UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2009
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: 333-147178
UCI HOLDCO, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 16-1760186 | |
(State or Other Jurisdiction of | (I.R.S. Employer Identification No.) | |
Incorporation or Organization) | ||
14601 Highway 41 North | ||
Evansville, Indiana | ||
(Address of Principal Executive | 47725 | |
Offices) | (Zip Code) |
(812) 867-4156
(Registrant’s Telephone Number, Including Area Code)
(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 Noþ
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yeso Noo
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 filerþ | 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 Exchange Act). Yeso Noþ
The registrant had 2,860,560 shares of its $0.01 par value common stock outstanding as of May 14, 2009, 225,660 of which were held by non-affiliates.
UCI Holdco, Inc.
Index
Page | ||||
Part I FINANCIAL INFORMATION | ||||
Item 1. Financial Statements (unaudited) | 3 | |||
Condensed consolidated balance sheets — March 31, 2009 and December 31, 2008 | 3 | |||
Condensed consolidated statements of operations — Three months ended March 31, 2009 and 2008 | 4 | |||
Condensed consolidated statements of cash flows — Three months ended March 31, 2009 and 2008 | 5 | |||
Condensed consolidated statements of changes in shareholders’ equity (deficit) — Three months ended March 31, 2009 and 2008 | 6 | |||
Notes to condensed consolidated financial statements | 7 | |||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 18 | |||
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 31 | |||
Item 4. Controls and Procedures | 32 | |||
Part II OTHER INFORMATION | ||||
Item 1. Legal Proceedings | 33 | |||
Item 1A. Risk Factors | 33 | |||
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 33 | |||
Item 3. Default Upon Senior Securities | 33 | |||
Item 4. Submission of Matters to Vote of Security Holders | 33 | |||
Item 5. Other Information | 33 | |||
Item 6. Exhibits | 33 | |||
Signatures | 34 | |||
Exhibits |
2
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
UCI Holdco, Inc.
Condensed Consolidated Balance Sheets
(in thousands)
(in thousands)
March 31, | December 31, | |||||||
2009 | 2008 | |||||||
(unaudited) | (audited) | |||||||
Assets | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 73,045 | $ | 46,655 | ||||
Accounts receivable, net | 253,741 | 261,624 | ||||||
Inventories, net | 146,838 | 159,444 | ||||||
Deferred tax assets | 32,246 | 30,378 | ||||||
Other current assets | 19,463 | 19,452 | ||||||
Total current assets | 525,333 | 517,553 | ||||||
Property, plant and equipment, net | 163,953 | 167,906 | ||||||
Goodwill | 241,461 | 241,461 | ||||||
Other intangible assets, net | 72,470 | 74,606 | ||||||
Deferred financing costs, net | 3,977 | 4,307 | ||||||
Other long-term assets | 1,536 | 1,823 | ||||||
Total assets | $ | 1,008,730 | $ | 1,007,656 | ||||
Liabilities and shareholders’ deficit | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | 109,677 | $ | 104,416 | ||||
Short-term borrowings | 6,595 | 25,199 | ||||||
Current maturities of long-term debt | 384 | 422 | ||||||
Accrued expenses and other current liabilities | 100,291 | 88,983 | ||||||
Total current liabilities | 216,947 | 219,020 | ||||||
Long-term debt, less current maturities | 715,020 | 707,264 | ||||||
Pension and other postretirement liabilities | 80,649 | 79,832 | ||||||
Deferred tax liabilities | 4,489 | 4,000 | ||||||
Other long-term liabilities | 2,760 | 2,540 | ||||||
Total liabilities | 1,019,865 | 1,012,656 | ||||||
Contingencies – Note I | ||||||||
Shareholders’ deficit | ||||||||
UCI Holdco, Inc. shareholders’ deficit | ||||||||
Common stock | 29 | 29 | ||||||
Additional paid in capital | 279,306 | 279,141 | ||||||
Retained deficit | (251,414 | ) | (247,060 | ) | ||||
Accumulated other comprehensive loss | (41,242 | ) | (39,600 | ) | ||||
Total UCI Holdco, Inc. shareholders’ deficit | (13,321 | ) | (7,490 | ) | ||||
Noncontrolling interest | 2,186 | 2,490 | ||||||
Total shareholders’ deficit | (11,135 | ) | (5,000 | ) | ||||
Total liabilities and shareholders’ deficit | $ | 1,008,730 | $ | 1,007,656 | ||||
The accompanying notes are an integral part of these statements.
3
UCI Holdco, Inc.
Condensed Consolidated Statements of Operations(unaudited)
(in thousands)
(in thousands)
Three Months ended March 31, | ||||||||
2009 | 2008 | |||||||
Net sales | $ | 219,862 | $ | 229,290 | ||||
Cost of sales | 179,598 | 178,230 | ||||||
Gross profit | 40,264 | 51,060 | ||||||
Operating expense | ||||||||
Selling and warehousing | (14,298 | ) | (15,505 | ) | ||||
General and administrative | (13,405 | ) | (13,201 | ) | ||||
Amortization of acquired intangible assets | (1,480 | ) | (1,593 | ) | ||||
Costs of integration of water pump operations (Note B) | (205 | ) | (363 | ) | ||||
Operating income | 10,876 | 20,398 | ||||||
Other expense | ||||||||
Interest expense, net | (15,704 | ) | (17,566 | ) | ||||
Management fee expense | (500 | ) | (500 | ) | ||||
Miscellaneous, net | (1,485 | ) | (527 | ) | ||||
(Loss) income before income taxes | (6,813 | ) | 1,805 | |||||
Income tax (expense) benefit | 2,155 | (922 | ) | |||||
Net (loss) income | (4,658 | ) | 883 | |||||
Less: Loss attributable to noncontrolling interest | (304 | ) | (29 | ) | ||||
Net (loss) income attributable to UCI Holdco, Inc. | $ | (4,354 | ) | $ | 912 | |||
The accompanying notes are an integral part of these statements.
4
UCI Holdco, Inc.
Condensed Consolidated Statements of Cash Flows(unaudited)
(in thousands)
(in thousands)
Three Months ended March 31, | ||||||||
2009 | 2008 | |||||||
Cash flows from operating activities | ||||||||
Net (loss) income attributable to UCI Holdco, Inc. | $ | (4,354 | ) | $ | 912 | |||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization of other intangible assets | 9,439 | 9,072 | ||||||
Amortization of deferred financing costs and debt discount | 787 | 825 | ||||||
Non-cash interest expense on Holdco Notes | 7,321 | 8,281 | ||||||
Deferred income taxes | (1,379 | ) | 552 | |||||
Other non-cash, net | 355 | 502 | ||||||
Changes in operating assets and liabilities | ||||||||
Accounts receivable | 7,061 | 1,195 | ||||||
Inventories | 11,735 | (6,715 | ) | |||||
Other current assets | (198 | ) | 5,167 | |||||
Accounts payable | 5,536 | (4,189 | ) | |||||
Accrued expenses and other current liabilities | 11,608 | (9,740 | ) | |||||
Other long-term assets | 287 | 7 | ||||||
Other long-term liabilities | 1,038 | 364 | ||||||
Net cash provided by operating activities | 49,236 | 6,233 | ||||||
Cash flows from investing activities | ||||||||
Capital expenditures | (4,018 | ) | (7,886 | ) | ||||
Proceeds from sale of other property, plant and equipment | 24 | 58 | ||||||
Net cash used in investing activities | (3,994 | ) | (7,828 | ) | ||||
Cash flows from financing activities | ||||||||
Issuances of debt | 3,672 | 347 | ||||||
Debt repayments | (22,391 | ) | (18,256 | ) | ||||
Net cash used in financing activities | (18,719 | ) | (17,909 | ) | ||||
Effect of currency exchange rate changes on cash | (133 | ) | 109 | |||||
Net increase (decrease) in cash and cash equivalents | 26,390 | (19,395 | ) | |||||
Cash and cash equivalents at beginning of year | 46,655 | 42,025 | ||||||
Cash and cash equivalents at end of period | $ | 73,045 | $ | 22,630 | ||||
The accompanying notes are an integral part of these statements.
5
UCI Holdco, Inc.
Condensed Consolidated Statements of Changes in Shareholders’ Equity (Deficit)(unaudited)
(in thousands)
(in thousands)
UCI Holdco, Inc. Shareholders’ Deficit | ||||||||||||||||||||||||||||
Accumulated | Total | |||||||||||||||||||||||||||
Additional | Other | Shareholders’ | ||||||||||||||||||||||||||
Common | Paid In | Retained | Comprehensive | Noncontrolling | Equity | Comprehensive | ||||||||||||||||||||||
Stock | Capital | Deficit | Income (Loss) | Interest | (Deficit) | Income (Loss) | ||||||||||||||||||||||
Balance at January 1, 2008 | $ | 28 | $ | 278,306 | $ | (235,452 | ) | $ | 6,762 | $ | 3,308 | $ | 52,952 | |||||||||||||||
Recognition of stock based compensation expense | 230 | 230 | ||||||||||||||||||||||||||
Comprehensive income | ||||||||||||||||||||||||||||
Net income (loss) | 912 | (29 | ) | 883 | $ | 883 | ||||||||||||||||||||||
Other comprehensive income | ||||||||||||||||||||||||||||
Interest rate swaps (after $130 of income taxes) | (208 | ) | (208 | ) | (208 | ) | ||||||||||||||||||||||
Foreign currency adjustment (after $5 of income taxes) | 1,009 | 1,009 | 1,009 | |||||||||||||||||||||||||
Total comprehensive income | $ | 1,684 | ||||||||||||||||||||||||||
Balance at March 31, 2008 | $ | 28 | $ | 278,536 | $ | (234,540 | ) | $ | 7,563 | $ | 3,279 | $ | 54,866 | |||||||||||||||
Balance at January 1, 2009 | $ | 29 | $ | 279,141 | $ | (247,060 | ) | $ | (39,600 | ) | $ | 2,490 | $ | (5,000 | ) | |||||||||||||
Recognition of stock based compensation expense | 165 | 165 | ||||||||||||||||||||||||||
Comprehensive income | ||||||||||||||||||||||||||||
Net loss | (4,354 | ) | (304 | ) | (4,658 | ) | $ | (4,658 | ) | |||||||||||||||||||
Other comprehensive loss | ||||||||||||||||||||||||||||
Foreign currency adjustment (after $(7) of income taxes) | (1,642 | ) | (1,642 | ) | (1,642 | ) | ||||||||||||||||||||||
Total comprehensive loss | $ | (6,300 | ) | |||||||||||||||||||||||||
Balance at March 31, 2009 | $ | 29 | $ | 279,306 | $ | (251,414 | ) | $ | (41,242 | ) | $ | 2,186 | $ | (11,135 | ) | |||||||||||||
The accompanying notes are an integral part of these statements.
