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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 of this report.
Currency Exchange
The compressor industry, and our business in particular, are characterized by global and regional markets that are served by manufacturing locations positioned throughout the world. Most of our manufacturing presence is in international locations. During each of
2013
and
2012
, approximately
80%
of our sales activity took place outside the U.S., including Brazil, Europe and India. As a result of these factors, our consolidated financial results are sensitive to changes in foreign currency exchange rates, especially the Brazilian Real, the Euro and the Indian Rupee. These currencies have been volatile against the U.S. Dollar in
2013
, as shown in the table below:
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|
|
|
|
|
|
|
Strengthened/(Weakened)
|
|
Strengthened/(Weakened)
|
|
Strengthened/(Weakened)
|
|
|
Brazilian Real
|
|
Indian Rupee
|
|
Euro
|
|
12/31/12 vs 03/31/13
|
1.5%
|
|
1.3%
|
|
(2.9)%
|
|
03/31/13 vs 06/30/13
|
(10.0)%
|
|
(9.7)%
|
|
1.5%
|
|
06/30/13 vs 09/30/13
|
(0.6)%
|
|
(5.4)%
|
|
3.9%
|
|
09/30/13 vs 12/31/13
|
(5.0)%
|
|
1.2%
|
|
1.6%
|
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. Only one major competitor of our compressor business faces similar exposure to the Brazilian Real. Our Brazilian and European manufacturing and sales presence is
significant and changes in the Brazilian Real and the Euro have been significant to our results of operations when compared to prior periods.
For a discussion of the risks to our business associated with currency fluctuations, refer to “Quantitative and Qualitative Disclosures about Market Risk – Foreign Currency Exchange Risk” in Part II, Item 7A of this report.
Liquidity
Challenges remain with respect to our ability to generate appropriate levels of liquidity solely from cash flows from operations, particularly related to uncertainties of future sales levels, global economic conditions, currency exchange rates and commodity pricing as discussed above. However, in
2013
, we generated
$11.6 million
of cash flow from operating activities. Our net loss included the following non-cash items: depreciation and amortization of
$33.5 million
,
$6.3 million
change of deferred taxes primarily related to the curtailment of our postretirement benefit plans, share based compensation of
$0.8 million
and
0.2 million
loss on disposal of property and equipment, partially offset by a gain on employee retirement benefits of
$11.6 million
.
In 2013, we received approximately
$9.9 million
and
$18.6 million
of outstanding refundable non-income taxes in India and Brazil, respectively. We have received and expect to receive refunds of outstanding Indian and Brazilian non-income taxes through the end of 2015. Due to changes in exchange rates, the actual amounts received as expressed in U.S. Dollars will vary depending on the exchange rate at the time of receipt or future reporting date. We expect to recover approximately
$16.7 million
of the
$27.3 million
outstanding refundable taxes in the next twelve months, primarily related to the short-term portion of the outstanding refundable taxes of
$12.4 million
in Brazil and
$2.9 million
in India. The tax authorities will not commit to an actual date of payment and the timing of receipt may be different than planned if the tax authorities change their pattern of payment or past practices.
We realize that we may not generate cash flow from operating activities unless further restructuring activities are implemented or, sales or economic conditions improve. As a result, we continued to adjust our workforce levels as conditions demanded in 2013 in order to reduce our aggregate salary, wages and employee benefits. Total realized savings on an annual basis were approximately
$2.5 million
. We incurred a charge of
$9.9 million
associated with the layoffs which took place in 2013. The realized savings in 2013 are consistent with our initial estimates. As previously discussed, we have commenced several strategic initiatives, which include rolling out lean manufacturing techniques and reducing our indirect staff through a social plan at our French facility. Additional restructuring actions may be necessary during the next several quarters and might include changing our current footprint, consolidation of facilities, other reductions in manufacturing capacity, further reductions in our workforce, sales of assets, and other restructuring activities. These actions could result in significant restructuring or asset impairment charges, severance costs, losses on asset sales and use of cash. Accordingly, these restructuring activities could have a significant effect on our consolidated financial position, operating profit, cash flows and future operating results. Cash required by these restructuring activities might be provided by our cash balances, cash proceeds from the sale of assets or new financing arrangements. If such actions are taken, there is a risk that the costs of the restructuring and cash required will exceed our original estimates or the benefits received from such activities.
In December 2013, we amended our Revolving Credit and Security Agreement with PNC Bank, National Association (“PNC”), subject to the terms and conditions of the agreement, to extend the maturity of our facilities to December 11, 2018, to add a new Term Loan for up to $15.0 million, subject to conditions precedent which have not yet been met and to continue our revolving credit facility up to
$34.0 million
(formerly $45.0 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. Currently,
$12.7 million of the funds received from the PNC Term Loan are held in a blocked account and 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 sixty monthly installments of $250,000 to repay the principal on the Term Loan began January 2, 2014. The 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. 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. We were in compliance with all covenants and terms of the agreement at
December 31, 2013
. At
December 31, 2013
, our borrowings under these facilities totaled
$23.0 million
, with
$15.0 million
outstanding on the term loan and
$8.0 million
outstanding on the revolver. We also had
$3.2 million
in outstanding letters of credit. A fixed charge coverage ratio covenant applies if our availability falls 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 charge coverage 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.
We also continue to maintain various credit facilities in most jurisdictions in which we operate outside the U.S. While we believe that current cash balances and available borrowings under our credit facilities and cash inflows related to non-income tax refunds will produce adequate liquidity to implement our business strategy over the foreseeable future, there can be no assurance that such amounts will ultimately be adequate if sales or economic conditions deteriorate. We anticipate that we will continue to monitor non-essential uses of our cash balances until cash provided by normal operations improves.
Our business exposes us to potential litigation, such as product liability lawsuits or other lawsuits related to anti-competitive practices and securities law or other types of business disputes. These claims can be expensive to defend and an unfavorable outcome from any such litigation could adversely affect our cash flows and liquidity.
In addition, while our past business dispositions have improved our liquidity position, many of the sale agreements provide for certain retained liabilities and indemnities including liabilities that relate to environmental issues and product warranties. While we believe we have properly accounted for such contingent liabilities based on currently available information, future events could result in the recognition of additional liabilities that could consume available liquidity and management attention.
For further information related to other factors that have had, or may in the future have, a significant impact on our business, financial condition or results of operations, see “Cautionary Statements Relating To Forward-Looking Statements” above, “Results of Operations” below, and “Risk Factors” in Item 1A.
RESULTS OF OPERATIONS
A summary of our operating results is shown below:
Year Ended December 31, 2013 vs. Year Ended December 31, 2012
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2013
|
|
%
|
|
2012
|
|
%
|
|
Net sales
|
$
|
823.6
|
|
|
100.0
|
%
|
|
$
|
854.7
|
|
|
100.0
|
%
|
|
Cost of sales
|
(745.5
|
)
|
|
(90.5
|
%)
|
|
(790.0
|
)
|
|
(92.4
|
%)
|
|
Gross profit
|
78.1
|
|
|
9.5
|
%
|
|
64.7
|
|
|
7.6
|
%
|
|
Selling and administrative expenses
|
(104.9
|
)
|
|
(12.7
|
%)
|
|
(107.7
|
)
|
|
(12.6
|
%)
|
|
Other income (expense), net
|
21.4
|
|
|
2.6
|
%
|
|
22.3
|
|
|
2.6
|
%
|
|
Impairments, restructuring charges, and other items
|
(13.6
|
)
|
|
(1.7
|
%)
|
|
40.6
|
|
|
4.7
|
%
|
|
Operating (loss) income
|
(19.0
|
)
|
|
(2.3
|
%)
|
|
19.9
|
|
|
2.3
|
%
|
|
Interest expense
|
(9.2
|
)
|
|
(1.1
|
%)
|
|
(10.2
|
)
|
|
(1.2
|
%)
|
|
Interest income
|
1.5
|
|
|
0.2
|
%
|
|
3.2
|
|
|
0.4
|
%
|
|
(Loss) income from continuing operations before taxes
|
(26.7
|
)
|
|
(3.2
|
%)
|
|
12.9
|
|
|
1.5
|
%
|
|
Tax (expense) benefit
|
(7.7
|
)
|
|
(0.9
|
%)
|
|
10.2
|
|
|
1.2
|
%
|
|
(Loss) income from continuing operations
|
$
|
(34.4
|
)
|
|
(4.1
|
%)
|
|
$
|
23.1
|
|
|
2.7
|
%
|
Net sales in the year ended
December 31, 2013
decreased
by
$31.1 million
, or
3.6%
, compared with the same period of
2012
. Excluding the
decrease
in sales due to the effect of changes in foreign currency translation of
$24.4 million
, net sales
decreased
by
0.8%
from
2012
, primarily due to net decreases in volume and mix, partially offset by net price increases.
Sales of compressors used in commercial refrigeration and aftermarket applications represented
59%
of our total sales and
decreased
by
3.2%
to
$487.7 million
in
2013
, when compared to
2012
. Lower volume and unfavorable changes in sales mix of
$16.1 million
and unfavorable changes in currency exchange rates of
$2.5 million
were partially offset by price increases of
$2.7 million
. Volume decreases are mainly attributable to our European and North American markets due to continued soft market conditions, partially offset by volume and mix improvements attributable to our Indian and Brazilian operations.
Sales of compressors for air conditioning applications and all other applications represented
22%
of our total sales and
increased
by
9.6%
to
$180.9 million
in
2013
, when compared to
2012
. This
increase
is primarily due to higher volumes and favorable changes in sales mix of
$25.4 million
and price increases of
$0.7 million
, partially offset by unfavorable changes in currency exchange rates of
$10.3 million
. Volume increased in Brazil primarily due to a temporary shutdown of one of our major Brazilian customers in 2012 which did not recur in 2013. Volume also increased as a result of improved demand in Europe, partially offset by reduced sales in North America due to soft market conditions in the first half of 2013, specifically in the trucking industry, as well as lower volumes in India in the second half of the year related to a warranty claim that originated in the second quarter.
Sales of compressors used in household refrigeration and freezer (“R&F”) applications represented
19%
of our total sales and
decreased
by
16.7%
to
$155.0 million
in
2013
, when compared to
2012
. This
decrease
is primarily due to lower sales volume and unfavorable changes in sales mix of
$20.4 million
and unfavorable changes in currency exchange rates of
$11.6 million
, partially offset by price increases of
$1.0 million
. Volume decreases are primarily the result of lower local demand at our Brazilian location.
Gross profit increased by
$13.4 million
from
$64.7 million
, or
7.6%
of net sales, in
2012
to
$78.1 million
, or
9.5%
of net sales in
2013
. The increase in gross profit in
2013
was primarily attributable to favorable changes in currency exchange effects of
$14.4 million
, favorable changes in commodity costs of
$6.1 million
and net price increases of
$4.4 million
, partially offset by unfavorable changes in other material and manufacturing costs of
$6.4 million
and net unfavorable changes in volume and sales mix of
$5.1 million
. The changes in material and manufacturing costs primarily relate to a warranty claim in India that originated in the second quarter of 2013, for which we recorded expense of
$5.6 million
, as well as a warranty claim in Europe, for which we recorded expense of
$2.7 million
. The unfavorable impact of these warranty claims was partially offset by other favorable changes in material and manufacturing costs of $1.9 million.
Selling and administrative (“S&A”) expenses
decreased
by
$2.8 million
from
$107.7 million
in
2012
to
$104.9 million
in
2013
. As a percentage of net sales, S&A expenses were
12.7%
in
2013
compared to
12.6%
in
2012
. The decrease was due to lower professional fees of $2.2 million, primarily related to fees paid to a financial adviser in 2012 that did not recur in 2013, a decrease in depreciation of $1.5 million primarily due to an information technology asset that became fully depreciated in the fourth quarter of 2013, a decrease of $1.2 million related to our incentive compensation awards and a decrease of $0.5 million in other miscellaneous expenses. These decreases were partially offset by $1.0 million of bad debt expense recognized in the second quarter of 2013 due to a bankruptcy filing by one of our Brazilian customers and an increase of $1.6 million in employee benefits which primarily related to an increase in healthcare claims. As of December 31, 2013, we partially achieved our target levels of performance related to our compensation awards; however, these levels were lower in 2013 as compared to 2012. The decrease in the portion of the incentive compensation earned was partially offset by the re-measurement of the value of our outstanding share-based compensation awards as our Class A Common Stock closing price at December 31, 2013 was
$9.05
compared with
$4.62
at December 31, 2012.
Other income (expense), net,
decreased
by
$0.9 million
from
$22.3 million
in
2012
to
$21.4 million
in
2013
. The
decrease
is mainly due to $2.9 million of income due to our sale of the right to proceeds from a future potential settlement of a lawsuit involving our Brazilian location received in the second quarter of 2012, $1.3 million due to a mutual release agreement that we signed in the second quarter of 2012 and a $1.8 million decline in income from Indian government incentives, primarily due to a one-time incentive which occurred in the first quarter of 2012. These decreases were partially offset by $1.4 million of income related to securities that had zero net book value and were sold during the second quarter of 2013, a $2.8 million increase in net amortization of gains for our postretirement benefits primarily due to curtailment of these benefits in the second quarter of 2012, (see Note 5, “Pension and Other Postretirement Benefit Plans” of the Notes to Consolidated Financial Statements in Item 8 of this report, for additional information), a $0.8 million increase in miscellaneous other income, primarily due to miscellaneous other expense recognized in 2012 that did not recur in 2013 and a $0.1 million favorable change in foreign currency exchange rates.
