Attached files
file | filename |
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EX-32 - Federal-Mogul Holdings LLC | v182476_ex32.htm |
EX-31.1 - Federal-Mogul Holdings LLC | v182476_ex31-1.htm |
EX-31.2 - Federal-Mogul Holdings LLC | v182476_ex31-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the quarterly period ended March
31, 2010
or
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
|
For the transition period from
__________ to __________
Commission
File Number: 000-52986
FEDERAL-MOGUL
CORPORATION
(Exact
name of Registrant as specified in its charter)
Delaware
|
20-8350090
|
(State
or other jurisdiction of
incorporation
or organization)
|
(IRS
employer
identification
number)
|
26555
Northwestern Highway, Southfield, Michigan
|
48033
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(248)
354-7700
|
(Registrant’s
telephone number, including area
code)
|
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 x No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes ¨ No
¨
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 x Non-accelerated
filer ¨ Smaller
Reporting Company ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨ No
x
Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court.
Yes x No
¨
As of
April 27, 2010, there were 98,904,500 outstanding shares of the registrant’s
$0.01 par value common stock.
FEDERAL-MOGUL
CORPORATION
Form
10-Q
For the
Quarter Ended March 31, 2010
INDEX
Page
No.
|
|
Part
I – Financial Information
|
3
|
Item
1 – Financial Statements
|
3
|
Consolidated
Statements of Operations
|
3
|
Consolidated
Balance Sheets
|
4
|
Consolidated
Statements of Cash Flows
|
5
|
Notes
to Consolidated Financial Statements
|
6
|
Forward-Looking
Statements
|
25
|
Item
2 – Management’s Discussion and Analysis of Financial Condition and
Results of Operations
|
25
|
Item
3 – Qualitative and Quantitative Disclosures about Market
Risk
|
34
|
Item
4 – Controls and Procedures
|
34
|
Part
II – Other Information
|
35 |
Item
1 – Legal Proceedings
|
35
|
Item
6 – Exhibits
|
35
|
Signatures
|
36
|
Exhibits
|
|
2
PART
I
FINANCIAL
INFORMATION
ITEM
1. FINANCIAL STATEMENTS
FEDERAL-MOGUL
CORPORATION
Consolidated
Statements of Operations (Unaudited)
Three
Months Ended
March 31
|
||||||||
2010
|
2009
|
|||||||
(Millions
of Dollars,
|
||||||||
Except
Per Share Amounts)
|
||||||||
Net
sales
|
$ | 1,489 | $ | 1,238 | ||||
Cost
of products sold
|
(1,235 | ) | (1,080 | ) | ||||
Gross
margin
|
254 | 158 | ||||||
Selling,
general and administrative expenses
|
(184 | ) | (184 | ) | ||||
Interest
expense, net
|
(33 | ) | (34 | ) | ||||
Amortization
expense
|
(12 | ) | (12 | ) | ||||
Equity
earnings of non-consolidated affiliates
|
7 | — | ||||||
Restructuring
expense, net
|
(1 | ) | (38 | ) | ||||
Other
(expense) income, net
|
(21 | ) | 13 | |||||
Income
(loss) before income taxes
|
10 | (97 | ) | |||||
Income
tax benefit (expense)
|
7 | (4 | ) | |||||
Net
income
(loss)
|
17 | (101 | ) | |||||
Less
net income attributable to noncontrolling interests
|
(2 | ) | — | |||||
Net
income (loss) attributable to Federal-Mogul
|
$ | 15 | $ | (101 | ) | |||
Basic
and diluted income (loss) per common share
|
$ | 0.15 | $ | (1.02 | ) |
See
accompanying notes to consolidated financial statements.
3
FEDERAL-MOGUL
CORPORATION
Consolidated
Balance Sheets
(Unaudited)
March
31
2010
|
December 31
2009
|
|||||||
(Millions
of Dollars)
|
||||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and equivalents
|
$ | 1,028 | $ | 1,034 | ||||
Accounts
receivable, net
|
1,018 | 950 | ||||||
Inventories,
net
|
842 | 823 | ||||||
Prepaid
expenses and other current assets
|
231 | 221 | ||||||
Total
current assets
|
3,119 | 3,028 | ||||||
Property,
plant and equipment, net
|
1,762 | 1,834 | ||||||
Goodwill
and indefinite-lived intangible assets
|
1,427 | 1,427 | ||||||
Definite-lived
intangible assets, net
|
503 | 515 | ||||||
Other
noncurrent assets
|
320 | 323 | ||||||
$ | 7,131 | $ | 7,127 | |||||
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Short-term
debt, including current portion of long-term debt
|
$ | 97 | $ | 97 | ||||
Accounts
payable
|
576 | 537 | ||||||
Accrued
liabilities
|
408 | 410 | ||||||
Current
portion of postemployment benefit liability
|
60 | 61 | ||||||
Other
current liabilities
|
159 | 175 | ||||||
Total
current liabilities
|
1,300 | 1,280 | ||||||
Long-term
debt
|
2,758 | 2,760 | ||||||
Postemployment
benefits
|
1,284 | 1,298 | ||||||
Long-term
portion of deferred income taxes
|
496 | 498 | ||||||
Other
accrued liabilities
|
187 | 192 | ||||||
Shareholders’
equity:
|
||||||||
Preferred
stock ($.01 par value;
90,000,000 authorized shares; none issued)
|
— | — | ||||||
Common stock ($.01 par
value; 450,100,000 authorized shares; 100,500,000
issued shares; 98,904,500 outstanding shares as of March 31, 2010 and December 31,
2009)
|
1 | 1 | ||||||
Additional
paid-in capital, including warrants
|
2,150 | 2,123 | ||||||
Accumulated
deficit
|
(498 | ) | (513 | ) | ||||
Accumulated
other comprehensive loss
|
(607 | ) | (571 | ) | ||||
Treasury
stock, at cost
|
(17 | ) | (17 | ) | ||||
Total
Federal-Mogul shareholders’ equity
|
1,029 | 1,023 | ||||||
Noncontrolling
interests
|
77 | 76 | ||||||
Total
shareholders’ equity
|
1,106 | 1,099 | ||||||
$ | 7,131 | $ | 7,127 |
See
accompanying notes to consolidated financial statements.
4
FEDERAL-MOGUL
CORPORATION
Consolidated
Statements of Cash Flows (Unaudited)
Three
Months Ended
March 31
|
||||||||
2010
|
2009
|
|||||||
(Millions
of Dollars)
|
||||||||
Cash
Provided From (Used By) Operating Activities
|
||||||||
Net
income (loss)
|
$ | 17 | $ | (101 | ) | |||
Adjustments
to reconcile net income (loss) to net cash provided from (used by)
operating activities:
|
||||||||
Depreciation
and amortization
|
81 | 77 | ||||||
Cash
received from 524(g) Trust
|
— | 40 | ||||||
Payments
to settle non-debt liabilities subject to compromise, net
|
(14 | ) | (49 | ) | ||||
Loss
on Venezuelan currency devaluation
|
20 | — | ||||||
Equity
earnings of non-consolidated affiliates
|
(7 | ) | — | |||||
Cash
dividends received from non-consolidated affiliates
|
20 | — | ||||||
Change
in postemployment benefits, including pensions
|
7 | 14 | ||||||
Change
in deferred taxes
|
(27 | ) | (3 | ) | ||||
Gain
on sale of property, plant and equipment
|
(2 | ) | — | |||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(83 | ) | (66 | ) | ||||
Inventories
|
(36 | ) | (22 | ) | ||||
Accounts
payable
|
56 | (107 | ) | |||||
Other
assets and liabilities
|
48 | 57 | ||||||
Net
Cash Provided From (Used By) Operating Activities
|
80 | (160 | ) | |||||
Cash
Provided From (Used By) Investing Activities
|
||||||||
Expenditures
for property, plant and equipment
|
(46 | ) | (45 | ) | ||||
Net
proceeds from the sale of property, plant and equipment
|
2 | — | ||||||
Net
Cash Used By Investing Activities
|
(44 | ) | (45 | ) | ||||
Cash
Provided From (Used By) Financing Activities
|
||||||||
Principal
payments on term loans
|
(7 | ) | (7 | ) | ||||
Decrease
in other long-term debt
|
(1 | ) | (1 | ) | ||||
Increase
in short-term debt
|
1 | 2 | ||||||
Net
payments from factoring arrangements
|
(14 | ) | (9 | ) | ||||
Net
Cash Used By Financing Activities
|
(21 | ) | (15 | ) | ||||
Effect
of Venezuelan currency devaluation on cash
|
(16 | ) | — | |||||
Effect
of foreign currency exchange rate fluctuations on cash
|
(5 | ) | (4 | ) | ||||
Effect
of foreign currency fluctuations on cash
|
(21 | ) | (4 | ) | ||||
Decrease
in cash and equivalents
|
(6 | ) | (224 | ) | ||||
Cash
and equivalents at beginning of period
|
1,034 | 888 | ||||||
Cash
and equivalents at end of period
|
$ | 1,028 | $ | 664 |
See
accompanying notes to consolidated financial statements.
5
FEDERAL-MOGUL
CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March
31, 2010
1.
|
BASIS
OF PRESENTATION
|
Interim Financial Statements:
The unaudited consolidated financial statements of Federal-Mogul
Corporation (the “Company”) have been prepared in accordance with the rules and
regulations of the Securities and Exchange Commission (“SEC”). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States (“U.S. GAAP”) have been condensed or omitted pursuant to such
rules and regulations. These statements include all adjustments (consisting of
normal recurring adjustments) that management believes are necessary for a fair
presentation of the results of operations, financial position and cash flows.
The Company’s management believes that the disclosures are adequate to make the
information presented not misleading when read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2009.
Operating results for the three months ended March 31, 2010 are not necessarily
indicative of the results that may be expected for the year ended
December 31, 2010.
Principles of Consolidation:
The Company consolidates into its financial statements the accounts of
the Company, all wholly-owned subsidiaries, and any partially-owned subsidiary
that the Company has the ability to control. Control generally equates to
ownership percentage, whereby investments that are more than 50% owned are
consolidated, investments in affiliates of 50% or less but greater than 20% are
accounted for using the equity method, and investments in affiliates of 20% or
less are accounted for using the cost method. The Company does not consolidate
any entity for which it has a variable interest based solely on power to direct
the activities and significant participation in the entity’s expected results
that would not otherwise be consolidated based on control through voting
interests. Further, the Company’s joint ventures are businesses established and
maintained in connection with its operating strategy. All intercompany
transactions and balances have been eliminated.
Use of Estimates: The
preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the amounts reported
therein. Due to the inherent uncertainty involved in making estimates, actual
results reported in future periods may be based upon amounts that differ from
these estimates.
Controlling Ownership: Mr.
Carl C. Icahn indirectly controls approximately 76% of the voting power of the
Company’s capital stock and, by virtue of such stock ownership, is able to
control or exert substantial influence over the Company, including the election
of directors, business strategy and policies, mergers or other business
combinations, acquisition or disposition of assets, future issuances of common
stock or other securities, incurrence of debt or obtaining other sources of
financing, and the payment of dividends on the Company’s common stock. The
existence of a controlling stockholder may have the effect of making it
difficult for, or may discourage or delay, a third party from seeking to acquire
a majority of the Company’s outstanding common stock, which may adversely affect
the market price of the stock.
Mr.
Icahn’s interests may not always be consistent with the Company’s interests or
with the interests of the Company’s other stockholders. Mr. Carl C. Icahn and
entities controlled by him may also pursue acquisitions or business
opportunities that may or may not be complementary to the Company’s business. To
the extent that conflicts of interest may arise between the Company and Mr.
Icahn and his affiliates, those conflicts may be resolved in a manner adverse to
the Company or its other shareholders.
Trade Accounts Receivable:
Federal-Mogul subsidiaries in Brazil, France, Germany, Italy, Japan and
Spain are party to accounts receivable factoring arrangements. Gross accounts
receivable factored under these facilities were $225 million and $217 million as
of March 31, 2010 and December 31, 2009, respectively. Of those gross amounts,
$195 million and $190 million, respectively, were factored without recourse and
treated as sales. The remaining $30 million and $27 million, respectively, were
factored with recourse, pledged as collateral, accounted for as secured
borrowings and recorded in the consolidated balance sheets within “Accounts
receivable, net” and “Short-term debt, including current portion of long-term
debt.” Under terms of these factoring arrangements, the Company is not obligated
to draw cash immediately upon the factoring of accounts receivable. Thus, as of
March 31, 2010 and December 31, 2009, the Company had outstanding factored
amounts of $3 million and $4 million, respectively, for which cash had not yet
been drawn. For each of the three months ended March 31, 2010 and 2009, expenses
associated with receivables factored of $1 million were recorded in the
consolidated statements of operations within “Other (expense) income, net.” The
Company receives a fee to service and monitor these factored receivables. The
fees associated with the servicing of factored receivables are sufficient to
offset the cost and as such, a servicing asset or liability is not incurred as a
result of these factoring arrangements.