6
UCI Holdco, Inc.
Notes to Condensed Consolidated Financial Statements(unaudited)
NOTE A — GENERAL AND BASIS OF FINANCIAL STATEMENT PRESENTATION
General
UCI Holdco, Inc. was incorporated on March 8, 2006 as a holding company for UCI Acquisition Holdings, Inc. (“UCI Acquisition”) and United Components, Inc. UCI Holdco, Inc. owns all of the common stock of United Components, Inc. through its wholly-owned subsidiary, UCI Acquisition. UCI Holdco, Inc., UCI Acquisition, and United Components, Inc. are corporations formed at the direction of The Carlyle Group (“Carlyle”). At March 31, 2009, affiliates of The Carlyle Group owned 90.9% of UCI Holdco, Inc.’s common stock, and the remainder was owned by certain current and former members of UCI Holdco, Inc.’s senior management and board of directors. The senior management and board of directors of UCI Holdco, Inc. are also the senior management and board of directors of United Components, Inc.
All operations of UCI Holdco, Inc. are conducted by United Components, Inc. United Components, Inc. operates in one business segment through its subsidiaries. United Components, Inc. manufactures and distributes vehicle parts primarily servicing the vehicle replacement parts market in North America and Europe.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of UCI Holdco, Inc., its wholly-owned subsidiaries and a 51% owned joint venture. All significant intercompany accounts and transactions have been eliminated. In these notes to the financial statements, the term “Holdco” refers to UCI Holdco, Inc. and its subsidiaries, as well as UCI Acquisition and its subsidiaries prior to the formation of UCI Holdco, Inc. The term “UCI” refers to United Components, Inc. without its subsidiaries.
The accompanying unaudited condensed consolidated 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, 2008 consolidated balance sheet has been derived from the audited financial statements included in Holdco’s annual report on Form 10-K for the year ended December 31, 2008. The financial statements at March 31, 2009 and for the three months ended March 31, 2009 and 2008 are unaudited. In the opinion of Holdco, these financial statements include all adjustments necessary for a fair presentation of the financial position and results of operations for such periods.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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. They also include estimates of cost accruals, environmental liabilities, warranty and other 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.
These financial statements should be read in conjunction with the financial statements and notes thereto included in Holdco’s annual report on Form 10-K for the year ended December 31, 2008.
Operating results for the three months ended March 31, 2009 are not necessarily indicative of the results that may be expected for the year ended December 31, 2009.
7
UCI Holdco, Inc.
Notes to Condensed Consolidated Financial Statements(unaudited)
Notes to Condensed Consolidated Financial Statements(unaudited)
NOTE B — COSTS OF INTEGRATION OF WATER PUMP OPERATIONS
In May 2006, Holdco acquired ASC Industries, Inc., (“ASC”) a manufacturer and distributor of water pumps. Before acquiring ASC, Holdco manufactured and distributed water pumps for all market channels. In 2006, Holdco began the process of integrating its pre-acquisition water pump operations with the water pump operations of ASC. By mid-2007, all domestic water pump manufacturing had been combined at ASC’s manufacturing facilities. Holdco’s pre-acquisition water pump facility was closed as of July 2007.
In the first quarters of 2009 and 2008, Holdco incurred $0.2 million and $0.2 million, respectively, of costs for the maintenance and security of the land and building that was used by Holdco’s pre-acquisition water pump operation. This land and building is held for sale. In the first quarter of 2008, Holdco also incurred $0.2 million of severance expense related to the water pump integration. These costs are reported in “Costs of integration of water pump operations” in the statements of operations.
NOTE C — SALES OF RECEIVABLES
Holdco has agreements to sell undivided interests in certain of its receivables with factoring companies, which in turn have the right to sell an undivided interest to a financial institution or other third party. Holdco enters into these agreements at its discretion as part of its overall cash management activities. Pursuant to these agreements, Holdco sold $60.0 million and $43.7 million of receivables during the three months ended March 31, 2009 and 2008, respectively.
If receivables had not been factored, $105.4 million and $80.1 million of additional receivables would have been outstanding at March 31, 2009 and December 31, 2008, respectively. Holdco retained no rights or interest, and has no obligations, with respect to the sold receivables. Holdco does not service the receivables after the sales.
The sales of receivables were accounted for as a sale 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 $1.5 million and $0.5 million in the three months ended March 31, 2009 and 2008, respectively. These costs are recorded in “Miscellaneous, net” in the statements of operations.
NOTE D — INVENTORIES
The components of inventory are as follows (in millions):
March 31, | December 31, | |||||||
2009 | 2008 | |||||||
Raw materials | $ | 49.3 | $ | 55.3 | ||||
Work in process | 34.2 | 34.6 | ||||||
Finished products | 78.3 | 84.4 | ||||||
Valuation reserves | (15.0 | ) | (14.9 | ) | ||||
$ | 146.8 | $ | 159.4 | |||||
8
UCI Holdco, Inc.
Notes to Condensed Consolidated Financial Statements(unaudited)
Notes to Condensed Consolidated Financial Statements(unaudited)
NOTE E — ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
“Accrued expenses and other current liabilities” consists of the following (in millions):
March 31, | December 31, | |||||||
2009 | 2008 | |||||||
Salaries and wages | $ | 4.0 | $ | 2.7 | ||||
Bonuses and profit sharing | 1.9 | 3.5 | ||||||
Vacation pay | 4.7 | 4.4 | ||||||
Product returns | 31.7 | 32.0 | ||||||
Rebates, credits and discounts due customers | 12.6 | 10.8 | ||||||
Insurance | 13.1 | 11.5 | ||||||
Taxes payable | 7.0 | 5.6 | ||||||
Interest | 8.4 | 3.3 | ||||||
Other | 16.9 | 15.2 | ||||||
$ | 100.3 | $ | 89.0 | |||||
NOTE F — PRODUCT RETURNS LIABILITY
The liability for product returns is included in “Accrued expenses and other current liabilities.” This liability includes accruals for parts returned under warranty and for parts returned because of customer excess quantities. Holdco provides warranties for its products’ performance. Warranty periods vary by part, but generally are either one year or indefinite. In addition to returns under warranty, Holdco allows its customers to return quantities of parts that the customer determines to be in excess of its current needs. Customer rights to return excess quantities vary by customer and by product category. Generally, these returns are contractually limited to 3% to 5% of the customer’s purchases in the preceding year. In some cases, Holdco does not have a contractual obligation to accept excess quantities. However, common practice for Holdco and the industry is to accept periodic returns of excess quantities from on-going customers. If a customer elects to cease purchasing from Holdco and change to another vendor, it is industry practice for the new vendor, and not Holdco, to accept any inventory returns resulting from the vendor change and any subsequent inventory returns.
Holdco routinely monitors returns data and adjusts estimates based on this data.
Changes in Holdco’s product returns accrual were as follows (in millions):
Three Months ended March 31, | ||||||||
2009 | 2008 | |||||||
Beginning of year | $ | 32.0 | $ | 28.1 | ||||
Cost of unsalvageable parts | (12.0 | ) | (12.0 | ) | ||||
Additional reductions to sales | 11.7 | 10.9 | ||||||
End of period | $ | 31.7 | $ | 27.0 | ||||
9
UCI Holdco, Inc.
Notes to Condensed Consolidated Financial Statements(unaudited)
Notes to Condensed Consolidated Financial Statements(unaudited)
NOTE G — PENSION
The following are the components of net periodic pension expense (in millions):
Three Months ended March 31, | ||||||||
2009 | 2008 | |||||||
Service cost | $ | 1.1 | $ | 1.3 | ||||
Interest cost | 3.3 | 3.2 | ||||||
Expected return on plan assets | (3.6 | ) | (3.7 | ) | ||||
Amortization of prior service cost and unrecognized loss | 0.1 | — | ||||||
Special termination benefits | — | 0.2 | ||||||
$ | 0.9 | $ | 1.0 | |||||
NOTE H — DEBT
Holdco’s debt is summarized as follows (in millions):
March 31, | December 31, | |||||||
2009 | 2008 | |||||||
UCI short-term borrowings | $ | 6.6 | $ | 5.2 | ||||
UCI revolving credit line borrowings | — | 20.0 | ||||||
UCI capital lease obligations | 1.2 | 1.2 | ||||||
UCI term loan | 190.0 | 190.0 | ||||||
Holdco floating rate senior PIK notes | 302.5 | 295.1 | ||||||
UCI senior subordinated notes | 230.0 | 230.0 | ||||||
Unamortized debt discount and debt issuance costs | (8.3 | ) | (8.6 | ) | ||||
722.0 | 732.9 | |||||||
Less: | ||||||||
UCI short-term borrowings | 6.6 | 5.2 | ||||||
UCI revolving credit line borrowings | — | 20.0 | ||||||
UCI current maturities | 0.4 | 0.4 | ||||||
Long-term debt | $ | 715.0 | $ | 707.3 | ||||
UCI’s senior credit facility — The senior credit facility includes a term loan and a revolving credit facility.
