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, Malaysia, Poland and Thailand, 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, 2013.
(a) 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.
(b) 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.
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
Our Class A and Class B Common Stock trade on The Nasdaq Stock Market LLC under the symbols TECUA and TECUB, respectively. Total shareholders of record as of February 28, 2014 were approximately 204 for Class A Common Stock and 205 for Class B Common Stock. As of February 28, 2014, the closing price per share of our Class A Common Stock was $7.90 and the closing price per share of our Class B Common Stock was $7.58 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 no equity securities authorized for issuance under compensation plans, other than the 2014 Omnibus Incentive Plan, which we are submitting to shareholders for approval at the 2014 annual meeting, expected to be held on April 30, 2014. We did not repurchase any of our equity securities during the fourth quarter of 2013.
Market Price and Dividend Information
Range of Common Stock Prices and Dividends for 2013
Range of Common Stock Prices and Dividends for 2012
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, 2008 through December 31, 2013.
*
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)
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.
(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 is equivalent to 7% of our fully diluted common stock (including both Class A and Class B shares). This warrant is 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.
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) the success of our ongoing effort to improve productivity and restructure to reduce costs and bring them in line with projected production levels and product mix; iv) 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; v) loss of, or substantial decline in, sales to any of our key customers; vi) 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; vii) increased or unexpected 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; xvi) risks relating to our information technology systems; 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 continuously monitor future changes in local governmental regulations with regards to allowable refrigerants we can use in our compressors and condensing units. These future changes can also have a significant impact on our sales and our product costs.
Economy
Our sales depend significantly on worldwide economic conditions, which impact the demand for the products in which our products are used. Global economic weakness and uncertainty continued to impact our sales in 2013. While the U.S. economy
generated some positive news regarding business investment and exports, there was offsetting negative news regarding imports and consumer spending. The prolonged stagnation in Western Europe has impacted other economies in the region. Finally, while credit markets in the U.S. appear to be easing, in the Euro zone, bank lending continued to decrease in 2013.
Our sales decreased in 2013 compared to 2012 primarily due to the unfavorable impact of changes in currency exchange rates as well as net lower volumes and unfavorable changes in mix, partially offset by net price increases. Excluding the effects of foreign currency translation, sales in 2013 were approximately 0.8% lower than in 2012 .
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 decreased in 2013 as compared to 2012, with copper decreasing by 10.3%, steel decreasing by 6.7% and aluminum decreasing by 16.5%. After consideration of our hedge positions our average cost of copper and aluminum decreased in 2013 by 5.9% and 7.6%, respectively, compared to 2012. Our average cost of copper and aluminum in 2013 is lower in our results of operations when compared to 2012, primarily due to market price reductions. Extreme volatilities 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 particularly negative impact on our product costs, as there is currently no well-established global market for hedging against increases in the price of steel. In the past, we had been successful in securing a few contracts to help mitigate the risk of the rising steel market, but this market is not very liquid and is only available against our purchases of steel in the U.S. We currently have no steel contracts outstanding.
Based upon the introduction of the new TA Mini and AE2 Midi platforms, we used more aluminum in our motors in 2013 and expect to continue this trend in 2014. While aluminum is typically not as volatile as copper and steel, it can demonstrate significant price swings. We execute derivative contacts for aluminum to help mitigate the risk of rising aluminum prices.
We have been proactive in addressing the volatility of copper and aluminum costs, including executing derivative contracts, as of December 31, 2013 to cover approximately 25.9% and 29.1% of our projected 2014 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 foreign currency forward exchange contracts and commodity futures 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 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, was $42.7 million and $49.3 million at December 31, 2013 and 2012, respectively and the weighted average discount rate was 6.1% in 2013 and 6.7% in 2012. The amount of factored receivables sold with limited recourse, which results in a contingent liability to us, was $12.1 million and $11.9 million as of December 31, 2013 and 2012, respectively.
In June 2013, our European subsidiary entered into a three-year Factoring Agreement with GE Factofrance, which became available in October 2013. The maximum aggregate amount of the financed eligible receivables is EUR 40.0 million, which may be increased by up to EUR 10.0 million, subject to increased sales, GE Credit Committee's prior approval and signing an amendment, as set forth in the agreement. The Factoring Facility is a limited recourse facility, which provides non-recourse (amounts covered by a credit insurance policy) and with-recourse financing (subject to GE's prior review and acceptance). We began using this facility in the fourth quarter of 2013. This committed factoring facility replaced a previously existing uncommitted factoring facility in Europe.