6
Equity and Comprehensive
Loss: The following table presents a rollforward of the
changes in equity for the three months ended March 31, 2010, including changes
in the components of comprehensive loss (also contained in Note 14). In
accordance with FASB ASC Topic 810, Consolidation, amounts
attributable to the Company’s shareholders and to the noncontrolling interests
are as follows:
Total
|
Federal-Mogul
Shareholders’
Equity
|
Non-
Controlling
Interests
|
||||||||||
(Millions
of Dollars)
|
||||||||||||
Equity
balance as of December 31, 2009
|
$ | 1,099 | $ | 1,023 | $ | 76 | ||||||
Comprehensive
loss:
|
||||||||||||
Net income
|
17 | 15 | 2 | |||||||||
Foreign currency translation
adjustments and other
|
(34 | ) | (33 | ) | (1 | ) | ||||||
Hedge instruments, net of
tax
|
(10 | ) | (10 | ) | — | |||||||
Postemployment benefits, net of
tax
|
7 | 7 | — | |||||||||
(20 | ) | (21 | ) | 1 | ||||||||
Stock-based
compensation (see Note 16)
|
27 | 27 | — | |||||||||
Equity
balance as of March 31, 2010
|
$ | 1,106 | $ | 1,029 | $ | 77 |
Adoption of New Accounting
Pronouncements: In June 2009, the FASB issued accounting
guidance on accounting for transfers of financial assets. This guidance amends
previous guidance by including: the elimination of the qualifying
special-purpose entity (“QSPE”) concept; a new participating interest definition
that must be met for transfers of portions of financial assets to be eligible
for sale accounting; clarifications and changes to the derecognition criteria
for a transfer to be accounted for as a sale; and a change to the amount of
recognized gain or loss on a transfer of financial assets accounted for as a
sale when beneficial interests are received by the transferor. Additionally, the
guidance requires extensive new disclosures regarding an entity’s involvement in
a transfer of financial assets. Finally, existing QSPEs (prior to the effective
date of this guidance) must be evaluated for consolidation by reporting entities
in accordance with the applicable consolidation guidance upon the elimination of
this concept. The adoption of this new guidance effective January 1, 2010 had no
impact on the Company’s consolidated financial position, results of operations
or cash flows.
In June
2009, the FASB issued accounting guidance on the consolidation of variable
interest entities (“VIE”). This new guidance revises previous guidance by
eliminating the exemption for qualifying special purposes entities, by
establishing a new approach for determining who should consolidate a VIE. The
adoption of this new guidance effective January 1, 2010 had no impact on the
Company’s consolidated financial position, results of operations or cash
flows.
2.
|
RESTRUCTURING
|
The costs
contained within “Restructuring expense, net” in the Company’s consolidated
statements of operations are comprised of two types: employee costs (principally
termination benefits) and facility closure costs. Termination benefits are
accounted for in accordance with FASB ASC Topic 712, Compensation – Nonretirement
Postemployment Benefits, and are recorded when it is probable that
employees will be entitled to benefits and the amounts can be reasonably
estimated. Estimates of termination benefits are based on the frequency of past
termination benefits, the similarity of benefits under the current plan and
prior plans, and the existence of statutory required minimum benefits. Facility
closure and other costs are accounted for in accordance with FASB ASC Topic 420,
Exit or Disposal Cost
Obligations, and are recorded when the liability is
incurred.
7
Estimates
of restructuring charges are based on information available at the time such
charges are recorded. In certain countries where the Company operates, statutory
requirements include involuntary termination benefits that extend several years
into the future. Accordingly, severance payments continue well past the date of
termination at many international locations. Thus, these programs appear to be
ongoing when, in fact, terminations and other activities under these programs
have been substantially completed. Management expects that future savings
resulting from execution of its restructuring programs will generally result in
full pay back within 36 months.
Due to
the inherent uncertainty involved in estimating restructuring expenses, actual
amounts paid for such activities may differ from amounts initially estimated.
Accordingly, previously recorded liabilities of $1 million and $5 million were
reversed for the three months ended March 31, 2010 and 2009, respectively. Such
reversals result from: changes in estimated amounts to accomplish previously
planned activities; changes in expected (based on historical practice) outcome
of negotiations with labor unions, which reduced the level of originally
committed actions; newly implemented government employment programs, which
lowered the expected cost; and changes in approach to accomplish restructuring
activities.
Management
expects to finance these restructuring programs over the next several years
through cash generated from its ongoing operations or through cash available
under its existing credit facility, subject to the terms of applicable
covenants. Management does not expect that the execution of these programs will
have an adverse impact on its liquidity position.
The
Company’s restructuring activities are undertaken as necessary to execute
management’s strategy and streamline operations, consolidate and take advantage
of available capacity and resources, and ultimately achieve net cost reductions.
Restructuring activities include efforts to integrate and rationalize the
Company’s businesses and to relocate manufacturing operations to best cost
markets. These activities generally fall into one of the following
categories:
1.
|
Closure
of facilities and relocation of production – in connection with the
Company’s strategy, certain operations have been closed and related
production relocated to best cost countries or to other locations with
available capacity.
|
2.
|
Consolidation
of administrative functions and standardization of manufacturing processes
– as part of its productivity strategy, the Company has acted to
consolidate its administrative functions to reduce selling, general and
administrative costs and change its manufacturing processes to improve
operating efficiencies through standardization of
processes.
|
During
the three months ended March 31, 2010, the Company recorded $1 million in net
restructuring expenses, all of which were facility closure costs. During the
three months ended March 31, 2009, the Company recorded $38 million in net
restructuring expenses, all of which were employee costs. The facility closure
costs were paid within the quarter of incurrence and there were no reversals.
The following table provides a summary of the Company’s consolidated
restructuring liabilities and related activity as of and for the three months
ended March 31, 2010 by reporting segment. “PTE,” “PTSB,” “VSP,” and “GA”
represent the Powertrain Energy, Powertrain Sealing and Bearings, Vehicle Safety
and Protection, and Global Aftermarket reporting segments,
respectively.
PTE
|
PTSB
|
VSP
|
GA
|
Corporate
|
Total
|
|||||||||||||||||||
(Millions
of Dollars)
|
||||||||||||||||||||||||
Balance
at December 31, 2009
|
$ | 19 | $ | 24 | $ | 5 | $ | 4 | $ | 3 | $ | 55 | ||||||||||||
Provisions
|
— | 1 | — | 1 | — | 2 | ||||||||||||||||||
Reversals
|
(1 | ) | — | — | — | — | (1 | ) | ||||||||||||||||
Payments
|
(3 | ) | (5 | ) | (3 | ) | (1 | ) | — | (12 | ) | |||||||||||||
Foreign
currency
|
(1 | ) | (1 | ) | — | — | — | (2 | ) | |||||||||||||||
Balance
at March 31, 2010
|
$ | 14 | $ | 19 | $ | 2 | $ | 4 | $ | 3 | $ | 42 |
8
Activities
under Global “Restructuring 2009” Program
An
unprecedented downturn in the global automotive industry and global financial
markets led the Company to announce, in September and December 2008, certain
restructuring actions, herein referred to as “Restructuring 2009,” designed to
improve operating performance and respond to increasingly challenging conditions
in the global automotive market. It was anticipated that this plan would reduce
the Company’s global workforce by approximately 8,600 positions when compared
with the workforce as of September 30, 2008. The Company expects to incur
additional restructuring expenses up to $5 million through 2010, of which $2
million are expected to be employee costs and $3 million are expected to be
facility closure costs. As the majority of the costs expected to be incurred in
relation to Restructuring 2009 are related to severance, such activities are
expected to yield future annual savings at least equal to the incurred
costs.
The
following table provides a summary of the Company’s Restructuring 2009
liabilities and related activity as of and for the three months ended March 31,
2010 by reporting segment:
PTE
|
PTSB
|
VSP
|
GA
|
Corporate
|
Total
|
|||||||||||||||||||
(Millions
of Dollars)
|
||||||||||||||||||||||||
Balance
at December 31, 2009
|
$ | 19 | $ | 23 | $ | 5 | $ | 4 | $ | 1 | $ | 52 | ||||||||||||
Provisions
|
— | 1 | — | — | — | 1 | ||||||||||||||||||
Reversals
|
(1 | ) | — | — | — | — | (1 | ) | ||||||||||||||||
Payments
|
(3 | ) | (5 | ) | (3 | ) | (1 | ) | — | (12 | ) | |||||||||||||
Foreign
currency
|
(1 | ) | (1 | ) | — | — | — | (2 | ) | |||||||||||||||
Balance
at March 31, 2010
|
$ | 14 | $ | 18 | $ | 2 | $ | 3 | $ | 1 | $ | 38 |
Net
charges related to Restructuring 2009 are as follows:
Total
Expected
Costs
|
Incurred
During
2008
|
Incurred
During
2009
|
First
Quarter
2010
|
Estimated
Additional
Charges
|
||||||||||||||||
(Millions
of Dollars)
|
||||||||||||||||||||
Powertrain
Energy
|
$ | 50 | $ | 39 | $ | 11 | $ | (1 | ) | $ | 1 | |||||||||
Powertrain
Sealing and Bearings
|
60 | 46 | 10 | 1 | 3 | |||||||||||||||
Vehicle
Safety and Protection
|
35 | 31 | 3 | — | 1 | |||||||||||||||
Global
Aftermarket
|
12 | 7 | 5 | — | — | |||||||||||||||
Corporate
|
6 | 4 | 2 | — | — | |||||||||||||||
$ | 163 | $ | 127 | $ | 31 | $ | — | $ | 5 |
9
3.
|
OTHER
(EXPENSE) INCOME, NET
|
The
specific components of “Other (expense) income, net” are as
follows:
Three
Months Ended
|
||||||||
March 31
|
||||||||
2010
|
2009
|
|||||||
(Millions
of Dollars)
|
||||||||
Foreign
currency exchange
|
$ | (24 | ) | $ | — | |||
Environmental
claims settlements
|
— | 12 | ||||||
Adjustment
of assets to fair value
|
(4 | ) | 1 | |||||
Unrealized
loss on hedge instruments
|
— | (2 | ) | |||||
Other
|
7 | 3 | ||||||
$ | (21 | ) | $ | 14 |
The
Company has operated an aftermarket distribution center in Venezuela for several
years, supplying imported replacement automotive parts to the local independent
aftermarket. Since 2005, two exchange rates have existed in Venezuela: the
official rate, which has been frozen since 2005 at 2.15 bolivars per U.S.
dollar; and the parallel rate, which floats at a rate much higher than the
official rate. Given the existence of the two rates in Venezuela, the Company
deemed the official rate was appropriate for the purpose of conversion into U.S.
dollars at December 31, 2009 based on no positive intent to repatriate cash at
the parallel rate and demonstrated ability to repatriate cash at the official
rate.
Near the
end of 2009, the three year cumulative inflation rate for Venezuela was above
100%, which requires the Venezuelan operation to report its results as though
the U.S. dollar is its functional currency in accordance with FASB ASC Topic
830, Foreign Currency
Matters, commencing January 1, 2010 (“inflationary accounting”). The
impact of this transition to a U.S. dollar functional currency is that any
change in the U.S. dollar value of bolivar denominated monetary assets and
liabilities must be recognized directly in earnings.
On
January 8, 2010, the official exchange rate was set by the Venezuelan government
at 4.3 bolivars per U.S. dollar, except for certain “strategic industries” that
are permitted to repatriate U.S. dollars at the rate of 2.6 bolivars per U.S.
dollar. During the three months ended March 31, 2010, the Company recorded $20
million in foreign currency exchange expense due to this change in the exchange
rate. Based upon recent 2010 repatriations of cash, the Company believes that
all amounts currently submitted to the Venezuelan government for repatriation
will be paid out at the “strategic” rate, with the remaining monetary assets
being converted at the official rate of 4.3.
The
Company recorded $4 million in impairment charges during the three months ended
March 31, 2010 related to the identification of equipment at a Vehicle Safety
and Protection facility where the Company’s assessment of future undiscounted
cash flows, when compared to the current carrying value of the equipment,
indicated the assets were not recoverable. The Company determined the fair value
of the assets by applying a probability weighted, expected present value
technique to the estimated future cash flows using assumptions a market
participant would utilize. The discount rate used is consistent with other
long-lived asset fair value measurements. The carrying value of the assets
exceeded the resulting fair value by $4 million and an impairment charge was
recorded for that amount.
The
Company was a party to two lawsuits in Ohio and Michigan relating to
indemnification for costs arising from environmental releases from industrial
operations of the Predecessor Company prior to 1986. During the first quarter of
2009, the Company reached settlements with certain parties, which resulted in
net recoveries to the Company of $12 million.
10
4.
|
FINANCIAL
INSTRUMENTS
|
Interest
Rate Risk
The
Company, during 2008, entered into a series of five-year interest rate swap
agreements with a total notional value of $1,190 million to hedge the
variability of interest payments associated with its variable-rate term loans.
Through these swap agreements, the Company has fixed its base interest and
premium rate at a combined average interest rate of approximately 5.37% on the
hedged principal amount of $1,190 million. As of March 31, 2010 and December 31,
2009, unrealized net losses of $62 million and $50 million,
respectively, were recorded in “Accumulated other comprehensive loss” as a
result of these hedges. As of March 31, 2010, losses of $35 million are
expected to be reclassified from “Accumulated other comprehensive loss” to
consolidated statement of operations within the next 12 months.
These
interest rate swaps reduce the Company’s overall interest rate risk. However,
due to the remaining outstanding borrowings on the Company’s Debt Facilities and
other borrowing facilities that continue to have variable interest rates,
management believes that interest rate risk to the Company could be material if
there are significant adverse changes in interest rates.
