Summary of TECUMSEH PRODUCTS CO

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Executive Summary
Until 2007, our business was focused upon three businesses: hermetically sealed compressors, small gasoline engine and power train products, and electrical components. Over the course of 2007 and 2008, we successfully executed a strategy to divest operations that we did not consider to be core to our ongoing business strategy. As part of that strategy, we sold the Residential & Commercial, Asia Pacific and Automotive & Specialty portions of our Electrical Components business, and also sold our Engine & Power Train business (with the exception of TMT Motoco, which recently completed a judicial restructuring and is in the process of finalizing its liquidation). We also completed the sale of MP Pumps, a business not associated with any of our major business segments. As a result of these initiatives, we are now primarily focused on our global compressor and compressor-related condensing unit business.
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 volumes; the drivers of product cost, especially the cost of copper and steel; the relative value against the U.S. dollar of those foreign currencies where we operate; and global weather conditions.
With respect to global economic activity, the recent global recession precipitated by the financial crisis, has had a detrimental effect on our sales volumes for the last four consecutive quarters. Given that the slow down in economic activity has affected all of the geographic regions where we sell our product with nearly equal severity, the impact on our financial results in these periods has been significant. Overall, volumes in the first half of 2009 across all product lines were approximately 34% lower than the previous year. While seasonal activity and some recent increases in order activity suggest that second half volumes will improve over the first half of the year, we cannot currently project when market conditions may begin to improve on a sustained or significant basis. Accordingly, we have accelerated certain restructuring activities which involve the idling of underutilized assets and reductions in employment levels throughout the world. Some actions have been implemented during the first half of the year, while additional actions are currently under negotiation with the relevant governmental labor entities, including Works Councils.
Due to the high material content of copper and steel in compressor products, our results of operations are very sensitive to the prices of these commodities. Overall, commodity prices have been extremely volatile in recent history including the first half of 2009. The price of copper is representative of this overall market volatility; from January 1 through July 31, 2008, copper prices increased by 22.6%; in the subsequent five months, the price dropped by 62.8%; then, from January 1 to June 30, 2009, copper prices rebounded, increasing once again by 65.3%. Such 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 forward and futures contracts. The cost for the types of steel utilized in our products escalated in a manner similar to copper in 2008 (one type of steel increased by 86.2% from the beginning of 2008 to September 30) but did not begin to experience any decline in certain markets, particularly in Brazil, until the past few months. Due to competitive markets, we are typically not able to quickly recover cost increases through price increases or other cost savings. While we have been proactive in addressing the volatility of these costs, including executing forward purchase and futures contracts to cover approximately 88% of our anticipated copper requirements for

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the remaining two quarters of 2009, renewed rapid escalation of these costs would nonetheless have an adverse affect on our results of operations both in the near and long term. The rapid increase of steel prices has a particularly negative impact, as there is currently no well-established market for hedging against increases in the cost of steel. In addition, while the use of forwards and futures can mitigate the risks of cost increases associated with these commodities by "locking in" costs at a specific level, declines in the prices of the underlying commodities can result in downward pressure in selling prices, particularly if competitors have lesser future purchase positions, thus causing a contraction of margins.
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. An increasing portion of our manufacturing presence is in international locations. From January 1 to December 31, 2008, approximately 81% of our compressor manufacturing activity took place outside the United States, primarily in Brazil, France, and India. Similarly, approximately 82% of our sales in 2008, and approximately 81% of our sales in the first two quarters of 2009, were to destinations outside the United States. As a result, our consolidated financial results are extremely sensitive to changes in foreign currency exchange rates, most notably the Brazilian real, the euro and the Indian rupee. Because of our significant manufacturing and sales presence in Brazil, changes in the Brazilian real have been especially adverse 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" in Part 1, Item 3 of this report.
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 to our compressor business faces similar exposure to the real. Other competitors, particularly those with operations in countries where the currency has been substantially pegged to the U.S. dollar, currently enjoy a cost advantage over our compressor operations.
Our foreign manufacturing operations are subject to many other risks, including governmental expropriation, governmental regulations that may be disadvantageous to businesses owned by foreign nationals, and instabilities in the workforce due to changing political and social conditions.
Aside from our efforts to manage increasing commodity costs and foreign exchange risk with forward purchase contracts and futures, we have executed other strategies to mitigate or partially offset the impact of rising costs and declining volumes, which include aggressive cost reduction actions, cost optimization engineering strategies, selective out-sourcing of components where internal supplies are not cost competitive, continued consolidation of our supply base and acceleration of low-cost country sourcing. In addition, the sharing of increases in raw material costs has been, and will continue to be as the situation warrants, the subject of negotiations with our customers, including seeking mechanisms that would result in more timely adjustment of pricing in reaction to changing material costs. While we believe that our mitigation strategies have offset a substantial portion of the financial impact of these increased costs, no assurances can be given that the magnitude and duration of these increased costs will not have a continued material adverse impact on our operating results. As we have raised prices to address cost increases, it is possible that customers may react by choosing to purchase their requirements from alternative suppliers, or, in the case of certain customers, to source more

