Attached files
file | filename |
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EX-32.1 - UCI Holdco, Inc. | v177280_ex32-1.htm |
EX-31.2 - UCI Holdco, Inc. | v177280_ex31-2.htm |
EX-21.1 - UCI Holdco, Inc. | v177280_ex21-1.htm |
EX-31.1 - UCI Holdco, Inc. | v177280_ex31-1.htm |
EX-10.19 - UCI Holdco, Inc. | v177280_ex10-19.htm |
EX-10.22 - UCI Holdco, Inc. | v177280_ex10-22.htm |
EX-10.20 - UCI Holdco, Inc. | v177280_ex10-20.htm |
EX-10.17 - UCI Holdco, Inc. | v177280_ex10-17.htm |
EX-10.16 - UCI Holdco, Inc. | v177280_ex10-16.htm |
EX-10.21 - UCI Holdco, Inc. | v177280_ex10-21.htm |
EX-10.18 - UCI Holdco, Inc. | v177280_ex10-18.htm |
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
DC 20549
Form
10-K
(Mark one)
|
R
|
ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the fiscal year ended December 31, 2009
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£
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the transition period
from to
Commission
file number: 333-147178
UCI
Holdco, Inc.
(Exact
Name of Registrant as Specified in Its Charter)
Delaware
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16-1760186
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(State
or Other Jurisdiction of
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(I.R.S.
Employer
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Incorporation
or Organization)
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Identification
No.)
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14601
Highway 41 North
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|
Evansville,
Indiana
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47725
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(Address
of Principal Executive Offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code:
(812)
867-4156
Securities
registered pursuant to Section 12(b) of the Act:
None
Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes £ No R
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes £ No R
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes R No £
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. R
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer £
|
Accelerated
filer £
|
Non-accelerated
filer R
|
Smaller
reporting company £
|
(Do
not check if a smaller reporting
company)
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes £ No R
The
Registrant had 2,864,210 shares outstanding of its $0.01 par value common stock
as of March 19, 2010, 225,560 of which were held by non-affiliates.
Documents
Incorporated by Reference: None
TABLE
OF CONTENTS
Page
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Part
I
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Item
1.
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Business
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3
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Item
1A.
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Risk
Factors
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11
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Item
1B.
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Unresolved
Staff Comments
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21
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Item
2.
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Properties
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22
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Item
3.
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Legal
Proceedings
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23
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Item
4.
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Reserved
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25
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Part
II
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||
Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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26
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Item
6.
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Selected
Financial Data
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27
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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29
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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46
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Item
8.
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Financial
Statements and Supplementary Data
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48
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Item
9.
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Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
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91
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Item
9A(T).
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Controls
and Procedures
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91
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Item
9B.
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Other
Information
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92
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Part
III
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||
Item
10.
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Directors,
Executive Officers and Corporate Governance
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93
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Item
11.
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Executive
Compensation
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95
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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106
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Item
13.
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Certain
Relationships and Related Transactions, and Director
Independence
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108
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Item
14.
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Principal
Accounting Fees and Services
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109
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Part
IV
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||
Item
15.
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Exhibits,
Financial Statement Schedules
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110
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Signatures
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115
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2
PART
I
ITEM 1. BUSINESS
Overview
UCI
Holdco, Inc. (“Holdco”, the “Company”, or “we”) was incorporated on March 8,
2006 as a holding company for UCI Acquisition Holdings, Inc., (“UCI
Acquisition”) and United Components, Inc. (“UCI”). Holdco owns all of the common
stock of UCI through its wholly-owned subsidiary, UCI Acquisition. The senior
management and Board of Directors of Holdco are also the senior management and
Board of Directors of UCI. In this report, we use the terms “Holdco,” the
“Company,” “we,” “us,” and “our” to refer to UCI Holdco, Inc. and its
subsidiaries, unless the context indicates otherwise.
Holdco
has $324.1 million of floating rate senior PIK notes due 2013 (the “Holdco
Notes”) outstanding. Pursuant to a registration rights agreement entered in
connection with the issuance of the Holdco Notes in December 2006, the Company
completed an exchange offer in January 2008, registering the exchange of the
Holdco Notes pursuant to a registration statement on Form S-4. As a result,
Holdco is filing this Annual Report on Form 10-K with the Securities and
Exchange Commission in accordance with requirements under the Securities
Exchange Act of 1934 and the indenture governing the Holdco Notes.
On June
20, 2003, UCI purchased all of its operating units from UIS, Inc., and UIS
Industries. Inc. (together “UIS”). For more information regarding the purchase
of our operations, see “The Acquisition and Ownership” section, which
immediately follows this overview.
Prior to
June 20, 2003, UCI’s operations comprised the vehicle parts businesses of UIS.
Beginning with the purchase of Airtex Products in 1958, UIS continued making
acquisitions in the automotive industry over the following four decades,
including Wells Manufacturing Corporation, Champion Laboratories, Inc., Neapco,
Inc., Flexible Lamps Ltd. and Pioneer, Inc. In 2006 we acquired ASC
Industries, Inc. (“ASC”) and sold Neapco, Inc., Pioneer, Inc. and Flexible Lamps
Ltd.
We are a
leading supplier to the vehicle replacement parts market, or the aftermarket,
with either the leading or second market position in each of our product lines.
We supply a broad range of filtration, fuel, cooling and engine management
products to the automotive, trucking, industrial, construction, agricultural,
marine and mining vehicle markets. Approximately 88% of our 2009 net sales were
made to a diverse aftermarket customer base that includes some of the largest
and fastest growing companies servicing the aftermarket.
We have
one of the most comprehensive product lines in the aftermarket, offering
approximately 47,000 part numbers. We believe that the breadth of our offerings
in each of our product lines, combined with our extensive global manufacturing,
sourcing and distribution capabilities, product innovations, diverse customer
base and reputation for quality and service, including industry leading order
fill rates, makes us a leader in our industry.
We
design, develop, manufacture and distribute an extensive range of vehicle
replacement parts across our four product lines:
|
•
|
Filtration Products:
oil, air, fuel, hydraulic, transmission, cabin air and industrial
filters and PCV valves.
|
|
•
|
Fuel Products: fuel
pump assemblies, electric fuel pumps, mechanical fuel pumps and fuel pump
strainers.
|
|
•
|
Cooling Products: water
pumps, fan clutches and other
products.
|
|
•
|
Engine Management Products:
caps and rotors, emission controls, sensors, ignition controls,
coils and switches.
|
We
believe that the majority of our sales tend to track the overall growth of the
aftermarket. Sales in the North American vehicle aftermarket (excluding tires)
grew at a compounded average annual growth rate of approximately 3.5% from 1998
through 2009. However, aftermarket sales grew by only 0.1% in 2008
and are estimated to have declined by approximately 1.2% in 2009 due to the
challenging economic environment.
3
A key
metric in measuring aftermarket performance is miles driven. For 2008, the U.S.
Department of Energy reported a decrease in miles driven of 3.2% (equaling 96
billion fewer miles) which represented the first annual decrease in miles driven
since 1980. We believe that high gasoline prices and generally weak economic
conditions adversely affected our sales during the second half of 2008 and 2009.
During 2009, retail gasoline prices were significantly lower than the historic
highs experienced at the beginning of the third quarter of 2008. Despite the
lower retail gasoline prices, the negative trend in miles driven continued in
the first quarter of 2009 (a 2.7% decrease over the comparable quarter in 2008)
due to the ongoing weak economic conditions. The negative trend reversed in the
last three quarters of 2009 as miles driven exceeded the comparable 2008
quarters. For the full year of 2009, miles driven increased 0.1% from
2008. Despite the decrease in miles driven in 2008 and the small
decline in the North American vehicle aftermarket in 2009, we believe that the
aftermarket will continue to grow in the long-term as a result of increases in
the average age of vehicles, average number of miles driven per year by
passenger cars, number of vehicles registered in the United States and number of
licensed drivers, as well as the increasing complexity of
vehicles. Because we primarily supply the aftermarket, our sales do
not correlate strongly with annual vehicle production.
Due to
our acquisition of ASC, investments made in the last three years to establish
filtration and fuel pump manufacturing facilities in China and our footprint in
Mexico, we have significant expertise in global manufacturing and
sourcing. We believe that our low-cost China manufacturing and
sourcing capability, along with our Mexican operations, positions us to realize
meaningful cost savings over the next few years.
Through
our emphasis on category management, high order fill rates, customer service,
product quality and competitive pricing, we have developed long-standing
relationships with our customers, including leading aftermarket companies and
wholesale buying groups such as Advance Stores Company, Inc. (Advance Auto
Parts), AutoZone, Inc. (AutoZone), Aftermarket Auto Parts Alliance (Alliance),
AIM/CMB Marketing, Automotive Distribution Network (Network), Auto Parts
Associates, Inc. (APA), Auto Parts Professionals, CARQUEST Corporation
(CARQUEST), Genuine Parts Company (NAPA and UAP), Independent Warehouse
Distributors (IWD), National Pronto Association (Pronto), O’Reilly Automotive,
Inc. (O’Reilly Auto Parts), TruStar, Valvoline Company, a division of
Ashland Inc. (Valvoline) and VIPAR, as well as a diverse group of original
equipment manufacturers, or OEMs, such as Chrysler Group LLC (Chrysler), Ford
Motor Company, Inc. (Ford), General Motors Corporation (GM), Harley-Davidson,
Inc. (Harley-Davidson), Mercury Marine Division of Brunswick Corporation
(Mercury Marine), Perkins/Caterpillar and Volkswagen of America, Inc.
(Volkswagen).
The
Acquisition and Ownership
On June
20, 2003, UCI purchased the vehicle parts businesses of UIS, consisting of all
of the issued and outstanding common stock or other equity interests of Champion
Laboratories, Inc., Wells Manufacturing Corporation, Neapco, Inc., Pioneer,
Inc., Wells Manufacturing Canada Limited, UIS Industries Ltd. (which was the
owner of 100% of the capital stock of Flexible Lamps, Ltd. and Airtex Products
Ltd.), Airtex Products S.A., Airtex Products, Inc., (currently Airtex Mfg.,
Inc.), Talleres Mecanicos Montserrat S.A. de C.V., Brummer Seal de Mexico, S.A.
de C.V., Brummer Mexicana en Puebla, S.A. de C.V., Automotive Accessory Co. Ltd
and Airtex Products, LLC, predecessors to the entities that now own the assets
of the Airtex business. We refer to this transaction as the
“Acquisition.”
The
purchase price paid was $808 million, plus transaction fees. The Acquisition was
financed through a combination of debt and $260 million in cash contributed to
UCI as equity by its parent, UCI Acquisition Holdings, Inc. through
contributions from Carlyle Partners III, L.P. and CP III Coinvestment, L.P. UCI,
UCI Acquisition and Holdco are corporations formed at the direction
of The Carlyle Group, which we refer to as Carlyle.
Our
Industry
According
to the 2010 AAIA Digital Aftermarket Factbook (the “Factbook”), the North
American light vehicle aftermarket (excluding tires) is large and fragmented,
with an estimated $210 billion of aggregate sales in 2008. Light vehicles are
defined as those typically weighing less than 14,000 pounds. The
vehicle replacement parts industry contains numerous suppliers and is
characterized by one or two key competitors in each product line. We believe
that customers within the aftermarket are increasingly focused on consolidating
their supplier base, and therefore place a premium on suppliers with customized
service and consistent and timely availability and delivery of products. Our
industry is also characterized by relatively high barriers to entry, which
include the need for significant start-up capital expenditures, initial part
number breadth within a product line, proven product quality, distribution
infrastructure and long-standing customer relationships.
4
The
vehicle parts industry is comprised of five main sales channels: the retail
sales channel, the traditional sales channel, the heavy-duty sales channel, the
original equipment service, or OES, sales channel and the OEM sales channel. The
retail, traditional, heavy-duty and OES sales channels together comprise the
aftermarket, which has significantly different characteristics than the OEM
sales channel. While product sales to OEMs are one-time sales for the production
of new vehicles and are therefore tied to fluctuations in annual vehicle
production volumes, product sales in the aftermarket are repeat sales of
replacement parts for the entire base of vehicles on the road and are less
susceptible to changes in production volumes for new cars.
Within
the five main sales channels, the North American light vehicle aftermarket is
primarily organized around two groups of end-users: the do-it-yourself (“DIY”)
group and the do-it-for-me (“DIFM”) group. The DIY group, which is supplied
primarily through the retail channel (e.g., Advance Auto Parts, AutoZone and
O’Reilly Auto Parts), represented approximately 20% of industry-wide aftermarket
sales in 2008, and consists of consumers who prefer to do various repairs on
their vehicles themselves. The DIFM group is supplied primarily through the
traditional channel (e.g., Alliance, CARQUEST, NAPA and Network) and the OES
channel, which represented approximately 80% of industry-wide aftermarket sales
in 2008, and consists of car dealers, repair shops, service stations and
independent installers who perform the work for the consumer.
According
to the Factbook, the North American vehicle aftermarket (excluding tires) has
grown at a compounded annual average growth rate of 3.5% from
1998-2009. In 2008, however, aftermarket sales grew by only 0.1% and
2009 aftermarket sales are estimated to have declined by 1.2% due to the
challenging economic environment. The overall growth in aftermarket
sales has been primarily driven by:
Increase in miles driven. The
demand for the majority of aftermarket products is tied to the regular
replacement cycle or the natural wearing cycle of a vehicle part and, in turn,
is heavily influenced by actual miles a vehicle is driven. Since 1970, miles
driven has decreased only four times, 1974 (-1.4%); 1979 (-1.2%); 1980 (-.05%)
and 2008 (-3.6%). Although miles driven decreased in 2008, the total miles
driven in 2008 is 9.5% higher than miles driven ten years prior. We expect that
miles driven per vehicle will recover over time and begin to increase and, as a
result, the need for automotive component replacement parts will also
increase.
Growing base of vehicles.
From 1998 to 2009, the number of registered passenger cars and light
trucks increased by approximately 22.6%. With more than 240 million light
vehicles currently on the road, we expect there will be an increasing need for
replacement parts and general maintenance.
Aging vehicle population.
From 1998 to 2008, the median age of passenger cars in use grew from 8.3
years to 9.4 years, due to a growing population of vehicles eleven or more years
of age. The significant increase in the median age for passenger cars is
expected to drive growth for aftermarket services due to the large number of
vehicles entering the prime age for aftermarket maintenance (seven to 12 years
old).
Our
Strategy
Our
strategic objective is to achieve profitable growth and maximize return on
invested capital by:
Leveraging Unique Value-Added
Services to Our Customers. We have invested significant
resources to develop differentiated services for our customers, particularly in
the areas of category management, fill rates and broad product
coverage. As category management becomes a key supplier deliverable
for long-term success in the aftermarket, our unique category management
capabilities serve as a key differentiator and enhances our overall customer
relationships. With our experienced professionals using specialized
software and proprietary processes and tools, we are able to analyze many
industry, competitive and customer specific inputs to develop and recommend
specific targeted actions to our customers. These targeted actions
are designed to help customers, among other things, improve their return on
investment, develop category growth plans, execute customer retention tactics
and effectively maximize pricing opportunities. Internally, our
category management capabilities allow us to make timely make-versus-buy
decisions, manage our inventory investment more effectively and maintain world
class order fill rates, all while maintaining broad product coverage with over
47,000 part numbers. The strength of our category management
capabilities is evidenced by our status as Category Captain in one or more of
our product lines at the majority of our retail and large traditional channel
customers. We have also been successful at providing this broad
product offering with leading fill rates, allowing our customers to reduce
inventory levels. We will continue to utilize these unique,
value-added services as a key differentiator against our
competition.
5
Continuing to Grow Market Share in
Core Markets. We will continue to focus on increasing our market share
and driving growth in each of our product lines by strengthening our existing
customer relationships, expanding our sales efforts and offering the same level
of value–added services to new customers in our core markets. As a result of
these efforts we have expanded our product lines resulting in higher end
consumer sales with existing customers including Advance, AutoZone, Alliance and
CARQUEST. In addition to expanding revenue with existing customers,
we have also recently won business with Alliance and NAPA at our Airtex business
due to our demonstrated capabilities of adding value to our
customers. We also continue to expand our share of the engine
management business in the traditional channel and have strengthened our
position in the heavy duty channel.
Growing and Expanding Share in
International and Adjacent Markets. Unlike many competitors,
we have an established global manufacturing, distribution and customer
footprint. We have initiatives underway to leverage this footprint by
making strategic investments in international product offerings and using
internationally recognized brands (such as Luber-finer and Airtex) to expand
existing customers’ market share and attract new customers. We also
have initiatives to take advantage of new sales opportunities in identified
adjacent markets where our low-cost country qualification, procurement and
distribution capabilities can be leveraged into similar products to the ones we
currently provide.
Improving Global Sourcing and
Manufacturing. We continually seek to lower our overall product costs by
improving our sourcing and manufacturing processes. Through our acquisition of
ASC, we obtained proven global sourcing capabilities and a China manufacturing
platform. We have since made substantial investments to establish
filtration and fuel pump manufacturing capabilities in China. With
significant available capacity in our Chinese facilities, we have near-term
plans to place additional product manufacturing in China to take further
advantage of our low-cost country manufacturing and sourcing
resources.
Implementing Cost Reduction
Initiatives. We have developed a culture that drives daily cost reduction
and continuous improvement. As part of this lean cost culture, we
have pursued and will continue to pursue opportunities to optimize our resources
and reduce manufacturing costs through various initiatives. As an example of
this culture, we have consolidated several of our distribution and manufacturing
facilities since 2003 in order to maximize capacity utilization. Additionally,
we have implemented inventory management systems at our filtration products and
fuel products facilities in order to reduce inventory while increasing our order
fill rates. This lean cost culture has resulted in increased sales per employee
and industry leading margins. We believe significant cost savings
still exist to further improve our profitability, including identified further
sourcing and manufacturing alignment initiatives.
Our
Products
We have
an extensive line of product offerings including over 47,000 part numbers, which
fall into four primary categories: filtration products, fuel products, cooling
products and engine management products. The majority of these
products, including fuel pumps, water pumps and engine management products, are
non-discretionary parts that must be replaced for vehicles to
operate. In addition, filtration products are tied to regular
maintenance intervals, providing a recurring sales stream. Set forth below is a
description of our products and their respective percentages of 2009 net
sales:
Products
|
Percent of
2009 Net Sales
|
Description
|
||||
Filtration
Products
|
39.2 | % |
Oil,
air, fuel, hydraulic, transmission, cabin air and industrial filters and
PCV valves
|
|||
Fuel
Products
|
25.1 | % |
Fuel
pump assemblies, electric fuel pumps, mechanical fuel pumps and fuel pump
strainers
|
|||
Engine
Management Products
|
18.4 | % |
Caps,
rotors, emission controls, sensors, ignition controls, coils and
switches
|
|||
Cooling
Products
|
17.3 | % |
Water
pumps, fan clutches and other
products
|
6
Filtration
Products
We are a
leading designer and manufacturer of a broad range of filtration products for
the automotive, trucking, construction, mining, agriculture and marine
industries, as well as other industrial markets. We distribute to both the
aftermarket and OEMs. Our primary aftermarket competitors include Honeywell
Consumer Products Group (FRAM), Bosch/Mann+Hummel (Purolator) and The Affinia
Group (Wix). Our primary heavy duty competitors include Cummins (Fleetguard),
Donaldson and Clarcor (Baldwin).
We are
one of the leading global manufacturers of private label filters. Our filtration
products consist of approximately 4,950 part numbers and include oil filters,
air filters, fuel filters, transmission filters, cabin air filters, PCV valves,
hydraulic filters, fuel dispensing filters and fuel/water separators. Set forth
below is a description of our filtration products:
|
•
|
Oil Filters: Designed
to filter engine oil and withstand operating pressures of 40 to 60 PSI at
250° F to 300° F;
|
|
•
|
Air Filters: Designed
to filter the air that enters the engine combustion
chamber;
|
|
•
|
Fuel Filters: Designed
to filter the fuel immediately prior to its injection into the engine;
and
|
|
•
|
Other Filters: Includes
cabin air filters, transmission filters, hydraulic filters, PCV valves and
industrial filters.
|
Fuel
Products
We are a
leading designer and manufacturer of a broad range of fuel delivery systems. Our
fuel delivery systems are distributed to both the aftermarket and OEMs under the
Airtex and Master Parts brand names and private labels. Our primary fuel pump
competitors are Federal-Mogul (Carter), AC Delco, Delphi, and Bosch. Set forth
below is a description of our fuel system products:
|
•
|
Fuel Pumps: Serve the
essential role of moving fuel from the fuel tank into the engine, with
approximately 950 fuel pumps for carbureted and fuel-injected
applications; and
|
|
•
|
Fuel Pump Assemblies:
Provide for easier, and therefore faster, installation and allow
the technician to charge a similar fee for a repair that is less
time-intensive than replacing an individual fuel pump. We manufacture all
three types of in-tank assemblies: hangers, senders and modules with
approximately 700 in-tank fuel pump
assemblies.
|
Engine
Management Products
We design
and manufacture a broad line of engine management components distributed to both
the aftermarket and OEMs under the Wells and Airtex Engine Management brand
names. We believe that we have one of the industry’s most comprehensive lines of
highly engineered engine management system components for use in a broad range
of vehicle platforms. Additionally, our engine management components offerings
allow us to distribute specialty or “hard-to-find” products to the aftermarket
and OEM channels.
Engine
management components include distributor caps and rotors, ignition coils,
electronic controls, sensors, emissions components, solenoids, switches, voltage
regulators and wire sets. These products are primarily used to regulate the
ignition, emissions and fuel management functions of the engine and determine
vehicle performance. Replacement rates for these products are higher for
vehicles that have reached the primary repair age range of seven to 12 years
old. Our products in this category consist of approximately 38,300 part numbers.
Primary competitors for engine management products include Standard Motor
Products and AC Delco.
Cooling
Products
We are a
leading designer and manufacturer of a broad range of cooling systems. Our
cooling systems products are distributed to both the aftermarket and OEMs under
the Airtex, ASC and Master Parts brand names and private labels. The acquisition
of ASC has significantly enhanced our water pump business. Currently, our
primary water pump competitors are GMB North America, Inc. and Gates
Corporation. Set forth below is a description of our cooling systems
products:
7
|
•
|
Water Pumps: Serve the
essential role of dissipating excess heat from the engine with
approximately 1,600 distinct types of water pumps;
and
|
|
•
|
Other: Includes
industrial components and other products with a selection of approximately
500 other part numbers.
|
Our
Sales Channels and Customers
Our sales
are diversified between the aftermarket sales channels (retail, traditional,
heavy-duty and OES) and the OEM sales channel, which enables us to capture
demand throughout the life cycle of the vehicle. In the early part of a
vehicle’s life, the OES channel services a significant percentage of aftermarket
vehicle maintenance and repair volume as the vehicle is under the original OEM
warranty period. However, as vehicles age and their warranties expire, consumers
increasingly rely on the retail or traditional aftermarket channels for vehicle
maintenance.
The
Aftermarket
Approximately
88% of our 2009 net sales were to the aftermarket, which is subdivided into four
primary channels: retail, traditional, heavy-duty and OES.
The
retail channel represented approximately 47% of our 2009 net sales. The retail
channel is our largest channel and has historically provided us with a steadily
increasing revenue stream. As retailers become increasingly focused on
consolidating their supplier base, we believe that our broad product offering,
product quality and customer service make us increasingly valuable to these
customers. One of our longest standing customers is AutoZone, which we have been
supplying since the opening of its first store in 1979. We believe that we are
one of the few suppliers in the industry that can provide AutoZone with the
levels of quality, customer service and product breadth that AutoZone requires,
which is substantiated by our receipt of multiple awards from AutoZone since
1994, including the “Extra Miler” Award 2007 and 2008, Vendor of the Year Award
2008, and “Whatever it Takes to do the Job Right” Award 2008. Other awards we
have received in the retail channel include O’Reilly Auto Parts “Changeover
Award” in 2009 for work with O’Reilly Auto Parts’ acquisition of CSK, O’Reilly
Auto Parts Vendor of the Year 2007 and Advance Auto Parts Vendor of the Year
2005.
The
traditional channel is comprised of established warehouses and installers and
represented approximately 25% of our 2009 net sales. The traditional channel is
important to us because it is the primary source of products for professional
mechanics, or the DIFM market. We have many long-standing relationships with
leading customers in the traditional channel, such as CARQUEST and NAPA, for
whom we have supplied products for over 20 years. We believe that our strong
position in this channel allows us to capitalize on the growth of the
traditional channel within the aftermarket. We believe that professional
mechanics place a premium on the quality of a product and unlike the retail
channel, end users in this channel require manufacturers to provide a high level
of individual customer service, including field support and product breadth and
depth. Awards from customers in the traditional channel include: CARQUEST Vendor
of the Year Award 2005, 2006 and 2007; NAPA Excellence in Shipping Performance
2005; Automotive Distribution Network Preferred Vendor Award 2005; Aftermarket
Auto Parts Alliance “Gold Level Supplier for Outstanding Shipping Performance
2007,” and Aftermarket Auto Parts Alliance “Outstanding Private Label Vendor
2006.”
The
traditional channel also includes installers such as quick lubes, tire dealers
and full service gas stations. Almost all of our sales to installers consist of
filtration products, which are supplied to the national and regional service
chains through distributors such as Valvoline and Firestone. Installers require
“Just-In-Time” availability, ability to meet competitive price points and
product breadth and depth.
We
believe the large and highly fragmented heavy-duty aftermarket channel, which
accounted for approximately 8% of our 2009 net sales, provides us with one of
our best opportunities for growth. We believe heavy-duty truck owners tend to be
less price-sensitive and more diligent about maintenance of their vehicles than
vehicle owners in other markets, as idle vehicles typically represent lost
revenue potential for heavy-duty truck owners. As a result, we believe that
heavy-duty trucks are more likely to have consistent routine maintenance
performed with high quality parts. We believe we have developed a
well-recognized brand presence in this channel through our Luber-finer brand of
filtration products.
8
The OES
channel is comprised of a diverse mix of dealership service bays in the
automotive, truck, motorcycle and watercraft vehicle markets, and represented
approximately 8% of our 2009 net sales. A substantial majority of our OES 2009
net sales were derived from sales of filtration products and cooling systems.
Our position in this channel allows us to capitalize on vehicle maintenance in
the early years of a vehicle’s life, when the vehicle is under warranty and the
consumer typically returns to the dealer for routine maintenance. Our most
significant OES channel customers include service parts operations associated
with companies such as GM, Ford and Chrysler.
Original
Equipment Manufacturers
Although
the OEM channel comprised only approximately 7% of our 2009 net sales, it is an
important sales channel to us because OEM affiliations have a direct impact on
our aftermarket credibility. We believe aftermarket customers show a preference
for products that were utilized in original equipment. We sell products to a
diverse mix of OEMs, enabling us to capitalize on a number of different
opportunities and market shifts. Our OEM products are sold to end users within
each of the following categories:
•
|
Automotive:
Chrysler, Ford, GM, Remy and
Volkswagen
|
•
|
Recreational
Equipment: Onan and
Polaris
|
•
|
Heavy-duty
Truck: Caterpillar, Freightliner, GM, Parker Hannifin and
Perkins
|
•
|
Agriculture:
John Deere and
Kubota
|
•
|
Marine:
Mercury Marine and Sierra
Supply
|
•
|
Lawn
and Garden: Briggs and Stratton, John Deere and
Kohler
|
•
|
Motorcycle:
Harley-Davidson and
Kawasaki
|
Customers
We
distribute our products primarily in North America and Europe to customers
across several sales channels, including the retail, traditional, installer and
OES aftermarket channels and OEMs of automotive, trucking, agricultural, marine,
mining and construction equipment. We have maintained long-standing
relationships with our customers and have been servicing many for well over a
decade. Our top five customers in 2009 included AutoZone, Advance Auto Parts,
O’Reilly Auto Parts, CARQUEST and General Motors. Sales to AutoZone were
approximately 30% of our total net sales in 2009 and 29% of our total net sales
in 2008. Our customers include:
•
|
Retail:
Advance Auto Parts, AutoZone and O’Reilly Auto
Parts
|
•
|
Traditional:
Alliance, CARQUEST, NAPA, Network and
Uni-Select
|
•
|
Installer:
Firestone, Service Champ and
Valvoline
|
•
|
OES:
Ford, GM Service Parts Organization and
Saturn
|
•
|
OEM:
Ford, Chrysler, GM and
Remy
|
•
|
Heavy
Duty: Caterpillar, Freightliner, Mr. Lube, Parker Hannifin and
Perkins
|
Sales
and Marketing
We market
our products to a wide range of customers across a variety of global sales
channels. To effectively address the requirements of our customers and end
users, our sales people are primarily organized by product category and
secondarily by sales channel. During 2006, we combined the individual in-house
sales forces for each product category in the traditional channel into one UCI
sales force and also established a new export sales force. We are increasing our
focus on international markets and believe there are opportunities for growth in
selected areas. For financial information concerning geographic distribution of
our 2007, 2008 and 2009 net sales, see Note 18 to our audited consolidated
financial statements included in this Form 10-K.
We use
both a direct sales force and independent manufacturers’ representatives to
market and sell our products. The number of sales personnel varies within each
sales group. Each sales group is uniquely qualified to sell its particular
products and to focus on the requirements of its particular market. We believe
that the market positions we hold with respect to certain of our products are,
in part, related to the specialization of our sales groups.
9
Operations
Our
operational strategy is to pursue operational excellence at all of our
facilities. This strategy encompasses a lean philosophy which focuses on
continuous improvement in inventory management, customer delivery, plant
utilization and cost structure. The foundation for this strategy is based in the
principles of lean manufacturing, which targets the elimination of waste from
every business process.
We have
made substantial progress in the implementation of lean manufacturing and have
received the related benefits. We plan to continue our emphasis on lean
manufacturing by expanding its use at all of our facilities. As a result of this
lean cost culture, we have consolidated several of our distribution and
manufacturing facilities since 2003 which allowed us to reduce our cost
structure, maximize capacity utilization and generate industry leading
margins.
We
expanded our global manufacturing and sourcing capabilities through the ASC
acquisition, which added two manufacturing facilities and an engineering and
procurement office in China. We have since made substantial
investments to establish filtration and fuel pump manufacturing capabilities in
China. With significant available capacity in our Chinese facilities,
we have near-term plans to place additional product manufacturing in China to
take further advantage of our low-cost country manufacturing and sourcing
resources.
In
addition, we will continue to examine each of our logistics and distribution
systems with an objective of developing an integrated system that fully meets
customer requirements, eliminates redundancies, lowers costs and minimizes
inventories and cycle times.
Suppliers
and Raw Materials
We
purchase various components and raw materials for use in our manufacturing
processes as well as purchasing finished parts for resale. In 2009, we sourced
purchases from approximately 1,200 suppliers. Our raw materials include steel
and other commodities, such as aluminum, iron, plastic and other petrochemical
products, packaging material and media. During periods of peak demand
such as 2008, we have experienced significant price increases and/or surcharges.
More recently, the demand for many of the commodities used in our business has
lessened and we have experienced lower prices on many of our
commodities. While we have been, and expect to continue to be able to
obtain sufficient quantities of these raw materials to satisfy our needs, in the
future we may be required to pay higher prices and/or have difficulty procuring
these raw materials.
To manage
our supply spending, we have established a centralized purchasing organization,
including a group of dedicated buyers at each of our locations. This
organization consists of 56 employees, including 18 individuals in
China. While specific raw material and product expertise resides
largely at our operating locations, we coordinate overall procurement activities
through our centralized purchasing organization, which enables us to leverage
the collective buying power of the Company. The centralized
purchasing organization also establishes the strategy and policy for contracts
and commodity risk management in areas such as steel, aluminum, plastics,
petrochemical products, packaging and media.
Trademarks
and Patents
We rely
on a combination of patents, trademarks, copyright and trade secret protection,
employee and third-party non-disclosure agreements, license arrangements and
domain name registrations to protect our intellectual property. We sell many of
our products under a number of registered trademarks, which we believe are
widely recognized in the sales channels we serve. No single patent, trademark or
trade name is material to our business as a whole.
Employees
As of
December 31, 2009, we had approximately 4,350 employees, with union affiliations
and collective bargaining agreements at two of our businesses, representing
approximately 9% of our workforce. Management considers our labor relations to
be good and our labor rates competitive. Since 1984, we have had one minor
three-day work stoppage at a Fairfield, Illinois plant which took place in
August 2004 and did not result in any material change in capacity or operations
at the plant or the business as a whole.
10
Environmental
and Health and Safety Matters
We are
subject to a variety of federal, state, local and foreign environmental laws and
regulations, including those governing the discharge of pollutants into the air
or water, the management and disposal of hazardous substances or wastes and the
cleanup of contaminated sites. Some of our operations require environmental
permits and controls to prevent and reduce air and water pollution, and these
permits are subject to modification, renewal and revocation by issuing
authorities. We are also subject to the U.S. Occupational Health and Safety Act
and similar state and foreign laws. We believe that we are in substantial
compliance with all applicable material laws and regulations in the United
States. Historically, our costs of achieving and maintaining compliance with
environmental and health and safety requirements have not been material to our
operations.
We have
been identified as a potentially responsible party for contamination at three
formerly operated sites. One of these sites is a former facility in Edison, New
Jersey, (the “New Jersey Site”) where a state agency has ordered us to continue
with the monitoring and investigation of chlorinated solvent contamination. The
New Jersey Site has been the subject of litigation to determine whether a
neighboring facility was responsible for contamination discovered at the New
Jersey Site. A judgment has been rendered in that litigation to the effect that
the neighboring facility is not responsible for the contamination. We are
analyzing what further investigation and remediation, if any, may be required at
the New Jersey Site. The second site is a previously owned site in Solano
County, California. At the request of the regional water board, we are
investigating and analyzing the nature and extent of the contamination and are
conducting some remediation. In addition to the two matters discussed above, we
have been named as a potentially responsible party at a site in Calvert City,
Kentucky. Based on currently available information, management
believes that the cost of the ultimate outcome of these environmental matters
will not exceed the amounts accrued at December 31, 2009 by a material amount,
if at all.
ITEM 1A. RISK
FACTORS
We wish to caution the reader that
the following important risk factors, and those risk factors described
elsewhere in this report or our other Securities and Exchange Commission filings,
could cause our actual results to differ materially from those stated in
forward-looking statements contained in this document and
elsewhere.
The Company may
be adversely affected by the current economic environment.
As a
result of the credit market crisis, dramatic increases in energy costs and other
challenges currently affecting economic conditions in the United States and
other parts of the world, customers may delay or cancel plans to purchase our
products. In addition, some of our customers are likely to experience serious
cash flow problems and, as a result, may find it difficult to obtain financing,
if financing is available at all. If our customers are not successful in
generating sufficient revenue or securing alternate financing arrangements, they
may be unable to pay, or may delay payment of, the amounts that they owe us. Any
inability of current or potential customers to pay us for our products may
adversely affect our cash flow, the timing of our revenue recognition and the
amount of revenue.
Further,
some of our vendors are likely to experience serious cash flow problems and, as
a result, may find it difficult to obtain financing, if financing is available
at all. If our vendors are not successful in generating sufficient revenue or
securing alternate financing arrangements, they may no longer be able to supply
goods and services to us. In that event, we would need to find alternate sources
of these goods and services, and there is no assurance that we would be able to
find such alternate sources on favorable terms, if at all. Any such disruption
in our supply chain could adversely affect our ability to manufacture and
deliver our products on a timely basis, and thereby adversely affect our results
of operations.
If
economic conditions in the United States and other key markets deteriorate
further or do not show improvement, we believe that we may experience material
adverse impacts to our business and operating results.
11
Our relationship
with AutoZone creates risks associated with a concentrated net sales
source.
We
generate a large percentage of our sales from our business with AutoZone, but we
cannot assure you that AutoZone will continue to purchase from us. Sales to
AutoZone accounted for approximately 30% of our total net sales in fiscal 2009
and 29% of our total net sales in 2008, respectively. Several of our competitors
are likely to pursue business opportunities with this customer and threaten our
current position. If we fail to maintain this relationship, our net sales will
be significantly diminished. Even if we maintain our relationship, our net sales
concentration as a result of this relationship increases the potential impact to
our business that could result from any changes in the economic terms of this
relationship. Any change in the terms of our sales to this customer could have a
material impact on our financial position and results of
operations.
If the North
American light vehicle aftermarket adopts more expansive return policies
or practices such as
extended payment terms, our cash flow and results of operations could
be harmed.
We are
subject to returns from customers, some of which may manage their excess
inventory through returns. In line with industry practices, arrangements with
customers typically include provisions that permit them to return specified
levels of their purchases. Returns have historically represented approximately
3% to 5% of our sales. If returns from our customers significantly increase, our
profitability may be adversely affected. In addition, some customers in the
North American light vehicle aftermarket are pursuing ways to shift their costs
of working capital, including extending payment terms. To the extent customers
extend payment terms, our cash flow may be adversely affected.
As a supplier to
the automotive industry, we face certain risks due to the nature of the
automotive business.
As a
supplier of automotive products, our sales and our profitability could be
negatively impacted by changes in the operations, products, business models,
parts-sourcing requirements, financial condition, market share or consumer
financing and rebate programs of our automotive customers. In addition, demand
for our automotive products is linked to consumer demand for automobiles, which
has been, and may continue to be, adversely impacted by the continuing uncertain
economic environment.
The current
economic environment and adverse credit market conditions may significantly
affect our ability to meet liquidity needs and access to
capital.
The
capital and credit markets have been experiencing extreme volatility and
disruption for more than 12 months and as a result, the markets have exerted
downward pressure on the availability of liquidity and credit capacity for many
issuers. While currently these conditions have not materially impaired our
ability to operate our business, there can be no assurance that there will not
be a further deterioration in financial markets and confidence in major
economies, which could increase the cost of financing.
We need
liquidity to pay our operating expenses, interest on our debt and capital
expenditures. Without sufficient liquidity, we will be forced to curtail our
operations, and our business will suffer. Our primary sources of liquidity are
cash on hand, cash flow from operations and factoring of customer trade accounts
receivable. Subject to certain limitations, UCI’s credit agreement for its
senior credit facility permits sales of and liens on receivables, which are
being sold pursuant to factoring arrangements. At December 31, 2009, we had
factoring relationships with eight banks. The terms of these relationships are
such that the banks are not obligated to factor any amount of receivables.
Because of the current challenging capital markets, it is possible that these
banks may not have the capacity or willingness to fund these factoring
arrangements at the levels they have in the past, or at all.
Our lean
manufacturing and other cost saving plans may not be
effective.
Since our
formation, our strategy has included goals such as improvement of inventory
management and customer delivery and plant and distribution facility
consolidation. While we have and will continue to implement these strategies,
there can be no assurance that we will be able to do so successfully or that we
will realize the projected benefits of these and other cost saving plans. If we
are unable to realize these anticipated cost reductions, our financial health
may be adversely affected. Moreover, our continued implementation of cost saving
plans and facilities integration may disrupt our operations and
performance.
12
It may be
difficult for us to recruit and retain the types of highly-skilled employees we need
to remain competitive.
Our
continued success will also depend on our ability to recruit, retain and
motivate highly skilled sales, marketing and engineering personnel. Competition
for persons in our industry is intense, and we may not be able to successfully
recruit, train or retain qualified personnel. If we fail to retain and recruit
the necessary personnel, our business and our ability to obtain new customers
and retain existing customers, develop new products and provide acceptable
levels of customer service could suffer. We have entered into employment
agreements with certain of our key personnel. However, we cannot assure you that
these individuals will stay with us. If any of these persons were to leave our
company, it could be difficult to replace him or her, and our business could be
harmed.
We may be subject
to work stoppages at our facilities, or our customers may be subjected to work
stoppages, either of which could negatively impact the profitability of
our business.
As of
December 31, 2009, we had approximately 4,350 employees, with union affiliations
and collective bargaining agreements at two of our businesses, representing
approximately 9% of our workforce. Other than a three-day work stoppage at our
Fairfield, Illinois plant in August 2004, we have not had a labor stoppage since
1984. Although we believe that our relations with our employees are currently
good, if our unionized workers were to engage in a strike, work stoppage or
other slowdown in the future, we could experience a significant disruption of
our operations, which could interfere with our ability to deliver products on a
timely basis and could have other negative effects, such as decreased
productivity and increased labor costs. In addition, many of our direct and
indirect customers have unionized work forces. Strikes, work stoppages or
slowdowns experienced by these customers or their other suppliers could result
in slowdowns or closings of assembly plants that use our products. Organizations
responsible for shipping our products may also be impacted by occasional
strikes. Any interruption in the delivery of our products could reduce demand
for our products and could have a material adverse effect on us.
We are subject to
increasing pricing pressure from import activity, particularly from
Asia.
Price
competition from automotive aftermarket manufacturers, particularly based in
Asia and other locations with lower production costs, have historically played a
role and may play an increasing role in the aftermarket channels in which we
compete. Pricing pressures have historically been more prevalent with respect to
our filter products than our other products. While aftermarket manufacturers in
these locations have historically competed primarily in markets for less
technologically advanced products and manufactured a limited number of products,
they are expanding their manufacturing capabilities to move toward producing a
broad range of lower cost, higher quality products and provide an expanded
product offering. Partially in response to these pressures, we opened two new
factories in China in 2008. In the future, competitors in Asia may be able to
effectively compete in our premium markets and produce a wider range of
products, which may force us to move additional manufacturing capacity offshore
and/or lower our prices, reducing our margins and/or decreasing our net
sales.
Increased crude
oil and energy prices and overall economic conditions could reduce global
demand for and use of automobiles, which could have an adverse effect on our
profitability.
Material
increases in the price of crude oil have, historically, been a contributing
factor to the periodic reduction in the global demand for and use of
automobiles. A significant increase in the price of crude oil could reduce
global demand for and use of automobiles and shift customer demand away from
larger cars and light trucks (including SUVs), which we believe have more
frequent replacement intervals for our products, which could have an adverse
effect on our profitability. For example, historic highs in crude oil prices and
corresponding historic highs in gasoline prices at the pump in 2008 impacted
consumers’ driving habits. In addition, particularly in the latter part of 2008
and 2009, consumers’ driving habits were impacted by deteriorating economic
conditions. U.S. Department of Energy statistics indicate that miles driven in
the United States for the year 2008 were 3.2% lower than for 2007. Miles driven
in 2009 increased only slightly from 2008. If total miles driven were
to continue to decrease and consumers extend the mileage interval for routine
maintenance, we could experience a decline in demand for our products due to a
reduction in the need for replacement parts. Further, as higher gasoline prices
and economic conditions result in a reduction in discretionary spending for auto
repair by the end users of our products, our results of operations could be
impacted.
13
Environmental
regulations may impose significant environmental compliance costs and liabilities
on us.
We are
subject to many environmental laws and regulations. Compliance with these laws
and regulations is costly. We have incurred and expect to continue to incur
significant costs to maintain or achieve compliance with applicable
environmental laws and regulations. Moreover, if these environmental laws and
regulations become more stringent in the future, we could incur additional
costs. Our failure to comply with applicable environmental laws and regulations
and permit requirements could result in civil or criminal fines, penalties or
enforcement actions, third-party claims for property damage and personal injury,
requirements to clean up property or to pay for the costs of cleanup or
regulatory or judicial orders enjoining or curtailing operations or requiring
corrective measures, including the installation of pollution control equipment
or remedial actions.
Some
environmental laws and regulations impose liability for contamination on present
and former owners, operators or users of facilities and sites without regard to
causation or knowledge of contamination. We have been identified as a
potentially responsible party for contamination at two sites, for which
management believes it has made adequate reserves. See “Business — Environmental
and Health and Safety Matters.” In addition, we occasionally evaluate various
alternatives with respect to our facilities, including possible dispositions or
closings. Investigations undertaken in connection with these activities may lead
to discoveries of contamination that must be remediated, and closings of
facilities may trigger remediation requirements that are not applicable to
operating facilities. We may also face lawsuits brought by third parties that
either allege property damage or personal injury as a result of, or seek
reimbursement for costs associated with, such contamination.
We could face
potential product liability claims relating to products we manufacture or
distribute.
We face a
business risk of exposure to product liability claims in the event that the use
of our products is alleged to have resulted in injury or other adverse effects.
We currently maintain product liability insurance coverage, but we cannot assure
you that we will be able to obtain such insurance on acceptable terms in the
future, if at all, or that any such insurance will provide adequate coverage
against potential claims. Product liability claims can be expensive to defend
and can divert the attention of management and other personnel for long periods
of time, regardless of the ultimate outcome. An unsuccessful product liability
defense could have a material adverse effect on our business, financial
condition, results of operations or prospects. In addition, our business depends
on the strong brand reputation we have developed. In the event that our
reputation is damaged, we may face difficulty in maintaining our pricing
positions with respect to some of our products or have reduced demand for our
products, which could negatively impact our net sales and
profitability.