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 $6.0 million and $4.0 million that would otherwise have been outstanding as receivables, under both of these programs at December 31, 2013 and December 31, 2012, respectively and the weighted average discount rate was 10.7% and 11.6% in 2013 and 2012, 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 fixed 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. 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. Based on our debt and invested cash balances at December 31, 2012, a 1% increase in interest rates would increase interest expense for the year by approximately $0.6 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, 2013 and 2012, we held a total notional value of $12.2 million and $19.1 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 values and increased aluminum usage, which is lower in cost and typically less volatile than copper. Derivatives are designated at the inception of the contract as cash flow hedges against the future prices of copper, steel, 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, 2013, we have been proactive in addressing the volatility of copper prices, including executing derivative contracts to cover approximately 25.9% of our anticipated copper requirements for 2014.
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; however, in the past, we have been successful at securing a few steel derivative contracts in the U.S. to help mitigate this risk. At December 31, 2013 and 2012, we had no derivative contracts outstanding to cover our anticipated steel requirements in the U.S.
Based upon the recent redesign of our products, we are utilizing more aluminum in our motors in 2013. Similar to copper and steel, our results of operations are sensitive to the price of aluminum and we have proactively addressed the volatility by executing derivative contracts that cover 29.1% of our projected usage in 2014.
Based on our current level of activity, and before consideration of our outstanding commodity derivative 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 affect our annual operating profit on an annual basis as indicated in the table below:
Based on our current level of commodity derivative contracts, a 10% decrease in the price of copper, steel or aluminum used in production of our products would have resulted in losses under these contracts that would adversely impact our annual operating results for 2013 and 2012 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 is 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 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, 2013, the Brazilian Real weakened against the U.S. Dollar by 14.6%, the Indian Rupee weakened against the U.S. Dollar by 12.5%, and the Euro strengthened against the U.S. Dollar by 4.0%.
At December 31, 2013 and 2012, we held foreign currency forward contracts with a total notional value of $22.3 million and $52.2 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 2013 and 2012 as indicated in the table below:
The decreases in 2013 compared to 2012, are primarily due to the net level of activity in U.S. Dollars at our Brazilian location.
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 2013 and 2012 as indicated in the table below:
The decrease in 2013 compared to 2012, is primarily due to the lower notional amount of foreign currency forward contracts held at December 31, 2013.
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, 2013 and 2012, 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, 2013. 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, 2013 and 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013 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, 2013, based on criteria established in the 1992 Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 4, 2014 expressed an unqualified opinion.
/s/ GRANT THORNTON LLP
Southfield, Michigan
March 4, 2014
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) A warrant issued to a lender in 2007 expired on April 9, 2012. This warrant was not included in diluted earnings per share information for 2011, 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 (the “Company”, "we", "us" or "our") is a global manufacturer 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.
Restricted cash and cash equivalents consist of funds utilized as cash collateral for hedging activities, funds restricted to funding our defined contribution retirement plan, funds posted as collateral for our non-U.S. letters of credit and funds held in a blocked account under terms and conditions of a newly negotiated Term Loan. The restricted Term Loan funds will become available if and when we satisfy all of the closing conditions of the agreement. For more information on this refer to Note 8, “Debt”.
Cash and cash equivalents outside of North American locations amounted to $35.5 and $22.3 million at December 31, 2013 and 2012, 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 - Revenues 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 currency forward exchange contracts and commodity futures contracts to hedge certain 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 other comprehensive income (loss) 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 other comprehensive income 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, in accordance with U.S. GAAP. Liabilities are not discounted or 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 there were no outstanding rights to acquire our equity securities at December 31, 2013 or December 31, 2012, and the effect in 2011 would have been anti-dilutive.
Research, Development and Testing Expenses - Our research, development and testing expenses related to present and future products are expensed as incurred and were $14.7 million, $15.1 million, and $19.8 million in 2013, 2012 and 2011, 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, pension obligations, litigation and other contingent liabilities, as well as the evaluation of long-lived asset impairments, determination of share-based compensation and the realizability of our deferred tax assets.