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compressors utilizing internal capabilities. It is also expected that prices would be adjusted downward when the economy contracts for an extended period of time as price competitiveness increases to secure volume. Any increases in cost that could not be recovered through increases in selling prices would make it more difficult for us to achieve our business plans.
Upon completion of the divestitures of the business operations discussed above, we eliminated all our North American debt, and accumulated substantial net cash on our balance sheet. This cash balance has become increasingly important in light of recently constrained capital markets and the current economic environment. As an additional benefit, consolidated interest expense for our business, taking into account amounts allocated to both continuing and discontinued operations, will be substantially reduced in comparison to 2008 levels. We also have received and expect further non-operational cash inflows through the end of 2009, due primarily to the receipt in July 2009 of a $14.9 million tax refund in the U.S and expected proceeds in the fourth quarter from the termination and reversion of our over-funded hourly pension plan. However, challenges remain with respect to our ability to generate appropriate levels of liquidity via results of operations, particularly those driven by global economic conditions, currency exchange and commodity pricing as discussed above. With current macroeconomic conditions and expected further volatility of the U.S. dollar versus key currencies, we did not generate cash from operations in the first half of 2009. While we expect improvement from further restructuring activities and seasonal business patterns in the latter half of 2009, we still may not generate cash from normal operations until further restructuring activities are implemented or economic conditions improve. As part of our strategy to maintain sufficient liquidity, we continue to maintain various credit facilities, both drawn and undrawn upon, in each of the jurisdictions in which we operate. While we believe that current cash balances combined with the recently received U.S. income tax refund as well as the cash to be generated by the pension plan reversion will produce adequate liquidity to implement our business strategy over a reasonable time horizon, there can be no assurance that such improvements will ultimately be adequate if economic conditions remain at current levels or even continue to deteriorate. We anticipate that we will restrict non-essential uses of our cash balances until the global economy begins to recover, credit markets become less constrained, and cash production from normal operations improves. In addition, while our business dispositions have improved our liquidity, many of the sale agreements provide for certain retained liabilities, indemnities and/or purchase price adjustments including liabilities that relate to environmental issues and product warranties. While we believe we have adequately provided 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 "Other Matters - Adequacy of Liquidity Sources," "Outlook," and "Cautionary Statements Relating To Forward-Looking Statements" below.