We are subject to
class action lawsuits alleging conspiracy violations of Section 1 of the
Sherman Act, 15 U.S.C. § 1 and state law, related to aftermarket oil,
air, fuel and transmission filters and lawsuits alleging violations of the
Canadian Competition Act. If the plaintiffs in these lawsuits against us are
successful, our financial condition, results of operations and liquidity, as
well as our reputation may be materially and adversely
affected.
UCI’s
wholly owned subsidiary, Champion Laboratories, Inc. (“Champion”), has been
named as one of multiple defendants in two consolidated amended complaints
alleging conspiracy violations of Section 1 of the Sherman Act, 15 U.S.C. § 1
and state law, related to aftermarket oil, air, fuel and transmission filters.
The complaints are styled as putative class actions. One asserts claims on
behalf of a putative class of direct filter purchasers and the other asserts
claims on behalf of a putative class of indirect filter purchases. Both
complaints seek damages, including statutory treble damages, an injunction
against future violations, costs and attorney’s fees. Champion and UCI have both
been named in a similar lawsuit filed by the Gasoline and Automotive Service
Dealers of America (“GASDA”) trade association. The GASDA complaint seeks an
injunction, costs and attorney’s fees. Champion, but not UCI, was also named as
one of five defendants in a putative class action filed in Quebec, Canada. This
action alleges conspiracy violations of the Canadian Competition Act and
violations of the obligation to act in good faith (contrary to art. 6 of the
Civil Code of Quebec) related to the sale of aftermarket filters. The plaintiff
seeks compensatory damages against the five defendants in the amount of $5
million and $1 million in punitive damages. Champion, but not UCI, was also
named as one of 14 defendants in a putative class action filed in Ontario,
Canada. This action alleges civil conspiracy, intentional interference with
economic interests, and conspiracy violations under the Canadian Competition Act
related to the sale of aftermarket filters. The plaintiff seeks $150 million in
general damage against the 14 defendants and $15 million in punitive damages.
The Office of the Attorney General for the State of Florida is also
investigating the allegations raised in these suits. We are fully cooperating
with the Florida Attorney General investigation.
14
The
Antitrust Division of the Department of Justice (DOJ) investigated the
allegations raised in these suits and certain current and former employees of
the defendants, including Champion, testified pursuant to
subpoenas. On January 21, 2010, DOJ sent a letter to counsel for
Champion stating that “the Antitrust Division’s investigation into possible
collusion in the replacement auto filters industry is now officially
closed.”
We intend
to vigorously defend against these claims. However, the outcome of these class
actions, like other litigation proceedings, is uncertain. Also, litigation and
other steps taken to defend these lawsuits can be costly, and we may incur
substantial costs and expenses in doing so. Multidistrict litigation is
particularly complex and can extend for a protracted time, which can
substantially increase the cost of such litigation. The defense of these
lawsuits is also expected to divert the efforts and attention of some of our key
management and personnel from the normal business operations of our company. As
a result, our defense of this litigation, regardless of its eventual outcome,
will likely be costly and time consuming. If the plaintiffs in these lawsuits
against us are successful, it may result in substantial monetary damages, which
could have a material adverse effect on our business, financial condition,
results of operations, and liquidity as well as our reputation.
Increases in our
raw materials and component costs or the loss of a number of our suppliers
could adversely affect our financial health.
We depend
on third parties for the raw materials and components used in our manufacturing
processes. We generally purchase our materials on the open market. However, in
certain situations we have found it advantageous to enter into long-term
contracts for certain commodities purchases. During much of 2008, the cost of
commodities, including steel, aluminum, iron, plastic and other petrochemical
products, packaging materials and media, increased significantly compared to
2007. Energy costs also increased significantly during this period. These higher
costs affected the prices we paid for raw materials and for purchased component
parts and finished products. The prices of these commodities have fluctuated
significantly in recent years and such volatility in the prices of these
commodities could increase the costs of manufacturing our products and providing
our services. We may not be able to pass on these costs to our customers and
this could have a material adverse effect on our financial condition, results of
operations or cash flows. While we currently maintain alternative sources for
steel and other raw materials, our business is subject to the risk of additional
price fluctuations and periodic delays in the delivery of our raw materials. Any
such price fluctuations or delays, if material, could harm our profitability or
operations. In addition, the loss of a substantial number of suppliers could
result in material cost increases or reduce our production capacity. We are also
significantly affected by the cost of natural gas used for fuel and the cost of
electricity. Natural gas and electricity prices have historically been
volatile.
We
monitor sources of supply to attempt to assure that adequate raw materials and
other supplies needed in manufacturing processes are available. However, we do
not typically enter into hedge transactions to reduce our exposure to price
risks and cannot assure you that we will be successful in passing on these
attendant costs if these risks were to materialize. In addition, if we are
unable to continue to purchase our required quantities of raw materials on
commercially reasonable terms, or at all, or if we are unable to maintain or
enter into purchasing contracts for commodities, our operations could be
disrupted or our profitability could be adversely impacted.
We face
competition in our markets.
We
operate in some very competitive markets, and we compete against numerous
different types of businesses. Although we have significant market positions in
each of our product lines within the aftermarket, we cannot assure you that we
will be able to maintain our current market share. In the OEM sales channel,
some of our competitors have achieved substantially greater market penetration
in many of the product lines which we offer. Competition is based on a number of
considerations, including product performance, quality of client service and
support, timely delivery and price. Our customers increasingly demand a broad
product range, and we must continue to develop our expertise in order to
manufacture and market these products successfully. To remain competitive, we
will need to invest continuously in manufacturing, working capital, customer
service and support, marketing and our distribution networks. We cannot assure
you that we will have sufficient resources to continue to make such investments
or that we will maintain our competitive position within each of the markets we
serve. As a result of competition, we have experienced pricing pressure. There
can be no guarantee that this downward price pressure will not continue, and we
may be forced to adjust the prices of some of our products to stay competitive,
or not compete at all in some markets, possibly giving rise to revenue
loss.
15
If we are unable
to meet future capital requirements, our business may be adversely
affected.
We
periodically make capital investments to, among other things, maintain and
upgrade our facilities and enhance our production processes. As we grow, we may
have to incur capital expenditures. Historically, we have been able to fund
these expenditures through cash flow from operations and borrowings under UCI’s
senior credit facilities. However, UCI’s senior credit facilities contain
limitations that could affect our ability to fund our future capital
expenditures and other capital requirements. In addition, the revolving credit
facility of UCI’s senior credit facility terminated in June 2009. We cannot
assure you that we will have, or be able to obtain, adequate funds to make all
necessary capital expenditures when required, or that the amount of future
capital expenditures will not be materially in excess of our anticipated or
current expenditures. If we are unable to make necessary capital expenditures,
our product line may become dated, our productivity may be decreased and the
quality of our products may be adversely affected, which, in turn, could reduce
our net sales and profitability.
The introduction
of new and improved products and services poses a potential threat to the
aftermarket for automotive parts.
Improvements
in technology and product quality are extending the longevity of automotive
parts and delaying aftermarket sales. In particular, the introduction of oil
change indicators and the use of synthetic motor oils may extend oil filter
replacement cycles. The introduction of electric, fuel cell and hybrid
automobiles may pose a long-term risk to our business because these vehicles are
unlikely to utilize many of our primary product lines. The introduction of new
and improved service initiatives by OEMs also poses a risk to our market share
in the vehicle replacement parts market. In particular, we face market share
risk from general automakers, which have introduced increased warranty and
maintenance service initiatives, which are gaining popularity. These service
initiatives have the potential to decrease the demand on aftermarket sales of
our products in the traditional and retail sales channels.
We are subject to
risks associated with changing manufacturing techniques, which could place
us at a competitive disadvantage.
The
successful implementation of our business strategy requires us to continuously
evolve our existing products and introduce new products to meet customers’ needs
in the industries we serve and want to serve. Our products are characterized by
stringent performance and specification requirements that mandate a high degree
of manufacturing and engineering expertise. If we fail to meet these
requirements, our business could be at risk. We believe that our customers
rigorously evaluate their suppliers on the basis of a number of factors,
including:
•
|
product
quality;
|
•
|
technical
expertise and development
capability;
|
•
|
new
product innovation;
|
•
|
reliability
and timeliness of delivery;
|
•
|
price
competitiveness;
|
•
|
product
design capability;
|
•
|
manufacturing
expertise;
|
•
|
operational
flexibility;
|
•
|
customer
service; and
|
•
|
overall
management.
|
Our
success will depend on our ability to continue to meet our customers’ changing
specifications with respect to these criteria. We cannot assure you that we will
be able to address technological advances or introduce new products that may be
necessary to remain competitive within our businesses. Furthermore, we cannot
assure you that we can adequately protect any of our own technological
developments to produce a sustainable competitive advantage.
16
Our international
operations are subject to uncertainties that could affect our operating
results.
Our
business is subject to certain risks associated with doing business
internationally. The net sales of our foreign subsidiaries represented
approximately 8% of our total net sales for the year ended December 31, 2009. In
addition, we operate seven manufacturing facilities outside of the United
States. Accordingly, our future results could be harmed by a variety of factors,
including:
•
|
fluctuations
in currency exchange rates;
|
•
|
geopolitical
instability;
|
•
|
exchange
controls;
|
•
|
compliance
with U.S. Department of Commerce export
controls;
|
•
|
tariffs
or other trade protection measures and import or export licensing
requirements;
|
•
|
potentially
negative consequences from changes in tax
laws;
|
•
|
interest
rates;
|
•
|
unexpected
changes in regulatory
requirements;
|
•
|
differing
labor regulations;
|
•
|
requirements
relating to withholding taxes on remittances and other payments by
subsidiaries;
|
•
|
restrictions
on our ability to own or operate subsidiaries, make investments or acquire
new businesses in these
jurisdictions;
|
•
|
restrictions
on our ability to repatriate dividends from our subsidiaries;
and
|
•
|
exposure
to liabilities under the U.S. Foreign Corrupt Practices
Act.
|
As we
continue to expand our business globally, our success will depend, in large
part, on our ability to anticipate and effectively manage these and other risks
associated with our international operations. However, any of these factors
could adversely affect our international operations and, consequently, our
operating results.
We could be
materially adversely affected by changes or imbalances in currency exchange and
other rates.
As a
result of increased international production and sourcing of components and
completed parts for resale, we are exposed to risks related to the effects of
changes in foreign currency exchange rates, principally exchange rates between
the U.S. dollar and the Chinese Yuan. The currency exchange rate from Chinese
Yuan to U.S. dollars has historically been stable, in large part due to the
economic policies of the Chinese government. However, there are no assurances
that this currency exchange rate will continue to be as stable in the future.
The U.S. government has stated that the Chinese government should reduce its
influence over the currency exchange rate and let market conditions control.
Less influence by the Chinese government will most likely result in the Chinese
Yuan strengthening against the U.S. dollar. During the period June 30, 2007
through June 30, 2008, the dollar weakened against the Chinese Yuan by
approximately 11%. The relationship of the Chinese Yuan to the U.S. dollar has
remained stable since June 2008. An increase in the Chinese Yuan
against the dollar means that we will have to pay more in U.S. dollars for our
purchases from China. If we are unable to negotiate commensurate price decreases
from our Chinese suppliers, these higher prices would eventually translate into
higher costs of sales. In that event, we would attempt to obtain corresponding
price increases from our customers, but there are no assurances that we would be
successful.
Our
Mexican operations source a significant amount of inventory from the United
States. During the period September 30, 2008 through March 31, 2009, the U.S.
dollar strengthened against the Mexican peso by approximately 33%. During the
period March 31, 2009 through December 31, 2009, the U.S. dollar weakened
against the Mexican peso by approximately 11%, partially offsetting the trend
experienced in the prior six months. A strengthening U.S. dollar
against the Mexican peso means that our Mexican operations must pay more in
pesos to obtain inventory from the United States, which translates into higher
cost of sales for the Mexican operations. We are attempting to obtain price
increases from our customers for the products sold by our Mexican operations,
but there are no assurances that we will be successful.
17
Our intellectual
property may be misappropriated or subject to claims of infringement.
We
attempt to protect our intellectual property rights through a combination of
patent, trademark, copyright and trade secret protection, as well as licensing
agreements and third-party nondisclosure and assignment agreements. We cannot
assure you that any of our applications for protection of our intellectual
property rights will be approved or that others will not infringe or challenge
our intellectual property rights. We also may rely on unpatented proprietary
technology. It is possible that our competitors will independently develop the
same or similar technology or otherwise obtain access to our unpatented
technology. To protect our trade secrets and other proprietary information, we
require employees, consultants and advisors to maintain the confidentiality of
our trade secrets and proprietary information. We cannot assure you that these
measures will provide meaningful protection for our trade secrets, know-how or
other proprietary information in the event of any unauthorized use,
misappropriation or disclosure. If we are unable to maintain the proprietary
nature of our technologies, our ability to sustain margins on some or all of our
products may be affected, which could reduce our sales and profitability. In
addition, from time to time, we pursue and are pursued in potential litigation
relating to the protection of certain intellectual property rights, including
with respect to some of our more profitable products.
An impairment in
the carrying value of goodwill or other assets could negatively affect
our consolidated results of operations and net worth.
Pursuant
to accounting principles generally accepted in the United States, we are
required to annually assess our goodwill, intangibles and other long-lived
assets to determine if they are impaired. In addition, interim reviews must be
performed whenever events or changes in circumstances indicate that impairment
may have occurred. If the testing performed indicates that impairment has
occurred, we are required to record a non-cash impairment charge for the
difference between the carrying value of the goodwill or other intangible assets
and the implied fair value of the goodwill or other intangible assets in the
period the determination is made. Disruptions to our business, end market
conditions, protracted economic weakness and unexpected significant declines in
operating results may result in charges for goodwill and other asset
impairments. We assess the potential impairment of goodwill on an annual basis,
as well as when interim events or changes in circumstances indicate that the
carrying value may not be recoverable. We assess definite lived intangible
assets when events or changes in circumstances indicate that the carrying value
may not be recoverable. Our annual goodwill impairment test resulted in no
goodwill impairment. Although our analysis regarding the fair value of goodwill
indicates that it exceeds its carrying value, materially different assumptions
regarding the future performance of our businesses could result in goodwill
impairment losses.
Our substantial
indebtedness could adversely affect our financial health.
As of
December 31, 2009, we had total indebtedness of $748.5 million, consisting of
the Holdco Notes, and our subsidiaries had $424.4 million of indebtedness (not
including intercompany indebtedness).
Our
substantial indebtedness could have important consequences to you. For example,
it could:
•
|
make
it more difficult for us to satisfy our obligations with respect to the
Holdco Notes;
|
•
|
require
us to dedicate a substantial portion of our cash flow from operations to
payments on our indebtedness, thereby reducing the availability of our
cash flow to fund acquisitions, working capital, capital expenditures,
research and development efforts and other general corporate
purposes;
|
•
|
increase
our vulnerability to and limit our flexibility in planning for, or
reacting to, changes in our business and the industry in which we
operate;
|
•
|
expose
us to the risk of increased interest rates as borrowings under the senior
credit facilities will be subject to variable rates of
interest;
|
•
|
place
us at a competitive disadvantage compared to our competitors that have
less debt; and
|
•
|
limit
our ability to borrow additional
funds.
|
In
addition, the indentures governing the Holdco Notes and UCI’s senior
subordinated notes, as well as the agreement governing UCI’s senior credit
facilities, contain financial and other restrictive covenants that limit our
ability to engage in activities that may be in our long-term best interests. Our
failure to comply with those covenants could result in an event of default
which, if not cured or waived, could result in the acceleration of all of our
debts.
18
The
Holdco Notes are structurally subordinated to the debts and liabilities of
Holdco’s direct and indirect subsidiaries.
Generally,
claims of creditors of a subsidiary, including trade creditors, will have
priority with respect to the assets and earnings of the subsidiary over the
claims of creditors of its parent company. Holders of the Holdco Notes,
therefore, are structurally subordinated to those of the creditors of Holdco’s
direct and indirect subsidiaries. In the event of bankruptcy or insolvency,
there may be no assets remaining to satisfy the claims of the holders of the
Holdco Notes after payment of the debt and other liabilities of our
subsidiaries, including the claims of the holders of UCI’s senior subordinated
notes and the lenders under UCI’s senior credit facilities.
As of
December 31, 2009, the aggregate amount of indebtedness of Holdco and our
subsidiaries was $748.5. We cannot assure you that our subsidiaries that have
their debt accelerated will be able to repay such indebtedness. We can also not
assure you that our assets and our subsidiaries’ assets will be sufficient to
fully repay the Holdco Notes and our other indebtedness. See “Description of
Other Indebtedness.”
In
addition, holders of the secured debt of UCI have claims that are prior to
claims of the holders of the Holdco Notes, as well as claims of unsecured
creditors of UCI, to the extent of the value of the assets securing that debt.
UCI’s senior credit facility is secured, subject to certain exceptions, by liens
on a large percentage of the assets of UCI and its subsidiaries. If UCI becomes
insolvent or is liquidated, or if payment under its credit facility is not made,
the lenders are entitled to exercise the remedies available to a secured lender.
Accordingly, these lenders have a secured claim against the secured assets of
UCI and have priority with respect to those assets over any other claim for
payment, including any claim of Holdco for amounts invested in UCI. In such
event, it is possible that there would be no assets remaining after payment to
these lenders from which claims to the holders of the Holdco Notes could be
satisfied.
Holdco
is the sole obligor of the Holdco Notes, and Holdco’s direct and indirect
subsidiaries do not guarantee Holdco’s obligations under the Holdco Notes and do
not have any obligation with respect to the Holdco Notes.
Holdco is
a holding company with no business operations or assets other than the capital
stock of UCI Acquisition, which itself is a holding company with no operations
or assets of its own other than the capital stock of UCI. Operations are
conducted through UCI and its subsidiaries. Consequently, Holdco will be
dependent on loans, dividends and other payments from UCI Acquisition, and,
indirectly, UCI and its subsidiaries, to make payments of principal and interest
in cash on the Holdco Notes. However, Holdco’s subsidiaries are separate and
distinct legal entities, and they will have no obligation, contingent or
otherwise, to pay the amounts due under the Holdco Notes or to make any funds
available to pay those amounts, whether by dividend, distribution, loan or other
payments. Holders of the Holdco Notes will not have any direct claim on the cash
flows or assets of Holdco’s direct and indirect subsidiaries.
The
ability of Holdco’s subsidiaries to pay dividends and make other payments to
Holdco will depend on their cash flows and earnings, which, in turn, will be
affected by all of the factors discussed in these “Risk Factors.” The ability of
Holdco’s direct and indirect subsidiaries to pay dividends and make
distributions to Holdco may be restricted by, among other things, applicable
laws and regulations and by the terms of agreements into which they enter. If
Holdco is unable to obtain funds from its direct and indirect subsidiaries as a
result of restrictions under their debt or other agreements, applicable laws and
regulations or otherwise, Holdco may not be able to pay cash interest or
principal on the Holdco Notes when due. The terms of UCI’s senior credit
facilities significantly restrict it from paying dividends and otherwise
transferring assets to UCI Acquisition and Holdco, except for administrative,
legal and accounting services. The terms of the indenture governing the senior
subordinated notes issued by UCI significantly restrict UCI and its subsidiaries
from paying dividends and otherwise transferring assets to UCI Acquisition and
Holdco. Holdco cannot assure you that the agreements governing the current and
future indebtedness of its direct and indirect subsidiaries will permit such
subsidiaries to provide Holdco with sufficient dividends, distributions or loans
to pay cash interest or principal on the Holdco Notes when due.
19
Holdco
currently anticipates that, in order to pay the principal amount of the Holdco
Notes or to repurchase the Holdco Notes upon a change of control as defined in
the indenture governing the Holdco Notes, it will be required to adopt one or
more alternatives, such as refinancing all or a portion of the indebtedness of
Holdco and its subsidiaries, selling its equity securities or the equity
securities or assets of UCI or seeking capital contributions or loans from its
affiliates. None of Holdco’s affiliates are required to make any capital
contributions, loans or other payments to us with respect to Holdco’s
obligations on the Holdco Notes. There can be no assurance that any of the
foregoing actions could be effected on satisfactory terms, if at all, or that
any of the foregoing actions would enable Holdco to refinance indebtedness of
Holdco and its subsidiaries or pay the principal amount of or interest due on
the Holdco Notes or that any of such actions would be permitted by the terms of
any debt instruments of Holdco or its direct and indirect subsidiaries then in
effect.
To service our
indebtedness, we will require a significant amount of cash. Our ability to
generate cash depends on many factors beyond our control.
Our cash
interest expense for fiscal year 2009 was $28.7 million. Our ability to make
payments on and to refinance our indebtedness, and to fund planned capital
expenditures will depend on our ability to generate cash in the future. This, to
a certain extent, is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our
control.
We cannot
assure you that our business will generate sufficient cash flow from operations
or that future borrowings will be available to us in an amount sufficient to
enable us to pay our indebtedness, including the Holdco Notes, UCI’s senior
credit facilities and UCI’s senior subordinated notes, or to fund our other
liquidity needs. In such circumstances, we may need to refinance all or a
portion of our indebtedness, including the Holdco Notes, on or before maturity.
We cannot assure you that we will be able to refinance any of our indebtedness
including the Holdco Notes, the senior credit facilities and the senior
subordinated notes, on commercially reasonable terms or at all. If we cannot
service our indebtedness, we may have to take actions such as selling assets,
seeking additional equity or reducing or delaying capital expenditures,
strategic acquisitions, investments and alliances. We cannot assure you that any
such actions, if necessary, could be effected on commercially reasonable terms
or at all. In addition, the indentures governing the Holdco Notes and UCI’s
senior subordinated notes and the agreement governing UCI’s senior credit
facilities limit our ability to sell assets and will also restrict the use of
proceeds from any such sale. Furthermore, UCI’s senior credit facilities are
secured by substantially all of the assets of UCI. Therefore, we may not be able
to sell assets quickly enough or for sufficient amounts to enable us to meet our
debt service obligations.
Despite current
indebtedness levels, we and our subsidiaries may still be able to incur
substantially more debt. This could further exacerbate the risks associated with
our substantial financial leverage.
We and
our subsidiaries may be able to incur substantial additional indebtedness in the
future because the terms of the indentures governing the Holdco Notes and UCI’s
senior subordinated notes and the agreement governing UCI’s senior credit
facilities do not fully prohibit us or our subsidiaries from doing so. If new
debt is added to our and our subsidiaries’ current debt levels, the related
risks that we and they now face could intensify.
Restrictive
covenants in the indenture governing our debt may restrict our ability to pursue
our business strategies.
The
indentures governing the Holdco Notes and the senior subordinated notes and the
agreement governing UCI’s senior credit facility limit our ability and the
ability of our restricted subsidiaries, among other things, to:
•
|
incur
additional indebtedness;
|
•
|
sell
assets, including capital stock of restricted
subsidiaries;
|
•
|
agree
to payment restrictions affecting our restricted
subsidiaries;
|
•
|
consolidate,
merge, sell or otherwise dispose of all or substantially all of our
assets;
|
•
|
enter
into transactions with our
affiliates;
|
•
|
incur
liens; and
|
•
|
designate
any of our subsidiaries as unrestricted
subsidiaries.
|
In
addition, as of the end of any given quarter, UCI’s senior credit facilities
require us to maintain a maximum consolidated leverage ratio and a minimum
consolidated interest coverage ratio, covering the previous four quarters,
through the term of the senior credit facilities. At December 31, 2009, UCI was
required to maintain a maximum consolidated leverage ratio and a minimum
consolidated interest coverage ratio of 4.10 to 1 and 2.8 to 1, respectively.
These ratio requirements change quarterly under the terms of UCI’s senior credit
facilities. Our ability to comply with these ratios may be affected by events
beyond our control.
20
The
restrictions contained in the indentures governing the Holdco Notes and UCI’s
senior subordinated notes and the agreement governing the senior credit
facilities could limit our ability to plan for or react to market conditions,
meet capital needs or make acquisitions or otherwise restrict our activities or
business plans.
The
breach of any of these covenants or restrictions could result in a default under
the indentures governing the Holdco Notes or UCI’s senior subordinated notes and
the agreement governing UCI’s senior credit facilities. An event of default
under either or both of these indentures or UCI’s senior credit facilities would
permit some of our lenders to declare all amounts borrowed from them to be due
and payable. An event of default under either of these indentures or UCI’s
senior credit facilities would likely result in a cross default under either or
both of the other instruments. If we are unable to repay debt, lenders having
secured obligations could proceed against the collateral securing that debt. In
addition, if any of our other indebtedness is accelerated, we may be unable to
make interest payments on the Holdco Notes and repay the principal amount of the
notes.
We are controlled
by Carlyle, whose interests in our business may be different than
yours.
As of
December 31, 2009, Carlyle Partners III, L.P. and CP III Coinvestment, L.P.,
both of which are affiliates of Carlyle, owned 90.8% of our equity and are able
to control our affairs in all cases. Our entire board has been designated by the
affiliates of Carlyle and a majority of the board is associated with Carlyle. In
addition, the affiliates of Carlyle control the appointment of our management,
the entering into of mergers, sales of substantially all of our assets and other
extraordinary transactions. The interests of Carlyle and its affiliates could
conflict with yours. In addition, Carlyle or its affiliates may in the future
own businesses that directly compete with ours.
ITEM 1B. UNRESOLVED STAFF
COMMENTS
Not
applicable.
21
ITEM 2. PROPERTIES
We
currently maintain 20 manufacturing facilities, 14 of which are located in North
America, 2 in Europe and 4 in China. In addition, we maintain 9 distribution and
warehouse facilities. Listed below are the locations of our principal
manufacturing facilities:
Location
|
Owned/Leased
|
Square Footage
|
Products
Manufactured
|
||||||
North
America
|
Albion,
Illinois I
|
Owned
|
271,000 |
Spin-on
Oil Filters; Heavy-duty Lube Filters; Micro Glass
Elements
|
|||||
Albion,
Illinois II
|
Owned
|
53,000 |
Spin-on
Oil Filters; Poly Panel Air Filters
|
||||||
Albion,
Illinois III
|
Owned
|
50,000 |
Heavy-duty
Lube Units; Round Air Filters
|
||||||
Albion,
Illinois IV
|
Owned
|
101,000 |
Heavy-duty
Air Filters; Radial Air Filters; Automotive Conical and Radial Air
Filters
|
||||||
Shelby
Township, Michigan
|
Leased
|
30,000 |
Auto
Fuel Filters
|
||||||
West
Salem, Illinois
|
Owned
|
217,000 |
Heavy-duty
Lube Filters; Spin-on Oil Filters
|
||||||
York,
South Carolina
|
Owned
|
189,000 |
Auto
Spin-on Oil Filters
|
||||||
Fairfield,
Illinois I
|
Owned
|
183,000 |
Electric
and Mechanical Fuel Pump Components
|
||||||
Fairfield,
Illinois II
|
Owned
|
457,000 |
Electric
Fuel Pump Assemblies and Components; Mechanical Fuel Pumps and
Components
|
||||||
North
Canton, Ohio
|
Leased*
|
210,000 |
Water
Pump Assemblies
|
||||||
Fond
du Lac, Wisconsin I
|
Owned
|
188,000 |
Distributor
Caps and Rotors
|
||||||
Fond
du Lac, Wisconsin II
|
Owned
|
36,000 |
Electronic
Controls; Sensors; Voltage Regulators
|
||||||
Puebla,
Mexico
|
Three
Owned Buildings
|
229,000 |
Gray
Iron Foundry Castings; Water Pump Seal Assemblies; Water Outlets; Water
Pump Assemblies and Components
|
||||||
Reynosa,
Mexico
|
Owned
|
108,000 |
Coils;
Distributor Caps and Rotors; Sensors; Solenoids; Switches and Wire Sets;
5,000 square feet utilized for Fuel Products
|
||||||
Europe
|
Mansfield
Park, United Kingdom
|
Leased
|
100,000 |
Radial
Seal Air Filters; Poly Panel Air Filters; Heavy-duty Air Filters; Dust
Collection Filters
|
|||||
Zaragoza,
Spain
|
Leased
|
86,000 |
Water
Pump Assemblies; Gray Iron Foundry Castings; Water Pump Seal Assemblies;
Water Outlets; Water Pump Assemblies and Components
|
||||||
China
|
Tianjin,
China
|
Land
leased/Building owned
|
162,000 |
Water
Pump Components
|
|||||
Tianjin
Economic Development Areas, China
|
Leased
|
60,000 |
Fuel
Pump Components
|
||||||
Wujiang,
China
|
Leased
|
35,000 |
Light-duty
Panel Air Filters
|
||||||
Yanzhou,
China
|
Owned/Leased**
|
241,000/134,000 |
Water
Pump
Components
|
*
|
Leased
from a related party.
|
22
**
|
Owned/Leased
by joint venture in which we have 51%
ownership.
|
ITEM 3. LEGAL
PROCEEDINGS
UCI and
its wholly owned subsidiary, Champion Laboratories, Inc. (“Champion”), were
named as two of multiple defendants in 23 complaints originally filed in the
District of Connecticut, the District of New Jersey, the Middle District of
Tennessee and the Northern District of Illinois alleging conspiracy violations
of Section 1 of the Sherman Act, 15 U.S.C. § 1, related to aftermarket oil, air,
fuel and transmission filters. T.D.S. Co. v. Champion Labs. et
al. (D. Conn., filed April 8, 2008); Barjan, LLC v. Champion Labs. et
al. (D. Conn., filed April 10, 2008); Bruene v. Champion Labs. et
al. (D. Conn., filed April 8, 2008); S&E Quick Lube Distrib., Inc. v.
Champion Labs. et al. (D. Conn., filed March 31, 2008); Flash Sales, Inc. v. Champion Labs.
et al. (D. Conn., filed April 4, 2008); The Parts Plus Group, Inc. v.
Champion Labs. et al. (D. Conn., filed April 28, 2008); Ward’s Auto Painting & Body
Works, Inc. v. Champion Labs. et al. (D. Conn., filed April 29,
2008); G.W.C. Distributors,
Inc. v. Champion Laboratories, Inc. et al. (D. Conn., filed May 19,
2008); A&L Systems, Inc.
v. Champion Laboratories, Inc. et al. (D. Conn., filed May 28,
2008); Aaron Dunham
v. Champion Laboratories,
Inc. et al. (D.
Conn., filed June 17, 2008);
Auto Pro, LLC v. Champion Laboratories, Inc. et al. (D. Conn., filed June
17, 2008); JDL Corp. v.
Champion Laboratories, Inc. et al. (D. Conn., filed July
1, 2008); Associate Jobbers
Warehouse Inc. v. Champion Laboratories, Inc. et al. (D. Conn., filed
July 28, 2008); Friedson v.
Champion Laboratories, Inc. et al. (D. Conn., filed July 28, 2008); Colburn v. Champion Laboratories,
Inc. et al. (D. Conn., filed July 28, 2008); Lown v. Champion Laboratories, Inc.
et al. (D. Conn., filed July 28, 2008); Boardman v. Champion Laboratories,
Inc. et al. (D.
Conn., filed August 14, 2008); Central Warehouse Sales Corp. v.
Champion Labs. et al. (D.N.J., filed April 29, 2008); All American Plazas of New Jersey,
Inc. v. Honeywell International Inc. et al. (D.N.J., filed May 7,
2008); Werner Aero Services v.
Champion Labs. et al. (M.D. Tenn., filed May 9, 2008); Pawnee/S.A.E. Warehouse, Inc. v.
Champion Laboratories, Inc. et al. (N.D. Ill., filed May 14, 2008); S.A.E. Warehouse, Inc. v. Champion
Laboratories, Inc. et al. (N.D. Ill., filed May 14, 2008); Monroe Motor Products Corp. v.
Champion Laboratories, Inc. et al. (N.D. Ill., filed May
22, 2008). Flash
Sales, S&E Quick Lube, Bruene, Central Warehouse, Pawnee/S.A.E., S.A.E., All American and Monroe Motor also named The
Carlyle Group as a defendant, but those plaintiffs voluntarily dismissed Carlyle
from each of those actions without prejudice. Champion, but not UCI,
was also named as a defendant in 13 virtually identical actions originally filed
in the Northern and Southern Districts of Illinois, and the District of New
Jersey. Lovett Auto
& Tractor Parts, Inc. v. Champion Labs. et al. (N.D. Ill., filed
April 10, 2008); Neptune
Warehouse Distributors, Inc. v. Champion Labs. et al. (N.D. Ill., filed
April 23, 2008); Hovis
Auto Supply, Inc. v. Robert Bosch LLC et al. (N.D. Ill., filed May 19,
2008); Ace Quick Lube v.
Champion Laboratories Inc. et al. (N.D. Ill., filed August 27,
2008); Manasek Auto Parts,
Inc. v. Champion Labs. et al. (S.D. Ill., filed April 23, 2008);
Big T Inc. v. Champion Labs.
et al. (S.D. Ill., filed May 6, 2008); Gemini of Westmont, inc. v. Champion
Laboratories, Inc. et al. (D. Conn., filed May 12, 2008); Cal’s Auto Service, Inc. v. Champion
Laboratories, Inc. et al. (S.D. Ill., filed May 14, 2008); WWD Parts, Inc., d/b/a Parts For
Imports v. Champion Laboratories, Inc. et al. (S.D. Ill., filed May 15,
2008); Muralt’s, Inc. v.
Champion Laboratories, Inc. et al. (S.D. Ill., filed May
27, 2008); G&H Import Auto
Inc. v. Champion Laboratories, Inc. et al. (S.D. Ill., filed May
29, 2008); Mike’s Inc. v.
Champion Laboratories, Inc. et al. (S.D. Ill., filed June 2, 2008); Worldwide Equipment, Inc. v.
Honeywell Int’l et al. (D.N.J., filed May 9, 2008). All
of these complaints are styled as putative class actions on behalf of all
persons and entities that purchased aftermarket filters in the U.S. directly
from the defendants, or any of their predecessors, parents, subsidiaries or
affiliates, at any time during the period from January 1, 1999 to the
present. Each case seeks damages, including statutory treble damages,
an injunction against future violations, costs and attorney’s
fees.
23
UCI and
Champion were also named as two of multiple defendants in 17 similar complaints
originally filed in the District of Connecticut, the Northern District of
California, the Northern District of Illinois and the Southern District of New
York by plaintiffs who claim to be indirect purchasers of aftermarket
filters. Packard
Automotive, Inc. v. Honeywell International Inc. et al., (D. Conn., filed
April 21, 2008); Doll et
al. v. Champion Labs. et al. (D. Conn., filed May 9, 2008); Austin v. Honeywell Int’l et al.
(D. Conn., filed May 8, 2008); Gasoline and Automotive Service
Dealers of America, Inc. v. Champion Laboratories, Inc. et al. (D. Conn., filed May
12, 2008); David Stoll v.
Honeywell International, Inc. et al. (D. Conn., filed May
19, 2008); Jerry Vandiver v.
Champion Laboratories, Inc. et al. (D. Conn., filed June
3, 2008); Bettendorf Transfer
& Excavating, Inc. v. Champion Laboratories, Inc. et al. (D. Conn., filed June
16, 2008); Ponce v. Honeywell
International Inc. et al. (N.D. Ca., filed May 28, 2008); G.S.G. Excavating v. Honeywell
International Inc. et al. (N.D. Ca., filed June 20, 2008); Gertha Wilkerson v. Honeywell
International, Inc. et al. (N.D. Ca., filed July 3, 2008); Bobbi Cooper v. Honeywell
International, Inc. et al. (N.D. Ca., filed July 3, 2008); Bay Area Truck Services v. Champion
Laboratories, Inc. et al. (N.D. Ca., filed June 26, 2008); Robert A. Nilsen v. Champion
Laboratories, Inc. et al., (S.D.N.Y., filed July 23, 2008); Ehrhardt et al. v. Champion
Laboratories, Inc. et al. (N.D. Ill., filed July 28, 2008); Faircloth v. Champion Laboratories,
Inc. et al. (N.D. Ill., filed August 25, 2008); Carpenter et al. v. Honeywell Int’l
Inc. et al. (N.D. Ill., filed September 12, 2008); Warner et al. v. Honeywell Int’l
Inc. et al. (N.D. Ill., filed September 22, 2008). Austin and G.S.G. Excavating also named
The Carlyle Group as a defendant, but the plaintiffs in both of those actions
voluntarily dismissed Carlyle without prejudice. Champion, but not
UCI, was also named in 3 similar actions originally filed in the Eastern
District of Tennessee, the Northern District of Illinois and the Southern
District of California. Bethea et al. v. Champion
Labs. et al.
(E.D. Tenn., filed April 25, 2008); Mark Moynahan v. Champion Laboratories, Inc. et al.
(N.D. Ill., filed June 2, 2008); Sepher Torabi d/b/a Protec Auto v.
Champion Laboratories, Inc. et al. (S.D. Ca., filed July 25,
2008). These complaints allege conspiracy violations of Section 1 of
the Sherman Act and/or violations of state antitrust, consumer protection and
unfair competition law. They are styled as putative class actions on
behalf of all persons or entities who acquired indirectly aftermarket filters
manufactured and/or distributed by one or more of the defendants, their agents
or entities under their control, at any time between January 1, 1999 and
the present; with the exception of Austin, David Stoll and Bay Area, which each allege a
class period from January 1, 2002 to the present, and Bettendorf, which alleges a
class period from the “earliest legal permissible date” to the
present. The complaints seek damages, including statutory treble
damages, an injunction against future violations, disgorgement of profits, costs
and attorney’s fees.
On August
18, 2008, the Judicial Panel on Multidistrict Litigation (“JPML”) issued an
order transferring the U.S. direct and indirect purchaser aftermarket filters
cases to the Northern District of Illinois for coordinated and consolidated
pretrial proceedings before the Honorable Robert W. Gettleman pursuant to 28
U.S.C. § 1407. On November 26, 2008, all of the direct purchaser
plaintiffs filed a Consolidated Amended Complaint. This complaint
names Champion as one of multiple defendants, but it does not name
UCI. The complaint is styled as a putative class action and alleges
conspiracy violations of Section 1 of the Sherman Act. The direct
purchaser plaintiffs seek damages, including statutory treble damages, an
injunction against future violations, costs and attorney’s fees. On
February 2, 2009, Champion filed its answer to the direct purchasers’
Consolidated Amended Complaint.
On
December 1, 2008, all of the indirect purchaser plaintiffs, except Gasoline and
Automotive Service Dealers of America (“GASDA”), filed a Consolidated Indirect
Purchaser Complaint. This complaint names Champion as one of multiple
defendants, but it does not name UCI. The complaint is styled as a
putative class action and alleges conspiracy violations of Section 1 of the
Sherman Act and violations of state antitrust, consumer protection and unfair
competition law. The indirect purchaser plaintiffs seek damages,
including statutory treble damages, penalties and punitive damages where
available, an injunction against future violations, disgorgement of profits,
costs and attorney’s fees. On February 2, 2009, Champion and the
other defendants jointly filed a motion to dismiss the Consolidated Indirect
Purchaser Complaint. On November 5, 2009, the Court granted the
motion in part, and denied it in part. The Court directed the
indirect purchaser plaintiffs to file an amended complaint conforming to the
order. On November 30, 2009, the indirect purchasers filed an amended
complaint. On December 17, 2009, the indirect purchasers filed a
motion for leave to file a second amended complaint. On December 22,
2009, the Court granted the motion for leave, but gave defendants permission to
move to dismiss the second amended complaint. Defendants’ filed that
motion to dismiss on January 19, 2010.
On
February 2, 2009, Champion, UCI and the other defendants jointly filed a motion
to dismiss the GASDA complaint. On April 13, 2009, GASDA voluntarily
dismissed UCI from its case without prejudice. On November 5, 2009,
the Court granted defendants’ motion.
Pursuant
to a stipulated agreement between the parties, all defendants produced limited
initial discovery on January 30, 2009. On December 10, 2009 the
plaintiffs filed their first sets of interrogatories and requests for production
of documents. On January 11, 2010, all defendants filed a number of
discovery requests to plaintiffs and third parties. All discovery
responses were due on February 16, 2010. On January 21, 2010, the
Court entered a scheduling order for discovery. Under this order,
discovery related to class-certification will proceed immediately, with document
production scheduled to be completed no later than June 21,
2010. Class certification briefing will follow the completion of
document production, and expert discovery on merits-related issues follow the
court’s ruling on plaintiffs’ motions for class certification.
24
On
January 12, 2009, Champion, but not UCI, was named as one of ten defendants in a
related action filed in the Superior Court of California, for the County of Los
Angeles on behalf of a purported class of direct and indirect purchasers of
aftermarket filters. Peerali v. Champion Laboratories,
Inc. et al., No. BC405424. On March 5, 2009, one of the
defendants filed a notice of removal to the U.S. District Court for the Central
District of California, and then subsequently requested that the JPML transfer
this case to the Northern District of Illinois for coordinated pre-trial
proceedings, and the JPML did.
Champion,
but not UCI, was also named as one of five defendants in a class action filed in
Quebec, Canada. Jean-Paul
Perrault v. Champion Labs. et al. (filed April 25,
2008). This action alleges conspiracy violations under the Canadian
Competition Act and violations of the obligation to act in good faith (contrary
to art. 6 of the Civil Code of Quebec) related to the sale of aftermarket
filters. The plaintiff seeks joint and several liability against the
five defendants in the amount of $5.0 million in compensatory damages and $1.0
million in punitive damages. The plaintiff is seeking authorization
to have the matter proceed as a class proceeding, which motion has not yet been
ruled on.
Champion,
but not UCI, was also named as one of 14 defendants in a class action filed on
May 21, 2008, in Ontario, Canada (Urlin Rent A Car Ltd. v. Champion
Laboratories, Inc. et al). This action alleges civil
conspiracy, intentional interference with economic interests, and conspiracy
violations under the Canadian Competition Act related to the sale of aftermarket
filters. The plaintiff seeks joint and several liability against the
14 defendants in the amount of $150 million in general damages and $15 million
in punitive damages. The plaintiff is also seeking authorization to
have the matter proceed as a class proceeding, which motion has not yet been
ruled on.
On July
30, 2008, the Office of the Attorney General for the State of Florida issued
Antitrust Civil Investigative Demands to Champion and UCI requesting documents
and information related to the sale of oil, air, fuel and transmission
filters. We are cooperating with the Attorney General’s
requests. On April 16, 2009, the Florida Attorney General filed a
complaint against Champion and eight other defendants in the Northern District
of Illinois. The complaint alleges violations of Section 1 (f) of the
Sherman Act and Florida law related to the sale of aftermarket
filters. The complaint asserts direct and indirect purchaser claims
on behalf of Florida governmental entities and Florida consumers. It
seeks damages, including statutory treble damages, penalties, fees, costs and an
injunction. The Florida Attorney General action is being coordinated
with the rest of the filters cases pending in the Northern District of Illinois
before the Honorable Robert W. Gettleman.
The
Antitrust Division of the Department of Justice (DOJ) investigated the
allegations raised in these suits and certain current and former employees of
the defendants, including Champion, testified pursuant to
subpoenas. On January 21, 2010, DOJ sent a letter to counsel for
Champion stating that “the Antitrust Division’s investigation into possible
collusion in the replacement auto filters industry is now officially
closed.”
We intend
to vigorously defend against these claims.
From time
to time, we may be involved in other disputes or litigation relating to claims
arising out of our operations. However, we are not currently a party to any
other material legal proceedings.
ITEM 4. RESERVED
25
PART
II
ITEM 5. MARKET FOR
REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES
(a)
Market Information
No
trading market for our common stock currently exists.
(b)
Holders
As of
March 19, 2010, there were 66 holders of our common stock.
(c)
Dividends
In
December 2006, we paid a special cash dividend of approximately $96 per share on
our common stock. Prior to that time, since the date of our incorporation on
April 16, 2003, we did not pay dividends. It is our current policy to retain
earnings to repay debt and finance our operations. In addition, UCI’s credit
facility and indenture significantly restrict the payment of dividends on common
stock.
(d)
Securities Authorized for Issuance under Equity Compensation Plans
The
following table gives information about our common stock that may be issued
under the Amended and Restated Equity Incentive Plan of Holdco as of December
31, 2009.
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights (1)
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
|
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
|
||||||||||
Plan category
|
(a)
|
(b)
|
(c)
|
|||||||||
Equity
compensation plans approved by security holders
|
127,715 | $9.60 | 39,273 | |||||||||
Equity
compensation plans not approved by security holders
|
0 | 0 | 0 | |||||||||
Total
|
127,715 | $9.60 | 39,273 |
(1)
|
This
includes shares subject to options outstanding under the Amended and
Restated Equity Incentive Plan of
Holdco.
|
(e)
Stock Performance Graph
None.
