Attached files

file filename
EX-23.2 - CONSENT OF DELOITTE & TOUCHE LLP - Affinia Group Holdings Inc.d401880dex232.htm
EX-10.35 - AMD. NO. 2 TO THE AMENDED AND RESTATED EMPLOYMENT AGREEMENT - STEVEN E. KELLER - Affinia Group Holdings Inc.d401880dex1035.htm
EX-10.38 - AMD. NO. 2 TO THE AMENDED AND RESTATED EMPLOYMENT AGREEMENT - KEITH A. WILSON - Affinia Group Holdings Inc.d401880dex1038.htm
EX-10.36 - AMD. NO. 2 TO THE AMENDED AND RESTATED EMPLOYMENT AGREEMENT - THOMAS H. MADDEN - Affinia Group Holdings Inc.d401880dex1036.htm
EX-10.39 - AMENDMENT NO.1 TO THE ADVISORY AGREEMENT - Affinia Group Holdings Inc.d401880dex1039.htm
EX-10.37 - AMD. NO. 2 TO THE AMENDED AND RESTATED EMPLOYMENT AGREEMENT - TERRY R. MCCORMACK - Affinia Group Holdings Inc.d401880dex1037.htm
Table of Contents

As filed with the Securities and Exchange Commission on August 31, 2012

Registration: No. 333-167759

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 9

to

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

LOGO

 

 

AFFINIA GROUP HOLDINGS INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   3714   20-1483366

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code number)

 

(I.R.S. Employer

Identification Number)

1101 Technology Drive

Ann Arbor, Michigan 48108

(734) 827-5400

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

c/o Steven E. Keller

Senior Vice President, General Counsel and Secretary

1101 Technology Drive

Ann Arbor, Michigan 48108

(734) 827-5400

(Name, address, including zip code and telephone number, including area code, of agent for service)

 

 

Please address a copy of all communications to:

 

Vincent Pagano, Jr., Esq.

Simpson Thacher & Bartlett LLP

425 Lexington Avenue

New York, New York 10017

(212) 455-2000

 

William V. Fogg, Esq.

Cravath, Swaine & Moore LLP

Worldwide Plaza, 825 Eighth Avenue

New York, New York 10019

(212) 474-1000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

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 Securities Exchange Act of 1934, as amended.

 

Large accelerated filer  ¨

   Accelerated filer  ¨

Non-accelerated filer  x

   Smaller reporting company  ¨

(Do not check if a smaller reporting company)

  

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Proposed Maximum

Aggregate

Offering Price(1)(2)

  Amount of
Registration Fee

Common Stock, $0.01 par value

  $230,000,000   $16,399(3)

 

 

 

(1) Estimated solely for the purpose of computing the registration fee pursuant to Rule 457(o) under the Securities Act. This amount represents the proposed maximum aggregate offering price of the securities registered hereunder to be sold by the Registrant.
(2) Includes shares of common stock which may be sold pursuant to the underwriters’ option to purchase additional shares.
(3) Previously paid.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion, Dated August 31, 2012

PROSPECTUS

             shares

 

LOGO

Affinia Group Holdings Inc.

Common Stock

This is an initial public offering of common stock by Affinia Group Holdings Inc. We are selling              shares of our common stock.

We estimate the initial public offering price to be between $             and $             per share. Currently, no public market exists for our common stock. We have applied for the listing of our common stock on The New York Stock Exchange under the symbol “AFN.”

 

     Per share      Total  

Initial public offering price

   $                    $                

Underwriting discounts and commissions

   $                    $                

Proceeds, before expenses, to us

   $                    $                

We have granted the underwriters an option for a period of 30 days to purchase up to              additional shares of common stock from us, at the initial public offering price, less underwriting discounts and commissions.

Investing in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 12 of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares against payment in New York, New York on or about                     , 2012.

 

J.P. Morgan   Barclays Capital   BofA Merrill Lynch   Baird

 

Wells Fargo Securities   

BMO Capital Markets

 

BB&T Capital Markets

                    , 2012


Table of Contents

Table of Contents

 

     Page  

Market and Industry Data

     ii   

Prospectus Summary

     1   

Risk Factors

     12   

Forward-Looking Statements

     28   

Use of Proceeds

     29   

Dividend Policy

     30   

Capitalization

     31   

Dilution

     33   

Selected Historical Financial Data

     35   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     38   

Business

     71   

Management

     83   

Compensation Discussion and Analysis

     89   

Certain Relationships and Related Person Transactions

     105   

Principal Stockholders

     107   

Description of Certain Indebtedness

     109   

Description of Capital Stock

     113   

Shares Eligible for Future Resale

     119   

Certain United States Federal Income and Estate Tax Consequences to Non-U.S. Holders

     121   

ERISA Considerations

     124   

Underwriting

     125   

Legal Matters

     131   

Experts

     131   

Available Information

     131   

Index to Financial Statements

     F-1   

You should rely only on the information contained in this prospectus or contained in any free writing prospectus approved by us or filed by us with the Securities and Exchange Commission (the “SEC”). Neither we, nor the underwriters, have authorized anyone to provide you with additional information or information different from that contained in this prospectus or in any such free writing prospectus. We are offering to sell, and seeking offers to buy, our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock.

Dealer Prospectus Delivery Obligation

Through and including                     , 2012 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

 

i


Table of Contents

MARKET AND INDUSTRY DATA

Unless otherwise specified, (i) all references to the “aftermarket” or “market” refer to the light and commercial vehicle replacement products and services industry, (ii) “Eastern Europe” refers to Czech Republic, Hungary, Poland, Russia, Slovakia, Slovenia and Turkey, (iii) “North America” refers to the United States, Canada and Mexico, (iv) all references to the “traditional” distribution channel refer to our sales to warehouse distributors, jobber stores and professional installers, (v) “the Alliance” refers to Aftermarket Auto Parts Alliance Inc., which is an auto parts distribution and marketing organization, marketing the Auto Value and Bumper to Bumper brands, (vi) “CARQUEST” refers to CARQUEST Auto Parts, a distributor of replacement products, comprised of stores owned and operated by General Parts Inc. (and its affiliated companies) and by independent franchise dealers, (vii) “DIFM” is an acronym for do-it-for-me and refers to consumers who use professionals to perform the maintenance and repair work needed on their vehicles, (viii) “DIY” is an acronym for do-it-yourself and refers to consumers who perform the maintenance and repair work needed on their vehicles, (ix) “NAPA” refers to NAPA Auto Parts, a distributor of replacement products, comprised of stores owned and operated by Genuine Parts Company (and its affiliated companies) and by independent franchise dealers, (x) “OEM” refers to original equipment manufacturers and (xi) “OES” refers to original equipment service providers.

Our market position is based on in-depth analysis of sales data for 2009 and subsequent periodic review for any changes in the market. This prospectus includes industry data and forecasts that we have prepared based, in part, upon industry data and forecasts obtained from industry publications and surveys including, among others, the Automotive Aftermarket Industry Association (“AAIA”) 2013 Automotive Aftermarket Factbook and R.L. Polk & Co. (“Polk”) 2011 Vehicles-in-Operation Overview, as well as internal company surveys. Third-party industry publications and surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable. Our internal data and forecasts have not been verified by any independent source and we have not independently verified any of the data from third-party sources nor have we ascertained the underlying economic assumptions upon which those sources relied. Estimates of historical growth rates in the markets where we operate are not necessarily indicative of future growth rates in such markets.

Certain Trademarks

The product and brand names WIX®, Raybestos®, Filtron™, Nakata®, McQuay-Norris® and ecoLAST® are trademarks of Affinia Group Holdings Inc. or its subsidiaries. This prospectus may refer to brand names, trademarks, service marks and trade names of other companies and organizations, and such brand names, trademarks, service marks and trade names are the property of their respective owners.

 

ii


Table of Contents

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by, and should be read together with, the more detailed information and financial statements and related notes thereto appearing elsewhere in this prospectus. You should read the entire prospectus carefully, particularly the “Risk Factors” and our consolidated financial statements and the related notes thereto. In this prospectus, unless otherwise indicated or the context otherwise requires, references to the terms “we,” “us,” “our,” the “Company” and “Affinia” refer to Affinia Group Holdings Inc. and its subsidiaries on a consolidated basis.

Our Company

We are a global leader in the commercial and light vehicle replacement products and services industry, which is also referred to as the aftermarket. Our extensive aftermarket product offering consists principally of filtration and chassis products. Our filtration products fit medium and heavy duty trucks, light vehicles, equipment in the off-highway market (i.e., construction, mining, forestry and agricultural) and equipment for industrial and marine applications. Our chassis products fit light vehicles, heavy and medium duty trucks, trailers and all terrain vehicles. In addition, we provide aftermarket products and distribution services in South America. We believe that the growth of the global aftermarket, from which we derived approximately 99% of our net sales in 2011, is predominantly driven by the size, age and use of the population of vehicles and equipment in operation. We design, manufacture, distribute and market a broad range of aftermarket products in North America, South America, Europe, Asia and Africa and generate sales in over 70 countries. Our filtration business has seen significant growth since 2005 as we have successfully entered new markets in Europe and in Central and South America and grown existing market share. Based on management estimates and certain information from third parties, we believe that we hold the #1 market position in North America for aftermarket filtration products by net sales for the year ended December 31, 2011, and we also have a strong presence in Eastern Europe, including the #1 market position for aftermarket filtration products in Poland. Our South American commercial distribution business has experienced rapid growth since 2005 as we have invested in opening a new distribution center and new branches. Based on management estimates and certain information from third parties, we believe that we hold the #2 market position in Brazilian aftermarket parts distribution by net sales for the year ended December 31, 2011. Our chassis business has experienced growth in the last two years as we have gained new customers and expanded business with existing customers. With the recent growth in our chassis product sales, we believe we have now achieved the #1 market position for aftermarket chassis products in North America by net sales for the year ended December 31, 2011.

Our aftermarket products can be classified into two primary groups:

 

  (1) Routine maintenance products, such as oil, fuel, air and other filters, and

 

  (2) Products that are designed to be replaced occasionally, such as chassis products (e.g., shock absorbers, steering and other suspension products).

We believe that the filtration business is among the most attractive within the aftermarket given the higher frequency of replacement for filters. We believe our chassis business will continue to grow because we added product coverage of European-branded applications at the beginning of the 2012. Additionally, we believe our South American commercial distribution business will continue to grow as our Brazilian distribution operations continue to expand.

We market our products under a variety of well-known brands, including WIX®, Raybestos®, Filtron™, Nakata®, McQuay-Norris® and ecoLAST®. Additionally, we provide private label products to large aftermarket distributors, including NAPA® and CARQUEST®. We believe that we have achieved our leading market positions due to the quality and reputation of our brands and products among professional installers, who are the primary decision makers for the purchase of the products we supply to the aftermarket. We believe that the reputation of our brands and products for form, fit, function and quality promotes significant demand for our

 

 

1


Table of Contents

products from these installers and throughout the aftermarket supply chain. Our reputation for reliability has helped us penetrate retailers, such as O’Reilly Auto Parts, whose customers have become increasingly sophisticated about the quality of the products they install in their vehicles.

We sell to medium and heavy duty truck fleets and repair facilities as well as the light vehicle population through many of our customers, such as NAPA, CARQUEST, the Alliance and other independent warehouse distributors. We also serve the off-highway market through our large customers and have successfully developed products for new non-vehicle related opportunities in stationary equipment and wind generation applications.

Our principal product areas are described below:

 

Product Area

  

Representative Brands

  

Product Description

Filtration

   WIX, Filtron, NAPA, CARQUEST and ecoLAST    Oil, air, fuel, hydraulic and other filters for light, medium and heavy duty on and off-highway vehicle, industrial and marine applications

Distribution – South America

   Nakata, Bosch and WIX    Steering, shock absorbers and other suspension and driveline components, brakes, fuel and water pumps and other aftermarket products

Chassis

  

Raybestos, Nakata, NAPA

Chassis, McQuay-Norris and

ACDelco

   Suspension, driveline and steering components

Our net sales for 2011 were $1.5 billion, excluding our Brake North America and Asia group, which is classified as a discontinued operation. The following charts illustrate our net sales by geography and product type for the fiscal year ended December 31, 2011, excluding our Brake North America and Asia group.

LOGO

Our Industry

According to AAIA, there were approximately one billion light, medium and heavy duty vehicles registered worldwide in 2011. Approximately 249 million, or 25%, of these vehicles were registered in the United States. According to the AAIA, the overall size of the U.S. aftermarket was approximately $296.3 billion in 2011. We are one of the largest independent participants in the global aftermarket, based on our sales in over 70 countries, and we offer what we believe is the broadest line within our product categories. To facilitate efficient inventory management and timely vehicle owner customer service, many of our customers and professional installers rely on larger suppliers like us to have full line product offerings, consistent value-added services and timely delivery.

 

 

2


Table of Contents

There are important advantages to having meaningful size and scale in the aftermarket, including the ability to support significant distribution operations, offer sophisticated supply chain management capabilities and provide a broad line of quality products.

In general, aftermarket industry participants can be categorized into three major groups: (1) manufacturers of parts, (2) distributors of replacement parts (without manufacturing capabilities) and (3) installers, both professional and DIY customers. Distributors purchase products from manufacturers and sell them to wholesale or retail operations, which in turn sell them to installers.

The distribution business is comprised of the (1) traditional, (2) retail and (3) OES channels. Typically, professional installers purchase their products through the traditional channel, and DIY customers purchase products through the retail channel. The traditional channel includes such well-known distributors as NAPA, CARQUEST, Federated, the Alliance, Uni-Select and ADN. Through a network of distribution centers, these distributors sell primarily to owned or affiliated stores, which in turn supply professional installers. The retail channel includes merchants such as AutoZone, O’Reilly Auto Parts and Canadian Tire. The OES channel consists primarily of vehicle manufacturers’ service departments at new vehicle dealerships. Our South America Commercial distribution business mainly serves the traditional and retail channels.

We believe that future growth in aftermarket product sales will be driven by the following key factors:

Growth in global vehicle population. AAIA estimates that the world’s total vehicle population in 2011 was approximately 1.0 billion. Polk expects that the total vehicle populations of several key emerging markets will grow significantly over the next several years, as indicated by the forecasted compound annual growth rates (“CAGRs”) in vehicle population from 2010 to 2015 for the following geographic areas:

 

   

Brazil – 7.4%

 

   

Eastern Europe – 4.0%

 

   

China – 15.7%

Growth in global commercial vehicle population. Polk estimates that there were approximately 241 million commercial vehicles worldwide in 2010 and expects the commercial vehicle population to continue to grow at a CAGR of 3.5% from 2010 to 2015. In particular, Polk expects that the U.S. commercial vehicle population will grow at a CAGR of 1.6% from 2010 to 2015 and that the commercial vehicle populations of several key emerging markets will grow significantly over the next several years, as indicated by the forecasted CAGRs in commercial vehicle populations from 2010 to 2015 for the following geographic areas:

 

   

Brazil – 8.6%

 

   

Eastern Europe – 5.4%

 

   

China – 10.5%

Increase in total miles driven in the United States. In the United States, the total miles driven rose from 2.15 trillion in 1990 to 2.96 trillion in 2011, an increase of approximately 38%. Since 1980, annual miles driven in the United States have increased every year except for 2008 and 2011.

Increase in average age of light vehicles in the United States. As of 2011, the average light vehicle age in the United States was 10.8 years, compared to an average of 8.9 years in 2000. As the average light vehicle age continues to rise, we believe that the use of aftermarket products will generally increase as well.

Increase in vehicle related regulation and legislation. Increase in environmental and safety legislation that is being adopted on a global basis has led to an increase in demand for high value filtration products.

 

 

3


Table of Contents

Our Competitive Strengths

Leading market positions in our product categories

We are one of the largest suppliers of aftermarket products with leading market positions in all of our primary categories. Based on management estimates and certain information from third parties, we believe that we hold the #1 market position in North American aftermarket filtration and chassis products and the #2 market position in Brazilian aftermarket parts distribution by net sales for the year ended December 31, 2011.

Well positioned to capture growth in emerging markets

We expect the aftermarket to grow disproportionately in the emerging markets. Additionally, we expect the vehicle population of Brazil, China and Eastern Europe to grow by a CAGR of 10.2% from 2010 to 2015, driven by robust new light vehicle sales and increasing commercial vehicle sales, a large percentage of which are first time vehicle purchases as opposed to replacement of existing vehicles. We have an established, large manufacturing footprint, well-known brands and an efficient distribution system to capitalize on the organic growth of these markets. Revenues in these markets represented approximately 41% of total revenues in 2011 and grew by approximately 118% between 2005 and 2011.

Long-standing customer relationships

Our top ten customers have maintained a relationship with us for an average of approximately 24 years. We have supplied our largest customer, NAPA, for over 40 years and we currently supply them with filtration and chassis products. Similarly, we have supplied filter products to our second largest customer, CARQUEST, for approximately 20 years and were awarded their chassis business in 2010. We provide our primary customers with an extensive range of services which help build customer loyalty and generate repeat business while differentiating us from our competitors. Our strong relationships and reputation with customers in the traditional channel have increasingly positioned us to penetrate the retail channel as evidenced by recent business wins at O’Reilly Auto Parts.

Portfolio of highly regarded aftermarket brands

As a result of their reputation for form, fit, function and quality, we believe that our brands are preferred by the most common purchasers of products in the aftermarket (i.e., professional installers and technicians). Our well-known portfolio of brands includes WIX, Raybestos, Nakata, Filtron, McQuay-Norris and ecoLAST. We believe that through our WIX line of filters, we have the broadest product line offering in the North American aftermarket. Approximately 80% of our filtration product net sales in 2011 were derived from products we consider to be premium products, which command higher prices due to their reputation for superior quality and performance.

Leading heavy duty filtration platform

We believe that we are among the largest global manufacturers of aftermarket filters for heavy duty applications. We manufacture aftermarket filters for nearly every type of vehicle, including products for light, medium and heavy duty as well as off-highway applications. Approximately 60% of our premium North America filtration net sales in 2011 were for heavy duty and off-highway applications (i.e., construction, mining, forestry and agricultural). These heavy duty and off-highway products require more complex technologies and therefore are priced at three to four times the price of those used in light vehicle products. We believe that our WIX brand of filters has the #1 market position in the commercial vehicle filtration market by net sales for the year ended December 31, 2011.

Strong reputation for customer support and product breadth

We believe that our emphasis on customer service coupled with the breadth of our product offering are key factors in maintaining our leading market positions. We continuously seek to improve service, order turnaround

 

 

4


Table of Contents

time, product coverage and order accuracy. Our ability to replenish inventory quickly is important to customers as it enables them to maximize their sales while carrying reduced inventory levels. For these reasons, we ship the vast majority of orders within 24 to 48 hours of receipt. We continue to introduce new products, including a recently extended line of chassis products that has increased our sales and scope, as we identify customer opportunities. Our acquisition of a chassis products company in December 2010 expanded our chassis product offering to cover more European-branded vehicles and gave us one of the broadest product offerings in the industry.

Accomplished management team

Our operations are led by an experienced management team that has successfully transformed the business over the past six years. Our top nine executives, led by our Chief Executive Officer, Terry R. McCormack, have an average of approximately 25 years in the aftermarket and industrial sectors. These executives have been instrumental in our efforts to shift the manufacturing footprint to lower labor cost, high growth emerging markets while maintaining and enhancing our customer relationships, entering into new markets and positioning us for future growth. As a result of their efforts, our net sales has grown 41% since 2005.

Our Business Strategy 

Increase product innovation and expand sales with existing customers in the traditional distribution channel

We are highly focused on enhancing our products for our core customers. We use our expertise in product design and engineering to develop and improve our product coverage with parts that meet or exceed OEM specifications. We also have been successful at expanding our strong relationships with customers by selling them additional products. We will continue to leverage our distribution and customer relationships to sell new products and services. For example, we introduced our motorcycle and heavy duty parts in Brazil in 2009 and we introduced new hydraulic filtration products in 2010. Due to the innovation and expansion of our products, the net sales in our filtration products, South America products and chassis products have increased 32%, 118% and 31%, respectively, from 2004 to 2011.

Expand sales in emerging markets

We have made significant investments in emerging markets over the last four years to capitalize on the rapid growth in these regions. During that time, we have opened new filtration manufacturing locations in China, Ukraine and Mexico. In 2010, we expanded our filtration manufacturing capacity and capabilities in Brazil to sell into the domestic market. In 2011, we expanded our international distribution capabilities with a new warehouse in Brazil, a new filtration facility in China and a new filtration facility in Poland.

Grow presence in the commercial vehicle, industrial and marine aftermarket

We derived approximately 50% of our 2011 filtration revenues from the premium heavy duty equipment market, which includes on-highway trucks, construction equipment, agricultural equipment, industrial equipment and severe service vehicles. We believe that these products enjoy growth rates well in excess of gross domestic product given the increased focus on emissions coupled with the growing importance of fuel efficiency. We also have expanded our product line in filtration, including the introduction of new hydraulic filtration products.

