ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
Our headquarters are located in the United States of America in Ann Arbor, Michigan, approximately 40 miles west of Detroit. We have properties in the U.S., Brazil, France, India, Canada, Mexico, China and Malaysia, occupying approximately 4.8 million square feet; approximately 3.9 million square feet are devoted to manufacturing and assembly. Manufacturing and assembly facility utilization varies during the year depending on the production cycle. All owned and leased properties are adequate and suitable, well maintained and equipped for the purposes for which they are used. See Item 1. Business - "Manufacturing and Assembly Operations" for a description of the production capacity of our manufacturing and assembly facilities. Management believes our manufacturing facilities have excess capacity around the world and is considering reducing excess capacity which could result in a significant change in our manufacturing footprint.
The schedule below outlines our significant facilities by location, ownership and function as of December 31, 2014.
(a) In March 2014, we subleased 102,161 square feet of this facility to a third party.
(b) In November 2012, we entered into a sublease of our original corporate office; in February 2013, we moved our corporate office function into the same building as our Technical Center.
(c) This land is classified as "lease-hold" property. We treat this land as Tecumseh property, however, prior to any sale government approval must be obtained.
See Item 8 - Financial Statements and Supplementary Data - Note 8 “Debt” of Notes to Consolidated Financial Statements for a description of security interests in real estate in the United States and Canada.
ITEM 3.
ITEM 3.
LEGAL PROCEEDINGS
See “Note 16 - Commitments and Contingencies - Litigation” of the Notes to Financial Statements (Part II, Item 8 of this
Form 10-K) for information regarding legal proceedings in which we are involved, which is incorporated into this Item 3 by reference.
ITEM 4.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
As of May 2, 2014, our Common Shares trade on The Nasdaq Stock Market LLC under the symbol TECU. Total shareholders of record as of February 27, 2015 were approximately 114. Prior to May 2, 2014, we had two classes of stock: Class A and Class B Common Stock. Both of these classes of stock traded on The Nasdaq Stock Market LLC under the symbols TECUA and TECUB, respectively. See "Note 9, Stockholders' Equity" of the Notes to Consolidated Financial Statements (Part II, Item 8 of this Form 10K), for additional information regarding the recapitalization that occurred in May 2014.
We do not currently expect to pay dividends. See “Note 8 - Debt” of Notes to Consolidated Financial Statements (Part II, Item 8 of this Form 10-K) for a description of restrictions in our credit facility limiting our ability to pay dividends. As of the date of this report, we have 1,800,000 common shares authorized for issuance under the 2014 Omnibus Incentive Plan. We did not repurchase any of our equity securities during the fourth quarter of 2014.
Market Price and Dividend Information
Range of Common Stock Prices and Dividends for 2014
(a) Common Shares started trading on May 2, 2014. See "Note 9, Stockholders' Equity" of the Notes to Consolidated Financial Statements (Part II, Item 8 of this Form 10K), for additional information.
(b) Class A and Class B Common Stock ceased trading on May 1, 2014. See "Note 9, Stockholders' Equity" of the Notes to Consolidated Financial Statements (Part II, Item 8 of this Form 10K), for additional information.
Range of Common Stock Prices and Dividends for 2013
Stock Performance Graph
The following graph and table depict the cumulative total shareholder return (assuming reinvestment of dividends) on $100 invested in each class of Tecumseh common stock, the S&P 500 Index, and the S&P Composite Industry Index for the five year period from December 31, 2009 through December 31, 2014.
(a) Common Shares started trading on May 2, 2014. See Note 9, “Stockholders' Equity" of the Notes to Consolidated Financial Statements in Item 8 of this report, for additional information. The return for Tecumseh Products Company represents an investment in Tecumseh Products Company Class A and Class B stock through May 1, 2014 and Tecumseh Products Company common shares subsequent to this date, since both classes were converted into an equal number of Common Shares effective May 2, 2014. Tecumseh Products Class A and Class B are no longer trading due to the amendment to our articles of incorporation that was approved on April 30, 2014. Therefore the 2014 results can only be calculated for the separate classes through May 1, 2014 and as deemed investments in an equal number of common shares after that date. Indexed Returns for Class A and Class B Stock on May 1, 2014 were $52.27 and 52.33 respectively.
(b) Class A and Class B Common Stock ceased trading after May 1, 2014. See Note 9, “Stockholders' Equity" of the Notes to Consolidated Financial Statements in Item 8 of this report, for additional information.
(c) S&P Composite Industry Index comprises the S&P Household Appliances Index (50%), the S&P Industrial Machinery Index (25%) and the S&P Electrical Components and Equipment Index (25%).
ITEM 6.
ITEM 6.
SELECTED FINANCIAL DATA
The following is a summary of certain of our financial information.
(a)
In 2014, we granted restricted stock units ("RSUs") to our non-employee directors and our Chief Executive Officer and we granted non-qualified stock options to our officers in 2014. These RSUs and options are not included in diluted earnings per share, as the effect would be antidilutive.
(b)
In 2007, we issued a warrant to a lender to purchase 1,390,944 shares of our Class A Common Stock, at $6.05 per share, which was equivalent to 7% of our then-outstanding fully diluted common stock (including both Class A and Class B shares). This warrant was not included in diluted earnings per share, as the effect would be antidilutive. This warrant expired on April 9, 2012 without the purchase or issuance of additional shares.
(c)
Certain reclassifications have been made to prior results to conform to classifications used at December 31, 2011. These classifications have no impact on net income.
ITEM 7.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statements Relating To Forward-Looking Statements
The following information should be read in connection with the information contained in the Consolidated Financial Statements and Notes to Consolidated Financial Statements in Item 8 of this report.
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act that are subject to the safe harbor provisions created by that Act. In addition, forward-looking statements may be made orally in the future by or on behalf of us. Forward-looking statements can be identified by the use of terms such as “expects,” “should,” “may,” “believes,” “anticipates,” “will,” and other future tense and forward-looking terminology, or by the fact that they appear under the caption “Outlook.” Our forward-looking statements generally relate to our future performance, including our anticipated operating results and liquidity sources and requirements, our business strategies and goals, and the effect of laws, rules, regulations, new accounting pronouncements and outstanding litigation, on our business, operating results, and financial condition.
Readers are cautioned that actual results may differ materially from those projected as a result of certain risks and uncertainties, including, but not limited to, i) our history of losses and our ability to maintain adequate liquidity in total and within each foreign operation; ii) our ability to develop successful new products in a timely manner; iii) current and future global or regional political and economic conditions, including housing starts, and the condition of credit markets, which may magnify other risk factors; iv) the success of our effort to effectively improve productivity and restructure our operations in order to reduce costs and bring them in line with projected production levels and product mix; v) the extent of any business disruption that may result from the restructuring and realignment of our manufacturing operations and personnel or system implementations, the ultimate cost of those initiatives and the amount of savings actually realized; vi) loss of, or substantial decline in; sales to any of our key customers; vii) increased or unexpected product warranty claims; viii) actions of competitors in markets with intense competition; ix) financial market changes, including fluctuations in foreign currency exchange rates and interest rates; x) the ultimate cost of defending and resolving legal and environmental matters, including any liabilities resulting from the regulatory antitrust investigations commenced by the United States Department of Justice Antitrust Division and the Secretariat of Economic Law of the Ministry of Justice of Brazil, both of which could preclude commercialization of products or adversely affect profitability and/or civil litigation related to such investigations; xi) local governmental, environmental, trade and energy regulations; xii) availability and volatility in the cost of materials, particularly commodities, including steel, copper and aluminum, whose cost can be subject to significant variation; xiii) significant supply interruptions or cost increases; xiv) loss of key employees; xv) the extent of any business disruption caused by work stoppages initiated by organized labor unions and other labor matters; xvi) risks relating to our information technology systems or failures of third-party technology service providers; xvii) impact of future changes in accounting rules and requirements on our financial statements; xviii) default on covenants of financing arrangements and the availability and terms of future financing arrangements; xix) reduction or elimination of credit insurance; xx) potential political and economic adversities that could adversely affect anticipated sales and production; xxi) in India, potential military conflict with neighboring countries that could adversely affect anticipated sales and production; xxii) weather conditions affecting demand for replacement products; and xxiii) the effect of terrorist activity and armed conflict. These forward-looking statements are made only as of the date of this report, and we undertake no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise.
For more information regarding these and other uncertainties and factors that could cause our actual results to differ materially from what we have anticipated in our forward-looking statements or otherwise could materially adversely affect our business, financial condition, or operating results, see “Risk Factors” in Item 1A of this report.
EXECUTIVE SUMMARY
In addition to the relative competitiveness of our products, our business is significantly influenced by several specific economic factors: the strength of the overall global economy, which can have a significant impact on our sales; our product costs, especially the price of copper, steel and aluminum; and the relative value compared to the U.S. Dollar of those foreign currencies of countries where we operate.
Furthermore, we monitor changes in local governmental regulations with regards to allowable refrigerants we can use in our compressors and condensing units. These changes can also have a significant impact on our sales and our product costs.
Economy
Our sales depend significantly on worldwide economic conditions, which directly impact consumers' demand for the products in which our products are used. The prolonged stagnation and recent political upheaval in the Euro zone, which has impacted other economies in the region, uncertainties surrounding the conflicts in the Ukraine and the Middle East and concerns about market fundamentals in many of the world's largest economies have led to the lack of growth in each of these markets.
Our sales decreased in 2014 compared to 2013 primarily due to lower volumes and unfavorable impact of changes in currency exchange rates, partially offset by price increases. Excluding the effects of foreign currency translation, sales in 2014 were approximately 9.9% lower than in 2013.
Liquidity
Challenges remain with respect to our ability to generate appropriate levels of liquidity solely from cash flows from operations, particularly related to uncertainties of future sales levels, global economic conditions, currency exchange rates and commodity pricing as discussed below. In 2014, cash provided by operating activities was $7.2 million, which included $25.3 million provided by inventories and $9.9 million provided by receivables, partially offset by $4.9 million used for payables and accrued expenses.
In 2014, we received approximately $1.9 million and $5.4 million of outstanding refundable non-income taxes in India and Brazil, respectively, although we accrued $3.5 million more in non-refundable income taxes than we received in 2014. We have received and expect to receive refunds of outstanding Indian and Brazilian non-income taxes through the end of 2016. Due to changes in exchange rates, the actual amounts received as expressed in U.S. Dollars will vary depending on the exchange rate at the time of receipt or future reporting date. We expect to recover approximately $19.8 million of the $27.7 million outstanding refundable taxes in the next twelve months, primarily related to the short-term portion of the outstanding refundable taxes of $15.1 million in Brazil and $3.5 million in India. The tax authorities will not commit to an actual date of payment and the timing of receipt may be different than planned if the tax authorities change their pattern of payment or past practices.
We realize that we may not generate cash flow from operating activities unless further restructuring activities are implemented or, sales or economic conditions improve. As a result, we continued to adjust our workforce levels as conditions demanded in 2014 in order to reduce our aggregate salary, wages and employee benefits. Our estimated realized savings on an annual basis for these 2014 reductions is approximately $4.2 million. We incurred a charge of $4.0 million associated with the layoffs which took place in 2014. The realized savings in 2014 are consistent with our initial estimates. During 2014, we hired a Chief Restructuring Officer as well as a new Chief Executive Officer. Additional restructuring actions may be necessary during the next several quarters. These restructuring actions could result in significant restructuring or asset impairment charges, severance costs, losses on asset sales and use of cash. Accordingly, any future restructuring activities could have a significant effect on our consolidated financial position, operating profit, cash flows and future operating results. Cash required for any future restructuring activities may be provided by our cash balances, cash proceeds from the sale of assets or new financing arrangements. There is a risk that the costs of the restructuring and cash required will exceed our original estimates or the benefits received from such activities.
