UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
(Mark one)
 
þRANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 20082009

 
o£TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from       to

Commission file number: 333-107219

United Components, Inc.
(Exact Name of Registrant as Specified in Its Charter)

Delaware04-3759857
(State or Other Jurisdiction of
(I.R.S. Employer
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
  
14601 Highway 41 North
Evansville, Indiana
47725
(Address of Principal Executive Offices)(Zip Code)

Registrant’s telephone number, including area code:
(812) 867-4156
Securities registered pursuant to Section 12(b) of the Act:
None
None
Securities registered pursuant to Section 12(g) of the Act:
None
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yeso£ NoþR

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yeso£ NoþR

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YesþR Noo£

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.þR

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero£
Accelerated filero£
Non-accelerated filerþR
Smaller reporting companyo£
 (Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yeso£ NoþR

The Registrant had 1,000 shares outstanding of its $0.01 par value common stock as of March 30, 2009,19, 2010, none of which were held by non-affiliates.

Documents Incorporated by Reference: None
 


TABLE OF CONTENTS

  Page
 Part I 
Item 1.Business3
Item 1A.Risk Factors11
Item 1B.Unresolved Staff Comments20
Item 2.Properties21
Item 3.Legal Proceedings22
Item 4.Reserved24
 PagePart II 
Part I
Item 1.
Business
3
Item 1A.
Risk Factors
10
Item 1B.
Unresolved Staff Comments
19
Item 2.
Properties
20
Item 3.
Legal Proceedings
21
Item 4.
Submission of Matters to a Vote of Security Holders
23
Part II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
2325
Item 6.
Selected Financial Data
2425
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
2627
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
4344
Item 8.
Financial Statements and Supplementary Data
4546
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
97
Item 9A(T).Controls and Procedures97
Item 9B.Other Information98
 95Part III 
Item 9A(T).
Controls and Procedures
95
Item 9B.
Other Information
96
Part III
Item 10.
Directors, Executive Officers and Corporate Governance
9699
Item 11.
Executive Compensation
98101
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
107112
Item 13.
Certain Relationships and Related Transactions, and Director Independence
109114
Item 14.
Principal Accounting Fees and Services
115
 109Part IV 
Part IV
Item 15.
Exhibits, Financial Statement Schedules
116
Signatures 110
Signatures
115121

2

2

PART I

ITEM 1.BUSINESS
Overview
Overview

United Components, Inc. (“UCI”, the “Company”, or “we”) was incorporated on April 16, 2003 and on June 20, 2003, we purchased all of our operating unitsthe issued and outstanding common stock and other equity interests of certain companies from UIS, Inc., and UIS Industries, Inc. (together “UIS”). For more information regarding the purchase of our operations, see “The Acquisition and Ownership” section, which immediately follows this overview.

Prior to June 20, 2003, our operations comprised the vehicle parts businesses of UIS. Beginning with the purchase of Airtex Products in 1958, UIS continued making acquisitions in the automotive industry over the following four decades, resulting in the acquisitions ofincluding Wells Manufacturing Corporation, Champion Laboratories, Inc., Neapco, Inc., Flexible Lamps Ltd. and Pioneer. Over the years, UIS achieved growth in these businesses through increased parts offerings and domestic and international expansion.Pioneer, Inc.  In 2006 we acquired ASC Industries, Inc. (“ASC”) and sold Neapco,Inc., Pioneer, Inc. and Flexible Lamps Ltd.

We are a leading supplier to the vehicle replacement parts market, or the aftermarket, with top threeeither the leading or second market positionsposition in each of our product lines. We supply a broad range of filtration, fuel, cooling and engine management products to the automotive, trucking, industrial, construction, agricultural, marine and mining vehicle markets. Over 87%Approximately 88% of our 20082009 net sales were made to a diverse aftermarket customer base that includes some of the largest and fastest growing companies servicing the aftermarket.

We have one of the most comprehensive product lines in the aftermarket, offering approximately 43,00047,000 part numbers. We believe that the breadth of our offerings in each of our product lines, combined with our extensive global manufacturing, sourcing and distribution capabilities, product innovations, diverse customer base and reputation for quality and service, makeincluding industry leading order fill rates, makes us a leader in our industry.

We design, develop, manufacture and distribute an extensive range of vehicle replacement parts across our four product lines:
•Filtration Products:oil, air, fuel, hydraulic, transmission, cabin air and industrial filters and PCV valves.
•Fuel Products:fuel pump assemblies, electric fuel pumps, mechanical fuel pumps and fuel pump strainers.
•Cooling Products:water pumps, fan clutches and other products.
•Engine Management Products:caps and rotors, emission controls, sensors, ignition controls, coils and switches.

Filtration Products: oil, air, fuel, hydraulic, transmission, cabin air and industrial filters and PCV valves.
Fuel Products: fuel pump assemblies, electric fuel pumps, mechanical fuel pumps and fuel pump strainers.
Cooling Products: water pumps, fan clutches and other products.
Engine Management Products: caps and rotors, emission controls, sensors, ignition controls, coils and switches.

We believe that the majority of our sales tend to track the overall growth of the aftermarket. Sales in the automotiveNorth American vehicle aftermarket (excluding tires) have growngrew at ana compounded average annual growth rate of approximately 3.9%3.5% from 1998 through 2007, with the lowest year of growth2009.  However, aftermarket sales grew by only 0.1% in 1998 of approximately 2.1%. However, 2008 has beenand are estimated to have growndeclined by only 1.5%.approximately 1.2% in 2009 due to the challenging economic environment.

A key metric in measuring aftermarket performance is miles driven. The more frequently a vehicle is used (driven)For 2008, the greater the need for regular maintenance and repair. In 2008, The USU.S. Department of TransportationEnergy reported a decrease in miles driven of 3.2% (equaling 96 billion fewer miles) which represented the first annual decrease in miles driven since 1980 (-3.6%).1980. We believe that high gasoline prices and generally weak economic conditions adversely affected our sales during the second half of 2008 and 2009. During 2009, retail gasoline prices were significantly lower than the historic highs experienced at the beginning of the third quarter of 2008. Despite thisthe lower retail gasoline prices, the negative trend in miles driven continued in the first quarter of 2009 (a 2.7% decrease over the comparable quarter in 2008) due to the ongoing weak economic conditions. The negative trend reversed in the last three quarters of 2009 as miles driven exceeded the comparable 2008 quarters.  For the full year of 2009, miles driven increased 0.1% from 2008.  Despite the decrease in miles driven in 2008 and the small decline in the North American vehicle aftermarket in 2009, we believe that the aftermarket will continue to grow in the long-term as a result of increases in the average age of vehicles, average number of miles driven per year by passenger cars, number of vehicles registered in the United States and number of licensed drivers.drivers, as well as the increasing complexity of vehicles.  Because we primarily supply the aftermarket, our sales do not correlate strongly with annual vehicle production.

 We
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Due to our acquisition of ASC, investments made in the last three years to establish filtration and fuel pump manufacturing facilities in China and our footprint in Mexico, we have significant expertise in global manufacturing and sourcing, particularly in China, due to our acquisition of ASC.sourcing.  We believe that the consolidation of our historical water pump facilities into ASC’s existing facilities, combined with our low-cost China manufacturing and sourcing capability, along with our Mexican operations, positions us to realize meaningful cost savings over the next few years.

Through our emphasis on category management, high order fill rates, customer service, product quality and competitive pricing, we have developed long-standing relationships with our customers, including leading aftermarket companies and wholesale buying groups such as Advance Stores Company, Inc. (Advance Auto Parts), AutoZone, Inc. (AutoZone), Aftermarket Auto Parts Alliance (Alliance), AIM/CMB Marketing, Automotive Distribution Network (Network), Auto Parts Associates, Inc.(APA), Auto Parts Professionals, CARQUEST Corporation (CARQUEST), Genuine Parts Company (NAPA and UAP), Independent Warehouse Distributors (IWD), National Pronto Association (Pronto), TruStar, MDSA, Inc. (Mighty), O’Reilly Automotive, Inc. (O’Reilly)(O’Reilly Auto Parts),  UAP, Inc., a wholly owned subsidiary of Genuine Parts Company (NAPA), andTruStar, Valvoline Company, a division of Ashland Inc. (Valvoline), and VIPAR, as well as a diverse group of original equipment manufacturers, or OEMs, such as DaimlerChrysler Corporation (DaimlerChrysler)Chrysler Group LLC (Chrysler), Ford Motor Company, Inc. (Ford), General Motors Corporation (GM), Harley-Davidson, Inc. (Harley-Davidson), Mercury Marine Division of Brunswick Corporation (Mercury Marine), Perkins/Caterpillar and Volkswagen of America, Inc. (Volkswagen).

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The Acquisition and Ownership

On June 20, 2003, we purchased the vehicle parts businesses of UIS, consisting of all of the issued and outstanding common stock or other equity interests of Champion Laboratories, Inc., Wells Manufacturing Corporation, Neapco, Inc., Pioneer, Inc., Wells Manufacturing Canada Limited, UIS Industries Ltd. (which was the owner of 100% of the capital stock of Flexible Lamps, Ltd. and Airtex Products Ltd.), Airtex Products S.A., Airtex Products, Inc., (currently Airtex Mfg., Inc.), Talleres Mecanicos Montserrat S.A. de C.V., Brummer Seal de Mexico, S.A. de C.V., Brummer Mexicana en Puebla, S. A.S.A. de C.V., Automotive Accessory Co. Ltd and Airtex Products, LLC, predecessors to the entities that now own the assets of the Airtex business. We refer to this transaction as the “Acquisition.”

The purchase price paid was $808 million, plus transaction fees. The Acquisition was financed through a combination of debt and $260 million in cash contributed to us as equity by our parent, UCI Acquisition Holdings, Inc. through contributions from Carlyle Partners III, L.P. and CP III Coinvestment, L.P. We are an indirect wholly-owned subsidiary of UCI Holdco, Inc. (“UCI Holdco”). We and UCI Holdco are corporations formed at the direction of The Carlyle Group, which we refer to as Carlyle. UCI Holdco has $295.1$324.1 million of Floating Rate Senior PIK Notes (the “Holdco Notes”) outstanding. While UCI has no direct obligation under the Holdco Notes, UCI is the sole source of cash generation for UCI Holdco. The Holdco Notes do not appear on our balance sheet and the related interest expense ison the Holdco Notes and other general and administrative expenses of UCI Holdco are not included in our income statement.

Our Industry

According to the 2009 Automotive2010 AAIA Digital Aftermarket Factbook (the “AAIA Report”“Factbook”), the U.S. automotiveNorth American light vehicle aftermarket (excluding tires) is large and fragmented, with an estimated $188$210 billion of aggregate sales in 2007.2008. Light vehicles are defined as those typically weighing less than 14,000 pounds.  The vehicle replacement parts industry contains numerous suppliers and is characterized by one or two key competitors in each product line. We believe that customers within the aftermarket industry are increasingly focused on consolidating their supplier base, and therefore place a premium on suppliers with customized service and consistent and timely availability and delivery of products. Our industry is also characterized by relatively high barriers to entry, which include the need for significant start-up capital expenditures, initial part number breadth within a product line, proven product quality, distribution infrastructure and long-standing customer relationships.

The vehicle parts industry is comprised of five main sales channels: the retail sales channel, the traditional sales channel, the heavy-duty sales channel, the original equipment service, or OES, sales channel and the OEM sales channel. The retail, traditional, heavy-duty and OES sales channels together comprise the aftermarket, which has significantly different characteristics than the OEM sales channel. While product sales for use byto OEMs are one-time sales for the production of new vehicles and are therefore tied to fluctuations in annual vehicle production volumes, product sales in the aftermarket are repeat sales of replacement parts for the entire base of vehicles on the road and are less susceptible to changes in production volumes for new cars.

 
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Within the five main sales channels, the U.S. automotiveNorth American light vehicle aftermarket is primarily organized around two groups of end-users: the DIY, or do-it-yourself (“DIY”) group and the DIFM, or do-it-for-me (“DIFM”) group. The DIY group, which is supplied primarily through the retail channel (e.g., Advance Auto Parts, AutoZone and O’Reilly and Wal-Mart)Auto Parts), represented approximately 21%20% of industry-wide aftermarket sales in 2008, and consists of consumers who prefer to do various repairs on their vehicles themselves. The DIFM group is supplied primarily through the traditional channel (e.g., Alliance, CARQUEST, NAPA Alliance and Network) and the OES channel, which represented approximately 79%80% of industry-wide aftermarket sales in 2008, and consists of car dealers, repair shops, service stations and independent installers who perform the work for the consumer.

According to the AAIA Report,Factbook, the automotiveNorth American vehicle aftermarket (excluding tires) has grown at ana compounded annual average growth rate of 3.9%3.5% from 1998-2007. This1998-2009.  In 2008, however, aftermarket sales grew by only 0.1% and 2009 aftermarket sales are estimated to have declined by 1.2% due to the challenging economic environment.  The overall growth in aftermarket sales has been primarily driven by:

Increase in miles driven.The demand for the majority of aftermarket products is tied to the regular replacement cycle or the natural wearing cycle of a vehicle part and, in turn, is heavily influenced by actual miles a vehicle is driven. Over the past decade, miles driven has had an average annual growth rate of 0.9%. Since 1970, miles driven has decreased only four times, 1974 (-1.4%); 1979 (-1.2%); 1980 (-.05%); and 2008 (-3.6%). Although miles driven decreased in 2008, that figurethe total miles driven in 2008 is 9.5% higher than miles driven ten years ago.prior. We expect that miles driven per vehicle will recover over time and begin to increase and, as a result, the need for automotive component replacement parts will also increase.

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Growing base of vehicles and registrants.vehicles. From 1998 to 2007,2009, the number of registered passenger cars and light trucks or light vehicles (defined as vehicles with gross vehicle weight of less than 14,000 lbs.), increased by approximately 22.3% and the number of licensed drivers increased by approximately 11%22.6%. With more than 240 million light vehicles currently on the road, we expect there will be an increasing need for replacement parts and general maintenance.

Aging vehicle population.From 19971998 to 2007,2008, the averagemedian age of passenger cars in use grew from 8.78.3 years to 10.4 years.9.4 years, due to a growing population of vehicles eleven or more years of age. The significant increase in the averagemedian age for passenger cars is expected to drive growth for aftermarket services due to the large number of vehicles entering the prime age for aftermarket maintenance (six(seven to 12 years old).

Our Strategy

Our strategic objective is to achieve profitable growth and maximize return on invested capital by:
Focusing on Key Product Lines.By divesting three non-core operations, we
Leveraging Unique Value-Added Services to Our Customers.  We have concentratedinvested significant resources to develop differentiated services for our focus oncustomers, particularly in the areas of category management, fill rates and broad product coverage.  As category management becomes a key supplier deliverable for long-term success in the aftermarket, our four core product lines. In addition, our strategic acquisition of ASC increased our market share in water pumps,unique category management capabilities serve as a key differentiator and we believe it has improved our cost structure through more efficient sourcing and manufacturing processes.
Improving Global Sourcing and Manufacturing.We continually seek to lowerenhances our overall customer relationships.  With our experienced professionals using specialized software and proprietary processes and tools, we are able to analyze many industry, competitive and customer specific inputs to develop and recommend specific targeted actions to our customers.  These targeted actions are designed to help customers, among other things, improve their return on investment, develop category growth plans, execute customer retention tactics and effectively maximize pricing opportunities.  Internally, our category management capabilities allow us to make timely make-versus-buy decisions, manage our inventory investment more effectively and maintain world class order fill rates, all while maintaining broad product costscoverage with over 47,000 part numbers.  The strength of our category management capabilities is evidenced by improving our sourcingstatus as Category Captain in one or more of our product lines at the majority of our retail and manufacturing processes. Through our acquisition of ASC, we have obtained proven global sourcing capabilities and a China manufacturing platform.large traditional channel customers.  We have completed the process of integratingalso been successful at providing this broad product offering with leading fill rates, allowing our existing water pump business with ASC, which we expectcustomers to reduce inventory levels.  We will result in significant operational savings. We believe we have additional opportunities for meaningful cost savings by leveragingcontinue to utilize these unique, value-added services as a key differentiator against our China manufacturing and sourcing expertise across our other product lines.competition.

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Continuing to Grow Market Share.Share in Core Markets. We will continue to focus on increasing our market share and driving growth in each of our product lines by strengthening our existing customer relationships, expanding our sales forceefforts and enteringoffering the same level of value–added services to new customers in our core markets. As a result of these efforts we have expanded our product lines resulting in higher end consumer sales with existing customers including Advance, AutoZone, Alliance and CARQUEST.  In addition to expanding revenue with existing customers, we have also recently won business with CARQUESTAlliance and Exxon Mobil, andNAPA at our Airtex business due to our demonstrated capabilities of adding value to our customers.  We also continue to expand our share of ourthe engine management business in the traditional channel. We continue to strengthenchannel and have strengthened our position in the heavy duty channelchannel.

Growing and believe thatExpanding Share in International and Adjacent Markets.  Unlike many competitors, we have an established global manufacturing, distribution and customer footprint.  We have initiatives underway to leverage this channel continuesfootprint by making strategic investments in international product offerings and using internationally recognized brands (such as Luber-finer and Airtex) to provide oneexpand existing customers’ market share and attract new customers.  We also have initiatives to take advantage of new sales opportunities in identified adjacent markets where our low-cost country qualification, procurement and distribution capabilities can be leveraged into similar products to the ones we currently provide.

Improving Global Sourcing and Manufacturing. We continually seek to lower our overall product costs by improving our sourcing and manufacturing processes. Through our acquisition of ASC, we obtained proven global sourcing capabilities and a China manufacturing platform.  We have since made substantial investments to establish filtration and fuel pump manufacturing capabilities in China.  With significant available capacity in our Chinese facilities, we have near-term plans to place additional product manufacturing in China to take further advantage of our best opportunities for growth. Also, we have increased our focus on international markets with the formation of trading companies in Mexicolow-cost country manufacturing and China.sourcing resources.

Implementing Cost Reduction Initiatives.We have developed a culture that drives daily cost reduction and continuous improvement.  As part of this lean cost culture, we have pursued and will continue to pursue opportunities to optimize our resources and reduce manufacturing costs through various initiatives. WeAs an example of this culture, we have consolidated several of our distribution and manufacturing facilities since 2003 in order to maximize capacity utilization. WeAdditionally, we have implemented inventory management systems at our filtration products and fuel products facilities in order to reduce inventory while increasing our order fill rates. We are also utilizing centralized procurement for common raw material purchases across all of our plantsThis lean cost culture has resulted in North America.increased sales per employee and industry leading margins.  We believe these and other initiatives will result in significant cost savings.savings still exist to further improve our profitability, including identified further sourcing and manufacturing alignment initiatives.

Our Products

We have an extensive line of product offerings made up ofincluding over 43,00047,000 part numbers, which fall into four primary categories: filtration products, fuel products, cooling products and engine management products.  The majority of these products, including fuel pumps, water pumps and engine management products, are non-discretionary parts that must be replaced for vehicles to operate.  In addition, filtration products are tied to regular maintenance intervals, providing a recurring sales stream. Set forth below is a description of our products and their respective percentages of 20082009 net sales:

��
Percent of
Products 2008
Percent of
2009 Net Sales
 Description
Filtration Products 41.5%39.2% Oil, air, fuel, hydraulic, transmission, cabin air and industrial filters and PCV valves
Fuel Products 24.8%25.1% Fuel pump assemblies, electric fuel pumps, mechanical fuel pumps and fuel pump strainers
Cooling Products17.5%Water pumps, fan clutches and other products
Engine Management Products 16.2%18.4% Caps, rotors, emission controls, sensors, ignition controls, coils and switches
Cooling Products17.3%Water pumps, fan clutches and other products
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Filtration Products

We are a leading designer and manufacturer of a broad range of filtration products for the automotive, trucking, construction, mining, agriculture and marine industries, as well as other industrial markets. We distribute to both the aftermarket and OEMs. Our primary aftermarket competitors include Honeywell Consumer Products Group (FRAM), Bosch/Mann+Hummel (Purolator) and The Affinia Group (Wix). Our primary heavy duty competitors include Cummins (Fleetguard), Donaldson and Clarcor.Clarcor (Baldwin).

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We are one of the leading global manufacturers of private label filter products.filters. Our filtration product offering consistsproducts consist of approximately 4,9004,950 part numbers and includesinclude oil filters, air filters, fuel filters, transmission filters, cabin air filters, PCV valves, hydraulic filters, fuel dispensing filters and fuel/water separators. Set forth below is a description of our filtration products:
•Oil Filters:Designed to filter engine oil and withstand operating pressures of 40 to 60 PSI at 250° F to 300° F;
•Air Filters:Designed to filter the air that enters the engine combustion chamber;
•Fuel Filters:Designed to filter the fuel immediately prior to its injection into the engine; and
•Other Filters:Includes cabin air filters, transmission filters, hydraulic filters, PCV valves and industrial filters.

Oil Filters: Designed to filter engine oil and withstand operating pressures of 40 to 60 PSI at 250° F to 300° F;
Air Filters: Designed to filter the air that enters the engine combustion chamber;
Fuel Filters: Designed to filter the fuel immediately prior to its injection into the engine; and
Other Filters: Includes cabin air filters, transmission filters, hydraulic filters, PCV valves and industrial filters.

Fuel Products

We are a leading designer and manufacturer of a broad range of fuel delivery systems. Our fuel delivery systems are distributed to both the aftermarket and OEMs under the Airtex and Master Parts brand names and some private labels. Our primary fuel pump competitor iscompetitors are Federal-Mogul (Carter)., AC Delco, Delphi, and Bosch. Set forth below is a description of our fuel system products:
•Fuel Pumps:Serve the essential role of moving fuel from the fuel tank into the engine, with approximately 1,250 fuel pumps for carbureted and fuel-injected applications; and
•Fuel Pump Assemblies:Provide for easier, and therefore faster, installation and allow the technician to charge a similar fee for a repair that is less time-intensive than replacing an individual fuel pump. We manufacture all three types of in-tank assemblies: hangers, senders and modules with approximately 650 in-tank fuel pump assemblies.

Cooling Products
Fuel Pumps: Serve the essential role of moving fuel from the fuel tank into the engine, with approximately 950 fuel pumps for carbureted and fuel-injected applications; and
Fuel Pump Assemblies: Provide for easier, and therefore faster, installation and allow the technician to charge a similar fee for a repair that is less time-intensive than replacing an individual fuel pump. We are a leading designermanufacture all three types of in-tank assemblies: hangers, senders and manufacturer of a broad range of cooling systems. Our cooling systems products are distributed to both the aftermarket and OEMs under the Airtex, ASC and Master Parts brand names and some private labels. The acquisition of ASC, previously our primary watermodules with approximately 700 in-tank fuel pump competitor, has significantly enhanced our water pump business. Currently, our primary water pump competitor is GMB North America, Inc. Set forth below is a description of our cooling systems products:assemblies.
•Water Pumps:Serve the essential role of dissipating excess heat from the engine with approximately 1,350 distinct types of water pumps; and
•Other:Includes industrial components and other products with a selection of approximately 1,450 other part numbers.

Engine Management Products

We design and manufacture a broad line of engine management components distributed to both the aftermarket and OEMs under the Wells and Airtex Engine Management brand names. We believe that we have one of the industry’s most comprehensive lines of highly engineered engine management system components for use in a broad range of vehicle platforms. Additionally, our engine management components offerings allow us to distribute specialty or “hard-to-find” products to the aftermarket and OEM channels.

Engine management components include distributor caps and rotors, ignition coils, electronic controls, sensors, emissions components, solenoids, switches, voltage regulators and wire sets. These products are primarily used to regulate the ignition, emissions and fuel management functions of the engine and determine vehicle performance. Replacement rates for these products are higher for vehicles that have reached the primary repair age range of sixseven to 12 years old. Our product offeringproducts in this category consistsconsist of approximately 34,00038,300 part numbers. Primary competitors for engine management products include Standard Motor Products and AC Delco, Delphi,Delco.

Cooling Products

We are a leading designer and Bosch.manufacturer of a broad range of cooling systems. Our cooling systems products are distributed to both the aftermarket and OEMs under the Airtex, ASC and Master Parts brand names and private labels. The acquisition of ASC has significantly enhanced our water pump business. Currently, our primary water pump competitors are GMB North America, Inc. and Gates Corporation.  Set forth below is a description of our cooling systems products:

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Water Pumps: Serve the essential role of dissipating excess heat from the engine with approximately 1,600 distinct types of water pumps; and
Other: Includes industrial components and other products with a selection of approximately 500 other part numbers.

Our Sales Channels and Customers

Our sales are diversified between the automotive aftermarket sales channels (comprised of the retail,(retail, traditional, heavy-duty and OES sales channels of distribution)OES) and the OEM sales channel, which enables us to capture demand throughout the life cycle of the vehicle. In the early part of a vehicle’s life, the OES channel services a significant percentage of aftermarket vehicle maintenance and repair volume.volume as the vehicle is under the original OEM warranty period. However, as vehicles age and their warranties expire, consumers increasingly rely on the retail or traditional aftermarket channels for vehicle maintenance.

The Aftermarket
     We estimate that over 87%
Approximately 88% of our 20082009 net sales were to the aftermarket, which is subdivided into four primary channels: retail, traditional, heavy-duty and OES.

The retail channel represented approximately 44%47% of our 20082009 net sales. The retail channel is our largest channel and has historically provided us with a steadily increasing revenue stream. As retailers become increasingly focused on consolidating their supplier base, we believe that our broad product offering, product quality and customer service make us increasingly valuable to these customers. One of our longest standing customers is AutoZone, which we have been supplying since the opening of theirits first store in 1979. We believe that we are one of the few suppliers in the industry that can provide AutoZone with the levels of quality, customer service and product breadth that AutoZone requires, which is substantiated by our receipt of multiple awards from AutoZone since 1994, including the “Extra Miler” Award 2007 and 2008, Vendor of the Year Award 2008, and “Whatever it Takes to do the Job Right” Award 2008. In addition to AutoZone, otherOther awards we have received in the retail channel include O’Reilly Auto Parts “Changeover Award” in 2009 for work with O’Reilly Auto Parts’ acquisition of CSK, O’Reilly Auto Parts Vendor of the Year 20062007 and Advance Auto Parts Vendor of the Year 2005.

The traditional channel is composedcomprised of established warehouses and installers and represented approximately 24%25% of our 20082009 net sales. The traditional channel is important to us because it is the primary source of products for professional mechanics, or the DIFM market. We have many long-standing relationships with leading customers in the traditional channel, such as CARQUEST and NAPA, for whom we have supplied products for over 20 years. We believe that our strong position in this channel allows us to capitalize on the growth of the traditional channel within the aftermarket. We believe that professional mechanics place a premium on the quality of a product and unlike the retail channel, end users in this channel require manufacturers to provide a high level of individual customer service, including field support and product breadth and depth. Awards from customers in the traditional channel include: CARQUEST Vendor of the Year Award 2005;2005, 2006 and 2007; NAPA Excellence in Shipping Performance 2005; Automotive Distribution Network Preferred Vendor Award 2005; Aftermarket Auto Parts Alliance “Gold Level Supplier for Outstanding Shipping Performance 2007”;2007,” and Aftermarket Auto Parts Alliance “Outstanding Private Label Vendor 2006”.2006.”

The traditional channel also includes installers such as quick lubes, tire dealers and full service gas stations. Almost all of our sales to installers consist of filtration products, which are supplied to the national and regional service chains through distributors such as Valvoline Firestone and Mighty.Firestone. Installers require “Just-In-Time” availability, ability to meet competitive price points and product breadth and depth.

We believe the large and highly fragmented heavy-duty aftermarket channel, which accounted for approximately 10%8% of our 20082009 net sales, provides us with one of our best opportunities for growth. We believe heavy-duty truck owners tend to be less price-sensitive and more diligent about maintenance of their vehicles than vehicle owners in other markets, as idle vehicles typically represent lost revenue potential for heavy-duty truck owners. As a result, we believe that heavy-duty trucks are more likely to have consistent routine maintenance performed with high quality parts. We believe we have developed a well-recognized brand presence in this channel through our Luber-finer brand of filtration products.

 
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The OES channel is comprised of a diverse mix of dealership service bays in the automotive, truck, motorcycle and watercraft vehicle markets, and represented approximately 9%8% of our 20082009 net sales. A substantial majority of our OES 20082009 net sales were derived from sales of filtration products.products and cooling systems. Our position in this channel allows us to capitalize on vehicle maintenance in the early years of a vehicle’s life, when the vehicle is under warranty and the consumer typically returns to the dealer for routine maintenance. Our most significant OES channel customers include service parts operations associated with companies such as GM, Ford and Chrysler.

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Original Equipment Manufacturers

Although the OEM channel comprised only approximately 8%7% of our 20082009 net sales, it is an important sales channel to us because OEM affiliations have a direct impact on our aftermarket credibility. We believe aftermarket customers show a preference for products that were utilized in original equipment. We sell products to a diverse mix of OEMs, enabling us to capitalize on a number of different opportunities and market shifts. Our OEM products are sold to end users within each of the following categories:
•Automotive:Chrysler, Ford, GM, Remy, Siemens and Volkswagen
•Recreational Equipment:Onan and Polaris
•Heavy-duty Truck:Caterpillar, Freightliner, GM and Parker Hannifin
•Agriculture:John Deere and Kubota
•Marine:Mercury Marine and Sierra Supply
•Lawn and Garden:Briggs and Stratton, John Deere and Kohler
•Motorcycle:Harley-Davidson and Kawasaki

Customers
Automotive: Chrysler, Ford, GM, Remy and Volkswagen
Recreational Equipment: Onan and Polaris
Heavy-duty Truck: Caterpillar, Freightliner, GM, Parker Hannifin and Perkins
Agriculture: John Deere and Kubota
Marine: Mercury Marine and Sierra Supply
Lawn and Garden: Briggs and Stratton, John Deere and Kohler
Motorcycle: Harley-Davidson and Kawasaki

Customers

We distribute our products primarily in North America and Europe to customers across several sales channels, including the retail, traditional, installer and OES aftermarket channels and OEMs of automotive, trucking, agricultural, marine, mining and construction equipment. We have maintained long-standing relationships with our customers and have been servicing many for well over a decade. Some of our most significantOur top five customers includein 2009 included AutoZone, GM, CARQUEST, Ford, Valvoline and Advance Auto Parts.Parts, O’Reilly Auto Parts, CARQUEST and General Motors. Sales to AutoZone were approximately 30% of our total net sales in 2009 and 29% of our total net sales in 2008 and 28% of our total net sales in 2007.2008. Our customers include:
•Retail:Advance Auto Parts, AutoZone, CSK and O’Reilly
•Traditional:Alliance, Network, CARQUEST and NAPA
•Installer:Firestone, Mighty, Service Champ and Valvoline
•OES:Ford, GM Service Parts Organization and Saturn
•OEM:Ford, Chrysler, GM, Remy and Siemens
•Heavy Duty:Caterpillar, Freightliner, Mr. Lube and Parker Hannifin

Retail: Advance Auto Parts, AutoZone and O’Reilly Auto Parts
Traditional: Alliance, CARQUEST, NAPA, Network and Uni-Select
Installer: Firestone, Service Champ and Valvoline
OES: Ford, GM Service Parts Organization and Saturn
OEM: Ford, Chrysler, GM and Remy
Heavy Duty: Caterpillar, Freightliner, Mr. Lube, Parker Hannifin and Perkins

Sales and Marketing

We market our products predominantly throughout North America and Europe. In 2007, we completed water pumpto a wide range of customers across a variety of global sales to our first customer in China.channels. To effectively address the requirements of our customers and end users, our sales people are primarily organized by product category and secondarily by sales channel. During 2006, we combined the individual in-house sales forces for each product category in the traditional channel into one UCI sales force and also established a new export sales force. Generally, weWe are increasing our focus on international markets and believe there are opportunities for growth in selected areas. For financial information concerning geographic distribution of our 2007, 2008 and 2009 net sales, see Note 1918 to our audited consolidated financial statements included in this report.Form 10-K.

We use both a direct sales representativesforce and independent manufacturers’ representatives to market and sell our products. The number of sales personnel varies within each sales group. Each sales group is uniquely qualified to sell theirits particular products and to focus on the requirements of theirits particular market. We believe that the market positions we hold with respect to certain of our products are, in part, related to the specialization of our sales groups.

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Operations
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Operations

Our operational strategy is to pursue operational excellence at all of our facilities. This initiativestrategy encompasses a lean enterprise strategy, the goals ofphilosophy which includefocuses on continuous improvement in inventory management, customer delivery, plant utilization and cost structure. The foundation for this strategy is based in the principles of lean manufacturing, which targets the elimination of waste from every business process.

We have already made substantial progress in the implementation of lean manufacturing and have received the related benefits. We plan to continue our emphasis on lean manufacturing and, where appropriate, to expandby expanding its use at all of our plants. facilities. As a result of this lean cost culture, we have consolidated several of our distribution and manufacturing facilities since 2003 which allowed us to reduce our cost structure, maximize capacity utilization and generate industry leading margins.

We have expanded our global manufacturing and sourcing capabilities through the ASC acquisition, addingwhich added two manufacturing facilities and an engineering and procurement office. In orderoffice in China.  We have since made substantial investments to reduce costsestablish filtration and maximizefuel pump manufacturing capabilities in China.  With significant available capacity utilization,in our Chinese facilities, we have consolidated severalnear-term plans to place additional product manufacturing in China to take further advantage of our distributionlow-cost country manufacturing and manufacturing facilities since 2003.sourcing resources.

In addition, we will continue to examine each of our logistics and distribution systems with an objective of developing an integrated system that fully meets customer requirements, eliminates redundancies, lowers costs and minimizes inventories and cycle times.

Suppliers and Raw Materials

We purchase various components and raw materials for use in our manufacturing processes. We also purchaseprocesses as well as purchasing finished parts for resale. In 2008,2009, we sourced purchases from approximately 1,200 suppliers. Our raw materials include steel and other commodities, such as aluminum, iron, plastic and other petrochemical products, packaging material and media, for which globalmedia.  During periods of peak demand has been high, resulting insuch as 2008, we have experienced significant price increases and/or surcharges. More recently, the demand for many of the commodities used in our business has lessened and we have experienced lower prices on many of our commodities.  While we have been, and expect to continue to be able to obtain sufficient quantities of these raw materials to satisfy our needs, in some cases we have been required to pay significantly higher prices, and in the future we may be required to pay higher prices and/or have difficulty procuring these raw materials.
     Some of
To manage our purchasing is accomplished throughsupply spending, we have established a centralized purchasing organization, including a group of dedicated buyers at each of locations.  This organization consists of 56 employees, including 18 individuals in China.  While specific raw material and product expertise resides largely at our operating locations, we coordinate overall procurement activities through our centralized purchasing organization, which enables us to leverage the collective buying power of the Company.  WeThe centralized purchasing organization also are beginning to leverage our ASC China sourcing expertise across our product lines. We believe that centralized procurementestablishes the strategy and increased global sourcing represent attractive opportunities to lower the cost of our purchased materials.policy for contracts and commodity risk management in areas such as steel, aluminum, plastics, petrochemical products, packaging and media.

Trademarks and Patents

We rely on a combination of patents, trademarks, copyright and trade secret protection, employee and third-party non-disclosure agreements, license arrangements and domain name registrations to protect our intellectual property. We sell many of our products under a number of registered trademarks, which we believe are widely recognized in the sales channels we serve. No single patent, trademark or trade name is material to our business as a whole.
Employees
Employees

As of December 31, 2008,2009, we had approximately 4,9004,350 employees, with union affiliations and collective bargaining agreements at two of our businesses, representing approximately 9% of our workforce. Management considers our labor relations to be good and our labor rates competitive. Since 1984, we have had one minor three-day work stoppage at a Fairfield, Illinois plant which took place in August 2004. The work stoppage2004 and did not result in any material change in capacity or operations at the plant or the business as a whole.

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Environmental and Health and Safety Matters

We are subject to a variety of federal, state, local and foreign environmental laws and regulations, including those governing the discharge of pollutants into the air or water, the management and disposal of hazardous substances or wastes and the cleanup of contaminated sites. Some of our operations require environmental permits and controls to prevent and reduce air and water pollution, and these permits are subject to modification, renewal and revocation by issuing authorities. We are also subject to the U.S. Occupational Health and Safety Act and similar state and foreign laws. We believe that we are in substantial compliance with all applicable material laws and regulations in the United States. Historically, our costs of achieving and maintaining compliance with environmental and health and safety requirements have not been material to our operations.

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We have been identified as a potentially responsible party for contamination at twothree formerly operated sites. One of these sites is a former facility in Edison, New Jersey, (the “New Jersey Site”) where a state agency has ordered us to continue with the monitoring and investigation of chlorinated solvent contamination. We have informedThe New Jersey Site has been the agency that this contamination was caused by another party atsubject of litigation to determine whether a neighboring facility and have initiated a lawsuit againstwas responsible for contamination discovered at the New Jersey Site. A judgment has been rendered in that partylitigation to the effect that the neighboring facility is not responsible for damages and to compel it to take responsibility for anythe contamination. UCI is analyzing what further investigation or remediation.and remediation, if any, may be required at the New Jersey Site. The second site is a previously owned site in Solano County, California. At the request of the regional water board, we are investigating and analyzing the nature and extent of the contamination and are conducting some remediation. In addition to the two matters discussed above, UCI has been named as a potentially responsible party at a site in Calvert City, Kentucky.  Based on currently available information, management believes that the cost of the ultimate outcome of these environmental matters will not exceed the amounts accrued at December 31, 20082009 by a material amount, if at all.

ITEM 1A.RISK FACTORS

We wish to caution the reader that the following important risk factors, and those risk factors described elsewhere in this report or our other Securities and Exchange Commission filings, could cause our actual results to differ materially from those stated in forward-looking statements contained in this document and elsewhere.

The Company may be adversely affected by the current economic environment.

As a result of the credit market crisis, dramatic increases in energy costs and other challenges currently affecting economic conditions in the United States and other parts of the world, customers may delay or cancel plans to purchase our products. In addition, some of our customers are likely to experience serious cash flow problems and, as a result, may find it difficult to obtain financing, if financing is available at all. If our customers are not successful in generating sufficient revenue or securing alternate financing arrangements, they may be unable to pay, or may delay payment of, the amounts that they owe us. Any inability of current or potential customers to pay us for our products may adversely affect our cash flow, the timing of our revenue recognition and the amount of revenue.

Further, some of our vendors are likely to experience serious cash flow problems and, as a result, may find it difficult to obtain financing, if financing is available at all. If our vendors are not successful in generating sufficient revenue or securing alternate financing arrangements, they may no longer be able to supply goods and services to us. In that event, we would need to find alternate sources of these goods and services, and there is no assurance that we would be able to find such alternate sources on favorable terms, if at all. Any such disruption in our supply chain could adversely affect our ability to manufacture and deliver our products on a timely basis, and thereby adversely affect our results of operations.

If economic conditions in the United States and other key markets deteriorate further or do not show improvement, we believe that we may experience material adverse impacts to our business and operating results.
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Our relationship with AutoZone creates risks associated with a concentrated net sales source.

We generate a large percentage of our sales from our business with AutoZone, but we cannot assure you that AutoZone will continue to purchase from us. Sales to AutoZone accounted for approximately 30% of our total net sales in fiscal 2009 and 29% of our total net sales in fiscal 2008, and 28% of our total net sales in 2007, respectively. Several of our competitors are likely to pursue business opportunities with this customer and threaten our current position. If we fail to maintain this relationship, our net sales will be significantly diminished. Even if we maintain our relationship, our net sales concentration as a result of this relationship increases the potential impact to our business that could result from any changes in the economic terms of this relationship. Any change in the terms of our sales to this customer could have a material impact on our financial position and results of operations.

If the automotiveNorth American light vehicle aftermarket adopts more expansive return policies or practices such as extended payment terms, our cash flow and results of operations could be harmed.

We are subject to returns from customers, some of which may manage their excess inventory through returns. In line with industry practices, arrangements with customers typically include provisions that permit them to return specified levels of their purchases. Returns have historically represented approximately 3% to 5% of our sales. If returns from our customers significantly increase, our profitability may be adversely affected. In addition, some customers in the automotiveNorth American light vehicle aftermarket are pursuing ways to shift their costs of working capital, including extending payment terms. To the extent customers extend payment terms, our cash flow may be adversely affected.

As a supplier to the automotive industry, we face certain risks due to the nature of the automotive business.

As a supplier of automotive products, our sales and our profitability could be negatively impacted by changes in the operations, products, business models, parts-sourcing requirements, financial condition, market share or consumer financing and rebate programs of our automotive customers. In addition, demand for our automotive products is linked to consumer demand for automobiles, which has been, and may continue to be, adversely impacted by the continuing uncertain economic environment.

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Our business could be adversely affected if GM and/or Chrysler filed for bankruptcy or were unable to comply with the terms of the Secured Term Loan Facility provided by the U.S. Treasury and any additional requirements of the Troubled Asset Relief Program (TARP).
     In the fourth quarter of 2008, both GM and Chrysler publicly announced that they would not be able to meet near-term working capital requirements without additional private funding, which seemed unlikely based on the distress in the credit markets, or assistance from the federal government. Both GM and Chrysler secured financing commitments by entering into loan agreements with the U.S. Treasury and began borrowing under those agreements in the fourth quarter of 2008. These loan agreements are conditioned upon submitting viable plans of reorganization and sustainability to the President of the United States in the first quarter of 2009. On February 17, 2009, both companies submitted their viability plans and are required to provide a progress report of their viability plan by March 31, 2009. If the U.S. government does not approve of the submitted plans, it may accelerate the repayment of the loans provided to either or both companies.
     Even if the U.S. government allows the loans provided to GM and Chrysler to remain outstanding, it is not certain that the loans will be sufficient to meet their working capital requirements in 2009 or future periods. As part of their viability plans, both companies have requested additional funding from the U.S. government to cover near-term liquidity requirements. It is possible that additional funding, public or private, would not be available to meet these needs.
     We sell products to both GM and Chrysler and GM is a significant customer of ours. If either GM or Chrysler is unable to continue operations, we could suffer unfavorable consequences, such as payment delays, inability to collect trade and other accounts receivable, price reductions, production volume declines or the failure to honor contractual commitments including sourcing decisions and financial obligations.
The current economic environment and adverse credit market conditions may significantly affect our ability to meet liquidity needs and access to capital.

The capital and credit markets have been experiencing extreme volatility and disruption for more than 12 months. In recent months the volatility and disruption have reached unprecedented levels. Theas a result, the markets have exerted downward pressure on the availability of liquidity and credit capacity for many issuers. While currently these conditions have not materially impaired our ability to operate our business, there can be no assurance that there will not be a further deterioration in financial markets and confidence in major economies, which could increase the cost of financing.

We need liquidity to pay our operating expenses, interest on our debt and capital expenditures. Without sufficient liquidity, we will be forced to curtail our operations, and our business will suffer. Our primary sources of liquidity are cash on hand, cash flow from operations and borrowings under our existing revolving credit facility, which terminates in June 2009. We are currently in negotiations to extend or replace our revolving credit facility; however, in the current environment, we cannot be assured that our revolving credit facility will be available for borrowing, or that we will be able to replace the revolving credit facility upon its expiration in June 2009. In the event that we are unable to access or replace our revolving credit facility, we may have to seek additional financing, the availability of which will depend on a variety of factors such as market conditions, the general availability of credit, the overall availability of credit to the financial services industry, our credit ratings and credit capacity. In addition, our customers or lenders could develop a negative perception of our long- or short-term financial prospects if the level of our business activity decreased due to a market downturn.
      Factoringfactoring of customer trade accounts receivable is a significant part of our liquidity.receivable. Subject to certain limitations, UCI’s credit agreement for its senior credit facility permits sales of and liens on receivables, which are being sold pursuant to factoring arrangements. At December 31, 2008,2009, we had factoring relationships with sixeight banks. The terms of these relationships are such that the banks are not obligated to factor any amount of receivables. Because of the current challenging capital markets, it is possible that these banks may not have the capacity or willingness to fund these factoring arrangements at the levels they have in the past, or at all.

Our lean manufacturing and other cost saving plans may not be effective.

Since our formation, our strategy has included goals such as improvement of inventory management and customer delivery and plant and distribution facility consolidation. While we have and will continue to implement these strategies, there can be no assurance that we will be able to do so successfully or that we will realize the projected benefits of these and other cost saving plans. If we are unable to realize these anticipated cost reductions, our financial health may be adversely affected. Moreover, our continued implementation of cost saving plans and facilities integration may disrupt our operations and performance.

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It may be difficult for us to recruit and retain the types of highly-skilled employees we need to remain competitive.

Our continued success will also depend on our ability to recruit, retain and motivate highly skilled sales, marketing and engineering personnel. Competition for persons in our industry is intense, and we may not be able to successfully recruit, train or retain qualified personnel. If we fail to retain and recruit the necessary personnel, our business and our ability to obtain new customers and retain existing customers, develop new products and provide acceptable levels of customer service could suffer. We have entered into employment agreements with certain of our key personnel. However, we cannot assure you that these individuals will stay with us. If any of these persons were to leave our company, it could be difficult to replace him or her, and our business could be harmed.

We may be subject to work stoppages at our facilities, or our customers may be subjected to work stoppages, either of which could negatively impact the profitability of our business.

As of December 31, 2008,2009, we had approximately 4,9004,350 employees, with union affiliations and collective bargaining agreements at two of our businesses, representing approximately 9% of our workforce. Other than a three-day work stoppage at aour Fairfield, Illinois plant in August 2004, we have not had a labor stoppage since 1984. Although we believe that our relations with our employees are currently good, if our unionized workers were to engage in a strike, work stoppage or other slowdown in the future, we could experience a significant disruption of our operations, which could interfere with our ability to deliver products on a timely basis and could have other negative effects, such as decreased productivity and increased labor costs. In addition, many of our direct and indirect customers have unionized work forces. Strikes, work stoppages or slowdowns experienced by these customers or their other suppliers could result in slowdowns or closings of assembly plants that use our products. Organizations responsible for shipping our products may also be impacted by occasional strikes. Any interruption in the delivery of our products could reduce demand for our products and could have a material adverse effect on us.

We are subject to increasing pricing pressure from import activity, particularly from Asia.

Price competition from automotive aftermarket manufacturers, particularly based in Asia and other locations with lower production costs, have historically played a role and may play an increasing role in the aftermarket channels in which we compete. Pricing pressures have historically been more prevalent with respect to our filter products than our other products. While aftermarket manufacturers in these locations have historically competed primarily in markets for less technologically advanced products and manufactured a limited number of products, they are expanding their manufacturing capabilities to move toward producing a broad range of lower cost, higher quality products and provide an expanded product offering. Partially in response to these pressures, we opened two new factories in China in 2008. In the future, competitors in Asia may be able to effectively compete in our premium markets and produce a wider range of products, which may force us to move additional manufacturing capacity offshore and/or lower our prices, reducing our margins and/or decreasing our net sales.

Increased crude oil and energy prices and overall economic conditions could reduce global demand for and use of automobiles, which could have an adverse effect on our profitability.

Material increases in the price of crude oil have, historically, been a contributing factor to the periodic reduction in the global demand for and use of automobiles. A significant increase in the price of crude oil could reduce global demand for and use of automobiles and shift customer demand away from larger cars and light trucks (including SUVs), which we believe have more frequent replacement intervals for our products, which could have an adverse effect on our profitability. For example, historic highs in crude oil prices and corresponding historic highs in gasoline prices at the pump in 2008 impacted consumers’ driving habits. In addition, particularly in the latter part of 2008 consumers’sand 2009, consumers’ driving habits have beenwere impacted by deteriorating economic conditions. Federal Highway AdministrationU.S. Department of Energy statistics indicate that miles driven in the United States for the year 2008 were 3.6%3.2% lower than for 2007. Miles driven in 2009 increased only slightly from 2008.  If total miles driven were to continue to decrease and consumers extend the mileage interval for routine maintenance, we could experience a decline in demand for our products due to a reduction in the need for replacement parts. Further, as higher gasoline prices and economic conditions result in a reduction in discretionary spending for auto repair by the end users of our products, our results of operations could be impacted.
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Environmental regulations may impose significant environmental compliance costs and liabilities on us.

We are subject to many environmental laws and regulations. Compliance with these laws and regulations is costly. We have incurred and expect to continue to incur significant costs to maintain or achieve compliance with applicable environmental laws and regulations. Moreover, if these environmental laws and regulations become more stringent in the future, we could incur additional costs. Our failure to comply with applicable environmental laws and regulations and permit requirements could result in civil or criminal fines, penalties or enforcement actions, third-party claims for property damage and personal injury, requirements to clean up property or to pay for the costs of cleanup or regulatory or judicial orders enjoining or curtailing operations or requiring corrective measures, including the installation of pollution control equipment or remedial actions.

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Some environmental laws and regulations impose liability for contamination on present and former owners, operators or users of facilities and sites without regard to causation or knowledge of contamination. We have been identified as a potentially responsible party for contamination at two sites, for which management believes it has made adequate reserves. See “Business — Environmental and Health and Safety Matters.” In addition, we occasionally evaluate various alternatives with respect to our facilities, including possible dispositions or closings. Investigations undertaken in connection with these activities may lead to discoveries of contamination that must be remediated, and closings of facilities may trigger remediation requirements that are not applicable to operating facilities. We may also face lawsuits brought by third parties that either allege property damage or personal injury as a result of, or seek reimbursement for costs associated with, such contamination.

We could face potential product liability claims relating to products we manufacture or distribute.

We face a business risk of exposure to product liability claims in the event that the use of our products is alleged to have resulted in injury or other adverse effects. We currently maintain product liability insurance coverage, but we cannot assure you that we will be able to obtain such insurance on acceptable terms in the future, if at all, or that any such insurance will provide adequate coverage against potential claims. Product liability claims can be expensive to defend and can divert the attention of management and other personnel for long periods of time, regardless of the ultimate outcome. An unsuccessful product liability defense could have a material adverse effect on our business, financial condition, results of operations or prospects. In addition, our business depends on the strong brand reputation we have developed. In the event that our reputation is damaged, we may face difficulty in maintaining our pricing positions with respect to some of our products or have reduced demand for our products, which could negatively impact our net sales and profitability.

We are subject to class action lawsuits alleging conspiracy violations of Section 1 of the Sherman Act, 15 U.S.C. § 1 and state law, related to aftermarket oil, air, fuel and transmission filters and lawsuits alleging violations of the Canadian Competition Act. If the plaintiffs in these lawsuits against us are successful, our financial condition, results of operations and liquidity, as well as our reputation may be materially and adversely affected.

United Components, Inc.’s wholly owned subsidiary, Champion Laboratories, Inc. (“Champion”), has been named as one of multiple defendants in two consolidated amended complaints alleging conspiracy violations of Section 1 of the Sherman Act, 15 U.S.C. § 1 and state law, related to aftermarket oil, air, fuel and transmission filters. The complaints are styled as putative class actions. One asserts claims on behalf of a putative class of direct filter purchasers and the other asserts claims on behalf of a putative class of indirect filter purchases. Both complaints seek damages, including statutory treble damages, an injunction against future violations, costs and attorney’s fees. Champion and United Components have both been named in a similar lawsuit filed by the Gasoline and Automotive Service Dealers of America (“GASDA”) trade association. The GASDA complaint seeks an injunction, costs and attorney’s fees. Champion, but not United Components, was also named as one of five defendants in a putative class action filed in Quebec, Canada. This action alleges conspiracy violations of the Canadian Competition Act and violations of the obligation to act in good faith (contrary to art. 6 of the Civil Code of Quebec) related to the sale of aftermarket filters. The plaintiff seeks compensatory damages against the five defendants in the amount of $5 million and $1 million in punitive damages. Champion, but not United Components, was also named as one of 14 defendants in a putative class action filed in Ontario, Canada. This action alleges civil conspiracy, intentional interference with economic interests, and conspiracy violations under the Canadian Competition Act related to the sale of aftermarket filters. The plaintiff seeks $150 million in general damage against the 14 defendants and $15 million in punitive damages. The Antitrust Division of the Department of Justice (DOJ) and Office of the Attorney General for the State of Florida areis also investigating the allegations raised in these suits. We are fully cooperating with the Florida Attorney General investigation.

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The Antitrust Division of the Department of Justice (DOJ) investigated the allegations raised in these suits and certain current and former employees of the defendants, including Champion, have testified pursuant to subpoenas.  On January 21, 2010, DOJ subpoenas. We are fully cooperating withsent a letter to counsel for Champion stating that “the Antitrust Division’s investigation into possible collusion in the DOJ and Florida Attorney General investigation.replacement auto filters industry is now officially closed.”

We intend to vigorously defend against these claims. However, the outcome of these class actions, like other litigation proceedings, is uncertain. Also, litigation and other steps taken to defend these lawsuits can be costly, and we may incur substantial costs and expenses in doing so. Multidistrict litigation is particularly complex and can extend for a protracted time, which can substantially increase the cost of such litigation. The defense of these lawsuits is also expected to divert the efforts and attention of some of our key management and personnel from the normal business operations of our company. As a result, our defense of this litigation, regardless of its eventual outcome, will likely be costly and time consuming. If the plaintiffs in these lawsuits against us are successful, it may result in substantial monetary damages, which could have a material adverse effect on our business, financial condition, results of operations, and liquidity as well as our reputation.

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Increases in our raw materials and component costs or the loss of a number of our suppliers could adversely affect our financial health.

We depend on third parties for the raw materials and components used in our manufacturing processes. We generally purchase our materials on the open market. However, in certain situations we have found it advantageous to enter into long-term contracts for certain commodities purchases. OneDuring much of our primary raw materials is2008, the cost of commodities, including steel, for which global demand has been high and for which we have been required to pay significantly higher prices since early in 2004. In addition, we are subject to increasing costs of other raw materials, including aluminum, iron, plastic and other petrochemical products, packaging materials and media, increased significantly compared to 2007. Energy costs also increased significantly during this period. These higher costs affected the prices we paid for raw materials and other raw materials.for purchased component parts and finished products. The prices of these commodities have fluctuated significantly in recent years and such volatility in the prices of these commodities could increase the costs of manufacturing our products and providing our services. We may not be able to pass on these costs to our customers and this could have a material adverse effect on our financial condition, results of operations or cash flows. While we currently maintain alternative sources for steel and other raw materials, our business is subject to the risk of additional price fluctuations and periodic delays in the delivery of our raw materials. Any such price fluctuations or delays, if material, could harm our profitability or operations. In addition, the loss of a substantial number of suppliers could result in material cost increases or reduce our production capacity. We are also significantly affected by the cost of natural gas used for fuel and the cost of electricity. Natural gas and electricity prices have historically been volatile.

We monitor sources of supply to attempt to assure that adequate raw materials and other supplies needed in manufacturing processes are available. However, we do not typically enter into hedge transactions to reduce our exposure to price risks and cannot assure you that we will be successful in passing on these attendant costs if these risks were to materialize. In addition, if we are unable to continue to purchase our required quantities of raw materials on commercially reasonable terms, or at all, or if we are unable to maintain or enter into purchasing contracts for commodities, our operations could be disrupted or our profitability could be adversely impacted.

We face competition in our markets.

We operate in some very competitive markets, and we compete against numerous different types of businesses. Although we have significant market positions in each of our product lines within the aftermarket, we cannot assure you that we will be able to maintain our current market share. In the OEM sales channel, some of our competitors have achieved substantially greater market penetration in many of the product lines which we offer. Competition is based on a number of considerations, including product performance, quality of client service and support, timely delivery and price. Our customers increasingly demand a broad product range, and we must continue to develop our expertise in order to manufacture and market these products successfully. To remain competitive, we will need to invest continuously in manufacturing, working capital, customer service and support, marketing and our distribution networks. We cannot assure you that we will have sufficient resources to continue to make such investments or that we will maintain our competitive position within each of the markets we serve. As a result of competition, we have experienced pricing pressure. There can be no guarantee that this downward price pressure will not continue, and we may be forced to adjust the prices of some of our products to stay competitive, or not compete at all in some markets, possibly giving rise to revenue loss.

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If we are unable to meet future capital requirements, our business may be adversely affected.

