-----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, S9nHv6Z2HwTwnKqCDGfgyFNQ6n12wHRmiA3QYQXAqCuwO0h3xc+vQ0Gu4eJ+pmqE NqiaHx5G7I6THtsticyetw== 0000950124-98-001567.txt : 19980326 0000950124-98-001567.hdr.sgml : 19980326 ACCESSION NUMBER: 0000950124-98-001567 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980325 SROS: NASD 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-K405 SEC ACT: SEC FILE NUMBER: 000-00452 FILM NUMBER: 98573217 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-K405 1 FORM 10-K405 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1997 Commission File Number 0-452 TECUMSEH PRODUCTS COMPANY (Exact Name of Registrant as Specified in its Charter) Michigan 38-1093240 (State of Incorporation) (I.R.S. Employer Identification No.) 100 East Patterson Street Tecumseh, Michigan 49286 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (517) 423-8411 Securities Registered Pursuant to Section 12(b) of the Act: Securities Registered Pursuant to Section 12(g) of the Act:
Name of Each Exchange Title of Each Class on Which Registered - ------------------- ----------------------- Class B Common Stock, $1.00 Par Value Class A Common Stock, $1.00 Par Value None None Class B Common Stock Purchase Rights Class A Common Stock Purchase Rights
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ Registrant disclaims the existence of control and, accordingly, believes that as of March 2, 1998 all of the 5,470,146 shares of its Class B Common Stock, $1.00 par value, then issued and outstanding, were held by non-affiliates of Registrant. Certain shareholders, which, as of March 2, 1998, held an aggregate of 2,279,300 shares of Class B Common Stock might be regarded as "affiliates" of Registrant as that word is defined in Rule 405 under the Securities Exchange Act of 1934, as amended. If such persons are "affiliates," the aggregate market value as of March 2, 1998 (based on the closing price of $52.75 per share, as reported on the NASDAQ National Market System on such date) of the 3,190,846 shares then issued and outstanding held by non-affiliates was approximately $168,317,127. Numbers of shares outstanding of each of the Registrant's classes of Common Stock at March 13, 1998: Class B Common Stock, $1.00 Par Value: 5,470,146 Class A Common Stock, $1.00 Par Value: 16,197,438 Certain information contained in the Registrant's Annual Report to Shareholders for the year ended December 31, 1997 has been incorporated herein by reference in Parts I and II hereof. Certain information in the definitive proxy statement to be used in connection with the Registrant's 1998 Annual Meeting of Shareholders has been incorporated herein by reference in Part III hereof. The Exhibit Index is located on page 24. 2 TABLE OF CONTENTS
Item Page - ---- ---- PART I 1. Business 3 Executive Officers of the Registrant 12 2. Properties 13 3. Legal Proceedings 13 4. Submission of Matters to a Vote of Security Holders 14 PART II 5. Market for the Company's Common Equity and Related Stockholder Matters 15 6. Selected Financial Data 15 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 15 8. Financial Statements and Supplementary Data 15 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 15 PART III 10. Directors and Executive Officers of the Company 16 11. Executive Compensation 16 12. Security Ownership of Certain Beneficial Owners and Management 16 13. Certain Relationships and Related Transactions 16 PART IV 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 17 Signatures 22 Exhibit Index 24
2 3 PART I ITEM 1. BUSINESS GENERAL Tecumseh Products Company (the "Company") is a full-line, independent global manufacturer of hermetic compressors for air conditioning and refrigeration products, gasoline engines and power train components for lawn and garden applications, and pumps. The Company believes it is the largest independent producer of hermetically sealed compressors in the world, as well as one of the world's leading manufacturers of small gasoline engines and power train products used in lawn and garden applications. The Company also produces an extensive line of pumps. Products are sold in over 100 countries around the world. The Company groups its products into three principal industry segments: Compressor Products, Engine and Power Train Products and Pump Products. Compressor Products include a broad range of air conditioning and refrigeration compressors, as well as refrigeration condensing units. The Company's compressor products range from fractional horsepower models used in small refrigerators and dehumidifiers to large compressors used in roof top air conditioning applications. The Company sells compressors in all four compressor market segments: (i) household refrigerators and freezers; (ii) room air conditioners; (iii) commercial and residential unitary central air conditioning systems; and (iv) commercial refrigeration applications including freezers, dehumidifiers, water coolers and vending machines. The Company sells compressors to original equipment manufacturers ("OEMs") and aftermarket distributors. Engine and Power Train Products consist of (i) two- and four-cycle gasoline engines for use in a wide variety of lawn and garden applications and other consumer and light commercial applications and (ii) transmissions, transaxles and related parts for use principally in lawn and garden tractors and riding lawn mowers. The Company sells engine and power train products to OEMs and aftermarket distributors. Pump Products include (i) small submersible pumps used in a wide variety of industrial, commercial, and consumer applications and (ii) heavy duty centrifugal type pumps used in the construction, mining, agricultural, marine, and transportation industries. The Company sells pump products to distributors, mass merchants and OEMs. FOREIGN OPERATIONS AND SALES In recent years, international sales and manufacturing have become increasingly important to the Company's business as a whole. In 1997, sales to customers outside the United States represented approximately 46% of total consolidated net sales. In addition to North American operations, 3 4 compressor products are produced in Brazil, France and India, while engines are produced in Italy. Products sold outside the United States are manufactured at both U.S. and foreign plants. The Company's European compressor subsidiary, Tecumseh Europe, S.A. ("Tecumseh Europe"), generally sells the compressor products it manufactures in Europe, the Middle East, Africa, Latin America and Asia. Tecumseh do Brasil, Ltda. ("Tecumseh do Brasil"), the Company's Brazilian compressor subsidiary, sells its products principally in Latin America, North America and Europe. In 1997, the Company completed the acquisition of two manufacturing facilities in India which produce air conditioning and refrigeration compressors for the Indian appliance markets. In the engine business, the Company's two principal markets are North America, which is generally served by the Company's U.S. manufacturing operations, and Europe, which is served both by the manufacturing operations of the Company's European engine subsidiary, Tecumseh Europa, S.p.A. ("Tecumseh Europa"), in Italy and, to a lesser extent, by U.S. export sales. The Company's dependence on sales in foreign countries entails certain commercial and political risks, including currency fluctuations, unstable economic or political conditions in some areas and the possibility of U.S. government embargoes on sales to certain countries. The Company's foreign manufacturing operations are subject to other risks as well, including governmental expropriation, governmental regulations which may be disadvantageous to businesses owned by foreign nationals and instabilities in the work force due to changing political and social conditions. These considerations are especially significant in the context of the Company's Brazilian operations given the importance of Tecumseh do Brasil's performance to the Company's total operating results. COMPRESSOR PRODUCTS The Compressor Products segment is the Company's largest business segment. A compressor is a device which compresses a refrigerant gas. When the gas is later permitted to expand, it absorbs and transfers heat, and produces a cooling effect which forms the basis for a wide variety of refrigeration and air conditioning products. All of the compressors produced by the Company are hermetically sealed. The Company's current compressor line includes reciprocating and rotary designs. PRODUCT LINE The Company manufactures and sells a wide variety of traditional, reciprocating compressors suitable for use in all four compressor market segments. These range in size from 12.5 HP compressors for unitary air conditioning applications to small fractional HP compressors for refrigerators, dehumidifiers and vending machines. The Company also produces rotary compressors ranging from 5,000 to 18,000 BTU/hr for use in room and mobile air conditioning applications. Rotary compressors generally provide increased operating efficiency, lower equipment space requirements, and reduced sound levels when compared to reciprocating designs. 4 5 Scroll compressors generally offer improved energy efficiency and reduced noise levels compared to traditional reciprocating designs and are generally preferred by OEMs for certain products, including unitary central air conditioning systems and certain commercial applications. The Company does not currently offer scroll compressors while its principal unitary air conditioning competitors do, which the Company believes puts it at a competitive disadvantage. The Company believes that successful development of a commercially saleable scroll is necessary to maintain its participation in the unitary compressor market. The Company has invested approximately $50 million in a scroll compressor facility in Tecumseh, Michigan. After experiencing setbacks in developing a commercially acceptable scroll compressor, the Company is currently testing a new generation of scroll product. The Company is unable to predict when, or if, it will offer a scroll compressor for commercial sale, but it does anticipate that reaching volume production will require a significant additional investment. Given such additional investment and current market conditions, management is currently reviewing its options with respect to scroll product improvement, cost reductions, joint ventures and alternative new products. MANUFACTURING OPERATIONS Compressor Products manufactured in the Company's U.S. plants accounted for approximately 50% of 1997 compressor sales. The balance was produced at the Company's manufacturing facilities in Brazil, France and India. The compressor operations are substantially vertically integrated, and the Company manufactures a significant portion of its component needs internally, including electric motors, metal stampings and glass terminals. Raw materials are purchased from a variety of non-affiliated suppliers. The Company utilizes multiple sources of supply and the required raw materials and components are generally available in sufficient quantities. SALES AND MARKETING The Company markets its U.S., Brazilian and Indian built compressors under the "Tecumseh" brand and French built compressors under the "Tecumseh Europe-L'Unite Hermetique" brand. The Company sells its Compressor Products in North America primarily through its own sales staff. Major OEM customers are assigned to sales staff on an account basis. Other customers, (aftermarket wholesalers and smaller commercial OEM's) are served by sales personnel assigned to specified geographic regions. The Company's U.S. Export division and Brazilian, French and Indian subsidiaries have their own sales staff. In certain foreign markets, the Company also uses local independent sales representatives and distributors. Substantially all of the Company's sales of Compressor Products for room air conditioners and for household refrigerators and freezers are to OEMs. Sales of Compressor Products for unitary central air conditioning systems and commercial applications include substantial sales to both OEM and distributor customers. 5 6 The Company has a joint venture with Bitzer Kuhlmaschinenbau GmbH and Co. KG ("Bitzer") of Germany for the purpose of marketing Bitzer's extensive lines of semi-hermetic and open drive piston and screw-type compressor products in the United States and Canada. Product is marketed under the "Tecumseh-Bitzer" brand, using existing marketing and distribution systems. The Company has over 1,200 customers for Compressor Products, the majority of which are commercial customers. In 1997, the two largest customers for Compressor Products accounted for 8.9% and 7.5%, respectively, of segment sales, or 5.4% and 4.6%, respectively, of consolidated net sales. Loss of either of these customers could have a material adverse effect on the results of operations of the Compressor Products segment and, at least temporarily, on the Company's business as a whole. Generally, the Company does not enter into long-term contracts with its customers in this segment. However, the present business relationships with all major customers have existed for a substantial period of time. In 1997, approximately 40% of the Compressor Products produced by the Company in its U.S. plants were exported to foreign countries. The Company exports to over 100 countries. Approximately three-quarters of these exported products were sold in the Far and Middle East. COMPETITION All of the compressor market segments in which the Company operates are highly competitive. Participants compete on the basis of delivery, efficiency, noise level, price and reliability. The Company competes not only with other independent compressor producers but also with manufacturers of end products which have internal compressor manufacturing operations. The domestic unitary air conditioning compressor market consists of OEMs and a significant compressor aftermarket. The Company competes primarily with two U.S. manufacturers, Copeland Corporation, a subsidiary of Emerson Electric, Inc., and Bristol Compressors Inc., a subsidiary of York International Corporation. Copeland Corporation enjoys a larger share of the domestic unitary air conditioning compressor business than either Bristol Compressors, Inc. or the Company. Over the last several years there has been an industry trend toward the use of scroll compressors in the unitary air conditioning market. Copeland Corporation and other compressor manufacturers have had scroll compressors as part of their product offerings for some time. Along with its own manufacturing capabilities, Copeland Corporation is also a member of the Alliance Scroll manufacturing joint venture with two major U.S. central air conditioning manufacturers, American Standard's Trane air conditioning division and Lennox International, Inc. Carrier Corporation, a subsidiary of United Technologies and a major OEM has a joint venture to produce scroll compressors with Bristol Compressors Inc. As discussed in the product line section, the Company has made a significant investment in a scroll compressor facility in Tecumseh, Michigan but cannot predict when, or if, it will offer a scroll 6 7 compressor for commercial sale. The Company believes that successful introduction of this product is necessary to maintain its participation in the unitary market. In the domestic room air conditioning compressor market, the Company competes primarily