-----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, KntycdvG2u4m56DjhOppliw63gbDPMiK1oywnCVQZ9Ti7e2mrDwOPdJEQYWR4WCE f+ZclFH+NkqDaAIO/8qGaA== 0000950124-03-000630.txt : 20030313 0000950124-03-000630.hdr.sgml : 20030313 20030313163306 ACCESSION NUMBER: 0000950124-03-000630 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030313 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-00452 FILM NUMBER: 03602676 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-K 1 k74390e10vk.txt ANNUAL REPORT FOR FISCAL YEAR ENDED 12/31/02 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 COMMISSION FILE NUMBER 0-452 --------------------- TECUMSEH PRODUCTS COMPANY (Exact Name of Registrant as Specified in its Charter) MICHIGAN 38-1093240 (State of Incorporation) (I.R.S. Employer Identification No.) 100 EAST PATTERSON STREET 49286 TECUMSEH, MICHIGAN (Zip Code) (Address of Principal Executive Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (517) 423-8411 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED - ------------------- ----------------------------------------- None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Class B Common Stock, $1.00 Par Value Class A Common Stock, $1.00 Par Value Class B Common Stock Purchase Rights Class A Common Stock Purchase Rights 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ] Registrant disclaims the existence of control and, accordingly, believes that as of March 7, 2002 all of the 5,077,746 shares of its Class B Common Stock, $1.00 par value, then issued and outstanding, were held by non-affiliates of Registrant. Certain shareholders, which, as of March 7, 2003, held an aggregate of 2,279,494 shares of Class B Common Stock might be regarded as "affiliates" of Registrant as that word is defined in Rule 405 under the Securities Exchange Act of 1934, as amended. If such persons are "affiliates," the aggregate market value as of March 7, 2003 (based on the closing price of $41.60 per share, as reported on the Nasdaq Stock Market on such date) of 2,798,252 shares then issued and outstanding held by non-affiliates was approximately $116,407,283. Numbers of shares outstanding of each of the Registrant's classes of Common Stock at March 7, 2003: Class B Common Stock, $1.00 Par Value: 5,077,746 Class A Common Stock, $1.00 Par Value: 13,401,938 Certain information in the definitive proxy statement to be used in connection with the Registrant's 2003 Annual Meeting of Shareholders has been incorporated herein by reference in Part III hereof. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE ---- PART I Item 1. Business.................................................... 1 Executive Officers of Registrant............................ 10 Item 2. Properties.................................................. 10 Item 3. Legal Proceedings........................................... 11 Item 4. Submission of Matters to a Vote of Security Holders......... 12 PART II Item Market for the Registrant's Common Equity and Related 5..... Stockholder Matters......................................... 12 Item 6. Selected Financial Data..................................... 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 14 Item 7A. Quantitative and Qualitative Disclosures about Market Risk........................................................ 24 Item 8. Financial Statements and Supplementary Data................. 25 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 48 PART III Item 10. Directors and Executive Officers of the Company............. 48 Item 11. Executive Compensation...................................... 48 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.................. 48 Item 13. Certain Relationships and Related Transactions.............. 48 Item 14. Controls and Procedures..................................... 48 PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................................................... 49 Signatures............................................................ 52
PART I ITEM 1. BUSINESS GENERAL Tecumseh Products Company (the "Company") is a full line, independent global manufacturer of hermetic compressors for air conditioning and refrigeration products, gasoline engines and power train components for lawn and garden applications, and pumps. In addition, as of December 30, 2002, due to the acquisition of the FASCO Motors Group ("FASCO"), the Company also manufactures fractional horsepower electric motors and related products for a broad range of residential and commercial applications. The Company believes it is one of the largest independent producers of hermetically sealed compressors in the world, one of the world's leading manufacturers of small gasoline engines and power train products used in lawn and garden applications, and one of the leading manufacturers of fractional horsepower motors for the United States market. The Company also produces a variety of pump products with a wide range of applications. The Company's products are sold in countries all around the world. Prior to the acquisition of FASCO, the Company grouped its products into three principal market segments: Compressor Products, Engine & Power Train Products and Pump Products. With the addition of FASCO, the Company will form a new market segment referred to as Electrical Components. This market segment will include FASCO and certain other operations that were formerly grouped with Compressor Products. Compressor Products include a broad range of air conditioning and refrigeration compressors, as well as refrigeration condensing units. The Company's compressor products range from fractional horsepower models used in small refrigerators and dehumidifiers to large compressors used in unitary air conditioning applications. The Company sells compressors in all four compressor market segments: (i) household refrigerators and freezers; (ii) room air conditioners; (iii) commercial and residential unitary central air conditioning systems; and (iv) commercial refrigeration applications including freezers, dehumidifiers, water coolers and vending machines. The Company sells compressors to original equipment manufacturers ("OEMs") and aftermarket distributors. Engine & Power Train Products consist of (i) two- and four-cycle gasoline engines for use in a wide variety of lawn and garden applications and other consumer and light commercial applications and (ii) transmissions, transaxles and related parts for use principally in lawn and garden tractors and riding lawn mowers. The Company sells engine and power train products to OEMs and aftermarket distributors. Pump Products include (i) small submersible pumps used in a wide variety of industrial, commercial, and consumer applications and (ii) heavy-duty centrifugal type pumps used in the construction, mining, agricultural, marine, and transportation industries. The Company sells pump products to distributors, mass merchants and OEMs. Electrical Component Products include AC and DC electric motors, blowers, gear motors and linear actuators for a broad and diverse set of applications across many industries. These markets include automotive, appliance and consumer durables, heating and cooling equipment, computer and office equipment, industrial machinery, commercial equipment, aerospace and healthcare to name a few. In addition to motors, the Company also manufacturers other electrical components that work in tandem with electric and electronic devices to manage and regulate their operation and provide connectivity and other motor parts for sale to external customers. These products include overloads, relays, thermostats, terminals, laminations and electronic circuit boards. Recently, the Company began customer testing of an uninterruptible alternative power system for use in commercial structures, such as cell towers, that require reliable backup electrical power sources. FOREIGN OPERATIONS AND SALES In recent years, international sales and manufacturing have become increasingly important to the Company's business as a whole. In 2002, sales to customers outside the United States represented 1 approximately 48% of total consolidated net sales. In addition to North American operations, compressor products are produced in Brazil, France and India, while engines are produced in Italy and the Czech Republic. Products sold outside the United States are manufactured at both U.S. and foreign plants. Tecumseh do Brasil, Ltda. ("Tecumseh do Brasil"), the Company's Brazilian compressor subsidiary, sells its products principally in Latin America, North America, Europe and the Middle East. The Brazilian operation represents a significant portion of the Company's compressor business. In 2002, total sales generated by Tecumseh do Brasil amounted to 28% of total Compressor Products segment sales. Brazilian operating income amounted to approximately 67% of total Compressor Products segment operating income and approximately 59% of consolidated operating income for the year, exclusive of nonrecurring items. The Company's European compressor subsidiary, Tecumseh Europe, S.A. ("Tecumseh Europe"), generally sells the compressor products it manufactures in Europe, the Middle East, Africa, Latin America and Asia. The Company also has two manufacturing facilities in India that produce air conditioning and refrigeration compressors primarily for the Indian appliance market. In the engine business, the Company has two principal markets. The North American market is primarily served by the Company's U.S. manufacturing operations. The European market is served by the manufacturing operations of the Company's Italian engine subsidiary, Tecumseh Europa, S.p.A. ("Tecumseh Europa"), and to a lesser extent, by U.S. export sales. Tecumseh Europa produces light-weight engines primarily for lawn and garden applications along with some utility applications. In addition, the engine business has a manufacturing facility in the Czech Republic that produces primarily larger engines and engine components for export to the U.S. market. In the fourth quarter of 2002, the Company purchased a facility in Curitiba, Brazil. This facility, when operational in 2003, will also produce engine components and sub-assemblies for export to the U.S. and European markets. FASCO's primary market is North America with some sales in Asia. Manufacturing operations outside the United States are located in Mexico, Thailand and Australia. Mexican operations are used to supply the North American market, while the Australian operations supply Asia. The operations in Thailand supply both of FASCO's markets. The Company's dependence on sales in foreign countries entails certain commercial and political risks, including currency fluctuations, unstable economic or political conditions in some areas and the possibility of U.S. government embargoes on sales to certain countries. The Company's foreign manufacturing operations are subject to other risks as well, including governmental expropriation, governmental regulations which may be disadvantageous to businesses owned by foreign nationals and instabilities in the workforce due to changing political and social conditions. These considerations are especially significant in the context of the Company's Brazilian operations given the importance of Tecumseh do Brasil's performance to the Company's total operating results. INDUSTRY SEGMENT AND GEOGRAPHIC LOCATION INFORMATION The results of operations and other financial information by industry segment and geographic location (including the footnotes thereto) for each of the years ended December 31, 2002, 2001 and 2000 appear under the caption "Business Segment Data" in Note 6 to the Consolidated Financial Statements which appear in Part II, Item 8, of this report, "Financial Statements and Supplementary Data". This information is presented on a basis consistent with operations over the respective periods and does not include the segment identified as "Electrical Components", which was created on December 30, 2002 in conjunction with the acquisition of FASCO. Future reporting periods will include this segment and prior period information restated to conform to the Company's new segment configuration. The information contained under the caption "Business Segment Data", along with the written discussion in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the caption "Results of Operations" in this report should be read in conjunction with the business segment information presented in the following sections entitled: Compressor Products, Engine & Power Train Products and Pump Products. The section, entitled "FASCO Motors 2 Group", provides information regarding those operations which were acquired on December 30, 2002, and therefore do not affect the results of the Company for the historical periods presented. COMPRESSOR PRODUCTS The Compressor Products segment is the Company's largest business segment. A compressor is a device that compresses a refrigerant gas. When the gas is later permitted to expand, it absorbs and transfers heat, producing a cooling effect, which forms the basis for a wide variety of refrigeration and air conditioning products. All of the compressors produced by the Company are hermetically sealed. The Company's current compressor line consists primarily of reciprocating and rotary designs with a very limited number of scroll models. PRODUCT LINE The Company manufactures and sells a variety of traditional, reciprocating piston compressors suitable for use in all four compressor market segments. This line of compressors range in size from approximately 12 horsepower models used in unitary air conditioning applications to small fractional horsepower models used in refrigerators, dehumidifiers and vending machines. Rotary compressors ranging from 5,000 to 18,000 BTU/hour are produced by the Company for room and mobile air conditioning applications. These compressors generally provide increased operating efficiency, lower equipment space requirements, and reduced sound levels when compared to reciprocating piston models. Scroll compressors generally offer improved energy efficiency and reduced noise levels compared to traditional reciprocating designs and are generally preferred by OEMs for certain products, including unitary central air conditioning systems and certain commercial applications. The Company has a scroll compressor product line for the unitary air conditioning market that is sold in very limited quantities. MANUFACTURING OPERATIONS Compressor Products manufactured in the Company's U.S. plants accounted for approximately 41% of 2002 compressor sales. The balance was produced at the Company's manufacturing facilities in Brazil, France and India. The compressor operations are substantially vertically integrated, and the Company manufactures a significant portion of its component needs internally, including electric motors, metal stampings and glass terminals. Raw materials are purchased from a variety of non-affiliated suppliers. The Company utilizes multiple sources of supply and the required raw materials and components are generally available in sufficient quantities. SALES AND MARKETING The Company markets its U.S., Brazilian and Indian built compressors under the "Tecumseh" brand and French built compressors under the "Tecumseh Europe-L'Unite Hermetique" brand. The Company sells its compressor products in North America primarily through its own sales staff. Major OEM customers are assigned to sales staff on an account basis. Other customers (smaller commercial OEMs) are served by sales personnel assigned to specified geographic regions, and sales to aftermarket customers are made through independent sales representatives. The Company's U.S., Brazilian, French and Indian operations each have their own sales staff. In certain foreign markets, the Company also uses local independent sales representatives and distributors. Substantially all of the Company's sales of compressor products for room air conditioners and for household refrigerators and freezers are to original equipment manufacturers. Sales of compressor products for unitary central air conditioning systems and commercial applications include substantial sales to both OEM and distributor customers. The Company has over 1,200 customers for compressor products, the most significant of which are commercial customers. In 2002, the two largest customers for compressor products accounted for 7.6% and 5.2%, respectively, of total segment sales, or 4.5% and 3.0%, respectively, of consolidated net sales. Loss of 3 either of these customers could have a material adverse effect on the results of operations of the Compressor Products segment and, at least temporarily, on the Company's business as a whole. Generally, the Company does not enter into long-term contracts with its customers in this segment. However, the Company does pursue long-term agreements with selected major customers where a business relationship has existed for a substantial period of time. In 2002, approximately 31% of the Compressor Products produced by the Company in its U.S. plants were exported to foreign countries. The Company exports to over 60 countries. Over 90% of these exported products were sold in the Far and Middle East. COMPETITION All of the compressor market segments in which the Company operates are highly competitive. Participants compete on the basis of delivery, efficiency, noise level, price and reliability. The Company competes not only with other independent compressor producers but also with manufacturers of end products that have internal compressor manufacturing operations. NORTH AMERICAN OPERATIONS The domestic unitary air conditioning compressor market consists of OEMs and a significant compressor aftermarket. The Company competes primarily with two U.S. manufacturers, Copeland Corporation, a subsidiary of Emerson Electric, Inc., and Bristol Compressors, Inc., a subsidiary of York International Corporation. Copeland Corporation enjoys a larger share of the domestic unitary air conditioning compressor business than either Bristol Compressors, Inc. or the Company. Over the last several years there has been an industry trend toward the use of scroll compressors in the high efficiency segment of the unitary air conditioning market. Copeland Corporation and other compressor manufacturers have had scroll compressors as part of their product offerings for some time. Along with its own manufacturing capabilities, Copeland Corporation is also a member of the Alliance Scroll manufacturing joint venture with two major U.S. central air conditioning manufacturers, American Standard's Trane air conditioning division and Lennox International, Inc. Carrier Corporation, a subsidiary of United Technologies and a major original equipment manufacturer, has a joint venture to produce scroll compressors with Bristol Compressors, Inc. As discussed in the product line section, the Company offers only a limited line of scroll compressor models for sale through the Company's Cool Products aftermarket division. The Company continues to believe that the scroll compressor is important to maintaining a position in the unitary air conditioning and commercial refrigeration markets and it continues to pursue development of the scroll compressor in a manner that limits risk to the Company. In the domestic room air conditioning compressor market, the Company competes primarily with foreign companies, as a majority of room air conditioners are now manufactured outside the United States. The Company also competes to a lesser extent with U.S. manufacturers. Competitors include Matsushita Electric Industrial Corporation, Rotorex, Inc., Sanyo Electric Trading Company, L.G. Electronics, Inc., Mitsubishi, Daikin, and others. The Company has increasingly struggled with price competition from foreign companies during the last two years. Downward pressure on prices, particularly in the room air conditioning market, has continued due to world over-capacity and a market flooded by cheap Asian products both in North America and in Europe. In the domestic markets for water coolers, dehumidifiers, vending machines, refrigerated display cases and other commercial refrigeration products, the Company competes primarily with compressor manufacturers from the Far East, Europe and South America, and to a lesser extent, the United States. Competitors include Matsushita Electric Industrial Corporation, Danfoss, Inc., Embraco, S.A., Copeland Corporation and others. The household refrigerator and freezer market is vertically integrated with many white good producers manufacturing a substantial portion of their compressor needs. The Company's competitors include AB 4 Electrolux, Matsushita Electric Industrial Corporation, Embraco, S.A., Danfoss, Inc., and others. The Company has an extensive product line in this market which includes both reciprocating piston and rotary type compressors with a reputation for reliable field performance. In light of the domestic competition and world over-capacity situation, the Company has continued to take actions begun in late 1999 to consolidate North American compressor manufacturing capacity. The objective is to reduce the cost structure of the Company's domestically produced compressor models and improve the quality performance, thereby offering a more competitively priced product to our customers. In the first quarter of 2002, the Company recorded a charge of $4.5 million in connection with the relocation of rotary compressor lines from the U.S. to Brazil. The charge represents primarily the write down of certain unusable equipment. EUROPEAN OPERATIONS Tecumseh Europe sells the major portion of its manufactured compressors in Western Europe, and competes in those markets primarily with several large European manufacturers, some of which are captive suppliers, and to a lesser but increasing extent, with manufacturers from the Far East and Brazil. Competitors include AB Electrolux, Embraco, S.A., Danfoss, Inc. and others. Tecumseh Europe produces compressors primarily for the commercial refrigeration market. BRAZILIAN OPERATIONS Tecumseh do Brasil competes directly with Embraco, S.A. in Brazil and with Embraco and several other foreign manufacturers in Latin America. Historically, Tecumseh do Brasil has sold the major portion of its manufactured compressors in Latin America, North America, Europe and the Middle East. Significant devaluations of the Brazilian Real in 1999 and 2002 have set the stage for Tecumseh do Brasil to better compete in foreign markets, resulting in approximately 66%, 64% and 61% of its production being exported in 2002, 2001 and 2000, respectively. INDIAN OPERATIONS Tecumseh Products India, Ltd. has two compressor manufacturing facilities in India that sell to regional markets. Major competitors include the Indian manufacturers Kirloskar Copeland Ltd., Carrier Aircon Ltd., Godrej, Videocon, BPL and others. Tecumseh Products India, Ltd. produces compressors for the air conditioning and refrigerator and freezer markets. In 2002, approximately 31% of its sales were made to a single customer, and the loss of this customer would have a significant impact on the results of operations of this facility, and to a lesser extent, on the consolidated results of the Company as a whole. RESEARCH Ongoing research and development is another method in which the Company strives to meet its competition. The ability to successfully bring new products to market in a timely manner has rapidly become a critical factor in competing in the compressor products business as a result of, among other things, the imposition of energy efficiency standards and environmental regulations including those related to refrigerant requirements. These factors are discussed below. REGULATORY REQUIREMENTS Chlorofluorocarbon compounds ("CFCs"), the primary refrigerants used in household refrigerators and freezers and in commercial refrigeration equipment, have been identified as one of the leading factors causing depletion of the earth's ozone layer. Under a 1992 international agreement, production of CFCs in developed countries was phased out January 1, 1996. The Company began producing compressors using alternative refrigerants (approved by the U.S. government) for the commercial refrigeration market in late 1992 and for the refrigerator and freezer market during 1994. The Company believes that its rapid development of products using non-CFC refrigerant technology has improved its competitive position in these markets. 5 Hydrochlorofluorocarbon compounds ("HCFCs") are used as a refrigerant in air conditioning systems. Under a 1992 international agreement, HCFCs will be banned from new equipment beginning in 2010. Some European countries began HCFC phase-outs as early as 1998, and some have fully eliminated the use of HCFCs as early as 2002. Within the last several years, the Company has approved and released a number of compressor models utilizing U.S. government approved hydrofluorocarbons, ("HFC") refrigerants, which are considered more environmentally safe than the preceding refrigeration compounds. HFCs are also currently under global scrutiny and subject to possible future restrictions. In the last few years, there has been an even greater political and consumer movement, particularly from northern European countries, toward the use of hydrocarbons ("HCs") as alternative refrigerants, moving further away from the use of chlorine (which depletes the ozone layer of our atmosphere) and the use of fluorine (which contributes to the "green-house" effect). Both Tecumseh do Brasil and Tecumseh Europe have compressor products available for sale that utilize hydrocarbon refrigerants. Hydrocarbons are flammable compounds and have not been approved by the U.S. government for air conditioning or household refrigerator and freezer applications. It is not presently possible to estimate the level of expenditures that will be required to meet future industry requirements or the effect on the Company's competitive position. The U.S. National Appliance Energy Conservation Act of 1987 (the "NAECA") requires specified energy efficiency ratings on room air conditioners and household refrigerator/freezers. Proposed energy efficiency requirements for unitary air conditioners were published in the U.S. in January 2001 to be effective in the year 2006. The European manufacturing community has issued energy efficiency directives that specify the acceptable level of energy consumption for refrigerators and freezers. These efficiency ratings apply to the overall performance of the specific appliance, of which the compressor is one component. The Company has ongoing projects aimed at improving the efficiency levels of its compressor products and plans to have products available to meet known energy efficiency requirements as determined by our customers. Some of the Company's compressor products already meet or exceed the new energy efficiency standards. It is not presently possible to estimate the level of expenditures that will be required to meet the new standards or the effect on the Company's competitive position. ENGINE & POWER TRAIN PRODUCTS Small gasoline engines account for a majority of the net sales of the Company's Engine & Power Train Products segment. These are used in a broad variety of consumer products, including lawn mowers (both riding and walk-behind types), snow throwers, small lawn and garden tractors, small power devices used in outdoor chore products, generators, pumps and certain self-propelled vehicles. The Company manufactures gasoline engines, both two- and four-cycle types, with aluminum die cast bodies ranging in size from 2 through 22 horsepower and with cast iron bodies ranging in size from 12 through 18 horsepower. The Company's power train products include transmissions, transaxles and related parts used principally in lawn and garden tractors and riding lawn mowers. MANUFACTURING OPERATIONS The Company manufactures engines and related components in its five plants in the United States, one plant in Italy and one plant in the Czech Republic. In the fourth quarter of 2002 the Company purchased a vacant facility in Curitiba, Brazil for the manufacture of engine and power train components and sub- assemblies. This plant is expected to be operational in the first half of 2003. All of the Company's power train products are currently manufactured in one facility in the United States. Operations of the Company in this segment are partially vertically integrated as the Company produces most of its plastic parts and carburetors, as well as a substantial portion of the aluminum die-castings used in its engines and power train products. Significant declines in unit volumes since 1999 have left the Engine & Power Train operations with over-capacity. During the fourth quarter of 2002 and 2001 the Company recognized nonrecurring charges of $4.1 million and $6.1 million, respectively related primarily to the transfer of certain engine and component part production from domestic facilities to the Company's facilities in the Czech Republic. 6 SALES AND MARKETING The Company markets its Engine & Power Train Products worldwide under the "Tecumseh" and "Peerless" brands. A substantial portion of the Company's engines are incorporated into lawn and garden and other consumer products under brand labels owned by OEMs and sold through "do it yourself" home centers, mass merchandisers, department stores and lawn and garden specialty retailers. The majority of the Company's Engine & Power Train Products are sold directly to OEMs. The Company also sells engines and parts to its authorized dealers and distributors, who service its engines both in the United States and abroad. Marketing of Engine & Power Train Products is handled by the Company's own sales staff and by local sales representatives in certain foreign countries. North America and Europe are the principal markets for lawn and garden products. Sales in this segment can be significantly affected by environmental factors affecting the respective selling seasons for the various types of equipment. For example, snow thrower sales, and therefore the demand for the Company's applicable engine, show a strong correlation with the amount of snowfall received. Similarly, the frequency of weather-related and other interruptions to power supplies or the perceived threat of interruptions, affect the demand for generators. Factors such as these are largely unpredictable, yet greatly influence the year-to-year demand for engine products. In 2002, the three largest (direct ship) customers for Engine & Power Train Products accounted for 20.9%, 19.4% and 13.6%, respectively, of segment sales, or 6.7%, 6.2% and 4.4%, respectively, of consolidated net sales. Some of the engines provided to these customers are incorporated into end consumer products that are sold by Sears. Total sales to Sears and Sears affiliated suppliers in 2002 and 2001 amounted to 16.8% and 23.5%, respectively, of segment sales, or 5.4% and 8.1%, respectively, of consolidated net sales. The year over year reduction in the percentage of sales to Sears and Sears affiliated suppliers is due to a substantial decline in participation in their walk behind lawn mower segment. Loss of any of this segment's three largest customers, and/or the loss of Sears as a retail distributor, would have a material adverse effect on the results of operations of this segment and, at least temporarily, on the Company and its business as a whole. COMPETITION The Company believes it is the largest consolidated producer of engines and transmissions for the outdoor power equipment industry. However, it remains the second largest producer of small gasoline engines for lawn and garden applications in the world. The largest such producer, with a broader product range, is Briggs & Stratton Corporation. Other producers of small gasoline engines include Kohler Corporation, Toro Company and Honda Corporation, among others. Competition in the Company's engine business is based principally on price, service, product performance and features and brand recognition. As mass merchandisers have captured a larger portion of the sales of lawn and garden products in the United States, price competition and the ability to offer customized styling and feature choices have become even more important. The Company believes that it competes effectively on these bases. ENVIRONMENTAL STANDARDS The U.S. Environmental Protection Agency ("EPA") has in place regulations for the engines produced by the company. The Company produces competitively priced engines that comply with current EPA and California Air Resources Board ("CARB") Standards. Phase-in of the rules for various engine models is in progress and will continue through the 2008 model year. It is not possible at this time to determine the related costs of compliance, nor the impact on the competitive position of the Company. The State of California enforces the CARB Tier II Emission Standards. A broad range of the Company's engines has been certified to comply with these emissions standards. The European Community has implemented noise standards for some categories of engine powered equipment. These standards take effect in two stages: Stage I began January 3, 2002 and Stage II is scheduled to take affect January 3, 2006. They regulate the sound level of the complete product delivered to the end user. 7 The Company currently supplies engines to and works with equipment manufacturers to assure that their products comply with these standards. The European community has also adopted exhaust emission regulations that will affect the engines sold into the European community. These regulations will be implemented in stages with the initial stage taking affect in August 2004. These regulations are similar to the U.S. EPA regulations and as a result will not impact the competitive position of the Company. PUMP PRODUCTS The Company manufactures and sells submersible pumps, centrifugal pumps and related products through its two subsidiaries, Little Giant Pump Company ("Little Giant") and MP Pumps, Inc. ("MP Pumps"). Little Giant pumps are used in a broad range of commercial, industrial, and consumer products, including (1) heating, (2) ventilating and cooling, (3) parts washers, (4) machine tools, (5) evaporative coolers, (6) sump pumps, (7) statuary fountains, (8) water gardening and (9) waste management. Little Giant's products are sold worldwide to OEMs, distributors and mass retailers. Sales and marketing is executed through Little Giant's own sales management and through manufacturers' representatives under the "Little Giant" and "Interon" brand names. The pump industry is highly fragmented, with many relatively small producers competing for sales. Little Giant has been particularly successful in competing in the pump industry by targeting specific market niches where opportunities exist and then designing and marketing corresponding products. In the last three years, the "Little Giant" brand name has become more associated with consumer products due to the success of the subsidiary's water-gardening product line. However, the focus of this pump manufacturer has long been in the commercial and industrial market channels of the pump industry, and Little Giant is pursuing these markets through the development of complete pump systems utilizing larger pump models. MP Pumps manufactures and sells a variety of centrifugal pumps ranging in capacity from 15 to 1,500 gallons per minute, that are used in the agricultural, marine and transportation industries, and in a variety of commercial and industrial applications and end products. MP Pumps sells both to OEMs, which incorporate its pumps into their end products, and through an extensive network of market segmented distributors located throughout the United States. The distributors within the network both engineer and sell pump products to end users and small OEMs. A limited number of pumps are also sold to departments and agencies of the U.S. government. MP Pumps markets both custom and standard catalog product through its own sales staff. Pumps sold through distribution channels are branded under the "MP" and "Flomax" registered trade names. Some pumps are privately labeled for specific customer use. FASCO MOTORS GROUP On December 30, 2002 the Company acquired the stock of the companies that comprise the FASCO Motors Group from Invensys plc for approximately $411 million. Headquartered in Eaton Rapids, Michigan, FASCO is a leading manufacturer in the U.S. fractional horsepower ("FHP") motors industry. This industry is large and diverse with an estimated size of $10.4 billion. The market is generally stable as many different manufacturers use FHP motors as components of their applications. The pervasiveness of motors has been due, in part, to rising disposable income, spending on appliance "necessities" for remodeling and new construction, increased heating efficiency standards, increased use of power options in vehicles, growth in applications for motors in healthcare, leisure, exercise and home maintenance products, a wide variety of industrial applications, decreases in motor size and improvements in motor efficiency. PRODUCT LINE FASCO manufacturers AC motors, DC motors, blowers, gearmotors and linear actuators. Its products are used in a wide variety of applications in markets that include automotive, appliance and consumer durables, heating and cooling equipment, computer and office equipment, industrial machinery, commercial equipment, aerospace and healthcare to name a few. Tecumseh believes that FASCO has products to serve approximately 23% of the market, with its primary focus on high value-added products and services. 8 MANUFACTURING At the time of purchase, FASCO operated 13 manufacturing locations, 2 of which were in the process of being closed and were not purchased by Tecumseh from Invensys. The remaining 11 locations, most of which are owned, are located as follows: 6 in the United States, 2 in Mexico and 1 each in Canada, Thailand and Australia. FASCO's facilities are to a large extent vertically integrated, however, some component parts are purchased from outside suppliers. FASCO utilizes multiple sources of supply and the required raw materials, including copper wire, steel, aluminum, zinc and components are generally available in sufficient quantities. SALES AND MARKETING FASCO markets its products principally under the "FASCO" brand. The FASCO brand name is well-known and nearly a century old. FASCO sells its products primarily through its own direct sales force supplemented by third party sales representatives in certain markets. Approximately, 90% of FASCO's sales are to OEM customers. Sales professionals are assigned to accounts based upon type of account and geographic region. FASCO has over 2,500 customers for its products, the largest of which are in the automotive sector. Historically, the top three customers have accounted for less the 20% of revenues, with the largest customer accounting for approximately 10% of revenues. Loss of the largest customer could have a material adverse affect on the results of FASCO. In addition, certain of FASCO's customers are competitors of Tecumseh's other business segments. Individually, none of these customers exceed 1% of FASCO's total sales. Generally, FASCO does not have long-term contracts with its customers, with the exception of select major customers. COMPETITION All of the application markets in which FASCO competes are highly competitive. Different competitors are present within each of the application markets. Key competitors in the automotive market segment include Daewoo, Bosch and Johnson Electric. Key competitors in residential and commercial market segments include General Electric, Emerson and A.O. Smith. In the linear actuator and gearmotor market segments, key competitors include Merkle-Koff, Bison and Hubbell. Participants compete on various levels, including motor design and application, customer service and price. Motor design and application is critical because OEMs are constantly improving their product lines, which often require new motor specifications. In general, end-use markets today are looking for smaller, more efficient, faster, cooler-operating and lighter motors. In addition to competing with other independent motor manufactures, FASCO also competes to a lesser extent with manufacturers of end products that have internal motor manufacturing operations. BACKLOG AND SEASONAL VARIATIONS Most of the Company's production is against short-term purchase orders, and backlog is not significant. Both Compressor Products and Engine & Power Train Products are subject to some seasonal variation. Generally, the Company's sales and operating profit are stronger in the first two quarters of the year than in the last two quarters. PATENTS, LICENSES AND TRADEMARKS The Company owns a substantial number of patents, licenses and trademarks and deems them to be important to certain lines of its business; however, the success of the Company's overall business is not considered primarily dependent on them. In the conduct of its business, the Company owns and uses a variety of registered trademarks, the most familiar of which is the trademark consisting of the word "Tecumseh" in combination with a Native American Indian head symbol. RESEARCH AND DEVELOPMENT The Company must continually develop new and improved products in order to compete effectively and to meet evolving regulatory standards in all of its major lines of business. The Company spent approximately 9 $30.8, $27.6 and $28.1 million during 2002, 2001, and 2000, respectively, on research activities relating to the development of new products and the development of improvements to existing products. None of this research was customer sponsored. EMPLOYEES On December 31, 2002, the Company employed approximately 22,000 persons, 55% of whom were employed in foreign locations. Of this total approximately, 5,200 employees were added on December 30, 2002 with the acquisition of FASCO. Approximately 2,000 of the U.S. employees were represented by labor unions, with no more than approximately 1,300 persons represented by the same union contract. The majority of foreign location personnel are represented by national trade unions. The number of the Company's employees is subject to some seasonal variation. Excluding the employees added at year end as a result of the FASCO acquisition, the maximum number of persons employed was approximately 17,200 and the minimum was 16,800. Overall, the Company believes it generally has a good relationship with its employees. AVAILABLE INFORMATION We make available, free of charge, on our Internet website (http://www.tecumseh.com) our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. EXECUTIVE OFFICERS OF THE REGISTRANT Kenneth G. Herrick retired as Chairman of the Board of Directors effective February 26, 2003. He was given the honorary designation of Chairman Emeritus by the Board. Todd W. Herrick has succeeded Kenneth G. Herrick as Chairman. The following are the executive officers of the Company.