UCI term loan
In the three month period ended March 31, 2008, Holdco used cash on hand to voluntarily repay $10.0 million of its term loan. As a result of this voluntary early repayment, Holdco recorded $0.1 million of accelerated write-offs of deferred financing costs. This cost is included in “Interest expense, net” in the statements of operations. Because of previous early payments of the term loan, we do not have any required repayments until December 2011.
UCI revolving credit facility
UCI’s senior credit facility includes a $75 million revolving credit facility, which is available until June 2009. 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 UCI’s total $75.0 million revolving credit line, Lehman’s commitment is $9.5 million. In September 2008, UCI borrowed $20.0 million under its 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
10
UCI Holdco, Inc.
Notes to Condensed Consolidated Financial Statements(unaudited)
Notes to Condensed Consolidated Financial Statements(unaudited)
management based on the presumption that Lehman will not fund any of Lehman’s $9.5 million commitment under our revolving credit line.
At March 31, 2009 and December 31, 2008, revolving credit borrowings were $0.0 million and $20.0 million, respectively. $9.4 million of revolving credit borrowing capacity was used to support outstanding letters of credit at both dates. Excluding Lehman’s $9.5 million commitment, UCI had $56.1 million of unused borrowing capacity at March 31, 2009. We have evaluated our options with respect to the revolving credit facility. Given the current capital markets environment, we believe it is unlikely we will extend or replace the revolving credit facility upon its expiration in June 2009.
Holdco’s floating rate senior PIK notes — The Holdco Notes are due in 2013. Interest on the Holdco Notes will be paid by issuing new notes until December 2011. Therefore, the Holdco Notes will not affect our cash flow through 2011. Thereafter, all interest will be payable in cash. On March 15, 2012, and each quarter thereafter, Holdco is required to redeem for cash a portion of each note required to be redeemed to prevent the Holdco Notes from being treated as an applicable high yield discount obligation.
The Holdco Notes are unsecured and will rankpari passuwith any future senior indebtedness of Holdco and will rank senior to any future subordinated indebtedness of Holdco. The Holdco Notes are effectively subordinated to future secured indebtedness, to the extent of the value of the collateral securing such indebtedness. The Holdco Notes are effectively subordinated to all existing and future indebtedness and other liabilities of our subsidiaries (other than indebtedness or other liabilities owed to UCI Holdco, Inc., excluding its subsidiaries).
UCI’s senior subordinated notes (the “Notes”)— The Notes bear interest at 9 3/8%. Interest is payable semi-annually, in arrears on June 15 and December 15 of each year. The Notes are unsecured and rank equally in right of payment with any of UCI’s future senior subordinated indebtedness. They are subordinated to indebtedness and other liabilities of UCI’s subsidiaries that are not guarantors of the Notes. They are guaranteed on a full and unconditional and joint and several basis by UCI’s domestic subsidiaries. The Notes mature on June 15, 2013.
UCI’s short-term borrowings — At March 31, 2009, short-term borrowings included $1.2 million of a Spanish subsidiary’s notes payable and $5.4 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. 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.
NOTE I — CONTINGENCIES
Insurance Reserves
Holdco purchases insurance policies for workers’ compensation, automobile and product and general liability. These policies include high deductibles for which Holdco is responsible. These deductibles are estimated and recorded as expenses in the period incurred. Estimates of these expenses are updated each quarter, and 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 Holdco is responsible are included in the balance sheet in “Accrued expenses and other current liabilities.”
Environmental
Holdco is subject to a variety of federal, state, local and foreign environmental laws and regulations, including those governing the discharge of pollutants into the air or water, the management and disposal of hazardous substances or wastes, and the cleanup of contaminated sites. Holdco has been identified as a potentially responsible party for contamination at two sites. One of these sites is a former facility in Edison, New Jersey, where a state agency has ordered Holdco to continue with the monitoring and investigation of chlorinated solvent contamination. Holdco has informed the agency that this contamination was caused by
11
UCI Holdco, Inc.
Notes to Condensed Consolidated Financial Statements(unaudited)
Notes to Condensed Consolidated Financial Statements(unaudited)
another party at a neighboring facility and has initiated a lawsuit against that party for damages and to compel it to take responsibility for any further investigation or remediation. The lawsuit has proceeded to trial, which is expected to be completed in the second quarter of 2009, although it is uncertain when a decision will be rendered. The second site is a previously owned site in Solano County, California, where Holdco, at the request of the regional water board, is investigating and analyzing the nature and extent of the contamination and is conducting some remediation. Based on currently available information, management believes that the cost of the ultimate outcome of these environmental matters will not exceed the $1.8 million accrued at March 31, 2009 by a material amount, if at all. However, because all investigation and analysis has not yet been completed, and because of 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.
In addition to the two matters discussed above, Holdco has been named as a potentially responsible party at a site in Calvert City, Kentucky. Holdco estimates settlement costs at $0.1 million for this site. Also, Holdco is involved in regulated remediation at two of its manufacturing sites. The combined cost of the remediation is $0.6 million. The majority of the $0.7 million will be spent in the next two years. To date, the expenditures related to these three sites have been immaterial.
Antitrust Litigation
As of April 21, 2009, UCI and its wholly owned subsidiary, Champion Laboratories, Inc. (“Champion”), were named as two of multiple defendants in 23 complaints originally filed in the District of Connecticut, the District of New Jersey, the Middle District of Tennessee and the Northern District of Illinois alleging conspiracy violations of Section 1 of the Sherman Act, 15 U.S.C. § 1, related to aftermarket oil, air, fuel and transmission filters. Eight of the complaints also named The Carlyle Group as a defendant, but those plaintiffs voluntarily dismissed Carlyle from each of those actions without prejudice. Champion, but not UCI, was also named as a defendant in 13 virtually identical actions originally filed in the Northern and Southern Districts of Illinois, and the District of New Jersey. All of these complaints are styled as putative class actions on behalf of all persons and entities that purchased aftermarket filters in the U.S. directly from the defendants, or any of their predecessors, parents, subsidiaries or affiliates, at any time during the period from January 1, 1999 to the present. Each case seeks damages, including statutory treble damages, an injunction against future violations, costs and attorney’s fees.
UCI and Champion were also named as two of multiple defendants in 17 similar complaints originally filed in the District of Connecticut, the Northern District of California, the Northern District of Illinois and the Southern District of New York by plaintiffs who claim to be indirect purchasers of aftermarket filters. Two of 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 UCI, was also named in 3 similar actions originally filed in the Eastern District of Tennessee, the Northern District of Illinois and the Southern District of California. These complaints allege conspiracy violations of Section 1 of the Sherman Act and/or violations of state antitrust, consumer protection and unfair competition law. They are styled as putative class actions on behalf of all persons or entities who acquired indirectly aftermarket filters manufactured and/or distributed by one or more of the defendants, their agents or entities under their control, at any time between January 1, 1999 and the present; with the exception of three complaints which each allege a class period from January 1, 2002 to the present, and one complaint which alleges a class period from the “earliest legal permissible date” to the present. The complaints seek damages, including statutory treble damages, an injunction against future violations, disgorgement of profits, costs and attorney’s fees.
On August 18, 2008, the Judicial Panel on Multidistrict Litigation (“JPML”) issued an order transferring the U.S. direct and indirect purchaser aftermarket filters cases to the Northern District of Illinois for coordinated and consolidated pretrial proceedings before the Honorable Robert W. Gettleman pursuant to 28 U.S.C. § 1407. On November 26, 2008, all of the direct purchaser plaintiffs filed a Consolidated Amended Complaint. This complaint names Champion as one of multiple defendants, but it does not name UCI. The complaint is styled as a putative class action and alleges conspiracy violations of Section 1 of the Sherman Act. The direct purchaser plaintiffs seek damages, including statutory treble damages, an injunction against future violations, costs and attorney’s fees. On February 2, 2009, Champion filed its answer to the direct purchasers’ Consolidated Amended Complaint.
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UCI Holdco, Inc.
Notes to Condensed Consolidated Financial Statements(unaudited)
Notes to Condensed Consolidated Financial Statements(unaudited)
On December 1, 2008, all of the indirect purchaser plaintiffs, except Gasoline and Automotive Service Dealers of America (“GASDA”), filed a Consolidated Indirect Purchaser Complaint. This complaint names Champion as one of multiple defendants, but it does not name UCI. The complaint is styled as a putative class action and alleges conspiracy violations of Section 1 of the Sherman Act and violations of state antitrust, consumer protection and unfair competition law. The indirect purchaser plaintiffs seek damages, including statutory treble damages, penalties and punitive damages where available, an injunction against future violations, disgorgement of profits, costs and attorney’s fees. On February 2, 2009, Champion and the other defendants jointly filed a motion to dismiss the Consolidated Indirect Purchaser Complaint. On that same date, 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. 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 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.
Champion, but not UCI, was also named as one of five defendants in a class action filed in Quebec, Canada. This action alleges conspiracy violations under the Canadian Competition Act and violations of the obligation to act in good faith (contrary to art. 6 of the Civil Code of Quebec) related to the sale of aftermarket filters. The plaintiff seeks joint and several liability against the five defendants in the amount of $5.0 million in compensatory damages and $1.0 million in punitive damages. The plaintiff is seeking authorization to have the matter proceed as a class proceeding, which motion has not yet been ruled on.