with foreign companies, which export compressors to the United States but also have U.S. manufacturing capabilities. The Company also competes to a lesser extent with U.S. manufacturers. Competitors include Matsushita Electric Industrial Corporation, Rotorex, Inc., and Sanyo Electric Trading Company, L.G. Electronics, Inc. and others. In the domestic markets for water coolers, dehumidifiers, vending machines, refrigerated display cases and other commercial refrigeration products, the Company competes primarily with compressor manufacturers from the Far East, Europe and South America, and to a lesser extent, the United States. Competitors include Matsushita Electric Industrial Corporation, Danfoss, Inc., Embraco, S.A. and Copeland Corporation, and others. The household refrigerator and freezer market is vertically integrated with white good producers manufacturing a substantial portion of their compressor needs. The non-captive portion of the household refrigerator and freezer segment is substantially dominated by Far Eastern manufacturers, which export compressors to the United States but are also increasing U.S. manufacturing capabilities. Non-captive and captive competitors include Matsushita Electric Industrial Corporation, Embraco S.A., Danfoss, Inc. and AB Electrolux, and others. Tecumseh Europe sells the major portion of its manufactured compressors in Western Europe, and competes in those markets primarily with several large European manufacturers, some of which are captive suppliers, and to a lesser but increasing extent, with manufacturers from the Far East and Brazil. Competitors include AB Electrolux, Embraco S.A. and Danfoss, Inc., and others. Tecumseh do Brasil sells the major portion of its manufactured compressors in Brazil and other Latin American countries and competes directly with Embraco S.A. in Brazil and with Embraco and several other foreign manufacturers in Latin America. The Company has two compressor manufacturing subsidiaries in India, Tecumseh Products India, Ltd. and Tecumseh India Private, Ltd., which sell to regional markets. Major competitors include the Indian manufacturers Kirloskar Copeland Ltd., Carrier Aircon Ltd., Godrej, Videocon, BPL and others. The ability to successfully bring new products to market in a timely manner has rapidly become a critical factor in competing in the compressor products business as a result of, among other things, the imposition of energy efficiency standards and environmental regulations. These factors are discussed below. 7 8 NEW REGULATORY REQUIREMENTS Chloroflourocarbon compounds ("CFCs"), the primary refrigerants used in household refrigerators and freezers and in commercial refrigeration equipment, have been identified as one of the leading factors causing depletion of the earth's ozone layer. Under a 1992 international agreement, production of CFCs in developed countries was phased out January 1, 1996. The U.S. government has approved several replacement refrigerants, including HFC-134a, HFC-404A, and HFC-507, among others. The Company began producing compressors using alternative refrigerants for the commercial refrigeration market in late 1992 and for the refrigerator and freezer market during 1994. The Company believes that its rapid development of product using non-CFC refrigerant technology has improved its competitive position in these markets. Hydrochlorofluorocarbon compounds ("HCFCs") are used as a refrigerant in air conditioning systems. Under a 1992 international agreement, HCFCs will be banned from new equipment beginning in 2010, however, some European countries are beginning HCFC phase-outs as early as 1998. The Company believes the replacement of HCFCs will accelerate due to the expected availability of alternative refrigerants with better performance characteristics than HCFCs. It is not presently possible to estimate the level of expenditures which will be required to meet industry needs or the effect on the Company's competitive position. The U.S. National Appliance Energy Conservation Act of 1987 (the "NAECA") will require higher energy efficiency ratings on air conditioners, household refrigerator/freezers and commercial refrigeration. The standards call for staggered implementation starting in 2000 and running through 2003. The European Community has similar energy efficiency directives for refrigerators and freezers beginning mid 1999. Asian customers are addressing energy conservation either by responding to government regulations or by manufacturing products suitable for sale globally. It is not presently possible to estimate the level of expenditures which will be required to meet the new standards or the effect on the Company's competitive position. ENGINE AND POWER TRAIN PRODUCTS Small gasoline engines account for a majority of the net sales of the Company's Engine and Power Train Products segment. These are used in a broad variety of consumer products, including lawn mowers (both riding and walk-behind types), snow throwers, small lawn and garden tractors, small power devices used in outdoor chore products, generators, pumps and certain self-propelled vehicles. The Company manufactures gasoline engines, both two and four-cycle types, with aluminum die cast bodies ranging in size from 2 through 17 horsepower and with cast iron bodies ranging in size from 12 through 18 horsepower. A line of battery-operated electric power heads is also produced. The Company's power train products include transmissions, transaxles and related parts used principally in lawn and garden tractors and riding lawn mowers. MANUFACTURING OPERATIONS The Company manufactures engines and related components in its five plants in the United States and one plant in Italy. All of the Company's power train products are manufactured in one facility in the United States. Operations of the Company in this segment are partially vertically integrated 8 9 as the Company produces most of its plastic parts and carburetors, as well as a substantial portion of the aluminum diecastings used in its engines and power train products. SALES AND MARKETING The Company markets its Engine and Power Train Products worldwide under the "Tecumseh" and "Peerless" brands. A substantial portion of the Company's engines are incorporated into lawn mowers sold under brand labels, including the "Craftsman" brand of Sears, Roebuck and Co. A majority of the Company's Engine and Power Train Products are sold directly to OEMs. The Company also sells engines and parts to its authorized dealers and distributors, who service its engines both in the United States and abroad. Marketing of Engine and Power Train Products is handled by the Company's own sales staff and by local sales representatives in certain foreign countries. North America and Europe are the principal markets for lawn and garden products. In 1997, the two largest customers for Engine and Power Train Products accounted for 25.8% and 19.0%, respectively, of segment sales, or 8.6% and 6.3%, respectively, of consolidated net sales. Loss of either of this segment's two largest customers would have a material adverse effect on the results of operations of this segment and, at least temporarily, on the Company and its business as a whole. There are no long-term contracts between the Company and its major customers, but the present business relationships have existed for a substantial period of time. COMPETITION The Company believes it is the second largest producer of small gasoline engines in the world and that the largest such producer, with a broader product range, is Briggs & Stratton Corporation. Other producers of small gasoline engines include Kohler Corporation, Toro Company and Honda Corporation, among others. Competition in the Company's engine business is based principally on price, service, product performance and features. As mass merchandisers have captured a larger portion of the sales of lawn and garden products in the United States, price competition and the ability to offer customized styling and feature choices have become even more important. The Company believes that it competes effectively on these bases. NEW EMISSION STANDARDS The U.S. Environmental Protection Agency ("EPA") is developing emission standards for utility engines which include the two- and four-cycle engines produced by the Company. The Company already produces competitively priced engines that comply with the current EPA phase I standards. EPA Phase II standards propose to reduce certain emissions from utility engines an additional 30 percent beyond the current EPA Phase I standards. The proposed standards are expected to be finalized over the next twelve months and will be phased in between 2001 and 2005. It is not currently possible to determine the related costs of compliance nor the impact on the competitive position of the Company. 9 10 PUMP PRODUCTS The Company manufactures and sells centrifugal pumps and related products through its subsidiary, Little Giant Pump Company ("Little Giant"). Little Giant pumps are used in a broad range of commercial, industrial, and consumer products, including heating, ventilating and cooling, parts washers, machine tools, evaporative coolers, sump pumps, statuary, fountains and water gardening. Little Giant's products are sold worldwide to OEMs, distributors and mass retailers. Sales and marketing is executed through Little Giant's own sales staff and manufacturer's representatives under the "Little Giant" brand name. The Company's other pump subsidiary, MP PUMPS Inc. ("MP PUMPS"), manufactures and sells a variety of centrifugal pumps ranging in capacity from 15 to 3,700 gallons per minute, that are used in the agricultural, marine and transportation industries and in a variety of commercial and industrial applications and end products. MP PUMPS sells both to OEMs, which incorporate its pumps into their end products, and through an extensive network of distributors located throughout the United States, which sell to end-users. A limited number of pumps are also sold to departments and agencies of the U.S. government. Most of MP PUMPS' products are sold in the United States. MP PUMPS markets its products through its own sales staff under the "MP PUMPS" brand name. The pump industry is highly fragmented, with many relatively small producers competing for sales. Little Giant has been particularly successful in competing in this industry by targeting specific market niches where opportunities exist and then designing and marketing corresponding products. BACKLOG, CUSTOMERS AND SEASONAL VARIATIONS Most of the Company's production is against short-term purchase orders, and backlog is not significant. In 1997, 13% of consolidated sales represented engine and compressor sales to customers under the common control of AB Electrolux. Both Compressor Products and Engine and Power Train Products are subject to some seasonal variation. Generally, the Company's sales and operating profit are stronger in the first two quarters of the year than in the last two quarters. PATENTS, LICENSES AND TRADEMARKS The Company owns a substantial number of patents, licenses and trademarks and deems them to be important to certain of its lines of business; however, the success of the Company's overall business is not considered primarily dependent on them. In the conduct of its business, the Company owns and uses a variety of registered trademarks, the most familiar of which is the trademark consisting of the word "Tecumseh" in combination with a Native American Indian head symbol. 10 11 RESEARCH AND DEVELOPMENT The Company must continually develop new and improved products in order to compete effectively and to meet evolving regulatory standards in all of its major lines of business. The Company spent approximately $32.6 million, $30.4 million and $30.1 million during 1997, 1996 and 1995 on research activities relating to the development of new products and the development of improvements to existing products. None of this research was customer sponsored. ENVIRONMENTAL LEGISLATION The Company has been named by the EPA as a potentially responsible party in connection with the Sheboygan River and Harbor Superfund Site in Wisconsin. The Company is also participating with the EPA and various state agencies in investigating possible remedial action that may be necessary at other sites. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" and Note 9 of the Notes to Consolidated Financial Statements in the Company's Annual Report to Shareholders for the year ended December 31, 1997 for a discussion of the impact of these matters on the Company's financial condition and results of operations. Also see Item 3. Legal Proceedings. INDUSTRY SEGMENT AND GEOGRAPHIC LOCATION INFORMATION The results of operations and other financial information by industry segment and geographic location (including the footnotes thereto) for each of the years ended December 31, 1997, 1996 and 1995 appear under the caption "Business Segment Data" of the Company's Annual Report to Shareholders for the year ended December 31, 1997 and are incorporated herein by reference. EMPLOYEES On December 31, 1997 the Company employed approximately 17,100 persons, 54% of which were employed in foreign locations. Approximately 3,100 of the U.S. employees were represented by labor unions, with no more than approximately 1,400 persons represented by the same union. The majority of foreign location personnel are represented by national trade unions. The number of the Company's employees is subject to some seasonal variation; during 1997, the maximum number of persons employed was approximately 18,900 and the minimum was 16,600. The Company believes it has a good relationship with its employees. 11 12 EXECUTIVE OFFICERS OF THE REGISTRANT The following are the executive officers of the Company:
PERIOD OF SERVICE NAME AND AGE OFFICE OR POSITION HELD AS AN OFFICER ------------ ----------------------- ----------------- Kenneth G. Herrick, 76 Chairman of the Board of Directors Since 1966 Todd W. Herrick, 55 President and Chief Executive Officer Since 1974 John H. Foss, 55 Vice President, Treasurer, and Chief Since 1979 Financial Officer James E. Martinco, 52 Group Vice President, Engine and Since 1998 Power Train (1) Dennis E. McCloskey, 55 Group Vice President, Compressors (2) Since 1998
Unless otherwise indicated, each executive officer has held his position for at least five years. (1) Last five years of business experience--Vice President, Engine and Power Train, Tecumseh Products Company 1996 to 1997; Vice President of Operations and Vice President/General Manager of Engine Products 1990 to 1996. (Employed at Tecumseh Products Company since 1976) (2) Last five years of business experience--Vice President, Compressors, Tecumseh Products Company, 1994 to 1997; Group Vice President Refrigeration and Air Conditioning, Frigidaire Company, 1990-1993 (Employed at Frigidaire since 1976) 12 13 ITEM 2. PROPERTIES The Company's headquarters are located in Tecumseh Michigan, approximately 50 miles southwest of Detroit. At December 31, 1997 the Company had 31 principal properties worldwide occupying approximately 8.4 million square feet with the majority, approximately 7.9 million square feet devoted to manufacturing. Eleven facilities with approximately 3.3 million square feet were located in five countries outside the United States. The following table shows the approximate amount of space devoted to each of the Company's three principal business segments.