We recorded expense of
$13.6 million
in impairments, restructuring charges, and other items in
2013
compared to
$40.6 million
of income in
2012
. In
2013
, this expense included
$9.9 million
related to severance, $2.7 million related to business process re-engineering, $0.5 million of costs related to the relocation of our corporate office, $0.3 million for a contingent legal liability and a $0.2 million environmental reserve with respect to a sold building. The severance expense 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. Refer to Note 11, “Impairments, Restructuring Charges and Other Items” of the Notes to Consolidated Financial Statements in Item 8 of this report.
Interest expense was
$9.2 million
in
2013
compared to
$10.2 million
in
2012
. Our weighted average borrowings and the average amount of accounts receivable factored decreased, primarily due to less factoring by our Brazilian location, as well as lower borrowing levels in Brazil and India. In addition, the weighted average interest rates for our borrowings and factored accounts receivable decreased in
2013
as compared to 2012.
Interest income was
$1.5 million
in
2013
compared to
$3.2 million
in
2012
primarily due to the interest received in the second quarter of 2012 related to an IRS refund.
For
2013
, we recorded a tax expense of
$7.7 million
from continuing operations, which related to U.S. federal tax, primarily due to tax expense reclassified out of AOCI in relation to our postretirement benefit plan that was curtailed in 2012. The
$10.2 million
in tax benefit from continuing operations for
2012
was comprised of
$0.7 million
in foreign tax benefit,
$0.1 million
in
state and local tax benefit and
$9.4 million
in U.S. federal tax benefit, primarily related to the refund received from the IRS related to a previously unrecognized tax benefit.
Net loss from continuing operations for the year ended
December 31, 2013
was
$34.4 million
, or a net loss per share of
$1.86
, as compared to net income from continuing operations of
$23.1 million
, or
$1.25
per share for the year ended
December 31, 2012
. The change was primarily related to the postretirement benefit curtailment gain recorded in the second quarter of 2012, higher other impairments, restructuring charges, and other items in 2013 and an income tax benefit in 2012 compared to income tax expense in 2013, partially offset by higher gross profit in 2013, as well as due to the other factors described above.
A summary of our operating results is shown below:
Year Ended December 31, 2012 vs. Year Ended December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2012
|
|
%
|
|
2011
|
|
%
|
|
Net sales
|
$
|
854.7
|
|
|
100.0
|
%
|
|
$
|
864.4
|
|
|
100.0
|
%
|
|
Cost of sales
|
(790.0
|
)
|
|
(92.4
|
%)
|
|
(826.5
|
)
|
|
(95.6
|
%)
|
|
Gross profit
|
64.7
|
|
|
7.6
|
%
|
|
37.9
|
|
|
4.4
|
%
|
|
Selling and administrative expenses
|
(107.7
|
)
|
|
(12.6
|
%)
|
|
(108.1
|
)
|
|
(12.5
|
%)
|
|
Other income (expense), net
|
22.3
|
|
|
2.6
|
%
|
|
14.7
|
|
|
1.7
|
%
|
|
Impairments, restructuring charges, and other items
|
40.6
|
|
|
4.7
|
%
|
|
(8.5
|
)
|
|
(1.0
|
%)
|
|
Operating income (loss)
|
19.9
|
|
|
2.3
|
%
|
|
(64.0
|
)
|
|
(7.4
|
%)
|
|
Interest expense
|
(10.2
|
)
|
|
(1.2
|
%)
|
|
(10.5
|
)
|
|
(1.2
|
%)
|
|
Interest income
|
3.2
|
|
|
0.4
|
%
|
|
2.3
|
|
|
0.3
|
%
|
|
Income (loss) from continuing operations before taxes
|
12.9
|
|
|
1.5
|
%
|
|
(72.2
|
)
|
|
(8.3
|
%)
|
|
Tax benefit
|
10.2
|
|
|
1.2
|
%
|
|
0.9
|
|
|
0.1
|
%
|
|
Income (loss) from continuing operations
|
$
|
23.1
|
|
|
2.7
|
%
|
|
$
|
(71.3
|
)
|
|
(8.2
|
%)
|
|
|
Net sales in the year ended December 31, 2012 decreased by $9.7 million, or 1.1%, compared with the same period of 2011. Excluding the decrease in sales due to the effect of changes in foreign currency translation of $63.1 million, net sales increased by 6.2% from 2011, primarily due to net increases in volume and mix as well as net price increases.
Sales of compressors used in commercial refrigeration and aftermarket applications represented 59% of our total sales and increased by 0.2% to $503.6 million in 2012, when compared to 2011. Higher volume and favorable changes in sales mix of $20.1 million and price increases of $5.6 million were offset by unfavorable changes in currency exchange rates of $24.5 million. The volume increase is mainly attributable to increases in regional demands for these types of products in India and Brazil, as well as a small improvement in market conditions in Europe and North America compared to 2011.
Sales of compressors used in household refrigeration and freezer (“R&F”) applications represented 22% of our total sales and increased by 1.9% to $186.0 million in 2012, when compared to 2011. This increase is primarily due to higher sales volume and favorable changes in sales mix of $30.5 million, partially offset by unfavorable changes in currency exchange rates of $21.8 million and price decreases of $5.2 million. The volume increases are primarily the result of new business with one major customer at our Indian operations and an increase in regional demand in Brazil.
Sales of compressors for air conditioning applications and all other applications represented 19% of our total sales and decreased by 8.0% to $165.1 million in 2012, when compared to 2011. This decrease is primarily due to unfavorable changes in currency exchange rates of $16.8 million and lower volumes and unfavorable changes in sales mix of $0.5 million, partially offset by price increases of $2.9 million. Volume decreases are primarily due to the temporary shutdown of a plant by one of our major Brazilian customers which lasted six months in 2012, continued competition from Asian supply sources in this market, as well as a decrease in volume in the North American market due to soft market conditions.
The new Mini compressor platform for use in household refrigerators and freezers and the Midi compressor platform for use in commercial refrigeration have been launched and commercial sales started in the fourth quarter of 2011 to several customers. The full offering of these products to our remaining customers took longer than originally expected. Management identified bottlenecks and released 90% of the Mini compressor models for production by the end of 2012. We believe these new products improve the quality, sound, and performance of our products and lower their manufacturing cost with enhanced
internal design and the use of lower cost materials, such as aluminum motor windings. We believe that these new products better position us by providing efficiency improvements required by customers as well as providing products designed for more environmentally-friendly hydrocarbon refrigerants.
Gross profit increased by $26.8 million from $37.9 million, or 4.4% of net sales, in 2011 to $64.7 million, or 7.6% of net sales in 2012. The increase in gross profit in 2012 was primarily attributable to $11.6 million of favorable changes in other material and manufacturing costs, favorable changes in commodity costs of $9.1 million, favorable changes in currency exchange effects of $4.5 million and net price increases of $3.3 million, partially offset by unfavorable changes in volume and sales mix of $1.0 million and increased other expenses of $0.7 million.
Selling and administrative (“S&A”) expenses decreased by $0.4 million from $108.1 million in 2011 to $107.7 million in 2012. As a percentage of net sales, S&A expenses were 12.6% in 2012 compared to 12.5% in 2011. The decrease was due to a decline in payroll, benefits and other employee related expenses of $2.1 million as a result of our continued restructuring efforts and a decline in other selling and administrative expenses of $2.1 million, including a decrease in professional fees of $0.6 million, partially offset by an expense of $3.8 million related to our annual incentive plan.
Other income (expense), net, increased by $7.6 million from $14.7 million in 2011 to $22.3 million in 2012. The increase is mainly due to $2.9 million of income due to our sale of the right to proceeds from a future potential settlement of a lawsuit involving our Brazilian location received in the second quarter of 2012, $1.3 million due to a mutual release agreement that we signed in the second quarter of 2012, $2.4 million due to increases in various Indian government incentives, $3.6 million due to an increase in net amortization of gains for our postretirement benefits due to curtailment of these benefits (refer to Note 5, "Pension and Other Postretirement Benefit Plans" of the Notes to Consolidated Financial Statements in Item 8 of this report), a $0.9 million favorable change in foreign currency exchange rates and a net increase of $0.2 million of miscellaneous other income, partially offset by $3.7 million gain on sale of fixed assets that occurred in 2011.
We recorded income of $40.6 million in impairments, restructuring charges, and other items in 2012 compared to $8.5 million of expense in 2011. In 2012, this included a postretirement curtailment gain of $45.0 million and income of $0.1 million related to a refund of notice and administrative costs related to the antitrust investigation settlement agreement which we entered in October, 2012, partially offset by severance expense of $3.8 million associated with a reduction in force at our Brazilian ($2.6 million), North American ($0.3 million), French ($0.6 million), and Corporate ($0.3 million) locations, $0.6 million for additional estimated environmental costs associated with the remediation activities at our former Tecumseh, Michigan facility, and $0.1 million of costs related to relocation of our corporate office. Refer to Note 11, “Impairments, Restructuring Charges and Other Items” of the Notes to Consolidated Financial Statements in Item 8 of this report.
Interest expense was $10.2 million in 2012 compared to $10.5 million in 2011. Our average borrowings declined, while our weighted average interest rate on debt increased to 8.8% in 2012 as compared to 7.9% in 2011. The increase in our weighted average interest rate on debt was primarily due to termination of our credit facilities in Europe in January 2012, which were paid off and replaced with a factoring program. In addition, the weighted average interest rate increased in Brazil and decreased in India due to changes in mix of the borrowings in these regions. Finally, our average amount of accounts receivable factoring increased, while the weighted average interest rate of factored accounts receivable decreased to 7.6% in 2012 as compared to 9.5% in 2011, primarily due to our new European factoring facility.
Interest income was $3.2 million in 2012 compared to $2.3 million in 2011, primarily due to interest of $1.3 million, received from an IRS refund, partially offset by a decline in the interest rate on a judicial deposit in Brazil that is being held in an interest-bearing court appointed cash account.
For 2012, we recorded a tax benefit of $10.2 million from continuing operations. This tax benefit is comprised of $0.7 million in foreign tax benefit, $0.1 million in state and local tax benefit, and $9.4 million in U.S. federal tax benefit, primarily related to the refund received from the IRS related to a previously unrecognized tax benefit. The $0.9 million in tax benefit from continuing operations for 2011 was comprised of $0.2 million in foreign tax expense, $0.1 million in state and local tax expense, more than offset by a tax benefit of $1.2 million in U.S. federal tax.
Net income from continuing operations for the year ended December 31, 2012 was $23.1 million, or $1.25 per share, as compared to a loss of $71.3 million, or $3.86 per share for the year ended December 31, 2011. This change was primarily related to the postretirement benefit curtailment, improved gross profit, higher tax benefit and other income.
LIQUIDITY AND CAPITAL RESOURCES
Our primary liquidity needs are to fund capital expenditures, service indebtedness, support working capital requirements, and, when needed, fund operating losses. In general, our principal sources of liquidity are cash and cash equivalents on hand, cash flows from operating activities, borrowings under available credit facilities and cash inflows related to non-income taxes. In
addition, we believe that factoring our receivables is an alternative way of freeing up working capital and providing sufficient cash to pay off debt that may mature within a year.
A substantial portion of our operating income is generated by foreign operations. As a result, we are dependent on the earnings, cash flows and the combination of dividends, distributions, intercompany loan payments and advances from our foreign operations to provide the funds necessary to meet our obligations in each of our legal jurisdictions. There are no significant restrictions on the ability of our subsidiaries to pay dividends or make other distributions.
Cash Flow
2013
vs.
2012
Cash provided by operations was
$11.6 million
in
2013
, as compared to
$8.8 million
in
2012
. The
2013
cash flows from operations include our net loss of
$37.5 million
which included a non-cash gain on an adjustment for employee retirement benefits of
$11.6 million
, partially offset by non-cash depreciation and amortization of
$33.5 million
, a
$6.3 million
release of deferred taxes from "Accumulated other comprehensive loss" in relation to the curtailment of our postretirement benefit plans (see Note 5 "Pension and Other Postretirement Benefit plans" of the Notes to Consolidated Financial Statements in Item 8 of this report for additional information), non-cash share-based compensation of
$0.8 million
and a non-cash loss on the disposal of property and equipment of
$0.2 million
.
With respect to the changes in working capital, increased inventory levels were primarily due to building of inventory to support higher levels of anticipated sales in North America and Asia, which resulted in a use of cash of
$10.5 million
. Inventory days on hand
worsened
by
6
days to
77
days at
December 31, 2013
primarily due to lower sales for the three months ended December 31, 2013 as compared to the three months ended December 31, 2012.
Accounts receivable provided cash of
$6.2 million
mainly due to an
improvement
in our days sales outstanding by
3
days as compared to December 31, 2012 to
52
days at
December 31, 2013
. The improvement in days sales outstanding related to increased accounts receivables factoring in Europe and higher collections of accounts receivable that are backed by letters of credit in India.
Payables and accrued expenses provided
$22.8 million
of cash. We had an increase in accruals at our French location due to severance and business re-engineering accruals, as well as increases in our product warranty accrual for new claims at our French and Indian locations in 2013. We saw a
decrease
in payable days outstanding of
4
days to
59
days at
December 31, 2013
.
Recoverable non-income taxes provided cash of
$8.1 million
, which included
$18.6 million
cash received from the Brazilian government and
$9.9 million
cash received from the Indian government, partially offset by accruals of additional recoverable non-income taxes.
