Accrual for environmental matters 32.5 33.3 Pension liabilities 15.7 15.5 -------- -------- Total liabilities 549.4 557.7 -------- -------- Stockholders' Equity: Class A common stock, $1 par value; authorized 75,000,000 shares; issued and outstanding 13,401,938 shares in 2001 and 13,410,438 shares in 2000 13.4 13.4 Class B common stock, $1 par value; authorized 25,000,000 shares; issued and outstanding 5,080,746 shares in 2001 and 5,470,146 shares in 2000 5.1 5.5 Retained earnings 1,051.4 1,050.2 Accumulated other comprehensive income (104.5) (73.7) -------- -------- Total stockholders' equity 965.4 995.4 -------- -------- Total liabilities and stockholders' equity $1,514.8 $1,553.1 ======== ========
The accompanying notes are an integral part of these Consolidated Financial Statements. Page 2 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART I. FINANCIAL INFORMATION - ITEM 1 CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited and subject to year end adjustments)
(Dollars in millions except per share data) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------- --------------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Net sales $ 313.1 $ 348.8 $ 1,099.8 $ 1,291.4 Cost of sales and operating expenses 263.4 305.6 943.2 1,098.7 Selling and administrative expenses 28.0 27.1 89.6 90.6 Nonrecurring charges 29.3 -- 29.3 33.5 ---------- ---------- ---------- ---------- Operating income (loss) (7.6) 16.1 37.7 68.6 Interest expense (0.9) (1.6) (3.4) (4.5) Interest income and other, net 7.4 6.8 16.6 19.8 ---------- ---------- ---------- ---------- Income (loss) before taxes (1.1) 21.3 50.9 83.9 Taxes on income (6.3) 7.5 14.2 32.6 ---------- ---------- ---------- ---------- Net income $ 5.2 $ 13.8 $ 36.7 $ 51.3 ========== ========== ========== ========== Basic and diluted earnings per share $ 0.28 $ 0.73 $ 1.97 $ 2.65 ========== ========== ========== ========== Weighted average shares (In thousands of shares) 18,545 19,052 18,650 19,330 ========== ========== ========== ========== Cash dividends declared per share $ 0.32 $ 0.32 $ 0.96 $ 0.96 ========== ========== ========== ==========
The accompanying notes are an integral part of these Consolidated Financial Statements. Page 3 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART I. FINANCIAL INFORMATION - ITEM 1 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited and subject to year end adjustments)
NINE MONTHS ENDED (Dollars in millions) SEPTEMBER 30, --------------------- 2001 2000 ------- ------- Cash Flows From Operating Activities: Net income $ 36.7 $ 51.3 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 55.2 55.0 Nonrecurring items 29.3 33.5 Accounts receivable 30.1 8.0 Inventories 6.0 (21.0) Payables and accrued expenses (20.7) 24.0 Prepaid pension expense (21.6) (18.8) Other (7.7) (15.1) ------- ------- Cash Provided By Operating Activities 107.3 116.9 ------- ------- Cash Flows From Investing Activities: Business acquisition, net of cash acquired (15.5) -- Capital expenditures (48.6) (45.7) ------- ------- Cash Used in Investing Activities (64.1) (45.7) ------- ------- Cash Flows From Financing Activities: Dividends paid (17.9) (18.5) Increase (decrease) in borrowings, net 0.7 (2.8) Repurchases of common stock (18.0) (38.1) ------- ------- Cash Used in Financing Activities (35.2) (59.4) ------- ------- Effect Of Exchange Rate Changes On Cash (11.3) (6.4) ------- ------- Increase (Decrease) in Cash and Cash Equivalents (3.3) 5.4 Cash And Cash Equivalents: Beginning of period 268.2 270.5 ------- ------- End of period $ 264.9 $ 275.9 ======= =======
The accompanying notes are an integral part of these Consolidated Financial Statements. Page 4 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART I. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 1. The condensed consolidated financial statements of Tecumseh Products Company and Subsidiaries (the "Company") are unaudited and reflect all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position and operating results for the interim periods. The December 31, 2000 condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company's Annual Report for the fiscal year ended December 31, 2000. Due to the seasonal nature of the Company's business, the results of operations for the interim period are not necessarily indicative of the results for the entire fiscal year. Certain amounts included in the prior year's financial statements have been reclassified to conform to the 2001 presentation. The financial data required in this Form 10-Q by Rule 10.01 of Regulation S-X have been reviewed by Ciulla, Smith & Dale, LLP, the Company's independent certified public accountants, as described in their report contained elsewhere herein. 2. Inventories consisted of:
(Dollars in millions) SEPTEMBER 30, DECEMBER 31, --------------------------------------------------------------- 2001 2000 --------------------------------------------------------------- Raw material and work in process $140.4 $148.6 Finished goods 103.5 110.1 Supplies 17.0 16.2 ------ ------ Total Inventories $260.9 $274.9 ====== ======