We periodically make capital investments to, among other things, maintain and upgrade our facilities and enhance our production processes. As we grow, we may have to incur capital expenditures. Historically, we have been able to fund these expenditures through cash flow from operations and borrowings under our senior credit facilities. However, our senior credit facilities contain limitations that could affect our ability to fund our future capital expenditures and other capital requirements. In addition, as discussed above, ourthe revolving credit facility terminatesof our senior credit facility terminated in June 2009, and there is no assurance that we will be able to replace it.2009. We cannot assure you that we will have, or be able to obtain, adequate funds to make all necessary capital expenditures when required, or that the amount of future capital expenditures will not be materially in excess of our anticipated or current expenditures. If we are unable to make necessary capital expenditures, our product line may become dated, our productivity may be decreased and the quality of our products may be adversely affected, which, in turn, could reduce our net sales and profitability.

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The introduction of new and improved products and services poses a potential threat to the aftermarket for automotive parts.

Improvements in technology and product quality are extending the longevity of automotive parts and delaying aftermarket sales. In particular, the introduction of oil change indicators and the use of synthetic motor oils may extend oil filter replacement cycles. The introduction of electric, fuel cell and hybrid automobiles may pose a long-term risk to our business because these vehicles are unlikely to utilize many of our primary product lines. The introduction of new and improved service initiatives by OEMs also poses a risk to our market share in the vehicle replacement parts market. In particular, we face market share risk from general automakers, which have introduced increased warranty and maintenance service initiatives, which are gaining popularity. These service initiatives have the potential to decrease the demand on aftermarket sales of our products in the traditional and retail sales channels.

We are subject to risks associated with changing manufacturing techniques, which could place us at a competitive disadvantage.

The successful implementation of our business strategy requires us to continuously evolve our existing products and introduce new products to meet customers’ needs in the industries we serve and want to serve. Our products are characterized by stringent performance and specification requirements that mandate a high degree of manufacturing and engineering expertise. If we fail to meet these requirements, our business could be at risk. We believe that our customers rigorously evaluate their suppliers on the basis of a number of factors, including:
•product quality;
•technical expertise and development capability;
•new product innovation;
•reliability and timeliness of delivery;
•price competitiveness;
•product design capability;
•manufacturing expertise;
•operational flexibility;
•customer service; and
•overall management.

product quality;
technical expertise and development capability;
new product innovation;
reliability and timeliness of delivery;
price competitiveness;
product design capability;
manufacturing expertise;
operational flexibility;
customer service; and
overall management.

Our success will depend on our ability to continue to meet our customers’ changing specifications with respect to these criteria. We cannot assure you that we will be able to address technological advances or introduce new products that may be necessary to remain competitive within our businesses. Furthermore, we cannot assure you that we can adequately protect any of our own technological developments to produce a sustainable competitive advantage.

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Our international operations are subject to uncertainties that could affect our operating results.

Our business is subject to certain risks associated with doing business internationally. The net sales of our foreign subsidiaries represented approximately 8% of our total net sales for the year ended December 31, 2008.2009. In addition, we operate seven manufacturing facilities outside of the United States. Accordingly, our future results could be harmed by a variety of factors, including:
•fluctuations in currency exchange rates;
•geopolitical instability;
•exchange controls;
•compliance with U.S. Department of Commerce export controls;
•tariffs or other trade protection measures and import or export licensing requirements;
•potentially negative consequences from changes in tax laws;

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•interest rates;
•unexpected changes in regulatory requirements;
•differing labor regulations;
•requirements relating to withholding taxes on remittances and other payments by subsidiaries;
•restrictions on our ability to own or operate subsidiaries, make investments or acquire new businesses in these jurisdictions;
•restrictions on our ability to repatriate dividends from our subsidiaries; and
•exposure to liabilities under the U.S. Foreign Corrupt Practices Act.
fluctuations in currency exchange rates;
geopolitical instability;
exchange controls;
compliance with U.S. Department of Commerce export controls;
tariffs or other trade protection measures and import or export licensing requirements;
potentially negative consequences from changes in tax laws;
interest rates;
unexpected changes in regulatory requirements;
differing labor regulations;
requirements relating to withholding taxes on remittances and other payments by subsidiaries;
restrictions on our ability to own or operate subsidiaries, make investments or acquire new businesses in these jurisdictions;
restrictions on our ability to repatriate dividends from our subsidiaries; and
exposure to liabilities under the U.S. Foreign Corrupt Practices Act.

As we continue to expand our business globally, our success will depend, in large part, on our ability to anticipate and effectively manage these and other risks associated with our international operations. However, any of these factors could adversely affect our international operations and, consequently, our operating results.

We could be materially adversely affected by changes or imbalances in currency exchange and other rates.

As a result of increased international production and sourcing of components and completed parts for resale, we are exposed to risks related to the effects of changes in foreign currency exchange rates, principally exchange rates between the U.S. dollar and the Chinese yuan.Yuan. The currency exchange rate from Chinese yuanYuan to U.S. dollars has historically been stable, in large part due to the economic policies of the Chinese government. However, there are no assurances that this currency exchange rate will continue to be as stable in the future. The U.S. government has stated that the Chinese government should reduce its influence over the currency exchange rate and let market conditions control. Less influence by the Chinese government will most likely result in the Chinese yuanYuan strengthening against the U.S. dollar. SinceDuring the period June 30, 2007 through June 30, 2008, the dollar has weakened against the Chinese yuanYuan by approximately 11%,. The relationship of which approximately 7% of this increasethe Chinese Yuan to the U.S. dollar has occurredremained stable since December 31, 2007. ThisJune 2008.  An increase in the Chinese yuanYuan against the dollar means that we will have to pay more in U.S. dollars for our purchases from China. If we are unable to negotiate commensurate price decreases from our Chinese suppliers, these higher prices would eventually translate into higher costs of sales. In that event, we would attempt to obtain corresponding price increases from our customers, but there are no assurances that we would be successful.

Our Mexican operations source a significant amount of inventory from the United States. During the three month period ending DecemberSeptember 30, 2008 through March 31, 2008,2009, the U.S. dollar strengthened against the Mexican peso by approximately 28%, and strengthened an additional 3% for33%. During the period from January 1,March 31, 2009 through March 18, 2009.December 31, 2009, the U.S. dollar weakened against the Mexican peso by approximately 11%, partially offsetting the trend experienced in the prior six months.  A strengthening U.S. dollar against the Mexican peso means that our Mexican operations must pay more in pesos to obtain inventory from the United States, which translates into higher cost of sales for the Mexican operations. We are attempting to obtain price increases from our customers for the products sold by our Mexican operations, but there are no assurances that we will be successful.
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Our intellectual property may be misappropriated or subject to claims of infringement.

We attempt to protect our intellectual property rights through a combination of patent, trademark, copyright and trade secret protection, as well as licensing agreements and third-party nondisclosure and assignment agreements. We cannot assure you that any of our applications for protection of our intellectual property rights will be approved or that others will not infringe or challenge our intellectual property rights. We also may rely on unpatented proprietary technology. It is possible that our competitors will independently develop the same or similar technology or otherwise obtain access to our unpatented technology. To protect our trade secrets and other proprietary information, we require employees, consultants and advisors to maintain the confidentiality of our trade secrets and proprietary information. We cannot assure you that these measures will provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure. If we are unable to maintain the proprietary nature of our technologies, our ability to sustain margins on some or all of our products may be affected, which could reduce our sales and profitability. In addition, from time to time, we pursue and are pursued in potential litigation relating to the protection of certain intellectual property rights, including with respect to some of our more profitable products.

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An impairment in the carrying value of goodwill or other assets could negatively affect our consolidated results of operations and net worth.
 
Pursuant to accounting principles generally accepted in the United States, we are required to annually assess our goodwill, intangibles and other long-lived assets to determine if they are impaired. In addition, interim reviews must be performed whenever events or changes in circumstances indicate that impairment may have occurred. If the testing performed indicates that impairment has occurred, we are required to record a non-cash impairment charge for the difference between the carrying value of the goodwill or other intangible assets and the implied fair value of the goodwill or other intangible assets in the period the determination is made. Disruptions to our business, end market conditions, protracted economic weakness and unexpected significant declines in operating results may result in charges for goodwill and other asset impairments. We assess the potential impairment of goodwill on an annual basis, as well as when interim events or changes in circumstances indicate that the carrying value may not be recoverable. We assess definite lived intangible assets when events or changes in circumstances indicate that the carrying value may not be recoverable. Our annual goodwill impairment test resulted in no goodwill impairment. Although our analysis regarding the fair value of goodwill indicates that it exceeds its carrying value, materially different assumptions regarding the future performance of our businesses could result in goodwill impairment losses.

Our substantial indebtedness could adversely affect our financial health.

As of December 31, 2008,2009, we had total indebtedness of $446.4$424.4 million (not including intercompany indebtedness) and additional available borrowings of $36.1 million under our senior credit facilities.. In addition, as of that date our parent, UCI Holdco, had indebtedness of $295.1$324.1 million, which indebtedness does not require any cash interest payments until 2011.2012. While UCI has no direct obligation under the Holdco Notes, UCI is the sole source of cash generation for UCI Holdco. The Holdco Notes do not appear on our balance sheet and the related interest expense is not included in our income statement.

Our substantial indebtedness could have important consequences to you. For example, it could:
•make it more difficult for us to satisfy our obligations with respect to the Holdco Notes;
•require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund acquisitions, working capital, capital expenditures, research and development efforts and other general corporate purposes;
•increase our vulnerability to and limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
•expose us to the risk of increased interest rates as borrowings under the senior credit facilities will be subject to variable rates of interest;
•place us at a competitive disadvantage compared to our competitors that have less debt; and
•limit our ability to borrow additional funds.

make it more difficult for us to satisfy our obligations with respect to the Holdco Notes;
require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund acquisitions, working capital, capital expenditures, research and development efforts and other general corporate purposes;
increase our vulnerability to and limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
expose us to the risk of increased interest rates as borrowings under the senior credit facilities will be subject to variable rates of interest;
place us at a competitive disadvantage compared to our competitors that have less debt; and
limit our ability to borrow additional funds.

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In addition, the indentures governing the senior subordinated notes and the Holdco Notes, as well as the agreement governing our senior credit facilities, contain financial and other restrictive covenants that limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our debts.

To service our indebtedness, we will require a significant amount of cash. Our ability to generate cash depends on many factors beyond our control.

Our cash interest expense for fiscal year 20082009 was $33.4$28.7 million. Our ability to make payments on and to refinance our indebtedness, and to fund planned capital expenditures will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

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We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us in an amount sufficient to enable us to pay our indebtedness, including our senior credit facilities and senior subordinated notes, or to fund our other liquidity needs. In such circumstances, we may need to refinance all or a portion of our indebtedness on or before maturity. We cannot assure you that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all. If we cannot service our indebtedness, we may have to take actions such as selling assets, seeking additional equity or reducing or delaying capital expenditures, strategic acquisitions, investments and alliances. We cannot assure you that any such actions, if necessary, could be effected on commercially reasonable terms or at all. In addition, the indentures governing the senior subordinated notes and the Holdco Notes and the agreement governing the senior credit facilities limit our ability to sell assets and will also restrict the use of proceeds from any such sale. Furthermore, our senior credit facilities are secured by substantially all of our assets. Therefore, we may not be able to sell assets quickly enough or for sufficient amounts to enable us to meet our debt service obligations.

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

We and our subsidiaries may be able to incur substantial additional indebtedness in the future because the terms of the indentures governing the senior subordinated notes and the Holdco Notes and the agreement governing the senior credit facilities do not fully prohibit us or our subsidiaries from doing so. As of December 31, 2008, as adjusted for the pay down of the revolving credit borrowings to zero, subject to covenant compliance and certain conditions, the senior credit facilities permitted borrowing up to an additional $65.6 million. Any of those additional borrowings would be structurally senior to the Holdco Notes and the subsidiary guarantees. If new debt is added to our and our subsidiaries’ current debt levels, the related risks that we and they now face could intensify.

Restrictive covenants in the indenture governing our debt may restrict our ability to pursue our business strategies.

The indentures governing the senior subordinated notes and the Holdco Notes and the agreement governing our senior credit facility limit our ability and the ability of our restricted subsidiaries, among other things, to:
•incur additional indebtedness;
•sell assets, including capital stock of restricted subsidiaries;
•agree to payment restrictions affecting our restricted subsidiaries;
•consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;
•enter into transactions with our affiliates;
•incur liens; and
•designate any of our subsidiaries as unrestricted subsidiaries.

incur additional indebtedness;
sell assets, including capital stock of restricted subsidiaries;
agree to payment restrictions affecting our restricted subsidiaries;
consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;
enter into transactions with our affiliates;
incur liens; and
designate any of our subsidiaries as unrestricted subsidiaries.

In addition, as of the end of any given quarter, our senior credit facilities require us to maintain a maximum consolidated leverage ratio and a minimum consolidated interest coverage ratio, covering the previous four quarters, through the term of the senior credit facilities. At December 31, 2008,2009, UCI was required to maintain a maximum consolidated leverage ratio and a minimum consolidated interest coverage ratio of 4.754.10 to 1 and 2.52.8 to 1, respectively. These ratio requirements change quarterly under the terms of our senior credit facilities. Our ability to comply with these ratios may be affected by events beyond our control.

 
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The restrictions contained in the indentures governing the senior subordinated notes and the Holdco Notes and the agreement governing the senior credit facilities could limit our ability to plan for or react to market conditions, meet capital needs or make acquisitions or otherwise restrict our activities or business plans.

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The breach of any of these covenants or restrictions could result in a default under the indentures governing the senior subordinated notes and the Holdco Notes and the agreement governing our senior credit facilities. An event of default under either or both of these indentures or the senior credit facilities would permit some of our lenders to declare all amounts borrowed from them to be due and payable. An event of default under either of these indentures or the senior credit facilities would likely result in a cross default under either or both of the other instruments. If we are unable to repay debt, lenders having secured obligations could proceed against the collateral securing that debt. In addition, if any of our other indebtedness is accelerated, we may be unable to make interest payments on the Holdco Notes and repay the principal amount of the notes.

We are controlled by Carlyle, whose interests in our business may be different than yours.

As of December 31, 2008,2009, Carlyle Partners III, L.P. and CP III Coinvestment, L.P., both of which are affiliates of Carlyle, owned 90.9%90.8% of the equity of Holdco, which owns all of our common stock, through its wholly-owned subsidiary, UCI Acquisition Holdings, Inc. and are able to control our affairs in all cases. Our entire board has been designated by the affiliates of Carlyle and a majority of the board is associated with Carlyle. In addition, the affiliates of Carlyle control the appointment of our management, the entering into of mergers, sales of substantially all of our assets and other extraordinary transactions. The interests of Carlyle and its affiliates could conflict with yours. In addition, Carlyle or its affiliates may in the future own businesses that directly compete with ours.

ITEM 1B.UNRESOLVED STAFF COMMENTS

Not applicable.

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ITEM 2.PROPERTIES

We currently maintain 2120 manufacturing facilities, 1514 of which are located in North America, 2 in Europe and 4 in China. In addition, we maintain 249 distribution and warehouse facilities. Listed below are the locations of our principal manufacturing facilities:

  Location Owned/Leased Square Footage 
Products
Manufactured
North
America
 Albion, Illinois I Owned 270,972271,000 Spin-on Oil Filters; Heavy-duty Lube Filters; Micro Glass Elements
  Albion, Illinois II Owned 53,26253,000 Spin-on Oil Filters; Poly Panel Air Filters
  Albion, Illinois III Owned 49,67250,000 Heavy-duty Lube Units; Round Air Filters
  Albion, Illinois IV Owned 101,320101,000 Heavy-duty Air Filters; Radial Air Filters; Automotive Conical and Radial Air Filters
  Shelby Township, Michigan Leased 30,39330,000 Auto Fuel Filters
  West Salem, Illinois Owned 216,829217,000 Heavy-duty Lube Filters; Spin-on Oil Filters
  York, South Carolina Owned 188,672189,000 Auto Spin-on Oil Filters
  Fairfield, Illinois I Owned 148,067183,000 Electric and Mechanical Fuel Pump Components
  Fairfield, Illinois II Owned 418,811457,000 Electric Fuel Pump Assemblies and Components; Mechanical Fuel Pumps and Components;
Fairfield, Illinois IIILeased65,280Electric Fuel Pumps and Components; StrainersComponents
  North Canton, Ohio Leased** 210,000 Water Pump Assemblies
  Fond du Lac, Wisconsin I Owned 187,750188,000 Distributor Caps and Rotors
  Fond du Lac, Wisconsin II Owned 36,000 Electronic Controls; Sensors; Voltage Regulators
  Puebla, Mexico Three Owned Buildings 118,299229,000 Gray Iron Foundry Castings; Water Pump Seal Assemblies; Water Outlets; Water Pump Assemblies and Components
  Reynosa, Mexico Owned 107,500108,000 Coils; Distributor Caps and Rotors; Sensors; Solenoids; Switches and Wire Sets; 5,000 square feet utilized for Fuel Products
Europe
 Mansfield Park, United Kingdom Leased 100,000 Radial Seal Air Filters; Poly Panel Air Filters; Heavy-duty Air Filters; Dust Collection Filters
  Zaragoza, Spain OwnedLeased 34,40886,000 Water Pump Assemblies; Gray Iron Foundry Castings; Water Pump Seal Assemblies; Water Outlets; Water Pump Assemblies and Components
China
 Tianjin, China Land leased/Building owned 162,000 Water Pump Components
  TEDA,Tianjin Economic Development Areas, China Leased 60,000 Fuel Pump Components
  Wujiang, China Leased 35,000 Light-duty Panel Air Filters
   Yanzhou, China  Owned/Leased**  241,278/134,326241,000/134,000  Water Pump Components
 
*Leased from a related party.

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**Owned/Leased by joint venture in which we have 51% ownership.
**Leased from a related party.

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ITEM 3.LEGAL PROCEEDINGS
 As of March 15, 2009, United Components, Inc.
UCI and its wholly owned subsidiary, Champion Laboratories, Inc. (“Champion”), were named as two of multiple defendants in 23 complaints originally filed in the District of Connecticut, the District of New Jersey, the Middle District of Tennessee and the Northern District of Illinois alleging conspiracy violations of Section 1 of the Sherman Act, 15 U.S.C. § 1, related to aftermarket oil, air, fuel and transmission filters.T.D.S. Co. v. Champion Labs. et al.(D. (D. Conn., filed April 8, 2008);Barjan, LLC v. Champion LabsLabs. et al.(D. (D. Conn., filed April 10, 2008);Bruene v. Champion Labs. et al.(D. (D. Conn., filed April 8, 2008);S&E Quick Lube Distrib., Inc. v. Champion Labs. et al.(D. (D. Conn., filed March 31, 2008);Flash Sales, Inc. v. Champion Labs. et al. (D.(D. Conn., filed April 4, 2008);The Parts Plus Group, Inc. v. Champion Labs. et al.(D. (D. Conn., filed April 28, 2008);Ward’s Auto Painting & Body Works, Inc. v. Champion Labs. et al.(D. (D. Conn., filed April 29, 2008);G.W.C. Distributors, Inc. v. Champion Laboratories, Inc. et al.(D. Conn., filed May 19, 2008);A&L Systems, Inc. v. Champion Laboratories, Inc. et al.(D. Conn., filed May 28, 2008);Aaron Dunham v. Champion Laboratories, Inc. et al.(D. Conn., filed June 17, 2008);Auto Pro, LLC v. Champion Laboratories, Inc. et al.(D. Conn., filed June 17, 2008);JDL Corp. v. Champion Laboratories, Inc. et al.(D. Conn., filed July 1, 2008);Associate Jobbers Warehouse Inc. v. Champion Laboratories, Inc. et al.(D. Conn., filed July 28, 2008);Friedson v. Champion Laboratories, Inc. et al.(D. Conn., filed July 28, 2008);Colburn v. Champion Laboratories, Inc. et al.(D. Conn., filed July 28, 2008);Lown v. Champion Laboratories, Inc. et al.(D. Conn., filed July 28, 2008);Boardman v. Champion Laboratories, Inc. et al.(D. Conn., filed August 14, 2008);Central Warehouse Sales Corp. v. Champion Labs. et al.(D.N.J. (D.N.J., filed April 29, 2008);All American Plazas of New Jersey, Inc. v. Honeywell International Inc. et al.(D.N.J., filed May 7, 2008);Werner Aero Services v. Champion Labs. et al.(M.D. (M.D. Tenn., filed May 9, 2008);Pawnee/S.A.E. Warehouse, Inc. v. Champion Laboratories, Inc. et al.(N.D. Ill., filed May 14, 2008);S.A.E. Warehouse, Inc. v. Champion Laboratories, Inc. et al.(N.D. Ill., filed May 14, 2008);Monroe Motor Products Corp. v. Champion Laboratories, Inc. et al.(N.D. Ill., filed May 22, 2008).Flash Sales, S&E Quick Lube, Bruene, Central Warehouse,Pawnee/S.A.E.,S.A.E.,All AmericanandMonroe Motor also named The Carlyle Group as a defendant, but those plaintiffs voluntarily dismissed Carlyle from each of those actions without prejudice.  Champion, but not United Components,UCI, was also named as a defendant in 13 virtually identical actions originally filed in the Northern and Southern Districts of Illinois, and the District of New Jersey.Lovett Auto & Tractor Parts, Inc. v. Champion Labs. et al.(N.D. (N.D. Ill., filed April 10, 2008);Neptune Warehouse Distributors, Inc. v. Champion Labs. et al.(N.D. (N.D. Ill., filed April 23, 2008);Hovis Auto Supply, Inc. v. Robert Bosch LLC et al.(N.D. Ill., filed May 19, 2008);Ace Quick Lube v. Champion Laboratories Inc. et al. (N.D.(N.D. Ill., filed August 27, 2008);Manasek Auto Parts, Inc. v. Champion Labs. et al.(S.D. (S.D. Ill., filed April 23, 2008);Big T Inc. v. Champion Labs. et al.(S.D. (S.D. Ill., filed May 6, 2008);Gemini of Westmont, inc. v. Champion Laboratories, Inc. et al.(D. Conn., filed May 12, 2008);Cal’s Auto Service, Inc. v. Champion Laboratories, Inc. et al.(S.D. Ill., filed May 14, 2008);WWD Parts, Inc., d/b/a Parts For Imports v. Champion Laboratories, Inc. et al.(S.D. Ill., filed May 15, 2008);Muralt’s, Inc. v. Champion Laboratories, Inc. et al.(S.D. Ill., filed May 27, 2008);G&H Import Auto Inc. v. Champion Laboratories, Inc. et al.(S.D. Ill., filed May 29, 2008);Mike’s Inc. vv. Champion Laboratories, Inc. et al.(S.D. (S.D. Ill., filed June 2, 2008);Worldwide Equipment, Inc. v. Honeywell Int’l et al.(D.N.J., filed May 9, 2008).  All of these complaints are styled as putative class actions on behalf of all persons and entities that purchased aftermarket filters in the U.S. directly from the defendants, or any of their predecessors, parents, subsidiaries or affiliates, at any time during the period from January 1, 1999 to the present.  Each case seeks damages, including statutory treble damages, an injunction against future violations, costs and attorney’s fees.

               United Components
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UCI and Champion were also named as two of multiple defendants in 17 similar complaints originally filed in the District of Connecticut, the Northern District of California, the Northern District of Illinois and the Southern District of New York by plaintiffs who claim to be indirect purchasers of aftermarket filters.Packard Automotive, Inc. v. Honeywell International Inc. et al.,(D. (D. Conn., filed April 21, 2008);Doll et al. v. Champion Labs. et al.(D. (D. Conn., filed May 9, 2008);Austin v. Honeywell Int’l et al.(D. Conn., filed May 8, 2008);Gasoline and Automotive Service Dealers of America, Inc. v. Champion Laboratories, Inc. et al.(D. Conn., filed May 12, 2008);David Stoll v. Honeywell International, Inc. et al.(D. Conn., filed May 19, 2008);Jerry Vandiver v. Champion Laboratories, Inc. et al.(D. Conn., filed June 3, 2008);Bettendorf Transfer & Excavating, Inc. v. Champion Laboratories, Inc. et al.(D. Conn., filed June 16, 2008);Ponce v. Honeywell International Inc. et al.(N.D. Ca., filed May 28, 2008);G.S.G. Excavating v. Honeywell International Inc. et al.(N.D. Ca., filed June 20, 2008);Gertha Wilkerson v. Honeywell International, Inc. et al.(N.D. Ca., filed July 3, 2008);Bobbi Cooper v. Honeywell International, Inc. et al.(N.D. Ca., filed July 3, 2008);Bay Area Truck Services v. Champion Laboratories, Inc. et al.(N.D. Ca., filed June 26, 2008);Robert A. Nilsen v. Champion Laboratories, Inc. et al., (S.D.N.Y.(S.D.N.Y., filed July 23, 2008);Ehrhardt et al. v. Champion Laboratories, Inc. et al.(N.D. Ill., filed July 28, 2008);Faircloth v. Champion Laboratories, Inc. et al.(N.D. Ill., filed August 25, 2008);Carpenter et al. v. Honeywell Int’l Inc. et al.(N.D. (N.D. Ill., filed September 12, 2008);Warner et al. v. Honeywell Int’l Inc. et al.(N.D. Ill., filed September 22, 2008).AustinandG.S.G. Excavatingalso named The Carlyle Group as a defendant, but the plaintiffs in both of those actions voluntarily dismissed Carlyle without prejudice.  Champion, but not United Components,UCI, was also named in 3 similar actions originally filed in the Eastern District of Tennessee, the Northern District of Illinois and the Southern District of California.Bethea et al. v. Champion Labs. et al.(E.D. Tenn., filed April 25, 2008);Mark Moynahanv.Champion Laboratories, Inc. et al.(N.D. Ill., filed June 2, 2008);Sepher Torabi d/b/a/a Protec Auto v. Champion Laboratories, Inc. et al. (S.D.(S.D. Ca., filed July 25, 2008).  These complaints allege conspiracy violations of Section 1 of the Sherman Act and/or violations of state antitrust, consumer protection and unfair competition law.  They are styled as putative class actions on behalf of all persons or entities who acquired indirectly aftermarket filters manufactured and/or distributed by one or more of the defendants, their agents or entities under their control, at any time between January 1, 1999 and the present; with the exception ofAustin, David StollandBay Area, which each allege a class period from January 1, 2002 to the present, andBettendorf, which alleges a class period from the “earliest legal permissible date” to the present.  The complaints seek damages, including statutory treble damages, an injunction against future violations, disgorgement of profits, costs and attorney’s fees.

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On August 18, 2008, the Judicial Panel on Multidistrict Litigation (“JPML”) issued an order transferring the U.S. direct and indirect purchaser aftermarket filters cases to the Northern District of Illinois for coordinated and consolidated pretrial proceedings before the Honorable Robert W. Gettleman pursuant to 28 U.S.C. § 1407.  On November 26, 2008, all of the direct purchaser plaintiffs filed a Consolidated Amended Complaint.  This complaint names Champion as one of multiple defendants, but it does not name United Components.  The complaint is styled as a putative class action and alleges conspiracy violations of Section 1 of the Sherman Act.  The direct purchaser plaintiffs seek damages, including statutory treble damages, an injunction against future violations, costs and attorney’s fees.  On February 2, 2009, Champion filed its answer to the direct purchasers’ Consolidated Amended Complaint.

On December 1, 2008, all of the indirect purchaser plaintiffs, except Gasoline and Automotive Service Dealers of America (“GASDA”), filed a Consolidated Indirect Purchaser Complaint.  This complaint names Champion as one of multiple defendants, but it does not name United Components.UCI.  The complaint is styled as a putative class action and alleges conspiracy violations of Section 1 of the Sherman Act and violations of state antitrust, consumer protection and unfair competition law.  The indirect purchaser plaintiffs seek damages, including statutory treble damages, penalties and punitive damages where available, an injunction against future violations, disgorgement of profits, costs and attorney’s fees.  On February 2, 2009, Champion and the other defendants jointly filed a motion to dismiss the Consolidated Indirect Purchaser Complaint.  On November 5, 2009, the Court granted the motion in part, and denied it in part.  The Court directed the indirect purchaser plaintiffs to file an amended complaint conforming to the order.  On November 30, 2009, the indirect purchasers filed an amended complaint.  On December 17, 2009, the indirect purchasers filed a motion for leave to file a second amended complaint.  On December 22, 2009, the Court granted the motion for leave, but gave defendants permission to move to dismiss the second amended complaint.  Defendants’ filed that same date,motion to dismiss on January 19, 2010.

On February 2, 2009, Champion, United ComponentsUCI and the other defendants jointly filed a motion to dismiss the GASDA complaint.  On April 13, 2009, GASDA voluntarily dismissed UCI from its case without prejudice.  On November 5, 2009, the Court granted defendants’ motion.

Pursuant to a stipulated agreement between the parties, all defendants produced limited initial discovery on January 30, 2009.  TheOn December 10, 2009 the plaintiffs filed their first sets of interrogatories and requests for production of documents.  On January 11, 2010, all defendants filed a number of discovery requests to plaintiffs and third parties.  All discovery responses were due on February 16, 2010.  On January 21, 2010, the Court has ordered that all furtherentered a scheduling order for discovery.  Under this order, discovery shallrelated to class-certification will proceed immediately, with document production scheduled to be stayed until after it rulescompleted no later than June 21, 2010.  Class certification briefing will follow the completion of document production, and expert discovery on merits-related issues follow the court’s ruling on plaintiffs’ motions to dismiss.for class certification.

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On January 12, 2009, Champion, but not United Components,UCI, was named as one of ten defendants in a related action filed in the Superior Court of California, for the County of Los Angeles on behalf of a purported class of direct and indirect purchasers of aftermarket filters.Peerali v. Champion Laboratories, Inc. et al., No. BC405424.  On March 5, 2009, one of the defendants filed a notice of removal to the U.S. District Court for the Central District of California, and then subsequently requested that the JPML transfer this case to the Northern District of Illinois for coordinated pre-trial proceedings.proceedings, and the JPML did.

Champion, but not United Components,UCI, was also named as one of five defendants in a class action filed in Quebec, Canada.Jean-Paul Perrault v. Champion Labs. et al.(filed (filed April 25, 2008).  This action alleges conspiracy violations under the Canadian Competition Act and violations of the obligation to act in good faith (contrary to art. 6 of the Civil Code of Quebec) related to the sale of aftermarket filters.  The plaintiff seeks joint and several liability against the five defendants in the amount of $5.0 million in compensatory damages and $1.0 million in punitive damages.  The plaintiff is seeking authorization to have the matter proceed as a class proceeding, which motion has not yet been ruled on.

Champion, but not United Components,UCI, was also named as one of 14 defendants in a class action filed on May 21, 2008, in Ontario, Canada (Urlin Rent A Car Ltd. v. Champion Laboratories, Inc. et al).  This action alleges civil conspiracy, intentional interference with economic interests, and conspiracy violations under the Canadian Competition Act related to the sale of aftermarket filters.  The plaintiff seeks joint and several liability against the 14 defendants in the amount of $150 million in general damages and $15 million in punitive damages.  The plaintiff is also seeking authorization to have the matter proceed as a class proceeding, which motion has not yet been ruled on.
 The Antitrust Division of the Department of Justice (DOJ) is also investigating the allegations raised in these suits and certain current and former employees of the defendants, including Champion, have testified pursuant to subpoenas. We are fully cooperating with the DOJ investigation.
On July 30, 2008, the Office of the Attorney General for the State of Florida issued Antitrust Civil Investigative Demands to Champion and UCI requesting documents and information related to the sale of oil, air, fuel and transmission filters.  We are cooperating with the Attorney General’s requests.  On April 16, 2009, the Florida Attorney General filed a complaint against Champion and eight other defendants in the Northern District of Illinois.  The complaint alleges violations of Section 1 (f) of the Sherman Act and Florida law related to the sale of aftermarket filters.  The complaint asserts direct and indirect purchaser claims on behalf of Florida governmental entities and Florida consumers.  It seeks damages, including statutory treble damages, penalties, fees, costs and an injunction.  The Florida Attorney General action is being coordinated with the rest of the filters cases pending in the Northern District of Illinois before the Honorable Robert W. Gettleman.

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The Antitrust Division of the Department of Justice (DOJ) investigated the allegations raised in these suits and certain current and former employees of the defendants, including Champion, testified pursuant to subpoenas.  On January 21, 2010, DOJ sent a letter to counsel for Champion stating that “the Antitrust Division’s investigation into possible collusion in the replacement auto filters industry is now officially closed.”
 
We intend to vigorously defend against these claims.

From time to time, we may be involved in other disputes or litigation relating to claims arising out of our operations. However, we are not currently a party to any other material legal proceedings.

ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSRESERVED

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 No matters were submitted to a vote of security holders during the fourth quarter ended December 31, 2008.
PART II

ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

(a) Market Information

No trading market for our common stock currently exists.

(b) Holders

As of March 26, 2009,19, 2010, our parent, UCI Acquisition Holdings, Inc. was the sole holder of our common stock.

(c) Dividends

In December 2006, we paid a special cash dividend of approximately $96 per share on our common stock. Prior to that time, we did not pay dividends since the date of our incorporation on April 16, 2003.2003, we did not pay dividends. It is our current policy to retain earnings to repay debt and finance our operations. In addition, our credit facility and indenture significantly restrict the payment of dividends on common stock.

(d) Securities Authorized for Issuance under Equity Compensation Plans

None of our securities are offered under any compensation plans. For a description of the stock option plan granting options for the purchase of securities of UCI Holdco, see “Item 11. Executive Compensation.”

(e) Stock Performance Graph

None.

(f) Recent Sales of Unregistered Securities

None.

(g) Purchases of Equity Securities by the Issuer and Affiliated Purchasers.

None.

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ITEM 6.SELECTED FINANCIAL DATA

The selected financial data have been derived from UCI’s financial statements. The financial data as of December 31, 20082009 and 20072008 and for each of the years in the three-year period ended December 31, 20082009 have been derived from the audited financial statements included in this Form 10-K. We derived the balance sheet data as of December 31, 2007, 2006 2005 and 20042005 and the statement of income data for the 20052006 and 20042005 years from audited financial statements that are not included herein. The data for the periods from January 1, 2004 to March 31, 2004 are based on a preliminary allocation of the Acquisition purchase price. Data for periods after March 31, 2004 are based on the final allocation of the Acquisition purchase price. The data also includes the results of operations of ASC beginning on May 25, 2006, the date of the acquisition of ASC by the Company. The operating results of the Company’s driveline components and specialty distribution operations, which were sold on June 30, 2006, and the Company’s lighting systems operation, which was sold on November 30, 2006, are presented as discontinued operations for all periods presented. The amounts are presented in millions of dollars.
                     
  Year  Year  Year  Year  Year 
  ended  ended  ended  ended  ended 
  Dec. 31, 2008  Dec. 31, 2007  Dec. 31, 2006  Dec. 31, 2005  Dec. 31, 2004 
Statement of Income Data:
                    
Net sales (1) $880.4  $969.8  $906.1  $812.7  $834.3 
Cost of sales (2) (3)  702.5   748.8   728.6   657.9   653.1 
                
Gross profit  177.9   221.0   177.5   154.8   181.2 
                
Operating expenses:                    
Selling and warehousing  62.9   61.2   60.0   57.3   57.0 
General and administrative  49.3   49.2   42.6   37.9   34.6 
Amortization of acquired intangible assets  6.3   7.0   6.7   5.9   6.8 
Costs of integration of water pump operations and resulting asset impairment losses (3)  2.4   0.7   7.0   —   — 
Costs of closing facilities and consolidating operations and gain on sale of assets (4)  —   (1.5)  6.4   —   — 
Asset impairments and other costs (5)  0.5   3.6   —   21.5   — 
                
Operating income  56.5   100.8   54.8   32.2   82.8 
Interest expense, net  (34.2)  (40.7)  (43.3)  (36.1)  (35.9)
Write-off of deferred financing costs (6)  —   —   (2.6)  —   — 
                     
Other expense, net  (4.7)  (4.7)  (2.1)  (3.2)  (2.0)
                
Income (loss) before income taxes  17.6   55.4   6.8   (7.1)  44.9 
Income tax expense  7.7   20.0   0.7   0.5   17.8 
                
Net income (loss) from continuing operations  9.9   35.4   6.1   (7.6)  27.1 
Net income from discontinued operations, net of tax  —   —   2.1   3.1   3.7 
Gain (loss) on sale of discontinued operations, net of tax —   2.7   (16.9)  —   — 
                
Net income (loss) $9.9  $38.1  $(8.7) $(4.5) $30.8 
                

24


                     
  UCI Consolidated 
  Year  Year  Year  Year  Year 
  ended  ended  ended  ended  ended 
  Dec. 31, 2008  Dec. 31, 2007  Dec. 31, 2006  Dec. 31, 2005  Dec. 31, 2004 
  (in millions) 
Balance Sheet Data:
                    
Cash and cash equivalents $46.6  $41.4  $31.5  $23.7  $11.3 
Working capital — continuing operations  295.6   281.8   281.0   254.7   264.8 
Working capital — discontinued operations  —   —   —   56.5   43.3 
Total assets  999.8   999.5   1,002.5   984.8   966.9 
Debt (including current maturities)  443.6   438.4   500.6   442.5   456.9 
Total shareholder’s equity  260.1   295.8   244.8   280.3   287.9 
                     
Other Data:
                    
Net cash provided by operating activities of continuing operations $32.4  $93.1  $73.9  $57.1  $65.4 
Net cash (used in) provided by operating activities of discontinued operations  —   —   (1.5)  5.7   12.9 
Net cash used in investing activities of continuing operations  (31.5)  (19.0)  (79.7)  (26.5)  (44.9)
Net cash used in investing activities of discontinued operations  —   —   (2.9)  (5.3)  (5.9)
Net cash provided by (used in) financing activities of continuing operations  4.6   (64.1)  15.7   (15.7)  (63.0)
25
 

  
Year
ended
Dec. 31, 2009
  
Year
ended
Dec. 31, 2008
  
Year
ended
Dec. 31, 2007
  
Year
ended
Dec. 31, 2006
  
Year
ended
Dec. 31, 2005
 
        (in millions)       
Statement of Income Data:               
Net sales (1) $885.0  $880.4  $969.8  $906.1  $812.7 
Cost of sales (2) (3)  685.4   702.5   748.8   728.6   657.9 
Gross profit  199.6   177.9   221.0   177.5   154.8 
Operating expenses:                    
Selling and warehousing  56.6   62.9   61.2   60.0   57.3 
General and administrative  45.5   49.3   49.2   42.6   37.9 
Amortization of acquired intangible assets  5.8   6.3   7.0   6.7   5.9 
Restructuring costs (gains) (3) (4)  0.9   2.4   (0.8)  13.4   — 
Asset impairments and other costs (5)  —   0.5   3.6   —   21.5 
Patent litigation costs (6)  7.0   —   —   —   — 
Operating income  83.8   56.5   100.8   54.8   32.2 
Interest expense, net  (30.0)  (34.2)  (40.7)  (43.3)  (36.1)
Write-off of deferred financing costs (7)  —   —   —   (2.6)  — 
Other expense, net  (7.5)  (5.5)  (4.8)  (2.9)  (3.2)
Income (loss) before income taxes  46.3   16.8   55.3   6.0   (7.1)
Income tax expense  16.4   7.7   20.0   0.7   0.5 
Net income (loss) from continuing operations  29.9   9.1   35.3   5.3   (7.6)
Net income from discontinued operations, net of tax  —   —   —   2.1   3.1 
Gain (loss) on sale of discontinued operations, net of tax�� —   —   2.7   (16.9)  — 
Net income (loss)  29.9   9.1   38.0   (9.5)  (4.5)
Less:  Loss attributable to noncontrolling interest  (0.7)  (0.8)  (0.1)  (0.8)  — 
Net income (loss) attributable to UCI $30.6  $9.9  $38.1  $(8.7) $(4.5)

  
Year
ended
Dec. 31, 2009
  
Year
ended
Dec. 31, 2008
  
Year
ended
Dec. 31, 2007
  
Year
ended
Dec. 31, 2006
  
Year
ended
Dec. 31, 2005
 
  (in millions) 
Balance Sheet Data:               
Cash and cash equivalents $131.9  $46.6  $41.4  $31.5  $23.7 
Working capital — continuing operations  340.1   295.6   281.8   281.0   254.7 
Working capital — discontinued operations  —   —   —   —   56.5 
Total assets  1,057.2   999.8   999.5   1,002.5   984.8 
Debt (including current maturities)  422.2   443.6   438.4   500.6   442.5 
Total equity  299.9   262.6   299.1   248.2   280.3 
Other Data:                    
Net cash provided by operating activities of continuing operations $129.3  $32.4  $93.1  $73.9  $57.1 
Net cash (used in) provided by operating activities of discontinued operations  —   —   —   (1.5)  5.7 
Net cash used in investing activities of continuing operations  (22.1)  (31.5)  (19.0)  (79.7)  (26.5)
Net cash used in investing activities of discontinued operations  —   —   —   (2.9)  (5.3)
Net cash (used in) provided by financing activities of continuing operations  (22.0)  4.6   (64.1)  15.7   (15.7)

(1)Sales in 2005 have been reduced by a $14.0 million change in estimated warranty reserve requirements. Sales in 2008 have been reduced by a special $6.7 million warranty provision related to unusually high warranty returns related to one category of parts.

(2)Includes $9.8 million in 2006 for the sale of inventory written up to market from historical cost per U.S. GAAP (Accounting Principles Generally Accepted in the United States) rules for accounting for the acquisition of ASC.

26

(3)Cost of sales in 2007 and 2006 include $4.7 million and $3.9 million, respectively, of costs incurred in connection with the integration of the Company’s pre-ASC Acquisition water pump operations with the operations of ASC.
The remaining $0.7 million of water pump integration costs in 2007 and $7.0 million in 2006 are included in “Costs of integration of water pump operations and resulting asset impairment losses.”

The remaining $0.7 million of water pump integration costs in 2007 and $7.0 million in 2006 are included in “Restructuring costs.”

(4)2006 includes asset write-downs and severance and other costs in connection with the closures of the Company’s Canadian fuel pump facility and Mexican filter manufacturing facility. 2007 includes a gain on the sale of land and building.

(5)Includes impairments of property and equipment of a foreign entity, a trademark and software, and a write-down of assets related to the abandonment of a foreign subsidiary.

(6)Includes trial costs and damages awarded in connection with an unfavorable jury verdict on a patent infringement matter.  See Note 16 to the financial statements included in this Form 10-K.

(7)Write-off of unamortized deferred financing costs related to the Company’s previously outstanding debt, which was replaced in connection with the establishment of the Company’s new credit facility on May 25, 2006.

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ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations must be read together with the “Item 1. Business” section of this Form 10-K and the financial statements included herein.

Forward-Looking Statements

In this Annual Report on Form 10-K, United Components, Inc. makes some “forward-looking” statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. These statements are included throughout this report on Form 10-K and relate to analyses and other information based on forecasts of future results and estimates of amounts not yet determinable. These forward-looking statements are identified by their use of terms and phrases such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will,” “continue,” and other similar terms and phrases, including references to assumptions.

These forward-looking statements are based on UCI’s expectations and beliefs concerning future events affecting UCI. They are subject to uncertainties and factors relating to UCI’s operations and business environment, all of which are difficult to predict and many of which are beyond UCI’s control. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we do not know whether our expectations will prove correct. They can be affected by inaccurate assumptions we make or by known or unknown risks and uncertainties. Many factors mentioned in our discussion in this report will be important in determining future results. UCI cautions the reader that these uncertainties and factors, including those discussed in Item 1A of this Annual Report on Form 10-K and in other SEC filings, could cause UCI’s actual results to differ materially from those stated in the forward-looking statements.

Although we believe the expectations reflected in our forward-looking statements are based upon reasonable assumptions, we can give no assurance that we will attain these expectations or that any deviations will not be material. Except as otherwise required by the federal securities laws, we disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this Annual Report on Form 10-K or any other SEC filings to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

Overview
27

Overview

Sales.We are among North America’s largest and most diversified companies servicing the vehicle replacement parts market, or the aftermarket. We supply a broad range of filtration products, fuel delivery and cooling systems, and engine management systems to the automotive, trucking, marine, mining, construction, agricultural and industrial vehicle markets. We estimate that over 87%approximately 88% of our net sales in 20082009 were made in the aftermarket, to a diverse customer base that includes some of the largest and fastest growing companies servicing the aftermarket. Sales in the North American light vehicle aftermarket, excluding tires, have grown at ana compounded average annual growth rate of approximately 3.9%3.5% from 1998 through 2007, with the lowest year of growth2009.  However, aftermarket sales grew by only 0.1% in 1998 of approximately 2.1%. However, 2008 has beenand are estimated to have growndeclined by only 1.5%.1.2% in 2009.

Our sales to General Motors Corporation (GM) comprise approximately 6% of our consolidated sales. More than 85% of our sales to GM are to dealerships in the original equipment service (OES) channel, with the remainder to the original equipment manufacturing (OEM) sales channel for inclusion in new vehicle production. Our sales to Chrysler LLC (Chrysler) comprise less than 1% of our consolidated sales and are largely to the service organization in the OES channel. Both GM and Chrysler filed petitions under chapter 11 of the U.S. Bankruptcy Code in the Southern District of New York during the second quarter of 2009, with both emerging from bankruptcy in the third quarter of 2009. GM and Chrysler assumed all contracts with UCI companies. As widely publicized, GM and Chrysler’s reorganization plans included substantial reductions to the dealership base. Given that the majority of our sales to GM and Chrysler are to dealerships in the OES channel, the closure of these dealerships could result in lower UCI sales to these customers. To date there has been no material change in our post-bankruptcy sales levels to GM and Chrysler; however there can be no assurance as to the level of demand for our products from those customers in the future.

Because most of our sales are to the aftermarket, we believe that our sales are primarily driven by the number of vehicles on the road, the average age of those vehicles, the average number of miles driven per year, the mix of light trucks to passenger cars on the road and the relative strength of our sales channels. Historically, our sales have not been materially adversely affected by market cyclicality, as we believe that our aftermarket sales are less dependent on economic conditions than our sales to OEMs, due to the generally non-discretionary nature of vehicle maintenance and repair. While many vehicle maintenance and repair expenses are non-discretionary in nature, high gasoline prices and difficult economic conditions can lead to a reduction in miles driven, which then results in increased time intervals for routine maintenance and vehicle parts lasting longer before needing replacement. Historic highs in crude oil prices experienced in 2008 and corresponding historic highs in retail gasoline prices at the pump impacted consumers’ driving and vehicle maintenance habits. In addition, we believe consumers’ driving and vehicle maintenance habits have been impacted by the deterioratinggenerally weak economic conditions.conditions experienced in the latter part of 2008 and through 2009.

A key metric in measuring aftermarket performance is miles driven. InFor 2008, the U.S. Department of TransportationEnergy reported a decrease in miles driven of 3.6%3.2% (equaling 10896 billion fewer miles). This decrease iswas the first annual decrease in miles driven since 1980. TheWe believe that high gasoline prices and generalgenerally weak economic conditions, in addition to reducing miles driven, have also resulted in consumers extending the mileage interval for routine maintenance, reducing demand for our products. We believe that these conditions adversely affected our sales during the second half of 2008. While2008 and into 2009. During 2009, retail gasoline prices have fallenwere significantly fromlower than the historic highs experienced at the beginning of the third quarter of 2008. Despite the lower retail gasoline prices, the negative trend in miles driven continued in the first quarter of 2009 (a 2.7% decrease over the comparable quarter in 2008) due to the ongoing weak economic conditions. The negative trend reversed in the last three quarters of 2009 as miles driven exceeded the comparable 2008 generalquarters.  For the full year of 2009, miles driven increased 0.1% from 2008.

While the conditions described above have adversely affected our sales, other trends resulting from the current economic conditions may have continueda positive impact on sales in the future. Specifically, with new car sales remaining at historically low levels, consumers are keeping their cars longer, resulting in an increased demand for replacement parts as consumers repair their increasingly older cars. In addition, a significant number of new car dealers have closed in recent months, either voluntarily or as a result of the Chrysler and GM restructurings. This decline in the number of dealerships has the potential of sending more consumers to worsen. As long as these conditions persist, our sales may continue to be adversely affected.customers in other channels of the aftermarket for their replacement parts.

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28


Management believes that we have leading market positions in our primary product lines. We continue to expand our product and service offerings to meet the needs of our customers. We believe that a key competitive advantage is that we offerhave one of the most comprehensive lines of productsproduct offerings in the vehicle replacement parts market, consisting of over 43,00047,000 parts. This product breadth, along with our extensive manufacturing and distribution capabilities, product innovation, and reputation for quality and service, makes us a leader in our industry.

However, it is also important to note that in 2009, 2008 and 2007, approximately 30%, 29% and 2006, approximately 29%, 28% and 24%, respectively, of our total net sales were derived from our business with AutoZone. Our failure to maintain a healthy relationship with AutoZone stores would result in a significant decrease in our net sales. Even if we maintain our relationship, this sales concentration with one customer increases the potential impact to our business that could result from any changes in the economic terms of this relationship. Historically, we sold a small number of products under an AutoZone program called Pay-on-Scan. Under this program, we retained title to the product at AutoZone locations, and we recorded sales for the product when an AutoZone customer purchased it. In the second quarter of 2007, AutoZone and UCI terminated the Pay-on-Scan program for these products. Accordingly, sales of these products are now recorded when received by AutoZone. We doThis change has not expect this change to havehad a material effect on our on-going financial results. As part of the termination of the Pay-on-Scan program, AutoZone purchased all of the products at its locations that were previously under the Pay-on-Scan program. In the second quarter of 2007, we recorded $12.1 million of sales for these products.

Cost of sales. Cost of sales includes all costs of manufacturing required to bring a product to a ready-for-sale condition. Such costs include direct and indirect materials (net of vendor consideration), direct and indirect labor costs (including pension, postretirement and other fringe benefits), supplies, utilities, freight, depreciation, insurance information technology costs and other costs. Cost of sales also includes all costs to procure, package and ship products that we purchase and resell. The two largest components of our cost of sales are labor and steel.
Since early in 2004, global demand for steel has been high and has resulted in supplier-imposed price increases and/or surcharges for this raw material.
During much of 2008, the cost of other commodities, including steel, aluminum, iron, plastic and other petrochemical products, packaging materials and media, increased significantly compared to 2007. Energy costs also increased significantly during this period. These higher costs affected the prices we paid for raw materials and for purchased component parts and finished products. Most recently,During 2009, general market prices for thesemost commodities have decreased from 2008 levels in reaction to generalglobal economic conditions and current uncertainties regarding short-term demand. However, we believe that the long-term trend will be toward higher costs for these commodities. While we have been, and expect to continue to be, able to obtain sufficient quantities of these commodities to satisfy our needs, increased demand from current levels for these commodities could result in pricecost increases and may make procurement more difficult in the future. Due to our inventory being accounted for on the first-in, first-out (FIFO) method, a time lag of approximately three months exists from the time we experience cost increases or decreases until these increases or decreases flow through cost of sales.

In addition to the adverse impact of increasing commodities and energy costs, we are also beinghave been adversely affected by changes in foreign currency exchange rates, primarily relating to the Chinese yuan and Mexican peso. In 2008, we sourced approximately $70 million of components from China. During the period June 30, 2007 through June 30, 2008, the U.S. dollar weakened against the Chinese yuan by approximately 11%, with most of this decline occurring from December 31, 2007 through June 30, 2008. A weakening U.S. dollar means that we must pay more U.S. dollars to obtain components from China, which equates to higher costs. Since June 30, 2008 the U.S. dollar has remained stable against the Chinese yuan.
Our Mexican operations source a significant amount of inventory from the United States. In 2008, our Mexican operations sourced approximately $11.7 million from the United States. During the period September 30, 2008 through DecemberMarch 31, 2008,2009, the U.S. dollar strengthened against the Mexican peso by approximately 28% and strengthened an additional 3%33%. During the period March 31, 2009 through March 18, 2009.December 31, 2009, the U.S. dollar weakened against the Mexican peso by approximately 11%, partially offsetting the trend experienced in the prior six months. A strengthening U.S. dollar against the Mexican peso means that our Mexican operations must pay more pesos to obtain inventory from the United States.
In the year ended December 31, 2008, we estimate the adverse pre-tax effect of higher commodities and energy costs and changes in currency exchange rates, net of the mitigation efforts set forth below, was $8.8 million when compared to 2007. Most recently, general market prices for certain of the commodities used in our operations, excluding certain steel products, have decreased in reaction to general economic conditions and current uncertainties regarding short-term demand. Due to our inventory being on the FIFO method, a time lag of approximately three months exists from the time we experience cost decreases until these increases flow through cost of sales. In the near term, we will continue to be adversely effected by the high costs of commodities in our inventory.

27

Generally, we attempt to mitigate the effects of these cost increases and currency changes via a combination of design changes, material substitution, global resourcing efforts and increases in the selling prices for our products. With respect to pricing, it should be noted that, while the terms of supplier and customer contracts and special pricing arrangements can vary, generally a time lag exists between when we incur increased costs and when we might recoup or offset themrecover a portion of the higher costs through increased pricing. This time lag typically spans a fiscal quarter or more, depending on the specific situation. During 2008, we secured customer price increases that offset a portion of the cost increase we experienced in 2008. However, because of reductions from 2008 highs in both energy costs and the costs of certain commodities used in our operations, we have not been able to retain the entire effect of customer price increases secured in 2008. We continue to pursue efforts to mitigate the effects of any cost increases; however, there are no assurances that we will be entirely successful. To the extent that we are unsuccessful, our profit margins will be adversely affected. Because of uncertainties regarding future commodities and energy prices, and the success of our mitigation efforts, it is difficult to estimate the impact of commodities and energy costs on 2009 and beyond. However, we currently expect the adverse effect in 2009 to be much less significant than that experienced in 2008. This forecast is based on assumptions regarding the future cost of commodities and our ability to mitigate these costs. Actual events could vary significantly from our assumptions. Consequently, the actual effect could be significantly different than our forecast.operating results.

29

Selling and warehousing expenses. Selling and warehousing expenses primarily include sales and marketing, warehousing and distribution costs. Our major cost elements include salaries and wages, pension and fringe benefits, depreciation, advertising and information technology costs.

General and administrative expenses. General and administrative expenses primarily include executive, accounting and administrative personnel salaries and fringe benefits, professional fees, pension benefits, insurance, provision for doubtful accounts, rent and information technology costs.

Critical Accounting Policies and Estimates

The methods, estimates and judgments we use in applying our most critical accounting policies have a significant impact on the results we report in our financial statements. We evaluate our estimates and judgments on an on-going basis. We base our estimates on historical experience and on assumptions that we believe to be reasonable under the circumstances. Our experience and assumptions form the basis for our judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may vary from what we anticipate, and different assumptions or estimates about the future could change our reported results.

We believe the following accounting policies are the most critical in that they significantly affect our financial statements, and they require our most significant estimates and complex judgments.
Inventory. We record inventory at the lower of cost or market. Cost is principally determined using standard cost or average cost, which approximates the first-in, first-out method. Estimated market value is based on assumptions for future demand and related pricing. If actual market conditions are less favorable than those projected by management, reductions in the value of inventory may be required.
Revenue recognition. We record sales when title and risk of loss transfers to the customer, the sale price is fixed and determinable, and the collection of the related accounts receivable is reasonably assured. In the case of sales to the aftermarket, we recognize revenue when these conditions are met for our direct customers, which are the aftermarket retailers and distributors.

Where we have sales rebate programs with some of our customers, we estimate amounts due under these sales rebate programs when the sales are recorded. Net sales relating to any particular shipment are based upon the amounts invoiced for the shipped goods less estimated future rebate payments. These estimates are based upon our historical experience, current trends and our expectations regarding future experience. Revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known.

Additionally, we have agreements with our customers that provide for sales discounts, marketing allowances, return allowances and performance incentives. Any discount, allowance or incentive is treated as a reduction to sales, based on estimates of the criteria that give rise to the discount, allowance or incentive, such as sales volume and marketing spending. We routinely review these criteria and our estimating process and make adjustments as facts and circumstances change. Historically, we have not found material differences between our estimates and actual results.