Capitalize on favorable aftermarket trends

We are focused on expanding our product lines and solidifying our position as a leading provider of aftermarket filtration and chassis products in order to capitalize on several trends that are likely to positively affect growth and profitability in the aftermarket. For example, the AAIA expects the U.S. aftermarket to grow by 3.8% in 2012, 3.5% in 2013, 3.4% in 2014 and 3.6% in 2015 due to an expected increase in average age of vehicles and

 

 

5


Table of Contents

an increase in miles driven. Based on AAIA data, the markets for our primary products are expected to grow at a similar or higher rate than the overall aftermarket due to the fact that our maintenance and wear replacement markets are less affected by the increasing durability of vehicles.

Focus on operating efficiency and cash flow generation

We produce the majority of our products via light-intensity manufacturing processes, which avoid material capital expenditure requirements for individual pieces of production equipment. We believe that our focus on operating cost savings and achieving a high return on assets, combined with our relatively low capital expenditure requirements, will allow us to continue generating significant free cash flow in the future. As a result of this focus, our operating margin grew from 7% for the year ended December 31, 2005 to 10% for the year ended December 31, 2011.

Develop relationships with new customers in the retail distribution channel

Historically, we have held a leading position in the traditional channel for filtration and chassis products and have benefited from our strong reputation for quality among the most sophisticated customers (i.e., professional installers and technicians). As retailers expand their target markets to the professional installers, we have been able to maintain our leading position by adding retailers to our customer base. Management expects to continue leveraging our distribution capabilities and lower labor cost operating base to generate additional opportunities in the retail channel and continue to gain overall market share.

Pursue opportunistic acquisitions and joint ventures

We intend to continue to analyze and pursue acquisition opportunities and joint ventures where we believe that we can add value and realize synergies by improving operating results through application of our processes, as demonstrated in our existing businesses. Our acquisition strategy also is focused on expanding into new geographic markets and providing products that fit well within our existing distribution channels.

Risks Related to Our Business

Investing in our common stock involves substantial risk. You should carefully consider all of the information in this prospectus prior to investing in our common stock. There are several risks related to our business that are described under “Risk Factors” elsewhere in this prospectus. Among these important risks are the following:

 

   

Continued volatility in and disruption to the global economy, including the global capital and credit markets, has affected and may continue to materially and adversely affect our business, financial condition and results of operations, as well as our ability to access credit and has affected and may continue to materially and adversely affect the financial soundness of our customers and suppliers.

 

   

Our business would be materially and adversely affected if we lost any of our larger customers.

 

   

Increased crude oil and gasoline prices could reduce global demand for and use of automobiles and increase our costs, which could have a material and adverse effect on our business, financial condition and results of operations.

 

   

The shift in demand from premium to economy brands may require us to produce value products at the expense of premium products, resulting in lower prices, thereby reducing our margins and decreasing our net sales.

 

   

We are subject to increasing pricing pressure from imports, particularly from lower labor cost countries.

 

 

6


Table of Contents
   

Increasing costs for manufactured components, raw materials and energy prices may materially and adversely affect our business, financial condition and results of operations.

 

   

If our customers seek more expansive return policies or practices, such as extended payment terms, our cash flow and results of operations could be materially and adversely affected.

 

   

Our substantial leverage could harm our business by limiting our available cash and our access to additional capital.

 

   

The potential sale of the Brake North America and Asia operations could adversely affect our continuing operations.

Ownership

Affinia Group Holdings Inc. is a Delaware corporation formed on July 6, 2004 and the issuer of the common stock offered hereby. Affinia Group Holdings Inc.’s principal stockholders are investment funds affiliated with The Cypress Group L.L.C. (collectively, “Cypress”) and OMERS Administration Corporation (“OMERS”). The Cypress Group L.L.C. is a New York-based private equity firm founded in 1994. Since 1994, Cypress professionals have invested $4 billion in transactions exceeding $22 billion in value. Selected transactions include: Communications & Power Industries Inc.; Cinemark USA, Inc.; The Meow Mix Company; Wesco International, Inc. and Williams Scotsman, Inc. OMERS is one of Canada’s leading pension funds with approximately $56 billion in net investment assets at December 31, 2011. As one of the largest institutional investors in Canada, OMERS manages a diversified global portfolio of more than 2,800 stocks and bonds as well as real estate, infrastructure and private equity investments. Cypress and OMERS invested in us in connection with the acquisition by Affinia Group Inc., one of our subsidiaries, of substantially all of Dana Corporation’s (“Dana”) aftermarket business operations on November 30, 2004 (the “Acquisition”).

Following the Acquisition, we announced two restructuring plans: (i) a restructuring plan that we announced at the beginning of 2005 as part of the Acquisition, also referred to herein as the “acquisition restructuring” and (ii) a restructuring plan that we announced at the end of 2005, also referred to herein as the “comprehensive restructuring” (collectively, the “restructuring plans”). We have completed the acquisition restructuring and the comprehensive restructuring was substantially completed by the end of 2010. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Restructuring Activity.” In the fourth quarter of 2011, we committed to a plan to sell the Brake North America and Asia group, which qualified as a discontinued operation.

Affinia Group Holdings Inc. is a holding company with no significant operations or material assets other than equity interests in its subsidiaries. Our principal subsidiaries are Affinia Group Intermediate Holdings Inc. and Affinia Group Inc.

Corporate Information

Our principal executive offices are located at 1101 Technology Drive, Ann Arbor, Michigan, 48108, and our telephone number is (734) 827-5400. Our website address is www.affiniagroup.com. The information contained on our website or that can be accessed through our website is not part of this prospectus, and investors should not rely on any such information in deciding whether to purchase our common stock.

 

 

7


Table of Contents

THE OFFERING

 

Common stock we are offering

             shares (or              shares if the underwriters exercise their option to purchase additional shares in full).

 

Common stock to be outstanding after this offering

             shares (or              shares if the underwriters exercise their option to purchase additional shares in full).

 

Use of proceeds

We estimate that the net proceeds to us from this offering will be approximately $             after deducting the underwriting discounts and commissions and estimated expenses of this offering and assuming we sell the shares for $            per share, representing the mid-point of the price range set forth on the cover page of this prospectus. We intend to use approximately $122 million of our net proceeds from this offering to prepay the payment in kind Seller Subordinated Note (the “Seller Note”) that we issued to an affiliate of Dana in connection with the Acquisition and the remainder for general corporate purposes. See “Use of Proceeds.”

 

Dividend policy

We do not intend to pay dividends on our common stock in the foreseeable future. See “Dividend Policy.”

 

Risk factors

See “Risk Factors” and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our common stock.

 

Proposed ticker symbol

“AFN”

 

 

Unless otherwise indicated, all information contained in this prospectus assumes:

 

   

the underwriters do not exercise their option to purchase up to            additional shares of our common stock; and

 

   

an initial public offering price of $            per share, the mid-point of the price range set forth on the cover page of this prospectus.

The number of shares of common stock to be outstanding immediately after this offering does not reflect:

 

   

             shares of common stock issuable upon the exercise of options granted to our management and employees; and

 

   

             additional shares of common stock authorized and reserved for future issuance under our stock incentive plan.

For more detailed information regarding our common stock, see “Description of Capital Stock.”

 

 

8


Table of Contents

SUMMARY HISTORICAL FINANCIAL DATA

The following table sets forth summary historical financial data as of and for the years ended December 31, 2009, 2010 and 2011 and the six months ended June 30, 2011 and 2012. The summary historical financial data as of December 31, 2010 and 2011 and for each of the fiscal years ended December 31, 2009, 2010 and 2011 have been derived from, and should be read together with, our audited historical consolidated financial statements and the accompanying notes included elsewhere in this prospectus. The summary historical financial data as of December 31, 2009 have been derived from our audited historical consolidated financial statements and the accompanying notes that are not included in this prospectus. The summary historical financial data as of June 30, 2012 and for the six months ended June 30, 2011 and 2012 are derived from, and should be read together with, our unaudited condensed consolidated financial statements and the accompanying notes included elsewhere in this prospectus, which have been prepared on a basis consistent with our annual audited financial statements. The summary historical financial data as of June 30, 2011 have been derived from our unaudited condensed consolidated financial statements and the accompanying notes that are not included in this prospectus. In the opinion of management, such unaudited financial data reflect all adjustments, consisting only of normal and recurring adjustments, necessary for a fair statement of the results for those periods.

The results of operations for the periods presented below are not necessarily indicative of the results to be expected for any future period and the results for any interim period are not necessarily indicative of the results that may be expected for a full fiscal year. The summary historical financial data should be read together with “Selected Historical Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus.

 

 

9


Table of Contents
     Year Ended December 31,     Six Months
Ended June 30,
 
(Dollars in millions, except per share data)    2009     2010     2011         2011             2012      

Statement of income data:(1)

        

Net sales

   $ 1,207      $ 1,359      $ 1,478      $ 754      $ 737   

Cost of sales

     (930     (1,043     (1,136     (581     (571
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     277        316        342        173        166   

Selling, general and administrative expenses

     (189     (193     (200     (103     (98
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

     88        123        142        70        68   

Gain (loss) on extinguishment of debt

     8        (1     —         —         (1

Change in fair value of redeemable preferred stock embedded derivative liability

     (24     (24     5        17        15   

Other income (loss), net

     4        1        4        (1     —    

Interest expense

     (78     (76     (80     (41     (39
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income tax provision, equity in income and noncontrolling interest

     (2     23        71        45        43   

Income tax provision

     (9     (26     (33     (8     (12

Equity in income, net of tax

     1        1        —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

     (10     (2     38        37        31   

Income (loss) from discontinued operations, net of tax

     (58     1        (113     (13     (47
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (68     (1     (75     24        (16

Less: net income attributable to noncontrolling interest, net of tax

     2        4        1        1        —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to the Company

   $ (70   $ (5   $ (76   $ 23      $ (16
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share data:(1)

          

Basic earnings per share attributable to common shareholders:

          

Basic net income (loss) from continuing operations

   $ (4.64   $ (10.82   $ 5.84      $ 7.39      $ 5.75   

Income (loss) from discontinued operations, net of tax

     (14.11     0.15        (26.59     (3.27     (10.96
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to the Company

   $ (18.75   $ (10.67   $ (20.75   $ 4.12      $ (5.21
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding (in thousands)

     3,559        3,572        3,583        3,580        3,585   

Diluted earnings per share attributable to common shareholders:

          

Diluted net income (loss) from continuing operations

   $ (4.64   $ (10.82   $ 5.82      $ 7.36      $ 5.72   

Income (loss) from discontinued operations, net of tax

     (14.11     0.15        (26.46     (3.25     (10.92
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to the Company

   $ (18.75   $ (10.67   $ (20.64   $ 4.11      $ (5.20
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding (in thousands)

     3,559        3,572        3,600        3,595        3,600   

Statement of cash flows data:(1)

          

Net cash provided by (used in) operating activities

   $ 55      $ 22      $ 14      $ (52   $ 79   

Net cash used in investing activities

     (36     (98     (39     (21     (4

Net cash provided by (used in) financing activities

     (35     66        26        70        (65

Other financial data:

          

Capital expenditures

   $ 31      $ 52      $ 55      $ 27      $ 11   

Depreciation and amortization(2)

     26        26        25        12        11   

EBITDA(3)

     100        121        175        97        93   

Change in fair value of redeemable preferred stock embedded derivative liability

     (24     (24     5        17        15   

Restructuring charges(4)

     5        12        1        1        1   

Balance sheet data (end of period):(1)

          

Cash and cash equivalents

   $ 66      $ 55      $ 54      $ 54      $ 63   

Total current assets

     973        1,017        1,062        1,150        1,034   

Total assets

     1,505        1,616        1,490        1,771        1,452   

Total current liabilities

     437        455        419        497        480   

Total debt

     692        798        813        874        763   

Total shareholders’ equity(5)

     238        177        59        221        25   

 

 

10


Table of Contents

 

(1) In accordance with Accounting Standards Codification (“ASC”) Topic 205-20, “Presentation of Financial Statements—Discontinued Operations,” the Commercial Distribution Europe segment, which is also referred to as Quinton Hazell, and the Brake North America and Asia group are accounted for as discontinued operations. The consolidated statements of operations for all periods presented have been adjusted to reflect these operations as discontinued operations. The consolidated statements of cash flows have not been adjusted for any periods presented to reflect these operations as discontinued operations. The consolidated balance sheet for December 31, 2009 has been adjusted to reflect the Commercial Distribution Europe segment, which we sold in February 2010, as a discontinued operation. The consolidated balance sheets for December 31, 2011 and June 30, 2012 have been adjusted to reflect the Brake North America and Asia group as a discontinued operation.
(2) The depreciation and amortization expense excludes the Commercial Distribution Europe segment and the Brake North America and Asia group. The consolidated cash flow statement, which is included in our audited financial statements included elsewhere in this prospectus, includes the Commercial Distribution Europe segment and the Brake North America and Asia group.
(3) EBITDA is defined by us as net income (loss) from continuing operations, before interest expense, income tax provision and depreciation and amortization, less net income attributable to noncontrolling interest, net of tax, and less equity in income, net of tax. We believe that EBITDA is useful to investors because it is frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry. EBITDA is not a recognized term under generally accepted accounting principles in the United States (“GAAP”). Other companies may define EBITDA differently and, as a result, our measure of EBITDA may not be directly comparable to EBITDA of other companies. EBITDA should not be viewed in isolation and does not purport to be an alternative to net income as an indicator of operating performance or cash flows from operating activities as a measure of liquidity. The following table sets forth a reconciliation of EBITDA to net income from continuing operations:

 

     Year Ended December 31,      Six Months
Ended
June 30,
 
(Dollars in millions)    2009     2010     2011      2011      2012  

Net income (loss) from continuing operations

   $ (10   $ (2   $ 38       $ 37       $ 31   

Interest expense

     78        76        80         41         39   

Income tax provision

     9        26        33         8         12   

Depreciation and amortization

     26        26        25         12         11   

Less: net income attributable to noncontrolling interest, net of tax

     2        4        1         1           

Less: equity in income, net of tax

     1        1                          
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

EBITDA

   $ 100      $ 121      $ 175       $ 97       $ 93   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

(4) Reflects expenditures from continuing operations incurred in connection with our comprehensive and other restructuring plans, which are principally related to severance and facility exit costs. The amounts also include expenditures related to asset write-downs. We commenced the comprehensive restructuring in 2005 and had substantially completed it by the end of 2010. At the end of 2009, we also approved the closure of our distribution operations located in Mississauga, Ontario, Canada. The operations closed at the end of the first quarter of 2010. On May 3, 2010, we announced the closure of our manufacturing operations located in Maracay, Edo Aragua, Venezuela. The operations closed during the second quarter of 2010.
(5) Effective January 1, 2009, we changed the accounting for and reporting of minority interest (now called noncontrolling interest) in our consolidated financial statements as required under ASC Topic 810, Consolidation.” Upon adoption, applicable prior period amounts have been retrospectively changed to conform. The noncontrolling interest was reclassified to the equity section of the balance sheet.

 

 

11


Table of Contents

RISK FACTORS

An investment in our common stock is subject to a number of risks. You should carefully consider the risks described below together with all the other information contained in this prospectus, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus, before deciding whether to purchase our common stock. If any of the events described in the risk factors below occur, our business, financial condition, results of operation, cash flows and prospects could be materially and adversely affected. In such an event, the trading price of our common stock could decline and you may lose part or all of your investment.

Risks Relating to Our Industry and Our Business

Continued volatility in and disruption to the global economy, including the global capital and credit markets, has affected and may continue to materially and adversely affect our business, financial condition and results of operations, as well as our ability to access credit and has affected and may continue to materially and adversely affect the financial soundness of our customers and suppliers.

The global economy, including the global capital and credit markets, has been experiencing a period of significant uncertainty, characterized by very weak or negative economic growth, high unemployment, reduced spending by consumers and businesses, the bankruptcy, failure, collapse or sale of various financial institutions and a considerable level of intervention from the United States federal government and various foreign governments. Downgrades of long-term sovereign debt issued by the United States and various European countries by Standard & Poor’s, Moody’s and other rating agencies could also affect global and domestic financial markets and economic conditions. These recessionary conditions have materially and adversely affected the demand for our products and services and, therefore, reduced purchases by our customers, which has negatively affected our revenue growth and caused a decrease in our profitability. Although many vehicle maintenance and repair expenses are non-discretionary, difficult economic conditions may reduce miles driven and thereby increase periods between maintenance and repairs. In addition, interest rate fluctuations, financial market volatility or credit market disruptions may limit our access to capital, and may also negatively affect our customers’ and our suppliers’ ability to obtain credit to finance their businesses on acceptable terms. As a result, our customers’ need for and ability to purchase our products or services may decrease, and our suppliers may increase their prices, reduce their output or change their terms of sale. If our customers’ or suppliers’ operating and financial performance deteriorates, or if they are unable to make scheduled payments or obtain credit, our customers may not be able to pay, or may delay payment of, accounts receivable owed to us, and our suppliers may restrict credit or impose different payment terms. Any inability of customers to pay us for our products and services, or any demands by suppliers for different payment terms, may materially and adversely affect our earnings and cash flow.

If these economic conditions do not improve or continue to deteriorate, our results of operations or financial condition could limit our ability to take actions pursuant to certain covenants in our debt agreements that are tied to ratios based on our financial performance. Such covenants include our ability to incur additional indebtedness, make investments or pay dividends.

Our business would be materially and adversely affected if we lost any of our larger customers.

For the year ended December 31, 2011, approximately 26% and 8% of our net sales from continuing operations were to NAPA and CARQUEST, respectively. To compete effectively, we must continue to satisfy these and other customers’ pricing, service, technology and increasingly stringent quality and reliability requirements. Additionally, our revenues may be affected by decreases in NAPA’s or CARQUEST’s business or market share. Consolidation among our customers may also negatively impact our business. We cannot provide any assurance as to the amount of future business with these or any other customers. While we intend to continue to focus on retaining and winning these and other customers’ business, we may not succeed in doing so. Although business with any given customer is typically split among numerous contracts, the loss of, or significant reduction in purchases by, one of those major customers could materially and adversely affect our business, financial condition and results of operations.

 

12


Table of Contents

Increased crude oil and gasoline prices could reduce global demand for and use of automobiles and increase our costs, which could have a material and adverse effect on our business, financial condition and results of operations.

Material increases in the price of crude oil have historically been a contributing factor to the periodic reduction in the global demand for and use of automobiles. An increase in the price of crude oil could reduce global demand for and use of automobiles and continue to shift customer demand away from larger cars and light trucks (including sport utility vehicles (“SUVs”)), which we believe have more frequent replacement intervals for our products, which could have a material and adverse effect on our business, financial condition and results of operations. Demand for traditional SUVs and vans has declined in the past due, in part, to higher gasoline prices. If this trend were to continue, or if total miles driven were to decrease for a number of years, it could have a material and adverse effect on our business, financial condition and results of operations. Further, as higher gasoline prices result in a reduction in discretionary spending for auto repair by the end users of our products, our results of operations have been, and could continue to be, impacted. Additionally, higher gasoline prices have a material and adverse impact on our freight expenses.

The shift in demand from premium to economy brands may require us to produce value products at the expense of premium products, resulting in lower prices, thereby reducing our margins and decreasing our net sales.

We estimate that a majority of our net sales are currently derived from products we consider to be premium products. There has been, and may continue to be, a shift in demand from premium products, on which we can generally command premium pricing and generate enhanced margins, to value products. If such a trend continues, we may be forced to expand our production and/or purchases of value products at competitive prices. In addition, we could be forced to further reduce our prices to remain competitive, in which case our margins will decrease unless we make corresponding reductions in our cost structure.

We are subject to increasing pricing pressure from imports, particularly from lower labor cost countries.

Price competition from other aftermarket manufacturers particularly those based in lower labor cost countries, such as China, have historically played a role and may play an increasing role in the aftermarket sectors in which we compete. Pricing pressures have historically been more prevalent with respect to our brake products than our other products. While aftermarket manufacturers in these locations have historically competed primarily in markets for less technologically advanced products and manufactured a limited number of products, many are expanding their manufacturing capabilities to produce a broad range of lower labor cost, higher quality products and provide an expanded product offering. In the future, competitors in Asia or other lower labor cost sources may be able to effectively compete in our premium markets and produce a wider range of products which may force us to move additional manufacturing capacity offshore and/or lower our prices, reducing our margins and/or decreasing our net sales.

Increasing costs for manufactured components, raw materials and energy prices may materially and adversely affect our business, financial condition and results of operations.

We use a broad range of manufactured components and raw materials in our products, including raw steel, steel-related components, filtration media, aluminum, brass, iron, rubber, resins, plastics, paper and packaging materials. Materials comprise the largest component of our manufactured goods cost structure. Increases in the price of these items could materially increase our operating costs and materially and adversely affect our profit margins. In addition, in connection with passing through steel and other raw material price increases to our customers, there has typically been a delay of up to several months in our ability to increase prices, which has temporarily impacted profitability. In the future, it may be difficult to pass further price increases on to our customers, especially if we experience additional cost increases soon after implementing price increases. In addition, we have experienced longer than typical lead times in sourcing some of our steel-related components and certain finished products, which has caused us to buy from non-preferred vendors at higher costs.

