United Components 10-Q 2004 Q2 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2004

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)

Delaware
(State or Other Jurisdiction of	04-3759857
Incorporation or Organization)	(I.R.S. Employer Identification No.)
14601 Highway 41 North
Evansville, Indiana	47725
(Address of Principal Executive Offices)	(Zip Code)

(812) 867-4156
(Registrant’s Telephone Number, Including Area Code)

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

     Yeso Nox

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

     Yeso Nox

     The registrant had 1,000 shares of its $0.01 par value common stock outstanding as of August 11, 2004.

Index

United Components, Inc.

Part I	FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Condensed balance sheets—June 30, 2004 and December 31, 2003
	Condensed income statements—Three and six months ended June 30, 2004 and 2003
	Condensed statements of cash flows—Six months ended June 30, 2004 and 2003
	Statement of changes in shareholder’s equity—June 20, 2003, December 31, 2003 and June 30, 2004
	Notes to condensed financial statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Qualitative and Quantitative Information About Market Risk
Item 4.	Controls and Procedures
Part II	OTHER INFORMATION
Item 6.	Exhibits and Reports on Form 8-K
Signatures
Exhibits

FORWARD-LOOKING STATEMENTS

In this periodic report on Form 10-Q, United Components. Inc. (“UCI”) makes some “forward-looking” statements. These statements are included throughout this report on Form 10-Q and relate to, among other things, 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 UCI believes that the expectations reflected in its forward-looking statements are reasonable, it does not know whether the expectations will prove correct. They can be affected by inaccurate assumptions UCI might make or by known or unknown risks and uncertainties. Many factors mentioned in UCI’s discussion in this report will be important in determining future results.

1

Although UCI believes the expectations reflected in its forward-looking statements are based upon reasonable assumptions, UCI can give no assurance that UCI will attain these expectations or that any deviations will not be material. Because of these factors, UCI cautions that investors should not place undue reliance on any of these forward-looking statements.

Except as otherwise required by the federal securities laws, UCI disclaims any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this periodic report on Form 10-Q to reflect any change in its expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

2

PART I
FINANCIAL INFORMATION

Item 1. Financial Statements

United Components, Inc. (“UCI”)

Condensed Balance Sheets

(in thousands)

	UCI		UCI
	Consolidated		Consolidated
	June 30, 2004		December 31, 2003
	(unaudited)
Assets
Current assets
Cash and cash equivalents	$	31,077	$	46,130
Accounts receivable, net		269,422		230,345
Inventories		175,307		168,797
Deferred tax		14,405		17,756
Other current assets		9,347		10,877
Total current assets		499,558		473,905
Property, plant and equipment, net		214,018		219,973
Goodwill		166,559		163,823
Other intangible assets, net		89,722		77,124
Deferred financing costs		8,792		10,146
Deferred tax		—		13,609
Pension and other assets		9,752		11,359
Total assets	$	988,401	$	969,939
Liabilities and shareholder’s equity
Current liabilities
Accounts payable	$	102,148	$	74,652
Notes payable		1,219		752
Current maturities of long-term debt		139		1,034
Accrued expenses and other current liabilities		76,898		66,729
Total current liabilities		180,404		143,167
Long-term debt, less current maturities		481,549		520,472
Pension and other postretirement liabilities		50,201		50,038
Deferred tax		1,567		—
Other liabilities		2,772		2,172
Contingencies – Note J
Total liabilities		716,493		715,849
Shareholder’s equity
Common stock		—		—
Additional paid in capital		261,357		261,385
Retained earnings (deficit)		8,997		(8,755	)
Accumulated other comprehensive income		1,554		1,460
Total shareholder’s equity		271,908		254,090
Total liabilities and shareholder’s equity	$	988,401	$	969,939

The accompanying notes are an integral part of these statements.

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United Components, Inc.

Condensed Income Statements (unaudited)
(in thousands)

	UCI			UCI			Predecessor
	Consolidated			Consolidated			Combined
	Three Months			June 21, 2003			April 1, 2003
	Ended			Through			Through
	June 30, 2004			June 30, 2003			June 20, 2003
Net sales	$	273,952		$	26,179		$	216,142
Cost of sales		214,156			23,402			190,937
Gross profit		59,796			2,777			25,205
Operating expenses
Selling and warehousing		19,342			2,213			15,475
General and administrative		12,127			1,440			10,665
Amortization of intangible assets		1,851			164			30
Operating income (loss)		26,476			(1,040	)		(965	)
Other income (expense)
Interest income		48						830
Interest expense		(9,070	)		(3,860	)		(121	)
Management fee expense		(500	)		(55	)		(3	)
Miscellaneous, net		41			111			(255	)
Income (loss) before income taxes		16,995			(4,844	)		(514	)
Income tax expense (benefit)		6,778			(1,841	)		(23	)
Net income (loss)	$	10,217		$	(3,003	)	$	(491	)
Pro forma (unaudited), adjusted solely for change in income tax filing status (Note C):
Historical income (loss) before provision for income taxes	$	16,995		$	(4,844	)	$	(514	)
Income tax expense (benefit)		6,778			(1,841	)		(193	)
Pro forma net income (loss)	$	10,217		$	(3,003	)	$	(321	)

The accompanying notes are an integral part of these statements.

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United Components, Inc.

Condensed Income Statements (unaudited)
(in thousands)

	UCI			UCI			Predecessor
	Consolidated			Consolidated			Combined
	Six Months			June 21, 2003			January 1, 2003
	Ended			through			through
	June 30, 2004			June 30, 2003			June 20, 2003
Net sales	$	530,763		$	26,179		$	452,467
Cost of sales		415,420			23,402			378,211
Gross profit		115,343			2,777			74,256
Operating expenses
Selling and warehousing		38,387			2,213			33,585
General and administrative		24,199			1,440			18,928
Amortization of intangible assets		3,702			164			60
Operating income (loss)		49,055			(1,040	)		21,683
Other income (expense)
Interest income		113			—			1,712
Interest expense		(18,701	)		(3,860	)		(245	)
Management fee expense		(1,000	)		(55	)		(18	)
Miscellaneous, net		126			111			(408	)
Income (loss) before income taxes		29,593			(4,844	)		22,724
Income tax expense (benefit)		11,841			(1,841	)		942
Net income (loss)	$	17,752		$	(3,003	)	$	21,782
Pro forma (unaudited), adjusted solely for change in income tax filing status (Note C):
Historical income (loss) before provision for income taxes	$	29,593		$	(4,844	)	$	22,724
Income tax expense (benefit)		11,841			(1,841	)		8,544
Pro forma net income (loss)	$	17,752		$	(3,003	)	$	14,180

The accompanying notes are an integral part of these statements.

5

United Components, Inc.

Condensed Statements of Cash Flow (unaudited)
(in thousands)

	UCI			UCI			Predecessor
	Consolidated			Consolidated			Combined
	Six Months			June 21,2003			January 1, 2003
	Ended			through			through
	June 30, 2004			June 30, 2003			June 20, 2003
Cash flows from operating activities:
Net income (loss)	$	17,752		$	(3,003	)	$	21,782
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		17,779			1,049			12,928
Amortization of intangible assets		3,702			164			60
Amortization of deferred financing fees and debt issuance costs		1,670			(99	)		242
Loss on sale of assets, net		43
Changes in operating assets and liabilities
Accounts receivable		(39,077	)		(2,682	)		(18,146	)
Inventories		(6,510	)		3,297			18,806
Other current assets		(121	)		(6,337	)		(3,035	)
Accounts payable		27,496			4,192			(9,425	)
Accrued expenses and other current liabilities		16,464			8,190			(2,438	)
Other assets		6,808			2,244			715
Other liabilities		3,644			(52	)		2,404
Net cash provided by operating activities		49,650			6,963			23,893
Cash flows from investing activities:
Acquisition and related fees		(8,000	)		(818,180	)		—
Capital expenditures		(17,165	)		(78	)		(21,388	)
Proceeds from sale of assets		184			—			215
Net cash used in investing activities		(24,981	)		(818,258	)		(21,173	)
Cash flows from financing activities:
Issuances of debt		467			585,110			—
Financing fees and debt issuance cost		—			(21,340	)		—
Debt repayments		(40,134	)		—			(98	)
Stockholder’s equity contribution		—			260,000			—
Dividends and transfers to UIS, Inc., net		—			—			(28,033	)
Other		(28	)
Net cash provided by (used in) financing activities		(39,695	)		823,770			(28,131	)
Effect of exchange rate changes on cash		(27	)		(236	)		1,509
Net increase (decrease) in cash and equivalents		(15,053	)		12,239			(23,902	)
Cash and cash equivalents at beginning of period		46,130			4,452			28,354
Cash and cash equivalents at end of period	$	31,077		$	16,691		$	4,452

The accompanying notes are an integral part of these statements

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United Components, Inc.