Champion, but not UCI, was also named as one of 14 defendants in a class action filed on May 21, 2008, in Ontario, Canada. This action alleges civil conspiracy, intentional interference with economic interests, and conspiracy violations under the Canadian Competition Act related to the sale of aftermarket filters. The plaintiff seeks joint and several liability against the 14 defendants in the amount of $150 million in general damages and $15 million in punitive damages. The plaintiff is also seeking authorization to have the matter proceed as a class proceeding, which motion has not yet been ruled on.
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 civil complaint against Champion and eight other defendants in the Northern District of Illinois. The complaint alleges violations of Section 1 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.
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.
Value-added Tax Receivable
Holdco’s Mexican operation has outstanding receivables denominated in Mexican pesos in the amount of $3.2 million from the Mexican Department of Finance and Public Credit. The receivables relate to refunds of Mexican value-added tax, to which Holdco believes it is entitled in the ordinary course of business. The local Mexican tax authorities have rejected Holdco’s claims for these refunds, and Holdco has commenced litigation in the regional federal administrative and tax courts in Monterrey to order the local tax authorities to process these refunds.
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UCI Holdco, Inc.
Notes to Condensed Consolidated Financial Statements(unaudited)
Notes to Condensed Consolidated Financial Statements(unaudited)
Other Litigation
Holdco is subject to various other contingencies, including routine legal proceedings and claims arising out of the normal course of business. These proceedings primarily involve commercial claims, product liability claims, personal injury claims and workers’ compensation claims. The outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty. Nevertheless, Holdco believes that the outcome of any currently existing proceedings, even if determined adversely, would not have a material adverse effect on Holdco’s financial condition or results of operations.
NOTE J — GEOGRAPHIC INFORMATION
Holdco had the following net sales by country (in millions):
Three Months ended March 31, | ||||||||
2009 | 2008 | |||||||
United States | $ | 190.7 | $ | 192.9 | ||||
Mexico | 5.9 | 8.7 | ||||||
Canada | 6.5 | 7.5 | ||||||
United Kingdom | 1.8 | 3.3 | ||||||
France | 1.9 | 3.1 | ||||||
Venezuela | 0.9 | 0.7 | ||||||
Germany | 1.2 | 1.5 | ||||||
Spain | 0.8 | 1.0 | ||||||
Other | 10.2 | 10.6 | ||||||
$ | 219.9 | $ | 229.3 | |||||
Net long-lived assets by country are as follows (in millions):
March 31, | December 31, | |||||||
2009 | 2008 | |||||||
United States | $ | 197.9 | $ | 203.2 | ||||
China | 32.0 | 33.2 | ||||||
Mexico | 9.5 | 9.9 | ||||||
Spain | 2.5 | 2.3 | ||||||
Goodwill | 241.5 | 241.5 | ||||||
$ | 483.4 | $ | 490.1 | |||||
NOTE K — OTHER INFORMATION
At March 31, 2009, 5,000,000 shares of common stock were authorized, and 2,860,560 were issued and outstanding. The par value of each share of common stock is $0.01 per share.
Cash payments for interest in the first quarters of 2009 and 2008 were $2.6 million and $3.6 million, respectively. Cash payments (net of refunds) for income taxes for the first quarters of 2009 and 2008 were $0.4 million and $(2.6) million, respectively.
NOTE L—CONCENTRATION OF RISK
Our sales to General Motors Corporation’s (GM) automotive original equipment manufacturing and sales operations and Chrysler LLC (Chrysler) comprise less than 10% of Holdco’s consolidated sales. While sales to GM are less than 10% of our
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UCI Holdco, Inc.
Notes to Condensed Consolidated Financial Statements(unaudited)
Notes to Condensed Consolidated Financial Statements(unaudited)
sales, Holdco does carry accounts receivable from GM in the range of $6.0 million to $10.0 million at any given time. At March 31, 2009, accounts receivable from GM and its subsidiaries totaled $9.7 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. As of May 12, 2009, Holdco had collected all but $0.9 million of the $9.7 million of the accounts receivable at March 31, 2009 and expects to collect the remaining $0.9 million. Consequently, Holdco has not recorded an allowance for doubtful accounts as of March 31, 2009. Subsequent to March 31, 2009, Holdco has continued normal shipments to GM.
While sales to Chrysler are less than 10% of our sales, Holdco does carry accounts receivable from Chrysler in the range of $0.5 million to $1.5 million at any given time. At March 31, 2009, accounts receivable from Chrysler and its subsidiaries totaled $1.2 million. On April 30, 2009, Chrysler filed a petition under chapter 11 of the U.S. Bankruptcy Code in the Southern District of New York. As of May 12, 2009, Holdco had collected $0.6 million of the accounts receivable at March 31, 2009. Due to the uncertainty that exists as to the ultimate recoverability of these accounts receivables, Holdco recorded an allowance for doubtful accounts in its March 31, 2009 financial statements of $0.6 million representing the March 31, 2009 accounts receivable of $1.2 million less the $0.6 million collected prior to the filing date. From April 1, 2009 to the April 30, 2009 filing date, Holdco’s sales to Chrysler totaled $0.4 million. The majority of these sales occurred within 20 days of the April 30, 2009 filing date; consequently, we believe that claims against the Chrysler estate for such amounts will be classified as Administrative Claims. If these claims are classified as Administrative Claims, it is probable that Holdco will recover some, if not all, of these claims. As of the April 30, 2009 filing date, accounts receivable from Chrysler and its subsidiaries, net of allowance for doubtful accounts, totaled $0.4 million. Holdco will continue to monitor the Chrysler bankruptcy and will record adjustments to the allowance for doubtful accounts, if any, based upon the ultimate resolution of the recovery.
NOTE M — ADOPTION OF RECENT ACCOUNTING PRONOUNCEMENTS
In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 160, “Noncontrolling Interests in Consolidated Financial Statements,” an amendment of ARB No. 51. SFAS No. 160 was adopted on January 1, 2009. This standard changed the name of “Minority Interest” to “Noncontrolling Interest.” This standard also changed the accounting and reporting related to noncontrolling interests in a consolidated subsidiary. After adoption, the noncontrolling interests are now classified as a separate component of “shareholders’ deficit.” Income and losses attributable to the noncontrolling interests are now included in net income, however, such income and losses are subsequently deducted to arrive at net income attributable to Holdco. Prior period financial statements included in this Form 10-Q have been reclassified to conform to the 2009 presentation.
In September 2006, 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. SFAS No. 157 was adopted in two steps. For certain nonfinancial assets and liabilities, adoption of SFAS No. 157 was not required until 2009, and Holdco did not adopt SFAS No. 157 for those certain nonfinancial assets and liabilities until January 1, 2009. Adoption of SFAS No. 157 in 2009 for those certain nonfinancial assets and liabilities did not have an effect on Holdco’s financial statements. For assets and liabilities other than those certain nonfinancial assets and liabilities, Holdco adopted SFAS No. 157 on January 1, 2008. Adoption of this portion of SFAS No. 157 did not have a material impact on Holdco’s financial statements.
In December 2007, the FASB issued SFAS No. 141R, “Business Combinations.” SFAS No. 141R replaced 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 Holdco.
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 changed disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative
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UCI Holdco, Inc.
Notes to Condensed Consolidated Financial Statements(unaudited)
Notes to Condensed Consolidated Financial Statements(unaudited)
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 was effective for Holdco as of January 1, 2009. Because of Holdco’s insignificant, if any, use of derivatives, adoption of this statement did not have an effect on Holdco’s financial statements.
In April 2008, the FASB issued FASB Staff Position FAS 142-3 (“FSP FAS 142-3”), “Determination of the Useful Life of Intangible Assets.” FSP FAS 142-3 was issued 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. FSP FAS 142-3 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 was adopted on January 1, 2009. Adoption of FSP FAS 142-3 did not have a significant effect on Holdco’s financial statements. FSP FAS 142-3 requires the disclosure of Holdco’s policy regarding the treatment of costs incurred to renew or extend the term of a recognized intangible asset. Holdco’s policy is to expense such costs when incurred.
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 was adopted on January 1, 2009. SFAS No. 162 did not have a significant effect on Holdco’s financial statements.
In December 2008, the FASB issued 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 FAS 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. Holdco has agreements to sell undivided interests in certain of its receivables with factoring companies, which in turn have the right to sell an undivided interest to a financial institution or other third party. However, Holdco retains no rights or interest, and has no obligations, with respect to the sold receivables. Furthermore, Holdco does not service the receivables after the sales. Because of the terms of Holdco’s sales of receivables, the adoption of FSP FAS 140-4 on January 1, 2009 did not have a significant effect on Holdco’s financial statements.
NOTE N — RECENT ACCOUNTING PRONOUNCEMENTS, NOT YET ADOPTED
In December 2008, the FASB issued FSP FAS 132R-1, “Employer Disclosures about Postretirement Benefit Plan Assets.” FSP FAS 132R-1 was issued to provide guidance on an employer’s disclosures about plan assets of defined benefit pension or other funded postretirement plans. The objective of these disclosures is to provide users of financial statements with an understanding of: (a) how investment allocation decisions are made, (b) the major categories of plan assets, (c) the inputs and valuation techniques used to measure the fair value of plan assets, (d) the effect of fair value measurements using significant unobservable inputs (Level 3) on changes in plan assets for the period, and (e) significant concentrations of risk within plan assets. This statement is effective for annual statements for fiscal years ending after December 15, 2009. Adoption of FSP FAS 132R-1 by Holdco for the year ended December 31, 2009, will result in expanded disclosures in the notes to the financial statements regarding pension plan assets.
In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments.” FSP FAS 107-1 and APB 28-1 requires disclosures about the fair value of financial instruments for interim reporting periods.
FSP FAS 107-1 and APB 28-1 is effective for interim reporting periods ending after June 15, 2009. Adoption of FSP FAS 107-1 and APB 28-1 will result in interim financial statement disclosures about the fair value of financial instruments that are comparable to those disclosures in the notes to the financial statements included in Holdco’s December 31, 2008 Form 10-K.