Employee retirement benefits were a use of cash of
$2.1 million
due to benefit payments and contributions related to our non-U.S. pension and U.S. postretirement benefit plans.
Cash used in investing activities was
$22.0 million
in
2013
as compared to
$5.7 million
in
2012
. The
2013
use of cash in investing activities includes
$11.8 million
of capital expenditures, primarily for equipment, and $12.7 million of blocked funds related to our term loan with PNC (see Note 8 "Debt" of the Notes to Consolidated Financial Statements in Item 8 of this report for additional information). This use of cash was partially offset by the release of restricted cash of $2.0 million that became available to fund our 401(k) matching contributions, $0.2 million decrease in cash collateral on our letters of credit and proceeds from the sale of assets of
$0.3 million
.
Cash provided by financing activities was
$9.8 million
in
2013
compared to
$3.1 million
provided by financing activities in
2012
. The increase in borrowings in 2013 of
$16.0 million
is mainly due to new term loan financing with PNC of
$15.0 million
(most of which is in a blocked account), partially offset by net payments on long-term debt of
$4.1 million
, payments on capital leases of
$0.4 million
, debt issuance costs of
$0.2 million
and net other repayments of
$1.5 million
.
2012
vs.
2011
Cash provided by operations was $8.8 million in 2012, as compared to $5.3 million of cash used in operations in 2011. The 2012 cash flows from operations include our net income of $22.6 million, non-cash depreciation and amortization of $36.4 million and non-cash share-based compensation of $0.5 million, partially offset by a non-cash gain on curtailment of our postretirement benefits of $45.0 million, a non-cash gain on an adjustment for employee retirement benefits of $8.9 million, a $3.5 million increase in deferred tax assets, and a gain on disposal of property and equipment of $0.2 million. Net income included a non-recurring $4.4 million refund from the IRS related to a previously unrecognized tax benefit and $1.3 million in interest income related to the refund, income of $2.9 million due to the sale of proceeds from a future potential settlement of a lawsuit involving our Brazilian location and a $1.7 million payment received from a mutual release agreement that we signed in the second quarter of 2012.
With respect to working capital, reduced inventory levels provided $9.4 million of cash. Inventory days on hand decreased by 19 days to 71 days at December 31, 2012, primarily due to increased sales for the three months ended December 31, 2012 as compared to the three months ended December 31, 2011 and continued cost containment measures.
Increased accounts receivable resulted in a use of cash of $15.4 million during the year primarily as a result of our increased sales in the fourth quarter of 2012 compared to the fourth quarter of 2011. Our days sales outstanding increased by one day as compared to December 31, 2011 to 55 days at December 31, 2012. This increase was primarily related to a decrease in factoring of our receivables as a percentage of the outstanding receivables balance in Brazil, partially offset by increased factoring due to our new European facility.
Payables and accrued expenses provided $12.4 million of cash mainly as a result of an increase in inventory purchases and timing of those purchases, as well as an increase in accrued expenses due to our annual incentive plan. Payable days outstanding remained at 63 days at both December 31, 2012 and December 31, 2011.
Recoverable non-income taxes provided cash of $1.1 million, which included $9.2 million cash received from the Brazilian government and $15.8 million cash received from the Indian government, partially offset by accruals of additional recoverable non-income taxes.
Employee retirement benefits were a use of cash of $1.7 million due to benefit payments and contributions related to our non-U.S. pension and U.S. postretirement benefit plans.
Cash used in investing activities was $5.7 million in 2012 as compared to $9.1 million in 2011. The 2012 use of cash in investing activities includes $13.8 million of capital expenditures. This use of cash was partially offset by the release of restricted cash of $7.1 million and proceeds from the sale of assets of $1.0 million, primarily related to the sale of our Grafton facility. The release of restricted cash primarily relates to $2.4 million of restricted cash that became available to fund our 401(k) matching contributions and a $4.9 million decrease in cash pledged on our derivatives related to our hedging activities, partially offset by a $0.2 million increase in cash collateral on our letters of credit.
Cash provided by financing activities was $3.1 million in 2012 compared to $0.6 million provided by financing activities in 2011. The increase in borrowings in 2012 is mainly due to financing our regional operating needs, partially offset by our cash management strategy to increase our usage of accounts receivable factoring programs from December 2011 levels.
Liquidity Sources
Credit Facilities and Cash on Hand
In addition to cash on hand, cash provided by operating activities and cash inflows related to non-operating activities, we use bank debt and other foreign credit facilities, such as accounts receivable factoring programs, when available, to fund our working capital requirements. We have an agreement with PNC Bank pursuant to which, subject to the terms and conditions of our Revolving Credit and Security Agreement, as amended, PNC Bank provides senior secured revolving credit financing up to
$34.0 million
, which continues to include
$10.0 million
in letters of credit, subject to a borrowing base formula, lender reserves and PNC's reasonable discretion and a five-year term loan up to an aggregate of $15.0 million, subject to conditions precedent which have not yet been met. The 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, falls below a specified level. We were in compliance with all covenants and terms of the agreement as of
December 31, 2013
. As of
December 31, 2013
, we had
$23.0 million
of borrowings outstanding and
$3.2 million
in outstanding letters of credit under our PNC financing facilities. A fixed charge coverage ratio covenant applies if our availability falls 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 have been 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. As part of our December 2013 amendment to this facility, 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,
$12.7 million of the funds received from the PNC Term Loan are held in a blocked account and 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 sixty 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. The facility matures on December 11, 2018. For a more detailed description of the facilities, see Note 8, “Debt”, of the Notes to Consolidated Financial Statements in Item 8 of this report.
In the U.S., we have also entered into an agreement with the Mississippi Development Authority for low interest rate financing up to
$1.5 million
in aggregate draws to be utilized to purchase specific capital equipment. This loan is to encourage business development in the State of Mississippi. As of
December 31, 2013
, we have drawn
$1.1 million
of the available funds.
We have various borrowing arrangements at our foreign subsidiaries to support working capital needs and government sponsored borrowings which provide advantageous lending rates. (See Note 8 “Debt”, of the Notes to Consolidated Financial Statements in Item 8 of this report for additional information.) We also use these cash resources to fund capital expenditures, and when necessary, to fund operating losses.
For the
for the years ended December 31, 2013 and 2012
our average outstanding debt balance was
$55.2 million
and $58.8 million, respectively. The weighted average interest rate was
8.1%
and 8.8%
for the years ended December 31, 2013 and 2012
, respectively.
As of
December 31, 2013
, our cash and cash equivalents on hand was
$55.0 million
. Our borrowings under current credit facilities, including capital lease obligations, totaled
$67.2 million
at
December 31, 2013
, with an uncommitted additional borrowing capacity of
$22.0 million
. Included in our debt balance at
December 31, 2013
are capital lease obligations of
$1.8 million
. For a more detailed discussion of our credit facilities, refer to Note 8, “Debt”, of the Notes to Consolidated Financial Statements in Item 8 of this report.
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.
Cash inflows related to taxes
We expect to receive refunds of outstanding refundable non-income taxes. 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. Based on applicable foreign currency exchange rates at
December 31, 2013
, we expect to recover approximately
$16.7 million
of the
$27.3 million
outstanding refundable taxes in the next twelve months, primarily related to the short-term portion of the outstanding refundable taxes of
$12.4 million
in Brazil and
$2.9 million
in India. The tax authorities will not commit to an actual date of payment and the timing of receipt may be different than planned if the tax authorities change their pattern of payment or past practices.
Accounts Receivable Sales
Our Brazilian and European subsidiaries periodically factor their accounts receivable with financial institutions for seasonal and other working capital needs. Such receivables are factored both with limited and without recourse to us and are excluded from accounts receivable in our Consolidated Balance Sheets. The amount of factored receivables, including both with limited and without recourse amounts, was
$42.7 million
and
$49.3 million
at December 31, 2013
and
2012
, respectively. The amount of factored receivables sold with limited recourse through our Brazilian subsidiary, which results in a contingent liability to us, was
$12.1 million
and
$11.9 million
as of December 31,
2013
and
2012
, respectively. The amount of factored receivables sold without recourse at our Brazilian and European subsidiaries, which is recorded as a sale of the related receivables, was
$30.6 million
and
$37.4 million
as of December 31,
2013
and
2012
respectively. In addition to the credit facilities described above, our Brazilian subsidiary also has an additional
$22.9 million
uncommitted, discretionary factoring credit facility with respect to its local (without recourse) and foreign (with recourse) accounts receivable, subject to the availability of its accounts receivable balances eligible for sale under the facility. We use these factoring facilities, when available, for seasonal and other working capital needs.
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.
At December 31, 2013, $8.3 million was available for sales of additional receivables under this facility. We were in compliance with all of the covenants, terms and conditions under this facility as of
December 31, 2013
.
Our Indian subsidiary has the ability to collect receivables that are backed by letters of credit sooner than the receivables would otherwise be paid by the customer. Furthermore, some of our large customers 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 these programs at
December 31, 2013
and
December 31, 2012
, respectively.
Adequacy of Liquidity Sources
In the near term, and in particular over the next twelve months, we expect that our liquidity sources, described above, will be sufficient to meet our liquidity requirements, including debt service, capital expenditures, working capital requirements and warranty claims, and, when needed, cash to fund operating losses and any additional restructuring activities we may implement. However, we also anticipate challenges with respect to generating positive cash flows from operations, most significantly due to challenges driven by possible volume declines, ability to generate savings from our restructuring activities, as well as currency exchange and commodity pricing volatility.
In addition, our business exposes us to potential litigation, such as product liability lawsuits or other lawsuits related to anti-competitive practices and securities law or other types of business disputes. These claims can be expensive to defend and an unfavorable outcome from any such litigation could adversely affect our cash flows and liquidity.
As of
December 31, 2013
, we had
$55.0 million
of cash and cash equivalents, and
$67.2 million
in debt and capital lease obligations, of which
$17.5 million
was long-term in nature. The short-term debt primarily consists of current maturities of long-term debt as well as committed and uncommitted revolving lines of credit, which we intend to maintain for the foreseeable future. We believe our cash on hand and availability under our borrowing facilities is sufficient to meet our debt service requirements. We do not expect any material differences between cash availability and cash outflows.
We expect capital expenditures will average
$15.0 million to $20.0 million
annually, although the timing of expenditures may result in higher investment in some years and lower amounts in others. For 2014, we expect our capital expenditures to be in this range as we continue to re-engineer our products and invest in our information technology infra-structure to be more efficient. These 2014 expenditures may be adjusted based on achieving expected results described in the “Outlook” section.
We realize that we may not generate cash flow from operating activities unless further restructuring activities are implemented or sales or economic conditions improve. As a result, we continued to adjust our workforce levels as conditions demanded in 2013 to reduce our aggregate salary, wages and employee benefits, with total realized savings on an annual basis of approximately
$2.5 million
. We incurred a charge of
$9.9 million
associated with further layoffs which took place in 2013. The realized savings in 2013 are consistent with our initial estimates. As previously discussed, we have commenced several strategic initiatives, which include rolling out lean manufacturing techniques and reducing our indirect staff through a social plan at our French facility. Additional restructuring actions may be necessary during the next several quarters and might include changing our current footprint, consolidation of facilities, other reductions in manufacturing capacity, further reductions in our workforce, sales of assets, and other restructuring activities. These actions could result in significant restructuring or asset impairment charges, severance costs, losses on asset sales and use of cash. Accordingly, these restructuring activities could have a significant effect on our consolidated financial position, operating profit, cash flows and future operating results. Cash required by these restructuring activities might be provided by our cash balances, cash proceeds from the sale of assets or new financing arrangements. If such actions are taken, there is a risk that the costs of the restructuring and cash required will exceed our original estimates or the benefits received from such activities.
OFF-BALANCE SHEET ARRANGEMENTS
Other than operating leases, we do not have any off-balance sheet financing. We do not believe we have any off-balance sheet arrangements that have, or are reasonably likely to have, a material effect on us. However, a portion of accounts receivable at our Brazilian subsidiary is 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. We maintain a reserve for anticipated losses against these sold receivables, and losses have not historically resulted in the recording of a liability greater than the reserved amount. Under our factoring program in Europe, we may discount receivables with recourse; however, at
December 31, 2013
there were no receivables sold with recourse.
CONTRACTUAL OBLIGATIONS
Our payments by period as of
December 31, 2013
for our contractual obligations are as follows:
Payments due by Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Total
|
|
2014
|
|
2015/2016
|
|
2017/2018
|
|
After 2018
|
|
Debt
|
|
$
|
65.4
|
|
|
$
|
49.2
|
|
|
$
|
9.1
|
|
|
$
|
6.3
|
|
|
$
|
0.8
|
|
|
Capital Lease Obligations
|
|
$
|
1.8
|
|
|
$
|
0.5
|
|
|
$
|
0.9
|
|
|
$
|
0.4
|
|
|
$
|
—
|
|
|
Purchase Obligations
|
|
$
|
22.0
|
|
|
$
|
22.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Operating Leases
(1)
|
|
$
|
13.1
|
|
|
$
|
3.8
|
|
|
$
|
4.0
|
|
|
$
|
2.7
|
|
|
$
|
2.6
|
|
|
Pension and Postretirement Obligations
|
|
$
|
116.4
|
|
|
$
|
10.5
|
|
|
$
|
22.2
|
|
|
$
|
23.6
|
|
|
$
|
60.1
|
|
|
|
|
|
(1)
|
Operating lease obligations do not include payments to landlords covering real estate taxes and common area maintenance or rent received from a sublease contract on our previous corporate office.
|
We have not included, in the table above, other long-term liabilities net of current portion in the amount of
$21.0 million
which include product warranty and self-insured risk, deferred tax and environmental liabilities, because they do not have a definite payout by year.