(f)
Recent Sales of Unregistered Securities
In 2009,
Holdco granted 59,500 shares of its common stock to certain employees, and
granted options to purchase 2,000 shares of its common stock to certain
directors at an exercise price of $58.80 per share. Of the options granted in
2009, all remain outstanding, no shares of common stock have been issued
pursuant to exercise of such options and no shares have returned to the stock
option plan pool due to the forfeiture of such options. In 2009, 3,650 shares of
Holdco common stock were issued to certain employees upon the exercise of
options. The exercise prices of these options ranged from $5.00 to $23.63 per
share.
26
The
offers, sales and issuances of the options and common stock described in the
paragraph above of this Item 5 were deemed to be exempt from registration under
the Securities Act in reliance on Rule 701 in that the transactions were under a
compensatory benefit plan as provided under such rule and/or Regulation D. The
recipients of such options and common stock were our employees, directors or
bona fide consultants. Appropriate legends were affixed to the share
certificates issued in such transactions. Each of these recipients had adequate
access, through employment or other relationships, to information about
us.
(g)
|
Purchases of Equity Securities
by the Issuer and Affiliated
Purchasers.
|
None.
ITEM 6. SELECTED
FINANCIAL DATA
The
selected financial data have been derived from Holdco’s and, prior to Holdco’s
inception, UCI Acquisition’s financial statements. The financial data as of
December 31, 2009 and 2008 and for each of the years in the three-year period
ended December 31, 2009 have been derived from the audited financial statements
included in this Form 10-K. We derived the balance sheet data as of December 31,
2007, 2006 and 2005 and the statement of income data for the 2006 and 2005 years
from audited financial statements that are not included herein. The data
includes the results of operations of ASC beginning on May 25, 2006, the date of
the acquisition of ASC by the Company. The operating results of the Company’s
driveline components and specialty distribution operations, which were sold on
June 30, 2006, and the Company’s lighting systems operation, which was sold on
November 30, 2006, are presented as discontinued operations for all periods
presented. The amounts are presented in millions of dollars.
27
Year
ended
Dec. 31, 2009
|
Year
ended
Dec. 31, 2008
|
Year
ended
Dec. 31, 2007
|
Year
ended
Dec. 31, 2006
|
Year
ended
Dec. 31, 2005
|
||||||||||||||||
(in
millions)
|
||||||||||||||||||||
Statement
of Income Data:
|
||||||||||||||||||||
Net
sales (1)
|
$ | 885.0 | $ | 880.4 | $ | 969.8 | $ | 906.1 | $ | 812.7 | ||||||||||
Cost
of sales (2) (3)
|
685.4 | 702.5 | 748.8 | 728.6 | 657.9 | |||||||||||||||
Gross
profit
|
199.6 | 177.9 | 221.0 | 177.5 | 154.8 | |||||||||||||||
Operating
expenses (income):
|
||||||||||||||||||||
Selling
and warehousing
|
56.6 | 62.9 | 61.2 | 60.0 | 57.3 | |||||||||||||||
General
and administrative
|
47.7 | 51.6 | 49.9 | 42.9 | 37.9 | |||||||||||||||
Amortization
of acquired intangible assets
|
5.8 | 6.3 | 7.0 | 6.7 | 5.9 | |||||||||||||||
Restructuring
costs (gains) (3) (4)
|
0.9 | 2.4 | (0.8 | ) | 13.4 | — | ||||||||||||||
Asset
impairments and other costs (5)
|
— | 0.5 | 3.6 | — | 21.5 | |||||||||||||||
Patent
litigation costs (6)
|
7.0 | — | — | — | — | |||||||||||||||
Operating
income
|
81.6 | 54.2 | 100.1 | 54.5 | 32.2 | |||||||||||||||
Interest
expense, net
|
(60.5 | ) | (65.4 | ) | (72.9 | ) | (44.2 | ) | (36.1 | ) | ||||||||||
Write-off
of deferred financing costs (7)
|
— | — | — | (2.6 | ) | — | ||||||||||||||
Other
expense, net
|
(7.5 | ) | (5.5 | ) | (4.8 | ) | (2.9 | ) | (3.2 | ) | ||||||||||
Income
(loss) before income taxes
|
13.6 | 16.7 | 22.4 | 4.8 | (7.1 | ) | ||||||||||||||
Income
tax expense (benefit)
|
5.1 | (4.3 | ) | 8.4 | 0.2 | 0.5 | ||||||||||||||
Net
income (loss) from continuing operations
|
8.5 | (12.4 | ) | 14.0 | 4.6 | (7.6 | ) | |||||||||||||
Net
income from discontinued operations, net of tax
|
— | — | — | 2.0 | 3.1 | |||||||||||||||
Gain
(loss) on sale of discontinued operations, net of tax
|
— | — | 2.7 | (16.9 | ) | — | ||||||||||||||
Net
income (loss)
|
8.5 | (12.4 | ) | 16.7 | (10.3 | ) | (4.5 | ) | ||||||||||||
Less: Loss
attributable to noncontrolling interest
|
(0.7 | ) | (0.8 | ) | (0.1 | ) | (0.8 | ) | — | |||||||||||
Net
income (loss) attributable to Holdco
|
$ | 9.2 | $ | (11.6 | ) | $ | 16.8 | $ | (9.5 | ) | $ | (4.5 | ) |
Year
ended
Dec. 31, 2009
|
Year
ended
Dec. 31, 2008
|
Year
ended
Dec. 31, 2007
|
Year
ended
Dec. 31, 2006
|
Year
ended
Dec. 31, 2005
|
||||||||||||||||
(in
millions)
|
||||||||||||||||||||
Balance
Sheet Data:
|
||||||||||||||||||||
Cash
and cash equivalents
|
$ | 131.9 | $ | 46.7 | $ | 42.0 | $ | 31.5 | $ | 23.7 | ||||||||||
Working
capital — continuing operations
|
339.3 | 298.5 | 280.9 | 280.2 | 254.7 | |||||||||||||||
Working
capital — discontinued operations
|
— | — | — | — | 56.5 | |||||||||||||||
Total
assets
|
1,058.9 | 1,007.7 | 1,002.0 | 1,005.1 | 984.8 | |||||||||||||||
Debt
(including current maturities)
|
741.6 | 732.9 | 696.6 | 727.4 | 442.5 | |||||||||||||||
Total
shareholders’ equity (deficit)
|
9.2 | (7.5 | ) | 49.6 | 19.3 | 280.3 | ||||||||||||||
Other
Data:
|
||||||||||||||||||||
Net
cash provided by operating activities of continuing
operations
|
$ | 129.3 | $ | 31.7 | $ | 93.1 | $ | 74.1 | $ | 57.1 | ||||||||||
Net
cash (used in) provided by operating activities of discontinued
operations
|
— | — | — | (1.5 | ) | 5.7 | ||||||||||||||
Net
cash used in investing activities of continuing operations
|
(22.1 | ) | (31.5 | ) | (19.0 | ) | (79.7 | ) | (26.5 | ) | ||||||||||
Net
cash used in investing activities of discontinued
operations
|
— | — | — | (2.9 | ) | (5.3 | ) | |||||||||||||
Net
cash (used in) provided by financing activities of continuing
operations
|
(22.0 | ) | 4.7 | (63.5 | ) | 15.5 | (15.7 | ) |
(1)
|
Sales
in 2005 have been reduced by a $14.0 million change in estimated warranty
reserve requirements. Sales in 2008 have been reduced by a special $6.7
million warranty provision related to unusually high warranty returns
related to one category of parts.
|
(2)
|
Includes
$9.8 million in 2006 for the sale of inventory written up to market from
historical cost per U.S. GAAP (Accounting Principles Generally Accepted in
the United States) rules for accounting for the acquisition of
ASC.
|
28
(3)
|
Cost
of sales in 2007 and 2006 include $4.7 million and $3.9 million,
respectively, of costs incurred in connection with the integration of the
Company’s pre-ASC Acquisition water pump operations with the operations of
ASC.
|
The
remaining $0.7 million of water pump integration costs in 2007 and $7.0 million
in 2006 are included in “Restructuring costs (gains).”
(4)
|
2006
includes asset write-downs and severance and other costs in connection
with the closures of the Company’s Canadian fuel pump facility and Mexican
filter manufacturing facility. 2007 includes a gain on the sale of land
and building.
|
(5)
|
Includes
impairments of property and equipment of a foreign entity, a trademark and
software, and a write-down of assets related to the abandonment of a
foreign subsidiary.
|
(6)
|
Includes
trial costs and damages awarded in connection with an unfavorable jury
verdict on a patent infringement matter. See Note 16 to the
financial statements included in this Form
10-K.
|
(7)
|
Write-off
of unamortized deferred financing costs related to the Company’s
previously outstanding debt, which was replaced in connection with the
establishment of the Company’s new credit facility on May 25,
2006.
|
ITEM 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion of our financial condition and results of operations must
be read together with the “Item 1. Business” section of this Form 10-K and the
financial statements included herein.
Forward-Looking
Statements
In this
Annual Report on Form 10-K, Holdco makes some “forward-looking” statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, and Section 27A of the Securities Act of 1933, as amended. These
statements are included throughout this report on Form 10-K and relate to
analyses and other information based on forecasts of future results and
estimates of amounts not yet determinable. These forward-looking statements are
identified by their use of terms and phrases such as “anticipate,” “believe,”
“could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,”
“will,” “continue,” and other similar terms and phrases, including references to
assumptions.
These
forward-looking statements are based on Holdco’s expectations and beliefs
concerning future events affecting Holdco. They are subject to uncertainties and
factors relating to Holdco’s operations and business environment, all of which
are difficult to predict and many of which are beyond Holdco’s control. Although
we believe that the expectations reflected in our forward-looking statements are
reasonable, we do not know whether our expectations will prove correct. They can
be affected by inaccurate assumptions we make or by known or unknown risks and
uncertainties. Many factors mentioned in our discussion in this report will be
important in determining future results. Holdco cautions the reader that these
uncertainties and factors, including those discussed in Item 1A of this Annual
Report on Form 10-K and in other SEC filings, could cause Holdco’s actual
results to differ materially from those stated in the forward-looking
statements.
Although
we believe the expectations reflected in our forward-looking statements are
based upon reasonable assumptions, we can give no assurance that we will attain
these expectations or that any deviations will not be material. Except as
otherwise required by the federal securities laws, we disclaim any obligation or
undertaking to publicly release any updates or revisions to any forward-looking
statement contained in this Annual Report on Form 10-K or any other SEC filings
to reflect any change in our expectations with regard thereto or any change in
events, conditions or circumstances on which any such statement is
based.
29
Overview
Sales. We are among North
America’s largest and most diversified companies servicing the vehicle
replacement parts market, or the aftermarket. We supply a broad range of
filtration products, fuel delivery and cooling systems, and engine management
systems to the automotive, trucking, marine, mining, construction, agricultural
and industrial vehicle markets. We estimate that approximately 88% of our net
sales in 2009 were made in the aftermarket, to a diverse customer base that
includes some of the largest and fastest growing companies servicing the
aftermarket. Sales in the North American light vehicle aftermarket, excluding
tires, have grown at a compounded average annual growth rate of approximately
3.5% from 1998 through 2009. However, aftermarket sales grew by only
0.1% in 2008 and are estimated to have declined by 1.2% in 2009.
Our sales
to General Motors Corporation (GM) comprise approximately 6% of our consolidated
sales. More than 85% of our sales to GM are to dealerships in the original
equipment service (OES) channel, with the remainder to the original equipment
manufacturing (OEM) sales channel for inclusion in new vehicle production. Our
sales to Chrysler LLC (Chrysler) comprise less than 1% of our consolidated sales
and are largely to the service organization in the OES channel. Both GM and
Chrysler filed petitions under chapter 11 of the U.S. Bankruptcy Code in the
Southern District of New York during the second quarter of 2009, with both
emerging from bankruptcy in the third quarter of 2009. GM and Chrysler assumed
all contracts with Holdco companies. As widely publicized, GM and Chrysler’s
reorganization plans included substantial reductions to the dealership base.
Given that the majority of our sales to GM and Chrysler are to dealerships in
the OES channel, the closure of these dealerships could result in lower Holdco
sales to these customers. To date there has been no material change in our
post-bankruptcy sales levels to GM and Chrysler; however there can be no
assurance as to the level of demand for our products from those customers in the
future.
Because
most of our sales are to the aftermarket, we believe that our sales are
primarily driven by the number of vehicles on the road, the average age of those
vehicles, the average number of miles driven per year, the mix of light trucks
to passenger cars on the road and the relative strength of our sales channels.
Historically, our sales have not been materially adversely affected by market
cyclicality, as we believe that our aftermarket sales are less dependent on
economic conditions than our sales to OEMs, due to the generally
non-discretionary nature of vehicle maintenance and repair. While many vehicle
maintenance and repair expenses are non-discretionary in nature, high gasoline
prices and difficult economic conditions can lead to a reduction in miles
driven, which then results in increased time intervals for routine maintenance
and vehicle parts lasting longer before needing replacement. Historic highs in
crude oil prices experienced in 2008 and corresponding historic highs in retail
gasoline prices at the pump impacted consumers’ driving and vehicle maintenance
habits. In addition, we believe consumers’ driving and vehicle maintenance
habits have been impacted by the generally weak economic conditions experienced
in the latter part of 2008 and through 2009.
A key
metric in measuring aftermarket performance is miles driven. For 2008, the U.S.
Department of Energy reported a decrease in miles driven of 3.2% (equaling 96
billion fewer miles). This was the first annual decrease in miles driven since
1980. We believe that high gasoline prices and generally weak economic
conditions adversely affected our sales during the second half of 2008 and into
2009. During 2009, retail gasoline prices were significantly lower than the
historic highs experienced at the beginning of the third quarter of 2008.
Despite the lower retail gasoline prices, the negative trend in miles driven
continued in the first quarter of 2009 (a 2.7% decrease over the comparable
quarter in 2008) due to the ongoing weak economic conditions. The negative trend
reversed in the last three quarters of 2009 as miles driven exceeded the
comparable 2008 quarters. For the full year of 2009, miles driven
increased 0.1% from 2008.
While the
conditions described above have adversely affected our sales, other trends
resulting from the current economic conditions may have a positive impact on
sales in the future. Specifically, with new car sales remaining at historically
low levels, consumers are keeping their cars longer, resulting in an increased
demand for replacement parts as consumers repair their increasingly older cars.
In addition, a significant number of new car dealers have closed in recent
months, either voluntarily or as a result of the Chrysler and GM restructurings.
This decline in the number of dealerships has the potential of sending more
consumers to our customers in other channels of the aftermarket for their
replacement parts.
30
Management
believes that we have leading market positions in our primary product lines. We
continue to expand our product and service offerings to meet the needs of our
customers. We believe that a key competitive advantage is that we have one of
the most comprehensive product offerings in the vehicle replacement parts
market, consisting of over 47,000 parts. This product breadth, along with our
extensive manufacturing and distribution capabilities, product innovation, and
reputation for quality and service, makes us a leader in our
industry.
However,
it is also important to note that in 2009, 2008 and 2007, approximately 30%, 29%
and 28%, respectively, of our total net sales were derived from our business
with AutoZone. Our failure to maintain a healthy relationship with AutoZone
would result in a significant decrease in our net sales. Even if we maintain our
relationship, this sales concentration with one customer increases the potential
impact to our business that could result from any changes in the economic terms
of this relationship. Historically, we sold a small number of products under an
AutoZone program called Pay-on-Scan. Under this program, we retained title to
the product at AutoZone locations, and we recorded sales for the product when an
AutoZone customer purchased it. In the second quarter of 2007, we and AutoZone
terminated the Pay-on-Scan program for these products. Accordingly, sales of
these products are now recorded when received by AutoZone. This change has not
had a material effect on our on-going financial results. As part of the
termination of the Pay-on-Scan program, AutoZone purchased all of the products
at its locations that were previously under the Pay-on-Scan program. In the
second quarter of 2007, we recorded $12.1 million of sales for these
products.
Cost of
sales. Cost of sales includes all costs of manufacturing required to
bring a product to a ready-for-sale condition. Such costs include direct and
indirect materials (net of vendor consideration), direct and indirect labor
costs (including pension, postretirement and other fringe benefits), supplies,
utilities, freight, depreciation, insurance and other costs. Cost of sales also
includes all costs to procure, package and ship products that we purchase and
resell.
During
much of 2008, the cost of commodities, including steel, aluminum, iron, plastic
and other petrochemical products, packaging materials and media, increased
significantly compared to 2007. Energy costs also increased significantly during
this period. These higher costs affected the prices we paid for raw materials
and for purchased component parts and finished products. During 2009, general
market prices for most commodities decreased from 2008 levels in reaction to
global economic conditions and uncertainties regarding short-term demand. While
we have been, and expect to continue to be, able to obtain sufficient quantities
of these commodities to satisfy our needs, increased demand from current levels
for these commodities could result in cost increases and may make procurement
more difficult in the future. Due to our inventory being accounted for on the
first-in, first-out (FIFO) method, a time lag of approximately three months
exists from the time we experience cost increases or decreases until these
increases or decreases flow through cost of sales.
In
addition to the adverse impact of increasing commodities and energy costs, we
have been adversely affected by changes in foreign currency exchange rates,
primarily relating to the Mexican peso. Our Mexican operations source a
significant amount of inventory from the United States. In 2008, our Mexican
operations sourced approximately $11.7 million from the United States. During
the period September 30, 2008 through March 31, 2009, the U.S. dollar
strengthened against the Mexican peso by approximately 33%. During the period
March 31, 2009 through December 31, 2009, the U.S. dollar weakened against the
Mexican peso by approximately 11%, partially offsetting the trend experienced in
the prior six months. A strengthening U.S. dollar against the Mexican peso means
that our Mexican operations must pay more pesos to obtain inventory from the
United States.
Generally,
we attempt to mitigate the effects of cost increases and currency changes via a
combination of design changes, material substitution, global resourcing efforts
and increases in the selling prices for our products. With respect to pricing,
it should be noted that, while the terms of supplier and customer contracts and
special pricing arrangements can vary, generally a time lag exists between when
we incur increased costs and when we might recover a portion of the higher costs
through increased pricing. This time lag typically spans a fiscal quarter or
more, depending on the specific situation. During 2008, we secured customer
price increases that offset a portion of the cost increase we experienced in
2008. However, because of reductions from 2008 highs in both energy costs and
the costs of certain commodities used in our operations, we have not been able
to retain the entire effect of customer price increases secured in 2008. We
continue to pursue efforts to mitigate the effects of any cost increases;
however, there are no assurances that we will be entirely successful. To the
extent that we are unsuccessful, our profit margins will be adversely affected.
Because of uncertainties regarding future commodities and energy prices, and the
success of our mitigation efforts, it is difficult to estimate the impact of
commodities and energy costs on future operating results.
31
Selling
and warehousing expenses. Selling and warehousing expenses primarily
include sales and marketing, warehousing and distribution costs. Our major cost
elements include salaries and wages, pension and fringe benefits, depreciation,
advertising and information technology costs.
General
and administrative expenses. General and administrative expenses
primarily include executive, accounting and administrative personnel salaries
and fringe benefits, professional fees, pension benefits, insurance, provision
for doubtful accounts, rent and information technology costs.
Critical
Accounting Policies and Estimates
The
methods, estimates and judgments we use in applying our most critical accounting
policies have a significant impact on the results we report in our financial
statements. We evaluate our estimates and judgments on an on-going basis. We
base our estimates on historical experience and on assumptions that we believe
to be reasonable under the circumstances. Our experience and assumptions form
the basis for our judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Actual results may vary from
what we anticipate, and different assumptions or estimates about the future
could change our reported results.
We
believe the following accounting policies are the most critical in that they
significantly affect our financial statements, and they require our most
significant estimates and complex judgments.
Revenue
recognition. We record sales when title and risk of loss transfers to the
customer, the sale price is fixed and determinable, and the collection of the
related accounts receivable is reasonably assured.
Where we
have sales rebate programs with some of our customers, we estimate amounts due
under these sales rebate programs when the sales are recorded. Net sales
relating to any particular shipment are based upon the amounts invoiced for the
shipped goods less estimated future rebate payments. These estimates are based
upon our historical experience, current trends and our expectations regarding
future experience. Revisions to these estimates are recorded in the period in
which the facts that give rise to the revision become known.
Additionally,
we have agreements with our customers that provide for sales discounts,
marketing allowances, return allowances and performance incentives. Any
discount, allowance or incentive is treated as a reduction to sales, based on
estimates of the criteria that give rise to the discount, allowance or
incentive, such as sales volume and marketing spending. We routinely review
these criteria and our estimating process and make adjustments as facts and
circumstances change. Historically, we have not found material differences
between our estimates and actual results.
In order
to obtain exclusive contracts with certain customers, we may incur up-front
costs or assume the cost of returns of products sold by the previous supplier.
These costs are capitalized and amortized over the life of the contract. The
amortized amounts are recorded as a reduction of sales.
New
business changeover costs also can include the costs related to removing a new
customer’s inventory and replacing it with our inventory, commonly referred to
as a “stocklift.” Stocklift costs are recorded as a reduction to revenue when
incurred.
Product
returns. Our
customers have the right to return parts that have failed within warranty time
periods. Our customers also have the right, in varying degrees, to return excess
quantities of product. Credits for parts returned under warranty and parts
returned because of customer excess quantities are estimated and recorded at the
time of the related sales. These estimates are based on historical experience,
current trends and our expectations regarding future experience. Revisions to
these estimates are recorded in the period in which the facts that give rise to
the revision become known. Any significant increase in the amount of product
returns above historical levels could have a material adverse effect on our
financial results.
32
Inventory.
We record inventory at the lower of cost or market. Cost is principally
determined using standard cost or average cost, which approximates the first-in,
first-out method. Estimated market value is based on assumptions for future
demand and related pricing. If actual market conditions are less favorable than
those projected by management, reductions in the value of inventory may be
required.
Impairment
of intangible assets. Goodwill is subject to annual review unless
conditions arise that require a more frequent evaluation. The review for
impairment is based on a two-step accounting test. The first step is to compare
the estimated fair value with the recorded net book value (including the
goodwill). If the estimated fair value is higher than the recorded net book
value, no impairment is deemed to exist and no further testing is required. If,
however, the estimated fair value is below the recorded net book value, then a
second step must be performed to determine the goodwill impairment required, if
any. In this second step, the estimated fair value from the first step is used
as the purchase price in a hypothetical acquisition. Purchase business
combination accounting rules are followed to determine a hypothetical purchase
price allocation to the reporting unit’s assets and liabilities. The residual
amount of goodwill that results from this hypothetical purchase price allocation
is compared to the recorded amount of goodwill, and the recorded amount is
written down to the hypothetical amount, if lower.
We
perform our annual goodwill impairment review in the fourth quarter of each year
using discounted future cash flows. Management retains the services of a
independent valuation company in order to assist in evaluating the estimated
fair value of the Company. The process of evaluating the potential
impairment of goodwill is subjective because it requires the use of estimates
and assumptions as to future cash flows of the Company, discount rates
commensurate with the risks involved in the assets, future economic and market
conditions, competition, customer relations, pricing, raw material costs,
production costs, selling, general and administrative costs, and income and
other taxes. Although we base cash flow forecasts on assumptions that are
consistent with plans and estimates we use to manage the Company, there is
significant judgment in determining the cash flows. Based upon the
results of our impairment review, we determined that the fair value of the
Company significantly exceeded the carrying value of the assets and no
impairment existed.
Trademarks
with indefinite lives are tested for impairment on an annual basis in the fourth
quarter, unless conditions arise that would require a more frequent evaluation.
In assessing the recoverability of these assets, projections regarding estimated
discounted future cash flows and other factors are made to determine if
impairment has occurred. If we conclude that there has been impairment, we will
write down the carrying value of the asset to its fair value. In 2008, we
recorded a trademark impairment loss of $0.5 million. In 2007, we recorded a
trademark impairment loss of $3.6 million. See Note 9 to the financial
statements included in this Form 10-K.
Each
year, we evaluate those trademarks with indefinite lives to determine whether
events and circumstances continue to support the indefinite useful lives. Other
than the impaired trademarks mentioned above, we have concluded that events and
circumstances continue to support the indefinite lives of these
trademarks.
Retirement
benefits. Pension obligations are actuarially determined and are affected
by assumptions including discount rate, life expectancy, annual compensation
increases and the expected rate of return on plan assets. Changes in the
discount rate, and differences between actual results and assumptions, will
affect the amount of pension expense we recognize in future
periods.
Postretirement
health obligations are actuarially determined and are based on assumptions
including discount rate, life expectancy and health care cost trends. Changes in
the discount rate, and differences between actual results and assumptions, will
affect the amount of expense we recognize in future periods.
Insurance
reserves. Our
insurance for workers’ compensation, automobile, product and general liability
include high deductibles (less than $1 million) for which we are responsible.
Deductibles for which we are responsible are recorded in accrued expenses.
Estimates of such losses involve substantial uncertainties including litigation
trends, the severity of reported claims and incurred but not yet reported
claims. External actuaries are used to assist us in estimating these
losses.
33
Environmental
expenditures. Our expenditures for environmental matters fall into two
categories. The first category is routine compliance with applicable laws and
regulations related to the protection of the environment. The costs of such
compliance are based on actual charges and do not require significant
estimates.
The
second category of expenditures is for matters related to investigation and
remediation of contaminated sites. The impact of this type of expenditure
requires significant estimates by management. The estimated cost of the ultimate
outcome of these matters is included as a liability in Holdco’s December 31,
2009 balance sheet. This estimate is based on all currently available
information, including input from outside legal and environmental professionals,
and numerous assumptions. Management believes that the ultimate outcome of these
matters will not exceed the $2.0 million accrued at December 31, 2009 by a
material amount, if at all. However, because all investigation and site analysis
has not yet been completed and because of the inherent uncertainty in such
environmental matters and related litigation, there can be no assurance that the
ultimate outcome of these matters will not be significantly different than our
estimates.
Results
of Operations
The
following table was derived from Holdco’s consolidated income statements for the
years ended December 31, 2009, 2008 and 2007. The amounts are presented in
millions of dollars.
2009
|
2008
|
2007
|
||||||||||
Net
sales
|
$ | 885.0 | $ | 880.4 | $ | 969.8 | ||||||
Cost
of sales
|
685.4 | 702.5 | 748.8 | |||||||||
Gross
profit
|
199.6 | 177.9 | 221.0 | |||||||||
Operating
(expenses) income
|
||||||||||||
Selling
and warehousing
|
(56.6 | ) | (62.9 | ) | (61.2 | ) | ||||||
General
and administrative
|
(47.7 | ) | (51.6 | ) | (49.9 | ) | ||||||
Amortization
of acquired intangible assets
|
(5.8 | ) | (6.3 | ) | (7.0 | ) | ||||||
Restructuring
(costs) gains
|
(0.9 | ) | (2.4 | ) | 0.8 | |||||||
Trademark
impairment loss
|
— | (0.5 | ) | (3.6 | ) | |||||||
Patent
litigation costs
|
(7.0 | ) | — | — | ||||||||
Operating
income
|
81.6 | 54.2 | 100.1 | |||||||||
Other
expense
|
||||||||||||
Interest
expense, net
|
(60.5 | ) | (65.4 | ) | (72.9 | ) | ||||||
Management
fee expense
|
(2.0 | ) | (2.0 | ) | (2.0 | ) | ||||||
Miscellaneous,
net
|
(5.5 | ) | (3.5 | ) | (2.8 | ) | ||||||
Income
(loss) before income taxes
|
13.6 | (16.7 | ) | 22.4 | ||||||||
Income
tax (expense) benefit
|
(5.1 | ) | 4.3 | (8.4 | ) | |||||||
Net
income (loss) from continuing operations
|
8.5 | (12.4 | ) | 14.0 | ||||||||
Gain
on sale of discontinued operations, net of tax
|
— | — | 2.7 | |||||||||
Net
income (loss)
|
8.5 | (12.4 | ) | 16.7 | ||||||||
Less:
Loss attributable to noncontrolling interest
|
(0.7 | ) | (0.8 | ) | (0.1 | ) | ||||||
Net
income (loss) attributable to UCI Holdco, Inc.
|
$ | 9.2 | $ | (11.6 | ) | $ | 16.8 |
Year
Ended December 31, 2009 compared with Year Ended December 31, 2008
Net
sales. Net sales of $885.0 million in 2009 increased $4.6 million, or
0.5%, compared to net sales of $880.4 million in 2008. Sales in 2008
were reduced by a $6.7 million loss provision resulting from the unusually high
level of warranty returns related to a specific category of parts. In connection
with obtaining new business, sales were reduced by $5.0 million in 2009 and $7.8
million in 2008. These reductions were the result of accepting returns of the
inventory of our customers’ previous suppliers in connection with securing new
business with our customers.
Excluding
the 2008 $6.7 million warranty loss provision, and the effects of obtaining new
business from both periods, sales were 0.5% lower in 2009 compared to
2008. Within the aftermarket channel, our retail and traditional
channel sales increased approximately 5.7% and approximately 6.5%, compared to
2008, respectively, while sales to dealerships in the OES channel decreased
approximately 6.6%. The increased sales in the retail and traditional channels
reflect the sales growth experienced by our retail and traditional customer
base. The overall uncertainty surrounding GM and Chrysler leading up to their
bankruptcy proceedings initiated during the second quarter of 2009 resulted in
the decreased OES channel sales. Our heavy-duty aftermarket sales also decreased
approximately 23.3% due to weakness in the transportation segment. OEM sales,
which comprise only 7% of our sales, decreased approximately 17.7% compared to
2008 due to general economic conditions in the United States and the significant
downturn in the automotive industry, which resulted in a reduction in vehicles
manufactured.
34
Gross
profit. Gross
profit, as reported, was $199.6 million for 2009 and $177.9 million for 2008.
Both periods included special items which are presented in the following table
along with a comparison of adjusted gross profit after excluding such special
items. Adjusted gross profit is a non-GAAP financial measurement of our
performance which is not in accordance with, or a substitute for, GAAP measures.
It is intended to supplement the presentation of our financial results that are
prepared in accordance with GAAP. We use adjusted gross profit as presented to
evaluate and manage our operations internally. You are encouraged to evaluate
each adjustment and whether you consider it to be appropriate.
2009
|
2008
|
|||||||
(in
millions)
|
||||||||
Gross
profit, as reported
|
$ | 199.6 | $ | 177.9 | ||||
Add
back special items:
|
||||||||
Nonrecurring
provision for warranty costs
|
— | 6.7 | ||||||
New
business changeover and sales commitment costs
|
5.0 | 7.8 | ||||||
Severance
costs
|
0.8 | 0.1 | ||||||
Costs
to establish additional manufacturing in China
|
0.5 | 3.1 | ||||||
$ | 205.9 | $ | 195.6 |
The “Nonrecurring provision for warranty
costs” in 2008 related to an unusually high level of warranty returns of
a specific category of parts. When these parts are subjected to certain
conditions, they experience a higher than normal failure rate. As a result of
the higher than normal failure rate, a $6.7 million warranty loss provision was
recorded in 2008. We modified the design of these parts in 2008 to eliminate
this issue.
The 2009
$5.0 million and the 2008 $7.8 million of “new business changeover and
sales commitment costs”
were up-front costs incurred to obtain new business and to extend existing
long-term sales commitments.
The 2009
$0.5 million and 2008 $3.1 million of “costs to establish
additional manufacturing in China”
related to start-up costs establishing two new factories in
China.
Excluding
the special items, adjusted gross profit increased to $205.9 million in 2009
from $195.6 million in 2008, and the related gross margin percentage increased
to 23.1% in 2009 from 21.9% in 2008. The gross margin percentage is based on
sales before the effects of obtaining new business and deducting the $6.7
million warranty loss provision in 2008, which are discussed in the net sales
comparison above.
The
higher gross profit in 2009 as compared to 2008 was primarily due to the
favorable effects of cost reduction initiatives to align our cost structure with
our customers’ spending and current market conditions, lower commodity and
energy costs, favorable exchange rates and price increases. The cost reduction
initiatives included workforce reductions and other employee cost saving
actions, as well as the institution of tight controls over discretionary
spending. Partially offsetting these factors were higher product
returns expense (excluding the aforementioned special $6.7 million charge in
2008) and a higher percentage of third-party sourced products which have lower
margins than manufactured product.
Selling
and warehousing expenses. Selling and warehousing expenses were $56.6
million in 2009; $6.3 million lower than 2008. The reduction was driven by cost
saving initiatives to reduce headcount, and tight controls over discretionary
spending. Selling and warehousing expenses were 6.4% of sales in 2009 and 7.1%
in 2008.
General
and administrative expenses. General and administrative expenses were
$47.7 million in 2009 and $51.6 million in 2008, a decrease of $3.9
million. Costs incurred in connection with our antitrust litigation
(discussed in Item 3 and in Note 16 to the financial statements included in this
Form 10-K) were $1.5 million in 2009 as compared to $4.0 million in 2008
accounting for $2.5 million of the decrease in general and administrative
expenses. The 2009 reduction also included the favorable effects of
lower salary expense due to headcount reductions and lower bad debt expense. The
reduction in 2009 compared to 2008 was also attributable to 2008 costs
associated with establishing two factories in China. These cost reductions were
partially offset by $1.8 million of higher severance expense in 2009 and higher
other employee costs related to matters other than headcount.
35
Restructuring
costs. See Note 2 to the financial statements included in this Form
10-K.
Trademark
impairment loss.
See Note 9 to the financial statements included in this Form
10-K.
Patent
litigation costs. See Note 16 to the
financial statements included in this Form 10-K for a discussion of estimated
costs in connection with an unfavorable jury verdict on a patent infringement
matter.
Interest
expense, net. Net interest expense was $4.9 million lower in 2009
compared to 2008. This reduction was primarily due to lower interest rates in
2009.
Income
tax expense. Income tax expense was $9.4 million higher in 2009 as
compared to 2008 due to higher pre-tax income in 2009. For reasons why the
effective tax rates in both years differ from statutory rates, see the table in
Note 14 to the financial statements included in this Form 10-K, which reconciles
income taxes computed at the U.S. federal statutory rate to income tax
expense.
Net
income. Due to the factors described above, we reported a net income of
$8.5 million in 2009 compared to a net loss of $12.4 million in
2008.
Net
income attributable to UCI Holdco, Inc. After deducting losses
attributable to a noncontrolling interest, net income attributable to UCI
Holdco, Inc. was $9.2 million in 2009, compared to a net loss of $11.6 million
in 2008.
Year
Ended December 31, 2008 compared with Year Ended December 31, 2007
Net
sales. Net sales of $880.4 million in 2008 declined $89.4 million, or
9.2%, compared to net sales of $969.8 million in 2007. The 2007 sales included
$12.1 million of sales to AutoZone in connection with the termination of the
Pay-on-Scan program for certain of our products. Sales in 2008 were reduced by a
$6.7 million loss provision resulting from the unusually high level of warranty
returns related to a category of parts. In connection with obtaining new
business, sales were reduced by $7.8 million in 2008 and $7.5 million in 2007.
These reductions were the result of accepting returns of the inventory of our
customers’ previous suppliers in connection with securing new business with our
customers.
Excluding
the $12.1 million of 2007 sales associated with the termination of the
Pay-on-Scan program, the 2008 $6.7 million warranty loss provision, and the
effects of obtaining new business from both periods, sales were 7.3% lower in
2008 compared to 2007. This 7.3% decrease includes lower sales to all of our
market channels. Automotive aftermarket sales that comprise approximately 87% of
our sales were down approximately 7.7% compared to 2007. Within the automotive
aftermarket channel, our traditional channel sales were down approximately 10.0%
while retail channel sales were down approximately 2.5%. We believe the larger
decline in the traditional sales channel is reflective of a shift to the retail
channel as (i) consumers shift away from do-it-for-me to do-it-yourself and (ii)
retail outlets expand their sales to commercial accounts. OEM sales, which
comprise only 8% of our sales, decreased approximately 26.0% compared to 2007
due to the significant downturn in the automotive industry. We believe that the
sales decline was due primarily to general economic conditions in the United
States, including the impact of record gasoline prices on miles driven and
consumers’ spending habits.
Gross
profit. Gross
profit, as reported, was $177.9 million for 2008 and $221.0 million for 2007.
Both periods included special items which are presented in the following table
along with a comparison of adjusted gross profit after excluding such special
items. Adjusted gross profit is a non-GAAP financial measurement of our
performance. This non-GAAP measure is not in accordance with, nor is it a
substitute for, GAAP measures. It is intended to supplement our presentation of
our financial results that are prepared in accordance with GAAP. We use adjusted
gross profit as presented to evaluate and manage Holdco’s operations internally.
You are encouraged to evaluate each adjustment and whether you consider each to
be appropriate.
36
2008
|
2007
|
|||||||
(in
millions)
|
||||||||
Gross
profit, as reported
|
$ | 177.9 | $ | 221.0 | ||||
Add
back special items:
|
||||||||
Nonrecurring
provision for warranty costs
|
6.7 | — | ||||||
Water
pump integration costs
|
— | 5.5 | ||||||
New
business changeover and sales commitment costs
|
7.8 | 5.2 | ||||||
Facilities
consolidation and severance costs
|
0.1 | 0.3 | ||||||
Costs
to establish additional manufacturing in China
|
3.1 | 0.7 | ||||||
Resolution
of pre-acquisition matters
|
— | (0.9 | ) | |||||
Reserve
for resolution of disputed non-trade receivables
|
— | 0.8 | ||||||
$ | 195.6 | $ | 232.6 |
The “Nonrecurring provision for warranty
costs” in 2008 related to an unusually high level of warranty returns
related to a specific category of parts. When these parts are subjected to
certain conditions, they experience a higher than normal failure rate. As a
result of the higher than normal failure rate, a $6.7 million warranty loss
provision was recorded in 2008. We have modified the design of these parts to
eliminate this issue.
The 2007
$5.5 million of “water pump
integration costs” relate to the integration of the ASC water pump
operation and the water pump operation that we owned before we acquired ASC. In
2007, we completed the integration, closed our previously owned factory, and
transferred production to ASC. These costs include (i) costs and operating
inefficiencies caused by the wind-down of our previously owned factory, (ii)
transportation and other costs directly related to completing the integration,
and (iii) a write-off of component parts that could not be used after production
was transitioned to the ASC product design. The 2007 amount also included $0.8
million of costs incurred to minimize the write-off of component parts that
would not be usable when production was transitioned to the ASC product
design.
The 2008
$7.8 million and the 2007 $5.2 million of “new business changeover and
sales commitment costs”
were up-front costs incurred to obtain new business and to extend existing
long-term sales commitments.
The 2008
$3.1 million and 2007 $0.7 million of “costs to establish
additional manufacturing in China”
related to start-up costs establishing two new factories in
China.
Excluding
the special items, adjusted gross profit decreased to $195.6 million in 2008
from $232.6 million in 2007, and the related gross margin percentage decreased
to 21.9% in 2008 from 23.8% in 2007. The gross margin percentage is based on
sales before the effects of obtaining new business and deducting the $6.7
million warranty loss provision in 2008, which are discussed in the net sales
comparison above.
When
comparing 2008 and 2007 gross profit excluding the special items, lower sales
volume in 2008 was the largest factor in our gross profit decline. The 2008
results were also adversely affected by the impact of significantly higher
energy and commodity costs and currency fluctuations. Inflation-driven wage
increases and higher warranty expense also contributed to the lower profits in
the 2008 period compared to 2007. Partially offsetting these adverse effects
were the benefits of our ongoing manufacturing cost reduction
initiatives.
Selling
and warehousing expenses. Selling and warehousing expenses were $62.9
million in 2008, $1.7 million higher than 2007. The increase included additional
upfront costs associated with new business with an existing customer and the
addition of sales and marketing personnel in targeted areas. The increase also
included the effects of inflation on employee related and other costs. The
effect of lower sales volume partially offset these increases. Selling and
warehousing expenses were 7.1% of sales in 2008 and 6.3% in 2007.
General
and administrative expenses. General and administrative expenses were
$51.6 million in 2008 and $49.9 million in 2007. 2008 included $4.0 million of
costs incurred in connection with our antitrust litigation (discussed in Item 3
and in Note 16 to the financial statements included in this Form 10-K),
inflation driven cost increases, $1.3 million higher expense for the cost of
litigation and settlement of disputed matters, $2.2 million higher bad debt
expense and $0.4 million of severance costs resulting from employee lay-offs.
These cost increases were offset by lower employee bonus expense and $2.6
million lower stock option related costs.
37
Restructuring
costs. See Note 2 to the financial statements included in this Form
10-K.
Trademark
impairment loss.
See Note 9 to the financial statements included in this Form
10-K.
Interest
expense, net. Net interest expense was $7.5 million lower in 2008
compared to 2007. This reduction was due to lower debt levels and lower interest
rates in 2008. Also, accelerated amortization of deferred financing costs
associated with the voluntary prepayments of debt was $0.5 million higher in
2007.
Income
tax expense. Income tax expense was $12.7 million lower in 2008 as
compared to 2007 due to lower pre-tax income in 2008. For reasons why the
effective tax rates in both years differ from statutory rates, see the table in
Note 14 to the financial statements included in this Form 10-K, which reconciles
income taxes computed at the U.S. federal statutory rate to income tax
expense.
Gain on
sale of discontinued operations, net of tax. See Note 3 to the financial
statements included in this Form 10-K.
Net
income. Due to the factors described above, we reported a net loss of
$12.4 million in 2008 compared to a net income of $14.0 million in
2007.
Net
income attributable to UCI Holdco, Inc. After deducting losses
attributable to a noncontrolling interest, net loss attributable to UCI Holdco,
Inc. was $11.6 million in 2008, compared to net income of $16.8 million in
2007.
Liquidity
and Capital Resources
Historical
Cash Flows
Net
cash provided by operating activities.
Year Ended December 31,
2009
Net cash
provided by operating activities in 2009 was $129.3 million. Profits, before
deducting depreciation and amortization, non-cash interest on the Holdco Notes
of $28.9 million and other non-cash items, generated $78.9 million of cash. A
decrease in inventory resulted in a generation of cash of $27.0 million. The
decrease in inventory was due to (i) focused efforts to reduce inventory
investments through improved inventory turns, (ii) higher sales in the fourth
quarter of 2009 compared to the fourth quarter of 2008 and (iii) reduced
material costs as compared to December 31, 2008 resulting from decreases in
costs of certain commodities used in our operations. An increase in accounts
payable resulted in a generation of cash of $7.2 million. The increase in
accounts payable was due to initiatives with our vendors to reduce our working
capital investment levels, which offset reductions in accounts payable related
to the significantly lower inventory balances at December 31, 2009 compared to
December 31, 2008. A decrease in accounts receivable resulted in a generation of
cash of $1.0 million. The decrease in accounts receivable was due to an increase
in factored accounts receivable during 2009. This decrease was
largely offset by an increase in sales of $25.6 million in the third and fourth
quarters of 2009, as compared to the third and fourth quarters of 2008, and the
impact of the higher mix of retail and traditional channel sales in relation to
OEM and OES channels. Accounts receivable dating terms with OEM and OES
customers are significantly shorter than retail and traditional customers. As a
result of the higher mix of retail and traditional channel sales, gross account
receivable days sales outstanding has increased. The effect of higher sales and
changes in channel mix changes was partially offset by an increase in factored
accounts receivable during 2009. Factored accounts receivable totaled $121.5
million and $80.1 million at December 31, 2009 and December 31, 2008,
respectively.
Changes
in all other assets and liabilities netted to a $15.2 million increase in cash.
This amount consisted primarily of timing of payment of employee-related accrued
liabilities, including salaries and wages, incentive compensation and employee
insurance, timing of product returns and customer rebates and credits, timing of
income tax payments and the accrual for the adverse patent litigation
verdict.
38
Year
Ended December 31, 2008
Net cash
provided by operating activities in 2008 was $31.7 million. Profits, before
deducting depreciation and amortization, non-cash interest of $29.8 million and
other non-cash items, generated $56.5 million. An increase in accounts
receivable and inventory resulted in the use of cash of $9.5 million and $19.1
million, respectively. The increase in accounts receivable was primarily due to
increased days sales outstanding as a result of increased accounts receivable
dating terms with certain customers, partially offset by lower sales in the
latter half of 2008. Factored accounts receivable totaled $80.1 million and
$81.1 million at December 31, 2008 and 2007, respectively. The increase in
inventory was due to (i) lower than expected sales in the fourth quarter of
2008, (ii) higher inventory levels to support new business wins that began to
ship in the first quarter of 2009, (iii) higher raw material costs resulting
from the significant increases experienced in commodity costs in 2008 and (iv)
increased production related to the ramp up of our Chinese operations. An
increase in accounts payable resulted in a generation of cash of $3.0 million.
