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Executives

James J. Connor - President and CEO

Janice E. Stipp - EVP, CFO and Treasurer

Christine Saurini - Director of Treasury

Analysts

Nathaniel August - Mangrove Partners

Tecumseh Products Company (TECUA) Q2 2013 Earnings Conference Call August 12, 2013 11:00 AM ET

Operator

Good morning and welcome to the Tecumseh Products Company’s Second Quarter 2013 Results Conference Call. All participants will be in a listen-only mode until the question-and-answer portion of the call. This conference call is being recorded at the request of Tecumseh Products. If anyone has any objections, you may disconnect at this time.

I’d now like to introduce Ms. Christine Saurini from Tecumseh Products Company. Ms. Saurini, you may proceed.

Christine Saurini

Thank you, Sheryl. Good morning and welcome to our call. I’m joined today by Jim Connor, our President and Chief Executive Officer; and Janice Stipp, our Executive Vice President, Chief Financial Officer and Treasurer.

We posted a presentation relating to the second quarter 2013 shareholder update on our website and filed it as an exhibit to a Form 8-K both posted Friday, if you want to follow along. On page two of our presentation, you will find the agenda for today’s call.

Before we begin, if you turn to page three, I’d like to remind you that during the course of this conference call, we will make projections and other forward-looking statements regarding, among other things, our estimates for 2013 financial results as well as our estimates, plans and assumptions regarding our future revenue growth, profitability, operating results, liquidity, operations and products, and while it goes without saying that we intend to provide reasonable projections, there are many factors that could cause actual results to differ from these projections.

Listeners are cautioned that actual results may differ materially from those projected as a result of certain risks and uncertainties, including but not limited to current and future global or regional or economic conditions, including housing starts and the condition of credit market, which may magnify other risk factors, loss of, or substantial decline in sales to, any of our key customers; our history of losses and our ability to maintain adequate liquidity in total and within each foreign operation; our ability to restructure or reduce our costs and increase productivity and quality and develop successful new products in a timely manner; actions of competitors in highly competitive markets with intense competition; 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; availability and volatility in the cost of materials, particularly commodities, including steel, copper and aluminum, whose cost can be subject to significant variation; financial market changes, including fluctuations in foreign currency exchange rates and interest rates; default on covenants of financing arrangements and the availability and terms of future financing arrangements; reduction or elimination of credit insurance; significant supply interruptions or cost increases; potential political and economic adversities that could adversely affect anticipated sales and production; in India, potential military conflict with neighboring countries could adversely affect anticipated sales and production; local governmental, environmental, trade and energy regulations; increased or unexpected warranty claims; the extent of any business disruption caused by work stoppages initiated by organized labor unions; 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; the success of our ongoing effort to bring costs in line with projected production levels and product mix; weather conditions affecting demand for replacement products; the effect of terrorist activity and armed conflict. These forward-looking statements are made only as of the date of this presentation, and we undertake no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise.

Forward-looking statements can be identified by the use of terms such as estimate, expect, intend, believe, anticipate, should, may, could, will and other future tense and forward-looking terminology. Again, these statements are predictions, not guarantees, that reflect the Company’s current views as of the time of this call, and that are subject to risks and uncertainties that may cause actual results to differ materially from our projections and other forward-looking statements.

By providing this information, we undertake no obligation to update or revise any projections or forward-looking statements whether as a result of new information, new developments or otherwise. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

You should also review the cautionary statements and discussion of risk factors included in our press release issued Friday and our presentation posted on our website Friday, our Form 10-Q for the quarter ended June, 30, 2013 filed Friday, our Form 10-K for the year ended December 31, 2012 as well as our other filings with the Securities and Exchange Commission under the titles Risk Factors or Cautionary Statements related to forward-looking statementsfor additional discussion of risk factors that could cause actual results to differ materially from our current expectations and those discussions regarding risk factors, as well as the discussion of forward-looking statements in such sections are incorporated by reference in this call and are readily available on our website at www.tecumseh.com.

In addition, during our call today, we may discuss EBITDA and EBITDAR from continuing operations, which are not measures of performance calculated in accordance with U.S. GAAP. However, we believe that when taken together with the corresponding U.S. GAAP measure, they provide incremental insight into the underlying factors and trends affecting our performance.

We have included the reconciliation from net loss to EBITDA and EBITDAR from continuing operations in our press release issued Friday. (Technical difficulty) presentation if you’re following along Again, all this information is readily available and can be accessed on the Investor Relations page of our website at www.tecumseh.com.