As of
December 31, 2013
, we had
$3.2 million
in outstanding domestic letters of credit and
$7.9 million
in outstanding foreign letters of credit issued in the normal course of business, as required by some vendor contracts.
CRITICAL ACCOUNTING ESTIMATES
In preparing our consolidated financial statements in accordance with U.S. GAAP and pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"), we make assumptions, judgments and estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments and estimates.
We believe that the assumptions, judgments and estimates involved in the accounting for Accrued and Contingent Liabilities, Employee Related Benefits, Impairment of Long-Lived Assets, Share-based Compensation and Income Taxes have the greatest potential impact on our consolidated financial statements. These areas are key components of our results of operations and are based on complex rules which require us to make judgments and estimates, so we consider these to be our critical accounting policies. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results.
Accrued and Contingent Liabilities
We have established reserves for legal contingencies, self-insured product liabilities, workers compensation claims, environmental contingencies and warranty claims in accordance with U.S. GAAP. We also have liabilities with regard to certain indemnification claims and litigation related to our divested operations, which could be material. A significant amount of judgment and use of estimates is required to quantify our ultimate exposure in these matters. The valuation of reserves for contingencies is reviewed on a quarterly basis at the operating and corporate levels to assure that we are properly reserved. Reserve balances are adjusted to account for changes in circumstances for ongoing issues and the establishment of additional reserves for emerging issues. While management believes that the current level of reserves is appropriate, changes in the future could impact these determinations. Historically, reserves for accrued and contingent liabilities typically have not differed
materially from actual results; however, unanticipated events such as the discovery of new facts could result in material changes to our reserves in future periods.
Employee Related Benefits
Significant employee related benefit assumptions include, but are not limited to, the expected rates of return on plan assets, determination of discount rates for re-measuring plan obligations and determination of inflation rates regarding compensation levels. Differences among these assumptions, specifically our actual return on assets and financial market-based discount rates, will impact future results of operations.
We develop our demographics and utilize the expertise of actuaries to assist with the measurement of employee related obligations. The discount rate assumption is established based on Towers Watson's Rate:Link 40/90 yield curve. For the purpose of setting the discount rate, the U.S. Pension Plans (including non-qualified plans) are treated as one plan. The expected return on plan assets reflects our current asset allocation and investment strategy. The inflation rate for compensation levels reflects our actual historical experience as well as our outlook on near-term compensation increases. Assuming no changes in any other assumptions, a 0.5% decrease in the discount rate and a 0.5% decrease in the rate of return on plan assets would have increased 2013 expense by $0.6 million and $0.7 million, respectively. Historically, these assumptions, specifically our actual return on assets and financial market-based discount rates, have not differed materially from actual results; however, unanticipated events will impact future results of operations and could result in material changes to our reserves in future periods.
See Note 5, “Pension and Other Postretirement Benefit Plans” of the Notes to Consolidated Financial Statements in Item 8 of this report for more information regarding costs and assumptions for postretirement benefits.
Impairment of Long-Lived Assets
It is our policy to review our long-lived assets for possible impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable. At
December 31, 2013
and
2012
, other than those assets for which impairment charges had been taken, we do not believe there was a material amount of assets that had associated undiscounted projected cash flows that were materially less than their carrying values. If there are in the future, we will disclose that fact and the carrying amount of the assets at risk of impairment. Additional restructuring actions taken will be based upon our assessment of ongoing economic activity and any such additional actions, if warranted, could result in further restructuring and/or asset impairment charges in the foreseeable future, and, accordingly, could have a significant effect on our consolidated financial position and future operating results. Such events could include a loss of a significant customer or market share, the decision to relocate production to other locations or the decision to cease production of specific models of products.
We recognize losses related to the impairment of long-lived assets when the estimated future undiscounted cash flows are less than the asset's carrying value or when the assets become permanently idle. 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, and 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 our 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.
Share-based Compensation
Share-based payment awards exchanged for employee services are recorded at fair value on the date of grant and, for cash-settled awards, re-measured quarterly over the life of the award. The awards are expensed in the Consolidated Statements of Operations over the requisite employee service period. Our plan, in effect in 2013, authorizes two types of incentive awards for our key employees, both of which are based upon the value of our Class A Common Stock: stock appreciation rights (“SARs”) and phantom shares. Both types of awards are settled in cash. Stock-based compensation expense is generally recognized over the vesting period on a straight-line basis. We determine the fair value of the SARs using the Black-Scholes option pricing model. The Black-Scholes option pricing model incorporates certain assumptions, such as risk-free interest rate, expected volatility, expected dividend yield and the expected life of the SARs, in order to arrive at a fair value estimate. Expected volatilities are based on the historical volatility of our common stock. The risk-free interest rate is based upon quoted market yields for United States Treasury debt securities. The expected dividend yield is based upon our history of not paying dividends since the second quarter of 2005 and management's current plans regarding future dividends. We believe that the assumptions selected by management are reasonable; however, significant changes could materially impact the results of the calculation of fair value.
The fair value of the phantom shares is determined based on the closing stock price on our Class A Common Stock on the initial grant date and, for cash-settled phantom shares, revalued based on the closing price of our Class A Common Stock as of the last business day of each quarterly period.
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 will 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 for DSUs, with a corresponding liability on our Consolidated Balance Sheets. See Note 10, “Share-based Compensation Arrangements,” of the Notes to the Consolidated Financial Statements in Item 8 of this report for additional information.
Income Taxes
We use the asset and liability method of accounting for income taxes. 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. Management must make assumptions, judgments and estimates to determine our current provision for income taxes, our deferred tax assets and liabilities and any valuation allowance to be recorded against a deferred tax asset.
Our assumptions, judgments and estimates relative to the current provision for income taxes take into account current tax laws, our interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. We establish reserves for income taxes to address potential exposures involving tax positions that could be challenged by tax authorities. Although we believe our assumptions, judgments and estimates are reasonable, changes in tax laws or our interpretation of tax laws or the resolution of current or any future tax audits could significantly impact the amounts provided for income taxes in our consolidated financial statements.
Our assumptions, judgments and estimates relative to the value of a deferred tax asset take into account predictions of the amount and category of future taxable income, such as income from operations or capital gains income. Actual operating results and the underlying amount and category of income in future years could render our current assumptions, judgments and estimates of recoverable net deferred taxes inaccurate. Any of the assumptions, judgments and estimates mentioned above could cause our actual income tax obligations to differ from our estimates, thus materially impacting our financial position and results of operations. Historically, our assumptions, judgments and estimates have not differed materially from actual results; however, unanticipated events such as income from operations or capital gains income could result in material changes to our tax accounts in future periods.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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.
OUTLOOK
Information in this “Outlook” section should be read in conjunction with the cautionary statements and discussion of risk factors included elsewhere in this report.
Sales declined in
2013
primarily due to the unfavorable foreign currency exchange rate impact and net unfavorable changes in volume and product mix, partially offset by net price increases. We expect to see continued lack of growth in demand as we enter 2014 as a result of continued uncertainties and current events around the world. For 2014, we currently expect net sales to increase in the range of 1 percent to 3 percent from
2013
levels. The potential improvement is based on our internal projections about the market and related economic conditions, expected price increases to our customers, estimated foreign currency exchange rate effects, as well as our continued efforts in sales and marketing.
We cannot currently project whether market conditions will improve on a sustained or significant basis. If the economic improvement in our key markets does not occ
ur as expected, this could have an adverse impact on our current outlook. In addition, based on a recent review of the strategic initiatives we discussed in May 2013, we are in the process of adjusting these strategic initiatives and their impacts on our future results.
The prices of some of our key commodities, specifically copper, aluminum and steel, have remained volatile. The weighted average market prices of copper, aluminum and steel
decreased
10.3%
,
16.5%
and
6.7%
, respectively, in
2013
compared to
2012
, see “Executive Summary – Commodities” above. We expect the full year change in average cost of our purchased materials in 2014, including the impact of our hedging activities, to have a slightly negative impact in 2014 when compared to 2013, depending on commodity cost levels and the level of our hedging over the course of the year. We expect to continue our approach of mitigating the effect of short-term price swings through the appropriate use of hedging instruments, price increases, and modified pricing structures.
The outlook for 2014 is subject to many of the same variables that have negatively impacted us in recent years, which have had significant impacts on our results of operations. The condition of, and uncertainties regarding, the global economy, commodity costs, key currency rates and weather are all important to future performance, as is our ability to match our hedging activity with actual levels of transactions. The extent to which adverse trends in recent years continue, will ultimately determine our 2014 results. We can give no guarantees regarding what impact future exchange rates, commodity prices and other economic changes will have on our 2014 results. For a discussion of the sensitivity analysis associated with our key commodities and currency hedges see “Quantitative and Qualitative Disclosures About Market Risk” in Part II, Item 7A of this report.
Changes in foreign exchange rates continue to impact our results of operations, specifically the Brazilian Real and the Indian Rupee, continue to be volatile against the U.S. Dollar. We have considerable forward purchase contracts to cover a portion of our exposure to additional fluctuations in value during 2014. See “Executive Summary-Currency Exchange” above. In the aggregate, we expect the changes in foreign currency exchange rates, after giving consideration to our hedging contracts and including the impact of realized gains/losses, to have slightly positive impact on our net income in 2014 when compared to 2013.
After giving recognition to the factors discussed above, we expect that the full year 2014 operating profit could improve compared to 2013, if we are successful at offsetting volatility in commodity costs and foreign exchange rates, and implementing initiatives for re-engineering our product lines to reduce our costs, price increases, restructuring activities and other cost reductions. We also expect that our operating cash flow net of capital spending could be slightly positive if we are successful at achieving the improved operating profit discussed above and the tax authorities do not significantly change their pattern of payments or past practices for the expected outstanding refundable Brazilian and Indian non-income taxes. Furthermore, we expect capital spending in 2014 to be approximately
$15.0 million to $20.0 million
.
Based on our assessment of ongoing economic activity, we realize that we may not generate cash flow from operating activities unless further restructuring activities are implemented or sales or economic conditions improve. Additional restructuring actions may be necessary in 2014 and might include changing our current footprint, consolidation of facilities, other reductions in manufacturing capacity, reductions in our workforce, completing sales margin review and rationalizing loss generating products, sales of assets, and other restructuring activities. These actions could result in significant restructuring or asset impairment charges, severance costs, losses on asset sales and use of cash. Accordingly, these restructuring activities could have a significant effect on our consolidated financial position, operating profit, cash flows and future operating results. Cash required by these restructuring activities might be provided by our cash balances and the cash proceeds from the sale of assets. If such restructuring actions are taken, there is a risk that the costs of the restructuring and cash required will exceed our original estimates or the benefits received from such activities.
As we look to the first quarter of 2014, we expect our sales, operating profit and operating cash flow to be slightly lower than the first quarter of 2013. Operating profit might be lower than in the first quarter of 2013 primarily due lower sales levels and completion of amortization as of December 31, 2013 of net gains related to our U.S. postretirement benefit plan which we curtailed in 2012, as well as additional restructuring actions.
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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:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
10% increase in commodity prices
|
|
(in millions)
|
|
2013
|
|
2012
|
|
Copper
|
|
$
|
(4.4
|
)
|
|
$
|
(5.3
|
)
|
|
Steel
|
|
(10.0
|
)
|
|
(11.0
|
)
|
|
Aluminum
|
|
(0.6
|
)
|
|
(0.7
|
)
|
|
Total
|
|
$
|
(15.0
|
)
|
|
$
|
(17.0
|
)
|
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:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
10% decrease in commodity prices
|
|
(in millions)
|
|
2013
|
|
2012
|
|
Copper
|
|
$
|
(1.1
|
)
|
|
$
|
(1.7
|
)
|
|
Steel
|
|
—
|
|
|
—
|
|
|
Aluminum
|
|
(0.2
|
)
|
|
(0.2
|
)
|
|
Total
|
|
$
|
(1.3
|
)
|
|
$
|
(1.9
|
)
|
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:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
10% Strengthening against U.S. $
|
|
(in millions)
|
|
2013
|
|
2012
|
|
Real
|
|
$
|
(2.7
|
)
|
|
$
|
(5.7
|
)
|
|
Euro
|
|
(9.5
|
)
|
|
(9.3
|
)
|
|
Rupee
|
|
(0.7
|
)
|
|
(0.4
|
)
|
|
Total
|
|
$
|
(12.9
|
)
|
|
$
|
(15.4
|
)
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10% Weakening against U.S. $
|
|
(in millions)
|
|
2013
|
|
2012
|
|
Real
|
|
$
|
(0.8
|
)
|
|
$
|
(1.3
|
)
|
|
Euro
|
|
—
|
|
|
(0.7
|
)
|
|
Rupee
|
|
—
|
|
|
—
|
|
|
Total
|
|
$
|
(0.8
|
)
|
|
$
|
(2.0
|
)
|
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.
