-----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, AyhZ0NPNlbGtNRhR7BtduNqgX2RK44bxoKGW1bx+x+AnxJVP4LWLGVkrXhJFXr8o Qo50j2sfix12B2WWrV5+Gw== 0000950124-05-006233.txt : 20051108 0000950124-05-006233.hdr.sgml : 20051108 20051108114320 ACCESSION NUMBER: 0000950124-05-006233 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20050930 FILED AS OF DATE: 20051108 DATE AS OF CHANGE: 20051108 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TECUMSEH PRODUCTS CO CENTRAL INDEX KEY: 0000096831 STANDARD INDUSTRIAL CLASSIFICATION: AIR COND & WARM AIR HEATING EQUIP & COMM & INDL REFRIG EQUIP [3585] IRS NUMBER: 381093240 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-00452 FILM NUMBER: 051185320 BUSINESS ADDRESS: STREET 1: 100 E PATTERSON ST CITY: TECUMSEH STATE: MI ZIP: 49286 BUSINESS PHONE: 5174238411 MAIL ADDRESS: STREET 1: 100 EAST PATTERSON STREET CITY: TECUMSEH STATE: MI ZIP: 49286 10-Q 1 k99361e10vq.txt QUARTERLY REPORT FOR PERIOD ENDED SEPTEMBER 30, 2005 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 For the quarterly period ended September 30, 2005 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT of 1934 For the transition period from ___________ to ___________ COMMISSION FILE NUMBER: 0-452 TECUMSEH PRODUCTS COMPANY (Exact name of registrant as specified in its charter) MICHIGAN 38-1093240 (State of Incorporation) (IRS Employer Identification Number)
100 EAST PATTERSON STREET TECUMSEH, MICHIGAN 49286 (Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (517) 423-8411 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class of Stock Outstanding at September 30, 2005 -------------- --------------------------------- Class B Common Stock, $1.00 par value 5,077,746 Class A Common Stock, $1.00 par value 13,401,938
Page 1 TABLE OF CONTENTS
Page ---- Part I. Financial Information Item 1. Financial Statements Consolidated Condensed Balance Sheets.......................... 3 Consolidated Condensed Statements of Income.................... 5 Consolidated Condensed Statements of Cash Flows................ 6 Notes to Consolidated Condensed Financial Statements........... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 17 Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................................... 31 Item 4. Controls and Procedures................................... 32 Part II. Other Information........................................... 34 Signatures 35 Certification of CEO Pursuant to Section 302......................... Exh 31.1 Certification of CFO Pursuant to Section 302......................... Exh 31.2 Certification of CEO Pursuant to Section 906......................... Exh 32.1 Certification of CFO Pursuant to Section 906......................... Exh 32.2
Page 2 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART I. FINANCIAL INFORMATION - ITEM 1 CONSOLIDATED CONDENSED BALANCE SHEETS (Unaudited)
SEPTEMBER 30, December 31, 2005 2004 ------------- ------------ (Dollars in millions, except share data) ASSETS Current Assets: Cash and cash equivalents $ 83.9 $ 227.9 Accounts receivable, less allowance for doubtful accounts of $9.5 in 2005 and $11.0 in 2004 266.9 220.4 Inventories 370.2 394.2 Deferred and recoverable income taxes 31.1 36.9 Other current assets 109.4 47.8 -------- -------- Total current assets 861.5 927.2 Property, plant, and equipment, at cost, net of accumulated depreciation of $964.8 in 2005 and $933.1 in 2004 601.1 554.8 Goodwill 133.8 243.5 Other intangibles 58.7 62.4 Deferred income taxes -- 29.6 Prepaid pension expense 181.8 171.9 Other assets 87.0 73.4 -------- -------- Total assets $1,923.9 $2,062.8 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable, trade 170.6 $ 178.1 Income taxes payable 5.4 5.4 Short-term borrowings 88.1 68.8 Accrued liabilities 131.5 169.2 -------- -------- Total current liabilities 395.6 421.5 Long-term debt 293.1 317.3 Deferred income taxes 18.3 8.0 Other postretirement benefit liabilities 210.1 210.7 Product warranty and self-insured risks 16.4 21.2 Accrual for environmental matters 40.8 41.3 Pension liabilities 21.4 24.5 Other non-current liabilities 32.1 -- -------- -------- Total liabilities 1,027.8 1,044.5 -------- -------- Commitments and contingencies Stockholders' Equity Class A common stock, $1 par value; authorized 75,000,000 shares; issued and outstanding 13,401,938 shares in 2005 and 2004 13.4 13.4 Class B common stock, $1 par value; authorized 25,000,000 shares; issued and outstanding 5,077,746 shares in 2005 and 2004 5.1 5.1 Retained earnings 862.5 1,041.9 Accumulated other comprehensive income (loss) 15.1 (42.1) -------- -------- Total stockholders' equity 896.1 1,018.3 -------- -------- Total liabilities and stockholders' equity $1,923.9 $2,062.8 ======== ========
Page 3 The accompanying notes are an integral part of these Consolidated Condensed Financial Statements. Page 4 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART I. FINANCIAL INFORMATION - ITEM 1 CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ------------------- 2005 2004 2005 2004 ------- ------- -------- -------- (Dollars in millions, except per share data) Net sales $ 478.5 $ 478.6 $1,404.8 $1,439.8 Cost of sales and operating expenses 431.5 403.4 1,285.0 1,245.3 Selling and administrative expenses 41.4 49.6 135.9 145.4 Impairments, restructuring charges, and other items 1.4 2.0 111.3 5.6 ------- ------- -------- -------- Operating income (loss) 4.2 23.6 (127.4) 43.5 Interest expense (8.0) (5.3) (22.4) (16.5) Interest income and other, net 1.9 2.3 6.9 10.6 ------- ------- -------- -------- Income (loss) before taxes (1.9) 20.6 (142.9) 37.6 Tax provision 30.9 8.3 24.8 14.3 ------- ------- -------- -------- Net income (loss) ($32.8) $ 12.3 ($167.7) $ 23.3 ======= ======= ======== ======== Basic and diluted earnings (loss) per share ($1.77) $ 0.67 ($9.07) $ 1.26 ======= ======= ======== ======== Weighted average shares (in thousands) 18,480 18,480 18,480 18,480 ======= ======= ======== ======== Cash dividends declared per share $ 0.00 $ 0.32 $ 0.64 $ 0.96 ======= ======= ======== ========
The acompanying notes are an integral part of these Consolidated Condensed Financial Statements. Page 5 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART I. FINANCIAL INFORMATION - ITEM 1 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, ----------------- 2005 2004 ------ ------ (Dollars in millions) Cash Flows from Operating Activities: Cash provided by (used in) operating activities ($34.6) $ 34.5 Cash Flows from Investing Activities: Capital expenditures (88.6) (55.6) ------ ------ Cash used in investing activities (88.6) (55.6) ------ ------ Cash Flows from Financing Activities: Dividends paid (11.8) (17.7) Proceeds (Repayments) of borrowings, net 38.8 (35.4) Repayments of long-term debt (50.0) -- ------ ------ Cash used in financing activities (23.0) (53.1) ------ ------ Effect of exchange rate changes on cash 2.2 2.5 ------ ------ Decrease in cash and cash equivalents (144.0) (71.7) Cash and Cash Equivalents: Beginning of period 227.9 344.6 ------ ------ End of period $ 83.9 $272.9 ====== ======
The accompanying notes are an integral part of these Consolidated Condensed Financial Statements. Page 6 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) 1. The consolidated condensed financial statements of Tecumseh Products Company and Subsidiaries (the "Company") are unaudited and reflect all adjustments (including normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of the financial position and operating results for the interim periods. The December 31, 2004 condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles in the United States ("U.S. GAAP"). The consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company's Annual Report for the fiscal year ended December 31, 2004. Due to the seasonal nature of the Company's business, the results of operations for the interim period are not necessarily indicative of the results for the entire fiscal year. 2. Comprehensive Income
THREE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, ------------- --------------- 2005 2004 2005 2004 ------ ----- ------- ----- (Dollars in millions) Net income (loss) ($32.8) $12.3 ($167.7) $23.3 Other comprehensive income (loss): Foreign currency translation adjustments 22.8 15.6 38.4 2.4 Gain (Loss) on derivatives (2.0) -- 15.1 (0.3) Unrealized gain on investment holdings -- -- 3.8 -- ------ ----- ------- ----- Total comprehensive income (loss) ($12.0) $27.9 ($110.4) $25.4 ====== ===== ======= =====
3. Inventories
SEPTEMBER 30, DECEMBER 31, 2005 2004 ------------- ------------ (Dollars in millions) Raw material $142.2 $169.3 Work in progress 82.5 82.1 Finished goods 141.6 130.0 Supplies 3.9 12.8 ------ ------ Total inventories $370.2 $394.2 ====== ======
Page 7 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART I. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) 4. Business Segments The Company has four reportable segments based on the criteria set forth in SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information": Compressor Products, Electrical Component Products, Engine & Power Train Products, and Pump Products. Revenues and operating income by segment for the periods indicated are as follows:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ------------------- BUSINESS SEGMENT DATA 2005 2004 2005 2004 - --------------------- ------ ------ -------- -------- (Dollars in millions) Net sales: Compressor Products $218.6 $218.9 $ 707.2 $ 664.9 Electrical Component Products 103.3 102.1 305.9 314.3 Engine & Power Train Products 124.2 128.6 297.8 356.9 Pump Products 31.8 28.5 92.4 102.5 Other (a) 0.6 0.5 1.5 1.2 ------ ------ -------- -------- Total Net Sales $478.5 $478.6 $1,404.8 $1,439.8 ====== ====== ======== ======== Operating income (loss): Compressor Products $ 7.6 $ 22.5 $ 23.6 $ 53.7 Electrical Component Products 4.8 3.5 4.0 11.2 Engine & Power Train Products (5.2) 2.2 (41.6) (11.2) Pump Products 3.6 3.1 10.1 11.3 Other (a) (0.6) (0.9) (2.6) (2.7) Corporate expenses (4.6) (4.8) (9.6) (13.2) Impairments, restructuring charges, and other items (1.4) (2.0) (111.3) (5.6) ------ ------ -------- -------- Total operating income (loss) 4.2 23.6 (127.4) 43.5 Interest expense (8.0) (5.3) (22.4) (16.5) Interest income and other, net 1.9 2.3 6.9 10.6 ------ ------ -------- -------- Income (Loss) before taxes ($1.9) $ 20.6 ($142.9) $ 37.6 ====== ====== ======== ========
(a) "Other" consists of non-reportable business segments, primarily Manufacturing Data Systems, Inc. The Electrical Component Products segment had inter-segment sales of $12.4 million and $17.3 million in the third quarter of 2005 and 2004, respectively, and $42.7 million and $50.8 million for the first nine months of 2005 and 2004, respectively. Page 8 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART I. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) 5. Goodwill and Other Intangible Assets At September 30, 2005, goodwill by segment consisted of the following:
ELECTRICAL ENGINE & COMPRESSOR COMPONENTS POWER TRAIN PUMPS TOTAL ---------- ---------- ----------- ----- ------ Balance at 1/1/2005 18.6 216.9 2.9 5.1 243.5 Impairment -- (108.0) -- -- (108.0) Foreign Currency Translation (1.4) -- (0.3) -- (1.7) ---- ------ ---- --- ------ Balance at 9/30/2005 17.2 108.9 2.6 5.1 133.8
Second quarter 2005 results include an impairment charge of $108.0 million related to the goodwill associated with the 2002 acquisition of FASCO (which is included in the Electrical Components segment). As previously disclosed, the failure to achieve the business plan, coupled with expected future market conditions, has caused the Company to revisit the assumptions utilized to determine FASCO's estimated fair value in the impairment assessment performed at December 31, 2004. The deterioration of volumes and the Company's inability to recover higher commodity and transportation costs through price increases has resulted in revised expected cash flows for FASCO. SFAS 142 requires that the Company estimate the fair value of the reporting unit as compared to its recorded book value. If the estimated fair value is less than the book value, then an impairment is deemed to have occurred. In estimating the fair value of the reporting units, management used forecasted discounted cash flows. As required by SFAS 142, the Company measured the amount of goodwill impairment by allocating the estimated fair value to the tangible and intangible assets within this reporting unit. Based on this allocation, it was concluded that $108.0 million of the recorded goodwill in the FASCO reporting unit was impaired and needed to be expensed as a non-cash charge to continuing operations. Prior to performing the SFAS 142 analysis, management assessed long lived assets for impairment in accordance with SFAS 144. No SFAS 144 impairment was identified. Other intangible assets consisted of the following:
GROSS CARRYING ACCUMULATED AMORTIZABLE AMOUNT AMORTIZATION NET LIFE -------- ------------ ----- ----------- Intangible assets subject to amortization: Customer relationships and contracts 39.3 7.4 31.9 6-15 years Technology 15.4 5.9 9.5 3-10 years Trade-name and trademarks 0.9 0.5 0.4 3-8 years ----- ----- ----- Total 55.6 13.8 41.8 Intangible assets not subject to amortization: Trade name 16.9 -- 16.9 ----- ----- ----- Total intangible assets $72.5 $13.8 $58.7
The estimated amortization expense over the next five years is $5.0 million for 2005 and approximately $4.2 million annually for 2006 through 2009. Amortization expense for the three Page 9 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) months ended September 30 was $1.3 million and $3.2 million for 2005 and 2004, respectively. Amortization expense for year to date ended September 30 was $3.9 million and $9.4 million for 2005 and 2004, respectively. 6. Pension and Other Postretirement Benefit Plans Components of net periodic benefit (income) cost are as follows:
PENSION BENEFITS OTHER BENEFITS ------------------ ----------------- THREE MONTHS ENDED THREE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ------------------ 2005 2004 2005 2004 ------ ------ ----- ----- Service Cost $ 2.3 $ 2.2 $ 1.3 $ 0.9 Interest Cost 5.4 5.4 2.8 2.4 Expected return on plan assets (10.5) (10.5) -- -- Amortization of prior service costs 0.1 0.3 (0.3) (0.3) Amortization of net gain (0.6) (1.1) (0.8) (1.6) ------ ------ ----- ----- Net periodic benefit (income) cost ($3.3) ($3.7) $ 3.0 $ 1.4
PENSION BENEFITS OTHER BENEFITS ----------------- ----------------- NINE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------- ----------------- 2005 2004 2005 2004 ------ ------- ----- ----- Service Cost $ 6.9 $ 6.6 $ 3.9 $ 3.0 Interest Cost 16.2 16.2 8.4 7.5 Expected return on plan assets (31.5) (31.5) -- -- Amortization of prior service costs 0.3 0.9 (0.9) (0.9) Amortization of net gain (1.8) (3.3) (2.4) (4.2) ------ ------- ----- ----- Net periodic benefit (income) cost ($9.9) ($11.1) $ 9.0 $ 5.4
During the second quarter of 2005, the Company announced some changes to certain of its retiree medical benefits. Included among these changes were plans to phase in retiree contributions and raise plan deductibles (both as of January 1, 2006). The Company also implemented plans to eliminate Post-65 prescription drug benefits starting January 1, 2008 and discontinue all retiree medical benefits for anyone hired after January 1, 2006. As a result of these actions, the Company performed a re-measurement of its liability at June 30, 2005 factoring in applicable plan changes, as well as a reduction in the discount rate used in the calculation from 5.85% to 5.5%. The amortization of the benefit related to these changes will be $1.4 million for 2005 and will be recognized in the fourth quarter. Page 10 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) The Company previously disclosed in its financial statements for the year ended December 2004, that it expected to contribute $0.1 million to one of its pension plans in 2005. As of September 30, 2005, no contributions have been made. The Company presently anticipates contributing a total of $0.1 million to fund this pension plan in 2005. 7. Impairments, Restructuring Charges, and Other Items During the third quarter, the Company recognized $1.4 million in restructuring and asset impairment charges. The European Engine & Power Train and Compressor businesses recorded $0.4 million and $0.5 million, respectively, under ongoing programs. The remaining $0.5 million related to the Electrical Components segment represents asset impairment charges for idled equipment. The Company also recognized restructuring costs of $1.9 million in the first half of 2005. These costs included $0.3 million of facility consolidation costs in the North American Compressor business and a $0.5 million additional impairment charge related to the St. Clair, Missouri Electrical Components facility. The remaining $1.1 million of restructuring costs related to the first step in the Company's efforts to reduce its excess capacity in the European Engine & Power Train operations. Included in the Company's plans for this operation is a workforce reduction of 100 personnel. Year to date 2005 results also included an impairment charge of $108.0 million related to the goodwill associated with the 2002 acquisition of FASCO (which is included in the Electrical Components segment). As previously disclosed, the failure to achieve the business plan, coupled with expected future market conditions, has caused the Company to revisit the assumptions utilized to determine FASCO's estimated fair value in the impairment assessment performed at December 31, 2004. The deterioration of volumes and the Company's inability to recover higher commodity and transportation costs through price increases has resulted in revised expected cash flows for FASCO. Based on the revised estimates of cash flow, FASCO's fair value has deteriorated from the previous assessment and, as a result, a goodwill impairment of $108.0 million was recognized representing approximately half of the goodwill associated with this segment. Third quarter 2004 results included a reduction in workforce at one of the Company's Indian compressor facilities. The action affected approximately 100 employees at the cost of $1.0 million. Year-to-date 2004 results also included restructuring and impairment charges totaling $4.6 million related to several of the Company's facilities in its North American Compressor and Electrical Components businesses. 8. Guarantees and Warranties A portion of accounts receivable at the Company's Brazilian subsidiary are sold with recourse. Brazilian receivables sold at September 30, 2005 and December 31, 2004 were $30.3 million and $101.0 million, respectively. The Company estimates the fair value of the contingent liability related to these receivables to be $0.5 million, which is included in operating income and allowance for doubtful accounts. Page 11 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) A provision for estimated future warranty costs and estimated returns for credit relating to warranty are recorded when products are sold and revenue recognized. A reconciliation of the changes in the Company's product warranty liability follows:
Nine Months Ended September 30, 2005 ------------------ (Dollars in millions) Balance at January 1, 2005 $ 38.1 Accruals for warranties 12.5 Settlements made (in cash or in kind) (18.9) Effect of foreign currency translation (0.3) ------ Balance at September 30, 2005 $ 31.4
9. Debt Subsequent to the end of the second quarter, the Company renegotiated the terms of its lending agreements with the holders of the Senior Guaranteed Notes. The amendment to this agreement added additional restrictive covenants and relaxed certain others. The capital expenditure covenant required further amendment in order for the Company to remain in compliance as of September 30, 2005 and the leverage ratio covenant was eliminated through December 31, 2006. The amendment also required the Company to provide collateral including all North American personal property and select real property. Under the agreement, the Company was permitted to pay dividends up to current levels beginning with the third quarter 2005. After the third quarter, however, dividend payments are only permitted to the extent the Company meets certain financial targets and remains in compliance with all other terms. This restriction will end if the Company remains in compliance with this requirement through first quarter 2007. As of August 8, 2005 the interest rate applicable to this borrowing increased from 4.6% to 6.60%, payable on the same schedule as the existing notes. There is no change to the maturity schedule. In conjunction with the amendment to the Senior Guaranteed Notes indicated above, the Company also renegotiated the terms of its $100 million five-year revolving credit facility. Similar to the arrangement applicable to the Senior Guaranteed Notes, certain covenants have been relaxed and others added. The Company's debt under the amended credit agreement will participate in the collateral established under the Senior Guaranteed Notes. The amended credit facility has an applicable Eurodollar rate margin, letter of credit fee rate and facility fee rate based on a sliding scale related to the Company's debt to EBITDA ratio. The Eurodollar rate margin and letter of credit fee rate was set at 210 basis points and the facility fee rate was set at 40.0 basis points on August 8, 2005. As of September 30, 2005, the Company had borrowed $10 million under the revolving credit facility at an average interest rate of 4.35%. The holders of the Company's industrial revenue bonds will share in the collateral established through these amendments. Due to further deterioration of future expected results related to the exchange rate between the Brazilian Real and the U.S. Dollar and the global demand for refrigeration and freezer compressors, the Company elected to not pay a dividend in the third quarter and does not currently expect to be able to pay dividends through first quarter 2007 under the terms of its current borrowing agreements. Page 12 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) The Company continues to monitor its future expected results in relationship to the financial covenants specified under the terms of the respective borrowing arrangements, and should the Company fail to comply with such covenants, further amendments would be required. If the Company were to fail to obtain such amendment, the lenders could exercise their rights under the terms of the agreement. Alternatively, the Company may seek new financing arrangements which provide greater flexibility than currently afforded under the existing Senior Guaranteed Notes, in combination with potential sales of assets as part of its overall business strategies. 10. 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. 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 Company's Sheboygan Falls plant site and the upper river constituting the first phase ("Phase I") and the middle and lower river and harbor being the second phase ("Phase II"). In March 2003, the Company entered into a Consent Decree with the EPA concerning the performance of remedial design and remedial action for Phase I. The Consent Decree has also been approved by the U.S. Department of Justice, but it has yet to become a final judgment pending approval by the pertinent federal district court. Negotiation of a Consent Decree regarding Phase II has yet to commence. On March 25, 2003, with the cooperation of the EPA, the Company and Pollution Risk Services, LLC ("PRS") entered into a Liability Transfer and Assumption Agreement (the "Liability Transfer Agreement"). Under the terms of the Liability Transfer Agreement, PRS assumed all of the Company's responsibilities, obligations and liabilities for remediation of the entire Site and the associated costs, except for certain specifically enumerated liabilities. Also, as required by the Liability Transfer Agreement, the Company purchased Remediation Cost Cap insurance, with a 30 year term, in the amount of $100.0 million and Environmental Site Liability insurance in the amount of $20.0 million. The Company believes such insurance coverage will provide sufficient assurance for completion of the responsibilities, obligations and liabilities assumed by PRS under the Liability Transfer Agreement. On October 10, 2003, in conjunction with the Liability Transfer Agreement, the Company completed the transfer of title to the Sheboygan Falls, Wisconsin property to PRS. The total cost of the Liability Transfer Agreement to the Company, including the cost of the insurance policies, was $39.2 million. The Company recognized a charge of $13.6 million ($8.7 million net of tax) in the first quarter of 2003. The charge consisted of the difference between the cost of the Liability Transfer Agreement and amounts previously accrued for the cleanup. The Company continues to maintain an additional reserve of $0.5 million to reflect its potential environmental liability arising from operations at the Site, including potential residual liabilities not assumed by PRS pursuant to the Liability Transfer Agreement. It is the intent of the Company, PRS and the EPA to negotiate provisions that would add PRS as a PRP by amendment to the Consent Decree, which requires the approval of the U.S. Department of Justice. Until such approval is received, U.S. GAAP requires that the Company continue to record Page 13 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) the full amount of the estimated remediation liability of $39.7 million and a corresponding asset of $39.2 million included in Other Assets in the balance sheet. While the Company believes the arrangements with PRS are sufficient to satisfy substantially all of the Company's environmental responsibilities with respect to the Site, these arrangements do not constitute a legal discharge or release of the Company's liabilities with respect to the Site. The actual cost of this obligation will be governed by numerous factors, including, without limitation, the requirements of the WDNR, and may be greater or lower than the amount accrued. The Company, in cooperation with the WDNR, also 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 were 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. At September 30, 2005, the Company had accrued $2.3 million for the total estimated cost associated with the investigation and remediation of the on-site contamination. Investigation efforts related to the potential off-site groundwater contamination have to date been limited in their nature and scope. The extent, timing and cost of off-site remediation requirements, if any, are not presently determinable. The Company and TRC Companies and TRC Environmental Corporation (collectively, "TRC") entered into a Consent Order with the Wisconsin Department of Natural Resources (the "WDNR") on December 29, 2004 relating to the Hayton Area Remediation Project ("HARP") downstream from the Company's New Holstein, Wisconsin facility. The Consent Order provides a framework for the completion of the remediation and regulatory closure at HARP. Concurrent to entering into the Consent Order, the Company and two of its subsidiaries and TRC entered into an Exit Strategy Agreement (the "Agreement"), whereby the Company transferred to TRC substantially all of its obligations to complete the HARP remediation pursuant to the Consent Order and in accordance with applicable environmental laws and regulations. As required by the Agreement, the Company purchased a Pollution Legal Liability Select Cleanup Cost Cap Policy (the "Policy"). The Company believes that the Policy provides additional assurance that the responsibilities, obligations, and liabilities transferred and assigned by the Company and assumed by TRC under the Agreement will be completed. Although the arrangements with TRC and the WDNR do not constitute a legal discharge or release of the Company's liabilities, the Company believes that the specific work substitution provisions of the Consent Order and the broad coverage terms of the Policy, collectively, are sufficient to satisfy substantially all of the Company's environmental obligations with respect to the HARP remediation. In addition to the above-mentioned environmental matters, 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 September 30, 2005 and December 31, 2004, the Company had accrued $42.8 million and $43.3 million, respectively, for environmental remediation, including $39.7 million relating to the Sheboygan River and Harbor Superfund Site. Additionally, as of September 30, 2005 and December 31, 2004, the Company had recorded a corresponding asset of $39.2 million relating to the Sheboygan River and Harbor Superfund Site in connection with its agreement with PRS. 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 Page 14 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) quarter or period that 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. 11. Income Taxes The Company recognized tax expense of $30.9 million on a loss before taxes of $1.9 million for the quarter and $24.8 million on a loss before taxes of $142.9 million for the nine months ended September 30, 2005 as compared with an effective tax rate of 40% and 38% for the respective periods in 2004. The current quarter expense was primarily related to the recognition of deferred tax asset valuation allowances against amounts previously recorded by the Brazilian Engine operations ($7.1 million) and U.S. ($18.1 million) as the preponderance of negative evidence indicates that these deferred taxes will not be recoverable. The continued strength of the Brazilian Real against the U.S. Dollar and other factors has diminished the prospects of tax planning strategies utilizing these carry-forwards in a timely manner. The comparison of our year to date effective rate to prior year was also affected by the non-deductibility of the goodwill impairment recognized in the second quarter of 2005. Excluding these charges, the effective rate varies from rates used in prior periods as the result of not providing benefits on losses in jurisdictions where the preponderance of negative evidence suggests that these deferred tax assets would not be recoverable. 12. Commitments and Contingencies A lawsuit filed against the Company and other defendants alleges that the horsepower labels on the products the plaintiffs purchased were inaccurate. The plaintiffs seek certification of a class of all persons in the United States who, beginning January 1, 1995 through the present, purchased a lawnmower containing a two stroke or four stroke gas combustible engine up to 20 horsepower that was manufactured by defendants. The complaint seeks an injunction, compensatory and punitive damages, and attorneys' fees. No orders have been entered in the case, and there has been limited discovery. While the Company believes it has meritorious defenses and intends to assert them vigorously, there can be no assurance that the Company will prevail. The Company also may pursue settlement discussions. It is not possible to reasonably estimate the amount of the Company's ultimate liability, if any, or the amount of any future settlement, but the amount could be material to the Company's financial position, consolidated results of operations and cash flows. The Company is also the subject of, or a party to, a number of other pending or threatened legal actions involving a variety of matters, including class actions, incidental to its business. Although their ultimate outcome cannot be predicted with certainty, and some may be disposed of unfavorably to the Company, management does not believe that the disposition of these other matters will have a material adverse effect on the consolidated financial position or results of operations of the Company. 13. New Accounting Standards On November 24, 2004, the FASB issued Statement No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4 (FAS 151). The standard adopts the IASB view related to inventories that abnormal amounts of idle capacity and spoilage costs should be excluded from the cost of inventory and expensed when incurred. Additionally, the Board made the decision to clarify the meaning of the term 'normal capacity'. The provisions of FAS 151 are applicable to inventory costs Page 15 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) incurred during fiscal years beginning after June 15, 2005. The Company does have operations with idle capacity; however, while the Company has not yet calculated the effects of this pronouncement, it does not believe the effects will be material. 14. Subsequent Event On October 28, 2005, the Company announced it would cease engine assembly operations in Corinth, Mississippi and consolidate such activities at its U.S. assembly facility in Dunlap, Tennessee. This move affects approximately 280 people with layoffs to begin on or after December 31, 2005. The Company estimates the costs to be $1.5 million, consisting primarily of severance and asset relocation costs. Page 16 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS Executive Summary We are 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. We also produce a variety of pump products with a wide range of applications. Our net sales have grown from $1.4 billion for the year ended December 31, 2001 to $1.9 billion for the year ended December 31, 2004. The primary source of sales growth was our 2002 acquisition of FASCO Motors, now the key component of our presence in the U.S. fractional horsepower motor market. Our products are sold in countries all over the world. In evaluating our financial condition and operating performance, we focus primarily on profitable sales growth and cash flows, as well as return on invested capital on a consolidated basis. In addition to maintaining and expanding our business with our existing customers in our more established markets, we rely on developing new products and improving our ability to penetrate new markets through enhancements to the functionality, performance and quality of our existing products. For instance, in 2005 our Compressor Group expects to introduce a scroll-style compressor to serve commercial and air conditioning markets throughout the globe, and it will begin producing a new expanded range rotary compressor in India for global applications. Our Electrical Components Group has expanded its range of Brushless DC ("BLDC") variable speed motor products and our Pump Group will be selling a range of new energy saving pump models. To continue to grow sales and improve cash flows, we must successfully bring these products to market in a timely manner and win customer acceptance. International sales are important to our business as a whole with sales to customers outside the United States representing approximately 44% of total consolidated net sales in 2004. 