28


In order to obtain exclusive contracts with certain customers, we may incur up-front costs or assume the cost of returns of products sold by the previous supplier. These costs are capitalized and amortized over the life of the contract. The amortized amounts are recorded as a reduction of sales.

New business changeover costs also can include the costs related to removing a new customer’s inventory and replacing it with UCI inventory, commonly referred to as a “stocklift.” Stocklift costs are recorded as a reduction to revenue when incurred.

Product returns.returns. Our customers have the right to return parts that have failed within warranty time periods. Our customers also have the right, in varying degrees, to return excess quantities of product. Credits for parts returned under warranty and parts returned because of customer excess quantities are estimated and recorded at the time of the related sales. These estimates are based on historical experience, current trends and UCI’s expectations regarding future experience. Revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known. Any significant increase in the amount of product returns above historical levels could have a material adverse effect on our financial results.

30
Inventory. We record inventory at the lower of cost or market. Cost is principally determined using standard cost or average cost, which approximates the first-in, first-out method. Estimated market value is based on assumptions for future demand and related pricing. If actual market conditions are less favorable than those projected by management, reductions in the value of inventory may be required.

Impairment of intangible assets. Goodwill is subject to annual review unless conditions arise that require a more frequent evaluation. The review for impairment is based on a two-step accounting test. The first step is to compare the estimated fair value with the recorded net book value (including the goodwill). If the estimated fair value is higher than the recorded net book value, no impairment is deemed to exist and no further testing is required. If, however, the estimated fair value is below the recorded net book value, then a second step must be performed to determine the goodwill impairment required, if any. In this second step, the estimated fair value from the first step is used as the purchase price in a hypothetical acquisition. Purchase business combination accounting rules are followed to determine a hypothetical purchase price allocation to the reporting unit’s assets and liabilities. The residual amount of goodwill that results from this hypothetical purchase price allocation is compared to the recorded amount of goodwill, and the recorded amount is written down to the hypothetical amount, if lower.

We perform our annual goodwill impairment review in the fourth quarter of each year using discounted future cash flows. Management retains the services of a independent valuation company in order to assist in evaluating the estimated fair value of the Company.  The process of evaluating the potential impairment of goodwill is subjective because it requires the use of estimates and assumptions as to future cash flows of the company,Company, discount rates commensurate with the risks involved in the assets, future economic and market conditions, competition, customer relations, pricing, raw material costs, production costs, selling, general and administrative costs, and income and other taxes. Although we base cash flow forecasts on assumptions that are consistent with plans and estimates we use to manage our company,the Company, there is significant judgment in determining the cash flows.  Based upon the results of our impairment review, we determined that the fair value of the Company significantly exceeded the carrying value of the assets and no impairment existed.

Trademarks with indefinite lives are tested for impairment on an annual basis in the fourth quarter, unless conditions arise that would require a more frequent evaluation. In assessing the recoverability of these assets, projections regarding estimated discounted future cash flows and other factors are made to determine if impairment has occurred. If we conclude that there has been impairment, we will write down the carrying value of the asset to its fair value. In 2008, we recorded a trademark impairment loss of $0.5 million. In 2007, we recorded a trademark impairment loss of $3.6 million. See Note 119 to the financial statements included in this Form 10-K.

Each year, UCI evaluates those trademarks with indefinite lives to determine whether events and circumstances continue to support the indefinite useful lives. Other than the impaired trademarks mentioned above, UCI has concluded that events and circumstances continue to support the indefinite lives of these trademarks.

Retirement benefits. Pension obligations are actuarially determined and are affected by assumptions including discount rate, life expectancy, annual compensation increases and the expected rate of return on plan assets. Changes in the discount rate, and differences between actual results and assumptions, will affect the amount of pension expense we recognize in future periods.

Postretirement health obligations are actuarially determined and are based on assumptions including discount rate, life expectancy and health care cost trends. Changes in the discount rate, and differences between actual results and assumptions, will affect the amount of expense we recognize in future periods.

Insurance reserves.reserves. Our insurance for workers’ compensation, automobile, product and general liability include high deductibles (less than $1 million) for which we are responsible. Deductibles for which we are responsible are recorded in accrued expenses. Estimates of such losses involve substantial uncertainties including litigation trends, the severity of reported claims and incurred but not yet reported claims. External actuaries are used to assist us in estimating these losses.

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Environmental expenditures. Our expenditures for environmental matters fall into two categories. The first category is routine compliance with applicable laws and regulations related to the protection of the environment. The costs of such compliance are based on actual charges and do not require significant estimates.

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The second category of expenditures is for matters related to investigation and remediation of contaminated sites. The impact of this type of expenditure requires significant estimates by management. The estimated cost of the ultimate outcome of these matters is included as a liability in UCI’s December 31, 20082009 balance sheet. This estimate is based on all currently available information, including input from outside legal and environmental professionals, and numerous assumptions. Management believes that the ultimate outcome of these matters will not exceed the $2.6$2.0 million accrued at December 31, 20082009 by a material amount, if at all. However, because all investigation and site analysis has not yet been completed and because of the inherent uncertainty in such environmental matters and related litigation, there can be no assurance that the ultimate outcome of these matters will not be significantly different than our estimates.

Results of Operations

The following table was derived from UCI’s consolidated income statements for the years ended December 31, 2009, 2008 2007 and 2006.2007. The amounts are presented in millions of dollars.
             
  2008  2007  2006 
Net sales $880.4  $969.8  $906.1 
Cost of sales  702.5   748.8   728.6 
          
Gross profit  177.9   221.0   177.5 
Operating expenses            
Selling and warehousing  62.9   61.2   60.0 
General and administrative  49.3   49.2   42.6 
Amortization of acquired intangible assets  6.3   7.0   6.7 
Costs of integration of water pump operations and resulting asset impairment losses  2.4   0.7   7.0 
Costs of closing facilities and consolidating operations and gain from sale of assets  —   (1.5)  6.4 
Trademark impairment loss  0.5   3.6   — 
          
Operating income  56.5   100.8   54.8 
Other expense            
Interest expense, net  (34.2)  (40.7)  (43.3)
Write-off of deferred financing costs  —   —   (2.6)
Management fee expense  (2.0)  (2.0)  (2.0)
Miscellaneous, net  (2.7)  (2.7)  (0.1)
          
Income before income taxes  17.6   55.4   6.8 
Income tax expense  7.7   20.0   0.7 
          
Net income from continuing operations  9.9   35.4   6.1 
Discontinued operations            
Net income from discontinued operations, net of tax  —   —   2.1 
Gain (loss) on sale of discontinued operations, net of tax  —   2.7   (16.9)
          
Net income (loss) $9.9  $38.1  $(8.7)
          

Acquisition
  2009  2008  2007 
Net sales $885.0  $880.4  $969.8 
Cost of sales  685.4   702.5   748.8 
Gross profit  199.6   177.9   221.0 
Operating (expenses) income            
Selling and warehousing  (56.6)  (62.9)  (61.2)
General and administrative  (45.5)  (49.3)  (49.2)
Amortization of acquired intangible assets  (5.8)  (6.3)  (7.0)
Restructuring (costs) gains  (0.9)  (2.4)  0.8 
Trademark impairment loss  —   (0.5)  (3.6)
Patent litigation costs  (7.0)  —   — 
Operating income  83.8   56.5   100.8 
Other expense            
Interest expense, net  (30.0)  (34.2)  (40.7)
Management fee expense  (2.0)  (2.0)  (2.0)
Miscellaneous, net  (5.5)  (3.5)  (2.8)
Income before income taxes  46.3   16.8   55.3 
Income tax expense  (16.4)  (7.7)  (20.0)
Net income from continuing operations  29.9   9.1   35.3 
Gain on sale of discontinued operations, net of tax  —   —   2.7 
Net income  29.9   9.1   38.0 
Less: Loss attributable to noncontrolling interest  (0.7)  (0.8)  (0.1)
Net income attributable to United Components, Inc. $30.6  $9.9  $38.1 

Year Ended December 31, 2009 compared with Year Ended December 31, 2008

Net sales. Net sales of $885.0 million in 2009 increased $4.6 million, or 0.5%, compared to net sales of $880.4 million in 2008.  Sales in 2008 were reduced by a $6.7 million loss provision resulting from the unusually high level of warranty returns related to a specific category of parts. In connection with obtaining new business, sales were reduced by $5.0 million in 2009 and Sales$7.8 million in 2008. These reductions were the result of Operationsaccepting returns of the inventory of our customers’ previous suppliers in connection with securing new business with our customers.
On May 25, 2006, we acquired ASC.
Excluding the 2008 $6.7 million warranty loss provision, and the effects of obtaining new business from both periods, sales were 0.5% lower in 2009 compared to 2008.  Within the aftermarket channel, our retail and traditional channel sales increased approximately 5.7% and approximately 6.5%, compared to 2008, respectively, while sales to dealerships in the OES channel decreased approximately 6.6%. The amountsincreased sales in the retail and traditional channels reflect the sales growth experienced by our retail and traditional customer base. The overall uncertainty surrounding GM and Chrysler leading up to their bankruptcy proceedings initiated during the second quarter of 2009 resulted in the decreased OES channel sales. Our heavy-duty aftermarket sales also decreased approximately 23.3% due to weakness in the transportation segment. OEM sales, which comprise only 7% of our sales, decreased approximately 17.7% compared to 2008 due to general economic conditions in the United States and the significant downturn in the automotive industry, which resulted in a reduction in vehicles manufactured.

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Gross profit. Gross profit, as reported, was $199.6 million for 2009 and $177.9 million for 2008. Both periods included special items which are presented in the following table abovealong with a comparison of adjusted gross profit after excluding such special items. Adjusted gross profit is a non-GAAP financial measurement of our performance which is not in accordance with, or a substitute for, GAAP measures. It is intended to supplement the presentation of our financial results that are prepared in accordance with GAAP. We use adjusted gross profit as presented to evaluate and discussed below include the resultsmanage UCI’s operations internally. You are encouraged to evaluate each adjustment and whether you consider it to be appropriate.

  2009  2008 
  (in millions) 
Gross profit, as reported $199.6  $177.9 
Add back special items:        
Nonrecurring provision for warranty costs  —   6.7 
New business changeover and sales commitment costs  5.0   7.8 
Severance costs  0.8   0.1 
Costs to establish additional manufacturing in China  0.5   3.1 
  $205.9  $195.6 

The “Nonrecurring provision for warranty costs” in 2008 related to an unusually high level of ASC from the May 25, 2006 ASC acquisition date (the “ASC Acquisition Date”).
On June 30, 2006, we sold our driveline components operation and our specialty distribution operation. On November 30, 2006, we sold our lighting systems operation. The resultswarranty returns of a specific category of parts. When these parts are subjected to certain conditions, they experience a higher than normal failure rate. As a result of the driveline components, specialty distributionhigher than normal failure rate, a $6.7 million warranty loss provision was recorded in 2008. We modified the design of these parts in 2008 to eliminate this issue.

The 2009 $5.0 million and lighting systems operationsthe 2008 $7.8 million of “new business changeover and sales commitment costs” were up-front costs incurred to obtain new business and to extend existing long-term sales commitments.

The 2009 $0.5 million and 2008 $3.1 million of “costs to establish additional manufacturing in China” related to start-up costs establishing two new factories in China.

Excluding the special items, adjusted gross profit increased to $205.9 million in 2009 from $195.6 million in 2008, and the related gross margin percentage increased to 23.1% in 2009 from 21.9% in 2008. The gross margin percentage is based on sales before the effects of obtaining new business and deducting the $6.7 million warranty loss provision in 2008, which are reported as discontinued operationsdiscussed in the tablenet sales comparison above. Except where specifically referred

The higher gross profit in 2009 as compared to 2008 was primarily due to the favorable effects of cost reduction initiatives to align our cost structure with our customers’ spending and current market conditions, lower commodity and energy costs, favorable exchange rates and price increases. The cost reduction initiatives included workforce reductions and other employee cost saving actions, as discontinued operations,well as the amountsinstitution of tight controls over discretionary spending.  Partially offsetting these factors were higher product returns expense (excluding the aforementioned special $6.7 million charge in 2008) and comparisons discussed below address only continuing operationsa higher percentage of third-party sourced products which have lower margins than manufactured product.

Selling and therefore, excludewarehousing expenses. Selling and warehousing expenses were $56.6 million in 2009; $6.3 million lower than 2008. The reduction was driven by cost saving initiatives to reduce headcount, and tight controls over discretionary spending. Selling and warehousing expenses were 6.4% of sales in 2009 and 7.1% in 2008.

General and administrative expenses. General and administrative expenses were $45.5 million in 2009 and $49.3 million in 2008, a decrease of $3.8 million.  Costs incurred in connection with our antitrust litigation (discussed in Item 3 and in Note 16 to the resultsfinancial statements included in this Form 10-K) were $1.5 million in 2009 as compared to $4.0 million in 2008 accounting for $2.5 million of the operations thatdecrease in general and administrative expenses.  The 2009 reduction also included the favorable effects of lower salary expense due to headcount reductions and lower bad debt expense. The reduction in 2009 compared to 2008 was also attributable to 2008 costs associated with establishing two factories in China. These cost reductions were sold.partially offset by $1.8 million of higher severance expense in 2009 and higher other employee costs related to matters other than headcount.

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Restructuring costs. See Note 2 to the financial statements included in this Form 10-K.

Trademark impairment loss. See Note 9 to the financial statements included in this Form 10-K.

Patent litigation costs.  See Note 16 to the financial statements included in this Form 10-K for a discussion of estimated costs in connection with an unfavorable jury verdict on a patent infringement matter.

Interest expense, net. Net interest expense was $4.2 million lower in 2009 compared to 2008. This reduction was primarily due to lower interest rates in 2009.

Income tax expense. Income tax expense was $8.7 million higher in 2009 as compared to 2008 due to higher pre-tax income in 2009. For reasons why the effective tax rates in both years differ from statutory rates, see the table in Note 14 to the financial statements included in this Form 10-K, which reconciles income taxes computed at the U.S. federal statutory rate to income tax expense.

Net income. Due to the factors described above, we reported a net income of $29.9 million in 2009 compared to $9.1 million in 2008.

Net income attributable to United Components, Inc. After deducting losses attributable to a noncontrolling interest, net income attributable to United Components, Inc. was $30.6 million in 2009 compared to $9.9 million in 2008.

Year Ended December 31, 2008 compared with Year Ended December 31, 2007

Net sales. Net sales of $880.4 million in 2008 declined $89.4 million, or 9.2%, compared to net sales of $969.8 million in 2007. The 2007 sales included $12.1 million of sales to AutoZone in connection with the termination of the Pay-on-Scan program for certain UCI products. Sales in 2008 were reduced by a $6.7 million loss provision resulting from the unusually high level of warranty returns related to a category of parts. In connection with obtaining new business, sales were reduced by $7.8 million in 2008 and $7.5 million in 2007. These reductions were the result of accepting returns of the inventory of our customers’ previous suppliers in connection with securing new business with our customers.

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Excluding the $12.1 million of 2007 sales associated with the termination of the Pay-on-Scan program, the 2008 $6.7 million warranty loss provision, and the effects of obtaining new business from both periods, sales were 7.3% lower in 2008 compared to 2007. This 7.3% decrease includes lower sales to all of our market channels. Automotive aftermarket sales that comprise approximately 87% of our sales were down approximately 7.7% compared to 2007. Within the automotive aftermarket channel, our traditional channel sales were down approximately 10.0% while retail channel sales were down approximately 2.5%. We believe the larger decline in the traditional sales channel is reflective of a shift to the retail channel as (i) consumers shift away from do-it-for-me to do-it-yourself and (ii) retail outlets expand their sales to commercial accounts. OEM sales, which comprise only 8% of our sales, decreased approximately 26.0% compared to 2007 due to the significant downturn in the automotive industry. We believe that the sales decline was due primarily to general economic conditions in the United States, including the impact of record gasoline prices on miles driven and consumers’ spending habits.

Gross profit.Gross profit, as reported, was $177.9 million for 2008 and $221.0 million for 2007. Both periods included special items which are presented in the following table along with a comparison of adjusted gross profit after excluding such special items. Adjusted gross profit is a non-GAAP financial measurement of our performance. This non-GAAP measure is not in accordance with, nor is it a substitute for, GAAP measures. It is intended to supplement our presentation of our financial results that are prepared in accordance with GAAP. We use adjusted gross profit as presented to evaluate and manage UCI’s operations internally. You are encouraged to evaluate each adjustment and whether you consider each to be appropriate.

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  2008  2007 
  (in millions) 
Gross profit, as reported $177.9  $221.0 
Add back special items:        
Nonrecurring provision for warranty costs  6.7   — 
Water pump integration costs  —   5.5 
New business changeover and sales commitment costs  7.8   5.2 
Facilities consolidation and severance costs  0.1   0.3 
Costs to establish additional manufacturing in China  3.1   0.7 
Resolution of pre-acquisition matters  —   (0.9)
Reserve for resolution of disputed non-trade receivables  —   0.8 
  $195.6  $232.6 

The“Nonrecurring provision for warranty costs”in 2008 related to an unusually high level of warranty returns related to onea specific category of parts. When these parts are subjected to certain conditions, they experience a higher than normal failure rate. As a result of the higher than normal failure rate, a $6.7 million warranty loss provision was recorded in 2008. We have modified the design of these parts to eliminate this issue.

The 2007 $5.5 million of “water pump integration costs” relate to the integration of the ASC water pump operation and the water pump operation that we owned before we acquired ASC. In 2007, we completed the integration, closed our previously owned factory, and transferred production to ASC. These costs include (i) costs and operating inefficiencies caused by the wind-down of our previously owned factory, (ii) transportation and other costs directly related to completing the integration, and (iii) a write-off of component parts that could not be used after production was transitioned to the ASC product design. The 2007 amount also included $0.8 million of costs incurred to minimize the write-off of component parts that would not be usable when production was transitioned to the ASC product design.

The 2008 $7.8 million and the 2007 $5.2 million of “new business changeover and sales commitment costs” were up-front costs incurred to obtain new business and to extend existing long-term sales commitments.

The 2008 $3.1 million and 2007 $0.7 million of“costs to establish additional manufacturing in China”related to start-up costs establishing two new factories in China.

Excluding the special items, adjusted gross profit decreased to $195.6 million in 2008 from $232.6 million in 2007, and the related gross margin percentage decreased to 21.9% in 2008 from 23.8% in 2007. The gross margin percentage is based on sales before the effects of obtaining new business and deducting the $6.7 million warranty loss provision in 2008, which are discussed in the net sales comparison above.

When comparing 2008 and 2007 gross profit excluding the special items, lower sales volume in 2008 was the largest factor in our gross profit decline. The 2008 results were also adversely affected by the impact of significantly higher energy and commodity costs and currency fluctuations, which were previously discussed in this Management’s Discussion and Analysis.fluctuations. Inflation-driven wage increases and higher warranty expense also contributed to the lower profits in the 2008 period compared to 2007. Partially offsetting these adverse effects were the benefits of our ongoing manufacturing cost reduction initiatives.

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Selling and warehousing expenses. Selling and warehousing expenses were $62.9 million in 2008, $1.7 million higher than 2007. The increase included additional upfront costs associated with new business with an existing customer and the addition of sales and marketing personnel in targeted areas. The increase also included the effects of inflation on employee related and other costs. The effect of lower sales volume partially offset these increases. Selling and warehousing expenses were 7.1% of sales in 2008 and 6.3% in 2007.

General and administrative expenses. General and administrative expenses were $49.3 million in 2008 and $49.2 million in 2007. 2008 included $4.0 million of costs incurred in connection with our antitrust litigation (discussed in Item 3 and in Note 1716 to the financial statements included in this Form 10-K), inflation driven cost increases, $1.3 million higher expense for the cost of litigation and settlement of disputed matters, $2.2 million higher bad debt expense and $0.4 million of severance costs resulting from employee lay-offs. These cost increases were offset by lower employee bonus expense and $2.6 million lower stock option related costs.

Costs of integration of water pump operations and resulting asset impairment losses
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Restructuring costs. See Note 32 to the financial statements included in this Form 10-K.
Costs of closing facilities and consolidating operations and gain from sale of assets
Trademark impairment loss. See Note 59 to the financial statements included in this Form 10-K.
Trademark impairment loss.See Note 11 to the financial statements included in this Form 10-K.
Interest expense, net. Net interest expense was $6.5 million lower in 2008 compared to 2007. This reduction was due to lower debt levels and lower interest rates in 2008. Also, accelerated amortization of deferred financing costs associated with the voluntary prepayments of debt was $0.5 million higher in 2007.

Income tax expense. Income tax expense was $12.3 million lower in 2008 as compared to 2007 due to lower pre-tax income in 2008. For reasons why the effective tax rates in both years differ from statutory rates, see the table in Note 1514 to the financial statements included in this Form 10-K, which reconciles income taxes computed at the U.S. federal statutory rate to income tax expense.

Gain on sale of discontinued operations, net of tax.See Note 4 to the financial statements included in this Form 10-K.
Net income. Due to the factors described above, we reported net income of $9.9 million in 2008 compared to $38.1 million in 2007.

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Year Ended December 31, 2007 Compared with Year Ended December 31, 2006
Net sales. Net sales increased $63.7 million, or 7.0%, to $969.8 million in 2007 compared to $906.1 million in 2006. $50.3 million of the increase was due to the inclusion of ASC’s results for all of 2007, whereas 2006 results included ASC’s results only for the period after the ASC Acquisition Date. The 2007 ASC sales included $12.1 million of sales to AutoZone in connection with the termination of the Pay-on-Scan program for certain UCI products. In connection with obtaining new business, sales were reduced in 2007 by $7.5 million due to the acceptance of returns of the inventory of our customers’ previous supplier. Also in connection with obtaining new business, sales increased by $1.8 million in 2006 due to the initial stocking of an additional product line at an existing customer, partially offset by the cost of accepting returns of the inventory of our customers’ previous suppliers, plus up-front payments to obtain long-term sales commitments.
Excluding the impact of including ASC’s results for all of 2007, versus only part of 2006, and excluding from both years the effects of obtaining new business and extending existing long-term sales commitments discussed above, sales were 2.5% higher in 2007 compared to 2006. This 2.5% increase includes higher sales to the retail, heavy duty and OES channels in the 2007 period, partially offset by lower sales to the traditional and OEM channels.
Gross profit. Gross profit, as reported, was $221.0 million for 2007 and $177.5 million for 2006. Both years included special items, which are presented in the following table along with a comparison of adjusted gross profit after excluding such special items. Adjusted gross profit is a non-GAAP financial measurement of our performance. This non-GAAP measure is not in accordance with, nor is it a substitute for, GAAP measures. It is intended to supplement our presentation of our financial results that are prepared in accordance with GAAP. We use adjusted gross profit as presented to evaluate and manage UCI’s operations internally. You are encouraged to evaluate each adjustment and whether you consider each to be appropriate.
         
  2007  2006 
  (in millions) 
Gross profit, as reported $221.0  $177.5 
Add back special items:        
Non-cash ASC Acquisition-related charges  —   9.8 
Water pump integration costs  5.5   3.9 
New business changeover and sales commitment costs  5.2   3.7 
Facilities consolidation and severance costs  0.3   1.0 
Costs to establish additional manufacturing in China  0.7   — 
Resolution of pre-acquisition matters  (0.9)  — 
Reserve for resolution of disputed non-trade receivables  0.8   — 
       
  $232.6  $195.9 
       
The $9.8 million “non-cash ASC Acquisition-related charges” in 2006 consisted of the sales, after the ASC Acquisition Date, of ASC inventory that was written up from historical cost to fair market value as part of the preliminary allocation of the ASC Acquisition purchase price. This write-up is required by U.S. GAAP, as it applies to accounting for acquisitions. When this inventory was sold, the $9.8 million difference between historical cost and fair market value was charged to cost of sales, thereby reducing reported gross profit.
The 2007 $5.5 million and the 2006 $3.9 million of “water pump integration costs” related to the integration of the ASC water pump operation and the water pump operation that we owned before we acquired ASC. In 2007, we completed the integration, closed our previously owned factory and transferred production to ASC. These costs include (i) costs and operating inefficiencies caused by the wind-down of our previously owned factory, (ii) transportation and other costs directly related to completing the integration, and (iii) a write-off of component parts that could not be used after production was transitioned to the ASC product design. The 2007 amount also included $0.8 million of costs incurred to minimize the write-off of component parts that would not be usable when production was transitioned to the ASC product design.
The 2007 $5.2 million and the 2006 $3.7 million of “new business changeover and sales commitment costs” were up-front costs incurred to obtain new business and to extend existing long-term sales commitments.
Excluding the special items, adjusted gross profit increased to $232.6 million in 2007 from $195.9 million in 2006, and the related gross margin percentage increased to 23.8% in 2007 from 21.6% in 2006. (The gross margin percentages are based on sales before the effects of obtaining new business and extending existing long-term sales commitments, which are discussed in the net sales comparison above.)

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Higher sales volume in 2007 was a major factor in our gross profit increase. The 2007 gross profit was also favorably impacted by lower warranty expense in 2007 and benefits from our facilities consolidations and other manufacturing cost reduction initiatives. These benefits were partially offset by the cost of inflation-driven wage increases and higher raw material costs.
Selling and warehousing expenses. Selling and warehousing expenses were $61.2 million in 2007, $1.2 million higher than in 2006. The inclusion of ASC for all of 2007, versus only part of 2006, increased expenses by $2.3 million. The 2007 increase also included the effects of inflation on employee-related and other operating costs. These increases were partially offset by cost reductions due to 2006 facility consolidations and headcount reductions made possible by a 2006 investment in system enhancements. Selling and warehousing expenses were 6.3% of sales in 2007 and 6.6% of sales in 2006.
General and administrative expenses. General and administrative expenses were $49.2 million in 2007, $6.6 million higher than in 2006. $2.0 million of this increase was due to the inclusion of ASC for all of 2007, versus only part of 2006. 2007 also includes (i) inflation-driven cost increases, (ii) additional costs for Sarbanes-Oxley compliance, (iii) $0.4 million of costs incurred in connection with the establishment of two new factories in China, and (iv) $1.8 million higher employee stock option based compensation expense. 2006 included a $0.5 million gain on the sale of the Company’s airplane. There is no comparable gain in 2007.
Of the $1.8 million increase in the stock option related expense, $1.5 million was due to accelerated vesting resulting from stock option plan changes. Earlier vesting affects when stock option expense is recognized, but does not affect the ultimate total expense. Consequently, accelerating the vesting results in recording more of the total expense this year and less in later years.
Costs of integration of water pump operations and resulting asset impairment losses. See Note 3 to the financial statements included in this Form 10-K.
Costs of closing facilities and consolidating operations and gain from sale of assets. See Note 5 to the financial statements included in this Form 10-K.
Trademark impairment loss. See Note 11 to the financial statements included in this Form 10-K.
Interest expense, net. Net interest expense was $2.6 million lower in 2007 compared to 2006. The reduction was primarily due to lower debt levels, which more than offset the adverse effect of higher interest rates.
Write-off of deferred financing costs. See Note 14 to the financial statements included in this Form 10-K.
Miscellaneous, net.Miscellaneous, net was a loss of $2.7 million in 2007 compared to a loss of $0.1 million in 2006. The 2007 increase is primarily attributable to $1.9 million of higher costs related to our sales of accounts receivable.
Income tax expense. Income tax expense was $19.3 million higher in 2007 than it was in 2006. The primary reason for the increase is higher pre-tax profits in 2007. For reasons why the effective tax rates in both years differ from statutory rates, see the table in Note 15 to the financial statements in this Form 10-K, which reconciles income taxes computed at the U.S. federal statutory rate to income tax expense.
Net income from continuing operations. Due to the factors described above, we reported net income from continuing operations of $35.4 million for 2007 and $6.1 million for 2006.
Discontinued operations. In 2006, net income from discontinued operations was $2.1 million, and the net loss on the sale of discontinued operations was $16.9 million. In 2007 we recorded a $2.7 million gain relating to the 2006 sale of our lighting systems operation. (See Note 4 to the financial statements included in this Form 10-K).
Net income (loss). Due to the factors described above, we reported net income of $9.1 million in 2008 compared to $38.0 million in 2007.

Net income attributable to United Components, Inc. After deducting losses attributable to a noncontrolling interest, net income attributable to United Components, Inc. was $9.9 million in 2008 compared to $38.1 million in 2007 compared to a net loss of $8.7 million in 2006.2007.

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Liquidity and Capital Resources

Historical Cash Flows

Net cash provided by operating activities.

Year Ended December 31, 2009

Net cash provided by operating activities in 2009 was $129.3 million. Profits, before deducting depreciation and amortization, and other non-cash items, generated $64.3 million of cash. A decrease in inventory resulted in a generation of cash of $27.0 million. The decrease in inventory was due to (i) focused efforts to reduce inventory investments through improved inventory turns, (ii) higher sales in the fourth quarter of 2009 compared to the fourth quarter of 2008 and (iii) reduced material costs as compared to December 31, 2008 resulting from decreases in costs of certain commodities used in our operations. An increase in accounts payable resulted in a generation of cash of $7.2 million. The increase in accounts payable was due to initiatives with our vendors to reduce our working capital investment levels, which offset reductions in accounts payable related to the significantly lower inventory balances at December 31, 2009 compared to December 31, 2008. A decrease in accounts receivable resulted in a generation of cash of $1.0 million. The decrease in accounts receivable was due to an increase in factored accounts receivable during 2009.  This decrease was largely offset by an increase in sales of $25.6 million in the third and fourth quarters of 2009, as compared to the third and fourth quarters of 2008, and the impact of the higher mix of retail and traditional channel sales in relation to OEM and OES channels. Accounts receivable dating terms with OEM and OES customers are significantly shorter than retail and traditional customers. As a result of the higher mix of retail and traditional channel sales, gross account receivable days sales outstanding has increased. The effect of higher sales and changes in channel mix changes was partially offset by an increase in factored accounts receivable during 2009. Factored accounts receivable totaled $121.5 million and $80.1 million at December 31, 2009 and December 31, 2008, respectively.

UCI’s cash flow was also positively affected by $12.6 million because of an increase in UCI’s liability to Holdco, due primarily to UCI’s use of Holdco’s taxable losses to offset UCI taxes that would otherwise be payable in cash. Changes in all other assets and liabilities netted to a $17.2 million increase in cash. This amount consisted primarily of timing of payment of employee-related accrued liabilities, including salaries and wages, incentive compensation and employee insurance, timing of product returns and customer rebates and credits, timing of income tax payments and the accrual for the adverse patent litigation verdict.

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Year Ended December 31, 2008

Net cash provided by operating activities in 2008 was $32.4 million. Profits, before deducting depreciation and amortization, and other non-cash items, generated $52.9 million. An increase in accounts receivable and inventory resulted in the use of cash of $9.5 million and $19.1 million, respectively. The increase in accounts receivable was primarily due to increased days sales outstanding as a result of increased accounts receivable dating terms with certain customers, partially offset by lower sales in the latter half of 2008. Factored accounts receivable totaled $80.1 million and $81.1 million at December 31, 2008 and 2007, respectively. The increase in inventory was due to (i) lower than expected sales in the fourth quarter of 2008, (ii) higher inventory levels to support new business wins that began to ship in the first quarter of 2009, (iii) higher raw material costs resulting from the significant increases experienced in commodity costs in 2008 and (iv) increased production related to the ramp up of our Chinese operations. An increase in accounts payable resulted in a generation of cash of $3.0 million. An increase in amounts due to Holdco had a $6.2 million positive effect on cash. Changes in all other assets and liabilities netted to a $1.1 million use of cash. This amount included income tax refunds resulting from the carryback of 2006 operating losses to 2004, partially offset by employee-related accrued liabilities, including annual employee bonus and profit sharing payments, due to headcount reductions and the lower operating performance in 2008 as compared to 2007.

Year Ended December 31, 2007

Net cash provided by operating activities in 2007 was $93.1 million.  Profits, before deducting depreciation and amortization and the $3.6 million non-cash trademark impairment loss, and excluding the $1.8 million gain on the sale of Mexican land and building, generated $90.8 million.  An increase in accounts receivable resulted in the use of $24.9 million of cash.  This increase was the result of higher sales and, in certain cases, extended payment terms.  Net inventory reductions generated $15.4 million of cash.  An increase in accounts payable, due to normal fluctuations in the timing of purchases and payments, generated $9.8 million of cash.  An increase in amounts due to Holdco had a $11.3 million positive effect on cash.  This increase was primarily related to the payable due to Holdco for UCI’s use of Holdco’s federal tax benefit generated from its current taxable loss, which offset UCI’s federal current taxes payable.  The use of 2006 net operating losses lower tax payments that otherwise would have been paid by $3.3 million.  Changes in all other assets and liabilities netted to a $12.6 million negative effect on cash.

Net cash used in investing activities.Historically, net cash used in investing activities has been for capital expenditures, including routine expenditures for equipment replacement and efficiency improvements, offset by proceeds from the disposition of property, plant and equipment. Capital expenditures for the years ended December 31, 2009, 2008 and 2007 and 2006 were $15.3 million, $31.9 million and $29.7 million, respectively. The lower capital expenditures in 2009 are the result of capital spending being limited to expenditures necessary to maintain current operations and $22.8 million, respectively.projects that have short payback periods.  The 2008 and 2007 amounts included $3.6 million and $1.7 million, respectively, for our two new factories in China.

Proceeds from the sale of property, plant and equipment for the years ended December 31, 2009, 2008 and 2007 were $2.6 million, $0.4 million and $10.7 million, respectively. In 2009, in order to accommodate expected growth in the European market, our Spanish operation was relocated to a new leased facility resulting in the idling of an owned facility. Proceeds for 2009 primarily related to the sale of that facility.  In 2007, we received $6.6 million, net of fees and expenses, from the sale of the land and building of the Mexican filtration operation that was closed in 2006. Also in 2007, we received $2.2 million, net of fees and expenses, of additional proceeds from the 2006 sale of our lighting systems operations.
In 2006,
During the second quarter of 2009, we used $123.6posted $9.4 million net of cash acquired, to purchase ASC. Also in 2006, we received $65.2 million fromcollateralize a letter of credit required by our workers’ compensation insurance carrier. Historically, assets pledged pursuant to the saleterms of our driveline components, specialty distribution and lighting systems operations.senior credit facility provided the collateral for the letters of credit. As a result of the revolving credit facility termination, we were required to post $9.4 million of cash to collateralize the letter of credit. This cash is recorded as “Restricted cash” as a component of long-term assets on UCI’s balance sheet at December 31, 2009. This cash is not available for general operating purposes as long as the letter of credit remains outstanding or until alternative collateral is posted.

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Net cash provided by / used in financing activities. Net cash used by financing activities in 2009 was $22.0 million.  Net cash provided by financing activities in 2008 was $4.6 million. Netmillion, while net cash used in financing activities in 2007 was $64.1 million.

Borrowings of $13.2 million while net cash provided by financing activities in 2006 was $15.7 million.
during 2009 consisted solely of short-term borrowings payable to foreign credit institutions.  In 2008, we borrowed $20.0 million under our revolving credit line to increase our short-term liquidity in light of the current challenging capital markets. The $8.0 million remainder of our borrowings of $8.0 million during 2008 wereconsisted of short-term borrowings payable to foreign credit institutions. Borrowings of $20.8 million during 2007 consisted solely of short-term borrowings payable to foreign credit institutions. In 2006,

During the second quarter of 2009, we borrowed $113.0repaid the $20.0 million to fund a portion of the ASC acquisition price.
outstanding borrowings under our revolving credit facility.  In 2008 2007 and 2006,2007, we used cash on hand to voluntarily repay $10.0 million $65.0 million and $65.0 million, respectively, of our term loan. Additionally, during 2009, 2008 and 2007, our Spanish and Chinese subsidiaries repaid short-term notes borrowings to foreign credit institutions in the amount of $14.9 million, $12.9 million and $19.3 million, respectively.
In December 2006, we paid a special cash dividend of $35.3 million on our common stock. Prior to that time, we did not pay dividends since the date of our incorporation on April 16, 2003. It is our current policy to retain earnings to repay debt and finance our operations. In addition, our senior credit facility and indenture significantly restrict the payment of dividends on common stock. Also in 2006, shareholder equity contributions totaled $8.5 million consisting of rollover equity of $8.3 million in connection with the ASC Acquisition and stock option exercises.

35

Current Debt Capitalization and Scheduled Maturities

At December 31, 20082009 and 2007,2008, we had $46.6$131.9 million and $41.4$46.6 million of cash and cash equivalents, respectively. Outstanding debt was as follows (in millions):
         
  December 31, 
  2008  2007 
Short-term borrowing $5.2  $10.1 
Revolving credit line borrowing  20.0   — 
Capital lease obligations  1.2   1.8 
Term loan  190.0   200.0 
Senior subordinated notes  230.0   230.0 
       
Amount of debt requiring repayment  446.4   441.9 
Unamortized debt discount  (2.8)  (3.5)
       
  $443.6  $438.4 
       

  December 31, 
  2009  2008 
Short-term borrowings $3.5  $5.2 
Revolving credit line borrowing  —   20.0 
Capital lease obligations  0.9   1.2 
Term loan  190.0   190.0 
Senior subordinated notes  230.0   230.0 
Amount of debt requiring repayment  424.4   446.4 
Unamortized debt discount  (2.2)  (2.8)
  $  422.2  $  443.6 

Short-term borrowings are routine short-term borrowings by our foreign operations.

Because of theprevious prepayments of theour term loan, discussed previously, we do not have any requiredscheduled repayments of the senior credit facility term loansloan until December 2011. While there are no scheduled repayments until December 2011, the senior credit facility does require mandatory prepayments of the term loan when we generate Excess Cash Flow as defined in the senior credit facility. We generated Excess Cash Flow in the year ending December 31, 2009 resulting in a mandatory prepayment of $17.7 million, payable within 95 days of December 31, 2009. This mandatory prepayment is presented as a component of Current maturities of long-term debt in the Company’s Consolidated Balance Sheet at December 31, 2009.  The term loan matures in June 2012. Our $230.0 million senior subordinated notes are due in 2013.

In addition to the debt discussed above, our ultimate parent, UCI Holdco, has $295.1$324.1 million in Floating Rate Senior PIK Notes (the “Holdco Notes”) outstanding at December 31, 2008.2009. The Holdco Notes do not appear on our balance sheet and the related interest expense is not included in our income statement. While UCI has no direct obligation under the Holdco Notes, UCI is the sole source of cash generation for UCI Holdco. The interest on the Holdco Notes is payable “in kind” until December 2011, so no cash interest is payable until after that date. Accordingly, the Holdco Notes will not have any material effect on the cash flow or liquidity of UCI until after that date. In addition, the covenants contained in the Holdco Notes indenture are substantially the same as those contained in the senior subordinated notes indenture, so we expect that the Holdco Notes will have no effect on the current operations of UCI.

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Below is a schedule of required future debt repayments. The 20092010 amount consists primarily of the repaymentmandatory prepayment of our revolving credit line borrowings uponterm debt of $17.7 million resulting from the maturitygeneration of the revolving credit facilityExcess Cash Flow in June 2009 and routine short-term borrowings by our foreign operations. The amounts are presented in millions of dollars.
     
2009 $25.5 
2010  0.2 
2011  45.2 
2012  145.2 
2013  230.1 
Thereafter  0.2 
    
  $446.4 
    

2010 $21.4 
2011  41.0 
2012  131.7 
2013  230.1 
2014  0.1 
Thereafter  0.1 
  $424.4 

The terms of UCI’s senior credit facility permit UCI to repurchase from time to time up to $75$75.0 million in aggregate principal amount of senior subordinated notes. As of March 30, 2009,19, 2010, we had not repurchased any of the senior subordinated notes, although we or UCI Holdco may, under appropriate market conditions, do so in the future through cash purchases or exchange offers, in open market, privately negotiated or other transactions. Similarly, we or UCI Holdco may from time to time seek to repurchase or retire the Holdco Notes. We will evaluate any such transactions in light of then-existing market conditions, taking into account contractual restrictions, our current liquidity and prospects for future access to capital. The amounts involved may be material.

Our significant debt service obligation is an important factor when assessing UCI’s liquidity and capital resources. At our December 31, 20082009 debt level and borrowing rates, annual interest expense, including amortization of deferred financing costs and debt discount, is approximately $32.9$27.5 million. An increase of 0.25 percentage points (25 basis points) on our variable interest rate debt would increase our annual interest cost by $0.5 million.

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Covenant Compliance

Our senior credit facilities requirefacility requires us to maintain certain financial covenants and requirerequires mandatory prepayments under certain events as defined in the agreement. Also, the facilities include certain negative covenants restricting or limiting our ability to, among other things: declare dividends or redeem stock; prepay certain debt; make loans or investments; guarantee or incur additional debt; make capital expenditures; engage in acquisitions or other business combinations; sell assets and alter our business. In addition, the senior credit facility contains the following financial covenants: a maximum leverage ratio and a minimum interest coverage ratio. The financial covenants are calculated on a trailing four consecutive quarters basis. As of December 31, 2008,2009, we were in compliance with all of these covenants.

Our covenant compliance levels and ratios for the quarter ended December 31, 20082009 are as follows:
         
  Covenant  
  Compliance Level  
  for the  
  Quarter Ended Actual
  December 31, 2008 Ratios
Minimum Adjusted EBITDA to interest expense ratio  2.50x 3.45x 
Maximum total debt to Adjusted EBITDA ratio  4.75x 3.93x 

   
Covenant
Compliance Level
for the Quarter Ended
December 31, 2009
  
Actual
Ratios
 
Minimum Adjusted EBITDA to interest expense ratio  2.80x  4.54x
Maximum total debt to Adjusted EBITDA ratio  4.10x  3.17x

The minimum interest coverage ratio and maximum leverage ratio levels become increasingly more restrictive over time. The senior credit facility provides for a minimum Adjusted EBITDA to interest expense ratio and a maximum total debt to Adjusted EBITDA ratio as set forth opposite the corresponding fiscal quarter.

Minimum
AdjustedMaximum
EBITDA
39

  
Minimum
Adjusted
EBITDA
to
Interest
Expense
Covenant
Compliance
Level
  
Maximum
Total Debt
to
Adjusted
EBITDA
Covenant
Compliance
Level
 
Quarter ending March 31, 2010  3.00x  3.75x
Quarter ending June 30, 2010  3.00x  3.75x
Quarter ending September 30, 2010 and thereafter  3.00x  3.50x

to
Total Debt
to
InterestAdjusted
ExpenseEBITDA
CovenantCovenant
ComplianceCompliance
LevelLevel
Quarter ending March 31, 20092.60x4.60x
Quarter ending June 30, 20092.65x4.50x
Quarter ending September 30, 20092.75x4.40x
Quarter ending December 31, 20092.80x4.10x
Quarter ending March 31, 20103.00x3.75x
Quarter ending June 30, 20103.00x3.75x
Quarter ending September 30, 2010 and thereafter3.00x3.50x
Adjusted EBITDA is used to determine our compliance with many of the covenants contained in our senior credit facilities. Adjusted EBITDA is defined as EBITDA further adjusted to exclude unusual items and other adjustments permitted by our lenders in calculating covenant compliance under our senior credit facility.

We believe that the inclusion of debt covenant related adjustments to EBITDA applied in presenting Adjusted EBITDA is appropriate to provide additional information to investors to demonstrate compliance with our financing covenants.

A breach of covenants in our senior credit facilities that are tied to ratios based on Adjusted EBITDA could result in a default under those facilities and the lenders could elect to declare all amounts borrowed due and payable. Any such acceleration would also result in a default under our senior subordinated notes.

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EBITDA and Adjusted EBITDA are not recognized terms under U.S. GAAP (Accounting Principles Generally Accepted in the United States) and do not purport to be alternatives to net income as a measure of operating performance. Additionally, EBITDA and Adjusted EBITDA are not intended to be measures of free cash flow for management’s discretionary use, as they do not consider certain cash requirements such as interest payments, tax payments and debt service requirements.

The following table reconciles net income to EBITDA and Adjusted EBITDA (dollars in millions):

     
  Year ended 
  Dec. 31, 2008 
Net income $9.9 
     
Interest, net of minority interest  34.2 
     
Income tax expense  7.9 
     
Depreciation, net of minority interest  27.3 
     
Amortization  9.0 
    
     
EBITDA
  88.3 
     
Special items:    
Cost of integration of water pump operations
and the resulting asset impairment losses		  2.4 
     
Facilities consolidation & severance costs  0.4 
     
Trademark impairment loss  0.5 
     
Cost of defending class action litigation  4.0 
     
One-time warranty expense  6.7 
     
New business changeover cost and sales commitment costs  5.0 
     
Establishment of new facilities in China  3.6 
     
Non-cash charges (stock options expense)  0.8 
     
Management fee  2.0 
    
     
Adjusted EBITDA
 $113.7 
    
   
Trailing Four
Quarters Ended
Dec. 31, 2009
 
Net income attributable to UCI $30.6 
Interest, net of minority interest  30.0 
Income tax expense  16.5 
Depreciation, net of minority interest  27.9 
Amortization  8.5 
EBITDA  113.5 
Special items:    
Restructuring costs, net  1.2 
Reduction in force severance  2.8 
Patent litigation costs  7.0 
Cost of defending class action litigation  1.5 
New business changeover cost and sales commitment costs  5.0 
Establishment of new facilities in China  0.5 
Non-cash charges (stock options expense)  0.4 
Management fee  2.0 
Adjusted EBITDA $133.9 

Management’s Action Plan and Outlook

Our primary sources of liquidity currently are cash on hand, cash flow from operations and accounts receivable factoring arrangements and borrowings under our existing revolving credit facility, which terminates in June 2009.
Revolving Credit Facility
Lehman Brothers Commercial Paper Inc. (“Lehman”), the administrative agent under UCI’s senior credit facility and one of the syndication banks that fund senior UCI revolving credit borrowings, filed for protection under Chapter 11 of the U.S. Bankruptcy Code on October 5, 2008. Of our total $75.0 million revolving credit line, Lehman’s commitment is $9.5 million. In September 2008, we borrowed $20.0 million under our revolving credit facility, and Lehman did not fund its pro rata share. Because of the bankruptcy filing, we are evaluating our options as to the administrative agent under our credit facility, and we are conducting our cash management based on the presumption that Lehman will not fund any of Lehman’s $9.5 million commitment under our revolving credit line.
arrangements.  At December 31, 2008, revolving credit borrowings were $20.0 million and $9.42009, we had $131.9 million of revolving credit borrowing capacity had been used to support outstanding letters of credit related to our insurance programs. Excluding Lehman’s $9.5 million commitment, we had $36.1 million of unused borrowing capacity at December 31, 2008. We are currently in negotiations to extend or replace our revolving credit facility; however, in the current environment, we cannot be assured that our revolving credit facility will be available for borrowing, or that we will be able to extend or replace the revolving credit facility upon its expiration in June 2009. We are conducting our cash management under the presumption that will be unable to replace the revolving credit facility upon its expiration. Therefore, our ability to make scheduled payments of principal or interestand cash equivalents on or to refinance, our indebtedness or to fund planned capital expenditures will depend on our ability to generate cash from operations in the future and from factoring arrangements. Such cash generation is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.hand.

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40
Accounts Receivable Factoring

Factoring of customer trade accounts receivable is a significant part of our liquidity. Subject to certain limitations, UCI’s credit agreement for its senior credit facility permits sales of and liens on receivables, which are being sold pursuant to factoring arrangements. At December 31, 2008,2009, we had factoring relationships with sixeight banks. The terms of these relationships are such that the banks are not obligated to factor any amount of receivables. Because of the current challenging capital markets, it is possible that these banks may not have the capacity or willingness to fund these factoring arrangements at the levels they have in the past, or at all.

We sold approximately $197.9$225.9 million of receivables in 20082009 and approximately $126.8$197.9 million in 2007.2008. If receivables had not been factored, $80.1$121.5 million and $81.1$80.1 million of additional receivables would have been outstanding at December 31, 20082009 and December 31, 2007,2008, respectively. If we had not factored these receivables, we would have had to finance these receivables in some other way including borrowings against our revolving credit line and reducingor reduce cash on hand. Our short termshort-term cash projections assume a significant increase over the $80.1 millionfairly constant level of factored accounts receivable with the $121.5 million at December 31, 2008 based upon expected growth in business with certain customers.2009.

Short-Term Liquidity Outlook
We have
As a result of the termination of the revolving credit facility in 2009, our ability to make scheduled payments of principal or interest on, or to refinance, our indebtedness or to fund capital expenditures will depend on our ability to generate cash from operations and from factoring arrangements as discussed previously. Such cash generation is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control.

In addition to the increased level of factoring previously discussed, we implemented a number of measures to improve the level of cash generated by our operations in order to increase our liquidity. Specific actions taken include activitiesliquidity and to align our cost structure with our customers’ spending and current market conditions. These restructuring activities include:included:
•Employment cost savings — We have implemented hourly and salaried workforce reductions across all overhead and selling, general and administrative cost centers to align staffing levels with current business levels. At December 31, 2008, we had approximately 4,900 employees as compared to approximately 5,200 at December 31, 2007. Actions taken subsequent to December 31, 2008 have further reduced headcounts by an additional 200. Additionally, we have implemented wage freezes, suspended certain matching contributions to defined contribution and profit sharing plans and other cost reduction activities.
•Additional cost savings — We have critically evaluated overall overhead and selling, general and administrative discretionary spending and have instituted “zero-board” discretionary spending, requiring additional approvals for all such spending across the Company.
Employment cost savings — we implemented hourly and salaried workforce reductions across all overhead and selling, general and administrative cost centers to align staffing levels with current business levels. At December 31, 2009, we had approximately 4,350 employees as compared to approximately 4,900 at December 31, 2008. Additionally in 2009, we implemented wage freezes, suspended certain matching contributions to defined contribution and profit sharing plans and other cost reduction activities.  The wage freeze and suspension of certain matching contributions continues into 2010.
Additional cost savings — in 2009, we critically evaluated overall overhead and selling, general and administrative discretionary spending and have instituted tight controls over discretionary spending, requiring additional approvals for all such spending across the Company.  The same tight controls over discretionary spending continue into 2010.

2007 and 2008 capital spending levels were higher than 2009 estimated spending levels. Spending levels in 2007 and 2008 spending levels included $5.3 million for our two new facilities in China which are substantially complete, as well as funds to support other strategic initiatives. As part of our plans to conserve cash, 2009 capital spending will bewas limited to expenditures necessary to maintain current operations and projects that have short payback periods generally no longer than six months. 2009periods.  2010 capital expenditures are expected to be in the range of $15.0$30 million to $20.0$33 million. This increase over 2009 primarily relates to funding specific targeted cost reduction opportunities.

Additionally, we have implemented initiativeswill continue to reduceaggressively manage our investment in working capital. These reductions are expected to be achieved through focus on inventory reductions and initiatives related to accounts payable.

Based on our forecasts, we believe that cash flow from operations and available cash will be adequate to service debt, including the repayment of revolving credit borrowings upon the termination of our existing credit facility in June 2009, meet liquidity needs, and fund necessary capital expenditures for the next twelve months.

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Long-Term Liquidity Outlook

As presently structured, UCI would be the sole source of cash for the payment of cash interest on the Holdco Notes beginning in 2012, and we can give no assurance that the cash for those interest payments will be available. In the future, we may also need to refinance all or a portion of the principal amount of the senior subordinated notes and/or senior credit facility borrowings, on or prior to maturity. If refinancing is necessary, there can be no assurance that we will be able to secure such financing on acceptable terms, or at all.

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Contractual Obligations

The following table is a summary of contractual cash obligations at December 31, 20082009 (in millions):
                     
  Payments Due by Period 
  Less Than          More Than    
  1 Year  1-3 Years  3-5 Years  5 Years  Total 
Debt repayments (excluding interest) (1) $25.5  $45.4  $375.3  $0.2  $446.4 
Interest payments (2)  30.4   59.9   33.9  See (2) below  124.2 
Estimated pension funding (3)  5.8   20.0   26.0  See (3) below  51.8 
Other postretirement benefit payments (4)  0.8   1.5   1.6  See (4) below  3.9 
Operating leases  5.5   8.9   7.2   10.1   31.7 
Purchase obligations (5)  43.8   —   —   —   43.8 
Management fee (6)  2.0   4.0   4.0  See (6) below  10.0 
Unrecognized tax benefits (7)                    
Employment agreements  0.5   —   —   —   0.5 
                
Total contractual cash obligations $114.3  $139.7  $448.0  $10.3  $712.3 
                

   Payments Due by Period 
   
Less Than
1 Year
  1-3 Years  3-5 Years  
More Than
5 Years
  Total 
Debt repayments (excluding interest) (1) $21.4  $172.7  $230.2  $0.1  $424.4 
Interest payments (2)  25.8   48.8   10.1  See (2) below   84.7 
Estimated pension funding (3)  3.1   20.4   21.7  See (3) below   45.2 
Other postretirement benefit payments (4)  0.7   1.3   1.5  See (4) below   3.5 
Operating leases  5.8   8.8   6.8   12.2   33.6 
Purchase obligations (5)  70.9   —   —   —   70.9 
Management fee (6)  2.0   4.0   4.0  See (6) below   10.0 
Unrecognized tax benefits (7)                    
Employment agreements  0.5   —   —   —   0.5 
Total contractual cash obligations $130.2  $256.0  $274.3  $12.3  $672.8 
(1)Does not include the $295.1$324.1 million of Holdco Notes outstanding. See Note 1413 to the financial statements included in this Form 10-K.

(2)Estimated interest payments are based on the assumption that (i) December 31, 20082009 interest rates will prevail throughout all future periods, (ii) debt is repaid on its due date, and (iii) no new debt is issued. Interest payments beyond year 5 are less than $0.1 million. Nevertheless, estimated interest payments were excluded from the table after year 5.

(3)Estimated pension funding is based on the current composition of pension plans and current actuarial assumptions. Pension funding will continue beyond year 5. Nevertheless, estimated pension funding is excluded from the table after year 5. See Note 1615 to the financial statements included in this Form 10-K for the funding status of the Company’s pension plans at December 31, 2008.2009.

(4)Estimated benefit payments are based on current actuarial assumptions. Benefit payments will continue beyond year 5. Nevertheless, estimated payments are excluded from the table after year 5. See Note 1615 to the financial statements included in this Form 10-K for the funding status of the Company’s other postretirement benefit plans at December 31, 2008.2009.

(5)Included in the purchase obligations is $4.4$8.2 million related to property, plant and equipment. The remainder is for materials, supplies and services routinely used in the Company’s normal operations.

(6)The management fee is excluded from the table after year 5. The management fee is expected to continue at an annual rate of $2.0 million as long as the ownership of the Company does not change.

(7)Possible payments of $4.1$4.2 million related to unrecognized tax benefits are not included in the table because management cannot make reasonable reliable estimates of when cash settlement will occur, if ever. These unrecognized tax benefits are discussed in Note 1514 to the financial statements included in this Form 10-K.

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Commitments and Contingencies

Environmental

UCI is subject to a variety of federal, state, local and foreign environmental laws and regulations, including those governing the discharge of pollutants into the air or water, the management and disposal of hazardous substances or wastes, and the cleanup of contaminated sites. UCI has been identified as a potentially responsible party for contamination at two sites. One of these sites is a former facility in Edison, New Jersey (the “New Jersey Site”), where a state agency has ordered UCI to continue with the monitoring and investigation of chlorinated solvent contamination. UCIThe New Jersey Site has informedbeen the agency that this contamination was caused by another party atsubject of litigation to determine whether a neighboring facility andwas responsible for contamination discovered at the New Jersey Site. A judgment has initiated a lawsuit againstbeen rendered in that partylitigation to the effect that the neighboring facility is not responsible for damages and to compel it to take responsibility for anythe contamination. UCI is analyzing what further investigation or remediation. The lawsuit has proceeded to trial, which is expected toand remediation, if any, may be completed inrequired at the first quarter of 2009, although it is uncertain when a decision will be rendered.New Jersey Site. The second site is a previously owned site in Solano County, California (the “California Site”), where UCI, at the request of the regional water board, is investigating and analyzing the nature and extent of the contamination and is conducting some remediation. Based on currently available information, management believes that the cost of the ultimate outcome of thesethe environmental matters related to the New Jersey Site and the California Site will not exceed the $1.9$1.6 million accrued at December 31, 20082009 by a material amount, if at all. However, because all investigation and analysis has not yet been completed and because ofdue to the inherent uncertainty in such environmental matters, and in the outcome of litigation, such as the New Jersey litigation, it is reasonably possible that the ultimate outcome of these matters could have a material adverse effect on results for a single quarter. Expenditures for these environmental matters totaled $0.4 million in each 2009, 2008 and 2007.