Statements of Changes in Shareholder’s Equity (unaudited)
(in thousands)

														Accumulated
					Additional			Retained						Other			Total
	Preferred		Common		Paid-In			Earnings			Division			Comprehensive			Shareholder’s			Comprehensive
	Stock		Stock		Capital			(Deficit)			Equity			Income (Loss)			Equity			Income (Loss)
Predecessor combined balance at January 1, 2003	$	13	$	4,289	$	44,940		$	467,376		$	67,929		$	(16,512	)	$	568,035
Dividends paid									(17,913	)								(17,913	)
Liability to UIS contributed to capital						20,271												20,271
Transfers with UIS, Inc., net									(56,630	)		(10,120	)					(66,750	)
Comprehensive income
Net earnings									6,650			15,132						21,782		$	21,782
Other comprehensive income
Foreign currency adjustment															4,125			4,125			4,125
Total comprehensive income																				$	25,907
Predecessor combined balance at June 20, 2003	$	13	$	4,289	$	65,211		$	399,483		$	72,941		$	(12,387	)	$	529,550
UCI consolidated balance at June 20, 2003	$	—	$	—	$	260,000		$	—		$	—		$	—		$	260,000
Additions to paid-in capital						1,385												1,385
Comprehensive income
Net earnings (loss)									(8,755	)								(8,755	)	$	(8,755	)
Other comprehensive income (loss)
Interest rate swaps															(114	)		(114	)		(114	)
Foreign currency adjustment															1,574			1,574			1,574
Total comprehensive income (loss)																				$	(7,295	)
UCI consolidated balance at December 31, 2003	$	—	$	—	$	261,385		$	(8,755	)	$	—		$	1,460		$	254,090
UCI consolidated balance at December 31, 2003	$	—	$	—	$	261,385		$	(8,755	)	$	—		$	1,460		$	254,090
Partial return of additions to paid-in capital						(28	)											(28	)
Comprehensive income
Net earnings									17,752									17,752		$	17,752
Other comprehensive income (loss)
Interest rate swaps															(405	)		(405	)		(405	)
Foreign currency adjustment															499			499			499
Total comprehensive income																				$	17,846
UCI consolidated balance at June 30, 2004	$	—	$	—	$	261,357		$	8,997		$	—		$	1,554		$	271,908

The accompanying notes are an integral part of these statements.

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United Components, Inc.

Notes to Condensed Financial Statements (unaudited)

NOTE A — GENERAL AND BASIS OF FINANCIAL STATEMENT PRESENTATION

General

United Components, Inc. is a wholly owned subsidiary of UCI Acquisition Holdings, Inc. UCI Acquisition Holdings, Inc. and United Components, Inc. are corporations formed at the direction of The Carlyle Group (“Carlyle”). Affiliates of Carlyle own 99.2% of UCI Acquisition Holdings, Inc.’s common stock, and the remainder is owned by certain members of senior management and a member of the Company’s Board of Directors.

On June 20, 2003, United Components, Inc. (“UCI”) purchased, from UIS, Inc. and UIS Industries, Inc. (together “UIS”), the vehicle parts business of UIS, consisting of all of the issued and outstanding common stock or other equity interests in Champion Laboratories, Inc., Wells Manufacturing Corporation, Neapco Inc., Pioneer, Inc., Wells Manufacturing Canada Limited, UIS Industries Ltd. (which is the owner of 100% of the capital stock of Flexible Lamps, Ltd. and Airtex Products Ltd.), Mid-South Mfg., Inc., Airtex Products S.A., Airtex Products, Inc. (currently, Airtex Mfg., Inc.), Talleres Mecanicos Montserrat S.A. de C.V., Brummer Seal de Mexico, S.A. de C.V., Brummer Mexicana en Puebla, S.A. de C.V., Automotive Accessory Co. Ltd. and Airtex Products, LLC, a limited liability company that owns the assets of the Airtex Products business of UIS, Inc. (See Note B.)

The Company operates in one business segment through its subsidiaries. The Company manufactures and distributes vehicle parts, primarily servicing the vehicle replacement parts market in North America and Europe.

Basis of Presentation

The accompanying consolidated financial statements include the accounts of UCI and its subsidiaries. The accompanying combined financial statements include the accounts of the vehicle parts businesses of UIS, consisting of the aforementioned entities, which are collectively referred to in these financial statements as the “Predecessor Company” or “Predecessor.” In these notes to the financial statements, the term the “Company” refers to both UCI and the Predecessor Company. The aforementioned June 20, 2003 acquisition is referred to in these notes to the financial statements as the “Acquisition.”

The accompanying unaudited condensed consolidated and combined financial statements have been prepared in accordance with accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

The December 31, 2003 consolidated balance sheet has been derived from the audited financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2003. The December 31, 2003 consolidated balance sheet reflects the preliminary allocation of the June 20, 2003 Acquisition purchase price. The June 30, 2004 consolidated balance sheet has been reclassified to reflect the impact of the final allocation of the June 20, 2003 Acquisition purchase price. Such changes had no impact on previously reported results of operations.

The financial statements at June 30, 2004 and for the three and six month periods ended June 30, 2004 and 2003 are unaudited. In the opinion of management, these financial statements include all adjustments necessary for a fair presentation of the financial position and results of operations for such periods. All significant intercompany transactions and balances have been eliminated.

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United Components, Inc.

Notes to Condensed Financial Statements (unaudited)

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 the collectibility of accounts receivable and the realizability of inventory, goodwill and other intangible assets, cost accruals, insurance reserves, income taxes and other factors. Management has exercised reasonableness in deriving these estimates; however, actual results could differ from these estimates.

These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2003.

Operating results for the three and six month periods ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ended December 31, 2004.

Reclassifications

The December 31, 2003 consolidated balance sheet reflects the preliminary allocation of the June 20, 2003 Acquisition purchase price. The June 30, 2004 consolidated balance sheet has been reclassified to reflect the impact of the final allocation of the June 20, 2003 Acquisition purchase price. Such changes had no impact on previously reported results of operations. The income statement for the 2003 period has been reclassified to conform to the 2004 presentation.

NOTE B — ACQUISITION

Overview

On June 20, 2003, UCI purchased from UIS the vehicle parts businesses of UIS, consisting of all of the issued and outstanding common stock or other equity interests of the Predecessor Company.

The acquisition purchase price was $808 million. In addition, the Company assumed $2 million of debt and capital lease obligations. Fees and expenses associated with the acquisition (excluding financing fees) were $18.2 million and are accounted for as additional purchase price. Financing for the acquisition was comprised of a $260 million equity contribution by Carlyle, proceeds from $585 million of debt, and an $8 million accrued liability, which was paid in January 2004. In addition to funding the purchase price, proceeds from the borrowings were also used to pay for the aforementioned $18.2 million of acquisition-related fees and expenses and $21.6 million of financing fees.

Change in Income Tax Filing Status

As discussed in Note C, the Predecessor Company had elected for certain of its subsidiaries to be taxed as S Corporations pursuant to the Internal Revenue Code. In connection with the Acquisition, the Company terminated its S corporation elections and became a C corporation and, consequently, became subject to Federal and additional state and local income taxes. As part of the allocation of the Acquisition purchase price, net deferred tax assets have been calculated based on UCI’s higher effective tax rate. The pro forma information presented below includes adjustments for, among other things, the change in the Company’s income tax filing status. The pro forma income tax amounts include income taxes as if the Company had been filing as a C corporation for the entire period.

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United Components, Inc.

Notes to Condensed Financial Statements (unaudited)

Allocation of the Acquisition Purchase Price
and Pro Forma Information

The Acquisition is accounted for under the purchase method of accounting, and accordingly, the results of operations of the acquired companies are included in the results of UCI beginning on the June 20, 2003 acquisition date.

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition.

	(in millions)
Current assets	$	474
Property, plant and equipment		214
Goodwill		167
Other intangible assets		97
Deferred taxes		7
Other long term assets		3
Total assets acquired		962
Current liabilities		93
Long-term debt, excluding borrowings to fund the Acquisition purchase price and related transaction fees		2
Pension and other postretirement liabilities		37
Other long-term liabilities		4
Total liabilities assumed
Net assets acquired	$	826

Of the $97 million of acquired intangible assets, approximately $40 million was assigned to trademarks that are not subject to amortization, $50 million was assigned to customer relationships and $7 million was assigned to technologies. The estimated useful lives of the customer relationships and technologies are 5 – 15 years. For the three and six months ended June 30, 2004, amortization expense was $1.9 and $3.8 million. Accumulated amortization at June 30, 2004 was $7 million.

The $167 million of goodwill resulting from the transaction and all but approximately $10 million of the written-up values of the other assets are deductible for income tax purposes.