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
Page
|
|
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|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in millions, except share data)
|
|
2013
|
|
2012
|
|
ASSETS
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
55.0
|
|
|
$
|
55.3
|
|
|
Restricted cash and cash equivalents
|
|
14.2
|
|
|
3.7
|
|
|
Accounts receivable, trade, less allowance for doubtful accounts of $1.5 million in 2013 and $1.2 million in 2012
|
|
85.5
|
|
|
97.0
|
|
|
Inventories
|
|
127.7
|
|
|
123.3
|
|
|
Deferred income taxes
|
|
0.8
|
|
|
0.2
|
|
|
Recoverable non-income taxes
|
|
16.7
|
|
|
20.7
|
|
|
Fair value of derivatives
|
|
0.6
|
|
|
0.7
|
|
|
Other current assets
|
|
18.1
|
|
|
16.2
|
|
|
Total current assets
|
|
318.6
|
|
|
317.1
|
|
|
Property, plant, and equipment, net
|
|
122.8
|
|
|
157.0
|
|
|
Deferred income taxes
|
|
1.1
|
|
|
0.1
|
|
|
Recoverable non-income taxes
|
|
10.6
|
|
|
18.8
|
|
|
Deposits
|
|
25.8
|
|
|
25.3
|
|
|
Other assets
|
|
8.5
|
|
|
9.6
|
|
|
Total assets
|
|
$
|
487.4
|
|
|
$
|
527.9
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
Accounts payable, trade
|
|
$
|
100.4
|
|
|
$
|
104.0
|
|
|
Short-term borrowings
|
|
49.7
|
|
|
55.6
|
|
|
Accrued liabilities:
|
|
|
|
|
|
Employee compensation
|
|
25.5
|
|
|
24.6
|
|
|
Product warranty and self-insured risks
|
|
15.1
|
|
|
9.2
|
|
|
Payroll taxes
|
|
13.4
|
|
|
10.9
|
|
|
Fair value of derivatives
|
|
1.6
|
|
|
0.9
|
|
|
Other current liabilities
|
|
12.6
|
|
|
6.9
|
|
|
Total current liabilities
|
|
218.3
|
|
|
212.1
|
|
|
Long-term borrowings
|
|
17.5
|
|
|
5.8
|
|
|
Other postretirement benefit liabilities
|
|
0.3
|
|
|
—
|
|
|
Product warranty and self-insured risks
|
|
4.2
|
|
|
2.4
|
|
|
Pension liabilities
|
|
20.0
|
|
|
37.1
|
|
|
Other liabilities
|
|
16.8
|
|
|
12.1
|
|
|
Total liabilities
|
|
277.1
|
|
|
269.5
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
Class A common stock, $1 par value; authorized 75,000,000 shares; issued and outstanding 13,401,938 shares in 2013 and 2012
|
|
13.4
|
|
|
13.4
|
|
|
Class B common stock, $1 par value; authorized 25,000,000 shares; issued and outstanding 5,077,746 shares in 2013 and 2012
|
|
5.1
|
|
|
5.1
|
|
|
Paid in capital
|
|
11.0
|
|
|
11.0
|
|
|
Retained earnings
|
|
266.1
|
|
|
303.6
|
|
|
Accumulated other comprehensive loss
|
|
(85.3
|
)
|
|
(74.7
|
)
|
|
Total stockholders’ equity
|
|
210.3
|
|
|
258.4
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
487.4
|
|
|
$
|
527.9
|
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
(in millions, except share and per share data)
|
|
2013
|
|
2012
|
|
2011
|
|
Net sales
|
|
$
|
823.6
|
|
|
$
|
854.7
|
|
|
$
|
864.4
|
|
|
Cost of sales
|
|
(745.5
|
)
|
|
(790.0
|
)
|
|
(826.5
|
)
|
|
Gross profit
|
|
78.1
|
|
|
64.7
|
|
|
37.9
|
|
|
Selling and administrative expenses
|
|
(104.9
|
)
|
|
(107.7
|
)
|
|
(108.1
|
)
|
|
Other income (expense), net
|
|
21.4
|
|
|
22.3
|
|
|
14.7
|
|
|
Impairments, restructuring charges, and other items
|
|
(13.6
|
)
|
|
40.6
|
|
|
(8.5
|
)
|
|
Operating (loss) income
|
|
(19.0
|
)
|
|
19.9
|
|
|
(64.0
|
)
|
|
Interest expense
|
|
(9.2
|
)
|
|
(10.2
|
)
|
|
(10.5
|
)
|
|
Interest income
|
|
1.5
|
|
|
3.2
|
|
|
2.3
|
|
|
(Loss) income from continuing operations before taxes
|
|
(26.7
|
)
|
|
12.9
|
|
|
(72.2
|
)
|
|
Tax (expense) benefit
|
|
(7.7
|
)
|
|
10.2
|
|
|
0.9
|
|
|
(Loss) income from continuing operations
|
|
(34.4
|
)
|
|
23.1
|
|
|
(71.3
|
)
|
|
(Loss) income from discontinued operations, net of tax
|
|
(3.1
|
)
|
|
(0.5
|
)
|
|
(1.9
|
)
|
|
Net (loss) income
|
|
$
|
(37.5
|
)
|
|
$
|
22.6
|
|
|
$
|
(73.2
|
)
|
|
Basic and diluted (loss) income per share (a):
|
|
|
|
|
|
|
|
(Loss) income from continuing operations
|
|
$
|
(1.86
|
)
|
|
$
|
1.25
|
|
|
$
|
(3.86
|
)
|
|
(Loss) from discontinued operations
|
|
(0.17
|
)
|
|
(0.03
|
)
|
|
(0.10
|
)
|
|
Net (loss) income per share
|
|
$
|
(2.03
|
)
|
|
$
|
1.22
|
|
|
$
|
(3.96
|
)
|
|
Weighted average shares, basic and diluted (in thousands)
|
|
18,480
|
|
|
18,480
|
|
|
18,480
|
|
|
Cash dividends declared per share
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
(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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
For the Years Ended December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
|
Net (loss) income
|
$
|
(37.5
|
)
|
|
$
|
22.6
|
|
|
$
|
(73.2
|
)
|
|
Other comprehensive (loss) income, before tax:
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
(22.6
|
)
|
|
(12.6
|
)
|
|
(26.8
|
)
|
|
Pension and postretirement benefits:
|
|
|
|
|
|
|
Prior service credit
|
(2.4
|
)
|
|
(4.1
|
)
|
|
(6.4
|
)
|
|
Net actuarial loss (gain)
|
2.2
|
|
|
(5.3
|
)
|
|
(16.4
|
)
|
|
Loss (gain) on curtailments and settlements
|
3.9
|
|
|
(40.5
|
)
|
|
—
|
|
|
Cash flow hedges:
|
|
|
|
|
|
|
Unrealized (loss) gain on cash flow hedges
|
(0.9
|
)
|
|
2.3
|
|
|
(17.3
|
)
|
|
Reclassification adjustment for losses (gains) on cash flow hedges included in net (loss) income
|
0.4
|
|
|
13.8
|
|
|
(10.6
|
)
|
|
Other comprehensive (loss), before tax
|
(19.4
|
)
|
|
(46.4
|
)
|
|
(77.5
|
)
|
|
Tax attributes of items in other comprehensive (loss) income:
|
|
|
|
|
|
|
Foreign currency translation adjustments, tax impact
|
—
|
|
|
—
|
|
|
(0.1
|
)
|
|
Pension and postretirement benefits:
|
|
|
|
|
|
|
Prior service credit, tax impact
|
(4.7
|
)
|
|
0.2
|
|
|
—
|
|
|
Net actuarial loss (gain), tax impact
|
4.3
|
|
|
0.2
|
|
|
—
|
|
|
Loss (gain) on curtailments and settlements, tax impact
|
7.7
|
|
|
—
|
|
|
—
|
|
|
Cash flow hedges:
|
|
|
|
|
|
|
Unrealized gain (loss) on cash flow hedges, tax impact
|
2.7
|
|
|
(0.6
|
)
|
|
0.1
|
|
|
Reclassification adjustment for losses (gains) on cash flow hedges included in net (loss) income, tax impact
|
(1.2
|
)
|
|
(3.5
|
)
|
|
1.7
|
|
|
Other comprehensive income (loss), tax impact
|
8.8
|
|
|
(3.7
|
)
|
|
1.7
|
|
|
Total other comprehensive (loss), net of tax
|
(10.6
|
)
|
|
(50.1
|
)
|
|
(75.8
|
)
|
|
Total comprehensive loss
|
$
|
(48.1
|
)
|
|
$
|
(27.5
|
)
|
|
$
|
(149.0
|
)
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
(in millions)
|
2013
|
|
2012
|
|
2011
|
|
Cash Flows from Operating Activities:
|
|
|
|
|
|
|
Net (loss) income
|
$
|
(37.5
|
)
|
|
$
|
22.6
|
|
|
$
|
(73.2
|
)
|
|
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
Depreciation and amortization
|
33.5
|
|
|
36.4
|
|
|
40.5
|
|
|
Non-cash employee retirement benefits
|
(11.6
|
)
|
|
(8.9
|
)
|
|
(6.9
|
)
|
|
Non-cash postretirement benefits curtailment and settlement gain
|
—
|
|
|
(45.0
|
)
|
|
—
|
|
|
Deferred income taxes
|
6.3
|
|
|
(3.5
|
)
|
|
0.1
|
|
|
Share-based compensation
|
0.8
|
|
|
0.5
|
|
|
(1.6
|
)
|
|
Loss (gain) on disposal of property and equipment
|
0.2
|
|
|
(0.2
|
)
|
|
(2.5
|
)
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
Accounts receivable
|
6.2
|
|
|
(15.4
|
)
|
|
34.9
|
|
|
Inventories
|
(10.5
|
)
|
|
9.4
|
|
|
6.5
|
|
|
Payables and accrued expenses
|
22.8
|
|
|
12.4
|
|
|
(43.7
|
)
|
|
Employee retirement benefits
|
(2.1
|
)
|
|
(1.7
|
)
|
|
(0.5
|
)
|
|
Recoverable non-income tax
|
8.1
|
|
|
1.1
|
|
|
41.7
|
|
|
Other
|
(4.6
|
)
|
|
1.1
|
|
|
(0.6
|
)
|
|
Cash provided by (used in) operating activities
|
11.6
|
|
|
8.8
|
|
|
(5.3
|
)
|
|
Cash Flows from Investing Activities:
|
|
|
|
|
|
|
Capital expenditures
|
(11.8
|
)
|
|
(13.8
|
)
|
|
(17.7
|
)
|
|
Change in restricted cash and cash equivalents
|
(10.5
|
)
|
|
7.1
|
|
|
3.8
|
|
|
Proceeds from sales of assets
|
0.3
|
|
|
1.0
|
|
|
4.8
|
|
|
Cash used in investing activities
|
(22.0
|
)
|
|
(5.7
|
)
|
|
(9.1
|
)
|
|
Cash Flows from Financing Activities:
|
|
|
|
|
|
|
Proceeds from long-term debt
|
16.0
|
|
|
4.5
|
|
|
4.5
|
|
|
Payments on long-term debt
|
(4.1
|
)
|
|
(4.8
|
)
|
|
(12.1
|
)
|
|
Payments on capital leases
|
(0.4
|
)
|
|
(0.1
|
)
|
|
—
|
|
|
Debt issuance costs
|
(0.2
|
)
|
|
—
|
|
|
(0.3
|
)
|
|
Other (repayments) borrowings, net
|
(1.5
|
)
|
|
3.5
|
|
|
8.5
|
|
|
Cash provided by financing activities
|
9.8
|
|
|
3.1
|
|
|
0.6
|
|
|
Effect of Exchange Rate Changes on Cash
|
0.3
|
|
|
(0.5
|
)
|
|
(2.5
|
)
|
|
(Decrease) Increase in cash and cash equivalents
|
(0.3
|
)
|
|
5.7
|
|
|
(16.3
|
)
|
|
Cash and Cash Equivalents:
|
|
|
|
|
|
|
Beginning of Period
|
55.3
|
|
|
49.6
|
|
|
65.9
|
|
|
End of Period
|
$
|
55.0
|
|
|
$
|
55.3
|
|
|
$
|
49.6
|
|
|
Supplemental Schedule of Cash Flows and Non-cash Investing and Financing Activities:
|
|
|
|
|
|
|
Cash paid for interest
|
$
|
8.8
|
|
|
$
|
9.1
|
|
|
$
|
9.6
|
|
|
Cash paid for taxes
|
$
|
1.4
|
|
|
$
|
0.7
|
|
|
$
|
(0.5
|
)
|
|
Capital lease obligations incurred
|
$
|
0.2
|
|
|
2.0
|
|
|
—
|
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Class A
$1 Par
Value
|
|
Class B
$1 Par
Value
|
|
Paid in
Capital
|
|
Retained
Earnings
|
|
Accumulated Other Comprehensive Income/(Loss)
|
|
Total
Stockholders’
Equity
|
|
Balance, January 1, 2011
|
$
|
13.4
|
|
|
$
|
5.1
|
|
|
$
|
11.0
|
|
|
$
|
354.2
|
|
|
$
|
51.2
|
|
|
$
|
434.9
|
|
|
Net loss
|
|
|
|
|
|
|
(73.2
|
)
|
|
|
|
(73.2
|
)
|
|
Loss on derivatives, net of tax
|
|
|
|
|
|
|
|
|
(26.1
|
)
|
|
(26.1
|
)
|
|
Translation adjustments, net of tax
|
|
|
|
|
|
|
|
|
(26.9
|
)
|
|
(26.9
|
)
|
|
Pension and postretirement benefits, net of tax
|
|
|
|
|
|
|
|
|
(22.8
|
)
|
|
(22.8
|
)
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
(149.0
|
)