PERIOD OF SERVICE NAME AND AGE OFFICE OR POSITION HELD AS AN OFFICER - ------------ ----------------------- ----------------- Todd W. Herrick, 60....................... Chairman of the Board of Directors, Since 1974 President and Chief Executive Officer(1) David W. Kay, 54.......................... Vice President, Treasurer, and Chief Since 2001 Financial Officer(2) Michael R. Forman, 56..................... Vice President and Corporate Director of Since 2001 Human Resources(3)
- --------------- (1) Last five years of business experience -- President and Chief Executive Officer, Tecumseh Products Company 1986 to 2003. (Employed with Tecumseh Products Company since 1972.) (2) Last five years of business experience -- Corporate Controller, Tecumseh Products Company 1999 to 2001. Corporate Controller, RTI International Metals, Inc. (formerly RMI Titanium Company) 1986 to 1999. (Employed with Tecumseh Products Company since 1999.) (3) Last five years of business experience -- Assistant Director of Corporate Human Resources, Tecumseh Products Company 1990 to 2001. (Employed with Tecumseh Products Company since 1990.) ITEM 2. PROPERTIES The Company's headquarters are located in Tecumseh, Michigan, approximately 50 miles southwest of Detroit. At December 31, 2002 the Company had 43 principal properties worldwide occupying approximately 11.0 million square feet with the majority, approximately 9.6 million square feet, devoted to manufacturing. Seventeen facilities with approximately 5.2 million square feet were located in nine countries outside the 10 United States. The following table shows the approximate amount of space devoted to each of the Company's three principal business segments and FASCO.
APPROXIMATE FLOOR AREA INDUSTRY SEGMENT IN SQUARE FEET - ---------------- -------------- Compressor Products......................................... 6,236,000 Engine & Power Train Products............................... 2,647,000 Pump Products and Other..................................... 442,000 FASCO Motors Group.......................................... 1,568,000
Five domestic facilities, including land, building and certain machinery and equipment were financed and leased through industrial revenue bonds. All owned and leased properties are suitable, well maintained and equipped for the purposes for which they are used. The Company considers that its facilities are suitable and adequate for the operations involved. ITEM 3. LEGAL PROCEEDINGS 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. 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. As part of these negotiations the Company has agreed to pay an additional $2.1 million in past response costs to the EPA. At December 31, 2002 and December 31, 2001, the Company had accrued $29.2 and $28.7 million, respectively, for estimated costs associated with the cleanup of this site. The actual cost will be governed by numerous factors including the requirements of the WDNR, and may be greater or lower than the amount accrued. 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 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 began remediation of soils in 2001 on the east side of the facility. Additional remediation of soils began in the fall of 2002 in two other areas on the plant 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 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 11 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 2003 involving a stream segment downstream of the source area. The Company has provided for these costs. Although participation in a cooperative remedial effort after 2003 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 that may be necessary with regard to such other sites. At December 31, 2002 and 2001, the Company had accrued $36.3 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. Various lawsuits and claims, including those involving ordinary routine litigation incidental to its business, to which the Company is a party, are pending, or have been asserted, against the Company. Although the outcome of these matters cannot be predicted with certainty, and some of them 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted during the fourth quarter of 2002 to a vote of security holders through the solicitation of proxies or otherwise. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Class A and Class B common stock trades on the Nasdaq Stock Market under the symbols TECUA and TECUB, respectively. Total shareholders of record as of March 7, 2003 were approximately 513 for Class A common stock and 506 for Class B common stock. There were no equity securities sold by the Company during the period covered by this report. The Company has no equity securities authorized for issuance under compensation plans. MARKET PRICE AND DIVIDEND INFORMATION RANGE OF COMMON STOCK PRICES AND DIVIDENDS FOR 2002
SALES PRICE ------------------------------------- CLASS A CLASS B CASH ----------------- ----------------- DIVIDENDS QUARTER ENDED HIGH LOW HIGH LOW DECLARED - ------------- ------- ------- ------- ------- --------- March 31............................. $56.220 $46.200 $52.000 $43.350 $0.32 June 30.............................. 57.250 45.000 52.750 41.700 0.32 September 30......................... 53.520 40.760 49.840 37.250 0.32 December 31.......................... 49.120 37.820 45.750 35.100 0.32
12 RANGE OF COMMON STOCK PRICES AND DIVIDENDS FOR 2001
SALES PRICE ------------------------------------- CLASS A CLASS B CASH ----------------- ----------------- DIVIDENDS QUARTER ENDED HIGH LOW HIGH LOW DECLARED - ------------- ------- ------- ------- ------- --------- March 31............................. $54.000 $38.750 $50.750 $36.250 $0.32 June 30.............................. 53.450 43.500 47.950 40.438 0.32 September 30......................... 52.990 40.800 47.890 38.820 0.32 December 31.......................... 52.530 41.120 49.600 39.500 0.32
ITEM 6. SELECTED FINANCIAL DATA The following is a summary of certain financial information of the Company.
YEARS ENDED DECEMBER 31, ---------------------------------------------------- 2002 2001 2000 1999 1998 -------- -------- -------- -------- -------- (DOLLARS IN MILLIONS EXCEPT PER SHARE DATA) Net sales.................................. $1,343.8 $1,398.9 $1,649.9 $1,814.3 $1,750.2 Cost of sales and operating expenses....... 1,141.6 1,207.2 1,411.4 1,507.4 1,492.8 Selling and administrative expenses........ 117.4 112.1 118.3 117.6 115.8 Nonrecurring items......................... 10.3 35.4 33.5 (5.5) 45.0 -------- -------- -------- -------- -------- Operating income........................... 74.5 44.2 86.7 194.8 96.6 Interest expense........................... (5.8) (4.1) (6.7) (7.9) (6.9) Interest income and other, net............. 15.1 20.3 27.9 28.1 27.8 Nonrecurring gain.......................... -- -- -- 8.6 -- -------- -------- -------- -------- -------- Income before taxes and cumulative effect of change in accounting principle........ 83.8 60.4 107.9 223.6 117.5 Taxes on income............................ 29.7 17.6 41.8 81.6 43.3 -------- -------- -------- -------- -------- Income before cumulative effect of accounting change........................ 54.1 42.8 66.1 142.0 74.2 Cumulative effect of change in accounting for goodwill............................. (3.1) -- -- -- -- -------- -------- -------- -------- -------- Net income................................. $ 51.0 $ 42.8 $ 66.1 $ 142.0 $ 74.2 ======== ======== ======== ======== ======== Basic and diluted earnings per share from continuing operations.................... $ 2.93 $ 2.30 $ 3.44 $ 7.00 $ 3.47 Cash dividends declared per share.......... $ 1.28 $ 1.28 $ 1.28 $ 1.22 $ 1.20 Weighted average number of shares outstanding (in thousands)............... 18,480 18,607 19,218 20,277 21,366 Cash and cash equivalents.................. $ 333.1 $ 317.6 $ 268.2 $ 270.5 $ 277.7 Working capital............................ 503.7 605.7 602.4 618.6 605.9 Net property, plant and equipment.......... 570.5 431.9 444.7 477.4 508.9 Total assets............................... 2,063.0 1,519.8 1,553.1 1,553.3 1,556.2 Long-term debt............................. 298.2 13.7 14.2 15.6 17.2 Stockholders' equity....................... 978.9 977.7 995.4 1,014.2 995.7 Capital expenditures....................... 73.9 65.4 64.0 73.0 64.4 Depreciation and amortization.............. 65.1 72.0 71.2 72.4 74.6 Cost of common shares repurchased.......... -- 18.1 39.6 57.7 49.0
13 Nonrecurring items: 2002 net income included $10.3 million ($6.6 million net of tax or $0.36 per share) in nonrecurring charges. Of this amount, the Engine & Power Train business had a charge of $5.8 million ($3.7 million net of tax or $0.20 per share) which included $4.1 million for costs, mostly write-downs of fixed assets, associated with the relocation of engine component manufacturing, and the discontinuation of production activities at its Grafton, Wisconsin facility and $1.7 million for additional environmental clean up costs, primarily additional past response costs levied by the EPA for its Sheboygan, Wisconsin facility. Additionally, the Compressor business had a charge of $4.5 million ($2.8 million net of tax or $0.15 per share) for costs related to the relocation of additional rotary compressor lines from the U.S. to Brazil, primarily the write-off of certain unusable equipment. 2001 net income included $29.3 million ($18.9 million net of tax) related to the cost of an early retirement incentive program and an asset impairment charge of $6.1 million ($3.9 million net of tax) for unusable equipment due to the transfer of certain engine and component part production from domestic facilities to the Company's facilities in the Czech Republic. During 2000 the Company recorded a $33.5 million charge ($23.3 million net of tax) related to the realignment of its North American and Indian compressor manufacturing operations. The 1999 results included credit of $14.1 million ($9.0 million net of tax) comprised of a $4.6 million gain on the curtailment of employee benefit plans at a closed plant, a $4.0 million gain on an insurance settlement, and an $8.6 million gain from currency hedging at the Company's Brazilian subsidiary. These gains were partially offset by charges for plant closing and environmental costs totaling $3.1 million. During 1998, the Company recorded a $45 million charge ($28.8 million net of tax) for asset impairment. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY STATEMENTS RELATING TO FORWARD LOOKING STATEMENTS The following report should be read in connection with the information contained in the Consolidated Financial Statements and Notes to Consolidated Financial Statements. This discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act and 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; ii) the effect of terrorist activity and armed conflict; iii) weather conditions affecting demand for air conditioners, lawn and garden products and snow throwers; iv) 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; v) financial market changes, including fluctuations in interest rates and foreign currency exchange rates; vi) economic trend factors such as housing starts; vii) emerging governmental regulations; viii) availability of materials; ix) actions of competitors; x) the ultimate cost of resolving environmental matters; 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 integration of FASCO into the Company and the issuance of debt in connection with the FASCO acquisition; 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 14 obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise. OVERVIEW Tecumseh Products Company is a full line, independent global manufacturer of hermetic compressors for air conditioning and refrigeration products, gasoline engines and power train components for lawn and garden applications, and pumps. In addition, as of December 30, 2002, due to the acquisition of FASCO, the Company also manufactures fractional horsepower electric motors and related products for a broad range of residential and commercial applications. The Company's products are sold in countries all around the world. The 2002 statement of income does not include any of FASCO's operations, nor does the discussion and analysis of results of operations set forth below. For the reporting periods presented products are grouped into three principal industry segments: Compressor Products, Engine & Power Train Products, and Pump Products. In future periods the Company will be including the results of FASCO and certain other operations in a new Electrical Components segment. Consolidated net income for 2002 amounted to $51.0 million or $2.76 per share, compared to $42.8 million or $2.30 per share in the same period of 2001. Included in the full year 2002 reported results were several one-time items, such as nonrecurring charges of $10.3 million ($6.6 million net of tax or $0.36 per share), 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 No. 142, "Goodwill and Other Intangible Assets". On a pro forma basis (excluding these one-time items), full year results would have been $60.7 million or $3.28 per share. Full year 2001 results also included several one-time items, such as nonrecurring charges of $35.4 million ($22.8 million net of tax or $1.23 per share), a $5.2 million ($0.28 per share) tax credit resulting from a refund of prior years' federal income taxes, and $2.0 million net of tax ($0.11 per share) for interest income associated with the tax credit. For comparative purposes, pro forma results for the 2001 full year (excluding these one-time items) would have been $58.4 million or $3.14 per share. The improvement in pro forma results for the full year was attributable to better results from the Compressor and Pumps Groups, mostly offset by a substantial decline in profitability at the Engine & Power Train Group. Consolidated net sales for the full year ended December 31, 2002 amounted to $1,343.8 million, a decrease of 3.9%, compared to sales of $1,398.9 million for the comparable period in 2001. Excluding the effects of foreign currency translation on sales, the lower 2002 sales were primarily attributable to the Engine & Power Train Group. RESULTS OF OPERATIONS COMPRESSOR PRODUCTS 2002 vs. 2001 Sales for the year ended December 31, 2002 amounted to $790.9 million compared to $804.6 million in 2001. Excluding the $8.5 million reduction in sales resulting from currency translation, full year sales declined less than 1%. Increases in sales of compressors used in household refrigeration and commercial applications nearly offset losses of share in the unitary and room air conditioning markets. Sales of compressors manufactured in North America were down 19.3% as productive capacities for the residential refrigeration and room air conditioning markets were moved to Brazil and India where favorable cost structures enable the Company to more effectively compete. Correspondingly, sales of compressors manufactured in Brazil and India increased 35.4% over prior year levels. Compressor Group operating income, exclusive of non-recurring charges, for the years ended December 31, 2002 and 2001 amounted to $77.5 million and $54.3 million, respectively. The improvement in operating margins was attributable to greater coverage of fixed costs, the positive effects of restructuring 15 actions implemented over the last 18 months, and the favorable effects from devaluation of the Brazilian Real. This improvement in operating margins was partially offset by declining margins on high-volume, commodity-type compressors and accelerated spending on new products. The Company's Brazilian operations contributed approximately 67% of the compressor business's operating profit in 2002, compared to 77% in 2001. While Brazilian operation profits improved year over year, the decline in the overall percentage was a result of improved profitability in North America where prior restructuring actions reduced fixed costs. Indian operations were also profitable for the full year 2002 compared to a loss in 2001. 2001 vs. 2000 Annual Compressor Group sales declined approximately 13% to $804.6 million in 2001 compared to $919.8 million in 2000. While sales declines generally occurred throughout the Company's global operations reflective of the slower worldwide economy, the majority of the decline was attributable to the continuing sea-change in the North American room air conditioning market. U.S.-based manufacturers of room air conditioners continued to shift the manufacture of completed units to Asia where inexpensive locally produced compressors were readily available. As a result, the Company lost market share in the room air conditioning market which continued to erode the volume of North American-based production. Brazilian sales also declined by approximately 14% reflecting weakness in the local economy and the effects of currency translations. Compressor Group operating income, exclusive of nonrecurring items, was $54.3 million in 2001 compared to $66.5 million in 2000. Operating margins were 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. The Company's Brazilian operations continued to be a significant component of worldwide compressor operations. Operating margins in 2001 were consistent with 2000 margins, therefore, increasing the Brazilian operations overall portion of Compressor Group operating profit from 66% in 2000 to 77% in 2001. The Indian operations significantly reduced their operating losses from 2000 levels when margins were adversely impacted by a lengthy work stoppage and start-up costs associated with a new manufacturing plant. ENGINE & POWER TRAIN PRODUCTS 2002 vs. 2001 Engine & Power Train sales and operating income declined for the third consecutive year. Sales for the year ended December 31, 2002 amounted to $432.3 million compared to $480.9 million in 2001. Operating income, exclusive of nonrecurring items, for the year ended December 31, 2002 was $1.4 million compared to $20.0 million in 2001. For the full year 2002, domestic engine unit volume decreased 8% over the prior year, including a 36% decline in engines for snow throwers. 2001 was a record year for snow thrower engine sales as a result of low inventories at retail at the beginning of that season. However, low snowfall in the winter of 2002 left above average inventories at retail at the end of the 2002 season and as a result, sales of engines for snow throwers was below average for the calendar year as fewer were required for the winter of 2003. Declines in volume, less profitable mix and declining contribution margins were responsible for the substantial deterioration in full year profitability. 2001 vs. 2000 The Engine & Power Train Group's sales and operating income declined for the second straight year with 2001 results significantly below those for 2000. Sales declined from $612.8 million in 2000 to $480.9 million in 2001 reflecting a significant reduction in both engine and transmission sales in the lawn and garden segment, as well as various utility applications, such as portable power generators. While sales of engines used for snow throwers was one of the best seasons in the group's history, they were not enough to offset the demand in other applications. While the sales declines were reflective of the overall economic condition, some portion of the decline was attributable to the Company's declining participation in the walk behind mower segment. 16 As a result of the approximate 22% decline in sales, operating income of $20.0 million in 2001 was dramatically lower than the $46.8 million posted in 2000. These amounts were exclusive of a nonrecurring charge recorded in the fourth quarter of 2001 of $6.1 million ($3.9 million net of tax) related primarily to the transfer of certain engine and component part production from domestic facilities to the Company's newly acquired facilities in the Czech Republic. PUMP PRODUCTS 2002 vs. 2001 Pump business sales for the year ended December 31, 2002 increased 6.3% to $120.6 million compared to $113.4 million in 2001. Full year operating income amounted to $14.8 million in 2002 compared to $11.6 million in 2001. Improvements in sales were primarily in pumps used in consumer applications, such as water gardening where the overall market continued to grow, and condensate pumps used in HVAC applications where the Company has gained share in that market. 2001 vs. 2000 Pump Products sales in 2001 amounted to $113.4 million compared to $117.3 million in 2000, a slight decrease of 3%. Operating income in 2001 was $11.6 million compared to $14.7 million in 2000. Decreased retail sales activity in the water gardening market, resulting from a soft economy combined with slight decreases in sales for industrial and commercial applications, were primary reasons for the decline in sales and profits in 2001. During the third quarter of 2000, the Pump segment entered the residential wastewater collection, transfer and disposal market by acquiring the assets of Interon Corporation. This market, while currently in its infancy, is expected to grow rapidly as it provides an economical alternative to conventional gravity wastewater disposal systems. The acquisition of Interon assets has not had a material impact on reported results of operations, financial position or cash flows. NONRECURRING ITEMS Full year 2002 results were adversely impacted by $10.3 million ($6.6 million net of tax or $0.36 per share) in nonrecurring charges. During the fourth quarter, a charge of $5.8 million ($3.7 million net of tax or $0.20 per share) was recorded in the Engine & Power Train business. Included in the charge was $4.1 million for costs, mostly write-downs of fixed assets, associated with the relocation of engine component manufacturing, and the discontinuation of production activities at its Grafton, Wisconsin facility. Also included in the charge was $1.7 million for additional environmental clean up costs, primarily additional past response costs levied by the EPA for its Sheboygan, Wisconsin facility. During the first quarter, a charge of $4.5 million ($2.8 million net of tax or $0.15 per share) was recorded in the Compressor business. This charge was for costs, primarily the write-off of certain unusable equipment, related to the relocation of additional rotary compressor lines from the U.S. to Brazil. The 2001 results were adversely impacted by $35.4 million ($22.8 million net of tax, or $1.23 per share) in nonrecurring items. 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, or $1.02 per share) and was recorded as a nonrecurring charge in the third quarter. Ongoing cost savings from this action were estimated to be in a range of $10 to $12 million annually. During the fourth quarter of 2001, the Company recorded a charge of $6.1 million ($3.9 million net of tax, or $.21 per share) in the Engine & Power Train business related primarily to the transfer of certain engine and component part production from domestic facilities to the Company's facilities in the Czech Republic. 17 In early 2000, the Company recorded $33.5 million in nonrecurring charges ($23.3 million net of tax, or $1.21 per share) related to the restructuring and realignment of its domestic and international compressor manufacturing operations. These amounts included approximately $15.5 million ($12.0 million net of tax) in severance pay and future benefit costs relating to the announced realignment and manpower reductions in the Company's North American and Indian manufacturing operations, $3.2 million ($2.0 million net of tax) in plant closing and exit costs, and $14.8 million ($9.3 million net of tax) in asset impairment charges for idled, unusable and/or underutilized equipment. INTEREST INCOME AND INCOME TAX Interest income and other, net amounted to $15.1 million, $20.3 million, and $27.9 million in 2002, 2001 and 2000, respectively. The decline was the result of declining average interest rates over the period. On a comparable basis, the Company's effective tax rates were 35.4%, 35.6% and 38.7% for the years ended December 31, 2002, 2001 and 2000, respectively. The 2001 effective tax rate excludes 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. The higher effective tax rate in 2000 was due primarily to the inability to recognize a tax benefit on Indian operating losses. ACQUISITIONS On December 30, 2002, the Company acquired the FASCO Motors Group from Invensys Plc for cash of $396.6 million and the assumption of approximately $14.5 million in debt. FASCO is a leading manufacturer in the U.S. of fractional horsepower motors. FASCO manufactures AC motors, DC motors, blowers, gear motors and linear actuators, all of which are used in a wide variety of applications within the HVAC, automotive, healthcare and appliance industries. The addition of FASCO will allow the Company to reach new customers and markets and enables the Company to deliver higher valued-added products and complete customer solutions in all of its business segments. The acquisition was financed with proceeds from $325 million in new bank borrowings and internal cash flows. Of the $325 million in new borrowings, $250 million was from a six-month bridge loan and $75 million was from a new three-year $125 million revolving credit facility. As the bridge loan was replaced on March 5, 2003 with permanent long-term financing, it has been presented as long-term debt in the December 31, 2002 balance sheet. The purchase price allocation has been prepared on a preliminary basis, and reasonable changes are expected as additional information becomes available. The following is a summary of the estimated values of the assets acquired and liabilities assumed as of the date of the acquisition:
(DOLLARS IN MILLIONS) Current assets.............................................. $110.4 Property, plant and equipment............................... 158.2 Intangible assets........................................... 55.0 Goodwill.................................................... 223.2 ------ Total assets acquired..................................... $546.8 ====== Current liabilities......................................... $ 92.2 Other liabilities........................................... 53.7 Long-term debt.............................................. 0.6 ------ Total liabilities assumed................................. $146.5 ======
The Company also expended $4.0 million in April 2002 for the acquisition of Manufacturing Data Systems, Inc., a supplier of Internet-enabled, open-architecture software motion control applications that increase manufacturing flexibility and enable agile manufacturing for the Computer Numerical Control (CNC) and General Motion Control (GMC)markets. 18 In May 2001, the Company acquired an engine manufacturing facility in the Czech Republic for $14.9 million. This transaction was accounted for as an asset purchase. The results of operations for this facility since the acquisition are included in the Company's statement of consolidated income. LIQUIDITY AND CAPITAL RESOURCES Historically, the Company's primary source of cash has been net cash provided by operations, however, as noted above, to partially finance the acquisition of FASCO, the Company borrowed $325 million on December 30, 2002. For the year ended 2002, operating activities generated cash flows of $131.5 million, compared to $173.0 million in 2001. This decrease resulted primarily from higher working capital requirements offset by higher operating results. Capital expenditures for 2002 amounted to $73.9 million compared to $65.4 million in 2001. Approximately $41.3 million was spent on capacity enhancements, new product capabilities and routine upgrades in the Brazilian, French and Indian compressor facilities. Approximately $5.3 million was spent primarily on facility improvement and upgrades in the North American Compressor Operations. Engine operations capital expenditures were approximately $23 million, $17.8 million of which were spent on facilities, capacity expansion and new product capabilities in Brazil and the Czech Republic. Net cash provided by financing activities amounted to $353.8 million in 2002 compared to a net cash use of $37.0 million in 2001. Proceeds from borrowings net of debt repayments in 2002 amounted to $377.5 million compared to $4.9 million in 2001. The Company paid dividends of $23.7 million and $23.8 million in 2002 and 2001, respectively. During 2001, the Company repurchased 8,500 shares of Class A stock at a cost of $0.4 million and 392,400 shares of Class B stock at a cost of $17.7 million. There were no stock repurchases during 2002. The Company continued to preserve its strong liquid financial position by maintaining a cash and cash equivalent balance of $333.1 million at December 31, 2002, compared to $317.6 million at the end of 2001. Working capital was $503.7 million at December 31, 2002 compared to $605.7 million at December 31, 2001. The ratio of current assets to current liabilities was 2.1 in 2002 and 3.4 in 2001. RESTRUCTURING ACTIONS As discussed under "Nonrecurring Items", the Company has undertaken several restructuring actions during 2000 through 2002 to improve the overall competitiveness of the Company. These actions were intended to lower the Company's overall operating costs and to eliminate non-productive capacity. During the first quarter of 2002 the Company recorded a charge of $4.5 million ($2.8 million net of tax or $0.15 per share) in the Compressor business related to the relocation of additional rotary compressor lines from the Tupelo, Mississippi plant to Brazil. The charge was primarily for the write-off of certain equipment that is not useable in Brazil. During the fourth quarter of 2002 the Company recorded a charge of $4.1 million ($2.6 million net of tax or $0.14 per share) in the Engine & Power Train business. The charge related to the relocation of certain component part manufacturing operations from several facilities in the United States to the Czech Republic and the discontinuation of production activities at its Grafton, Wisconsin facility. The charge was primarily for the write-down of excess fixed assets and relocation costs. 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 was 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. 19 The fourth quarter 2001 charge of $6.1 million ($3.9 million net of tax, or $.21 per share) in the Engine & Power Train business related primarily to the transfer of certain engine and component part production from domestic facilities to the Company's facilities in the Czech Republic. In 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, 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 that will be paid from Company funds, and $2.9 million that 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. PROJECTED CASH REQUIREMENTS Capital expenditures for 2003 are projected to be slightly above 2002 levels, however, this includes projected capital expenditures for FASCO, which was not part of the consolidated Company during 2002. Approximately two thirds (2/3) of the budgeted capital spending is planned for foreign operations to expand product offerings. Additional spending may be required for acquisitions or investments in joint ventures or partnering arrangements should such opportunities be pursued. Working capital requirements, planned capital investment, capacity consolidation, and restructuring costs for 2003 are expected to be financed primarily through internally available funds, supplemented, if necessary, by borrowings and other sources of external financing. LONG-TERM LIQUIDITY The Company anticipates that it will be able to continue to fund its long-term liquidity requirements, including capital expenditures and working capital needs, from internally generated funds, supplemented by borrowings and other financing arrangements as required. The Company maintains a $125 million revolving credit facility, which is available for general corporate purposes. At December 31, 2002 the Company had borrowed $75 million against this line on a short-term basis to fund the acquisition of FASCO. The Company completed a private placement of $300 million of long-term senior notes with an average maturity of 6 years and a final maturity of 8 years on March 5, 2003. Proceeds from the new notes were used to repay the $250 million in bridge financing and to repay a portion of the amount borrowed against the revolving credit facility. Other available financing sources include long-term financing arrangements in connection with state sponsored investment incentive programs, short-term borrowing and various other forms of financial instruments to finance foreign working capital requirements and hedge exposure to foreign currency exchange risks. The Company regularly considers various strategic business opportunities including acquisitions. Tecumseh evaluates such potential acquisitions on the basis of their ability to enhance the Company's existing products, operations, or capabilities, as well as provide access to new products, markets and customers. Although no assurances can be given that any acquisition will be consummated, the Company may finance such acquisitions through a number of sources including internally available cash resources, new debt financing, the issuance of equity securities or any combination of the above. INTERNATIONAL OPERATIONS As of December 31, 2002, and excluding amounts related to FASCO, approximately 44% of the Company's consolidated net sales and 37% of the Company's total assets were outside of North America, primarily in Brazil, France, Italy, India and the Czech Republic. Including FASCO, 29% of the Company's total assets were outside North America, with additional non-North American locations including Australia and Thailand. Management believes that international operations have been, and will continue to be, a significant benefit to overall Company performance. However, the Company's international operations are 20 subject to a number of risks inherent with operating abroad, including, but not limited to, world economic conditions, political instability and currency rate fluctuations. There can be no assurance that these risks will not have a material adverse impact on the Company's foreign or consolidated net sales, or on its results of operations or financial condition. For further information, see Item 7A, "Quantitative and Qualitative Disclosure About Market Risk" below. IMPACT OF FOREIGN CURRENCIES Changes in the value of foreign currencies in relation to the U.S. dollar can affect both reported results and the competitiveness of goods produced for export in countries like Brazil. While the Company does hedge some of its short-term forecasted transactions denominated in foreign currencies, the effects of these contracts were not significant in 2002 or 2001. Alternatively, the Company does not generally hedge its net investment in its foreign subsidiaries. During 2002, the U.S. dollar weakened against most currencies where the Company has operations, with the exception of the Brazilian Real which devalued 53% against the U.S dollar during the year. As a result, the Company's investments in its foreign net assets declined in U.S. dollar value by $26.1 million. Under applicable accounting standards, translation adjustments relating to the Company's investments in foreign affiliates are reflected in other comprehensive income (part of stockholders' equity) in the period in which they arise. ENVIRONMENTAL As discussed under "Business -- Engine & Power Train Products -- Environmental Standards", the Company's engines are subject to increasingly stringent emission and noise standards. In addition, as discussed under "Business -- Compressor Products -- Regulatory Requirements", the Company is subject to evolving and sometimes conflicting environmental regulations and regulatory requirements governing the types of refrigerants used in refrigeration and air conditioning products. It is not presently possible to estimate the level of expenditures which will be required to meet any future industry or governmental regulatory requirements, or the effect on the Company's competitive position. 