-----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, WPpGaNJccaIl+4HaUJ5QvQBGxH2d/RTJcBpMGLTkSVG4+fo+TmnAK9FoAjpH14aM 5wVRbf+tMUIPJSa/xLDmgA== 0000950124-06-007696.txt : 20061220 0000950124-06-007696.hdr.sgml : 20061220 20061219211307 ACCESSION NUMBER: 0000950124-06-007696 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20060930 FILED AS OF DATE: 20061220 DATE AS OF CHANGE: 20061219 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: 061288031 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 k10863e10vq.txt QUARTERLY REPORT FOR PERIOD ENDED 09/30/06 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, 2006 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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange 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, 2006 -------------- --------------------------------- Class B Common Stock, $1.00 par value 5,077,746 Class A Common Stock, $1.00 par value 13,401,938
TABLE OF CONTENTS
Page -------- Part I. Financial Information Item 1. Financial Statements Consolidated Condensed Balance Sheets......................... 3 Consolidated Condensed Statements of Operations............... 4 Consolidated Condensed Statements of Cash Flows............... 5 Notes to Consolidated Condensed Financial Statements.......... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 28 Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................................... 51 Item 4. Controls and Procedures................................... 53 Part II. Other Information........................................... 56 Signatures........................................................... 58 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, (Dollars in millions, except share data) 2006 2005 ------------- ------------ ASSETS Current Assets: Cash and cash equivalents $ 58.7 $ 116.6 Accounts receivable, less allowance for doubtful accounts of $11.8 in 2006 and $11.3 in 2005 247.4 211.1 Inventories 368.6 346.8 Deferred and recoverable income taxes 20.7 43.4 Other current assets 70.5 89.2 -------- -------- Total current assets 765.9 807.1 Property, plant, and equipment, net 569.0 578.6 Goodwill 125.3 130.9 Other intangibles 54.1 54.8 Prepaid pension expense 196.7 185.3 Other assets 101.1 43.8 -------- -------- Total assets $1,812.1 $1,800.5 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable, trade $ 215.1 $ 187.3 Short-term borrowings 95.0 82.5 Accrued liabilities 139.3 135.3 -------- -------- Total current liabilities 449.4 405.1 Long-term debt 265.7 283.0 Deferred income taxes 7.6 25.0 Other postretirement benefit liabilities 202.1 210.9 Product warranty and self-insured risks 11.3 14.5 Pension liabilities 15.8 15.2 Other non-current liabilities 42.0 32.4 -------- -------- Total liabilities 993.9 986.1 -------- -------- 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 2006 and 2005 13.4 13.4 Class B common stock, $1 par value; authorized 25,000,000 shares; issued and outstanding 5,077,746 shares in 2006 and 2005 5.1 5.1 Retained earnings 790.1 806.6 Accumulated other comprehensive income (loss) 9.6 (10.7) -------- -------- Total stockholders' equity 818.2 814.4 -------- -------- Total liabilities and stockholders' equity $1,812.1 $1,800.5 ======== ========
The accompanying notes are an integral part of these Consolidated Condensed Financial Statements. Page 3 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART I. FINANCIAL INFORMATION - ITEM 1 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, -------------------- --------------------- 2005 2005 (Dollars in millions, except per share data) 2006 (restated) 2006 (restated) ------- ---------- -------- ---------- Net sales $ 429.4 $ 449.9 $1,331.8 $1,322.9 Cost of sales 407.9 409.8 1,251.8 1,224.9 Selling and administrative expenses 42.4 37.2 131.9 121.4 Impairments, restructuring charges, and other items 8.4 1.4 14.0 111.3 ------- ------- -------- -------- Operating profit (loss) (29.3) 1.5 (65.9) (134.7) Interest expense (10.0) (6.3) (29.4) (18.0) Interest income and other, net 2.1 1.9 10.0 6.9 ------- ------- -------- -------- Loss from continuing operations before taxes (37.2) (2.9) (85.3) (145.8) Tax provision (benefit) 8.1 34.9 (3.7) 28.3 ------- ------- -------- -------- Loss from continuing operations (45.3) (37.8) (81.6) (174.1) Income from discontinued operations, net of tax 7.5 0.6 65.1 2.5 ------- ------- -------- -------- Net loss ($37.8) ($37.2) ($16.5) ($171.6) ======= ======= ======== ======== Basic and diluted earnings (loss) per share Loss from continuing operations ($2.45) ($2.05) ($4.42) ($9.42) Income from discontinued operations, net of tax 0.40 0.04 3.52 0.13 ------- ------- -------- -------- Net loss per share ($2.05) ($2.01) ($0.90) ($9.29) ======= ======= ======== ======== Weighted average shares (in thousands) 18,480 18,480 18,480 18,480 ======= ======= ======== ======== Cash dividends declared per share $ 0.00 $ 0.00 $ 0.00 $ 0.64 ======= ======= ======== ========
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 CASH FLOWS (Unaudited)
NINE MONTHS ENDED SEPTEMBER 30, ----------------- (Dollars in millions) 2006 2005 ------- ------- Cash Flows from Operating Activities: Cash used by operating activities $(129.4) ($34.6) Cash Flows from Investing Activities: Proceeds from sale of assets 132.4 -- Capital expenditures (45.6) (88.6) Business acquisition (2.0) -- ------- ------- Cash provided by (used in) investing activities 84.8 (88.6) ------- ------- Cash Flows from Financing Activities: Dividends paid -- (11.8) Repayment of Senior Guaranteed Notes (250.0) (50.0) Repayment of Industrial Development Revenue Bonds (10.5) -- Proceeds from First Lien Credit Agreement 147.5 -- Proceeds from Second Lien Credit Agreement 100.0 -- Repayments of Second Lien Credit Agreement (45.4) -- Other borrowings, net 45.6 38.8 ------- ------- Cash used in financing activities (12.8) (23.0) ------- ------- Effect of exchange rate changes on cash (0.5) 2.2 ------- ------- Decrease in cash and cash equivalents (57.9) (144.0) Cash and Cash Equivalents: Beginning of period 116.6 227.9 ------- ------- End of period $ 58.7 $ 83.9 ======= =======
The accompanying notes are an integral part of these Consolidated Condensed Financial Statements. Page 5 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART I. 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, 2005 consolidated 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, 2005. 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. Restatement The Company has restated the consolidated financial statements for the three and nine months ended September 30, 2005 for errors in the interim period tax provisions. Generally accepted accounting principles require interim period income taxes to be recorded based on an estimated annual effective rate. The Company in error combined the income from foreign jurisdictions with losses from foreign jurisdictions for which tax benefits are not expected to be realizable, which resulted in an understatement in the tax provision of $4.4 million and $3.9 million for the three and nine months, respectively, ended September 30, 2005. Additionally, as a result of the sale of Little Giant Pump Company in the second quarter of 2006, the Company has recasted the Consolidated Statement of Operations for the three and nine months ended September 30, 2005 to show the Little Giant Pump Company as a discontinued operation. The footnotes contained herein have been adjusted for matters discussed in this footnote. Page 6 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART I. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) Adjustments made to the Consolidated Statement of Operations for the three month period ended September 30, 2005 to correct the errors discussed above and to give effect to the sale of Little Giant Pump Company as a discontinued operation are as follows:
RESTATEMENT ------------------ RESTATED DISCONTINUED OPERATIONS Three Months Ended September 30, 2005 AS ADJUST- FOR ----------------------- (Dollars in millions, except per share data) REPORTED MENTS TAXES ADJUSTMENTS RESTATED -------- ------- -------- ----------- -------- Net sales 478.5 478.5 (28.6) $449.9 Cost of sales and operating expenses 431.5 431.5 (21.7) 409.8 Selling and administrative expenses 41.4 41.4 (4.2) 37.2 Impairments, restructuring charges, and other items 1.4 1.4 1.4 ------ ------ ------ Operating income 4.2 4.2 (2.7) 1.5 Interest expense (8.0) (8.0) 1.7 (6.3) Interest income and other, net 1.9 1.9 -- 1.9 ------ ------ ------ Loss from continuing operations before taxes (1.9) (1.9) (1.0) (2.9) Tax provision 30.9 4.4 35.3 (0.4) 34.9 ------ ------ ------ Loss from continuing operations (32.8) (4.4) (37.2) (0.6) (37.8) Income from discontinued operations, net of tax -- -- 0.6 0.6 ------ ------ ------ Net loss (32.8) (4.4) (37.2) (37.2) ====== ====== ====== Basic and diluted loss per share Loss from continuing operations ($1.77) ($0.24) ($2.01) ($0.04) (2.05) Income from discontinued operations, net of tax -- -- 0.04 .04 ------ ------ ------ Net loss ($1.77) ($0.24) ($2.01) (2.01) ====== ====== ======
Page 7 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) Adjustments made to the Consolidated Statement of Operations for the nine month period ended September 30, 2005 to correct the errors discussed above and to give effect to the sale of Little Giant Pump Company as a discontinued operation are as follows:
DISCONTINUED RESTATEMENT OPERATIONS ------------------ ------------------ Nine Months Ended September 30, 2005 AS ADJUST- RESTATED ADJUST- (Dollars in millions, except per share data) REPORTED MENTS FOR TAXES MENTS RESTATED -------- ------- --------- ------- -------- Net sales 1,404.8 1,404.8 (81.9) 1,322.9 Cost of sales and operating expenses 1,285.0 1,285.0 (60.1) 1,224.9 Selling and administrative expenses 135.9 135.9 (14.5) 121.4 Impairments, restructuring charges, and other items 111.3 111.3 111.3 ------- ------- ------- Operating loss (127.4) (127.4) (7.3) (134.7) Interest expense (22.4) (22.4) 4.4 (18.0) Interest income and other, net 6.9 6.9 6.9 ------- ------- ------- Loss from continuing operations before taxes (142.9) (142.9) (2.9) (145.8) Tax provision 24.8 3.9 28.7 (0.4) 28.3 ------- ------- ------- Loss from continuing operations (167.7) (3.9) (171.6) (2.5) (174.1) Income from discontinued operations, net of tax -- -- 2.5 2.5 ------- ------- ------- Net loss (167.7) (3.9) (171.6) -- (171.6) ======= ======= ======= Basic and diluted loss per share Loss from continuing operations ($9.07) $0.22 ($9.29) ($0.13) ($9.42) Income from discontinued operations, net of tax 0.13 0.13 ------- ------- ------- Net loss ($9.07) $0.22 ($9.29) ($9.29) ======= ======= =======
3. Comprehensive Income
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------- -------------------- 2005 2005 (Dollars in millions) 2006 (restated) 2006 (restated) ------ ---------- ------- ---------- Net loss ($37.8) ($37.2) ($16.5) ($171.6) Other comprehensive income (loss): Foreign currency translation adjustments (2.4) 22.8 26.4 38.4 Gain (Loss) on derivatives 0.4 (2.0) (2.2) 15.1 Unrealized gain (loss) on investment holdings -- -- (0.2) 3.8 Less: Reclassification adjustment for gains realized in net income -- -- (3.6) -- ------ ------ ------- ------- Total comprehensive income (loss) ($39.8) ($16.4) $ 3.9 ($114.3) ====== ====== ======= =======
Page 8 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) 4. Inventories
SEPTEMBER 30, DECEMBER 31, (Dollars in millions) 2006 2005 ------------- ------------ Raw material $158.2 $128.5 Work in progress 75.1 73.3 Finished goods 129.4 136.7 Supplies 5.9 8.3 ------ ------ Total inventories $368.6 $346.8 ====== ======
Page 9 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) 5. Business Segments The Company has three 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, and Engine & Power Train Products. Previously, the Company also reported a Pump Products business segment; however, as a result of the decision, during the first quarter of 2006, to sell 100% of its ownership in Little Giant Pump Company, such operations are no longer reported in loss from continuing operations before tax. Little Giant operations represented approximately 90% of that previously reported segment. Since the Company's remaining pump business does not meet the definition of a reporting segment as defined by SFAS No. 131, "Segment Reporting," the Company will no longer report a Pump Products segment, and operating results of the remaining pump business are included in Other for segment reporting purposes. 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 ---------------- ------------------- (Dollars in millions) 2006 2005 2006 2005 ------- ------ -------- -------- Net sales: Compressor Products $ 230.8 $218.6 $ 755.6 $ 707.2 Electrical Component Products 109.3 103.3 325.3 305.9 Engine & Power Train Products 85.2 124.2 237.6 297.8 Other (a) 4.1 3.8 13.3 12.0 ------- ------ -------- -------- Total Net Sales $ 429.4 $449.9 $1,331.8 $1,322.9 ======= ====== ======== ======== Operating income (loss): Compressor Products ($6.5) $ 7.6 ($3.7) $23.6 Electrical Component Products (0.5) 4.8 2.7 4.0 Engine & Power Train Products (9.2) (5.2) (38.9) (41.6) Other (a) -- 0.3 0.7 0.2 Corporate expenses (4.7) (4.6) (12.7) (9.6) Impairments, restructuring charges, and other items (8.4) (1.4) (14.0) (111.3) ------- ------ -------- -------- Total operating income (loss) from continuing operations (29.3) 1.5 (65.9) (134.7) Interest expense (10.0) (6.3) (29.4) (18.0) Interest income and other, net 2.1 1.9 10.0 6.9 ------- ------ -------- -------- Loss from continuing operations before taxes ($37.2) ($2.9) ($85.3) ($145.8) ======= ====== ======== ========
(a) "Other" consists of non-reportable business segments. The Electrical Component Products segment had inter-segment sales of $15.4 million and $12.4 million in the third quarter of 2006 and 2005, respectively, and $40.4 million and $42.7 million for the first nine months of 2006 and 2005, respectively. Page 10 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) 6. Goodwill and Other Intangible Assets At September 30, 2006, goodwill by segment consisted of the following:
ELECTRICAL COMPRESSOR COMPONENTS OTHER TOTAL ---------- ---------- ----- ------ Balance at 1/1/2006 $16.9 $108.9 $ 5.1 $130.9 Sale of Little Giant Pump Company -- -- (5.1) (5.1) Foreign Currency Translation 0.6 (1.1) -- (0.5) ----- ------ ----- ------ Balance at 9/30/2006 $17.5 $107.8 -- $125.3 ===== ====== ===== ======
At September 30, 2005, goodwill by segment consisted of the following:
ELECTRICAL ENGINE & COMPRESSOR COMPONENTS POWER TRAIN OTHER 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
On April 21, 2006, the Company completed the sale of its 100% ownership in Little Giant Pump Company. The only other change in goodwill during 2006 was due to foreign currency fluctuations. As discussed in the Significant Accounting Policies and Critical Accounting Estimates sections of the Form 10-K for the year ended December 31, 2005, the Company traditionally conducts its annual assessment of impairment in the fourth quarter by comparing the carrying value of the Company's reporting units to their fair value. Fair value of the Company's goodwill and other intangible assets is estimated based upon a present value technique using discounted future cash flows, forecasted out over a six year period, with residual growth rates forecasted at 3.0% thereafter. The Company uses management business plans and projections as the basis for expected future cash flows. In evaluating such business plans for reasonableness in the context of their use for predicting discounted cash flows in our valuation model, the Company evaluates whether there is a reasonable basis for differences between actual results of the preceding year and projected results for the upcoming years. This methodology can potentially yield significant improvements in growth rates in the first few years of forecast data, due to multiple factors such as improved efficiencies or incremental sales volume opportunities that are deemed to be reasonably likely to be achieved. While performance of the Europe reporting unit for the Compressor Group has been relatively close to expectation during the nine months of 2006, the India reporting unit for the Compressor Group has seen its net profitability decline $7.0 million against the forecasts made at the beginning of the year, and the reporting unit within the Electrical Components Group with goodwill has reported net profit results $20.5 million lower than forecast. Page 11 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) The majority of the profitability decline against the original 2006 plan for the Electrical Components reporting unit occurred in the third quarter of the year. Profitability in the first quarter of the year exceeded expectations; the second quarter, while unprofitable and unfavorable to plan, still showed forecasts that the full year would be profitable. By the end of the third quarter, however, the decline against expectations had continued and become more pronounced, and the full year forecast indicated a substantial loss for the business unit was now anticipated. According to SFAS No. 142, "Goodwill and other Intangible Assets," "goodwill of a reporting unit shall be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount." The profitability decline for the Electrical Components reporting unit in the third quarter led the Company to conclude that it should perform an interim goodwill impairment analysis, incorporating the 2006 year to date results and updated cash flow forecasts. The sales growth rates utilized in the interim analysis were 3.0% or less in each year, and operating profit as a percentage of sales ranged from 0.8% to 7.8%. Based on the results of this analysis, the Company determined that no impairment of the unit's goodwill had taken place. Although the decline in sales and profitability in the current year for the India reporting unit is considered to be temporary and due to a delay in the launch of new products, the operating profit performance through the nine months of 2006 led the Company to perform an interim goodwill analysis for that business unit as well. The sales growth rates utilized in the interim analysis were reduced to 21.5% in 2007, 2.2% in 2008, and 3.0% percent thereafter. The operating profit percentages were modeled at 2.8% of sales. Based on the results of this interim analysis, the Company determined that no impairment of the unit's goodwill had taken place. Assumptions in estimating future cash flows are subject to a high degree of judgment and complexity. The Company makes every effort to forecast these future cash flows as accurately as possible with the information available at the time the forecast is developed. However, changes in the assumptions and estimates may affect the carrying value of goodwill, and could result in additional impairment charges in future periods. Factors that have the potential to create variances between forecasted cash flows and actual results include but are not limited to (i) fluctuations in sales volumes, which can be driven by multiple external factors, including weather conditions affecting demand; (ii) product costs, particularly commodities such as copper; (iii) currency exchange fluctuations; (iv) acceptance of the Company's pricing actions undertaken in response to rapidly changing commodity prices and other product costs; and (v) interest rate fluctuations. Refer to "Cautionary Statements Relating to Forward-Looking Statements" in Item 2 for other factors that have the potential to impact estimates of future cash flows. Discount rates utilized in the goodwill valuation analysis are derived from published resources such as Ibbotson. The rates utilized were 8.15% at September 30, 2006 and 9.25% at December 31, 2005 for all business units for which goodwill is currently recorded. Operating Profit as a percentage of sales revenue is also a key assumption in the fair value calculation. The range of assumptions used incorporates the anticipated results of the Company's ongoing productivity improvements over the life of the forecast model. Page 12 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) Other intangible assets (all included in the Electrical Components Group) as of September 30, 2006 consisted of the following:
Gross Carrying Accumulated Amortizable Amount Amortization Net Life -------- ------------ ----- ----------- Intangible assets subject to amortization: Customer relationships and contracts $39.9 $10.6 $29.3 6-15 years Technology 12.0 4.1 7.9 5-10 years ----- ----- ----- Total 51.9 14.7 37.2 Intangible assets not subject to amortization: Trade name 16.9 -- 16.9 ----- ----- ----- Total intangible assets $68.8 $14.7 54.1 ===== ===== ====
The estimated amortization expense over the next five years is $4.3 million for 2006 and 2007, $4.1 million for 2008, and approximately $3.9 million annually for 2009 and 2010. Amortization expense for the three months ended September 30 was $1.2 million and $1.3 million for 2006 and 2005, respectively. Amortization expense for the nine months ended September 30 was $3.1 million and $3.9 million for 2006 and 2005, respectively. As a result of the acquisition of In Motion Technologies Pty. Ltd. (IMT), in the first quarter 2006, the Company recorded an additional technology intangible asset of $2.0 million. Other intangible assets as of December 31, 2005 consisted of the following:
Gross Carrying Accumulated Amortizable (in millions) Amount Amortization Impairment Net Life -------- ------------ ---------- ----- ----------- Intangible assets subject to amortization: Customer relationships and contracts....... $39.3 $ 8.1 $ -- $31.2 6-15 years Technology................................. 15.4 6.4 (2.3) 6.7 3-10 years Trade-name and trademarks..................... 0.9 0.5 (0.4) -- 3-8 years ----- ----- ----- ----- Total................................... 55.6 15.0 (2.7) 37.9 ----- ----- ----- ----- Intangible assets not subject to amortization: Trade-name................................. 16.9 -- -- 16.9 ----- ----- ----- ----- Total other intangible assets................. $72.5 $15.0 $(2.7) $54.8 ===== ===== ===== =====
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, caused the Company to revisit the assumptions utilized to determine FASCO's estimated fair value in the impairment assessment performed at December 31, 2004. Page 13 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) The deterioration of sales volumes and the Company's inability to recover higher commodity and transportation costs through price increases resulted in lower expected cash flows for FASCO. The Company estimated the fair value of the reporting unit as compared to its recorded book value. Since the estimated fair value was less than the book value, an impairment was deemed to have occurred. 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, $108.0 million of the recorded goodwill in the FASCO reporting unit was impaired and charged to continuing operations. Prior to performing the impairment analysis, management assessed long lived assets for impairment and concluded these assets were not impaired. Page 14 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) 7. 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, ------------------ ------------------ 2006 2005 2006 2005 ------ ------ ------ ----- Service Cost $ 2.1 $ 2.3 $ 0.8 $ 1.3 Interest Cost 5.4 5.4 2.4 2.8 Expected return on plan assets (11.1) (10.5) -- -- Amortization of prior service costs 0.1 0.1 (1.2) (0.3) Amortization of net gain (0.1) (0.6) -- (0.8) ------ ------ ------ ----- Net periodic benefit (income) cost ($3.6) ($3.3) $2.0 $ 3.0 Curtailment gain - discontinued operations (1.0) -- (7.5) -- ------ ------ ------ ----- Total Pension (Income) Expense ($4.6) ($3.3) ($5.5) $ 3.0 ====== ====== ====== =====
PENSION BENEFITS OTHER BENEFITS NINE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------- ----------------- 2006 2005 2006 2005 ------- ------ ------ ----- Service Cost $ 6.8 $ 6.9 $ 2.5 $ 3.9 Interest Cost 15.9 16.2 7.3 8.4 Expected return on plan assets (33.4) (31.5) -- -- Amortization of prior service costs 0.4 0.3 (3.7) (0.9) Amortization of net gain (0.1) (1.8) (0.1) (2.4) ------- ------ ------ ----- Net periodic benefit (income) cost ($10.4) ($9.9) $ 6.0 $ 9.0 Curtailment gain - discontinued operations (1.0) -- (7.5) -- ------- ------ ------ ----- Total Pension (Income) Expense ($11.4) ($9.9) ($1.5) $ 9.0 ======= ====== ====== =====
As a result of the sale of Little Giant Pump Company and an associated curtailment of pension and retiree benefits of its employees, the Company recognized a gain of $1.0 million in pension benefits and $7.5 million in other benefits in the third quarter 2006. Since the Company uses September 30 as the date upon which plan assets and obligations are measured to facilitate the preparation and reporting of pension and postretirement plan data, a three-month lag in reporting expenses and benefits occurs. Accordingly, the curtailment was recorded during the third quarter of 2006. In addition, future pension and retiree health care expense will decrease by $0.3 million per quarter. 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 Page 15 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) eliminate Post-65 prescription drug benefits starting January 1, 2008 and discontinue all retiree medical benefits for anyone hired after January 1, 2006. The Company does not expect to contribute to its pension plans in 2006. 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, 2006 and December 31, 2005 were $45.7 million and $32.1 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 profit (loss) and allowance for doubtful accounts. Reserves are recorded on the Consolidated Balance Sheet to reflect the Company's contractual liabilities relating to warranty commitments to customers. Warranty coverage is provided for a period of twenty months to two years from date of manufacture for compressors; ninety days to three years from date of purchase for electrical components; one year from date of delivery for engines and one year from date of sale for pumps. An estimate for warranty expense is recorded at the time of sale, based on historical warranty return rates and repair costs. Changes in the carrying amount and accrued product warranty costs for the nine months ended September 30, 2006 and 2005 are summarized as follows:
Nine Months Nine Months Ended Ended (Dollars in millions) Sept. 30, 2006 Sept. 30, 2005 ----------------- -------------- Balance at January 1 $ 29.4 $ 38.1 Settlements made (in cash or in kind) (11.5) (18.9) Current year accrual 12.9 8.5 Adjustments to preexisting warranties (0.7) 4.0 Effect of foreign currency translation 0.2 (0.3) Sale of Little Giant Pump Company (2.7) -- ------ ------ Balance at September 30 $ 27.6 $ 31.4 ====== ======
At September 30, 2006, $22.3 million was included in current liabilities and $5.3 million was included in noncurrent liabilities. 9. Debt On February 6, 2006, the Company's Senior Guaranteed Notes and Revolving Credit Facility were replaced by a new financing package that included a $275 million First Lien Credit Agreement and a $100 million Second Lien Credit Agreement. The repayment of the Senior Guaranteed Notes, Revolving Credit Facility and Industrial Revenue Bonds was accounted for as an extinguishment of debt and $0.9 million of unamortized debt issuance costs net of unamortized gains from related swap agreements were written off to interest expense. Costs of $7.0 million associated with the origination of the Company's new lending arrangements were capitalized and will be amortized as interest expense over the terms of the agreements. Page 16 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) The First and Second Lien Credit Agreements provided for security interests in substantially all of the Company's assets and specific quarterly financial covenants related to EBITDA (as defined under the agreement, which provides adjustments for certain items, and hereafter referred to as "Adjusted EBITDA"), capital expenditures, and fixed charge coverage. The Adjusted EBITDA covenant applied through September 30, 2007, and a fixed charge coverage covenant applied thereafter. As more fully described in Note 13, on April 21, 2006, the Company sold Little Giant Pump Company and proceeds from the sale were used to repay portions of the new debt arrangements. Approximately 63% of the proceeds were applied against the First Lien borrowing and 37% against the Second Lien borrowing. During the second quarter, the Company entered into interest rate swap agreements, effectively converting $90 million (or 25.0% of the Company's total debt as of September 30, 2006) of variable rate debt to fixed rate debt. Including the effect of these swap agreements, the effective weighted average interest rate of the Company's outstanding borrowings under the First and Second Lien Credit Agreements was 8.8% at September 30, 2006. At September 30, 2006, the Company had outstanding letters of credit of $6.2 million and total borrowing availability of $39.0 million under its $275 million First Lien Credit Agreement. In addition, the Company has various borrowing arrangements at its foreign subsidiaries to support working capital needs and governmental sponsored lendings that provided advantageous lending rates. During the quarter, the Company had net proceeds from these arrangements totaling $5.0 million. During 2006 the Company's results from operations have continued to be impacted by unfavorable events that have caused actual Adjusted EBITDA for the twelve-month period ended September 30, 2006, calculated to be $5.1 million, to fall short of the $21.0 million required under the credit agreements before the amendments and replacement second lien agreement described below. These events included the previously disclosed issue with respect to non-income based taxes deemed to be unconstitutional by the Brazilian Supreme Court. The Company's Adjusted EBITDA target included the expectation that approximately $7.0 million of previously provided accruals would be reversed; however, GAAP does not permit reversal until the Company's own individual case is decided by the court. Under Brazilian law, lower courts are not bound by Supreme Court decisions, and the Company's case still had not been finally decided. In addition, lower than expected sales in the Engine & Power Train Business due to lack of storm activity, operational inefficiencies at the Company's Juarez, Mexico facility and shipping delays in the Compressor Business associated with the August 1, 2006 adoption of the Oracle ERP system in the US and Brazil, contributed to the shortfall of Adjusted EBITDA versus the covenant level. As a result, the Company sought, and on November 3, 2006 it signed, amendments to its lending arrangements with its first and second lien lenders. The principal terms of the November 3 amendments were described in a Current Report on Form 8-K we filed on November 8, 2006. On November 13, 2006 we signed a new $100 million Second Lien Credit Agreement with Tricap Partners LLC (the "New Second Lien Agreement") and another amendment to our February 6, Page 17 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) 2006 First Lien Credit Agreement. The new second lien facility provides the Company with additional liquidity and more lenient financial covenants. We borrowed $100 million under the new Second Lien Credit Agreement and used the proceeds to repay in full the outstanding balance of $54.6 million under the old Second Lien Credit agreement, plus a 2.0% prepayment premium, and to repay $40.0 million of borrowings under the First Lien Credit Agreement. Under the terms of the First Lien Credit Agreement, as amended, we have the capacity for additional borrowings under the borrowing base formula of $65.3 million in the U.S. and $58.3 million in foreign jurisdictions. Both the First Lien Credit Agreement as amended and the new Second Lien Credit Agreement have three year terms, from November 13, 2006 through November 12, 2009. The Adjusted EBITDA covenant requirement as of September 30, 2006 in the First Lien Credit Agreement was removed as a result of the amendments. As part of the new Second Lien Credit Agreement with Tricap and the corresponding amendment to our First Lien Credit Agreement, the minimum cumulative Adjusted EBITDA levels (measured from October 1, 2006) for the fourth quarter 2006 and 2007 quarterly periods (in millions) were set at:
Quarterly Period Ending First Lien Agreement Second Lien Agreement - ----------------------- -------------------- --------------------- December 31, 2006 ($14.9) ($16.9) March 31, 2007 ($8.0) ($10.0) June 30, 2007 $ 17.0 $ 15.0 September 30, 2007 $ 52.0 $ 50.0 December 31, 2007 $ 82.0 $ 80.0
Interest on the New Second Lien Agreement is equal to LIBOR plus 6.75% plus paid in kind ("PIK") interest of 1.5%. PIK interest accrues monthly on the outstanding debt balance and is paid when the associated principal is repaid. This compares to the previous second lien arrangement, as amended, of interest of LIBOR plus 7.5% plus PIK interest of 2.0%. While the new Second Lien Agreement has more favorable interest terms than its predecessor, our weighted average cost of borrowing under the current agreements is higher than it was before the November 13 refinancing. This is attributable to a greater proportion of our total debt being borrowed under the Second Lien Agreement ($100 million versus $54.6 million) and less under the First Lien Agreement. Giving effect to the Company's new and amended arrangements, our weighted average interest rate for all borrowings is 10.4% compared to 8.8% prior to the November 13 refinancing. Other interest rate related terms of the new Second Lien Credit Agreement provide for additional PIK interest at the rate of 5.0% if outstanding debt balances are not reduced by certain specified dates. This additional PIK interest would apply to the difference between a target amount of aggregate reduction in debt and the actual amount of first and second lien debt reduction according to the following milestones:
Milestone Date Aggregate Reduction - -------------- ------------------- June 30, 2007 $20.0 million September 30, 2007 $40.0 million December 31, 2007 $60.0 million
Page 18 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) The new Second Lien Credit Agreement also provides for an additional 2.5% in PIK interest if certain assets are not sold by December 31, 2007. Sources of funds to make the principal reductions could include, but are not limited to, cash from operations, reductions in working capital, or asset sales. In addition, the new Second Lien Credit Agreement includes a commitment to create an advisory committee to assist our board of directors in working with a nationally recognized executive recruiting firm and to recommend to the board qualified candidates for various executive management positions, including the Chief Executive Officer position. The agreement provides that when the Board engages a new Chief Executive Officer, Todd W. Herrick will remain as Chairman of the Board. Some of our major shareholders (Herrick Foundation, of which Todd W. Herrick and Kent B. Herrick are members of the Board of Trustees, and two Herrick family trusts, of which Todd W. Herrick is one of the trustees) entered into option agreements with Tricap to induce Tricap to make the new second lien financing available to us. We are not a party to the option agreements. After giving effect to the refinancing, waivers and amendments discussed above, we are currently in compliance with the covenants of our domestic debt agreements. Achieving the level of future financial performance required by our lending arrangements, will depend on a variety of factors, including customer price increases to cover increases in commodity costs, further employee headcount reductions, consolidation of productive capacity and rationalization of various product platforms. While we are currently moving forward with these actions, there can be no assurance that any of these initiatives will be sufficient if certain risks continue to impede our progress. Those risks include currency fluctuations, weather, the extent to which the Company may lose sales in reaction to higher product prices, or adverse publicity. In the event that we fail to improve performance through these measures, our ability to raise additional funds through debt financing will be limited. We are also concerned about the amount of debt we are carrying in this challenging operating environment and as we seek to improve our company's financial performance. As a result, we are evaluating the feasibility of asset sales as a means to reduce our total indebtedness and to increase liquidity. In our November 15, 2006 Form 8-K, we disclosed that the Company was in negotiations with its lenders in Brazil to reschedule maturities of its current lending arrangements for its Brazilian engine manufacturing subsidiary. The Company's Brazilian engine manufacturing subsidiary has its own financing arrangements with Brazilian banks under which it is required to pay principal installments of various amounts throughout the remainder of 2006 through 2009. Historically, the subsidiary has experienced negative cash flows from operations indicating that it may not have sufficient liquidity on its own to make all required debt repayments as originally scheduled. On November 21, 2006, lenders representing greater than 60% of the outstanding amounts borrowed, executed a restructuring agreement whereby scheduled maturities were deferred for eighteen months, with subsequent amortization over the following eighteen months. Other provisions of the agreement included a pledge of certain of the assets of the Brazilian engine manufacturing subsidiary, and a parent guarantee of the obligation, which would only become effective after full repayment of the Second Lien debt. Page 19 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) Two banks representing less than 40% of the outstanding balances did not participate in the restructuring agreement. We ceased further payments to those banks effective November 15, 2006 and are seeking remedies available to us under Brazilian law that would require those banks to abide by the terms of the restructuring agreement. While the non-payments constitute a default under the debt agreements, the lenders under the First Lien Credit Agreement, as amended, and the new Second Lien Credit Agreement have waived, for a time, any cross-default that otherwise would result from our failing to make a required payment on these Brazilian loans. The waiver will expire 180 days after November 15, 2006, though either the First Lien or Second Lien lenders have the authority to shorten the 180-day period to 100 days. The waiver will expire immediately if a Brazilian lender takes legal action to collect and the action is not stayed within ten days. If, before the waiver expires we succeed in our legal action to compel the non-agreeing banks to abide by the terms of the restructuring agreement, the First Lien and Second Lien lenders will have no further right to declare a cross-default based on the Brazilian non-payments so long as we comply with our obligations under the restructuring agreement. The agreement with the Brazilian banks was subject to the approval of our First and Second Lien credit holders. This approval was obtained through amendments to our existing agreements, which were effective on December 11, 2006. The principal terms of the December 11 amendments were described on a Current Report on Form 8-K we filed on December 15, 2006. Terms of the amendments included fees paid of $1.5 million. In addition, the availability reserve of $10.0 million instituted under a previous amendment to the First Lien Credit Agreement became permanent. In accordance with its terms, all the debt associated with the Brazilian engine subsidiary was classified as current at December 31, 2005. As a result of the restructuring, all of the Brazilian debt that is subject to the new agreement ($60.6 million) has been classified on the Company's Consolidated Balance Sheet as long-term. The Brazilian debt that is attributable to the two banks that did not participate in the restructuring agreement ($23.9 million) continues to be carried as short-term while the Company pursues legal action to compel those banks to abide by the terms of the restructuring agreement. This classification is in accordance with Statement of Financial Accounting Standards (SFAS) 6, "Classification of Short-Term Obligations Expected to Be Refinanced." The restructuring agreement clearly permits the Company to refinance its obligations on a long-term basis, with terms that are readily determinable, and the agreement is not cancelable by the lenders except under conditions of default. See Part II, Item 1A, "Risk Factors," in this report for a summary of some of the most significant risks posed by our current liquidity issues. 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. 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 May 2003, the Company concluded a Consent Decree with the EPA concerning the performance of Page 20 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) remedial design and remedial action for Phase I, deferring for an unspecified period any action regarding Phase II. In March 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 has 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. As the Liability Transfer Agreement was executed prior to the signing of the original Consent Decree for the Phase I work, the original Consent Decree was amended in the fourth quarter of 2005 to include PRS as a signing party. This assigns PRS full responsibility for complying with the terms of the Consent Decree and allows the EPA to enforce the Consent Decree directly with PRS. Prior to the execution of this amendment, U.S. GAAP required that the Company continue to record 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. With the subsequent amendment, the Company has removed the asset and $39.2 million of the liability from 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. With respect to other environmental matters, the Company has been voluntarily participating in a cooperative effort to investigate and cleanup PCB contamination in the watershed of the south branch of the Manitowoc River, at and downstream from the Company's New Holstein, Wisconsin facility. On December 29, 2004, 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") relating to this effort known as the Hayton Area Remediation Project ("HARP"). The Consent Order provides a framework for the completion of the remediation and regulatory closure at HARP. Page 21 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) Concurrently, on December 29, 2004, 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. TRC's obligations under the Agreement include any ongoing monitoring or maintenance requirements and certain off-site mitigation or remediation, if required. TRC will also manage any third-party remediation claims that might arise or otherwise be filed against the Company. As required by the Agreement, the Company also purchased a Pollution Legal Liability Select Cleanup Cost Cap Policy (the "Policy") from American International Specialty Lines Company. The term of the Policy is 20 years with an aggregate combined policy limit of $41 million. The policy lists the Company and TRC as named insureds and includes a number of first and third party coverages for remediation costs and bodily injury and property damage claims associated with the HARP remediation and contamination. 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. The total cost of the exit strategy insured remediation arrangement to Tecumseh was $16.4 million. This amount included $350,000 that was paid to the WDNR pursuant to the Consent Order to settle any alleged liabilities associated with natural resource damages. The charge represented the cost of the agreements less what was previously provided for cleanup costs to which the Company had voluntarily agreed. 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, 2006, 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. In addition to the above-mentioned sites, the Company is also currently participating with the EPA and various state agencies at certain other sites to determine the nature and extent of any remedial action that may be necessary with regard to such other sites. At September 30, 2006 and December 31, 2005, the Company had accrued $3.4 million and $3.5 million, respectively, for environmental remediation. As these matters continue toward final resolution, amounts in excess of those already provided may be necessary to discharge the Company from its obligations for these sites. Such amounts, depending on their amount and timing, could be material to reported net income in the particular quarter or period 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. Page 22 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) 11. Income Taxes The Company's provision for income taxes for the three and nine month periods ended September 30, 2006 and 2005 is computed by applying an estimated annual tax rate against income (loss) from continuing operations for the period and is applied by tax jurisdiction. Under Accounting Principle Board Opinion No. 28, "Interim Financial Reporting", the Company is required to adjust its effective tax rate each three-month period to be consistent with the estimated annual effective tax rate. The Company is also required to record the tax impact of certain unusual or infrequently occurring items, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, in the interim period in which they occur. For the three and nine month periods ended September 30, 2006, the Company reported other U.S. income in the form of other comprehensive income and income from discontinued operations that are related to the U.S. tax jurisdiction. Pursuant to SFAS No. 109, Paragraph 35, the Company allocated income tax expense or benefit among continuing operations, discontinued operations and OCI. The consolidated condensed statement of operations reflects a $8.1 million and ($3.7) million income tax provision (benefit) for the three and nine months ended September 30, 2006 and a $34.9 million and $28.3 million income tax provision for the three and nine months ended September 30, 2005. Valuation allowances were established against remaining foreign deferred tax assets in Brazil in the third quarter of 2006 (aggregating approximately $5.9 million or $0.32 per share) due to negative evidence resulting in a determination that it is no longer more likely than not that the assets will be realized. It became apparent during this quarter that the Brazilian Compressor Operations would not return to historical profitability levels, and current forecasted levels would not be sufficient to realize the net deferred tax assets. The expense recorded in the third quarter of 2005 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. federal jurisdiction ($18.3 million) as the preponderance of negative evidence indicated that these deferred tax assets will 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 and asbestos-related claims, Page 23 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) 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. Discontinued Operations On April 21, 2006, the Company completed the sale of its 100% ownership interest in Little Giant Pump Company for $120.7 million. Its results for the nine months ended September 30, 2006 and 2005 are included in income (loss) from discontinued operations. Interest expense of $0.0 million and $2.9 million was allocated to discontinued operations for the three and nine months ended September 30, 2006 because the Company's new financing package required that the proceeds from the sale be utilized to repay portions of the Company's debt. The Company recognized a pre-tax gain on the sale of $77.9 million. The gain on the sale, including losses incurred during the Company's period of ownership, net of taxes and interest, is presented in income from discontinued operations and amounted to $65.1 million net of tax ($3.52 per share). Pretax gains of $8.4 million primarily associated with curtailment of employee benefits formerly provided to Little Giant employees ($7.5 million net of tax) are reflected in third quarter financial results. The Company's remaining pump business does not meet the definition of an operating segment as defined by SFAS No. 131, "Segment Reporting." Accordingly, its operating results are included in Other within the Results by Segment table. Page 24 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) Following is a summary of income (loss) from discontinued operations for the three months ended September 30, 2006 and 2005:
Three Months Three Months Ended Ended (Dollars in millions) Sept. 30, 2006 Sept. 30, 2005 -------------- -------------- Net sales $ -- $28.6 Cost of sales -- 21.7 Selling and administrative expenses -- 4.2 ---- ----- Operating income -- 2.7 Interest expense allocated -- 1.7 ---- ----- Income from discontinued operations before income taxes $ -- $ 1.0 Tax provision -- 0.4 ---- ----- Income from discontinued operations, net of tax -- 0.6 ---- ----- Gain on disposal 8.4 -- Tax provision on gain 0.9 -- ---- ----- Gain on disposal, net 7.5 -- ---- ----- Income from discontinued operations $7.5 $ 0.6 ==== =====
Following is a summary of income (loss) from discontinued operations for the nine months ended September 30, 2006 and 2005:
Nine Months Nine Months Ended Ended (Dollars in millions) Sept. 30, 2006 Sept. 30, 2005 -------------- -------------- Net sales $ 32.9 $81.9 Cost of sales 23.9 60.1 Selling and administrative expenses 6.9 14.5 ------ ----- Operating income 2.1 7.3 Interest expense allocated 2.9 4.4 ------ ----- Income (Loss) from discontinued operations before income taxes ($0.8) $ 2.9 Tax provision 0.2 0.4 ------ ----- Income (loss) from discontinued operations, net of tax ($1.0) $ 2.5 ------ ----- Gain on disposal 77.9 -- Tax provision on gain 11.8 -- ------ ----- Gain on disposal, net 66.1 -- ------ ----- Income from discontinued operations $ 65.1 $ 2.5 ====== =====
Page 25 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) 14. Impairments, Restructuring Charges, and Other Items During the third quarter of 2006, the Company concluded that an asset impairment charge of $8.4 million would be required related to the Engine & Power Train business for the write-down of assets that have become idled under the segment's overall restructuring program. For the nine months ended September 30, 2006, asset impairment charges totaled $14.0 million. The Company recognized asset impairment charges of $1.4 million and $111.3 million for the three and nine months respectively ended September 30, 2005. Charges in 2005 were primarily attributable to a goodwill impairment charge related to the Electrical Components business of $108.0 million. 15. Recently Issued Accounting Pronouncements Accounting for Defined Benefit Pension and Other Postretirement Plans In September 2006, the FASB issued Statement No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R)" ("SFAS 158"). SFAS 158 requires companies to recognize the funded status of their defined postretirement benefit plans as a net asset or liability on the balance sheet. Any unrecognized past service cost, experience gains/losses, or transition obligations are reported as a component of other comprehensive income, net of tax, in stockholders' equity. SFAS 158 also eliminates the company's option to select a date prior to its year-end balance sheet date to measure benefit plan assets and obligations. SFAS 158 is effective with balance sheets reported as of December 31, 2006. The Company estimates that the impact of the adoption of SFAS 158 will be material. As of December 31, 2005, the Company had net unrecognized benefits totaling $27.2 million (consisting of $2.2 million related to the pension plan and $25.0 million related to the OPEB plan). If this standard had been adopted in 2005, this unrecognized amount would have been recorded in Other Comprehensive Income, thereby increasing consolidated net assets and shareholders' equity by approximately $27.2 million dollars as of that date. The actual impact on the Company's 2006 balance sheet position will vary depending on factors affecting remeasurement of plan assets and obligations as of its remeasurement date. The change in accounting principle has no impact on the Company's net earnings, cash flow, liquidity, debt covenants, or plan funding requirements. The Company is also assessing which of the acceptable alternatives prescribed in the Standard it will use to transition to a fiscal year-end measurement date. Accounting for Uncertainty in Income Taxes In June 2006, the FASB issued Financial Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes," an interpretation of FASB Statement of Financial Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes." This interpretation clarifies the accounting for income taxes recognized in accordance with SFAS 109 with respect to recognition and measurement for tax positions that are taken or expected to be taken in a tax return. FIN 48 is effective on January 1, 2007 and the Company is currently evaluating the impact of this pronouncement on its consolidated financial statements. Fair Value Measurements Page 26 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 1 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited) In September 2006, the FASB issued Statement No. 157, "Fair Value Measurements" ("SFAS 157), to provide enhanced guidance for using fair value to measure assets and liabilities. The Standard also expands disclosure requirements for assets and liabilities measured at fair value, how fair value is determined, and the effect of fair value measurements on earnings. The Standard applies whenever other authoritative literature require (or permit) certain assets or liabilities to be measured at fair value, but does not expand the use of fair value. SFAS 157 is effective beginning January 1, 2008, and the company is currently evaluating the impact of this pronouncement on its consolidated financial statements. 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 Restatement The Company has restated the quarterly financial statements for the three and nine months ended September 30, 2005 for matters, principally regarding the interim period tax provisions, discussed in Footnote 2 to the consolidated financial statements included in Item 1 of Part 1 of the Form 10-Q/A. Generally accepted accounting principles require interim period income taxes to be recorded based on an estimated annual effective rate. Due to an oversight, the Company combined the income from foreign jurisdictions with losses from foreign jurisdictions for which tax benefits are not expected to be realizable. Additionally, as a result of the sale of Little Giant Pump Company in the second quarter of 2006, the Company has recasted the Consolidated Statement of Operations for the three and nine months ended September 30, 2005 to show Little Giant Pump Company as a discontinued operation. Accordingly, the Company has restated its Consolidated Financial Statements as of and for the three and nine months ended September 30, 2005. 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. 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 endeavoring to maintain and expand 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, our Compressor Group has introduced a scroll-style compressor to serve commercial refrigeration markets throughout the globe, a new line of high performance refrigeration compressors in Brazil, and it has begun producing a new expanded range rotary compressor in India for global applications. In addition, our Electrical Components Group has expanded its range of Brushless DC ("BLDC") variable speed motor products. 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 50% of total consolidated net sales in 2005 and 51.5% in 2006. 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 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 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 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 provide a significant portion of total Compressor Products segment production, and our Curitiba, Brazil facility is the key future manufacturing site to supply worldwide demand for lawn and garden engines. 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 and the first nine months of 2006 and have had significant adverse effect on our results over these periods. 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. However, these hedging programs only reduce exposure to currency movements over the limited time frame of three to fifteen months. Ultimately, long term changes in currency exchange rates have lasting effects on the relative competitiveness of operations located in certain countries versus competitors located in different countries. Lastly, commodity prices increased very rapidly during 2004, 2005 and into 2006. Due to competitive markets, we were not able to fully recover these cost increases through price increases and other cost savings. Increases in certain commodity costs have had a material adverse impact on our operating results during these periods. For example, from January 1, 2005 through October 31, 2006, the prices of copper and aluminum have increased approximately 124% and 37%, respectively. 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, including seeking mechanisms that would result in more timely adjustment of pricing in reaction to changing material costs. 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. As the Company raises prices to cover cost increases, it is possible that customers may react by choosing to purchase their requirements from alternative suppliers. 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 have had a positive impact on our cash flows in the past; however, seasonal patterns and the need to build inventories to manage production transfers during restructuring programs have caused higher working capital needs. Our cash flow is highly sensitive to the price of copper and other commodities and the Company's ability to recover higher commodity costs. As we cannot predict the movement of commodity prices, which have been substantial in recent history, we cannot predict with 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 certainty that we can remain in compliance with our adjusted EBITDA covenants included in our financing arrangements. See Adequacy of Liquidity Sources for further discussion. 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 "Adequacy of Liquidity," "Outlook," and "Cautionary Statements Relating To Forward-Looking Statements" below. Page 30 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, (dollars in millions) 2006 % 2005 % ------- ----- ------- ----- Net sales $ 429.4 100.0% $ 449.9 100.0% Cost of sales 407.9 95.0% 409.8 91.1% Selling and administrative expenses 42.4 9.9% 37.2 8.3% Impairments, restructuring charges, and other items 8.4 2.0% 1.4 0.3% ------- ------- Operating income (loss) (29.3) (6.9%) 1.5 0.3% Interest expense (10.0) 2.3% (6.3) 1.4% Interest income and other, net 2.1 0.5% 1.9 0.4% ------- ------- Loss from continuing operations before taxes (37.2) (8.7%) (2.9) (0.7%) Tax provision 8.1 1.9% 34.9 7.8% ------- ------- Loss from continuing operations ($45.3) (10.6%) ($37.8) (8.4%) ======= =======
Three Months Ended September 30, 2006 vs. Three Months Ended September 30, 2005 Consolidated net sales from continuing operations in the third quarter of 2006 decreased to $429.4 million from $449.9 million in 2005. Excluding the increase in sales due to the effects of currency translation of $10.2 million, 2006 third quarter sales decreased by $30.7 million or 6.8%. Sales increases attributable to the Compressor and Electrical Components segments were more than offset by a substantial decline in sales in the Engine & Power Train segment. Cost of sales was $407.9 million in the three months ended September 30, 2006, as compared to $409.8 million in the three months ended September 30, 2005. As a percentage of net sales, cost of sales were 95.0% and 91.1% in the third quarters of 2006 and 2005, respectively. The increase was primarily created by unfavorable foreign currency exchange rates and higher commodity costs, partially offset by efficiency improvements and overhead reductions. Selling, general and administrative expenses were $42.4 million in the three months ended September 30, 2006, as compared to $37.2 million in the three months ended September 30, 2005. As a percentage of net sales, selling, general and administrative expenses were 9.9% and 8.3% in the third quarters of 2006 and 2005, respectively. The increase was primarily related to AlixPartners' fees of $5.5 million for consulting services provided to our Engine & Power Train business. Also included in Selling, General and Administrative expenses were corporate expenses of $4.7 million for the third quarter 2006, as compared to $4.6 million in the prior year. The slight increase was due to additional staffing and information technology costs, associated with the Company's globalization of certain purchasing and information technology functions. Impairments, restructuring charges and other items were $8.4 million ($8.4 million after tax or $0.45 per share) in the three months ended September 30, 2006, compared to $1.4 million in the three months ended September 30, 2005. During the third quarter 2006, we incurred asset impairment and other Page 31 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS charges of $8.4 million related to the Engine & Power Train business for the write-down of assets that have become idled under the segment's overall restructuring program. During the third quarter of 2005, we recognized restructuring and asset impairment charges of $1.4 million ($1.7 million net of tax or $0.09 per share) related to the European Engine & Power Train operations ($0.4 million), Compressor ($0.5 million) and Electrical Components ($0.5 million) segments. Interest expense amounted to $10.0 million in the third quarter of 2006 compared to $6.3 million in the third quarter of 2005. The increase was primarily related to the higher average interest rates associated with the Company's current borrowing arrangements. Interest income and other, net was $2.1 million in the third quarter of 2006 compared to $1.9 million in the third quarter of 2005. The consolidated condensed statement of operations reflects a $8.1 million income tax provision for the third quarter 2006 and a $34.9 million income tax provision for the third quarter 2005. The third quarter of 2006 reflected a tax benefit in continuing operations offset by tax expense in other comprehensive income and discontinued operations. At September 30, 2006 and September 30, 2005, full valuation allowances are recorded for net operating loss carryovers for those tax jurisdictions in which the Company is in a cumulative three year loss position. Valuation allowances were established against remaining foreign deferred tax assets in Brazil in the third quarter of 2006 (aggregating approximately $5.9 million or $0.32 per share) due to negative evidence resulting in a determination that it is no longer more likely than not that the assets will be realized. Income taxes are recorded pursuant to SFAS No. 109, "Accounting for Income Taxes," and are applied on a jurisdiction by jurisdiction basis. Generally, the tax effect of income from items other than continuing operations is not taken into account when computing the tax effect of pretax income or loss from continuing operations. However, the exception relates to a situation in which an enterprise reports a zero total tax provision and incurs a loss from continuing operations and income related to other items such as an extraordinary item or discontinued operations. In that situation, paragraph 140 of SFAS 109 requires that all items (including extraordinary items and discontinued operations) be considered for purposes of determining the amount of tax benefit that should be allocated among continuing operations. In the U.S. federal jurisdiction, the Company anticipates ordinary loss for the year ended December 31, 2006 and had an ordinary loss for the quarter. Given that Tecumseh recorded a full valuation allowance, no tax benefit for the losses should normally be recognized. However, since Tecumseh reported a loss from continuing operations and income in discontinued operations and other comprehensive income (OCI) for the nine months ended September 30, 2006, tax expense/benefit was allocated to each item. Tax expense was recorded in discontinued operations and OCI related to translation gains on unremitted earnings and a tax benefit was recorded on the loss in continuing operations to offset the expense recorded in OCI and discontinued operations. The net result was an effective rate in the U.S. federal jurisdiction of 0%. Since the Company pays taxes in various states there is an expense recorded in the US that is related to separate company state tax liabilities. Page 32 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 expense recorded in the third quarter of 2005 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. federal jurisdiction ($18.3 million) as the preponderance of negative evidence indicated that these deferred tax assets will not be recoverable. Refer to Note 11, "Income Taxes," for a more detailed discussion of the determining factors identified that led management to record its valuation allowances. Net loss from continuing operations in the third quarter of 2006 was $45.3 million ($2.45 per share) as compared to net loss of $37.8 million ($2.05 per share) in the third quarter of 2005. The decline was primarily the result of the factors described above. Reportable Operating Segments The financial information presented below is for our three reportable operating segments for the periods presented: Compressor, Electrical Components, and Engine & Power Train. Financial measures regarding each segment's income (loss) before interest, other expense, income taxes, and impairments, restructuring charges, and other items ("operating income") and income (loss) before interest, other expense and income taxes and impairments, restructuring charges, and other items 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 (loss) before interest, other expense, income taxes, and impairments, restructuring charges, and other items. 