|
|
Balance, December 31, 2011
|
$
|
13.4
|
|
|
$
|
5.1
|
|
|
$
|
11.0
|
|
|
$
|
281.0
|
|
|
$
|
(24.6
|
)
|
|
$
|
285.9
|
|
|
Net income
|
|
|
|
|
|
|
22.6
|
|
|
|
|
22.6
|
|
|
Gain on derivatives, net of tax
|
|
|
|
|
|
|
|
|
12.0
|
|
|
12.0
|
|
|
Translation adjustments, net of tax
|
|
|
|
|
|
|
|
|
(12.6
|
)
|
|
(12.6
|
)
|
|
Pension and postretirement benefits, net of tax
|
|
|
|
|
|
|
|
|
(49.5
|
)
|
|
(49.5
|
)
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
(27.5
|
)
|
|
Balance, December 31, 2012
|
$
|
13.4
|
|
|
$
|
5.1
|
|
|
$
|
11.0
|
|
|
$
|
303.6
|
|
|
$
|
(74.7
|
)
|
|
$
|
258.4
|
|
|
Net loss
|
|
|
|
|
|
|
(37.5
|
)
|
|
|
|
(37.5
|
)
|
|
Gain on derivatives, net of tax
|
|
|
|
|
|
|
|
|
1.0
|
|
|
1.0
|
|
|
Translation adjustments, net of tax
|
|
|
|
|
|
|
|
|
(22.6
|
)
|
|
(22.6
|
)
|
|
Pension and postretirement benefits, net of tax
|
|
|
|
|
|
|
|
|
11.0
|
|
|
11.0
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
(48.1
|
)
|
|
Balance, December 31, 2013
|
$
|
13.4
|
|
|
$
|
5.1
|
|
|
$
|
11.0
|
|
|
$
|
266.1
|
|
|
$
|
(85.3
|
)
|
|
$
|
210.3
|
|
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:
|
|
|
|
|
|
Land improvements
|
10 years
|
|
Buildings and improvements
|
10-40 years
|
|
Machinery, equipment and tooling
|
2-10 years
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
Environmental and legal charges and settlements
|
|
$
|
(0.7
|
)
|
|
$
|
(0.9
|
)
|
|
$
|
(2.0
|
)
|
|
Workers' compensation and product liability claims
|
|
(2.4
|
)
|
|
(0.8
|
)
|
|
0.3
|
|
|
Legal fee reimbursements
|
|
—
|
|
|
0.8
|
|
|
—
|
|
|
Grafton operating costs
|
|
—
|
|
|
(0.4
|
)
|
|
(0.2
|
)
|
|
Mutual release agreement
|
|
—
|
|
|
0.4
|
|
|
—
|
|
|
Gain on sale of Grafton
|
|
—
|
|
|
0.4
|
|
|
—
|
|
|
Total (loss) from discontinued operations, net of tax
|
|
$
|
(3.1
|
)
|
|
$
|
(0.5
|
)
|
|
$
|
(1.9
|
)
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in millions)
|
|
2013
|
|
2012
|
|
Raw materials, net of reserves
|
|
$
|
81.1
|
|
|
$
|
76.6
|
|
|
Work in progress
|
|
1.2
|
|
|
2.1
|
|
|
Finished goods, net of reserves
|
|
45.4
|
|
|
44.6
|
|
|
Inventories
|
|
$
|
127.7
|
|
|
$
|
123.3
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in millions)
|
|
2013
|
|
2012
|
|
Land and land improvements
|
|
$
|
10.5
|
|
|
$
|
11.3
|
|
|
Buildings and building improvements
|
|
93.2
|
|
|
95.0
|
|
|
Machinery and equipment
|
|
701.1
|
|
|
791.3
|
|
|
Capital leases
|
|
2.2
|
|
|
2.0
|
|
|
Construction in process
|
|
5.1
|
|
|
5.4
|
|
|
Property, plant and equipment, gross
|
|
812.1
|
|
|
905.0
|
|
|
Less accumulated depreciation
|
|
689.3
|
|
|
748.0
|
|
|
Property, plant and equipment, net
|
|
$
|
122.8
|
|
|
$
|
157.0
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefit
|
|
Other Benefit
|
|
(in millions)
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
Assets and liabilities:
|
|
|
|
|
|
|
|
|
Liabilities – current
|
$
|
(0.8
|
)
|
|
$
|
(0.8
|
)
|
|
$
|
—
|
|
|
$
|
(0.2
|
)
|
|
Liabilities – long term
|
$
|
(20.0
|
)
|
|
$
|
(37.1
|
)
|
|
$
|
(0.3
|
)
|
|
$
|
—
|
|
|
Accumulated other comprehensive income:
|
|
|
|
|
|
|
|
|
Prior service cost (credit)
|
$
|
1.1
|
|
|
$
|
0.8
|
|
|
$
|
—
|
|
|
$
|
(2.1
|
)
|
|
Net actuarial loss (gain)
|
$
|
22.8
|
|
|
$
|
41.7
|
|
|
$
|
—
|
|
|
$
|
(12.8
|
)
|
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
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefit
|
|
Other Benefit
|
|
(in millions)
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
Change in benefit obligation
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of period
|
$
|
186.5
|
|
|
$
|
182.3
|
|
|
$
|
0.2
|
|
|
$
|
5.2
|
|
|
Service cost
|
2.2
|
|
|
2.4
|
|
|
—
|
|
|
—
|
|
|
Interest cost
|
6.8
|
|
|
7.2
|
|
|
—
|
|
|
0.1
|
|
|
Plan amendments
|
—
|
|
|
—
|
|
|
—
|
|
|
(3.5
|
)
|
|
Actuarial loss (gain)
|
(15.1
|
)
|
|
4.9
|
|
|
(0.1
|
)
|
|
(0.3
|
)
|
|
Benefit payments
|
(10.2
|
)
|
|
(11.0
|
)
|
|
(0.1
|
)
|
|
(0.4
|
)
|
|
Special termination benefits
|
—
|
|
|
0.2
|
|
|
—
|
|
|
—
|
|
|
Reclassification adjustment
|
—
|
|
|
—
|
|
|
0.3
|
|
|
—
|
|
|
Settlements
|
(1.6
|
)
|
|
—
|
|
|
—
|
|
|
(0.9
|
)
|
|
Curtailments
|
(3.8
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Effect of changes in exchange rate
|
—
|
|
|
0.5
|
|
|
—
|
|
|
—
|
|
|
Benefit obligation at measurement date
|
$
|
164.8
|
|
|
$
|
186.5
|
|
|
$
|
0.3
|
|
|
$
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
Fair value at beginning of period
|
$
|
148.5
|
|
|
$
|
144.2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Actual return on plan assets
|
5.9
|
|
|
14.0
|
|
|
—
|
|
|
—
|
|
|
Employer contributions
|
1.7
|
|
|
1.3
|
|
|
0.1
|
|
|
0.4
|
|
|
Benefit payments
|
(10.2
|
)
|
|
(11.0
|
)
|
|
(0.1
|
)
|
|
(0.4
|
)
|
|
Settlements
|
(1.6
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Effect of changes in exchange rate
|
(0.3
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Fair value at measurement date
|
$
|
144.0
|
|
|
$
|
148.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in millions)
|
2013
|
|
2012
|
|
Projected benefit obligation
|
$
|
162.8
|
|
|
$
|
184.2
|
|
|
Accumulated benefit obligation
|
$
|
159.3
|
|
|
$
|
175.9
|
|
|
Fair value of plan assets
|
$
|
142.3
|
|
|
$
|
146.9
|
|
Information for pension plans with a projected benefit obligation in excess of plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in millions)
|
2013
|
|
2012
|
|
Projected benefit obligation
|
$
|
164.8
|
|
|
$
|
186.5
|
|
|
Accumulated benefit obligation
|
$
|
160.9
|
|
|
$
|
177.4
|
|
|
Fair value of plan assets
|
$
|
144.0
|
|
|
$
|
148.5
|
|
Components of net periodic expense (benefit) during the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
(in millions)
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
Service cost
|
|
$
|
2.2
|
|
|
$
|
2.4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Interest cost
|
|
6.8
|
|
|
7.2
|
|
|
—
|
|
|
0.1
|
|
|
Expected return on plan assets
|
|
(8.5
|
)
|
|
(8.4
|
)
|
|
—
|
|
|
—
|
|
|
Amortization of net loss (gain)
|
|
2.7
|
|
|
3.0
|
|
|
(12.9
|
)
|
|
(9.2
|
)
|
|
Amortization of unrecognized prior service costs
|
|
(0.2
|
)
|
|
(0.2
|
)
|
|
(2.1
|
)
|
|
(3.9
|
)
|
|
Curtailment and settlement gain
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(45.0
|
)
|
|
Net periodic expense (benefit)
|
|
$
|
3.0
|
|
|
$
|
4.0
|
|
|
$
|
(15.0
|
)
|
|
$
|
(58.0
|
)
|
Additional Information
Assumptions
Weighted-average assumptions used to determine benefit obligations as of December 31;
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
U.S.-Based Plans:
|
|
|
|
|
|
|
|
|
Discount rate
|
4.50
|
%
|
|
3.75
|
%
|
|
N/A
|
|
|
0.50
|
%
|
|
Rate of compensation increase
|
N/A
|
|
|
3.50
|
%
|
|
N/A
|
|
|
N/A
|
|
|
Europe-Based Plans:
|
|
|
|
|
|
|
|
|
Discount rate
|
2.75
|
%
|
|
2.75
|
%
|
|
2.25
|
%
|
|
N/A
|
|
|
Rate of compensation increase
|
3.00
|
%
|
|
3.00
|
%
|
|
N/A
|
|
|
N/A
|
|
|
India-Based Plans:
|
|
|
|
|
|
|
|
|
Discount rate
|
9.00
|
%
|
|
8.25
|
%
|
|
N/A
|
|
|
N/A
|
|
|
Rate of compensation increase
|
6.00
|
%
|
|
6.00
|
%
|
|
N/A
|
|
|
N/A
|
|
Weighted-average assumptions used to determine net periodic benefit costs for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
U.S.-Based Plans:
|
|
|
|
|
|
|
|
|
Discount rate
|
3.75
|
%
|
|
4.00
|
%
|
|
N/A
|
|
4.00
|
%
|
|
Expected long-term return on plan assets
|
6.00
|
%
|
|
6.00
|
%
|
|
N/A
|
|
N/A
|
|
|
Rate of compensation increase
|
3.50
|
%
|
|
4.25
|
%
|
|
N/A
|
|
N/A
|
|
|
Europe-Based Plans:
|
|
|
|
|
|
|
|
|
Discount rate
|
2.75
|
%
|
|
3.80
|
%
|
|
N/A
|
|
N/A
|
|
|
Expected long-term return on plan assets
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
N/A
|
|
|
Rate of compensation increase
|
3.00
|
%
|
|
3.00
|
%
|
|
N/A
|
|
N/A
|
|
|
India-Based Plans:
|
|
|
|
|
|
|
|
|
Discount rate
|
8.25
|
%
|
|
8.60
|
%
|
|
N/A
|
|
N/A
|
|
|
Expected long-term return on plan assets
|
9.25
|
%
|
|
9.40
|
%
|
|
N/A
|
|
N/A
|
|
|
Rate of compensation increase
|
6.00
|
%
|
|
6.00
|
%
|
|
N/A
|
|
N/A
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan Assets at December 31, 2013
|
|
(in millions)
|
Total Fair Value Measurement
|
|
Quoted Prices in Active Markets (Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
|
Significant Unobservable Inputs (Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
3.1
|
|
|
$
|
3.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Mutual Funds:
|
|
|
|
|
|
|
|
|
U.S. large cap
|
18.2
|
|
|
18.2
|
|
|
—
|
|
|
—
|
|
|
U.S. small cap
|
12.3
|
|
|
12.3
|
|
|
—
|
|
|
—
|
|
|
International growth
|
15.0
|
|
|
15.0
|
|
|
—
|
|
|
—
|
|
|
Fixed Income Securities:
|
|
|
|
|
|
|
|
|
Corporate bonds
|
73.9
|
|
|
—
|
|
|
73.9
|
|
|
—
|
|
|
U.S. Treasury and Government bonds
|
10.0
|
|
|
10.0
|
|
|
—
|
|
|
—
|
|
|
U.S. state and political subdivision bonds
|
3.6
|
|
|
—
|
|
|
3.6
|
|
|
—
|
|
|
Other fixed income securities
|
5.7
|
|
|
—
|
|
|
5.7
|
|
|
—
|
|
|
Other:
|
|
|
|
|
|
|
|
|
India Government backed funds
|
2.2
|
|
|
2.2
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
144.0
|
|
|
$
|
60.8
|
|
|
$
|
83.2
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan Assets at December 31, 2012
|
|
(in millions)
|
Total Fair Value Measurement
|
|
Quoted Prices in Active Markets (Level 1)
|
|
Significant Other Observable Inputs (Level 2)
|
|
Significant Unobservable Inputs (Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
2.4
|
|
|
$
|