Below is unaudited pro forma data for the three and six months ended June 30, 2003, after giving effect to the Acquisition as if it had occurred on January 1, 2003. The pro forma adjustments give effect to (i) the allocation of the June 20, 2003 Acquisition purchase price, (ii) the Company’s capital structure immediately after the Acquisition, (iii) the new Carlyle management fee (see Note I), and (iv) income tax expense based on a C corporation filing status. The pro forma earnings data does not purport to represent what the results of operations would have been if the Acquisition had occurred as of the dates indicated above, or what the results will be in future periods.

	Pro Forma Data
	Three Months Ended			Six Months Ended
	June 30, 2003			June 30, 2003
	(in thousands)
Net sales	$	242,321		$	478,646
Operating loss		(6,705	)		(11,714	)
Net loss		(11,833	)		(24,292	)

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United Components, Inc.

Notes to Condensed Financial Statements (unaudited)

NOTE C — INCOME TAXES

Prior to June 21, 2003, the subsidiaries comprising the Predecessor Company were treated as disregarded entities for U.S. tax purposes (Qualified Subchapter S subsidiaries, or Q subs). As Q subs of UIS, the subsidiaries were included in the U.S. Federal and certain state S corporation income tax returns of UIS. As such, the income taxes on the earnings of the Predecessor Company were paid by the sole shareholder of UIS pursuant to an election for Federal income tax purposes not to be taxed as a corporation. No tax sharing arrangement existed for the subsidiaries comprising the Predecessor Company. Accordingly, no provision has been made in the accompanying financial statements for Federal income taxes on the net earnings of these companies for the periods prior to June 21, 2003. A provision for certain state franchise and income taxes has been made.

The Q sub status and the S corporation status terminated effective with the Acquisition. (See Note B) On the Acquisition date, the Company became a C corporation and became subject to both Federal and state income taxes. UCI’s effective tax rate has increased accordingly. As part of the allocation of the Acquisition purchase price, net deferred tax assets have been established and calculated based on UCI’s higher effective tax rate.

NOTE D — ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consist of the following (in thousands):

	June 30,		December 31,
	2004		2003
Salaries and wages	$	3,777	$	2,464
Bonuses		3,504		5,712
Vacation pay		6,238		5,252
Pension and other postretirement liabilities		2,988		3,174
Profit sharing		597		1,546
Product returns		14,787		13,999
Rebates and discounts due customers		6,603		4,902
Other credits due customers		2,433		4,518
Insurance		7,413		804
Taxes payable		6,146		—
Interest		1,951		1,882
Final payment of Acquisition purchase price		—		8,000
Other		20,461		14,476
	$	76,898	$	66,729

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United Components, Inc.

Notes to Condensed Financial Statements (unaudited)

NOTE E — INVENTORIES

The components of inventory consist of the following (in thousands):

	June 30,			December 31,
	2004			2003
Raw material	$	31,906		$	29,305
Work in process		49,199			47,056
Finished products		116,450			116,176
Valuation reserves		(22,248	)		(23,740	)
	$	175,307		$	168,797

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

NOTE F — GEOGRAPHIC INFORMATION

The Company had the following sales by country (in thousands):

	UCI		Predecessor		UCI		Predecessor
	Consolidated		Combined		Consolidated		Combined
	Three Months		Three Months		Six Months		Six Months
	Ended		Ended		Ended		Ended
	June 30, 2004		June 30, 2003		June 30, 2004		June 30, 2003
United States	$	229,048	$	201,008	$	438,182	$	399,401
Canada		8,313		7,536		17,500		15,150
United Kingdom		10,684		9,131		20,919		18,538
Mexico		5,701		6,649		12,918		11,803
Germany		3,155		2,566		6,845		6,029
Spain		749		1,416		1,962		1,595
Belgium		1,660		1,521		3,654		3,183
France		1,019		1,887		4,043		4,070
Other		13,623		10,607		24,740		18,877
	$	273,952	$	242,321	$	530,763	$	478,646

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United Components, Inc.

Notes to Condensed Financial Statements (unaudited)

The above sales include combined sales of the Predecessor Company through the June 20, 2003 Acquisition date. Approximately 90% of the six months ended June 30, 2003 amounts are combined sales of the Predecessor Company.

Net long-lived assets by country are presented below (in thousands):

	June 30,		December 31,
	2004		2003
United States	$	269,051	$	140,003
United Kingdom		36,010		32,207
Mexico		12,987		9,528
Spain		3,955		3,362
Canada		281		301
Goodwill only for June 30, 2004		166,559		—
Preliminary allocation of the June 20, 2003 acquisition purchase price, not yet allocated to operating entities as of December 31, 2003		—		310,633
	$	488,843	$	496,034

NOTE G — STOCK OPTION

The Company uses the “disclosure only” provision of SFAS 123. Accordingly, stock options are accounted for by the “intrinsic value method” of APB Opinion No. 25. Below is a reconciliation to the pro forma after tax effect of compensation expense for the stock options had such expense been determined in accordance with the “fair value method” prescribed by SFAS No. 123 (in thousands):

	Three Months			Six Months
	Ended			Ended
	June 30, 2004			June 30, 2004
Net income as reported	$	10,217		$	17,752
Stock option cost included in net income as reported, net of tax		—			—
Stock option cost that would have been reported using the “fair value method”, net of tax		(520	)		(1,040	)
Pro forma net income had the “fair value method” been used	$	9,697		$	16,712

13

United Components, Inc.

Notes to Condensed Financial Statements (unaudited)

NOTE H —PENSION

The following are the components of net periodic pension expense (in thousands):

	UCI			Predecessor			UCI			Predecessor
	Consolidated			Combined			Consolidated			Combined
	Three Months			Three Months			Six Months			Six Months
	Ended			Ended			Ended			Ended
	June 30, 2004			June 30, 2003			June 30, 2004			June 30, 2003
Service cost	$	2,034		$	1,678		$	4,069		$	3,483
Interest cost		2,947			2,387			5,894			5,071
Expected return on plan assets		(3,358	)		(3,147	)		(6,753	)		(6,684	)
Amortization of transition asset		—			(41	)		—			(88	)
Amortization of prior services cost		—			127			—			270
Amortization of unrecognized gain		—			(44	)		—			(93	)
	$	1,623		$	960		$	3,210		$	1,959

NOTE I — RELATED PARTY TRANSACTIONS

UIS maintained workers’ compensation, general liability, product liability and comprehensive automobile insurance for all of its subsidiaries, including the Predecessor Company. UIS allocated premium expense to each subsidiary based on rates charged by the insurance carrier and predicated and adjusted on estimated losses. UIS is liable for the settlement of all claims on these policies. As of the Acquisition date, the Company is no longer covered by UIS.

UIS management fee expense charged to the Predecessor Company was $18,000 for the six months ended June 30, 2003. Occasionally, UIS extended financing to the Predecessor Company. Interest charges to the Predecessor Company on debt to UIS were $96,000 and $180,000 for the three and six months ended June 30, 2003. These charges are recorded as interest expense. In addition, the Predecessor Company extended financing to UIS. Interest income from UIS was $698,000 and $1.4 million for the three and six months ended June 30, 2003. This income is recorded as interest income.

The Company has employment agreements with certain of its executive officers providing for annual compensation amounting to approximately $0.7 million per annum plus bonuses (as defined in the employment agreements) and severance pay under certain circumstances (as defined in the employment agreements).

In connection with the Acquisition, the Company 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 the Company and its subsidiaries. Pursuant to this agreement, the Company will pay an annual management fee to Carlyle of $2 million and out-of-pocket expenses, and the Company may pay Carlyle additional fees associated with financial advisory and other future transactions. Carlyle also received a one-time transaction fee of $10 million upon consummation of the Acquisition. The 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 10% of the Company’s equity interest or when the company and Carlyle mutually agree to terminate the agreement.

14

United Components, Inc.

Notes to Condensed Financial Statements (unaudited)

NOTE J — CONTINGENCIES

Environmental

The Company is subject to contingencies pursuant to environmental laws and regulations that in the future may require the Company to take action to correct the effects on the environment of prior disposal practices or releases of chemical or petroleum substances by the Company or other parties. The Company has been identified as a potential responsible party for contamination at several sites. As a result, the Company has accrued liabilities for certain environmental testing and remediation activities included in the “accrued expenses and other current liabilities” line and the “other liabilities” line on the balance sheet. While there is inherent uncertainty in such matters, in management’s opinion, the amounts accrued are appropriate based on the facts and circumstances that are currently known. The Company believes that the ultimate outcome of these matters will not have a material adverse effect on the financial position of the Company or results of operations for a full year. However, adjustment to the ultimate outcome of the matters could have a material adverse effect on the results for a single quarter.