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 Item 3 "Legal Proceedings" and Note 8 to the Consolidated 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 December 31, 2002 and 2001 the Company had accrued $36.3 million and $36.1 million, respectively for environmental remediation, including $29.2 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 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. For further information on environmental matters, see Item 3, "Legal Proceedings". NEW ACCOUNTING STANDARDS 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) was written-off and recognized as a cumulative effect from an accounting change. The net book value of 21 the Company's goodwill at December 31, 2002, was $270.3 million, and included $223.2 million of goodwill recorded in connection with the FASCO acquisition. Amortization of goodwill amounted to approximately $1.5 million for the twelve months ended December 31, 2001. On January 1, 2002, the Company also adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets". This statement, which superseded 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 items recorded in the first and fourth quarters were determined in accordance with the provisions of SFAS No. 144. In June 2002 the Financial Accounting Standards Board ("FASB") issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". The standard nullifies EITF Issue 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit". In particular, the new standard applies to involuntary work force reductions and the costs to consolidate facilities. The statement mostly addresses when such costs can be accrued and generally delays recognition versus current practice by providing that liabilities must be actually incurred and not just planned. The standard is effective for actions occurring after December 31, 2002. To the extent that the Company takes such actions in 2003, SFAS No. 146 will be applied. The FASB also issued other standards during 2002, including SFAS No. 148, "Accounting for Stock-based Compensation -- Transition and Disclosure an amendment to SFAS No. 123". The Company does not employ the type of stock-based compensation covered by SFAS No. 148 and does not believe that it or any of these other standards will have an effect on the Company. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of financial statements requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses during the period. Management bases its estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Management continually evaluates the information used to make these estimates as our business and the economic environment change. The use of estimates is pervasive throughout the Company's financial statements, but the accounting policies and estimates Management considers most critical are as follows: Impairment of Long-Lived Assets It is the Company's policy to review our long-lived assets for possible impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable. The Company recognizes losses relating to the impairment of long-lived assets when the future undiscounted cash flows are less than the asset's carrying value. Assumptions and estimates used in the evaluation of impairment, including current and future economic trends, the effects of new technologies and foreign currency movements are subject to a high degree of judgment and complexity. Changes in the assumptions and estimates may affect the carrying value of long-lived assets and could result in additional impairment charges in future periods. Goodwill and Intangibles Purchase accounting requires accounting estimates and judgments to allocate the purchase price to the fair market value of the assets and liabilities purchased. On December 30, 2002 the Company acquired FASCO for $396.6 million, recognizing $223.2 million in goodwill and $55 million in intangibles with lives ranging from 2 years to indefinite lives. These values are based upon preliminary estimates of the fair market values of the tangible and intangible assets and liabilities of FASCO at the date of acquisition. These estimates will be adjusted upon completion of professional asset appraisals. In addition, the Company has additional amounts of goodwill and intangible assets recorded from previous acquisitions. These assets, and those recorded in conjunction with the FASCO acquisition, are 22 subject to periodic evaluation for impairment when circumstances warrant, or at least once per year. With respect to goodwill, impairment is tested in accordance with SFAS No. 142, "Goodwill and Other Intangibles" by comparison of the carrying value of the reporting unit to its fair value. As there is not a quoted price for the Company's reporting units, fair value is estimated based upon a present value technique of estimated future cash flows. Assumptions in estimating future cash flows are subject to a high degree of judgment and complexity. Changes in the assumptions and estimates may affect the carrying value of goodwill and could result in additional impairment charges in future periods. Intangible assets other than goodwill are also subject to periodic evaluation for impairment and are equally sensitive to changes in the underlying assumptions and estimates. Accrued and Contingent Liabilities The Company has established reserves for environmental and legal contingencies in accordance with SFAS No. 5. A significant amount of judgment and use of estimates is required to quantify the Company's ultimate exposure in these matters. The valuation of reserves for contingencies is reviewed on a quarterly basis at the operating and corporate levels to assure that the Company is properly reserved. Reserve balances are adjusted to account for changes in circumstances for ongoing issues and the establishment of additional reserves for emerging issues. While management believes that the current level of reserves is adequate, changes in the future could impact these determinations. For additional information on environmental liabilities, see Note 8 to the Financial Statements. Employee Related Benefits Accounting for pensions and other postretirement benefits involves several assumptions relating to expected rates of return on plan assets, determination of discount rates for remeasuring plan obligations, determination of inflation rates regarding compensation levels and health care cost projections. The Company develops its demographics and utilizes the work of actuaries to assist with the measurement of employee related obligations. The assumptions used vary from year-to-year, which will affect future results of operations. Any differences among these assumptions and the Company's actual return on assets, financial market-based discount rates, and the level of cost sharing provisions will also impact future results of operations. OUTLOOK Information in this "Outlook" section should be read in conjunction with the cautionary language and discussion of risks included above. The Company does not expect 2003 worldwide market conditions in its Compressor and Engine Businesses to be much improved over 2002. Conditions in these markets will continue to suffer from over-capacity and deflationary pricing. However, actions to improve profitability in these segments, as well as the addition of FASCO should improve overall Company earnings in 2003, excluding any restructuring charges, if cost reduction efforts are sustained. Full year 2003 results in the Compressor segment are expected to continue to improve, as they did in 2002, as a result of past actions to consolidate operations in the U.S. and move production to low-cost locations like India and Brazil. In addition, the Group will be looking at ways to revitalize U.S. operations by reversing the negative growth pattern demonstrated over the past several years. Until this can be accomplished, the Group's reliance on Brazilian operations for growth and profitability will represent a significant concentration of risk. Profits from the Brazilian and Indian compressor operations are expected to grow in 2003 as a result of their additional productive capacities. Results in the Engine Group are expected to deteriorate before they improve. The restructuring actions recognized in the fourth quarter only represent an initial step in correcting the overall cost structure of the Group and further actions are expected in 2003 as the new engine component operations in Brazil commence and further restructuring actions are defined and implemented. While improvements are not materializing as quickly as desired, the slower approach has the benefit of not compromising the supply of quality product to our customers. 23 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market 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. Credit Risk -- Financial instruments which potentially subject the Company to concentrations of credit risk are primarily cash investments and accounts receivable. The Company places its cash investments in bank deposits and investment grade, short-term debt instruments (predominately commercial paper) with reputable credit-worthy counterparties and, by policy, limits the amount of credit exposure to any one counterparty. The Company uses contemporary credit review procedures to approve customer credit. Customer accounts are actively monitored and collection efforts are pursued within normal industry practice. Management believes that concentrations of credit risk with respect to receivables are somewhat limited due to the large number of customers in the Company's customer base and their dispersion across different industries and geographic areas. However, in the Engine & Power Train Group, the manufacture of small gasoline engine-powered lawn and garden equipment is dominated, to a large extent, by three manufacturers. The Company sells to all three of these manufacturers and, as a result, a significant portion of the Group's open accounts receivable at any time is comprised of amounts due from these three manufacturers. A portion of export accounts receivable of the Company's Brazilian subsidiary is sold at a discount. Discounted receivable balances in the Brazilian subsidiary at December 31, 2002 and 2001 were $41.2 and $15.5 million, respectively, and the discount rate was 4.9% in 2002 and 4.8% in 2001. The Company maintains an allowance for losses based upon the expected collectability of all accounts receivable, including receivables sold. Interest Rate Risk -- The Company is subject to minimal interest rate risk in relation to variable rate, long-term Industrial Development Revenue Bonds and to short-term variable rate borrowings used by our foreign subsidiaries to manage their working capital needs. The Company's interim financing of the FASCO acquisition was subject to variable interest rates, however, these borrowings were refinanced on March 5, 2003 with fixed rate debt. The Company is also subject to interest rate risk relating to interest earned on its short-term funds invested. Commodity Price Risk -- 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. Company policy allows local management to contract commodity forwards for a limited percentage of projected raw material requirements up to one year in advance. Commodity contracts at most of the Company's divisions and subsidiaries are essentially purchase contracts designed to fix the price of the commodities during the operating cycle. The Company's practice has been to accept delivery of the commodities and consume them in manufacturing activities. At December 31, 2002 and 2001, the Company held a total notional value of $14.6 and $25.8 million, respectively, in commodity forward purchasing contracts. The majority of these contracts were not recorded on the balance sheet as they did not require an initial cash outlay and do not represent a liability until delivery of the commodities is accepted. However, commodity contracts at the Company's French compressor subsidiary are essentially derivative financial instruments designed to hedge the fluctuation in commodity pricing and, as such, are subject to the provisions of SFAS No. 133. Foreign Currency Exchange Risk -- The Company is subject to foreign currency exchange exposure for operations whose assets and liabilities are denominated in currencies other than U.S. dollars. On a normal basis, the Company does not attempt to hedge the foreign currency translation fluctuations in the net investments in its foreign subsidiaries. The Company does, from time to time, enter into short-term forward exchange contracts to sell or purchase foreign currencies at specified rates based on estimated foreign currency cash flows. Company policy allows local management to hedge known receivables or payables and forecasted cash flows up to a year in advance. It is the policy of the Company not to purchase financial and/or derivative instruments for speculative purposes. At December 31, 2002 and 2001, the Company held foreign currency forward contracts with a total notional value of $4.9 and $15.0 million, respectively. 24 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Management........................................ 26 Report of Independent Accountants........................... 27 Financial Statements Consolidated Statements of Income for the years ended December 31, 2002, 2001 and 2000....................... 28 Consolidated Balance Sheets at December 31, 2002 and 2001................................................... 29 Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000....................... 30 Consolidated Statements of Stockholders' Equity for the years ended December 31, 2002, 2001 and 2000........... 31 Notes to Consolidated Financial Statements................ 32
All other schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. 25 MANAGEMENT'S REPORT To the Shareholders of Tecumseh Products Company Management is responsible for the integrity and objectivity of the financial statements and other information presented in this annual report. The statements were prepared in accordance with generally accepted accounting principles and, where necessary, include certain amounts based on management's best estimate and judgment to reflect the expected effects of events and transactions that have not been completed. All financial information in the annual report is consistent with the financial statements. Management has established and maintains a system of internal accounting controls to provide reasonable assurance that assets are safeguarded and transactions are executed in accordance with management's authorization. These controls are documented by written policies and procedures that are communicated to employees with significant roles in the financial reporting process. This system is continually reviewed, evaluated, and modified to reflect current conditions. The Audit Committee of the Board of Directors, composed of outside Directors, assists the Board of Directors in overseeing and monitoring management's and the independent public accountants' participation in the financial reporting process. The Audit Committee meets regularly with management, the internal auditors, and the independent public accountants. Both the independent public accountants and the internal auditors have unrestricted access to the Audit Committee with and without management's representative present, to discuss the results of their examinations and their opinions on the adequacy of internal accounting controls and quality of financial reporting. The independent public accountants are engaged to express an opinion on the Company's financial statements. Their opinion is based on procedures which they believe to be sufficient to provide reasonable assurance that the financial statements contain no material errors. Todd W. Herrick Chairman of the Board of Directors, President and Chief Executive Officer David W. Kay Vice President, Treasurer and Chief Financial Officer 26 INDEPENDENT ACCOUNTANT'S REPORT To the Shareholders and Board of Directors of Tecumseh Products Company We have audited the accompanying consolidated balance sheets of Tecumseh Products Company and Subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Tecumseh Products Company and Subsidiaries at December 31, 2002 and 2001 and the consolidated results of operations and cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets", and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets", effective January 1, 2002. Ciulla, Smith & Dale, LLP Certified Public Accountants January 31, 2003 Southfield, Michigan 27 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, --------------------------------------- 2002 2001 2000 ----------- ----------- ----------- (DOLLARS IN MILLIONS EXCEPT PER SHARE DATA) Net sales................................................... $1,343.8 $1,398.9 $1,649.9 Cost of sales and operating expenses...................... 1,141.6 1,207.2 1,411.4 Selling and administrative expenses....................... 117.4 112.1 118.3 Nonrecurring items........................................ 10.3 35.4 33.5 -------- -------- -------- Operating income............................................ 74.5 44.2 86.7 Interest expense.......................................... (5.8) (4.1) (6.7) Interest income and other, net............................ 15.1 20.3 27.9 -------- -------- -------- Income before taxes and cumulative effect of change in accounting principle...................................... 83.8 60.4 107.9 Taxes on income........................................... 29.7 17.6 41.8 -------- -------- -------- Income before cumulative effect of accounting change........ 54.1 42.8 66.1 Cumulative effect of accounting change for goodwill, net of tax....................................................... (3.1) -- -- -------- -------- -------- Net Income.................................................. $ 51.0 $ 42.8 $ 66.1 -------- -------- -------- Basic and diluted earnings per share Income before cumulative effect of accounting change...... $ 2.93 $ 2.30 $ 3.44 Change in accounting for goodwill......................... (0.17) -- -- -------- -------- -------- Net income................................................ $ 2.76 $ 2.30 $ 3.44 ======== ======== ========
The accompany notes are an integral part of these Consolidated Financial Statements. 28 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31, --------------------- 2002 2001 --------- --------- (DOLLARS IN MILLIONS) ASSETS Current Assets: Cash and cash equivalents................................. $ 333.1 $ 317.6 Accounts receivable, trade, less allowance for doubtful accounts of $9.2 million in 2002 and $7.7 million in 2001.................................................... 242.4 207.1 Inventories............................................... 304.0 261.9 Deferred and recoverable income taxes..................... 51.4 58.0 Other current assets...................................... 24.2 14.9 -------- -------- Total current assets.................................. 955.1 859.5 -------- -------- Property, Plant, and Equipment, at cost: Land and land improvements................................ 28.6 18.7 Buildings................................................. 219.6 170.1 Machinery and equipment................................... 961.4 760.0 Assets in process......................................... 51.5 44.2 -------- -------- 1,261.1 993.0 Less, accumulated depreciation............................ 690.6 561.1 -------- -------- Property, plant and equipment, net.................... 570.5 431.9 -------- -------- Goodwill.................................................... 270.3 45.1 Deferred income taxes....................................... 32.2 29.7 Prepaid pension expense..................................... 162.8 137.3 Other assets................................................ 72.1 16.3 -------- -------- Total assets.......................................... $2,063.0 $1,519.8 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable, trade................................... $ 172.6 $ 101.3 Income taxes payable...................................... 8.6 4.2 Short-term borrowings..................................... 112.6 11.6 Accrued liabilities: Employee compensation................................... 37.8 29.0 Product warranty and self-insured risks................. 51.7 56.7 Other................................................... 68.1 51.0 -------- -------- Total current liabilities............................. 451.4 253.8 Long-term debt.............................................. 298.2 13.7 Deferred income taxes....................................... 33.6 3.0 Other postretirement benefit liabilities.................... 217.3 203.0 Product warranty and self-insured risks..................... 21.3 23.9 Accrual for environmental matters........................... 29.5 29.4 Pension liabilities......................................... 32.8 15.3 -------- -------- Total liabilities..................................... 1,084.1 542.1 -------- -------- Stockholders' Equity Class A common stock, $1 par value; authorized 75,000,000 shares; issued 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 5,077,746 shares in 2002 and 2001........ 5.1 5.1 Retained earnings......................................... 1,078.9 1,051.5 Accumulated other comprehensive income (loss)............. (118.5) (92.3) -------- -------- Total stockholders' equity............................ 978.9 977.7 -------- -------- Total liabilities and stockholders' equity............ $2,063.0 $1,519.8 ======== ========
The accompanying notes are an integral part of these Consolidated Financial Statements. 29 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, ------------------------- 2002 2001 2000 ------- ------ ------ (DOLLARS IN MILLIONS) Cash Flows from Operating Activities: Net income before cumulative effect of change in accounting principle................................... $ 54.1 $ 42.8 $ 66.1 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................ 65.1 72.0 71.2 Nonrecurring items................................... 10.3 35.4 33.5 Accounts receivable.................................. 18.4 52.7 (5.8) Inventories.......................................... (13.8) 8.7 (14.9) Payables and accrued expenses........................ 20.0 (23.6) 20.2 Prepaid pension expense.............................. (25.5) (31.4) (25.3) Other................................................ 2.9 16.4 (11.0) ------- ------ ------ Cash Provided By Operating Activities............. 131.5 173.0 134.0 ------- ------ ------ Cash Flows from Investing Activities: Business acquisitions, net of cash acquired............... (392.9) (13.4) -- Capital expenditures...................................... (73.9) (65.4) (64.0) ------- ------ ------ Cash Used In Investing Activities................. (466.8) (78.8) (64.0) ------- ------ ------ Cash Flows from Financing Activities: Dividends paid............................................ (23.7) (23.8) (24.5) Proceeds from borrowings.................................. 379.1 5.3 1.2 Repayments of borrowings.................................. (1.6) (0.4) (3.4) Repurchases of common stock............................... -- (18.1) (39.6) ------- ------ ------ Cash Provided by (Used in) Financing Activities... 353.8 (37.0) (66.3) ------- ------ ------ Effect of Exchange Rate Changes on Cash..................... (3.0) (7.8) (6.0) ------- ------ ------ Increase (Decrease) In Cash and Cash Equivalents.......... 15.5 49.4 (2.3) Cash and Cash Equivalents: Beginning of Period............................... 317.6 268.2 270.5 ------- ------ ------ End of Period..................................... $ 333.1 $317.6 $268.2 ======= ====== ======
The accompany notes are an integral part of these Consolidated Financial Statements. 30 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED OTHER TOTAL CLASS A CLASS B RETAINED COMPREHENSIVE STOCKHOLDERS' $1 PAR VALUE $1 PAR VALUE EARNINGS INCOME/(LOSS) EQUITY ------------ ------------ -------- ------------- ------------- (DOLLARS IN MILLIONS) BALANCE, DECEMBER 31, 1999....... $14.3 $ 5.5 $1,047.3 $ (52.9) $1,014.2 COMPREHENSIVE INCOME: Net income....................... 66.1 66.1 Minimum pension liability (net of tax of $0.1)................... 0.5 0.5 Gain (loss) on derivatives (net of tax benefit of $0.2)........ (0.3) (0.3) Translation adjustments (net of tax benefit of $7.5)........... (21.0) (21.0) -------- TOTAL COMPREHENSIVE INCOME.................... 45.3 Cash dividends................... (24.5) (24.5) Stock repurchase................. (0.9) (38.7) (39.6) ----- ----- -------- ------- -------- BALANCE, DECEMBER 31, 2000....... 13.4 5.5 1,050.2 (73.7) 995.4 COMPREHENSIVE INCOME: Net income....................... 42.8 42.8 Minimum pension liability (net of tax of $0.5)................... 0.4 0.4 Gain (loss) on derivatives (net of tax of $0.2)................ 0.3 0.3 Translation adjustments (net of tax benefit of $11.0).......... (19.3) (19.3) -------- TOTAL COMPREHENSIVE INCOME.................... 24.2 Cash dividends................... (23.8) (23.8) Stock repurchase................. (0.4) (17.7) (18.1) ----- ----- -------- ------- -------- BALANCE, DECEMBER 31, 2001....... 13.4 5.1 1,051.5 (92.3) 977.7 COMPREHENSIVE INCOME: Net income....................... 51.0 51.0 Minimum pension liability........ (0.1) (0.1) Translation adjustments (net of tax benefit of $13.7).......... (26.1) (26.1) -------- TOTAL COMPREHENSIVE INCOME.................... 24.8 Cash dividends................... (23.6) (23.6) ----- ----- -------- ------- -------- BALANCE, DECEMBER 31, 2002....... $13.4 $ 5.1 $1,078.9 $(118.5) $ 978.9 ===== ===== ======== ======= ========
The accompanying notes are an integral part of these Consolidated Financial Statements. 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN MILLIONS) NOTE 1. ACCOUNTING POLICIES Business Description -- Tecumseh Products Company (the "Company") is a full line, independent global manufacturer of hermetic compressors for residential and commercial refrigerators, freezers, water coolers, dehumidifiers, window air conditioning units and residential and commercial central system air conditioners and heat pumps; gasoline engines and power trains for lawn mowers, lawn and garden tractors, garden tillers, string trimmers, snow throwers, industrial and agricultural applications and recreational vehicles; and centrifugal pumps, sump pumps and small submersible pumps for industrial, commercial marine and agricultural applications. On December 30, 2002, the Company acquired FASCO, a leading manufacturer of electric motors and components, including AC and DC motors, blowers, gear motors and linear actuators, for a wide variety of industrial and consumer applications across a broad range of industries. Principles of Consolidation -- The consolidated financial statements include the accounts of the Company and its subsidiaries. The Company's investments in unconsolidated affiliates are generally accounted for on the equity basis. All significant intercompany transactions and balances have been eliminated. Foreign Currency Translation -- All of the Company's foreign subsidiaries use the local currency of the country of operation as the functional currency. Assets and liabilities are translated into U.S. dollars at year-end exchange rates while revenues and expenses are translated at average monthly exchange rates. The resulting translation adjustments are recorded in other comprehensive income or loss, a component of stockholders' equity. Realized foreign currency transaction gains and losses are included in current income and amounted to a net gain of $5.2 million in 2002. Amounts realized in 2001 and 2000 were not significant. Cash Equivalents -- Cash equivalents consist of commercial paper and other short-term investments that are readily convertible into cash. Inventories -- Inventories are valued at the lower of cost or market, generally on the first-in, first-out basis. Property, Plant and Equipment -- Expenditures for additions, major renewals and betterments are capitalized and expenditures for maintenance and repairs are charged to expense as incurred. For financial statement purposes, depreciation is determined using the straight-line method at rates based upon the estimated useful lives of the assets. Depreciation expense was $64.9, $70.5, and $69.3 million in 2002, 2001 and 2000, respectively. On January 1, 2002, the Company 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. The nonrecurring items in 2002 include $7.2 million for the impairment of unusable assets determined in accordance with the provisions of SFAS No. 144. Goodwill and Intangible Assets -- Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets". Under SFAS No. 142, goodwill and intangible assets deemed to have indefinite lives are no longer amortized, but are subject to impairment testing on at least an annual basis. Other intangible assets continue to be amortized over their estimated useful lives. Accumulated amortization of goodwill and intangibles was $29.9 and $25.1 million at December 31, 2002 and 2001, respectively. The Company tested goodwill for impairment at the date of adoption and found that 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) was written-off and recognized as a cumulative effect from an accounting change. At December 31, 2002 the Company's goodwill associated with its three reportable business segments was $39.9 million for Compressor Products, $2.1 million for Engine & Power Train Products, and $5.1 million for Pump Products. As more fully explained in Note 13, The Company acquired FASCO on December 30, 2002. This acquisition was accounted for as a purchase following the accounting standards established under 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) SFAS No. 141, "Business Combinations", and No. 142, "Goodwill and Other Intangible Assets". Goodwill associated with the FASCO purchase was preliminarily estimated to be $223.2 million. The final value of goodwill recorded at December 31, 2002 is subject to adjustment as third party valuations are completed. The Company recognized goodwill amortization of $1.5 and $1.7 million in 2002 and 2001, respectively. Net earnings for the years ended December 31, 2001 and 2000, excluding goodwill amortization, would have been $43.8 million and $67.2 million, respectively. The Company's accounting policy for goodwill prior to January 1, 2002 was to amortize goodwill over its estimated useful life, principally over a forty-year period. Intangible assets associated with the FASCO purchase were preliminarily estimated to be $55 million consisting of $35 million in intangible assets subject to amortization and $20 million in intangibles with indefinite useful lives. The final value of intangible assets associated with the FASCO purchase is subject to adjustment as third party valuations are completed. Intangible assets are included with Other assets on the Consolidated Balance Sheet. Revenue Recognition -- Revenues from the sale of the Company's products are recognized upon passage of title to the customer, which, in most cases, coincides with shipment of the products. Derivative Financial Instruments -- Derivative financial instruments are occasionally utilized by the Company to manage risk exposure to movements in foreign exchange rates. The Company, from time to time, enters into forward exchange contracts to obtain foreign currencies at specified rates based on expected future cash flows for each currency. The premium or discount on the contracts is amortized over the life of the contract. Changes in the value of derivative financial instruments are measured at the balance sheet date and recognized in current earnings or other comprehensive income depending on whether the derivative is designated as part of a hedge transaction and, if it is, the type of transaction. The Company does not hold derivative financial instruments for trading purposes. See Note 10 for discussion of adoption of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities". Product Warranty -- Provision is made for the estimated cost of maintaining product warranties at the time the product is sold. Self-Insured Risks -- Provision is made for the estimated costs of known and anticipated claims under the deductible portions of the Company's health, liability and workers' compensation insurance programs. In addition, provision is made for the estimated cost of post-employment benefits. Environmental Expenditures -- Expenditures for environmental safekeeping are expensed or capitalized as appropriate. Costs associated with remediation activities are expensed. Liabilities relating to probable remedial activities are recorded when the costs of such activities can be reasonably estimated and are not discounted or reduced for possible recoveries from insurance carriers. Earnings Per Share -- Basic and diluted earnings per share are equivalent. Earnings per share are computed based on the weighted average number of common shares outstanding for the periods reported. The weighted average number of common shares used in the computations was 18,479,684 in 2002, 18,607,249 in 2001, and 19,218,065 in 2000. Research, Development and Testing Expenses -- Company sponsored research, development and testing expenses related to present and future products are expensed as incurred and were $30.8, $27.6, and $28.1 million in 2002, 2001 and 2000, respectively. Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts during the reporting period and at the date of the financial statements. Significant estimates include accruals for product warranty, self-insured risks, pension and postretirement benefit obligations and environmental matters, as well as the evaluation of goodwill and long-lived asset impairment. Actual results could differ materially from those estimates. 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 2. COMPREHENSIVE INCOME Accumulated other comprehensive income or loss is shown in the Consolidated Statements of Stockholders' Equity and includes the following:
2002 2001 ------- ------ Foreign currency translation adjustments (net of tax of $63.1 million in 2002 and $49.6 million in 2001).......... $(117.8) $(91.7) Minimum pension liability adjustments (net of tax of $0.4 million in 2002 and 2001)................................. (0.7) (0.6) ------- ------ $(118.5) $(92.3) ======= ======
NOTE 3. PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS The Company has defined benefit retirement plans that cover substantially all domestic employees. Plans covering salaried employees generally provide pension benefits that are based on average earnings and years of credited service. Plans covering hourly employees generally provide pension benefits of stated amounts for each year of service. The Company sponsors a retiree health care benefit plan, including retiree life insurance, for eligible salaried employees and their eligible dependents. At certain divisions, the Company also sponsors retiree health care benefit plans for hourly retirees and their eligible dependents. The retiree health care plans, which are unfunded, provide for coordination of benefits with Medicare and any other insurance plan covering a participating retiree or dependent, and have lifetime maximum benefit restrictions. Some of the retiree health care plans are contributory, with some retiree contributions adjusted annually. The Company has reserved the right to interpret, change or eliminate these health care benefit plans. The Company uses September 30 as the measurement date (the date upon which plan assets and obligations are measured) to facilitate the preparation and reporting of pension and postretirement plan data. Information regarding the funded status and net periodic benefit costs are reconciled to or stated as of the fiscal year end of December 31. 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following tables provide a reconciliation of the changes in the plans' benefit obligations, fair value of assets and funded status for 2002 and 2001:
PENSION OTHER --------------- --------------- 2002 2001 2002 2001 ------ ------ ------ ------ RECONCILIATION OF BENEFIT OBLIGATION Benefit obligation at beginning of period.......... $302.4 $270.3 $168.4 $142.5 Service cost..................................... 5.2 6.3 4.7 4.6 Interest cost.................................... 21.2 18.3 11.9 9.7 Amendments....................................... 0.7 -- -- -- Actuarial (gain) loss............................ (1.3) 11.3 .2 6.7 Acquired with FASCO.............................. 39.9 -- 10.6 -- Curtailment loss................................. -- 18.0 -- 11.3 Benefit payments................................. (17.3) (21.8) (7.4) (6.4) ------ ------ ------ ------ Benefit obligation at measurement date............. $350.8 $302.4 $188.4 $168.4 ====== ====== ====== ====== RECONCILIATION OF FAIR VALUE OF PLAN ASSETS Fair value at beginning of period.................. $567.4 $605.0 Actual return on plan assets..................... (9.1) (15.8) Acquired with FASCO.............................. 24.8 -- Employer contributions........................... 0.2 -- Benefit payments................................. (17.3) (21.8) ------ ------ Fair value at measurement date..................... $566.0 $567.4 ====== ======
The following table provides the funded status of the plans for 2002 and 2001:
PENSION OTHER ---------------- ----------------- 2002 2001 2002 2001 ------ ------- ------- ------- FUNDED STATUS Funded status at measurement date............... $230.2 $ 264.9 $(177.8) $(168.4) Unrecognized transition (asset) obligation.... (1.8) (3.9) -- -- Unrecognized prior service cost............... 9.6 10.3 (6.4) (7.7) Unrecognized (gain)........................... (72.2) (134.0) (29.1) (33.0) IRC sec.420 asset transfer.................... (3.0) -- -- -- Acquired with FASCO........................... (15.1) -- (10.6) -- ------ ------- ------- ------- Net amount recognized......................... $147.7 $ 137.3 $(223.9) $(209.1) ------ ------- ------- ------- TOTAL RECOGNIZED AMOUNTS IN THE BALANCE SHEETS CONSIST OF: Prepaid benefit cost.......................... $162.8 $ 137.3 Accrued pension cost.......................... (15.1) -- ------ ------- Net amount recognized........................... $147.7 $ 137.3 ====== ======= FOR PLANS NOT FULLY FUNDED: Accumulated benefit obligation................ $ 35.1 $ 1.4 Plan assets................................... 24.8 --
35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following tables provide the components of net periodic benefit (income) cost for 2002, 2001 and 2000:
2002 2001 2000 ------ ------ ------ PENSION BENEFITS Service cost............................................. $ 5.2 $ 6.3 $ 6.6 Interest cost............................................ 21.2 18.3 18.8 Expected return on plan assets........................... (45.0) (43.1) (40.6) Amortization of net (gain)............................... (9.8) (12.9) (9.9) Curtailment loss......................................... -- 18.0 -- ------ ------ ------ Net periodic benefit (income)............................ $(28.4) $(13.4) $(25.1) ====== ====== ====== OTHER BENEFITS Service cost............................................. $ 4.7 $ 4.6 $ 4.6 Interest cost............................................ 11.9 9.7 9.1 Curtailment loss......................................... -- 11.3 -- Amortization of net (gain)............................... (5.0) (6.0) (4.8) ------ ------ ------ Net periodic benefit cost................................ $ 11.6 $ 19.6 $ 8.9 ====== ====== ======
Assumptions used in measuring the benefit obligations were:
PENSION OTHER ------------- ------------- 2002 2001 2002 2001 ----- ----- ----- ----- Discount rate........................................ 6.75% 7.25% 6.75% 7.25% Long-term rate of: Compensation increases............................. 5.00% 5.00% N/A N/A Return on plan assets.............................. 6.75% 7.50% N/A N/A
For measurement purposes an 8.38% annual rate of increase in the cost of covered health care benefits was assumed for 2002. The rate was assumed to decrease each year to a rate of 5.25% for 2008 and remain at that rate thereafter. In 2001, the Company offered an early retirement incentive plan to eligible employees which resulted in the recognition of a curtailment loss of $29.3 million. The accumulated other postretirement benefit obligation was increased by $11.3 million and additional pension expense of $18.0 million was recorded. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage point change in assumed health care cost trend rates would have the following effects:
+1% -1% ----- ------ Accumulated postretirement benefit obligation............... $26.3 $(22.1) Net postretirement benefit cost............................. 2.4 (2.3)
The Company's foreign subsidiaries provide for defined benefits that are generally based on earnings at retirement date and years of credited service. The combined expense for these unfunded plans was $2.6, $3.0 and $2.9 million in 2002, 2001, and 2000, respectively. The net liability recorded in the consolidated balance sheet was $17.7 and $14.6 million for 2002 and 2001, respectively. Tecumseh Europe, S.A. has a minimum pension liability of $1.1 million $(0.7 million net of tax effects) which is recognized in accumulated other comprehensive income. The Company has defined contribution retirement plans that cover substantially all domestic employees. The combined expense for these plans was $2.5, $2.9 and $3.9 million in 2002, 2001 and 2000, respectively. 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 4. INCOME TAXES Consolidated income before taxes consists of the following:
2002 2001 2000 ----- ----- ------ United States............................................... $22.6 $15.9 $ 56.9 Foreign..................................................... 56.5 44.5 51.0 ----- ----- ------ $79.1 $60.4 $107.9 ===== ===== ======
Provision for income taxes consists of the following:
2002 2001 2000 ----- ------ ----- Current: U.S. federal.............................................. $(3.2) $(22.2) $16.4 State and local........................................... 1.2 (0.7) 2.2 Foreign income and withholding taxes...................... 22.0 15.6 20.7 ----- ------ ----- 20.0 (7.3) 39.3 ----- ------ ----- Deferred: U.S. federal.............................................. 11.4 25.7 3.1 Foreign................................................... (3.4) (0.8) (0.6) ----- ------ ----- 8.0 24.9 2.5 ----- ------ ----- Provision for income taxes.................................. $28.0 $ 17.6 $41.8 ===== ====== ===== Income tax provision includes the following: Continuing operations....................................... $29.7 $ 17.6 $41.8 Cumulative effect of accounting change...................... (1.7) -- -- ----- ------ ----- $28.0 $ 17.6 $41.8 ===== ====== ===== Income taxes (refunded) paid................................ $10.1 $ (2.4) $42.4 ===== ====== =====
A reconciliation between the actual income tax expense provided and the income tax expense computed by applying the statutory federal income tax rate of 35% to income before tax is as follows:
2002 2001 2000 ----- ----- ----- Income taxes at U.S. statutory rate......................... $27.7 $21.1 $37.8 Excess of foreign taxes over the U.S. statutory rate........ 1.3 2.0 7.8 State and local income taxes................................ 0.8 (0.4) 1.4 Tax benefits from Foreign Sales Corporation................. (1.3) (1.7) (1.8) Other....................................................... (0.2) (3.4) (3.4) ----- ----- ----- $28.3 $17.6 $41.8 ===== ===== =====
37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Significant components of the Company's deferred tax assets and liabilities as of December 31 were as follows:
2002 2001 ------ ------ Deferred tax assets: Other postretirement liabilities.......................... $ 82.6 $ 77.3 Product warranty and self-insured risks................... 21.0 23.3 Net operating loss carryforwards.......................... 0.5 5.7 Provision for environmental matters....................... 12.8 13.4 Other accruals and miscellaneous.......................... 105.3 85.0 ------ ------ 222.2 204.7 Valuation allowance....................................... (3.2) (3.2) ------ ------ Total deferred tax assets................................. 219.0 201.5 ------ ------ Deferred tax liabilities: Tax over book depreciation................................ 62.1 33.3 Pension................................................... 59.2 57.5 Other..................................................... 47.7 39.8 ------ ------ Total deferred tax liabilities............................ 169.0 130.6 ------ ------ Net deferred tax assets................................... $ 50.0 $ 70.9 ====== ======
The Company's share of accumulated unremitted earnings of foreign subsidiaries at December 31, 2002 and 2001 was $264.4 and $245.7 million, respectively. At December 31, 2002, the Company had net operating loss carryforwards attributable to foreign operations for income tax purposes of $1.1 million which expire from 2003 to 2007 if not offset against future taxable income. NOTE 5. INVENTORIES The components of inventories at December 31, were:
2002 2001 ------ ------ Raw materials and work in process........................... $164.3 $137.1 Finished goods.............................................. 123.5 108.3 Supplies.................................................... 16.2 16.5 ------ ------ $304.0 $261.9 ====== ======
NOTE 6. BUSINESS SEGMENT DATA In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", the Company has identified three reportable operating segments. Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker(s) in deciding how to allocate resources and in assessing performance. The Company's three reportable operating segments are defined as follows: Compressor Products -- Manufacturing and marketing of a full line of hermetic compressors for residential and commercial air conditioning and refrigeration products. 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Engine & Power Train Products -- Manufacturing and marketing of gasoline engines and power train components for lawn and garden and utility applications. Pump Products -- Manufacturing and marketing centrifugal, sump and small submersible pumps for industrial, commercial, marine and agricultural applications. FASCO was acquired on December 30, 2002. Accordingly, none of FASCO's operating results are included in the Company's operating segment disclosures. FASCO's assets are disclosed on a separate line in the assets segment information as this acquisition will be the basis for forming a fourth reportable segment, "Electrical Components", in 2003. The accounting policies of the reportable segments are the same as those described in Note 1 of Notes to the Consolidated Financial Statements. External customer sales by geographic area are based upon the destination of products sold. The Company has no single customer that accounts for 10% or more of consolidated net sales. Long-lived assets by geographic area are based upon the physical location of the assets. 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INDUSTRY SEGMENT INFORMATION
2002 2001 2000 -------- -------- -------- External customer sales: Compressor Products....................................... $ 790.9 $ 804.6 $ 919.8 Engine & Power Train Products............................. 432.3 480.9 612.8 Pump Products............................................. 120.6 113.4 117.3 -------- -------- -------- Total external customer sales........................ $1,343.8 $1,398.9 $1,649.9 ======== ======== ======== Operating income: Compressor Products....................................... $ 77.5 $ 54.3 $ 66.5 Engine & Power Train Products............................. 1.4 20.0 46.8 Pump Products............................................. 14.8 11.6 14.7 Corporate and consolidating items......................... (8.9) (6.3) (7.8) Nonrecurring items........................................ (10.3) (35.4) (33.5) -------- -------- -------- Total operating income............................... $ 74.5 $ 44.2 $ 86.7 ======== ======== ======== Reconciliation to income before taxes: Operating income.......................................... $ 74.5 $ 44.2 $ 86.7 Interest income, net...................................... 9.3 16.2 21.2 -------- -------- -------- Income before taxes.................................. $ 83.8 $ 60.4 $ 107.9 ======== ======== ======== Assets: Compressor Products....................................... $ 533.0 $ 575.2 $ 612.1 Engine & Power Train Products............................. 273.3 255.0 312.2 Pump Products............................................. 58.7 58.0 61.6 Corporate and consolidating items......................... 662.6 631.6 567.2 FASCO..................................................... 535.4 -- -- -------- -------- -------- Total assets......................................... $2,063.0 $1,519.8 $1,553.1 ======== ======== ======== Capital expenditures: Compressor Products....................................... $ 47.0 $ 53.1 $ 43.4 Engine & Power Train Products............................. 23.0 10.0 18.3 Pump Products............................................. 0.6 1.6 1.9 Corporate................................................. 3.3 0.7 0.4 -------- -------- -------- Total capital expenditures........................... $ 73.9 $ 65.4 $ 64.0 ======== ======== ======== Depreciation and amortization: Compressor Products....................................... $ 41.7 $ 49.4 $ 50.1 Engine & Power Train Products............................. 20.7 19.9 18.8 Pump Products............................................. 1.8 1.7 1.7 Corporate................................................. 0.9 1.0 0.6 -------- -------- -------- Total depreciation and amortization.................. $ 65.1 $ 72.0 $ 71.2 ======== ======== ========
40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) GEOGRAPHIC SEGMENT INFORMATION
CUSTOMER SALES BY DESTINATION ------------------------------ 2002 2001 2000 -------- -------- -------- North America United States............................................. $ 695.9 $ 748.5 $ 897.6 Other North America....................................... 56.1 70.1 71.2 -------- -------- -------- Total North America......................................... 752.0 818.6 968.8 South America............................................... 116.7 134.8 161.7 Europe...................................................... 259.8 247.0 270.6 Middle East and Asia........................................ 215.3 198.5 248.8 -------- -------- -------- $1,343.8 $1,398.9 $1,649.9 ======== ======== ========
NET LONG-LIVED ASSETS ------------------------ 2002 2001 2000 ------ ------ ------ United States............................................... $322.8 $265.5 $292.3 Brazil...................................................... 97.9 76.7 70.4 Rest of world............................................... 149.8 89.7 82.0 ------ ------ ------ $570.5 $431.9 $444.7 ====== ====== ======
NOTE 7. DEBT
2002 2001 ------ ----- Short-term borrowings consist of the following: Borrowings by foreign subsidiaries under revolving credit agreements, advances on export receivables and overdraft arrangements with banks used in the normal course of business; weighted average interest rate of 5.5% in 2002 and 6.7% in 2001.......................... $ 35.6 $10.9 Borrowings under a $125 million unsecured revolving credit facility with a consortium of banks, bearing interest at variable rates (2.16% at December 31, 2002) and maturing on December 30, 2005.......................... 75.0 -- Current maturities of long-term debt........................ 2.0 0.7 ------ ----- Total short-term borrowings.......................... $112.6 $11.6 ====== ===== Long-term debt consists of the following: Unsecured borrowings, primarily with banks, by foreign subsidiaries with weighted average interest rate of 6.6% and maturing in 2003 through 2012................. $ 37.7 $ 1.2 Unsecured bridge loan from a bank bearing interest at variable rates (2.06% at December 31, 2002) and maturing on June 30, 2003.............................. 250.0 -- Variable rate Industrial Development Revenue Bonds payable in quarterly installments from 2003 to 2021............ 12.5 13.2 ------ ----- 300.2 14.4 Less current maturities of long-term debt................. 2.0 0.7 ------ ----- Total long-term debt................................. $298.2 $13.7 ====== =====
On December 30, 2002, the Company acquired FASCO. The acquisition was financed with proceeds from $325 million in new bank borrowings and internal cash flows. Of $325 million in new borrowings, $250 million was from a six-month bridge loan and $75 million was from a new $125 million revolving credit 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) facility. As the bridge loan was replaced with long-term Senior Notes on March 5, 2003, it has been presented as long-term debt in the December 31, 2002 balance sheet. These Notes have an effective interest rate of 4.66% over their average 6 year life. Under the revolving credit facility, the Company may select among various interest rate arrangements. The facility has a three-year term, which may be extended annually with the consent of the participating banks. Scheduled maturities of long-term debt for each of the five years subsequent to December 31, 2002 are as follows: 2003........................................................ $ 2.0 2004........................................................ 36.0 2005........................................................ 0.8 2006........................................................ 0.9 2007 and thereafter......................................... 260.5 ------ $300.2 ======
Interest paid was $4.4 million in 2002, $3.3 million in 2001, and $3.4 million in 2000. NOTE 8. ENVIRONMENTAL MATTERS 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. 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. As part of these negotiations the Company has agreed to pay an additional $2.1 million in past response costs to the EPA. At December 31, 2002 and December 31, 2001, the Company had accrued $29.2 and $28.7 million, respectively, for estimated costs associated with the cleanup of this site. The actual cost will be governed by numerous factors including the requirements of the WDNR, and may be greater or lower than the amount accrued. 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 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 began remediation of soils in 2001 on the east side of the facility. Additional remediation of soils began in the fall of 2002 in two other areas on the plant site. While the Company has provided for estimated 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 2003 involving a stream segment downstream of the source area. The Company has provided for these costs. Although participation in a cooperative remedial effort after 2003 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 December 31, 2002 and 2001, the Company had accrued $36.3 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. NOTE 9. COMMITMENTS AND CONTINGENCIES Various lawsuits and claims, including those involving ordinary routine litigation incidental to its business, to which the Company is a party, are pending, or have been asserted, against the Company. Although the outcome of these matters cannot be predicted with certainty, and some of them 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. NOTE 10. FINANCIAL INSTRUMENTS The following table presents the carrying amounts and the estimated fair values of financial instruments at December 31, 2002 and 2001:
2002 2001 ----------------- ----------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- ------ -------- ------ Cash and cash equivalents......................... $333.1 $333.1 $317.6 $317.6 Short-term borrowings............................. 110.6 110.6 10.9 10.9 Long-term debt.................................... 300.2 300.2 14.4 14.4 Foreign currency contracts........................ (0.2) (0.2) 0.3 0.4 Commodity contracts............................... -- 1.1 -- (0.5)
The carrying amount of cash equivalents approximates fair value due to their liquidity and short-term maturities. The carrying value of the Company's debt approximates fair value due to the variable interest rate on the majority of the debt. The fair values of foreign currency and commodity contracts reflect the differences between the contract prices and the forward prices available on the balance sheet date. The Company does not utilize financial instruments for trading or other speculative purposes. The Company generally does not hedge the net investment in its subsidiaries. All derivative financial instruments 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) held at December 31, 2002 will mature within 6 months. All such instruments held at December 31, 2001 matured in 2002. Effective July 1, 2000, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". The adoption of SFAS No. 133 resulted in an insignificant impact on reported earnings and an unrealized loss of $1.6 million net of tax, classified in accumulated other comprehensive income. By December 31, 2000, the Company had reclassified $1.3 million of this loss to earnings leaving a balance of $.3 million in other comprehensive income for its outstanding foreign currency cash flow hedge contracts. During 2001, the remaining $0.3 million was reclassified to earnings. The Company's derivative financial instruments consist of foreign currency forward exchange contracts. These contracts are recognized on the balance sheet at their fair value, which is the estimated amount at which they could be settled based on forward market exchange rates. The Company's foreign subsidiaries use forward exchange contracts to hedge foreign currency receivables, payables, and other known and forecasted transactional exposures for periods consistent with the expected cash flow of the underlying transactions. The contracts generally mature within one year and are designed to limit exposure to exchange rate fluctuations. On the date a forward exchange contract is entered into, it is designated as a foreign currency cash flow hedge. Subsequent changes in the fair value of the contract that is highly effective and qualifies as a foreign currency cash flow hedge are recorded in other comprehensive income. The Company's European subsidiaries had contracts for the sale of $0.2 million and $13.0 million at December 31, 2002 and 2001, respectively. The European subsidiaries had contracts for the purchase of $4.7 million and $2.0 million at December 31, 2002 and 2001, respectively. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as foreign currency hedges to specific forecasted transactions. The Company formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the Company discontinues hedge accounting prospectively, as discussed below. The Company discontinues hedge accounting prospectively when the derivative is (1) determined to be no longer effective in offsetting the fair value of the cash flows of a hedged item; (2) sold, terminated, or exercised; (3) undesignated as a hedge instrument, because it is unlikely that a forecasted transaction will occur. When hedge accounting is discontinued, the derivative will be carried at its fair value on the balance sheet, with changes in its fair value recognized in current period earnings. Any related gains or losses that were accumulated in other comprehensive income will be recognized immediately in cost of sales. The Company uses commodity forward purchasing contracts to help control the cost of commodities (copper and aluminum) used in the production of compressor motors and components and engines. Company policy allows local managers to contract commodity forwards for a limited percentage of raw material requirements up to one year in advance. These contracts are not recorded in the balance sheet as they do not require an initial cash outlay and do not represent a liability until delivery of the commodity. Commodity forwards outstanding at December 31, 2002 and 2001 were $14.6 and $25.8 million, respectively. A portion of export accounts receivable at the Company's Brazilian subsidiary are sold at a discount. Discounted Brazilian receivable balances at December 31, 2002 and 2001 were $41.2 and $15.5 million, respectively, and the discount rate was 4.9% in 2002 and 4.8% in 2001. NOTE 11. STOCKHOLDERS' EQUITY The shares of Class A common stock and Class B common stock are substantially identical except as to voting rights. Class A common stock has no voting rights except the right to i) vote on any amendments that 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) could adversely affect the Class A Protection Provision in the articles of incorporation and ii) vote in other limited circumstances, primarily involving mergers and acquisitions, as required by law. A Shareholders' Rights Plan is in effect for each class of stock. These plans protect shareholders against unsolicited attempts to acquire control of the Company that do not offer an adequate price to all shareholders. The rights are not currently exercisable, but would become exercisable at an exercise price of $180 per share, subject to adjustment, if certain events occurred relating to a person or group acquiring or attempting to acquire 10% or more of the outstanding shares of Class B common stock. The rights have no voting or dividend privileges and are attached to, and do not trade separately from, the Class A and Class B common stock. The rights expire on August 25, 2009. As of December 31, 2002, 13,401,938 shares of Class A common stock and 5,077,746 shares of Class B common stock were reserved for future exercise under the plans. NOTE 12. NONRECURRING ITEMS 2002 Full year 2002 results were adversely impacted by $10.3 million ($6.6 million net of tax or $0.36 per share) in nonrecurring charges. During the fourth quarter, a charge of $5.8 million ($3.7 million net of tax or $0.20 per share) was recorded in the Engine & Power Train business. Included in the charge is $4.1 million for costs, mostly write-downs of fixed assets, associated with the relocation of engine component manufacturing, and the discontinuation of production activities at its Grafton, Wisconsin facility. Also included in the charge is $1.7 million for additional environmental clean up costs, primarily additional past response costs levied by the EPA for its Sheboygan, Wisconsin facility. During the first quarter, a charge of $4.5 million ($2.8 million net of tax or $0.15 per share) was recorded in the Compressor business. This charge was for costs, primarily the write-off of certain unusable equipment, related to the relocation of additional rotary compressor lines from the U.S. to Brazil. 2001 The 2001 results were adversely impacted by $35.4 million ($22.8 million net of tax, or $1.23 per share) in nonrecurring items. 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 were estimated to be in a range of $10 to $12 million annually. During the fourth quarter of 2001, the charge of $6.1 million ($3.9 million net of tax, or $.21 per share) in the Engine & Power Train business related primarily to the transfer of certain engine and component part production from domestic facilities to the Company's facilities in the Czech Republic. 2000 In 2000, the Company recorded $33.5 million in nonrecurring charges ($23.3 million 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 December 31, 2002 this program was substantially complete. 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 December 31, 2002, this program was substantially complete. 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. NOTE 13. BUSINESS ACQUISITIONS On December 30, 2002, the Company acquired the FASCO Motors Group from Invensys Plc for cash of $396.6 million and the assumption of approximately $14.5 million in debt. FASCO is a leading manufacturer in the U.S. of fractional horsepower motors. FASCO manufactures AC motors, DC motors, blowers, gear motors and linear actuators, all of which are used in a wide variety of applications within the HVAC, automotive, healthcare and appliance industries. The addition of FASCO will allow the Company to reach new customers and markets and enables the Company to deliver higher valued-added products and complete customer solutions in all of its business segments. The acquisition was financed with proceeds from $325 million in new bank borrowings and internal cash flows. Of $325 million in new borrowings, $250 million was from a six-month bridge loan and $75 million was from a new three-year $125 million revolving credit facility. As the bridge loan is expected to be replaced with permanent long-term financing, it has been presented as long-term debt in the December 31, 2002 balance sheet. The purchase price allocation has been prepared on a preliminary basis, and reasonable changes are expected as additional information becomes available. The following is a summary of the estimated values of the assets acquired and liabilities assumed as of the date of the acquisition: Current assets.............................................. $110.4 Property, plant and equipment............................... 158.2 Intangible assets........................................... 55.0 Goodwill.................................................... 223.2 ------ Total assets acquired.................................. $546.8 ====== Current liabilities......................................... $ 92.2 Other liabilities........................................... 53.7 Long-term debt.............................................. 0.6 ------ Total liabilities assumed.............................. $146.5 ======
FASCO will be the basis for forming a fourth reportable segment, Electrical Components, in 2003. The goodwill of $223.2 will be included in that segment. None of the goodwill from the FASCO acquisition is deductible for tax purposes. The $55 million of intangible assets consists of $15 million for a two-year non- compete agreement, $20 million for trade names and trademarks with an estimated ten year life, and $20 million for various trade names and trademarks with indefinite lives. The final value of goodwill and the intangible assets are subject to adjustment as third party valuations are completed. 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following unaudited pro forma financial information presents the results of operations as though the acquisition had been completed at the beginning of the respective periods.