We have a Revolving Credit and Security Agreement with PNC Bank, National Association (“PNC”). Subject to the terms and conditions of the agreement as amended, PNC agreed to provide a senior secured term loan and a senior secured revolving credit financing up to an aggregate principal amount of $34.0 million, which includes up to $10.0 million in letters of credit, subject to a borrowing base formula, lender reserves and PNC’s reasonable discretion. PNC also provided us with a senior secured term loan. The loans under these facilities bear interest at either the London Interbank Offered Rate (LIBOR) or an alternative base rate, plus a margin that varies with borrowing availability under the revolving credit facility. These facilities mature on December 11, 2018. We were in compliance with all covenants and terms of the agreement at December 31, 2014. At December 31, 2014, our borrowings under the PNC revolving facility totaled $0.3 million and borrowings under PNC term loan totaled $8.3 million. We also had $6.4 million in outstanding letters of credit. We had $0.4 million of additional borrowing capacity under the PNC facilities as of December 31, 2014, after giving effect to our fixed charge coverage ratio covenant and our outstanding borrowings and letters of credit.
In the second quarter of 2014, our Brazilian subsidiary was approved for a special term low interest rate governmental loan intended to promote innovation and research and development spending in Brazil, in the amount of approximately 82.5 million Brazilian Reals to be used on approved research and development projects, provided that we spend approximately 35.3 million Reals of our resources on the financed projects. We received the first installment of the loan in the amount equivalent to $11.0 million during the third quarter of 2014. However, $0.5 million of this amount is not available to us because the related projects have not yet commenced. We expect to receive additional funding in two equal installments during the next two years. This loan has a grace period of 36 months, after which it will be repaid on a monthly basis between July 2017 and July 2023.
We have additional credit facilities in Brazil, as well as in most other jurisdictions in which we operate outside the U.S. (See Note 8 “Debt”, of the Notes to Consolidated Financial Statements in Item 8 of this report, for additional information.) Our Brazilian and European subsidiaries periodically factor their accounts receivable with financial institutions for seasonal and other working capital needs. Such receivables are factored both with limited and without recourse to us. Our Indian location also has the ability to collect receivables that are backed by letters of credit sooner than the receivables would otherwise be paid by the customer. Furthermore, some of our large customers from this location offer a non-recourse factoring program relating to their receivables only, under which we can collect these receivables at a discount sooner than they would otherwise be paid by the customer. We consider these programs similar to the factoring programs in Brazil and Europe as it relates to our liquidity.
While we believe that current cash balances and available borrowings under our credit facilities and cash inflows related to
non-income tax refunds will produce adequate liquidity to implement our business strategy over the foreseeable future, there can be no assurance that such amounts will ultimately be adequate if sales or economic conditions deteriorate. We anticipate
that we will continue to monitor non-essential uses of our cash balances until cash provided by normal operations improves.
Our business exposes us to potential litigation, such as product liability lawsuits or other lawsuits related to anti-competitive practices and securities law or other types of business disputes. These claims can be expensive to defend and an unfavorable outcome from any such litigation could adversely affect our cash flows and liquidity.
In addition, while our past business dispositions have improved our liquidity position, many of the sale agreements provide for certain retained liabilities and indemnities including liabilities that relate to environmental issues and product warranties. While we believe we have properly accounted for such contingent liabilities based on currently available information, future events could result in the recognition of additional liabilities that could consume available liquidity and management attention.
For further information related to other factors that have had, or may in the future have, a significant impact on our business, financial condition or results of operations, see “Cautionary Statements Relating To Forward-Looking Statements” above, “Results of Operations” below, and “Risk Factors” in Item 1A of this report.
Commodities
Our results of operations are very sensitive to the prices of commodities due to the high content of copper and steel and the increasing usage of aluminum in our compressor products.
The average market costs for the types of copper, steel and aluminum used in our products in 2014 as compared to 2013 fluctuated, with copper decreasing by 10.7%, steel decreasing by 8.8% and aluminum increasing by 10.0%. After consideration of our hedge positions our average cost of copper and aluminum decreased in 2014 by 8.7% and 4.6%, respectively, compared to 2013. Our average cost of copper in 2014 is lower and aluminum is higher in our results of operations when compared to 2013, primarily due to market price fluctuations. Volatility in market prices of these commodities create substantial challenges to our ability to control the cost of our products, as the final product cost can depend greatly on our ability to secure optimally priced derivative contracts.
Any increase in steel prices may have a negative impact on our product costs, as there is currently no well-established global market for hedging against increases in the price of steel.
We have been proactive in addressing the volatility of copper and aluminum costs, by executing derivative contracts. As of December 31, 2014, we had derivative contracts outstanding to cover approximately 31.9% and 22.0% of our projected 2015 copper and aluminum usage, respectively. Continued volatility of these costs could nonetheless have an adverse effect on our results of operations both in the near and long term as our anticipated needs are not 100% hedged.
We expect to continue our approach of mitigating the effect of short-term price swings of commodities through the appropriate use of hedging instruments, price increases and modified pricing structures with our customers, where available, to allow us to recover our costs in the event that the prices of commodities escalate. Due to competitive markets for our finished products, we are typically not able to quickly recover product cost increases through price increases or other cost savings. For a discussion of the risks to our business associated with commodity price risk fluctuations, refer to “Quantitative and Qualitative Disclosures about Market Risk - Commodity Price Risk” in Part II, Item 7A
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk during the normal course of business from credit risk associated with cash investments and accounts receivable and from changes in interest rates, commodity prices and foreign currency exchange rates. The exposure to these risks is managed through a combination of normal operating and financing activities, which include the use of derivative financial instruments in the form of interest rates swaps, commodity futures contracts and foreign currency forward exchange contracts. Commodity prices and foreign currency exchange rates can be volatile, and our risk management activities do not totally eliminate these risks. Consequently, these fluctuations can have a significant effect on our results.
Credit Risk - Financial instruments which potentially subject us to concentrations of credit risk are primarily cash investments, both restricted and unrestricted and accounts receivable. In the U.S., only a small portion of our cash balances are insured by the FDIC. Any cash we hold in the U.S. that is not utilized for day-to-day working capital requirements is primarily invested in secure, institutional money market funds, which are strictly regulated by the U.S. Securities and Exchange Commission and operate under tight requirements for the liquidity, creditworthiness and diversification of their assets.
We utilize credit review procedures to approve customer credit. Customer accounts are actively monitored and collection efforts are pursued within normal industry practice. Management believes that concentrations of credit risk with respect to receivables are somewhat limited due to the large number of customers in our customer base and their dispersion across different industries and geographic areas, as well as credit insurance we obtain in certain regions.
A portion of accounts receivable at our Brazilian subsidiary is sold with limited recourse at a discount. Our European and Brazilian subsidiaries also discount certain receivables without recourse. Such receivables factored by us, both with and without limited recourse, are excluded from accounts receivable in our Consolidated Balance Sheets. Discounted receivables sold in these subsidiaries, including both with limited and without recourse amounts, were $25.1 million and $42.7 million at December 31, 2014 and 2013, respectively and the weighted average discount rate was 8.5% in 2014 and 6.1% in 2013. The amount of factored receivables sold with limited recourse, which results in a contingent liability to us, was $3.7 million and $12.1 million as of December 31, 2014 and 2013, respectively.
In India, we have the ability to collect receivables that are backed by letters of credit sooner than the receivables would otherwise be paid by the customer. Furthermore, some of our large customers offer a non-recourse factoring program relating to their receivables only, under which we can collect these receivables, at a discount, sooner than they would otherwise be paid by the customer. We consider these programs similar to the factoring programs in Brazil and Europe as it relates to our liquidity. We collected a total of $4.0 million and $6.0 million that would otherwise have been outstanding as receivables, under both of these programs at December 31, 2014 and December 31, 2013, respectively and the weighted average discount rate was 9.0% and 10.7% in 2014 and 2013, respectively.
We maintain an allowance for losses based upon the expected collectability of all accounts receivable, including receivables sold with recourse and without recourse.
Interest Rate Risk - We are subject to interest rate risk, primarily associated with our borrowings and our investments of excess cash. Our current borrowings by our foreign subsidiaries consist of variable and fixed rate loans that are based on either the London Interbank Offered Rate, European Interbank Offered Rate or the BNDES TJLP rate. Our current borrowings in the U.S. primarily bear interest at either LIBOR or an alternative base rate. We also record interest expense associated with the accounts receivable factoring facilities described above. While changes in interest rates do not affect the fair value of our variable-interest rate debt or cash investments, they do affect future earnings and cash flows. During 2014, we began using interest rate swaps to help us manage our U.S. interest rate risk. As of December 31, 2014, we held a total notional value of $8.3 million in interest rate swaps, which covers 100% of the outstanding interest rate exposure of our PNC variable rate Term Loan. Based on our debt and invested cash balances at December 31, 2014, a 1% increase in interest rates would increase interest expense for the year by approximately $0.5 million and a 1% decrease in interest rates would have an immaterial effect on investments. Based on our debt and invested cash balances at December 31, 2013, a 1% increase in interest rates would increase interest expense for the year by approximately $0.7 million and a 1% decrease in interest rates would have an immaterial effect on investments.
Commodity Price Risk - Our exposure to commodity price risk is related primarily to the price of copper, steel and aluminum, as these are major components of our product cost.
We use commodity derivatives to provide us with greater flexibility in managing the substantial volatility in commodity pricing. Our policy allows management to utilize commodity derivative contracts for a limited percentage of projected raw materials requirements up to 18 months in advance. At December 31, 2014 and 2013, we held a total notional value of $8.9 million and $12.2 million, respectively, in commodity derivative contracts. The decline in notional value of our commodity
contracts is primarily due to downward trends in base metal market prices and increased aluminum usage, which is lower in cost. Derivatives are designated at the inception of the contract as cash flow hedges against the future prices of copper and aluminum, and are accounted for as hedges on our Consolidated Balance Sheets unless they are subsequently de-designated. While the use of derivatives can mitigate the risks of short-term price increases associated with these commodities by “locking in” prices at a specific level, we do not realize the full benefit of a rapid decrease in commodity prices. If market pricing becomes significantly deflationary, our level of commodity hedging could result in lower operating margins and reduced profitability.
As of December 31, 2014, we have been proactive in addressing the volatility of copper and aluminum prices, including executing derivative contracts to cover approximately 31.9% and 22.0% of our anticipated copper and aluminum requirements for 2015, respectively.
Any rapid increases in steel prices has a particularly negative impact, as there is currently no well-established global market for hedging against increases in the cost of steel.
Based on our current level of activity, and before consideration of our outstanding commodity derivatives contracts, a 10% increase in the price, as of December 31, of copper, steel or aluminum used in production of our products would have adversely affected our annual operating profit on an annual basis as indicated in the table below:
The decreases shown in the table above are primarily due to lower market prices of copper and steel at December 31, 2014, compared to December 31, 2013 and lower than expected sales.
Based on our current level of commodity derivative contracts, a 10% decrease in the price as of December 31, of copper, or aluminum (there are currently no steel contracts) used in production of our products would have resulted in losses under these contracts that would adversely impact our annual operating results for 2014 and 2013 as indicated in the table below:
Foreign Currency Exchange Risk - We are exposed to significant exchange rate risk since the majority of all our revenue, expenses, assets and liabilities are derived from operations conducted outside the U.S. in local and other currencies. For purposes of financial reporting, the results are translated into U.S. Dollars based on currency exchange rates prevailing during or at the end of the reporting period. We are also exposed to significant exchange rate risk when an operation has sales or expense transactions in a currency that differs from its local, functional currency or when the sales and expenses are denominated in different currencies. This risk applies to all of our foreign locations since a large percentage of their receivables are transacted in a currency other than their local currency, mainly U.S. Dollars. In those cases, if the receivable is ultimately paid in less valuable U.S. Dollars, the foreign location realizes less proceeds in its local currency, which can adversely impact its margins. The periodic adjustment of these receivable balances based on the prevailing foreign exchange rates is recognized in our Consolidated Statements of Operations. As the U.S. Dollar strengthens, our reported net revenues, operating profit (loss) and assets are reduced because the local currency will translate into fewer U.S. Dollars, and during times of a weakening U.S. Dollar, our reported expenses and liabilities are increased because the local currency will translate into more U.S. Dollars. Translation of our Consolidated Statements of Operations into U.S. Dollars affects the comparability of revenue, expenses, operating income (loss), and earnings (loss) per share between years. Because of the geographic diversity of our operations, weaknesses in some currencies might be offset by strengths in others over time. However, fluctuations in foreign currency exchange rates, particularly the weakening of the U.S. Dollar against major currencies, as shown in the table below, could materially affect our financial results.