Litigation

The Company is subject to various other contingencies, including routine legal proceedings and claims arising out of its 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, the Company believes that the outcome of any currently existing proceedings, even if determined adversely, would not have a material adverse effect on its business, financial condition and results of operations.

NOTE K – PRODUCT RETURNS LIABILITY

The product returns liability is included in accrued expenses and other current liabilities. It includes accruals for parts returned due to manufacturing defect and for certain parts returned because of customer excess quantities. The changes in the Company’s product returns liability are as follows (in thousands):

	UCI			Predecessor
	Consolidated			Combined
	Six Months			Six Months
	Ended			Ended
	June 30, 2004			June 30, 2003
Liability, beginning of period	$	13,999		$	4,252
Returned parts expense		(13,874	)		(17,368	)
Additional loss provision		14,662			16,941
Allocation of acquisition purchase price adjustments		—			9,600
Liability, end of period	$	14,787		$	13,425

15

United Components, Inc.

Notes to Condensed Financial Statements (unaudited)

NOTE L — NEW ACCOUNTING PRONOUNCEMENTS

In December 2003, SFAS No. 132R, “Employers’ Disclosure about Pensions and Other Postretirement Benefits” was issued. SFAS No. 132R requires additional disclosures about defined benefit pension plans and other postretirement benefit plans. The standard requires, among other things, additional disclosures about the assets held in employer sponsored pension plans, disclosures relating to plan asset investment policy and practices, disclosure of expected contributions to be made to the plans and expected benefit payments to be made by the plans. Annual disclosures applicable to the Company’s U.S. pension and postretirement plans were required to be made in its financial statements for the year ended December 31, 2003. The Company has adopted this pronouncement as of December 31, 2003 for all of its U.S. plans. Annual disclosures relating to its non-U.S. plans will be adopted for the year ending December 31, 2004. Interim disclosures relating to its non-U.S. plans will be adopted for the year ending December 31, 2005.

In March 2004, the FASB’s Emerging Issues Task Force concluded its discussion of Issue No. 03-01,The Meaning of Other-Than-Temporary Impairments and Its Application to Certain Investments(“EITF 03-01”). EITF 03-01 provides guidance regarding the determination of when an impairment of debt and marketable equity securities and investments, which are accounted for under the cost method, should be considered other-than-temporary and recognized in earnings. EITF 03-01 also requires annual disclosures of certain quantitative and qualitative factors of debt and marketable equity securities that are classified as available-for-sale or held-to-maturity and are in an unrealized loss position at the balance sheet date, but for which an other-than-temporary impairment has not been recognized. The disclosure requirements of EITF 03-01 were effective December 31, 2003 and had no effect on the Company’s financial statements. The accounting guidance of EITF 03-01 will be effective in the third quarter of 2004 and is not expected to have a material effect on the Company’s financial statements.

NOTE M — OTHER INFORMATION

Cash payments for interest and income taxes (net of refunds) (in thousands):

	UCI		Predecessor		UCI		Predecessor
	Consolidated		Combined		Consolidated		Combined
	Three Months		Three Months		Six Months		Six Months
	Ended		Ended		Ended		Ended
	June 30, 2004		June 30, 2003		June 30, 2004		June 30, 2003
Interest	$	11,902	$	234	$	15,837	$	323
Income taxes		656		1,901		2,555		1,973

On March 1, 2004, the Company made a voluntary prepayment of $40 million of outstanding senior credit facility term loan borrowings.

At June 30, 2004, 1,000 shares of common stock were authorized, issued and outstanding. The par value of each share of common stock is $0.01 per share.

16

United Components, Inc.

Notes to Condensed Financial Statements (unaudited)

NOTE N — GUARANTOR AND NONGUARANTOR FINANCIAL STATEMENTS

The senior credit facilities are secured by substantially all the assets of the Company. The senior subordinated notes (the “Notes”) are unsecured and rank equally in right of payment with any of the Company’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, which follows, includes the consolidated results of UCI subsequent to the June 20, 2003 Acquisition date and the combined results of the Predecessor Company prior to the Acquisition. This information 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) a consolidated UCI or a combined Predecessor Company, as applicable. 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.

The June 30, 2004 UCI Consolidated, UCI, Guarantor and Non-Guarantor balance sheets that follow in this Note N include the final allocation of the June 20, 2003 Acquisition purchase price. For all other financial statements that follow in this Note N, step-up amounts resulting from the preliminary allocation of the Acquisition purchase price are included with UCI and were not allocated to its subsidiaries. Consequently, for those financial statements, the Guarantor and Non-Guarantor are reported on the Predecessor’s historical basis. For all financial statements in Note N, except the June 30, 2004 balance sheet, purchase price allocations were based on preliminary estimates of the fair value of assets acquired and liabilities assumed.

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

17

United Components, Inc.

Notes to Condensed Financial Statements (unaudited)

NOTE N (continued)

Combining Condensed Balance Sheet
June 30, 2004 (unaudited)
(in thousands)

	UCI										Non-
	Consolidated		Eliminations		UCI			Guarantor			Guarantor
Assets
Current assets
Cash and cash equivalents	$	31,077	$			$	23,969	$	(50	)		$	7,158
Accounts receivable, net		269,422							246,829				22,593
Inventories		175,307							159,357				15,950
Deferred tax		14,405					144		13,557				704
Other current assets		9,347					71		2,515				6,761
Total current assets		499,558					24,184		422,208				53,166
Property, plant and equipment, net		214,018					384		165,887				47,747
Intercompany receivables		—		(149,153)					146,981				2,172
Investment in subsidiaries		—		(707,556)			698,759		8,797
Goodwill		166,559					166,559
Other intangible assets, net		89,722							87,322				2,400
Deferred financing costs		8,792					8,792
Pension and other assets		9,752					195		9,274				283
Total assets	$	988,401	$	(856,709)		$	898,873	$	840,469			$	105,768
Liabilities and shareholder’s equity
Current liabilities
Accounts payable	$	102,148	$			$		$	87,503			$	14,645
Notes payable		1,219											1,219
Current maturities of long-term debt		139											139
Accrued expenses and other current liabilities		76,898					3,428		65,679				7,791
Total current liabilities		180,404					3,428		153,182				23,794
Long-term debt, less current maturities		481,549					481,324						225
Pension and other postretirement liabilities		50,201							35,664				14,537
Deferred tax		1,567					5,860		(2,983	)			(1,310	)
Other liabilities		2,772							2,772
Intercompany payables		—		(149,153)			136,353		2,303				10,497
Total shareholder’s equity		271,908		(707,556)			271,908		649,531				58,025
Total liabilities and shareholder’s equity	$	988,401	$	(856,709)	$		898,873	$	840,469			$	105,768

18

United Components, Inc.

Notes to Condensed Financial Statements (unaudited)

NOTE N (continued)

Consolidating Condensed Balance Sheet
December 31, 2003
(in thousands)

	UCI											Non-
	Consolidated		Eliminations			UCI			Guarantor			Guarantor
Assets
Current assets
Cash and cash equivalents	$	46,130	$			$	33,164		$	4,448		$	8,518
Accounts receivable, net		230,345								208,762			21,583
Inventories		168,797					471			152,506			15,820
Deferred tax		17,756					36,010			(19,472	)		1,218
Other current assets		10,877					(336	)		5,275			5,938
Total current assets		473,905					69,309			351,519			53,077
Property, plant and equipment, net		219,973					54,055			124,977			40,941
Intercompany receivables		—		(124,033	)					124,033
Investment in subsidiaries		—		(566,026	)		553,055			12,971
Goodwill		163,823					163,823
Other intangible assets, net		77,124					76,574			550
Deferred financing costs		10,146					10,146
Deferred tax		13,609					13,609
Pension and other assets		11,359					(4,301	)		14,380			1,280
Total assets	$	969,939	$	(690,059	)	$	936,270		$	628,430		$	95,298
Liabilities and shareholder’s equity
Current liabilities
Accounts payable	$	74,652	$			$			$	63,456		$	11,196
Notes payable		752											752
Current maturities of long-term debt		1,034					750						284
Accrued expenses and other current liabilities		66,729					19,072			41,895			5,762
Total current liabilities		143,167					19,822			105,351			17,994
Long-term debt, less current maturities		520,472					520,258						214
Pension and other postretirement liabilities		50,038					31,965			18,073
Deferred tax		—					(4,050	)		699			3,351
Other liabilities		2,172								2,172
Intercompany payables		—		(124,033	)		114,185						9,848
Total shareholder’s equity		254,090		(566,026	)		254,090			502,135			63,891
Total liabilities and shareholder’s equity	$	969,939	$	(690,059	)	$	936,270		$	628,430		$	95,298

19

United Components, Inc.