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                   TECUMSEH PRODUCTS COMPANY AND SUBSIDIARIES
                     PART 1. FINANCIAL INFORMATION - ITEM 2
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
A summary of our operating results as a percentage of net sales is shown below
(dollar amounts in millions):

Three Months Ended June 30,
(dollars in millions)                          2009             %             2008             %

Net sales                                     $ 161.2          100.0 %       $ 273.8          100.0 %
Cost of sales                                   156.1           96.8 %         240.3           87.8 %
Selling and administrative expenses              33.1           20.5 %          34.3           12.5 %
Impairments, restructuring charges, and
other items                                       1.1            0.7 %           3.3            1.2 %

Operating loss                                  (29.1 )        (18.1 %)         (4.1 )         (1.5 %)
Interest expense                                 (2.1 )         (1.3 %)         (6.2 )         (2.3 %)
Interest income and other, net                    0.6            0.4 %           3.3            1.2 %

Loss from continuing operations before
taxes                                           (30.6 )        (19.0 %)         (7.0 )         (2.6 %)
Tax benefit                                      (7.3 )         (4.5 %)         (0.4 )          0.2 %

Loss from continuing operations               $ (23.3 )        (14.5 %)      $  (6.6 )         (2.4 %)

Three Months Ended June 30, 2009 vs. Three Months Ended June 30, 2008 Consolidated net sales from continuing operations in the second quarter of 2009 decreased to $161.2 million from $273.8 million in 2008. After consideration for the effect of currency translation, which decreased sales in U.S. dollars by $25.3 million, sales declined by $87.3 million or 31.9%. Compressors for commercial and aftermarket applications recorded the most substantial decline when compared to the second quarter of 2008, down by $72.9 million or 51.2%. These volume declines were driven by adverse economic conditions which create overall declines in market volumes. As customers reduced inventory balances to better reflect current sales levels, sales volumes were substantially affected. Sales for refrigeration & freezer ("R&F") applications also recorded a significant decline, with sales reduced by $26.8 million or 31.8% year-on-year. Volumes for R&F product were also substantially affected by the global economic contraction, as consumer credit was considerably more constrained than in the second quarter of 2008 and the comparative rate of housing starts declined. The downturn in market volumes for R&F applications was the end result of a twofold effect of these economic conditions; a decreased demand by consumers, combined with lower demand from our R&F customers as they brought their own inventories in line with lower volumes. Cooler-than-normal weather also adversely affected R&F sales in the quarter just ended. Sales of compressors for air conditioning and other applications declined by $12.9 million or 27.4%.
Cost of sales was $156.1 million in the three months ended June 30, 2009 compared to $240.3 million in the three months ended June 30, 2008. As a percentage of net sales, cost of sales was 96.8% and 87.8% in the second quarters of 2009 and 2008, respectively. Gross profit (defined as net sales less cost of sales) declined by $28.4 million, from $33.5 million or 12.2% in the second quarter of 2008 to $5.1 million or 3.2% in the second quarter of 2009. The reduction in gross profit was primarily due to the abrupt decline in sales volumes, which resulted in Iower absorption of fixed costs.