Changes in all other assets and liabilities netted to a $0.8 million generation
of cash. This amount included income tax refunds resulting from the carryback of
2006 operating losses to 2004, partially offset by employee-related accrued
liabilities, including annual employee bonus and profit sharing payments, due to
headcount reductions and the lower operating performance in 2008 as compared to
2007.
Year Ended December 31,
2007
Net cash
provided by operating activities in 2007 was $93.1 million. Profits,
before deducting depreciation and amortization, non-cash interest on the Holdco
Notes of $30.7 million, the $3.6 million non-cash trademark impairment loss and
other non-cash items, and excluding the $1.7 million gain on the sale of Mexican
land and building, generated $102.5 million. An increase in accounts
receivable resulted in the use of $24.9 million of cash. This
increase was the result of higher sales and, in certain cases, extended payment
terms. Net inventory reductions generated $15.4 million of
cash. An increase in accounts payable, due to normal fluctuations in
the timing of purchases and payments, generated $9.5 million of
cash. The use of 2006 net operating losses lowered tax payments that
otherwise would have been paid by $3.3 million. Changes in all other
assets and liabilities netted to a $12.7 million negative effect on
cash.
Net cash
used in investing activities. Historically, net cash used in investing
activities has been for capital expenditures, including routine expenditures for
equipment replacement and efficiency improvements, offset by proceeds from the
disposition of property, plant and equipment. Capital expenditures for the years
ended December 31, 2009, 2008 and 2007 were $15.3 million, $31.9 million and
$29.7 million, respectively. The lower capital expenditures in 2009 are the
result of capital spending being limited to expenditures necessary to maintain
current operations and projects that have short payback periods. The
2008 and 2007 amounts included $3.6 million and $1.7 million, respectively, for
our two new factories in China.
Proceeds
from the sale of property, plant and equipment for the years ended December 31,
2009, 2008 and 2007 were $2.6 million, $0.4 million and $10.7 million,
respectively. In 2009, in order to accommodate expected growth in the European
market, our Spanish operation was relocated to a new leased facility resulting
in the idling of an owned facility. Proceeds for 2009 primarily related to the
sale of that facility. In 2007, we received $6.6 million, net of fees
and expenses, from the sale of the land and building of the Mexican filtration
operation that was closed in 2006. Also in 2007, we received $2.2 million, net
of fees and expenses, of additional proceeds from the 2006 sale of our lighting
systems operations.
During
the second quarter of 2009, we posted $9.4 million of cash to collateralize a
letter of credit required by our workers’ compensation insurance carrier.
Historically, assets pledged pursuant to the terms of our senior credit facility
provided the collateral for the letters of credit. As a result of the revolving
credit facility termination, we were required to post $9.4 million of cash to
collateralize the letter of credit. This cash is recorded as “Restricted cash”
as a component of long-term assets on Holdco’s balance sheet at December 31,
2009. This cash is not available for general operating purposes as long as the
letter of credit remains outstanding or until alternative collateral is
posted.
39
Net cash
provided by / used in financing activities. Net cash used by financing
activities in 2009 was $22.0 million. Net cash provided by financing
activities in 2008 was $4.6 million, while net cash used in financing activities
in 2007 was $64.1 million.
Borrowings
of $13.2 million during 2009 consisted solely of short-term borrowings payable
to foreign credit institutions. In 2008, we borrowed $20.0 million
under UCI’s revolving credit line to increase our short-term liquidity in light
of the current challenging capital markets. The $8.0 million remainder of our
borrowings during 2008 consisted of short-term borrowings payable to foreign
credit institutions. Borrowings of $20.8 million during 2007 consisted solely of
short-term borrowings payable to foreign credit institutions.
During
the second quarter of 2009, we repaid the $20.0 million of outstanding
borrowings under UCI’s revolving credit facility. In 2008 and 2007,
we used cash on hand to voluntarily repay $10.0 million and $65.0 million,
respectively, of our term loan. Additionally, during 2009, 2008 and 2007, our
Spanish and Chinese subsidiaries repaid short-term notes borrowings to foreign
credit institutions in the amount of $14.9 million, $12.9 million and $19.3
million, respectively.
Current
Debt Capitalization and Scheduled Maturities
At
December 31, 2009 and 2008, Holdco had $131.9 million and $46.7 million of cash
and cash equivalents, respectively. Outstanding debt was as follows (in
millions):
December 31,
|
||||||||
2009
|
2008
|
|||||||
UCI
short-term borrowings
|
$ | 3.5 | $ | 5.2 | ||||
UCI
revolving credit line borrowing
|
— | 20.0 | ||||||
UCI
capital lease obligations
|
0.9 | 1.2 | ||||||
UCI
term loan
|
190.0 | 190.0 | ||||||
Holdco
floating rate senior PIK notes
|
324.1 | 295.1 | ||||||
UCI
senior subordinated notes
|
230.0 | 230.0 | ||||||
Amount
of debt requiring repayment
|
748.5 | 741.5 | ||||||
Unamortized
debt discount and issuance costs
|
(6.9 | ) | (8.6 | ) | ||||
$ | 741.6 | $ | 732.9 |
Short-term
borrowings are routine short-term borrowings by our foreign
operations.
Because
of previous prepayments of our term loan, we do not have any scheduled
repayments of the senior credit facility term loan until December 2011. While
there are no scheduled repayments until December 2011, the senior credit
facility does require mandatory prepayments of the term loan when we generate
Excess Cash Flow as defined in the senior credit facility. We generated Excess
Cash Flow in the year ending December 31, 2009 resulting in a mandatory
prepayment of $17.7 million, payable within 95 days of December 31, 2009. This
mandatory prepayment is presented as a component of Current maturities of
long-term debt in the Company’s Consolidated Balance Sheet at December 31,
2009. The term loan matures in June 2012. UCI’s $230.0 million senior
subordinated notes are due in 2013.
The
Holdco Notes are due in 2013. Interest on the Holdco Notes will be paid by
issuing new notes until December 2011. Therefore, the Holdco Notes will not
affect our cash flow through 2011. Thereafter, all interest will be payable in
cash. On March 15, 2012, and each quarter thereafter, Holdco is required to
redeem for cash a portion of each note required to be redeemed to prevent the
Holdco Notes from being treated as an applicable high yield discount obligation.
In the schedule below, the $89.1 million of Holdco Notes that were issued in
lieu of cash interest through December 31, 2009, have been included in the 2012
debt repayment amount. Depending on the circumstances, a portion of the $89.1
million may be paid after 2012.
40
Below is
a schedule of required future debt repayments. The 2010 amount consists
primarily of the mandatory prepayment of term debt of $17.7 million resulting
from the generation of Excess Cash Flow in 2009 and routine short-term
borrowings by UCI’s foreign operations. The amounts are presented in millions of
dollars.
2010
|
$ | 21.4 | ||
2011
|
41.0 | |||
2012
|
220.8 | |||
2013
|
465.1 | |||
2014
|
0.1 | |||
Thereafter
|
0.1 | |||
$ | 748.5 |
The terms
of UCI’s senior credit facility permit us to repurchase from time to time up to
$75.0 million in aggregate principal amount of senior subordinated notes. As of
March 19, 2010, neither we nor UCI had repurchased any of the senior
subordinated notes, although we or UCI may, under appropriate market conditions,
do so in the future through cash purchases or exchange offers, in open market,
privately negotiated or other transactions. Similarly, we may from time to time
seek to repurchase or retire the Holdco Notes. We will evaluate any such
transactions in light of then-existing market conditions, taking into account
contractual restrictions, our current liquidity and prospects for future access
to capital. The amounts involved may be material.
Our
significant debt service obligation is an important factor when assessing
Holdco’s liquidity and capital resources. At our December 31, 2009 debt level
and borrowing rates, annual interest expense, including amortization of deferred
financing costs and debt discount, is approximately $59.0 million. An increase
of 0.25 percentage points (25 basis points) on our variable interest rate debt
would increase our annual interest cost by $1.3 million.
Covenant
Compliance
UCI’s
senior credit facility requires us to maintain certain financial covenants and
requires mandatory prepayments under certain events as defined in the agreement.
Also, the facilities include certain negative covenants restricting or limiting
our ability to, among other things: declare dividends or redeem stock; prepay
certain debt; make loans or investments; guarantee or incur additional debt;
make capital expenditures; engage in acquisitions or other business
combinations; sell assets and alter our business. In addition, the senior credit
facility contains the following financial covenants: a maximum leverage ratio
and a minimum interest coverage ratio. The financial covenants are calculated on
a trailing four consecutive quarters basis based on the operating results and
indebtedness of UCI on a stand-alone basis. As of December 31, 2009, UCI was in
compliance with all of these covenants.
UCI’s
covenant compliance levels and ratios for the quarter ended December 31, 2009
are as follows:
Covenant
Compliance Level
for the Quarter Ended
December 31, 2009
|
Actual
Ratios
|
|||||||
Minimum
Adjusted EBITDA to interest expense ratio
|
2.80 | x | 4.54 | x | ||||
Maximum
total debt to Adjusted EBITDA ratio
|
4.10 | x | 3.17 | x |
The
minimum interest coverage ratio and maximum leverage ratio levels become
increasingly more restrictive over time. UCI’s senior credit facility provides
for a minimum Adjusted EBITDA to interest expense ratio and a maximum total debt
to Adjusted EBITDA ratio as set forth opposite the corresponding fiscal
quarter.
Minimum
Adjusted
EBITDA
to
Interest
Expense
Covenant
Compliance
Level
|
Maximum
Total Debt
to
Adjusted
EBITDA
Covenant
Compliance
Level
|
|||||||
Quarter
ending March 31, 2010
|
3.00 | x | 3.75 | x | ||||
Quarter
ending June 30, 2010
|
3.00 | x | 3.75 | x | ||||
Quarter
ending September 30, 2010 and thereafter
|
3.00 | x | 3.50 | x |
41
Adjusted
EBITDA is used to determine UCI’s compliance with many of the covenants
contained in UCI’s senior credit facilities. Adjusted EBITDA is defined as
EBITDA further adjusted to exclude unusual items and other adjustments permitted
by our lenders in calculating covenant compliance under UCI’s senior credit
facility.
We
believe that the inclusion of debt covenant related adjustments to EBITDA
applied in presenting Adjusted EBITDA is appropriate to provide additional
information to investors to demonstrate compliance with our financing
covenants.
A breach
of covenants in UCI’s senior credit facilities that are tied to ratios based on
Adjusted EBITDA could result in a default under those facilities and the lenders
could elect to declare all amounts borrowed due and payable. Any such
acceleration would also result in a default under UCI’s senior subordinated
notes.
EBITDA
and Adjusted EBITDA are not recognized terms under U.S. GAAP (Accounting
Principles Generally Accepted in the United States) and do not purport to be
alternatives to net income as a measure of operating performance. Additionally,
EBITDA and Adjusted EBITDA are not intended to be measures of free cash flow for
management’s discretionary use, as they do not consider certain cash
requirements such as interest payments, tax payments and debt service
requirements.
The
following table reconciles net income to EBITDA and Adjusted EBITDA. The amounts
are based on UCI’s income statement on a UCI stand-alone basis. The
amounts are in millions of dollars.
Trailing Four
Quarters Ended
Dec. 31, 2009
|
||||
Net
income attributable to UCI
|
$ | 30.6 | ||
Interest,
net of minority interest
|
30.0 | |||
Income
tax expense
|
16.5 | |||
Depreciation,
net of minority interest
|
27.9 | |||
Amortization
|
8.5 | |||
EBITDA
|
113.5 | |||
Special
items:
|
||||
Restructuring
costs, net
|
1.2 | |||
Reduction
in force severance
|
2.8 | |||
Patent
litigation costs
|
7.0 | |||
Cost
of defending class action litigation
|
1.5 | |||
New
business changeover cost and sales commitment costs
|
5.0 | |||
Establishment
of new facilities in China
|
0.5 | |||
Non-cash
charges (stock options expense)
|
0.4 | |||
Management
fee
|
2.0 | |||
Adjusted
EBITDA
|
$ | 133.9 |
Management’s
Action Plan and Outlook
Our
primary sources of liquidity currently are cash on hand, cash flow from
operations and accounts receivable factoring arrangements. At
December 31, 2009, we had $131.9 million of cash and cash equivalents on
hand.
Accounts Receivable
Factoring
Factoring
of customer trade accounts receivable is a significant part of our liquidity.
Subject to certain limitations, UCI’s credit agreement for its senior credit
facility permits sales of and liens on receivables, which are being sold
pursuant to factoring arrangements. At December 31, 2009, we had factoring
relationships with eight banks. The terms of these relationships are such that
the banks are not obligated to factor any amount of receivables. Because of the
current challenging capital markets, it is possible that these banks may not
have the capacity or willingness to fund these factoring arrangements at the
levels they have in the past, or at all.
42
We sold
approximately $225.9 million of receivables in 2009 and approximately $197.9
million in 2008. If receivables had not been factored, $121.5 million and $80.1
million of additional receivables would have been outstanding at December 31,
2009 and December 31, 2008, respectively. If we had not factored these
receivables, we would have had to finance these receivables in some other way or
reduce cash on hand. Our short-term cash projections assume a fairly constant
level of factored accounts receivable with the $121.5 million at December 31,
2009.
Short-Term Liquidity
Outlook
As a
result of the termination of the revolving credit facility in 2009, our ability
to make scheduled payments of principal or interest on, or to refinance, our
indebtedness or to fund capital expenditures will depend on our ability to
generate cash from operations and from factoring arrangements as discussed
previously. Such cash generation is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control.
In
addition to the increased level of factoring previously discussed, we
implemented a number of measures to improve the level of cash generated by our
operations in order to increase our liquidity and to align our cost structure
with our customers’ spending and current market conditions. These restructuring
activities included:
|
•
|
Employment
cost savings — we implemented hourly and salaried workforce reductions
across all overhead and selling, general and administrative cost centers
to align staffing levels with current business levels. At December 31,
2009, we had approximately 4,350 employees as compared to approximately
4,900 at December 31, 2008. Additionally in 2009, we implemented wage
freezes, suspended certain matching contributions to defined contribution
and profit sharing plans and other cost reduction
activities. The wage freeze and suspension of certain matching
contributions continues into 2010.
|
|
•
|
Additional
cost savings — in 2009, we critically evaluated overall overhead and
selling, general and administrative discretionary spending and have
instituted tight controls over discretionary spending, requiring
additional approvals for all such spending across the
Company. The same tight controls over discretionary spending
continue into 2010.
|
2007 and
2008 capital spending levels were higher than 2009 spending levels. Spending
levels in 2007 and 2008 included $5.3 million for our two new facilities in
China which are substantially complete, as well as funds to support other
strategic initiatives. As part of our plans to conserve cash, 2009 capital
spending was limited to expenditures necessary to maintain current operations
and projects that have short payback periods. 2010 capital
expenditures are expected to be in the range of $30 million to $33 million. This
increase over 2009 primarily relates to funding specific targeted cost reduction
opportunities.
Additionally,
we will continue to aggressively manage our investment in working
capital.
Based on
our forecasts, we believe that cash flow from operations and available cash will
be adequate to service debt, meet liquidity needs, and fund necessary capital
expenditures for the next twelve months.
Long-Term Liquidity
Outlook
Holdco is
a holding company with no business operations or assets other than the capital
stock of UCI Acquisition, which itself is a holding company with no operations
or assets other than the capital stock of UCI. Consequently, Holdco is dependent
on loans, dividends, and other payments from UCI to make payments of principal
and interest in cash on the Holdco Notes.
If Holdco
is unable to obtain adequate funds from UCI, it may not be able to pay cash
interest or principal on the Holdco Notes when due. The terms of UCI’s term loan
and senior subordinated notes significantly restrict UCI from paying dividends
and otherwise transferring assets to Holdco. Therefore, we currently anticipate
that in order to pay the principal and interest amounts of the Holdco Notes, we
will be required to adopt one or more alternatives, such as refinancing all or a
portion of Holdco’s indebtedness. In the future, we may also need to refinance
all or a portion of the principal amount of UCI’s senior subordinated notes
and/or senior credit facility borrowings on or prior to maturity. If refinancing
is necessary, there can be no assurance that we will be able to secure such
financing on acceptable terms, or at all.
43
Contractual
Obligations
The
following table is a summary of contractual cash obligations at December 31,
2009 (in millions):
Payments Due by Period
|
||||||||||||||||||||
Less
Than
1 Year
|
1-3 Years
|
3-5 Years
|
More
Than
5 Years
|
Total
|
||||||||||||||||
Debt
repayments (excluding interest) (1)
|
$ | 21.4 | $ | 172.7 | $ | 465.2 | $ | 0.1 | $ | 659.4 | ||||||||||
Interest
payments (2)
|
25.8 | 137.9 | 10.1 |
See
(2) below
|
173.8 | |||||||||||||||
Estimated
pension funding (3)
|
3.1 | 20.4 | 21.7 |
See
(3) below
|
45.2 | |||||||||||||||
Other
postretirement benefit payments (4)
|
0.7 | 1.3 | 1.5 |
See
(4) below
|
3.5 | |||||||||||||||
Operating
leases
|
5.8 | 8.8 | 6.8 | 12.2 | 33.6 | |||||||||||||||
Purchase
obligations (5)
|
70.9 | — | — | — | 70.9 | |||||||||||||||
Management
fee (6)
|
2.0 | 4.0 | 4.0 |
See
(6) below
|
10.0 | |||||||||||||||
Unrecognized
tax benefits (7)
|
||||||||||||||||||||
Employment
agreements
|
0.5 | — | — | — | 0.5 | |||||||||||||||
Total
contractual cash obligations
|
$ | 130.2 | $ | 345.1 | $ | 509.3 | $ | 12.3 | $ | 996.9 |
(1)
|
Debt
repayments exclude $89.1 million of the Holdco Notes which were issued in
lieu of cash interest. See (2) below for a discussion of the catch-up
interest payment.
|
(2)
|
Estimated
interest payments are based on the assumption that (i) December 31, 2009
interest rates will prevail throughout all future periods, (ii) debt is
repaid on its due date, and (iii) no new debt is issued. Interest payments
beyond year 5 are less than $0.1 million. Nevertheless, estimated interest
payments were excluded from the table after year 5. Holdco is required to
make cash payments for all accumulated PIK interest on the Holdco Notes in
2012 or in some combination of 2012 and 2013, depending on certain
circumstances. In the above table, the entire cash payment is presented in
2012.
|
(3)
|
Estimated
pension funding is based on the current composition of pension plans and
current actuarial assumptions. Pension funding will continue beyond year
5. Nevertheless, estimated pension funding is excluded from the table
after year 5. See Note 15 to the financial statements included in this
Form 10-K for the funding status of the Company’s pension plans at
December 31, 2009.
|
(4)
|
Estimated
benefit payments are based on current actuarial assumptions. Benefit
payments will continue beyond year 5. Nevertheless, estimated payments are
excluded from the table after year 5. See Note 15 to the financial
statements included in this Form 10-K for the funding status of the
Company’s other postretirement benefit plans at December 31,
2009.
|
(5)
|
Included
in the purchase obligations is $8.2 million related to property, plant and
equipment. The remainder is for materials, supplies and services routinely
used in the Company’s normal
operations.
|
(6)
|
The
management fee is excluded from the table after year 5. The management fee
is expected to continue at an annual rate of $2.0 million as long as the
ownership of the Company does not
change.
|
(7)
|
Possible
payments of $3.9 million related to unrecognized tax benefits are not
included in the table because management cannot make reasonable reliable
estimates of when cash settlement will occur, if ever. These unrecognized
tax benefits are discussed in Note 14 to the financial statements included
in this Form 10-K.
|
44
Commitments
and Contingencies
Environmental
Holdco is
subject to a variety of federal, state, local and foreign environmental laws and
regulations, including those governing the discharge of pollutants into the air
or water, the management and disposal of hazardous substances or wastes, and the
cleanup of contaminated sites. Holdco has been identified as a potentially
responsible party for contamination at two sites. One of these sites is a former
facility in Edison, New Jersey (the “New Jersey Site”), where a state agency has
ordered Holdco to continue with the monitoring and investigation of chlorinated
solvent contamination. The New Jersey Site has been the subject of litigation to
determine whether a neighboring facility was responsible for contamination
discovered at the New Jersey Site. A judgment has been rendered in that
litigation to the effect that the neighboring facility is not responsible for
the contamination. Holdco is analyzing what further investigation and
remediation, if any, may be required at the New Jersey Site. The second site is
a previously owned site in Solano County, California (the “California Site”),
where Holdco, at the request of the regional water board, is investigating and
analyzing the nature and extent of the contamination and is conducting some
remediation. Based on currently available information, management believes that
the cost of the ultimate outcome of the environmental matters related to the New
Jersey Site and the California Site will not exceed the $1.6 million accrued at
December 31, 2009 by a material amount, if at all. However, because all
investigation and analysis has not yet been completed and due to the inherent
uncertainty in such environmental matters, it is possible that the ultimate
outcome of these matters could have a material adverse effect on results for a
single quarter. Expenditures for these environmental matters totaled $0.4
million in each 2009, 2008 and 2007.
In
addition to the two matters discussed above, Holdco has been named as a
potentially responsible party at a site in Calvert City, Kentucky (the “Kentucky
Site”). Holdco estimates settlement costs at $0.1 million for this site. Also,
Holdco is involved in regulated remediation at two of its manufacturing sites
(the “Manufacturing Sites”). The combined cost of the remaining remediation at
such Manufacturing Sites is $0.3 million. Holdco anticipates that the majority
of the $0.4 million reserved for settlement and remediation costs will be spent
in the next year. To date, the expenditures related to the Kentucky Site and the
Manufacturing Sites have been immaterial.
Antitrust
Litigation
We are
subject to litigation and investigation related to pricing of aftermarket oil,
air, fuel and transmission filters, as described in “Part I, Item 3. Legal
Proceedings” in this Form 10-K. We intend to vigorously defend
against these claims. No amounts, other than ongoing defense costs,
have been recorded in the financial statements for this matter.
Value-added
Tax Receivable
Holdco’s
Mexican operation has outstanding receivables denominated in Mexican pesos in
the amount of $3.7 million from the Mexican Department of Finance and Public
Credit, which are included in the balance sheet in “Other current assets”. The
receivables relate to refunds of Mexican value-added tax, to which Holdco
believes it is entitled in the ordinary course of business. The local Mexican
tax authorities have rejected Holdco’s claims for these refunds, and Holdco has
commenced litigation in the regional federal administrative and tax courts in
Monterrey to order the local tax authorities to process these
refunds.
Patent
Litigation
Champion
is a defendant in litigation with Parker-Hannifin Corporation pursuant to which
Parker-Hannifin claims that certain of Champion’s products infringe a
Parker-Hannifin patent. On December 11, 2009, following trial, a jury verdict
was reached, finding in favor of Parker-Hannifin with damages of approximately
$6.5 million. No judgment has yet been entered by the court in this
matter. Champion continues to vigorously defend this matter; however,
there can be no assurance with respect to the outcome of litigation. Holdco has
recorded a $6.5 million liability in the financial statements for this
matter.
45
Other
Litigation
Holdco is
subject to various other contingencies, including routine legal proceedings and
claims arising out of the normal course of business. These proceedings primarily
involve commercial claims, product liability claims, personal injury claims and
workers’ compensation claims. The outcome of these lawsuits, legal proceedings
and claims cannot be predicted with certainty. Nevertheless, Holdco believes
that the outcome of any currently existing proceedings, even if determined
adversely, would not have a material adverse effect on Holdco’s financial
condition or results of operations.
Recently
Adopted Accounting Guidance
See the
Recently Adopted Accounting Guidance section of Note 1 to the Consolidated
Financial Statements in Part II Item 8 of this Form 10-K.
Recently
Issued Accounting Guidance
See the
Recently Issued Accounting Guidance section of Note 1 to the Consolidated
Financial Statements in Part II Item 8 of this Form 10-K.
ITEM 7A. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our
exposure to market risk consists of foreign currency exchange rate fluctuations
and changes in interest rates.
Foreign
Currency Exposure
Currency
translation. As
a result of international operating activities, we are exposed to risks
associated with changes in foreign exchange rates, principally exchange rates
between the U.S. dollar and the Mexican peso, British pound and the Chinese
Yuan. The results of operations of our foreign subsidiaries are translated into
U.S. dollars at the average exchange rates for each relevant period, except for
our Chinese subsidiaries, where cost of sales is translated primarily at
historical exchange rates. This translation has no impact on our cash flow.
However, as foreign exchange rates change, there are changes to the U.S. dollar
equivalent of sales and expenses denominated in foreign currencies. In 2009,
approximately 8% of our net sales were made by our foreign subsidiaries. Their
combined net income was not material. While these results, as measured in U.S.
dollars, are subject to foreign exchange rate fluctuations, we do not consider
the related risk to be material to our financial condition or results of
operations.
Except
for the Chinese subsidiaries, the balance sheets of foreign subsidiaries are
translated into U.S. dollars at the closing exchange rates as of the relevant
balance sheet date. Any adjustments resulting from the translation are recorded
in accumulated other comprehensive income (loss) on our statements of changes in
shareholders’ equity (deficit). For our Chinese subsidiaries, non-monetary
assets and liabilities are translated into U.S. dollars at historical rates and
monetary assets and liabilities are translated into U.S. dollars at the closing
exchange rate as of the relevant balance sheet date. Adjustments resulting from
the translation of the balance sheets of our Chinese subsidiaries are recorded
in our income statements.
Currency
transactions.
Currency transaction exposure arises where actual sales and purchases are
made by a company in a currency other than its own functional currency. In 2010,
we expect to source approximately $112 million of components from China. To the
extent possible, we structure arrangements where the purchase transactions are
denominated in U.S. dollars as a means to minimize near-term exposure to foreign
currency fluctuations. During the period from December 31, 2007
through June 30, 2008, the Chinese Yuan strengthened against the U.S. dollar by
approximately 6%. Since June 30, 2008, the relationship of the U.S. dollar to
the Chinese Yuan has remained stable.
46
A
weakening U.S. dollar means that we must pay more U.S. dollars to obtain
components from China, which equates to higher cost of sales. If we are unable
to negotiate commensurate price decreases from our Chinese suppliers, these
higher prices would eventually translate into higher cost of sales. In that
event we would attempt to obtain corresponding price increases from our
customers, but there are no assurances that we would be successful.
Our
Mexican operations source a significant amount of inventory from the United
States. During the period September 30, 2008 through March 31, 2009, the U.S.
dollar strengthened against the Mexican peso by approximately 33%. During the
period March 31, 2009 through December 31, 2009, the U.S. dollar weakened
against the Mexican peso by approximately 11%, partially offsetting the trend
experienced in the prior six months. A strengthening U.S. dollar against the
Mexican peso means that our Mexican operations must pay more pesos to obtain
inventory from the United States. These higher prices translate into higher cost
of sales for our Mexican operations. We are attempting to obtain corresponding
price increases from our customers served by our Mexican operations, but the
weakness in the Mexican economy has limited the ability to entirely offset the
higher cost of sales.
We will
continue to monitor our transaction exposure to currency rate changes and may
enter into currency forward and option contracts to limit the exposure, as
appropriate. Gains and losses on contracts are deferred until the transaction
being hedged is finalized. As of December 31, 2009, we had no foreign currency
contracts outstanding. We do not engage in speculative activities.
Interest
Rate Risk
We
utilize, and we will continue to utilize, sensitivity analyses to assess the
potential effect of our variable rate debt. If variable interest rates were to
increase by 0.25% per annum, the net impact would be a decrease of approximately
$0.8 million of our net income and cash flow.
Treasury
Policy
Our
treasury policy seeks to ensure that adequate financial resources are available
for the development of our businesses while managing our currency and interest
rate risks. Our policy is to not engage in speculative transactions. Our
policies with respect to the major areas of our treasury activity are set forth
above.
47
ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
Page
|
|
Report
of Independent Registered Public Accounting Firm
|
49
|
Consolidated
Financial Statements
|
|
Consolidated
Balance Sheets
|
50
|
Consolidated
Income Statements
|
51
|
Consolidated
Statements of Cash Flows
|
52
|
Consolidated
Statements of Changes in Shareholders’ Equity (Deficit)
|
53
|
Notes
to Consolidated Financial Statements
|
54
|
48
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and Shareholders
UCI
Holdco, Inc. and subsidiaries
We have
audited the accompanying consolidated balance sheets of UCI Holdco, Inc. and
subsidiaries (the “Company”) (a Delaware corporation) as of December 31, 2009
and 2008, and the related consolidated statements of income, shareholders’
equity and cash flows for each of the three years in the period ended December
31, 2009. These consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of UCI Holdco, Inc. and
subsidiaries as of December 31, 2009 and 2008, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2009 in conformity with accounting principles generally accepted in
the United States of America.
As
discussed in Note 1, the Company’s consolidated financial statements have been
adjusted retrospectively for presentation associated with noncontrolling
interests in 2009 and, as discussed in Note 14, the Company changed its
method of accounting for uncertain tax positions in 2007.
/s/ GRANT
THORNTON LLP
Cincinnati,
Ohio
March 19,
2010
49
UCI
Holdco, Inc.
Consolidated
Balance Sheets
(in
thousands)
December 31,
|
||||||||
2009
|
2008
|
|||||||
Assets
|
||||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$ | 131,942 | $ | 46,655 | ||||
Accounts
receivable, net
|
261,210 | 261,624 | ||||||
Inventories,
net
|
133,058 | 159,444 | ||||||
Deferred
tax assets
|
31,034 | 30,378 | ||||||
Other
current assets
|
23,499 | 19,452 | ||||||
Total
current assets
|
580,743 | 517,553 | ||||||
Property,
plant and equipment, net
|
149,753 | 167,906 | ||||||
Goodwill
|
241,461 | 241,461 | ||||||
Other
intangible assets, net
|
68,030 | 74,606 | ||||||
Deferred
financing costs, net
|
3,164 | 4,307 | ||||||
Restricted
cash
|
9,400 | — | ||||||
Other
long-term assets
|
6,304 | 1,823 | ||||||
Total
assets
|
$ | 1,058,855 | $ | 1,007,656 | ||||
Liabilities and shareholders’ equity
(deficit)
|
||||||||
Current
liabilities
|
||||||||
Accounts
payable
|
$ | 111,898 | $ | 104,416 | ||||
Short-term
borrowings
|
3,460 | 25,199 | ||||||
Current
maturities of long-term debt
|
17,925 | 422 | ||||||
Accrued
expenses and other current liabilities
|
108,147 | 88,983 | ||||||
Total
current liabilities
|
241,430 | 219,020 | ||||||
Long-term
debt, less current maturities
|
720,202 | 707,264 | ||||||
Pension
and other postretirement liabilities
|
70,802 | 79,832 | ||||||
Deferred
tax liabilities
|
8,785 | 4,000 | ||||||
Other
long-term liabilities
|
6,672 | 2,540 | ||||||
Total
liabilities
|
1,047,891 | 1,012,656 | ||||||
Contingencies
— Note 16
|
||||||||
Shareholders’
equity (deficit)
|
||||||||
UCI
Holdco, Inc. shareholders’ equity (deficit)
|
||||||||
Common
stock
|
29 | 29 | ||||||
Additional
paid in capital
|
279,485 | 279,141 | ||||||
Retained
deficit
|
(237,858 | ) | (247,060 | ) | ||||
Accumulated
other comprehensive loss
|
(32,502 | ) | (39,600 | ) | ||||
Total
UCI Holdco, Inc. shareholders’ equity (deficit)
|
9,154 | (7,490 | ) | |||||
Noncontrolling
interest
|
1,810 | 2,490 | ||||||
Total
equity (deficit)
|
10,964 | (5,000 | ) | |||||
Total
liabilities and equity (deficit)
|
$ | 1,058,855 | $ | 1,007,656 |
The
accompanying notes are an integral part of these statements.
50
UCI
Holdco, Inc.
Consolidated Income
Statements
(in
thousands)
Year ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Net
sales
|
$ | 884,954 | $ | 880,441 | $ | 969,782 | ||||||
Cost
of sales
|
685,356 | 702,522 | 748,822 | |||||||||
Gross
profit
|
199,598 | 177,919 | 220,960 | |||||||||
Operating
(expenses) income
|
||||||||||||
Selling
and warehousing
|
(56,598 | ) | (62,906 | ) | (61,146 | ) | ||||||
General
and administrative
|
(47,763 | ) | (51,612 | ) | (49,948 | ) | ||||||
Amortization
of acquired intangible assets
|
(5,758 | ) | (6,349 | ) | (7,000 | ) | ||||||
Restructuring
(costs) gains (Note 2)
|
(923 | ) | (2,380 | ) | 802 | |||||||
Trademark
impairment loss (Note 9)
|
— | (500 | ) | (3,600 | ) | |||||||
Patent
litigation costs (Note 16)
|
(7,002 | ) | — | — | ||||||||
Operating
income
|
81,554 | 54,172 | 100,068 | |||||||||
Other
expense
|
||||||||||||
Interest
expense, net
|
(60,469 | ) | (65,404 | ) | (72,903 | ) | ||||||
Management
fee expense
|
(2,000 | ) | (2,000 | ) | (2,000 | ) | ||||||
Miscellaneous,
net
|
(5,458 | ) | (3,507 | ) | (2,867 | ) | ||||||
Income
(loss) before income taxes
|
13,627 | (16,739 | ) | 22,298 | ||||||||
Income
tax (expense) benefit
|
(5,105 | ) | 4,313 | (8,334 | ) | |||||||
Net
income (loss) from continuing operations
|
8,522 | (12,426 | ) | 13,964 | ||||||||
Gain
on sale of discontinued operations, net of tax (Note 3)
|
— | — | 2,707 | |||||||||
Net
income (loss)
|
8,522 | (12,426 | ) | 16,671 | ||||||||
Less:
Loss attributable to noncontrolling interest
|
(680 | ) | (818 | ) | (128 | ) | ||||||
Net
income (loss) attributable to UCI Holdco, Inc.
|
$ | 9,202 | $ | (11,608 | ) | $ | 16,799 |
The
accompanying notes are an integral part of these statements.
51
UCI
Holdco, Inc.
Consolidated Statements of Cash
Flows
(in
thousands)
Year ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Cash flows from operating
activities:
|
||||||||||||
Net
income (loss) attributable to UCI Holdco, Inc.
|
$ | 9,202 | $ | (11,608 | ) | $ | 16,799 | |||||
Less:
|
||||||||||||
Gain
on sale of discontinued operations, net of tax
|
— | — | 2,707 | |||||||||
Net
income from continuing operations
|
9,202 | (11,608 | ) | 14,092 | ||||||||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
Depreciation
and amortization of other intangible assets
|
37,134 | 36,970 | 35,308 | |||||||||
Amortization
of deferred financing costs and debt issuance costs
|
2,978 | 3,088 | 3,596 | |||||||||
Non-cash
interest expense on Holdco Notes
|
28,921 | 29,801 | 30,685 | |||||||||
Deferred
income taxes
|
407 | (5,245 | ) | 13,676 | ||||||||
Gain
on sale of Mexican land and building
|
— | — | (1,716 | ) | ||||||||
Trademark
impairment loss
|
— | 500 | 3,600 | |||||||||
Other
non-cash, net
|
258 | 2,980 | 3,232 | |||||||||
Changes
in operating assets and liabilities
|
||||||||||||
Accounts
receivable
|
1,017 | (9,538 | ) | (24,908 | ) | |||||||
Inventories
|
27,008 | (19,088 | ) | 15,403 | ||||||||
Other
current assets
|
(3,863 | ) | 9,513 | 304 | ||||||||
Accounts
payable
|
7,237 | 2,954 | 9,506 | |||||||||
Accrued
expenses and other current liabilities
|
18,883 | (7,527 | ) | (2,371 | ) | |||||||
Other
assets
|
1,057 | 252 | (2,337 | ) | ||||||||
Other
long-term liabilities
|
(958 | ) | (1,317 | ) | (4,948 | ) | ||||||
Net
cash provided by operating activities
|
129,281 | 31,735 | 93,122 | |||||||||
Cash flows from investing
activities:
|
||||||||||||
Proceeds
from sale of Mexican land and building
|
— | — | 6,637 | |||||||||
Proceeds
from sale of discontinued operations, net of transaction costs and cash
sold
|
— | — | 2,202 | |||||||||
Capital
expenditures
|
(15,266 | ) | (31,940 | ) | (29,687 | ) | ||||||
Proceeds
from sale of property, plant and equipment
|
2,566 | 421 | 1,836 | |||||||||
Increase
in restricted cash
|
(9,400 | ) | — | — | ||||||||
Net
cash used in investing activities
|
(22,100 | ) | (31,519 | ) | (19,012 | ) | ||||||
Cash flows from financing
activities:
|
||||||||||||
Issuance
of debt
|
13,187 | 27,993 | 20,760 | |||||||||
Debt
repayments
|
(35,227 | ) | (23,407 | ) | (84,884 | ) | ||||||
Proceeds
from exercise of stock options
|
18 | 146 | 593 | |||||||||
Net
cash (used in) provided by financing activities
|
(22,022 | ) | 4,732 | (63,531 | ) | |||||||
Effect
of exchange rate changes on cash
|
128 | (318 | ) | (77 | ) | |||||||
Net
increase in cash and cash equivalents
|
85,287 | 4,630 | 10,502 | |||||||||
Cash
and cash equivalents at beginning of year
|
46,655 | 42,025 | 31,523 | |||||||||
Cash
and cash equivalents at end of year
|
$ | 131,942 | $ | 46,655 | $ | 42,025 |
The
accompanying notes are an integral part of these statements.
52
UCI
Holdco, Inc.
Consolidated Statements of Changes in
Shareholders’ Equity (Deficit)
(in
thousands)
UCI Holdco, Inc. Shareholders’ Equity (Deficit)
|
||||||||||||||||||||||||||||
Common
Stock
|
Additional
Paid In
Capital
|
Retained
Deficit
|
Accumulated
Other
Comprehensive
Income (Loss)
|
Noncontrolling
Interest
|
Total
Equity
|
Comprehensive
Income (Loss)
|
||||||||||||||||||||||
Balance
at January 1, 2007
|
$ | 27 | $ | 273,722 | $ | (251,914 | ) | $ | (2,534 | ) | $ | 3,436 | $ | 22,737 | ||||||||||||||
Adjustment
to adopt accounting for uncertainty in income taxes
|
(337 | ) | (337 | ) | ||||||||||||||||||||||||
Recognition
of stock based compensation expense
|
3,445 | 3,445 | ||||||||||||||||||||||||||
Exercise
of stock options
|
1 | 592 | 593 | |||||||||||||||||||||||||
Tax
effect of exercise of stock options
|
547 | 547 | ||||||||||||||||||||||||||
Comprehensive
income
|
||||||||||||||||||||||||||||
Net
income
|
16,799 | (128 | ) | 16,671 | $ | 16,799 | ||||||||||||||||||||||
Other
comprehensive income (loss)
|
||||||||||||||||||||||||||||
Interest
rate swaps (after $293 of income tax)
|
(478 | ) | (478 | ) | (478 | ) | ||||||||||||||||||||||
Foreign
currency (after $68 of income tax)
|
845 | 845 | 845 | |||||||||||||||||||||||||
Pension
and OPEB liability (after $(5,565) of income tax)
|
8,929 | 8,929 | 8,929 | |||||||||||||||||||||||||
Total
comprehensive income
|
$ | 26,095 | ||||||||||||||||||||||||||
Balance
at December 31, 2007
|
$ | 28 | $ | 278,306 | $ | (235,452 | ) | $ | 6,762 | $ | 3,308 | $ | 52,952 | |||||||||||||||
Balance
at January 1, 2008
|
$ | 28 | $ | 278,306 | $ | (235,452 | ) | $ | 6,762 | $ | 3,308 | $ | 52,952 | |||||||||||||||
Recognition
of stock based compensation expense
|
833 | 833 | ||||||||||||||||||||||||||
Exercise
of stock options
|
1 | 146 | 147 | |||||||||||||||||||||||||
Tax
effect of exercise of stock options
|
(144 | ) | (144 | ) | ||||||||||||||||||||||||
Comprehensive
income
|
||||||||||||||||||||||||||||
Net
loss
|
(11,608 | ) | (818 | ) | (12,426 | ) | $ | (11,608 | ) | |||||||||||||||||||
Other
comprehensive income (loss)
|
||||||||||||||||||||||||||||
Interest
rate swaps (after $3 of income tax)
|
4 | 4 | 4 | |||||||||||||||||||||||||
Foreign
currency (after $(134) of income tax)
|
(4,357 | ) | (4,357 | ) | (4,357 | ) | ||||||||||||||||||||||
Pension
and OPEB liability (after $25,994 of income tax)
|
(42,009 | ) | (42,009 | ) | (42,009 | ) | ||||||||||||||||||||||
Total
comprehensive loss
|
$ | (57,970 | ) | |||||||||||||||||||||||||
Balance
at December 31, 2008
|
$ | 29 | $ | 279,141 | $ | (247,060 | ) | $ | (39,600 | ) | $ | 2,490 | $ | (5,000 | ) | |||||||||||||
Balance
at January 1, 2009
|
$ | 29 | $ | 279,141 | $ | (247,060 | ) | $ | (39,600 | ) | $ | 2,490 | $ | (5,000 | ) | |||||||||||||
Recognition
of stock based compensation expense
|
350 | 350 | ||||||||||||||||||||||||||
Exercise
of stock options
|
18 | 18 | ||||||||||||||||||||||||||
Tax
effect of exercise of stock options
|
(24 | ) | (24 | ) | ||||||||||||||||||||||||
Comprehensive
income
|
||||||||||||||||||||||||||||
Net
income
|
9,202 | (680 | ) | 8,522 | $ | 9,202 | ||||||||||||||||||||||
Other
comprehensive income
|
||||||||||||||||||||||||||||
Foreign
currency (after $(213) of income tax)
|
1,242 | 1,242 | 1,242 | |||||||||||||||||||||||||
Pension
and OPEB liability (after $(3,622) of income tax)
|
5,856 | 5,856 | 5,856 | |||||||||||||||||||||||||
Total
comprehensive income
|
$ | 16,300 | ||||||||||||||||||||||||||
Balance
at December 31, 2009
|
$ | 29 | $ | 279,485 | $ | (237,858 | ) | $ | (32,502 | ) | $ | 1,810 | $ | 10,964 |
The
accompanying notes are an integral part of these statements.
53
UCI
Holdco, Inc.
Notes
to Consolidated Financial Statements
NOTE 1 — GENERAL AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
General
UCI
Holdco, Inc. was incorporated on March 8, 2006 as a holding company for UCI
Acquisition Holdings, Inc. (“UCI Acquisition”) and United Components, Inc. UCI
Holdco, Inc. owns all of the common stock of United Components, Inc. through its
wholly-owned subsidiary UCI Acquisition, UCI Holdco, Inc., UCI Acquisition and
United Components, Inc. are corporations formed at the direction of The Carlyle
Group (“Carlyle”). At December 31, 2009, affiliates of The Carlyle Group owned
90.8% of UCI Holdco, Inc.’s common stock and the remainder was owned by certain
current and former members of UCI Holdco, Inc.’s senior management and board of
directors. The senior management and board of directors of UCI Holdco, Inc. are
also the senior management and board of directors of United Components,
Inc.
All
operations of UCI Holdco, Inc. are conducted by United Components, Inc. United
Components, Inc. operates through its subsidiaries. United Components, Inc.
manufactures and distributes vehicle parts, primarily servicing the vehicle
replacement parts market in North American and Europe.
A summary
of the significant accounting policies applied in the preparation of the
accompanying financial statements follows.
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of Holdco,
its wholly-owned subsidiaries and a 51% owned joint venture. All significant
intercompany accounts and transactions have been eliminated. In these notes to
the financial statements, the term “Holdco” refers to UCI Holdco, Inc. and its
subsidiaries as well as UCI Acquisition and its subsidiaries prior to the
formation of UCI Holdco, Inc. The term “UCI” refers to United Components, Inc.
and its subsidiaries.
Revenue
Recognition
Holdco
records sales when title has transferred to the customer, the sales price is
fixed and determinable, and the collection of the related accounts receivable is
reasonably assured.
Provisions
for estimated sales returns, allowances and warranty costs are recorded when the
sales are recorded. Sales returns, allowances and warranty costs are estimated
based upon historical experience, current trends, and Holdco’s expectations
regarding future experience. Adjustments to such returns, allowances, and
warranty costs are made as new information becomes available.
In order
to obtain exclusive contracts with certain customers, we may incur up-front
costs or assume the cost of returns of products sold by the previous supplier.
These costs are capitalized and amortized over the life of the contract. The
amortized amounts are recorded as a reduction of sales.