Notes to Condensed Financial Statements (unaudited)

NOTE N (continued)

Consolidating Condensed Income Statement
Three Months Ended June 30, 2004 (Unaudited)
(in thousands)

	UCI Consolidated			Eliminations			UCI			Guarantor			Non-Guarantor
Net sales	$	273,952		$	(3,718	)	$	—		$	245,791		$	31,879
Cost of sales		214,156			(3,718	)		1,050			190,899			25,925
Gross profit (loss)		59,796			—			(1,050	)		54,892			5,954
Operating expenses
Selling and warehousing		19,342			—			(26	)		17,552			1,816
General and administrative		12,127			—			2,563			6,719			2,845
Amortization of intangibles		1,851			—			1,851			—			—
Operating income (loss)		26,476			—			(5,438	)		30,621			1,293
Other income (expense)
Interest income		48			(153	)		4			109			88
Interest expense		(9,070	)		153			(9,054	)		(23	)		(146	)
Management fee expense		(500	)		—			(500	)		—			—
Miscellaneous, net		41			—			—			68			(27	)
Income (loss) before income taxes		16,995			—			(14,988	)		30,775			1,208
Income tax expense (benefit)		6,778			—			(6,186	)		12,035			929
Increase (decrease) before equity in earnings of subsidiaries		10,217			—			(8,802	)		18,740			279
Equity in earnings of subsidiaries		—			(18,004	)		19,019			(1,015	)		—
Net income (loss)	$	10,217		$	(18,004	)	$	10,217		$	17,725		$	279

20

United Components, Inc.

Notes to Condensed Financial Statements (unaudited)

NOTE N (continued)

Combining Condensed Income Statement
June 21 to June 30, 2003 (unaudited)
(in thousands)

	Predecessor												Non-
	Combined			Eliminations			UCI			Guarantor			Guarantor
Net sales	$	26,179		$	(358	)	$			$	23,299		$	3,238
Cost of sales		23,402			(358	)		3,073			18,637			2,050
Gross profit (loss)		2,777						(3,073	)		4,662			1,188
Operating expenses
Selling and warehousing		2,213									2,071			142
General and administrative		1,440						425			373			642
Amortization of intangible assets		164						164
Operating income (loss)		(1,040	)					(3,662	)		2,218			404
Other income (expense)
Interest income								1			6			(7	)
Interest expense		(3,860	)					(3,859	)		15			(16	)
Management fee expense		(55	)								(56	)		1
Miscellaneous, net		111						(110	)		204			17
Income (loss) before income taxes		(4,844	)					(7,630	)		2,387			399
Income tax expense (benefit)		(1,841	)					(1,849	)		2			6
Increase (decrease) before equity in earnings of subsidiaries		(3,003	)					(5,781	)		2,385			393
Equity in earnings of subsidiaries					(2,778	)		2,778
Net income (loss)	$	(3,003	)	$	(2,778	)	$	(3,003	)	$	2,385		$	393

21

United Components, Inc.

Notes to Condensed Financial Statements (unaudited)

NOTE N (continued)

Combining Condensed Income Statement
April 1 to June 20, 2003 (unaudited)
(in thousands)

	Predecessor										Non-
	Combined			Eliminations			UCI	Guarantor			Guarantor
Net sales	$	216,142		$	(3,001	)	$	$	194,278		$	24,865
Cost of sales		190,937			(3,001	)			174,359			19,579
Gross profit		25,205							19,919			5,286
Operating expenses
Selling and warehousing		15,475							13,814			1,661
General and administrative		10,665							6,628			4,037
Amortization of intangible assets		30							30
Operating loss		(965	)						(553	)		(412	)
Other income (expense)
Interest income		830							777			53
Interest expense		(121	)						(73	)		(48	)
Management fee expense		(3	)						11			(14	)
Miscellaneous, net		(255	)						184			(439	)
Income (loss) before income taxes		(514	)						346			(860	)
Income tax expense (benefit)		(23	)						278			(301	)
Net income (loss)	$	(491	)	$			$	$	68		$	(559	)

22

United Components, Inc.

Notes to Condensed Financial Statements (unaudited)

NOTE N (continued)

Combining Condensed Income Statement
Six Months Ended June 30, 2004 (unaudited)
(in thousands)

	Predecessor												Non-
	Combined			Eliminations			UCI			Guarantor			Guarantor
Net sales	$	530,763		$	(7,741	)	$			$	473,333		$	65,171
Cost of sales		415,420			(7,741	)		3,021			367,990			52,150
Gross profit (loss)		115,343			—			(3,021	)		105,343			13,021
Operating expenses
Selling and warehousing		38,387			—			(26	)		34,722			3,691
General and administrative		24,199			—			5,154			13,322			5,723
Amortization of intangible assets		3,702			—			3,702			—
Operating income (loss)		49,055			—			(11,851	)		57,299			3,607
Other income (expense)
Interest income		113			(231	)		9			222			113
Interest expense		(18,701	)		231			(18,672	)		(40	)		(220	)
Management fee expense		(1,000	)		—			(1,000	)		—			—
Miscellaneous, net		126			—			—			69			57
Income (loss) before income taxes		29,593			—			(31,514	)		57,550			3,557
Income tax expense (benefit)		11,841			—			(12,479	)		22,477			1,843
Increase (decrease) before equity in earnings of subsidiaries		17,752			—			(19,035	)		35,073			1,714
Equity in earnings of subsidiaries		—			(35,335	)		36,787			(1,452	)		—
Net income (loss)	$	17,752		$	(35,335	)	$	17,752		$	33,621		$	1,714

23

United Components, Inc.

Notes to Condensed Financial Statements (unaudited)

NOTE N (continued)

Combining Condensed Income Statement
January 1 to June 20, 2003 (unaudited)
(in thousands)

	Predecessor										Non-
	Combined			Eliminations			UCI	Guarantor			Guarantor
Net sales	$	452,467		$	(6,912	)	$	$	405,003		$	54,376
Cost of sales		378,211			(6,912	)			344,218			40,905
Gross profit		74,256							60,785			13,471
Operating expenses
Selling and warehousing		33,585							30,216			3,369
General and administrative		18,928							10,526			8,402
Amortization of intangible assets		60							60
Operating income		21,683							19,983			1,700
Other income (expense)
Interest income		1,712							1,449			263
Interest expense		(245	)						73			(318	)
Management fee expense		(18	)						9			(27	)
Miscellaneous, net		(408	)						(7	)		(401	)
Income before income taxes		22,724							21,507			1,217
Income tax expense		942							493			449
Net income	$	21,782		$			$	$	21,014		$	768

24

United Components, Inc.

Notes to Condensed Financial Statements (unaudited)

NOTE N (continued)

Consolidating Condensed Statement of Cash Flows
Six months ended June 30, 2004 (unaudited)
(in thousands)

	UCI										Non-
	Consolidated			Eliminations	UCI			Guarantor			Guarantor
Net cash provided by operating activities	$	49,650		$	$	38,943		$	9,194		$	1,513
Cash flows from investing activities:
Acquisition and related fees		(8,000	)			(8,000	)
Capital expenditures		(17,165	)			(110	)		(13,772	)		(3,283	)
Proceeds from sale of assets		184							80			104
Net cash used in investing activities		(24,981	)			(8,110	)		(13,692	)		(3,179	)
Cash flows from financing activities:
Debt repayments		(40,134	)			(40,000	)					(134	)
Issuance of debt		467										467
Other		(28	)			(28	)
Net cash used in financing activities		(39,695	)			(40,028	)					333
Effect of exchange rate changes on cash		(27	)									(27	)
Net decrease in cash and equivalents		(15,053	)			(9,195	)		(4,498	)		(1,360	)
Cash and cash equivalents at beginning of period		46,130				33,164			4,448			8,518
Cash and cash equivalents at end of period	$	31,077		$	$	23,969		$	(50	)	$	7,158

25

United Components, Inc.

Notes to Condensed Financial Statements (unaudited)

NOTE N (continued)

Combining Condensed Statement of Cash Flows
June 21 to June 30, 2003 (unaudited)
(in thousands)

	Predecessor										Non-
	Combined			Eliminations	UCI			Guarantor			Guarantor
Net cash provided by operating activities	$	6,963		$	$	1,477		$	3,806		$	1,680
Cash flows from investing activities:
Acquisition and related fees		(818,180	)			(818,180	)
Capital expenditures		(78	)						(48	)		(30	)
Proceeds from sale of assets
Net cash used in investing activities		(818,258	)			(818,180	)		(48	)		(30	)
Cash flows from financing activities:
Debt borrowings		585,110				585,000						110
Financing fees and debt issuance cost		(21,340	)			(21,340	)
Stockholder’s equity contribution		260,000				260,000
Dividends and transfers to UIS, Inc., net
Net cash provided by financing activities		823,770				823,660						110
Effect of exchange rate changes on cash		(236	)									(236	)
Net increase in cash and equivalents		12,239				6,957			3,758			1,524
Cash and cash equivalents at beginning of period		4,452							2,368			2,084
Cash and cash equivalents at end of period	$	16,691		$	$	6,957		$	6,126		$	3,608

26

United Components, Inc.

