-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GaeuoqphMp+0zC/ZjB4d6pw0oOCEAWJu25PqZvZyTIgeSjzcr5quaX5TOAUIzRVV SZ5SfC+RXh942je9bDBryg== 0000950124-02-002689.txt : 20020813 0000950124-02-002689.hdr.sgml : 20020813 20020813171956 ACCESSION NUMBER: 0000950124-02-002689 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TECUMSEH PRODUCTS CO CENTRAL INDEX KEY: 0000096831 STANDARD INDUSTRIAL CLASSIFICATION: AIR COND & WARM AIR HEATING EQUIP & COMM & INDL REFRIG EQUIP [3585] IRS NUMBER: 381093240 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-00452 FILM NUMBER: 02730733 BUSINESS ADDRESS: STREET 1: 100 E PATTERSON ST CITY: TECUMSEH STATE: MI ZIP: 49286 BUSINESS PHONE: 5174238411 MAIL ADDRESS: STREET 1: 100 EAST PATTERSON STREET CITY: TECUMSEH STATE: MI ZIP: 49286 10-Q 1 k71269e10vq.txt QUARTERLY REPORT FOR PERIOD ENDED JUNE 30, 2002 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 June 30, 2002 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 August 2, 2002 - ------------------------------------------------------------------------------- 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) JUNE 30, DECEMBER 31, ASSETS 2002 2001 ------------------------ Current Assets: Cash and cash equivalents $ 335.4 $ 317.6 Accounts receivable, less allowances for doubtful accounts of $7.9 million in 2002 and $7.7 million in 2001 249.1 207.1 Inventories 259.1 261.9 Deferred and recoverable income taxes 44.8 58.0 Other current assets 19.7 14.9 --------- ---------- Total current assets 908.1 859.5 Property, plant, and equipment, at cost, net of accumulated depreciation of $556.4 million in 2002 and $561.1 million in 2001 420.4 431.9 Goodwill 44.1 45.1 Deferred income taxes 34.2 29.7 Prepaid pension expense 151.7 137.3 Other assets 21.8 16.3 --------- ---------- Total assets $ 1,580.3 $ 1,519.8 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable, trade $ 144.5 $ 101.3 Income taxes payable 5.0 4.2 Short-term borrowings 8.0 11.6 Accrued liabilities 147.2 136.7 --------- ---------- Total current liabilities 304.7 253.8 Long-term debt 14.0 13.7 Deferred income taxes 3.1 3.0 Other postretirement benefit liabilities 205.1 203.0 Product warranty and self-insured risks 21.9 23.9 Accrual for environmental matters 28.4 29.4 Pension liabilities 17.4 15.3 --------- ---------- Total liabilities 594.6 542.1 --------- ---------- Stockholders' Equity: Class A common stock, $1 par value; authorized 75,000,000 shares; issued and outstanding 13,401,938 shares in 2002 and 2001 13.4 13.4 Class B common stock, $1 par value; authorized 25,000,000 shares; issued and outstanding 5,077,746 shares in 2002 and 2001 5.1 5.1 Retained earnings 1,067.2 1,051.5 Accumulated other comprehensive income (100.0) (92.3) --------- ---------- Total stockholders' equity 985.7 977.7 --------- ---------- Total liabilities and stockholders' equity $ 1,580.3 $ 1,519.8 ========= ==========
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 SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------------------------- 2002 2001 2002 2001 ---- ---- ---- ---- Net Sales $ 395.3 $ 382.0 $ 728.7 $ 786.7 Cost of sales and operating expenses 328.9 324.4 621.0 679.8 Selling and administrative expenses 31.9 31.1 59.5 61.6 Nonrecurring item -- -- 4.5 -- ------- ------- ------- ------- Operating Income 34.5 26.5 43.7 45.3 Interest expense (1.2) (1.3) (2.1) (2.5) Interest income and other, net 3.0 4.6 5.8 9.2 ------- ------- ------- ------- Income before taxes and cumulative effect of change in 36.3 29.8 47.4 52.0 accounting principle Taxes on income 12.9 12.3 16.8 20.5 ------- ------- ------- ------- Income before cumulative effect of accounting change 23.4 17.5 30.6 31.5 Cumulative effect of accounting change for goodwill, net of tax -- -- (3.1) -- ------- ------- ------- ------- Net Income $ 23.4 $ 17.5 $ 27.5 $ 31.5 ======= ======= ======= ======= Basic and Diluted Earnings Per Share: Income before cumulative effect of accounting change $ 1.27 $ 0.94 $ 1.66 $ 1.68 Change in accounting for goodwill -- -- (.17) -- ------- ------- ------- ------- Net income $ 1.27 $ 0.94 $ 1.49 $ 1.68 Weighted Average Shares (in thousands of shares) 18,480 18,572 18,480 18,704 ======= ======= ======= ======= Cash Dividends Declared Per Share $ 0.32 $ 0.32 $ 0.64 $ 0.64 ======= ======= ======= =======
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)
SIX MONTHS ENDED (Dollars in millions) JUNE 30, -------------------- 2002 2001 ------ ------- Cash Flows From Operating Activities: Income before cumulative effect of change in accounting principle $ 30.6 $ 31.5 Adjustments to reconcile income before cumulative effect of change in accounting principle to net cash provided by operating activities: Depreciation and amortization 32.6 37.3 Nonrecurring items 4.5 -- Accounts receivable (35.6) (12.5) Inventories -- (4.1) Payables and accrued expenses 51.0 24.1 Prepaid pension expense (14.4) (14.5) Other (0.4) (5.0) ------ ------ Cash Provided By Operating Activities 68.3 56.8 ------ ------ Cash Flows From Investing Activities: Business acquisition, net of cash acquired (4.0) (15.5) Capital expenditures (35.0) (30.8) ------ ------ Cash Used In Investing Activities (39.0) (46.3) ------ ------ Cash Flows From Financing Activities: Dividends paid (11.8) (11.9) (Decrease) increase in borrowings, net (3.4) 1.8 Repurchases of common stock -- (15.3) ------ ------ Cash Used In Financing Activities (15.2) (25.4) ------ ------ Effect Of Exchange Rate Changes On Cash 3.7 (8.3) ------ ------ Increase (Decrease) In Cash and Cash Equivalents 17.8 (23.2) Cash and Cash Equivalents: Beginning of Period 317.6 268.2 ------ ------ End of Period $335.4 $245.0 ====== ======