FSP FAS 107-1 and APB 28-1 is effective for interim reporting periods ending after June 15, 2009. Adoption of FSP FAS 107-1 and APB 28-1 will result in interim financial statement disclosures about the fair value of financial instruments that are comparable to those disclosures in the notes to the financial statements included in Holdco’s December 31, 2008 Form 10-K.
In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” FSP FAS 157-4 is effective for
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UCI Holdco, Inc.
Notes to Condensed Consolidated Financial Statements(unaudited)
Notes to Condensed Consolidated Financial Statements(unaudited)
reporting periods ending after June 15, 2009. For Holdco, adoption of FSP FAS 157-4 could affect only disclosures in the notes to financial statements. Holdco has not yet evaluated the potential affect, if any, the adoption of FSP FAS 157-4 will have on the disclosures in the notes to financial statements.
In April 2009, the FASB issued FSP FAS 141R-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies.” FSP FAS 141R-1 is effective for business combinations for which the acquisition date is after the first annual reporting period beginning on or after December 15, 2008. The effects of FSP FAS 141R-1 will depend on the occurrence of future acquisitions, if any, by Holdco.
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Item 2. 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” and “Item 7. Management’s Discussion & Analysis of Financial Condition and Results of Operations” sections of our 2008 Form 10-K filed March 31, 2009 and the financial statements included herein.
Forward-Looking Statements
In this Quarterly Report on Form 10-Q for the period ended March 31, 2009, Holdco makes some “forward-looking” statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. These statements are included throughout this report on Form 10-Q and relate to analyses and other information based on forecasts of future results and estimates of amounts not yet determinable. These forward-looking statements are identified by their use of terms and phrases such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will,” “continue,” and other similar terms and phrases, including references to assumptions.
These forward-looking statements are based on Holdco’s expectations and beliefs concerning future events affecting Holdco. They are subject to uncertainties and factors relating to Holdco’s operations and business environment, all of which are difficult to predict and many of which are beyond Holdco’s control. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we do not know whether our expectations will prove correct. They can be affected by inaccurate assumptions we make or by known or unknown risks and uncertainties. Many factors mentioned in our discussion in this report will be important in determining future results. Holdco cautions the reader that these uncertainties and factors, including those discussed in Item 1A of our Annual Report on Form 10-K and in other SEC filings, could cause Holdco’s actual results to differ materially from those stated in the forward-looking statements.
Although we believe the expectations reflected in our forward-looking statements are based upon reasonable assumptions, we can give no assurance that we will attain these expectations or that any deviations will not be material. Except as otherwise required by the federal securities laws, we disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this Quarterly Report on Form 10-Q 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
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 and cooling systems, and engine management systems to the automotive, trucking, marine, mining, construction, agricultural and industrial vehicle markets. We estimate that over 87% of our net sales in 2008 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 aftermarket, excluding tires, have grown at an average annual rate of approximately 3.9% from 1998 through 2007, with the lowest year of growth in 1998 of approximately 2.1%. However, 2008 has been estimated to have grown by only 1.5%.
Our sales to General Motors Corporation’s (GM) automotive original equipment manufacturing and sales operations comprise less than 7% of our consolidated sales. More than 80% of our sales to GM are to dealerships in the OES channel, with the remainder to the 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. As discussed in more detail in Note L to the financial statements in this Form 10-Q, there is substantial doubt about the ability of GM and Chrysler to continue as going concerns. In addition to the credit risk exposures identified in Note L, if either GM or Chrysler is unable to continue operations, we could suffer unfavorable consequences including production volume and sales declines.
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
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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 habits. In addition, we believe consumers’ driving habits have been impacted by the deteriorating economic conditions.
A key metric in measuring aftermarket performance is miles driven. In 2008, the U.S. Department of Energy reported a decrease in miles driven of 3.5% (equaling 108 billion fewer miles). This was the first annual decrease in miles driven since 1980. The high gasoline prices and general 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. Retail gasoline prices have fallen significantly from the historic highs experienced at the beginning of the third quarter of 2008. However, we believe the historically high gasoline prices in 2008 are continuing to have a residual effect on miles driven in 2009 and general economic conditions have continued to worsen. Miles driven in the first quarter of 2009 continued to decline. As reported by the U.S. Department of Energy, miles driven were 1.5% lower for the first quarter of 2009 than the same period in 2008. We believe that these conditions continued to adversely impact our sales in the first quarter of 2009, and as long as these conditions persist, our sales may continue to be adversely affected.
While the conditions described above have adversely affected our sales, other trends resulting from the current economic conditions may have a positive impact on sales in the future. Specifically, with new car sales declining, consumers are keeping their cars longer, resulting in an increased demand for replacement parts as consumers repair their increasingly older cars. Within this trend, we believe that more consumers are moving to the “do-it-yourself” market, buying their parts at retail outlets, which is the core of our business. In addition, a significant number of new car dealers have closed in recent months, with more predicted to close this year, potentially sending more consumers to our customers in the aftermarket for their replacement parts.
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 offer one of the most comprehensive lines of products in the vehicle replacement parts market, consisting of over 43,000 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 2008, 2007 and 2006, approximately 29%, 28% and 24%, respectively, of our total net sales were derived from our business with AutoZone, Inc. 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.
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 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. In the latter part of 2008 and into the first quarter of 2009, general market prices for certain of these commodities have decreased in reaction to general 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 price increases and may make procurement more difficult in the future. Due to our inventory being on the first-in, first-out (FIFO) method, a time lag of approximately three months exists from the time we experience cost increases until these increases flow through cost of sales.
In addition to the adverse impact of increasing commodities and energy costs, we are also being 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 December 31, 2007 through June 30, 2008, the U.S. dollar weakened against the Chinese yuan by approximately 6% and has since 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 costs.
Our Mexican operations source a significant amount of inventory from the United States. In 2008, our Mexican operations sourced approximately $11.7 million from the United States. During the period September 30, 2008 through March 31, 2009, the
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U.S. dollar strengthened against the Mexican peso by approximately 33%. 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. In the latter part of 2008 and the first quarter of 2009, 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. Even with the benefit of this reduction in commodity prices, the combined impact of commodity prices, energy costs and changes in currency exchange rates, net of the mitigation efforts set forth below, had a negative effect on our 2009 first quarter results when compared to our 2008 first quarter results. We estimate this negative effect to be $1.7 million.
Generally, we attempt to mitigate the effects of cost increases and currency changes via a combination of design changes, material substitution, global resourcing efforts and increases in the selling prices for our products. With respect to pricing, it should be noted that, while the terms of supplier and customer contracts and special pricing arrangements can vary, generally a time lag exists between when we incur increased costs and when we might recoup some 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, as a result of the recent reductions in energy costs and costs of certain commodities used in our operations, the potential exists that we may be unable 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 the remaining quarters of 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.
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 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.
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Where we have sales rebate programs with some of our customers, we estimate amounts due under these sales rebate programs when the sales are recorded. Net sales relating to any particular shipment are based upon the amounts invoiced for the shipped goods less estimated future rebate payments. These estimates are based upon our historical experience, current trends and our expectations regarding future experience. Revisions to these estimates are recorded in the period in which the facts that give rise to the revision become known.
Additionally, we have agreements with our customers that provide for sales discounts, marketing allowances, return allowances and performance incentives. Any discount, allowance or incentive is treated as a reduction to sales, based on estimates of the criteria that give rise to the discount, allowance or incentive, such as sales volume and marketing spending. We routinely review these criteria and our estimating process and make adjustments as facts and circumstances change. Historically, we have not found material differences between our estimates and actual results.
In order to obtain exclusive contracts with certain customers, we may incur up-front costs or assume the cost of returns of products sold by the previous supplier. These costs are capitalized and amortized over the life of the contract. The amortized amounts are recorded as a reduction of sales.
New business changeover costs also can include the costs related to removing a new customer’s inventory and replacing it with Holdco inventory, commonly referred to as a “stocklift.” Stocklift costs are recorded as a reduction to revenue when incurred.
Product returns.Our customers have the right to return parts that have failed within warranty time periods. Our customers also have the right, in varying degrees, to return excess quantities of product. Credits for parts returned under warranty and parts returned because of customer excess quantities are estimated and recorded at the time of the related sales. These estimates are based on historical experience, current trends and Holdco’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.
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. The process of evaluating the potential impairment of goodwill is subjective because it requires the use of estimates and assumptions as to future cash flows of the company, discount rates commensurate with the risks involved in the assets, future economic and market conditions, competition, customer relations, pricing, raw material costs, production costs, selling, general and administrative costs, and income and other taxes. Although we base cash flow forecasts on assumptions that are consistent with plans and estimates we use to manage our company, there is significant judgment in determining the cash flows.
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.
Each year, Holdco evaluates those trademarks with indefinite lives to determine whether events and circumstances continue to support the indefinite useful lives.
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.
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Postretirement health obligations are actuarially determined and are based on assumptions including discount rate, life expectancy and health care cost trends. Changes in the discount rate, and differences between actual results and assumptions, will affect the amount of expense we recognize in future periods.
Insurance reserves.Our insurance for workers’ compensation, automobile, product and general liability include high deductibles (less than $1 million) for which we are responsible. Deductibles for which we are responsible are recorded in accrued expenses. Estimates of such losses involve substantial uncertainties including litigation trends, the severity of reported claims and incurred but not yet reported claims. External actuaries are used to assist us in estimating these losses.
Environmental expenditures. Our expenditures for environmental matters fall into two categories. The first category is routine compliance with applicable laws and regulations related to the protection of the environment. The costs of such compliance are based on actual charges and do not require significant estimates.