We have developed strategies to mitigate or partially offset these impacts, primarily hedging against transactional exposure where the risk of loss is greatest. This involves entering into short-term derivative contracts to sell or purchase U.S. Dollars at specified rates based on estimated currency cash flows. In particular, we have entered into foreign currency derivative contracts to hedge the Brazilian, European and Indian export sales, which are predominately denominated in U.S. Dollars. However, these hedging programs only reduce exposure to currency movements over the limited time frame of up to eighteen months. Ultimately, long-term changes in currency exchange rates have lasting effects on the relative competitiveness of operations located in certain countries versus competitors located in different countries. Additionally, if the currencies weaken against the U.S. Dollar, any hedge contracts that have been entered into at higher rates result in losses recognized in our Consolidated Statements of Operations when they are settled. From January 1 to December 31, 2014, the Brazilian Real weakened against the U.S. Dollar by 13.4%, the Indian Rupee weakened against the U.S. Dollar by 1.9%, and the Euro weakened against the U.S. Dollar by 13.6%. This weakening primarily occurred in the second half of 2014.
At December 31, 2014 and 2013, we held foreign currency forward contracts with a total notional value of $21.2 million and $22.3 million, respectively. The decline in the notional value of our currency contracts was primarily due to changes in our business practices to better utilize U.S. Dollars collected by our Brazilian, Indian and European locations. Based on our current level of activity, and including any mitigation as the result of hedging activities, we believe that a 10% strengthening of the Brazilian Real, the Euro, or the Indian Rupee against the U.S. Dollar would have negatively impacted our operating profit on an annual basis for 2014 and 2013 as indicated in the table below:
Based on our current foreign currency forward contracts, a 10% weakening in the value of the Brazilian Real, the Euro or the Indian Rupee against the U.S. Dollar would have resulted in losses under such foreign currency forward contracts that would adversely impact our operating results in 2014 and 2013 as indicated in the table below:
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
All schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Tecumseh Products Company
We have audited the accompanying consolidated balance sheets of Tecumseh Products Company (a Michigan corporation) and subsidiaries (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014. 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 the standards of the Public Company Accounting Oversight Board (United States). 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Tecumseh Products Company and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2014, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 4, 2015 expressed an unqualified opinion.
/s/ GRANT THORNTON LLP
Southfield, Michigan
March 4, 2015
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these Consolidated Financial Statements.
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(a) During 2014, we have granted Restricted Stock Units ("RSUs") to our non-employee directors and our Chief Executive Officer. Also during 2014, we granted non-qualified stock options to our officers. These RSUs and options are not included in diluted earnings per share information for 2014, as the effect would be antidilutive.
The accompanying notes are an integral part of these Consolidated Financial Statements.
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
The accompanying notes are an integral part of these Consolidated Financial Statements.
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these Consolidated Financial Statements.
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
The accompanying notes are an integral part of these Consolidated Financial Statements.
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. Accounting Policies
Business Description - Tecumseh Products Company and Subsidiaries (the “Company”, "we", "us" or "our") is a global manufacturer primarily of hermetically sealed compressors for (i) commercial refrigeration applications, including walk-in coolers and freezers, ice makers, dehumidifiers, water coolers, food service equipment and refrigerated display cases and vending machines; (ii) household refrigerator and freezer applications; and (iii) residential and specialty air conditioning and heat pump applications, including window air conditioners, packaged terminal air conditioners and recreational vehicle and mobile air conditioners.
Principles of Consolidation - The accompanying consolidated financial statements include the accounts of the Company and our subsidiaries. All significant intercompany transactions and balances have been eliminated from the consolidated financial statements.
Foreign Currency Translation and Transaction Gains and Losses - The financial position and operating results of substantially all foreign operations are consolidated using the local currency as the functional currency. Local currency assets and liabilities are translated at the rates of exchange as of the balance sheet date, and local currency revenue and expenses are translated at average rates of exchange during the period. Resulting translation gains or losses are included as a component of accumulated other comprehensive income ("AOCI"), a separate component of stockholders’ equity. Transaction gains and losses arising from transactions denominated in a currency other than the functional currency of the entity involved are included in the Consolidated Statements of Operations.
Cash and Cash Equivalents and Restricted Cash and Cash Equivalents - Cash and cash equivalents consist of bank deposits and other highly liquid investments that are readily convertible into cash with original maturities of three months or less.
At December 31, 2014, restricted cash and cash equivalents consisted of funds utilized as cash collateral for a special term governmental loan at our Brazilian location, cash collateral for hedging activities and funds posted as collateral for our non-U.S. letters of credit. For more information on the special term governmental loan refer to Note 8, “Debt”.
Cash and cash equivalents outside of North American locations amounted to $31.3 million and $35.5 million at December 31, 2014 and 2013, respectively.
In the U.S., only a small portion of our cash balances are insured by the Federal Deposit Insurance Corporation ("FDIC"). All cash that we hold in the U.S. is held at two major financial institutions. Any cash we hold in the U.S. that is not utilized for day-to-day working capital requirements is primarily invested in secure, institutional money market funds, which are strictly regulated by the U.S. Securities and Exchange Commission and operate under tight requirements for the liquidity, creditworthiness, and diversification of their assets.
Accounts Receivable - Accounts receivable are stated at amounts due from customers, net of an allowance for doubtful accounts. We determine our allowance by considering a number of factors, including the length of time trade accounts receivable are past due and the customer’s current ability to pay its obligation.
Inventories - Inventories are valued at the lower of cost or market, on the first-in, first-out basis. Cost in inventory includes purchased parts and materials, direct labor and applied manufacturing overhead. We maintain an allowance for slow-moving inventory for items which we do not expect to sell within the next 24 months.
Property, Plant and Equipment, Net - Property, plant and equipment, including significant improvements, are recorded at cost. Repairs and maintenance and any gains or losses on disposition are included in operations. Depreciation is recorded on a straight-line basis to allocate the cost of depreciable assets and leasehold improvements over their estimated service lives, which generally fall within the following ranges:
Impairment of Long-Lived Assets - We review our long-lived assets for possible impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated future undiscounted cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assumptions and estimates used in the evaluation of impairment are consistent with our business plan, including current and future economic trends, the effects of new technologies and foreign currency movements, all of which are subject to a high degree of judgment and complexity. All of these variables ultimately affect management’s estimate of the expected future cash flows to be derived from the asset or group of assets under evaluation, as well as the estimate of their fair value. Changes in the assumptions and estimates, or the inability to achieve our business plan, may affect the carrying value of long-lived assets and could result in additional impairment charges in future periods.
Deposits - Our deposits primarily relate to social taxes and judicial matters and release of the monies to us depends on the outcome of these matters.
Revenue Recognition - Revenue from the sale of our products are recognized once the risk and rewards of ownership have transferred to the customers, which, in most cases, coincide with shipment of the products. For other cases involving export sales, title transfers either when the products are delivered to the port of embarkation or received at the port of the country of destination.
Income Taxes - Income taxes are accounted for using the asset and liability method. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year. In addition, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating loss and tax credit carry forwards. We record a valuation allowance to reduce our deferred tax assets to the amount that we believe is more likely than not to be realized. In addition, we establish reserves for income taxes to address potential exposures involving tax positions that could be challenged by tax authorities.
Derivative Financial Instruments - In the normal course of business, we employ established policies and procedures to manage our exposure to changes in foreign exchange rates and commodity prices using financial instruments deemed appropriate by management. As part of our risk management strategy, we may use derivative instruments, including interest rate swaps, currency forward exchange contracts and commodity futures contracts to hedge certain variable interest rate exposures, foreign exchange exposures and commodity prices. Our objective is to offset gains and losses resulting from these exposures with losses and gains on the derivative contracts used to hedge them, thereby reducing volatility of earnings. Derivative positions are used only to manage our underlying exposures. We do not use derivative financial instruments for speculative purposes. We formally designate and document all of our hedging relationships at the inception of the hedge as either fair value hedges or cash flow hedges, as applicable. In addition, we document our strategy for undertaking each hedge transaction and our method of assessing ongoing effectiveness. We record all derivative instruments at fair value.
For a derivative designated as a cash flow hedge, the gain or loss on the derivative is initially reported as a component of AOCI and subsequently reclassified into the statement of operations when the hedged transaction occurs. For a derivative designated as a fair value hedge, the gain or loss on the derivative in the period of change and the offsetting loss or gain of the hedged item attributed to the hedged risk are recognized in the statement of operations. For cash flow hedges, we assess the effectiveness of our futures and forwards contracts using the dollar offset method and de-designate the derivative if it is determined that the derivative will no longer be highly effective at offsetting the cash flows of the hedged item. At the time a derivative is de-designated, any losses recorded in AOCI are recognized in our Consolidated Statements of Operations while gains remain in AOCI on our Consolidated Balance Sheets until the original hedged transaction occurs. All subsequent gains and losses related to de-designated derivatives are recognized in our Consolidated Statements of Operations. See Note 14, “Derivative Instruments and Hedging Activities”, for a description of derivative instruments.
Product Warranty - Provision is made for the estimated cost of maintaining product warranties at the time the product is sold based upon historical claims experienced for each major product line. For most of our customers, warranty coverage on our compressors is provided for a period of twelve months to three years from the date of manufacture. In the U.S., for wholesale customers only, the warranty is provided for a period of up to twelve months from the date of their resale.
Self-Insured Risks - Provision is made for the estimated costs of known and anticipated claims under the deductible portions of our health, product liability and workers’ compensation insurance programs.
Environmental Expenditures - Expenditures for environmental remediation are expensed or capitalized, as appropriate. Liabilities relating to probable remedial activities are recorded when the costs of such activities can be reasonably estimated. Liabilities are not reduced for possible recoveries from insurance carriers.
Earnings (Loss) Per Share - Basic income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect the dilutive effect that would result from the conversion of, or exercise of a right to acquire, equity securities. Diluted earnings per share are not presented because
the effect in 2014 would have been anti-dilutive, and there were no outstanding rights to acquire our equity securities at December 31, 2013 or December 31, 2012.
Research, Development and Testing Expenses - Our research, development and testing expenses related to present and future products are expensed as incurred and were $14.3 million, $14.7 million, and $15.1 million in 2014, 2013 and 2012, respectively. Such expenses consist primarily of salary and material costs and are included in selling and administrative expenses.
Share-Based Compensation - We account for share-based compensation using the fair value for awards issued. See Note 10, “Share-based Compensation Arrangements” for a description of the types of awards we grant.
Estimates - Management is required to make certain estimates and assumptions in preparing the consolidated financial statements in accordance with U.S. GAAP. These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. They also impact the reported amount of net earnings or losses during any period. Actual results could differ from those estimates.
Significant estimates and assumptions used in the preparation of the accompanying consolidated financial statements include those related to: accruals for product warranty, self-insured risks, environmental matters, litigation and other contingent liabilities, pension obligations as well as the evaluation of long-lived asset impairments, determination of share-based compensation and the realizability of our deferred tax assets.
Certain reclassifications of prior years' amounts have been made to conform with the current year's presentation.
NOTE 2. Discontinued Operations
In 2007 and 2008, we completed the sale of the majority of our non-core businesses; however, we continue to incur legal fees, settlements and other expenses based on provisions in the purchase agreements.
Charges to discontinued operations are as follows:
For the year ended December 31, 2012, legal fee reimbursements were for the Platinum lawsuit received under our Directors and Officers insurance. We sold our Grafton facility in the fourth quarter of 2012 for net cash consideration of $0.9 million. See Note 12, “Income Taxes”, for a discussion of income taxes included in discontinued operations.