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 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 (loss) before interest, other expense and income taxes, impairments, restructuring charges, and other items to income before provision for income taxes, see Note 5, Business Segments. Compressor Products Third quarter 2006 sales in the Compressor business increased to $230.8 million from $218.6 million in the prior year. Excluding the increase in sales due to the effects of foreign currency translation of $9.3 million, sales increased by 1.3% in the third quarter. The increase was primarily attributable to higher selling prices, implemented to offset increases in material costs. Compressor volumes were somewhat compromised in the third quarter of 2006 by shipping issues which were experienced as a result of the conversion of the majority of the Compressor business to the Company's new global ERP platform in August. The Company estimates that approximately $10.0 million in lost opportunities for product shipments occurred during the transition. While some volume may be recovered in the fourth quarter of 2006, the majority of the sales volumes lost as a result of this issue are not expected to be recovered in the current season. Compressor business operating results for the third quarter of 2006 were a loss of $6.5 million compared to income of $7.6 million in the third quarter of 2005. The lower operating income was attributable to unfavorable foreign currency exchange rates, and higher material and other input costs partially offset by pricing adjustments, headcount reductions, and productivity improvements. For the third quarter, the Brazilian Real was on average 7.3% stronger against the U.S. Dollar in 2006 versus Page 33 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS 2005, and the results of hedging activities were less favorable year over year in the third quarter than compared to the second quarter. Including the effects of hedging activities, the Company estimates that changes in foreign exchange rates decreased operating income by approximately $9.7 million compared to the third quarter 2005. Much of the remainder of the increase in cost was attributable to unfavorable variances associated with shipping bottlenecks experienced subsequent to the Oracle go-live, and increases in administrative costs. Electrical Component Products Electrical Components business sales were $109.3 million for the third quarter of 2006, an increase of 5.8% over sales of $103.3 million in the same quarter last year. Sales were higher in the residential and commercial markets in the third quarter of 2006 (up 6.1% over third quarter 2005) due to strong HVAC related sales. Sales in the automotive market remained flat as compared to the same period in 2005. Electrical Components operating results for the third quarter of 2006 were a loss of $0.5 million compared to income of $4.8 million in the third quarter of 2005. Approximately half of the decline during the third quarter was due to production inefficiencies, including Oracle go-live issues, associated with a facility in Mexico. The remaining differences were primarily related to a shortfall of price increases versus current commodity costs, including copper. Like the Compressor business, copper is a significant input into the cost of an electric motor. The cost of copper and other commodities were approximately $2.8 million higher in the third quarter 2006 when compared to prices available at the beginning of the year. While price advances have partially mitigated that cost increase, the structure of pricing agreements with many of our customers in the Electrical Components segment results in the implementation of pricing increases over a more extended period than in the Compressor segment. The Company estimates that pricing advances for Electrical Components customers will fully offset copper costs within the next six months, if copper costs remain at current levels. Engine & Power Train Products Engine & Power Train business sales were $85.2 million in the third quarter of 2006 compared to $124.2 million for the same period a year ago. The year-over-year decline in sales was partially attributable to lower sales of generators (down $14.9 million versus 2005) caused by a lack of significant hurricane or other storm activity during the 2006 season. In addition, sales volumes of snowthrowers declined $12.3 million as compared to the third quarter of 2005, due to a shift by our customers to more aggressive inventory management policies. In snowthrower units sold, the third quarter of 2006 lagged the same period of 2005 by approximately 18.2%. The fourth quarter of 2006 is currently forecasted to be approximately flat when compared to the prior year, resulting in a decline for the full season of 11.7%. The remaining sales decline in the quarter was due to a decrease in transmission business and loss of sales into the Europe market. Engine & Power Train business operating loss for the third quarter of 2006 was $9.2 million compared to a loss of $5.2 million during the same period a year ago. Included in the 2006 loss were AlixPartners' fees of $5.5 million in the third quarter. Exclusive of AlixPartners' fees, operating results improved by approximately 40.5% in the third quarter versus the comparable prior year period. The improvement in the third quarter results reflected lower fixed costs associated with plant closures and higher productivity levels in Brazil, partially offset by higher commodity and transportation costs and a less favorable value of the Brazilian Real. In comparison to forecasted expectations for the third Page 34 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS quarter, results fell substantially short due to lost margins attributable to the sales declines referenced above, as well as higher-than-expected commodity surcharges. Nine Months Ended September 30, 2006 vs. Nine Months Ended September 30, 2005
NINE MONTHS ENDED SEPTEMBER 30, (dollars in millions) 2006 % 2005 % -------- ----- -------- ----- Net sales $1,331.8 100.0% $1,322.9 100.0% Cost of sales 1,251.8 93.9% 1,224.9 92.6% Selling and administrative expenses 131.9 9.9% 121.4 9.2% Impairments, restructuring charges, and other items 14.0 1.1% 111.3 8.4% -------- -------- Operating loss (65.9) (4.9%) (134.7) (10.2%) Interest expense (29.4) 2.2% (18.0) 1.4% Interest income and other, net 10.0 0.7% 6.9 0.4% -------- -------- Loss from continuing operations before taxes (85.3) (6.4%) (145.8) (11.0%) Tax provision (benefit) (3.7) (0.3%) 28.3 2.2 -------- -------- Loss from continuing operations ($81.6) (6.1%) ($174.1) (13.2%) ======== ========
Consolidated net sales from continuing operations in the first nine months of 2006 increased to $1,331.8 million from $1,322.9 million in 2005. Excluding the increase in sales due to the effects of currency fluctuation of $30.2 million, 2006 first nine months sales decreased by $21.3 million or 1.6%. The sales decline was attributable to a substantial decline in sales in the Engine & Power Train segment, partially offset by increases in the Compressor and Electrical Components segments. Cost of sales was $1,251.8 million in the nine months ended September 30, 2006, as compared to $1,224.9 million in the nine months ended September 30, 2005. As a percentage of net sales, cost of sales was 93.9% and 92.6% in the first nine months of 2006 and 2005, respectively. The increase in cost was primarily due to unfavorable foreign currency rates and higher commodity costs, offset by improved operational efficiencies, lower fixed costs associated with plant closures and a $3.5 million ($3.0 million net of tax or $0.16 per share) gain from the sale of the Douglas, Georgia engine facility in the first quarter of 2006. Selling, general and administrative expenses were $131.9 million in the nine months ended September 30, 2006, as compared to $121.4 million in the nine months ended September 30, 2005. As a percentage of net sales, selling, general and administrative expenses were 9.9% and 9.2% in the first nine months of 2006 and 2005, respectively. The increase was primarily related to AlixPartners' fees of $18.8 million offset by global headcount reductions. Included in Selling, General and Administrative expenses were corporate expenses of $12.7 million for the first nine months of 2006. These expenses increased from $9.6 million in the prior year as a result of additional staff and information technology costs associated with the Company's globalization of certain purchasing and information technology functions. Impairments, restructuring charges and other items were $14.0 million ($14.0 million net of tax or $0.76 per share) in the nine months ended September 30, 2006, compared to $111.3 million ($111.3 million net of tax or $6.02 per share) in the nine months ended September 30, 2005. As a percentage of net sales, impairments, restructuring charges and other items were 1.1% and 8.4% respectively in the third Page 35 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS quarter of 2006 and 2005. During the third quarter 2006, we recorded asset impairment and restructuring charges of $8.4 million related to the Engine & Power Train business for the write-down of assets that have become idled under the segment's overall restructuring program. During the second quarter 2006, we incurred asset impairment and restructuring charges of $2.4 million ($0.13 per share) related to the Electrical Components business for the relocation of certain electric motor production from Australia to Thailand and $2.6 million ($0.14 per share) in asset impairment and restructuring charges related to the Engine & Power Train business for the consolidation of transmission production into a single U.S. facility. First quarter 2006 charges amounted to $0.6 million ($0.03 per share) and were the result of the continuation of previously announced programs. During the first nine months of 2005, we recognized a goodwill impairment charge related to the Electrical Components business of $108.0 million ($5.84 per share), and restructuring and asset impairment charges of $3.3 million ($3.3 million net of tax or $0.18 per share) related to the Engine & Power Train ($1.4 million), Compressor ($0.9 million) and Electrical Components ($1.0 million) segments. Interest expense amounted to $29.4 million in the first nine months of 2006 compared to $18.0 million in the first nine months of 2005. The increase was primarily related to the higher average interest rates associated with the Company's current borrowing arrangements. Interest income and other, net was $10.0 million in the first nine months of 2006 compared to $6.9 million in the first nine months of 2005. The impact of lower interest income due to lower cash balances was more than offset by a gain of $3.6 million ($2.3 million net of tax or $0.12 per share) on the sale of the Company's interest in Kulthorn Kirby Public Company Limited, a manufacturer of compressors based in Thailand during the first quarter. The sale of the stock was completed in conjunction with the end of a licensing agreement between the Company's Compressor operations and Kulthorn Kirby. The consolidated statement of operations reflects a $3.7 million income tax benefit for the first nine months of 2006 and a $28.3 million income tax expense for the first nine months of 2005. Income taxes are recorded pursuant to SFAS No. 109, "Accounting for Income Taxes," which specifies the allocation method of income taxes between categories of income defined by that statement as those that are included in net income (continuing operations and discontinued operations) and those included in comprehensive income but excluded from net income. SFAS 109 is applied by tax jurisdiction, and in periods in which there is a pre-tax loss from continuing operations and pre-tax income in another category (such as other comprehensive income or discontinued operations), tax expense is first allocated to the other sources of income with a related benefit recorded in continuing operations. The second and third quarters of 2006 reflected a tax benefit in continuing operations and tax expense in other comprehensive income and discontinued operations. At September 30, 2006 and December 31, 2005, full valuation allowances are recorded for net operating loss carryovers for those tax jurisdictions in which the Company is in a cumulative three year loss position. Valuation allowances were established against remaining foreign deferred tax assets in Brazil in the third quarter of 2006 (aggregating approximately $5.9 million) due to negative evidence resulting in a determination that it is no longer more likely than not that the assets will be realized. Page 36 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net loss from continuing operations in the first nine months of 2006 was $81.6 million ($4.42 per share) as compared to net loss of $174.1 million ($9.42 per share) through the third quarter of 2005. The variance was primarily the result of the factors described above. Reportable Operating Segments The financial information presented below is for our three reportable operating segments for the periods presented: Compressor, Electrical Components, and Engine & Power Train. Financial measures regarding each segment's income (loss) before interest, other expense, income taxes, and impairments, restructuring charges, and other items ("operating income") and income (loss) before interest, other expense and income taxes and impairments, restructuring charges, and other items 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 (loss) before interest, other expense, income taxes, and impairments, restructuring charges, and other items. 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 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 (loss) before interest, other expense and income taxes, impairments, restructuring charges, and other items to income before provision for income taxes, see Note 5, Business Segments. Compressor Products Compressor business sales in the first nine months of 2006 increased to $755.6 million from $707.2 million in the first nine months of 2005. Excluding the increase in sales due to the effects of foreign currency translation of $28.9 million, sales increased by 2.8% in the first nine months. The balance of the increase was primarily attributable to higher unit volumes in aftermarket and commercial distribution markets in the U.S. and Europe as a result of favorable weather conditions, and higher selling prices implemented over the course of 2006 to offset increases in material costs. This increase over the same period in 2005 was somewhat compromised by shipping issues which were experienced as a result of the conversion of the majority of the Compressor business to the Company's new global ERP platform in August. The Company estimates that approximately $10.0 million in lost opportunities for product shipments occurred during the transition. While some volume may be recovered in the fourth quarter of 2006, the majority of the sales volumes lost as a result of this issue are not expected to be recovered in the current season. Operating loss for the nine months ended September 30, 2006 amounted to $3.7 million compared to income of $23.6 million for the first nine months of 2005. The decline was attributable to unfavorable foreign currency rates, higher material and other input costs, and unfavorable variances associated with the Oracle go-live, partially offset by price advances, better volumes, headcount reductions, and productivity improvements. For the first nine months, the Brazilian Real was on average 12% stronger against the U.S. Dollar in 2006 versus 2005, and the results of hedging activities were less favorable year over year in the third quarter than compared to the second quarter. Electrical Component Products Electrical Components business sales were $325.3 million for the first nine months of 2006, an Page 37 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS increase of 6.3% over sales of $305.9 million in the same period last year. In the residential and commercial markets, third quarter trends were consistent with those of the first and second quarters of 2006, with higher sales (up 10.8% over 2005 year-to-date) due to strong HVAC related sales. Lower sales in the automotive motor market (down 5.5% year-to-date) were as a result of lower build schedules and losses in sales volumes by the Company's customers at their respective OEM's. This trend moderated in the third quarter, as automotive motor sales were flat as compared to the third quarter of 2005. Electrical Components operating results for the first nine months of 2006 were net income of $2.7 million compared to net income of $4.0 million in the first nine months of 2005. The decline was attributable to weaker results in the second and third quarters due to higher commodity costs, production inefficiencies, including Oracle go-live issues, associated with a facility in Mexico, and costs associated with a product warranty issue. These higher costs were offset somewhat by the results of the first quarter when results improved by $6.0 million over the prior year's first quarter, due to the higher sales volumes, improved operational efficiencies and pricing actions taken in 2005. Engine & Power Train Products Engine & Power Train business sales for the nine months ended September 30, 2006 amounted to $237.6 million compared to $297.8 million in the same period of 2005. The most significant decline in the nine month period was primarily due to the loss of sales of $23.9 million into the European market from the Company's former Italian subsidiary that was shut down at the end of 2005. The Italian subsidiary was the primary, but not sole, source of engines for sales in the European market. This decline in unit volumes sold into Europe was partially offset by an increase in volumes sold into the United States that were primarily attributable to the placement of the Company's engines on additional product applications at existing customers. A year-over-year decline in sales volumes for generators reflects the lack of a significant hurricane or other storm activity during the 2006 season, and is down $16.3 million over the same period in 2005. In addition, sales volumes of snowthrowers declined $13.3 million as compared to the nine months of 2005, due to a shift by our customers to more aggressive inventory management policies. In units sold, 2006 volumes of snowthrowers sold year to date lagged the same period of 2005 by approximately 16.3%. The full year 2006 is currently forecasted to show a decline in snowthrower units sold of 11.7% when compared to the prior year. The remaining sales decline was due to a decrease in transmission business. For the first nine months of 2006, the business incurred an operating loss of $38.9 million compared to an operating loss of $41.6 million in 2005. Included in the 2006 loss were AlixPartners' fees of $18.8 million in the first nine months and a $3.5 million gain from the sale of the Douglas, Georgia engine facility. Exclusive of these two items, operating results improved by approximately 43.3% in the first nine months of 2006 versus the comparable prior year period. The improvement in results reflected lower fixed costs associated with plant closures, higher productivity levels in Brazil, and higher U.S. volumes, partially offset by higher commodity and transportation costs and a less favorable value of the Brazilian Real. In comparison to forecasted expectations, year-to-date results have fallen substantially short, primarily due to lost margins attributable to the sales declines referenced above. Page 38 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS OTHER MATTERS Sale of Subsidiary During the second quarter of 2006, the Company completed the sale of 100% of its ownership in Little Giant Pump Company. The operating results of Little Giant Pump Company for 2006 and the comparable prior year periods have been reclassified from continuing operations to income from discontinued operations. Under accounting rules, the Company has also allocated the portion of its interest expense associated with this operation to the discontinued operations line item. Proceeds from the sale were approximately $121 million. The Company recognized a pre-tax gain on the sale of $77.9 million. The gain on the sale, including losses incurred during the Company's period of ownership, net of taxes and interest, is presented in income from discontinued operations and amounted to $65.1 million net of tax ($3.52 per share). As required by the Company's lending agreements, the proceeds were utilized to repay a portion of the Company's debt. Pretax gains of $8.4 million primarily associated with curtailment of employee benefits formerly provided to Little Giant employees ($7.5 million net of tax) are reflected in third quarter financial results. 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, 2006 and December 31, 2005, we had accrued $3.4 million and $3.5 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. 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 included focusing on improving profitability and customer service. The plans also included eliminating significant duplicate capacity, among other cost reduction efforts. We believe participation by AlixPartners has allowed the Company to progress in effecting these changes in a shorter time frame than it otherwise could have achieved. During the third quarter and first nine months of 2006, the Company recognized fees of $5.5 million and $18.8 million, respectively, related to the AlixPartners engagement. On December 9, 2006, we entered into a new letter agreement with AlixPartners and its affiliate, AP Services, LLC. This agreement provides for AlixPartners to continue to provide interim management, financial advisory, and consulting services for our Engine and Power Train Group, but alters the Page 39 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS amounts and timing of payments that would be due to AlixPartners over the next nine months. The new agreement replaces provisions that determined an amount of "success" fee based upon computations of cost savings with a mutually agreed upon fixed amount so that the Company would have greater certainty concerning its future cash outflows. Albert A. Koch, a member of our Board of Directors, is a Managing Director of AlixPartners, and effective as of January 1, 2007, he will become a partner in AlixPartners. He has not been personally involved in any of the services AlixPartners has performed for us. 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 For the first nine months of 2006, cash used by operations amounted to $129.4 million, reflecting both an operating loss and net investments in working capital. Accounts receivable increased by $36.3 million from the beginning of the year. This increase was the result of several factors. First, the seasonality of the Company's sales patterns resulted in higher sales in the third quarter of the year when compared to the fourth quarter of 2005. More specifically, sales in the last two months of the respective quarters - which is the primary driver of the accounts receivable balance - increased by $31.0 million in the August 1 to September 30, 2006 period when compared to November and December of 2005. Finally, receivables, on average, required an additional three days to collect as of September 30, 2006 as compared to the end of 2005. This increase was driven by the Engine & Power Train segment, whose days sales outstanding increased from 50 at the end of the year to 60 as of September 30, due to more extended payment terms to certain key customers. Recoverable non-income taxes in Brazil have increased by $33.1 million since the beginning of the year. In addition, inventories increased by $23.7 million since the beginning of the year, attributable to production inefficiencies associated with a facility in Mexico and shipping issues driven by the conversion to the Company's new global ERP platform. The cash used to fund operations, fund capital expenditures and repay amounts originally borrowed under the new debt arrangements was predominantly provided by proceeds from the sale of Little Giant Pump Company. In evaluating its balance sheet metrics, the Company considers the days sales outstanding and days inventory on hand metrics to be more relevant when comparing year-over-year periods than when comparing the current period to year-end, as it removes any seasonality of the Company's sales patterns from the comparison. Average days sales outstanding were 58 days at September 30, 2006 versus 53 days at September 30, 2005, before giving effect to receivables sold. Days inventory on hand were 80 days at September 30, 2006, up from 77 days at September 30, 2005, due to the factors discussed above. Page 40 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cash provided by investing activities was $84.8 million in the first nine months of 2006 versus a use of $88.6 million for the same period of 2005. Of the overall change of $173.4 million, $43.0 million was related to lower capital expenditures due to significant new product expansions in India and Brazil in the prior year, and $132.4 million related to proceeds received from the sale of assets during 2006. Included in such sales was the Company's 100% interest in Little Giant Pump Company for $120.7 million, the sale of the Company's 7% interest in Kulthorn Kirby Public Company Limited stock for $4.7 million and the sale of the Company's former Douglas, Georgia manufacturing facility for $3.5 million. In addition, during the first quarter, the Company acquired a small Australian-based company, which owned patents related to the manufacturing of certain types of electric motors, which are applicable to both our Electrical Components, and Compressor segments. The entire purchase price was allocated to amortizable intangible assets. Cash flows from financing activities used cash of $12.8 million in the first nine months of 2006 as compared to a use of $23.0 million in the same period of 2005. During the first quarter 2006, the remaining outstanding balances of our Senior Guaranteed Notes, Revolving Credit Facility and Industrial Revenue Bonds were replaced by a new financing package that included a $275 million First Lien Credit Agreement and a $100 million Second Lien Credit Agreement. During the second quarter 2006, proceeds from the sale of Little Giant Pump Company were used to repay a portion of First and Second Lien Credit Agreements, based upon formulas contained in the agreements. Capitalization In addition to cash provided by operating activities when available, we use a combination of our revolving credit arrangement under our First Lien Credit Agreement, long-term debt under our Second Lien Credit Agreement, and foreign bank debt to fund our capital expenditures and working capital requirements. For the nine months ended September 30, 2006 and September 30, 2005, our average outstanding debt balance was $363.1 million and $370.9 million, respectively. During the second quarter of 2006 the Company entered into interest rate swap agreements, effectively converting $90 million of variable rate debt to fixed rate debt. The weighted average long-term interest rate, including the effect of hedging activities, was 6.7% and 4.6% for the respective periods. Among other factors, the change in the weighted average, long-term interest rate for the respective periods reflected the increase in the borrowing rate applicable to our new borrowing arrangements of 8.8% as of September 30, 2006, as compared to the original interest rate of 4.6% under our Senior Guaranteed Notes. Accounts Receivable Sales Certain of our Brazilian and Asian subsidiaries periodically sell their accounts receivable to financial institutions. Such receivables are factored with recourse to us and, in the case of Brazil, are excluded from accounts receivable in our consolidated balance sheets. The amount of sold receivables excluded from our balance sheet was $45.7 million and $32.1 million as of September 30, 2006 and December 31, 2005, 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 previous credit facilities were sufficient to meet our long-term debt maturities, projected capital expenditures and anticipated working capital requirements. However, in recent years cash flows from operations have been negative and the Page 41 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS Company has had to rely on existing cash balances, proceeds from credit facilities and asset sales to fund its needs. Throughout the third quarter, our main domestic credit facilities were provided under two credit agreements we signed on February 6, 2006: a $275 million First Lien Credit Agreement and a $100 million Second Lien Credit Agreement. Both agreements provided for security interests in substantially all of the Company's assets and specific financial covenants related to EBITDA (as defined under the agreements and hereafter referred to as our "Adjusted EBITDA"), capital expenditures, fixed charge coverage, and limits on additional foreign borrowings. During the third quarter, the weighted average annual interest rate on our borrowings under these agreements was 8.8%. During 2006 the Company's results from operations have continued to be impacted by unfavorable events that have caused actual Adjusted EBITDA for the twelve-month period ended September 30, 2006, calculated to be $5.1 million, to fall short of the $21.0 million required under the credit agreements before the amendments and replacement second lien agreement described below. These events included the previously disclosed issue with respect to non-income based taxes deemed to be unconstitutional by the Brazilian Supreme Court. The Company's Adjusted EBITDA target included the expectation that approximately $7.0 million of previously provided accruals would be reversed; however, GAAP does not permit reversal until the Company's own individual case is decided by the court. Under Brazilian law, lower courts are not bound by Supreme Court decisions, and the Company's case still had not been finally decided. In addition, lower than expected sales in the Engine & Power Train Business due to lack of storm activity, operational inefficiencies at the Company's Juarez, Mexico facility and shipping delays in the Compressor Business associated with the August 1, 2006 adoption of the Oracle ERP system in the US and Brazil, contributed to the shortfall of Adjusted EBITDA versus the covenant level. As a result, the Company sought, and on November 3, 2006 it signed, amendments to its lending arrangements with its first and second lien lenders. The principal terms of the November 3 amendments were described in a Current Report on Form 8-K we filed on November 8, 2006. On November 13, 2006 we signed a new $100 million Second Lien Credit Agreement with Tricap Partners LLC (the "New Second Lien Agreement") and a corresponding further amendment to our February 6, 2006 First Lien Credit Agreement. The new second lien facility provides the Company with additional liquidity and more lenient financial covenants. We borrowed $100 million under the new Second Lien Credit Agreement and used the proceeds to repay in full the outstanding balance of $54.6 million under the old Second Lien Credit agreement, plus a 2.0% prepayment premium, and to repay $40.0 million of borrowings under the First Lien Credit Agreement. Under the terms of the First Lien Credit Agreement, as amended, we have the capacity for additional borrowings under the borrowing base formula of $65.3 million in the U.S. and $58.3 million in foreign jurisdictions. Both the First Lien Credit Agreement as amended and the new Second Lien Credit Agreement have three year terms, beginning November 13, 2006 and ending November 12, 2009. The Adjusted EBITDA covenant requirement as of September 30, 2006 in the First Lien Credit Agreement was removed as a result of the amendments. As part of the new Second Lien Credit Agreement with Tricap and the corresponding amendment to our First Lien Credit Agreement, the minimum cumulative Adjusted EBITDA levels (measured from October 1, 2006) for the fourth quarter 2006 and 2007 quarterly periods (in millions) were set at: Page 42 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Quarterly Period Ending First Lien Agreement Second Lien Agreement - ----------------------- -------------------- --------------------- December 31, 2006 ($14.9) ($16.9) March 31, 2007 ($8.0) ($10.0) June 30, 2007 $17.0 $15.0 September 30, 2007 $52.0 $50.0 December 31, 2007 $82.0 $80.0