The second category of expenditures is for matters related to investigation and remediation of contaminated sites. The impact of this type of expenditure requires significant estimates by management. The estimated cost of the ultimate outcome of these matters is included as a liability in Holdco’s March 31, 2009 balance sheet. This estimate is based on all currently available information, including input from outside legal and environmental professionals, and numerous assumptions. Management believes that the ultimate outcome of these matters will not exceed the $2.5 million accrued at March 31, 2009 by a material amount, if at all. However, because all investigation and site analysis has not yet been completed and because of the inherent uncertainty in such environmental matters and related litigation, there can be no assurance that the ultimate outcome of these matters will not be significantly different than our estimates.
Results of Operations
The following table is Holdco’s unaudited condensed consolidated statements of operations for the three months ended March 31, 2009 and 2008. The amounts are presented in thousands of dollars.
Three Months ended March 31, | ||||||||
2009 | 2008 | |||||||
Net sales | $ | 219,862 | $ | 229,290 | ||||
Cost of sales | 179,598 | 178,230 | ||||||
Gross profit | 40,264 | 51,060 | ||||||
Operating expense | ||||||||
Selling and warehousing | (14,298 | ) | (15,505 | ) | ||||
General and administrative | (13,405 | ) | (13,201 | ) | ||||
Amortization of acquired intangible assets | (1,480 | ) | (1,593 | ) | ||||
Costs of integration of water pump operations | (205 | ) | (363 | ) | ||||
Operating income | 10,876 | 20,398 | ||||||
Other expense | ||||||||
Interest expense, net | (15,704 | ) | (17,566 | ) | ||||
Management fee expense | (500 | ) | (500 | ) | ||||
Miscellaneous, net | (1,485 | ) | (527 | ) | ||||
(Loss) income before income taxes | (6,813 | ) | 1,805 | |||||
Income tax benefit (expense) | 2,155 | (922 | ) | |||||
Net (loss) income | (4,658 | ) | 883 | |||||
Less: Loss attributable to noncontrolling interest | (304 | ) | (29 | ) | ||||
Net (loss) income attributable to UCI Holdco, Inc. | $ | (4,354 | ) | $ | 912 | |||
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Three Months Ended March 31, 2009 compared with the Three Months Ended March 31, 2008
Net sales. Net sales of $219.9 million in the first quarter of 2009 decreased $9.4 million, or 4.1%, compared to net sales in the first quarter of 2008. In connection with obtaining new business, sales were reduced by $2.4 million in the first quarter of 2009 and $1.1 million in the first quarter of 2008. These reductions were the result of accepting returns of the inventory of our customers’ previous suppliers.
Excluding the effects of obtaining new business from both quarters, sales were 3.5% lower in the first quarter of 2009 compared to the first quarter of 2008. Automotive aftermarket sales that comprise more than 85% of our sales increased approximately 2.5% compared to the first quarter of 2008. Within the automotive aftermarket channel, our retail channel sales increased approximately 7.6% while traditional channel sales increased approximately 3.5%. We believe the larger increase in the retail 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 6% of our sales, decreased approximately 46.0% compared to the first quarter of 2008 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. Despite the decline in sales compared to the first quarter of 2008, sales, on a comparable basis, increased 6.6% compared to the fourth quarter of 2008. There is no assurance, however, that this trend will continue.
Gross profit.Gross profit, as reported, was $40.3 million for the first quarter of 2009 and $51.1 million for the first quarter of 2008. Both years included special items. Both quarters included the adverse effects of obtaining new business, a $2.4 million cost in the first quarter of 2009 and a $1.1 million cost in the first quarter of 2008. The 2009 and 2008 quarters included $0.4 million and $1.0 million, respectively, of costs related to establishing two new factories in China. The 2009 quarter included $0.4 million of severance expense incurred in connection with cost saving initiatives to reduce headcount.
Excluding the adverse effects of these special items, adjusted gross profit decreased to $43.5 million in the first quarter of 2009 from $53.2 million in the first quarter of 2008, and the related gross margin percentage decreased to 19.6% in the first quarter of 2009 from 23.1% in the first quarter of 2008. The gross margin percentage is based on sales before the effects of obtaining new business, which are discussed in the net sales comparison above.
Lower sales volume in the first quarter of 2009 was a significant factor in our gross profit decline. The 2009 results were also adversely affected by (i) the impact of higher energy and commodity costs and currency fluctuations, which were previously discussed in this Management’s Discussion and Analysis, (ii) higher product returns expense, and (iii) higher per unit cost of manufacturing at lower production volumes.
Selling and warehousing expenses. Selling and warehousing expenses were $14.3 million in the first quarter of 2009; $1.2 million lower than the first quarter of 2008. The reduction is driven by lower sales and cost saving initiatives to reduce headcount and promotional expenses. Selling and warehousing expenses were 6.5% of sales in the 2009 quarter and 6.8% in the 2008 quarter.
General and administrative expenses. General and administrative expenses were $13.4 million in the first quarter of 2009, $0.2 million higher than the first quarter of 2008. This increase includes higher professional fees, 2009 severance expense and $0.5 million of costs incurred in connection with our antitrust litigation (discussed in Note I to the financial statements included in the financial statements included in this Form 10-Q.) The cost increases were offset by lower salary expense due to headcount reductions, lower employee bonus expense, and lower bad debt expense due to collection of a receivable that was previously written down. The 2009 versus 2008 reduction is also attributable to 2008 costs associated with establishing two factories in China.
Costs of integration of water pump operations. See Note B to the financial statements included in this Form 10-Q.
Interest expense, net. Net interest expense was $1.9 million lower in the first quarter of 2009 compared to the first quarter of 2008. This decrease is due to lower interest rates in the first quarter of 2009, partially offset by higher average debt levels in the 2009 quarter. Results for the 2008 quarter included $0.1 million of accelerated amortization of deferred financing costs associated with the voluntary prepayments of debt.
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Miscellaneous, net.Miscellaneous expense is $1.0 million higher in the first quarter of 2009 compared to the first quarter of 2008. This increase is due to the higher cost of selling our receivables.
Income tax expense. Income tax expense in the first quarter of 2009 was $3.1 million lower than in the first quarter of 2008, due to lower pre-tax income in the 2009 quarter.
Net (loss) income. Due to the factors described above, we reported a net loss of $4.7 million for the first quarter of 2009, and net income of $0.9 million for the first quarter of 2008.
Liquidity and Capital Resources
Historical Cash Flows
Net cash provided by operating activities. Net cash provided by operating activities for the three months ended March 31, 2009 was $49.2 million. Profits, before deducting depreciation and amortization, non-cash interest on the Holdco Notes of $7.3 million and other non-cash items, generated $12.2 million. A decrease in accounts receivable and inventory resulted in a generation of cash of $7.1 million and $11.7 million, respectively. The decrease in accounts receivable was primarily due to increased factoring of accounts receivable during the three months ended March 31, 2009, partially offset by an increase in sales of $16.3 million in the three months ended March 31, 2009 as compared to the fourth quarter of 2008. Factored accounts receivable totaled $105.4 million and $80.1 million at March 31, 2009 and December 31, 2008, respectively. The decrease in inventory was due to (i) focused efforts to reduce inventory investments through improved inventory turns, (ii) higher sales in the three months ended March 31, 2009 over the fourth quarter of 2008 and (iii) reduced material costs resulting from decreases in costs of certain of the commodities used in our operations experienced in the latter part of 2008 and in the first quarter of 2009. An increase in accounts payable resulted in a generation of cash of $5.5 million. The increase in accounts payable was due to initiatives with our vendors to reduce our working capital investment levels. An increase in interest payable, which will reverse in the second quarter when interest on our senior subordinated notes is paid, had a $5.1 million positive effect on cash. Changes in all other assets and liabilities netted to a $7.6 million increase in cash. This amount included timing of payment of employee-related accrued liabilities, including salaries and wages and insurance, and timing of product returns.
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 three months ended March 31, 2009 and March 31, 2008 were $4.0 million and $7.9 million, respectively. The 2008 expenditures included $2.4 million for our two new factories in China.
Net cash provided by / used in financing activities. Net cash used in financing activities in the three months ended March 31, 2009 was $18.7 million compared to net cash used in financing activities in the three months ended March 31, 2008 of $17.9 million.
Borrowings of $3.7 and $0.3 million during the three months ended March 31, 2009 and 2008, respectively, consisted solely of short-term borrowings payable to foreign credit institutions.
During the three months ended March 31, 2009, we repaid the $20.0 million of outstanding borrowings under UCI’s revolving credit facility. Additionally during the three months ended March 31, 2009, our Spanish and Chinese subsidiaries repaid short-term notes borrowings to foreign credit institutions in the amount of $2.3 million.
During the three months ended March 31, 2008, we used cash on hand to voluntarily repay $10.0 million of UCI’s term loan. Additionally during the three months ended March 31, 2008, our Spanish and Chinese subsidiaries repaid short-term notes borrowings to foreign credit institutions in the amount of $8.1 million.
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Current Debt Capitalization and Scheduled Maturities
At March 31, 2009 and December 31, 2008, Holdco had $73.0 million and $46.7 million of cash, respectively. Outstanding debt was as follows (in millions):
March 31, | December 31, | |||||||
2009 | 2008 | |||||||
UCI short-term borrowings | $ | 6.6 | $ | 5.2 | ||||
UCI revolving credit line borrowings | — | 20.0 | ||||||
UCI capitalized leases | 1.2 | 1.2 | ||||||
UCI term loan | 190.0 | 190.0 | ||||||
Holdco floating rate senior PIK notes | 302.5 | 295.1 | ||||||
UCI senior subordinated notes | 230.0 | 230.0 | ||||||
Amount of debt requiring repayment | 730.3 | 741.5 | ||||||
Unamortized debt discount and issuance costs | (8.3 | ) | (8.6 | ) | ||||
$ | 722.0 | $ | 732.9 | |||||
Short-term borrowings are routine short-term borrowings by our foreign operations.