3. During the third quarter of 2001, the Company offered an early retirement incentive plan to eligible Corporate, North American Compressor Group and Engine & Power Train Group employees. Two hundred fifty (250) employees, representing approximately 78% of those eligible, or approximately 20% of the total salaried workforce in the eligible groups, elected early retirement. The cost of providing the pension and healthcare benefits associated with this plan amounted to $29.3 million pretax ($18.9 million net of tax) and has been recorded as a nonrecurring charge in the third quarter. Ongoing cost savings from this action are estimated to be in a range of $10 to $12 million annually. 4. In early 2000, the Company recorded $33.5 million in nonrecurring charges ($23.3 million or $1.21 per share, net of tax) related to the restructuring and realignment of its domestic and international compressor manufacturing operations. Included in this charge was $15.5 million in severance pay and other employee related costs, $3.2 million in plant closing and exit costs, and $14.8 million in asset impairment charges for idled, unusable and/or underutilized equipment. As of September 30, 2001 approximately $3.3 million of these restructuring items remained to be paid or incurred. Page 5 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART I. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, CONTINUED The $15.5 million charge for severance pay and other employee related costs involves the termination of approximately 895 employees due to the closing of the compressor manufacturing plant in Somerset, Kentucky and 600 employees in India caused by the transfer of production to a new facility. At September 30, 2001, this program was substantially complete. The plant closing and exit costs relate to the facility in Somerset, Kentucky which was permanently closed. Production has been transferred to other facilities. The asset impairment charge represents write-downs to net realizable value of equipment dedicated to the production of a discontinued compressor model and equipment no longer needed in the restructured manufacturing operations. 5. The following table reports the Company's comprehensive income:
---------------------------------------------------------------------------------------------------------- COMPREHENSIVE INCOME THREE MONTHS ENDED NINE MONTHS ENDED (Dollars in millions) SEPTEMBER 30, SEPTEMBER 30, 2001 2000 2001 2000 ---------------------------------------------------------------------------------------------------------- Net Income $ 5.2 $13.8 $36.7 $51.3 Other comprehensive income (expense): Foreign currency translation adjustments (8.9) (9.6) (31.2) (17.7) Deferred gain (loss) from hedging .4 (1.6) .4 (1.6) ----- ----- ----- ----- Total Comprehensive Income (Loss) $(3.3) $ 2.6 $ 5.9 $32.0 ===== ===== ===== =====
6. During the third quarter of 2001, the Company repurchased 67,100 shares of its Class B common stock at an approximate cost of $2.7 million. During the first nine months of 2001, the Company repurchased 8,500 shares of its Class A common stock and 389,400 shares of its Class B common stock at an approximate cost of $18.0 million. Existing authority permits the purchase of an additional 1,102,100 shares of Class A or B in any combination. 7. The Company has been named by the U.S. Environmental Protection Agency ("EPA") as a potentially responsible party ("PRP") in connection with the Sheboygan River and Harbor Superfund Site in Wisconsin. At the direction of the EPA, the Company and its independent environmental consultants conducted a remedial investigation and feasibility study. As a result of this study, the Company believes the most appropriate course of action is active remediation to the upper river near the Company's facility, and that only monitored natural armoring should be required in the middle river and the lower river and harbor. At September 30, 2001 and December 31, 2000, the Company had accrued $29.8 and $30.3 million, respectively for estimated costs associated with the cleanup of this site. In May 2000 the EPA issued its Record of Decision ("ROD") for the Sheboygan River and Harbor Superfund Site. The Company is one of several named PRPs in the proposed cleanup action. The EPA has estimated the cost of cleanup at $40.9 million. The cost to the Company could be more or less than that depending on a number of factors including the accuracy of EPA estimates, the results of further investigations required by the ROD, changes in technology, the extent of contributions by other PRPs, and other factors beyond the Company's control. The Company believes that the EPA's remedy, as specified in the ROD, goes well beyond what is environmentally protective and cost-effective for the site Page 6 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART I. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, CONTINUED and largely ignores the results of the multi-million dollar remedial investigation and feasibility study that the Company performed under EPA oversight. Additionally, the Wisconsin Department of Natural Resources ("WDNR"), as a Natural Resource Trustee, is investigating what additional requirements, if any, the state may have beyond those specified under the ROD. The ultimate costs to the Company for potential natural resource damage claims is currently not determinable and would be dependent upon factors beyond its control. These factors include the results of future investigations required by the ROD, potential changes to the remedial action requirements established by the EPA (in consultation with the WDNR), required cleanup standards, rapidly changing remediation technology, the extent of any natural resource damages, and the outcome of any related litigation. Other PRPs may contribute to the costs of any final remediation, and/or natural resource damage claims, regarding the middle river and lower river and harbor portions of the Site. The Company, in cooperation with the WDNR, conducted an investigation of soil and groundwater contamination at the Company's Grafton, Wisconsin plant. It was determined that contamination from petroleum and degreasing products used at the plant are contributing to an off-site groundwater plume. Certain test procedures are underway to assess the extent of contamination and to develop remedial options for the site. While the Company has provided for estimated investigation and on-site remediation costs, the extent and timing of future off-site remediation requirements, if any, are not presently determinable. The WDNR and the Company's environmental engineers have been concurrently investigating PCB contamination in the watershed of the south branch of the Manitowoc River, downstream of the Company's New Holstein, Wisconsin engine plant. The Company has cooperated to date with the WDNR in investigating the scope of the contamination. Although the WDNR's investigation has not established the parties responsible for the contamination, the WDNR has indicated that it believes the Company is a source of the PCB contamination and that it expects the Company to participate in a cooperative cleanup effort. The Company has provided for investigation expenses and for a portion of source area remediation costs that it is likely to agree to share with federal and state authorities. Although participation in a cooperative remediation effort for the balance of the watershed is under consideration, it is not possible to reasonably estimate the cost of any such participation at this time. In addition to the above mentioned sites, the Company is also currently participating with the EPA and various state agencies at certain other sites to determine the nature and extent of any remedial action which may be necessary with regard to such other sites. At September 30, 2001 and December 31, 2000, the Company had accrued $39.2 million and $40.1 million, respectively for environmental remediation, including the amounts noted above relating to the Sheboygan River and Harbor Superfund Site. As these matters continue toward final resolution, amounts in excess of those already provided may be necessary to discharge the Company from its obligations for these sites. Such amounts, depending on their amount and timing, could be material to reported net income in the particular quarter or period in which they are recorded. In addition, the ultimate resolution of these matters, either individually or in the aggregate, could be material to the consolidated financial statements. Page 7 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART I. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, CONTINUED 8. The Company is also the subject of, or a party to, a number of other pending or threatened legal actions involving a variety of matters incidental to its business. Although the ultimate outcome of these matters cannot be predicted with certainty, and some may be disposed of unfavorably to the Company, management has no reason to believe that their disposition will have a materially adverse effect on the consolidated financial position or results of operations of the Company. 9. The Company has three reportable segments based on the similarity of products produced: Compressor Products, Engine & Power Train Products, and Pump Products. There has been no change since the prior year end in the methods used to determine reportable segments. The 2000 segment operating income has been restated to conform to the 2001 presentation. The effect on segment income was not material. There has been no material change in total assets for each reportable segment (other than changes due to normal, cyclical business operations) since December 31, 2000. Revenues and operating income by segment for the periods indicated are as follows:
--------------------------------------------------------------------------------------------------------- BUSINESS SEGMENT DATA THREE MONTHS ENDED NINE MONTHS ENDED (Dollars in millions) SEPTEMBER 30, SEPTEMBER 30, 2001 2000 2001 2000 --------------------------------------------------------------------------------------------------------- NET SALES: Compressor Products $ 175.5 $ 207.0 $ 647.9 $ 720.2 Engine & Power Train Products 111.4 116.6 357.7 475.3 Pump Products 26.2 25.2 94.2 95.9 --------------------------------------------------------------------------------------------------------- Total Net Sales $ 313.1 $ 348.8 $1,099.8 $1,291.4 ========================================================================================================= OPERATING INCOME: Compressor Products $ 15.2 $ 9.6 $ 52.0 $ 58.3 Engine & Power Train Products 5.5 5.9 9.9 37.6 Pump Products 2.7 2.3 10.7 12.2 Corporate expenses (1.7) (1.7) (5.6) (6.0) Nonrecurring items (29.3) -- (29.3) (33.5) --------------------------------------------------------------------------------------------------------- Total Operating Income (Loss) (7.6) 16.1 37.7 68.6 Interest expense (0.9) (1.6) (3.4) (4.5) Interest income and other, net 7.4 6.8 16.6 19.8 ========================================================================================================= INCOME (LOSS) BEFORE TAXES $ (1.1) $ 21.3 $ 50.9 $ 83.9 =========================================================================================================
10. In May 2001, the Company acquired an engine manufacturing facility in the Czech Republic for $15.5 million. This transaction was accounted for as an asset purchase. Page 8 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART I. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, CONTINUED 11. Taxes on income for the nine months ended September 30, 2001 include the effects of a $5.2 million refund of prior years' U.S. federal income taxes and a $1.3 million charge from the resolution of an income tax issue in Italy. 12. In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." Under SFAS No. 142, goodwill is no longer amortized, but is subject to impairment testing on at least an annual basis. As of September 30, 2001 the net book value of the Company's goodwill was $44.9 million and goodwill amortization for the first nine months of 2001 was $1.1 million. The Company will adopt SFAS No. 142 on January 1, 2002, as required, and goodwill amortization will be discontinued at that time. The Company has not yet determined the impact this statement will have on its results of operations or financial position. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets." This statement, which supersedes SFAS No. 121, addresses accounting and financial reporting for the impairment or disposal of long-lived assets. The Company will adopt SFAS No. 144 on January 1, 2002, as required. The Company does not expect that adoption of this statement will have a material effect on its results of operations or financial position. Page 9 INDEPENDENT ACCOUNTANTS' REPORT November 8, 2001 Tecumseh Products Company Tecumseh, Michigan We have reviewed the consolidated condensed balance sheet of Tecumseh Products Company and Subsidiaries as of September 30, 2001 and the related consolidated condensed statements of income and cash flows for the three months and nine months ended September 30, 2001 and 2000. These financial statements are the responsibility of the Company's management. We have conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the consolidated condensed financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet as of December 31, 2000, and the related consolidated statements of income, stockholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated January 26, 2001, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated condensed balance sheet as of December 31, 2000, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. CIULLA, SMITH & DALE, LLP Certified Public Accountants Southfield, Michigan Page 10 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART I. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Consolidated sales for the third quarter of 2001 were $313.1 million compared to sales of $348.8 million in the same quarter of 2000. Year-to-date sales were $1,099.8 million compared to $1,291.4 million in 2000. Net income for the third quarter of 2001 was $5.2 million or $.28 per share compared with net income of $13.8 million or $.73 per share in the same quarter of 2000. Third quarter 2001 net income included a nonrecurring charge of $29.3 million ($18.9 million net of tax, or $1.02 per share) representing the cost of the Company's previously announced early retirement incentive program and a $5.2 million ($.28 per share) tax credit resulting from a refund of prior years' federal income taxes. On a year-to-date