 

13


Table of Contents

If our customers seek more expansive return policies or practices, such as extended payment terms, our cash flows and results of operations could be materially and adversely affected.

We are subject to product returns from customers, some of which manage their excess inventory by returning product to us. Our contracts with our customers typically include provisions that permit our customers to return specified levels of their purchases. Returns have historically represented approximately 2% of our sales. If returns from our customers significantly increase, our business, financial condition and results of operations may be materially and adversely affected. In addition, some customers in the aftermarket are pursuing ways to shift their costs of working capital, including extending payment terms. To the extent customers extend payment terms, our cash flows and results of operations may be materially and adversely affected.

We are subject to other risks associated with our non-U.S. operations.

We have significant manufacturing operations outside the United States, including joint ventures and other alliances. In 2011, approximately 51% of our net sales from continuing operations originated outside the United States. Risks inherent in international operations include:

 

   

multiple regulatory requirements that are subject to change and that could restrict our ability to manufacture, market or sell our products;

 

   

inflation, recession, fluctuations in foreign currency exchange and interest rates and discriminatory fiscal policies;

 

   

trade protection measures, including increased duties and taxes, and import or export licensing requirements;

 

   

price controls;

 

   

exposure to possible expropriation or other government actions;

 

   

differing local product preferences and product requirements;

 

   

difficulty in establishing, staffing and managing operations;

 

   

differing labor regulations;

 

   

potentially negative consequences from changes in or interpretations of tax laws;

 

   

political and economic instability and possible terrorist attacks against American interests;

 

   

enforcement of remedies in various jurisdictions; and

 

   

diminished protection of intellectual property in some countries.

These and other factors may have a material and adverse effect on our international operations or on our business, financial condition and results of operations. In addition, we may experience net foreign exchange losses due to currency fluctuations.

We are exposed to risks related to our receivables factoring arrangements.

We have entered into agreements with third-party financial institutions to factor on a non-recourse basis certain receivables. The terms of the factoring arrangements provide for the factoring of certain U.S. Dollar-denominated or Canadian Dollar-denominated receivables, which are purchased at the face amount of the receivable discounted at the annual rate of LIBOR plus a bank-determined spread on the purchase date. The amount factored is not contractually defined by the factoring arrangements and our use will vary each month based on the amount of underlying receivables and our cash flow needs. We began factoring certain of our receivables during the third quarter of 2010. For the years ended December 31, 2010 and 2011, we factored $156 million and $408 million of receivables, respectively, incurred costs on factoring of $2 million and $4 million, respectively. During the first six months of 2011 and 2012, we factored $190 million and $333 million of

 

14


Table of Contents

receivables, respectively, and incurred costs on factoring of $2 million and $3 million, respectively. Accounts receivable factored by us will be accounted for as a sale and removed from the balance sheet at the time of factoring for each period, and the cost of the factoring will be accounted for in other income. If any of the financial institutions we have factoring arrangements with experience financial difficulties or are otherwise unable or unwilling to honor the terms of, or otherwise terminate, our factoring arrangements, we may experience material and adverse economic losses due to the failure of such factoring arrangements and the impact of such failure on our liquidity, which could have a material and adverse effect upon our financial condition, results of operations and cash flows.

We may incur material losses and costs as a result of product liability and warranty and recall claims that may be brought against us.

We may be exposed to product liability and warranty claims in the event that our products actually or allegedly fail to perform as expected or the use of our products results, or is alleged to result, in bodily injury and/or property damage. Accordingly, we could experience material warranty or product liability losses in the future and incur significant costs to defend these claims.

In addition, if any of our products are, or are alleged to be, defective, we may be required to participate in a recall of that product if the defect or the alleged defect relates to vehicle safety. Our costs associated with providing product warranties could be material. Product liability, warranty and recall costs may have a material and adverse effect on our business, financial condition and results of operations. Our insurance may not be sufficient to cover such costs.

As a result of the consolidation driven by improved logistics and data management, distributors have reduced their inventory levels, which have reduced and could continue to reduce our sales.

Warehouse distributors have consolidated through acquisition and rationalized inventories, while streamlining their distribution systems through more timely deliveries and better data management. The corresponding reduction in purchases by distributors has negatively impacted our sales. Further consolidation or improvements in distribution systems could have a similar material and adverse impact on our sales.

We are subject to costly regulation, particularly in relation to environmental, health and safety matters, which could materially and adversely affect our business, financial condition and results of operations.

We are subject to a substantial number of costly regulations. In particular, we are required to comply with frequently changing and increasingly stringent requirements of federal, state and local environmental and occupational safety and health laws and regulations in the United States and other countries, including those governing emissions to air, discharges to air and water, and the creation and emission of noise and odor; the generation, handling, storage, transportation, treatment and disposal of waste materials; and the cleanup of contaminated properties and occupational health and safety. We could incur substantial costs, including cleanup costs, fines and civil or criminal sanctions, third-party property damage or personal injury claims, or costs to upgrade or replace existing equipment, as a result of violations of or liabilities under environmental, health and safety laws or non-compliance with environmental permits required at our facilities. In addition, many of our current and former facilities are located on properties with long histories of industrial or commercial operations. Because some environmental laws can impose joint and several liability for the entire cost of cleanup upon any of the current or former owners or operators, regardless of fault, we could become liable for investigating and/or remediating contamination at these properties if contamination requiring such activities is discovered in the future. We cannot assure that we have been, or will at all times be, in complete compliance with all environmental requirements, or that we will not incur material costs or liabilities in connection with these requirements in excess of amounts we have reserved. In addition, environmental requirements are complex, change frequently and have tended to become more stringent over time. These requirements may change in the future in a manner that could have a material and adverse effect on our business, financial condition and results of operations. We have made and will continue to make expenditures to comply with environmental

 

15


Table of Contents

requirements. These requirements, responsibilities and associated expenses and expenditures, if they continue to increase, could have a material and adverse effect on our business and results of operations. While our costs to defend and settle claims arising under environmental laws in the past have not been material, we cannot assure you that this will remain the case in the future. For more information about our environmental compliance and potential environmental liabilities, see “Business—Environmental Matters” and “Business—Legal Proceedings.”

Our operations would be materially and adversely affected if we are unable to purchase raw materials, manufactured components or equipment from our suppliers.

Because we purchase from suppliers various types of raw materials, finished goods, equipment and component parts, we may be materially and adversely affected by the failure of those suppliers to perform as expected. This non-performance may consist of delivery delays or failures caused by production issues or delivery of non-conforming products. The risk of non-performance may also result from the insolvency or bankruptcy of one or more of our suppliers. Our suppliers’ ability to supply products to us is also subject to a number of risks, including availability of raw materials, such as steel, destruction of their facilities or work stoppages. In addition, our failure to promptly pay, or order sufficient quantities of inventory from, our suppliers may increase the cost of products we purchase or may lead to suppliers refusing to sell products to us at all. Our efforts to protect against and to minimize these risks may not always be effective.

Our intellectual property portfolio could be subject to legal challenges and we may be subject to certain intellectual property claims.

We have developed and actively pursue developing a considerable amount of proprietary technology in the replacement products industry and rely on intellectual property laws of the United States and other countries to protect such technology. In doing so, we incur ongoing costs to enforce and defend our intellectual property. We have from time to time been involved in litigation regarding patents and other intellectual property. We may be subject to material intellectual property claims in the future or we may incur significant costs or losses related to such claims, including payments for licenses that may not be available on reasonable terms, if at all. Our proprietary rights may be challenged, invalidated or circumvented. Moreover, third parties may independently develop technology or other intellectual property that is comparable with or similar to our own, and we may not be able to prevent the use of it.

Our success depends in part on our development of improved products, and our efforts may fail to meet the needs of customers on a timely or cost-effective basis.

Our continued success depends on our ability to maintain advanced technological capabilities, machinery and knowledge necessary to adapt to changing market demands as well as to develop and commercialize innovative products. We cannot assure you that we will be able to develop new products as successfully as in the past or that we will be able to keep pace with technological developments by our competitors and the industry generally. In addition, we may develop specific technologies and capabilities in anticipation of customers’ demands for new innovations and technologies. If such demand does not materialize, we may be unable to recover the costs incurred in such programs. If we are unable to recover these costs or if any such programs do not progress as expected, our business, financial condition or results of operations could be materially and adversely affected.

The introduction of new and improved products and services may reduce our future sales.

Improvements in technology and product quality may extend the longevity of vehicle component parts and delay aftermarket sales. In particular, in our oil filter business the introduction of oil change indicators and the use of synthetic motor oils may further extend oil filter replacement cycles. The introduction of electric, fuel cell and hybrid automobiles may pose a long-term risk to our business because these vehicles may alter demand for our primary product lines. In addition, the introduction by OEMs of increased warranty and maintenance service initiatives, which are gaining popularity, have the potential to decrease the demand for our products in the traditional and retail sales channels.

 

16


Table of Contents

We may not realize the cost savings that we expect from the restructuring of our operations.

At the end of 2005 we announced the comprehensive restructuring through which we seek to lower costs and improve profitability by rationalizing manufacturing operations and to focus on low-cost sourcing opportunities. We have substantially completed the comprehensive restructuring plan and have realized approximately $100 million in cost savings as a result of the comprehensive restructuring to date. However, we may not be able to achieve the level of benefits that we expect to realize or we may not be able to realize these benefits within the timeframes we currently expect. Our expectations regarding cost savings are predicated upon maintaining our sales levels. Furthermore, the majority of our comprehensive restructuring relates to our Brake North America and Asia group, which we have classified as a discontinued operation. If we are successful in divesting our Brake North America and Asia group, the related cost savings will no longer benefit us.

Work stoppages, labor disputes or similar difficulties could significantly disrupt our operations.

As of December 31, 2011, 226 of our U.S. employees and 3 of our Canadian employees were represented by unions. It is possible that our workforce will become more unionized in the future. We may be subject to work stoppages and may be affected by other labor disputes. A work stoppage at one or more of our plants may have a material and adverse effect on our business. Unionization activities could also increase our costs, which could have an adverse effect on our business, financial condition and results of operations.

Additionally, a work stoppage at one of our suppliers could materially and adversely affect our operations if an alternative source of supply were not readily available. Stoppages by employees of our customers also could result in reduced demand for our products.

Any dispositions we make could disrupt our business and materially and adversely affect our business, financial condition and results of operations.

We may, from time to time, consider dispositions of existing lines of business. For example, we recently announced that we are committed to selling our Brake North America and Asia group. Dispositions involve numerous risks, including the diversion of our management’s attention from other business concerns and potential adverse effects on existing business relationships with current customers and suppliers. We cannot assure that we will be able to realize higher values for our Brake North America and Asia group related businesses through the sale or that we will be able to consummate any proposals for strategic alternatives for the Brake North America and Asia group at all or within a specified time period, due to market, regulatory and other factors. Any of these factors could materially and adversely affect our business, financial condition and results of operations.

Any acquisitions we make could disrupt our business and materially and adversely affect our business, financial condition and results of operations.

We may, from time to time, consider acquisitions of complementary companies, products or technologies. Acquisitions involve numerous risks, including the diversion of our management’s attention from other business concerns and potential adverse effects on existing business relationships with current customers and suppliers. Any acquisitions could present difficulties in the assimilation of the acquired business and involve the incurrence of substantial additional indebtedness. We cannot assure that we will be able to successfully integrate any acquisitions that we pursue or that such acquisitions will perform as planned or prove to be beneficial to our operations and cash flow. Any of these factors could materially and adversely affect our business, financial condition and results of operations.

Our ability to maintain our ongoing operations could be impaired.

To be successful and achieve our objectives under our strategic plan, we must retain qualified personnel. Our potential sale of the Brake North America and Asia group may create uncertainty for our employees and this uncertainty may adversely affect our ability to retain key employees, including our senior management, and to hire new talent necessary to maintain our ongoing operations, which could have a material adverse effect on our business. Accordingly, we may fail to maintain our ongoing operations or execute our strategic plan if we are unable to manage such changes effectively.

 

17


Table of Contents

Our internal control over financial reporting does not currently meet the standards required by Section 404 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), and failure to achieve and maintain effective internal control over financial reporting in accordance with Section 404 of Sarbanes-Oxley could have a material and adverse effect on our business.

As a privately held company, we have not been required to maintain internal control over financial reporting in a manner that meets the standards of publicly traded companies required by Section 404 of Sarbanes-Oxley, standards that we will be required to meet in the course of preparing our consolidated financial statements in the future.

If, as a public company, we are not able to implement the requirements of Section 404 of Sarbanes-Oxley in a timely manner or with adequate compliance, our independent registered public accounting firm may not be able to attest to the effectiveness of our internal control over financial reporting. If we are unable to maintain adequate internal control over financial reporting, we may be unable to report our financial information on a timely basis, may suffer adverse regulatory consequences or violations of applicable stock exchange listing rules and may breach the covenants under our revolving credit facilities and our senior notes. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements. Confidence in our financial statements is also likely to suffer if we or our independent registered public accounting firm report a material weakness in our internal control over financial reporting.

In addition, we will incur incremental costs in order to improve our internal control over financial reporting and comply with Section 404 of Sarbanes-Oxley, including increased auditing and legal fees.

We may be required to recognize impairment charges for our long-lived assets, which include fixed assets, intangible assets, and goodwill.

At June 30, 2012, the net carrying value of long-lived assets (property, plant and equipment) totaled $115 million. Additionally, we have $121 million of property, plant and equipment on our consolidated balance sheet classified in current assets of discontinued operations as of June 30, 2012. In accordance with GAAP, we periodically assess our long-lived assets to determine if they are impaired. Significant negative industry or economic trends, disruptions to our business, unexpected significant changes or planned changes in use of the assets, divestitures and market capitalization declines may result in charges to long-lived asset impairments. Future impairment charges could significantly affect our results of operations in the periods recognized. Impairment charges would also reduce our consolidated net worth and increase our debt to total capitalization ratio, which could negatively impact our access to the public debt and equity markets.

We have $127 million of recorded intangible assets and goodwill on our consolidated balance sheet as of June 30, 2012. Additionally, we have $78 million of recorded intangible assets and goodwill on our consolidated balance sheet classified in current assets of discontinued operations as of June 30, 2012. These assets may become impaired with the loss of significant customers or a decline of profitability. In assessing the recoverability of goodwill, projections regarding estimated future cash flows and other factors are made to determine the fair value of the respective reporting unit. If these estimates or related projections change in the future, we may be required to record impairment charges for goodwill at that time. If our trade names carrying values exceed fair value we will be required to record an impairment charge.

While our intangibles with definite lives may not be impaired, the useful lives are subject to continual assessment, taking into account historical and expected losses of relationships that were in the base at time of acquisition. This assessment may result in a reduction of the remaining useful life of these assets, resulting in potentially significant increases to non-cash amortization expense that is charged to our consolidated statement of operations. An intangible asset or goodwill impairment charge, or a reduction of amortization lives, could have a material and adverse effect on our results of operations.

 

18


Table of Contents

Business disruptions could materially and adversely affect our future sales and financial condition or increase our costs and expenses.

Our business may be disrupted by a variety of events or conditions, including, but not limited to, threats to physical security, acts of terrorism, raw material shortages, natural and man-made disasters, information technology failures and public health crises. Any of these disruptions could affect our internal operations or services provided to customers, and could impact our sales, increase our expenses or materially and adversely affect our reputation.

Foreign exchange rate fluctuations could cause a decline in our financial condition, results of operations and cash flows.

As a result of our international operations, we are subject to risk because we generate a significant portion of our revenues and incur a significant portion of our expenses in currencies other than the U.S. Dollar. Our international presence is most significant in Brazil, Canada, China, Mexico and Poland. To the extent that we have significantly more costs than revenues generated in a foreign currency, we are subject to risk if the foreign currency appreciates because the appreciation effectively increases our cost in that country to a greater extent than our revenues. To the extent that we are unable to match revenues received in foreign currencies with costs paid in the same currency, foreign exchange rate fluctuations in that currency could have a material and adverse effect on our financial condition, results of operations and cash flows. In addition, the financial condition, results of operations and cash flows of some of our operating entities are reported in foreign currencies and then translated into U.S. Dollars at the applicable foreign exchange rate for inclusion in our consolidated financial statements. As a result, appreciation of the U.S. Dollar against these foreign currencies generally will have a negative impact on our reported sales and profits.

For example, on January 11, 2010, the Venezuelan government devalued the country’s currency, Bolivar Fuerte (“VEF”), and changed to a two-tier exchange structure. The official exchange rate moved from 2.15 VEF per U.S. Dollar to 2.60 VEF for essential goods and 4.30 VEF for non-essential goods and services, with our products falling into the non-essential category. A Venezuelan currency control board is responsible for foreign exchange procedures, including approval of requests for exchanges of VEF for U.S. Dollars at the official, government established exchange rate. We use the parallel market rate, which ranged between 5.30 to 7.70 VEF to the U.S. Dollar during 2010 and 2011 and remained at 5.30 VEF to the U.S. Dollar for the first six months of 2012, to translate the financial statements of our Venezuelan subsidiary because we expect to obtain U.S. Dollars at the parallel market rate for future dividend remittances. The one-time devaluation had a $2 million negative impact on our pre-tax net income in 2010. Further depreciation of the VEF, or depreciation of the currencies of other countries in which we do business, could materially and adversely affect our business, financial condition, results of operations and cash flows. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Environment.”

We use a combination of natural hedging techniques and financial derivatives to protect against certain foreign currency exchange rate risks. Such hedging activities may be ineffective or may not offset more than a portion of the adverse financial impact resulting from foreign currency variations. Gains or losses associated with hedging activities also may negatively impact operating results.

Entering new markets poses new competitive threats and commercial risks.

In recent years we have sought to expand our manufacturing and sales into new markets. Expanding into new markets requires investments and resources that may not be available as needed. We cannot guarantee that we will be successful in leveraging our capabilities to compete favorably in new markets or that we will be able to recoup our significant investments in expansion projects. If our customers in new markets experience reduced demand for their products or financial difficulties, our future prospects will be negatively affected as well.

 

19


Table of Contents

The mix of profits and losses in various jurisdictions may have an impact on our overall tax rate, which in turn, may materially and adversely affect our profitability.

Tax expenses and benefits are determined separately for each of our taxpaying entities or groups of entities that is consolidated for tax purposes in each jurisdiction. Losses in such jurisdictions may provide no current financial statement tax benefit. As a result, changes in the mix of projected profits and losses between jurisdictions, among other factors, could have a significant impact on our overall effective tax rate.

The value of our deferred tax assets could become impaired, which could materially and adversely affect our operating results.

As of December 31, 2011, we had $179 million in net deferred income tax assets. These deferred tax assets include net operating loss carryforwards that can be used to offset taxable income in future periods and reduce income taxes payable in those future periods. We periodically determine the probability of the realization of deferred tax assets, using significant judgments and estimates with respect to, among other things, historical operating results, expectations of future earnings and tax planning strategies. If we determine in the future that there is not sufficient positive evidence to support the valuation of these assets, due to the factors described above or other factors, we may be required to further adjust the valuation allowance to reduce our deferred tax assets. Such a reduction could result in material non-cash expenses in the period in which the valuation allowance is adjusted and could have a material and adverse effect on our results of operations.

Our ability to utilize our net operating loss carryforwards may be limited and delayed. As of December 31, 2011, we had U.S. net operating loss carryforwards of $378 million. Certain provisions of the Internal Revenue Code of 1986, as amended (the “Code”) could limit our annual utilization of the net operating loss carryforwards. There can be no assurance that we will be able to utilize all of our net operating loss carryforwards and any subsequent net operating loss carryforwards in the future.

We must successfully maintain and/or upgrade our information technology systems.

We rely on various information technology systems to manage our operations. We are currently implementing modifications and upgrades to our systems, including making changes to legacy systems, replacing legacy systems with successor systems with new functionality and acquiring new systems with new functionality. These types of activities subject us to inherent costs and risks associated with replacing and changing these systems, including impairment of our ability to fulfill customer orders, potential disruption of our internal control structure, substantial capital expenditures, additional administration and operating expenses, retention of sufficiently skilled personnel to implement and operate the new systems, demands on management time, and other risks and costs of delays or difficulties in transitioning to new systems or of integrating new systems into our current systems. Our system implementations may not result in productivity improvements at a level that outweighs the costs of implementation, or at all. In addition, the implementation of new technology systems may cause disruptions in our business operations and have an adverse effect on our business and operations, if not anticipated and appropriately mitigated.

Our international operations are subject to political and economic risks of developing countries and special risks associated with doing business in corrupting environments.

We design, manufacture, distribute and market a broad range of aftermarket products in various regions, some of which are less developed, have less stability in legal systems and financial markets and are generally recognized as potentially more corrupt business environments than the United States, and therefore present greater political, economic and operational risks. We have in place certain policies, procedures and certain ongoing training of employees with regard to business ethics and many key legal requirements, such as applicable anti-corruption laws, including the U.S. Foreign Corrupt Practices Act (the “FCPA”), which make it illegal for us to give anything of value to foreign officials in order to obtain or retain any business or other advantages; however, there can be no assurance that our employees will adhere to our code of business conduct

 

20


Table of Contents

and ethics or any other of our policies, applicable anti-corruption laws, including the FCPA, or other legal requirements. If we fail to enforce our policies and procedures properly or fail to maintain adequate record-keeping and internal accounting practices to accurately record our transactions, we may be subject to regulatory sanctions. In the event that we believe or have reason to believe that our employees have or may have violated applicable anti-corruption laws, including the FCPA, or other laws or regulations, we are required to investigate or have outside counsel investigate the relevant facts and circumstances, and if violations are found or suspected could face civil and criminal penalties, and significant costs for investigations, litigation, fees, settlements and judgments, which in turn could have a material and adverse effect on our business.