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 various government interventions into trade policy. We have experienced some of these factors and continue to carefully pursue these markets. Our operating results are indicative of the environment that manufacturers face in today's global economy. The addition of new productive capacities in low-cost locations, like China, has resulted in new capacities and deflationary pricing in many of the market segments in which we operate. Like many of our customers and competitors, we have restructured older operations to remain cost competitive, including the movement of productive capacities to low-cost locations or nearer to customer facilities. These restructurings involve significant costs, in both financial and human terms. In addition, many of our markets are subject to macroeconomics trends, which expand and contract, and many overall trends which affect demand, such as weather. The foreign manufacturing operations we have developed are subject to many risks, including governmental expropriation, governmental regulations that 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 our Brazilian operations. The Brazilian compressor operations provided a significant portion of total Compressor Products segment production during 2004, and our Curitiba, Brazil facility is the key future manufacturing site to supply worldwide demand for lawn and garden engines. Page 17 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS As a global manufacturer with production in 11 countries and sales in over 110 countries throughout the world, results are sensitive to changes in foreign currency exchange rates. In total, those movements have not been favorable to us during 2005. We have developed strategies to mitigate or partially offset the impact, primarily hedging where the risk of loss is greatest. In particular, we have entered into foreign currency forward purchases to hedge the Brazilian export sales denominated in both U.S. Dollars and Euros. Additionally, we have structured local financing relationships as natural hedges. Lastly, commodity prices increased very rapidly during 2004 and 2005. Due to contractual commitments and competitive markets, we were not able to fully recover these cost increases through price increases and other cost savings. Increases in certain raw material, energy and commodity costs had a material adverse impact on our operating results in 2004 and continue to have a significant affect on our profitability in 2005. We have developed strategies to mitigate or partially offset the impact, which include aggressive cost reduction actions, cost optimization engineering strategies, selective in-sourcing of components where we have available capacity, continued consolidation of our supply base, and acceleration of low-cost country sourcing. In addition, the sharing of increased raw material costs has been, and will continue to be, the subject of negotiations with our customers. While we believe that our mitigation strategies eventually will offset a substantial portion of the financial impact of these increased costs, no assurances can be given that the magnitude and duration of these increased costs will not have a continued material adverse impact on our operating results. We are very focused on efforts to help us maintain our ability to compete on cost. Our success in generating cash flow will depend, in part, on our ability to efficiently manage working capital. In this regard, changes in inventory management practices and customer and vendor payment terms are expected to have a positive impact on our reported cash flows through 2005. In addition, our cash flow is also dependent on our ability to efficiently manage our capital spending. We use cash return on invested capital as a measure of the efficiency with which assets are deployed to increase earnings. Improvements in our return on invested capital will depend on our ability to maintain an appropriate asset base for our business and to increase productivity and operating efficiency. For further information related to other factors that have had, or may in the future have, a significant impact on our business, financial condition or results of operations, see Forward-Looking Statements and Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2004. Page 18 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations A summary of our operating results as a percentage of net sales is shown below (dollar amounts in millions):
THREE MONTHS ENDED SEPTEMBER 30, 2005 % 2004 % - -------------------------------- ------- ----- ------ ----- (dollars in millions) Net sales $ 478.5 100.0% $478.6 100.0% Cost of sales and operating expenses 431.5 90.2% 403.4 84.3% Selling and administrative expenses 41.4 8.7% 49.6 10.4% Impairments, restructuring charges, and other items 1.4 0.3% 2.0 0.4% ------- ------ Operating income 4.2 0.9% 23.6 4.9% Interest expense (8.0) 1.7% (5.3) 1.1% Interest income and other, net 1.9 0.4% 2.3 0.5% ------- ------ Income (Loss) before taxes (1.9) 0.4% 20.6 4.3% Tax provision 30.9 6.5% 8.3 1.7% ------- ------ Net income (loss) ($32.8) 6.9% $ 12.3 2.6% ======= ======
Three Months Ended September 30, 2005 vs. Three Months Ended September 30, 2004 Net sales in the third quarter of 2005 were $478.5 million as compared to $478.6 million in the third quarter of 2004. Excluding an increase in sales of $20.5 million resulting from the effect of changes in foreign currency exchange rates, sales decreased $20.6 million or 4.3% versus the same quarter in the prior year. This was primarily due to lower volumes in the Compressor and Engine & Power Train segments. Gross profit and gross margin were $47.0 million and 9.8% in the quarter ended September 30, 2005, as compared to $75.2 million and 15.7% in the quarter ended September 30, 2004. Gross profit was negatively affected by the impact of commodity costs, which reduced gross profit by $24.2 million. Pricing increases have helped to mitigate the impact of this increase. Gross profit was also negatively affected by unfavorable foreign exchange rates, particularly the Brazilian Real, which had an impact of $10.6 million. Selling, general and administrative expenses were $41.4 million in the three months ended September 30, 2005, as compared to $49.6 million in the three months ended September 30, 2004. As a percentage of net sales, selling, general and administrative expenses were 8.7% and 10.4% in the third quarters of 2005 and 2004, respectively. The decrease is primarily related to improvement in variable selling costs and global headcount reduction. The completion of the amortization of non-compete agreements associated with our 2002 acquisition of FASCO contributed $1.9 million to the decrease. We incurred $1.4 million in asset impairment and restructuring charges during the third quarter. The North American Compressor operations recorded $0.5 million of additional moving costs related to previously announced actions and the European Engine & Power Train operations recorded $0.4 million of additional termination costs related to previously announced intent to reduce its workforce. Page 19 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Engine & Power Train costs relate to the termination of an additional 15 employees and ongoing costs related to previous terminations. The remaining $0.5 million relates to asset impairment for manufacturing equipment idled through a facility consolidation within the Electrical Components segment. Interest expense amounted to $8.0 million in the third quarter of 2005 compared to $5.3 million in the third quarter of 2004. The increase was primarily related to higher average interest rates applicable to our borrowings both in the United States and in a number of our foreign locations, in addition to reflecting the impact of the loss of benefit previously provided by interest rate swaps exchanging fixed rates for variable. Interest income and other, net amounted to $1.9 million in the third quarter of 2005 compared to $2.3 million in the third quarter of 2004. This decrease resulted primarily from lower average deposits in Brazil and the United States. We recognized tax expense of $30.9 million on a loss before taxes of $1.9 million for the third quarter, as compared with an effective tax rate of 40.3% on income before taxes of $20.6 million for the corresponding period in 2004. The current period expense was primarily related to the recognition of deferred tax asset valuation allowances against amounts previously recorded by the Brazilian Engine operations ($7.1 million) and U.S. ($18.2 million) as the preponderance of negative evidence indicates that these deferred tax assets will not be recoverable. The continued strength of the Brazilian Real against the U.S. Dollar and other factors has diminished the prospects of tax planning strategies utilizing these carry-forwards in a timely manner. Excluding these charges, the unusual result was the product of not providing benefits on losses in jurisdictions where the preponderance of negative evidence would indicate that these deferred tax assets would not be recoverable. The effective tax rate in future periods may vary from standard U.S. tax rates based upon changes in the mix of profitability between the jurisdictions where benefits on losses are not provided versus other jurisdictions where provisions and benefits were recognized. In addition, circumstances could change such that additional valuation allowances may become necessary on deferred tax assets in various jurisdictions. Net loss in the third quarter of 2005 was $32.8 million, or $1.77 per share, as compared to net income of $12.3 million, or $0.67 per share, in the third quarter of 2004. The decline was primarily the result of the factors described above. Excluding charges, this quarter's results reflect the continuation of a trend of declining quarter over comparable quarter results which began with the fourth quarter of 2003. Reportable Operating Segments The financial information presented below is for our four reportable operating segments for the periods presented: Compressor, Engine & Power Train, Electrical Components and Pump. Financial measures regarding each segment's income before interest, other expense and income taxes ("operating income") and income before interest, other expense and income taxes divided by net sales ("operating margin") are not measures of performance under accounting principles generally accepted in the United States (GAAP). Such measures are presented because we evaluate the performance of our reportable operating segments, in part, based on income before interest, other expense and income taxes. These measures should not be considered in isolation or as a substitute for net income, net cash provided by operating activities or other income statement or cash flow statement data prepared in Page 20 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS accordance with GAAP or as measures of profitability or liquidity. In addition, these measures, as we determine them, may not be comparable to related or similarly titled measures reported by other companies. For a reconciliation of consolidated income before interest, other expense and income taxes to income before provision for income taxes, see Note 4, Segment Reporting. Compressor Products Third quarter 2005 sales in our compressor business were flat at $218.6 million from $218.9 million in the third quarter of 2004. Declines in sales of compressors utilized in room air conditioners and commercial applications offset the increase in sales due to the effect of foreign currency translation of $19.5 million. Compressor business operating income and the related margin on net sales for the third quarter of 2005 amounted to $7.6 million and 3.5% compared to $22.5 million and 10.3% in the third quarter of 2004. The effects of a weaker U.S. Dollar caused an operating income decline of $11.0 million compared to last year's third quarter. During the third quarter of 2005 when compared to the third quarter of 2004, the U.S. Dollar was on average 20.3% weaker versus the Brazilian Real. Compressor segment operating margin also deteriorated due to an unfavorable mix of sales and increases in commodity costs in excess of pricing adjustments. Results in the third quarter indicate lower total market demand in Europe and South America. Electrical Component Products Electrical Components business sales were $103.3 million in the third quarter of 2005, a slight increase when compared to $102.1 million from the third quarter of 2004. The segment offset volume declines with pricing increases. Volume declines totaled $4.3 million and were particularly significant in the automotive seat actuator, blower, and motor businesses. Electrical Components operating income and margin for the third quarter of 2005 amounted to $4.8 million and 4.6% compared to $3.5 million and 3.4% in the third quarter of 2004. The improvement in operating income in the quarter largely resulted from lower sales volumes and poorer mix of sales ($1.8 million) and higher commodity costs ($2.7 million), being offset by lower amortization of intangible assets of $1.9 million as well as productivity improvements and pricing recoveries. Engine & Power Train Products Engine & Power Train business sales were slightly down at $124.2 million in the third quarter of 2005 compared to $128.6 million in the third quarter of 2004. Loss of business on walk behind rotary lawn applications and other engine lines used on certain utility products led the decline in sales totaling $8.7 million and $6.5 million, respectively. This was somewhat offset through increased volume of engines used in generators. Engine & Power Train business operating loss in the third quarter of 2005 amounted to $5.2 million compared to income of $2.2 million in the third quarter of 2004. The decline in quarter results reflects losses in volume and increases in commodity ($3.8) and other costs ($9.6) somewhat offset by a better mix of sales of $7.0 million. Page 21 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS Pump Products Pump business sales in the third quarter of 2005 amounted to $31.8 million compared to $28.5 million in same period in 2004. The 11.6% increase in sales was the result of volume growth across almost all of the segment's lines of business. Operating income and margin amounted to $3.6 million and 11.3% in the third quarter of 2005 compared to $3.1 million and 10.9% in the same period in 2004. The increase in operating income was primarily attributable to the increases in sales volumes. The margin decline was a result of sales mix. Nine Months Ended September 30, 2005 vs. Nine Months Ended September 30, 2004
NINE MONTHS ENDED SEPTEMBER 30, 2005 % 2004 % - ------------------------------- -------- ----- -------- ----- (dollars in millions) Net sales $1,404.8 100.0% $1,439.8 100.0% Cost of sales and operating expenses 1,285.0 91.5% 1,245.3 86.5% Selling and administrative expenses 135.9 9.7% 145.4 10.1% Impairments, restructuring charges, and other items 111.3 7.9% 5.6 0.4% -------- ----- -------- ----- Operating income (loss) (127.4) 9.1% 43.5 3.0% Interest expense (22.4) 1.6% (16.5) 1.1% Interest income and other, net 6.9 0.5% 10.6 0.7% -------- ----- -------- ----- Income (Loss) before taxes (142.9) 10.2% 37.6 2.6% Tax provision 24.8 1.8% 14.3 1.0% -------- ----- -------- ----- Net income (loss) ($167.7) 11.9% $ 23.3 1.6% ======== ===== ======== =====
Net sales in the nine months ended September 30, 2005 were $1,404.8 million as compared to $1,439.8 million in the same period of 2004. Excluding an increase in sales of $66.0 million resulting from the effect of changes in foreign currency exchange rates, sales decreased $101.0 million or 7.0% versus the same quarter in the prior year. This was primarily due to lower volumes in the Compressor and Engine & Power Train segments. Year to date sales declines were also experienced in our Electrical Components and Pump segments. Gross profit and gross margin were $119.8 million and 8.5% in the nine months ended September 30, 2005, as compared to $194.5 million and 13.5% in the nine months ended September 30, 2004. Gross profit was negatively affected by the impact of commodity costs which were $78.2 million higher in relative terms. Pricing increases helped to mitigate the impact of this increase, though neither the Electrical Components or Engine & Power Train segments were able to achieve complete recovery. Gross profit was also negatively affected by unfavorable foreign exchange rates, particularly the Brazilian Real. Selling, general and administrative expenses were $135.9 million in the nine months ended September 30, 2005, as compared to $145.4 million in the nine months ended September 30, 2004. As a percentage of net sales, selling, general and administrative expenses were 9.7% and 10.1% in the nine months ended September 30, 2005 and September 30, 2004, respectively. The completion of the amortization of non-compete agreements associated with our 2002 acquisition of FASCO contributed Page 22 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS $5.7 million to the decrease in selling, general and administrative expenses in 2005. The comparison to sales did not improve due to higher relative first quarter selling costs, particularly in the Brazilian compressor operations. We incurred $3.3 million in asset impairment and restructuring charges during the nine months ended September 30, 2005. The North American Compressor operations recorded $0.9 million of additional moving costs related to previously announced actions. The European Engine & Power Train operations recorded $1.4 million of termination costs related to previously announced intent to reduce its workforce. The Engine & Power Train costs relate to the termination of approximately 115 employees. The remaining $1.0 million relates to asset impairment for manufacturing equipment idled through a facility consolidation and additional impairment of the carrying value of a closed plant, both within the Electrical Components segment. Current year results also include an impairment charge of $108.0 million related to the goodwill associated with the 2002 acquisition of FASCO (which is included in the Electrical Components segment). As previously disclosed, the failure to achieve the business plan, coupled with expected market conditions, has caused us to revisit the assumptions utilized to determine FASCO's estimated fair value in the impairment assessment performed at December 31, 2004. The deterioration of volumes and our inability to recover higher commodity and transportation costs through price increases has resulted in revised expected cash flows for FASCO. Based on the revised estimates of cash flow, FASCO's estimated fair value has deteriorated from the previous assessment and, as a result, a goodwill impairment of $108.0 million was recognized. Interest expense amounted to $22.4 million in the nine months ended September 30, 2005 compared to $16.5 million in the comparable period of 2004. The increase was primarily related to higher average interest rates applicable to our borrowings both in the United States and in a number of our foreign locations, in addition to reflecting the impact of the loss of benefit previously provided by interest rate swaps exchanging fixed rates for variable. Interest income and other, net amounted to $6.9 million in the nine months ended September 30, 2005 compared to $10.6 million in the same period of 2004. This decrease resulted primarily from lower average deposits in Brazil and the United States. We recorded income tax expense of $24.8 million on a loss before taxes of $142.9 million for the nine months ended September 30, 2005, as compared with an effective tax rate of 38.0% for the