In addition to the two matters discussed above, UCI has been named as a potentially responsible party at a site in Calvert City, Kentucky.Kentucky (the “Kentucky Site”). UCI estimates settlement costs at $0.1 million for this site. Also, UCI is involved in regulated remediation at two of its manufacturing sites.sites (the “Manufacturing Sites”). The combined cost of the remaining remediation at such Manufacturing Sites is $0.6$0.3 million. TheUCI anticipates that the majority of the $0.7$0.4 million reserved for settlement and remediation costs will be spent in the next two years.year. To date, the expenditures related to these three sitesthe Kentucky Site and the Manufacturing Sites have been immaterial.

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Antitrust Litigation
As of March 15, 2009, United Components, Inc.
We are subject to litigation and its wholly owned subsidiary, Champion, were named as two of multiple defendants in 23 complaints originally filed in the District of Connecticut, the District of New Jersey, the Middle District of Tennessee and the Northern District of Illinois alleging conspiracy violations of Section 1 of the Sherman Act, 15 U.S.C. § 1,investigation related to pricing of aftermarket oil, air, fuel and transmission filters. Eight of these complaints also named The Carlyle Groupfilters, as a defendant, but those plaintiffs voluntarily dismissed Carlyle from each of those actions without prejudice. Champion, but not United Components, was also named as a defendantdescribed in 13 virtually identical actions originally filed“Part I, Item 3. Legal Proceedings” in the Northern and Southern Districts of Illinois, and the District of New Jersey. All of these complaints are styled as putative class actions on behalf of all persons and entities that purchased aftermarket filters in the U.S. directly from the defendants, or any of their predecessors, parents, subsidiaries or affiliates, at any time during the period from January 1, 1999 to the present. Each case seeks damages, including statutory treble damages, an injunction against future violations, costs and attorney’s fees.
United Components and Champion were also named as two of multiple defendants in 17 similar complaints originally filed in the District of Connecticut, the Northern District of California, the Northern District of Illinois and the Southern District of New York by plaintiffs who claim to be indirect purchasers of aftermarket filters. Two of these complaints also named The Carlyle Group as a defendant, but the plaintiffs in both of those actions voluntarily dismissed Carlyle without prejudice. Champion, but not United Components, was also named in 3 similar actions originally filed in the Eastern District of Tennessee, the Northern District of Illinois and the Southern District of California. These complaints allege conspiracy violations of Section 1 of the Sherman Act and/or violations of state antitrust, consumer protection and unfair competition law. They are styled as putative class actions on behalf of all persons or entities who acquired indirectly aftermarket filters manufactured and/or distributed by one or more of the defendants, their agents or entities under their control, at any time between January 1, 1999 and the present; with the exception of three complaints which each allege a class period from January 1, 2002 to the present, and one complaint which alleges a class period from the “earliest legal permissible date” to the present. The complaints seek damages, including statutory treble damages, an injunction against future violations, disgorgement of profits, costs and attorney’s fees.
On August 18, 2008, the Judicial Panel on Multidistrict Litigation (“JPML”) issued an order transferring the U.S. direct and indirect purchaser aftermarket filters cases to the Northern District of Illinois for coordinated and consolidated pretrial proceedings before the Honorable Robert W. Gettleman pursuant to 28 U.S.C. § 1407. On November 26, 2008, all of the direct purchaser plaintiffs filed a Consolidated Amended Complaint. This complaint names Champion as one of multiple defendants, but it does not name United Components. The complaint is styled as a putative class action and alleges conspiracy violations of Section 1 of the Sherman Act. The direct purchaser plaintiffs seek damages, including statutory treble damages, an injunction against future violations, costs and attorney’s fees. On February 2, 2009, Champion filed its answer to the direct purchasers’ Consolidated Amended Complaint.
On December 1, 2008, all of the indirect purchaser plaintiffs, except Gasoline and Automotive Service Dealers of America (“GASDA”), filed a Consolidated Indirect Purchaser Complaint. This complaint names Champion as one of multiple defendants, but it does not name United Components. The complaint is styled as a putative class action and alleges conspiracy violations of Section 1 of the Sherman Act and violations of state antitrust, consumer protection and unfair competition law. The indirect purchaser plaintiffs seek damages, including statutory treble damages, penalties and punitive damages where available, an injunction against future violations, disgorgement of profits, costs and attorney’s fees. On February 2, 2009, Champion and the other defendants jointly filed a motion to dismiss the Consolidated Indirect Purchaser Complaint. On that same date, Champion, United Components and the other defendants jointly filed a motion to dismiss the GASDA complaint. Pursuant to a stipulated agreement between the parties, all defendants produced limited initial discovery on January 30, 2009. The Court has ordered that all further discovery shall be stayed until after it rules on the motions to dismiss.
On January 12, 2009, Champion, but not United Components, was named as one of ten defendants in a related action filed in the Superior Court of California, for the County of Los Angeles on behalf of a purported class of direct and indirect purchasers of aftermarket filters. On March 5, 2009, one of the defendants filed a notice of removal to the U.S. District Court for the Central District of California, and then subsequently requested that the JPML transfer this case to the Northern District of Illinois for coordinated pre-trial proceedings.
Champion, but not United Components, was also named as one of five defendants in a class action filed in Quebec, Canada. This action alleges conspiracy violations under the Canadian Competition Act and violations of the obligation to act in good faith (contrary to art. 6 of the Civil Code of Quebec) related to the sale of aftermarket filters. The plaintiff seeks joint and several liability against the five defendants in the amount of $5.0 million in compensatory damages and $1.0 million in punitive damages. The plaintiff is seeking authorization to have the matter proceed as a class proceeding, which motion has not yet been ruled on.
Champion, but not United Components, was also named as one of 14 defendants in a class action filed on May 21, 2008, in Ontario, Canada. This action alleges civil conspiracy, intentional interference with economic interests, and conspiracy violations under the Canadian Competition Act related to the sale of aftermarket filters. The plaintiff seeks joint and several liability against the 14 defendants in the amount of $150 million in general damages and $15 million in punitive damages. The plaintiff is also seeking authorization to have the matter proceed as a class proceeding, which motion has not yet been ruled on. The Antitrust Division of the Department of Justice (DOJ) is also investigating the allegations raised in these suits and certain current and former employees of the defendants, including Champion, have testified pursuant to subpoenas. We are fully cooperating with the DOJ investigation.

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On July 30, 2008, the Office of the Attorney General for the State of Florida issued Antitrust Civil Investigative Demands to Champion and UCI requesting documents and information related to the sale of oil, air, fuel and transmission filters. We are cooperating with the Attorney General’s requests.
Form 10-K.  We intend to vigorously defend against these claims. It is too soon to assess the possible outcome of these proceedings.  No amounts, other than ongoing defense costs, have been recorded in the financial statements for these matters.this matter.

Value-added Tax Receivable

UCI’s Mexican operation has outstanding receivables denominated in Mexican pesos in the amount of $3.3$3.7 million from the Mexican Department of Finance and Public Credit.Credit, which are included in the balance sheet in “Other current assets”. The receivables relate to refunds of Mexican value-added tax, to which UCI believes it is entitled in the ordinary course of business. The local Mexican tax authorities have rejected UCI’s claims for these refunds, and the companyUCI has commenced litigation in the regional federal administrative and tax courts in Monterrey to order the local tax authorities to process these refunds.

Patent Litigation

Champion is a defendant in litigation with Parker-Hannifin Corporation pursuant to which Parker-Hannifin claims that certain of Champion’s products infringe a Parker-Hannifin patent. On December 11, 2009, following trial, a jury verdict was reached, finding in favor of Parker-Hannifin with damages of approximately $6.5 million.  No judgment has yet been entered by the court in this matter.  Champion continues to vigorously defend this matter; however, there can be no assurance with respect to the outcome of litigation. UCI has recorded a $6.5 million liability in the financial statements for this matter.

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Other Litigation

UCI is subject to various other contingencies, including routine legal proceedings and claims arising out of the normal course of business. These proceedings primarily involve commercial claims, product liability claims, personal injury claims and workers’ compensation claims. The outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty. Nevertheless, UCI believes that the outcome of any currently existing proceedings, even if determined adversely, would not have a material adverse effect on UCI’s financial condition or results of operations.
Recent
Recently Adopted Accounting PronouncementsGuidance
On January
See the Recently Adopted Accounting Guidance section of Note 1 2007, UCI adoptedto the provisions ofConsolidated Financial Accounting Standards Board Interpretation No. 48 “Accounting for UncertaintyStatements in Income Taxes.” The effect was immaterial to UCI’s financial statements.
In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 (i) defines fair value, (ii) establishes a framework for measuring fair value in generally accepted accounting principles, and (iii) expands disclosures about fair value measurements. For certain nonfinancial assets and liabilities, adoption of SFAS No. 157 is not required until 2009, and UCI has not adopted for those certain nonfinancial assets and liabilities. Adoption of SFAS No. 157 in 2009 for those certain nonfinancial assets and liabilities is not expected to have a significant effect on UCI’s financial statements. For assets and liabilities other than those certain nonfinancial assets and liabilities, UCI adopted SFAS No. 157 on January 1, 2008. AdoptionPart II Item 8 of this portionForm 10-K.

Recently Issued Accounting Guidance

See the Recently Issued Accounting Guidance section of SFAS No. 157 did not have a material impact on UCI’s financial statements.
In February 2007,Note 1 to the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities— Including an Amendment of SFAS No. 115.” SFAS No. 159 permits companies to choose to measure certain financial instruments and other items at fair value. UCI did not choose the fair value measurement options permitted by SFAS No. 159 for any of its assets and liabilities. Therefore, adoption of SFAS No. 159 did not impact UCI’s financial statements.
In December 2007, the FASB issued SFAS No. 141R, “Business Combinations.” SFAS No. 141R will replace SFAS No. 141 and provides new rules for accounting for the acquisition of a business. This statement is effective for fiscal years beginning after December 15, 2008. Generally, the effects of SFAS No. 141R will depend on the occurrence of future acquisitions, if any, by UCI.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements” an amendment of ARB No. 51, which will be adopted on January 1, 2009. This standard will change the name of “Minority Interest” to “Noncontrolling Interest.” This standard will also change the accounting and reporting related to noncontrolling interests in a consolidated subsidiary. After adoption, noncontrolling interests, ($2.5 million and $3.3 million at December 31, 2008 and 2007, respectively) will be classified as shareholder’s equity, a change from its current classification with long-term liabilities. Losses attributable to minority interests ($0.9 million, $0.1 million, and $0.8 million for 2008, 2007 and 2006, respectively), will be included in net income, although such losses will be deducted to arrive at net income attributable to UCI.

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In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No. 133.” SFAS No. 161 changes disclosure requirements for derivative instruments and hedging activities. Entities will be required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. This statement is effective for fiscal years beginning after November 15, 2008. UCI has not evaluated the potential impactPart II Item 8 of this statement on its financial statements.Form 10-K.
In April 2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, “Determination of the Useful Life of Intangible Assets,” to provide guidance for determining the useful life of recognized intangible assets and to improve consistency between the period of expected cash flows used to measure the fair value of a recognized intangible asset and the useful life of the intangible asset as determined under Statement 142. The FSP requires that an entity consider its own historical experience in renewing or extending similar arrangements. However, the entity must adjust that experience based on entity-specific factors under FASB Statement 142, “Goodwill and Other Intangible Assets.” FSP FAS 142-3 is effective for fiscal years and interim periods that begin after November 15, 2008. UCI has periodically purchased recognized intangible assets. The adoption of FSP FAS 142-3 is not expected to have a material effect on UCI’s financial statements.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” This statement identifies the sources of accounting principles and the framework, or hierarchy, for selecting the principles to be used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles in the United States. This statement is effective November 15, 2008. SFAS No. 162 is not expected to have a significant effect on UCI’s financial statements.
In December 2008, the FASB issued FASB Staff Position (FSP) FAS 140-4, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities,” to provide additional disclosures about transfers of financial assets. The disclosures required by FSP 140-4 are intended to provide more transparency to financial statement users about a transferor’s continuing interest involvement with transferred financial assets and an enterprise’s involvement with variable interest entities and qualifying special purpose entities. FSP FAS 140-4 is effective for fiscal years and interim periods that begin after December 15, 2008. UCI has agreements to sell undivided interests in certain of its receivables with factoring companies, which in turn have the right to sell an undivided interest to a financial institution or other third party. However, UCI retains no rights or interest, and has no obligations, with respect to the sold receivables. UCI does not service the receivables after the sales. As such, FSP FAS 140-4 is not expected to have a significant effect on UCI’s financial statements.
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk consists of foreign currency exchange rate fluctuations and changes in interest rates.

Foreign Currency Exposure

Currency translation.As a result of international operating activities, we are exposed to risks associated with changes in foreign exchange rates, principally exchange rates between the U.S. dollar and the Mexican peso, British pound and the Chinese yuan.Yuan. The results of operations of our foreign subsidiaries are translated into U.S. dollars at the average exchange rates for each relevant period, except for our Chinese subsidiaries, where cost of sales is translated primarily at historical exchange rates. This translation has no impact on our cash flow. However, as foreign exchange rates change, there are changes to the U.S. dollar equivalent of sales and expenses denominated in foreign currencies. In 2008,2009, approximately 8% of our net sales were made by our foreign subsidiaries. Their combined net income was not material. While these results, as measured in U.S. dollars, are subject to foreign exchange rate fluctuations, we do not consider the related risk to be material to our financial condition or results of operations.

Except for the Chinese subsidiaries, the balance sheets of foreign subsidiaries are translated into U.S. dollars at the closing exchange rates as of the relevant balance sheet date. Any adjustments resulting from the translation are recorded in accumulated other comprehensive income (loss) on our statementstatements of changes in shareholder’s equity. For our Chinese subsidiaries, non-monetary assets and liabilities are translated into U.S. dollars at historical rates and monetary assets and liabilities are translated into U.S. dollars at the closing exchange rate as of the relevant balance sheet date. Adjustments resulting from the translation of the balance sheets of our Chinese subsidiaries are recorded in our income statement.statements.

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Currency transactions.Currency transaction exposure arises where actual sales and purchases are made by a business or company in a currency other than its own functional currency. In 2009,2010, we expect to source approximately $70$112 million of components from China. The currency exchange rate from Chinese yuan toTo the extent possible, we structure arrangements where the purchase transactions are denominated in U.S. dollars has been stable, in large part dueas a means to the economic policies of the Chinese government. However, the Chinese government has reduced its influence over theminimize near-term exposure to foreign currency exchange rate, and let market conditions control to a greater extent. As a result, duringfluctuations.  During the period from June 30,December 31, 2007 through June 30, 2008, the Chinese yuanYuan strengthened against the U.S. dollar by approximately 11%6%. Less influence bySince June 30, 2008, the relationship of the U.S. dollar to the Chinese government will most likely result in the Chinese yuan continuing to strengthening against the U.S. dollar. Yuan has remained stable.

A weakening U.S. dollar means that we must pay more U.S. dollars to obtain components from China, which equates to higher cost of sales. If we are unable to negotiate commensurate price decreases from our Chinese suppliers, these higher prices would eventually translate into higher cost of sales. In that event we would attempt to obtain corresponding price increases from our customers, but there are no assurances that we would be successful.

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Our Mexican operations source a significant amount of inventory from the United States. During the period September 30, 2008 through DecemberMarch 31, 2008,2009, the U.S. dollar strengthened against the Mexican peso by approximately 28% and has further strengthened33%. During the period March 31, 2009 through December 31, 2009, the U.S. dollar weakened against the Mexican peso by approximately 3% from January 1, 2009 through March 18, 2009.11%, partially offsetting the trend experienced in the prior six months. A strengthening U.S. dollar against the Mexican peso means that our Mexican operations must pay more pesos to obtain inventory from the United States. These higher prices translate into higher cost of sales for our Mexican operations. We are attempting to obtain corresponding price increases from our customers served by our Mexican operations, but there are no assurances that we will be successful.the weakness in the Mexican economy has limited the ability to entirely offset the higher cost of sales.

We will continue to monitor our transaction exposure to currency rate changes and may enter into currency forward and option contracts to limit the exposure, as appropriate. Gains and losses on contracts are deferred until the transaction being hedged is finalized. As of December 31, 2008,2009, we had no foreign currency contracts outstanding. We do not engage in any speculative activities.

Interest Rate Risk
In connection with our senior credit facilities, we entered into interest rate swap agreements in August 2005. These agreements effectively converted $80 million of variable rate debt to fixed rate debt for the two years ended August 2007, and converted $40 million for the 12-month period ended August 2008. The variable component of the interest rate on borrowings under the senior credit facilities was based on LIBOR. Under the swap agreements, we paid 4.4% and received the then current LIBOR on $80 million through August 2007, and we paid 4.4% and received the then current LIBOR on $40 million for the 12-month period ending August 2008.
UCI did not replace the interest rate swap that expired in August 2008, and at this time does not intend to replace it.
We utilize, and we will continue to utilize, sensitivity analyses to assess the potential effect of our variable rate debt. If variable interest rates were to increase by 0.25% per annum, the net impact would be a decrease of approximately $0.3 million of our net income and cash flow.

Treasury Policy

Our treasury policy seeks to ensure that adequate financial resources are available for the development of our businesses while managing our currency and interest rate risks. Our policy is to not engage in speculative transactions. Our policies with respect to the major areas of our treasury activity are set forth above.

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ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

  Page
   
Page
Report of Independent Registered Public Accounting Firm
 4647
Consolidated Financial Statements  
Consolidated Balance Sheets
47
Consolidated Income Statements
 48
Consolidated Income Statements 49
Consolidated Statements of Cash Flows
 4950
Consolidated Statements of Changes in Shareholder’s Equity
 5051
Notes to Consolidated Financial Statements
 5152

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Report of Independent Registered Public Accounting Firm
46
To the
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholder
United Components, Inc. and subsidiaries

We have audited the accompanying consolidated balance sheets of United Components, Inc. and subsidiaries (the “Company”) (a Delaware corporation) as of December 31, 20082009 and 2007,2008, and the related consolidated statements of income, shareholder’s equity and cash flows for each of the three years in the period ended December 31, 2008.2009. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of United Components, Inc. and subsidiaries as of December 31, 20082009 and 2007,2008, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 20082009 in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 15,1, the Company’s consolidated financial statements have been adjusted retrospectively for presentation associated with noncontrolling interests in 2009 and, as discussed in Note 14, the Company changed its method of accounting for uncertain tax positions in 2007 due to the adoption of Financial Accounting Standards Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes. Further, as discussed in Note 16, the Company changed its method of accounting for pension and other postretirement benefits in 2007 due to the adoption of FASB Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Post-Retirement Plans: an amendment of FASB Statement No. 87, 88, 106 and 132(R). Also as discussed in Note 20, the Company changed its method of accounting for share-based compensation in 2006 due to the adoption of FASB Statement No. 123(R), Share-Based Payment.2007. 

/s/ GRANT THORNTON LLP

Cincinnati, Ohio
March 30, 200919, 2010

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United Components, Inc.

Consolidated Balance Sheets
(in thousands)
         
  December 31, 
  2008  2007 
Assets
        
Current assets        
Cash and cash equivalents $46,612  $41,440 
Accounts receivable, net  261,624   253,904 
Inventories, net  159,444   142,621 
Deferred tax assets  24,245   22,837 
Other current assets  19,452   29,306 
       
Total current assets  511,377   490,108 
         
Property, plant and equipment, net  167,906   167,812 
Goodwill  241,461   241,461 
Other intangible assets, net  74,606   83,594 
Deferred financing costs, net  2,649   3,701 
Pension and other assets  1,823   11,478 
Assets held for sale  —   1,300 
       
Total assets $999,822  $999,454 
       
         
Liabilities and shareholder’s equity
        
Current liabilities        
Accounts payable $104,416  $102,553 
Short-term borrowings  25,199   10,134 
Current maturities of long-term debt  422   479 
Accrued expenses and other current liabilities  85,730   95,169 
       
Total current liabilities  215,767   208,335 
         
Long-term debt, less current maturities  418,025   427,815 
Pension and other postretirement liabilities  79,832   22,871 
Deferred tax liabilities  3,560   27,338 
Due to UCI Holdco  17,535   11,330 
Minority interest  2,490   3,308 
Other long-term liabilities  2,540   2,638 
       
Total liabilities  739,749   703,635 
         
Contingencies — Note 17        
         
Shareholder’s equity        
Common stock  —   — 
Additional paid in capital  278,430   277,741 
Retained earnings  21,243   11,316 
Accumulated other comprehensive income (loss)  (39,600)  6,762 
       
Total shareholder’s equity  260,073   295,819 
       
Total liabilities and shareholder’s equity $999,822  $999,454 
       

   December 31, 
  2009  2008 
Assets      
Current assets      
Cash and cash equivalents $131,913  $46,612 
Accounts receivable, net  261,210   261,624 
Inventories, net  133,058   159,444 
Deferred tax assets  30,714   24,245 
Other current assets  23,499   19,452 
Total current assets  580,394   511,377 
Property, plant and equipment, net  149,753   167,906 
Goodwill  241,461   241,461 
Other intangible assets, net  68,030   74,606 
Deferred financing costs, net  1,843   2,649 
Restricted cash  9,400   — 
Other long-term assets  6,304   1,823 
Total assets $1,057,185  $999,822 
         
Liabilities and shareholder’s equity        
Current liabilities        
Accounts payable $111,898  $104,416 
Short-term borrowings  3,460   25,199 
Current maturities of long-term debt  17,925   422 
Accrued expenses and other current liabilities  106,981   85,730 
Total current liabilities  240,264   215,767 
Long-term debt, less current maturities  400,853   418,025 
Pension and other postretirement liabilities  70,802   79,832 
Deferred tax liabilities  8,546   3,560 
Due to UCI Holdco  30,105   17,535 
Other long-term liabilities  6,672   2,540 
Total liabilities  757,242   737,259 
         
Contingencies — Note 16        
         
Equity        
United Components, Inc. shareholder’s equity        
Common stock  —   — 
Additional paid in capital  278,756   278,430 
Retained earnings  51,879   21,243 
Accumulated other comprehensive loss  (32,502)  (39,600)
Total United Components, Inc. shareholder’s equity  298,133   260,073 
Noncontrolling interest  1,810   2,490 
Total equity  299,943   262,563 
Total liabilities and equity $1,057,185  $999,822 

The accompanying notes are an integral part of these statements.

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48

United Components, Inc.

Consolidated Income Statements
(in thousands)
             
  Year ended December 31, 
  2008  2007  2006 
Net sales $880,441  $969,782  $906,050 
Cost of sales  702,522   748,822   728,511 
          
Gross profit  177,919   220,960   177,539 
             
Operating (expenses) income            
Selling and warehousing  (62,906)  (61,146)  (60,047)
General and administrative  (49,320)  (49,239)  (42,636)
Amortization of acquired intangible assets  (6,349)  (7,000)  (6,651)
Costs of integration of water pump operations and resulting asset impairment losses (Note 3)  (2,380)  (696)  (6,981)
Costs of closing facilities and consolidating operations and gain from sale of assets (Note 5)  —   1,498   (6,364)
Trademark impairment loss (Note 11)  (500)  (3,600)  — 
          
             
Operating income  56,464   100,777   54,860 
             
Other expense            
Interest expense, net  (34,192)  (40,706)  (43,262)
Write-off of deferred financing costs (Note 14)  —   —   (2,625)
Management fee expense  (2,000)  (2,000)  (2,000)
Miscellaneous, net  (2,689)  (2,739)  (137)
          
             
Income before income taxes  17,583   55,332   6,836 
Income tax expense  (7,656)  (19,953)  (694)
          
Net income from continuing operations  9,927   35,379   6,142 
          
             
Discontinued operations (Note 4)            
Net income from discontinued operations, net of tax  —   —   2,061 
Gain (loss) on sale of discontinued operations, net of tax  —   2,707   (16,877)
          
   —   2,707   (14,816)
          
Net income (loss) $9,927  $38,086  $(8,674)
          

   Year ended December 31, 
  2009  2008  2007 
          
Net sales $884,954  $880,441  $969,782 
Cost of sales  685,356   702,522   748,822 
Gross profit  199,598   177,919   220,960 
Operating (expenses) income            
Selling and warehousing  (56,598)  (62,906)  (61,146)
General and administrative  (45,525)  (49,320)  (49,239)
Amortization of acquired intangible assets  (5,758)  (6,349)  (7,000)
Restructuring (costs) gains (Note 2)  (923)  (2,380)  802 
Trademark impairment loss (Note 9)  —   (500)  (3,600)
Patent litigation costs (Note 16)  (7,002)  —   — 
Operating income  83,792   56,464   100,777 
Other expense            
Interest expense, net  (30,001)  (34,192)  (40,706)
Management fee expense  (2,000)  (2,000)  (2,000)
Miscellaneous, net  (5,458)  (3,507)  (2,867)
Income before income taxes  46,333   16,765   55,204 
Income tax expense  (16,377)  (7,656)  (19,953)
Net income from continuing operations  29,956   9,109   35,251 
Gain on sale of discontinued operations, net of tax (Note 3)  —   —   2,707 
Net income  29,956   9,109   37,958 
Less: Loss attributable to noncontrolling interest  (680)  (818)  (128)
Net income attributable to United Components, Inc. $30,636  $9,927  $38,086 

The accompanying notes are an integral part of these statements.

48


49

United Components, Inc.

Consolidated Statements of Cash Flows
(in thousands)
             
  Year ended December 31, 
  2008  2007  2006 
Cash flows from operating activities of continuing operations:
            
Net income (loss) $9,927  $38,086  $(8,674)
Less:            
Net income from discontinued operations, net of tax  —   —   2,061 
Gain (loss) on sale of discontinued operations, net of tax  —   2,707   (16,877)
          
Net income from continuing operations  9,927   35,379   6,142 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:            
Depreciation and amortization of other intangible assets  36,970   35,308   35,334 
Amortization of deferred financing costs and debt issuance costs  1,684   2,083   2,510 
Deferred income taxes  796   12,883   (2,188)
Gain on sale of Mexican land and building  —   (1,716)  — 
Non-cash write off of deferred financing costs  —   —   2,625 
Non-cash asset write-downs described in Notes 3 and 5  —   —   7,542 
Trademark impairment loss  500   3,600   — 
Other non-cash, net  2,978   3,232   3,051 
Changes in operating assets and liabilities            
Accounts receivable  (9,538)  (24,908)  3,033 
Inventories  (19,088)  15,403   27,041 
Other current assets  9,513   304   (7,325)
Accounts payable  2,955   9,833   (11,999)
Accrued expenses and other current liabilities  (9,414)  (2,501)  1,804 
Other assets  252   (2,152)  4,530 
Due to UCI Holdco  6,205   11,330   — 
Other long-term liabilities  (1,317)  (4,948)  1,803 
          
Net cash provided by operating activities of continuing operations  32,423   93,130   73,903 
          
             
Cash flows from investing activities of continuing operations:
            
Proceeds from sale of Mexican land and building  —   6,637   — 
Purchase price of the ASC acquisition, net of cash acquired  —   —   (123,634)
Proceeds from sale of discontinued operations, net of transaction costs and cash sold  —   2,202   65,177 
Capital expenditures  (31,940)  (29,687)  (22,846)
Proceeds from sale of property, plant and equipment  421   1,836   1,611 
          
Net cash used in investing activities of continuing operations  (31,519)  (19,012)  (79,692)
          
             
Cash flows from financing activities of continuing operations:
            
Issuance of debt  27,993   20,760   113,000 
Financing fees  —   —   (3,636)
Debt repayments  (23,407)  (84,884)  (66,853)
Dividend paid to UCI Holdco  —   —   (35,305)
Shareholder’s equity contributions  —   —   8,515 
          
Net cash provided by (used in) financing activities of continuing operations  4,586   (64,124)  15,721 
          
             
Discontinued operations:
            
Net cash used in operating activities of discontinued operations  —   —   (1,472)
Net cash used in investing activities of discontinued operations  —   —   (2,864)
Effect of exchange rate changes on cash of discontinued operations  —   —   (341)
             
Effect of exchange rate changes on cash  (318)  (77)  86 
          
Net increase in cash and cash equivalents  5,172   9,917   5,341 
Cash and cash equivalents at beginning of year  41,440   31,523   26,182 
          
Cash and cash equivalents of continuing operations at end of year $46,612  $41,440  $31,523 
          

   Year ended December 31, 
  2009  2008  2007 
Cash flows from operating activities:
         
Net income attributable to United Components, Inc. $30,636  $9,927  $38,086 
Less:            
Gain on sale of discontinued operations, net of tax  —   —   2,707 
Net income from continuing operations  30,636   9,927   35,379 
Adjustments to reconcile net income to net cash provided by operating activities:            
Depreciation and amortization of other intangible assets  37,134   36,970   35,308 
Amortization of deferred financing costs and debt issuance costs  1,439   1,684   2,083 
Deferred income taxes  (5,205)  796   12,883 
Gain on sale of Mexican land and building  —   —   (1,716)
Trademark impairment loss  —   500   3,600 
Other non-cash, net  259   2,978   3,232 
Changes in operating assets and liabilities            
Accounts receivable  1,017   (9,538)  (24,908)
Inventories  27,007   (19,088)  15,403 
Other current assets  (3,863)  9,513   304 
Accounts payable  7,237   2,955   9,833 
Accrued expenses and other current liabilities  20,983   (9,414)  (2,501)
Other assets  1,057   252   (2,152)
Due to UCI Holdco  12,570   6,205   11,330 
Other long-term liabilities  (958)  (1,317)  (4,948)
Net cash provided by operating activities  129,313   32,423   93,130 
             
Cash flows from investing activities:
            
Proceeds from sale of Mexican land and building  —   —   6,637 
Proceeds from sale of discontinued operations, net of transaction costs and cash sold  —   —   2,202 
Capital expenditures  (15,266)  (31,940)  (29,687)
Proceeds from sale of property, plant and equipment  2,566   421   1,836 
Increase in restricted cash  (9,400)  —   — 
Net cash used in investing activities  (22,100)  (31,519)  (19,012)
             
Cash flows from financing activities:
            
Issuance of debt  13,187   27,993   20,760 
Debt repayments  (35,227)  (23,407)  (84,884)
Net cash (used in) provided by financing activities  (22,040)  4,586   (64,124)
             
Effect of exchange rate changes on cash  128   (318)  (77)
Net increase in cash and cash equivalents  85,301   5,172   9,917 
             
Cash and cash equivalents at beginning of year  46,612   41,440   31,523 
Cash and cash equivalents at end of year $131,913  $46,612  $41,440 

The accompanying notes are an integral part of these statements.

49


50
United Components, Inc.

Consolidated Statements of Changes in Shareholder’s Equity
(in thousands)
                         
              Accumulated       
      Additional  Retained  Other  Total    
  Common  Paid In  Earnings  Comprehensive  Shareholder’s  Comprehensive 
  Stock  Capital  (Deficit)  Income (Loss)  Equity  Income (Loss) 
Balance at January 1, 2006 $—  $263,636  $17,546  $(836) $280,346     
Additions to paid in capital      8,515           8,515     
Dividend paid to UCI Holdco, Inc.          (35,305)      (35,305)    
Recognition of stock based compensation expense      1,598           1,598     
Cumulative effect adjustment due to the adoption of SFAS No. 158              (2,425)  (2,425)    
Comprehensive loss                        
Net loss          (8,674)      (8,674) $(8,674)
Other comprehensive income                        
Interest rate swaps (after $(87) of income tax)              146   146   146 
Foreign currency (after $66 of income tax)              278   278   278 
Pension and OPEB liability (after $(187) of income tax)              303   303   303 
                        
Total comprehensive loss                     $(7,947)
                   
Balance at December 31, 2006 $—  $273,749  $(26,433) $(2,534) $244,782     
                    
                         
Balance at January 1, 2007 $—  $273,749  $(26,433) $(2,534) $244,782     
Effect of adopting FIN 48          (337)      (337)    
Recognition of stock based compensation expense      3,445           3,445     
Tax effect of exercise of UCI Holdco stock options      547           547     
Comprehensive income                        
Net income          38,086       38,086  $38,086 
Other comprehensive income                        
Interest rate swaps (after $293 of income tax)              (478)  (478)  (478)
Foreign currency (after $68 of income tax)              845   845   845 
Pension and OPEB liability (after $(5,565) of income tax)              8,929   8,929   8,929 
                        
Total comprehensive income                     $47,382 
                   
Balance at December 31, 2007 $—  $277,741  $11,316  $6,762  $295,819     
                    
                         
Balance at January 1, 2008 $—  $277,741  $11,316  $6,762  $295,819     
Recognition of stock based compensation expense      833           833     
Tax effect of exercise of UCI Holdco stock options      (144)          (144)    
Comprehensive loss                        
Net income          9,927       9,927  $9,927 
Other comprehensive income                        
Interest rate swaps (after $3 of income tax)              4   4   4 
Foreign currency (after $(134) of income tax)              (4,357)  (4,357)  (4,357)
Pension and OPEB liability (after $25,994 of income tax)              (42,009)  (42,009)  (42,009)
                        
Total comprehensive loss                     $(36,435)
                   
Balance at December 31, 2008 $—  $278,430  $21,243  $(39,600) $260,073     
                    

   United Components, Inc. Shareholder’s Equity          
   
Common
Stock
  
Additional
Paid In
Capital
  
Retained
Earnings
  
Accumulated
Other
Comprehensive
Income (Loss)
  
Noncontrolling
Interest
  
Total
Equity
  
Comprehensive
Income (Loss)
 
                      
Balance at January 1, 2007 $—  $273,749  $(26,433) $(2,534) $3,436  $248,218    
Adjustment to adopt accounting for uncertainty in income taxes          (337)          (337)   
Recognition of stock based compensation expense      3,445               3,445    
Tax effect of exercise of UCI Holdco stock options      547               547    
Comprehensive income                           
Net income          38,086       (128)  37,958  $38,086 
Other comprehensive income (loss)                            
Interest rate swaps (after $293 of income tax)              (478)      (478)  (478)
Foreign currency (after $68 of income tax)              845       845   845 
Pension and OPEB liability (after $(5,565) of income tax)              8,929       8,929   8,929 
Total comprehensive income                         $47,382 
Balance at December 31, 2007 $ —  $277,741  $11,316  $6,762  $3,308  $299,127     
                             
Balance at January 1, 2008 $—  $277,741  $11,316  $6,762  $3,308  $299,127     
Recognition of stock based compensation expense      833               833     
Tax effect of exercise of UCI Holdco stock options      (144)              (144)    
Comprehensive income                            
Net income          9,927       (818)  9,109  $9,927 
Other comprehensive income (loss)                            
Interest rate swaps (after $3 of income tax)              4       4   4 
Foreign currency (after $(134) of income tax)              (4,357)      (4,357)  (4,357)
Pension and OPEB liability (after $25,994 of income tax)              (42,009)      (42,009)  (42,009)
Total comprehensive loss                         $(36,435)
Balance at December 31, 2008 $—  $278,430  $21,243  $(39,600) $2,490  $262,563     
                             
Balance at January 1, 2009 $—  $278,430  $21,243  $(39,600)  2,490  $262,563     
Recognition of stock based compensation expense      350               350     
Tax effect of exercise of UCI Holdco stock options      (24)              (24)    
Comprehensive income                            
Net income          30,636       (680)  29,956  $30,636 
Other comprehensive income                            
Foreign currency (after $(213) of income tax)              1,242       1,242   1,242 
Pension and OPEB liability (after $(3,622) of income tax)              5,856       5,856   5,856 
Total comprehensive income                         $37,734 
Balance at December 31, 2009 $—  $278,756  $51,879  $(32,502) $1,810  $299,943     

The accompanying notes are an integral part of these statements.

50


51

United Components, Inc.
Notes to Consolidated Financial Statements

NOTE 1 — GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General

United Components, Inc. (“UCI”) is an indirect wholly-owned subsidiary of UCI Holdco, Inc. (“Holdco”). Holdco and UCIUnited Components, Inc. are corporations formed at the direction of The Carlyle Group. At December 31, 2008,2009, affiliates of The Carlyle Group owned 90.9%90.8% of Holdco’s common stock, and the remainder was owned by certain current and former members of UCI’sUnited Components, Inc.’s senior management and board of directors. At December 31, 2008,2009, Holdco had $295.1$324.1 million of Floating Rate Senior PIK Notes (the “Holdco Notes”) outstanding. While UCIUnited Components, Inc. has no direct obligation under the Holdco Notes, UCIUnited Components, Inc. is the sole source of cash generation for UCI Holdco. The Holdco Notes do not appear on UCI’sUnited Components, Inc.’s balance sheet and the related interest expense is not included in UCI’sUnited Components, Inc.’s income statement. See Note 14.13.
On May 25, 2006, UCI acquired ASC Industries, Inc. See Note 2.
On June 30, 2006, UCI sold its driveline components operation and its specialty distribution operation. See Note 4.
On November 30, 2006, UCI sold its lighting systems operation. See Note 4.
UCI operates through its subsidiaries. UCI manufactures and distributes vehicle parts, primarily servicing the vehicle replacement parts market in North America and Europe.
In these notes to the financial statements, the term “UCI” refers to United Components, Inc. and its subsidiaries and the term “United Components” refers to United Components, Inc. without its subsidiaries.

UCI operates through its subsidiaries. UCI manufactures and distributes vehicle parts, primarily servicing the vehicle replacement parts market in North America and Europe.

A summary of the significant accounting policies applied in the preparation of the accompanying financial statements follows.

Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements include the accounts of UCI,United Components, its wholly-owned subsidiaries and a 51% owned joint venture. All significant intercompany accounts and transactions have been eliminated.

Revenue Recognition

UCI records sales when title has transferred to the customer, the sales price is fixed and determinable, and the collection of the related accounts receivable is reasonably assured. In the case of sales to the aftermarket, UCI recognizes revenue when the above conditions are met for its direct customers, which are the aftermarket retailers and distributors.

Provisions for estimated sales returns, allowances and warranty costs are recorded when the sales are recorded. Sales returns, allowances and warranty costs are estimated based upon historical experience, current trends, and UCI’s expectations regarding future experience. Adjustments to such returns, allowances, and warranty costs are made as new information becomes available.

In order to obtain exclusive contracts with certain customers, weUCI may incur up-front costs or assume the cost of returns of products sold by the previous supplier. These costs are capitalized and amortized over the life of the contract. The amortized amounts are recorded as a reduction of sales.

New business changeover costs also can include the costs related to removing a new customer’s inventory and replacing it with UCI inventory, commonly referred to as a “stocklift.” Stocklift costs are recorded as a reduction to revenue when incurred.

52
United Components, Inc.
Notes to Consolidated Financial Statements

Cash Equivalents

Certificates of deposit, commercial paper, and other highly liquid investments with an original maturity of three months or less are considered to be cash equivalents.

51

United Components, Inc.
Notes to Consolidated Financial Statements
Allowance for Doubtful Accounts

UCI generally does not require collateral for its trade accounts receivable. Accounts receivable have been reduced by an allowance for amounts that may become uncollectible in the future. These allowances are established based on a combination of write-off history, aging analysis, and specific account evaluations. When a receivable balance is known to be uncollectible, it is written off against the allowance for doubtful accounts.

Inventories

Inventories are stated at the lower of cost or market. Cost is principally determined using standard or average cost, which approximates the first-in, first-out method. Inventories are reduced by an allowance for excess and obsolete inventories, based on UCI’s review of on-hand inventories. The expense of inventory write-downs is included in cost of sales.

Depreciation and Amortization

Depreciation of property, plant and equipment is provided on a straight-line basis, over the estimated service lives of the assets. Leasehold improvements are amortized over the shorter of their service life or the remaining term of the lease.

Major renewals and improvements of property, plant and equipment are capitalized, and repairs and maintenance costs are expensed as incurred. Repairs and maintenance expenses for the years ended December 31, 2009, 2008 and 2007 and 2006 were $4.4 million, $6.1 million, and $5.7 million, and $5.8 million, respectively.

Most of UCI’s trademarks have indefinite lives and are not amortized; instead they are subject to impairment evaluations. Trademarks with finite lives and other intangible assets are amortized over their useful lives on an accelerated or straight-line basis commensurate with the expected benefits received from such intangible assets.

Goodwill and Trademarks with Indefinite Lives

Goodwill is subject to annual review unless conditions arise that require a more frequent evaluation. The review for impairment is based on a two-step accounting test. The first step is to compare the estimated fair value of UCI with the recorded net book value (including the goodwill). If the estimated fair value is higher than the recorded net book value, no impairment is deemed to exist and no further testing is required. If, however, the estimated fair value is below the recorded net book value, then a second step must be performed to determine the goodwill impairment required, if any. In this second step, the estimated fair value from the first step is used as the purchase price in a hypothetical acquisition. Purchase business combination accounting rules are followed to determine a hypothetical purchase price allocation to the reporting unit’s assets and liabilities. The residual amount of goodwill that results from this hypothetical purchase price allocation is compared to the recorded amount of goodwill, and the recorded amount is written down to the hypothetical amount, if lower.

We perform our
53

United Components, Inc.
Notes to Consolidated Financial Statements

UCI performs its annual goodwill impairment review in the fourth quarter of each year using discounted future cash flows of the Company’sUCI’s one reporting unit. Management retainedretains the services of an independent valuation company in order to assist in evaluating the estimated fair value of the company. The process of evaluating the potential impairment of goodwill is subjective because it requires the use of estimates and assumptions as to future cash flows of the company and discount rates commensurate with the risks involved in the assets. Although we basethe Company bases cash flow forecasts on assumptions that are consistent with plans and estimates we use to manage our company, there is significant judgment in determining the cash flows. After determiningBased upon the fair valuesresults of our company as of December 31, 2008,the annual impairment review, it was determined that the fair value of our company significantly exceeded the carrying value of the assets and no impairment existed.

Trademarks with indefinite lives are tested for impairment on an annual basis in the fourth quarter, unless conditions arise that would require a more frequent evaluation. In assessing the recoverability of these assets, projections regarding estimated discounted future cash flows and other factors are made to determine if an impairment has occurred. If UCI concludes that there has been an impairment, UCI will write down the carrying value of the asset to its fair value. In 2008 and 2007, UCI recorded trademark impairment losses of $0.5 million and $3.6 million, respectively.

52

United Components, Inc.
Notes to Consolidated Financial Statements
Each year, UCI evaluates those trademarks with indefinite lives to determine whether events and circumstances continue to support the indefinite useful lives. Other than the impaired trademark impairment mentioned above, UCI has concluded that events and circumstances continue to support the indefinite lives of these trademarks.

Impairment of Long-Lived Assets, other than Goodwill and Trademarks with Indefinite Lives and Long-Lived Assets to be Disposed of

UCI evaluates all of its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of such long-lived assets is measured by a comparison of the carrying amount of the asset to the future undiscounted net cash flows that are expected to be generated by the asset. If the carrying amount exceeds the expected undiscounted future cash flows, the asset is considered to be impaired. If an asset is considered to be impaired, it is written down to fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. See Notes 3, 52 and 119 for impairment losses recorded in 2009, 2008 2007 and 2006.2007.

Income Taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax basis. Deferred tax assets are also recognized for operating losses and tax credit carryforwards. UCI establishes valuation allowances against operating losses and tax credit carryforwards when the ability to fully utilize these benefits is determined to be uncertain. Deferred tax assets and liabilities are measured using enacted tax rates applicable in the years in which they are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax law is recognized in income in the period that includes the enactment date.

UCI records a liability for uncertain tax positions where management concludes that the likelihood of sustaining such positions upon examination by taxing authorities is less than “more likely than not”.not.” UCI also records any interest and penalties related to these unrecognized tax benefits as a component of “Income tax expense.”

Foreign Currency Translation

Chinese operations — The functional currency of ourUCI’s Chinese operations is the U.S. dollar. Income statements of these operations are translated into U.S. dollars at the average exchange rates for each relevant period, except for cost of sales, which is translated primarily at historical exchange rates. Non-monetary assets and liabilities are translated into U.S. dollars at historical rates, and monetary assets and liabilities are translated at the closing exchange rate as of the applicable balance sheet date. Adjustments resulting from the translation of the balance sheet are recorded in the income statement.

54

United Components, Inc.
Notes to Consolidated Financial Statements

All other foreign operations — The functional currency for all other foreign operations is their local currency. Income statements of these operations are translated into U.S. dollars using the average exchange rates during the applicable period. Assets and liabilities of these operations are translated into U.S. dollars using the exchange rates in effect at the applicable balance sheet date. Resulting cumulative translation adjustments are recorded as a component of shareholder’s equity in “Accumulated other comprehensive income (loss).”

Foreign Currency Transactions

Transaction foreign exchange gains and losses are included in “Cost of sales” in the income statement. The net foreign exchange gains (losses) were $(0.3) million, $(2.6) million $0.5 million and $0.7$0.5 million for the years ended December 31, 2009, 2008 and 2007, and 2006, respectively.

53

United Components, Inc.
Notes to Consolidated Financial Statements
Reporting of Comprehensive Income (Loss)

Comprehensive income (loss) includes (i) net income (loss), (ii) the cumulative effect of translating balance sheets of certain foreign subsidiaries to U.S. dollars, (iii) the effect of adjusting interest rate swaps to market, and (iv) the recognition of pension liabilities. The last three are not included in the income statement and are reflected as adjustments to shareholder’s equity.

Financial Statement Presentation

The following provides a description of certain items that appear in the income statement:

Net sales includes gross sales less deductions for incentive rebate programs, product returns, allowances and discounts. Shipping and handling fees that are billed to customers are classified as revenues.

Cost of sales includes all costs required to bring a product to a ready-for-sale condition. Such costs include direct and indirect materials (net of vendor consideration), direct and indirect labor costs (including pension, postretirement and other fringe benefits), supplies, utilities, depreciation, insurance, information technology costs, shipping and other costs. Cost of sales also includes the procurement, packaging, and shipping of products purchased for resale.

Selling and warehousing expenses includes costs of selling and marketing, warehousing, technical services and distribution. The major cost elements for this line item include salaries and wages (including pension, postretirement and other fringe benefits), freight, depreciation advertising and information technology costs.advertising.

Advertising is expensed as incurred. Advertising expense for the years ended December 31, 2009, 2008 and 2007 and 2006 was $2.9$1.5 million, $2.9 million, and $3.8$2.9 million, respectively.

General and administrative expenses includes the costs of executive, accounting and administrative personnel (including pension, postretirement and other fringe benefits), professional fees, insurance, provisions for doubtful accounts, rent and information technology costs.
Stock-Based Compensation
UCI Holdco adopted a stock option plan in 2003. In December 2008, the Board of Directors of UCI Holdco approved the adoption of an amended and restated equity incentive plan that represented a complete amendment, restatement and continuation of the previous stock option plan. The amended and restated equity incentive plan permits the granting of options to purchase shares of common stock of UCI Holdco to UCI’s employees, directors, and consultants, as well as the granting of restricted shares of UCI Holdco common stock.
In January 2006,UCI adopted SFAS No. 123R, “Share-Based Payments.” UCI elected the modified prospective method of adoption under which prior periods are not revised.
Environmental Liabilities

UCI accrues for environmental investigation, remediation and penalty costs when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. The liability is determined on an undiscounted cash flow basis and is not reduced for potential claims for recovery. Claims for recovery are recognized as agreements are reached with third parties. Environmental expenditures are capitalized if they mitigate or prevent future contamination or if they improve the environmental safety or efficiency of the existing assets. All other environmental costs are expensed as incurred. Environmental cost estimates may include expenses for remediation of identified sites, long term monitoring, payments for claims, administrative expenses, and expenses for ongoing evaluations and litigation. The liability is adjusted periodically as assessment and remediation efforts progress or as additional technical or legal information becomes available.

54


55

United Components, Inc.
Notes to Consolidated Financial Statements

Insurance Reserves

UCI’s insurance for workers’ compensation, automobile, product and general liability includes high deductibles for which UCI is responsible. Deductibles, for which UCI is responsible, are estimated and recorded as expenses in the period incurred.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions in determining the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting period. The estimates and assumptions include estimates of collectibilitycollectability of accounts receivable and the realizability of inventory, goodwill and other intangible assets. They also include estimates of cost accruals, environmental liabilities, warranty and product returns, insurance reserves, income taxes, pensions and other postretirement benefits and other factors. Management has exercised reasonableness in deriving these estimates; however, actual results could differ from these estimates.

Segment Reporting

In accordance with the provisions of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,guidance included in Accounting Standards Codification ASC 280, “Segment Reporting,” UCI reports as one segment. UCI is in one business, which is the manufacturing and distribution of vehicle parts. The products and services, customer base, distribution channel, manufacturing process, procurement, and economic characteristics are similar throughout all of UCI’s operations.

Derivative Financial Instruments

UCI routinely enters into purchase agreements to acquire materials used in the normal course of its operations.  In certain instances, a routine purchase agreement may meet the technical definition of a derivative.  In all such cases, UCI elects the “normal purchases” exemption from derivative accounting.

Other than the purchase agreements discussed above, UCI recognizes derivatives as either assets or liabilities in the balance sheet and measures those instruments at fair value. Changes in the fair value of those instruments will be reported in income or other comprehensive income (loss) depending on the use of the derivative and whether it qualifies for hedge accounting. The accounting for gains and losses associated with changes in the fair value of the derivative, and the effect on the financial statements, will depend on its hedge designation and whether the hedge is highly effective in offsetting changes in the fair value of cash flows of the asset or liability hedged.
Defined Benefit Pension and Other Post Retirement Plans
At December 31, 2006,Recently Adopted Accounting Guidance

On September 30, 2009, UCI adopted Statement of Financial Accounting Standard (“SFAS”) No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Post Retirement Plans — an amendment of FASB Statements No. 87, 88, 106, and 132(R).” See Note 16 for the effects of adopting SFAS No. 158.
New Accounting Pronouncements
On January 1, 2007, UCI adopted the provisions of Financial Accounting Standards Board Interpretation No. 48 “Accounting for Uncertainty in Income Taxes.” The effect was immaterial to UCI’s financial statements.
In September 2006,changes issued by the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 (i) defines fair value, (ii) establishes a framework for measuring fair value into the authoritative hierarchy of accounting principles generally accepted in the United States of America (“GAAP”). These changes establish the FASB Accounting Standards Codification™ (“ASC”) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and (iii) expands disclosures about fair value measurements. For certain nonfinancial assetsinterpretive releases of the Securities and liabilities,Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The FASB will no longer issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead the FASB will issue Accounting Standards Updates. Accounting Standards Updates will not be authoritative in their own right as they will only serve to update the ASC. These changes and the ASC itself do not change GAAP. Other than the manner in which new accounting guidance is referenced, the adoption of SFAS No. 157 is not required until 2009, and UCI has not adopted it for those certain nonfinancial assets and liabilities. Adoption of SFAS No. 157 in 2009 for those certain nonfinancial assets and liabilities is not expected to have a significant effect on UCI’s financial statements. For assets and liabilities other than those certain nonfinancial assets and liabilities, UCI adopted SFAS No. 157 on January 1, 2008. Adoption of this portion of SFAS No. 157 did not have a materialthese changes had no impact on UCI’s financial statements.

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56

United Components, Inc.
Notes to Consolidated Financial Statements
In February 2007,
Business Combinations and Consolidation Accounting

On January 1, 2009, UCI adopted changes issued by the FASB issued SFAS No. 159, “The Fair Value Optionto consolidation accounting and reporting. These changes establish accounting and reporting for Financial Assetsthe noncontrolling interest in a subsidiary and Financial Liabilities — Including an Amendmentfor the deconsolidation of SFAS No. 115.” SFAS No. 159 permits companiesa subsidiary. This guidance defines a noncontrolling interest, previously called a minority interest, as the portion of equity in a subsidiary not attributable, directly or indirectly, to choosea parent. These changes require, among other items: a noncontrolling interest to measure certainbe included in the consolidated statement of financial instrumentsposition within equity separate from the parent’s equity; consolidated net income to be reported at amounts inclusive of both the parent’s and other itemsnoncontrolling interest’s shares and, separately, the amounts of consolidated net income attributable to the parent and noncontrolling interest all on the consolidated statement of operations; and if a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary to be measured at fair value and a gain or loss to be recognized in net income based on such fair value. UCI did not chooseOther than the fair value measurement options permitted by SFAS No. 159 for anychange in presentation of its assets and liabilities. Therefore,noncontrolling interests, the adoption of SFAS No. 159 did notthese changes had no impact on UCI’s financial statements. The presentation and disclosure requirements of these changes were applied retrospectively.
In December 2007,
On January 1, 2009, UCI adopted changes issued by the FASB issued SFAS No. 141R, “Business Combinations.” SFAS No. 141R will replace SFAS No. 141 and provides new rules forto accounting for business combinations. While retaining the fundamental requirements of accounting for business combinations, including that the purchase method be used for all business combinations and for an acquirer to be identified for each business combination, these changes define the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control instead of the date that the consideration is transferred. These changes require an acquirer in a business.business combination, including a business combination achieved in stages (step acquisition), to recognize the assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions. This statement is effective for fiscal years beginning after December 15, 2008. Generally,guidance also requires the effectsrecognition of SFAS No. 141Rassets acquired and liabilities assumed arising from certain contractual contingencies as of the acquisition date, measured at their acquisition-date fair values. Additionally, these changes require acquisition-related costs to be expensed in the period in which the costs are incurred and the services are received instead of including such costs as part of the acquisition price. The adoption of these changes will depend on the occurrence of future acquisitions, if any, by UCI.
In December 2007,
Effective January 1, 2009, UCI adopted changes issued by the FASB issued SFAS No. 160, “Noncontrolling Intereststo accounting for business combinations. These changes apply to all assets acquired and liabilities assumed in a business combination that arise from certain contingencies and requires (i) an acquirer to recognize at fair value, at the acquisition date, an asset acquired or liability assumed in a business combination that arises from a contingency if the acquisition-date fair value of that asset or liability can be determined during the measurement period, otherwise, the asset or liability should be recognized at the acquisition date if certain defined criteria are met; (ii) contingent consideration arrangements of an acquiree assumed by the acquirer in a business combination to be recognized initially at fair value; (iii) subsequent measurements of assets and liabilities arising from contingencies to be based on a systematic and rational method depending on their nature and contingent consideration arrangements to be measured subsequently; and (iv) disclosures of the amounts and measurement basis of such assets and liabilities and the nature of the contingencies. The adoption of these changes will depend on the occurrence of future acquisitions, if any, by UCI.

57
United Components, Inc.
Notes to Consolidated Financial Statements” an amendment of ARB No. 51, which will be adopted on

Fair Value Accounting

On January 1, 2009. This standard will change2009, UCI adopted changes issued by the name of “Minority Interest”FASB to “Noncontrolling Interest.” This standard will also change thefair value accounting and reporting relatedas it relates to noncontrolling interestsnonfinancial assets and nonfinancial liabilities that are not recognized or disclosed at fair value in the financial statements on at least an annual basis. These changes define fair value, establish a framework for measuring fair value in GAAP, and expand disclosures about fair value measurements. This guidance applies to other GAAP that require or permit fair value measurements and is to be applied prospectively with limited exceptions. The adoption of these changes, as it relates to nonfinancial assets and nonfinancial liabilities, had no impact on UCI’s financial statements. These provisions will be applied at such time as a fair value measurement of a nonfinancial asset or nonfinancial liability is required, which may result in a consolidated subsidiary. Afterfair value that is materially different than would have been calculated prior to the adoption noncontrolling interests, ($2.5 million and $3.3 million at December 31, 2008 and 2007, respectively) will be classified as shareholder’s equity, a change from its current classification with long-term liabilities. Losses attributable to minority interests ($0.9 million, $0.1 million, and $0.8 million for 2008, 2007 and 2006, respectively), will be included in net income, although such losses will be deducted to arrive at net income attributable to UCI.of these changes.
In March 2008,
On June 30, 2009, UCI adopted changes issued by the FASB to fair value accounting. These changes provide additional guidance for estimating fair value when the volume and level of activity for an asset or liability have significantly decreased and includes guidance for identifying circumstances that indicate a transaction is not orderly. This guidance is necessary to maintain the overall objective of fair value measurements, which is that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. The adoption of these changes had no impact on UCI’s financial statements.