With that said, please turn to page five of the presentation. And I would now like to turn the call over to Jim Connor, the Company’s President and Chief Executive Officer.

James J. Connor

Thank you, Christine. This is Jim. Good morning and welcome to today’s conference call everyone. The second quarter 2013, the Company showed sales of $227.6 million and after excluding the effect of changes in foreign currency translation of $3.4 million, we show a net sales increase of 1.3% from the second quarter of 2012. Including the effect of the currency changes, net sales decreased slightly by $0.5 million.

Gross profit improved in the second quarter of 2013 to 8.4% of sales as compared to 7.7% in the second quarter 2012. Commodities, aluminum and copper particularly and favorable steel prices contributed to these favorable results. In addition, cash and cash equivalents at June 30, 2013 was $34.7 million as compared to $46.2 million at the same time in 2012 and $55.3 million at the beginning of the year.

The lower cash position at the end of June was a planned inventory build primarily in our Brazilian operation as we transition assembly lines from the older TH model to the new TA model in accordance with customer demands. The build is going to plan and we will see that inventory start to drop next quarter and it should be well back to normal by the end of the year. This is a planned build and we’re actually running slightly better than our cash forecast had predicted.

Second quarter 2013 results continue to move in the right direction for Tecumseh. As compared to 2012, we improved our gross margins on generally stable sales volume, which we will review in detail during the course of today’s call. The Tecumseh is on track with our stated strategy as we discussed and placed on our website in May of this year. I’ll come back to all of that in the call later on with an update.

I should also briefly comment on delayed earnings release. My apologies to our investors and our stakeholders on the sudden change in timing. As we’ve said in our timing announcement, we had an issue related to a customer claim that we needed to review. Let me expand on that just a bit.

One of our operations, we changed the process in the way we attach a simple wire inside the motor. That process was thoroughly vetted, our test procedures were verified and it was released for production. Unfortunately, the process caused some failures of our compressors. We talk with our customers, we’re committed to making it right and we did so. We (indiscernible) in that process and we continue to ship compressors using the alternative process today.

The compressor is not one of our new compressors. It is neither the AE2 nor the TA, but rather a lower volume compressor used in a very limited application. We recorded a reserve of $3.5 million which is our best estimate of that exposure. This matter came up very late in the closing process, actually last Wednesday morning, when we had a video call with them.

We concluded our review and we just could not record an adjustment, have the proper reviews with the related SEC filings and disclosures and still made the earnings call schedule. We did discover the issue, we agreed it was indeed a second quarter event, and needed to be recorded rather than wait until the third quarter. This is the reason for the delay.

We are going to change our format a bit for this call from prior calls. I’m going to take a minute and talk about the product line revitalization and our advanced technology that we’re putting in place around the world today. We will then move our traditional discussion to the three markets we serve, following that Janice Stipp, our CFO, will talk through the numbers. And finally I’m coming back after Janice to give an update on the progress the Company is making with the strategy report we put forward in May of this year.

Move to page 6 now. As we have cautioned before challenging economic conditions, the competitive landscape, foreign currency exchange rates, commodity costs related to the materials we purchase and ongoing regulatory activities are all factors that Tecumseh is confronted with everyday, which were going to adversely affect – adverse impact on our financial results.

Let me now provide an update on our few of our key initiatives addressing these ongoing challenges. Our focus and key strength of our strategy is our product roadmap. I know this starts to sound like a broken record, but we remain steadfast in our mission to revitalize our product line, enhance the technology to make Tecumseh a stronger Company for the future.

We continue to invest in R&D and technology, while balancing the ongoing efforts to contain our costs. Tecumseh has gotten its reputation as an engineering company and a technology leader, we believe that reputation in the marketplace has been strengthened today to our current efforts.

Most importantly, we’re increasing our engineering resources by adding advanced engineering personnel dedicated to our research efforts. This isn’t hundreds of engineers but it consists of technical people and acute in a few key areas of focus. This enhances the value of our state of the art global technical center, in Ann Arbor, Michigan.

We are also adding product design engineers to help us redesign our current product line up. I will be talking about the efforts on the all new AJ2, still on the drawing board, mind you, but the next step in our product development plan.

Finally, we’re adding manufacturing engineers to focus on automation and process improvements on the production floor. Key to all of this is leadership, leadership at engineering, leadership in the Company.

We will be announcing very soon the name of our newly recruited Vice President of Engineering. He is a very capable guy, well known in our industry and has previously managed other large compressor manufacturers engineering organizations over his entire career. We are very pleased with his decision to join our team and know he will be a huge part of our success in the future. Unfortunately we can’t disclose his name at the moment. We are excited that he has made a decision to join our team and you should look for an announcement on that in the very near future.

