Scroll Compressors

I'll pursue the technological point I mentioned in yesterday's entry for a moment today, because I do think its healthy for those of us who characteristically write about the financial side of business news to re-focus when we can on the operational side -- on the fact that companies do stuff, they make things, they provide services to people, etc.

The cash flow, and everything connected with it, ultimately is founded on this doing-of-stuff. Operations should drive finance, not the other way around.

So in trying to understand the dispute over Tecumseh, I found myself wondering what exactly is a "scroll compressor."

To start at the start: a "compressor" in the relevant sense is a device that increases the pressure of a gas by reducing its volume. The more traditional sorts of compressor are: rotary, reciprocating, or wobble-plate. Reciprocating compressors, just for example, use pistones driven by a crankshaft.

A scroll cmopressor, on the other hand, involves two spiral-shaped surfaces, interleaved. One is fixed, the other orbits eccentrically without rotating. If you look at a diagram of this, the effect is positively hypnotic. There's a photograph that will give the general idea.

The site that includes that photograph also gives a list (in the context of their use cooling milk) of some of the benefits of scroll compressors: they require less electrical current than the alternatives, make less noise, are easier to maintain since there is no metal-on-metal friction, etc.

So now I understand: one of the contentions of the dissidents in the Tecumseh proxy fight is that the management failed to make a transition to scroll compressors in a timely way, and is now behind the rest of the industry.

On the other hand ... scroll compressors are not without their drawbacks. They're more vulnerable than other compressors to damage caused by foreign objects, or by brief power interruptions.

At any rate, these issues have been under consideration within Tecumseh for more than a decade. In the company's 2000 annual report there's a reference to the company's investment in a scroll compressor manufacturing facility, with the rueful observations that, "In 1996, unacceptable field testing results led to the abandonment of this particular design. Since then, several new designs, intended to serve primarily commercial applications, have been under development and testing."

So that's my bit of didacticism on engineering for the day. Back to finance tomorrow.

What's a "scroll compressor"?

Tecumseh Products, a Michigan-based manufacturer of compressors for heat pumps and refrigeration products, especially for the commercial and industrial markets, is seeking to put a chill into a bid for control by the Herrick Foundation. The matter will come to a head at a special meeting on November 21.

The proxy advisory firm Glass Lewis has come to Tecumseh's aid with a report that says among much else: “We see no reason to believe that the replacement of current directors with the [Herrick Foundation] nominees would provide more meaningful returns to shareholders than management’s current strategy.”

Glass Lewis praised the company's improvements in "operational performance," its recent asset sales, and its cost reduction efforts.

This proxy fight has a nearly two-year time line. It was in February 2007 that Herrick informed Tecumseh that it would be nominating three candidates for director. This was a bid for control, since the board has only five seats.

Tecumseh replied by expanding its board to seven seats. After some back-and-forth over the following weeks, the parties reached a one-year standstill agreement in April. This agreement left Herrick with two of the seven seats.

So in the spring of this year, that agreement came to its end and the back-and-forth manuveuring resumed. In April 2008, the Tecumseh board amended the company by-laws to make it very difficult for shareholders to call a special meeting. Herrick sued.

In August,the circuit court in Lenawee County, Michigan, ordered a special meeting for November 21. The purpose of the meeting is to consider the removal of two directors and the election of new directors to fill the vacancy if removal is approved. The two directors that Herrick has targeted for removal are Tecumseh's longest-serving directors, Peter M. Banks and David M. Risley.

Obviously, if Herrick manages to replace Messrs Banks and Risley with two directors more favorable to itself, its share of the seven member board rises from two seats to a majority four.

An intriguing but rather isolated line in Herrick's proxy materials says, "The industry trend is toward the use of scroll compressors, which competitors have had for some time, but Tecumseh is in the early stages of offering."

What's a scroll compressor and how does it differ from the sort of thing Tecumseh does offer? A homework assignment!