NOTE 3. Inventories
The components of inventories are as follows:
Raw materials are net of a $3.0 million and $4.2 million reserve for obsolete and slow moving inventory at December 31, 2014 and December 31, 2013, respectively. The decline in the reserve for raw materials in 2014 is due to one of our U.S. locations disposing of some previously reserved inventory in the second quarter of 2014. Finished goods are net of a $2.0 million and $1.7 million reserve for obsolete and slow moving inventory and lower of cost or market at December 31, 2014 and 2013, respectively.
NOTE 4. Property, Plant and Equipment, net
The components of property, plant and equipment, net are as follows:
Depreciation expense associated with property, plant and equipment was $25.0 million, $33.5 million and $36.3 million for the years ended December 31, 2014, 2013 and 2012, respectively.
NOTE 5. Pension and Other Postretirement Benefit Plans
We have a defined benefit retirement plan that covers substantially all domestic employees. This plan was frozen to new hires after January 15, 2011. We have frozen the pension benefits provided to our salaried pension plan participants as of December 31, 2013, and benefits provided to our hourly plan participants as of June 30, 2014. This means that: (i) pension plan participants will not earn any additional years of benefit service under the plan after the dates the respective plans were frozen for purposes of accruing an additional plan benefit; and (ii) no pay increases/decreases that plan participants earn after the dates the respective plans were frozen will be taken into account in determining their Plan benefit. Pension benefits covering salaried employees generally provide benefits that are based on average earnings and years of credited service. Pension benefits covering hourly employees generally provide benefits of stated amounts for each year of service.
With regard to our retiree health care benefit plan, in the second quarter of 2012 we informed employees and current retirees that (1) effective May 1, 2012 we would no longer provide life insurance benefits to eligible current and future salaried retirees of the Company, (2) effective December 31, 2013, we would no longer provide pre-age 65 retiree group health care benefits to current salaried employees and current salaried retirees of the Company who could participate or who are currently participating in the Plan and (3) effective May 1, 2012, all current employees who have not satisfied the age and Company service requirements as of May 1, 2012, for eligibility and participation in the Plan providing pre-age 65 retiree group health care benefits, will no longer be eligible. These plan amendments and settlements resulted in a total non-cash gain of $45.0 million on our Consolidated Statements of Operations. Due to the negative plan amendment, described in clause (2) in this paragraph, we recorded increased amortization of net gains until December 31, 2013.
We use December 31 as the measurement date for determining pension and other postretirement benefits. Information regarding the funded status and net periodic benefit costs was reconciled to or stated as of the year ended December 31.
Amounts recognized for both pension and other postretirement benefit plans in the Consolidated Balance Sheets and in AOCI as of December 31 consist of:
The estimated net actuarial loss (gain) and prior service cost (credit) for the defined benefit pension plans that will be amortized from AOCI into net periodic benefit cost over the next twelve months are $2.1 million and ($0.1) million, respectively. Both the estimated net actuarial gain and prior service credit for the remaining other defined benefit postretirement plan that will be amortized from AOCI into net periodic benefit cost over the next twelve months are not material.
The following table provides a reconciliation of the changes in the pension and postretirement plan benefit obligations and fair value of plan assets for 2014 and 2013:
The changes in benefit obligation due to the "Settlements" of $0.3 million in 2014 are related to some of our benefit plans in Europe and India, where the lump sum benefit payments exceeded the sum of service cost and interest cost, triggering settlement accounting.
The changes in benefit obligation due to the "Curtailments" of $3.8 million in 2013 are related to curtailment of our defined benefit retirement plan for the domestic salaried employees. The related balance was also reversed from AOCI.
The changes in benefit obligation due to "Reclassification adjustment" of $0.3 million in 2013 are related to reclassification of our postretirement benefit in Europe due to a continued review of our employee related plans. Previously the liabilities associated with this plan were recorded in other current liabilities and other long-term liabilities on our Consolidated Balance Sheets.
The accumulated benefit obligation for all defined benefit pension plans was $172.6 million and $160.9 million at December 31, 2014 and 2013, respectively.
Information for pension plans with an accumulated benefit obligation in excess of plan assets:
Information for pension plans with a projected benefit obligation in excess of plan assets:
Components of net periodic expense (benefit) during the year:
Additional Information
Assumptions
Assumptions used to determine benefit obligations as of December 31:
Assumptions used to determine net periodic benefit costs for the years ended December 31:
In 2014, we adopted a new mortality base table and projection scale based on guidance published by the Society of Actuaries. Prior to 2014, for the U.S. Pension Plans, we used the PPA static mortality tables. The effect of adopting this new mortality table increased our pension benefit obligation by $4.9 million.
The expected long-term return on assets was determined for each class of assets in which the plan is invested based on consultation with the company's investment advisers. That information is combined with the target asset allocation, where applicable, to determine our best estimate of future returns.
Plan Assets
Our primary investment objectives are 1) preservation of principal, 2) minimizing the volatility of our assets and liabilities from changes in interest rates and market conditions, and 3) providing liquidity to meet benefit payments and expenses. Our portfolio primarily consists of fixed income obligations rated investment grade, (i.e., “Baa3/BBB” or better by Moody’s or Standard & Poor’s), respectively, and international and domestic equities.
The following tables provide pension plan assets based on nature and risks as of December 31, 2014 and 2013 (See Note 13, “Fair Value Measurements”, for additional information):
We expect to make contributions of $0.3 million to our pension plans in 2015.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
Defined Contribution Plan
We have a defined contribution retirement plan that covers substantially all U.S. employees. The expense for this plan was $0.8 million, $2.2 million and $2.4 million in 2014, 2013 and 2012, respectively. Contributions have been funded from the proceeds obtained from the reversion of our former salaried pension plan, however these funds were exhausted late in the third quarter of 2014. Starting late in the third quarter of 2014, contributions are funded from our cash flow from operations.
NOTE 6. Recoverable Non-Income Taxes
We pay various value-added taxes in jurisdictions outside of the U.S. These include taxes levied on material purchases, fixed asset purchases and various social taxes. The majority of these taxes are creditable when goods are sold to customers domestically or against income taxes due. Since the taxes are recoverable upon completion of these activities, they are recorded as assets upon payment of the taxes.
Historically, in Brazil, such taxes were credited against income taxes. However, with reduced profitability, we instead sought these refunds via alternate proceedings. In India, we participate in a number of government sponsored tax incentive programs, which result in refundable non-income taxes.
Following is a summary of the recoverable non-income taxes recorded on our balance sheet at December 31, 2014 and 2013:
At December 31, 2014, a receivable of $19.8 million was included in current assets and $7.9 million was included in non-current assets and is expected to be recovered through 2016. At December 31, 2013, a receivable of $16.7 million was included in current assets and $10.6 million was included in non-current assets. The actual amounts received as expressed in U.S. dollars will vary depending on the exchange rate at the time of receipt or future reporting date.
NOTE 7. Warranties
Reserves are recorded on our Consolidated Balance Sheets to reflect our contractual liabilities relating to warranty commitments to customers. Unanticipated quality issues could result in material changes to estimates.
Changes in the carrying amount and accrued product warranty costs for the years ended December 31, 2014, 2013 and 2012 are summarized as follows:
Warranty expense was $11.4 million, $14.5 million and $6.4 million for the years ended December 31, 2014, 2013 and 2012, respectively. At December 31, 2014, $9.6 million was included in current liabilities and $1.1 million was included in non-current liabilities. At December 31, 2013, $11.9 million was included in current liabilities and $1.3 million was included in non-current liabilities.
The increase in this accrual balance is primarily due to additional accruals related to two warranty claims which originated in 2013 at our French and Indian locations. Furthermore in July 2014, the customer related to the claim at our French location has filed a lawsuit against the Company. See Note 16, "Commitments and Contingencies" for a description of the lawsuit.
NOTE 8. Debt
Our debt consists of the following:
We have a Revolving Credit and Security Agreement with PNC Bank, National Association (“PNC”). Subject to the terms and conditions of the agreement as amended, PNC agreed to provide senior secured revolving credit financing up to an aggregate principal amount of $34.0 million, which includes up to $10.0 million in letters of credit subject to a borrowing base formula, lender reserves and PNC’s reasonable discretion. With the 2013 amendment, PNC also provided a senior secured term loan up to an aggregate principal amount of $15.0 million. The loans under the facilities bear interest at either LIBOR or an alternative
base rate, plus a margin that varies with borrowing availability under the revolving credit facility. The maturity of these facilities has been extended to December 11, 2018.
During the first quarter of 2014, we entered into an amendment to our Revolving Credit and Security Agreement with PNC, pursuant to which all closing conditions which existed at the end of 2013 related to the 2013 amendment were deemed met and we agreed to use a portion of those proceeds to prepay the Term Loan because of a shortfall in the margin value of the collateral. As a result, we reclassified the remaining proceeds from "Restricted cash and cash equivalents" to "Cash and cash equivalents" on our Consolidated Balance Sheets.
We paid $0.4 million in fees associated with the amendments. We had a remaining balance of $0.1 million in fees associated with the original agreement in 2011, which were capitalized and will now be amortized over the new five year term of the amended agreement. We must also pay a facility fee of 0.375% a year on the unused portion of the facility. The facility is guaranteed by Tecumseh Products Company and its U.S. and Canadian subsidiaries and is secured by substantially all of the assets of the borrowers.
The PNC agreement contains various covenants, including limitations on dividends, investments and additional indebtedness and liens, and a minimum fixed charge coverage ratio, which would apply only if average undrawn borrowing availability, as defined by the credit agreement, were to fall below a specified level for more than five business days. We had $0.4 million of additional borrowing capacity under this facility as of December 31, 2014, after giving effect to our fixed charge coverage ratio covenant and our outstanding borrowings and letters of credit under this facility. We were in compliance with all covenants and terms of the agreement at December 31, 2014.
At December 31, 2014, our borrowings under the PNC revolving facility totaled $0.3 million and borrowings under the PNC term loan were $8.3 million. In addition, we had $6.4 million in outstanding letters of credit.
In April 2013, we signed a loan agreement with the Mississippi Development Authority ("MDA") for draws up to $1.5 million at an interest rate of 2.25% and with a maturity date of February 2021. Draws under the agreement are permitted for purchases of certain equipment at our Tupelo, Mississippi location. We received the final draw in the second quarter of 2014. Fixed principal and interest payments started on the loan in the first quarter of 2014 and as of December 31, 2014 we had an outstanding balance of $1.3 million.
In the U.S., we have $0.3 million outstanding in short term borrowings related to financing some of our insurance premiums and $0.4 million outstanding in long term borrowings related to software financing.
We have various borrowing arrangements at our foreign subsidiaries to support working capital needs and government sponsored borrowings which provide advantageous lending rates.
In Brazil, as of December 31, 2014, we have uncommitted, discretionary line of credit facilities with several local private Brazilian banks (some of which are sponsored by the Brazilian government) for an aggregate maximum of $37.6 million, subject to a borrowing base formula computed on a monthly basis. These credit facilities are secured by a portion of our accounts receivable and inventory balances and expire at various times from January 16, 2015 through July 15, 2023. Since the expiration of the January 16, 2015 credit facility, Brazil has already acquired new credit facilities in 2015. Historically we have been able to enter into replacement facilities when these facilities expire, but such replacements are at the discretion of the banks. Lenders determine, at their discretion, whether to make new advances with respect to each draw on such facilities. There are no restrictive covenants on these credit facilities. In the second quarter of 2014, our Brazilian location was approved for a special term low interest rate loan from a governmental agency: FINEP. This agency provides funding to companies to further innovation and research and development spending in Brazil. Our Brazilian location was approved for a loan in the amount of up to approximately 82.5 million Brazilian Reals to be used on approved research and development projects, provided that our Brazilian location spends up to approximately 35.3 million Reals of its own resources on the financed projects. This loan has a grace period of 36 months, after which it will be repaid on a monthly basis between July 2017 and July 2023. We paid $0.1 million in fees associated with this loan. We received the first installment of the loan in the amount equivalent to $11.0 million during the third quarter of 2014; however, $0.5 million of this amount represents restricted funds for projects not yet commenced. We also placed collateral in the amount of $5.1 million for this loan in a separate bank account. Both the collateral and the restricted funds are recorded as "Restricted cash and cash equivalents" on our Consolidated Balance Sheets. Our borrowings in Brazil at December 31, 2014 totaled $28.8 million, with an additional $19.8 million available for borrowing, based on our accounts receivable, inventory levels and current FINEP financing at that date. In addition, we expect to receive the remaining amount of the FINEP loan in two equal installments during the next two years.