corresponding period in 2004. The primary differences in our tax benefit rate for the third quarter and the first nine months of fiscal 2005 as compared with the corresponding periods of fiscal 2004 was primarily due to non-deductibility of the goodwill impairment recognized in the second quarter of 2005 and the recognition of deferred tax asset valuation allowances during the third quarter of 2005 related to the Brazilian Engine operations ($7.1 million) and U.S. ($18.2 million) as the preponderance of negative evidence indicates that these deferred tax assets will not be recoverable. The continued strength of the Brazilian Real against the U.S. Dollar and other factors has diminished the prospects of tax planning strategies utilizing these carry-forwards in a timely manner. Excluding the goodwill impairment and valuation allowances, the unusual result was also the product of not providing benefits on losses in jurisdictions where the preponderance of negative evidence would indicate that these deferred tax assets would not be recoverable. The effective tax rate in future periods may vary from Page 23 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS the 35% used in prior years based upon changes in the mix of profitability between the jurisdictions where benefits on losses are not provided versus other jurisdictions where provisions and benefits were recognized. In addition, circumstances could change such that additional valuation allowances may become necessary on deferred tax assets in various jurisdictions. Net loss in the nine months ended September 30, 2005 was $167.7 million, or $9.07 per share, as compared to net income of $23.3 million, or $1.26 per share, in the nine months ended September 30, 2004. The current period decline was primarily the result of the impact of the goodwill impairment described above. Additional factors discussed through the Reportable Operating Segments discussion that follows contributed to the operating loss experienced which results even after excluding the impairment, other charges and deferred tax asset valuation allowances. REPORTABLE OPERATING SEGMENTS Please see the previous discussion of our use of segment income before interest, other expense and income taxes ("operating income") and income before interest, other expense and income taxes divided by net sales ("operating margin") on page 18. Compressor Products Compressor business sales in the first nine months of 2005 increased 6.4% to $707.2 million from $664.9 million in the first nine months of 2004. The increase for the period from the prior year was mainly attributable to the effect of foreign currency translation that increased sales by $62.8 million. Excluding the effect of foreign currency fluctuation, volume increases of compressor products that are primarily manufactured by the Company in its Brazilian and Indian facilities and sold into the original equipment markets for residential refrigerators and freezers and volume increases in compressor products for commercial applications were more than offset by declines in sales of compressors used in room air conditioners. Compressor business operating income and the related margin on net sales for the nine months ended September 30, 2005 amounted to $23.6 million and 3.3% compared to $53.7 million and 8.1% for the first nine months of 2004. The effects of foreign currency exchange rates caused a decline of $25.5 million. During the nine month period, the U.S. Dollar was on average 17% weaker versus the Brazilian Real and 3% weaker versus the Euro. Compressor segment operating margin also deteriorated due to an unfavorable mix of sales and higher commodity and transportation costs. Electrical Component Products Sales for the first nine months of 2005 amounted to $305.9 million compared to $314.3 million in the first nine months of 2004. Volume declines totaled $19.7 million and were particularly significant in the automotive seat actuator, blowers, and residential and commercial aftermarket. Electrical Components operating income and margin for the first nine months of 2005 amounted to $4.0 million and 1.3% compared to $11.2 million and 3.6% in the first nine months of 2004. The decline in operating income in the period largely resulted from lower sales volumes ($7.9 million), higher commodity costs ($15.0 million), and unanticipated operational inefficiencies primarily related to the Page 24 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS closure of the St. Clair facility ($1.2 million), partially offset by lower amortization of intangible assets of $5.7 million. Engine & Power Train Products Engine & Power Train business sales declined 16.6% to $297.8 million in the nine months ended September 30, 2005 compared to $356.9 million in the corresponding period of 2004. Loss of business totaling $32.7 million on walk behind rotary lawn applications led the decline in sales. Volumes were also lower in the transaxle business and in other engine lines utilized on certain utility products. These volume declines were somewhat offset by increased sales of engines used in generators. Engine & Power Train business operating loss in the nine months ended September 30, 2005 amounted to $41.6 million compared to a loss of $11.2 million in the corresponding period of 2004. The decline in year to date results reflects increases in commodity costs of $10.6 million and other costs of $13.7 million. The significant costs associated with excess capacities in the U.S. and Europe contributed substantially to the Engine & Power Train losses. The excess capacity situation was exacerbated by the current shift of production to our Brazilian manufacturing facility resulting in duplicate capacities. We intend to complete substantial cost reductions and volume improvements throughout 2005 and into 2006 to achieve sustained improvement. Pump Products Pump business sales in the nine months ended 2005 amounted to $92.4 million compared to $102.5 million in comparable period in 2004. The 9.9% reduction in sales was primarily attributable to the loss of water gardening business at one mass market retailer. Operating income and margin amounted to $10.1 million and 10.9% in the nine months ended September 30, 2005 compared to $11.3 million and 11.0% in the comparable period in 2004. The decrease in operating income and margin was primarily attributable to the reductions in sales volumes. OTHER MATTERS Environmental Matters We are subject to various federal, state and local laws relating to the protection of the environment and are actively involved in various stages of investigation or remediation for sites where contamination has been alleged. (See Note 10 to the financial statements.) Liabilities relating to probable remediation activities are recorded when the costs of such activities can be reasonably estimated based on the facts and circumstances currently known. Difficulties exist estimating the future timing and ultimate costs to be incurred due to uncertainties regarding the status of laws, regulations, levels of required remediation, changes in remediation technology and information available. At September 30, 2005 and December 31, 2004, we had accrued $42.8 million and $43.3 million, respectively, for environmental remediation. As these matters continue toward final resolution, amounts in excess of those already provided may be necessary to discharge our obligations for these sites. Page 25 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS Such amounts, depending on their amount and timing, could be material to reported net income in the particular quarter or period in which they are recorded. In addition, the ultimate resolution of these matters, either individually or in the aggregate, could be material to the consolidated financial statements. AlixPartners Engagement We engaged AlixPartners during the third quarter of 2005 to assist in the restructuring plans of the Engine & Power Train business. These plans include focusing on improving profitability and customer service. The participation by AlixPartners allows the Company to affect this change in a shorter time frame than it otherwise could have achieved. The plan includes eliminating the significant duplicate capacity, among other cost reduction efforts. LIQUIDITY AND CAPITAL RESOURCES Our primary liquidity needs are to fund capital expenditures, service indebtedness, and support working capital requirements. Our principal sources of liquidity are cash flows from operating activities and borrowings under available credit facilities. A substantial portion of our operating income is generated by foreign operations. As a result, we are dependent on the earnings and cash flows of and the combination of dividends, distributions and advances from our foreign operations to provide the funds necessary to meet our obligations in each of our legal jurisdictions. There are no significant restrictions on the ability of our subsidiaries to pay dividends or make other distributions. Cash Flow Cash used in operating activities was $34.6 million in the first nine months of 2005 as compared to cash provided by operations of $34.5 million in the first nine months of 2004. The decrease was primarily the result of the declining net income; however, it represents an improvement of $20.9 million from the first six months as the Company successfully reduced its investment in working capital during the third quarter by $4.9 million. The cash generated from operations during the third quarter was used to fund capital expenditures and losses. Year to date, the Company used existing cash balances to prepay $50 million of the Company's Guaranteed Senior Guaranteed Notes, pay dividends, and fund capital expenditures. Cash flows used in investing activities were $88.6 million in the first nine months of 2005 as compared to $55.6 million in the first nine months of 2004, reflecting a $33.0 million increase in capital expenditures in 2005, primarily related to new product expansions in Brazil and India. Cash flows used in financing activities were $23.0 million in the first nine months of 2005 as compared to $53.1 million in the first nine months of 2004, primarily reflecting the repayment of $50 million of our Senior Guaranteed Notes in the first quarter net of additional foreign borrowings during 2005 versus repayments in 2004. The Company also paid dividends in the first and second quarters amounting to $11.8 million. The Company has currently suspended its dividend, did not pay a dividend during the third quarter, and does not expect to accumulate sufficient earnings under the terms of its current borrowing agreements to pay a dividend through first quarter 2007. Page 26 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS Capitalization In addition to cash provided by operating activities, we use a combination of our credit facility and long-term debt to fund our capital expenditures and working capital requirements. For the nine months ended September 30, 2005 and September 30, 2004, our average outstanding debt balance was $370.9 million and $399.2 million, respectively. The weighted average long-term interest rate, including the effect of hedging activities, was 4.64% and 3.47% for the respective periods. Among other factors, the change in the weighted average, long-term interest rate for the respective periods reflects the increase in the borrowing rate applicable to the $250 million Senior Guaranteed Notes which changed from 4.6% to 6.6% on August 8, 2005. We use our $100 million revolving credit facility as needed for our short-term working capital fluctuations and general corporate purposes. For the nine months ended September 30, 2005, our average outstanding unsecured short-term debt balance was $11.2 million at a weighted average interest rate of 4.3%. This facility was not utilized during 2004. At September 30, 2005, $17.9 million was utilized for letters of credit. The Company may also utilize long-term financing arrangements in connection with state investment incentive programs. Accounts Receivable Sales Certain of our Brazilian and Asian subsidiaries periodically sell their accounts receivable with financial institutions. Such receivables are factored with recourse to us and, in most cases, are excluded from accounts receivable in our consolidated balance sheets. The amount of sold receivables excluded from our balance sheet was $30.3 million and $101.0 million as of September 30, 2005 and December 31, 2004, respectively. We cannot provide any assurances that these facilities will be available or utilized in the future. Adequacy of Liquidity Sources Historically, cash flows from operations and borrowing capacity under available credit facilities were sufficient to meet our long-term debt maturities, projected capital expenditures and anticipated working capital requirements; however, the negative results experienced over the last quarter of 2004 and the first six months of 2005 and the recognition of the goodwill impairment charge required the Company to amend its debt covenants in both the Note Purchase Agreement with the holders of its Senior Guaranteed Notes and the credit agreement for its Revolving Credit Facility, under which JPMorgan Chase Bank, N.A. acts as agent for a group of lenders. The amendments were signed on August 5, 2005. New terms of the agreements provide for security interests in certain of the Company's assets and specific covenants related to EBITDA and capital expenditures through December 2006. The capital expenditure covenant required further amendment in order for the Company to remain in compliance as of September 30, 2005 and the leverage ratio covenant was eliminated through December 31, 2006. While the terms of the agreement also permit resumption of dividends, presuming continued compliance with these covenants and subject to minimum levels of EBITDA, beginning with the fourth quarter of 2005 through the first quarter of 2007, the Company does not currently expect to pay dividends through this compliance period and elected not to pay a dividend in the third quarter. The Company continues to monitor its future expected results in relationship to the financial covenants specified under the terms of the respective borrowing arrangements, and should the Company fail to comply with such covenants, Page 27 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS further amendments would be required. If the Company fails to obtain such amendment, the lenders could exercise their rights under the terms of the agreement. Alternatively, the Company may seek new financing arrangements which provide greater flexibility than currently afforded under the existing Senior Guaranteed Notes, in combination with potential sales of assets as part of its overall business strategies. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," in our Annual Report on Form 10-K for additional discussion related to the year ended December 31, 2004. SIGNIFICANT ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES Some of our accounting policies require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are subject to an inherent degree of uncertainty. They are based on our historical experience, the terms of existing contracts, our evaluation of trends in the industry, information provided by our customers and suppliers, and information available from other outside sources, as appropriate. Actual results in these areas could differ from our estimates. For a discussion of our significant accounting policies and critical accounting estimates, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Significant Accounting Policies and Critical Accounting Estimates," and Note 1, "Accounting Policies," to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2004. There have been no significant changes to our significant accounting policies or critical accounting estimates during the first nine months of 2005. Recently Issued Accounting Pronouncements Inventory Costs The Financial Accounting Standards Board ("FASB") issued SFAS No. 151, "Inventory Costs - an amendment of ARB No. 43, Chapter 4." This statement clarifies the requirement that abnormal inventory-related costs be recognized as current-period charges and requires that the allocation of fixed production overheads to inventory conversion costs be based on the normal capacity of the production facilities. The provisions of this statement are to be applied prospectively to inventory costs incurred during fiscal years beginning after June 15, 2005. While we have idle production capacity in several of our facilities and we are still evaluating the impact of this pronouncement, we do not believe the effects will be material. OUTLOOK Information in this "Outlook" section should be read in conjunction with the cautionary language and discussion of risks included below. The outlook for the remainder of the year is subject to the same variables that have negatively impacted the Company's year to date results. Commodity costs and key currency rates, particularly the Brazilian Real, will remain key factors to any rebound in the final quarter of the year. Recent indicators provide only slight encouragement as the Company expects the Brazilian Real to continue to Page 28 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS negatively affect its business. The Company has been acting on variables within its control, such as aggressively executing cost cutting actions. Global headcounts have been reduced by 2,300 since March 31, 2005, and the Company has changed retiree and healthcare benefits in the U.S. with an expected annual benefit of $4.0 million. The Company has engaged AlixPartners to assist in the completion of the Engine & Power Train Group restructuring, where substantial cost reductions associated with the elimination of duplicate capacities, are expected to benefit future periods. Despite these efforts, the Company expects fourth quarter results to lag comparable 2004 results, particularly due to the Compressor segment. Higher costs, an unfavorable Brazilian Real, weaker global markets for refrigeration and freezer compressors, and continued shifts to Asian-based rotary compressor for air conditioning are all factors. In addition, these factors can be reasonably expected to continue into 2006. The Company will continue to focus its efforts on improving the profitability and competitiveness of its worldwide operations. It is likely that additional production relocation and consolidation initiatives will take place during 2005 and 2006 that could have an effect on the consolidated financial position and future results of operations of the Company. CAUTIONARY STATEMENTS RELATING TO FORWARD-LOOKING STATEMENTS This discussion contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act that are subject to the safe harbor provisions created by that Act. In addition, forward-looking statements may be made orally in the future by or on behalf of us. 