Approximate Floor Industry Segment Area in Square Feet ---------------- ------------------- Compressor Products 5,853,000 Engine and Power Train Products 1,975,000 Pump Products and Other 547,000
Five domestic facilities, including land, building and certain machinery and equipment were financed and leased through industrial revenue bonds. All owned and leased properties are suitable, well maintained and equipped for the purposes for which they are used. The Company considers that its facilities are suitable and adequate for the operations involved. ITEM 3. LEGAL PROCEEDINGS The Company has been named by the EPA as a potentially responsible party in connection with the Sheboygan River and Harbor Superfund Site in Wisconsin. This matter is discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 9 of the Notes to Consolidated Financial Statements in the Company's Annual Report to Shareholders for the year ended December 31, 1997, both of which are incorporated herein by reference. As discussed in Note 9, the ultimate costs to the Company will be dependent upon factors beyond its control such as the scope and methodology of the remedial action requirements to be established by the EPA (in consultation with the State of Wisconsin), rapidly changing technology, and the outcome of any related litigation. In addition to the matter discussed in the preceding paragraph, the Company is currently participating with the EPA and various state agencies at certain other sites to determine the nature and extent, if any, of any remedial action which may be required of the Company with regard to such other sites. Various lawsuits and claims, including those involving ordinary routine litigation incidental to its business, to which the Company is a party, are pending, or have been asserted, against the Company. Although the outcome of the various lawsuits and claims asserted or pending against the Company or its subsidiaries, including those discussed in the immediately preceding 13 14 paragraph, cannot be predicted with certainty, and some may be disposed of unfavorably to the Company, its management has no reason to believe that their ultimate disposition will have a materially adverse effect on the future consolidated financial position or income from continuing operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted during the fourth quarter of 1997 to a vote of security holders through the solicitation of proxies or otherwise. 14 15 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information under the captions "Financial Summary" and "Information Concerning Equity Securities" of the Company's Annual Report to Shareholders for year ended December 31, 1997 is incorporated herein by reference. As of a March 2, 1998, there were 835 holders of record of the Company's Class A common stock and 808 holders of the Class B common stock. No equity securities were sold by the Company during the period covered by this report. ITEM 6. SELECTED FINANCIAL DATA The information under the caption "Selected Financial Data" of the Company's Annual Report to Shareholders for the year ended December 31, 1997 is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" of the Company's Annual Report to Shareholders for the year ended December 31, 1997 is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information on pages 16 to 27, inclusive, of the Company's Annual Report to Shareholders for the year ended December 31, 1997 is incorporated herein by reference. See Item 14 of this report for financial statement schedules. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 15 16 ` PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY The information pertaining to directors under the caption "Election of Directors" in the Company's definitive Proxy Statement relating to its 1998 Annual Meeting of Shareholders is incorporated herein by reference. Information regarding executive officers required by Item 401 of Regulation S-K is furnished in Part I of this report. ITEM 11. EXECUTIVE COMPENSATION The information under the captions "Executive Compensation," "Compensation Committee Interlocks and Insider Participation" and "Election of Directors - Director Compensation" in the Company's definitive Proxy Statement relating to its 1998 Annual Meeting of Shareholders is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information under the captions "Principal Shareholders" and "Election of Directors -- Management's Ownership of Equity Securities" in the Company's definitive Proxy Statement relating to its 1998 Annual Meeting of Shareholders is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information under the caption "Compensation Committee Interlocks and Insider Participation" in the Company's definitive Proxy Statement relating to its 1998 Annual Meeting of Shareholders is incorporated herein by reference. 16 17 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report: (1) The following described financial statements, notes and report on pages 16 through 25 of the Company's Annual Report to Shareholders for the year ended December 31, 1997: * Statements of Consolidated Income for the years ended December 31, 1997, 1996 and 1995 * Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995 * Consolidated Balance Sheets as of December 31, 1997 and 1996 * Statements of Consolidated Cash Flows for the years ended December 31, 1997, 1996 and 1995 * Notes to Consolidated Financial Statements * Report of Independent Accountants (2) Financial Statement Schedules:
Schedule Form 10-K Number Description Page Reference -------- ----------- -------------- II Valuation and Qualifying Accounts 21
Schedules other than those listed above are omitted because they are either not applicable or are not required. 17 18 (3) Exhibits: Exhibit Number Description ------- ----------- (2) (not applicable) (3)(a) The Company's Restated Articles of Incorporation as in effect prior to April 22, 1992 (filed as Exhibit (3) to Annual Report on Form 10-K for the year ended December 31, 1991 (Commission File no. 0-452) and incorporated herein by reference) (3)(b) Certificate of Amendment to the Company's Restated Articles of Incorporation adopted April 22, 1992 (filed as Exhibit B-5 to Form 8 Amendment No. 1 dated April 22, 1992 to Form 10 Registration Statement dated April 24, 1965 (Commission File No. 0-452) and incorporated herein by reference) (3)(c) Certificate of Amendment to the Company's Restated Articles of Incorporation adopted April 27, 1994 (filed as Exhibit (4)(c) to Quarterly report on Form 10-Q for the quarterly period ended March 31, 1994 (Commission File No. 0-452) and incorporated herein by reference) (3)(d) Company's Amended and Restated Bylaws as amended through October 22, 1997 (filed as Exhibit (3) to Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1997 (Commission File No. 0-452) and incorporated herein by reference) (4) [Note: No instruments defining the rights of holders of long-term debt are being filed because no such instrument authorizes a total amount of securities which exceeds 10% of the total assets of the Company and its subsidiaries on a consolidated basis. The Company hereby agrees to furnish a copy of any such instrument to the Commission upon request.] (9) (not applicable) (10)(a) Amended and Restated Class B Rights Agreement (filed as Exhibit 4 to Form 8 Amendment No. 1 dated April 22, 1992 to Form 8-A registering Common Stock Purchase Rights dated January 23, 1991 (Commission File No. 0-452) and incorporated herein by reference) 18 19 (3) Exhibits (continued): Exhibit Number Description ------- ----------- (10)(b) Amendment No. 1 to Amended and Restated Class B Rights Agreement (filed as Exhibit 4 to Form 8 Amendment No. 2 dated October 2, 1992 to Form 8-A registering Common Stock Purchase Rights dated January 23, 1991 (Commission File No. 0-452) and incorporated herein by reference) (10)(c) Amendment No. 2 to Amended and Restated Class B Rights Agreement (filed as Exhibit 4 to Form 8-A/A Amendment No. 3 dated June 22, 1993 to Form 8-A registering Common Stock Purchase Rights dated January 23, 1991 (Commission File No. 0-452) and incorporated herein by reference) (10)(d) Class A Rights Agreement (filed as Exhibit 4 to Form 8-A registering Class A Common Stock Purchase Rights dated April 22, 1992 (Commission File No. 0-452) and incorporated herein by reference) (10)(e) Amendment No. 1 to Class A Rights Agreement (filed as Exhibit 4 to Form 8 Amendment No. 1 dated October 2, 1992 to Form 8-A registering Class A Common Stock Purchase Rights dated April 22, 1992 (Commission File No. 0-452) and incorporated herein by reference) (10)(f) Amendment No. 2 to Class A Rights Agreement (filed as Exhibit 4 to Form 8-A/A Amendment No. 2 dated June 22, 1993 to Form 8-A registering Class A Common Stock Purchase Rights dated April 22, 1992 (Commission File No. 0-452) and incorporated herein by reference) (10)(g) Description of Death Benefit Plan (management contract or compensatory plan or arrangement) (filed as Exhibit (10)(f) to Annual Report on Form 10-K for the year ended December 31, 1992 (Commission File No. 0-452) and incorporated herein by reference) (10)(h) Management Incentive Plan, as amended through November 22, 1995 (management contract or compensatory plan or arrangement) (filed as Exhibit (10)(h) to Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-452) and incorporated herein by reference) 19 20 (3) Exhibits (continued): Exhibit Number Description ------- ----------- (10)(i) Third Amendment to Management Incentive Plan, adopted January 22, 1997 (management contract or compensatory plan or arrangement) (filed as Exhibit (10)(i) to Annual Report on Form 10-K for the year ended December 31, 1996 (Commision file No. 0-452) and incorporated herein by reference) (10)(j) Supplemental Executive Retirement Plan effective January 1, 1995 (management contract or compensatory plan or arrangement) (filed as Exhibit (10)(l) to Annual Report on Form 10-K for the year ended December 31, 1994 (Commission File No. 0-452) and incorporated herein by reference) (11) (not applicable) (12) (not applicable) (13) Portions of Tecumseh Products Company Annual Report to Shareholders for the year ended December 31, 1997, incorporated by reference herein (16) (not applicable) (18) (not applicable) (21) Subsidiaries of the Company (22) (not applicable) (23) Report and Consent of Certified Public Accountants (24) (not applicable) (27) Financial Data Schedule (99) (not applicable) (b) No Reports on Form 8-K were filed by the Company during the last quarter of the period covered by this Report. 20 21 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (Dollars in millions)
Column A Column B Column C Column D Column E - -------------------------------------------------------------------------------------------------------------------- Additions ----------------------------------- Balance at Charged to Charged to Additions Balance at Beginning Costs and Other and End of Description of Period Expenses Accounts (Deductions) Period - --------------------------------------------------------------------------------------------------------------------- Allowance for doubtful accounts, deducted from accounts receivable in the balance sheet: (A) 1997 $6.7 $0.1 ($1.1) $5.7 1996 $6.9 $0.2 ($0.4) $6.9 1995 $5.8 $1.5 ($0.4) $5.8
Notes: (A) Represents the total of accounts charged against the allowance for doubtful accounts and adjustments from the translation of foreign currency. 21 22 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. TECUMSEH PRODUCTS COMPANY By /s/ TODD W. HERRICK ------------------------------------ Todd W. Herrick President and Chief Executive Officer Dated: March 25, 1998 22 23 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Date Signature Office of signing --------- ------ ---------- - --------------------------- Chairman of the Kenneth G. Herrick Board of Directors /s/ TODD W. HERRICK - --------------------------- President, Chief March 25, 1998 Todd W. Herrick Executive Officer (Principal Executive Officer) and Director /s/ PETER M. BANKS - --------------------------- Director March 25, 1998 Peter M. Banks /s/ JON E. BARFIELD - --------------------------- Director March 25, 1998 Jon E. Barfield /s/ JOHN H. FOSS - --------------------------- Vice President, Treasurer March 25, 1998 John H. Foss and Chief Financial Officer (Principal Accounting and Principal Financial Officer) and Director /s/ J. RUSSELL FOWLER - --------------------------- Director March 25, 1998 J. Russell Fowler /s/ JOHN W. GELDER - --------------------------- Director March 25, 1998 John W. Gelder /s/ STEPHEN L. HICKMAN - --------------------------- Director March 25, 1998 Stephen L. Hickman /s/ DEAN E. RICHARDSON - --------------------------- Director March 25, 1998 Dean E. Richardson