Commodity
Price Risk
The
Company’s production processes are dependent upon the supply of certain raw
materials that are exposed to price fluctuations on the open market. The primary
purpose of the Company’s commodity price forward contract activity is to manage
the volatility associated with forecasted purchases. The Company monitors its
commodity price risk exposures regularly to maximize the overall effectiveness
of its commodity forward contracts. Principal raw materials hedged include
natural gas, copper, nickel, lead, platinum, high-grade aluminum and aluminum
alloy. Forward contracts are used to mitigate commodity price risk associated
with raw materials, generally related to purchases forecast for up to fifteen
months in the future.
The
Company had commodity price hedge contracts outstanding with combined notional
values of $38 million and $28 million at March 31, 2010 and December 31, 2009,
respectively, of which substantially all mature within one year. Of these
outstanding contracts, $38 million and $26 million in combined notional values
at March 31, 2010 and December 31, 2009, respectively, were designated as
hedging instruments for accounting purposes. Unrealized net gains of $7 million
and $5 million were recorded in “Accumulated other comprehensive loss” as of
March 31, 2010 and December, 31, 2009, respectively.
Foreign
Currency Risk
The
Company manufactures and sells its products in North America, South America,
Asia, Europe and Africa. As a result, the Company's financial results could be
significantly affected by factors such as changes in foreign currency exchange
rates or weak economic conditions in foreign markets in which the Company
manufactures and sells its products. The Company's operating results are
primarily exposed to changes in exchange rates between the U.S. dollar and
European currencies.
The
Company generally tries to use natural hedges within its foreign currency
activities, including the matching of revenues and costs, to minimize foreign
currency risk. Where natural hedges are not in place, the Company considers
managing certain aspects of its foreign currency activities and larger
transactions through the use of foreign currency options or forward contracts.
Principal currencies hedged have historically included the euro, British pound,
Japanese yen and Canadian dollar. The Company had notional values of $20 million
and $10 million of foreign currency hedge contracts outstanding at March 31,
2010 and December 31, 2009, respectively, of which all mature in less than one
year and substantially all were designated as hedging instruments for accounting
purposes. Immaterial unrealized net gains and losses were recorded in
“Accumulated other comprehensive loss” as of March 31, 2010 and December 31,
2009, respectively.
Other
The
Company presents its derivative positions and any related material collateral
under master netting agreements on a net basis. For derivatives designated as
cash flow hedges, changes in the time value are excluded from the assessment of
hedge effectiveness. Unrealized gains and losses associated with ineffective
hedges, determined using the hypothetical derivative method, are recognized in
“Other (expense) income, net.” Derivative gains and losses included in
“Accumulated other comprehensive loss” for effective hedges are reclassified
into operations upon recognition of the hedged transaction. Derivative gains and
losses associated with undesignated hedges are recognized in “Other (expense)
income, net” for outstanding hedges and “Cost of products sold” upon hedge
maturity. The Company’s undesignated hedges are primarily commodity hedges and
such hedges have become undesignated mainly due to forecasted volume
declines.
11
Concentrations
of Credit Risk
Financial
instruments, which potentially subject the Company to concentrations of credit
risk, consist primarily of accounts receivable and cash investments. The
Company's customer base includes virtually every significant global light and
commercial vehicle manufacturer and a large number of distributors, installers
and retailers of automotive aftermarket parts. The Company's credit evaluation
process and the geographical dispersion of sales transactions help to mitigate
credit risk concentration. No individual customer accounted for more than 5% of
the Company’s sales during the quarter ended March 31, 2010. The Company
requires placement of cash in financial institutions evaluated as highly
creditworthy.
The
following table discloses the fair values and balance sheet locations of the
Company’s derivative instruments:
Asset
Derivatives
|
Liability
Derivatives
|
||||||||||||||||||
Balance Sheet
Location
|
March
31
2010
|
December
31
2009
|
Balance
Sheet
Location
|
March
31
2010
|
December
31
2009
|
||||||||||||||
(Millions of
Dollars)
|
|||||||||||||||||||
Derivatives
designated as cash flow hedging instruments:
|
|||||||||||||||||||
Interest
rate swap contracts
|
$ | — | $ | — |
Other
current
liabilities
|
$ | (35 | ) | $ | (34 | ) | ||||||||
Other
noncurrent
liabilities
|
(27 | ) | (16 | ) | |||||||||||||||
Commodity
contracts
|
Other
current
assets
|
8 | 6 |
Other
current
assets
|
(1 | ) | (1 | ) | |||||||||||
$ | 8 | $ | 6 | $ | (63 | ) | $ | (51 | ) | ||||||||||
Derivatives
not designated as hedging instruments:
|
|||||||||||||||||||
Commodity
contracts
|
Other
current
assets
|
$ | — | $ | 1 |
The
following tables disclose the effect of the Company’s derivative instruments on
the consolidated statement of operations for the three months ended March 31,
2010 (in millions of dollars):
Derivatives
Designated
as
Hedging Instruments
|
Amount
of
Gain
(Loss)
Recognized
in
OCI
on
Derivatives
(Effective
Portion)
|
Location
of Gain
(Loss)
Reclassified
from
AOCI into
Income
(Effective
Portion)
|
Amount
of Gain
(Loss)
Reclassified
from
AOCI into
Income
(Effective
Portion)
|
|||||||
Interest
rate swap contracts
|
$ | (21 | ) |
Interest
expense, net
|
$ | (9 | ) | |||
Commodity
contracts
|
3 |
Cost
of products sold
|
1 | |||||||
$ | (18 | ) | $ | (8 | ) |
Derivatives
Not Designated
as
Hedging Instruments
|
Location
of Gain
(Loss)
Recognized in
Income
on Derivatives
|
Amount
of Gain
(Loss)
Recognized
in
Income
on
Derivatives
|
||||
Commodity
contracts
|
Cost
of products sold
|
$ | 1 |
12
The
following tables disclose the effect of the Company’s derivative instruments on
the consolidated statement of operations for the three months ended March 31,
2009 (in millions of dollars):
Derivatives
Designated
as
Hedging Instruments
|
Amount
of
Gain
(Loss)
Recognized
in
OCI
on
Derivatives
(Effective
Portion)
|
Location
of Gain
(Loss)
Reclassified
from
AOCI into
Income
(Effective
Portion)
|
Amount
of Gain
(Loss)
Reclassified
from
AOCI into
Income
(Effective
Portion)
|
Location
of Gain
(Loss)
Recognized
in
Income on
Derivatives
(Ineffective
Portion
and
Amount
Excluded
from
Effectiveness
Testing)
|
Amount
of Gain
(Loss)
Recognized
in
Income on
Derivatives
(Ineffective
Portion
and
Amount
Excluded
from
Effectiveness
Testing)
|
|||||||||||
Interest
rate swap contracts
|
$ | (8 | ) |
Interest
expense, net
|
$ | (9 | ) | $ | — | |||||||
Commodity
contracts
|
6 |
Cost
of products sold
|
(8 | ) |
Other
income, net
|
1 | ||||||||||
Foreign
currency contracts
|
1 |
Cost
of products sold
|
1 | — | ||||||||||||
$ | (1 | ) | $ | (16 | ) | $ | 1 |
Derivatives
Not Designated
as
Hedging Instruments
|
Location
of Gain
(Loss)
Recognized in
Income
on Derivatives
|
Amount
of Gain
(Loss)
Recognized
in
Income on
Derivatives
|
||||
Commodity
contracts
|
Cost
of products sold
|
$ | (2 | ) | ||
Commodity
contracts
|
Other
income, net
|
(3 | ) | |||
$ | (5 | ) |
5.
|
FAIR VALUE
MEASUREMENTS
|
FASB ASC
Topic 820, Fair Value
Measurements and Disclosures, clarifies that fair value is an exit price,
representing the amount that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants. As
such, fair value is a market-based measurement that should be determined based
upon assumptions that market participants would use in pricing an asset or
liability. As a basis for considering such assumptions, FASB ASC Topic 820
establishes a three-tier fair value hierarchy, which prioritizes the inputs used
in measuring fair value as follows:
Level
1:
|
Observable
inputs such as quoted prices in active
markets;
|
Level
2:
|
Inputs,
other than quoted prices in active markets, that are observable either
directly or indirectly; and
|
Level3:
|
Unobservable
inputs in which there is little or no market data, which require the
reporting entity to develop its own
assumptions.
|
An
asset’s or liability’s fair value measurement level within the fair value
hierarchy is based on the lowest level of any input that is significant to the
fair value measurement. Valuation techniques used need to maximize the use of
observable inputs and minimize the use of unobservable
inputs.
Assets
and liabilities measured at fair value are based on one or more of the following
three valuation techniques noted in FASB ASC Topic 820:
A.
|
Market approach: Prices
and other relevant information generated by market transactions involving
identical or comparable assets or
liabilities.
|
B.
|
Cost approach: Amount
that would be required to replace the service capacity of an asset
(replacement cost).
|
13
C.
|
Income approach:
Techniques to convert future amounts to a single present amount based upon
market expectations (including present value techniques, option-pricing
and excess earnings models).
|
Assets
and liabilities remeasured and disclosed at fair value on a recurring basis at
March 31, 2010 and December 31, 2009 are set forth in the table
below:
Asset
/
|
Valuation
|
|||||||||||
(Liability)
|
Level 2
|
Technique
|
||||||||||
(Millions
of Dollars)
|
||||||||||||
March
31, 2010:
|
||||||||||||
Interest
rate swap contracts
|
$ | (62 | ) | $ | (62 | ) |
C
|
|||||
Commodity
contracts
|
7 | 7 |
C
|
|||||||||
December
31, 2009:
|
||||||||||||
Interest
rate swap contracts
|
(50 | ) | (50 | ) |
C
|
|||||||
Commodity
contracts
|
6 | 6 |
C
|
The
Company calculates the fair value of its interest rate swap contracts, commodity
contracts and foreign currency contracts using quoted interest rate curves,
quoted commodity forward rates and quoted currency forward rates, respectively,
to calculate forward values, and then discounts the forward values.
The
discount rates for all derivative contracts are based on quoted swap interest
rates or bank deposit rates. For contracts which, when aggregated by
counterparty, are in a liability position, the rates are adjusted by the credit
spread that market participants would apply if buying these contracts from the
Company’s counterparties.
In
addition to items that are measured at fair value on a recurring basis, the
Company also has assets and liabilities that are measured at fair value on a
nonrecurring basis. As these assets and liabilities are not measured at fair
value on a recurring basis, they are not included in the tables above. Assets
and liabilities that are measured at fair value on a nonrecurring basis include
long-lived assets (see Note 3), investments in non-consolidated affiliates (see
Note 8) and conditional asset retirement obligations (see Note 13). The Company
has determined that the fair value measurements included in each of these assets
and liabilities rely primarily on the Company’s assumptions as observable inputs
are not available. As such, the Company has determined that each of these fair
value measurements reside within Level 3 of the fair value
hierarchy.
6.
|
INVENTORIES
|
Inventories
are stated at the lower of cost or market. Cost was determined by the first-in,
first-out (“FIFO”) method at March 31, 2010 and December 31, 2009. Inventories
are reduced by an allowance for excess and obsolete inventories based on
management’s review of on-hand inventories compared to historical and estimated
future sales and usage.
Net
inventories consisted of the following:
March
31
|
December
31
|
|||||||
2010
|
2009
|
|||||||
(Millions
of Dollars)
|
||||||||
Raw
materials
|
$ | 159 | $ | 151 | ||||
Work-in-process
|
129 | 118 | ||||||
Finished
products
|
634 | 630 | ||||||
922 | 899 | |||||||
Inventory
valuation allowance
|
(80 | ) | (76 | ) | ||||
$ | 842 | $ | 823 |
14
7.
|
GOODWILL
AND OTHER INTANGIBLE ASSETS
|
At March
31, 2010 and December 31, 2009, goodwill and other intangible assets consist of
the following:
March
31, 2010
|
December
31, 2009
|
|||||||||||||||||||||||
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
|||||||||||||||||||
(Millions
of Dollars)
|
||||||||||||||||||||||||
Definite-Lived
Intangible Assets:
|
||||||||||||||||||||||||
Customer
relationships
|
$ | 525 | $ | (113 | ) | $ | 412 | $ | 525 | $ | (104 | ) | $ | 421 | ||||||||||
Developed
technology
|
115 | (24 | ) | 91 | 115 | (21 | ) | 94 | ||||||||||||||||
$ | 640 | $ | (137 | ) | $ | 503 | $ | 640 | $ | (125 | ) | $ | 515 | |||||||||||
Goodwill
and Indefinite-Lived Intangible Assets:
|
||||||||||||||||||||||||
Goodwill
|
$ | 1,073 | $ | 1,073 | ||||||||||||||||||||
Trademarks
and brand names
|
354 | 354 | ||||||||||||||||||||||
$ | 1,427 | $ | 1,427 |
During
each of the three months ended March 31, 2010 and 2009, the Company recorded
amortization expense of $12 million associated with definite-lived intangible
assets. The Company utilizes the straight line method of amortization,
recognized over the estimated useful lives of the assets.
8.
|
INVESTMENTS
IN NON-CONSOLIDATED AFFILIATES
|
The
Company maintains investments in 14 non-consolidated affiliates, which are
located in China, Germany, India, Italy, Korea, Turkey, the United Kingdom and
the United States. The Company’s direct ownership in such affiliates ranges from
approximately 1% to 50%. The aggregate investments in these affiliates were $216
million and $238 million at March 31, 2010 and December 31, 2009, respectively,
and are included in the consolidated balance sheets as “Other noncurrent
assets.”