Interest on the new Second Lien Agreement is equal to LIBOR plus 6.75% plus paid in kind ("PIK") interest of 1.5%. PIK interest accrues monthly on the outstanding debt balance and is paid when the associated principal is repaid. This compares to the previous second lien arrangement, as amended, of cash interest of LIBOR plus 7.5% plus PIK interest of 2.0%. While the new Second Lien Agreement has more favorable interest terms than its predecessor, our weighted average cost of borrowing under the current agreements is higher than it was before the November 13 refinancing. This is attributable to a greater proportion of our total debt being borrowed under the Second Lien Agreement ($100 million versus $54.6 million) and less under the First Lien Agreement. Giving effect to the Company's new and amended arrangements, our weighted average interest rate for all borrowings is 10.4% compared to 8.8% prior to the November 13 refinancing. Other interest rate related terms of the new Second Lien Credit Agreement are also more favorable than the former second lien arrangement, as amended. The new Second Lien Credit Agreement provides for additional PIK interest at the rate of 5.0% if outstanding debt balances are not reduced by certain specified dates. This additional PIK interest would apply to the difference between a target amount of aggregate reduction in debt and the actual amount of first and second lien debt reduction according to the following milestones:
Milestone Date Aggregate Reduction - -------------- ------------------- June 30, 2007 $20.0 million September 30, 2007 $40.0 million December 31, 2007 $60.0 million
The new Second Lien Credit Agreement also provides for an additional 2.5% in PIK interest if certain assets are not sold by December 31, 2007. Sources of funds to make the principal reductions could include, but are not limited to, cash from operations, reductions in working capital, or asset sales. In addition, the new Second Lien Credit Agreement includes a commitment to create an advisory committee to assist our board of directors in working with a nationally recognized executive recruiting firm and to recommend to the board qualified candidates for various executive management positions, including the Chief Executive Officer position. The agreement provides that when the Board engages a new Chief Executive Officer, Todd W. Herrick will remain as Chairman of the Board. Some of our major shareholders (Herrick Foundation, of which Todd W. Herrick and Kent B. Herrick are members of the Board of Trustees, and two Herrick family trusts, of which Todd W. Herrick is one of the trustees) entered into option agreements with Tricap to induce Tricap to make the new second lien financing available to us. We are not a party to the option agreements. Page 43 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS After giving effect to the refinancing, waivers and amendments discussed above, we are currently in compliance with the covenants of our domestic debt agreements. Achieving the level of future financial performance required by our lending arrangements will depend on a variety of factors, including customer price increases to cover increases in commodity costs, further employee headcount reductions, consolidation of productive capacity and rationalization of various product platforms. While we are currently moving forward with these actions, there can be no assurance that any of these initiatives will be sufficient if certain risks continue to impede our progress. Those risks include currency fluctuations, weather, the extent to which the Company may lose sales in reaction to higher product prices, or adverse publicity. In the event that we fail to improve performance through these measures, our ability to raise additional funds through debt financing will be limited. We are also concerned about the amount of debt we are carrying in this challenging operating environment and as we seek to improve our company's financial performance. As a result, we are evaluating the feasibility of asset sales as a means to reduce our total indebtedness and to increase liquidity. In our November 15, 2006 Form 8-K, we disclosed that the Company was in negotiations with its lenders in Brazil to reschedule maturities of its current lending arrangements for its Brazilian engine manufacturing subsidiary. The Company's Brazilian engine manufacturing subsidiary has its own financing arrangements with Brazilian banks under which it is required to pay principal installments of various amounts throughout the remainder of 2006 through 2009. Historically, the subsidiary has experienced negative cash flows from operations indicating that it may not have sufficient liquidity on its own to make all required debt repayments as originally scheduled. On November 21, 2006, lenders representing greater than 60% of the outstanding amounts borrowed, executed a restructuring agreement whereby scheduled maturities were deferred for eighteen months, with subsequent amortization over the following eighteen months. Other provisions of the agreement included a pledge of certain of the assets of the Brazilian engine manufacturing subsidiary, and a parent guarantee of the obligation, which would only become effective after full repayment of the Second Lien debt. Two banks representing less than 40% of the outstanding balances did not participate in the restructuring agreement. We have ceased further payments to those banks effective November 15, 2006 and are seeking remedies available to us under Brazilian law that would require those banks to abide by the terms of the restructuring agreement. While the non-payments constitute a default under the debt agreements, the lenders under the First Lien Credit Agreement, as amended, and the new Second Lien Credit Agreement have waived, for a time, any cross-default that otherwise would result from our failing to make a required payment on these Brazilian loans. The waiver will expire 180 days after November 15, 2006, though either the First Lien or Second Lien lenders have the authority to shorten the 180-day period to as few as 100 days. The waiver will expire immediately if a Brazilian lender takes legal action to collect and the action is not stayed within ten days. If, before the waiver expires, we succeed in our legal action to compel the non-agreeing banks to abide by the terms of the restructuring agreement, the First Lien and Second Lien lenders will have no further right to declare a cross-default based on the Brazilian non-payments so long as we comply with our obligations under the restructuring agreement. The agreement with the Brazilian banks was subject to the approval of our First and Second Lien credit holders. This approval was obtained through amendments to our existing agreements, which were Page 44 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS effective on December 11, 2006. The principal terms of the December 11 amendments were described on a Current Report on Form 8-K we filed on December 15, 2006. Terms of the amendments included fees paid of $1.5 million. In addition, the availability reserve of $10.0 million instituted under a previous amendment to the First Lien Credit Agreement became permanent. In accordance with its terms, all the debt associated with the Brazilian engine subsidiary was classified as current at December 31, 2005. As a result of the restructuring, all of the Brazilian debt that is subject to the new agreement ($60.6 million) has been classified on the Company's Consolidated Balance Sheet as long-term. The Brazilian debt that is attributable to the two banks that did not participate in the restructuring agreement ($23.9 million) continues to be carried as short-term while the Company pursues legal action to compel those banks to abide by the terms of the restructuring agreement. This classification is in accordance with Statement of Financial Accounting Standards (SFAS) 6, "Classification of Short-Term Obligations Expected to Be Refinanced." The restructuring agreement clearly permits the Company to refinance its obligations on a long-term basis, with terms that are readily determinable, and the agreement is not cancelable by the lenders except under conditions of default. After giving effect to the restructuring of a portion of the Brazilian debt from current to long-term and the amendments to the First and Second Lien agreements, the Company's payments by period for its long-term contractual obligations are as follows:
Payments by Period (in millions) ------------------------------------- Total Less than 1 Year 1-3 Years ------ ---------------- --------- Long-Term Debt $360.7 $95.0 $265.7 Interest Payments on Debt (a) 119.4 41.2 78.2 Interest Rate Swap Payments (b) -- -- --
(a) Interest rate is assumed to remain constant at current weighted average rate of 10.4%. (b) Less than $20,000 annually. See Part II, Item 1A, "Risk Factors," in this report for a summary of some of the most significant risks posed by our current liquidity issues. 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 Page 45 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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, 2005. Although not mentioned at December 31, 2005, we regard the recoverability of our deferred tax assets as a critical accounting estimate. We are required to estimate whether recoverability of our deferred tax assets is more likely than not based on forecasts of taxable earnings in the related tax jurisdiction. We use historical and projected future operating results, based upon approved business plans, including a review of the eligible carry-forward period, tax planning opportunities and other relevant considerations. Examples of evidence that we consider when making judgments about the deferred tax valuation includes tax law changes, a history of cumulative losses, and variances in future projected profitability. Full valuation allowances will be maintained against deferred tax assets in the U.S. and other foreign countries until sufficient positive evidence exists to reduce or eliminate them. In the third quarter of 2006, valuation allowances were established against remaining foreign deferred tax assets in Brazil (aggregating approximately $5.9 million) due to negative evidence (including a continuation of losses recognized during 2006) which resulted in a determination that it is no longer more likely than not that the assets will be realized. As discussed in the Significant Accounting Policies and Critical Accounting Estimates sections of the Form 10-K for the year ended December 31, 2005, the Company traditionally conducts its annual assessment of impairment for goodwill in the fourth quarter by comparing the carrying value of the Company's reporting units to their fair value. Fair value of the Company's goodwill and other intangible assets is estimated based upon a present value technique using discounted future cash flows, forecasted out over a six year period, with residual growth rates forecasted at 3.0% thereafter. The Company uses management business plans and projections as the basis for expected future cash flows. In evaluating such business plans for reasonableness in the context of their use for predicting discounted cash flows in our valuation model, the Company evaluates whether there is a reasonable basis for differences between actual results of the preceding year and projected results for the upcoming years. This methodology can potentially yield significant improvements in growth rates in the first few years of forecast data, due to multiple factors such as improved efficiencies or incremental sales volume opportunities that are deemed to be reasonably likely to be achieved. In the India reporting unit of the Compressor Group, the goodwill analysis performed at the end of 2005 projected growth rates of approximately 35.0% and 29.0% in 2007 and 2008 respectively, before moderating to a 3.0% residual growth rate. For the reporting unit within the Electrical Components Group, the rates were approximately 10.0% and 9.0% in 2007 and 2008, thereafter adjusting to 3.0%, and the Europe reporting unit of the Compressor Group projected growth rates of approximately 5.0% in 2007 and 2008, adjusted to 3.0% thereafter. While performance of the Europe reporting unit of the Compressor Group has been relatively close to expectation during the first nine months of 2006, the India reporting unit of the Compressor Group has seen its net profitability decline $7.0 million against the forecasts made at the beginning of the year, and the reporting unit within the Electrical Components Group with goodwill has reported net profit results $20.5 million lower than forecast. The majority of the profitability decline against the original 2006 plan for the Electrical Components reporting unit occurred in the third quarter of the year. Profitability in the first quarter of the year exceeded expectations; the second quarter, while unprofitable and unfavorable to plan, still showed Page 46 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS forecasts that the full year would be profitable. By the end of the third quarter, however, the decline against expectations had continued and become more pronounced, and the full year forecast indicated a substantial loss for the business unit was now anticipated. According to SFAS No. 142, "Goodwill and other Intangible Assets," "goodwill of a reporting unit shall be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount." The profitability decline for the Electrical Components reporting unit in the third quarter led the Company to conclude that it should perform an interim goodwill impairment analysis, incorporating the 2006 year to date results and updated cash flow forecasts. The sales growth rates utilized in the interim analysis were 3.0% or less in each year, and operating profit as a percentage of sales ranged from 0.8% to 7.8%. Based on the results of this analysis, the Company determined that no impairment of the unit's goodwill had taken place. Although the decline in sales and profitability in the current year for the India reporting unit is considered to be temporary and due to a delay in the launch of new products, the operating profit performance through the nine months of 2006 led the Company to perform an interim goodwill analysis for that business unit as well. The sales growth rates utilized in the interim analysis were reduced to 21.5% in 2007, 2.2% in 2008, and 3.0% percent thereafter. The operating profit percentages were modeled at 2.8% of sales. Based on the results of this interim analysis, the Company determined that no impairment of the unit's goodwill has taken place. Assumptions in estimating future cash flows are subject to a high degree of judgment and complexity. The Company makes every effort to forecast these future cash flows as accurately as possible with the information available at the time the forecast is developed. However, changes in the assumptions and estimates may affect the carrying value of goodwill, and could result in additional impairment charges in future periods. Factors that have the potential to create variances between forecasted cash flows and actual results include but are not limited to (i) fluctuations in sales volumes, which can be driven by multiple external factors, including weather conditions affecting demand; (ii) product costs, particularly commodities such as copper; (iii) currency exchange fluctuations; (iv) acceptance of the Company's pricing actions undertaken in response to rapidly changing commodity prices and other product costs; and (v) interest rate fluctuations. Refer to "Cautionary Statements Relating to Forward-Looking Statements" in Item 2 for other factors that have the potential to impact estimates of future cash flows. Discount rates utilized in the goodwill valuation analysis are derived from published resources such as Ibbotson. The rates utilized were 8.15% at September 30, 2006 and 9.25% at December 31, 2005 for all business units for which goodwill is currently recorded. Operating Profit as a percentage of sales revenue is also a key assumption in the fair value calculation. The range of assumptions used incorporates the anticipated results of the Company's ongoing productivity improvements over the life of the forecast model. The Europe reporting unit forecasted operating profit percentages ranging from 1.3% up to 3.9%. The India reporting unit forecasted 2.8% of sales, and the reporting unit within the Electrical Components Group with goodwill forecasted a range of 0.8% to 7.8%. Based on the goodwill analysis performed for the year ended December 31, 2005, changes of 1.0% in the discount rate utilized would increase (decrease) the fair value calculated for the respective business units as follows: Page 47 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Change in Change in valuation valuation with 1.0% with 1.0% decrease in increase in discount rate discount rate ------------- ------------- Compressor Segment - Europe $14.8 ($10.6) Compressor Segment - India 24.1 (17.3) Electrical Components Segment 71.8 (52.2)
For the Europe business unit within the Compressor segment, if the discount rate were to increase by 1.0%, the fair value of the business unit would decrease by approximately $11 million. Such an increase in the discount rate would result in the need for management to perform a step 2 analysis on this business unit and could result in an impairment. Other than the addition of the disclosure of the policies regarding income taxes and goodwill noted above, there have been no significant changes to our significant accounting policies or critical accounting estimates during the first nine months of 2006. Recently Issued Accounting Pronouncements Accounting for Defined Benefit Pension and Other Postretirement Plans In September 2006, the FASB issued Statement No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R)" ("SFAS 158"). SFAS 158 requires companies to recognize the funded status of their defined postretirement benefit plans as a net asset or liability on the balance sheet. Any unrecognized past service cost, experience gains/losses, or transition obligations are reported as a component of other comprehensive income, net of tax, in stockholders' equity. SFAS 158 also eliminates the company's option to select a date prior to its year-end balance sheet date to measure benefit plan assets and obligations. SFAS 158 is effective with balance sheets reported as of December 31, 2006. The Company estimates that the impact of the adoption of SFAS 158 will be material. As of December 31, 2005, the Company had net unrecognized benefits totaling $27.2 million (consisting of $2.2 million related to the pension plan and $25.0 million related to the OPEB plan). If this standard had been adopted in 2005, this unrecognized amount would have been recorded in Other Comprehensive Income, thereby increasing consolidated net assets and shareholders' equity by approximately $27.2 million. The actual impact on the Company's 2006 balance sheet position will vary depending on factors affecting remeasurement of plan assets and obligations as of its remeasurement date. The change in accounting principle has no impact on the Company's net earnings, cash flow, liquidity, debt covenants, or plan funding requirements. The Company is also assessing which of the acceptable alternatives prescribed in the Standard it will use to transition to a fiscal year-end measurement date. Accounting for Uncertainty in Income Taxes In June 2006, the FASB issued Financial Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes" an interpretation of FASB Statement of Financial Accounting Standards No. 109 ("SFAS Page 48 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS 109"), "Accounting for Income Taxes." This interpretation clarifies the accounting for income taxes recognized in accordance with SFAS 109 with respect to recognition and measurement for tax positions that are taken or expected to be taken in a tax return. FIN 48 is effective on January 1, 2007 and the Company is currently evaluating the impact of this pronouncement on its consolidated financial statements. Fair Value Measurements In September 2006, the FASB issued Statement No. 157, "Fair Value Measurements" ("SFAS 157"), to provide enhanced guidance for using fair value to measure assets and liabilities. The Standard also expands disclosure requirements for assets and liabilities measured at fair value, how fair value is determined, and the effect of fair value measurements on earnings. The Standard applies whenever other authoritative literature require (or permit) certain assets or liabilities to be measured at fair value, but does not expand the use of fair value. SFAS 157 is effective beginning January 1, 2008, and the company is currently evaluating the impact of this pronouncement on its consolidated financial statements. 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 2006 is subject to the same variables that negatively impacted the Company throughout 2005 and the first nine months of 2006. Commodity costs, key currency rates, weather and the overall growth rates of the respective economies around the world are all important to future performance. Overall, the Company does not expect these factors to become any more favorable in the foreseeable future. Certain key commodities, including copper and aluminum continue to trade at elevated levels compared to recent history. From January 1, 2006 through October 31, 2006, the prices of copper and aluminum have increased approximately 60% and 23%, respectively. Lack of storm activity has significantly reduced sales of engines used for generators and has left the Company and the industry with above normal inventory levels. The Brazilian Real continues to strengthen against the dollar, and as of October 31, 2006 had strengthened 8.5% since the beginning of the year. Accordingly, the Company expects to continue to incur losses in the fourth quarter 2006, as we do not expect improvements in any of the key factors noted above. Specifically, the Compressor and Electrical Components groups' fourth quarter results are expected to lag the results of the comparable 2005 period. On the other hand, despite the expectation of continued lower levels of sales in the Engine group due to unfavorable market conditions, results in the Engine Group are expected to improve over the very poor 2005 fourth quarter excluding restructuring charges. This improvement continues to be driven by the overall restructuring efforts undertaken by AlixPartners and as further restructuring steps are completed it is expected that additional excess capacity will become idle and impairments might need to be recognized. While no such actions have been approved, these actions could have a significant effect on the consolidated financial position and future results of operations of the Company. To respond to the continued losses and consumption of capital resources, the Company is seeking price increases to cover its increased input costs, and has planned further employee headcount reductions, consolidation of productive capacity and rationalization of product platforms. We believe that such actions will contribute to restoring the profitability of the Company, will help to mitigate such Page 49 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS negative external factors as currency fluctuation and increased commodity costs and will result in improved operating performance in all business segments in 2007. These actions also could result in restructuring and/or asset impairment charges in the foreseeable future and accordingly, could have a significant effect on the consolidated financial position and future results of operations of the Company. In addition, we are also concerned about the amount of debt carried by the Company during this period of unfavorable operating environment. As a result, the Company will be evaluating the feasibility of asset sales as a means to reduce the overall amount of Company indebtedness. Such transactions could also have a significant effect on future results of operations. Page 50 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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) the extent of any business disruption caused by work stoppages initiated by organized labor unions; xiv) the ability of the Company to maintain adequate liquidity in total and within each foreign operation; xv) potential political and economic adversities that could adversely affect anticipated sales and production in Brazil; xvi) potential political and economic adversities that could adversely affect anticipated sales and production in India, including potential military conflict with neighboring countries; xvii) our ability to reduce a substantial amount of costs in the Engine & Power Train group associated with excess capacity, and xviii) 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 to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise. Page 51 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 first nine months of 2006. The Company is subject to foreign currency exchange exposure for operations whose assets and liabilities are denominated in currencies other than U.S. Dollars. On a normal basis, the Company does not attempt to hedge the foreign currency translation fluctuations in the net investments in its foreign subsidiaries. The Company does, from time to time, enter into short-term forward exchange contracts to sell or purchase foreign currencies at specified rates based on estimated foreign currency cash flows. Company policy allows local management to hedge known receivables or payables and forecasted cash flows up to a year in advance. It is the policy of the Company not to purchase financial and/or derivative instruments for speculative purposes. At September 30, 2006 and December 31, 2005, the Company held foreign currency forward contracts with a total notional value of $148.9 million and $173.0 million, respectively. The Company has a particularly concentrated exposure to the Brazilian Real. The Company estimates, excluding any mitigation as the result of hedging activities, that a change in the value of the Real of 0.10 per U.S. Dollar will affect pre-tax results by approximately $10 million on an annual basis. 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. Company policy allows local management to contract commodity forwards for a limited percentage of projected raw material requirements up to fifteen months in advance. Commodity contracts at most of the Company's divisions and subsidiaries are essentially purchase contracts designed to fix the price of the commodities during the operating cycle. The Company's practice has been to accept delivery of the commodities and consume them in manufacturing activities. At September 30, 2006 and December 31, 2005, the Company held a total notional value of $5.5 million and $61.8 million, respectively, in commodity forward purchasing contracts. The majority of these contracts were not recorded on the balance sheet as they did not require an initial cash outlay and do not represent a liability until delivery of the commodities is accepted; however, commodity contracts at the Company's French compressor subsidiary are essentially derivative financial instruments designed to hedge the fluctuation in commodity pricing and, as such, are subject to the provisions of SFAS No. 133, as amended by SFAS 149. The Company is subject to interest rate risk, primarily associated with its borrowings of $360.7 million at September 30, 2006. The Company's $250 million First Lien Credit Agreement and $100 million Second Lien Credit agreement are variable-rate debt. The Company's remaining borrowings consist of variable-rate borrowings by its foreign subsidiaries. The Company entered into variable to fixed interest Page 52 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK rate swaps with notional amounts totaling $90 million. The Company's remaining borrowings consist of variable-rate borrowings by its foreign subsidiaries. This resulted in 25.0% of the Company's total debt at September 30, 2006 being fixed-rate. While changes in interest rates impact the fair value of the fixed rate debt, there is no impact to earnings and cash flow because the Company intends to hold these obligations to maturity unless refinancing conditions are favorable. Alternatively, 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 $2.7 million. Page 53 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 4 CONTROLS AND PROCEDURES Disclosure 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 because of the material weaknesses discussed below, which still exist as of September 30, 2006, the Company's disclosure controls and procedures were not effective at the reasonable assurance level as of September 30, 2006. Notwithstanding the material weaknesses, 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 amended annual report as of December 31, 2005: 1) The Company did not maintain effective controls 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. These control deficiencies, when aggregated, could result in misstatements to the aforementioned financial statement accounts that would result in a material misstatement to the consolidated financial statements that would not be prevented or detected. Accordingly, management has determined that this control deficiency represents a material weakness. 