Because of previous prepayments of the term loan, we do not have any required repayments of the senior credit facility term loans until December 2011. UCI’s $230.0 million senior subordinated notes are due in 2013.
The Holdco Notes are due in 2013. Interest on the Holdco Notes will be paid by issuing new notes until December 2011. Therefore, the Holdco Notes will not affect our cash flow through 2011. Thereafter, all interest will be payable in cash. On March 15, 2012, and each quarter thereafter, Holdco is required to redeem for cash a portion of each note required to be redeemed to prevent the Holdco Notes from being treated as an applicable high yield discount obligation. In the schedule below, the $67.5 million of Holdco Notes that were issued in lieu of cash interest through March 31, 2009, have been included in the 2012 debt repayment amount. Depending on the circumstances, a portion of this $67.5 million may be paid after 2012.
Below is a schedule of required future repayments of all debt outstanding on March 31, 2009. The amounts are presented in millions of dollars.
Remainder of 2009 | $ | 6.9 | ||
2010 | 0.2 | |||
2011 | 45.2 | |||
2012 | 212.7 | |||
2013 | 465.1 | |||
Thereafter | 0.2 | |||
$ | 730.3 | |||
The terms of UCI’s senior credit facility permit UCI to repurchase from time to time up to $75 million in aggregate principal amount of senior subordinated notes. As of May 13, 2009, neither we nor UCI had repurchased any of the senior subordinated notes, although we or UCI may, under appropriate market conditions, do so in the future through cash purchases or exchange offers, in open market, privately negotiated or other transactions. Similarly, 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 Holdco’s liquidity and capital resources. At our March 31, 2009 debt level and borrowing rates, annual interest expense, including amortization of deferred financing costs and debt discount, is approximately $59.1 million. An increase of 0.25 percentage points (25 basis points) on our variable interest rate debt would increase our annual interest cost by $1.2 million.
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Management’s Action Plan and Outlook
Historically, our primary sources of liquidity have been cash on hand, cash flow from operations, 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, UCI borrowed $20.0 million under its 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 UCI’s 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.
At March 31, 2009 and December 31, 2008, UCI’s revolving credit borrowings were $0.0 million and $20.0 million, respectively. $9.4 million of revolving credit borrowing capacity had been used to support outstanding letters of credit at both dates. Excluding Lehman’s $9.5 million commitment, UCI had $56.1 million of unused borrowing capacity at March 31, 2009. Subsequent to March 31, 2009, UCI borrowed $20.0 million under its revolving credit facility.
We have evaluated our options with respect to the revolving credit facility. Given the current capital markets environment, we believe it is unlikely we will extend or replace the revolving credit facility upon its expiration in June 2009. Therefore our ability to make scheduled payments of principal or interest 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.
In the event we do not extend or replace the revolving credit facility, we will be required to repay the $20.0 million of borrowings currently outstanding in the second quarter of 2009. Additionally, we will be required to post $9.4 million in cash as collateral to support outstanding letters of credit. The cash collateral amounts would not be available for general business purposes as long as the letters of credit remain outstanding or alternative collateral is posted.
Accounts Receivable Factoring
Factoring of customer trade accounts receivable is a significant part of our liquidity. Subject to certain limitations, UCI’s senior credit facility agreement permits sales of and liens on receivables, which are being sold pursuant to factoring arrangements. At March 31, 2009, we had factoring relationships with six 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.
UCI sold approximately $60.0 million and $43.7 million of receivables during the three months ended March 31, 2009 and 2008, respectively. If receivables had not been factored, $105.4 million and $80.1 million of additional receivables would have been outstanding at March 31, 2009 and December 31, 2008, respectively. If we had not factored these receivables, we would have had to finance these receivables in some other way, including borrowings and reducing cash on hand. Our short term cash projections assume additional increases over and above the $105.4 million level of factored accounts receivable at March 31, 2009 based upon expected growth in business with certain customers.
Short-Term Liquidity Outlook
We have 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 activities to align our cost structure with our customers’ spending and current market conditions. These restructuring activities include:
• | 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 March 31, 2009, |
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we had approximately 4,700 employees as compared to approximately 4,900 and 5,200 at December 31, 2008 and December 31, 2007, respectively. 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-based” discretionary spending, requiring additional approvals for all such spending across the Company. |
2007 and 2008 capital spending levels were higher than 2009 estimated spending levels. 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 be limited to expenditures necessary to maintain current operations and projects that have payback periods generally no longer than six months. 2009 capital expenditures are expected to be in the range of $15.0 million to $20.0 million.
Additionally, we have implemented initiatives to reduce 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.
Long-Term Liquidity Outlook
Holdco is a holding company with no business operations or assets other than the capital stock of UCI Acquisition, which itself is a holding company with no operations or assets other than the capital stock of UCI. Consequently, Holdco is dependent on loans, dividends and other payments from UCI to make payments of principal and interest in cash on the Holdco Notes.
If Holdco is unable to obtain adequate funds from UCI, it may not be able to pay cash interest or principal on the Holdco Notes when due. The terms of UCI’s term loan and senior subordinated notes significantly restrict UCI from paying dividends and otherwise transferring assets to Holdco. Therefore, we currently anticipate that in order to pay the principal amount of the Holdco Notes, we will be required to adopt one or more alternatives, such as refinancing all or a portion of Holdco’s and UCI’s indebtedness. In the future, we may also need to refinance all or a portion of the principal amount of UCI’s senior subordinated notes and/or senior credit facility borrowings, on or prior to maturity. If refinancing is necessary, there can be no assurance that we will be able to secure such financing on acceptable terms, or at all.
Covenant Compliance
UCI’s senior credit facility requires us to maintain certain financial covenants and require mandatory prepayments under certain events as defined in the agreement. Also, the facility includes certain negative covenants restricting or limiting our ability to, among other things: declare dividends or redeem stock; prepay certain debt; make loans or investments; guarantee or incur additional debt; make capital expenditures; engage in acquisitions or other business combinations; sell assets; and alter our business. In addition, the senior credit facility contains the following financial covenants: a maximum leverage ratio and a minimum interest coverage ratio. The financial covenants are calculated on a trailing four consecutive quarters basis based on the operating results and indebtedness of UCI on a stand-alone basis. As of March 31, 2009, UCI was in compliance with all of these covenants.
UCI’s covenant compliance levels and actual ratios for the quarter ended March 31, 2009 are as follows:
Covenant | Actual | |||||||
Compliance Level | Ratio | |||||||
Minimum Adjusted EBITDA to interest expense ratio | 2.60x | 3.31x | ||||||
Maximum total debt to Adjusted EBITDA ratio | 4.60x | 4.02x |
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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 | ||||||||
Adjusted | Maximum | |||||||
EBITDA | Total Debt | |||||||
to | to | |||||||
Interest | Adjusted | |||||||
Expense | EBITDA | |||||||
Covenant | Covenant | |||||||
Compliance | Compliance | |||||||
Level | Level | |||||||
Quarter ending June 30, 2009 | 2.65x | 4.50x | ||||||
Quarter ending September 30, 2009 | 2.75x | 4.40x | ||||||
Quarter ending December 31, 2009 | 2.80x | 4.10x | ||||||
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 |
Adjusted EBITDA is used to determine UCI’s compliance with many of the covenants contained in its senior credit facility. Adjusted EBITDA is defined as EBITDA (earnings before interest, taxes, depreciation and amortization) 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 UCI’s senior credit facility that are tied to ratios based on Adjusted EBITDA could result in a default under the facility and the lenders could elect to declare all amounts borrowed due and payable. Any such acceleration would also result in a default under UCI’s senior subordinated notes.
EBITDA and Adjusted EBITDA are not recognized terms under U.S. GAAP (Accounting Principles Generally Accepted in the United States) and do not purport to be alternatives to net income as a measure of operating performance. Additionally, EBITDA and Adjusted EBITDA are not intended to be measures of free cash flow for management’s discretionary use, as they do not consider certain cash requirements such as interest payments, tax payments and debt service requirements.
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The following table reconciles net income to EBITDA and Adjusted EBITDA. The amounts are based on UCI’s income statement on a UCI stand-alone basis. The amounts are in millions of dollars.
Trailing Four | ||||||||
Three Months | Quarters | |||||||
ended | ended | |||||||
Mar. 31, 2009 | Mar. 31, 2009 | |||||||
Net income attributable to United Components, Inc. | $ | 1.6 | $ | 4.7 | ||||
Interest, net of noncontrolling interest | 8.0 | 33.1 | ||||||
Income tax expense, net of noncontrolling interest | 1.2 | 4.9 | ||||||
Depreciation, net of noncontrolling interest | 7.1 | 27.7 | ||||||
Amortization | 2.1 | 8.9 | ||||||
EBITDA | 20.0 | 79.3 | ||||||
Special items: | ||||||||
Cost of integration of water pump operations and the resulting asset impairment losses | 0.2 | 2.2 | ||||||
Reduction in force severance and facilities consolidation | 1.0 | 1.4 | ||||||
Trademark impairment loss | — | 0.5 | ||||||
Cost of defending class action litigation | 0.5 | 4.5 | ||||||
One-time warranty expense | — | 6.7 | ||||||
New business changeover cost and sales commitment costs | 2.4 | 6.3 | ||||||
Establishment of new facilities in China | 0.4 | 2.6 | ||||||
Non-cash charges (stock options expense) | 0.2 | 0.8 | ||||||
Management fee | 0.5 | 2.0 | ||||||
Adjusted EBITDA | $ | 25.2 | $ | 106.3 | ||||
Contingencies
Environmental
Holdco is subject to a variety of federal, state, local and foreign environmental laws and regulations, including those governing the discharge of pollutants into the air or water, the management and disposal of hazardous substances or wastes, and the cleanup of contaminated sites. Holdco has been identified as a potentially responsible party for contamination at two sites. One of these sites is a former facility in Edison, New Jersey, where a state agency has ordered Holdco to continue with the monitoring and investigation of chlorinated solvent contamination. Holdco has informed the agency that this contamination was caused by another party at a neighboring facility and has initiated a lawsuit against that party for damages and to compel it to take responsibility for any further investigation or remediation. The lawsuit has proceeded to trial, which is expected to be completed in the second quarter of 2009, although it is uncertain when a decision will be rendered. The second site is a previously owned site in Solano County, California, where Holdco, at the request of the regional water board, is investigating and analyzing the nature and extent of the contamination and is conducting some remediation. Based on currently available information, management believes that the cost of the ultimate outcome of these environmental matters will not exceed the $1.8 million accrued at March 31, 2009 by a material amount, if at all. However, because all investigation and analysis has not yet been completed, and because of 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.