Notes to Condensed Financial Statements (unaudited)

NOTE N (continued)

Combining Condensed Statement of Cash Flows
January 1 to June 20, 2003 (unaudited)
(in thousands)

	Predecessor										Non-
	Combined			Eliminations		UCI		Guarantor			Guarantor
Net cash provided by operating activities	$	23,893		$	—	$	—	$	21,650		$	2,243
Cash flows from investing activities:
Capital expenditures		(21,388	)						(16,026	)		(5,362	)
Proceeds from sale of assets		215							34			181
Net cash used in investing activities		(21,173	)						(15,992	)		(5,181	)
Cash flows from financing activities:
Debt borrowings		(98	)									(98	)
Dividends and transfers to UIS, Inc., net		(28,033	)						(10,527	)		(17,506	)
Net cash used in financing activities		(28,131	)						(10,527	)		(17,604	)
Effect of exchange rate changes on cash		1,509										1,509
Net decrease in cash and equivalents		(23,902	)						(4,869	)		(19,033	)
Cash and cash equivalents at beginning of period		28,354							7,237			21,117
Cash and cash equivalents at end of period	$	4,452		$		$		$	2,368		$	2,084

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Sales.United Components, which we also refer to as the Company, is 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 and cooling systems, engine management systems, driveline components and lighting systems to the automotive, trucking, marine, mining, construction, agricultural and industrial vehicle markets. We estimate that about 80% of our net sales in 2003 were made in the aftermarket, to a customer base that includes some of the largest and fastest growing companies servicing the aftermarket. The aftermarket has grown at an annual rate of approximately 4.1% from 1997 to 2003. We believe it will continue to grow, at least in the near term. We believe we are well positioned to participate in that growth.

We believe 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, and we believe that we offer one of the most comprehensive lines of products in the vehicle replacement parts market, consisting of approximately 60,000 part numbers. We believe our breadth of product offering is a key competitive advantage. 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. We have established a network of manufacturing facilities, distribution centers and offices located in the United States, Europe, Mexico and China, with a global work force of approximately 6,900 employees as of June 30, 2004.

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 number of miles driven per year, the average age of the vehicle, 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 non-discretionary nature of vehicle maintenance and repair.

However, it is also important to note that in 2003 and 2002, 23% of our revenues were derived from our business with AutoZone, and our failure to maintain a healthy relationship with AutoZone would result in a significant decrease in our net sales. Even if we maintain our relationship, 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 sales to this customer could have a material impact on our financial position and results of operations. Any changes could, for example, result in an increase in the time it takes for us to record net sales and collect on receivables. AutoZone has publicly announced its intent to transition its suppliers to a program where suppliers are paid when an AutoZone customer purchases the supplier’s product.

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 including fringe benefits, supplies, warranty costs, utilities, freight, depreciation, insurance, pension and postretirement benefits, 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 steel and labor.

In 2004, global demand for steel is high and is resulting in supplier-imposed surcharges for this raw material. While we have been and expect to continue to be able to obtain sufficient quantities to satisfy our needs, we have been required to pay significantly higher prices for the material. As a result, the Company is in the process of implementing price increases on its products with high steel content in order to reflect this cost increase.

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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.

Management intends to increase promotional spending to selectively expand the Company’s customer base and products. Management also intends to leverage the fixed portion of sales and warehousing as sales increase. In the long run, management thinks that sales and warehousing expense as a percentage of sales is a key measure and is working to reduce this percentage.

General and Administrative Expenses. General and administrative expenses primarily include executive, accounting and legal personnel salaries and fringe benefits, professional fees, pension benefits, insurance, provision for doubtful accounts and rent.

Cash Generation.Net cash from operating activities was $49.7 million. Capital expenditures were $17.2 million. The net cash generated from these activities was $32.5 million.

Critical Accounting Policies

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 to us, because they are important to our financial statements, and they require our most complex judgments in the preparation of the financial statements.

Accounts receivable. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. These allowances are based on a combination of an aging analysis and our analyses of our history of write-offs. In addition, we evaluate allowance requirements if the financial condition of a particular customer were to deteriorate.

Inventory. We record inventory at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) 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 upon transfer of title of product, which occurs upon shipment to the customer. Because we enter into sales rebate programs with some of our customers that require us to make rebate payments to them from time to time, we estimate amounts due under these sales rebate programs at the time of shipment. Net sales relating to any particular shipment are based upon the amount invoiced for the shipped goods less estimated future rebate payments. These estimates are based upon our historical experience. Revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known. Additionally, we enter into formal and informal agreements with our customers that provide for sales discounts, marketing allowances, provided return allowances and performance incentives. The discounts, allowances and incentives are expensed as a reduction to sales, based on estimates of the criteria that give rise to the discount or allowance, 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.

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Impairment of intangible assets and tangible fixed assets. Our intangible assets and tangible fixed assets are held at historical cost, net of depreciation and amortization, less any provision for impairment. We periodically evaluate the realizability of our intangible or tangible fixed assets. We also perform a review of these assets if an indicator of impairment exists, such as an operating loss or cash outflow from operating activities or a significant adverse change in the business or market place. Estimates of future cash flows used to test the asset for impairment are based on current operating projections extended to the useful life of the asset group and are, by their nature, subjective.

In accordance with SFAS 142, we stopped amortizing goodwill on January 1, 2002. In lieu of amortization, we perform impairment analysis of our goodwill. Based on this analysis in the fourth quarters of 2003 and 2002, we have concluded that there has not been an impairment. If we determine that goodwill has been impaired, we will record the impairment as a charge against income. Estimates of future discounted cash flows used in the impairment test are based on current operating projections, which are by their nature subjective.

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 from actual results for each assumption, 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 from actual results for each assumption, will affect the amount of expense we recognize in future periods. A one percent increase or decrease in the assumed health care cost trends would result in an approximate $40,000 annual increase or decrease in annual postretirement health costs.

Insurance Reserves. Prior to the Acquisition, the Company had insurance under UIS’s master policies for group, worker’s compensation, automobile, product and general liability. These policies were subject to retrospective rating adjustments for which we were responsible. These adjustments were predicated upon paid losses, reserves and expenses. The projections involved in this estimate were subject to substantial uncertainty because of several unpredictable factors, including actual claims experience, regulatory changes, litigation trends and changes in inflation.

As of the June 20, 2003 Acquisition, the Company is no longer covered by the UIS master insurance policies. As of that date, the Company has purchased insurance, which does not include retrospective rating adjustments but does include high deductibles for which the Company is responsible. Consequently, the Company is subject to the same substantial uncertainties as those described in the preceding paragraph. Unpaid estimated losses, for which the Company is responsible, are recorded in accrued expenses in the June 30, 2004 and December 31, 2003 balance sheets.

Environmental Expenditures. Our aggregate expenditures (both capital and operating) for compliance with laws and regulations related to the protection of the environment were approximately $1.0 million in 2003, $0.8 million in 2002 and $0.7 million in 2001. The majority of our environmental expenditures relate to the proper disposal of environmentally sensitive waste. Management does not expect this disposal cost to change significantly in the near term, other than for volume fluctuations. Also, management does not expect capital spending on environmental matters to increase materially over the near term; however, changes in environmental regulations, or the outcome of litigation, could result in additional requirements that could necessitate increased spending.

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Results of Operations

The following table was derived from the United Components, Inc. consolidated income statements for the 2004 periods presented and from the United Components, Inc. consolidated and the Predecessor Company combined income statements for the 2003 periods. To enable meaningful comparisons, the consolidated results of United Components, Inc., after the June 20, 2003 Acquisition, and the combined results of the Predecessor Company, before the June 20, 2003 Acquisition, have been combined. The amounts are presented in millions of dollars.

	Three Months						Six Months
	Ended						Ended
	June 30,						June 30,
	2004			2003			2004			2003
Net sales	$	274.0		$	242.3		$	530.8		$	478.6
Cost of Sales		214.2			214.3			415.4			401.6
Gross profit		59.8			28.0			115.4			77.0
Operating expenses
Selling and warehousing		19.3			17.7			38.4			35.8
General and administrative		12.1			12.1			24.2			20.4
Amortization of intangible assets		1.9			0.2			3.7			0.2
Operating income		26.5			(2.0	)		49.1			20.6
Interest, net		(9.0	)		(3.2	)		(18.6	)		(2.4	)
Management fee expense		(0.5	)		(0.1	)		(1.0	)		(0.1	)
Miscellaneous, net		—			(0.1	)		0.1			(0.3	)
Income before income taxes		17.0			(5.4	)		29.6			17.8
Income taxes		6.8			(1.9	)		11.8			(0.9	)
Net income	$	10.2		$	(3.5	)	$	17.8		$	18.7
Pro forma net income, adjusted only for change in tax filing status (1)	$	10.2		$	(3.3	)	$	17.8		$	11.2

(1) Prior to the Acquisition, the subsidiaries of UIS that we acquired operated as S corporations for Federal and state income tax purposes. The historical combined financial statements do not include a provision for Federal and certain state income taxes for such periods. A provision for state income taxes has been made for those states not recognizing S corporation status. Pro forma net income has been computed as if we had been fully subject to Federal and state income taxes based on the tax laws in effect during the respective periods. See Notes B and C to the financial statements.