2) The Company did not maintain effective controls over the completeness and accuracy of interim income taxes. Specifically, the Company did not maintain effective controls to ensure the completeness and accuracy of (i) state income tax expense associated with a division accounted for as a discontinued operation in 2006, (ii) the effective tax rates applied to foreign operations, and (iii) the allocation of federal income tax expense between continuing and discontinued operations. This control deficiency resulted in the restatement of the Company's 2005 quarterly consolidated financial statements, the consolidated financial statements for the first and second quarters of 2006 and adjustments to the consolidated financial statements for the third quarter of 2006, affecting accrued liabilities, tax expense (benefit), and income from discontinued operations, net of tax. Additionally, this control deficiency could result in a misstatement of the aforementioned accounts that would result in a material misstatement of the Company's interim and annual consolidated financial statements that would not be prevented or detected. Accordingly, management has determined that this control deficiency represents a material weakness. Page 54 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 4 CONTROLS AND PROCEDURES These material weaknesses continued to exist at September 30, 2006. Management's Remediation Plan The Company has implemented additional controls to remediate the material weakness related to user access rights. 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, and are on-going, 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 have 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 monitoring of users having unrestricted access to financial application programs and data, and provides for improved segregation of duties. On April 1, 2006, four of nine locations, scheduled for implementation during 2006, went live. These locations represented approximately 8% of the Company's employee base, 14% of its assets and 4% of its revenues. On May 1, 2006, two additional locations went live representing approximately 14%, 5% and 7% of employees, assets and revenues, respectively. The remaining three locations went live on August 1, 2006, representing approximately 36%, 47% and 40% of employees, assets and revenues, respectively. As of the date of this filing, in aggregate, approximately 58% of the Company's employee base, 66% of its assets and 51% of its revenues are operating under the Company's new ERP system. However, some of the remaining locations utilize systems that have segregation of duty limitations as previously described. The remainder of these locations is expected to adopt the new system in 2007. Until such time, the Company is implementing other measures to correct the segregation of duty issues at these locations. With respect to the completeness and accuracy of the calculation of interim income taxes, the Company has corrected its methodologies to comply with generally accepted accounting principles. The Company has also instituted additional review procedures relating to these processes that includes additional management reviews and review by our outside tax advisors prior to the finalization of the income tax provision for the period. While management has enhanced internal control processes around the calculation of interim income taxes, management has not performed an assessment of these controls and cannot conclude that the material weakness has been remediated. Changes In Internal Control Over Financial Reporting As noted above, the Company is in the process of implementing a new global ERP system. During the three months ended September 30, 2006, that process resulted in significant changes that have materially affected, or are reasonably likely to materially affect the Company's internal control over financial reporting at the operations affected. The Company believes it has designed adequate controls into the new system. Page 55 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART 1. FINANCIAL INFORMATION - ITEM 4 CONTROLS AND PROCEDURES 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 56 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART II. OTHER INFORMATION ITEM 1A. RISK FACTORS In addition to the risk factors presented in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2005, readers should consider the following: WE MAY NOT HAVE SUFFICIENT LIQUIDITY TO CONTINUE OPERATING AS A GOING CONCERN. We must comply with the financial covenants in our U.S. credit agreements. To avoid defaults under financial covenants, we have been forced to amend or refinance our U.S. credit agreements for five out of the last six fiscal quarters, including the most recent one. While our current agreements provide somewhat wider latitude than we have enjoyed in the past, we cannot continue to sustain losses at current levels without consuming our available capital resources and again failing to meet financial covenants. If we default under our U.S. credit agreements, either through failing to meet financial covenants or in some other way, our lenders could elect to stop making the advances we need to fund daily operations, could declare all the debt we owe them immediately due and payable, and could proceed against their collateral. Under those circumstances, we might elect or be compelled to enter bankruptcy proceedings, in which case our shareholders could lose the entire value of their investment in our common stock. For more information about the provisions of our U.S. credit agreements, as well as our Brazilian debt, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Adequacy of Liquidity Sources" and Note 9 to our financial statements. WE MAY DISPOSE OF SOME OF OUR LINES OF BUSINESS OR BECOME EVEN MORE LEVERAGED. Our new Second Lien Credit Agreement requires us to accrue additional PIK interest if we do not reduce the principal balance according to a specified schedule. If funds from operations combined with proceeds of potential asset sales are insufficient to meet the payment schedule, the resulting PIK interest will increase our total debt, thus increasing the leverage risks described in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2005. In addition, if we choose to sell any of our businesses future cash flows and results of operations will be affected. The effects could be either positive or negative and could be material. For more information about the applicable terms of the Second Lien Credit Agreement, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Adequacy of Liquidity Sources" and Note 9 to our financial statements. ITEM 5. OTHER INFORMATION On November 15, 2006, the Company concluded that an asset impairment charge totaling $8.4 million would be required in the third quarter related to the Engine & Power Train business for the write-down of assets that have become idled under the segment's overall restructuring program. The Company does not expect any future cash expenditures related to the impairment charge. Page 57 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES PART II. OTHER INFORMATION ITEM 6. EXHIBITS
(a) Exhibit Number Description ------- ----------- 4.1 Amendment No. 4 to First Lien Credit Agreement dated as of December 7, 2006 by and among Tecumseh Products Company, certain Lenders and Issuers listed therein, and Citicorp USA, Inc. as Administrative Agent and Collateral Agent 4.2 Amendment No. 1 to Amended and Restated Second Lien Credit Agreement dated as of December 7, 2006 among Tecumseh Products Company, Tricap Partners LLC, and Citicorp USA, Inc. 10.1 Out-of-Court Restructuring Agreement dated November 21, 2006 among Tecumseh Products Company, Tecumseh Power Company, TMT Motoco do Brasil, Ltda., and the banks named therein 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 58 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: December 19, 2006 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 59 EX-4.1 2 k10863exv4w1.txt AMENDMENT NO.4 TO FIRST LIEN CREDIT AGREEMENT EXHIBIT 4.1 AMENDMENT NO. 4 TO FIRST LIEN CREDIT AGREEMENT AMENDMENT NO. 4 (this "Amendment"), dated as of December 7, 2006, among TECUMSEH PRODUCTS COMPANY, a Michigan corporation (the "Borrower"), the Lenders party hereto, and CITICORP USA, INC., as administrative agent and collateral agent for the Lenders and the Issuers (in such capacities, the "Administrative Agent"), amends certain provisions of the FIRST LIEN CREDIT AGREEMENT, dated as of February 6, 2006 (as the same has heretofore been amended, as amended hereby, and as it may be further amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among the Borrower, the financial institutions from time to time party thereto as lenders (the "Lenders"), the financial institutions from time to time party thereto as issuing banks (the "Issuers") and the Administrative Agent. WITNESSETH: WHEREAS, the Borrower has informed the Administrative Agent of its desire to provide a limited unsecured springing guaranty in favor of certain creditors of TMT in connection with the restructuring of the obligations of TMT under the TMT Debt Documents; and WHEREAS, the Borrower requested, and the Administrative Agent and each Lender signatory to an Acknowledgement and Consent have agreed to amend the Credit Agreement as set forth below; NOW, THEREFORE, in consideration of the premises and the mutual covenants and provisions hereinafter contained, the parties hereto hereby agree as follows: 1. DEFINED TERMS. Capitalized terms used herein and not defined herein but defined in the Credit Agreement are used herein as defined in the Credit Agreement. 2. AMENDMENT TO THE CREDIT AGREEMENT. As of the Fourth Amendment Effective Date (as defined in Section 4), the Credit Agreement is hereby amended as follows: (a) Section 1.1 of the Credit Agreement is hereby amended by deleting the existing definition of "Permanent Availability Reserve" in its entirety and inserting the following in lieu thereof: "Permanent Availability Reserve" means an amount equal to $10,000,000 which shall be applied at all times until all the Obligations have been paid in full and the Revolving Credit Commitments have been terminated. (b) Section 1.1 of the Credit Agreement is hereby amended by adding the following defined terms in alphabetical order: "Amendment No. 4 to the Credit Agreement" means that certain Amendment No. 4 to First Lien Credit Agreement, dated as of December 7, 2006, entered into by the Borrower, the Administrative Agent and the Lenders party thereto. "Restructuring Agreement" means that Out-of-Court Restructuring Agreement (attached hereto as Exhibit B), dated as of November 21, 2006, by and among TMT, the Borrower, Tecumseh Power Company and certain financial institutions party thereto. 1 "Supply Agreement" means that certain Supply Agreement, dated as of November 21, 2006, between Tecumseh Power Company and TMT, in the form attached as Exhibit 3.1 to the Restructuring Agreement. "TMT Guaranty Agreement" means a Guaranty Agreement (substantially in the form attached hereto as Exhibit A) to be entered into upon the satisfaction of the TMT Guaranty Conditions by and among the Borrower, as the guarantor, and certain financial institutions that are party to the Restructuring Agreement, as the guarantied parties. "TMT Guaranty Conditions" means those conditions set forth in Section 5.2(g) of the Restructuring Agreement. "TMT Guaranty Obligations" means the Borrower's obligations under the TMT Guaranty Agreement to guarantee TMT's obligations to certain of its creditors under the TMT Debt Documents; provided, however, the Borrower's obligations under such TMT Guaranty Agreement shall not be secured by any of the Borrower's or any of its Subsidiaries' property (other than TMT) and shall not exceed the aggregate amounts set forth on Exhibit 1.1 to the Restructuring Agreement (as in effect on the date hereof) plus any other amounts to accrue thereon in accordance with such Restructuring Agreement and increases or decreases in such TMT Guaranty Obligations due to fluctuations in exchange rates. (c) Article (VI) (Affirmative Covenant) Section 6.1(i) is hereby amended by (A) deleting the word "Tuesday" appearing on the third line and inserting the word "Wednesday" and (B) inserting the following as the last sentence thereof: Each such forecast shall be accompanied by a report certified to be accurate to the best of such officer's knowledge by a Responsible Officer of the Borrower detailing variances between actual cash receipts and disbursements for the week just completed and the cash receipts and disbursements that had been forecast for such week in the immediately preceding cash flow forecast delivered pursuant hereto. (d) Article VII (Affirmative Covenants) is hereby amended by inserting the following new Section 7.19 immediately after the existing Section 7.18 to read as follows: Section 7.19 TMT Guaranty Agreement Promptly, but in any event within 5 days after all of the TMT Guaranty Conditions have been satisfied, a Responsible Officer of the Borrower shall deliver to the Administrative Agent an executed certificate stating that all of the TMT Guaranty Conditions have been satisfied. (e) Article (VIII) Section 8.1 is hereby amended by (A) deleting the word "and" appearing immediately at the end of clause (k) and inserting "; and" at the end of clause (l) after deleting "." and (B) inserting the following new clause (m) immediately after the existing clause (l) to read as follows: 2 (m) following the satisfaction of the TMT Guaranty Conditions and delivery of the certificate required under Section 7.19 (TMT Guaranty Agreement), TMT Guaranty Obligations. (f) Article (VIII) Section 8.1 (f) is hereby amended by deleting clause (iii) therein and inserting the following in lieu thereof: (iii) from any Non-Guarantor Subsidiary (other than TMT solely to the extent prohibited under the Restructuring Agreement) to the Borrower or any Guarantor (g) Article (VIII) Section 8.2 is hereby amended by deleting clause (g) therein and inserting the following in lieu thereof: (g) Liens securing any Indebtedness of Excluded Foreign Subsidiaries permitted under Section 8.1(b),(i), (j) or (k) (including Liens granted by TMT on certain of its property to secure its Indebtedness pursuant to the Restructuring Agreement (as in effect on the date hereof)); and (h) Article (VIII) Section 8.3 is hereby amended by deleting clause (g) in its entirety and inserting the following in lieu thereof: (g) Guaranty Obligations (including the TMT Guaranty Obligations) permitted by Section 8.1 (Indebtedness). (i) Article (VIII) Section 8.10 is hereby amended by deleting the existing clause (a) therein and inserting the following in lieu thereof: (a) agree to enter into or suffer to exist or become effective any consensual encumbrance or restriction of any kind on the ability of such Subsidiary (other than TMT solely to the extent required under the Restructuring Agreement) to pay dividends or make any other distribution or transfer of funds or assets or make loans or advances to or other Investments in, or pay any Indebtedness owed to, the Borrower or any other Subsidiary of the Borrower (j) Article (VIII) (Negative Covenants) is hereby amended by inserting the following new Section 8.19 after the existing Section 8.18 to read as follows: Section 8.19 Amendment of TMT Agreements Neither the Borrower nor any of its Subsidiaries shall change or amend the terms of the Restructuring Agreement, the Supply Agreement, the TMT Guaranty Agreement or any other agreement or instrument related to the TMT Indebtedness, or enter into any other agreement or instrument that has the effect of varying the terms thereof, in any material respect that is adverse to the Borrower or any Subsidiary or the Lenders. (k) Section 9.1 (e)(i) of the Credit Agreement is hereby deleted in its entirety and replaced with the following: 3 (e)(i) the Borrower, any other Loan Party or any Material Foreign Subsidiary shall fail to make any payment on any Indebtedness of the Borrower or any such Subsidiary (other than the Obligations) or any Guaranty Obligation (including the TMT Guaranty Obligations) in respect of Indebtedness of any other Person, and, in each case, such failure relates to Indebtedness having a principal amount of $1,000,000 or more, except as otherwise waived in writing by the Administrative Agent and the Requisite Lenders, when the same becomes due and payable (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise), 3. CONSENT. (a) The Administrative Agent and each Lender signatory to an Acknowledgement and Consent hereby consents to the terms contained in the TMT Guaranty Agreement and the Restructuring Agreement, as in effect on the date hereof, (including the Supply Agreement attached thereto as exhibit 3.1), each attached hereto as Exhibit A and Exhibit B, respectively; provided, however, the Borrower hereby acknowledges that neither the Administrative Agent nor any such Lender shall be bound by (or shall be deemed to be subject to) Section 5.2(b) of, and any other provision in, the Restructuring Agreement that restricts or purports to restrict the sale or transfer of the Stock of TMT, or otherwise requires the prior written approval of the banks party thereto in connection with such sale or transfer. (b) Each Lender signatory to an Acknowledgement and Consent hereby consents to the Borrower's request of a one time extension of the delivery date of the quarterly report solely for the Fiscal Quarter of September 2006, due within 45 days after the end of such Fiscal Quarter pursuant to Section 6.1(b) of the Credit Agreement, to December 20, 2006. 4. CONDITIONS PRECEDENT TO THE EFFECTIVENESS OF THIS AMENDMENT. This Amendment shall become effective on the date (the "Fourth Amendment Effective Date") when the Administrative Agent shall have received all of the following, each of which shall be in form and substance satisfactory to the Administrative Agent: (a) Certain Documents. The Administrative Agent shall have received each of the following, in form and substance satisfactory to the Administrative Agent: (i) this Amendment, executed by the Borrower and the Administrative Agent; (ii) an Acknowledgment and Consent, in the form set forth hereto as Exhibit C, duly executed by each of the Requisite Lenders; (iii) the Consent of Guarantors, in the form set forth hereto as Exhibit D, executed by each Guarantor; (iv) Amendment No. 1 to the Second Lien Credit Agreement, executed by the Borrower, the Second Lien Agent and the lenders party thereto; and (v) such additional documentation as the Administrative Agent or the Requisite Lenders may reasonably require. (b) Payment of Fees, Costs and Expenses. The Administrative Agent shall have received payment of all fees, costs and expenses, including, without limitation, 4 all fees, costs and expenses of the Administrative Agent (including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Administrative Agent) in connection with this Amendment, the Credit Agreement and each other Loan Document, as required by Sections 8 and 9 hereof. (c) Representations and Warranties. Each of the representations and warranties contained in Section 5 below shall be true and correct. (d) No Default or Event of Default. After giving effect to this Amendment and Amendment No. 1 to the Second Lien Credit Agreement, no Default or Event of Default shall have occurred and be continuing. 5. REPRESENTATIONS AND WARRANTIES. On and as of the date hereof, and as of the Fourth Amendment Effective Date, after giving effect to this Amendment and Amendment No. 1 to the Second Lien Credit Agreement, the Borrower hereby represents and warrants to the Lenders as follows: (a) Each of the representations and warranties contained in Article IV of the Credit Agreement, the other Loan Documents or in any certificate, document or financial or other statement furnished at any time under or in connection therewith are true and correct in all material respects on and as of the date as if made on and as of such date, except to the extent that such representations and warranties specifically relate to a specific date, in which case such representations and warranties shall be true and correct in all material respects as of such specific date; and (b) No Default or Event of Default has occurred and is continuing. 6. CONTINUING EFFECT; NO OTHER AMENDMENTS. Except as expressly amended hereby, all of the terms and provisions of the Credit Agreement and the other Loan Documents are and shall remain in full force and effect. The amendments and consents contained herein shall not constitute an amendment or a waiver of any other provision of the Credit Agreement or the other Loan Documents or for any other purpose except as expressly set forth herein. 7. LOAN DOCUMENTS. This Amendment is deemed to be a "Loan Document" for the purposes of the Credit Agreement. 8. FEES. As consideration for the execution of this Amendment, the Borrower agrees to pay on the Fourth Amendment Effective Date to the Administrative Agent, for the account of each Lender from which the Administrative Agent shall have received (by facsimile or otherwise) an executed Acknowledgment and Consent with respect to this Amendment by 5:00 p.m. (New York time) on December 7, 2006, a fee equal to 0.10% of such Lender's Revolving Credit Commitment then in effect. 9. COSTS AND EXPENSES. The Borrower agrees to pay on demand on the Fourth Amendment Effective Date all reasonable and documented out-of-pocket costs and expenses of the Administrative Agent in connection with the preparation, execution and delivery of this Amendment and other instruments and documents to be delivered pursuant hereto, 5 including the reasonable and documented fees and out-of-pocket expenses of counsel for the Administrative Agent with respect thereto. 10. GOVERNING LAW; COUNTERPARTS; MISCELLANEOUS. (a) This Amendment shall be governed by, and construed and interpreted in accordance with, the law of the State of New York. (b) This Amendment may be executed in any number of counterparts and by the different parties on separate counterparts, each of which counterparts when executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. (c) Section captions used in this Amendment are for convenience only and shall not affect the construction of this Amendment. (d) From and after the Fourth Amendment Effective Date, all references in the Credit Agreement to the "Agreement" shall be deemed to be references to such Agreement as modified hereby and this Amendment and the Credit Agreement shall be read together and construed as a single instrument. [signature pages follow] 6 IN WITNESS WHEREOF, the undersigned parties have executed this Amendment No. 4 to the Credit Agreement to be effective for all purposes as of the Fourth Amendment Effective Date. Borrower TECUMSEH PRODUCTS COMPANY as Borrower By: ------------------------------------ Name: James S. Nicholson Title: Vice President, Treasurer and Chief Financial Officer [SIGNATURE PAGE TO AMENDMENT NO. 4 TO FIRST LIEN CREDIT AGREEMENT] Administrative Agent CITICORP USA, INC., as Administrative Agent, Collateral Agent, Swing Loan Lender, Issuer and as a Lender By: ------------------------------------ Name: Sebastien Delasnerie Title: Vice President [SIGNATURE PAGE TO AMENDMENT NO. 4 TO FIRST LIEN CREDIT AGREEMENT] EXHIBIT A TMT GUARANTY AGREEMENT [EXHIBIT A] EXHIBIT B RESTRUCTURING AGREEMENT [EXHIBIT B] EXHIBIT C ACKNOWLEDGEMENT AND CONSENT To: CITICORP USA, INC., as Administrative Agent 388 Greenwich Street, 19th Floor New York, New York 10013 RE: TECUMSEH PRODUCTS COMPANY Reference is made to the CREDIT AGREEMENT, dated as of February 6, 2006, as amended (as the same may be further amended, supplemented, restated or otherwise modified from time to time, the "Credit Agreement"), among TECUMSEH PRODUCTS COMPANY, a Michigan corporation (the "Borrower"), the Lenders and Issuers party thereto and CITICORP USA, INC. ("Citicorp"), as administrative agent and collateral agent for the Lenders and the Issuers (in such capacity, the "Administrative Agent"). Unless otherwise specified herein, all capitalized terms used in this Acknowledgment and Consent shall have the meanings ascribed to such terms in the Credit Agreement. The Borrower has requested that the Lenders consent to amending the Credit Agreement on the terms described in Amendment No. 4 to First Lien Credit Agreement (the "Amendment"), the form of which is attached hereto. Pursuant to Section 11.1(a) (Amendments, Waivers, Etc.) of the Credit Agreement, the undersigned Lender hereby consents to the terms of the Amendment and authorizes the Administrative Agent to execute and deliver such Amendment on its behalf. Very truly yours, ---------------------------------------- [Name of Lender] By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- Dated as of December 7, 2006 EXHIBIT D CONSENT OF GUARANTORS Dated as of December 7, 2006 Each of the undersigned companies, as a Guarantor under the Guaranty dated February 6, 2006 (the "Guaranty") in favor of the Secured Parties under the Credit Agreement referred to in the foregoing Amendment, hereby consents to such Amendment and hereby confirms and agrees that notwithstanding the effectiveness of such Amendment, the Guaranty is, and shall continue to be, in full force and effect and is hereby ratified and confirmed in all respects, except that, on and after the effectiveness of such Amendment, each reference in the Guaranty to the "Credit Agreement", "thereunder", "thereof" or words of like import shall mean and be a reference to the Credit Agreement, as amended by such Amendment. [Signature pages follow] IN WITNESS WHEREOF, the parties hereto have consented to this Amendment No. 4, as of the date first written above. CONVERGENT TECHNOLOGIES INTERNATIONAL, INC. TECUMSEH TRADING COMPANY EVERGY, INC. FASCO INDUSTRIES, INC. MANUFACTURING DATA SYSTEMS, INC. M. P. PUMPS, INC. TECUMSEH CANADA HOLDING COMPANY TECUMSEH COMPRESSOR COMPANY TECUMSEH POWER COMPANY VON WEISE GEAR COMPANY as U.S. Guarantors By: ------------------------------------ Name: James S. Nicholson Title: Vice President and Treasurer EUROMOTOR, INC. as U.S. Guarantor By: ------------------------------------ Name: James S. Nicholson Title: Vice President HAYTON PROPERTY COMPANY, LLC TECUMSEH DO BRASIL USA, LLC as U.S. Guarantors By: ------------------------------------ Name: James S. Nicholson Title: President [SIGNATURE PAGE TO GUARANTOR CONSENT TO AMENDMENT NO. 4 TO FIRST LIEN CREDIT AGREEMENT] TECUMSEH PRODUCTS OF CANADA LIMITED, as Canadian Guarantor By: ------------------------------------ Name: James S. Nicholson Title: Vice President and Treasurer FASCO MOTORS COMPANY, as Canadian Guarantor By: ------------------------------------ Name: James S. Nicholson Title: Vice President [SIGNATURE PAGE TO GUARANTOR CONSENT TO AMENDMENT NO. 4 TO FIRST LIEN CREDIT AGREEMENT] EX-4.2 3 k10863exv4w2.txt AMENDMENT NO.1 TO THE AMENDED & RESTATED SECOND LIEN CREDIT AGREEMENT EXHIBIT 4.2 AMENDMENT NO. 1 TO AMENDED AND RESTATED SECOND LIEN CREDIT AGREEMENT Amendment No. 1 (this "Amendment"), dated as of December 7, 2006, among Tecumseh Products Company, a Michigan corporation (the "Borrower"), TRICAP PARTNERS, LLC, as Lender and Administrative Agent (in such capacities, the "Lender"), and Citicorp USA, Inc., as Collateral Agent for the Lender (in such capacity, the "Collateral Agent"), amends certain provisions of the AMENDED AND RESTATED SECOND LIEN CREDIT AGREEMENT, dated as of November 13, 2006 (as amended hereby, and as it may be further amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among the Borrower, the Lender and the Collateral Agent. WITNESSETH: WHEREAS, the Borrower has informed the Lender of its desire to enter into certain agreements in connection with the restructuring of the TMT Indebtedness; and WHEREAS, the Borrower has requested, and the Lender and the Collateral Agent have agreed to amend the Credit Agreement as set forth below; NOW, THEREFORE, in consideration of the premises and the mutual covenants and provisions hereinafter contained, the parties hereto hereby agree as follows: 1. DEFINED TERMS. Capitalized terms used herein and not defined herein but defined in the Credit Agreement are used herein as defined in the Credit Agreement. 2. AMENDMENT TO THE CREDIT AGREEMENT. As of the First Amendment Effective Date (as defined in Section 4), the Credit Agreement is hereby amended as follows: (a) Section 1.1 of the Credit Agreement is hereby amended by adding the following defined terms in alphabetical order: "Amendment No. 1 to the Credit Agreement" means that certain Amendment No. 1 to Amended and Restated Second Lien Credit Agreement, dated as of December 7, 2006, entered into by the Borrower, the Lender and the Collateral Agent. "Restructuring Agreement" means that certain Out-of-Court Restructuring Agreement (attached hereto as Exhibit B), dated as of November 21, 2006, by and among TMT, the Borrower, Tecumseh Power Company and certain financial institutions party thereto. "Supply Agreement" means that certain Supply Agreement, dated as of November 21, 2006, between Tecumseh Power Company and TMT, in the form attached as Exhibit 3.1 to the Restructuring Agreement. "TMT Guaranty Agreement" means a Guaranty Agreement (substantially in the form attached hereto as Exhibit A) to be entered into upon 1 the satisfaction of the TMT Guaranty Conditions by and among the Borrower, as the guarantor, and certain financial institutions that are party to the Restructuring Agreement, as the guarantied parties. "TMT Guaranty Conditions" means those conditions set forth in Section 5.2(g) of the Restructuring Agreement. (b) Article (II) Section 2.6(b) is hereby amended by inserting the following as the last sentence thereof: In addition, in the event that the Obligations are prepaid in full (or required to be paid in full as provided hereunder) on or before March 31, 2008, or after March 31, 2008 from the Net Proceeds of an Asset Sale with respect to which a definitive agreement was in place on or before March 31, 2008, such prepayment shall be accompanied by a fee to the Lender in the amount of $1,000,000. (c) Article (VI) Section 6.1(i) is hereby amended by (A) deleting the word "Tuesday" and inserting the word "Wednesday" and (B) inserting the following as the last sentence thereof: Each such forecast shall be accompanied by a report certified to be accurate to the best of such officer's knowledge by a Responsible Officer of the Borrower detailing variances between actual cash receipts and disbursements for the week just completed and the cash receipts and disbursements that had been forecast for such week in the immediately preceding cash flow forecast delivered pursuant hereto. (d) Article (VIII) Section 8.1 (f) is hereby amended by deleting clause (iii) therein and inserting the following in lieu thereof: (iii) from any Non-Guarantor Subsidiary (other than TMT solely to the extent prohibited under the Restructuring Agreement) to the Borrower or any Guarantor (e) Article (VIII) Section 8.2 is hereby amended by deleting clause (g) therein and inserting the following in lieu thereof: (g) Liens securing any Indebtedness of Excluded Foreign Subsidiaries permitted under Section 8.1(b),(i), (j) or (k) (including Liens granted by TMT on certain of its property to secure its Indebtedness pursuant to the Restructuring Agreement (as in effect on the date hereof)); and (f) Article (VIII) Section 8.10 is hereby amended by deleting the existing clause (a) therein and inserting the following in lieu thereof: (a) agree to enter into or suffer to exist or become effective any consensual encumbrance or restriction of any kind on the ability of such 2 Subsidiary (other than TMT solely to the extent required under the Restructuring Agreement) to pay dividends or make any other distribution or transfer of funds or assets or make loans or advances to or other Investments in, or pay any Indebtedness owed to, the Borrower or any other Subsidiary of the Borrower (g) Article (VIII) (Negative Covenants) is hereby amended by inserting the following new Section 8.19 after the existing Section 8.18 to read as follows: Section 8.19 Amendment of TMT Agreements Neither the Borrower nor any of its Subsidiaries shall change or amend the terms of the Restructuring Agreement, the Supply Agreement, the TMT Guaranty Agreement or any other agreement or instrument related to the TMT Indebtedness, or enter into any other agreement or instrument that has the effect of varying the terms thereof, in any material respect that is adverse to the Borrower or any Subsidiary or the Lender. 