basis, net income was $36.7 million or $1.97 per share compared to $51.3 million or $2.65 per share last year. Year-to-date net income before nonrecurring items was $50.4 million or $2.70 per share compared to $74.6 million or $3.86 per share last year. Last year's net income was reduced by a nonrecurring charge of $23.3 million, net of tax, related to the restructuring and realignment of the Company's worldwide compressor manufacturing operations. The reduced 2001 results were due primarily to lower sales and profits in the Company's two major business segments, Compressor Products and Engine & Power Train Products. Compressor Products Third quarter 2001 Compressor Products sales declined to $175.5 million from $207.0 million in the third quarter of 2000. Compressor Products sales in the nine months ended September 30, 2001 declined to $647.9 million compared to $720.2 million for the same period of 2000. These declines were attributable to lower demand in most of the major markets served by the Company's products when compared to last year. Sales of air conditioning compressors experienced decreases from 2000 levels. The room air market continues to be hard hit by the impact of, not only continued price competition from Asian producers, but the shifting of production of finished room air conditioning units from the United States to Asia by domestic manufacturers. Export sales, particularly to Asian customers, have declined significantly year over year. Compressor Products operating income for the third quarter of 2001 amounted to $15.2 million compared to $9.6 million in the third quarter of 2000. Year-to-date operating income amounted to $52.0 million compared to $58.3 million in the first nine months of 2000. Operating margins in the Company's domestic compressor operations have been adversely impacted by a number of factors including lower overall selling prices, reduced fixed cost coverage as a result of lower production volumes and manufacturing inefficiencies. Results from the Company's Brazilian compressor operations remained strong and contributed over 95% of the Compressor Products operating income in the third quarter of 2001, and approximately 68% of the segment's operating income on a year-to-date basis. European Page 11 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART I. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED compressor operations had decreased profitability on basically flat sales primarily due to unfavorable geographic and product sales mix. Indian compressor operations generated a small operating loss during the quarter as a result of reduced demand. Engine & Power Train Products Engine & Power Train Products sales amounted to $111.4 million in the third quarter of 2001 compared to $116.6 million in the third quarter of 2000. Sales in the first nine months of 2001 were $357.7 million compared to $475.3 million for the same period in 2000. Engine & Power Train Products generated operating income of $5.5 million in the third quarter of 2001 compared to $5.9 million in the third quarter of 2000. Operating income in the nine months ended September 30, 2001 declined to $9.9 million from $37.6 million in 2000. Both sales and profits in the three and nine month periods ended September 30, 2001 were adversely impacted by significant reductions in demand for the Company's lawn and garden engines and engines for utility applications, such as portable power generators, edgers and tillers. The effect of decreased sales of lawn and garden engines was partially offset by higher than initially expected snow thrower demand. Sales of engines in the European market were significantly reduced for both the quarter and year-to-date periods compared to last year. Pump Products Pump Products sales in the third quarter were $26.2 million compared to $25.2 million in 2000. Operating income improved from $2.3 million in the third quarter of 2000 to $2.7 in 2001. The improvement for the quarter was due to increased sales in the plumbing and HVAC markets. Year-to-date sales were $94.2 million in 2001 compared to $95.9 million in 2000. Operating income in the first nine months of 2001 decreased to $10.7 million from $12.2 million in 2000. A weak economy and generally soft retail demand, particularly for the Company's water gardening products, were primarily responsible for the nine months reduced results. Nonrecurring Charges During the third quarter of 2001, the Company offered an early retirement incentive plan to eligible Corporate, North American Compressor Group and Engine & Power Train Group employees. Two hundred fifty (250) employees, representing approximately 78% of those eligible, or approximately 20% of the total salaried workforce in the eligible groups, elected early retirement. The cost of providing the pension and healthcare benefits associated with this plan amounted to $29.3 million ($18.9 million net of tax) and has been recorded as a nonrecurring charge in the third quarter. Ongoing cost savings from this action are estimated to be in a range of $10 to $12 million annually. During the first quarter of 2000, the Company recorded $33.5 million in nonrecurring charges ($23.3 million net of tax) related to the restructuring and realignment of its compressor manufacturing operations, both domestically and internationally. The charges consisted primarily of plant closing costs including employee termination liabilities, plant decommissioning expenses, Page 12 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART I. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED the write-off, removal, and storage of obsolete equipment, a workforce reduction charge at the Indian compressor operations, and an asset impairment charge. Included in the $33.5 million charge were cash items of approximately $15.8 million which will be paid from Company funds, and $2.9 million which will be paid from pension plan assets. The balance of $14.8 million was comprised of non-cash items, principally the write down or impairment of long-lived assets. As of September 30, 2001, approximately $3.5 million of these restructuring items remains to be paid or incurred. Interest Income and Other, Net Interest income and other, net amounted to $7.4 million in the quarter ended September 30, 2001 compared to $6.8 million in the same quarter of 2000. The increase over 2000 was due primarily to interest on the tax refund of prior years' federal income taxes. Interest income and other, net amounted to $16.6 million in the first nine months of 2001 compared to $19.8 million in the same period in 2000. The lower interest income resulted primarily from lower overall interest rates both in the U.S. and Brazil as well as lower available invested cash partially offset by the interest on the tax refund. Taxes on Income After eliminating the effects of the $5.2 million tax refund and the resolution of a $1.3 million foreign tax claim in Italy, the effective income tax rate was 35.5% for the first nine months of the year compared to 38.9% in 2000. The higher effective tax rate in 2000 was due primarily to the inability to recognize a tax benefit on foreign (Indian) operating losses. Outlook Competitive pricing pressures and worldwide excess production capacity will continue to impact the compressor business. Brazilian sales are expected to remain strong during the fourth quarter of the year, but risks exist relative to the Brazilian energy crisis, a weakening domestic economy, and the currency situation. While the Company anticipates that the reasonably robust market for its snow thrower engines will continue into the fourth quarter, demand for other Engine & Power Train Products is expected to remain weak. A soft economy and uncertain consumer spending, due in part to the events of September 11th, will likely have an adverse impact on demand for all of the Company's products. As a result, 2001 consolidated fourth quarter earnings before special charges are expected to be below the earnings level reported for the fourth quarter of 2000. In addition to the early retirement incentive action reported above, it is probable that the Company will undertake further restructuring and/or realignment action in the fourth quarter. These actions will be designed to address capacity issues, as well as to improve overall cost structure and competitive position, and will likely result in a significant reorganization of the Company's Engine & Power Train Group which may include the closing of one or more manufacturing or assembly plants. While the cost of these actions is not yet known, they will no doubt have a significant impact on the fourth quarter results. Page 13 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART I. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED In response to intense pricing competition from Asian producers in the room air conditioning market, as well as a shifting of the manufacture of finished room air conditioning units to Asian countries by domestic manufacturers, the Company has elected to move the majority of its remaining U.S. based production capacity of room air compressors to Brazil, where the Company believes it can manufacture at lower overall cost. Additional capacity rationalization and cost structure initiatives are under consideration in both the Compressor and Engine & Power Train businesses and, as these plans are finalized, future results will likely be impacted by one or more nonrecurring charges. While the amount and timing of these charges cannot be accurately predicted, they may affect several quarterly periods or years, and they could be material to the reported results in the particular quarter or year in which they are recorded LIQUIDITY, CAPITAL RESOURCES AND RISKS Historically, the Company's primary source of cash has been net cash provided by operations. Operating activities in the first nine months of 2001 