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, 2001 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, 2001. 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. 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:
JUNE 30, DECEMBER 31, (Dollars in millions) 2002 2001 ------------------------------------------------------------------- Raw material and work in process $138.1 $137.1 Finished goods 104.4 108.3 Supplies 16.6 16.5 ------------------------------------------------------------------- Total Inventories $259.1 $261.9 ===================================================================
3. In an effort to more effectively compete in a business environment plagued by worldwide production over-capacity and low cost foreign-sourced product, the Company has undertaken a number of strategic initiatives designed to reduce production costs and improve overall productivity and product quality by consolidating and relocating production capabilities, both domestically and internationally. These ongoing initiatives are being implemented within both of the Company's primary business segments. As a result of these initiatives, the Company recorded a $4.5 million nonrecurring charge ($2.8 million or $0.15 per share, net of tax), during the first quarter of 2002, in connection with the relocation of the production of additional rotary compressor product lines to Brazil from the United States and consists of the write-off of certain equipment which cannot be used in Brazil. Page 5 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART I. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) 4. The following table reports the Company's comprehensive income:
COMPREHENSIVE INCOME THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, (Dollars in millions) 2002 2001 2002 2001 ----------------------------------------------------------------------------------------------- Net Income $23.4 $17.5 $27.5 $31.5 Other comprehensive income (expense): Foreign currency translation adjustments (4.7) (8.2) (7.7) (22.3) ----------------------------------------------------------------------------------------------- Total Comprehensive Income $18.7 $ 9.3 $19.8 $ 9.2 ===============================================================================================
5. During the second quarter of 2002, the Company did not repurchase any shares of its Class A common stock or its Class B common stock. The authority to repurchase stock, which permitted the purchase of an additional 1,099,100 shares of Class A or B in any combination, expired on June 30, 2002. The Board of Directors has not renewed the authority to repurchase shares. 6. 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. In May 2000, the EPA issued a Record of Decision ("ROD") selecting the remedy for the Site. The Company is one of several named PRP's in the proposed cleanup action. The EPA has estimated the cost of cleanup at $40.9 million. 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 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 EPA has indicated its intent to address the site in two phases, with the plant site and upper river constituting the first phase and the middle and lower river and harbor being the second phase. The Company anticipates entering into a Consent Decree concerning the performance of remedial design and remedial action for the plant site, the upper river and the flood plain soils, deferring for an unspecified period any action regarding Phase II. At June 30, 2002 and December 31, 2001, the Company had accrued $28.4 and $28.7 million, respectively, for estimated costs associated with the cleanup of this site. The actual cost may be greater or lower than the amount accrued and will be governed by numerous factors including the requirements of the WDNR. These factors include the results of further investigations, the details of the remedial actions required by the EPA (in consultation with the WDNR), changes in remedial technologies, the extent of any natural resource damages, and the outcome of any related litigation. Other PRPs may contribute to the costs of any final Page 6 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART I. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) remediation, and/or natural resource damage claims, regarding the middle 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. The Company has undertaken remediation of soils in a source area on the east side of its Grafton facility. 