3. CONSENT. (a) The Lender and the Collateral Agent hereby consent to the terms contained in the Supply Agreement, the TMT Guaranty Agreement and the Restructuring Agreement, as in effect on the date hereof; provided, however, the Borrower hereby acknowledges that neither the Lender nor the Collateral Agent shall be bound by (or shall be deemed to be subject to) Section 5.2(b) of, and any other provision in, the Restructuring Agreement that restricts or purports to restrict the sale or transfer of the Stock of TMT, or otherwise requires the prior written approval of the banks party thereto in connection with such sale or transfer. (b) Lender hereby consents to the Borrower's request of a one time extension of the delivery date of the quarterly report solely for the Fiscal Quarter of September 2006, due within 45 days after the end of such Fiscal Quarter pursuant to Section 6.1(b) of the Credit Agreement, to December 20, 2006. 4. CONDITIONS PRECEDENT TO THE EFFECTIVENESS OF THIS AMENDMENT. This Amendment shall become effective on the date (the "First Amendment Effective Date") when the Lender shall have received all of the following, each of which shall be in form and substance satisfactory to the Lender: (a) Certain Documents. The Lender shall have received each of the following, in form and substance satisfactory to the Lender: (i) this Amendment, executed by the Borrower and the Collateral Agent; (ii) the Consent of Guarantors, in the form set forth hereto as Exhibit C, executed by each Guarantor; (iii) Amendment No. 4 to the First Lien Credit Agreement, executed by the Borrower and the First Lien Secured Parties; and 3 (iv) such additional documentation as the Lender may reasonably require. (b) Payment of Fees, Costs and Expenses. The Lender shall have received payment of all fees, costs and expenses as required by Sections 8 and 9 hereof, including, without limitation, all fees, costs and expenses of the Lender (including, without limitation, the reasonable fees and out-of-pocket expenses of counsel for the Lender) in connection with this Amendment, the Credit Agreement and each other Loan Document. (c) Representations and Warranties. Each of the representations and warranties contained in Section 5 below shall be true and correct. (d) No Default or Event of Default. After giving effect to this Amendment and Amendment No. 4 to the First Lien Credit Agreement, no Default or Event of Default shall have occurred and be continuing. 5. REPRESENTATIONS AND WARRANTIES. On and as of the date hereof, and as of the First Amendment Effective Date, after giving effect to this Amendment and Amendment No. 4 to the First Lien Credit Agreement, the Borrower hereby represents and warrants to the Lender as follows: (a) Each of the representations and warranties contained in Article IV of the Credit Agreement, the other Loan Documents or in any certificate, document or financial or other statement furnished at any time under or in connection therewith are true and correct in all material respects on and as of the date as if made on and as of such date, except to the extent that such representations and warranties specifically relate to a specific date, in which case such representations and warranties shall be true and correct in all material respects as of such specific date; and (b) No Default or Event of Default has occurred and is continuing. 6. CONTINUING EFFECT; NO OTHER AMENDMENTS. Except as expressly amended hereby, all of the terms and provisions of the Credit Agreement and the other Loan Documents are and shall remain in full force and effect. The amendments and consents contained herein shall not constitute an amendment or a waiver of any other provision of the Credit Agreement or the other Loan Documents or for any other purpose except as expressly set forth herein. 7. LOAN DOCUMENTS. This Amendment is deemed to be a "Loan Document" for the purposes of the Credit Agreement. 8. FEES. As consideration for the execution of this Amendment, the Borrower agrees to pay on the First Amendment Effective Date to the Lender a fee equal to $250,000. 9. COSTS AND EXPENSES. The Borrower agrees to pay on demand on the First Amendment Effective Date all costs and expenses of the Lender incurred from and after the Closing Date through and including the First Amendment Effective Date and payable to the Lander under Section 11.3 of the Credit Agreement, including, without limitation, all reasonable and documented out-of-pocket costs and expenses of the Lender in connection with the 4 preparation, execution and delivery of this Amendment and other instruments and documents to be delivered pursuant hereto, including the reasonable and documented fees and out-of-pocket expenses of counsel for the Lender with respect thereto. 10. GOVERNING LAW; COUNTERPARTS; MISCELLANEOUS. (a) This Amendment shall be governed by, and construed and interpreted in accordance with, the law of the State of New York. (b) This Amendment may be executed in any number of counterparts and by the different parties on separate counterparts, each of which counterparts when executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. (c) Section captions used in this Amendment are for convenience only and shall not affect the construction of this Amendment. (d) From and after the First Amendment Effective Date, all references in the Credit Agreement to the "Agreement" shall be deemed to be references to such Agreement as modified hereby and this Amendment and the Credit Agreement shall be read together and construed as a single instrument. [signature pages follow] 5 IN WITNESS WHEREOF, the undersigned parties have executed this Amendment No. 1 to the Credit Agreement to be effective for all purposes as of the First Amendment Effective Date. Borrower TECUMSEH PRODUCTS COMPANY as Borrower By: ------------------------------------ Name: James S. Nicholson Title: Vice President, Treasurer and Chief Financial Officer [SIGNATURE PAGE TO AMENDMENT NO. 1 TO AMENDED AND RESTATED SECOND LIEN CREDIT AGREEMENT] Lender TRICAP PARTNERS, LLC as Lender and Administrative Agent By: ------------------------------------ Name: Alexander Greeene Title: President [SIGNATURE PAGE TO AMENDMENT NO. 1 TO AMENDED AND RESTATED SECOND LIEN CREDIT AGREEMENT] Collateral Agent Citicorp USA, Inc., as Collateral Agent By: ------------------------------------ Name: Sebastien Delasnerie Title: Vice President [SIGNATURE PAGE TO AMENDMENT NO. 1 TO AMENDED AND RESTATED SECOND LIEN CREDIT AGREEMENT] EXHIBIT A TMT GUARANTY AGREEMENT [EXHIBIT A] EXHIBIT B RESTRUCTURING AGREEMENT [EXHIBIT B] EXHIBIT C CONSENT OF GUARANTORS Dated as of December 7, 2006 Each of the undersigned companies, as a Guarantor under the Guaranty dated November 13, 2006 (the "Guaranty") in favor of the Secured Parties under the Credit Agreement referred to in the foregoing Amendment, hereby consents to such Amendment and hereby confirms and agrees that notwithstanding the effectiveness of such Amendment, the Guaranty is, and shall continue to be, in full force and effect and is hereby ratified and confirmed in all respects, except that, on and after the effectiveness of such Amendment, each reference in the Guaranty to the "Credit Agreement", "thereunder", "thereof" or words of like import shall mean and be a reference to the Credit Agreement, as amended by such Amendment. [Signature pages follow] [EXHIBIT C] IN WITNESS WHEREOF, the parties hereto have consented to this Amendment No. 1, as of the date first written above. CONVERGENT TECHNOLOGIES INTERNATIONAL, INC. TECUMSEH TRADING COMPANY EVERGY, INC. FASCO INDUSTRIES, INC. MANUFACTURING DATA SYSTEMS, INC. M. P. PUMPS, INC. TECUMSEH CANADA HOLDING COMPANY TECUMSEH COMPRESSOR COMPANY TECUMSEH POWER COMPANY VON WEISE GEAR COMPANY as U.S. Guarantors By: ------------------------------------ Name: James S. Nicholson Title: Vice President and Treasurer EUROMOTOR, INC. as U.S. Guarantor By: ------------------------------------- Name: James S. Nicholson Title: Vice President HAYTON PROPERTY COMPANY, LLC Tecumseh do Brasil USA, LLC as U.S. Guarantors By: ------------------------------------ Name: James S. Nicholson Title: President [SIGNATURE PAGE TO GUARANTOR CONSENT TO AMENDMENT NO. 1 TO AMENDED AND RESTATED SECOND LIEN CREDIT AGREEMENT] TECUMSEH PRODUCTS OF CANADA LIMITED, as Canadian Guarantor By: ------------------------------------ Name: James S. Nicholson Title: Vice President and Treasurer FASCO MOTORS COMPANY, as Canadian Guarantor By: ------------------------------------ Name: James S. Nicholson Title: Vice President [SIGNATURE PAGE TO GUARANTOR CONSENT TO AMENDMENT NO. 1 TO AMENDED AND RESTATED SECOND LIEN CREDIT AGREEMENT] EX-10.1 4 k10863exv10w1.txt OUT-OF-COURT RESTRUCTURING AGREEMENT EXHIBIT 10.1 OUT-OF-COURT RESTRUCTURING AGREEMENT Executed by and between, BANCO BRADESCO S.A., with its headquarters in the City of Osasco, State of Sao Paulo, Cidade de Deus Street, Vila Yara, enrolled with the Brazilian Taxpayer's Registry (CNPJ) under no 60.746.948/0001-12, herein represented in accordance with its bylaws, hereinafter referred to as "BRADESCO"; BANCO ITAU BBA S.A., with its headquarters in the City of Sao Paulo, State of Sao Paulo, Brigadeiro Faria Lima Avenue, 3.400, 4th floor (part), enrolled with the Brazilian Taxpayer's Registry (CNPJ) under no 17.298.092/0001-30, herein represented in accordance with its bylaws, hereinafter referred to as "ITAU BBA"; and HSBC BANK BRASIL S.A. - BANCO MULTIPLO, with its headquarters in the City of Curitiba, State of Parana, Travessa Oliveira Bello, 34, 4th floor, enrolled with the Brazilian Taxpayer's Registry (CNPJ) under no 01.701.201/0001-89, herein represented in accordance with its bylaws, hereinafter referred to as "HSBC"; BRADESCO, ITAU BBA and HSBC hereinafter referred to jointly as the "Participating Banks"; And, on the other side, TMT MOTOCO DO BRASIL LTDA., with its headquarters in the City of Campo Largo, State of Parana, Ema Tanner de Andrade Street, no 792, enrolled with the Brazilian Taxpayer's Registry (CNPJ) under no 05.203.407/0001-30, herein represented in accordance with its articles of association, hereinafter referred to as "TMT"; and, as intervening parties, TECUMSEH PRODUCTS COMPANY, a corporation organized and existing under the laws of the State of Michigan, headquartered at 100 East Patterson Street, in the city of Tecumseh, State of Michigan, United States of America, enrolled with the Brazilian Taxpayer's Registry (CNPJ) under no 05.719.749/0001-07, herein represented in accordance with its articles of association, hereinafter referred to as "Tecumseh"; and TECUMSEH POWER COMPANY, a corporation organized and existing under the laws of the State of a Delaware, headquartered at 900 North Street, Grafton, Wisconsin, herein represented in accordance with its articles of association, hereinafter referred to as "Tecumseh Power Company". TMT, Tecumseh, Tecumseh Power Company and the Participating Banks hereinafter referred to jointly as "Parties" and each as "Party"; WHEREAS TMT has executed, individually with each of the Participating Banks and with certain other banks (hereinafter referred to as the "Non-Participating Banks" and, together with the Participating Banks, the "Banks"), on different dates, facility agreements in order to fund its industrial expansion and the required working capital for its activities, including its export activity, which were structured as advance on export contracts ("Facility Agreements"), Bank Credit Bills ("Credit Bills") and the Pro-Gerem/Counter Guaranty Agreements, as applicable, the Facility Agreements, the Credit Bills and the Pro-Gerem/Counter Guaranty Agreements are hereinafter referred to jointly as "Contracts"; WHEREAS on October 4th, 2006, TMT, Tecumseh and the Participating Banks executed a Standstill Agreement whereby the signing parties agreed to continue to extend the maturities of the respective Contracts and to jointly prepare a restructuring plan with respect to the payment obligations of TMT under the Contracts (the "Outstanding Balance"); WHEREAS subject to the terms and conditions hereunder, the Parties are willing to restructure and reschedule the payment of the Outstanding Balance; NOW THEREFORE, the Parties hereby agree to enter into this Out-of-Court Restructuring Agreement ("Agreement"), which will be governed by the following terms and conditions: 1. DEBT RESTRUCTURING 1.1 The Parties agree that, on the date hereof, the amounts described in Exhibit 1.1 attached hereto correspond to TMT's total Outstanding Balance with respect to each of the Banks. 1.2 Subject to the terms and conditions of this Agreement, the Parties agree to restructure and reschedule the payment of TMT's Outstanding Balance in accordance with the provisions of this Agreement. 2. PAYMENT OF OUTSTANDING BALANCE 2.1 The Participating BANKS agree to grant to TMT: 2.1.1. A grace period of 18 months commencing on November 21, 2006 (the "Grace Period"), during which no payment of principal can be demanded by the Participating Banks from TMT under the Contracts. During the Grace Period, interest on the Outstanding Balance will be paid on arrears by TMT on a quarterly basis commencing on January 1st, 2007 at an annual rate of Libor plus 3 % Interest will accrue computed on the basis of a year of 360 days and actual days elapsed. 2.2 After the Grace Period, the Outstanding Balance will be divided into 18 monthly equal installments, which will be paid by TMT commencing on June 21, 2008. After the Grace Period, interest accruing on the Outstanding Balance will be paid monthly in arrears. 2.2.1 As long as this Agreement has not been homologated by the Court of Campo Largo, the Banks shall have the option to apply any principal payment amounts received under this Agreement as payment for interest under the existing Contracts, provided that any principal amount payment received and used to pay interest will cause the succeeding payments of interest to be considered payments of principal up to the amount previously converted into interest payment and the Outstanding Balance will be reduced to off-set the increase of interest this swap will generate. The swap authorized shall not generate any increase in the amounts and in the flow of payments of TMT stipulated in this Agreement, even after the homologation of the Agreement by the Campo Largo Court. 2.3. In case there is a material change in the US dollar/real conversion rate, compared to the current conversion rate, TMT shall prepay certain amounts of its Outstanding Balance to the Banks according to the formula described in Exhibit 2.3 and, apply such payment adjustments against the earliest payments of principal due under this Agreement. 2.4 Should any of the dates on which any installment is to be paid hereunder be a non-business day in the City of Sao Paulo, Brazil, such payment shall be made on the next succeeding business day, without accrual of additional interest for such non-business day. 2.5 Should TMT default in the payment of any Installment hereunder when such payment becomes due and payable, default interest on the rate of 1% per annum over the agreed interest rate (Libor + 3% per annum) shall accrue on the principal of such defaulted amount until it is paid in full. In the event of any late payment hereunder by TMT to the Participating Banks, a penalty of 2% over such late payment amount shall be immediately due and payable by TMT to the Participating Banks, unless such payment is fully made within the cure period pursuant to the terms of this Agreement. In addition to that, if such payment is not cured and the Outstanding Balance is accelerated pursuant to the terms of this agreement, then such 2% penalty shall be immediately due and payable over the entire Outstanding Balance. 3. SUPPLY AGREEMENT 3.1 TMT and Tecumseh Power Company will enter into a supply agreement for the purchase of LV156/195, OV195 and OV490 type engines and kits, including new developments on these engines (the "Engines") from TMT by Tecumseh Power Company (the "Supply Agreement") in the form of Exhibit 3.1 hereto. 3.2 In connection with the Supply Agreement, TMT and the Banks will enter into an agreement (the "Pledge Agreement") in the form of Exhibit 3.2 hereto whereby TMT will assign to the Banks, as a security for the payment of the Outstanding Balance, the amounts owed by Tecumseh Power Company to TMT, after the deduction of the amounts owed by TMT to Tecumseh Power Company for the supply of components and parts used by TMT in the manufacture of the Engines, all in accordance with the Supply Agreement. 3.3 The purchase price of the Engines will be calculated based on the effective prices received by Tecumseh Power Company from its customers in accordance with the Supply Agreement. 3.4 All income generated by TMT as a result of the Supply Agreement will be deposited in a bank account designated from time to time by the Participating Banks, which will be operated freely by TMT, except that if a default occurs, the Participating Banks may fully exercise their rights under the Pledge Agreement. TMT authorizes the Banks to have full access to the account information of said account and, if a default occurs, to debit such account for the purpose of allowing the Participating Banks to receive their credits. 4. NEW INDEBTEDNESS (NOT INCLUDED REFINANCING OF EXISTING INDEBTEDNESS)AND DIVIDEND OR PROFIT DISTRIBUTION 4.1 The Parties agree that during the period of this Agreement and thereafter TMT may enter into new financial facility agreements with BNDES and/or with the Banks or other institutions (excluding refinancing of existing indebtedness) for purposes of development of new products by TMT and payment of some or all of the Outstanding Balance or other specific debts, provided any such new indebtedness and/or any new guarantees instituted to the benefit of any creditor shall be previously approved by the Banks representing 60% of the then Outstanding Balance (such approval not to be unreasonably withheld). Notwithstanding the stipulation of this section, credit operations in the normal course of business may continue to be carried out, provided they are limited in the aggregate to R$ 500,000.00 on a revolving basis. 4.2 Until all the Participating Banks will have received fully their credits which are the object of this Agreement or are otherwise satisfied that the Outstanding Balance is being paid as scheduled and that TMT has recovered from its financial difficulties, at the reasonable discretion of the Banks which represent more then 60% of the then outstanding credits, TMT shall not pay any dividend, interest over capital or profit distribution directly or indirectly to its parent company or to any other third party and shall not grant any loan to its parent company or to any other affiliated (controller, controlled or colligated) company unless such payment or loan is approved by the Banks representing 60% of the then Outstanding Balance. 5. REPRESENTATIONS AND WARRANTIES 5.1 TMT hereby represents and warrants as follows: a) TMT will not sell, without the consent of the Banks representing 60% of the then Outstanding Balance (such approval not to be unreasonably withheld), any of its fixed assets the value of which in the aggregate exceeds five hundred thousand Brazilian Reais (R$ 500,000), except for the transfer of assets foreseen in section 5.1(d)(i); and b) The Banks will have at any time access to all information concerning TMT's business and financial situation, including the examination of TMT's plant operations, inventory, agreements, and accounting books or records and TMT will keep the Banks updated regarding any new material information or material changes in the information provided. c) TMT will maintain during the entire term of this Agreement a positive cash flow, before debt service, calculated in accordance with the projections contained in Exhibit 5.1.c). to be confirmed by quarterly financial information which will be supplied to the Banks. d) Simultaneously with the signature of this Agreement, and the advisory services provided as of such date, TMT will execute with the Participating Banks the following contracts and will effect the following payment of principal due: i) the agreement attached hereto as Exhibit 5.1 (d)(i) ("Payment-in-Kind") contemplating the transfer of certain assets by TMT to the Banks under certain conditions. The amounts received from the sale of the assets which eventually correspond to the share of the Non Participating Banks will be deposited by TMT in Court, so that the Court may determine the amounts due to each Bank, in order to off-set the amounts received by the Non Participating Banks during the Stand Still Period. The value of the assets transferred to the Participating Banks in accordance with the Payment-in-Kind will be deducted from the Outstanding Balance with respect to each Bank. Once the proceeds deriving from the sale of assets become available, the amount which corresponds to the share of the Non-Participating Banks will be deposited in court so that the payments received by the Non-Participating Banks during the Stand Still Period can be taken into account in the calculation of the amount which is owed to each Bank. ii) the agreements attached hereto as Exhibits 5.1(d)(ii)(a) and 5.1(d)(ii)(b) ("Chattel Mortgage Agreements") granting security to the Banks in the form of a chattel mortgage for the payment of the Outstanding Balance of TMT with respect to such Banks. iii) the Conditional Guaranty defined and stipulated below and iv) an amount to be paid by TMT to the Banks proportionally to their respective credits of the equivalent in reais to one million five hundred dollars (US$ 1,500,000) to be converted in accordance with the official exchange rate valid for the date of payment (PTAX 800- option 5) and paid on or before January 15th, 2007 to be deducted from the Outstanding Balance. v) TMT will not pay any of the amounts owed to its affiliates resulting from inter-company debt incurred before the signature of this Agreement, except if such payments are effected with resources which result from foreign exchange gains and provided the limits stipulated in Exhibit 2.3. are duly observed, without prejudice of the stipulation contained in section 5.1.c). 5.2 Tecumseh hereby represents and warrants as follows: a) Tecumseh acknowledges that the payment terms hereunder have been granted to TMT in reliance upon, among other things, Tecumseh's direct or indirect stock ownership and managerial control of TMT; b) Tecumseh's quotaholding interest in TMT represents more than 99% on the date hereof of the total issued and outstanding quotas of TMT. Tecumseh agrees that the sale or transfer of stock of TMT shall require the prior written approval of the Banks which represent 60% or more of the then Outstanding Balance. c) All of the financial obligations granted to TMT are not in violation of Tecumseh's corporate powers or of the applicable laws of its state of incorporation; d) As long as TMT is bound by the terms of this Agreement, Tecumseh will take commercially reasonable steps to ensure that TMT is managed in a financially prudent and business-like manner and that its assets and earnings shall not be inappropriately depleted; e) Tecumseh will notify the Banks immediately after the occurrence of, or expectation to occur, any fact or event of which Tecumseh has actual knowledge that: (i) may adversely affect the ability of TMT to continue its normal business activities; or (ii) represents or may come to represent a material adverse change in the financial or other conditions of TMT, Tecumseh and Tecumseh Power Company; and f) Tecumseh will keep the Banks informed regarding any material adverse changes or defaults related to Tecumseh's secured credit facilities in the United States of America and any amendments to the covenants and other conditions contained in the secured credit facilities in the United States of America. In addition, Tecumseh's shall provide to the Participating Banks on a timely manner its 10Q and 10K reports and Tecumseh Power Company shall provide to the Participating Banks on a quarterly basis its Executive Report and Financial Statements. g) Subject to the Condition Precedent contained in section 6.1 below, Tecumseh shall enter into a guarantee (the "Conditional Guaranty") in favor of the Participating Banks for the payment of the Outstanding Balance with respect to the payment of the Outstanding Balance owed to the Banks on such future date as all of the following conditions have been satisfied (and in no event shall there be any liability of Tecumseh and no claim shall be made against Tecumseh on account of the foregoing Conditional Guaranty unless all such conditions have been satisfied: (i) the Outstanding Balance owed to the Banks shall be unpaid and outstanding (ii) Tecumseh's second lien debt facility (as amended, modified, restated or refinanced) shall have been paid in full in cash and terminated (iii) the required number of lenders under Tecumseh's first lien debt facility shall have consented to the entry into such Conditional Guaranty on or before December 7, 2006 and (iv) entering into such Conditional Guaranty shall not otherwise breach the terms of Tecumseh's first lien debt facility. The obligation of Tecumseh under this Agreement to enter into the Conditional Guaranty shall survive any voluntary or involuntary bankruptcy of TMT if, at the time of the commencement of such proceeding, the conditions to the grant of the Conditional Guaranty as set forth in this Section 5.2(g) shall not have been met. Notwithstanding anything in this Agreement or otherwise to the contrary, the obligation, if any, of Tecumseh to enter into the Conditional Guaranty shall not survive, and shall terminate and be of no force and effect, upon (x) the commencement of, a voluntary or involuntary bankruptcy or insolvency proceeding of Tecumseh and Tecumseh Power Company, unless at the time of the commencement of such proceeding, the conditions to the grant of the Conditional Guaranty as set forth in this Section 5.2(g) shall have already been met, (y) conversion or exchange (whether implemented as part of an in court or out of court restructuring) in a distressed situation of all or any portion of Tecumseh's first lien debt facility or second lien debt facility (in each case as amended, modified, restated or refinanced) into equity interests (whether common, preferred or otherwise) of Tecumseh or any of its United States affiliates, or (z) consummation of a sale, transfer or other disposition of all or a substantial portion of the equity interests in (or assets of) TMT in which the purchaser or transferee thereof assumes the obligations of TMT with respect to the Outstanding Balance, provided that such sale has been approved by the Banks in accordance with this Agreement. h) The terms and conditions of the Conditional Guaranty are contained in Exhibit 5.2.h. i) Tecumseh agrees to exercise its commercially reasonable efforts to sell the assets contemplated under Tecumseh's second lien debt facility in accordance with a time line and a procedure to be mutually agreed and upon terms consistent with Tecumseh's first lien debt facility and the second lien debt facility, in order to allow Tecumseh to pay in full its second lien debt facility in the first quarter of 2008. j) Notwithstanding anything to the contrary contained herein, the effectiveness and binding effect of each of the representations, warranties and agreements of Tecumseh and Tecumseh Power Company contained in this Agreement are conditioned on obtaining the consent of the lenders under Tecumseh's first lien debt facility and the consent of the lenders under Tecumseh's second lien debt facility, and such representations, warranties and agreements of Tecumseh will not be legally binding if each of such consents has not been obtained by December 7, 2006. Tecumseh shall notify in writing the Participating Banks on or before December 7, 2006 in order to inform them whether or not such consent was obtained from Tecumseh first and second lien lenders. 5.3 Tecumseh Power Company hereby represents and warrants as follows: a) Tecumseh Power Company will honor the Supply Agreement, and shall not amend or vary any of its terms and conditions without the express prior written approval of the Banks which represent 60% or more of the then Outstanding Balance; and b) As long as TMT is bound by the terms of this Agreement, Tecumseh Power Company commits not to source its Engines (as defined in the Supply Agreement) from any other third party other than TMT, which will be the exclusive supplier of the Engines. 5.4 The Participating Banks hereby jointly and severally represent and warrant as follows: a) The Participating Banks are in agreement with the financial restructuring being sought by TMT and Tecumseh and this Agreement is not - and shall not be considered - an event of default under the Standstill Agreement and the Contracts; and b) As of the date of execution hereof, the terms and conditions of the obligations contained in this Agreement shall prevail over the conditions contained in the Contracts and schedules attached hereto, to the extent they are inconsistent with this Agreement. c) This Agreement will be filed with the Court of Competent Jurisdiction in order to bind the Non-Participating Banks. Any stipulation in favor of the Participating Banks which is extended to the Non-Participating Banks shall be net of any payments or advantages received by such Non Participating Banks during the term of the Standstill Agreement and shall not result in any additional obligation to TMT, Tecumseh or Tecumseh Power Company. The Out-of-Court Restructuring Plan shall contain a provision authorizing any unsecured operational creditor (which is not an affiliate of TMT, Tecumseh and Tecumseh Power Company), whose credit is in excess of R$ 100,000.00, to exercise the option to participate proportionally to its credit in the Plan, provided such option is exercised within 30 days of the publication of the notice of Out-of-Court Restructuring by the Campo Largo Court such creditor accepts to restructure its credit and assume the same rights and obligations as the Participating Banks, except for the payment of principal provided for under section 5.1(d) above and provided further that this event does not affect the payment or transfer of the amounts due to the Participating Banks. Any difference of payment resulting from the exercise of such option by operational creditors will be immediately paid by TMT. A creditor wishing to exercise such option must do so for its entire credit. 6. CONDITION PRECEDENT AND ACCELERATION 6.1. Condition Precedent: Any representation, warranty, agreement or obligation of Tecumseh and/or Tecumseh Power Company under this Agreement and exhibits hereof will only come into force upon approval of the Tecumseh first and second lien lenders, provided such approval is given on or before December 7, 2006, and of the Board of Directors of Tecumseh, provided such approval is given on or before November 24, 2006. If such approvals are not given by such dates, this Agreement shall have no force and effect whatsoever in respect of the US parties, except that such date may be extended if all Parties hereto agree in writing to extend the period during which the condition precedent herein established may be complied with. 6.2. Duration. This Agreement shall come into force and effect on the date hereof, without prejudice to the Condition Precedent established in the preceding clause and shall terminate after the payment of the Outstanding Balance by TMT in accordance with the provisions of this Agreement. 6.3 Events of Default. This agreement may be terminated upon the occurrence of any of the following events of default: a) If any of the Parties breach any representation, warranty, covenant or agreement contained in this Agreement or in any of the other agreements attached hereto as Exhibits, which breach cannot be or is not cured within 5 business days after receipt of a notice by the non defaulting Party specifying the default, and provided that such breach shall not be caused by action or omission of the non defaulting Party; or b) If TMT, Tecumseh and/or Tecumseh Power Company file for bankruptcy or any other insolvency proceeding, in which case the cure period provided for in the preceding section shall not apply; or. c) if TMT, Tecumseh and or Tecumseh Power Company take, or omit to take, any action the effect of which results in the impairment or reduction or the non perfection or the irregular perfection of any guarantee stipulated in this Agreement; or d) if the Supply Agreement. does not generate an income compatible with the projections of Exhibit 5.1 "c" and is not supplemented by other sources of income in a timely manner; or e) If the approvals referred in section 6.1 are not granted as provided for in this section, 6.3.1 In case this Agreement is terminated in accordance with this section, the Participating Banks will be entitled to accelerate payment of the entire Outstanding Balance and TMT will be obligated to pay such amount within 72 hours after the receipt of a notice to this effect, together with all the accrued interest and penalty as provided for in Section 2.5. of this Agreement and, when applicable, reasonable attorney's fees. Notwithstanding the termination of the Agreement, any payments made or the performance of any other act in accordance with this Agreement until the date of termination shall be considered valid and final. 