Regarding our new products, we continue to show increased momentum on the AE2 and the TA compressor platforms, gaining some modest market share increases with the AE2 compressor primarily in North America and Europe. In South America, in the household refrigerator and freezer market, sales of the new TA compressor continue to grow as well. We are already enhancing the just released TA with projects like stress capacity, a commercial back pressure version in a variable speed model, which reduces power consumption to the consumer.

The variable speed model with higher efficiency ratings and lower overall power consumption is on test now at one of our customers. Electronics and controls is the wave of the future in our industry and we continue to address market needs such as power consumption and efficiency.

Our new VA model, the V being variable speed of our TA, the new VA model does just that. We also continue to develop and release the model of the AE2 to replace our industry standard AE model and expand our product offering there. We just announced a new low back pressure model of our AE2, which lets us move into a lower temperature applications for commercial freezers.

The LBP, or low back pressure AE2, lets us compete with a more efficient product offering, replacing our older T series of compressors in that line up. We’ve just organized our test plans with our first customer here, we’re very optimistic on the success of the low back pressure AE2 in the future.

Finally and cautiously recognizes this is an earnings call and not an infomercial, we’re introducing our stress version of the AE2. By using our advanced modeling capability, our prototype shops and technical expertise in Ann Arbor and San Carlos, Brazil we’ve designed an enhanced AE2 to reach higher capacity as a compressor. This means we can take the lighter, efficient technology as a small AE2 and compete against the heavier and more costly compressors of our competition.

All these advances on AE2 and TA are variable speed, stress version, low back pressure, due to our focus on the product roadmap and the dedication of our engineering resources towards success. We continue to revitalize the product line in every fashion and enhance the products that are already out there. Condensing units is also a focus for Tecumseh as we said. Following the successful launch of our new Celseon AK and AJ series indoor condensing units in North America in early second quarter.

We are also seeing increased activity related to all of our new condensing unit models at many of our OE manufacturing accounts. This is a key part of our business growth strategy, for these value added high margin products. Condensing units are high margin, higher sales dollar per order as compared to compressors.

The AK and AJ series condensing units specifically is receiving good market acceptance in both the wholesale distributor and the OEM channels. Again the manufacturing efficiency side, these units allow Tecumseh to reduce our model count in this important commercial refrigeration range by 26% and build the material by almost 90% or still offering the same capacities and product coverage as our previous line up.

Turn to page 7 please. There were lots of market activity in the second quarter. Briefly although not pictured here, I will note our participation in 2013 Atmosphere America Industry Symposium, in Washington DC, which represented case studies related to the efficiency gains realized for the use of R290 hydrocarbon refrigerant. We spend a lot of time in R290, it’s a natural refrigerant and we see its merits into the future. Pictured here are the results of our compressor – of our partnership with Hussmann Corporation.

The newly opened Austin, Texas supermarket is the greenest store built to-date by H-E-B Grocery. Self-contained refrigerated display cases are used throughout the store in order to comply with the lower charge requirements of hydrocarbon refrigerant, and again R290. The majority of the display cases and walk in coolers utilize Tecumseh condensing units. Over 40% of which are equipped with the company’s all new AE2 series high efficiency compressor.

Tecumseh leveraged over 10 years of hydrocarbon application and compressor knowledge in developing R290 condensing units. The units deliver the highest level of efficiency and reliability, while complying with the stringent safety standards required for hydrocarbon refrigerants.

The reduced sound level of the AE2 compressors, another inherent benefit, especially when considering the use of self contained display cases. Again, the AE2 was originally designed to maximize and optimize for R290 refrigerant. Norm Street, Hussmann’s Director of New Technology Department said Tecumseh was a key partner improving out refrigeration systems, designed in terms of both performance and safety, while R290 offers the inherent efficiency improvements, the limited charge requirements present some challenges, they were able to collectively overcome.

In our view, Tecumseh’s view green refrigerant, flexible systems quiet sound levels at a competitive price will continue to be the focus in commercial refrigeration market in the future. This mirrors our product roadmap strategy and we were delighted that Hussmann refrigeration, a major, major refrigerant manufacturer – refrigeration manufacturer in the OEM commercial refrigeration market has partnered with us to help us put together this R290 condensing units.