In India, we have an aggregate maximum availability of $12.4 million in line of credit facilities which are secured by land, buildings and equipment, inventories and receivables and are subject to a borrowing base formula computed on a monthly basis. The arrangements expire at various times from February 2015 through March 2015. The acquisition of new credit facilities to replace expired facilities is currently underway. Historically, we have been able to renew these facilities when they expire; however, such renewal is at the discretion of the banks. Our borrowings under these facilities totaled $8.5 million, and
based on our borrowing base as of December 31, 2014, we had $3.9 million available for borrowing under these facilities. There are no restrictive covenants on these credit facilities, except that consent must be received from the bank in order to dispose of certain assets located in India.
We also have capital lease agreements with an outstanding balance of $1.1 million which are included in our total borrowings balance at December 31, 2014.
Our consolidated borrowings totaled $49.2 million at December 31, 2014 and $67.2 million at December 31, 2013. Our weighted average interest rate for these borrowings was 9.0% for the twelve months ended December 31, 2014 and 8.1% for the twelve months ended December 31, 2013.
Scheduled maturities of debt and capital lease obligations for each of the five years subsequent to December 31, 2014 are as follows:
NOTE 9. Stockholders’ Equity
On April 30, 2014, our shareholders approved an amendment to our articles of incorporation reclassifying and converting our Class A Common Stock and Class B Common Stock into a new class of Common Shares with no par value on a one-for-one basis. This recapitalization was completed by filing Amended and Restated Articles of Incorporation with the State of Michigan on April 30, 2014 with an effective date of May 2, 2014. As of May 2, 2014, our Common Shares are traded on the Nasdaq Stock Market under the symbol TECU.
We currently have no expectation to resume payment of dividends.
During 2014, we have granted Restricted Stock Units ("RSUs") as well as non-qualified stock options. See Note 10, "Share-based Compensation" for additional detail regarding the RSUs and stock options.
NOTE 10. Share-Based Compensation Arrangements
Prior to 2011, we granted Stock Appreciation Rights ("SARs") and phantom shares to certain key employees under our Long-Term Incentive Cash Award Plan. As both the SARs and the phantom shares under this plan are settled in cash rather than by issuing equity instruments, we record an expense with a corresponding liability on our Consolidated Balance Sheets. The expense is based on the fair value of the awards on the last day of the reporting period and represents an amortization of that fair value over the vesting period of the awards.
From 2011 to 2013, we awarded performance-based phantom shares to certain key employees to make our equity incentives reflect our performance during the respective calendar year. These performance phantom shares vest one-third each year over a three year period. In 2013, 2012 and 2011, 23,642, 435,866 and zero, respectively, performance-based phantom shares were issued based on our calendar year financial results.
In the first quarter of 2014, our Board of Directors adopted the 2014 Omnibus Incentive Plan, which was approved by our shareholders at our Annual Shareholders Meeting. Under this plan, we may award share-based compensation that does not have to be settled in cash to key employees, directors and third-party service providers. In 2014, we awarded restricted stock units ("RSUs") and non-qualified stock options under our 2014 Omnibus Incentive Plan.
Our liability with regard to our outstanding, cash settled, share-based awards is re-measured in each quarterly reporting period. The fair value of the phantom shares is based on the closing stock price of our Common Shares, or Class A Common Stock prior to May 2, 2014 (see Note 9, "Stockholders' Equity", for further discussion), on the last day of the period. At December 31, 2014 and December 31, 2013, the applicable closing stock price was $3.09 and $9.05, respectively.
A summary of activity under the plans during 2014 is as follows:
The initial value of the phantom shares is based on the closing price of our Class A Common Stock as of the grant date. The initial value of the SARs, which are the economic equivalent of options, is based on a Black-Scholes model as of the grant date.
We measure the fair value of each SAR based on the closing stock price of Common Shares, or Class A Common Stock prior to May 2, 2014 (see Note 9, Stockholders' Equity", for further discussion), on the last day of the period, using a Black-Scholes valuation model. The fair value of each SAR was estimated as of December 31, 2014, 2013 and 2012 using the following assumptions:
Compensation expense (income) related to outstanding share-based compensation awards under the Long-Term Incentive Cash Award Plan for the years ended December 31, 2014, 2013 and 2012 was $(0.7) million, $2.3 million and $2.6 million,
respectively. The balance of the fair value that has not yet been recorded as expense is considered an unrecognized liability. The total unrecognized compensation liability with respect to awards under the Long-Term Incentive Cash Award Plan as calculated at December 31, 2014 was immaterial and for December 31, 2013 was $1.7 million. Total cash paid under this plan for the years ended December 31, 2014 and 2013 was $1.0 million and $1.6 million, respectively.
Prior to 2014, we granted deferred stock units ("DSUs") to our non-employee directors under our Outside Directors' Deferred Stock Unit Plan. These awards were fully vested when made. We measure the fair value of outstanding DSUs based upon the closing stock price of our Common Shares, or Class A Common Stock prior to May 2, 2014 (see Note 9, Stockholders' Equity", for further discussion), on the last day of the reporting period. We pay out the DSUs to a director after the earlier of a Company Change in Control, as defined in the plan, or the date when he or she ceases to be a non-employee director for any reason. Since the DSUs are settled in cash rather than by issuing equity instruments, we record an expense with a corresponding liability on our Consolidated Balance Sheets. Total expense (income) related to the DSUs for the years ended December 31, 2014, 2013 and 2012 was $(0.3) million, $0.8 million and $0.5 million, respectively. We recorded a liability of $0.2 million and $1.2 million as of December 31, 2014 and 2013, respectively. Total cash paid for DSUs in the year ended December 31, 2014 and 2013 was $0.7 million and $0.2 million, respectively.
In 2014, we granted restricted stock units ("RSUs") to our non-employee directors and our Chief Executive Officer under our 2014 Omnibus Incentive Plan. These RSUs vest immediately before our 2015 Annual Meeting of Shareholders if the non-employee director or Chief Executive Officer, as applicable, is serving on our Board on that date. The RSUs will be settled 75% in our Common Shares and 25% in cash. For the RSUs settled in our Common Shares, we record an expense and corresponding change in "Paid in Capital" on our Consolidated Balance Sheets, based on the fair value of the RSUs at grant date and recognized over the vesting period. For the year ended December 31, 2014, the expense was $0.3 million. For the RSUs settled in cash, we record an expense with a corresponding liability on our Consolidated Balance Sheets recognized over the vesting period. This liability will be remeasured in each quarterly reporting period, based on the closing price of our Common Shares on the last day of each period. No cash was paid for RSUs in the year ended December 31, 2014.
During fourth quarter 2014, we granted non-qualified stock options under our 2014 Omnibus Incentive Plan to certain executive officers and key employees. The stock options will be settled in our Common Shares and will vest in three equal annual installments beginning December 2015. For the stock options settled in our Common Shares, we record an expense and corresponding change in "Paid in Capital" on our Consolidated Balance Sheets. For the year ended December 31, 2014, the expense was immaterial. The value of each stock option is based on a Black-Scholes valuation model as of December 31, 2014 using the following assumptions:
NOTE 11. Impairments, Restructuring Charges and Other Items
The charges (gains) recorded as impairments, restructuring charges, and other items are as follows:
Severance expense in 2014 was associated with a reduction in force at our Brazilian ($3.3 million), French ($0.6 million) and Indian ($0.1 million) locations. See Note 16, "Commitments and Contingencies - Litigation - Compressor industry antitrust investigation" and "Environmental matters" for a description of a litigation settlement and additional environmental remediation accruals.
Severance expense in 2013 was associated with a reduction in force at our French ($7.8 million), Brazilian ($1.3 million), Indian ($0.5 million) and Corporate ($0.3 million) locations.
Severance expense in 2012 was associated with a reduction in force at our Brazilian ($2.6 million), French ($0.6 million), North American ($0.3 million) and Corporate ($0.3 million) locations. For additional information regarding the "Curtailment and settlement gain" on postretirement benefits see Note 5, "Pension and Other Postretirement Benefit Plans". For additional information on "Refund of settlement notice and administrative costs" see Note 16, "Commitments and Contingencies".
The following table reconciles activities for the years ended December 31, 2014 and 2013 for accrued impairments, restructuring charges and other items:
The accrued balance at December 31, 2014 for "Severance" mainly includes payments to be made related to our European reduction in force and is expected to be settled in the next 9 months. The accrued "Other" balance at December 31, 2014, includes $1.6 million for the estimated costs associated with remediation activities at our former Tecumseh, Michigan facility, which is expected to be paid over the next 6 months, $1.0 million for a legal settlement related to one of the anti-trust litigations (see Note 16, "Commitments and Contingencies - Legal", for further discussion) and $0.2 million related to the reserve for our former corporate office which will be paid through December 2015.
NOTE 12. Income Taxes
Consolidated income (loss) from continuing operations before taxes consists of the following:
Provision for (benefit from) income taxes from continuing operations consists of the following:
A reconciliation between the actual income tax expense (benefit) and the income tax expense (benefit) computed by applying the statutory federal income tax rate of 35% to income before tax is as follows:
Deferred income taxes reflect the effect of temporary differences between the tax basis of an asset or liability and its reported amount in the financial statements. Provisions are also made for estimated taxes which may be incurred on the remittance of subsidiaries’ undistributed earnings, none of which are deemed to be permanently reinvested.
Significant components of our deferred tax assets and liabilities as of December 31, were as follows:
Deferred tax details included in the Consolidated Balance Sheets at December 31, are as follows:
*Deferred tax liabilities are included in Other liabilities within the balance sheet.
At December 31, 2014, we had the following tax carry forwards:
Income taxes are allocated between continuing operations, discontinued operations and other comprehensive income because all items, including discontinued operations, should be considered for purposes of determining the amount of tax benefit that results from a loss from continuing operations and that could be allocated to continuing operations. We apply this concept by tax jurisdiction, and in periods in which there is a pre-tax loss from continuing operations and pre-tax income in another category, such as discontinued operations or other comprehensive income, the tax benefit allocated to continuing operations is determined by taking into account the pre-tax income of other categories.
Deferred income tax assets are evaluated quarterly to determine if valuation allowances are required or should be adjusted. All available evidence, both positive and negative using a more likely than not standard, is considered to determine if valuation allowances should be established against deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity of recent losses, forecasts of future profitability, the duration of statutory carry forward periods,
previous experience with tax attributes expiring unused and tax planning alternatives. In making such judgments, significant weight is given to evidence that can be objectively verified. A significant piece of objective negative evidence evaluated was the cumulative loss incurred over the three-year period ended December 31, 2014. This objective negative evidence limits the ability to consider other subjective evidence such as our projections for future growth.
Based on this assessment, full valuation allowances have been recorded against our net deferred tax assets for all tax jurisdictions in which we believe it is more likely than not that the deferred taxes will not be realized. Full valuation allowances were recorded for all of our tax jurisdictions except for Mexico and Malaysia. The amount of the deferred tax assets considered realizable, however, could be adjusted if estimates of future taxable income during the carry forward period are reduced or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as our projections for growth.
At December 31, 2014 and 2013 we did not have any unrecognized tax benefits.
We accrue interest and penalties related to unrecognized tax benefits in our provision for income taxes. At December 31, 2014 and 2013, we had no accrued interest and penalties.