Equity
earnings of non-consolidated affiliates were $7 million and less than one
million for the three months ended March 31, 2010 and 2009, respectively. During
the three months ended March 31, 2010, these entities generated sales of
approximately $147 million, net income of approximately $17 million and at March
31, 2010 had total net assets of approximately $454 million. Dividends received
from non-consolidated affiliates by the Company for the three months ended March
31, 2010 were $20 million. The Company does not hold a controlling interest in
an entity based on exposure to economic risks and potential rewards (variable
interests) for which it is the primary beneficiary. Further, the Company’s joint
ventures are businesses established and maintained in connection with its
operating strategy and are not special purpose entities.
The
Company holds a 50% non-controlling interest in a joint venture located in
Turkey. This joint venture was established in 1995 for the purpose of
manufacturing and marketing automotive parts, including pistons, piston rings,
piston pins, and cylinder liners to OE and aftermarket customers. Pursuant to
the joint venture agreement, the Company’s partner holds an option to put its
shares to a subsidiary of the Company at the higher of the current fair value or
at a guaranteed minimum amount. The term of the contingent guarantee is
indefinite, consistent with the terms of the joint venture agreement. However,
the contingent guarantee would not survive termination of the joint venture
agreement.
The
guaranteed minimum amount represents a contingent guarantee of the initial
investment of the joint venture partner and can be exercised at the discretion
of the partner. As of March 31, 2010, the total amount of the contingent
guarantee, were all triggering events to occur, approximated $58 million. The
Company believes that this contingent guarantee is substantially less than the
estimated current fair value of the guarantees’ interest in the affiliate. As
such, the contingent guarantee does not give rise to a contingent liability and,
as a result, no amount is recorded for this guarantee. If this put option were
exercised, the consideration paid and net assets acquired would be accounted for
in accordance with business combination accounting guidance. Any value in excess
of the guaranteed minimum amount of the put option would be the subject of
negotiation between the Company and its joint venture partner.
15
The
Company has determined that its investments in Chinese joint venture
arrangements are considered to be “limited-lived” as such entities have
specified durations ranging from 30 to 50 years pursuant to regional statutory
regulations. In general, these arrangements call for extension, renewal or
liquidation at the discretion of the parties to the arrangement at the end of
the contractual agreement. Accordingly, a reasonable assessment cannot be made
as to the impact of such arrangements on the future liquidity position of the
Company.
9.
|
ACCRUED
LIABILITIES
|
Accrued
liabilities consisted of the following:
March
31
|
December
31
|
|||||||
2010
|
2009
|
|||||||
(Millions of
Dollars)
|
||||||||
Accrued
compensation
|
$ | 176 | $ | 153 | ||||
Accrued
rebates
|
83 | 100 | ||||||
Restructuring
liabilities
|
42 | 55 | ||||||
Non-income
taxes payable
|
41 | 37 | ||||||
Accrued
income taxes
|
24 | 23 | ||||||
Accrued
product returns
|
20 | 22 | ||||||
Accrued
professional services
|
13 | 11 | ||||||
Accrued
warranty
|
8 | 7 | ||||||
Accrued
Chapter 11 and U.K. Administration expenses
|
1 | 2 | ||||||
$ | 408 | $ | 410 |
10.
|
DEBT
|
On
December 27, 2007, the Company entered into a Term Loan and Revolving Credit
Agreement (the “Debt Facilities”) with Citicorp U.S.A. Inc. as Administrative
Agent, JPMorgan Chase Bank, N.A. as Syndication Agent and certain lenders. The
Debt Facilities include a $540 million revolving credit facility (which is
subject to a borrowing base and can be increased under certain circumstances and
subject to certain conditions) and a $2,960 million term loan credit
facility divided into a $1,960 million tranche B loan and a $1,000 million
tranche C loan. The obligations under the revolving credit facility mature
December 27, 2013 and bear interest for the first six months at LIBOR plus 1.75%
or at the alternate base rate (“ABR,” defined as the greater of Citibank, N.A.’s
announced prime rate or 0.50% over the Federal Funds Rate) plus 0.75%, and
thereafter shall be adjusted in accordance with a pricing grid based on
availability under the revolving credit facility. Interest rates on the pricing
grid range from LIBOR plus 1.50% to LIBOR plus 2.00% and ABR plus 0.50% to ABR
plus 1.00%. The tranche B term loans mature December 27, 2014 and the tranche C
term loans mature December 27, 2015. The tranche C term loans are subject to a
pre-payment premium, should the Company choose to prepay the loans prior to
December 27, 2011. All Debt Facilities term loans bear interest at LIBOR plus
1.9375% or at the alternate base rate (as previously defined) plus 0.9375% at
the Company’s election. To the extent that interest rates change by 25 basis
points, the Company’s annual interest expense would show a corresponding change
of approximately $4 million.
The
Company, during 2008, entered into a series of five-year interest rate swap
agreements with a total notional value of $1,190 million to hedge the
variability of interest payments associated with its variable-rate term loans
under the Debt Facilities. Through these swap agreements, the Company has fixed
its combined interest and premium rate at an average of approximately 5.37% on
the hedged principal amount of $1,190 million. Since the interest rate swaps
hedge the variability of interest payments on variable rate debt with the same
terms, they qualify for cash flow hedge accounting treatment.
16
The Debt
Facilities were initially negotiated and agreement was reached on the majority
of significant terms in early 2007. Between the time the terms were agreed in
early 2007 and December 27, 2007, interest rates charged on similar debt
instruments for companies with similar debt ratings and capitalization levels
rose to higher levels. As such, when applying the provisions of fresh-start
reporting, the Company estimated a fair value adjustment of $163 million for the
available borrowings under the Debt Facilities. This estimated fair value was
recorded within the fresh-start reporting, and is being amortized as interest
expense over the terms of each of the underlying components of the Debt
Facilities. During each of the three month periods ended March 31, 2010 and
2009, the Company recognized $6 million in interest expense associated with the
amortization of this fair value adjustment.
Debt
consisted of the following:
March
31
|
December
31
|
|||||||
2010
|
2009
|
|||||||
(Millions
of Dollars)
|
||||||||
Debt
Facilities:
|
||||||||
Revolver
|
$ | — | $ | — | ||||
Tranche B term
loan
|
1,916 | 1,921 | ||||||
Tranche C term
loan
|
978 | 980 | ||||||
Debt
discount
|
(113 | ) | (119 | ) | ||||
Other
debt, primarily foreign instruments
|
74 | 75 | ||||||
2,855 | 2,857 | |||||||
Less:
short-term debt, including current maturities of long-term
debt
|
(97 | ) | (97 | ) | ||||
Total
long-term debt
|
$ | 2,758 | $ | 2,760 |
The
obligations of the Company under the Debt Facilities are guaranteed by
substantially all of the domestic subsidiaries and certain foreign subsidiaries
of the Company, and are secured by substantially all personal property and
certain real property of the Company and such guarantors, subject to certain
limitations. The liens granted to secure these obligations and certain cash
management and hedging obligations have first priority.
The Debt
Facilities contain certain affirmative and negative covenants and events of
default, including, subject to certain exceptions, restrictions on incurring
additional indebtedness, mandatory prepayment provisions associated with
specified asset sales and dispositions, and limitations on i) investments; ii)
certain acquisitions, mergers or consolidations; iii) sale and leaseback
transactions; iv) certain transactions with affiliates; and v) dividends and
other payments in respect of capital stock.
The total
commitment and amounts outstanding on the revolving credit facility are as
follows:
March
31
|
December
31
|
|||||||
2010
|
2009
|
|||||||
(Millions
of Dollars)
|
||||||||
Current
Contractual Commitment
|
$ | 540 | $ | 540 | ||||
Outstanding:
|
||||||||
Revolving
credit facility
|
$ | — | $ | — | ||||
Letters
of credit
|
— | — | ||||||
Total
outstanding
|
$ | — | $ | — | ||||
Borrowing
Base on Revolving Credit Facility:
|
||||||||
Current
borrowings
|
$ | — | $ | — | ||||
Letters
of credit
|
— | — | ||||||
Available
to borrow
|
493 | 470 | ||||||
Total
borrowing base
|
$ | 493 | $ | 470 |
17
The
Company had $50 million of letters of credit outstanding at March 31, 2010 and
December 31, 2009, all pertaining to the term loan credit facility. To the
extent letters of credit associated with the revolving credit facility are
issued, there is a corresponding decrease in borrowings available under this
facility.
As of
March 31, 2010 and December 31, 2009, the estimated fair values of the Company’s
Debt Facilities were $2,683 and $2,444 million, respectively. The estimated fair
values were $98 million lower at March 31, 2010 and $338 million lower at
December 31, 2009 than their respective carrying values. Fair market values are
developed by the use of estimates obtained from brokers and other appropriate
valuation techniques based on information available as of March 31, 2010 and
December 31, 2009. The fair value estimates do not necessarily reflect the
values the Company could realize in the current markets.
11.
|
PENSIONS
AND OTHER POSTEMPLOYMENT BENEFITS
|
The
Company sponsors several defined benefit pension plans (“Pension Benefits”) and
health care and life insurance benefits (“Other Benefits”) for certain employees
and retirees around the world. Components of net periodic benefit cost for the
three months ended March 31 are as follows:
Pension Benefits
|
||||||||||||||||||||||||
United States Plans
|
Non-U.S. Plans
|
Other Benefits
|
||||||||||||||||||||||
2010
|
2009
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||||||||
(Millions
of Dollars)
|
||||||||||||||||||||||||
Service
cost
|
$ | 6 | $ | 6 | $ | 2 | $ | 2 | $ | — | $ | — | ||||||||||||
Interest
cost
|
15 | 16 | 4 | 4 | 7 | 8 | ||||||||||||||||||
Expected
return on plan assets
|
(12 | ) | (11 | ) | (1 | ) | (1 | ) | — | — | ||||||||||||||
Amortization
of actuarial loss
|
6 | 8 | — | — | — | — | ||||||||||||||||||
Net
periodic benefit cost
|
$ | 15 | $ | 19 | $ | 5 | $ | 5 | $ | 7 | $ | 8 |
On March
23, 2010, the Patient Protection and Affordable Care Act was signed into law and
on March 30, 2010, a companion bill, the Health Care and Education
Reconciliation Act of 2010, was also signed into law. These bills contain
provisions which could impact the Company’s accounting for retiree medical
benefits in future periods, however, the extent of that impact, if any, cannot
be determined until regulations are promulgated under these bills and additional
interpretations of these bills become available. The Company will continue to
assess the accounting implications of these bills. See Note 12, Income Taxes, below for
further discussion on the impact of these bills.
12.
|
INCOME
TAXES
|
For the
three months ended March 31, 2010, the Company recorded an income tax benefit of
$7 million on income before income taxes of $10 million. This compares to income
tax expense of $4 million on a loss before income taxes of $97 million in the
same period of 2009. The income tax benefit for the three months ended March 31,
2010 differs from statutory rates due primarily to non-recognition of income tax
benefits on certain operating losses and the reversal of a valuation allowance
against net deferred tax assets of a Belgium subsidiary.
The
Company believes that it is reasonably possible that its unrecognized tax
benefits in multiple jurisdictions, which primarily relate to transfer pricing,
corporate reorganization and various other matters, may decrease by
approximately $300 million in the next 12 months due to audit settlements or
statute expirations, of which approximately $30 million, if recognized, could
impact the effective tax rate.
On March
23, 2010, the Patient Protection and Affordable Care Act was signed into law and
on March 30, 2010, a companion bill, the Health Care and Education
Reconciliation Act of 2010, was also signed into law. These bills will reduce
the tax deduction available to the Company to the extent of receipt of the
Medicare Part D subsidy. Although this legislation does not take effect until
2012, the Company is required to recognize the impact in the financial
statements in the period in which it is signed. Due to the full valuation
allowance recorded against deferred tax assets in the United States, this
legislation will not impact the Company’s 2010 effective tax
rate.
18
13.
|
COMMITMENTS
AND CONTINGENCIES
|
Environmental
Matters
The
Company is a defendant in lawsuits filed, or the recipient of administrative
orders issued, in various jurisdictions pursuant to the Federal Comprehensive
Environmental Response Compensation and Liability Act of 1980 (“CERCLA”) or
other similar national, provincial or state environmental laws. These laws
require responsible parties to pay for remediating contamination resulting from
hazardous substances that were discharged into the environment by them, by prior
owners or occupants of their property, or by others to whom they sent such
substances for treatment or other disposition. The Company has been notified by
the United States Environmental Protection Agency, other national environmental
agencies, and various provincial and state agencies that it may be a potentially
responsible party (“PRP”) under such laws for the cost of remediating hazardous
substances pursuant to CERCLA and other national and state or provincial
environmental laws. PRP designation typically requires the funding of site
investigations and subsequent remedial activities.
Many of
the sites that are likely to be the costliest to remediate are often current or
former commercial waste disposal facilities to which numerous companies sent
wastes. Despite the joint and several liability which might be imposed on the
Company under CERCLA and some of the other laws pertaining to these sites, the
Company’s share of the total waste sent to these sites has generally been small.