23 24 EXHIBIT INDEX Exhibit Number (13) Portions of the Company's Annual Report to Shareholders for the year ended December 31, 1997, incorporated by reference herein (21) Subsidiaries of the Company (23) Report and Consent of Certified Public Accountants (27) Financial Data Schedule 24 EX-13 2 EXHIBIT 13 1 EXHIBIT 13 FINANCIAL SUMMARY
(Dollars in millions except per share data) 1997 1996(a) 1995 1994 1993 ------------ ------------ ------------ ------------ ------------ Net sales $ 1,728.3 $ 1,784.6 $ 1,716.0 $ 1,533.4 $ 1,314.2 - ---------------------------------------------------------------------------------------------------------------------------- Net income 100.5 112.6 119.2 120.3 81.4 % of net sales 5.8% 6.3% 6.9% 7.8% 6.2% - ---------------------------------------------------------------------------------------------------------------------------- Capital expenditures 90.6 115.2 127.4 136.2 51.1 - ---------------------------------------------------------------------------------------------------------------------------- Business acquisitions 46.9 -- -- -- -- - ---------------------------------------------------------------------------------------------------------------------------- Total assets 1,537.4 1,472.6 1,407.6 1,289.8 1,132.7 - ---------------------------------------------------------------------------------------------------------------------------- Stockholders' equity 1,000.2 947.5 877.1 785.5 686.8 Return on average stockholders' equity 10.3% 12.3% 14.3% 16.3% 12.3% - ---------------------------------------------------------------------------------------------------------------------------- Per share of common stock: Basic and diluted earnings $ 4.59 $ 5.15 $ 5.45 $ 5.50 $ 3.72 Cash dividends declared 1.20 1.68 1.61 1.35 1.15 Book value 45.80 43.30 40.09 35.90 31.39 - ---------------------------------------------------------------------------------------------------------------------------- Average number of employees 17,400 16,300 15,600 14,400 12,400 ============================================================================================================================
(a) The 1996 results included a $5.1 million nonrecurring charge for environmental and litigation costs. This charge was equivalent to $.15 per share after taxes. Note: The above per share amounts have been adjusted as necessary to reflect the 100% stock dividend paid June 30, 1993. 2 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES BUSINESS SEGMENT DATA (Dollars in millions) INDUSTRY SEGMENT INFORMATION
Net Sales Operating Income ---------------------------------------- ------------------------------------ 1997 1996 1995 1997 1996 1995 ---------- ---------- ---------- -------- -------- -------- Compressor Products .... $ 1,050.1 $ 1,126.5 $ 1,131.9 $ 82.7 $ 102.7 $ 114.7 Engine & Power Train Products .... 576.8 564.1 497.6 61.9 64.5 51.4 Pump Products .... 101.4 94.0 86.5 11.1 11.5 11.1 Corporate Expenses .... - - - (10.5) (10.4) (10.3) Nonrecurring Charges (a).. - - - - (5.1) - ---------- ---------- ---------- -------- -------- -------- Total ....... $ 1,728.3 $ 1,784.6 $ 1,716.0 $ 145.2 $ 163.2 $ 166.9 ========== ========== ========== ======== ======== ========
Year End Assets Capital Expenditures Depreciation -------------------------------- ------------------------------- -------------------------------- 1997 1996 1995 1997 1996 1995 1997 1996 1995 --------- --------- --------- -------- ------- ------- ---------- ---------- ---------- Compressor Products......... $ 770.9 $ 741.2 $ 729.0 $ 68.0 $ 77.9 $ 96.3 $ 54.5 $ 49.3 $ 45.4 Engine & Power Train Products......... 293.8 296.7 271.4 21.0 35.3 27.4 15.3 14.2 12.7 Pump Products......... 55.9 47.9 42.6 1.6 2.0 3.7 1.3 1.1 1.1 Corporate........... 416.8 386.8 364.6 - - - - - - --------- --------- --------- -------- ------- ------- ---------- ---------- ---------- Total............ $ 1,537.4 $ 1,472.6 $ 1,407.6 $ 90.6 $ 115.2 $ 127.4 $ 71.1 $ 64.6 $ 59.2 ========= ========= ========= ======== ======= ======= ========== ========== ==========
GEOGRAPHIC SEGMENT INFORMATION
Net Sales Operating Income Year End Assets -------------------------------- ------------------------------- -------------------------------- 1997 1996 1995 1997 1996 1995 1997 1996 1995 -------- -------- -------- ------- ------ ------ -------- -------- --------- North America....... $1,234.8 $1,281.1 $1,159.6 $ 110.9 $121.4 $111.9 $1,050.1 $1,009.1 $ 942.4 Europe.............. 303.1 328.5 373.0 9.0 1.7 12.5 257.6 273.6 321.5 Brazil.............. 263.8 270.1 272.7 26.1 40.1 42.5 179.3 189.9 143.7 India (b)........... 11.7 - - (.8) - - 50.4 - - Inter-area: North America.... (13.7) (19.7) (25.2) - - - - - - Europe........... (9.6) (11.5) (7.6) - - - - - - Brazil........... (61.8) (63.9) (56.5) - - - - - - -------- -------- -------- ------- ------ ------ -------- -------- --------- Total............ $1,728.3 $1,784.6 $1,716.0 $ 145.2 $163.2 $166.9 $1,537.4 $1,472.6 $ 1,407.6 ======== ======== ======== ======= ====== ====== ======== ======== =========
Transfers between geographic areas are accounted for at cost plus a reasonable profit. Export sales of domestic operations were $265.3, $264.1 and $258.2 million in 1997, 1996 and 1995, respectively. Of these sales, approximately two-thirds were to customers in the Far and Middle East. In 1997, 13% of consolidated sales represented engine and compressor sales to customers under common control. The Company's share of net unremitted earnings of its foreign subsidiaries was $12.1 million in 1997, $8.6 million in 1996 and $9.6 million in 1995. Accumulated unremitted earnings of foreign subsidiaries at December 31, 1997 were $149.1 million. (a) The 1996 results include a $5.1 million nonrecurring charge for environmental and litigation costs. This charge was equivalent to $.15 per share after taxes. (b) Acquired as of July 1, 1997. 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Tecumseh Products Company is a full-line, independent global manufacturer of hermetic compressors for air conditioning and refrigeration products, gasoline engines and power train components for lawn and garden applications, and pumps. The Company's products are sold in over 100 countries around the world. Products are grouped into three principal industry segments: Compressor Products, Engine and Power Train Products and Pump Products. 1997 WORLDWIDE SALES $1.7 BILLION SALES [PIE CHART] COMPRESSORS 61% ENGINES 33% PUMPS 6% Annual sales for 1997 were $1,728.3 million, a decrease of 3% from 1996. Annual earnings for 1997 were $100.5 million, or $4.59 per share, compared to $112.6 million or $5.15 per share in 1996. The 1996 results included a $5.1 million nonrecurring charge for environmental and litigation costs, which was equivalent to $.15 per share after taxes. Weather-related softness in demand for air conditioning in North America and an economic slowdown in Brazil were the major negative influences impacting results. COMPRESSOR PRODUCTS 1997 VS. 1996 The Company's worldwide Compressor Products sales were $1,050.1 million, down 7% from $1,126.5 million in 1996. In North American markets, improved sales of the Brazilian-built TP compressor for household refrigeration were more than offset by a weather-related decline in sales of compressors for room air conditioning applications, and to a lesser extent weaker sales of unitary air conditioning compressors. U.S. export sales were essentially flat with the prior year. COMPRESSOR PRODUCTS SALES [BAR GRAPH] dollars in millions 1995 1131.9 1996 1126.5 1997 1050.1 Early in 1997, the Brazilian appliance industry experienced a cyclical downturn, which was later deepened by monetary policy aimed at decreasing consumer spending and defending the currency. Total sales from our Brazilian operations dropped 2%, while local Brazilian sales dropped 11%. Tecumseh Europe had much improved results in 1997. A weaker French franc coupled with extensive cost reduction efforts helped increase our competitive position. French franc sales increased 6%, contributing to higher margins. Compressor Products operating margins for 1997 declined to 7.9% as compared to 9.1% in 1996, largely because of lower Brazilian operating profit margins (9.9% in 1997 versus 14.8% in 1996). 1996 VS. 1995 Worldwide Compressor Products sales for 1996 were $1,126.5 million, down slightly from $1,131.9 million in 1995. New product development programs launched over the past several years continued to positively impact sales, offset by a sales decline in Europe. Compressor Products operating margins were 9.1% for 1996 as compared to 10.1% in 1995. Weak sales results in Europe, including an operating loss in European operations in the fourth quarter of 1996, were the primary contributor to margin declines. ENGINE AND POWER TRAIN PRODUCTS 1997 VS. 1996 Worldwide Engine and Power Train Products sales were $576.8 million, up 2% as compared to 1996. As expected, the unusually heavy demand for snow thrower engines in 1996 was not repeated in 1997. Engine unit sales, exclusive of snow thrower engines, were up 7% for the year. [continued on next page] 4 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS [continued] ENGINE AND POWER TRAIN PRODUCTS SALES [BAR GRAPH] dollars in millions 1995 497.6 1996 564.1 1997 576.8 Engine and Power Train Products operating margin was 10.7% for 1997 as compared to 11.4% for 1996. Margins declined due to volume reductions of higher margin snow engine product coupled with start-up costs at the new engine production facility in Georgia. 1996 VS. 1995 Worldwide Engine and Power Train Products sales were $564.1 million, up 13% as compared to 1995. Unusually strong sales of snow engine product were offset in part by weaker sales in the Company's European operations. Operating margins were 11.4% for 1996 as compared to 10.3% for 1995. A small loss experienced by the European operations was more than offset by margin gains from increased sales volume in North America. PUMP PRODUCTS 1997 Pump Products sales of $101.4 million increased 8% as compared to 1996. Sales gains were due to stronger demand for water-gardening products. 