We file U.S., state and foreign income tax returns in jurisdictions with varying statues of limitations. We have open tax years from 2007 to 2013 with various significant taxing jurisdictions including Canada, France and Brazil. In the U.S., our federal income tax returns through 2005 have been examined by the Internal Revenue Service and we have open tax years from 2010 to 2013.
Management is not aware of any uncertain tax positions taken or expected to be taken that would require recognition of a liability or asset for disclosure in the financial statements.
NOTE 13. Fair Value Measurements
We use fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosure. We categorize assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are as follows:
Level 1 Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2
Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3
Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability.
Except for derivative instruments, pension liabilities and pension plan assets, the Company has no financial assets and liabilities that are carried at fair value at December 31, 2014 and 2013. The carrying amounts of financial instruments comprising cash and cash equivalents, and accounts receivable approximate their fair values due to their short-term nature. The carrying value of the Company’s long-term debt approximates its fair value because interest charged on the loan balance is variable. See Note 8, “Debt”, for a description of Company’s debt and corresponding rates of interest. See Note 5, “Pension and Other Postretirement Benefit Plans”, regarding the fair value of pension liabilities and pension plan assets. See Note 14, “Derivative Instruments and Hedging Activities”, regarding the fair value of derivative instruments and hedging activities.
Certain Company assets are required to be recorded at fair value on a non-recurring basis when events and circumstances indicate that the carrying value may not be recoverable. As of December 31, 2014 and 2013, the Company did not have any assets at fair value on a non-recurring basis.
The following is a description of valuation methodologies used for our assets and liabilities recorded at fair value.
Foreign currency and commodity derivative contracts
Derivative instruments recognized on our Consolidated Balance Sheets consist of foreign currency forward exchange contracts, commodity futures contracts and interest rate swaps. These contracts are recognized at the estimated amount at which they could be settled based on market observable inputs, such as forward market exchange rates and are recorded on our
Consolidated Balance Sheets as part of current assets and liabilities under the heading “Fair value of derivatives.” We classify our derivative instruments as Level 2.
The following table presents the amounts recorded on our balance sheet for assets and liabilities measured at fair value on a recurring basis as of December 31, 2014.
The following table presents the amounts recorded on our balance sheet for assets and liabilities measured at fair value on a recurring basis as of December 31, 2013.
NOTE 14. Derivative Instruments and Hedging Activities
We are exposed to foreign currency exchange rate risk arising from transactions in the normal course of business, such as sales to foreign customers not denominated in the seller’s functional currency, foreign operations, and purchases from foreign suppliers. We actively manage the exposure of our foreign currency exchange rate market risk, market fluctuations in commodity prices and interest rate risk associated with our U.S. variable rate borrowings by entering into various hedging instruments, authorized under our policies that place controls on these activities, with counterparties that are highly rated financial institutions. We are exposed to credit-related losses in the event of non-performance by these counterparties; however, our exposure is generally limited to the unrealized gains in our contracts should any of the counterparties fail to perform as contracted.
Our hedging activities primarily involve use of foreign currency forward exchange contracts, commodity derivatives contracts and, starting in 2014, interest rate swap contracts. These contracts are designated as cash flow hedges at the inception of the contract. We use derivative instruments only in an attempt to limit underlying exposure from foreign currency exchange rate fluctuations, commodity price fluctuations and variable interest rate fluctuations to minimize earnings and cash flow volatility associated with these risks. Decisions on whether to use such contracts are made based on the amount of exposure to the currency or commodity involved and an assessment of the near-term market value for each risk. Our policy is not to allow the use of derivatives for trading or speculative purposes. Our primary foreign currency exchange rate exposures are with the Brazilian Real, the Euro, and the Indian Rupee, against the U.S. Dollar. Our primary commodity risk is the price risk associated with forecasted purchases of materials used in our manufacturing process. Our primary variable interest rate exposure is with the PNC term loan.
We assess the effectiveness of our futures and forwards contracts using the dollar offset method and de-designate the derivative if it is determined that the derivative will no longer be highly effective at offsetting the cash flows of the hedged item. At the time a derivative is de-designated, any losses recorded in other comprehensive income are recognized in our Consolidated Statements of Operations while gains remain in AOCI on our Consolidated Balance Sheets until the original forecasted cash flows occur. All subsequent gains and losses related to the de-designated derivatives are recognized in our Consolidated Statements of Operations.
The notional amount outstanding of derivative commodity and currency contracts designated as cash flow hedges was $23.6 million and $21.9 million at December 31, 2014 and 2013, respectively. The notional amount outstanding of de-designated
derivative contracts was $6.5 million and $12.6 million at December 31, 2014 and December 31, 2013, respectively. The notional amount of the interest rate swaps at December 31, 2014, all of which were designated as cash flow hedges, was $8.3 million. We had no interest rate swaps outstanding at December 31, 2013.
We recognized $1.1 million and $5.5 million of losses associated with the derivative contracts that have been de-designated during the years ended December 31, 2014 and December 31, 2013, respectively. We had gains of $0.1 million in “Other comprehensive income” at both December 31, 2014 and December 31, 2013, for derivative contracts that have been de-designated. These gains will be recognized as the forecasted cash flows occur.
The following table presents the fair value of our derivatives designated as hedging instruments in our Consolidated Balance Sheets as of December 31, 2014 and 2013:
The following table presents the fair value of our derivatives that have been de-designated as hedging instruments in our Consolidated Balance Sheets as of December 31, 2014 and 2013:
The following table presents the impact of derivatives designated as hedging instruments on our Consolidated Statements of Operations and AOCI for our derivatives designated as cash flow hedging instruments for the years ended December 31, 2014, 2013 and 2012.
As of December 31, 2014, we estimate that we will reclassify into earnings during the next twelve months approximately $0.7 million of losses from the pretax amount recorded in AOCI as the anticipated cash flows occur. In addition, decreases in spot prices below our hedged prices may require us to post cash collateral with our hedge counterparties. At December 31, 2014
and 2013, we were required to post $0.6 million and $0.8 million, respectively, of cash collateral on our hedges, which is recorded in “Restricted cash and cash equivalents” in our Consolidated Balance Sheets.
NOTE 15. Reclassifications Out of Accumulated Other Comprehensive Income
The following table presents the amounts reclassified out of AOCI for the years ended December 31:
Gains and losses on our currency derivatives that are reclassified out of AOCI are recognized as part of "Cost of sales" on our Consolidated Statements of Operations in their entirety.
Gains and losses on our commodity derivatives that are reclassified out of AOCI are partially recognized as part of "Cost of sales" on our Consolidated Statement of Operations and partially capitalized as part of "Inventories" on our Consolidated Balance Sheets. (See Note 14, "Derivative Instruments and Hedging Activities" for additional information.)
Gains and losses on amortization of prior service credit and net actuarial gain that are reclassified out of AOCI are recognized partially as a part of "Cost of sales" and "Other income" on our Consolidated Statements of Operations and partially capitalized as part of "Inventories" on our Consolidated Balance Sheets. (See Note 5, "Pension and Other Postretirement Benefit Plans" for additional information.)
NOTE 16. Commitments and Contingencies
Operating leases
Future minimum lease payments under non-cancelable operating leases amounted to $10.4 million at December 31, 2014 as follows:
Aggregate rental expense for operating leases was $4.7 million, $5.2 million, and $7.9 million for the fiscal years ended December 31, 2014, 2013, and 2012, respectively.
Purchase Commitments
As of December 31, 2014, 2013 and 2012, we had $19.2 million, $22.0 million and $24.8 million respectively of non-cancelable purchase commitments with suppliers for materials and supplies in the normal course of business.
Commitments to Former Chief Executive Officer
On June 27, 2014, we entered into a General Release of All Claims with our former Chief Executive Officer ("CEO") in connection with the termination of his employment. We agreed to (i) the payment of $835,000 over 20 months and (ii) continuation of his medical, dental and vision insurance until the earlier of the date he becomes a full-time employee of a third party and 18 months after the date of the General Release of All Claims. The former CEO agreed to release us from claims, rights and liabilities, including his previously vested stock appreciation rights and his previously unvested performance-based phantom shares. This expense is included in "Selling and administrative expenses" on our Consolidated Statements of Operations.
Accounts Receivable
A portion of accounts receivable at our Brazilian subsidiary are sold with limited recourse at a discount, which creates a contingent liability for the business. Discounted receivables sold with limited recourse were $3.7 million and $12.1 million at December 31, 2014 and 2013, respectively, and our weighted average interest rate for these receivables was 8.5% and 5.9% for the twelve months ended December 31, 2014 and 2013, respectively. Under our factoring program in Europe, we may discount receivables with recourse; however, at December 31, 2014 and 2013, there were no receivables sold with recourse.
Letters of credit
We issue letters of credit in the normal course of business as required by some vendor contracts and insurance policies. As of December 31, 2014 and 2013, we had $6.4 million and $3.2 million, respectively, in outstanding letters of credit in the U.S. Outside the U.S. we had $16.2 million and $7.9 million outstanding letters of credit at December 31, 2014 and 2013, respectively.
Litigation
General
We are party to litigation in the ordinary course of business. Litigation occasionally involves claims for punitive as well as compensatory damages arising out of use of our products. Although we are self-insured to some extent, we maintain insurance against certain product liability losses. We are also subject to administrative proceedings with respect to claims involving the discharge of hazardous substances into the environment. Some of these claims assert damages and liability for remedial investigation and clean-up costs. We are also typically involved in commercial and employee disputes in the ordinary course of business. Although their ultimate outcome cannot be predicted with certainty, and some may be disposed of unfavorably to us, management considers that appropriate reserves have been established and, except as described below, does not believe that the disposition of these matters will have a material adverse effect on our consolidated financial position, cash flows or results of operations. With the exception of the settlement of the working capital adjustment made with the purchaser of our former Engine & Power Train business segment, our reserves for contingent liabilities have not historically differed materially from estimates upon their final outcomes. However, discovery of new facts, developments in litigation, or settlement negotiations could cause estimates to differ materially from current expectations in the future. Except as disclosed below, we do not believe we have any pending loss contingencies that are probable or reasonably possible of having a material impact to our consolidated financial position, results of operations or cash flows.
Canadian Horsepower label litigation
On March 19, 2010, Robert Foster and Murray Davenport filed a lawsuit under the Class Proceedings Act in the Ontario Superior Court of Justice against us and several other defendants (including Sears Canada Inc., Sears Holdings Corporation, John Deere Limited, Platinum Equity, LLC, Briggs & Stratton Corporation, Kawasaki Motors Corp., USA, MTD Products Inc., The Toro Company, American Honda Motor Co., Electrolux Home Products, Inc., Husqvarna Consumer Outdoor Products N.A., Inc. and Kohler Co.), alleging that defendants conspired to fix prices of lawn mowers and lawn mower engines in Canada, to lessen competition in lawn mowers and lawn mower engines in Canada, and to mislabel the horsepower of lawn mower engines and lawn mowers in violation of the Canadian Competition Act, civil conspiracy prohibitions and the Consumer Packaging and Labeling Act. Plaintiffs seek to represent a class of all persons in Canada who purchased, for their own use and not for resale, a lawn mower containing a gas combustible engine of 30 horsepower or less provided that either the lawn mower or the engine contained within the lawn mower was manufactured and/or sold by a defendant or their predecessors between January 1, 1994 and the date of judgment. Plaintiffs seek undetermined money damages, punitive damages, interest, costs and equitable relief. In addition, Snowstorm Acquisition Corporation and Platinum Equity, LLC, the purchasers of Tecumseh Power Company and its subsidiaries and Motoco a.s. in November 2007, have notified us that they claim indemnification with respect to this lawsuit under our Stock Purchase Agreement with them.
A settlement involving all but three of the defendants (Kawasaki, American Honda and Tecumseh) has been negotiated and approved by the court. It is not binding on the non-settling defendants, nor is it determinative of their liability, if any.
At this time, we do not have a reasonable estimate of the amount of our ultimate liability, if any, or the amount of any potential future settlement, but the amount could be material to our financial position, consolidated results of operations and cash flows.