The Company believes its exposure for liability at these sites is
limited.
The
Company has also identified certain other present and former properties at which
it may be responsible for cleaning up or addressing environmental contamination,
in some cases as a result of contractual commitments. The Company is actively
seeking to resolve these actual and potential statutory, regulatory and
contractual obligations. Although difficult to quantify based on the complexity
of the issues, the Company has accrued amounts corresponding to its best
estimate of the costs associated with such regulatory and contractual
obligations on the basis of available information from site investigations and
best professional judgment of consultants.
Total
environmental liabilities, determined on an undiscounted basis, were $21 million
and $22 million at March 31,
2010 and December 31, 2009, respectively, and are included in the
consolidated balance sheets as follows:
March
31
|
December
31
|
|||||||
2010
|
2009
|
|||||||
(Millions
of Dollars)
|
||||||||
Other
current liabilities
|
$ | 6 | $ | 7 | ||||
Other
accrued liabilities (noncurrent)
|
15 | 15 | ||||||
$ | 21 | $ | 22 |
Management
believes that recorded environmental liabilities will be adequate to cover the
Company’s estimated liability for its exposure in respect to such matters. In
the event that such liabilities were to significantly exceed the amounts
recorded by the Company, the Company’s results of operations and financial
condition could be materially affected. At March 31, 2010, management estimates
that reasonably possible material additional losses above and beyond
management’s best estimate of required remediation costs as recorded approximate
$43 million.
Conditional
Asset Retirement Obligations
The
Company records conditional asset retirement obligations (“CARO”) in accordance
with FASB ASC Topic 410, Asset
Retirement and Environmental Obligations. The Company’s primary CARO
activities relate to the removal of hazardous building materials at its
facilities. The Company records a CARO at fair value upon initial recognition
when the amount can be reasonably estimated, typically upon the expectation that
an operating site may be closed or sold. CARO fair values are determined based
on the Company’s determination of what a third party would charge to perform the
remediation activities, generally using a present value technique. The Company
has identified sites with contractual obligations and several sites that are
closed or expected to be closed and sold. In connection with these sites, the
Company has accrued $29 million and $30 million as of March 31, 2010 and
December 31, 2009, respectively, for CARO, primarily related to anticipated
costs of removing hazardous building materials, and has considered impairment
issues that may result from capitalization of CARO.
19
The
Company has additional CARO, also primarily related to removal costs of
hazardous materials in buildings, for which it believes reasonable cost
estimates cannot be made at this time because the Company does not believe it
has a reasonable basis to assign probabilities to a range of potential
settlement dates for these retirement obligations. Accordingly, the Company is
currently unable to determine amounts to accrue for CARO at such
sites.
For those
sites that the Company identifies in the future for closure or sale, or for
which it otherwise believes it has a reasonable basis to assign probabilities to
a range of potential settlement dates, the Company will review these sites for
both CARO and impairment issues.
Liabilities
for CARO are included in the consolidated balance sheets as
follows:
March
31
|
December
31
|
|||||||
2010
|
2009
|
|||||||
(Millions
of Dollars)
|
||||||||
Other
current liabilities
|
$ | 13 | $ | 14 | ||||
Other
accrued liabilities (noncurrent)
|
16 | 16 | ||||||
$ | 29 | $ | 30 |
Other
Matters
The
Company is involved in other legal actions and claims, directly and through its
subsidiaries. Management does not believe that the outcomes of these other
actions or claims are likely to have a material adverse effect on the Company’s
consolidated financial position, results of operations or cash
flows.
14.
|
COMPREHENSIVE
LOSS
|
The
Company’s comprehensive loss consists of the following:
Three
Months Ended
|
||||||||
March 31
|
||||||||
2010
|
2009
|
|||||||
(Millions
of Dollars)
|
||||||||
Net
income (loss) attributable to Federal-Mogul
|
$ | 15 | $ | (101 | ) | |||
Foreign
currency translation adjustments and other
|
(33 | ) | (98 | ) | ||||
Hedge instruments
|
(10 | ) | 16 | |||||
Income taxes
|
— | (6 | ) | |||||
Hedge
instruments, net of tax
|
(10 | ) | 10 | |||||
Postemployment
benefits
|
7 | 7 | ||||||
Income taxes
|
— | — | ||||||
Postemployment
benefits, net of tax
|
7 | 7 | ||||||
$ | (21 | ) | $ | (182 | ) |
20
15.
|
WARRANTS
|
On
December 27, 2007, the Company issued 6,951,871 warrants to purchase common
shares of the Company at an exercise price equal to $45.815, exercisable through
December 27, 2014. All of these warrants remain outstanding as of March 31,
2010.
16.
|
STOCK-BASED
COMPENSATION
|
CEO
Stock-Based Compensation Agreement
On
February 2, 2005, the Predecessor Company entered into a five-year employment
agreement with José Maria Alapont, effective March 23, 2005, whereby Mr. Alapont
was appointed as the Predecessor Company’s president and chief executive
officer. Mr. Alapont served as chairman of the board of the directors of the
Company from June 2005 to December 2007. In connection with this agreement, the
Plan Proponents agreed to amend the Plan to provide that the Successor Company
would grant to Mr. Alapont stock options equal to at least 4% of the value of
the Successor Company at the reorganization date (the “Employment Agreement
Options”). The Employment Agreement Options vest ratably over the life of the
employment agreement, such that one fifth of the Employment Agreement Options
vest on each anniversary of the employment agreement effective date. For
purposes of estimating fair value, the Employment Agreement Options were deemed
to expire on December 27, 2014.
Additionally,
one-half of the Employment Agreement Options had an additional feature allowing
for the exchange of one half of the options for shares of stock of the Successor
Company, at the exchange equivalent of four options for one share of Common
Stock. The Employment Agreement Options without the exchange feature are
referred to herein as “plain vanilla options” and those Employment
Agreement Options with the exchange feature are referred to as “options with
exchange.”
On the
Effective Date and in accordance with the Plan, the Company granted to Mr.
Alapont stock options to purchase four million shares of Successor Company
Common Stock at an exercise price of $19.50 (the “Granted Options”). Pursuant to
the Stock Option Agreement dated as of December 27, 2007 between the Company and
Mr. Alapont (the “Initial CEO Stock Option Agreement”), the Granted Options did
not have an exchange feature. In lieu of “options with exchange” under the
Employment Agreement Options, the Successor Company entered into a deferred
compensation agreement with Mr. Alapont intended to be the economic equivalent
of the options with exchange. Under the terms of this deferred compensation
agreement, Mr. Alapont is entitled to certain distributions of Common
Stock, or, at the election of Mr. Alapont, certain distributions of cash upon
certain events as set forth in the Deferred Compensation Agreement dated as of
December 27, 2007 between the Company and Mr. Alapont (the “Deferred
Compensation Agreement”). The amount of the distributions is equal to the
fair value of 500,000 shares of Common Stock, subject to certain adjustments and
offsets, determined on March 23, 2010.
On
February 14, 2008, the Company entered into Amendment No. 1 to the Initial CEO
Stock Option Agreement, dated as of February 14, 2008 (the “Amendment”).
Pursuant to the Amendment, the exercise price for the granted options was
increased to $29.75 per share. On February 15, 2008, the Initial CEO Stock
Option Agreement as amended was cancelled by mutual written agreement of the
Company and Mr. Alapont. On February 15, 2008, the Company entered into a new
Stock Option Agreement with Mr. Alapont dated as of February 15, 2008 (the “New
CEO Stock Option Agreement”). The New CEO Stock Option Agreement grants Mr.
Alapont a non-transferable, non-qualified option (the “CEO Option”) to purchase
up to 4,000,000 shares of the Company’s Common Stock subject to the terms and
conditions described below. The exercise price for the CEO Option is $19.50 per
share, which is at least equal to the fair market value of a share of the
Company’s Common Stock on the date of grant of the CEO Option. In no event may
the CEO Option be exercised, in whole or in part, after December 27, 2014. The
CEO Option became fully vested on March 23, 2010. These transactions were
undertaken to comply with Internal Revenue Code Section 409A in connection with
the implementation of Mr. Alapont’s employment agreement. The grant of the CEO
Option was approved by the Company’s shareholders effective July 28,
2008.
21
On March
23, 2010, the Company entered into the Second Amended and Restated Employment
Agreement, which extended Mr. Alapont’s employment with the Company for three
years. Also on March 23, 2010, the Company amended and restated the CEO Option
(the “Restated Stock Option Agreement”). The Restated Stock Option Agreement
removed Mr. Alapont’s put option to sell stock received from an option exercise
to the Company for cash. The Restated Stock Option Agreement provides for pay
out of any exercise of the CEO Option in stock or, at the election of the
Company, in cash. The awards were previously accounted for as liability awards
based on the optional cash exercise feature, however the accounting impact
associated with this modification is that the options are now considered an
equity award as of March 23, 2010.
The
Company revalued the options granted to Mr. Alapont at March 23, 2010, resulting
in a revised fair value of $27 million. This amount was reclassified from “Other
accrued liabilities” to “Additional paid-in capital” due to their equity award
status. As these options are fully vested, no further expense related to the
options will be recognized. The Company revalued the Deferred Compensation
Agreement, which was also amended and restated on March 23, 2010, at March 31,
2010, resulting in a revised fair value of $7 million. Since this agreement
provides for net cash settlement at the option of Mr. Alapont, it continues to
be treated as a liability award as of March 31, 2010 and through its eventual
payout. During the three months ended March 31, 2010 and 2009, the Company
recognized $6 million and $3 million, respectively, in expense associated with
the CEO Option and Deferred Compensation Agreement. Key assumptions and related
option-pricing models used by the Company are summarized in the following
table:
March
23, 2010
|
March
31, 2010
|
|||||||||||
Options
Connected
|
||||||||||||
Plain
Vanilla
|
To
Deferred
|
Deferred
|
||||||||||
Options
|
Compensation
|
Compensation
|
||||||||||
Valuation
model
|
Black-Scholes
|
Monte
Carlo
|
Monte
Carlo
|
|||||||||
Expected
volatility
|
58 | % | 58 | % | 59 | % | ||||||
Expected
dividend yield
|
0 | % | 0 | % | 0 | % | ||||||
Risk-free
rate over the estimated expected option life
|
1.18 | % | 1.18 | % | 1.25 | % | ||||||
Expected
option life (in years)
|
2.38 | 2.38 | 2.38 |
Expected
volatility is based on the average of five-year historical volatility and
implied volatility for a group of auto industry comparator companies as of the
measurement date. Risk-free rate is determined based upon U.S. Treasury rates
over the estimated expected option lives. Expected dividend yield is zero as the
Company has not paid dividends to holders of its common stock in the recent past
nor does it expect to do so in the future. Expected option lives are equal to
one-half of the time to the end of the option term.
Stock
Appreciation Rights
On
February 22, 2010, the Company granted, subject to stockholder approval,
approximately 437,000 stock appreciation rights (“SARs”) to certain employees.
The SARs vest over periods up to three years and have a term of five years from
date of grant. The SARs are payable in cash or, at the election of the Company,
in stock. As the Company anticipates paying out SARs exercises in the form of
cash, the SARs are being treated as liability awards for accounting purposes.
The Company valued the SARs at March 31, 2010, resulting in a fair value of $4
million. SARs expense for the three months ended March 31, 2010 was immaterial.
The SARs fair value was estimated using the Black-Scholes valuation model with
the following assumptions:
Exercise
price
|
$ | 17.16 | ||
Expected
volatility
|
59 | % | ||
Expected
dividend yield
|
0 | % | ||
Risk-free
rate over the estimated expected option life
|
1.89 | % | ||
Expected
life (in years)
|
3.41 |
Expected
volatility is based on the average of five-year historical volatility and
implied volatility for a group of auto industry comparator companies as of the
measurement date. Risk-free rate is determined based upon U.S. Treasury rates
over the estimated expected option lives. Expected dividend yield is zero as the
Company has not paid dividends to holders of its common stock in the recent past
nor does it expect to do so in the future. Expected life is the average of the
time until the award is fully vested and the end of the
term.
22
17.
|
INCOME
(LOSS) PER COMMON SHARE
|
The
following table sets forth the computation of basic and diluted income (loss)
per common share:
Three
Months Ended
|
||||||||
March 31
|
||||||||
2010
|
2009
|
|||||||
(Millions
of Dollars, Except
Per
Share Amounts)
|
||||||||
Net
income (loss) attributable to Federal-Mogul shareholders
|
$ | 15 | $ | (101 | ) | |||
Weighted
average shares outstanding, basic (in millions)
|
98.9 | 98.9 | ||||||
Incremental
shares on assumed conversion of deferred compensation
stock (in millions)
|
0.5 | 0.4 | ||||||
Weighted
average shares outstanding, including dilutive shares
(in millions)
|
99.4 | 99.3 | ||||||
Net
income (loss) per share attributable to Federal-Mogul:
|
||||||||
Basic
|
$ | 0.15 | $ | (1.02 | ) | |||
Diluted
|
$ | 0.15 | $ | (1.02 | ) |
The
Company had a loss for the three months ended March 31, 2009. As a result,
diluted loss per common share is the same as basic loss per common share as any
potentially dilutive securities would reduce the loss per common
share.
Options
and warrants to purchase 4,000,000 and 6,951,871 common shares, respectively,
were not included in the computation of diluted earnings per share because the
exercise prices were greater than the average market price of the Company’s
common shares during the three months ended March 31, 2010 and 2009,
respectively.