New
business changeover costs also can include the costs related to removing a new
customer’s inventory and replacing it with UCI inventory, commonly referred to
as a “stocklift.” Stocklift costs are recorded as a reduction to revenue when
incurred.
54
UCI
Holdco, Inc.
Notes
to Consolidated Financial Statements
Cash
Equivalents
Certificates
of deposit, commercial paper, and other highly liquid investments with an
original maturity of three months or less are considered to be cash
equivalents.
Allowance
for Doubtful Accounts
Holdco
generally does not require collateral for its trade accounts receivable.
Accounts receivable have been reduced by an allowance for amounts that may
become uncollectible in the future. These allowances are established based on a
combination of write-off history, aging analysis, and specific account
evaluations. When a receivable balance is known to be uncollectible, it is
written off against the allowance for doubtful accounts.
Inventories
Inventories
are stated at the lower of cost or market. Cost is principally determined using
standard or average cost, which approximates the first-in, first-out method.
Inventories are reduced by an allowance for excess and obsolete inventories,
based on Holdco’s review of on-hand inventories. The expense of inventory
write-downs is included in cost of sales.
Depreciation
and Amortization
Depreciation
of property, plant and equipment is provided on a straight-line basis, over the
estimated service lives of the assets. Leasehold improvements are amortized over
the shorter of their service life or the remaining term of the
lease.
Major
renewals and improvements of property, plant and equipment are capitalized, and
repairs and maintenance costs are expensed as incurred. Repairs and maintenance
expenses for the years ended December 31, 2009, 2008 and 2007 were $4.4 million,
$6.1 million, and $5.7 million, respectively.
Most of
Holdco’s trademarks have indefinite lives and are not amortized; instead they
are subject to impairment evaluations. Trademarks with finite lives and other
intangible assets are amortized over their useful lives on an accelerated or
straight-line basis commensurate with the expected benefits received from such
intangible assets.
Goodwill
and Trademarks with Indefinite Lives
Goodwill
is subject to annual review unless conditions arise that require a more frequent
evaluation. The review for impairment is based on a two-step accounting test.
The first step is to compare the estimated fair value of Holdco with the
recorded net book value (including the goodwill). If the estimated fair value is
higher than the recorded net book value, no impairment is deemed to exist and no
further testing is required. If, however, the estimated fair value is below the
recorded net book value, then a second step must be performed to determine the
goodwill impairment required, if any. In this second step, the estimated fair
value from the first step is used as the purchase price in a hypothetical
acquisition. Purchase business combination accounting rules are followed to
determine a hypothetical purchase price allocation to the reporting unit’s
assets and liabilities. The residual amount of goodwill that results from this
hypothetical purchase price allocation is compared to the recorded amount of
goodwill, and the recorded amount is written down to the hypothetical amount, if
lower.
Holdco
performs its annual goodwill impairment review in the fourth quarter of each
year using discounted future cash flows of the Company’s one reporting unit.
Management retains the services of an independent valuation company in order to
assist in evaluating the estimated fair value of the company. The process of
evaluating the potential impairment of goodwill is subjective because it
requires the use of estimates and assumptions as to future cash flows of the
company and discount rates commensurate with the risks involved in the assets.
Although the Company bases cash flow forecasts on assumptions that are
consistent with plans and estimates we use to manage our company, there is
significant judgment in determining the cash flows. Based upon the results of
the annual impairment review, it was determined that the fair value of our
Company significantly exceeded the carrying value of the assets and no
impairment existed.
55
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Holdco, Inc.
Notes
to Consolidated Financial Statements
Trademarks
with indefinite lives are tested for impairment on an annual basis in the fourth
quarter, unless conditions arise that would require a more frequent evaluation.
In assessing the recoverability of these assets, projections regarding estimated
discounted future cash flows and other factors are made to determine if an
impairment has occurred. If Holdco concludes that there has been an impairment,
Holdco will write down the carrying value of the asset to its fair value. In
2008 and 2007, Holdco recorded trademark impairment losses of $0.5 million and
$3.6 million, respectively.
Each
year, Holdco evaluates those trademarks with indefinite lives to determine
whether events and circumstances continue to support the indefinite useful
lives. Other than the trademark impairment mentioned above, Holdco has concluded
that events and circumstances continue to support the indefinite lives of these
trademarks.
Impairment of
Long-Lived Assets, other than Goodwill and Trademarks with Indefinite Lives
and Long-Lived Assets to be Disposed of
Holdco
evaluates all of its long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of such assets may not be
recoverable. Recoverability of such long-lived assets is measured by a
comparison of the carrying amount of the asset to the future undiscounted net
cash flows that are expected to be generated by the asset. If the carrying
amount exceeds the expected undiscounted future cash flows, the asset is
considered to be impaired. If an asset is considered to be impaired, it is
written down to fair value. Assets to be disposed of are reported at the lower
of the carrying amount or fair value less costs to sell. See Notes 2 and 9 for
impairment losses recorded in 2009, 2008 and 2007.
Income
Taxes
Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
assets and liabilities and their respective tax basis. Deferred tax assets are
also recognized for operating losses and tax credit carryforwards. Holdco
establishes valuation allowances against operating losses and tax credit
carryforwards when the ability to fully utilize these benefits is determined to
be uncertain. Deferred tax assets and liabilities are measured using enacted tax
rates applicable in the years in which they are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
law is recognized in income in the period that includes the enactment
date.
Holdco
records a liability for uncertain tax positions where management concludes that
the likelihood of sustaining such positions upon examination by taxing
authorities is less than “more likely than not.” Holdco also records any
interest and penalties related to these unrecognized tax benefits as a component
of “Income tax expense.”
Foreign
Currency Translation
Chinese operations —
The functional currency of Holdco’s Chinese operations is the U.S. dollar.
Income statements of these operations are translated into U.S. dollars at the
average exchange rates for each relevant period, except for cost of sales, which
is translated primarily at historical exchange rates. Non-monetary assets and
liabilities are translated into U.S. dollars at historical rates, and monetary
assets and liabilities are translated at the closing exchange rate as of the
applicable balance sheet date. Adjustments resulting from the translation of the
balance sheet are recorded in the income statement.
All other foreign
operations — The functional currency for all other foreign operations is
their local currency. Income statements of these operations are translated into
U.S. dollars using the average exchange rates during the applicable period.
Assets and liabilities of these operations are translated into U.S. dollars
using the exchange rates in effect at the applicable balance sheet date.
Resulting cumulative translation adjustments are recorded as a component of
shareholder’s equity in “Accumulated other comprehensive income
(loss).”
56
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Holdco, Inc.
Notes
to Consolidated Financial Statements
Foreign
Currency Transactions
Transaction
foreign exchange gains and losses are included in “Cost of sales” in the income
statement. The net foreign exchange gains (losses) were $(0.3) million, $(2.6)
million and $0.5 million for the years ended December 31, 2009, 2008 and 2007,
respectively.
Reporting
of Comprehensive Income (Loss)
Comprehensive
income (loss) includes (i) net income (loss), (ii) the cumulative effect of
translating balance sheets of certain foreign subsidiaries to U.S. dollars,
(iii) the effect of adjusting interest rate swaps to market, and (iv) the
recognition of pension liabilities. The last three are not included in the
income statement and are reflected as adjustments to shareholder’s
equity.
Financial
Statement Presentation
The
following provides a description of certain items that appear in the income
statement:
Net
sales includes gross sales less deductions for incentive rebate programs,
product returns, allowances and discounts. Shipping and handling fees that are
billed to customers are classified as revenues.
Cost of
sales includes all costs required to bring a product to a ready-for-sale
condition. Such costs include direct and indirect materials (net of vendor
consideration), direct and indirect labor costs (including pension,
postretirement and other fringe benefits), supplies, utilities, depreciation,
insurance, shipping and other costs. Cost of sales also includes the
procurement, packaging, and shipping of products purchased for
resale.
Selling
and warehousing expenses includes costs of selling and marketing,
warehousing, technical services and distribution. The major cost elements for
this line item include salaries and wages (including pension, postretirement and
other fringe benefits), freight, depreciation and advertising.
Advertising
is expensed as incurred. Advertising expense for the years ended December 31,
2009, 2008 and 2007 was $1.5 million, $2.9 million, and $2.9 million,
respectively.
General
and administrative expenses includes the costs of executive, accounting
and administrative personnel (including pension, postretirement and other fringe
benefits), professional fees, insurance, provisions for doubtful accounts, rent
and information technology costs.
Environmental
Liabilities
Holdco
accrues for environmental investigation, remediation and penalty costs when it
is probable that a liability has been incurred and the amount of loss can be
reasonably estimated. The liability is determined on an undiscounted cash flow
basis and is not reduced for potential claims for recovery. Claims for recovery
are recognized as agreements are reached with third parties. Environmental
expenditures are capitalized if they mitigate or prevent future contamination or
if they improve the environmental safety or efficiency of the existing assets.
All other environmental costs are expensed as incurred. Environmental cost
estimates may include expenses for remediation of identified sites, long term
monitoring, payments for claims, administrative expenses, and expenses for
ongoing evaluations and litigation. The liability is adjusted periodically as
assessment and remediation efforts progress or as additional technical or legal
information becomes available.
Insurance
Reserves
Holdco’s
insurance for workers’ compensation, automobile, product and general liability
includes high deductibles for which Holdco is responsible. Deductibles, for
which Holdco is responsible, are estimated and recorded as expenses in the
period incurred.
57
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Holdco, Inc.
Notes
to Consolidated Financial Statements
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions in determining the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
sales and expenses during the reporting period. The estimates and assumptions
include estimates of collectability of accounts receivable and the realizability
of inventory, goodwill and other intangible assets. They also include estimates
of cost accruals, environmental liabilities, warranty and product returns,
insurance reserves, income taxes, pensions and other postretirement benefits and
other factors. Management has exercised reasonableness in deriving these
estimates; however, actual results could differ from these
estimates.
Segment
Reporting
In
accordance with the guidance included in Accounting Standards Codification ASC
280, “Segment Reporting,” Holdco reports as one segment. Holdco is in one
business, which is the manufacturing and distribution of vehicle parts. The
products and services, customer base, distribution channel, manufacturing
process, procurement, and economic characteristics are similar throughout all of
Holdco’s operations.
Derivative
Financial Instruments
Holdco
routinely enters into purchase agreements to acquire materials used in the
normal course of its operations. In certain instances, a routine
purchase agreement may meet the technical definition of a
derivative. In all such cases, Holdco elects the “normal purchases”
exemption from derivative accounting.
Other
than the purchase agreements discussed above, Holdco recognizes derivatives as
either assets or liabilities in the balance sheet and measures those instruments
at fair value. Changes in the fair value of those instruments will be reported
in income or other comprehensive income (loss) depending on the use of the
derivative and whether it qualifies for hedge accounting. The accounting for
gains and losses associated with changes in the fair value of the derivative,
and the effect on the financial statements, will depend on its hedge designation
and whether the hedge is highly effective in offsetting changes in the fair
value of cash flows of the asset or liability hedged.
Recently
Adopted Accounting Guidance
On
September 30, 2009, Holdco adopted changes issued by the Financial Accounting
Standards Board (“FASB”) to the authoritative hierarchy of accounting principles
generally accepted in the United States of America (“GAAP”). These changes
establish the FASB Accounting Standards Codification™ (“ASC”) as the source of
authoritative accounting principles recognized by the FASB to be applied by
nongovernmental entities in the preparation of financial statements in
conformity with GAAP. Rules and interpretive releases of the Securities and
Exchange Commission (“SEC”) under authority of federal securities laws are also
sources of authoritative GAAP for SEC registrants. The FASB will no longer issue
new standards in the form of Statements, FASB Staff Positions, or Emerging
Issues Task Force Abstracts; instead the FASB will issue Accounting Standards
Updates. Accounting Standards Updates will not be authoritative in their own
right as they will only serve to update the ASC. These changes and the ASC
itself do not change GAAP. Other than the manner in which new accounting
guidance is referenced, the adoption of these changes had no impact on Holdco’s
financial statements.
Business
Combinations and Consolidation Accounting
On
January 1, 2009, Holdco adopted changes issued by the FASB to consolidation
accounting and reporting. These changes establish accounting and reporting for
the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. This guidance defines a noncontrolling interest, previously called a
minority interest, as the portion of equity in a subsidiary not attributable,
directly or indirectly, to a parent. These changes require, among other items: a
noncontrolling interest to be included in the consolidated statement of
financial position within equity separate from the parent’s equity; consolidated
net income to be reported at amounts inclusive of both the parent’s and
noncontrolling interest’s shares and, separately, the amounts of consolidated
net income attributable to the parent and noncontrolling interest all on the
consolidated statement of operations; and if a subsidiary is deconsolidated, any
retained noncontrolling equity investment in the former subsidiary to be
measured at fair value and a gain or loss to be recognized in net income based
on such fair value. Other than the change in presentation of noncontrolling
interests, the adoption of these changes had no impact on Holdco’s financial
statements. The presentation and disclosure requirements of these changes were
applied retrospectively.
58
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Holdco, Inc.
Notes
to Consolidated Financial Statements
On
January 1, 2009, Holdco adopted changes issued by the FASB to accounting for
business combinations. While retaining the fundamental requirements of
accounting for business combinations, including that the purchase method be used
for all business combinations and for an acquirer to be identified for each
business combination, these changes define the acquirer as the entity that
obtains control of one or more businesses in the business combination and
establishes the acquisition date as the date that the acquirer achieves control
instead of the date that the consideration is transferred. These changes require
an acquirer in a business combination, including a business combination achieved
in stages (step acquisition), to recognize the assets acquired, liabilities
assumed, and any noncontrolling interest in the acquiree at the acquisition
date, measured at their fair values as of that date, with limited exceptions.
This guidance also requires the recognition of assets acquired and liabilities
assumed arising from certain contractual contingencies as of the acquisition
date, measured at their acquisition-date fair values. Additionally, these
changes require acquisition-related costs to be expensed in the period in which
the costs are incurred and the services are received instead of including such
costs as part of the acquisition price. The adoption of these changes will
depend on the occurrence of future acquisitions, if any, by Holdco.
Effective
January 1, 2009, Holdco adopted changes issued by the FASB to accounting for
business combinations. These changes apply to all assets acquired and
liabilities assumed in a business combination that arise from certain
contingencies and requires (i) an acquirer to recognize at fair value, at the
acquisition date, an asset acquired or liability assumed in a business
combination that arises from a contingency if the acquisition-date fair value of
that asset or liability can be determined during the measurement period,
otherwise, the asset or liability should be recognized at the acquisition date
if certain defined criteria are met; (ii) contingent consideration arrangements
of an acquiree assumed by the acquirer in a business combination to be
recognized initially at fair value; (iii) subsequent measurements of assets and
liabilities arising from contingencies to be based on a systematic and rational
method depending on their nature and contingent consideration arrangements to be
measured subsequently; and (iv) disclosures of the amounts and measurement basis
of such assets and liabilities and the nature of the contingencies. The adoption
of these changes will depend on the occurrence of future acquisitions, if any,
by Holdco.
59
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Holdco, Inc.
Notes
to Consolidated Financial Statements
Fair
Value Accounting
On
January 1, 2009, Holdco adopted changes issued by the FASB to fair value
accounting and reporting as it relates to nonfinancial assets and nonfinancial
liabilities that are not recognized or disclosed at fair value in the financial
statements on at least an annual basis. These changes define fair value,
establish a framework for measuring fair value in GAAP, and expand disclosures
about fair value measurements. This guidance applies to other GAAP that require
or permit fair value measurements and is to be applied prospectively with
limited exceptions. The adoption of these changes, as it relates to nonfinancial
assets and nonfinancial liabilities, had no impact on Holdco’s financial
statements. These provisions will be applied at such time as a fair value
measurement of a nonfinancial asset or nonfinancial liability is required, which
may result in a fair value that is materially different than would have been
calculated prior to the adoption of these changes.
On June
30, 2009, Holdco adopted changes issued by the FASB to fair value accounting.
These changes provide additional guidance for estimating fair value when the
volume and level of activity for an asset or liability have significantly
decreased and includes guidance for identifying circumstances that indicate a
transaction is not orderly. This guidance is necessary to maintain the overall
objective of fair value measurements, which is that fair value is the price that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date under current
market conditions. The adoption of these changes had no impact on Holdco’s
financial statements.
Other
On June
30, 2009, Holdco adopted changes issued by the FASB to accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued, otherwise known
as “subsequent events.” Specifically, these changes set forth the period after
the balance sheet date during which management of a reporting entity should
evaluate events or transactions that may occur for potential recognition or
disclosure in the financial statements, the circumstances under which an entity
should recognize events or transactions occurring after the balance sheet date
in its financial statements, and the disclosures that an entity should make
about events or transactions that occur after the balance sheet
date.
On
January 1, 2009, Holdco adopted changes issued by the FASB to accounting for
intangible assets. These changes amend the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset in order to improve the consistency between the
useful life of a recognized intangible asset outside of a business combination
and the period of expected cash flows used to measure the fair value of an
intangible asset in a business combination. The adoption of these changes had no
impact on Holdco’s financial statements.
On
January 1, 2009, Holdco adopted changes issued by the FASB to disclosures by
public entities about transfers of financial assets and interests in variable
interest entities. The changes require additional disclosures about transfers of
financial assets. The required disclosures are intended to provide more
transparency to financial statement users about a transferor’s continuing
interest in transferred financial assets and an enterprise’s involvement with
variable interest entities and qualifying special purpose entities. Holdco has
agreements to sell undivided interests in certain of its receivables with
factoring companies which in turn have the right to sell an undivided interest
to a financial institution or other third party. However, Holdco retains no
rights or interest, and has no obligations, with respect to the sold
receivables. Furthermore, Holdco does not service the receivables after the
sales. Because of the terms of Holdco’s sales of receivables, the adoption of
the changes did not have an effect on Holdco’s financial
statements.
On
January 1, 2009, Holdco adopted changes issued by the FASB to disclosures about
derivative instruments and hedging activities. These changes require enhanced
disclosures about an entity’s derivative and hedging activities, including (i)
how and why an entity uses derivative instruments, (ii) how derivative
instruments and related hedged items are accounted for and (iii) how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance and cash flows. Because of Holdco’s insignificant, if any,
use of derivatives, adoption of these changes did not have an effect on Holdco’s
financial statements.
60
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Holdco, Inc.
Notes
to Consolidated Financial Statements
In
December 2008, the FASB issued changes to employers’ disclosures about
postretirement benefit plan assets. These changes provide guidance on an
employer’s disclosures about plan assets of a defined benefit pension or other
postretirement plan. This guidance is intended to ensure that an employer meets
the objectives of the disclosures about plan assets in the employer’s defined
benefit pension or other postretirement plan to provide users of financial
statements with an understanding of the following: how investment allocation
decisions are made; the major categories of plan assets; the inputs and
valuation techniques used to measure the fair value of plan assets; the effect
of fair value measurements using significant unobservable inputs on changes in
the value of plan assets; and significant concentrations of risk within plan
assets. These changes became effective for Holdco on December 31, 2009 and are
reflected in Note 15.
Recently
Issued Accounting Guidance
Transfers of Financial
Assets
In June
2009, the FASB issued changes to accounting for transfers of financial assets.
These changes, among other things: remove the concept of a qualifying
special-purpose entity and remove the exception from the application of variable
interest accounting to variable interest entities that are qualifying
special-purpose entities; limit the circumstances in which a transferor
derecognizes a portion or component of a financial asset; defines a
participating interest; require a transferor to recognize and initially measure
at fair value all assets obtained and liabilities incurred as a result of a
transfer accounted for as a sale; and require enhanced disclosure. These changes
become effective for Holdco on January 1, 2010. Management has determined
that the adoption of these changes will have no impact on Holdco’s financial
statements.
Revenue Recognition for
Multiple-Deliverable Arrangements
In
October 2009, the FASB issued changes to revenue recognition for
multiple-deliverable arrangements. These changes require separation of
consideration received in such arrangements by establishing a selling price
hierarchy (not the same as fair value) for determining the selling price of a
deliverable, which will be based on available information in the following
order: vendor-specific objective evidence, third-party evidence, or estimated
selling price. The changes also: eliminate the residual method of
allocation and require that the consideration be allocated at the inception of
the arrangement to all deliverables using the relative selling price method,
which allocates any discount in the arrangement to each deliverable on the basis
of each deliverable’s selling price; require that a vendor determine its best
estimate of selling price in a manner that is consistent with that used to
determine the price to sell the deliverable on a standalone basis; and expand
the disclosures related to multiple-deliverable revenue arrangements. These
changes become effective for Holdco on January 1, 2011. Management has
determined that the adoption of these changes will not have an impact on
Holdco’s financial statements, as Holdco does not currently have any such
arrangements with its customers.
61
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Holdco, Inc.
Notes
to Consolidated Financial Statements
NOTE 2 — RESTRUCTURING (COSTS)
GAINS
2009
Capacity Consolidation and European Realignment Actions
To
further align Holdco’s cost structure with customers’ spending and current
market conditions, Holdco implemented restructuring plans in 2009. The
restructuring plans target excess assembly and aluminum casting capacity and
restructuring costs of the plan include workforce reductions, facility closures,
consolidations and realignments. During 2009, Holdco recorded asset write-offs
of $1.8 million associated with the capacity consolidation, recognized a gain of
$1.5 million on the sale of a facility and incurred other costs of $0.2
million.
Water
Pump Integration
On May
25, 2006, Holdco completed the acquisition of ASC Industries, Inc. and its
subsidiaries (“ASC Industries”). This transaction is referred to herein as the
“ASC Acquisition.” Before the ASC Acquisition, Holdco manufactured
and distributed water pumps for all market channels. In June 2006, Holdco began
the process of integrating its pre ASC-acquisition water pump operations with
the water pump operations of ASC Industries. In 2007, Holdco completed the
integration. By mid-2007, all domestic water pump manufacturing had been
combined at ASC Industries’ manufacturing facilities. Holdco’s pre
ASC-acquisition water pump facility was closed as of July 2007.
2007
Expenses and Gain
In 2007,
Holdco recorded pre-tax expenses and a gain related to the water pump
integration. In 2007, $0.7 million of these costs were included in the income
statement in “Restructuring (costs) gains,” and $4.7 million of those costs were
included in “Cost of sales.” The combined net $5.4 million of 2007 expenses and
gain were as follows (in millions):
Restructuring costs
|
Cost of sales
|
Combined
|
||||||||||
Severance
|
$ | 1.6 | $ | — | $ | 1.6 | ||||||
Pension
plan curtailment gain
|
(0.9 | ) | — | (0.9 | ) | |||||||
Production
wind-down costs
|
— | 2.2 | 2.2 | |||||||||
Other
integration costs
|
— | 2.5 | 2.5 | |||||||||
$ | 0.7 | $ | 4.7 | $ | 5.4 |
The
combined after-tax effect of these items was a net loss of $3.3 million in
2007.
The $2.2
million of production wind-down costs included inefficiencies and unabsorbed
overhead resulting from extraordinarily low levels of production during the
second quarter 2007 wind-down of operations at the pre-acquisition water pump
facility. The facility ceased production at the end of the second quarter of
2007.
The $2.5
million of other integration costs included transportation expenses and other
costs that were directly related to completing the integration.
2008
and 2009 Expenses
In 2008
and 2009, Holdco recorded additional pre-tax expense related to the water pump
integration. These costs were reported in the income statement in “Restructuring
(costs) gains.” These costs were as follows (in millions):
2009
|
2008
|
|||||||
Severance
|
$ | — | $ | 0.2 | ||||
Costs
of maintaining the pre-acquisition water pump facility
|
0.4 | 0.6 | ||||||
Additional
asset impairments
|
— | 1.6 | ||||||
$ | 0.4 | $ | 2.4 |
62
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Holdco, Inc.
Notes
to Consolidated Financial Statements
In the
fourth quarter of 2008, in light of current market and economic conditions,
Holdco wrote down the carrying value of the pre-ASC Acquisition water pump
manufacturing facility from $1.3 million to zero. Also in the fourth quarter of
2008, Holdco recorded a $0.3 million impairment loss on pre-ASC Acquisition
water pump equipment that was no longer useable.
Balance
sheet amounts
The
following table presents accrued liabilities balances related to the water pump
integration costs as of December 31, 2006, 2007 and 2008 along with the 2007 and
2008 changes (in millions):
Accrued
severance
|
Other
liabilities
|
|||||||
December
31, 2006 balance
|
$ | 1.4 | $ | 0.2 | ||||
Additional
loss provision
|
1.6 | — | ||||||
Payments
|
(2.8 | ) | (0.2 | ) | ||||
December
31, 2007 balance
|
0.2 | — | ||||||
Additional
loss provision
|
0.2 | — | ||||||
Payments
|
(0.4 | ) | — | |||||
December
31, 2008 balance
|
$ | — | $ | — |
Closure
of Mexican facility
In 2006,
Holdco closed its Mexican filter manufacturing operation. In 2007, Holdco sold
the land and building and certain building improvements formerly used as its
Mexican filter manufacturing operation. The sale proceeds were $6.6 million, net
of fees and expenses. In 2007, Holdco recorded a $1.7 million pre-tax gain on
the sale. Also, in 2007, Holdco incurred $0.2 million of costs associated with
the closure of the Mexican facility. These gains and costs were reported in the
income statement in “Restructuring (costs) gains.”
NOTE 3 — DISCONTINUED
OPERATIONS
In
November 2006, Holdco sold its lighting systems operation. The final sale price
was subject to post-closing adjustments related to working capital and possible
additional proceeds if a lighting systems building were sold. In the third
quarter of 2007, the final working capital amounts were settled favorably and
the building was sold. Accordingly, Holdco recorded a $2.7 million after-tax
gain in 2007 which was all attributable to Holdco’s ownership.
NOTE 4 — TERMINATION OF PAY-ON-SCAN
PROGRAM
Until the
second quarter of 2007, a portion of the products sold to AutoZone, Inc.
(“AutoZone”) were sold under an AutoZone program called Pay-on-Scan. Under this
program, Holdco retained title to its products at AutoZone locations, and a sale
was not recorded until an AutoZone customer purchased the product. In the second
quarter of 2007, AutoZone and Holdco terminated the Pay-on-Scan program for
these Holdco products. Accordingly, sales of these products are now recorded
when the product is received at an AutoZone location.
As part
of the termination of the Pay-on-Scan program, AutoZone purchased all of the
products at its locations that were previously under the Pay-on-Scan program. In
the second quarter of 2007, Holdco recorded $12.1 million of sales for these
products.
63
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Holdco, Inc.
Notes
to Consolidated Financial Statements
NOTE 5 — ALLOWANCE FOR DOUBTFUL
ACCOUNTS
Changes
in Holdco’s allowance for doubtful accounts were as follows (in
millions):
December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Beginning
of year
|
$ | 4.0 | $ | 2.3 | $ | 2.7 | ||||||
Provision
for doubtful accounts
|
0.4 | 2.0 | (0.2 | ) | ||||||||
Accounts
written off
|
(1.2 | ) | (0.3 | ) | (0.2 | ) | ||||||
$ | 3.2 | $ | 4.0 | $ | 2.3 |
NOTE 6 — SALES OF
RECEIVABLES
Holdco
has agreements to sell undivided interests in certain of its receivables to
factoring companies, which in turn have the right to sell an undivided interest
in those receivables to a financial institution or other third party. Holdco
enters into these agreements at its discretion as part of its overall cash
management activities. Pursuant to these agreements, Holdco sold $225.9 million
and $197.9 million of receivables during 2009 and 2008,
respectively.
If
receivables had not been factored, $121.5 million and $80.1 million of
additional receivables would have been outstanding at December 31, 2009 and
2008, respectively. Holdco retained no rights or interest, and has no
obligations, with respect to the sold receivables. Holdco does not service the
receivables after the sales.
The sales
of receivables were accounted for as a sale and were removed from the balance
sheet at the time of the sales. The costs of the sales were discounts deducted
by the factoring companies. These costs were $5.5 million, $3.5 million and $2.9
million in 2009, 2008 and 2007, respectively. These costs are recorded in the
consolidated income statements in “Miscellaneous, net.”
NOTE 7 — INVENTORIES
The
components of inventories were as follows (in millions):
December 31,
|
||||||||
2009
|
2008
|
|||||||
Raw
materials
|
$ | 47.5 | $ | 55.3 | ||||
Work
in process
|
27.6 | 34.6 | ||||||
Finished
products
|
73.1 | 84.4 | ||||||
Valuation
reserves
|
(15.1 | ) | (14.9 | ) | ||||
$ | 133.1 | $ | 159.4 |
64
UCI
Holdco, Inc.
Notes
to Consolidated Financial Statements
NOTE 8 — PROPERTY, PLANT AND
EQUIPMENT
Property,
plant and equipment consisted of the following (in millions):
December 31,
|
||||||||||
Depreciable Life
|
2009
|
2008
|
||||||||
Land
and improvements
|
5-10
years
(for
improvements)
|
$ | 6.1 | $ | 6.1 | |||||
Buildings
and improvements
|
5-40
years
|
65.5 | 67.2 | |||||||
Equipment
|
3-15
years
|
234.1 | 222.3 | |||||||
305.7 | 295.6 | |||||||||
Less
accumulated depreciation
|
(155.9 | ) | (127.7 | ) | ||||||
$ | 149.8 | $ | 167.9 |
Included
in equipment shown above are cumulative additions related to capital lease
obligations of $3.5 million and $3.6 million at December 31, 2009 and 2008,
respectively. The related accumulated depreciation was approximately $2.2
million and $1.8 million at December 31, 2009 and 2008,
respectively.
Depreciation
expense for the years ended December 31, 2009, 2008 and 2007 was $28.6 million,
$28.0 million and $25.7 million, respectively.
The fair
value of Holdco’s asset retirement obligation (“ARO”) is recorded as a liability
with the offsetting associated asset retirement costs capitalized as part of the
carrying amount of the related buildings. The asset retirement costs are
amortized over the useful life of the building. Changes in the ARO resulting
from the passage of time are recognized as an increase in the carrying amount of
the liability and as accretion expense. The liabilities for ARO were $1.1
million and $1.0 million at December 31, 2009 and 2008,
respectively.
NOTE 9 — OTHER INTANGIBLE
ASSETS
The
components of other intangible assets were as follows (in
millions):
December 31, 2009
|
December 31, 2008
|
||||||||||||||||||||||||
Amortizable
Life
|
Gross
|
Accumulated
amortization
|
Net
|
Gross
|
Accumulated
amortization
|
Net
|
|||||||||||||||||||
Acquired
intangible assets
|
|||||||||||||||||||||||||
Customer
relationships
|
3 -
20 years
|
$ | 62.1 | $ | (32.4 | ) | $ | 29.7 | $ | 62.1 | $ | (27.9 | ) | $ | 34.2 | ||||||||||
Technologies
|
10
years
|
8.9 | (7.0 | ) | 1.9 | 8.9 | (6.3 | ) | 2.6 | ||||||||||||||||
Trademarks
|
10
years
|
4.3 | (2.3 | ) | 2.0 | 4.3 | (1.7 | ) | 2.6 | ||||||||||||||||
Trademarks
|
Indefinite
|
25.5 | — | 25.5 | 25.5 | — | 25.5 | ||||||||||||||||||
Integrated
software system
|
7
years
|
20.1 | (11.2 | ) | 8.9 | 18.2 | (8.5 | ) | 9.7 | ||||||||||||||||
$ | 120.9 | $ | (52.9 | ) | $ | 68.0 | $ | 119.0 | $ | (44.4 | ) | $ | 74.6 |
In 2007,
Holdco recognized a trademark impairment loss of $3.6 million. This non-cash
loss was due to a customer’s decision to market a significant portion of
Holdco-supplied products under the customer’s own private label brand, instead
of Holdco’s brand. This decision has not affected and is not expected to affect
Holdco’s sales of these products. In 2008, Holdco recognized an
additional impairment loss of $0.5 million on the same trademark that was
written down in 2007.
65
UCI
Holdco, Inc.
Notes
to Consolidated Financial Statements
The
estimated amortization expense related to acquired intangible assets and the
integrated software system for each of the succeeding five years is (in
millions):
Acquired
intangible
assets
|
Integrated
software
system
|
|||||||
2010
|
$ | 5.2 | $ | 3.0 | ||||
2011
|
4.7 | 3.1 | ||||||
2012
|
4.3 | 2.2 | ||||||
2013
|
3.8 | 0.4 | ||||||
2014
|
3.3 | 0.2 |
NOTE 10 — RESTRICTED
CASH
In June
2009, Holdco posted $9.4 million of cash to collateralize a letter of credit
required by Holdco’s workers’ compensation insurance carrier. Historically,
assets pledged pursuant to the terms of UCI’s senior credit facility provided
the collateral for the letter of credit. As a result of the termination of UCI’s
revolving credit facility (see further discussion in Note 13), these assets were
no longer allowed to be pledged for this purpose and, accordingly, Holdco was
required to post the cash as collateral. This cash is recorded as “Restricted
cash” and is a component of long-term assets on Holdco’s balance sheet at
December 31, 2009. This cash is invested in highly liquid, high quality
government securities and is not available for general operating purposes as
long as the letter of credit remains outstanding or until alternative collateral
is posted.
NOTE 11 — ACCRUED EXPENSES AND OTHER CURRENT
LIABILITIES
Accrued
expenses and other current liabilities consisted of the following (in
millions):
December 31,
|
||||||||
2009
|
2008
|
|||||||
Salaries
and wages
|
$ | 3.1 | $ | 2.7 | ||||
Bonuses
and profit sharing
|
6.1 | 3.5 | ||||||
Vacation
pay
|
4.4 | 4.4 | ||||||
Product
returns
|
42.1 | 32.0 | ||||||
Rebates,
credits and discounts due customers
|
13.6 | 10.8 | ||||||
Insurance
|
9.8 | 11.5 | ||||||
Taxes
payable
|
7.0 | 5.6 | ||||||
Interest
|
2.4 | 3.3 | ||||||
Other
|
19.6 | 15.2 | ||||||
$ | 108.1 | $ | 89.0 |
NOTE 12 — PRODUCT RETURNS
LIABILITY
The
liability for product returns is included in “Accrued expenses and other current
liabilities.” This liability includes accruals for estimated parts returned
under warranty and for parts returned because of customer excess quantities.
Holdco provides warranties for its products’ performance. Warranty periods vary
by part. In addition to returns under warranty, Holdco allows its customers to
return quantities of parts that the customer determines to be in excess of its
current needs. Customer rights to return excess quantities vary by customer and
by product category. Generally, these returns are contractually limited to 3% to
5% of the customer’s purchases in the preceding year. While Holdco does not have
a contractual obligation to accept excess quantity returns from all customers,
common practice for Holdco and the industry is to accept periodic returns of
excess quantities from on-going customers. If a customer elects to cease
purchasing from Holdco and change to another vendor, it is industry practice for
the new vendor, and not Holdco, to accept any inventory returns resulting from
the vendor change and any subsequent inventory returns.
66
UCI
Holdco, Inc.
Notes
to Consolidated Financial Statements
In 2008,
Holdco identified an unusually high level of warranty returns related to one
category of parts. When these parts were subjected to certain conditions, they
experienced a higher than normal failure rate. As a result of the higher than
normal failure rate, a $6.7 million warranty loss provision was recorded in
2008. This loss provision is included in the line captioned “Additional
reductions to sales” in the table below. Holdco has modified the design of these
parts to eliminate this issue.
Holdco
routinely monitors returns data and adjusts estimates based on this
data.
Changes
in Holdco’s product returns accrual were (in millions):
Year ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Beginning
of year
|
$ | 32.0 | $ | 28.1 | $ | 28.6 | ||||||
Cost
of unsalvageable returned parts
|
(46.4 | ) | (51.6 | ) | (46.6 | ) | ||||||
Additional
reductions to sales
|
55.2 | 55.5 | 46.1 | |||||||||
Reclassification
from other current liabilities
|
1.3 | — | — | |||||||||
End
of year
|
$ | 42.1 | $ | 32.0 | $ | 28.1 |
NOTE 13 — DEBT
Holdco’s
debt is summarized as follows (in millions):
December 31,
|
||||||||
2009
|
2008
|
|||||||
UCI
short-term borrowings
|
$ | 3.5 | $ | 5.2 | ||||
UCI
revolving credit line borrowing
|
— | 20.0 | ||||||
UCI
capital lease obligations
|
0.9 | 1.2 | ||||||
UCI
term loan
|
190.0 | 190.0 | ||||||
Holdco
floating rate senior PIK notes
|
324.1 | 295.1 | ||||||
UCI
senior subordinated notes
|
230.0 | 230.0 | ||||||
Unamortized
debt discount and debt issuance costs
|
(6.9 | ) | (8.6 | ) | ||||
741.6 | 732.9 | |||||||
Less:
|
||||||||
UCI
short-term borrowings
|
3.5 | 5.2 | ||||||
UCI
revolving credit line borrowing
|
— | 20.0 | ||||||
UCI
term loan
|
17.7 | — | ||||||
Current
maturities
|
0.2 | 0.4 | ||||||
Long-term
debt
|
$ | 720.2 | $ | 707.3 |
Holdco’s
floating rate senior PIK notes — On December 20, 2006, Holdco issued $235
million of Floating Rate Senior PIK notes (the “Holdco Notes”). These notes were
sold at a 3.5% discount and are due December 15, 2013.
Cash fees
related to the issuance of the Holdco Notes were $2.3 million. This $2.3 million
was recorded as an addition to “Deferred financing costs” and is amortized as
interest expense over the life of the notes.
Interest
on the Holdco Notes is payable quarterly beginning March 15, 2007. The interest
rate for the Holdco Notes is based on three-month LIBOR plus the applicable
spread. This rate was 9.25% at December 31, 2009. The spread was 700 basis
points through December 15, 2007, 750 basis points from December 15, 2007
through December 15, 2008, and 800 basis points after December 15, 2008.
Interest on the Holdco Notes will be paid by issuing new notes until December
15, 2011. After 2011, the interest will be payable in cash.
67
UCI
Holdco, Inc.
Notes
to Consolidated Financial Statements
On March
15, 2012 and each quarter thereafter, Holdco is required to redeem for cash a
portion of each note required to be redeemed to prevent such note from being
treated as an applicable high yield discount obligation. The redemption price
for the portion of each note so redeemed will be 100% of the principal amount of
such portion plus any accrued interest at the date of redemption.
On or
after December 15, 2007, Holdco has the option to redeem all or part of the
Holdco Notes at the following redemption prices (expressed as percentages of
principal amount):
Twelve Months Beginning December
15:
|
Percentage
|
|||
2007
|
100 | % | ||
2008
|
103 | % | ||
2009
|
102 | % | ||
2010
|
101 | % | ||
2011
and thereafter
|
100 | % |
In
specified changes in control, holders of the Holdco Notes have the right to
require Holdco to redeem all or any part of the notes at the redemption price of
101% of the principal amount.
The
Holdco Notes are unsecured and will rank pari passu with any future
senior indebtedness of Holdco and will rank senior to any future subordinated
indebtedness of Holdco. The Holdco Notes are effectively subordinated to future
secured indebtedness, to the extent of the value of the collateral securing such
indebtedness. The Holdco Notes are effectively subordinated to all existing and
future indebtedness and other liabilities of our subsidiaries (other than
indebtedness or other liabilities owed to Holdco).
The
Holdco Notes indenture contains covenants that restrict Holdco’s ability to:
incur or guarantee additional debt, pay dividends or redeem stock, make certain
investments, sell assets, merge or consolidate with other entities, and enter
into transactions with affiliates. Management believes that Holdco is currently
in compliance with all of these covenants.
UCI’s
senior credit facilities — The senior credit facility includes a term
loan and, until its termination in June 2009, included a revolving credit
facility.
UCI’s term
loan
The term
loan is secured by all tangible and intangible assets of UCI. Interest is
payable quarterly or more frequently depending on the Eurodollar interest
periods that may be elected by UCI. The interest rate is variable and is
determined as described in the second paragraph below.
UCI may
select from two options to determine the interest rate on the term loan. The two
options are the Base Rate or Eurodollar Rate plus, in each case, an applicable
margin. The applicable margin is subject to adjustment based on a consolidated
leverage ratio, as defined. The Base Rate is a fluctuating interest rate equal
to the higher of (a) the prime rate as publicly announced by Bank of America as
its “prime rate” and (b) the Federal funds effective rate plus 0.50%. At
December 31, 2009 and 2008, the interest rate was 2.25% and 4.39%, respectively.
In addition to interest on outstanding borrowings, UCI was required to pay a
commitment fee on any unused revolving credit facility commitments at a per
annum rate of 0.50%, subject to adjustment based upon the consolidated leverage
ratio, as defined. (See Note 21 for the impact of interest rate
swaps.)
In 2008
and 2007, UCI used cash on hand to voluntarily prepay $10 million and $65
million, respectively, of the term loan. As a result of these voluntary early
repayments, UCI recorded $0.1 million and $0.6 million of accelerated write-offs
of deferred financing costs in 2008 and 2007, respectively. These costs are
included in “Interest expense, net” in the income statement.
As a
result of previous prepayments there are no scheduled repayments of the term
loan before December 2011. While there are no scheduled repayments
before December 2011, the senior credit facility does require mandatory
prepayments of the term loan when UCI generates Excess Cash Flow as defined in
the senior credit facility. The UCI generated Excess
Cash Flow in the year ending December 31, 2009 resulting in a mandatory
prepayment of $17.7 million, payable within 95 days of December 31, 2009. This
mandatory prepayment is presented as a component of “Current maturities of
long-term debt” in the December 31, 2009 balance sheet. The term loan
matures in June 2012.
68
UCI
Holdco, Inc.
Notes
to Consolidated Financial Statements
UCI’s revolving credit
facility
UCI’s
senior credit facility included a $75 million revolving credit facility, which
was available until June 2009. The interest rate was variable and was determined
in the same manner as the term loan discussed above.
The
revolving credit facility terminated in June 2009. Prior to its scheduled
maturity, UCI conducted an evaluation with respect to extending the facility,
analyzing the size of a commitment that could be secured against the total cost
of obtaining the commitment, including the related credit facility amendment.
Based upon this evaluation, UCI concluded that the size of the potential
commitment did not justify the cost and, accordingly, the revolving credit
facility was terminated.
At
December 31, 2008, revolving credit facility borrowings were $20.0 million, all
of which were repaid during the six months ended June 30, 2009. Additionally,
$9.4 million of revolving credit facility capacity was used to support an
outstanding letter of credit related to workers compensation insurance
liabilities. Historically, the assets pledged pursuant to the terms of the
senior credit facility provided the collateral for the letter of credit. As a
result of the revolving credit facility termination, Holdco was required to post
$9.4 million of cash to collateralize the letter of credit. (See further
discussion in Note 10.)
Covenants
and other provisions — The senior credit facilities require UCI to
maintain certain financial covenants and require mandatory prepayments under
certain events. Also, the facilities include certain negative covenants
restricting or limiting UCI’s ability to, among other things: declare dividends
or redeem stock; prepay certain debt; make loans or investments; guarantee or
incur additional debt; make capital expenditures; engage in acquisitions or
other business combinations; sell assets; and alter UCI’s business. UCI is in
compliance with all of these covenants.
UCI’s
senior subordinated notes (the “Notes”) — The Notes bear interest
at 9 3/8%. Interest is payable semi-annually, in arrears on June 15 and December
15 of each year. The Notes are unsecured and rank equally in right of payment
with any of UCI’s future senior subordinated indebtedness. They are subordinated
to indebtedness and other liabilities of UCI’s subsidiaries that are not
guarantors of the Notes. They are guaranteed on a full and unconditional and
joint and several basis by UCI’s domestic subsidiaries. The Notes mature on June
15, 2013.
The Notes
indenture contains covenants that limit UCI’s ability to incur or guarantee
additional debt, pay dividends or redeem stock, make certain investments, and
sell assets. UCI is in compliance with all of these covenants.
UCI’s
short-term borrowings — At December 31, 2009, short-term borrowings
included $0.3 million of a Spanish subsidiary’s notes payable and $3.2 million
of the Chinese subsidiaries’ notes payable to foreign credit institutions. At
December 31, 2008, short-term borrowings included $2.3 million of a Spanish
subsidiary’s notes payable and $2.9 million of the Chinese subsidiaries’ notes
payable to foreign credit institutions. At December 31, 2009, the interest rate
on the Spanish subsidiary’s notes payable and the Chinese subsidiaries’ notes
payable was 0.9% and 3.5%, respectively. At December 31, 2008, the interest rate
on the Spanish subsidiary’s notes payable and the Chinese subsidiaries’ notes
payable was 3.7% and 5.3%, respectively. The Spanish subsidiary’s notes payable
are collateralized by certain accounts receivable related to the amounts
financed. The Chinese subsidiaries’ notes payable are secured by
receivables.