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 requested that the Company join it in a cooperative effort to investigate and clean up PCB contamination in the watershed of the south branch of the Manitowoc River, downstream of the Company's New Holstein, Wisconsin facility. Despite the fact that the WDNR's investigation does not establish the parties responsible for the PCB contamination, the WDNR has indicated that it believes the Company is a source and that it expects the Company to participate in the cleanup. The Company has participated in the first phase of a cooperative cleanup, consisting of joint funding of the removal of soils and sediments in the source area near its facility. The next phase of the cooperative effort is scheduled to occur in 2002 involving a stream segment downstream of the source area. The Company has provided for these costs. Although participation in a cooperative remedial effort after 2002 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 June 30, 2002 and December 31, 2001, the Company had accrued $35.1 million and $36.1 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 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. 7. 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. 8. 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 or in measuring segment income. There has been no material change in total assets for each Page 7 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART I. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued) reportable segment (other than changes due to normal, cyclical business operations) since December 31, 2001. Revenues and operating income by segment for the periods indicated are as follows:
BUSINESS SEGMENT DATA THREE MONTHS ENDED SIX MONTHS ENDED (Dollars in millions) JUNE 30, JUNE 30, 2002 2001 2002 2001 ------------------------------------------------------------------------------------------------------- NET SALES: Compressor Products $243.3 $236.1 $436.9 $472.4 Engine & Power Train Products 111.3 109.2 222.8 246.3 Pump Products 40.7 36.7 69.0 68.0 ------------------------------------------------------------------------------------------------------- Total Net Sales $395.3 $382.0 $728.7 $786.7 ======================================================================================================= OPERATING INCOME: Compressor Products $ 28.6 $ 23.3 $ 43.6 $ 36.8 Engine & Power Train Products 2.1 (0.1) (0.2) 4.4 Pump Products 6.2 5.0 9.1 8.0 Corporate expenses (2.4) (1.7) (4.3) (3.9) Nonrecurring item --- --- (4.5) --- ------------------------------------------------------------------------------------------------------- Total Operating Income 34.5 26.5 43.7 45.3 Interest expense (1.2) (1.3) (2.1) (2.5) Interest income and other, net 3.0 4.6 5.8 9.2 ------------------------------------------------------------------------------------------------------- INCOME BEFORE TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE $ 36.3 $ 29.8 $ 47.4 $ 52.0 =======================================================================================================
9. On January 1, 2002, the Company adopted 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 December 31, 2001, the net book value of the Company's goodwill was $45.1 million. However, as required by the statement, the Company tested for impairment at the date of adoption and found that the goodwill associated with the Engine & Power Train European operations had been impaired. Accordingly, goodwill amounting to $4.8 million ($3.1 million net of tax) has been written-off and recognized as a cumulative effect from an accounting change. The net book value of the Company's goodwill at June 30, 2002 was $44.1 million. Amortization of goodwill amounted to approximately $0.5 and $0.9 million in the second quarter and first half of 2001, respectively. The Company also adopted 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. There was no material effect on the results of operations or financial position as a result of adopting this standard. The nonrecurring charge related to the impairment of unusable assets in the Compressor group, recorded during the first quarter, was determined in accordance with the provisions of SFAS No. 144. Page 8 INDEPENDENT ACCOUNTANTS' REPORT August 12, 2002 Tecumseh Products Company Tecumseh, Michigan We have reviewed the consolidated condensed balance sheet of Tecumseh Products Company and Subsidiaries as of June 30, 2002 and the related consolidated condensed statements of income and cash flows for the three months and six months ended June 30, 2002 and 2001. 