The great Shawnee Indian war chief Tecumseh was seen as a brilliant leader who thwarted U.S. attempts to invade Canada but ultimately could not save his people. Tecumseh Products (NASDAQ:TECUA), which makes generators, compressors, air conditioners, and other industrial, commercial, and consumer products, seems to be of the same mold: unable to save itself -- from itself.
After delaying the release of its third-quarter results three times and then announcing it would have to restate prior financial statements, Tecumseh
finally 'fessed up and said its losses widened year over year.
In particular, in its engine and power train division -- which manufactures generators, snow throwers, and lawn mowers -- sales dropped 31% from 2005 primarily because of fewer hurricanes and other severe storms, which had driven generator sales the year before. It was the same type of story for rival Briggs & Stratton (NYSE:BGG) two months ago when it reported lousy sales.
While you can get the raw data in this Fool by Numbers, the crux is that Tecumseh was short-circuited by fluctuating currency exchange rates and higher prices for commodities like copper. Losses in the quarter widened to $45.3 million, or $2.45 per share, compared with the loss of $37.8 million, or $2.05 per share, in the quarter last year.
Tecumseh also had to increase a tax provision by $4.4 million as part of its earnings restatement. It had erroneously combined income from foreign jurisdictions with losses from foreign jurisdictions where tax benefits weren't going to be realized, resulting in the understatement of the tax provision. A similar error had led the company to report losses that were $3 million lower than they actually were, while the second-quarter profit was actually $200,000 more.
The tough times have harmed Tecumseh's ability to fund its operations from cash flows. Historically, operating cash flows and existing credit facilities were enough to meet ongoing needs, but that's all changed now, and in recent periods cash flows have been negative. As a result, Tecumseh found it necessary this quarter to refinance $100 million worth of debt, leading it to pay substantially higher interest rates than it had. With the new credit facility, the engine maker that apparently can't will be paying 10.4% interest, up from the 8.8% it had been paying.
Moreover, while it's also trying to renegotiate debt covenants with some Brazilian banks, it has since halted payments to two of them that did not agree to the same terms that the others did. Tecumseh is obviously in default on those loans, though they represent less than 40% of the total amount it has outstanding in Brazil, and the other lenders have temporarily waived the payment requirements.
At one time I thought that despite the size disparity, Tecumseh might be interested in Briggs & Stratton's small engine division. How long it will be able to hold on before its financial engine seizes remains to be seen, but having sold off its pump division earlier this year to get an infusion of cash, this Fool thinks it won't be able to save itself.
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Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