7. MISCELLANEOUS 7.1. The Participating Banks are authorized to assign their rights under the present Agreement and its Guarantees to third Parties, which are not competitors, suppliers or clients of TMT, Tecumseh or Tecumseh Power Company. Any Assignee must agree in writing prior and as a condition for the effectiveness of the assignment, to be bound by the same restrictions in order to validate such assignment and will have access to the information which the Participating Banks are entitled to receive to the extent there is no conflict of interest on their part. 7.1-A. Confidentiality. Unless required by applicable legislation or upon TMT's consent, the Banks and their respective directors, officers, employees, attorneys-in-fact and representatives shall keep confidential and not disclose to any third party: (i) all information, documents and materials related to TMT, Tecumseh and Tecumseh Power Company disclosed or obtained by the Banks during the relationship between the Parties and (ii) the object, rights and obligations of the Parties under this Agreement. 7.2. Notices. Except if a notice of change of address has been previously provided pursuant to the provisions hereof, any notice required or permitted by this Agreement shall be addressed as follows: a) If to the BANKS: BRADESCO: Av. Paulista, 1.450, 4 andar 01310-917 - Sao Paulo - SP At.: Joao Gilberto Krepel Telephone: 2178-4531 Facsimile: 2178-4501 E-mail: 4224.jgkrepel@bradesco.com.br ITAU BBA: Al. Dr. Carlos Carvalho, 417 - 25 andar - cj. 2501 80410-180 - Curitiba - Parana At.: Gustavo Henrique Penha Tavares Telephone: (41) 3028-4450 Facsimile: (41) 3028-4488 E-mail: gptavares@itaubba.com.br HSBC: Travessa Oliveira Bello, 34, S/loja - Centro 80020-030 - Curitiba - Parana At.: Fernando Freiberger Telephone: (41) 3321-6395 Facsimile: (41) 3321-6607 Email: ffreiberger@hsbc.com.br b) If to TMT: TMT MOTOCO DO BRASIL LTDA. Rua Ema Tanner de Andrade, 792 Campo Largo, Estado do Parana At.: Sr. Antonio Luiz Urso Telephone: (41) 2104-4130 Facsimile: (41) 2104-4111 E-mail: aurso@tmt-motoco.com.br c) If to Tecumseh: TECUMSEH PRODUCTS COMPANY 100 East Patterson Street, City of Tecumseh Michigan, U.S.A. At: James S. Nicholson Telephone: 517-423-8417 Facsimile: 517-423-0200 E-mail: jnicholson@tecumseh.com d) If to Tecumseh Power Company: TECUMSEH POWER COMPANY 900 North Street, Grafton Wisconsin, U.S.A. At: James J. Bonsall Telephone: 262 376-8292 Facsimile: 262 376-8287 E-mail: jbonsall@tecumsepower.com e) With a copy to: Felsberg. Pedretti, Mannrich e Aidar Advogados Av. Paulista, 1294 - 2 andar Cerqueira Cesar CEP 01310-915 - Sao Paulo, SP, Brazil At.: Thomas FelsbergTelephone: (55 11) 3141-9101 Fac-simile: (55 11) 3141-9150 E-mail: thomasfelsberg@felsberg.com.br 7.2.1 Any notice required or permitted hereunder shall be in writing and personally delivered and/or sent by registered mail, except if by fax or e-mail and shall be deemed effective on the date of the receipt thereof. The date of receipt shall be evidenced by the mail receipt, in the event of registered letter, or signed receipt, if it is personally delivered, or by electronic means if by fax or e-mail. Either party may change its address indicated above, at any time, by sending the other party a written notice to that effect, as provided herein. 7.3 Language. This Agreement has been written in the Portuguese and English languages. In the event of inconsistencies, the Portuguese version shall prevail in case of any dispute involving the Brazilian Parties and the English version shall prevail in case of any dispute involving only the US parties and the Banks. The Parties will also sign a Portuguese version of this Agreement, which will be used for filings in Brazil. 7.4 Governing Law. This Agreement shall be construed and interpreted in accordance with the laws of Brazil without giving effect to the conflict of laws principles thereof. 7.5 Choice of Forum and Arbitration. Any disputes between the Participating Banks and TMT will be submitted to the courts of city of Sao Paulo, unless the matter falls under the jurisdiction of the Campo Largo Court in accordance with Law 11,101/2005, until the homologation of this Agreement. 7.5.1 Arbitration. Any controversy or claim with respect to any U.S. affiliate of TMT, including Tecumseh and Tecumseh Power Company, arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration administered by the American Arbitration Association in accordance with its Commercial Arbitration Rule, including the Optional Rules for Emergency Measures of Protection, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. The written decision of the arbitrator or arbitrators shall state the reasons on which it is based and shall be without appeal. The arbitral award shall be final and binding upon all Parties. The place of Arbitration shall be at a location in New York, NY or otherwise as agreed to by the Parties. 7.6. Amendment and Entire Agreement. This Agreement and its Exhibits represent the entire agreement of the Parties relating to the subject matter hereof. No provision of this Agreement may be amended, modified, waived or discharged unless such amendment, modification, waiver or discharge is agreed to in writing and signed by TMT, Tecumseh and Tecumseh Power Company and by the Banks which represent more 60% of the then Outstanding Balance. 7.7. Successors. This Agreement is binding upon the contracting parties and their successors pursuant to the law and assignees, except as otherwise provided herein. 7.8 Notwithstanding anything in this Agreement or otherwise to the contrary, Tecumseh and Tecumseh Power Company (i) are parties to this Agreement and "Parties" in each case solely for purposes of Sections 3, 5.2 and 5.3, respectively, and for purposes of Sections 6.1, 6.2, 6.3(b) and 6.3(c) and Section 7 (other than the heading of Section 7.5), and (ii) shall in any event have no obligation or liability hereunder if the conditions referred to in Section 6.1 are not satisfied by the date referred to in Section 6.1. IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be executed in eight (8) counterparts of equal contents and effects, before the 2 (two) undersigned witnesses, on the date referred to below. Sao Paulo, November 21, 2006. BANCO BRADESCO S.A. By/Por: -------------------------------------- Name/Nome: Joao Gilberto de Seixas Maia Krepel ----------------------------------- Position/Cargo: ------------------------------ By/Por: -------------------------------------- Name/Nome: Marco Antonio de Sequeira ----------------------------------- Position/Cargo: ------------------------------ BANCO ITAU BBA S.A. By/Por: -------------------------------------- Name/Nome: Gustavo Henrique Penha Tavares ----------------------------------- Position/Cargo: ------------------------------ By/Por: -------------------------------------- Name/Nome: Haddrey Rodrigues Santos ----------------------------------- Position/Cargo: ------------------------------ HSBC BANK BRASIL S.A. - BANCO MULTIPLO By/Por: -------------------------------- Name/Nome: Luis Antonio Marconcini Position/Cargo: TMT MOTOCO DO BRASIL LTDA. By/Por: -------------------------------- Name/Nome: Antonio Ruiz Urso Position/Cargo: Director TECUMSEH PRODUCTS COMPANY By/Por: -------------------------------- Name/Nome: James S. Nicholson Position/Cargo: Vice President, Treasurer and Chief Financial Officer TECUMSEH POWER COMPANY By/Por: -------------------------------- Name/Nome: James J. Bonsall Position/Cargo: President WITNESSES/TESTEMUNHAS: - ------------------------------------- NAME/NOME: Marisa Piccaro ID/RG: ------------------------------ - ------------------------------------- NAME/NOME: Maria Alfa Canaes ID/RG: ------------------------------ ANEXO 1.1 Saldo Devedor Total da TMT
STARTING EXPIRE PRINCIPAL VALUE CREDIT LINE BANK CONTRACT DATE DATE IN U$DOLARS FX EX TOTAL R$ - --------------------- -------- --------------- ---------- ---------- --------------- ------ ------------- ACC Alfa 06/001123 5/9/2006 11/15/2006 515,662.50 2.1593 1,113,470.04 ACC Alfa 06/001132 5/10/2006 11/15/2006 563,963.40 2.1593 1,217,766.17 ACC Alfa 06/001292 5/23/2006 11/19/2006 824,678.97 2.1593 1,780,729.30 ACC Alfa 06/001332 5/29/2006 11/25/2006 1,662,775.75 2.1593 3,590,431.68 ACC Alfa 06/001387 6/7/2006 12/4/2006 691,798.08 2.1593 1,493,799.59 ACC Alfa 06/001388 6/7/2006 12/4/2006 826,173.78 2.1593 1,783,957.04 ACC Alfa 06/001408 6/14/2006 12/11/2006 70,232.52 2.1593 151,653.08 ACC Alfa 06/001773 8/28/2006 12/11/2006 1,330,489.31 2.1593 2,872,925.57 -------------- ------------- SUB-TOTAL ALFA 6,485,774.31 14,004,732.47 ============== ============= ACC Bradesco 06/005075 6/28/2006 12/25/2006 465,842.89 2.1593 1,005,894.56 ACC Bradesco 06/005170 6/30/2006 12/27/2006 514,379.44 2.1593 1,110,699.53 ACC Bradesco 06/005231 7/3/2006 12/30/2006 374,088.26 2.1593 807,768.78 ACC Bradesco 06/005453 7/10/2006 1/6/2007 302,852.90 2.1593 653,950.27 ACC Bradesco 06/005452 7/10/2006 1/6/2007 739,311.60 2.1593 1,596,395.54 ACC Bradesco 06/005607 7/13/2006 1/9/2007 687,430.05 2.1593 1,484,367.71 ACC Bradesco 06/006530 8/9/2006 2/5/2007 547,862.47 2.1593 1,182,999.42 ACC Bradesco 06/006531 8/9/2006 2/5/2007 408,171.33 2.1593 881,364.36 ACC Bradesco 06/006532 8/9/2006 2/5/2007 102,062.86 2.1593 220,384.34 ACC Bradesco 06/006649 8/11/2006 2/7/2007 458,844.50 2.1593 990,782.93 ACC Bradesco 06/006650 8/11/2006 2/7/2007 461,812.61 2.1593 997,191.97 ACC Bradesco 06/006778 8/16/2006 2/12/2007 152,892.00 2.1593 330,139.70 ACC Bradesco 06/006779 8/16/2006 2/12/2007 152,892.00 2.1593 330,139.70 ACC Bradesco 06/006780 8/16/2006 2/12/2007 152,892.00 2.1593 330,139.70 ACC Bradesco 06/006781 8/16/2006 2/12/2007 152,892.00 2.1593 330,139.70 ACC Bradesco 06/006782 8/16/2006 2/12/2007 152,861.88 2.1593 330,074.65 ACC Bradesco 06/006784 8/16/2006 2/12/2007 101,907.92 2.1593 220,049.76 ACC Bradesco 06/006785 8/16/2006 2/12/2007 152,831.75 2.1593 330,009.60 ACC Bradesco 06/006786 8/16/2006 2/12/2007 101,887.83 2.1593 220,006.40 ACC Bradesco 06/006979 8/23/2006 2/19/2007 152,681.13 2.1593 329,684.35 ACC Bradesco 06/006980 8/23/2006 2/19/2007 508,836.67 2.1593 1,098,731.01 ACC Bradesco 06/006981 8/23/2006 2/19/2007 452,775.26 2.1593 977,677.62 ACC Bradesco 06/007140 8/28/2006 2/24/2007 508,334.58 2.1593 1,097,646.87 ACC Bradesco 06/007141 8/28/2006 2/24/2007 304,940.50 2.1593 658,458.02 ACC Bradesco 06/007559 9/11/2006 3/10/2007 202,811.67 2.1593 437,931.23 ACC Bradesco 06/007561 9/11/2006 3/10/2007 202,811.67 2.1593 437,931.23 ACC Bradesco 06/007562 9/11/2006 3/10/2007 101,385.75 2.1593 218,922.25 ACC Bradesco 06/007563 9/11/2006 3/10/2007 998,451.82 2.1593 2,155,957.01 ACC Bradesco 06/007764 9/13/2006 3/12/2007 2,045,096.15 2.1593 4,415,976.11 -------------- ------------- SUB-TOTAL BRADESCO 11,661,841.48 25,181,414.31 ============== ============= ACC Itau-BBA 05/020684 11/17/2005 11/12/2006 1,169,715.56 2.1593 2,525,766.80 ACC Itau-BBA 05/020968 11/21/2005 11/16/2006 318,920.42 2.1593 688,644.86 ACC Itau-BBA 05/021502 11/25/2005 11/20/2006 425,200.00 2.1593 918,134.36 -------------- ------------- SUB-TOTAL ITAU-BBA 1,913,835.98 4,132,546.02 ============== ============= ACE Itau-BBA 05/018001 10/6/2005 11/16/2006 633,583.64 2.1593 1,368,097.15 ACE Itau-BBA 05/018536 10/17/2005 11/16/2006 1,122,148.13 2.1593 2,423,054.46 ACE Itau-BBA 05/019934 11/4/2005 11/16/2006 426,386.67 2.1593 920,696.74 -------------- ------------- SUB-TOTAL ITAU-BBA 2,182,118.44 4,711,848.35 ============== =============
1/2
STARTING EXPIRE PRINCIPAL VALUE CREDIT LINE BANK CONTRACT DATE DATE IN U$DOLARS FX EX TOTAL R$ - --------------------- -------- --------------- ---------- ---------- --------------- ------ ------------- ACC HSBC 06/039810 5/22/2006 11/18/2006 161,901.61 2.1593 349,594.15 ACC HSBC 06/086768 10/27/2006 11/26/2006 644,093.89 2.1593 1,390,791.94 ACC HSBC 06/087711 10/31/2006 11/30/2006 301,206.67 2.1593 650,395.56 ACC HSBC 06/087713 10/31/2006 11/30/2006 501,910.56 2.1593 1,083,775.47 ACC HSBC 06/087716 10/31/2006 11/30/2006 580,979.54 2.1593 1,254,509.12 ACC HSBC 06/089666 11/8/2006 12/8/2006 551,332.83 2.1593 1,190,492.98 ACC HSBC 06/089669 11/8/2006 12/8/2006 400,888.56 2.1593 865,638.67 ACC HSBC 06/089674 11/8/2006 12/8/2006 683,377.26 2.1593 1,475,616.52 ACC HSBC 06/074200 9/14/2006 12/13/2006 796,159.05 2.1593 1,719,146.24 ACC HSBC 06/049962 6/22/2006 12/19/2006 545,040.96 2.1593 1,176,906.94 ACC HSBC 06/051829 6/29/2006 12/26/2006 569,302.44 2.1593 1,229,294.76 ACC HSBC 06/077936 9/27/2006 12/26/2006 1,310,132.88 2.1593 2,828,969.93 ACC HSBC 06/079685 10/3/2006 1/2/2007 504,765.28 2.1593 1,089,939.67 ACC HSBC 06/079687 10/3/2006 1/2/2007 621,745.91 2.1593 1,342,535.94 ACC HSBC 06/055126 7/11/2006 1/7/2007 359,226.39 2.1593 775,677.54 ACC HSBC 06/081982 10/11/2006 1/9/2007 554,461.11 2.1593 1,197,247.87 ACC HSBC 06/081983 10/11/2006 1/9/2007 863,603.66 2.1593 1,864,779.38 ACC HSBC 06/056736 7/17/2006 1/13/2007 67,693.63 2.1593 146,170.86 ACC HSBC 06/057958 7/20/2006 1/16/2007 512,284.72 2.1593 1,106,176.40 ACC HSBC 06/057962 7/20/2006 1/16/2007 507,886.78 2.1593 1,096,679.92 ACC HSBC 06/083807 10/18/2006 1/16/2007 493,179.56 2.1593 1,064,922.62 ACC HSBC 06/084158 10/19/2006 1/17/2007 655,092.26 2.1593 1,414,540.72 ACC HSBC 06/059007 7/25/2006 1/21/2007 601,854.75 2.1593 1,299,584.96 ACC HSBC 06/060457 7/28/2006 1/24/2007 758,805.48 2.1593 1,638,488.67 ACC HSBC 06/062166 8/3/2006 1/30/2007 116,485.20 2.1593 251,526.49 ACC HSBC 06/063032 8/7/2006 2/5/2007 520,858.75 2.1593 1,124,690.30 -------------- ------------- SUB-TOTAL HSBC 14,184,269.73 30,628,093.63 ============== ============= TOTAL IN U$ 36,427,839.93 78,658,634.77 ============== ============= BNDES Finame Safra 32108874-3 12/07/05 4/15/2008 409,015.05 BNDES Finame Safra 32108523-0 30/12/04 1/16/2008 428,379.27 BNDES Exim Bradesco 2004018 19/04/05 2/17/2008 49,016,779.57 BNDES Progerem Unibanco 05203061013 23/08/05 8/15/2007 33,850,791.24 Duplo indexador (CCB) Itau-BBA 106306110026500 17/11/06 11/20/2006 28,249,321.22 -------------- TOTAL EXPRESSA R$ 111,954,286.35 ============== TOTAL GERAL IN R$ 190,612,921.12 ============== BRADESCO 74,198,193.88 ITAU-BBA 37,093,715.59 HSBC 30,628,093.63 UNIBANCO 33,850,791.24 ALFA 14,004,732.47 SAFRA 837,394.32 -------------- 190,612,921.12
TMT-Motoco do Brasil Ltda. expressly represents that it agrees to the amounts above described/listed, recognizing the same as precise, certain and due, on this base date of November 20, 2006. - ------------------------------------ TMT-Motoco do Brasil Ltda. 2/2 EXHIBIT 2.3 Material Change in U$ dollar / real Conversion Rate Formula This calculation will be done on a semiannual basis, starting on May 21st of 2007. (+) AR Payments - Actual Rate (-) AR Payments - Forecasted Rate (Nov 17th 2006) - ------------------------------------------------- = NET IMPROVEMENT / DEFICIT (-) Net Improvement / Deficit Prior Periods (-) Debt Payment (Principal Only) ================================================= = FX GAIN TO SHARE / DEFICIT If the resulted FX GAIN TO SHARE number is a positive number, 30% of this FX GAIN TO SHARE number will be used to anticipate coming bank debt payments to the banks. The other 70% of the FX GAIN TO SHARE number will be used to pay the total Parent Company support given after the debt restructuring agreement was signed. After the company support given after the debt restructuring agreement was signed is paid down, 70% of FX GAIN TO SHARE number will be used to anticipate coming bank debt payments and TMT may use the remaining 30% to pay down Intercompany debts EXHIBIT 3.1 SUPPLY AGREEMENT This Agreement ("Agreement") is entered into this 21ST DAY OF NOVEMBER, 2006, ("Effective Date") by and between Tecumseh Power Company, a Delaware corporation, with offices at 900 North Street, Grafton, Wisconsin 53024 ("Tecumseh"), and TMT Motoco, a corporation with its main offices at 792 Ema Tanner de Andrade Street, Campo Largo, Parana, ("Supplier"). In this Agreement, Tecumseh and Supplier are sometimes called the "Parties," or a "Party." WHEREAS, Supplier is engaged in the business of manufacturing of LV156, LV195 and OV195 engines for export to the customers of Tecumseh. In addition, Supplier manufactures a kit for the OV490 engine. Such engines and kits were developed by Tecumseh, or in the case of the LV156 are based upon Tecumseh owned designs. Due to emissions and other characteristics, these engines are not able to be sold into California, USA and Tecumseh must bring the engine into environmental compliance. WHEREAS, Tecumseh desires to designate Supplier as a source for the Products (complete engines or kits for the LV156, LV195, OV195 and OV490, including new developments on these engines or kits), for Tecumseh and Supplier will sell the Products to Tecumseh on the terms and conditions set forth herein. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, it is agreed by the Parties as follows: 1. Designation of Supplier. Tecumseh hereby designates Supplier as supplier for the Products. Tecumseh will purchase 100% of their requirements for the Product, except when Supplier can not produce parts matching Tecumseh's customer requirements. 2. Term. The term of this Agreement (the "Term") shall commence on the Effective Date, shall remain in effect for a term of three years (the "Initial Term") and shall renew automatically for successive renewal terms of one year each, unless either Party with one year's notice signifies its intent not to renew. Tecumseh shall have the right to terminate this Agreement at any time without cause on 18 months prior written notice to Supplier. The termination or expiration of this Agreement shall not relieve Supplier of its obligations to manufacture, deliver Products for which purchase orders are issued prior to termination, payments and credits hereunder, product liability, indemnifications, parts availability, sales record retention, insurance requirements, or product recall obligations. If this Agreement is terminated for any reason, Tecumseh shall retain all rights in and to any Products, and any special tooling. 3. Products. The Products covered by this Agreement are manufactured by Supplier and conform to the product specifications and performance criteria provided by Tecumseh from time to time. Tecumseh may change the Specifications from time to time. Supplier shall not materially change the Products' Specifications unless Supplier has provided Tecumseh with at least ninety (90) days' prior written notice stating the type of material change to be made to the Products. If Tecumseh is not satisfied with the material changes, the parties shall then meet within fifteen (15) days and negotiate in good faith to reconcile their differences. Routine, incremental changes shall not be considered to be material changes. Specifications given by Tecumseh shall not constitute a warranty, express or EXHIBIT 3.1 implied, by Tecumseh to Supplier against any claims whatsoever; and Tecumseh shall not be responsible to Supplier in any way, as indemnitor otherwise, for or on account of any such claims or liability. 4. Purchase Prices; Purchase Orders. The purchase price for the Products purchased by an Account for the Initial Term of this Agreement shall be the amounts set forth on Schedule A attached hereto and incorporated herein (the "Purchase Price"). All prices shall be stated in United States dollars. Supplier shall maintain the Purchase Price unchanged during the Initial Term. Supplier acknowledges and agrees that Tecumseh shall be solely responsible to Supplier for payment of the Purchase Price. Supplier shall sell to Tecumseh, and Tecumseh shall purchase from Supplier, such quantity of Products as Tecumseh shall determine pursuant to a purchase order ("Order") submitted to Supplier from time to time during the term hereof. Tecumseh shall transmit orders for Products by written Order delivered to Supplier specifying the quantities of the Products to be purchased, the date for shipment and place of destination. Tecumseh will place all Orders for Products utilizing its BPICS system, which is linked to Supplier. In the event of any conflict between the terms and conditions of any Order or any standard purchase order form, and the terms and conditions of this Agreement, this Agreement shall govern. 5. Authorized Representative. Supplier shall appoint an Authorized Representative, acceptable to Tecumseh, to act on behalf and with the authority to bind Supplier. 6. Notices. Notices permitted or required to be given hereunder shall be deemed effective if made in writing (including telecommunications) and delivered to the recipient's designated address or facsimile number by any of the following methods: (a) hand-delivery; (b) registered or certified mail, postage prepaid with return receipt requested; (c) first class or express mail, postage prepaid; or (d) Federal Express or like overnight courier service. Notice made in accordance with this section shall be deemed delivered on receipt of delivery by hand or on the third business day after mailing if mailed by first class, registered or certified mail, on the date of delivery if sent through an express or overnight courier service. Any notices or other communications required or permitted hereunder shall be addressed as follows: If by Supplier-to the President of Tecumseh, If by Tecumseh-to Managing Director of Supplier. 7. Choice of Law. This Agreement shall be governed by and construed in accordance with the laws of Brazil. 8. Arbitration. Any disputes arising out of or in connection with this agreement shall be definitively resolved by Arbitration (Law No. 9,307/96), under the Rules of the Arbitration Center of the American Chamber of Commerce to Brazil - Sao Paulo (Regulamento do Centro de Arbitragem da Camara Americana de Comercio para o Brasil - Sao Paulo). 8.1 The Parties may each appoint an arbitrator to participate in the arbitration, and they shall choose a third arbitrator by mutual agreement to make up the arbitration panel. The arbitration tribunal EXHIBIT 3.1 will be appointed according the rules of the Arbitration Center of American Chamber of Commerce to Brazil - Sao Paulo. 8.2 The venue for the arbitration will be the City of Sao Paulo, State of Sao Paulo, Brazil. 8.3 The arbitration proceedings should be conducted in the English language. 8.4 To settle the disputes, the arbitrators shall apply the Law, exclusively, and especially the provisions contained in this Agreement and the applicable Brazilian legislation. 8.5 For the purpose of avoiding any doubt as to the choice of arbitration as the means for resolving possible disputes arising from this Agreement, the Parties expressly warrant that this clause is set down for the purposes of Article 4 of Law No. 9,307, dated September 23, 1996. 8.6 The arbitral decision shall be final and binding on the Parties, and shall be handed down within the timeframe stipulated by the Arbitration Panel. 8.7 The costs and expenses of arbitration shall be borne by the losing Party. 9. Entire Agreement. All agreements between the Parties for the sale of the Products shall be governed exclusively by the terms and conditions set forth herein, with all exhibits and schedules annexed hereto, except as the Parties may otherwise agree in a writing duly executed by their respected duly authorized representatives which expressly references this Agreement. IN WITNESS WHEREOF, each of the undersigned has caused this Agreement to be executed by its duly authorized representative. TECUMSEH POWER COMPANY TMT MOTOCO By: By: --------------------------------- ------------------------------------ Authorized Signature Authorized Signature Name: James Bonsall Name: Antonio Urso Title: President Title: Managing Director EXHIBIT 3.1 Schedule A PRODUCT PRICES AND OTHER TERMS AND CONDITIONS 1. Cost Adjustment. The initial purchase price for the Products purchased by Tecumseh for the Initial Term of this Agreement shall be equal to the amount which Tecumseh receives from its customers for the Products, less 15%, except for the first year of this Agreement for which the 15% reduction shall not apply (the "Purchase Price"). Supplier shall maintain the total Purchase Price unchanged for 6 months after the effective date of this contract. Thereafter, Product prices can be adjusted once every six months to reflect changes in aluminum raw material costs using the formulas and baselines shown below. Prices will only be changed when the Change in Aluminum Price/kg as described below exceeds + /- 5 % from the baseline. The first adjustment can occur 6 months after the effective date of this contract. The Product cost price adjustment formula and definitions are found below. FORMULA Adjusted Price = (Baseline Price) + [(Change in Aluminum Price/kg) x (kg Aluminum in Product) DEFINITIONS Change in Aluminum Price/kg = (New Aluminum Price/kg) - (Baseline Aluminum Price/kg) Kg Aluminum in Part = Actual, as agreed from time to time. Baseline Price = See above Baseline Aluminum Price / kg: US $1.08 New Aluminum Price / kg = Primary aluminum (99.7%) at LME for cash purchase 2. Invoicing; Pricing. The purchase price for Supplies, under this Order, include storage, handling, packaging, freight, insurance, transportation, and all other expenses, costs and charges of Supplier to produce Supplies. All invoices under this Order must reference the purchase order number, amendment or release number, Tecumseh's part number, Supplier's part number where applicable, quantity of pieces in the shipment, number of cartons or containers in the shipment, Supplier's name, and the Tecumseh assigned "supplier number," bill of lading number, and other information required by Tecumseh. Under no circumstances will Tecumseh be liable for any of Supplier's taxes. 3. Quantities; Delivery. Time is of the essence. Unless otherwise agreed in writing by Tecumseh and Supplier, Supplier agrees to 100% on-time delivery of the quantities, at the times specified by Tecumseh. Failure to meet agreed delivery and quantities shall be considered a breach of this agreement and Supplier shall pay to Tecumseh any damages or expenses imposed upon or incurred by Tecumseh as a result of such breach. Tecumseh may change the rate of scheduled shipments or direct temporary suspension of scheduled shipments, neither of which entitles Supplier to modify the price for Product covered by this agreement. Tecumseh is not obligated to accept early deliveries, late deliveries, partial deliveries, or excess deliveries. EXHIBIT 3.1 4. Premium Freight; Shipping Costs; Related Costs. If, as a result of Supplier's failure to comply with shipping or delivery requirements, Tecumseh incurs any costs or expenses, including, without limitation, costs charged by Tecumseh's customer(s) to Tecumseh, Supplier shall pay such costs and expenses. Tecumseh is not liable for premium freight costs or expenses. 5. Defective and Nonconforming Supplies. Unless Tecumseh otherwise notifies Supplier, if defective or nonconforming Products are shipped to and rejected by Tecumseh, the quantities under any order will not be reduced by the number of such nonconforming or defective Products. Supplier will replace any such rejected nonconforming or defective Products without a new order or release from Tecumseh. In addition to other remedies available to Tecumseh: (i) Supplier agrees to authorize return, at Supplier's risk and expense at full invoice price, plus transportation charges (ii) Supplier will reimburse Tecumseh for all reasonable expenses that result from any rejection or correction of nonconforming and defective Supplies. Payment for defective or nonconforming Supplies is not an acceptance of such Supplies by Tecumseh, does not limit or impair Tecumseh's right to assert any legal or equitable remedy, and does not relieve Supplier's responsibility for latent defects. 6. Payment. Payment shall be made net five (5) days from date that Tecumseh's customer payments are due In case the Product is for Tecumseh's utilization, payment shall be made thirty 30) days from the date that Supplier ships the Product. Payment will be made in U.S. dollars. 7. Warranties. (a) Supplier warrants to Tecumseh, to Tecumseh's assigns and customers, and to user's of Tecumseh's products, that all Products delivered to Tecumseh will: (i) conform to the specifications, standards, drawings, samples, descriptions, and revisions as furnished to or by Tecumseh; (ii) be merchantable and free of defects in design (to the extent designed by Supplier), materials and workmanship; and (iii) be selected, designed (to the extent designed by Supplier), manufactured or assembled by Supplier based upon Tecumseh's intended use and be fit and sufficient for the purposes intended by Tecumseh. The foregoing warranties are in addition to those available to Tecumseh by law. (b) The warranty period for the Products shall be the longer of (i) any warranty period provided by applicable law or (ii) that provided by Tecumseh to its customer. 8. Remedies. The rights and remedies reserved to Tecumseh in this agreement shall be cumulative with, and additional to, all other legal or equitable remedies. Tecumseh will notify Supplier if any Products fail to conform to the warranties set forth herein. Supplier will participate in and comply with any warranty reduction or related programs of Tecumseh or (to the extent directed by Tecumseh) Tecumseh's customer(s). In any action brought by Tecumseh to enforce Supplier's obligation to sell Products, the parties agree that Tecumseh does not have an adequate remedy at law, and that Tecumseh is entitled to specific performance of Supplier's obligations under this agreement. Fulfillment of all terms and conditions, formal, procedural, substantial, or otherwise, is prerequisite to fulfillment of this Order, including, without limitation, the right to receive payment of the purchase price. EXHIBIT 3.1 9. Indemnification. To the fullest extent permitted by law, Supplier will defend, indemnify, and hold harmless Tecumseh, Tecumseh's officers, directors, representatives, and agents, Tecumseh's successors and assigns and dealers, and users of the Products sold by Tecumseh against all damages, claims, or liabilities and expenses (including, without limitation, attorney's fees and other professional fees, settlements and judgments) arising from or resulting in any defective Products or from any negligent or wrongful act or omission of Supplier, or Supplier's agents, representatives, employees or subcontractors, or any breach or failure by Supplier to comply with any of the Supplier's representations or other terms and conditions of this Order. 10. Product Recall and Retrofit. Supplier hereby agrees to comply with the recall and/or retrofit procedures reasonably established from time to time by Tecumseh. Furthermore, Supplier agrees to bear all costs and expenses incurred by it in complying with such recall or field retrofit procedures. 11. Insolvency. To the extent that Tecumseh no longer owns the majority of the outstanding quotas of Supplier, this agreement may be terminated immediately by Tecumseh without liability to Supplier upon the occurrence of the following events, or any other comparable events, and Supplier shall reimburse Tecumseh for all costs incurred by Tecumseh in connection with any of the following, including, without limitation, attorney's and other professional fees: (a) Supplier becomes insolvent; (b) Supplier files a voluntary petition in bankruptcy; (c) an involuntary petition in bankruptcy is filed against the Supplier; (d) a receiver or trustee is appointed for Supplier; or (e) Supplier needs accommodations from Tecumseh, financial or otherwise, in order to meet its obligations under this agreement; (f) Supplier executes an assignment for the benefit of creditors. 