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, portable power generators and snow throwers; iv) the success of our 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 and cost of materials, particularly commodities, including steel, copper and aluminum, whose cost can be subject to significant variation; ix) actions of competitors; x) the ultimate cost of resolving environmental and legal matters; xi) our 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 our manufacturing operations or system implementations, the ultimate cost of those initiatives and the amount of savings actually realized; xiii) potential political and economic adversities that could adversely affect anticipated sales and production in Brazil; xiv) potential political and economic adversities that could adversely affect anticipated sales and production in India, including potential military conflict with neighboring countries; xv) our ability to reduce a substantial amount of costs in the Engine & Power Train group associated with excess capacity, and xvi) the ongoing financial health of major customers. These forward-looking statements are made only as of the date of this report, and we undertake no obligation Page 29 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise. Page 30 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to risk during the normal course of business from credit risk associated with accounts receivable and from changes in interest rates, commodity prices, and foreign currency exchange rates. The exposure to these risks is managed through a combination of normal operating and financing activities which include the use of derivative financial instruments in the form of foreign currency forward exchange contracts and commodity forward purchasing contracts. Fluctuations in commodity prices and foreign currency exchange rates can be volatile, and the Company's risk management activities do not totally eliminate these risks. Consequently, these fluctuations can have a significant effect on results. A discussion of the Company's policies and procedures regarding the management of market risk and the use of derivative financial instruments was provided in its Annual Report on Form 10-K in Item 7A and in Notes 1 and 12 of the Notes to Consolidated Financial Statements. The Company does not utilize financial instruments for trading or other speculative purposes. There have been no changes in these policies or procedures during the third quarter of 2005. The Company utilizes foreign currency forward exchange contracts to hedge foreign currency receivables, payables, and other known transactional exposures for periods consistent with the expected cash flows of the underlying transactions. The contracts generally mature within one year and are designed to limit exposure to exchange rate fluctuations because gains and losses on the hedged transactions offset gains and losses on the contracts. At September 30, 2005 and December 31, 2004, the Company held foreign currency forward exchange contracts and foreign currency call options with total notional values in the amount of $96.7 million and $53.4 million, respectively. The Company uses commodity forward purchasing contracts to help control the cost of traded commodities, primarily copper and aluminum, used as raw material in the production of motors, electrical components and engines. Local management is allowed to contract commodity forwards for a limited percentage of projected raw material requirements up to one year in advance. The total values of commodity forwards outstanding at September 30, 2005 and December 31, 2004 were $36.8 million and $23.7 million, respectively. The Company is subject to interest rate risk, primarily associated with its borrowings. The Company's $250 million Senior Guaranteed Notes are fixed-rate debt. The Company's remaining borrowings, which consist of bank borrowings by its foreign subsidiaries and Industrial Development Revenue Bonds, are variable-rate debt. Currently, 67% of the Company's total debt is fixed-rate. While changes in interest rates do not affect the fair value of the Company's variable-interest rate debt, they do affect future earnings and cash flows. A 1% increase in interest rates would increase interest expense for the year by approximately $1.3 million. Page 31 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 4 CONTROLS AND PROCEDURES The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including its President and Chief Executive Officer and Vice President, Treasurer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. As of the end of the fiscal quarter covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's Disclosure Committee and management, including the President and Chief Executive Officer and the Company's Vice President, Treasurer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon such evaluation, the Company's President and Chief Executive Officer along with the Company's Vice President, Treasurer and Chief Financial Officer concluded that the Company's disclosure controls and procedures which were identified as not effective as of December 31, 2004 because of the material weakness discussed below, have not yet been fully corrected and are, therefore, not effective as of September 30, 2005. In light of the material weakness, the Company performed additional analysis and other post-closing procedures to ensure our consolidated financial statements were prepared in accordance with generally accepted accounting principles. Accordingly, management believes that the financial statements included in this report fairly state in all material respects our financial condition, results of operations and cash flows for the periods presented. As outlined in management's annual report as of December 31, 2004, the Company did not maintain effective controls over the segregation of duties over certain system access controls as well as security over user access rights to certain financial application systems which could affect accounts receivable and revenue, inventory and cost of goods sold, and accounts payable and other financial statement accounts at a number of its locations. Specifically, the control deficiencies demonstrated an inadequate design of access security policies and segregation of duties requirements as well as a lack of independent monitoring of user access to financial application programs and data. Individually, these deficiencies were evaluated as representing a more than remote likelihood that a misstatement that is more than inconsequential, but less than material, could occur; however, when aggregated, these deficiencies could result in a misstatement to the financial statement accounts, resulting in a material misstatement to the consolidated financial statements that would not be prevented or detected. The Company has implemented additional controls to remediate this material weakness. These controls include, but are not limited to, additional levels of reviews of transactions, additional reviews of changes to financial applications and data by those with access to both, and reassignment of responsibilities to provide for better segregation of duties. While specific efforts have been undertaken to address the segregation of duties and system access issues within each of the affected locations, the Company has not completed its process to verify the adequacy of the measures taken and ensure these steps had completely addressed the previously identified concerns. The Company has also made progress with respect to its implementation of a common, global ERP system, which represents the long-term solution to these deficiencies as well as a significant improvement to the overall internal control structure of the company. The system implementation includes improved controls over access to financial application programs and data, independent Page 32 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 4 CONTROLS AND PROCEDURES monitoring of users having unrestricted access to financial application programs and data, and provides for improved segregation of duties. The first business went live March 1, 2005 and the Company's remaining locations are expected to go live during 2006 and 2007. Changes In Internal Control Over Financial Reporting As noted above, the Company is in the process of implementing a new global ERP system. Location implementations began in the first quarter of 2005 and the Company's remaining locations are expected to go live during 2006 and 2007. During this time period, there will be significant changes in internal controls over financial reporting at the operations affected. The Company believes it has designed adequate controls into the new system and will begin testing their application at each location after their respective go-live dates. There have been no changes in the Company's internal controls over financial reporting that occurred during the quarter that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. Limitations On The Effectiveness Of Controls And Procedures Management of the Company, including the chief executive officer and chief financial officer, does not expect that the Company's disclosure controls and procedures or internal control over financial reporting will detect or prevent all error and all fraud. A control system, no matter how well designed and implemented, can provide only reasonable, not absolute, assurance that the control system's objective will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues within a company are detected. In addition, projection of any evaluation of the effectiveness of internal control over financial reporting to future periods is subject to the risk that controls may become inadequate because of changes in condition, or that the degree of compliance with policies and procedures included in such controls may deteriorate. Page 33 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART II. OTHER INFORMATION ITEM 6. EXHIBITS
(a) Exhibit Number Description ------- ----------- 31.1 Certification of the President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of the President and Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Page 34 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TECUMSEH PRODUCTS COMPANY (Registrant) Dated: November 7, 2005 BY: /s/ JAMES S. NICHOLSON ------------------------------------ James S. Nicholson Vice President, Treasurer and Chief Financial Officer (on behalf of the Registrant and as principal financial officer) Page 35 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ----------- ----------- 4.1 Amendment No. 3 dated November 4, 2005 to Note Purchase Agreement dated March 5, 2003 by and among Tecumseh Products Company and certain Purchasers listed therein. 4.2 Second Amendment dated November 4, 2005 to Credit Agreement dated as of December 21, 2004 among Tecumseh Products Company, the lenders named therein, and JPMorgan Chase Bank, N.A., as agent. EX-31.1 Certification of the President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. EX-31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. EX-32.1 Certification of the President and Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. EX-32.2 Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
EX-4.1 2 k99361exv4w1.txt AMENDMENT NO. 3 DATED 11/4/05 TO NOTE PURCHASE AGREEMENT EXHIBIT 4.1 =============================================================================== EXECUTION COPY TECUMSEH PRODUCTS COMPANY AMENDMENT NO. 3 TO NOTE PURCHASE AGREEMENT DATED AS OF NOVEMBER 4, 2005 $300,000,000 ADJUSTABLE RATE SENIOR GUARANTEED NOTES DUE MARCH 5, 2011 =============================================================================== TECUMSEH PRODUCTS COMPANY $300,000,000 ADJUSTABLE RATE SENIOR GUARANTEED NOTES DUE MARCH 5, 2011 As of November 4, 2005 TO EACH OF THE CURRENT NOTEHOLDERS NAMED IN ANNEX 1 HERETO: Ladies and Gentlemen: TECUMSEH PRODUCTS COMPANY, a Michigan corporation (together with any successors and assigns, the "COMPANY"), hereby agrees with each of you as follows: 1. PRIOR ISSUANCE OF NOTES, ETC. The Company is a party to a certain Note Purchase Agreement dated as of March 5, 2003 with the purchasers named in Schedule A thereto, as amended by that certain Amendment and Waiver No. 1 to Note Purchase Agreement (the "FIRST AMENDMENT AGREEMENT") dated as of June 30, 2005, and that certain Amendment No. 2 to Note Purchase Agreement (the "SECOND AMENDMENT AGREEMENT") dated as of August 5, 2005 (as amended by the First Amendment Agreement and the Second Amendment Agreement, the "EXISTING NOTE PURCHASE AGREEMENT" and, as amended pursuant to this Agreement and as may be further amended, restated or otherwise modified from time to time, the "NOTE PURCHASE AGREEMENT") pursuant to which the Company issued and sold three hundred million dollars ($300,000,000) in aggregate principal amount of its 4.66% Senior Guaranteed Notes due March 5, 2011, which Notes were amended pursuant to the Second Amendment Agreement to be the Company's Adjustable Rate Senior Guaranteed Notes due March 5, 2011 (as amended, restated, modified or replaced from time to time, together with any such notes issued in substitution therefor pursuant to Section 13 of the Note Purchase Agreement, the "NOTES"). The Company represents and warrants to each of you that the register kept by the Company for the registration and transfer of the Notes indicates that each of the Persons named in Annex 1 hereto (collectively, the "CURRENT NOTEHOLDERS") is currently a holder of the aggregate principal amount of the Notes indicated in such Annex. 2. REQUEST FOR CONSENT TO AMENDMENTS. The Company requests that each of the Current Noteholders agree to the amendment of certain provisions of the Existing Note Purchase Agreement as provided for by Section 4 of this Agreement (the "AMENDMENTS"). 3. WARRANTIES AND REPRESENTATIONS. To induce the Current Noteholders to enter into this Agreement and to agree to the Amendments, the Company warrants and represents to you, as of the Effective Date, as follows (it being agreed, however, that nothing in this Section 3 shall affect any of the warranties and representations previously made by the Company in or pursuant to the Existing Note Purchase Agreement, and that all of such other warranties and representations, as well as the warranties and representations in this Section 3, shall survive the effectiveness of the Amendments). 3.1. NO MATERIAL ADVERSE CHANGE. Since the date of the financial statements of the Company filed with the Securities and Exchange Commission with the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2005 (the "Second Quarter 2005 Financial Statements"), there has been no change in the business operations, profits, financial condition, properties or business prospects of the Company except for an approximate $25 million reduction in profits and assets resulting from the establishment by the Company, during the fiscal quarter ended September 30, 2005, of a valuation allowance against deferred tax assets, as contemplated in footnote 11 to the Second Quarter 2005 Financial Statements, and except for changes that, in the aggregate, could not reasonably be expected to have a Material Adverse Effect. 3.2. FULL DISCLOSURE. Neither the financial statements and other certificates previously provided to the Current Noteholders pursuant to the provisions of the Existing Note Purchase Agreement nor the statements made in this Agreement nor the materials and information furnished by or on behalf of the Company to the Current Noteholders in connection with the proposal and negotiation of the Amendments, taken as a whole, contain any untrue statement of a material fact or omit a material fact necessary to make the statements contained therein and herein, taken as a whole, not misleading. There is no fact relating to any event or circumstance that has occurred or arisen since August 5, 2005 that the Company has not disclosed to the Current Noteholders in writing that has had or, so far as the Company can now reasonably foresee, could reasonably be expected to have, a Material Adverse Effect. All pro forma financial information, financial or other projections and forward-looking statements delivered to the Current Noteholders have been prepared in good faith by the Company based on reasonable assumptions. 3.3. SOLVENCY. The fair value of the business and assets of each of the Company and each Subsidiary Guarantor exceeds the amount that will be required to pay its respective liabilities (including, without limitation, contingent, subordinated, unmatured and unliquidated liabilities on existing debts, as such liabilities may become absolute and matured). Neither the Company nor the Subsidiary Guarantors is engaged in any business or transaction, or about to engage in any business or transaction, for which such Person has unreasonably small assets or capital (within the meaning of the Uniform Fraudulent Transfer Act, the Uniform Fraudulent Conveyance Act and Section 548 of the Federal Bankruptcy Code), and neither the Company nor the Subsidiary Guarantors has any intent to (a) hinder, delay or defraud any entity to which any of them is, or will become, on or after the Effective Date, indebted, or (b) incur debts that would be beyond any of their ability to pay as they mature. 3.4. NO DEFAULTS. No event has occurred and no condition exists that, upon the execution and delivery of this Agreement and the effectiveness of the Amendments, would constitute a Default or an Event of Default. 