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 price 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 five 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. Volumes in the third quarter of 2009 reflected less of a decline when compared to third quarter of 2008, but nonetheless were down 12.5% in the current year exclusive of the effects of currency translation. 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 idled underutilized assets and reduced employment levels throughout the world. Some actions have been implemented during last year and the first nine months of the year, while additional actions have been authorized with the relevant governmental labor entities, including Works Councils. These additional actions, which are related to our European operations, are expected to result in restructuring expense of $13 to $15 million in the fourth quarter of 2009. 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 three quarters 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 September 30, 2009, copper prices more than doubled, increasing by 103.7%. 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 price 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 second quarter of 2009; in the third quarter of

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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 2009, steel prices rebounded to levels approximately commensurate with the beginning of the year. Due to competitive markets, we are typically not able to quickly recover product 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 75% of our anticipated copper requirements for the remaining quarter 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 price of steel. In addition, while the use of forwards and futures can mitigate the risks of price increases associated with these commodities by "locking in" prices 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 80% of our sales in the first three 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. Due to 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 prices 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 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

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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 increased costs, we cannot provide assurances that they 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 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, cash paid for interest has been and will continue to be substantially reduced in comparison to 2008 levels. We also have received and expect further non-operational cash inflows through the end of 2009, including the receipt in July 2009 of a $14.9 million tax refund in the U.S. and possible proceeds of approximately $45 million in the fourth quarter from the termination and reversion of our over-funded hourly pension plan (although the pension plan reversion is more likely to occur in 2010). However, challenges remain with respect to our ability to generate appropriate levels of liquidity solely from cash flows from operations, particularly challenges related to global economic conditions, currency exchange effects 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 nine months of 2009. While we expect continued improvement as our restructuring activities take effect, we still may not generate cash from normal operations unless further restructuring activities are implemented and/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 most of the jurisdictions in which we operate. While we believe that current cash balances (including the recently received U.S. income tax refund) combined with available borrowings and the cash to be generated by the pension plan reversion will produce adequate liquidity to implement our business strategy over at least the next twelve months, there can be no assurance that such improvements will ultimately be adequate if economic conditions 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 September 30,
(dollars in millions)                          2009             %             2008             %
Net sales                                     $ 208.0          100.0 %       $ 256.2          100.0 %
Cost of sales                                   189.4           91.1 %         238.7           93.2 %
Selling and administrative expenses              29.4           14.1 %          33.7           13.2 %
Impairments, restructuring charges, and
other items                                       3.6            1.7 %          16.2            6.3 %

Operating loss                                  (14.4 )         (6.9 %)        (32.4 )        (12.7 %)
Interest expense                                 (3.0 )         (1.4 %)         (7.0 )         (2.7 %)
Interest income and other, net                    0.5            0.2 %           2.7            1.1 %

Loss from continuing operations before
taxes                                           (16.9 )         (8.1 %)        (36.7 )        (14.3 %)
Tax benefit                                       0.7            0.3 %           0.2            0.1 %

Loss from continuing operations               $ (16.2 )         (7.8 %)      $ (36.5 )        (14.2 %)