Turning briefly to page 8. We also continue to focus on condensing unit lineup as well. As a result, Tecumseh units will be utilized for walk in cooler rooms as well as wine coolers at the new St. Regis location, St. Regis hotel location, in Kuala Lumpur. We are very pleased with the decision of the St. Regis to use Tecumseh condensing units for the refrigeration needs.

These are high capacity condensing units, utilizing a multi cylinder compressor platform such as AG and FH series. The hotel is scheduled to open in September or October this year and we’re delighted that we will be part of their grand opening. This was just a couple of examples and some background on our engineering efforts at Tecumseh, they’re showing results. I cannot describe to you the enthusiasm of our team and our customers every move forward with new technology into the marketplace and really get some cutting edge stuff moving here.

Now let’s take a look, more in-depth at our second quarter 2013 results, starting on page 9. For the quarter ended June 30, 2013 net sales were $227.6 million as I said. Sales were negatively impacted by $3.4 million of currency, adjusting for this impact of sales increased 1.3% from the second quarter of last year. This was primarily driven by increases in volume mix and price.

Overall, India continues to be a real bright spot in 2013. We have gained some new business with major telecom and bottle cooler manufacturers there and just recently completed the largest condensing unit order ever built from India to a Middle East based OE manufacturer. South America Mexico commercial refrigeration business is on the upstream as well. We just secured an order to sell 30,000 compressors to a major commercial refrigeration manufacturer and have added several new distributors in both regions in recent months.

Europe continues to be a challenge. As business in the distribution channel remains sluggish. Refocusing our efforts on the OE channel to compensate and then recently closed a number of significant compressor and condensing unit supply agreements in the commercial refrigeration sector. The North American market continue to remain soft as well, but this is primarily due to a very weak Class A heavy duty truck market, where we maintain our presence in cooling sleeper cabs in that market niche. We’ll talk more about that in a minute.

Turning to page 10 now for a more detailed review of our three markets, the commercial, the air conditioning and the household refrigeration and freezer market. Revenue in our largest market, which is the commercial market was $136.2 million or 60% of total sales for the second quarter 2013, represents a 4.6% decrease in revenue when compared to the same period 2012. After adjusting for currency, sales decreased 4.4%. The decrease was primarily driven by lower volumes and unfavorable mix of $7 million as well as unfavorable changes in currency rates of $0.3 million both of which were partially offset by price increases of $700,000.

We continue to experience strong regional demand in India and Brazil. In India for example, sales in the Middle East and Southeast Asia as well as domestic sales within India more than doubled from the prior-year. Brazil also saw a significant volume growth of 19% in commercial sales particularly in the local market. Unfortunately, soft market conditions in our North American and European markets offset these increases.

In Europe we continue to sell into a weak market and our traditional customers in France and Germany. We’re trying to offset this with some success by penetrating the eastern European countries, North Africa, Russia and the U.K. Sales in North America were down 10% on the year-over-year basis, while our distribution -- again this is a commercial refrigeration market. While our distribution sales came back this quarter to approximately flat on a year-over-year basis OEM customers have slowed the production of cabinets working down their inventory levels to anticipation of weaker sales. We believe we have offset this decline somewhat with our new product and this will continue into the future.

Now let’s review our air-conditioning and all other applications market on page 11. This market accounted for 21% of our total sales in the second quarter 2013, $48.9 million which is up 33.2% from the second quarter 2012, while currency neutral sales increased 37% on a year-over-year basis. This increase was primarily due to net higher volumes, favorable mix and price increases of $13.6 million partially offset by unfavorable currency of $1.4 million.

The main factors contributed to higher volumes in the market during the second quarter 2013 are the increased demand in Brazil and Europe. However, demand in Europe -- however continued soft market conditions in North America specifically in the trucking industry are somewhat offsetting this. Most importantly as you may recall we had a Brazilian customer shutdown for a portion of last year in the air conditioning market, this is now recurred in 2013 and this is a major factor contributing to the increased demand we see on a year-over-year basis in Brazil.

In North America we saw significant declines in the heavy Class A truck market. Remember we participated in this market through sales of variable-speed compressors for cooling the cab and the sleeper units for over the road truckers. We have a significant portion of this market, but with sales of Class A truck very depressed at the moment we too feel the lower volumes in our compressor sales. The Tier this market is taking up into the future, but there can be no assurance that, that won't be the case.

Finally on page 12, lets look at the household refrigeration and freezer market, our R&F has referred to it. The R&F market represented 19% of our total sales, $42.5 million in the second quarter 2013. Sales in this market were down 12.6% as compared to the second quarter of last year. However after adjusting for currencies the sales decrease is 9%. This decrease is primarily attributable due to lower volumes and favorable mix of $4.6 million as well a change in the currency of $1.7 million which is partly offset by price increases of $200.