2.4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Mutual Funds:
|
|
|
|
|
|
|
|
|
U.S. large cap
|
17.3
|
|
|
17.3
|
|
|
—
|
|
|
—
|
|
|
U.S. small cap
|
11.8
|
|
|
11.8
|
|
|
—
|
|
|
—
|
|
|
International growth
|
14.8
|
|
|
14.8
|
|
|
—
|
|
|
—
|
|
|
Fixed Income Securities:
|
|
|
|
|
|
|
|
|
Corporate bonds
|
78.5
|
|
|
—
|
|
|
78.5
|
|
|
—
|
|
|
U.S. Treasuries and Government bonds
|
13.1
|
|
|
13.1
|
|
|
—
|
|
|
—
|
|
|
U.S. state and political subdivision bonds
|
3.8
|
|
|
—
|
|
|
3.8
|
|
|
—
|
|
|
Other fixed income securities
|
4.4
|
|
|
—
|
|
|
4.4
|
|
|
—
|
|
|
Other:
|
|
|
|
|
|
|
|
|
India Government backed funds
|
2.4
|
|
|
2.4
|
|
|
—
|
|
|
—
|
|
|
Total
|
$
|
148.5
|
|
|
$
|
61.8
|
|
|
$
|
86.7
|
|
|
$
|
—
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
Year
|
Projected Benefit
Payments from
Pension Plans
|
|
Projected Benefit Payments
From Postretirement Medical
And Life Insurance Plans
|
|
2014
|
$
|
10.5
|
|
|
$
|
—
|
|
|
2015
|
$
|
11.2
|
|
|
$
|
—
|
|
|
2016
|
$
|
11.0
|
|
|
$
|
—
|
|
|
2017
|
$
|
11.2
|
|
|
$
|
—
|
|
|
2018
|
$
|
12.4
|
|
|
$
|
—
|
|
|
Aggregate for 2019-2023
|
$
|
60.1
|
|
|
$
|
0.1
|
|
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
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(in millions)
|
|
2013
|
|
2012
|
|
Brazil
|
|
$
|
22.1
|
|
|
$
|
32.5
|
|
|
India
|
|
3.9
|
|
|
6.1
|
|
|
Europe
|
|
1.3
|
|
|
0.8
|
|
|
Mexico
|
|
—
|
|
|
0.1
|
|
|
Total recoverable non-income taxes
|
|
$
|
27.3
|
|
|
$
|
39.5
|
|
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:
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Balance at January 1, 2011
|
$
|
5.9
|
|
|
Settlements of warranty claims (in cash or in kind)
|
(5.6
|
)
|
|
Current year accruals for warranties
|
6.5
|
|
|
Effect of foreign currency translation
|
(0.3
|
)
|
|
Balance at December 31, 2011
|
$
|
6.5
|
|
|
Settlements of warranty claims (in cash or in kind)
|
(6.3
|
)
|
|
Current year accruals for warranties
|
6.5
|
|
|
Effect of foreign currency translation
|
(0.1
|
)
|
|
Balance at December 31, 2012
|
$
|
6.6
|
|
|
Settlements of warranty claims (in cash or in kind)
|
(7.9
|
)
|
|
Current year accruals for warranties
|
14.8
|
|
|
Effect of foreign currency translation
|
(0.3
|
)
|
|
Balance at December 31, 2013
|
$
|
13.2
|
|
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,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2013
|
|
2012
|
|
|
|
|
Weighted Avg. Int. Rate
|
|
|
|
Weighted Avg. Int. Rate
|
|
Short-term borrowings
|
|
|
|
|
|
|
|
|
Lines of credit
|
$
|
33.9
|
|
|
|
|
$
|
40.0
|
|
|
|
|
Revolving credit facility
|
8.0
|
|
|
|
|
10.0
|
|
|
|
|
Capital lease obligations
|
—
|
|
|
|
|
0.4
|
|
|
|
|
Other debt
|
0.4
|
|
|
|
|
0.2
|
|
|
|
|
Current maturities of long-term debt
|
7.4
|
|
|
|
|
5.0
|
|
|
|
|
Total short-term borrowings
|
$
|
49.7
|
|
|
8.7
|
%
|
|
$
|
55.6
|
|
|
8.9
|
%
|
|
Long-term borrowings
|
|
|
|
|
|
|
|
|
Lines of credit
|
$
|
7.1
|
|
|
|
|
|
$
|
9.2
|
|
|
|
|
|
Term Loan
|
15.0
|
|
|
|
|
—
|
|
|
|
|
Capital lease obligations
|
1.8
|
|
|
|
|
1.5
|
|
|
|
|
Other debt
|
1.0
|
|
|
|
|
|
0.1
|
|
|
|
|
|
Less: Current maturities of long-term debt
|
(7.4
|
)
|
|
|
|
(5.0
|
)
|
|
|
|
Total long-term debt borrowings
|
$
|
17.5
|
|
|
4.4
|
%
|
|
$
|
5.8
|
|
|
5.2
|
%
|
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:
|
|
|
|
|
|
|
|
(in millions)
|
|
|
2014
|
$
|
49.7
|
|
|
2015
|
$
|
4.7
|
|
|
2016
|
$
|
5.3
|
|
|
2017
|
$
|
3.6
|
|
|
2018
|
$
|
3.1
|
|
|
Thereafter
|
$
|
0.8
|
|
|
Total
|
$
|
67.2
|
|
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:
|
|
|
|
|
|
|
Year
|
|
Number of Phantom Shares Awarded
|
|
2011
|
|
0
|
|
2012
|
|
435,866
|
|
2013
|
|
23,642
|
A summary of activity under the plans during
2013
is as follows:
|
|
|
|
|
|
|
|
|
|
|
SARs:
|
Number of awards
|
|
Weighted average exercise price per share
|
|
Outstanding at January 1, 2013
|
100,539
|
|
|
$
|
11.14
|
|
|
Granted
|
—
|
|
|
$
|
—
|
|
|
Exercised
|
—
|
|
|
$
|
—
|
|
|
Forfeited
|
(48,460)
|
|
|
$
|
13.21
|
|
|
Outstanding at December 31, 2013
|
52,079
|
|
|
$
|
11.81
|
|
|
|
|
|
|
|
|
|
|
|
|
Phantom Shares: *
|
Number of awards
|
|
Weighted average grant date value per share
|
|
Outstanding at January 1, 2013
|
487,670
|
|
|
$
|
5.67
|
|
|
Granted
|
23,642
|
|
|
$
|
9.02
|
|
|
Exercised
|
(197,093
|
)
|
|
$
|
6.87
|
|
|
Forfeited
|
(78,277
|
)
|
|
$
|
4.73
|
|
|
Outstanding at December 31, 2013
|
235,942
|
|
|
$
|
5.98
|
|
|
* Includes both non-performance and performance based shares.
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
Risk-free interest rate
|
0.16%-0.78%
|
|
|
0.27%-0.52%
|
|
|
0.4%-0.83%
|
|
|
Dividend yield
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
|
Expected life (years)
|
1.2-3.0 years
|
|
|
2.2-4.0 years
|
|
|
3.2-5.0 years
|
|
|
Volatility
|
62.21
|
%
|
|
63.63
|
%
|
|
80.66
|
%
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
(in millions)
|
2013
|
|
2012
|
|
2011
|
|
Severance, restructuring costs, and special termination benefits
|
$
|
9.9
|
|
|
$
|
3.8
|
|
|
$
|
8.0
|
|
|
Business process re-engineering
|
2.7
|
|
|
—
|
|
|
—
|
|
|
Impairment of investment and assets
|
—
|
|
|
—
|
|
|
0.4
|
|
|
Environmental reserve for sold building
|
0.2
|
|
|
0.6
|
|
|
0.1
|
|
|
Curtailment and settlement gain on postretirement benefits
|
—
|
|
|
(45.0
|
)
|
|
—
|
|
|
Refund of settlement notice and administrative costs
|
—
|
|
|
(0.1
|
)
|
|
—
|
|
|
Moving costs
|
0.5
|
|
|
0.1
|
|
|
—
|
|
|
Contingent legal liability
|
0.3
|
|
|
—
|
|
|
—
|
|
|
Total impairments, restructuring charges, and other items
|
$
|
13.6
|
|
|
$
|
(40.6
|
)
|
|
$
|
8.5
|
|
2013
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.
2012
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".
2011
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Severance
|
|
Other
|
|
Total
|
|
Balance at January 1, 2012
|
|
$
|
0.1
|
|
|
$
|
1.8
|
|
|
$
|
1.9
|
|
|
Accruals
|
|
3.8
|
|
|
0.6
|
|
|
4.4
|
|
|
Payments
|
|
(3.8
|
)
|
|
(0.9
|
)
|
|
(4.7
|
)
|
|
Balance at December 31, 2012
|
|
$
|
0.1
|
|
|
$
|
1.5
|
|
|
$
|
1.6
|
|
|
Accruals
|
|
9.9
|
|
|
3.7
|
|
|
13.6
|
|
|
Payments
|
|
(4.5
|
)
|
|
(3.5
|
)
|
|
(8.0
|
)
|
|
Balance at December 31, 2013
|
|
$
|
5.5
|
|
|
$
|
1.7
|
|
|
$
|
7.2
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2013
|
|
2012
|
|
2011
|
|
U.S.
|
$
|
0.8
|
|
|
$
|
45.5
|
|
|
$
|
(22.4
|
)
|
|
Foreign
|
(27.5
|
)
|
|
(32.6
|
)
|
|
(49.8
|
)
|
|
Consolidated (loss) income from continuing operations before tax
|
$
|
(26.7
|
)
|
|
$
|
12.9
|
|
|
$
|
(72.2
|
)
|
Provision for (benefit from) income taxes from continuing operations consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2013
|
|
|
2012
|
|
2011
|
|
Current:
|
|
|
|
|
|
|
U.S. federal
|
$
|
—
|
|
|
$
|
(4.6
|
)
|
|
$
|
(1.2
|
)
|
|
State and local
|
—
|
|
|
(0.1
|
)
|
|
0.1
|
|
|
Foreign income and withholding taxes
|
0.6
|
|
|
(0.6
|
)
|
|
0.1
|
|
|
Total current:
|
$
|
0.6
|
|
|
$
|
(5.3
|
)
|
|
$
|
(1.0
|
)
|
|
Deferred:
|
|
|
|
|
|
|
U.S. federal
|
7.7
|
|
|
(4.8
|
)
|
|
—
|
|
|
State and local
|
—
|
|
|
—
|
|
|
—
|
|
|
Foreign
|
(0.6
|
)
|
|
(0.1
|
)
|
|
0.1
|
|
|
Total deferred:
|
7.1
|
|
|
(4.9
|
)
|
|
0.1
|
|
|
Provision for (benefit from) income taxes from continuing operations
|
$
|
7.7
|
|
|
$
|
(10.2
|
)
|
|
$
|
(0.9
|
)
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2013
|
|
2012
|
|
2011
|
|
Income taxes expense (benefit) at U.S. statutory rate
|
$
|
(9.3
|
)
|
|
$
|
4.5
|
|
|
$
|
(25.3
|
)
|
|
State and local income taxes, net of federal benefit
|
—
|
|
|
(0.1
|
)
|
|
0.1
|
|
|
Foreign tax rate differential
|
0.2
|
|
|
0.2
|
|
|
0.4
|
|
|
Valuation allowances
|
(2.1
|
)
|
|
(88.7
|
)
|
|
25.7
|
|
|
Tax attribute expiration
|
9.1
|
|
|
68.5
|
|
|
—
|
|
|
Intraperiod allocation
|
7.1
|
|
|
(4.8
|
)
|
|
—
|
|
|
Release of uncertain tax positions
|
—
|
|
|
(4.5
|
)
|
|
—
|
|
|
Tax refunds
|
(0.4
|
)
|
|
(1.0
|
)
|
|
(1.7
|
)
|
|
Deemed foreign dividend
|
—
|
|
|
15.7
|
|
|
—
|
|
|
Deferred tax adjustments
|
4.0
|
|
|
—
|
|
|
—
|
|
|
Transfer pricing
|
2.2
|
|
|
—
|
|
|
—
|
|
|
Tax exempt income
|
(5.8
|
)
|
|
—
|
|
|
—
|
|
|
Non-deductible expense
|
1.9
|
|
|
—
|
|
|
—
|
|
|
Other items, net
|
0.8
|
|
|
—
|
|
|
(0.1
|
)
|
|
Income tax expense (benefit) at effective worldwide tax rates
|
$
|
7.7
|
|
|
$
|
(10.2
|
)
|
|
$
|
(0.9
|
)
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2013
|
|
2012
|
|
Deferred tax assets:
|
|
|
|
|
Other postretirement liabilities
|
$
|
6.3
|
|
|
$
|
5.6
|
|
|
Product warranty and self-insured risks
|
0.3
|
|
|
2.7
|
|
|
Tax carry forwards
|
292.9
|
|
|
305.2
|
|
|
Other accruals and miscellaneous
|
22.6
|
|
|
26.9
|
|
|
Subtotal
|
322.1
|
|
|
340.4
|
|
|
Valuation allowance
|
(305.2
|
)
|
|
(307.3
|
)
|
|
Total deferred tax assets
|
$
|
16.9
|
|
|
$
|
33.1
|
|
|
Deferred tax liabilities:
|
|
|
|
|
Property, plant & equipment
|
$
|
7.8
|
|
|
$
|
14.0
|
|
|
Pension
|
—
|
|
|
13.9
|
|
|
Unrealized gains on securities
|
6.4
|
|
|
1.6
|
|
|
Other
|
2.6
|
|
|
3.5
|
|
|
Total deferred tax liabilities
|
16.8
|
|
|
33.0
|
|
|
Net deferred tax assets
|
$
|
0.1
|
|
|
$
|
0.1
|
|
Deferred tax details included in the Consolidated Balance Sheets at December 31, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2013
|
|
2012
|
|
Deferred tax assets
|
$
|
1.9
|
|
|
$
|
0.3
|
|
|
Deferred tax liabilities
|
1.8
|
|
|
0.2
|
|
|
Total
|
$
|
0.1
|
|
|
$
|
0.1
|
|
At
December 31, 2013