1996 sales of $94.0 million increased 9% as compared to 1995, due to increased sales to the plumbing and HVAC industries. INTEREST INCOME AND INCOME TAX Interest income and other, net was $21.9, $20.2 and $29.1 million in 1997, 1996 and 1995, respectively, primarily due to changes in financial income reported by the Company's Brazilian subsidiary. The effective tax rate was 37.5%, 36.4% and 36.6% in 1997, 1996 and 1995, respectively. STOCK REPURCHASE On November 26, 1997, the Company announced its intention to repurchase up to 1 million shares of class A common stock over the next year. As of February 15, 1998 143,000 shares have been acquired. The Company intends to continue open market purchases depending on market conditions and other factors. The repurchase program is expected to be financed primarily through internally available funds. LIQUIDITY, CAPITAL RESOURCES AND RISKS The Company continued to maintain a strong and liquid financial position. Working capital of $554.8 million at December 31, 1997 was up from $549.7 million at December 31, 1996, and the ratio of current assets to current liabilities was 3.1. Capital expenditures, including $46.9 million for the acquisition of two compressor manufacturing facilities in India, were $137.5 million for 1997 as compared to $115.2 million in 1996. Major capital projects for 1997, other than acquisitions, included equipment for a rotary compressor line in Brazil and the completion of an electric motors production facility in Mississippi. Total capital spending for 1998 should approximate $80-100 million and will be spent on maintenance and capacity expansion in India and Brazil. Working capital requirements and planned capital, investment and stock repurchase expenditures for 1998 and early 1999 are expected to be financed primarily through internally available funds. However, the Company may also utilize long-term financing arrangements in connection with state investment incentives and may from time to time utilize short-term borrowings to hedge currency risk and to finance foreign working capital requirements. The Company maintains a $100 million revolving credit facility that is available for general corporate purposes. The Company has reviewed its manufacturing, financial and administrative information systems and has developed plans for the completion of modifications related to the year 2000. The financial impact of making the required systems changes is not expected to be material to the Company's consolidated financial position, results of operations or cash flows. Over the past several years there has been an industry trend toward the use of scroll compressor technology in the unitary air conditioning market, and to a lesser extent in other markets. Copeland Corporation, a principal competitor, has had a scroll compressor as part of its product line for some time. 5 Many other companies have also introduced scroll compressors. The world's largest unitary air conditioning manufacturer produces scroll compressors for its own use and for outside sales through a joint venture with Bristol Compressors, Inc., another principal competitor of the Company. Two other large unitary air conditioning manufacturers have formed a joint venture with Copeland Corporation for the production of scroll compressors for their own use and for outside sales. The Company believes that successful development of a commercially saleable scroll is necessary to maintain its participation in the unitary compressor market. The Company has invested approximately $50 million in a scroll compressor manufacturing facility in Tecumseh, Michigan. After experiencing setbacks in developing a commercially acceptable scroll compressor, the Company is currently testing a new generation of scroll product. The Company is unable to predict when, or if, it will offer a scroll compressor for commercial sale, but it does anticipate that reaching volume production will require a significant additional investment. Given such additional investment and current market conditions, management is currently reviewing its options with respect to scroll product improvement, cost reductions, joint ventures and alternative new products. The U.S. Environmental Protection Agency (EPA) is developing emission standards for utility engines which include the two- and four-cycle engines produced by the Company. The Company already produces competitively priced engines that comply with the current EPA Phase I standards. EPA Phase II standards propose to reduce certain emissions from utility engines an additional 30 percent beyond the current EPA Phase I standards. The proposed standards are expected to be finalized over the next twelve months and will be phased in between 2001 and 2005. It is not currently possible to determine the related costs of compliance nor the impact on the competitive position of the Company. The Company is subject to various laws relating to the protection of the environment and is in various stages of investigation or remediation for sites where contamination has been alleged. (See Note 9 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, technology and information available. At December 31, 1997 and 1996 the Company had accrued $38.4 million and $39.6 million for environmental remediation, respectively. OUTLOOK Recent Asian currency devaluations have resulted in expanded Asian exports of low-priced compressors and related products. The Brazilian economic slowdown is expected to continue, at least in the near term. Continued high levels of air conditioning inventory exist in the U.S. retail pipeline. While development efforts continue toward obtaining a marketable scroll compressor, the current lack of a scroll is making it more difficult to compete in the unitary air conditioning market. Given these conditions, the Company expects 1998 to be increasingly challenging. UNCERTAINTIES RELATING TO FORWARD-LOOKING STATEMENTS This report contains forward-looking statements within the meaning of the securities laws. In addition, forward-looking statements may be made orally in the future by or on behalf of the Company. Forward-looking statements can be identified by the use of terms such as "expects", "should", "may", "believes", "anticipates", "will" and other future tense and forward-looking terminology. Investors are cautioned that forward-looking statements involve risks and uncertainties, including, but not limited to, changes in business conditions and the economy in general in both foreign and domestic markets; weather conditions affecting demand for air conditioners, lawn and garden products and snow throwers; financial market changes, including interest rates and foreign exchange rates; economic trend factors such as housing starts; governmental regulations; availability of materials; actions of competitors; and the Company's ability to profitably develop, manufacture and sell both new and existing products. 6 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES STATEMENTS OF CONSOLIDATED INCOME (Dollars in millions except per share data)
For the Years Ended December 31, -------------------------------------------- 1997 1996 1995 --------- --------- --------- NET SALES ........................................................... $ 1,728.3 $ 1,784.6 $ 1,716.0 COSTS AND EXPENSES Cost of sales and operating expense.............................. 1,480.5 1,517.8 1,454.8 Selling and admininistrative expense............................. 102.6 98.5 94.3 Nonrecurring charge(a) .......................................... - 5.1 - --------- --------- --------- OPERATING INCOME .................................................... 145.2 163.2 166.9 OTHER INCOME (EXPENSE) Interest expense................................................. (6.3) (6.4) (8.0) Interest income and other, net................................... 21.9 20.2 29.1 --------- --------- --------- INCOME BEFORE TAXES ON INCOME ....................................... 160.8 177.0 188.0 TAXES ON INCOME ..................................................... 60.3 64.4 68.8 --------- --------- --------- NET INCOME .......................................................... $ 100.5 $ 112.6 $ 119.2 ========= ========= ========= BASIC AND DILUTED EARNINGS PER SHARE ................................ $ 4.59 $ 5.15 $ 5.45 ========= ========= =========
(a) The 1996 results include a $5.1 million nonrecurring charge for environmental and litigation costs. This charge was equivalent to $.15 per share after taxes. The accompanying notes are an integral part of these statements. 7 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars in millions)
COMMON STOCK FOREIGN ---------------------------- CAPITAL CURRENCY TOTAL CLASS A CLASS B IN EXCESS RETAINED TRANSLATION STOCKHOLDERS' $1 PAR VALUE $1 PAR VALUE OF PAR VALUE EARNINGS ADJUSTMENT EQUITY ------------ ------------ ------------ -------- ----------- ----------- BALANCE, DECEMBER 31, 1994 ........... $ 16.4 $ 5.5 $ 29.9 $ 724.0 $ 9.7 $ 785.5 Net income............................ 119.2 119.2 Cash dividends........................ (35.2) (35.2) Translation adjustments............... 7.6 7.6 ------------ ------------ ------------ -------- ----------- ----------- BALANCE, DECEMBER 31, 1995 ........... 16.4 5.5 29.9 808.0 17.3 877.1 Net income............................ 112.6 112.6 Cash dividends........................ (36.8) (36.8) Translation adjustments............... (5.4) (5.4) ------------ ------------ ------------ -------- ----------- ----------- BALANCE, DECEMBER 31, 1996 ........... 16.4 5.5 29.9 883.8 11.9 947.5 Net income............................ 100.5 100.5 Cash dividends........................ (26.3) (26.3) Stock repurchase...................... (1.9) (1.9) Translation adjustments............... (19.6) (19.6) ------------ ------------ ------------ -------- ----------- ----------- BALANCE, DECEMBER 31, 1997............ $ 16.4 $ 5.5 $ 28.0 $ 958.0 $ (7.7) $ 1,000.2 ============ ============ ============ ======== =========== ===========
The accompanying notes are an integral part of these statements. 8 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in millions)
December 31, -------------------------- ---------- ---------- ASSETS 1997 1996 CURRENT ASSETS: Cash and cash equivalents ........................................................ $ 304.1 $ 277.7 Accounts receivable, trade, less allowance for doubtful accounts of $5.7 million in 1997 and $6.7 million in 1996 .................... 207.7 204.5 Inventories ...................................................................... 259.4 275.2 Deferred income taxes ............................................................ 38.2 36.6 Other current assets ............................................................. 8.7 10.4 ---------- ---------- TOTAL CURRENT ASSETS ...................................................... 818.1 804.4 ---------- ---------- PROPERTY, PLANT, AND EQUIPMENT, at cost: Land and land improvements ....................................................... 18.3 8.9 Buildings ........................................................................ 174.8 162.6 Machinery and equipment .......................................................... 845.8 805.9 ---------- ---------- 1,038.9 977.4 Less, accumulated depreciation ................................................... 469.2 448.3 ---------- ---------- PROPERTY, PLANT AND EQUIPMENT, net ........................................ 569.7 529.1 ---------- ---------- EXCESS OF COST OVER ACQUIRED NET ASSETS, less accumulated amortization of $18.2 million in 1997 and $16.5 million in 1996 .................. 56.7 56.0 DEFERRED INCOME TAXES ............................................................... 10.8 13.6 PREPAID PENSION EXPENSE ............................................................. 58.4 46.7 OTHER ASSETS ........................................................................ 23.7 22.8 ---------- ---------- TOTAL ASSETS .............................................................. $ 1,537.4 $ 1,472.6 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable, trade .......................................................... $ 110.6 $ 114.3 Income taxes payable ............................................................. 9.3 .1 Short-term borrowings ............................................................ 29.0 19.8 Accrued liabilities: Employee compensation ........................................................ 30.9 37.2 Product warranty and self-insured risks ...................................... 32.9 35.2 Other ........................................................................ 50.6 48.1 ---------- ---------- TOTAL CURRENT LIABILITIES ................................................. 263.3 254.7 LONG-TERM DEBT ...................................................................... 17.5 14.4 NON-PENSION POSTRETIREMENT BENEFITS ................................................. 182.7 178.4 PRODUCT WARRANTY AND SELF-INSURED RISKS ............................................. 28.9 30.2 ACCRUAL FOR ENVIRONMENTAL MATTERS ................................................... 31.6 33.0 PENSION LIABILITIES ................................................................. 13.2 14.4 ---------- ---------- TOTAL LIABILITIES ......................................................... 537.2 525.1 ---------- ---------- STOCKHOLDERS' EQUITY: Class A common stock, $1 par value; authorized 75,000,000 shares; issued 16,370,438 and 16,410,438 shares in 1997 and 1996, respectively ................................................................. 16.4 16.4 Class B common stock, $1 par value; authorized 25,000,000 shares; issued 5,470,146 shares in 1997 and 1996 ............................. 5.5 5.5 Capital in excess of par value ................................................... 28.0 29.9 Retained earnings ................................................................ 958.0 883.8 Foreign currency translation adjustment .......................................... (7.7) 11.9 ---------- ---------- TOTAL STOCKHOLDERS' EQUITY ................................................ 1,000.2 947.5 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ................................ $ 1,537.4 $ 1,472.6 ========== ==========