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 $4.2 million reserve for obsolete and slow moving inventory at each of December 31, 2013 and December 31, 2012. Finished goods are net of a $1.7 million and $2.7 million reserve for obsolete and slow moving inventory and lower of cost or market at December 31, 2013 and 2012, 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 $33.5 million, $36.3 million and $40.5 million for the years ended December 31, 2013, 2012 and 2011, 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. This means that: (i) salaried pension plan participants will not earn any additional years of benefit service under the plan after December 31, 2013 for purposes of accruing an additional plan benefit; and (ii) no pay increases/decreases that salaried pension plan participants earn after December 31, 2013 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.
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 accumulated other comprehensive income into net periodic benefit cost over the next twelve months are $0.9 million and ($0.2) 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 accumulated other comprehensive income 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 2013 and 2012:
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 the "Settlements" of $1.6 million in 2013 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 "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 changes in benefit obligation due to the "Plan amendments" of $3.5 million and "Settlements" of $0.9 million in 2012 are related to termination of our postretirement benefits in the second quarter of 2012. The related balance was also reversed from AOCI, resulting 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) of the second paragraph of this note above, we recorded increased amortization of net gains until December 31, 2013.
The accumulated benefit obligation for all defined benefit pension plans was $160.9 million and $177.4 million at December 31, 2013 and 2012, 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
Weighted-average assumptions used to determine benefit obligations as of December 31;
Weighted-average assumptions used to determine net periodic benefit costs for the years ended December 31:
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, 2013 and 2012 (See Note 13, “Fair Value Measurements”, for additional information):
We expect to make contributions of $0.2 million to our pension plans in 2014.
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 domestic employees. The expense for this plan was $2.2 million, $2.4 million and $2.5 million in 2013, 2012 and 2011, respectively. Contributions were 100% funded from the proceeds obtained from the reversion of our former salaried pension plan.
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 procedures, 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, 2013 and 2012:
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 and is expected to be recovered through 2015. At December 31, 2012, a receivable of $20.7 million was included in current assets and $18.8 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. Historically, estimates of warranty commitments have not differed materially from actual results; however, unanticipated product quality issues could result in material changes to estimates in future periods.
Changes in the carrying amount and accrued product warranty costs for the years ended December 31, 2013, 2012 and 2011 are summarized as follows:
Warranty expense was $14.5 million, $6.4 million and $6.2 million for the years ended December 31, 2013, 2012 and 2011, respectively. At December 31, 2013, $11.9 million was included in current liabilities and $1.3 million was included in non-current liabilities. At December 31, 2012, $5.8 million was included in current liabilities and $0.8 million was included in non-current liabilities.
The increase in this accrual is primarily due to two warranty claims. At December 31, 2013 approximately $2.7 million of the increase in the 'Current year accrual' is due to a warranty issues in Europe and $5.6 million of the increase is due to a warranty issue in India. Settlements made of $7.9 million are net of the expected value of anticipated returned compressors associated with the warranty claim in India.
NOTE 8. Debt
Our debt consists of the following at December 31,
We have a Revolving Credit and Security Agreement with PNC Bank, National Association (“PNC”). On December 11, 2013 we entered into Amendment 3 to the Revolving Credit and Security Agreement with PNC. Subject to the terms and conditions of the agreement, PNC agreed to continue to provide senior secured revolving credit financing up to an aggregate principal amount of $34.0 million which continues to include up to $10.0 million in letters of credit subject to a narrower borrowing base formula, lender reserves and PNC’s reasonable discretion. 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. With this
amendment, PNC also provides a senior secured term loan up to an aggregate principal amount of $15.0 million, subject to conditions precedent which have not yet been met. As part of the amendment, we used $2.3 million of the Term Loan funds, at the time of the amendment, to pay down a portion of the PNC revolving credit facility. Currently, the remaining $12.7 million of the PNC Term Loan is held in a blocked account and is recorded in "Restricted cash and cash equivalents" on our Consolidated Balance Sheets. Interest has begun accruing on the entire $15.0 million Term Loan balance, and the 60 monthly installments of $250,000 to repay the principal on the Term Loan began January 2, 2014. These funds in the blocked account will become available if and when we satisfy all of the closing conditions, which we must do by May 31, 2014, or PNC may apply the amount held in the blocked account to principal installments of the Term Loan.