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Three Months Ended June 30, 2004 Compared with the Three Months Ended June 30, 2003

Net sales. Net sales increased $31.7 million, or 13.1%, from $242.3 million in the 2003 quarter to $274 million in the 2004 quarter. The increase was volume driven, with increases in all market channels.

Cost of sales.Cost of sales was $214.2 million in the 2004 quarter compared to $214.3 million in the 2003 quarter. The 2004 amount includes the cost associated with the higher 2004 volume. The 2003 amount includes $19.8 million of one-time cost adjustments. Both quarters were adversely affected by non-cash Acquisition-related charges, which totaled $1 million in the 2004 quarter and $2.9 million in the 2003 quarter.

The aforementioned $19.8 million of one-time adjustments in 2003 include: inventory valuation adjustments — ($12.3 million); provisions for environmental issues — ($4.6 million), and provisions for patent disputes, product line relocations, and costs relating to the upgrade of the Albion, Illinois manufacturing facility — ($2.9 million).

The aforementioned non-cash Acquisition-related charges include: (i) $2.6 million of cost in the 2003 quarter, due to the sale of inventory that was written-up above cost to market, as part of the allocation of the Acquisition purchase price; and (ii) higher depreciation expense of $1 million in the 2004 quarter and $0.3 million in the 2003 quarter resulting from the Acquisition-related step-up of property, plant and equipment. The higher depreciation will continue in the long-term. The additional cost of selling the stepped-up inventory on-hand at the Acquisition date stopped adversely affecting results in the first quarter of 2004 when the last of such inventory was sold.

Excluding the $19.8 million of one-time adjustments and the $2.6 million of Acquisition-related expense resulting from the sale of the written-up inventory, gross profit in the 2003 quarter would have been $50.4 million, or 20.8% of sales. This compares to $59.8 million, or 21.8%, in the 2004 quarter. The one percentage point increase in gross margin percent in 2004 is due to gains in manufacturing efficiency, procurement savings, and increased sales volume. The improvement over the second quarter of 2003 would have been larger if not for the adverse effect on 2004 of $0.7 million more depreciation that resulted from the Acquisition-related step-up of property, plant and equipment. The additional $0.7 million of Acquisition-related depreciation expense reduced the second quarter 2004 gross margin percentage by 0.3%.

Selling and warehousing expenses. Selling and warehousing expenses of $19.3 million for the 2004 quarter were $1.6 million higher than the 2003 quarter. In the 2004 quarter, this cost was 7.0% of sales compared to 7.3% in the 2003 quarter.

General and administrative expenses. General and administrative expenses for the 2004 quarter were $12.1 million compared to $12.1 million in the 2003 quarter. Expense for the second quarter of 2003 includes a $1.9 million higher provision for bad debt expense. Excluding this expense from the 2003 quarter, general and administrative expense was $1.9 million, or 18.6%, higher in the second quarter of 2004 than in the 2003 second quarter. This increase is due to (i) the higher cost of operating as a stand-alone company after the Acquisition; and (ii) the Company’s investment in processes and management talent necessary to drive improvements in future operational efficiency.

Interest, net. Net interest expense increased from $3.2 million in the 2003 quarter to $9 million in the 2004 quarter. The $5.8 million increase includes $5 million more of interest expense on Acquisition-related debt, and $0.8 million lower interest income on loans to the Predecessor Company’s previous owner, which were canceled in connection with the Acquisition.

Income taxes. The change in income taxes is driven by changes in pre-tax income plus the use of a 40.7% incremental effective rate after the Acquisition in 2003. The higher rate is the result of the Company’s transition from S corporation filing status before the Acquisition to C corporation filing status after the Acquisition.

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Net Income. Due to the factors described above, net income increased $13.7 million from a $3.5 million net loss in the 2003 quarter to $10.2 million of net income in the 2004 quarter.

Six Months Ended June 30, 2004 Compared with the Six Months Ended June 30, 2003

Net sales. Net sales increased $52.2 million, or 10.9%, from $478.6 million in the first half of 2003 to $530.8 million in the first half of 2004. The increase was volume driven, with increases in all market channels.

Cost of sales.Cost of sales was $415.4 million in the first half of 2004 compared to $401.6 million in the 2003 first half. The 2004 amount includes the cost associated with the higher 2004 sales volume. The 2003 amount includes $21.3 million of one-time cost adjustments. Both periods were adversely affected by non-cash Acquisition-related charges, which totaled $3 million in the first half of 2004 and $2.9 million in the first half of 2003.

The aforementioned $21.3 million one-time adjustments in 2003 include: inventory valuation adjustments — ($12.6 million); provisions for environmental issues — ($4.6 million), and provisions for patent disputes, product line relocations, costs relating to the upgrade of the Albion, Illinois manufacturing facility, and cost associated with the consolidation of our European filtration manufacturing operations — ($4.1 million).

The aforementioned non-cash Acquisition-related charges include; (i) cost of $0.5 million in the first half of 2004 and $2.6 million in the first half of 2003, due to the sale of inventory that was written-up above cost to market value, as part of the allocation of the Acquisition purchase price: and (ii) higher depreciation expense of $2.5 million in the first half of 2004 and $0.3 million in the first half of 2003 resulting from the Acquisition-related step-up of property, plant and equipment. The higher depreciation expense will continue in the long-term. All of the additional cost of selling the stepped-up inventory on-hand at the Acquisition date was realized in full by the end of first quarter of 2004.

Excluding the $0.5 million of non-cash Acquisition-related costs resulting from the sale of the written-up inventory, gross profit for the first half of 2004 would have been $115.9 million, or 21.8% of sales. Excluding the $21.3 of million one-time adjustments and the $2.6 million of non-cash Acquisition-related costs resulting from the sale of the written-up inventory, gross profit in the first half of 2003 would have been $100.9 million, or 21.1% of sales. The 0.7% improvement in gross margin percentage in 2004 is due to gains in manufacturing efficiency, procurement savings, and increased sales volume. The 0.7% improvement in 2004 would have been larger if not for the adverse effect on 2004 of $2.2 million more depreciation that resulted from the Acquisition-related step-up of property, plant and equipment. The additional $2.2 million of Acquisition-related depreciation expense reduced the 2004 gross margin percentage by 0.4%.

Selling and warehousing expenses. Selling and warehousing expenses of $38.4 million for the first half of 2004 are $2.6 million higher than the first half of 2003. In the 2004 six month period, this cost was 7.2% of sales compared to 7.5% in the first half of 2003.

General and administrative expenses. General and administrative expenses for the first half of 2004 were $24.2 million compared to $20.4 million in the first half of 2003. The 2003 six month period includes a $1.6 million higher provision for bad debt expense. Excluding this expense, general and administrative expense is $5.4 million higher in the first half of 2004 than in the first half of 2003. This increase was due to (i) the higher cost of operating as a stand-alone company after the Acquisition; and (ii) the Company’s investment in processes and management talent necessary to drive improvements in future operational efficiency.

Interest, net. Net interest expense increased from $2.4 million in the first half of 2003 to $18.6 million in the first half of 2004. The $16.2 million increase included: (i) $0.6 million of accelerated write-off of debt issuance costs due to voluntary prepayments of debt; (ii) $13.9 million of interest expense on Acquisition-related debt; and (iii) $1.7 million lower interest income on loans to the Predecessor Company’s previous owner, which were canceled in connection with the Acquisition.

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Income taxes. The change in income taxes is driven by changes in pre-tax income plus the use of a 40.7% incremental effective rate after the Acquisition in 2003. The higher rate is the result of the Company’s transition from S corporation filing status before the Acquisition to C corporation filing status after the Acquisition.

Net Income. Due to the factors described above, net income decreased $0.9 million from $18.7 million in the 2003 quarter to $17.8 million of net income in the 2004 quarter.

Liquidity and Capital Resources

At December 31, 2003, the Company had $46.1 million of cash and $528.3 million of debt outstanding. (The difference between this debt amount and the amount on the balance sheet is $6 million of unamortized debt issuance cost.) The Company’s December 31, 2003 debt included $297 million of senior credit facility term loans and its $230 million senior subordinated notes. On March 1, 2004, the Company made a voluntary prepayment of $40 million of term loan borrowings. The Company funded this $40 million prepayment with cash generated from operations. At June 30, 2004, the Company had $31.1 million of cash and $488.6 million of debt outstanding (before netting unamortized debt issuance cost).