FOR THE YEARS ENDED DECEMBER 31, ------------------- 2002 2001 -------- -------- Net Sales................................................... $1,789.8 $1,865.6 Income before taxes and cumulative effect of accounting change.................................................... 100.2 86.2 Net Income.................................................. 59.6 53.0 Basic Earnings Per Share.................................... $ 3.23 $ 2.85
The Company also expended $4.0 million in April 2002 for the acquisition of Manufacturing Data Systems, Inc., a supplier of Internet-enabled, open-architecture software motion control applications that increase manufacturing flexibility and enable agile manufacturing for the Computer Numerical Control (CNC) and General Motion Control (GMC) markets. In May 2001, the Company acquired an engine manufacturing facility in the Czech Republic for $14.9 million. This transaction was accounted for as an asset purchase. The results of operations for this facility since the acquisition are included in the Company's statement of consolidated income. NOTE 14. QUARTERLY FINANCIAL DATA
QUARTER --------------------------------- FIRST SECOND THIRD FOURTH TOTAL ------ ------ ------ ------ -------- 2002 Net sales...................................... $333.4 $395.3 $310.9 $304.2 $1,343.8 Gross profit................................... 36.8 66.4 49.8 38.9 191.9 Income before cumulative effect of accounting change...................................... 7.2 23.4 14.2 9.3 54.1 Net income..................................... 4.1 23.4 14.2 9.3 51.0 ====== ====== ====== ====== ======== Basic and diluted earnings per share........... $ 0.22 $ 1.27 $ 0.77 $ 0.50 $ 2.76 ====== ====== ====== ====== ======== 2001 Net sales...................................... $404.7 $382.0 $313.1 $299.1 $1,398.9 Gross profit................................... 49.3 57.6 20.4 29.0 156.3 Net income..................................... 14.0 17.5 5.2 6.1 42.8 ====== ====== ====== ====== ======== Basic and diluted earnings per share........... $ 0.74 $ 0.94 $ 0.28 $ 0.33 $ 2.30 ====== ====== ====== ====== ========
47 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The information pertaining to directors under the caption "Election of Directors" in the Company's definitive Proxy Statement relating to its 2003 Annual Meeting of Shareholders is incorporated herein by reference. Information regarding executive officers required by Item 401 of Regulation S-K is furnished in Part I of this report. The information required to be reported pursuant to Item 405 of Regulation S-K will be set forth under the caption "Appendix A -- Share Ownership -- Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive Proxy Statement relating to its 2003 Annual Meeting of Shareholders and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information under the captions "Appendix B -- Executive Compensation," "Compensation Committee Interlocks and Insider Participation" and "Election of Directors -- Director Compensation" in the Company's definitive Proxy Statement relating to its 2003 Annual Meeting of Shareholders is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information under the caption "Appendix A -- Share Ownership" in the Company's definitive Proxy Statement relating to its 2003 Annual Meeting of Shareholders is incorporated herein by reference. No information is required to be reported pursuant to Item 2019d) of Regulation S-K. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information under the caption "Compensation Committee Interlocks and Insider Participation" in the Company's definitive Proxy Statement relating to its 2003 Annual Meeting of Shareholders is incorporated herein by reference. ITEM 14. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures The Company's principal executive officer and principal financial officer, after evaluating the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) as of a date within 90 days before the filing date of this report, have concluded that, as of such date the Company's disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities. (b) Changes in Internal Controls There were no significant changes in the Company's internal controls or in other factors that could significantly affect those internal controls subsequent to the date of the evaluation, nor were there any significant deficiencies or material weaknesses in our internal controls. As a result, no corrective actions were required or undertaken. 48 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) and (2) Financial Statements See "Financial Statements" (3) See Index to Exhibits (Item 15(c), below) (b) Report on Form 8-K filed in the fourth quarter of 2002 On October 2, 2002, the Company filed a report on Form 8-K reporting under Item 7, "Financial Statements and Exhibits," the issuance of a press release regarding third quarter 2002 earnings. On October 10, 2002, the Company filed a report on Form 8-K reporting under Item 5, "Other Events," the issuance of a press release regarding its engine product recall. On November 27, 2002, the Company filed a report on Form 8-K reporting under Item 7, "Financial Statements and Exhibits," the issuance of a press release regarding its Agreement to purchase FASCO Motors from Invensys. On December 30, 2002, the Company filed a report on Form 8-K reporting under Item 7, "Financial Statements and Exhibits," the issuance of a press release regarding its Acquisition of FASCO Motors from Invensys. (c) Exhibits
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.1 Restated Articles of Incorporation of Tecumseh Products Company (incorporated by reference to Exhibit (3) of the registrant's Annual Report on Form 10-K for the year ended December 31, 1991, as filed with the Securities and Exchange Commission, File No. 0-452) 3.2 Certificate of Amendment to the Restated Articles of Incorporation of Tecumseh Products Company (incorporated by reference to Exhibit B-5 of the registrant's Form 8 Amendment No. 1 dated April 22, 1992 to Form 10 Registration Statement dated April 24, 1965, as filed with the Securities and Exchange Commission, File No. 0-452) 3.3 Certificate of Amendment to the Restated Articles of Incorporation of Tecumseh Products Company (incorporated by reference to Exhibit (4)(c) of the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994, as filed with the Securities and Exchange Commission, File No. 0-452) 3.4* Amended and Restated Bylaws of Tecumseh Products Company as amended through February 26, 2003 4.1 Note Purchase Agreement dated March 5, 2003 by and among Tecumseh Products Company and certain Purchasers listed therein (incorporated by reference to Exhibit 4.1 of the registrant's Current Report on Form 8-K as filed March 7, 2003 with the Securities and Exchange Commission, File No. 0-452) 4.2 Guaranty Agreement dated March 5, 2003 in made by certain subsidiaries of Tecumseh Products Company in favor of the Purchasers of the Notes (incorporated by reference to Exhibit 4.2 of the registrant's Current Report on Form 8-K as filed March 7, 2003 with the Securities and Exchange Commission, File No. 0-452) 4.3 Form of Note (incorporated by reference to Exhibit 4.3 of the registrant's Current Report on Form 8-K as filed March 7, 2003 with the Securities and Exchange Commission, File No. 0-452)
49
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.1 Amended and Restated Class B Rights Agreement (incorporated by reference to Exhibit 4 to Form 8 Amendment No. 1 dated April 22, 1992 to Form 8-A registering Common Stock Purchase Rights dated January 23, 1991, as filed with the Securities and Exchange Commission, File No. 0-452) 10.2 Amendment No. 1 to Amended and Restated Class B Rights Agreement (incorporated by reference to Exhibit 4 to Form 8 Amendment No. 2 dated October 2, 1992 to Form 8-A registering Common Stock Purchase Rights dated January 23, 1991, as filed with the Securities and Exchange Commission, File No. 0-452) 10.3 Amendment No. 2 to Amended and Restated Class B Rights Agreement (incorporated by reference to Exhibit 4 to Form 8-A/A Amendment No. 3 dated June 22, 1993 to Form 8-A registering Common Stock Purchase Rights dated January 23, 1991, as filed with the Securities and Exchange Commission, File No. 0-452) 10.4 Third Amendment to Amended and Restated Class B Rights Agreement (incorporated by reference to Exhibit 4.2 of the registrant's Current Report on Form 8-K as filed August 26, 1999 with the Securities and Exchange Commission, File No. 0-452) 10.5 Fourth Amendment to Amended and Restated Class B Rights Agreement, dated as of August 22, 2001, between Tecumseh Products Company and State Street Bank and Trust Company, N.A., as successor Class B Rights Agent (incorporated by reference to Exhibit 4.4 to Form 8-A/A Amendment No. 5 dated September 19, 2001 to Form 8-A registering Common Stock Purchase Rights dated January 23, 1991, as filed with the Securities and Exchange Commission, File No. 0-452) 10.6* Fifth Amendment to Class B Rights Agreement, dated as of July 15, 2002, between Tecumseh Products Company, State Street Bank and Trust Company, N.A. as the existing agent, and Equiserve Trust Company, N.A. as successor Class B Rights Agent 10.7 Class A Rights Agreement (incorporated by reference to Exhibit 4 to Form 8-A registering Class A Common Stock Purchase Rights dated April 22, 1992, as filed with the Securities and Exchange Commission, File No. 0-452) 10.8 Amendment No. 1 to Class A Rights Agreement (incorporated by reference to Exhibit 4 to Form 8 Amendment No. 1 dated October 2, 1992 to Form 8-A registering Class A Common Stock Purchase Rights dated April 22, 1992, as filed with the Securities and Exchange Commission, File No. 0-452) 10.9 Amendment No. 2 to Class A Rights Agreement (incorporated by reference to Exhibit 4 to Form 8-A/A Amendment No. 2 dated June 22, 1993 to Form 8-A registering Class A Common Stock Purchase Rights dated April 22, 1992, as filed with the Securities and Exchange Commission, File No. 0-452) 10.10 Third Amendment to Class A Rights Agreement (incorporated by reference to Exhibit 4.1 of the registrant's Current Report on Form 8-K as filed August 26, 1999 with the Securities and Exchange Commission, File No. 0-452) 10.11 Fourth Amendment to Class A Rights Agreement dated as of August 22, 2001, between Tecumseh Products Company and State Street Bank and Trust Company, N.A., as successor Class A Rights Agent (incorporated by reference to Exhibit 4.4 to Form 8-A/A Amendment No. 4 dated September 19, 2001 to Form 8-A registering Class A Common Stock Purchase Rights dated April 22, 1992, as filed with the Securities and Exchange Commission, File No. 0-452) 10.12* Fifth Amendment to Class A Rights Agreement, dated as of July 15, 2002, between Tecumseh Products Company, State Street Bank and Trust Company, N.A. as the existing agent, and Equiserve Trust Company, N.A. as successor Class A Rights Agent 10.13 Description of Death Benefit Plan (management contract or compensatory plan or arrangement) (incorporated by reference to Exhibit (10)(f) to registrant's Annual Report on Form 10-K for the year ended December 31, 1992, as filed with the Securities and Exchange Commission, File No. 0-452)
50
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.14 Management Incentive Plan, as amended through November 22, 1995 (management contract or compensatory plan or arrangement) (incorporated by reference to Exhibit (10)(h) to registrant's Annual Report on Form 10-K for the year ended December 31, 1995, as filed with the Securities and Exchange Commission, File No. 0-452) 10.15 Third Amendment to Management Incentive Plan, adopted January 22, 1997 (management contract or compensatory plan or arrangement) (incorporated by reference to Exhibit (10)(i) to registrant's Annual Report on Form 10-K for the year ended December 31, 1996, as filed with the Securities and Exchange Commission, File No. 0-452) 10.16 Fourth Amendment to Management Incentive Plan effective January 1, 2000 (management contract or compensatory plan or arrangement) (incorporated by reference to Exhibit 10.12 to registrant's Annual Report on Form 10-K for the year ended December 31, 1999, as filed with the Securities and Exchange Commission, File No. 0-452) 10.17 Fifth Amendment to Management Incentive Plan effective November 22, 2000 (management contract or compensatory plan or arrangement) (incorporated by reference to Exhibit 10.12 to registrant's Annual Report on Form 10-K for the year ended December 31, 2000, as filed with the Securities and Exchange Commission, File No. 0-452) 10.18 Amended and Restated Supplemental Executive Retirement Plan effective June 27, 2001 (management contract or compensatory plan or arrangement) (incorporated by reference to Exhibit 10.16 to registrant's Annual Report on Form 10-K for the year ended December 31, 2001, as filed with the Securities and Exchange Commission, File No. 0-452) 10.19 First Amendment to the Supplemental Executive Retirement Plan adopted September 26, 2001 (management contract or compensatory plan or arrangement) (incorporated by reference to Exhibit 10.17 to registrant's Annual Report on Form 10-K for the year ended December 31, 2001, as filed with the Securities and Exchange Commission, File No. 0-452) 10.20 Outside Directors' Voluntary Deferred Compensation Plan adopted November 25, 1998 (management contract or compensatory plan or arrangement) (incorporated by reference to Exhibit (10)(k) to registrant's Annual Report on Form 10-K for the year ended December 31, 1998, as filed with the Securities and Exchange Commission, File No. 0-452) 10.21* First Amendment to Outside Directors' Voluntary Deferred Compensation Plan adopted August 28, 2002 (management contract or compensatory plan or arrangement) 10.22 Amended and Restated Voluntary Deferred Compensation Plan effective November 28, 2001 (management contract or compensatory plan or arrangement) (incorporated by reference to Exhibit 10.19 to registrant's Annual Report on Form 10-K for the year ended December 31, 2001, as filed with the Securities and Exchange Commission, File No. 0-452) 10.23* First Amendment to Amended and Restated Voluntary Deferred Compensation Plan adopted September 25, 2002 (management contract or compensatory plan or arrangement) 10.24 Description of Voluntary Early Retirement Program effective July 2, 2001 (management contract or compensatory plan or arrangement) (incorporated by reference to Exhibit 10.20 to registrant's Annual Report on Form 10-K for the year ended December 31, 2001, as filed with the Securities and Exchange Commission, File No. 0-452) 10.25* Director Retention Phantom Stock Plan as amended and restated November 27, 2002 (management contract or compensatory plan or arrangement) 21* Subsidiaries to the Company 24* Power of Attorney 99.1* Certification of Chairman and Chief Executive Officer pursuant to 18 U.S.C. Section 1350 99.2* Certification of Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350
- --------------- * Filed herewith (d) Financial Statement Schedules None. 51 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 Date: March 13, 2003 By /s/ TODD W. HERRICK -------------------------------------- Todd W. Herrick Chairman of the Board of Directors, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE OFFICE DATE OF SIGNING --------- ------ --------------- /s/ TODD W. HERRICK Chairman of the Board of Directors, March 13, 2003 - --------------------------------------------- President, Chief Executive Officer Todd W. Herrick (Principal Executive Officer) /s/ DAVID W. KAY Vice President, Treasurer and Chief March 13, 2003 - --------------------------------------------- Financial Officer (Principal David W. Kay Accounting and Principal Financial Officer) and Director * Director March 13, 2003 - --------------------------------------------- Ralph W. Babb, Jr. * Director March 13, 2003 - --------------------------------------------- Peter M. Banks * Director March 13, 2003 - --------------------------------------------- Jon E. Barfield * Director March 13, 2003 - --------------------------------------------- J. Russell Fowler * Director March 13, 2003 - --------------------------------------------- Stephen L. Hickman *By: /s/ DAVID W. KAY ---------------------------------------- David W. Kay Attorney-in-Fact
52 CERTIFICATION I, Todd W. Herrick, certify that: 1. I have reviewed this annual report on Form 10-K of Tecumseh Products Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the Audit Committee of Registrant's Board of Directors (or persons performing the equivalent function); a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The Registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ TODD W. HERRICK -------------------------------------- Todd W. Herrick President and Chief Executive Officer Dated: March 13, 2003 CERTIFICATION I, David W. Kay, certify that: 1. I have reviewed this annual report on Form 10-K of Tecumseh Products Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report; 4. The Registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the Registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The Registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the Registrant's auditors and the Audit Committee of Registrant's Board of Directors (or persons performing the equivalent function); a) all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant's ability to record, process, summarize and report financial data and have identified for the Registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal controls; and 6. The Registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ DAVID W. KAY -------------------------------------- David W. Kay Vice President, Treasurer and Chief Financial Officer Dated: March 13, 2003 INDEX TO EXHIBITS Exhibit Number Description - ------ ----------- 3.1 Restated Articles of Incorporation of Tecumseh Products Company (incorporated by reference to Exhibit (3) of the registrant's Annual Report on Form 10-K for the year ended December 31, 1991, as filed with the Securities and Exchange Commission, File No. 0-452) 3.2 Certificate of Amendment to the Restated Articles of Incorporation of Tecumseh Products Company (incorporated by reference to Exhibit B-5 of the registrant's Form 8 Amendment No. 1 dated April 22, 1992 to Form 10 Registration Statement dated April 24, 1965, as filed with the Securities and Exchange Commission, File No. 0-452) 3.3 Certificate of Amendment to the Restated Articles of Incorporation of Tecumseh Products Company (incorporated by reference to Exhibit (4)(c) of the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994, as filed with the Securities and Exchange Commission, File No. 0-452) 3.4* Amended and Restated Bylaws of Tecumseh Products Company as amended through February 26, 2003 4.1 Note Purchase Agreement dated March 5, 2003 by and among Tecumseh Products Company and certain Purchasers listed therein (incorporated by reference to Exhibit 4.1 of the registrant's Current Report on Form 8-K as filed March 7, 2003 with the Securities and Exchange Commission, File No. 0-452) 4.2 Guaranty Agreement dated March 5, 2003 is made by certain subsidiaries of Tecumseh Products Company in favor of the Purchasers of the Notes (incorporated by reference to Exhibit 4.2 of the registrant's Current Report on Form 8-K as filed March 7, 2003 with the Securities and Exchange Commission, File No. 0-452) 4.3 Form of Note (incorporated by reference to Exhibit 4.3 of the registrant's Current Report on Form 8-K as filed March 7, 2003 with the Securities and Exchange Commission, File No. 0-452) 10.1 Amended and Restated Class B Rights Agreement (incorporated by reference to Exhibit 4 to Form 8 Amendment No. 1 dated April 22, 1992 to Form 8-A registering Common Stock Purchase Rights dated January 23, 1991, as filed with the Securities and Exchange Commission, File No. 0-452) 10.2 Amendment No. 1 to Amended and Restated Class B Rights Agreement (incorporated by reference to Exhibit 4 to Form 8 Amendment No. 2 dated October 2, 1992 to Form 8-A registering Common Stock Purchase Rights dated January 23, 1991, as filed with the Securities and Exchange Commission, File No. 0-452) Exhibit Number Description - ------ ----------- 10.3 Amendment No. 2 to Amended and Restated Class B Rights Agreement (incorporated by reference to Exhibit 4 to Form 8-A/A Amendment No. 3 dated June 22, 1993 to Form 8-A registering Common Stock Purchase Rights dated January 23, 1991, as filed with the Securities and Exchange Commission, File No. 0-452) 10.4 Third Amendment to Amended and Restated Class B Rights Agreement (incorporated by reference to Exhibit 4.2 of the registrant's Current Report on Form 8-K as filed August 26, 1999 with the Securities and Exchange Commission, File No. 0-452) 10.5 Fourth Amendment to Amended and Restated Class B Rights Agreement, dated as of August 22, 2001, between Tecumseh Products Company and State Street Bank and Trust Company, N.A., as successor Class B Rights Agent (incorporated by reference to Exhibit 4.4 to Form 8-A/A Amendment No. 5 dated September 19, 2001 to Form 8-A registering Common Stock Purchase Rights dated January 23, 1991, as filed with the Securities and Exchange Commission, File No. 0-452) 10.6* Fifth Amendment to Class B Rights Agreement, dated as of July 15, 2002, between Tecumseh products Company, State Street Bank and Trust Company, N.A. as the existing agent, and Equiserve Trust Company, N.A. as successor Class B Rights Agent 10.7 Class A Rights Agreement (incorporated by reference to Exhibit 4 to Form 8-A registering Class A Common Stock Purchase Rights dated April 22, 1992, as filed with the Securities and Exchange Commission, File No. 0-452) 10.8 Amendment No. 1 to Class A Rights Agreement (incorporated by reference to Exhibit 4 to Form 8 Amendment No. 1 dated October 2, 1992 to Form 8-A registering Class A Common Stock Purchase Rights dated April 22, 1992, as filed with the Securities and Exchange Commission, File No. 0-452) 10.9 Amendment No. 2 to Class A Rights Agreement (incorporated by reference to Exhibit 4 to Form 8-A/A Amendment No. 2 dated June 22, 1993 to Form 8-A registering Class A Common Stock Purchase Rights dated April 22, 1992, as filed with the Securities and Exchange Commission, File No. 0-452) 10.10 Third Amendment to Class A Rights Agreement (incorporated by reference to Exhibit 4.1 of the registrant's Current Report on Form 8-K as filed August 26, 1999 with the Securities and Exchange Commission, File No. 0-452) 10.11 Fourth Amendment to Class A Rights Agreement dated as of August 22, 2001, between Tecumseh products Company and State Street Bank and Trust Company, N.A., as successor Class A Rights Agent (incorporated by reference Exhibit Number Description - ------ ----------- to Exhibit 4.4 to Form 8-A/A Amendment No. 4 dated September 19, 2001 to Form 8-A registering Class A Common Stock Purchase Rights dated April 22, 1992, as filed with the Securities and Exchange Commission, File No. 0-452) 10.12* Fifth Amendment to Class A Rights Agreement, dated as of July 15, 2002, between Tecumseh products Company, State Street Bank and Trust Company, N.A. as the existing agent, and Equiserve Trust Company, N.A. as successor Class A Rights Agent 10.13 Description of Death Benefit Plan (management contract or compensatory plan or arrangement) (incorporated by reference to Exhibit (10)(f) to registrant's Annual Report on Form 10-K for the year ended December 31, 1992, as filed with the Securities and Exchange Commission, File No. 0-452) 10.14 Management Incentive Plan, as amended through November 22, 1995 (management contract or compensatory plan or arrangement) (incorporated by reference to Exhibit (10)(h) to registrant's Annual Report on Form 10-K for the year ended December 31, 1995, as filed with the Securities and Exchange Commission, File No. 0-452) 10.15 Third Amendment to Management Incentive Plan, adopted January 22, 1997 (management contract or compensatory plan or arrangement) (incorporated by reference to Exhibit (10)(i) to registrant's Annual Report on Form 10-K for the year ended December 31, 1996, as filed with the Securities and Exchange Commission, File No. 0-452) 10.16 Fourth Amendment to Management Incentive Plan effective January 1, 2000 (management contract or compensatory plan or arrangement) (incorporated by reference to Exhibit 10.12 to registrant's Annual Report on Form 10-K for the year ended December 31, 1999, as filed with the Securities and Exchange Commission, File No. 0-452) 10.17 Fifth Amendment to Management Incentive Plan effective November 22, 2000 (management contract or compensatory plan or arrangement) (incorporated by reference to Exhibit 10.12 to registrant's Annual Report on Form 10-K for the year ended December 31, 2000, as filed with the Securities and Exchange Commission, File No. 0-452) 10.18 Amended and Restated Supplemental Executive Retirement Plan effective June 27, 2001 (management contract or compensatory plan or arrangement) (incorporated by reference to Exhibit 10.16 to registrant's Annual Report on Form 10-K for the year ended December 31, 2001, as filed with the Securities and Exchange Commission, File No. 0-452) 10.19 First Amendment to the Supplemental Executive Retirement Plan adopted September 26, 2001 (management contract or compensatory plan or Exhibit Number Description - ------ ----------- arrangement) (incorporated by reference to Exhibit 10.17 to registrant's Annual Report on Form 10-K for the year ended December 31, 2001, as filed with the Securities and Exchange Commission, File No. 0-452) 10.20 Outside Directors' Voluntary Deferred Compensation Plan adopted November 25, 1998 (management contract or compensatory plan or arrangement) (incorporated by reference to Exhibit (10)(k) to registrant's Annual Report on Form 10-K for the year ended December 31, 1998, as filed with the Securities and Exchange Commission, File No. 0-452) 10.21* First Amendment to Outside Directors' Voluntary Deferred Compensation Plan adopted August 28, 2002 (management contract or compensatory plan or arrangement) 10.22 Amended and Restated Voluntary Deferred Compensation Plan effective November 28, 2001 (management contract or compensatory plan or arrangement) (incorporated by reference to Exhibit 10.19 to registrant's Annual Report on Form 10-K for the year ended December 31, 2001, as filed with the Securities and Exchange Commission, File No. 0-452) 10.23* First Amendment to Amended and Restated Voluntary Deferred Compensation Plan adopted September 25, 2002 (management contract or compensatory plan or arrangement) 10.24 Description of Voluntary Early Retirement Program effective July 2, 2001 (management contract or compensatory plan or arrangement) (incorporated by reference to Exhibit 10.20 to registrant's Annual Report on Form 10-K for the year ended December 31, 2001, as filed with the Securities and Exchange Commission, File No. 0-452) 10.25* Director Retention Phantom Stock Plan as amended and restated November 27, 2002 (management contract or compensatory plan or arrangement) 21* Subsidiaries to the Company 24* Power of Attorney 99.1* Certification of Chairman and Chief Executive Officer pursuant to 18 U.S.C. Section 1350 99.2* Certification of Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 - -------------------- * Filed herewith EX-3.4 3 k74390exv3w4.txt AMENDED & RESTATED BYLAWS EXHIBIT 3.4 AMENDED AND RESTATED BYLAWS OF TECUMSEH PRODUCTS COMPANY As amended through 2/26/2003 ARTICLE I MEETINGS SECTION 1. PLACE OF MEETING. Any or all meetings of the shareholders, and of the board of directors, of this Corporation may be held within or without the State of Michigan provided that no meeting shall be held at a place other than the registered office in Michigan, except pursuant to Bylaw or resolution adopted by the board of directors. SECTION 2. ANNUAL MEETING OF SHAREHOLDERS. An annual meeting of the shareholders shall be held in each calendar year on the last Wednesday of April of such calendar year at 10:30 a.m., local time, or at such other date and time as shall be determined from time to time by the board of directors, for the election of directors and for the transaction of such other business as may come before such annual meeting. SECTION 3. NOTICE OF ANNUAL MEETING OF SHAREHOLDERS. Except as otherwise provided in the Michigan Business Corporation Act, as amended from time to time (the "Act"), at least ten (10) but not more than sixty (60) days prior to the date fixed by Section 2 of this Article for the holding of the annual meeting of shareholders, written notice of the time, place, and purposes of such meeting shall be given either personally or by mail, as hereinafter provided, to each shareholder entitled to vote at such meeting. SECTION 4. BUSINESS AT ANNUAL MEETINGS. At an annual meeting of the shareholders of the Corporation, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise brought before the meeting by or at the direction of the Board of Directors, or (c) otherwise properly brought before the meeting by a shareholder. For business to be properly brought before an annual meeting by a shareholder, if such business relates to the election of directors of the Corporation, the procedures in Article IV, Section 2, of these Bylaws must be complied with. If such business relates to any other matter, the shareholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a shareholder's notice must be delivered to the Secretary and received at the principal executive offices of the Corporation not less than 60 days nor more than 90 days prior to the anniversary date of the immediately preceding annual meeting of shareholders; provided however that in the event that the annual meeting is called for a date that is not within 20 days before or after such anniversary date, such notice by the shareholder in order to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the annual meeting is mailed or public disclosure of the date of the annual meeting is made, whichever first occurs. A shareholder's notice to the Secretary shall set forth as to each matter the shareholder proposes to bring before the annual meeting (a) a brief description of the business desired to be brought before the annual meeting containing all material information relating thereto and the reasons for conducting such business at the annual meeting, (b) the name and address, as they appear on the Corporation's books, of the shareholder proposing such business, (c) the class and number of shares of the Corporation which are beneficially owned by the shareholder, and (d) any material interest of the shareholder in such business. Notwithstanding anything in the Bylaws to the contrary, no business shall be conducted at any annual meeting except in accordance with the procedures set forth in this Section 4. The officer presiding over the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 4, and if he or she should so determine, the presiding officer shall so declare to the meeting that any such business not properly brought before the meeting shall not be transacted. SECTION 5. SPECIAL MEETINGS OF SHAREHOLDERS. A special meeting of the shareholders, for any purpose or purposes proper for shareholder action and specified in the notice of such meeting, may be called at any time by the Chairman of the Board of Directors or, during the absence or disability of the Chairman of the Board of Directors or while that office is vacant, by the President (or, during the absence or disability of both the Chairman of the Board of Directors and the President or while both such offices are vacant, by the Vice-Chairman of the Board of Directors) and shall be so called at the request in writing of a majority of the board of directors or of shareholders entitled to vote not less than an aggregate of fifty percent (50%) of the outstanding shares of the Corporation having the right to vote at such special meeting. Any such request shall state the purpose or purposes of the proposed meeting. The method by which such meeting may be called is as follows: upon receipt of a specification in writing setting forth the date and objects of such proposed special meeting, signed by the Chairman of the Board of Directors or, during the absence or disability of the Chairman of the Board of Directors or while that office is vacant, by the President (or, during the absence or disability of both the Chairman of the Board of Directors and the President or while both such offices are vacant, by the Vice-Chairman of the Board of Directors) or of a request by a majority of the board of directors, or by shareholders as above provided, the Secretary of this Corporation shall prepare, sign, and mail the notices requisite to such meeting. SECTION 6. NOTICE AND BUSINESS AT SPECIAL MEETINGS OF SHAREHOLDERS. At least ten (10) but not more than sixty (60) days prior to the date fixed for the holding of any special meeting of shareholders, written notice of the time, place, and purposes of such meeting shall be given either personally or by mail, as hereinafter provided, to each shareholder entitled to vote at such meeting. The business transacted at any such special meeting, other than procedural matters and matters relating to the conduct of the meeting, shall be limited to the purpose or purposes set forth in the notice. The officer presiding at the meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 6, and if he or she should so determine, such presiding officer shall so declare to the meeting that any business not properly brought before the meeting shall not be transacted. SECTION 7. ORGANIZATION MEETING OF BOARD. At the place of holding the annual meeting of shareholders, and immediately following the same, the board of directors, as constituted upon final adjournment of such annual meeting, shall convene for the purpose of election of officers and transacting any other business properly brought before it, provided, that the organization meeting in any year may be held at a different time and place than that herein provided by consent of a majority of the directors of such new board. No notice of such meeting shall be necessary to the newly elected directors in order to legally constitute the meeting, provided a quorum -2- shall be present, unless the meeting is not held at the place of holding and immediately following the annual meeting of shareholders. SECTION 8. REGULAR MEETINGS OF BOARD. Regular meetings of the board of directors shall be held not less frequently than once in each month other than July and December, and at such time and place as the board of directors shall from time to time determine. No notice of regular meetings of the board of directors shall be required. SECTION 9. SPECIAL MEETING OF BOARD. Special meetings of the board of directors may be called by the Chairman of the Board of Directors or, during the absence or disability of the Chairman of the Board of Directors or, while that office is vacant, by the President (or, during the absence or disability of both the Chairman of the Board of Directors and the President or while both such offices are vacant, by the Vice-Chairman of the Board of Directors) at any time by means of notice of the time and place thereof to each Director given not less than twenty-four (24) hours before the time such special meeting is to be held, but action taken at any such meeting shall not be invalidated for want of notice if such notice shall be waived as hereinafter provided. SECTION 10. NOTICES AND MAILING. All notices required to be given by any provision of these Bylaws shall state the authority pursuant to which they are issued (as, "by order of the Chairman of the Board of Directors" or "by order of the President" or "by order of the Vice-Chairman of the Board of Directors" or "by request of the board of directors" or "by request of shareholders," as the case may be) and shall bear the written or printed signature of the Secretary. Every notice to a shareholder shall be plainly addressed to the sendee at such shareholder's last address appearing upon the original or duplicate stock ledger of this Corporation. Every notice to a director shall be plainly addressed to the sendee at his last address appearing on the records of this Corporation. Every notice by mail shall be deemed duly served when the same has been deposited in the United States mail with postage fully prepaid so addressed to the sendee. Written notice may also be given in person or by telegram, telecopy, telex, radiogram, cablegram, or mailgram, and such notice shall be deemed duly given when the recipient receives the notice personally or when notice, so addressed to the sendee, has been delivered to the company, or to the equipment, transmitting such notice. SECTION 11. WAIVER OF NOTICE. Notice of the time, place, and purpose of any meeting of the shareholders or of the board of directors may be waived in writing, either before or after such meeting has been held. Any and all requirements of the laws of the State of Michigan, and of the Articles of Incorporation, and of the Bylaws with respect to the calling of any meeting of the shareholders or of the board of directors may be waived in writing, either before or after such meeting has been held. Neither the business to be transacted at, nor the purpose of, a regular or special meeting of the board of directors need be specified in the waiver of notice of the meeting. SECTION 12. PROCEDURAL MATTERS. At each meeting of the shareholders, the officer presiding over the meeting shall fix and announce the date and time of the opening and the closing of the polls for each matter upon which the shareholders will vote at the meeting and shall determine the order of business and all other matters of procedure. Except to the extent inconsistent with any such rules and regulations as adopted by the board of directors, such presiding officer may establish rules, which need not be in writing, to maintain order for the conduct of the meeting, including, without limitation, restricting attendance to bona fide shareholders of record and their proxies and -3- other persons in attendance at the invitation of the Board or such presiding officer and making rules governing speeches and debates. The presiding officer acts in his or her absolute discretion and his or her rulings are not subject to appeal. ARTICLE II QUORUM SECTION 1. QUORUM OF SHAREHOLDERS. A majority of the outstanding shares of this Corporation entitled to vote, present by the record holders thereof in person or by proxy, shall constitute a quorum at any meeting of the shareholders. SECTION 2. QUORUM OF DIRECTORS. A majority of the members of the board of directors then in office shall constitute a quorum for transaction of business. ARTICLE III VOTING, ELECTIONS AND PROXIES SECTION 1. WHO IS ENTITLED TO VOTE. Except as the Articles of Incorporation of this Corporation otherwise provide, each shareholder of this Corporation shall, at every meeting of the shareholders, be entitled to one vote in person or by proxy for each share of capital stock of this Corporation held by such shareholder, subject, however, to the full effect of the limitations imposed by the fixed record date for determination of shareholders set forth in Section 2 of this Article. SECTION 2. RECORD DATE FOR DETERMINATION OF SHAREHOLDERS. For the purpose of determining shareholders entitled to notice of and to vote at a meeting of shareholders or an adjournment of a meeting, the board of directors may fix a record date, which shall not precede the date on which the resolution fixing the record date is adopted by the board. The date shall not be more than sixty (60) nor less than ten (10) days before the date of the meeting. If a record date is not fixed, the record date for determination of shareholders entitled to notice of or to vote at a meeting of shareholders shall be the close of business on the day next preceding the day on which notice is given, or if no notice is given, the day next preceding the day on which the meeting is held. When a determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders has been made as provided in this Section, the determination applies to any adjournment of the meeting, unless the board of directors fixes a new record date under this Section for the adjourned meeting. For the purpose of determining shareholders entitled to receive payment of a share dividend or distribution, or allotment of a right, or for the purpose of any other action, the board of directors may fix a record date, which shall not precede the date on which the resolution fixing the record date is adopted by the board. The date shall not be more than sixty (60) days before the payment of the share dividend or distribution or allotment of a right or other action. If a record date is not fixed, the record date shall be the close of business on the day on which the resolution of the board of directors relating to the corporate action is adopted. SECTION 3. PROXIES. No proxy shall be deemed operative unless and until signed by the shareholder and filed with the Corporation. In the absence of limitation to the contrary contained in the proxy, the same shall extend to all meetings of the shareholders and shall remain in force three years from its date and no longer. -4- SECTION 4. VOTE BY SHAREHOLDER CORPORATION. Any other corporation owning voting shares in this Corporation may vote upon the same by the President of such shareholder corporation, or by proxy appointed by him or, in absence of the President and his proxy, by its Treasurer or, in their absence, by its Secretary. The board of directors of such shareholder corporation may appoint some other person to vote such shares. SECTION 5. INSPECTORS OF ELECTION. The board of directors, in advance of a shareholders' meeting, may appoint one (1) or more inspectors of election to act at the meeting or any adjournment thereof. If inspectors are not so appointed, the person presiding at a shareholders' meeting may, and on request of a shareholder entitled to vote thereat shall, appoint one (1) or more inspectors. In case a person appointed fails to appear or act, the vacancy may be filled by appointment made by the board of directors in advance of the meeting or at the meeting by the person presiding thereat. The inspectors shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes or ballots, hear and determine challenges and questions arising in connection with the right to vote, count and tabulate votes or ballots, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all shareholders. On request of the person presiding at the meeting or a shareholder entitled to vote thereat, the inspectors shall make and execute a written report to the person presiding at the meeting of any of the facts found by them and matters determined by them. The report shall be prima facie evidence of the facts stated and of the vote as certified by the inspectors. ARTICLE IV BOARD OF DIRECTORS SECTION 1. NUMBER AND TERM OF DIRECTORS. The business and affairs of the Corporation shall be managed by a board of directors composed of not less than five (5) nor more than ten (10) members. The number of directors which shall constitute the board of directors at any given time shall be determined by resolution of the board of directors; provided, however, that in the absence of an express determination by the board of directors, the number of directors, until changed by the board, shall be that number of directors elected at the most recently held annual meeting of shareholders and, provided further, that no decrease in the number of directors constituting the whole board of directors shall shorten the term of any then incumbent director. At each annual meeting of shareholders, the shareholders shall elect directors to hold office until the succeeding annual meeting. The board of directors may thereafter increase the number of directors from time to time up to a maximum of ten (10) and may then fill the vacancies resulting from such increase as provided by Section 3 of this Article IV. A director shall hold office for the term for which he or she is elected and until his or her successor is elected and qualified, or until his or her resignation or removal. Directors need not be shareholders. SECTION 2. NOMINATIONS. Nominations for election to the board of directors at a meeting of shareholders may be made by the board of directors or by a committee thereof, or by any shareholder of the Corporation entitled to vote for the election of directors at such meeting. Such nominations, other than those made by or on behalf of the board of directors, shall be made by notice in writing delivered or mailed by first class United States mail, postage prepaid, to the Secretary of -5- the Corporation, and received (1) in the case of an annual meeting, not less than 60 days nor more than 90 days prior to the anniversary date of the immediately preceding annual meeting of the shareholders; provided, however, that in the event that the annual meeting is called for a date that is not within 20 days before or after such anniversary date, such notice by the shareholder in order to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the annual meeting is mailed or public disclosure of the date of the annual meeting is made, whichever first occurs, or (2) in the case of a special meeting of shareholders called for the purpose of electing directors, not later than the close of business on the tenth day following the day on which notice of the date of the special meeting is mailed or public disclosure of the date of the special meeting is made, whichever first occurs. Such notice shall set forth (a) as to each proposed nominee (i) the name, date of birth, business address, and residence address of such nominee, (ii) the principal occupation or employment of such nominee during the past five years, (iii) the number of shares of stock of the Corporation which are beneficially owned by such nominee, and (iv) any other information concerning such nominee that must be disclosed as to nominees in proxy solicitations pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person's written consent to be named as a nominee and to serve as a director if elected), and (b) as to the shareholder giving the notice (i) the name and address of such shareholder, as they appear on the Corporation's books, (ii) the class or classes and number(s) of shares of the Corporation which are beneficially owned by such shareholder, (iii) a description of all arrangement or understandings between such shareholder and each proposed nominee and any other person or persons (including their names) pursuant to which the nomination(s) are to be made by such shareholder, and (iv) any other information relating to such shareholder that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder. At the request of the board of directors, any person nominated by the board of directors for election as a director shall furnish to the Secretary of the Corporation that information required to be set forth in a shareholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 2 of the Bylaws. The officer presiding over a meeting of shareholders may, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure, and if he or she should so determine, the presiding officer shall so declare to the meeting and the defective nomination shall be disregarded. SECTION 3. VACANCIES. Unless otherwise limited by the articles of incorporation, if a vacancy, including a vacancy resulting from an increase in the number of directors, occurs in the board of directors, the vacancy may be filled as follows: (a) The shareholders may fill the vacancy at an annual meeting of shareholders or a special meeting called for such purpose. (b) The board may fill the vacancy. (c) If the directors remaining in office constitute fewer than a quorum of the board of directors, they may fill the vacancy by the affirmative vote of a majority of all the directors remaining in office. -6- SECTION 4. ACTION BY UNANIMOUS WRITTEN CONSENT. Action required or permitted to be taken under authorization voted at a meeting of the board of directors or a committee of the board of directors, may be taken without a meeting if, before or after the action, all members of the board then in office or of the committee consent to the action in writing. The written consents shall be filed with the minutes of the proceedings of the board of directors or committee. The consent has the same effect as a vote of the board of directors or committee for all purposes. SECTION 5. POWER TO ELECT OFFICERS. The board of directors shall elect a Chairman of the Board of Directors, a President, a Secretary, and a Treasurer and may elect a Vice-Chairman of the Board of Directors, a Secretary of the Board of Directors, a Chairman of the Board of Directors Emeritus, and one or more Vice-Presidents, Assistant Secretaries, and Assistant Treasurers. None of said officers, except the Chairman of the Board of Directors, the President, and the Vice-Chairman of the Board of Directors, need be a member of the board of directors, but a Vice-President who is not a director shall not succeed to or fill the office of Chairman of the Board of Directors or President. Any two of the aforementioned offices, except those of Chairman of the Board of Directors and President, of Chairman of the Board of Directors and Vice-Chairman of the Board of Directors, or of President and Vice-President, may be held by the same person, but no officer shall execute, acknowledge, or verify any instrument or document in more than one capacity. SECTION 6. POWER TO APPOINT OTHER OFFICERS AND AGENTS. The board of directors shall have power to appoint such other officers and agents as the board may deem necessary for transaction of the business of the Corporation. SECTION 7. REMOVAL OF OFFICERS AND AGENTS. Any officer or agent may be removed by the board of directors, with or without cause, whenever in the judgment of the board the business interests of the corporation will be served thereby. SECTION 8. POWER TO FILL VACANCIES. The board shall have power to fill any vacancy in any office occurring from any reason whatsoever. SECTION 9. DELEGATION OF POWERS. For any reason deemed sufficient by the board of directors, whether occasioned by absence or otherwise, the board may delegate all or any of the powers and duties of any officer to any other officer or director, but no officer or director shall execute, acknowledge, or verify any instrument or document in more than one capacity. SECTION 10. POWER TO APPOINT EXECUTIVE AND OTHER COMMITTEES. The board of directors shall have power to appoint by resolution an Executive Committee composed of two or more directors who, to the extent provided in such resolution and except as otherwise provided in the Act, shall have and may exercise the authority of the board of directors in the management of the business of the Corporation between meetings of the board. The board of directors may also designate one or more other committees, each such committee to consist of one or more of the directors of the Corporation. Any such other committee, to the extent provided in the resolution of the board of directors creating such committee and except as otherwise provided in the Act, may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace an absent or disqualified member at a meeting of the committee. Any committee, and each member thereof, shall serve at the pleasure of the board of directors. -7- SECTION 11. POWER TO REQUIRE BONDS. The board of directors may require any officer or agent to file with the Corporation a satisfactory bond conditioned for faithful performance of his duties. SECTION 12. COMPENSATION. The compensation of directors, officers, and agents may be fixed by the board. SECTION 13. OATH OF DIRECTORS. Each person who shall be elected a director of this Corporation shall promptly, after being so elected, and before assuming his duties as such director for the term for which he has been so elected, have administered to him, and shall take, in such manner, and at such time and place as the Chairman of the Board of Directors or the President shall determine and decide, an oath substantially as follows: I, ___________________________________, being duly elected to the board of directors of Tecumseh Products Company, do hereby accept such office and solemnly swear or affirm that I, conscientiously, honestly, lawfully, and to the best of my ability, will perform the duties and discharge the responsibilities of a director of this Corporation. SECTION 14. HONORARY MEMBERS OF THE BOARD OF DIRECTORS. There shall be such number of Honorary Members of the board of directors as the board of directors shall from time to time determine and decide. The board of directors may appoint as an Honorary Member of the board of directors any person who at the time of his appointment as such is not, but who at any time prior to his appointment as such has been, a member of the board of directors, as a reward for and in recognition of distinguished service to the Corporation as a member of its board of directors. An Honorary Member of the board of directors shall have the right, but not the obligation, to attend meetings of the board of directors and shall receive for such attendance such fee or other compensation as the board of directors shall from time to time fix and determine. An Honorary Member of the board of directors shall have the right to participate in any discussions and deliberations at any meeting of the board of directors in the same manner and to the same extent as if he were a member of the board of directors but shall have no right to vote on or with respect to any resolution adopted or to be adopted, any business transacted or to be transacted, or any action taken or to be taken by the board of directors at any such meeting. Except as expressly provided herein, an Honorary Member of the board of directors shall have only such authority, and shall perform only such duties, in, or in connection with, the management of the property and affairs of the Corporation and the transaction of its business as the board of directors shall from time to time delegate to him with his consent. SECTION 15. MANDATORY RETIREMENT AGE FOR DIRECTORS. Except as hereinafter provided, no person shall be eligible for election or re-election as a member, other than as an Honorary Member, of the board of directors of the Corporation after he shall have attained the age of 70 years. Each person who attains the age of 70 years during his term as a member, other than an Honorary Member, of the board of directors shall retire as a member of the board of directors of the Corporation not later than at the expiration of any term of office for which he shall have been elected and which began before, and ended after, such person shall have attained the age of 70 years. Notwithstanding the foregoing, any member of the board of directors who has attained the age of 71 -8- years prior to February 24, 1993 shall be eligible for re-election as a member of the board of directors. SECTION 16. MANDATORY RESIGNATION UPON CHANGE IN DIRECTOR'S EMPLOYMENT. If any member of the board of directors of the Corporation ceases for any reason (including retirement, resignation, discharge, or any other reason) to be actively employed by the same employer, if any, by which such member was employed at the time of his or her most recent election to the board of directors, then such person shall tender his or her resignation from the board of directors to the Nominating Committee of the board of directors (or, if there is no such committee, to the full board of directors) no later than 60 days after the date of such change in employment, and the Nominating Committee, with the director in question taking no part in such action if he or she is a member of the Nominating Committee (or, if there is no such committee, the board of directors, with the director in question taking no part in such action), shall determine whether or not such resignation shall be accepted, and if such resignation is so accepted, it shall be effective as of the date of such acceptance. If the Nominating Committee (or, if there is no such committee, the board of directors) refuses such resignation, or if it does not accept such resignation within 60 days after it is tendered, then such resignation shall be of no force or effect. Each person who accepts election to the board of directors after April 24, 2002 (the date of adoption of this Section 16) shall be deemed to have agreed to comply with the provisions of this Section 16. SECTION 17. PARTICIPATION IN MEETING BY TELEPHONE. By oral or written permission of a majority of the board of directors, a member of the board of directors or of a committee designated by the board may participate in a meeting by means of conference telephone or similar communications equipment through which all persons participating in the meeting can communicate with the other participants. Participation in a meeting pursuant to this Section constitutes presence in person at the meeting. ARTICLE V OFFICERS SECTION 1. CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of the Board of Directors shall be selected by, and from among the membership of, the board of directors. He shall preside at all meetings of the shareholders and of the board of directors and of any Executive Committee at which he is in attendance. He shall perform such other duties and functions as shall be assigned to him from time to time by the board of directors. Except where by law the signature of the President of this Corporation is required, the Chairman of the Board of Directors shall possess the same power and authority as the President to sign all certificates, contracts, instruments, papers, and documents of every conceivable kind and character whatsoever, in the name of and on behalf of this Corporation, which may be authorized by the board of directors. During the absence or disability of the President, the Chairman of the Board of Directors shall exercise all of the powers and discharge all of the duties of the President. SECTION 2. VICE-CHAIRMAN OF THE BOARD OF DIRECTORS. If the board of directors elects a Vice-Chairman of the Board of Directors, he shall be selected from the membership of the board of directors. During the absence or disability of both the Chairman of the Board of Directors and the President, or while both such offices are vacant, he shall preside at all meetings -9- of the shareholders, of the board of directors, and of any Executive Committee. During the absence or disability of both the President and the Chairman of the Board of Directors, or while both such offices are vacant for any reason, the Vice-Chairman of the Board of Directors shall have and may exercise any and all of the powers and duties of the President and of the Chairman of the Board of Directors. At all other times the Vice-Chairman of the Board of Directors shall be responsible to the Chairman of the Board of Directors and through him (or during the absence or disability of the Chairman of the Board of Directors or while that office is vacant for any reason, directly) to the board of directors for the exercise, performance, and discharge of such powers, duties, and responsibilities as the Chairman of the Board of Directors or the board of directors shall see fit to vest in or delegate to him or which are vested in or imposed upon him by the Bylaws. SECTION 3. PRESIDENT AND CHIEF EXECUTIVE OFFICER. The President shall be selected by, and from among the membership of, the board of directors. He shall be (and may identify himself and execute instruments and other documents using the title of) the Chief Executive Officer of this Corporation and shall, in general, supervise and manage the business affairs of this Corporation, including, but not limited to, any and all duties normally and customarily incident to the office of the President and Chief Executive Officer of a corporation and such other duties and functions as shall be assigned to him from time to time by the board of directors. During the absence or disability of the Chairman of the Board of Directors, or while such office is vacant, the President shall perform all duties and functions, and while so acting shall have all of the powers and authority, of the Chairman of the Board of Directors. SECTION 4. VICE-PRESIDENTS. The board of directors may designate one or more Vice-Presidents as Executive Vice-Presidents. Except as otherwise expressly provided in the Bylaws of this Corporation, or unless the board of directors shall otherwise provide by resolution duly adopted by it, such of the Vice-Presidents as shall have been designated Executive Vice-Presidents and are members of the board of directors in order of their seniority as members of the board of directors (or if no Vice-President who is a member of the board of directors shall have been designated an Executive Vice-President, then such Vice-Presidents as are members of the board of directors specified by the board of directors) shall perform the duties and exercise the power of the President, of the Chairman of the Board of Directors, and of the Vice-Chairman of the Board of Directors during the absence or disability of all of the persons occupying said offices. The Vice-Presidents shall perform such other duties as may be delegated to them by the board of directors, any Executive Committee, the Chairman of the Board of Directors, or the President. SECTION 5. SECRETARY. The Secretary shall attend all meetings of the shareholders and of any Executive Committee and, during the absence or disability of the Secretary of the Board of Directors or while such office is vacant, all meetings of the board of directors, and the Secretary shall preserve in the books of the Corporation true minutes of the proceedings of the shareholders and of any Executive Committee and, during the absence or disability of the Secretary of the Board of Directors or while such office vacant, the minutes of all meetings of the board of directors. He shall safely keep in his custody the seal of the Corporation and shall have authority to affix the same to all instruments where its use is required by statute, bylaw, or resolution. He shall perform such other duties as may be delegated to him by the board of directors, any Executive Committee, the Chairman of the Board of Directors, or the President. -10- SECTION 6. TREASURER. The Treasurer shall have custody of all corporate funds and securities and shall keep in books belonging to the Corporation full and accurate accounts of all receipts and disbursements; he shall deposit all moneys, securities, and other valuable effects in the name of the Corporation in such depositories as may be designated for that purpose by the board of directors. He shall disburse the funds of the Corporation as may be ordered by the board of directors, taking proper vouchers for such disbursements, and shall render to the Chairman of the Board of Directors, the President, and the board of directors whenever requested by them an account of all his transactions as Treasurer and of the financial condition of the Corporation. If required by the board of directors, he shall keep in force a bond, in form, amount, and with a surety or sureties satisfactory to the board of directors, conditioned for faithful performance of the duties of his office, and for restoration to the Corporation in case of his death, resignation, retirement, or removal from office, of all books, papers, vouchers, money, and property of whatever kind in his possession or under his control belonging to the Corporation. He shall perform such other duties as may be delegated to him by the board of directors, any Executive Committee, the Chairman of the Board of Directors, or the President. SECTION 7. ASSISTANT SECRETARY AND ASSISTANT TREASURER. The Assistant Secretary or Assistant Secretaries, in the absence or disability of the Secretary, shall perform the duties and exercise the powers of the Secretary. The Assistant Treasurer or Assistant Treasurers, in the absence or disability of the Treasurer, shall perform the duties and exercise the powers of the Treasurer. Any Assistant Treasurer, if required by the board of directors, shall keep in force a bond as provided in Section 6 of this Article V. SECTION 8. SECRETARY OF THE BOARD OF DIRECTORS. The Secretary of the Board of Directors shall attend all meetings of the board of directors, and shall preserve in books of the Corporation true minutes of all such meetings. He shall have authority to affix the seal of the Corporation to all certificates or other instruments embodying or relating to any resolution adopted by, or proceedings taken at any meeting of, the board of directors of the Corporation. He shall perform such other duties as may be delegated to him by the board of directors. SECTION 9. CHAIRMAN OF THE BOARD OF DIRECTORS EMERITUS. The board of directors may designate as Chairman of the Board of Directors Emeritus any person who at any time prior to such designation has been Chairman of the Board of Directors, and who at the time of his designation as Chairman of the Board of Directors Emeritus is a member of the board of directors of the Corporation, as a reward for and in recognition of distinguished service to this Corporation as Chairman of the Board of Directors. During the absence or disability of the Chairman of the Board of Directors, the Vice-Chairman of the Board of Directors, and the President, or while all such offices are vacant, the Chairman of the Board of Directors Emeritus shall preside at all meetings of the shareholders and of the board of