The
500,000 common shares issued in connection with the Deferred Compensation
Agreement described in Note 16 are excluded from the basic earnings per share
calculation as required by FASB ASC Topic 710, Compensation.
18.
|
OPERATIONS
BY REPORTING SEGMENT
|
The
Company's integrated operations are organized into five reporting segments
generally corresponding to major product groups: Powertrain Energy, Powertrain
Sealing and Bearings, Vehicle Safety and Protection, Global Aftermarket and
Corporate.
The
accounting policies of the reporting segments are the same as those of the
Company. Revenues related to products sold from Powertrain Energy, Powertrain
Sealing and Bearings, and Vehicle Safety and Protection to OE customers are
recorded within the respective reporting segments. Revenues from such products
sold to aftermarket customers are recorded within the Global Aftermarket
segment. All product transferred into Global Aftermarket from other reporting
segments is transferred at cost in the United States and at agreed-upon
arm’s-length transfer prices internationally.
The
Company evaluates reporting segment performance principally on a non-GAAP
Operational EBITDA basis. Management believes that Operational EBITDA most
closely approximates the cash flow associated with the operational earnings of
the Company and uses Operational EBITDA to measure the performance of its
operations. Operational EBITDA is defined as earnings before interest, income
taxes, depreciation and amortization, and certain items such as restructuring
and impairment charges, Chapter 11 and U.K. Administration related
reorganization expenses, gains or losses on the sales of businesses and expense
associated with U.S. based funded pension plans.
23
Net
sales, cost of products sold and gross margin information by reporting segment
are as follows:
Three Months Ended March 31
|
||||||||||||||||||||||||
Net Sales
|
Cost of Products Sold
|
Gross Margin
|
||||||||||||||||||||||
2010
|
2009
|
2010
|
2009
|
2010
|
2009
|
|||||||||||||||||||
(Millions
of Dollars)
|
||||||||||||||||||||||||
Powertrain
Energy
|
$ | 435 | $ | 309 | $ | 377 | $ | 294 | $ | 58 | $ | 15 | ||||||||||||
Powertrain
Sealing and Bearings
|
270 | 184 | 244 | 190 | 26 | (6 | ) | |||||||||||||||||
Vehicle
Safety and Protection
|
231 | 162 | 170 | 127 | 61 | 35 | ||||||||||||||||||
Global
Aftermarket
|
553 | 583 | 449 | 469 | 104 | 114 | ||||||||||||||||||
Corporate
|
— | — | (5 | ) | — | 5 | — | |||||||||||||||||
$ | 1,489 | $ | 1,238 | $ | 1,235 | $ | 1,080 | $ | 254 | $ | 158 |
Operational
EBITDA by reporting segment and the reconciliation of Operational EBITDA to net
income (loss) are as follows:
Three
Months Ended
|
||||||||
March 31
|
||||||||
2010
|
2009
|
|||||||
(Millions
of Dollars)
|
||||||||
Powertrain
Energy
|
$ | 69 | $ | 21 | ||||
Powertrain
Sealing and Bearings
|
24 | (4 | ) | |||||
Vehicle
Safety and Protection
|
57 | 33 | ||||||
Global
Aftermarket
|
65 | 72 | ||||||
Corporate
|
(77 | ) | (52 | ) | ||||
Total
Operational EBITDA
|
138 | 70 | ||||||
Interest
expense, net
|
(33 | ) | (34 | ) | ||||
Depreciation
and amortization
|
(81 | ) | (77 | ) | ||||
Restructuring
expenses, net
|
(1 | ) | (38 | ) | ||||
Expense
associated with U.S. based funded pension plans
|
(13 | ) | (17 | ) | ||||
Adjustment
of assets to fair value
|
(4 | ) | 1 | |||||
Income
tax benefit (expense)
|
7 | (4 | ) | |||||
Other
|
4 | (2 | ) | |||||
Net
income (loss)
|
$ | 17 | $ | (101 | ) |
Total
assets by reporting segment are as follows:
March
31
|
December 31
|
|||||||
2010
|
2009
|
|||||||
(Millions
of Dollars)
|
||||||||
Powertrain
Energy
|
$ | 1,713 | $ | 1,696 | ||||
Powertrain
Sealing and Bearings
|
835 | 830 | ||||||
Vehicle
Safety and Protection
|
1,619 | 1,626 | ||||||
Global
Aftermarket
|
1,930 | 1,970 | ||||||
Corporate
|
1,034 | 1,005 | ||||||
$ | 7,131 | $ | 7,127 |
24
FORWARD-LOOKING
STATEMENTS
Certain
statements contained or incorporated in this Quarterly Report on Form 10-Q which
are not statements of historical fact constitute “Forward-Looking Statements”
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
“Reform Act”). Forward-looking statements give current expectations or forecasts
of future events. Words such as “anticipate,” “believe,” “estimate,” “expect,”
“intend,” “may,” “plan,” “seek” and other words and terms of similar meaning in
connection with discussions of future operating or financial performance signify
forward-looking statements. The Company also, from time to time, may provide
oral or written forward-looking statements in other materials released to the
public. Such statements are made in good faith by the Company pursuant to the
“Safe Harbor” provisions of the Reform Act.
Any or
all forward-looking statements included in this report or in any other public
statements may ultimately be incorrect. Forward-looking statements may involve
known and unknown risks, uncertainties and other factors, which may cause the
actual results, performance, experience or achievements of the Company to differ
materially from any future results, performance, experience or achievements
expressed or implied by such forward-looking statements. The Company undertakes
no obligation to update any forward-looking statements, whether as a result of
new information, future events, or otherwise.
All of
the forward-looking statements are qualified in their entirety by reference to
the factors discussed under “Risk Factors” in the Company’s Annual Report on
Form 10-K for the year ended December 31, 2009 (the “Annual Report”) filed on
February 23, 2010, as well as the risks and uncertainties discussed elsewhere in
the Annual Report and this report. Other factors besides those listed could also
materially affect the Company’s business.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following Management’s Discussion and Analysis of financial condition and
results of operations (“MD&A”) should be read in conjunction with the
MD&A included in the Company’s Annual Report.
Overview
Federal-Mogul
Corporation is a
leading global supplier of technology and innovation in vehicle and industrial
products for fuel economy, alternative energies, environment and safety systems.
The Company serves the world’s foremost original equipment manufacturers (“OEM”)
of automotive, light commercial, heavy-duty, industrial, agricultural,
aerospace, marine, rail, and off-road vehicles, as well as the worldwide
aftermarket. During the three months ended March 31, 2010, the Company derived
63% of its sales from the OEM market and 37% from the aftermarket. The Company
seeks to participate in both of these markets by leveraging its original
equipment product engineering and development capability, manufacturing
know-how, and expertise in managing a broad and deep range of replacement parts
to service the aftermarket. The Company believes that it is uniquely positioned
to effectively manage the life cycle of a broad range of products to a diverse
customer base.
Federal-Mogul
has established a global presence and conducts its operations through various
manufacturing, distribution and technical centers that are wholly-owned
subsidiaries or partially-owned joint ventures. During the three months ended
March 31, 2010, the Company derived 38% of its sales in the United States and
62% internationally. The Company has operations in established markets including
Canada, France, Germany, Italy, Japan, Spain, the United Kingdom and the United
States, and emerging markets including Argentina, Brazil, China, Czech Republic,
Hungary, India, Korea, Mexico, Poland, Russia, South Africa, Thailand, Turkey
and Venezuela. The attendant risks of the Company’s international operations are
primarily related to currency fluctuations, changes in local economic and
political conditions, and changes in laws and regulations.
Federal-Mogul
offers its customers a diverse array of market-leading products for OEM and
replacement parts (“aftermarket”) applications, including pistons, piston rings,
piston pins, cylinder liners, valve seats and guides, ignition products, dynamic
seals, bonded piston seals, combustion and exhaust gaskets, static gaskets and
seals, rigid heat shields, engine bearings, industrial bearings, bushings and
washers, transmission components, brake disc pads, brake linings, brake blocks,
element resistant systems protection sleeving products, acoustic shielding,
flexible heat shields, brake system components, chassis products, wipers, fuel
pumps and lighting.
25
The
Company operates in an extremely competitive industry, driven by global vehicle
production volumes and part replacement trends. Business is typically awarded to
the supplier offering the most favorable combination of cost, quality,
technology and service. Customers continue to require periodic cost reductions
that require the Company to continually assess, redefine and improve its
operations, products, and manufacturing capabilities to maintain and improve
profitability. Management continues to develop and execute initiatives to meet
the challenges of the industry and to achieve its strategy for sustainable
global profitable growth.
For a
more detailed description of the Company’s business, products, industry,
operating strategy and associated risks, refer to the Annual
Report.
Results
of Operations
Consolidated
Results
Net sales
by reporting segment were:
Three
Months Ended
March 31
|
||||||||
2010
|
2009
|
|||||||
(Millions
of Dollars)
|
||||||||
Powertrain
Energy
|
$ | 435 | $ | 309 | ||||
Powertrain
Sealing and Bearings
|
270 | 184 | ||||||
Vehicle
Safety and Protection
|
231 | 162 | ||||||
Global
Aftermarket
|
553 | 583 | ||||||
$ | 1,489 | $ | 1,238 |
The
percentage of net sales by group and region for the three months ended March 31,
2010 and 2009 are listed below. “PTE,” “PTSB,” “VSP,” and “GA” represent
Powertrain Energy, Powertrain Sealing and Bearings, Vehicle Safety and
Protection, and Global Aftermarket, respectively.
PTE
|
PTSB
|
VSP
|
GA
|
Total
|
||||||||||||||||
2010
|
||||||||||||||||||||
United
States and Canada
|
21 | % | 34 | % | 28 | % | 65 | % | 41 | % | ||||||||||
Europe
|
61 | % | 52 | % | 51 | % | 21 | % | 43 | % | ||||||||||
Rest
of World
|
18 | % | 14 | % | 21 | % | 14 | % | 16 | % | ||||||||||
2009
|
||||||||||||||||||||
United
States and Canada
|
22 | % | 34 | % | 31 | % | 67 | % | 46 | % | ||||||||||
Europe
|
63 | % | 54 | % | 56 | % | 18 | % | 40 | % | ||||||||||
Rest
of World
|
15 | % | 12 | % | 13 | % | 15 | % | 14 | % |
26
Cost of
products sold by reporting segment were:
Three
Months Ended
March 31
|
||||||||
2010
|
2009
|
|||||||
(Millions
of Dollars)
|
||||||||
Powertrain
Energy
|
$ | 377 | $ | 294 | ||||
Powertrain
Sealing and Bearings
|
244 | 190 | ||||||
Vehicle
Safety and Protection
|
170 | 127 | ||||||
Global
Aftermarket
|
449 | 469 | ||||||
Corporate
|
(5 | ) | — | |||||
$ | 1,235 | $ | 1,080 |
Gross
margin by reporting segment was:
Three
Months Ended
March 31
|
||||||||
2010
|
2009
|
|||||||
(Millions
of Dollars)
|
||||||||
Powertrain
Energy
|
$ | 58 | $ | 15 | ||||
Powertrain
Sealing and Bearings
|
26 | (6 | ) | |||||
Vehicle
Safety and Protection
|
61 | 35 | ||||||
Global
Aftermarket
|
104 | 114 | ||||||
Corporate
|
5 | — | ||||||
$ | 254 | $ | 158 |
Net sales
increased by $251 million to $1,489 million for the first quarter of 2010 from
$1,238 million in the same period of 2009. The impact of the U.S. dollar
weakening, primarily against the euro, increased reported sales by $51
million.
In
general, light and commercial vehicle OE production increased in all regions
and, when combined with market share gains in all regions across all three
manufacturing segments, resulted in increased OE sales of $259 million.
Aftermarket sales fell by $50 million, $22 million of which is due to reduced
sales in Venezuela as a direct consequence of currency restrictions. The
remainder of the reduction reflects the impact of declines in consumer
confidence impacting the demand for high quality replacement parts. Net customer
price decreases were $9 million.
Cost of
products sold increased by $155 million to $1,235 million for the first quarter
of 2010 compared to $1,080 million in the same period of 2009. The impact of the
relative weakness of the U.S. dollar increased cost of products sold by $59
million. Manufacturing, labor and variable overhead costs increased by $153
million as a direct consequence of the higher production volumes. Productivity
and operational efficiency exceeded labor and benefits inflation by $26 million
and material sourcing savings were $32 million.
Gross
margin increased by $96 million to $254 million, or 17.1% of sales, for the
first quarter of 2010 compared to $158 million, or 12.8% of sales, in the same
period of 2009. Net customer price decreases of $9 million and currency
movements of $8 million were more than offset by sales volume increases, which
increased gross margin by $57 million, favorable productivity in excess of labor
and benefits inflation of $26 million and material sourcing savings of $32
million.
27
Reporting
Segment Results – Three Months Ended March 31, 2010 vs. Three Months Ended March
31, 2009
The
following table provides a reconciliation of changes in sales, cost of products
sold, gross margin and Operational EBITDA for the three months ended March 31,
2010 compared with the three months ended March 31, 2009 for each of the
Company’s reporting segments. Operational EBITDA is defined as earnings before
interest, income taxes, depreciation and amortization, and certain items such as
restructuring and impairment charges, Chapter 11 and U.K. Administration related
reorganization expenses, gains or losses on the sales of businesses and expense
associated with U.S. based funded pension plans. “PTE,” “PTSB,” “VSP,” and “GA”
represent Powertrain Energy, Powertrain Sealing and Bearings, Vehicle Safety and
Protection, and Global Aftermarket, respectively.