We paid $0.2 million in fees associated with Amendment 3. We had a balance of $0.1 million in fees associated with the original agreement in 2011, which were capitalized and will now be amortized over the 5 year term of the amended agreement. The maturity of these facilities has been extended to December 11, 2018. 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. At December 31, 2013, our availability fell below this threshold. In January 2014, we paid $2.0 million on our revolving credit line so that the fixed coverage charge ratio was not required to be tested as of December 31, 2013, however, if we were required to test the fixed coverage charge ratio we would be in compliance. We had $1.1 million of additional borrowing capacity under this facility as of December 31, 2013, 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, 2013.
At December 31, 2013, our borrowings under the PNC revolving facility totaled $8.0 million, borrowings under the PNC term loan were $15.0 million and we had $3.2 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%. Fixed principal and interest payments commence in March 2014 and continue until February 2021. Draws under the agreement are permitted for purchases of certain equipment at our Tupelo, Mississippi location. At December 31, 2013, our borrowings under the MDA loan agreement totaled $1.1 million.
In the U.S., we have $0.4 million outstanding in short term borrowings related to financing some of our insurance premiums and $1.0 million 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, 2013, 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 $47.8 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 March 2014 through January 15, 2020. 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. Our borrowings under the revolving credit facilities in Brazil, at December 31, 2013, totaled $28.6 million, with an additional $19.2 million available for borrowing, based on our accounts receivable and inventory levels at that date.
In India, we have an aggregate maximum availability of $12.6 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 March 2014 through July 2014. 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 $11.3 million, and based on our borrowing base as of December 31, 2013, we had $1.3 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 $1.8 million which are included in our total borrowings balance at December 31, 2013.
Our consolidated borrowings totaled $67.2 million at December 31, 2013 and $61.4 million at December 31, 2012. Our weighted average interest rate for these borrowings was 8.1% for the twelve months ended December 31, 2013 and 8.8% for the twelve months ended December 31, 2012.
Scheduled maturities of debt and capital lease obligations for each of the five years subsequent to December 31, 2013 are as follows:
NOTE 9. Stockholders’ Equity
The shares of Class A Common Stock and Class B Common Stock are substantially identical except as to voting rights. Class A common stock has no voting rights except the right to i) vote on any amendments that could adversely affect the Class A Protection Provision in the articles of incorporation and ii) vote in other limited circumstances, primarily involving mergers and acquisitions, as required by law.
At our 2014 Shareholder meeting, expected to be held on April 30, 2014, all record holders of our Class A Common Stock and Class B Common Stock are being asked to approve a recapitalization by means of an amendment to our articles of incorporation, whereby each share of Class A Common Stock will be reclassified and converted into one Common Share and each share of Class B Common Stock will be reclassified and converted into one Common Share. If the recapitalization proposed is approved, we will no longer have authorized Class A Common Stock or Class B Common Stock. The Common Shares will be our only authorized capital stock and all shareholders will be entitled to voting rights.
We currently have no expectation to resume payment of dividends.
On April 9, 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 is equivalent to 7% of our fully diluted common stock (including both Class A and Class B shares). This warrant expired on April 9, 2012 without the purchase or issuance of additional shares.
NOTE 10. Share-Based Compensation Arrangements
We may grant stock appreciation rights ("SARs") and phantom shares under our Long-Term Incentive Cash Award Plan. As both the SARs and the phantom shares are settled in cash rather than by issuing equity instruments, we record an expense with a corresponding liability on our balance sheet. 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.
The SARs and phantom shares do not entitle recipients to receive any of our common shares, nor do they provide recipients with any voting or other shareholder rights. Similarly, since the awards are not paid out in the form of equity, they do not change the number of shares we have available for any future equity compensation we may elect to grant and they do not dilute existing shareholders' ownership of the Company. However, because the value of the awards is based on the value of our Class A Common Stock, we believe they align employee and shareholder interests, and provide retention benefits in much the same way as would stock options and restricted stock awards.
Prior to 2011, two types of incentives were awarded: SARs and non-performance based phantom shares. SARs and non-performance phantom shares were generally granted to key employees in the first quarter of each year and vested one-third each year over a 3 year period. SARs were granted with an exercise price equal to the closing price of our common stock on the date of the grant, as reported by the Nasdaq Stock Market and expire seven years after their grant date.
Starting in 2011, we awarded performance based phantom shares to make our equity incentives reflect our performance during the respective calendar year. These performance phantom shares vest one-third each year over a 3 year period. Based on our calendar year results, the following number of performance phantom shares were awarded:
A summary of activity under the plans during 2013 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.