On May 3, 2010, a class action was commenced in the Superior Court of the Province of Quebec by Eric Liverman and Sidney Vadish against us and several other defendants (including those listed above) advancing allegations similar to those outlined immediately above. Plaintiffs seek undetermined monetary damages, punitive damages, interest, costs, and equitable relief. As stated above, Snowstorm Acquisition Corporation and Platinum Equity, LLC, the purchasers of Tecumseh Power Company and its subsidiaries and Motoco a.s. in November 2007, have notified us that they claim indemnification with respect to this lawsuit under our Stock Purchase Agreement with them.
As was the case with the Ontario litigation described above, a settlement involving all but three of the defendants (Kawasaki, American Honda and Tecumseh) has been negotiated and approved by the court. It is not binding on the non-settling defendants, nor is it determinative of their liability, if any.
At this time, we do not have a reasonable estimate of the amount of our ultimate liability, if any, or the amount of any potential future settlement, but the amount could be material to our financial position, consolidated results of operations and cash flows.
Compressor industry antitrust investigation
On February 17, 2009, we received a subpoena from the United States Department of Justice Antitrust Division (“DOJ”) and a formal request for information from the Secretariat of Economic Law of the Ministry of Justice of Brazil (“SDE”) related to investigations by these authorities into possible anti-competitive pricing arrangements among certain manufacturers in the compressor industry. The European Commission began an investigation of the industry on the same day.
We have entered into a conditional amnesty agreement with the DOJ under the Antitrust Division's Corporate Leniency Policy. Pursuant to the agreement, the DOJ has agreed to not bring any criminal prosecution or impose any monetary fines with
respect to the investigation against us as long as we, among other things, continue our full cooperation in the investigation. We have received similar conditional immunity from the European Commission and the SDE, and have received or requested immunity or leniency from competition authorities in other jurisdictions. On December 7, 2011, the European Commission announced it had reached a cartel settlement under which certain of our competitors received fines for the conduct investigated. As a result of our conditional immunity, we were not assessed any fine.
While we have taken steps to avoid fines, penalties and other sanctions as the result of proceedings brought by regulatory authorities, the amnesty grants do not extend to civil actions brought by private plaintiffs. The public disclosure of these investigations has resulted in class action lawsuits filed in Canada and numerous class action lawsuits filed in the United States, including by both direct and indirect purchaser groups. In Canada, the class actions are still in a preliminary stage. All of the U.S. actions have been transferred to the U.S. District Court for the Eastern District of Michigan for coordinated or consolidated pretrial proceedings under Multidistrict Litigation (“MDL”) procedures.
Persons who engage in price-fixing in violation of U.S. antitrust law generally are jointly and severally liable to private claimants for three times the actual damages caused by the joint conduct. As a conditional amnesty recipient, however, our civil liability will be limited pursuant to the Antitrust Criminal Penalty Enhancement and Reform Act of 2004, as amended
(“ACPERA”). As long as we continue to cooperate with the civil claimants and comply with the requirements of ACPERA, we will be liable only for actual, as opposed to treble, damages and will not be jointly and severally liable for claims against other participants in the alleged anticompetitive conduct being investigated.
As previously reported, Tecumseh Products Company, Tecumseh Compressor Company, Tecumseh do Brasil, Ltda, and Tecumseh do Brasil U.S.A. LLC entered into a settlement agreement with the direct purchaser plaintiffs in the U.S. actions on June 24, 2010 to resolve claims in the action in order to avoid the costs and distraction of this ongoing class action litigation.
On June 13, 2011, the Court issued an order denying without prejudice a motion for preliminary approval of our proposed settlement with the direct purchaser plaintiffs because the time frame and products covered by the proposed settlement class were inconsistent with the Court's rulings of the same date granting, in part, a motion by the other defendants to dismiss claims by the direct purchaser plaintiffs.
The direct purchaser plaintiffs subsequently filed a Second Amended Master Complaint to reflect the court's rulings on the motion to dismiss which allowed them to cover fractional compressors, or compressors of less than one horsepower, used for refrigeration purposes (but excluding those used for air conditioning) purchased from February 25, 2005 to December 31, 2008 (the "Covered Products").
On October 15, 2012, we entered into a settlement agreement with the direct purchaser plaintiffs (the "Settlement Agreement"). The Settlement Agreement was made by and between us and our subsidiaries and affiliates, and plaintiffs, both individually and on behalf of a class of persons who purchased the Covered Products in the United States, its territories and possessions, directly from a defendant. Under the terms of the Settlement Agreement, in exchange for plaintiffs' full release of all U.S. direct purchaser claims against us relating to refrigeration compressors, we agreed to pay a settlement amount of $7.0 million and, in addition, agreed to pay up to $150,000 for notice and administrative costs associated with administering the settlement. These costs were recorded as an expense in the second quarter ended June 30, 2010 (and paid in the third quarter of 2010) in the line item captioned "Impairments, restructuring charges, and other items" on our Consolidated Statements of Operations. On June 16, 2014, the court issued an order granting final approval of the Settlement Agreement between Tecumseh and the direct purchaser plaintiffs. The court also issued a Final Judgment dismissing all direct purchaser actions against Tecumseh and several other defendants.
We entered into a Settlement Agreement on March 21, 2014 with the named indirect purchaser plaintiffs pursuant to which these plaintiffs agreed to enter a Stipulated Order of Dismissal with Prejudice and Without Costs that dismisses all claims and causes of action alleged in their third consolidated amended complaint. Our share of the settlement was $250,000. The court entered this order on April 9, 2014.
On March 12, 2012, a proceeding was commenced by Electrolux do Brasil S.A., in the Civil Division of the State District Court in São Paulo, Brazil, against Tecumseh Do Brasil Ltda. and two other defendants controlled by Whirlpool, jointly and severally. The complaint alleges that Electrolux suffered damages from over pricing due to the activities of a cartel of which we and Whirlpool were members. The complaint states that the amount in controversy is Brazilian Real 1,000,000. However, Electrolux would be entitled to recover any damages it is able to prove in the proceeding, in the event that they exceed this amount. We timely filed opposition to this claim. We intend to continue to vigorously contest the claim.
On March 20, 2013, a proceeding was commenced by Electrolux Home Products Corporation N.V. in the Regional Court of Kiel, Germany against Tecumseh Europe S.A. and several other defendants, jointly and severally. The claim alleges total estimated damages of approximately €63.0 million based on 15% of Electrolux's total purchases in Europe of the relevant compressors, the vast majority of which were purchased from a competitor. We filed our initial response to the claim on
August 30, 2013. On August 22, 2013, the District Court of Kiel decided to stay the case until the Court of Justice of the European Union issues a decision in another case regarding jurisdictional issues that are also raised in this case. On March 20, 2014, we entered into a Settlement Agreement with AB Electrolux and its affiliates (“Electrolux”) pursuant to which Electrolux agreed to release us from all antitrust claims worldwide except those currently pending in the Brazil case described above and except for Electrolux's share of any direct purchaser settlement payments pursuant to the settlement described above. We agreed to pay Electrolux US$1.5 million over three years in connection with this settlement agreement.
On December 18, 2013, BSH Boschund Siemens Hausgerate GMBH ("Bosch") sent the company a letter in which it threatened to initiate court proceedings in Germany against Tecumseh unless Tecumseh pays Bosch damages for alleged overcharges relating to its purchases of compressors. A complaint was filed by Bosch in the Regional Court of Munich I on August 25, 2014 against us and several other defendants (including Embraco Europe S.r.l., Whirlpool S.A. and Panasonic Corporation). We intend to vigorously contest the claim. Danfoss (one of the other participants in the conduct) pre-empted Bosch’s claim in Munich by filing a declarative claim against Bosch in Denmark, to which Bosch has filed a counterclaim for damages. In connection with this proceeding in Denmark, Danfoss has filed a contribution claim in Denmark against Tecumseh as well as a claim for damages in France against Tecumseh Europe. In addition, Embraco has issued third party notices to Tecumseh for a contribution claim in connection with the Embraco claims.
Products Liability/ Warranty Claim
On July 31, 2014, Tecumseh Europe S.A. was served a writ (on the merits) before the Commercial court of La Roche-sur-Yon by the five companies of the Atlantic Industrie SAS group. The dispute alleges product failures associated with the supply by Tecumseh Europe of evaporating units mounted on Atlantic's thermodynamic water heaters pursuant to a November 2009 purchase agreement. The writ seeks the payment of 16,715,109 Euros as damages alleging our failure to satisfy our obligation of information, hidden defects, lack of conformity and breach of the purchase agreement. We have informed our insurance company about this dispute. Under our insurance policy, we are responsible for the first 60,000 Euros, with our insurance covering up to the next 3.5 million Euros. Our insurance company has assumed the defense of this claim, subject to a reservation of rights. See Note 7, "Warranties" for additional detail regarding the accrual related to this issue. We intend to vigorously contest Atlantic's claim.
Due to the uncertainty of our liability in the "Litigation" issues discussed above, or other cases that may be brought in the future, we have not recognized any impact in our financial statements, other than for the claims subject to the settlement agreements as well as our estimated contractual obligation related to the Atlantic claim described above. Our ultimate liability or the amount of any potential future settlements or resolution of these claims, if any, could be material to our financial position, consolidated results of operations and cash flows.
We anticipate that we will incur additional expenses as we continue to cooperate with the investigations and defend the lawsuits. We expense all legal costs as incurred in our Consolidated Statements of Operations. Such expenses and any restitution payments could negatively impact our reputation, compromise our ability to compete and result in financial losses in an amount which could be material to our financial position, consolidated results of operations and cash flows.
Environmental Matters
At December 31, 2014 and December 31, 2013 we had accrued $5.7 million and $2.4 million, respectively, for environmental remediation. Included in the December 31, 2014 balance is an accrual, measured on a discounted basis, of $1.6 million for the remaining estimated costs associated with remediation activities at our former Tecumseh, Michigan facility. We have met with the United States Environmental Protection Agency ("USEPA") several times and most recently in early 2014, to discuss the overall project at this site. On September 30, 2013, we submitted the Supplement to the Current Human Exposures Environmental Indicators Report to the USEPA. This Supplement confirmed that human exposures are under control in accordance with the Administrative Order on Consent. USEPA provided comments on January 31, 2014. We submitted a scope of work for additional investigation activities to USEPA on March 27, 2014 to respond to USEPA’s comments. These additional investigative activities began in the second quarter of 2014. The deadline for the final corrective measures proposal was extended to January 31, 2016, based upon feedback from the USEPA and time to address their comments. Most of the investigation is now expected to be completed in the next 6 months while remediation and monitoring activities are expected to be completed by the end of 2020. Delays in demolition activities of the current property owner could delay remediation system construction at the site. The investigation efforts expected to take place in the fourth quarter of 2014 and the first quarter of 2015 have been hampered due to winter weather. Based upon the additional investigation activities that were requested by USEPA and additional remediation activities that will be required, an additional accrual of $1.5 million was recognized during 2014 in "Impairments, restructuring charges, and other items" in our Consolidated Statement of Operations.
We were named by the USEPA as a potentially responsible party in connection with the Sheboygan River and Harbor Superfund Site ("SRHS") in Wisconsin. In 2003, with the cooperation of the USEPA, we and Pollution Risk Services, LLC (“PRS”) entered into a Liability Transfer and Assumption Agreement (the “Liability Transfer Agreement”). Under the terms of the Liability Transfer Agreement, PRS assumed all of our responsibilities, obligations and liabilities for remediation of the entire SRHS and the associated costs, except for potential future liabilities related to Natural Resource Damages (“NRD”). Also, as required by the Liability Transfer Agreement, we purchased Remediation Cost Cap insurance, with a 30 year term, in the amount of $100.0 million and Environmental Site Liability insurance in the amount of $20.0 million.