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 auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 2001, 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 25, 2002, 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, 2001, 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 9 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Consolidated net sales for the second quarter of 2002 were $395.3 million, compared to $382.0 million in the second quarter of 2001. Consolidated net sales for the six months ended June 30, 2002 amounted to $728.7 million compared to $786.7 million in the first half of 2001. Consolidated net income for the second quarter of 2002 amounted to $23.4 million or $1.27 per share compared to $17.5 million or $0.94 per share in the second quarter of 2001. Consolidated net income for the six months ended June 30, 2002 amounted to $27.5 million or $1.49 per share compared to $31.5 million or $1.68 per share for the same period in 2001. Included in the 2002 first half results are nonrecurring charges of $4.5 million ($2.8 million net of tax or $0.15 per share) related to the relocation of certain compressor manufacturing operations from the United States to Brazil and the cumulative effect of a change in accounting for goodwill ($3.1 million net of tax or $0.17 per share) related to the adoption of Statement of Financial Accounting Standards (SFAS) No. 142 "Goodwill and Other Intangible Assets". Exclusive of nonrecurring charges and the cumulative effect of the accounting change, first half results would have been $33.4 million or $1.81 per share. Results for 2001 were unfavorably impacted by the settlement of a $1.3 million foreign tax claim, which had the effect of increasing the effective tax rate to 41% and 39% for the second quarter and first half respectively. Sales and profits for the second quarter 2002 improved over the prior year in all the Company's segments with the largest improvement occurring in the compressor segment. Despite the improved year over year sales in the second quarter, sales for the first half of the year still lagged the prior year in the Compressor and Engine & Power Train Groups. Compressor Products Second quarter 2002 sales in the Company's Compressor business increased to $243.3 million from $236.1 million in the second quarter of 2001. This increase was attributable to greater sales of compressors for refrigeration & freezer applications. Improved marketing efforts and more competitive pricing afforded by the Company's low cost manufacturing centers have helped the Company to capitalize on the improving market conditions in the refrigeration and freezer compressor sector. Compressor business sales in the first six months of 2002 declined $35.5 million or approximately 7.5% from the first six months of 2001. This decline is primarily attributable to lower sales for compressors used in unitary and room air conditioning applications. While some sales were lost in the first quarter due to ramp up and production problems experienced at the Company's Tupelo facility, the main impetus continues to be competitive pressures from Asian producers and a decline in sales of compressors for unitary applications. Compressor business operating income for the second quarter of 2002 amounted to $28.6 million compared to $23.3 million in the second quarter of 2001. Operating income for the six months ended June 30, 2001 amounted to $43.6 million compared to $36.8 million in the first six months of 2001. The increase in operating income for the second quarter and first half of 2002 over the comparable 2001 periods reflects the effect of cost reduction efforts implemented over the past 12-18 months. Page 10 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results from the Company's Brazilian compressor operations for the second quarter and first six months of 2002 have declined from the comparable prior year periods, reflecting a shift in mix to lower priced compressors and increased material and operating costs. While the Brazilian export market remains strong, sales in the local Brazilian and certain South American markets, where margins are typically higher, have declined due to weaker economic conditions and unfavorable weather. Despite these declines, Brazilian operations remain a key to future competitiveness and for the three and six-month periods ended June 30, 2002 represented 35% and 41% of operating income for the Compressor business. Operations in India had the most successful quarter since operations commenced, contributing 9% of the Compressor Group's operating income for the second quarter 2002. Increases in both domestic and export volumes were responsible for the improvement in these operations. Engine & Power Train Products Engine & Power Train business sales amounted to $111.3 million in the second quarter of 2002 compared to $109.2 million in the second quarter of 2001. Sales in the first half of 2002 were $222.8 million compared to $246.3 million in the first half of 2001. The Engine & Power Train business operating income was $2.1 million in the second quarter of 2002 compared to an operating loss of $0.1 million in the second quarter of 2001. For the first half of 2002 the Group incurred an operating loss of $0.2 million compared to an operating profit of $4.4 million in 2001. Despite flat sales and an unfavorable product sales mix, second quarter results in the Engine & Power Train Group were improved over the prior year second quarter due to the favorable