PTE
|
PTSB
|
VSP
|
GA
|
Corporate
|
Total
|
|||||||||||||||||||
(Millions of
Dollars)
|
||||||||||||||||||||||||
Sales
|
||||||||||||||||||||||||
Three
months ended March 31, 2009
|
$ | 309 | $ | 184 | $ | 162 | $ | 583 | $ | — | $ | 1,238 | ||||||||||||
Sales
volumes
|
115 | 80 | 64 | (50 | ) | — | 209 | |||||||||||||||||
Customer
pricing
|
(5 | ) | (1 | ) | (3 | ) | — | — | (9 | ) | ||||||||||||||
Foreign
currency
|
16 | 7 | 8 | 20 | — | 51 | ||||||||||||||||||
Three
months ended March 31, 2010
|
$ | 435 | $ | 270 | $ | 231 | $ | 553 | $ | — | $ | 1,489 | ||||||||||||
PTE
|
PTSB
|
VSP
|
GA
|
Corporate
|
Total
|
|||||||||||||||||||
(Millions
of Dollars)
|
||||||||||||||||||||||||
Cost
of Products Sold
|
||||||||||||||||||||||||
Three
months ended March 31, 2009
|
$ | 294 | $ | 190 | $ | 127 | $ | 469 | $ | — | $ | 1,080 | ||||||||||||
Sales
volumes / mix
|
75 | 57 | 49 | (28 | ) | — | 153 | |||||||||||||||||
Productivity,
net of inflation
|
(14 | ) | (5 | ) | (4 | ) | 1 | (4 | ) | (26 | ) | |||||||||||||
Materials
and services sourcing
|
(2 | ) | (9 | ) | (11 | ) | (9 | ) | (1 | ) | (32 | ) | ||||||||||||
Depreciation
|
— | 1 | — | — | — | 1 | ||||||||||||||||||
Foreign
currency
|
24 | 10 | 9 | 16 | — | 59 | ||||||||||||||||||
Three
months ended March 31, 2010
|
$ | 377 | $ | 244 | $ | 170 | $ | 449 | $ | (5 | ) | $ | 1,235 | |||||||||||
PTE
|
PTSB
|
VSP
|
GA
|
Corporate
|
Total
|
|||||||||||||||||||
(Millions of
Dollars)
|
||||||||||||||||||||||||
Gross
Margin
|
||||||||||||||||||||||||
Three
months ended March 31, 2009
|
$ | 15 | $ | (6 | ) | $ | 35 | $ | 114 | $ | — | $ | 158 | |||||||||||
Sales
volumes / mix
|
40 | 23 | 15 | (22 | ) | — | 56 | |||||||||||||||||
Customer
pricing
|
(5 | ) | (1 | ) | (3 | ) | — | — | (9 | ) | ||||||||||||||
Productivity,
net of inflation
|
14 | 5 | 4 | (1 | ) | 4 | 26 | |||||||||||||||||
Materials
and services sourcing
|
2 | 9 | 11 | 9 | 1 | 32 | ||||||||||||||||||
Depreciation
|
— | (1 | ) | — | — | — | (1 | ) | ||||||||||||||||
Foreign
currency
|
(8 | ) | (3 | ) | (1 | ) | 4 | — | (8 | ) | ||||||||||||||
Three
months ended March 31, 2010
|
$ | 58 | $ | 26 | $ | 61 | $ | 104 | $ | 5 | $ | 254 | ||||||||||||
PTE
|
PTSB
|
VSP
|
GA
|
Corporate
|
Total
|
|||||||||||||||||||
(Millions of
Dollars)
|
||||||||||||||||||||||||
Operational
EBITDA
|
||||||||||||||||||||||||
Three
months ended March 31, 2009
|
$ | 21 | $ | (4 | ) | $ | 33 | $ | 72 | $ | (52 | ) | $ | 70 | ||||||||||
Sales
volumes / mix
|
40 | 23 | 15 | (22 | ) | — | 56 | |||||||||||||||||
Customer
pricing
|
(5 | ) | (1 | ) | (3 | ) | — | — | (9 | ) | ||||||||||||||
Productivity
– Cost of products sold
|
14 | 5 | 4 | (1 | ) | 4 | 26 | |||||||||||||||||
Productivity
– SG&A
|
(2 | ) | — | (1 | ) | 3 | 2 | 2 | ||||||||||||||||
Productivity
– Other
|
— | (1 | ) | — | — | — | (1 | ) | ||||||||||||||||
Sourcing
– Cost of products sold
|
2 | 9 | 11 | 9 | 1 | 32 | ||||||||||||||||||
Sourcing
– SG&A
|
— | — | — | — | 1 | 1 | ||||||||||||||||||
Sourcing
– Other
|
— | (1 | ) | — | — | 2 | 1 | |||||||||||||||||
Equity
earnings of non-consolidated affiliates
|
6 | — | (1 | ) | 1 | — | 6 | |||||||||||||||||
Stock-based
compensation expense
|
— | — | — | — | (3 | ) | (3 | ) | ||||||||||||||||
Foreign
currency
|
(9 | ) | (2 | ) | (2 | ) | 3 | (22 | ) | (32 | ) | |||||||||||||
Other
|
2 | (4 | ) | 1 | — | (10 | ) | (11 | ) | |||||||||||||||
Three
months ended March 31, 2010
|
$ | 69 | $ | 24 | $ | 57 | $ | 65 | $ | (77 | ) | $ | 138 | |||||||||||
Interest
expense, net
|
(33 | ) | ||||||||||||||||||||||
Depreciation
and amortization
|
(81 | ) | ||||||||||||||||||||||
Restructuring
expense, net
|
(1 | ) | ||||||||||||||||||||||
Expense
associated with U.S. based funded pension plans
|
(13 | ) | ||||||||||||||||||||||
Adjustments
of assets to fair value
|
(4 | ) | ||||||||||||||||||||||
Income
tax benefit
|
7 | |||||||||||||||||||||||
Other
|
4 | |||||||||||||||||||||||
Net
income
|
$ | 17 |
28
Powertrain
Energy
Sales
increased by $126 million, or 41%, to $435 million for the first quarter of 2010
from $309 million in the same period of 2009. PTE generates approximately 80% of
its revenue outside the United States and the resulting currency movements
increased reported sales by $16 million. Sales volumes increased by $115 million
due to OE production volume increases and market share gains in all regions.
Continued customer pricing pressure reduced sales by $5 million.
Cost of
products sold increased by $83 million to $377 million for the first quarter of
2010 compared to $294 million in the same period of 2009. This was primarily due
to a $75 million increase directly associated with increased sales volume and
$24 million of currency movements. This increase was partly offset by
productivity in excess of labor and benefits inflation of $14
million.
Gross
margin increased by $43 million to $58 million, or 13.3% of sales, for the first
quarter of 2010 compared to $15 million, or 4.9% of sales, for the first quarter
of 2009. The favorable impact of increased sales volumes contributed to a $40
million increase in gross margin. Other factors contributing to the improved
margin were $14 million of productivity in excess of labor and benefits
inflation, partially offset by $8 million in currency movements and $5 million
in customer price decreases.
Operational
EBITDA increased by $48 million to $69 million for the first quarter of 2010
from $21 million in the same period of 2009. The impact of increased sales
volumes of $40 million, productivity improvements of $12 million and improved
equity earnings of non-consolidated affiliates of $6 million were partially
offset by currency movements of $9 million and customer price decreases of $5
million.
Powertrain
Sealing and Bearings
Sales
increased by $86 million, or 47%, to $270 million for the first quarter of 2010
from $184 million in the same period of 2009. Approximately 70% of PTSB’s
revenues are generated outside the United States and the resulting foreign
currency movements increased reported sales by $7 million.
Sales volumes increased by $80 million due to OE production volume increases and
market share gains in all regions.
Cost of
products sold increased by $54 million to $244 million for the first quarter of
2010 compared to $190 million in the same period of 2009. This was primarily due
to a $57 million increase directly associated with the increased sales and $10
million of currency movements, partially offset by favorable materials and
services sourcing of $9 million and productivity improvements of $5
million.
Gross
margin increased by $32 million to $26 million, or 9.6% of sales, for the first
quarter of 2010 compared to $(6) million, or (3.3)% of sales, for the first
quarter of 2009. The increase was due to improved sales volumes, which increased
gross margin by $23 million, materials and services sourcing improvements of $9
million and productivity, net of labor and benefits inflation, of $5 million,
partially offset by currency movements of $3 million, customer price decreases
of $1 million and increased depreciation of $1 million.
Operational
EBITDA increased by $28 million to $24 million for the first quarter of 2010
from $(4) million in the same period of 2009. This was primarily due to the
favorable impact of sales volumes increases of $23 million and favorable
materials and services sourcing of $9 million, partially offset by other
decreases of $4 million.
Vehicle
Safety and Protection
Sales
increased by $69 million, or 43%, to $231 million for the first quarter of 2010
from $162 million in the same period of 2009. Approximately 70% of VSP sales are
generated outside the United States and the resulting currency movements
increased reported sales by $8 million.
Sales volumes rose by $64 million due to increased OE production and market
share gains in all regions.
29
Cost of
products sold increased by $43 million to $170 million for the first quarter of
2010 compared to $127 million in the same period of 2009. This was primarily due
to a $49 million increase directly associated with the increased sales volume
and $9 million of currency movements. This increase was partly offset by
favorable materials and services sourcing of $11 million and productivity
improvements of $4 million.
Gross
margin increased by $26 million to $61 million, or 26.4% of sales, for the first
quarter of 2010 compared to $35 million, or 21.6% of sales, for the first
quarter of 2009. This increase was due to improved sales volume, which increased
gross margin by $15 million, and favorable materials and services sourcing of
$11 million.
Operational
EBITDA increased by $24 million to $57 million for the first quarter of 2010
from $33 million in the same period of 2009. The increase was primarily due to
the impact of increased sales volumes of $15 million and favorable material and
services sourcing of $11 million.
Global
Aftermarket
Sales
decreased by $30 million, or 5%, to $553 million for the first quarter of 2010,
from $583 million in the same period of 2009. This change was primarily due to
decreased sales volumes of $50 million, partially offset by currency movements
of $20 million. Of the $50 million volume drop, $22 million is due to the
cessation of sales in Venezuela as a result of the currency restrictions. The
remainder of the sales decline is primarily in North America and reflects the impact
of declines in consumer confidence impacting the demand for high quality
replacement parts.
Cost of
products sold decreased by $20 million to $449 million for the first quarter of
2010 compared to $469 million in the same period of 2009. This was primarily due
to a $28 million decrease directly associated with the decline in sales volume
and favorable materials and services sourcing of $9 million, partially offset by
currency movements of $16 million.
Gross
margin decreased by $10 million to $104 million, or 18.8% of sales, for the
first quarter of 2010 compared to $114 million, or 19.6% of sales, in the same
period of 2009. This decrease was due to lower sales volumes, which decreased
gross margin by $22 million, partially offset by favorable materials and
services sourcing of $9 million and currency movements of $4
million.
Operational
EBITDA decreased by $7 million to $65 million for the first quarter of 2010 from
$72 million in the same period of 2009. This decrease was due to the unfavorable
impact of lower sales volumes of $22 million, partially offset by favorable
materials and services sourcing of $9 million, currency movements of $3 million
and improved productivity of $2 million.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses (“SG&A”) were $184 million, or 12.4% of
net sales, for the first quarter of 2010 as compared to $184 million, or 14.9%
of net sales, for the same quarter of 2009. Reduced pension expenses of $4
million and overhead efficiency of $2 million were offset by unfavorable
currency movements of $6 million.
The
Company maintains technical centers throughout the world designed to integrate
the Company’s leading technologies into advanced products and processes, to
provide engineering support for all of the Company’s manufacturing sites, and to
provide technological expertise in engineering and design development providing
solutions for customers and bringing new, innovative products to market.
Included in SG&A were research and development (“R&D”) costs, including
product and validation costs, of $39 million for the first quarter of 2010
compared with $35 million for the same period in 2009. As a percentage of OE
sales, R&D was 4.2% and 5.4% for the quarters ended March 31, 2010 and 2009,
respectively.
Other
(Expense) Income, Net
Other
(expense) income, net was $(21) million in the first quarter of 2010 compared to
$14 million for the first quarter of 2009.
30
The
Company has operated an aftermarket distribution center in Venezuela for several
years, supplying imported replacement automotive parts to the local independent
aftermarket. Since 2005, two exchange rates have existed in Venezuela: the
official rate, which has been frozen since 2005 at 2.15 bolivars per U.S.
dollar; and the parallel rate, which floats at a rate much higher than the
official rate. Given the existence of the two rates in Venezuela, the Company
deemed the official rate was appropriate for the purpose of conversion into U.S.
dollars at December 31, 2009 based on no positive intent to repatriate cash at
the parallel rate and demonstrated ability to repatriate cash at the official
rate.