In addition to the two matters discussed above, Holdco has been named as a potentially responsible party at a site in Calvert City, Kentucky. Holdco estimates settlement costs at $0.1 million for this site. Also, Holdco is involved in regulated remediation at two of its manufacturing sites. The combined cost of the remediation is $0.6 million. The majority of the $0.7 million will be spent in the next two years. To date, the expenditures related to these three sites have been immaterial.
Antitrust Litigation
We are subject to litigation and investigation related to pricing of aftermarket oil, air, fuel and transmission filters, as described in “Part II, Item 1. Legal Proceedings” in this Form 10-Q.
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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.
Value-added Tax Receivable
Holdco’s Mexican operation has outstanding receivables denominated in Mexican pesos in the amount of $3.2 million from the Mexican Department of Finance and Public Credit. The receivables relate to refunds of Mexican value-added tax, to which Holdco believes it is entitled in the ordinary course of business. The local Mexican tax authorities have rejected Holdco’s claims for these refunds, and Holdco has commenced litigation in the regional federal administrative and tax courts in Monterrey to order the local tax authorities to process these refunds.
Other Litigation
Holdco is subject to various other contingencies, including routine legal proceedings and claims arising out of the normal course of business. These proceedings primarily involve commercial claims, product liability claims, personal injury claims and workers’ compensation claims. The outcome of these lawsuits, legal proceedings and claims cannot be predicted with certainty. Nevertheless, Holdco believes that the outcome of any currently existing proceedings, even if determined adversely, would not have a material adverse effect on Holdco’s financial condition or results of operations.
Recent Accounting Pronouncements, Not Yet Adopted
In December 2008, the FASB issued FSP FAS 132R-1, “Employer Disclosures about Postretirement Benefit Plan Assets.” FSP FAS 132R-1 was issued to provide guidance on an employer’s disclosures about plan assets of defined benefit pension or other funded postretirement plans. The objective of these disclosures is to provide users of financial statements with an understanding of: (a) how investment allocation decisions are made, (b) the major categories of plan assets, (c) the inputs and valuation techniques used to measure the fair value of plan assets, (d) the effect of fair value measurements using significant unobservable inputs (Level 3) on changes in plan assets for the period, and (e) significant concentrations of risk within plan assets. This statement is effective for annual statements for fiscal years ending after December 15, 2009. Adoption of FSP FAS 132R-1 by Holdco for the year ended December 31, 2009, will result in expanded disclosures in the notes to the financial statements regarding pension plan assets.
In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments.” FSP FAS 107-1 and APB 28-1 requires disclosures about the fair value of financial instruments for interim reporting periods. FSP FAS 107-1 and APB 28-1 is effective for interim reporting periods ending after June 15, 2009. Adoption of FSP FAS 107-1 and APB 28-1 will result in interim financial statement disclosures about the fair value of financial instruments that are comparable to those disclosures in the notes to the financial statements included in Holdco’s December 31, 2008 Form 10-K.
In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” FSP FAS 157-4 is effective for reporting periods ending after June 15, 2009. For Holdco, adoption of FSP FAS 157-4 could affect only disclosures in the notes to financial statements. Holdco has not yet evaluated the potential affect, if any, the adoption of FSP FAS 157-4 will have on the disclosures in the notes to financial statements.
In April 2009, the FASB issued FSP FAS 141R-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies.” FSP FAS 141R-1 is effective for business combination for which the acquisition date is after the first annual reporting period beginning on or after December 15, 2008. The effects of FSP FAS 141R-1 will depend on the occurrence of future acquisitions, if any, by Holdco.
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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.As a result of international operating activities, we are exposed to risks associated with changes in foreign exchange rates, principally exchange rates between the U.S. dollar and the Mexican peso, British pound and the Chinese yuan. The results of operations of our foreign subsidiaries are translated into U.S. dollars at the average exchange rates for each relevant period, except for our Chinese subsidiaries where cost of sales is translated primarily at historical exchange rates. This translation has no impact on our cash flow. However, as foreign exchange rates change, there are changes to the U.S. dollar equivalent of sales and expenses denominated in foreign currencies. In 2008, 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 statement of shareholders’ equity (deficit). For our Chinese subsidiaries, non-monetary assets and liabilities are translated into U.S. dollars at historical rates and monetary assets and liabilities are translated into U.S. dollars at the closing exchange rate as of the relevant balance sheet date. Adjustments resulting from the translation of the balance sheets of our Chinese subsidiaries are recorded in our statements of operations.
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, we expect to source approximately $70 million of components from China. The currency exchange rate from Chinese yuan to U.S. dollars has been stable, in large part due to the economic policies of the Chinese government. However, the Chinese government has reduced its influence over the currency exchange rate, and let market conditions control to a greater extent. As a result, during the period from December 31, 2007 through June 30, 2008, the Chinese yuan strengthened against the U.S. dollar by approximately 6% and has since remained stable. Less influence by the Chinese government will most likely result in the Chinese yuan continuing to strengthening against the U.S. dollar. A weakening U.S. dollar means that we must pay more U.S. dollars to obtain components from China, which equates to higher cost of sales. If we are unable to negotiate commensurate price decreases from our Chinese suppliers, these higher prices would eventually translate into higher cost of sales. In that event we would attempt to obtain corresponding price increases from our customers, but there are no assurances that we would be successful.
Our Mexican operations source a significant amount of inventory from the United States. During the period September 30, 2008 through March 31, 2009, the U.S. dollar strengthened against the Mexican peso by approximately 33%. 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.
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 March 31, 2009, we had no foreign currency contracts outstanding. We do not engage in speculative activities.
Interest Rate Risk
We utilize, and we will continue to utilize, sensitivity analyses to assess the potential effect of our variable rate debt. If variable interest rates were to increase by 0.25% per annum, the net impact would be a decrease of approximately $0.7 million of our 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 to not 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
Holdco maintains disclosure controls and procedures that are designed to provide reasonable assurance to Holdco’s management and board of directors regarding the preparation and fair presentation of published financial statements. As required by Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, we conducted an evaluation under the supervision and with the participation of Holdco’s management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2009. During the evaluation, it was determined that isolated control deficiencies related to the accounting and closing process for inventory at one of our manufacturing operations represented material weaknesses. Based on the evaluation, the Chief Executive Officer and Chief Financial Officer determined that our disclosure controls and procedures were not effective as of March 31, 2009, due solely to these material weaknesses in our internal control over financial reporting.
The Company’s controls to monitor the financial results of one of its manufacturing operations, which are designed (i) to properly account for product returns, (ii) to provide for timely review and correction of batch posting errors and (iii) to account for the elimination of intercompany profit in inventory in accordance with U.S. generally accepted accounting principles, were not effective. The failure of these controls to operate as designed resulted in (i) the failure to accrue for unprocessed product returns from customers in the proper period, (ii) one day of cost of goods sold entries not being posted timely and (iii) not deferring the appropriate amount of intercompany profit on inventory until final sale of the product. These control deficiencies were identified and the resulting errors were corrected prior to the finalization of the Company’s financial results for the three months ended March 31, 2009.
To ensure that our consolidated financial statements for the quarter ended March 31, 2009 are fairly stated in accordance with U.S. generally accepted accounting principles, Holdco performed a review of the procedures constituting the accounting and closing process for inventory to identify the root cause of the control deficiencies at the manufacturing operation and performed additional in-depth analyses of the impact on the operation’s financial results. Holdco has taken remedial actions including performing additional levels of review of batch postings and formalizing procedural documentation for the elimination of the operation’s intercompany profit in inventory.
Other than as described above, there were no changes in Holdco’s internal control over financial reporting during the three months ended March 31, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The litigations and investigations reported in our 2008 Annual Report on Form 10-K as of March 15, 2009 related to pricing of aftermarket oil, air, fuel and transmission filters are ongoing.
On April 13, 2009, plaintiff Gasoline and Automotive Service Dealers of America voluntarily dismissed UCI from its case pending in the Northern District of Illinois (1:08cv4883) without prejudice.
On April 16, 2009, the Office of the Attorney General for the State of Florida filed a civil complaint against UCI’s wholly-owned subsidiary Champion and eight other defendants in the Northern District of Illinois. The complaint alleges violations of Section 1 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.
We intend to continue 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 1.A. Risk Factors
There have been no material changes from the risk factors previously disclosed in Holdco’s annual report on Form 10-K for the year ended December 31, 2008.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Default Upon Senior Securities
None.
Item 4. Submission of Matters to Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. 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.* |
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* | 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 Holdco, whether made before or after the date hereof, regardless of any general incorporation language in such filing. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
UCI HOLDCO, INC. | ||||
Date: May 14, 2009 | By: | /s/ DANIEL J. JOHNSTON | ||
Name: | Daniel J. Johnston | |||
Title: | Chief Financial Officer and Authorized Representative |
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