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The most substantial impact to gross profit in the second quarter of 2009 was volume declines, which had an unfavorable impact of $32.0 million when compared to the same quarter of 2008. Offsetting the volume declines were favorable productivity costs of $5.2 million, selling price / mix improvements of $3.0 million, favorable currency impacts of $1.9 million, and favorable commodity costs of $0.3 million as compared to the same period in 2008. Lower pension and OPEB credits reduced 2009 gross profit by $2.1 million when compared to the second quarter of 2008; in addition, favorable litigation settlement costs were recorded in Europe in 2008 amounting to $2.2 million, while no such benefit was realized in the current year. All other income and expense items reduced 2009 results by an additional $2.5 million.
Selling and administrative ("S&A") expenses were $33.1 million and $34.3 million in the three months ended June 30, 2009 and 2008 respectively. As a percentage of net sales, S&A expenses were 20.5% in the second quarter of 2009 compared to 12.5% in the second quarter of 2008. We recorded expenditures of approximately $5.0 million in the second quarter of 2009 for one-time professional fees, primarily comprised of legal fees for corporate governance issues. This expenditure constituted an increase of $1.1 million in professional fees incurred for one-time projects when compared to the $3.9 million incurred during the same period in 2008. In addition, a favorable change in estimate of $1.9 million that was recorded in 2008 was not repeated in 2009. The effect of foreign currency translation had a favorable effect in 2009 of $2.8 million; all other S&A expenses decreased in the aggregate by $1.4 million.
We recorded expense of $1.1 million in impairments, restructuring charges, and other items in the three months ended June 30, 2009. These expenses were as a result of costs associated with reductions in force at our Brazilian ($0.8 million) and North American ($0.3 million) locations during the quarter. We recorded expense of $3.3 million in impairments, restructuring charges, and other items in the three months ended June 30, 2008. These expenses were as a result of severance and restructuring costs from previously announced actions recognized at our North American ($1.6 million) European ($0.9 million) and Brazilian ($0.8 million) locations during the quarter.
Interest expense amounted to $2.1 million in the three months ended June 30, 2009 compared to $6.2 million in the same period of 2008. The substantially lower interest expense in the current quarter was primarily attributable to reduced borrowings, including both debt balances and accounts receivable factoring. Interest income and other, net was $0.6 million in the second quarter of 2009 compared to $3.3 million in the second quarter of 2008, primarily reflecting the lower levels of cash and short-term investments held in 2009. Our results of operations reflect a $7.3 million income tax benefit from continuing operations for the second quarter of 2009 and a $0.4 million income tax benefit from continuing operations for the second quarter of 2008. For further discussion of the factors that affect our tax benefits and expenses, refer to Note 13, "Income Taxes," of the Notes to the consolidated condensed financial statements.
As a result of the factors described above, net loss from continuing operations for the quarter ended June 30, 2009 was $23.3 million ($1.26 per share basic and diluted) as compared to net loss of $6.6 million ($0.36 per share basic and diluted) in the same period of 2008.

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Six Months Ended June 30,
(dollars in millions) 2009 % 2008 %

Net sales $ 309.3 100.0 % $ 549.0 100.0 % Cost of sales 294.9 95.3 % 469.9 85.6 % Selling and administrative expenses 65.3 21.1 % 65.9 12.0 % Impairments, restructuring charges, and
other items 7.0 2.3 % 3.8 0.7 %

Operating (loss) income (57.9 ) (18.7 %) 9.4 1.7 % Interest expense (5.0 ) (1.6 %) (13.5 ) (2.5 %) Interest income and other, net 1.4 0.5 % 5.1 0.9 %

(Loss) income from continuing operations before taxes (61.5 ) (19.9 %) 1.0 0.1 % Tax (benefit) expense (13.7 ) (4.4 %) 0.8 (0.1 %)

(Loss) income from continuing operations $ (47.8 ) (15.5 %) $ 0.2 * *

** Less than 0.1%

Six Months Ended June 30, 2009 vs. Six Months Ended June 30, 2008 Consolidated net sales from continuing operations in the first two quarters of 2009 decreased to $309.3 million from $549.0 million in 2008. After consideration for the effect of currency translation, which decreased sales in U.S. dollars by $53.6 million, compressor sales declined by $186.1 million or 33.9%. Sales of compressors used in commercial applications decreased by $125.2 million or 44.5%. For the commercial and aftermarket business, volume declines were driven by softer economic conditions as well as lower shipments to customers as they too reduced inventory balances to better reflect current sales levels. Dollar volume declines in sales of compressors used in R&F applications were $84.8 million or 49.3%. Volumes for R&F product were also substantially affected by the global economic contraction, as consumer credit became more constrained than in the first two quarters of 2008 and the rate of housing starts declined. The downturn in market volumes for R&F applications was the end result of the effect of these economic conditions; a decreased demand by consumers, combined with lower demand from our R&F customers as they brought their own inventories in line with lower volumes. These factors were further compounded by unusually cool weather in many of the geographic locations served. Sales of compressors for air conditioning applications and all other applications also declined by $29.6 million or 30.9%.
Cost of sales was $294.9 million in the six months ended June 30, 2009, as compared to $469.9 million in the same period of 2008. As a percentage of net sales, cost of sales was 95.3% and 85.6% in the first six months of 2009 and 2008, respectively. Gross profit (defined as net sales less cost of sales) declined by $64.7 million, from $79.1 million or 14.4% through the second quarter of 2008 to $14.4 million or 4.7% in the comparable period of 2009. As was the case for the second quarter, the reduction in gross profit was primarily due to the abrupt decline in sales volumes, which resulted in Iower absorption of fixed costs.
Volume declines accounted for the majority of the decrease in gross profit, reducing 2009 results by $61.6 million as compared to the first two quarters of 2008. Commodity costs were unfavorable year-on-year by $4.3 million, and other material variances were also unfavorable by $2.4 million. Current year margin was also unfavorably impacted by selling price and mix of $0.3 million. In addition, certain