The accompanying notes are an integral part of these statements. 9 STATEMENTS OF CONSOLIDATED CASH FLOWS (Dollars in millions)
FOR THE YEARS ENDED DECEMBER 31, --------------------------------- 1997 1996 1995 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income .................................... $ 100.5 $ 112.6 $ 119.2 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ............. 71.1 64.6 59.2 Accounts receivable ....................... (6.3) 17.5 (31.2) Inventories ............................... 11.9 (16.3) (21.6) Payables and accrued expenses ............. 8.4 (15.0) 12.1 Other ..................................... 1.1 2.7 (5.3) -------- -------- -------- Cash Provided By Operating Activities ... 186.7 166.1 132.4 -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures .......................... (90.6) (115.2) (127.4) Business acquisitions, net of cash acquired ... (46.9) -- -- -------- -------- -------- Cash Used In Investing Activities ....... (137.5) (115.2) (127.4) -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid ................................ (26.3) (36.8) (35.2) Proceeds from borrowings ...................... 25.3 7.1 10.9 Repayments of borrowings ...................... (11.8) (1.1) (4.5) Repurchases of common stock ................... (1.9) -- -- -------- -------- -------- Cash Used In Financing Activities ....... (14.7) (30.8) (28.8) -------- -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH .......... (8.1) (4.0) 2.2 -------- -------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................. 26.4 16.1 (21.6) CASH AND CASH EQUIVALENTS: Beginning of period ........................... 277.7 261.6 283.2 -------- -------- -------- End of period ................................. $ 304.1 $ 277.7 $ 261.6 ======== ======== ========
The accompanying notes are an integral part of these statements. 10 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. ACCOUNTING POLICIES BUSINESS DESCRIPTION -- Tecumseh Products Company is a full-line, independent global manufacturer of hermetic compressors for air conditioning and refrigeration products, gasoline engines and power train components for lawn and garden applications, and pumps. The Company's products are sold in over 100 countries around the world. PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements include the accounts of the Company and its subsidiaries. The Company's investments in unconsolidated affiliates are generally accounted for on the equity basis. All significant intercompany transactions and balances have been eliminated. CASH EQUIVALENTS -- Cash equivalents consist of short-term investments which are readily convertible into cash. INVENTORIES -- Inventories are valued at the lower of cost or market, generally on the first-in, first-out basis. PROPERTY, PLANT AND EQUIPMENT -- Expenditures for additions, major renewals and betterments are capitalized and expenditures for maintenance and repairs are charged to expense as incurred. For financial statement purposes, depreciation is determined using the straight-line basis. EXCESS OF COST OVER ACQUIRED NET ASSETS -- Assets and liabilities related to business combinations accounted for as purchases are recorded at fair value. The excess of cost over the net tangible assets acquired is amortized on a straight-line basis over forty years. PRODUCT WARRANTY -- Provision is made for the estimated cost of maintaining product warranties at the time the product is sold. SELF-INSURED RISKS -- Provision is made for the estimated costs of known and anticipated claims under the deductible portions of the Company's liability and workers' compensation insurance policies. In addition, provision is made for the estimated cost of postemployment benefits at employment separation. ENVIRONMENTAL EXPENDITURES -- Expenditures for environmental safekeeping are expensed or capitalized as appropriate. Costs associated with remediation activities are expensed. Liabilities relating to probable remedial activities are recorded when the costs of such activities can be reasonably estimated. EARNINGS PER SHARE -- Basic and diluted earnings per share are equivalent. Earnings per share is computed based on the weighted average number of common shares outstanding for the periods reported. The weighted average number of common shares used in the computations were 21,878,995 in 1997, and 21,880,584 in 1996 and 1995. RESEARCH, DEVELOPMENT AND TESTING EXPENSES -- Company sponsored research, development, and testing expenses related to present and future products are expensed as incurred and were $32.6, $30.4 and $30.1 million in 1997, 1996 and 1995, respectively. ESTIMATES -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts during the reporting period and at the date of the financial statements. Actual results could differ from those estimates. NOTE 2. FOREIGN CURRENCY TRANSLATION Prior to July 1, 1997 the functional currency of the Company's Brazilian subsidiary was the U.S. dollar, since it operated in a highly inflationary economy. Accordingly, inventory, plant and equipment and related income statement items were translated at historical exchange rates while other assets and liabilities were translated at current exchange rates. The resulting translation gain (loss) included in net earnings was $(0.4), $2.5 and $4.8 million in 1997, 1996 and 1995, respectively. Effective July 1, 1997 the functional currency of the Company's Brazilian subsidiary was changed to the local Brazilian currency as Brazil is no longer considered a highly inflationary economy. At December 31, 1997 all of the Company's foreign subsidiaries use the local currency of the country of operation as the functional currency. Assets and liabilities are translated into U.S. dollars at year-end exchange rates while revenues and expenses are translated at average monthly exchange rates. The resulting translation adjustments are recorded as a component of stockholders' equity:
(Dollars in millions) 1997 1996 --------- --------- Balance at January 1 $ 11.9 $ 17.3 Effect of balance sheet translations: Amount (28.4) (8.8) Tax effect 8.8 3.4 --------- --------- Balance at December 31 $ (7.7) $ 11.9 ========= =========
NOTE 3. RETIREMENT PLANS The Company has defined benefit retirement plans that cover substantially all domestic employees. Plans covering salaried employees generally provide pension benefits that are based on average earnings and years of credited service. Plans covering hourly employees generally provide benefits of stated amounts for each year of service. The Company's funding policy for retirement plans is to contribute amounts that meet the minimum funding requirements specified by the Employee 11 Retirement Income Security Act, plus such additional amounts as the Company may determine to be appropriate. The domestic plan assets are invested in a diversified portfolio that primarily consists of equity and fixed income securities. Net pension expense of the Company's domestic defined benefit plans include the following components:
(Dollars in millions) 1997 1996 1995 --------- --------- --------- Service cost - benefits earned during year $ 6.8 $ 6.5 $ 5.2 Interest cost on projected benefit obligations 17.6 16.9 17.1 Actual (gain) loss on assets (68.6) (47.0) (85.0) Net amortization and deferral 33.1 14.6 57.2 --------- --------- --------- Net pension expense (credit) $ (11.1) $ (9.0) $ (5.5) ========= ========= =========
The following table sets forth the funded status and amounts recognized in the consolidated balance sheets for the Company's domestic defined benefit plans at December 31:
(Dollars in millions) 1997 1996 ------------------ ------------------ OVER- UNDER- Over- Under- FUNDED FUNDED funded funded PLANS PLANS Plans Plans -------- ------ -------- ------ Plan assets at fair value $ 502.3 $ .1 $ 455.6 $ .4 -------- ------ -------- ------ Actuarial present value of benefit obligation: Vested benefits 238.1 .7 235.9 .8 Non-vested benefits 13.5 .3 14.2 .3 -------- ------ -------- ------ Accumulated benefit obligation 251.6 1.0 250.1 1.1 Effect of projected future salary increases 27.8 .5 21.2 .5 -------- ------ -------- ------ Projected benefit obligation 279.4 1.5 271.3 1.6 -------- ------ -------- ------ Projected benefit obligation (in excess of) or less than plan assets 222.9 (1.4) 184.3 (1.2) Unrecognized prior service cost 8.1 1.4 9.5 .9 Unrecognized net (gain)loss (159.8) -- (132.3) .3 -------- ------ -------- ------ Unrecognized net transition (asset) obligation (12.8) -- (14.8) -- -------- ------ -------- ------ Prepaid pension expense $ 58.4 $ -- $ 46.7 $ -- ======== ====== ======== ======
Assumptions used in accounting for the domestic defined benefit plans were:
1997 1996 ---- ---- Measurement of projected benefit obligation: Discount rate 6.5% 6.5% Long-term rate of compensation increases 5.0% 5.0% Long-term rate of return on plan assets 7.5% 7.5%
The Company's European subsidiaries provide for defined benefits that are generally based on earnings at retirement date and years of credited service. The combined expense for these unfunded plans was $2.7, $2.1 and $2.5 million in 1997, 1996 and 1995, respectively. The net liability recorded in the consolidated balance sheet was $13.2 and $14.4 million for 1997 and 1996, respectively. Consolidated pension expense (credit) of $(5.0) million in 1997, $(3.3) million in 1996 and $0.1 million in 1995 includes amounts associated with the domestic and foreign defined benefit plans described above and certain defined contribution plans. NOTE 4. NON-PENSION POSTRETIREMENT BENEFIT PLANS The Company sponsors a retiree health care benefit plan, including retiree life insurance, for eligible salaried retirees and their eligible dependents. The Company also sponsors at certain divisions, retiree health care benefit plans for eligible hourly retirees and their eligible dependents. Some of the hourly retiree health care plans include retiree life insurance. The retiree health care plans are unfunded and provide for coordination of benefits with Medicare and any other insurance plan covering a participating retiree or dependent. The plans have lifetime maximum benefit restrictions and pay a stated percentage of covered, medically necessary expenses incurred by the eligible retiree after applicable deductibles are met. Some of the plans are contributory, with some retiree contributions adjusted annually. The Company has reserved the right to interpret, change or eliminate these benefit plans. The components of the net periodic postretirement benefit cost were:
(Dollars in millions) 1997 1996 1995 ---- ---- ---- Service cost-benefits earned during year $4.5 $4.2 $3.6 Interest cost on accumulated postretirement benefit obligation 8.6 8.3 8.9 Net amortization and deferral (3.7) (3.2) (3.7) ---- ---- ---- Net postretirement health care costs $9.4 $9.3 $8.8 ==== ==== ====
[continued on next page] 12 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [continued] The total of accrued postretirement benefit obligation is presented below as of December 31:
(Dollars in millions) 1997 1996 ------- ------- Accumulated postretirement benefit obligation: Retirees $ 51.4 $ 50.0 Active, eligible employees 27.1 26.0 Active, not yet eligible employees 61.0 59.7 ------- ------- 139.5 135.7 Unrecognized plan amendment gain 13.6 11.7 Unrecognized net actuarial gain 36.0 37.0 ------- ------- Accrued postretirement benefit cost in excess of plan assets $189.1 $184.4 ====== ====== Assumptions used: Discount rate 6.5% 6.5% Health care cost trend rate 7.3% 7.6% Ultimate health care cost trend rate in 2004 5.0% 5.0%
At December 31, 1997 and 1996 respectively, $6.4 and $6.0 million were included in Accrued Liabilities, Other. The health care cost trend rate assumption has a significant effect on the amounts reported and increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1997 by $24.8 million and the aggregate of the service and interest cost components of net postretirement health care cost for the year then ended by $2.8 million. NOTE 5. INCOME TAXES Consolidated income before taxes consists of the following:
(Dollars in millions) 1997 1996 1995 ------ ------ ------ United States $124.6 $131.4 $125.8 Foreign 36.2 45.6 62.2 ------ ------ ------ $160.8 $177.0 $188.0 ====== ====== ======
Provision for income taxes consists of the following:
(Dollars in millions) 1997 1996 1995 ------- ------ ------ Current: U.S. federal $ 37.5 $ 37.4 $ 34.7 State and local 3.8 6.2 6.4 Foreign income and withholding taxes 9.0 14.0 25.6 ------- ------ ------ 50.3 57.6 66.7 ------- ------ ------ Deferred: U.S. federal 8.6 8.5 .5 Foreign 1.4 (1.7) 1.6 ------- ------ ------ 10.0 6.8 2.1 ------- ------ ------ Provision for income taxes $ 60.3 $ 64.4 $ 68.8 ======= ====== ====== Income taxes paid $ 39.6 $ 61.6 $ 59.4 ======= ====== ======
A reconciliation between the actual income tax expense provided and the income tax expense computed by applying the statutory federal income tax rate of 35% to income before tax is as follows:
(Dollars in millions) 1997 1996 1995 ------ ------ ------ Income taxes at U.S. statutory rate $56.3 $62.0 $65.8 Excess of foreign taxes over the U.S. statutory rate 2.2 .9 .2 State and local income taxes 2.4 4.0 4.1 Tax benefits from Foreign Sales Corporation (1.0) (1.6) (1.7) Other .4 (.9) .4 ----- ----- ----- $60.3 $64.4 $68.8 ===== ===== =====
Significant components of the Company's deferred tax assets and liabilities as of December 31 were as follows:
(Dollars in millions) 1997 1996 ------ ------ Deferred tax assets: Non-pension postretirement benefits $70.0 $68.2 Product warranty and self-insured risks 22.9 24.5 Net operating loss carryforwards 3.0 5.0 Provision for environmental matters 14.2 14.7 Other accruals and miscellaneous 23.8 21.7 ----- ----- 133.9 134.1 Valuation allowance (2.6) (5.4) ----- ----- Total deferred tax assets 131.3 128.7 ----- ----- Deferred tax liabilities: Tax over book depreciation 45.8 42.4 Pension 19.0 15.0 Other 17.5 21.1 ----- ----- Total deferred tax liabilities 82.3 78.5 ----- ----- Net deferred tax assets $49.0 $50.2 ===== =====
At December 31, 1997, the Company had net operating loss carryforwards attributable to foreign operations for income tax purposes of $8.1 million which expire from 1998 to 2001 if not offset against future taxable income. For financial reporting purposes, a valuation allowance has been established to offset the deferred tax assets related to those loss carryforwards. NOTE 6. INVENTORIES The components of inventories at December 31, were:
(Dollars in millions) 1997 1996 ------ ------ Raw materials and work in process $154.7 $155.1 Finished goods 89.1 101.4 Supplies 15.6 18.7 ------ ------ $259.4 $275.2 ====== ======
13 NOTE 7. BUSINESS SEGMENT DATA Business segment data is presented on page 12 of this report. NOTE 8. DEBT Short-term debt consists of borrowings by foreign subsidiaries at varying interest rates under revolving credit agreements, advances on export receivables and overdraft arrangements with banks used in the normal course of business. The U.S. dollar equivalent of this debt was $22.6 million (at 7.4%) at December 31, 1997, and $16.4 million (at 5.4%) at December 31, 1996. Long-term debt consists of the following: 1. Unsecured borrowings, primarily with banks, by foreign subsidiaries with interest at 6.13%. The U.S. dollar equivalent of these borrowings was $2.4 and $5.6 million at December 31, 1997 and 1996, respectively. 2. A $5.4 million variable-rate bank repurchase agreement (effective interest rate of 6.28% at December 31, 1997), due in 1998. 3. $16 million ($6.7 million in 1996) variable-rate Industrial Development Revenue Bonds (effective interest rate of 6.31% at December 31, 1997) payable in quarterly installments from 1998 to 2021. Scheduled maturities of long-term debt outstanding at December 31, 1997, are as follows: 1998--$6.4 million; 1999--$.9 million; 2000--$1.6 million; 2001--$1.5 million; 2002 and beyond--$13.5 million. Interest paid was $6.5 million in 1997, $6.4 million in 1996 and $8.6 million in 1995. The Company has a $100 million revolving credit facility for general corporate purposes. The facility has a three-year term which may be extended annually with the consent of the participating banks. Under the facility, the Company may select among various interest rate arrangements. As of December 31, 1997, the Company had not made any borrowings under this facility. NOTE 9. ENVIRONMENTAL MATTERS The Company has been named by the EPA as a potentially responsible party in connection with the Sheboygan River and Harbor Superfund Site in Wisconsin. At December 31, 1997 and 1996, the Company had an accrual of $29.0 and $30.1 million, respectively, for estimated costs associated with the cleanup of certain polychlorinated biphenyl (PCB) contamination at this Superfund Site. The Company has based the estimated cost of cleanup on ongoing engineering studies, including samples taken in the Sheboygan River, and on assumptions as to the nature, extent and areas that will have to be remediated. Significant assumptions underlying the estimated costs are that remediation will involve innovative technologies, including (but not limited to) bioremediation near the Company's plant site and along the upper river, and only natural armoring and bioremediation in the lower river and harbor. The EPA has indicated it expects to issue a record of decision on the cleanup of the Sheboygan River and Harbor Site in 1998, but the ultimate resolution of the matter may take much longer. The ultimate costs to the Company will be dependent upon factors beyond its control. These factors include the scope and methodology of the remedial action requirements to be established by the EPA (in consultation with the Wisconsin Department of Natural Resources (WDNR)), rapidly changing technology, natural resource damages (if any) and the outcome of any related litigation. The Company, in cooperation with the WDNR, is conducting an investigation of soil and groundwater contamination at the Company's Grafton, Wisconsin plant. Certain test procedures are underway to assess the extent of contamination and to develop remedial options for the site. While the Company has provided for estimated investigation and on-site remediation costs, the extent and timing of future off-site remediation requirements, if any, are not presently determinable. The WDNR has requested that the Company and other interested parties join it in a cooperative effort to clean up PCB contamination in the watershed of the south branch of the Manitowoc River, downstream of the Company's New Holstein, Wisconsin facility. The Company has cooperated to date with the WDNR in investigating the scope and range of the contamination. The WDNR has not identified the parties it believes are responsible for such contamination. The Company has provided for preliminary investigation expenses. Although participation in a cooperative remediation effort is under consideration, it is not possible at this time to reasonably estimate the cost of any such participation. In addition to the above mentioned sites, the Company is also currently participating with the EPA and various state agencies at certain other sites to determine the nature and extent of any remedial action which may be necessary with regard to such other sites. Based on limited preliminary data and other information currently available, the Company has no reason to believe that the level of expenditures for potential remedial action necessary at these other sites will have a material effect on its financial position. [continued on next page] 14 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [continued] NOTE 10. COMMITMENTS AND CONTINGENCIES Various lawsuits and claims, including those involving ordinary routine litigation incidental to its business, to which the Company is a party, are pending, or have been asserted, against the Company. Although the outcome of these matters cannot be predicted with certainty, and some of them may be disposed of unfavorably to the Company, management has no reason to believe that their disposition will have a materially adverse effect on the consolidated financial position of the Company. NOTE 11. FINANCIAL INSTRUMENTS Financial instruments which potentially subject the Company to concentrations of credit risk are primarily cash investments and accounts receivable. The Company places its cash investments in investment grade, short-term debt instruments and limits the amount of credit exposure to any one commercial issuer. Concentrations of credit risk with respect to receivables are limited due to the large number of customers in the Company's customer base, and their dispersion across different industries and geographic areas. A portion of export accounts receivable of the Company's Brazilian subsidiary are sold at a discount. Discounted Brazilian export accounts receivable balances at December 31, 1997 and 1996, respectively, were $18.1 million and $13.3 million with discount rates, respectively of 6.2 percent and 6.3 percent. The Company maintains an allowance for losses based upon the expected collectability of all accounts receivable, including receivables sold. The Company enters into forward exchange contracts to hedge receivables, payables and other known transactional exposures for periods consistent with the expected cash flows of the underlying transactions. Foreign exchange contracts generally mature within one year and are designed to limit exposure to exchange rate fluctuations because gains and losses on these contracts are offset by gains and losses on the hedged transactions. The carrying value of these contracts approximates fair value based on market rates for similar instruments. At December 31, 1997 and 1996 respectively, the Company had $144.3 million and $64.9 million in foreign exchange contracts outstanding. The carrying value of cash and cash equivalents approximates fair value due to the short maturity of the instruments. The carrying value of short and long-term debt approximates fair value based on discounting the projected cash flows using market rates available for similar maturities. NOTE 12. STOCKHOLDERS' EQUITY The shares of Class A common stock and Class B common stock are substantially identical except as to voting rights. Class A common stock has no voting rights except the right to i) vote on any amendments that could adversely affect the Class A Stock Protection Provision and ii) vote in other limited circumstances, primarily involving mergers and acquisitions, as required by law. A Shareholders' Rights Plan is in effect for each class of stock. These plans protect shareholders against unsolicited attempts to acquire control of the Company that do not offer an adequate price to all shareholders. The rights are not currently exercisable, but would become exercisable at an exercise price of $80 per share, subject to adjustment, if certain events occurred relating to a person or group acquiring or attempting to acquire 10% or more of the outstanding shares of Class B common stock. The rights have no voting or dividend privileges and are attached to, and do not trade separately from the Class A and Class B common stock. The rights expire on January 23, 2001. As of December 31, 1997, 16,410,438 shares of Class A common stock and 5,470,146 share of Class B common stock were reserved for future exercise under the plans. On November 26, 1997 the Company announced a share repurchase program for the Class A common stock. Under the program, the Company is authorized to repurchase up to one million Class A shares on the open market through December 31, 1998, depending upon market conditions and other factors. The repurchase program is expected to be financed primarily through internally available funds. In fiscal year 1997, the Company repurchased and retired 40,000 shares of Class A common stock at a cost of approximately $1.9 million. As of January 30, 1998, and subsequent to December 31, 1997, the Company has repurchased and retired an additional 58,000 shares at a cost of approximately $2.9 million. NOTE 13. BUSINESS ACQUISITIONS In July, 1997 the Company completed the acquisition of two compressor manufacturing facilities in India for $46.9 million. The transaction was accounted for as a purchase and the excess of cost over the acquired net assets is being amortized over 40 years. Results of operations for the last six months of 1997 are included in the Company's statement of consolidated income. 