impact of operational improvements and cost cutting efforts. Unit sales of engines for walk behind rotary mowers were improved in the second quarter 2002 compared to the same period in 2001as a result of strong sell through of Toro products with Tecumseh engines that are marketed through Home Depot and Toro's dealer distribution network. These products have experienced a high degree of consumer acceptance and the Company's industry-leading use of Sentinel(R) equipment for quality assurance has been highly successful. The increase in second quarter unit sales volume of engines for walk behind rotary motors was offset by declines in engines sold for snow throwers and specialty lawn care products. These declines are primarily due to lower overall market demand for these product categories. For the first half of 2002, North American unit sales of engines are 11% below the same period 2001, primarily due to the snow thrower and specialty lawn care product segments, as noted above. Declines in these segments were partially offset by increased unit sales in the generator and pressure washer product categories where the Company has captured share at OEM's not affiliated with other engine manufacturers. With respect to engines for walk behind rotary mowers, the strong second quarter has resulted in first half unit sales being approximately equal to first half 2001. Pump Products Sales and operating profits in the Pump business both reflected increases over 2001 levels. Sales in the second quarter of 2002 amounted to $40.7 million compared to $36.7 million in 2002. Page 11 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Year-to-date sales amounted to $69.0 million in 2002 compared to $68.0 million the previous year. Operating income amounted to $6.2 million in the quarter ended June 30, 2002 compared to $5.0 million in the same period of 2001. Operating income in the first half of 2002 increased to $9.1 million from $8.0 million in 2001. The improvements in sales and operating income for the quarter are attributable to the residential pump sector, particularly water gardening products, which benefited from the introduction of a new line of products, partially offset by weakness in the general market for industrial products. Operating results were improved for the first half, despite flat sales, through effective cost control. Nonrecurring Item First half 2002 results were adversely affected by a $4.5 million ($2.8 million net of tax or $0.15 per share) nonrecurring charge recorded in the first quarter in the Compressor segment. The charge related to the decision to relocate the production of additional rotary compressor product lines to Brazil from the United States and consists of the write-off of certain equipment which cannot be used in Brazil. Accounting Changes On January 1, 2002, the Company adopted 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 December 31, 2001, the net book value of the Company's goodwill was $45.1 million. However, as required by the statement, the Company tested for impairment at the date of adoption and found that the goodwill associated with the Engine & Power Train European operations had been impaired. Accordingly, goodwill amounting to $4.8 million ($3.1 million net of tax) has been written-off and recognized as a cumulative effect from an accounting change. The net book value of the Company's goodwill at June 30, 2002 was $44.1 million. Amortization of goodwill amounted to approximately $0.5 and $0.9 the second quarter and first half of 2001, respectively. The Company also adopted 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. There was no material effect on the results of operations or financial position as a result of adopting this standard. The nonrecurring charge related to the impairment of unusable assets in the Compressor group, recorded during the first quarter, was determined in accordance with the provisions of SFAS No. 144. Interest Income and Other, Net Interest income and other, net amounted to $3.0 million in the second quarter of 2002 compared to $4.6 million in the second quarter of 2001. Interest income and other, net amounted to $5.8 million in the first half of 2002 compared to $9.2 million in the first half of 2001. This reduction resulted primarily from lower overall interest rates as well as lower available invested cash in Brazil. Page 12 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Taxes on Income The effective income tax rate was 35.5% in the second quarter of 2002 and 35.4% for the first half of the year, compared to 41.3% and 39.4% in the comparable periods of 2001. The higher effective rate in the second quarter of 2001 reflects the resolution of a $1.3 million foreign tax claim in Italy. Outlook On a consolidated basis, the second half of 2002 is expected to improve over the comparable 2001 period with the expected improvement attributable to the Compressor and Pump segments. In spite of the continuing erosion in the air conditioning markets, both room air and unitary applications, the Compressor Group is