The volume decline is primarily the result of lower regional demand in Brazil. As the real continues to weaken against the dollar we see some opportunity for export of our new TA compressor and we’re exploring those potential markets as we speak. Overall we anticipate demand volatility to continue into the second half of 2013 given the continued uncertainties in the global economy which Janice will touch upon shortly.

Let me now turn the call over to our CFO, Janice Stipp to comment further on the second quarter 2013 financial results and a brief look at our outlook into the balance of the year.

Janice E. Stipp

Thank you Jim, and good morning everyone. During the second quarter we experienced unseasonably cool climate conditions and continued global macroeconomic weaknesses. Although the economy remains uncertain we have a diverse global footprint which leaves us well positioned to overcome these regional uncertainties as they materialize. We are not planning for an improved environment for the balance of 2013. However key fundamentals are within our controls such as technology, cost and disciplined capital appropriation. We are confident that these fundamental strengths will enhance shareholder value over the long-term. Since Jim, has just reviewed our sales, let me share with you our financial results starting on page 14.

Gross profit in the second quarter of 2013 came in at $19.2 million which represents an increase of $1.6 million over 2012. Gross profit margin also increased to 8.4% of net sales as compared to 7.7% in the second quarter of 2012. The main factors contributing to the increased gross profit level in the second quarter of 2013 were $1.9 million in favorable change in the cost of our commodities, $1.6 million favorable change in currency, $1.3 million of price increases and $1.7 million of other material and manufacturing costs. This favorable impact was partially offset by unfavorable changes in warranty of $1.2 million primarily due to the new claim in India as well as sales and volume mix of $0.7 million.

Turning now to page 15 we saw a decreased selling and administrative expenses of $0.9 million in the second quarter of 2013 as compared with the same period of 2012. This decrease is primarily a result of $2.1 million lower expense related to our incentive compensation award, professional services and other miscellaneous items which were partially offset by $1 million of bad debt expense due to a bankruptcy filing of one of our Brazilian customers and $0.9 million increase in other employee benefits.

Other income was $7.2 million in the second quarter of 2013 compared with $7.6 million for the same period in 2012 or a decrease of $0.4 million. The major component of this decrease include $2.9 million related to 2012 income resulting from the sale of our rights to receive proceeds from a future potential Brazilian lawsuit settlement and $1.3 million related to 2012 income recorded to primary execution of a mutual release agreement.

Partially offsetting these items just noted is $1.4 million of income recognized in the sales of securities in 2013, $0.8 million favorable change in foreign currency, $0.7 million net amortization of gains resulting from the curtailment of our postretirement benefit and $0.9 million of other miscellaneous items including $0.2 million increase in Indian Government incentive.

Moving on to impairments, restructuring charges and other items; we’ve recorded $2 million of expense in the second quarter of 2013 related to headcount reductions as well as business process reengineering. As you may recall we recorded $45 million of income in the second quarter of 2012 related to a gain on the curtailment of our postretirement benefit which is leading the large differential when comparing second quarter 2013 to 2012.

Net loss from continuing operations before taxes was $5.8 million in the second quarter of 2013 compared to the adjusted loss from continuing operation before taxes of $5.9 million in 2012, which excludes the one-time non-recurring $45 million curtailment gain just discussed.

Moving over to page 16, to Company’s EBITDA from continuing operations for the second quarter of 2013 was $5.1 million as compared to $49.2 million for the same period in 2012. Again the second quarter of 2012 includes $45 million gain related to the curtailment of our postretirement benefit. EBITDAR from continuing operations for the second quarter of 2013 was $7.1 million as compared to the second quarter of 2012 of $5 million. This is an improvement of 42% or $2.1 million over the same period in 2012.

Through our use of our EBITDAR margin we came to the positive trend in normalized earnings. Our continuing efforts are focused on our goal of returning to Company profitability. Let me quickly remind you that EBITDA and EBITDAR from a continuing operation’s are not measures of performance calculated in accordance with U.S. GAAP and you can find the reconciliation of how this metric is calculated in our press release issued Friday as well as on page 16 of this presentation.

Let’s take a look at our June 30, 2013 cash position on page 17. We ended the quarter with $34.7 million of unrestricted cash and cash equivalents that compares to $46.2 million of unrestricted cash and cash equivalents at the end of the second quarter in 2012 and $55.3 million at December 31, 2012. In addition to the borrowing available noted on the chart the Company has regional factoring capabilities which are not quantified in the figures shown.