At the $488.6 million debt level, annual interest expense, including amortization of deferred financing costs and debt issuance cost, is approximately $35.4 million at June 30, 2004 borrowing rates. An increase in the interest rate of 0.25% in the variable interest rate would have increased the annual interest cost by $0.4 million. The Company’s significant debt service obligations could, under certain circumstances, have material consequences.

The Company’s primary source of liquidity is cash flow from operations and borrowings under its $75 million revolving credit facility. Borrowings under the revolving credit facility are available to fund the Company’s working capital requirements, capital expenditures and other general corporate purposes. At June 30, 2004 there were no outstanding revolving credit borrowings; however, $3.4 million of revolving credit borrowing capacity has been used to support outstanding letters of credit.

On May 27, 2004, the Company amended its credit agreement to permit sales of and liens on receivables which are being sold pursuant to factoring arrangements, subject to certain limitations. The Company intends to factor its receivables when it is economically beneficial to do so. The Company is in the process of establishing a factoring relationship with one of its customers, which will result in the sale of approximately $6 million of receivables.

Because of voluntary prepayments, the Company does not have any required repayments of its senior credit facility term loans until December 2005. The $230 million senior subordinated notes are due in 2013. The Company’s ability to make scheduled payments of principal on, or to pay interest on, or to refinance, its indebtedness or to fund planned capital expenditures will depend on its ability to generate cash in the future. Such cash generation is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond its control.

Based on the current level of operations, the Company believes that cash flow from operations and available cash, together with available borrowings under its revolving credit facility, will be adequate to meet liquidity needs and fund planned capital expenditures for the next two years. The Company may, however, 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, to meet liquidity needs in later years. If it is determined that refinancing is necessary, and the Company is unable to secure such financing on acceptable terms, then the Company may have insufficient liquidity to carry on its operations and meet its obligations at such time.

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The Company can give no assurance that its business will generate sufficient cash flow from operations, that any revenue growth or operating improvements will be realized, or that future borrowings will be available under its revolving credit facilities in an amount sufficient to enable it to service its indebtedness or to fund other liquidity needs. In addition, the Company can give no assurance that it will be able to refinance any of its indebtedness, including its senior credit facilities and the senior subordinated notes, on commercially reasonable terms or at all.

Net cash provided by operating activities

Net cash provided by operating activities for the six months ended June 30, 2004 and 2003 was $49.7 million and $30.9 million, respectively. The $18.8 million increase in net cash provided by operating activities in the first half of 2004 as compared to the first half of 2003 was attributable primarily to higher profit before depreciation and amortization, lower uses to fund working capital, and reductions in long-term deferred tax assets. Significant 2004 sales increases resulted in the need to fund $39.1 million of accounts receivable.

Net cash used in investing activities

Historically, net cash used in investing activities has been for capital expenditures, offset by proceeds from the disposition of property, plant and equipment. Capital expenditures for the six months ended June 30, 2004 and 2003 were $17.2 million and $21.5 million, respectively. Approximately $7.8 and $6.6 million of the 2004 and 2003 six month capital expenditures were related to the long-term capital investment plan to increase capacity and reduce cost at our filtration facilities. Capital expenditures for the 2003 full year were $43.4 million. For the full year 2004, capital expenditures are expected to be approximately $43 to $48 million.

Impact of the Acquisition and Related Financing Transactions

The Company incurred significant indebtedness in connection with the Acquisition. Accordingly, our interest expense is higher than it was prior to the Acquisition. As a result of the Acquisition, our assets and liabilities were adjusted to their estimated fair value as of the closing of the Acquisition. The excess of the total purchase price over the value of our net assets at closing of the Acquisition was allocated to goodwill and other intangible assets. These long-lived assets are subject to annual impairment review. See Note B to the Condensed Financial Statements for information regarding the allocation of the Acquisition purchase price and the impact of the Acquisition and the financing thereof.

Recent Accounting Pronouncements

In December 2003, SFAS No. 132R, “Employers’ Disclosure about Pensions and Other Postretirement Benefits” was issued. SFAS No. 132R requires additional disclosures about defined benefit pension plans and other postretirement benefit plans. The standard requires, among other things, additional disclosures about the assets held in employer sponsored pension plans, disclosures relating to plan asset investment policy and practices, disclosure of expected contributions to be made to the plans and expected benefit payments to be made by the plans. Annual disclosures applicable to the Company’s U.S. pension and postretirement plans were required to be made in its financial statements for the year ended December 31, 2003. The Company has adopted this pronouncement as of December 31, 2003 for all of its U.S. plans. Annual disclosures relating to its non-U.S. plans will be adopted for the year ending December 31, 2004. Interim disclosures relating to its non-U.S. plans will be adopted for the year ending December 31, 2005.

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In March 2004, the FASB’s Emerging Issues Task Force concluded its discussion of Issue No. 03-01,The Meaning of Other-Than-Temporary Impairments and Its Application to Certain Investments(“EITF 03-01”). EITF 03-01 provides guidance regarding the determination of when an impairment of debt and marketable equity securities and investments, that are accounted for under the cost method, should be considered other-than-temporary and recognized in earnings. EITF 03-01 also requires annual disclosures of certain quantitative and qualitative factors of debt and marketable equity securities that are classified as available-for-sale or held-to-maturity and are in an unrealized loss position at the balance sheet date, but for which an other-than-temporary impairment has not been recognized. The disclosure requirements of EITF 03-01 were effective December 31, 2003 and had no effect on the Company’s financial statements. The accounting guidance of EITF 03-01 will be effective in the third quarter of 2004 and is not expected to have a material effect on the Company’s financial statements.

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Item 3. 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 exposure. 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, Spanish peseta, Canadian dollar and British pound. The results of operations of our foreign subsidiaries are translated into U.S. dollars at the average exchange rates for each relevant period. 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. During 2003, approximately 12% of our business was transacted in local currencies of foreign countries. While our international results of operations as measured in dollars are subject to foreign exchange fluctuations, we do not consider the related risk to be material to our financial condition or results of operations. If the exchange rate between the foreign currencies and the U.S. dollar were to decrease by 10%, our annual net income would have been lower by $0.3 million in 2003 due to the reduction in reported results from our foreign operations.

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 as other comprehensive income on our statement of shareholder’s equity. In the past, the vehicle parts businesses of UIS have attempted to manage, and in the future we expect to continue to manage, this exposure primarily by balancing monetary assets and liabilities and maintaining cash positions only at levels necessary for operating purposes in those countries.

Currency transaction exposure.Currency transaction exposure arises where actual sales and purchases are made by a business in a currency other than its own functional currency. The majority of our businesses source raw materials and sell their products within their local markets’ currencies and, therefore, have limited transaction exposure.

In the future, we expect to continue to monitor our transaction exposure to currency rate changes and 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 June 30, 2004, we had no outstanding foreign currency contracts. We do not engage in any speculative activities.

Interest rate risk

Borrowings under our senior credit facilities bear variable rates of interest. Under our senior credit facilities, we are required to provide interest rate protection on approximately $118 million of our senior term loan facilities borrowings. In August 2003, we entered into an interest rate swap for $118 million. This swap effectively converts $118 million of variable rate debt to fixed rate debt for the two years ended August 2005. The variable component of the interest rate on borrowings under the senior credit facilities is based on LIBOR. Under the swap, we will pay 1.94% and will receive the then-current LIBOR on $118 million of debt.

We utilize, and we will continue to utilize, sensitivity analyses to assess the potential effect of our variable rate debt. If the variable interest rate were to increase by 0.25% per annum, the net impact would be a decrease of approximately $0.2 million on our annual net income and cash flow.

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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 not to engage in speculative transactions. Our policies with respect to the major areas of our treasury activity are set forth above.

Item 4. 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 SEC Rule 13a-15(b), the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the quarter covered by this report. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the quarter covered by this report, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

There has been no change in the Company’s internal controls over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

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PART II
OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

Exhibit 31.1	Certification of Periodic Report by the Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
Exhibit 31.2	Certification of Periodic Report by the Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
Exhibit 32	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.*

* 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.

(b) Reports on Form 8-K filed during the quarter ended June 30, 2004.

The Company filed a current report on Form 8-K dated May 11, 2004 with respect to announcing financial results for the quarter ended March 31, 2004 (Items 7 and 12).

The Company filed a current report on Form 8-K dated June 8, 2004 with respect to an amendment to its credit facility on May 27, 2004 (Items 5 and 7).

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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.
Date: August 13, 2004	By:	/s/ Charles T. Dickson
	Name:	Charles T. Dickson
	Title:	Chief Financial Officer

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