directors. Except where by law the signature of the President of this Corporation is required, the Chairman of the Board of Directors Emeritus shall possess the same power and authority as the President to sign all certificates, contracts, instruments, papers, and documents of every conceivable kind and character whatsoever, in the name of and on behalf of this Corporation, which may be authorized by the board of directors. He shall perform such other duties as may be delegated to him by the board of directors, any Executive Committee, or the President. SECTION 10. CHIEF FINANCIAL OFFICER. As and whenever it determines the same to be appropriate, the board of directors may designate the President, an Executive Vice-President, a -11- Vice-President, or the Treasurer as the Chief Financial Officer of the Corporation, and any such officer so designated (while he continues to hold the office held at the time of such designation and until such designation is revoked or a different officer is so designated by the board of directors) may identify himself and execute instruments and other documents using the title of Chief Financial Officer. ARTICLE VI STOCK AND TRANSFERS SECTION 1. CERTIFICATES FOR SHARES. Every shareholder shall be entitled to a certificate evidencing the shares of the capital stock of the Corporation owned by him, signed by the President or a Vice-President, and by the Secretary, the Treasurer, an Assistant Secretary, or an Assistant Treasurer, under the seal of the Corporation, certifying the number and class of shares, evidenced by such certificate, which certificate may, but need not be, also signed by the Chairman of the Board of Directors, shall be in such manner and form as shall have been approved by the board of directors, and shall set forth such terms and provisions as shall from time to time be required by the laws of the State of Michigan to be set forth in such certificate; provided, that where any such certificate is signed: (i) by a transfer agent or an assistant transfer agent or (ii) by a transfer clerk acting on behalf of this Corporation, and by a registrar, the signature of any such President, Vice-President, Secretary, Assistant Secretary, Treasurer, or Assistant Treasurer, or of the Chairman of the Board of Directors, and the seal of the Corporation, may be a facsimile. SECTION 2. TRANSFERABLE ONLY ON BOOKS OF CORPORATION. Shares shall be transferable only on the books of the Corporation by the person named in the certificate, or by attorney lawfully constituted in writing, and upon surrender of the certificate therefor. A record shall be made of every such transfer and issue. Whenever any transfer is made for collateral security and not absolutely, the fact shall be so expressed in the entry of such transfer. SECTION 3. REGISTERED STOCKHOLDERS. The Corporation shall have the right to treat the registered holder of any share as the absolute owner thereof and shall not be bound to recognize any equitable or other claim to, or interest in, such share on the part of any other person, whether or not the Corporation shall have express or other notice thereof, save as may be otherwise provided by the statutes of Michigan. SECTION 4. TRANSFER AGENT AND REGISTRAR. The board of directors may appoint a transfer agent and a registrar of transfers, and may require all certificates of shares to bear the signature of such transfer agent and of such registrar of transfers, or as the board may otherwise direct. SECTION 5. REGULATIONS. The board of directors shall have power and authority to make all such rules and regulations as the board shall deem expedient regulating the issue, transfer, and registration of certificates for shares in this Corporation. -12- ARTICLE VII DIVIDENDS AND RESERVES SECTION 1. DIVIDENDS. The board of directors shall have the power and authority to declare dividends or other distributions to security holders to the full extent permitted by applicable law. Dividends may be paid in cash or other property of the Corporation, in shares, obligations, or other securities of the Corporation, or in any other form permitted by applicable law. SECTION 2. RESERVES. The board of directors shall have power and authority to set apart such reserve or reserves, for any proper purpose, as the board in its discretion shall approve; and the board shall have power and authority to abolish any reserve created by the board. ARTICLE VIII LIST OF SHAREHOLDERS SECTION 1. LIST OF SHAREHOLDERS ENTITLED TO VOTE. The officer or agent having charge of the stock transfer books for shares of the Corporation shall make and certify a complete list of the shareholders entitled to vote at a shareholders' meeting or any adjournment thereof. The list shall: (a) Be arranged alphabetically within each class and series, with the address of, and the number of shares held by, each shareholder. (b) Be produced at the time and place of the meeting. (c) Be subject to inspection by any shareholder during the whole time of the meeting. (d) Be prima facie evidence as to who are the shareholders entitled to examine the list or to vote at the meeting. ARTICLE IX GENERAL PROVISIONS SECTION 1. CHECKS, ETC. All checks, drafts, and orders for payment of money shall be signed in the name of the Corporation by one or more of such officers or agents as the board of directors shall from time to time designate for that purpose or as shall be designated from time to time by any officer of the Corporation authorized by the board of directors to make such designations. SECTION 2. CONTRACTS, CONVEYANCES, ETC. When the execution of any contract, conveyance, or other instrument has been authorized without specification of the executing officers, the Chairman of the Board of Directors, the President, or any Vice-President, and the Secretary or any Assistant Secretary, may execute the same in the name and behalf of this Corporation and may affix the corporate seal thereto. The board of directors shall have power to designate the officers and agents who shall have authority to execute any instrument in behalf of this Corporation. SECTION 3. VOTING SECURITIES. Unless otherwise directed by the board of directors, the Chairman of the Board of Directors, or the President, or, in the case of their absence or inability -13- to act, the Vice-Presidents, in order of their seniority, shall have full power and authority on behalf of this Corporation to attend and to act and to vote, or to execute in the name or on behalf of this Corporation a consent in writing in lieu of a meeting of shareholders or a proxy authorizing an agent or attorney-in-fact for this Corporation to attend and vote, at any meetings of security holders of corporations in which this Corporation may hold securities, and at such meetings he or his duly authorized agent or attorney-in-fact shall possess and may exercise any and all rights and powers incident to the ownership of such securities and which, as the owner thereof, this Corporation might have possessed and exercised if present. The board of directors by resolution from time to time may confer like power upon any other person or persons. ARTICLE X AMENDMENT SECTION 1. MANNER OF AMENDMENT. The Bylaws of the Corporation may be amended, altered, changed, added to, or repealed, in whole or in part, by the affirmative vote of a majority of the shares of the capital stock of the Corporation entitled to vote thereat, present in person or proxy at any annual or special meeting of the shareholders of the Corporation at which a quorum is present, if notice of the proposed amendment, alteration, change, addition, or repeal is contained in the notice of such meeting. The Bylaws may also be amended, altered, changed, added to, or repealed, in whole or in part, by the affirmative vote of a majority of the board of directors, at any regular meeting of the board of directors at which a quorum is present, or at any special meeting of the board of directors at which a quorum is present if notice of the proposed amendment, alteration, change, addition, or repeal is contained in the notice of such special meeting, unless and to the extent that the power to amend or repeal the Bylaws is reserved exclusively to the shareholders of the Corporation in its Articles of Incorporation. The power and authority of the board of directors to amend, alter, change, add to, or repeal the Bylaws shall extend and be exercisable with respect to not only all or any portion of the Bylaws adopted by the board of directors but also with respect to all or any portion of the Bylaws adopted by the shareholders, provided, however, that the shareholders may, if they elect so to do, prescribe in the Bylaws that any or all of the provisions of the Bylaws adopted by the shareholders shall not be altered or repealed by the board of directors. ARTICLE XI CHAPTER 7B OF MICHIGAN BUSINESS CORPORATION ACT SECTION 1. CHAPTER 7B NOT APPLICABLE. Chapter 7B of the Act (entitled "Control Share Acquisitions") does not apply to control share acquisitions of shares of the Corporation. -14- EX-10.6 4 k74390exv10w6.txt FIFTH AMENDMENT TO CLASS B RIGHTS AGREEMENT EXHIBIT 10.6 FIFTH AMENDMENT TO AMENDED AND RESTATED CLASS B RIGHTS AGREEMENT THIS FIFTH AMENDMENT to the Amended and Restated Class B Rights Agreement dated April 22, 1992, as amended (as so amended, the "Existing Agreement"), is dated as of July 15, 2002 and is among TECUMSEH PRODUCTS COMPANY, a Michigan corporation (the "Company"), STATE STREET BANK AND TRUST COMPANY, N.A., as Class B Rights Agent (the "Existing Agent"), and EQUISERVE TRUST COMPANY, N.A. (the "Successor Agent"). WHEREAS, Section 26 of the Existing Agreement entitles the Company at any time prior to the Distribution Date (as therein defined) to amend any provisions of the Existing Agreement and requires the Existing Agent, if directed by the Company, to execute any such amendment upon the delivery of a certificate from an appropriate officer of the Company which states that it is in compliance with Section 26 (a "compliance certificate"); and WHEREAS, the Company has appointed EquiServe Trust Company, N.A. to succeed State Street Bank and Trust Company, N.A. as Class B Rights Agent under the Existing Agreement, with such appointment to be effective as of the date of this Amendment, and EquiServe Trust Company, N.A. has accepted such appointment; and WHEREAS, the Board of Directors of the Company has authorized and approved the amendments to the Existing Agreement hereafter set forth in this Amendment and has directed the execution hereof, and a compliance certificate concerning this Amendment has been delivered to the Existing Agent; NOW, THEREFORE, in consideration of the foregoing and pursuant to Section 26 of the Existing Agreement, the parties hereby agree as follows: 1. Amendment of Cover Page. The cover page of the Existing Agreement is hereby amended by replacing the words "STATE STREET BANK AND TRUST COMPANY, N.A." with "EQUISERVE TRUST COMPANY, N.A." 2. Amendment of First Paragraph. The first paragraph of the Existing Agreement is hereby amended by replacing the words "STATE STREET BANK AND TRUST COMPANY, N.A., a Massachusetts Trust Company" with "EQUISERVE TRUST COMPANY, N.A., a National Banking Association". 3. Amendment of Section 3(c). The legend set forth in Section 3(c) of the Existing Agreement is hereby amended by adding the following sentence at the end of such legend: EquiServe Trust Company, N.A. is the successor Class B Rights Agent under the Class B Rights Agreement. 4. Amendment of Section 21. Section 21 of the Existing Agreement is hereby amended to read in its entirety as follows: SECTION 21. Change of Class B Rights Agent. The Class B Rights Agent or any successor Class B Rights Agent may resign and be discharged from its duties under this Agreement upon 30 days' notice in writing mailed to the Company and to each transfer agent of the Class B Stock by registered or certified mail and to the holders of the Class B Rights Certificates by first-class mail. The Company may remove the Class B Rights Agent or any successor Class B Rights Agent upon 30 days' notice in writing mailed to the Class B Rights Agent or successor Class B Rights Agent, as the case may be, and to each transfer agent of the Class B Stock by registered or certified mail, and to the holders of the Class B Rights Certificates by first-class mail. In the event the Transfer Agency and Services Agreement between the Company and EquiServe Trust Company, N.A. terminates, the Rights Agent will be deemed to resign automatically on the effective date of such termination; and any required notice will be sent by the Company. If the Class B Rights Agent shall resign or be removed or shall otherwise become incapable of acting, the Company shall appoint a successor to the Class B Rights Agent. If the Company shall fail to make such appointment within a period of 30 days after giving notice of such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Class B Rights Agent or by the holder of a Class B Rights Certificate (who shall, with such notice, submit such holder's Class B Rights Certificate for inspection by the Company), then the registered holder of any Class B Rights Certificate may apply to any court of competent jurisdiction for the appointment of a new Class B Rights Agent. Any successor Class B Rights Agent, whether appointed by the Company or by such a court, shall be a corporation or trust company organized and doing business under the laws of the United States, in good standing, which is authorized under such laws to exercise corporate trust or stock transfer powers and is subject to supervision or examination by federal or state authority and which has individually or combined with an affiliate at the time of its appointment as Class B Rights Agent a combined capital and surplus of at least $100 million. After appointment, the successor Class B Rights Agent shall be vested with the same powers, rights, duties, and responsibilities as if it had been originally named as Class B Rights Agent without further act or deed; but the predecessor Class B Rights Agent shall deliver and transfer to the successor Class B Rights Agent any property at the time held by it hereunder and execute and deliver any further assurance, conveyance, act, or deed necessary for the purpose. Not later than the effective date of any such appointment, the Company shall file notice thereof in writing with the predecessor Class B Rights Agent and each transfer agent of the Class B Stock and mail a notice -2- thereof in writing to the registered holders of the Class B Rights Certificates. Failure to give any notice provided for in this Section 26, however, or any defect therein, shall not affect the legality or validity of the resignation or removal of the Class B Rights Agent or the appointment of the successor Class B Rights Agent, as the case may be. 5. Amendment of Section 25. The address of the Class B Rights Agent in Section 25 of the Existing Rights Agreement is hereby replaced with the following: EquiServe Trust Company, N.A. 150 Royal Street Canton, MA 02021 Attn: Client Administrator 6. Amendment of Summary of Rights. Exhibit B to the Existing Agreement (Summary of Rights to Purchase Class B Stock) is hereby amended to read in its entirety as set forth in Annex A to this Amendment. 7. Affirmation. Except as specifically amended herein, the Existing Agreement shall remain in full force and effect as existing prior to the date hereof. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed, all as of the date first above written. TECUMSEH PRODUCTS COMPANY STATE STREET BANK AND TRUST COMPANY, N.A. By: /s/Todd W. Herrick By: /s/S. Cesso ----------------------------- ----------- Todd W. Herrick S. Cesso Its: President and Chief Executive Its: Authorized Signer Officer EQUISERVE TRUST COMPANY, N.A. By: /s/Dennis V. Moccia Dennis V. Moccia Its: Managing Director -3- ANNEX A EXHIBIT B SUMMARY OF RIGHTS TO PURCHASE CLASS B STOCK Pursuant to a Class B Rights Agreement entered into in 1992, Tecumseh Products Company (the "Company") distributed one Class B Right for each share of Class B Stock issued by the Company. Each Class B Right entitles the registered holder, subject to the terms of the Class B Rights Agreement, to purchase from the Company one share of Class B Stock at a specified purchase price. The Class B Rights are issued pursuant to a Class B Rights Agreement dated as of April 22, 1992, as amended, between the Company and EquiServe Trust Company, N.A., as successor Class B Rights Agent. This summary does not purport to be complete and is qualified in its entirety by reference to all the provisions of the Class B Rights Agreement, including its definition of certain terms. The Class B Rights Agreement is incorporated in this summary by reference. Copies of the Class B Rights Agreement and all amendments to that Agreement have been filed with the Securities and Exchange Commission and are available free of charge from the Company. Each Class B Right entitles the registered holder, subject to the terms of the Class B Rights Agreement, to purchase from the Company one share of Class B Stock at a purchase price of $180.00 per share, subject to adjustment (the "Purchase Price"). The Purchase Price is payable in cash or by certified or bank check or money order payable to the order of the Company. The Class B Rights currently are attached to all certificates representing shares of outstanding Class B Stock. Class B Rights will also be attached to all certificates representing shares of Class B Stock issued in the future until the Distribution Date. Initially, no separate Class B Rights Certificates will be distributed. Until the Distribution Date, the Class B Rights will be evidenced by the certificates representing Class B Stock and will be transferred with and only with those certificates. The Class B Rights are not exercisable until the Distribution Date and will expire at the close of business on August 25, 2009, unless earlier redeemed by the Company as described below. The Class B Rights will separate from the Class B Stock on the Distribution Date. The Distribution Date will occur upon the earlier of (i) ten business days following a public announcement (the "Stock Acquisition Date") that a person or group of persons (an "Acquiring Person") has acquired 10% (or, if such person or group is a "Grandfathered Person," the "Grandfathered Percentage") or more of the then outstanding shares of Class B Stock other than as a result of repurchases of Class B Stock by the Company or certain inadvertent actions by institutional or certain other shareholders, or (ii) ten business days (or a later date determined by the Board of Directors) following the commencement, without Board approval, of a tender or exchange offer that would result in a person or group owning 10% or more of the then outstanding shares of Class B Stock. Any person or group that owned 5% or more of the Class B Stock outstanding on April 22, 1992 (a "Grandfathered Person") will not be an Acquiring Person unless the percentage of outstanding shares of Class B Stock owned by that Grandfathered Person subsequently exceeds twice the percentage owned on April 22, 1992, plus an additional 1% (the "Grandfathered Percentage"). An announcement by the Company will only give rise to the Stock Acquisition Date if the Company expressly states in the announcement that it will do so. After the Distribution Date, Class B Rights Certificates will be mailed to holders of record of Class B Stock on the Distribution Date. From that point on, the separate Class B Rights Certificates alone will represent the Class B Rights. If (i) the Company survives a merger with an Acquiring Person and shares of Class B Stock remain outstanding, or (ii) any Acquiring Person becomes the owner of 15% (or, if such person is a Grandfathered Person, the greater of 15% or the Grandfathered Percentage) or more of the outstanding shares of Class B Stock (other than pursuant to a transaction described in the next paragraph), or (iii) an Acquiring Person engages in one or more "self-dealing" transactions as set forth in the Class B Rights Agreement, or (iv) the Company is a party to any transaction which results in an Acquiring Person's ownership interest being increased by more than 1% (other than a transaction described in the next paragraph), then, in each such case, each Class B Right will thereafter represent the right to receive, upon exercise, shares of Class B Stock (or, in certain circumstances, shares of Class B Stock and cash, property, or other securities of the Company) having a value (based on the current market price) equal to two times the Purchase Price of the Class B Right. However, all Class B Rights that are owned by any Acquiring Person will be null and void. If, at any time following the Stock Acquisition Date, (i) the Company merges into any other person, (ii) any person merges into the Company and in connection with the merger all or part of the Class B Stock is converted or exchanged for cash or property, or securities of any other person, or (iii) 50% or more of the Company's assets or earning power is sold or transferred, each holder of a Class B Right (except Class B Rights which previously have been voided as described above) will have the right to receive, upon exercise, common stock of the Acquiring Person having a value (based on the current market price) equal to two times the Purchase Price of the Class B Right. -2- For purposes of the calculations described above, the current market price of the Class B Stock will be considered to be the average of the daily closing prices of the Class A Stock and the Class B Stock over a period of ten consecutive trading days. The Purchase Price payable, and the number of shares of Class B Stock issuable, upon exercise of the Class B Rights are subject to adjustment from time to time to prevent dilution. Those circumstances are set forth in detail in the Class B Rights Agreement. With certain exceptions, no adjustment in the Purchase Price will be required until cumulative adjustments amount to at least 1% of the Purchase Price. The Company is not required to issue fractional shares. Instead, it may make a cash adjustment based on the market price of the Class B Stock prior to the date of exercise. For ten business days following the Stock Acquisition Date, the Company's Board of Directors may redeem all the Class B Rights at a price of one-fourth of one cent ($.0025) per Class B Right, subject to adjustment (the "Redemption Price"). The Redemption Price is payable, at the election of the Board, in cash or shares of Class B Stock. Immediately upon action of the Board of Directors ordering the redemption of the Class B Rights, the Class B Rights will terminate and the holders of Class B Rights will only have a right to receive the Redemption Price. Until a Class B Right is exercised, the holder of the Right will have no rights as a shareholder of the Company with respect to that Right (but the holder will have rights as a shareholder with respect to the Class B Stock that the Class B Right is attached to). The distribution of the Class B Rights was not taxable to shareholders or to the Company. However, Class B shareholders may, depending on the circumstances, recognize taxable income if the Class B Rights become exercisable. Any of the provisions of the Class B Rights Agreement may be amended at any time prior to the Distribution Date. After the Distribution Date, the Class B Rights Agreement may be amended to cure an ambiguity, defect, or inconsistency, to make changes that do not adversely affect the interests of holders of Class B Rights Certificates (excluding the interests of any Acquiring Person), or to shorten or lengthen any time period. However, no amendment may be made to lengthen the time period governing redemption when the Class B Rights are not redeemable or to lengthen any other time period unless it is for the purpose of protecting, enhancing, or clarifying the rights of and/or the benefits to the holders of Class B Rights. -3- EX-10.12 5 k74390exv10w12.txt FIFTH AMENDMENT TO CLASS A RIGHTS AGREEMENT EXHIBIT 10.12 FIFTH AMENDMENT TO CLASS A RIGHTS AGREEMENT THIS FIFTH AMENDMENT to the Class A Rights Agreement dated April 22, 1992, as amended (as so amended, the "Existing Agreement"), is dated as of July 15, 2002 and is among TECUMSEH PRODUCTS COMPANY, a Michigan corporation (the "Company"), STATE STREET BANK AND TRUST COMPANY, N.A., as Class A Rights Agent (the "Existing Agent"), and EQUISERVE TRUST COMPANY, N.A. (the "Successor Agent"). WHEREAS, Section 26 of the Existing Agreement entitles the Company at any time prior to the Distribution Date (as therein defined) to amend any provisions of the Existing Agreement and requires the Existing Agent, if directed by the Company, to execute any such amendment upon the delivery of a certificate from an appropriate officer of the Company which states that it is in compliance with Section 26 (a "compliance certificate"); and WHEREAS, the Company has appointed EquiServe Trust Company, N.A. to succeed State Street Bank and Trust Company, N.A. as Class A Rights Agent under the Existing Agreement, with such appointment to be effective as of the date of this Amendment, and EquiServe Trust Company, N.A. has accepted such appointment; and WHEREAS, the Board of Directors of the Company has authorized and approved the amendments to the Existing Agreement hereafter set forth in this Amendment and has directed the execution hereof, and a compliance certificate concerning this Amendment has been delivered to the Existing Agent; NOW, THEREFORE, in consideration of the foregoing and pursuant to Section 26 of the Existing Agreement, the parties hereby agree as follows: 1. Amendment of Cover Page. The cover page of the Existing Agreement is hereby amended by replacing the words "STATE STREET BANK AND TRUST COMPANY, N.A." with "EQUISERVE TRUST COMPANY, N.A." 2. Amendment of First Paragraph. The first paragraph of the Existing Agreement is hereby amended by replacing the words "STATE STREET BANK AND TRUST COMPANY, N.A., a Massachusetts Trust Company" with "EQUISERVE TRUST COMPANY, N.A., a National Banking Association". 3. Amendment of Section 3(c). The legend set forth in Section 3(c) of the Existing Agreement is hereby amended by adding the following sentence at the end of such legend: EquiServe Trust Company, N.A. is the successor Class A Rights Agent under the Class A Rights Agreement. 4. Amendment of Section 21. Section 21 of the Existing Agreement is hereby amended to read in its entirety as follows: SECTION 21. Change of Class A Rights Agent. The Class A Rights Agent or any successor Class A Rights Agent may resign and be discharged from its duties under this Agreement upon 30 days' notice in writing mailed to the Company and to each transfer agent of the Class A Stock by registered or certified mail and to the holders of the Class A Rights Certificates by first-class mail. The Company may remove the Class A Rights Agent or any successor Class A Rights Agent upon 30 days' notice in writing mailed to the Class A Rights Agent or successor Class A Rights Agent, as the case may be, and to each transfer agent of the Class A Stock by registered or certified mail, and to the holders of the Class A Rights Certificates by first-class mail. In the event the Transfer Agency and Services Agreement between the Company and EquiServe Trust Company, N.A. terminates, the Rights Agent will be deemed to resign automatically on the effective date of such termination; and any required notice will be sent by the Company. If the Class A Rights Agent shall resign or be removed or shall otherwise become incapable of acting, the Company shall appoint a successor to the Class A Rights Agent. If the Company shall fail to make such appointment within a period of 30 days after giving notice of such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Class A Rights Agent or by the holder of a Class A Rights Certificate (who shall, with such notice, submit such holder's Class A Rights Certificate for inspection by the Company), then the registered holder of any Class A Rights Certificate may apply to any court of competent jurisdiction for the appointment of a new Class A Rights Agent. Any successor Class A Rights Agent, whether appointed by the Company or by such a court, shall be a corporation or trust company organized and doing business under the laws of the United States, in good standing, which is authorized under such laws to exercise corporate trust or stock transfer powers and is subject to supervision or examination by federal or state authority and which has individually or combined with an affiliate at the time of its appointment as Class A Rights Agent a combined capital and surplus of at least $100 million. After appointment, the successor Class A Rights Agent shall be vested with the same powers, rights, duties, and responsibilities as if it had been originally named as Class A Rights Agent without further act or deed; but the predecessor Class A Rights Agent shall deliver and transfer to the successor Class A Rights Agent any property at the time held by it hereunder and execute and deliver any further assurance, conveyance, act, or deed necessary for the purpose. Not later than the effective date of any such appointment, the Company shall file notice thereof in writing with the predecessor Class A Rights Agent and each transfer agent of the Class A Stock and mail a notice thereof in writing to the registered holders of the Class A Rights Certificates. Failure to give any notice provided for in this Section 26, however, or any defect therein, shall not affect the -2- legality or validity of the resignation or removal of the Class A Rights Agent or the appointment of the successor Class A Rights Agent, as the case may be. 5. Amendment of Section 25. The address of the Class A Rights Agent in Section 25 of the Existing Rights Agreement is hereby replaced with the following: EquiServe Trust Company, N.A. 150 Royal Street Canton, MA 02021 Attn: Client Administrator 6. Amendment of Summary of Rights. Exhibit B to the Existing Agreement (Summary of Rights to Purchase Class A Stock) is hereby amended to read in its entirety as set forth in Annex A to this Amendment. 7. Affirmation. Except as specifically amended herein, the Existing Agreement shall remain in full force and effect as existing prior to the date hereof. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed, all as of the date first above written. TECUMSEH PRODUCTS COMPANY STATE STREET BANK AND TRUST COMPANY, N.A. By: /s/Todd W. Herrick By: /s/S. Cesso ----------------------------- ----------- Todd W. Herrick S. Cesso Its: President and Chief Executive Its: Authorized Signer Officer EQUISERVE TRUST COMPANY, N.A. By: /s/Dennis V. Moccia ----------------------- Dennis V. Moccia Its: Managing Director -3- ANNEX A EXHIBIT B SUMMARY OF RIGHTS TO PURCHASE CLASS A STOCK Pursuant to a Class A Rights Agreement entered into in 1992, Tecumseh Products Company (the "Company") distributed one Class A Right for each share of Class A Stock issued by the Company. Each Class A Right entitles the registered holder, subject to the terms of the Class A Rights Agreement, to purchase from the Company one share of Class A Stock at a specified purchase price. The Class A Rights are issued pursuant to a Class A Rights Agreement dated as of April 22, 1992, as amended, between the Company and EquiServe Trust Company, N.A., as successor Class A Rights Agent. This summary does not purport to be complete and is qualified in its entirety by reference to all the provisions of the Class A Rights Agreement, including its definition of certain terms. The Class A Rights Agreement is incorporated in this summary by reference. Copies of the Class A Rights Agreement and all amendments to that Agreement have been filed with the Securities and Exchange Commission and are available free of charge from the Company. Each Class A Right entitles the registered holder, subject to the terms of the Class A Rights Agreement, to purchase from the Company one share of Class A Stock at a purchase price of $180.00 per share, subject to adjustment (the "Purchase Price"). The Purchase Price is payable in cash or by certified or bank check or money order payable to the order of the Company. The Class A Rights currently are attached to all certificates representing shares of outstanding Class A Stock. Class A Rights will also be attached to all certificates representing shares of Class A Stock issued in the future until the Distribution Date. Initially, no separate Class A Rights Certificates will be distributed. Until the Distribution Date, the Class A Rights will be evidenced by the certificates representing Class A Stock and will be transferred with and only with those certificates. The Class A Rights are not exercisable until the Distribution Date and will expire at the close of business on August 25, 2009, unless earlier redeemed by the Company as described below. The Class A Rights will separate from the Class A Stock on the Distribution Date. The Distribution Date will occur upon the earlier of (i) ten business days following a public announcement (the "Stock Acquisition Date") that a person or group of persons (an "Acquiring Person") has acquired 10% (or, if such person or group is a "Grandfathered Person," the "Grandfathered Percentage") or more of the then outstanding shares of Class B Stock other than as a result of repurchases of Class B Stock by the Company or certain inadvertent actions by institutional or certain other shareholders, or (ii) ten business days (or a later date determined by the Board of Directors) following the commencement, without Board approval, of a tender or exchange offer that would result in a person or group owning 10% or more of the then outstanding shares of Class B Stock. Any person or group that owned 5% or more of the Class B Stock outstanding on April 22, 1992 (a "Grandfathered Person") will not be an Acquiring Person unless the percentage of outstanding shares of Class B Stock owned by that Grandfathered Person subsequently exceeds twice the percentage owned on April 22, 1992, plus an additional 1% (the "Grandfathered Percentage"). An announcement by the Company will only give rise to the Stock Acquisition Date if the Company expressly states in the announcement that it will do so. After the Distribution Date, Class A Rights Certificates will be mailed to holders of record of Class A Stock on the Distribution Date. From that point on, the separate Class A Rights Certificates alone will represent the Class A Rights. If (i) the Company survives a merger with an Acquiring Person and shares of Class A Stock remain outstanding, or (ii) any Acquiring Person becomes the owner of 15% (or, if such person is a Grandfathered Person, the greater of 15% or the Grandfathered Percentage) or more of the outstanding shares of Class B Stock (other than pursuant to a transaction described in the next paragraph), or (iii) an Acquiring Person engages in one or more "self-dealing" transactions as set forth in the Class A Rights Agreement, or (iv) the Company is a party to any transaction which results in an Acquiring Person's ownership interest being increased by more than 1% (other than a transaction described in the next paragraph), then, in each such case, each Class A Right will thereafter represent the right to receive, upon exercise, shares of Class A Stock (or, in certain circumstances, shares of Class A Stock and cash, property, or other securities of the Company) having a value (based on the current market price) equal to two times the Purchase Price of the Class A Right. However, all Class A Rights that are owned by any Acquiring Person will be null and void. If, at any time following the Stock Acquisition Date, (i) the Company merges into any other person, (ii) any person merges into the Company and in connection with the merger all or part of the Class A Stock is converted or exchanged for cash or property, or securities of any other person, or (iii) 50% or more of the Company's assets or earning power is sold or transferred, each holder of a Class A Right (except Class A Rights which previously have been voided as described above) will have the right to receive, upon exercise, common stock of the Acquiring Person having a value (based on the current market price) equal to two times the Purchase Price of the Class A Right. -2- For purposes of the calculations described above, the current market price of the Class A Stock will be considered to be the average of the daily closing prices of the Class A Stock and the Class B Stock over a period of ten consecutive trading days. The Purchase Price payable, and the number of shares of Class A Stock issuable, upon exercise of the Class A Rights are subject to adjustment from time to time to prevent dilution. Those circumstances are set forth in detail in the Class A Rights Agreement. With certain exceptions, no adjustment in the Purchase Price will be required until cumulative adjustments amount to at least 1% of the Purchase Price. The Company is not required to issue fractional shares. Instead, it may make a cash adjustment based on the market price of the Class A Stock prior to the date of exercise. For ten business days following the Stock Acquisition Date, the Company's Board of Directors may redeem all the Class A Rights at a price of one-fourth of one cent ($.0025) per Class A Right, subject to adjustment (the "Redemption Price"). The Redemption Price is payable, at the election of the Board, in cash or shares of Class A Stock. Immediately upon action of the Board of Directors ordering the redemption of the Class A Rights, the Class A Rights will terminate and the holders of Class A Rights will only have a right to receive the Redemption Price. Until a Class A Right is exercised, the holder of the Right will have no rights as a shareholder of the Company with respect to that Right (but the holder will have rights as a shareholder with respect to the Class A Stock that the Class A Right is attached to). The distribution of the Class A Rights was not taxable to shareholders or to the Company. However, Class A shareholders may, depending on the circumstances, recognize taxable income if the Class A Rights become exercisable. Any of the provisions of the Class A Rights Agreement may be amended at any time prior to the Distribution Date. After the Distribution Date, the Class A Rights Agreement may be amended to cure an ambiguity, defect, or inconsistency, to make changes that do not adversely affect the interests of holders of Class A Rights Certificates (excluding the interests of any Acquiring Person), or to shorten or lengthen any time period. However, no amendment may be made to lengthen the time period governing redemption when the Class A Rights are not redeemable or to lengthen any other time period unless it is for the purpose of protecting, enhancing, or clarifying the rights of and/or the benefits to the holders of Class A Rights. -3- EX-10.21 6 k74390exv10w21.txt 1ST AMEND-OUTSIDE DIRECTORS VOL DEF COMP PLAN EXHIBIT 10.21 FIRST AMENDMENT TO TECUMSEH PRODUCTS COMPANY OUTSIDE DIRECTORS' VOLUNTARY DEFERRED COMPENSATION PLAN Tecumseh Products Company (the "Company") amends the Outside Directors' Voluntary Deferred Compensation Plan (the "Plan") as follows: 1. Effective April 9, 2002, Section 6.3 of the Plan is amended to read: 6.3 Corporate Bond Investment Option. Participant elections for this Option shall be reflected in a bookkeeping sub-account, the value of which shall be based upon quarterly crediting of earnings based on the current yield of the Dow Jones Corporate Bond Index (DJCI). Amounts deferred will be credited to such sub-account on the date such amount would otherwise have been paid to the Participant. All amounts reflected in this sub-account shall be credited with earnings, compounded quarterly, from the date credited, based on a rate of return equal to the current yield of the DJCI as of the last business day of the preceding quarter. 2. Except as amended above, the Plan continues in full force and effect. WITNESS execution of this amendment on behalf of the Company. TECUMSEH PRODUCTS COMPANY By /s/ DAVID W. KAY -------------------------------------- David W. Kay Its Vice President, Treasurer and Chief Financial Officer Dated: August 28, 2002 EX-10.23 7 k74390exv10w23.txt 1ST AMEND TO AMEND & RESTATED DEFERRED COMP PLAN EXHIBIT 10.23 FOURTH AMENDMENT TO TECUMSEH PRODUCTS COMPANY VOLUNTARY DEFERRED COMPENSATION PLAN Tecumseh Products Company (the "Company") amends the Company's Voluntary Deferred Compensation Plan (the "Plan") as follows: 1. Effective April 9, 2002, Section 6.3 of the Plan is amended to read: 6.3 Corporate Bond Investment Option. Participant elections for this Option shall be reflected in a bookkeeping sub-account, the value of which shall be based upon quarterly crediting of earnings based on the current yield of the Dow Jones Corporate Bond Index (DJCI). Amounts deferred will be credited to such sub-account on the date such amount would otherwise have been paid to the Participant. All amounts reflected in this sub-account shall be credited with earnings, compounded quarterly, from the date credited, based on a rate of return equal to the current yield of the DJCI as of the last business day of the preceding quarter. 2. Except as amended above, the Plan continues in full force and effect. WITNESS execution of this amendment on behalf of the Company. TECUMSEH PRODUCTS COMPANY By /s/ DAVID W. KAY -------------------------------------- David W.Kay Its Vice President, Treasurer and Chief Financial Officer Dated: September 25, 2002 EX-10.25 8 k74390exv10w25.txt DIRECTOR RETENTION PHANTOM STOCK PLAN EXHIBIT 10.25 TECUMSEH PRODUCTS COMPANY DIRECTOR RETENTION PHANTOM STOCK PLAN [Amended and restated November 27, 2002] Tecumseh Products Company (the "Company") amends and restates its Director Retention Phantom Stock Plan to provide an incentive for outside Directors to remain in service on the Company's Board of Directors so that the Company may continue to benefit from their counsel and dedication, while rewarding their commitment to the Company with deferred income based on the Company's realized return on equity and the stock market performance of the Class A Common Stock of the Company. 1 DEFINITIONS As used in the Plan, the following terms have the following respective meanings: "Account" has the meaning given in Section 4.1 hereof. "Award" means an allocation of Phantom Shares to the Account of an Eligible Director and shall include the dollar amount authorized for Plan Awards prior to the conversion of such amount into Phantom Share units. "Company" means Tecumseh Products Company. "Board" means the Board of Directors of the Company. "Committee" means Governance and Executive Compensation Committee of the Board, or such other committee as the Board may subsequently appoint to administer the Plan. "Determination Date" means, for each Eligible Director, the date on which he or she ceases to be a Director of the Company due to resignation, retirement, death, Disability, or other reason. "Disabled" (or to have a "Disability") shall mean an Eligible Director has been declared to be permanently and totally disabled after examination by an independent physician satisfactory to the Company and the Committee has reasonably determined that the physical or mental condition of the Eligible Director is such as would prevent such Director from performing the regular duties of that position for a period of more than six months. "Eligible Director" means, for any relevant time, each individual who at that time is a member of the Board but is not also an officer or employee of the Company or of any subsidiary of the Company. "Market Price" means, for any given date (i) if the Shares are then listed for trading on one or more national securities exchanges (including for this purpose the NASDAQ "National Market"), the average of the high and low sale prices for a Share on the principal such exchange on the date in question (or, if no Shares traded on such exchange on such date, the next preceding date on which such trading occurred); (ii) if (i) is inapplicable but bid and asked prices for Shares are quoted through NASDAQ, the average of the highest bid and lowest asked prices so quoted for a Share on the date in question (or, if no prices for Shares were quoted on that date, the next preceding date on which they were quoted); (iii) if (i) and (ii) are inapplicable but bid and asked prices for Shares are otherwise quoted by one or more broker-dealers known to the Company to be making a market in the Shares, the average of the highest bid and lowest asked prices so quoted on the date in question (or, if no prices were quoted on that date, the next preceding date on which they were quoted); and (iv) if all of the foregoing are inapplicable, the fair market value of a Share on the date in question as determined in good faith by the Committee. "NASDAQ" means the National Association of Securities Dealers, Inc. Automated Quotation System. "Phantom Share" means an allocation credited to the Account of an Eligible Director and maintained in such Account together with any prior or subsequent allocations made on behalf of such Director. An allocation of Phantom Shares shall confer only such rights as are specified in the Plan. Directors who receive allocations of Phantom Share units shall not (as a consequence of such allocations) be treated as shareholders under the Articles of Incorporation or By-Laws of the Company or under applicable law. "Plan" means this Director Retention Phantom Stock Plan. "Plan Year" means the calendar year. "Retainer" means the annual amount payable to an Eligible Director for serving as a Director of the Company during a given year, excluding amounts payable for attendance at meetings of the Board, any amounts payable for serving on or as chair of any committee of the Board and any amounts payable for reimbursement of expenses. "Share(s)" means Class A Common Stock, $1.00 par value per share, of the Company. 2 ADMINISTRATION The Plan shall be administered by the Committee. To the extent consistent with the terms of the Plan, the Committee shall have the power to interpret any Plan provision, to prescribe, amend, and rescind rules and regulations relating to the Plan, and to make all 2 other determinations that it deems necessary or advisable to administer the Plan. The Committee may appoint such agents to assist in administration of the Plan, other than Eligible Directors, as the Committee deems appropriate. The Committee's interpretation of the Plan and any action it takes with respect to allocations of Phantom Share units pursuant thereto shall be final and binding upon all affected parties. 3 AWARDS 3.1 The target dollar amount of an Award shall equal a stated percentage (not to exceed 50%) of each Eligible Director's annual Retainer that will constitute the Award if the Company attains or exceeds a target Return on Equity ("ROE") as established by the Committee from time to time. The actual amount to be used for Awards (the "Award Pool") for a given Plan Year shall be a percentage of the target amount (not to exceed 100%) of the Company's actual ROE for such Plan Year. As used in this Plan, "ROE" means the Company's average annual rate of return on equity for the Plan Year, determined by the same method as the Company uses for other performance measurement purposes (rounded to the nearest one-hundredth of a percent). The Award Pool shall be zero for any Plan Year in which ROE is below a percentage established by the Committee when the Committee establishes the target ROE. Promptly after establishing the target ROE and the minimum ROE (if any) the Committee shall advise the Eligible Directors of such determination(s). 3.2 If an Eligible Director shall die, become Disabled, retire or otherwise terminate service as a Director prior to December 31 of a Plan Year, he or she shall not be entitled to an Award for such Plan Year. If an Eligible Director shall die or become Disabled on or after January 1 but before Awards, if any, are determined pursuant to Section 4.2, the Committee may authorize an Award to him or her or to his or her beneficiary or estate in such amount, if any, as the Committee in its discretion deems appropriate; provided that Awards shall be made under this Section 3.2 only if an Award Pool is established under Section 3.1. 4 ACCOUNTS 4.1 For each Eligible Director, the Company shall establish and maintain a bookkeeping account ("Account") in which all Phantom Share units allocable to the Eligible Director due to his or her participation in the Plan shall be credited. 4.2 At the organizational meeting of the Board of Directors which follows the Annual Meeting of Shareholders, the Award (if any) for the preceding Plan Year shall be determined and there shall be allocated to each Eligible Director's Account a number (to four decimal places) of Phantom Share units that is equal to the dollar amount of the Eligible Director's Award, divided by the Market Price on the trading date immediately preceding the allocation date. EXAMPLE: If an Eligible Director is due to receive $10,000 as his/her annual Award pursuant to this Plan, and if the Market Price per Share is $51 on the 3 valuation date, then he or she will receive an allocation of Phantom Share units determined by the formula $10,000 / $51, or 196.0784 Phantom Share units. 4.3 On the payment date for any cash dividend or other cash distribution declared upon the Shares, there shall be allocated to each Eligible Director's Account that number (to four decimal places) of Phantom Share units that is equal to the total of units which on the related record date were in the Eligible Director's Account, multiplied by the per Share cash dividend or other distribution, and divided by the Market Price on such payment date. 5 POLICY REGARDING RETIREMENT OF OUTSIDE DIRECTORS 5.1 An Eligible Director shall retire from the Board as provided in the Company's Bylaws, and nothing contained in this Plan shall entitle an Eligible Director to serve beyond the term for which he or she was elected to the Board. Nothing in this Plan shall be construed to restrict the stockholders' right to elect any person a Director of the Company in accordance with the Articles of Incorporation and Bylaws. 6 PAYMENT OF AWARDS 6.1 Subject to the provisions of Sections 6.2 and 6.3, within 30 days after (a) an Eligible Director's Determination Date, or (b) a Company Change of Control, the Company shall pay to the Director an amount in cash equal to the number of Phantom Share units then credited to his or her Account multiplied by the Market Price per Share on the Determination Date or date such Company Change of Control shall have occurred, as the case may be. 6.2 An Eligible Director's Account shall be forfeited if his or her service on the Board is terminated, voluntarily or otherwise, for any Reason denominated below (which shall be determined by the Committee). Such "Reason", for the sole purpose of determining whether an Eligible Director's Awards are to be forfeited, shall be deemed to exist where - (i) The Eligible Director breaches any material written rules, regulations or policies of the Board, now existing or hereafter arising, which are uniformly applied to all Eligible Directors or which rules, regulations and policies are promulgated for general application to Directors of the Company; or (ii) The Eligible Director willfully and repeatedly fails to substantially perform the duties of his or her tenure (other than any such failure resulting from incapacity due to physical or mental illness) after a written demand for substantial performance is delivered to him by the Board chairperson, which demand specifically identifies the manner in which the chairperson believes that the Eligible Director has not substantially performed such duties; or 4 (iii) The Eligible Director is convicted of a felony under state or federal law, or commits a crime involving moral turpitude; or (iv) The Eligible Director embezzles or misappropriates any property belonging to the Company such that he may be subject to criminal prosecution therefor or the Eligible Director intentionally and materially injures the Company, its personnel or its property. 6.3 If an Eligible Director's Determination Date occurs due to death, or if he or she dies prior to payment pursuant to Section 6.1, then the amount payable shall be paid to the beneficiary or beneficiaries designated in the Eligible Director's written beneficiary designation filed with the Committee, or, if no valid beneficiary designation has been filed, the legally appointed personal representative of the Eligible Director's estate. If no such representative is appointed by the time payment is due, then the Company shall hold the payment without interest until appointment occurs or proper claim for such items otherwise is made of the Company by the person or persons entitled thereto. If the Company is notified that an Eligible Director has been adjudicated mentally incompetent as of the time any amount is payable under the Plan to the Eligible Director, or if it otherwise is demonstrated to the satisfaction of the Committee that such mental incapacity then exists by a person authorized by a durable power of attorney or similar document to attend to the Eligible Director's financial affairs, the any cash so payable shall be delivered to, the Eligible Director's legally appointed guardian or conservator or, if none has been appointed, the holder of such power of attorney or similar document. 6.4 A "Company Change in Control," for the purposes of this Plan, shall mean one or more of the following events: (i) The acquisition, after December 31, 2002, of beneficial ownership of 25% or more of the Company's Class A Common Stock or Class B Common Stock then outstanding by any person (including a group, within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934 (the "1934 Act")), other than: (A) the trustee of any Company-sponsored employee benefit plan, (B) the Company or any of its subsidiaries, (C) Kenneth G. Herrick, his descendants, or trusts for the benefit of such individuals, or (D) trusts or foundations established by Kenneth G. Herrick or by any of the descendants or trusts mentioned in (C), above. (ii) The first purchase, after December 31, 2002, under a tender offer or exchange offer for 25% or more of the Company's Class A Common Stock or Class B Common Stock then outstanding, other than an offer by: (A) the trustee of any Company-sponsored employee benefit plan, 5 (B) the Company or any of its subsidiaries, (C) Kenneth G. Herrick, his descendants, or trusts for the benefit of such individuals, or (D) trusts or foundations established by Kenneth G. Herrick or by any of the descendants or trusts mentioned in (C), above. (iii) The first day on which less than a majority of the total membership of the Board shall be Continuing Directors; (iv) The effective date of a transaction (or a group of related transactions) in which more than 50% in fair market value of the assets of the Company are disposed of pursuant to a partial or complete liquidation, a spin-off, a sale of assets or otherwise; or (v) The date on which the shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 51% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger of consolidation. (b) For purposes of this Section 6.3, the following terms shall have the following meanings: (i) "Continuing Director" shall mean any Director of the Company who either (1) is a member of the Board on the date this Plan is adopted by the Board and has not terminated membership on the Board, or (2) is recommended or elected to the Company's Board of Directors by at least three-quarters of the Continuing Directors. (ii) "Person" shall mean a person as defined in Section 3(a)(9) of the 1934 Act, "beneficial ownership" shall be determined in accordance with Rule 13d-3 promulgated under the 1934 Act or any successor regulation, the term "group" shall mean a group as described in Rule 13d-5 promulgated under the 1934 Act or any successor regulation, and the formation of a group hereunder shall have the effect described in paragraph (b) of said Rule 13d-5 or any successor regulation. Anything hereinabove to the contrary notwithstanding, however: (a) relationships by blood, adoption or marriage between or among two or more persons shall not be deemed to constitute any of such persons a member of a group with any other such persons; (b) action taken or agreed to be taken by any person acting in his official capacity as an officer or Director of the Company shall not be deemed to constitute such person a member of a group with any other person, and (c) formation of a group shall not constitute an acquisition by the group (or any member thereof) of beneficial ownership of any shares of the Company's Class B ("voting") common stock beneficially owned by any member of such group and acquired by such group member in an Excluded Acquisition. 6 (iii) "Excluded Acquisition" means any acquisition of shares of voting common stock from the Company (whether or not for consideration) or from any person by operation of law (including but not limited to the laws of descent and distribution), by will, by gift or by foreclosure of a security interest given to secure a bona fide loan, or any acquisition consummated prior to January 1, 2002. 7 ADJUSTMENTS In the event of any non-cash dividend or other distribution, or any stock split, reverse stock split, recapitalization, reorganization, split-up, spin-off, merger, consolidation, share exchange, or other like change in the capital or corporate structure of the Company affecting the Shares, there shall be made such adjustment or adjustments (if any) in the number of units credited to the Accounts of Eligible Directors as the Committee determines to be appropriate in light of such event in order to continue to make available the benefits intended by the Plan, but no adjustment shall be required by reason of any sales of Shares or other Company securities by the Company at any price, whether below, or at or above Market Price, and whether by or pursuant to warrant, option, right, conversion right or privilege, or otherwise. 8 MISCELLANEOUS MATTERS 8.1 Accounts are not intended to be and shall not be trust accounts for the benefit of any Eligible Director or other person, nor shall the establishment and maintenance of an Account afford any Eligible Director or other person any right or interest in any asset the Company may determine to earmark for future payment of benefits under the Plan. Rather, benefits payable under the Plan are intended to be unfunded for tax purposes, and the sole right of an Eligible Director or beneficiary or other successor in interest thereof with respect to his or her Account shall be the right as an unsecured general creditor of the Company to claim any cash benefit to which the Eligible Director becomes entitled after his or her Determination Date, pursuant to the terms and conditions of the Plan. 8.2 An Eligible Director's right and interest in his or her Account shall not be subject in any manner to anticipation, alienation, sale, assignment, pledge, encumbrance, attachment, garnishment for the benefit of creditors of the Eligible Director, or other transfer whatsoever, other than by will or the laws of descent and distribution. 8.3 Nothing in the Plan shall obligate any Eligible Director to continue as a Director of the Company or the Company, or to accept any nomination for a future term as such a Director, or require the Company to nominate or cause the nomination of any Eligible Director for a future term as a Director of the Company or the Company. 8.4 This Plan shall be governed by and construed, enforced, and administered in accordance with the laws of the State of Michigan excluding any such laws which direct an application of the laws of any other jurisdiction. The Company and the Committee shall be subject to suit regarding the Plan only in the courts of the State of 7 Michigan, and the Company shall fully indemnify and defend the Board and the Committee with respect to any actions relating to this Plan made in good faith by such bodies or their members. 9 DURATION OF THE PLAN 9.1 The Plan was adopted by the Board on October 30, 2002 amended November 27, 2002 and shall take effect on January 1, 2003. 9.2 The Board may at any time and from time to time amend, modify, suspend, or terminate the Plan, except that none of the foregoing actions by the Board shall adversely affect the rights or benefits of an Eligible Director without such Eligible Director's consent. 8 EX-21 9 k74390exv21.txt SUBSIDIARIES OF REGISTRANTS EXHIBIT 21 SUBSIDIARIES OF THE COMPANY The following is a list of subsidiaries of the Company as of December 31, 2002 except that certain subsidiaries, the sole function of which is to hold the stock of operating subsidiaries, which in the aggregate do not constitute significant subsidiaries, have been omitted. Subject to the foregoing in each case, 100% of the voting securities (except for directors' qualifying shares, if required) are owned by the subsidiary's immediate parent as indicated by indentation.
STATE OR COUNTRY NAME OF SUBSIDIARIES OF THE COMPANY OF ORGANIZATION - ----------------------------------- --------------- Tecumseh Compressor Company Delaware Tecumseh Power Company Delaware M.P. Pumps, Inc. Michigan Little Giant Pump Company Oklahoma Evergy, Inc. Delaware Eaton Technologies Michigan FASCO Industries, Inc. Delaware ECM Motor Company Delaware Von Weise Gear Company Delaware Motores FASCO de Mexico Mexico Manufacturing Data Systems, Inc. Michigan Tecumseh do Brasil, Ltda. Brazil Tecumseh do Brasil Europe Srl. Italy Tecumseh do Brasil USA Delaware Tecumseh Products Company of Canada, Ltd. Canada Tecumseh France S.A. France Tecumseh Services EURL S.A. France Tecumseh Europe S.A. France Societe Immobiliere de Construction de la Verpilliere France L'Unite Hermetique-Far East Sdn. Bhd. Malaysia Tecumseh Products India, Ltd. India Tecumseh Europa, S.p.A. Italy Societe T.I.G.E.R. France Tecumseh Deutschland GmbH Germany Tecumseh Service France France Tecumseh U.K. Limited United Kingdom Motoco a.s. Czech Republic TMT Motoco, Ltd. Brazil FASCO Motors, Ltd Canada FASCO Motors, Ltd. Thailand FASCO Yambischi Co., Ltd. Thailand
EX-24 10 k74390exv24.txt POWER OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY WITH RESPECT TO ANNUAL REPORT OF TECUMSEH PRODUCTS COMPANY ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002 Each of the undersigned, a director or officer of TECUMSEH PRODUCTS COMPANY, appoints each of Todd W. Herrick and David W. Kay as his true and lawful attorney and agent to do any and all acts and things and execute any and all instruments which the attorney and agent may deem necessary or advisable in order to enable TECUMSEH PRODUCTS COMPANY to comply with the Securities Exchange Act of 1934, and with any requirements of the Securities and Exchange Commission, in connection with the Annual Report of TECUMSEH PRODUCTS COMPANY on Form 10-K for the year ended December 31, 2002 and any and all amendments thereto, including, but not limited to, power and authority to sign his name (whether on behalf of TECUMSEH PRODUCTS COMPANY, or as a director or officer of TECUMSEH PRODUCTS COMPANY, or otherwise) to such instruments and to such Annual Report and any amendments thereto, and to file them with the Securities and Exchange Commission. The undersigned ratifies and confirms all that either of the attorneys and agents shall do or cause to be done by virtue hereof. Any one of the attorneys and agents shall have, and may exercise, all the powers conferred by this instrument. Signature Date /s/ TODD W. HERRICK February 26, 2003 - ---------------------------------------- Todd W. Herrick /s/ DAVID W. KAY February 26, 2003 - ---------------------------------------- David W. Kay /s/ J. RUSSELL FOWLER February 26, 2003 - ---------------------------------------- J. Russell Fowler /s/ STEPHEN L. HICKMAN February 26, 2003 - ---------------------------------------- Stephen L. Hickman /s/ PETER M. BANKS February 26, 2003 - ---------------------------------------- Peter M. Banks /s/ JON E. BARFIELD February 26, 2003 - ---------------------------------------- Jon E. Barfield /s/ RALPH W. BABB, JR. February 26, 2003 - ---------------------------------------- Ralph W. Babb, Jr. EX-99.1 11 k74390exv99w1.txt 906 CERTIFICATE OF CHIEF EXECUTIVE OFFICER EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Tecumseh Products Company (the "Company") on Form 10-K for the fiscal year ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Todd W. Herrick, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 13, 2003 TECUMSEH PRODUCTS COMPANY By: /s/ TODD W. HERRICK ---------------------------------------- Todd W. Herrick Chairman and Chief Executive Officer This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. EX-99.2 12 k74390exv99w2.txt 906 CERTIFICATE OF CHIEF FINANCIAL OFFICER EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Tecumseh Products Company (the "Company") on Form 10-K for the fiscal year ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, David W. Kay, Vice President, Treasurer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 13, 2003 TECUMSEH PRODUCTS COMPANY By: /s/ DAVID W. KAY --------------------------------- David W. Kay Vice President, Treasurer and Chief Financial Officer This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. -----END PRIVACY-ENHANCED MESSAGE-----