Components of the decrease in cash and cash equivalents during the first six months of 2013 are $7 million use of cash in operating activities, $4.7 million use of cash in investing activities and $8.9 million use of cash in financing activity. Now let’s review each component in further detail.

Let’s turn to page 18. As previously stated cash used in operation was $7 million as compared to cash provided by operations of $3.8 million for the same period in 2012. Significant elements driving the use of cash from operational activities for the first half of 2013 were net loss of $14.7 million. Adjustments for significant non-cash items of depreciation and amortization of $18.3 million a non-cash employee retirement benefits gains of $6.1 million and $1.2 million related to non-cash share based compensation.

Turning to working capital you can see $30 million use of cash due to higher inventory levels primarily related to the plant increases in Brazil to manage over still capacity and specific clients for delivery in the third and fourth quarter of 2013. Payables and accrued expenses generated $39.5 million of cash mainly due to increased purchases of inventories just noted.

Increased accounts receivable levels resulted in the use of cash of $12.3 million mainly due to increased sales activity when compared with sales activity in the fourth quarter of 2012. Recoverable non-income tax which provided cash at $1.5 million, this is mainly the result of cash received in Brazil of $10.2 million and India of $3.8 million partially offset by accrual.

Cash used in investing activities was $4.7 million. During the first half of 2013 our capital investments were $4.9 million or 1.1% of sales. Partially offset the cash used in capital investments was the release of restricted cash of $1.2 million, mainly related to our 401 contributions and partly offset by cash pledged for derivative. Lastly, cash used in financing activity was $8.9 million, cash loss from financing activities are mainly due to the timing of regional repayments and borrowings.

Now that we reviewed our second quarter 2013 financial results, I would share with you our outlook for the remainder of 2013. Please turn to page 19. We expect to see continued demand of volatility during the second quarter of 2013 given the continued uncertainty surrounding the economic environment, particularly in Europe and the U.S. and current events around the world.

However, we currently expect full-year net sales to fall somewhere between flat to an increase of 3% over 2012 levels. This potential improvement is based on our internal projections about the market and related economic conditions, expected price increases to our customers and estimated foreign currency exchange rate impact, as well as our continued sales and marketing efforts.

In addition, we expect that the full-year change in the average cost of our purchased products included in the impact of hedging activities could have a favorable impact when compared to 2012. Furthermore, in the aggregate, we believe that changes in foreign currency exchange rates after giving consideration to our hedging contracts and including the impact of the balance sheet transactions do have a favorable impact on our net income for 2013 in relation to 2012.

If we successfully achieve all of our initiatives in 2013, we estimate that full-year operating profit could improve compared to 2012, exclusive of the $45 million curtailment gain on our postretirement benefits recognized in 2012.

Operating cash flow for 2013 is expected to be flat if we are successful at achieving the initiative announced earlier this year. This also requires that tax authorities not significantly change their pattern of payment or past practice for the expected outstanding refundable Brazilian and Indian non-income taxes.

We now expect capital spending expenditures in 2013 to be in the range of $13 million to $18 million for the entire year which is about $7 million lower than previously anticipated. In May we announced to our French employees that we began the process of reducing our indirect staff to a social plant and negotiations are underway.

In light of this, we now believe we require additional cash in the range of $5 million to $8 million to fund our initiatives. As we look specifically to the third quarter of 2013, we expect sales and operating profit to be slightly improved over the third quarter of 2012 and flat operating cash flow.

In summary, our second quarter results demonstrate our ongoing focus in execution of our strategic initiatives that are expected to generate long-term growth and profitability. This is evident in the 42% improvement in our EBITDAR margin as compared to its results in 2012. While there is cautioned around the economic environment, we’re confident that our strategy, operational efficiency, improvement actions and our diligent management of our cost structure will lead us to long-term profitability. We will continue to invest in technology to innovate new products, enhance design and maintain product reliability. This will position the Company to capitalize on future opportunities.

Now I’d like to turn the call back over to Jim. Jim?

James J. Connor

Thanks again Janice. Let’s turn to page 21; I’ll give you a brief update on a couple of events that happened in the business in this last quarter. You have not only seen that with our press releases with the State of Mississippi where we again have partnered and committed to jobs and investment in that region and it took a lot of while in Mississippi plant.

You may recall we worked with the State previously at a consolidated assembly line; we call the terminal line, where we’re producing multiple different compressor families on one single line instead of individual lines for each compressor. This thus consolidates six different assembly lines into one and with an automated process. And we believe we’re the only ones in the world assembling different compressors on one assembly line.