Our liability with regard to these awards is re-measured in each quarterly reporting period. The fair value of the phantom shares is based on the closing stock price on our Class A Common Stock on the last day of the period. At December 31, 2013 and December 31, 2012, the closing stock price on our Class A Common Stock was $9.05 and $4.62 respectively.
We measure the fair value of each SAR based on the closing stock price of Class A Common Stock 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, 2013, 2012 and 2011 using the following assumptions:
Total compensation expense (income) related to this plan for the years ended December 31, 2013, 2012 and 2011 was $2.3 million, $2.6 million and $(1.6) 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 as calculated at December 31, 2013 and 2012 was $1.7 million and $0.8 million, respectively. Total cash paid under this plan for the years ended December 31, 2013 and 2012 was $1.6 million and $0.1 million, respectively.
In addition to the awards to our employees, we grant deferred stock units ("DSUs") to our non-employee directors under our Outside Directors' Deferred Stock Unit Plan. These awards are fully vested when made. We measure the fair value of outstanding DSUs based upon the closing stock price of our Class A Common Stock 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 related to the DSUs for the years ended December 31, 2013 and 2012 was $0.8 million and $0.5 million, respectively. Total expense related to the DSUs for the year ended December 31, 2011 was immaterial. We recorded a liability of $1.2 million and $0.6 million as of December 31, 2013 and 2012, respectively. Total cash paid for DSUs in the year ended December 31, 2013 was $0.2 million; no cash was paid out for DSUs in the year ended December 31, 2012.
As of December 31, 2013 and January 20, 2014, two of our Board members resigned from our Board of Directors. Cash paid in the first quarter of 2014 to settle these directors' DSUs totaled $0.7 million.
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 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".
Severance expense in 2011 was associated with a reduction in force at our Brazilian ($4.1 million), Corporate ($3.5 million), French ($0.2 million), North American ($0.1 million) and Indian ($0.1 million) locations. On March 7, 2011, our President and Chief Executive Officer and our Board of Directors mutually determined to separate our President and Chief Executive Officer’s employment with us after a transition period. The $3.5 million severance associated with a reduction in force at our Corporate location includes $1.35 million relating to our former President and Chief Executive Officer’s separation.
The following table reconciles cash activities for the years ended December 31, 2013 and 2012 for accrued impairments, restructuring charges and other items:
The accrued balance at December 31, 2013 for "Severance" mainly includes payments to be made related to our European reduction in force and is expected to be settled in the next 14 months. The accrued "Other" balance at December 31, 2013, includes $0.3 million related to the reserve for our former corporate office and will be paid through December 2015 and $1.1 million for the estimated costs associated with remediation activities at our former Tecumseh, Michigan facility, and is expected to be paid over the next 12 to 15 months. We also have a contingent liability in "Other" of $0.3 million which we believe will be settled in early 2014.
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:
At December 31, 2013, 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, 2013. 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, 2013 and 2012 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, 2013 and 2012, we had no accrued interest and penalties.
The following reconciliation illustrates the unrecognized tax benefits for the years ended December 31:
We file U.S., state and foreign income tax returns in jurisdictions with varying statues of limitations. We have open tax years from 2006 to 2012 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 2009 to 2012.
As a result of a U.S. income tax refund, a tax benefit was recognized in the second quarter of 2012. 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.
On September 16, 2013, the Internal Revenue Service released final regulations governing the application of Internal Revenue Code Sections 162(a) and 263(a) to amounts paid to acquire, produce or improve tangible property. The implementation of these regulations was optional for the years ended December 31, 2012 and 2013, respectively, but is mandatory beginning January 1, 2014. Based on a preliminary analysis, we believe that these regulations will not have material impact on our 2014 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.
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 and commodity futures contracts. 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, 2013.
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, 2012.
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 and market fluctuations in commodity prices 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 and commodity derivatives 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 and commodity price 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.
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 contracts designated as cash flow hedges was $21.9 million and $50.9 million at December 31, 2013 and 2012, respectively. The notional amount outstanding of de-designated derivative contracts was $12.6 million and $20.4 million at December 31, 2013 and December 31, 2012, respectively.
We recognized $5.5 million of losses associated with the derivative contracts that have been de-designated during the year ended December 31, 2013. We had gains of $0.1 million in “Other comprehensive income” at 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, 2013 and 2012:
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, 2013 and 2012:
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, 2013, 2012 and 2011.