Future
payments — The following is a schedule of future payments of debt at
December 31, 2009 (in millions):
2010
|
$ | 21.4 | ||
2011
|
41.0 | |||
2012
|
220.8 | |||
2013
|
465.1 | |||
2014
|
0.1 | |||
Thereafter
|
0.1 | |||
$ | 748.5 |
69
UCI
Holdco, Inc.
Notes
to Consolidated Financial Statements
As
discussed previously, on March 15, 2012 and each quarter thereafter, Holdco is
required to redeem for cash a portion of each note required to be redeemed to
prevent the Holdco Notes from being treated as an applicable high yield discount
obligation. In the schedule above, the $89.1 million of Holdco Notes that were
issued in lieu of cash interest through December 31, 2009 have been included in
the 2012 debt repayment amount. Depending on the circumstances, a portion of the
$89.1 million may be paid after 2012.
Interest
expense — Net interest expense in 2009 was $60.5 million. Net
interest expense in 2008 was $65.4 million, including $0.1 million of
accelerated write-off of deferred financing costs due to the voluntary
prepayment of $10 million of the senior credit facility term loan. Net interest
expense in 2007 was $72.9 million, including $0.6 million of accelerated
write-off of deferred financing costs due to the voluntary prepayments of $65
million of the senior credit facility term loan. $0.2 million of interest was
capitalized in 2007. No interest was capitalized in 2009 and 2008.
NOTE 14 — INCOME TAXES
The
components of income before income taxes were as follows (in
millions):
Year ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Income
(loss) before income taxes
|
||||||||||||
United
States
|
$ | 8.1 | $ | (17.7 | ) | $ | 26.9 | |||||
Foreign
|
5.5 | 1.0 | (4.6 | ) | ||||||||
$ | 13.6 | $ | (16.7 | ) | $ | 22.3 |
Components
of income tax expense (benefit) were as follows (in millions):
Year ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Current
|
||||||||||||
Federal
|
$ | 3.5 | $ | (3.1 | ) | $ | (5.4 | ) | ||||
State
|
1.0 | 0.9 | 1.1 | |||||||||
Foreign
|
1.3 | 2.5 | (1.3 | ) | ||||||||
5.8 | 0.3 | (5.6 | ) | |||||||||
Deferred
|
||||||||||||
Federal
|
(1.4 | ) | (2.4 | ) | 12.9 | |||||||
State
|
(0.6 | ) | (0.3 | ) | 1.0 | |||||||
Foreign
|
1.3 | (1.9 | ) | — | ||||||||
(0.7 | ) | (4.6 | ) | 13.9 | ||||||||
$ | 5.1 | $ | (4.3 | ) | $ | 8.3 |
A
reconciliation of income taxes computed at the United States Federal statutory
tax rate to income tax expense follows (in millions):
Year ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Income
tax expense (benefit) at U.S. Federal statutory rate
|
$ | 4.8 | $ | (5.8 | ) | $ | 7.8 | |||||
Federal
income taxes related to “check the box” election
|
(0.4 | ) | 3.4 | (1.4 | ) | |||||||
Foreign
income not taxable, foreign income tax losses not benefited and rate
differential
|
0.1 | (2.0 | ) | 1.8 | ||||||||
State
income taxes, net of Federal income tax benefit
|
0.2 | 0.4 | 1.5 | |||||||||
Adjust
ASC pre-acquisition deferred tax liabilities
|
— | — | (1.1 | ) | ||||||||
Other,
net
|
0.4 | (0.3 | ) | (0.3 | ) | |||||||
Income
tax expense (benefit)
|
$ | 5.1 | $ | (4.3 | ) | $ | 8.3 |
70
UCI
Holdco, Inc.
Notes
to Consolidated Financial Statements
The
adjustment in the above table for “Adjust ASC pre-acquisition deferred tax
liabilities” is to reflect the finally determined tax basis of ASC
pre-acquisition intangible assets. “Other, net” in the above table includes
reductions of prior year-end tax liabilities to reflect the actual tax expense
reported in subsequently filed tax returns.
Deferred
taxes were attributable to the following (in millions):
December 31,
|
||||||||
2009
|
2008
|
|||||||
Deferred
tax assets
|
||||||||
Pension
and postretirement benefits
|
$ | 7.5 | $ | 6.8 | ||||
Product
returns and warranty accruals
|
16.0 | 12.7 | ||||||
Inventory
valuation
|
6.8 | 7.1 | ||||||
Net
operating loss carryforwards
|
5.2 | 10.2 | ||||||
Vacation
accrual
|
1.3 | 1.2 | ||||||
Insurance
accruals
|
3.1 | 2.8 | ||||||
Allowance
for doubtful accounts
|
1.1 | 1.4 | ||||||
Tax
credit carryforwards
|
0.3 | 0.3 | ||||||
Pension
liability adjustment included in other comprehensive income
(loss)
|
19.1 | 22.7 | ||||||
Other
accrued liabilities
|
6.7 | 1.8 | ||||||
Other
|
2.2 | 2.1 | ||||||
69.3 | 69.1 | |||||||
Less:
valuation allowance for net operating loss carryforwards and foreign tax
credit carryforwards
|
(5.2 | ) | (4.2 | ) | ||||
Total
deferred tax assets
|
64.1 | 64.9 | ||||||
Deferred
tax liabilities
|
||||||||
Depreciation
and amortization
|
(14.5 | ) | (15.6 | ) | ||||
Goodwill
amortization for tax, but not book
|
(21.2 | ) | (17.8 | ) | ||||
Acquired
Intangible assets
|
(2.4 | ) | (2.2 | ) | ||||
Prepaid
expenses
|
(2.7 | ) | (1.7 | ) | ||||
Other
|
(1.1 | ) | (1.2 | ) | ||||
Total
deferred tax liabilities
|
(41.9 | ) | (38.5 | ) | ||||
Net
deferred tax assets (liabilities)
|
$ | 22.2 | $ | 26.4 |
The net
deferred tax assets were included in the balance sheet as follows (in
millions):
December 31,
|
||||||||
2009
|
2008
|
|||||||
Deferred
tax assets
|
$ | 31.0 | $ | 30.4 | ||||
Deferred
tax liabilities
|
(8.8 | ) | (4.0 | ) | ||||
Net
deferred tax assets (liabilities)
|
$ | 22.2 | $ | 26.4 |
At
December 31, 2007, Holdco had valuation allowances for all of the deferred tax
assets associated with foreign net operating loss carryforwards. In 2008, Holdco
concluded that $0.6 million of these deferred tax assets would be realized and,
accordingly the valuation allowances were reduced by $0.6 million. This
reduction resulted in a $0.6 million benefit in 2008 income tax
expense.
At
December 31, 2009, Holdco had $13.2 million of foreign net operating loss
carryforwards with no expiration date, $3.5 million of foreign net operating
losses which expire between 2012 and 2019 and $0.3 million of foreign tax credit
carryforwards which expire in 2023 and 2024. In assessing the realization of the
deferred tax assets related to these carryforwards, Holdco determined that it is
more likely than not that $4.9 million of the deferred tax assets related to
these loss carryforwards and tax credits will not be realized. Therefore, a
valuation allowance has been recorded for these carryforwards.
71
UCI
Holdco, Inc.
Notes
to Consolidated Financial Statements
At
December 31, 2009, Holdco had various state net operating loss carryforwards
totaling $13.1 million which expire at various times. In assessing the
realization of the deferred tax asset related to the state carryforwards, Holdco
determined that it is more likely than not that $0.3 million of the deferred tax
assets related to the state carryforwards will not be realized. Therefore, a
valuation allowance has been recorded for these carryforwards. At December 31,
2008, Holdco had U.S. federal net operating loss carryforwards of $12.9 million.
This net operating loss was used in 2009.
Realization
of the remaining net deferred tax assets is dependent on Holdco generating
sufficient taxable income in future years to utilize the benefits of the
reversals of temporary differences. Holdco has performed an assessment regarding
the realization of the remaining net deferred tax assets, which includes
projecting future taxable income, and has determined it is more likely than not
that the remaining net deferred tax assets will be realized.
Holdco
does not provide for U.S. income taxes on undistributed earnings of its foreign
subsidiaries that are intended to be permanently reinvested. At
December 31, 2009, these undistributed earnings amounted to approximately $22.7
million. Determination of the net amount of unrecognized U.S. income taxes with
respect to these earnings is not practicable.
Uncertain
Tax Positions
On
January 1, 2007, Holdco adopted the guidance in ASC 740, “Income Taxes,”
prescribing how a company should recognize, measure, present and disclose
uncertain tax positions. The effect was immaterial to Holdco’s financial
statements.
A
reconciliation of the beginning and ending amount of unrecognized tax benefits
follows (in millions):
2009
|
2008
|
2007
|
||||||||||
Balance
at January 1
|
$ | 7.5 | $ | 5.6 | $ | 4.3 | ||||||
Additions
for tax positions related to the current year
|
1.3 | 2.4 | 2.0 | |||||||||
Reductions
based on tax position related to the current year
|
(0.2 | ) | (0.3 | ) | (0.9 | ) | ||||||
Additions
for tax position of prior years
|
0.1 | 0.3 | 0.4 | |||||||||
Reductions
for tax position of prior years
|
(0.2 | ) | (0.1 | ) | (0.1 | ) | ||||||
Reduction
for lapse of applicable statutes of limitations
|
(0.8 | ) | (0.4 | ) | (0.1 | ) | ||||||
Balance
at December 31
|
$ | 7.7 | $ | 7.5 | $ | 5.6 |
At
December 31, 2009, approximately $2.7 million of the unrecognized tax benefits,
if recognized, would change Holdco’s effective tax rate. In 2009, Holdco
recorded, as income tax expense, $0.1 million of penalties related to the
unrecognized tax benefits. At December 31, 2009, the total interest (net of
federal benefit) and penalties accrued related to uncertain tax benefits were
$0.5 million and $0.7 million, respectively.
While
most of Holdco’s business is conducted within the United States, Holdco also
conducts business in several foreign countries. As a result, Holdco and/or one
or more of its subsidiaries files income tax returns in the U.S. federal tax
jurisdiction and in many state and foreign tax jurisdictions. In the normal
course of business, Holdco is subject to examination by tax authorities in these
tax jurisdictions. With few exceptions, Holdco is not subject to examination by
federal, state or foreign tax authorities for tax years ending on or before
2004. Chinese tax authorities have commenced a transfer price examination at one
of Holdco’s subsidiaries. Other than this examination and routine
inquiries, Holdco and its subsidiaries are not currently under examination by
tax authorities.
Holdco
expects the total unrecognized tax benefits to decline by approximately $0.3
million in 2010. This decline is due to the expiration of applicable statutes of
limitations. $0.3 million of this amount will impact the effective tax
rate.
72
UCI
Holdco, Inc.
Notes
to Consolidated Financial Statements
NOTE 15 — EMPLOYEE BENEFIT
PLANS
Defined
Benefit Pension Plans
Holdco
maintains defined benefit retirement plans covering certain U.S. and non-U.S.
employees. Retiree benefits under the defined benefit retirement plans are
generally based on years of service and employee compensation.
Obligations and Funded
Status
The
measurement date used to determine pension obligations is December 31. The
following table sets forth the plans’ status (in millions).
December 31,
|
||||||||
2009
|
2008
|
|||||||
Accumulated
benefit obligation
|
$ | 214.9 | $ | 204.4 | ||||
Change
in projected benefit obligations:
|
||||||||
Projected
benefit obligations at beginning of year
|
$ | 217.5 | $ | 198.6 | ||||
Service
cost
|
4.4 | 4.4 | ||||||
Interest
cost
|
13.0 | 12.6 | ||||||
Actuarial
loss
|
2.4 | 8.5 | ||||||
Plan
amendments
|
— | 2.4 | ||||||
Plan
curtailment and settlements
|
(0.1 | ) | — | |||||
Benefits
paid
|
(9.7 | ) | (8.6 | ) | ||||
Special
termination benefits
|
— | 0.2 | ||||||
Currency
translation adjustment
|
0.1 | (0.6 | ) | |||||
Projected
benefit obligations at end of year
|
$ | 227.6 | $ | 217.5 | ||||
Change
in plan assets:
|
||||||||
Fair
value of plan assets at beginning of year
|
$ | 146.5 | $ | 192.9 | ||||
Actual
return on plan assets
|
25.4 | (40.9 | ) | |||||
Employer
contributions
|
4.2 | 3.4 | ||||||
Benefits
paid
|
(9.7 | ) | (8.6 | ) | ||||
Currency
translation adjustment
|
0.1 | (0.3 | ) | |||||
Plan
assets at end of year
|
$ | 166.5 | $ | 146.5 | ||||
Funded
status, net
|
$ | (61.1 | ) | $ | (71.0 | ) | ||
Amounts
recognized in the balance sheet consist of:
|
||||||||
Noncurrent
assets
|
$ | 0.6 | $ | — | ||||
Current
liabilities
|
(0.1 | ) | (0.1 | ) | ||||
Noncurrent
liabilities
|
(61.6 | ) | (70.9 | ) | ||||
$ | (61.1 | ) | $ | (71.0 | ) |
73
UCI
Holdco, Inc.
Notes
to Consolidated Financial Statements
A portion
of the above “Funded status, net” has not been recorded in any of Holdco’s
income statements, but instead has been recorded in “Accumulated other
comprehensive income (loss).” Amounts recognized in “Accumulated other
comprehensive income (loss)” consisted of (in millions):
Dec 31,
2008
|
Amortization
and
curtailment
in 2009
pension
expense
|
2009
Additions
|
Dec 31,
2009
|
|||||||||||||
Prior
service costs
|
$ | (3.1 | ) | $ | 0.4 | $ | — | $ | (2.7 | ) | ||||||
Net
actuarial gain (loss)
|
(55.2 | ) | 0.3 | 8.6 | (46.3 | ) | ||||||||||
Deferred
income tax benefit (expense)
|
22.2 | (0.3 | ) | (3.1 | ) | 18.8 | ||||||||||
Accumulated
other comprehensive income (loss)
|
$ | (36.1 | ) | $ | 0.4 | $ | 5.5 | $ | (30.2 | ) |
Dec 31,
2007
|
Amortization,
in 2008
pension
expense
|
2008
Additions
|
Dec 31,
2008
|
|||||||||||||
Prior
service costs
|
$ | (1.0 | ) | $ | 0.3 | $ | (2.4 | ) | $ | (3.1 | ) | |||||
Net
actuarial gain (loss)
|
9.4 | — | (64.6 | ) | (55.2 | ) | ||||||||||
Deferred
income tax benefit (expense)
|
(3.2 | ) | (0.1 | ) | 25.5 | 22.2 | ||||||||||
Accumulated
other comprehensive income (loss)
|
$ | 5.2 | $ | 0.2 | $ | (41.5 | ) | $ | (36.1 | ) |
In 2010,
a loss of approximately $0.9 million will be amortized from “Accumulated other
comprehensive income (loss).”
For
certain of the pension plans, accumulated benefit obligations (ABO) exceed plan
assets. For these plans, the combined projected benefit obligation, ABO and fair
value of plan assets were $219.8 million, $207.4 million and $158.1 million,
respectively, as of December 31, 2009 and $217.4 million, $204.4 million and
$146.4 million, respectively, as of December 31, 2008.
Components of Net Periodic Pension
Expense
The
components of net periodic pension expense were as follows (in
millions):
Year ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Service
cost
|
$ | 4.4 | $ | 4.4 | $ | 5.5 | ||||||
Interest
cost
|
13.0 | 12.6 | 12.0 | |||||||||
Expected
return on plan assets
|
(14.4 | ) | (15.2 | ) | (14.1 | ) | ||||||
Amortization
of prior service cost
|
0.3 | 0.3 | 0.1 | |||||||||
Amortization
of unrecognized gain
|
0.3 | (0.1 | ) | 0.2 | ||||||||
Special
termination benefits and curtailment (gain) loss
recognized
|
0.2 | 0.2 | (0.9 | ) | ||||||||
$ | 3.8 | $ | 2.2 | $ | 2.8 |
In 2009,
Holdco recorded $0.2 million of curtailment losses related to headcount
reductions as part of specific actions taken to align Holdco’s cost structure
with current market conditions. As a result of closing one of
Holdco’s water pump operations (Note 2), in 2008 Holdco recorded $0.2 million of
expense for special pension benefits for the terminated employees and in 2007
Holdco recorded a $0.9 million curtailment gain.
74
UCI
Holdco, Inc.
Notes
to Consolidated Financial Statements
Assumptions
Holdco
determines its actuarial assumptions on an annual basis. In determining the
present values of Holdco’s benefit obligations and net periodic pension expense
for all plans as of and for the years ended December 31, 2009, 2008 and 2007,
Holdco used the following assumptions:
2009
|
2008
|
2007
|
||||||||||
Weighted
average discount rate to determine benefit obligations
|
6.0 | % | 6.2 | % | 6.5 | % | ||||||
Weighted
average discount rate to determine net cost
|
6.2 | % | 6.5 | % | 5.8 | % | ||||||
Weighted
average rate of future compensation increases to determine benefit
obligation
|
3.5 | % | 4.0 | % | 4.0 | % | ||||||
Weighted
average rate of future compensation increases to determine net
cost
|
4.0 | % | 4.0 | % | 4.0 | % | ||||||
Weighted
average rate of return on plan assets to determine net
cost
|
8.0 | % | 8.0 | % | 8.0 | % |
The
discount rate was determined considering current yield curves representing high
quality, long-term fixed income instruments. The discount rate for our U.S.
plans is based on a review of high quality (Aa or better) bonds from the
Barclay’s Capital bond database.
Plan
Assets
Holdco
directs the investment of the plans’ assets with the objective of being able to
meet current and future benefit payment needs while maximizing total investment
returns within the constraints of a prudent level of portfolio risk and
diversification. Holdco believes it is prudent to diversify among and within
each asset class to decrease portfolio risk while, at the same time, proving the
potential for enhanced long-term returns. Equity investments comprise
the largest portion of the plan assets because they are believed to provide
greater long-term returns than fixed income investments, although with greater
short-term volatility. Additionally, Holdco believes that a
meaningful allocation to foreign equities will increase portfolio
diversification and thereby decrease portfolio risk while, at the same time,
providing the potential for enhanced long-term returns. With
respect to fixed income investments, Holdco believes that the duration of the
fixed income component should approximate the projected benefit obligation
duration for better correlation of assets to liabilities.
Derivatives,
options and futures are permitted investments but only for the purpose of
reducing risk. Derivatives, options and futures are not permitted for
speculative purposes. Currently, the use of derivative instruments is not
significant when compared to the overall portfolio.
Holdco
believes that investment managers with active mandates can reduce portfolio risk
below market risk and potentially add value through security selection
strategies. Consistent with this belief, Holdco retains the services
of professional money managers to provide advice and recommendations to help
Holdco discharge its fiduciary responsibilities in furtherance of the plans’
goals. With the services of professional money managers and the asset
allocation targets discussed below, Holdco believes that the assumed expected
long-term return on plan assets of 8.0% used to determine net pension cost will
be achieved.
Holdco
has a long-term strategic target for the allocation of plan assets. However,
Holdco realizes that actual allocations at any point will vary from this
strategic target due to current and anticipated market conditions and required
cash flows to and from the plans. The “Permitted Range” anticipates this
fluctuation and provides flexibility for the professional managers’ portfolios
to vary around the target without a mandatory immediate
rebalancing.
75
UCI
Holdco, Inc.
Notes
to Consolidated Financial Statements
Strategic Target
|
Permitted Range
|
|||||
U.S.
equities
|
42 | % |
37%
to 47%
|
|||
Foreign
equities
|
23 | % |
18%
to 28%
|
|||
Fixed
income
|
35 | % |
25%
to 45%
|
|||
100 | % |
The fair
value of the plan assets at December 31, 2009 are presented below (in
millions).
U.S.
equities
|
% of Total
|
|||||||
Large Cap Growth
|
$ | 17.0 | ||||||
Large Cap Value
|
15.6 | |||||||
Large Cap Indexed
|
26.7 | |||||||
Small and Mid Cap
Growth
|
8.2 | |||||||
Small and Mid Cap
Value
|
9.3 | |||||||
Total U.S.
equities
|
76.8 | 47 | % | |||||
Foreign
equities
|
35.4 | 21 | % | |||||
Fixed
income
|
||||||||
Short & Mid
Duration
|
16.3 | |||||||
Long Duration
|
30.5 | |||||||
Long Duration
Indexed
|
6.8 | |||||||
Total fixed
income
|
53.6 | 32 | % | |||||
Cash
|
0.7 | * | ||||||
$ | 166.5 | 100 | % |
* Less
than 1%
The plan
assets are primarily invested in commingled collective trusts, as well as a
portion in pooled separate accounts of a large, rated A+ (Superior) by A.M. Best
insurance company, collectively the “Investment Funds.” The
Investment Funds are managed by professional money managers. The
following provides a summary of the investment styles of the respective
Investment Funds.
Growth Investment
Funds – This investment style seeks long-term growth through equity
appreciation. Large Cap Growth funds seeks long-term appreciation
through investment in large market capitalizations similar to companies in the
Russell 1000, while the Small and Mid Cap Growth funds invest in small and mid
market capitalizations similar to companies in the Russell 2500.
Value Investment
Funds – This investment style seeks to identify equity securities that
are perceived to be undervalued in the marketplace. Large Cap Value
funds invest in large market capitalizations similar to companies in the Russell
1000, while the Small and Mid Cap Growth funds invest in small and mid market
capitalizations similar to companies in the Russell 2500.
Large Cap Indexed –
This investment style seeks to replicate the S&P 500.
Foreign Equities –
This investment style uses multiple sub-advisors including core, value, growth
and emerging markets strategies to provide a diversified exposure to non-U.S.
equity markets.
Short & Mid Duration
Fixed Income – This investment style invests in a diversified portfolio
of corporate securities and U.S. Treasuries and Agencies with shorter average
durations. This investment style benchmarks against the Barclays
Capital Aggregate Index.
76
UCI
Holdco, Inc.
Notes
to Consolidated Financial Statements
Long Duration Fixed
Income – This investment style invests in a diversified portfolio of
corporate securities and U.S. Treasury securities which have maturities greater
than ten years. The asset allocation is weighted much heavier to U.S.
investment grade corporate securities.
Long Duration Indexed
– This investment style seeks to track the return of the Barclays Capital Long
Government / Credit Bond Index. This strategy invests in a
diversified portfolio of corporate securities and U.S. Treasuries and Agencies
which have maturities greater than ten years.
Fair value measurements
- The Investment Funds determine the fair value of them by accumulating
the fair values of their underlying investments. The pension plans
own undivided interests in the underlying assets of the Investment Funds where
no active market exists for the identical investment. Accordingly,
the fair value measurements of the Investment Funds are considered Level 2
measurements.
Cash Flows
It is
Holdco’s policy to fund amounts for pension plans sufficient to meet the minimum
requirements set forth in applicable benefits laws and local tax laws, for U.S.
plans, including the Pension Protection Act of 2006 and the Worker, Retiree, and
Employer Recovery Act of 2008 for U.S. plans. From time to time, Holdco may
contribute additional amounts as deemed appropriate. During 2010,
Holdco expects to contribute approximately $3.1 million to its
plans.
Pension
benefits expected to be paid are as follows: $10.6 million in 2010; $11.1
million in 2011; $11.6 million in 2012; $12.1 million in 2013; $12.6 million in
2014; and $70.8 million in 2015 through 2019. Expected benefit payments are
based on the same assumptions used to measure Holdco’s benefit obligations at
December 31, 2009 and include estimated future employee service.
Profit
Sharing and Defined Contribution Pension Plans
Certain
Holdco subsidiaries sponsor defined contribution plans under section 401(k) of
the Internal Revenue Code. Eligible participants may elect to defer from 5% to
50% of eligible compensation, subject to certain limitations imposed by the
Internal Revenue Code. For some plans, such subsidiaries are required to match
employees’ contributions based on formulas which vary by plan. For the rest of
these plans, Holdco matching contributions are discretionary. For those plans
where Holdco’s matching contributions are discretionary, Holdco did not make any
matching contribution in 2009.
Holdco
subsidiaries in China participate in government-sponsored defined contribution
plans. Holdco’s subsidiary in the United Kingdom sponsors a defined contribution
plan. For United States profit sharing and defined contribution
pension plans, Holdco expensed $1.1 million, $2.8 million and $3.5 million for
the years ended December 31, 2009, 2008 and 2007, respectively. For the Chinese
and United Kingdom defined contribution plans, Holdco expensed $0.1 million,
$0.7 million, and $0.4 million for the years ended December 31, 2009, 2008, and
2007, respectively.
77
UCI
Holdco, Inc.
Notes
to Consolidated Financial Statements
Other
Postretirement Benefits
Certain
Holdco subsidiaries provide health care and life insurance benefits to eligible
retired employees. The plans are partially funded by participant contributions
and contain cost-sharing features such as deductibles and
coinsurance.
The
measurement date used to determine postretirement obligations is December 31.
The following table presents information for the postretirement plans (in
millions):
December 31,
|
||||||||
2009
|
2008
|
|||||||
Change
in benefit obligations
|
||||||||
Benefit
obligations at beginning of year
|
$ | 9.7 | $ | 8.3 | ||||
Service
cost
|
0.3 | 0.3 | ||||||
Interest
cost
|
0.6 | 0.5 | ||||||
Actuarial
loss
|
— | 1.3 | ||||||
Benefits
paid
|
(0.8 | ) | (0.7 | ) | ||||
Benefit
obligations accrued at end of year
|
$ | 9.8 | $ | 9.7 |
The
accrued obligation was included in the balance sheet as follows (in
millions):
December 31,
|
||||||||
2009
|
2008
|
|||||||
Accrued
obligation included in “Accrued expenses and other current
liabilities”
|
$ | (0.7 | ) | $ | (0.8 | ) | ||
Accrued
obligation included in “Pension and other postretirement
liabilities”
|
(9.1 | ) | (8.9 | ) | ||||
$ | (9.8 | ) | $ | (9.7 | ) |
A portion
of the $9.8 million and $9.7 million of accrued liabilities shown above has not
been recorded in Holdco’s income statements, but instead has been recorded in
“Accumulated other comprehensive income (loss).” The accumulated amounts in
“Accumulated other comprehensive income (loss)” were $(1.0) million (($0.6)
million after tax) and $(1.0) million ($(0.6) million after tax) at December 31,
2009 and 2008, respectively.
The
following were the components of net periodic postretirement benefit cost (in
millions):
Year ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Service
cost
|
$ | 0.3 | $ | 0.3 | $ | 0.2 | ||||||
Interest
cost
|
0.6 | 0.5 | 0.5 | |||||||||
$ | 0.9 | $ | 0.8 | $ | 0.7 |
Holdco
determines its actuarial assumptions annually. In determining the present values
of Holdco’s benefit obligations, Holdco used discount rates of 6.0%, 6.1% and
6.5% for the years ended December 31, 2009, 2008 and 2007, respectively. In
determining Holdco’s benefit obligation at December 31, 2009, the annual health
care cost trend rate is assumed to decline from 8.0% in 2010 to 4.5% in 2030. In
determining net periodic benefit cost, Holdco used discount rates of 6.1%, 6.5%
and 5.8% for the years ended December 31, 2009, 2008 and 2007, respectively.
Increasing the assumed healthcare cost trend rates by one percentage point would
result in additional annual costs of approximately $0.1 million. Decreasing the
assumed health care cost trend rates by one percentage point would result in a
decrease of approximately $0.1 million in annual costs. The effect on
postretirement benefit obligations at December 31, 2009 of a one percentage
point increase would be $0.5 million. The effect of a one percentage point
decrease would be $0.4 million.
Holdco
continues to fund medical and life insurance benefit costs principally on a
pay-as-you-go basis. The pay-as-you-go expenditures for postretirement benefits
have not been material. During 2010, Holdco expects to contribute approximately
$0.7 million to its postretirement benefit plans. In the years 2011 through
2014, Holdco expects to pay $0.7 million of benefits each year. The aggregate
benefits expected to be paid in the five years 2015 through 2019 are $3.8
million.
78
UCI
Holdco, Inc.
Notes
to Consolidated Financial Statements
NOTE 16 — COMMITMENTS AND
CONTINGENCIES
Leases
The
following is a schedule of the future minimum payments under operating leases
that have non-cancelable lease terms (in millions):
Minimum
payments
|
||||
2010
|
$ | 5.8 | ||
2011
|
4.8 | |||
2012
|
4.0 | |||
2013
|
3.5 | |||
2014
|
3.3 | |||
2015
and thereafter
|
12.2 | |||
$ | 33.6 |
These
lease payments include the payment of certain taxes and other expenses. Rent
expense was $6.3 million, $5.8 million and $4.8 million for the years ended
December 31, 2009, 2008 and 2007, respectively.
Insurance
Reserves
Holdco
purchases insurance policies for workers’ compensation, automobile and product
and general liability. These policies include high deductibles for which Holdco
is responsible. These deductibles are estimated and recorded as expenses in the
period incurred. Estimates of these expenses are updated each quarter and are
adjusted accordingly. These estimates are subject to substantial uncertainty
because of several factors that are difficult to predict, including actual
claims experience, regulatory changes, litigation trends and changes in
inflation. Estimated unpaid losses for which Holdco is responsible are included
in the balance sheet in “Accrued expenses and other current
liabilities.”
Environmental
Holdco is
subject to a variety of federal, state, local and foreign environmental laws and
regulations, including those governing the discharge of pollutants into the air
or water, the management and disposal of hazardous substances or wastes, and the
cleanup of contaminated sites. Holdco has been identified as a potentially
responsible party for contamination at two sites. One of these sites is a former
facility in Edison, New Jersey (the “New Jersey Site”), where a state agency has
ordered Holdco to continue with the monitoring and investigation of chlorinated
solvent contamination. The New Jersey Site has been the subject of litigation to
determine whether a neighboring facility was responsible for contamination
discovered at the New Jersey Site. A judgment has been rendered in that
litigation to the effect that the neighboring facility is not responsible for
the contamination. Holdco is analyzing what further investigation and
remediation, if any, may be required at the New Jersey Site. The second site is
a previously owned site in Solano County, California (the “California Site”),
where Holdco, at the request of the regional water board, is investigating and
analyzing the nature and extent of the contamination and is conducting some
remediation. Based on currently available information, management believes that
the cost of the ultimate outcome of the environmental matters related to the New
Jersey Site and the California Site will not exceed the $1.6 million accrued at
December 31, 2009 by a material amount, if at all. However, because all
investigation and analysis has not yet been completed and due to inherent
uncertainty in such environmental matters, it is possible that the ultimate
outcome of these matters could have a material adverse effect on results for a
single quarter. Expenditures for these environmental matters totaled $0.4
million in each of 2009, 2008 and 2007.
In
addition to the two matters discussed above, Holdco has been named as a
potentially responsible party at a site in Calvert City, Kentucky (the “Kentucky
Site”). Holdco estimates settlement costs at $0.1 million for this site. Also,
Holdco is involved in regulated remediation at two of its manufacturing sites
(the “Manufacturing Sites”). The combined cost of the remaining remediation at
such Manufacturing Sites is $0.3 million. Holdco anticipates that the majority
of the $0.4 million reserved for settlement and remediation costs will be spent
in the next year. To date, the expenditures related to the Kentucky Site and the
Manufacturing Sites have been immaterial.
79
UCI
Holdco, Inc.
Notes
to Consolidated Financial Statements
Antitrust
Litigation
UCI and
its wholly owned subsidiary, Champion Laboratories, Inc. (“Champion”), were
named as two of multiple defendants in 23 complaints originally filed in the
District of Connecticut, the District of New Jersey, the Middle District of
Tennessee and the Northern District of Illinois alleging conspiracy violations
of Section 1 of the Sherman Act, 15 U.S.C. § 1, related to aftermarket oil, air,
fuel and transmission filters. Eight of the complaints also named The
Carlyle Group as a defendant, but those plaintiffs voluntarily dismissed Carlyle
from each of those actions without prejudice. Champion, but not UCI,
was also named as a defendant in 13 virtually identical actions originally filed
in the Northern and Southern Districts of Illinois, and the District of New
Jersey. All of these complaints are styled as putative class actions
on behalf of all persons and entities that purchased aftermarket filters in the
U.S. directly from the defendants, or any of their predecessors, parents,
subsidiaries or affiliates, at any time during the period from January 1,
1999 to the present. Each case seeks damages, including statutory
treble damages, an injunction against future violations, costs and attorney’s
fees.
UCI and
Champion were also named as two of multiple defendants in 17 similar complaints
originally filed in the District of Connecticut, the Northern District of
California, the Northern District of Illinois and the Southern District of New
York by plaintiffs who claim to be indirect purchasers of aftermarket
filters. Two of the complaints also named The Carlyle Group as a
defendant, but the plaintiffs in both of those actions voluntarily dismissed
Carlyle without prejudice. Champion, but not UCI, was also named in 3
similar actions originally filed in the Eastern District of Tennessee, the
Northern District of Illinois and the Southern District of
California. These complaints allege conspiracy violations of Section
1 of the Sherman Act and/or violations of state antitrust, consumer protection
and unfair competition law. They are styled as putative class actions
on behalf of all persons or entities who acquired indirectly aftermarket filters
manufactured and/or distributed by one or more of the defendants, their agents
or entities under their control, at any time between January 1, 1999 and
the present; with the exception of three complaints which each allege a class
period from January 1, 2002 to the present, and one complaint which alleges
a class period from the “earliest legal permissible date” to the
present. The complaints seek damages, including statutory treble
damages, an injunction against future violations, disgorgement of profits, costs
and attorney’s fees.
On August
18, 2008, the Judicial Panel on Multidistrict Litigation (“JPML”) issued an
order transferring the U.S. direct and indirect purchaser aftermarket filters
cases to the Northern District of Illinois for coordinated and consolidated
pretrial proceedings before the Honorable Robert W. Gettleman pursuant to 28
U.S.C. § 1407. On November 26, 2008, all of the direct purchaser
plaintiffs filed a Consolidated Amended Complaint. This complaint
names Champion as one of multiple defendants, but it does not name
UCI. The complaint is styled as a putative class action and alleges
conspiracy violations of Section 1 of the Sherman Act. The direct
purchaser plaintiffs seek damages, including statutory treble damages, an
injunction against future violations, costs and attorney’s fees. On
February 2, 2009, Champion filed its answer to the direct purchasers’
Consolidated Amended Complaint.
On
December 1, 2008, all of the indirect purchaser plaintiffs, except Gasoline and
Automotive Service Dealers of America (“GASDA”), filed a Consolidated Indirect
Purchaser Complaint. This complaint names Champion as one of multiple
defendants, but it does not name UCI. The complaint is styled as a
putative class action and alleges conspiracy violations of Section 1 of the
Sherman Act and violations of state antitrust, consumer protection and unfair
competition law. The indirect purchaser plaintiffs seek damages,
including statutory treble damages, penalties and punitive damages where
available, an injunction against future violations, disgorgement of profits,
costs and attorney’s fees. On February 2, 2009, Champion and the
other defendants jointly filed a motion to dismiss the Consolidated Indirect
Purchaser Complaint. On November 5, 2009, the Court granted the
motion in part, and denied it in part. The Court directed the
indirect purchaser plaintiffs to file an amended complaint conforming to the
order. On November 30, 2009, the indirect purchasers filed an amended
complaint. On December 17, 2009, the indirect purchasers filed a
motion for leave to file a second amended complaint. On December 22,
2009, the Court granted the motion for leave, but gave defendants permission to
move to dismiss the second amended complaint. Defendants’ filed that
motion to dismiss on January 19, 2010.
80
UCI
Holdco, Inc.
Notes
to Consolidated Financial Statements
On
February 2, 2009, Champion, UCI and the other defendants jointly filed a motion
to dismiss the GASDA complaint. On April 13, 2009, GASDA voluntarily
dismissed UCI from its case without prejudice. On November 5, 2009,
the Court granted defendants’ motion.
Pursuant
to a stipulated agreement between the parties, all defendants produced limited
initial discovery on January 30, 2009. On December 10, 2009 the
plaintiffs filed their first sets of interrogatories and requests for production
of documents. On January 11, 2010, all defendants filed a number of
discovery requests to plaintiffs and third parties. All discovery
responses were due on February 16, 2010. On January 21, 2010, the
Court entered a scheduling order for discovery. Under this order,
discovery related to class-certification will proceed immediately, with document
production scheduled to be completed no later than June 21,
2010. Class certification briefing will follow the completion of
document production, and expert discovery on merits-related issues will follow
the court’s ruling on plaintiffs’ motions for class certification.
On
January 12, 2009, Champion, but not UCI, was named as one of ten defendants in a
related action filed in the Superior Court of California, for the County of Los
Angeles on behalf of a purported class of direct and indirect purchasers of
aftermarket filters. On March 5, 2009, one of the defendants filed a
notice of removal to the U.S. District Court for the Central District of
California, and then subsequently requested that the JPML transfer this case to
the Northern District of Illinois for coordinated pre-trial proceedings, and the
JPML did.
Champion,
but not UCI, was also named as one of five defendants in a class action filed in
Quebec, Canada. This action alleges conspiracy violations under the Canadian
Competition Act and violations of the obligation to act in good faith (contrary
to art. 6 of the Civil Code of Quebec) related to the sale of aftermarket
filters. The plaintiff seeks joint and several liability against the
five defendants in the amount of $5.0 million in compensatory damages and $1.0
million in punitive damages. The plaintiff is seeking authorization
to have the matter proceed as a class proceeding, which motion has not yet been
ruled on.
Champion,
but not UCI, was also named as one of 14 defendants in a class action filed on
May 21, 2008, in Ontario, Canada. This action alleges civil
conspiracy, intentional interference with economic interests, and conspiracy
violations under the Canadian Competition Act related to the sale of aftermarket
filters. The plaintiff seeks joint and several liability against the
14 defendants in the amount of $150 million in general damages and $15 million
in punitive damages. The plaintiff is also seeking authorization to
have the matter proceed as a class proceeding, which motion has not yet been
ruled on.
On July
30, 2008, the Office of the Attorney General for the State of Florida issued
Antitrust Civil Investigative Demands to Champion and UCI requesting documents
and information related to the sale of oil, air, fuel and transmission
filters. We are cooperating with the Attorney General’s
requests. On April 16, 2009, the Florida Attorney General filed a
complaint against Champion and eight other defendants in the Northern District
of Illinois. The complaint alleges violations of Section 1 (f) of the
Sherman Act and Florida law related to the sale of aftermarket
filters. The complaint asserts direct and indirect purchaser claims
on behalf of Florida governmental entities and Florida consumers. It
seeks damages, including statutory treble damages, penalties, fees, costs and an
injunction. The Florida Attorney General action is being coordinated
with the rest of the filters cases pending in the Northern District of Illinois
before the Honorable Robert W. Gettleman.
The
Antitrust Division of the Department of Justice (DOJ) investigated the
allegations raised in these suits and certain current and former employees of
the defendants, including Champion, testified pursuant to
subpoenas. On January 21, 2010, DOJ sent a letter to counsel for
Champion stating that “the Antitrust Division’s investigation into possible
collusion in the replacement auto filters industry is now officially
closed.”
We intend
to vigorously defend against these claims.
Value-added
Tax Receivable
Holdco’s
Mexican operation has outstanding receivables denominated in Mexican pesos in
the amount of $3.7 million from the Mexican Department of Finance and Public
Credit, which are included in the balance sheet in “Other current assets”. The
receivables relate to refunds of Mexican value-added tax, to which Holdco
believes it is entitled in the ordinary course of business. The local Mexican
tax authorities have rejected Holdco’s claims for these refunds, and Holdco has
commenced litigation in the regional federal administrative and tax courts in
Monterrey to order the local tax authorities to process these
refunds.
81
UCI
Holdco, Inc.
Notes
to Consolidated Financial Statements
Patent
Litigation
Champion
is a defendant in litigation with Parker-Hannifin Corporation pursuant to which
Parker-Hannifin claims that certain of Champion’s products infringe a
Parker-Hannifin patent. On December 11, 2009, following trial, a jury verdict
was reached, finding in favor of Parker-Hannifin with damages of approximately
$6.5 million. No judgment has yet been entered by the court in this
matter. Champion continues to vigorously defend this matter; however,
there can be no assurance with respect to the outcome of litigation. Holdco has
recorded a $6.5 million liability and incurred trial costs of $0.5 million in
the financial statements for this matter.
Other
Litigation
Holdco is
subject to various other contingencies, including routine legal proceedings and
claims arising out of the normal course of business. These proceedings primarily
involve commercial claims, product liability claims, personal injury claims and
workers’ compensation claims. The outcome of these lawsuits, legal proceedings
and claims cannot be predicted with certainty. Nevertheless, Holdco believes
that the outcome of any currently existing proceedings, even if determined
adversely, would not have a material adverse effect on Holdco’s financial
condition or results of operations.
NOTE 17 — RELATED PARTY
TRANSACTIONS
Holdco
has an employment agreement with one of its executive officers providing for
annual compensation amounting to approximately $0.5 million per annum plus
bonuses and severance pay under certain circumstances. In addition,
Holdco has agreements with certain of its other executive officers providing for
severance under certain circumstances. The severance agreements
generally provide for salary continuation for a period of twelve months or, in
the case of a change in control, a period of 24 months. Total
potential severance for its executive officers amounts to approximately $1.4
million, or in the case of a change in control, approximately $2.8
million.
In
2003, Holdco entered
into a management agreement with TC Group, L.L.C., an affiliate of Carlyle, for
management and financial advisory services and oversight to be provided to
Holdco and its subsidiaries. Pursuant to this agreement, Holdco pays an annual
management fee of $2.0 million and out-of-pocket expenses, and Holdco may pay
Carlyle additional fees associated with financial advisory services and other
transactions. The management agreement provides for indemnification of Carlyle
against liabilities and expenses arising out of Carlyle’s performance of
services under this agreement. The agreement terminates either when Carlyle or
its affiliates own less than 10% of Holdco’s equity interest or when Holdco and
Carlyle mutually agree to terminate the agreement.
Sales to
The Hertz Corporation were $0.9 million, $0.6 million and $0.6 million for the
years ended December 31, 2009, 2008 and 2007, respectively. Affiliates of The
Carlyle Group own more than 10% of Hertz Global Holdings, Inc. The
Hertz Corporation is an indirect, wholly-owned subsidiary of Hertz Global
Holdings, Inc.
Sales to
Allison Transmission, Inc. were $0.6 million for the year ended December 31,
2009. Affiliates of The Carlyle Group own more than 10% of Allison Transmission,
Inc.
As part
of the ASC Acquisition, Holdco acquired a 51% interest in a Chinese joint
venture. This joint venture purchases aluminum castings from Holdco’s 49% joint
venture partner, Shandong Yanzhou Liancheng Metal Products Co. Ltd. (“LMC”) and
other materials from LMC’s affiliates. In 2009, 2008 and 2007, Holdco purchased
$11.1 million, $12.0 million and $15.4 million, respectively, from LMC and its
affiliates. In addition, Holdco sold materials and processing
services to LMC in the amount of $3.1 million in 2009.
ASC rents
a building from its former president. The 2009, 2008 and 2007 rent payments,
which are believed to be at market rate, were $1.5 million, $1.5 million and
$1.4 million, respectively.
82
UCI
Holdco, Inc.
Notes
to Consolidated Financial Statements
NOTE 18 — GEOGRAPHIC
INFORMATION
Holdco
had the following net sales by country (in millions):
Year ended December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
United
States
|
$ | 755.1 | $ | 735.1 | $ | 821.7 | ||||||
Canada
|
29.0 | 30.1 | 34.0 | |||||||||
Mexico
|
24.7 | 32.9 | 34.7 | |||||||||
United
Kingdom
|
11.6 | 12.3 | 13.8 | |||||||||
France
|
8.6 | 9.8 | 8.5 | |||||||||
Germany
|
5.4 | 5.0 | 4.2 | |||||||||
Spain
|
4.2 | 5.2 | 4.1 | |||||||||
Venezuela
|
2.3 | 4.6 | 6.4 | |||||||||
Other
|
44.1 | 45.4 | 42.4 | |||||||||
$ | 885.0 | $ | 880.4 | $ | 969.8 |
Net
long-lived assets by country were as follows (in millions):
December 31,
|
||||||||
2009
|
2008
|
|||||||
United
States
|
$ | 194.2 | $ | 203.2 | ||||
China
|
29.7 | 33.2 | ||||||
Mexico
|
8.9 | 9.9 | ||||||
Spain
|
3.8 | 2.3 | ||||||
Goodwill
|
241.5 | 241.5 | ||||||
$ | 478.1 | $ | 490.1 |
NOTE 19 — STOCK-BASED
COMPENSATION
In 2009,
2008 and 2007, pre-tax expenses of $0.4 million, $0.8 million and $3.4 million,
respectively, were recorded for stock option based compensation.