The recently announced expansion represents a significant $1 million investment for Tecumseh retaining the 350 jobs in the facility and creating up to 150 new jobs over the next several years. With this expansion we will be able to manufacture the complete AE2 compressor, in Tupelo. No parts of subassemblies will be required from our other operations anywhere in the world.

Currently the AE2 compressor is assembled in Brazil and in France and we have plans to do that in India. This project is a major step in improving our flexibility where we can move production of our flagship compressor from a real based manufacturing site to a dollar based manufacturing site as the situation in exchange rates dictates. Steel and commodities they also require some luck as whether the manufacturing location is appropriate given the cost structure at the moment.

Also I’d like to discuss our French social plan. As part of our cost reduction efforts we announced to our French employees our intention to reduce our indirect staff in that location in those locations to a social plan. Negotiations are underway and on track with our expectations. The outcome of this process is expected in the third quarter 2013. We are working with our employees and their unions to reduce our salary as an indirect headcount employee in a very meaningful percentage and unfortunately I can’t talk too much more about it than that.

We also talked about -- Janice also talked about our financing arrangements in France and in Europe to enhance in our liquidity profile of our European subsidiary by signing a three year agreement with GE FACTOFRANCE, this provides $40 million committed factory facility replacing our existing uncommitted facility with the prior lender. This is a three year agreement with General Electric, a very, very good enhancement of our liquidity position for the Company.

Other very attractive financing for the restructuring cost in Europe associated with the headcount reactions are also in process, but I can’t talk too much more about that at the moment. We’re also preparing to expand Tecumseh University concept in Europe and India. This year as highlighted in previous calls we established this program in Tupelo, Mississippi last year to enhance market value and brand awareness for wholesale distribution personnel and it has been a great, great success. We had unbelievable success in participation and that to come to University classes that we offer today. They’re full and you got to signup early.

You have also probably noticed the 8-K and our two new board members. We are excited to welcome them to Tecumseh and the benefit for their additional experience in expertise they bring to the Company has been tremendous. Both Gary and Doug have gotten involved in the business in very meaningful ways bringing their experience to our board and I’ve enjoyed interacting with them both.

Lastly, we previously announced a decision to collapse our A&B shares into one stock class. This project is on track and we currently anticipate presenting it for a vote at the 2014 annual shareholders meeting. I know that several shareholders wanted to see this move faster, but changing the equity structure of a public company is a very regulated process. We look at this early on and concluded the most efficient and cost effective process, which includes the proposal in the normal proxy at the regular general meeting of shareholders. It is just less costly and more efficient for us to do it this way.

This is just a snapshot of the many initiatives underway to deliver our goal of adding value to our shareholders. If you turn to page 22, I am going to provide a quick update on OE manufacturing initiative or TOPS, the Tecumseh Optimized Production System which we touched upon briefly during our previous call.

You’ll see that we’re making good progress globally implementing the TOPS system. It is our lean manufacturing system and it’s taken off changing the culture within the company in a very visible way on a sharp floor in all of our plants. I can’t tell you the number of team members often with decades of experience with the Company who tell me they can see the change.

Comments like, I’ve never seen the plant look so good. I’ve never seen enthusiasm so high. We’re really working on solving problems instead of just doing quick fixes. The management is listening to our ideas. We’ve got a long way to go, no question, but we’re making great progress and that culture is changing and that to me is the fundamental difference in the Company.

Our first global TOPS meeting was held in France in June, in fact it was the first time the manufacturing people met as a team. It was a huge success, a lot of momentum was garnered and they continue to bolster on that in the future. You have to be a believer in lead manufacturing and I got to tell you, I am all that. By getting every employee involved in building a better compressor and powering them to put their hand up with an idea as of why you become the best compressor manufacturer in the world. Not just a manufacturer, but every functional area of this Company.

Go to page 23, you’ll see the strategic initiatives we set forth in mid May of this year. The column on the right shows where we’re headed. Hopefully this quarter, the review shows that we’re staying on these initiatives, and even at this early stage we showed some success. We’re very encouraged by the progress we’re making and we believe we’re on track.

Turn to page 24, you will note that a key part of our strategy was to sell non-core assets to a sure less risky restructuring plan. The asset monetization, the vacant land in India and the Brazilian foundry have both been slower than we thought. On the foundry we are very encouraged when we had a strategic buyer early on in the process who performed significant due diligence and provided us a preliminary price which was generally in the range we anticipated.