Risks Relating to Our Indebtedness

Our substantial leverage could harm our business by limiting our available cash and our access to additional capital and, to the extent of our variable rate indebtedness, exposing us to interest rate risk.

As a result of the Acquisition in 2004, the refinancing in 2009 and our issuance of an additional $100 million Senior Subordinated Notes in 2010, we are highly leveraged. As of June 30, 2012, we had $763 million of indebtedness, which excludes $13 million of indebtedness in our Brake North America and Asia group. This leverage may limit our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions, restructuring and general corporate or other purposes, limit our ability to adjust to changing market conditions and place us at a competitive disadvantage compared to our less leveraged competitors. Further volatility in the credit markets would adversely impact our ability to obtain favorable terms on financing in the future. In addition, a substantial portion of our cash flows from operations must be dedicated to the payment of principal and interest on our indebtedness and is not available for other purposes, including our operations, capital expenditures and future business opportunities. We may be more vulnerable than a less leveraged company to a downturn in the general economic conditions or in our business, or we may be unable to carry out capital spending that is important to our growth. We may be vulnerable to interest rate increases, as certain of our borrowings, including those under our four-year $315 million asset-based revolving credit facility (the “ABL Revolver”), are at variable rates. We can give no assurance that our business will generate sufficient cash flow from operations, that revenue growth or operating improvements will be realized, or that future borrowings will be available under our ABL Revolver in an amount sufficient to enable us to service our indebtedness or to fund other liquidity needs.

We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which actions may not be successful.

Our ability to make scheduled payments or to refinance our debt obligations depends on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may not be able to maintain a level of cash flow from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital or seek to restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. In the absence of such operating results and resources, we could face substantial liquidity problems and might be required to sell material assets or operations to attempt to meet our debt service and other obligations. Our ABL Revolver and the indentures governing our notes restrict our ability to use the proceeds from asset sales. We may not be able to consummate those asset sales to raise capital or sell assets at prices that we believe are fair, and proceeds that we do receive may not be adequate to meet any debt service obligations then due.

 

21


Table of Contents

Despite our current indebtedness levels, we may still be able to incur substantially more debt, which could further exacerbate the risks associated with our substantial leverage.

We and our subsidiaries may be able to incur substantial additional indebtedness in the future. Although the terms of the agreements governing our debt instruments contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and the indebtedness incurred in compliance with these restrictions could be substantial. As of June 30, 2012, we had $169 million of borrowing capacity available under the ABL Revolver after giving effect to $13 million in outstanding letters of credit, none of which was drawn against, and $3 million for borrowing base reserves. If we incur additional debt above the levels currently in effect, the risks associated with our leverage, including those described above, would increase.

The terms of our debt covenants could limit how we conduct our business and our ability to raise additional funds.

The agreements that govern the terms of our debt, including the indentures governing our notes and the credit agreement that governs our ABL Revolver, contain, and the agreements that govern our future indebtedness may contain, certain covenants that, among other things, limit or restrict our ability and the ability of our subsidiaries to (subject to certain qualifications and exceptions):

 

   

incur and guarantee additional indebtedness, issue disqualified stock or issue certain preferred stock;

 

   

repay subordinated indebtedness prior to its stated maturity;

 

   

pay dividends, make other distributions on, redeem or repurchase stock or make certain other restricted payments;

 

   

make certain investments or acquisitions;

 

   

create certain liens or encumbrances;

 

   

sell assets;

 

   

enter into transactions with affiliates;

 

   

issue capital stock;

 

   

change our line of business;

 

   

consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;

 

   

designate subsidiaries as unrestricted subsidiaries;

 

   

make capital expenditures; and

 

   

restrict dividends, distributions or other payments from our subsidiaries.

There are limitations on our ability to incur the full $315 million of commitments under the ABL Revolver. The borrowers organized in the United States are limited to $300 million and the borrower organized in Canada may borrow up to the remaining $15 million. In each case, borrowings under our ABL Revolver are limited by a specified borrowing base consisting of a percentage of eligible accounts receivable and inventory, less customary reserves. Subject to certain conditions, the commitments under the ABL Revolver may be increased by up to $160 million.

In addition, under the ABL Revolver, a covenant trigger would occur if excess availability under the ABL Revolver is less than (i) with respect to periods prior to the sale of all or substantially all of the ABL priority collateral of the consolidated U.S. and Canadian brake operations of the Company and the guarantors, the greater of 10.0% of the total revolving loan commitments and $31.5 million or (ii) with respect to periods after

 

22


Table of Contents

the sale of all or substantially all of the ABL priority collateral of the consolidated U.S. and Canadian brake operations of the Company and the guarantors, the greater of 10.0% of the total borrowing base and $20.0 million. If the covenant trigger were to occur, we would be required to satisfy and maintain a fixed charge coverage ratio of at least 1.00x, measured for the last twelve-month period. Our ability to meet the required fixed charge coverage ratio can be affected by events beyond our control, and we cannot assure you that we will meet this ratio. A breach of any of these covenants could result in a default under the ABL Revolver.

Moreover, the ABL Revolver provides the lenders considerable discretion to impose reserves, which could materially impair the amount of borrowings that would otherwise be available to us. There can be no assurance that the lenders under the ABL Revolver will not impose such actions during the term of the ABL Revolver.

A breach of the covenants or restrictions under the indentures governing our notes or the credit agreement that governs the ABL Revolver could result in a default under the applicable indebtedness. Such default may allow the creditors to accelerate the related debt and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. In addition, an event of default under our ABL Revolver would permit the lenders under our ABL Revolver to terminate all commitments to extend further credit under that facility. Furthermore, if we were unable to repay the amounts due and payable under our ABL Revolver, those lenders could proceed against the collateral granted to them to secure that indebtedness. In the event our lenders and noteholders accelerate the repayment of our borrowings, we cannot assure that we and our subsidiaries would have sufficient assets to repay such indebtedness. As a result of these restrictions, we may be:

 

   

limited in how we conduct our business;

 

   

unable to raise additional debt or equity financing to operate during general economic or business downturns; or

 

   

unable to compete effectively or to take advantage of new business opportunities.

These restrictions may affect our ability to grow in accordance with our plans.

Our variable rate indebtedness exposes us to interest rate risk, which could cause our debt costs to increase significantly.

A portion of our borrowings are at variable rates of interest and expose us to interest rate risks. We are exposed to the risk of rising interest rates to the extent that we fund our operations with short-term or variable-rate borrowings. As of June 30, 2012, the Company’s $776 million of aggregate debt outstanding, which includes $13 million classified in current liabilities of discontinued operations for our Brake North America and Asia group, consisted of $103 million of floating-rate debt and $673 million of fixed-rate debt. Fixed rate debt comprised approximately 87% of our total debt as of June 30, 2012. Based on the amount of floating-rate debt outstanding at June 30, 2012, a 1% rise in interest rates would result in an incremental annual interest expense of approximately $1 million. If the LIBOR rates increase in the future then the floating-rate debt could have a material effect on our interest expense.

Risks Relating to This Offering

The price of our common stock may be volatile.

The price at which our common stock will trade after this offering may be volatile due to a number of factors, including:

 

   

market conditions in the broader stock market in general;

 

   

actual or anticipated fluctuations in our financial condition or annual or quarterly results of operations;

 

   

changes in investors’ and financial analysts’ perception of the business risks and conditions of our business;

 

23


Table of Contents
   

changes in, or our failure to meet, earning estimates and other performance expectations of investors or financial analysts;

 

   

unfavorable commentary or downgrades of our stock by equity research analysts, or the announcement of any changes to our credit rating;

 

   

regulatory or political developments;

 

   

litigation and government investigations;

 

   

our success or failure in implementing our growth plans;

 

   

changes in the market valuations of companies viewed as similar to us;

 

   

changes or proposed changes in governmental regulations affecting our business;

 

   

changes in key personnel;

 

   

depth of the trading market in our common stock;

 

   

failure of securities analysts to cover our common stock after this offering;

 

   

termination of the lock-up agreement or other restrictions on the ability of our existing stockholders to sell shares after this offering;

 

   

future sales of our common stock;

 

   

the granting or exercise of employee stock options or other equity awards;

 

   

increased competition;

 

   

realization of any of the risks described elsewhere under “Risk Factors;” and

 

   

general market and economic conditions.

In addition, equity markets have experienced significant price and volume fluctuations that have affected the market prices for the securities of newly public companies for a number of reasons, including reasons that may be unrelated to our business or operating performance. These broad market fluctuations may result in a material decline in the market price of our common stock and you may not be able to sell your shares at prices you deem acceptable. In the past, following periods of volatility in the equity markets, securities class action lawsuits have been instituted against public companies. Such litigation, if instituted against us, could result in substantial cost and the diversion of management attention.

The shares you purchase in this offering will experience immediate and substantial dilution.

The initial public offering price of our common stock will be substantially higher than the net tangible book value per share of our outstanding common stock prior to the completion of this offering. Assuming an initial public offering price of $             per share, representing the mid-point of the range set forth on the cover page of this prospectus, purchasers of our common stock will effectively experience an immediate dilution in net tangible book value per share of $             from the offering price. Conversely, the shares of our common stock owned by existing stockholders will receive a material increase in net tangible book value per share. You may experience additional dilution if we issue common stock in the future. As a result of this dilution, you may receive significantly less than the full purchase price you paid for the shares in the event of liquidation.

Our principal stockholders, Cypress and OMERS, will together continue to control us following the offering, and their interests in their capacities as stockholders may be adverse to your interests.

After this offering, Cypress and OMERS, our principal stockholders, will beneficially own     % and     %, respectively, of our outstanding shares of common stock and voting power, or     % and     %, respectively, if the underwriters exercise their option to purchase additional shares in full, and therefore will together continue to be

 

24


Table of Contents

able to control the election of our directors, determine our corporate and management policies and determine, without the consent of our other stockholders, the outcome of any corporate transaction or other matter submitted to our stockholders for approval, including potential mergers or acquisitions, asset sales and other significant corporate transactions. Our principal stockholders will also have sufficient voting power to amend our organizational documents.

We cannot assure you that the interests of our principal stockholders will coincide with the interests of other holders of our common stock. Additionally, our principal stockholders are in the business of making investments in companies and may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us. Our principal stockholders may also pursue, for their own account, acquisition opportunities that may be complementary to our business, and, as a result, those acquisition opportunities may not be available to us.

So long as our principal stockholders continue to own a significant amount of our common stock and voting power, even if such amount is less than 50%, they will continue to be able to strongly influence or effectively control our decisions, including director and officer appointments, potential mergers or acquisitions, asset sales and other significant corporate transactions. In particular, as discussed under “Management—Board Composition and Director Qualifications,” Cypress will have the right to nominate to our board of directors (the “Board”) such number of nominees as reflects its beneficial ownership of our shares on a fully-diluted basis (or a minimum of two nominees so long as Cypress beneficially owns at least 10% of our shares on a fully-diluted basis) and OMERS will have the right to nominate to our Board one nominee so long as it beneficially owns at least 10% of our shares on a fully-diluted basis.

Shares eligible for future sale may cause the market price of our common stock to decline, even if our business is doing well.

Sales of substantial amounts of our common stock in the public market after this offering, or the perception that these sales may occur, could adversely affect the price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. Upon completion of this offering, our amended and restated certificate of incorporation (the “certificate of incorporation”) will authorize us to issue              shares of common stock and we will have              shares of common stock outstanding or              shares if the underwriters exercise their option to purchase additional shares in full. All the shares sold in this offering will be freely tradable. Substantially all of the remaining shares of our common stock will be available for resale in the public market, subject to the restrictions on sale or transfer during the 180-day lockup period after the date of this prospectus that is described in “Shares Eligible for Future Sale.” Registration of the sale of these shares of our common stock would permit their sale into the market immediately. As restrictions on resale end or upon registration of any of these shares for resale, the market price of our common stock could drop significantly if the holders of these shares sell them or are perceived by the market as intending to sell them. In particular, we have granted certain of our stockholders the right to cause us, at our expense, to file registration statements under the Securities Act of 1933, as amended (the “Securities Act”) covering resales of shares of our common stock held by them and to piggyback on future registration statements that we may file.

A trading market may not develop for our common stock, and you may not be able to sell your stock.

There is no established trading market for our common stock, and the market for our common stock may be highly volatile or may decline regardless of our operating performance. You may not be able to sell your shares at or above the initial public offering price.

Prior to this offering, you could not buy or sell our equity publicly. We have applied to have our common stock listed on The New York Stock Exchange. However, an active public market for our common stock may not develop or be sustained after this offering. If a market does not develop or is not sustained, it may be difficult for you to sell your shares of common stock at a price that is attractive to you, or at all.

The initial public offering price will be determined through negotiation between us and representatives of the underwriters, and may not be indicative of the market price for our common stock after this offering.

 

25


Table of Contents

Reports published by securities or industry analysts, including projections in those reports that exceed our actual results, could materially and adversely affect our common stock price and trading volume.

We currently expect that securities research analysts, including those affiliated with our underwriters, will establish and publish their own periodic projections for our business. These projections may vary widely from one another and may not accurately predict the results we actually achieve. Our stock price may decline if our actual results do not match securities research analysts’ projections. Similarly, if one or more of the analysts who writes reports on us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price could decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, our stock price or trading volume could decline. While we expect securities research analyst coverage, if no securities or industry analysts commence coverage of our company, the trading price for our stock and the trading volume could be materially and adversely affected.

We will have broad discretion over the use of the proceeds to us from this offering, and we may not use these funds in a manner of which you would approve or which would enhance the market price of our common stock.

We will have broad discretion to use the net proceeds from this offering, and you will be relying on the judgment of our board of directors and management regarding the use of these proceeds. Although we expect to use a substantial portion of the net proceeds from this offering to retire existing indebtedness, we have not allocated the balance of these net proceeds for specific purposes and cannot assure you that we will use these funds in a manner of which you would approve. See “Use of Proceeds.”

Provisions in our charter documents, certain agreements governing our indebtedness and under Delaware law could make an acquisition of us more difficult and may prevent attempts by our stockholders to replace or remove our current management, even if beneficial to our stockholders.

Provisions in our certificate of incorporation and our amended and restated bylaws (the “bylaws”) may discourage, delay or prevent a merger, acquisition or other change in control of our company that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock, thereby depressing the market price of our common stock. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our Board. See “Description of Capital Stock—Anti-Takeover Effects of Delaware Law and Certain Provisions of our Certificate of Incorporation.”

Our certificate of incorporation authorizes our Board to issue up to              shares of preferred stock. The preferred stock may be issued in one or more series, the terms of which may be determined by our Board at the time of issuance or fixed by resolution without further action by the stockholders. These terms may include voting rights, preferences as to dividends and liquidation, conversion rights, redemption rights and sinking fund provisions. The issuance of preferred stock could diminish the rights of holders of our common stock, and therefore could reduce the value of our common stock. In addition, specific rights granted to holders of preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of our Board to issue preferred stock could delay, discourage, prevent or make it more difficult or costly to acquire or effect a change in control, thereby preserving the current stockholders’ control.

We have no present intention to pay dividends and, even if we change that policy, we may be unable to pay dividends on our common stock.

We do not intend to pay dividends on our common stock for the foreseeable future. If we change that policy and commence paying dividends, we will not be obligated to continue paying those dividends and our stockholders will not be guaranteed, or have contractual or other rights, to receive dividends. If we commence paying dividends in the future, our board of directors may decide, in its discretion, at any time, to decrease the amount of dividends, otherwise modify or repeal the dividend policy or discontinue entirely the payment of dividends.

 

26


Table of Contents

Our ability to pay dividends will be restricted by certain of the agreements governing our indebtedness, and may be restricted by agreements governing any of our future indebtedness. Furthermore, we are permitted under the terms of certain of the agreements governing our indebtedness to incur additional indebtedness, which in turn may severely restrict or prohibit the payment of dividends.

Affinia Group Holdings Inc. is a holding company with no significant operations or material assets other than the equity interests it holds in its subsidiaries. Affinia Group Holdings Inc. conducts all of its business operations through its subsidiaries. As a result, its ability to pay dividends is dependent on the generation of cash flow by its subsidiaries, and their ability to make such cash available, by dividend or otherwise.

Under the Delaware General Corporation Law (the “DGCL”), our Board may not authorize the payment of a dividend unless it is either paid out of our surplus, as calculated in accordance with the DGCL, or if we do not have a surplus, it is paid out of our net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year.

 

27


Table of Contents

FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements, including statements concerning our plans, objectives, goals, strategies, future events, future revenue or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions, business trends and other information that is not historical information and, in particular, statements appearing under the headings “Summary,” “Management’s Discussion and Analysis of Financial Condition and Results of Operation” and “Business.” When used in this prospectus, the words “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “plans,” “projects” or future or conditional verbs, such as “could,” “may,” “should” or “will,” and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, management’s examination of historical operating trends and data, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith and we believe that there is a reasonable basis for them. However, we cannot assure you that these expectations, beliefs and projections will be achieved.

There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this prospectus. Important factors that could cause our actual results to differ materially from the forward-looking statements we make in this prospectus are set forth in this prospectus, including under the heading “Risk Factors.”

As stated elsewhere in this prospectus, such risks, uncertainties and other important factors include, among others, continued volatility in and disruption to the global economy and the resulting impact on the availability and cost of credit; financial viability of key customers and key suppliers; our dependence on our largest customers; increased crude oil and gasoline prices and resulting reductions in global demand for the use of automobiles; the shift in demand from premium to economy products; pricing and pressures from imports; increasing costs for manufactured components; the expansion of return policies or the extension of payment terms; risks associated with our non-U.S. operations; risks related to our receivables factoring arrangements; product liability and warranty and recall claims; reduced inventory levels by our distributors resulting from consolidation and increased efficiency; environmental and automotive safety regulations; the availability of raw materials, manufactured components or equipment from our suppliers; challenges to our intellectual property portfolio; our ability to develop improved products; the introduction of improved products and services that extend replacement cycles otherwise reduce demand for our products; our ability to achieve cost savings from our restructuring plans; work stoppages, labor disputes or similar difficulties that could significantly disrupt our operations; our ability to successfully effect dispositions of existing lines of business; our ability to successfully combine our operations with any businesses we have acquired or may acquire; our ability to comply with internal control standards applicable to public companies; risk of impairment charges to our long-lived assets; risk of impairment to intangibles and goodwill; the risk of business disruptions related to a variety of events or conditions, including natural and man-made disasters; risks associated with foreign exchange rate fluctuations; risks associated with our expansion into new markets; the impact on our tax rate resulting from the mix of our profits and losses in various jurisdictions; reductions in the value of our deferred tax assets; difficulties in developing, maintaining or upgrading information technology systems; risks associated with doing business in corrupting environments; our substantial leverage and limitations on flexibility in operating our business contained in our debt agreements. Additionally, there may be other factors that could cause our actual results to differ materially from the forward-looking statements.

All forward-looking statements attributable to us or persons acting on our behalf apply only as of the date of this prospectus and are expressly qualified in their entirety by the cautionary statements included in this prospectus. We undertake no obligation to update or revise forward-looking statements to reflect events or circumstances that arise after the date made or to reflect the occurrence of unanticipated events.

 

28


Table of Contents

USE OF PROCEEDS

We estimate that the net proceeds from this offering will be approximately $             million, after deducting the underwriting discounts and commissions and estimated expenses of this offering and assuming we sell the shares for $             per share, representing the mid-point of the range set forth on the cover page of this prospectus.

We intend to use approximately $122 million of our net proceeds from this offering to prepay in full the Seller Note, a subordinated payment in kind note with a face amount of $74.5 million that matures on November 30, 2019. The fair market value of the Seller Note was $98 million and the effective interest rate on it as of June 30, 2012 was 12.5% per annum, payable in kind at our option. We have made each interest payment on the Seller Note to date in kind rather than in cash. We intend to use any remaining proceeds for general corporate purposes.

A $1.00 increase or decrease in the assumed initial public offering price of $             per share would increase or decrease the net proceeds to us from this offering by approximately $             million, assuming the number of shares offered by us, as listed on the cover page of this prospectus, remains the same.

 

29


Table of Contents

DIVIDEND POLICY

We currently expect to retain future earnings, if any, for use in the operation and expansion of our business and do not anticipate paying any dividends on our common stock in the foreseeable future. Payments of future dividends, if any, will be at the discretion of our Board after taking into account various factors, including our business, operating results and financial condition, current and anticipated cash needs, plans for expansion and any legal or contractual limitations on our ability to pay dividends. Our ability to pay dividends on our common stock is currently limited by the covenants of the agreements governing our indebtedness and may be further restricted by the terms of any future debt or preferred securities. See “Description of Certain Indebtedness” for a description of the restrictions on our ability to pay dividends.