As of December 31, 2013, we estimate that we will reclassify into earnings during the next twelve months approximately $0.6 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, 2013 and 2012, we were required to post $0.8 million and $0.6 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 $13.1 million at December 31, 2013 as follows:
Aggregate rental expense for operating leases was $5.2 million, $7.9 million, and $8.2 million for the fiscal years ended December 31, 2013, 2012, and 2011, respectively.
Purchase Commitments
As of December 31, 2013, 2012 and 2011, we had $22.0 million , $24.8 million and $13.7 million respectively of non-cancelable purchase commitments with some suppliers for materials and supplies in the normal course of business.
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 $12.1 million and $11.9 million at December 31, 2013 and 2012, respectively, and our weighted average interest rate for these receivables was 5.9% and 6.1% for the twelve months ended December 31, 2013 and 2012, respectively. Under our factoring program in Europe, we may discount receivables with recourse; however, at December 31, 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, 2013 and 2012, we had $3.2 million and $3.4 million, respectively, in outstanding letters of credit in the U.S. Outside the U.S. we had $7.9 million and $8.7 million outstanding letters of credit at December 31, 2013 and 2012, 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.
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.
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. 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.
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 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 new settlement agreement with the direct-purchaser plaintiffs (the "Settlement Agreement"), which must be approved by the court. 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". Under the original agreement, administrative costs were $250,000; however upon signing the new settlement, the difference was refunded to Tecumseh Products Company. The Settlement Agreement was submitted to the court on May 8, 2013 for preliminary approval. On January 9, 2014, the court granted preliminary approval of the proposed Settlement agreement with the direct purchaser plaintiffs.
For the remaining indirect purchaser class actions in the United States, a consolidated amended complaint was filed on June 30, 2010, and we filed a motion to dismiss the indirect purchaser class action on August 30, 2010. On June 7, 2012, the court partially granted a motion to dismiss the consolidated amended complaint with regard to claims for purchasers in several states in which the complaint identified no named plaintiff. On April 9, 2013, the court partially granted the motion to dismiss with regard to claims for purchasers in the majority of the remaining states. As a result of these rulings, the indirect purchaser class action currently includes claims for plaintiffs in only six states. The indirect purchasers sought to appeal the dismissal of certain claims to the U.S. Court of Appeals for the Sixth Circuit. On September 25, 2013, the Sixth Circuit court dismissed the indirect purchaser plaintiffs' appeal for lack of jurisdiction. In Canada, the class actions are still in a preliminary stage.
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.
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. Whirlpool expert reports were filed for consideration by the court that states the claim is time barred due to the expiration of the applicable statute of limitations. 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. We intend to vigorously contest the claim. 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 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.
Due to uncertainty of our liability in these cases, 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 Agreement. 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, 2013 and December 31, 2012 we had accrued $2.4 million and $2.9 million, respectively, for environmental remediation. Included in the December 31, 2013 balance is an accrual of $1.1 million for the remaining estimated costs associated with remediation activities at our former Tecumseh, Michigan facility. We met with the United States Environmental Protection Agency ("USEPA") in late 2012, to discuss the overall project at the Site. Based upon this meeting and additional information that was requested by the USEPA, most of the investigation efforts are now expected to be completed in the next 3 - 4 months and most of the remediation system construction efforts are expected to be completed in the next 12 - 15 months. Delays in demolition activities by the current property owner could delay remediation system construction at the site. Some short term delays in investigation efforts have already occurred due to demolition activities. The monitoring activities to demonstrate effectiveness of the remediation systems are anticipated to be completed by the end of 2019.
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 such 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. We anticipate that PRS will submit these reports to USEPA in 2014. 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 there are 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. An initial meeting with the Wisconsin Department of Justice ("WDOJ") and the Trustees, along with other potentially responsible parties, took place in October 2012 to discuss the next steps in the assessment process and to provide a pathway for the potentially responsible parties to participate in a formal NRD assessment at the site. The meeting was primarily informational in nature. In a letter dated April 19, 2013, but not received by us until May 23, 2013, the Trustees provided notice to us of their intent to perform a formal NRD assessment.