Three Months Ended September 30, 2009 vs. Three Months Ended September 30, 2008 Consolidated net sales from continuing operations in the third quarter of 2009 decreased to $208.0 million from $256.2 million in 2008. After consideration for the effect of currency translation, which decreased sales in U.S. dollars by $16.2 million, sales declined by $32.0 million, or 12.5%. Compressors for commercial and aftermarket applications declined by $24.5 million, or 18.3%, when compared to the third quarter of 2008. These volume reductions tracked overall market declines, which were driven by continued adverse economic conditions. Sales for refrigeration & freezer ("R&F") applications also recorded a significant decline, with sales reduced by $16.4 million, or 19.4%, year-on-year. Volumes for R&F product were also substantially affected by the global economic contraction, driven by constrained consumer demand and a decline in housing starts. 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 in certain key geographies also adversely affected R&F sales in the third quarter of 2009. Sales of compressors for air conditioning and other applications also declined, by $7.3 million, or 19.3%.
Cost of sales was $189.4 million in the three months ended September 30, 2009 compared to $238.7 million in the three months ended September 30, 2008. As a percentage of net sales, cost of sales improved in 2009, to 91.1% versus 93.2% in the third quarter of 2008. Gross profit in the third quarter of 2009 (defined as net sales less cost of sales) improved slightly when compared to the prior year, moving from $17.5 million, or 6.8%, in the third quarter of 2008 to $18.6 million, or 8.9%, in the third quarter of 2009, despite substantially lower volumes. Gross profit in the third quarter of 2008 was adversely affected by the declining sales volumes at the outset of the global financial crisis, which resulted in Iower absorption of fixed costs. Over the course of 2009, we have worked to reduce our fixed cost structure to more closely match our current levels of sales, as well as reducing our variable cost structure by repositioning production capabilities to lower-cost locations.

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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
Gross profit continued to be unfavorably impacted in the third quarter of 2009 by volume declines, which had an unfavorable impact of $8.7 million when compared to the same quarter of 2008. Product mix effects also affected gross profit unfavorably, by $10.7 million. Offsetting the volume declines and pricing/mix effects were favorable currency impacts of $9.9 million, favorable commodity costs of $8.5 million, productivity improvements of $5.1 million and improvements in purchasing expenses of $1.1 million as compared to the same period in 2008. Lower pension and OPEB credits, however, reduced 2009 gross profit by $1.4 million when compared to the third quarter of 2008, and all other income and expense items included in cost of sales reduced 2009 results by an additional $2.7 million.
Selling and administrative ("S&A") expenses were $29.4 million and $33.7 million in the three months ended September 30, 2009 and 2008 respectively. As a percentage of net sales, S&A expenses were 14.1% in the third quarter of 2009 compared to 13.2% in the third quarter of 2008. We recorded expenditures of approximately $4.5 million in the third quarter of 2009 for professional fees outside the ordinary course of business, primarily comprised of legal fees for corporate governance issues. This expenditure constituted a reduction of $0.6 million in professional fees incurred for one-time projects when compared to the $5.1 million incurred during the same period in 2008. All other S&A expenses decreased in the aggregate by $3.7 million.
We recorded expense of $3.6 million and $16.2 million in impairments, restructuring charges, and other items in the three months ended September 30, 2009 and 2008 respectively. For further discussion of the expenses recorded, refer to Note 12, "Impairments, Restructuring Charges, and Other Items," of the Notes to the consolidated condensed financial statements, as well as "Adequacy of Liquidity."
Interest expense amounted to $3.0 million in the three months ended September 30, 2009 compared to $7.0 million in the same period of 2008. The substantial decrease in the current quarter was primarily attributable to reduced borrowings, particularly in Brazil, including both debt balances and accounts receivable factoring, as well as to slightly lower interest rates. Interest income and other, net was $0.5 million in the third quarter of 2009 compared to $2.7 million in the third quarter of 2008, primarily reflecting the lower levels of cash and short-term investments held in 2009. Our results of operations reflect a $0.7 million income tax benefit from continuing operations for the third quarter of 2009 and a $0.2 million income tax benefit from continuing operations for the third 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 September 30, 2009 was $16.2 million ($0.87 per share, basic and diluted) as compared to net loss of $36.5 million ($1.98 per share, basic and diluted) in the same period of 2008.