Furthermore, we are a holding company that does not conduct any business operations of our own. As a result, we are dependent upon cash dividends and distributions and other transfers from our subsidiaries to make any dividend payments on our common stock. In addition, our subsidiaries are permitted to pay dividends to us subject to general restrictions imposed on dividend payments under the jurisdiction of incorporation or organization of each subsidiary.

The ability of our Board to declare a dividend is also subject to limits imposed by Delaware corporate law. Under Delaware law, our Board and the boards of directors of our corporate subsidiaries incorporated in Delaware may declare dividends only to the extent of “surplus,” which is defined as total assets at fair market value minus total liabilities, minus statutory capital, or if there is no surplus out of net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year.

 

30


Table of Contents

CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization on a consolidated basis as of June 30, 2012:

 

   

on an actual basis; and

 

   

on an as adjusted basis, giving effect to the sale by us of            shares of common stock in this offering at an assumed initial public offering price of $            per share, representing the mid-point of the range set forth on the cover page of this prospectus, our receipt of the net proceeds thereof, after deducting underwriting discounts and commissions and the estimated offering expenses payable by us, and our use of such net proceeds as described under “Use of Proceeds,” in each case as if they had occurred on June 30, 2012.

The as adjusted information below is illustrative only and our capitalization following the closing of this offering will depend on the actual number of shares we sell (including any shares sold in connection with the underwriters’ exercise of their overallotment option) and the actual initial public offering price. This table should be read in conjunction with “Prospectus Summary—Summary Historical Financial Data,” “Use of Proceeds,” “Selected Historical Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus.

 

     As of June 30, 2012  
(Dollars in millions)    Actual     As  Adjusted(1)  

Cash and cash equivalents

   $ 63      $                
  

 

 

   

 

 

 

Long-term debt (including current portion):

    

9% Senior Subordinated Notes due 2014(2)

   $ 367     

10.75% Senior Secured Notes due 2016(3)

     179     

ABL Revolver(4)

     75     

Seller Note(5)

     122     

Other debt(6)

     33     
  

 

 

   

 

 

 

Total debt (including current portion)(7):

     776     

Mezzanine equity:

    

Redeemable preferred stock, $0.01 par value, 150,000 class A shares authorized; 72,325 shares outstanding(8)

     145     

Shareholders’ equity:

    

Common stock, $0.01 par value; 4,800,000 shares authorized, 3,584,194 shares issued and outstanding

     —       

Additional paid-in capital

     238     

Accumulated (deficit)

     (221  

Accumulated other comprehensive income

     (5  
  

 

 

   

 

 

 

Total shareholders’ equity of the Company

     12     

Noncontrolling interest in consolidated subsidiaries

     13     
  

 

 

   

 

 

 

Total shareholders’ equity

     25     
  

 

 

   

 

 

 

Total capitalization (including current portion of long-term debt)

   $ 946      $                
  

 

 

   

 

 

 

 

31


Table of Contents

 

(1) A $1.00 increase or decrease in the assumed initial public offering price of $            per share, representing the mid-point of the range set forth on the cover page of this prospectus, would result in an approximately $            million increase or decrease in each of the as adjusted additional paid-in capital, as adjusted total shareholders’ equity and as adjusted total capitalization, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the commissions and discounts and estimated offering expenses payable by us. An increase or decrease of 1.0 million shares in the number of shares offered by us would result in an approximately $            million increase or decrease in each of the as adjusted additional paid-in capital, as adjusted total shareholders’ equity and as adjusted total capitalization, assuming the assumed initial public offering price of $            per share, representing the mid-point of the range set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.
(2) On November 30, 2004, Affinia Group Inc. issued $300 million aggregate principal amount of its 9% Senior Subordinated Notes due 2014 (the “Subordinated Notes”). On December 9, 2010, Affinia Group Inc. issued an additional $100 million aggregate principal amount of Subordinated Notes (the “Additional Notes”). The outstanding principal amount of the Subordinated Notes as of June 30, 2012 was $367 million.
(3) On August 13, 2009, Affinia Group Inc. issued $225 million aggregate principal amount of its 10.75% Senior Secured Notes due 2016 (the “Secured Notes”). The Secured Notes were offered at a price of 98.799% of their face value, resulting in $222 million of net proceeds. On each of December 31, 2010 and June 25, 2012, Affinia Group Inc. redeemed $22.5 million aggregate principal amount of the Secured Notes pursuant to their terms at a redemption price equal to 103% of the principal amount of such notes being redeemed, plus accrued and unpaid interest to the redemption date. As of June 30, 2012, $179 million of the Secured Notes were outstanding net of a $1 million discount, which is being amortized based on the effective interest rate method and included in interest expense until the notes mature.
(4) Our ABL Revolver, which matures in 2017, consists of a revolving credit facility that provides for loans in a total principal amount of up to $315 million of which $75 million was outstanding at June 30, 2012. As of June 30, 2012, we had an additional $169 million of borrowing capacity available under our ABL Revolver after giving effect to $13 million in outstanding letters of credit, none of which was drawn against, and $3 million for borrowing base reserves.
(5) As part of the financing in connection with the Acquisition, we issued the Seller Note with a face amount of $74.5 million to an affiliate of Dana. The Seller Note had an estimated fair market value of $50 million upon issuance and as of June 30, 2012 had a fair market value of $98 million.
(6) Consists of borrowings of $20 million in Poland and includes $13 million in our Brake North America and Asia group, which consists of borrowings of $10 million in China and $3 million in India.
(7) For further information regarding our long-term debt, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” and the notes to our consolidated financial statements included elsewhere in this prospectus.
(8) On October 30, 2008, we authorized the issuance of 150,000 shares of 9.5% Class A Convertible Participating Preferred Stock, par value $0.01 per share (the “Class A Preferred Stock” or the “Redeemable Preferred Stock”), at an initial issuance price of $1,000 per share. We issued 51,475 shares on October 31, 2008 to Cypress, OMERS, Stockwell Fund, L.P. and certain management and directors. We contributed substantially all of the proceeds from the issuance of the Class A Preferred Stock to Affinia Acquisition LLC for the purchase of an 85% controlling interest in Affinia Hong Kong Limited, the parent company of Haimeng.

 

32


Table of Contents

DILUTION

Purchasers of the common stock in this offering will experience an immediate dilution in net tangible book value per share. Dilution is the amount by which the price paid by the purchasers of common stock in this offering will exceed the net tangible book value per share of common stock as adjusted to give effect to the offering and our use of the net proceeds thereof, which we refer to as our pro forma net tangible book value per share.

Net tangible book value per share represents our tangible assets less total liabilities, divided by the number of shares of common stock outstanding. Our net tangible book value (deficit) as of June 30, 2012 was $(            ) million or $(            ) per share of common stock. After giving effect to the consummation of this offering, assuming an initial public offering price of $              per share, representing the mid-point of the range set forth on the cover page of this prospectus, and the application of the net proceeds therefrom, our pro forma net tangible book value as of June 30, 2012 would have been $             million or $             per share of common stock. This represents an immediate increase in adjusted net tangible book value to existing stockholders of $             per share of common stock and an immediate dilution to new investors of $             per share of common stock.

The following table illustrates this per share dilution:

 

Assumed initial public offering price per share

   $                

Net tangible book value (deficit) per share as of June 30, 2012

     (            

Increase in net tangible book value per share resulting from this offering

  

Pro forma net tangible book value per share after this offering

  

Dilution per share to new investors

   $                
  

 

 

 

A $1.00 increase or decrease in the assumed initial public offering price of $             per share, representing the mid-point of the range set forth on the cover page of this prospectus, would increase or decrease our pro forma net tangible book value by $             million, the pro forma net tangible book value per share of common stock after this offering by $             per share of common stock, and the dilution per share of common stock to new investors by $             per share of common stock, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters exercise their option to purchase additional shares from us in full, the following will occur:

 

   

the percentage of shares of our common stock held by existing stockholders will decrease to approximately     % of the total number of shares of our common stock outstanding after this offering; and

 

   

the number of shares of our common stock held by new public investors will increase to             , or approximately     % of the total number of shares of our common stock outstanding after this offering.

 

33


Table of Contents

The following table summarizes, on a pro forma basis as of June 30, 2012, the number of shares purchased or to be purchased from us, the total consideration paid or to be paid to us, and the average price per share paid or to be paid to us by existing stockholders and new investors purchasing shares of our common stock in this offering, assuming an initial public offering price of $             per share, representing the mid-point of the range set forth on the cover page of this prospectus, before deducting underwriting discounts and commissions and estimated offering expenses payable by us. As the table below shows, new investors purchasing shares of our common stock in this offering will pay an average price per share substantially higher than our existing stockholders paid.

 

     Shares Purchased     Total Consideration     Average
Price
Per Share
 
     Number    Percent     Amount      Percent        

Existing Stockholders

        $                      $                

New Investors

            
  

 

  

 

 

   

 

 

    

 

 

   

 

 

 

Total

        100.0 %   $                      100.0   $     
  

 

  

 

 

   

 

 

    

 

 

   

 

 

 

To the extent that we grant options to our employees in the future and those options are exercised or other issuances of common stock are made, there may be further dilution to new investors.

 

34


Table of Contents

SELECTED HISTORICAL FINANCIAL DATA

The following table sets forth selected historical financial data as of and for the years ended December 31, 2007, 2008, 2009, 2010 and 2011 and the six months ended June 30, 2011 and 2012. The selected historical financial data as of December 31, 2010 and 2011 and for each of the fiscal years ended December 31, 2009, 2010 and 2011 have been derived from, and should be read together with, our audited historical financial statements and the accompanying notes included elsewhere in this prospectus. The selected historical financial data as of December 31, 2008 and 2009 and for the fiscal years ended December 31, 2007 and 2008 have been derived from our audited historical consolidated financial statements and accompanying notes that are not included in this prospectus. The selected historical financial data as of December 31, 2007 has been derived from our unaudited historical financial statements and the accompanying notes that are not included in this prospectus. The selected historical financial data as of June 30, 2012 and for the six months ended June 30, 2011 and 2012 are derived from, and should be read together with, our unaudited condensed consolidated financial statements and the accompanying notes included elsewhere in this prospectus, which have been prepared on a basis consistent with our annual audited financial statements. The summary historical financial data as of June 30, 2011 have been derived from our unaudited condensed consolidated financial statements and the accompanying notes that are not included in this prospectus. In the opinion of management, such unaudited financial data reflect all adjustments, consisting only of normal and recurring adjustments, necessary for a fair statement of the results for those periods.

The results of operations for the periods presented below are not necessarily indicative of the results to be expected for any future period and the results for any interim period are not necessarily indicative of the results that may be expected for a full fiscal year. The selected historical financial data should be read together with “Prospectus Summary—Summary Historical Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus.

 

35


Table of Contents
     Year Ended December 31,     Six Months
Ended
June 30,
 

(Dollars in millions, except per share data)

   2007     2008     2009     2010     2011     2011     2012  

Statement of income data:(1)

            

Net sales

   $ 1,185      $ 1,257      $ 1,207      $ 1,359      $ 1,478      $ 754      $ 737   

Cost of sales

     (911     (986     (930     (1,043     (1,136     (581     (571
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     274        271        277        316        342        173        166   

Selling, general and administrative expenses

     (180     (192     (189     (193     (203     (103     (102

Income from settlement(2)

     15        —         —         —         3        —         4   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

     109        79        88        123        142        70        68   

Gain (loss) on extinguishment of debt

     —         —         8        (1     —         —         (1

Change in fair value of redeemable preferred stock embedded derivative liability

     —         3        (24     (24     5        17        15   

Other income (loss), net

     3        (3     4        1        4        (1     —     

Interest expense

     (67     (64     (78     (76     (80     (41     (39
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income tax provision, equity in income and noncontrolling interest

     45        15        (2     23        71        45        43   

Income tax provision

     (14     (8     (9     (26     (33     (8     (12

Equity in income, net of tax

     1        —         1        1        —         —         —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

     32        7        (10     (2     38        37        31   

Income (loss) from discontinued operations, net of tax

     (31     (13     (58     1        (113     (13     (47
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     1        (6     (68     (1     (75     24        (16

Less: net income attributable to noncontrolling interest, net of tax

     —         —         2        4        1        1        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to the Company

   $ 1      $ (6   $ (70   $ (5   $ (76   $ 23      $ (16
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per share data:(1)

              

Basic earnings per share attributable to common shareholders:

              

Basic net income (loss) from continuing operations

   $ 8.90      $ (4.80   $ (4.64   $ (10.82   $ 5.84      $ 7.39      $ 5.75   

Income (loss) from discontinued operations, net of tax

     (8.67     (3.20     (14.11     0.15        (26.59     (3.27     (10.96
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to the Company

   $ 0.23      $ (8.00   $ (18.75   $ (10.67   $ (20.75   $ 4.12      $ (5.21
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding (in thousands)

     3,559        3,558        3,559        3,572        3,583        3,580        3,585   

Diluted earnings per share attributable to common shareholders:

              

Diluted net income (loss) from continuing operations

   $ 8.90      $ (4.80   $ (4.64   $ (10.82   $ 5.82      $ 7.36      $ 5.72   

Income (loss) from discontinued operations, net of tax

     (8.67     (3.20     (14.11     0.15        (26.46     (3.25     (10.92
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to the Company

   $ 0.23      $ (8.00   $ (18.75   $ (10.67   $ (20.64   $ 4.11      $ (5.20
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding (in thousands)

     3,559        3,558        3,559        3,572        3,600        3,595        3,600   

Statement of cash flows data:(1)

              

Net cash provided by (used in) operating activities

   $ 1      $ 47      $ 55      $ 22      $ 14      $ (52   $ 79   

Net cash used in investing activities

     (16     (75     (36     (98     (39     (21     (4

Net cash (used in) provided by financing activities

     —          53        (35     66        26        70        (65

Other financial data:

              

Capital expenditures

   $ 30      $ 25      $ 31      $ 52      $ 55      $ 27      $ 11   

Depreciation and amortization(3)

     25        28        26        26        25        12        11   

Balance sheet data (end of period):(1)

              

Cash and cash equivalents

   $ 59      $ 78      $ 66      $ 55      $ 54      $ 54      $ 63   

Total current assets

     970        995        973        1,017        1,062        1,150        1,034   

Total assets

     1,473        1,535        1,505        1,616        1,490        1,771        1,452   

Total current liabilities

     402        467        437        455        419        497        480   

Total debt

     669        703        692        798        813        874        763   

Total shareholders’ equity(4)

     370        257        238        177        59        221        25   

 

 

(1)

In accordance with Accounting Standards Codification (“ASC”) Topic 205-20, “Presentation of Financial Statements—Discontinued Operations,” the Commercial Distribution Europe segment, which is also referred to as Quinton Hazell, and the

 

36


Table of Contents
  Brake North America and Asia group are accounted for as discontinued operations. The consolidated statements of operations for all periods presented have been adjusted to reflect these operations as discontinued operations. The consolidated statements of cash flows have not been adjusted for any periods presented to reflect these operations as discontinued operations. The consolidated balance sheet for December 31, 2009 has been adjusted to reflect the Commercial Distribution Europe segment, which we sold in February 2010, as a discontinued operation. The consolidated balance sheets for December 31, 2011 and June 30, 2012 have been adjusted to reflect the Brake North America and Asia group as a discontinued operation.
(2) We received a general unsecured nonpriority claim against Dana relating to a settlement in 2007. The claim was monetized for $15 million and was recorded as income from the settlement. In 2011, we entered into a settlement agreement with Satisfied for $10 million to settle our claims against Satisfied for their theft of our trade secrets, of which we have received $2.5 million in 2011 and $4 million in the first quarter of 2012.
(3) The depreciation and amortization expense excludes the Commercial Distribution Europe segment. The consolidated cash flow statement, which is included in our audited financial statements included elsewhere in this prospectus, includes the Commercial Distribution Europe segment and the Brake North America and Asia group.
(4) Effective January 1, 2009, the Company changed the accounting for and reporting of minority interest (now called noncontrolling interest) in our consolidated financial statements as required under ASC Topic 810, Consolidation.” Upon adoption, applicable prior period amounts have been retrospectively changed to conform. The noncontrolling interest was reclassified to the equity section of the balance sheet.

 

37


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

You should read the following discussion of our financial condition and results of operations together with the “Prospectus Summary—Summary Historical Financial Data,” the “Selected Historical Financial Data” and our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described under “Risk Factors.” Actual results may differ materially from those contained in any forward-looking statements.

Statements in the discussion and analysis regarding industry outlook and our expectations regarding the performance of our business and other non-historical statements are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described under “Forward-Looking Statements.” Our actual results may differ materially from those contained in or implied by any forward-looking statements. You should read the following discussion together with “Forward-Looking Statements” and our consolidated financial statements and the related notes included elsewhere in this prospectus.

Company Overview

We are a global leader in the commercial and light vehicle replacement products and services industry, which also is referred to as the aftermarket. Our extensive aftermarket product offering consists principally of filtration and chassis products. Our filtration products fit medium and heavy duty trucks, light vehicles, equipment in the off-highway market (i.e., construction, mining, forestry and agricultural) and equipment for industrial and marine applications. Our chassis products fit light vehicles, medium and heavy duty trucks, trailers and all terrain vehicles. In addition, we provide aftermarket products and distribution services in South America. We believe that the growth of the global aftermarket, from which we derived approximately 99% of our net sales in 2011, is predominantly driven by the size, age and use of the population of vehicles and equipment in operation. We design, manufacture, distribute and market a broad range of aftermarket products in North America, South America, Europe, Asia and Africa and generate sales in over 70 countries.

Our product groupings consist of filtration products, South America products, chassis products and Brake North America and Asia products. In the fourth quarter of 2011, we committed to a plan to sell the Brake North America and Asia group, which qualified as a discontinued operation.

The aftermarket brake industry is highly competitive and price sensitive. Over the past several years, we have addressed this by moving our manufacturing from high cost facilities to state of the art low cost manufacturing facilities in China. There are any number of importers of brake products who do not design, manufacture, or for that matter warehouse and distribute on a mass scale, but strictly offer a short line of products to the industry. Affinia has developed the strategy over many years of providing our customers with an extensive range of not only products, but services such as detailed product catalogs, e-catalogs, technical services and training, electronic data interchange, point of sale marketing materials, and direct shipments to jobber and retail outlets. These additional offerings help build customer loyalty and generate repeat business while differentiating us from our competitors. In pursuit of this strategy, and in response to the changing dynamics of the brake industry, we have committed to a plan to sell the Brake North America and Asia group.

 

38


Table of Contents

The net sales by product grouping for our continuing operations, together with major brands and the concentration of on and off-highway replacement product sales and OEM sales, for the year ended December 31, 2011 are illustrated in the charts below.

LOGO

We market our continuing products under a variety of well-known brands, including WIX®, Raybestos®, FiltronTM, Nakata®, McQuay-Norris® and ecoLAST®. Additionally, we provide private label products to large aftermarket distributors, including NAPA®, CARQUEST® and ACDelco®, as well as co-branded products for Federated and ADN. We believe that we have achieved our leading market positions due to the quality and reputation of our brands and products among professional installers, who are the primary decision makers for the purchase of the products we supply to the aftermarket.

We provide our primary customers with an extensive range of services which help build customer loyalty and generate repeat business while differentiating us from our competitors. These services include detailed product catalogs, e-catalogs, technical services, electronic data interchange, direct shipments of products and point-of-sale marketing materials. The depth of our value added services has led to numerous customer awards.

 

39


Table of Contents

Transformation

Our filtration, South America and chassis product groups fit with our strategic initiatives of growth and profitability. As shown in the chart below these product groups have grown significantly since our acquisition in 2004.

LOGO

Our global filtration products group has seen significant growth since 2005 as we have successfully entered new markets in Europe and in Central and South America and grown existing market share. We believe we hold the #1 market position in North America for filtration products by net sales for the year ended December 31, 2011, and we also have a strong presence in Eastern Europe, including the #1 market position for filtration products in Poland.

Our South America products group has experienced rapid growth since 2005 in its distribution operations as we have invested to grow this business. Based on management estimates and certain information from third parties, we believe that we hold the #2 market position in Brazilian aftermarket parts distribution by net sales for the year ended December 31, 2011.

 

40


Table of Contents

Our chassis products group has experienced growth in the last two years as we have gained new customers and expanded business with existing customers. With the recent growth in chassis product sales, we believe we have now achieved the #1 market position for aftermarket chassis products by a marginal percentage in North America by net sales for the year ended December 31, 2011.

The following are major transformation projects we have completed or are in the process of completing in our continuing operations:

 

   

First quarter of 2012 – Our Brazilian distribution company opened a new branch at the end of 2011, which began operating in the first quarter of 2012.

 

   

Second quarter of 2011 – During April 2011 we completed the construction of a filtration manufacturing facility in China, in which we have an 85% ownership interest. This facility manufactures products in China and distribute these products in Asia and North America. We began shipping products from this facility during the third quarter of 2011.