The Trustees sent the May 23, 2013 notice to three parties in addition to us. Neither we, nor any of the other three notified parties, admit that 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 tolling agreement with the Trustees to stop any applicable limitations period on their asserted claims for the period from September 15, 2013 to September 15, 2014, "to facilitate settlement negotiations between the Parties." We do not have a reasonable estimate of the amount of our ultimate NRD liability, if any, or the amount of any potential future claims, but the amount could be material to our financial position, consolidated results of operations and cash flows.
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 with the timetable for monitoring beginning with the sampling event conducted in October 2012, in order to demonstrate concentrations are stable and receive full closure from the WDNR. 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. Based upon evaluation of the potential for vapor intrusion at buildings that are located near (but not on) the plant site, we are working with the WDNR to install a vapor mitigation system at one building and to evaluate the potential for vapor intrusion at nine additional properties.
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 2013 and 2012 one household refrigeration and freezer customer accounted for 8.3% and 7.2% of our consolidated sales, respectively. Long-lived assets by geographic area are based upon the physical location of the assets.
Assets, capital expenditures and depreciation and amortization from continuing operations for the years ended December 31, were as follows:
Business Segment Information
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 $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.
(b) Includes curtailment gain related to termination of certain postretirement benefits for salaried employees and retirees, which resulted in a non-cash gain of $45.0 million as well as $0.1 million refund for a settlement notice and administrative costs, partially offset by $3.8 million in expense related to severance associated with reductions in work force and $0.1 million in moving costs.
NOTE 19. New Accounting Standards
Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying 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.
On January 23, 2014, our Board of Directors adopted, and on February 28, 2014 our Board of Directors amended, the Tecumseh Products Company 2014 Omnibus Incentive Plan (the "2014 Plan"), subject to shareholder approval of the 2014 Plan at the 2014 annual meeting of shareholders. The 2014 Plan provides for the award to our directors, key employees and third-party service providers, of options, stock appreciation rights, restricted stock, restricted stock units (including performance restricted stock units), performance awards (which may take the form of performance units, including annual cash performance units, or performance shares) and other stock and stock unit awards to acquire up to an aggregate of 1,800,000 share of our Class A Common Stock, par value $1.00 per share (Common Shares, no par value per share, if the recapitalization proposal we are submitting to shareholders for approval at the 2014 annual meeting of shareholders is approved and implemented).
In the first quarter of 2014, we agreed to sell some of our assets at one of our U.S. locations for consideration of approximately $4.0 million.
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, 2013, pursuant to Exchange Act Rule 13a-15. Based upon such evaluation, and as of December 31, 2013, 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, 2013.
Limitations on the Effectiveness of Controls and Procedures
Management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or internal control over financial reporting will detect or prevent all error and all fraud. A control system, no matter how well designed and implemented, can provide only reasonable, not absolute, assurance that the control system’s objective will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues within a company are detected.
In addition, projection of any evaluation of the effectiveness of internal control over financial reporting to future periods is subject to the risk that controls may become inadequate because of changes in condition, or that the degree of compliance with policies and procedures included in such controls may deteriorate.
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, 2013. In making its assessment, management used the framework described in Internal Control - Integrated Framework (1992 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, 2013.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2013 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, 2013 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, 2013, based on criteria established in the 1992 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, 2013, based on criteria established in the 1992 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, 2013, and our report dated March 4, 2014 expressed an unqualified opinion on those financial statements.
/s/ GRANT THORNTON LLP
Southfield, Michigan
March 4, 2014
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/prospectus relating to our 2014 annual meeting of shareholders scheduled to be held April 30, 2014 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/prospectus relating to our 2014 annual meeting of shareholders scheduled to be held April 30, 2014 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/prospectus relating to our 2014 annual meeting of shareholders scheduled to be held April 30, 2014 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/prospectus relating to our 2014 annual meeting of shareholders scheduled to be held April 30, 2014 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/prospectus relating to our 2014 annual meeting of shareholders scheduled to be held April 30, 2014 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/prospectus relating to our 2014 annual meeting of shareholders scheduled to be held April 30, 2014 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/prospectus relating to our 2014 annual meeting of shareholders scheduled to be held April 30, 2014 and is incorporated herein by reference. No information is required to be reported pursuant to Item 201(d) of Regulation S-K.
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/prospectus relating to our 2014 annual meeting of shareholders scheduled to be held April 30, 2014 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 /prospectus relating to our 2014 annual meeting of shareholders scheduled to be held April 30, 2014 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, 2014
By
/s/ James J. Connor
James J. Connor
President, Chief Executive Officer and
Secretary
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