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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

Nine Months Ended September 30,
(dollars in millions) 2009 % 2008 % Net sales $ 517.3 100.0 % $ 805.2 100.0 % Cost of sales 484.3 93.6 % 708.6 88.0 % Selling and administrative expenses 94.7 18.3 % 99.6 12.4 % Impairments, restructuring charges, and
other items 10.6 2.1 % 20.0 2.5 %

Operating loss (72.3 ) (14.0 %) (23.0 ) (2.9 %) Interest expense (7.9 ) (1.5 %) (20.5 ) (2.5 %) Interest income and other, net 1.8 0.3 % 7.8 1.0 %

Loss from continuing operations before
taxes (78.4 ) (15.2 %) (35.7 ) (4.4 %) Tax (benefit) expense (14.4 ) 2.8 % 0.6 (0.1 %)

Loss from continuing operations $ (64.0 ) (12.4 %) $ (36.3 ) (4.5 %)

Nine Months Ended September 30, 2009 vs. Nine Months Ended September 30, 2008 Consolidated net sales from continuing operations in the first three quarters of 2009 decreased to $517.3 million from $805.2 million in 2008. After consideration for the effect of currency translation, which decreased sales in U.S. dollars by $69.8 million, sales declined by $218.1 million, or 27.1%. Sales of compressors used in commercial applications decreased by $129.7 million, or 31.3%. 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 $101.3 million or 39.4%. Volumes for R&F product were also substantially affected by the global economic contraction, as consumer credit became more constrained than in the first three 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 $56.9 million, or 42.5%.
Cost of sales was $484.3 million in the nine months ended September 30, 2009, as compared to $708.6 million in the same period of 2008. Expressed as a percentage of net sales, cost of sales was 93.6% and 88.0% in the first nine months of 2009 and 2008, respectively. Gross profit (defined as net sales less cost of sales) declined by $63.6 million, from $96.6 million, or 12.0%, through the third quarter of 2008 to $33.0 million, or 6.4%, in the comparable period of 2009. The current year decline is mostly attributable to the materially lower levels of sales volume in 2009, which resulted in Iower absorption of fixed costs, although reductions in our fixed cost structure during 2009 helped to mitigate this effect.
Volume declines accounted for the majority of the decrease in gross profit, reducing 2009 results by $67.6 million as compared to the first three quarters of 2008. Current year margin was also unfavorably impacted by changes in sales mix of $12.5 million. Other material variances were also unfavorable by $3.4 million. In addition, certain 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

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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
million and favorable litigation settlement costs of $2.2 million. Lower pension and OPEB credits of $4.4 million were also recorded in the current year. In contrast, productivity improvements of $20.1 million, favorable currency effects of $17.3 million and lower commodity costs of $3.6 million improved 2009 results when compared to the same period of 2008. Reduced export incentives for our Indian operations adversely affected current year margins by $1.3 million; the effect of all other income and expense items included in cost of sales was unfavorable to 2009 results by $9.0 million.
S&A expenses were $94.7 million in the first three quarters of 2009 as compared to $99.6 million in the nine months ended September 30, 2008. As a percentage of net sales, S&A expenses were 18.3% and 12.4% in 2009 and 2008, respectively. We incurred approximately $9.0 million in the first three quarters of 2009 for professional fees outside the ordinary course of business, which included legal fees for corporate governance issues, representing a decrease of $2.1 million when compared to the $11.1 million incurred in 2008. In contrast, 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 $7.2 million; all other S&A expenses increased in the aggregate by $2.5 million.
We recorded $10.6 million and $20.0 million in impairments, restructuring charges, and other items in the nine months ended September 30, 2009 and 2008 respectively. For further discussion of the expenses recorded, refer to Note 12, "Impairments, Restructuring Charges, and Other Items," of the Notes to the consolidated condensed financial statements.
Interest expense amounted to $7.9 million through September 30, 2009 compared to $20.5 million in the nine months ended September 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.
Interest income and other, net was $1.8 million in the first nine months of 2009 compared to $7.8 million in the same period of 2008. The decrease was due to the lower levels of cash and short-term investments held in 2009 as compared to 2008, particularly compared to the levels of cash held in the second and third quarters of the prior year.
We recorded a $14.4 million income tax benefit from continuing operations for the nine months ended September 30, 2009, compared to a $0.6 million income tax expense from continuing operations for the nine months ended September 30, 2008. For further discussion of the factors that affect our tax benefits and expenses, . . .