Description
of Equity Incentive Plan
Holdco
adopted a stock option plan in 2003. In December 2008, the Board of Directors of
Holdco approved the adoption of an amended and restated equity incentive plan
that represented a complete amendment, restatement and continuation of the
previous stock option plan. The amended and restated equity incentive plan
permits the granting of options to purchase shares of common stock of Holdco to
its employees, directors, and consultants, as well as the granting of restricted
shares of Holdco common stock. Options and restricted shares granted pursuant to
the equity incentive plan must be authorized by the Compensation Committee of
the Board of Directors of Holdco. The aggregate number of shares of Holdco’s
common stock that may be issued under the equity incentive plan may not exceed
450,000.
The terms
of the options may vary with each grant and are determined by the Compensation
Committee within the guidelines of the equity incentive plan. No option life can
be greater than ten years. Options currently vest over an 8 year period, and
vesting of a portion of the options could accelerate if Holdco achieves certain
financial targets, or in the event of certain changes in control. The options
have an exercise price equal to the estimated market value of Holdco’s common
stock on the date of grant, except for options to purchase 45,750 shares of
stock granted in 2007 at an exercise price that was above the estimated market
value at the date of grant.
83
UCI
Holdco, Inc.
Notes
to Consolidated Financial Statements
The terms
of the restricted stock are determined by the Compensation Committee within the
guidelines of the equity incentive plan. The shares of the restricted
stock vest only upon a change in control of Holdco.
Stock
Options
Options
granted prior to December 2006 originally had an exercise price of $100. In
January 2007, as a result of the dividend paid to Holdco stockholders of
approximately $96 per share, the exercise price for all options outstanding as
of that date was revised to $5 per share. See “Stock Option Modifications”
below.
Information
related to the number of shares under options follows:
December 31,
|
||||||||||||
2009
|
2008
|
2007
|
||||||||||
Number
of shares under option:
|
||||||||||||
Outstanding,
beginning of year
|
177,426 | 233,995 | 321,565 | |||||||||
Granted
|
2,000 | 2,000 | 73,750 | |||||||||
Canceled
|
(48,061 | ) | (38,000 | ) | (42,654 | ) | ||||||
Exercised
|
(3,650 | ) | (20,569 | ) | (118,666 | ) | ||||||
Outstanding,
end of year
|
127,715 | 177,426 | 233,995 | |||||||||
Exercisable,
end of year
|
110,906 | 141,520 | 148,611 |
The
Black-Scholes option pricing model was used to estimate fair values of the
options as of the date of grant. The fair value of options granted in 2009 and
2008 was $29.98 and $5.06, respectively. The fair value of options granted in
2007 ranged from $4.05 to $12.96. Principal assumptions used in applying the
Black-Scholes model were as follows:
Valuation assumptions
|
2009
|
2008
|
2007
|
|||||||||
Dividend
yield
|
0.00 | % | 0.00 | % | 0.00 | % | ||||||
Risk-free
interest rate
|
2.92 | % | 2.82 | % | 4.67 | % | ||||||
Volatility
|
41.76 | % | 42.15 | % | 41.83 | % | ||||||
Expected
option term in years
|
8 | 8 | 8 | |||||||||
Weighted
average exercise price per share
|
$ | 58.80 | $ | 23.63 | $ | 74.11 | ||||||
Weighted
average market value per share
|
$ | 58.80 | $ | 13.87 | $ | 23.63 |
Because
of its outstanding debt balances, Holdco does not anticipate paying cash
dividends in the foreseeable future and, therefore, uses an expected dividend
yield of zero. The expected option term is based on the assumption that options
will be outstanding throughout their 8-year vesting period. Volatility is based
upon the volatility of comparable publicly traded companies. Because Holdco is
not publicly traded, the market value of its stock is estimated based upon the
valuation of comparable publicly traded companies, the value of reported
acquisitions of comparable companies, and discounted cash flows. The exercise
price and market value per share amounts presented above were as of the date the
stock options were granted.
84
UCI
Holdco, Inc.
Notes
to Consolidated Financial Statements
A summary
of stock option activity in 2009 follows:
Number
of Shares
Under Option
|
Weighted
Average
Exercise Price
|
Weighted
Average
Remaining
Contractual
Life
|
|||||||
Outstanding
at December 31, 2008
|
177,426 | $ | 13.66 | ||||||
Granted
|
2,000 | 58.80 | |||||||
Canceled
|
(48,061 | ) | 26.04 | ||||||
Exercised
|
(3,650 | ) | 5.00 | ||||||
Outstanding
at December 31, 2009
|
127,715 | $ | 9.60 |
5.4
years
|
|||||
Exercisable
at December 31, 2009
|
110,906 | $ | 8.37 |
5.2
years
|
The
intrinsic value of options exercised during 2009, 2008 and 2007 was $0.1
million, $0.3 million and $2.2 million, respectively. Proceeds from the exercise
of options in 2009, 2008 and 2007 of $18 thousand dollars, $0.1 million and $0.6
million, respectively, were received and retained by Holdco.
A summary
of the number of shares under options that are outstanding as of December 31,
2009 follows:
Number
of Shares
Under Option
|
Weighted
Average
Remaining Life
|
Weighted
Average
Exercise Price
|
Number
Exercisable at
December 31, 2009
|
Weighted Average
Exercise Price
|
||||||||||||
108,715
|
4.9 | $ | 5.00 | 100,353 | $ | 5.00 | ||||||||||
15,000
|
8.1 | $ | 23.63 | 8,153 | $ | 23.63 | ||||||||||
2,000
|
10.0 | $ | 58.80 | 400 | $ | 58.80 | ||||||||||
2,000
|
8.0 | $ | 105.00 | 2,000 | $ | 105.00 |
At
December 31, 2009, there was $0.9 million of unrecognized compensation cost
relating to outstanding unvested stock options. Approximately $0.4 million of
this cost will be recognized in 2010. The balance will be recognized in
declining amounts through 2015.
The $0.4
million, $0.8 million and $3.4 million of stock option based compensation
expense recorded in 2009, 2008 and 2007, respectively, is a non-cash
charge.
Stock
Option Modifications
In
December 2006, Holdco declared a dividend of approximately $96 per share of
common stock. In accordance with the terms of the agreement related to then
outstanding stock options, in January 2007 the exercise price of all outstanding
options was lowered to offset the adverse effect the dividend had on the value
of the options. This change did not increase the value of the options;
consequently, no additional compensation expense was or will be
incurred.
In 2007,
the Compensation Committee of the Board of Directors accelerated the vesting of
approximately 10% of the then outstanding stock options and lowered the levels
of profitability and cash generation required to achieve future accelerated
vesting, including those for the 2007 year. This resulted in $1.5 million more
expense in 2007 than would have been incurred had the changes not been made.
Earlier vesting affects when stock option expense is recognized, but does not
affect the ultimate total expense. Consequently, accelerating the vesting
resulted in recording more of the total expense in 2007and less in later
years.
85
UCI
Holdco, Inc.
Notes
to Consolidated Financial Statements
Restricted
Stock
In
December 2008, the Compensation Committee granted 32,500 shares of restricted
stock in exchange for options to purchase 32,500 shares of common stock issued
in 2007 at an exercise price of $105.00 per share. The stock options surrendered
in exchange for the restricted stock are presented as a cancellation of stock
options in the stock option activity table above. Also in December 2008, the
Compensation Committee granted an additional 21,840 shares of restricted stock
to various members of management.
A summary
of all restricted stock activity during 2009 is as follows:
Number of Shares
|
Weighted Average
Grant Date Fair
Value
|
|||||||
Restricted
Stock Outstanding at December 31, 2008
|
54,340 | $ | 13.87 | |||||
Granted
|
59,500 | $ | 48.13 | |||||
Vested
|
— | $ | — | |||||
Forfeited
|
(4,000 | ) | $ | 13.87 | ||||
Restricted
Stock Outstanding at December 31, 2009
|
109,840 | $ | 32.43 |
During
2009 and 2008, the Company granted 59,500 and 54,340 shares of restricted stock
with aggregate fair values of $2.9 million and $0.7 million,
respectively.
The terms
of the restricted stock agreement provide that the shares of restricted stock
vest only upon a change of control, as defined, of Holdco. Due to the
uncertainty surrounding the ultimate vesting of the restricted stock, no
stock-based compensation expense has been recorded. When a change in control
becomes probable, expense equal to the fair value of the stock at that time will
be recorded.
NOTE 20 — FAIR VALUE
ACCOUNTING
The
accounting guidance on fair value measurements uses the term “inputs” to broadly
refer to the assumptions used in estimating fair values. It distinguishes
between (i) assumptions based on market data obtained from independent third
party sources (“observable inputs”) and (ii) Holdco’s assumptions based on the
best information available (“unobservable inputs”). The accounting guidance
requires that fair value valuation techniques maximize the use of “observable
inputs” and minimize the use of “unobservable inputs.” The fair value hierarchy
consists of the three broad levels listed below. The highest priority is given
to Level 1, and the lowest is given to Level 3.
Level
1 —
|
Quoted
market prices in active markets for identical assets or
liabilities
|
Level
2 —
|
Inputs
other than Level 1 inputs that are either directly or indirectly
observable
|
Level
3 —
|
Unobservable
inputs developed using Holdco’s estimates and assumptions, which reflect
those that market participants would use when valuing an asset or
liability
|
The
determination of where an asset or liability falls in the hierarchy requires
significant judgment.
Interest
rate swap measured at fair value on a recurring basis
The only
recurring fair value measurement reflected in Holdco’s financial statements was
the measurement of interest rate swaps. These interest rate swaps are described
in Note 21. The swaps expired in August 2008 and were not replaced.
86
UCI
Holdco, Inc.
Notes
to Consolidated Financial Statements
When the
swaps were outstanding, the fair value of the interest rate swaps were estimated
at the present value of the difference between (i) interest payable for the
duration of the swap at the swap interest rate and (ii) interest that would be
payable for the duration of the swap at the relevant current interest rate at
the date of measurement. The estimated fair value was based on “Level 2”
inputs.
Assets
measured at fair value on a nonrecurring basis
In 2009,
no assets were adjusted to their fair values on a nonrecurring
basis.
In 2008,
the assets listed in the following table were adjusted to fair value on a
nonrecurring basis. The amounts are in millions.
Fair Value Measurements
|
|||||||||
Using
|
|||||||||
Significant Unobservable Inputs
|
2008 Write-down
|
||||||||
Description
|
(Level 3)
|
Loss Adjustments
|
|||||||
Assets
held for sale
|
(a)
|
$ | 0.0 | $ | (1.3 | ) | |||
Trademarks
|
(b)
|
$ | 0.5 | $ | (0.5 | ) |
|
(a)
|
See
Note 2 for a description of the impairment write-down of these long-lived
assets held for sale. Their carrying amount of $1.3 million was written
down to their fair value of zero. This resulted in a loss of $1.3 million,
which was included in the 2008 income statement in “Restructuring
costs”.
|
|
(b)
|
See
Note 9 for a description of the 2008 impairment write-down of this
intangible asset. The estimated fair value of this asset is based on
discounted cash flows. The cash flows are estimated benefits, which are in
the form of avoided costs, because Holdco owns this intangible asset. The
estimated fair value of this intangible asset is based on “Level 3”
inputs.
|
Fair
value of financial instruments
Cash and cash equivalents -
The carrying amount of cash equivalents approximates fair value because the
original maturity is less than 90 days.
Trade accounts receivable -
The carrying amount of trade receivables approximates fair value because of
their short outstanding terms.
Trade accounts payable - The
carrying amount of trade payables approximates fair value because of their short
outstanding terms.
Short-term borrowings - The
carrying value of these borrowings equals fair value because their interest
rates reflect current market rates.
Long-term debt - The fair
value of the $190 million of term loan borrowings under UCI’s senior credit
facility at December 31, 2009 and 2008 was $176.7 million and $131.1 million,
respectively. The estimated fair value of UCI’s term loan was based on
information provided by an independent third party who participates in the
trading market for debt similar to the term loan. Due to the infrequency of
trades, this input is considered to be a Level 2 input.
The fair
value of UCI’s $230 million senior subordinated notes at December 31, 2009 and
2008 was $221.1 million and $94.9 million, respectively. The estimated fair
value of these notes was based on bid/ask prices, as reported by a third party
bond pricing service. Due to the infrequency of trades of the senior
subordinated notes, these inputs are considered to be Level 2
inputs.
87
UCI
Holdco, Inc.
Notes
to Consolidated Financial Statements
The fair
value of the Holdco Notes at December 31, 2009 and December 31, 2008 was $274.2
million and $94.1 million, respectively. The estimated fair value of these notes
is based on the bid/ask prices, as reported by a third party bond pricing
service. Due to the infrequency of trades of these notes, these inputs are
considered to be Level 2 inputs.
Interest rate swaps - See
Note 21.
NOTE 21 — INTEREST RATE
SWAPS
In
connection with UCI’s senior credit facilities, UCI was party to interest rate
swap agreements that effectively converted $80 million of variable rate debt to
fixed rate debt for the two years ended August 2007, and converted $40 million
for the 12-month period ended August 2008. The variable component of the
interest rate on borrowings under UCI’s senior credit facilities is based on
LIBOR. Under the swap agreements, UCI paid 4.4%, and received the then current
LIBOR on $80 million through August 2007 and UCI paid 4.4% and received the then
current LIBOR on $40 million for the 12-month period ending August
2008. UCI did not replace the interest rate swap that expired in
August 2008.
Quarterly,
Holdco adjusted the carrying value of this interest rate swap derivative to its
estimated fair value. The offset to the change in this carrying value was
recorded as an adjustment to “Accumulated other comprehensive income (loss)” in
Holdco’s stockholder’s equity. At December 31, 2006, Holdco recorded a $0.8
million asset to recognize the fair value of its interest rate swaps. Holdco
also recorded a $0.3 million deferred tax liability associated therewith. At
December 31, 2007, the estimated fair value was $7 thousand
dollars.
NOTE 22 — OTHER COMPREHENSIVE INCOME
(LOSS)
Accumulated
other comprehensive income (loss) was as follows (in millions):
Interest rate
swaps
|
Foreign
Currency
adjustment
|
Pension
and OPEB
Liability
adjustment
|
Total
accumulated
other
comprehensive
income (loss)
|
|||||||||||||
Balance
at January 1, 2007
|
$ | 0.5 | $ | 0.6 | $ | (3.6 | ) | $ | (2.5 | ) | ||||||
2007
change
|
(0.5 | ) | 0.8 | 9.0 | 9.3 | |||||||||||
Balance
at December 31, 2007
|
— | 1.4 | 5.4 | 6.8 | ||||||||||||
2008
change
|
— | (4.3 | ) | (42.1 | ) | (46.4 | ) | |||||||||
Balance
at December 31, 2008
|
— | (2.9 | ) | (36.7 | ) | (39.6 | ) | |||||||||
2009
change
|
— | 1.2 | 5.9 | 7.1 | ||||||||||||
Balance
at December 31, 2009
|
$ | — | $ | (1.7 | ) | $ | (30.8 | ) | $ | (32.5 | ) |
NOTE 23 — OTHER
INFORMATION
Cash
payments for interest in 2009, 2008 and 2007 were $29.6 million, $33.6 million
and $40.4 million, respectively. Cash payments (net of refunds) for income taxes
for 2009, 2008 and 2007 were $7.6 million, $(3.5) million and $(1.3) million,
respectively.
At
December 31, 2009 and 2008, 5,000,000 shares of voting common stock were
authorized and 2,864,210 and 2,860,560, respectively, were, issued and
outstanding. The par value of each share of common stock is $0.01 per
share.
88
UCI
Holdco, Inc.
Notes
to Consolidated Financial Statements
NOTE 24 — CONCENTRATION OF
RISK
Holdco
places its cash investments with a relatively small number of high quality
financial institutions. Substantially all of the cash and cash equivalents,
including foreign cash balances at December 31, 2009 and 2008, were uninsured.
Foreign cash balances at December 31, 2009 and 2008 were $8.4 million and $6.7
million, respectively.
Holdco
sells vehicle parts to a wide base of customers. Sales are primarily to
automotive aftermarket customers. Holdco has outstanding receivables owed by
these customers and to date has experienced no significant collection problems.
Sales to a single customer, AutoZone, approximated 30%, 29% and 28% of total net
sales for the years ended December 31, 2009, 2008 and 2007, respectively. No
other customer accounted for more than 10% of total net sales for the years
ended December 31, 2009, 2008 and 2007.
NOTE 25 — QUARTERLY FINANCIAL INFORMATION
(unaudited)
The
following is a summary of the unaudited quarterly results of operations. Holdco
believes that all adjustments considered necessary for a fair presentation in
accordance with generally accepted accounting principles have been included (in
millions).
Quarter Ended
|
||||||||||||||||
March 31
|
June 30
|
Sept. 30
|
Dec. 31
|
|||||||||||||
2009
|
||||||||||||||||
Net
sales
|
$ | 219.9 | $ | 217.4 | $ | 228.9 | $ | 218.8 | ||||||||
Gross
profit
|
40.3 | 48.3 | 55.8 | 55.2 | ||||||||||||
Net
income (loss) attributable to UCI Holdco, Inc.
|
(4.4 | ) | 2.5 | 8.2 | 2.9 | |||||||||||
2008
|
||||||||||||||||
Net
sales
|
$ | 229.3 | $ | 229.3 | $ | 218.1 | $ | 203.7 | ||||||||
Gross
profit
|
51.1 | 46.7 | 47.5 | 32.6 | ||||||||||||
Net
income (loss) attributable to UCI Holdco, Inc.
|
0.9 | (1.1 | ) | (0.5 | ) | (10.9 | ) |
Holdco’s
quarterly results were affected by the gains and (losses) described in Notes 2,
9, 12 and 16. Below is a summary of the gains and (losses). Except for the
effect on cost of sales described in Note 2 and the reduction in sales described
in Note 12, none of these losses affect net sales or gross profit. The amounts
below are after-tax amounts:
2009 Quarter Ended
|
||||||||||||||||
March 31
|
June 30
|
Sept. 30
|
Dec. 31
|
|||||||||||||
Note
2 — Restructuring costs
|
$ | 0.1 | $ | (0.4 | ) | $ | 0.3 | $ | 0.6 | |||||||
Note
16 — Patent litigation costs
|
— | — | — | 4.3 |
2008 Quarter Ended
|
||||||||||||||||
March 31
|
June 30
|
Sept. 30
|
Dec. 31
|
|||||||||||||
Note
2 — Restructuring costs
|
(0.2 | ) | (0.1 | ) | (0.1 | ) | (1.1 | ) | ||||||||
Note
9 — Trademark impairment loss
|
— | — | — | (0.3 | ) | |||||||||||
Note
12 — Higher than normal warranty loss provision
|
— | (3.6 | ) | — | (0.6 | ) |
89
UCI
Holdco, Inc.
Notes
to Consolidated Financial Statements
NOTE 26 — SUBSEQUENT
EVENTS
In
February 2010, Holdco entered into an agreement to sell its entire 51% interest
in its Chinese joint venture to its joint venture partner, LMC. The
sale price is approximately $0.9 million, plus the assumption of certain
liabilities due Holdco of approximately $2.5 million. Based upon the
terms of the proposed transaction, Holdco will record an after tax loss in the
range of $1.2 million to $1.6 million.
The sale
agreement also provides for the Company to enter into a long-term supply
agreement pursuant to which LMC will supply certain water pump components to the
Company. As part of this long-term supply agreement, LMC will
purchase from Holdco all the aluminum necessary to produce aluminum parts to be
supplied under the agreement. The completion of the sale is subject
to certain closing conditions, including approval from governmental entities in
China; accordingly, there is no assurance when, or if, the transaction will be
completed.
90
ITEM 9. CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A(T). CONTROLS AND
PROCEDURES
Evaluation
of Disclosure Controls and Procedures
The
Company maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed in the Company’s Exchange Act reports
is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission’s rules and forms and that
such information is accumulated and communicated to the Company’s management,
including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow for timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives, and management is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
As
required by Rule 13a-15 under the Exchange Act, management has evaluated, with
the participation of our Chief Executive Officer and Chief Financial Officer,
the effectiveness of our disclosure controls and procedures as of the end of the
period covered by this Annual Report on Form 10-K. Our Chief Executive Officer
and Chief Financial Officer have concluded, based on this evaluation, that as of
December 31, 2009, the end of the period covered by this Annual Report on Form
10-K, our disclosure controls and procedures were effective.
Management’s Annual Report on
Internal Control Over Financial Reporting
Under
Section 404 of the Sarbanes-Oxley Act of 2002, management is required to assess
the effectiveness of the Company’s internal control over financial reporting as
of the end of each fiscal year and report, based on that assessment, whether the
Company’s internal control over financial reporting is effective.
Management
of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting. The Company’s internal control over financial
reporting is designed to provide reasonable assurance as to the reliability of
the Company’s financial reporting and the preparation of financial statements in
accordance with generally accepted accounting principles.
Internal
control over financial reporting, no matter how well designed, has inherent
limitations. Therefore, internal control over financial reporting determined to
be effective can provide only reasonable assurance with respect to financial
statement preparation and may not prevent or detect all misstatements. Moreover,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
The
Company’s management has assessed the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2009. In making this
assessment, the Company used the criteria established by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in “Internal
Control-Integrated Framework.”
Based on
the Company’s processes and assessment, as described above, management has
concluded that, as of December 31, 2009, the Company’s internal control over
financial reporting was effective.
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this annual report.
91
Changes in Internal Control Over
Financial Reporting.
Management
also carried out an evaluation, as required by Rule 13a-15(d) of the Exchange
Act, with the participation of our Chief Executive Officer and our Chief
Financial Officer, of changes in the Company’s internal control over financial
reporting. Based on this evaluation, the Chief Executive Officer and the Chief
Financial Officer concluded that there were no changes in our internal control
over financial reporting that occurred during our last fiscal quarter that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
ITEM 9B. OTHER
INFORMATION
None.
92
PART
III
ITEM 10. DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The
following table sets forth information concerning our executive officers and
directors as of the date of this report.
Name
|
Age
|
Position
|
||
David
L. Squier
|
64
|
Chairman
of the Board
|
||
Bruce
M. Zorich
|
56
|
President,
Chief Executive Officer, Director
|
||
Mark
P. Blaufuss
|
41
|
Chief
Financial Officer, Director
|
||
Ian
I. Fujiyama
|
37
|
Director
|
||
Paul
R. Lederer
|
70
|
Director
|
||
Gregory
S. Ledford
|
52
|
Director
|
||
Michael
G. Malady
|
54
|
Vice
President, Human Resources
|
||
Raymond
A. Ranelli
|
62
|
Director
|
||
John
C. Ritter
|
62
|
Director
|
||
Martin
Sumner
|
36
|
Director
|
||
Keith
A. Zar
|
55
|
Vice
President, General Counsel and
Secretary
|
David L. Squier is the
Chairman of our Board of Directors and has been a member of the Board since
2006. He has also served in the same capacities for UCI since 2003. Mr. Squier
retired from Howmet Corporation in October 2000, where he served as the
President and Chief Executive Officer for over eight years. Prior to his tenure
as CEO, Mr. Squier served in a number of senior management assignments at
Howmet, including Executive Vice President and Chief Operating Officer. Mr.
Squier was also a member of the Board of Directors of Howmet from 1987 until his
retirement. Mr. Squier currently serves as an adviser to Carlyle. Mr. Squier
currently serves on the Boards of Directors of Vought Aircraft Industries, Wesco
Aircraft and Sequa Corporation and he served on the Board of Directors of Forged
Metal, Inc. from 2003 to 2008.
Bruce M. Zorich is our
President and Chief Executive Officer and has been a member of the Board since
2006. He has also served in the same capacities for UCI since 2003. From January
2002 through May 2003, Mr. Zorich was President and CEO of Magnatrax
Corporation. From 1996 to 2001, Mr. Zorich was President of Huck International.
In May of 2003, Magnatrax Corporation filed a voluntary petition to reorganize
under Chapter 11 of the U.S. Bankruptcy Code.
Mark P. Blaufuss is our Chief
Financial Officer and was elected as a member of the Board in September 2009. He
has also served in the same capacities for UCI since 2009. From April 2007
through August 2009, Mr. Blaufuss was Chief Financial Officer of AxleTech
International. From June 2004 through April 2007, he was a Director
at AlixPartners LLC.
Ian I. Fujiyama has been a
member of the Board since 2006. He has also served in the same capacity for UCI
since 2003. Mr. Fujiyama is a Managing Director with Carlyle, which he joined in
1997. During his tenure at Carlyle, he spent two years in Hong Kong and Seoul
working for Carlyle’s Asia buyout fund, Carlyle Asia Partners. Prior to joining
Carlyle, Mr. Fujiyama was an Associate at Donaldson Lufkin and Jenrette
Securities Corp. from 1994 to 1997. He is also a director of ARINC, Incorporated
and Booz Allen Hamilton, Incorporated.
Paul R. Lederer has been a
member of the Board since 2006. He has also served in the same capacity for UCI
since 2003. Mr. Lederer has been retired the past nine years with the exception
of serving on the Boards of Directors of several public companies, acting as a
consultant to Carlyle and serving on the Advisory Boards of Richco, Inc. and RTC
Corp. Mr. Lederer currently sits on the Board of Directors of O’Reilly
Automotive, Inc., Dorman Products, Inc. and MAXIMUS, Inc. Mr. Lederer served as
a director of Proliance International from 1995 to 2009.
Gregory S. Ledford has been a
member of the Board of Directors since September 2006. He has also served in the
same capacity for UCI since 2006. Mr. Ledford is a Managing Director with
Carlyle. Mr. Ledford joined Carlyle in 1988 and is currently head of the
Automotive and Transportation group. Prior to joining Carlyle, Mr. Ledford was
Director of Capital Leasing for MCI Telecommunications, where he was responsible
for more than $1 billion of leveraged lease financing. From 1991 to 1997, he was
Chairman and CEO of The Reilly Corp., a former portfolio Company that was
successfully sold in September 1997. Mr. Ledford is also a member of the Board
of Directors of The Hertz Corporation.
93
Michael G. Malady has been
our Vice President, Human Resources since 2006. He has also served in the same
capacity for UCI since 2003. Prior to joining UCI, Mr. Malady spent 16 years in
various positions with Howmet Corporation, most recently as Vice President,
Human Resources.
Raymond A. Ranelli has been a
member of the Board since 2006. He has also served in the same capacity for UCI
since 2004. Mr. Ranelli retired from PricewaterhouseCoopers, where he was a
partner for over 21 years, in 2003. Mr. Ranelli held several positions at
PricewaterhouseCoopers, including Vice Chairman and Global Leader of the
Financing Advisory Services practice. Mr. Ranelli is also a director of United
Surgical Partners International, Inc. Mr. Ranelli previously served as a
director of Centennial Communications Corp. from 2004 to 2009, Hawaiian Telcom
Communications, Inc. from 2005 to 2009 and Ameripath, Inc. from 2003 to
2007.
John C. Ritter has been a
member of the Board since 2006. He has also served in the same capacity for UCI
since 2003. Mr. Ritter served as President and a director of Raser Technologies,
Inc. from February 2004 to October 2005. From April 2003 to September 2003, Mr.
Ritter was our Chief Financial Officer. From July 2000 to December 2002, Mr.
Ritter held the position of Senior Vice President and CFO of Alcoa Industrial
Components. Mr. Ritter held the position of Senior Vice President and CFO for
Howmet Corporation from 1996 through 2000.
Martin Sumner has been a
member of the Board since December 2006. He has also served in the same capacity
for UCI since 2006. Mr. Sumner is a Principal with Carlyle, which he joined in
2003. During his tenure at Carlyle, he served as a Senior Associate from 2003 to
2005. Prior to joining Carlyle, Mr. Sumner worked as an Associate at Thayer
Capital Partners from 1999 to 2001 and an Associate at Mercer Management
Consulting from 1996 to 1999.
Keith A. Zar has been our
Vice President, General Counsel and Secretary since 2006. He has also served in
the same capacity for UCI since 2005. Prior to joining UCI, Mr. Zar was Senior
Vice President, General Counsel and Chief Administrative Officer of Next Level
Communications.
Board
Committees
Our Board
directs the management of our business and affairs as provided by Delaware law
and conducts its business through meetings of the Board of Directors and four
standing committees: the Audit Committee, the Executive Committee, the
Compensation Committee and the Investment Committee. The Audit Committee
consists of Messrs. Ranelli (chair), Ritter and Fujiyama. The Board has
determined that Messrs. Ranelli and Ritter are the Audit Committee financial
experts and that Messrs. Ranelli and Ritter are independent, determined using
the NYSE standard, for purposes of the Audit Committee. The Executive Committee
consists of Messrs. Squier, Zorich and Fujiyama. The Compensation Committee
consists of Messrs. Squier (chair), Lederer and Fujiyama. Mr. Blaufuss is the
sole member of the Investment Committee. In addition, from time to time, other
committees may be established under the direction of the Board when necessary to
address specific issues.
Code
of Ethics
The
Company has adopted a code of ethics that applies to its executive officers. A
copy of the code of ethics will be provided to any person without charge.
Request should be made in writing to Karl Van Mill at United Components, Inc.,
14601 Highway 41 North, Evansville, Indiana 47725.
94
ITEM 11. EXECUTIVE
COMPENSATION
Compensation
Discussion & Analysis
Compensation
Objectives
Our named
executive officers for 2009, or NEOs, include Bruce M. Zorich, President and
Chief Executive Officer, Mark P. Blaufuss, who joined UCI in September 2009 as
Chief Financial Officer and Executive Vice President, Daniel J. Johnston, who
served as Chief Financial Officer and Executive Vice President until September
30, 2009, Michael G. Malady, our Vice President, Human Resources, and Keith A.
Zar, our Vice President, General Counsel and Secretary. For our NEOs,
compensation is intended to be performance-based. The Compensation Committee
believes that compensation paid to executive officers should be closely aligned
with the performance of the Company on both a short-term and long-term basis,
linked to specific, measurable results intended to create value for
stockholders, and that such compensation should assist the Company in attracting
and retaining key executives critical to its long-term success.
In
establishing compensation for executive officers, the following are the
Compensation Committee’s objectives:
|
•
|
Attract
and retain individuals of superior ability and managerial
talent;
|
|
•
|
Ensure
senior officer compensation is aligned with the Company’s corporate
strategies, business objectives and the long-term interests of the
Company’s stockholders;
|
|
•
|
Increase
the incentive to achieve key strategic and financial performance measures
by linking incentive award opportunities to the achievement of performance
goals in these areas; and
|
|
•
|
Enhance
the officers’ incentive to maximize stockholder value, as well as promote
retention of key people, by providing a portion of total compensation
opportunities for senior management in the form of direct ownership in the
Company through stock options.
|
The
Company’s overall compensation program is structured to attract, motivate and
retain highly qualified executive officers by paying them competitively,
consistent with the Company’s success and their contribution to that success.
The Company believes compensation should be structured to ensure that a
significant portion of compensation opportunity will be directly related to
factors that directly and indirectly influence stockholder value. Accordingly,
the Company sets goals designed to link each NEO’s compensation to the Company’s
performance and the NEO’s own performance within the Company. Consistent with
our performance-based philosophy, the Company provides a base salary to our
executive officers and includes a significant incentive based component. For the
Company’s senior executive management team, comprised of the Chief Executive
Officer and Chief Financial Officer, the Company reserves the largest potential
cash compensation awards for its performance-based bonus program. This program
provides annual cash awards based on the financial performance of the
Company.
Determination
of Compensation Awards
The
Compensation Committee is provided with the primary authority to determine and
recommend the compensation awards available to the Company’s executive officers.
The Compensation Committee uses published surveys to evaluate competitive
practices and the amounts and nature of compensation paid to executive officers
of public companies with approximately $1 billion in annual sales to determine
the amount of executive compensation. Although the Compensation Committee
reviews and considers the survey data for purposes of developing a baseline
understanding of current compensation practices, the Compensation Committee does
not see the identity of any of the surveyed companies and the data is reviewed
only to ensure that the Company’s compensation levels and elements are
consistent with market standards. The Company does not benchmark compensation of
its NEOs against this data.
95
The
Company’s executive compensation package for the NEOs generally consists of a
fixed base salary and a variable cash incentive award, combined with an
equity-based incentive award granted at the commencement of employment. The
Company also granted an additional special equity-based incentive award in the
form of restricted stock to Messrs. Zorich, Malady and Zar in 2008. The variable
annual cash incentive award and the equity-based awards are designed to ensure
that total compensation reflects the overall success or failure of the Company
and to motivate the NEOs to meet appropriate performance measures, thereby
maximizing total return to stockholders.
To aid
the Compensation Committee in making its determination, the CEO provides
recommendations annually to the Compensation Committee regarding the
compensation of all officers, excluding himself. The performance of our senior
executive management team is reviewed annually by the Compensation Committee and
the Compensation Committee determines each NEO’s compensation
annually.
Within
its performance-based compensation program, the Company aims to compensate the
NEOs in a manner that is tax effective for the Company. In practice,
the Compensation Committee expects that all of the annual and long-term
compensation delivered by the Company will be deductible for purposes of the
Internal Revenue Code, as amended.
The
Company has no policy with respect to requiring officers and directors to own
stock of Holdco.
Salary
Freeze in 2009
In 2009,
as a result of the difficult economic conditions affecting us, the Company
instituted a wage freeze, which was applicable to all officers, including the
NEOs.
Compensation
Benchmarking and Survey Data
The
Company does not benchmark compensation of the NEOs against peer group data.
Base salary structures and annual incentive targets are set following the
Compensation Committee’s review of a general survey of the nature and amounts
and compensation paid by comparably sized companies. The Compensation Committee
believes that this approach helps to ensure that our cost structures will allow
us to remain competitive in our markets.
Historically,
we have targeted the aggregate value of our total compensation to be at or above
the median level for this survey group for most executive officer positions.
Actual pay for each NEO is determined around this structure, driven by the
performance of the executive over time, as well as the annual performance of the
Company. Because of the institution of the salary freeze for 2009 discussed
above, we did not review compensation data for the survey group for
2009.
Base
Compensation
In
setting base salaries for the Company’s executive officers, the Compensation
Committee reviews data from independently conducted compensation surveys, as
discussed above. While base salaries are not considered by the IRS to constitute
performance-based compensation, in addition to market positioning, each year the
Company determines base salary increases based upon the performance of the
executive officers as assessed by the Compensation Committee, and for executive
officers other than the CEO, by the CEO. No formulaic base salary increases are
provided to the NEOs. The Company sets base salaries for its NEOs generally at a
level it deems necessary to attract and retain individuals with superior
talent. In 2009, the Company instituted a salary freeze, resulting in
the NEOs who continued in employment with the Company receiving the same level
of base salary that they received in 2008.
Mr.
Blaufuss commenced his employment with the Company in September
2009. His salary of $380,000 per year was negotiated on an
arms-length basis prior to the beginning of his employment and is the same level
of salary earned by Mr. Johnston in the same position in 2009. The Compensation
Committee determined that that level of salary was appropriate for Mr. Blaufuss
based on the factors discussed above.
96
Performance-Based
Compensation
Annual
Performance-Based Cash Compensation
The
Company structures its compensation programs to reward executive officers based
on the Company’s performance and the individual executive’s contribution to that
performance. This allows executive officers to receive bonus compensation in the
event certain specified corporate performance measures and individual objectives
are achieved. In determining the compensation awarded to each executive officer
based on performance, the Company evaluates the Company’s and executive’s
performance in a number of areas.
The
annual bonus program consists of an annual cash award based upon the Company’s
achievement of adjusted EBITDA and operating cash flow targets and the
subjective assessment of performance of each NEO.
Under the
terms of the annual bonus plan, results of at least 90% of the target
performance level for any performance criteria must be achieved in order to earn
the portion of the award based on that criteria. Achievement of 90% of the
target performance level results in an award of 50% of the targeted award.
Achievement of 110% of the target performance level results in an award of 150%
of the targeted award. Once the achievement of targets has been determined, the
Compensation Committee makes a subjective assessment of personal performance for
each officer, and may adjust the amount of award paid upward or downward based
upon that assessment. In addition, incentive amounts to be paid under the
performance-based programs may be adjusted by the Compensation Committee to
account for unusual events such as extraordinary transactions, asset
dispositions and purchases, and mergers and acquisitions if, and to the extent,
the Compensation Committee does not consider the effect of such events
indicative of Company performance. Payments under each of the programs are
contingent upon continued employment, though pro rata bonus payments will be
paid in the event of death or disability based on actual performance at the date
relative to the targeted performance measures for each program.
The
adjusted EBITDA and operating cash flow targets are those contained in the
Company’s business plan for the year, are intended to satisfy overall corporate
goals for growth and strategic accomplishment, and are considered by the
Compensation Committee to be difficult to achieve, but obtainable.
.
For 2009,
the Company achieved 107% of the adjusted EBITDA performance target (which
carried a 50% weighting) and 107% of the operating cash flow performance target
(which carried a 50% weighting). Accordingly, before factoring in the
achievement of personal objectives, the executive officers achieved 135% of the
target award. Mr. Zorich’s target award under the plan is 80% of his base
salary, the target award for each of Messrs. Blaufuss and Johnston under the
plan is 50% of his base salary, the target award for Mr. Malady under the plan
is 35% of his base salary and the target award for Mr. Zar under the plan is 40%
of his base salary. Based on the criteria discussed above, for 2009 Messrs.
Zorich, Blaufuss, Johnston, Malady and Zar were awarded $558,000, $95,000,
$142,500, $124,950 and $173,400, respectively. The awards for Messrs.
Blaufuss and Johnston were adjusted to reflect a
pro-rata award based on a partial year of service. In
addition, pursuant to the terms of his severance agreement, Mr. Johnston’s award
(before taking into account his partial year of service) was limited to 100% of
his target award.
The
Compensation Committee believes that the payment of the annual cash incentive
bonus provides incentives necessary to retain executive officers and reward them
for short-term Company performance.
Discretionary
Long-Term Equity Incentive Awards
The
Company’s executive officers, along with other key Company employees, are
granted Holdco stock options or restricted stock at the commencement of their
employment with the Company, and are eligible to receive additional awards of
stock options or restricted stock at the discretion of the Compensation
Committee.
Guidelines
for the number of equity awards granted to each executive officer are determined
using a procedure approved by the Compensation Committee based upon several
factors, including the executive officer’s position and salary level and the
value of the equity award at the time of grant.
97
Equity
award grants are tied to vesting requirements and are designed to not only
compensate but to also motivate and retain the recipients by providing an
opportunity for the recipients to participate in the ownership of the Company.
The equity award grants to members of the senior management team also promote
the Company’s long-term objectives by aligning the interests of the executives
with the interests of the Company’s stockholders.
Generally,
stock options granted under the Holdco equity incentive plan have an eight-year
vesting schedule in order to provide an incentive for continued employment and
expire ten years from the date of the grant. 50% of each option is subject to
vesting in five equal installments over the first five years of the officer’s
employment. The remaining 50% of each option vests at the end of eight years
from the grant date, but may be accelerated upon the achievement of certain
targets in EBITDA and free cash flow. The exercise price of options granted
under the stock option plan is 100% of the fair market value of the underlying
stock on the date of grant.
None of
Messrs. Zorich, Johnston, Malady or Zar received an equity award grant in
2009. Mr. Blaufuss received an award of 30,000 shares of Holdco
restricted stock in 2009 in connection with the commencement of his employment
with the Company, which the Compensation Committee determined was appropriate to
attract, retain and incentivize Mr. Blaufuss. The shares of
restricted stock will vest only upon a change in control of Holdco.
Defined
Contribution Plans
The
Company has a Section 401(k) Savings/Retirement Plan (the “401(k) Plan”) to
cover eligible employees of the Company. The 401(k) Plan permits eligible
employees of the Company to defer up to 50% of their annual compensation,
subject to certain limitations imposed by the Internal Revenue Code. The
employees’ elective deferrals are immediately vested and non-forfeitable upon
contribution to the 401(k) Plan. The Company has suspended its matching
contributions to the 401(k) Plan. Prior to the suspension, the Company had made
matching contributions in an amount equal to fifty cents for each dollar of
participant contributions, up to a maximum of five percent of the participant’s
annual salary and subject to certain other limits. Plan participants vest in the
amounts contributed by the Company following three years of employment with the
Company. Employees of the Company are eligible to participate in the 401(k) Plan
immediately upon commencing employment with the Company.
The
401(k) Plan is offered on a nondiscriminatory basis to all employees of the
Company who meet the eligibility requirements. The Compensation Committee
believes that matching contributions previously provided by the Company assist
the Company in attracting and retaining talented executives and the Company may
determine to make matching contributions again in the future. The 401(k) Plan
provides an opportunity for participants to save money for retirement on a
tax-qualified basis and to achieve financial security, thereby promoting
retention.
Defined
Benefit Plans
Our CEO
and Vice President, Human Resources participate in the Champion Laboratories,
Inc. Pension Plan. Annual retirement benefits under the plan accrue at a rate of
1.5% of the first $200,000 of gross wages for each year of service up to 30
years of service. Benefits are payable as a life annuity for the participant. If
elected, joint & survivor and 10 year guaranteed payment options are
available at reduced benefit levels. The full retirement benefit is payable to
participants who retire on or after the social security retirement age, and a
reduced early retirement benefit is available to participants who retire on or
after age 55. No offsets are made for the value of any social security benefits
earned.
Similar
to the 401(k) Plan, this defined benefit plan is a nondiscriminatory
tax-qualified retirement plan that provides participants with an opportunity to
earn retirement benefits and provides for financial security. Offering these
benefits is an additional means for the Company to attract and retain
well-qualified executives.
Severance
Arrangements/Employment Agreements
The
Compensation Committee considers the maintenance of a sound management team to
be essential to protecting and enhancing our best interests and the best
interests of the Company. To that end, we recognize that the uncertainty that
may exist among management with respect to their “at-will” employment with the
Company may result in the departure or distraction of management personnel to
the detriment of the Company. Accordingly, the Compensation Committee has
determined that severance arrangements are appropriate to encourage the
continued attention and dedication of members of our management.
98
Messrs.
Zorich, Blaufuss, Malady and Zar each has an agreement which provides for
severance benefits upon termination of employment. Mr. Zorich has an employment
agreement, amended and restated as of December 23, 2008, which has an original
one-year term and is extended automatically for successive one-year periods
thereafter unless either party delivers notice within specified notice periods
to terminate the agreement. The agreement provides that upon termination of Mr.
Zorich’s employment he will be entitled to receive the sum of his unpaid annual
base salary through the date of termination, any unpaid expenses, any unpaid
accrued vacation pay, and any amount arising from his participation in, or
benefits under, any of our employee benefits plans, programs or arrangements.
Upon termination of Mr. Zorich’s employment either by us without cause or due to
nonextension of the term by us or by Mr. Zorich for good reason, he is entitled
to receive his stated annual base salary paid in monthly installments for 12
months (24 months in the case of a termination for any of these reasons
following a change of control of the Company), a lump sum payment of the pro
rata portion of his target level bonus and, during the severance period (but not
with respect to a termination due to nonextension of the term by us), continued
coverage under all of our group health benefit plans in which Mr. Zorich and any
of his dependents were entitled to participate immediately prior to termination.
The agreement also provides that upon termination of Mr. Zorich’s employment due
to his death or disability, he or his estate shall be entitled to six months of
his annual base salary and the pro rata portion of his annual bonus, to be
determined in good faith by the Compensation Committee. During his employment
and for 12 months following termination (24 months in the case of a termination
following a change of control), Mr. Zorich is prohibited from competing with any
material business of the Company, or from soliciting employees, customers or
suppliers of the Company to terminate their employment or arrangements with the
Company.
Mr.
Blaufuss has a severance agreement, dated as of September 8, 2009. The agreement
provides that, upon termination of Mr. Blaufuss’s employment either by us
without cause or by Mr. Blaufuss for good reason, he is entitled to receive his
stated annual base salary, paid in monthly installments for 12 months and,
during the severance period, direct payment or reimbursement of health and
dental insurance premiums. Upon termination of Mr. Blaufuss’s employment either
by us without cause, or by Mr. Blaufuss for good reason following a change of
control of the Company, he is entitled to receive his stated annual base salary
paid in monthly installments for 24 months and, during the severance period,
direct payment or reimbursement of health and dental insurance
premiums.
Mr.
Malady has a severance agreement, dated as of December 23, 2008. The agreement
provides that, upon termination of Mr. Malady’s employment either by us without
cause or by Mr. Malady for good reason, he is entitled to receive his stated
annual base salary, paid in monthly installments for 12 months and, during the
severance period, direct payment or reimbursement of health and dental insurance
premiums. Upon termination of Mr. Malady’s employment either by us without
cause, or by Mr. Malady for good reason following a change of control of the
Company, he is entitled to receive his stated annual base salary paid in monthly
installments for 24 months and, during the severance period, direct payment or
reimbursement of health and dental insurance premiums.