Other

On June 30, 2009, UCI adopted changes issued SFAS No. 161, “Disclosures about Derivative Instrumentsby the FASB to accounting for and Hedging Activities — an amendmentdisclosure of FASB Statement No. 133.events that occur after the balance sheet date but before financial statements are issued or are available to be issued, otherwise known as “subsequent events.” SFAS No. 161Specifically, these changes set forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure requirements for derivative instruments and hedging activities. Entities will be required to provide enhanced disclosures about (a) how and whyin the financial statements, the circumstances under which an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. This statement is effective for fiscal years beginningshould recognize events or transactions occurring after November 15, 2008. UCI has not evaluated the potential impact of this statement onbalance sheet date in its financial statements.statements, and the disclosures that an entity should make about events or transactions that occur after the balance sheet date.
In April 2008,
On January 1, 2009, UCI adopted changes issued by the FASB issued FASB Staff Position (FSP) FAS 142-3, “Determination ofto accounting for intangible assets. These changes amend the Useful Life of Intangible Assets,”factors that should be considered in developing renewal or extension assumptions used to provide guidance for determiningdetermine the useful life of a recognized intangible assets andasset in order to improve the consistency between the useful life of a recognized intangible asset outside of a business combination and the period of expected cash flows used to measure the fair value of a recognizedan intangible asset and the useful life of the intangible asset as determined under Statement 142. The FSP requires that an entity consider its own historical experience in renewing or extending similar arrangements. However, the entity must adjust that experience based on entity-specific factors under FASB Statement 142, “Goodwill and Other Intangible Assets.” FSP FAS 142-3 is effective for fiscal years and interim periods that begin after November 15, 2008. UCI has periodically purchased recognized intangible assets.a business combination. The adoption of FSP FAS 142-3 is not expected to have a material effectthese changes had no impact on UCI’s financial statements.
In May 2008,
On January 1, 2009, UCI adopted changes issued by the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” This statement identifies the sources of accounting principles and the framework, or hierarchy, for selecting the principles to be used in the preparationdisclosures by public entities about transfers of financial statements that are presentedassets and interests in conformity with generally accepted accounting principles in the United States. This statement is effective November 15, 2008. SFAS No. 162 is not expected to have a significant effect on UCI’s financial statements.
In December 2008, the FASB issued FASB Staff Position (FSP) FAS 140-4, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities,” to providevariable interest entities. The changes require additional disclosures about transfers of financial assets. The disclosures required by FSP 140-4disclosures are intended to provide more transparency to financial statement users about a transferor’s continuing interest involvement within transferred financial assets and an enterprise’s involvement with variable interest entities and qualifying special purpose entities. FSP FAS 140-4 is effective for fiscal years and interim periods that begin after December 15, 2008. UCI has agreements to sell undivided interests in certain of its receivables with factoring companies which in turn have the right to sell an undivided interest to a financial institution or other third party. However, UCI retains no rights or interest, and has no obligations, with respect to the sold receivables. Furthermore, UCI does not service the receivables after the sales. As such, FSP FAS 140-4 isBecause of the terms of UCI’s sales of receivables, the adoption of the changes did not expected to have a significantan effect on UCI’s financial statements.

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United Components, Inc.
Notes to Consolidated Financial Statements

On January 1, 2009, UCI adopted changes issued by the FASB to disclosures about derivative instruments and hedging activities. These changes require enhanced disclosures about an entity’s derivative and hedging activities, including (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedged items are accounted for and (iii) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. Because of UCI’s insignificant, if any, use of derivatives, adoption of these changes did not have an effect on UCI’s financial statements.

In December 2008, the FASB issued changes to employers’ disclosures about postretirement benefit plan assets. These changes provide guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. This guidance is intended to ensure that an employer meets the objectives of the disclosures about plan assets in the employer’s defined benefit pension or other postretirement plan to provide users of financial statements with an understanding of the following: how investment allocation decisions are made; the major categories of plan assets; the inputs and valuation techniques used to measure the fair value of plan assets; the effect of fair value measurements using significant unobservable inputs on changes in the value of plan assets; and significant concentrations of risk within plan assets. These changes became effective for UCI on December 31, 2009 and are reflected in Note 15.
Recently Issued Accounting Guidance
Transfers of Financial Assets
In June 2009, the FASB issued changes to accounting for transfers of financial assets. These changes, among other things: remove the concept of a qualifying special-purpose entity and remove the exception from the application of variable interest accounting to variable interest entities that are qualifying special-purpose entities; limit the circumstances in which a transferor derecognizes a portion or component of a financial asset; defines a participating interest; require a transferor to recognize and initially measure at fair value all assets obtained and liabilities incurred as a result of a transfer accounted for as a sale; and require enhanced disclosure. These changes become effective for UCI on January 1, 2010. Management has determined that the adoption of these changes will have no impact on UCI’s financial statements.
Revenue Recognition for Multiple-Deliverable Arrangements

In October 2009, the FASB issued changes to revenue recognition for multiple-deliverable arrangements. These changes require separation of consideration received in such arrangements by establishing a selling price hierarchy (not the same as fair value) for determining the selling price of a deliverable, which will be based on available information in the following order: vendor-specific objective evidence, third-party evidence, or estimated selling price.  The changes also: eliminate the residual method of allocation and require that the consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method, which allocates any discount in the arrangement to each deliverable on the basis of each deliverable’s selling price; require that a vendor determine its best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a standalone basis; and expand the disclosures related to multiple-deliverable revenue arrangements. These changes become effective for UCI on January 1, 2011. Management has determined that the adoption of these changes will not have an impact on UCI’s financial statements, as UCI does not currently have any such arrangements with its customers.

59
United Components, Inc.
Notes to Consolidated Financial Statements

NOTE 2 — ACQUISITION OF ASC INDUSTRIES, INC. RESTRUCTURING (COSTS) GAINS

2009 Capacity Consolidation and European Realignment Actions

To further align UCI’s cost structure with customers’ spending and current market conditions, UCI implemented restructuring plans in 2009. The restructuring plans target excess assembly and aluminum casting capacity and restructuring costs of the plan include workforce reductions, facility closures, consolidations and realignments. During 2009, UCI recorded asset write-offs of $1.8 million associated with the capacity consolidation, recognized a gain of $1.5 million on the sale of a facility and incurred other costs of $0.2 million.

Water Pump Integration

On May 25, 2006, (the “ASC Acquisition Date”), UCI completed the acquisition of ASC Industries, Inc. and its subsidiaries (“ASC”ASC Industries”). This transaction is referred to herein as the “ASC Acquisition.”
The ASC Acquisition is accounted for under the purchase method of accounting and, accordingly, the results of operations of ASC have been included in UCI’s results beginning on the ASC Acquisition Date.
Purchase Price
The ASC Acquisition purchase price, including $4.4 million of fees and expenses directly related to the ASC Acquisition, was $127.4 million. In addition, UCI assumed $12.0 million of ASC debt and certain other ASC obligations related to the acquisition.
Financing for the ASC Acquisition
Financing for the ASC Acquisition was comprised of the following (in millions):
     
Proceeds from additional UCI debt $113.0 
UCI’s cash on hand  6.1 
Rollover equity  8.3 
    
  $127.4 
    
Certain ASC stockholders exchanged $8.3 million of ASC stock for the stock of UCI Holdco, and UCI Holdco contributed the ASC stock to UCI. This stock is referred to as “rollover equity” in the above table.
Pursuant to the Stock Purchase Agreement, ASC was required to repay $81.6 million of certain ASC debt and other ASC obligations. These repayments were made from the cash received by ASC stockholders from the sale of the ASC stock to UCI.
Allocation of the ASC Acquisition Purchase Price
The allocation of the ASC Acquisition purchase price was based on the fair value of the assets acquired and liabilities assumed. In 2007, the allocation of the ASC Acquisition purchase price was finalized. The final allocation of the ASC Acquisition purchase price is as follows (in millions):
     
Cash $3.7 
Accounts receivable  11.4 
Inventory  40.8 
Property, plant and equipment  27.3 
Acquired intangible assets  18.6 
Goodwill  74.9 
Other assets  2.2 
Accounts payable and accrued liabilities  (25.5)
Notes payable  (10.0)
Capital lease obligations  (1.2)
Other liabilities  (5.0)
Deferred income taxes  (9.8)
    
  $127.4 
    
Goodwill is not deductible for income tax purposes. Acquired intangible assets are primarily customer relations and trademarks, which are amortized on an accelerated basis commensurate with the expected benefits. The useful lives of these intangibles are estimated to range from 3 to 20 years.

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United Components, Inc.
Notes to Consolidated Financial Statements
In the fourth quarter of 2007, UCI recorded a $1.8 million pre-tax benefit resulting from the favorable resolution of certain pre-acquisition ASC liabilities. The 2007 income statement includes $1.4 million in “Cost of sales” and $0.4 million in “General and administrative.”
Pro Forma Information
The unaudited pro forma income statement information presented below is based on the historical income statements of UCI and ASC and has been adjusted on a pro forma basis to give effect to the ASC Acquisition and the related financing, as if they had occurred on January 1, 2006. The pro forma adjustments give effect to (i) the allocation of the ASC Acquisition purchase price, (ii) UCI’s ASC Acquisition related financing, and (iii) the repayment by ASC of $81.6 million of ASC debt and other ASC obligations from the proceeds received in connection with the ASC Acquisition, as if they occurred on January 1, 2006.
The unaudited pro forma financial information does not purport to represent what the results of operations would have been had the ASC Acquisition occurred as of the date indicated, or what results will be in future periods.
     
  (in millions)
  Year ended
  December 31, 2006
Net sales $948.0 
Operating income  68.0 
Net income from continuing operations  14.2 
Net loss  (0.7)
The 2006 pro forma results include the 2006 losses described in Notes 3 and 5.
NOTE 3 — COSTS OF INTEGRATION OF WATER PUMP OPERATIONS AND RESULTING ASSET IMPAIRMENT LOSSES
Before the ASC Acquisition, UCI manufactured and distributed water pumps for all market channels. In 2007,June 2006, UCI completedbegan the process of integrating its pre ASC-acquisition water pump operations with the water pump operations of ASC.ASC Industries. In 2007, UCI completed the integration. By mid-2007, all domestic water pump manufacturing hashad been combined at ASC’sASC Industries’ manufacturing facilities. UCI’s pre ASC-acquisition water pump facility was closed as of July 2007.
2006 Losses
The water pump integration process began in June of 2006. In 2006, UCI recorded a total of $10.9 million of expenses related to the integration. Of these costs, $7.0 million were recorded in the income statement in “Costs of integration of water pump operations and resulting asset impairment losses,” and $3.9 million were recorded in “Cost of sales.” The combined $10.9 million of 2006 expenses were as follows (in millions):
             
  Cost of integration       
  of       
  water pump       
  operations       
  and resulting asset       
  impairment losses  Cost of sales  Combined 
Land, building and equipment impairment losses $4.3   —  $4.3 
Severance  1.7   —   1.7 
Write-off of component parts  —   1.9   1.9 
Costs and inefficiencies caused by wind-down  —   2.0   2.0 
Other integration costs  1.0   —   1.0 
          
  $7.0  $3.9  $10.9 
          
The combined after-tax effect of these items was a net loss of $7.0 million in 2006.

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United Components, Inc.
Notes to Consolidated Financial Statements
The non-cash land, building and equipment impairment losses pertain to assets that were not expected to be used when the water pump integration was completed. These assets were written down by $4.3 million to their estimated net realizable value, when sold or scrapped. The estimated realizable values were based on preliminary estimates by management. The $1.0 million of other integration costs include travel expenses, transportation costs and other expenditures incurred solely for the purpose of transferring production and distribution to ASC’s facilities and completing integration of the operations.
The $3.9 million of costs recorded in 2006 “Cost of sales” were directly related to the integration of water pump operations. These costs include (i) $2.0 million of costs and operating inefficiencies caused by the wind-down of our pre-ASC Acquisition water pump factory and (ii) a $1.9 million write-off of component parts that were not expected to be usable when all production was transitioned to the ASC product designs.
Severance expense is discussed below.
2007 Expenses and Gain

In 2007, UCI recorded additional pre-tax expenses and a gain related to the water pump integration. In 2007, $0.7 million of these costs arewere included in the income statement in “Costs of integration of water pump operations and resulting asset impairment losses,“Restructuring (costs) gains,” and $4.7 million of thesethose costs arewere included in “Cost of sales.” The combined net $5.4 million of 2007 expenses and gain were as follows (in millions):
             
  Cost of integration       
  of       
  water pump       
  operations       
  and resulting asset       
  impairment losses  Cost of sales  Combined 
Severance $1.6  $—  $1.6 
Pension plan curtailment gain  (0.9)  —   (0.9)
Production wind-down costs  —   2.2   2.2 
Other integration costs  —   2.5   2.5 
          
  $0.7  $4.7  $5.4 
          

  Restructuring costs  Cost of sales  Combined 
Severance $1.6  $—  $1.6 
Pension plan curtailment gain  (0.9)  —   (0.9)
Production wind-down costs  —   2.2   2.2 
Other integration costs  —   2.5   2.5 
  $0.7  $4.7  $5.4 

The combined after-tax effect of these items was a net loss of $3.3 million in 2007.

The $2.2 million of production wind-down costs includeincluded inefficiencies and unabsorbed overhead resulting from extraordinarily low levels of production during the second quarter 2007 wind-down of operations at the pre-acquisition water pump facility. ThisThe facility ceased production at the end of the second quarter of 2007.

The $2.5 million of other integration costs includeincluded transportation expenses and other costs that were directly related to completing the integration.

2008 and 2009 Expenses

In 2008 and 2009, UCI recorded additional pre-tax expense related to the water pump integration. These costs arewere reported in the income statement in “Costs of integration of water pump operations and resulting asset impairment losses.“Restructuring (costs) gains.” These costs were as follows (in millions):
     
  Cost of integration 
  of 
  water pump 
  operations 
Severance $0.2 
Costs of maintaining the pre-acquisition water pump facility  0.6 
Additional asset impairments  1.6 
    
  $2.4 
    

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United Components, Inc.
Notes to Consolidated Financial Statements

  2009  2008 
Severance $—  $0.2 
Costs of maintaining the pre-acquisition water pump facility  0.4   0.6 
Additional asset impairments  —   1.6 
  $0.4  $2.4 

In the fourth quarter of 2008, in light of current market and economic conditions, UCI wrote down the carrying value of the pre-ASC Acquisition water pump manufacturing facility from $1.3 million to zero. Also in the fourth quarter of 2008, UCI recorded a $0.3 million impairment loss on pre-ASC Acquisition water pump equipment that was no longer useable.
Severance expense
As part of the water pump integration, UCI closed its pre-acquisition water pump manufacturing facility and substantially all of that facility’s employees were terminated. All 311 permanent employees of this facility were eligible for severance benefits, which were earned only if the employee remained employed until a Company-designated termination date. The severance benefit was (i) a three month continuation of medical insurance after termination and (ii) a lump sum payment, which varied based on years of service. The benefits resulted in $3.5 million of severance costs. $1.7 million of these costs were expensed in 2006. $1.6 million of these costs were expensed ratably over the 2007 employment periods of the affected employees and $0.2 million were expensed in 2008.
Of the total $3.5 million of severance costs, $0.3 million was paid in 2006; $2.8 million was paid in 2007; and $0.4 million was paid in 2008.
Balance sheet amounts

The following table presents accrued liabilities balances related to the water pump integration costs as of December 31, 2006, 2007 and 2008 along with the 2007 and 2008 changes (in millions):
         
  Accrued  Other 
  severance  liabilities 
December 31, 2006 balance $1.4  $0.2 
Additional loss provision  1.6   — 
Payments  (2.8)  (0.2)
       
December 31, 2007 balance  0.2   — 
Additional loss provision  0.2   — 
Payments  (0.4)  — 
       
December 31, 2008 balance $—  $— 
       

As discussed above, in
  
Accrued
severance
  
Other
liabilities
 
December 31, 2006 balance $1.4  $0.2 
Additional loss provision  1.6   — 
Payments  (2.8)  (0.2)
December 31, 2007 balance  0.2   — 
Additional loss provision  0.2   — 
Payments  (0.4)  — 
December 31, 2008 balance $—  $— 

Closure of Mexican facility

In 2006, UCI closed its Mexican filter manufacturing operation. In 2007, UCI sold the fourth quarter of 2008, UCI wrote down the carrying value of the pre-ASC Acquisition water pump land and building to zero. At December 31, 2008, 2007 and 2006, the carrying value of this land andcertain building was $0, $1.3improvements formerly used as its Mexican filter manufacturing operation. The sale proceeds were $6.6 million, and $1.6 million, respectively. This land and building is classified as “Assets held for sale” in the 2007 and 2006 balance sheets. In 2007, UCI realized $0.3 million more than the 2006 estimated realizable value from the disposal of pre-ASC Acquisition equipment that was not used when the water pump integration was completed. This $0.3 million gain was offset by a $0.3 million reduction in the estimated realizable value of the pre-ASC Acquisition water pump land and building.
NOTE 4 — DISCONTINUED OPERATIONS
2006 Sales of Operations
On June 30, 2006, UCI sold its driveline components operation and its specialty distribution operation. These operations were sold to two separate buyers for a combined $33.4 million in cash, net of fees and expenses. In connection2007, UCI recorded a $1.7 million pre-tax gain on the sale. Also, in 2007, UCI incurred $0.2 million of costs associated with the driveline components transaction, UCI retained $4.9 millionclosure of pension liabilities. UCI recorded an $18.5 million after-tax loss on the sale of these discontinued operations.

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United Components, Inc.Mexican facility. These gains and costs were reported in the income statement in “Restructuring (costs) gains.”
Notes to Consolidated Financial Statements
On
NOTE 3 — DISCONTINUED OPERATIONS

In November 30, 2006, UCI sold its lighting systems operation for $37.2 million in cash, net of fees and expenses. In 2006, UCI recorded a $1.6 million after-tax gain on this sale.operation. The final sale price was subject to post-closing adjustments related to working capital and possible additional proceeds if a lighting systems building were sold. In the third quarter of 2007, the final working capital amounts were settled favorably and the building was sold. Accordingly, UCI recorded an additionala $2.7 million after-tax gain in 2007. A final post-closing adjustment2007 which was possible if, by the second quarter of 2008, the lighting system operation made structural changes to its pension plan which resulted in a reduction in the actuarially-determined deficit. In 2008, UCI was informed that such changes were not made.
2006 results of discontinued operations
The operating results of all three of the sold operations are presented as discontinued operations in UCI’s 2006 consolidated income statements. Net sales and income before income taxes for these discontinued operations were $124.4 million and $3.6 million, respectively.
The $3.6 million of pre-tax income includes a deduction for allocated interest expense of $0.3 million for the year ended December 31, 2006. Interest expense is allocated to discontinued operations in accordance with EITF Issue No. 87-24, which requires allocation of interest expense to discontinued operations to the extent UCI is required to repay debt as a result of a disposition transaction.
NOTE 5 — COSTS OF CLOSING FACILITIES AND CONSOLIDATING OPERATIONS AND GAIN FROM SALE OF ASSETS
2006 loss provision
The following table summarizes the 2006 costs of closing facilities (in millions):
                 
  Asset          
  write-downs  Severance  Other  Total 
Closure of Canadian facility $0.4  $0.4  $0.1  $0.9 
Closure of Mexican facility  0.8   1.8   2.9   5.5 
             
  $1.2  $2.2  $3.0  $6.4 
             
Closure of Canadian facility
In 2006, UCI closed its Canadian facility, which manufactured and distributed mechanical fuel pumps. This production and distribution was transferredattributable to UCI’s fuel pump operations in Fairfield, Illinois. Closure activities were completed in 2006. The severance and other costs were paid in 2006. After tax, the losses recorded for the Canadian facility closure totaled $0.6 million.ownership.
Closure of Mexican facility
In 2006, UCI closed its Mexican filter manufacturing plant and transferred production to its Albion, Illinois filter manufacturing facility. Closure activities and the transfer of production were completed in 2006.
After tax, the losses recorded for the Mexican facility closure totaled $3.7 million.
All of the $1.8 million of severance costs and $2.9 million of other costs (primarily equipment dismantling and transportation costs and $0.6 million of professional fees) related to the shutdown and consolidation were paid in 2006. In addition, UCI spent $1.4 million for capital expenditures in connection with this consolidation in 2006.

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United Components, Inc.
Notes to Consolidated Financial Statements
2007 Update
In 2007, UCI sold the land and building and certain building improvements, formerly used by the Mexican manufacturing operation. The sale proceeds were $6.6 million, net of fees and expenses. The $4.5 million net book value of the land and building was classified as “Assets held for sale” in the December 31, 2006 balance sheet. The $0.4 million of building improvements were classified as “Property, plant and equipment, net.” In 2007, UCI recorded a $1.7 million pre-tax gain on the sale. Also, in the first half of 2007, UCI incurred $0.2 million of additional costs associated with the closure of the Mexican facility.
NOTE 6 4 — TERMINATION OF PAY-ON-SCAN PROGRAM

Until the second quarter of 2007, a portion of the products sold to AutoZone, Inc. (“AutoZone”) were sold under an AutoZone program called Pay-on-Scan. Under this program, UCI retained title to its products at AutoZone locations, and a sale was not recorded until an AutoZone customer purchased the product. In the second quarter of 2007, AutoZone and UCI terminated the Pay-on-Scan program for these UCI products. Accordingly, sales of these products are now recorded when the product is received at an AutoZone location.

As part of the termination of the Pay-on-Scan program, AutoZone purchased all of the products at its locations that were previously under the Pay-on-Scan program. In the second quarter of 2007, UCI recorded $12.1 million of sales for these products.

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United Components, Inc.
Notes to Consolidated Financial Statements

NOTE 7 5 — ALLOWANCE FOR DOUBTFUL ACCOUNTS

Changes in UCI’s allowance for doubtful accounts were as follows (in millions):
             
  December 31, 
  2008  2007  2006 
Beginning of year $2.3  $2.7  $2.5 
Addition due to ASC Acquisition  —   —   0.1 
Provision for doubtful accounts  2.0   (0.2)  0.3 
Accounts written off  (0.3)  (0.2)  (0.2)
          
  $4.0  $2.3  $2.7 
          

  December 31, 
  2009  2008  2007 
Beginning of year $4.0  $2.3  $2.7 
Provision for doubtful accounts  0.4   2.0   (0.2)
Accounts written off  (1.2)  (0.3)  (0.2)
  $3.2  $4.0  $2.3 

NOTE 8 6 — SALES OF RECEIVABLES

UCI has agreements to sell undivided interests in certain of its receivables withto factoring companies, which in turn have the right to sell an undivided interest in those receivables to a financial institution or other third party. UCI enters into these agreements at its discretion as part of its overall cash management activities. Pursuant to these agreements, UCI sold $197.9$225.9 million and $126.8$197.9 million of receivables during 2009 and 2008, and 2007, respectively.

If receivables had not been factored, $80.1$121.5 million and $81.1$80.1 million of additional receivables would have been outstanding at December 31, 20082009 and 2007,2008, respectively. UCI retained no rights or interest, and has no obligations, with respect to the sold receivables. UCI does not service the receivables after the sales.

The sales of receivables were accounted for as a sale in accordance with SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” The sold receivables were removed from the balance sheet at the time of the sales. The costs of the sales were discounts deducted by the factoring companies. These costs were $5.5 million, $3.5 million and $2.9 million in 2009, 2008 and $1.0 million in 2008, 2007, and 2006, respectively. These costs are recorded in the consolidated income statement in “Miscellaneous, net.”

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United Components, Inc.
Notes to Consolidated Financial Statements
NOTE 9 7 — INVENTORIES

The components of inventories were as follows (in millions):
         
  December 31, 
  2008  2007 
Raw materials $55.3  $45.8 
Work in process  34.6   33.0 
Finished products  84.4   79.4 
Valuation reserves  (14.9)  (15.6)
       
  $159.4  $142.6 
       

  December 31, 
  2009  2008 
Raw materials $47.5  $55.3 
Work in process  27.6   34.6 
Finished products  73.1   84.4 
Valuation reserves  (15.1)  (14.9)
  $133.1  $159.4 

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United Components, Inc.
Notes to Consolidated Financial Statements

NOTE 10 8 — PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following (in millions):
             
      December 31, 
  Depreciable Life  2008  2007 
Land and improvements 5-10 years        
  (for improvements) $6.1  $6.3 
Buildings and improvements 5-40 years  67.2   64.7 
Equipment 3-15 years  222.3   197.2 
           
       295.6   268.2 
Less accumulated depreciation      (127.7)  (100.4)
           
      $167.9  $167.8 
           

    December 31, 
  Depreciable Life 2009  2008 
Land and improvements 
5-10 years 
(for improvements)
 $6.1  $6.1 
Buildings and improvements 5-40 years  65.5   67.2 
Equipment 3-15 years  234.1   222.3 
     305.7   295.6 
Less accumulated depreciation    (155.9)  (127.7)
    $149.8  $167.9 

Included in equipment shown above are cumulative additions related to capital lease obligations of approximately$3.5 million and $3.6 million at each of December 31, 2009 and 2008, and 2007, respectively, under capital lease obligations.respectively. The related accumulated depreciation was approximately $1.8$2.2 million and $1.2$1.8 million at December 31, 2009 and 2008, and 2007, respectively.

Depreciation expense for the years ended December 31, 2009, 2008 and 2007 and 2006 was $28.6 million, $28.0 million and $25.7 million, and $26.2 million, respectively.

The fair value of UCI’s asset retirement obligations (“AROs”ARO”) are recorded as liabilities with the offsetting associated asset retirement costs capitalized as part of the carrying amount of the related buildings. The asset retirement costs are amortized over the useful life of the building. Changes in the ARO resulting from the passage of time are recognized as an increase in the carrying amount of the liability and as accretion expense. The liabilities for AROsARO were $1.0$1.1 million and $0.8$1.0 million at December 31, 2009 and 2008, and 2007, respectively.

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United Components, Inc.
Notes to Consolidated Financial Statements
NOTE 11 9 — OTHER INTANGIBLE ASSETS

The components of other intangible assets were as follows (in millions):
                             
      December 31, 2008  December 31, 2007 
          Accumulated          Accumulated    
  Amortizable Life  Gross  amortization  Net  Gross  amortization  Net 
Acquired intangible assets                            
Customer relationships 3 – 20 years $62.1  $(27.9) $34.2  $62.1  $(23.1) $39.0 
Technologies 10 years  8.9   (6.3)  2.6   8.9   (5.4)  3.5 
Trademarks 10 years  4.3   (1.7)  2.6   4.3   (1.0)  3.3 
Trademarks Indefinite  25.5   —   25.5   26.0   —   26.0 
Integrated software system 7 years  18.2   (8.5)  9.7   17.7   (5.9)  11.8 
                       
      $119.0  $(44.4) $74.6  $119.0  $(35.4) $83.6 
                       

    December 31, 2009  December 31, 2008 
  
Amortizable
Life
 Gross  
Accumulated
amortization
  Net  Gross  
Accumulated
amortization
  Net 
Acquired intangible assets                          
Customer relationships 3 - 20 years $62.1  $(32.4) $29.7  $62.1  $(27.9) $34.2 
Technologies 10 years  8.9   (7.0)  1.9   8.9   (6.3)  2.6 
Trademarks 10 years  4.3   (2.3)  2.0   4.3   (1.7)  2.6 
Trademarks Indefinite  25.5   —   25.5   25.5   —   25.5 
Integrated software system 7 years  20.1   (11.2)  8.9   18.2   (8.5)  9.7 
    $120.9  $(52.9) $68.0  $119.0  $(44.4) $74.6 

In 2007, UCI recognized a trademark impairment loss of $3.6 million. This non-cash loss was due to a customer’s decision to market a significant portion of UCI-supplied products under the customer’s own private label brand, instead of UCI’s brand. The customer’sThis decision to market using its own private label brand has not affected and is not expected to affect UCI’s sales of these products.
In 2008, UCI recognized an additional impairment loss of $0.5 million on the same trademark that was written down in 2007.

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United Components, Inc.
Notes to Consolidated Financial Statements

The estimated amortization expense related to acquired intangible assets and the integrated software system for each of the succeeding five years is (in millions):
         
  Acquired Integrated
  intangible software
  assets system
2009 $5.7  $2.5 
2010  5.2   2.5 
2011  4.7   2.5 
2012  4.2   1.7 
2013  3.7   — 

  
Acquired
intangible
assets
  
Integrated
software
system
 
2010 $5.2  $3.0 
2011  4.7   3.1 
2012  4.3   2.2 
2013  3.8   0.4 
2014  3.3   0.2 

NOTE 1210 — RESTRICTED CASH

In June 2009, UCI posted $9.4 million of cash to collateralize a letter of credit required by UCI’s workers compensation insurance carrier. Historically, assets pledged pursuant to the terms of UCI’s senior credit facility provided the collateral for the letter of credit. As a result of the termination of UCI’s revolving credit facility (see further discussion in Note 13), these assets were no longer allowed to be pledged for this purpose and, accordingly, UCI was required to post the cash as collateral. This cash is recorded as “Restricted cash” and is a component of long-term assets on UCI’s balance sheet at December 31, 2009. This cash is invested in highly liquid, high quality government securities and is not available for general operating purposes as long as the letter of credit remains outstanding or until alternative collateral is posted.

NOTE 11 — ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consisted of the following (in millions):
         
  December 31, 
  2008  2007 
Salaries and wages $2.7  $3.5 
Bonuses and profit sharing  3.5   8.8 
Vacation pay  4.4   4.7 
Product returns  32.0   28.1 
Rebates, credits and discounts due customers  10.8   10.9 
Insurance  11.5   9.8 
Taxes payable  4.8   10.4 
Interest  2.1   2.6 
Other  13.9   16.4 
       
  $85.7  $95.2 
       

64

United Components, Inc.
Notes to Consolidated Financial Statements
  December 31, 
  2009  2008 
Salaries and wages $3.1  $2.7 
Bonuses and profit sharing  6.1   3.5 
Vacation pay  4.4   4.4 
Product returns  42.1   32.0 
Rebates, credits and discounts due customers  13.6   10.8 
Insurance  9.8   11.5 
Taxes payable  7.4   4.8 
Interest  1.2   2.1 
Other  19.3   13.9 
  $107.0  $85.7 

NOTE 13 12 — PRODUCT RETURNS LIABILITY

The liability for product returns is included in “Accrued expenses and other current liabilities.” This liability includes accruals for estimated parts returned under warranty and for parts returned because of customer excess quantities. UCI provides warranties for its products’ performance. Warranty periods vary by part, but generally are either one year or indefinite.part. In addition to returns under warranty, UCI allows its customers to return quantities of parts that the customer determines to be in excess of its current needs. Customer rights to return excess quantities vary by customer and by product category. Generally, these returns are contractually limited to 3% to 5% of the customer’s purchases in the preceding year. In some cases,While UCI does not have a contractual obligation to accept excess quantities. However,quantity returns from all customers, common practice for UCI and the industry is to accept periodic returns of excess quantities from on-going customers. If a customer elects to cease purchasing from UCI and change to another vendor, it is industry practice for the new vendor, and not UCI, to accept any inventory returns resulting from the vendor change and any subsequent inventory returns.

64

United Components, Inc.
Notes to Consolidated Financial Statements

In 2008, UCI identified an unusually high level of warranty returns related to one category of parts. When these parts arewere subjected to certain conditions, they experienceexperienced a higher than normal failure rate. As a result of the higher than normal failure rate, a $6.7 million warranty loss provision was recorded in 2008. This loss provision is included in the line captioned “Additional reductions to sales” in the table below. UCI has modified the design of these parts to eliminate this issue.

UCI routinely monitors returns data and adjusts estimates based on this data.


Changes in UCI’s product returns accrual were (in millions):
             
  Year ended December 31, 
  2008  2007  2006 
Beginning of year $28.1  $28.6  $26.2 
Addition due to ASC Acquisition  —   —   1.4 
Cost of unsalvageable returned parts  (51.6)  (46.6)  (50.2)
Additional reductions to sales  55.5   46.1   51.2 
          
End of year $32.0  $28.1  $28.6 
          

   Year ended December 31, 
  2009  2008  2007 
Beginning of year $32.0  $28.1  $28.6 
Cost of unsalvageable returned parts  (46.4)  (51.6)  (46.6)
Additional reductions to sales  55.2   55.5   46.1 
Reclassification from other current liabilities  1.3   —   — 
End of year $42.1  $32.0  $28.1 

NOTE 14 13 — DEBT

The Company’s debt is summarized as follows (in millions):
         
  December 31, 
  2008  2007 
Short-term borrowings $5.2  $10.1 
Revolving credit line borrowing  20.0   — 
Capital lease obligations  1.2   1.8 
Term loan  190.0   200.0 
Senior subordinated notes  230.0   230.0 
Debt issuance costs  (2.8)  (3.5)
       
   443.6   438.4 
Less:        
Short-term borrowings  5.2   10.1 
Revolving credit line borrowing  20.0   — 
Current maturities  0.4   0.5 
       
Long-term debt $418.0  $427.8 
       

UCI’s balance sheet does not include the Holdco Notes. While UCI has no direct obligation under the Holdco Notes, UCI is the sole source of cash generation for UCI Holdco. Interest on Holdco Notes is payable “in kind” through December 2011, therefore UCI Holdco has no cash interest payments until that date.

65

United Components, Inc.
Notes to Consolidated Financial Statements
   December 31, 
  2009  2008 
Short-term borrowings $3.5  $5.2 
Revolving credit line borrowing  —   20.0 
Capital lease obligations  0.9   1.2 
Term loan  190.0   190.0 
Senior subordinated notes  230.0   230.0 
Unamortized debt issuance costs  (2.2)  (2.8)
   422.2   443.6 
Less:        
Short-term borrowings  3.5   5.2 
Revolving credit line borrowing  —   20.0 
Term loan  17.7   — 
Current maturities  0.2   0.4 
Long-term debt $400.8  $418.0 

Senior credit facilities — The senior credit facility includes a term loan and, until its termination in June 2009, included a revolving credit facility.

In connection with the ASC Acquisition, on May 25, 2006, UCI entered into an Amended and Restated Credit Agreement. This Amended and Restated Credit Agreement replaced UCI’s previously existing senior credit facility, and provided for additional borrowing capacity of up
65

United Components, Inc.
Notes to $113 million.

UCI replaced the $217 million term loan that was outstanding at May 25, 2006 under its previously existing senior credit facility with a term loan borrowing under the new credit facility. In addition, $113 million of this term loan was borrowed to finance a portion of the ASC Acquisition purchase price.Consolidated Financial Statements
Cash fees related to the new Amended and Restated Credit Agreement were $3.6 million. This $3.6 million was recorded as an addition to “Deferred financing costs, net” and is amortized as interest expense over the remaining life of the new debt. In 2006, UCI recorded a $2.6 million loss to write off the unamortized deferred financing costs related to the previously outstanding debt, which was replaced by the borrowing under the new credit facility. This $2.6 million loss is recorded as “Write-off of deferred financing costs” in the 2006 income statement.
Term loan

The term loan is secured by all tangible and intangible assets of UCI. Interest is payable quarterly or more frequently depending on the Eurodollar interest periods that may be elected by UCI. The interest rate is variable and is determined as described in the second paragraph below.

UCI may select from two options to determine the interest rate on the term loan and revolving credit borrowings.loan. The two options are the Base Rate or Eurodollar Rate plus, in each case, an applicable margin. The applicable margin is subject to adjustment based on a consolidated leverage ratio, as defined. The Base Rate is a fluctuating interest rate equal to the higher of (a) the prime lending rate as set forth on the British Banking Association Telerate page 5 or another comparable pagepublicly announced by Bank of America as its “prime rate” and (b) the Federal funds effective rate plus 0.50%. At December 31, 20082009 and 2007,2008, the interest rate was 4.39%2.25% and 6.91%4.39%, respectively. In addition to interest on outstanding borrowings, UCI iswas required to pay a commitment fee on any unused revolving credit facility commitments at a per annum rate of 0.50%, subject to adjustment based upon the consolidated leverage ratio, as defined. (See Note 2221 for the impact of interest rate swaps.)

In 2008 and 2007, and 2006, UCI used cash on hand to voluntarily prepaidprepay $10 million, $65 million and $65 million, respectively, of the term loan. As a result of these voluntary early repayments, UCI recorded $0.1 million and $0.6 million of accelerated write-offs of deferred financing costs in 2008 and 2007, respectively. These costs are included in “Interest expense, net” in the income statement.

As a result of previous prepayments there are no scheduled repayments of the term loan before December 2011.  While there are no scheduled repayments before December 2011, the senior credit facility does require mandatory prepayments of the term loan.loan when UCI generates Excess Cash Flow as defined in the senior credit facility. The company generated Excess Cash Flow in the year ending December 31, 2009 resulting in a mandatory prepayment of $17.7 million, payable within 95 days of December 31, 2009. This mandatory prepayment is presented as a component of “Current maturities of long-term debt” in the December 31, 2009 balance sheet.  The term loan matures in June 2012.

Revolving credit facility

UCI’s senior credit facility also includesincluded a $75 million revolving credit facility, which iswas available until June 2009. Revolving credit borrowings are also secured by all tangible and intangible assets of UCI. The interest rate iswas variable and iswas determined in the same manner as the term loan discussed above.
Lehman Brothers Commercial Paper Inc. (“Lehman”), the administrative agent under UCI’s senior credit facility and one of the syndication banks that fund senior UCI revolving credit borrowings, filed for protection under Chapter 11 of the U.S. Bankruptcy Code on October 5, 2008. Of our total $75.0 million revolving credit line, Lehman’s commitment is $9.5 million. In September 2008, we borrowed $20.0 million under our
The revolving credit facility and Lehmanterminated in June 2009. Prior to its scheduled maturity, UCI conducted an evaluation with respect to extending the facility, analyzing the size of a commitment that could be secured against the total cost of obtaining the commitment, including the related credit facility amendment. Based upon this evaluation, UCI concluded that the size of the potential commitment did not fund its pro rata share. Because ofjustify the bankruptcy filing, we are evaluating our options as tocost and, accordingly, the administrative agent under ourrevolving credit facility and we are conducting our cash management based on the presumption that Lehman will not fund any of Lehman’s $9.5 million commitment under our revolving credit line.was terminated.

At December 31, 2008, revolving credit facility borrowings were $20.0 million, andall of which were repaid during the six months ended June 30, 2009. Additionally, $9.4 million of revolving credit borrowingfacility capacity had beenwas used to support an outstanding lettersletter of credit related to workers compensation insurance liabilities. Historically, the assets pledged pursuant to the terms of the senior credit facility provided the collateral for the letter of credit. Excluding Lehman’s $9.5 million commitment, we had $36.1 millionAs a result of unused borrowing capacity at December 31, 2008. We are currently in negotiations to extend or replace our revolving credit facility; however, in the current environment, we cannot be assured that our revolving credit facility will be available for borrowing, or that we will be able to extend or replace the revolving credit facility upon its expirationtermination, UCI was required to post $9.4 million of cash to collateralize the letter of credit. (See further discussion in June 2009. We are conducting our cash management under the presumption that will be unable to replace the revolving credit facility upon its expiration.

66

United Components, Inc.
Notes to Consolidated Financial StatementsNote 10.)

Covenants and other provisions — The senior credit facilities require UCI to maintain certain financial covenants and require mandatory prepayments under certain events as defined in the agreement.events. Also, the facilities include certain negative covenants restricting or limiting UCI’s ability to, among other things: declare dividends or redeem stock; prepay certain debt; make loans or investments; guarantee or incur additional debt; make capital expenditures; engage in acquisitions or other business combinations; sell assets; and alter UCI’s business. UCI is in compliance with all of these covenants.

In December 2006, UCI entered into an amendment
66

United Components, Inc.
Notes to the senior credit facility for the purpose of paying a $35.3 million dividend to its shareholder.Consolidated Financial Statements

Senior subordinated notes (the “Notes”)— The Notes bear interest at 9 3/8%. Interest is payable semi-annually, in arrears on June 15 and December 15 of each year. The Notes are unsecured and rank equally in right of payment with any of UCI’s future senior subordinated indebtedness. They are subordinated to indebtedness and other liabilities of UCI’s subsidiaries that are not guarantors of the Notes. They are guaranteed on a full and unconditional and joint and several basis by UCI’s domestic subsidiaries. The Notes mature on June 15, 2013.


The Notes indenture contains covenants that limit UCI’s ability to:to incur or guarantee additional debt, pay dividends or redeem stock, make certain investments, and sell assets. UCI is in compliance with all of these covenants.

Short-term borrowings — At December 31, 2009, short-term borrowings included $0.3 million of a Spanish subsidiary’s notes payable and $3.2 million of the Chinese subsidiaries’ notes payable to foreign credit institutions. At December 31, 2008, short-term borrowings included $2.3 million of a Spanish subsidiary’s notes payable and $2.9 million of the Chinese subsidiaries’ notes payable to foreign credit institutions. At December 31, 2007, short-term borrowings included $1.2 million of a2009, the interest rate on the Spanish subsidiary’s notes payable and $8.9 million of the Chinese subsidiaries’ notes payable to foreign credit institutions.was 0.9% and 3.5%, respectively. At December 31, 2008, the interest rate on the Spanish subsidiary’s notes payable and the Chinese subsidiaries’ notes payable was 3.7% and 5.3%, respectively. At December 31, 2007, the interest rate on the Spanish subsidiary’s notes payable and the Chinese subsidiaries’ notes payable was 5.2% and 6.5%, respectively. The Spanish subsidiary’s notes payable are collateralized by certain accounts receivable related to the amounts financed. The Chinese subsidiaries’ notes payable are secured by receivables.

Future payments — The following is a schedule of future payments of debt at December 31, 20082009 (in millions):
     
2009 $25.5 
2010  0.2 
2011  45.2 
2012  145.2 
2013  230.1 
Thereafter  0.2 
    
  $446.4 
    

2010 $21.4 
2011  41.0 
2012  131.7 
2013  230.1 
2014  0.1 
Thereafter  0.1 
  $424.4 

Interest expense — Net interest expense in 2009 was $30.0 million.  Net interest expense in 2008 was $34.2 million, including $0.1 million of accelerated write-off of deferred financing costs due to the voluntary prepayment of $10 million of the senior credit facility term loan. Net interest expense in 2007 was $40.7 million, including $0.6 million of accelerated write-off of deferred financing costs due to the voluntary prepayments of $65 million of the senior credit facility term loan. Net interest expense in 2006 was $43.3 million, including a $0.6 million senior credit agreement amendment fee and $0.7 million of accelerated write-off of deferred financing costs due to the voluntary prepayment of $65 million of the senior credit facility term loan. $0.2 million of interest was capitalized in 2007. No interest was capitalized in 20082009 and 2006.2008.

Holdco Notes — As of December 31, 2008,2009, UCI Holdco had $295.1$324.1 million of Holdco Notes outstanding. The Holdco Notes bear interest at a rate based upon LIBOR plus a spread. This rate was 10.0%9.25% at December 31, 2008.2009. The Holdco Notes do not appear on UCI’s balance sheet and the related interest expense is not included in UCI’s income statement. While UCI has no direct obligation under the Holdco Notes, UCI is the sole source of cash generation for UCI Holdco. The interest is payable “in kind” through December 2011, so that UCI Holdco has no cash interest payable until after that date. Accordingly, the Holdco Notes will not have any material effect on the cash flow of the Company until that date. In addition, the covenants contained in the Holdco Notes indenture are substantially the same as those contained in the Notes indenture, so the Company expects that the covenant of the Holdco Notes will have no effect on the current operations of UCI.

67


67

United Components, Inc.
Notes to Consolidated Financial Statements

NOTE 15 14 — INCOME TAXES

The components of income before income taxes were as follows (in millions):
             
  Year ended December 31, 
  2008  2007  2006 
Income (loss) before income taxes            
United States $15.8  $59.8  $10.7 
Foreign  1.8   (4.5)  (3.9)
          
  $17.6  $55.3  $6.8 
          

  Year ended December 31, 
  2009  2008  2007 
Income (loss) before income taxes         
United States $40.8  $15.8  $59.8 
Foreign  5.5   1.0   (4.6)
  $46.3  $16.8  $55.2 

Components of income tax expense (benefit) were as follows (in millions):
             
  Year ended December 31, 
  2008  2007  2006 
Current            
Federal $3.8  $6.0  $— 
State  0.9   1.7   1.5 
Foreign  2.5   (1.3)  1.8 
          
   7.2   6.4   3.3 
          
Deferred            
Federal  2.0   12.6   (2.9)
State  0.4   1.0   0.5 
Foreign  (1.9)  —   (0.2)
          
   0.5   13.6   (2.6)
          
  $7.7  $20.0  $0.7 
          

  Year ended December 31, 
  2009  2008  2007 
Current         
Federal $18.5  $3.8  $6.0 
State  1.9   0.9   1.7 
Foreign  1.3   2.5   (1.3)
   21.7   7.2   6.4 
Deferred            
Federal  (5.7)  2.0   12.6 
State  (0.9)  0.4   1.0 
Foreign  1.3   (1.9)  — 
   (5.3)  0.5   13.6 
  $16.4  $7.7  $20.0 

A reconciliation of income taxes computed at the United States Federal statutory tax rate to income tax expense follows (in millions):
             
  Year ended December 31, 
  2008  2007  2006 
Income tax expense (benefit) at U.S. Federal statutory rate $6.1  $19.4  $2.4 
R&D tax credit  —   (0.2)  (0.2)
Federal income taxes related to “check the box” election and insolvency loss of a foreign subsidiary  3.4   (1.4)  (2.7)
Foreign income not taxable, foreign income tax losses not benefited and rate differential  (2.0)  1.8   1.5 
State income taxes, net of Federal income tax benefit  0.7   1.8   1.2 
Adjust ASC pre-acquisition deferred tax liabilities  —   (1.1)  — 
Other, net  (0.5)   (0.3)  (1.5)
          
Income tax expense $7.7  $20.0  $0.7 
          

  Year ended December 31, 
  2009  2008  2007 
Income tax expense (benefit) at U.S. Federal statutory rate $16.2  $5.9  $19.3 
Federal income taxes related to “check the box” election  (0.4)  3.4   (1.4)
Foreign income not taxable, foreign income tax losses not benefited and rate differential  0.1   (2.0)  1.8 
State income taxes, net of Federal income tax benefit  0.5   0.7   1.8 
Adjust ASC pre-acquisition deferred tax liabilities  —   —   (1.1)
Other, net  —   (0.3)  (0.4)
Income tax expense $16.4  $7.7  $20.0 

The adjustment in the above table for “Adjust ASC pre-acquisition deferred tax liabilities” is to reflect the finally determined tax basis of ASC pre-acquisition intangible assets. “Other, net” in the above table is primarily reductions of prior year-end tax liabilities to reflect the actual tax expense reported in subsequently filed tax returns.

68


68

United Components, Inc.
Notes to Consolidated Financial Statements

Deferred taxes were attributable to the following (in millions):
         
  December 31, 
  2008  2007 
Deferred tax assets        
Pension and postretirement benefits $6.8  $7.5 
Product returns and warranty accruals  12.7   10.7 
Inventory valuation  7.1   7.9 
Net operating loss carryforwards  4.0   4.1 
Vacation accrual  1.2   1.3 
Insurance accruals  2.8   3.0 
Allowance for doubtful accounts  1.4   0.8 
Tax credit carryforwards  0.3   0.3 
Pension liability adjustment included in other comprehensive income (loss)  22.7   — 
Other accrued liabilities  1.9   1.3 
Other  2.1   2.1 
       
   63.0   39.0 
         
Less: valuation allowance for foreign tax credit carryforwards and foreign net operating loss carryforwards  (4.2)  (4.3)
       
Total deferred tax assets  58.8   34.7 
       
         
Deferred tax liabilities        
Depreciation and amortization  (15.6)  (16.2)
Goodwill amortization for tax, but not book  (17.8)  (14.2)
Acquired Intangible assets  (2.2)  (2.5)
Pension liability adjustment included in other comprehensive income (loss)  —   (3.3)
Prepaid expenses  (1.7)  (2.1)
Other  (0.8)  (0.9)
       
Total deferred tax liabilities  (38.1)  (39.2)
       
Net deferred tax assets (liabilities) $20.7  $(4.5)
       
  December 31, 
  2009  2008 
Deferred tax assets      
Pension and postretirement benefits $7.5  $6.8 
Product returns and warranty accruals  16.0   12.7 
Inventory valuation  6.8   7.1 
Net operating loss carryforwards  4.9   4.0 
Vacation accrual  1.3   1.2 
Insurance accruals  3.1   2.8 
Allowance for doubtful accounts  1.1   1.4 
Tax credit carryforwards  0.3   0.3 
Pension liability adjustment included in other comprehensive income (loss)  19.1   22.7 
Other accrued liabilities  6.7   1.9 
Other  2.2   2.1 
   69.0   63.0 
Less: valuation allowance for net operating loss carryforwards and foreign tax credit carryforwards  (5.2)  (4.2)
Total deferred tax assets  63.8   58.8 
Deferred tax liabilities        
Depreciation and amortization  (14.5)  (15.6)
Goodwill amortization for tax, but not book  (21.2)  (17.8)
Acquired Intangible assets  (2.4)  (2.2)
Prepaid expenses  (2.7)  (1.7)
Other  (0.8)  (0.8)
Total deferred tax liabilities  (41.6)  (38.1)
Net deferred tax assets (liabilities) $22.2  $20.7 

The net deferred tax assets were included in the balance sheet as follows (in millions):
         
  December 31, 
  2008  2007 
Deferred tax assets $24.3  $22.8 
Deferred tax liabilities  (3.6)  (27.3)
       
Net deferred tax assets (liabilities) $20.7  $(4.5)
       

In 2007, UCI elected to carryback its 2006 U.S. federal net operating loss to the 2004 tax year. Approximately $8.3 million of the refund was outstanding at December 31, 2007 and is included in “Other current assets” at December 31, 2007. This refund was received in 2008.
  December 31, 
  2009  2008 
Deferred tax assets $30.7  $24.3 
Deferred tax liabilities  (8.5)  (3.6)
Net deferred tax assets (liabilities) $22.2  $20.7 

At December 31, 2007, UCI had valuation allowances for all of the deferred tax assets associated with foreign net operating loss carryforwards. In 2008, UCI concluded that $0.6 million of these deferred tax assets would be realized and, consequently, in 2008 reducedaccordingly the valuation allowances were reduced by $0.6 million. This reduction resulted in a $0.6 million benefit in 2008 income tax expense.

At December 31, 2008,2009, UCI had $11.0$13.2 million of foreign net operating loss carryforwards with no expiration date, $0.4$3.5 million of foreign net operating losses which expire in 2013between 2012 and 2019 and $0.3 million of foreign tax credit carryforwards which expire in 20132023 and 2014.2024. In assessing the realization of the deferred tax assets related to these carryforwards, UCI has determined that it is more likely than not that $3.7$4.9 million of thesethe deferred tax assets related to these loss carryforwards and tax credits will not be realized. Therefore, a valuation allowance has been recorded for these carryforwards.

At December 31, 2008,2009, UCI hashad various state net operating loss carryforwards totaling $19.4$4.5 million which expire at various times. In assessing the realization of the deferred tax asset related to the state carryforwards, UCI determined that it is more likely than not that $0.5$0.3 million of the deferred tax assets related to the state carryforwards will not be realized. Therefore, a valuation allowance has been recorded for these carryforwards.

69


69

United Components, Inc.
Notes to Consolidated Financial Statements

Realization of the remaining net deferred tax assets is dependent on UCI generating sufficient taxable income in future years to utilize the benefits of the reversals of temporary differences. UCI has performed an assessment regarding the realization of the remaining net deferred tax assets, which includes projecting future taxable income, and has determined it is more likely than not that the remaining net deferred tax assets will be realized.

UCI does not provide for U.S. income taxes on undistributed earnings of its foreign subsidiaries that are intended to be permanently reinvested.  At December 31, 2008,2009, these undistributed earnings amounted to approximately $5.7$22.7 million. Determination of the net amount of unrecognized U.S. income taxes with respect to these earnings is not practicable.
FIN 48
Uncertain Tax Positions

On January 1, 2007, UCI adopted the provisions of Financial Accounting Standards Board Interpretation No. 48, ���Accounting for Uncertaintyguidance in Income Taxes.ASC 740, “Income Taxes,” prescribing how a company should recognize, measure, present and disclose uncertain tax positions. The effect was immaterial to UCI’s financial statements.


A reconciliation of the beginning and ending amount of unrecognized tax benefits follows (in millions):
     
Balance at January 1, 2007 $4.3 
Additions for tax positions related to the current year  2.1 
Reductions based on tax position related to the current year  (0.9)
Additions for tax position of prior years  0.4 
Reductions for tax position of prior years  (0.1)
Reduction for lapse of applicable statutes of limitations  (0.1)
    
Balance at December 31, 2007 $5.7 
    
     
Balance at January 1, 2008 $5.7 
Additions for tax positions related to the current year  2.5 
Reductions based on tax position related to the current year  (0.3)
Additions for tax position of prior years  0.3 
Reductions for tax position of prior years  (0.1)
Reduction for lapse of applicable statutes of limitations  (0.4)
    
Balance at December 31, 2008 $7.7 
    

  2009  2008  2007 
Balance at January 1 $7.7  $5.7  $4.3 
Additions for tax positions related to the current year  1.3   2.5   2.1 
Reductions based on tax position related to the current year  —   (0.3)  (0.9)
Additions for tax position of prior years  0.1   0.3   0.4 
Reductions for tax position of prior years  (0.2)  (0.1)  (0.1)
Reduction for lapse of applicable statutes of limitations  (0.8)  (0.4)  (0.1)
Balance at December 31 $8.1  $7.7  $5.7 

At December 31, 2008,2009, approximately $3.0 million of the unrecognized tax benefits, if recognized, would change theUCI’s effective tax rate. Also,In 2009, UCI has recorded, as income tax expense, $0.1 million of interest expense (net of Federal benefit) and $0.1 million of penalties related to the unrecognized tax benefits. At December 31, 2008,2009, the total interest (net of Federalfederal benefit) and penalties accrued related to uncertain tax benefits were $0.5 million and $0.6$0.7 million, respectively.

While most of UCI’s business is conducted within the United States, UCI also conducts business in several foreign countries. As a result, UCI and/or one or more of its subsidiaries files income tax returns in the U.S. federal tax jurisdiction and in many state and foreign tax jurisdictions. In the normal course of business, UCI is subject to examination by tax authorities in these tax jurisdictions. With few exceptions, UCI is not subject to examination by federal, state or foreign tax authorities for tax years ending on or before 2004. Chinese tax authorities have commenced a transfer price examination at one of UCI’s subsidiaries.  Other than this examination and routine inquiries, UCI and its subsidiaries are not currently under examination by tax authorities.

UCI expects the total unrecognized tax benefits to decline by approximately $0.5$0.3 million in 2009.2010. This decline is due to the expiration of applicable statutes of limitations. $0.5$0.3 million of this amount will impact the effective tax rate.

70

United Components, Inc.
Notes to Consolidated Financial Statements

Intercompany payable to UCI Holdco

For federal and certain state tax purposes, UCI is included in the consolidated tax returns of UCI Holdco. UCI’s stand-alone financial statements report UCI’s income tax liabilities and refunds receivable as income taxes payable and receivable until they are settled in cash with the taxing jurisdictions. To the extent UCI’s tax on its current taxable income is offset by UCI Holdco’s current taxable losses, UCI records that portion of its tax expense as a payable to UCI Holdco.