generated cash of $107.3 million compared to $116.9 million in the same period in 2000. This reduction resulted primarily from reduced operating results exclusive of nonrecurring charges, partially offset by reduced working capital requirements. The Company continues to maintain a strong balance sheet and liquid financial position. Working capital amounted to $575.4 million at September 30, 2001. The ratio of current assets to current liabilities was approximately 3.19 to 1. Capital spending for the first nine months of 2001 was $48.6 million compared to $45.7 million in the same period in 2000. Total capital spending for 2001 should approximate $60 million. In the first nine months of 2001, the Company repurchased 8,500 shares of Class A stock and 389,400 shares of Class B stock at a total cost of $18.0 million. Dividends paid on common stock amounted to $17.9 million in the first nine months of 2001 compared to $18.5 million in the same period of 2000. Working capital requirements, planned capital investment and stock repurchase expenditures for 2001 are expected to be financed primarily through internally generated funds; however, short-term borrowings and various financial instruments are utilized from time to time to hedge currency risk and finance foreign working capital requirements. The Company maintains a $100 million revolving credit facility that is available for general corporate purposes. The Company may also utilize long-term financing arrangements in connection with state investment incentive programs. The Company will continue to focus its efforts on improving the profitability and competitiveness of its worldwide Compressor operations. It is possible that additional production realignment and consolidation initiatives will take place that could have a material effect on the consolidated financial position and future results of operations of the Company. A major realignment of the Engine & Power Train Group is expected to take place during the fourth quarter of 2001 and may result in the closing of one or more manufacturing or assembly plants. Additionally, efforts are underway to reduce manufacturing and overhead costs through aggressive cost cutting strategies, process improvements and facility utilization. Page 14 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART I. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, CONTINUED Environmental Matters The Company is subject to various federal, state and local laws relating to the protection of the environment, and is actively involved in various stages of investigation or remediation for sites where contamination has been alleged. (See Note 7 to the financial statements.) Liabilities, relating to probable remediation activities, are recorded when the costs of such activities can be reasonably estimated based on the facts and circumstances currently known. Difficulties exist estimating the future timing and ultimate costs to be incurred due to uncertainties regarding the status of laws, regulations, levels of required remediation, changes in remediation technology and information available. At September 30, 2001 and December 31, 2000, the Company had accrued $39.2 and $40.1 million, respectively, for environmental remediation, including $29.8 and $30.3 million, respectively, relating to the Sheboygan River and Harbor Superfund Site. As these matters continue toward final resolution, amounts in excess of those already provided may be necessary to discharge the Company from its obligations for these sites. Such amounts, depending on their amount and timing, could be material to reported net income in the particular quarter or period in which they are recorded. In addition, the ultimate resolution of these matters, either individually or in the aggregate, could be material to the consolidated financial statements. New Accounting Standards In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." Under SFAS No. 142, goodwill is no longer amortized, but is subject to impairment testing on at least an annual basis. As of September 30, 2001 the net book value of the Company's goodwill was $44.9 million and goodwill amortization for the first nine months of 2001 was $1.1 million. The Company will adopt SFAS No. 142 on January 1, 2002, as required, and goodwill amortization will be discontinued at that time. The Company has not yet determined the impact this statement will have on its results of operations or financial position. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets." This statement, which supersedes SFAS No. 121, addresses accounting and financial reporting for the impairment or disposal of long-lived assets. The Company will adopt SFAS No. 144 on January 1, 2002, as required. The Company does not expect that adoption of this statement will have a material effect on its results of operations or financial position. CAUTIONARY STATEMENTS RELATING TO FORWARD-LOOKING STATEMENTS This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to the safe harbor provisions created by that Act. In addition, forward-looking statements may be made orally in the future by or on behalf of the Company. Forward-looking statements can be identified by the use of terms such as "expects", "should", "may", "believes", "anticipates", "will", and other future tense and forward-looking terminology or by the fact that they appear under the caption "Outlook." Readers are cautioned that actual results may differ materially from those projected as a result of certain risks and uncertainties, including, but not limited to, i) changes in business conditions and the economy in general in both foreign and domestic markets and the effect of terrorist activity and armed conflict; ii) weather conditions affecting demand for air conditioners, lawn and garden products and snow throwers; iii) the extent to which the decline in demand for lawn and garden and utility engines will continue, and the success of the Company's ongoing effort to bring costs in line with projected production levels and product mix; iv) financial market changes, including fluctuations in interest rates and foreign currency exchange rates; v) economic trend factors such as housing starts; vi) emerging governmental regulations; vii) availability of materials; viii) actions of competitors; ix) the ultimate cost of resolving environmental matters; x) the extent of any business disruption resulting from the conversion to the Euro; xi) the Company's ability to profitably develop, manufacture and sell both new and existing products; xii) the extent of any business disruption that may result from the restructuring and realignment of the Company's manufacturing operations, the ultimate cost of those initiatives and the amount of savings actually realized; xiii) the extent of savings actually realized from the Company's early retirement program; and xiv) potential political and economic adversities that could adversely affect anticipated sales and production in Brazil. These forward-looking statements are made only as of the date hereof, and the Company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise. Page 15 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART I. FINANCIAL INFORMATION - ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to risk during the normal course of business from credit risk associated with 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 foreign currency forward exchange contracts and commodity forward purchasing contracts. A discussion of the Company's policies and procedures regarding the management of market risk and the use of derivative financial instruments was provided in its Annual Report for year ended December 31, 2000 under the caption of "Management's Discussion and Analysis of Financial Condition and Results of Operations - Quantitative and Qualitative Disclosures About Market Risk" and in Notes 1 and 10 of the Notes to Consolidated Financial Statements. The Company does not utilize financial instruments for trading or other speculative purposes. There have been no changes in these policies or procedures during the current year. The Company utilizes foreign currency forward exchange contracts to hedge foreign currency receivables, payables and other known transactional exposures for periods consistent with the expected cash flows of the underlying transactions. The contracts generally mature within one year and are designed to limit exposure to exchange rate fluctuations because gains and losses on the hedged transactions offset gains and losses on the contracts. At September 30, 2001 and December 31, 2000, the Company held foreign currency forward exchange contracts and foreign currency call options with total notional values in the amount of $18.5 and $37.2 million, respectively. The Company uses commodity forward purchasing contracts to help control the cost of traded commodities, primarily copper and aluminum, used as raw material in the production of compressor motors and components and engines. Local management is allowed to contract commodity forwards for a limited percentage of projected raw material requirements up to one year in advance. The total notional values of commodity forwards outstanding at September 30, 2001 and December 31, 2000 were $18.5 and $25.0 million, respectively. Page 16 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit Number Description None (b) On August 23, 2001, the Company filed a report on Form 8-K reporting Item 5, Other Events; a press release regarding management changes. Page 17 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TECUMSEH PRODUCTS COMPANY ------------------------- (Registrant) Dated: November 13 , 2001 BY: /s/ DAVID W. KAY ----------------------- ---------------------------------------- Vice President, Treasurer and Chief Financial Officer (on behalf of the Registrant and as principal financial officer) Page 18