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items that were favorable to 2008 results did not recur in 2009. These amounts included a gain on the sale of an airplane and our former airport facility of $4.2 million and favorable litigation settlement costs of $2.2 million. Lower pension and OPEB credits of $3.0 million were also recorded in the current year. In contrast, productivity improvements of $15.0 million and favorable currency impacts of $6.3 million improved 2009 results when compared to the same period of 2008. The effect of all other income and expense items was unfavorable to 2009 results by $8.0 million.
S&A expenses were $65.3 million in the first two quarters of 2009 as compared to $65.9 million in the six months ended June 30, 2008. As a percentage of net sales, S&A expenses were 21.1% and 12.0% in 2009 and 2008, respectively. We incurred approximately $8.3 million in the first two quarters of 2009 for one-time professional fees, which included legal fees for corporate governance issues, representing an increase of $2.2 million when compared to the $6.1 million incurred in 2008. In addition, a favorable change in estimate of $1.9 million that was recorded in the second quarter of 2008 was not repeated in 2009. The effect of foreign currency translation had a favorable effect in 2009 of $6.1 million; all other S&A expenses increased in the aggregate by $1.4 million.
We recorded $7.0 million in impairments, restructuring charges, and other items in the six months ended June 30, 2009. $4.4 million of these charges related to restructuring costs at our Brazilian ($2.7 million), North American, ($1.1 million) and Indian ($0.6 million) facilities. The remainder of the expense in 2009 was primarily associated with the establishment of an environmental accrual for our former Tecumseh, Michigan facility of $2.3 million. We also incurred $0.3 million in losses related to the transfer of surplus land.
We recorded expense of $3.8 million in impairments, restructuring charges, and other items in the six months ended June 30, 2008. This included $20.0 million in excise tax expense on the proceeds received from the reversion of our former salaried retirement plan, and a curtailment loss on our hourly pension plan of $3.9 million. We also recorded expense of $5.9 million related to severance costs for previously announced on-going restructuring activities at our North American ($3.0 million) Brazilian ($2.0 million) and European ($0.9 million) locations. Offsetting these expenses were a curtailment gain on our hourly OPEB plans ($19.1 million) due to reductions in future service cost related to the impending closure of our manufacturing operations in Tecumseh, Michigan, a settlement gain on the sale of annuity contracts for our former salaried retirement plan ($6.3 million), and a gain on the sale of our facility in Dundee, Michigan ($0.6 million).
Interest expense amounted to $5.0 million through June 30, 2009 compared to $13.5 million in the six months ended June 30, 2008. A portion of the 2008 expense was attributable to the amortization of $1.4 million in capitalized debt amendment costs associated with our former First Lien credit agreement, which were expensed in the first quarter of 2008 upon its termination. Aside from these factors, the lower levels of discounted accounts receivable and overall debt levels over the course of 2009 have contributed to the reduction in interest costs. . . .