15 MANAGEMENT'S REPORT TO THE SHAREHOLDERS OF TECUMSEH PRODUCTS COMPANY Management is responsible for the integrity and objectivity of the financial statements and other information presented in this annual report. The statements were prepared in accordance with generally accepted accounting principles and, where necessary, include certain amounts based on management's best estimate and judgment to reflect the expected effects of events and transactions that have not been completed. All financial information in the annual report is consistent with the financial statements. Management has established and maintains a system of internal accounting controls to provide reasonable assurance that assets are safeguarded and transactions are executed in accordance with management's authorization. These controls are documented by written policies and procedures that are communicated to employees with significant roles in the financial reporting process. This system is continually reviewed and evaluated and modified to reflect current conditions. The Audit Committee of the Board of Directors, composed primarily of outside Directors, is responsible for monitoring the Company's accounting and reporting practices. The Audit Committee meets regularly with management, the internal auditors, and the independent public accountants to review the work of each and to assure that each is carrying out its responsibilities. Both the independent public accountants and the internal auditors have unrestricted access to the Audit Committee with and without management's representative present, to discuss the results of their examinations and their opinions on the adequacy of internal accounting controls and quality of financial reporting. The independent public accountants are engaged to express an opinion on the Company's financial statements. Their opinion is based on procedures which they believe to be sufficient to provide reasonable assurance that the financial statements contain no material errors. Todd W. Herrick Todd W. Herrick President and Chief Executive Officer John H. Foss John H. Foss Vice President, Treasurer and Chief Financial Officer INDEPENDENT ACCOUNTANT'S REPORT TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF TECUMSEH PRODUCTS COMPANY We have audited the accompanying consolidated balance sheets of Tecumseh Products Company and Subsidiaries as of December 31, 1997 and 1996, and the related statements of consolidated income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Tecumseh Products Company and Subsidiaries at December 31, 1997 and 1996 and the consolidated results of operations and cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Ciulla, Smith & Dale, LLP Ciulla, Smith & Dale, LLP Certified Public Accountants January 30, 1998 Southfield, Michigan 16 TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES SELECTED FINANCIAL DATA (Dollars in millions except per share data)
1997 1996(a) 1995 1994 ---------- ---------- ---------- ---------- INCOME STATEMENT DATA: Net sales $ 1,728.3 $ 1,784.6 $ 1,716.0 $ 1,533.4 ---------- ---------- ---------- ---------- Net income before accounting changes 100.5 112.6 119.2 120.3 ---------- ---------- ---------- ---------- Cumulative effect of changes in accounting principles - - - - ---------- ---------- ---------- ---------- Net income (loss) 100.5 112.6 119.2 120.3 ========== ========== ========== ========== PER SHARE OF COMMON STOCK: (e) Net income before accounting changes $ 4.59 $ 5.15 $ 5.45 $ 5.50 ---------- ---------- ---------- ---------- Cumulative effect of accounting changes - - - - ---------- ---------- ---------- ---------- Net income (loss) 4.59 5.15 5.45 5.50 ---------- ---------- ---------- ---------- Cash dividends declared 1.20 1.68 1.61 1.35 ========== ========== ========== ========== BALANCE SHEET DATA (AT PERIOD END): Cash and cash equivalents $ 304.1 $ 277.7 $ 261.6 $ 283.2 ---------- ---------- ---------- ---------- Working capital (f) 554.8 549.7 521.3 504.2 ---------- ---------- ---------- ---------- Net property, plant and equipment 569.7 529.1 477.0 402.4 ---------- ---------- ---------- ---------- Total assets 1,537.4 1,472.6 1,407.6 1,289.8 ---------- ---------- ---------- ---------- Long-term debt 17.5 14.4 14.7 9.1 ---------- ---------- ---------- ---------- Stockholders' equity 1,000.2 947.5 877.1 785.5 ========== ========== ========== ========== OTHER DATA: Capital expenditures $ 90.6 $ 115.2 $ 127.4 $ 136.2 ---------- ---------- ---------- ---------- Depreciation and amortization 71.1 64.6 59.2 55.7 ========== ========== ========== ==========
Note: The above per share amounts have been adjusted as necessary to reflect the 100% stock dividend paid June 30, 1993 and the 100% stock dividend paid May 29, 1992. (a) The 1996 results included a $5.1 million nonrecurring charge for environmental and litigation costs. This charge was equivalent to $.15 per share after taxes. (b) The 1992 results reflected the cumulative effect of adoption of Statement of Financial Accounting Standards (SFAS) No. 106, Accounting for Non-pension Postretirement Benefits, and SFAS No. 109, Accounting for Income Taxes. - -------------------------------------------------------------------------------- QUARTERLY FINANCIAL DATA (Dollars in millions except per share data)
Quarter ------------------------------------------------------------------------- First Second Third Fourth* Total ------- ------- ------- ------- --------- 1997 Net sales $ 479.6 $ 480.6 $ 389.0 $ 379.1 $1,728.3 Gross profit 72.3 72.5 54.6 48.4 247.8 Net income $ 31.5 $ 31.8 $ 21.9 $ 15.3 $ 100.5 ======= ======= ======= ======= ========= Basic and diluted earnings per share $ 1.44 $ 1.45 $ 1.00 $ 0.70 $ 4.59 ======= ======= ======= ======= ========== 1996 Net sales $ 496.2 $ 490.9 $ 408.7 $ 388.8 $1,784.6 Gross profit 69.9 76.3 62.6 58.0 266.8 Net income $ 31.0 $ 33.9 $ 27.2 $ 20.5 $ 112.6 ======= ======= ======= ======= ========= Basic and diluted earnings per share $ 1.42 $ 1.55 $ 1.24 $ 0.94 $ 5.15 ======= ======= ======= ======= ==========
* Fourth quarter 1996 results included a $5.1 million nonrecurring charge for environmental and litigation costs. This charge was equivalent to $.15 per share after taxes. 17
1993 1992(b) 1991 1990(c) 1989(d) 1988 ---------- ---------- ---------- ----------- ---------- ---------- $ 1,314.2 $ 1,258.5 $ 1,197.2 $ 1,318.1 $ 1,509.8 $ 1,093.5 ---------- ---------- ---------- ---------- ---------- ---------- 81.4 52.3 42.5 14.2 82.6 70.2 ---------- ---------- ---------- ---------- ---------- ---------- - (95.0) - - - - ---------- ---------- ---------- ---------- ---------- ---------- 81.4 (42.7) 42.5 14.2 82.6 70.2 ========== ========== ========== ========== ========== ========== $ 3.72 $ 2.39 $ 1.94 $ .65 $ 3.77 $ 3.21 ---------- ---------- ---------- ---------- ---------- ---------- - (4.34) - - - - ---------- ---------- ---------- ---------- ---------- ---------- 3.72 (1.95) 1.94 .65 3.77 3.21 ---------- ---------- ---------- ---------- ---------- ---------- 1.15 .80 .80 .80 1.11 1.05 ========== ========== ========== ========== ========== ========== $ 313.2 $ 263.6 $ 256.4 $ 240.3 $ 187.2 $ 163.0 ---------- ---------- ---------- ---------- ---------- ---------- 473.6 420.4 403.1 414.3 397.3 340.4 ---------- ---------- ---------- ---------- ---------- ---------- 320.4 322.9 324.3 304.9 280.0 251.8 ---------- ---------- ---------- ---------- ---------- ---------- 1,132.7 1,078.6 1,055.4 1,032.2 1,034.1 900.0 ---------- ---------- ---------- ---------- ---------- ---------- 11.2 14.4 17.9 23.6 19.9 14.3 ---------- ---------- ---------- ---------- ---------- ---------- 686.8 639.8 712.8 692.2 682.3 618.0 ========== ========== ========== ========== ========== ========== $ 51.1 $ 56.6 $ 85.8 $ 64.8 $ 57.5 $ 37.7 ---------- ---------- ---------- ---------- ---------- ---------- 52.5 53.6 49.9 49.6 43.9 30.5 ========== ========== ========== ========== ========== ==========
(c) The 1990 results included a nonrecurring provision for environmental cleanup of $19.2 million after income taxes, or $0.88 per share. (d) The 1989 results reflected completion of the acquisitions of Tecumseh Europe S.A. on December 30, 1988 and Tecumseh Europa S.p.A. on July 25, 1989. (e) Basic and diluted earnings per share are equivalent. (f) Working capital is the excess of current assets over current liabilities. INFORMATION CONCERNING EQUITY SECURITIES The Company's Class A and Class B common stock trades on the Nasdaq Stock Market under the symbols TECUA and TECUB, respectively. Total shareholders as of February 1, 1998 were 9,315 for Class A common stock and 3,954 for Class B common stock.
1997 1996 ---------------------------------------------------- ---------------------------------------------------- Sales Price Sales Price --------------------------------------- --------------------------------------- Class A Class B Cash Class A Class B Cash ----------------- ----------------- Dividends ----------------- ----------------- Dividends QUARTER ENDED High Low High Low Declared High Low High Low Declared ------ ------ ------ ------ -------- ------ ------ ------ ------ --------- March 31 60 56 1/4 56 1/4 53 3/4 $ .30 59 1/2 51 3/4 56 1/4 49 3/4 $ .26 June 30 60 1/8 53 1/4 56 3/8 50 1/2 .30 60 1/4 51 1/2 56 3/4 50 1/8 .26 September 30 60 1/8 55 58 52 .30 55 1/2 50 53 48 .26 December 31 57 7/8 46 7/8 58 48 1/4 .30 60 1/4 54 1/4 57 1/4 50 3/4 .90
EX-21 3 EXHIBIT 21 1 EXHIBIT (21) Tecumseh Products Company Report on Form 10-K for the period ended December 31, 1997 Subsidiaries of the Company The following is a list of subsidiaries of the Company as of December 31, 1997 except that certain subsidiaries, the sole function of which is to hold the stock of operating subsidiaries, which in the aggregate do not constitute significant subsidiaries, have been omitted. Subject to the foregoing in each case, 100% of the voting securities (except for directors' qualifying shares, if required) are owned by the subsidiary's immediate parent as indicated by indentation.
State or Country Name of Organization MP Pumps, Inc. Michigan Ottawa Machine & Tool Co. Michigan Tecumseh do Brasil, Ltd. Brazil Tec Kold International Company, Ltd. Lichteinstein SICOM Europe Srl Italy Tecumseh Products Company of Canada, Ltd. Canada Tecumseh Products Company, Engine & Transmission Group, Dunlap Operations, Inc. Tennessee Douglas Products, Inc. Georgia Tecumseh France S.A. France Tecumseh Europe S.A. France Societe Des Moteurs Electriques de Normandie S.A. France Societe Immobiliere De Construction de La Verpilliere France Tecumseh Services EURL France Tecumseh Products Company, International Division, Inc. (FSC) Virgin Islands Tecumseh Europa, S.p.A. Italy Society T.I.G.E.R. France Tecumseh Deutschland GmbH Germany Tecumseh U.K. Limited United Kingdom Little Giant Pump Co. Oklahoma Trenton Division, Inc. Tennessee Vitrus, Inc. Rhode Island Tecumseh Products India, Ltd. India Tecumseh India Private, Ltd. India
EX-23 4 EXHIBIT 23 1 EXHIBIT (23) REPORT AND CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Tecumseh Products Company We hereby consent to the incorporation by reference in this Annual Report on Form 10-K of Tecumseh Products Company for the year ended December 31, 1997 of our report dated January 30, 1998 which appears on page 25 of the Annual Report of Shareholders for the year ended December 31, 1997. Our audit also included the related financial schedule for the three years ended December 31, 1997 listed in Item 14(a). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audit. In our opinion, the financial schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. CIULLA, SMITH & DALE, LLP Southfield, Michigan January 30, 1998 EX-27 5 EXHIBIT 27
5 1,000 12-MOS DEC-31-1997 DEC-31-1997 304,100 0 213,400 5,700 259,400 818,100 1,038,900 469,200 1,537,400 263,300 0 0 0 21,900 978,300 1,537,400 1,728,300 1,750,200 1,480,500 1,583,100 0 0 6,300 160,800 60,300 100,500 0 0 0 100,500 4.59 4.59
-----END PRIVACY-ENHANCED MESSAGE-----