3.5. NO BANKRUPTCY FILING. Neither the Company nor any Subsidiary (a) is contemplating either an Insolvency Proceeding with respect to it or the liquidation of all or a major portion of its assets or property following the Effective Date and (b) has any knowledge of any Person contemplating an Insolvency Proceeding against it. As used herein, the term "Insolvency Proceeding" means any proceeding commenced by or against any Person under any provision of the United States Federal Bankruptcy Code or under any other bankruptcy or insolvency law, assignments for the benefit of creditors, formal or informal moratoria, compositions, or extensions generally with creditors, or proceedings seeking reorganization, arrangement, or other similar relief. 3.6. TITLE TO PROPERTIES. The Company and its Subsidiaries have good and sufficient title to or the legal right to use their respective properties that individually or in the aggregate are Material, including all such properties reflected in the most recent audited balance sheet of the Company delivered pursuant to the provisions of Section 7.1 of the Existing Note Purchase Agreement (except as sold or otherwise disposed of in the ordinary course of business) or purported to have been acquired by the Company or any Subsidiary after said date (except as sold or otherwise disposed of in the ordinary course of business), in each case free and clear of Liens not permitted by the Note Purchase Agreement. 3.7. TRANSACTION IS LEGAL AND AUTHORIZED; OBLIGATIONS ARE ENFORCEABLE. (a) The execution and delivery of this Agreement by the Company and compliance by the Company with all of its respective obligations hereunder: (i) is within the corporate powers of the Company; (ii) is legal and does not conflict with, result in any breach in any of the provisions of, constitute a default under, or result in the creation of any Lien upon any Property of the Company or any Subsidiary under the provisions of, any agreement, charter instrument, bylaw or other instrument to which it is a party or by which it or any of its Property may be bound; and (iii) does not give rise to a right or option of any other Person under any agreement or other instrument, which right or option could reasonably be expected to have a Material Adverse Effect. (b) This Agreement has been duly authorized by all necessary action on the part of the Company and has been executed and delivered by one or more duly authorized officers of the Company, and each constitutes a legal, valid and binding obligation of the Company, enforceable in accordance with its terms, except that such enforceability may be: (i) limited by applicable bankruptcy, reorganization, arrangement, insolvency, moratorium or other similar laws affecting the enforceability of creditors' rights generally; and (ii) subject to the availability of equitable remedies. 3.8. CERTAIN LAWS. The execution and delivery of this Agreement by the Company and the consummation of the transaction contemplated hereby: (a) is not subject to regulation under the Investment Company Act of 1940, as amended, the Public Utility Holding Company Act of 1935, as amended, the Transportation Acts, as amended, or the Federal Power Act, as amended, and (b) does not violate any provision of any statute or other rule or regulation of any Governmental Authority applicable to the Company or any Subsidiary. 3.9. LITIGATION; OBSERVANCE OF AGREEMENTS. (a) Other than the matters disclosed in the consolidated financial statements of the Company and its Subsidiaries for the fiscal year ended December 31, 2004 and the fiscal quarters ended March 31, 2005 and June 30, 2005 (and the footnotes thereto), there are no actions, suits or proceedings pending or, to the knowledge of the Company, threatened against or affecting the Company or any Subsidiary or any property of the Company or any Subsidiary in any court or before any arbitrator of any kind or before or by any Governmental Authority that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. (b) Other than the matters disclosed in the consolidated financial statements of the Company and its Subsidiaries for the fiscal year ended December 31, 2004 and the quarters ended March 31, 2005 and June 30, 2005 (and the footnotes thereto), neither the Company nor any Subsidiary is in default under any term of any order, judgment, decree or ruling of any court, arbitrator or Governmental Authority or is in violation of any applicable law, ordinance, rule or regulation (including, without limitation, Environmental Laws) of any Governmental Authority, which default or violation, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. 3.10. CHARTER INSTRUMENTS; OTHER AGREEMENTS. Neither the Company nor any Subsidiary is in violation in any respect of any term of any charter instrument or bylaw. Upon the execution and delivery hereof and the effectiveness of the Amendments as provided herein, neither the Company nor any Subsidiary is in violation or default in any material respect of any term in any agreement or other instrument to which it is a party or by which it or any of its material property may be bound or affected. The execution, delivery and performance by the Company of this Agreement will not conflict with or result in the breach of any of the terms, conditions or provisions of any order, judgment, decree or ruling of any court, arbitrator or Governmental Authority applicable to the Company or any Subsidiary or violate any provision of any statute or other rule or regulation of any Government Authority applicable to the Company or any Subsidiary. The Company represents that the Specified IRB Documents will be amended to conform certain terms thereof to the terms of the Credit Agreement, but no other material amendments to the Specified IRB Documents will be made. 3.11. TAXES. The Company and its Subsidiaries have filed all tax returns that are required to have been filed in any jurisdiction, and have paid all taxes shown to be due and payable on such returns and all other taxes and assessments levied upon them or their properties, assets, income or franchises, to the extent such taxes and assessments have become due and payable and before they have become delinquent, except for any taxes and assessments (a) the amount of which is not individually or in the aggregate Material or (b) the amount, applicability or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which the Company or a Subsidiary, as the case may be, has established adequate reserves in accordance with GAAP. The Company knows of no basis for any other tax or assessment that could reasonably be expected to have a Material Adverse Effect. The charges, accruals and reserves on the books of the Company and the Subsidiaries in respect of federal, state or other taxes for all fiscal periods are adequate. 3.12. GOVERNMENTAL CONSENT. Neither the Company or any Subsidiary thereof, nor the nature of any of its or their respective businesses or properties, is such so as to require a consent, approval or authorization of, or filing, registration or qualification with, any governmental authority on the part of the Company as a condition to the execution and delivery of this Agreement. 3.13. FEES. Neither the Company nor any Subsidiary thereof has paid (or promised to pay) any amendment fee or any other direct or indirect compensation to any lender, the arranger or the agent party to the Credit Agreement or to any other creditor of the Company or any Subsidiary (other than the Current Noteholders) in connection with the transactions contemplated hereby other than a fee of 0.5% on the outstanding balance as of March 31, 2006, if any, under the Credit Agreement, and a fee of 0.5% on the outstanding balance as of June 30, 2006, if any, under the Credit Agreement. 3.14. INDEBTEDNESS; LIENS. Schedule 3.14 to this Agreement correctly describes all Indebtedness of the Company and its Subsidiaries as of September 30, 2005. Schedule 3.14 to this Agreement correctly describes all outstanding Liens securing Indebtedness in an amount greater than $1,000,000 and all other material Liens on property of the Company or its Subsidiaries as of the date hereof. Neither the Company nor any Subsidiary is in default and no waiver of default is currently in effect, in the payment of any principal or interest on any Indebtedness of the Company or such Subsidiary listed on Schedule 3.14 hereto and no event or condition exists with respect to any Indebtedness of the Company or any Subsidiary listed on such schedule that would permit (or that with notice or the lapse of time, or both, would permit) one or more Persons to cause such Indebtedness to become due and payable before its stated maturity or before its regularly scheduled dates of payment, other than any such conditions under the Credit Agreement giving rise to the amendment thereof to be entered into contemporaneously herewith. 4. AMENDMENTS. 4.1. NOTE PURCHASE AGREEMENT AMENDMENTS. Subject to the satisfaction of the conditions set forth in Section 5, the Existing Note Purchase Agreement is hereby and shall be amended in the manner specified in Exhibit A to this Agreement (the "AMENDMENTS"). 4.2. NO OTHER AMENDMENTS; CONFIRMATION. Except as expressly provided herein, (a) no terms or provisions of any agreement are modified or changed by this Agreement, (b) the terms of this Agreement shall not operate as a waiver by any Current Noteholder of, or otherwise prejudice any Current Noteholder's rights, remedies or powers under, the Existing Note Purchase Agreement, the Notes or any other Financing Document or under any applicable law, and (c) the terms and provisions of the Existing Note Purchase Agreement, the Notes and each other Financing Document shall continue in full force and effect. 5. CONDITIONS TO EFFECTIVENESS; POST-CLOSING OBLIGATIONS. (a) Conditions to Effectiveness. This Agreement shall become effective on November 4, 2005 (the "EFFECTIVE DATE") provided that the Company and the Required Holders shall have indicated their written consent hereto by executing and delivering the applicable counterparts of this Agreement in accordance with Section 17.1 of the Existing Note Purchase Agreement. It is understood that any Current Noteholder may withhold its consent for any reason or for no reason, and that, without limitation of the foregoing, any Current Noteholder hereby makes the granting of its consent contingent upon satisfaction of each of the following conditions: (i) the Company shall have entered into and delivered to each of the Current Noteholders a true and correct copy of an amendment to the Credit Agreement entered into on the date hereof, providing for corresponding amendments (as applicable) to the Amendments provided for herein, together with all agreements and documents executed in connection therewith, in form and substance satisfactory to the Current Noteholders; (ii) the Company shall have pledged to the Collateral Agent for the benefit of the holders of Notes and the lenders party to the Credit Agreement 65% of each class of the issued and outstanding capital stock of each Material Foreign Subsidiary (as defined in the Second Amendment Agreement) pursuant to agreements duly executed and delivered by it to the Collateral Agent or its counsel, together with such other documents as are required under local law to create a valid, enforceable and perfected lien on such stock (except that, with respect to the Company's Indian Subsidiary, delivery of faxed copies of such documents shall have been provided, with a commitment to deliver the originals thereof on the next business day) in form and substance satisfactory to the Collateral Agent and the Current Noteholders; (iii) the Company shall have delivered a certificate of one of its Senior Financial Officers (A) attaching projections of Consolidated EBITDA and Consolidated Capital Expenditures for each fiscal quarter of the Company during the Specified Compliance Period, (B) acknowledging that such projections are the "Covenant Compliance Projections" referred to in the Note Purchase Agreement and (C) certifying that such projections contained therein have been prepared by the Company on the basis of assumptions which the Company reasonably believes are reasonable in light of the historical performance of the Company and its Subsidiaries and reasonably foreseeable business conditions, in form and substance (including the Covenant Compliance Projections) satisfactory to the Current Noteholders; (iv) the Company shall have delivered legal opinions of Miller, Canfield, Paddock and Stone, PLC and of Daryl McDonald, general counsel to the Company, with respect to such matters as the Current Noteholders may reasonably request and otherwise in form and substance satisfactory to them; and (v) the Company shall have entered into and delivered to each of the Current Noteholders a true and correct copy of the following, each in form and substance satisfactory to the Current Noteholders: (A) a revised engagement agreement with Bingham McCutchen LLP ("BINGHAM"), special counsel to the Current Noteholders; and (B) a revised engagement agreement with Conway, Del Genio, Gries & Co. LLC ("CDG"), financial advisor to the Current Noteholders, providing for the engagement of CDG as of October 26, 2005. (b) Post Closing Obligations. On or before November 7, 2005, the Company shall have: (i) in accordance with the terms of the revised engagement agreement between Bingham and the Company referred to in Section 5(a)(v)(A) above, paid the fee reserve described therein, and all unpaid fees and other amounts and disbursements of Bingham for which invoices were presented to the Company on or before November 4, 2005; and (ii) in accordance with the terms of the revised engagement agreement between CDG and the Company referred to above in Section 5(a)(v)(B), paid the retainer and initial monthly fee described therein, and paid all unpaid fees and other amounts due to CDG and shall have reimbursed CDG for all of its reasonable out-of-pocket expenses in connection with the transactions contemplated hereby for which invoices were presented to the Company on or before November 4, 2005. Any amendment entered into in connection with the transaction contemplated hereby shall be in form and substance satisfactory to the Required Holders, provided that execution and delivery of this Agreement by the Required Holders shall be deemed to be an affirmation that such amendment is so satisfactory. 6. DEFINED TERMS. Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the Note Purchase Agreement. 7. EXPENSES; FEE. (a) Whether or not any of the Amendments becomes effective, the Company will promptly (and in any event within thirty (30) days of receiving any statement or invoice therefor) pay all fees, expenses and costs relating to this Agreement, including, but not limited to, (i) the reasonable cost of reproducing this Agreement and the other documents delivered in connection herewith, (ii) the reasonable fees and other amounts and disbursements of Bingham, incurred in connection with the preparation, negotiation and delivery of this Agreement and the documents contemplated hereby, to the extent not paid pursuant to Section 5(f) above and (iii) the fees and other amounts and disbursements of CDG. This Section 7 shall not be construed to limit the Company's obligations under Section 15.1 of the Note Purchase Agreement. (b) In consideration of the Amendments provided herein, the Company shall pay to each holder of Notes a fee, on March 31, 2006, equal to 1% of the aggregate outstanding principal amount of Notes held by such holder on such date, in each case payable by wire transfer of immediately available funds to the account and in accordance with the instructions for payments in respect of the Notes held by such holder set forth in Schedule A to the Note Purchase Agreement, or in accordance with such other instructions provided by such holder to the Company in writing. 8. MISCELLANEOUS. 8.1. ACKNOWLEDGEMENT OF INTEREST RATE. The Company hereby acknowledges and agrees that, prior to giving effect to this Agreement, it was not in compliance with Section 10.14 of the Note Purchase Agreement and therefore has not met the Applicable Rate Reduction Criteria, and that, as a result of such non-compliance, the Applicable Interest Rate under the Note Purchase Agreement is and shall remain 6.60% per annum. Notwithstanding the foregoing, the Current Noteholders acknowledge and affirm that for purposes of determining the "Remaining Scheduled Payments" (as defined in Section 8.7 of the Note Purchase Agreement) with respect to any Note in determining the Make-Whole Amount with respect thereto, such determination shall be made assuming the Applicable Interest Rate were 4.66% per annum, as agreed in the Second Amendment Agreement. 8.2. WAIVERS. (a) Conditional Waiver. The Current Noteholders hereby agree that if an Event of Default exists and a lender or lenders, or group of lenders, contemplating making a loan or loans to the Company requires as the sole remaining condition to funding such loan or loans that the Current Noteholders waive such Event of Default, then the Current Noteholders will, without compensation, provide such a waiver, but only if the Notes are paid in full (including accrued interest and any applicable Make-Whole Amount) from the proceeds of such loan or loans contemporaneously with the giving of such waiver. (b) Credit Agreement Leverage Ratio. The Current Noteholders hereby agree that the leverage ratio (the "EXISTING BANK LEVERAGE RATIO") set forth in Section 6.19.2 of the Credit Agreement prior to giving effect to the Second Amendment to Credit Agreement, dated as of the date hereof, between the Company and the lenders party to the Credit Agreement (the "SECOND CREDIT AGREEMENT AMENDMENT"), which was deemed to be incorporated into the Note Purchase Agreement pursuant to Section 10.15 thereof (the "MOST FAVORED LENDER COVENANT") shall be deemed to be removed from the Note Purchase Agreement. For the avoidance of doubt, the deemed removal of the Existing Bank Leverage Ratio from the Note Purchase Agreement shall in no way limit the operation of the Most Favored Lender Covenant to any other provision of any More Favorable Lending Agreement, including without limitation, the leverage ratio (the "NEW BANK LEVERAGE RATIO") set forth in Section 6.19.2 of the Credit Agreement, after giving effect to the Second Credit Agreement Amendment, which ratio shall be deemed to be incorporated into the Note Purchase Agreement under the Most Favored Lender Covenant. 