Near the
end of 2009, the three year cumulative inflation rate for Venezuela was above
100%, which requires the Venezuelan operation to report its results as though
the U.S. dollar is its functional currency in accordance with FASB ASC Topic
830, Foreign Currency
Matters, commencing January 1, 2010 (“inflationary accounting”). The
impact of this transition to a U.S. dollar functional currency is that any
change in the U.S. dollar value of bolivar denominated monetary assets and
liabilities must be recognized directly in earnings.
On
January 8, 2010, the official exchange rate was set by the Venezuelan government
at 4.3 bolivars per U.S. dollar, except for certain “strategic industries” that
are permitted to buy U.S. dollars at the rate of 2.6 bolivars per U.S. dollar.
During the three months ended March 31, 2010, the Company recorded $20 million
in foreign currency exchange expense due to this change in the exchange rate.
Based upon recent 2010 cash repatriations of cash, the Company believes that all
amounts currently submitted to the Venezuelan government for repatriation will
be paid out at the “strategic” rate, with the remaining monetary assets being
converted at the official rate of 4.3.
The
Company recorded $4 million in impairment charges during the three months ended
March 31, 2010 related to the identification of equipment at a Vehicle Safety
and Protection facility where the Company’s assessment of future undiscounted
cash flows, when compared to the current carrying value of the equipment,
indicated the assets were not recoverable. The Company determined the fair value
of the assets by applying a probability weighted, expected present value
technique to the estimated future cash flows using assumptions a market
participant would utilize. The discount rate used is consistent with other
long-lived asset fair value measurements. The carrying value of the assets
exceeded the resulting fair value by $4 million and an impairment charge was
recorded for that amount.
The
Company was a party to two lawsuits in Ohio and Michigan relating to
indemnification for costs arising from environmental releases from industrial
operations of the Predecessor Company prior to 1986. During the first quarter of
2009, the Company reached settlements with certain parties, which resulted in
net recoveries to the Company of $12 million.
Interest
Expense, Net
Net
interest expense was $33 million in the first quarter of 2010 compared to $34
million for the first quarter of 2009.
Restructuring
Activities
The
following is a summary of the Company’s consolidated restructuring liabilities
and related activity as of and for the quarter ended March 31,
2010:
PTE
|
PTSB
|
VSP
|
GA
|
Corporate
|
Total
|
|||||||||||||||||||
(Millions
of dollars)
|
||||||||||||||||||||||||
Balance
at December 31, 2009
|
$ | 19 | $ | 24 | $ | 5 | $ | 4 | $ | 3 | $ | 55 | ||||||||||||
Provisions
|
— | 1 | — | 1 | — | 2 | ||||||||||||||||||
Reversals
|
(1 | ) | — | — | — | — | (1 | ) | ||||||||||||||||
Payments
|
(3 | ) | (5 | ) | (3 | ) | (1 | ) | — | (12 | ) | |||||||||||||
Foreign
currency
|
(1 | ) | (1 | ) | — | — | — | (2 | ) | |||||||||||||||
Balance
at March 31, 2010
|
$ | 14 | $ | 19 | $ | 2 | $ | 4 | $ | 3 | $ | 42 |
31
Income
Tax Expense
For the
three months ended March 31, 2010, the Company recorded an income tax benefit of
$7 million on income before income taxes of $10 million. This compares to income
tax expense of $4 million on a loss before income taxes of $97 million in the
same period of 2009. The income tax benefit for the three months ended March 31,
2010 differs from statutory rates due primarily to non-recognition of income tax
benefits on certain operating losses and the reversal of a valuation allowance
against net deferred tax assets of a Belgium subsidiary.
The
Company believes that it is reasonably possible that its unrecognized tax
benefits in multiple jurisdictions, which primarily relates to transfer pricing,
corporate reorganization and various other matters, may decrease by
approximately $300 million in the next 12 months due to audit settlements or
statute expirations, of which approximately $30 million, if recognized, could
impact the effective tax rate.
On March
23, 2010, the Patient Protection and Affordable Care Act was signed into law and
on March 30, 2010, a companion bill, the Health Care and Education
Reconciliation Act of 2010, was also signed into law. These bills will reduce
the tax deduction available to the Company to the extent of receipt of the
Medicare Part D subsidy. Although this legislation does not take effect until
2012, the Company is required to recognize the impact in the financial
statements in the period in which it is signed. Due to the full valuation
allowance recorded against deferred tax assets in the United States, this
legislation will not impact the Company’s 2010 effective tax rate.
Litigation
and Environmental Contingencies
For a
summary of material litigation and environmental contingencies, refer to
Note 13 of the consolidated financial statements, “Commitments and
Contingencies.”
Liquidity
and Capital Resources
Cash Flow
Cash flow
provided from operating activities was $80 million for the first quarter of 2010
compared to cash used by operating activities of $160 million for the comparable
period of 2009. The difference in year-over-year performance is largely
attributable to increased earnings and movements in working capital,
particularly the relative timing of payments to suppliers. Furthermore, although
sales volumes have risen significantly, improvements in cash collections have
resulted in a far lower increase in accounts receivable than would otherwise
have occurred.
Cash flow
used by investing activities was $44 million for the first quarter of 2010
compared to cash used by investing activities of $45 million for the comparable
period of 2009, reflecting a stable capital investment pattern as existing
capacity is being utilized to support growth.
Cash flow
used by financing activities was $21 million for the first three months of 2010,
compared to cash used by financing activities of $15 million for the comparable
period of 2009.
The
January 8, 2010 bolivar devaluation by the Venezuelan government resulted in the
Company’s recognition of $20 million in foreign currency exchange expense, $16
million of which reflects the impact on the cash balance.
Financing
Activities
On
December 27, 2007, the Company entered into a Term Loan and Revolving Credit
Agreement (the “Debt Facilities”) with Citicorp U.S.A. Inc. as Administrative
Agent, JPMorgan Chase Bank, N.A. as Syndication Agent and certain lenders. The
Exit Facilities include a $540 million revolving credit facility (which is
subject to a borrowing base and can be increased under certain circumstances and
subject to certain conditions) and a $2,960 million term loan credit
facility divided into a $1,960 million tranche B loan and a $1,000 million
tranche C loan. The obligations under the revolving credit facility mature
December 27, 2013 and bear interest for the first six months at LIBOR plus 1.75%
or at the alternate base rate (“ABR,” defined as the greater of Citibank, N.A.’s
announced prime rate or 0.50% over the Federal Funds Rate) plus 0.75%, and
thereafter shall be adjusted in accordance with a pricing grid based on
availability under the revolving credit facility. Interest rates on the pricing
grid range from LIBOR plus 1.50% to LIBOR plus 2.00% and ABR plus 0.50% to ABR
plus 1.00%. The tranche B term loans mature December 27, 2014 and the tranche C
term loans mature December 27, 2015. The tranche C term loans are subject to a
pre-payment premium, should the Company choose to prepay the loans prior to
December 27, 2011. All Debt Facilities term loans bear interest at LIBOR plus
1.9375% or at the ABR plus 0.9375% at the Company’s election. To the extent that
interest rates change by 25 basis points, the Company’s annual interest expense
would show a corresponding change of approximately $4 million.
32
Other
Liquidity and Capital Resource Items
The
Company maintains investments in 14 non-consolidated affiliates, which are
located in China, Germany, India, Italy, Korea, Turkey, the United Kingdom and
the United States. The Company’s direct ownership in such affiliates ranges from
approximately 1% to 50%. The aggregate investments in these affiliates were $216
million and $238 million at March 31, 2010 and December 31, 2009, respectively.
Dividends received from non-consolidated affiliates by the Company during the
three months ended March 31, 2010 were $20 million.
The
Company’s joint ventures are businesses established and maintained in connection
with its operating strategy and are not special purpose entities. In general,
the Company does not extend guarantees, loans or other instruments of a variable
nature that may result in incremental risk to the Company’s liquidity position.
Furthermore, the Company does not rely on dividend payments or other cash flows
from its non-consolidated affiliates to fund its operations and, accordingly,
does not believe that they have a material effect on the Company’s
liquidity.
The
Company holds a 50% non-controlling interest in a joint venture located in
Turkey. This joint venture was established in 1995 for the purpose of
manufacturing and marketing automotive parts, including pistons, piston rings,
piston pins, and cylinder liners to OE and aftermarket customers. Pursuant to
the joint venture agreement, the Company’s partner holds an option to put its
shares to a subsidiary of the Company at the higher of the current fair value or
at a guaranteed minimum amount. The term of the contingent guarantee is
indefinite, consistent with the terms of the joint venture agreement. However,
the contingent guarantee would not survive termination of the joint venture
agreement.
The
guaranteed minimum amount represents a contingent guarantee of the initial
investment of the joint venture partner and can be exercised at the discretion
of the partner. As of March 31, 2010, the total amount of the contingent
guarantee, were all triggering events to occur, approximated $58 million. The
Company believes that this contingent guarantee is substantially less than the
estimated current fair value of the guarantees’ interest in the affiliate. As
such, the contingent guarantee does not give rise to a contingent liability and,
as a result, no amount is recorded for this guarantee. If this put option were
exercised, the consideration paid and net assets acquired would be accounted for
in accordance with business combination accounting guidance. Any value in excess
of the guaranteed minimum amount of the put option would be the subject of
negotiation between the Company and its joint venture partner.
The
Company has determined that its investments in Chinese joint venture
arrangements are considered to be “limited-lived” as such entities have
specified durations ranging from 30 to 50 years pursuant to regional statutory
regulations. In general, these arrangements call for extension, renewal or
liquidation at the discretion of the parties to the arrangement at the end of
the contractual agreement. Accordingly, a reasonable assessment cannot be made
as to the impact of such contingencies on the future liquidity position of the
Company.
The
Company’s subsidiaries in Brazil, France, Germany, Italy, Japan and Spain are
party to accounts receivable factoring arrangements. Gross accounts receivable
factored under these facilities were $225 million and $217 million as of March
31, 2010 and December 31, 2009, respectively. Of those gross amounts, $195
million and $190 million, respectively, were factored without recourse and
treated as sales. The remaining $30 million and $27 million, respectively, were
factored with recourse, pledged as collateral, accounted for as secured
borrowings and recorded in the consolidated balance sheets within “Accounts
receivable, net” and “Short-term debt, including current portion of long-term
debt.” Under terms of these factoring arrangements, the Company is not obligated
to draw cash immediately upon the factoring of accounts receivable. As of March
31, 2010 and December 31, 2009, the Company had outstanding factored amounts of
$3 million and $4 million, respectively, for which cash had not yet been drawn.
For each of the three months ended March 31, 2010 and 2009, expenses associated
with receivables factored of $1 million were recorded in the consolidated
statements of operations within “Other (expense) income, net.” The Company
receives a fee to service and monitor these factored receivables. The fees
associated with the servicing of factored receivables are sufficient to offset
the cost and as such, a servicing asset or liability is not incurred as a result
of these factoring arrangements.
33
ITEM
3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
There
have been no material changes to the information concerning the Company’s
exposures to market risk as stated in the Company’s Annual Report on Form 10-K
for the year ended December 31, 2009. Refer to Note 4, “Financial
Instruments,” of the consolidated financial statements for information with
respect to interest rate risk, commodity price risk and foreign currency
risk.
ITEM
4. CONTROLS AND PROCEDURES
A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are
resource constraints, and the benefits of controls must be considered relative
to their costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been
detected.
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 periodic Securities
Exchange Act reports is recorded, processed, summarized and reported within the
time periods specified in the SEC'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 timely
decisions regarding required disclosure.
As of
March 31, 2010, an evaluation was performed under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
and the Chief Financial Officer, of the effectiveness of the design and
operation of the Company’s disclosure controls and procedures. Based upon that
evaluation, the Chief Executive Officer and the Chief Financial Officer
concluded that the Company’s disclosure controls and procedures were effective
as of March 31, 2010, at the reasonable assurance level previously
described.
Changes
to Internal Control Over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the U.S. Securities Exchange Act of 1934. As of March 31,
2010, the Company's management, with the participation of the Chief Executive
Officer and the Chief Financial Officer, has evaluated for disclosure, changes
to the Company's internal control over financial reporting that occurred during
the fiscal quarter ended March 31, 2010 that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting. There were no material changes in the Company’s internal
control over financial reporting during the first quarter of
2010.
34
PART
II
OTHER
INFORMATION
ITEM 1.
|
LEGAL
PROCEEDINGS
|
(a)
|
Contingencies.
|
|
Note 13,
that is included in Part I of this report, is incorporated herein by
reference.
|
ITEM 6.
|
EXHIBITS
|
(a)
|
Exhibits:
|
|
31.1
|
Certification
by the Company’s Chief Executive Officer pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934.
|
|
31.2
|
Certification
by the Company’s Chief Financial Officer pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934.
|
|
32
|
Certification
by the Company’s Chief Executive Officer and Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, and Rule 13a-14(b) of the Securities
Exchange Act of 1934.
|
35
SIGNATURES
Pursuant
to the requirements 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.
FEDERAL-MOGUL
CORPORATION
|
|
By:
|
/s/ Jeff J. Kaminski
|
Jeff
J. Kaminski
|
|
Senior
Vice President and Chief Financial Officer,
|
|
Principal
Financial Officer
|
|
By:
|
/s/ Alan J. Haughie
|
Alan
J. Haughie
|
|
Vice
President, Controller, and Chief Accounting Officer
|
|
Principal
Accounting Officer
|
Dated: April
28, 2010
36