Mr. Zar
has a severance agreement, dated as of December 23, 2008. The agreement provides
that, upon termination of Mr. Zar’s employment either by us without cause or by
Mr. Zar for good reason, he is entitled to receive his stated annual base
salary, paid in monthly installments for 12 months and, during the severance
period, direct payment or reimbursement of health and dental insurance premiums.
Upon termination of Mr. Zar’s employment either by us without cause, or by Mr.
Zar for good reason following a change of control of the Company, he is entitled
to receive his stated annual base salary paid in monthly installments for 24
months and, during the severance period, direct payment or reimbursement of
health and dental insurance premiums.
Mr.
Johnston had a severance agreement, dated as of December 23, 2008. The agreement
provided that, upon termination of Mr. Johnston’s employment (i) either by us
without cause or by Mr. Johnston for good reason or (ii) for any reason on or
after September 30, 2009, he would be entitled to receive his stated annual base
salary paid in monthly installments for 12 months, a lump sum payment of the pro
rata portion of his target level bonus and, during the severance period, direct
payment or reimbursement of health and dental insurance premiums. Upon
termination of Mr. Johnston’s employment either by us without cause or by Mr.
Johnston for good reason following a change of control of the Company, he would
have been entitled to receive his stated annual base salary paid in monthly
installments for 24 months and, during the severance period, direct payment or
reimbursement of health and dental insurance premiums. Mr. Johnston’s
employment with us terminated on September 30, 2009 and we are currently making
severance payments to Mr. Johnston in accordance with the terms of his severance
agreement, as described in more detail below.
99
Other
Elements of Compensation and Perquisites
Medical Insurance. The
Company provides to each NEO, the NEO’s spouse and children such health, dental
and optical insurance as the Company may from time to time make available to its
other executives of the same level of employment.
Life and Disability Insurance.
The Company provides each NEO such disability and/or life insurance as
the Company in its sole discretion may from time to time make available to its
other executive employees of the same level of employment.
Policies with Respect to Equity
Compensation Awards `
The
Company grants all stock option awards at no less than fair market value as of
the date of grant. The fair market value is determined in good faith by the
Board of Directors, with analyses prepared by independent valuation experts, as
deemed appropriate.
COMPENSATION
COMMITTEE REPORT
The
Compensation Committee has reviewed and discussed the Compensation Discussion
and Analysis required by Item 402(b) of Regulation S-K (Section 229.402(b)) with
management. Based on this review and discussion, the Compensation Committee
recommended to the Board of Directors that the Compensation Discussion and
Analysis be included in this Annual Report on Form 10-K.
Respectfully
submitted,
|
|
David
L. Squier, Chairman
|
|
Ian
I. Fujiyama
|
|
100
SUMMARY
COMPENSATION TABLE FOR 2009
Name and Principal
Position
|
Year
|
Salary
|
Bonus
|
Stock
Awards(1)
|
Option
Awards(2)
|
Non-Equity
Incentive Plan
Compensation(3)
|
Change in Pension
Value
|
All Other
Compensation(4)
|
Total
|
|||||||||||||||||||||||||
Bruce
M. Zorich
|
2009
|
$ | 465,000 | $ | 558,000 | $ | 36,936 | $ | 8,401 | $ | 1,068,337 | |||||||||||||||||||||||
President
and Chief
|
2008
|
465,000 | $ | 125,000 | (5) | $ | 0 | 36,856 | 7,935 | 634,791 | ||||||||||||||||||||||||
Executive
Officer
|
2007
|
441,000 | $ | 0 | 387,000 | 19,855 | 7,141 | 854,996 | ||||||||||||||||||||||||||
Mark
P. Blaufuss
Chief
Financial
|
2009
|
126,667 | 75,000 | (7) | 0 | 95,000 | 556 | 297,223 | ||||||||||||||||||||||||||
Officer
and
|
||||||||||||||||||||||||||||||||||
Executive
Vice President(6)
|
||||||||||||||||||||||||||||||||||
Daniel
J. Johnston
|
2009
|
285,000 | 142,500 | 99,230 | 526,730 | |||||||||||||||||||||||||||||
Chief
Financial
|
2008
|
380,000 | 62,700 | (5) | 7,141 | 449,841 | ||||||||||||||||||||||||||||
Officer
and
|
2007
|
203,558 | 100,000 | (9) | 46,955 | 119,000 | 1,629 | 471,142 | ||||||||||||||||||||||||||
Executive
Vice President(8)
|
||||||||||||||||||||||||||||||||||
Michael
G. Malady
|
2009
|
238,000 | 124,950 | 29,984 | 3,143 | 396,077 | ||||||||||||||||||||||||||||
Vice
President,
|
||||||||||||||||||||||||||||||||||
Human
Resources
|
||||||||||||||||||||||||||||||||||
Keith
A. Zar
|
2009
|
289,000 | 173,400 | 3,410 | 465,810 | |||||||||||||||||||||||||||||
Vice
President, General
|
||||||||||||||||||||||||||||||||||
Counsel
and Secretary
|
(1)
|
Amounts
represent the aggregate grant date fair value computed in accordance with
FASB ASC Topic 718. For the assumptions used in calculating the value of
this award, see Note 19 to our consolidated financial statements included
in this report.
|
(2)
|
Amounts
represent the aggregate grant date fair value computed in accordance with
FASB ASC Topic 718. For the assumptions used in calculating the value of
this award, see Note 19 to our consolidated financial statements included
in this report.
|
(3)
|
Represents
bonus amounts earned under the Company’s annual bonus program for fiscal
years ended December 31, 2007 and December 31, 2009. No bonuses were
earned under the annual bonus program with respect to performance for the
year ended December 31, 2008.
|
(4)
|
Includes
Company matching funds under the Company’s 401(k) plan and Company-paid
life insurance premiums. For Mr. Johnston, includes $95,000 in
severance payments, and $3,608, representing the cost of healthcare
continuation benefits provided to Mr. Johnston in 2009. The
total amount of severance payments and benefits to be made or provided to
Mr. Johnston are set forth in more detail below and are contingent on Mr.
Johnston’s compliance with certain non-competition, non-solicitation and
non-disparagement covenants.
|
(5)
|
Represent
discretionary bonuses paid in 2009 with respect to the year ended December
31, 2008. These bonuses were not paid under the Company’s annual bonus
program.
|
(6)
|
Mr.
Blaufuss’s employment with the Company commenced on September 8,
2009.
|
(7)
|
Represents
payment made to Mr. Blaufuss in connection with the commencement of his
employment with the Company.
|
(8)
|
Mr.
Johnston’s employment with the Company commenced on June 11,
2007.
|
(9)
|
Represents
payment made to Mr. Johnston in connection with the commencement of his
employment with the Company.
|
101
GRANTS
OF PLAN-BASED AWARDS FOR 2009
Grant Date Fair
|
||||||||||||||||||||||
Estimated Future Payouts Under Non-Equity
|
All Other Stock Awards:
|
Value of
|
||||||||||||||||||||
Incentive
Plan Awards
|
Number
of Shares of Stock
|
Stock
and Option
|
||||||||||||||||||||
Name
|
Grant
Date
|
Threshold
|
Target
|
Maximum
|
or
Units
|
Awards
|
||||||||||||||||
Bruce
M. Zorich
|
$ | 186,000 | $ | 372,000 | (1) | $ | 558,000 | |||||||||||||||
Mark
P. Blaufuss
|
31,667 | 63,333 | (2) | 95,000 | ||||||||||||||||||
9/8/09
|
30,000 | (3) | $ | 0 | (4) | |||||||||||||||||
Daniel
J. Johnston
|
71,250 | 142,500 | (5) | 142,500 | ||||||||||||||||||
Michael
G. Malady
|
41,650 | 83,300 | (6) | 124,950 | ||||||||||||||||||
Keith
A. Zar
|
57,800 | 115,600 | (7) | 173,400 |
(1)
|
Actual
cash bonus earned under the UCI Annual Incentive Compensation Plan for the
2009 plan year was $558,000. See “Annual Performance-Based Cash
Compensation” above for a discussion of the calculation of this
bonus.
|
(2)
|
Actual
cash bonus earned under the UCI Annual Incentive Compensation Plan for the
2009 plan year was $95,000. See “Annual Performance-Based Cash
Compensation” above for a discussion of the calculation of this
bonus.
|
(3)
|
This
restricted stock was granted on September 8, 2009 under the Holdco equity
incentive plan. All stock vests following a change of control of Holdco.
See “Discretionary Long-Term Equity Incentive Awards” for a discussion of
the terms of these option grants.
|
(4)
|
The
value of a stock award is based on the grant date fair value computed in
accordance with FASB ASC Topic 718. For the assumptions used in
calculating the value of this award, see Note 19 to our consolidated
financial statements included in this
report.
|
(5)
|
Actual
cash bonus earned under the UCI Annual Incentive Compensation Plan for the
2009 plan year was $142,500. See “Annual Performance-Based Cash
Compensation” above for a discussion of the calculation of this
bonus.
|
(6)
|
Actual
cash bonus earned under the UCI Annual Incentive Compensation Plan for the
2009 plan year was $124,950. See “Annual Performance-Based Cash
Compensation” above for a discussion of the calculation of this
bonus.
|
(7)
|
Actual
cash bonus earned under the UCI Annual Incentive Compensation Plan for the
2009 plan year was $173,400. See “Annual Performance-Based Cash
Compensation” above for a discussion of the calculation of this
bonus.
|
102
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END 2009
The
following table provides information regarding the Holdco stock options and
restricted stock held by the named executive officers as of December 31,
2009.
Name
|
Number of
Securities
Underlying
Unexercised
Options —
Exercisable
|
Number of
Securities
Underlying
Unexercised
Options —
Unexercisable
|
Equity Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
|
Option Exercise
Price
|
Option Expiration
Date
|
Number of Shares or
Units of Stock That
Have Not Vested
|
Market Value of
Shares or Units of
Stock That Have
Not Vested
|
||||||||||||||||||
Bruce
M. Zorich
|
6,500 | (1) | 2,889 | (2) | 28,889 | (3) | $ | 5.00 |
11/21/2013
|
19,300 | (4) | $ | 0 | ||||||||||||
Mark
P. Blaufuss
|
0 | 0 | 0 | 30,000 | (4) | 0 | |||||||||||||||||||
Daniel
J. Johnston
|
0 | 0 | 0 | ||||||||||||||||||||||
Michael
G. Malady
|
2,250 | (5) | 1,000 | (6) | 5.00 |
8/25/2013
|
8,260 | (4) | 0 | ||||||||||||||||
Keith
A. Zar
|
7,500 | (7) | 2,500 | (8) | 5.00 |
1/31/2015
|
9,280 | (4) | 0 |
(1)
|
The
6,500 shares underlying the exercisable portion of the option became
exercisable on December 31, 2007.
|
(2)
|
These
2,889 shares will become exercisable on November 20,
2011.
|
(3)
|
These
28,889 shares may become exercisable upon the achievement of certain
financial targets.
|
(4)
|
These
shares of restricted stock become vested only in connection with a change
of control of Holdco.
|
(5)
|
The
2,250 shares underlying the exercisable portion of the option became
exercisable on December 31, 2007.
|
(6)
|
These
1,000 shares will become exercisable on August 25,
2011.
|
(7)
|
The
7,500 shares underlying the exercisable portion of the option became
exercisable as follows: 1,500 shares on December 31, 2005, 2,000 shares on
December 31, 2006, 2,000 shares on December 31, 2007, 1,000 shares on
December 31, 2008 and 1,000 shares on December 31,
2009.
|
(8)
|
These
2,500 shares will become exercisable on January 31,
2013.
|
PENSION
BENEFITS FOR 2009
The
following table sets forth information regarding the accrued pension benefits
for the named executive officers for 2009 under the Champion Laboratories Inc.
Pension Plan, described below.
Name
|
Plan Name
|
Number of
Years
Credited
Service
|
Present Value
of
Accumulated
Benefit
|
Payments
During Last
Fiscal Year
|
||||||||||
Bruce
M. Zorich
|
Champion
Laboratories Inc. Pension Plan
|
7 | $ | 152,533 | $ | 0 | ||||||||
Michael
G. Malady
|
Champion
Laboratories Inc. Pension Plan
|
6 | 127,191 | 0 |
103
Mr.
Zorich and Mr. Malady are the only named executive officers eligible to
participate in the Champion Laboratories Inc. Pension Plan offered by us as
described below. The following table shows the estimated annual pension benefit
under the pension plan for the specified compensation and years of
service.
Years
of Service
|
||||||||||||||||||||||||
Remuneration
|
5
|
10
|
15
|
20
|
25
|
30
|
||||||||||||||||||
$125,000
|
9,375 | 18,750 | 28,125 | 37,500 | 46,875 | 56,250 | ||||||||||||||||||
$150,000
|
11,250 | 22,500 | 33,750 | 45,000 | 56,250 | 67,500 | ||||||||||||||||||
$175,000
|
13,125 | 26,250 | 39,375 | 52,500 | 65,625 | 78,750 | ||||||||||||||||||
$200,000
and over
|
15,000 | 30,000 | 45,000 | 60,000 | 75,000 | 90,000 |
Annual
retirement benefits accrue at a rate of 1.5% of the first $200,000 of gross
wages for each year of service up to 30 years of service. Benefits are payable
as a life annuity for the participant. If elected, joint & survivor and 10
year guaranteed options are available at reduced benefit levels. The full
retirement benefit is payable to participants who retire on or after the social
security retirement age, and a reduced early retirement benefit is available to
participants who retire on or after age 55. No offsets are made for the value of
any social security benefits earned.
As of
December 31, 2009, Messrs. Zorich and Malady had earned seven and six years,
respectively, of credited service under the pension plan.
For
information with respect to the valuation methods and material assumptions
applied in quantifying the present value of the accrued benefits under the
pension plan, see Note 15 to the financial statements of the Company contained
in this Form 10-K.
Potential
Payments upon Termination or Change-in-Control
Messrs.
Zorich, Blaufuss, Malady and Zar each has an agreement which provides for
severance benefits upon termination of employment. See the section titled
“Severance Arrangements/Employment Agreements” above for a description of the
employment and severance agreements with our NEOs.
Assuming
that Mr. Zorich’s employment had been terminated by us without cause or by Mr.
Zorich with good reason effective December 31, 2009, he would have been entitled
to the following severance benefits: salary continuation, $465,000 ($930,000 if
his employment had been terminated for any of those reasons following a change
of control); bonus, $372,000; and group health benefits, $15,570 ($31,140 if his
employment had been terminated for any of those reasons following a change of
control). The health benefits were calculated using an estimate of the cost to
the Company of such health coverage based upon past experience.
Assuming
that Mr. Blaufuss’s employment had been terminated by us without cause or by Mr.
Blaufuss with good reason effective December 31, 2009, he would have been
entitled to the following severance benefits: salary continuation, $380,000; and
group health benefits, $15,172. If his employment had been terminated effective
December 31, 2009 for any of those reasons following a change of control, he
would have been entitled to the following severance benefits: salary
continuation, $760,000; and group health benefits, $30,344. The health benefits
were calculated using an estimate of the cost to the Company of such health
coverage based upon past experience.
Assuming
that Mr. Malady’s employment had been terminated by us without cause or by Mr.
Malady with good reason effective December 31, 2009, he would have been entitled
to the following severance benefits: salary continuation, $238,000; and group
health benefits, $15,172. If his employment had been terminated effective
December 31, 2009 for any of those reasons following a change of control, he
would have been entitled to the following severance benefits: salary
continuation, $476,000; and group health benefits, $30,344. The health benefits
were calculated using an estimate of the cost to the Company of such health
coverage based upon past experience.
104
Assuming
that Mr. Zar’s employment had been terminated by us without cause or by Mr. Zar
with good reason effective December 31, 2009, he would have been entitled to the
following severance benefits: salary continuation, $289,000; and group health
benefits, $15,172. If his employment had been terminated effective December 31,
2009 for any of those reasons following a change of control, he would have been
entitled to the following severance benefits: salary continuation, $578,000; and
group health benefits, $30,344. The health benefits were calculated using an
estimate of the cost to the Company of such health coverage based upon past
experience.
Mr.
Johnston is being paid the following severance benefits following his
termination in September 2009: salary continuation, $380,000 ($95,000 in 2009
and $285,000 in 2010); bonus for 2009, $142,500; and group health benefits,
$18,039 ($3,608 in 2009 and $14,431 in 2010).
Under the
agreements covering certain of Mr. Zorich’s, Mr. Zar’s and Mr. Malady’s stock
options, in the event of a change in control of the Company, the exercisability
of all shares of Holdco underlying the option would be accelerated. In addition,
under the agreement covering Mr. Zorich’s, Mr. Blaufuss’s, Mr. Zar’s and Mr.
Malady’s restricted stock, in the event of a change of control of Holdco, all of
the restricted stock would vest. Assuming a change in control of Holdco occurred
effective December 31, 2009, based on the estimated fair market value of $58.80
per share of the Company’s common stock on that date, the value of the
acceleration of Mr. Zorich’s, Mr. Zar’s and Mr. Malady’s unvested outstanding
options (determined by multiplying the fair market value on December 31, 2009,
minus the exercise price, by the number of shares subject to the option that
would receive accelerated vesting), would be $155,427, $107,599 and $53,800,
respectively. Assuming a change in control of Holdco occurred effective December
31, 2009, based on the estimated fair market value of $58.80 per share of
Holdco’s common stock on that date, the value of the vesting of Mr. Zorich’s,
Mr. Blaufuss’s, Mr. Zar’s and Mr. Malady’s restricted stock would be $1,134,835,
$1,763,992, $545,662 and $485,686,respectively.
Compensation
Risk
Management
of the Company, through the human resources, finance and legal departments, have
analyzed the potential risks arising from the Company's compensation policies
and practices, and has determined that there are no such risks that are
reasonably likely to have a material adverse effect on the Company.
DIRECTOR
COMPENSATION FOR 2009
Directors
who are employees of the Company (Messrs. Zorich and Blaufuss) or Carlyle
(Messrs. Fujiyama, Ledford and Sumner) receive no additional compensation for
serving on the board or its committees. Mr. Squier, Chairman of the Board,
receives a cash retainer of $60,000 per year; Mr. Ranelli, Chairman of our Audit
Committee, receives a cash retainer of $55,000 per year; and the other directors
not employed by Carlyle or the Company, John Ritter and Paul Lederer, receive a
cash retainer of $45,000 per year. Each of Messrs. Squier, Ranelli, Ritter and
Lederer is also granted, in December of each year he continues in service as a
director, an option to purchase 500 shares of the common stock of Holdco, to
become exercisable 20% per year over five years.
In 2009,
we provided the following annual compensation to directors who are not employees
of the Company or Carlyle.
Name
|
Fees Earned if
Paid in Cash
|
Option
Awards(1)
|
Total
|
|||||||||
David
L. Squier
|
$ | 60,000 | $ | 14,990 | (2) | $ | 74,990 | |||||
Paul
R. Lederer
|
45,000 | 14,990 | (3) | 59,990 | ||||||||
Raymond
A. Ranelli
|
55,000 | 14,990 | (4) | 69,990 | ||||||||
John
C. Ritter
|
45,000 | 14,990 | (5) | 59,990 |
(1)
|
Amounts
represent the aggregate grant date fair value computed in accordance with
FASB ASC Topic 718. For the assumptions used in calculating the value of
this award, see Note 19 to our consolidated financial statements included
in this report.
|
105
(2)
|
As
of December 31, 2009, Mr. Squier held options with respect to 4,000 shares
of common stock of Holdco: 1,000 granted on December 9, 2003 with a grant
date fair value of $52,170; 500 granted on August 2, 2004 with a grant
date fair value of $27,150; 500 granted on December 14, 2005 with a grant
date fair value of $26,755; 500 granted on December 15, 2006 with a grant
date fair value of $36,441; 500 granted on December 15, 2007 with a grant
date fair value of $6,380; 500 granted on December 15, 2008 with a grant
date fair value of $2,530; and 500 granted on December 15, 2009 with a
grant date fair value of $14,990.
|
(3)
|
As
of December 31, 2009, Mr. Lederer held options with respect to 3,500
shares of common stock of Holdco: 500 granted on December 9, 2003 with a
grant date fair value of $26,085; 500 granted on August 2, 2004 with a
grant date fair value of $27,150; 500 granted on December 14, 2005 with a
grant date fair value of $26,755; 500 granted on December 15, 2006 with a
grant date fair value of $36,441; 500 granted on December 15, 2007 with a
grant date fair value of $6,380; 500 granted on December 15, 2008 with a
grant date fair value of $2,530; and 500 granted on December 15, 2009 with
a grant date fair value of $14,990.
|
(4)
|
As
of December 31, 2009, Mr. Ranelli held options with respect to 3,500
shares of common stock of Holdco: 1,000 granted on June 30, 2004 with a
grant date fair value of $54,300; 500 granted on December 14, 2005 with a
grant date fair value of $26,755; 500 granted on December 15, 2006 with a
grant date fair value of $36,441; 500 granted on December 15, 2007 with a
grant date fair value of $6,380; 500 granted on December 15, 2008 with a
grant date fair value of $2,530; and 500 granted on December 15, 2009 with
a grant date fair value of $14,990.
|
(5)
|
As
of December 31, 2009, Mr. Ritter held options with respect to 3,500 shares
of common stock of Holdco: 500 granted on December 9, 2003 with a grant
date fair value of $26,085; 500 granted on August 2, 2004 with a grant
date fair value of $27,150; 500 granted on December 14, 2005 with a grant
date fair value of $26,755; 500 granted on December 15, 2006 with a grant
date fair value of $36,441; 500 granted on December 15, 2007 with a grant
date fair value of $6,380; 500 granted on December 15, 2008 with a grant
date fair value of $2,530; and 500 granted on December 15, 2009 with a
grant date fair value of $14,990.
|
ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
EQUITY
COMPENSATION PLAN INFORMATION
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights (1)
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
|
Number of securities
remaining available
for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
|
||||||||||
Plan
category
|
(a)
|
(b)
|
(c)
|
|||||||||
Equity
compensation plans approved by security holders
|
127,715 | $9.60 | 39,273 | |||||||||
Equity
compensation plans not approved by security holders
|
0 | 0 | 0 | |||||||||
Total
|
127,715 | $9.60 | 39,273 |
(1)
|
This
includes shares subject to options outstanding under the Amended and
Restated Equity Incentive Plan of Holdco,
Inc.
|
106
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Holdco
has 2,864,210 shares of common stock outstanding. Certain affiliates of Carlyle
own approximately 90.8% of Holdco’s common stock while the remainder is owned by
members of our Board of Directors, Bruce M. Zorich, our President and Chief
Executive Officer, and other employees of the Company.
The
following table sets forth information with respect to the beneficial ownership
of Holdco’s common stock as of the date of this report by:
|
•
|
each
person known to own beneficially more than 5% of the capital
stock;
|
|
•
|
each
of our directors;
|
|
•
|
each
of the executive officers named in the summary compensation table;
and
|
|
•
|
all
of our directors and executive officers as a
group.
|
The
amounts and percentages of shares beneficially owned are reported on the basis
of SEC regulations governing the determination of beneficial ownership of
securities. Under SEC rules, a person is deemed to be a “beneficial” owner of a
security if that person has or shares voting power or investment power, which
includes the power to dispose of or to direct the disposition of such security.
A person is also deemed to be a beneficial owner of any securities of which that
person has a right to acquire beneficial ownership within 60 days. Securities
that can be so acquired are deemed to be outstanding for purposes of computing
any other person’s percentage. Under these rules, more than one person may be
deemed to be a beneficial owner of securities as to which such person has no
economic interest.
Except as
otherwise indicated in these footnotes, each of the beneficial owners listed
has, to our knowledge, sole voting and investment power with respect to the
shares of capital stock.
Beneficial
Ownership of Holdco
Name of Beneficial Owner
|
Number of
Shares
|
Percentage of
Outstanding
Capital Stock
|
||||||
TCG
Holdings, L.L.C.(1)
|
2,600,500 | 90.8 | % | |||||
Bruce
M. Zorich(2)
|
29,000 | * | ||||||
David
L. Squier(3)
|
4,000 | * | ||||||
Ian
I. Fujiyama
|
1,500 | * | ||||||
Paul
R. Lederer(4)
|
2,900 | * | ||||||
Michael
G. Malady(5)
|
11,000 | * | ||||||
Raymond
A. Ranelli(6)
|
3,500 | * | ||||||
John
C. Ritter(7)
|
5,500 | * | ||||||
Keith
A. Zar(8)
|
8,000 | * | ||||||
All
executive officers and directors as a group (11 persons)
|
65,400 | 1.6 | % |
*
|
Denotes
less than 1.0% of beneficial
ownership.
|
(1)
|
Carlyle
Partners III, L.P., a Delaware limited partnership, and CP III
Coinvestment, L.P., a Delaware limited partnership (the “Investment
Partnerships”), both of which are affiliates of Carlyle, own approximately
90.8% of the outstanding common stock of Holdco, Inc. TC Group Investment
Holdings, L.P. exercises investment discretion and control over the shares
held by the Investment Partnerships indirectly through its subsidiary TC
Group III, L.P., which is the sole general partner of the Investment
Partnerships. TCG Holdings II, L.P., a Delaware limited partnership, is
the sole general partner of TC Group Investment Holdings, L.P. DBD
Investors V, L.L.C., a Delaware limited liability Company, is the sole
general partner of TCG Holdings II, L.P. and its address is c/o The
Carlyle Group, 1001 Pennsylvania Ave. N.W., Suite 220S, Washington, D.C.
20004.
|
107
(2)
|
Includes
22,500 shares in Holdco beneficially owned by Mr. Zorich and the right to
acquire up to 6,500 additional
shares.
|
(3)
|
Includes
1,000 shares in Holdco beneficially owned by Mr. Squier and the right to
acquire up to 3,000 additional
shares.
|
(4)
|
Includes
400 shares in Holdco beneficially owned by Mr. Lederer and the right to
acquire up to 2,500 additional
shares.
|
(5)
|
Includes
8,750 shares in Holdco beneficially owned by Mr. Malady and the right to
acquire up to 2,250 additional
shares.
|
(6)
|
Includes
1,000 shares in Holdco beneficially owned by Mr. Ranelli and the right to
acquire up to 2,500 additional
shares.
|
(7)
|
Includes
3,000 shares in Holdco beneficially owned by Mr. Ritter and the right to
acquire up to 2,500 additional
shares.
|
(8)
|
Includes
the right to acquire up to 8,000 shares in
Holdco.
|
ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Carlyle
Management Agreement
In
connection with the Acquisition, we entered into a management agreement with TC
Group, L.L.C., an affiliate of Carlyle, for management and financial advisory
services and oversight to be provided to us and our subsidiaries. Pursuant to
this agreement, we pay an annual management fee to Carlyle of $2.0 million and
annual out-of-pocket expenses, and we may pay Carlyle additional fees associated
with financial advisory and other future transactions. Carlyle also received a
one-time transaction fee of $10.0 million upon consummation of the Acquisition.
In 2006, Carlyle was paid $2.5 million for the ASC Acquisition. The management
agreement also provides for indemnification of Carlyle against liabilities and
expenses arising out of Carlyle’s performance of services under the agreement.
The agreement terminates either when Carlyle or its affiliates own less than ten
percent of our equity interests or when we and Carlyle mutually agree to
terminate the agreement.
Stockholders
Agreement
On May
25, 2006, we and certain of our executive officers and affiliates of Carlyle who
are holders of our common stock entered into a stockholders agreement
that:
|
•
|
imposes
restrictions on their transfer of
shares;
|
|
•
|
requires
those stockholders to take certain actions upon the approval by
stockholders party to the agreement holding a majority of the shares held
by those stockholders in connection with a sale of the Company;
and
|
|
•
|
grants
our principal stockholders the right to require other stockholders to
participate pro rata in connection with a sale of shares by our principal
stockholder.
|
The
stockholder agreement will terminate upon the sale or disposition of all or
substantially all of our assets or upon the execution of a resolution of our
board of directors terminating the agreement.
Employment
Agreements
In
connection with the Acquisition, we entered into employment agreements with
certain of our named executive officers as described in “Item 11. Executive
Compensation — Compensation Discussion and Analysis — Severance
Arrangement/Employment Agreements.”
108
Other
Related Party Transactions
Sales to
The Hertz Corporation were $0.9 million, $0.6 million and $0.6 million for the
years ended December 31, 2009, 2008 and 2007, respectively. Affiliates of The
Carlyle Group own more than 10% of Hertz Global Holdings, Inc. The
Hertz Corporation is an indirect, wholly-owned subsidiary of Hertz Global
Holdings, Inc.
Sales to
Allison Transmission, Inc. were $0.6 million for the year ended December 31,
2009. Affiliates of The Carlyle Group own more than 10% of Allison Transmission,
Inc.
As part
of the ASC Acquisition, we acquired a 51% interest in a Chinese joint venture.
This joint venture purchases aluminum castings from our 49% joint venture
partner, Shandong Yanzhou Liancheng Metal Products Co. Ltd (“LMC”) and other
materials from the joint venture partner’s affiliates. In 2009, 2008 and 2007,
we purchased $11.1 million, $12.0 million and $15.4 million, respectively, from
its joint venture partner and its affiliates. In addition, we sold materials and
processing services to LMC in the amount of $3.1 million in 2009.
ASC rents
a building from its former president. The 2009, 2008 and 2007 rent payments,
which are believed to be at market rate, were $1.5 million, $1.5 million and
$1.4 million, respectively.
Director
Independence
The
Company has no securities listed for trading on a national securities exchange
or in an automated inter-dealer quotation system of a national securities
association, which has requirements that a majority of its board of directors be
independent. However, the board has determined that under the New York Stock
Exchange’s definition of independence, Messrs. Lederer, Ritter and Ranelli would
be independent.
ITEM 14. PRINCIPAL
ACCOUNTING FEES AND SERVICES
Fees
billed by Grant Thornton LLP in 2009 and 2008 were:
Audit Fees — Audit fees
billed in 2009 and 2008, were $2,317,111 and $2,806,228,
respectively.
Audit-Related Fees — In 2009
and 2008, the Company had audit-related fees of $207,698 and $303,949,
respectively. These fees were primarily for audits of Company-sponsored pension
plans.
Tax Fees — There were no fees
billed for tax services in 2009 and 2008.
All Other Fees — There were
no other fees billed in 2009 and 2008.
Our
policy is to require our Audit Committee to pre-approve audit services. In March
2004, the Company established a policy that also requires Audit Committee
pre-approval for all audit-related, tax, and other services. Previously, senior
management was authorized to approve such services provided that the services
were brought to the attention of the Audit Committee and were approved by the
Audit Committee prior to the completion of the audit. Management monitors all
services provided by our principal accountants and reports periodically to our
Audit Committee on these matters.
109
PART
IV
ITEM 15. EXHIBITS AND
FINANCIAL STATEMENT SCHEDULES
(a)(1)
Financial
Statements.
The
Company’s consolidated financial statements included in Item 8 hereof are as of
December 31, 2009 and 2008, and for the three years ending December 31, 2009.
Such financial statements consist of the following:
Balance
Sheets
Income
Statements
Statements
of Cash Flows
Statements
of Changes in Shareholder’s Equity
Notes to
Consolidated Financial Statements
(a)(2)
Financial Statement
Schedules.
Schedule
II — Valuation and Qualifying Accounts
Certain
information required in Schedule II, Valuation and Qualifying Accounts, has been
omitted because equivalent information has been included in the financial
statements included in this Form 10-K.
Other
financial statement schedules have been omitted because they either are not
required, are immaterial or are not applicable.
110
Report
of Independent Registered Public Accounting Firm
Board of
Directors and Shareholders
of UCI
Holdco, Inc. and subsidiaries
We have
audited in accordance with the standards of the Public Company Accounting
Oversight Board (United States) the consolidated financial statements of UCI
Holdco, Inc. and subsidiaries referred to in our report dated March 19, 2010,
which is included in Part II on this Form 10-K. Our audits of the basic
financial statements included the financial statement schedule listed in the
index appearing under Item 15(a)(2), which is the responsibility of
the Company’s management. In our opinion, this financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth
therein.
/s/ GRANT
THORNTON LLP
Cincinnati,
Ohio
March 19,
2010
111
Schedule II — Valuation and Qualifying
Accounts
Description
|
Balance
at
Beginning of Year
|
Charged
to
Income
|
Deductions
|
Other
(a)
|
Balance at
End of Year
|
|||||||||||||||
(In
millions)
|
||||||||||||||||||||
Year
ended December 31, 2009
|
||||||||||||||||||||
Allowance
for excess and obsolete inventory
|
$ | 14.9 | $ | 3.1 | $ | (3.0 | ) | $ | 0.1 | $ | 15.1 | |||||||||
Valuation
allowance for deferred tax assets
|
4.2 | 0.4 | — | 0.6 | 5.2 | |||||||||||||||
Year
ended December 31, 2008
|
||||||||||||||||||||
Allowance
for excess and obsolete inventory
|
15.6 | 3.7 | (4.3 | ) | (0.1 | ) | 14.9 | |||||||||||||
Valuation
allowance for deferred tax assets
|
4.3 | 0.9 | — | (1.0 | ) | 4.2 | ||||||||||||||
Year
ended December 31, 2007
|
||||||||||||||||||||
Allowance
for excess and obsolete inventory
|
19.7 | 2.3 | (6.4 | ) | — | 15.6 | ||||||||||||||
Valuation
allowance for deferred tax assets
|
3.1 | 1.3 | (0.1 | ) | — | 4.3 |
(a)
|
In
2009 and 2008, Other is the effect of foreign currency
translation.
|
(a)(3)
Exhibits
EXHIBIT
INDEX
Exhibit
No.
|
Description of
Exhibit
|
|
2.1
|
Stock
Purchase Agreement by and among United Components, Inc., ACAS Acquisitions
(ASC), Inc. and the Sellers named herein, dated as of March 8, 2006
(incorporated by reference to Exhibit 2.1 to United Components’ Report on
Form 10-K filed March 31, 2006).
|
|
2.2
|
Asset
Purchase Agreement by and among United Components, Inc., Neapco Inc. and
Neapco, LLC, dated as of June 30, 2006 (incorporated by reference to
Exhibit 2.1 to United Components’ Report on Form 8-K filed July 6,
2006).
|
|
2.3
|
Asset
Purchase Agreement by and among Pioneer Inc. Automotive Products, United
Components, Inc. and Pioneer, Inc., dated as of June 29, 2006
(incorporated by reference to Exhibit 2.2 to United Components’ Report on
Form 8-K filed July 6, 2006).
|
|
2.4
|
Stock
Purchase Agreement by and among Truck-Lite Co. Limited, Truck-Lite Co.,
Inc., UIS Industries Limited and United Components, Inc., dated as of
November 30, 2006 (incorporated by reference to Exhibit 2.1 to United
Components’ Report on Form 8-K filed December 6, 2006).
|
|
3.1
|
Amended
and Restated Certificate of Incorporation of United Components, Inc.,
filed April 29, 2003 (incorporated by reference to Exhibit 3.1 to United
Components’ Registration Statement on Form S-4 (No. 333-107219) filed July
21, 2003).
|
|
3.2
|
Bylaws
of United Components, Inc. (incorporated by reference to Exhibit 3.14 to
United Components’ Registration Statement on Form S-4 (No. 333-107219)
filed July 21, 2003).
|
|
4.1
|
Senior
Subordinated Note Indenture with respect to the 9 3/8% Senior Subordinated
Notes due 2013, between United Components, Inc., Wells Fargo Bank
Minnesota, National Association, as trustee, and the Guarantors listed on
the signature pages thereto, dated as of June 20, 2003. (incorporated by
reference to Exhibit 4.1 to United Components’ Registration Statement on
Form S-4 (No. 333-107219) filed July 21, 2003).
|
|
4.2
|
Form
of 9 3/8% Senior Subordinated Notes due 2013 (included in Exhibit
4.1).
|
112
10.1
|
Credit
Agreement, dated as of June 20, 2003, by and among United Components,
Inc., the lenders party thereto, Lehman Brothers Inc. and J.P. Morgan
Securities Inc. as joint lead arrangers, J.P. Morgan Chase Bank as
syndication agent, ABN AMRO Bank N.V., Credit Lyonnais, New York Branch,
Fleet National Bank and General Electric Capital Corporation as
co-documentation agents and Lehman Commercial Paper Inc. as administrative
agent (incorporated by reference to Exhibit 10.1 to United Components’
Registration Statement on Form S-4 (No. 333-107219) filed July 21,
2003).
|
|
10.2
|
Guarantee
and Collateral Agreement, dated as of June 20, 2003, among UCI Acquisition
Holdings, Inc., United Components, Inc. and certain subsidiaries of United
Components, Inc., for the benefit of Lehman Commercial Paper, Inc., as
administrative agent (incorporated by reference to Exhibit 10.2 to United
Components’ Registration Statement on Form S-4 (No. 333-107219) filed July
21, 2003).
|
|
10.3
|
Management
Agreement among United Components, Inc. and TC Group, L.L.C. dated June
20, 2003 (incorporated by reference to Exhibit 10.3 to United Components’
Registration Statement on Form S-4 (No. 333-107219) filed July 21,
2003).
|
|
*10.4
|
Employment
Agreement Term Sheet between United Components, Inc. and John Ritter
effective as of April 25, 2003, as amended (incorporated by reference to
Exhibit 10.4 to United Components’ Registration Statement on Form S-4 (No.
333-107219) filed July 21, 2003).
|
|
*10.5
|
Employment
Agreement between United Aftermarket, Inc. and Bruce Zorich dated as of
April 18, 2003, as amended (incorporated by reference to Exhibit 10.5 to
United Components’ Registration Statement on Form S-4 (No. 333-107219)
filed July 21, 2003).
|
|
*10.6
|
Fourth
Amended and Restated Champion Laboratories Pension Plan, effective as of
January 1, 1997 (incorporated by reference to Exhibit 10.7 to United
Components’ Registration Statement on Form S-4 (No. 333-107219) filed July
21, 2003).
|
|
*10.7
|
Employment
Agreement among United Components, Inc., Champion Laboratories, Inc. and
Charlie Dickson, effective as of September 2, 2003 (incorporated by
reference to Exhibit 10.8 to United Components’ Amendment No. 1 to
Registration Statement on Form S-4/A (No. 333-107219) filed October 7,
2003).
|
|
10.8
|
First
Amendment to Credit Agreement dated as of December 22, 2003, by and among
United Components, Inc., the lenders party thereto, Lehman Brothers Inc.
and J.P. Morgan Securities Inc. as joint lead arrangers, J.P. Morgan Chase
Bank as syndication agent, ABN AMRO Bank N.V., Credit Lyonnais, New York
Branch, Fleet National Bank and General Electric Capital Corporation as
co-documentation agents and Lehman Commercial Paper Inc. as administrative
agent (incorporated by reference to Exhibit 10.9 to United Components’
Report on Form 10-K filed March 30, 2004).
|
|
*10.9
|
Amended
and Restated Stock Option Plan of UCI Holdco, Inc., effective as of May
25, 2006 (incorporated by reference to Exhibit 10.10 to United Components’
Report on Form 10-K filed March 30, 2007).
|
|
*10.10
|
UCI
Annual Incentive Compensation Plan (incorporated by reference to Exhibit
10.11 to United Components’ Report on Form 10-K filed March 30,
2004).
|
|
10.11
|
Amended
and Restated Credit Agreement, dated May 25, 2006, among United
Components, Inc., as borrower, Lehman Brothers Inc. and J.P. Morgan
Securities Inc., as joint advisors, joint lead arrangers and joint
bookrunners, JPMorgan Chase Bank, N.A., as syndication agent, ABN AMRO
Bank N.V., Bank of America, N.A. and General Electric Capital Corporation,
as co-documentation agents, and Lehman Commercial Paper Inc., as
administrative agent and the several banks and other financial
institutions or entities from time to time parties to the agreement
(incorporated by reference to Exhibit 10.12 to United Components’ Report
on Form 8-K filed May 31, 2006).
|
|
*10.12
|
Amended
and Restated Equity Incentive Plan of UCI Holdco, Inc., effective as of
December 23, 2008 (incorporated by reference to Exhibit 10.12 to United
Components’ Report on Form 10-K filed March 31, 2009).
|
|
*10.13
|
Restricted
Stock Agreement, dated December 23, 2008, between UCI Holdco, Inc. and
Bruce M. Zorich (incorporated by reference to Exhibit 10.12 to United
Components’ Report on Form 10-K filed March 31, 2009).
|
|
*10.14
|
Amended
and Restated Employment Agreement, dated December 23, 2008, between United
Components, Inc. and Bruce Zorich (incorporated by reference to Exhibit
10.12 to United Components’ Report on Form 10-K filed March 31,
2009).
|
113
*10.15
|
Severance
Agreement, dated December 23, 2008, between Daniel Johnston, United
Components, Inc., and UCI Holdco, Inc. (incorporated by reference to
Exhibit 10.12 to United Components’ Report on Form 10-K filed March 31,
2009).
|
|
*10.16
|
Severance
Agreement, dated September 8, 2009, between Mark P. Blaufuss, United
Components, Inc., and UCI Holdco, Inc.
|
|
*10.17
|
Restricted
Stock Agreement, dated September 8, 2009, between UCI Holdco, Inc. and
Mark P. Blaufuss.
|
|
*10.18
|
Severance
Agreement, dated December 23, 2008, between Keith A. Zar, United
Components, Inc., and UCI Holdco, Inc.
|
|
*10.19
|
Restricted
Stock Agreement, dated December 23, 2008, between UCI Holdco, Inc. and
Keith A. Zar
|
|
*10.20
|
Severance
Agreement, dated December 23, 2008, between Michael G. Malady, United
Components, Inc., and UCI Holdco, Inc.
|
|
*10.21
|
Restricted
Stock Agreement, dated December 23, 2008, between UCI Holdco, Inc. and
Michael G. Malady.
|
|
10.22
|
Resignation,
Waiver, Consent, Appointment and Amendment Agreement entered into as of
December 22, 2009, by and among Lehman Commercial Paper Inc. acting
through one or more of its branches as the Administrative Agent and Swing
Line Lender, under the Credit Agreement, Bank of America, N.A., the
Lenders party hereto, United Components, Inc. and each of the Guarantors
signatory hereto.
|
|
31.1
|
Certification
of Periodic Report by the Chief Executive Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934.
|
|
31.2
|
Certification
of Periodic Report by the Chief Financial Officer pursuant to Rule
13a-14(a) of the Securities Exchange Act of 1934.
|
|
32.1**
|
|
Certification
of Periodic Report by the Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C 1350, as created by Section 906 of the
Sarbanes-Oxley Act of 2002.
|
*
|
Management
contract or compensatory plan or
arrangement.
|
**
|
This
certificate is being furnished solely to accompany the report pursuant to
18 U.S.C 1350 and is not being filed for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended, and is not to be incorporated
by reference into any filing of the Company, whether made before or after
the date hereof, regardless of any general incorporation language in such
filing.
|
114
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
UCI HOLDCO,
INC.
|
||
By:
|
/s/ MARK P. BLAUFUSS
|
|
Name:
Mark P. Blaufuss
|
||
Title:
Chief Financial Officer
|
Date:
March 19, 2010
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
/s/ BRUCE M. ZORICH
|
President
and Chief Executive Officer
|
|||
Bruce
M. Zorich
|
(Principal
Executive Officer)
|
March
19, 2010
|
||
/s/ MARK P. BLAUFUSS
|
Chief
Financial Officer
|
|||
Mark
P. Blaufuss
|
(Principal
Financial Officer and
|
|||
Principal
Accounting Officer)
|
March
19, 2010
|
|||
/s/ DAVID L. SQUIER
|
Chairman
|
|||
David
L. Squier
|
March
19, 2010
|
|||
/s/ IAN I. FUJIYAMA
|
Director
|
|||
Ian
I. Fujiyama
|
March
19, 2010
|
|||
/s/ PAUL R. LEDERER
|
Director
|
|||
Paul
R. Lederer
|
March
19, 2010
|
|||
/s/ GREGORY S. LEDFORD
|
Director
|
|||
Gregory
S. Ledford
|
March
19, 2010
|
|||
/s/ RAYMOND A. RANELLI
|
Director
|
|||
Raymond
A. Ranelli
|
March
19, 2010
|
|||
/s/ JOHN C. RITTER
|
Director
|
|||
John
C. Ritter
|
March
19, 2010
|
|||
/s/ MARTIN SUMNER
|
|
Director
|
|
|
Martin
Sumner
|
March
19, 2010
|
115