8.3. FURTHER ASSURANCES. Without in any way limiting the obligations of the Company and its Subsidiaries under the Security Agreement, the Company and its Subsidiaries shall take all further commercially reasonable action requested by the Collateral Agent or the Current Noteholders to create valid, enforceable and perfected liens in favor of the Collateral Agent on 65% of each class of the issued and outstanding capital stock of each Material Foreign Subsidiary. 8.4. PART OF NOTE PURCHASE AGREEMENT, FUTURE REFERENCES, ETC. This Agreement shall be construed in connection with and as a part of the Existing Note Purchase Agreement and, except as expressly amended by this Agreement, all terms, conditions and covenants contained in the Existing Note Purchase Agreement, the Notes and the other Financing Documents are hereby ratified and shall be and remain in full force and effect. Any and all notices, requests, certificates and other instruments executed and delivered after the execution and delivery of this Agreement may refer to the Note Purchase Agreement without making specific reference to this Agreement, but nevertheless all such references shall include this Agreement unless the context otherwise requires. 8.5. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAW OF THE STATE OF MICHIGAN, UNITED STATES OF AMERICA, EXCLUDING CHOICE-OF-LAW PRINCIPLES OF THE LAW OF SUCH STATE THAT WOULD REQUIRE THE APPLICATION OF THE LAWS OF A JURISDICTION OTHER THAN SUCH STATE. 8.6. DUPLICATE ORIGINALS, EXECUTION IN COUNTERPART. Two (2) or more duplicate originals hereof may be signed by the parties, each of which shall be an original but all of which together shall constitute one and the same instrument. This Agreement may be executed in one or more counterparts and shall become effective at the time provided in Section 5 hereof, and each set of counterparts that, collectively, show execution by the Company and each consenting Current Noteholder shall constitute one duplicate original. 8.7. BINDING EFFECT. This Agreement shall be binding upon and shall inure to the benefit of the Company and the Current Noteholders and their respective successors and assigns. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK; NEXT PAGE IS SIGNATURE PAGE.] If this Agreement is satisfactory to you, please so indicate by signing the applicable acceptance on a counterpart hereof and returning such counterpart to the Company, whereupon this Agreement shall become binding among the Company and you in accordance with its terms. Very truly yours, TECUMSEH PRODUCTS COMPANY By: /s/ James S. Nicholson Name: James S. Nicholson Title: Vice President, Treasurer & CFO Accepted: NEW YORK LIFE INSURANCE COMPANY By: /s/ Lisa A. Scuderi Name: Lisa A. Scuderi Title: Investment Vice President NEW YORK LIFE INSURANCE AND ANNUITY CORPORATION BY: NEW YORK LIFE INVESTMENT MANAGEMENT LLC, ITS INVESTMENT MANAGER By: /s/ Lisa A. Scuderi Name: Lisa A. Scuderi Title: Investment Vice President NEW YORK LIFE INSURANCE AND ANNUITY CORPORATION INSTITUTIONALLY OWNED LIFE INSURANCE SEPARATE ACCOUNT BY: NEW YORK LIFE INVESTMENT MANAGEMENT LLC, ITS INVESTMENT MANAGER By: /s/ Lisa A. Scuderi Name: Lisa A. Scuderi Title: Investment Vice President [Signature Page to Amendment No. 3 to Note Purchase Agreement] STATE FARM LIFE INSURANCE COMPANY By: /s/ Jeffrey Attwood Name: Jeffrey Attwood Title: Investment Officer By: /s/ Larry Rottunda Name: Larry Rottunda Title: Assistant Secretary STATE FARM LIFE AND ACCIDENT ASSURANCE COMPANY By: /s/ Jeffrey Attwood Name: Jeffrey Attwood Title: Investment Officer By: /s/ Larry Rottunda Name: Larry Rottunda Title: Assistant Secretary GENERAL ELECTRIC CAPITAL ASSURANCE COMPANY By: /s/ Morian C. Mooers Name: Morian C. Mooers Title: Investment Officer GE CAPITAL LIFE ASSURANCE COMPANY OF NEW YORK By: /s/ Morian C. Mooers Name: Morian C. Mooers Title: Investment Officer EMPLOYERS REINSURANCE CORPORATION BY: GE ASSET MANAGEMENT INCORPORATED, ITS INVESTMENT MANAGER BY: GENWORTH FINANCIAL ASSET MANAGEMENT, LLC, ITS INVESTMENT ADVISOR By: /s/ Morian C. Mooers Name: Morian C. Mooers Title: Investment Officer FIRST COLONY LIFE INSURANCE COMPANY By: /s/ Morian C. Mooers Name: Morian C. Mooers Title: Investment Officer GE LIFE AND ANNUITY ASSURANCE COMPANY By: /s/ Morian C. Mooers Name: Morian C. Mooers Title: Investment Officer GREAT-WEST LIFE & ANNUITY INSURANCE COMPANY By: /s/ Tad Anderson Name: Tad Anderson Title: Ass't. Vice President, Investments By: /s/ J.G. Lowery Name: J.G. Lowery Title: Ass't. Vice President, Investments LONDON LIFE AND CASUALTY (BARBADOS) CORPORATION BY: ORCHARD CAPITAL MANAGEMENT, LLC, AS INVESTMENT ADVISER By: /s/ Wayne Hoffmann Name: Wayne Hoffmann Title: Senior Vice President, Investments By: /s/ Tad Anderson Name: Tad Anderson Title: Ass't. Vice President, Investments LONDON LIFE INSURANCE COMPANY By: /s/ W.J. Sharman Name: W.J. Sharman Title: Authorized Signatory By: /s/ D.B. Bergen Name: D.B. Bergen Title: Authorized Signatory THE GREAT-WEST LIFE ASSURANCE COMPANY By: /s/ W.J. Sharman Name: W.J. Sharman Title: Authorized Signatory By: /s/ D.B. Bergen Name: D.B. Bergen Title: Authorized Signatory PACIFIC LIFE INSURANCE COMPANY (NOMINEE: MAC & CO.) By: /s/ Cathy Schwartz Name: Cathy Schwartz Title: Assistant Vice President By: /s/ David C. Patch Name: David C. Patch Title: Assistant Secretary JEFFERSON-PILOT LIFE INSURANCE COMPANY By: ---------------------------------- Name: Title: JEFFERSON PILOT FINANCIAL INSURANCE COMPANY By: ---------------------------------- Name: Title: JEFFERSON PILOT LIFEAMERICA INSURANCE COMPANY By: ---------------------------------- Name: Title: MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY BY: BABSON CAPITAL MANAGEMENT LLC, AS INVESTMENT ADVISER By: /s/ Elisabeth A. Perenick Name: Elisabeth A. Perenick Title: Managing Director C.M. LIFE INSURANCE COMPANY BY: BABSON CAPITAL MANAGEMENT LLC, AS INVESTMENT SUB-ADVISER By: /s/ Elisabeth A. Perenick Name: Elisabeth A. Perenick Title: Managing Director MASSMUTUAL ASIA LIMITED BY: BABSON CAPITAL MANAGEMENT LLC, AS INVESTMENT ADVISER By: /s/ Elisabeth A. Perenick Name: Elisabeth A. Perenick Title: Managing Director ALLSTATE LIFE INSURANCE COMPANY By: /s/ Robert B. Bodett Name: B. Bodett By: /s/ Jerry D. Zinkula Name: Jerry D. Zinkula Authorized Signatories ALLSTATE LIFE INSURANCE COMPANY OF NEW YORK By: /s/ Robert B. Bodett Name: B. Bodett By: /s/ Jerry D. Zinkula Name: Jerry D. Zinkula Authorized Signatories AMERICAN HERITAGE LIFE INSURANCE COMPANY By: /s/ Robert B. Bodett Name: B. Bodett By: /s/ Jerry D. Zinkula Name: Jerry D. Zinkula Authorized Signatories NATIONWIDE LIFE INSURANCE COMPANY NATIONWIDE LIFE AND ANNUITY INSURANCE COMPANY NATIONWIDE MUTUAL INSURANCE COMPANY By: /s/ Mark W. Poeppelman Name: Mark W. Poeppelman Title: Authorized Signatory TRANSAMERICA LIFE INSURANCE COMPANY By: /s/ Bill Henricksen Name: Bill Henricksen Title: Vice President TRANSAMERICA OCCIDENTAL LIFE INSURANCE COMPANY By: /s/ Bill Henricksen Name: Bill Henricksen Title: Vice President HARTFORD LIFE INSURANCE COMPANY, AND HARTFORD UNDERWRITERS INSURANCE COMPANY BY: HARTFORD INVESTMENT SERVICES, INC., AS AGENT AND ATTORNEY-IN-FACT By: /s/ Ronald A. Mendel Name: Ronald A. Mendel Title: Managing Director AMERICAN UNITED LIFE INSURANCE COMPANY By: /s/ Michael Bullock Name: Michael Bullock Title: V.P. Private Placements PIONEER MUTUAL LIFE INSURANCE COMPANY BY: AMERICAN UNITED LIFE INSURANCE COMPANY, ITS AGENT By: /s/ Michael Bullock Name: Michael Bullock Title: V.P. Private Placements THE STATE LIFE INSURANCE COMPANY BY: AMERICAN UNITED LIFE INSURANCE COMPANY, ITS AGENT By: /s/ Michael Bullock Name: Michael Bullock Title: V.P. Private Placements AMERITAS LIFE INSURANCE CORP. BY: AMERITAS INVESTMENT ADVISORS, INC., AS AGENT By: /s/ Andrew S. White Name: Andrew S. White Title: Vice President, Fixed Income Securities ACACIA NATIONAL LIFE INSURANCE COMPANY BY: AMERITAS INVESTMENT ADVISORS, INC., AS AGENT By: s/ Andrew S. White Name: Andrew S. White Title: Vice President, Fixed Income Securities AMERITAS VARIABLE LIFE INSURANCE COMPANY BY: AMERITAS INVESTMENT ADVISORS, INC., AS AGENT By: /s/ Andrew S. White Name: Andrew S. White Title: Vice President, Fixed Income Securities The undersigned Guarantors hereby acknowledge and agree to the terms and provisions contained herein, agree to be bound by the terms of Section 4 hereof, and consent to the Company's execution hereof: CONVERGENT TECHNOLOGIES INTERNATIONAL, INC. DOUGLAS HOLDINGS, INC. EVERGY, INC. FASCO INDUSTRIES, INC. LITTLE GIANT PUMP CO. MANUFACTURING DATA SYSTEMS, INC. MP PUMPS, INC. TECUMSEH CANADA HOLDING COMPANY TECUMSEH COMPRESSOR COMPANY TECUMSEH INVESTMENTS INC. TECUMSEH POWER COMPANY TECUMSEH PUMP COMPANY VON WEISE GEAR COMPANY TECUMSEH DO BRAZIL USA, LLC By: /s/ James S. Nicholson Name: James S. Nicholson Title: Vice President and Treasurer EUROMOTOR, INC. By: /s/ James S. Nicholson Name: James S. Nicholson Title: Vice President HAYTON PROPERTY COMPANY, LLC BY: TECUMSEH PRODUCTS COMPANY, ITS SOLE MEMBER By: /s/ James S. Nicholson Name: James S. Nicholson Title: Vice President, Treasurer and Chief Financial Officer ANNEX 1 CURRENT NOTEHOLDERS AND PRINCIPAL AMOUNTS
NAME OF CURRENT NOTEHOLDER OUTSTANDING PRINCIPAL AMOUNT OF NOTES HELD AT JUNE 30, 2005 - ---------------------------------------------------------------- ------------------------------- New York Life Insurance Company $23,333,333.33 New York Life Insurance and Annuity Corporation $13,750,000.00 New York Life Insurance and Annuity Corporation $416,666.66 Institutionally Owned Life Insurance Separate Account State Farm Life Insurance Company $31,666,666.67 State Farm Life and Accident Assurance Company $1,666,666.67 Hare & Co. $12,500,000.00 (as nominee for General Electric Capital Assurance Company) Hare & Co. $4,166,666.67 (as nominee for GE Capital Life Assurance Company of New York) Cudd & Co. $4,166,666.67 (as nominee for Employers Reinsurance Corporation) Hare & Co. $4,166,666.67 (as nominee for First Colony Life Insurance Company) Hare & Co. $4,166,666.67 (as nominee for GE Life and Annuity Assurance Company) Great-West Life & Annuity Insurance Company $12,500,000.00 London Life Insurance Company $8,333,333.33 Mac & Co. $4,166,666.67 (as nominee for The Great-West Life Assurance Company) London Life and Casualty (Barbados) Corporation $4,166,666.67 Mac & Co. (as nominee for Pacific Life Insurance Company) $20,833,333.33 Jefferson-Pilot Life Insurance Company $7,500,000.00 Jefferson Pilot Financial Insurance Company $5,833,333.33 Jefferson Pilot Life America Insurance Company $3,333,333.34 Massachusetts Mutual Life Insurance Company $13,583,333.32 C.M. Life Insurance Company $2,666,666.67 Gerlach & Co. $416,666.67 (as nominee for MassMutual Asia) Allstate Life Insurance Company $10,000,000.00
Annex 1-1
NAME OF CURRENT NOTEHOLDER OUTSTANDING PRINCIPAL AMOUNT OF NOTES HELD AT JUNE 30, 2005 - ---------------------------------------------------------------- ------------------------------- Allstate Life Insurance Company of New York $4,166,667.00 American Heritage Life Insurance Company $2,500,000.00 Nationwide Life Insurance Company $7,500,000.00 Nationwide Life and Annuity Insurance Company $6,250,000.00 Nationwide Mutual Insurance Company $2,916,666.67 Transamerica Life Insurance Company $9,375,000.00 Transamerica Occidental Life Insurance Company $3,125,000.00 Hartford Life Insurance Company $6,666,666.66 Hartford Underwriters Insurance Company $3,333,333.33 American United Life Insurance Company $6,250,000.00 Pioneer Mutual Life Insurance Company $625,000.00 The State Life Insurance Company $625,000.00 Ameritas Life Insurance Corp. $1,666,666.67 Chimebridge & Company $833,333.33 (as nominee for Acacia National Life Insurance Company) Ameritas Variable Life Insurance Company $833,333.33
Annex 1-2 SCHEDULE 3.14 EXISTING INDEBTEDNESS AND LIENS [TO BE ATTACHED] Schedule 3.14-1 EXHIBIT A AMENDMENTS TO EXISTING NOTE PURCHASE AGREEMENT 1. Section 7.1(a) of the Existing Note Purchase Agreement is hereby amended by deleting the first three lines thereof and replacing them with the following: "(a) Quarterly Statements - with respect to each quarterly fiscal period in each fiscal year of the Company, on the earlier of (x) the date the Company files its Quarterly Report on Form 10-Q with the Securities and Exchange Commission and (y) 40 days after the end of such quarterly fiscal period, beginning with the quarterly fiscal period ending December 31, 2005, duplicate copies of:" 2. Section 7.1(h)(i) of the Existing Note Purchase Agreement is hereby amended by adding "(1)" after the phrase "which sets forth in reasonable detail" in the third line thereof and adding the following to the end of such Section, immediately prior to the semi-colon: ", and (2) a calculation of Consolidated EBITDA for the period of 12 fiscal months of the Company ending on the last day of such fiscal month and for the period beginning on the first day of the then current fiscal year of the Company and ending on the last day of such fiscal month" 3. Section 8.8(a) of the Existing Note Purchase Agreement is hereby amended by deleting the amount "$15,000,000" appearing in the fifth line thereof and replacing it with "$7,500,000". 4. Section 10.10(e) of the Existing Note Purchase Agreement is hereby amended by deleting the amount "$15,000,000" appearing in the fifth line thereof and replacing it with "$7,500,000". 5. Section 10.13 of the Existing Note Purchase Agreement is hereby amended to read in its entirety as follows: "Section 10.13. Bank Credit Facility. (a) The Company will not, at any time, permit the aggregate commitment of the Lenders under its Primary Credit Facility to be less than $75,000,000. (b) The Company will not permit the aggregate commitment of the Lenders under its Primary Credit Facility, or the aggregate principal amount of Indebtedness outstanding thereunder, to be: (i) greater than $100,000,000 at any time during the Specified Compliance Period; and (ii) greater than $200,000,000 at any other time. Exhibit A-1 (c) The Company and its Subsidiaries will be permitted to (and shall, on or prior to December 21, 2009) refinance the credit facilities provided under the Credit Agreement, but shall do so only in accordance with the terms of the Intercreditor Agreement." 6. Section 12.2 of the Existing Note Purchase Agreement is hereby amended by adding the following proviso immediately prior to the period at the end of such Section: "; provided, however, that the rights of each holder of Notes with respect to any collateral securing the Notes for which a Lien has been granted to the Collateral Agent, and any other rights, powers and remedies under any of the Security Documents, shall be exercised solely in accordance with the terms of the Intercreditor Agreement" 7. The definition of "Initial Projections" appearing in Schedule B to the Existing Note Purchase Agreement is hereby deleted, and each reference to the "Initial Projections" in the Existing Note Purchase Agreement shall be deemed to be a reference to the "Covenant Compliance Projections" (as defined below in Section 10 of this Exhibit A). 8. The definition of "Permitted Senior Secured Debt" appearing in Schedule B to the Existing Note Purchase Agreement is hereby amended and restated to read in its entirety as follows: "Permitted Senior Secured Debt" shall have the meaning ascribed to the term "Secured Obligations" in the Intercreditor Agreement." 9. The definition of "Projected Consolidated EBITDA" appearing in Schedule B to the Existing Note Purchase Agreement is hereby amended by deleting the references to "Required Business Percentage" and "Required Securitization Segments Percentage" and replacing such references with "Remaining Business Percentage" and "Remaining Securitization Segments Percentage", respectively. 10. The definition of "Specified Covenant Reversion Condition" appearing in Schedule B to the Existing Note Purchase Agreement is hereby amended and restated in its entirety to read as follows: ""Specified Covenant Reversion Condition" means compliance by the Company in all respects with the terms and conditions of this Agreement at all times during the period beginning on (and including) the Second Amendment Effective Date and ending on (and including) December 31, 2006, without giving effect to any non-compliance by the Company with the terms of Section 10.14 of the Agreement prior to the effectiveness of the Third Amendment other than for purposes of determining if the Applicable Rate Reduction Criteria have been met." 11. The following new definitions are hereby added to Schedule B of the Existing Note Purchase Agreement to appear in their appropriate alphabetical places: Exhibit A-2 ""Covenant Compliance Projections" means the projections of Consolidated EBITDA and Consolidated Capital Expenditures delivered to the holders of the Notes pursuant to Section 5(c) of the Third Amendment." ""Third Amendment" means Amendment No. 3 to Note Purchase Agreement dated as of November 4, 2005 by and among the Company and the Required Holders." Exhibit A-3 EX-4.2 3 k99361exv4w2.txt SECOND AMENDMENT DATED 11/4/05 TO CREDIT AGREEMENT EXHIBIT 4.2 Execution Copy SECOND AMENDMENT TO CREDIT AGREEMENT THIS SECOND AMENDMENT TO CREDIT AGREEMENT, dated as of November 4, 2005 (this "Amendment"), is among Tecumseh Products Company, a Michigan corporation (the "Borrower"), the Lenders party hereto and JPMorgan Chase Bank, N.A., as agent for the Lenders (in such capacity, the "Agent"). RECITAL The Borrower, the Lenders party thereto and the Agent are parties to a Credit Agreement dated as of December 21, 2004, as modified by a waiver letter dated June 30, 2005 and a First Amendment dated August 5, 2005 (the "Credit Agreement"). The Borrower and the Guarantors desire to amend the Credit Agreement and the Agent and the Lenders are willing to do so in accordance with the terms hereof. TERMS In consideration of the premises and of the mutual agreements herein contained, the parties agree as follows: ARTICLE 1. AMENDMENTS The Credit Agreement shall be amended as follows: 1.1 The following definitions are added to the Credit Agreement in appropriate alphabetical order: "Second Amendment" means the Second Amendment to this Agreement dated as of the Second Amendment Effective Date. "Second Amendment Effective Date" shall mean November 4, 2005. 