70

United Components, Inc.
Notes to Consolidated Financial Statements
In 20082009 and 2007, UCI2008, Holdco’s taxable losses partially offset UCI’s current taxable income. Accordingly, UCI has recorded a $19.2$34.9 million and $12.4$19.2 million payable to UCI Holdco as of December 31, 20082009 and 2007,2008, respectively.

NOTE 16 15 — EMPLOYEE BENEFIT PLANS

Defined Benefit Pension Plans

UCI maintains defined benefit retirement plans covering certain U.S. and non-U.S. employees. Retiree benefits under the defined benefit retirement plans are generally based on years of service and employee compensation.

Obligations and Funded Status

The measurement date used to determine pension obligations is December 31. The following table sets forth the plans’ status (in millions):.
         
  December 31, 
  2008  2007 
Accumulated benefit obligation $204.4  $186.6 
       
         
Change in projected benefit obligations:        
Projected benefit obligations at beginning of year $198.6  $208.3 
Service cost  4.4   5.5 
Interest cost  12.6   12.0 
Actuarial loss (gain)  8.5   (18.1)
Plan amendments  2.4   0.1 
Plan curtailment  —   (0.9)
Benefits paid  (8.6)  (8.3)
Special termination benefits  0.2   — 
Currency translation adjustment  (0.6)  — 
       
Projected benefit obligations at end of year $217.5  $198.6 
       
Change in plan assets:        
Fair value of plan assets at beginning of year $192.9  $183.3 
Actual return on plan assets  (40.9)  10.2 
Employer contributions  3.4   7.7 
Benefits paid  (8.6)  (8.3)
Currency translation adjustment  (0.3)  — 
       
Plan assets at end of year $146.5  $192.9 
       
         
Funded status, net $(71.0) $(5.7)
       
         
Amounts recognized in the balance sheet consist of:        
Prepaid pension cost $—  $9.4 
Current liabilities  (0.1)  (0.1)
Noncurrent liabilities  (70.9)  (15.0)
       
  $(71.0) $(5.7)
       

71

  December 31, 
  2009  2008 
       
Accumulated benefit obligation $214.9  $204.4 
         
Change in projected benefit obligations:        
Projected benefit obligations at beginning of year $217.5  $198.6 
Service cost  4.4   4.4 
Interest cost  13.0   12.6 
Actuarial loss  2.4   8.5 
Plan amendments  —   2.4 
Plan curtailment and settlements  (0.1)  — 
Benefits paid  (9.7)  (8.6)
Special termination benefits  —   0.2 
Currency translation adjustment  0.1   (0.6)
Projected benefit obligations at end of year $227.6  $217.5 
         
Change in plan assets:        
Fair value of plan assets at beginning of year $146.5  $192.9 
Actual return on plan assets  25.4   (40.9)
Employer contributions  4.2   3.4 
Benefits paid  (9.7)  (8.6)
Currency translation adjustment  0.1   (0.3)
Plan assets at end of year $166.5  $146.5 
         
Funded status, net $(61.1) $(71.0)
         
Amounts recognized in the balance sheet consist of:        
Noncurrent assets $0.6  $— 
Current liabilities  (0.1)  (0.1)
Noncurrent liabilities  (61.6)  (70.9)
  $(61.1) $(71.0)

71

United Components, Inc.
Notes to Consolidated Financial Statements
Some
A portion of the above “Funded status, net” has not been recorded in any of UCI’s income statements, but instead has been recorded in “Accumulated other comprehensive income (loss).” Amounts recognized in “Accumulated other comprehensive income (loss)” consisted of (in millions):
                 
      Amortized,       
      in 2008       
  Dec 31,  pension  2008  Dec 31, 
  2007  expense  Additions  2008 
             
Prior service costs $(1.0) $0.3  $(2.4) $(3.1)
Net actuarial gain (loss)  9.4   —   (64.6)  (55.2)
Deferred income tax benefit  (3.2)  (0.1)  25.5   22.2 
             
Accumulated other comprehensive income (loss) $5.2  $0.2  $(41.5) $(36.1)
             

                 
      Amortized,       
      in 2007       
  Dec 31,  pension  2007  Dec 31, 
  2006  expense  Additions  2007 
Prior service costs $(1.0) $0.1  $(0.1) $(1.0)
Net actuarial gain (loss)  (4.9)  0.2   14.1   9.4 
Deferred income tax benefit  2.3   (0.1)  (5.4)  (3.2)
             
Accumulated other comprehensive income (loss) $(3.6) $0.2  $8.6  $5.2 
             
  
Dec 31,
2008
  
Amortization
and
curtailment
in 2009
pension
expense
  
2009
Additions
  
Dec 31,
2009
 
Prior service costs $(3.1) $0.4  $—  $(2.7)
Net actuarial gain (loss)  (55.2)  0.3   8.6   (46.3)
Deferred income tax benefit (expense)  22.2   (0.3)  (3.1)  18.8 
Accumulated other comprehensive income (loss) $(36.1) $0.4  $5.5  $(30.2)

  
Dec 31,
2007
  
Amortization,
in 2008
pension
expense
  
2008
Additions
  
Dec 31,
2008
 
Prior service costs $(1.0) $0.3  $(2.4) $(3.1)
Net actuarial gain (loss)  9.4   —   (64.6)  (55.2)
Deferred income tax benefit (expense)  (3.2)  (0.1)  25.5   22.2 
Accumulated other comprehensive income (loss) $5.2  $0.2  $(41.5) $(36.1)

In 2009,2010, a loss of approximately $0.4$0.9 million will be amortized from “Accumulated other comprehensive income (loss).”

For certain of the pension plans, accumulated benefit obligations (ABO) exceed plan assets. For these plans, the combined projected benefit obligation, ABO and fair value of plan assets were $219.8 million, $207.4 million and $158.1 million, respectively, as of December 31, 2009 and $217.4 million, $204.4 million and $146.4 million, respectively, as of December 31, 2008.

Components of Net Periodic Pension Expense

The components of net periodic pension expense arewere as follows (in millions):
             
  Year ended December 31, 
  2008  2007  2006 
Service cost $4.4  $5.5  $6.7 
Interest cost  12.6   12.0   11.3 
Expected return on plan assets  (15.2)  (14.1)  (13.0)
Amortization of prior service cost  0.3   0.1   0.1 
Amortization of unrecognized gain  (0.1)  0.2   0.2 
Special termination benefits and curtailment (gain) loss recognized  0.2   (0.9)  0.8 
          
  $2.2  $2.8  $6.1 
          

  Year ended December 31, 
  2009  2008  2007 
Service cost $4.4  $4.4  $5.5 
Interest cost  13.0   12.6   12.0 
Expected return on plan assets  (14.4)  (15.2)  (14.1)
Amortization of prior service cost  0.3   0.3   0.1 
Amortization of unrecognized gain  0.3   (0.1)  0.2 
Special termination benefits and curtailment (gain) loss recognized  0.2   0.2   (0.9)
  $3.8  $2.2  $2.8 

In 2009, UCI recorded $0.2 million of curtailment losses related to headcount reductions as part of specific actions taken to align UCI’s cost structure with current market conditions.  As a result of closing one of UCI’s water pump operations (Note 3)2), in 2008 UCI recorded $0.2 million of expense for special pension benefits for the terminated employees and in 2007 UCI recorded a $0.9 million curtailment gain. The 2006 $0.8 million curtailment loss relates

72

United Components, Inc.
Notes to the sale of UCI’s driveline components operation (Note 4) and is included in the income statement in “Loss on sale of discontinued operations.”Consolidated Financial Statements

Assumptions

UCI determines its actuarial assumptions on an annual basis. In determining the present values of UCI’s benefit obligations and net periodic pension expense for all plans as of and for the years ended December 31, 2009, 2008 2007 and 2006,2007, UCI used the following assumptions:
             
  2008 2007 2006
Weighted average discount rate to determine benefit obligations  6.2%  6.5%  5.8%
Weighted average discount rate to determine net cost  6.5%  5.8%  5.5%
Rate of future compensation increases  4.0%  4.0%  4.0%
Rate of return on plan assets  8.0%  8.0%  8.0%

The assumed rate of return on plan assets was determined based on expected asset allocation and long-term returns for each category of investment.
  2009  2008  2007 
Weighted average discount rate to determine benefit obligations  6.0%  6.2%  6.5%
Weighted average discount rate to determine net cost  6.2%  6.5%  5.8%
Weighted average rate of future compensation increases to determine benefit obligation  3.5%  4.0%  4.0%
Weighted average rate of future compensation increases to determine net cost  4.0%  4.0%  4.0%
Weighted average rate of return on plan assets to determine net cost  8.0%  8.0%  8.0%

The discount rate was determined considering current yield curves representing high quality, long-term fixed income instruments. The discount rate for our U.S. plans is based on a review of high quality (Aa or better) bonds from the Barclay’s Capital bond database.

72


Plan Assets
United Components, Inc.
Notes to Consolidated Financial Statements
UCI has adopted a pensiondirects the investment policy designedof the plans’ assets with the objective of being able to meet current and future benefit payment needs while maximizing total investment returns withwithin the constraints of a prudent level of portfolio risk and diversification. To achieve this,UCI believes it is prudent to diversify among and within each asset class to decrease portfolio risk while, at the pension plans retain professional investment managers that investsame time, proving the potential for enhanced long-term returns.  Equity investments comprise the largest portion of the plan assets in equity andbecause they are believed to provide greater long-term returns than fixed income securities. In addition, some plans invest in insurance contracts. The Company’s measurement date of its plan assetsinvestments, although with greater short-term volatility.  Additionally, UCI believes that a meaningful allocation to foreign equities will increase portfolio diversification and obligations is December 31. The Company has a target mix of 65% equity securities and 35%thereby decrease portfolio risk while, at the same time, providing the potential for enhanced long-term returns.   With respect to fixed income securities, which are readjusted periodically, when an asset class weighting deviates frominvestments, UCI believes that the target mix, withduration of the goal of achieving the required return at a prudent level of risk.
The weighted-average pension plan asset allocations for all plans were as follows:
         
  December 31,
  2008 2007
Equity securities  60%  62%
Debt securities  40%  38%
         
Total  100%  100%
         
For pension plans with accumulated benefit obligations (ABO) that exceed plan assets,fixed income component should approximate the projected benefit obligation ABOduration for better correlation of assets to liabilities.

Derivatives, options and futures are permitted investments but only for the purpose of reducing risk. Derivatives, options and futures are not permitted for speculative purposes. Currently, the use of derivative instruments is not significant when compared to the overall portfolio.

UCI believes that investment managers with active mandates can reduce portfolio risk below market risk and potentially add value through security selection strategies.  Consistent with this belief, UCI retains the services of professional money managers to provide advice and recommendations to help UCI discharge its fiduciary responsibilities in furtherance of the plans’ goals.  With the services of professional money managers and the asset allocation targets discussed below, UCI believes that the assumed expected long-term return on plan assets of 8.0% used to determine net pension cost will be achieved.

UCI has a long-term strategic target for the allocation of plan assets. However, UCI realizes that actual allocations at any point will vary from this strategic target due to current and anticipated market conditions and required cash flows to and from the plans. The “Permitted Range” anticipates this fluctuation and provides flexibility for the professional managers’ portfolios to vary around the target without a mandatory immediate rebalancing.

73

United Components, Inc.
Notes to Consolidated Financial Statements

Strategic TargetPermitted Range
U.S. equities42%37% to 47%
Foreign equities23%18% to 28%
Fixed income35%25% to 45%
100%

The fair value of the plan assets of those plans were $217.4 million, $204.4 million and $146.4 million, respectively, as ofat December 31, 2009 are presented below (in millions).

     % of Total 
U.S. equities       
Large Cap Growth $17.0    
Large Cap Value  15.6    
Large Cap Indexed  26.7    
Small and Mid Cap Growth  8.2    
Small and Mid Cap Value  9.3    
Total U.S. equities  76.8   47%
Foreign equities  35.4   21%
Fixed income        
Short & Mid Duration  16.3     
Long Duration  30.5     
Long Duration Indexed  6.8     
Total fixed income  53.6   32%
Cash  0.7   * 
  $166.5   100%
* Less than 1%

The plan assets are primarily invested in commingled collective trusts, as well as a portion in pooled separate accounts of a large, rated A+ (Superior) by A.M. Best insurance company, collectively the “Investment Funds.”  The Investment Funds are managed by professional money managers.  The following provides a summary of the investment styles of the respective Investment Funds.

Growth Investment Funds – This investment style seeks long-term growth through equity appreciation.  Large Cap Growth funds seeks long-term appreciation through investment in large market capitalizations similar to companies in the Russell 1000, while the Small and Mid Cap Growth funds invest in small and mid market capitalizations similar to companies in the Russell 2500.

Value Investment Funds – This investment style seeks to identify equity securities that are perceived to be undervalued in the marketplace.  Large Cap Value funds invest in large market capitalizations similar to companies in the Russell 1000, while the Small and Mid Cap Growth funds invest in small and mid market capitalizations similar to companies in the Russell 2500.

Large Cap Indexed – This investment style seeks to replicate the S&P 500.

Foreign Equities – This investment style uses multiple sub-advisors including core, value, growth and emerging markets strategies to provide a diversified exposure to non-U.S. equity markets.

Short & Mid Duration Fixed Income – This investment style invests in a diversified portfolio of corporate securities and U.S. Treasuries and Agencies with shorter average durations.  This investment style benchmarks against the Barclays Capital Aggregate Index.

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Notes to Consolidated Financial Statements

Long Duration Fixed Income – This investment style invests in a diversified portfolio of corporate securities and U.S. Treasury securities which have maturities greater than ten years.  The asset allocation is weighted much heavier to U.S. investment grade corporate securities.

Long Duration Indexed – This investment style seeks to track the return of the Barclays Capital Long Government / Credit Bond Index.   This strategy invests in a diversified portfolio of corporate securities and U.S. Treasuries and Agencies which have maturities greater than ten years.

Fair value measurements - The Investment Funds determine the fair value of them by accumulating the fair values of their underlying investments.  The pension plans own undivided interests in the underlying assets of the Investment Funds where no active market exists for the identical investment.  Accordingly, the fair value measurements of the Investment Funds are considered Level 2 measurements.

Cash Flows

It is UCI’s policy to fund amounts for pension plans sufficient to meet the minimum requirements set forth in applicable benefits laws and local tax laws, for U.S. plans, including the Pension Protection Act of 2006 and the Worker, Retiree, and Employer Recovery Act of 2008 and $148.1 million, $139.7 million and $133.1 million, respectively,for U.S. plans. From time to time, UCI may contribute additional amounts as of December 31, 2007.
deemed appropriate.  During 2009,2010, UCI expects to contribute approximately $5.4$3.1 million to its plans.

Pension benefit paymentsbenefits expected to be paid are as follows: $10.0 million in 2009; $10.5$10.6 million in 2010; $11.0$11.1 million in 2011; $11.6 million in 2012; $12.3$12.1 million in 2013; and $72.0$12.6 million in 20142014; and $70.8 million in 2015 through 2018.2019. Expected benefit payments are based on the same assumptions used to measure UCI’s benefit obligations at December 31, 20082009 and include estimated future employee service.

Profit Sharing and Defined Contribution Pension Plans

Certain UCI subsidiaries sponsor defined contribution plans under section 401(k) of the Internal Revenue Code. Eligible participants may elect to defer from 5% to 50% of eligible compensation, subject to certain limitations imposed by the Internal Revenue Code. SuchFor some plans, such subsidiaries are required to match employees’ contributions based on formulas which vary by plan. For the rest of these plans, UCI matching contributions are discretionary. For those plans where UCI’s matching contributions are discretionary, UCI did not make any matching contribution in 2009.

UCI subsidiaries in China participate in government-sponsored defined contribution plans.
UCI’s subsidiary in the United Kingdom sponsors a defined contribution plan.  For United States profit sharing and defined contribution pension plans, UCI expensed $1.1 million, $2.8 million $3.5 million and $2.9$3.5 million for the years ended December 31, 2009, 2008 2007 and 2006,2007, respectively. For the Chinese and United Kingdom defined contribution plans, UCI expensed $0.1 million, $0.7 million, $0.4 million, and $0.3$0.4 million for the years ended December 31, 2009, 2008, and 2007, and 2006, respectively.

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United Components, Inc.
Notes to Consolidated Financial Statements

Other Postretirement Benefits

Certain UCI subsidiaries provide health care and life insurance benefits to eligible retired employees. The plans are partially funded by participant contributions and contain cost-sharing features such as deductibles and coinsurance.

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United Components, Inc.
Notes to Consolidated Financial Statements
The measurement date used to determine postretirement obligations is December 31. The following table presents information for the postretirement plans (in millions):
         
  December 31, 
  2008  2007 
Change in benefit obligations        
Benefit obligations at beginning of year $8.3  $8.2 
Service cost  0.3   0.2 
Interest cost  0.5   0.5 
Actuarial loss (gain)  1.3   (0.2)
Benefits paid  (0.7)  (0.4)
       
Benefit obligations accrued at end of year $9.7  $8.3 
       
  December 31, 
  2009  2008 
Change in benefit obligations      
Benefit obligations at beginning of year $9.7  $8.3 
Service cost  0.3   0.3 
Interest cost  0.6   0.5 
Actuarial loss  —   1.3 
Benefits paid  (0.8)  (0.7)
Benefit obligations accrued at end of year $9.8  $9.7 

The accrued obligation was included in the balance sheet as follows (in millions):
         
  December 31, 
  2008  2007 
Accrued obligation included in “Accrued expenses and other current liabilities” $(0.8) $(0.5)
Accrued obligation included in “Pension and other postretirement liabilities”  (8.9)  (7.8)
       
  $(9.7) $(8.3)
       
  December 31, 
  2009  2008 
Accrued obligation included in “Accrued expenses and other current liabilities” $(0.7) $(0.8)
Accrued obligation included in “Pension and other postretirement liabilities”  (9.1)  (8.9)
  $(9.8) $(9.7)

A portion of the cost of the $9.7$9.8 million and $8.3$9.7 million of accrued liabilities shown above havehas not been recorded in theUCI’s income statement, but instead havehas been recorded in “Accumulated other comprehensive income (loss).” The accumulated amounts in “Accumulated other comprehensive income (loss)” were $(1.0) million (($0.6) million after tax) and $0.3$(1.0) million ($0.2(0.6) million after tax) at December 31, 2009 and 2008, and 2007, respectively.

The following were the components of net periodic postretirement benefit cost (in millions):
             
  Year ended December 31, 
  2008  2007  2006 
Service cost $0.3  $0.2  $0.3 
Interest cost  0.5   0.5   0.4 
          
  $0.8  $0.7  $0.7 
          

  Year ended December 31, 
  2009  2008  2007 
Service cost $0.3  $0.3  $0.2 
Interest cost  0.6   0.5   0.5 
  $0.9  $0.8  $0.7 

UCI determines its actuarial assumptions annually. In determining the present values of UCI’s benefit obligations, and net periodic benefit cost, UCI used discount rates of 6.13%6.0%, 6.5%6.1% and 5.75%6.5% for the years ended December 31, 2009, 2008 and 2007, and 2006, respectively. TheIn determining UCI’s benefit obligation at December 31, 2009, the annual health care cost trend rate is assumed to decline from 9.0%8.0% in 2010 to 4.5% in 2030. In determining net periodic benefit cost, UCI used discount rates of 6.1%, 6.5% and 5.8% for the years ended December 31, 2009, 2008 to 7.0% in 2013.and 2007, respectively. Increasing the assumed healthcare cost trend rates by one percentage point would result in additional annual costs of approximately $0.1 million. Decreasing the assumed health care cost trend rates by one percentage point would result in a decrease of approximately $0.1 million in annual costs. The effect on postretirement benefit obligations at December 31, 20082009 of a one percentage point increase is $0.4would be $0.5 million. The effect of a one percentage point decrease iswould be $0.4 million.

UCI continues to fund medical and life insurance benefit costs principally on a pay-as-you-go basis. The pay-as-you-go expenditures for postretirement benefits have not been material. During 2009,2010, UCI expects to contribute approximately $0.8$0.7 million to its postretirement benefit plans. The benefits expectedIn the years 2011 through 2014, UCI expects to be paid in each year from 2010 through 2013 are $0.8 million,pay $0.7 million $0.8 million, and $0.8 million, respectively.of benefits each year. The aggregate benefits expected to be paid in the five years 20142015 through 20182019 are $3.6$3.8 million.

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United Components, Inc.
Notes to Consolidated Financial Statements
2006 Adoption of SFAS No. 158
UCI adopted SFAS No. 158 effective December 31, 2006. Adoption of SFAS No. 158 did not effect the 2006 income statement. The incremental effects of adopting SFAS No. 158 at December 31, 2006, on individual line items of the balance sheet were (in millions):
             
  Before Adjustments After
  Adoption of due to adoption Adoption of
  SFAS No. 158 of SFAS No. 158 SFAS No. 158
Prepaid pension included in “Pension and other assets” $7.7  $—  $7.7 
Liability for pension benefits included in:            
“Accrued expenses and other current liabilities”  0.1   —   0.1 
“Pension and other postretirement liabilities”  28.7   3.9   32.6 
Deferred tax (assets) related to pension included in:            
“Deferred tax liabilities”  (0.8)  (1.5)  (2.3)
Accumulated other comprehensive income (loss)  (1.2)  (2.4)  (3.6)
The adjustment to accumulated other comprehensive income (loss) at adoption, to the extent that it offsets the increase in pension and other post retirement liabilities, represents the net unrecognized actuarial losses and unrecognized prior service costs, which were previously netted against the plans’ funded status in UCI’s financial statements pursuant to the provisions of SFAS No. 87. These amounts are being subsequently recognized as net periodic pension cost pursuant to UCI’s historical accounting policy for amortizing such amounts. Further, additional actuarial gains and losses and additional prior service costs, if any, will be recognized as a component of other comprehensive income (loss) in the period in which they arise. Those additional amounts will be subsequently recognized as a component of net periodic pension cost pursuant to UCI’s historical accounting policy for amortizing such amounts.
Amounts recognized in “Accumulated other comprehensive income (loss)” at December 31, 2006 consist of (in millions):
             
  Before  Adjustments  After 
  Adoption of  Due to adoption  Adoption of 
  SFAS No. 158  of SFAS No. 158  SFAS No. 158 
Prior service costs $(0.2) $(0.8) $(1.0)
Net actuarial losses  (1.8)  (3.1)  (4.9)
Deferred income tax benefit  0.8   1.5   2.3 
          
Accumulated other comprehensive income (loss) $(1.2) $(2.4) $(3.6)
          
The provisions of SFAS No. 158 were applied prospectively. Therefore, 2006 income statement amounts presented in these consolidated financial statements are not restated.
NOTE 17 16 — COMMITMENTS AND CONTINGENCIES

Leases

The following is a schedule of the future minimum payments under operating leases that have non-cancelable lease terms (in millions):
     
  Minimum 
  payments 
2009 $5.5 
2010  4.8 
2011  4.1 
2012  3.8 
2013  3.4 
2014 and thereafter  10.1 
    
  $31.7 
    

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United Components, Inc.
  
Minimum
payments
 
2010 $5.8 
2011  4.8 
2012  4.0 
2013  3.5 
2014  3.3 
2015 and thereafter  12.2 
  $33.6 

Notes to Consolidated Financial Statements
These lease payments include the payment of certain taxes and other expenses. Rent expense was $6.3 million, $5.8 million $4.8 million and $4.9$4.8 million for the years ended December 31, 2009, 2008 2007 and 2006,2007, respectively.

Insurance Reserves

UCI purchases insurance policies for workers’ compensation, automobile and product and general liability. These policies include high deductibles for which UCI is responsible. These deductibles are estimated and recorded as expenses in the period incurred. Estimates of these expenses are updated each quarter and the expenses are adjusted accordingly. These estimates are subject to substantial uncertainty because of several factors that are difficult to predict, including actual claims experience, regulatory changes, litigation trends and changes in inflation. Estimated unpaid losses for which UCI is responsible are included in the balance sheet in “Accrued expenses and other current liabilities.”

Environmental

UCI is subject to a variety of federal, state, local and foreign environmental laws and regulations, including those governing the discharge of pollutants into the air or water, the management and disposal of hazardous substances or wastes, and the cleanup of contaminated sites. UCI has been identified as a potentially responsible party for contamination at two sites. One of these sites is a former facility in Edison, New Jersey (the “New Jersey Site”), where a state agency has ordered UCI to continue with the monitoring and investigation of chlorinated solvent contamination. UCIThe New Jersey Site has informedbeen the agency that this contamination was caused by another party atsubject of litigation to determine whether a neighboring facility andwas responsible for contamination discovered at the New Jersey Site. A judgment has initiated a lawsuit againstbeen rendered in that partylitigation to the effect that the neighboring facility is not responsible for damages and to compel it to take responsibility for anythe contamination. UCI is analyzing what further investigation or remediation. The lawsuit has proceeded to trial, which is expected toand remediation, if any, may be completed inrequired at the first quarter of 2009, although it is uncertain when a decision will be rendered.New Jersey Site. The second site is a previously owned site in Solano County, California (the “California Site”), where UCI, at the request of the regional water board, is investigating and analyzing the nature and extent of the contamination and is conducting some remediation. Based on currently available information, management believes that the cost of the ultimate outcome of thesethe environmental matters related to the New Jersey Site and the California Site will not exceed the $1.9$1.6 million accrued at December 31, 20082009 by a material amount, if at all. However, because all investigation and analysis has not yet been completed and because of thedue to inherent uncertainty in such environmental matters, and in the outcome of litigation, such as the New Jersey litigation, it is reasonably possible that the ultimate outcome of these matters could have a material adverse effect on results for a single quarter. Expenditures for these environmental matters totaled $0.4 million $0.4 million,in each of 2009, 2008 and $0.6 million in 2008, 2007 and 2006, respectively.2007.

In addition to the two matters discussed above, UCI has been named as a potentially responsible party at a site in Calvert City, Kentucky.Kentucky (the “Kentucky Site”). UCI estimates settlement costs at $0.1 million for this site. Also, UCI is involved in regulated remediation at two of its manufacturing sites.sites (the “Manufacturing Sites”). The combined cost of the remaining remediation at such Manufacturing Sites is $0.6$0.3 million. TheUCI anticipates that the majority of the $0.7$0.4 million reserved for settlement and remediation costs will be spent in the next two years.year. To date, the expenditures related to these three sitesthe Kentucky Site and the Manufacturing Sites have been immaterial.

Antitrust Litigation
As of March 15, 2009,
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United Components, Inc.
Notes to Consolidated Financial Statements

Antitrust Litigation

UCI and its wholly-ownedwholly owned subsidiary, Champion Laboratories, Inc. (“Champion”), were named as two of multiple defendants in 23 complaints originally filed in the District of Connecticut, the District of New Jersey, the Middle District of Tennessee and the Northern District of Illinois alleging conspiracy violations of Section 1 of the Sherman Act, 15 U.S.C. § 1, related to aftermarket oil, air, fuel and transmission filters.  Eight of thesethe complaints also named The Carlyle Group as a defendant, but those plaintiffs voluntarily dismissed Carlyle from each of those actions without prejudice.  Champion, but not United Components,UCI, was also named as a defendant in 13 virtually identical actions originally filed in the Northern and Southern Districts of Illinois, and the District of New Jersey.  All of these complaints are styled as putative class actions on behalf of all persons and entities that purchased aftermarket filters in the U.S. directly from the defendants, or any of their predecessors, parents, subsidiaries or affiliates, at any time during the period from January 1, 1999 to the present.  Each case seeks damages, including statutory treble damages, an injunction against future violations, costs and attorney’s fees.

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United Components, Inc.
Notes to Consolidated Financial Statements
United ComponentsUCI and Champion were also named as two of multiple defendants in 17 similar complaints originally filed in the District of Connecticut, the Northern District of California, the Northern District of Illinois and the Southern District of New York by plaintiffs who claim to be indirect purchasers of aftermarket filters.  Two of thesethe complaints also named The Carlyle Group as a defendant, but the plaintiffs in both of those actions voluntarily dismissed Carlyle without prejudice.  Champion, but not United Components,UCI, was also named in 3 similar actions originally filed in the Eastern District of Tennessee, the Northern District of Illinois and the Southern District of California.  These complaints allege conspiracy violations of Section 1 of the Sherman Act and/or violations of state antitrust, consumer protection and unfair competition law.  They are styled as putative class actions on behalf of all persons or entities who acquired indirectly aftermarket filters manufactured and/or distributed by one or more of the defendants, their agents or entities under their control, at any time between January 1, 1999 and the present; with the exception of three complaints which each allege a class period from January 1, 2002 to the present, and one complaint which alleges a class period from the “earliest legal permissible date” to the present.  The complaints seek damages, including statutory treble damages, an injunction against future violations, disgorgement of profits, costs and attorney’s fees.

On August 18, 2008, the Judicial Panel on Multidistrict Litigation (“JPML”) issued an order transferring the U.S. direct and indirect purchaser aftermarket filters cases to the Northern District of Illinois for coordinated and consolidated pretrial proceedings before the Honorable Robert W. Gettleman pursuant to 28 U.S.C. § 1407.  On November 26, 2008, all of the direct purchaser plaintiffs filed a Consolidated Amended Complaint.  This complaint names Champion as one of multiple defendants, but it does not name United Components.UCI.  The complaint is styled as a putative class action and alleges conspiracy violations of Section 1 of the Sherman Act.  The direct purchaser plaintiffs seek damages, including statutory treble damages, an injunction against future violations, costs and attorney’s fees.  On February 2, 2009, Champion filed its answer to the direct purchasers’ Consolidated Amended Complaint.

On December 1, 2008, all of the indirect purchaser plaintiffs, except Gasoline and Automotive Service Dealers of America (“GASDA”), filed a Consolidated Indirect Purchaser Complaint.  This complaint names Champion as one of multiple defendants, but it does not name United Components.UCI.  The complaint is styled as a putative class action and alleges conspiracy violations of Section 1 of the Sherman Act and violations of state antitrust, consumer protection and unfair competition law.  The indirect purchaser plaintiffs seek damages, including statutory treble damages, penalties and punitive damages where available, an injunction against future violations, disgorgement of profits, costs and attorney’s fees.  On February 2, 2009, Champion and the other defendants jointly filed a motion to dismiss the Consolidated Indirect Purchaser Complaint.  On November 5, 2009, the Court granted the motion in part, and denied it in part.  The Court directed the indirect purchaser plaintiffs to file an amended complaint conforming to the order.  On November 30, 2009, the indirect purchasers filed an amended complaint.  On December 17, 2009, the indirect purchasers filed a motion for leave to file a second amended complaint.  On December 22, 2009, the Court granted the motion for leave, but gave defendants permission to move to dismiss the second amended complaint.  Defendants’ filed that same date, Champion, motion to dismiss on January 19, 2010.

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United Components, Inc.
Notes to Consolidated Financial Statements

On February 2, 2009, Champion, UCI and the other defendants jointly filed a motion to dismiss the GASDA complaint.  On April 13, 2009, GASDA voluntarily dismissed UCI from its case without prejudice.  On November 5, 2009, the Court granted defendants’ motion.

Pursuant to a stipulated agreement between the parties, all defendants produced limited initial discovery on January 30, 2009.  TheOn December 10, 2009 the plaintiffs filed their first sets of interrogatories and requests for production of documents.  On January 11, 2010, all defendants filed a number of discovery requests to plaintiffs and third parties.  All discovery responses were due on February 16, 2010.  On January 21, 2010, the Court has ordered that all furtherentered a scheduling order for discovery.  Under this order, discovery shallrelated to class-certification will proceed immediately, with document production scheduled to be stayed until after it rulescompleted no later than June 21, 2010.  Class certification briefing will follow the completion of document production, and expert discovery on merits-related issues will follow the court’s ruling on plaintiffs’ motions to dismiss.for class certification.

On January 12, 2009, Champion, but not United Components,UCI, was named as one of ten defendants in a related action filed in the Superior Court of California, for the County of Los Angeles on behalf of a purported class of direct and indirect purchasers of aftermarket filters.  On March 5, 2009, one of the defendants filed a notice of removal to the U.S. District Court for the Central District of California, and then subsequently requested that the JPML transfer this case to the Northern District of Illinois for coordinated pre-trial proceedings.proceedings, and the JPML did.

Champion, but not United Components,UCI, was also named as one of five defendants in a class action filed in Quebec, Canada. This action alleges conspiracy violations under the Canadian Competition Act and violations of the obligation to act in good faith (contrary to art. 6 of the Civil Code of Quebec) related to the sale of aftermarket filters.  The plaintiff seeks joint and several liability against the five defendants in the amount of $5.0 million in compensatory damages and $1.0 million in punitive damages.  The plaintiff is seeking authorization to have the matter proceed as a class proceeding, which motion has not yet been ruled on.

Champion, but not United Components,UCI, was also named as one of 14 defendants in a class action filed on May 21, 2008, in Ontario, Canada.  This action alleges civil conspiracy, intentional interference with economic interests, and conspiracy violations under the Canadian Competition Act related to the sale of aftermarket filters.  The plaintiff seeks joint and several liability against the 14 defendants in the amount of $150 million in general damages and $15 million in punitive damages.  The plaintiff is also seeking authorization to have the matter proceed as a class proceeding, which motion has not yet been ruled on.


The Antitrust Division of the Department of Justice (DOJ) is also investigating the allegations raised in these suits and certain current and former employees of the defendants, including Champion, have testified pursuant to subpoenas. We are fully cooperating with the DOJ investigation.

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United Components, Inc.
Notes to Consolidated Financial Statements
On July 30, 2008, the Office of the Attorney General for the State of Florida issued Antitrust Civil Investigative Demands to Champion and UCI requesting documents and information related to the sale of oil, air, fuel and transmission filters.  We are cooperating with the Attorney General’s requests.  On April 16, 2009, the Florida Attorney General filed a complaint against Champion and eight other defendants in the Northern District of Illinois.  The complaint alleges violations of Section 1 (f) of the Sherman Act and Florida law related to the sale of aftermarket filters.  The complaint asserts direct and indirect purchaser claims on behalf of Florida governmental entities and Florida consumers.  It seeks damages, including statutory treble damages, penalties, fees, costs and an injunction.  The Florida Attorney General action is being coordinated with the rest of the filters cases pending in the Northern District of Illinois before the Honorable Robert W. Gettleman.

The Antitrust Division of the Department of Justice (DOJ) investigated the allegations raised in these suits and certain current and former employees of the defendants, including Champion, testified pursuant to subpoenas.  On January 21, 2010, DOJ sent a letter to counsel for Champion stating that “the Antitrust Division’s investigation into possible collusion in the replacement auto filters industry is now officially closed.”
We intend to vigorously defend against these claims. It is too soon

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Notes to assess the possible outcome of these proceedings. No amounts, other than ongoing defense costs, have been recorded in the financial statements for these matters.Consolidated Financial Statements
Value-added Tax Receivable

UCI’s Mexican operation has outstanding receivables denominated in Mexican pesos in the amount of $3.3$3.7 million from the Mexican Department of Finance and Public Credit.Credit, which are included in the balance sheet in “Other current assets”. The receivables relate to refunds of Mexican value-added tax, to which UCI believes it is entitled in the ordinary course of business. The local Mexican tax authorities have rejected UCI’s claims for these refunds, and the companyUCI has commenced litigation in the regional federal administrative and tax courts in Monterrey to order the local tax authorities to process these refunds. Due

Patent Litigation

Champion is a defendant in litigation with Parker-Hannifin Corporation pursuant to which Parker-Hannifin claims that certain of Champion’s products infringe a Parker-Hannifin patent. On December 11, 2009, following trial, a jury verdict was reached, finding in favor of Parker-Hannifin with damages of approximately $6.5 million.  No judgment has yet been entered by the court in this matter.  Champion continues to vigorously defend this matter; however, there can be no assurance with respect to the weakening Mexican peso againstoutcome of litigation. UCI has recorded a $6.5 million liability and incurred trial costs of $0.5 million in the U.S. dollar, we revaluedfinancial statements for this outstanding receivable from $4.6 million at December 31, 2007 to $3.3 million at December 31, 2008 resulting in an exchange loss of $1.3 million.matter.

Other Litigation

UCI is subject to various other contingencies, including routine legal proceedings and claims arising out of the normal course of business. These proceedings primarily involve commercial claims, product liability claims, personal injury claims and workers’ compensation claims. The outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty. Nevertheless, UCI believes that the outcome of any currently existing proceedings, even if determined adversely, would not have a material adverse effect on UCI’s financial condition or results of operations.

NOTE 18 17 — RELATED PARTY TRANSACTIONS

UCI has an employment agreementsagreement with certainone of its executive officers providing for annual compensation amounting to approximately $0.5 million per annum plus bonuses and severance pay under certain circumstances.  In addition, UCI has agreements with certain of its other executive officers providing for severance under certain circumstances.  The severance agreements generally provide for salary continuation for a period of twelve months or, in the case of a change in control, a period of 24 months.  Total potential severance for its executive officers amounts to approximately $1.4 million, or in the case of a change in control, approximately $2.8 million.

In 2003,UCI entered into a management agreement with TC Group, L.L.C., an affiliate of Carlyle, for management and financial advisory services and oversight to be provided to UCI and its subsidiaries. Pursuant to this agreement, UCI pays an annual management fee of $2.0 million and out-of-pocket expenses, and UCI may pay Carlyle additional fees associated with financial advisory services and other transactions. The management agreement provides for indemnification of Carlyle against liabilities and expenses arising out of Carlyle’s performance of services under this agreement. The agreement terminates either when Carlyle or its affiliates own less than 10% of UCI’s equity interest or when UCI and Carlyle mutually agree to terminate the agreement.
In May 2006, UCI paid $2.5 million to the Carlyle Group for its services in connection with the ASC Acquisition and the related financing.
Sales to The Hertz Corporation were $0.6$0.9 million, $0.6 million and $0.0$0.6 million for the years ended December 31, 2009, 2008 2007 and 2006,2007, respectively. Affiliates of The Carlyle Group own more than 10% of Hertz Global Holdings, Inc.  The Hertz Corporation.Corporation is an indirect, wholly-owned subsidiary of Hertz Global Holdings, Inc.

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United Components, Inc.
Notes to Consolidated Financial Statements

Sales to Allison Transmission, Inc. were $0.6 million for the year ended December 31, 2009. Affiliates of The Carlyle Group own more than 10% of Allison Transmission, Inc.

As part of the ASC Acquisition, UCI acquired a 51% interest in a Chinese joint venture. This joint venture purchases aluminum castings from UCI’s 49% joint venture partner, Shandong Yanzhou Liancheng Metal Products Co. LtdLtd. (“LMC”) and other materials from the joint venture partner’sLMC’s affiliates. From the ASC Acquisition Date to December 31, 2006, approximately $7 million of aluminum castings and other materials were purchased from UCI’s joint venture partner and its affiliates. In 2009, 2008 and 2007, UCI purchased $11.1 million, $12.0 million and $15.4 million, respectively, from its joint venture partnerLMC and its affiliates.  In addition, UCI sold materials and processing services to LMC in the amount of $3.1 million in 2009.

ASC rents a building from its former president. The 2009, 2008 and 2007 rent payments, which are believed to be at market rate, were $1.5 million, $1.5 million and $1.4 million, respectively.

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United Components, Inc.
Notes to Consolidated Financial Statements
NOTE 19 18 — GEOGRAPHIC INFORMATION

UCI had the following net sales by country (in millions):
             
  Year ended December 31, 
  2008  2007  2006 
United States $735.1  $821.7  $770.9 
Mexico  32.9   34.7   39.2 
Canada  30.1   34.0   27.6 
United Kingdom  12.3   13.8   12.6 
France  9.8   8.5   7.9 
Venezuela  4.6   6.4   4.5 
Germany  5.0   4.2   3.9 
Spain  5.2   4.1   3.6 
Other  45.4   42.4   35.9 
          
  $880.4  $969.8  $906.1 
          

  Year ended December 31, 
  2009  2008  2007 
United States $755.1  $735.1  $821.7 
Canada  29.0   30.1   34.0 
Mexico  24.7   32.9   34.7 
United Kingdom  11.6   12.3   13.8 
France  8.6   9.8   8.5 
Germany  5.4   5.0   4.2 
Spain  4.2   5.2   4.1 
Venezuela  2.3   4.6   6.4 
Other  44.1   45.4   42.4 
  $885.0  $880.4  $969.8 

Net long-lived assets by country were as follows (in millions):
         
  December 31, 
  2008  2007 
United States $201.5  $226.0 
Mexico  9.9   12.2 
Spain  2.3   2.6 
China  33.2   27.0 
Goodwill  241.5   241.5 
       
  $488.4  $509.3 
       

  December 31, 
  2009  2008 
United States $192.9  $201.5 
China  29.7   33.2 
Mexico  8.9   9.9 
Spain  3.8   2.3 
Goodwill  241.5   241.5 
  $476.8  $488.4 

NOTE 20 19 — STOCK-BASED COMPENSATION

In 2009, 2008 2007 and 2006,2007, pre-tax expenses of $0.4 million, $0.8 million $3.4 million and $1.6$3.4 million, respectively, were recorded for stock option based compensation.

81

United Components, Inc.
Notes to Consolidated Financial Statements

Description of Equity Incentive Plan
UCI
Holdco adopted a stock option plan in 2003. In December 2008, the Board of Directors of UCI Holdco approved the adoption of an amended and restated equity incentive plan that represented a complete amendment, restatement and continuation of the previous stock option plan. The amended and restated equity incentive plan permits the granting of options to purchase shares of common stock of UCI Holdco to UCI’s employees, directors, and consultants, as well as the granting of restricted shares of UCI Holdco common stock. Options and restricted shares granted pursuant to the equity incentive plan must be authorized by the Compensation Committee of the Board of Directors of UCI Holdco. The aggregate number of shares of UCI Holdco’s common stock that may be issued under the equity incentive plan may not exceed 450,000.

The terms of the options may vary with each grant and are determined by the Compensation Committee within the guidelines of the equity incentive plan. No option life can be greater than ten years. Options currently vest over an 8 year period, and vesting of a portion of the options could accelerate if UCI achieves certain financial targets, or in the event of certain changes in control. The options have an exercise price equal to the estimated market value of UCI Holdco’s common stock on the date of grant, except for options to purchase 45,750 shares of stock granted in 2007 at an exercise price that was above the estimated market value at the date of grant.

The terms of the restricted stock are determined by the Compensation Committee within the guidelines of the equity incentive plan.
The shares of the restricted stock vest only upon a change in control of UCI Holdco.

79

United Components, Inc.
Notes to Consolidated Financial Statements
Stock Options

Options granted prior to December 2006 originally had an exercise price of $100. In January 2007, as a result of the dividend paid to UCI Holdco stockholders of approximately $96 per share, the exercise price for all options outstanding as of that date was revised to $5 per share. See “Stock Option Modifications” below.

Information related to the number of shares under options follows:
             
  December 31, 
  2008  2007  2006 
Number of shares under option:            
Outstanding, beginning of year  233,995   321,565   304,040 
Granted  2,000   73,750   49,500 
Canceled  (38,000)  (42,654)  (31,975)
Exercised  (20,569)  (118,666)  — 
          
Outstanding, end of year  177,426   233,995   321,565 
          
Exercisable, end of year  141,520   148,611   108,290 
          

  December 31, 
  2009  2008  2007 
Number of shares under option:         
Outstanding, beginning of year  177,426   233,995   321,565 
Granted  2,000   2,000   73,750 
Canceled  (48,061)  (38,000)  (42,654)
Exercised  (3,650)  (20,569)  (118,666)
Outstanding, end of year  127,715   177,426   233,995 
             
Exercisable, end of year  110,906   141,520   148,611 

The Black-Scholes option pricing model was used to estimate fair values of the options as of the date of the grant. The fair value of options granted in 2009 and 2008 was $5.06.$29.98 and $5.06, respectively. The fair value of options granted in 2007 ranged from $4.05 to $12.96. Except for options granted in December 2006, the fair value of options granted in 2006 was $53.51. The fair value of the options to purchase 2,000 shares that were granted in December 2006 was $72.88 per share. Principal weighted average assumptions used in applying the Black-Scholes model were as follows:
             
Valuation assumptions 2008 2007 2006
Dividend yield  0.00%  0.00%  0.00%
Risk-free interest rate  2.82%  4.67%  4.36%
Volatility  42.15%  41.83%  41.37%
Expected option term in years  8   8   8 
Weighted average exercise price per share $23.63  $74.11  $5.00 
Weighted average market value per share $13.87  $23.63  $100.75 

Valuation assumptions 2009  2008  2007 
Dividend yield  0.00%  0.00%  0.00%
Risk-free interest rate  2.92%  2.82%  4.67%
Volatility  41.76%  42.15%  41.83%
Expected option term in years  8   8   8 
Weighted average exercise price per share $58.80  $23.63  $74.11 
Weighted average market value per share $58.80  $13.87  $23.63 

82

United Components, Inc.
Notes to Consolidated Financial Statements

Because of its large outstanding debt balances, UCI does not anticipate paying cash dividends in the foreseeable future and, therefore, uses an expected dividend yield of zero. The expected option term is based on the assumption that options will be outstanding throughout their 8-year vesting period. Volatility is based upon the volatility of comparable publicly traded companies. Because UCI Holdco is not publicly traded, the market value of its stock is estimated based upon the valuation of comparable publicly traded companies, the value of reported acquisitions of comparable companies, and discounted cash flows. The exercise price and market value per share amounts presented above were as of the date the stock options were granted.

80

United Components, Inc.
Notes to Consolidated Financial Statements
A summary of stock option activity in 20082009 follows:
             
          Weighted 
          Average 
  Number  Weighted  Remaining 
  of Shares  Average  Contractual 
  Under Option  Exercise Price  Life 
Outstanding at December 31, 2007  233,995  $5.00     
Granted  2,000   23.63     
Canceled  (38,000)  98.42     
Exercised  (20,569)  7.26     
           
Outstanding at December 31, 2008  177,426  $13.66  6.8 years
           
Exercisable at December 31, 2008  141,520  $13.15  6.4 years
  
Number
of Shares
Under Option
  
Weighted
Average
Exercise Price
  
Weighted
Average
Remaining
Contractual
Life
 
          
Outstanding at December 31, 2008  177,426  $13.66    
Granted  2,000   58.80    
Canceled  (48,061)  26.04    
Exercised  (3,650)  5.00    
Outstanding at December 31, 2009  127,715  $9.60  5.4 years 
            
Exercisable at December 31, 2009  110,906  $8.37  5.2 years 

The intrinsic value of options exercised during 2009, 2008 and 2007 was $0.1 million, $0.3 million and $2.2 million, respectively. There were no options exercised during 2006. Proceeds from the exercise of options in 2009, 2008 and 2007 of $18 thousand dollars, $0.1 million and $0.6 million, respectively, were received and retained by UCI Holdco.

A summary of the number of shares under options that are outstanding as of December 31, 20082009 follows:
                 
    Number Weighted Weighted Number  
  of Shares Average Average Exercisable at Weighted Average
Under Option Remaining Life Exercise Price December 31, 2008 Exercise Price
139,676  6.1  $5.00   118,789  $5.00 
27,500  9.1  $23.63   13,763  $23.63 
10,250  9.0  $105.00   8,969  $105.00 

Number
of Shares
Under Option
 
Weighted
Average
Remaining Life
  
Weighted
Average
Exercise Price
  
Number
Exercisable at
December 31, 2009
  
Weighted Average
Exercise Price
 
             
108,715  4.9  $5.00   100,353  $5.00 
15,000  8.1  $23.63   8,153  $23.63 
2,000  10.0  $58.80   400  $58.80 
2,000  8.0  $105.00   2,000  $105.00 

At December 31, 2008,2009, there was $1.9$0.9 million of unrecognized compensation cost relating to outstanding unvested stock options. Approximately $0.7$0.4 million of this cost will be recognized in 2009.2010. The balance will be recognized in declining amounts through 2015.

The $0.4 million, $0.8 million $3.4 million and $1.6$3.4 million of stock option based compensation expense recorded in 2009, 2008 2007 and 2006,2007, respectively, is a non-cash charge.

Stock Option Modifications

In December 2006, UCI Holdco declared a dividend of approximately $96 per share of common stock. In accordance with the terms of the agreement related to then outstanding stock option agreement,options, in January 2007 the exercise price of all outstanding options was lowered to offset the adverse effect the dividend had on the value of the options. This change did not increase the value of the options; consequently, no additional compensation expense was or will be incurred.

In 2007, the Compensation Committee of the Board of Directors accelerated the vesting of approximately 10% of the then outstanding stock options and also lowered the levels of profitability and cash generation required to achieve future accelerated vesting, including those for the 2007 year. This resulted in $1.5 million more expense in 2007 than would have been incurred had the changes not been made. Earlier vesting affects when stock option expense is recognized, but does not affect the ultimate total expense. Consequently, accelerating the vesting resultsresulted in recording more of the total expense this year andin 2007and less in later years.

81


83

United Components, Inc.
Notes to Consolidated Financial Statements
Restricted Stock
In December 2008, the Compensation Committee granted 32,500 shares of restricted stock in exchange for options to purchase 32,500 shares of common stock options issued in 2007 at an exercise price of $105.00 per share. The stock options surrendered in exchange for the restricted stock are presented as a cancellation of stock options in the stock option activity table above. Also in December 2008, the Compensation Committee granted an additional 21,840 shares of restricted stock to various members of management.

A summary of all restricted stock activity during 2009 is as follows:

  Number of Shares  
Weighted Average
Grant Date Fair
Value
 
       
Restricted Stock Outstanding at December 31, 2008  54,340  $13.87 
Granted  59,500  $48.13 
Vested  —  $— 
Forfeited  (4,000) $13.87 
Restricted Stock Outstanding at December 31, 2009  109,840  $32.43 

During 2009 and 2008, the Company granted 59,500 and 54,340 shares of restricted stock with aggregate fair values of $2.9 million and $0.7 million, respectively.

The terms of the restricted stock agreement provide that the shares of restricted stock vest only upon a change of control, as defined, of UCI Holdco. Due to the uncertainty surrounding the ultimate vesting of the restricted stock, no stock-based compensation expense has been recorded. When a change in control becomes probable, expense equal to the fair value of the stock at that time will be recorded.

NOTE 21 20 — FAIR VALUE ACCOUNTING
In 2008, UCI adopted SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of SFAS No. 115.” SFAS No. 159 permits (but does not require) companies to choose to measure certain financial instruments and other items at fair value. UCI did not choose the
The accounting guidance on fair value measurement options permitted by SFAS No. 159 for any of its assets and liabilities. Therefore, adoption of SFAS No. 159 did not impact UCI’s financial statements.
In September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 (i) defines fair value, (ii) establishes a framework for measuring fair value in generally accepted accounting principles, and (iii) expands disclosures about fair value measurements. For certain nonfinancial assets and liabilities, adoption of SFAS No. 157 is not required until 2009, and UCI has not adopted for those certain nonfinancial assets and liabilities. Adoption of SFAS No. 157 in 2009 for those certain nonfinancial assets and liabilities is not expected to have a significant effect on UCI’s financial statements. For assets and liabilities other than those certain nonfinancial assets and liabilities, UCI adopted SFAS No. 157 on January 1, 2008. Adoption of this portion of SFAS No. 157 did not have a material impact on UCI’s financial statements.
Fair value hierarchy
SFAS No. 157 defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. To increase consistency and comparability in fair value measurements SFAS No. 157 provides a fair value estimating hierarchy. The hierarchy is listed below.
SFAS No. 157 uses the term “inputs” to broadly refer to the assumptions used in estimating fair values. It distinguishes between (i) assumptions based on market data obtained from independent third party sources (“observable inputs”) and (ii) UCI’s assumptions based on the best information available (“unobservable inputs”). SFAS No. 157The accounting guidance requires that fair value valuation techniques maximize the use of “observable inputs” and minimize the use of “unobservable inputs.” The fair value hierarchy consists of the three broad levels listed below. The highest priority is given to Level 1, and the lowest is given to Level 3.

Level 1 —Quoted market prices in active markets for identical assets or liabilities

Level 2 —Inputs other than Level 1 inputs that are either directly or indirectly observable

Level 3 —Unobservable inputs developed using UCI’s estimates and assumptions, which reflect those that market participants would use when valuing an asset or liability

The determination of where an asset or liability falls in the hierarchy requires significant judgment.

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84

United Components, Inc.
Notes to Consolidated Financial Statements

Interest rate swap measured at fair value on a recurring basis

The only recurring fair value measurement reflected in UCI’s financial statements was the measurement of interest rate swaps. These interest rate swaps are described in Note 22.21. The swaps expired in August 2008 and were not replaced.

When the swaps were outstanding, the fair value of the interest rate swaps were estimated at the present value of the difference between (i) interest payable for the duration of the swap at the swap interest rate and (ii) interest that would be payable for the duration of the swap at the relevant current interest rate at the date of measurement. The estimated fair value was based on “Level 2” inputs, as defined above.inputs.

Assets measured at fair value on a nonrecurring basis
The
In 2009, no assets were adjusted to their fair values on a nonrecurring basis.

In 2008, the assets listed in the following table summarizes the valuation of assets measured atwere adjusted to fair value on a nonrecurring basisbasis. The amounts are in the December 31, 2008 balance sheet (in millions):millions.
           
  Fair Value Measurements using
    Significant  
    Unobservable  
    Inputs Gains
         Description            (Level 3) (Losses)
Assets held for sale (a) $—  $(1.3)
Trademarks (b) $0.5  $(0.5)

   Fair Value Measurements    
   Using    
   Significant Unobservable Inputs  2008 Write-down 
Description
  
(Level 3)
  
Loss Adjustments
 
        
Assets held for sale(a) $0.0  $(1.3)
Trademarks(b) $0.5  $(0.5)
 
(a)See Note 32 for a description of the impairment write-down of these long-lived assets held for sale. Their carrying amount of $1.3 million was written down to their fair value of zero. This resulted in a loss of $1.3 million, which was included in the 2008 earnings.income statement in “Restructuring costs”.

 
(b)See Note 119 for a description of the 2008 impairment write-down of this intangible asset. The estimated fair value of this asset is based on discounted cash flows. The cash flows are estimated benefits, which are in the form of avoided costs, because UCI owns this intangible asset. The estimated fair value of this intangible asset is based on “Level 3” inputs as described above.inputs.

Fair value of financial instruments

Cash and cash equivalents—- The carrying amount of cash equivalents approximates fair value because the original maturity is less than 90 days.

Trade accounts receivable—- The carrying amount of trade receivables approximates fair value because of their short outstanding terms.

Trade accounts payable—- The carrying amount of trade payables approximates fair value because of their short outstanding terms.

Short-term borrowings—- The carrying value of these borrowings equals fair market value because their interest rates reflect current market rates.

85

United Components, Inc.
Notes to Consolidated Financial Statements

Long-term debt—- The carryingfair value of the $190 million of term loan borrowings under the senior credit facility equalsat December 31, 2009 and 2008 was $176.7 million and $131.1 million, respectively. The estimated fair value of the term loan was based on information provided by an independent third party who participates in the trading market value because their variable interest rates reflect market rates.for debt similar to the term loan. Due to the infrequency of trades, this input is considered to be a Level 2 input.

The fair market value of the $230 million senior subordinated ratesnotes at December 31, 2009 and 2008 was $221.1 million and 2007 was $94.9 million, and $226 million, respectively. TheseThe estimated fair values were estimatedvalue of these notes was based on the bid and bid/ask prices, on December 31, which isas reported by a “Level 1” input, as defined above.third party bond pricing service. Due to the infrequency of trades of the senior subordinated notes, these inputs are considered to be Level 2 inputs.

Interest rate swaps—- See Note 22.

83

United Components, Inc.
Notes to Consolidated Financial Statements21.

NOTE 22 21 — INTEREST RATE SWAPS

In connection with UCI’s senior credit facilities, UCI was party to interest rate swap agreements that effectively converted $80 million of variable rate debt to fixed rate debt for the two years ended August 2007, and converted $40 million for the 12-month period ended August 2008. The variable component of the interest rate on borrowings under the senior credit facilities is based on LIBOR. Under the swap agreements, UCI paid 4.4%, and received the then current LIBOR on $80 million through August 2007 and UCI paid 4.4% and received the then current LIBOR on $40 million for the 12-month period ending August 2008.
UCI did not replace the interest rate swap that expired in August 2008.