 

   

Second quarter of 2011 – We completed a new filtration facility in Poland and began shipping products in the second quarter of 2011. The facility was constructed to handle our increased production volumes in Poland and other European countries where we distribute products.

 

   

2010 and 2011 – Our Brazilian distribution company opened one new branch in 2010 and a new warehouse in January 2011. The new warehouse more than tripled our distribution company’s warehouse and distribution capacity in Brazil. The new branch has contributed to the growth of our Brazilian distribution business.

 

   

Fourth quarter of 2010 – We purchased substantially all the assets of NAPD, a chassis distributor with strong foreign nameplate product capabilities.

 

   

Fourth quarter of 2010 – We initiated filter product distribution capabilities in Russia.

 

   

Third quarter of 2007 - We opened our first filter manufacturing operation in Mexico. During 2008, the manufacturing operation was brought up to its full capabilities. This operation serves markets in both North America and Central America. We are expanding our distribution capabilities at this operation to increase our sales in the Mexican market.

 

   

Second quarter of 2007 - We opened a new filter manufacturing plant in Ukraine on April 1, 2007 to help meet increased demand for filtration products in Eastern Europe. The plant became fully operational in 2009.

Since our acquisition in 2004, we have executed and completed significant transformation projects that have positioned us for growth. During 2011, we experienced a record for sales and operating profit from continuing operations.

Strategic Focus

With the sale of the Commercial Distribution Europe group in 2010 and the anticipated sale of the Brake North America and Asia group in 2012, we have positioned ourselves to be a global filtration, chassis and distribution business. With the realignment of our company we will be able to better focus on expanding our global manufacturing and distribution capabilities throughout the world.

Acquisitions and New Technology

On December 16, 2010, the Company, through its subsidiary Affinia Products Corp LLC, acquired substantially all the assets of NAPD, which is located in Ramsey, New Jersey. NAPD designs and engineers chassis products, which are manufactured by contractors in low labor cost countries. The NAPD acquisition expands our product offering of chassis products to one of broadest in the industry. More specifically, the acquisition provides us with a broad range of European branded product coverage. We acquired NAPD’s assets and liabilities for cash consideration of $52 million.

 

41


Table of Contents

In January 2011, we introduced ecoLAST® oil filters, a line of heavy duty oil filters that has been demonstrated to double oil life. WIX ecoLAST oil filters capture dirt and soot like a traditional filter, while utilizing media to sequester the acids in the oil. WIX’s ecoLAST oil filters are a direct replacement with no changes or modification required to the vehicle. The first ecoLAST oil filters became available in April 2011.

Disposition

On February 2, 2010, as part of our strategic plan, we sold our Commercial Distribution Europe business unit for approximately $11 million. Quinton Hazell’s financial performance did not meet our strategic financial metrics, as evidenced by a 2009 pre-tax loss of $84 million, of which $75 million related to an impairment of assets.

Nature of Business

We typically conduct business with our customers pursuant to short-term contracts and purchase orders. However, our business is not characterized by frequent customer turnover due to the critical nature of long-term relationships in our industry. The expectation of quick turnaround times for car repairs and the broad proliferation of available part numbers require a large investment in inventory and strong fulfillment capabilities in order to deliver high fill rates and quick cycle times. Large aftermarket distributors typically source their product lines at a particular price point and product category with one “full-line” supplier, such as us, which covers substantially all of their product requirements. Switching to a new supplier typically requires that a distributor or supplier make a substantial investment to purchase, or “changeover” to, the new supplier’s products. In addition, the end user of our products, who is most frequently a professional installer, requires consistently high quality products because it is industry practice to replace, free of any labor or service charge, malfunctioning parts.

Business Environment

Our Markets. We believe that future growth in aftermarket product sales will be driven by the following key factors: (1) growth in global vehicle population; (2) growth in global commercial vehicle population; (3) increase in total miles driven in the United States and other key countries around the world; (4) increase in average age of light vehicles in the United States and other key countries around the world and (5) increase in vehicle related regulation and legislation. Growth in sales in the aftermarket does not always have a direct correlation to sales growth for aftermarket suppliers like us. For example, as automotive parts distributors have consolidated during the past several years, they have reduced purchases from manufacturers as they focused on reducing their combined inventories. The automotive distributors are also focused on reducing inventories due to the recent decline in miles driven.

Raw Materials and Manufactured Components. Our variable costs are proportional to sales volume and mix and are comprised primarily of raw materials, labor and certain overhead costs. Our fixed costs are not significantly influenced by volume in the short term and consist principally of selling, general and administrative expenses, depreciation and other facility-related costs.

We use a broad range of manufactured components and raw materials in our products, including raw steel, steel-related components, filtration media, aluminum, brass, iron, rubber, resins, plastics, paper and packaging materials. We purchase raw materials from a wide variety of domestic and international suppliers, and we have not, in recent years, experienced any significant shortages of these items and normally do not carry inventories of these items in excess of those reasonably required to meet our production and shipping schedules.

Seasonality. Our working capital requirements are significantly impacted by the seasonality of the aftermarket. In a typical year, we build inventory during the first and second quarters to accommodate our peak sales during the

 

42


Table of Contents

second and third quarters. Our working capital requirements therefore tend to be highest from March through August. In periods of weak sales, inventory can increase beyond typical seasonal levels, as our product delivery lead times are less than two days while certain components we purchase from overseas require lead times of approximately 90 days.

Global Developments. The aftermarket has also experienced increased price competition from manufacturers based in China and other lower labor cost countries. We responded to this challenge by acquiring an 85% controlling interest in Haimeng, one of the largest drum and rotor manufacturers in the world and by expanding our manufacturing capacity in China, India, Mexico, Poland and Ukraine. Additionally, we are meeting this challenge through restructuring and outsourcing initiatives, as well as through ongoing cost reduction programs.

Results of Operations

In accordance with ASC Topic 360, “Property, Plant, and Equipment,” the Brake North America and Asia group and Commercial Distribution Europe segment qualified as discontinued operations. Previously reported consolidated statements of operations for all periods presented have been adjusted to reflect the discontinued operations.

Three months ended June 30, 2011 compared to the three months ended June 30, 2012

Net sales. Consolidated sales decreased by $15 million, which was primarily due to unfavorable currency effects of $32 million, in the second quarter of 2012 in comparison to the second quarter of 2011. The following table summarizes the consolidated net sales results for the three months ended June 30, 2011 and the consolidated net sales results for the three months ended June 30, 2012:

 

(Dollars in millions)

   Consolidated
Three Months
Ended June 30,
2011
    Consolidated
Three Months
Ended June 30,
2012
    Dollar
Change
    Percent
Change
    Currency
Effect(1)
 

Net sales

          

Filtration products

   $ 208      $ 215      $ 7        3   $ (10

Commercial Distribution South America products

     118        102        (16     -14     (22

Chassis products

     61        55        (6     -10     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

On and Off-highway segment

     387        372        (15     -4     (32

South America other segment

     4        4        —         —         —    

Corporate, eliminations and other

     (3     (3     —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

   $ 388      $ 373      $ (15 )      -4 %    $ (32 ) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The currency effect was calculated by comparing the local currency net sales for all international locations for both periods, each at the current year exchange rate, to determine the impact of the currency between periods. These currency effects provide a clearer understanding of the operating results of our foreign entities because they exclude the varying effects that changes in foreign currency exchange rates may have on those results.

On and Off-highway segment products sales decreased due to the following:

 

  (1) Filtration products sales increased in the second quarter of 2012 in comparison to the second quarter of 2011 due to increased sales of $4 million in our U.S. and Canadian operations due to increased volume. Additionally, our sales increased by $11 million in our Polish, Venezuelan, Russian and Mexican operations related to new customers and new business with existing customers. Our new Chinese operations sales increased by $2 million, which was due to the recent start of production as we expand our filtration products into this new market. The increased sales were partially offset by unfavorable currency translation effects of $10 million, which mainly related to Poland.

 

43


Table of Contents
  (2) Commercial Distribution South America products sales decreased by $16 million in the second quarter of 2012 in comparison to the second quarter of 2011 due to $22 million of negative currency effects. Partially offsetting the decrease were increased sales in our Brazilian distribution company and our shock operations.

 

  (3) Chassis products sales decreased in the second quarter of 2012 in comparison to the second quarter of 2011. During the second quarter of 2011, our sales increased due to new business in our premium chassis product line. The new business in 2011 resulted in significant initial orders to fulfill customer requirements. The second quarter of 2012 represents a more normal run rate for the new business.

South America other segment products sales were consistent in the second quarter of 2012 in comparison to the second quarter of 2011.

The following table summarizes the consolidated results for the three months ended June 30, 2011 and the consolidated results for the three months ended June 30, 2012:

 

(Dollars in millions)

   Consolidated
Three Months
Ended June 30,
2011
    Consolidated
Three Months
Ended June 30,
2012
    Dollar
Change
    Percent
Change
 

Net sales

   $ 388      $ 373      $ (15 )      -4 % 

Cost of sales

     (298 )      (284 )      14        -5 % 
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     90        89        (1     -1

Gross margin

     23 %      24 %     

Selling, general and administrative expenses(1)

     (53     (52     1        -2

Selling, general and administrative expenses as a percent of sales

     14 %      14 %     
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit (loss)

        

On and Off-highway segment

     44        49        5        11

South America other segment

     1              (1     -100

Corporate, eliminations and other

     (8     (12     (4     -50
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

     37        37        —         —    

Operating margin

     10 %      10 %     

Loss on extinguishment of debt

     —         (1     (1     NM   

Change in fair value of redeemable preferred stock embedded derivative liability

     6        25        19        317

Other loss, net

     (1     —         1        100

Interest expense

     (21     (19     2        -10
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations, before income tax provision, equity in income and noncontrolling interest

     21        42        21        100 % 

Income tax provision

     (5     (8     (3     -60

Equity in loss, net of tax

     —         (1     (1     NM   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income from continuing operations

     16        33        17        106 % 

Loss from discontinued operations, net of tax

     (4     (42     (38     -950
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     12        (9 )      (21 )      -175 % 

Less: net income attributable to noncontrolling interest, net of tax

     —         —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to the Company

   $ 12      $ (9 )    $ (21 )      -175 % 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) We recorded $1 million of restructuring costs in selling, general and administrative expenses in the second quarter of 2011.
NM (Not Meaningful)

 

44


Table of Contents

Gross profit/Gross margin. Gross profit remained consistent during the second quarter of 2012 in comparison to the second quarter of 2011. Gross margin increased in the second quarter of 2012 to 24% from 23% in the second quarter of 2011 due to increased volume.

Selling, general and administrative expenses. Our selling, general and administrative expenses for the second quarter of 2012 decreased by $1 million from the second quarter of 2011 due to decrease in marketing expenses and legal and professional fees.

Operating profit/Operating margin. Operating profit remained consistent during the second quarter of 2012 in comparison to the second quarter of 2011. The operating profit in the On and Off-highway segment increased by $5 million due to a decrease in selling, general and administrative expenses in the second quarter of 2012 in comparison to the second quarter of 2011. Corporate, eliminations and other operating profit decreased in the second quarter of 2012 in comparison to the second quarter of 2011 by $4 million due to costs related to higher general and administrative expenses.

Interest expense. Interest expense decreased by $2 million in the second quarter of 2012 in comparison to the second quarter of 2011 due to lower debt levels.

Change in fair value of redeemable preferred stock embedded derivative liability. We issued 51,475 shares of Redeemable Preferred Stock on October 31, 2008 with a conversion in cash, common stock or a combination of both. We determined that the conversion feature of our Redeemable Preferred Stock is an embedded derivative. The estimated value of the embedded derivative is calculated based on such factors as expected volatility of the value of our equity, the expected conversion date, an appropriate risk-free interest rate and the estimated fair value of our equity. The decrease in fair value in the three months ended June 30, 2012 in comparison to three months ended June 30, 2011 was due to changes in the estimated fair value of our equity.

Income tax provision. The income tax provision was $8 million and $5 million for the second quarter of 2012 and 2011, respectively. The effective tax rate was higher in the second quarter of 2012 in comparison to the second quarter of 2011 due to deemed distributions from certain foreign subsidiaries.

Loss from discontinued operations, net of tax. Our Brake North America and Asia group had a loss of $42 million in the second quarter of 2012 of which $3 million related to a loss from operations, $62 million related to an impairment charge to reduce the carrying value of the business to expected realizable value, and offsetting these amounts was $23 million, which related to a tax benefit for the impairment. In the second quarter of 2011, Brake North America and Asia group incurred a loss from operations of $4 million.

Net income (loss). Net income decreased in the second quarter of 2012 in comparison to the second quarter of 2011 due mainly to the increase in the loss from discontinued operations, net of tax partially offset by the change in fair value of the redeemable preferred stock embedded derivative liability.

 

45


Table of Contents

Six months ended June 30, 2011 compared to the six months ended June 30, 2012.

Net sales. Consolidated sales decreased by $17 million, which was primarily due to unfavorable currency effects of $43 million, in the first six months of 2012 in comparison to the first six months of 2011. The following table summarizes the consolidated net sales results for the six months ended June 30, 2011 and the consolidated net sales results for the six months ended June 30, 2012.

 

(Dollars in millions)

   Consolidated
Six Months
Ended June 30,
2011
    Consolidated
Six Months
Ended June 30,
2012
    Dollar
Change
    Percent
Change
    Currency
Effect(1)
 

Net sales

          

Filtration products

   $ 404      $ 420      $ 16        4   $ (14

Commercial Distribution South America products

     228        209        (19     -8     (29

Chassis products

     120        103        (17     -14     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

On and Off-highway segment

     752        732        (20     -3     (43

South America other segment

     8        9        1        13     —    

Corporate, eliminations and other

     (6     (4     2        33     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

   $ 754      $ 737      $ (17 )      -2 %    $ (43 ) 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) The currency effect was calculated by comparing the local currency net sales for all international locations for both periods, each at a current year exchange rate, to determine the impact of the currency between periods. These currency effects provide a clearer understanding of the operating results of our foreign entities because they exclude the varying effects that changes in foreign currency exchange rates may have on those results.

On and Off-highway segment products sales decreased due to the following:

 

  (1) Filtration products sales increased in the first six months of 2012 in comparison to the first six months of 2011 due to increased sales of $8 million in our U.S. and Canadian operations due to increased volume. Additionally, our sales increased by $20 million in our Polish, Venezuelan, Russian and Mexican operations related to new customers and new business with existing customers. Our new Chinese operations sales increased by $2 million, which was due to the recent start of production as we expand our filtration products into this new market. The increased sales were partially offset by unfavorable currency translation effects of $14 million, which mainly related to Poland.

 

  (2) Commercial Distribution South America products sales decreased by $19 million in the first six months of 2012 in comparison to the first six months of 2011 due to $29 million of negative currency effects. Partially offsetting the decrease were price increases on certain products and new business at our Brazilian distribution company.

 

  (3) Chassis products sales decreased in the first six months of 2012 in comparison to the first six months of 2011. During the first six months of 2011, our sales increased due to new business in our premium chassis line. The new business in 2011 resulted in significant initial orders to fulfill customer requirements. The first six months of 2012 represents a more normal run rate for the new business.

South America other segment products sales increased in the first six months of 2012 in comparison to the first six months of 2011 due to the impact of price increases on certain products and additional volumes in Venezuela.

 

46


Table of Contents

The following table summarizes the consolidated results for the six months ended June 30, 2011 and the consolidated results for the six months ended June 30, 2012:

 

(Dollars in millions)

   Consolidated
Six Months
Ended June 30,
2011
    Consolidated
Six Months
Ended June 30,
2012
    Dollar
Change
    Percent
Change
 

Net sales

   $ 754      $ 737      $ (17 )      -2 % 

Cost of sales

     (581 )      (571 )      10        -2 % 
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     173        166        (7     -4

Gross margin

     23 %      23 %     

Selling, general and administrative expenses(1)

     (103     (98     5        -5

Selling, general and administrative expenses as a percent of sales

     14 %      13 %     
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit (loss)

        

On and Off-highway segment

     87        84        (3     -3

South America other segment

     —         —         —         —    

Corporate, eliminations and other

     (17     (16     1        6
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

     70        68        (2 )      -3 % 

Operating margin

     9 %      9 %     

Loss on extinguishment of debt

     —         (1     (1     NM   

Change in fair value of redeemable preferred stock embedded derivative liability

     17        15        (2     -12

Other loss, net

     (1     —         1        100

Interest expense

     (41     (39     2        -5
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations, before income tax provision, equity in income and noncontrolling interest

     45        43        (2 )      -4 % 

Income tax provision

     (8     (12     (4     50
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income from continuing operations

     37        31        (6 )      -16 % 

Loss from discontinued operations, net of tax

     (13     (47     (34     -262
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     24        (16 )      (40 )      -167 % 

Less: net income attributable to noncontrolling interest, net of tax

     1        —         (1     -100
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to the Company

   $ 23      $ (16 )    $ (39 )      -170 % 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) We recorded $1 million of restructuring costs in selling, general and administrative expenses in the first six months of 2011 and 2012, respectively.
NM (Not Meaningful)

Gross profit/Gross margin. Gross profit decreased by $7 million during the first six months of 2012 in comparison to the first six months of 2011. The decrease in gross profit was mainly due to a reduction in gross profit in our chassis products, negative currency impacts, higher material costs on some products and higher returns on certain products. The lower gross profit on our chassis products was due to a lower margin on products obtained and sold in connection with a significant change over of product related to new business in 2010 and 2011. In addition, in 2012 we had new business that required temporarily sourcing some of the product from higher cost sources.

Selling, general and administrative expenses. Our selling, general and administrative expenses for the first six months of 2012 decreased by $5 million from the first six months of 2011 due to the Satisfied settlement of $4 million.

 

47


Table of Contents

Operating profit/Operating margin. Operating profit decreased by $2 million in the first six months of 2012 in comparison to the first six months of 2011 due to a lower gross profit. The operating profit in the On and Off-highway segment decreased by $3 million due to lower gross margin on our chassis products in the first six months of 2012 in comparison to the first six months of 2011.

Change in fair value of redeemable preferred stock embedded derivative liability. We issued 51,475 shares of Redeemable Preferred Stock on October 31, 2008 with a conversion in cash, common stock or a combination of both. We determined that the conversion feature of our Redeemable Preferred Stock is an embedded derivative. The estimated value of the embedded derivative is calculated based on such factors as expected volatility of the value of our equity, the expected conversion date, an appropriate risk-free interest rate and the estimated fair value of our equity. The decrease in fair value in the six months ended June 30, 2012 in comparison to six months ended June 30, 2011 was due to changes in the estimated fair value of our equity.

Interest expense. Interest expense decreased by $2 million in the first six months of 2012 in comparison to the first six months of 2011 due to lower debt levels.

Income tax provision. The income tax provision was $12 million and $8 million for the first six months of 2012 and 2011, respectively. The effective tax rate was higher in the first six months of 2012 in comparison to the first six months of 2011 due to deemed distributions from certain foreign subsidiaries.

Loss from discontinued operations, net of tax. Our Brake North America and Asia group reported a loss of $47 million in the first six months of 2012 of which $8 million related to a loss from operations, $62 million related to an impairment charge to reduce the carrying value of the business to expected realizable value, and offsetting these amounts was $23 million, which related to a tax benefit for the impairment. In the first six months of 2011, Brake North America and Asia group incurred a loss from operations of $13 million.

Net income (loss). Net income decreased in the first six months of 2012 in comparison to the first six months of 2011 due mainly to the increase in the loss from discontinued operations, net of tax and a decrease in gross profit in the first six months of 2012.

Year Ended December 31, 2010 Compared to the Year Ended December 31, 2011

Net sales. Consolidated net sales increased by $119 million in 2011 in comparison to 2010 due to increased sales to new and existing customers and favorable currency translation effects. The following table summarizes the consolidated net sales results for the years ended December 31, 2010 and December 31, 2011:

 

(Dollars in millions)    Consolidated
Year Ended
December 31,
2010
    Consolidated
Year Ended
December 31,
2011
    Dollar
Change
     Percent
Change
    Currency
Effect(1)
 

Net sales

           

Filtration products

   $ 759      $ 801      $ 42         6   $ 8   

Commercial Distribution South America products

     430        459        29         7     21   

Chassis products

     169        213        44         26     1   
  

 

 

   

 

 

   

 

 

      

 

 

 

On and Off-highway segment

     1,358        1,473        115         8     30   

South America other segment

     15        16        1         7     1   

Corporate, eliminations and other

     (14     (11     3         21     —    
  

 

 

   

 

 

   

 

 

      

 

 

 

Total net sales

   $ 1,359      $ 1,478      $ 119         9 %    $ 31   
  

 

 

   

 

 

   

 

 

      

 

 

 

 

(1) The currency effect was calculated by comparing the local currency net sales for all international locations for both periods, each at the current year exchange rate, to determine the impact of the currency between periods. These currency effects provide a clearer understanding of the operating results of our foreign entities because they exclude the varying effects that changes in foreign currency exchange rates may have on those results.

 

48


Table of Contents

On and Off-highway segment products sales increased due to the following:

 

  (1) Filtration products sales increased in 2011 in comparison to 2010 due mainly to increased sales of $35 million related to our Polish, Russian and Venezuelan operations, which includes $7 million of favorable currency translation effects.