, we had the following tax carry forwards:
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Amounts
|
|
Expiration
|
|
U.S. Federal Net Operating Loss
|
$
|
184.5
|
|
|
2027 to 2033
|
|
U.S. State Net Operating Loss
|
16.9
|
|
|
2016 to 2033
|
|
Foreign Net Operating Losses
|
54.1
|
|
|
Unlimited
|
|
U.S. Tax Credits
|
37.1
|
|
|
2015 to 2031
|
|
U.S. Alternative Minimum Tax Credit
|
0.3
|
|
|
Unlimited
|
|
Total operating loss and tax credit carry forwards
|
$
|
292.9
|
|
|
|
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
no
t 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:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2013
|
|
2012
|
|
Unrecognized tax benefits – beginning of period
|
$
|
—
|
|
|
$
|
5.5
|
|
|
Settlements
|
—
|
|
|
(5.5
|
)
|
|
Unrecognized tax benefits – end of period
|
$
|
—
|
|
|
$
|
—
|
|
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
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Total Fair
Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
Commodity futures contracts
|
$
|
0.6
|
|
|
$
|
—
|
|
|
$
|
0.6
|
|
|
$
|
—
|
|
|
Balance as of December 31, 2013
|
$
|
0.6
|
|
|
$
|
—
|
|
|
$
|
0.6
|
|
|
$
|
—
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Foreign currency derivatives
|
(1.6
|
)
|
|
—
|
|
|
(1.6
|
)
|
|
—
|
|
|
Balance as of December 31, 2013
|
$
|
(1.6
|
)
|
|
$
|
—
|
|
|
$
|
(1.6
|
)
|
|
$
|
—
|
|
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
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Total Fair
Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
Commodity futures contracts
|
$
|
0.4
|
|
|
$
|
—
|
|
|
$
|
0.4
|
|
|
$
|
—
|
|
|
Foreign currency derivatives
|
0.3
|
|
|
—
|
|
|
0.3
|
|
|
—
|
|
|
Balance as of December 31, 2012
|
0.7
|
|
|
—
|
|
|
0.7
|
|
|
—
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Foreign currency derivatives
|
(0.9
|
)
|
|
$
|
—
|
|
|
(0.9
|
)
|
|
—
|
|
|
Balance as of December 31, 2012
|
$
|
(0.9
|
)
|
|
$
|
—
|
|
|
$
|
(0.9
|
)
|
|
$
|
—
|
|
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
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset (Liability) Derivatives
|
|
|
December 31, 2013
|
|
December 31, 2012
|
|
(in millions)
|
Financial
Position Location
|
|
Fair Value
|
|
Financial
Position Location
|
|
Fair Value
|
|
Commodity derivatives contracts
|
Fair value of derivative asset
|
|
$
|
0.3
|
|
|
Fair value of derivative asset
|
|
$
|
0.3
|
|
|
Commodity derivatives contracts
|
Fair value of derivative
liability
|
|
—
|
|
|
Fair value of derivative
liability
|
|
—
|
|
|
Foreign currency derivatives
|
Fair value of derivative asset
|
|
—
|
|
|
Fair value of derivative asset
|
|
0.2
|
|
|
Foreign currency derivatives
|
Fair value of derivative
liability
|
|
(1.1
|
)
|
|
Fair value of derivative
liability
|
|
(0.7
|
)
|
|
Total
|
|
|
$
|
(0.8
|
)
|
|
|
|
$
|
(0.2
|
)
|
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
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset (Liability) Derivatives
|
|
|
December 31, 2013
|
|
December 31, 2012
|
|
(in millions)
|
Financial
Position Location
|
|
Fair
Value
|
|
Financial
Position Location
|
|
Fair
Value
|
|
Commodity derivatives contracts
|
Fair value of derivative asset
|
|
$
|
0.3
|
|
|
Fair value of derivative asset
|
|
$
|
0.1
|
|
|
Commodity derivatives contracts
|
Fair value of derivative
liability
|
|
—
|
|
|
Fair value of derivative
liability
|
|
—
|
|
|
Foreign currency derivatives
|
Fair value of derivative asset
|
|
—
|
|
|
Fair value of derivative asset
|
|
0.1
|
|
|
Foreign currency derivatives
|
Fair value of derivative
liability
|
|
(0.5
|
)
|
|
Fair value of derivative
liability
|
|
(0.2
|
)
|
|
Total
|
|
|
$
|
(0.2
|
)
|
|
|
|
$
|
—
|
|
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
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Amount of Gain (Loss) Recognized in AOCI (Effective Portion)
|
Location of
Gain (Loss)
Reclassified
from AOCI
into Income
(Effective
Portion)
|
Amount of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)
|
Location of
Gain (Loss)
Recognized
in Income
(Ineffective
Portion)
|
Amount of Gain (Loss) Recognized in Income (Ineffective Portion)
|
|
Years Ended December 31,
|
Years Ended December 31,
|
Years Ended December 31,
|
|
|
2013
|
|
2012
|
|
2011
|
2013
|
|
2012
|
|
2011
|
2013
|
|
2012
|
|
2011
|
|
Commodity
|
$
|
0.3
|
|
|
$
|
1.3
|
|
|
$
|
(4.5
|
)
|
Cost of Sales
|
$
|
0.2
|
|
|
$
|
(2.2
|
)
|
|
$
|
5.8
|
|
Cost of Sales
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(1.3
|
)
|
|
Currency
|
(1.5
|
)
|
|
1.1
|
|
|
(10.9
|
)
|
Cost of Sales
|
(1.0
|
)
|
|
(11.3
|
)
|
|
6.7
|
|
Cost of Sales
|
—
|
|
|
—
|
|
|
(0.7
|
)
|
|
Total
|
$
|
(1.2
|
)
|
|
$
|
2.4
|
|
|
$
|
(15.4
|
)
|
|
$
|
(0.8
|
)
|
|
$
|
(13.5
|
)
|
|
$
|
12.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(2.0
|
)
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
Pension and postretirement benefits:
|
|
|
|
|
|
|
Amortization of prior service credit, net of tax
|
$
|
7.1
|
|
|
$
|
3.9
|
|
|
$
|
7.4
|
|
|
Amortization of net actuarial gain, net of tax
|
30.0
|
|
|
6.1
|
|
|
1.0
|
|
|
Reclassification of prior service credit and net actuarial gain due to curtailment, net of tax
|
—
|
|
|
44.1
|
|
|
—
|
|
|
Total reclassification, net of tax - pension and postretirement benefits
|
$
|
37.1
|
|
|
$
|
54.1
|
|
|
$
|
8.4
|
|
|
Cash flow hedges:
|
|
|
|
|
|
|
Reclassification adjustment for gain, net of tax - commodities
|
$
|
0.4
|
|
|
$
|
1.9
|
|
|
$
|
3.8
|
|
|
Reclassification adjustment for (loss) gain, net of tax - currency
|
(1.2
|
)
|
|
8.4
|
|
|
5.1
|
|
|
Total reclassification, net of tax - cash flow hedges
|
$
|
(0.8
|
)
|
|
$
|
10.3
|
|
|
$
|
8.9
|
|
|
Total reclassification, net of tax
|
$
|
36.3
|
|
|
$
|
64.4
|
|
|
$
|
17.3
|
|
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:
|
|
|
|
|
|
|
|
Years ending December 31,
|
(in millions)
|
|
|
2014
|
$
|
3.8
|
|
|
2015
|
$
|
2.4
|
|
|
2016
|
$
|
1.6
|
|
|
2017
|
$
|
1.4
|
|
|
2018
|
$
|
1.3
|
|
|
Thereafter
|
$
|
2.6
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2013
|
|
2012
|
|
2011
|
|
Assets:
|
|
|
|
|
|
|
Compressor products
|
$
|
356.0
|
|
|
$
|
392.3
|
|
|
$
|
452.1
|
|
|
Corporate and consolidating items
|
129.0
|
|
|
133.5
|
|
|
111.1
|
|
|
Assets held for sale
|
2.4
|
|
|
2.1
|
|
|
0.5
|
|
|
Total assets
|
$
|
487.4
|
|
|
$
|
527.9
|
|
|
$
|
563.7
|
|
|
Capital expenditures:
|
|
|
|
|
|
|
Compressor products
|
$
|
10.3
|
|
|
$
|
11.9
|
|
|
$
|
11.5
|
|
|
Corporate and consolidating items
|
1.5
|
|
|
1.9
|
|
|
6.2
|
|
|
Total capital expenditures
|
$
|
11.8
|
|
|
$
|
13.8
|
|
|
$
|
17.7
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
Compressor products
|
$
|
27.3
|
|
|
$
|
29.0
|
|
|
$
|
32.6
|
|
|
Corporate and consolidating items
|
6.2
|
|
|
7.4
|
|
|
7.9
|
|
|
Total depreciation and amortization
|
$
|
33.5
|
|
|
$
|
36.4
|
|
|
$
|
40.5
|
|
Geographic Information
Customer sales by geographic location for the years ended December 31, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2013
|
|
2012
|
|
2011
|
|
Customer sales by destination:
|
|
|
|
|
|
|
North America
|
|
|
|
|
|
|
United States
|
$
|
135.9
|
|
|
$
|
168.0
|
|
|
$
|
170.6
|
|
|
Other North America
|
15.7
|
|
|
18.3
|
|
|
19.0
|
|
|
Total North America
|
$
|
151.6
|
|
|
$
|
186.3
|
|
|
$
|
189.6
|
|
|
South America
|
|
|
|
|
|
|
Brazil
|
$
|
223.9
|
|
|
$
|
193.4
|
|
|
$
|
224.6
|
|
|
Other South America
|
58.8
|
|
|
65.9
|
|
|
53.1
|
|
|
Total South America
|
$
|
282.7
|
|
|
$
|
259.3
|
|
|
$
|
277.7
|
|
|
Europe
|
$
|
207.1
|
|
|
$
|
203.2
|
|
|
$
|
210.8
|
|
|
Asia
|
|
|
|
|
|
|
China
|
$
|
20.0
|
|
|
$
|
26.2
|
|
|
$
|
24.7
|
|
|
India
|
74.5
|
|
|
66.3
|
|
|
48.1
|
|
|
Other Asia
|
21.1
|
|
|
27.2
|
|
|
24.9
|
|
|
Total Asia
|
$
|
115.6
|
|
|
$
|
119.7
|
|
|
$
|
97.7
|
|
|
Middle East and Africa
|
$
|
66.6
|
|
|
$
|
86.2
|
|
|
$
|
88.6
|
|
|
Total sales
|
$
|
823.6
|
|
|
$
|
854.7
|
|
|
$
|
864.4
|
|
Property, plant and equipment at December 31, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2013
|
|
2012
|
|
2011
|
|
Property, plant and equipment, net:
|
|
|
|
|
|
|
North America
|
$
|
27.1
|
|
|
$
|
30.2
|
|
|
$
|
35.3
|
|
|
Brazil
|
60.1
|
|
|
85.4
|
|
|
110.7
|
|
|
India
|
20.4
|
|
|
24.8
|
|
|
30.0
|
|
|
Europe
|
15.2
|
|
|
16.6
|
|
|
13.4
|
|
|
Total property, plant and equipment, net
|
$
|
122.8
|
|
|
$
|
157.0
|
|
|
$
|
189.4
|
|
NOTE 18. Quarterly Financial Data – Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
|
|
(in millions, except per share data)
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Total
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
207.6
|
|
|
$
|
227.6
|
|
|
$
|
194.4
|
|
|
$
|
194.0
|
|
|
$
|
823.6
|
|
|
Gross profit
|
22.1
|
|
|
19.2
|
|
|
24.0
|
|
|
12.8
|
|
|
78.1
|
|
|
Net (loss)
(a)
|
(8.4
|
)
|
|
(6.3
|
)
|
|
(5.7
|
)
|
|
(17.1
|
)
|
|
(37.5
|
)
|
|
Basic and diluted (loss) per share
|
$
|
(0.45
|
)
|
|
$
|
(0.35
|
)
|
|
$
|
(0.30
|
)
|
|
(0.93
|
)
|
|
$
|
(2.03
|
)
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
$
|
219.6
|
|
|
$
|
228.1
|
|
|
$
|
208.6
|
|
|
$
|
198.4
|
|
|
$
|
854.7
|
|
|
Gross profit
|
15.6
|
|
|
17.6
|
|
|
18.2
|
|
|
13.3
|
|
|
64.7
|
|
|
Net (loss) income
(b)
|
(7.1
|
)
|
|
44.0
|
|
|
(3.8
|
)
|
|
(10.5
|
)
|
|
22.6
|
|
|
Basic and diluted (loss) earnings per share
|
$
|
(0.38
|
)
|
|
$
|
2.38
|
|
|
$
|
(0.21
|
)
|
|
$
|
(0.57
|
)
|
|
$
|
1.22
|
|
(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
.