Quarterly, UCI adjusted the carrying value of this interest rate swap derivative to its estimated fair value. The offset to the change in this carrying value was recorded as an adjustment to “Other“Accumulated other comprehensive income (loss)” in UCI’s stockholder’s equity. At December 31, 2006, UCI recorded ana $0.8 million asset to recognize the fair value of its interest rate swaps. UCI also recorded a $0.3 million deferred tax liability associated therewith.
The net offset is recorded in “Accumulated other comprehensive income (loss).” At December 31, 2007, the estimated fair value was seven$7 thousand dollars.

NOTE 23 22 — OTHER COMPREHENSIVE INCOME (LOSS)

Accumulated other comprehensive income (loss) was as follows (in millions):
                 
              Total 
          Pension  accumulated 
      Foreign  and OPEB  other 
  Interest rate  currency  liability  comprehensive 
  swaps  adjustment  adjustment  income (loss) 
Balance at January 1, 2006 $0.3  $0.4  $(1.5) $(0.8)
2006 change  0.2   0.2   0.3   0.7 
Cumulative effect adjustment due to adoption of SFAS No. 158  —   —   (2.4)  (2.4)
             
Balance at December 31, 2006  0.5   0.6   (3.6)  (2.5)
2007 change  (0.5)  0.8   9.0   9.3 
             
Balance at December 31, 2007  —   1.4   5.4   6.8 
2008 change  —   (4.3)  (42.1)  (46.4)
             
Balance at December 31, 2008 $—  $(2.9) $(36.7) $(39.6)
             

  
Interest rate
swaps
  
Foreign
Currency
adjustment
  
Pension
and OPEB
Liability
adjustment
  
Total
accumulated
other
comprehensive
income (loss)
 
             
Balance at January 1, 2007 $0.5  $0.6  $(3.6) $(2.5)
2007 change  (0.5)  0.8   9.0   9.3 
Balance at December 31, 2007  —   1.4   5.4   6.8 
2008 change  —   (4.3)  (42.1)  (46.4)
Balance at December 31, 2008  —   (2.9)  (36.7)  (39.6)
2009 change  —   1.2   5.9   7.1 
Balance at December 31, 2009 $—  $(1.7) $(30.8) $(32.5)

86

United Components, Inc.
Notes to Consolidated Financial Statements
NOTE 24 23 — OTHER INFORMATION

Cash payments for interest in 2009, 2008 and 2007 and 2006 were $29.6 million, $33.6 million $40.4 million and $41.6$40.4 million, respectively. Cash payments (net of refunds) for income taxes for 2009, 2008 and 2007 and 2006 were $7.6 million, $(3.5) million and $(1.3) million, and $(0.4) million, respectively.

At December 31, 20082009 and 2007,2008, 1,000 shares of voting common stock were authorized, issued and outstanding. The par value of each share of common stock is $0.01 per share. Income of $0.8 million in 2008, $0.1 million in 2007 and $0.8 million in 2006 related to minority interest is included in “Miscellaneous, net.”

84

United Components, Inc.
Notes to Consolidated Financial Statements

NOTE 25 24 — CONCENTRATION OF RISK

UCI places its cash investments with a relatively small number of high quality financial institutions. Substantially all of the cash and cash equivalents, including foreign cash balances at December 31, 20082009 and 2007,2008, were uninsured. Foreign cash balances at December 31, 2009 and 2008 were $8.4 million and 2007 were $6.7 million, and $3.3 million, respectively.

UCI sells vehicle parts to a wide base of customers. Sales are primarily to automotive aftermarket customers. UCI has outstanding receivables owed by these customers and to date has experienced no significant collection problems. Sales to a single customer, AutoZone, approximated 29%30%, 28%29% and 24%28% of total net sales for the years ended December 31, 2009, 2008 2007 and 2006,2007, respectively. No other customer accounted for more than 10% of total net sales for the years ended December 31, 2009, 2008 2007 and 2006.2007.
Our sales to General Motors Corporation’s (GM) automotive original equipment manufacturing and sales operations comprise less than 10% of our consolidated sales. While sales to GM are less than 10% of our sales, we do carry accounts receivable from GM in the range of $6.0 million to $10.0 million at any given time. At December 31, 2008, accounts receivable from GM and its subsidiaries totaled $9.6 million. In the audit report to the GM financial statements included in GM’s 2008 Annual Report on Form 10-K, GM’s independent auditors expressed substantial doubt as to GM’s ability to continue as a going concern. If GM is unable to continue as a going concern, the possibility exists that some or all of accounts receivable from GM might become uncollectible. We have not recorded an allowance for doubtful accounts as of December 31, 2008.
NOTE 26 25 — QUARTERLY FINANCIAL INFORMATION (unaudited)

The following is a summary of the unaudited quarterly results of operations. UCI believes that all adjustments considered necessary for a fair presentation in accordance with generally accepted accounting principles have been included (in millions).
                 
  Quarter Ended
  March 31 June 30 Sept. 30 Dec. 31
2008                
Net sales $229.3  $229.3  $218.1  $203.7 
Gross profit  51.1   46.7   47.5   32.6 
Net income (loss) from continuing operations  6.8   4.0   4.4   (5.3)
                 
2007                
Net sales $238.8  $259.6  $230.7  $240.7 
Gross profit  49.6   59.4   53.6   58.4 
Net income from continuing operations  4.5   10.0   8.4   12.5 

  Quarter Ended 
  March 31  June 30  Sept. 30  Dec. 31 
             
2009            
Net sales $219.9  $217.4  $228.9  $218.8 
Gross profit  40.3   48.3   55.8   55.2 
Net income attributable to United Components, Inc.  1.6   7.5   13.1   8.4 
                 
2008                
Net sales $229.3  $229.3  $218.1  $203.7 
Gross profit  51.1   46.7   47.5   32.6 
Net income (loss) attributable to United Components, Inc.  6.8   4.0   4.4   (5.3)

87

United Components, Inc.
Notes to Consolidated Financial Statements
UCI’s quarterly results were affected by the gains and (losses) described in Notes 2, 3, 5, 119, 12 and 13.16. Below is a summary of the gains and (losses). Except for the effect on cost of sales described in NotesNote 2 and 3 and the reduction in sales described in Note 13,12, none of these losses affect net sales or gross profit. The amounts below are after-tax amounts:
                 
  2008 Quarter Ended
  March 31 June 30 Sept. 30 Dec. 31
Note 3 — Cost of integration of water pump operations $(0.2) $(0.1) $(0.1) $(1.1)
Note 11 — Trademark impairment loss  —   —   —   (0.3)
Note 13 — Higher than normal warranty loss provision  —   (3.6)  —   (0.6)

                 
  2007 Quarter Ended
  March 31 June 30 Sept. 30 Dec. 31
Note 2 — Favorable resolution of pre-acquisition ASC liabilities $—  $—  $—  $1.1 
Note 3 — Cost of integration of water pump operations  (1.1)  (0.9)  (1.1)  (0.2)
Note 5 — Costs of closing facilities and consolidating operations  1.0   (0.1)  —   — 
Note 11 — Trademark impairment loss  —   (2.2)  —   — 

85

United Components, Inc.
  2009 Quarter Ended 
  March 31  June 30  Sept. 30  Dec. 31 
             
Note 2 — Restructuring costs $0.1  $(0.4) $0.3  $0.6 
Note 16 — Patent litigation costs  —   —   —   4.3 

Notes
  2008 Quarter Ended 
  March 31  June 30  Sept. 30  Dec. 31 
             
Note 2 — Restructuring costs  (0.2)  (0.1)  (0.1)  (1.1)
Note 9 — Trademark impairment loss  —   —   —   (0.3)
Note 12 — Higher than normal warranty loss provision  —   (3.6)  —   (0.6)

NOTE 26 — SUBSEQUENT EVENTS

In February 2010, UCI entered into an agreement to Consolidated Financial Statementssell its entire 51% interest in its Chinese joint venture to its joint venture partner, LMC.  The sale price is approximately $0.9 million, plus the assumption of certain liabilities due UCI of approximately $2.5 million.  Based upon the terms of the proposed transaction, UCI will record an after tax loss in the range of $1.2 million to $1.6 million.

The sale agreement also provides for the Company to enter into a long-term supply agreement pursuant to which LMC will supply certain water pump components to the Company.  As part of this long-term supply agreement, LMC will purchase from UCI all the aluminum necessary to produce aluminum parts to be supplied under the agreement.  The completion of the sale is subject to certain closing conditions, including approval from governmental entities in China; accordingly, there is no assurance when, or if, the transaction will be completed.

NOTE 27 — GUARANTOR AND NON-GUARANTOR FINANCIAL STATEMENTS

The senior credit facilities are secured by substantially all the assets of UCI. The Notes are unsecured and rank equally in right of payment with any of UCI’s future senior subordinated indebtedness. The Notes are subordinated to indebtedness and other liabilities of UCI’s subsidiaries that are not guarantors of the Notes. The Notes and borrowings under the senior credit facilities are guaranteed on a full and unconditional and joint and several basis by UCI’s domestic subsidiaries.

The condensed financial information that follows includes condensed financial statements for (a) UCI, which is the issuer of the Notes and borrower under the senior credit facilities, (b) the domestic subsidiaries, which guarantee the Notes and borrowings under the senior credit facilities (the “Guarantors”), (c) the foreign subsidiaries (the “Non-Guarantors”), and (d) consolidated UCI. Also included are consolidating entries, which principally consist of eliminations of investments in consolidated subsidiaries and intercompany balances and transactions. All goodwill is included in UCI’s balance sheet.

Separate financial statements of the Guarantor subsidiaries are not presented because their guarantees are full and unconditional and joint and several, and UCI believes separate financial statements and other disclosures regarding the Guarantor subsidiaries are not material to investors.

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88

United Components, Inc.
Notes to Consolidated Financial Statements

Note 27 (continued)

Consolidating Condensed Balance Sheet
December 31, 2008
2009
(in thousands)
                     
  UCI              Non- 
  Consolidated  Eliminations  UCI  Guarantors  Guarantors 
Assets
                    
Current assets                    
Cash and cash equivalents $46,612  $—  $39,061  $860  $6,691 
Accounts receivable, net  261,624   —   —   246,101   15,523 
Inventories, net  159,444   —   —   133,900   25,544 
Deferred tax assets  24,245   —   255   23,479   511 
Other current assets  19,452   —   648   8,602   10,202 
                
Total current assets  511,377       39,964   412,942   58,471 
                     
Property, plant and equipment, net  167,906   —   1,006   123,579   43,321 
Investment in subsidiaries  —   (253,698)  225,275   28,423   — 
Goodwill  241,461   —   241,461   —   — 
Other intangible assets, net  74,606   —   9,025   65,378   203 
Deferred financing costs, net  2,649   —   2,649   —   — 
Pension and other assets  1,823   —   365   1,292   166 
                
Total assets $999,822  $(253,698) $519,745  $631,614  $102,161 
                
                     
Liabilities and shareholder’s equity
                    
Current liabilities                    
Accounts payable $104,416  $—  $4,140  $86,407  $13,869 
Short-term borrowings  25,199   —   20,003   —   5,196 
Current maturities of long-term debt  422   —   363   59   — 
Accrued expenses and other current liabilities  85,730   —   8,356   73,448   3,926 
                
Total current liabilities  215,767   —   32,862   159,914   22,991 
                     
Long-term debt, less current maturities  418,025   —   417,573   452   — 
Pension and other postretirement liabilities  79,832   —   10,336   68,276   1,220 
Deferred tax liabilities  3,560   —   18,406   (15,500)  654 
Due to UCI Holdco  17,535   —   17,535   —   — 
Minority Interest  2,490   —   —   —   2,490 
Other long-term liabilities  2,540   —   —   1,732   808 
Intercompany payables (receivables)  —   —   (237,040)  207,173   29,867 
                     
Total shareholder’s equity  260,073   (253,698)  260,073   209,567   44,131 
                
Total liabilities and shareholder’s equity $999,822  $(253,698) $519,745  $631,614  $102,161 
                

87

  
UCI
Consolidated
  Eliminations  UCI  Guarantors  
Non-
Guarantors
 
Assets               
Current assets               
Cash and cash equivalents $131,913  $—  $122,968  $536  $8,409 
Accounts receivable, net  261,210   —   —   245,606   15,604 
Inventories, net  133,058   —   —   110,247   22,811 
Deferred tax assets  30,714   —   (13)  31,654   (927)
Other current assets  23,499   —   6,048   9,594   7,857 
Total current assets  580,394   —   129,003   397,637   53,754 
                     
Property, plant and equipment, net  149,753   —   261   109,918   39,574 
Investment in subsidiaries  —   39,612   (68,955)  29,343   — 
Goodwill  241,461   —   241,461   —   — 
Other intangible assets, net  68,030   —   7,453   60,087   490 
Deferred financing costs, net  1,843   —   1,843   —   — 
Restricted cash  9,400   —   —   9,400   — 
Other long-term assets  6,304   —   367   5,759   178 
Total assets $1,057,185  $39,612  $311,433  $612,114  $93,996 
                     
Liabilities and shareholder’s equity                    
Current liabilities                    
Accounts payable $111,898  $—  $4,974  $89,121  $17,803 
Short-term borrowings  3,460   —   —   —   3,460 
Current maturities of long-term debt  17,925   —   17,866   59   — 
Accrued expenses and other current liabilities  106,981   —   9,242   93,900   3,839 
Total current liabilities  240,264   —   32,082   183,080   25,102 
                     
Long-term debt, less current maturities  400,853   —   400,460   393   — 
Pension and other postretirement liabilities  70,802   —   9,716   60,072   1,014 
Deferred tax liabilities  8,546   —   21,469   (13,499)  576 
Due to UCI Holdco  30,105   —   30,105   —   — 
Other long-term liabilities  6,672   —   —   4,739   1,933 
Intercompany payables (receivables)  —   —   (480,531)  475,936   4,595 
                     
Total shareholder’s equity  299,943   39,612   298,132   (98,577)  60,776 
Total liabilities and shareholder’s equity $1,057,185  $39,612  $311,433  $612,144  $93,996 

89

United Components, Inc.
Notes to Consolidated Financial Statements

Note 27 (continued)

Consolidating Condensed Balance Sheet
December 31, 2007
2008
(in thousands)
                     
  UCI              Non- 
  Consolidated  Eliminations  UCI  Guarantors  Guarantors 
Assets
                    
Current assets                    
Cash and cash equivalents $41,440  $—  $36,684  $1,234  $3,522 
Accounts receivable, net  253,904   —   —   239,888   14,016 
Inventories, net  142,621   —   —   119,882   22,739 
Deferred tax assets  22,837   —   49   23,329   (541)
Other current assets  29,306   —   11,532   9,913   7,861 
                
Total current assets  490,108       48,265   394,246   47,597 
                     
Property, plant and equipment, net  167,812   —   1,190   124,744   41,878 
Investment in subsidiaries  —   (273,387)  262,871   10,516   — 
Goodwill  241,461   —   241,461   —   — 
Other intangible assets, net  83,594   —   11,628   71,966   — 
Deferred financing costs, net  3,701   —   3,701   —   — 
Deferred tax assets  —   —   (186)  —   186 
Pension and other assets  11,478   —   365   9,997   1,116 
Assets held for sale  1,300   —   —   1,300   — 
                
Total assets $999,454  $(273,387) $569,295  $612,769  $90,777 
                
                     
Liabilities and shareholder’s equity
                    
Current liabilities                    
Accounts payable $102,553  $—  $1,072  $85,181  $16,300 
Short-term borrowings  10,134   —   —   —   10,134 
Current maturities of long-term debt  479   —   418   61   — 
Accrued expenses and other current liabilities  95,169   —   19,981   71,187   4,001 
                
Total current liabilities  208,335   —   21,471   156,429   30,435 
                     
Long-term debt, less current maturities  427,815   —   427,304   511   — 
Pension and other postretirement liabilities  22,871   —   —   21,657   1,214 
Deferred tax liabilities  27,338   —   15,570   10,230   1,538 
Due to UCI Holdco  11,330   —   11,330   —   — 
Minority interest  3,308   —   —   —   3,308 
Other long-term liabilities  2,638   —   —   1,984   654 
Intercompany payables (receivables)  —   —   (202,199)  187,938   14,261 
                     
Total shareholder’s equity  295,819   (273,387)  295,819   234,020   39,367 
                
Total liabilities and shareholder’s equity $999,454  $(273,387) $569,295  $612,769  $90,777 
                

88

  
UCI
Consolidated
  Eliminations  UCI  Guarantors  
Non-
Guarantors
 
Assets               
Current assets               
Cash and cash equivalents $46,612  $—  $39,061  $860  $6,691 
Accounts receivable, net  261,624   —   —   246,101   15,523 
Inventories, net  159,444   —   —   133,900   25,544 
Deferred tax assets  24,245   —   255   23,479   511 
Other current assets  19,452   —   648   8,602   10,202 
Total current assets  511,377       39,964   412,942   58,471 
                     
Property, plant and equipment, net  167,906   —   1,006   123,579   43,321 
Investment in subsidiaries  —   (253,698)  225,275   28,423   — 
Goodwill  241,461   —   241,461   —   — 
Other intangible assets, net  74,606   —   9,025   65,378   203 
Deferred financing costs, net  2,649   —   2,649   —   — 
Pension and other assets  1,823   —   365   1,292   166 
Total assets $999,822  $(253,698) $519,745  $631,614  $102,161 
                     
Liabilities and shareholder’s equity                    
Current liabilities                    
Accounts payable $104,416  $—  $4,140  $86,407  $13,869 
Short-term borrowings  25,199   —   20,003   —   5,196 
Current maturities of long-term debt  422   —   363   59   — 
Accrued expenses and other current liabilities  85,730   —   8,356   73,448   3,926 
Total current liabilities  215,767   —   32,862   159,914   22,991 
                     
Long-term debt, less current maturities  418,025   —   417,573   452   — 
Pension and other postretirement liabilities  79,832   —   10,336   68,276   1,220 
Deferred tax liabilities  3,560   —   18,406   (15,500)  654 
Due to UCI Holdco  17,535   —   17,535   —   — 
Other long-term liabilities  2,540   —   —   1,732   808 
Intercompany payables (receivables)  —   —   (237,040)  207,173   29,867 
                     
Total shareholder’s equity  262,563   (253,698)  260,073   209,567   46,621 
Total liabilities and shareholder’s equity $999,822  $(253,698) $519,745  $631,614  $102,161 

90

United Components, Inc.
Notes to Consolidated Financial Statements

Note 27 (continued)
Consolidating Condensed Income Statement
Year Ended December 31, 2009
(in thousands)

  
UCI
Consolidated
  Eliminations  UCI  Guarantors  
Non-
Guarantors
 
                
Net sales $884,954  $(104,585) $—  $842,830  $146,709 
Cost of sales  685,356   (104,585)  —   659,738   130,203 
Gross profit  199,598   —   —   183,092   16,506 
Operating expenses                    
Selling and warehousing  (56,598)  —   (431)  (50,398)  (5,769)
General and administrative  (45,525)  —   (14,177)  (26,188)  (5,160)
Amortization of acquired intangible assets  (5,758)  —   —   (5,758)  — 
Restructuring costs  (923)  —   —   (1,371)  448 
Patent litigation costs  (7,002)  —   —   (7,002)  — 
Operating income (loss)  83,792   —   (14,608)  92,375   6,025 
Other income (expense)                    
Interest expense, net  (30,001)  —   (29,817)  (26)  (158)
Intercompany interest  —   —   25,518   (25,024)  (494)
Management fee expense  (2,000)  —   (2,000)  —   — 
Miscellaneous, net  (5,458)  —   —   (5,458)  — 
Income (loss) before income taxes  46,333   —   (20,907)  61,867   5,373 
Income tax (expense) benefit  (16,377)  —   (7,953)  22,145   2,185 
Increase (decrease) from continuing operations before equity in earnings of subsidiaries  29,956   —   (12,954)  39,722   3,188 
Equity in earnings of subsidiaries  —   (45,798)  43,590   2,208   — 
Net income (loss)  29,956   (45,798)  30,636   41,930   3,188 
Less: Loss attributable to noncontrolling interest  (680)  —   —   —   (680)
Net income attributable to United Components, Inc. $30,636  $(45,798) $30,636  $41,930  $3,868 

91

United Components, Inc.
Notes to Consolidated Financial Statements

Note 27 (continued)

Consolidating Condensed Income Statement
Year Ended December 31, 2008
(in thousands)
                     
  UCI              Non- 
  Consolidated  Eliminations  UCI  Guarantors  Guarantors 
Net sales $880,441  $(88,019) $—  $834,630  $133,830 
Cost of sales  702,522   (88,019)  —   659,695   130,846 
                
Gross profit  177,919   —   —   174,935   2,984 
                     
Operating expenses                    
Selling and warehousing  (62,906)  —   (854)  (56,261)  (5,791)
General and administrative  (49,320)  —   (16,589)  (26,555)  (6,176)
Amortization of acquired intangible assets  (6,349)  —   (1)  (6,348)  — 
Costs of integration of water pump operations  (2,380)  —   —   (2,380)  — 
Trademark impairment loss  (500)  —   —   (500)  — 
                
                     
Operating income (loss)  56,464   —   (17,444)  82,891   (8,983)
                     
Other income (expense)                    
Interest expense, net  (34,192)  —   (34,052)  (28)  (112)
Intercompany interest  —   —   27,574   (26,712)  (862)
Management fee expense  (2,000)  —   (2,000)  —   — 
Miscellaneous, net  (2,689)  —   —   (14,207)  11,518 
                
                     
Income (loss) before income taxes  17,583   —   (25,922)  41,944   1,561 
Income tax (expense) benefit  (7,656)  —   9,789   (16,950)  (495)
                
                     
Increase (decrease) from continuing operations before equity in earnings of subsidiaries  9,927   —   (16,133)  24,994   1,066 
                     
Equity in earnings of subsidiaries  —   (28,001)  26,060   1,941   — 
                
Net income (loss) $9,927  $(28,001) $9,927  $26,935  $1,066 
                

89

  
UCI
Consolidated
  Eliminations  UCI  Guarantors  
Non-
Guarantors
 
                
Net sales $880,441  $(88,019) $—  $834,630  $133,830 
Cost of sales  702,522   (88,019)  —   659,695   130,846 
Gross profit  177,919   —   —   174,935   2,984 
Operating expenses                    
Selling and warehousing  (62,906)  —   (854)  (56,261)  (5,791)
General and administrative  (49,320)  —   (16,589)  (26,555)  (6,176)
Amortization of acquired intangible assets  (6,349)  —   (1)  (6,348)  — 
Restructuring costs  (2,380)  —   —   (2,380)  — 
Trademark impairment loss  (500)  —   —   (500)  — 
Operating income (loss)  56,464   —   (17,444)  82,891   (8,983)
Other income (expense)                    
Interest expense, net  (34,192)  —   (34,052)  (28)  (112)
Intercompany interest  —   —   27,574   (26,712)  (862)
Management fee expense  (2,000)  —   (2,000)  —   — 
Miscellaneous, net  (3,507)  —   —   (14,207)  10,700 
Income (loss) before income taxes  16,765   —   (25,922)  41,944   743 
Income tax (expense) benefit  (7,656)  —   9,789   (16,950)  (495)
Increase (decrease) from continuing operations before equity in earnings of subsidiaries  9,109   —   (16,133)  24,994   248 
Equity in earnings of subsidiaries  —   (28,001)  26,060   1,941   — 
Net income (loss)  9,109   (28,001)  9,927   26,935   248 
Less: Loss attributable to noncontrolling interest  (818)  —   —   —   (818)
Net income attributable to United Components, Inc. $9,927  $(28,001) $9,927  $26,935  $1,066 

92

United Components, Inc.
Notes to Consolidated Financial Statements

Note 27 (continued)

Consolidating Condensed Income Statement
Year Ended December 31, 2007
(in thousands)
                     
  UCI              Non- 
  Consolidated  Eliminations  UCI  Guarantors  Guarantors 
Net sales $969,782  $(62,734) $—  $918,654  $113,862 
Cost of sales  748,822   (62,734)  —   702,235   109,321 
                
Gross profit  220,960   —   —   216,419   4,541 
                     
Operating expenses                    
Selling and warehousing  (61,146)  —   (1,120)  (55,793)  (4,233)
General and administrative  (49,239)  —   (16,006)  (27,786)  (5,447)
Amortization of acquired intangible assets  (7,000)  —   —   (7,000)  — 
Costs of integration of water pump operations  (696)  —   —   (696)  — 
Costs of closing facilities and consolidating operations  1,498   —   —   —   1,498 
Trademark impairment loss  (3,600)  —   —   (3,600)  — 
                
                     
Operating income (loss)  100,777   —   (17,126)  121,544   (3,641)
                     
Other income (expense)                    
Interest expense, net  (40,706)  —   (40,264)  (45)  (397)
Intercompany interest  —   —   31,381   (30,337)  (1,044)
Management fee expense  (2,000)  —   (2,000)  —   — 
Miscellaneous, net  (2,739)  —   —   (2,867)  128 
                
                     
Income (loss) before income taxes  55,332   —   (28,009)  88,295   (4,954)
Income tax (expense) benefit  (19,953)  —   11,540   (33,006)  1,513 
                
                     
Increase (decrease) from continuing operations before equity in earnings of subsidiaries  35,379   —   (16,469)  55,289   (3,441)
                     
Equity in earnings of subsidiaries  —   (46,586)  51,848   (5,262)  — 
                     
Discontinued operations                    
Gain on sale of discontinued operations, net of tax  2,707   —   2,707   —   — 
                
Net income (loss) $38,086  $(46,586) $38,086  $50,027  $(3,441)
                

90

  
UCI
Consolidated
  Eliminations  UCI  Guarantors  
Non-
Guarantors
 
                
Net sales $969,782  $(62,734) $—  $918,654  $113,862 
Cost of sales  748,822   (62,734)  —   702,235   109,321 
Gross profit  220,960   —   —   216,419   4,541 
Operating expenses                    
Selling and warehousing  (61,146)  —   (1,120)  (55,793)  (4,233)
General and administrative  (49,239)  —   (16,006)  (27,786)  (5,447)
Amortization of acquired intangible assets  (7,000)  —   —   (7,000)  — 
Restructuring costs  802   —   —   (696)  1,498 
Trademark impairment loss  (3,600)  —   —   (3,600)  — 
Operating income (loss)  100,777   —   (17,126)  121,544   (3,641)
Other income (expense)                    
Interest expense, net  (40,706)  —   (40,264)  (45)  (397)
Intercompany interest  —   —   31,381   (30,337)  (1,044)
Management fee expense  (2,000)  —   (2,000)  —   — 
Miscellaneous, net  (2,867)  —   —   (2,867)  — 
Income (loss) before income taxes  55,204   —   (28,009)  88,295   (5,082)
Income tax (expense) benefit  (19,953)  —   11,540   (33,006)  1,513 
Increase (decrease) from continuing operations before equity in earnings of subsidiaries  35,251   —   (16,469)  55,289   (3,569)
Equity in earnings of subsidiaries  —   (46,586)  51,848   (5,262)  — 
Gain on sale of discontinued operations, net of tax  2,707   —   2,707   —   — 
Net income (loss)  37,958   (46,586)  38,086   50,027   (3,569)
Less: Loss attributable to noncontrolling interest  (128)  —   —   —   (128)
Net income attributable to United Components, Inc. $38,086  $(46,586) $38,086  $50,027  $(3,441)

93

United Components, Inc.
Notes to Consolidated Financial Statements

Note 27 (continued)
Consolidating Condensed Income Statement
Year Ended December 31, 2006
(in thousands)
                     
  UCI              Non- 
  Consolidated  Eliminations  UCI  Guarantors  Guarantors 
Net sales $906,050  $(44,559) $—  $855,040  $95,569 
Cost of sales  728,511   (44,559)  —   684,744   88,326 
                
Gross profit  177,539   —   —   170,296   7,243 
                     
Operating expenses                    
Selling and warehousing  (60,047)  —   (1,772)  (53,818)  (4,457)
General and administrative  (42,636)  —   (14,336)  (22,135)  (6,165)
Amortization of acquired intangible assets  (6,651)  —   —   (6,651)  — 
Costs of integration of water pump operations and resulting asset impairment losses  (6,981)  —   —   (6,981)  — 
Costs of closing facilities and consolidating operations  (6,364)  —   —   (6,038)  (326)
                
                     
Operating income (loss)  54,860   —   (16,108)  74,673   (3,705)
                     
Other income (expense)                    
Interest expense, net  (43,262)  —   (43,249)  299   (312)
Intercompany interest  —   —   42,315   (39,900)  (2,415)
Write-off of deferred financing costs  (2,625)  —   (2,625)  —   — 
Management fee expense  (2,000)  —   (2,000)  —   — 
Miscellaneous, net  (137)  —   —   (1,045)  908 
                
                     
Income (loss) before income taxes  6,836   —   (21,667)  34,027   (5,524)
Income tax (expense) benefit  (694)  —   13,281   (12,834)  (1,141)
                
                     
Increase (decrease) from continuing operations before equity in earnings of subsidiaries  6,142   —   (8,386)  21,193   (6,665)
                     
Equity in earnings of subsidiaries  —   (11,416)  16,589   (5,173)  — 
                     
Discontinued operations                    
Net income from discontinued operations, net of tax  2,061   —   —   1,979   82 
Loss on sale of discontinued operations, net of tax  (16,877)  —   (16,877)  —   — 
                
                     
Net income (loss) $(8,674) $(11,416) $(8,674) $17,999  $(6,583)
                

91

United Components, Inc.
Notes to Consolidated Financial Statements
Note 27 (continued)
Consolidating Condensed Statement of Cash Flows
Year Ended December 31, 2008
2009
(in thousands)
                     
  UCI             
  Consolidated  Eliminations  UCI  Guarantors  Non-Guarantors 
Net cash provided by (used in) operating activities $32,423  $   $(6,869) $20,503  $18,789 
                
                     
Cash flows from investing activities of continuing operations                    
Capital expenditures  (31,940)  —   (339)  (20,937)  (10,664)
Proceeds from sale of property, plant and equipment  421   —   —   121   300 
                
Net cash used in investing activities of continuing operations  (31,519)  —   (339)  (20,816)  (10,364)
                
                     
Cash flows from financing activities of continuing operations                    
Issuances of debt  27,993   —   20,003   —   7,990 
Debt repayments  (23,407)  —   (10,418)  (61)  (12,928)
                
Net cash provided by (used in) financing activities of continuing operations  4,586   —   9,585   (61)  (4,938)
                
                     
Effect of exchange rate changes on cash  (318)  —   —   —   (318)
                
                     
Net increase (decrease) in cash and cash equivalents  5,172   —   2,377   (374)  3,169 
                     
Cash and cash equivalents at beginning of year  41,440   —   36,684   1,234   3,522 
                
                     
Cash and cash equivalents at end of period $46,612  $—  $39,061  $860  $6,691 
                

92

  
UCI
Consolidated
  Eliminations  UCI  Guarantors  
Non-
Guarantors
 
                
Net cash provided by (used in) operating activities $129,313  $   $(5,185) $109,047  $25,451 
                     
Cash flows from investing activities:                    
Capital expenditures  (15,266)  —   (672)  (9,871)  (4,723)
Proceeds from sale of property, plant and equipment  2,566   —   —   96   2,470 
Increase in restricted cash  (9,400)  —   —   (9,400)  — 
Net cash used in investing activities:  (22,100)  —   (672)  (19,175)  (2,253)
                     
Cash flows from financing activities:                    
Issuances of debt  13,187   —   —   —   13,187 
Debt repayments  (35,227)  —   (20,245)  (59)  (14,923)
Intercompany capital contribution  —   —   —   (5,400)  5,400 
Change in intercompany indebtedness  —   —   110,009   (84,737)  (25,272)
Net cash provided by (used in) financing activities  (22,040)  —   89,764   (90,196)  (21,608)
                     
Effect of exchange rate changes on cash  128   —   —   —   128 
Net increase (decrease) in cash and cash equivalents  85,301   —   83,907   (324)  1,718 
                     
Cash and cash equivalents at beginning of year  46,612   —   39,061   860   6,691 
Cash and cash equivalents at end of period $131,913  $—  $122,968  $536  $8,409 

94
United Components, Inc.
Notes to Consolidated Financial Statements

Note 27 (continued)

Consolidating Condensed Statement of Cash Flows
Year Ended December 31, 2007
2008
(in thousands)
                     
  UCI             
  Consolidated  Eliminations  UCI  Guarantors  Non-Guarantors 
Net cash provided by operating activities $93,130  $—  $69,613  $20,008  $3,509 
                
                     
Cash flows from investing activities of continuing operations                    
Proceeds from sale of Mexican land and building  6,637   —   —   —   6,637 
Proceeds from sale of discontinued operations  2,202   —   2,202   —   — 
Capital expenditures  (29,687)  —   (204)  (17,719)  (11,764)
Proceeds from sale of property, plant and equipment  1,836   —   —   1,174   662 
                
Net cash (used in) provided by investing activities of continuing operations  (19,012)  —   1,998   (16,545)  (4,465)
                
                     
Cash flows from financing activities of continuing operations                    
Issuances of debt  20,760   —   —   —   20,760 
Debt repayments  (84,884)  —   (65,139)  (462)  (19,283)
                
Net cash (used in) provided by financing activities of continuing operations  (64,124)  —   (65,139)  (462)  1,477 
                
                     
Effect of exchange rate changes on cash  (77)  —   —   —   (77)
                
                     
Net increase in cash and cash equivalents  9,917   —   6,472   3,001   444 
                     
Cash and cash equivalents at beginning of year  31,523   —   30,212   (1,767)  3,078 
                
                     
Cash and cash equivalents at end of period $41,440  $—  $36,684  $1,234  $3,522 
                

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UCI
Consolidated
  Eliminations  UCI  Guarantors  
Non-
Guarantors
 
                
Net cash provided by (used in) operating activities $32,423  $—  $(41,710) $39,738  $34,395 
                     
Cash flows from investing activities:                    
Capital expenditures  (31,940)  —   (339)  (20,937)  (10,664)
Proceeds from sale of property, plant and equipment  421   —   —   121   300 
Net cash used in investing activities:  (31,519)  —   (339)  (20,816)  (10,364)
                     
Cash flows from financing activities:                    
Issuances of debt  27,993   —   20,003   —   7,990 
Debt repayments  (23,407)  —   (10,418)  (61)  (12,928)
Change in intercompany indebtedness  —   —   34,841   (19,235)  (15,606)
Net cash provided by (used in) financing activities  4,586   —   44,426   (19,296)  (20,544)
                     
Effect of exchange rate changes on cash  (318)  —   —   —   (318)
Net increase (decrease) in cash and cash equivalents  5,172   —   2,377   (374)  3,169 
                     
Cash and cash equivalents at beginning of year  41,440   —   36,684   1,234   3,522 
Cash and cash equivalents at end of period $46,612  $—  $39,061  $860  $6,691 

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United Components, Inc.
Notes to Consolidated Financial Statements

Note 27 (continued)

Consolidating Condensed Statement of Cash Flows
Year Ended December 31, 2006
2007
(in thousands)
                     
  UCI              Non- 
  Consolidated  Eliminations  UCI  Guarantors  Guarantors 
Net cash provided by operating activities $73,903  $—  $50,478  $14,729  $8,696 
                
                     
Cash flows from investing activities of continuing operations                    
Purchase price of the ASC acquisition, net of cash acquired  (123,634)  —   (123,634)  —   — 
Proceeds from sale of discontinued operations, net of transaction costs and cash sold  65,177   —   65,177   —   — 
Capital expenditures  (22,846)  —   (2,419)  (18,436)  (1,991)
Proceeds from sale of property, plant and equipment  1,611   —   —   1,108   503 
                
Net cash used in investing activities of continuing operations  (79,692)  —   (60,876)  (17,328)  (1,488)
                
                     
Cash flows from financing activities of continuing operations                    
Issuances of debt  113,000   —   113,000   —   — 
Financing fees  (3,636)  —   (3,636)  —   — 
Debt repayments  (66,853)  —   (65,000)  —   (1,853)
Dividends  —   —   3,007   —   (3,007)
Dividends paid to UCI Holdco, Inc.  (35,305)  —   (35,305)  —   — 
Shareholder’s equity contributions  8,515   —   8,515   —   — 
                
Net cash provided by (used in) financing activities of continuing operations  15,721   —   20,581   —   (4,860)
                
                     
Discontinued operations:                    
Net cash (used in) provided by operating activities of discontinued operations  (1,472)  —   —   369   (1,841)
Net cash used in investing activities of discontinued operations  (2,864)  —   —   (844)  (2,020)
Effect of exchange rates on cash of discontinued operations  (341)  —   —   —   (341)
                     
Effect of exchange rate changes on cash  86   —   —   —   86 
                
                     
Net increase (decrease) in cash and cash equivalents  5,341   —   10,183   (3,074)  (1,768)
                     
Cash and cash equivalents at beginning of year  26,182   —   20,029   1,307   4,846 
                
                     
Cash and cash equivalents at end of period $31,523  $—  $30,212  $(1,767) $3,078 
                

94

  
UCI
Consolidated
  Eliminations  UCI  Guarantors  Non-Guarantors 
Net cash provided by (used in) operating activities $93,130  $—  $(48,376) $149,658  $(8,152)
                     
Cash flows from investing activities:                    
Proceeds from sale of Mexican land and building  6,637   —   —   —   6,637 
Proceeds from sale of discontinued operations  2,202   —   2,202   —   — 
Capital expenditures  (29,687)  —   (204)  (17,719)  (11,764)
Proceeds from sale of property, plant and equipment  1,836   —   —   1,174   662 
Net cash (used in) provided by investing activities  (19,012)  —   1,998   (16,545)  (4,465)
                     
Cash flows from financing activities:                    
Issuances of debt  20,760   —   —   —   20,760 
Debt repayments  (84,884)  —   (65,139)  (462)  (19,283)
Change in intercompany indebtedness  —   —   117,989   (129,650)  11,661 
Net cash (used in) provided by financing activities of continuing operations  (64,124)  —   52,850   (130,112)  13,138 
                     
Effect of exchange rate changes on cash  (77)  —   —   —   (77)
Net increase in cash and cash equivalents  9,917   —   6,472   3,001   444 
                     
Cash and cash equivalents at beginning of year  31,523   —   30,212   (1,767)  3,078 
Cash and cash equivalents at end of period $41,440  $—  $36,684  $1,234  $3,522 
                     

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ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A(T).CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by Rule 13a-15 under the Exchange Act, management has evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Our Chief Executive Officer and Chief Financial Officer have concluded, based on this evaluation, that as of December 31, 2008,2009, the end of the period covered by this Annual Report on Form 10-K, our disclosure controls and procedures were effective.

Management’s Annual Report on Internal Control Over Financial Reporting

Under Section 404 of the Sarbanes-Oxley Act of 2002, management is required to assess the effectiveness of the Company’s internal control over financial reporting as of the end of each fiscal year and report, based on that assessment, whether the Company’s internal control over financial reporting is effective.

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is designed to provide reasonable assurance as to the reliability of the Company’s financial reporting and the preparation of financial statements in accordance with generally accepted accounting principles.

Internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, internal control over financial reporting determined to be effective can provide only reasonable assurance with respect to financial statement preparation and may not prevent or detect all misstatements. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Company’s management has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008.2009. In making this assessment, the Company used the criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal Control-Integrated Framework.”

Based on the Company’s processes and assessment, as described above, management has concluded that, as of December 31, 2008,2009, the Company’s internal control over financial reporting was effective.

This annual report does not include an attestation report of the company’sCompany’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the company’sCompany’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the companyCompany to provide only management’s report in this annual report.

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97

Changes in Internal Control Over Financial Reporting.

Management also carried out an evaluation, as required by Rule 13a-15(d) of the Exchange Act, with the participation of our Chief Executive Officer and our Chief Financial Officer, of changes in the company’sCompany’s internal control over financial reporting. Based on this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that there were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B.OTHER INFORMATION

None.

98

PART III
 None.
PART III
ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The following table sets forth information concerning our executive officers and directors as of the date of this report.

Name Age Position
David L. Squier 6364 Chairman of the Board
Bruce M. Zorich 5556 President, Chief Executive Officer, Director
Daniel J. JohnstonMark P. Blaufuss 5141 Chief Financial Officer, Director
Ian I. Fujiyama 3637 Director
Paul R. Lederer 6970 Director
Gregory S. Ledford 5152 Director
Michael G. Malady54Vice President, Human Resources
Raymond A. Ranelli 6162 Director
John C. Ritter 6162 Director
Martin Sumner 3536 Director
Keith A. Zar55Vice President, General Counsel and Secretary

David L. Squieris the Chairman of our Board of Directors and has been a member of the Board since 2003. Mr. Squier retired from Howmet Corporation in October 2000, where he served as the President and Chief Executive Officer for over eight years. Prior to his tenure as CEO, Mr. Squier served in a number of senior management assignments at Howmet, including Executive Vice President and Chief Operating Officer. Mr. Squier was also a member of the Board of Directors of Howmet from 1987 until his retirement. Mr. Squier currently serves as an adviser to Carlyle. Mr. Squier currently serves on the Boards of Directors of Vought Aircraft Industries, Wesco Aircraft and Sequa Corporation.Corporation and he served on the Board of Directors of Forged Metal, Inc. from 2003 to 2008.

Bruce M. Zorichis our President and Chief Executive Officer and has been a member of the Board since 2003. From January 2002 through May 2003, Mr. Zorich was President and CEO of Magnatrax Corporation. From 1996 to 2001, Mr. Zorich was President of Huck International. In May of 2003, Magnatrax Corporation filed a voluntary petition to reorganize under Chapter 11 of the U.S. Bankruptcy Code.
Daniel J. Johnston
Mark P. Blaufuss is our Chief Financial Officer and was elected as a member of the Board in June 2007.September 2009. From April 2007 through August 2009, Mr. JohnstonBlaufuss was the Vice President and Chief Financial Officer of Solae, LLC, a manufacturer of soy-based food ingredients, from 2006 toAxleTech International.  From June 2007. From 1994 to 2005,2004 through April 2007, he was employed by United Industries Corporation, a manufacturer of consumer packaged goods, most recently as Executive Vice President and Chief Financial Officer from 2001 to 2005.Director at AlixPartners LLC.

Ian I. Fujiyamahas been a member of the Board since 2003. Mr. Fujiyama is a Managing Director with Carlyle, which he joined in 1997. During his tenure at Carlyle, he spent two years in Hong Kong and Seoul working for Carlyle’s Asia buyout fund, Carlyle Asia Partners. Prior to joining Carlyle, Mr. Fujiyama was an Associate at Donaldson Lufkin and Jenrette Securities Corp. from 1994 to 1997. He is also a director of ARINC, Incorporated and Booz Allen Hamilton, Incorporated.

96


Paul R. Ledererhas been a member of the Board since 2003. Mr. Lederer has been retired the past nine years with the exception of serving on the Boards of Directors of several public companies, acting as a consultant to Carlyle and serving on the Advisory Boards of Richco, Inc., and RTC Corp. and Group 329, Inc. Mr. Lederer currently sits on the Board of Directors of O’Reilly Automotive, Inc., Dorman Products, Inc., Proliance International and MAXIMUS, Inc. Mr. Lederer’s termLederer served as a director of Proliance International ends as of May 7, 2009, and he will not be standing for re-election.from 1995 to 2009.

Gregory S. Ledfordhas been a member of the Board of Directors since September 2006. Mr. Ledford is a Managing Director with Carlyle. Mr. Ledford joined Carlyle in 1988 and is currently head of the Automotive and Transportation group. Prior to joining Carlyle, Mr. Ledford was Director of Capital Leasing for MCI Telecommunications, where he was responsible for more than $1 billion of leveraged lease financing. From 1991 to 1997, he was Chairman and CEO of The Reilly Corp., a former portfolio company that was successfully sold in September 1997. Mr. Ledford is also a member of the Board of Directors of The Hertz Corporation.

99

Michael G. Malady has been our Vice President, Human Resources since 2003.  Prior to joining UCI, Mr. Malady spent 16 years in various positions with Howmet Corporation, and AxleTech International.most recently as Vice President, Human Resources.

Raymond A. Ranellihas been a member of the Board since 2004. Mr. Ranelli retired from PricewaterhouseCoopers, where he was a partner for over 21 years, in 2003. Mr. Ranelli held several positions at PricewaterhouseCoopers, including Vice Chairman and Global Leader of the Financing Advisory Services practice. Mr. Ranelli is also a director of United Surgical Partners International, Inc., Mr. Ranelli previously served as a director of Centennial Communications Corp. andfrom 2004 to 2009, Hawaiian Telcom Communications, Inc. from 2005 to 2009 and Ameripath, Inc. from 2003 to 2007.

John C. Ritterhas been a member of the Board since 2003. Mr. Ritter served as President and a director of Raser Technologies, Inc. from February 2004 to October 2005. From April 2003 to September 2003, Mr. Ritter was our Chief Financial Officer. From July 2000 to December 2002, Mr. Ritter held the position of Senior Vice President and CFO of Alcoa Industrial Components. Mr. Ritter held the position of Senior Vice President and CFO for Howmet Corporation from 1996 through 2000.

Martin Sumnerhas been a member of the Board since December 2006. Mr. Sumner is a Vice PresidentPrincipal with Carlyle, which he joined in 2003. During his tenure at Carlyle, he served as a Senior Associate from 2003 to 2005. Prior to joining Carlyle, Mr. Sumner worked as an Associate at Thayer Capital Partners from 1999 to 2001 and an Associate at Mercer Management Consulting from 1996 to 1999.

Keith A. Zar has been our Vice President, General Counsel and Secretary since 2005.  Prior to joining UCI, Mr. Zar was Senior Vice President, General Counsel and Chief Administrative Officer of Next Level Communications.

Board Committees

Our Board directs the management of our business and affairs as provided by Delaware law and conducts its business through meetings of the Board of Directors and four standing committees: the Audit Committee, the Executive Committee, the Compensation Committee and the Investment Committee. The Audit Committee consists of Messrs. Ranelli (chair), Ritter and Fujiyama. The Board has determined that Messrs. Ranelli and Ritter are the Audit Committee financial experts and that Messrs. Ranelli and Ritter are independent, determined using the NYSE standard, for purposes of the Audit Committee. The Executive Committee consists of Messrs. Squier, Zorich and Fujiyama. The Compensation Committee consists of Messrs. Squier (chair), Lederer and Fujiyama. Mr. JohnstonBlaufuss is the sole member of the Investment Committee. In addition, from time to time, other committees may be established under the direction of the Board when necessary to address specific issues.

Code of Ethics

The Company has adopted a code of ethics that applies to its executive officers. A copy of the code of ethics will be provided to any person without charge. Request should be made in writing to Karl Van Mill at United Components, Inc., 14601 Highway 41 North, Evansville, Indiana 47725.

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100
ITEM 11.EXECUTIVE COMPENSATION

Compensation Discussion & Analysis

Compensation Objectives

Our named executive officers for 2008,2009, or NEOs, include Bruce M. Zorich, President and Chief Executive Officer, and Daniel J. Johnston,Mark P. Blaufuss, who joined UCI in September 2009 as Chief Financial Officer and Executive Vice President.President, Daniel J. Johnston, who served as Chief Financial Officer and Executive Vice President until September 30, 2009, Michael G. Malady, our Vice President, Human Resources, and Keith A. Zar, our Vice President, General Counsel and Secretary. For our NEOs, compensation is intended to be performance-based. The Compensation Committee believes that compensation paid to executive officers should be closely aligned with the performance of the Company on both a short-term and long-term basis, linked to specific, measurable results intended to create value for stockholders, and that such compensation should assist the Company in attracting and retaining key executives critical to its long-term success.

In establishing compensation for executive officers, the following are the Compensation Committee’s objectives:
•Attract and retain individuals of superior ability and managerial talent;
•Ensure senior officer compensation is aligned with the Company’s corporate strategies, business objectives and the long-term interests of the Company’s stockholders;
•Increase the incentive to achieve key strategic and financial performance measures by linking incentive award opportunities to the achievement of performance goals in these areas; and
•Enhance the officers’ incentive to maximize stockholder value, as well as promote retention of key people, by providing a portion of total compensation opportunities for senior management in the form of direct ownership in the Company through stock options.

Attract and retain individuals of superior ability and managerial talent;

Ensure senior officer compensation is aligned with the Company’s corporate strategies, business objectives and the long-term interests of the Company’s stockholders;

Increase the incentive to achieve key strategic and financial performance measures by linking incentive award opportunities to the achievement of performance goals in these areas; and

Enhance the officers’ incentive to maximize stockholder value, as well as promote retention of key people, by providing a portion of total compensation opportunities for senior management in the form of direct ownership in the Company through stock options.

The Company’s overall compensation program is structured to attract, motivate and retain highly qualified executive officers by paying them competitively, consistent with the Company’s success and their contribution to that success. The Company believes compensation should be structured to ensure that a significant portion of compensation opportunity will be directly related to factors that directly and indirectly influence stockholder value. Accordingly, the Company sets goals designed to link each NEO’s compensation to the Company’s performance and the NEO’s own performance within the Company. Consistent with our performance-based philosophy, the Company provides a base salary to our executive officers and includes a significant incentive based component. For the Company’s senior executive management team, comprised of the Chief Executive Officer and Chief Financial Officer, the Company reserves the largest potential cash compensation awards for its performance-based bonus program. This program provides annual cash awards based on the financial performance of the Company.

Determination of Compensation Awards

The Compensation Committee is provided with the primary authority to determine and recommend the compensation awards available to the Company’s executive officers. The Compensation Committee uses published surveys to evaluate competitive practices and the amounts and nature of compensation paid to executive officers of public companies with approximately $1 billion in annual sales to determine the amount of executive compensation. Although the Compensation Committee reviews and considers the survey data for purposes of developing a baseline understanding of types ofcurrent compensation practices, the Compensation Committee does not see the identity of any of the surveyed companies and the data wasis reviewed only to ensure that the Company’s compensation levels and elements are consistent with market standards. The Company does not benchmark compensation of its NEOs against this data.

 
101

The Company’s executive compensation package for the NEOs generally consists of a fixed base salary and a variable cash incentive award, combined with an equity-based incentive award granted at the commencement of employment. The Company also granted an additional special equity-based incentive award in the form of restricted stock to Mr.Messrs. Zorich, Malady and Zar in 2008. The variable annual cash incentive award and the equity-based awards are designed to ensure that total compensation reflects the overall success or failure of the Company and to motivate the NEOs to meet appropriate performance measures, thereby maximizing total return to stockholders.

98


To aid the Compensation Committee in making its determination, the CEO provides recommendations annually to the Compensation Committee regarding the compensation of all officers, excluding himself. The performance of our senior executive management team is reviewed annually by the Compensation Committee. TheCommittee and the Compensation Committee based upon recommendations of the compensation consultant, determines each NEO’s compensation annually.

Within its performance-based compensation program, the Company aims to compensate the NEOs in a manner that is tax effective for the Company.  Section 162(m) ofIn practice, the Code imposes a $1 million limit on the amountCompensation Committee expects that a public company may deduct for compensation paid to the Company’s NEOs listed in the summary compensation table below. The $1 million limitation does not apply to compensation that qualifies as performance-based compensation under Section 162(m) of the Code. The annual performance-based cash compensation and the discretionary long-term equity incentive awards are designed to qualify as performance-based compensation under Section 162(m) of the Code. In practice, all of the annual and long-term compensation delivered by the Company is tax-qualified under Section 162(m)will be deductible for purposes of the Internal Revenue Code, as amended.

The Company has no policy with respect to requiring officers and directors to own stock of UCI Holdco.

Salary Freeze in 2009

In 2009, as a result of the difficult economic conditions affecting us, the Company instituted a wage freeze, which was applicable to all officers, including the NEOs.

Compensation Benchmarking and Peer GroupSurvey Data

The Company does not benchmark compensation of the NEOs against peer group data. Base salary structures and annual incentive targets are set aroundfollowing the medianCompensation Committee’s review of a general survey of the nature and amounts and compensation paid by comparably sized companies. ThisThe Compensation Committee believes that this approach ensureshelps to ensure that our cost structures will allow us to remain competitive in our markets.
     For 2008,
Historically, we have targeted the aggregate value of our total compensation to be at or above the median level for this survey group for most executive officer positions. Actual pay for each NEO is determined around this structure, driven by the performance of the executive over time, as well as the annual performance of the Company. Using this methodology,Because of the total cashinstitution of the salary freeze for 2009 discussed above, we did not review compensation data for our CEO was below the 50th percentile of the survey group and the total cash compensation for our CFO was at approximately the 50th percentile of the survey group.2009.
     In setting annual cash compensation, the Company reviews salary data from the survey group. Our review indicates that we are providing an annual base salary to our CEO below the median of salaries provided to CEOs of companies in the survey group and an annual base salary to our CFO at approximately the median of salaries provide to CFOs of companies in the survey group. Also, the Company provides annual cash incentive bonuses that allow the NEOs, upon achieving 100% of their targets, to receive bonus payments at or above the median for the survey group. The Company believes the design of base and incentive annual cash compensation appropriately provides market compensation to the Company’s executive officers.
Base Compensation

In setting base salaries for the Company’s executive officers, the Compensation Committee reviews data from independently conducted compensation surveys, using the peer group.as discussed above. While base salaries are not considered by the IRS to constitute performance-based compensation, in addition to market positioning, each year the Company determines base salary increases based upon the performance of the executive officers as assessed by the Compensation Committee, and for executive officers other than the CEO, by the CEO. No formulaic base salary increases are provided to the NEOs. The Company sets base salaries for its NEOs generally at a level it deems necessary to attract and retain individuals with superior talent.  In 2009, the Company instituted a salary freeze, resulting in the NEOs who continued in employment with the Company receiving the same level of base salary that they received in 2008.

Mr. Blaufuss commenced his employment with the Company in September 2009.  His salary of $380,000 per year was negotiated on an arms-length basis prior to the beginning of his employment and is the same level of salary earned by Mr. Johnston in the same position in 2009. The Compensation Committee determined that that level of salary was appropriate for Mr. Blaufuss based on the factors discussed above.

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Performance-Based Compensation

Annual Performance-Based Cash Compensation

The Company structures its compensation programs to reward executive officers based on the Company’s performance and the individual executive’s contribution to that performance. This allows executive officers to receive bonus compensation in the event certain specified corporate performance measures and individual objectives are achieved. In determining the compensation awarded to each executive officer based on performance, the Company evaluates the Company’s and executive’s performance in a number of areas.

The annual bonus program consists of an annual cash award based upon the Company’s achievement of adjusted EBITDA and operating cash flow targets and the achievementsubjective assessment of individual objectives forperformance of each NEO.

99


Under the terms of the annual bonus plan, results of at least 90% of the target performance level for any performance criteria must be achieved in order to earn the portion of the award based on that criteria. Achievement of 90% of the target performance level results in an award of 50% of the targeted award. Achievement of 110% of the target performance level results in an award of 150% of the targeted award. Once the achievement of targets has been determined, the Compensation Committee considers the achievementmakes a subjective assessment of personal objectivesperformance for each officer, and may adjust the amount of award paid upward or downward based upon the achievement of those objectives.that assessment. In addition, incentive amounts to be paid under the performance-based programs may be adjusted by the Compensation Committee to account for unusual events such as extraordinary transactions, asset dispositions and purchases, and mergers and acquisitions if, and to the extent, the Compensation Committee does not consider the effect of such events indicative of Company performance. Payments under each of the programs are contingent upon continued employment, though pro rata bonus payments will be paid in the event of death or disability based on actual performance at the date relative to the targeted performance measures for each program.