 

  (2) Commercial Distribution South America products sales increased in 2011 in comparison to 2010 due to favorable currency translation effects and the impact of price increases on certain products. Our Brazilian distribution company accounted for the majority of the increase in sales.

 

  (3) Chassis products sales increased in 2011 in comparison to 2010 by $44 million. During the fourth quarter of 2010, we began shipping new premium chassis products, which accounted for a $34 million increase in sales in 2011 compared to 2010. We also benefited from $15 million in additional sales related to NAPD, which we acquired during the fourth quarter of 2010.

South America other segment products sales for 2011 increased in comparison to 2010 due to favorable currency translation effects.

The following table summarizes the consolidated results for the years ended December 31, 2010 and December 31, 2011:

 

(Dollars in millions)    Consolidated
Year Ended
December 31,
2010
    Consolidated
Year Ended
December 31,
2011
    Dollar
Change
    Percent
Change
 

Net sales

   $ 1,359      $ 1,478      $ 119        9 % 

Cost of sales(1)

     (1,043 )      (1,136 )      (93 )      9 % 
  

 

 

   

 

 

   

 

 

   

Gross profit

     316        342        26        8

Gross margin

     23 %      23 %     

Selling, general and administrative expenses(2)

     (193     (200     (7     4

Selling, general and administrative expenses as a percent of sales

     14 %      14 %     
  

 

 

   

 

 

   

 

 

   

Operating profit (loss)

        

On and Off-highway segment

     169        169        —         NM   

South America other segment

     (8     (1     7        88

Corporate, eliminations and other

     (38     (26     12        32
  

 

 

   

 

 

   

 

 

   

Operating profit

     123        142        19        15 % 

Operating margin

     9 %      10 %     

Loss on extinguishment of debt

     (1     —         1        NM   

Change in fair value of redeemable preferred stock embedded derivative liability

     (24     5        29        121

Other income, net

     1        4        3        300

Interest expense

     (76     (80     (4     5
  

 

 

   

 

 

   

 

 

   

Income from continuing operations before income tax provision, equity in income and noncontrolling interest

     23        71        48        209 % 

Income tax provision

     (26     (33     (7     27

Equity in income, net of tax

     1              (1     NM   
  

 

 

   

 

 

   

 

 

   

Net income (loss) from continuing operations, net of tax

     (2 )      38        40        NM   

Income (loss) from discontinued operations, net of tax(3)

     1        (113     (114     NM   
  

 

 

   

 

 

   

 

 

   

Net loss

     (1 )      (75 )      (74 )      NM   

Less: net income attributable to noncontrolling interest, net of tax

     4        1        (3     -75
  

 

 

   

 

 

   

 

 

   

Net loss attributable to the Company

   $ (5 )    $ (76 )    $ (71 )      NM   
  

 

 

   

 

 

   

 

 

   

 

49


Table of Contents

 

(1) We recorded $2 million of restructuring costs in cost of sales for 2010.
(2) We recorded $10 million and $1 million of restructuring costs in selling, general and administrative expenses for 2010 and 2011, respectively.
(3) We recorded in our discontinued operations $12 million and $11 million of restructuring costs for 2010 and 2011, respectively.
NM (Not Meaningful)

Gross profit/Gross margin. Gross profit increased by $26 million from 2010 to 2011 and the gross margin remained at 23% in 2011. The increase in gross profit is consistent with the increase in sales. Our freight costs and operating costs increased during 2011 and as a result we increased prices, the effect of which will be reflected on a full year basis in 2012, and we have made productivity improvements to offset these cost increases. In 2011, we built up inventory in anticipation of increased demand. However, due to a decrease in miles driven and other factors, we built inventory at a higher pace than actual sales increased and as a result our inventory carrying costs increased.

Selling, general and administrative expenses. Our selling, general and administrative expenses for 2011 increased by $7 million from 2010 due to an increase in advertising costs, legal and professional costs, and information technology costs offset by a reduction in restructuring costs.

Operating profit/Operating margin. Operating profit increased by $19 million and the operating margin increased marginally in 2011 compared to 2010. In 2011 our operating profit in the South America other segment improved by $7 million due to lower restructuring costs in 2011. Additionally, corporate costs were reduced by $12 million in 2011.

Other income, net. Other income, net increased in 2011 in comparison to 2010 due to the gain on a sale of our Venezuelan facility in the fourth quarter of 2011.

Change in fair value of redeemable preferred stock embedded derivative liability. We issued 51,475 shares of Redeemable Preferred Stock on October 31, 2008 with a conversion in cash, common stock or a combination of both. We determined that the conversion feature of our Redeemable Preferred Stock is an embedded derivative. The estimated value of the embedded derivative is calculated based on such factors as expected volatility of the value of our equity, the expected conversion date, an appropriate risk-free interest rate and the estimated fair value of our equity. The increase in fair value in 2011 in comparison to 2010 was due to changes in the estimated fair value of our equity and a decrease in the risk-free interest rate.

Interest expense. Interest expense increased by $4 million in 2011 in comparison to 2010 due to higher debt levels in 2011 offset by lower short term interest rates. The higher debt levels related to higher inventory levels to support increased sales.

Income tax provision. The income tax provision was $26 million and $33 million for 2010 and 2011, respectively. The effective tax rate was similar for both 2010 and 2011.

Income (loss) from discontinued operations, net of tax. As part of our strategic plan, we committed to a plan to sell our Brake North America and Asia group during the fourth quarter of 2011. Brake North America and Asia group incurred a loss of $113 million in 2011 of which $7 million related to a loss from operations, $165 million related to an impairment charge to reduce the carrying value of the business to expected realizable value, and offsetting these amounts was $57 million, which related to a tax benefit for the impairment. In 2010, Brake North America and Asia group incurred income from operations of $1 million.

Net loss. The decrease in net loss was driven by the loss from discontinued operations, net of tax, offset by an increase in the change in fair value of the redeemable preferred stock embedded derivative liability and sales and gross profit in 2011 in comparison to 2010.

 

50


Table of Contents

Net income attributable to noncontrolling interest, net of tax. Our net income attributable to noncontrolling interest, net of tax decreased due to the increase in our ownership of our two most significant noncontrolling interests. We increased our ownership in Affinia Acquisition LLC from 5% to 40% effective on June 1, 2009 and to 100% effective on September 1, 2010. We acquired the remaining 50% interest in Affinia India Private Limited on December 3, 2010.

Year Ended December 31, 2009 Compared to the Year Ended December 31, 2010

Net sales. Consolidated net sales increased by $152 million in 2010 in comparison to 2009 due mainly to favorable foreign currency translation effects of $17 million, improved market conditions and increased business from new and existing customers. The following table summarizes the consolidated net sales results for the years ended December 31, 2009 and December 31, 2010:

 

(Dollars in millions)    Consolidated
Year Ended
December 31,
2009
    Consolidated
Year Ended
December 31,
2010
    Dollar
Change
    Percent
Change
    Currency
Effect(1)
 

Net sales

          

Filtration products

   $ 713      $ 759      $ 46        6   $ (21

Commercial Distribution South America products

     333        430        97        29     45   

Chassis products

     153        169        16        10     3   
  

 

 

   

 

 

   

 

 

     

 

 

 

On and Off-highway segment

     1,199        1,358        159        13     27   

Brake South America segment

     22        15        (7     -32     (10

Corporate, eliminations and other

     (14     (14     —          —          —     
  

 

 

   

 

 

   

 

 

     

 

 

 

Total net sales

   $ 1,207      $ 1,359      $ 152        13   $ 17   
  

 

 

   

 

 

   

 

 

     

 

 

 

 

(1) The currency effect was calculated by comparing the local currency net sales for all international locations for both periods, each at the current year exchange rate to determine the impact of the currency between periods. These currency effects provide a more clear understanding of the operating results of our foreign entities because they exclude the varying effects that changes in foreign currency exchange rates may have on those results.

On and Off-highway segment products sales increased due to the following:

 

  (1) Filtration products sales increased in 2010 in comparison to 2009 due in part to increased sales in our Polish operation and due to improving markets. Sales increased $43 million due to the improving U.S. and Canadian markets, $23 million due to our Polish operation gaining market share in Western and Eastern Europe and due to $1 million in additional volumes in other countries. The increased sales were offset by $21 million of unfavorable currency translations which were comprised of unfavorable currency translation effects in Venezuela of $31 million, favorable currency translation effects of $4 million related to Poland and an additional $6 million of favorable currency effects in three other countries.

 

  (2)

Commercial Distribution South America products sales increased in 2010 in comparison to 2009 partially due to favorable foreign currency translation effects of $45 million. The Brazilian Real weakened significantly in the first half of 2009 and then strengthened in the last half of the year and has remained strong in 2010. Excluding currency effects, sales grew by 16% in 2010 in comparison to

 

51


Table of Contents
  2009. This growth was due to improved market conditions, growth in our Brazilian distribution company and the introduction of motorcycle applications, heavy duty applications and related accessories. Our Brazilian distribution company sales grew significantly in 2010 and have grown since 2005 by 135%.

 

  (3) Chassis products sales increased in 2010 in comparison to 2009 due to an improvement in general market conditions, new business and favorable currency translation effects of $3 million related to the Canadian Dollar. Additionally, sales increased due to new business with new customers and existing customers. During the fourth quarter we began shipping premium chassis product to one of our largest customers, which accounted for an $8 million increase in sales in 2010.

South America other segment products sales for 2010 decreased in comparison to 2009 due to the devaluation of the Venezuelan currency, which resulted in a decrease in sales of $10 million for 2010, offset partially by additional volumes in Venezuela and Uruguay.

The following table summarizes the consolidated results for the years ended December 31, 2009 and December 31, 2010:

 

(Dollars in millions)    Consolidated
Year Ended
December 31,
2009
    Consolidated
Year Ended
December 31,
2010
    Dollar
Change
    Percent
Change
 

Net sales

   $ 1,207      $ 1,359      $ 152        13

Cost of sales(1)

     (930     (1,043     (113     12
  

 

 

   

 

 

   

 

 

   

Gross profit

     277        316        39        14

Gross margin

     23     23    

Selling, general and administrative expenses(2)

     (189     (193     (4     2

Selling, general and administrative expenses as a percent of sales

     16     14    
  

 

 

   

 

 

   

 

 

   

Operating profit (loss)

        

On and Off-highway segment

     138        169        31        22

South America other segment

     (3     (8     (5     NM   

Corporate, eliminations and other

     (47     (38     9        19
  

 

 

   

 

 

   

 

 

   

Operating profit

     88        123        35        40

Operating margin

     7     9    

Gain (loss) on extinguishment of debt

     8        (1     (9     NM   

Other income, net

     4        1        (3     -75

Change in fair value of redeemable preferred stock embedded derivative liability

     (24     (24     —          NM   

Interest expense

     (78     (76     2        -3
  

 

 

   

 

 

   

 

 

   

Income (loss) from continuing operations before income tax provision, equity in income and noncontrolling interest

     (2     23        25        NM   

Income tax provision

     (9     (26     (17     189

Equity in income, net of tax

     1        1        —          NM   
  

 

 

   

 

 

   

 

 

   

Net loss from continuing operations, net of tax

     (10     (2     8        80

Income (loss) from discontinued operations, net of tax(3)

     (58     1        59        102
  

 

 

   

 

 

   

 

 

   

Net loss

     (68     (1     67        NM   

Less: net income attributable to noncontrolling interest, net of tax

     2        4        2        100
  

 

 

   

 

 

   

 

 

   

Net loss attributable to the Company

   $ (70   $ (5   $ 65        NM   
  

 

 

   

 

 

   

 

 

   

 

52


Table of Contents

 

(1) We recorded $2 million of restructuring costs in cost of sales for 2010.
(2) We recorded $5 million and $10 million of restructuring costs in selling, general and administrative expenses for 2009 and 2010, respectively.
(3) We recorded in our discontinued operations $9 million and $12 million of restructuring costs in 2009 and 2010, respectively.

NM (Not Meaningful)

Gross profit/Gross margin. Gross profit increased by $39 million during 2010 in comparison to 2009. The increase in gross profit during 2010 was primarily due to an increase in sales volume and currency effects. The improvement in gross profit included $11 million of favorable currency translation effects.

Selling, general and administrative expenses. Our selling, general and administrative expenses for 2010 increased $4 million from 2009 due mainly to restructuring expenses. The restructuring costs increased $5 million in 2010 in comparison to 2009, which was mainly related to our Venezuela operations. There were $7 million additional increases in advertising costs and insurance costs in 2010 in comparison to 2009. Offsetting these increases in 2010 was a reduction in the management fee charged by Cypress from $3 million in 2009 to no charge in 2010.

Operating profit/Operating margin. Our operating profit increased in 2010 in comparison to 2009 due to an improvement in gross profit and an increase in sales volume. On and Off-highway segment operating profit increased in 2010 in comparison to 2009 due to the improved gross profit and increased sales. South America other segment operating loss increased in 2010 due to the restructuring costs related to the closure of our Maracay, Venezuela manufacturing plant. In 2010, Corporate, eliminations and other operating loss decreased by $9 million due to lower general and administrative expenses and due to Cypress not charging us a management fee.

Gain (loss) on extinguishment of debt. In June of 2009 we purchased in the open market approximately $33 million principal amount of the Subordinated Notes and thereafter promptly surrendered such purchased notes for cancellation, which resulted in a pre-tax gain on the extinguishment of debt of $8 million in 2009. The retirement of $22.5 million of Secured Notes on December 31, 2010 resulted in a pre-tax loss on extinguishment of debt of $1 million.

Interest expense. Interest expense decreased by $2 million in 2010 in comparison to 2009 due to lower refinancing costs in 2010 and offset by higher interest rates on our new debt structure. During 2009, we recognized $10 million in refinancing costs related to replacing our former term loan facility, revolving credit facility and accounts receivable facility and the termination of our interest rate swap agreements. The refinancing consisted of the ABL Revolver and the Secured Notes, the proceeds of which were used to repay outstanding borrowings under Affinia Group Inc.’s former term loan facility, revolving credit facility and accounts receivable facility, as well as to settle interest rate derivatives and to pay fees and expenses related to the refinancing. During 2010, Affinia Group Inc. issued Additional Notes and amended the ABL Revolver, which resulted in payment of deferred financing costs of $5 million.

Income tax provision. The income tax provision increased by $17 million for 2010 in comparison to 2009 due mainly to a higher level of income from continuing operations. Excluding the change in fair value of redeemable preferred stock embedded derivative liability, the effective tax rate was higher in 2010 due to higher foreign taxes from increased withholding taxes related to dividends in our international subsidiaries.

 

53


Table of Contents

Loss from discontinued operations, net of tax. Included within discontinued operations is our Commercial Distribution Europe segment and our Brake North America and Asia group. As part of our strategic plan we committed to a plan to sell our Commercial Distribution Europe business unit during the fourth quarter of 2009 and our Brake North America and Asia group in the fourth quarter of 2011. Commercial Distribution Europe incurred a loss of $61 million in 2009 and less than $1 million in 2010. Brake North America and Asia had income from operations of $3 million and $1 million in 2009 and 2010, respectively. The Commercial Distribution Europe loss in 2009 consisted of a $10 million loss on operations and a $75 million impairment charge to reduce the carrying value of the business to expected realizable value offset by a tax benefit of $24 million. Brake North America and Asia group net income decreased in 2010 in comparison to 2009 due to higher restructuring costs, payroll, information and technology costs, travel costs and legal and professional fees.

Net loss. Net loss decreased in 2010 in comparison to 2009 due mainly to the decrease in the loss from discontinued operations, net of tax and the increase in gross profit in 2010.

Net income attributable to noncontrolling interest, net of tax. Our net income attributable to noncontrolling interest, net of tax increased due to the increase in net income of Affinia India Private Limited and Haimeng.

Results by Geographic Region

Net sales by geographic region were as follows:

 

     Year Ended December 31,     Three Months
Ended
June 30,
    Six Months
Ended
June 30,
 
(Dollars in millions)    2009     2010     2011     2011     2012     2011     2012  

Net sales

              

United States

   $ 627      $ 669      $ 728      $ 191      $ 192      $ 378      $ 376   

Foreign

     580        690        750        197        181        376        361   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

   $ 1,207      $ 1,359      $ 1,478      $ 388      $ 373      $ 754      $ 737   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

United States sales as a percent of total sales

     52     49     49     49     51     50     51

Foreign sales as a percent of total sales

     48     51     51     51     49     50     49

United States. Net sales increased in 2011 in comparison to 2010 mainly due to increased sales in our chassis products. The chassis products sales increase was primarily due to new premium chassis business and additional sales related to NAPD, which we acquired during the fourth quarter of 2010. Net sales increased in 2010 in comparison to 2009 due to improving market conditions and new business from both new customers and existing customers. Net sales decreased in the first six months of 2012 in comparison to the first six months of 2011 and the second quarter of 2012 in comparison to the second quarter of 2011, respectively, due to a decrease in our chassis product sales.

Foreign. Net sales increased in 2011 in comparison to 2010 due to improving market conditions, increased sales to new and existing customers and favorable currency translation effects. Our sales increased by $40 million in South America and $18 million in Europe for 2011 in comparison to 2010. Net sales increased in 2010 in comparison to 2009 due to increased sales in Brazil and Poland, the majority of which related to gains in market share by our Brazilian distribution company and our Polish operation in 2010. Additionally, our Brazilian and Polish subsidiaries’ sales were higher in 2010 due to favorable currency translation effects of $46 million and $4 million, respectively. Net sales decreased in the first six months of 2012 in comparison to the first six months of 2011 and the second quarter of 2012 in comparison to second quarter of 2011, respectively, due to unfavorable currency translation effects, partially offset by increased sales to new customers and new business with existing customers.

 

54


Table of Contents

Income from continuing operations before income tax provision, equity in income and noncontrolling interest by geographic region was as follows:

 

     Year Ended
December 31,
    Three Months
Ended
June 30,
     Six Months
Ended
June 30,
 
(Dollars in millions)    2009     2010     2011     2011     2012      2011     2012  

Income (loss) from continuing operations before income tax provision, equity in income and noncontrolling interest

             

United States

   $ (78   $ (66   $ (25   $ (4   $ 12       $ (2   $ (11

Foreign

     76        89        96        25        30         47        54   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total income from continuing operations before income tax provision, equity in income and noncontrolling interest

   $ (2   $ 23      $ 71      $ 21      $ 42       $ 45      $ 43   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

United States. Loss from continuing operations before income tax provision, equity in income and noncontrolling interest decreased in 2011 in comparison to 2010 due to an increase in the change in fair value of redeemable preferred stock embedded derivative liability and an increase in gross profit. Loss from continuing operations before income tax provision, equity in income and noncontrolling interest increased in 2010 in comparison to 2009 due to our open-market purchase of approximately $33 million principal amount of the Subordinated Notes in June 2009 and the subsequent cancellation of those notes, which resulted in a pre-tax gain on the extinguishment of debt of $8 million in 2009. Loss from continuing operations before income tax provision, equity in income and noncontrolling interest increased in the first six months of 2012 in comparison to the first six months of 2011 due to a decrease in gross profit.

The United States income from continuing operations before income tax provision, equity in income and noncontrolling interest compared to the foreign income is lower due to interest expense in domestic operations, the change in fair value of the redeemable preferred stock embedded derivative liability and higher profitability of some of our foreign operations. The majority of our debt relates to our United States operations and as a consequence almost all of the associated interest expense is allocated to our domestic operations. During 2011, our United States operations had $79 million of interest expense and our foreign operations had $1 million of interest expense, and during the first six months of 2012, our United States operations had $39 million of interest expense and our foreign operations had less than $1 million of interest expense. The change in fair value of the redeemable preferred stock embedded derivative liability all relates to our United States operations. Some of our foreign operations, such as our Polish and Brazilian subsidiaries, have experienced significant growth and as a result their profitability has also increased.

Foreign. Income from continuing operations before income tax provision, equity in income and noncontrolling interest increased in 2011 in comparison to 2010. The majority of the increase was due to an improvement in gross profit, which was driven by an increase in sales volume and favorable currency translation effects. Foreign sales increased by 9% in 2011 in comparison to 2010. Income from continuing operations before income tax provision, equity in income and noncontrolling interest increased in 2010 in comparison to 2009 due to an improvement in gross profit, which was driven by an increase in sales volume and favorable currency translation effects. Foreign sales increased by 19% in 2010 in comparison to 2009. The improvement in gross profit includes $11 million of favorable currency translation effects. Income from continuing operations before income tax provision, equity in income and noncontrolling interest increased in the first six months of 2012 in comparison to the first six months of 2011. The majority of the increase was due to an improvement in gross profit, which was driven by an increase in sales volume, partially offset by unfavorable currency translation effects.

Liquidity and Capital Resources

Our primary source of liquidity is cash flow from operations and available borrowings from our ABL Revolver. Our primary liquidity requirements are significant and are expected to be primarily for debt servicing, working capital, restructuring obligations and capital spending.