1.2 The following definition in the Credit Agreement is restated as follows: "Second Amendment Financial Certificate" means a separate certificate delivered by the Borrower to the Lenders dated the Second Amendment Effective Date and identified as the "Second Amendment Financial Certificate", together with any Supplemental Projections delivered under this Agreement. 1.3 All references in the Credit Agreement to "First Amendment Financial Certificate" shall be deleted and "Second Amendment Financial Certificate" shall be substituted in each place thereof. 1.4 Section 2.2(ii) is amended by deleting reference therein to "$15,000,000" and substituting "$7,500,000" in place thereof. -1- 1.5 Section 5.5 is restated as follows: 5.5. Material Adverse Change. Since the date of the financial statements of the Borrower filed with the Securities and Exchange Commission with the Borrower's Quarterly Report on Form 10-Q for the period ended June 30, 2005 (the "Second Quarter 2005 Financial Statements"), there has been no change in the business, Property, prospects, condition (financial or otherwise) or results of operations of the Borrower and its Subsidiaries which, except for an approximate $25,000,000 reduction in profits and assets resulting from the establishment by the Company, during the fiscal quarter ended September 30, 2005, of a valuation allowance against deferred tax assets, as contemplated in footnote 11 to the Second Quarter 2005 Financial Statements, could reasonably be expected to have a Material Adverse Effect, except as disclosed in the SEC Reports. 1.6 Section 6.1(ii) is restated as follows: (ii) For each of the first three quarterly periods of each of its fiscal years, upon the earlier of the date 40 days after the close of each such quarterly period and the date the Company files its quarterly report on Form 10-Q with the Securities and Exchange Commission for such quarterly period, for itself and its Subsidiaries, consolidated unaudited balance sheets as at the close of each such period and consolidated profit and loss and reconciliation of surplus statements and a statement of cash flows for the period from the beginning of such fiscal year to the end of such quarter, all certified by its chief financial officer. 1.7 Section 6.1(x) is hereby amended by adding the following proviso to the end of such Section: "; provided, however that such reporting package shall also contain a calculation in reasonable detail of Consolidated EBITDA for the period of 12 fiscal months of the Borrower ending on the last day of such fiscal month and for the period beginning on the first day of the then current fiscal year of the Borrower and ending on the last day of such fiscal month" 1.8 Section 6.13(vi) is restated as follows: (vi) Other leases, sales or other dispositions of its Property that, together with all other Property of the Borrower and its Subsidiaries previously leased, sold or disposed of (other than inventory in the ordinary course of business) as permitted by this clause (vi) shall be less than: (a) in the 2005 or 2006 fiscal year of the Borrower, $7,500,000 in the aggregate for each such fiscal year, based on the Net Cash Proceeds received by the Borrower or any of its Subsidiaries from the lease, sale or other disposition of such Property, (b) in any fiscal year of the Borrower thereafter, 15% of the consolidated assets of the Borrower and its Subsidiaries or Property which is responsible for more than 15% of the consolidated net sales or of the consolidated net income of the Borrower and its Subsidiaries, in each case, as would be shown in the consolidated financial statements of the Borrower and its Subsidiaries as of the end of the immediately preceding fiscal year, and (c) cumulatively after the date hereof, 30% of the consolidated assets of the Borrower and its Subsidiaries or Property which is responsible for more than 30% of the consolidated net sales or of the consolidated net income of the Borrower and its Subsidiaries, in each case, as would be shown in the consolidated financial statements of the Borrower and its Subsidiaries as of the end -2- of the most recent fiscal quarter ending prior to the date hereof, provided that, immediately before and after any such transaction, no Default or Unmatured Default shall exist or shall have occurred and be continuing. Notwithstanding the foregoing, and in addition to any other restrictions contained herein, the Borrower will not, nor will permit its Subsidiary to lease, sell or otherwise dispose of its Property to any other person if such lease, sale or other disposition is not permitted by the 2003 Senior Note Documents. 1.9 Section 6.19.2 is restated as follows: 6.19.2. Leverage Ratio. The Borrower will not permit the Leverage Ratio to be greater than 3.0:1.0 at any time on or after March 31, 2007. 1.10 Section 6.19.6 is amended by deleting reference therein to "December 31, 2006" and substituting "March 30, 2007" in place thereof. 1.11 Sections 6.21 and 6.22 added pursuant to the First Amendment and inadvertently designated as Sections 6.20 and 6.21 are re-designated as Sections 6.21 and 6.22, respectively, and such Section 6.22 is restated as follows: 6.22 Optional Payments and Modification of Debt. The Borrower will not, nor will it permit any Subsidiary to, (i) make any optional payment, defeasance (whether a covenant defeasance, legal defeasance or other defeasance), prepayment, repurchase (including without limitation any offer to repurchase) or other optional redemption of any 2003 Senior Note Debt or IRB Debt, unless, concurrently therewith, all other Secured Obligations are paid in full, (ii) enter into any agreement restricting the ability of the Borrower and its Subsidiaries to amend or modify any Loan Document, (iii) enter into any agreement or arrangement requiring any defeasance of any kind of any 2003 Senior Note Debt or IRB Debt or (iv) pay or agree to pay any fee, interest or other compensation or consideration (other than as required under the 2003 Senior Note Documents and IRB Documents delivered to the Lenders prior to the First Amendment Effective Date and under Amendment No. 3 to the 2003 Note Purchase Agreement delivered to the Lenders pursuant to Section 3.3 of the Second Amendment (which means that any fees in the documents delivered to the Agent and the Lenders under Section 3.3 of the Second Amendment are permitted to be paid, which the Agent and the Lenders understand to be the fees payable to Bingham McCutchen LLP and Conway, Del Genio, Gries & Co., LLC agreed to by the Borrower and the fee payable on March 31, 2006 under Section 7(b) of such Amendment No. 3) to any purchaser or other holder of the 2003 Senior Note Debt or IRB Debt. ARTICLE 2. REPRESENTATIONS The Borrower represents and warrants to the Agent and the Lenders that: 2.1 The execution, delivery and performance of this Amendment are within its powers, have been duly authorized by the Borrower and are not in contravention of any Requirement of Law. This Amendment is the legal, valid and binding obligations of the Borrower, enforceable against it in accordance with the terms thereof, except to the extent the enforcement thereof may be limited by bankruptcy, insolvency or similar laws affecting the enforcement of creditors' rights generally. -3- 2.2 After giving effect to the amendments and waiver herein contained and the amendment to the 2003 Note Purchase Agreement delivered under Section 3.3 below and previously received waiver to the IRB Documents dated August 5, 2005, the representations and warranties contained in the Credit Agreement and the representations and warranties contained in the other Loan Documents are true on and as of the date hereof with the same force and effect as if made on and as of the date hereof, except to the extent any such representation or warranty is stated to relate solely to an earlier date, in which case such representation or warranty shall have been true and correct on and as of such earlier date, and no Default or Unmatured Default exists or has occurred and is continuing on the date hereof. 2.3 Complete and correct copies of Amendment No. 3 to 2003 Note Purchase Agreement and all agreements and documents executed in connection therewith have been delivered to the Lenders and such amendment and other agreements and documents are being executed simultaneously herewith, and neither the Borrower nor any Subsidiary thereof has paid (or promised to pay) any amendment fee or any other direct or indirect compensation to any party to the 2003 Note Purchase Documents or the IRB Documents or any of their respective Affiliates, attorneys, agents, consultants or other representatives (other than as set forth in such amendment and other agreements and documents, which means that any fees in the documents delivered to the Agent and the Lenders under Section 3.3 below are permitted to be paid, which the Agent and the Lenders understand to be the fees payable to Bingham McCutchen LLP and Conway, Del Genio, Gries & Co., LLC agreed to by the Borrower and the fee payable on March 31, 2006 under Section 7(b) of such Amendment No. 3) or to any other creditor of the Borrower or any Subsidiary in connection with the transactions contemplated thereby. No amendment, waiver or other modification is being made to the IRB Documents as of the date hereof and there is no default under the IRB Documents, provided that the Borrower represents that the IRB Documents will be amended to conform certain terms thereof to the Credit Agreement but no other material amendments to the IRB Documents will be made. 2.4 All Subsidiaries that are Guarantors (per the definition of Guarantor) have duly executed and delivered a Guaranty and are parties to the Consent and Agreement attached hereto. ARTICLE 3. CONDITIONS PRECEDENT. This Amendment shall become effective as of the date hereof, provided that each of the following has been satisfied: 3.1 This Amendment shall be signed by the Borrower, the Agent and the Required Lenders. 3.2 Each Guarantor shall have executed the Consent and Agreement attached hereto. 3.3 The Lenders shall have received an amendment to the 2003 Note Purchase Agreement and all agreements and documents executed in connection therewith, and all such amendments and waivers and other agreements and documents shall be executed simultaneously herewith and shall be satisfactory to the Required Lenders. 3.4 The Lenders shall have received the Second Amendment Financial Certificate, and such Second Amendment Financial Certificate shall be satisfactory to the Required Lenders. -4- 3.5 The Borrower and the Guarantors shall have executed and delivered such other agreements and instruments, and satisfied such other conditions in connection with this Amendment as required by the Agent, including but not limited to certificates, financial statements and projections and opinions of counsel acceptable to the Agent. ARTICLE 4. WAIVER. The Lenders hereby waive (a) any Default as a result of the non-compliance with Section 6.19.5 of the Credit Agreement for the fiscal quarter ending September 30, 2005, (but do not waive compliance with such Section 6.19.5 for any other fiscal quarter) and (b) any Default as a result of the non-compliance with Section 6.19.2 of the Credit Agreement at any time on or prior to the date hereof. The Lenders do not waive any other Default or Unmatured Default. ARTICLE 5. MISCELLANEOUS. 5.1 References in any Loan Document to the Credit Agreement shall be deemed to be references to the Credit Agreement as amended hereby and as further amended from time to time. 5.2 The Borrower agrees to pay and to save the Agent harmless for the payment of all costs and expenses arising in connection with this Amendment, including the reasonable fees of counsel to the Agent in connection with preparing this Amendment and the related documents. 5.3 The Borrower acknowledges and agrees that the Agent and the Lenders have fully performed all of their obligations under all documents executed in connection with the Loan Documents and all actions taken by the Agent and the Lenders are reasonable and appropriate under the circumstances and within their rights under the Loan Documents. The Borrower represents and warrants that it is not aware of, and hereby waives, any claims or causes of action against the Agent or any Lender, any participant lender or any of their successors or assigns. 5.4 Except as expressly amended hereby, the Borrower agrees that the Loan Documents are ratified and confirmed and shall remain in full force and effect and that it has no set off, counterclaim, defense or other claim or dispute with respect to any Loan Document or any transactions in connection therewith. Terms used but not defined herein shall have the respective meanings ascribed thereto in the Credit Agreement. 5.5 This Amendment may be signed upon any number of counterparts with the same effect as if the signatures thereto and hereto were upon the same instrument, and telecopied signatures shall be enforceable as originals. -5- IN WITNESS WHEREOF, the parties signing this Amendment have caused this Amendment to be executed, delivered and effective as of the day and year first above written. TECUMSEH PRODUCTS COMPANY By: /s/ James S. Nicholson Title: Vice President, Treasurer & CFO JPMORGAN CHASE BANK, N.A., as a Lender and as Agent and LC Issuer By: /s/ Mike Kelly Title: Vice President COMERICA BANK, as a Lender and as Syndication Agent By: /s/ (not readable) Title: Account Officer FIFTH THIRD BANK By: /s/ (not readable) Title: Executive Vice President THE NORTHERN TRUST COMPANY By: /s/ (not readable) Title: Vice President -6- CONSENT AND AGREEMENT As of the date and year first above written, each of the undersigned hereby: (a) fully consents to the terms and provisions of the above Amendment and the consummation of the transactions contemplated hereby, and agrees to all terms and provisions of the above letter applicable to it; (b) agrees that its Guaranty and all other Loan Documents executed by the undersigned in connection with the Credit Agreement or otherwise in favor of the Agent and/or the Lenders (collectively, the "Documents") are hereby ratified and confirmed and shall remain in full force and effect, and the undersigned acknowledges that it has no setoff, counterclaim, defense or other claim or dispute with respect to any Document or any transactions in connection therewith; and (c) acknowledges that it is in its interest and to its financial benefit to execute this consent and agreement. M.P. PUMPS, INC. TECUMSEH INVESTMENTS INC. TECUMSEH COMPRESSOR COMPANY LITTLE GIANT PUMP COMPANY DOUGLAS HOLDINGS, INC. TECUMSEH POWER COMPANY FASCO INDUSTRIES, INC. CONVERGENT TECHNOLOGIES INTERNATIONAL, INC. EVERGY, INC. TECUMSEH DO BRASIL USA, LLC TECUMSEH PUMP COMPANY TECUMSEH CANADA HOLDING COMPANY VON WEISE GEAR COMPANY MANUFACTURING DATA SYSTEMS, INC. By: ------------------------------------------ James. Nicholson Their: Vice President and Treasurer EUROMOTOR, INC. By: ------------------------------------------ James. Nicholson Its: Vice President and Treasurer -7- EX-31.1 4 k99361exv31w1.txt CERTIFICATION OF PRESIDENT AND CEO TO SECTION 302 Exhibit 31.1 RULE 13A-14(A) CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, Todd W. Herrick, Chairman, President and Chief Executive Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Tecumseh Products Company; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b. designed such internal controls over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the Audit Committee of the registrant's Board of Directors (or persons performing the equivalent function): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: November 7, 2005 BY: /s/ TODD W. HERRICK ------------------------------------ Todd W. Herrick Chairman, President, and Chief Executive Officer EX-31.2 5 k99361exv31w2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 Exhibit 31.2 RULE 13A-14(A) CERTIFICATION OF CHIEF FINANCIAL OFFICER I, James S. Nicholson, Vice President, Treasurer and Chief Financial Officer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Tecumseh Products Company; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; b. designed such internal controls over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the Audit Committee of the registrant's Board of Directors (or persons performing the equivalent function): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: November 7, 2005 BY: /s/ JAMES S. NICHOLSON ------------------------------------ James S. Nicholson Vice President, Treasurer and Chief Financial Officer EX-32.1 6 k99361exv32w1.txt CERTIFICATION OF PRESIDENT AND CEO TO SECTION 906 Exhibit 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER In connection with the quarterly report of Tecumseh Products Company (the "Company") on Form 10-Q for the period ended September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Form 10-Q"), I, Todd W. Herrick, 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 Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 7, 2005 BY: /s/ TODD W. HERRICK ------------------------------------- Todd W. Herrick President and Chief Executive Officer EX-32.2 7 k99361exv32w2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 Exhibit 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER In connection with the quarterly report of Tecumseh Products Company (the "Company") on Form 10-Q for the period ended September 30, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Form 10-Q"), I, James S. Nicholson, 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 Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and (2) the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: November 7, 2005 BY: /s/ JAMES S. NICHOLSON ------------------------------------ James S. Nicholson Vice President, Treasurer and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----