We believe that insurance coverage will provide sufficient assurance for completion of the responsibilities, obligations and liabilities assumed by PRS under the Liability Transfer Agreement. In conjunction with the Liability Transfer Agreement, we completed the transfer of title to the Sheboygan Falls, Wisconsin property to PRS. Active remediation of the SRHS was completed in 2013 and PRS is currently preparing the final work completion reports. PRS has been submitting these reports during the second and third quarters of 2014 and will continue to submit required reports during the first quarter of 2015. USEPA is expected to issue a Certificate of Completion for the Site after it has reviewed and approved the final work completion reports.
Now that the remediation and reporting on SRHS is nearing completion, the natural resource trustees (Wisconsin Department of Natural Resources, U.S. Fish and Wildlife Service, and the National Oceanic and Atmospheric Administration (collectively, the "Trustees")) will have the opportunity to assess if they will assert any NRD claims. In September 2012, we were advised that the Sheboygan River Natural Resource Trustees conducted a pre-assessment screen of natural resources damages related to the Sheboygan River and Harbor Site, including the Kohler Landfill Superfund Site and the Campmarina Alternate Superfund Site. In a letter received by us on May 23, 2013, the Trustees provided notice to us of their intent to perform a formal NRD assessment. The Trustees sent this letter to three parties in addition to us. Neither we, nor any of the other three notified parties, admit that we are, or it is, liable for any natural resource damages in connection with the SRHS. Further, no allocation of liability among the parties, whether interim or final, has been reached.
At this time, we have not received a Notice of Intent to Sue as required by the Comprehensive Environmental Response, Compensation and Liability Act as a predicate to any lawsuit for natural resources damages by the Trustees. However, we have entered into a second tolling agreement with the Trustees to stop any applicable limitations period on their asserted claims for the period from September 15, 2014 to September 15, 2015, "to facilitate settlement negotiations between the Parties".
Settlement discussions among us, one of the other potentially responsible parties ("PRP's") and the Trustees have been ongoing and continue. In 2014, we accrued $3.1 million for this issue, as part of "Loss from discontinued operations, net of tax".
In cooperation with the Wisconsin Department of Natural Resources (“WDNR”), we also conducted an investigation of soil and groundwater contamination at our Grafton, Wisconsin plant. In February 2013, the WDNR granted a "no further action" for the on-site groundwater component of the investigation but required the installation of three additional off-site, down-gradient monitoring wells and two years (six sampling events) of off-site monitoring. The timetable for monitoring began with the sampling event conducted in October 2012, with the objective of demonstrating that concentrations are stable and receiving full closure from the WDNR in 2014. The three additional off-site, down-gradient monitoring wells were installed and all on-site monitoring wells were formally abandoned during the second quarter of 2013. Groundwater results from the off-site monitoring indicated the possibility of vapor intrusion in nearby residences. Under an agreement with the WDNR, we initiated sampling of vapor intrusion beginning with residences nearest the off-site monitoring wells. Based on the results of fifteen properties to date, we have installed vapor mitigation systems in four residences and the vapor intrusion investigation was deemed complete by the WDNR. The WDNR subsequently required an additional off-site groundwater investigation. A work plan to investigate the extent of the contamination was approved by the WDNR in June 2014. Four new monitoring wells were installed and sampled in the third quarter of 2014. The sampling results of these wells indicated that additional investigation was needed and will be performed, as approved by the WDNR, during the first and second quarters of 2015. The additional off-site groundwater investigation has led to the additional vapor intrusion investigation of nine additional offsite properties that may be completed during the first quarter of 2015. Based upon the work related to vapor intrusion and the future additional off-site groundwater investigation, the accrual was adjusted by $0.2 million during 2014.
In addition to the above-mentioned sites, we are also currently participating with the USEPA and various state agencies at certain other sites to determine the nature and extent of any remedial action that may be necessary with regard to such other sites. As these matters continue toward final resolution, amounts in excess of those already provided may be necessary to discharge us from our obligations for these sites. Such amounts, depending on their amount and timing, could be material to reported net income in the particular quarter or period that they are recorded. In addition, the ultimate resolution of these matters, either individually or in the aggregate, could be material to the consolidated financial statements.
NOTE 17. Business Segments
Operating segments are defined as components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker(s) in deciding how to allocate resources and in assessing performance. The accounting policies of the reportable segments are the same as those described in Note 1, “Accounting Policies”.
External customer sales by geographic area are based upon the destination of products sold. In 2014 and 2013 one household refrigeration and freezer customer accounted for 6.3% and 8.3% of our consolidated sales, respectively. Long-lived assets by geographic area are based upon the physical location of the assets.
Business Segment Information
Assets, capital expenditures and depreciation and amortization from continuing operations for the years ended December 31, were as follows:
Geographic Information
Customer sales by geographic location for the years ended December 31, were as follows:
Property, plant and equipment at December 31, were as follows:
NOTE 18. Quarterly Financial Data - Unaudited
(a) Includes $4.0 million in expense related to severance associated with reductions in work force, $1.8 million in business re-engineering costs, $1.5 million related to a contingent legal liability and settlement and $1.5 million related to environmental reserve for sold building.
(b) Includes $9.9 million in expense related to severance associated with reductions in work force, $2.7 million in business re-engineering costs, $0.3 million related to a contingent legal liability and $0.5 million in moving costs.
NOTE 19. New Accounting Standards
In August 2014, FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern: Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. The ASU provides guidance to an organization's management regarding its responsibility to evaluate whether there is a substantial doubt about the organization's ability to continue as a going concern or to provide related footnote disclosures. The amendment is effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Management will continuously assess the applicability of this ASU and its required disclosures.
In May 2014, the Financial Accounting Standards Board (FASB), issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. For all public entities, this ASU is effective for annual reporting periods beginning after December 15, 2016. The ASU allows for a choice of two methods for adoption: full retrospective with practical expedients or modified retrospective. Management continues to assess the impact of the adoption of this guidance on our financial statements and selecting the method of its retrospective adoption.
In April 2014, FASB issued ASU No. 2014-08, Presentation of Financial Statements and Property, Plant, and Equipment: Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This ASU is effective in the first quarter of 2015 for public with calendar year ends. Management believes that ASU No. 2014-08 will have no material effect on our financial statements.
NOTE 20. Subsequent Events
We perform review procedures for subsequent events, and determine any necessary disclosures that arise from such evaluation, up to the date of issuance of our annual and interim reports.
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our President and Chief Executive Officer and our Executive Vice President and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Our management evaluated, with the participation of our President and Chief Executive Officer and our Executive Vice President and Chief Financial Officer, the effectiveness of our disclosure controls and procedures and our internal control over financial reporting as of December 31, 2014, pursuant to Exchange Act Rule 13a-15. Based upon such evaluation, and as of December 31, 2014, our President and Chief Executive Officer along with our Executive Vice President and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of December 31, 2014.
Limitations on the Effectiveness of Controls and Procedures
Management, including our President and Chief Executive Officer and our Executive Vice President and Chief Financial Officer, does not expect that our disclosure controls and procedures or internal control over financial reporting will detect or prevent all errors and all fraud. A control system, no matter how well designed and implemented, can provide only reasonable, not absolute, assurance that the control system’s objective will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues within a company are detected.
In addition, projection of any evaluation of the effectiveness of internal control over financial reporting to future periods is subject to the risk that controls may become inadequate because of changes in condition, or that the degree of compliance with policies and procedures included in such controls may deteriorate.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting. Our internal control over financial reporting is a process designed by, or under the supervision of, our principal executive and principal financial officers, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the U.S. and includes policies and procedures that:
(1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect our transactions and dispositions of assets
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors, and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Management has evaluated the effectiveness of our internal control over financial reporting as of December 31, 2014. In making its assessment, management used the framework described in Internal Control - Integrated Framework (2013 version) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2014.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2014 has been audited by Grant Thornton LLP, our independent registered public accounting firm, as stated in their report which is included in this Item 9A of this report on Form 10-K.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting identified in connection with our evaluation that occurred during the fourth quarter ended December 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Tecumseh Products Company
We have audited the internal control over financial reporting of Tecumseh Products Company (a Michigan corporation) and subsidiaries (the “Company”) as of December 31, 2014, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of and for the year ended December 31, 2014, and our report dated March 4, 2015 expressed an unqualified opinion on those financial statements.
/s/ GRANT THORNTON LLP
Southfield, Michigan
March 4, 2015
ITEM 9B.
ITEM 9B.
OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information pertaining to directors required by Item 401 of Regulation S-K will be set forth under the caption “Proposal No. 1- Election of Directors - Our Nominees” and “- Qualifications of Directors and Nominees” in our definitive proxy statement relating to our 2015 annual meeting of shareholders scheduled to be held April 29, 2015 and is incorporated herein by reference. The information pertaining to executive officers required by Item 401 of Regulation S-K will be set forth under the caption “Executive Officers” in our definitive proxy statement relating to our 2015 annual meeting of shareholders scheduled to be held April 29, 2015 and is incorporated herein by reference. The information required to be reported pursuant to Item 405 of Regulation S-K will be set forth under the caption “Information Concerning the Board of Directors - Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive proxy statement relating to our 2015 annual meeting of shareholders scheduled to be held April 29, 2015 and is incorporated herein by reference.
The information required to be reported pursuant to Item 406 of Regulation S-K will be set forth under the caption “Information Concerning the Board of Directors - Code of Conduct” in our definitive proxy statement relating to our 2015 annual meeting of shareholders scheduled to be held April 29, 2015 and is incorporated herein by reference. The information required to be reported pursuant to paragraphs (d)(4) and (d)(5) of Item 407 of Regulation S-K will be set forth under the caption “Information Concerning the Board of Directors - Committees of the Board” and “- Audit Committee” in our definitive proxy statement relating to our 2015 annual meeting of shareholders scheduled to be held April 29, 2015 and is incorporated herein by reference. No information is required to be reported pursuant to paragraph (c)(3) of Item 407 of Regulation S-K.
The information required to be reported pursuant to Item 402 of Regulation S-K and paragraph (e)(5) of Item 407 of Regulation S-K will be set forth under the caption “Executive Compensation,” and the information required to be reported pursuant to paragraph (e)(4) of Item 407 of Regulation S-K will be set forth under the sub-caption “Compensation Committee Interlocks and Insider Participation” under the caption “Information Concerning the Board of Directors” in our definitive proxy statement relating to our 2015 annual meeting of shareholders scheduled to be held April 29, 2015 and is incorporated herein by reference.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required to be reported pursuant to Item 403 of Regulation S-K will be set forth under the caption “Share Ownership” in our definitive proxy statement relating to our 2015 annual meeting of shareholders scheduled to be held April 29, 2015 and is incorporated herein by reference. Information is required to be reported pursuant to Item 201(d) of Regulation S-K will be set forth under the caption “Executive Compensation - Equity Compensation Plan Information” in our definitive proxy statement relating to our 2015 annual meeting of shareholders scheduled to be held April 29, 2015 and is incorporated herein by reference.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required to be reported pursuant to Item 404 of Regulation S-K and paragraph (a) of Item 407 of Regulation S-K will be set forth under the sub-captions “Board Independence,” “Compensation Committee Interlocks and Insider Participation” and “Transactions with Related Persons” under the caption “Information Concerning the Board of Directors” in our definitive proxy statement relating to our 2015 annual meeting of shareholders scheduled to be held April 29, 2015 and is incorporated herein by reference.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required to be reported pursuant to Item 9(e) of Schedule 14A will be set forth under the caption “Proposal No. 3 - Ratification of Appointment of Independent Accountant - Audit and Non-Audit Fees” in our definitive proxy statement relating to our 2015 annual meeting of shareholders scheduled to be held April 29, 2015 and is incorporated herein by reference.
PART IV
ITEM 15.
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
See “Index to Consolidated Financial Statements” in Item 8 of this report.
(a)(2) Financial Statement Schedules
None
(a)(3) Exhibits
See Exhibit Index following the signature page of this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
TECUMSEH PRODUCTS COMPANY
Date:
March 4, 2015
By
/s/ Harold M. Karp
Harold M. Karp
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
10-K EXHIBIT INDEX
*
Filed herewith
**
Furnished herewith