 

55


Table of Contents

We are significantly leveraged as a result of the Acquisition, the refinancing that occurred in 2009 and the issuance of Additional Notes in 2010. Affinia Group Inc. issued the Subordinated Notes in connection with the Acquisition and issued the Secured Notes and entered into the ABL Revolver in connection with the refinancing. As of June 30, 2012, we had $776 million in aggregate indebtedness, which includes $13 million classified in current liabilities of discontinued operations. As of June 30, 2012, we had an additional $169 million of borrowing capacity available under our ABL Revolver after giving effect to $13 million in outstanding letters of credit, none of which was drawn against, and $3 million for borrowing base reserves. In addition, we had cash and cash equivalents of $54 million and $63 million as of December 31, 2011 and June 30, 2012, respectively.

We spent $27 million and $11 million in capital expenditures during the first six months of 2011 and 2012, respectively, as well as $52 million and $55 million during 2010 and 2011, respectively. The cash flow from operations on an annual basis has historically been adequate to meet our liquidity needs. However, during the first half of the year, cash flows from operations are typically not sufficient to meet our liquidity needs, and we therefore utilize our ABL Revolver to bridge our financing needs until the second half of the year. Based on the current level of operations, we believe that cash flow from operations and available cash, together with available borrowings under our ABL Revolver, will be adequate to meet our short term and long term liquidity needs.

Our ABL Revolver matures in May 2017, our Subordinated Notes mature in November 2014 and our Secured Notes mature in August 2016. Refinancing our ABL Revolver, Subordinated Notes and our Secured Notes will require significant additional sources of liquidity over the long term. Furthermore, if we were to undertake a significant acquisition or capital improvement plan, we may need additional sources of liquidity. We expect to meet such liquidity needs by entering into new or additional credit facilities and/or offering new or additional debt or equity securities, but whether such sources of liquidity will be available to us at any given point in the future will depend on a number of factors that are outside of our control, including general market conditions.

Asset Based Credit Facilities

Overview. On August 13, 2009, Affinia Group Intermediate Holdings Inc., Affinia Group Inc. and certain of its subsidiaries entered into a four-year $315 million ABL Revolver maturing in 2013. On November 30, 2010 and May 22, 2012, we entered into amendments to the credit agreement governing the ABL Revolver to, among other things, extend the maturity date from August 13, 2013 to May 22, 2017 (subject to early termination under certain limited circumstances). There was $75 million outstanding on the ABL Revolver at June 30, 2012. The ABL Revolver includes (i) a revolving credit facility of up to $300 million for borrowings solely to the U.S. domestic borrowers (the “U.S. Facility”), including (a) a $40 million sub-limit for letters of credit and (b) a $30 million swingline facility and (ii) a revolving credit facility of up to $15 million for Canadian Dollar denominated revolving loans solely to a Canadian borrower (the “Canadian Facility”). Availability under the ABL Revolver is based upon monthly (or more frequent under certain circumstances) borrowing base valuations of Affinia Group Inc.’s eligible inventory and accounts receivable and is reduced by certain reserves in effect from time to time.

Guarantees and Collateral. The indebtedness, obligations and liabilities under the U.S. Facility are unconditionally guaranteed jointly and severally on a senior secured basis by Affinia Group Intermediate Holdings Inc. and certain of its current and future U.S. subsidiaries, and are secured by a first-priority lien on accounts receivable, inventory, cash, deposit accounts, securities accounts and proceeds of the foregoing and certain assets related thereto and a second-priority lien on the collateral securing the Secured Notes on a first-priority basis (collectively, the “U.S. Collateral”).

The indebtedness, obligations and liabilities under the Canadian Facility are unconditionally guaranteed jointly and severally on a senior secured basis by Affinia Group Intermediate Holdings Inc., certain of its current and future U.S. subsidiaries and certain of its Canadian subsidiaries and are also secured by the U.S. Collateral and by a first-priority lien on substantially all of the Canadian borrower’s and the Canadian guarantors’ existing

 

56


Table of Contents

and future assets, including, but not limited to, accounts receivable and inventory (but excluding owned real property and the capital stock of any non-U.S. and non-Canadian subsidiaries of the Canadian borrower or the Canadian guarantors).

Mandatory Prepayments. If at any time the outstanding borrowings under the ABL Revolver (including outstanding letters of credit and swingline loans) exceed the lesser of (i) the borrowing base as in effect at such time and (ii) the aggregate revolving commitments as in effect at such time, the borrowers will be required to prepay an amount equal to such excess and/or cash collateralize outstanding letters of credit.

Voluntary Prepayments. Subject to certain conditions, the ABL Revolver allows the borrowers to voluntarily reduce the amount of the revolving commitments and to prepay the loans without premium or penalty other than customary breakage costs for LIBOR rate contracts.

Covenants. The ABL Revolver contains certain covenants that, among other things, limit or restrict the ability of Affinia Group Intermediate Holdings Inc. and its subsidiaries to (subject to certain qualifications and exceptions):

 

   

create liens and encumbrances;

 

   

incur additional indebtedness;

 

   

merge, dissolve, liquidate or consolidate;

 

   

make acquisitions and investments;

 

   

dispose of or transfer assets;

 

   

pay dividends or make other payments in respect of the borrowers’ capital stock;

 

   

amend certain material governance documents;

 

   

change the nature of the borrowers’ business;

 

   

make any advances, investments or loans;

 

   

engage in certain transactions with affiliates;

 

   

issue or dispose of equity interests;

 

   

change the borrowers’ fiscal periods; and

 

   

restrict dividends, distributions or other payments from Affinia Group Intermediate Holdings Inc.’s subsidiaries.

In addition, commencing on the day that an event of default occurs or availability under the ABL Revolver is less than (i) with respect to periods prior to the sale of all or substantially all of the ABL priority collateral of the consolidated U.S. and Canadian brake operations of the Company and the guarantors, the greater of 10.0% of the total revolving loan commitments and $31.5 million or (ii) with respect to periods after the sale of all or substantially all of the ABL priority collateral of the consolidated U.S. and Canadian brake operations of the Company and the guarantors, the greater of 10.0% of the total borrowing base and $20.0 million, Affinia Group Intermediate Holdings Inc. is required to maintain a fixed charge coverage ratio of at least 1.00x measured for the last 12-month period.

As of the date of this prospectus, we were in compliance in all material respects with all covenants and provisions contained in the ABL Revolver.

Interest Rates and Fees. Outstanding borrowings under the U.S. Facility will accrue interest at an annual rate of interest equal to (i) a base rate plus the applicable spread or (ii) a LIBOR rate plus the applicable spread. Swingline loans will bear interest at a base rate plus the applicable spread. Outstanding borrowings under the

 

57


Table of Contents

Canadian Facility will accrue interest at an annual rate of interest equal to (i) the Canadian prime rate plus the applicable spread or (ii) the BA rate (the average discount rate of bankers’ acceptances as quoted on the Reuters Screen CDOR page) plus the applicable spread. We will pay a commission on letters of credit issued under the U.S. Facility at a rate equal to the applicable spread for loans based upon the LIBOR rate.

The borrowers will pay certain fees with respect to the ABL Revolver, including (i) an unused commitment fee on the undrawn portion of the credit facility of 0.25% per annum in the event that more than 50% of the commitments (excluding swingline loans) under the credit facility are utilized, 0.375% per annum in the event that more than 25% but less than or equal to 50% of the commitments (excluding swingline loans) under the credit facility are utilized, and 0.50% per annum in the event that less than or equal to 25% of the commitments (excluding swingline loans) under the credit facility are utilized and (ii) customary annual administration fees and fronting fees in respect of letters of credit equal to 0.125% per annum on the stated amount of each letter of credit outstanding during each month. During an event of default, the fee payable under clause (i) will be increased by 2% per annum.

Cash Dominion. If availability under the ABL Revolver is less than (i) with respect to periods prior to the sale of all or substantially all of the ABL priority collateral of the consolidated U.S. and Canadian brake operations of the Company and the guarantors, the greater of 12.5% of the total revolving loan commitments and $39.375 million and (ii) with respect to periods after the sale of all or substantially all of the ABL priority collateral of the consolidated U.S. and Canadian brake operations of the Company and the guarantors, the greater of 12.5% of the total borrowing base and $22.5 million, or if there exists an event of default, amounts in Affinia Group Intermediate Holdings Inc.’s deposit accounts and the deposit accounts of the subsidiary guarantors (other than certain excluded accounts) will be transferred daily into a blocked account held by the administrative agent and applied to reduce the outstanding amounts under the ABL Revolver.

Senior Notes

Overview. In November 2004, Affinia Group Inc. issued $300 million aggregate principal amount of the Subordinated Notes, which bear interest at a rate of 9% and mature on November 30, 2014, pursuant to an indenture dated as of November 30, 2004 (the “senior subordinated indenture”). On December 9, 2010, Affinia Group Inc. issued $100 million of Additional Notes. In connection with our refinancing in August 2009, Affinia Group Inc. issued $225 million aggregate principal amount of the Secured Notes (together with the Subordinated Notes, the “Senior Notes”), which bear interest at a rate of 10.75% and mature on August 15, 2016, pursuant to an indenture dated as of August 13, 2009 (the “senior secured indenture” and, together with the senior subordinated indenture, the “senior indentures”). On each of December 31, 2010 and June 25, 2012, Affinia Group Inc. redeemed $22.5 million aggregate principal amount of the Secured Notes pursuant to their terms at a redemption price equal to 103% of the principal amount of such notes being redeemed, plus accrued and unpaid interest to the redemption date. As of June 30, 2012, $367 million principal amount of the Subordinated Notes was outstanding and $179 million principal amount of the Secured Notes was outstanding, net of a $1 million issue discount which is being amortized until the Secured Notes mature.

Guarantees and Collateral. The Subordinated Notes are unconditionally guaranteed jointly and severally on a senior subordinated basis by substantially all of our wholly-owned domestic subsidiaries. The Secured Notes are unconditionally guaranteed jointly and severally on a senior secured basis by substantially all of our wholly-owned domestic subsidiaries.

The Secured Notes and the related guarantees are secured on a first-priority lien basis by substantially all of the assets (other than accounts receivable, inventory, cash, deposit accounts, securities accounts and proceeds of the foregoing and certain assets related thereto) of Affinia Group Inc. and the guarantors and on a second-priority

 

58


Table of Contents

lien basis by the accounts receivable, inventory, cash, deposit accounts, securities accounts and proceeds of the foregoing and certain assets related thereto of Affinia Group Inc. and the guarantors.

Interest Payments. Interest on the Subordinated Notes is payable on May 30 and November 30 of each year and interest on the Secured Notes is payable on February 15 and August 15 of each year.

Optional Redemption. We may redeem some or all of the Senior Notes at any time at redemption prices described or set forth in the applicable senior indenture.

Change of Control. Upon the occurrence of certain change of control events specified in the applicable senior indenture, each holder of the Subordinated Notes or Secured Notes has the right to require us to repurchase such holder’s Subordinated Notes or Secured Notes, as applicable, at a purchase price in cash equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the repurchase date.

Covenants. The senior indentures contain certain covenants that, among other things, limit or restrict the ability of Affinia Group Inc. and its restricted subsidiaries to (subject to certain qualifications and exceptions):

 

   

incur and guarantee additional indebtedness, issue disqualified stock or issue certain preferred stock;

 

   

pay dividends, make other distributions on, redeem or repurchase stock or make certain other restricted payments;

 

   

create certain liens or encumbrances;

 

   

sell assets;

 

   

issue capital stock;

 

   

make certain investments or acquisitions;

 

   

make capital expenditures;

 

   

restrict dividends, distributions or other payments from our subsidiaries;

 

   

change their line of business;

 

   

enter into transactions with affiliates;

 

   

consolidate, merge, sell or otherwise dispose of all or substantially all of their assets; and

 

   

designate subsidiaries as unrestricted subsidiaries.

As of the date of this prospectus, we were in compliance in all material respects with all covenants and provisions contained under the senior indentures.

Seller Note

Overview. As part of the financing in connection with our acquisition of substantially all of Dana’s aftermarket business operations, Affinia Group Holdings Inc. issued to Dana the Seller Note, a subordinated payment in kind note due 2019 with a face amount of $74.5 million, which matures on November 30, 2019. We may prepay at our option all or part of the Seller Note at specified prepayment prices, subject to certain structural and contractual limitations.

We intend to use approximately $122 million of our net proceeds from this offering to repay the Seller Note in full.

Interest Rate. The interest rate on the Seller Note was initially 8% per annum with an increase to 10% per annum on November 30, 2009, payable in kind at our option. We have made each interest payment on the Seller Note to date in kind rather than in cash. The fair market value of the Seller Note was $98 million and it bore an effective interest rate of 12.5% as of June 30, 2012.

 

59


Table of Contents

Change of Control; Dividend Payments. Upon the occurrence of certain change of control events specified in the Seller Note, each holder of the Seller Note will have the right to require us to repurchase the Seller Note at specified prepayment prices. In addition, upon the occurrence of a dividend event specified in the Seller Note, we will be required to offer to redeem a portion of the Seller Note at specified prepayment prices using 17.5% of dividends proposed to be made, subject to certain structural and contractual limitations.

Covenants. The Seller Note contains certain covenants that among other things limit or restrict our ability to (subject to certain qualifications and exceptions):

 

   

pay dividends from the proceeds of any asset sale event or recapitalization event; and

 

   

enter into transactions with affiliates.

As of the date of this prospectus, we were in compliance in all material respects with all covenants and provisions contained under the Seller Note.

Cash Flows

Net cash provided by (used in) operating, investing and financing activities including continuing and discontinued operations is summarized in the tables below for the years ended 2009, 2010 and 2011 and the six months ended June 30, 2011 and 2012:

Net Cash Provided by (Used in) Operating Activities

Net cash provided by operating activities is summarized in the table below for the years ended 2009, 2010 and 2011 and the six months ended June 30, 2011 and 2012:

 

(Dollars in millions)   Year Ended
December 31,
2009
    Year Ended
December 31,
2010
    Year Ended
December 31,
2011
    Six Months
Ended
June 30,
2011
    Six Months
Ended
June 30,
2012
 

Net income (loss)

  $ (68   $ (1   $ (75   $ 24      $ (16

Loss (gain) on extinguishment of debt

    (8     1                      1   

Write-off of unamortized deferred financing costs

    5        1                        

Change in trade accounts receivable

    3        (14     14        (46     (20

Change in inventories

    42        (77     8        (48     2   

Impairment of assets

    75               166        1        62   

Change in other current operating liabilities

    (42     39        (47     34        65   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subtotal

    7        (51     66        (35     94   

Other changes in operating activities

    48        73        (52     (17     (15
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) operating activities

  $ 55      $ 22      $ 14      $ (52   $ 79   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)—Net loss decreased in 2010 in comparison to 2009 due to the decrease in the loss from discontinued operations, net of tax. We recorded a $75 million impairment related to our Commercial Distribution Europe segment in 2009, which was sold on February 2, 2010. Net income decreased in 2011 in comparison to 2010 due to the loss from discontinued operations, net of tax, offset by an increase in sales and gross profit. We recorded a $165 million impairment related to our Brake North America and Asia group in 2011, offset by a tax benefit to the Company of $57 million. Net income decreased in the first six months of 2012 compared to the first six months of 2011 due to the loss from discontinued operations, net of tax. We recorded a $62 million impairment related to our Brake North America and Asia group in the second quarter of 2012, partially offset by a tax benefit to the Company of $23 million.

Loss (gain) on extinguishment of debt—The retirement of $33 million of Subordinated Notes during the second quarter of 2009 resulted in a pre-tax gain on the extinguishment of debt of $8 million. The retirement of

 

60


Table of Contents

$22.5 million of Secured Notes during the fourth quarter of 2010 resulted in a pre-tax loss on the extinguishment of debt of $1 million. The retirement of $22.5 million of Secured Notes during the second quarter of 2012 resulted in a pre-tax loss on the extinguishment of debt of $1 million.

Write-off of debt issuance costs—We recorded a write-off of $5 million in 2009 to interest expense for unamortized deferred financing costs associated with the retirement of the term loan facility, revolving credit facility and the accounts receivable facility. We wrote off $1 million in deferred costs in 2010 related to the extinguishment of $22.5 million of Secured Notes during the fourth quarter of 2010.

Change in trade accounts receivable—Our accounts receivable decreased in 2009 and increased in 2010 mainly due to the timing of payments in the United States. Our accounts receivable decreased in 2011 due to timing of payments. The change in trade accounts receivable was due in part to entering into factoring programs in the third quarter of 2010 that have continued through to 2012. The change in trade accounts receivable was a $46 million and $20 million use of cash in the first six months of 2011 and 2012, respectively. The change in trade accounts receivable was due to timing of payments and increased levels of factoring in the first six months of 2012.

Change in inventories—The change in inventories was an $8 million source of cash in 2011, a $77 million use of cash in 2010 and a $42 million source of cash in 2009. The reduction in inventory in 2009 was due to a concerted effort to reduce inventories due to the economic downturn. In 2008, our inventory increased mainly due to increases in Brazil and other international locations. Our Brazilian operations were experiencing record sales in 2008 and, as a result, built up inventory to keep up with demand. In the second half of 2010 we began building up inventory, which we continued until the second quarter of 2011, in anticipation of increased demand. However, due to a decrease in miles driven and other factors, we built inventory at a higher pace than actual sales increased. We began focusing on reducing inventory levels during the second half of 2011, which resulted in an $81 million decrease from the second quarter of 2011 until the end of 2011. The change in inventories was a $48 million use of cash and a $2 million source of cash in the first six months of 2011 and 2012, respectively. In the first quarter of 2011, we built up inventory to keep up with increased demand, which was due to improved market conditions in the aftermarket industry, new business with new customers and additional business with existing customers. During the last half of 2011 and the first six months of 2012, we made a concerted effort to decrease inventory levels.

Change in other current operating liabilities—The change in other current operating liabilities was a $47 million use of cash in 2011, a $39 million source of cash during 2010 and a $42 million use of cash in the 2009. The changes over the last three years were primarily due to accounts payable, which was a $54 million use of cash in 2011, a $38 million source of cash in 2010 and a $54 million use of cash in 2009. Accounts payable fluctuates from quarter to quarter due to the timing of payments. The change in other current operating liabilities was a $34 million and a $65 million source of cash during the first six months of 2011 and 2012, respectively. The change was primarily due to an increase in accounts payable, which was a $24 million and a $63 million source of cash in the first six months of 2011 and 2012, respectively. Accounts payable fluctuates from quarter to quarter due to the timing of payments.

 

61


Table of Contents

Net Cash Used in Investing Activities

Net cash used in investing activities is summarized in the table below for the years ended 2009, 2010 and 2011 and the six months ended June 30, 2011 and 2012:

 

(Dollars in millions)    Year Ended
December 31,
2009
    Year Ended
December 31,
2010
    Year Ended
December 31,
2011
    Six Months
Ended
June 30,
2011
    Six Months
Ended
June 30,
2012
 

Proceeds from sales of assets

   $ —        $ 1      $ 9      $ —        $ —     

Investments in companies, net of cash acquired

     —          (51     (1     —          —     

Proceeds from sales of affiliates

     —          11        —          —          3   

Change in restricted cash

     (5     (3     5        2        4   

Additions to property, plant and equipment

     (31     (52     (55     (27     (11

Other investing activities

     —          (4     3        4        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

   $ (36   $ (98   $ (39   $ (21   $ (4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The changes in our net cash used in investing activities are mainly comprised of the following:

Proceeds from sales of assets—The proceeds from sales of assets increased in 2011 to $9 million mainly due to the sale of Venezuelan and Canadian facilities, which were part of our restructuring plans.

Investments in companies, net of cash acquired—The NAPD business was acquired for an original payment of $51 million in 2010 and a $1 million payment in 2011 for a working capital settlement.

Proceeds from sale of affiliates—We sold our Commercial Distribution Europe segment for $11 million during 2010.

Additions to property, plant and equipment—The additions increased significantly in 2010 and 2011 due to the expansion in China for new friction and filtration facilities and for the expansion of our Polish and Brazilian operations. The total additions to property, plant and equipment in China, Poland and Brazil increased $21 million in 2010 from 2009 and, in addition, China also increased $11 million in 2011 from 2010. The additions increased significantly in 2011 due to the expansion in China for new friction and filtration facilities. The total additions to property, plant and equipment in China decreased $11 million in the first six months of 2012 in comparison to the first six months of 2011. The friction and filtration facilities in China were completed during 2011 and as a consequence the additions in property, plant and equipment decreased during the first six months of 2012.

 

62


Table of Contents

Net Cash Provided by (Used in) Financing Activities

Net cash provided by (used in) financing activities is summarized in the table below for the years ended 2009, 2010 and 2011 and the six months ended June 30, 2011 and 2012:

 

(Dollars in millions)    Year Ended
December 31,
2009
    Year Ended
December 31,
2010
    Year Ended
December 31,
2011
    Six Months
Ended
June 30,
2011
    Six Months
Ended
June 30,
2012
 

Net increase (decrease) in other short-term debt

   $ —       $ 13      $ (6   $ (8   $ (5

Proceeds from other debt

     —         2        20        —         —    

Payments on other debt

     —         —         (10     (3     (2