expected to achieve improved operating results in the second half of 2002. These results will continue to be driven by cost improvements recognized as a result of prior year restructuring actions and, to a lesser extent, sales that are expected to be improved over last year's weak fourth quarter. There are several cautionary risks that could impact these results, particularly with the Company's greater dependency on its operations in Brazil. The weakness of the Brazilian and Argentinean economies, the upcoming presidential elections in Brazil and the weather in the fourth quarter are all key factors that could affect the results in Brazil. Results of the Engine & Power Train Group for the second half of 2002 are expected to lag behind the prior year, largely due to an anticipated reduction in demand for snow applications to more historical levels from last year's record year. The Company continues to maintain a dominant market share in engines for this application, therefore, fluctuations in market demand, which are highly dependent on weather, have a direct impact on the volumes of engines sold. As a result of past performance trends and market conditions that include production over-capacity and inexpensive Asian-based production sources, the Company will continue to undertake actions designed to improve its competitive position in all of its major markets. These actions will likely include production relocation and consolidation, development of new strategic relationships with customers, development of new products, and expansion into new product segments. These actions could involve joint ventures and business combinations. The Company expects that some of these initiatives will still occur in 2002, particularly with respect to the Engine & Transmission operations, although the exact timing will depend on the conclusion and outcome of negotiations with outside parties, which cannot be predicted at this time. Accordingly, future results will likely be impacted by one or more nonrecurring charges. While the amount and timing of these charges cannot currently 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. Page 13 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 half of 2002 generated cash flows of $68.3 million compared to $56.8 million in 2001. This improvement resulted primarily from a greater source of cash from working capital items. Working capital from $603.4 million at June 30, 2002 was down slightly from $605.7 million at the end of 2001. First half 2002 capital spending was $35.0 million compared to $30.8 million in the first half of 2001. Total capital spending for 2002 is projected to remain near 2001 levels. Working capital requirements, planned capital investment and stock repurchase expenditures, if any, for 2002 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 operations. It is likely that additional production relocation and consolidation initiatives will take place during 2002 that could have a material effect on the consolidated financial position and future results of operations of the Company. These initiatives could include joint ventures or business combinations. The Company currently has no board authorization to repurchase shares of Class A or B stock. 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 6 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 June 30, 2002 and December 31, 2001, the Company had accrued $35.1 and $36.1 million, respectively, for environmental remediation, including $28.4 and $28.7 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. Page 14 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 Company's ability to profitably develop, manufacture and sell both new and existing products; xi) 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; xii) the extent of savings actually realized from the Company's early retirement program; and xiii) 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 1. 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 on Form 10-K for year ended December 31, 2001 in Item 7A 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 first six months of 2002. 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 June 30, 2002 and December 31, 2001, the Company held foreign currency forward exchange contracts and foreign currency call options with total notional values in the amount of $6.8 and $15.0 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 values of commodity forwards outstanding at June 30, 2002 and December 31, 2001 were $14.8 and $25.8 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 June 28, 2002 the Company filed a report on Form 8-K reporting Item 5, Other Events; a press release regarding the retirement of a member of the Board of Directors. 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: August 13, 2002 BY: /s/ DAVID W. KAY --------------------------- ------------------------------ David W. Kay Vice President, Treasurer and Chief Financial Officer (on behalf of the Registrant and as principal financial officer) Page 18 -----END PRIVACY-ENHANCED MESSAGE-----