12. Termination for Breach or Nonperformance. Tecumseh reserves the right to terminate all or any part of this agreement, without liability to Supplier, if Supplier is no longer in a position to manufacture and deliver the Products in accordance with the requirements of Tecumseh or, to the extent that Tecumseh no longer owns the majority of the outstanding quotas of Supplier, if Supplier: (a) repudiates, breaches, or threatens to breach any of the terms of this agreement, (b) fails to perform or threatens not to perform services or deliver Supplies as specified by Tecumseh; (c) fails to make progress so as to endanger timely and proper completion or delivery of Products and does not correct the failure or breach within ten (10) days (or such shorter period of time if commercially reasonable under the circumstances) after receipt of written notice from Tecumseh specifying the failure or breach; or (d) sells, or offers to sell, a substantial portion of its assets used for the production of Products for Tecumseh, or sells or exchanges, or offers to sell or exchange, an amount of its stock or other equity interests that would result in a change in control of Supplier. 13. Termination. In the event of Termination of this contract for any reason, Supplier shall immediately ship all tooling and Tecumseh owned equipment utilized in the manufacturer of the Products. Pricing for tooling not owned by Tecumseh or its customers shall be the lower of its fair market value (as determined by independent appraisal) or its amortized cost. Pricing for such tooling shall be determined within 30 days of Termination. Such tooling shall become the sole property of Tecumseh. EXHIBIT 3.1 14. Force Majeure. Any delay or failure of either party to perform its obligations hereunder shall be excused if, and to the extent, that it is caused by an event or occurrence beyond the reasonable control of the party and without its fault or negligence. This includes acts of God; terrorism, fires; floods; windstorms; explosions; riots; natural disasters; or wars. Immediate written notice of such delay (including the anticipated duration of the delay) must be given to the other party as soon as possible after the occurrence. During the delay or failure to perform by Supplier, Tecumseh, at its option, (a) may purchase Supplies from other sources and reduce its outstanding orders and Releases to Supplier by such quantities, without liability to Supplier; or (b) may ask Supplier to deliver to Tecumseh at Tecumseh's expense all finished goods, work in process and parts and materials produced or acquired for Products under this agreement. In addition, Supplier, at its expense, shall take all necessary actions to ensure the supply of Products to Tecumseh for a period of at least ninety (90) days during any anticipated labor disruption or resulting from the expiration of Supplier's labor contracts. Events, Force Majeure or otherwise, which cause supply interruption for a period of 30 days or more may terminate this agreement. 15. Service and Replacement Parts. Supplier agrees to sell each component or part at a price that equals its cost plus 10%, but, never in the aggregate (of all components in the Product) more than the price of the Product. 16. Supplier's Property. Supplier, at its expense, shall furnish, keep in good condition, and replace when necessary, all machinery, equipment, tools, jigs, dies, gauges, fixtures, molds, patterns, and items other than Tecumseh's Property that are necessary for the production of Products ("Supplier's Property"). 17. Set-Off; Recoupment. In addition to any right of setoff or recoupment provided by law, all amounts due to Supplier shall be considered net of indebtedness of Supplier to Tecumseh and its affiliates Motoco. Tecumseh shall have the right to set off against or to recoup from any payment or other obligation owed to Supplier, in whole or in part, any amounts due to Tecumseh and Motoco. 18. Non-Assignment; Supplier Change in Control. Supplier may not assign or delegate its obligations under this agreement without Tecumseh's prior written consent. Tecumseh will have the right to assign any benefit or duty under this agreement to any third party upon notice to Supplier with or without consent. 19. Severability. If any term of this agreement is invalid or unenforceable under any statute, regulation, ordinance, executive order or other rule of law, the term shall be deemed reformed or deleted, as the case may be, but only to the extent necessary to comply with applicable law. The remaining provisions of this agreement shall remain in full force and effect. 20. Survival. The obligations of Supplier to Tecumseh survive termination of this agreement, except as otherwise provided in this agreement. 21. No Implied Waiver. The failure of either party at any time to require performance by the other party of any provision of this agreement shall in no way affect the right to require performance at any later time, nor shall the waiver of either party of a breach of any provision of this agreement constitute a waiver of any later breach of the same or any other provision of this agreement. EXHIBIT 3.1 22. Sales Tax Exemption. Tecumseh certifies that Supplies purchased under this agreement and identified as industrial processing are eligible for state and federal sales tax exemption under the federal identification number provided by Tecumseh. 23. Tooling. Unless otherwise agreed in writing by Tecumseh, payment by Tecumseh to Supplier for tooling shall be due within 30 days of the later of (a) PPAP approval of the tooling or Supply, (b) following Tecumseh's successful product validation testing given an approved PPAP submission for the Supply, and (c) in the case of reimbursable tooling (e.g., tooling to be paid for and owned by Tecumseh's customer), receipt of payment by Tecumseh from Tecumseh's customer. All tools and equipment are to be made to Tecumseh's specifications (or, where directed by Tecumseh, those of Tecumseh's customer). Exceptions are to be issued in writing by an appropriate representative of Tecumseh. EXHIBIT 3.2 RECEIVABLES PLEDGE AGREEMENT This Receivables Pledge Agreement (the "Pledge Agreement") is entered into by and among the following parties: I. TMT MOTOCO DO BRASIL LTDA., with its headquarters in the City of Campo Largo, State of Parana, Ema Tanner de Andrade Street, No. 792, enrolled with the Brazilian Taxpayer's Registry (CNPJ) under no 05.203.407/0001-30, herein represented in accordance with its articles of association, hereinafter referred to as "TMT";. II. BANCO BRADESCO S.A., with its headquarters in the City of Osasco, State of Sao Paulo, Cidade de Deus Street, w/out No., Vila Yara, enrolled with the Brazilian Taxpayer's Registry (CNPJ) under no 60.746.948/0001-12, herein represented in accordance with its bylaws, hereinafter referred to as "BRADESCO"; III. BANCO ITAU BBA S.A., with its headquarters in the City of Sao Paulo, State of Sao Paulo, Brigadeiro Faria Lima Avenue, 3.400, 4th floor (part), enrolled with the Brazilian Taxpayer's Registry (CNPJ) under no 17.298.092/0001-30, herein represented in accordance with its bylaws, hereinafter referred to as "ITAU BBA"; IV. HSBC BANK BRASIL S.A. - BANCO MULTIPLO, with its headquarters in the City of Curitiba, State of Parana, Travessa Oliveira Bello, 34, 4th floor, enrolled with the Brazilian Taxpayer's Registry (CNPJ) under no 01.701.201/0001-89, herein represented in accordance with its bylaws, hereinafter referred to as "HSBC" and together with BRADESCO and ITAU BBA, the "Banks"; WHEREAS (i) TMT has executed, individually with each of the BANKS on different dates, facility agreements in order to fund its industrial expansion and the required working capital for its activities, including its export activity, which were structured as advance on export contracts ("Facility Agreements"), Bank Credit Bills representing Loans ("Credit Bills") and the Progerem/Counter Guaranty Agreements, as applicable (the Facility Agreements, the Credit Bills and the Guaranty Agreement are hereinafter referred to jointly as the "Contracts"); (ii) On October 4th, 2006, TMT, Tecumseh Products Company (a company organized and existing under the laws of the State of Michigan, headquartered at 100 East Patterson Street, in the city of Tecumseh, State of Michigan, United States of America, enrolled with the Brazilian Taxpayer's Registry (CNPJ) under no 05.719.749/0001-07), BRADESCO, ITAU BBA and HSBC executed a Standstill Agreement whereby the Banks agreed to continue to restructure the maturities of the respective Contracts and to jointly prepare a plan with respect to the payment obligations of TMT under the Contracts (the "Outstanding Balance"); (iii) Pursuant to an Out-of-Court Restructuring Agreement dated as of 21.11.2006 entered into between TMT, Tecumseh Products Company and Tecumseh Power Company and the Banks (the "Restructuring Agreement"), the Banks have agreed to restructure and reschedule the payment of the Outstanding Balance, under the terms and conditions therein set out, including the following ones, which are summarized below in order to comply with the requirements of Article 1424 of the Brazilian Civil Code: (a) TMT's total Outstanding Balance: The amounts described in Exhibit 1.1 of the Restructuring Agreement, correspond to TMT's total Outstanding Balance with respect to each of the BANKS. (b) Grace Period: TMT has been granted a grace period of 18 months commencing November 21, 2006 (the "Grace Period"), during which no payment of principal can be demanded by the Banks from TMT under the Contracts without prejudice of the provision of section 2.2.1 of the Restructuring Agreement. (c) Interest: During the GRACE PERIOD, interest on the Outstanding Balance will be paid on arrears by TMT on a quarterly basis commencing on January 1st, 2007 at an annual rate of Libor plus 3%. Interest will accrue computed on the basis of a year of 360 days and actual days elapsed, without prejudice of the provision of section 2.2.1 of the Restructuring Agreement. (d) Payment: After the Grace Period, the Outstanding Balance will be divided into 18 equal installments, which will be paid by TMT in arrears on a monthly basis, plus interest at an annual rate of Libor plus 3% which will be paid on a monthly basis in arrears and accrue computed on a basis of a year of 360 days and actual days elapsed. (iv) To secure the payment of the Outstanding Balance and accrued interest to the Banks, TMT agrees to pledge in favor of the Banks certain accounts receivable held by TMT under a supply agreement in the form of Exhibit 3.1. of the Restructuring Agreement (the "Supply Agreement"), entered into by and between TMT and Tecumseh Power Company, a company organized and existing under the laws of the State of a Delaware, headquartered at 900 North Street, Grafton, Wisconsin, for the purchase by Tecumseh Power Company from TMT of LV156/195, OV195 and OV490 type engines and kits, including new developments on these engines and kits (the "ENGINES"). NOW THEREFORE, the above-mentioned parties agree to the following which shall irrevocably and irreversibly bind the parties and their successors and assigns. CLAUSE 1 1.1. In order to secure the payment of the Outstanding Balance and accrued interest to the BANKS as provided in the Restructuring Agreement, TMT hereby pledges to the BANKS, pursuant to Article 1451 et seq. of the Brazilian Civil Code, the accounts receivable held by TMT for the amounts owed by Tecumseh Power Company to TMT, after the deduction of the amounts owed by TMT to Tecumseh Power Company for the supply of components and parts used by TMT in the manufacture of the Engines, all in accordance with the Supply Agreement (hereinafter the "COLLATERAL"). 1.2 Tecumseh Power Company signs this Pledge Agreement, as an intervening party hereto, solely for the purpose of acknowledging the pledge of the Collateral to the BANKS, as provided in Article 1453 of the Brazilian Civil Code. CLAUSE 2 2.1 In case of a default of any of the obligations assumed by TMT under the Restructuring Agreement, Banks may exercise with respect to Collateral any and all rights and remedies conferred by this Pledge Agreement and the law, in particular the rights provided by Article 1459 of the Brazilian Civil Code. 2.2 As long as no event of default has occurred under the Restructuring Agreement, TMT may receive and collect any amounts owed by Tecumseh Power Company to TMT under the Supply Agreement, as pledged hereunder to the BANKS. If an event of default under the Restructuring Agreement occurs, TMT's authorization to receive such payments shall immediately cease upon the occurrence of a default under the Restructuring Agreement and thereafter all such TMT's rights shall be automatically transferred to the Banks and any payments made by Tecumseh Power Company under the Collateral shall be used by the Banks to settle the outstanding amounts due by TMT and applied under the Restructuring Agreement. 2.3 Upon the occurrence of an event of default under the Restructuring Agreement, the Banks shall be entitled to dispose the COLLATERAL by private or public sale, assignment, transfer or by any other means, the BANKS being duly authorized and empowered by TMT to perform any of the aforementioned acts, including without limitation, the power to sign receipts, grant releases and execute agreements, public deeds and all instruments without requirement of any judicial or extra-judicial measures, so as to permit the BANKS to recover any and all outstanding amount owing under the Restructuring Agreement. CLAUSE 3 3.1. This Pledge Agreement constitutes a security interest regardless of the of any other security interest or guaranties that may possibly be held by the Banks for TMT's obligations due or to become due under the Restructuring Agreement. 3.2 Upon payment in full of all of TMT's obligations under the Restructuring Agreement, then the Banks shall release the charge created by this Pledge Agreement on the Collateral by a release in writing. CLAUSE 4 4.1 TMT covenants: (i) to warrant and defend the Bank's rights to the Collateral against any claims and demands of any third parties; (ii) not, without Bank's prior written consent, to sell, assign, transfer, pledge or encumber in any manner any part of the Collateral or permit to exist any other encumbrance on the Collateral, in addition to the lien resulting herefrom; (iii) from time to time promptly to execute and deliver all such other assignments, instruments and documents (including any amendments to this Pledge Agreement), and take any further action, that may reasonably be necessary or requested by the BANKS, in order more fully to evidence and perfect, and protect the security interest granted by this Pledge Agreement or to enable the Banks to exercise and enforce their rights and remedies under this Pledge Agreement; and (iv) promptly to provide to the BANKS any additional information or documents which the BANKS may reasonably request concerning the Collateral. 4.2 TMT represents and warrants that: (i) it is the legal and beneficial owner of the Collateral; (ii) the Collateral is free and clear from any lien, burden, debt, or adverse claim other than the lien created hereby; (iii) TMT has full corporate power and authority to enter into this Pledge Agreement and perform the obligations provided hereunder; and (iv) the execution and performance of this Pledge Agreement by TMT shall not violate or contravene its Articles of Association, any provision of any applicable law, judgment or award of any court or governmental authority, or any contract to which TMT is a party or which may be binding upon it or any of its respective properties, and shall not result in the creation or imposition of any lien or security interest ("direito real de garantia") in any of its relevant properties, except solely the lien created hereunder. CLAUSE 5 5.1 In order to be valid and effective, any amendments to this Pledge Agreement shall be in writing and signed by the parties hereto. 5.2 TMT shall not assign or transfer this Pledge Agreement without prior written consents from the other parties. 5.3 This Pledge Agreement neither constitutes a novation nor modifies any TMT's obligations to the Banks under the Restructuring Agreement. 5.4 Any notice required or permitted hereunder shall be in writing and addressed and delivered as provided in the Restructuring Agreement. 5.5 This Pledge Agreement has been written in the Portuguese and English languages. In the event of inconsistencies, the Portuguese version shall prevail. 5.6 This Pledge Agreement shall be construed and interpreted in accordance with the laws of Brazil. Any disputes between the Banks and TMT will be submitted to the courts of the city of Sao Paulo. IN WITNESS WHEREOF, the parties hereby have executed 12 (twelve) identical copies of this Pledge Agreement duly witnessed. Sao Paulo, November 21st, 2006 TMT MOTOCO DO BRASIL LTDA. By/Por: -------------------------------- Name/Nome: ----------------------------- Title/Cargo: --------------------------- BANCO BRADESCO S.A. By/Por: -------------------------------- Name/Nome: ----------------------------- Title/Cargo: --------------------------- BANCO ITAU BBA S.A. By/Por: -------------------------------- Name/Nome: ----------------------------- Title/Cargo: --------------------------- HSBC BANK BRASIL S.A. - BANCO MULTIPLO By/Por: -------------------------------- Name/Nome: ----------------------------- Title/Cargo: --------------------------- TECUMSEH POWER COMPANY By/Por: -------------------------------- Name/Nome: ----------------------------- Title/Cargo: --------------------------- WITNESSES/TESTEMUNHAS: - ------------------------------------- ---------------------------------------- NAME/NOME: NAME/NOME: -------------------------- ----------------------------- ID/RG: ID/RG: ------------------------------ --------------------------------- EXHIBIT 5.1 TMT-MOTOCO DO BRASIL LTDA BUSINESS PLAN PROJECTIONS PACKAGE 2006-2011 - NOVEMBER 2006
CASH IN LC ENGINES VOL 789.489 1.211.866 1.279.127 1.534.127 1.609.127 1.619.127 PARTS VOL 2.423.148 677.804 851.772 851.772 851.772 851.772 YTD - 2006 YTD - 2007 YTD - 2008 YTD - 2009 YTD - 2010 YTD - 2011 ----------- ----------- ----------- ----------- ----------- ----------- RECEIPTS TPC 169.189.055 228.548.570 284.567.753 367.036.396 384.757.835 418.068.974 Domestic sales 4.790.681 3.623.971 4.845.305 5.343.241 5.458.150 5.515.604 Forward gain 5.722.762 -- -- -- -- -- Capital Infusion 9.354.787 -- -- -- -- -- Recoverable tax 5.708.284 12.999.885 17.054.189 22.451.102 24.798.366 26.549.872 ----------- ----------- ----------- ----------- ----------- ----------- TOTAL RECEIPTS 194.765.569 245.172.426 306.467.247 394.830.739 415.014.351 450.134.450 DISBURSEMENTS RAW MATERIALS Aluminum 27.337.967 -- -- -- -- -- Tecumseh Prod Co. 2.812.023 21.780.353 27.241.098 29.657.741 32.171.661 33.640.957 Tecumseh do Brasil 7.878.521 16.206.497 23.089.438 31.691.888 35.417.551 37.136.023 Others 56.577.786 137.739.264 171.635.013 216.513.154 241.997.221 245.372.977 ----------- ----------- ----------- ----------- ----------- ----------- TOTAL RAW MATERIALS + TAX 94.606.297 175.726.115 221.965.550 277.862.782 309.586.434 316.149.957 WAGES AND BENEFITS Salaries 15.383.772 21.841.486 23.229.536 27.655.831 29.516.505 30.255.244 Temps 500.546 -- -- -- -- -- Social Charges 7.806.281 8.132.768 8.877.322 10.565.411 11.288.216 11.582.226 Benefits 3.671.981 6.143.410 6.563.736 7.856.182 8.239.873 8.307.035 ----------- ----------- ----------- ----------- ----------- ----------- TOTAL WAGES AND BENEFITS TAX 27.362.581 36.117.664 38.670.594 46.077.423 49.044.594 50.144.506 CPMF 1.454.915 995.106 1.301.315 1.630.404 1.469.617 1.507.400 Federal Tax 499.521 -- -- -- -- -- State Tax 137.107 -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- ----------- TOTAL TAX 2.091.543 995.106 1.301.315 1.630.404 1.469.617 1.507.400 OTHER OPERATING 25.422.026 25.878.339 26.232.854 30.085.849 34.604.531 38.894.451 INTEREST 13.333.919 19.843.469 15.815.454 6.087.297 6.218.206 6.283.661 CAPEX 9.812.312 5.294.093 6.004.973 5.592.027 4.191.091 3.866.719 ----------- ----------- ----------- ----------- ----------- ----------- TOTAL DISBURSEMENTS 172.628.679 263.854.786 309.990.741 367.335.783 405.114.473 416.846.694 ----------- ----------- ----------- ----------- ----------- ----------- NET SOURCE (USE) 22.136.890 (18.682.359) (3.523.494) 27.494.957 9.899.878 33.287.756 Cash Beginning of Period 267.000 6.849.609 66.674 (40.378.139) (90.787.775) (80.887.896) Debt Loan (Repay) (15.554.281) 11.899.424 (36.921.319) (77.904.592) -- -- ROUNDING ----------- ----------- ----------- ----------- ----------- ----------- CASH END OF PERIOD 6.849.609 66.674 (40.378.139) (90.787.775) (80.887.896) (47.600.140) ----------- ----------- ----------- ----------- ----------- ----------- FX RATES 2,17 2,25 2,30 2,35 2,40 2,40
EXHIBIT 5.2(h) (DRAFT FORM OF GUARANTY AGREEMENT TO BE EXECUTED ONLY UPON SATISFACTION OF CONDITIONS PRECEDENT AS SET FORTH IN THE OUT-OF-COURT RESTRUCTURING AGREEMENT) GUARANTY AGREEMENT This GUARANTY AGREEMENT (this "Guaranty") dated as of November 21, 2006, among Tecumseh Products Company, a corporation organized and existing under the laws of the State of Michigan ("Guarantor"), and the financial institutions that are party to the Out-of-Court Restructuring Agreement referenced below and listed on the signature pages hereof (collectively, the "Guarantied Parties"). WITNESSETH: WHEREAS, GUARANTOR entered into that certain Restructuring Agreement dated as of November 21, 2006 (as entered into on such date, the "Out-of-Court Restructuring Agreement"), with TMT - Motoco do Brasil Ltda. ("TMT") and the Guarantied Parties (among others), pursuant to which Guarantor agreed to enter into this Guaranty upon the satisfaction of certain conditions precedent, which conditions precedent have all been met. NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I. GUARANTY SECTION 1.01 THE GUARANTY. The Guarantor hereby guaranties to each Guarantied Party and their respective successors and assigns the prompt payment when due (whether at stated maturity, by required prepayment, declaration, demand, by acceleration or otherwise) of the Outstanding Balance from time to time owing to the Guarantied Parties by TMT, in each case strictly in accordance with the terms of the Restructuring Agreement (such obligations being herein collectively called the "Guarantied Obligations"). The Guarantor hereby agrees that if TMT or any other guarantor of the Guarantied Obligations shall fail to pay in full when due (whether at stated maturity, by acceleration or otherwise) any of the Guarantied Obligations, the Guarantor will promptly pay the same in cash, upon notice to and demand on the Guarantor, and that in the case of any extension of time of payment of any of the Guarantied Obligations, the same will be promptly paid in full when due (whether at extended maturity, by acceleration or otherwise) in accordance with the terms of such extension. SECTION 1.02 OBLIGATIONS UNCONDITIONAL. The obligations of the Guarantor under Section 1.01 to the fullest extent permitted by applicable law are absolute, irrevocable and unconditional, irrespective of any substitution, release or exchange of any other guarantee of or security for any of the Guarantied Obligations. To the extent not prohibited by law, the Guarantor hereby expressly waives diligence, presentment and protest, and any requirement that any Guarantied Party exhaust any right, power or remedy or proceed against any other guarantor of any of the Guarantied Obligations. To the extent not prohibited by law, the Guarantor waives any and all notice of the creation, renewal, extension, waiver, termination or accrual of any of the Guarantied Obligations and notice of or proof of reliance by any Guarantied Party upon this Guaranty or acceptance of this Guaranty. This Guaranty shall remain in full force and effect and be binding in accordance with and to the extent of its terms upon the 1 GUARANTOR and its successors and assigns, and shall inure to the benefit of the GUARANTIED PARTIES, and their respective successors and assigns. SECTION 1.03 REINSTATEMENT. The obligations of the Guarantor under this Article I shall be automatically reinstated if and to the extent that for any reason any payment by or on behalf of TMT or any guarantor in respect of the Guarantied Obligations is rescinded or must be otherwise restored by any Guarantied Party, whether as a result of any proceedings in bankruptcy or reorganization or otherwise. SECTION 1.04 CONTINUING GUARANTY. The guaranty in this Article I is a continuing guaranty, and shall apply to all Guarantied Obligations whenever arising, and shall terminate on payment in full of the Guarantied Obligations (other than contingent or indemnifications obligations for which no claims have been made). The obligations of Guarantor under this Guaranty shall survive any voluntary or involuntary bankruptcy of TMT. Notwithstanding anything in this Guaranty or otherwise to the contrary, the obligations of Guarantor under this Guaranty (x) shall be pre-petition date, unsecured obligations of Tecumseh in any voluntary or involuntary bankruptcy or insolvency proceeding of Tecumseh or any of its United States affiliates and (y) shall not survive, and shall terminate and be of no force and effect following, (1) conversion or exchange (whether implemented as part of an in court or out of court restructuring) of all or any portion of Tecumseh's first lien debt facility and/or second lien facility (as amended, modified, restated or refinanced) into equity interests (whether common, preferred or otherwise) of Tecumseh or any of its United States affiliates, or (2) consummation of a sale, transfer or other disposition of all or a substantial portion of the equity interests in (or assets of) TMT in which the purchaser or transferee thereof assumes the obligations of TMT with respect to the Outstanding Balance, subject to the consent of the Participating Banks stipulated in the Restructuring Agreement. SECTION 1.05 GENERAL LIMITATION ON GUARANTEE OBLIGATIONS. In any action or proceeding involving any state corporate law, or any applicable state, federal or foreign bankruptcy, insolvency, reorganization or other applicable law affecting the rights of creditors generally, if the obligations of the Guarantor under Section 1.01 would otherwise be held or determined to be void, voidable, invalid or unenforceable, or subordinated to the claims of any other creditors, on account of the amount of its liability under Section 1.01, then, notwithstanding any other provision to the contrary, the amount of such liability shall, without any further action by the Guarantor or any other person, be automatically limited and reduced to the highest amount that is valid and enforceable, not void or voidable and not subordinated to the claims of other creditors as determined in such action or proceeding. ARTICLE II. MISCELLANEOUS SECTION 2.01 NOTICES. Notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by PDF e-mail or telecopy, as follows: (a) if to the Guarantor, at: [TO BE COMPLETED AT THE TIME THE GUARANTY IS EXECUTED AND DELIVERED.] (b) if to any Guarantied Party, to it at its address and facsimile number set forth below its name on the signature pages hereof. All notices and other communications given to any party hereto in accordance with the provisions of this Guaranty shall be deemed to have been given on the date of receipt if delivered by hand or overnight 2 courier service or sent by telecopy or by certified or registered mail, in each case delivered, sent or mailed (properly addressed) to such party as provided in this Section 2.01 or in accordance with the latest unrevoked direction from such party given in accordance with this Section 2.01, and failure to deliver courtesy copies of notices and other communications shall in no event affect the validity or effectiveness of such notices and other communications. As may be agreed to among the Guarantor and the applicable Guarantied Parties from time to time, notices and other communications may also be delivered by e-mail to the e-mail address of a representative of the applicable person from time to time by such person. Communications delivered by e-mail shall be deemed to have been given upon receipt. SECTION 2.02 WAIVERS; AMENDMENT. No failure or delay by any Guarantied Party in exercising any right or power hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of each Guarantied Party are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver or amendment of any provision of this Guaranty shall be effective unless the same shall be approved by the Guarantor and Guarantied Parties holding more than 50% of the amount of the Outstanding Balance. SECTION 2.03 COUNTERPARTS; INTEGRATION; EFFECTIVENESS. This Guaranty may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Guaranty shall become effective when it shall have been executed by the Guarantor and each of the Guarantied Parties, and thereafter shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Delivery of an executed counterpart of a signature page of this Guaranty by telecopy, Adobe PDF file or other electronic transmission shall be effective as delivery of a manually executed counterpart of this Guaranty. SECTION 2.04 GOVERNING LAW. This Guaranty shall be construed in accordance with and governed by the law of the State of New York, without regard to conflicts of law principles that would require the application of the laws of another jurisdiction. SECTION 2.05 ARBITRATION. Any controversy or claim arising out of or relating to this Guaranty, or the breach thereof, shall be settled before the by arbitration administered by the American Arbitration Association in accordance with its Commercial Arbitration Rule, including the Optional Rules for Emergency Measures Of Protection, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. The written decision of the arbitrator or arbitrators shall state the reasons on which it is based and shall be without appeal. The arbitral award shall be final and binding upon all parties hereto. The place of arbitration shall be at a location in New York, N.Y., or otherwise as agreed to by the Guarantor and the Guarantied Parties. (Signature Pages Follow) 3 IN WITNESS WHEREOF, the parties hereto have caused this Guaranty to be duly executed by their respective authorized officers or other authorized signatories as of the day and year first above written. TECUMSEH PRODUCTS COMPANY By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- [NAMES OF GUARANTIED PARTIES] By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- [ADDRESSES OF GUARANTIED PARTIES.] 1 EX-31.1 5 k10863exv31w1.txt CERTIFICATION OF THE PRESIDENT & CEO PURSUANT TO SECTION 302 Exhibit 31.1 RULE 13A-14(A) CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, Todd W. Herrick 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: December 19, 2006 BY: /s/ TODD W. HERRICK ------------------------------------ Todd W. Herrick Chairman, President, and Chief Executive Officer EX-31.2 6 k10863exv31w2.txt CERTIFICATION OF THE CFO PURSUANT TO SECTION 302 Exhibit 31.2 RULE 13A-14(A) CERTIFICATION OF CHIEF FINANCIAL OFFICER I, James S. Nicholson 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: December 19, 2006 BY: /s/ James S. Nicholson ------------------------------------ James S. Nicholson Vice President, Treasurer and Chief Financial Officer EX-32.1 7 k10863exv32w1.txt CERTIFICATION OF THE PRESIDENT & CEO PURSUANT 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, 2006 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, to my knowledge: (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: December 19, 2006 BY: /s/ TODD W. HERRICK ------------------------------------ Todd W. Herrick Chairman, President and Chief Executive Officer EX-32.2 8 k10863exv32w2.txt CERTIFICATION OF THE CFO 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, 2006 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, to my knowledge: (3) 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 (4) 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: December 19, 2006 BY: /s/ JAMES S. NICHOLSON ------------------------------------ James S. Nicholson Vice President, Treasurer and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----