The adjusted EBITDA and operating cash flow targets are those contained in the Company’s business plan for the year, and are intended to satisfy overall corporate goals for growth and strategic accomplishment.accomplishment, and are considered by the Compensation Committee to be difficult to achieve, but obtainable.
.
For 2008,2009, the Company achieved less than 90% of each107% of the adjusted EBITDA performance target (which carried a 75%50% weighting) and 107% of the operating cash flow performance target (which carried a 25%50% weighting). Accordingly, before factoring in the achievement of personal objectives, the executive officers did not achieve aachieved 135% of the target award. However,Mr. Zorich’s target award under the Compensation Committee reviewedplan is 80% of his base salary, the Company’s performance intarget award for each of Messrs. Blaufuss and Johnston under the contextplan is 50% of his base salary, the difficult economic conditionstarget award for Mr. Malady under the plan is 35% of 2008,his base salary and reviewed the actions taken bytarget award for Mr. Zar under the NEOs during the year to mitigate the effectsplan is 40% of the economyhis base salary. Based on the Company’s performance. Basedcriteria discussed above, for 2009 Messrs. Zorich, Blaufuss, Johnston, Malady and Zar were awarded $558,000, $95,000, $142,500, $124,950 and $173,400, respectively.  The awards for Messrs. Blaufuss and Johnston were adjusted to reflect a pro-rata award based on this review,a partial year of service.  In addition, pursuant to the Compensation Committee awarded the Chief Executive Officer and Chief Financial Officer discretionary bonusesterms of $125,000 and $62,700, respectively.his severance agreement, Mr. Johnston’s award (before taking into account his partial year of service) was limited to 100% of his target award.

The Compensation Committee believes that the payment of the annual cash incentive bonus provides incentives necessary to retain executive officers and reward them for short-term company performance.

Discretionary Long-Term Equity Incentive Awards

The Company’s executive officers, along with other key Company employees, are granted UCI Holdco stock options or restricted stock at the commencement of their employment with the Company, and are eligible to receive additional awards of stock options or restricted stock at the discretion of the Compensation Committee.

Guidelines for the number of equity awards granted to each executive officer are determined using a procedure approved by the Compensation Committee based upon several factors, including the executive officer’s position and salary level and the value of the equity award at the time of grant.

 
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Equity award grants are tied to vesting requirements and are designed to not only compensate but to also motivate and retain the recipients by providing an opportunity for the recipients to participate in the ownership of the Company. The equity award grants to members of the senior management team also promote the Company’s long-term objectives by aligning the interests of the executives with the interests of the Company’s stockholders.

Generally, stock options granted under the UCI Holdco equity incentive plan have an eight-year vesting schedule in order to provide an incentive for continued employment and expire ten years from the date of the grant. 50% of each option is subject to vesting in five equal installments over the first five years of the officer’s employment. The remaining 50% of each option vests at the end of eight years from the grant date, but may be accelerated upon the achievement of certain targets in EBITDA and free cash flow. The exercise price of options granted under the stock option plan is 100% of the fair market value of the underlying stock on the date of grant.
     In 2007, special options were granted to
None of Messrs. Zorich, and Johnston. These options become exercisable onlyJohnston, Malady or Zar received an equity award grant in 2009.  Mr. Blaufuss received an award of 30,000 shares of UCI Holdco restricted stock in 2009 in connection with the event that the optionee remains employedcommencement of his employment with the Company, or its acquirer one year following a change of control ofwhich the Company, provided, however, that the option will vest immediately if (following a change of control but priorCompensation Committee determined was appropriate to one year following the change of control) the optionee is terminated without cause or resigns with good reason. In 2008, the special options granted toattract, retain and incentivize Mr. Zorich in 2007 were cancelled and he was grantedBlaufuss.  The shares of restricted stock. The restricted stock becomes vestedwill vest only in the event that Mr. Zorich remains employed with the Company at the time ofupon a change ofin control of the Company.UCI Holdco.

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Defined Contribution Plans

The Company has a Section 401(k) Savings/Retirement Plan (the “401(k) Plan”) to cover eligible employees of the Company. The 401(k) Plan permits eligible employees of the Company to defer up to 50% of their annual compensation, subject to certain limitations imposed by the Internal Revenue Code. The employees’ elective deferrals are immediately vested and non-forfeitable upon contribution to the 401(k) Plan. The Company currently makeshas suspended its matching contributions to the 401(k) PlanPlan. Prior to the suspension, the Company had made matching contributions in an amount equal to fifty cents for each dollar of participant contributions, up to a maximum of five percent of the participant’s annual salary and subject to certain other limits. Plan participants vest in the amounts contributed by the Company following three years of employment with the Company. Employees of the Company are eligible to participate in the 401(k) Plan immediately upon commencing employment with the Company.

The 401(k) Plan is offered on a nondiscriminatory basis to all employees of the Company who meet the eligibility requirements. The Compensation Committee believes that matching contributions previously provided by the Company assist the Company in attracting and retaining talented executives.executives and the Company may determine to make matching contributions again in the future. The 401(k) Plan provides an opportunity for participants to save money for retirement on a tax-qualified basis and to achieve financial security, thereby promoting retention.

Defined Benefit Plans

Our CEO participatesand Vice President, Human Resources participate in the Champion Laboratories, Inc. Pension Plan. Annual retirement benefits under the plan accrue at a rate of 1.5% of the first $200,000 of gross wages for each year of service up to 30 years of service. Benefits are payable as a life annuity for the participant. If elected, joint & survivor and 10 year guaranteed payment options are available at reduced benefit levels. The full retirement benefit is payable to participants who retire on or after the social security retirement age, and a reduced early retirement benefit is available to participants who retire on or after age 55. No offsets are made for the value of any social security benefits earned.

Similar to the 401(k) Plan, this defined benefit plan is a nondiscriminatory tax-qualified retirement plan that provides participants with an opportunity to earn retirement benefits and provides for financial security. Offering these benefits is an additional means for the Company to attract and retain well-qualified executives.

Severance Arrangements/Employment Agreements

The Compensation Committee considers the maintenance of a sound management team to be essential to protecting and enhancing our best interests and the best interests of the Company. To that end, we recognize that the uncertainty that may exist among management with respect to their “at-will” employment with the Company may result in the departure or distraction of management personnel to the detriment of the Company. Accordingly, the Compensation Committee has determined that severance arrangements are appropriate to encourage the continued attention and dedication of members of our management.

 Mr.
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Messrs. Zorich, Blaufuss, Malady and Mr. JohnstonZar each has an agreement which provides for severance benefits upon termination of employment. Mr. Zorich has an employment agreement, amended and restated as of December 23, 2008, which has an original one-year term and is extended automatically for successive one-year periods thereafter unless either party delivers notice within specified notice periods to terminate the agreement. The agreement provides that upon termination of Mr. Zorich’s employment he will be entitled to receive the sum of his unpaid annual base salary through the date of termination, any unpaid expenses, any unpaid accrued vacation pay, and any amount arising from his participation in, or benefits under, any of our employee benefits plans, programs or arrangements. Upon termination of Mr. Zorich’s employment either by us without cause or due to nonextension of the term by us or by Mr. Zorich for good reason, he is entitled to receive his stated annual base salary paid in monthly installments for 12 months (24 months in the case of a termination for any of these reasons following a change of control of the Company), a lump sum payment of the pro rata portion of his target level bonus and, during the severance period (but not with respect to a termination due to nonextension of the term by us), continued coverage under all of our group health benefit plans in which Mr. Zorich and any of his dependents were entitled to participate immediately prior to termination. The agreement also provides that upon termination of Mr. Zorich’s employment due to his death or disability, he or his estate shall be entitled to six months of his annual base salary and the pro rata portion of his annual bonus, to be determined in good faith by the Compensation Committee. During his employment and for 12 months following termination (24 months in the case of a termination following a change of control), Mr. Zorich is prohibited from competing with any material business of the Company, or from soliciting employees, customers or suppliers of the Company to terminate their employment or arrangements with the Company.

101


Mr. JohnstonBlaufuss has a severance agreement, dated as of September 8, 2009. The agreement provides that, upon termination of Mr. Blaufuss’s employment either by us without cause or by Mr. Blaufuss for good reason, he is entitled to receive his stated annual base salary, paid in monthly installments for 12 months and, during the severance period, direct payment or reimbursement of health and dental insurance premiums. Upon termination of Mr. Blaufuss’s employment either by us without cause, or by Mr. Blaufuss for good reason following a change of control of the Company, he is entitled to receive his stated annual base salary paid in monthly installments for 24 months and, during the severance period, direct payment or reimbursement of health and dental insurance premiums.

Mr. Malady has a severance agreement, dated as of December 23, 2008. The agreement provides that, upon termination of Mr. Malady’s employment either by us without cause or by Mr. Malady for good reason, he is entitled to receive his stated annual base salary, paid in monthly installments for 12 months and, during the severance period, direct payment or reimbursement of health and dental insurance premiums. Upon termination of Mr. Malady’s employment either by us without cause, or by Mr. Malady for good reason following a change of control of the Company, he is entitled to receive his stated annual base salary paid in monthly installments for 24 months and, during the severance period, direct payment or reimbursement of health and dental insurance premiums.

Mr. Zar has a severance agreement, dated as of December 23, 2008. The agreement provides that, upon termination of Mr. Zar’s employment either by us without cause or by Mr. Zar for good reason, he is entitled to receive his stated annual base salary, paid in monthly installments for 12 months and, during the severance period, direct payment or reimbursement of health and dental insurance premiums. Upon termination of Mr. Zar’s employment either by us without cause, or by Mr. Zar for good reason following a change of control of the Company, he is entitled to receive his stated annual base salary paid in monthly installments for 24 months and, during the severance period, direct payment or reimbursement of health and dental insurance premiums.

Mr. Johnston had a severance agreement, dated as of December 23, 2008. The agreement provided that, upon termination of Mr. Johnston’s employment (i) either by us without cause or by Mr. Johnston for good reason or (ii) for any reason on or after September 30, 2009, he iswould be entitled to receive his stated annual base salary paid in monthly installments for 12 months, a lump sum payment of the pro rata portion of his target level bonus and, during the severance period, direct payment or reimbursement of health and dental insurance premiums. Upon termination of Mr. Johnston’s employment either by us without cause or by Mr. Johnston for good reason following a change of control of the Company, he iswould have been entitled to receive his stated annual base salary paid in monthly installments for 24 months and, during the severance period, direct payment or reimbursement of health and dental insurance premiums.  Mr. Johnston’s employment with us terminated on September 30, 2009 and we are currently making severance payments to Mr. Johnston in accordance with the terms of his severance agreement, as described in more detail below.

     Any unvested options held by the NEO under the Company’s stock option plan will expire as of the date of the NEO’s termination of employment.
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Other Elements of Compensation and Perquisites

Medical Insurance.The Company provides to each NEO, the NEO’s spouse and children such health, dental and optical insurance as the Company may from time to time make available to its other executives of the same level of employment.

Life and Disability Insurance.The Company provides each NEO such disability and/or life insurance as the Company in its sole discretion may from time to time make available to its other executive employees of the same level of employment.

Policies with Respect to Equity Compensation Awards`

The Company grants all equity incentivestock option awards at no less than fair market value as of the date of grant. The fair market value is determined in good faith by the Board of Directors, with analyses prepared by independent valuation experts, as deemed appropriate.

COMPENSATION COMMITTEE REPORT

The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of Regulation S-K (Section 229.402(b)) with management. Based on this review and discussions,discussion, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.

Respectfully submitted,
 
Respectfully submitted,

David L. Squier, chairman
Chairman
Ian I. Fujiyama
Paul R. Lederer
106
SUMMARY COMPENSATION TABLE FOR 20082009
                                           
                      Non-Equity      
Name and Principal             Stock Option Incentive Plan Change in Pension All Other  
Position Year Salary Bonus Awards(1) Awards(2) Compensation(3) Value Compensation(4) Total
Bruce M. Zorich
  2008
  $465,000
   $125,000(5)  $0  $22,177
  $ 
  $36,856
   7,935
  $656,968
 
President and Chief
  2007
   441,000
           213,830
   387,000
   19,855
   7,141
   1,068,826
 
Executive Officer  2006
   420,000
           122,967   350,000   17,649   7,752   918,368 
                                     
Daniel J. Johnston                                    
Chief Financial
  2008
   380,000
   62,700(5)
       81,000
           7,141
   530,841
 
Officer and
  2007   203,558   100,000(7)       46,955   119,000       1,629   471,142 
Executive Vice
                                    
President(6)                                    

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Name and Principal
Position
 
Year
 
Salary
  
Bonus
  
Stock
Awards(1)
  
Option
Awards(2)
 
Non-Equity
Incentive Plan
Compensation(3)
 
Change in Pension
Value
 
All Other
Compensation(4)
 
Total
 
Bruce M. Zorich 2009 $465,000          $558,000 $36,936 $8,401 $1,068,337 
President and Chief 2008  465,000  $125,000(5) $0        36,856  7,935  634,791 
Executive Officer 2007  441,000          $0  387,000  19,855  7,141  854,996 
                               
Mark P. Blaufuss
Chief Financial
 2009  126,667   75,000(7)  0      95,000     556  297,223 
Officer and                              
Executive Vice President(6)                              
                               
Daniel J. Johnston 2009  285,000              142,500     99,230  526,730 
Chief Financial 2008  380,000   62,700(5)               7,141  449,841 
Officer and 2007  203,558   100,000(9)      46,955  119,000     1,629  471,142 
Executive Vice President(8)                              
                               
Michael G. Malady 2009  238,000              124,950  29,984  3,143  396,077 
Vice President,                              
Human Resources                              
                               
Keith A. Zar 2009  289,000              173,400     3,410  465,810 
Vice President, General                              
Counsel and Secretary                              
(1)Amounts represent the Company’s compensation cost recognized for financial statement reporting purposes for the fiscal year ended December 31, 2008,aggregate grant date fair value computed in accordance with the provisions of Statement of Financial Accounting Standards No. 123R (FAS 123R), but disregarding forfeitures related to service based vesting conditions.FASB ASC Topic 718. For the assumptions used in calculating the value of this award, see Note 2119 to our consolidated financial statements included in of this report.

(2)Amounts represent the Company’s compensation cost recognized for financial statement reporting purposes for the fiscal years ended December 31, 2006, December 31, 2007 and December 31, 2008,aggregate grant date fair value computed in accordance with the provisions of Statement of Financial Accounting Standards No. 123R (FAS 123R), but disregarding forfeitures related to service based vesting conditions.FASB ASC Topic 718. For the assumptions used in calculating the value of this award, see Note 2119 to our consolidated financial statements included in of this report.

(3)Represents bonus amounts earned under the Company’s annual bonus program for fiscal years ended December 31, 20062007 and December 31, 2007, and paid in 2007 and 2008.2009. No bonuses were earned under the annual bonus program with respect to performance for the year ended December 31, 2008.

(4)Includes Company matching funds under the Company’s 401(k) plan and Company-paid life insurance premiums.  For Mr. Johnston, includes $95,000 in severance payments, and $3,608, representing the cost of healthcare continuation benefits provided to Mr. Johnston in 2009.  The total amount of severance payments and benefits to be made or provided to Mr. Johnston are set forth in more detail below and are contingent on Mr. Johnston’s compliance with certain non-competition, non-solicitation and non-disparagement covenants.

(5)Represent discretionary bonuses paid in 2009 with respect to the year ended December 31, 2008. These bonuses were not paid under the Company’s annual bonus program.

(6)Mr. Blaufuss’s employment with the Company commenced on September 8, 2009.

(7)Represents payment made to Mr. Blaufuss in connection with the commencement of his employment with the Company.

(8)Mr. Johnston’s employment with the Company commenced on June 11, 2007.

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(7)(9)This $100,000Represents payment was made to Mr. Johnston in connection with the commencement of his employment with the Company.

GRANTS OF PLAN-BASED AWARDS FOR 20082009
                         
  Estimated Future Payouts Under Non-Equity     Grant Date Fair
      Incentive Plan Awards     All Other Stock Awards: Value of
                  Number of Shares of Stock Stock and Option
Name Grant Date Threshold Target Maximum or Units(1) Awards
Bruce M. Zorich     $186,000  $372,000(1) $558,000         
   12/23/08               19,300(2) $0(3)
Daniel J. Johnston      95,000   190,000(1)  285,000         

  Estimated Future Payouts Under Non-Equity      
    
Incentive Plan Awards
    
 
  
 
 
Name
 
Grant Date
 
Threshold
 
Target
  
Maximum
 
All Other Stock Awards:
Number of Shares of Stock
or Units
  
Grant Date Fair
Value of
Stock and Option
Awards
 
Bruce M. Zorich   $186,000 $372,000(1) $558,000      
                   
Mark P. Blaufuss    31,667  63,333(2)  95,000      
  9/8/09            30,000(3) $0(4)
                     
Daniel J. Johnston    71,250  142,500(5)  142,500        
                     
Michael G. Malady    41,650  83,300(6)  124,950        
                     
Keith A. Zar    57,800  115,600(7)  173,400        
(1)NoActual cash bonus was earned under the UCI Annual Incentive Compensation Plan for the 20082009 plan year since the performance targets were not met.was $558,000. See “Annual Performance-Based Cash Compensation” above for a discussion of the calculation of this bonus.

(2)Actual cash bonus earned under the UCI Annual Incentive Compensation Plan for the 2009 plan year was $95,000. See “Annual Performance-Based Cash Compensation” above for a discussion of the calculation of this bonus.

(3)This restricted stock was granted on December 23, 2008September 8, 2009 under the Company’sUCI Holdco equity incentive plan. All stock vests following a change of control of the Company.UCI Holdco. See “Discretionary Long-Term Equity Incentive Awards” for a discussion of the terms of these option grants.

(3)(4)The value of a stock award is based on the grant date fair value as ofcomputed in accordance with FASB ASC Topic 718. For the date of grant of the award determined pursuant to FAS 123R. The valuation assumptions used to calculate these amounts are described in calculating the value of this award, see Note 2119 to our consolidated financial statements included in of this report.

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(5)Actual cash bonus earned under the UCI Annual Incentive Compensation Plan for the 2009 plan year was $142,500. See “Annual Performance-Based Cash Compensation” above for a discussion of the calculation of this bonus.

(6)Actual cash bonus earned under the UCI Annual Incentive Compensation Plan for the 2009 plan year was $124,950. See “Annual Performance-Based Cash Compensation” above for a discussion of the calculation of this bonus.

(7)Actual cash bonus earned under the UCI Annual Incentive Compensation Plan for the 2009 plan year was $173,400. See “Annual Performance-Based Cash Compensation” above for a discussion of the calculation of this bonus.
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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END 20082009

The following table provides information regarding the UCI Holdco stock options and restricted stock held by the named executive officers as of December 31, 2007.2009.
                             
          Equity Incentive              
          Plan Awards:              
          Number of              
  Number of Number of Securities              
  Securities Securities Underlying             Market Value of
  Underlying Underlying Unexercised         Number of Shares or Shares or Units of
  Unexercised Options — Unexercised Options — Unearned Option Exercise Option Expiration Units of Stock That Stock That Have
Name Exercisable Unexercisable Options Price Date Have Not Vested Not Vested
Bruce M.                            
Zorich  6,500(1)  2,889(2)  28,889(3) $5.00   11/21/2013   19,300(4) $0 
 
Daniel J.                            
Johnston  1,250(5)  8,750(6)     $23.63   6/11/2017         
 
       4,250(7)     $105.00   6/11/2017         

Name
 
Number of
Securities
Underlying
Unexercised
Options —
Exercisable
  
Number of
Securities
Underlying
Unexercised
Options —
Unexercisable
  
Equity Incentive
Plan Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
  
Option Exercise
Price
 
Option Expiration
Date
 
Number of Shares or
Units of Stock That
Have Not Vested
  
Market Value of
Shares or Units of
Stock That Have
Not Vested
 
Bruce M. Zorich  6,500(1)  2,889(2)  28,889(3) $5.00 11/21/2013  19,300(4) $0 
Mark P. Blaufuss  0   0   0        30,000(4)  0 
Daniel J. Johnston  0   0   0              
Michael G. Malady  2,250(5)  1,000(6)      5.00 8/25/2013  8,260(4)  0 
Keith A. Zar  7,500(7)  2,500(8)      5.00 1/31/2015  9,280(4)  0 
(1)The 6,500 shares underlying the exercisable portion of the option became exercisable on December 31, 2007.

(2)These 2,889 shares will become exercisable on November 20, 2011.

(3)These 28,889 shares may become exercisable upon the achievement of certain financial targets.

(4)These shares of restricted stock become vested only in connection with a change of control of the Company.UCI Holdco.

(5)The 1,2502,250 shares underlying the exercisable portion of the option became exercisable on December 31, 2008.2007.

(6)These 1,000 shares will become exercisable on August 25, 2011.

(7)Of the 8,750The 7,500 shares underlying the unexercisableexercisable portion of the option 1,250became exercisable as follows: 1,500 shares on December 31, 2005, 2,000 shares on December 31, 2006, 2,000 shares on December 31, 2007, 1,000 shares on December 31, 2008 and 1,000 shares on December 31, 2009.

(8)These 2,500 shares will become exercisable on DecemberJanuary 31, of each of the years 2009, 2010 and 2011, and 5,000 will become exercisable on June 11, 2015 (although the exercisability may be accelerated upon the achievement of certain financial targets).
(7)These options become exercisable only in connection with a change of control of the Company.
OPTION EXERCISES IN 2008
         
  OPTION AWARDS
  Number of Value
  Shares Realized
  Acquired on
Name on Exercise Exercise
Daniel J. Johnston  2,500  $0(1)
(1)The reported dollar value is the difference between the option exercise price and the closing price of the underlying shares on the date of exercise multiplied by the number of shares covered by the option.2013.

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EQUITY COMPENSATION PLAN INFORMATION
             
          Number of securities
          remaining available for
          future issuance under
  Number of securities to Weighted-average equity compensation
  be issued upon exercise exercise price of plans (excluding
  of outstanding options, outstanding options, securities reflected in
  warrants and rights (1) warrants and rights column (a))
   Plan category (a) (b) (c)
Equity compensation plans approved by security holders  177,426  $13.66   74,499 
             
Equity compensation plans not approved by security holders  0   0   0 
             
Total
            
(1)This includes shares subject to options outstanding under the Amended and Restated Equity Incentive Plan of UCI Holdco, Inc.
PENSION BENEFITS FOR 20082009

The following table sets forth information regarding the accrued pension benefits for the named executive officers for 20082009 under the Champion Laboratories Inc. Pension Plan, described below.
                 
      Number of Present Value  
      Years of Payments
      Credited Accumulated During Last
Name Plan Name Service Benefit Fiscal Year
Bruce M. Zorich Champion Laboratories Inc. Pension Plan  6  $115,597  $0 

Name Plan Name 
Number of
Years
Credited
Service
  
Present Value
of Accumulated
Benefit
  
Payments
During Last
Fiscal Year
 
Bruce M. Zorich Champion Laboratories Inc. Pension Plan  7  $152,533  $0 
Michael G. Malady Champion Laboratories Inc. Pension Plan  6   127,191   0 
 
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Mr. Zorich isand Mr. Malady are the only named executive officerofficers eligible to participate in the Champion Laboratories Inc. Pension Plan offered by us as described below. The following table shows the estimated annual pension benefit under the pension plan for the specified compensation and years of service.

  Years of Service 
Remuneration  5   10   15   20   25   30 
$125,000  9,375   18,750   28,125   37,500   46,875   56,250 
$150,000  11,250   22,500   33,750   45,000   56,250   67,500 
$175,000  13,125   26,250   39,375   52,500   65,625   78,750 
$200,000 and over  15,000   30,000   45,000   60,000   75,000   90,000 

Annual retirement benefits accrue at a rate of 1.5% of the first $200,000 of gross wages for each year of service up to 30 years of service. Benefits are payable as a life annuity for the participant. If elected, joint & survivor and 10 year guaranteed options are available at reduced benefit levels. The full retirement benefit is payable to participants who retire on or after the social security retirement age, and a reduced early retirement benefit is available to participants who retire on or after age 55. No offsets are made for the value of any social security benefits earned.

As of December 31, 2008, Mr.2009, Messrs. Zorich and Malady had earned seven and six years, respectively, of credited service under the pension plan.

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For information with respect to the valuation methods and material assumptions applied in quantifying the present value of the accrued benefits under the pension plan, see Note 1615 to the financial statements of the Company contained in this Form 10-K.

Potential paymentsPayments upon terminationTermination or change-in-controlChange-in-Control
     Each of our NEOs
Messrs. Zorich, Blaufuss, Malady and Zar each has an agreement which provides for severance benefits upon termination of employment. See the section titled “Severance Arrangements /EmploymentArrangements/Employment Agreements” above for a description of the employment and severance agreements with our NEOs.

Assuming that Mr. Zorich’s employment had been terminated by us without cause or by Mr. Zorich with good reason effective December 31, 2008,2009, he would have been entitled to the following severance benefits: salary continuation, $465,000 ($930,000 if his employment had been terminated for any of those reasons following a change of control); bonus, $372,000; and group health benefits, $14,471$15,570 ($28,94231,140 if his employment had been terminated for any of those reasons following a change of control). The health benefits were calculated using an estimate of the cost to the Company of such health coverage based upon past experience.

Assuming that Mr. Johnston’sBlaufuss’s employment had been terminated by us without cause or by Mr. JohnstonBlaufuss with good reason effective December 31, 2008,2009, he would have been entitled to the following severance benefits: salary continuation, $380,000; bonus, $190,000; and group health benefits, $13,420.$15,172. If his employment had been terminated effective December 31, 20082009 for any of those reasons following a change of control, he would have been entitled to the following severance benefits: salary continuation, $930,000;$760,000; and group health benefits, $26,840$30,344. The health benefits were calculated using an estimate of the cost to the Company of such health coverage based upon past experience.

Assuming that Mr. Malady’s employment had been terminated by us without cause or by Mr. Malady with good reason effective December 31, 2009, he would have been entitled to the following severance benefits: salary continuation, $238,000; and group health benefits, $15,172. If his employment had been terminated effective December 31, 2009 for any of those reasons following a change of control, he would have been entitled to the following severance benefits: salary continuation, $476,000; and group health benefits, $30,344. The health benefits were calculated using an estimate of the cost to the Company of such health coverage based upon past experience.

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Assuming that Mr. Zar’s employment had been terminated by us without cause or by Mr. Zar with good reason effective December 31, 2009, he would have been entitled to the following severance benefits: salary continuation, $289,000; and group health benefits, $15,172. If his employment had been terminated effective December 31, 2009 for any of those reasons following a change of control, he would have been entitled to the following severance benefits: salary continuation, $578,000; and group health benefits, $30,344. The health benefits were calculated using an estimate of the cost to the Company of such health coverage based upon past experience.

Mr. Johnston is being paid the following severance benefits following his termination in September 2009: salary continuation, $380,000 ($95,000 in 2009 and $285,000 in 2010); bonus for 2009, $142,500; and group health benefits, $18,039 ($3,608 in 2009 and $14,431 in 2010).

Under the agreementagreements covering certain of each NEO’sMr. Zorich’s, Mr. Zar’s and Mr. Malady’s stock options, in the event of a change in control of the Company, the exercisability of all shares of UCI Holdco underlying the option would be accelerated. In addition, under the agreement covering Mr. Zorich’s, Mr. Blaufuss’s, Mr. Zar’s and Mr. Malady’s restricted stock, in the event of a change of control of the Company,UCI Holdco, all of the restricted stock would vest. Assuming a change in control of the CompanyUCI Holdco occurred effective December 31, 2008,2009, based on the estimated fair market value of $13.87$58.80 per share of the Company’s common stock on that date, the value of the acceleration of Mr. Zorich’s, Mr. Zar’s and Mr. Malady’s unvested outstanding options (determined by multiplying the fair market value on December 31, 2008,2009, minus the exercise price, by the number of shares subject to the option that would receive accelerated vesting), would be $25,625,$155,427, $107,599 and the value of the acceleration of Mr. Johnston’s unvested options (based on the same method of calculation), would be $0. In addition, under the agreement covering the special stock options granted to Mr. Johnston on April 21, 2007, the option would become exercisable in connection with a change of control as described in “Discretionary Long-Term Equity Incentive Awards” above.$53,800, respectively. Assuming a change in control of the CompanyUCI Holdco occurred effective December 31, 2008,2009, based on the estimated fair market value of $13.87$58.80 per share of the Company’s common stock on that date, at an exercise price of $105 per share, these options would have no value. Assuming a change in control of the Company occurred effective December 31, 2008, based on the estimated fair market value of $13.87 per share of the Company’sUCI Holdco’s common stock on that date, the value of the vesting of Mr. Zorich’s, Mr. Blaufuss’s, Mr. Zar’s and Mr. Malady’s restricted stock would be $267,691.$1,134,835, $1,763,992, $545,662 and $485,686,respectively.

Compensation Risk
Management of the Company, through the human resources, finance and legal departments, have analyzed the potential risks arising from the Company's compensation policies and practices, and has determined that there are no such risks that are reasonably likely to have a material adverse effect on the Company.

DIRECTOR COMPENSATION FOR 20082009

Directors who are employees of the Company (Messrs. Zorich and Johnston)Blaufuss) or Carlyle (Messrs. Fujiyama, Ledford and Sumner) receive no additional compensation for serving on the board or its committees. Mr. Squier, chairmanChairman of the Board, receives a cash retainer of $60,000 per year; Mr. Ranelli, Chairman of our Audit Committee, receives a cash retainer of $55,000 per year; and the other directors not employed by Carlyle or the Company, John Ritter and Paul Lederer, receive a cash retainer of $45,000 per year. Each of Messrs. Squier, Ranelli, Ritter and Lederer is also granted, in December of each year he continues in service as a director, an option to purchase 500 shares of the common stock of UCI Holdco, to become exercisable 20% per year over five years.

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In 2008,2009, we provided the following annual compensation to directors who are not employees of the Company or Carlyle:Carlyle.
             
  Fees Earned if Option  
Name Paid in Cash Awards(1) Total
David L. Squier $60,000  $22,475(2) $82,475 
Paul R. Lederer  45,000   22,475(3)  67,475 
Raymond A. Ranelli  55,000   32,322(4)  87,322 
John C. Ritter  45,000   22,475(5)  67,475 

Name 
Fees Earned if
Paid in Cash
  
Option
Awards(1)
  Total 
David L. Squier $60,000  $14,990(2) $74,990 
Paul R. Lederer  45,000   14,990(3)  59,990 
Raymond A. Ranelli  55,000   14,990(4)  69,990 
John C. Ritter  45,000   14,990(5)  59,990 
(1)ReflectsAmounts represent the dollar amount recognized for financial statement reporting purposes for the fiscal year ended December 31, 2008,aggregate grant date fair value computed in accordance with the provisions of Statement of Financial Accounting Standards No. 123R (FAS 123R), but disregarding forfeitures related to service based vesting conditions.FASB ASC Topic 718. For the assumptions used in calculating the value of this award, see Note 2119 to our consolidated financial statements included in of this report.

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(2)As of December 31, 2008,2009, Mr. Squier held options with respect to 3,5004,000 shares of common stock:stock of UCI Holdco: 1,000 granted on December 9, 2003 with a grant date fair value of $52,170; 500 granted on August 2, 2004 with a grant date fair value of $27,150; 500 granted on December 14, 2005 with a grant date fair value of $26,755; 500 granted on December 15, 2006 with a grant date fair value of $36,441; 500 granted on December 15, 2007 with a grant date fair value of $6,380; and 500 granted on December 15, 2008 with a grant date fair value of $2,530.$2,530; and 500 granted on December 15, 2009 with a grant date fair value of $14,990.

(3)As of December 31, 2008,2009, Mr. Lederer held options with respect to 3,0003,500 shares of common stock:stock of UCI Holdco: 500 granted on December 9, 2003 with a grant date fair value of $26,085; 500 granted on August 2, 2004 with a grant date fair value of $27,150; 500 granted on December 14, 2005 with a grant date fair value of $26,755; 500 granted on December 15, 2006 with a grant date fair value of $36,441; 500 granted on December 15, 2007 with a grant date fair value of $6,380; and 500 granted on December 15, 2008 with a grant date fair value of $2,530.$2,530; and 500 granted on December 15, 2009 with a grant date fair value of $14,990.

(4)As of December 31, 2008,2009, Mr. Ranelli held options with respect to 3,0003,500 shares of common stock:stock of UCI Holdco: 1,000 granted on June 30, 2004 with a grant date fair value of $54,300; 500 granted Onon December 14, 2005 with a grant date fair value of $26,755; 500 granted on December 15, 2006 with a grant date fair value of $36,441; 500 granted on December 15, 2007 with a grant date fair value of $6,380; and 500 granted on December 15, 2008 with a grant date fair value of $2,530.$2,530; and 500 granted on December 15, 2009 with a grant date fair value of $14,990.

(5)As of December 31, 2008,2009, Mr. Ritter held options with respect to 3,0003,500 shares of common stock:stock of UCI Holdco: 500 granted on December 9, 2003 with a grant date fair value of $26,085; 500 granted on August 2, 2004 with a grant date fair value of $27,150; 500 granted on December 14, 2005 with a grant date fair value of $26,755; 500 granted on December 15, 2006 with a grant date fair value of $36,441; 500 granted on December 15, 2007 with a grant date fair value of $6,380; and 500 granted on December 15, 2008 with a grant date fair value of $2,530.$2,530; and 500 granted on December 15, 2009 with a grant date fair value of $14,990.

ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

EQUITY COMPENSATION PLAN INFORMATION

  
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights (1)
  
Weighted-average
exercise price of
outstanding options,
warrants and rights
  
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
 
Plan category (a)  (b)  (c) 
Equity compensation plans approved by security holders  127,715   $9.60   39,273 
Equity compensation plans not approved by security holders  0   0   0 
Total  127,715   $9.60   39,273 

(1)This includes shares subject to options outstanding under the Amended and Restated Equity Incentive Plan of UCI Holdco, Inc.
 
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

United Components, Inc. has 1,000 shares of common stock outstanding, all of which isare owned by our indirect parent, UCI Holdco, Inc. Certain affiliates of Carlyle own approximately 90.9%90.8% of UCI Holdco’s common stock while the remainder is owned by members of our Board of Directors, Bruce M. Zorich, our President and Chief Executive Officer, Daniel J. Johnston, our Chief Financial Officer, and other employees of the Company. UCI Holdco has 2,865,0602,864,210 shares of common stock outstanding.

The following table sets forth information with respect to the beneficial ownership of UCI Holdco’s common stock as of the date of this report by:
•each person known to own beneficially more than 5% of the capital stock;
•each of our directors;
•each of the executive officers named in the summary compensation table; and
•all of our directors and executive officers as a group.

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each person known to own beneficially more than 5% of the capital stock;

each of our directors;

each of the executive officers named in the summary compensation table; and

all of our directors and executive officers as a group.

The amounts and percentages of shares beneficially owned are reported on the basis of SEC regulations governing the determination of beneficial ownership of securities. Under SEC rules, a person is deemed to be a “beneficial” owner of a security if that person has or shares voting power or investment power, which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. Securities that can be so acquired are deemed to be outstanding for purposes of computing any other person’s percentage. Under these rules, more than one person may be deemed to be a beneficial owner of securities as to which such person has no economic interest.

Except as otherwise indicated in these footnotes, each of the beneficial owners listed has, to our knowledge, sole voting and investment power with respect to the shares of capital stock.

Beneficial Ownership of UCI Holdco, Inc.
         
      Percentage of
  Number of Outstanding
Name of Beneficial Owner Shares Capital Stock
TCG Holdings, L.L.C.(1)  2,600,500   90.9%
Bruce M. Zorich(2)  29,000   * 
Daniel J. Johnston(3)  3,750   * 
David L. Squier(4)  3,500   * 
Ian I. Fujiyama  1,500   * 
Paul R. Lederer(5)  2,400   * 
Raymond A. Ranelli(6)  3,000   * 
John C. Ritter(7)  5,000   * 
All executive officers and directors as a group (10 persons)  48,150   1.7%

Name of Beneficial Owner 
Number of
Shares
  
Percentage of
Outstanding
Capital Stock
 
TCG Holdings, L.L.C.(1)  2,600,500   90.8%
Bruce M. Zorich(2)  29,000   * 
David L. Squier(3)  4,000   * 
Ian I. Fujiyama  1,500   * 
Paul R. Lederer(4)  2,900   * 
Michael G. Malady(5)  11,000   * 
Raymond A. Ranelli(6)  3,500   * 
John C. Ritter(7)  5,500   * 
Keith A. Zar(8)  8,000   * 
All executive officers and directors as a group (11 persons)  65,400   1.6%

*Denotes less than 1.0% of beneficial ownership.

(1)Carlyle Partners III, L.P., a Delaware limited partnership, and CP III Coinvestment, L.P., a Delaware limited partnership (the “Investment Partnerships”), both of which are affiliates of Carlyle, own approximately 90.9%90.8% of the outstanding common stock of UCI Holdco, Inc. TC Group Investment Holdings, L.P. exercises investment discretion and control over the shares held by the Investment Partnerships indirectly through its subsidiary TC Group III, L.P., which is the sole general partner of the Investment Partnerships. TCG Holdings II, L.P., a Delaware limited partnership, is the sole general partner of TC Group Investment Holdings, L.P. DBD Investors V, L.L.C., a Delaware limited liability company, is the sole general partner of TCG Holdings II, L.P. and its address is c/o The Carlyle Group, 1001 Pennsylvania Ave. N.W., Suite 220S, Washington, D.C. 20004.

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(2)Includes 22,500 shares in UCI Holdco, Inc. beneficially owned by Mr. Zorich and the right to acquire up to 6,500 additional shares.

(3)Includes 2,500 shares in UCI Holdco, Inc. beneficially owned by Mr. Johnston and the right to acquire up to 1,250 additional shares.
(4)Includes 1,000 shares in UCI Holdco, Inc. beneficially owned by Mr. Squier and the right to acquire up to 2,5003,000 additional shares.

(5)(4)Includes 400 shares in UCI Holdco, Inc. beneficially owned by Mr. Lederer and the right to acquire up to 2,0002,500 additional shares.

(5)Includes 8,750 shares in UCI Holdco, Inc. beneficially owned by Mr. Malady and the right to acquire up to 2,250 additional shares.

(6)Includes 1,000 shares in UCI Holdco, Inc. beneficially owned by Mr. Ranelli and the right to acquire up to 2,0002,500 additional shares.

(7)Includes 3,000 shares in UCI Holdco, Inc. beneficially owned by Mr. Ritter and the right to acquire up to 2,0002,500 additional shares.

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(8)Includes the right to acquire up to 8,000 shares in UCI Holdco.

ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Carlyle Management Agreement

In connection with the Acquisition, we entered into a management agreement with TC Group, L.L.C., an affiliate of Carlyle, for management and financial advisory services and oversight to be provided to us and our subsidiaries. Pursuant to this agreement, we pay an annual management fee to Carlyle of $2.0 million and annual out-of-pocket expenses, and we may pay Carlyle additional fees associated with financial advisory and other future transactions. Carlyle also received a one-time transaction fee of $10.0 million upon consummation of the Acquisition. In 2006, Carlyle was paid $2.5 million for the ASC Acquisition. The management agreement also provides for indemnification of Carlyle against liabilities and expenses arising out of Carlyle’s performance of services under the agreement. The agreement terminates either when Carlyle or its affiliates own less than ten percent of our equity interests or when we and Carlyle mutually agree to terminate the agreement.

Stockholders Agreement

On May 25, 2006, we and certain of our executive officers and affiliates of Carlyle who are holders of our common stock entered into a stockholders agreement that:
•imposes restrictions on their transfer of shares;
•requires those stockholders to take certain actions upon the approval by stockholders party to the agreement holding a majority of the shares held by those stockholders in connection with a sale of the company; and
•grants our principal stockholders the right to require other stockholders to participate pro rata in connection with a sale of shares by our principal stockholder.

imposes restrictions on their transfer of shares;

requires those stockholders to take certain actions upon the approval by stockholders party to the agreement holding a majority of the shares held by those stockholders in connection with a sale of the company; and

grants our principal stockholders the right to require other stockholders to participate pro rata in connection with a sale of shares by our principal stockholder.

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The stockholder agreement will terminate upon the sale or disposition of all or substantially all of our assets or upon the execution of a resolution of our board of directors terminating the agreement.

Employment Agreements

In connection with the Acquisition, we entered into employment agreements with certain of our named executive officers as described in “Item 11. Executive Compensation ¯— Compensation Discussion and Analysis — Severance Arrangement/Employment Agreements.”

Other Related Party Transactions

Sales to The Hertz Corporation were $0.9 million, $0.6 million and $0.6 million for the years ended December 31, 2009, 2008 and 2007, respectively. Affiliates of The Carlyle Group own more than 10% of Hertz Global Holdings, Inc.  The Hertz Corporation is an indirect, wholly-owned subsidiary of Hertz Global Holdings, Inc.

Sales to Allison Transmission, Inc. were $0.6 million for the year ended December 31, 2009. Affiliates of The Carlyle Group own more than 10% of Allison Transmission, Inc.

As part of the ASC Acquisition, UCI acquired a 51% interest in a Chinese joint venture. This joint venture purchases aluminum castings from UCI’s 49% joint venture partner, Shandong Yanzhou Liancheng Metal Products Co. Ltd (“LMC”) and other materials from the joint venture partner’s affiliates. In 2009, 2008 and 2007, UCI purchased $11.1 million, $12.0 million and $15.4 million, respectively, from its joint venture partner and its affiliates. In addition, UCI sold materials and processing services to LMC in the amount of $3.1 million in 2009.
ASC rents a building from its former president. The 2009, 2008 and 2007 rent payments, which are believed to be at market rate, were $1.5 million, $1.5 million and $1.4 million, respectively.

Director Independence

The Company has no securities listed for trading on a national securities exchange or in an automated inter-dealer quotation system of a national securities association, which has requirements that a majority of its board of directors be independent. However, the board has determined that under the New York Stock Exchange’s definition of independence, Messrs. Lederer, Ritter and Ranelli would be independent.

ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES

Fees billed by Grant Thornton LLP in 20082009 and 20072008 were:

Audit Fees— Audit fees billed in 2009 and 2008, were $2,144,849 and 2007, were $2,626,128, and $2,225,274, respectively.

Audit-Related Fees— In 20082009 and 2007,2008, the Company had audit-related fees of $272,899$168,138 and $264,366,$272,899, respectively. These fees were for audits of Company-sponsored pension plans.

Tax Fees— BillingsThere were no fees billed for tax services were $0in 2009 and $15,483 in 2008 and 2007, respectively. The services were primarily for the preparation of a foreign subsidiary tax return in 2007.2008.

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All Other Fees— There were no other fees billed in 20082009 and 2007.2008.

Our policy is to require our Audit Committee to pre-approve audit services. In March 2004, the Company established a policy that also requires Audit Committee pre-approval for all audit-related, tax, and other services. Previously, senior management was authorized to approve such services provided that the services were brought to the attention of the Audit Committee and were approved by the Audit Committee prior to the completion of the audit. Management monitors all services provided by our principal accountants and reports periodically to our Audit
Committee on these matters.

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PART IV
ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1)Financial Statements.

The Company’s consolidated financial statements included in Item 8 hereof are as of December 31, 20082009 and 2007,2008, and for the three years ending December 31, 2008.2009. Such financial statements consist of the following:

Balance Sheets
Income Statements
Statements of Cash Flows
Statements of Changes in Shareholder’s Equity
Notes to Consolidated Financial Statements

(a)(2)Financial Statement Schedules.

Schedule II — Valuation and Qualifying Accounts

Certain information required in Schedule II, Valuation and Qualifying Accounts, has been omitted because equivalent information has been included in the financial statements included in this Form 10-K.

Other financial statement schedules have been omitted because they either are not required, are immaterial or are not applicable.

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116

Report of Independent Registered Public Accounting Firm
To the
Board of Directors and Shareholder
of United Components, Inc. and subsidiaries

We have audited in accordance with the standards of the Public Company Accounting Oversight Board (United States) the consolidated financial statements of United Components, Inc. and subsidiaries referred to in our report dated March 30, 2009,19, 2010, which is included in Part II on this Form 10-K. Our audits of the basic financial statements included the financial statement schedule listed in the index appearing under Item 15(a)(2), which is the responsibility of the Company’s management. In our opinion, this financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/ GRANT THORNTON LLP

Cincinnati, Ohio
March 30, 200919, 2010

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117

Schedule II — Valuation and Qualifying Accounts
                     
  Balance at Charged to     Other Balance at
Description Beginning of Year Income Deductions (a) End of Year
  (In millions)
Year ended December 31, 2008                    
Allowance for excess and obsolete inventory $15.6  $3.7  $(4.3) $(0.1) $14.9 
Valuation allowance for deferred tax assets  4.3   0.9   —   (1.0)  4.2 
Year ended December 31, 2007                    
Allowance for excess and obsolete inventory  19.7   2.3   (6.4)  —   15.6 
Valuation allowance for deferred tax assets  3.1   1.3   (0.1)  —   4.3 
Year ended December 31, 2006                    
Allowance for excess and obsolete inventory  17.2   7.6   (6.5)  1.4   19.7 
Valuation allowance for deferred tax assets  2.3   0.8   —   —   3.1 

Description                                                            
Balance at
Beginning of Year
 
Charged to
Income
 Deductions 
Other
(a)
 
Balance at
End of Year
 
  (In millions) 
Year ended December 31, 2009           
Allowance for excess and obsolete inventory $14.9 $3.1 $(3.0)$0.1 $15.1 
Valuation allowance for deferred tax assets  4.2  0.4  —  0.6  5.2 
Year ended December 31, 2008                
Allowance for excess and obsolete inventory  15.6  3.7  (4.3) (0.1) 14.9 
Valuation allowance for deferred tax assets  4.3  0.9  —  (1.0) 4.2 
Year ended December 31, 2007                
Allowance for excess and obsolete inventory  19.7  2.3  (6.4) —  15.6 
Valuation allowance for deferred tax assets  3.1  1.3  (0.1) —  4.3 
____________
(a)In 2009 and 2008, otherOther is the effect of foreign currency translation. In 2006, other is the balance acquired in connection with the May 25, 2006 acquisition of ASC Industries.

(a)(3)Exhibits

EXHIBIT INDEX

Exhibit
No.
 Description of Exhibit
   
2.1 Stock Purchase Agreement by and among United Components, Inc., ACAS Acquisitions (ASC), Inc. and the Sellers named herein, dated as of March 8, 2006 (incorporated by reference to Exhibit 2.1 to United Components’ Report on formForm 10-K filed March 31, 2006).
   
2.2 Asset Purchase Agreement by and among United Components, Inc., Neapco Inc. and Neapco, LLC, dated as of June 30, 2006 (incorporated by reference to Exhibit 2.1 to United Components’ Report on Form 8-K filed July 6, 2006).
   
2.3 Asset Purchase Agreement by and among Pioneer Inc. Automotive Products, United Components, Inc. and Pioneer, Inc., dated as of June 29, 2006 (incorporated by reference to Exhibit 2.2 to United Components’ Report on Form 8-K filed July 6, 2006).
   
2.4 Stock Purchase Agreement by and among Truck-Lite Co. Limited, Truck-Lite Co., Inc., UIS Industries Limited and United Components, Inc., dated as of November 30, 2006 (incorporated by reference to Exhibit 2.1 to United Components’ Report on Form 8-K filed December 6, 2006).
   
3.1 Amended and Restated Certificate of Incorporation of United Components, Inc., filed April 29, 2003 (incorporated by reference to Exhibit 3.1 to United Components’ Registration Statement on Form S-4 (No. 333-107219) filed July 21, 2003).
   
3.2 Bylaws of United Components, Inc. (incorporated by reference to Exhibit 3.14 to United Components’ Registration Statement on Form S-4 (No. 333-107219) filed July 21, 2003).
   
4.1 Senior Subordinated Note Indenture with respect to the 9 3/8%Senior Subordinated Notes due 2013, between United Components, Inc., Wells Fargo Bank Minnesota, National Association, as trustee, and the Guarantors listed on the signature pages thereto, dated as of June 20, 2003. (incorporated by reference to Exhibit 4.1 to United Components’ Registration Statement on Form S-4 (No. 333-107219) filed July 21, 2003).
   
4.2 Form of 9 3/8% Senior Subordinated Notes due 2013 (included in Exhibit 4.1).

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Exhibit
No.Description of Exhibit
10.1 Credit Agreement, dated as of June 20, 2003, by and among United Components, Inc., the lenders party thereto, Lehman Brothers Inc. and J.P. Morgan Securities Inc. as joint lead arrangers, J.P. Morgan Chase Bank as syndication agent, ABN AMRO Bank N.V., Credit Lyonnais, New York Branch, Fleet National Bank and General Electric Capital Corporation as co-documentation agents and Lehman Commercial Paper Inc. as administrative agent (incorporated by reference to Exhibit 10.1 to United Components’ Registration Statement on Form S-4 (No. 333-107219) filed July 21, 2003).
   
10.2 Guarantee and Collateral Agreement, dated as of June 20, 2003, among UCI Acquisition Holdings, Inc., United Components, Inc. and certain subsidiaries of United Components, Inc., for the benefit of Lehman Commercial Paper, Inc., as administrative agent (incorporated by reference to Exhibit 10.2 to United Components’ Registration Statement on Form S-4 (No. 333-107219) filed July 21, 2003).
   
10.3 Management Agreement among United Components, Inc. and TC Group, L.L.C. dated June 20, 2003 (incorporated by reference to Exhibit 10.3 to United Components’ Registration Statement on Form S-4 (No. 333-107219) filed July 21, 2003).
   
*10.4 *10.4 Employment Agreement Term Sheet between United Components, Inc. and John Ritter effective as of April 25, 2003, as amended (incorporated by reference to Exhibit 10.4 to United Components’ Registration Statement on Form S-4 (No. 333-107219) filed July 21, 2003).
   
*10.5 *10.5 Employment Agreement between United Aftermarket, Inc. and Bruce Zorich dated as of April 18, 2003, as amended (incorporated by reference to Exhibit 10.5 to United Components’ Registration Statement on Form S-4 (No. 333-107219) filed July 21, 2003).
   
*10.6 *10.6 Fourth Amended and Restated Champion Laboratories Pension Plan, effective as of January 1, 1997 (incorporated by reference to Exhibit 10.7 to United Components’ Registration Statement on Form S-4 (No. 333-107219) filed July 21, 2003).
   
*10.7 *10.7 Employment Agreement among United Components, Inc., Champion Laboratories, Inc. and Charlie Dickson, effective as of September 2, 2003 (incorporated by reference to Exhibit 10.8 to United Components’ Amendment No. 1 to Registration Statement on Form S-4/A (No. 333-107219) filed October 7, 2003).
   
10.8 First Amendment to Credit Agreement dated as of December 22, 2003, by and among United Components, Inc., the lenders party thereto, Lehman Brothers Inc. and J.P. Morgan Securities Inc. as joint lead arrangers, J.P. Morgan Chase Bank as syndication agent, ABN AMRO Bank N.V., Credit Lyonnais, New York Branch, Fleet National Bank and General Electric Capital Corporation as co-documentation agents and Lehman Commercial Paper Inc. as administrative agent (incorporated by reference to Exhibit 10.9 to United Components’ Report on Form 10-K filed March 30, 2004).
   
*10.9 *10.9 Amended and Restated Stock Option Plan of UCI Holdco, Inc., effective as of May 25, 2006 (incorporated by reference to Exhibit 10.10 to United Components’ Report on Form 10-K filed March 30, 2007).
   
*10.10 *10.10 UCI Annual Incentive Compensation Plan (incorporated by reference to Exhibit 10.11 to United Components’ Report on Form 10-K filed March 30, 2004).
   
*10.11 Amended and Restated Credit Agreement, dated May 25, 2006, among United Components, Inc., as borrower, Lehman Brothers Inc. and J.P. Morgan Securities Inc., as joint advisors, joint lead arrangers and joint bookrunners, JPMorgan Chase Bank, N.A., as syndication agent, ABN AMRO Bank N.V., Bank of America, N.A. and General Electric Capital Corporation, as co-documentation agents, and Lehman Commercial Paper Inc., as administrative agent and the several banks and other financial institutions or entities from time to time parties to the agreement (incorporated by reference to Exhibit 10.12 to United Components’ Report on Form 8-K filed May 31, 2006).
   
*10.12 *10.12 Amended and Restated Equity Incentive Plan of UCI Holdco, Inc., effective as of December 23, 2008.2008 (incorporated by reference to Exhibit 10.12 to United Components’ Report on Form 10-K filed March 31, 2009).
   
*10.13 *10.13 Restricted Stock Agreement, dated December 23, 2008, between UCI Holdco, Inc. and Bruce M. Zorich.Zorich (incorporated by reference to Exhibit 10.12 to United Components’ Report on Form 10-K filed March 31, 2009).

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Exhibit
No.Description of Exhibit
*10.14 *10.14 Amended and Restated Employment Agreement, dated December 23, 2008, between United Components, Inc. and Bruce Zorich.Zorich (incorporated by reference to Exhibit 10.12 to United Components’ Report on Form 10-K filed March 31, 2009).
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*10.15*10.15 Severance Agreement, dated December 23, 2008, between Daniel Johnston, United Components, Inc., and UCI Holdco, Inc. (incorporated by reference to Exhibit 10.12 to United Components’ Report on Form 10-K filed March 31, 2009).
   
21.1*10.16 List of Subsidiaries.Severance Agreement, dated September 8, 2009, between Mark P. Blaufuss, United Components, Inc. and UCI Holdco, Inc.
   
*10.17Restricted Stock Agreement, dated September 8, 2009, between UCI Holdco, Inc. and Mark P. Blaufuss.
*10.18Severance Agreement, dated December 23, 2008, between Keith A. Zar, United Components, Inc., and UCI Holdco, Inc.
*10.19Restricted Stock Agreement, dated December 23, 2008, between UCI Holdco, Inc. and Keith A. Zar.
*10.20Severance Agreement, dated December 23, 2008, between Michael G. Malady, United Components, Inc., and UCI Holdco, Inc.
*10.21Restricted Stock Agreement, dated December 23, 2008, between UCI Holdco, Inc. and Michael G. Malady.
10.22Resignation, Waiver, Consent, Appointment and Amendment Agreement entered into as of December 22, 2009, by and among Lehman Commercial Paper Inc. acting through one or more of its branches as the Administrative Agent and Swing Line Lender, under the Credit Agreement, Bank of America, N.A., the Lenders party hereto, United Components, Inc. and each of the Guarantors signatory hereto.
31.1 Certification of Periodic Report by the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
   
31.2 Certification of Periodic Report by the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
   
32.1** Certification of Periodic Report by the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002.
____________
*           Management contract or compensatory plan or arrangement.

*Management contract or compensatory plan or arrangement.
**This certificate is being furnished solely to accompany the report pursuant to 18 U.S.C 1350 and is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

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SIGNATURES
120

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

UNITED COMPONENTS, INC.
By:  /s/ DANIEL J. JOHNSTON   
  
Name:By:  Daniel J. Johnston /s/ MARK P. BLAUFUSS 
 Title:Chief Financial Officer Name: Mark P. Blaufuss 
 Title: Chief Financial Officer

Date: March 30, 200919, 2010

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

/s/ BRUCE M. ZORICHPresident and Chief Executive Officer
Bruce M. Zorich (Principal Executive Officer)March 19, 2010
     
/s/ BRUCE M. ZORICH
Bruce M. Zorich		President and Chief Executive Officer
(Principal Executive Officer)		March 30, 2009
/s/ DANIEL J. JOHNSTON
Daniel J. JohnstonMARK P. BLAUFUSS		 Chief Financial Officer
Mark P. Blaufuss(Principal Financial Officer and
Principal Accounting Officer) March 30, 200919, 2010
/s/ DAVID L. SQUIER
David L. Squier		 Chairman 
David L. SquierMarch 30, 200919, 2010
/s/ IAN I. FUJIYAMA
Ian I. Fujiyama		 Director 
Ian I. FujiyamaMarch 30, 200919, 2010
/s/ PAUL R. LEDERER
Paul R. Lederer		 Director 
Paul R. LedererMarch 30, 200919, 2010
/s/ GREGORY S. LEDFORD
Gregory S. Ledford		 Director 
Gregory S. LedfordMarch 30, 200919, 2010
/s/ RAYMOND A. RANELLI
Raymond A. Ranelli		 Director 
Raymond A. RanelliMarch 30, 200919, 2010
/s/ JOHN C. RITTER
John C. Ritter		 Director 
John C. RitterMarch 30, 200919, 2010
/s/ MARTIN SUMNER
Martin Sumner		 Director 
Martin SumnerMarch 30, 200919, 2010

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121