For certain reasons related to their company and not ours that buyer is reconsidering his decision. We have other very interested parties in the foundry and again during the due diligence process and some have provided us with preliminary ranges of price which we believe are reasonable. The process continues and we’re hopeful we will arrive at a transaction.

The vacant land in India, of considerable lesser value than the foundry has moved very slowly. The political situation in Andhra Pradesh has not been encouraging for our investors and that continues. This property is listed by a respectable international broker and we continue to actively market the property for the future. Again this is the vacant land in the back of the plant.

The other non-core assets which we also are marketing for sale and these may or may not provide us any cash value in the future. Please note that we have improved the liquidity of Tecumseh with a credit agreement in Europe and that has solidified our financing significantly. Also note that our projections for cash even after restructuring cost are well within our current liquidity for 2013. Note that on our cash flow statement for six months we had $7 million used in the operations, but that after our plant inventory build of $30 million about half of that was in Brazil which will reduce this next half. We have also paid down credit lines by $8.9 million during this year was also contributed to the decrease in cash.

There is no assurance our market editions, commodity prices, exchange rates on currency, global economic editions, political situations in the countries that we do business in and any other factor that our Company faces every day won't cost a significant disruption to our plant. Nevertheless we trudge out.

On page 25, am not going to go through this, we’re running rather long on this call, but this is the last page of our strategic initiatives and we continue that we presented in May and we continue to move towards this goal.

In conclusion then we believe our commitment and focus is taking hold and we remain energized and excited as we look forward to the remainder of 2013. That concludes our prepared comments for this earnings call. We tried to cover an awful lot, I talk fast and I know I went through it, so I’d be happy now to entertain any of your calls with Janice right now. Operator, you can turn it over.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from Jeffrey Kalicka from Mangrove Partners. Please state your question.

Nathaniel August - Mangrove Partners

Hi, this is Nathaniel August for Jeff. I have a question about the warranty accrual that you took the $3.5 million charge, is that a new ongoing higher level of expense that we’re going to see on a quarterly basis going forward or do you view that as one-time in nature?

James J. Connor

Bite your tongue, Nathaniel. That should be a one-time adjustment only. That would relate to one very specific process that we changed and got unfavorable results. We’ve been and there’s really two customers a fact of that, it's a very regional market and it shouldn’t extend beyond that. We’re taking back the -- any faulty product and testing it. Taking back anything, they’ve got a finished goods inventory that was built after that date and I think we’ve captured it all. So, we have made some estimates but that’s certainly not an ongoing event. There was one specific item, we think we’ve got everything collected and are trying to -- and we’re selling those customers easily the other process. So I think that should be a -- that definitely should be onetime after that particulars because we stopped that process actually several weeks ago.

Nathaniel August - Mangrove Partners

Okay. And just to follow-up on that. When you calculate your EBITDAR from continuing operations, did you add back those onetime expenses of $3.5 million in the $7.1 million or would investors need to make that adjustment on their own?

James J. Connor

No sir, that’s in the EBITDAR number so it's a deduction showing worst EBITDAR or bad EBITDAR because of that $3.5 million. That’s already deducted from EBITDAR.

Nathaniel August - Mangrove Partners

Okay, so if we wanted to adjust for that it would be closer to $10.6 million or up a little more than 100% year-over-year?

James J. Connor

You would have to add that back and I’d also point out to you and there’s a number of different things so we can pick out all the bad stuff, but I’d also point out to you of the $1 million write-off of the receivables out in Brazil too with the Company, one of our customers filed bankruptcy, that would be a one-time item to that $1 million plus that $3.5 million. That is the way so I look at this quarter, but you can do the way you like.

Janice E. Stipp

Yes, and in fact (indiscernible) close to the 100%.

Nathaniel August - Mangrove Partners

Okay. That’s very impressive. Thank you.

James J. Connor

Thanks Nathaniel.

Operator

(Operator Instructions) And at this time I show no further audio questions. Do you have any closing comments?

James J. Connor

No. I thank you all. It's unfortunate as Nathaniel just pointed out on that, the one customer claim or the one problem we had. In our view this was a fairly good quarter, and that we continue to track right on the plan we’ve had, and we’re hopeful or hopefully we’ll continue on that, we’ll have some pretty good calls in the future. So, thank you all very much for joining. I appreciate all your support and we’ll talk to you in a quarter’s time. Thank you.

Operator

Thank you ladies and gentlemen. This concludes today’s conference. Thank you for participating. You may now disconnect.

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